Tyler Technologies - 10-Q quarterly report FY

Tyler Technologies - 10-Q quarterly report FY

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(x) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2004

OR

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission File Number 1-10485

TYLER TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)


DELAWARE		75-2303920
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)

5949 SHERRY LANE, SUITE 1400
DALLAS, TEXAS
75225
(Address of principal executive offices)
(Zip code)

(972) 713-3700
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

Number of shares of common stock of registrant outstanding at October 26, 2004: 41,263,408

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	ITEM 4. Evaluation of Disclosure Controls and Procedures
	Part II. OTHER INFORMATION
	ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
Certification of President & CEO Pursuant to Section 302
Certification of Vice-President & CFO Pursuant to Section 302
Certification of President & CEO Pursuant to Section 906
Certification of Vice-President & CFO Pursuant to Section 906


	Three months ended				Nine months ended
	September 30,				September 30,
	2004		2003		2004		2003
Revenues:
Software licenses	$	6,955	$	8,400	$	21,210	$	20,017
Software services		12,256		9,191		37,132		26,438
Maintenance		14,589		11,704		42,827		34,337
Appraisal services		6,406		7,440		21,405		21,547
Hardware and other		1,605		1,139		4,962		3,995

Total revenues		41,811		37,874		127,536		106,334
Cost of revenues:
Software licenses		2,318		2,041		6,564		5,104
Software services and maintenance		18,450		14,090		54,305		41,937
Appraisal services		4,432		5,422		15,659		15,309
Hardware and other		1,315		851		3,787		3,007

Total cost of revenues		26,515		22,404		80,315		65,357

Gross profit		15,296		15,470		47,221		40,977
Selling, general and administrative expenses		11,312		9,678		33,251		28,840
Amortization of acquisition intangibles		583		680		2,175		2,190

Operating income		3,401		5,112		11,795		9,947
Realized gain on sale of investment in H.T.E., Inc.		—		—		—		23,233
Other income, net		138		141		281		287

Income before income taxes		3,539		5,253		12,076		33,467
Income tax provision		1,507		2,020		4,978		10,957

Net income	$	2,032	$	3,233	$	7,098	$	22,510

Earnings per common share:
Basic	$	0.05	$	0.08	$	0.17	$	0.52

Diluted	$	0.05	$	0.07	$	0.16	$	0.50

Basic weighted average common shares outstanding		41,307		40,464		41,397		43,078
Diluted weighted average common shares outstanding		44,350		43,181		44,737		45,218

See accompanying notes.

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TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share amounts)


	September 30,
	2004			December 31,
	(Unaudited)			2003
ASSETS
Current assets:
Cash and cash equivalents	$	12,706		$	10,268
Short-term investments available-for-sale		16,359			11,669
Accounts receivable (less allowance for losses of $837 in 2004 and $1,094 in 2003)		39,057			38,694
Prepaid expenses and other current assets		4,262			3,532
Deferred income taxes		1,536			1,536

Total current assets		73,920			65,699
Property and equipment, net		6,697			6,927
Other assets:
Certificate of deposit		7,500			7,500
Goodwill		53,709			53,932
Customer base, net		19,145			20,014
Software, net		24,081			26,390
Trade name, net		1,396			1,476
Sundry		265			314

	$	186,713		$	182,252

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,441		$	2,378
Accrued liabilities		12,573			14,220
Deferred revenue		38,837			34,020
Income taxes payable		—			530

Total current liabilities		53,851			51,148
Deferred income taxes		13,182			13,182
Minority interest		—			15
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 2004 and 2003		481			481
Additional paid-in capital		153,309			156,201
Accumulated deficit		(7,454	)		(14,552	)
Accumulated other comprehensive loss, net of income taxes		(64	)		(32	)
Treasury stock, at cost; 6,937,375 and 6,703,763 shares in 2004 and 2003, respectively		(26,592	)		(24,191	)

Total shareholders’ equity		119,680			117,907

	$	186,713		$	182,252

See accompanying notes

2

TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


	Nine months ended September 30,
	2004			2003
Cash flows from operating activities:
Net income	$	7,098		$	22,510
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		8,587			7,029
Realized gain on sale of investment in H.T.E., Inc.		—			(23,233	)
Discontinued operations – non-cash charges and changes in operating assets and liabilities		—			98
Changes in operating assets and liabilities, exclusive of effects of acquired companies and discontinued operations		2,905			13,223

Net cash provided by operating activities		18,590			19,627

Cash flows from investing activities:
Proceeds from sale of investment in H.T.E., Inc.		—			39,333
Proceeds from sales of short-term investments		4,000			3,000
Purchases of short-term investments		(8,747	)		(27,664	)
Cost of acquisitions		(946	)		—
Investment in software development costs		(3,453	)		(5,217	)
Additions to property and equipment		(1,634	)		(1,187	)
Other		101			(500	)

Net cash (used) provided by investing activities		(10,679	)		7,765

Cash flows from financing activities:
Purchase of treasury shares		(7,559	)		(24,104	)
Proceeds from exercise of stock options		1,788			653
Contributions to employee stock purchase plan		331			—
Payments on notes payable		(33	)		(3,124	)

Net cash used by financing activities		(5,473	)		(26,575	)

Net increase in cash and cash equivalents		2,438			817
Cash and cash equivalents at beginning of period		10,268			13,744

Cash and cash equivalents at end of period	$	12,706		$	14,561

See accompanying notes

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Tyler Technologies, Inc.

Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)

(1)		Basis of Presentation

		We prepared the accompanying condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States, or GAAP, for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted for interim periods. Balance sheet amounts are as of September 30, 2004 and December 31, 2003 and operating result amounts are for the three and nine months ended September 30, 2004 and 2003, and include all normal and recurring adjustments that we considered necessary for the fair summarized presentation of our financial position and operating results. As these are condensed financial statements, one should also read the financial statements and notes included in our latest Form 10-K for the year ended December 31, 2003. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.

		Although we have a number of operating subsidiaries, separate segment data has not been presented as they meet the criteria set forth in SFAS (Statement of Financial Accounting Standards) No. 131, “Disclosures About Segments of an Enterprise and Related Information” to be presented as one segment.

		In addition, certain other amounts for the previous year have been reclassified to conform to the current year presentation.

(2)		Acquisitions

		During December 2003 we acquired one company, Eden Systems, Inc. (“Eden”) and certain assets of a business that provides forms software to users of some of our software products. The results of these acquisitions have been included in our condensed consolidated financial statements since their respective dates of acquisition. We acquired 95% of the outstanding common stock of Eden on December 2, 2003. Eden provides financial, personnel and citizen services applications software for local governments similar to our financial and city solutions products. We believe Eden’s products and expertise will complement our business model and give us additional opportunities to provide our customers with solutions tailored specifically for local governments. In particular, the addition of Eden considerably increases our presence in the western part of the United States.

		Following is a summary of our 2003 acquisitions:


			Shares of		Value of								Customer Related
Company	Cash		Common Stock		Common Stock		Goodwill		Software		Trade Name		Intangibles
Eden	$	10,660		237	$	1,938	$	5,426	$	3,710	$	1,180	$	6,281
Other		2,400		60		500		1,985		155		300		—

Total	$	13,060		297	$	2,438	$	7,411	$	3,865	$	1,480	$	6,281

		Cash paid for acquisitions excludes acquired Eden cash balances of approximately $2.1 million and includes payments in cash of $946,000 paid during the nine months ended September 30, 2004. The value of the Tyler common stock was determined based on the average market price of Tyler’s common shares over the ten-day period before the terms of the acquisition were agreed to and announced.

		Pursuant to the agreement with Eden, two of the shareholders of Eden were granted the right to “put” their remaining shares to Tyler and Tyler was also granted the right to “call” the remaining shares. In January 2004, Tyler purchased 500 shares for $145,000 in cash. We purchased the remaining 2,000 shares for a cash purchase price of $580,000 on July 14, 2004, which increased our ownership of the outstanding common stock of Eden from 96% to 100%.

		The decline in goodwill of $223,000 to $7.4 million at September 30, 2004, from $7.6 million at December 31, 2003, reflects adjustments relating to results of our valuation of intangible assets, additional purchase of shares pursuant to our call right exercised in January and July of 2004 and the valuation at estimated fair value of our other obligations assumed.

		The following unaudited pro forma information presents the consolidated results of operations as if our acquisition of Eden occurred as of the beginning of 2003, after giving effect to certain adjustments, including amortization of intangibles, interest and

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income tax effects. Pro forma information does not include acquisitions that are not considered material to our results of operations. The pro forma information does not purport to represent what our results of operations actually would have been had such transaction or event occurred on the dates specified, or to project our results of operations for any future period.


	Nine months ended
	September 30, 2003
Revenues	$	115,416
Net income	$	22,570
Net income per diluted share	$	0.50

		Pro forma results of operations for the nine months ended September 30, 2003, include the realized gain on the sale of our investment in H.T.E., Inc. of $16.2 million (net of income taxes of $7.0 million), or $0.36 per diluted share. See Note 4 – Investment in H.T.E., Inc.

(3)		Cash, Cash Equivalents, Short-term Investments and Other

		Cash equivalents include items almost as liquid as cash, such as money market investments and certificates of deposits with insignificant interest rate risk and original maturities of three months or less at the time of purchase. For purposes of the statements of cash flows, we consider all investments with original maturities of three months or less to be cash equivalents.

		In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, we determine the appropriate classification of debt and equity securities at the time of purchase and re-evaluate the classification as of each balance sheet date. We have classified our investments as available-for-sale securities pursuant to SFAS No. 115. Investments which are classified as available-for-sale are recorded at fair value and unrealized holding gains and losses, net of the related tax effect, if any, are not reflected in earnings but are reported as a separate component of other comprehensive income until realized. Interest and dividends earned on these securities are reinvested in the securities. The cost basis of the securities is determined using the average cost method.

		As of September 30, 2004, our investments classifieds as available-for-sale consist of primarily short-term mutual corporate and municipal bond funds, and auction rate municipal bonds.

		Short-term investments, classified as available-for-sale, are summarized as follows as of September 30, 2004:


			Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
State and municipal bond mutual fund	$	4,894	$	—	$	(5	)	$	4,889
Fixed income securities mutual fund.		4,958		—		(88	)		4,870
Auction rate municipal bonds		6,600		—		—			6,600

	$	16,452	$	—	$	(93	)	$	16,359

Short-term investments, classified as available-for-sale, are summarized as follows as of December 31, 2003:


			Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
State and municipal bond mutual fund	$	5,843	$	—	$	(6	)	$	5,837
Fixed income securities mutual fund		5,875		—		(43	)		5,832

	$	11,718	$	—	$	(49	)	$	11,669

		During the three months and nine months ended September 30, 2004, the aforementioned short-term investments earned interest income and dividends of $64,000 and $163,000, respectively. Interest and dividends earned during the three or nine months ended September 30, 2003 were $88,000 and $164,000, respectively.

		Proceeds from sales of short-term investments were $4.0 million during the three and nine months ended September 30, 2004. During the three and nine months ended September 30, 2003, proceeds from sales were $3.0 million. Gross realized net losses from sales were immaterial during the three and nine months ended September 30, 2004 and 2003.

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		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 $5.75 million is restricted to collateralize letters of credit required under our surety bond program. These letters of credit expire throughout 2005.

(4)		Investment in H.T.E., Inc.

		On March 25, 2003, we received cash proceeds of $39.3 million in connection with a transaction to sell all of our 5.6 million shares of H.T.E., Inc. (“HTE”) common stock to SunGard Data Systems Inc. for $7.00 cash per share, pursuant to a Tender and Voting Agreement dated February 4, 2003. Our original cost basis in the HTE shares was $15.8 million. After transaction and other costs, we recorded a realized gross gain of $23.2 million ($16.2 million after income taxes of $7.0 million, including the utilization for tax purposes and reduction in valuation allowance for accounting purposes related to a capital loss carryforward amounting to $1.1 million on a tax effected basis).

(5)		Shareholders’ Equity

		During the three months ended September 30, 2004, we purchased 333,400 shares of our common stock for an aggregate cash purchase price of $2.9 million. For the nine months ended September 30, 2004, we have purchased 851,260 shares of our common stock for an aggregate cash purchase price of $7.6 million. On October 27, 2004, our board of directors authorized the repurchase of up to an additional 2.0 million shares of Tyler common stock, increasing our total authorization to 3.1 million shares.

		We also issued 601,868 shares of common stock and received $1.8 million in aggregate proceeds, upon exercise of stock options during the first nine months of 2004.

		In March 2004, one of our warrant holders exercised his warrant to purchase 21,234 shares of our common stock by way of cashless exercise and was issued on a net basis, 15,780 shares of our common stock from our treasury. As of September 30, 2004, we have warrants outstanding to purchase 1.6 million shares of common stock at $2.50 per share. These warrants expire in September 2007.

		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. The purchase price of the shares is equal to 85% of the closing price of Tyler shares on either the first or last day of each quarterly offering period, whichever is lower. For the three months ended September 30, 2004, employees had contributed $331,000 to the ESPP. During October 2004, Tyler issued approximately 44,000 shares of common stock to the ESPP.

(6)		Income Tax Provision

		For the three months ended September 30, 2004 we had an income tax provision of $1.5 million compared to $2.0 million for the three months ended September 30, 2003. We had an income tax provision of $5.0 million for the nine months ended September 30, 2004 compared to $11.0 million for the comparable prior year period. The income tax provision for the nine months ended September 30, 2003, included $7.0 million (after utilization of a capital loss carryforward amounting to $1.1 million on a tax effected basis) related to the realized gain from the sale of our investment in HTE. See Note 4 – Investment in H.T.E., Inc. We had an effective income tax rate of 41.2% for the nine months ended September 30, 2004, compared to an effective income tax rate of 32.7% for the same period in the prior year. The effective income tax rates are estimated based on projected pre-tax income for the entire fiscal year and the resulting amount of income taxes. The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 35% primarily due to the utilization of the capital loss carryforward in 2003, state income taxes and non-deductible meals and entertainment costs.

		We made federal and state income tax payments, net of refunds of $5.5 million in the first nine months ended September 30, 2004 compared to $5.7 million in the prior year.

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(7)		Earnings Per Share

		The following table details the reconciliation of basic earnings per share to diluted earnings per share:


	Three months ended				Nine months ended
	September 30,				September 30,
	2004		2003		2004		2003
Numerator for basic and diluted earnings per share:
Net income	$	2,032	$	3,233	$	7,098	$	22,510

Denominator:
Weighted-average basic common shares outstanding		41,307		40,464		41,397		43,078
Assumed conversion of dilutive securities:
Employee stock options		1,895		1,576		2,166		1,251
Warrants		1,148		1,141		1,174		889

Potentially dilutive common shares		3,043		2,717		3,340		2,140

Weighted-average common shares outstanding, assuming full dilution		44,350		43,181		44,737		45,218

Basic earnings per share	$	0.05	$	0.08	$	0.17	$	0.52

Diluted earnings per share	$	0.05	$	0.07	$	0.16	$	0.50

(8)		Stock Compensation

		In accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” we elected to account for our stock-based compensation under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” as amended and related interpretations including FIN 44 (FASB Interpretation No. 44), “Accounting for Certain Transactions Involving Stock Compensation,” an interpretation of APB Opinion No. 25, issued in June 2000. Under APB No. 25’s intrinsic value method, compensation expense is determined on the measurement date; that is, the first date on which both the number of shares the option holder is entitled to receive, and the exercise price, if any, are known. Compensation expense, if any, is measured based on the award’s intrinsic value – the excess of the market price of the stock over the exercise price on the measurement date. The exercise price of all of our stock options granted equals the market price on the measurement date. Therefore we have not recorded any compensation expense related to grants of stock options.

		Pro forma information regarding net income and earnings per share is required by SFAS No. 123 for awards granted after December 31, 1994, as if we had accounted for our stock-based awards to employees under the fair value method of SFAS No. 123, and is as follows:


	Three months ended				Nine months ended
	September 30,				September 30,
	2004		2003		2004		2003
Net income	$	2,032	$	3,233	$	7,098	$	22,510
Add stock-based employee compensation cost included in net income, net of related tax benefit		—		—		—		—
Deduct total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of related tax benefit		292		581		828		1,514

Pro forma net income	$	1,740	$	2,652	$	6,270	$	20,996

Basic earnings per share:
As reported	$	0.05	$	0.08	$	0.17	$	0.52

Pro forma	$	0.04	$	0.07	$	0.15	$	0.49

Diluted earnings per share:
As reported	$	0.05	$	0.07	$	0.16	$	0.50

Pro forma	$	0.04	$	0.06	$	0.14	$	0.46

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(9)		Comprehensive Income

		The components of comprehensive income are as follows:


	Three months ended					Nine months ended
	September 30,					September 30,
	2004			2003		2004			2003
Net income	$	2,032		$	3,233	$	7,098		$	22,510
Other comprehensive income:
Change in fair value of short-term investments available-for-sale (net of tax benefit of $9 and $15 for the three and nine months ended September 30, 2004, respectively)		(17	)		24		(32	)		24
Reclassification adjustment for unrealized gain related to investment in H.T.E., Inc. (net of deferred tax expense of $3,995)		—			—		—			(7,418	)

Total comprehensive income	$	2,015		$	3,257	$	7,066		$	15,116

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

		FORWARD-LOOKING STATEMENTS

		The statements in this discussion that are not historical statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about our business, financial condition, business strategy, plans and the objectives of our management, and future prospects. In addition, we have made in the past and may make in the future other written or oral forward-looking statements, including statements regarding future operating performance, short- and long-term revenue and earnings growth, the timing of the revenue and earnings impact for new contracts, backlog, the value of new contract signings, business pipeline, and industry growth rates and our performance relative thereto. Any forward-looking statements may rely on a number of assumptions concerning future events and be subject to a number of uncertainties and other factors, many of which are outside our control, which could cause actual results to differ materially from such statements. These include, but are not limited to: our ability to improve productivity and achieve synergies from acquired businesses; technological risks associated with the development of new products and the enhancement of existing products; changes in the budgets and regulating environments of our government customers; competition in the industry in which we conduct business and the impact of competition on pricing, revenues and margins; with respect to customer contracts accounted for under the percentage-of-completion method of accounting, the performance of such contracts in accordance with our cost and revenue estimates; our ability to maintain health and other insurance coverage and capacity due to changes in the insurance market and the impact of increasing insurance costs on the results of operations; the costs to attract and retain qualified personnel, changes in product demand, the availability of products, economic conditions, 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, 2003. 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 software systems and related services for local governments. We develop and market a broad line of software products and services to address the information technology (IT) needs of cities, counties, schools and other local government entities. 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 capitalization, 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, 2003 regarding expanded information about our critical accounting policies and estimates.

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		ANALYSIS OF RESULTS OF OPERATIONS

		The following discussion compares the historical results of operations on a basis consistent with GAAP for the three and nine months ended September 30, 2004 and 2003. On December 2, 2003, we acquired 95% ownership of Eden Systems, Inc. (“Eden”), and the remaining 5% ownership during 2004. Their operating results have been included in our consolidated financial statements since the date of acquisition. Accordingly, the three and nine months ended September 30, 2004 includes the operating results of Eden, while the same three and nine-month periods in 2003 do not. This information should be considered when comparing to 2003 financial results. See Note 2 in the Notes to the Condensed Consolidated Financial Statements.

Revenues

The following table sets forth, a year-over-year comparison of the key components of our revenues for the following periods ended September 30:


	Third quarter										%			Nine months										%
			% of					% of			Increase/					% of					% of			Increase/
($ in thousands)	2004		Total			2003		Total			(decrease)			2004		Total			2003		Total			(decrease)
Software licenses	$	6,955		17	%	$	8,400		22	%		(17	)%	$	21,210		17	%	$	20,017		19	%		6	%
Software services		12,256		29			9,191		24			33			37,132		29			26,438		25			40
Maintenance		14,589		35			11,704		31			25			42,827		34			34,337		32			25
Appraisal services		6,406		15			7,440		20			(14	)		21,405		16			21,547		20			(1	)
Hardware and other		1,605		4			1,139		3			41			4,962		4			3,995		4			24

Total revenues	$	41,811		100	%	$	37,874		100	%		10	%	$	127,536		100	%	$	106,334		100	%		20	%

Software licenses. The change in software license revenues is due to the following factors:

	•		For the three months ended September 30, 2004, excluding $1.1 million generated by Eden, software license revenue for the third quarter of 2004 declined $2.5 million or 30% compared to the prior year quarter. The prior year third quarter included an unusually large amount of justice and courts software. In September 2003 we successfully installed the first phase of our Odyssey Case Management system (“Odyssey Courts”) in the State of Minnesota and Lee County, Florida and recognized software license revenue of $3.4 million. In the third quarter of 2004 we recognized revenue of $900,000 for Odyssey Courts relating to seven contracts, including Minnesota and Lee. Implementation of five new Odyssey Courts contracts totaling approximately $9.1 million commenced mid-year of 2004 and are expected to be substantially completed in late 2005.

	•		For the nine months ended September 30, 2004, excluding $2.2 million software revenue generated by Eden, software license revenue declined $1.0 million or 5% compared to the prior year period. The change was the result of the following factors: (1) justice and courts software revenue dropped primarily due to the State of Minnesota, which had $2.7 million less revenue recognized than in the prior year; (2) property appraisal and tax software revenue declined approximately $900,000. In the prior year we had several sizable property appraisal and tax software contracts compared to one significant contract in 2004; and (3) financial and city solutions software revenue increased $2.6 million, or 22%, due to a combination of geographic expansion on the west coast and the southern United States, and to a larger implementation staff, which has allowed us to install software products more quickly. In addition, the completion in late March 2004 of software enhancements to one of our financial software products has enabled us to expand into larger cities and counties resulting in larger contracts.

Software services. For the three months ended September 30, 2004, excluding software services generated by Eden of $2.2 million, software services revenue increased $866,000 or 9% compared to the prior year period. For the nine months ended September 30, 2004, excluding Eden software services revenues of $6.2 million, software services increased $4.5 million or 17% compared to the prior year period. Higher software services revenues were attributable to the following factors:

•

Excluding Eden, software services revenue from our financial and city solutions products was 16% higher for both the three and nine months ended September 30, 2004 as a result of increased staffing levels to install our existing backlog. In addition we have been expanding our application service provider (ASP) market, which created approximately $200,000 and $400,000 revenue increases for the three and nine months ended September 30, 2004, respectively.

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	•		Software services revenue related to appraisal products for the nine months ended September 30, 2004 included approximately $1.5 million from our subcontract agreement with the Valuation Office Agency of the United Kingdom (“England contract”) and $700,000 related to Orion, our new tax appraisal product. We began implementing the England contract late in the third quarter of 2003 and a contract with the State of Kansas to install Orion began in December 2003.

	•		The third quarter of 2004 included seven Odyssey Courts contracts which generated an additional $700,000 in service revenue compared to two Odyssey contracts in the prior year period. Implementation of five of these contracts began mid-year 2004 and did not generate substantial revenue in the first half of the year and therefore year-to-date services revenue related to Odyssey Courts was flat compared to the prior year period.

		Maintenance. We provide maintenance and support services for our software products and third party software. Maintenance revenues for the three months ended September 30, 2004 included $1.0 million from Eden. For the nine months ended September 30, 2004, Eden contributed maintenance revenues of $2.9 million. Excluding the impact from Eden, maintenance revenues increased approximately 16% due to growth in our installed customer base and slightly higher rates on certain product lines, during the three and nine months ended September 30, 2004 compared to the same prior year periods.

		Appraisal services. The decrease in appraisal services revenues is due to the timing of significant appraisal contracts, specifically the completion of our contract with Lake County, Indiana, during the third quarter of 2003.

		Cost of Revenues and Gross Margins

		The following table sets forth a comparison of the key components of our cost of revenues and associated gross margins, and those components stated as a percentage of related revenues for the following periods ended September 30:


	Third quarter															Nine months
				% of						% of			%						% of						% of			%
				related						related			Increase/						related						related			Increase/
($ in thousands)	2004			revenues			2003			revenues			(decrease)			2004			revenues			2003			revenues			(decrease)
Software licenses	$	2,318			33	%	$	2,041			24	%		14	%	$	6,564			31	%	$	5,104			25	%		29	%
Software services and maintenance		18,450			69			14,090			67			31			54,305			68			41,937			69			29
Appraisal services		4,432			69			5,422			73			(18	)		15,659			73			15,309			71			2
Hardware and other		1,315			82			851			75			55			3,787			76			3,007			75			26

Total cost of revenues	$	26,515			63	%	$	22,404			59	%		18	%	$	80,315			63	%	$	65,357			61	%		23	%

Overall gross margin		36.6	%					40.8	%								37.0	%					38.5	%

		Cost of software license revenues. The increase is related to the general release of several software development products and the commencement of the related amortization expense. Once a product is released, we begin to amortize the costs associated with its development over the estimated useful life of the product. Amortization expense is determined on a product-by-product basis at an annual rate not less than straight-line basis over the product’s estimated life. Development costs consist mainly of personnel costs, such as salary and benefits paid to our developers, rent for related office space and capitalized interest costs. Current year product releases include the Orion Texas appraisal and collections products and an enhancement to one of our financial and city solutions products. Amortization expense for 2004 also includes nine months of expense related to the amortization of Odyssey Courts versus only four months in 2003. The overall increase in amortization was offset by certain financial and city solution products becoming fully amortized during the third quarter of 2004.

		Cost of software services and maintenance revenues. Cost of software services and maintenance primarily consists of expenses, such as personnel costs related to installation of our software licenses, conversion of customer data, training customer personnel, support activities and various other services such as ASP and disaster recovery. During the three and nine months ended September 30, 2004, Eden contributed cost of software services and maintenance revenues of $2.2 million and $6.0 million, respectively. Excluding Eden, cost of software services and maintenance increased $2.1 million and $6.4 million, or 15%, during the third quarter and nine months ended September 30, 2004, respectively. Increased staff levels are the primary reason for the increase in cost of software services and maintenance revenues. Additional staff has been added to provide faster implementation of our existing backlog. Excluding Eden, software services and maintenance revenues increased 13% and 17% for the three and nine months ended September 30, 2004. In the third quarter, costs of services and maintenance revenues increased more than software services and maintenance revenues due to the time required to train and orient additional personnel hired in the third quarter of 2004 before they become capable of performing revenue-generating tasks, such as training and implementations. In addition, during the third quarter, we had a shift from employees being utilized for capitalization software development projects to implementation and support functions.

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		Cost of appraisal services revenues.

		The change in costs of appraisal services revenue is consistent with the change in appraisal revenues. For the nine months ended September 30, 2004, the cost of appraisal revenue is slightly higher than the prior year period due to the use of sub-contractors in the first quarter of 2004 to supplement our appraisal staff on some of our larger contracts. The nature and timing of these contracts required us to retain staff on either short notice or with specific qualifications that increased the associated costs as a percentage of appraisal revenue.

		Gross margin.

		Excluding the results of Eden, our gross margins for the three and nine-months ending September 30, 2004 were 35.8% and 36.3%, respectively, compared to 40.8% and 38.5% in the comparable prior year periods, respectively. The decline in gross margins from the comparable prior year periods was due to the following factors:

	•		Higher amortization costs of our software development products released mid-year;

	•		Our overall product mix included less software license revenues; and

	•		The utilization of sub-contractors by our property appraisal and tax division during the first quarter of 2004.

		Selling, General and Administrative Expenses

		The following table sets forth, comparisons of our selling, general and administrative expenses (SG&A) for the following periods ended September 30:


	Third quarter						Change					Nine months						Change
($ in thousands)	2004			2003			$		%			2004			2003			$		%
Selling, general and administrative expenses	$	11,312		$	9,678		$	1,634		17	%	$	33,251		$	28,840		$	4,411		15	%
Percent of revenues		27	%		26	%							26	%		27	%

		SG&A associated with Eden amounted to $1.0 million and $3.0 million for the three and nine months ended September 30, 2004, respectively. Excluding Eden, SG&A increased 7% and 5% for the three and nine months ended September 30, 2004, respectively, compared to the same periods in 2003. In addition, excluding Eden, SG&A was 28% and 26% of revenues, respectively, for the three and nine months ended September 30, 2004.

		The increase in SG&A is a result of the following factors:

	•		Costs to comply with corporate governance and public disclosure requirements of the Sarbanes-Oxley Act of 2002 and New York Stock Exchange rules, including those associated with documenting and testing internal controls. Compliance costs have been very high and have significantly exceeded our original estimates. While some of the expenses we are incurring this year may be considered “one-time” costs, it is clear that the new regulatory environment places an expensive burden on companies that will continue into the future; and

	•		Higher research and development costs.

		Amortization of Acquisition Intangibles

		The following table sets forth a year-over-year comparison of amortization of acquisition intangibles for the following periods ended September 30:


	Third quarter				Change						Nine months				Change
($ in thousands)	2004		2003		$			%			2004		2003		$			%
Amortization of acquisition intangibles	$	583	$	680	$	(97	)		(14	)%	$	2,175	$	2,190	$	(15	)		(1	)%

Amortization expense has declined compared to the prior year quarter due to certain intangible assets recorded for previous acquisitions that became fully amortized in 2003 and the first nine months of 2004. This decline was offset somewhat due to amortization expense for acquisition intangibles recorded related to the acquisition of Eden in December 2003. Acquisition

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intangibles are composed of the excess of the purchase price over the fair value of net tangible assets acquired that is allocated to acquired and amortizable software, customer base and trade name with the remainder allocated to goodwill that is not subject to amortization.

Realized Gain on Sale of Investment in H.T.E., Inc.

On March 25, 2003, we received cash proceeds of $39.3 million in connection with a transaction to sell all of our 5.6 million shares of H.T.E., Inc. (“HTE”) common stock to SunGard Data Systems Inc. for $7.00 cash per share. Our original cost basis in the HTE shares was $15.8 million. After transaction and other costs, we recorded a gross realized gain of $23.2 million ($16.2 million or $0.36 per diluted share after income taxes of $7.0 million) for the nine months ended September 30, 2003.

Other Income, Net

The following table sets forth a comparison of the key components of other income, net, for the following periods ended September 30:


	Third quarter						Change						Nine months						Change
($ in thousands)	2004			2003			$			%			2004			2003			$			%
Interest income	$	180		$	220		$	(40	)		(18	)%	$	457		$	470		$	(13	)		(3	)%
Interest expense		(42	)		(79	)		37			(47	)		(143	)		(183	)		40			(22	)
Realized net loss on sale of short-term investments available-for-sale		—			—			—			—			(10	)		—			(10	)		100
Minority Interest		—			—			—			—			(23	)		—			(23	)		100

	$	138		$	141								$	281		$	287

Income Tax Provision

The following table sets forth a comparison of our income tax provision for the following periods ended September 30:


	Third quarter						Change						Nine months						Change
($ in thousands)	2004			2003			$			%			2004			2003			$			%
Income tax provision	$	1,507		$	2,020		$	(513	)		(25	)%	$	4,978		$	10,957		$	(5,979	)		(55	)%
Effective income tax rate		43	%		38	%								41	%		33	%

		The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 35% primarily due to the utilization of the capital loss carryforward in 2003, increased state income taxes and non-deductible meals and entertainment costs.

		The income tax provision for the nine months ended September 30, 2003 includes income tax expense of approximately $7.0 million relating to the realized gain from the sale of our investment in HTE (after reduction in valuation allowance related to the utilization of a capital loss carryforward amounting to $1.1 million on a tax-effected basis). For the nine months ended September 30, 2003, we had an effective income tax rate of 38% excluding the effect of the HTE gain.

Net Income

The following table sets forth a comparison of our net income, earnings per diluted share, and diluted weighted average shares outstanding for the following periods ended September 30:


	Third quarter				Change						Nine months				Change
($ in thousands, except per share data)	2004		2003		$			%			2004		2003		$			%
Net income	$	2,032	$	3,233	$	(1,201	)		(37	)%	$	7,098	$	22,510	$	(15,412	)		(68	)%
Earnings per diluted share		0.05		0.07								0.16		0.50
Diluted weighted shares outstanding		44,350		43,181		1,169			3	%		44,737		45,218		(481	)		(1	)%

Net income for the nine months ended September 30, 2003 included a $16.2 million realized gain after income taxes relating to the sale of our investment in HTE, which had a diluted earnings per share effect of $0.36 per share.

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		FINANCIAL CONDITION AND LIQUIDITY

		As of September 30, 2004, our balance in cash and cash equivalents was $12.7 million and we had short-term investments of $16.4 million, compared to cash and cash equivalents of $10.3 million and short-term investments of $11.7 million at December 31, 2003. In addition we had a $7.5 million certificate of deposit as of September 30, 2004 and December 31, 2003. Cash increased primarily due to continued strong operating performance and strong collections of receivables, specifically those related to maintenance contracts that were billed during the nine months ended September 30, 2004, and cash received from employee stock option exercises. At September 30, 2004, our days sales outstanding (“DSOs”) were 84 compared to DSOs of 88 at December 31, 2003. The decrease in DSOs is due primarily to the collection of maintenance receivables during the nine months ended September 30, 2004 and collection of several large invoices from our property appraisal and tax clients. DSOs are determined based on accounts receivable divided by the quotient of annualized quarterly revenues divided by 360 days.

		On March 5, 2002, we entered into a $10.0 million revolving credit agreement with a bank, which matures January 1, 2005. Our borrowings are limited to 80% of eligible accounts receivable and interest is charged at either the prime rate or at the London Interbank Offered Rate plus a margin of 3%. The credit agreement is secured by our personal property and the common stock of our operating subsidiaries. The credit agreement is also guaranteed by our operating subsidiaries. In addition, the credit agreement contains covenants that require us to maintain certain financial ratios and other financial conditions and prohibits us from making certain investments, advances, cash dividends or loans. As of September 30, 2004, we were in compliance with those covenants. We had no outstanding bank borrowings under the credit agreement and our bank had issued letters of credit totaling $5.75 million to secure surety bonds required by some of our customer contracts as of September 30, 2004. All of the outstanding letters of credit were collateralized with a certificate of deposit of $7.5 million at September 30, 2004; thus, we had available credit of $10.0 million under the credit agreement.

		Proceeds from sales of short-term investments were $4.0 million during the nine months ended September 30, 2004. During the nine months ended September 30, 2004, the short-term investments earned interest income and dividends of $163,000. Interest and dividends were reinvested. In July 2004, we invested $6.6 million in auction rate municipal bonds. The bonds pay interest at various fixed rates.

		During the nine months ended September 30, 2004, we purchased approximately 851,300 shares of our common stock for an aggregate cash purchase price of $7.6 million. As of September 30, 2004 we had authorization to repurchase up to 1.1 million additional shares of Tyler common stock. A summary of the repurchase activity during the nine months ended September 30, 2004 is as follows:


					Maximum number
	Total number		Average		of shares that may
	of shares		price paid		be purchased under
Period	purchased		per share		current authorization
January 1 through January 31		32,500	$	10.02		1,948,000
February 1 through February 29		137,800		9.22		1,810,000
March 1 through March 31		21,000		9.03		1,789,000
April 1 through April 30		35,000		9.50		1,754,000
May 1 through May 31		180,700		8.93		1,573,000
June 1 through June 30		110,900		8.81		1,462,000
July 1 through July 31		227,800		8.41		1,234,000
August 1 through August 31		95,700		8.85		1,138,000
September 1 through September 30		9,900		8.99		1,128,000

Total nine months ended September 30, 2004		851,300	$	8.88		1,128,000

		The repurchase program, which was approved by our board of directors, was announced in October 2002, and was amended in April and July 2003 and October 2004. On October 27, 2004 our board of directors authorized the repurchase of an additional 2.0 million shares for a total authorization to repurchase 3.1 million shares of Tyler common stock. There is no expiration date specified for the authorization and we intend to repurchase stock under the plan from time to time in the future.

		During the nine months ended September 30, 2004, we made capital expenditures of $5.1 million, including $3.5 million for software development costs. The other expenditures related to computer equipment, furniture and fixtures and expansions related to internal growth. Capital expenditures were funded from cash generated from operations.

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		We made federal and state income tax payments, net of refunds, of $5.5 million during the nine months ended September 30, 2004 compared to $5.7 million during the same period in the prior year.

		During the nine months ended September 30, 2004, we received $1.8 million from the exercise of options to purchase approximately 602,000 shares of our common stock under our employee stock option plan.

		Pursuant to our purchase agreement with Eden, two of the shareholders of Eden were granted the right to “put” their remaining shares to Tyler and we were also granted the right to “call” the remaining shares. In January 2004, we purchased 500 shares for $145,000 in cash. We purchased the remaining 2,000 shares for a cash purchase price of $580,000 on July 14, 2004.

		During the three months ended September 30, 2004, we received $331,000 of contributions to the Tyler Technologies, Inc. Employee Stock Purchase Plan, which was adopted by our shareholders in May 2004.

		On March 28, 2003, we retired an outstanding $2.5 million, 10% promissory note payable. The note was originally due in January 2005 and required quarterly interest payments.

		From time to time we will engage in discussions with potential acquisition candidates. In order to pursue such opportunities, which could require significant commitments of capital, we may be required to incur debt or to issue additional potentially dilutive securities in the future. No assurance can be given as to our future acquisition opportunities and how such opportunities will be financed. In the absence of future acquisitions of other businesses, we believe our current cash balances and expected future cash flows from operations will be sufficient to meet our anticipated cash needs for working capital, capital expenditures and other activities through the next twelve months. If operating cash flows are not sufficient to meet our needs, we may borrow under our credit agreement.

ITEM 4. Evaluation of Disclosure Controls and Procedures

		Based on their evaluation as of the end of the period covered by this quarterly report, our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) believe, based on an evaluation performed under the supervision and with the participation of management, including our CEO and CFO, that the design and operation of our disclosure controls and procedures (as defined in Rules 13a – 15(e) under the Securities Exchange Act of 1934, as amended) are effective to ensure that material information relating to Tyler Technologies, Inc. is made known to them by others within our Company during the period in which this Report on Form 10-Q was being prepared. There have been no material changes in our internal controls over financial reporting that occurred during the period covered by the quarterly report which materially affected, or would be reasonably likely to affect, our internal control over financial reporting.

		We are currently undergoing a comprehensive effort to comply with Section 404 of the Sarbanes-Oxley Act of 2002. Compliance is required as of our year-end of December 31, 2004. This effort includes documenting, evaluating the design and testing the effectiveness of our internal controls. During this process, we have identified certain internal control issues, which management believes should be improved. Our comprehensive review continues, but to date we do not believe we have identified any material weaknesses in our internal controls as defined by the Public Company Accounting Oversight Board, although some internal control issues have been identified. We are making improvements to our internal controls over financial reporting as a result of our compliance effort in order to address the issues that have been identified, including the elimination or mitigation of any problems that are or could be considered significant deficiencies. These planned improvements include additional information technology system controls, further formalization of policies and procedures, improved segregation of duties and additional monitoring controls.

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Part II. OTHER INFORMATION

ITEM 6. Exhibits and Reports on Form 8-K


(a)	Exhibit 31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	Exhibit 31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	Exhibit 32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	Exhibit 32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)	Reports on Form 8-K filed during the three months ended September 30, 2004:

Item 3 of Part I and Items 1, 2, 3, 4 and 5 of Part II were not applicable and have been omitted.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		TYLER TECHNOLOGIES, INC.

		By: /s/ Theodore L. Bathurst
		Theodore L. Bathurst
		Vice President and Chief Financial Officer (principal financial officer and an authorized signatory)

		By: /s/ Terri L. Alford
		Terri L. Alford
		Controller
		(principal accounting officer and an authorized signatory)

Date: October 28, 2004

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Report Date

Reported

Exhibits Filed

News release issued by Tyler Technologies, Inc. dated July 28, 2004 announcing our operating results for the three and six months ended June 30, 2004

News release issued by Tyler Technologies, Inc. dated July 27, 2004 announcing John S. Marr, Jr. as President and Chief Executive Officer