Tyler Technologies (TYL) 10-K risk factor changes: FY2017 vs FY2016

[removed: As we continue to grow the number and scale of our cloud-based offerings, we] [added: We] store and process increasingly large amounts of personally identifiable and other confidential information of our clients.

| • | Name [removed: recognition] [added: recognition, reputation and references] |

Some of our contracts are [added: structured] on a [removed: fixed-priced] [added: fixed-price] basis, which can lead to various risks, including

If we do not adequately assess [added: and manage] these and other risks, we may be subject to cost overruns and penalties, which may harm our financial performance.

Our revenues and operating results are difficult to predict and may fluctuate substantially from quarter to quarter for a variety of reasons, including [removed: the following]

These transactions involve significant challenges and risks, including [removed: the] [added: risks that a] transaction does not advance our business [removed: strategy,] [added: strategy; that] we [removed: get no satisfactory] [added: do not achieve the expected] return on our [removed: investment,] [added: investment; that] we have difficulty integrating business systems and [removed: technology,] [added: technology; that] we have difficulty retaining or integrating new [removed: employees,] [added: employees; that] the transactions distract management from our other [removed: businesses,] [added: businesses; that] we acquire unforeseen [removed: liabilities,] [added: liabilities;] and other unanticipated events.

It may take longer than expected to realize the full benefits of these transactions, such as increased revenue, enhanced efficiencies, or increased market share, or the benefits may be ultimately [removed: smaller] [added: less] than we expected.

This growth places [removed: a] significant [removed: demand] [added: demands] on management and operational resources.

We have not declared [removed: or] [added: nor] paid a cash dividend since we entered the business of providing software solutions and services to the public sector in 1998.

Disclosure of personally identifiable information and/or other sensitive client data could result in liability and harm our reputation.

Disclosure of personally identifiable information and/or other sensitive client data could result in liability and harm our reputation.

Our financial outlook may not be realized.

We may not be able to fully protect client information from security breaches.

Improper disclosure could harm our reputation, lead to legal exposure to clients, or subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue.

| | |

| --- | --- |

A decline in the demand for IT may result in a decrease in our revenues or lower our growth rate.

A decline in the demand for IT among our current and prospective clients may result in decreased revenues or a lower growth rate because our sales depend, in part, on our clients’ level of funding for new or additional IT systems and services.

Moreover, demand for our solutions may be reduced by a decline in overall demand for computer software and services.

We cannot assure you that we will be able to increase or maintain our revenues.

| • | The transaction involves contingent payment terms or fees |

| • | We are required to accept a fixed-fee services contract |

| • | We are required to provide extended payment terms |

Financial Outlook.

Revenues for e-filing are derived from transaction fees [removed: and] [added: and,] in some [removed: cases] [added: cases,] fixed fee arrangements.

Subscriptions and maintenance are considered recurring revenue sources and comprised approximately [removed: 62%] [added: 64%] of our revenue in [removed: 2016.][added: 2017.]

During [removed: 2016,] [added: 2017,] based on our number of customers, turnover was approximately 2%.

As of December 31, [removed: 2016,] [added: 2017,] our total employee count increased to [removed: 3,831] [added: 4,069] from [removed: 3,586] [added: 3,831] at December 31, [removed: 2015.][added: 2016.]

Sales commissions typically fluctuate with revenues and share-based compensation expense generally increases [removed: when] [added: as] the market price of our stock increases.

On May 28, 2014, [removed: FASB] [added: the Financial Accounting Standards Board ("FASB")] issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This ASU is the result of a convergence project between the FASB and the International Accounting Standards Board.

We will adopt the new standard in fiscal year [removed: 2018.][added: 2019.]

[removed: We anticipate this] [added: This] standard will have a material impact on our consolidated [removed: financial statements.][added: balance sheets and statement of shareholders’ equity.]

Specifically, under the new standard [removed: we expect] software license fees under perpetual agreements will no longer be subject to 100% discount allocations from other elements in the contract.

[removed: We expect revenue] [added: Revenue] related to our [removed: SaaS offerings] [added: software as a service (“SaaS”) offerings, post-contract customer support ("PCS") renewals] and professional services [removed: to] remain substantially unchanged.

Application of the new standard requires that incremental costs directly related to obtaining a contract (typically sales commissions plus any associated fringe benefits) must be recognized as an asset and expensed [removed: over] [added: on a systematic basis that is consistent with] the [removed: expected life] [added: transfer to the customer] of the [removed: arrangement,] [added: goods and services to which the asset relates,] unless that life is less than one year.

With the adoption [added: of] the new standard, [removed: we expect] amortization periods [removed: to] [added: will] extend past the initial term.

[removed: Activity in the] [added: The] local government software market continues to be [removed: robust,] [added: active,] and our backlog at December 31, [removed: 2016] [added: 2017] reached [removed: $953.3 million,] [added: $1.1 billion,] a [removed: 13%] [added: 18%] increase from last year.

Our annual goodwill impairment analysis, which we performed quantitatively during the second quarter of [removed: 2016,] [added: 2017,] did not result in an impairment charge.

During [removed: 2016,] [added: 2017,] we did not identify any triggering events that would require an update to our annual impairment review.

We estimate the fair value of share-based awards on the date of grant using the Black-Scholes option [added: valuation model.]

The following discussion compares the historical results of operations on a basis consistent with GAAP for the years ended December 31, [removed: 2016, 2015] [added: 2017, 2016] and [removed: 2014.][added: 2015.]

| | [removed: 2016] [added: 2017] | | | [removed: 2015] [added: 2016] | | | [removed: 2014] [added: 2015] | |

| Software licenses and royalties | [removed: 9.8] [added: 9.0] | % | | [removed: 10.0] [added: 9.8] | % | | 10.0 | % |

| Subscriptions | [removed: 18.9] [added: 20.6] | | | 18.9 | | | [removed: 17.8] [added: 18.9] | |

| Software services | [removed: 23.1] [added: 22.3] | | | [removed: 23.7] [added: 23.1] | | | [removed: 23.1] [added: 23.7] | |

| Maintenance | [removed: 42.7] [added: 43.0] | | | [removed: 41.6] [added: 42.7] | | | [removed: 43.1] [added: 41.6] | |

| Appraisal services | [removed: 3.5] [added: 3.0] | | | [removed: 4.2] [added: 3.5] | | | [removed: 4.4] [added: 4.2] | |

| Hardware and other | [removed: 2.0] [added: 2.1] | | | [removed: 1.6] [added: 2.0] | | | 1.6 | |

| Cost of software licenses, royalties and acquired software | [removed: 3.3] [added: 3.0] | | | [removed: 1.0] [added: 3.3] | | | [removed: 0.8] [added: 1.0] | |

| Cost of software services, maintenance and subscriptions | [removed: 46.2] [added: 46.1] | | | [removed: 48.2] [added: 46.2] | | | [removed: 47.9] [added: 48.2] | |

| Cost of appraisal services | [removed: 2.2] [added: 1.9] | | | [removed: 2.7] [added: 2.2] | | | [removed: 2.9] [added: 2.7] | |

| Cost of hardware and other | [removed: 1.3] [added: 1.5] | | | [removed: 1.1] [added: 1.3] | | | 1.1 | |

| Selling, general and administrative expenses | [removed: 22.1] [added: 21.1] | | | [removed: 22.6] [added: 22.1] | | | [removed: 22.0] [added: 22.6] | |

| Research and development expense | [removed: 5.7] [added: 5.6] | | | [removed: 5.1] [added: 5.7] | | | [removed: 5.2] [added: 5.1] | |

| Amortization of customer and trade name intangibles | [removed: 1.8] [added: 1.7] | | | [removed: 1.0] [added: 1.8] | | | [removed: 0.9] [added: 1.0] | |

| Operating income | [removed: 17.4] [added: 19.1] | | | [removed: 18.3] [added: 17.4] | | | [removed: 19.2] [added: 18.3] | |

| Other [removed: (expense) income,] [added: income (expense),] net | [removed: (0.3] [added: 0.1] | [removed: )] | | [removed: 0.1] [added: (0.3] | [added: )] | | [removed: (0.1] [added: 0.1] | [removed: )] |

| Income before income taxes | [removed: 17.1] [added: 19.2] | | | [removed: 18.4] [added: 17.1] | | | [removed: 19.1] [added: 18.4] | |

| Income tax [added: (benefit)] provision | [removed: 2.6] [added: (0.3] | [added: )] | | [removed: 7.4] [added: 2.6] | | | [removed: 7.2] [added: 7.4] | |

| Net income | [removed: 14.5] [added: 19.5] | % | | [removed: 11.0] [added: 14.5] | % | | [removed: 11.9] [added: 11.0] | % |

Subscription-based [removed: services] revenue primarily consists of revenue derived from our SaaS arrangements, which utilize the Tyler private cloud.

Excluding acquisitions, subscription-based [removed: services] revenue increased 24% compared to 2015.

New SaaS clients as well as existing clients who converted to our SaaS model provided the [removed: remainder] [added: majority] of the subscriptions revenue increase.

[added: In 2016, we] added 250 new SaaS clients and 53 existing clients elected to convert to our SaaS model.

Total revenues increased 11% in 2017 compared to 2016.

Recent Acquisitions

On November 29, 2017, we acquired audio and digital two-way radio communications technology and related assets from Radio 10-33, LLC an audio and digital two-way radio communications company.

The total purchase price was $1.4 million.

On August 2, 2017, we acquired substantially all of the assets and assumed certain liabilities of Digital Health Department, Inc. ("DHD"), a company that provides environmental health software, offering a software-as-a-service (SaaS) solution for public health compliance and inspections processes.

The total purchase price, net of debt assumed, was $3.9 million.

On May 30, 2017, we acquired all of the capital stock of Modria.com, Inc., a company that specializes in online dispute resolution for government and commercial entities.

The total purchase price, net of debt assumed, was $7.0 million.

The operating results of these acquisitions are included in our results of operations of the Enterprise Software segment from the date of the acquisition.

The impact of these acquisitions, individually and in the aggregate, on our operating results is not material.

On December 22, 2017, the Tax Act was enacted.

The Tax Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits and deductions for individuals and businesses.

For businesses, the Tax Act reduces the U.S. corporate federal tax rate from 35% to 21% and transitions from a worldwide tax system to a territorial tax system.

The impact of the rate reduction on our 2017 income tax provision is a $21.6 million tax benefit due to the remeasurement of deferred tax assets and liabilities.

Refer to Note 7 "Income Tax" for further discussion on the impact of the Tax Act.

We have adopted the new standard effective January 1, 2018 using the full retrospective method which will require each prior reporting period presented to be recast in future issuance of our financial statements.

In preparation for adoption of the standard, we have implemented internal controls and key system functionality to enable the preparation of financial information and have reached conclusions on key accounting assessments related to the standard.

During the fourth quarter of fiscal 2017, we have substantially completed data conversion activities required to recast our prior period results.

We continue to perform an in-depth review of our preliminary results; therefore, we are in the process of completing our analysis necessary to recast prior period results.

We do not believe there are any remaining significant implementation topics associated with the adoption of this ASU that have not yet been addressed.

The impact of the standard on consolidated revenue and costs of revenue will be dependent upon the mix of revenue streams due to our accounting for software license fees, allocation of discounts across all performance obligations and to the incremental costs of obtaining a contract.

2017 Compared to 2016

| ES | | $ | 67,840 | | | $ | 68,844 | | | $ | (1,004 | ) | | (1 | )% |

| A&T | | 7,854 | | | | 5,462 | | | | 2,392 | | | | 44 | |

Software license revenue declined as a percentage of the revenue mix due to an increase in the percentage of new software clients choosing our subscription-based option, rather than purchasing the software under a traditional perpetual license arrangement.

| ($ in thousands) | | 2017 | | | | 2016 | | | | $ | | | | % | |

| ES | | $ | 165,651 | | | $ | 135,516 | | | $ | 30,135 | | | 22 | % |

| A&T | | 7,859 | | | | 7,188 | | | | 671 | | | | 9 | |

| Total subscriptions revenue | | $ | 173,510 | | | $ | 142,704 | | | $ | 30,806 | | | 22 | % |

The increase in e-filing revenue is attributed to new e-filing clients, as well as increased volumes as the result of several existing clients mandating e-filing.

| ($ in thousands) | | 2017 | | | | 2016 | | | | $ | | | | % | |

| ES | | $ | 167,934 | | | $ | 158,478 | | | $ | 9,456 | | | 6 | % |

| A&T | | 19,215 | | | | 16,326 | | | | 2,889 | | | | 18 | |

| Total software services revenue | | $ | 187,149 | | | $ | 174,804 | | | $ | 12,345 | | | 7 | % |

This growth is partly due to additions to our implementation and support staff, which increased our capacity to deliver backlog and partially due to completing recognition of a majority of the acquisition-related deferred service revenue that was fair valued at rates below Tyler's average service rate in prior periods.

| ($ in thousands) | | 2017 | | | | 2016 | | | | $ | | | | % | |

| ES | | $ | 339,951 | | | $ | 304,380 | | | $ | 35,571 | | | 12 | % |

| A&T | | 21,618 | | | | 18,589 | | | | 3,029 | | | | 16 | |

| Total maintenance revenue | | $ | 361,569 | | | $ | 322,969 | | | $ | 38,600 | | | 12 | % |

In addition, the increase is partially due to completing recognition of a majority of the acquisition-related deferred maintenance revenue that was fair valued at rates below Tyler's average maintenance rate in prior periods.

Total organic revenues increased 12% in 2016 compared to 2015.

On November 16, 2015, we acquired all of the capital stock of New World Systems Corporation (“NWS”), which provides public safety and financial solutions for local governments.

The purchase price, net of cash acquired of $22.5 million, was $337.5 million in cash, of which $4.0 million was accrued at December 31, 2015, and 2.1 million shares of Tyler common stock valued at $362.8 million.

On May 29, 2015, we acquired all of the capital stock of Brazos Technology Corporation (“Brazos”), which provides mobile hand held solutions primarily to law enforcement agencies for field accident reporting and electronically issuing citations.

The purchase price, net of cash acquired and including debt assumed, was $6.1 million in cash and 12,500 shares of Tyler common stock valued at $1.5 million.

The operating results of NWS and Brazos are included with the operating results of the Enterprise Software segment since their respective dates of acquisition.

In 2015, SG&A expenses include approximately $5.9 million for financial advisory, legal, accounting, due diligence, valuation and other various services necessary to complete the NWS acquisition.

New Accounting Pronouncements Adopted in 2016

Improvements to Employee Share-Based Payment Accounting.

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.

This standard is effective for our interim and annual reporting periods beginning December 15, 2016, and early adoption is permitted.

We elected to early adopt this standard in fourth quarter of 2016.

The impact of the early adoption was as follows:

| | |

| --- | --- |

| • | The standard eliminates additional paid in capital ("APIC") pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement as a discrete item when the awards vest or are settled. The adoption of this guidance on a prospective basis resulted in the recognition of excess tax benefits in our provision for income taxes. |

| • | The standard requires excess tax benefits to be recognized regardless of whether the benefit reduces taxes payable. The adoption of this guidance is applied on a modified retrospective basis; however, it did not have an impact on our retained earnings as of January 1, 2016, as we had previously recognized all our excess tax benefits. |

| • | As permitted, we have elected to continue to estimate forfeitures expected to occur to determine the amount of stock-based compensation cost to be recognized in each period. As such, the guidance relating to forfeitures did not have an impact on our retained earnings as of January 1, 2016. |

| • | The new guidance changes the calculation of common stock equivalents for earnings per share purposes. |

| • | As permitted, we elected to apply the statement of cash flows guidance that cash flows related to excess tax benefits be presented as an operating activity retrospectively. |

Adoption of the new standard resulted in the recognition of excess tax benefits in our provision for income taxes rather than APIC of $29.6 million for the period ended December 31, 2016.

As of December 31, 2016, the change in the calculation of common stock equivalents added approximately 519,000 weighted average shares for the diluted earnings per share calculations.

The impact to our previously reported quarterly results for fiscal year 2016 is as follows:

| | | | | | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | Three Months Ended | | | | | | | | Three Months Ended | | | | | | | | Three Months Ended | | | | | | |

| | March 31, 2016 | | | | | | | | June 30, 2016 | | | | | | | | September 30, 2016 | | | | | | |

| (In thousands, except per share amounts) | As Reported | | | | As Adjusted | | | | As Reported | | | | As Adjusted | | | | As Reported | | | | As Adjusted | | |

| Income statements: | | | | | | | | | | | | | | | | | | | | | | | |

| Income tax provision | $ | 10,495 | | | $ | 9,350 | | | $ | 11,323 | | | $ | 5,188 | | | $ | 14,155 | | | $ | 989 | |

| Net income | $ | 17,079 | | | $ | 18,224 | | | $ | 18,872 | | | $ | 25,007 | | | $ | 22,264 | | | $ | 35,430 | |

| Basic earnings per common share | $ | 0.47 | | | $ | 0.50 | | | $ | 0.52 | | | $ | 0.69 | | | $ | 0.61 | | | $ | 0.97 | |

| Diluted earnings per common share | $ | 0.44 | | | $ | 0.47 | | | $ | 0.49 | | | $ | 0.65 | | | $ | 0.58 | | | $ | 0.91 | |

| Diluted weighted average common shares outstanding | 38,557 | | | | 39,071 | | | | 38,196 | | | | 38,738 | | | | 38,506 | | | | 39,062 | | |

| Statement of cash flows: | | | | | | | | | | | | | | | | | | | | | | | |

| Net cash provided by operating activities | $ | 40,270 | | | $ | 41,321 | | | $ | 13,877 | | | $ | 19,520 | | | $ | 67,091 | | | $ | 79,213 | |

| Net cash (used) provided by financing activities | $ | (15,860 | ) | | $ | (16,911 | ) | | $ | 5,668 | | | $ | 25 | | | $ | (77,973 | ) | | $ | (90,095 | ) |

Presentation of Financial Statements - Going Concern.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.

The guidance requires an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the financial statements are available to be issued when applicable) and to provide related footnote disclosures in certain circumstances.

In [removed: 2016,] [added: 2017,] our effective average interest rate for borrowings was [removed: 1.79%.][added: 2.20%.]

As of December 31, 2017, our interest rate was 4.75% under the prime rate option or approximately 2.78% under the 30-day LIBOR option.

As of December 31, 2017, we had no outstanding borrowings under the Credit Facility and therefore are not subject to any interest risk.

As of December 31, 2016, we had $10.0 million in outstanding borrowings under the Credit Facility.

As of December 31, 2016 our interest rate was 1.96%.

Assuming borrowings of $10.0 million, a hypothetical 10% increase in our interest rate at December 31, 2016 for a one-year period would result in approximately $19,600 of additional interest rate expense.

In addition, we provide electronic document filing [removed: solutions (“e-filing”),] [added: (“e-filing”) solutions,] which simplify the filing and management of court documents.

Gartner, Inc., a leading information technology research and advisory company, estimates that state and local government application and vertical specific software spending will grow from [removed: $12.7] [added: $14.7] billion in [removed: 2017] [added: 2018] to [removed: $15.5] [added: $18.3] billion in [removed: 2020.][added: 2021.]

The professional services and support segments of the market are expected to expand from [removed: $31.1] [added: $30.7] billion in [removed: 2017] [added: 2018] to [removed: $35.1] [added: $34.4] billion in [removed: 2020.][added: 2021.]

Application and vertical specific software sales in the primary and secondary education segments of the market is expected to expand from [removed: $2.3] [added: $2.6] billion in [removed: 2017] [added: 2018] to [removed: $2.9] [added: $3.3] billion in [removed: 2020] [added: 2021] while professional services and support are expected to grow from [removed: $2.1] [added: $2.3] billion in [removed: 2017] [added: 2018] to [removed: $2.4] [added: $2.5] billion in [removed: 2020.][added: 2021.]

We derive our revenues from five primary [removed: sources][added: sources:]

The contract terms for these arrangements range from one to 10 years, but are typically contracted for initial periods of [removed: five] [added: three] to seven years.

Revenues for e-filing are included in subscription-based revenues and are derived from transaction fees and in some [removed: cases] [added: cases,] fixed fee arrangements.

Virtually all of our clients contract with us for installation, training, and data conversion services in connection with their [removed: purchase] [added: implementation] of Tyler’s software solutions.

At the culmination of the implementation process, a data implementation team [removed: travels to] [added: is generally onsite at] the client’s facility to ensure the smooth go-live with the new system.

[removed: Data implementation] [added: Implementation] fees are charged separately to clients on either a fixed-fee or hourly charge basis, depending on the contract.

For more complicated issues, our staff, with the [removed: client’s] [added: clients'] permission, can log on to clients’ systems remotely.

Virtually all of our software clients contract with us for maintenance and [removed: support,] [added: support;] which provides us with a significant source of recurring revenue.

The key components of our business strategy are [removed: to:][added: to]

We also offer solutions that allow the public to access data and conduct transactions with local governments, such as paying traffic tickets, property taxes and utility bills [removed: via the Internet.][added: online.]

While we currently have clients in all 50 states, Canada, the Caribbean, the United Kingdom, [added: Australia,] and other international locations, not all of our solutions have achieved nationwide geographic penetration.

We have a large recurring revenue base from maintenance and support and subscription-based services, which generated revenues of [removed: $465.7] [added: $535.1] million, or [removed: 62%] [added: 64%] of total revenues, in [removed: 2016.][added: 2017.]

Subscription-based revenues have been our fastest growing revenue category over the past five years, increasing from [removed: $44.6] [added: $61.9] million in [removed: 2012] [added: 2013] to [removed: $142.7] [added: $173.5] million in [removed: 2016.][added: 2017.]

We believe that the depth and quality of our [removed: operations] management and staff is one of our significant strengths, and that the ability to retain such employees is crucial to our continued growth and success.

Tyler is also an authorized Microsoft reseller for the Microsoft Dynamics solutions developed under this [removed: arrangement, and we are selling the solutions directly into the government market.][added: arrangement.]

During [removed: 2016,] [added: 2017,] approximately 43% of our revenue was attributable to ongoing support and maintenance agreements.

We also compete with national firms, some of which have greater financial and technical resources than we do, including Oracle Corporation, Infor, SAP AG, [removed: FIS (SunGard),] [added: Workday, Inc., Superion,] Thomson Reuters Corporation, and Constellation Software, Inc. In addition, we sometimes compete with consulting and systems integration firms, which develop custom systems, primarily for larger governments.

At December 31, [removed: 2016,] [added: 2017,] our estimated revenue backlog was approximately [removed: $953.3 million,] [added: $1.1 billion,] compared to [removed: $844.5] [added: $953.3] million at December 31, [removed: 2015.][added: 2016.]

Approximately [removed: $580.2] [added: $578.2] million, or [removed: 61%,] [added: 52%,] of the backlog is expected to be recognized during [removed: 2017.][added: 2018.]

At December 31, [removed: 2016,] [added: 2017,] we had [removed: 3,831] [added: 4,069] employees.

[added: |] FORM 10-K [added: |]

For the Fiscal Year Ended December 31, [removed: 2016][added: 2017]

[added: | TYLER TECHNOLOGIES, INC.] (Exact name of registrant as specified in its charter) [added: |]

[added: |] NONE [added: |]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, [removed: or] a non-accelerated [removed: filer.][added: filer, smaller reporting company, or an emerging growth company.]

See [removed: definition] [added: the definitions] of [removed: “accelerated filer and large] [added: “large] accelerated [removed: filer”] [added: filer," "accelerated filer,” "smaller reporting company," and "emerging growth company"] in Rule 12b-2 of the Exchange Act.

| Large accelerated filer | | x | [added: |] Accelerated filer | | [removed: ¨] [added: ☐] |

| Non-accelerated filer [removed: | | ¨] (Do not check if [removed: a] smaller reporting company) | [added: | ☐ | |] Smaller [removed: Reporting Company] [added: reporting company] | | [removed: ¨] [added: ☐] |

The aggregate market value of the voting stock held by non-affiliates of the registrant was [removed: $5,505,843,000] [added: $6,107,280,000] based on the reported last sale price of common stock on June 30, [removed: 2016,] [added: 2017,] which is the last business day of the registrant’s most recently completed second fiscal quarter.

The number of shares of common stock of the registrant outstanding on February [removed: 21, 2017] [added: 20, 2018] was [removed: 36,828,000][added: 37,901,000]

Certain information required by Part III of this annual report is incorporated by reference from the registrant’s definitive proxy statement for its annual meeting of stockholders to be held on May [removed: 10, 2017.][added: 9, 2018.]

| Item 1. | [removed: [Business](#sA3D975C0873770D4883BF75743E0AFAA)] [added: [Business](#s5A4DC258B6FF5B3DBCCA83AB0F9CD2B9)] | [removed: [3](#sA3D975C0873770D4883BF75743E0AFAA)] [added: [3](#s5A4DC258B6FF5B3DBCCA83AB0F9CD2B9)] |

| Item 1A. | [Risk [removed: Factors](#sB2ED0CB4DC0C6BDF9386F7574412A578)] [added: Factors](#sA220516537A85A4EB45E28DD60086C19)] | [removed: [11](#sB2ED0CB4DC0C6BDF9386F7574412A578)] [added: [11](#sA220516537A85A4EB45E28DD60086C19)] |

| Item 1B. | [Unresolved Staff [removed: Comments](#sE16973717D20304EAF70F75744320DB7)] [added: Comments](#sA8E47FA816765875B22CA63D27348EBB)] | [removed: [17](#sE16973717D20304EAF70F75744320DB7)] [added: [17](#sA8E47FA816765875B22CA63D27348EBB)] |

| Item 2. | [removed: [Properties](#s5D2263C08B9BEAF0FB82F75744655005)] [added: [Properties](#s28983F9E6E525DDFBBBB10499B9D82AF)] | [removed: [17](#s5D2263C08B9BEAF0FB82F75744655005)] [added: [17](#s28983F9E6E525DDFBBBB10499B9D82AF)] |

| Item 3. | [Legal [removed: Proceedings](#sDD17D9CC7D223A74BBA9F7574485BD0A)] [added: Proceedings](#s9BCBDDDEE9E450E1970F6D1F9F4A6297)] | [removed: [17](#sDD17D9CC7D223A74BBA9F7574485BD0A)] [added: [17](#s9BCBDDDEE9E450E1970F6D1F9F4A6297)] |

| Item 4. | [Submission of Matters to a Vote of Security [removed: Holders](#sD895EA860FF3C694E220F75744B8F1E1)] [added: Holders](#s4BE5FAF16C465086AADE5E2066168B06)] | [removed: [17](#sD895EA860FF3C694E220F75744B8F1E1)] [added: [17](#s4BE5FAF16C465086AADE5E2066168B06)] |

| Item 5. | [Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity [removed: Securities](#s5843B703C4852B3CBE12F75741CE0AB9)] [added: Securities](#sCD74C544776656B0A1893F8162BE3DAB)] | [removed: [18](#s5843B703C4852B3CBE12F75741CE0AB9)] [added: [18](#sCD74C544776656B0A1893F8162BE3DAB)] |

| Item 6. | [Selected Financial [removed: Data](#sB8BE2E3FB6F28AC9A594F75740F93E0A)] [added: Data](#s9ECD5098ABA15225918BE57CF6FCA610)] | [removed: [21](#sB8BE2E3FB6F28AC9A594F75740F93E0A)] [added: [21](#s9ECD5098ABA15225918BE57CF6FCA610)] |

| Item 7. | [Management’s Discussion and Analysis of Financial Condition and Results of [removed: Operations](#s1014D94ADC3FEF02F2AEF757455F0D05)] [added: Operations](#s6A3CDEA704A65CFB807DE7E8853C3A77)] | [removed: [22](#s1014D94ADC3FEF02F2AEF757455F0D05)] [added: [22](#s6A3CDEA704A65CFB807DE7E8853C3A77)] |

| Item 7A. | [Quantitative and Qualitative Disclosures about Market [removed: Risk](#sA9B706136A4162F90CF9F757467AF5B9)] [added: Risk](#s8E74CCF2DDAA559188CA15FE865A59FD)] | [removed: [39](#sA9B706136A4162F90CF9F757467AF5B9)] [added: [40](#s8E74CCF2DDAA559188CA15FE865A59FD)] |

| Item 8. | [Financial Statements and Supplementary [removed: Data](#s28FDB88A0B67FF69BC0BF75746AB2C45)] [added: Data](#sB33235B2645F55F4BD2E8D30833A6A55)] | [removed: [40](#s28FDB88A0B67FF69BC0BF75746AB2C45)] [added: [40](#sB33235B2645F55F4BD2E8D30833A6A55)] |

| Item 9. | [Changes in and Disagreements with Accountants on Accounting and Financial [removed: Disclosure](#s6CB0158B4BE576FBB091F75746CE7468)] [added: Disclosure](#sC239C2CF3A3D501C9D59F5E48098A6C9)] | [removed: [40](#s6CB0158B4BE576FBB091F75746CE7468)] [added: [40](#sC239C2CF3A3D501C9D59F5E48098A6C9)] |

| Item 9A. | [Controls and [removed: Procedures](#sD51640C64DDA99A51FBAF75746FF241F)] [added: Procedures](#sDB6E543A9BFC5FA9938A0B1860B59A4D)] | [removed: [40](#sD51640C64DDA99A51FBAF75746FF241F)] [added: [40](#sDB6E543A9BFC5FA9938A0B1860B59A4D)] |

| Item 9B. | [Other [removed: Information](#sED685D7A2FD96066B0F3F7574720B220)] [added: Information](#s5626F72410C059B7A1DDAB83B2D78137)] | [removed: [40](#sED685D7A2FD96066B0F3F7574720B220)] [added: [41](#s5626F72410C059B7A1DDAB83B2D78137)] |

| | [PART [removed: III](#s65A1E928CC0D38A24491F7574753EC00)] [added: III](#s57CB8B180A325959B2D9497A788E4AE4)] | |

| Item 10. | [Directors, Executive Officers and Corporate [removed: Governance](#sA37C21B644806EAA36EFF7574774DF13)] [added: Governance](#s7908AF1809B35440846D8763D59BF28E)] | [removed: [41](#sA37C21B644806EAA36EFF7574774DF13)] [added: [41](#s7908AF1809B35440846D8763D59BF28E)] |

| Item 11. | [Executive [removed: Compensation](#sD0BAE606EAA105311CFFF75747A51A47)] [added: Compensation](#s5F33AA4D529153F8BEB99810C051F2F0)] | [removed: [41](#sD0BAE606EAA105311CFFF75747A51A47)] [added: [41](#s5F33AA4D529153F8BEB99810C051F2F0)] |

| Item 12. | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder [removed: Matters](#s0D367104C30927534231F75747C85BF2)] [added: Matters](#sBBF9082A578654DAB48FF964A42BBB7E)] | [removed: [41](#s0D367104C30927534231F75747C85BF2)] [added: [41](#sBBF9082A578654DAB48FF964A42BBB7E)] |

| Item 13. | [Certain Relationships and Related Transactions, and Director [removed: Independence](#s2CF31CE6B93A141C1B8EF75747F9B031)] [added: Independence](#s1341CB2B2D9052AEAF00BB78243B3D98)] | [removed: [41](#s2CF31CE6B93A141C1B8EF75747F9B031)] [added: [41](#s1341CB2B2D9052AEAF00BB78243B3D98)] |

| Item 14. | [Principal Accounting Fees and [removed: Services](#sAD5644646884F4E1591FF757481A696D)] [added: Services](#s608D94090BA8566C987CBA9C67A3692E)] | [removed: [41](#sAD5644646884F4E1591FF757481A696D)] [added: [41](#s608D94090BA8566C987CBA9C67A3692E)] |

| Item 15. | [Exhibits, Financial Statement [removed: Schedules](#sFEB329789F67584D55D2F757486EBFF4)] [added: Schedules](#s1EDA1FD4BBF254F5BC8599B3965F0B2D)] | [removed: [42](#sFEB329789F67584D55D2F757486EBFF4)] [added: [42](#s1EDA1FD4BBF254F5BC8599B3965F0B2D)] |

10-K 1 tyl12312017-10k.htm 10-K

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| | | | | Emerging growth company | | ☐ |

| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | | | | | | ☐ |

| | [PART I](#s699FE6C867DA5F9A8DEF085436FC986C) | |

| | [PART II](#sCBC76C2562965D8BA08C1358E51AE188) | |

| | [PART IV](#sA5F2C01B53D059B5B1E134BA8ED4BA0E) | |

| [Signatures](#s06FA76E5176C5A8499EA098688EEACFB) | | [44](#s06FA76E5176C5A8499EA098688EEACFB) |

10-K 1 tyl12312016-10k.htm 10-K

__________________________________

________________________________

TYLER TECHNOLOGIES, INC.

_________________________________

| | | | | | |

| --- | --- | --- | --- | --- | --- |

| | [PART I](#s8AFBACD3109ED982D2BFF75743BD5909) | |

| | [PART II](#sD9339F7251770DCCA194F75744D976E8) | |

| | [PART IV](#sECD633192E486681C56AF757484D16D5) | |

| [Signatures](#s1EC93460C2D07B6BE2A9F757489F610D) | | [44](#s1EC93460C2D07B6BE2A9F757489F610D) |

We occupy approximately [removed: 890,000] [added: 1.0 million] square feet of office space, of which approximately [removed: 609,000] [added: 746,000] square feet is in office facilities we own.

We own or lease offices for our major operations in [added: the states of] Arizona, [added: Arkansas, California,] Colorado, Georgia, Iowa, Maine, [added: Massachusetts,] Michigan, [added: Missouri,] Montana, New [added: Hampshire, New] York, Ohio, [removed: Texas] [added: Texas, Washington] and [removed: Washington.][added: Wisconsin, and in Ontario, Canada.]

Our common stock is traded on the New York Stock Exchange under the symbol “TYL.” At December 31, [removed: 2016,] [added: 2017,] we had approximately [removed: 1,492] [added: 1,367] stockholders of record.

Most of our stockholders hold their shares in street name; therefore, there are substantially more than [removed: 1,492] [added: 1,367] beneficial owners of our common stock.

| [removed: 2017:] [added: 2017] | First Quarter [removed: (through February 21, 2017)] | $ | 166.86 | | | $ | 142.75 | |

We did not pay any cash dividends in [removed: 2016] [added: 2017] or [removed: 2015.][added: 2016.]

We intend to retain earnings for use in the operation and expansion of our [removed: business, and, therefore, we] [added: business and] do not anticipate [removed: declaring] [added: paying] a cash dividend in the foreseeable future.

There are no warrants or rights related to our equity compensation plans as of December 31, [removed: 2016.][added: 2017.]

| | Number of securities to be issued upon exercise of outstanding options, warrants and rights as of December 31, [removed: 2016] [added: 2017] | | | Weighted average exercise price of outstanding options, warrants and rights | | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in initial column as of December 31, [removed: 2016)] [added: 2017)] | |

As of December 31, [removed: 2016,] [added: 2017,] we had authorization to repurchase up to [added: approximately] 2.0 million additional shares of Tyler common stock.

During [removed: 2016,] [added: 2017,] we purchased approximately [removed: 882,000] [added: 44,000] shares of our common stock for an aggregate purchase price of [removed: $112.7] [added: $6.6] million.

A summary of the repurchase activity during [removed: 2016] [added: 2017] is as follows:

| Three months ended June 30 | | — | | | — | | | — | | | | [removed: 2,143,000] [added: 1,976,160] | |

| Three months ended September 30 | | — | | | — | | | — | | | | [removed: 2,143,000] [added: 1,976,160] | |

There is no expiration date specified for the authorization, and we intend to repurchase stock under the [removed: plan] [added: program] from time to time.

The following table compares total shareholder returns for Tyler over the last five years to the Standard and Poor’s 500 Stock Index and the Standard and Poor’s 600 Information Technology Index assuming a $100 investment made on December 31, [removed: 2011.][added: 2012.]

[removed: ][added: ]

| Company / Index | [removed: 12/31/11 | | |] 12/31/12 | | | 12/31/13 | | | 12/31/14 | | | 12/31/15 | | | 12/31/16 | | [added: | 12/31/17 | |]

| | Second Quarter | 178.09 | | | | 152.00 | | |

| | Third Quarter | 182.49 | | | | 165.14 | | |

| | Fourth Quarter | 188.22 | | | | 168.12 | | |

| Stock option plan | 4,817,241 | | | $ | 107.91 | | | 2,128,560 | |

| Employee stock purchase plan | 12,052 | | | 150.49 | | | | 796,834 | |

| | 4,829,293 | | | $ | 108.02 | | | 2,925,394 | |

| Three months ended March 31 | | 41,896 | | | | | | $ | 147.30 | | | 1,976,160 | |

| October 1 through October 31 | | — | | | — | | | — | | | | 1,976,160 | |

| November 1 through November 30 | | 2,600 | | | — | | | 169.93 | | | | 1,973,560 | |

| December 1 through December 31 | | — | | | — | | | — | | | | 1,973,560 | |

| | | 44,496 | | | — | | | $ | 148.62 | | | | |

| Tyler Technologies, Inc. | 100 | | | 210.84 | | | 225.93 | | | 359.87 | | | 294.74 | | | 365.50 | |

| S&P 500 Stock Index | 100 | | | 132.39 | | | 150.51 | | | 152.59 | | | 170.84 | | | 208.14 | |

| S&P 600 Information Technology Index | 100 | | | 144.91 | | | 164.17 | | | 171.80 | | | 229.96 | | | 253.61 | |

| | | | | | | | | |

| 2015: | First Quarter | $ | 125.84 | | | $ | 103.18 | |

| | Second Quarter | 133.54 | | | | 118.05 | | |

| | Third Quarter | 152.91 | | | | 127.25 | | |

| | Fourth Quarter | 184.01 | | | | 150.00 | | |

| Stock option plan | 5,155,437 | | | $ | 83.64 | | | 2,902,978 | |

| Employee stock purchase plan | 13,592 | | | 121.35 | | | | 846,727 | |

| | 5,169,029 | | | $ | 83.74 | | | 3,749,705 | |

| Three months ended March 31 | | 757,000 | | | | | | $ | 124.75 | | | 643,000 | |

| Additional authorization by the board of directors | | — | | | 1,500,000 | | | — | | | | 2,143,000 | |

| October 1 through October 31 | | — | | | — | | | — | | | | 2,143,000 | |

| November 1 through November 30 | | 37,000 | | | — | | | 149.53 | | | | 2,106,000 | |

| December 1 through December 31 | | 88,000 | | | — | | | 144.57 | | | | 2,018,000 | |

| | | 882,000 | | | 1,500,000 | | | $ | 127.75 | | | | |

Subsequent to December 31, 2016 and through February 21, 2017, we purchased approximately 42,000 shares of our common stock for an aggregate cash purchase price of $6.2 million.

| Tyler Technologies, Inc. | 100 | | | 160.88 | | | 339.19 | | | 363.47 | | | 578.94 | | | 474.16 | |

| S&P 500 Stock Index | 100 | | | 116.00 | | | 153.57 | | | 174.60 | | | 177.01 | | | 198.18 | |

| S&P 600 Information Technology Index | 100 | | | 112.02 | | | 162.33 | | | 183.91 | | | 192.46 | | | 257.61 | |

| | [removed: 2016] [added: 2017 (a)] | | | | [removed: 2015] [added: 2016] (b) | | | | [removed: 2014] [added: 2015 (c)] | | | | [removed: 2013] [added: 2014] | | | | [removed: 2012] [added: 2013] | | |

| Revenues | $ | [removed: 756,043] [added: 840,662] | | | $ | [removed: 591,022] [added: 756,043] | | | $ | [removed: 493,101] [added: 591,022] | | | $ | [removed: 416,643] [added: 493,101] | | | $ | [removed: 363,304] [added: 416,643] | |

| Cost of revenues | [removed: 400,692] [added: 441,522] | | | | [removed: 313,835] [added: 400,692] | | | | [removed: 259,730] [added: 313,835] | | | | [removed: 223,440] [added: 259,730] | | | | [removed: 195,602] [added: 223,440] | | |

| Selling, general and administrative expenses | [removed: 167,161] [added: 176,974] | | | | [removed: 133,317] [added: 167,161] | | | | [removed: 108,260] [added: 133,317] | | | | [removed: 98,289] [added: 108,260] | | | | [removed: 86,706] [added: 98,289] | | |

| Research and development expense | [removed: 43,154] [added: 47,324] | | | | [removed: 29,922] [added: 43,154] | | | | [removed: 25,743] [added: 29,922] | | | | [removed: 23,269] [added: 25,743] | | | | [removed: 20,140] [added: 23,269] | | |

| Amortization of customer and trade name intangibles | [removed: 13,731] [added: 13,912] | | | | [removed: 5,905] [added: 13,731] | | | | [removed: 4,546] [added: 5,905] | | | | [removed: 4,517] [added: 4,546] | | | | [removed: 4,279] [added: 4,517] | | |

| Operating income | [removed: 131,305] [added: 160,930] | | | | [removed: 108,043] [added: 131,305] | | | | [removed: 94,822] [added: 108,043] | | | | [removed: 67,128] [added: 94,822] | | | | [removed: 56,577] [added: 67,128] | | |

| Other [removed: (expenses) income,] [added: income (expense),] net | [added: 698 | | | |] (1,998 | | ) | | 381 | | | | (355 | | ) | | (1,309 | | ) | [removed: | (2,709 | | ) |]

| Income before income taxes | [removed: 129,307] [added: 161,628] | | | | [removed: 108,424] [added: 129,307] | | | | [removed: 94,467] [added: 108,424] | | | | [removed: 65,819] [added: 94,467] | | | | [removed: 53,868] [added: 65,819] | | |

| Income tax [added: (benefit)] provision (a) | [removed: 19,450] [added: (2,317] | | [added: )] | | [removed: 43,555] [added: 19,450] | | | | [removed: 35,527] [added: 43,555] | | | | [removed: 26,718] [added: 35,527] | | | | [removed: 20,874] [added: 26,718] | | |

| Net income | [removed: 109,857] [added: 163,945] | | | | [removed: 64,869] [added: 109,857] | | | | [removed: 58,940] [added: 64,869] | | | | [removed: 39,101] [added: 58,940] | | | | [removed: 32,994] [added: 39,101] | | |

| Net earnings per diluted share | $ | [removed: 2.82] [added: 4.18] | | | $ | [removed: 1.77] [added: 2.82] | | | $ | [removed: 1.66] [added: 1.77] | | | $ | [removed: 1.13] [added: 1.66] | | | $ | [removed: 1.00] [added: 1.13] | |

| Weighted average diluted shares [removed: (a)] [added: (b)] | [removed: 38,961] [added: 39,246] | | | | [removed: 36,552] [added: 38,961] | | | | [removed: 35,401] [added: 36,552] | | | | [removed: 34,590] [added: 35,401] | | | | [removed: 32,916] [added: 34,590] | | |

| Cash flows provided by operating activities [removed: (a)] [added: (b)] | $ | [removed: 191,859] [added: 195,755] | | | $ | [removed: 134,327] [added: 191,859] | | | $ | [removed: 142,839] [added: 134,327] | | | $ | [removed: 94,297] [added: 142,839] | | | $ | [removed: 67,432] [added: 94,297] | |

| Cash flows used by investing activities | [removed: (50,720] [added: (85,395] | | ) | | [removed: (398,459] [added: (50,720] | | ) | | [removed: (11,555] [added: (398,459] | | ) | | [removed: (25,658] [added: (11,555] | | ) | | [removed: (34,736] [added: (25,658] | | ) |

| Cash flows [removed: (used)] provided [added: (used)] by financing activities [removed: (a)] [added: (b)] | [added: 39,415 | | | |] (138,075 | | ) | | 91,052 | | | | (3,993 | | ) | | 3,831 | | | [removed: | (27,616 | | ) |]

| Total assets | $ | [removed: 1,357,945] [added: 1,589,592] | | | $ | [removed: 1,356,570] [added: 1,357,945] | | | $ | [removed: 569,812] [added: 1,356,570] | | | $ | [removed: 444,488] [added: 569,812] | | | $ | [removed: 338,666] [added: 444,488] | |

| Revolving line of credit | [removed: 10,000] [added: —] | | | | [removed: 66,000] [added: 10,000] | | | | [removed: —] [added: 66,000] | | | | — | | | | [removed: 18,000] [added: —] | | |

| Shareholders' equity | [removed: 915,525] [added: 1,167,094] | | | | [removed: 858,857] [added: 915,525] | | | | [removed: 336,973] [added: 858,857] | | | | [removed: 246,319] [added: 336,973] | | | | [removed: 145,299] [added: 246,319] | | |

[removed: (a)] [added: (b)] During 2016, we [added: early] adopted Accounting Standards Update ("ASU") No. 2016-09 "Improvements to Employee Share-Based Payment Accounting" requiring the recognition of excess tax benefits or tax deficiencies as a component of income tax expense; these benefits or deficiencies were historically recognized in equity.

As the standard requires a prospective method of adoption, our net income in 2016 includes a $29.6 million income tax benefit due to the adoption that did not occur in the comparable [added: prior] periods presented above.

In [removed: addition, the] [added: 2016,] ASU [removed: updates] [added: No. 2016-09 updated] the method of calculating diluted shares resulting in the inclusion of 519,000 additional shares in our diluted earnings per share [removed: calculation that] [added: calculation, which] is not comparable to the other [added: prior] periods presented.

The adoption of ASU No. 2016-09 also [removed: requires] [added: required] excess tax benefits, previously presented as financing activities, to be classified as operating activities.

[removed: (b)] [added: (c)] On November 16, 2015, we completed the acquisition of New World Systems Corporation ("NWS").

Operating results for the twelve months ended December 31, 2015, include $5.9 million for [added: non-recurring] financial advisory, legal, accounting, due diligence, valuation and other expenses necessary to complete the NWS [removed: acquisition as well as $3.5 million amortization expense related to NWS acquisition intangibles.][added: acquisition.]

(a) 2017 includes the significant impact of the enactment of the Tax Cuts and Jobs Act ("Tax Act").

The most significant impact of the Tax Act to us is the reduction in the U.S. federal corporate income tax rate from 35% to 21%.

The impact of the rate reduction on our 2017 income tax provision is a $21.6 million tax benefit due to the remeasurement of deferred tax assets and liabilities.

Refer to Note - 7 "Income Tax" for further discussion on the impact of the Tax Act.

Refer to Note 1 "Summary of Significant Accounting Policies" for further discussion of this new accounting standard.

Management, with the participation of the chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, [removed: 2016.][added: 2017.]

Based on this evaluation, the chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of December 31, [removed: 2016.][added: 2017.]

Management assessed the effectiveness of Tyler’s internal control over financial reporting as of December 31, [removed: 2016.][added: 2017.]

Based on our assessment, we concluded that, as of December 31, [removed: 2016,] [added: 2017,] Tyler’s internal control over financial reporting was effective based on those criteria.

Tyler’s internal control over financial reporting as of December 31, [removed: 2016] [added: 2017] has been audited by Ernst & Young LLP, the independent registered public accounting firm who also audited Tyler’s financial statements.

Changes in Internal Control Over Financial Reporting — During the quarter ended December 31, [removed: 2016,] [added: 2017,] there were no changes in our internal control over financial reporting, as defined in Securities Exchange Act Rule 13a-15(f), that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

| The information required under this item may be found under the section captioned “Proposals For Consideration – Proposal Two – Ratification of Our Independent Auditors for Fiscal Year [removed: 2017”] [added: 2018”] in our Proxy [removed: Statement and is incorporated herein by reference.] [added: Statement.] | | |

| | | | | | [Reports of Independent Registered Public Accounting [removed: Firm](#sD5C6F45FDD6BF9C45F43F75748C5064E)] [added: Firm](#sA65310313579596E97545E36208FD34E)] | | [removed: [F-1](#sD5C6F45FDD6BF9C45F43F75748C5064E)] [added: [F-1](#sA65310313579596E97545E36208FD34E)] |

| | | | | | [Consolidated Statements of Comprehensive Income for the years ended December 31, [removed: 2016, 2015] [added: 2017, 2016] and [removed: 2014](#s2DE01EE1B2280E11D4AFF7573C4625B2)] [added: 2015](#s2758680B2A5056E484E4DC02DB1A3A25)] | | [removed: [F-3](#s2DE01EE1B2280E11D4AFF7573C4625B2)] [added: [F-3](#s2758680B2A5056E484E4DC02DB1A3A25)] |

| | | | | | [Consolidated Balance Sheets as of December 31, [removed: 2016] [added: 2017] and [removed: 2015](#s0840DEC943B97986B82EF7573C116CB8)] [added: 2016](#s0475FEEF28545F0E994B2981D2C28B97)] | | [removed: [F-4](#s0840DEC943B97986B82EF7573C116CB8)] [added: [F-4](#s0475FEEF28545F0E994B2981D2C28B97)] |

| | | | | | [Consolidated Statements of Shareholders’ Equity for the years ended December 31, [removed: 2016, 2015] [added: 2017, 2016] and [removed: 2014](#s23E1047BAD03483B6D6AF7573BF531B5)] [added: 2015](#s4C47D472EC2D5DB0A14B6D153E532C49)] | | [removed: [F-5](#s23E1047BAD03483B6D6AF7573BF531B5)] [added: [F-5](#s4C47D472EC2D5DB0A14B6D153E532C49)] |

| | | | | | [Consolidated Statements of Cash Flows for the years ended December 31, [removed: 2016, 2015] [added: 2017, 2016] and [removed: 2014](#sA21F002EF825B90A2274F7573CCE3E92)] [added: 2015](#s23A8E3116EE15740A630618B23747901)] | | [removed: [F-6](#sA21F002EF825B90A2274F7573CCE3E92)] [added: [F-6](#s23A8E3116EE15740A630618B23747901)] |

| | | | | | [Notes to Consolidated Financial [removed: Statements](#sF5077E7992E9788CAA69F75749BBB9AC)] [added: Statements](#sFB2AEF20742A5D33B4D294D37016F7DD)] | | [removed: [F-7](#sF5077E7992E9788CAA69F75749BBB9AC)] [added: [F-7](#sFB2AEF20742A5D33B4D294D37016F7DD)] |

| [removed: 3.3] [added: [3.3](http://www.sec.gov/Archives/edgar/data/860731/000156459015008522/tyl-ex33_112.htm)] | | [removed: Amended] [added: [Amended] and Restated By-Laws of Tyler Corporation, dated October 20, 2015 (filed as Exhibit 3.3 to our Form 10-Q for the quarter ended September 30, 2015, and incorporated by reference [removed: herein).] [added: herein).](http://www.sec.gov/Archives/edgar/data/860731/000156459015008522/tyl-ex33_112.htm)] |

| [removed: 3.4] [added: [3.4](http://www.sec.gov/Archives/edgar/data/860731/000095013401002412/d84862ex3-4.txt)] | | [removed: Certificate] [added: [Certificate] of Amendment dated May 19, 1999 to the Restated Certificate of Incorporation (filed as Exhibit 3.4 to our Form 10-K for the year ended December 31, 2000, and incorporated by reference [removed: herein).] [added: herein).](http://www.sec.gov/Archives/edgar/data/860731/000095013401002412/d84862ex3-4.txt)] |

| [removed: 4.2] [added: [4.2](http://www.sec.gov/Archives/edgar/data/860731/000119312515378245/d57735dex101.htm)] | | [removed: Credit] [added: [Credit] Agreement dated November 16, 2015, among Tyler Technologies, Inc. and Wells Fargo Bank, N. A. as Administrative Agent and other lenders party hereto (filed as Exhibit 10.1 to our Form 8-K dated November 16, 2015, and incorporated by reference [removed: herein).] [added: herein).](http://www.sec.gov/Archives/edgar/data/860731/000119312515378245/d57735dex101.htm)] |

| [removed: 4.3] [added: [4.3](http://www.sec.gov/Archives/edgar/data/860731/000119312515334622/d68985dex21.htm)] | | [removed: Agreement] [added: [Agreement] and Plan of Merger, dated as of September 30, 2015, by and among Tyler Technologies, Inc., Brinston Acquisition, LLC, New World Systems Corporation, and Larry D. Leinweber, as the Principal Shareholder identified therein and the Shareholders’ Representative identified therein. (filed as Exhibit 2.1 to our Form 8-K, dated October 1, 2015, and incorporated by reference [removed: herein).] [added: herein).](http://www.sec.gov/Archives/edgar/data/860731/000119312515334622/d68985dex21.htm)] |

| [removed: 10.2] [added: [10.2](http://www.sec.gov/Archives/edgar/data/860731/000095012310071762/d74977exv4w1.htm)] | | [removed: Tyler] [added: [Tyler] Technologies, Inc. 2010 Stock Option Plan effective as of May 13, 2010 (filed as Exhibit 4.1 to our registration statement no. 333-168499 and incorporated by reference [removed: herein).] [added: herein).](http://www.sec.gov/Archives/edgar/data/860731/000095012310071762/d74977exv4w1.htm)] |

| [removed: 10.3] [added: [10.3](http://www.sec.gov/Archives/edgar/data/860731/000119312513067262/d487966dex103.htm)] | | [removed: Employment] [added: [Employment] and Non-Competition Agreement between Tyler Technologies, Inc. and John S. Marr Jr. dated February 5, 2013 (filed as Exhibit 10.3 to our Form 10-K for the year ended December 31, 2012 and incorporated by reference [removed: herein).] [added: herein).](http://www.sec.gov/Archives/edgar/data/860731/000119312513067262/d487966dex103.htm)] |

| [removed: 10.4] [added: [10.4](http://www.sec.gov/Archives/edgar/data/860731/000119312513067262/d487966dex104.htm)] | | [removed: Employment] [added: [Employment] and Non-Competition Agreement between Tyler Technologies, Inc. and Dustin R. Womble dated February 5, 2013 (filed as Exhibit 10.4 to our Form 10-K for the year ended December 31, 2012 and incorporated by reference [removed: herein).] [added: herein).](http://www.sec.gov/Archives/edgar/data/860731/000119312513067262/d487966dex104.htm)] |

| [removed: 10.5] [added: [10.5](http://www.sec.gov/Archives/edgar/data/860731/000119312513067262/d487966dex105.htm)] | | [removed: Employment] [added: [Employment] and Non-Competition Agreement between Tyler Technologies, Inc. and Brian K. Miller dated February 5, 2013 (filed as Exhibit 10.5 to our Form 10-K for the year ended December 31, 2012 and incorporated by reference [removed: herein).] [added: herein)](http://www.sec.gov/Archives/edgar/data/860731/000119312513067262/d487966dex105.htm).] |

| [removed: 10.6] [added: [10.6](http://www.sec.gov/Archives/edgar/data/860731/000119312513067262/d487966dex106.htm)] | | [removed: Employment] [added: [Employment] and Non-Competition Agreement between Tyler Technologies, Inc. and H. Lynn Moore dated February 5, 2013 (filed as Exhibit 10.6 to our Form 10-K for the year ended December 31, 2012 and incorporated by reference [removed: herein).] [added: herein).](http://www.sec.gov/Archives/edgar/data/860731/000119312513067262/d487966dex106.htm)] |

| [removed: 10.7] [added: [10.7](http://www.sec.gov/Archives/edgar/data/860731/000119312512139867/d323191ddef14a.htm)] | | [removed: Employee] [added: [Employee] Stock Purchase Plan (filed as Exhibit 10.1 to our registration statement 333-182318 dated June 25, 2012 and incorporated by reference [removed: herein).] [added: herein).](http://www.sec.gov/Archives/edgar/data/860731/000119312512139867/d323191ddef14a.htm)] |

| [removed: *23] [added: [*23](https://www.sec.gov/Archives/edgar/data/860731/000086073118000011/tyl12312017exhibit-23.htm)] | | [removed: Consent] [added: [Consent] of Independent Registered Public Accounting [removed: Firm.] [added: Firm.](https://www.sec.gov/Archives/edgar/data/860731/000086073118000011/tyl12312017exhibit-23.htm)] |

| [removed: *31.1] [added: [*31.1](https://www.sec.gov/Archives/edgar/data/860731/000086073118000011/tyl12312017exhibit311.htm)] | | [removed: Rule] [added: [Rule] 13a-14(a) Certification by Principal Executive [removed: Officer.] [added: Officer.](https://www.sec.gov/Archives/edgar/data/860731/000086073118000011/tyl12312017exhibit311.htm)] |

| [removed: *31.2] [added: [*31.2](https://www.sec.gov/Archives/edgar/data/860731/000086073118000011/tyl12312017exhibit312.htm)] | | [removed: Rule] [added: [Rule] 13a-14(a) Certification by Principal Financial [removed: Officer.] [added: Officer.](https://www.sec.gov/Archives/edgar/data/860731/000086073118000011/tyl12312017exhibit312.htm)] |

| [removed: *32] [added: [*32](https://www.sec.gov/Archives/edgar/data/860731/000086073118000011/tyl12312017exhibit321.htm)] | | [removed: Section] [added: [Section] 1350 Certification of Principal Executive Officer and Principal Financial [removed: Officer.] [added: Officer.](https://www.sec.gov/Archives/edgar/data/860731/000086073118000011/tyl12312017exhibit321.htm)] |

| Date: February [removed: 22, 2017] [added: 21, 2018] | | By: | | /s/ John S. Marr |

| Date: February [removed: 22, 2017] [added: 21, 2018] | | By: | | /s/ Brian K. Miller |

| Date: February [removed: 22, 2017] [added: 21, 2018] | | By: | | /s/ W. Michael Smith |

| Date: February [removed: 22, 2017] [added: 21, 2018] | | By: | | /s/ Donald R. Brattain |

| Date: February [removed: 22, 2017] [added: 21, 2018] | | By: | | /s/ Glenn A. Carter |

| Date: February [removed: 22, 2017] [added: 21, 2018] | | By: | | /s/ Brenda A. Cline |

| Date: February [removed: 22, 2017] [added: 21, 2018] | | By: | | /s/ J. Luther King |

| Date: February [removed: 22, 2017] [added: 21, 2018] | | By: | | /s/ Daniel M. Pope |

| Date: February [removed: 22, 2017] [added: 21, 2018] | | By: | | /s/ Dustin R.Womble |

| Date: February [removed: 22, 2017] [added: 21, 2018] | | By: | | /s/ John [removed: M. Yeaman] [added: S. Marr] |

[removed: The] [added: To the Shareholders and the] Board of Directors [removed: and Shareholders][added: of Tyler Technologies, Inc.]

We have audited Tyler Technologies, Inc.’s internal control over financial reporting as of December 31, [removed: 2016,] [added: 2017,] based on criteria established in Internal [removed: Control — Integrated] [added: Control-Integrated] Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).

[removed: Tyler Technologies, Inc.’s] [added: The Company’s] management is responsible for maintaining effective internal control over financial [removed: reporting,] [added: reporting] and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying [removed: “Management’s] [added: Management’s] Report on Internal Control Over Financial [removed: Reporting.” Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.][added: Reporting.]

We conducted our audit in accordance with the standards of the [removed: Public Company Accounting Oversight Board (United States).][added: PCAOB.]

In our opinion, Tyler Technologies, Inc. [added: (the Company)] maintained, in all material respects, effective internal control over financial reporting as of December 31, [removed: 2016,] [added: 2017,] based on the COSO criteria.

We [removed: also] have [removed: audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),] [added: audited] the [added: accompanying] consolidated balance sheets of Tyler Technologies, Inc. [added: (the Company)] as of December 31, [removed: 2016 and 2015,] [added: 2017] and [added: 2016,] the related consolidated statements of comprehensive income, [removed: shareholders’ equity, and] cash flows [added: and shareholders’ equity] for each of the three years in the period ended December 31, [removed: 2016] [added: 2017,] and [removed: our report dated February 22, 2017 expressed an unqualified opinion thereon.][added: the related notes (collectively referred to as the “consolidated financial statements”).]

[removed: February 22,] 2017

[removed: We have audited the accompanying consolidated balance sheets of Tyler Technologies, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of] comprehensive income, shareholders’ [removed: equity,] [added: equity] and cash flows for each of the three years in the period ended December 31, [removed: 2016.][added: 2017, and the related notes and our report dated February 21, 2018 expressed an unqualified opinion thereon.]

Our responsibility is to express an opinion on [removed: these] [added: the Company’s] financial statements based on our audits.

We conducted our audits in accordance with the standards of the [removed: Public Company Accounting Oversight Board (United States).][added: PCAOB.]

| Date: February 21, 2018 | | By: | | /s/ H. Lynn Moore |

| | | | | H. Lynn Moore |

| | | | | President and Director |

Opinion on the Financial Statements

Basis for Opinion

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

We have served as the Company’s auditor since 1966.

February 21, 2018

To the Shareholders and the Board of Directors of Tyler Technologies, Inc.

Opinion on Internal Control over Financial Reporting

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of

Basis for Opinion

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

Definition and Limitations of Internal Control Over Financial Reporting

February 21, 2018

| | $ | 1,589,592 | | | $ | 1,357,945 | |

| | $ | 1,589,592 | | | $ | 1,357,945 | |

| Balance at December 31, 2017 | 48,148 | | | $ | 481 | | | $ | 626,867 | | | $ | (46 | ) | | $ | 599,821 | | | (10,262 | ) | | $ | (60,029 | ) | | $ | 1,167,094 | |

| Net income | $ | 163,945 | | | $ | 109,857 | | | $ | 64,869 | |

The Tax Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits and deductions for individuals and businesses.

For businesses, the Tax Act reduces the corporate U.S. federal tax rate from a maximum of 35% to a flat 21% rate and transitions from a worldwide tax system to a territorial tax system.

Under ASC 740 Income Taxes, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted.

In the case of U.S. corporate federal income taxes, the enactment date is the date the bill becomes law (i.e., upon presidential signature).

See Note 7 - "Income Tax" for further discussion related to the Tax Act.

The investment in convertible preferred stock is accounted under the cost method because the Company does not have the ability to exercise significant influence over the investee and the securities do not have readily determinable fair values.

Our investment is carried at cost less any impairment write-downs.

Annually, the Company’s cost method investments are assessed for impairment.

The Company does not reassess the fair value of cost method investments if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investments.

This investment is included in non-current investments and other assets in the accompanying consolidated balance sheets.

We have adopted the new standard effective January 1, 2018 using the full retrospective method which will require each prior reporting period presented to be recast in future issuance of our financial statements.

In preparation for adoption of the standard, we have implemented internal controls and key system functionality to enable the preparation of financial information and have reached conclusions on key accounting assessments related to the standard.

During the fourth quarter of fiscal 2017, we have substantially completed data conversion activities required to recast our prior period results.

We continue to perform an in-depth review of our preliminary results; therefore, we are in the process of completing our analysis necessary to recast prior period results.

We do not believe there are any remaining significant implementation topics associated with the adoption of this ASU that have not yet been addressed.

The impact of the standard on consolidated revenue and costs of revenue will be dependent upon the mix of revenue streams due to our accounting for software license fees, allocation of discounts across all performance obligations and to the incremental costs of obtaining a contract.

On November 29, 2017, we acquired audio and digital two-way radio communications technology and related assets from Radio 10-33, LLC.

The total purchase price was $1.4 million, all of which was paid in cash.

On August 2, 2017, we acquired substantially all of the assets and assumed certain liabilities of Digital Health Department, Inc. ("DHD"), a company that provides environmental health software, offering a software-as-a-service (SaaS) solution for public health compliance and inspections processes.

| | |

| --- | --- |

| | | | | Director |

| Date: February 22, 2017 | | By: | | /s/ Larry D. Leinweber |

| | | | | Larry D. Leinweber |

| | | | | John M. Yeaman |

Tyler Technologies, Inc.

As discussed in Note 1 to the consolidated financial statements, the Company has adopted ASU 2016-09 Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.

| | $ | 1,357,945 | | | $ | 1,356,570 | |

| Balance at December 31, 2013 | 48,148 | | | $ | 481 | | | $ | 182,176 | | | $ | (46 | ) | | $ | 202,210 | | | (15,310 | ) | | $ | (138,502 | ) | | $ | 246,319 | |

| Federal income tax benefit related to exercise of stock options | — | | | — | | | | 19,415 | | | | — | | | | — | | | | — | | | — | | | | 19,415 | | |

| Issuance of shares for acquisition | — | | | — | | | | 193 | | | | — | | | | — | | | | 17 | | | 1,280 | | | | 1,473 | | |

| Purchase of cost method investment | — | | | | (15,000 | | ) | | — | | |

Alternatively, if sufficient VSOE does not exist and the only undelivered element is

determine the license fee.

During fourth quarter of 2016, we adopted Accounting Standards Update ("ASU") No. 2016-09 "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," See "New Accounting Pronouncements" below for further information.

New Accounting Pronouncements Adopted in 2016

Improvements to Employee Share-Based Payment Accounting.

In March 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.

This standard is effective for our interim and annual reporting periods beginning December 15, 2016, and early adoption is permitted.

We elected to early adopt this standard in fourth quarter of 2016.

The impact of the early adoption was as follows:

| • | The standard eliminates additional paid in capital ("APIC") pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement as a discrete item when the awards vest or are settled. The adoption of this guidance on a prospective basis resulted in the recognition of excess tax benefits in our provision for income taxes. |

| • | The standard requires excess tax benefits to be recognized regardless of whether the benefit reduces taxes payable. The adoption of this guidance is applied on a modified retrospective basis; however, it did not have an impact on our retained earnings as of January 1, 2016, as we had previously recognized all our excess tax benefits. |

| • | As permitted, we have elected to continue to estimate forfeitures expected to occur to determine the amount of stock-based compensation cost to be recognized in each period. As such, the guidance relating to forfeitures did not have an impact on our retained earnings as of January 1, 2016. |

| • | The new guidance changes the calculation of common stock equivalents for earnings per share purposes. |

| • | As permitted, we elected to apply the statement of cash flows guidance that cash flows related to excess tax benefits be presented as an operating activity retrospectively. |

Adoption of the new standard resulted in the recognition of excess tax benefits in our provision for income taxes rather than APIC of $29.6 million for the period ended December 31, 2016.

As of December 31, 2016, the change in the calculation of common stock equivalents added approximately 519,000 weighted average shares for the diluted earnings per share calculations.

The impact to our previously reported quarterly results for fiscal year 2016 is as follows:

| | | | | | | | | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | Three Months Ended | | | | | | | | Three Months Ended | | | | | | | | Three Months Ended | | | | | | |

| | March 31, 2016 | | | | | | | | June 30, 2016 | | | | | | | | September 30, 2016 | | | | | | |

| (In thousands, except per share amounts) | As Reported | | | | As Adjusted | | | | As Reported | | | | As Adjusted | | | | As Reported | | | | As Adjusted | | |

| Income statements: | | | | | | | | | | | | | | | | | | | | | | | |

| Income tax provision | $ | 10,495 | | | $ | 9,350 | | | $ | 11,323 | | | $ | 5,188 | | | $ | 14,155 | | | $ | 989 | |

| Net income | $ | 17,079 | | | $ | 18,224 | | | $ | 18,872 | | | $ | 25,007 | | | $ | 22,264 | | | $ | 35,430 | |

| Basic earnings per common share | $ | 0.47 | | | $ | 0.50 | | | $ | 0.52 | | | $ | 0.69 | | | $ | 0.61 | | | $ | 0.97 | |

| Diluted weighted average common shares outstanding | 38,557 | | | | 39,071 | | | | 38,196 | | | | 38,738 | | | | 38,506 | | | | 39,062 | | |