UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the quarterly period ended March 31, 2004

OR

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

Commission File Number 1-10485

TYLER TECHNOLOGIES, INC.

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

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

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

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

Number of shares of common stock of registrant outstanding at April 27, 2004: 41,479,290

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

See accompanying notes.

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

See accompanying notes

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

See accompanying notes

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

(1)		Basis of Presentation
		We prepared the accompanying condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States, or GAAP, for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted for interim periods. Balance sheet amounts are as of March 31, 2004 and December 31, 2003 and operating result amounts are for the three months ended March 31, 2004 and 2003, and include all normal and recurring adjustments that we considered necessary for the fair summarized presentation of our financial position and operating results. As these are condensed financial statements, one should also read the financial statements and notes included in our latest Form 10-K for the year ended December 31, 2003. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.
		Although we have a number of operating subsidiaries, separate segment data has not been presented as they meet the criteria set forth in SFAS (Statement of Financial Accounting Standards) No. 131, “Disclosures About Segments of an Enterprise and Related Information” to be presented as one segment.

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

		Cash paid for acquisitions excludes acquired Eden cash balances of approximately $2.1 million and includes a payment in cash of $303,000 paid during the three months ended March 31, 2004 and $52,000 to be paid subsequent to March 31, 2004. The value of the Tyler common stock was determined based on the average market price of Tyler’s common shares over the ten-day period before the terms of the acquisition were agreed to and announced.
		Pursuant to the agreement with Eden, two of the shareholders of Eden were granted the right to “put” their remaining shares to Tyler and Tyler was also granted the right to “call” the remaining shares. In January 2004, Tyler purchased 500 shares for $145,000, which increased our ownership of the outstanding common stock of Eden from 95% to 96%. The remaining option becomes effective for thirty days beginning July 1, 2004 to purchase the remaining 2,000 shares at a purchase price of $580,000.
		The decline in goodwill of $736,000 to $6.9 million at March 31, 2004, from $7.6 million at December 31, 2003, reflects adjustments relating to results of our valuation of intangible assets, additional purchase of shares pursuant to our call right and the valuation at estimated fair value of our other obligations assumed.
		The following unaudited pro forma information presents the consolidated results of operations as if our acquisition of Eden occurred as of the beginning of 2003, after giving effect to certain adjustments, including amortization of intangibles, interest and income tax effects. Pro forma information does not include acquisitions that are not considered material to our results of

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operations. The pro forma information does not purport to represent what our results of operations actually would have been had such transaction or event occurred on the dates specified, or to project our results of operations for any future period.

		Pro forma results of operations for the three months ended March 31, 2003, include the realized gain on the sale of our investment in H.T.E., Inc. of $16.2 million (net of income taxes of $7.0 million), or $0.34 per diluted share. See Note 4 – Investment in H.T.E., Inc.
(3)		Cash, Cash Equivalents, Short-term Investments and Other
		Cash equivalents include items almost as liquid as cash, such as money market investments and certificates of deposits with insignificant interest rate risk and original maturities of three months or less at the time of purchase. For purposes of the statements of cash flows, we consider all investments with original maturities of three months or less to be cash equivalents.
		In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, we determine the appropriate classification of debt and equity securities at the time of purchase and re-evaluate the classification as of each balance sheet date. We have classified these investments in bond funds as available-for-sale securities pursuant to SFAS No. 115. Investments which are classified as available-for-sale are recorded at fair value and unrealized holding gains and losses, net of the related tax effect, if any, are not reflected in earnings but are reported as a separate component of other comprehensive income until realized. Interest and dividends earned on these securities are reinvested in the securities. The cost basis of the securities is determined using the average cost method.
		Short-term investments, classified as available-for-sale, are summarized as follows as of March 31, 2004:

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

		There were no realized gains or losses during the three months ended March 31, 2004 and 2003. During the three months ended March 31, 2004, the aforementioned short-term investments earned interest income and dividends of $49,000. No interest or dividends were earned during the three months ended March 31, 2003.
		We have $7.5 million invested in a certificate of deposit with a maturity date in excess of one year included in other assets of which $5.3 million is restricted to collateralize letters of credit required under our surety bond program. These letters of credit expire in 2004.
(4)		Investment in H.T.E., Inc.
		On March 25, 2003, we received cash proceeds of $39.3 million in connection with a transaction to sell all of our 5.6 million shares of H.T.E., Inc. (“HTE”) common stock to SunGard Data Systems Inc. for $7.00 cash per share, pursuant to a Tender and

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		Voting Agreement dated February 4, 2003. Our original cost basis in the HTE shares was $15.8 million. After transaction and other costs, we recorded a realized gross gain of $23.2 million ($16.2 million after income taxes of $7.0 million, including the utilization for tax purposes and reduction in valuation allowance for accounting purposes related to a capital loss carryforward amounting to $1.1 million on a tax effected basis).
(5)		Shareholders’ Equity
		During the three months ended March 31, 2004, we purchased 191,300 shares of our common stock for an aggregate purchase price of $1.8 million. We currently have authorization from our board of directors to repurchase up to 1.8 million additional shares of Tyler common stock.
		We also issued 181,729 shares of common stock and received $611,000 in aggregate proceeds, upon exercise of stock options during the first three months of 2004.
		In March 2004, one of our warrant holders exercised his warrant to purchase 21,234 shares of our common stock by way of cashless exercise and was issued on a net basis, 15,780 shares of our common stock from our treasury. As of March 31, 2004, we have warrants outstanding to purchase 1.6 million shares of common stock at $2.50 per share. These warrants expire in September 2007.
(6)		Income Tax Provision
		For the three months ended March 31, 2004 we had an income tax provision of $1.4 million compared to $7.7 million for the three months ended March 31, 2003. The income tax provision for the three months ended March 31, 2003, included $7.0 million (after utilization of a capital loss carryforward amounting to $1.1 million on a tax effected basis) related to the realized gain from the sale of our investment in HTE. See Note 4 – Investment in H.T.E., Inc. We had an effective income tax rate of 39.9% for the three months ended March 31, 2004, compared to an effective income tax rate of 30.8% for the same period in the prior year. The effective income tax rates are estimated based on projected pre-tax income for the entire fiscal year and the resulting amount of income taxes. The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 35% primarily due to the utilization of the capital loss carryforward in 2003, state income taxes and non-deductible meals and entertainment costs.
		We made federal and state income tax payments, net of refunds of $1.2 million in the first three months ended March 31, 2004 compared to $150,000 in the prior year.

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(7)		Earnings Per Share
		The following table details the reconciliation of basic earnings per share to diluted earnings per share:

(8)		Stock Compensation
		In accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” we elected to account for our stock-based compensation under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” as amended and related interpretations including FIN 44 (FASB Interpretation No. 44), “Accounting for Certain Transactions Involving Stock Compensation,” an interpretation of APB Opinion No. 25, issued in June 2000. Under APB No. 25’s intrinsic value method, compensation expense is determined on the measurement date; that is, the first date on which both the number of shares the option holder is entitled to receive, and the exercise price, if any, are known. Compensation expense, if any, is measured based on the award’s intrinsic value – the excess of the market price of the stock over the exercise price on the measurement date. The exercise price of all of our stock options granted equals the market price on the measurement date. Therefore we have not recorded any compensation expense related to grants of stock options.
		Pro forma information regarding net income and earnings per share is required by SFAS No. 123 for awards granted after December 31, 1994, as if we had accounted for our stock-based awards to employees under the fair value method of SFAS No. 123, and is as follows:

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(9)		Comprehensive Income
		The components of comprehensive income are as follows:

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

		FORWARD-LOOKING STATEMENTS
		The statements in this discussion that are not historical statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about our business, financial condition, business strategy, plans and the objectives of our management, and future prospects. In addition, we have made in the past and may make in the future other written or oral forward-looking statements, including statements regarding future operating performance, short- and long-term revenue and earnings growth, the timing of the revenue and earnings impact for new contracts, backlog, the value of new contract signings, business pipeline, and industry growth rates and our performance relative thereto. Any forward-looking statements may rely on a number of assumptions concerning future events and be subject to a number of uncertainties and other factors, many of which are outside our control, which could cause actual results to differ materially from such statements. These include, but are not limited to: our ability to improve productivity and achieve synergies from acquired businesses; technological risks associated with the development of new products and the enhancement of existing products; changes in the budgets and regulating environments of our government customers; competition in the industry in which we conduct business and the impact of competition on pricing, revenues and margins; with respect to customer contracts accounted for under the percentage-of-completion method of accounting, the performance of such contracts in accordance with our cost and revenue estimates; our ability to maintain health and other insurance coverage and capacity due to changes in the insurance market and the impact of increasing insurance costs on the results of operations; the costs to attract and retain qualified personnel, changes in product demand, the availability of products, economic conditions, costs of compliance with corporate governance and public disclosure requirements as issued by the Sarbanes-Oxley Act of 2002 and New York Stock Exchange rules, changes in tax risks and other risks indicated in our filings with the Securities and Exchange Commission. The factors described in this paragraph and other factors that may affect Tyler, its management or future financial results, as and when applicable, are discussed in Tyler’s filings with the Securities and Exchange Commission, on its Form 10-K for the year ended December 31, 2003. Except to the extent required by law, we are not obligated to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. When used in this Quarterly Report, the words “believes,” “plans,” “estimates,” “expects,” “anticipates,” “intends,” “continue,” “may,” “will,” “should”, “projects”, “forecast”, “might”, “could” or the negative of such terms and similar expressions as they relate to Tyler or our management are intended to identify forward-looking statements.
		GENERAL
		We provide integrated software systems and related services for local governments. We develop and market a broad line of software products and services to address the information technology (IT) needs of cities, counties, schools and other local government entities. In addition, we provide professional IT services to our customers, including software and hardware installation, data conversion, training and for certain customers, product modifications, along with continuing maintenance and support for customers using our systems. We also provide property appraisal outsourcing services for taxing jurisdictions.
		CRITICAL ACCOUNTING POLICIES AND ESTIMATES
		The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements. These condensed consolidated financial statements have been prepared following the requirements of accounting principles generally accepted in the United States (GAAP) for interim periods and require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on going basis, we evaluate our estimates, including those related to revenue recognition and amortization and potential impairment of intangible assets and goodwill. As these are condensed financial statements, one should also read our Form 10-K for the year ended December 31, 2003 regarding expanded information about our critical accounting policies and estimates.

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		ANALYSIS OF RESULTS OF OPERATIONS
		The following discussion compares the historical results of operations on a basis consistent with GAAP for the three months ended March 31, 2004 and 2003. On December 2, 2003, we acquired 95% ownership of Eden Systems, Inc (“Eden”) and their operating results have been included in our consolidated financial statements since the date of acquisition. Accordingly, the three months ended March 31, 2004 includes the operating results of Eden, while the three months ended March 31, 2003 does not. This information should be considered when comparing to financial results of 2003. See Note 2 in the Notes to the Condensed Consolidated Financial Statements.

Revenues

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

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

•		Increased sales of our financial and city solutions software licenses (excluding Eden) of approximately $460,000. This increase was due to a combination of geographic expansion on the west coast, Florida and South Carolina and to a larger implementation staff, which has allowed us to install software licenses more quickly. In addition, during the first three months of 2003, we released a new version of one of our county tax products for our customers in the Midwest, which is generating slightly larger contracts than the previous county tax product;
•		Our property appraisal and tax division installed an Automated Valuation Model (“AVM”) at the Valuation Office Agency of the United Kingdom under a subcontract agreement. The amount of the license totaled approximately $450,000 which we recorded upon customer acceptance in the first quarter of 2004. The AVM will assist the United Kingdom’s Valuation Office in valuing over 21 million domestic properties in preparation for the assessment of the Valuation Office’s Council Tax, which is similar to local property taxes in the United States;
•		In March 2004, we released Orion, our newly developed n-tier web-based tax collections product. Orion is built on the same technology platform as our Odyssey Courts product. During March, after receiving customer acceptance, we recognized Orion licenses of approximately $330,000 at three initial sites; and
•		Eden generated approximately $300,000 of license revenue during the three months ended March 31, 2004, primarily consisting of financial and city solutions software.

Software services. Higher software services revenues were attributable to the following factors:

•		Software services related to property appraisal and tax software rose $1.4 million which included $700,000 related to the installation of an AVM at the Valuation Office Agency of the United Kingdom. Property appraisal and tax software services also included approximately $300,000 related to Orion.
•		Higher software license sales in the first quarter 2004 compared to the first quarter 2003. Typically, contracts for software license include services such as installation of the software, converting the customers’ data to be compatible with the software and training customer personnel to use the software. Increased training staff also allowed for faster implementation of our backlog; and
•		Eden recorded $1.9 million of software services revenue for the three months ended March 31, 2004.

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Maintenance. We provide maintenance and support services for our software products and third party software. Maintenance revenues for the three months ended March 31, 2004 included $890,000 from Eden. Excluding the impact from Eden, maintenance revenues increased 16% due to growth in our installed customer base and slightly higher rates on certain product lines