Tyler Technologies has a singular focus:
delivering enterprise software solutions
that help local governments better manage
their day-to-day operations. With a broad
portfolio of solutions and deep expertise
in the business of local government, we are
channeling success every day, proving that
Tyler not only works—we truly deliver.
Tyler Technologies 2006 AnnuAl reporT chAnneling
rESultS
To Our Shareholders: in 2006, Tyler posted its best annual
operating results as a technology company. We closed 2006
with 15 percent revenue growth over 2005, a gross margin
gain of 220 basis points, and operating income of $21.8
million, up 71 percent over the previous year. our free cash
flow, a significant indicator of our overall performance,
also hit an all-time high of $22.5 million, an increase of 22
percent over 2005.
The fourth quarter of 2006 represented our 23rd
consecutive quarter of profitability. our performance was
driven in large part by continued above-market growth in
our software-related revenues. software license revenues
grew faster than our overall growth rate, with a 27 percent
increase over last year. We were also extremely pleased
with the turnaround of our appraisal services business,
which, following a major restructuring in 2005, exceeded
our expectations in 2006 with consistently profitable
performance. As we end 2006 and look to the future,
we are pleased with our financial strength, competitive
position, and opportunities for growth.
ExEcuting Our StratEgy
With a strong vision and clear focus, Tyler is channeling
new growth by consistently executing our strategy:
expanding geographically, extending our customer base,
moving into larger clients, and broadening our product
lineup. Based on the outcomes of 2006, we believe
we are on the right path.
As it has for several years, our Financials Division
generated steady revenue growth for Tyler in
2006. We believe this will continue to be the case,
particularly as we expand geographically and win
larger deals. in early 2006, for example, we secured
a $3.6 million deal with the u.s. Virgin islands for
our Munis software.
revenues in our courts and Justice Division grew
faster than our overall growth rate, largely because
of robust sales of our odyssey product. With
contracts in place with six of the 20 largest u.s.
counties and two states, odyssey has become the
market leader in court case management systems.
in early 2006, we also secured a $12.4 million license
agreement for our odyssey case Manager with
the Texas conference of urban counties, a consortium
of the 34 largest counties in the state. each member
county that implements the product will pay separate
service and maintenance fees, which we expect will
provide Tyler a stream of revenues over the next
several years.
in the Appraisal and Tax Division, we continued to
generate solid revenues from our iasWorld solution,
Tyler Technologies 2006 AnnuAl reporT
COnSiSTenT exeCuTiOn
expanding geOgraphiCally
Tyler Technologies channels success to our customers because we help
build community. The Tyler neighborhood of products and services enable
cities, counties, and states of all sizes to strategically address their day-to-
day business issues—financial, education, pension, public safety, tax and
appraisal, citizen services, and courts and justice.
JOhn M. yEaMan
chairman of the Board
JOhn S. Marr, Jr
president and
chief executive
officer
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Tyler Technologies’ core software
revenues and free cash flow
have steadily grown each year.
in 2006, we posted our best
operating results since entering
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the market in 1998.
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with major implementations underway for the state of
new Jersey and the province of nova scotia. our new
orion tax and appraisal product, which is built on the
same platform as odyssey, is still maturing and is being
implemented in counties across the state of Kansas,
as well as in Texas, nebraska and Montana. And in our
Document Management Division, we also experienced
excellent revenue growth as we began delivering our new
eaglesoftware integrated land records solutions, with
launch contracts from seven utah counties.
adding ValuE
At Tyler, we continuously seek the best ways to maximize
our shareholders’ investments and build upon our
success. over the past five years, our software business,
including software licenses, services, and maintenance,
has generated a compound growth rate of 17 percent.
in particular, we have seen a significant increase in our
software license revenues. license growth drives higher
margins, as well as additional revenue from our software
services, maintenance, and support.
Tyler’s free cash flow continues to be very strong. With over
$10 million in depreciation and amortization and relatively
low capital expenditures, our free cash flow in 2006 was
57 percent greater than our gAAp net income. Throughout
2006, we used $10.5 million of our cash flow to repurchase
more than 1.0 million shares of our common stock.
our consistently solid free cash flow also provides us the
flexibility to take advantage of strategic growth opportunities,
either through acquisitions or internal product builds. on
the acquisition front, we will carefully evaluate opportunities
to add new assets. specifically, we seek acquisitions
that will augment our existing offerings and technologies
and/or broaden our customer base, when such deals can be
completed at reasonable prices.
in 2006, we used $12.2 million of cash for acquisitions.
To broaden our software portfolio, Tyler added two
Tyler Technologies 2006 AnnuAl reporT
deep domain expertise, and an exceptional employee
group that regularly exceeds customer expectations,
we are uniquely positioned to capitalize on a large and
growing market that remains very fragmented. And through
the consistent execution of our key strategies, we expect
to continue to achieve above-market growth in the coming
years. With a record high backlog of $206 million at the end
of 2006, we have good visibility into the coming year. As our
newer products continue to mature and gain scale we expect
that margins will continue to expand over the long term.
An essential component of any company’s success is
anticipating needs. At Tyler, because we serve only state
and local governments, we truly understand the unique
and complex requirements of our customers and look to
the future with those needs in mind. We stay intensely
focused on constantly improving the competitive position
of our offerings. Based on our solid performance in
2006, we believe the coming years will provide continued
opportunity and growth for Tyler Technologies.
JOhn S. Marr, Jr.
president and
chief executive officer
new complementary products through acquisitions in
early 2006. With these additions, we now offer the Tyler
education Management solution for K-12 schools and the
Tyler pension Management solution for local governments.
Both products align well with our existing financial
solutions and are being leveraged across our sales and
implementation channels to provide expected avenues for
future growth.
Building alliancES
in January 2007, we announced an exciting new strategic
alliance with Microsoft corporation. As part of this
arrangement, Tyler will develop the core public sector
functionality for the Microsoft Dynamics AX business
management solution. Tyler will also become a reseller
of the Microsoft Dynamics AX solution in the public
sector market. We will receive license and maintenance
royalties on all direct and indirect sales of this solution
—including sales by other Microsoft partners. We believe
this alliance and the Microsoft brand will strengthen our
position in the financial systems arena, particularly in larger
“Tier 1” opportunities. in addition, this alliance will give
us the opportunity to generate revenues from a much
broader market than we would likely address directly in
the foreseeable future, including federal and international
markets. Moving forward, we expect to explore other
opportunities to align ourselves with strategic partners
that can help make our products more competitive or
expand our market presence.
dEliVEring FuturE SuccESS
entering 2007, Tyler Technologies has the right
components in place to continue channeling results.
Thanks to our broad portfolio of feature-rich solutions,
CrOSS–Selling TO Our CuSTOmer BaSe
Tyler Technologies 2006 AnnuAl reporT chAnneling
PrOgrESS
uniquEly tylEr
city by city, county by county, and state by state, Tyler
Technologies works to help communities work. As our nation
grows, local governments face a myriad of responsibilities
and challenges to keep pace with citizens’ demand for
cost-effective, easy-to-use services. cities, counties, school
districts, and other local authorities and agencies are
seeking to convey their services efficiently and effectively.
At Tyler, we focus solely on supporting governments.
our software solutions help local government agencies
strategically address their day-to-day business issues—
whether financial, education, pension, public safety, tax and
appraisal, citizen services, or courts and justice. increasingly,
governments of all sizes are turning to Tyler because of
our extensive experience in developing solutions for the
public sector that maximize resources and deliver results.
yet we also back up our products with unparalleled service
and support. Many of our more than 1,500 employees have
worked in the public sector and have extensive knowledge of
the issues local government agencies face.
This deep domain expertise, combined with exceptional
product efficiency, enables us to leverage costs and expand
margins as we grow. For our clients, this means faster,
easier, and more predictable implementations, driving a
high level of satisfaction and improving our competitive
position. At Tyler, we know that to build long-term
relationships with customers, we must help them stay on
the leading edge of technology well into the future. That
is why our development team is continually improving our
products through enhancements and new releases that
present customers with innovative features and increased
functionality. our responsiveness translates to real value
for our customers and a strong competitive position for Tyler.
competing in a highly fragmented, continuously growing
market, we believe we are in a prime position to capitalize
on this dynamic market, which is estimated at $13 billion
in 2007. in 2006, Tyler’s revenues grew by 15 percent—
roughly double the overall market growth rate. With
more than 6,000 software installations in all 50 states,
canada, puerto rico, the u.s. Virgin islands, and the united
Kingdom, we have many opportunities to leverage our
existing customer base, while moving into untapped markets
in new geographic areas.
Tyler’s commitment to customers is evidenced by the many
long-term relationships we have established. in fact, we
have maintained an annual customer retention rate of
approximately 98 percent over the past 20-plus years. With
our solid past performance and our vision for the future,
Tyler works by channeling the right solutions for local
governments and the right value for our shareholders.
Our StratEgy FOr SuccESS
in recent years, Tyler has honed our focus even further,
executing a growth strategy that is helping us realize our
Tyler Technologies 2006 AnnuAl reporT
FinanCialS
potential. in the last two years we have
refined our organizational structure
to effectively utilize our management
strength and streamlined operations
to create greater efficiencies—opening
new channels for growth. sharpening
our vision has enabled us to more
effectively provide our customers with
products and services that emphasize
functionality and deliver results. And
for our shareholders, this commitment
translates to a stronger return on their
investment. With this solid base and
consistent performance, we are well
positioned to capture increased market
share and grow revenues, earnings, and
cash flow. With vision and discipline, we will continue building
on this foundation in the future.
ExPanding Our FOOtPrint
historically, many of Tyler’s products have had a regional
presence, targeting specific geographic areas and customer
markets. With a unified national sales channel and increased
marketing and branding activities, we have broadened our
efforts to market and sell each of our software solutions
in geographic areas where we previously had limited or
no presence.
Today, our products are offered nationwide and are delivering
outstanding growth from geographic expansion. our incoDe
financial solution, for example, historically had a regional
presence primarily in the southwest. in 2006, we signed our
first incoDe customers in new york and Maryland.
Tyler Technologies
helps city, county,
and state agencies of
all sizes manage the
complex network of
services they deliver to
local citizens.
Tyler Technologies 2006 AnnuAl reporT chAnneling
cOnnEctiOnS
our Munis and eDen financial products, which traditionally
enjoyed very strong market share on the east and West
coasts, respectively, signed deals with clients in 25
different states and the u.s. Virgin islands during 2006
and now together have customers in 44 states and two
territories. And our new courts and justice solution, odyssey,
has enjoyed success across the nation, from Florida to
Michigan and nevada to new hampshire. We believe that
expanding Tyler’s geographic footprint will continue to offer
considerable growth opportunities for Tyler.
Building On Our cuStOMEr BaSE
Today, Tyler has more than 6,000 installations with
clients in all 50 states, puerto rico, the u.s. Virgin
islands, canada, and the united Kingdom. We are
committed to building strong relationships with the
communities we serve. For us, it goes beyond managing
information. it is about delivering and supporting the
tools that empower local government agencies to harness
their information and in turn improve the lives of their
local citizens. We believe in taking full ownership at
every turn, which is why we primarily implement our
solutions and provide support services ourselves, rather
than through third-party integrators. From development
and implementation to training, consulting, and post-
implementation support, Tyler works for our customers.
While our existing customers provide a stable foundation
of recurring revenues, they are also an essential
component of our future growth. in 2006, we reorganized
our sales and marketing teams to create greater efficiencies
across our product families, helping us better address
a very broad market and leverage our current customer
base to cross-sell solutions. We can act as a one-source
provider for a multitude of local governments’ varying
needs—connecting them to our entire Tyler neighborhood
of financial, tax and appraisal, pension, education, public
safety, courts and justice, land records, and document
management products.
For many local agencies, upgrading their in-house systems
is resource-intensive, both financially and in technical staff
support. given Tyler’s established reputation, we are a
trusted source for agencies looking to update or replace
legacy software with turnkey solutions that simplify their
complex systems. in 2006, for instance, we secured a
$3 million deal with columbia county, georgia, and a
$1.1 million contract with Anderson county, Texas, for multi-
suite packages that include our financial, tax, and courts
and justice systems. in addition, a number of our existing
financial systems clients added our municipal court and
public safety solutions. While these types of multi-suite
and follow-on software deals have represented a relatively
Tyler Technologies 2006 AnnuAl reporT
delivering aBOve-markeT grOwTh
delivering aBOve-markeT grOwTh
OFFering inCreaSed FlexiBiliTy
Tyler Technologies
seeks to provide
customers with the
best user experience
possible. That’s why
we provide installation
services, training,
maintenance, and support
ourselves, rather than
outsourcing to
third parties.
Tyler Technologies 2006 AnnuAl reporT SOlid repuTaTiOn
Tyler Technologies
has built a solid
reputation in the
communities we serve.
We believe in building
long-term relationships
with our customers,
which is part of the
reason we have sustained
a customer retention rate of
approximately 98 percent over
the past 20-plus years.
Tax & appraiSal
10 Tyler Technologies 2006 AnnuAl reporT
small portion of our business to date, they have the potential
to generate significant revenue contributions in the future.
no matter how large or small, all local government
agencies want to obtain the best return on their investment
today—and in the future. Tyler’s deep experience in
technology innovation and working with the public sector
helps us better anticipate our customers’ needs. And in a
market that’s highly fragmented, this keen understanding
and responsiveness gives us an advantage. unlike many
of our competitors, which either narrowly focus on a few
applications or allocate resources across many vertical
markets, Tyler empowers local government with the right
tools to get the right results.
MOVing intO largEr OPPOrtunitiES
With small and mid-sized cities and counties composing
the majority of local governments, Tyler’s business
has historically focused on serving these customers.
Although we remain firmly committed to this segment of
the market, we are also successfully moving into larger
opportunities. At Tyler, we have the strength to devote
substantial resources to product development and have
upgraded products by introducing technologies that are
very competitive. As our brand reputation and presence
have increased, we are winning more of these higher-end
deals, as prospects are increasingly recognizing the value
of our government-specific solutions and our reputation for
completing implementations on time and on budget.
our odyssey courts and justice solution has been
particularly successful in larger opportunities, with
contracts from six of the top 20 counties nationwide and
two statewide implementations. in 2005, we moved
into Miami-Dade county, Florida, with a $4.1 million
contract and clark county (las Vegas), nevada, with a
$4.5 million deal, the 8th and 16th largest u.s. counties,
respectively. carrying this momentum into 2006, we
secured our largest software license contract to date—a
$12.4 million software license agreement for odyssey with
the Texas conference of urban counties, a consortium
composed of 34 member counties representing nearly 80
percent of the state’s population. This deal also presents
significant potential for recurring revenues. each member
county that adopts odyssey is responsible for the fees
associated with implementation services, modifications
and enhancements, and maintenance. since signing
the deal with the conference of urban counties, we
have already brought on several new customers from the
member counties, including collin county, Texas, which
signed a $1.7 million deal. As with odyssey, we are also
winning larger contracts with our other products. our
Munis financial solution, for example, was awarded a
contract worth $3.6 million with the u.s. Virgin islands in 2006.
As with our small and mid-sized clients, we are
successfully competing for larger clients because we
have the right combination of proven industry-specific
experience and a legacy of innovation. This broad customer
Small TOwnS
Small TOwnS
large CiTieS
Tyler Technologies 2006 AnnuAl reporT 11 K-12 schools and school districts
software applications to help manage
student information functions such as
grades, attendance, and scheduling. We
also added a feature-rich product to help
local governments better administer and
manage pensions through the acquisition of
TAcs, inc. Both solutions complement our existing
portfolio of financial software products for local
governments and schools, and we believe they
will contribute additional revenue streams in
the future. At Tyler, we are always looking
for ways to intelligently put our cash
to work and carefully evaluate each
opportunity to ensure it coincides
with our long-term strategy and
profitability objectives.
While acquisitions are one
way Tyler seeks to grow, we
also know that succeeding
chAnneling
grOwth
base is generating a growing stream of recurring revenues,
helping us fund more product development. our team of
more than 425 developers is working to ensure that our
software solutions reflect the most innovative technologies
and user-friendly features and functionality in the market.
BrOadEning Our PrOduct OFFEringS
Tyler’s healthy balance sheet and strong free cash flow
provide us with exceptional financial flexibility, and when
growth opportunities arise, we can respond. in part, our
future success hinges on our ability to create, deliver,
and support technologies tailored to the specifications of
local governments. Whether through completing strategic
acquisitions, developing new products internally, or
enhancing existing products, Tyler seeks to continually evolve
its portfolio to deliver the most competitive solutions possible.
in early 2006, we broadened our solutions mix with two
acquisitions. Through the acquisition of MazikusA, inc.,
we are now offering the Tyler education Management
solution, a versatile product suite designed to provide
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revenue Mix
19% SOFTware liCenSeS
29% SOFTware ServiCeS
38% mainTenanCe
10% appraiSal ServiCeS
4% OTher
1 Tyler Technologies 2006 AnnuAl reporT
Tyler Technologies channels results for our stakeholders through steady
growth and a business model with strong operational leverage. With a clear
strategy, healthy balance sheet, and competitive products, we believe Tyler is
perfectly positioned for continued success in a large and growing market.
dOCumenT managemenT
dOCumenT managemenT
COurTS & JuSTiCe
COurTS & JuSTiCe
in recent years, Tyler Technologies
has successfully expanded into
larger clients. our odyssey courts
and justice solution has now been
purchased by six of the 20 largest
u.s. counties.
Tyler Technologies 2006 AnnuAl reporT 13 Tyler Technologies’ deep experience in technology innovation and keen
understanding of the public sector help us anticipate customers’ needs.
our development team is dedicated to continuously improving our existing
products and creating new solutions, ensuring customers the best return
on their investment today—and in the future.
highly FOCuSed STraTegy
highly FOCuSed STraTegy
in today’s market means continually innovating. our
experienced team of developers is committed to enhancing
our existing systems and creating new turnkey solutions.
We use proven, scalable platforms to create best-in-
industry features and functionality. For example, the Tyler
public safety solution, which was developed internally to
meet our clients’ needs for police record management,
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1 Tyler Technologies 2006 AnnuAl reporT
has been on the market for just four years and is now
installed in over 85 agencies in 10 states. We have a
history of providing evolutionary enhancements through
version upgrades as part of our support agreements, as
well as offering migrations to new technology platforms at
reasonable costs. This not only eliminates disruptions, it
also provides customers with the most up-to-date features
and functionality. At Tyler, we want to ensure our products
evolve along with clients’ changing needs so that we can
channel real, long-term value.
providing our customers even more flexibility, Tyler
offers an application service provider (Asp) model, giving
agencies secure access to hosted Tyler software and data
solutions. This arrangement is particularly effective for
local governments who prefer to devote resources to
needs other than managing these systems in-house. With
approximately 75 clients and 100 percent renewal rates
to date, our Asp model makes sense for our customers
and is financially attractive for Tyler, as it provides growth
through predictable, recurring revenues. looking to the
future, we have the right components in place to continue
expanding our product portfolio.
At Tyler Technologies, we have put the infrastructure in
place to support our long-term growth strategies—helping
us better respond to customer demands, technological
developments, and market changes.
EStaBliShing nEw alliancES
Another growth opportunity for Tyler lies in forging new
relationships with other technology leaders. in January
2007, we entered into a strategic alliance with Microsoft
corporation to enhance the Microsoft Dynamics AX
business management solution with core public sector-
specific functionality. utilizing our vast knowledge of the
government market, we will broaden the functionality of
Microsoft Dynamics AX to address the unique accounting
needs of public sector organizations worldwide. Tyler will
resell Microsoft Dynamics AX solutions directly into the
government market. And we will also receive license and
maintenance royalties on direct and indirect sales of
these solutions through Microsoft’s worldwide distribution
channels. Although we don’t expect to see significant
revenues from this relationship before 2010, we expect
that the Microsoft Dynamics AX product will provide
us greater visibility in the upper end of the market, as
well as a new presence in the federal and international
markets. By leveraging our strengths to align with the
right partners, Tyler is looking for new opportunities to
accelerate our organic growth in the years to come.
a Bright FuturE
As expected, Tyler showed consistent growth in 2006
with our 23rd consecutive profitable quarter and revenue
and free cash flow at all-time highs. At Tyler, our strong
financial value is underscored by our deep domain
experience and singular focus on delivering a broad
portfolio of cost-effective, results-oriented solutions for
local governments. As we look to the future, we plan to
continue executing the strategies that have produced such
strong results to date: growing our geographic footprint,
deepening our customer base, moving into larger markets,
broadening our product offerings, and establishing new
alliances. These strategies are effective both in helping
us grow our customer base and the markets we serve, and
in creating a strong return for our stakeholders. From our
feature-rich software solutions to the commitment and
expertise of our more than 1,500 employees, it’s clear that
Tyler truly works…and delivers.
Tyler Technologies 2006 AnnuAl reporT 15 With a clear focus on serving local
governments and a proven strategy,
Tyler Technologies’ growth in 2006
was steady and strong. once again,
we demonstrated our ability to
channel success to our customers,
our shareholders and our employees.
The following financials detail
our performance over the last year.
1 Tyler Technologies 2006 AnnuAl reporT
Performance GraPh
The following table compares total shareholder returns for
Tyler Technologies over the last five years to the standard and
poor’s 500 stock index and the standard and poor’s 600 information
Technology index assuming a $100 investment made on December 31,
2001. each of the three measures of cumulative total return assumes
reinvestment of dividends. The stock performance shown on the graph
below is not necessarily indicative of future price performance.
(cid:27)(cid:43)(cid:39)(cid:39)
(cid:27)(cid:42)(cid:39)(cid:39)
(cid:27)(cid:41)(cid:39)(cid:39)
(cid:27)(cid:40)(cid:39)(cid:39)
(cid:27)(cid:39)
(cid:23)
(cid:41)(cid:39)(cid:39)(cid:40)(cid:23)
(cid:75)(cid:112)(cid:99)(cid:92)(cid:105)(cid:23)
(cid:40)(cid:39)(cid:39)(cid:37)(cid:39)(cid:39)(cid:23)
(cid:74)(cid:29)(cid:71)(cid:23)(cid:44)(cid:39)(cid:39)(cid:23)
(cid:40)(cid:39)(cid:39)(cid:37)(cid:39)(cid:39)(cid:23)
(cid:74)(cid:29)(cid:71)(cid:23)(cid:45)(cid:39)(cid:39)(cid:23)(cid:64)(cid:75)(cid:23)
(cid:40)(cid:39)(cid:39)(cid:37)(cid:39)(cid:39)(cid:23)
(cid:41)(cid:39)(cid:39)(cid:41)(cid:23)
(cid:48)(cid:40)(cid:37)(cid:45)(cid:44)(cid:23)
(cid:46)(cid:46)(cid:37)(cid:48)(cid:39)(cid:23)
(cid:45)(cid:42)(cid:37)(cid:44)(cid:47)(cid:23)
(cid:41)(cid:39)(cid:39)(cid:42)(cid:23)
(cid:41)(cid:40) (cid:40)(cid:37)(cid:45)(cid:44)(cid:23)
(cid:40)(cid:39)(cid:39)(cid:37)(cid:41)(cid:44)(cid:23)
(cid:48)(cid:46)(cid:37)(cid:47)(cid:42)(cid:23)
(cid:41)(cid:39)(cid:39)(cid:43)(cid:23)
(cid:40)(cid:47)(cid:42)(cid:37)(cid:46)(cid:43)(cid:23)
(cid:40) (cid:40) (cid:40) (cid:37) (cid:40) (cid:44)(cid:23)
(cid:40)(cid:39)(cid:43)(cid:37)(cid:42)(cid:42)(cid:23)
(cid:41)(cid:39)(cid:39)(cid:44)(cid:23)
(cid:40)(cid:48)(cid:41)(cid:37)(cid:48)(cid:46)(cid:23)
(cid:40)(cid:40)(cid:45)(cid:37)(cid:45) (cid:40)(cid:23)
(cid:40)(cid:39)(cid:43)(cid:37)(cid:39)(cid:47)(cid:23)
(cid:41)(cid:39)(cid:39)(cid:45)
(cid:42)(cid:39)(cid:48)(cid:37) (cid:39)(cid:40)
(cid:40)(cid:42)(cid:44)(cid:37)(cid:39)(cid:42)
(cid:40) (cid:40) (cid:42)(cid:37)(cid:47)(cid:48)
Tyler Technologies performance graph 17
our common stock is traded on the new york stock exchange under the symbol “Tyl.” at December 31, 2006, we had
approximately 2,225 stockholders of record. a number of our stockholders hold their shares in street name; therefore, there
are substantially more than 2,225 beneficial owners of our common stock.
The following table sets forth for the calendar periods indicated the high and low sales price per share of our common stock as
reported on the new york stock exchange.
2005: first Quarter
second Quarter
Third Quarter
fourth Quarter
2006: first Quarter
second Quarter
Third Quarter
fourth Quarter
HigH
Low
$ 8.45
7.90
8.69
9.15
$ 1 1.00
1 1.50
13.36
14.99
$ 6.29
5.25
7.25
7.88
$ 8.40
9.80
10.27
12.41
We did not pay any cash dividends in 2006 or 2005. During 2006 our bank credit agreement contained restrictions on the
payment of cash dividends. We terminated this credit agreement in January 2007. We intend to retain earnings for use in
the operation and expansion of our business, and, therefore, we do not anticipate declaring a cash dividend in the
foreseeable future.
During 2006, we purchased approximately 1.0 million shares of our common stock for an aggregate cash purchase price of
$10.5 million. our 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 and october 2005. as of December 31, 2006, we had remaining
authorization to repurchase up to 1.0 million additional shares of our common stock. There is no expiration date specified for
the authorization and we intend to repurchase stock under the plan from time to time in the future.
18 Tyler Technologies sTock markeT DaTa
SELECTED FiNANCiAL DATA
(iN THouSANDS, ExCEpT pEr SHArE DATA)
For THE YEArS ENDED DECEMBEr 31,
STaTemenT of oPeraTIonS DaTa( 1):
revenues
costs and expenses:
cost of revenues (2)
2006
2005
2004
2003
2002
$ 195,303
$ 170,457
$ 172,270
$ 145,454
$ 133,897
120,499
108,970
108,432
90,627
88,347
selling, general and administrative expenses (2)
51,7 1 1
46,242
45,451
38,390
33,914
restructuring charge
amortization of customer and trade name intangibles
operating income
realized gain on sale of investment in h.T.e., inc. (3)
other income (expense), net
—
1,318
1,260
1,266
21,775
12,719
—
1,267
1 7,120
—
925
—
897
15,512
10,739
—
1,080
—
906
—
23,233
—
317
339
(698)
income from continuing operations before income taxes
22,855
13,625
17,437
39,084
income tax provision
8,493
5,432
7,309
13,106
10,041
3,869
income from continuing operations
$ 14,362
$ 8,193
$ 10,128
$ 25,978
$ 6, 1 72
income from continuing operations per diluted share
$
0.34
$ 0.19
$ 0.23
$
0.58
$
0.12
Weighted average diluted shares
41,868
42,075
44,566
45,035
49,493
STaTemenT of caSh fLoWS DaTa:
cash flows provided by operating activities
$ 26,804
$ 21,187
$ 22,159
$ 22,535
$ 19,845
cash flows (used by) provided by investing activities
(24,326)
1,820
(9,914)
(590)
cash flows used by financing activities
(5,999)
(14,847)
(9,940)
(25,421)
(7,974)
(3,398)
BaLance SheeT DaTa:
Total assets
$ 220,276
$ 194,437
$ 190,487
$ 186,396
$ 169,845
long-term obligations, less current portion
—
—
—
—
2,550
shareholders’ equity
125,875
1 12,197
118,400
1 1 7,907
11 8,656
(1) in December 2003, we acquired eden systems, inc. (“eden”), a provider of financial, personnel and citizen services software for local
governments. These results include the results of the operations of eden from the date of its acquisition.
(2) effective January 1, 2006, we adopted the fair value recognition provisions of statement of financial accounting standards no. 123r, “share-
Based payment” using the modified-prospective method. in 2006 cost of revenues include $147,000 share-based compensation expense and
selling, general and administrative expenses include $1.8 million share-based compensation expense. in accordance with the standard, results
of operations for the years prior to 2006 are reported under the previous accounting standard and no expense was recorded.
(3) on march 25, 2003, we received cash proceeds of $39.3 million in connection with a transaction to sell all of our 5.6 million shares of h.T.e.,
inc. (“hTe”) common stock to sungard Data systems inc. for $7.00 cash per share. our original cost basis in the hTe shares was $15.8
million. after transaction and other costs, we recorded a gross realized gain of $23.2 million ($16.2 million or $0.36 per diluted share after
income taxes of $7.0 million) for the year ended December 31, 2003.
18 Tyler Technologies sTock markeT DaTa
Tyler Technologies selecTeD financial DaTa 19
ForwArD LooKiNg STATEMENTS
in addition to historical information, this annual report contains forward-looking statements. The forward-looking statements
are made in reliance upon safe harbor provisions of the private securities litigation reform act of 1995. The forward-looking
statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those
reflected in the forward-looking statements. readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly
release the results of any revision to these forward-looking statements. readers should carefully review the risk factors
described in our form 10-k and other documents we file from time to time with the sec.
When used in this annual report, the words “believes,” “plans,” “estimates,” “expects,” “anticipates,” “intends,” “continue,”
“may,” “will,” “should,” “projects,” “forecasts,” “might,” “could” or the negative of such terms and similar expressions are
intended to identify forward-looking statements.
oVErViEw
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 property appraisal outsourcing services for taxing jurisdictions.
our products are generally grouped into four major areas:
• financials;
• courts and Justice;
• property appraisal and Tax; and
• Document management.
We monitor and analyze several key performance indicators in order to manage our business and evaluate our financial and
operating performance. These indicators include the following:
• revenues – We derive our revenues from four primary sources: sale of software licenses; software services; appraisal
services; and maintenance and support. Because the majority of the software we sell is “off-the-shelf,” increased sales of
software products generally result in incrementally higher gross margins. Thus, the most significant driver to our business is
the number and size of software license sales. in addition, new software license sales generally generate implementation
services revenues as well as future maintenance and support revenues, which we view as a recurring revenue source. We
also monitor our customer base and churn since our maintenance and support revenue should increase due to our
historically low customer turnover.
• cost of revenues and Gross margins – our primary cost component is personnel expenses in connection with providing
software implementation and appraisal services to our customers. We can improve gross margins by controlling headcount
and related costs and by expanding our revenue base, especially from those products and services that produce incremental
revenue with minimal incremental cost, such as software licenses and maintenance and support. our appraisal projects are
seasonal in nature, and we often employ appraisal personnel on a short-term basis to coincide with the life of a project.
20 Tyler Technologies managemenT’s DiscUssion anD analysis of financial conDiTion anD resUlTs of operaTions
• Selling, General and administrative (“SG&a”) expenses – The primary components of sg&a expense are administrative
and sales personnel salaries and commissions, marketing expense, research and development costs, rent and professional fees.
sales commissions generally fluctuate with revenues but other administrative expenses tend to grow at a slower rate than
revenues; however, these costs have recently grown disproportionately because of the requirements of corporate governance
legislation. research and development costs fluctuate from year-to-year depending on product development activity.
• Liquidity and cash flows – The primary driver of our cash flows is net income. Uses of cash include acquisitions, capital
investments in software development and property and equipment and the discretionary purchases of treasury stock.
During 2006 we used cash of $12.2 million to acquire two small companies and certain maintenance and support
agreements. in 2006, we also purchased 1.0 million shares of our common stock at an aggregate cash purchase price of
$10.5 million. our working capital needs are fairly stable throughout the year with the significant components of cash
outflows being payment of personnel expenses offset by cash inflows representing collection of accounts receivable and
cash receipts from customers in advance of revenue being earned.
• Balance Sheet – cash, accounts receivable and days sales outstanding and deferred revenue balances are important
indicators of our business.
CriTiCAL ACCouNTiNg poLiCiES AND ESTiMATES
our discussion and analysis of financial condition and results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United states
(“gaap”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported
amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenues, cost of revenues
and expenses during the reporting period, and related disclosure of contingent assets and liabilities. The notes to the
consolidated financial statements included as part of this annual report describe our significant accounting policies used in
the preparation of the consolidated financial statements. on an on-going basis, we evaluate our estimates, including, but not
limited to, those related to intangible assets, bad debts and our service contracts. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect significant judgments and estimates used in the preparation of our
consolidated financial statements.
revenue recognition. We recognize revenues in accordance with the provisions of statement of position (“sop”) 97-2,
“software revenue recognition,” as amended by sop 98-4 and sop 98-9, as well as Technical practice aids issued from time
to time by the american institute of certified public accountants, and in accordance with the securities and exchange
commission staff accounting Bulletin no. 104 “revenue recognition.” We recognize revenue on our appraisal services
contracts using the proportionate performance method of accounting, with considerations for the provisions of emerging
issue Task force no. 00-21, “revenue arrangements with multiple Deliverables.” our revenues are derived from sale of
software licenses, appraisal services, maintenance and support, and services that typically range from installation, training and
basic consulting to software modification and customization to meet specific customer needs. for multiple element software
arrangements, which do not entail the performance of services that are considered essential to the functionality of the
software, we generally record revenue when the delivered products or performed services result in a legally enforceable and
non-refundable claim. We maintain allowances for doubtful accounts and sales adjustments, which are provided at the time the
revenue is recognized. Because most of our customers are governmental entities, we rarely incur a loss resulting from the
inability of a customer to make required payments. in a limited number of cases, we encounter a customer who is dissatisfied
with some aspect of the software product or our service, and we may offer a “concession” to such customer. in those limited
20 Tyler Technologies managemenT’s DiscUssion anD analysis of financial conDiTion anD resUlTs of operaTions
Tyler Technologies managemenT’s DiscUssion anD analysis of financial conDiTion anD resUlTs of operaTions 21
situations where we grant a concession, we rarely reduce the contract arrangement fee, but alternatively may perform
additional services, such as additional training or programming a minor feature the customer had in their prior software
solution. These amounts have historically been considered nominal. in connection with our customer contracts and the
adequacy of related allowances and measures of progress towards contract completion, our project managers are charged
with the responsibility to continually review the status of each customer on a specific contract basis. also, we review, on at
least a quarterly basis, significant past due accounts receivable and the adequacy of related reserves. events or changes in
circumstances that indicate that the carrying amount for the allowances for doubtful accounts and sales adjustments may
require revision, include, but are not limited to, deterioration of a customer’s financial condition, failure to manage our
customer’s expectations regarding the scope of the services to be delivered, and defects or errors in new versions or
enhancements of our software products.
for those software arrangements that involve significant production, modification or customization of the software, which is
considered essential to its functionality, and for substantially all real estate appraisal outsourcing projects, we recognize
revenue and profit as the work progresses using the percentage-of-completion method and the proportionate performance
method of revenue recognition. These methods rely on estimates of total expected contract revenue, billings and collections
and expected contract costs, as well as measures of progress toward completion. We believe reasonably dependable
estimates of revenue and costs and progress applicable to various stages of a contract can be made. at times, we perform
additional and/or non-contractual services for little to no incremental fee to satisfy customer expectations. if changes occur
in delivery, productivity or other factors used in developing our estimates of expected costs or revenues, we revise our cost
and revenue estimates, and any revisions are charged to income in the period in which the facts that give rise to that revision
first become known.
We use contract accounting, primarily the percentage-of-completion method, and apply the provisions of sop no. 81-1
“accounting for performance of construction – Type and certain production – Type contracts” for those software
arrangements that involve significant production, modification or customization of the software, or where our software
services are otherwise considered essential to the functionality of the software. in addition, we recognize revenue using the
proportionate performance method of revenue recognition for our property appraisal projects, some of which can range up to
three years. in connection with these and certain other contracts, we may perform the work prior to when the services are
billable and/or payable pursuant to the contract. 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.
in connection with certain of our contracts, we have recorded retentions receivable or unbilled receivables consisting of costs
and estimated profit in excess of billings as of the balance sheet date. many of the contracts which give rise to unbilled
receivables at a given balance sheet date are subject to billings in the subsequent accounting period. management reviews
unbilled receivables and related contract provisions to ensure we are justified in recognizing revenue prior to billing the
customer and that we have objective evidence which allows us to recognize such revenue. in addition, we have a sizable
amount of deferred revenue which represents billings in excess of revenue earned. The majority of this liability consists of
maintenance billings in which payments are made in advance and the revenue is ratably earned over the maintenance period,
generally one year. We also have deferred revenue for those contracts in which we receive a deposit and the conditions in
which to record revenue for the service or product has not been met. on a periodic basis, we review by customer the detail
components of our deferred revenue to ensure our accounting remains appropriate.
Intangible assets and Goodwill. our business acquisitions typically result in the creation of goodwill and other intangible
asset balances, and these balances affect the amount and timing of future period amortization expense, as well as expense we
could possibly incur as a result of an impairment charge. The cost of acquired companies is allocated to identifiable tangible
and intangible assets based on estimated fair value, with the excess allocated to goodwill. accordingly, we have a significant
balance of acquisition date intangible assets, including software, customer related intangibles, trade name and goodwill. in
addition, we capitalize software development costs incurred subsequent to the establishment of technological feasibility.
22 Tyler Technologies managemenT’s DiscUssion anD analysis of financial conDiTion anD resUlTs of operaTions
These intangible assets are amortized over their estimated useful lives. all intangible assets with definite and indefinite lives
are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. recoverability of goodwill is generally measured by a comparison of the carrying amount of an
asset to its fair value, generally determined by estimated future net cash flows expected to be generated by the asset.
recoverability of other intangible assets is generally measured by comparison of the carrying amount to estimated
undiscounted future cash flows. The assessment of recoverability or of the estimated useful life for amortization purposes will
be affected if the timing or the amount of estimated future operating cash flows is not achieved. events or changes in
circumstances that indicate the carrying amount may not be recoverable include, but are not limited to, a significant decrease
in the market value of the business or asset acquired, a significant adverse change in the extent or manner in which the
business or asset acquired is used, or a significant adverse change in the business climate. in addition, products, capabilities,
or technologies developed by others may render our software products obsolete or non-competitive.
Share-based compensation. We have a stock option plan that provides for the grant of stock options to key employees,
directors and non-employee consultants. prior to January 1, 2006, we accounted for share-based compensation utilizing the
intrinsic value method in accordance with the provisions of accounting principles Board opinion (“apB”) no. 25, “accounting
for stock issued to employees,” and related interpretations. accordingly no compensation expense was recorded because the
exercise prices of the stock options equaled the market prices of the underlying stock on the dates of grants. however, prior
to adoption of statement of financial accounting standards (“sfas”) no. 123r, share-based compensation had been included
in pro forma disclosures in the financial statement footnotes for periods prior to 2006.
effective January 1, 2006, we adopted the provisions of sfas no. 123r, “share-Based payment,” which establishes accounting
for share-based awards exchanged for employee services, using the modified prospective application transition method.
subsequently, we recorded compensation expense in our statement of operations over the service period that the awards are
expected to vest. compensation cost recognized in 2006, includes the applicable amounts of: (a) compensation cost of all
share-based payments granted prior to, but not yet vested as of, January 1, 2006 (based on the grant-date fair value
estimated in accordance with the original provisions of sfas no. 123, “accounting for stock-Based compensation,” and
previously presented in the pro forma footnote disclosures), and (b) compensation cost for all share-based payments granted
subsequent to January 1, 2006 (based on the grant-date fair value estimated in accordance with the new provisions of
sfas no. 123r).
We estimate the fair value of share-based awards on the date of grant using the Black-scholes option valuation model. share-
based compensation expense includes the estimated effects of forfeitures, which will be adjusted over the requisite service
period to the extent actual forfeitures differ, or are expected to differ from such estimates. changes in estimated forfeitures
are recognized in the period of change and will also impact the amount of expense to be recognized in future periods.
forfeiture rate assumptions are derived from historical data. We estimate stock price volatility at the date of grant based on
the historical volatility of our common stock. estimated option life is determined using the “simplified method” in accordance
with staff accounting Bulletin no. 107. Determining the appropriate fair-value model and calculating the fair value of share-
based awards at the grant date requires considerable judgment, including estimating stock price volatility, expected option life
and forfeiture rates.
ANALYSiS oF rESuLTS oF opErATioNS AND oTHEr
The following discussion compares the historical results of operations on a basis consistent with gaap for the years ended
December 31, 2006, 2005 and 2004.
22 Tyler Technologies managemenT’s DiscUssion anD analysis of financial conDiTion anD resUlTs of operaTions
Tyler Technologies managemenT’s DiscUssion anD analysis of financial conDiTion anD resUlTs of operaTions 23
2006 compared to 2005
revenues
The following table sets forth a comparison of the key components of our revenues for the following years ended December 31:
($ iN THouSANDS)
software licenses
software services
maintenance
appraisal services
hardware and other
Total revenues
2006
% oF
ToTAL
2005
% oF
ToTAL
CHANgE
$
%
$ 37,414
19%
$ 29,552
1 7%
57,588
73,413
19,755
7,133
29
38
10
4
51,532
64,728
1 8,374
6,271
30
38
1 1
4
$ 7,862
6,056
8,685
1,381
862
27%
1 2
1 3
8
1 4
$ 195,303
100%
$ 170,457
100%
$ 24,846
1 5%
Software licenses. changes in software license revenues consist of the following components:
• software license revenue related to financial products, which comprise over 70% of our software license revenues in the years
presented, increased significantly compared to the prior year primarily due to growth from geographic expansion and increased
success in winning larger contracts. Third party software revenue also increased over the comparable prior year because we
sold more financial software modules that utilize third party software. also, in late 2005 we simplified the implementation
process for one of our financial products, which has enabled us to deliver the product more rapidly. our financial software
products automate accounting systems for cities, counties, school districts, public utilities and not-for-profit organizations.
• in 2006 software license revenue related to our products other than financial systems experienced strong increases in the
aggregate compared to 2005. software license revenues from our odyssey courts and justice products experienced a
substantial increase over the prior year as a result of the product maturing following successful early implementations and
leveraging our existing customer base. in addition, licenses of our tax and appraisal products and a document management
product were much higher than the prior year due to several new Java based product releases and increased appraisal
revaluation activity. our appraisal software license volume varies from period to period dependent upon the special needs
and timing of our customers. local government taxing entities normally reappraise properties from time to time to update
values for tax assessment purposes and to maintain equity in the taxing process. While certain of these taxing jurisdictions
contract with our appraisal services division to perform the reappraisals, it is not always necessary for the customer to
purchase new software in order to process the appraisals. in some cases, a customer may simply add additional appraisal
software modules to enhance the functionality of its existing software.
Software services. changes in software services revenues consist of the following components:
• software services revenue related to financial products, which comprise more than half of our software service revenue in
the years presented, increased significantly in 2006 compared to the prior year reflecting increased contract volume and
additions to training staff which enabled us to deliver our backlog at a faster rate. Typically, software contracts include
services such as installing the software, converting the customers’ data to be compatible with the software and training
customer personnel to use the software. our application service provider (“asp”) hosting and disaster recovery services also
contributed to the increase as a result of geographic expansion, primarily in the south in the aftermath of hurricane katrina.
• software services revenue related to odyssey courts and justice products was up moderately in 2006 compared to 2005
reflecting increased contract volume. since march 31, 2005, we have increased our presence with odyssey in Texas, florida
and michigan and added one contract in nevada. odyssey software services revenue did not increase as strongly as odyssey
software license revenue because the prior year included a $1.4 million contract for follow-on services to an existing
customer that had previously implemented and accepted the software.
24 Tyler Technologies managemenT’s DiscUssion anD analysis of financial conDiTion anD resUlTs of operaTions
• software services revenue related to our document management products experienced strong increases in 2006 due to
several new Java based product releases.
maintenance. We provide maintenance and support services for our software products and third party software. maintenance
revenues increased due to growth in our installed customer base as evidenced by our software license revenue and slightly
higher maintenance rates on most of our product lines.
appraisal services. The appraisal services business is driven in part by revaluation cycles in various states. appraisal services
revenue increased over the prior year mainly due to activity related to ohio’s revaluation cycle, which occurs every six
years as well as the addition of new customers. The ohio revaluation cycle was nearly complete by the end of 2006. The level
of appraisal services revenues in 2007 will depend on our ability to replace appraisal services revenues associated with the
ohio revaluation.
Cost of revenues and gross Margins
The following table sets forth a comparison of the key components of our cost of revenues and those components stated as a
percentage of related revenues for the following years ended December 31:
($ iN THouSANDS)
software licenses
acquired software
software services and maintenance
appraisal services
hardware and other
Total cost of revenues
2006
% oF rELATED
rEVENuES
2005
% oF rELATED
rEVENuES
CHANgE
$
%
$ 9,980
27%
$ 9,1 0 1
31%
$
879
10%
1,360
90,330
13,563
5,266
4
69
69
74
794
80,347
14,188
4,540
3
69
77
72
566
9,983
(625)
726
7 1
1 2
(4)
1 6
$ 120,499
62%
$ 108,970
64%
$ 1 1,529
1 1%
The following table sets forth a comparison of gross margin percentage by revenue type for the periods presented for the
following years ended December 31:
groSS MArgiN pErCENTAgES
software licenses and acquired software
software services and maintenance
appraisal services
hardware
overall gross margin
2006
2005
CHANgE
69.7%
66.5%
3.2%
31.0
31.3
26.2
30.9
22.8
27.6
0. 1
8.5
(1.4)
38.3%
36.1%
2.2%
cost of software license revenues. our software license gross margin percentage in 2006 increased due to substantially
higher software license revenues and slightly lower amortization expense of software development costs as some products
became fully amortized during the first quarter of 2006. approximately half of our cost of software license revenues is
amortization expense for capitalized development costs on certain software products with the remainder consisting of costs
related to third-party software. amortization costs are fixed in nature and do not change with revenue changes. once a
product is released, we begin to amortize over the estimated useful life of the product the costs associated with its
development. amortization expense is determined on a product-by-product basis at an annual rate not less than straight-line
basis over the 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.
24 Tyler Technologies managemenT’s DiscUssion anD analysis of financial conDiTion anD resUlTs of operaTions
Tyler Technologies managemenT’s DiscUssion anD analysis of financial conDiTion anD resUlTs of operaTions 25
cost of software services and maintenance revenues. The software services and maintenance gross margin percentage in
2006 was comparable to the 2005. The cost of software services and maintenance increased because we added to our
implementation and support staff to increase our capacity to support new sales growth and deliver sales backlog. cost of
software services and maintenance primarily consists of expenses, such as personnel costs related to installation of our
software licenses, conversion of customer data, training customer personnel and support activities and various other services
such as asp and disaster recovery.
cost of appraisal services revenues. The appraisal services gross margin percentage increased in 2006 compared to 2005
mainly due to significant organizational changes and headcount reductions we made in the second quarter of 2005 to our
appraisal services business to bring costs in line with expected levels of revenue. in addition, margins in 2005 were negatively
affected by cost inefficiencies associated with one large contract.
The overall gross margin percentage rose mainly due to a revenue mix that included more software license revenues, as well
as lower costs as a result of the restructuring of our appraisal services business in the second quarter of 2005. software
license revenue inherently has higher gross margins than other revenues such as software services and hardware.
Selling, general and Administrative Expenses
The following table sets forth a comparison of our selling, general and administrative (“sg&a”) expenses for the following
years ended December 3 1:
($ iN THouSANDS)
2006
% oF
rEVENuES
2005
% oF
rEVENuES
CHANgE
$
%
selling, general and administrative expenses
$ 51,711
26%
$ 46,242
27%
$ 5,469
12%
in 2006 sg&a includes a non-cash purchased in-process research and development charge of $140,000 relating to one of our
acquisitions in January 2006 and $2.0 million of non-cash share-based compensation expense as a result of implementing
sfas no. 123r in January 2006. partially offsetting these charges were lower sg&a expenses relating to our appraisal services
and appraisal and tax software businesses due to the restructuring of those businesses in the second quarter of 2005.
restructuring Charge
Because of unsatisfactory financial performance early in 2005, we made significant organizational changes in the second
quarter of 2005 to those areas of our business that were not performing to our expectations. our goal was to bring costs in
line with expected levels of revenue while improving the efficiency of our organizational structure to ensure that clients
continue to receive superior service.
We reorganized the appraisal services business to eliminate levels of management and reduce overhead expense. We also took
actions to reduce headcount and costs in our appraisal and tax software division, and we consolidated certain senior
management positions at the corporate office. These cost reductions were made in the second quarter of 2005. as a result,
we eliminated approximately 120 positions, including management, staff and project-related personnel.
in connection with the reorganization, we incurred certain charges which were primarily comprised of employee severance
costs and related fringe benefits, and totaled approximately $1.3 million before income taxes. The related payments were paid
in 2005.
Amortization of Customer and Trade Name intangibles
acquisition intangibles are composed of the excess of the purchase price over the fair value of net tangible assets acquired
that is allocated to acquired and amortizable software, customer and trade name intangibles with the remainder allocated to
goodwill that is not subject to amortization. however, amortization expense related to acquired software is included with cost
26 Tyler Technologies managemenT’s DiscUssion anD analysis of financial conDiTion anD resUlTs of operaTions
of revenues while amortization expense of customer and trade name intangibles is recorded as other expense. The estimated
useful lives of both customer and trade name intangibles are 5 to 25 years. The following table sets forth a comparison of
amortization of customer and trade name intangibles for the following years ended December 3 1:
($ iN THouSANDS)
amortization of customer and trade name intangibles
2006
2005
$ 1,318
$ 1,266
CHANgE
$
$ 52
%
4%
estimated annual amortization expense relating to customer and trade name acquisition intangibles, excluding acquired software
for which the amortization expense is recorded as cost of revenues, for the next five years is as follows (in thousands):
2007
2008
2009
2010
201 1
other
$1,348
1,323
1,237
1,237
1,221
interest income is the main component of other income, which also includes non-usage and other fees associated with a credit
agreement we terminated in January 2007, gain on sale of certain assets, gains and losses on risk management liabilities and
assets associated with a foreign exchange contract and miscellaneous other items. interest income in 2006 was $1.4 million
compared to $900,000 in 2005.
income Tax provision
The following table sets forth a comparison of our income tax provision for the following years ended December 31:
($ iN THouSANDS)
income tax provision
effective income tax rate
2006
2005
$
%
CHANgE
$ 8,493
$ 5,432
$ 3,061
56%
37.2%
39.9%
The effective income tax rates were different from the statutory United states federal income tax rate of 35% primarily due
to state income taxes, the qualified manufacturing activities deduction and non-deductible meals and entertainment costs. in
2006 the rate is also impacted by non-deductible share-based compensation expense.
The effective rate for 2006 was lower than the prior year mainly due to changes in the Texas franchise tax law and rates
enacted in the second quarter of 2006, favorable state income tax audit results and lower state income taxes as a result of a
change in our corporate structure implemented in early 2005.
slightly more than half of our stock option awards granted qualify as incentive stock options (“iso”) for income tax purposes. as such,
a tax benefit is not recorded at the time the compensation cost related to the options is recorded for book purposes due to the fact
that an iso does not ordinarily result in a tax benefit unless there is a disqualifying disposition. stock option grants of non-qualified
options result in the creation of a deferred tax asset, which is a temporary difference, until the time that the option is exercised. Due to
the treatment of incentive stock options for tax purposes, our effective tax rate from year to year is subject to variability.
26 Tyler Technologies managemenT’s DiscUssion anD analysis of financial conDiTion anD resUlTs of operaTions
Tyler Technologies managemenT’s DiscUssion anD analysis of financial conDiTion anD resUlTs of operaTions 27
2005 compared to 2004
revenues
The following table sets forth a comparison of the key components of our revenues for the following years ended December 3 1:
($ iN THouSANDS)
software licenses
software services
maintenance
appraisal services
hardware and other
Total revenues
2005
% oF
ToTAL
$ 29,552
17%
51,532
64,728
1 8,374
6,271
30
38
1 1
4
2004
$ 30,258
49,786
57,760
27,394
7,072
% oF
ToTAL
CHANgE
$
%
18%
$ (706)
(2)%
29
33
16
4
1,746
6,968
(9,020)
(801)
4
12
(33)
(1 1)
$ 170,457
100%
$ 172,270
100%
$ (1,813)
(1)%
Software licenses. changes in software license revenues consist of the following components:
• software license revenue related to financial products, which comprise approximately 80% of our software license revenues
in the years presented, increased slightly compared to the prior year primarily due to third party software products which
enhance the functionality of our proprietary software.
• software license revenue related to our odyssey courts and justice products declined in 2005 compared to 2004. The prior
year was unusually high because it included approximately $900,000 of license fees earned upon final acceptance for two
original odyssey installation sites. in 2005 we had fifteen odyssey contracts in process compared to seven odyssey
contracts in 2004. The implementation cycle for odyssey products ranges from nine to thirty-six months depending on the
scope of the contract and modification complexity. We have recognized revenue on these contracts using contract
accounting.
Software services. changes in software services revenues consist of the following components:
• software services revenue related to financial products, which comprise more than half of our software service revenue in
the years presented, increased moderately in 2005 compared to the prior year. approximately one-half of our financial
software services revenue increase related to training and the remaining increases were due to new customers for our
application service provider hosting and disaster recovery services and other miscellaneous services. We increased our
training staff in 2005 which enabled us to deliver our backlog at a faster rate.
• software services revenue related to our odyssey courts and justice products increased significantly in 2005 compared to
the prior year mainly due to a new $1.4 million contract for follow-on services to an existing customer that had previously
implemented and accepted the software.
• software services revenue related to appraisal and tax products declined substantially in 2005. This decline was mainly
associated with the completion of several legacy appraisal and tax contracts in 2004 and early 2005.
maintenance. We provide maintenance and support services for our software products and third party software. maintenance
revenues increased due to growth in our installed customer base as evidenced by our software license revenue and slightly
higher maintenance rates on most of our product lines.
appraisal services. The decrease in appraisal services revenues is due to the completion in 2004 of certain significant
appraisal contracts. These larger projects are often relatively discretionary in nature compared to smaller projects which tend
to occur on a more consistent basis, and the larger projects we recently completed have not been replaced by similar projects.
The appraisal services business is driven in part by revaluation cycles in various states.
28 Tyler Technologies managemenT’s DiscUssion anD analysis of financial conDiTion anD resUlTs of operaTions
Cost of revenues and gross Margins
The following table sets forth a comparison of the key components of our cost of revenues, and those components stated as a
percentage of related revenues for the following years ended December 3 1:
($ iN THouSANDS)
software licenses
acquired software
2005
% oF rELATED
rEVENuES
2004
% oF rELATED
rEVENuES
CHANgE
$
%
$ 9, 1 0 1
794
31%
3
$ 8,819
1,447
29%
5
software services and maintenance
80,347
69
72,609
68
appraisal services
hardware and other
Total cost of revenues
14,188
4,540
77
72
20,132
5,425
73
77
$ 108,970
64%
$ 108,432
63%
$ 282
3%
(653)
7,738
(5,944)
(885)
$ 538
(45)
1 1
(30)
(16)
0%
The following table sets forth a comparison of gross margin percentage by revenue type for the periods presented for the
following years ended December 31:
groSS MArgiN pErCENTAgES
software licenses and acquired software
software services and maintenance
appraisal services
hardware
overall gross margin
2005
2004
CHANgE
66.5%
66 .1 %
0.4%
30.9
22.8
27.6
32.5
26.5
23.3
(1.6)
(3.7)
4.3
36.1%
37. 1 %
(1.0)%
cost of software license revenues. amortization expense for capitalized software products declined from $6.1 million in 2004
to $5.9 million in 2005, because certain software products became fully amortized during 2005, which offset new
amortization expense from software products released in 2004.
cost of acquired software. in 2005 cost of acquired software declined compared to the prior year because certain acquired
software assets recorded for previous acquisitions became fully amortized.
cost of software services and maintenance revenues. in 2005 cost of software services and maintenance grew 11% while
the related software services and maintenance revenues increased 8% compared to the prior year period. During 2005, costs
increased at a faster rate than related software services and maintenance revenues, which reflects lower utilization of
personnel in our appraisal and tax software division, costs to support our recently released orion products, a shift in the roles
of certain of our development personnel whose costs were capitalized in 2004 to projects that were expensed in 2005, and
higher health care costs.
cost of appraisal services revenues. The decline in the cost of appraisal services revenues is the result of lower appraisal
services revenues. We often hire temporary employees to assist in appraisal projects whose term of employment generally
ends with the projects’ completion. in addition, in the second quarter of 2005 we made significant organizational changes to
our appraisal services division because of the declining gross margins.
Gross margin percentage. The overall gross margin percentage decline was due to cost inefficiencies associated with lower
appraisal services revenues and efforts and costs to support our recently released orion products, as well as a shift in the
roles of certain of our development personnel whose costs were capitalized in 2004 to projects that are being expensed in
2005 and higher health care costs.
28 Tyler Technologies managemenT’s DiscUssion anD analysis of financial conDiTion anD resUlTs of operaTions
Tyler Technologies managemenT’s DiscUssion anD analysis of financial conDiTion anD resUlTs of operaTions 29
Selling, general and Administrative Expenses
The following table sets forth a comparison of our selling, general and administrative (“sg&a”) expenses for the following
years ended December 3 1:
($ iN THouSANDS)
2005
% oF
rEVENuES
2004
% oF
rEVENuES
CHANgE
$
%
selling, general and administrative expenses
$ 46,242
27%
$ 45,45 1
26%
$ 79 1
2%
sg&a increased mainly due to higher health care costs and an increase in the number of marketing personnel. These increases
were offset somewhat by lower consulting fees associated with documenting our internal control processes.
other
interest income is the main component of other income, which also includes non-usage and other fees associated with a credit
agreement we terminated in January 2007, gain on sale of certain assets, gain on risk management assets associated with a
foreign exchange contract and miscellaneous other items. other income increased compared to 2004 mainly due to higher
interest rates and a small gain on sale of certain assets.
income Tax provision
The following table sets forth a comparison of our income tax provision for the following years ended December 3 1:
($ iN THouSANDS)
income tax provision
effective income tax rate
2005
2004
CHANgE
$
%
$ 5,432
$ 7,309
$ (1,877)
(26)%
39.9%
4 1.9%
The effective income tax rate declined 2% from 2004 due to the qualified manufacturing activities deduction enacted in 2005
and a corporate reorganization in 2005 which favorably impacted our state income tax provision.
FiNANCiAL CoNDiTioN AND LiQuiDiTY
historically, we have funded our operations and capital expenditures primarily with cash generated from operating activities.
as of December 31, 2006, our combined cash and cash equivalents and short-term investments (including restricted cash
equivalents and a restricted certificate of deposit) balance was $41.7 million compared to $37.5 million at December 31, 2005.
cash provided by operating activities was $26.8 million in 2006 compared to $21.2 million in 2005 and $22.2 million in 2004.
cash and short-term investments increased primarily due to continued strong operating performance and higher deferred
revenue due to additional maintenance customers and new contract signings.
at December 31, 2006, our days sales outstanding (“Dsos”) were 102 days compared to Dsos of 101 days at December 31,
2005. Dsos are calculated based on accounts receivable (excluding long-term receivables) divided by the quotient of
annualized quarterly revenues divided by 360 days.
investing activities used cash of $24.3 million in 2006, while investing activities provided cash of $1.8 million in 2005 and used
cash of $9.9 million in 2004. in January 2006, we acquired two companies, mazikUsa, inc. and Tacs, inc. The combined
purchase price, including transaction costs, for the two companies was approximately $14.6 million, comprised of
approximately $11.7 million in cash and 325,000 shares of Tyler common stock. in september 2006 we also purchased certain
maintenance and support agreements associated with one of our financial products for approximately $580,000. other
30 Tyler Technologies managemenT’s DiscUssion anD analysis of financial conDiTion anD resUlTs of operaTions
investing activities during 2006 were capital expenditures of $4.3 million, including $4.1 million for computer hardware and
purchased software for internal use, including a new enterprise-wide customer relationship management system, and other
asset additions to support internal growth. in 2005 and 2004 investing activities primarily consisted of investments in
software development and property and equipment. investing activities in 2004 also included adjustments to the acquisition of
eden systems, inc. (“eden”). pursuant to our purchase agreement, two of the shareholders of eden were granted the right to
“put” their remaining shares to Tyler and we were also granted the right to “call” the remaining shares. in 2004, we
purchased the remaining 2,500 shares for $725,000 in cash.
We purchased $26.8 million of short-term investments during 2006. proceeds from sales of short-term investments were $19.0
million during 2006. During 2006, the short-term investments earned interest income of $438,000 which was reinvested. We
also earned interest income of $962,000 from money market investments and a restricted certificate of deposit.
financing activities used cash of $6.0 million in 2006 compared to $14.8 million in 2005 and $9.9 million in 2004. cash used
in financing activities was primarily comprised of purchases of treasury shares, net of proceeds from stock option exercises
and contributions from our employee stock purchase plan.
During 2006, we purchased approximately 1.0 million shares of our common stock for an aggregate cash purchase price of
$10.5 million.
in 2006, we received $2.9 million from the exercise of options to purchase approximately 623,000 shares of our common
stock under our employee stock option plan. During 2005 we issued 436,000 shares of common stock and received $1.8
million in aggregate proceeds, upon exercise of stock options and during 2004 we issued 680,000 shares of common stock
and received $1.9 million in aggregate proceeds upon exercise of stock options.
in both 2006 and 2005, we received $1.0 million for contributions to the Tyler Technologies, inc. employee stock purchase
plan (“espp”). The espp was adopted by our shareholders in may 2004.
subsequent to December 31, 2006 and through february 23, 2007 we purchased approximately 188,000 shares of our
common stock for an aggregate cash purchase price of $2.6 million.
We maintain a $10.0 million letter of credit facility under which the bank will issue cash collateralized letters of credit. as of
December 31, 2006 we had outstanding letters of credit totaling $5.0 million to secure surety bonds required by some of our
customer contracts.
in the first quarter of 2007 we acquired two small companies and a building for a combined cash purchase price of $5.0
million. We have not finalized the allocation of the excess purchase price over the fair value of the net identifiable assets of
the acquired companies but expect this allocation will result in non-cash charges that may have a small dilutive effect on
earnings per share in 2007.
excluding acquisitions, we anticipate that 2007 capital spending will be between $3.5 million and $4.0 million, the majority of
which will be related to computer equipment and software for infrastructure expansions. We currently do not expect to
capitalize significant amounts related to software development in 2007 but the actual amount and timing of those costs, and
whether they are capitalized or expensed may result in additional capitalized software development. capital spending in 2007
is expected to be funded from existing cash balances and cash flows from operations.
from time to time we engage in discussions with potential acquisition candidates. in order to pursue such opportunities, which
could require significant commitments of capital, we may be required to incur debt or to issue additional potentially dilutive
securities in the future. no assurance can be given as to our future acquisition opportunities and how such opportunities will
be financed. in the absence of future acquisitions of other businesses, we believe our current cash balances and expected
future cash flows from operations will be sufficient to meet our anticipated cash needs for working capital, capital
30 Tyler Technologies managemenT’s DiscUssion anD analysis of financial conDiTion anD resUlTs of operaTions
Tyler Technologies managemenT’s DiscUssion anD analysis of financial conDiTion anD resUlTs of operaTions 31
expenditures and other activities through the next twelve months. if operating cash flows are not sufficient to meet our needs,
we believe that credit would be available to us.
We lease office facilities, as well as transportation, computer and other equipment used in our operations under non-
cancelable operating lease agreements expiring at various dates through 2013. most leases contain renewal options and some
contain purchase options. following are the future obligations under non-cancelable leases at December 31, 2006 (in
thousands):
future rental payments under operating leases
$ 4,59 1
$ 4,365
$ 4,124
$ 2,843
$ 2,077
$ 1,465
$ 1 9,465
2007
2008
2009
2010
201 1
THErEAFTEr
ToTAL
it is not our usual business practice to enter into off-balance sheet arrangements or to issue guarantees to third parties. as of
December 31, 2006 we have no material purchase commitments, except for the operating lease commitments listed above.
CApiTALiZATioN
at December 31, 2006, our capitalization consisted of $125.9 million of shareholders’ equity.
NEw ACCouNTiNg proNouNCEMENTS
in July 2006, the financial accounting standards Board (“fasB”) issued fasB interpretation no. 48, “accounting for
Uncertainty in income Taxes – an interpretation of fasB statement no. 109” (“fin 48”), which clarifies the accounting and
disclosure for uncertainty in tax positions, as defined. fin 48 seeks to reduce the diversity in practice associated with certain
aspects of the recognition and measurement related to accounting for income taxes. This interpretation is effective for fiscal
years beginning after December 15, 2006. We do not expect the interpretation will have a material impact on our results from
operations or financial position.
in september 2006, the fasB issued sfas no. 157, “fair Value measurements.” sfas no. 157 defines fair value, establishes a
framework for measuring fair value in accordance with accounting principles generally accepted in the United states, and
expands disclosures about fair value measurements. sfas no. 157 is effective for fiscal years beginning after november 15,
2007, with earlier application encouraged. any amounts recognized upon adoption as a cumulative effect adjustment will be
recorded to the opening balance of retained earnings in the year of adoption. We have not yet determined the impact of sfas
no. 157 on our financial condition and results of operations.
QuANTiTATiVE AND QuALiTATiVE DiSCLoSurES ABouT MArKET riSK
market risk represents the risk of loss that may affect us due to adverse changes in financial market prices and interest rates.
as of December 31, 2006, we had funds invested in auction rate municipal securities and state and municipal bonds, which
we accounted for in accordance with sfas no. 115, “accounting for certain investments in Debt and equity securities.” These
investments were treated as available-for-sale under sfas no. 115. The carrying value of these investments approximates fair
market value. Due to the nature of this investment, we are not subject to significant market rate risk.
We have no outstanding debt at December 3 1, 2006, and we therefore are not subject to any interest rate risk.
32 Tyler Technologies managemenT’s DiscUssion anD analysis of financial conDiTion anD resUlTs of operaTions
rEporT oF iNDEpENDENT rEgiSTErED puBLiC ACCouNTiNg FirM
The Board of Directors and Shareholders
Tyler Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Tyler Technologies, inc. and subsidiaries as of December 31,
2006 and 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of
the three years in the period ended December 31, 2006. These financial statements are the responsibility of the company’s
management. our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the public company accounting oversight Board (United states).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. an audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. an audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
in our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of Tyler Technologies, inc. and subsidiaries at December 31, 2006 and 2005, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.s. generally accepted
accounting principles.
as discussed in note 1 in the notes to the consolidated financial statements, the company changed its method of accounting
for share-based compensation effective January 1, 2006.
We also have audited, in accordance with the standards of the public company accounting oversight Board (United states),
the effectiveness of Tyler Technologies, inc.’s internal control over financial reporting as of December 31, 2006, based on
criteria established in internal control—integrated framework issued by the committee of sponsoring organizations of the
Treadway commission and our report dated february 20, 2007 expressed an unqualified opinion thereon.
Dallas, Texas
february 20, 2007
32 Tyler Technologies managemenT’s DiscUssion anD analysis of financial conDiTion anD resUlTs of operaTions
Tyler Technologies reporT of inDepenDenT regisTereD pUBlic accoUnTing firm 33
rEporT oF iNDEpENDENT rEgiSTErED puBLiC ACCouNTiNg FirM
The Board of Directors and Shareholders
Tyler Technologies, Inc.
We have audited management’s assessment, included in the accompanying management’s report on internal controls over
financial reporting, that Tyler Technologies, inc. maintained effective internal control over financial reporting as of December
31, 2006, based on criteria established in internal control—integrated framework issued by the committee of sponsoring
organizations of the Treadway commission (the coso criteria). Tyler Technologies, inc.’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. our responsibility is to express an opinion on management’s assessment and an opinion on the
effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the public company accounting oversight Board (United states).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. our audit included obtaining an understanding of
internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
a company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. a company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
in our opinion, management’s assessment that Tyler Technologies, inc. maintained effective internal control over financial
reporting as of December 31, 2006, is fairly stated, in all material respects, based on the coso criteria. also, in our opinion,
Tyler Technologies, inc. maintained, in all material respects, effective internal control over financial reporting as of December
31, 2006, based on the coso criteria.
We also have audited, in accordance with the standards of the public company accounting oversight Board (United states),
the consolidated balance sheets of Tyler Technologies, inc. as of December 31, 2006 and 2005, and the related consolidated
statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 3 1,
2006 and our report dated february 20, 2007 expressed an unqualified opinion thereon.
Dallas, Texas
february 20, 2007
34 Tyler Technologies reporT of inDepenDenT regisTereD pUBlic accoUnTing firm
MANAgEMENT’S ASSESSMENT oF EFFECTiVENESS oF THE CoMpANY’S iNTErNAL CoNTroL
oVEr FiNANCiAL rEporTiNg
evaluation of Disclosure controls and Procedures — our chief executive officer and our chief financial officer have evaluated
the effectiveness of the design and operation of our disclosure controls and procedures (as defined in securities exchange act
rules 13a-15(e)) as of December 31, 2006. Based on such evaluation, our chief executive officer and chief financial officer have
concluded that as of December 31, 2006 such disclosure controls and procedures were effective and designed to ensure that
information required to be disclosed by us in the reports we file or submit under the securities exchange act is recorded,
processed, summarized, and reported within the time periods specified in the sec’s rules and forms, and include controls and
procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and
communicated to our management, including the chief executive officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure.
Internal control over financial reporting — During the quarter ended December 31, 2006, there were no changes in our
internal controls over financial reporting, as defined in securities exchange act rule 13a-15(f) and 15d-15(f), that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
management’s report on Internal control over financial reporting — Tyler’s management is responsible for establishing
and maintaining effective internal control over financial reporting as defined in securities exchange act rule 13a-15(f). Tyler’s
internal control over financial reporting is designed to provide reasonable assurance to Tyler’s management and board of
directors regarding the preparation and fair presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
management assessed the effectiveness of Tyler’s internal control over financial reporting as of December 31, 2006. in making
this assessment, management used the criteria set forth by the committee of sponsoring organizations of the Treadway
commission (coso) in internal control – integrated framework. Based on our assessment, we believe that, as of December 31,
2006, Tyler’s internal control over financial reporting is effective based on those criteria.
management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006 has been
audited by ernst & young, llp, the independent registered public accounting firm who also audited Tyler’s consolidated
financial statements. ernst & young’s attestation report on management’s assessment of Tyler’s internal control over financial
reporting appears on page 33 hereof.
34 Tyler Technologies reporT of inDepenDenT regisTereD pUBlic accoUnTing firm
managemenT’s assessmenT of effecTiVeness of The companies inTernal conTrol oVer financial reporTing 35
CoNSoLiDATED STATEMENTS oF opErATioNS
For THE YEArS ENDED DECEMBEr 31
iN THouSANDS, ExCEpT pEr SHArE AMouNTS
revenues:
software licenses
software services
maintenance
appraisal services
hardware and other
Total revenues
cost of revenues:
software licenses
acquired software
software services and maintenance
appraisal services
hardware and other
Total cost of revenues
gross profit
selling, general and administrative expenses
restructuring charge
amortization of customer and trade name intangibles
operating income
other income, net
income before income taxes
income tax provision
net income
earnings per common share:
Basic
Diluted
Basic weighted average common shares outstanding
Diluted weighted average common shares outstanding
see accompanying notes.
2006
2005
2004
$ 37,414
$ 29,552
$ 30,258
57,588
51,532
49,786
73,413
64,728
57,760
19,755
7,133
18,374
27,394
6,271
7,072
195,303
170,457
172,270
9,980
9,101
8,819
1,360
794
1,447
90,330
80,347
72,609
13,563
5,266
14,188
20,1 32
4,540
5,425
120,499
108,970
108,432
74,804
61,487
63,838
51,71 1
46,242
45,45 1
—
1,318
1,260
1,266
—
1,267
21,775
12,71 9
1 7,120
1,080
22,855
8,493
906
13,625
5,432
317
1 7,437
7,309
$ 14,362
$ 8,193
$ 10,128
$ 0.37
$ 0.34
$
$
0.21
$ 0.25
0.19
$
0.23
38,817
39,439
4 1,288
41,868
42,075
44,566
36 Tyler Technologies consoliDaTeD sTaTemenTs of operaTions
CoNSoLiDATED BALANCE SHEETS
DECEMBEr 31
iN THouSANDS, ExCEpT SHArE AND pEr SHArE AMouNTS
aSSeTS
current assets:
cash and cash equivalents
restricted cash equivalents
short-term investments available-for-sale
restricted certificate of deposit
2006
2005
$ 17,212
$ 20,733
4,962
19,543
—
—
1 1,750
4,750
accounts receivable (less allowance for losses of $2,971 in 2006 and $1,991 in 2005)
58,188
49,644
prepaid expenses
other current assets
Deferred income taxes
Total current assets
accounts receivable, long-term portion
property and equipment, net
other assets:
goodwill
customer related intangibles, net
software, net
Trade name, net
restricted certificate of deposit
sundry
LIaBILITIeS anD SharehoLDerS’ eQUITY
current liabilities:
accounts payable
accrued liabilities
Deferred revenue
income taxes payable
Total current liabilities
Deferred income taxes
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 2006 and 2005
additional paid-in capital
accumulated other comprehensive loss, net of tax
retained earnings
Treasury stock, at cost; 9,255,783 and 9,273,342 shares in 2006 and 2005, respectively
Total shareholders’ equity
see accompanying notes.
6,864
2,326
2,579
5,158
2,201
2,128
111,674
96,364
1,675
7,390
1,547
5,759
66,1 27
53,709
17,502
14,554
1,188
—
166
1 7,696
1 7,645
1,262
250
205
$ 220,276
$ 194,437
$ 5,063
$ 3,330
1 7,735
16,027
62,387
51,304
—
289
85,185
70,950
9,216
1 1,290
—
481
—
481
151,627
151,515
(10)
—
18, 131
3,769
(44,354)
(43,568)
125,875
1 1 2 ,1 9 7
$ 220,276
$ 194,437
36 Tyler Technologies consoliDaTeD sTaTemenTs of operaTions
Tyler Technologies consoliDaTeD Balance sheeTs 37
CoNSoLiDATED STATEMENTS oF SHArEHoLDErS’ EQuiTY
For THE YEArS ENDED DECEMBEr 31, 2006, 2005 AND 2004
CoMMoN SToCK
SHArES
AMouNT
ADDiTioNAL
pAiD-iN
CApiTAL
ACCuMuLATED
oTHEr
rETAiNED
CoMprEHENSiVE EArNiNgS
(DEFiCiT)
iNCoME (LoSS)
TrEASurY SToCK
SHArES
AMouNT
ToTAL
SHArEHoLDErS’
EQuiTY
48,148
$ 481
$ 156,201
$ (32)
$ (14,552)
(6,704) $ (24,191)
$ 1 1 7,907
—
10,128
iN THouSANDS
Balance at December 31, 2003
comprehensive income:
net income
Unrealized loss on investment
securities, net of tax
reclassification adjustment,
net of income taxes of $37
Total comprehensive income
issuance of shares pursuant
to stock compensation plan
Treasury stock purchases
stock warrant exercises
issuance of shares pursuant to
employee stock purchase plan
federal income tax benefit related
to exercise of stock options
Balance at December 31, 2004
comprehensive income:
net income
Unrealized loss on investment
securities, net of tax
reclassification adjustment,
net of income taxes of $5
Total comprehensive income
issuance of shares pursuant
to stock compensation plan
stock compensation
Treasury stock purchases
issuance of shares pursuant to
employee stock purchase plan
federal income tax benefit related
to exercise of stock options
Balance at December 31, 2005
comprehensive income:
net income
Unrealized loss on investment
securities, net of tax
Total comprehensive income
issuance of shares pursuant
to stock compensation plan
stock compensation
Treasury stock purchases
issuance of shares pursuant to
employee stock purchase plan
federal income tax benefit related
to exercise of stock options
issuance of shares for acquisitions
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(3,704)
—
(143)
(66)
—
48,148
—
481
582
152,870
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,570)
18
—
(116)
—
48,148
—
481
313
151,515
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(3,158)
1,960
—
22
1,150
138
—
—
—
—
—
—
10,128
(37)
69
10,160
680
(1,459)
16
5,644
(12,518)
143
1,940
(12,518)
—
44
395
329
—
—
—
—
—
—
—
(4,424)
—
(7,423)
—
(30,527)
582
1 18,400
8,193
—
—
—
—
—
—
—
—
—
—
—
—
8,193
(8)
8
8,193
436
—
(2,457)
3,370
—
(17,683)
1,800
18
(1 7,683)
171
1,272
1,156
—
3,769
—
(9,273)
—
(43,568)
313
1 1 2,1 97
14,362
—
—
—
—
—
—
—
—
—
—
—
623
—
(1,033)
6,074
—
(10,531)
14,362
(10)
14,352
2,916
1,960
(10,531)
102
—
325
918
940
—
2,753
1,150
2,891
(37)
69
—
—
—
—
—
—
—
(8)
8
—
—
—
—
—
—
—
(10)
—
—
—
—
—
—
Balance at December 31, 2006
48,148
$ 481
$ 151,627
$ (10)
$ 18,131
(9,256) $ (44,354)
$ 125,875
see accompanying notes.
38 Tyler Technologies consoliDaTeD sTaTemenTs of shareholDers’ eQUiTy
CoNSoLiDATED STATEMENTS oF CASH FLowS
For THE YEArS ENDED DECEMBEr 31
2006
2005
2004
iN THouSANDS
cash flows from operating activities:
net income
adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization
share-based compensation expense
realized net losses on sales of investment securities
purchased in-process research and development charge
non-cash interest and other charges
provision for losses – accounts receivable
Deferred income tax benefit
changes in operating assets and liabilities, exclusive of effects of acquired companies:
accounts receivable
income tax payable
prepaid expenses and other current assets
accounts payable
accrued liabilities
Deferred revenue
net cash provided by operating activities
cash flows from investing activities:
purchases of short-term investments
proceeds from sales of short-term investments
cost of acquisitions, net of cash acquired
Decrease in restricted investments
investment in software development costs
additions to property and equipment
other
net cash (used by) provided by investing activities
cash flows from financing activities:
purchase of treasury shares
contributions from employee stock purchase plan
proceeds from exercise of stock options
excess tax benefits from share-based compensation expense
payments on notes payable
net cash used by financing activities
net (decrease) increase in cash and cash equivalents
cash and cash equivalents at beginning of year
cash and cash equivalents at end of year
see accompanying notes.
$ 14,362
$ 8,193
$ 1 0,1 28
10,102
10,443
1 1,386
1,960
—
140
220
2,077
—
—
—
( 73)
1,64 1
—
106
—
88
796
(2,520)
(2,200)
(300)
(10,400)
(7,03 1)
(3,760)
(78)
(421)
1,063
(1,496)
(2, 117 )
(1,084)
1,626
972
561
2,428
51 1
(961)
9,839
9,763
4,186
26,804
21,187
22,1 59
(26,825)
(16,882)
(12,277)
19,016
18,964
10,055
(12,237)
—
(946)
38
2,500
—
(236)
(1,002)
(4,575)
(4,088)
(1,734)
(2,267)
6
(26)
96
(24,326)
1,820
(9,9 14)
(10,53 1)
(17,683)
(12,518)
1,002
2,916
614
—
1,036
1,800
—
—
673
1,940
—
(35)
(5,999)
(14,847)
(9,940)
(3,521)
8,160
2,305
20,733
12,573
10,268
$ 17,212
$ 20,733
$ 1 2,573
38 Tyler Technologies consoliDaTeD sTaTemenTs of shareholDers’ eQUiTy
Tyler Technologies consoliDaTeD sTaTemenTs of cash floWs 39
(TABLES iN THouSANDS, ExCEpT pEr SHArE DATA)
(1) SuMMArY oF SigNiFiCANT ACCouNTiNg poLiCiES
DeScrIPTIon of BUSIneSS
We provide integrated software systems and related services for local governments. We develop and market a broad line of
software products and services to address the information technology (“iT”) needs of cities, counties, schools and other local
government entities. in addition, we provide professional iT services, including software and hardware installation, data
conversion, training, and for certain customers, product modifications, along with continuing maintenance and support for
customers using our systems. We also provide property appraisal outsourcing services for taxing jurisdictions.
Tyler’s business is subject to risks and uncertainties including dependence on iT spending by customers, fluctuations of
quarterly results, a lengthy and variable sales cycle, dependence on key personnel, dependence on principal products and
third-party technology and rapid technological change. in addition, our products are complex and we run the risk of errors or
defects with new product introductions or enhancements.
PrIncIPLeS of conSoLIDaTIon
in 2005, we merged all of our subsidiaries into the parent company. The consolidated financials as of December 31, 2004 include
our parent company and our subsidiaries, all of which were wholly-owned.
caSh, caSh eQUIVaLenTS, ShorT-Term InVeSTmenTS anD oTher
cash equivalents include items almost as liquid as cash, such as money market investments 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 statement of financial accounting standards (“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. at December 31, 2006 and 2005, we classified our short-term
investments as available-for-sale securities pursuant to sfas no. 115. investments which are classified as available-for-sale are
recorded at fair value as determined by quoted market price 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 securities sold is
determined using the average cost method. following is a summary of short-term investments:
DECEMBEr 31, 2006
auction rate municipal securities
state and municipal bonds
DECEMBEr 31, 2005
CoST
$ 14,875
4,684
$ 19,559
uNrEALiZED
gAiNS
uNrEALiZED
LoSSES
ESTiMATED
FAir VALuE
$
$
—
—
—
$
—
(16)
(16)
$
$ 14,875
4,668
$ 19,543
CoST
uNrEALiZED
gAiNS
uNrEALiZED
LoSSES
ESTiMATED
FAir VALuE
auction rate municipal securities
$ 1 1,750
$
—
$
—
$ 1 1,750
We maintain a $10.0 million letter of credit facility under which the bank will issue cash collateralized letters of credit. as
of December 31, 2006 approximately $5.0 million of our cash equivalents are restricted and designated as collateral for our
letters of credit issued in connection with our surety bond program. These letters of credit expire during 2007.
40 Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs
reVenUe recoGnITIon
We recognize revenue related to our software arrangements pursuant to the provisions of statement of position (“sop”) 97-2,
“software revenue recognition,” as amended by sop 98-4 and sop 98-9, and related interpretations, as well as the
securities and exchange commission (“sec”) staff accounting Bulletin no. 104, “revenue recognition.” We recognize revenue
on our appraisal services contracts using the proportionate performance method of accounting, with considerations for the
provisions of emerging issues Task force (“eiTf”) no. 00-21, “revenue arrangements with multiple Deliverables.”
Software arrangements:
We earn revenue from software licenses, post-contract customer support (“pcs” or “maintenance”), software related services
and hardware. pcs includes telephone support, bug fixes, and rights to upgrades on a when-and-if available basis. We provide
services that range from installation, training, and basic consulting to software modification and customization to meet
specific customer needs. in software arrangements that include rights to multiple software products, specified upgrades, pcs,
and/or other services, we allocate the total arrangement fee among each deliverable based on the relative fair value of each.
We typically enter into multiple element arrangements, which include software licenses, software services, pcs and
occasionally hardware. The majority of our software arrangements are multiple element arrangements, but for those
arrangements that involve significant production, modification or customization of the software, or where software services
are otherwise considered essential to the functionality of the software in the customer’s environment, we use contract
accounting and apply the provisions of sop 81-1 “accounting for performance of construction – Type and certain production –
Type contracts.”
if the arrangement does not require significant production, modification or customization or where the software services are
not considered essential to the functionality of the software, revenue is recognized when all of the following conditions are met:
i. persuasive evidence of an arrangement exists;
ii. delivery has occurred;
iii. our fee is fixed or determinable; and
iv. collectibility is probable.
for multiple element arrangements, each element of the arrangement is analyzed and we allocate a portion of the total
arrangement fee to the elements based on the fair value of the element using vendor-specific objective evidence of fair value
(“Vsoe”), regardless of any separate prices stated within the contract for each element. fair value is considered the price a
customer would 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.
40 Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs
Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs 41
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 since we have the ability to produce reasonably dependable
estimates of contract billings and contract costs. We use the level of profit margin that is most likely to occur on a contract. if
the most likely profit margin cannot be precisely determined, the lowest probable level of profit in the range of estimates is
used until the results can be estimated more precisely. These arrangements are often implemented over an extended time
period and occasionally require us to revise total cost estimates. amounts recognized in revenue are calculated using the
progress-to-completion measurement after giving effect to any changes in our cost estimates. changes to total estimated
contract costs, if any, are recorded in the period they are determined. estimated losses on uncompleted contracts are
recorded in the period in which we first determine that a loss is apparent.
for arrangements that include new product releases for which it is difficult to estimate final profitability except to assume that
no loss will ultimately be incurred, we recognize revenue under the completed contract method. Under the completed contract
method, revenue is recognized only when a contract is completed or substantially complete. historically these amounts have
been immaterial.
Software Services
some of our software arrangements include services considered essential for the customer to use the software for the 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.
42 Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs
Postcontract customer Support
our customers generally enter into pcs agreements when they purchase our software licenses. our pcs agreements are
typically renewable annually. revenue allocated to pcs is recognized on a straight-line basis over the period the pcs is
provided. all significant costs and expenses associated with pcs are expensed as incurred. fair value for the maintenance and
support obligations for software licenses is based upon the specific sale renewals to customers.
appraisal Services:
for our property appraisal projects, we recognize revenue using the proportionate performance method of revenue
recognition since many of these projects are implemented over one to three year periods and consist of various unique
activities. Under this method of revenue recognition, we identify each activity for the appraisal project, with a typical project
generally calling for bonding, office set up, training, routing of map information, data entry, data collection, data verification,
informal hearings, appeals and project management. each activity or act is specifically identified and assigned an estimated
cost. costs which are considered to be associated with indirect activities, such as bonding costs and office set up, are
expensed as incurred. These costs are typically billed as incurred and are recognized as revenue equal to cost. Direct contract
fulfillment activities and related supervisory costs such as data collection, data entry and verification are expensed as
incurred. The direct costs for these activities are determined and the total contract value is then allocated to each activity
based on a consistent profit margin. each activity is assigned a consistent unit of measure to determine progress towards
completion and revenue is recognized for each activity based upon the percentage complete as applied to the estimated
revenue for that activity. progress for the fulfillment activities is typically based on labor hours or an output measure such as
the number of parcel counts completed for that activity. estimated losses on uncompleted contracts are recorded in the
period in which we first determine that a loss is apparent.
other:
The majority of deferred revenue consists of unearned support and maintenance revenue that has been billed based on
contractual terms in the underlying arrangement with the remaining balance consisting of payments received in advance of
revenue being earned under software licensing, software and appraisal services and hardware installation. Unbilled revenue is
not billable at the balance sheet date but is recoverable over the remaining life of the contract through billings made in
accordance with contractual agreements. The termination clauses in most of our contracts provide for the payment for the
fair value of products delivered and services performed in the event of an early termination.
prepaid expenses and other current assets include direct and incremental costs, consisting primarily of commissions
associated with arrangements for which revenue recognition has been deferred and third party subcontractor payments. such
costs are expensed at the time the related revenue is recognized.
USe of eSTImaTeS
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the
United states (“gaap”) requires us to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. significant items subject to such estimates and assumptions include the
application of the percentage-of-completion and proportionate performance methods of revenue recognition, the carrying
amount and estimated useful lives of intangible assets and valuation allowance for receivables. in addition we are primarily
self-insured for employee health care and base our self-insurance liability on claims filed and an estimate of claims incurred
but not yet reported. actual results could differ from estimates.
42 Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs
Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs 43
ProPerTY anD eQUIPmenT, neT
property, equipment and purchased software are recorded at original cost and increased by the cost of any significant
improvements after purchase. We expense maintenance and repairs when incurred. Depreciation and amortization is
calculated using the straight-line method over the shorter of the asset’s estimated useful life or the term of the lease in the
case of leasehold improvements. for income tax purposes, we use accelerated depreciation methods as allowed by tax laws.
reSearch anD DeVeLoPmenT coSTS
research and development costs are included with selling, general and administrative expenses and are expensed when
incurred. We expensed research and development costs of $3.3 million during 2006, $2.4 million during 2005 and $2.5 million
during 2004.
Income TaXeS
income taxes are accounted for under the asset and liability method. Deferred taxes arise because of different treatment
between financial statement accounting and tax accounting, known as “temporary differences.” We record the tax effect of
these temporary differences as “deferred tax assets” (generally items that can be used as a tax deduction or credit in the
future periods) and “deferred tax liabilities” (generally items that we received a tax deduction for, which have not yet been
recorded in the income statement). The deferred tax assets and liabilities are measured using enacted tax rules and laws that
are expected to be in effect when the temporary differences are expected to be recovered or settled. a valuation allowance
would be established to reduce deferred tax assets if it is likely that a deferred tax asset will not be realized.
STocK comPenSaTIon
prior to January 1, 2006, we accounted for stock options using the intrinsic value method under accounting principles Board
opinion (“apB”) no. 25, “accounting for stock issued to employees” and related interpretations, as permitted by sfas no.
123, “accounting for stock-Based compensation”, under which no compensation expense was recognized for stock option
grants. accordingly, share-based compensation related to our stock options for periods prior to 2006 are included as a pro
forma disclosure in the financial statement footnotes.
effective January 1, 2006, we adopted the fair value recognition provisions of sfas no. 123r, ”share-Based payment” using
the modified-prospective method. Under this transition method, compensation cost recognized in 2006, includes the applicable
amounts of: (a) compensation cost of all share-based payments granted prior to, but not yet vested as of, January 1, 2006
(based on the grant-date fair value estimated in accordance with the original provisions of sfas no. 123, and previously
presented in the pro forma footnote disclosures), and (b) compensation cost for all share-based payments granted subsequent
to January 1, 2006 (based on the grant-date fair value estimated in accordance with the new provisions of sfas no. 123r).
results for prior periods have not been restated.
as a result of adopting sfas no. 123r on January 1, 2006, our earnings before income taxes and net earnings for 2006
were $2.0 million and $1.6 million lower, respectively, than if we had continued to account for share-based compensation
under apB no. 25. Basic and diluted earnings per share for 2006 would have been $0.04 higher, had we continued to account
for share-based compensation under apB no. 25.
prior to the adoption of sfas no. 123r, we presented all tax benefits of deductions resulting from the exercise of options as
operating cash flows in the consolidated statements of cash flows. sfas no. 123r requires the cash flows resulting from tax
deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing
cash flows. The $614,000 excess tax benefit classified as a financing cash inflow for 2006 would have been classified as an
operating cash inflow if we had not adopted sfas no. 123r.
44 Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs
if compensation expense for our stock-based awards to employees had been recognized using the fair value method of sfas
no. 123r rather than the intrinsic value method under apB no. 25, net income and earnings per share would have been
reduced to the pro forma amounts below for 2005 and 2004.
YEArS ENDED DECEMBEr 31,
net income as reported
add stock-based employee compensation cost included in net income, net of related tax benefit
Deduct total stock-based employee compensation expense determined under fair-value-based method
for all awards, net of related tax benefit
pro forma net income
Basic earnings per share:
as reported
pro forma
Diluted earnings per share:
as reported
pro forma
2005
2004
$ 8,193
$ 10,1 28
—
—
(831)
(1,086)
$ 7,362
$ 9,042
$ 0.21
$ 0.25
$ 0.19
$ 0.22
$ 0.19
$ 0.23
$ 0.1 7
$ 0.20
see note 9 for further information on our share-based compensation plans.
SeGmenT anD reLaTeD InformaTIon
although we have a number of operating divisions, separate segment data has not been presented as they meet the criteria
for aggregation as permitted by sfas no. 131, “Disclosures about segments of an enterprise and related information.”
GooDWILL anD oTher InTanGIBLe aSSeTS
We have used the purchase method of accounting for all of our business combinations. our business acquisitions result in the
allocation of the purchase price to goodwill and other intangible assets. We first allocate the cost of acquired companies to
identifiable assets based on estimated fair values. The excess of the purchase price over the fair value of identifiable assets
acquired, net of liabilities assumed, is recorded as goodwill.
Under sfas no. 142, “goodwill and other intangible assets,” we evaluate goodwill for impairment annually as of april 1st, or
more frequently if impairment indicators arise. an impairment loss is recognized to the extent that the carrying amount
exceeds the asset’s fair value. in the implementation of sfas no. 142, we identified two reporting units for impairment testing.
The appraisal services and appraisal software stand-alone business unit qualified as a reporting unit since it is one level below
an operating segment, discrete financial information exists for the business unit and the executive management group directly
reviews this business unit. The other software business units were aggregated into the other single reporting unit. The
appraisal services and appraisal software stand-alone business unit is organized in such a manner that both of its revenue
sources are tightly integrated with each other and discrete financial information at the operating profit level does not exist for
this business unit’s respective revenue sources.
ImPaIrmenT of LonG-LIVeD aSSeTS
We periodically evaluate whether current facts or circumstances indicate that the carrying value of our property and
equipment or other long-lived assets to be held and used may not be recoverable. if such circumstances are determined to
exist, we measure the recoverability of assets to be held and used by a comparison of the carrying amount of the asset or
appropriate grouping of assets and the estimated undiscounted future cash flows expected to be generated by the assets. if
the carrying amount of the assets exceeds their estimated future cash flows, an impairment charge is recognized for the
amount by which the carrying amount of the assets exceeds the fair value of the assets. assets to be disposed of would be
44 Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs
Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs 45
separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and
are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the balance sheet.
coSTS of comPUTer SofTWare
software development costs have been accounted for in accordance with sfas no. 86, “accounting for the costs of computer
software to be sold, leased, or otherwise marketed.” Under sfas no. 86, capitalization of software development costs begins
upon the establishment of technological feasibility and prior to the availability of the product for general release to customers.
We capitalized software development costs of approximately $236,000 during 2006, $1.0 million during 2005, and $4.6 million
during 2004. software development costs primarily consist of personnel costs and rent for related office space. We begin to
amortize capitalized costs when a product is available for general release to customers. amortization expense is determined
on a product-by-product basis at a rate not less than straight-line basis over the product’s remaining estimated economic life,
but not to exceed five years. amortization of software development costs was approximately $5.1 million in 2006, $5.9 million
in 2005, and $6.1 million in 2004 and is included in cost of software license revenue in the accompanying consolidated
statements of operations.
faIr VaLUe of fInancIaL InSTrUmenTS
cash and cash equivalents, accounts receivables, accounts payables, deferred revenues and certain other assets at cost
approximate fair value because of the short maturity of these instruments. our available-for-sale investments are recorded at
fair value based on quoted market prices.
concenTraTIonS of creDIT rISK anD UnBILLeD receIVaBLeS
concentrations of credit risk with respect to receivables are limited due to the size and geographical diversity of our customer
base. historically, our credit losses have not been significant. as a result, we do not believe we have any significant
concentrations of credit risk as of December 31, 2006.
We maintain allowances for doubtful accounts and sales adjustments, which are provided at the time the revenue is
recognized. since most of our customers are domestic governmental entities, we rarely incur a loss resulting from the inability
of a customer to make required payments. events or changes in circumstances that indicate that the carrying amount for the
allowances for doubtful accounts and sales adjustments may require revision, include, but are not limited to, deterioration of a
customer’s financial condition, failure to manage our customer’s expectations regarding the scope of the services to be
delivered, and defects or errors in new versions or enhancements of our software products.
The termination clauses in most of our contracts provide for the payment for the fair value of products delivered or services
performed in the event of early termination. our property appraisal outsourcing service contracts can range up to three years
and, in one case, as long as six years in duration. in connection with these contracts, as well as certain software service
contracts, we may perform work prior to when the software and services are billable and/or payable pursuant to the contract.
We have historically recorded such unbilled receivables (costs and estimated profit in excess of billings) in connection with
(1) property appraisal services contracts accounted for using proportionate performance accounting in which the revenue is
earned based upon activities performed in one accounting period but the billing normally occurs shortly thereafter and may
span another accounting period; (2) software services contracts accounted for using the percentage-of-completion method of
revenue recognition using labor hours as a measure of progress towards completion in which the services are performed in
one accounting period but the billing for the software element of the arrangement may be based upon the specific phase of
the implementation; (3) software revenue for which we have objective evidence that the customer-specified objective criteria
has been met but the billing has not yet been submitted to the customer; and (4) in a limited number of cases, we may grant
extended payment terms generally to existing customers with whom we have a long-term relationship and favorable collection
46 Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs
history. in addition, certain of our property appraisal outsourcing contracts are required by law to have an amount withheld
from a progress billing (generally a 10% retention) until final and satisfactory project completion is achieved, typically upon
the completion of fieldwork or formal hearings.
in connection with this activity, we have recorded unbilled receivables of $10.1 million and $8.6 million at December 31, 2006
and 2005, respectively, with billing primarily dependent on fixed payment schedules based on specific calendar dates. We also
have recorded retention receivable of $3.8 million and $1.7 million at December 31, 2006 and 2005, respectively, and these
retentions become payable upon the completion of the contract or completion of our field work and formal hearings. Unbilled
receivables and retention receivables expected to be collected in excess of one year have been classified as non-current
receivables in the accompanying consolidated balance sheets.
InDemnIfIcaTIon
most of our software license agreements indemnify our customers in the event that the software sold infringes upon the
intellectual property rights of a third party. These agreements typically provide that in such event we will either modify or replace
the software so that it becomes non-infringing or procure for the customer the right to use the software. We have recorded no
liability associated with these indemnifications, as we are not aware of any pending or threatened infringement actions that are
possible losses. We believe the estimated fair value of these intellectual property indemnification clauses is minimal.
We have also agreed to indemnify our officers and board members if they are named or threatened to be named as a party to
any proceeding by reason of the fact that they acted in such capacity. a form of the indemnification agreement was filed as
exhibit 10.1 to our form 10-k for the year ended December 31, 2002. We maintain directors’ and officers’ insurance coverage to
protect against any such losses. We have recorded no liability associated with these indemnifications. Because of our
insurance coverage, we believe the estimated fair value of these indemnification agreements is minimal.
neW accoUnTInG PronoUncemenTS
in July 2006, the financial accounting standards Board (“fasB”) issued fasB interpretation no. 48, “accounting for
Uncertainty in income Taxes – an interpretation of fasB statement no. 109” (“fin 48”), which clarifies the accounting and
disclosure for uncertainty in tax positions, as defined. fin 48 seeks to reduce the diversity in practice associated with certain
aspects of the recognition and measurement related to accounting for income taxes. This interpretation is effective for fiscal
years beginning after December 15, 2006. We do not expect the interpretation will have a material impact on our results from
operations or financial position.
in september 2006, the fasB issued sfas no. 157, “fair Value measurements.” sfas no. 157 defines fair value, establishes a
framework for measuring fair value in accordance with accounting principles generally accepted in the United states, and
expands disclosures about fair value measurements. sfas no. 157 is effective for fiscal years beginning after november 15,
2007, with earlier application encouraged. any amounts recognized upon adoption as a cumulative effect adjustment will
be recorded to the opening balance of retained earnings in the year of adoption. We have not yet determined the impact of
sfas no. 157 on our financial condition and results of operations.
(2) ACQuiSiTioNS
in January 2006, we completed the acquisitions of all of the capital stock of mazikUsa, inc. (“mazik”) and Tacs, inc. (“Tacs”).
The total value of these transactions, including transaction costs, was approximately $14.6 million, which was comprised of
$11.7 million in cash and 325,000 shares of Tyler common stock valued at $2.9 million.
• mazik provides an integrated software solution for schools that combines the functionalities of student performance
monitoring, student tracking, financial accounting, human resources and reporting.
46 Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs
Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs 47
• Tacs provides pension and retirement software solutions that assist public and private pension institutions in increasing
operational efficiency and accuracy.
We believe the products offered by mazik and Tacs will complement our business model and give us additional opportunities
to provide our customers with solutions tailored specifically for local governments.
We acquired assets of approximately $300,000 and assumed liabilities of approximately $1.7 million. We recorded goodwill of
$12.4 million, all of which is expected to be deductible for tax purposes, and other intangible assets of $3.3 million. The $3.3
million of intangible assets is attributable to acquired software and customer relationships that will be amortized over a weighted
average period of approximately five years, and purchased in-process research and development of $140,000 which we expensed
during the first quarter of 2006. our consolidated balance sheet as of December 31, 2006 reflects the allocation of the purchase
price to the assets acquired and liabilities assumed based on their fair values at the date of acquisition. The operating results of
the acquired businesses are included in our results of operations since their respective dates of acquisition in late January 2006.
in september 2006, we also purchased certain maintenance and support agreements associated with one of our financial
software products for approximately $580,000. These costs have been capitalized and will be amortized over 13 years.
(3) rESTruCTuriNg CHArgE
Because of unsatisfactory financial performance early in 2005, we made significant organizational changes in the second
quarter of 2005 to those areas of our business that were not performing to our expectations. our goal was to bring costs in
line with expected levels of revenue while improving the efficiency of our organizational structure to ensure that clients
continue to receive superior service.
We reorganized the appraisal services business to eliminate levels of management and reduce overhead expense. We also took
actions to reduce headcount and costs in our appraisal and tax software division, and we consolidated certain senior
management positions at the corporate office. These cost reductions were made in the second quarter of 2005. as a result,
we eliminated approximately 120 positions, including management, staff and project-related personnel.
in connection with the reorganization, we incurred certain charges which were primarily comprised of employee severance
costs and related fringe benefits, and totaled approximately $1.3 million before income taxes. The related payments were paid
in 2005.
(4) propErTY AND EQuipMENT, NET
property and equipment, net consists of the following at December 31:
land
Transportation equipment
computer equipment and purchased software
furniture and fixtures
Building and leasehold improvements
accumulated depreciation and amortization
property and equipment, net
uSEFuL LiVES
(YEArS)
2006
2005
—
5
$
1 1 5
359
$
1 1 5
389
3-7
15,240
1 1,722
5
4,452
4,347
5-25
2,426
22,592
2,376
18,949
(15,202)
(1 3,1 90)
$ 7,390
$ 5,759
Depreciation expense was $2.4 million during 2006, $2.5 million during 2005, and $2.5 million during 2004.
48 Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs
(5) gooDwiLL AND oTHEr iNTANgiBLE ASSETS
intangible assets and related accumulated amortization consists of the following at December 31:
gross carrying amount of acquisition intangibles:
goodwill
customer related intangibles
software acquired
Trade name
accumulated amortization
acquisition intangibles, net
post acquisition software development costs
accumulated amortization
post acquisition software costs, net
2006
2005
$ 66,127
$ 53,709
25,291
24,278
19,1 13
1,681
16,023
1,643
112,212
95,653
(23,449)
(20,771)
$ 88,763
$ 74,882
$ 36,715
$ 36,478
(26,107)
(21,048)
$ 10,608
$ 15,430
Total amortization expense for acquisition related intangibles and post acquisition software development costs was $7.7 million
during 2006, $8.0 million during 2005, and $8.8 million during 2004.
The allocation of acquisition intangible assets is summarized in the following table:
DECEMBEr 31, 2006
groSS
CArrYiNg
AMouNT
wEigHTED AVErAgE
AMorTiZATioN
pErioD
ACCuMuLATED
AMorTiZATioN
groSS
CArrYiNg
AMouNT
DECEMBEr 31, 2005
wEigHTED AVErAgE
AMorTiZATioN ACCuMuLATED
AMorTiZATioN
pErioD
$ 66,127
—
$
—
$ 53,709
—
$
—
non-amortizable intangibles:
goodwill
amortizable intangibles:
customer related intangibles
25,291
21 years
software acquired
Trade name
19,113
5 years
1,681
21 years
7,789
15,167
493
24,278
22 years
16,023
1,643
5 years
21 years
6,582
13,808
381
The changes in the carrying amount of goodwill for the two years ended December 31, 2006 are as follows:
Balance as of December 31, 2004 and December 31, 2005
goodwill acquired during the year related to the purchase of mazikUsa, inc.
goodwill acquired during the year related to the purchase of Tacs, inc.
Balance as of December 31, 2006
$ 53,709
1 0,1 98
2,220
$ 66,127
48 Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs
Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs 49
estimated annual amortization expense relating to acquisition intangibles, including acquired software for which the
amortization expense is recorded as cost of revenues, is as follows:
YEArS ENDiNg DECEMBEr 31,
2007
2008
2009
201 0
20 1 1
(6) ACCruED LiABiLiTiES
accrued liabilities consist of the following at December 31:
accrued wages, bonuses and commissions
other accrued liabilities
accrued health claims
accrued third party contract costs
$ 2,708
2,621
1,855
1,855
1,273
2006
2005
$ 10,392
$ 9,38 1
4,416
3,907
1,302
1,625
1,379
1,360
$ 17,735
$ 16,027
(7) iNCoME TAx
The income tax provision (benefit) on income from operations consists of the following:
YEArS ENDED DECEMBEr 31,
2006
2005
2004
current:
federal
state
Deferred
$ 9,701
$ 6,340
$ 5,978
1,312
1,292
1,631
1 1,013
7,632
7,609
(2,520)
(2,200)
(300)
$8,493
$5,432
$7,309
reconciliation of the U.s. statutory income tax rate to our effective income tax expense rate for operations follows:
YEArS ENDED DECEMBEr 31,
income tax expense at statutory rate
state income tax, net of federal income tax benefit
non-deductible business expenses
Qualified manufacturing activities
other, net
2006
2005
2004
$ 7,999
430
518
(263)
(191)
$ 4,769
$ 6,1 03
778
182
(149)
(148)
1,060
1 95
—
(49)
$ 8,493
$ 5,432
$ 7,309
slightly more than half of our stock option awards granted qualify as incentive stock options (“iso”) for income tax purposes.
as such, a tax benefit is not recorded at the time the compensation cost related to the options is recorded for book purposes
due to the fact that an iso does not ordinarily result in a tax benefit unless there is a disqualifying disposition. stock option
grants of non-qualified options result in the creation of a deferred tax asset, which is a temporary difference, until the time
that the option is exercised. Due to the treatment of incentive stock options for tax purposes, our effective tax rate from year
to year is subject to variability.
50 Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs
The tax effects of the major items recorded as deferred tax assets and liabilities as of December 3 1 are:
Deferred income tax assets:
operating expenses not currently deductible
employee benefit plans
property and equipment
Total deferred income tax assets
Deferred income tax liabilities:
property and equipment
intangible assets
other
Total deferred income tax liabilities
net deferred income tax liabilities
2006
2005
$ 1,801
$
1,530
1,224
49
81 9
—
3,074
2,349
—
(94)
(9,535)
(1 1 ,202)
(176)
(215)
(9,71 1 )
(1 1 ,51 1 )
$ (6,637)
$ (9,162)
although realization is not assured, we believe it is more likely than not that all the deferred tax assets at December 31, 2006
and 2005 will be realized. accordingly, we believe no valuation allowance is required for the deferred tax assets. however, the
amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of reversing taxable
temporary differences are revised.
We paid income taxes, net of refunds received, of $10.4 million in 2006, $8.1 million in 2005, and $6.5 million in 2004.
(8) SHArEHoLDErS’ EQuiTY
The following table details activity in our common stock:
2006
2005
2004
YEArS ENDED DECEMBEr 31,
SHArES
AMouNT
SHArES
AMouNT
SHArES
AMouNT
purchases of common stock
stock option exercises
employee stock plan purchases
shares issued for acquisitions
(1,033)
$ (10,531)
(2,457)
$ (17,683)
(1,459)
$ (12,518)
623
102
325
2,916
436
1,800
680
940
2,891
1 71
—
1,1 56
—
44
—
1 ,940
329
—
subsequent to December 31, 2006 and through february 23, 2007, we repurchased 188,000 shares for an aggregate purchase
price of $2.6 million. as of february 23, 2007 we had authorization from our board of directors to repurchase up to 843,000
additional shares of our common stock.
as of December 3 1, 2006, we had warrants outstanding to purchase 1.6 million shares of common stock at $2.50 per share.
These warrants expire in september 2007.
50 Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs
Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs 51
(9) SHArE-BASED CoMpENSATioN
Share-based compensation plan
We have a stock option plan that provides for the grant of stock options to key employees, directors and non-employee
consultants. options become fully exercisable after three to five years of continuous employment and expire ten years after
the grant date. once options become exercisable, the employee can purchase shares of our common stock at the market price
on the date we granted the option. effective January 1, 2006, we adopted the provisions of sfas no. 123r, “share-Based
payment,” which establishes accounting for share-based awards exchanged for employee services, using the modified
prospective application transition method. Under this transition method, compensation cost recognized in 2006, includes the
applicable amounts of: (a) compensation cost of all share-based payments granted prior to, but not yet vested as of, January 1,
2006 (based on the grant-date fair value estimated in accordance with the original provisions of sfas no. 123, “accounting for
stock-Based compensation,” and previously presented in the pro forma footnote disclosures), and (b) compensation cost for
all share-based payments granted subsequent to January 1, 2006 (based on the grant-date fair value estimated in accordance
with the new provisions of sfas no. 123r). results for prior periods have not been restated. for prior periods we applied apB
no. 25, “accounting for stock issued to employees,” and related interpretations, and provided the required pro forma
disclosures under sfas no. 123.
as of December 31, 2006, there were 974,000 shares available for future grants under the plan from the 8.5 million shares
previously approved by the stockholders.
Determining fair Value Under SfaS no. 123r
Valuation and amortization method. We estimate the fair value of share-based awards granted using the Black-scholes option
valuation model. We amortize the fair value of all awards on a straight-line basis over the requisite service periods, which are
generally the vesting periods.
expected life. The expected life of awards granted represents the period of time that they are expected to be outstanding. We
determine the expected life using the “simplified method” in accordance with staff accounting Bulletin no. 107.
expected Volatility. Using the Black-scholes option valuation model, we estimate the volatility of our common stock at the
date of grant based on the historical volatility of our common stock.
risk-free interest rate. We base the risk-free interest rate used in the Black-scholes option valuation model on the implied
yield currently available on U.s. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of
the award.
expected Dividend yield. We have not paid any cash dividends on our common stock in the last ten years and we do not
anticipate paying any cash dividends in the foreseeable future. consequently, we use an expected dividend yield of zero in the
Black-scholes option valuation model.
expected forfeitures. We use historical data to estimate pre-vesting option forfeitures. We record stock-based compensation
only for those awards that are expected to vest.
The fair value of each option grant is estimated on the date of grant using the Black-scholes option valuation model.
52 Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs
The following weighted average assumptions were used for options granted:
YEArS ENDED DECEMBEr 31,
expected life (in years)
expected volatility
risk-free interest rate
expected forfeiture rate
2006
2005
2004
6
5
5
45.0%
48.4%
79. 1%
4.9%
3%
4.1 %
0%
3.7%
0%
Share-Based compensation Under SfaS no. 123r
The following table summarizes share-based compensation expense related to share-based awards under sfas no. 123r which
is recorded in the statement of operations for year ending December 31, 2006:
cost of software services and maintenance
selling, general and administrative expense
Total share-based compensation expense
Tax benefit
net decrease in net income
$
147
1,813
1,960
(336)
$ 1,624
share-based compensation expense recorded in the statement of operations for 2005 and 2004 was zero.
at December 31, 2006 we had unvested options to purchase 1.4 million shares with a weighted average grant date fair value of
$4.08. as of December 31, 2006, we had $4.6 million of total unrecognized compensation cost related to unvested options, net
of expected forfeitures, which is expected to be amortized over a weighted average amortization period of 2.2 years.
Stock option activity
options granted, exercised, forfeited and expired are summarized as follows:
NuMBEr
oF SHArES
wEigHTED AVErAgE
ExErCiSE priCE
wEigHTED AVErAgE
rEMAiNiNg
CoNTrACTuAL LiFE
(YEArS)
AggrEgATE
iNTriNSiC
VALuE
options outstanding at December 31, 2003
granted
exercised
forfeited
options outstanding at December 31, 2004
granted
exercised
forfeited
options outstanding at December 31, 2005
granted
exercised
forfeited
expired
options outstanding at December 31, 2006
options exercisable at December 31, 2006
4,630
62
(680)
(48)
3,964
1,135
(436)
(55)
4,608
237
(623)
(127)
(8)
4,087
2,727
$ 3.94
9.18
2.85
3.18
4.2 1
7.49
4.1 2
7.49
4.99
10.76
4.68
6.42
5.21
5.32
$ 4.25
6
5
$ 35,703
$ 26,760
52 Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs
Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs 53
other information pertaining to option activity was as follows during the twelve months ended December 31:
Weighted average grant-date fair value of stock options granted
Total fair value of stock options vested
Total intrinsic value of stock options exercised
employee Stock Purchase Plan
2006
2005
2004
$ 6.13
1,757
4,227
$ 3.47
1,519
1,753
$ 6.03
2,719
4,362
Under our employee stock purchase plan (“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 the
last day of each quarterly offering period. as of December 31, 2006, there were 683,000 shares available for future grants
under the espp from the 1.0 million shares originally reserved for issuance.
(10) EArNiNgS pEr SHArE
Basic earnings and diluted earnings per share data was computed as follows:
YEArS ENDED DECEMBEr 31,
numerator:
2006
2005
2004
net income for basic and diluted earnings per share
$ 14,362
$ 8,1 93
$ 1 0,1 28
Denominator:
Denominator for basic earnings per share – Weighted-average shares
38,817
39,439
41,288
effect of dilutive securities:
employee stock options
Warrants
potentially dilutive shares
1,799
1,252
1,56 1
1,075
3,051
2,636
2,1 1 4
1,164
3,278
Denominator for diluted earnings per share – adjusted weighted-average shares
41,868
42,075
44,566
Basic earnings per share
Diluted earnings per share
$ 0.37
$ 0.21
$ 0.25
$ 0.34
$ 0.19
$ 0.23
stock options representing the right to purchase common stock of 13,000 shares in 2006, 229,000 shares in 2005, and
110,000 shares in 2004, had exercise prices greater than the average quoted market price of our common stock. These
options were outstanding during 2006, 2005 and 2004, but were not included in the computation of diluted earnings per
share because their inclusion would have had an antidilutive effect.
(1 1) LEASES
We lease office facilities for use in our operations, as well as transportation, computer and other equipment. We also have two
office facility lease agreements with a shareholder and certain division managers. most of these leases are noncancelable
operating lease agreements and they expire at various dates through 2013. in addition to rent, the leases generally require us
to pay taxes, maintenance, insurance and certain other operating expenses.
rent expense was approximately $4.9 million in 2006, $4.6 million in 2005, and $4.6 million in 2004, which included rent
expense associated with related party lease agreements of $1.7 million in 2006, $1.5 million in 2005, and $1.4 million in 2004.
54 Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs
future minimum lease payments under all noncancelable leases at December 31, 2006 are as follows:
YEArS ENDiNg DECEMBEr 31,
2007
2008
2009
2010
2011
Thereafter
$ 4,59 1
4,365
4,1 24
2,843
2,077
1,465
$ 19,465
included in future minimum lease payments are noncancelable payments due to related parties of $1.7 million each in 2007,
2008 and 2009; $552,000 in 2010 and none thereafter.
(12) EMpLoYEE BENEFiT pLANS
We provide a defined contribution plan for the majority of our employees meeting minimum service requirements. The
employees can contribute up to 30% of their current compensation to the plan subject to certain statutory limitations. We
contribute up to a maximum of 2.5% of an employee’s compensation to the plan. We made contributions to the plan and
charged operations $1.6 million during 2006, $1.0 million during 2005, and $801,000 during 2004.
(13) CoMMiTMENTS AND CoNTiNgENCiES
other than ordinary course, routine litigation incidental to our business and except as described in this annual report, there
are no material legal proceedings pending to which we are party or to which any of our properties are subject.
(14) SuBSEQuENT EVENTS
in the first quarter of 2007 we acquired two small companies and a building for a combined cash purchase price of $5.0
million. We have not finalized the allocation of the excess purchase price over the fair value of the net identifiable assets of
the acquired companies but expect this allocation will result in non-cash charges that may have a small dilutive effect on
earnings per share in 2007.
54 Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs
Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs 55
(15) QuArTErLY FiNANCiAL iNForMATioN (uNAuDiTED)
The following tables contain selected financial information from unaudited consolidated statements of operations for each
quarter of 2006 and 2005.
QuArTEr ENDED
DEC. 31
SEp. 30
JuNE 30
MAr. 31
DEC. 31
SEp. 30
JuNE 30
MAr. 31
2006 (B)
2005 (C)
revenues
gross profit(a)
$ 51,155
$ 50,139
$ 49, 1 51
$ 44,858
$ 44,307
$ 42,306
$ 43,185
$ 40,659
20,239
20,157
18,946
15,462
16,700
15,822
16,050
12,915
income before income taxes
6,732
6,936
5,828
3,359
5,097
4,284
3,444
net income
4,177
4,413
3,760
2,012
3, 1 2 1
2,581
earnings per diluted share
0.10
0.11
0.09
0.05
0.07
0.06
2,02 1
0.05
800
470
0.0 1
shares used in computing
diluted earnings per share
42,163
41,898
41,946
41,894
41,869
4 1 ,771
41,943
42,735
(a) in the fourth quarter of 2005 we reclassified amortization cost of acquired software from amortization of acquisition intangibles to cost
of revenues. The reconciliation of gross profit to the 2005 form 10-Qs is as follows:
2005
gross profit per form 10-Q
reclassify acquired software amortization expense
adjusted gross profit
DEC. 31
SEp. 30
JuNE 30
MAr. 31
$ 16,700
$ 16,020
$ 16,249
$ 13,1 13
—
(198)
(199)
(198)
$ 16,700
$ 15,822
$ 16,050
$ 12,915
(B) as a result of adopting sfas no. 123r on January 1, 2006, our earnings before income taxes and net earnings for 2006 were $2.0 million
and $1.6 million lower, respectively, than if we had continued to account for share-based compensation under apB no. 25. Basic and diluted
earnings per share for 2006 would have been $0.04 higher, had we continued to account for share-based compensation under apB no. 25.
(c) We made significant organizational changes in the second quarter of 2005 to areas of our business that were not performing to our
expectations. in connection with the reorganization we recorded a restructuring charge of $1.3 million.
56 Tyler Technologies noTes To consoliDaTeD financial sTaTemenTs
Corporate offiCers
John M. Yeaman
Chairman of the Board
John S. Marr, Jr.
President and Chief Executive Officer
Dustin R. Womble
Executive Vice President
Brian K. Miller
Senior Vice President
Chief Financial Officer and Treasurer
H. Lynn Moore, Jr.
Vice President
General Counsel and Secretary
Rick L. Hoff
Chief Technology Officer
W. Michael Smith
Vice President
Chief Accounting Officer
Terri L. Alford
Controller
Board of direCtors
John M. Yeaman 1
Chairman of the Board
Tyler Technologies, Inc.
John S. Marr, Jr. 1
President and Chief Executive Officer
Tyler Technologies, Inc.
Donald R. Brattain 2,3
President
Brattain and Associates, LLC
J. Luther King, Jr. 2,4
Chief Executive Officer
Luther King Capital Management
G. Stuart Reeves 2,3,4
Retired Executive Vice President
Electronic Data Systems Corporation
Michael D. Richards 3,4
Chairman and Chief Executive Officer
Reunion Title Company
Dustin R. Womble 1
Executive Vice President
Tyler Technologies, Inc.
1 Executive Committee
2 Audit Committee
3 Nominating and Governance Committee
4 Compensation Committee
Corporate Headquarters
5949 Sherry Lane
Suite 1400
Dallas, Texas 75225
972.713.3700
www.tylertech.com
transfer agent and registrar
American Stock Transfer & Trust Company
59 Maiden Lane
Plaza Level
New York, New York 10038
800.937.5449 tel
718.236.2641 fax
www.amstock.com
independent registered puBLiC
aCCounting firM
Ernst & Young LLP
Dallas, Texas
annuaL Meeting of stoCkHoLders
Our Annual Meeting will be held on Thursday, May 17, 2007,
at 9:00 a.m. Central time at: The Park City Club, 5956
Sherry Lane, Suite 1700, Dallas, Texas 75225.
CertifiCations
We submitted an unqualified Annual CEO Certification to the
New York Stock Exchange (NYSE) as required by the NYSE
Listed Company rules. We also filed with the Securities and
Exchange Commission the Chief Executive Officer and Chief
Financial Officer certifications required under Section 302
of the Sarbanes-Oxley Act as exhibits to our Annual Report
on Form 10-K.
investor inforMation
Our Annual Report on Form 10-K is available on the
Company’s Web site at www.tylertech.com. A copy of the
Form 10-K or other information may also be obtained by
contacting the Investor Relations Department at corporate
headquarters.
investor reLations
Tyler Technologies, Inc.
972.713.3714
info@tylertech.com
CoMMon stoCk
Listed on the New York Stock Exchange under the symbol
“TYL”
5949 Sherry Lane
Suite 1400
Dallas, Texas 75225
972.713.3700
www.tylertech.com