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 September 30, 2004

OR

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

Commission File Number 1-10485

TYLER TECHNOLOGIES, INC.

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

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

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

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

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

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

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

See accompanying notes.

1

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

See accompanying notes

2

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

See accompanying notes

3

Tyler Technologies, Inc.

(1)		Basis of Presentation
		We prepared the accompanying condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States, or GAAP, for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted for interim periods. Balance sheet amounts are as of September 30, 2004 and December 31, 2003 and operating result amounts are for the three and nine months ended September 30, 2004 and 2003, and include all normal and recurring adjustments that we considered necessary for the fair summarized presentation of our financial position and operating results. As these are condensed financial statements, one should also read the financial statements and notes included in our latest Form 10-K for the year ended December 31, 2003. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.
		Although we have a number of operating subsidiaries, separate segment data has not been presented as they meet the criteria set forth in SFAS (Statement of Financial Accounting Standards) No. 131, “Disclosures About Segments of an Enterprise and Related Information” to be presented as one segment.
		In addition, certain other amounts for the previous year have been reclassified to conform to the current year presentation.
(2)		Acquisitions
		During December 2003 we acquired one company, Eden Systems, Inc. (“Eden”) and certain assets of a business that provides forms software to users of some of our software products. The results of these acquisitions have been included in our condensed consolidated financial statements since their respective dates of acquisition. We acquired 95% of the outstanding common stock of Eden on December 2, 2003. Eden provides financial, personnel and citizen services applications software for local governments similar to our financial and city solutions products. We believe Eden’s products and expertise will complement our business model and give us additional opportunities to provide our customers with solutions tailored specifically for local governments. In particular, the addition of Eden considerably increases our presence in the western part of the United States.
		Following is a summary of our 2003 acquisitions:

		Cash paid for acquisitions excludes acquired Eden cash balances of approximately $2.1 million and includes payments in cash of $946,000 paid during the nine months ended September 30, 2004. The value of the Tyler common stock was determined based on the average market price of Tyler’s common shares over the ten-day period before the terms of the acquisition were agreed to and announced.
		Pursuant to the agreement with Eden, two of the shareholders of Eden were granted the right to “put” their remaining shares to Tyler and Tyler was also granted the right to “call” the remaining shares. In January 2004, Tyler purchased 500 shares for $145,000 in cash. We purchased the remaining 2,000 shares for a cash purchase price of $580,000 on July 14, 2004, which increased our ownership of the outstanding common stock of Eden from 96% to 100%.
		The decline in goodwill of $223,000 to $7.4 million at September 30, 2004, from $7.6 million at December 31, 2003, reflects adjustments relating to results of our valuation of intangible assets, additional purchase of shares pursuant to our call right exercised in January and July of 2004 and the valuation at estimated fair value of our other obligations assumed.
		The following unaudited pro forma information presents the consolidated results of operations as if our acquisition of Eden occurred as of the beginning of 2003, after giving effect to certain adjustments, including amortization of intangibles, interest and

4

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

		Pro forma results of operations for the nine months ended September 30, 2003, include the realized gain on the sale of our investment in H.T.E., Inc. of $16.2 million (net of income taxes of $7.0 million), or $0.36 per diluted share. See Note 4 – Investment in H.T.E., Inc.
(3)		Cash, Cash Equivalents, Short-term Investments and Other
		Cash equivalents include items almost as liquid as cash, such as money market investments and certificates of deposits with insignificant interest rate risk and original maturities of three months or less at the time of purchase. For purposes of the statements of cash flows, we consider all investments with original maturities of three months or less to be cash equivalents.
		In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, we determine the appropriate classification of debt and equity securities at the time of purchase and re-evaluate the classification as of each balance sheet date. We have classified our investments as available-for-sale securities pursuant to SFAS No. 115. Investments which are classified as available-for-sale are recorded at fair value and unrealized holding gains and losses, net of the related tax effect, if any, are not reflected in earnings but are reported as a separate component of other comprehensive income until realized. Interest and dividends earned on these securities are reinvested in the securities. The cost basis of the securities is determined using the average cost method.
		As of September 30, 2004, our investments classifieds as available-for-sale consist of primarily short-term mutual corporate and municipal bond funds, and auction rate municipal bonds.
		Short-term investments, classified as available-for-sale, are summarized as follows as of September 30, 2004:

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

		During the three months and nine months ended September 30, 2004, the aforementioned short-term investments earned interest income and dividends of $64,000 and $163,000, respectively. Interest and dividends earned during the three or nine months ended September 30, 2003 were $88,000 and $164,000, respectively.
		Proceeds from sales of short-term investments were $4.0 million during the three and nine months ended September 30, 2004. During the three and nine months ended September 30, 2003, proceeds from sales were $3.0 million. Gross realized net losses from sales were immaterial during the three and nine months ended September 30, 2004 and 2003.

5

		We have $7.5 million invested in a certificate of deposit with a maturity date in excess of one year included in other assets of which $5.75 million is restricted to collateralize letters of credit required under our surety bond program. These letters of credit expire throughout 2005.
(4)		Investment in H.T.E., Inc.
		On March 25, 2003, we received cash proceeds of $39.3 million in connection with a transaction to sell all of our 5.6 million shares of H.T.E., Inc. (“HTE”) common stock to SunGard Data Systems Inc. for $7.00 cash per share, pursuant to a Tender and Voting Agreement dated February 4, 2003. Our original cost basis in the HTE shares was $15.8 million. After transaction and other costs, we recorded a realized gross gain of $23.2 million ($16.2 million after income taxes of $7.0 million, including the utilization for tax purposes and reduction in valuation allowance for accounting purposes related to a capital loss carryforward amounting to $1.1 million on a tax effected basis).
(5)		Shareholders’ Equity
		During the three months ended September 30, 2004, we purchased 333,400 shares of our common stock for an aggregate cash purchase price of $2.9 million. For the nine months ended September 30, 2004, we have purchased 851,260 shares of our common stock for an aggregate cash purchase price of $7.6 million. On October 27, 2004, our board of directors authorized the repurchase of up to an additional 2.0 million shares of Tyler common stock, increasing our total authorization to 3.1 million shares.
		We also issued 601,868 shares of common stock and received $1.8 million in aggregate proceeds, upon exercise of stock options during the first nine months of 2004.
		In March 2004, one of our warrant holders exercised his warrant to purchase 21,234 shares of our common stock by way of cashless exercise and was issued on a net basis, 15,780 shares of our common stock from our treasury. As of September 30, 2004, we have warrants outstanding to purchase 1.6 million shares of common stock at $2.50 per share. These warrants expire in September 2007.
		In May 2004, the shareholders of Tyler voted to adopt the Tyler Technologies, Inc. Employee Stock Purchase Plan (“ESPP”). Under the ESPP, participants may contribute up to 15% of their annual compensation to purchase common shares of Tyler. The purchase price of the shares is equal to 85% of the closing price of Tyler shares on either the first or last day of each quarterly offering period, whichever is lower. For the three months ended September 30, 2004, employees had contributed $331,000 to the ESPP. During October 2004, Tyler issued approximately 44,000 shares of common stock to the ESPP.
(6)		Income Tax Provision
		For the three months ended September 30, 2004 we had an income tax provision of $1.5 million compared to $2.0 million for the three months ended September 30, 2003. We had an income tax provision of $5.0 million for the nine months ended September 30, 2004 compared to $11.0 million for the comparable prior year period. The income tax provision for the nine months ended September 30, 2003, included $7.0 million (after utilization of a capital loss carryforward amounting to $1.1 million on a tax effected basis) related to the realized gain from the sale of our investment in HTE. See Note 4 – Investment in H.T.E., Inc. We had an effective income tax rate of 41.2% for the nine months ended September 30, 2004, compared to an effective income tax rate of 32.7% for the same period in the prior year. The effective income tax rates are estimated based on projected pre-tax income for the entire fiscal year and the resulting amount of income taxes. The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 35% primarily due to the utilization of the capital loss carryforward in 2003, state income taxes and non-deductible meals and entertainment costs.
		We made federal and state income tax payments, net of refunds of $5.5 million in the first nine months ended September 30, 2004 compared to $5.7 million in the prior year.

6

(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:

7

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

8

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