a5808587.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(x)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934.
For the
quarterly period ended September 30, 2008
OR
( )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934.
Commission
File Number 1-10485
TYLER
TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
DELAWARE
|
75-2303920
|
(State
or other jurisdiction of
|
(I.R.S.
employer
|
incorporation
or organization)
|
identification
no.)
|
5949
SHERRY LANE, SUITE 1400
DALLAS,
TEXAS
75225
(Address
of principal executive offices)
(Zip
code)
(972)
713-3700
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a small reporting
company. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated
filer [ ] Accelerated
filer [X] Non-accelerated
filer [ ] Smaller
Reporting Company [ ]
Indicated
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act.) Yes [ ] No [X]
The number
of shares of common stock of registrant outstanding on October 23, 2008 was
36,330,337.
PART
I. FINANCIAL INFORMATION
ITEM 1.
Financial Statements
TYLER
TECHNOLOGIES, INC.
|
|
CONDENSED
STATEMENTS OF OPERATIONS
|
|
(In
thousands, except per share amounts)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
licenses
|
|
$ |
11,372 |
|
|
$ |
8,145 |
|
|
$ |
31,646 |
|
|
$ |
24,431 |
|
Subscriptions
|
|
|
3,526 |
|
|
|
2,559 |
|
|
|
10,503 |
|
|
|
7,272 |
|
Software
services
|
|
|
18,600 |
|
|
|
15,872 |
|
|
|
54,973 |
|
|
|
44,213 |
|
Maintenance
|
|
|
28,353 |
|
|
|
22,132 |
|
|
|
79,102 |
|
|
|
62,526 |
|
Appraisal
services
|
|
|
5,289 |
|
|
|
4,927 |
|
|
|
14,249 |
|
|
|
16,514 |
|
Hardware
and other
|
|
|
1,497 |
|
|
|
1,297 |
|
|
|
5,084 |
|
|
|
4,420 |
|
Total
revenues
|
|
|
68,637 |
|
|
|
54,932 |
|
|
|
195,557 |
|
|
|
159,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
licenses
|
|
|
2,071 |
|
|
|
1,886 |
|
|
|
6,838 |
|
|
|
5,818 |
|
Acquired
software
|
|
|
472 |
|
|
|
427 |
|
|
|
1,369 |
|
|
|
1,248 |
|
Software
services, maintenance and subscriptions
|
|
|
31,988 |
|
|
|
26,795 |
|
|
|
93,555 |
|
|
|
77,677 |
|
Appraisal
services
|
|
|
3,098 |
|
|
|
3,248 |
|
|
|
9,269 |
|
|
|
11,340 |
|
Hardware
and other
|
|
|
1,058 |
|
|
|
946 |
|
|
|
3,684 |
|
|
|
3,304 |
|
Total
cost of revenues
|
|
|
38,687 |
|
|
|
33,302 |
|
|
|
114,715 |
|
|
|
99,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
29,950 |
|
|
|
21,630 |
|
|
|
80,842 |
|
|
|
59,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
15,985 |
|
|
|
12,691 |
|
|
|
46,155 |
|
|
|
38,448 |
|
Research
and development expense
|
|
|
1,416 |
|
|
|
639 |
|
|
|
5,485 |
|
|
|
3,266 |
|
Amortization
of customer and trade name intangibles
|
|
|
612 |
|
|
|
372 |
|
|
|
1,770 |
|
|
|
1,075 |
|
Non-cash
legal settlement related to warrants
|
|
|
- |
|
|
|
- |
|
|
|
9,045 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
11,937 |
|
|
|
7,928 |
|
|
|
18,387 |
|
|
|
17,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income, net
|
|
|
398 |
|
|
|
441 |
|
|
|
1,044 |
|
|
|
1,252 |
|
Income
before income taxes
|
|
|
12,335 |
|
|
|
8,369 |
|
|
|
19,431 |
|
|
|
18,452 |
|
Income
tax provision
|
|
|
5,976 |
|
|
|
3,209 |
|
|
|
9,700 |
|
|
|
7,141 |
|
Net
income
|
|
$ |
6,359 |
|
|
$ |
5,160 |
|
|
$ |
9,731 |
|
|
$ |
11,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.17 |
|
|
$ |
0.13 |
|
|
$ |
0.26 |
|
|
$ |
0.29 |
|
Diluted
|
|
$ |
0.16 |
|
|
$ |
0.12 |
|
|
$ |
0.25 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
38,474 |
|
|
|
38,688 |
|
|
|
38,093 |
|
|
|
38,717 |
|
Diluted
weighted average common shares outstanding
|
|
|
40,019 |
|
|
|
41,395 |
|
|
|
39,626 |
|
|
|
41,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TYLER
TECHNOLOGIES, INC.
|
|
CONDENSED
BALANCE SHEETS
|
|
(In
thousands, except par value and share amounts)
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
|
|
|
|
2008
|
|
|
December
31,
|
|
|
|
(Unaudited)
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
23,779 |
|
|
$ |
9,642 |
|
Restricted
cash equivalents
|
|
|
5,082 |
|
|
|
4,462 |
|
Short-term
investments available-for-sale
|
|
|
500 |
|
|
|
41,590 |
|
Accounts
receivable (less allowance for losses of $1,841 in 2008
|
|
|
|
|
|
and $1,851
in 2007)
|
|
|
66,430 |
|
|
|
63,965 |
|
Prepaid
expenses
|
|
|
7,693 |
|
|
|
7,726 |
|
Other
current assets
|
|
|
1,771 |
|
|
|
1,324 |
|
Deferred
income taxes
|
|
|
1,839 |
|
|
|
2,355 |
|
Total
current assets
|
|
|
107,094 |
|
|
|
131,064 |
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, long-term portion
|
|
|
681 |
|
|
|
398 |
|
Property
and equipment, net
|
|
|
24,773 |
|
|
|
9,826 |
|
Non-current
investments available-for-sale
|
|
|
4,893 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
88,733 |
|
|
|
71,677 |
|
Customer
related intangibles, net
|
|
|
28,071 |
|
|
|
17,706 |
|
Software,
net
|
|
|
7,034 |
|
|
|
9,588 |
|
Other
intangibles, net
|
|
|
2,577 |
|
|
|
1,074 |
|
Sundry
|
|
|
220 |
|
|
|
175 |
|
|
|
$ |
264,076 |
|
|
$ |
241,508 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
2,590 |
|
|
$ |
3,323 |
|
Accrued
liabilities
|
|
|
26,265 |
|
|
|
18,905 |
|
Deferred
revenue
|
|
|
91,029 |
|
|
|
73,714 |
|
Income
taxes payable
|
|
|
- |
|
|
|
632 |
|
Total
current liabilities
|
|
|
119,884 |
|
|
|
96,574 |
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
8,889 |
|
|
|
7,723 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $10.00 par value; 1,000,000 shares
authorized,
|
|
|
|
|
|
none issued
|
|
|
- |
|
|
|
- |
|
Common stock, $0.01 par value; 100,000,000 shares
authorized;
|
|
|
|
|
|
48,147,969 shares issued in 2008 and 2007
|
|
|
481 |
|
|
|
481 |
|
Additional
paid-in capital
|
|
|
150,561 |
|
|
|
149,568 |
|
Accumulated
other comprehensive loss, net of tax
|
|
|
(167 |
) |
|
|
- |
|
Retained
earnings
|
|
|
45,363 |
|
|
|
35,632 |
|
Treasury
stock, at cost; 10,321,534 and 9,528,467 shares in 2008
|
|
|
|
|
|
and 2007, respectively
|
|
|
(60,935 |
) |
|
|
(48,470 |
) |
Total shareholders' equity
|
|
|
135,303 |
|
|
|
137,211 |
|
|
|
$ |
264,076 |
|
|
$ |
241,508 |
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
|
|
|
|
|
|
|
TYLER
TECHNOLOGIES, INC.
|
|
CONDENSED
STATEMENTS OF CASH FLOWS
|
|
(In
thousands)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
9,731 |
|
|
$ |
11,311 |
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
provided
by operations:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
8,989 |
|
|
|
7,795 |
|
Non-cash
legal settlement related to warrants
|
|
|
9,045 |
|
|
|
- |
|
Share-based
compensation expense
|
|
|
2,719 |
|
|
|
1,705 |
|
Changes
in operating assets and liabilities, exclusive of
|
|
|
|
|
|
|
|
|
effects
of acquired companies:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
63 |
|
|
|
6,532 |
|
Income
tax receivable
|
|
|
(972 |
) |
|
|
(800 |
) |
Prepaid
expenses and other current assets
|
|
|
515 |
|
|
|
504 |
|
Accounts
payable
|
|
|
(833 |
) |
|
|
(1,465 |
) |
Accrued
liabilities
|
|
|
3,555 |
|
|
|
(1,289 |
) |
Deferred
revenue
|
|
|
12,587 |
|
|
|
245 |
|
Net
cash provided by operating activities
|
|
|
45,399 |
|
|
|
24,538 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sales of short-term investments
|
|
|
44,565 |
|
|
|
21,103 |
|
Purchases
of short-term investments
|
|
|
(8,625 |
) |
|
|
(29,940 |
) |
Cost
of acquisitions, net of cash acquired
|
|
|
(23,868 |
) |
|
|
(9,005 |
) |
Investment
in software development costs
|
|
|
- |
|
|
|
(158 |
) |
Additions
to property and equipment
|
|
|
(17,375 |
) |
|
|
(2,575 |
) |
Acquired
lease
|
|
|
(1,387 |
) |
|
|
- |
|
(Increase)
decrease in restricted investments
|
|
|
(620 |
) |
|
|
500 |
|
(Increase)
decrease in other
|
|
|
(38 |
) |
|
|
40 |
|
Net
cash used by investing activities
|
|
|
(7,348 |
) |
|
|
(20,035 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Purchase
of treasury shares
|
|
|
(28,968 |
) |
|
|
(11,134 |
) |
Contributions
from employee stock purchase plan
|
|
|
872 |
|
|
|
833 |
|
Proceeds
from exercise of stock options
|
|
|
1,617 |
|
|
|
3,291 |
|
Excess
tax benefits from share-based compensation expense
|
|
|
560 |
|
|
|
1,118 |
|
Warrant
exercise in connection with legal settlement
|
|
|
2,005 |
|
|
|
- |
|
Net
cash used by financing activities
|
|
|
(23,914 |
) |
|
|
(5,892 |
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
14,137 |
|
|
|
(1,389 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
9,642 |
|
|
|
17,212 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
23,779 |
|
|
$ |
15,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
|
|
|
|
|
|
|
Tyler
Technologies, Inc.
Notes to
Condensed Financial Statements
(Unaudited)
(Tables in
thousands, except per share data)
(1)
|
Basis
of Presentation
|
We
prepared the accompanying condensed 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, 2008 and December 31, 2007 and operating result amounts are for
the three and nine months ended September 30, 2008 and 2007, 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, 2007. 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 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.
Certain
other amounts for the previous period have been reclassified to conform to the
current period presentation.
Software
Arrangements:
We earn
revenue from software licenses, subscriptions, software related services,
post-contract customer support (“PCS” or “maintenance”), 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 customer’s
environment, we use contract accounting and apply the provisions of Statement of
Position (“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 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 product’s 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 customer’s 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 product’s 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 because 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.
Subscription-Based
Services
Subscription-based
services primarily consist of revenues derived from application service provider
(“ASP”) arrangements and other hosted service offerings, software subscriptions
and disaster recovery services.
We
recognize revenue for ASP and other hosting services, software subscriptions,
term license arrangements with renewal periods of twelve months or less and
disaster recovery ratably over the period of the applicable agreement as
services are provided. Disaster recovery agreements and other hosting
services are typically renewable annually. ASP and software
subscriptions are typically for periods of three to six years and automatically
renew unless either party cancels the agreement. The majority of the
ASP and other hosting services and software subscriptions also include
professional services as well as maintenance and support. In certain
ASP arrangements, the customer also acquires a license to the
software.
For ASP
and other hosting arrangements, we evaluate whether each of the elements in
these arrangements represents a separate unit of accounting, as defined by
Emerging Issues Task Force (“EITF”) 00-21, using all applicable facts and
circumstances, including whether (i) we sell or could readily sell the element
unaccompanied by the other elements, (ii) the element has stand-alone value to
the customer, (iii) there is objective reliable evidence of the fair value of
the undelivered item, and (iv) there is a general right of return. We
consider the applicability of EITF No. 00-03, “Application of SOP 97-2 to
Arrangements That Include the Right to Use Software Stored on Another
Entity’s Hardware”
on a contract-by-contract basis. In hosted term-based agreements,
where the customer does not have the contractual right to take possession of the
software, hosting fees are recognized on a monthly basis over the term of the
contract commencing when the customer has access to the software. For
professional services associated with hosting arrangements that we determine do
not have stand-alone value to the customer, we recognize the services revenue
ratably over the remaining contractual period once hosting has gone live and we
may begin billing for the hosting services. We record amounts that
have been invoiced in accounts receivable and in deferred revenue or revenues,
depending on whether the revenue recognition criteria have been
met.
If we
determine that the customer has the contractual right to take possession of our
software at any time during the hosting period without significant penalty, and
can feasibly maintain the software on the customer’s hardware or enter into
another arrangement with a third party to host the software, we recognize the
license, professional services and hosting services revenues pursuant to SOP
97-2.
Software
Services
Some of
our software arrangements include services considered essential for the customer
to use the software for the customer’s 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.
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, subscription-based
services, 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.
In August
2008, we completed the acquisition of all the capital stock of School
Information Systems, Inc. (“SIS”) which develops and sells a full suite of
student information and financial management systems for K-12
schools. The purchase price, including transaction costs and
excluding cash balances acquired, was approximately $9.9 million in cash and
approximately 70,000 shares of Tyler common stock valued at $1.2
million.
In the
first quarter of 2008, we completed the acquisitions of all of the capital stock
of VersaTrans Solutions Inc. (“VersaTrans”) and certain assets of Olympia
Computing Company, Inc. d/b/a Schoolmaster
(“Schoolmaster”). VersaTrans is a provider of student transportation
management software solutions for school districts and school transportation
providers across North America, including solutions for school bus routing and
planning, redistricting, GPS fleet tracking, fleet maintenance and field trip
planning. Schoolmaster provides a full suite of student information
systems, which manage such functions as grading, attendance, scheduling,
guidance, health, admissions and fund raising. The combined purchase
price for these transactions excluding cash acquired and including transaction
costs, was approximately $13.9 million in cash and approximately 126,000 shares
of Tyler common stock valued at $1.7 million.
The
operating results of these acquisitions are included in our results of
operations since their respective dates of acquisition.
We believe
these acquisitions will complement our business model by expanding our presence
in the education market and will give us additional opportunities to provide our
customers with solutions tailored specifically for local
governments.
In
connection with these three transactions we acquired total tangible assets of
approximately $3.6 million and assumed total liabilities of approximately $8.2
million. We recorded goodwill of $17.0 million, $7.7 million of which is
expected to be deductible for tax purposes, and other intangible assets of $14.3
million. The $14.3 million of intangible assets is attributable to acquired
software, customer relationships and trade name that will be amortized over a
weighted average period of approximately 10 years. Our balance sheet
as of September 30, 2008 reflects the preliminary allocation of the purchase
price to the assets acquired and liabilities assumed based on their estimated
fair values at the dates of acquisition.
(4)
|
Financial
Instruments
|
Assets
recorded at fair value in the balance sheet as of September 30, 2008 are
categorized based upon the level of judgment associated with the inputs used to
measure their fair value. Hierarchical levels, defined by SFAS 157
“Fair Value Measurements” are directly related to the amount of subjectivity
associated with the inputs to fair valuation of these assets are as
follows:
Level 1 – Inputs are unadjusted, quoted
prices in active markets for identical assets or liabilities at the measurement
date
Level 2 – Inputs other than Level 1
inputs that are either directly or indirectly observable; and
Level 3 –
Unobservable inputs developed using estimates and assumptions developed by
management,
which reflect those that a market participant would use.
We measure
the following financial assets at fair value on a recurring
basis. The fair value of these financial assets was determined using
the following inputs at September 30, 2008:
|
|
|
|
|
Quoted
prices in
|
|
|
Significant
other
|
|
|
Significant
|
|
|
|
Total
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Cash
and cash equivalents (1)
|
|
$ |
28,861 |
|
|
$ |
28,861 |
|
|
$ |
- |
|
|
$ |
- |
|
Short-term
investments available-for-sale (1)
|
|
|
500 |
|
|
|
500 |
|
|
|
- |
|
|
|
- |
|
Non-current
investments available-for-sale (2)
|
|
|
4,893 |
|
|
|
- |
|
|
|
- |
|
|
|
4,893 |
|
Total
|
|
$ |
34,254 |
|
|
$ |
29,361 |
|
|
$ |
- |
|
|
$ |
4,893 |
|
|
|
Cash
and cash equivalents consist primarily of money market funds with original
maturity dates of three months or less, for which we determine fair value
through quoted market prices. Level 1 financial assets also
include auction rate municipal securities which were sold at par during
the period October 1, 2008 through October 17,
2008.
|
|
(2)
|
Investments
available-for-sale consists of auction rate municipal securities
(“ARS”). ARS were originally considered Level 2 financial
assets and valued using estimated market values as of the balance sheet
date obtained from an independent pricing service employed by our broker
dealers. These independent pricing services carried these
investments at par value, due to the overall quality of the underlying
investments and taking into account credit support through insurance
policies guaranteeing each of the bonds’ payment of principal and accrued
interest, and the anticipated future market for such investments. However,
in the three months ending September 30, 2008, we began using discounted
cash flow analysis to more accurately measure possible liquidity
discounts. Because the discounted cash flow analysis included
unobservable inputs we transferred these securities to Level 3 financial
assets.
|
At
September 30, 2008 our ARS consist solely of collateralized debt obligations
supported by municipal and state agencies and do not include mortgage-backed
securities, have redemption features which call for redemption at 100% of par
value and have a current credit rating of A or AAA. The ratings on the ARS take
into account credit support through insurance policies guaranteeing each of the
bonds’ payment of principal and accrued interest, if it becomes
necessary. To date we have collected all interest payable on all of
our ARS when due and expect to continue to do so in the
future. Historically, the carrying value (par value) of the ARS
approximated fair market value due to the frequent resetting of variable
interest rates. Beginning in February 2008, however, the auctions for
ARS began to fail and were largely unsuccessful, requiring us to hold them
beyond their typical auction reset dates. As a result, the interest
rates on these investments reset to the maximum based on formulas contained in
the securities. The rates are generally equal to or higher than the
current market for similar securities. The par value of the ARS
associated with these failed auctions will not be available to us until a
successful auction occurs, a buyer is found outside of the auction process, the
securities are called or the underlying securities have matured. Due
to these liquidity issues, we performed a discounted cash flow analysis to
determine the estimated fair value of these investments. The assumptions used in
preparing the models include, but are not limited to, interest rate yield curves
for similar securities, market rates of returns, and the expected term of each
security. In making assumptions of required rates of return, we
considered risk-free interest rates and credit spreads for investments of
similar credit quality. As a result of the lack of
liquidity in the ARS market, we recorded an after tax temporary unrealized loss
on our ARS of $167,000, net of related tax effects of $90,000, in the three
months ended September, 30, 2008, which is included in accumulated other
comprehensive loss on our balance sheet. We deemed the loss to be
temporary because we do not plan to sell any of the ARS prior to maturity at an
amount below the original purchase value and, at this time, do not deem it
probable that we will receive less than 100% of the principal and accrued
interest. Based on our cash and cash equivalents balance of $28.9
million, expected operating cash flows and the liquidation of $500,000 of ARS
subsequent to the period ending September 30, 2008, we do not believe a lack of
liquidity associated with our ARS will adversely affect our ability to conduct
business, and believe we have the ability to hold the securities throughout the
currently estimated recovery period. We will continue to evaluate any
changes in the market value of the failed ARS that have not been liquidated
subsequent to quarter-end and in the future, depending upon existing market
conditions, we may be required to record an other-than-temporary decline in
market value. We are not certain how long we may be required to hold
each security. However, given our current cash position, liquid cash
equivalents and cash flow from operations we believe we have the ability and we
intend to hold the failed ARS as long-term investments until the market
stabilizes. The following table reflects the activity for the ARS
measured at fair value using Level 3 inputs (in thousands):
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
Auction
Rate Securities:
|
|
September
30, 2008
|
|
|
September
30, 2008
|
|
Balance
at beginning of period
|
|
$ |
- |
|
|
$ |
- |
|
Transfers
into level 3
|
|
|
5,150 |
|
|
|
5,150 |
|
Unrealized
losses included in accumulated other
|
|
|
|
|
|
comprehensive
income
|
|
|
(257 |
) |
|
|
(257 |
) |
Balance
as of September 30, 2008
|
|
$ |
4,893 |
|
|
$ |
4,893 |
|
(5)
Comprehensive Income
The
following table provides the composition of other comprehensive
income:
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income, as reported
|
|
$ |
6,359 |
|
|
$ |
5,160 |
|
|
$ |
9,731 |
|
|
$ |
11,311 |
|
Unrealized
losses-auction rate securities, net of tax
|
|
|
(167 |
) |
|
|
- |
|
|
|
(167 |
) |
|
|
- |
|
Comprehensive
income
|
|
$ |
6,192 |
|
|
$ |
5,160 |
|
|
$ |
9,564 |
|
|
$ |
11,311 |
|
(6)
Shareholders’ Equity
The
following table details activity in our common stock:
|
|
Nine
months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
Purchases
of common stock
|
|
|
(2,194 |
) |
|
$ |
(31,322 |
) |
|
|
(889 |
) |
|
$ |
(11,134 |
) |
Stock
option exercises
|
|
|
325 |
|
|
|
1,617 |
|
|
|
767 |
|
|
|
3,291 |
|
Employee
stock plan purchases
|
|
|
78 |
|
|
|
892 |
|
|
|
77 |
|
|
|
853 |
|
Shares
issued for acquisitions
|
|
|
196 |
|
|
|
2,863 |
|
|
|
- |
|
|
|
- |
|
Warrant
exercises in connection with legal settlement
|
|
|
802 |
|
|
|
11,050 |
|
|
|
- |
|
|
|
- |
|
As of
September 30, 2008 we have authorization from our board of directors to
repurchase up to 1.6 million additional shares of Tyler common stock. During the
period October 1, 2008 through October 20, 2008 we purchased 1.5 million shares
of our common stock for an aggregate purchase price of $20.6
million. On October 23, 2008, our board of directors authorized the
repurchase of an additional 2.0 million shares.
On June
27, 2008, we settled outstanding litigation related to two Stock Purchase
Warrants owned by Bank of America, N. A. (“BANA”). In July 2008, as a
result of this settlement, BANA paid us $2.0 million and we issued to BANA
801,883 restricted shares of Tyler common stock. See Note 10 –
Commitments and Contingencies for further information.
(7) Income
Tax Provision
For the
three and nine months ended September 30, 2008, we had an effective income tax
rate of 48.4% and 49.9%, respectively, compared to 38.3% and
38.7% for the three months and nine months ended September 30,
2007. Our effective income tax rate increased approximately
twelve points compared to the prior year periods due to a non-cash legal
settlement related to warrants charge of $9.0 million, which was not
deductible. 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 a non-cash legal settlement related to warrants charge which
was not deductible, state income taxes, non-deductible share-based compensation
expense, the qualified manufacturing activities deduction and non-deductible
meals and entertainment costs.
We made
federal and state income tax payments, net of refunds, of $10.1 million in the
nine months ended September 30, 2008, compared to $6.9 million in net payments
for the same period of the prior year.
(8)
Earnings Per Share
The
following table details the reconciliation of basic earnings per share to
diluted earnings per share:
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Numerator
for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
6,359 |
|
|
$ |
5,160 |
|
|
$ |
9,731 |
|
|
$ |
11,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
basic common shares outstanding
|
|
|
38,474 |
|
|
|
38,688 |
|
|
|
38,093 |
|
|
|
38,717 |
|
Assumed
conversion of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
1,545 |
|
|
|
1,685 |
|
|
|
1,533 |
|
|
|
1,753 |
|
Warrants
|
|
|
- |
|
|
|
1,022 |
|
|
|
- |
|
|
|
1,203 |
|
Potentially
dilutive common shares
|
|
|
1,545 |
|
|
|
2,707 |
|
|
|
1,533 |
|
|
|
2,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
share - Adjusted weighted-average shares
|
|
|
40,019 |
|
|
|
41,395 |
|
|
|
39,626 |
|
|
|
41,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.17 |
|
|
$ |
0.13 |
|
|
$ |
0.26 |
|
|
$ |
0.29 |
|
Diluted
|
|
$ |
0.16 |
|
|
$ |
0.12 |
|
|
$ |
0.25 |
|
|
$ |
0.27 |
|
(9)
Share-Based
Compensation
The
following table summarizes share-based compensation expense related to
share-based awards under SFAS No. 123R, “Share-Based Payment,” recorded in the
statements of operations:
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Cost
of software services, maintenance and subscriptions
|
|
$ |
100 |
|
|
$ |
59 |
|
|
$ |
250 |
|
|
$ |
158 |
|
Selling,
general and administrative expense
|
|
|
998 |
|
|
|
573 |
|
|
|
2,469 |
|
|
|
1,547 |
|
Total
share-based compensation expense
|
|
$ |
1,098 |
|
|
$ |
632 |
|
|
$ |
2,719 |
|
|
$ |
1,705 |
|
(10)
Commitments and Contingencies
On June
27, 2008, we settled outstanding litigation related to two Stock Purchase
Warrants (the “Warrants”) owned by Bank of America, N. A.
(“BANA”). As disclosed in prior SEC filings, the Warrants entitled
BANA to acquire 1.6 million shares of Tyler common stock at an exercise price of
$2.50 per share. The Warrants expired on September 10,
2007. Prior to their expiration, BANA attempted to exercise the
Warrants; however, the parties disputed whether or not BANA’s exercise was
effective. We filed suit for declaratory judgment seeking a court’s
determination on the matter, and BANA asserted numerous counterclaims against
us, including breach of contract and misrepresentation.
Following
court-ordered mediation, in July 2008, BANA paid us $2.0 million and we issued
to BANA 801,883 restricted shares of Tyler common stock. Accordingly,
as a result of the settlement, we recorded a non-cash legal settlement related
to warrants charge of $9.0 million, which is not tax deductible, during the
three months ended June 30, 2008.
In
February 2008 our board of directors authorized negotiations to purchase a
building in Falmouth, Maine that we currently lease from a related
party. We expect to purchase this building for approximately $10.0
million in the three months ending December 31, 2008.
(11)
Recent Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board issued SFAS No. 141(R)
“Business Combinations.” SFAS No. 141(R) changes the accounting for
business combinations including the measurement of acquirer shares issued in
consideration for a business combination, the recognition of contingent
consideration, the accounting for pre-acquisition gain and loss contingencies,
the recognition of capitalized in-process research and development, the
accounting for acquisition-related restructuring cost accruals, the treatment of
acquisition related transaction costs and the recognition of changes in the
acquirer’s income tax valuation allowance. SFAS No. 141(R) is
effective for fiscal years beginning after December 15, 2008, with early
adoption prohibited. We are currently evaluating the impact of the
pending adoption of SFAS 141(R) on our financial statements.
(12)
Subsequent Event
On October
20, 2008, we entered into a new revolving bank credit agreement (the “Credit
Facility”) and a related pledge and security agreement. The Credit
Facility matures October 19, 2009 and provides for total borrowings of up to
$25.0 million and a $6.0 million Letter of Credit facility under which the bank
will issue cash collateralized letters of credit. Borrowings under
the Credit Facility will bear interest at a rate of either LIBOR plus 1% or
prime rate minus 1.5%. As of October 20, 2008, our effective interest
rate was 3% under the Credit Facility. As of October 24, 2008
we had no outstanding borrowings under the Credit Facility.
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, 2007. Except to the extent required by law, we are not
obligated to update or revise any forward-looking statements whether as a result
of new information, future events or otherwise. When used in this
Quarterly Report, the words "believes," "plans," "estimates," "expects,"
"anticipates," "intends," "continue," "may," "will," "should," "projects,"
"forecast," "might," "could" or the negative of such terms and similar
expressions as they relate to Tyler or our management are intended to identify
forward-looking statements.
GENERAL
We provide
integrated information management solutions and services for local governments.
We develop and market a broad line of software products and services to address
the information technology (“IT”) needs of cities, counties, schools and other
local 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
subscription-based services such as application service provider arrangements
and other hosting services as well as property appraisal outsourcing services
for taxing jurisdictions.
On June
27, 2008, we settled outstanding litigation related to two Stock Purchase
Warrants (the “Warrants”) owned by Bank of America, N. A.
(“BANA”). As disclosed in prior SEC filings, the Warrants entitled
BANA to acquire 1.6 million shares of Tyler common stock at an exercise price of
$2.50 per share. Following court-ordered mediation, in July 2008,
BANA paid us $2.0 million and we issued to BANA 801,883 restricted shares of
Tyler common stock. Accordingly, we recorded a non-cash legal
settlement related to warrants charge of $9.0 million, which is not tax
deductible, during the three months ended June 30, 2008.
In August
2008, we completed the acquisition of all the capital stock of School
Information Systems, Inc. (“SIS”) which develops and sells a full suite of
student information and financial management systems for K-12
schools. The total purchase price, including transaction costs and
excluding cash balances acquired, was approximately $9.9 million in cash and
approximately 70,000 shares of Tyler common stock valued at $1.2
million. In the first quarter of 2008, we acquired all of the capital
stock of VersaTrans Solutions Inc. and certain assets of Olympia Computing
Company, Inc. d/b/a Schoolmaster. The combined purchase price,
excluding cash acquired and including transaction costs, was approximately $13.9
million in cash and approximately 126,000 shares of Tyler common stock valued at
$1.7 million. See Note 3 in the Notes to the Unaudited Condensed
Financial Statements.
As of
September 30, 2008, our total full-time equivalent employee count increased to
1,938 from 1,640 at September 30, 2007. Approximately 49% of these additions or
146 full-time equivalent employees were added as a result of several
acquisitions completed since September 30, 2007.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The
discussion and analysis of our financial condition and results of operations are
based upon our condensed financial statements. These condensed
financial statements have been prepared following the requirements of accounting
principles generally accepted in the United States (“GAAP”) for interim periods
and require us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate
our estimates, including those related to revenue recognition and amortization
and potential impairment of intangible assets and goodwill and share-based
compensation expense. As these are condensed financial statements,
one should also read expanded information about our critical accounting policies
and estimates provided in Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” included in our Form 10-K for
the year ended December 31, 2007. There have been no material changes to our
critical accounting policies and estimates from the information provided in our
10-K for the year ended December 31, 2007.
|
ANALYSIS
OF RESULTS OF OPERATIONS
|
|
The
following table sets forth the key components of our revenues for the
periods presented as of September
30:
|
|
|
Third
Quarter
|
|
|
%
|
|
|
Nine
Months
|
|
|
%
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
Increase/
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
Increase/
|
|
($
in thousands)
|
|
2008
|
|
|
Total
|
|
|
2007
|
|
|
Total
|
|
|
(Decrease)
|
|
|
2008
|
|
|
Total
|
|
|
2007
|
|
|
Total
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
licenses
|
|
$ |
11,372 |
|
|
|
17
|
% |
|
$ |
8,145 |
|
|
|
15
|
% |
|
|
40
|
% |
|
$ |
31,646 |
|
|
|
16
|
% |
|
$ |
24,431 |
|
|
|
15
|
% |
|
|
30
|
% |
Subscription
|
|
|
3,526 |
|
|
|
5 |
|
|
|
2,559 |
|
|
|
5 |
|
|
|
38 |
|
|
|
10,503 |
|
|
|
5 |
|
|
|
7,272 |
|
|
|
5 |
|
|
|
44 |
|
Software
services
|
|
|
18,600 |
|
|
|
27 |
|
|
|
15,872 |
|
|
|
29 |
|
|
|
17 |
|
|
|
54,973 |
|
|
|
28 |
|
|
|
44,213 |
|
|
|
28 |
|
|
|
24 |
|
Maintenance
|
|
|
28,353 |
|
|
|
41 |
|
|
|
22,132 |
|
|
|
40 |
|
|
|
28 |
|
|
|
79,102 |
|
|
|
41 |
|
|
|
62,526 |
|
|
|
39 |
|
|
|
27 |
|
Appraisal
services
|
|
|
5,289 |
|
|
|
8 |
|
|
|
4,927 |
|
|
|
9 |
|
|
|
7 |
|
|
|
14,249 |
|
|
|
7 |
|
|
|
16,514 |
|
|
|
10 |
|
|
|
(14 |
) |
Hardware
and other
|
|
|
1,497 |
|
|
|
2 |
|
|
|
1,297 |
|
|
|
2 |
|
|
|
15 |
|
|
|
5,084 |
|
|
|
3 |
|
|
|
4,420 |
|
|
|
3 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
68,637 |
|
|
|
100
|
% |
|
$ |
54,932 |
|
|
|
100
|
% |
|
|
25
|
% |
|
$ |
195,557 |
|
|
|
100
|
% |
|
$ |
159,376 |
|
|
|
100
|
% |
|
|
23
|
% |
|
Total
revenues grew 15% and 14% for the three and nine months ended September
30, 2008, respectively, excluding the impact of acquisitions completed in
the prior twelve months.
|
|
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/
|
|
|
|
2008
|
|
Total
|
|
|
2007
|
|
Total
|
|
|
(Decrease)
|
|
2008
|
|
Total
|
|
|
2007
|
|
Total
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
education
|
|
$ 6,452
|
|
57
|
%
|
|
$ 6,111
|
|
75
|
%
|
6
|
%
|
|
$ 21,023
|
|
66
|
%
|
|
$ 16,703
|
|
68
|
%
|
26
|
%
|
Courts
and justice
|
|
3,914
|
|
34
|
|
|
1,188
|
|
15
|
|
|
229
|
|
|
7,754
|
|
25
|
|
|
5,039
|
|
21
|
|
|
54
|
|
Appraisal
and tax and other
|
|
1,006
|
|
9
|
|
|
846
|
|
10
|
|
|
19
|
|
|
2,869
|
|
9
|
|
|
2,689
|
|
11
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
software license revenues
|
|
$ 11,372
|
|
100
|
%
|
|
$ 8,145
|
|
100
|
%
|
40
|
%
|
|
$ 31,646
|
|
100
|
%
|
|
$ 24,431
|
|
100
|
%
|
30
|
%
|
In the
three months ended September 30, 2008, we signed 16 new material contracts with
average software license fees of approximately $215,000 compared to 26 new
material contracts signed in the three months ended September 30, 2007 with
average software license fees of approximately $319,000. In the nine
months ended September 30, 2008, we signed 50 new material contracts with
average software license fees of approximately $310,000 compared to 59 new
material contracts signed in the nine months ended September 30, 2007 with
average software license fees of approximately $447,000. We consider
contracts with a license fee component of $100,000 or more to be
material. The mix of our new contracts signed in the three months
ended September 30, 2008 included more contacts with a license fee component of
less than $100,000 compared to the prior year period. 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 Notes to the Unaudited
Condensed Financial Statements.
Changes in
software license revenues consist of the following components:
·
|
Software
license revenue related to our financial management and education
solutions for three and nine months ended September 30, 2008 increased 6%
and 26%, respectively, compared to the prior year periods mainly due to
contract arrangements that included more software license revenue than in
the past. Revenue from student information and management solutions as
well as student transportation management solutions acquired in the last
twelve months also contributed to increases in the three and nine months
ended September 30, 2008.
|
·
|
Software
license revenue related to our courts and justice software solutions for
three and nine months ended September 30, 2008 increased 229% and 54%,
respectively, compared to the prior year periods. In the three
months ended September 30, 2008 we recorded software license revenue of
approximately $1.7 million from a contract which had been deferred in
accordance with the terms of the contract. In addition,
since late 2007 we expanded our presence in the markets for municipal
courts software solutions and public safety software solutions which
contributed to the increase in both
periods.
|
|
Subscriptions.
Subscription-based services revenue primarily consists of revenues
derived from application service provider (“ASP”) arrangements and other
hosted service offerings, software subscriptions and disaster recovery
services. ASP and other software subscriptions agreements are
typically for periods of three to six years and automatically renew unless
either party cancels the agreement. Disaster recovery and
miscellaneous other hosted service agreements are typically renewable
annually. New ASP customers and existing customers converting
to ASP arrangements provided approximately two-thirds of the subscription
revenue increase with the remaining increase due to new disaster recovery
customers and slightly higher rates for disaster recovery
services.
|
|
Software
services. Changes in software services revenues consist
of the following components:
|
·
|
Software
services revenue related to financial management and education solutions,
which comprise approximately half of our software services revenue in the
periods presented, increased substantially compared to the three and nine
months ended September 30, 2007. This increase was driven in
part by larger and more complex contracts, which include more programming
and project management services. In addition, we acquired a
student transportation management solution in January 2008 which
contributed approximately $1.1 million and $3.0 million to software
service revenues for the three and nine months ended September 30, 2008,
respectively.
|
·
|
Software
services revenue related to courts and justice solutions experienced
strong increases compared to the three and nine months ended September 30,
2007, reflecting increased capacity to deliver backlog following additions
to our implementation and support staff over the last twelve to fourteen
months. In addition, increased contract volume for
municipal courts software solutions and public safety software solutions
also generated higher related services
revenue.
|
|
Maintenance. We
provide maintenance and support services for our software products and
third party software. Maintenance revenues increased 28% and 27% for the
three and nine months ended September 30, 2008, respectively compared to
the prior year periods. Maintenance and support services
grew 17% and 16% for the three and nine months ended September 30, 2008,
respectively, excluding the impact of acquisitions completed in the prior
twelve months. This increase was due to growth in our installed
customer base and slightly higher maintenance rates on most of our product
lines.
|
|
Appraisal
services. Appraisal services revenue increased 7% for
the three months ended September 30, 2008, and declined 14% for the nine
months ended September 30, 2008, compared to the prior year
periods. The appraisal services business is driven in part by
revaluation cycles in various states. In late 2007, we
substantially completed several projects related to the Ohio revaluation
cycle, which occurs every six years, as well as a few other large
contracts. In mid-2008 we began a complete reappraisal of real
property in Orleans Parish, Louisiana. This contract is valued
at approximately $12.0 million and consists of two separate phases
expected to be complete by late 2010. We continue to expect appraisal
revenue for the full year 2008 will be moderately lower than
2007.
|
Cost of Revenues and Gross
Margins
|
The
following table sets forth a comparison of the key components of our cost
of revenues, and those components stated as a percentage of related
revenues for the periods presented as of September
30:
|
|
|
Third
Quarter
|
|
|
Nine
Months
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
|
Related
|
|
|
|
|
|
Related
|
|
|
|
|
|
Related
|
|
|
|
|
|
Related
|
|
($
in thousands)
|
|
2008
|
|
|
Revenues
|
|
|
2007
|
|
|
Revenues
|
|
|
2008
|
|
|
Revenues
|
|
|
2007
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
licenses
|
|
$ |
2,071 |
|
|
|
18
|
% |
|
$ |
1,886 |
|
|
|
23
|
% |
|
$ |
6,838 |
|
|
|
22
|
% |
|
$ |
5,818 |
|
|
|
24
|
% |
Acquired
software
|
|
|
472 |
|
|
|
4 |
|
|
|
427 |
|
|
|
5 |
|
|
|
1,369 |
|
|
|
4 |
|
|
|
1,248 |
|
|
|
5 |
|
Software
services, maintenance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
subscriptions
|
|
|
31,988 |
|
|
|
63 |
|
|
|
26,795 |
|
|
|
66 |
|
|
|
93,555 |
|
|
|
65 |
|
|
|
77,677 |
|
|
|
68 |
|
Appraisal
services
|
|
|
3,098 |
|
|
|
59 |
|
|
|
3,248 |
|
|
|
66 |
|
|
|
9,269 |
|
|
|
65 |
|
|
|
11,340 |
|
|
|
69 |
|
Hardware
and other
|
|
|
1,058 |
|
|
|
71 |
|
|
|
946 |
|
|
|
73 |
|
|
|
3,684 |
|
|
|
72 |
|
|
|
3,304 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cost of revenue
|
|
$ |
38,687 |
|
|
|
56
|
% |
|
$ |
33,302 |
|
|
|
61
|
% |
|
$ |
114,715 |
|
|
|
59
|
% |
|
$ |
99,387 |
|
|
|
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
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
licenses and acquired software
|
|
|
77.6
|
% |
|
|
71.6
|
% |
|
|
6.0
|
% |
|
|
74.1
|
% |
|
|
71.1
|
% |
|
|
3.0
|
% |
Software
services, maintenance and subscriptions
|
|
|
36.6 |
|
|
|
33.9 |
|
|
|
2.7 |
|
|
|
35.3 |
|
|
|
31.9 |
|
|
|
3.4 |
|
Appraisal
services
|
|
|
41.4 |
|
|
|
34.1 |
|
|
|
7.3 |
|
|
|
34.9 |
|
|
|
31.3 |
|
|
|
3.6 |
|
Hardware
and other
|
|
|
29.3 |
|
|
|
27.1 |
|
|
|
2.2 |
|
|
|
27.5 |
|
|
|
25.2 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall
gross margin
|
|
|
43.6
|
% |
|
|
39.4
|
% |
|
|
4.2
|
% |
|
|
41.3
|
% |
|
|
37.6
|
% |
|
|
3.7
|
% |
|
Software licenses. 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 the costs associated with its
development over the estimated useful life of the
product. Amortization expense is determined on a
product-by-product basis at an annual rate not less than straight-line
basis over the product’s estimated life, 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 three and nine months ended September 30, 2008, our software license
gross margin percentage rose compared to the prior year periods due to
strong license fee revenue increases. In addition, the three
months ended September 30, 2008 benefitted from slightly lower software
development amortization because certain software products became fully
amortized during that period. The year-to-date gross margin grew at a
slower rate because the first quarter product mix included more third
party software, which has higher associated costs than proprietary
software.
|
|
Software services, maintenance
and subscription-based services. Cost of software
services, maintenance and subscriptions primarily consists of personnel
costs related to installation of our software, conversion of customer
data, training customer personnel and support activities and various other
services such as ASP and disaster recovery. For the three and
nine months ended September 30, 2008, the software services, maintenance
and subscriptions gross margin increased 2.7% and 3.4%, respectively from
the prior year periods partly because maintenance and various other
services such as ASP and disaster recovery 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 225 full-time
equivalent employees since September 30, 2007 in order to expand our
capacity to implement our contract backlog. This increase
includes 102 full-time equivalent employees related to acquisitions
completed since September 30, 2007.
|
|
In
addition, approximately 0.6% of the gross margin increase for the nine
months ended September 30, 2008 reflects the impact of revenue which had
been deferred pending final acceptance on a certain
contract. There were no related costs associated with this
revenue in 2008.
|
|
Appraisal
services. A high proportion of the costs of
appraisal services revenue are variable, as we often hire temporary
employees to assist in appraisal projects whose term of employment
generally ends with the projects’ completion. Our appraisal
gross margin for the three months ended September 30, 2008 is higher than
the prior year period due to higher revenues associated with the Orleans
Parish reappraisal project.
|
|
Our
blended gross margin for the three and nine months ended September 30,
2008 was higher than the prior year periods in part due to leverage in the
utilization of our support and maintenance staff and economies of
scale. The blended gross margin for the three months
ended September 30, 2008 also benefitted from a product mix that included
more software license revenue, which inherently has higher gross margins,
and less appraisal services
revenue.
|
Selling,
General and Administrative Expenses
|
The
following table sets forth a comparison of our selling, general and
administrative (“SG&A”) expenses for the periods presented as of
September 30:
|
|
|
Third
Quarter
|
|
|
Change
|
|
|
Nine
Months
|
|
|
Change
|
|
($
in thousands)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
Selling,
general and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses
|
|
$ |
15,985 |
|
|
$ |
12,691 |
|
|
$ |
3,294 |
|
|
|
26
|
% |
|
$ |
46,155 |
|
|
$ |
38,448 |
|
|
$ |
7,707 |
|
|
|
20
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of revenues
|
|
|
23.3 |
% |
|
|
23.1 |
% |
|
|
|
|
|
|
|
|
|
|
23.6 |
% |
|
|
24.1 |
% |
|
|
|
|
|
|
|
|
|
SG&A
as a percentage of revenues for the three and nine months ended September
30, 2008 grew at a slower rate than the prior year periods due to
significantly higher revenues and leverage in the utilization of our
administrative and sales staff. Excluding the impact of acquisitions, our
full-time equivalent SG&A employee count declined 2% from September
30, 2007.
|
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)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
Research
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
expense
|
|
$ |
1,416 |
|
|
$ |
639 |
|
|
$ |
777 |
|
|
|
122
|
% |
|
$ |
5,485 |
|
|
$ |
3,266 |
|
|
$ |
2,219 |
|
|
|
68
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of revenues
|
|
|
2.1 |
% |
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
2.8 |
% |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
Research
and development expense consist mainly of 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 to jointly develop core public sector
functionality for Microsoft Dynamics AX to address the accounting needs of
public sector organizations worldwide. Research and development costs
increased over the prior year periods because the Microsoft Dynamics AX
development effort was not fully staffed until mid-2007. In the nine
months ended September 30, 2008 and 2007, we offset our research and development
expense by $987,000 and $883,000, respectively, which were the amounts earned
under the terms of our research and development agreement with
Microsoft. We amended this agreement in September 2008 to define the
scope of reimbursable development through the balance of the project and now
expect to offset research and development expense by approximately $850,000 each
quarter through the end of 2010. The actual amount and timing of future research
and development costs and related reimbursements and whether they are
capitalized or expensed may vary.
Non-Cash Legal Settlement
Related to Warrants
On June
27, 2008, we settled outstanding litigation related to two Stock Purchase
Warrants (the “Warrants”) owned by Bank of America, N. A.
(“BANA”). As disclosed in prior SEC filings, the Warrants entitled
BANA to acquire 1.6 million shares of Tyler common stock at an exercise price of
$2.50 per share. Following court-ordered mediation, in July 2008,
BANA paid us $2.0 million and we issued to BANA 801,883 restricted shares of
Tyler common stock. Accordingly, we recorded a non-cash legal
settlement related to warrants charge of $9.0 million, which is not tax
deductible, during the three months ended June 30, 2008.
|
Amortization of
Customer and Trade Name
Intangibles
|
|
Acquisition
intangibles are composed of the excess of the purchase price over the fair
value of net tangible assets acquired that is allocated to acquired
software and customer and trade name intangibles. The remaining
excess purchase price is allocated to goodwill that is not subject to
amortization. Amortization expense related to acquired software
is included with cost of revenues while amortization expense of customer
and trade name intangibles is recorded as a non-operating expense. The
following table sets forth a comparison of amortization of customer and
trade name intangibles for the periods presented as of September
30:
|
|
|
Third
Quarter
|
|
|
Change
|
|
|
Nine
Months
|
|
|
Change
|
|
($
in thousands)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
Amortization
of customer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
trade name intangibles
|
|
$ |
612 |
|
|
$ |
372 |
|
|
$ |
240 |
|
|
|
65
|
% |
|
$ |
1,770 |
|
|
$ |
1,075 |
|
|
$ |
695 |
|
|
|
65
|
% |
|
In
the nine months ended September 30, 2008, we completed three acquisitions,
which increased amortizable customer and trade name intangibles by $12.3
million. This amount will be amortized over approximately 11
years.
|
|
The
following table sets forth comparison of our income tax provision for the
periods presented as of September
30:
|
|
|
Third
Quarter
|
|
|
Change
|
|
|
Nine
Months
|
|
|
Change
|
|
($
in thousands)
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
Income
tax provision
|
|
$ |
5,976 |
|
|
$ |
3,209 |
|
|
$ |
2,767 |
|
|
|
86
|
% |
|
$ |
9,700 |
|
|
$ |
7,141 |
|
|
$ |
2,559 |
|
|
|
36
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
48.4 |
% |
|
|
38.3 |
% |
|
|
|
|
|
|
|
|
|
|
49.9 |
% |
|
|
38.7 |
% |
|
|
|
|
|
|
|
|
|
Our
effective income tax rate increased approximately twelve points compared
to the prior year periods due to a non-cash legal settlement related to
warrants charge of $9.0 million, which was not deductible. The
effective income tax rates for the three and nine months ended September
30, 2008 and 2007 were different from the statutory United States federal
income tax rate of 35% primarily due to a non-cash legal settlement
related to warrants charge which was not deductible, as well as state
income taxes, non-deductible share-based compensation expense, the
qualified manufacturing activities deduction, and non-deductible meals and
entertainment costs.
|
FINANCIAL
CONDITION AND LIQUIDITY
As of
September 30, 2008, we had cash and cash equivalents (including restricted cash
equivalents) of $28.9 million and current and non-current investments of $5.4
million, compared to cash and cash equivalents (including restricted cash
equivalents) of $14.1 million and short-term investments of $41.6 million at
December 31, 2007. As of September 30, 2008 we had outstanding
letters of credit totaling $5.1 million to secure surety bonds required by some
of our customer contracts. These letters of credit expire through July
2009.
The
following table sets forth a summary of cash flows for the periods presented as
of September 30:
Nine
months ended September 30,
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cash
flows provided by (used by):
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
45,399 |
|
|
$ |
24,538 |
|
Investing
activities
|
|
|
(7,348 |
) |
|
|
(20,035 |
) |
Financing
activities
|
|
|
(23,914 |
) |
|
|
(5,892 |
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
$ |
14,137 |
|
|
$ |
(1,389 |
) |
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, 2008, operating activities provided net cash
of $45.4 million, primarily generated from net income of $9.7 million, non-cash
legal settlement related to warrants charge of $9.0 million, non-cash
depreciation and amortization charges of $9.0 million, non-cash share-based
compensation expense of $2.7 million, and a decrease in net operating assets of
$14.9 million. Net operating assets declined mainly due to several
advance payments from customers.
As of
September 30, 2008, we had $5.7 million of principal invested in ARS that had
experienced failed auctions. Of this amount, we were able to
liquidate $500,000 for cash at par during the period October 1, 2008 through
October 17, 2008. The liquidity of ARS has been negatively
impacted by the uncertainty in the credit markets and the exposure of these
securities to the financial condition of bond insurance
companies. We will not be able to liquidate any of our
non-current ARS until a future auction is successful, the issuer calls the
security, a buyer is found outside the auction process or the securities are
redeemed. Based on our cash and cash equivalents at September 30,
2008 and our expected operating cash flows, we do not anticipate the current
lack of liquidity of these investments will have a material effect on our
ability to conduct business.
Our days
sales outstanding (“DSO”) was 87 days at September 30, 2008 and 95 days at
December 31, 2007. DSOs decreased compared to the fourth quarter of
2007 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 quarter-end accounts receivable divided by the quotient of
annualized quarterly revenues divided by 360 days.
Investing
activities used cash of $7.3 million in the nine months ending September 30,
2008 compared to $20.0 million cash used for the same period in
2007. In the nine months ended September 30, 2008, we liquidated
$35.9 million of short-term investments in ARS for cash at par, and we completed
the acquisitions of School Information Systems, Inc, VersaTrans Solutions Inc.
and certain assets of Olympia Computing Company, Inc. d/b/a Schoolmaster that
expanded our presence in the education market. The combined purchase
price, excluding cash acquired and including transaction costs, was
approximately $23.9 million in cash and approximately 196,000 shares of Tyler
common stock valued at $2.9 million. We also paid $2.5 million
primarily for land in Lubbock, Texas in connection with a planned office
development and paid $12.7 million for an office building, land, and a related
tenant lease in Yarmouth, Maine. Capital expenditures and acquisitions were
funded from cash generated from operations.
For the
nine months ended September 30, 2007, net cash used by investing activities of
$20.0 million included cash payments of $9.0 million for the acquisitions of EDP
Enterprises, Inc. and Advanced Data Systems, Inc., along with an office
building. Other investing activities in the nine months ended September 30, 2007
were primarily comprised of a net investment of $8.8 million in short term
investments and investments of $2.6 million in property and
equipment.
Financing
activities used cash of $23.9 million, in the nine months ending September 30,
2008 compared to $5.9 million in the same period for 2007. Cash used
in financing activities was primarily comprised of purchases of treasury shares,
net of proceeds from stock option exercises and employee stock purchase plan
activity.
During the
nine months ended September 30, 2008, we purchased 2.2 million shares of our
common stock for an aggregate purchase price of $31.3 million. At
September 30, 2008, we had authorization to repurchase up to 1.6 million
additional shares of Tyler common stock. A summary of the
repurchase activity during the nine months ended September 30, 2008 is as
follows:
Period |
|
|
Total number
of
shares
repurchased
|
|
|
|
Additional
number
of
shares authorized
that
may be
repurchased
|
|
|
|
Average price
paid
per share
|
|
|
|
Maximum
number of
shares
that may be
repurchased
under
current
authorization
|
|
January
1 through January 31
|
|
|
814 |
|
|
|
- |
|
|
$ |
12.92 |
|
|
|
967 |
|
February
1 through February 29
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
967 |
|
March
1 through March 31
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
967 |
|
April
1 through April 30
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
967 |
|
Additional
authorization by the board of directors
|
|
|
- |
|
|
|
2,000 |
|
|
|
- |
|
|
|
2,967 |
|
May
1 through May 31
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,967 |
|
June
1 through June 30
|
|
|
283 |
|
|
|
- |
|
|
|
13.80 |
|
|
|
2,684 |
|
July
1 through July 31
|
|
|
163 |
|
|
|
- |
|
|
|
14.08 |
|
|
|
2,521 |
|
August
1 through August 31
|
|
|
15 |
|
|
|
- |
|
|
|
15.41 |
|
|
|
2,506 |
|
September
1 through September 30
|
|
|
919 |
|
|
|
- |
|
|
|
15.64 |
|
|
|
1,587 |
|
Total
nine months ended September 30, 2008
|
|
|
2,194 |
|
|
|
2,000 |
|
|
$ |
14.28 |
|
|
|
|
|
During the
period October 1, 2008 through October 20, 2008 we purchased 1.5 million shares
of our common stock for an aggregate purchase price of $20.6
million.
The
repurchase program, which was approved by our board of directors, was announced
in October 2002, and was amended in April and July 2003, October 2004, October
2005, May 2007 and May 2008. On October 23, 2008, our board of
directors authorized the repurchase of an additional 2.0 million
shares. There is no expiration date specified for the authorization
and we intend to repurchase stock under the plan from time to time in the
future.
During the
second quarter of 2008, we began construction of an office development located
in Lubbock, Texas to consolidate our Lubbock based workforce and support planned
long-term growth. The office development is scheduled for completion
in early 2010 and expected to cost approximately $12.0 million to $13.0
million. As of September 30, 2008, we have paid $2.5 million,
primarily for land. We expect to capitalize additional costs of
approximately $1.0 million in 2008, related to the construction of this
facility.
In July
2008 we paid $12.7 million for an office building and land in Yarmouth, Maine as
part of a plan to consolidate our workforce in the Portland, Maine area and to
support long-term growth. This building will be leased to third-party
tenants through July 2011, at which time we expect to begin occupying the
facility.
We also
expect to purchase for approximately $10.0 million an office building in
Falmouth, Maine that we currently lease from a related party. The
building purchase is expected to close in the three months ended December 31,
2008.
None of
these real estate investments are expected to preclude us from taking advantage
of other opportunities to invest our cash in growing our business, and it is
possible that we will leverage these assets in the future.
On October
20, 2008, we entered into a new revolving bank credit agreement (the “Credit
Facility”) and a related pledge and security agreement. The Credit
Facility matures October 19, 2009 and provides for total borrowings of up to
$25.0 million and a $6.0 million Letter of Credit facility under which the bank
will issue cash collateralized letters of credit. Borrowings under
the Credit Facility will bear interest at a rate of either LIBOR plus 1% or
prime rate minus 1.5%. As of October 20, 2008, our effective interest
rate was 3% under the Credit Facility. As of September 30, 2008 we
had no debt and outstanding letters of credit totaling $5.1 million under a
previous agreement to secure surety bonds required by some of our customer
contracts. As of October 24, 2008 we had no outstanding borrowings
under the Credit Facility.
We made
federal and state income tax payments, net of refunds of $10.1 million in the
nine months ended September 30, 2008 compared to $6.9 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 to 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 may borrow under our revolving credit facility.
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. We are exposed to risk
related to our investments in ARS. Liquidity for ARS is typically provided by an
auction process that resets the applicable interest rate at pre-determined
intervals, usually every 28 to 35 days. Because of the short interest
rate reset period, we have historically recorded ARS as short-term investments
available-for-sale. The liquidity of ARS has been negatively impacted
by the uncertainty in the credit markets and the exposure of these securities to
the financial condition of bond insurance companies. We will not be
able to liquidate any of our non-current ARS until a future auction is
successful, the issuer calls the security, a buyer is found outside the auction
process or the securities are redeemed. Moreover, if the issuers are
unable to successfully close future auctions and their credit ratings
deteriorate, we may in the future be required to record an impairment charge on
these investments. Maturity dates for these ARS investments range
from 2017 to 2042.
We have no
outstanding debt at September 30, 2008, 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 and the Chief
Financial Officer, the Chief Executive and Chief Financial Officer believe that
these controls and procedures are effective to ensure that we are able to
collect, process and disclose the information we are required to disclose in the
reports we file with the Securities and Exchange Commission within the required
time periods.
Part
II. OTHER INFORMATION
ITEM
1. Legal Proceedings
Other than
ordinary course, 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
In
addition to the other information set forth in this report, one should carefully
consider the discussion of various risks and uncertainties contained in Part I,
“Item 1A. Risk Factors” in our 2007 Annual Report on Form 10-K. We
believe those risk factors are the most relevant to our business and could cause
our results to differ materially from the forward-looking statements made by
us. Please note, however, that those are not the only risk factors
facing us. Additional risks that we do not consider material, or of
which we are not currently aware, may also have an adverse impact on
us. Our business, financial condition and results of operations could
be seriously harmed if any of these risks or uncertainties actually occurs or
materializes. In that event, the market price for our common stock
could decline, and our shareholders may lose all or part of their
investment. During the first nine months of 2008, there were no
material changes in the information regarding risk factors contained in our
Annual Report on Form 10-K for the year ended December 31, 2007.
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 4.1
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Second
Amended and Restated Credit Agreement by and between Tyler Technologies,
Inc. and Bank of Texas, N.A. dated
October 20, 2008
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Exhibit 4.2
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Second
Amended and Restated Pledge and Security Agreement by and between Tyler
Technologies, Inc. and Bank of Texas, N.A. dated October 20,
2008
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Exhibit
31.1
|
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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|
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Executive
Vice President and Chief Financial Officer (principal financial officer
and an authorized signatory)
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Date:
October 23, 2008
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