SecProbe.io

CORRESP
1
filename1.htm

corresp

September 2, 2005

VIA EDGAR AND OVERNIGHT DELIVERY

Securities and Exchange Commission

Division of Corporation Finance

450 Fifth Street, N.W.

Washington, DC 20549

    Attention:

    Mr. Craig Wilson

Senior Assistant Chief Accountant

         Re:

    Tyler Technologies, Inc. (the “Company”)

Form 10-K for the Year Ended December 31, 2004

Filed March 10, 2005

Form 10-Q for the Quarter Ended June 30, 2005

Filed July 28, 2005

Form 8-K

Filed July 28, 2005

File No. 1-10485

Dear Mr. Wilson:

This letter is provided in response to the Staff’s comment letter dated August 16, 2005 addressed
to Mr. John S. Marr, Jr., President and Chief Executive Officer of Tyler Technologies, Inc. (the
“Company”). We have restated the Staff’s comments and the Company’s response follows each comment.

Form 10-K for the Year Ended December 31, 2004

Item 6. Selected Financial Data

    1.

    We note that you present a non-GAAP measure (i.e. EBITDA) under this item. Please note that
the “Other Data” information should be presented after your “Balance Sheet Data” information
to avoid giving that disclosure prominence over GAAP information. Additionally tell us how
you have considered the requirement of Item 10(e)(i)(C) of
Regulation S-K in disclosing the
reasons why you believe that presentation of such non-GAAP financial measure provides useful
information to investors regarding your financial condition and results of operations.

Securities and Exchange Commission

September 2, 2005

Page 2

Company response:

We will exclude the use of EBITDA in future Form 10-K filings and other periodic reports.

We will continue to include EBITDA as a non-GAAP financial measure in our quarterly
earnings press releases with the appropriate reconciliations and explanations. In such
presentations, we will include an expanded explanation of the reasons why we believe the
presentation of this non-GAAP financial measure provides useful information to users of our
financial statements. We believe that EBITDA is widely used by investors, analysts, and
other users of our financial statements to analyze our operating performance and to compare
our results to those of other companies. In addition, we internally monitor and review
EBITDA on a consolidated basis as one of the metrics management uses to evaluate Company
performance.

Item 7, MD&A and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies and Estimates, page 16

    2.

    We note that your capitalized software development costs represent approximately 12% of your
total 2004 assets. Please explain to us how you have considered SEC Release No. 33-8350
Section V in determining whether you have made any accounting estimates or assumptions related
to your software capitalization policy where:

    •

    The nature of the estimates or assumptions is material due to the levels of
subjectivity and judgment necessary to account for highly uncertain matters or the
susceptibility of such matters to change; and

    •

    The impact of the estimates and assumptions on financial condition or operating
performance is material.

Company response:

We did consider SEC Release No. 33-8350 Section V in developing our disclosures
regarding this critical accounting policy and its potential impact on our accounting policy
regarding software capitalization. Our software development cost includes both acquisition
related software and internally developed software to be sold. We believe our current disclosures
regarding the accounting estimates or assumptions related to our software capitalization
policy as provided on pages 16 and 17 are adequate because of the following:

    •

    Acquisition related intangibles, such as software, are valued with the
assistance of a nationally recognized outside appraisal firm.

Securities and Exchange Commission

September 2, 2005

Page 3

    •

    Establishment of technological feasibility is not highly subjective or
judgmental because we develop software to be sold by frequently leveraging our
existing software platforms or existing products. Many of our legacy products
have been in the market for 20 years or more and we generally do not commence
software development efforts without first determining that there is clear demand
for the product in the market.

    •

    Products developed to be sold are not considered to be completed until all
major business processes required of the product have been successfully deployed
in a “production environment” at a customer site. In addition, approval of
divisional management is necessary to confirm product development is completed,
and is subject to review by corporate management, including our chief technology
officer. Accordingly, we do not believe that determining when capitalization of
software costs ends is highly subjective or judgmental.

    •

    Our software products historically have long lives; therefore, the maximum life
of five years for newly introduced products is not considered high risk.

    •

    All of our customers are governmental agencies that have a history of retaining
our software products for long periods of time, which also supports a maximum
five-year product life.

    •

    Factors normally experienced in the software industry, such as the possible
introduction of competing products, the rapid pace of changes in technology and
the acceptance of the functionality of software by potential customers are all
considered less demanding in the government marketplace as it is generally very
risk averse.

    •

    We monitor customer churn for any indications of impairment. However,
historically we experience extremely low customer turnover due to the nature of
the local government market.

    •

    Our primary market for new products and enhancements is our existing customer
base. We believe our current disclosure regarding our impairment review process
provided on page 17 is adequate.

Securities and Exchange Commission

September 2, 2005

Page 4

Analysis of Results of Operations and Other

Revenues, page 18

    3.

    We note that appraisal services revenue consistently and significantly declined over the
three reported periods but it appears that you do not address this trend in your results of
operations section. Please tell us how you have considered Item 303 (a) (3) of Regulation S-K
and SEC Release No. 33-6835 Section III.B in disclosing the trend of declining appraisal
service revenues and all other material trends known to you that may affect your liquidity and
the results of your future operations.

    Company response:

    To detect trends that may affect our liquidity and results of future operations, we depend
on, among other things, quarterly reporting packages prepared by the divisions’ accounting
staffs and approved by senior division management, and on our quarterly financial and
operational review conferences. These conferences generally occur one to two weeks before
we release our Form 10-Q and approximately one month before we release our Form 10-K and
are attended by the chief executive officer, chief financial officer, in-house legal
counsel and senior division management. At these conferences each division head presents,
among other things, his division’s operating results, current forecast and potential new
business prospects.

    Appraisal services revenue increased 7% in 2002, and declined 20% and 9% in 2003 and 2004,
respectively. In order to explain the significant decrease in 2003 we included charts that
provided revenue and estimated completion dates for specific major appraisal services
contracts in our analysis of results of operations in our Form 10-Q and Form 10-K filings
for the periods from June 30, 2003 through June 30, 2004. These charts also enabled the
reader to determine that contracts signed in 2000 and throughout 2001 were being replaced
with generally smaller contracts and that the contract periods were extended over a longer
period of time. By the end of 2004, many of the larger contracts which began in 2000 and
2001 had been fully completed for a year and we dispensed with the chart in our analysis of
results of operations for the year ended December 31, 2004. We did note in our 2004 Form
10-K that larger appraisal contracts were discretionary in nature and that we had not been
successful in replacing them with similarly sized projects.

    In the first quarter of 2005, we first became informed that one of our largest new
appraisal services prospects lacked funding which will probably delay a contract award
until late 2005. In addition, in the first quarter of 2005, we reduced the

Securities and Exchange Commission

September 2, 2005

Page 5

probability assessment of two other prospective large contracts based on lack of progress
in the sales cycle. As a result, we added forward-looking information in our Form 10-Q for
the quarter ended March 31, 2005, indicating “the appraisal services business is driven in
part by revaluation cycles in various states and based on our new business pipeline, we
expect that appraisal services revenues will remain at historically low levels for several
quarters.” Disclosure regarding the decline in appraisal services revenue was also provided
in our Form 10-Q for the quarter ended June 30, 2005. We also issued a Form 8-K on
February 3, 2005 that provided earnings guidance and included a statement indicating that
we expected appraisal services revenues to decline 25% to 30% in 2005. Therefore, we
believe we identified the trend of declining appraisal services revenue sufficiently in our
2004 Form 10-K and through the information that has been provided currently in our Form
10-Q for the quarter ended March 31, 2005 and our Form 10-Q for the quarter ended June 30,
2005.

Item 8. Financial Statements and Supplementary Data

Consolidated Statement of Operations, page F-3" -->

    4.

    We note that you exclude acquisitions intangibles expense from your costs of sales.
Considering that such amortization expense is primarily due to acquired software and customer
related intangible assets that appear to be closely related with the generation of revenue,
explain why you believe that excluding such amortization expenses from cost of sales results
in a proper gross profit presentation. Please tell us how you considered paragraph 8 (i) of
SFAS 142 and Question 17 of Staff Implementation Guidance on applying SFAS 86.

    Company response:

    We first entered the government software technology sector in 1998. Our Company
currently consists primarily of divisions that were acquired since that time using the
purchase method of accounting. We have historically aggregated amortization from our
acquisition intangibles as a single line item outside of costs of revenue but within
operating profit. Such amortization included goodwill, customer-related intangibles,
software development costs, trademarks and other similar intangible assets. At the time
the decision regarding this presentation was made, we noted that other registrants had
aggregated acquisition date intangibles amortization and presented them as a single line item outside of
costs of revenue for a variety of reasons, one of which is to highlight the non-cash
aspects of this charge. Upon the adoption of SFAS 142, which no longer provides for the
amortization of goodwill, we continued our past practice described above. In our 2004 Form
10-K on page F-17, Note 7, entitled “Goodwill and Other
Intangible Assets,” we present our
estimated annual aggregate amortization expense relating to

Securities and Exchange Commission

September 2, 2005

Page 6

acquisition intangibles for each of the next five years. By separately presenting this
aggregate amortization in our consolidated financial statements, we believe we provide our
users with transparency regarding this amount and its impact on our present and future
operating performance.

For the six months ended June 30, 2005, our amortization expense for acquisition date
customer-related intangibles and for acquired software amounted to $976,000 with the
remainder allocated to amortizable trademarks. For the year ended December 31, 2004, our
amortization expense for acquisition date customer-related intangibles and for acquired
software amounted to $2.6 million with the remainder allocated to amortizable trademarks.
If we had included acquisition date customer-related intangibles and acquired software
amortization in cost of revenue, our gross profit margin for the six months ended June 30,
2004 and the year ended December 31, 2004 would have been 33.9% and 36.4%, respectively
compared to reported gross margins of 35.0% and 37.9%, respectively. The amortization
expense for customer related intangibles and for acquired software will be less significant
in 2005 and subsequent years. Based upon the relative materiality of this presentation,
the source of this amortization being from acquisitions, and the greater transparency our
past presentation provides, we conclude that no change should be made to our historical
presentations. If we consummate another acquisition for which amortization of acquired
software and customer related intangibles would materially affect our gross profit margins,
we will retroactively reclassify such amounts.

Notes to consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

Revenue Recognition, page F-8

    5.

    We note from your disclosures on page 16 that you derive revenue from multiple element
arrangements but it is unclear to us how you establish fair value for each of the elements of
such arrangements. To the extent the revenue generated from multiple element arrangements is
material please provide the following:

    •

    Identify the elements included in each material type of multiple element
transaction;

    •

    Indicate how you determined that each element is a separate unit of accounting
(refer to EITF 00-21); and

    •

    Explain how the timing and amount of revenue attributable to individual elements is
determined.

Securities and Exchange Commission

September 2, 2005

Page 7

Company response:

We recognize revenue on our appraisal services contracts using the proportionate
performance method of accounting, with considerations for the provisions of EITF No. 00-21,
Revenue Recognitions with Multiple Deliverables. The balance of our revenue is related to
software arrangements and is recognized pursuant to the provisions of SOP 97-2, Software
Revenue Recognition, and its related interpretations. To further clarify the establishment
of vendor-specific evidence of fair value for delivered and undelivered elements using the
residual method, we will expand our revenue recognition policy discussion in our Form 10-K
for the year ended December 31, 2005 to include substantially the following:

We typically enter into multiple element arrangements, which include software
licenses, software services, and post-contract customer support (PCS) and
occasionally hardware. The majority of our software arrangements are multiple
element arrangements, but for those arrangements that include customization or
significant modifications of the software, or where software services are otherwise
considered essential to the functionality of the software in the customer’s
environment, we use contract accounting and apply the provisions of SOP 81-1.

If the arrangement does not require significant modification or customization,
revenue is recognized when all of the following conditions are met:

i. persuasive evidence of an
arrangement exists;

ii. delivery has occurred;

iii. our fee is fixed or determinable; and

iv. collectibility is probable.

For multiple-element arrangements, each element of the arrangement is analyzed and
we allocate a portion of the total arrangement fee to the elements based on the
fair value of the element using vendor-specific evidence of fair val