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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission Number 0-14112
JACK HENRY & ASSOCIATES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 43-1128385
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
663 Highway 60, P. O. Box 807, Monett, MO 65708
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(Address of principal executive offices)
Registrant's telephone number, including area code: (417) 235-6652
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.01 par value)
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
As of August 19, 2002, Registrant had 87,910,881 shares of Common Stock
outstanding ($.01 par value). On that date, the aggregate market value
of the Common Stock held by persons other than those who may be deemed
affiliates of Registrant was $1,037,801,086 (based on the average of
the reported high and low sales prices on NASDAQ on such date).
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Company's Notice of Annual Meeting of
Stockholders and Proxy Statement for its Annual Meeting of Stockholders,
as described in the Footnotes to the Table of Contents included herewith,
are incorporated herein by reference into Parts II and III of this
Report.
PAGE>
TABLE OF CONTENTS
PART I PAGE REFERENCE (1)
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ITEM 1. BUSINESS ............................. 3
ITEM 3. LEGAL PROCEEDINGS .................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS ..................... 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY 13
AND RELATED STOCKHOLDER MATTERS ......
ITEM 6. SELECTED FINANCIAL DATA .............. 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF 14
OPERATIONS ...........................
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK .................... 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA ................................ 20
ITEM 9. CHANGES IN AND DISAGREEMENTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE .. 39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT (2) ................... 40
ITEM 11. EXECUTIVE COMPENSATION (3) ........... 40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT (4) . 40
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS (5) ..................... 40
ITEM 14 CONTROLS AND PROCEDURES .............. 40
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K .... 40
(1) Certain information is incorporated by reference, as indicated below,
from the Company's Notice of Annual Meeting of the Stockholders and
Proxy Statement (the "Proxy Statement").
(2) Proxy Statement sections entitled "Election of Directors" and
"Executive Officers and Significant Employees."
(3) Proxy Statement sections entitled "Executive Compensation",
"Compensation Committee Report", "Audit Committee Report" and
"Company Performance."
(4) Proxy Statement sections entitled "Stock Ownership of Certain
Stockholders" and "Election of Directors."
(5) Proxy Statement section entitled "Certain Relationships and Related
Transactions."
PART I
Item 1. Business
Jack Henry & Associates, Inc. ("JHA" or the "Company") is a leading provider
of integrated computer systems to banks with under $10.0 billion of total
assets, credit unions and other financial institutions in the United States.
We offer a complete, integrated suite of data processing system solutions
to improve our customers' management of their entire back-office and
customer interaction processes. We believe our solutions enable our
customers to provide better service to their customers and compete more
effectively against larger banks, credit unions and alternative financial
institutions. Our customers either install and use our systems in-house or
outsource these operations to us. We perform data conversion, hardware and
software installation and software customization for the implementation of
our systems and applications. We also provide continuing customer support
services to ensure proper product performance and reliability, which
provides us with continuing client relationships and recurring revenue. For
our customers who prefer not to acquire hardware and software, we provide
outsourcing services through eight data centers and fourteen item processing
centers located across the United States.
Our gross revenue has grown from $156.3 million in fiscal 1998 to $396.7
million in fiscal 2002, representing a compound annual growth rate over this
five-year period of 24.6%. Net income from continuing operations has grown
from $24.2 million in fiscal 1998 to $57.1 million in fiscal 2002, a
compound annual growth rate of 19%.
Industry Background
According to the Automation in Banking 2002 report, United States financial
institutions, including commercial banks, thrifts and credit unions,
increased spending on hardware, software, services and telecommunications to
$40.7 billion in 2001 from $31.0 billion in 1998, representing a compound
annual growth rate of 8.4%. Industry surveys continue to show that
financial institutions believe upgrading technology is the most important
issue to their continued success. We believe that the market opportunity
for providers of hardware and software systems, maintenance, support and
related outsourcing services targeted toward community banks and credit
unions will continue to grow as a result of the competitive pressure on
financial institutions.
There are approximately 8,600 commercial banks and 10,200 credit unions in
the United States. Our primary market has historically been commercial
banks with less than $10.0 billion in assets, of which there were
approximately 8,500 at December 31, 2001. As of December 31, 2001, banks
with under $10.0 billion in assets had aggregate assets of approximately $2
trillion. However, consolidation within the financial services industry has
resulted in a 2% compound annual decline in the population of commercial
banks and a 0.4% compound annual decline in their aggregate assets between
1997 and 2001. We also serve credit unions in the United States. These are
cooperative, not-for-profit financial institutions organized to promote
savings and provide credit to their members. As of December 31, 2001, there
were 10,200 federally insured credit unions in the United States. Although
the number of these credit unions has declined at a 2.6% compound annual
rate between 1997 and 2001, their aggregate assets have increased at an 8.9%
compound annual rate to $501.6 billion in 2001.
We believe that community/regional banks and credit unions play an important
role with the geographic and demographic communities and customers they
serve. Typically, customers of these banks and credit unions rely on these
financial institutions because of their ability to provide personalized,
relationship-based service and their focus on local community and business
needs. We believe these core strengths will allow community/regional banks
and credit unions to effectively compete with larger banks and alternative
financial institutions. In order to succeed and to maintain strong customer
relationships, we believe these banks and credit unions must continue to:
* focus on their primary products and services;
* respond rapidly to customer demand for new products and services;
* implement advanced technologies, such as Imaging and Internet
banking;
* use advanced technologies in back-office operations to improve
operating efficiency and control costs while increasing service
and lowering costs to their customers; and
* integrate products and services into their core service offerings
and data processing infrastructure, to provide the same wide range
of services as are offered by larger banks.
In 2001, approximately 57% of commercial banks utilized in-house hardware
and software systems to perform all of their core systems and data
processing functions. Off-site data processing centers provided systems
services on an outsourced basis for the remaining 43% of banks. Since the
mid-1980s, banks have tended to shift their data processing requirements in-
house from outsourcing such functions to third-party data centers. Of the
community banks with under $500 million of total assets in the United
States with in-house installations, approximately 58%, 21%, and 7% utilize
IBM, Unisys and NCR hardware, respectively. No other specific hardware
platform had more than a 5% share of the market.
The Internet continues to become a more powerful and efficient medium for
the delivery of financial services, including Internet banking, bill
payment, bill presentment and other services for individuals, and cash
management and other services for the commercial customers of financial
institutions. Financial institutions provide Internet banking solutions
to retain customers, attract new customers, reduce operating costs, and
gain non-interest sources of revenue. According to industry sources,
approximately 60% of banks in the United States offer Internet banking. We
believe that community/regional financial institutions risk losing customers
to larger or alternative financial institutions if they do not offer
competitive Internet banking services.
Our Solution
We are a single-source provider of a comprehensive and flexible suite of
integrated products and services that address the information technology and
data processing needs of financial institutions. Our business derives
revenues from four primary sources:
* software licensing and installation services;
* support and services; and
* hardware sales.
* customer reimbursements
We develop software applications designed primarily for use on hardware
supporting the IBM OS/400 and UNIX/NT operating systems. Our product and
service offerings are centered on five proprietary software applications,
each comprising the core data processing and information management
functions of a commercial bank or credit union. Key functions of each of
our core software applications include deposits, loans, and general ledger.
Our software applications make extensive use of parameters allowing our
customers to tailor the software to their needs. Our software applications
are designed to provide maximum flexibility in meeting our customer data
processing requirements within a single, integrated system. Our core
proprietary software applications are:
Banking Segment
* Silverlake System [R], which operates on the IBM iSeries (AS/400)
and is used primarily by banks with total assets up to $10.0
billion;
* CIF 20/20[TM], which operates on the IBM iSeries (AS/400) and is
used primarily by banks with total assets up to $300.0 million;
* Core Director[TM], which operates on hardware supporting a UNIX/NT
environment and is used by banks employing client-server
technology.
Credit Union Segment
* Symitar System[TM], which operates on the IBM pSeries (RS/6000)
with a UNIX/NT operating system and is primarily used by credit
unions with total assets over $25 million.
* Conductor[TM], which operates on the IBM iSeries (AS/400) and is
used primarily by credit unions with total assets under $25
million.
To complement our core software applications, we provide a variety of
complementary products and services for use on an in-house or an outsourced
basis by community/regional financial institutions.
We believe our solutions provide strategic advantages to our customers by
enabling them to:
* Implement Advanced Technologies with Full Functionality. Our
comprehensive suite of products and services is designed to meet
our customers' information technology needs through custom-
tailored solutions using proprietary software products. Our
clients can either perform these functions themselves on an in-
house basis through the installation of our hardware and software
systems or outsource those functions to us.
* Rapidly Deploy New Products and Services. Once a financial
institution has implemented our core software, either in-house or
on an outsourced basis, we can quickly and efficiently install
additional applications and functions. This allows our customers
to rapidly deploy new products and services.
* Focus on Customer Relationships. Our products and services allow
our customers to stay focused on their primary business of
gaining, maintaining and expanding their customer relationships
while providing the latest financial products and services.
* Access Outsourcing Solutions to Improve Operating Efficiency.
Customers utilizing our outsourcing solutions benefit from access
to all of our products and services without having to maintain
personnel to develop, update and run these systems and without
having to make large up-front capital expenditures to implement
these advanced technologies.
Our Strategy
Our objective is to grow our revenue and earnings internally, supplemented
by strategic acquisitions. The key components of our business strategy are
to:
* Provide High Quality, Value-Added Products and Services to Our
Clients. We compete on the basis of providing our customers with
the highest-value products and services in the market. We believe
we have achieved a reputation as a premium product and service
provider.
* Continue to Expand Our Product and Service Offerings. We
continually upgrade our core software applications and expand our
complementary product and service offerings to respond to
technological advances and the changing requirements of our
clients. For example, we offer a turn-key Internet banking
solution that enables financial institutions to rapidly deploy
sophisticated new products and services. Our integrated solutions
enable our customers to offer competitive services relative to
larger banks and alternative financial institutions. We intend to
continue to expand our range of internet banking and other
products and services as well as provide additional services such
as network services and computer facilities design.
* Expand Our Existing Customer Relationships. We seek to increase
the information technology products and services we provide to
those customers that do not utilize our full range of products and
services. In this way, we are able to increase revenues from
current customers with minimal additional sales and marketing
expenses.
* Expand Our Customer Base. We seek to establish long-term
relationships with new customers through our sales and marketing
efforts and selected acquisitions. As of June 30, 2002, we had
over 2,800 customers, up from 1,260 in 1997.
* Build Recurring Revenue. We enter into contracts with customers
to provide services that meet their information technology needs.
We provide ongoing software support for our in-house customers.
Additionally, we provide data processing for our outsourcing
customers and ATM transaction switching services, both on
contracts that typically extend for periods of up to five years.
* Maximize Economies of Scale. We strive to develop and maintain a
sufficiently large client base to create economies of scale,
enabling us to provide value-priced products and services to our
clients while expanding our operating margins.
* Attract and Retain Capable Employees. We believe attracting and
retaining high-quality employees is essential to our continued
growth and success. Our corporate culture focuses on the needs of
employees, a strategy we believe has resulted in low employee
turnover. In addition, we selectively use employee stock options
to serve as a strong incentive and retention tool.
Our Acquisitions
To complement and accelerate our internal growth, we selectively acquire
companies that provide us with one or more of the following:
* new customers;
* products and services to complement our existing offerings;
* additional outsourcing capabilities; and
* entry into new markets related to financial institutions.
When evaluating acquisition opportunities, we focus on companies with a
strong employee base and management team and excellent customer
relationships. Since fiscal 1998, we have completed the following
acquisitions:
Fiscal
Year Company Products and Services
---- ------- ---------------------
2002 Transcend Systems Group Customer Relationship Management
software and related services
2002 System Legacy Solutions Image data conversion systems
2000 Symitar Data processing systems and services
for credit unions
2000 Sys-Tech Uninterruptible power supply systems
and computer facilities design
2000 BancData Systems Outsourcing services
2000 Open Systems Group UNIX/NT-based data processing
systems for banks
1999 Peerless Group Data processing systems for banks
and credit unions
1999 Digital Data Services Outsourcing services
1999 Hewlett Computer Services Outsourcing services
1998 Vertex Teller software
1998 Financial Software Systems Payroll software
1998 GG Pulley Image and item processing
products and services
Our Products and Services
Changing technologies, business practices and financial products have
resulted in issues of compatibility, scalability and increased complexity
for the hardware and software used in many financial institutions. We have
responded to these issues by developing a fully integrated suite of products
and services consisting of core software systems, hardware and complementary
products and services. These address virtually all of a commercial bank or
credit union's customer interaction, back-office data and information
processing needs.
We provide our full range of products and services to financial institutions
on either an in-house or outsourced basis. For those customers who prefer
to purchase systems for their in-house facilities, we contract to sell
computer hardware, license core and complementary software and contract to
provide installation, data conversion, training and ongoing support and
other services.
We also offer our full suite of software products and services on an
outsourced basis to customers who do not wish to maintain, update and run
these systems or to make large up-front capital expenditures to implement
these advanced technologies. Our principal outsourcing service is the
delivery of mission-critical data processing services using our data centers
located within the United States. We provide our outsourcing services
through an extensive national data and service center network, comprised of
8 data centers and 14 item processing centers. We monitor and maintain our
network on a seven-day, 24-hour basis. Customers typically pay monthly fees
on service contracts of up to 5 years for these services.
Information regarding the classification of our business into separate
segments serving the banking and credit union industries is set forth in
Note 14 to the Financial Statements (Item 8, below).
Hardware Systems
Our software operates on a variety of hardware systems. We have entered
into remarketing agreements with IBM, NCR and other hardware providers which
allow us to purchase hardware at a discount and sell (remarket) it to our
customers together with our software applications. We currently sell the
IBM iSeries (AS/400), which is IBM's premier mid-range hardware system,
the IBM pSeries (RS/6000), NCR servers and reader/sorters, BancTec
reader/sorters and Unisys reader/sorters.
We have a long-term strategic relationship with IBM, dating to the initial
design of our first core software applications more than 20 years ago. In
addition to our remarketing agreement with IBM, which we renew annually, we
have been named a "Premier Business Partner'' of IBM for the last ten
consecutive years. Our relationship with IBM provides us with a substantial
and ongoing source of revenue.
Core Software Applications
Each of our core software systems consists of several fully-integrated
application modules, such as deposits, loans, general ledger, and the
customer information file, which is a centralized file containing customer
data for all applications. We can custom-tailor these modules utilizing
parameters determined by our customer. The applications can be connected to
a wide variety of peripheral hardware devices used in financial institutions
bank operations. Our software is designed to provide maximum flexibility in
meeting our customers' data processing requirements within a single system
to minimize data entry and improve efficiencies.
For our customers who choose to acquire in-house capabilities, we generally
license our core system under standard license agreements which provide the
customer with a fully-paid, nonexclusive, nontransferable right to use the
software on a single computer and at a single location. These same systems
can be delivered on an outsourced basis as well.
Our core software applications are differentiated broadly by size of
customer, scalability, customizable functionality, customer competitive
environment and, to a lesser extent, cost. Our core applications include:
Banking Segment
* Silverlake System[R], which operates on the IBM iSeries and is
used primarily by banks with total assets up to $10.0 billion;
* CIF 20/20[TM], which operates on the IBM iSeries and is used
primarily by banks with total assets up to $300.0 million;
* Core Director[TM], which operates on hardware supporting a UNIX/NT
environment and is used by banks employing client-server
technology.
Credit Union Segment
* Symitar System[TM], which operates on the IBM pSeries with a
UNIX/NT operating system and is used by credit unions.
* Conductor[TM], which operates on the IBM iSeries and is used
primarily by credit unions with total assets under $25.0 million.
Complementary Products and Services
To enhance our core software applications, we provide a number of
complementary products and services, including:
Vertex Teller Automation System[TM] is an online teller automation
system that enables tellers to process transactions more efficiently
and with greater accuracy.
Streamline Platform Automation[TM] is a fully-automated new account
origination solution that integrates new customer data, including
signature cards, disclosure statements, and loan applications into the
core customer data files on a real-time basis.
Alliance Check Image Solutions[TM] allow our customers to create and
store digital check images for inclusion in monthly statements and to
facilitate their customer support services.
4|sight[TM] item image solutions is our new generation of imaging
products, which allows our customers to create and store digital check
images for inclusion in monthly statements, facilitate their customer
support services and leverage their investments with system
integration.
Silhouette Document Imaging[TM] utilizes digital storage and retrieval
technology to provide online instant access to document images, such as
loan documents and signature cards.
PinPoint Report Retrieval[TM] enables system-wide storage and retrieval
of computer-generated reports for simplified information access.
NetTeller Online Banking[TM] and MemberConnect Web[TM] provides
Internet-based home banking and commercial cash management. See
"Online Banking'' below.
InTouch Voice Response[TM] provides a fully-automated interactive voice
response system for 24-hour telephone-based customer account
management.
Centurion Disaster RecoveryK provides multi-tiered disaster recovery
protection, including comprehensive disaster planning and procedures.
TimeTrack Payroll System [TM]is a fully-integrated payroll accounting
and human resources software system.
FormSmart[SM] provides day-to-day operating forms, year-end tax forms
and other printing and office supplies.
PassPort[TM] ATM & transaction processing solutions provides national
switching and processing services for ATM, debit card and point-of-sale
transactions.
Synapsis[TM] provides customer relationship management (CRM).
CARRIT [TM] provides CRM through a partnering relationship with ARGO
for larger commercial bank customers.
Other software products such as proof of deposit, secondary market loan
servicing, account reclassification, and investment sweeps further
complement our core systems.
Installation and Training
Although not a requirement of the software contract, virtually all of
our customers contract with us for installation and training services
in connection with their purchase of in-house systems. The complete
installation process of a core system typically includes planning, design,
data conversion, hardware set-up and testing. At the culmination of this
installation process, one of our installation teams travels to our
customer's facilities to ensure the smooth transfer of data to the new
system. Installation fees are charged separately to our customers on either
a fixed fee or hourly charge model depending on the system, with full pass-
through to our customers of travel and other expenses. Installation
services are also required in connection with new outsourcing customers, and
are billed separately at the time of installation.
Both in connection with installation of new systems and on an ongoing basis,
our customers need, and we provide, extensive training services and programs
related to our products and services. Training can be provided in our
regional training centers, at meetings and conferences or onsite at our
customers' locations, and can be customized to meet our customers'
requirements. The large majority of our customers acquire training services
from us, both to improve their employees' proficiency and productivity and
to make full use of the functionality of our systems. Generally, training
services are paid for on an hourly basis, however, we have recently been
successful in marketing annual subscriptions for training services,
representing blocks of training time that can be used by our customers in a
flexible fashion and the related revenue is recognized as the services are
provided.
Support and Services
Following the installation of our hardware and software systems at a
customer site, we provide ongoing software support services to assist our
customers in operating the systems and to periodically update the software.
We also offer support services for hardware, primarily through our hardware
suppliers, providing customers who have contracted for this service with
"one-call'' system support covering hardware and software applications.
Support is provided through a 24-hour telephone service available to our
customers seven days a week. Most questions and problems can be resolved
quickly by our experienced support staff. For more complicated issues, our
staff, with our customers' permission, can log on to our customers' systems
remotely. We maintain our customers' software largely through releases
which contain improvements and incremental additions. Updates also are
issued when required by changes in applicable laws and regulations. We
provide maintenance and support services on our core systems as well as our
complementary software products.
Nearly all of our in-house customers purchase support services from us.
These services are a significant source of recurring revenue, are contracted
for on an annual basis and are typically priced at approximately 18% of the
particular software product's license fee. These fees may be increased as
our customers' asset base increases and as they increase the level of
functionality of their system by purchasing additional complementary
products. Software support fees are generally paid in advance for the
entire year, with proration for new contracts which start during the year.
Hardware support fees are also paid in advance for the entire contract
period which ranges from one to five years. Most contracts automatically
renew annually unless we or our customer gives notice of termination at
least 60 days prior to expiration. Identical support is provided to our
outsourced customers, but is not separately priced in their overall monthly
fees.
Online Banking
We provide a suite of fully integrated Internet products and services that
enables financial institutions to offer Internet banking and e-commerce
solutions to their customers. Our offerings include:
NetTeller[TM], an Internet-based home banking system for individual
customers and commercial cash management for business customers of
banks;
MemberConnect Web[TM], an Internet-based home banking system for credit
union members;
PowerPay[TM] , which allows customers to pay bills online; and
NetHarbor[R], which provides our bank customers with a custom-branded
web portal that enables them to provide their customers with a variety
of customized information and e-commerce opportunities, including user-
defined content such as local or special interest events, weather,
financial news and other information.
Research and Development
We devote significant effort and expense to develop new software, service
products and continually upgrade and enhance our existing offerings.
Typically, we upgrade our core software applications and complementary
services once per year. We believe our research and development efforts are
highly efficient because of the extensive experience of our research and
development staff and because our product development is highly customer-
driven. Through our regular contact with customers at user group meetings,
sales contacts and through our ongoing maintenance services, our customers
inform us of the new products and functionalities they desire.
Sales and Marketing
Our primary markets consist of commercial banks and credit unions. We have
not devoted significant marketing and sales efforts to other financial
institutions such as thrifts. Historically, we have primarily and most
successfully marketed to banks with up to $10.0 billion in total assets and
credit unions of all sizes.
Our sales efforts are conducted by a dedicated field sales force, an inside
sales team and a technical sales support team, all of which are overseen by
regional sales managers. Our dedicated field sales force is responsible for
pursuing lead generation activities and representing the majority of our
products and solutions to current and prospective clients. Our inside sales
force sells certain complementary products to our existing customers. All
sales force personnel have responsibility for a specific territory. The
sales support team writes business proposals and contracts and prepares
responses to request-for-proposals regarding our software and hardware
solutions. All of our sales professionals receive a base salary and
performance-based commission compensation.
Our marketing effort consists of attendance at trade shows, printed media
advertisement placements, internally developed and managed marketing
campaigns. We also conduct a number of field and national user group
meetings each year which enable us to keep in close contact with our
customers and demonstrate new products and services to them.
We have 31 installations in the Caribbean primarily through the marketing
efforts of our wholly-owned foreign sales subsidiary, Jack Henry
International Limited. Our international sales have historically accounted
for less than 1% of our revenues.
Backlog
Our backlog consists of contracted in-house products and services (prior to
delivery) and the minimum amounts due on the remaining portion of
outsourcing contracts, which are typically for five-year periods. Our
backlog at June 30, 2002 was $52.8 million for in-house products and
services and $88.9 million for outsourcing services, with a total backlog of
$141.7 million. Of the $88.9 amount of the backlog for outsourcing
service at June 30, 2002, $58.6 is not expected to be realized in our
current fiscal year due to the long-term nature of many of our outsourcing
service contracts. Backlog at June 30, 2001 was $49.5 million for in-house
products and services and $77.6 million for outsourcing services, with a
total backlog of $127.1 million. Our backlog is subject to seasonal
variations and can fluctuate quarterly due to various factors, including
slower contract processing rates during the summer months.
Competition
The market for companies providing technology solutions to financial
institutions is competitive and fragmented, and we expect continued
competition from both existing competitors and companies entering our
existing or future markets. Some of our current competitors have longer
operating histories, larger customer bases and greater financial resources.
The principal competitive factors affecting the market for our services
include comprehensiveness of the applications, features and functionality,
flexibility and ease of use, customer support, references from existing
customers and price. We compete with large vendors that offer transaction
processing products and services to financial institutions, including Bisys,
Inc., ALLTEL Information Services, Inc., Fiserv, Inc., Electronic Data
Systems Corporation, and Marshall and Ilsley Corporation. In addition, we
compete with a number of providers that offer one or more specialized
products or services. There has been significant consolidation among
providers of information technology products and services to financial
institutions, and we believe this consolidation will continue in the future.
Intellectual Property, Patents and Trademarks
Although we believe that our success depends upon our technical expertise
more than on our proprietary rights, our future success and ability to
compete depends in part upon our proprietary technology. We have registered
or filed applications for our primary trademarks. None of our technology is
patented. Instead, we rely on a combination of contractual rights and
copyrights, trademarks and trade secrets to establish and protect our
proprietary technology. We generally enter into confidentiality agreements
with our employees, consultants, resellers, customers and potential
customers. We restrict access to and distribution of our source code and
further limit the disclosure and use of other proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy or otherwise obtain or use our products or technology.
We cannot be sure the steps taken by us in this regard will be adequate to
prevent misappropriation of our technology or that our competitors will not
independently develop technologies are substantially equivalent or superior
to our technology.
Government Regulation
The financial services industry is subject to extensive and complex federal
and state regulation. Our current and prospective customers, which consist
of financial institutions such as community/regional banks and credit
unions, operate in markets that are subject to substantial regulatory
oversight and supervision. We must ensure our products and services work
within the extensive and evolving regulatory requirements applicable to our
customers, including those under the federal truth-in-lending and truth-in-
savings rules, usury laws, the Equal Credit Opportunity Act, the Fair
Housing Act, the Electronic Funds Transfer Act, the Fair Credit Reporting
Act, the Bank Secrecy Act, the Patriot Act, the Gramm-Leach-Bliley Act, and
the Community Reinvestment Act. The compliance of our products and services
with these requirements depends on a variety of factors including the
particular functionality, the interactive design and the classification of
customers. Our customers must assess and determine what is required of them
under these regulations and they contract with us to ensure that our
products and services conform to their regulatory needs. It is not possible
to predict the impact any of these regulations could have on our business in
the future.
We are not chartered by the Office of the Comptroller of Currency, the Board
of Governors of the Federal Reserve System, the National Credit Union
Administration or other federal or state agencies that regulate or supervise
depository institutions. The services provided by our OutLink Data Centers
are subject to examination by the Federal depository institution regulators
under the Bank Service Company Act. On occasion these services are also
subject to examination by state banking authorities.
We provide outsourced data and item processing through our geographically
dispersed OutLink Data Centers, electronic transaction processing through
PassPort ATM and Transaction Processing Solutions, Internet banking
through NetTeller online banking, and bank business recovery services
through Centurion Disaster Recovery. As a service provider to financial
institutions, our operations are governed by the same regulatory
requirements as those imposed on financial institutions. We are subject to
periodic review by federal depository institution regulators who have broad
supervisory authority to remedy any shortcomings identified in such reviews.
Employees
As of June 30, 2002 and 2001, we had 2,093 and 1,910 full time employees
respectively. Our employees are not covered by a collective bargaining
agreement and there have been no labor-related work stoppages. We consider
our relationship with our employees to be good.
RISK FACTORS
The Company's business and the results of its operations are affected by
numerous factors and uncertainties, some of which are beyond their control.
The following is a description of some of the important risk factors and
uncertainties that may cause the actual results of the Company's operations
in future periods to differ materially from those currently expected or
desired.
Changes within the banking industry could reduce demand for our products.
In the current environment of low interest rates, the profit margins of
commercial banks and credit unions have narrowed. As the economy has
stumbled, loan demand has slackened and loan defaults have increased. As a
result, many banks have slowed or stopped their capital spending, including
spending on computer software and hardware, affecting both sales to new
customers and upgrade/complimentary product sales to existing customers.
We may not be able to continue or effectively manage our rapid growth. We
have grown at a rapid pace, both internally and through acquisitions. Our
expansion has and will continue to place significant demands on our
administrative, operational, financial and management personnel and systems.
We cannot assure you that we will be able to enhance and expand our product
lines, manage costs, adapt our infrastructure and modify our systems to
accommodate future growth.
If we fail to adapt our products and services to changes in technology, we
could lose existing customers and be unable to attract new business. The
markets for our software and hardware products and services are
characterized by changing customer requirements and rapid technological
changes. These factors and new product introductions by our existing
competitors or by new market entrants could reduce the demand for our
existing products and services and we may be required to develop or acquire
new products and services. Our future success is dependent on our ability
to enhance our existing products and services in a timely manner and to
develop or acquire new products and services. If we are unable to develop
or acquire new products and services as planned, or fail to achieve timely
market acceptance of our new or enhanced products and services, we may incur
unanticipated expenses, lose sales or fail to achieve anticipated revenues.
Acquisitions may be costly and difficult to integrate. We have acquired
several businesses and will continue to explore possible business
combinations in the future. We may not be able to successfully integrate
acquired companies. We may encounter problems in connection with the
integration of new businesses including: financial control and computer
system compatibility; unanticipated costs; unanticipated quality or customer
problems with acquired products or services; diversion of management's
attention; adverse effects on existing business relationships with suppliers
and customers; loss of key employees; and significant amortization expenses
related to identifiable intangible assets. Without additional acquisitions,
we may not be able to grow and to develop new products and services as
quickly as we have in the past to meet competitive challenges. If our
integration strategies fail, our business, financial condition and results
of operations could be materially and adversely affected.
If our strategic relationship with IBM were terminated, it could have
a negative impact on the continuing success of our business. We have
developed a strategic relationship with IBM. As part of this collaborative
relationship, we market and sell IBM hardware and equipment to our customers
under an industry remarketer agreement and resell maintenance on IBM
hardware products to our customers. Much of our software is designed to be
compatible with the IBM hardware that is run by a majority of our customers.
If IBM were to terminate or fundamentally modify our strategic
relationship, our relationship with our customers and our revenues and
earnings would suffer. We could also lose software market share or be
required to redesign existing products or develop new products that would be
compatible with the hardware used by our customers.
Competition may result in price reductions and decreased demand for our
products and services. We expect competition in the markets we serve will
remain vigorous. We compete on the basis of product quality, reliability,
performance, ease of use, quality of support and pricing. We cannot
guarantee that we will be able to compete successfully with our existing
competitors or with companies entering our markets in the future. Certain
of our competitors have strong financial, marketing and technological
resources and, in some cases, a larger customer base than we do. They may
be able to adapt more quickly to new or emerging technologies or to devote
greater resources to the promotion and sale of their products and services.
The loss of key employees could adversely affect our business. We depend to
a significant extent on the contributions and abilities of our senior
management. Our Company has grown significantly in recent years and our
management remains concentrated in a small number of key employees. If we
lose one or more of our key employees, we could suffer a loss of sales and
delays in new product development, and management resources would have to be
diverted from other activities to compensate for this loss. We do not have
employment agreements with any of our executive officers, however, we
currently have a management succession plan in place and are naming specific
managers successors.
Consolidation of financial institutions could reduce the number of our
customers and potential customers. Our primary market consists of
approximately 8,600 commercial banks and 10,200 credit unions. The number
of commercial banks and credit unions has decreased as a result of mergers
and acquisitions over the last five years and is expected to continue to
decrease as more consolidation occurs, which will reduce our number of
potential customers. As a result of this consolidation, some of our
existing customers could terminate, or refuse to renew their contracts with
us and potential customers could break off negotiations with us.
The services we provide to our customers are subject to government
regulation that could hinder our ability to develop portions of our
business or impose additional constraints on the way we conduct our
operations. The financial services industry is subject to extensive and
complex federal and state regulation. As a supplier of services to
financial institutions, some of our operations are examined by the Office of
the Comptroller of the Currency, the Federal Reserve Board and the Federal
Deposit Insurance Corporation, among other regulatory agencies. These
agencies regulate services we provide and the manner in which we operate,
and we are required to comply with a broad range of applicable laws and
regulations. In addition, existing laws, regulations and policies could be
amended or interpreted differently by regulators in a manner that has a
negative impact on our existing operations or that limits our future growth
or expansion. Our customers are also regulated entities, and the form and
content of actions by regulatory authorities could determine both the
decisions they make concerning the purchase of data processing and other
services and the timing and implementation of these decisions. The
development of financial services over the Internet has raised concerns with
respect to the use, confidentiality and security of private customer
information. Regulatory agencies, Congress and state legislatures are
considering numerous regulatory and statutory proposals to protect the
interests of consumers and to require compliance by the industry with
standards and policies that have not been defined.
Network or Internet security problems could damage our reputation and
business. We rely on standard network and Internet security systems, most
of which we license from third parties, to provide the security and
authentication necessary to effect secure transmission of data. Computer
networks and the Internet are vulnerable to unauthorized access, computer
viruses and other disruptive problems. In addition, advances in computer
capabilities, new discoveries in the field of cryptography or other events
or developments may render our security measures inadequate. Someone who is
able to circumvent security measures could misappropriate proprietary
information or cause interruptions in our operations or those of our
customers. Security risks may result in liability to us and also may deter
financial institutions from purchasing our products. We may need to expend
significant capital or other resources protecting against the threat of
security breaches or alleviating problems caused by breaches. Eliminating
computer viruses and alleviating other security problems may result in
interruptions, delays or cessation of service to users, any of which could
harm our business.
As technology becomes less expensive and more advanced, purchase prices of
hardware may decline and our revenues and profits from remarketing
arrangements may decrease. Computer hardware technology is rapidly
developing. Hardware manufacturers are producing less expensive and more
powerful equipment each year, and we expect this trend to continue into the
future. As computer hardware becomes less expensive, revenues and profits
derived from our hardware remarketing may decrease and become a smaller
portion of our revenues and profits.
An operational failure in our outsourcing facilities could cause us
to lose customers. Damage or destruction that interrupts our provision of
outsourcing services could damage our relationship with certain customers
and may cause us to incur substantial additional expense to repair or
replace damaged equipment. Although we have installed back-up systems and
procedures to prevent or reduce disruption, we cannot assure you that we
will not suffer a prolonged interruption of our transaction processing
services. In the event that an interruption of our network extends for more
than several hours, we may experience data loss or a reduction in revenues
by reason of such interruption. In addition, a significant interruption of
service could have a negative impact on our reputation and could lead our
present and potential customers to choose service providers other than us.
Item 2. Properties
We own approximately 138 acres located in Monett, Missouri on which we
maintain six office buildings. We also own buildings in Houston, Texas;
Allen, Texas; Albuquerque, New Mexico; Birmingham, Alabama; Angola, Indiana;
Lenexa, Kansas; Shawnee, Kansas; Rogers, Arkansas; and Oklahoma City,
Oklahoma. Our owned facilities represent approximately 474,000 square feet
of office space. We currently have two buildings under construction in
Monett with a total of 138,200 square feet and a total estimated cost of $18
million, of which we have incurred $8 million through June 30, 2002. We
have 33 leased office facilities in 19 states, which total approximately
252,000 square feet. All of the space is utilized for business.
Of these facilities, leased office space totaling approximately 44,500 in
one facility is devoted primarily to serving our credit union business
segment, with the remainder of our leased and all owned facilities primarily
devoted to serving our banking business segment.
We own six aircraft which are utilized for business purposes. Many of our
customers are located in communities that do not have an easily accessible
commercial airline service. We primarily use our airplanes in connection
with installation, sales of systems and internal requirements for day to
day operations. Transportation costs for installation and other customer
services are billed to our customers. We lease property, including real
estate and related facilities, at the Monett, Missouri municipal airport.
Item 3. Legal Proceedings
We are subject to various routine legal proceedings and claims arising in
the ordinary course of business. We do not expect that the results in any of
these legal proceedings will have a material adverse effect on our
business, financial condition, results of operations or cash flows.
Item 4. Submission of Matters To a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's common stock is quoted on the Nasdaq National Market under the
symbol "JKHY". The following table sets forth, for the periods indicated,
the high and low sales price per share of the common stock as reported by
the Nasdaq National Market.
Fiscal 2002 High Low
----------- ----- -----
First Quarter $ 33.24 $ 20.00
Second Quarter 27.07 19.05
Third Quarter 24.49 20.80
Fourth Quarter 23.50 15.76
Fiscal 2001
-----------
First Quarter $ 27.25 $ 19.41
Second Quarter 33.13 20.69
Third Quarter 31.38 19.81
Fourth Quarter 31.19 18.75
The Company established a practice of paying quarterly dividends at the end
of fiscal 1990 and has paid dividends with respect to every quarter since
that time. Quarterly dividends per share paid on the common stock for the
two most recent fiscal years ended June 30, 2002 and 2001 are as follows:
Fiscal 2002 Dividend
----------- -----
First Quarter $ .030
Second Quarter .030
Third Quarter .035
Fourth Quarter .035
Fiscal 2001
-----------
First Quarter $ .025
Second Quarter .025
Third Quarter .030
Fourth Quarter .030
The declaration and payment of any future dividends will continue to be at
the discretion of our Board of Directors and will depend upon, among other
factors, our earnings, capital requirements, contractual restrictions, and
operating and financial condition. The Company does not currently foresee
any changes in its dividend practices.
On August 19, 2002, there were 45,597 holders of the Company's common stock.
On that same date the last sale price of the common shares as reported on
NASDAQ was $16.29 per share.
Item 6. Selected Financial Data
Selected Financial Information (*)
(In Thousands, Except Per Share Information)
Year Ended June 30,
Income Statement Data 2002 2001 2000 1999 1998
--------------------- ------- ------- ------- ------- -------
Revenue (1) $396,657 $366,903 $239,841 $204,324 $156,269
Income from continuing
operations $ 57,065 $ 55,631 $ 34,350 $ 32,726 $ 24,205
Loss from discontinued
operations $ - $ - $ 332 $ 758 $ 668
Net income $ 57,065 $ 55,631 $ 34,018 $ 31,968 $ 23,537
Diluted income per share:
Income from continuing
operations $ .62 $ .61 $ .40 $ .39 $ .29
Loss from discontinued
operations $ - $ - $ - $ .01 $ .01
Net income $ .62 $ .61 $ .40 $ .38 $ .28
Dividends declared
per share $ .13 $ .11 $ .09 $ .08 $ .06
Balance Sheet Data
------------------
Working capital $ 67,321 $ 65,032 $(47,990) $ 24,133 $ 35,758
Total assets $486,142 $433,121 $321,082 $177,823 $133,830
Long-term debt $ - $ 228 $ 320 $ 211 $ 654
Stockholders' equity $340,739 $302,504 $154,545 $115,798 $ 83,591
* Selected financial information for 2000, 1999, and 1998 has been restated
to include all acquisitions that have been accounted for as pooling-of-
interest as if each had occurred at the beginning of the earliest period
reported. Revenue in each of the prior periods has been restated for the
adoption of Emerging Issues Task Force Issue No. 01-14, "Income Statement
Characterization of Reimbursements Received for 'Out of Pocket' Expenses
Incurred".
(1) Revenues include software licensing and installation revenues, support
and service revenues, hardware sales and customer reimbursements, less
returns and allowances.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction
with the "Selected Financial Data" and the consolidated financial statements
and related notes included elsewhere in this report.
OVERVIEW
We provide integrated computer systems for in-house and outsourced data
processing to commercial banks with under $10.0 billion in total assets,
credit unions and other financial institutions. We have developed and
acquired banking and credit union application software systems that we
market, together with compatible computer hardware, to financial
institutions throughout the United States. We also perform data conversion
and software installation for the implementation of our systems and provide
continuing customer maintenance and support services after the systems are
installed. For our customers who prefer not to make an up-front investment
in software and hardware, we provide our full range of products and services
on an outsourced basis through our eight data centers and fourteen item
processing centers located across the United States.
We derive revenues from four primary sources:
- sales of software licenses and installation services;
- support and service fees;
- hardware sales; and
- customer reimbursements.
Over the last five fiscal years, our revenues have grown from $156.3 million
in fiscal 1998 to $396.7 million in fiscal 2002. Income from continuing
operations has grown from $24.2 million in fiscal 1998 to $57.1 million in
fiscal 2002. This growth has resulted primarily from internal expansion
supplemented by strategic acquisitions, allowing us to develop and acquire
new products and services and expand the number of customers who use our
core software systems to approximately 2,400 as of June 30, 2002.
Since July 1997, we have completed 12 acquisitions. Ten of these
acquisitions were accounted for using the purchase method of accounting and
our consolidated financial statements include the results of operations of
the acquired companies from the dates of their respective acquisitions. The
remaining two acquisitions were accounted for as poolings-of-interests. The
comparisons set forth below reflect the fact that the consolidated financial
statements include all acquisitions accounted for as poolings-of-interests
as if each had occurred at the beginning of the earliest period reported.
Software sales and installation revenue includes the licensing of
application software systems and the conversion and installation services
contracted with us by the customer. We license our proprietary software
products under standard license agreements which typically provide the
customer with a non-exclusive, non-transferable right to use the software on
a single computer and for a single financial institution location upon
payment of the license fee. Generally, 25% to 50% of license fees are
payable upon execution of the license agreement with additional payments due
upon either delivery of the software or the installation of the last
application module. We recognize 100% of software license revenue upon
delivery of the software and documentation. We recognize installation
services each month as services are performed under hourly contracts and at
the completion of the installations under fixed fee contracts.
Support and services fees are generated from ongoing services to assist the
customer in operating the systems and to modify and update the software and
from providing outsourced data processing services. Revenues from software
support are generated pursuant to annual agreements and are recognized
ratably over the life of the agreements. Outsourcing services are performed
through data centers. Revenues from outsourced data processing are derived
from monthly usage fees typically under five-year service contracts with our
customers. We recognize the revenues under these outsourcing contracts as
services are performed.
Customer reimbursements represent direct costs paid to third parties
primarily for data communication, postage and travel. We recognize customer
reimbursements as revenue and as a pass through expense as incurred.
Cost of services represents costs associated with conversion and
installation efforts, ongoing support for our in-house customers, operation
of our data centers providing services for our outsourced customers, and
direct operation costs. These costs are recognized as they are incurred.
We have entered into remarketing agreements with several hardware
manufacturers under which we sell computer hardware and related services to
our customers along with our in-house banking software systems. Revenues
from hardware sales are recognized when the manufacturers ship the hardware
directly to our customers. Cost of hardware consists of the direct costs of
purchasing the equipment from the manufacturers. These costs are recognized
at the same time as the related revenue.
We have two business segments: bank systems and services and credit union
systems and services. The respective segments include all related software,
installation, support and service, hardware sales, and customer
reimbursement revenue along with related cost of services, hardware and
customer reimbursement expenses.
RESULTS OF OPERATIONS
FISCAL 2002 COMPARED TO FISCAL 2001
REVENUE - Revenues increased by 8% from $366.9 million in fiscal 2001 to
$396.7 million in fiscal 2002. Compared to fiscal 2001, software licensing
and installation decreased 4%; support and service revenues increased 28%,
hardware sales decreased 9% and customer reimbursements increased 29%.
Non-hardware revenues, which includes software licensing and installation,
support and service, and customer reimbursements increased 15% to $296.3
million and accounted for 75% of this year's revenues, compared to $256.8
million or 70% of revenues for fiscal 2001. Licensing, installation and
hardware revenues were negatively impacted by the sluggish economy following
the September 11th terrorist attacks. There was a gradual increase from the
2nd to the 4th quarter. The support and service revenues remained strong,
which was primarily recurring revenue from annual in-house support
agreements, monthly data center contracts, and processing of ATM and debit
card transactions. Customer reimbursements increased 29% from $21.4 million
to $27.7 million. The increase is primarily due to expenses passed through
relating to increased outsourcing revenue, increased PassPort[R] ATM revenue
and travel and lodging expenses.
Hardware sales decreased 9% to $100.3 million in fiscal 2002, and accounted
for 25% of revenues, compared to $110.1 million, or 30% of total revenues
for fiscal 2001. The decrease in hardware sales followed a year-long
industry trend due to an overall decrease in capital spending.
COST OF SALES - Cost of sales increased 9% from $215.3 million in fiscal
2001 to $235.4 million in fiscal 2002, compared to an 8% increase in
revenues. Cost of hardware decreased 7%, in line with the decrease in
hardware sales of 9%. Cost of services and customer reimbursements
increased 18% compared to the 15% increase in non-hardware revenues,
primarily due to increased number of employees and related benefits.
GROSS PROFIT - Gross profit increased 6% from $151.6 million in fiscal 2001
to $161.2 million in fiscal 2002. Gross profit percentage on non-hardware
revenue was 44% compared to 46% last year. Gross profit percentage on
hardware sales was 30% compared to 31% last year primarily due to sales mix
and reduced incentives from hardware suppliers. The total gross profit
percentage for fiscal 2002 and fiscal 2001 was 41%.
Non-hardware gross profit decreased due to employee related expenses. Even
though there was a year long industry slow-down, the number of employees
increased by 10% during the year, and there was an increase in employee
benefit cost, primarily due to increased health care costs. Hardware gross
profit decreased primarily due to reduced incentives from hardware suppliers
from prior years' higher sales volume threshold.
OPERATING EXPENSES - Operating expenses increased 13% from $65.9 million in
fiscal 2001 to $74.6 million in fiscal 2002. Selling and marketing expenses
increased 6%, research and development increased 15% and general and
administrative expenses increased 20% during fiscal 2002. Operating expenses
rose due to increasing employee benefit costs, primarily due to increased
health care costs and increased depreciation expense related to capital
expenditures.
OTHER INCOME (EXPENSE) - Other income (expense) increased from $1.2 million
in fiscal 2001 to $1.8 million in fiscal 2002. Interest income decreased by
4% from $2.1 million to $2.0 million due to lower interest rates on
investments. Interest expense decreased $729,000 due to expense last year
from short-term borrowing compared to this year. Short term debt was paid
off in January 2002.
PROVISION FOR INCOME TAXES - The provision for income taxes was $31.4
million, or 36% of income from continuing operations before income taxes in
fiscal 2002, compared with $31.3 million, or 36% of income from continuing
operations before income taxes in fiscal 2001.
NET INCOME - Net income increased 3% from $55.6 million, or $.61 per diluted
share in fiscal 2001 to $57.1 million, or $.62 per diluted share in fiscal
2002.
FISCAL 2001 COMPARED TO FISCAL 2000
REVENUE - Revenues increased by 53% from $239.8 million in fiscal 2000 to
$366.9 million in fiscal 2001. Software licensing and installation increased
76%; support and service revenues increased 38%, hardware sales increased
57% and customer reimbursements increased 47% compared to fiscal 2000. The
significant increase is due to organic growth in comparison to the prior
year, which was directly impacted by the Y2K slowdown, and a full year
impact on the current year of acquisitions made during fiscal 2000.
Non-hardware revenues, which includes software licensing and installation,
support and services revenues, and customer reimbursements increased 51% to
$256.8 million and accounted for 70% of this year's revenues, compared to
$169.7 million or 71% of revenues for fiscal 2000. Customer reimbursements
increased 47% from $14.5 million to $21.4 million. The increase is due to
expenses passed through relating to increased outsourcing revenues,
increased PassPort[R] ATM revenue along with travel and lodging expenses.
Hardware sales increased 57% to $110.1 million, and accounted for 30% of
revenues, compared to $70 million, or 29% of total revenues for fiscal 2000.
The increase in hardware sales was in line with the increase in non-
hardware revenues for the same reasons.
COST OF SALES - Cost of sales increased 52% from $141.7 million in fiscal
2000 to $215.3 million in fiscal 2001, compared to a 53% increase in
revenues. Cost of hardware increased 48% compared with the 57% increase in
hardware sales. Cost of services and customer reimbursements increased 54%
compared to the 51% increase in non-hardware revenues. This is primarily
due to operations acquired in the prior year, whose gross margins are less
than the rest of the Company's.
GROSS PROFIT - Gross profit increased 55% from $98.1 million in fiscal 2000
to $151.6 million in fiscal 2001. Gross profit percentage on non-hardware
revenue was 46% compared to 47% last year. Gross profit percentage on
hardware sales was 31% compared to 27% last year primarily due to sales mix.
The total gross profit percentage for fiscal 2001 was 41%, up slightly from
fiscal 2000.
OPERATING EXPENSES - Operating expenses increased 40% from $47.1 million in
fiscal 2000 to $65.9 million in fiscal 2001. Selling and marketing expenses
increased 46%, research and development increased 36% and general and
administrative expenses increased 36% during fiscal 2001. Operating expenses
increased due to higher commissions related to stronger sales, continued
development and refinement of new and existing products and higher overhead
related to prior acquisitions and overall growth.
OTHER INCOME (EXPENSE) - Other income (expense) increased from $755,000 in
fiscal 2000 to $1.2 million in fiscal 2001. The primary change is due to
the debt related to acquisitions in fiscal 2000 being retired in August 2000
with operating cash flows and the proceeds from the secondary offering in
August 2000. Interest income increased $.5 million, interest expense
decreased $1.0 million and other decreased by $1.1 million due to a gain on
sale of stock investment in the prior year.
PROVISION FOR INCOME TAXES - The provision for income taxes was $31.3
million, or 36% of income from continuing operations before income taxes in
fiscal 2001, compared with $17.4 million, or 34% of income from continuing
operations before income taxes in fiscal 2000. The rate increase is due to
the federal and state tax benefits realized in the prior year from the
disposition of specific assets.
INCOME FROM CONTINUING OPERATIONS - Income from continuing operations
increased 62% from $34.4 million, or $.40 per diluted share in fiscal 2000
to $55.6 million, or $.61 per diluted share in fiscal 2001.
DISCONTINUED OPERATIONS - None this year compared to $332,000 loss from
discontinued operations in fiscal 2000, all of which was realized in the
three months ended September 30, 1999.
Business Segment Discussion
Revenues in the bank systems and services business segment increased 7% from
$318.0 million in fiscal 2001 to $339.3 million in fiscal 2002. Gross
profit in this business segment increased 4% from $138.1 million in fiscal
2001 to $143.6 million for the year ended June 30, 2002, due to decrease in
amortization expense relating to goodwill as a result of the impact of
adopting SFAS No. 142 and the overall cost control measures put in place by
management. The slight increases, which are significantly lower than
historical levels, are primarily due to the industry trend of an overall
decrease in capital spending for the year which was impacted by September
11th and reduced growth for FY2002.
Revenues in the credit union systems and services business segment increased
from $48.9 million in fiscal 2001 to $57.3 million in fiscal 2002,
representing a 17% increase. Gross profit in this business segment
increased from $13.5 million in fiscal 2001 to $17.7 million or a 31%
increase for the year ended June 30, 2002. Despite the sluggish economy,
the credit union segment was able to maintain growth in revenue. Gross
profit margin remained strong due to decrease in amortization expense
relating to goodwill as a result of the impact of adopting SFAS No. 142 and
the overall cost control measures put in place by management.
Revenues in the bank systems and services business segment increased from
$235.1 million in fiscal 2000 to $318.0 million in fiscal 2001, or 35%
increase. Gross profit in this business segment increased from $96.1
million in fiscal 2000 to $138.1 million, or 44% increase for the year ended
June 30, 2001. The changes in revenue and gross profit from the prior year
are a direct result of the impact of Y2K on the prior year and the full year
benefit in the current year of acquisitions made during fiscal 2000.
Revenues in the credit union systems and services business segment increased
from $4.8 million in fiscal 2000 to $48.9 million in fiscal 2001, or 919%
increase. Gross profit in this business segment increased from $2.1 million
in fiscal 2000 to $13.5 million, or 543% increase for the year ended June
30, 2001. The increases are due to the acquisition of Symitar Systems, Inc.
on June 7, 2000, which enhanced the Company's position in the credit union
marketplace.
Liquidity and Capital Resources
We have historically generated positive cash flow from operations and have
generally used existing resources and funds generated from operations to
meet capital requirements. We expect this trend to continue in the future.
Our cash and cash equivalents decreased to $17.8 million at June 30, 2002,
from $18.6 million at June 30, 2001. Net cash from continuing operations
was $89.9 million, $72.8 million and $48.9 million for the years ended June
30, 2002, 2001 and 2000, respectively. The cash used in the year ended June
30, 2002, was primarily attributable to capital expenditures of $49.5
million. The cash used during fiscal 2001 was primarily attributable to
capital expenditures of $57.8 million and to retire outstanding debt. The
cash used during fiscal 2000 was primarily attributable to acquisition costs
of $93.3 million and capital expenditures of $32.6 million. The Company
expects capital expenditures to decrease to approximately $35 million in the
upcoming year from fiscal 2002 levels.
We currently have two buildings under construction in Monett with a total of
138,200 square feet and a total estimated cost of $18 million, of which we
have incurred $8 million through June 30, 2002.
On September 21, 2001, the Company's Board of Directors approved a stock
buyback of the Company's common stock of up to 3.0 million shares. As of
June 30, 2002, the Company had repurchased 1,656,733 shares of stock for the
treasury at a total cost of $31.1 million. The buyback was funded with cash
from continuing operations.
On August 16, 2000, the Company completed a secondary offering of 3.0
million shares of its common stock at $21.50 per share less a 5%
underwriters' discount and offering expenses paid by the Company. The net
proceeds of approximately $60.5 million, plus the proceeds from sale of
common stock and issuance of stock options exercised was used to retire all
outstanding debt that had been incurred during fiscal 2000. The balance
remained available for working capital, capital expenditures and other
general corporate purposes. Cash from financing activities was $69.4
million for the year ended June 30, 2000 and was primarily line-of-credit
advances used for acquisitions.
We currently have two bank credit lines upon which it can draw an aggregate
amount at any one time outstanding of $58.0 million. The major credit line
provides for funding of up to $50.0 million and bears interest at variable
LIBOR-based rates (3.03% at June 30, 2002). The second credit line
provides for funding of up to $8.0 million and bears interest at the prime
rate (4.75% at June 30, 2002).
Subsequent to June 30, 2002, the Company's Board of Directors declared a
cash dividend of $.035 per share on its common stock payable on September
20, 2002, to stockholders of record on September 6, 2002. Current funds
from operations were adequate for this purpose. The Board has indicated
that it plans to continue paying dividends as long as the Company's
financial picture continues to be favorable.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, was issued in August
2001. This standard addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This standard supersedes SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business (as previously defined in that Opinion). The
provisions of this standard are effective for financial statements issued
for fiscal years beginning after December 15, 2001 (July 1, 2002 for JHA),
and interim periods within those fiscal years, with early application
encouraged. The adoption of this standard did not have a material effect on
the Company's consolidated financial position or results of operation.
Effective January 1, 2002, the Company adopted Emerging Issues Task Force
Issue No. 01-14, Income Statement Characterization of Reimbursements
Received for 'Out of Pocket' Expenses Incurred, which requires that customer
reimbursements received for direct cost paid to third parties and related
expenses be characterized as revenue. Customer reimbursements represent
direct costs paid to third parties primarily for data communication,
postage and travel. The adoption of Issue No. 01-14 did not impact the
Company's consolidated financial position, operating income or net income.
Comparative financial information for each quarter for fiscal years 2002 and
2001 is presented at the end of Item 8.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with
accounting principles generally accepted in the United States. The
significant accounting policies are discussed in Note 1 to the consolidated
financial statements. Certain of these accounting policies as discussed
below require management to make estimates and assumptions about future
events that could materially affect the reported amounts of assets,
liabilities, revenues and expenses and disclosure of contingent assets and
liabilities. Actual results may differ from these estimates under different
assumptions or conditions.
We record revenue in accordance with Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended. We recognize revenue from sales
of hardware, software and services and from arrangements involving multiple
elements of each of the above. Revenue for multiple element arrangements
are recorded based on contractual amounts, which are determined based upon
the price charged when sold separately. Revenue is not recognized until
persuasive evidence of an arrangement exists, delivery has occurred, the fee
is fixed and determinable, and collectibility is probable. Sales of
hardware and equipment are recorded when title and risk of loss transfers.
Licensing revenues are recorded upon delivery and acceptance of the
software. Service fees for training and installation are recognized as the
services are provided. Support revenues are recorded evenly over the
related contract period.
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments.
The amount of our reserve is based on historical experience and our analysis
of the accounts receivable balance outstanding. If the financial condition
of our customers were to deteriorate, resulting in their inability to make
payments, additional allowances may be required which would result in an
additional expense in the period such determination was made. While such
credit losses have historically been within our expectations and the
provisions established, we cannot guarantee that we will continue to
experience the same credit loss rates that we have in the past.
The calculation of depreciation and amortization expense is based on the
estimated economic lives of the underlying property, plant and equipment and
intangibles. We believe it is unlikely that any significant changes to the
useful lives of its tangible and intangible assets will occur in the near
term, rapid changes in technology or changes in market conditions could
result in revisions to such estimates that could materially affect the
carrying value of these assets and the Company's future consolidated
operating results.
Forward Looking Statements
Except for the historical information contained herein, the matters
discussed in the Management's Discussion and Analysis of Financial Condition
and Results of Operations and other portions of this report contain forward-
looking statements within the meaning of federal securities laws. Actual
results are subject to risks and uncertainties, including both those
specific to the Company and those specific to the industry, which could
cause results to differ materially from those contemplated. The risks and
uncertainties include, but are not limited to, the matters detailed in "Risk
Factors" in Item 1 of the Company's 2002 Form 10-K annual report filed with
the Securities and Exchange Commission. Undue reliance should not be placed
on the forward-looking statements. The Company does not undertake any
obligation to publicly update any forward-looking statements.
Potential risks and uncertainties which could adversely affect the Company
include: the financial health of the banking industry, our ability to
continue or effectively manage our rapid growth, adapting our products and
services to changes in technology, changes in our strategic relationships,
price competition, loss of key employees, consolidation in the banking
industry, increased government regulation, network or internet security
problems, declining computer hardware prices, and operational problems in
our outsourcing facilities.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk refers to the risk that a change in the level of one or more
market prices, interest rates, indices, volatilities, correlations or other
market factors such as liquidity, will result in losses for a certain
financial instrument or group of financial instruments. We are currently
exposed to credit risk on credit extended to customers and interest risk on
investments in U.S. government securities. We actively monitor these risks
through a variety of controlled procedures involving senior management. We
do not currently use any derivative financial instruments. Based on the
controls in place, credit worthiness of the customer base and the relative
size of these financial instruments, we believe the risk associated with
these instruments will not have a material adverse effect on our
consolidated financial position or results of operations.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Independent Auditors' Report ............................ 21
Financial Statements:
Consolidated Statements of Income,
Years Ended June 30, 2002, 2001 and 2000........... 22
Consolidated Balance Sheets,
June 30, 2002 and 2001 ............................ 23
Consolidated Statements of Changes in Stockholders'
Equity, Years Ended June 30, 2002, 2001 and 2000... 24
Consolidated Statements of Cash Flows,
Years Ended June 30, 2002, 2001 and 2000........... 25
Notes to Consolidated Financial Statements......... 26
Financial Statement Schedules:
There are no schedules included because they are not applicable or the
required information is shown in the consolidated financial statements or
notes thereto.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Jack Henry & Associates, Inc.:
We have audited the accompanying consolidated balance sheets of Jack Henry &
Associates, Inc. and Subsidiaries (the "Company") as of June 30, 2002 and
2001, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the
period ended June 30, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Jack Henry & Associates,
Inc. and Subsidiaries at June 30, 2002, and 2001, and the results of their
operations and their cash flows for each of the three years in the period
ended June 30, 2002, in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
St. Louis, Missouri
August 16, 2002
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
YEAR ENDED JUNE 30,
-------------------------------
2002 2001 2000
------- ------- -------
REVENUES
Licensing and installation $ 97,189 $101,259 $ 57,688
Support and service 171,445 134,138 97,519
Hardware sales 100,342 110,071 70,093
Customer reimbursements 27,681 21,435 14,541
------- ------- -------
Total $396,657 $366,903 $239,841
COST OF SALES
Cost of services 137,346 118,242 76,139
Cost of hardware 70,410 75,629 51,045
Customer reimbursement expenses 27,681 21,435 14,541
------- ------- -------
Total $235,437 $215,306 $141,725
------- ------- -------
GROSS PROFIT $161,220 $151,597 $ 98,116
OPERATING EXPENSES
Selling and marketing 29,380 27,770 19,015
Research and development 12,526 10,871 8,022
General and administrative 32,668 27,216 20,069
------- ------- -------
Total $ 74,574 $ 65,857 $ 47,106
------- ------- -------
OPERATING INCOME FROM CONTINUING OPERATIONS $ 86,646 $ 85,740 $ 51,010
OTHER INCOME (EXPENSE)
Interest income 2,018 2,103 1,560
Interest expense (191) (920) (1,910)
Other, net - - 1,105
------- ------- -------
Total $ 1,827 $ 1,183 $ 755
------- ------- -------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES $ 88,473 $ 86,923 $ 51,765
PROVISION FOR INCOME TAXES 31,408 31,292 17,415
------- ------- -------
INCOME FROM CONTINUING OPERATIONS $ 57,065 $ 55,631 $ 34,350
LOSS FROM DISCONTINUED OPERATIONS, net
of taxes - - 332
------- ------- -------
INCOME $ 57,065 $ 55,631 $ 34,018
======= ======= =======
Diluted income per share:
Income from continuing operations $ 0.62 $ 0.61 $ 0.40
Loss from discontinued operations - - -
------- ------- -------
Net Income $ 0.62 $ 0.61 $ 0.40
======= ======= =======
Diluted weighted average shares outstanding 92,367 91,344 85,278
======= ======= =======
Basic net income per share:
Income from continuing operations $ 0.64 $ 0.64 $ 0.42
Loss from discontinued operations - - -
------- ------- -------
Net Income $ 0.64 $ 0.64 $ 0.42
======= ======= =======
Basic weighted average shares outstanding 89,316 86,834 81,766
======= ======= =======
See notes to consolidated financial statements
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
YEAR ENDED JUNE 30,
-------------------------
2002 2001
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 17,765 $ 18,589
Investments, at amortized cost 997 985
Trade receivables 131,431 116,573
Income taxes receivable - 537
Prepaid maintenance 17,663 17,191
Prepaid expenses and other 11,221 17,425
Deferred income taxes 900 750
--------- ---------
Total $ 179,977 $ 172,050
PROPERTY AND EQUIPMENT, net $ 173,775 $ 138,439
OTHER ASSETS:
Goodwill 40,335 29,348
Intangible assets, net of amortization 66,829 72,041
Computer software, net of amortization 7,499 5,806
Prepaid maintenance 12,992 12,007
Other non-current assets 4,735 3,430
--------- ---------
Total $ 132,390 $ 122,632
--------- ---------
Total assets $ 486,142 $ 433,121
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 9,051 $ 17,846
Accrued expenses 11,352 9,595
Accrued income taxes 225 -
Current portion of long-term debt - 87
Deferred revenues 92,028 79,490
--------- ---------
Total $ 112,656 $ 107,018
LONG-TERM DEBT - 228
DEFERRED REVENUES 16,947 15,514
DEFERRED INCOME TAXES 15,800 7,857
--------- ---------
Total liabilities $ 145,403 $ 130,617
STOCKHOLDERS' EQUITY:
Preferred stock - $1 par value; 500,000
shares authorized; None issued - -
Common stock - $.01 par value; shares
authorized 250,000,000; shares issued
2002 - 90,519,856; 2001 - 88,846,710 905 888
Additional paid-in capital 168,061 145,211
Retained earnings 201,162 156,405
Treasury stock at cost,
2002-1,568,910; 2001-none (29,389) -
--------- ---------
Total stockholders' equity $ 340,739 $ 302,504
--------- ---------
Total liabilities and stockholders' equity $ 486,142 $ 433,121
========= =========
See notes to consolidated financial statements.
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands, Except Share and Per Share Data)
YEAR ENDED JUNE 30,
------------------------------------
2002 2001 2000
---------- ---------- ----------
PREFERRED SHARES: - - -
========== ========== ==========
COMMON SHARES:
Shares, beginning of year 88,846,710 41,357,853 20,517,090
Shares issued upon exercise of options 1,523,446 3,097,363 500,792
Shares issued for Employee Stock
Purchase Plan 31,962 21,267 11,466
Shares issued in secondary offering - 1,500,000 -
Shares issued in acquisition 117,738 - -
Stock dividend - 42,870,227 20,328,505
---------- ---------- ----------
Shares, end of year 90,519,856 88,846,710 41,357,853
========== ========== ==========
COMMON STOCK - PAR VALUE $.01 PER SHARE:
Balance, beginning of year $ 888 $ 414 $ 205
Shares issued upon exercise of options 15 30 5
Shares issued in secondary offering - 15 -
Shares issued in acquisition 1 - -
Shares issued for Employee Stock
Purchase Plan 1 - 1
Stock dividend - 429 203
---------- ---------- ----------
Balance, end of year $ 905 $ 888 $ 414
---------- ---------- ----------
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of year $ 145,211 $ 43,753 $ 32,210
Shares issued upon exercise of options 13,650 18,274 6,394
Shares issued for Employee Stock
Purchase Plan 792 818 488
Shares issued in secondary offering - 60,510 -
Stock dividend - (429) (203)
Tax benefit on exercise of options 6,992 22,285 4,864
Shares issued in acquisition 2,399 - -
Cost of Treasury shares reissued (983) - -
---------- ---------- ----------
Balance, end of year $ 168,061 $ 145,211 $ 43,753
---------- ---------- ----------
RETAINED EARNINGS:
Balance, beginning of year $ 156,405 $ 110,378 $ 83,383
Net loss for the three months ended
September 30, 1999 - Sys-Tech, Inc. - - 264
Net income 57,065 55,631 34,018
Reissuance of Treasury shares (682) - -
Dividends (2002- $.13 per share;
2001 - $.11 per share;
2000 - $.09 per share) (11,626) (9,604) (7,287)
---------- ---------- ----------
Balance, end of year $ 201,162 $ 156,405 $ 110,378
---------- ---------- ----------
TREASURY STOCK:
Balance, beginning of year $ - $ - $ -
Purchase of Treasury shares (31,054) - -
Reissuance of Treasury shares 1,665 - -
---------- ---------- ----------
Balance, end of year $ (29,389) $ - $ -
---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY $ 340,739 $ 302,504 $ 154,545
========== ========== ==========
See notes to consolidated financial statements.
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
YEAR ENDED JUNE 30,
------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 2002 2001 2000
---------- ---------- ----------
Net Income $ 57,065 $ 55,631 $ 34,350
Adjustments to reconcile net income from
continuing operations to cash from
operating activities:
Depreciation 20,885 12,539 8,870
Amortization 6,585 9,349 6,603
Deferred income taxes 7,793 2,800 2,400
Gain on sale of investment - - (1,105)
Other, net (58) (3) 175
Changes in:
Trade receivables (14,858) (42,633) (11,870)
Prepaid expenses and other (1,621) (22,069) (9,451)
Accounts payable (8,795) 8,591 3,080
Accrued expenses 1,546 (155) (1,781)
Income taxes (including tax benefit
from exercise of stock options) 7,428 25,225 2,483
Deferred revenues 13,971 23,547 15,106
---------- ---------- ----------
Net cash from operating activities $ 89,941 $ 72,822 $ 48,860
CASH FLOWS FROM DISCONTINUED OPERATIONS $ - $ - $ 700
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (49,509) (57,781) (32,619)
Purchase of investments (2,987) (982) (946)
Proceeds from sale of investments - - 3,605
Proceeds from maturity of investments 3,000 1,000 6,702
Computer software developed (1,895) (1,447) (875)
Business acquisition costs, net
of cash acquired (11,111) - (93,280)
Other, net 274 375 (6)
---------- ---------- ----------
Net cash from investing activities $ (62,228) $ (58,835) $ (117,419)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock upon exercise of stock options 13,666 18,304 6,399
Proceeds from sale of common stock 792 61,344 488
Dividends paid (11,626) (9,604) (7,287)
Change in short-term borrowings, net - (70,500) 70,101
Principal payments on long-term debt (315) (128) (296)
Purchase of Treasury stock (31,054) - -
---------- ---------- ----------
Net cash from financing activities $ (28,537) $ (584) $ 69,405
Net cash activity for the three
months ended September 30,
1999 - Sys-Tech, Inc. $ - $ - $ 264
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS $ (824) $ 13,403 $ 1,810
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR $ 18,589 $ 5,186 $ 3,376
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 17,765 $ 18,589 $ 5,186
========== ========== ==========
See notes to consolidated financial statements
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
Jack Henry & Associates, Inc. ("JHA" or the "Company") is a computer
software company which has developed or acquired several banking and credit
union software systems. The Company's revenues are predominately earned by
marketing those systems to financial institutions nationwide along with the
computer equipment (hardware) and by providing the conversion and software
customization services for a financial institution to install a JHA software
system. JHA also provides continuing support and services to customers using
the systems either in-house or outsourced.
CONSOLIDATION
The consolidated financial statements include the accounts of JHA and all of
its wholly-owned subsidiaries and all significant intercompany accounts and
transactions have been eliminated.
POOLING OF INTERESTS TRANSACTION
The consolidated financial statements include Sys-Tech, Inc. ("Sys-Tech"),
acquired on June 1, 2000. This acquisition was accounted for as poolings of
interests, and therefore, all appropriate prior periods reflect the
acquisition as if it had occurred at the beginning of the earliest period
reported (see Note 13).
Prior to the consummation of the Sys-Tech acquisition, Sys-Tech's year end
was September 30. As a result of the Company and Sys-Tech having different
fiscal year ends, Sys-Tech's results of operations for the three month
period ended September 30, 1999, were reported in the consolidated statement
of income for the year ended June 30, 1999, instead of in the consolidated
statement of income for the year ended June 30, 2000. Revenues, net loss
from operations and net loss of Sys-Tech for the three month period ended
September 30, 1999, were $1,402,000, $378,000 and $264,000, respectively.
COMMON STOCK
On September 21, 2001, the Company's Board of Directors approved a buyback
of the Company's common stock of up to 3 million shares. As of June 30,
2002, 1,656,733 shares have been purchased for $31,054,139 and 1,568,910
shares remain in treasury stock.
On January 29, 2001 and January 31, 2000, the Company's Board of Directors
declared 100% stock dividends on its common stock, effectively 2 for 1 stock
splits. The stock dividends were paid March 2, 2001 and 2000 to stockholders
of record at the close of business on February 15, 2001 and February 17,
2000, respectively. All affected per share and shares outstanding data in
the consolidated statements of income and the notes to the consolidated
financial statements were retroactively restated to reflect the stock
splits.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
REVENUE RECOGNITION
In October, 1997, the Accounting Standards Executive Committee of the
American Institute of Public Accountants ("AcSEC") issued Statement of
Position ("SOP") 97-2, Software Revenue Recognition. The Company adopted SOP
97-2 effective July 1, 1998. SOP 97-2 generally requires revenue earned on
software arrangements involving multiple elements to be allocated to each
element based on the relative fair values of the elements. In March 1998,
AcSEC issued SOP 98-4, which deferred portions of SOP 97-2 for one year.
Revenues in fiscal year 1999 from the sales of software were recognized in
accordance with the enacted portions of SOP 97-2 and revenues beginning in
fiscal 2000 from the sale of software were recognized in accordance with SOP
98-4. These adoptions did not have a material effect on revenue recognition
or the consolidated results of operations.
The Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, on
December 3, 1999. SAB No. 101, as amended, provides the SEC Staff's views
on selected revenue recognition issues and was adopted by the Company in the
fourth fiscal quarter of fiscal year 2001. The adoption of SAB No. 101 did
not have a material effect on the Company's consolidated financial
statements.
The Company's various sources of revenue and the methods of revenue
recognition are as follows:
Software licensing fees - Initial licensing fees are recognized upon
delivery and acceptance of the unmodified software.
Software installation and related services - Fees for these services
are recognized as the services are performed on hourly contracts and
at completion and acceptance on fixed-fee contracts.
Support and service fees - Fees from these contracts are recognized
ratably over the life of the in-house support or outsourcing service
contract.
Hardware - Revenues from sales of hardware are recognized upon direct
shipment by the supplier to the Company's customers. Costs of items
purchased and remarketed are reported as cost of hardware in cost of
sales. Revenues and related costs of hardware maintenance are
recognized ratably over the life of the contract.
Customer reimbursements - Direct costs paid to third parties for
expenses incurred for customers are billed and recognized as revenue
when incurred.
PREPAID MAINTENANCE
Costs for these remarketed hardware and software maintenance contracts,
which are prepaid, are recognized ratably over the life of the contract,
generally one to five years, with the related revenue amortized from
deferred revenues.
DEFERRED REVENUES
Deferred revenues consist primarily of prepaid annual software support fees
and prepaid hardware maintenance fees. Hardware maintenance contracts are
multi-year, therefore, the deferred revenue and prepaid maintenance are
classified in accordance with the terms of the contract. Software and
hardware deposits received are also reflected as deferred revenues.
COMPUTER SOFTWARE DEVELOPMENT
The Company capitalizes new product development costs incurred from the
point at which technological feasibility has been established through the
point at which the product is ready for general availability. The
capitalized costs, which include salaries and benefits, equipment costs and
other direct expenses, are amortized to expense based on the estimated
product life (generally five years).
CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
INVESTMENTS
The Company invests its cash that is not required for current operations
primarily in U.S. government securities and money market accounts. The
Company has the positive intent and ability to hold its debt securities
until maturity and accordingly, these securities are classified as held-to-
maturity and are carried at historical cost adjusted for amortization of
premiums and accretion of discounts. Premiums and discounts are amortized
and accreted, respectively, to interest income using the level-yield method
over the period to maturity. The held-to-maturity securities typically
mature in less than one year. Interest on investments in debt securities is
included in income when earned.
The amortized cost of held-to-maturity securities is $997,000 and $985,000
at June 30, 2002 and 2001, respectively. Fair market values of these
securities did not differ significantly from amortized cost due to the
nature of the securities and minor interest rate fluctuations during the
periods.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated principally using
the straight-line method over the estimated useful lives of the assets.
INTANGIBLE ASSETS
Intangible assets consist of goodwill, customer relationships, software and
trade names acquired in business acquisitions. The amounts are amortized,
with the exception of goodwill and trade names, over an estimated economic
benefit period, generally five to twenty years, using the straight-line
method.
The Company reviews its long-lived assets and identifiable intangibles for
impairment whenever events or changes in circumstances have indicated that
the carrying amount of its assets might not be recoverable. The Company
evaluates goodwill and trade names for impairment of value on an annual
basis and between annual tests if events or changes in circumstances
indicate that the asset might be impaired.
COMPREHENSIVE INCOME
Comprehensive income for each of the three years ended June 30, 2002 equals
the Company's net income.
BUSINESS SEGMENT INFORMATION
In accordance with SFAS No. 131, Disclosure About Segments of an Enterprise
and Related Information, the Company's operations are classified as two
business segments: bank systems and services and credit union systems and
services (see Note 14). Revenue by type of product and service is presented
on the face of the consolidated statements of income. Substantially all the
Company's revenues are derived from operations and assets located within the
United States of America.
INCOME PER SHARE
Per share information is based on the weighted average number of common
shares outstanding during the year. Stock options have been included in the
calculation of income per diluted share to the extent they are dilutive.
The difference between basic and diluted weighted average shares outstanding
is the dilutive effect of outstanding stock options.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance would be established to reduce deferred
tax assets if it is likely that a deferred tax asset will not be realized.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, Business Combinations. This
standard eliminates the pooling method of accounting for business
combinations initiated after June 30, 2001. In addition, SFAS No. 141
addresses the accounting for intangible assets and goodwill acquired in a
business combination. SFAS No. 141 was effective for business combinations
completed after June 30, 2001. Adoption of this standard did not have a
material effect on the Company's consolidated financial position or results
of operations.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, was issued by the FASB in August 2001. This standard addresses
financial accounting and reporting for the impairment or disposal of long-
lived assets. This standard supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
and the accounting and reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions, for the disposal of a segment of a business (as previously
defined in that Opinion). The provisions of this standard are effective for
financial statements issued for fiscal years beginning after December 15,
2001 (July 1, 2002 for JHA), and interim periods within those fiscal years,
with early application encouraged. The adoption of this standard on July 1,
2002, did not have a material effect on the Company's consolidated financial
position or results of operations.
Effective January 1, 2002, the Company adopted Emerging Issues Task Force
Issue No. 01-14, Income Statement Characterization of Reimbursements
Received for 'Out of Pocket' Expenses Incurred, which requires that customer
reimbursements received for direct cost paid to third parties and related
expenses be characterized as revenue and expense. Customer reimbursements
represent direct costs paid to third parties primarily for data
communication, travel and postage costs. Prior periods have been
reclassified to reflect the adoption of Issue No. 01-14. The adoption of
Issue No. 01-14 by the Company did not impact the Company's consolidated
financial position, operating income or net income for any of the periods
presented.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections. Under this new standard, gains and losses from extinguishments
of debt should be classified as extraordinary items only if they meet the
criteria in APB Opinion No. 30. Applying the provision of APB Opinion No.
30 will distinguish transactions that are part of an entity's recurring
operations from those that are unusual or infrequent or that meet the
criteria for classification as an extraordinary item. The adoption of this
standard on July 1, 2002, did not have a material effect on the Company's
consolidated financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which is effective for any activity
initiated after December 31, 2002. This standard addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). This standard
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value only when the
liability is incurred. The accounting for similar events and circumstances
will be the same, thereby improving the comparability and representational
faithfulness of reported financial information. The Company does not expect
the adoption of this standard to have a material impact on its consolidated
financial position or results of operations.
RECLASSIFICATION
Where appropriate, prior year's financial information has been reclassified
to conform with the current year's presentation.
NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values for held-to-maturity securities are based on quoted market
prices. For all other financial instruments, including amounts receivable
and payable, short-term borrowings and long-term debt, fair values
approximate carrying value, based on the short-term nature of the assets and
liabilities and the variability of the interest rates on the borrowings.
NOTE 3: PROPERTY AND EQUIPMENT
The classification of property and equipment, together with their estimated
useful lives is as follows:
(In thousands)
Year Ended June 30,
----------------------- Estimated
2002 2001 Useful Life
--------- --------- -----------
Land $ 6,519 $ 6,519
Land improvements 8,774 4,731 5-20 years
Buildings 57,636 39,290 25-30 years
Equipment and furniture 100,309 79,892 5-8 years
Aircraft and equipment 41,633 31,737 8-10 years
Construction in process 17,028 14,024
--------- ---------
$ 231,899 $ 176,193
Less accumulated depreciation 58,124 37,754
--------- ---------
Property & equipment, net $ 173,775 $ 138,439
========= =========
At June 30, 2002, the Company has two buildings under construction in Monett
with a total of 138,200 square feet, and a total estimated cost of $18
million, of which $8 million had been incurred as of that date and is
included in construction in progress.
NOTE 4: OTHER ASSETS
The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets,
effective July 1, 2001. Under SFAS No. 142, goodwill and trade names are no
longer amortized but reviewed for impairment annually, or more frequently if
certain indicators arise. The Company completed the transitional impairment
tests for trade names with indefinite useful lives during the quarter ended
September 30, 2001, for goodwill during the quarter ended December 31,
2001, and its annual impairment tests and has determined that no impairment
exists. Had the Company been accounting for its goodwill and trade names
under SFAS No. 142 for all periods presented, the Company's net income and
net income per share would have been adjusted as follows:
(In Thousands, Except Per Share Data)
Year Ended June 30,
-----------------------------------
2002 2001 2000
--------- --------- ---------
Reported net income $ 57,065 $ 55,631 $ 34,018
Goodwill and trade names amortization,
net of tax - 1,108 686
--------- --------- ---------
Adjusted net income $ 57,065 $ 56,739 $ 34,704
========= ========= =========
Reported diluted net income per share $ .62 $ .61 $ .40
Goodwill and trade names amortization,
net of tax - .01 .01
--------- --------- ---------
Adjusted diluted net income per share $ .62 $ .62 $ .41
========= ========= =========
Reported basic net income per share $ .64 $ .64 $ .42
Goodwill and trade names amortization,
net of tax - .01 .01
--------- --------- ---------
Adjusted basic net income per share $ .64 $ .65 $ .43
========= ========= =========
There were no changes in the carrying amount of goodwill for the year ended
June 30, 2001, other than amortization expense. Changes in the carrying
amount of goodwill for the year ended June 30, 2002, by reportable
segments, are as follows:
(In Thousands)
Banking Credit Union
Systems Systems
and and
Services Services Total
-------- -------- ---------
Balance, July 1, 2001 $ 14,508 $ 14,840 $ 29,384
Goodwill acquired during the year 10,987 - 10,987
-------- -------- ---------
Balance, June 30, 2002 $ 25,495 $ 14,840 $ 40,335
======== ======== =========
Information regarding our other intangible assets is as follows:
(In Thousands)
Year Ended June 30,
-------------------
2002 2001
---------------------------- -----------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------- --------- ------- ------- --------- -------
Customer
Relationships $88,197 ($25,067) $63,130 $90,612 ($22,270) $68,342
Trade names 3,699 - 3,699 3,699 - 3,699
------- --------- ------- ------- --------- -------
Totals $91,896 ($25,067) $66,829 $94,311 ($22,270) $72,041
======= ========= ======= ======= ========= =======
Trade names have been determined to have indefinite lives and therefore as
of July 1, 2001, are no longer amortized. Customer relationships have lives
ranging from 5 to 20 years.
Computer software includes the unamortized cost of software products
developed or acquired by the Company which were required to be capitalized
by accounting principles generally accepted in the United States of America.
Following is an analysis of the computer software costs:
(In Thousands)
Year ended June 30,
-------------------------
2002 2001
-------- --------
Balance, beginning of year $ 5,806 $ 5,813
Acquired software 1 376 -
Capitalized development costs 1,895 1,447
-------- --------
$ 9,077 $ 7,260
Less amortization expense 1,578 1,454
-------- --------
Balance, end of year $ 7,499 $ 5,806
======== ========
Amortization expense for all intangible assets was $6,585, $9,349, and
$6,603 for the fiscal years ended June 30, 2002, 2001, and 2000
respectively. The estimated aggregate future amortization expense for all
intangible assets remaining as of June 30, 2002 is as follows:
2003 $ 6,084
2004 $ 5,730
2005 $ 5,137
2006 $ 4,810
2007 $ 4,496
Thereafter $ 42,947
NOTE 5: LINES OF CREDIT AND LONG-TERM DEBT
LINES OF CREDIT
JHA currently has two bank credit lines upon which it can draw an aggregate
amount at any one time outstanding of $58.0 million. The major credit line
provides for funding of up to $50.0 million and bears interest at variable
LIBOR-based rates (3.03% at June 30, 2002, and weighted average interest
rates of 3.07% and 6.42% for the years ended June 30, 2002, and 2001,
respectively and expires December 15, 2002). At June 30, 2000, this line
allowed up to $75.0 million of funding and was amended on September 7, 2000
to reduce the maximum borrowing to $50.0 million. At June 30, 2000 there
was $70.5 million outstanding of which the balance outstanding on August 16,
2000, was retired with the proceeds from the secondary offering (See Note
15). The second credit line provides for funding of up to $8.0 million and
bears interest at the prime rate (4.75% at June 30, 2002, and expires March
15, 2003), and is secured by $1.0 million of investments with the remainder
unsecured. There were no amounts outstanding under either line at June 30,
2002, or 2001.
LONG-TERM DEBT
The Company had a note payable which was assumed during the acquisition of
BancData Solutions, Inc. (See Note 13), bearing interest at 10%, payable
monthly. The note was secured by equipment. The note was paid in full
January 2002. Sys-Tech had a note payable with an original loan amount of
$400,000, bearing interest at 10%, payable monthly, due August 4, 2001. The
note was secured by specific real estate. The note was repaid subsequent to
the acquisition of Sys-Tech and prior to June 30, 2000.
(In Thousands)
Year ended June 30,
-------------------
2002 2001
------- -------
Long-term debt $ - $ 315
Less current maturities - 87
------- -------
Balance $ - $ 228
======= =======
The Company paid interest of $126,000, $1,150,000 and $1,600,000 in 2002,
2001, and 2000, respectively.
NOTE 6: LEASE COMMITMENTS
The Company leases certain property under operating leases which expire over
the next six years. As of June 30, 2002, net future minimum lease payments
under non-cancelable terms are as follows: $3,741,655, $3,535,600,
$2,178,055, $1,393,038, $522,338 and $165,768 in 2003, 2004, 2005, 2006,
2007 and thereafter, respectively. Rent expense for all operating leases
amount to $4,093,000, $3,400,000, and $2,200,000 in 2002, 2001, and 2000,
respectively.
NOTE 7: INCOME TAXES
The provision for income taxes on income from continuing operations consists
of the following:
(In Thousands)
Year Ended June 30,
2002 2001 2000
-------- -------- --------
Current:
Federal $ 22,387 $ 26,817 $ 14,050
State 1,228 1,675 965
Deferred:
Federal 7,548 2,200 1,900
State 245 600 500
-------- -------- --------
$ 31,408 $ 31,292 $ 17,415
======== ======== ========
The tax effects of temporary differences related to deferred taxes shown on
the balance sheets were:
(In Thousands)
Year ended June 30,
--------------------
2002 2001
------- -------
Deferred tax assets:
Carryforwards (operating losses and credits) $ 205 $ 314
Expense reserves (bad debts, insurance,
franchise tax and vacation) 710 516
Intangible assets 840 1,742
Other, net 195 200
------- -------
1,950 2,772
------- -------
Deferred tax liabilities:
Accelerated tax depreciation (14,330) (8,157)
Accelerated tax amortization (2,520) (1,722)
------- -------
(16,850) (9,879)
------- -------
Net deferred tax liability $(14,900) $ (7,107)
======= =======
The deferred taxes are classified on the balance sheet as follows:
(In Thousands)
Year ended June 30,
--------------------
2002 2001
------- -------
Deferred income taxes (current) $ 900 $ 750
Deferred income taxes (long-term) (15,800) (7,857)
------- -------
$(14,900) $ (7,107)
======= =======
The following analysis reconciles the statutory federal income tax rate to
the effective income tax rates reflected above:
Year ended June 30,
----------------------------
2002 2001 2000
---- ---- ----
Computed "expected" tax expense
(benefit) 35 % 35 % 35 %
Increase (reduction) in taxes
resulting from:
State income taxes, net of
federal income tax benefits 2 % 2 % 2 %
Research and development credit (1%) (1%) (1%)
Other - - (2%)
---- ---- ----
36 % 36 % 34 %
==== ==== ====
Net operating loss carryforwards of $571,000 (from acquisitions) expire
through the year 2014. The Company paid income taxes of $15,900,000,
$3,580,000, and $13,502,000 in 2002, 2001, and 2000, respectively.
NOTE 8: INDUSTRY AND SUPPLIER CONCENTRATIONS
The Company sells its products to banks and financial institutions
throughout the United States and generally does not require collateral.
Reserves (which are insignificant at June 30, 2002 and 2001) are maintained
for potential credit losses.
In addition, the Company purchases most of its computer hardware and related
maintenance for resale in relation to installation of JHA software systems
from one supplier. There are a limited number of hardware suppliers for
these required materials. If this relationship was terminated, it could
have a significant negative impact on the future operations of the Company.
NOTE 9: STOCK OPTION PLANS
The Company currently issues options under two stock option plans: the 1996
Stock Option Plan ("1996 SOP") and the Non-Qualified Stock Option Plan
("NSOP").
The 1996 SOP was adopted by the Company on October 29, 1996, for its
employees. This plan replaced the terminating 1987 SOP. Terms and vesting
periods of the options are determined by the Compensation Committee of the
Board of Directors when granted and for options outstanding include vesting
periods up to 4 years. Shares of common stock are reserved for issuance
under this plan at the time of each grant which must be at or above fair
market value of the stock at the grant date. The options terminate 30 days
after termination of employment, three months after retirement, one year
after death or ten years after grant. As of June 30, 2002, there were
968,940 shares available for future grants under the plan from the original
13,000,000 shares approved by the stockholders.
The NSOP was adopted by the Company on October 31, 1995, for its outside
directors. Options are exercisable beginning six months after grant at a
price equal to 100% of the fair market value of the stock at the grant date.
The options terminate when director status ends, upon surrender of the
option or ten years after grant. A total of 1,200,000 shares of common
stock have been reserved for issuance under this plan with a maximum of
300,000 for each director. As of June 30, 2002, there were 570,000 shares
available for future grants under the plan.
Changes in stock options outstanding are as follows:
Number of Shares Weighted Average
Exercise Price
---------- ------
Outstanding July 1, 1999 8,832,760 $ 5.40
Granted 5,969,000 15.75
Forfeited (127,800) 6.19
Exercised (1,416,392) 4.72
---------- ------
Outstanding June 30, 2000 13,257,568 10.12
Granted 1,422,280 23.57
Forfeited (104,616) 18.39
Exercised (3,285,433) 6.89
---------- ------
Outstanding June 30, 2001 11,289,799 12.68
Granted 618,116 23.26
Forfeited (82,500) 22.26
Exercised (1,607,846) 8.50
---------- ------
Outstanding June 30, 2002 10,217,569 $ 13.90
========== ======
During the year ended June 30, 2002, there were 84,400 shares reissued from
the treasury for exercised options. The weighted fair value of options
granted was $10.63, $9.58, and $6.69 for 2002, 2001, and 2000,
respectively.
Following is an analysis of stock options outstanding (O) and exercisable
(E) as of June 30, 2002:
Range of Weighted-Average
Exercise Remaining Contractual Weighted-Average
Prices Shares Life in Years Exercise Price
O E O O E
-------- --------- ----- ----- -----
$ 2 to 6 2,514,365 2,514,365 $ 4.57 $ 4.57
4.24
6 to 11 1,401,194 1,297,736 9.04 9.00
6.38
11 to 17 4,365,510 4,355,510 16.64 16.64
7.71
17 to 30 1,931,500 966,250 23.33 23.96
8.70
30 to 31 5,000 2,500 31.00 31.00
-------- --------- ---------- 9.00 ----- -----
----
$1 to 32 10,217,569 9,136,361 6.86 $13.90 $13.01
======== ========== ========== ==== ===== =====
As permitted under SFAS No. 123, Accounting for Stock-Based Compensation,
the Company has elected to continue to follow Accounting Principles Board
("APB") No. 25, Accounting for Stock Issued to Employees, in accounting for
stock-based awards to employees. Under APB No. 25, the Company generally
recognizes no compensation expense with respect to such awards, since the
exercise price of the stock options awarded are equal to the fair market
value of the underlying security on the grant date.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 for awards granted after December 31, 1994, as if
the Company had accounted for its stock-based awards to employees under the
fair value method of SFAS No. 123. The fair value of the Company's stock-
based awards to employees was estimated as of the date of the grant using a
Black-Scholes option pricing model.
The Company's pro forma information follows:
(In Thousands, Except Per Share Data)
Year ended June 30,
-----------------------------------
2002 2001 2000
------- ------- -------
Net income
As reported $ 57,065 $ 55,631 $ 34,018
======= ======= =======
Pro forma $ 47,671 $ 36,450 $ 26,503
======= ======= =======
Diluted net income per share
As reported $ .62 $ .61 $ .40
======= ======= =======
Pro forma $ .52 $ .40 $ .31
======= ======= =======
Basic net income per share
As reported $ .64 $ .64 $ .42
======= ======= =======
Pro forma $ .53 $ .42 $ .32
======= ======= =======
Assumptions:
Expected life (years) 3.10 2.92 2.95
Volatility 55% 54% 56%
Risk free interest rate 3.2% 4.4% 6.2%
Dividend yield .78% .36% .36%
NOTE 10: EARNINGS PER SHARE
The following table reflects a reconciliation between Basic and Diluted net
income per share:
(In Thousands, Except Per Share Data)
Year ended June 30,
-------------------
2002 2001 2000
--------------------------- ---------------------------- ----------------------------
Net Weighted Per Share Net Weighted Per Share Net Weighted Per Share
Income Average Amount Income Average Amount Income Average Amount
Shares Shares Shares
Basic Income Per Share:
Net income available to
Stockholders $57,065 89,316 $0.64 $55,631 86,834 $0.64 $34,018 81,766 $0.42
Effect of dilutive
securities:
Stock options - 3,051 $0.02 - 4,510 $0.03 - 3,512 $0.02
------ ------ ---- ------ ------ ---- ------ ------ ----
Diluted Income Per Share:
Net income available to
common stockholders $57,065 92,367 $0.62 $55,631 91,344 $0.61 $34,018 85,278 $0.40
====== ====== ==== ====== ====== ==== ====== ====== ====
Stock options to purchase approximately 690,858 shares for fiscal 2002,
102,591 for fiscal 2001, and 1,182,675 for fiscal 2000 were not dilutive and
therefore, were not included in the computations of diluted income per
common share amounts.
NOTE 11: EMPLOYEE BENEFIT PLANS
Employee Stock Purchase Plan - The Company established an employee stock
purchase plan on January 1, 1996. The plan allows the majority of employees
the opportunity to directly purchase shares of the Company. Purchase prices
for all participants are based on the closing bid price on the last business
day of the month.
Employee Stock Ownership Plan 401(k) - The Company has an Employee Stock
Ownership Plan 401(k) (the "Plan") covering substantially all employees of
the Company and its subsidiaries. As of July 1, 1987, the Plan was amended
and restated to include most of the existing ESOP provisions, to add salary
reduction contributions allowed under Section 401(k) of the Internal Revenue
Code and to require employer matching contributions. The Company matches
100% of employee contributions up to 5% of compensation subject to a
maximum of $5,000. The Company has the option of making a discretionary
contribution to the Plan, however, none has been made for any of the three
most recent fiscal years. The Company assumed responsibility for the
Symitar Employee 401(k) Plan as of the acquisition date and plans to merge
it into the Plan as of December 31, 2002. The total contribution related to
the Plans was $3,862,000, $2,986,000, and $2,430,000 for 2002, 2001, and
2000, respectively.
For the year ended June 30, 2002, there were 84,400 shares and 3,423 shares
reissued from treasury stock for the shares exercised in the employee stock
option plan and the employee stock purchase plan, respectively.
NOTE 12: DISCONTINUED OPERATIONS
On September 7, 1999, the Company completed the sale of BankVision Software,
Ltd. subsidiary for $1,000,000. The purchaser has paid $750,000 of the
purchase price and has executed a promissory note for the remainder (plus
interest). The net assets of the subsidiary, as of that date, approximately
equaled the sales proceeds, and as a result, the transaction had minimal
effect on its financial results for fiscal year 2000. Total loss from
discontinued operations was none, none, and $332,000 for the years ended
June 30, 2002, 2001 and 2000, respectively.
NOTE 13: BUSINESS ACQUISITIONS
POOLING OF INTERESTS TRANSACTION
On June 1, 2000, the Company acquired all the outstanding shares of Sys-Tech
for approximately $16,000,000 (834,000 shares) in Company stock.
The 2000 consolidated financial statements were restated for the effect of
this pooling transaction. The following table presents a reconciliation of
revenue and net income previously reported by the Company, and Sys-Tech to
those presented in the accompanying consolidated financial statements.
(In Thousands)
Nine Months Ended
March 31, 2000
-------
Revenues:
JHA $150,239
Sys-Tech 5,692
-------
Combined $155,931
=======
Net Income:
JHA $ 22,588
Sys-Tech (4)
-------
Combined $ 22,584
=======
PURCHASE TRANSACTIONS
On January 1, 2002, the Company acquired all the outstanding shares of
Transcend Systems Group (TSG) for $7,300,000 in cash and 117,738 restricted
shares of the Company's common stock valued at $2,400,000, for a total
consideration to the TSG shareholders of $9,700,000. As part of the
purchase price, the Company also advanced to TSG $851,000 for the repayment
of bank debt and certain TSG obligations to its shareholders. TSG provides
customer relationship management software and related services to financial
institutions. The purchase price for TSG was allocated to the assets and
liabilities acquired based on the estimated fair values at the acquisition
date, resulting in allocation to goodwill of $8,500,000, software of
$930,000, and customer contracts of $1,100,000, of which software and
customer contracts are being amortized on a straight-line basis over 10
years.
On December 1, 2001, the Company acquired all the outstanding shares of
System Legacy Solutions (SLS) for $3,000,000 in cash. SLS provides
technology to convert data from legacy systems into formats that can be used
by newer technologies. The purchase price for SLS was allocated to the
assets and liabilities acquired based on the estimated fair values at the
acquisition date, resulting in allocation to goodwill of $2,550,000 and
software $450,000 of which software is being amortized on a straight-line
basis over 10 years.
On June 7, 2000, the Company completed the acquisition of Symitar Systems,
Inc. ("Symitar"), a provider of in-house data processing solutions for
credit unions. At the time of acquisition, Symitar provided 237 credit
unions throughout the United States with its comprehensive line of software
and services that run on the IBM pSeries RS/6000. The purchase price for
Symitar was allocated to the assets and liabilities acquired based on their
estimated fair values at the acquisition date, resulting in allocation to
acquired customer relationships of $21,800,000, trade name of $3,900,000,
goodwill of $15,689,000 and software of $2,000,000, which customer
relationships and software are being amortized on a straight-line basis over
20 and 10 years, respectively.
On April 1, 2000, the Company acquired all the outstanding shares of
BancData Solutions, Inc. ("BDS"), for $5,000,000 in cash. BDS is a provider
of a variety of data center options to community banks, primarily in
southern California. Their systems are AS/400 based and are already using a
JHA core application system. The net intangible asset acquired of $3,963,000
was allocated to customer relationships and is being amortized on a
straight-line basis over 20 years.
On September 8, 1999, the Company's wholly-owned subsidiary Open System
Group, Inc. ("OSG"), completed the acquisition of BancTec, Inc.'s community
banking business, providing software, account processing capabilities and
data center operations. At the time of acquisition , the customer base
included over 700 community banks throughout the United States and
the Caribbean. The total value of the transaction was approximately
$56,136,000, made up of $50,000,000 paid in cash, the assumption of
approximately $5,475,000 liabilities and $661,000 in transaction costs. The
Company allocated the purchase price to the assets and liabilities acquired
based on their estimated fair value at the acquisition date, resulting
in allocations of $39,000,000, $5,315,000 and $1,000,000 to acquired
customer relationships, goodwill and software, respectively. The customer
relationships and software are being amortized on a straight-line basis over
20 and 10 years, respectively.
The five acquisitions discussed above were accounted for using the purchase
method. Accordingly, the accompanying consolidated financial statements do
not include any revenues and expenses related to these acquisitions prior to
their respective closing dates.
The following unaudited pro forma condensed information is presented as if
the OSG and Symitar acquisitions had occurred at the beginning of the
earliest period presented. The pro forma results for BDS, SLS, TSG were not
included as amounts are not material.
(In Thousands, Except Per Share Data)
Year Ended June 30, 2000
------------------------
Revenues $ 253,106
Income from continuing operations 30,478
Net income 30,146
Diluted Income Per Share:
Income from continuing operations $ .36
Net income $ .36
NOTE 14: BUSINESS SEGMENT INFORMATION
The Company is a leading provider of integrated computer systems that
perform data processing (available for in-house or service bureau
installations) for banks and credit unions. The Company's operations are
classified into two business segments: bank systems and services and credit
union systems and services. The Company evaluates the performance of its
segments and allocates resources to them based on various factors, including
prospects for growth, return on investment and return on revenue.
(In Thousands)
For the Year Ended June 30,
2002 2001 2000
--------- --------- ---------
Revenues
Bank systems and services $ 339,347 $ 318,011 $ 235,056
Credit Union systems and services 57,310 48,892 4,785
--------- --------- ---------
Total $ 396,657 $ 366,903 $ 239,841
========= ========= =========
Gross Profit
Bank systems and services $ 143,555 $ 138,143 $ 96,062
Credit Union systems and services 17,665 13,454 2,054
--------- --------- ---------
Total $ 161,220 $ 151,597 $ 98,116
========= ========= =========
Property and equipment, net
Bank systems and services $ 170,882 $ 136,166 $ 91,864
Credit Union systems and services 2,893 2,273 1,421
--------- --------- ---------
Total $ 173,775 $ 138,439 $ 93,285
========= ========= =========
Intangible assets, net
Bank systems and services $ 71,333 $ 62,575 $ 71,881
Credit Union systems and services 43,330 44,620 43,214
--------- --------- ---------
Total $ 114,663 $ 107,195 $ 115,095
========= ========= =========
Depreciation expense, net
Bank systems and services $ 20,328 $ 12,148 $ 8,843
Credit Union systems and services 557 391 27
--------- --------- ---------
Total $ 20,885 $ 12,539 $ 8,870
========= ========= =========
Amortization expense, net
Bank systems and services $ 5,295 $ 7,077 $ 6,414
Credit Union systems and services 1,290 2,272 189
--------- --------- ---------
Total $ 6,585 $ 9,349 $ 6,603
========= ========= =========
Capital expenditures, net
Bank systems and services $ 48,451 $ 55,474 $ 32,613
Credit Union systems and services 1,058 2,307 6
--------- --------- ---------
Total $ 49,509 $ 57,781 $ 32,619
========= ========= =========
The Company has not disclosed any additional asset information by segment,
as the information is not produced internally and its preparation is
impracticable.
NOTE 15: SECONDARY OFFERING
On August 16, 2000, the Company completed a secondary offering of 3.0
million shares of its common stock at $21.50 per share less a 5%
underwriters discount and offering expenses paid by the Company. The net
proceeds of approximately $60.5 million was used to retire all outstanding
debt under lines of credit as of that date, with the remaining balance
available for working capital, capital expenditures and other general
corporate purposes.
*****
Supplementary Data
Selected Quarterly Financial Information
(Unaudited)
FY 2002
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- --------
REVENUE:
Licensing and installation $ 22,270 $ 22,874 $ 24,751 $ 27,294 $ 97,189
Support and service 41,606 41,888 42,976 44,975 171,445
Hardware sales 22,256 26,783 24,825 26,478 100,342
Customer reimbursements 6,435 6,682 7,232 7,332 27,681
------- ------- ------- ------- --------
Total $ 92,567 $ 98,227 $ 99,784 $106,079 $ 396,657
------- ------- ------- ------- --------
COST OF SALES:
Cost of hardware $ 14,879 $ 18,371 $ 17,243 $ 19,917 $ 70,410
Cost of services 32,204 34,163 35,217 35,762 137,346
Customer reimbursement
expenses 6,435 6,682 7,232 7,332 27,681
------- ------- ------- ------- --------
Total $ 53,518 $ 59,216 $ 59,692 $ 63,011 $ 235,437
------- ------- ------- ------- --------
GROSS PROFIT $ 39,049 $ 39,011 $ 40,092 $ 43,068 $ 161,220
Income before income taxes $ 22,837 $ 20,366 $ 21,184 $ 24,086 $ 88,473
Net income $ 14,616 $ 13,034 $ 13,558 $ 15,857 $ 57,065
Diluted net income per share $ .16 $ .14 $ .15 $ .17 $ .62
FY 2001
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- --------
REVENUE:
Licensing and installation $ 23,512 $ 24,536 $ 26,233 $ 26,978 $ 101,259
Support and service 30,446 32,266 34,221 37,205 134,138
Hardware sales 23,050 23,930 32,357 30,734 110,071
Customer reimbursements 4,662 5,018 5,392 6,363 21,435
------- ------- ------- ------- --------
Total $ 81,670 $ 85,750 $ 98,203 $101,280 $ 366,903
------- ------- ------- ------- --------
COST OF SALES:
Cost of hardware $ 15,969 $ 15,635 $ 22,962 $ 21,063 $ 75,629
Cost of services 26,407 30,330 30,167 31,338 118,242
Customer reimbursement
expenses 4,662 5,018 5,392 6,363 21,435
------- ------- ------- ------- --------
Total $ 47,038 $ 50,983 $ 58,521 $ 58,764 $ 215,306
------- ------- ------- ------- --------
GROSS PROFIT $ 34,632 $ 34,767 $ 39,682 $ 42,516 $ 151,597
Income before income taxes $ 18,569 $ 20,125 $ 23,966 $ 24,263 $ 86,923
Net income $ 11,884 $ 12,880 $ 15,338 $ 15,529 $ 55,631
Diluted net income per share $ .13 $ .14 $ .17 $ .17 $ .61
*****
Item 9. Changes in and Disagreements on Accounting and Financial
Disclosures
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
See the information under the captions "Election of Directors" and
"Executive Officer and Significant Employees" in the Company's definitive
Proxy Statement which is incorporated herein by reference.*
Item 11. Executive Compensation
See the information under captions "Executive Compensation", "Compensation
Committee Report" and "Company Performance" in the Company's definitive
Proxy Statement which is incorporated herein by reference.*
Item 12. Security Ownership of Certain Beneficial Owners and Management
See the information under the captions "Stock Ownership of Certain
Stockholders" and "Election of Directors" in the Company's definitive Proxy
Statement which is incorporated herein by reference.*
Item 13. Certain Relationships and Related Transactions
See the information under the caption "Certain Relationships and Related
Transactions" in the Company's definitive Proxy Statement which is
incorporated herein by reference.*
*Incorporated by reference pursuant to Rule 12b-23 and General Instruction
G(3) to Form 10-K.
Item 14. Controls and Procedures
(a) Not applicable pursuant to Transition Provisions (Section V) of
Securities and Exchange Commission Release 33-8124.
(b) None.
(c) Not applicable.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
The following Consolidated Financial Statements of the Company and its
subsidiaries and the Report of Independent Auditors' thereon appear under
Item 8 of this Report:
- Independent Auditors' Report.
- Consolidated Statements of Income for the Years Ended June 30, 2002,
2001 and 2000.
- Consolidated Balance Sheets as of June 30, 2002 and 2001.
- Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended June 30, 2002, 2001 and 2000.
- Consolidated Statements of Cash Flows for the Years Ended June 30,
2002, 2001 and 2000.
- Notes to Consolidated Financial Statements.
The following Financial Statement Schedules filed as part of this Report
appear under Item 8 of this Report:
There are no schedules included because they are not applicable or the
required information is shown in the Consolidated Financial Statements
or Notes thereto.
Except as otherwise specifically noted, the following documents are
incorporated by reference as exhibits hereto pursuant to Rule 12b-32:
Exhibit No. Description
3.1.1 Certificate of Incorporation, attached as Exhibit 3.1 to
the Company's Registration Statement on Form S-1, filed
November 17, 1985.
3.1.2 Certificate of Amendment of Certificate of Incorporation
attached as Exhibit 4 to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1987.
3.1.3 Certificate of Amendment of Certificate of
Incorporation, attached as Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the Year Ended June 30, 1993.
3.1.4 Certificate of Amendment of Certificate of
Incorporation, attached as Exhibit 3.5 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1997.
3.1.5 Certificate of Amendment of Certificate of
Incorporation, attached as Exhibit 3.6 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998.
3.1.6 Certificate of Amendment of Certificate of
Incorporation, attached as Exhibit (a) to the Company's
Quarterly Report on For 10-Q for the quarter ended
December 31, 2000.
3.2.1 Amended and Restated Bylaws, attached as Exhibit A to
the Company's Quarterly Report on Form 10-Q for the
Quarter ended March 31, 1996.
10.1 The Company's 1987 Stock Option Plan, as amended as of
October 27, 1992, attached as Exhibit 19.1 to the Company's
Quarterly Report on Form 10-Q for the Quarter ended
September 30, 1992.
10.3 The Company's 1995 Non-Qualified Stock Option Plan, attached
as Exhibit 10.3 to the Company's Annual Report on Form 10-K
for the Year Ended June 30, 1996.
10.4 IBM Remarketer Agreement dated May 21, 1992, attached as
Exhibit 10.1 to the Company's Annual Report on Form 10-K the
Year Ended June 30, 1992; renewed for a two year term on
January 1, 2001.
10.5 Form of Indemnity Agreement which has been entered into as
of August 27, 1996, between the Company and each of its
Directors, attached as Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the Year Ended June 30, 1996.
10.6 The Company's 1996 Stock Option Plan, attached as Exhibit
10.9 to the Registrant's Annual Report on Form 10-K for the
Year Ended June 30, 1997.
10.11 Line of Credit Agreement dated September 7, 1999,
between the Company and Commerce Bank, N.A., attached as
Exhibit 10.11 to the Company's current report on Form
8-K filed September 20, 1999.
10.15 Line of Credit Loan Modification Agreement dated June 6,
2000, between the Company and Commerce Bank, N.A.
attached as Exhibit 10.11 to the Company's current
report on Form 8-K filed June 19, 2000.
21.1 A list of the Company's subsidiaries, is attached as
Exhibit 21.1.
23.1 Consent of Independent Auditors' is attached as Exhibit 23.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the last quarter of
the period covered by this report:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 this 25th
day of September, 2002.
JACK HENRY & ASSOCIATES, INC., Registrant
By /s/ Michael E. Henry
---------------------
Michael E. Henry
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Capacity Date
--------- -------- ----
/s/ Michael E. Henry Chairman of the Board and September 25, 2002
--------------------- Chief Executive Officer
Michael E. Henry and Director
/s/ Terry W. Thompson President September 25, 2002
---------------------
Terry W. Thompson
/s/ John F. Prim Chief Operating Officer September 25, 2002
---------------------
John F. Prim
/s/ John W. Henry Vice Chairman, Senior Vice September 25, 2002
--------------------- President and Director
John W. Henry
/s/ Jerry D. Hall Executive Vice President September 25, 2002
--------------------- and Director
Jerry D. Hall
/s/ Kevin D. Williams Treasurer and Chief September 25, 2002
--------------------- Financial Officer
Kevin D. Williams (Principal Accounting
Officer)
/s/ James J. Ellis Director September 25, 2002
---------------------
James J. Ellis
/s/ Burton O. George Director September 25, 2002
---------------------
Burton O. George
/s/ George R. Curry Director September 25, 2002
---------------------
George R. Curry
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
Each of the undersigned hereby certifies in his capacity as an officer of
Jack Henry & Associates, Inc., Inc. (the "Company") that the Annual Report
of the Company on Form 10-K for the period ended June 30, 2002 fully
complies with the requirements of Section 13(a) of the Securities Exchange
Act of 1934 and that the information contained in such report fairly
presents, in all material respects, the financial condition of the Company
at the end of such period and the results of operations of the Company for
such period.
/s/ Michael E. Henry
------------------------------
Date: September 25, 2002 Michael E. Henry
Chief Executive Officer
/s/ Kevin D. Williams
------------------------------
Date: September 25, 2002 Kevin D. Williams
Chief Financial Officer
CERTIFICATION
I, Michael E. Henry, certify that:
1. I have reviewed this annual report on Form 10-K of Jack Henry &
Associates, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
/s/ Michael E. Henry
------------------------------
Date: September 25, 2002 Michael E. Henry
Chief Executive Officer
CERTIFICATION
I, Kevin D. Williams, certify that:
1. I have reviewed this annual report on Form 10-K of Jack Henry &
Associates, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
/s/ Kevin D. Williams
-------------------------------
Date: September 25, 2002 Kevin D. Williams
Chief Financial Officer