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For multiple element arrangements, each element of the arrangement is analyzed and we allocate a portion of the total arrangement fee to the elements based on the fair value of the element using vendor-specific objective evidence of fair value (“VSOE”), regardless of any separate prices stated within the contract for each element. Fair value is considered the price a customer would be required to pay if the element was sold separately based on our historical experience of stand-alone sales of these elements to third parties. For PCS, we use renewal rates for continued support arrangements to determine fair value. For software services, we use the fair value we charge our customers when those services are sold separately. We monitor our transactions to insure we maintain and periodically revise VSOE to reflect fair value. In software arrangements in which we have the fair value of all undelivered elements but not of a delivered element, we apply the “residual method” as allowed under SOP 98-9 in accounting for any element of a multiple element arrangement involving software that remains undelivered such that any discount inherent in a contract is allocated to the delivered element. Under the residual method, if the fair value of all undelivered elements is determinable, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered element(s) and is recognized as revenue assuming the other revenue recognition criteria are met. In software arrangements in which we do not have VSOE for all undelivered elements, revenue is deferred until fair value is determined or all elements for which we do not have VSOE have been delivered. Alternatively, if sufficient VSOE does not exist and the only undelivered element is services that do not involve significant modification or customization of the software, the entire fee is recognized over the period during which the services are expected to be performed. Software Licenses
We recognize the revenue allocable to software licenses and specified upgrades upon delivery of the software product or upgrade to the customer, unless the fee is not fixed or determinable or collectibility is not probable. If the fee is not fixed or determinable, including new customers whose payment terms are three months or more from shipment, revenue is generally recognized as payments become due from the customer. If collectibility is not considered probable, revenue is recognized when the fee is collected. Arrangements that include software services, such as training or installation, are evaluated to determine whether those services are essential to the product’s functionality.
A majority of our software arrangements involve “off-the-shelf” software. We consider software to be off-the-shelf software if it can be added to an arrangement with minor changes in the underlying code and it can be used by the customer for the customer’s purpose upon installation. For off-the-shelf software arrangements, we recognize the software license fee as revenue after delivery has occurred, customer acceptance is reasonably assured, that portion of the fee represents a non-refundable enforceable claim and is probable of collection, and the remaining services such as training are not considered essential to the product’s functionality.
For arrangements that involve significant production, modification or customization of the software, or where software services are otherwise considered essential, we recognize revenue using contract accounting. We generally use the percentage-of-completion method to recognize revenue from these arrangements. We measure progress-to-completion primarily using labor hours incurred, or value added. The percentage-of-completion method generally results in the recognition of reasonably consistent profit margins over the life of a contract because we have the ability to produce reasonably dependable estimates of contract billings and contract costs. We use the level of profit margin that is most likely to occur on a contract. If the most likely profit margin cannot be precisely determined, the lowest probable level of profit in the range of estimates is used until the results can be estimated more precisely. These arrangements are often implemented over an extended time period and occasionally require us to revise total cost estimates. Amounts recognized in revenue are calculated using the progress-to-completion measurement after giving effect to any changes in our cost estimates. Changes to total estimated contract costs, if any, are recorded in the period they are determined. Estimated losses on uncompleted contracts are recorded in the period in which we first determine that a loss is apparent.
For arrangements that include new product releases for which it is difficult to estimate final profitability except to assume that no loss will ultimately be incurred, we recognize revenue under the completed contract method. Under the completed contract method, revenue is recognized only when a contract is completed or substantially complete. Historically these amounts have been immaterial.
Subscription-Based Services
Subscription-based services primarily consist of revenues derived from application service provider (“ASP”) arrangements and other hosted service offerings, software subscriptions and disaster recovery services.
We recognize revenue for ASP and other hosting services, software subscriptions, term license arrangements with renewal periods of twelve months or less and disaster recovery ratably over the period of the applicable agreement as services are provided. Disaster recovery agreements and other hosting services are typically renewable annually. ASP and software subscriptions are typically for periods of three to six years and automatically renew unless either party cancels the agreement. The majority of the ASP and other hosting services and software subscriptions also include professional services as well as maintenance and support. In certain ASP arrangements, the customer also acquires a license to the software.
For ASP and other hosting arrangements, we evaluate whether each of the elements in these arrangements represents a separate unit of accounting, as defined by Emerging Issues Task Force (“EITF”) 00-21, using all applicable facts and circumstances, including whether (i) we sell or could readily sell the element unaccompanied by the other elements, (ii) the element has stand-alone value to the customer, (iii) there is objective reliable evidence of the fair value of the undelivered item, and (iv) there is a general right of return. We consider the applicability of EITF No. 00-03, “Application of SOP 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware” on a contract-by-contract basis. In hosted term-based agreements, where the customer does not have the contractual right to take possession of the software, hosting fees are recognized on a monthly basis over the term of the contract commencing when the customer has access to the software. For professional services associated with hosting arrangements that we determine do not have stand-alone value to the customer, we recognize the services revenue ratably over the remaining contractual period once hosting has gone live and we may begin billing for the hosting services. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenues, depending on whether the revenue recognition criteria have been met.
If we determine that the customer has the contractual right to take possession of our software at any time during the hosting period without significant penalty, and can feasibly maintain the software on the customer’s hardware or enter into another arrangement with a third party to host the software, we recognize the license, professional services and hosting services revenues pursuant to SOP 97-2.
Software Services
Some of our software arrangements include services considered essential for the customer to use the software for the customer’s purposes. For these software arrangements, both the software license revenue and the services revenue are recognized as the services are performed using the percentage-of-completion contract accounting method. When software services are not considered essential, the fee allocable to the service element is recognized as revenue as we perform the services.
Computer Hardware Equipment
Revenue allocable to computer hardware equipment, which is based on VSOE, is recognized when we deliver the equipment and collection is probable.
Postcontract Customer Support
Our customers generally enter into PCS agreements when they purchase our software licenses. Our PCS agreements are typically renewable annually. Revenue allocated to PCS is recognized on a straight-line basis over the period the PCS is provided. All significant costs and expenses associated with PCS are expensed as incurred. Fair value for the maintenance and support obligations for software licenses is based upon the specific sale renewals to customers.
Appraisal Services:
For our property appraisal projects, we recognize revenue using the proportionate performance method of revenue recognition since many of these projects are implemented over one to three year periods and consist of various unique activities. Under this method of revenue recognition, we identify each activity for the appraisal project, with a typical project generally calling for bonding, office set up, training, routing of map information, data entry, data collection, data verification, informal hearings, appeals and project management. Each activity or act is specifically identified and assigned an estimated cost. Costs which are considered to be associated with indirect activities, such as bonding costs and office set up, are expensed as incurred. These costs are typically billed as incurred and are recognized as revenue equal to cost. Direct contract fulfillment activities and related supervisory costs such as data collection, data entry and verification are expensed as incurred. The direct costs for these activities are determined and the total contract value is then allocated to each activity based on a consistent profit margin. Each activity is assigned a consistent unit of measure to determine progress towards completion and revenue is recognized for each activity based upon the percentage complete as applied to the estimated revenue for that activity. Progress for the fulfillment activities is typically based on labor hours or an output measure such as the number of parcel counts completed for that activity. Estimated losses on uncompleted contracts are recorded in the period in which we first determine that a loss is apparent.
Other:
The majority of deferred revenue consists of unearned support and maintenance revenue that has been billed based on contractual terms in the underlying arrangement with the remaining balance consisting of payments received in advance of revenue being earned under software licensing, subscription-based services, software and appraisal services and hardware installation. Unbilled revenue is not billable at the balance sheet date but is recoverable over the remaining life of the contract through billings made in accordance with contractual agreements. The termination clauses in most of our contracts provide for the payment for the fair value of products delivered and services performed in the event of an early termination. Prepaid expenses and other current assets include direct and incremental costs, consisting primarily of commissions associated with arrangements for which revenue recognition has been deferred and third party subcontractor payments. Such costs are expensed at the time the related revenue is recognized.
In August 2008, we completed the acquisition of all the capital stock of School Information Systems, Inc. (“SIS”) which develops and sells a full suite of student information and financial management systems for K-12 schools. The purchase price, including transaction costs and excluding cash balances acquired, was approximately $9.9 million in cash and approximately 70,000 shares of Tyler common stock valued at $1.2 million. In the first quarter of 2008, we completed the acquisitions of all of the capital stock of VersaTrans Solutions Inc. (“VersaTrans”) and certain assets of Olympia Computing Company, Inc. d/b/a Schoolmaster (“Schoolmaster”). VersaTrans is a provider of student transportation management software solutions for school districts and school transportation providers across North America, including solutions for school bus routing and planning, redistricting, GPS fleet tracking, fleet maintenance and field trip planning. Schoolmaster provides a full suite of student information systems, which manage such functions as grading, attendance, scheduling, guidance, health, admissions and fund raising. The combined purchase price for these transactions excluding cash acquired and including transaction costs, was approximately $13.9 million in cash and approximately 126,000 shares of Tyler common stock valued at $1.7 million.
The operating results of these acquisitions are included in our results of operations since their respective dates of acquisition.
We believe these acquisitions will complement our business model by expanding our presence in the education market and will give us additional opportunities to provide our customers with solutions tailored specifically for local governments.
In connection with these three transactions we acquired total tangible assets of approximately $3.6 million and assumed total liabilities of approximately $8.2 million. We recorded goodwill of $17.0 million, $7.7 million of which is expected to be deductible for tax purposes, and other intangible assets of $14.3 million. The $14.3 million of intangible assets is attributable to acquired software, customer relationships and trade name that will be amortized over a weighted average period of approximately 10 years. Our balance sheet as of September 30, 2008 reflects the preliminary allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition.
| (4) | Financial Instruments |
Assets recorded at fair value in the balance sheet as of September 30, 2008 are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by SFAS 157 “Fair Value Measurements” are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets are as follows:
Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date Level 2 – Inputs other than Level 1 inputs that are either directly or indirectly observable; and Level 3 – Unobservable inputs developed using estimates and assumptions developed by management, which reflect those that a market participant would use.
We measure the following financial assets at fair value on a recurring basis. The fair value of these financial assets was determined using the following inputs at September 30, 2008: | | | | | Quoted prices in | | | Significant other | | | Significant | | | | | Total | | | (Level 1) | | | (Level 2) | | | (Level 3) | | Cash and cash equivalents (1) | | $ | 28,861 | | | $ | 28,861 | | | $ | - | | | $ | - | | Short-term investments available-for-sale (1) | | | 500 | | | | 500 | | | | - | | | | - | | Non-current investments available-for-sale (2) | | | 4,893 | | | | - | | | | - | | | | 4,893 | | | Total | | $ | 34,254 | | | $ | 29,361 | | | $ | - | | | $ | 4,893 | |
| | Cash and cash equivalents consist primarily of money market funds with original maturity dates of three months or less, for which we determine fair value ofthrough quoted market prices. Level 1 financial assets also include auction rate municipal securities which were sold at par during 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 wouldperiod October 1, 2008 through October 17, 2008. |
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| | (2) | be required to pay if the element was sold separately based on our historical experience of stand-alone sales of these elements to third parties. For PCS, we use renewal rates for continued support arrangements to determine fair value. For software services, we use the fair value we charge our customers when those services are sold separately. We monitor our transactions to insure we maintain and periodically revise VSOE to reflect fair value. In software arrangements in which we have the fair value of all undelivered elements but not of a delivered element, we apply the “residual method” as allowed under SOP 98-9 in accounting for any element of a multiple element arrangement involving software that remains undelivered such that any discount inherent in a contract is allocated to the delivered element. Under the residual method, if the fair value of all undelivered elements is determinable, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered element(s) and is recognized as revenue assuming the other revenue recognition criteria are met. In software arrangements in which we do not have VSOE for all undelivered elements, revenue is deferred until fair value is determined or all elements for which we do not have VSOE have been delivered. Alternatively, if sufficient VSOE does not exist and the only undelivered element is services that do not involve significant modification or customization of the software, the entire fee is recognized over the period during which the services are expected to be performed. | | | | Software Licenses | | | | We recognize the revenue allocable to software licenses and specified upgrades upon delivery of the software product or upgrade to the customer, unless the fee is not fixed or determinable or collectibility is not probable. If the fee is not fixed or determinable, including new customers whose payment terms are three months or more from shipment, revenue is generally recognized as payments become due from the customer. If collectibility is not considered probable, revenue is recognized when the fee is collected. Arrangements that include software services, such as training or installation, are evaluated to determine whether those services are essential to the product’s functionality. | | | | A majority of our software arrangements involve “off-the-shelf” software. We consider software to be off-the-shelf software if it can be added to an arrangement with minor changes in the underlying code and it can be used by the customer for the customer’s purpose upon installation. For off-the-shelf software arrangements, we recognize the software license fee as revenue after delivery has occurred, customer acceptance is reasonably assured, that portion of the fee represents a non-refundable enforceable claim and is probable of collection, and the remaining services such as training are not considered essential to the product’s functionality. | | | | For arrangements that involve significant production, modification or customization of the software, or where software services are otherwise considered essential, we recognize revenue using contract accounting. We generally use the percentage-of-completion method to recognize revenue from these arrangements. We measure progress-to-completion primarily using labor hours incurred, or value added. The percentage-of-completion method generally results in the recognition of reasonably consistent profit margins over the life of a contract 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. |
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| | 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 revenueInvestments available-for-sale consists of unearned supportauction rate municipal securities (“ARS”). ARS were originally considered Level 2 financial assets and maintenance revenue that has been billed based on contractual terms in the underlying arrangement with the remaining balance consistingvalued using estimated market values as 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 overobtained from an independent pricing service employed by our broker dealers. These independent pricing services carried these investments at par value, due to the remaining lifeoverall quality of the contractunderlying investments and taking into account credit support through billings made in accordance with contractual agreements. The termination clauses in most of our contracts provide for the payment for the fair value of products delivered and services performed in the event of an early termination. | | | | Prepaid expenses and other current assets include direct and incremental costs, consisting primarily of commissions associated with arrangements for which revenue recognition has been deferred and third party subcontractor payments. Such costs are expensed at the time the related revenue is recognized. | | (3) | | Acquisitions | | | | In September 2007, we completed the acquisition of all the capital stock of EDP Enterprises, Inc. (“EDP”), which develops and sells financial and student information and management systems for public school districts in Texas. The total purchase price, including transaction costs and excluding cash balances acquired, was $3.9 million in cash. | | | | In February 2007, we completed the acquisition of allinsurance policies guaranteeing each of the capital stockbonds’ payment of Advanced Data Systems, Inc. (“ADS”), which developsprincipal and sells fund accounting solutions, primarilyaccrued interest, and the anticipated future market for such investments. However, in New England. The total purchase price, including transaction costs along with an office building used in the business, was approximately $4.2 million in cash. In January 2007 we also purchased certain software assets to enhance our courts and justice product line for approximately $756,000 in cash, including transaction costs. | | | | We believe these acquisitions will complement our business model by broadening our customer base and will give us additional opportunities to provide our customers with solutions tailored specifically for the public sector. | | | | In connection with these three transactions we acquired total assets of approximately $5.3 million and assumed total liabilities of approximately $4.9 million. We recorded goodwill of $5.3 million, of which $2.4 million is expected to be deductible for tax purposes, and other intangible assets of $3.3 million. The $3.3 million of intangible assets is attributable to acquired software and customer relationships that will be amortized over a weighted average period of approximately 6 years. Our consolidated balance sheet as of September 30, 2007 reflects the allocation of the purchase price to the assets acquired and liabilities assumed based on |
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| | their estimated fair values at the dates of acquisition. The EDP purchase price allocation is preliminary. The operating results of these acquisitions are included in our results of operations since their respective dates of acquisition. | | (4) | | Shareholders’ Equity | | | | The following table details activity in our common stock: |
| | | | | | | | | | | | | | | | | | | | | Nine months ended September 30, | | | | 2007 | | 2006 | | | | Shares | | Amount | | Shares | | Amount | | Purchases of common stock | | | (889 | ) | | $ | (11,134 | ) | | | (987 | ) | | $ | (9,923 | ) | | Stock option exercises | | | 767 | | | | 3,291 | | | | 526 | | | | 2,420 | | | Employee stock plan purchases | | | 77 | | | | 853 | | | | 80 | | | | 700 | | | Shares issued for acquisitions | | | — | | | | — | | | | 325 | | | | 2,891 | |
| | As of September 30, 2007, we have authorization from our board of directors to repurchase up to 2.1 million shares of Tyler common stock. |
(5) | | Income Tax Provision | | | | The following table sets forth a comparison of our income tax provision for the following periods: |
| | | | | | | | | | | | | | | | | | | | | Three months ended | | Nine months ended | | | | September 30, | | September 30, | | | | 2007 | | 2006 | | 2007 | | 2006 | | Income tax provision | | $ | 3,209 | | | $ | 2,523 | | | $ | 7,141 | | | $ | 5,938 | | | Effective income tax rate | | | 38.3 | % | | | 36.4 | % | | | 38.7 | % | | | 36.8 | % |
| | The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 35% primarily due to state income taxes, non-deductible share-based compensation expense, the qualified manufacturing activities deduction and non-deductible meals and entertainment costs. | | | | The effective tax rate for the three months endedending September 30, 20062008, we began using discounted cash flow analysis to more accurately measure possible liquidity discounts. Because the discounted cash flow analysis included the benefit from previously unclaimed tax credits resulting from the completion of state income tax audits. The effective tax rate for the nine months ended September 30, 2006 also included the benefit of changes in the Texas franchise tax law and related rates enacted in the second quarter of 2006. | | | | We made federal and state income tax payments, net of refunds, of $6.9 million in the nine months ended September 30, 2007, comparedunobservable inputs we transferred these securities to $7.9 million in net payments for the same period of the prior year. | | | | We adopted the provisions of Financial Standards Accounting Board Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes,” on January 1, 2007. As a result of the implementation of FIN 48, we recognized no material adjustments in the liability for unrecognized income tax benefits. At the adoption date we did not have any unrecognized tax benefits and did not have any interest or penalties accrued. | | | | We are subject to United States federal tax as well as income tax of multiple state and local jurisdictions. We are no longer subject to United States federal income tax examinations for years before 2004 and are no longer subject to state and local income tax examinations by tax authorities for the years before 2002. The Internal Revenue Service concluded an examination of our United States federal tax return for 2005 in the second quarter of 2007, which did not result in any material adjustments. |
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(6) | | Earnings Per ShareLevel 3 financial assets. |
| | The following table details the reconciliation of basic earnings per share to diluted earnings per share: |
| | | | | | | | | | | | | | | | | | | | | Three months ended | | | Nine months ended | | | | | September 30, | | | September 30, | | | | | 2007 | | | 2006 | | | 2007 | | | 2006 | | | Numerator for basic and diluted earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | $ | 5,160 | | | $ | 4,413 | | | $ | 11,311 | | | $ | 10,185 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Denominator: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted-average basic common shares outstanding | | | 38,688 | | | | 38,705 | | | | 38,717 | | | | 38,947 | | | Assumed conversion of dilutive securities: | | | | | | | | | | | | | | | | | | Stock options | | | 1,685 | | | | 1,921 | | | | 1,753 | | | | 1,734 | | | Warrants | | | 1,022 | | | | 1,272 | | | | 1,203 | | | | 1,230 | | | | | | | | | | | | | | | | | Potentially dilutive common shares | | | 2,707 | | | | 3,193 | | | | 2,956 | | | | 2,964 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Denominator for diluted earnings per share — Adjusted weighted-average shares | | | 41,395 | | | | 41,898 | | | | 41,673 | | | | 41,911 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Earnings per common share: | | | | | | | | | | | | | | | | | | Basic | | $ | 0.13 | | | $ | 0.11 | | | $ | 0.29 | | | $ | 0.26 | | | | | | | | | | | | | | | | | Diluted | | $ | 0.12 | | | $ | 0.11 | | | $ | 0.27 | | | $ | 0.24 | | | | | | | | | | | | | | | |
| | Effective September 10, 2007, warrants to purchase 1.6 million shares of common stock at $2.50 per share expired and the effect of these warrants is not included in the potentially dilutive common shares after that date. See Note 8 — Commitments and Contingencies for further information. |
(7) | | Share-Based Compensation | | | | Share-based compensation plan | | | | We have a stock option plan that provides for the grant of stock options to key employees, directors and non-employee consultants. Stock options vest after three to five years of continuous service from the date of grant and have a contractual term of ten years. Once options become exercisable, the employee can purchase shares of our common stock at the market price on the date we granted the option. Effective January 1, 2006, we adopted the provisions of SFAS No. 123R, “Share-Based Payment,” which establishes accounting for share-based awards exchanged for employee services, using the modified prospective application transition method. Under this transition method, compensation cost recognized in 2007 and 2006 includes the applicable amounts of: (a) compensation cost of all share-based payments granted prior to, but not yet vested as of, January 1, 2006 (based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” and previously presented in the pro forma footnote disclosures), and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006 (based on the grant-date fair value estimated in accordance with the new provisions of SFAS No. 123R). | | | | Determining Fair Value Under SFAS No. 123R | | | | Valuation and Amortization Method. We estimate the fair value of share-based awards granted using the Black-Scholes option valuation model. We amortize the fair value of all awards on a straight-line basis over the requisite service periods, which are generally the vesting periods. |
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| | Expected Life. The expected life of awards granted represents the period of time that they are expected to be outstanding. We determine the expected life using the “simplified method” in accordance with Staff Accounting Bulletin No. 107. | | | | Expected Volatility. Using the Black-Scholes option valuation model, we estimate the volatility of our common stock at the date of grant based on the historical volatility of our common stock. | | | | Risk-Free Interest Rate. We base the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. | | | | Expected Dividend Yield. We have not paid any cash dividends on our common stock in the last ten years and we do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model. | | | | Expected Forfeitures. We use historical data to estimate pre-vesting option forfeitures. We record stock-based compensation only for those awards that are expected to vest. | | | | We did not grant any options during the three months ended September 30, 2007. We granted options for 120,000 shares during the three months ended September 30, 2006. | | | | The following weighted average assumptions were used for options granted during the three months ended September 30: |
| | | Three months ended | | | Nine months ended | | | Auction Rate Securities: | | September 30, 2008 | | | September 30, 2008 | | | Balance at beginning of period | | $ | - | | | $ | - | | | Transfers into level 3 | | | 5,150 | | | | 5,150 | | | Unrealized losses included in accumulated other | | | | | | | comprehensive income | | | (257 | ) | | | (257 | ) | | Balance as of September 30, 2008 | | $ | 4,893 | | | $ | 4,893 | |
| | | | | | | | | | | | | 2007 | | 2006 | | Expected life (in years) | | | — | | | | 6.5 | | | Expected volatility | | | — | % | | | 44.7 | % | | Risk-free interest rate | | | — | % | | | 5.0 | % | | Expected forfeiture rate | | | — | % | | | 3 | % |
| | Share-Based Compensation Under SFAS No. 123R |
| | The following table summarizes share-based compensation expense related to share-based awards under SFAS No. 123R recorded in the statements of operations: |
8 | | | | | | | | | | | | | | | | | | | | | Three months ended | | | Nine months ended | | | | | September 30, | | | September 30, | | | | | 2007 | | | 2006 | | | 2007 | | | 2006 | | | Cost of software services and maintenance | | $ | 59 | | | $ | 37 | | | $ | 158 | | | $ | 110 | | | Selling, general and administrative expenses | | | 573 | | | | 517 | | | | 1,547 | | | | 1,419 | | | | | | | | | | | | | | | | | Total share-based compensation expense | | $ | 632 | | | $ | 554 | | | $ | 1,705 | | | $ | 1,529 | | | | | | | | | | | | | | | |
(8) | | Commitments and Contingencies | | | | As of June 30, 2007, we had warrants outstanding to purchase 1.6 million shares of common stock at $2.50 per share, which were held by Bank of America, N. A. (“BOA”) pursuant to the terms of two Amended and Restated Stock Purchase Warrants (collectively, the “Warrants”). The exercise price could be paid either in cash or by a “cashless exercise” in which the holder was required to surrender the Warrants in exchange for warrant shares based on the following formula: [(Market Price — $2.50) / (Market Price)] x 1. 6 million shares, with the Market Price calculated as the immediately preceding 60-day trading average of our common stock. The Warrants identified specific exercise procedures for each method of exercise and further provided that any exercise would not be effective until we received all applicable documents, instruments, and the purchase price. The Warrants were originally issued on September 10, 1997 and were exercisable from that date until 5:00 p.m., Central Time, on September 10, 2007, when they expired. | | | | On September 10, 2007, at 4:44 p.m., BOA attempted to effectuate a “cashless exercise” of the Warrants via email; however, we believe BOA did not comply with all of the requirements set forth in the Warrants for an effective exercise. At 5:37 p.m., Central Time, BOA recalled this email exercise notice, which we subsequently accepted. At 6:10 p.m., Central Time, BOA attempted to |
9
(5) Comprehensive Income
The following table provides the composition of other comprehensive income: | | effectuate a cash exercise of the Warrants by emailing a different notice of exercise, which we believe also failed to comply with all of the requirements set forth in the Warrants for an effective exercise, and in any event, was after the expiration date of the Warrants. As a result, we believe these Warrants expired as of September 10, 2007 and have excluded the effect of the Warrants from potentially dilutive common shares as of such date in our earnings per share computation. | | | | On October 12, 2007, we filed a declaratory judgment action against BOA in the District Court of Dallas County, Texas, 101st Judicial District requesting the court to declare, among other things, that the Warrants have expired pursuant to their terms. As of the date of this Form 10-Q, BOA has not filed a response to the litigation. While we believe the Warrants expired as of September 10, 2007, there can be no assurance as to the ultimate resolution of this matter. | | | | Other than routine litigation incidental to our business, there are no material legal proceedings pending to which we are party or to which any of our properties are subject. | | (9) | | Recent Accounting Pronouncements | | | | In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, with earlier application encouraged. Any amounts recognized upon adoption as a cumulative effect adjustment will be recorded to the opening balance of retained earnings in the year of adoption. We have not yet determined the impact of SFAS No. 157 on our financial condition and results of operations. |
| | | Three months ended | | | Nine months ended | | | | | September 30, | | | September 30, | | | | | 2008 | | | 2007 | | | 2008 | | | 2007 | | | Net income, as reported | | $ | 6,359 | | | $ | 5,160 | | | $ | 9,731 | | | $ | 11,311 | | | Unrealized losses-auction rate securities, net of tax | | | (167 | ) | | | - | | | | (167 | ) | | | - | | | Comprehensive income | | $ | 6,192 | | | $ | 5,160 | | | $ | 9,564 | | | $ | 11,311 | |
(6) Shareholders’ Equity
The following table details activity in our common stock:
| | | Nine months ended September 30, | | | | | 2008 | | | 2007 | | | | | Shares | | | Amount | | | Shares | | | Amount | | | Purchases of common stock | | | (2,194 | ) | | $ | (31,322 | ) | | | (889 | ) | | $ | (11,134 | ) | | Stock option exercises | | | 325 | | | | 1,617 | | | | 767 | | | | 3,291 | | | Employee stock plan purchases | | | 78 | | | | 892 | | | | 77 | | | | 853 | | | Shares issued for acquisitions | | | 196 | | | | 2,863 | | | | - | | | | - | | | Warrant exercises in connection with legal settlement | | | 802 | | | | 11,050 | | | | - | | | | - | |
As of September 30, 2008 we have authorization from our board of directors to repurchase up to 1.6 million additional shares of Tyler common stock. During the period October 1, 2008 through October 20, 2008 we purchased 1.5 million shares of our common stock for an aggregate purchase price of $20.6 million. On October 23, 2008, our board of directors authorized the repurchase of an additional 2.0 million shares.
On June 27, 2008, we settled outstanding litigation related to two Stock Purchase Warrants owned by Bank of America, N. A. (“BANA”). In July 2008, as a result of this settlement, BANA paid us $2.0 million and we issued to BANA 801,883 restricted shares of Tyler common stock. See Note 10 – Commitments and Contingencies for further information.
(7) Income Tax Provision
For the three and nine months ended September 30, 2008, we had an effective income tax rate of 48.4% and 49.9%, respectively, compared to 38.3% and 38.7% for the three months and nine months ended September 30, 2007. Our effective income tax rate increased approximately twelve points compared to the prior year periods due to a non-cash legal settlement related to warrants charge of $9.0 million, which was not deductible. The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 35% primarily due to a non-cash legal settlement related to warrants charge which was not deductible, state income taxes, non-deductible share-based compensation expense, the qualified manufacturing activities deduction and non-deductible meals and entertainment costs.
We made federal and state income tax payments, net of refunds, of $10.1 million in the nine months ended September 30, 2008, compared to $6.9 million in net payments for the same period of the prior year.
(8) Earnings Per Share
The following table details the reconciliation of basic earnings per share to diluted earnings per share:
| | | Three months ended | | | Nine months ended | | | | | September 30, | | | September 30, | | | | | 2008 | | | 2007 | | | 2008 | | | 2007 | | | Numerator for basic and diluted earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | $ | 6,359 | | | $ | 5,160 | | | $ | 9,731 | | | $ | 11,311 | | | | | | | | | | | | | | | | | | | | | Denominator: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted-average basic common shares outstanding | | | 38,474 | | | | 38,688 | | | | 38,093 | | | | 38,717 | | | Assumed conversion of dilutive securities: | | | | | | | | | | | | | | | | | | Stock options | | | 1,545 | | | | 1,685 | | | | 1,533 | | | | 1,753 | | | Warrants | | | - | | | | 1,022 | | | | - | | | | 1,203 | | | Potentially dilutive common shares | | | 1,545 | | | | 2,707 | | | | 1,533 | | | | 2,956 | | | | | | | | | | | | | | | | | | | | | Denominator for diluted earnings | | | | | | | | | | | | | | | | | | per share - Adjusted weighted-average shares | | | 40,019 | | | | 41,395 | | | | 39,626 | | | | 41,673 | | | | | | | | | | | | | | | | | | | | | Earnings per common share: | | | | | | | | | | | | | | | | | | Basic | | $ | 0.17 | | | $ | 0.13 | | | $ | 0.26 | | | $ | 0.29 | | | Diluted | | $ | 0.16 | | | $ | 0.12 | | | $ | 0.25 | | | $ | 0.27 | |
(9) Share-Based Compensation
The following table summarizes share-based compensation expense related to share-based awards under SFAS No. 123R, “Share-Based Payment,” recorded in the statements of operations: | | | Three months ended | | | Nine months ended | | | | | September 30, | | | September 30, | | | | | 2008 | | | 2007 | | | 2008 | | | 2007 | | | Cost of software services, maintenance and subscriptions | | $ | 100 | | | $ | 59 | | | $ | 250 | | | $ | 158 | | | Selling, general and administrative expense | | | 998 | | | | 573 | | | | 2,469 | | | | 1,547 | | | Total share-based compensation expense | | $ | 1,098 | | | $ | 632 | | | $ | 2,719 | | | $ | 1,705 | |
(10) Commitments and Contingencies
On June 27, 2008, we settled outstanding litigation related to two Stock Purchase Warrants (the “Warrants”) owned by Bank of America, N. A. (“BANA”). As disclosed in prior SEC filings, the Warrants entitled BANA to acquire 1.6 million shares of Tyler common stock at an exercise price of $2.50 per share. The Warrants expired on September 10, 2007. Prior to their expiration, BANA attempted to exercise the Warrants; however, the parties disputed whether or not BANA’s exercise was effective. We filed suit for declaratory judgment seeking a court’s determination on the matter, and BANA asserted numerous counterclaims against us, including breach of contract and misrepresentation.
Following court-ordered mediation, in July 2008, BANA paid us $2.0 million and we issued to BANA 801,883 restricted shares of Tyler common stock. Accordingly, as a result of the settlement, we recorded a non-cash legal settlement related to warrants charge of $9.0 million, which is not tax deductible, during the three months ended June 30, 2008.
In February 2008 our board of directors authorized negotiations to purchase a building in Falmouth, Maine that we currently lease from a related party. We expect to purchase this building for approximately $10.0 million in the three months ending December 31, 2008. (11) Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board issued SFAS No. 141(R) “Business Combinations.” SFAS No. 141(R) changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. We are currently evaluating the impact of the pending adoption of SFAS 141(R) on our financial statements.
(12) Subsequent Event
On October 20, 2008, we entered into a new revolving bank credit agreement (the “Credit Facility”) and a related pledge and security agreement. The Credit Facility matures October 19, 2009 and provides for total borrowings of up to $25.0 million and a $6.0 million Letter of Credit facility under which the bank will issue cash collateralized letters of credit. Borrowings under the Credit Facility will bear interest at a rate of either LIBOR plus 1% or prime rate minus 1.5%. As of October 20, 2008, our effective interest rate was 3% under the Credit Facility. As of October 24, 2008 we had no outstanding borrowings under the Credit Facility.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | | FORWARD-LOOKING STATEMENTS | | | | The statements in this discussion that are not historical statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about our business, financial condition, business strategy, plans and the objectives of our management, and future prospects. In addition, we have made in the past and may make in the future other written or oral forward-looking statements, including statements regarding future operating performance, short- and long-term revenue and earnings growth, the timing of the revenue and earnings impact for new contracts, backlog, the value of new contract signings, business pipeline, and industry growth rates and our performance relative thereto. Any forward-looking statements may rely on a number of assumptions concerning future events and be subject to a number of uncertainties and other factors, many of which are outside our control, which could cause actual results to differ materially from such statements. These include, but are not limited to: our ability to improve productivity and achieve synergies from acquired businesses; technological risks associated with the development of new products and the enhancement of existing products; changes in the budgets and regulating environments of our government customers; competition in the industry in which we conduct business and the impact of competition on pricing, revenues and margins; with respect to customer contracts accounted for under the percentage-of-completion method of accounting, the performance of such contracts in accordance with our cost and revenue estimates; our ability to maintain health and other insurance coverage and capacity due to changes in the insurance market and the impact of increasing insurance costs on the results of operations; the costs to attract and retain qualified personnel, changes in product demand, the availability of products, economic conditions, costs of compliance with corporate governance and public disclosure requirements as issued by the Sarbanes-Oxley Act of 2002 and New York Stock Exchange rules, changes in tax risks and other risks indicated in our filings with the Securities and Exchange Commission. The factors described in this paragraph and other factors that may affect Tyler, our management or future financial results, as and when applicable, are discussed in our filings with the Securities and Exchange Commission, on its Form 10-K for the year ended December 31, 2006. Except to the extent required by law, we are not obligated to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. When used in this Quarterly Report, the words “believes,” “plans,” “estimates,” “expects,” “anticipates,” “intends,” “continue,” “may,” “will,” “should,” “projects,” “forecast,” “might,” “could” or the negative of such terms and similar expressions as they relate to Tyler or our management are intended to identify forward-looking statements. |
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FORWARD-LOOKING STATEMENTS
The statements in this discussion that are not historical statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about our business, financial condition, business strategy, plans and the objectives of our management, and future prospects. In addition, we have made in the past and may make in the future other written or oral forward-looking statements, including statements regarding future operating performance, short and long-term revenue and earnings growth, the timing of the revenue and earnings impact for new contracts, backlog, the value of new contract signings, business pipeline, and industry growth rates and our performance relative thereto. Any forward-looking statements may rely on a number of assumptions concerning future events and be subject to a number of uncertainties and other factors, many of which are outside our control, which could cause actual results to differ materially from such statements. These include, but are not limited to: our ability to improve productivity and achieve synergies from acquired businesses; technological risks associated with the development of new products and the enhancement of existing products; changes in the budgets and regulating environments of our government customers; competition in the industry in which we conduct business and the impact of competition on pricing, revenues and margins; with respect to customer contracts accounted for under the percentage-of-completion method of accounting, the performance of such contracts in accordance with our cost and revenue estimates; our ability to maintain health and other insurance coverage and capacity due to changes in the insurance market and the impact of increasing insurance costs on the results of operations; the costs to attract and retain qualified personnel, changes in product demand, the availability of products, economic conditions, costs of compliance with corporate governance and public disclosure requirements as issued by the Sarbanes-Oxley Act of 2002 and New York Stock Exchange rules, changes in tax risks and other risks indicated in our filings with the Securities and Exchange Commission. The factors described in this paragraph and other factors that may affect Tyler, its management or future financial results, as and when applicable, are discussed in Tyler's filings with the Securities and Exchange Commission, on its Form 10-K for the year ended December 31, 2007. Except to the extent required by law, we are not obligated to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. When used in this Quarterly Report, the words "believes," "plans," "estimates," "expects," "anticipates," "intends," "continue," "may," "will," "should," "projects," "forecast," "might," "could" or the negative of such terms and similar expressions as they relate to Tyler or our management are intended to identify forward-looking statements.
GENERAL
We provide integrated information management solutions and services for local governments. We develop and market a broad line of software products and services to address the information technology (“IT”) needs of cities, counties, schools and other local government entities. In addition, we provide professional IT services to our customers, including software and hardware installation, data conversion, training and for certain customers, product modifications, along with continuing maintenance and support for customers using our systems. We also provide subscription-based services such as application service provider arrangements and other hosting services as well as property appraisal outsourcing services for taxing jurisdictions.
On June 27, 2008, we settled outstanding litigation related to two Stock Purchase Warrants (the “Warrants”) owned by Bank of America, N. A. (“BANA”). As disclosed in prior SEC filings, the Warrants entitled BANA to acquire 1.6 million shares of Tyler common stock at an exercise price of $2.50 per share. Following court-ordered mediation, in July 2008, BANA paid us $2.0 million and we issued to BANA 801,883 restricted shares of Tyler common stock. Accordingly, we recorded a non-cash legal settlement related to warrants charge of $9.0 million, which is not tax deductible, during the three months ended June 30, 2008.
In August 2008, we completed the acquisition of all the capital stock of School Information Systems, Inc. (“SIS”) which develops and sells a full suite of student information and financial management systems for K-12 schools. The total purchase price, including transaction costs and excluding cash balances acquired, was approximately $9.9 million in cash and approximately 70,000 shares of Tyler common stock valued at $1.2 million. In the first quarter of 2008, we acquired all of the capital stock of VersaTrans Solutions Inc. and certain assets of Olympia Computing Company, Inc. d/b/a Schoolmaster. The combined purchase price, excluding cash acquired and including transaction costs, was approximately $13.9 million in cash and approximately 126,000 shares of Tyler common stock valued at $1.7 million. See Note 3 in the Notes to the Unaudited Condensed Financial Statements.
As of September 30, 2008, our total full-time equivalent employee count increased to 1,938 from 1,640 at September 30, 2007. Approximately 49% of these additions or 146 full-time equivalent employees were added as a result of several acquisitions completed since September 30, 2007. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our condensed financial statements. These condensed financial statements have been prepared following the requirements of accounting principles generally accepted in the United States (“GAAP”) for interim periods and require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and amortization and potential impairment of intangible assets and goodwill and share-based compensation expense. As these are condensed financial statements, one should also read expanded information about our critical accounting policies and estimates provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Form 10-K for the year ended December 31, 2007. There have been no material changes to our critical accounting policies and estimates from the information provided in our 10-K for the year ended December 31, 2007.
| | GENERAL | | | | We provide integrated information management solutions and services for local governments. We develop and market a broad line of software solutions and services to address the information technology (IT) needs of cities, counties, schools and other local government entities. In addition, we provide professional IT services to our customers, including software and hardware installation, data conversion, training and for certain customers, product modifications, along with continuing maintenance and support for customers using our systems. We also provide property appraisal outsourcing services for taxing jurisdictions. | | | | In September 2007, we completed the acquisition of all the capital stock of EDP Enterprises, Inc. (“EDP”), which develops and sells financial and student information management systems for public school districts in Texas. The total purchase price, including transaction costs and excluding acquired cash balances, was $3.9 million in cash. In the first quarter of 2007, we acquired one company, Advanced Data Systems, Inc. (“ADS”), as well as certain software assets to enhance our courts and justice product line. The combined purchase price for ADS and the software assets was approximately $5.1 million in cash. In connection with these three transactions we acquired total assets of approximately $5.3 million and assumed total liabilities of approximately $4.9 million. We recorded goodwill of $5.3 million and other intangible assets of $3.3 million. See Note 3 in the Notes to the Unaudited Condensed Consolidated Financial Statements. | | | | As of September 30, 2007, our total full-time equivalent employee count increased to 1,640 from 1,474 at September 30, 2006. Approximately one-half of these additions were to our implementation and support staff, including additions to our capacity to deliver our backlog, particularly for our Odyssey courts and justice solutions. Our implementation and support staff at September 30, 2007 includes 73 full-time equivalent employees added as a result of several acquisitions completed in the first nine months of 2007. | | | | CRITICAL ACCOUNTING POLICIES AND ESTIMATES | | | | The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements. These condensed consolidated financial statements have been prepared following the requirements of accounting principles generally accepted in the United States (“GAAP”) for interim periods and require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and amortization and potential impairment of intangible assets and goodwill. As these are condensed financial statements, one should also read expanded information about our critical accounting policies and estimates provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Form 10-K for the year ended December 31, 2006. There have been no material changes to our critical accounting policies and estimates from the information provided in our 10-K for the year ended December 31, 2006, except as follows: | | | | We account for uncertain tax positions in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time. Changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income. See Note 5 in the Notes to the Unaudited Condensed Consolidated Financial Statements for additional detail. | | | | In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, with earlier application encouraged. Any amounts recognized upon adoption as a cumulative effect adjustment will be recorded to the opening balance of retained earnings in the year of adoption. We have not yet determined the impact of SFAS No. 157 on our financial condition and results of operations. |
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| | ANALYSIS OF RESULTS OF OPERATIONS | |
| | | The following table sets forth the key components of our revenues for the periods presented as of September 30: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Third Quarter | | | % | | | Nine Months | | | % | | | | | | | | | % of | | | | | | | % of | | | Increase/ | | | | | | | % of | | | | | | | % of | | | Increase/ | | | ($in thousands) | | 2007 | | | Total | | | 2006 | | | Total | | | (Decrease) | | | 2007 | | | Total | | | 2006 | | | Total | | | (Decrease) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Software licenses | | $ | 8,196 | | | | 15 | % | | $ | 10,422 | | | | 21 | % | | | (21 | )% | | $ | 24,560 | | | | 16 | % | | $ | 27,817 | | | | 19 | % | | | (12 | )% | | Software services | | | 18,276 | | | | 33 | | | | 14,497 | | | | 29 | | | | 26 | | | | 51,068 | | | | 32 | | | | 42,678 | | | | 30 | | | | 20 | | | Maintenance | | | 22,132 | | | | 40 | | | | 18,847 | | | | 37 | | | | 17 | | | | 62,526 | | | | 39 | | | | 54,220 | | | | 38 | | | | 15 | | | Appraisal services | | | 4,927 | | | | 9 | | | | 4,920 | | | | 10 | | | | — | | | | 16,514 | | | | 10 | | | | 14,727 | | | | 10 | | | | 12 | | | Hardware and other | | | 1,401 | | | | 3 | | | | 1,453 | | | | 3 | | | | (4 | ) | | | 4,708 | | | | 3 | | | | 4,706 | | | | 3 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total revenues | | $ | 54,932 | | | | 100 | % | | $ | 50,139 | | | | 100 | % | | | 10 | % | | $ | 159,376 | | | | 100 | % | | $ | 144,148 | | | | 100 | % | | | 11 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Third Quarter | | | % | | | Nine Months | | | % | | | | | | | | % of | | | | | | % of | | | Increase/ | | | | | | % of | | | | | | % of | | | Increase/ | | | ($ in thousands) | | 2008 | | | Total | | | 2007 | | | Total | | | (Decrease) | | | 2008 | | | Total | | | 2007 | | | Total | | | (Decrease) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Software licenses | | $ | 11,372 | | | | 17 | % | | $ | 8,145 | | | | 15 | % | | | 40 | % | | $ | 31,646 | | | | 16 | % | | $ | 24,431 | | | | 15 | % | | | 30 | % | | Subscription | | | 3,526 | | | | 5 | | | | 2,559 | | | �� | 5 | | | | 38 | | | | 10,503 | | | | 5 | | | | 7,272 | | | | 5 | | | | 44 | | | Software services | | | 18,600 | | | | 27 | | | | 15,872 | | | | 29 | | | | 17 | | | | 54,973 | | | | 28 | | | | 44,213 | | | | 28 | | | | 24 | | | Maintenance | | | 28,353 | | | | 41 | | | | 22,132 | | | | 40 | | | | 28 | | | | 79,102 | | | | 41 | | | | 62,526 | | | | 39 | | | | 27 | | | Appraisal services | | | 5,289 | | | | 8 | | | | 4,927 | | | | 9 | | | | 7 | | | | 14,249 | | | | 7 | | | | 16,514 | | | | 10 | | | | (14 | ) | | Hardware and other | | | 1,497 | | | | 2 | | | | 1,297 | | | | 2 | | | | 15 | | | | 5,084 | | | | 3 | | | | 4,420 | | | | 3 | | | | 15 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total revenues | | $ | 68,637 | | | | 100 | % | | $ | 54,932 | | | | 100 | % | | | 25 | % | | $ | 195,557 | | | | 100 | % | | $ | 159,376 | | | | 100 | % | | | 23 | % |
| Total revenues grew 15% and 14% for the three and nine months ended September 30, 2008, respectively, excluding the impact of acquisitions completed in the prior twelve months. |
| Software licenses. Software license revenues consist of the following components for the periods presented as of September 30: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Third Quarter | | | % | | | Nine Months | | | % | | | | | | | | | % of | | | | | | | % of | | | Increase/ | | | | | | | % of | | | | | | | % of | | | Increase/ | | | ($in thousands) | | 2007 | | | Total | | | 2006 | | | Total | | | (Decrease) | | | 2007 | | | Total | | | 2006 | | | Total | | | (Decrease) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial management | | $ | 6,383 | | | | 78 | % | | $ | 7,677 | | | | 74 | % | | | (17 | )% | | $ | 17,753 | | | | 72 | % | | $ | 20,874 | | | | 75 | % | | | (15 | )% | | Courts and justice | | | 915 | | | | 11 | | | | 1,501 | | | | 14 | | | | (39 | ) | | | 3,989 | | | | 16 | | | | 3,679 | | | | 13 | | | | 8 | | | Appraisal and tax and other | | | 898 | | | | 11 | | | | 1,244 | | | | 12 | | | | (28 | ) | | | 2,818 | | | | 12 | | | | 3,264 | | | | 12 | | | | (14 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total software license revenues | | $ | 8,196 | | | | 100 | % | | $ | 10,422 | | | | 100 | % | | | (21 | )% | | $ | 24,560 | | | | 100 | % | | $ | 27,817 | | | | 100 | % | | | (12 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Third Quarter | | | % | | Nine Months | | | % | | | | | | | % of | | | | | % of | | | Increase/ | | | | % of | | | | | % of | | | Increase/ | | | | | 2008 | | Total | | | 2007 | | Total | | | (Decrease) | | 2008 | | Total | | | 2007 | | Total | | | (Decrease) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial management | | | | | | | | | | | | | | | | | | | | | | | | | | | | and education | | $ 6,452 | | 57 | % | | $ 6,111 | | 75 | % | 6 | % | | $ 21,023 | | 66 | % | | $ 16,703 | | 68 | % | 26 | % | | Courts and justice | | 3,914 | | 34 | | | 1,188 | | 15 | | | 229 | | | 7,754 | | 25 | | | 5,039 | | 21 | | | 54 | | | Appraisal and tax and other | | 1,006 | | 9 | | | 846 | | 10 | | | 19 | | | 2,869 | | 9 | | | 2,689 | | 11 | | | 7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total software license revenues | | $ 11,372 | | 100 | % | | $ 8,145 | | 100 | % | 40 | % | | $ 31,646 | | 100 | % | | $ 24,431 | | 100 | % | 30 | % |
In the three months ended September 30, 2008, we signed 16 new material contracts with average software license fees of approximately $215,000 compared to 26 new material contracts signed in the three months ended September 30, 2007 with average software license fees of approximately $319,000. In the nine months ended September 30, 2008, we signed 50 new material contracts with average software license fees of approximately $310,000 compared to 59 new material contracts signed in the nine months ended September 30, 2007 with average software license fees of approximately $447,000. We consider contracts with a license fee component of $100,000 or more to be material. The mix of our new contracts signed in the three months ended September 30, 2008 included more contacts with a license fee component of less than $100,000 compared to the prior year period. Although a contract is signed in a particular quarter, the period in which the revenue is recognized may be different because we recognize revenue according to our revenue recognition policy as described in Note 2 in the Notes to the Unaudited Condensed Financial Statements.
Changes in software license revenues consist of the following components:
· | Software license revenue related to our financial management and education solutions for three and nine months ended September 30, 2008 increased 6% and 26%, respectively, compared to the prior year periods mainly due to contract arrangements that included more software license revenue than in the past. Revenue from student information and management solutions as well as student transportation management solutions acquired in the last twelve months also contributed to increases in the three and nine months ended September 30, 2008. |
| · | Software license revenue related to our courts and justice software solutions for three and nine months ended September 30, 2008 increased 229% and 54%, respectively, compared to the prior year periods. In the three months ended September 30, 2008 we recorded software license revenue of approximately $1.7 million from a contract which had been deferred in accordance with the terms of the contract. In addition, since late 2007 we signed 26 material new contracts with average software license fees of approximately $319,000 compared to 23 material new contracts signedexpanded our presence in the three months ended September 30, 2006 with averagemarkets for municipal courts software license fees of approximately $230,000. Insolutions and public safety software solutions which contributed to the nine months ended September 30, 2007 we signed 59 material new contracts with average software license fees of approximately $447,000 compared to 64 material new contracts signedincrease in the nine months ended September 30, 2006 with average software license fees of approximately $309,000. We consider contracts with a license fee component of $100,000 or more to be material. Although a contract is signed in a particular quarter, the period in which the revenue is recognized may be different because we recognize revenue according to our revenue recognition policy as described in Note 2 in the Unaudited Condensed Consolidated Financial Statements.both periods. |
| | | Changes inSubscriptions. Subscription-based services revenue primarily consists of revenues derived from application service provider (“ASP”) arrangements and other hosted service offerings, software license revenues consistsubscriptions and disaster recovery services. ASP and other software subscriptions agreements are typically for periods of three to six years and automatically renew unless either party cancels the agreement. Disaster recovery and miscellaneous other hosted service agreements are typically renewable annually. New ASP customers and existing customers converting to ASP arrangements provided approximately two-thirds of the following components:subscription revenue increase with the remaining increase due to new disaster recovery customers and slightly higher rates for disaster recovery services. |
Software license revenue related to our financial management solutions for the three and nine months ended September 30, 2007 decreased 17% and 15%, respectively compared to the prior year periods. In the three months ended September 30, 2007, the number of customers choosing our subscription-based options, rather than purchasing the software under a traditional perpetual software license arrangement, represented a relatively small percentage of new customers; however, the size of those contracts was larger than in the prior year period. Subscription-based arrangements result in lower software license revenues in the initial year as compared to traditional perpetual software license arrangement but generate higher overall revenues over the term of the contract. The decline in software license for the nine months ended September 30, 2007 compared to the prior year period was also impacted by a large installation of our MUNIS financial management application in the United States Virgin Islands in the second quarter of 2006 and a product mix in 2007 that required less third party software.
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Software license revenue related to our courts and justice software solutions declined 39% for the three months ended September 30, 2007, and increased 8% for the nine months ended September 30, 2007 compared to the prior year periods. Although the number of active Odyssey contracts has increased by almost 50%, the software license revenue recognition for several of the larger arrangements will be deferred until 2008 in accordance with our revenue recognition policy and terms of the contracts.
| | | Software services. Changes in software services revenues consist of the following components: |
| • | · | Software services revenue related to financial management and education solutions, which comprises more thancomprise approximately half of our software services revenue in the periods presented, increased substantially compared to the three and nine months ended September 30, 2007. This increase was driven in part by larger and more complex contracts, which include more programming and project management services. In addition, we acquired a student transportation management solution in January 2008 which contributed approximately $1.1 million and $3.0 million to software service revenues for the three and nine months ended September 30, 2008, respectively. |
| · | Software services revenue related to courts and justice solutions experienced strong increases compared to the three and nine months ended September 30, 2006. Approximately one-half of these increases were due2007, reflecting increased capacity to new customers for our subscription-based application service provider hosted arrangements and disaster recovery services. While this does not represent a fundamental change in our business model, we provide our solutions to clients under a variety of innovative options that address their specific needs. Government is relatively deliberate in its pace of change, but over time, we expect to generate significant subscription-based revenue. Our current annualized revenue run rate for these subscription services is approximately $8.5 million, and we expect the new subscription contracts signed in the three months ended September 30, 2007, will increase the annualized run rate in future quarters to more than $10.8 million. We have also addeddeliver backlog following additions to our implementation and support staff over the last twelve months, which has enabled us to deliver our backlog at a faster rate. | | | • | | Software services revenue related to our Odyssey courts and justice solutions experienced substantial increases compared to the three and nine months ended September 30, 2006, reflectingfourteen months. In addition, increased contract volume. We had approximately 35 Odyssey contracts in the first nine months of 2007 compared to approximately 20 Odyssey contracts in the first nine months of 2006. | | | • | | Softwarevolume for municipal courts software solutions and public safety software solutions also generated higher related services revenue related to appraisal and tax and other solutions, which comprise approximately 20% of our software services revenue in the periods presented, had strong increases for the three and nine months ended September 30, 2007 compared to the prior year periods. The majority of the increase is related to one large appraisal and tax software implementation, which is expected to be substantially complete by December 31, 2007.revenue. |
| | | Maintenance. We provide maintenance and support services for our software products and third party software. Maintenance revenues increased over28% and 27% for the three and nine months ended September 30, 2008, respectively compared to the prior year periodsperiods. Maintenance and support services grew 17% and 16% for the three and nine months ended September 30, 2008, respectively, excluding the impact of acquisitions completed in the prior twelve months. This increase was due to growth in our installed customer base and slightly higher maintenance rates on most of our solutions.product lines. | |
| | | Appraisal services. Appraisal services are project-orientedrevenue increased 7% for the three months ended September 30, 2008, and aredeclined 14% for the nine months ended September 30, 2008, compared to the prior year periods. The appraisal services business is driven in part by revaluation cycles in various states. In late 2007, we substantially completed several projects related to the Ohio revaluation cycle, which occurs every six years, as well as a few other large contracts. In mid-2008 we began a complete reappraisal of real property in Orleans Parish, Louisiana. This contract is valued at approximately $12.0 million and consists of two separate phases expected to be complete by late 2010. We continue to expect appraisal revenue for the full year 2008 will be moderately lower than 2007. |
Cost of Revenues and Gross Margins
| The following table sets forth a comparison of the key components of our cost of revenues, and those components stated as a percentage of related revenues for the periods presented as of September 30: |
| | | Third Quarter | | | Nine Months | | | | | | | | % of | | | | | | % of | | | | | | % of | | | | | | % of | | | | | | | | Related | | | | | | Related | | | | | | Related | | | | | | Related | | | ($ in thousands) | | 2008 | | | Revenues | | | 2007 | | | Revenues | | | 2008 | | | Revenues | | | 2007 | | | Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Software licenses | | $ | 2,071 | | | | 18 | % | | $ | 1,886 | | | | 23 | % | | $ | 6,838 | | | | 22 | % | | $ | 5,818 | | | | 24 | % | | Acquired software | | | 472 | | | | 4 | | | | 427 | | | | 5 | | | | 1,369 | | | | 4 | | | | 1,248 | | | | 5 | | | Software services, maintenance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | and subscriptions | | | 31,988 | | | | 63 | | | | 26,795 | | | | 66 | | | | 93,555 | | | | 65 | | | | 77,677 | | | | 68 | | | Appraisal services | | | 3,098 | | | | 59 | | | | 3,248 | | | | 66 | | | | 9,269 | | | | 65 | | | | 11,340 | | | | 69 | | | Hardware and other | | | 1,058 | | | | 71 | | | | 946 | | | | 73 | | | | 3,684 | | | | 72 | | | | 3,304 | | | | 75 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total cost of revenue | | $ | 38,687 | | | | 56 | % | | $ | 33,302 | | | | 61 | % | | $ | 114,715 | | | | 59 | % | | $ | 99,387 | | | | 62 | % |
| The following table sets forth a comparison of gross margin percentage by revenue type for the periods presented as of September 30: |
| | | Third Quarter | | | Nine Months | | | Gross Margin percentages | | 2008 | | | 2007 | | | Change | | | 2008 | | | 2007 | | | Change | | | | | | | | | | | | | | | | | | | | | | | Software licenses and acquired software | | | 77.6 | % | | | 71.6 | % | | | 6.0 | % | | | 74.1 | % | | | 71.1 | % | | | 3.0 | % | | Software services, maintenance and subscriptions | | | 36.6 | | | | 33.9 | | | | 2.7 | | | | 35.3 | | | | 31.9 | | | | 3.4 | | | Appraisal services | | | 41.4 | | | | 34.1 | | | | 7.3 | | | | 34.9 | | | | 31.3 | | | | 3.6 | | | Hardware and other | | | 29.3 | | | | 27.1 | | | | 2.2 | | | | 27.5 | | | | 25.2 | | | | 2.3 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Overall gross margin | | | 43.6 | % | | | 39.4 | % | | | 4.2 | % | | | 41.3 | % | | | 37.6 | % | | | 3.7 | % |
| Software licenses. The main component of our cost of software license revenues is amortization expense for capitalized development costs on certain software products, with third party software costs making up the balance. Once a product is released, we begin to amortize the costs associated with its development over the estimated useful life of the product. Amortization expense is determined on a product-by-product basis at an annual rate not less than straight-line basis over the product’s estimated life, which is generally five years. Development costs consist mainly of personnel costs, such as salary and benefits paid to our developers, and rent for related office space. |
| For the three and nine months ended September 30, 2008, our software license gross margin percentage rose compared to the prior year periods due to strong license fee revenue increases. In addition, the three months ended September 30, 2008 benefitted from slightly lower software development amortization because certain software products became fully amortized during that period. The year-to-date gross margin grew at a slower rate because the first quarter product mix included more third party software, which has higher associated costs than proprietary software. |
| Software services, maintenance and subscription-based services. Cost of software services, maintenance and subscriptions primarily consists of personnel costs related to installation of our software, conversion of customer data, training customer personnel and support activities and various other services such as ASP and disaster recovery. For the three and nine months ended September 30, 2008, the software services, maintenance and subscriptions gross margin increased 2.7% and 3.4%, respectively from the prior year periods partly because maintenance and various other services such as ASP and disaster recovery costs typically grow at a slower rate than related revenues due to leverage in the utilization of our support and maintenance staff and economies of scale. We have increased our implementation and support staff by 225 full-time equivalent employees since September 30, 2007 in order to expand our capacity to implement our contract backlog. This increase includes 102 full-time equivalent employees related to acquisitions completed since September 30, 2007. |
| In addition, approximately 0.6% of the gross margin increase for the nine months ended September 30, 2008 reflects the impact of revenue which had been deferred pending final acceptance on a certain contract. There were no related costs associated with this revenue in 2008. |
| Appraisal services. A high proportion of the costs of appraisal services revenue are variable, as we often hire temporary employees to assist in appraisal projects whose term of employment generally ends with the projects’ completion. Our appraisal gross margin for the three months ended September 30, 2007 was flat compared to2008 is higher than the prior year period and 12%due to higher revenues associated with the Orleans Parish reappraisal project. |
| Our blended gross margin for the three and nine months ended September 30, 2007 compared to2008 was higher than the prior year period. The year-to-date increase wasperiods in part due to activity related to Ohio’s revaluation cycle, which occurs every six years, and a $4.0 million contract with Fulton County, Georgia, which began late in 2006. The Ohio revaluation projects began with smaller counties lateleverage in the first quarterutilization of 2006our support and expanded to larger counties bymaintenance staff and economies of scale. The blended gross margin for the third quarter of 2006. A substantial portion of the Ohio revaluation projects was complete bythree months ended September 30, 2007. The level of2008 also benefitted from a product mix that included more software license revenue, which inherently has higher gross margins, and less appraisal services revenues for 2008 will depend on our ability to replace the appraisal services revenues associated with the Ohio revaluation.revenue. |
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Cost of Revenues and Gross Margins
The following table sets forth a comparison of the key components of our cost of revenues, and those components stated as a percentage of related revenues for the periods presented as of September 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Third Quarter | | | Nine Months | | | | | | | | | % of | | | | | | | % of | | | | | | | % of | | | | | | | % of | | | | | | | | | Related | | | | | | | Related | | | | | | | Related | | | | | | | Related | | | ($ in thousands) | | 2007 | | | Revenues | | | 2006 | | | Revenues | | | 2007 | | | Revenues | | | 2006 | | | Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Software licenses | | $ | 1,888 | | | | 23 | % | | $ | 2,500 | | | | 24 | % | | $ | 5,823 | | | | 24 | % | | $ | 7,592 | | | | 27 | % | | Acquired software | | | 427 | | | | 5 | | | | 353 | | | | 3 | | | | 1,248 | | | | 5 | | | | 1,007 | | | | 4 | | | Software services and maintenance | | | 26,737 | | | | 66 | | | | 22,647 | | | | 68 | | | | 77,505 | | | | 68 | | | | 67,341 | | | | 69 | | | Appraisal services | | | 3,248 | | | | 66 | | | | 3,386 | | | | 69 | | | | 11,340 | | | | 69 | | | | 10,246 | | | | 70 | | | Hardware and other | | | 1,002 | | | | 72 | | | | 1,096 | | | | 75 | | | | 3,471 | | | | 74 | | | | 3,397 | | | | 72 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total cost of revenue | | $ | 33,302 | | | | 61 | % | | $ | 29,982 | | | | 60 | % | | $ | 99,387 | | | | 62 | % | | $ | 89,583 | | | | 62 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table sets forth a comparison of gross margin percentage by revenue type for the periods presented as of September 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Third Quarter | | | Nine Months | | | Gross Margin percentages | | 2007 | | | 2006 | | | Change | | | 2007 | | | 2006 | | | Change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Software licenses & acquired software | | | 71.8 | % | | | 72.6 | % | | | (0.8 | )% | | | 71.2 | % | | | 69.1 | % | | | 2.1 | % | | Software services and maintenance | | | 33.8 | | | | 32.1 | | | | 1.7 | | | | 31.8 | | | | 30.5 | | | | 1.3 | | | Appraisal services | | | 34.1 | | | | 31.2 | | | | 2.9 | | | | 31.3 | | | | 30.4 | | | | 0.9 | | | Hardware and other | | | 28.5 | | | | 24.6 | | | | 3.9 | | | | 26.3 | | | | 27.8 | | | | (1.5 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Overall gross margin | | | 39.4 | % | | | 40.2 | % | | | (0.8 | )% | | | 37.6 | % | | | 37.9 | % | | | (0.3 | )% |
Software license revenues. The main component of our cost of software license revenues is amortization expense for capitalized development costs on certain software products, with third party software costs making up the balance. Once a product is released, we begin to amortize, over the estimated useful life of the product, the costs associated with its development. Amortization expense is determined on a product-by-product basis at an annual rate not less than straight-line basis over the product’s estimated life, which is generally five years. Development costs consist mainly of personnel costs, such as salary and benefits paid to our developers, and rent for related office space.
For the nine months ended September 30, 2007, our software license gross margin percentage increased slightly compared to the prior year period due to lower amortization expense of software development costs because some products became fully amortized during the first quarter of 2006. Additionally our product mix in the first nine months of 2007 included less third party software, which has higher associated costs than proprietary software.
Software services and maintenance revenues. Cost of software services and maintenance primarily consists of personnel costs related to installation of our software, conversion of customer data, training customer personnel and support activities. For the three months and nine months ended September 30, 2007, the software services and maintenance gross margin percentage was slightly higher than the comparable prior year periods because maintenance costs typically grow at a slower rate than related revenues due to leverage in the utilization of our support and maintenance staff and economies of scale. We have increased our implementation and support staff by 163 full-time equivalent employees since September 30, 2006. This increase includes 73 additional employees related to acquisitions completed in the first nine months of 2007. The remaining additions were to increase our capacity to train and deliver our contract backlog, particularly for our Odyssey courts and justice solutions.
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Appraisal services. Higher revenues associated with increased activity on the Ohio revaluation projects contributed to the slight appraisal services gross margin percentage increase.
Our blended gross margin for the three months ended September 30, 2007 declined .8% compared to the prior year period due to a revenue mix that included less software license. Software license revenue inherently has higher gross margins than other revenues such as professional services and hardware. Although the revenue mix for the nine months ended September 30, 2007 also included less software license than the prior year period, the negative impact on the gross margin was offset by lower amortization expense of software development costs as well as lower third party software costs described above.
Selling,Selling, General and Administrative Expenses
The following table sets forth a comparison of our selling, general and administrative expenses (SG&A) for the periods presented as of September 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Third Quarter | | Change | | Nine Months | | Change | | ($ in thousands) | | 2007 | | 2006 | | $ | | % | | 2007 | | 2006 | | $ | | % | | Selling, general and administrative expenses | | $ | 12,691 | | | $ | 12,421 | | | $ | 270 | | | | 2 | % | | $ | 38,448 | | | $ | 35,578 | | | $ | 2,870 | | | | 8 | % | | Percent of revenues | | | 23.1 | % | | | 24.8 | % | | | | | | | | | | | 24.1 | % | | | 24.7 | % | | | | | | | | |
| The following table sets forth a comparison of our selling, general and administrative (“SG&A”) expenses for the periods presented as of September 30: |
For the three months ended September 30, 2007, SG&A costs grew at a slower rate than revenues due to leverage in the utilization of our administrative and sales staff.
| | | Third Quarter | | | Change | | | Nine Months | | | Change | | | ($ in thousands) | | 2008 | | | 2007 | | | $ | | | | % | | | 2008 | | | 2007 | | | $ | | | | % | | | Selling, general and | | | | | | | | | | | | | | | | | | | | | | | | | | | | administrative expenses | | $ | 15,985 | | | $ | 12,691 | | | $ | 3,294 | | | | 26 | % | | $ | 46,155 | | | $ | 38,448 | | | $ | 7,707 | | | | 20 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percent of revenues | | | 23.3 | % | | | 23.1 | % | | | | | | | | | | | 23.6 | % | | | 24.1 | % | | | | | | | | |
| SG&A as a percentage of revenues for the three and nine months ended September 30, 2008 grew at a slower rate than the prior year periods due to significantly higher revenues and leverage in the utilization of our administrative and sales staff. Excluding the impact of acquisitions, our full-time equivalent SG&A employee count declined 2% from September 30, 2007. |
Research and Development Expense
| The following table sets forth a comparison of our research and development expense for the periods presented as of September 30: |
| | | Third Quarter | | | Change | | | Nine Months | | | Change | | | ($ in thousands) | | 2008 | | | 2007 | | | $ | | | | % | | | 2008 | | | 2007 | | | $ | | | | % | | | Research and | | | | | | | | | | | | | | | | | | | | | | | | | | | | development expense | | $ | 1,416 | | | $ | 639 | | | $ | 777 | | | | 122 | % | | $ | 5,485 | | | $ | 3,266 | | | $ | 2,219 | | | | 68 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percent of revenues | | | 2.1 | % | | | 1.2 | % | | | | | | | | | | | 2.8 | % | | | 2.0 | % | | | | | | | | |
Research and development expense for the periods presented asconsist mainly of September 30: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Third Quarter | | Change | | Nine Months | | Change | | ($ in thousands) | | 2007 | | 2006 | | $ | | % | | 2007 | | 2006 | | $ | | % | | Research and development expense | | $ | 639 | | | $ | 780 | | | | ($141 | ) | | | (18 | )% | | $ | 3,266 | | | $ | 2,494 | | | $ | 772 | | | | 31 | % | | Percent of revenues | | | 1.2 | % | | | 1.6 | % | | | | | | | | | | | 2.0 | % | | | 1.7 | % | | | | | | | | |
For the three and nine months ended September 30, 2007, research and development expense included costs associated with the Microsoft Dynamics AX project, in addition to costs associated with other new product development efforts. In January 2007, we entered into a strategic alliance with Microsoft Corporation (“Microsoft”) to jointly develop core public sector functionality for Microsoft Dynamics AX to address the accounting needs of public sector organizations worldwide. In September 2007, we amendedResearch and development costs increased over the agreement with Microsoft. Underprior year periods because the amended agreement, Microsoft will assist in funding our Microsoft Dynamics AX development costs in exchange for intellectual property rights for use outside the public sector. We are accounting for this funding from Microsoft as a funded development activity.effort was not fully staffed until mid-2007. In the threenine months ended September 30, 2008 and 2007, we reducedoffset our research and development expense by $880,000,$987,000 and $883,000, respectively, which waswere the amountamounts earned under the terms of the contractour research and development agreement with Microsoft. We anticipate these costsamended this agreement in September 2008 to define the scope of reimbursable development through the balance of the project and associated reimbursements from Microsoft will continue into 2009; however,now expect to offset research and development expense by approximately $850,000 each quarter through the end of 2010. The actual amount and timing of thosefuture research and development costs and related reimbursements from Microsoft and whether they are capitalized or expensed may vary.
Amortization
Non-Cash Legal Settlement Related to Warrants
On June 27, 2008, we settled outstanding litigation related to two Stock Purchase Warrants (the “Warrants”) owned by Bank of CustomerAmerica, N. A. (“BANA”). As disclosed in prior SEC filings, the Warrants entitled BANA to acquire 1.6 million shares of Tyler common stock at an exercise price of $2.50 per share. Following court-ordered mediation, in July 2008, BANA paid us $2.0 million and Trade Name Intangibles Acquisition intangibles are comprisedwe issued to BANA 801,883 restricted shares of the excessTyler common stock. Accordingly, we recorded a non-cash legal settlement related to warrants charge of the purchase price over the fair value of net tangible assets acquired that is allocated to acquired software and customer and trade name intangibles. The remaining excess purchase price is allocated to goodwill that$9.0 million, which is not subject to amortization. Amortization expense related to acquired software is included with cost of revenues
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while amortization expense of customer and trade name intangibles is recorded as a non-operating expense. The following table sets forth a comparison of amortization of customer and trade name intangibles for the periods presented as of September 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Third Quarter | | Change | | Nine Months | | Change | | ($ in thousands) | | 2007 | | 2006 | | $ | | % | | 2007 | | 2006 | | $ | | % | | Amortization of customer and trade name intangibles | | $ | 372 | | | $ | 326 | | | $ | 46 | | | | 14 | % | | $ | 1,075 | | | $ | 973 | | | $ | 102 | | | | 10 | % |
In the first nine months of 2007, we completed three acquisitions, which increased amortizable customer intangibles by $3.3 million. This amount will be amortized over a weighted average period of approximately 6 years.
Income Tax Provision
The following table sets forth comparison of our income tax provision for the periods presented as of September 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Third Quarter | | Change | | Nine Months | | Change | | ($ in thousands) | | 2007 | | 2006 | | $ | | % | | 2007 | | 2006 | | $ | | % | | Income tax provision | | $ | 3,209 | | | $ | 2,523 | | | $ | 686 | | | | 27 | % | | $ | 7,141 | | | $ | 5,938 | | | $ | 1,203 | | | | 20 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Effective income tax rate | | | 38.3 | % | | | 36.4 | % | | | | | | | | | | | 38.7 | % | | | 36.8 | % | | | | | | | | |
The effective income tax rates for the three and nine months ended September 30, 2007 and 2006 were different from the statutory United States federal income tax rate of 35% primarily due to state income taxes, non-deductible share-based compensation expense, the qualified manufacturing activities deduction, and non-deductible meals and entertainment costs.
The effective tax rate fordeductible, during the three months ended SeptemberJune 30, 2006 included the benefit from previously unclaimed tax credits resulting from the completion of state income tax audits. The effective tax rate for the nine months ended September 30, 2006 also included the benefit of changes in the Texas franchise tax law and related rates enacted in the second quarter of 2006.2008.
| Amortization of Customer and Trade Name Intangibles |
| Acquisition intangibles are composed of the excess of the purchase price over the fair value of net tangible assets acquired that is allocated to acquired software and customer and trade name intangibles. The remaining excess purchase price is allocated to goodwill that is not subject to amortization. Amortization expense related to acquired software is included with cost of revenues while amortization expense of customer and trade name intangibles is recorded as a non-operating expense. The following table sets forth a comparison of amortization of customer and trade name intangibles for the periods presented as of September 30: |
| | | Third Quarter | | | Change | | | Nine Months | | | Change | | | ($ in thousands) | | 2008 | | | 2007 | | | $ | | | | % | | | 2008 | | | 2007 | | | $ | | | | % | | | Amortization of customer | | | | | | | | | | | | | | | | | | | | | | | | | | | | and trade name intangibles | | $ | 612 | | | $ | 372 | | | $ | 240 | | | | 65 | % | | $ | 1,770 | | | $ | 1,075 | | | $ | 695 | | | | 65 | % |
| In the nine months ended September 30, 2008, we completed three acquisitions, which increased amortizable customer and trade name intangibles by $12.3 million. This amount will be amortized over approximately 11 years. |
| The following table sets forth comparison of our income tax provision for the periods presented as of September 30: |
| | | Third Quarter | | | Change | | | Nine Months | | | Change | | | ($ in thousands) | | 2008 | | | 2007 | | | $ | | | | % | | | 2008 | | | 2007 | | | $ | | | | % | | | Income tax provision | | $ | 5,976 | | | $ | 3,209 | | | $ | 2,767 | | | | 86 | % | | $ | 9,700 | | | $ | 7,141 | | | $ | 2,559 | | | | 36 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Effective income tax rate | | | 48.4 | % | | | 38.3 | % | | | | | | | | | | | 49.9 | % | | | 38.7 | % | | | | | | | | |
| Our effective income tax rate increased approximately twelve points compared to the prior year periods due to a non-cash legal settlement related to warrants charge of $9.0 million, which was not deductible. The effective income tax rates for the three and nine months ended September 30, 2008 and 2007 were different from the statutory United States federal income tax rate of 35% primarily due to a non-cash legal settlement related to warrants charge which was not deductible, as well as state income taxes, non-deductible share-based compensation expense, the qualified manufacturing activities deduction, and non-deductible meals and entertainment costs. |
FINANCIAL CONDITION AND LIQUIDITY
As of September 30, 2007,2008, we had cash and cash equivalents (including restricted cash equivalents) of $20.3$28.9 million and short-termcurrent and non-current investments of $28.4$5.4 million, compared to cash and cash equivalents (including restricted cash equivalents) of $22.2$14.1 million and short-term investments of $19.5$41.6 million at December 31, 2006.2007. As of September 30, 20072008 we had outstanding letters of credit totaling $4.5$5.1 million to secure surety bonds required by some of our customer contracts. These letters of credit expire through mid-2008.July 2009.
The following table sets forth a summary of cash flows for the periods presented as of September 30: | | | | | | | | | | | Nine Months Ended September 30, | | 2007 | | | 2006 | | | | | | | | | | | | | Cash flows provided by (used by): | | | | | | | | | | Operating activities | | $ | 24,538 | | | $ | 22,687 | | | Investing activities | | | (20,035 | ) | | | (16,009 | ) | | Financing activities | | | (5,892 | ) | | | (6,359 | ) | | | | | | | | | | | | Net (decrease) increase in cash and cash equivalents | | $ | (1,389 | ) | | $ | 319 | | | | | | | | | |
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| Nine months ended September 30, | | 2008 | | | 2007 | | | | | | | | | | | Cash flows provided by (used by): | | | | | | | | Operating activities | | $ | 45,399 | | | $ | 24,538 | | | Investing activities | | | (7,348 | ) | | | (20,035 | ) | | Financing activities | | | (23,914 | ) | | | (5,892 | ) | | | | | | | | | | | | Net increase (decrease) in cash and cash equivalents | | $ | 14,137 | | | $ | (1,389 | ) |
Net cash provided by operating activities continues to be our primary source of funds to finance operating needs and capital expenditures. Other capital resources include cash on hand and access to the capital markets. For the nine months ended September 30, 2007,2008, operating activities provided net cash of $24.5$45.4 million, primarily generated from net income of $11.3$9.7 million, non-cash legal settlement related to warrants charge of $9.0 million, non-cash depreciation and amortization charges of $7.8$9.0 million, and non-cash share-based compensation expense of $1.7$2.7 million, and a net decrease in net operating assets of $14.9 million. Net operating assets declined mainly due to several advance payments from customers.
As of September 30, 2008, we had $5.7 million of principal invested in ARS that had experienced failed auctions. Of this amount, we were able to liquidate $500,000 for cash at par during the period October 1, 2008 through October 17, 2008. The liquidity of ARS has been negatively impacted by the uncertainty in the credit markets and liabilitiesthe exposure of $3.7 million. The operating asset decline mainly relatesthese securities to the timingfinancial condition of collectionbond insurance companies. We will not be able to liquidate any of annual maintenance renewals thatour non-current ARS until a future auction is successful, the issuer calls the security, a buyer is found outside the auction process or the securities are billed nearredeemed. Based on our cash and cash equivalents at September 30, 2008 and our expected operating cash flows, we do not anticipate the endcurrent lack of June.liquidity of these investments will have a material effect on our ability to conduct business.
Our days sales outstanding (“DSO”) was 9387 days at September 30, 20072008 and 10295 days at December 31, 2006. DSO2007. DSOs decreased compared to the fourth quarter of 20062007 because of annual maintenance billing collections. Our maintenance billings typically peak in December and June of each year and are followed by collections in the subsequent quarter. DSO is calculated based on totalquarter-end accounts receivable divided by the quotient of annualized quarterly revenues divided by 360 days. For
Investing activities used cash of $7.3 million in the nine months ending September 30, 2008 compared to $20.0 million cash used for the same period in 2007. In the nine months ended September 30, 2006 operating activities provided net2008, we liquidated $35.9 million of short-term investments in ARS for cash at par, and we completed the acquisitions of $22.7School Information Systems, Inc, VersaTrans Solutions Inc. and certain assets of Olympia Computing Company, Inc. d/b/a Schoolmaster that expanded our presence in the education market. The combined purchase price, excluding cash acquired and including transaction costs, was approximately $23.9 million in cash and approximately 196,000 shares of Tyler common stock valued at $2.9 million. We also paid $2.5 million primarily for land in Lubbock, Texas in connection with a planned office development and paid $12.7 million for an office building, land, and a related tenant lease in Yarmouth, Maine. Capital expenditures and acquisitions were funded from cash generated from net income of $10.2 million, non-cash depreciation and amortization charges of $7.6 million, and non-cash share-based compensation expense of $1.5 million, and by a net decline in operating assets and liabilities of $3.1 million. The net decrease in operating assets and liabilities is attributable to timing of cash receipts related to annual maintenance billings.operations.
For the nine months ended September 30, 2007, net cash used by investing activities of $20.0 million includesincluded cash payments of $9.0 million for the acquisitions of EDP Enterprises, Inc., and Advanced Data Systems, Inc. and certain software assets to enhance our courts and justice product line. In addition,, along with an office building. Other investing activities includes $8.8 million, net of sales, to purchase short-term investments and $2.6 million in property and equipment. The property and equipment increase was due to expenditures related to computer hardware and software and other asset additions to support internal growth. For the nine months ended September 30, 2006 net cash used by investing activities of $16.0 million includes cash payments of $12.2 million for two acquisitions, MazikUSA Inc. and TACS, Inc. In addition, we spent $3.3 million for property and equipment related to computer hardware and software, including a new enterprise-wide customer relationship management system, and other asset additions to support internal growth.
For the nine months ended September 30, 2007 were primarily comprised of a net investment of $8.8 million in short term investments and 2006, netinvestments of $2.6 million in property and equipment.
Financing activities used cash of $23.9 million, in the nine months ending September 30, 2008 compared to $5.9 million in the same period for 2007. Cash used in financing activities was $5.9 million and $6.4 million, respectively, and was attributable toprimarily comprised of purchases of treasury shares, net of proceeds from stock option exercises and employee stock purchase plan activity. During the nine months ended September 30, 2007,2008, we purchased 889,0002.2 million shares of our common stock for an aggregate purchase price of $11.1$31.3 million. At September 30, 2008, we had authorization to repurchase up to 1.6 million additional shares of Tyler common stock. A summary of the repurchase activity during the nine months ended September 30, 20072008 is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Maximum number of | | | | | | | | | Additional number | | | | | | | shares that may be | | | | | | | | | of shares | | | | | | | repurchased under | | | | | Total number of | | | authorized that may | | | Average price paid | | | current | | | Period | | shares repurchased | | | be repurchased | | | per share | | | authorization | | | January 1 through January 31 | | | 131 | | | | — | | | $ | 13.92 | | | | 900 | | | February 1 through February 28 | | | 92 | | | | — | | | | 13.63 | | | | 808 | | | March 1 through March 31 | | | 67 | | | | — | | | | 13.05 | | | | 741 | | | April 1 through April 30 | | | 60 | | | | — | | | | 12.01 | | | | 681 | | | Additional authorization by the board of directors | | | — | | | | 2,000 | | | | — | | | | 2,681 | | | May 1 through May 31 | | | 539 | | | | — | | | | 11.99 | | | | 2,142 | | | June 1 through June 30 | | | — | | | | — | | | | — | | | | 2,142 | | | July 1 through July 31 | | | — | | | | — | | | | — | | | | 2,142 | | | August 1 through August 31 | | | — | | | | — | | | | — | | | | 2,142 | | | September 1 through September 30 | | | — | | | | — | | | | — | | | | 2,142 | | | | | | | | | | | | | | | | | | Total nine months ended September 30, 2007 | | | 889 | | | | 2,000 | | | $ | 12.52 | | | | | | | | | | | | | | | | | | | | |
| Period | | | Total number of shares repurchased | | | | Additional number of shares authorized that may be repurchased | | | | Average price paid per share | | | | Maximum number of shares that may be repurchased under current authorization | | | January 1 through January 31 | | | 814 | | | | - | | | $ | 12.92 | | | | 967 | | | February 1 through February 29 | | | - | | | | - | | | | - | | | | 967 | | | March 1 through March 31 | | | - | | | | - | | | | - | | | | 967 | | | April 1 through April 30 | | | - | | | | - | | | | - | | | | 967 | | | Additional authorization by the board of directors | | | - | | | | 2,000 | | | | - | | | | 2,967 | | | May 1 through May 31 | | | - | | | | - | | | | - | | | | 2,967 | | | June 1 through June 30 | | | 283 | | | | - | | | | 13.80 | | | | 2,684 | | | July 1 through July 31 | | | 163 | | | | - | | | | 14.08 | | | | 2,521 | | | August 1 through August 31 | | | 15 | | | | - | | | | 15.41 | | | | 2,506 | | | September 1 through September 30 | | | 919 | | | | - | | | | 15.64 | | | | 1,587 | | | Total nine months ended September 30, 2008 | | | 2,194 | | | | 2,000 | | | $ | 14.28 | | | | | |
During the period October 1, 2008 through October 20, 2008 we purchased 1.5 million shares of our common stock for an aggregate purchase price of $20.6 million.
The repurchase program, which was approved by our board of directors, was announced in October 2002, and was amended in 17
April and July 2003, October 2004, October 2005, May 2007 and May 2007.2008. On May 17, 2007,October 23, 2008, our board of directors authorized the repurchase of an additional 2.0 million shares of our common stock. As of September 30, 2007 we had remaining authorization to repurchase up to 2.1 million additional shares of our common stock.shares. There is no expiration date specified for the authorization and we intend to repurchase stock under the plan from time to time in the future.
During the second quarter of 2008, we began construction of an office development located in Lubbock, Texas to consolidate our Lubbock based workforce and support planned long-term growth. The office development is scheduled for completion in early 2010 and expected to cost approximately $12.0 million to $13.0 million. As of September 30, 2008, we have paid $2.5 million, primarily for land. We expect to capitalize additional costs of approximately $1.0 million in 2008, related to the construction of this facility.
In July 2008 we paid $12.7 million for an office building and land in Yarmouth, Maine as part of a plan to consolidate our workforce in the Portland, Maine area and to support long-term growth. This building will be leased to third-party tenants through July 2011, at which time we expect to begin occupying the facility.
We also expect to purchase for approximately $10.0 million an office building in Falmouth, Maine that we currently lease from a related party. The building purchase is expected to close in the three months ended December 31, 2008.
None of these real estate investments are expected to preclude us from taking advantage of other opportunities to invest our cash in growing our business, and it is possible that we will leverage these assets in the future.
On October 20, 2008, we entered into a new revolving bank credit agreement (the “Credit Facility”) and a related pledge and security agreement. The Credit Facility matures October 19, 2009 and provides for total borrowings of up to $25.0 million and a $6.0 million Letter of Credit facility under which the bank will issue cash collateralized letters of credit. Borrowings under the Credit Facility will bear interest at a rate of either LIBOR plus 1% or prime rate minus 1.5%. As of October 20, 2008, our effective interest rate was 3% under the Credit Facility. As of September 30, 2008 we had no debt and outstanding letters of credit totaling $5.1 million under a previous agreement to secure surety bonds required by some of our customer contracts. As of October 24, 2008 we had no outstanding borrowings under the Credit Facility.
We made federal and state income tax payments, net of refunds of $6.9$10.1 million in the nine months ended September 30, 20072008 compared to $7.9$6.9 million in the comparable prior year. From time to time we engage in discussions with potential acquisition candidates. In order to consummate any such opportunities, which could require significant commitments of capital, we may be required to incur debt or to issue additional potentially dilutive securities in the future. No assurance can be given as to our future acquisitions and how such acquisitions may be financed. In the absence of future acquisitions, we believe our current cash balances and expected future cash flows from operations will be sufficient to meet our anticipated cash needs for working capital, capital expenditures and other activities through the next twelve months. If operating cash flows are not sufficient to meet our needs, we believe thatmay borrow under our revolving credit would be available to us.facility.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may affect us due to adverse changes in financial market prices and interest rates. AsWe are exposed to risk related to our investments in ARS. Liquidity for ARS is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals, usually every 28 to 35 days. Because of September 30, 2007,the short interest rate reset period, we had funds investedhave historically recorded ARS as short-term investments available-for-sale. The liquidity of ARS has been negatively impacted by the uncertainty in auction rate municipal securitiesthe credit markets and state and municipal bonds, which were accounted for in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” These investments were treated as available-for-sale under SFAS No. 115. The carrying valuethe exposure of these investments approximates fair market value. Duesecurities to the naturefinancial condition of bond insurance companies. We will not be able to liquidate any of our non-current ARS until a future auction is successful, the issuer calls the security, a buyer is found outside the auction process or the securities are redeemed. Moreover, if the issuers are unable to successfully close future auctions and their credit ratings deteriorate, we may in the future be required to record an impairment charge on these investments. Maturity dates for these ARS investments we are not subjectrange from 2017 to significant market rate risk.2042.
We have no outstanding debt at September 30, 2007,2008, and are therefore not subject to any interest rate risk. ITEM 4. Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the Securities and Exchange Commission (“SEC”), and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this report conducted by our management, with the participation of the Chief Executive Officer and the Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer believe that these controls and procedures are effective to ensure that we are able to collect, process and disclose the information we are required to disclose in the reports we file with the SECSecurities and Exchange Commission within the required time periods.
Part II. OTHER INFORMATION ITEM 1. Legal Proceedings As of June 30, 2007, we had warrants outstanding to purchase 1.6 million shares of common stock at $2.50 per share, which were held by Bank of America, N. A. (“BOA”) pursuant to the terms of two Amended and Restated Stock Purchase Warrants (collectively, the “Warrants”). The exercise price could be paid either in cash or by a “cashless exercise” in which the holder was required to surrender the Warrants in exchange for warrant shares based on the following formula: [(Market Price — $2.50) / (Market Price)] x 1. 6 million shares, with the Market Price calculated as the immediately preceding 60-day trading average of our common stock. The Warrants identified specific exercise procedures for each method of exercise and further provided that any exercise would not be effective until we received all applicable documents, instruments, and the purchase price. The Warrants were originally issued on September 10, 1997 and were exercisable from that date until 5:00 p.m., Central Time, on September 10, 2007, when they expired.
On September 10, 2007, at 4:44 p.m., BOA attempted to effectuate a “cashless exercise” of the Warrants via email; however, we believe BOA did not comply with all of the requirements set forth in the Warrants for an effective exercise. At 5:37 p.m., Central Time, BOA recalled this email exercise notice, which we subsequently accepted. At 6:10 p.m., Central Time, BOA attempted to effectuate a cash exercise of the Warrants by emailing a different notice of exercise, which we believe also failed to comply with all of the requirements set forth in the Warrants for an effective exercise, and in any event, was after the expiration date of the Warrants. As a result, we believe these Warrants expired as of September 10, 2007 and have excluded the effect of the Warrants from potentially dilutive common shares as of such date in our earnings per share computation.
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On October 12, 2007, we filed a declaratory judgment action against BOA in the District Court of Dallas County, Texas, 101st Judicial District requesting the court to declare, among other things, that the Warrants have expired pursuant to their terms. As of the date of this Form 10-Q, BOA has not filed a response to the litigation. While we believe the Warrants expired as of September 10, 2007, there can be no assurance as to the ultimate resolution of this matter.
Other than ordinary course, routine litigation incidental to our business, there are no material legal proceedings pending to which we are party or to which any of our properties are subject. ITEM 1A. Risk Factors No
In addition to the other information set forth in this report, one should carefully consider the discussion of various risks and uncertainties contained in Part I, “Item 1A. Risk Factors” in our 2007 Annual Report on Form 10-K. We believe those risk factors are the most relevant to our business and could cause our results to differ materially from the forward-looking statements made by us. Please note, however, that those are not the only risk factors facing us. Additional risks that we do not consider material, changes.or of which we are not currently aware, may also have an adverse impact on us. Our business, financial condition and results of operations could be seriously harmed if any of these risks or uncertainties actually occurs or materializes. In that event, the market price for our common stock could decline, and our shareholders may lose all or part of their investment. During the first nine months of 2008, there were no material changes in the information regarding risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2007. ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None ITEM 3. Defaults Upon Senior Securities
None ITEM 4. Submission of Matters to a Vote of Security Holders
None ITEM 5. Other Information
None ITEM 6. Exhibits
| Exhibit 4.1 | Second Amended and Restated Credit Agreement by and between Tyler Technologies, Inc. and Bank of Texas, N.A. dated October 20, 2008 | | | | | | Exhibit 4.2 | Second Amended and Restated Pledge and Security Agreement by and between Tyler Technologies, Inc. and Bank of Texas, N.A. dated October 20, 2008 | | | | | Exhibit 31.1 | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | Exhibit 31.2 | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | Exhibit 32.1 | | Certifications Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | TYLER TECHNOLOGIES, INC. | | | | | | | | | TYLER TECHNOLOGIES, INC.
By: | | | By: | /s/ Brian K. Miller | | | | | Brian K. Miller | | | | | SeniorExecutive Vice President and Chief Financial Officer (principal financial officer and an authorized signatory) | | | | | | |
Date: October 23, 2008
22 2007 20
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