UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
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For the quarterly period ended September 30, 2007
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
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Commission File Number 1-10485
TYLER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE
(State or other jurisdiction of
incorporation or organization)
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75-2303920
(I.R.S. employer
identification no.)
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5949 SHERRY LANE, SUITE 1400
DALLAS, TEXAS
75225
(Address of principal executive offices)
(Zip code)
(972) 713-3700
(Registrants 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
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
(Check one): Large accelerated filer
o
Accelerated filer
þ
Non-accelerated filer
o
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act.) Yes
o
No
þ
Number of shares of common stock of registrant outstanding at October 22, 2007: 38,870,335
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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Three months ended
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Nine months ended
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September 30,
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September 30,
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2007
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2006
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2007
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2006
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Revenues:
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Software licenses
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$
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8,196
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$
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10,422
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$
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24,560
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$
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27,817
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Software services
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18,276
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14,497
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51,068
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42,678
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Maintenance
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22,132
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18,847
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62,526
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54,220
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Appraisal services
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4,927
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4,920
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16,514
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14,727
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Hardware and other
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1,401
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1,453
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4,708
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4,706
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Total revenues
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54,932
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50,139
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159,376
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144,148
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Cost of revenues:
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Software licenses
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1,888
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2,500
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5,823
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7,592
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Acquired software
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427
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353
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1,248
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1,007
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Software services and maintenance
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26,737
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22,647
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77,505
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67,341
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Appraisal services
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3,248
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3,386
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11,340
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10,246
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Hardware and other
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1,002
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1,096
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3,471
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3,397
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Total cost of revenues
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33,302
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29,982
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99,387
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89,583
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Gross profit
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21,630
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20,157
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59,989
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54,565
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Selling, general and administrative expenses
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12,691
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12,421
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38,448
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35,578
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Research and development expense
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639
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780
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3,266
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2,494
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Amortization of customer and trade name intangibles
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372
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326
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1,075
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973
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Operating income
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7,928
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6,630
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17,200
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15,520
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Other income, net
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441
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306
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1,252
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603
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Income before income taxes
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8,369
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6,936
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18,452
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16,123
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Income tax provision
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3,209
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2,523
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7,141
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5,938
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Net income
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$
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5,160
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$
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4,413
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$
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11,311
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$
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10,185
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Earnings per common share:
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Basic
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$
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0.13
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$
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0.11
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$
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0.29
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$
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0.26
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Diluted
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$
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0.12
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$
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0.11
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$
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0.27
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$
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0.24
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Basic weighted average common shares outstanding
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38,688
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38,705
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38,717
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38,947
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Diluted weighted average common shares outstanding
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41,395
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41,898
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41,673
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41,911
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See accompanying notes.
1
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share amounts)
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September 30,
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2007
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December 31,
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(Unaudited)
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2006
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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15,823
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$
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17,212
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Restricted cash equivalents
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4,462
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4,962
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Short-term investments available-for-sale
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28,390
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19,543
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Accounts receivable (less allowance for losses of $1,756 in 2007
and $2,971 in 2006)
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56,919
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58,188
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Prepaid expenses
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6,401
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6,864
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Other current assets
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2,487
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2,326
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Deferred income taxes
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2,579
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2,579
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Total current assets
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117,061
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111,674
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Accounts receivable, long-term portion
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62
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1,675
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Property and equipment, net
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9,556
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7,390
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Other assets:
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Goodwill
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71,431
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66,127
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Customer related intangibles, net
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18,080
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17,502
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Software, net
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11,749
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14,554
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Trade name, net
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1,103
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1,188
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Sundry
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188
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166
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$
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229,230
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$
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220,276
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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3,759
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$
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5,063
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Accrued liabilities
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17,109
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17,735
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Deferred revenue
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66,655
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62,387
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Total current liabilities
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87,523
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85,185
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Deferred income taxes
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8,130
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9,216
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Commitments and contingencies
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Shareholders equity:
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Preferred stock, $10.00 par value; 1,000,000 shares authorized,
none issued
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Common stock, $0.01 par value; 100,000,000 shares authorized;
48,147,969 shares issued in 2007 and 2006
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481
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481
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Additional paid-in capital
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148,641
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151,627
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Accumulated other comprehensive loss, net of tax
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(4
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(10
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Retained earnings
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29,442
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18,131
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Treasury stock, at cost; 9,300,843 and 9,255,783 shares in 2007
and 2006, respectively
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(44,983
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(44,354
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)
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Total shareholders equity
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133,577
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125,875
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$
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229,230
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$
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220,276
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See accompanying notes.
2
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Nine months ended Septemer 30,
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2007
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2006
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Cash flows from operating activities:
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Net income
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$
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11,311
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$
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10,185
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Adjustments to reconcile net income to net cash
provided by operating activities:
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Depreciation and amortization
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7,795
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7,592
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Share-based compensation expense
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1,705
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1,529
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Purchased in-process research and development charge
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140
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Non-cash interest and other charges
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307
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Deferred income taxes
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(141
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)
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Changes in operating assets and liabilities, exclusive of
effects of acquired companies:
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Accounts receivable
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6,532
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5,496
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Income tax payable
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(800
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)
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(2,201
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)
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Prepaid expenses and other current assets
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504
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(591
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)
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Accounts payable
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(1,465
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)
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177
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Accrued liabilities
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(1,289
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)
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(103
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)
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Deferred revenue
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245
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297
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Net cash provided by operating activities
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24,538
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22,687
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Cash flows from investing activities:
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Proceeds from sale of short-term investments
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21,103
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14,691
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Purchases of short-term investments
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(29,940
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)
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(14,966
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)
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Cost of acquisitions, net of cash acquired
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|
(9,005
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)
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(12,237
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)
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Investment in software development costs
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(158
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)
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(203
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)
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Additions to property and equipment
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(2,575
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)
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(3,288
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)
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Reduction in restricted investments
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|
500
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Other
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40
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(6
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)
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Net cash used by investing activities
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(20,035
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)
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|
(16,009
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)
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|
|
|
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Cash flows from financing activities:
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|
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|
|
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Purchase of treasury shares
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|
(11,134
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)
|
|
|
(9,923
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)
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Contributions from employee stock purchase plan
|
|
|
833
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|
|
|
719
|
|
Proceeds from exercise of stock options
|
|
|
3,291
|
|
|
|
2,420
|
|
Excess tax benefits from share-based compensation expense
|
|
|
1,118
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|
|
|
425
|
|
|
|
|
|
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Net cash used by financing activities
|
|
|
(5,892
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)
|
|
|
(6,359
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net (decrease) increase in cash and cash equivalents
|
|
|
(1,389
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)
|
|
|
319
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|
Cash and cash equivalents at beginning of period
|
|
|
17,212
|
|
|
|
20,733
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|
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|
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|
|
|
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|
|
|
|
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Cash and cash equivalents at end of period
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|
$
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15,823
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|
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$
|
21,052
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|
|
|
|
|
|
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|
See accompanying notes.
3
Tyler Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)
(1)
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Basis of Presentation
|
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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,
2007 and December 31, 2006 and operating result amounts are for the three and nine months ended
September 30, 2007 and 2006, 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, 2006. 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.
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Although we have a number of divisions, separate segment data has not been presented as they meet
the criteria set forth in Statement of Financial Accounting Standards (SFAS) No. 131,
Disclosures About Segments of an Enterprise and Related Information to be presented as one
segment.
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|
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In addition, certain other amounts for the previous year have been reclassified to conform to the
current year presentation.
|
|
(2)
|
|
Revenue Recognition
|
|
|
|
We recognize revenue related to our software arrangements pursuant to the provisions of Statement
of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9,
and related interpretations, as well as the Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 104, Revenue Recognition. We recognize revenue on our appraisal
services contracts using the proportionate performance method of accounting, with considerations
for the provisions of Emerging Issues Task Force (EITF) No. 00-21, Revenue Arrangements with
Multiple Deliverables.
|
|
|
|
Software Arrangements:
|
|
|
|
We earn revenue from software licenses, post-contract customer support (PCS or maintenance),
software related services and hardware. PCS includes telephone support, bug fixes, and rights to
upgrades on a when-and-if available basis. We provide 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 multiple software products,
specified upgrades, PCS, and/or other services, we allocate the total arrangement fee among each
deliverable based on the relative fair value of each.
|
|
|
|
We typically enter into multiple element arrangements, which include software licenses, software
services, PCS and occasionally hardware. The majority of our software arrangements are multiple
element arrangements, but for those arrangements that involve significant production,
modification or customization of the software, or where software services are otherwise
considered essential to the functionality of the software in the customers environment, we use
contract accounting and apply the provisions of SOP 81-1 Accounting for Performance of
Construction Type and Certain Production Type Contracts.
|
|
|
|
If the arrangement does not require significant production, modification or customization or
where the software services are not considered essential to the functionality of the software,
revenue is recognized when all of the following conditions are met:
|
|
i.
|
|
persuasive evidence of an arrangement exists;
|
|
|
ii.
|
|
delivery has occurred;
|
|
|
iii.
|
|
our fee is fixed or determinable; and
|
|
|
iv.
|
|
collectibility is probable.
|
|
|
For multiple element arrangements, each element of the arrangement is analyzed and we allocate a
portion of the total arrangement fee to the elements based on the fair value of the element using
vendor-specific objective evidence of fair value (VSOE), regardless of any separate prices
stated within the contract for each element. Fair value is considered the price a customer would
|
4
|
|
be required to pay if the element was sold separately based on our historical experience of
stand-alone sales of these elements to third parties. For PCS, we use renewal rates for
continued support arrangements to determine fair value. For software services, we use the fair
value we charge our customers when those services are sold separately. We monitor our
transactions to insure we maintain and periodically revise VSOE to reflect fair value. In
software arrangements in which we have the fair value of all undelivered elements but not of a
delivered element, we apply the residual method as allowed under SOP 98-9 in accounting for any
element of a multiple element arrangement involving software that remains undelivered such that
any discount inherent in a contract is allocated to the delivered element. Under the residual
method, if the fair value of all undelivered elements is determinable, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to
the delivered element(s) and is recognized as revenue assuming the other revenue recognition
criteria are met. In software arrangements in which we do not have VSOE for all undelivered
elements, revenue is deferred until fair value is determined or all elements for which we do not
have VSOE have been delivered. Alternatively, if sufficient VSOE does not exist and the only
undelivered element is services that do not involve significant modification or customization of
the software, the entire fee is recognized over the period during which the services are expected
to be performed.
|
|
|
|
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 new customers
whose payment terms are three months or more from shipment, revenue is generally recognized 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
products 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 customers 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 portion of the fee
represents a non-refundable enforceable claim and is probable of collection, and the remaining
services such as training are not considered essential to the products functionality.
|
|
|
|
For arrangements that involve significant production, modification or customization of the
software, or where software services are otherwise considered essential, we recognize revenue
using contract accounting. We generally use the percentage-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 method 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 contract costs. We
use the level of profit margin that is most likely to occur on a contract. If the most likely
profit margin cannot be precisely determined, the lowest probable level of profit in the range of
estimates is used until the results can be estimated more precisely. These arrangements are
often implemented over an extended 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
contract costs, if any, are recorded in the period they are determined. Estimated losses on
uncompleted contracts are recorded in the period in which we first determine that a loss is
apparent.
|
|
|
|
For arrangements that include new product releases for which it is difficult to estimate final
profitability except to assume that no loss will ultimately be incurred, we recognize revenue
under the completed contract method. Under the completed contract method, revenue is recognized
only when a contract is completed or substantially complete. Historically these amounts have
been immaterial.
|
|
|
|
Software Services
|
|
|
|
Some of our software arrangements include services considered essential for the customer to use
the software for the customers purposes. For these software arrangements, both the software
license revenue and the services revenue are recognized as the services are performed using the percentage-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.
|
|
|
|
Computer Hardware Equipment
|
|
|
|
Revenue allocable to computer hardware equipment, which is based on VSOE, is recognized when we
deliver the equipment and collection is probable.
|
5
|
|
Postcontract Customer Support
|
|
|
|
Our customers generally enter into PCS agreements when they purchase our software licenses. Our
PCS agreements are typically renewable annually. 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. Fair value for the maintenance and support
obligations for software licenses is based upon the specific sale renewals to customers.
|
|
|
|
Appraisal Services:
|
|
|
|
For our property appraisal projects, we recognize revenue using the proportionate performance
method of revenue recognition since many of these projects are implemented over one to three year
periods and consist of various unique activities. Under this method of revenue recognition, we
identify each activity for the appraisal project, with a typical project generally calling for
bonding, office set up, training, routing of map information, data entry, data collection, data
verification, informal hearings, appeals and project management. Each activity or act is
specifically identified and assigned an estimated cost. Costs which are considered to be
associated with indirect activities, such as bonding costs and office set up, are expensed as
incurred. These costs are typically billed as incurred and are recognized as revenue equal to
cost. Direct contract fulfillment activities and related supervisory costs such as data
collection, data entry and verification are expensed as incurred. The direct costs for these
activities are determined and the total contract value is then allocated to each activity based
on a consistent profit margin. Each activity is assigned a consistent unit of measure to
determine progress towards completion and revenue is recognized for each activity based upon the
percentage complete as applied to the estimated revenue for that activity. Progress for the
fulfillment activities is typically based on labor hours or an output measure such as the number
of parcel counts completed for that activity. Estimated losses on uncompleted contracts are
recorded in the period in which we first determine that a loss is apparent.
|
|
|
|
Other:
|
|
|
|
The majority of deferred revenue consists of unearned support and maintenance revenue that has
been billed based on contractual terms in the underlying arrangement with the remaining balance
consisting of payments received in advance of revenue being earned under software licensing,
software and appraisal services and hardware installation. Unbilled revenue is not billable at
the balance sheet date but is recoverable over the remaining life of the contract through
billings made in accordance with contractual agreements. The termination clauses in most of our
contracts provide for the payment for the fair value of products delivered and services performed
in the event of an early termination.
|
|
|
|
Prepaid expenses and other current assets include direct and incremental costs, consisting
primarily of commissions associated with arrangements for which revenue recognition has been
deferred and third party subcontractor payments. Such costs are expensed at the time the related
revenue is recognized.
|
|
(3)
|
|
Acquisitions
|
|
|
|
In September 2007, we completed the acquisition of all the capital stock of EDP Enterprises, Inc.
(EDP), which develops and sells financial and student information and management systems for
public school districts in Texas. The total purchase price, including transaction costs and
excluding cash balances acquired, was $3.9 million in cash.
|
|
|
|
In February 2007, we completed the acquisition of all of the capital stock of Advanced Data
Systems, Inc. (ADS), which develops and sells fund accounting solutions, primarily in New
England. The total purchase price, including transaction costs along with an office building
used in the business, was approximately $4.2 million in cash. In January 2007 we also purchased
certain software assets to enhance our courts and justice product line for approximately $756,000
in cash, including transaction costs.
|
|
|
|
We believe these acquisitions will complement our business model by broadening our customer base
and will give us additional
opportunities to provide our customers with solutions tailored specifically for the public
sector.
|
|
|
|
In connection with these three transactions we acquired total assets of approximately $5.3
million and assumed total liabilities of approximately $4.9 million. We recorded goodwill of $5.3
million, of which $2.4 million is expected to be deductible for tax purposes, and other
intangible assets of $3.3 million. The $3.3 million of intangible assets is attributable to
acquired software and customer relationships that will be amortized over a weighted average
period of approximately 6 years. Our consolidated balance sheet as of September 30, 2007
reflects the allocation of the purchase price to the assets acquired and liabilities assumed
based on
|
6
|
|
their estimated fair values at the dates of acquisition. The EDP purchase price allocation is preliminary. The operating results of these acquisitions are included in our
results of operations since their respective dates of acquisition.
|
|
(4)
|
|
Shareholders Equity
|
|
|
|
The following table details activity in our common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
2007
|
|
2006
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
Purchases of common stock
|
|
|
(889
|
)
|
|
$
|
(11,134
|
)
|
|
|
(987
|
)
|
|
$
|
(9,923
|
)
|
Stock option exercises
|
|
|
767
|
|
|
|
3,291
|
|
|
|
526
|
|
|
|
2,420
|
|
Employee stock plan purchases
|
|
|
77
|
|
|
|
853
|
|
|
|
80
|
|
|
|
700
|
|
Shares issued for acquisitions
|
|
|
|
|
|
|
|
|
|
|
325
|
|
|
|
2,891
|
|
|
|
As of September 30, 2007, we have authorization from our board of directors to repurchase up
to 2.1 million shares of Tyler common stock.
|
(5)
|
|
Income Tax Provision
|
|
|
|
The following table sets forth a comparison of our income tax provision for the following
periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Income tax provision
|
|
$
|
3,209
|
|
|
$
|
2,523
|
|
|
$
|
7,141
|
|
|
$
|
5,938
|
|
Effective income tax rate
|
|
|
38.3
|
%
|
|
|
36.4
|
%
|
|
|
38.7
|
%
|
|
|
36.8
|
%
|
|
|
The effective income tax rates for the periods presented were different from the statutory
United States federal income tax rate of 35% primarily due to state income taxes,
non-deductible share-based compensation expense, the qualified manufacturing activities
deduction and non-deductible meals and entertainment costs.
|
|
|
|
The effective tax rate for the three months ended September 30, 2006 included the benefit
from previously unclaimed tax credits resulting from the completion of state income tax
audits. The effective tax rate for the nine months ended September 30, 2006 also included
the benefit of changes in the Texas franchise tax law and related rates enacted in the
second quarter of 2006.
|
|
|
|
We made federal and state income tax payments, net of refunds, of $6.9 million in the nine months
ended September 30, 2007, compared to $7.9 million in net payments for the same period of the
prior year.
|
|
|
|
We adopted the provisions of Financial Standards Accounting Board Interpretation (FIN) No. 48,
Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the
implementation of FIN 48, we recognized no material adjustments in the
liability for unrecognized income tax benefits. At the adoption date we did not have any
unrecognized tax benefits and did not have any interest or penalties accrued.
|
|
|
|
We are subject to United States federal tax as well as income tax of multiple state and local
jurisdictions. We are no longer subject to United States federal income tax examinations for
years before 2004 and are no longer subject to state and local income tax examinations by tax
authorities for the years before 2002. The Internal Revenue Service concluded an examination of
our United States federal tax return for 2005 in the second quarter of 2007, which did not result in any
material adjustments.
|
7
|
|
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,160
|
|
|
$
|
4,413
|
|
|
$
|
11,311
|
|
|
$
|
10,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average basic common shares outstanding
|
|
|
38,688
|
|
|
|
38,705
|
|
|
|
38,717
|
|
|
|
38,947
|
|
Assumed conversion of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
1,685
|
|
|
|
1,921
|
|
|
|
1,753
|
|
|
|
1,734
|
|
Warrants
|
|
|
1,022
|
|
|
|
1,272
|
|
|
|
1,203
|
|
|
|
1,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive common shares
|
|
|
2,707
|
|
|
|
3,193
|
|
|
|
2,956
|
|
|
|
2,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings
per share Adjusted weighted-average shares
|
|
|
41,395
|
|
|
|
41,898
|
|
|
|
41,673
|
|
|
|
41,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.13
|
|
|
$
|
0.11
|
|
|
$
|
0.29
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
0.27
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective September 10, 2007, warrants to purchase 1.6 million shares of common stock at $2.50
per share expired and the effect of these warrants is not included in the potentially dilutive
common shares after that date. See Note 8 Commitments and Contingencies for further
information.
|
(7)
|
|
Share-Based Compensation
|
|
|
|
Share-based compensation plan
|
|
|
|
We have a stock option plan that provides for the grant of stock options to key employees,
directors and non-employee consultants. Stock options vest after three to five years of
continuous service from the date of grant and have a contractual term of ten years. Once options
become exercisable, the employee can purchase shares of our common stock at the market price on
the date we granted the option. Effective January 1, 2006, we adopted the provisions of SFAS
No. 123R, Share-Based Payment, which establishes accounting for share-based awards exchanged
for employee services, using the modified prospective application transition method. Under this
transition method, compensation cost recognized in 2007 and 2006 includes the applicable amounts
of: (a) compensation cost of all share-based payments granted prior to, but not yet vested as of,
January 1, 2006 (based on the grant-date fair value estimated in accordance with the original
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and previously presented
in the pro forma footnote disclosures), and (b) compensation cost for all share-based
payments granted subsequent to January 1, 2006 (based on the grant-date fair value estimated in
accordance with the new provisions of SFAS No. 123R).
|
|
|
|
Determining Fair Value Under SFAS No. 123R
|
|
|
|
Valuation and Amortization Method. We estimate the fair value of share-based awards granted using
the Black-Scholes option valuation model. We amortize the fair value of all awards on a
straight-line basis over the requisite service periods, which are generally the vesting periods.
|
8
|
|
Expected Life. The expected life of awards granted represents the period of time that they are
expected to be outstanding. We determine the expected life using the simplified method in
accordance with Staff Accounting Bulletin No. 107.
|
|
|
|
Expected Volatility. Using the Black-Scholes option valuation model, we estimate the volatility
of our common stock at the date of grant based on the historical volatility of our common stock.
|
|
|
|
Risk-Free Interest Rate. We base the risk-free interest rate used in the Black-Scholes option
valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with
an equivalent remaining term equal to the expected life of the award.
|
|
|
|
Expected Dividend Yield. We have not paid any cash dividends on our common stock in the last ten
years and we do not anticipate paying any cash dividends in the foreseeable future. Consequently,
we use an expected dividend yield of zero in the Black-Scholes option valuation model.
|
|
|
|
Expected Forfeitures. We use historical data to estimate pre-vesting option forfeitures. We
record stock-based compensation only for those awards that are expected to vest.
|
|
|
|
We did not grant any options during the three months ended September 30, 2007. We granted
options for 120,000 shares during the three months ended September 30, 2006.
|
|
|
|
The following weighted average assumptions were used for options granted during the three months ended
September 30:
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
Expected life (in years)
|
|
|
|
|
|
|
6.5
|
|
Expected volatility
|
|
|
|
%
|
|
|
44.7
|
%
|
Risk-free interest rate
|
|
|
|
%
|
|
|
5.0
|
%
|
Expected forfeiture rate
|
|
|
|
%
|
|
|
3
|
%
|
|
|
Share-Based Compensation Under SFAS No. 123R
|
|
|
The following table summarizes share-based compensation expense related to share-based awards
under SFAS No. 123R recorded in the statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Cost of software services and maintenance
|
|
$
|
59
|
|
|
$
|
37
|
|
|
$
|
158
|
|
|
$
|
110
|
|
Selling, general and administrative expenses
|
|
|
573
|
|
|
|
517
|
|
|
|
1,547
|
|
|
|
1,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
632
|
|
|
$
|
554
|
|
|
$
|
1,705
|
|
|
$
|
1,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8)
|
|
Commitments and Contingencies
|
|
|
|
As of June 30, 2007, we had warrants outstanding to purchase 1.6 million shares of common stock
at $2.50 per share, which were held by Bank of America, N. A. (BOA) pursuant to the terms of
two Amended and Restated Stock Purchase Warrants (collectively, the Warrants). The exercise price could be paid either in cash or by a
cashless exercise in which the holder was required to surrender the Warrants in exchange for
warrant shares based on the following formula: [(Market Price $2.50) / (Market Price)] x 1. 6
million shares, with the Market Price calculated as the immediately preceding 60-day trading
average of our common stock. The Warrants identified specific exercise procedures for each
method of exercise and further provided that any exercise would not be effective until we
received all applicable documents, instruments, and the purchase price. The Warrants were
originally issued on September 10, 1997 and were exercisable from that date until 5:00 p.m.,
Central Time, on September 10, 2007, when they expired.
|
|
|
|
On September 10, 2007, at 4:44 p.m., BOA attempted to effectuate a cashless exercise of the
Warrants via email; however, we believe BOA did not comply with all of the requirements set
forth in the Warrants for an effective exercise. At 5:37 p.m., Central Time, BOA recalled this
email exercise notice, which we subsequently accepted. At 6:10 p.m., Central Time, BOA
attempted to
|
9
|
|
effectuate a cash exercise of the Warrants by emailing a different notice of exercise, which we believe also failed to comply with all of the requirements set forth in the
Warrants for an effective exercise, and in any event, was after the expiration date of the
Warrants. As a result, we believe these Warrants expired as of September 10, 2007 and have
excluded the effect of the Warrants from potentially dilutive common shares as of such date in
our earnings per share computation.
|
|
|
|
On October 12, 2007, we filed a declaratory judgment action against BOA in the District Court of
Dallas County, Texas, 101
st
Judicial District requesting the court to declare, among
other things, that the Warrants have expired pursuant to their terms. As of the date of this
Form 10-Q, BOA has not filed a response to the litigation. While we believe the Warrants
expired as of September 10, 2007, there can be no assurance as to the ultimate resolution of
this matter.
|
|
|
|
Other than routine litigation incidental to our business, there are no material legal proceedings
pending to which we are party or to which any of our properties are subject.
|
|
(9)
|
|
Recent Accounting Pronouncements
|
|
|
|
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in accordance with accounting
principles generally accepted in the United States, and expands disclosures about fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, with
earlier application encouraged. Any amounts recognized upon adoption as a cumulative effect
adjustment will be recorded to the opening balance of retained earnings in the year of adoption.
We have not yet determined the impact of SFAS No. 157 on our financial condition and results of
operations.
|
ITEM 2. Managements 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, our management or
future financial results, as and when applicable, are discussed in our filings
with the Securities and Exchange Commission, on its Form 10-K for the year ended December 31,
2006. 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.
|
10
|
|
GENERAL
|
|
|
|
We provide integrated information management solutions and services for local governments. We
develop and market a broad line of software solutions 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.
|
|
|
|
In September 2007, we completed the acquisition of all the capital stock of EDP Enterprises, Inc.
(EDP), which develops and sells financial and student information management systems for public
school districts in Texas. The total purchase price, including transaction costs and excluding
acquired cash balances, was $3.9 million in cash. In the first quarter of 2007, we acquired one
company, Advanced Data Systems, Inc. (ADS), as well as certain software assets to enhance our
courts and justice product line. The combined purchase price for ADS and the software assets was
approximately $5.1 million in cash. In connection with these three transactions we acquired
total assets of approximately $5.3 million and assumed total liabilities of approximately $4.9
million. We recorded goodwill of $5.3 million and other intangible assets of $3.3 million. See
Note 3 in the Notes to the Unaudited Condensed Consolidated Financial Statements.
|
|
|
|
As of September 30, 2007, our total full-time equivalent employee count increased to 1,640 from
1,474 at September 30, 2006. Approximately one-half of these additions were to our implementation
and support staff, including additions to our capacity to deliver our backlog, particularly for
our Odyssey courts and justice solutions. Our implementation and support staff at September 30,
2007 includes 73 full-time equivalent employees added as a result of several acquisitions
completed in the first nine months of 2007.
|
|
|
|
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 ongoing 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 expanded information about our critical accounting policies and estimates
provided in Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations, included in our Form 10-K for the year ended December 31, 2006. There have been no
material changes to our critical accounting policies and estimates from the information provided
in our 10-K for the year ended December 31, 2006, except as follows:
|
|
|
|
We account for uncertain tax positions in accordance with Financial Accounting Standards Board
(FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement No. 109. The application of income tax law is inherently complex. Laws and
regulations in this area are voluminous and are often ambiguous. As such, we are required to
make many subjective assumptions and judgments regarding our income tax exposures.
Interpretations of and guidance surrounding income tax laws and regulations change over time.
Changes in our subjective assumptions and judgments can materially affect amounts recognized in
the consolidated balance sheets and statements of income. See Note 5 in the Notes to the
Unaudited Condensed Consolidated Financial Statements for additional detail.
|
|
|
|
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in accordance with accounting
principles generally accepted in the United States, and expands disclosures about fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, with
earlier application encouraged. Any amounts recognized upon adoption as a cumulative effect
adjustment will be recorded to the opening balance of retained earnings in the year of adoption.
We have not yet determined the impact of SFAS No. 157 on our financial condition and results of
operations.
|
11
|
|
ANALYSIS OF RESULTS OF OPERATIONS
|
|
|
|
Revenues
|
|
|
|
The following table sets forth the key components of our revenues for the periods presented as of
September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
%
|
|
|
Nine Months
|
|
|
%
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
Increase/
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
Increase/
|
|
($in thousands)
|
|
2007
|
|
|
Total
|
|
|
2006
|
|
|
Total
|
|
|
(Decrease)
|
|
|
2007
|
|
|
Total
|
|
|
2006
|
|
|
Total
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses
|
|
$
|
8,196
|
|
|
|
15
|
%
|
|
$
|
10,422
|
|
|
|
21
|
%
|
|
|
(21
|
)%
|
|
$
|
24,560
|
|
|
|
16
|
%
|
|
$
|
27,817
|
|
|
|
19
|
%
|
|
|
(12
|
)%
|
Software services
|
|
|
18,276
|
|
|
|
33
|
|
|
|
14,497
|
|
|
|
29
|
|
|
|
26
|
|
|
|
51,068
|
|
|
|
32
|
|
|
|
42,678
|
|
|
|
30
|
|
|
|
20
|
|
Maintenance
|
|
|
22,132
|
|
|
|
40
|
|
|
|
18,847
|
|
|
|
37
|
|
|
|
17
|
|
|
|
62,526
|
|
|
|
39
|
|
|
|
54,220
|
|
|
|
38
|
|
|
|
15
|
|
Appraisal services
|
|
|
4,927
|
|
|
|
9
|
|
|
|
4,920
|
|
|
|
10
|
|
|
|
|
|
|
|
16,514
|
|
|
|
10
|
|
|
|
14,727
|
|
|
|
10
|
|
|
|
12
|
|
Hardware and other
|
|
|
1,401
|
|
|
|
3
|
|
|
|
1,453
|
|
|
|
3
|
|
|
|
(4
|
)
|
|
|
4,708
|
|
|
|
3
|
|
|
|
4,706
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
54,932
|
|
|
|
100
|
%
|
|
$
|
50,139
|
|
|
|
100
|
%
|
|
|
10
|
%
|
|
$
|
159,376
|
|
|
|
100
|
%
|
|
$
|
144,148
|
|
|
|
100
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses
. Software license revenues consist of the following components for the periods
presented as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
%
|
|
|
Nine Months
|
|
|
%
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
Increase/
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
Increase/
|
|
($in thousands)
|
|
2007
|
|
|
Total
|
|
|
2006
|
|
|
Total
|
|
|
(Decrease)
|
|
|
2007
|
|
|
Total
|
|
|
2006
|
|
|
Total
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial management
|
|
$
|
6,383
|
|
|
|
78
|
%
|
|
$
|
7,677
|
|
|
|
74
|
%
|
|
|
(17
|
)%
|
|
$
|
17,753
|
|
|
|
72
|
%
|
|
$
|
20,874
|
|
|
|
75
|
%
|
|
|
(15
|
)%
|
Courts and justice
|
|
|
915
|
|
|
|
11
|
|
|
|
1,501
|
|
|
|
14
|
|
|
|
(39
|
)
|
|
|
3,989
|
|
|
|
16
|
|
|
|
3,679
|
|
|
|
13
|
|
|
|
8
|
|
Appraisal and tax
and other
|
|
|
898
|
|
|
|
11
|
|
|
|
1,244
|
|
|
|
12
|
|
|
|
(28
|
)
|
|
|
2,818
|
|
|
|
12
|
|
|
|
3,264
|
|
|
|
12
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total software
license revenues
|
|
$
|
8,196
|
|
|
|
100
|
%
|
|
$
|
10,422
|
|
|
|
100
|
%
|
|
|
(21
|
)%
|
|
$
|
24,560
|
|
|
|
100
|
%
|
|
$
|
27,817
|
|
|
|
100
|
%
|
|
|
(12
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the three months ended September 30, 2007 we signed 26 material new contracts with average
software license fees of approximately $319,000 compared to 23 material new contracts signed in
the three months ended September 30, 2006 with average software license fees of approximately
$230,000. In the nine months ended September 30, 2007 we signed 59 material new contracts with
average software license fees of approximately $447,000 compared to 64 material new contracts
signed in the nine months ended September 30, 2006 with average software license fees of
approximately $309,000. We consider contracts with a license fee component of $100,000 or more
to be material. Although a contract is signed in a particular quarter, the period in which the
revenue is recognized may be different because we recognize revenue according to our revenue
recognition policy as described in Note 2 in the Unaudited Condensed Consolidated Financial
Statements.
|
|
|
Changes in software license revenues consist of the following components:
|
|
|
|
Software license revenue related to our financial management solutions for the three and
nine months ended September 30, 2007 decreased 17% and 15%, respectively compared to the
prior year periods. In the three months ended September 30, 2007, the number of customers choosing
our subscription-based options, rather than purchasing the software under a traditional perpetual software license
arrangement, represented a relatively small percentage of new customers; however, the size of those contracts was larger than in
the prior year period. Subscription-based arrangements result in lower software license revenues in the initial year as compared
to traditional perpetual software license arrangement but generate higher overall revenues over the term of the contract.
The decline in software license for the nine months ended September 30, 2007
compared to the prior year period was also impacted by a large installation of our MUNIS
financial management application in the United States Virgin Islands in the second quarter
of 2006 and a product mix in 2007 that required less third party software.
|
12
|
|
|
Software license revenue related to our courts and justice software solutions declined
39% for the three months ended September 30, 2007, and increased 8% for the nine months
ended September 30, 2007 compared to the prior year periods. Although the number of active
Odyssey contracts has increased by almost 50%, the software license revenue recognition for
several of the larger arrangements will be deferred until 2008 in accordance with our
revenue recognition policy and terms of the contracts.
|
|
|
Software services
. Changes in software services revenues consist of the following components:
|
|
|
|
Software services revenue related to financial management solutions, which comprises
more than half of our software services revenue in the periods presented, experienced
strong increases compared to the three and nine months ended September 30, 2006.
Approximately one-half of these increases were due to new customers for our
subscription-based application service provider hosted arrangements and disaster recovery services. While this does not represent a fundamental change in our
business model, we provide our solutions to clients under a variety of innovative options that address their specific needs.
Government is relatively deliberate in its pace of change, but over time, we expect to generate significant subscription-based revenue.
Our current annualized revenue run rate for these subscription services is approximately $8.5 million,
and we expect the new subscription contracts signed in the three months
ended September 30, 2007, will increase the annualized run rate in future quarters to more than $10.8 million. We have also added to our implementation
staff over the last twelve months, which has enabled us to deliver our backlog at a faster
rate.
|
|
|
|
|
Software services revenue related to our Odyssey courts and justice solutions
experienced substantial increases compared to the three and nine months ended September 30,
2006, reflecting increased contract volume. We had approximately 35 Odyssey contracts in
the first nine months of 2007 compared to approximately 20 Odyssey contracts in the first
nine months of 2006.
|
|
|
|
|
Software services revenue related to appraisal and tax and other solutions, which
comprise approximately 20% of our software services revenue in the periods presented, had
strong increases for the three and nine months ended September 30, 2007 compared to the
prior year periods. The majority of the increase is related to one large appraisal and tax
software implementation, which is expected to be substantially complete by December 31,
2007.
|
|
|
Maintenance
. We provide maintenance and support services for our software products and third
party software. Maintenance revenues increased over the prior year periods due to growth in
our installed customer base and slightly higher maintenance rates on most of our solutions.
|
|
|
|
Appraisal services
. Appraisal services are project-oriented and are driven in part by
revaluation cycles in various states. Appraisal services revenue for the three months ended
September 30, 2007 was flat compared to the prior year period and 12% higher for the nine
months ended September 30, 2007 compared to the prior year period. The year-to-date
increase was due to activity related to Ohios revaluation cycle, which occurs every six
years, and a $4.0 million contract with Fulton County, Georgia, which began late in 2006.
The Ohio revaluation projects began with smaller counties late in the first quarter of 2006
and expanded to larger counties by the third quarter of 2006. A substantial portion of the
Ohio revaluation projects was complete by September 30, 2007. The level of appraisal
services revenues for 2008 will depend on our ability to replace the appraisal services
revenues associated with the Ohio revaluation.
|
13
Cost of Revenues and Gross Margins
The following table sets forth a comparison of the key components of our cost of revenues,
and those components stated as a percentage of related revenues for the periods presented as
of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
Related
|
|
|
|
|
|
|
Related
|
|
|
|
|
|
|
Related
|
|
|
|
|
|
|
Related
|
|
($ in thousands)
|
|
2007
|
|
|
Revenues
|
|
|
2006
|
|
|
Revenues
|
|
|
2007
|
|
|
Revenues
|
|
|
2006
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses
|
|
$
|
1,888
|
|
|
|
23
|
%
|
|
$
|
2,500
|
|
|
|
24
|
%
|
|
$
|
5,823
|
|
|
|
24
|
%
|
|
$
|
7,592
|
|
|
|
27
|
%
|
Acquired software
|
|
|
427
|
|
|
|
5
|
|
|
|
353
|
|
|
|
3
|
|
|
|
1,248
|
|
|
|
5
|
|
|
|
1,007
|
|
|
|
4
|
|
Software services
and maintenance
|
|
|
26,737
|
|
|
|
66
|
|
|
|
22,647
|
|
|
|
68
|
|
|
|
77,505
|
|
|
|
68
|
|
|
|
67,341
|
|
|
|
69
|
|
Appraisal services
|
|
|
3,248
|
|
|
|
66
|
|
|
|
3,386
|
|
|
|
69
|
|
|
|
11,340
|
|
|
|
69
|
|
|
|
10,246
|
|
|
|
70
|
|
Hardware and other
|
|
|
1,002
|
|
|
|
72
|
|
|
|
1,096
|
|
|
|
75
|
|
|
|
3,471
|
|
|
|
74
|
|
|
|
3,397
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of
revenue
|
|
$
|
33,302
|
|
|
|
61
|
%
|
|
$
|
29,982
|
|
|
|
60
|
%
|
|
$
|
99,387
|
|
|
|
62
|
%
|
|
$
|
89,583
|
|
|
|
62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth a comparison of gross margin percentage by revenue type for
the periods presented as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Nine Months
|
|
Gross Margin percentages
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses &
acquired software
|
|
|
71.8
|
%
|
|
|
72.6
|
%
|
|
|
(0.8
|
)%
|
|
|
71.2
|
%
|
|
|
69.1
|
%
|
|
|
2.1
|
%
|
Software services
and maintenance
|
|
|
33.8
|
|
|
|
32.1
|
|
|
|
1.7
|
|
|
|
31.8
|
|
|
|
30.5
|
|
|
|
1.3
|
|
Appraisal services
|
|
|
34.1
|
|
|
|
31.2
|
|
|
|
2.9
|
|
|
|
31.3
|
|
|
|
30.4
|
|
|
|
0.9
|
|
Hardware and other
|
|
|
28.5
|
|
|
|
24.6
|
|
|
|
3.9
|
|
|
|
26.3
|
|
|
|
27.8
|
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall gross margin
|
|
|
39.4
|
%
|
|
|
40.2
|
%
|
|
|
(0.8
|
)%
|
|
|
37.6
|
%
|
|
|
37.9
|
%
|
|
|
(0.3
|
)%
|
Software license revenues
. The main component of our cost of software license revenues is
amortization expense for capitalized development costs on certain software products, with
third party software costs making up the balance. Once a product is released, we begin to
amortize, over the estimated useful life of the product, the costs associated with its
development. Amortization expense is determined on a product-by-product basis at an annual
rate not less than straight-line basis over the products estimated life, which is generally
five years. Development costs consist mainly of personnel costs, such as salary and
benefits paid to our developers, and rent for related office space.
For the nine months ended September 30, 2007, our software license gross margin percentage
increased slightly compared to the prior year period due to lower amortization expense of
software development costs because some products became fully amortized during the first
quarter of 2006. Additionally our product mix in the first nine months of 2007 included
less third party software, which has higher associated costs than proprietary software.
Software services and maintenance revenues
. Cost of software services and maintenance primarily
consists of personnel costs related to installation of our software, conversion of customer
data, training customer personnel and support activities. For the three months and nine
months ended September 30, 2007, the software services and maintenance gross margin
percentage was slightly higher than the comparable prior year periods because maintenance
costs typically grow at a slower rate than related revenues due to leverage in the
utilization of our support and maintenance staff and economies of scale. We have increased
our implementation and support staff by 163 full-time equivalent employees since September
30, 2006. This increase includes 73 additional employees related to acquisitions completed
in the first nine months of 2007. The remaining additions were to increase our capacity to
train and deliver our contract backlog, particularly for our Odyssey courts and justice
solutions.
14
Appraisal services
. Higher revenues associated with increased activity on the Ohio revaluation
projects contributed to the slight appraisal services gross margin percentage increase.
Our blended gross margin for the three months ended September 30, 2007 declined .8% compared to
the prior year period due to a revenue mix that included less software license. Software license
revenue inherently has higher gross margins than other revenues such as professional services and
hardware. Although the revenue mix for the nine months ended September 30, 2007 also included
less software license than the prior year period, the negative impact on the gross margin was
offset by lower amortization expense of software development costs as well as lower third party
software costs described above.
Selling, General and Administrative Expenses
The following table sets forth a comparison of our selling, general and administrative
expenses (SG&A) for the periods presented as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
Change
|
|
Nine Months
|
|
Change
|
($ in thousands)
|
|
2007
|
|
2006
|
|
$
|
|
%
|
|
2007
|
|
2006
|
|
$
|
|
%
|
Selling, general and
administrative expenses
|
|
$
|
12,691
|
|
|
$
|
12,421
|
|
|
$
|
270
|
|
|
|
2
|
%
|
|
$
|
38,448
|
|
|
$
|
35,578
|
|
|
$
|
2,870
|
|
|
|
8
|
%
|
Percent of revenues
|
|
|
23.1
|
%
|
|
|
24.8
|
%
|
|
|
|
|
|
|
|
|
|
|
24.1
|
%
|
|
|
24.7
|
%
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2007, SG&A costs grew at a slower rate than revenues due
to leverage in the utilization of our administrative and sales staff.
Research and Development Expense
The following table sets forth a comparison of our research and development expense for the
periods presented as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
Change
|
|
Nine Months
|
|
Change
|
($ in thousands)
|
|
2007
|
|
2006
|
|
$
|
|
%
|
|
2007
|
|
2006
|
|
$
|
|
%
|
Research and
development expense
|
|
$
|
639
|
|
|
$
|
780
|
|
|
|
($141
|
)
|
|
|
(18
|
)%
|
|
$
|
3,266
|
|
|
$
|
2,494
|
|
|
$
|
772
|
|
|
|
31
|
%
|
Percent of revenues
|
|
|
1.2
|
%
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
2.0
|
%
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2007, research and development expense included
costs associated with the Microsoft Dynamics AX project, in addition to costs associated with
other new product development efforts. In January 2007 we entered into a strategic alliance with
Microsoft Corporation (Microsoft) to jointly develop core public sector functionality for
Microsoft Dynamics AX to address the accounting needs of public sector organizations worldwide.
In September 2007, we amended the agreement with Microsoft. Under the amended agreement,
Microsoft will assist in funding our Microsoft Dynamics AX development costs in exchange for
intellectual property rights for use outside the public sector. We are accounting for this
funding from Microsoft as a funded development activity. In the three months ended September 30,
2007, we reduced our research and development expense by $880,000, which was the amount earned
under the terms of the contract with Microsoft. We anticipate these costs and associated
reimbursements from Microsoft will continue into 2009; however, the actual amount and timing of
those costs and related reimbursements from Microsoft and whether they are capitalized or
expensed, may vary.
Amortization of Customer and Trade Name Intangibles
Acquisition intangibles are comprised of the excess of the purchase price over the fair value of
net tangible assets acquired that is allocated to acquired software and customer and trade
name intangibles. The remaining excess purchase price is allocated to goodwill that is not
subject to amortization. Amortization expense related to acquired software is included with
cost of revenues
15
while amortization expense of customer and trade name intangibles is
recorded as a non-operating expense. The following table sets forth a comparison of
amortization of customer and trade name intangibles for the periods presented as of
September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
Change
|
|
Nine Months
|
|
Change
|
($ in thousands)
|
|
2007
|
|
2006
|
|
$
|
|
%
|
|
2007
|
|
2006
|
|
$
|
|
%
|
Amortization of customer
and trade name
intangibles
|
|
$
|
372
|
|
|
$
|
326
|
|
|
$
|
46
|
|
|
|
14
|
%
|
|
$
|
1,075
|
|
|
$
|
973
|
|
|
$
|
102
|
|
|
|
10
|
%
|
In the first nine months of 2007, we completed three acquisitions, which increased
amortizable customer intangibles by $3.3 million. This amount will be amortized over a
weighted average period of approximately 6 years.
Income Tax Provision
The following table sets forth comparison of our income tax provision for the periods
presented as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
Change
|
|
Nine Months
|
|
Change
|
($ in thousands)
|
|
2007
|
|
2006
|
|
$
|
|
%
|
|
2007
|
|
2006
|
|
$
|
|
%
|
Income tax provision
|
|
$
|
3,209
|
|
|
$
|
2,523
|
|
|
$
|
686
|
|
|
|
27
|
%
|
|
$
|
7,141
|
|
|
$
|
5,938
|
|
|
$
|
1,203
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
38.3
|
%
|
|
|
36.4
|
%
|
|
|
|
|
|
|
|
|
|
|
38.7
|
%
|
|
|
36.8
|
%
|
|
|
|
|
|
|
|
|
The effective income tax rates for the three and nine months ended September 30, 2007 and
2006 were different from the statutory United States federal income tax rate of 35%
primarily due to state income taxes, non-deductible share-based compensation expense, the
qualified manufacturing activities deduction, and non-deductible meals and entertainment
costs.
The effective tax rate for the three months ended September 30, 2006 included the benefit
from previously unclaimed tax credits resulting from the completion of state income tax
audits. The effective tax rate for the nine months ended September 30, 2006 also included
the benefit of changes in the Texas franchise tax law and related rates enacted in the
second quarter of 2006.
FINANCIAL CONDITION AND LIQUIDITY
As of September 30, 2007, we had cash and cash equivalents (including restricted cash
equivalents) of $20.3 million and short-term investments of $28.4 million, compared to cash and
cash equivalents (including restricted cash equivalents) of $22.2 million and short-term
investments of $19.5 million at December 31, 2006. As of September 30, 2007 we had outstanding
letters of credit totaling $4.5 million to secure surety bonds required by some of our customer
contracts. These letters of credit expire through mid-2008.
The following table sets forth a summary of cash flows for the periods presented as of
September 30:
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used by):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
24,538
|
|
|
$
|
22,687
|
|
Investing activities
|
|
|
(20,035
|
)
|
|
|
(16,009
|
)
|
Financing activities
|
|
|
(5,892
|
)
|
|
|
(6,359
|
)
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(1,389
|
)
|
|
$
|
319
|
|
|
|
|
|
|
|
|
16
Operating Activities
Net cash provided by operating activities continues to be our primary source of funds to
finance operating needs and capital expenditures. Other capital resources include cash on
hand and access to the capital markets. For the nine months ended September 30, 2007,
operating activities provided net cash of $24.5 million, primarily generated from net income
of $11.3 million, non-cash depreciation and amortization charges of $7.8 million, and
non-cash share-based compensation expense of $1.7 million, and a net decrease in operating
assets and liabilities of $3.7 million. The operating asset decline mainly relates to the
timing of collection of annual maintenance renewals that are billed near the end of June.
Our days sales outstanding (DSO) was 93 days at September 30, 2007 and 102 days at December
31, 2006. DSO decreased compared to the fourth quarter of 2006 because of annual
maintenance billing collections. Our maintenance billings typically peak in December and
June of each year and are followed by collections in the subsequent quarter. DSO is
calculated based on total accounts receivable divided by the quotient of annualized
quarterly revenues divided by 360 days.
For the nine months ended September 30, 2006 operating activities provided net cash of $22.7
million, primarily generated from net income of $10.2 million, non-cash depreciation and
amortization charges of $7.6 million, and non-cash share-based compensation expense of $1.5
million, and by a net decline in operating assets and liabilities of $3.1 million. The net
decrease in operating assets and liabilities is attributable to timing of cash receipts
related to annual maintenance billings.
For the nine months ended September 30, 2007, net cash used by investing activities of $20.0
million includes cash payments of $9.0 million for the acquisitions of EDP Enterprises,
Inc., Advanced Data Systems, Inc. and certain software assets to enhance our courts and
justice product line. In addition, investing activities includes $8.8 million, net of
sales, to purchase short-term investments and $2.6 million in property and equipment. The property and equipment increase was
due to expenditures related to computer hardware and software and other asset additions to
support internal growth.
For the nine months ended September 30, 2006 net cash used by investing activities of $16.0
million includes cash payments of $12.2 million for two acquisitions, MazikUSA Inc. and
TACS, Inc. In addition, we spent $3.3 million for property and equipment related to computer
hardware and software, including a new enterprise-wide customer relationship management
system, and other asset additions to support internal growth.
For the nine months ended September 30, 2007 and 2006, net cash used in financing activities
was $5.9 million and $6.4 million, respectively, and was attributable to purchases of
treasury shares, net of proceeds from stock option exercises and employee stock purchase
plan activity.
During the nine months ended September 30, 2007, we purchased 889,000 shares of our common stock
for an aggregate purchase price of $11.1 million. A summary of the repurchase activity
during the nine months ended September 30, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum number of
|
|
|
|
|
|
|
|
Additional number
|
|
|
|
|
|
|
shares that may be
|
|
|
|
|
|
|
|
of shares
|
|
|
|
|
|
|
repurchased under
|
|
|
|
Total number of
|
|
|
authorized that may
|
|
|
Average price paid
|
|
|
current
|
|
Period
|
|
shares repurchased
|
|
|
be repurchased
|
|
|
per share
|
|
|
authorization
|
|
January 1 through January 31
|
|
|
131
|
|
|
|
|
|
|
$
|
13.92
|
|
|
|
900
|
|
February 1 through February 28
|
|
|
92
|
|
|
|
|
|
|
|
13.63
|
|
|
|
808
|
|
March 1 through March 31
|
|
|
67
|
|
|
|
|
|
|
|
13.05
|
|
|
|
741
|
|
April 1 through April 30
|
|
|
60
|
|
|
|
|
|
|
|
12.01
|
|
|
|
681
|
|
Additional authorization by the board of directors
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
|
|
2,681
|
|
May 1 through May 31
|
|
|
539
|
|
|
|
|
|
|
|
11.99
|
|
|
|
2,142
|
|
June 1 through June 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,142
|
|
July 1 through July 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,142
|
|
August 1 through August 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,142
|
|
September 1 through September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nine months ended September 30, 2007
|
|
|
889
|
|
|
|
2,000
|
|
|
$
|
12.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The repurchase program, which was approved by our board of directors, was announced in
October 2002, and was amended in
17
April and July 2003, October 2004, October 2005 and May 2007. On May 17, 2007, our board of directors authorized the repurchase of an additional 2.0
million shares of our common stock. As of September 30, 2007 we had remaining authorization
to repurchase up to 2.1 million additional shares of our 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.
We made federal and state income tax payments, net of refunds of $6.9 million in the nine months
ended September 30, 2007 compared to $7.9 million in the comparable prior year.
From time to time we engage in discussions with potential acquisition candidates. In order to
consummate any such opportunities, which could require significant commitments of capital, we may
be required to incur debt or issue additional potentially dilutive securities in the future. No
assurance can be given as to our future acquisitions and how such acquisitions may be financed.
In the absence of future acquisitions, we believe our current cash balances and expected future
cash flows from operations will be sufficient to meet our anticipated cash needs for working
capital, capital expenditures and other activities through the next twelve months. If operating
cash flows are not sufficient to meet our needs, we believe that credit would be available to us.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may affect us due to adverse changes in
financial market prices and interest rates. As of September 30, 2007, we had funds invested in
auction rate municipal securities and state and municipal bonds, which were accounted for in
accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.
These investments were treated as available-for-sale under SFAS No. 115. The carrying value of
these investments approximates fair market value. Due to the nature of these investments, we
are not subject to significant market rate risk.
We have no outstanding debt at September 30, 2007, and are therefore not subject to any
interest rate risk.
ITEM 4. Evaluation of Disclosure Controls and Procedures
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 Officer and the Chief Financial Officer, the Chief
Executive Officer 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.
Part II. OTHER INFORMATION
ITEM 1. Legal Proceedings
As of June 30, 2007, we had warrants outstanding to purchase 1.6 million shares of common stock
at $2.50 per share, which were held by Bank of America, N. A. (BOA) pursuant to the terms of
two Amended and Restated Stock Purchase Warrants (collectively, the Warrants). The exercise
price could be paid either in cash or by a cashless exercise in which the holder was required
to surrender the Warrants in exchange for warrant shares based on the following formula:
[(Market Price $2.50) / (Market Price)] x 1. 6 million shares, with the Market Price
calculated as the immediately preceding 60-day trading average of our common stock. The
Warrants identified specific exercise procedures for each method of exercise and further
provided that any exercise would not be effective until we received all applicable documents,
instruments, and the purchase price. The Warrants were originally issued on September 10, 1997
and were exercisable from that date until 5:00 p.m., Central Time, on September 10, 2007, when
they expired.
On September 10, 2007, at 4:44 p.m., BOA attempted to effectuate a cashless exercise of the
Warrants via email; however, we believe BOA did not comply with all of the requirements set
forth in the Warrants for an effective exercise. At 5:37 p.m., Central Time, BOA recalled this
email exercise notice, which we subsequently accepted. At 6:10 p.m., Central Time, BOA
attempted to effectuate a cash exercise of the Warrants by emailing a different notice of
exercise, which we believe also failed to comply with all of the requirements set forth in the
Warrants for an effective exercise, and in any event, was after the expiration date of the
Warrants. As a result, we believe these Warrants expired as of September 10, 2007 and have
excluded the effect of the Warrants from potentially dilutive common shares as of such date in
our earnings per share computation.
18
On October 12, 2007, we filed a declaratory judgment action against BOA in the District Court of
Dallas County, Texas, 101
st
Judicial District requesting the court to declare, among
other things, that the Warrants have expired pursuant to their terms. As of the date of this
Form 10-Q, BOA has not filed a response to the litigation. While we believe the Warrants
expired as of September 10, 2007, there can be no assurance as to the ultimate resolution of
this matter.
Other than routine litigation incidental to our business, there are no material legal proceedings
pending to which we are party or to which any of our properties are subject.
ITEM 1A. Risk Factors
No material changes.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits
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Exhibit 31.1
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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Exhibit 31.2
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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Exhibit 32.1
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Certifications Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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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.
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TYLER TECHNOLOGIES, INC.
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By:
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/s/ Brian K. Miller
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Brian K. Miller
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Senior Vice President and Chief Financial Officer
(principal financial officer and an authorized
signatory)
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Date: October 22, 2007
20
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