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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, 2003
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 AND 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
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.01 par value)
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best pf registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes X No
As of August 21, 2003, the Registrant had 88,560,346 shares of Common Stock
outstanding ($.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 $1,332,458,488 (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 2003 Annual Meeting of Stockholders (the "Proxy
Statement"), as described in the footnotes to the Table of Contents below,
are incorporated by reference into Part III of this Report.
TABLE OF CONTENTS
PART I Page Reference
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ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 12
ITEM 3. LEGAL PRECEEDINGS 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 14
ITEM 6. SELECTED FINANCIAL DATA 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 42
ITEM 9A. CONTROLS AND PROCEDURES 42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT (1) 43
ITEM 11. EXECUTIVE COMPENSATION (2) 43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS (3) 43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (4) 43
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES (5) 43
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 43
(1) Proxy Statement sections entitled "Election of Directors", "Corporate
Governance," "Audit Committee Report," "Executive Officers and
Significant Employees," and "Section 16(a) Beneficial Ownership
Reporting Compliance."
(2) Proxy Statement sections entitled "Executive Compensation",
"Compensation Committee Report", and "Company Performance."
(3) Proxy Statement sections entitled "Stock Ownership of Certain
Stockholders," "Election of Directors," and "Equity
Compensation Plan Information."
(4) Proxy Statement section entitled "Certain Relationships and Related
Transactions."
(5) Proxy Statement sections entitled "Audit Committee Report" and
"Independent Auditors - Audit and Non-Audit Fees."
PART I
Item 1 Business
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Jack Henry & Associates, Inc. ("JHA" or the "Company") is a leading provider
of integrated computer systems providing data processing and management
information to banks, credit unions and other financial institutions in the
United States. The Company was formed in 1976 and made its initial public
offering in 1985. Since our formation, JHA has grown by developing highly
specialized products and services for its financial institution customers,
acquiring organizations that complemented and added to the infrastructure of
the Company and adding new customers.
We offer a complete, integrated suite of data processing system solutions to
improve our customers' management of their entire back-office and
customer/member interaction processes. We believe our solutions enable our
financial institution customers to provide better service to their customers
and compete more effectively against other 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 and hardware and software installation 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 sixteen item processing
centers located across the United States.
Our gross revenue has grown from $204.3 million in fiscal 1999 to $404.7
million in fiscal 2003, representing a compound annual growth rate over this
five-year period of 21.0%. Net income has grown from $32.7 million in
fiscal 1999 to $49.4 million in fiscal 2003, a compound annual growth rate
of 15.3%.
Industry Background
According to the Automation in Banking 2003 report, United States financial
institutions, including commercial banks, thrifts and credit unions,
increased spending on hardware, software, services and telecommunications to
$41.6 billion in calendar 2002 from $34.3 billion in 1999, representing a
compound annual growth rate of 6.0%. The increase of industry spending was
2.4% from December 31, 2001 to December 31, 2002. Industry surveys continue
to show that financial institutions believe upgrading information technology
is one of the most important issues to their continued success and to
enhance growth and efficiencies. We believe that the market opportunity for
providers of hardware and software systems, maintenance, support and related
outsourcing services targeted toward financial institutions will continue to
grow as a result of the competitive pressures within their respective
industries.
There are approximately 8,400 commercial banks and 9,900 credit unions
in the United States. Our primary market segment, which represented
approximately 85% of our consolidated revenues in fiscal 2003, is commercial
banks with less than $30.0 billion in assets, of which there were
approximately 8,350 at December 31, 2002. Consolidation within the
financial services industry has resulted in a 2% compound annual decline in
the population of commercial banks and a 1.2% compound annual decline in
their aggregate assets between 1999 and 2002. Our other market segment is
credit unions within the United States, and represented approximately 15% of
our total revenues in fiscal 2003. These are cooperative, not-for-profit
financial institutions organized to promote savings and provide credit to
their members. As of December 31, 2002, there were approximately 9,900
federally insured credit unions in the United States. Although the number
of these credit unions has declined at a 3.0% compound annual rate between
1999 and 2002, their aggregate assets have increased at a compound annual
growth rate of 9.7% to $557.1 billion at December 31, 2002.
We believe that commercial and regional banks and credit unions play an
important role with the geographic and demographic communities and the
customers they serve. Typically, customers of these financial institutions
rely on them because of their ability to provide personalized, relationship-
based service and their focus on retail, commercial and business needs. We
believe these core strengths will allow our financial institution customers
to effectively compete with other banks, credit unions 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 excellence in delivery to customers of their primary
products and service offerings;
* sell more products and services to existing customers through
utilization of customer relationship management ("CRM") products;
* implement advanced technologies, such as imaging, platform
automation 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, complementary
service offerings and data processing infrastructure, to provide
competitive products and services to their customers.
According to Automation in Banking 2003, in 2002 approximately 56% of all
commercial banks and 69% of all credit unions utilized in-house hardware and
software systems to perform all of their core systems and data processing
functions. Off-site data processing centers provided system services on an
outsourced basis for 44% of all banks and 31% of all credit unions. 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 commercial banks with under $500 million of total assets in the United
States with in-house installations, approximately 51%, 25%, 9%, and 8%
utilize IBM, Unisys, other Unix-based platforms and NCR, respectively. No
other specific hardware platform had more than a 7% 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 65% of banks and 64% of credit unions in the United States
offer Internet banking. We believe that commercial banks and credit unions
have a potential risk of losing customers to other 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 on various hardware
platforms and operating systems. Our business derives revenues from three
primary sources which include gross customer reimbursements received for out
of pocket expenses incurred and reported in the respective lines of revenue:
* sales of software licenses;
* support and services fees which include installation services; and
* hardware sales.
We develop software applications designed primarily for use on hardware
supporting IBM and UNIX/NT operating systems. Our marketed 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. Any of these core systems
can be utilized either through an in-house or outsourced delivery method
depending on the financial institution's management style and philosophy.
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
without needing to customize or program the software. Our software
applications are designed to provide maximum flexibility in meeting our
customer data processing requirements within a single, integrated system.
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 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 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 organically, 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 several turn-key solutions that
enable 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, 2003, we had
over 3,000 customers, up from 1,400 in 1999.
* 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. In April 2003,
the Company granted approximately 3,670,000 stock options to
approximately 2,100 full time employees, or 94% of all full time
employees as of that date.
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 1999, we have completed the following
acquisitions:
Fiscal
Year Company Products and Services
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2003 National Bancorp Data Item Processing
Services, LLC
2003 Credit Union Solutions, Inc Data processing systems and services
for smaller credit unions
2002 Transcend Systems Group Customer Relationship Management
software and related services
2002 System Legacy Solutions Image data conversion systems
2000 Symitar Systems, Inc. Data processing systems and services
for credit unions
2000 Sys-Tech, Inc. 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 Item Processing
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 16 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 13 to the Financial Statements (see 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, which is IBM's premier mid-range hardware system, the IBM
pSeries, 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 regularly renew, we
have been named a "Premier Business Partner'' of IBM for the last eleven
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
institution's 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, 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 $30.0 billion;
* CIF 20/20[R], which operates on the IBM iSeries and is used
primarily by banks with total assets up to $300.0 million;
* Core Director[R], which operates on hardware supporting a UNIX/NT
environment and is used by banks employing client-server
technology.
Credit Union Segment
* Episys[TM], which operates on the IBM pSeries with a UNIX/NT
operating system and is used primarily by credit unions with total
assets greater that $25.0 million.
* Cruise[TM], which operates on the IBM xSeries 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[R] is a fully-automated new account
origination and documentation preparation 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.
* SuperIMAGE[TM] is a check image system that provides enhanced
integration, automation, and dependability in item imaging
* 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[R] utilizes digital storage and
retrieval technology to provide online instant access to document
images, such as loan documents and signature cards.
* PinPoint/WinPoint Report Retrieval[TM] enables system-wide storage
and retrieval of computer-generated reports for simplified
information access.
* NetTeller Online Banking[TM] and NetTeller MemberConnect Web[TM]
provides Internet-based home banking and commercial cash management.
See "Online Banking" below.
* PowerPay[TM] is an internet bill payment solution.
* NetTeller Cash Management is an internet cash management solution
for small and large businesses providing complete ACH and wire
transfer capabilities over the internet.
* InTouch Voice Response[TM] provides a fully-automated interactive
voice response system for 24-hour telephone-based customer account
management.
* Centurion Disaster Recovery[R] 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[R] 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.
* Matrix Network Services[TM] provides network design, implementation,
security and related consulting services to financial institutions
* Synapsys[TM] provides a powerful stand alone tool for customer
relationship management (CRM).
* OnTarget[TM] provides a fully integrated deposit platform, lending
platform and teller solution for our Core Director and Banker II
customers through a partnering alliance with ARGO Data Resource
Corporation ("ARGO").
* ARGOKeys[TM] is a suite of platform sales and automation and CRM
solutions for clients using our Silverlake core systems, including
depositkeys, the deposit platform solution; lendingkeys, the lending
platform solution; and relationshipkeys, the customer relationship
management solution. ARGOKeys is a joint product delivered through
our alliance with ARGO.
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, the majority 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 require, 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 integrated software and hardware systems
at a customer site, we provide ongoing software support services to assist
our customers in operating the systems. 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 support services on our core systems as well as our complementary
software products.
Nearly all of our in-house customers contract for annual 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 to 20% of the particular software product's license fee. These fees will
increase 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 billed at June
30 and are paid in advance for the entire fiscal year, with pro-ration for
new contracts which start during the year at the time of final conversion.
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 by the same support personnel, but is included as part
of their overall monthly fees and therefore not billed separately.
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[R], an Internet-based home banking system for individual
customers and commercial cash management for business customers of
banks;
* DirectLine allows NetTeller customers to offer a direct connect
service utilizing personal financial management tools for their
customers.
* 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 information and e-commerce opportunities.
Customer Relationship Management
We offer several different CRM solutions for our customers:
* Synapsys[TM] is a powerful stand-alone tool integrated with our
strategic core products and provides an enterprise-wide relationship
management solution for both retail and commercial customers that
integrates sales management, customer profiling, automated sales
tracking, profitability assessment, lead generation and referral
tracking capabilities;
* The ARGOKeys[TM] is the Argo/JHA joint solution for our Silverlake
customers that provides an enterprise wide branch sales and
automation solution, including a deposit platform, a lending
platform with an advanced automated decision module, and a complete
CRM solution, all of which is fully integrated with our core and
teller systems.
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.
Our sales efforts are conducted by dedicated field sales forces, inside
sales teams and technical sales support teams, for each of our market
segments, 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 efforts consist of sponsorship and attendance at trade shows,
e-mail newsletters, print media advertisement placements, telemarketing, and
national and regional marketing campaigns. We also conduct a number of
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 38 installations in the Caribbean primarily through the marketing
efforts of our wholly-owned foreign sales subsidiary, Jack Henry
International Limited. Our international sales accounted for less than 1%
of our total 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 and
represents the minimum guaranteed payments over the remainder of the
contract period. Our backlog at June 30, 2003 was $69.5 million for in-
house products and services and $113.7 million for outsourcing services,
with a total backlog of $183.1 million. Of the $113.7 million amount of the
backlog for outsourcing service at June 30, 2003, $80.5 million 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,
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. 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
Fidelity Information Services, Inc., Fiserv, Inc., Intercept 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 USA 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 Financial Institution Examination
Council 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, 2003 and 2002, we had 2,257 and 2,093 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.
Available Information
Our internet website is easily accessible to the public at www.jackhenry.com
Our key corporate governance documents and our Code of Conduct addressing
matters of business ethics are available in the "Investor Relations"
portion of the website, together with archives of press releases and other
materials. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and other filings and amendments thereto that
we make with the U.S. Securities Exchange Commission (the "SEC") are
available free of charge on the website as soon as reasonably practicable
after such reports have been filed with or furnished to the SEC.
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 manage 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 IBM Business Partner 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.
Consolidation of financial institutions could reduce the number of our
customers and potential customers. Our primary market consists of
approximately 8,400 commercial banks and 9,900 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 eight office and three security, shipping & receiving and
maintenance 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 612,000 square feet
of office space. We have 28 leased office facilities in 17 states, which
total approximately 211,000 square feet. All of the space is utilized for
normal business purposes.
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. Subsequent to year-end, the
Company purchased a 93,000 square foot facility in San Diego, CA. for
approximately $12.8 million, with costs to complete the building estimated
at an additional approximately $16 million. This building will serve our
credit union business segment.
We own seven 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 2003 High Low
----------- ----- -----
First Quarter $17.22 $11.76
Second Quarter 13.71 7.24
Third Quarter 14.89 9.90
Fourth Quarter 18.32 10.34
Fiscal 2002
-----------
First Quarter $ 33.24 $ 20.00
Second Quarter 27.07 19.05
Third Quarter 24.49 20.80
Fourth Quarter 23.50 15.76
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, 2003 and 2002 are as follows:
Fiscal 2003 Dividend
----------- -----
First Quarter $ .035
Second Quarter .035
Third Quarter .035
Fourth Quarter .035
Fiscal 2002
-----------
First Quarter $ .030
Second Quarter .030
Third Quarter .035
Fourth Quarter .035
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.
Information regarding the Company's equity compensation plans is set forth
under the caption "Equity Compensation Plan Information" in the Company's
definitive Proxy Statement and is incorporated herein by reference.
On August 21, 2003, there were approximately 46,800 holders of the Company's
common stock. On that same date the last sale price of the common shares as
reported on NASDAQ was $19.31 per share.
Item 6 Selected Financial Data
------ -----------------------
(In Thousands, Except Per Share Data)
YEAR ENDED JUNE 30,
-------------------------------------------------------
Income Statement Data 2003 2002 2001* 2000* 1999*
--------------------------------------------------------------------------------------
Revenue (1) $404,627 $396,657 $366,903 $239,841 $204,324
Income from continuing
operations $ 49,397 $ 57,065 $ 55,631 $ 34,350 $ 32,726
Loss from discontinued
operations $ - $ - $ - $ 332 $ 758
Net income $ 49,397 $ 57,065 $ 55,631 $ 34,018 $ 31,968
Diluted income per share:
Income from continuing
operations $ 0.55 $ 0.62 $ 0.61 $ 0.40 $ 0.39
Loss from discontinued
operations $ - $ - $ - $ - $ 0.01
Net income $ 0.55 $ 0.62 $ 0.61 $ 0.40 $ 0.38
Dividends declared
per share $ 0.14 $ 0.13 $ 0.11 $ 0.09 $ 0.08
Balance Sheet Data
------------------
Working capital $ 70,482 $ 67,321 $ 65,032 $(47,990) $ 24,133
Total assets $548,575 $486,142 $433,121 $321,082 $177,823
Long-term debt $ - $ - $ 228 $ 320 $ 211
Stockholders' equity $365,223 $340,739 $302,504 $154,545 $115,798
* Selected financial information for 2000 and 1999 have been restated to
include all acquisitions that have been accounted for as pooling-of-
interests as if each had occurred at the beginning of the earliest period
reported. Revenue for the years ended June 30, 2001, 2000, and 1999 have
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) Revenue includes license sales, support and service revenue, and
hardware sales, 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 $30.0 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 support services after the systems are installed. For
our customers who prefer not to make an up-front capital investment in
software and hardware, we provide our full range of products and services on
an outsourced basis through our eight data centers and sixteen item
processing centers located throughout the United States.
We derive revenues from three primary sources, which include gross customer
reimbursements received for out of pocket expenses incurred and reported in
the respective lines of revenue:
- sales of software licenses;
- support and service fees, which include installation services; and
- hardware sales.
Over the last five fiscal years, our revenues have grown from $204.3 million
in fiscal 1999 to $404.6 million in fiscal 2003. Income from continuing
operations has grown from $32.7 million in fiscal 1999 to $49.4 million in
fiscal 2003. 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 2,450 as of June 30, 2003.
Since July 1998, we have completed 11 accretive acquisitions. Nine 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 their respective acquisition dates. The
remaining two acquisitions were accounted for using the pooling-of-interests
method.
License revenue represents the sale and delivery of application software
systems 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. In revenue arrangements with multiple elements, the components
are all separately and independently priced within the related contracts.
Allocation of revenue is consistent with pricing when each product or
service is sold separately establishing Vendor Specific Objective Evidence
("VSOE"). Generally, 25% of license fees are payable upon execution of the
license agreement with additional payments due at specified times after
contract signing. We recognize 100% of software license revenue upon
delivery and acceptance of the software and documentation.
Support and services fees are generated from installation services
contracted with us by the customer, ongoing support services to assist the
customer in operating the systems and to enhance and update the software,
and from providing outsourced data processing services and ATM and debit
card processing services. We recognize installation services revenue as
services are performed under hourly contracts and at the completion of the
installations under fixed fee contracts. 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 and
item centers. Revenues from outsourced processing and ATM and debit card
processing services are derived from monthly usage fees typically under
five-year service contracts with our customers. We recognize the revenues
under these contracts as services are performed.
Cost of license fees represents the third party vendor costs associated with
license fee revenue.
Cost of services represents costs associated with conversion and
installation efforts, ongoing support for our in-house customers, operation
of our data and item centers providing services for our outsourced
customers, ATM and debit card processing services, 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. Revenues from hardware sales are recognized when the
manufacturers ship the hardware directly to our customers. Cost of hardware
consists of the direct and related costs of purchasing the equipment from
the manufacturers and delivery to our customers. 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 license,
support and service, customer reimbursements and hardware sales along with
the related cost of sales.
RESULTS OF OPERATIONS
FISCAL 2003 COMPARED TO FISCAL 2002
REVENUE - Revenues increased 2% from $396.7 million in fiscal 2002 to $404.6
million in fiscal 2003. Compared to fiscal 2002, license fees decreased 27%;
support and service revenues increased 14%, and hardware sales decreased 5%.
Beginning in fiscal 2003, customer reimbursements received for pass-through
costs are now included and presented in the correlating line items of
support and service or hardware revenues and costs, respectively. Prior
years have been reclassified to conform with the 2003 presentation.
Reflecting the strength in new outsourcing business, revenues from support
and services continues to grow, increasing to 64% of revenues in 2003
compared to 58% of 2002 revenues. The increase is composed of $10.8 million
or 17% increase in outsourcing services, $5.2 million or 24% growth in ATM
and debit card processing services, $16.4 million or 16% growth in in-house
support and a slight decrease of $0.6 million or 2% for installation
services. Recurring revenue (support and service revenue less installation
services) increased to 55% of total revenue in fiscal 2003 from 47% of total
fiscal 2002 revenue.
Continued softness in banking core system sales negatively impacted revenues
from license fees and hardware sales in 2003. For the year, license fees
dropped 27% to $48.3 million or 12% of total 2003 revenues, compared to
$66.6 million, or 17% of 2002 revenues. The decrease is due to the overall
reduced number of software licenses delivered during the year in our bank
segment. Hardware revenue decreased 5% to $95.9 million or 24% of fiscal
2003 revenues compared with $101.3 million or 26% of fiscal 2002 revenues.
This decline is primarily attributable to the decrease in software sales
which typically drives the sale of related hardware.
COST OF SALES - Cost of sales increased 7% during the fiscal year, primarily
due to a 9% increase in employee related expenses included in cost of
services. Cost of license increased 55%, from $2.5 million in fiscal 2002
to $3.9 million in fiscal 2003, primarily due to obligations to third party
vendors for the software we resell. Cost of services increased 10% to
$178.3 million or 44% of revenue in fiscal 2003 compared to $161.5 million
or 41% of revenue in the fiscal 2002, which is in line with the increase in
revenue. Cost of hardware decreased 3% from $71.4 million or 18% of revenue
in year 2002 to $69.1 million or 17% of revenue in current 2003 fiscal year.
GROSS PROFIT - Gross profit decreased 5% from $161.2 million in fiscal 2002
to $153.3 million in fiscal 2003. The total gross margin for fiscal 2003
was 38% compared to 41% for fiscal 2002. Gross profit on license sales
decreased $19.7 million or 31% and gross margin decreased from 96% in fiscal
2002 to 92% in fiscal 2003. The decrease in gross profit was due to the
overall weakness in the capital goods market and the reduction in the margin
is primarily due to decrease in license revenue, which is our highest margin
revenue.
Gross profit for support and services increased $15.0 million or 22% in
fiscal year 2003 compared to fiscal 2002. Support and service margins
continue to strengthen to 32% this year from 29% in the prior year. The
increase is primarily due to increased volumes, increased number of
customers and continued leveraging of resources in our outsourcing and
ATM/Debit card processing services.
Hardware gross margin for the current fiscal year 2003 was 28%, compared to
30% margin in fiscal year 2002. The decrease in hardware margin for the
year is primarily attributable to the sales mix of products. In fiscal 2003
our hardware sales included a higher percentage of servers and personal
computers related to networks than in 2002. Network hardware has a
significantly lower margin than midrange hardware and reader sorters.
Another contributing factor to lower gross margin has been reduced vendor
incentives in fiscal 2003.
OPERATING EXPENSES - Operating expenses increased 2% for the current year,
with the majority of the increase generated from research and development
expenses. Research and development expenses went up by 27% to $15.9 million
for fiscal 2003 as compared to $12.5 million for fiscal 2002. The increase
is primarily attributable to a 27% increase in employee related expenses for
ongoing development of new products and enhancements to existing products in
both segments of our business. Selling and marketing annual expenses
increased 4% to $30.7 million in 2003 compared to $29.4 million for fiscal
year 2002. General and administrative expenses decreased 10% to $29.5
million this year from $32.7 million in fiscal year 2002, mainly due from
ongoing efforts to control expenses by management.
INTEREST INCOME (EXPENSE) - Interest income (expense) decreased from $1.8
million in fiscal 2002 to $0.5 million in fiscal 2003. Interest income
decreased 69% from $2.0 million to $0.6 million due to lower interest rates
on investments. Interest expense decreased $81,000 from $191,000 in fiscal
year 2002 to $110,000 in fiscal 2003. The decrease is due to short term
borrowings being paid off in January 2002, with no additional borrowings
since that date.
PROVISION FOR INCOME TAXES - The provision for income taxes was $28.4
million, or 36.5% of income before income taxes in fiscal 2003, compared
with $31.4 million, or 36% of income before income taxes in fiscal 2002.
The increase in the tax rate in the current fiscal year is due to changes in
effective state income tax rates.
NET INCOME - Net income decreased 13% from $57.1 million, or $.62 per
diluted share in fiscal 2002 to $49.4 million, or $.55 per diluted share in
fiscal 2003.
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, license revenue
decreased 5% from $70.1 million to $66.6 million in fiscal 2002; support and
service revenue increased 23% from $185.8 million in fiscal 2001 to $228.7
million in fiscal 2002, and hardware sales decreased 9% from $111.0 million
in fiscal 2001 to $101.3 million in fiscal 2002.
License fees and hardware revenues were negatively impacted by the sluggish
economy following the September 11th terrorist attacks and a decrease in
capital spending. The support and service revenues remained strong, which
was primarily recurring revenue from annual in-house support agreements,
monthly data and item center outsourcing contracts, and processing of ATM
and debit card transactions. The increase in fiscal 2002 is composed of
$10.9 million growth in outsourcing services, $6.2 million growth in ATM and
debit card processing services, $21.8 million growth in in-house support and
$4.1 million growth in installation services. Recurring revenue (support
and service revenue less installation services) increased to 47% of total
revenue in fiscal 2002 from 41% of total fiscal 2001 revenue.
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 license remained almost flat, while the license revenue
decreased 5%. Cost of services increased 19% compared to the 23% increase
in support and service revenue. Cost of hardware decreased 7%, in line with
the decrease in hardware sales of 9%. The total increase in cost of sales
is primarily due to a 10% increase in the number of employees, related
benefits and increased depreciation expense related to prior capital
expenditures.
GROSS PROFIT - Gross profit increased 6% from $151.6 million or 41% of
revenue in fiscal 2001 to $161.2 million in fiscal 2002, also 41% of
revenue. Gross profit decreased 5% in fiscal 2002 for license fees compared
to fiscal 2001. Support and services gross profit increased 35% from $49.6
million in fiscal 2001 to $67.2 million in fiscal 2002 and the related gross
margin increased from 27% to 29% in fiscal 2002. Hardware sales gross
profit decreased from $34.4 million in fiscal 2001 to $29.9 million in
fiscal 2002 and the gross margin was 30% in fiscal 2002 compared to 31% in
fiscal 2001. The slight decrease is due to the sales mix and reduced
incentives from hardware suppliers.
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.
INTEREST INCOME (EXPENSE) - Interest 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 before income taxes in fiscal 2002, compared with
$31.3 million, or 36% of income 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.
Business Segment Discussion
Revenues in the bank systems and services business segment increased 1% from
$339.3 million in fiscal 2002 to $343.1 million in fiscal 2003. Gross
profit in this business segment decreased 6% from $143.6 million or 42%
gross margin in fiscal 2002 to $135.0 million or 39% gross margin for the
year ended June 30, 2003. This decline in gross profit is primarily due to
the industry trend of an overall decrease in capital spending for the fiscal
year and is reflected by the significant decrease in software and hardware
revenues offset somewhat by the increase in services revenue. The decrease
in gross margin is primarily due to the significant reduction in license
revenue, which is our highest margin revenue.
Revenues in the credit union systems and services business segment increased
from $57.3 million in fiscal 2002 to $61.5 million in fiscal 2003,
representing a 7% increase. Gross profit in this business segment increased
from $17.7 million or 31% gross profit margin in fiscal 2002 to $18.3
million or 30% gross profit margin for the year ended June 30, 2003.
Despite the sluggish economy, the credit union segment was able to achieve
growth in revenue and maintain a fairly flat gross margin. The increase in
revenue was due to additional core customers during the year and expanded
product offerings in this segment.
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 continued to be impacted by
the events of September 11th and the weakened ongoing economy.
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. 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. Despite the sluggish economy, the
credit union segment had significant growth in revenue. The increase in
revenue was due to the addition of core customers during the year.
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.
The Company's cash and cash equivalents and investments increased to $32.0
million at June 30, 2003, from $17.8 million at June 30, 2002. Cash provided
by operations was $98.9 million for the fiscal year ended June 2003 as
compared to $89.9 million for the fiscal year ended 2002. Included in our
June 30, 2003 annual in-house support billing was an increase of $25.0
million because of a shift in billing cycles for our previously acquired
customers to our fiscal year-end from a calendar year. This shift in
billing from the prior year was the primary reason for the increase in
accounts receivable of $19.7 million and deferred revenues of $23.1 million.
In 2003, there was additional depreciation expense of $3.1 million and a
$6.5 million decrease in accounts payable and accrued expenses. Cash used in
investing activities for the fiscal year ended June 2003 was $58.5 million,
which included capital expenditures of $46.0 million, primarily for
expansion at our Monett complex and a new facility in Birmingham, AL., $6.5
million for acquisitions and $5.2 million for capitalization of software
development costs. Financing activities used cash of $26.1 million, of
which the majority was used to purchase treasury stock for $18.2 million,
and to pay dividends of $12.3 million for the fiscal year ended 2003.
At June 30, 2003, the Company is in negotiations to acquire two buildings in
San Diego, CA., which when completed will have a total cost of
approximately $29 million, and one building in Charlotte, NC., which will
have a total cost of approximately $8.0 million. The Company expects total
capital expenditures to increase to approximately $61 million in fiscal year
2004.
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, and
approved an increase to 6.0 million shares on October 4, 2002. The buyback
has been funded with cash from continuing operations. As of June 30, 2003,
3,012,933 shares have been purchased for $49,218,870. During fiscal 2003
there were 501,740 shares and 60,249 shares reissued from treasury stock for
the shares exercised in the employee stock option plan and the employee
stock purchase plan, respectively. At June 30, 2003, there were 2,363,121
shares remaining in treasury stock. As of June 30, 2002, 1,656,733 shares
had been purchased for $31,054,139 and 1,568,910 shares remained in treasury
stock.
We currently have two bank credit lines upon which we 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 (1.87% at June 30, 2003). The second credit line
provides for funding of up to $8.0 million and bears interest at the prime
rate (4.0% at June 30, 2003). Currently there are no amounts outstanding
under either line.
Subsequent to June 30, 2003, the Company's Board of Directors declared a
cash dividend of $.035 per share on its common stock payable on September
19, 2003, to stockholders of record on September 5, 2003. Current funds
from operations are 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.
Contractual Obligations and Other Commitments
At June 30, 2003, the Company's total off-balance sheet contractual
obligations of $5.2 million consists of long-term operating leases for
various facilities. The leases expire from 2004 to 2008.
Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 the Emerging Issues Task Force ("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 adoption of this standard on January 1, 2003, did not have
a material impact on the Company's consolidated financial position or
results of operations.
In November 2002, the EITF reached a consensus regarding EITF Issue No. 02-
16, Accounting by a Customer, Including a Reseller, for Cash Consideration
Received from a Vendor. This consensus requires that payments from a vendor
be classified as a reduction to the price of the vendor's goods and taken as
a reduction to cost of sales unless the payments are: (1) a reimbursement
for costs incurred to sell the product, or (2) a payment for assets or
services provided. The consensus also requires that payments from a vendor
be recognized as a reduction to cost of sales on a rational and systematic
basis. This consensus is effective for fiscal years beginning after
December 15, 2002 (July 1, 2003 for JHA). The adoption of this consensus on
July 1, 2003, did not have a material effect on the Company's consolidated
financial position or results of operation.
In November 2002, FASB Interpretations No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and
107 ("FIN 45") was issued. FIN 45 elaborates on the disclosures to be made
by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing a
guarantee. The initial recognition and initial measurement provisions of
this Interpretation are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of the guarantor's
fiscal year-end. The disclosure requirements in this Interpretation are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of this Interpretation on January 1, 2003,
did not have a material effect on the Company's consolidated financial
position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement
No. 123. SFAS No. 148 amends SFAS No. 123, to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method
of accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS No. 148 was effective for the
Company's financial statements for fiscal year ended June 30, 2003. The
Company has elected to continue to account for its stock-based compensation
in accordance with the provisions of APB No. 25 as interpreted by FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25, ("FIN 44") and
present the pro forma disclosures required by SFAS No. 123.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, which addresses consolidation
by business enterprises of variable interest entities that either: (1) do
not have sufficient equity investment at risk to permit the entity to
finance its activities without additional subordinated financial support, or
(2) the equity investors lack an essential characteristic of a controlling
financial interest. FIN 46 requires disclosure of Variable Interest
Entities (VIEs) in financial statements issued after January 31, 2003, if it
is reasonably possible that as of the transition date: (1) the company will
be the primary beneficiary of an existing VIE that will require
consolidation or, (2) the company will hold a significant variable interest
in, or have significant involvement with, an existing VIE. Pursuant to the
transitional requirements of FIN 46, the company will adopt the
consolidation guidance applicable to existing VIEs as of the reporting
period beginning July 1, 2003. Any VIEs created after January 31, 2003, are
immediately subject to the consolidation guidance in FIN 46. The adoption
of this interpretation did not have a material effect on the Company's
consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No.
150 states that companies which issue financial instruments that have
characteristics of both liabilities and equity will have to determine if the
instrument should be classified as a liability or equity for financial
instruments entered into or modified after May 31, 2003. The Company does
not expect the adoption of FASB No. 150 to have a material effect on our
operating results or financial condition.
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.
As discussed previously in the overview, the Company has established VSOE
separately for all the individual components of licensing, installation,
support, and hardware and recognizes revenue separately for the various
components. The components are all independently priced and consistent with
pricing when each element is sold separately. There are no rights of
return, conditions of acceptance or price protections in our contracts.
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 our tangible and intangible assets will occur in the near
term, but 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 2003 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 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
------ -------------------------------------------
Financial Statements
Consolidated Statements of Income,
Years Ended June 30, 2003, 2002, and 2001 24
Consolidated Balance Sheets, June 30, 2003 and 2002 25
Consolidated Statements of Changes in Stockholders' Equity,
Years Ended June 30, 2003, 2002, and 2001 26
Consolidated Statement of Cash Flows,
Years Ended June 30, 2003, 2002, and 2001 27
Notes to Consolidated Financial Statements 28
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, 2003 and
2002, 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, 2003. 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, 2003, and 2002, and the results of their
operations and their cash flows for each of the three years in the period
ended June 30, 2003, in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
St. Louis, Missouri
August 15, 2003
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
YEAR ENDED JUNE 30,
-------------------------------
2003 2002 2001
------- ------- -------
REVENUE
License $ 48,284 $ 66,576 $ 70,132
Support and service 260,452 228,744 185,763
Hardware 95,891 101,337 111,008
------- ------- -------
Total 404,627 396,657 366,903
COST OF SALES
Cost of license 3,890 2,509 2,532
Cost of support and service 178,256 161,523 136,208
Cost of hardware 69,145 71,405 76,566
------- ------- -------
Total 251,291 235,437 215,306
------- ------- -------
GROSS PROFIT $153,336 $161,220 $151,597
OPERATING EXPENSES
Selling and marketing 30,664 29,380 27,770
Research and development 15,892 12,526 10,871
General and administrative 29,509 32,668 27,216
------- ------- -------
Total 76,065 74,574 65,857
------- ------- -------
OPERATING INCOME $ 77,271 $ 86,646 $ 85,740
INTEREST INCOME (EXPENSE)
Interest income 630 2,018 2,103
Interest expense (110) (191) (920)
------- ------- -------
Total 520 1,827 1,183
------- ------- -------
INCOME BEFORE INCOME TAXES $ 77,791 $ 88,473 $ 86,923
PROVISION FOR INCOME TAXES 28,394 31,408 31,292
------- ------- -------
NET INCOME $ 49,397 $ 57,065 $ 55,631
======= ======= =======
Diluted net income per share $ 0.55 $ 0.62 $ 0.61
======= ======= =======
Diluted weighted average shares outstanding 89,270 92,367 91,344
======= ======= =======
Basic net income per share $ 0.56 $ 0.64 $ 0.64
======= ======= =======
Basic weighted average shares outstanding 87,866 89,316 86,834
======= ======= =======
See notes to consolidated financial statements
JACK HENRY & ASSOCIATES, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
JUNE 30,
-------------------------
2003 2002
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 32,014 $ 17,765
Investments, at amortized cost 998 997
Trade receivables 150,951 131,431
Prepaid cost of product 18,483 17,663
Prepaid expenses and other 13,816 11,221
Deferred income taxes 1,000 900
--------- ---------
Total $ 217,262 $ 179,977
PROPERTY AND EQUIPMENT, net $ 196,046 $ 173,775
OTHER ASSETS:
Goodwill $ 44,543 $ 40,335
Trade names 3,699 3,699
Customer relationships, net of amortization 59,358 63,130
Computer software, net of amortization 12,500 7,499
Prepaid cost of product 10,021 12,992
Other non-current assets 5,146 4,735
--------- ---------
Total $ 135,267 $ 132,390
--------- ---------
Total assets $ 548,575 $ 486,142
========= =========
LIABILITES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 9,617 $ 9,051
Accrued expenses 17,250 11,352
Accrued income taxes 421 225
Deferred revenues 119,492 92,028
--------- ---------
Total $ 146,780 $ 112,656
DEFERRED REVENUES 12,732 16,947
DEFERRED INCOME TAXES 23,840 15,800
--------- ---------
Total liabilities $ 183,352 $ 145,403
STOCKHOLDERS' EQUITY
Preferred stock - $1 par value; 500,000
shares authorized, none issued $ - $ -
Common stock - $0.01 par value: 250,000,000
shares authorized; Shares issued at
06/30/03 and 6/30/02 were 90,519,856 905 905
Additional paid-in capital 169,299 168,061
Retained earnings 233,396 201,162
Less Treasury stock at cost 2,363,121 shares
issued at 6/30/03, 1,568,910 shares issued
at 6/30/02 (38,377) (29,389)
--------- ---------
Total stockholders' equity $ 365,223 $ 340,739
--------- ---------
Total liabilities and stockholders' equity $ 548,575 $ 486,142
========= =========
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,
------------------------------------
2003 2002 2001
---------- ---------- ----------
PREFERRED SHARES: - - -
========== ========== ==========
COMMON SHARES:
Shares, beginning of year 90,519,856 88,846,710 41,357,853
Shares issued upon exercise of options - 1,523,446 3,097,363
Shares issued for Employee Stock
Purchase Plan - 31,962 21,267
Shares issued in secondary offering - - 1,500,000
Shares issued in acquisition - 117,738 -
Stock dividend - - 42,870,227
---------- ---------- ----------
Shares, end of year 90,519,856 90,519,856 88,846,710
========== ========== ==========
COMMON STOCK - PAR VALUE $.01 PER SHARE:
Balance, beginning of year $ 905 $ 888 $ 414
Shares issued upon exercise of options - 15 30
Shares issued for Employee Stock
Purchase Plan - 1 -
Shares issued in secondary offering - - 15
Shares issued in acquisition - 1 -
Stock dividend - - 429
---------- ---------- ----------
Balance, end of year $ 905 $ 905 $ 888
========== ========== ==========
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of year $ 168,061 $ 145,211 $ 43,753
Shares issued upon exercise of options 3,539 13,650 18,274
Shares issued for Employee Stock
Purchase Plan 771 792 818
Shares issued in secondary offering - - 60,510
Shares issued in acquisition - 2,399 -
Stock dividend - - (429)
Tax benefit on exercise of options 1,227 6,992 22,285
Cost of treasury shares reissued (4,299) (983) -
---------- ---------- ----------
Balance, end of year $ 169,299 $ 168,061 $ 145,211
---------- ---------- ----------
RETAINED EARNINGS:
Balance, beginning of year $ 201,162 156,405 $ 110,378
Net income 49,397 57,065 55,631
Reissuance of treasury shares, net (4,873) (682) -
Dividends (2003-$.14 per share;
2002-$.13 per share;
2001-$.11 per share) (12,290) (11,626) (9,604)
---------- ---------- ----------
Balance, end of year $ 233,396 $ 201,162 $ 156,405
---------- ---------- ----------
TREASURY STOCK:
Balance, beginning of year $ (29,389) $ - $ -
Purchase of treasury shares (18,165) (31,054) -
Reissuance of treasury shares
upon exercise of stock 8,187 1,601 -
Reissuance of treasury shares
for Employee Stock Purchase Plan 990 64 -
---------- ---------- ----------
Balance, end of year $ (38,377) $ (29,389) $ -
========== ========== ==========
TOTAL STOCKHOLDERS' EQUITY $ 365,223 $ 340,739 $ 302,504
========== ========== ==========
See notes to consolidated financial statements
JACK HENRY AND ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
YEAR ENDED JUNE 30,
------------------------------------
2003 2002 2001
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 49,397 $ 57,065 $ 55,631
Adjustments to reconcile net income
from continuing operations to cash
from operating activities:
Depreciation 24,025 20,885 12,539
Amortization 6,169 6,585 9,349
Deferred income taxes 7,940 7,793 2,800
Other, net 642 (58) (3)
Changes in:
Trade receivables (19,675) (14,858) (42,633)
Prepaid expenses and other (647) (1,621) (22,069)
Accounts payable 555 (8,795) 8,591
Accrued expenses 5,896 1,546 (155)
Income taxes (including tax benefit
from exercise of stock options) 1,428 7,428 25,225
Deferred revenues 23,131 13,971 23,547
---------- ---------- ----------
Net cash from operating activities $ 98,861 $ 89,941 $ 72,822
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures $ (45,958) $ (49,509) $ (57,781)
Purchase of investments (3,988) (2,987) (982)
Purchase of customer contracts (304) - -
Proceeds from maturity of investments 4,000 3,000 1,000
Computer software developed (5,162) (1,895) (1,447)
Payment for acquisitions, net (6,537) (11,111) -
Other, net (523) 274 375
---------- ---------- ----------
Net cash from investing activities $ (58,472) $ (62,228) $ (58,835)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock upon exercise of stock options $ 3,539 $ 13,666 $ 18,304
Proceeds from sale of
common stock, net 776 792 61,344
Dividends paid (12,290) (11,626) (9,604)
Change in short-term borrowings, net - - (70,500)
Principal payments on long-term debt - (315) (128)
Purchase of treasury stock (18,165) (31,054) -
---------- ---------- ----------
Net cash from financing activities $ (26,140) $ (28,537) $ (584)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ 14,249 $ (824) $ 13,403
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR $ 17,765 $ 18,589 $ 5,186
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 32,014 $ 17,765 $ 18,589
========== ========== ==========
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 leading provider
of integrated computer systems that 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 installation 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.
STOCK OPTIONS
As permitted under Statement of Financial Accounting Standards ("SFAS")
No. 123, Accounting for Stock-Based Compensation, the Company has elected
to follow Accounting Principles Board Opinion ("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 in financial statements for periods beginning after December 15,
2002, by SFAS No. 148, Accounting for Stock-Based Compensation-Transition
and Disclosure, an amendment of FASB Statement 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 is as follows:
(In Thousands, Except Per Share Data)
Year Ended June 30,
-----------------------------------
2003 2002 2001
--------- --------- ---------
Net income, as reported $ 49,397 $ 57,065 $ 55,631
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 6,572 9,394 19,181
--------- --------- ---------
Pro forma net income $ 42,825 $ 47,671 $ 36,450
========= ========= =========
Diluted net income per share
As reported $ 0.55 $ 0.62 $ 0.61
Pro forma $ 0.48 $ 0.52 $ 0.40
Basic net income per share
As reported $ 0.56 $ 0.64 $ 0.64
Pro forma $ 0.49 $ 0.53 $ 0.42
During fiscal year 2003, all the shares exercised came from treasury stock.
The weighted fair value of options granted was $4.68, $10.63 and $9.58 for
2003, 2002, and 2001, respectively.
Assumptions:
Expected life (years) 2.35 3.10 2.92
Volatility 55% 55% 54%
Risk free interest rate 1.3% 3.2% 4.4%
Dividend yield 1.16% 0.78% 0.36%
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 as of 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.
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.
For multiple element arrangements the Company has established Vendor
Specific Objective Evidence ("VSOE") separately for all the individual
components of licensing, installation, support, and hardware and recognizes
revenue separately for the various components. The components are all
independently priced and consistent with pricing when each element is sold
separately. There are no rights of return, condition of acceptance or price
protection in our contracts.
The Company's various sources of revenue and the methods of revenue
recognition are as follows:
License - Licensing fees are recognized upon delivery and acceptance
of the software. All software of the Company is sold unmodified.
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 from these contracts are recognized ratably
over the life of the in-house support or outsourcing service contract.
Regulatory requirement changes and technical enhancements to the
software are specifically referenced and included in the annual
support contracts.
Hardware - Revenues from sales of hardware are recognized upon direct
shipment to the Company's customers from the supplier. 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
in accordance with Emerging Issues Task Force ("EITF") Issue No. 01-14,
Income Statement Characterization of Reimbursements Received for 'Out
of Pocket' Expenses Incurred. These revenues are included and reported
in the respective lines of support and service or hardware revenue.
RECLASSIFICATION
To improve reporting disclosure, the Company has changed its reporting line
items, with installation revenue moving from license revenue to support and
service revenue and a new line item for license cost of sales. Gross
customer reimbursements are now included and presented in the correlating
line items of support and services and hardware revenues and costs,
respectively. Where appropriate, prior year's financial information has
been reclassified to conform with the current year's presentation.
PREPAID COST OF PRODUCT
Costs for 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. Software
development costs that are capitalized are evaluated on a product-by-product
basis annually and are assigned an estimated economic life based on the type
of product, market characteristics and maturity of the market for that
particular product. The Company's amortization policy for these capitalized
costs is to amortize the costs in accordance with SFAS No. 86, Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed. Generally, these costs are initially amortized on a straight-line
basis, and are monitored on a regular basis to assess that the amortization
method is still appropriate and that the remaining estimated life of the
asset is reasonable (generally five to ten years).
CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less at the time of acquisition 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 $998,000 and $997,000
at June 30, 2003 and 2002, 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 intangible assets
with finite lives 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, 2003 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 13). 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.
COMMON STOCK
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, and
approved an increase on October 4, 2002 to 6.0 million shares. As of June
30, 2003, 3,012,933 shares have been purchased for $49,218,870. During
fiscal 2003 there were 501,740 shares and 60,249 shares reissued from
treasury stock for the shares exercised in the employee stock option plan
and the employee stock purchase plan, respectively. At June 30, 2003, there
were 2,363,121 shares of treasury stock remaining. As of June 30, 2002,
1,656,733 shares had been purchased for $31,054,139 and 1,568,910 shares
remained in treasury stock.
On January 29, 2001, the Company's Board of Directors declared a 100% stock
dividend on its common stock, effectively a 2 for 1 stock split. The stock
dividend was paid March 2, 2001, to stockholders of record at the close of
business on February 15, 2001. 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
this stock split.
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 (see Note 10).
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 more likely than not that a deferred tax asset will not
be realized.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 the Emerging Issues Task Force ("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 adoption of this standard on January 1, 2003, did not have
a material impact on the Company's consolidated financial position or
results of operations.
In November 2002, the EITF reached a consensus regarding EITF Issue No. 02-
16, Accounting by a Customer, Including a Reseller, for Cash Consideration
Received from a Vendor. This consensus requires that payments from a vendor
be classified as a reduction to the price of the vendor's goods and taken as
a reduction to cost of sales unless the payments are: (1) a reimbursement
for costs incurred to sell the product, or (2) a payment for assets or
services provided. The consensus also requires that payments from a vendor
be recognized as a reduction to cost of sales on a rational and systematic
basis. This consensus is effective for fiscal years beginning after
December 15, 2002 (July 1, 2003 for JHA). The adoption of this consensus on
July 1, 2003, did not have a material effect on the Company's consolidated
financial position or results of operation.
In November 2002, FASB Interpretations No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and
107 ("FIN 45") was issued. FIN 45 elaborates on the disclosures to be made
by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing a
guarantee. The initial recognition and initial measurement provisions of
this Interpretation are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of the guarantor's
fiscal year-end. The disclosure requirements in this Interpretation are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of this Interpretation on January 1, 2003,
did not have a material effect on the Company's consolidated financial
position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure-an amendment of FASB Statement No.
123. SFAS No. 148 amends SFAS No. 123, to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method
of accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS No. 148 was effective for the
Company's financial statements for fiscal year ended June 30, 2003. The
Company has elected to continue to account for its stock-based compensation
in accordance with the provisions of APB No. 25 as interpreted by FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25, ("FIN 44") and
present the pro forma disclosures required by SFAS No. 123.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, which addresses consolidation
by business enterprises of variable interest entities that either: (1) do
not have sufficient equity investment at risk to permit the entity to
finance its activities without additional subordinated financial support, or
(2) the equity investors lack an essential characteristic of a controlling
financial interest. FIN 46 requires disclosure of Variable Interest
Entities (VIEs) in financial statements issued after January 31, 2003, if it
is reasonably possible that as of the transition date: (1) the company will
be the primary beneficiary of an existing VIE that will require
consolidation or, (2) the company will hold a significant variable interest
in, or have significant involvement with, an existing VIE. Pursuant to the
transitional requirements of FIN 46, the company will adopt the
consolidation guidance applicable to existing VIEs as of the reporting
period beginning July 1, 2003. Any VIEs created after January 31, 2003, are
immediately subject to the consolidation guidance in FIN 46. The adoption
of this interpretation did not have a material effect on the Company's
consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No.
150 states that companies which issue financial instruments that have
characteristics of both liabilities and equity will have to determine if the
instrument should be classified as a liability or equity for financial
instruments entered into or modified after May 31, 2003. The Company does
not expect the adoption of FASB No. 150 to have a material effect on our
operating results or financial condition.
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
or payable and short-term borrowings, 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)
June 30,
----------------------- Estimated
2003 2002 Useful Life
--------- --------- -----------
Land $ 6,519 $ 6,519
Land improvements 16,050 8,774 5-20 years
Buildings 76,891 57,636 25-30 years
Equipment and furniture 104,528 100,309 5-8 years
Aircraft and equipment 48,542 41,633 8-10 years
Construction in progress 4,834 17,028
--------- ---------
$ 257,364 $ 231,899
Less accumulated depreciation 61,318 58,124
--------- ---------
Propery and equipment, net $ 196,046 $ 173,775
========= =========
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 during 2003 and 2002 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,
-----------------------------------
2003 2002 2001
--------- --------- ---------
Reported net income $ 49,397 $ 57,065 $ 55,631
Goodwill and trade names amortization,
net of tax - - 1,108
--------- --------- ---------
Adjusted net income $ 49,397 $ 57,065 $ 56,739
========= ========= =========
Reported diluted net income per share $ 0.55 $ 0.62 $ 0.61
Goodwill and trade names amortization,
net of tax - - 0.01
--------- --------- ---------
Adjusted diluted net income per share $ 0.55 $ 0.62 $ 0.62
========= ========= =========
Reported basic net income per share $ 0.56 $ 0.64 $ 0.64
Goodwill and trade names amortization,
net of tax - - 0.01
--------- --------- ---------
Adjusted basic net income per share $ 0.56 $ 0.64 $ 0.65
========= ========= =========
Changes in the carrying amount of goodwill for the years ended June 30, 2003
and 2002, by reportable segments, are:
(In Thousands)
Banking Credit Union
Systems Systems
and and
Services Services Total
-------- -------- ---------
Balance, for the year
ended June 30, 2001 $ 14,508 $ 14,840 $ 29,348
Goodwill acquired during the year 10,987 - 10,987
-------- -------- ---------
Balance, for the year
ended June 30, 2002 $ 25,495 $ 14,840 $ 40,335
Goodwill acquired during the year 1,819 2,389 4,208
-------- -------- ---------
Balance, for the year
ended June 30, 2003 $ 27,314 $ 17,229 $ 44,543
======== ======== =========
Information regarding other identifiable intangible assets is as follows:
(In Thousands)
Year Ended June 30,
-------------------
2003 2002
---------------------------- -----------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------- --------- ------- ------- --------- -------
Customer
Relationships $89,212 $(29,854) $59,358 $88,197 $(25,067) $63,130
Trade names 3,699 - 3,699 3,699 - 3,699
------- --------- ------- ------- --------- -------
Totals $92,911 $(29,854) $63,057 $91,896 $(25,067) $66,829
======= ========= ======= ======= ========= =======
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 are 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)
Carrying Accumulated
Amount Amortization Total
-------- -------- ---------
Balance, June 30, 2001 $ 9,199 $ (3,393) $ 5,806
Acquired Software 1,376 - 1,376
Capitalizated development cost 1,895 - 1,895
Amortization expense - (1,578) (1,578)
-------- -------- ---------
Balance, June 30, 2002 $ 12,470 $ (4,971) $ 7,499
Acquired Software 1,222 - 1,222
Capitalizated development cost 5,162 - 5,162
Amortization expense - (1,383) (1,383)
-------- -------- ---------
Balance, June 30, 2003 $ 18,854 $ (6,354) $ 12,500
======== ======== =========
Amortization expense for all intangible assets was $6,169,000, $6,585,000
and $9,349,000 for the fiscal years ended June 30, 2003, 2002, and 2001
respectively. The estimated aggregate future amortization expense for each
of the next five years for all intangible assets remaining as of June 30,
2003, is as follows:
(In Thousands)
Customer
Year Relationships Software Total
---- ------------- -------- -----
2004 $ 4,679 $ 1,239 $ 5,918
2005 $ 4,201 $ 1,144 $ 5,345
2006 $ 4,197 $ 842 $ 5,039
2007 $ 4,156 $ 568 $ 4,724
2008 $ 4,115 $ 567 $ 4,682
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 unsecured
credit line provides for funding of up to $50.0 million and bears interest
at variable LIBOR-based rates (1.87% at June 30, 2003, and weighted average
interest rates of 2.23% and 3.07% for the years ended June 30, 2003, and
2002, respectively) and expires December 15, 2004. The line has an unused
commitment fee of .25% annually.
The second credit line provides for funding of up to $8.0 million and bears
interest at the prime rate (4.00% at June 30, 2003) and expires March 15,
2004, and is secured by $1.0 million of investments with the remainder
unsecured. There were no amounts outstanding under either line at June 30,
2003, or 2002.
The Company paid interest of $110,000, $126,000 and $1,150,000 in 2003,
2002, and 2001, respectively.
NOTE 6: LEASE COMMITMENTS
The Company leases certain property under operating leases which expire over
the next six years. As of June 30, 2003, net future minimum lease payments
under non-cancelable terms are as follows: $3,096,000, $1,443,000, $437,000,
$163,000, $15,000 in 2004, 2005, 2006, 2007, and 2008, respectively. Rent
expense for all operating leases amount to $3,921,000, $4,093,000, and
$3,400,000 in 2003, 2002, and 2001, respectively.
NOTE 7: INCOME TAXES
The provision for income taxes consists of the following:
(In Thousands)
Year Ended June 30,
-----------------------------------
2003 2002 2001
-------- -------- --------
Current:
Federal $ 19,001 $ 22,387 $ 26,817
State 1,453 1,228 1,675
Deferred:
Federal 7,577 7,548 2,200
State 363 245 600
-------- -------- --------
$ 28,394 $ 31,408 $ 31,292
======== ======== ========
The tax effects of temporary differences related to deferred taxes shown on
the balance sheets were:
(In Thousands)
June 30,
--------------------
2003 2002
------- -------
Deferred tax assets:
Carryforwards (operating losses and credits) $ 155 $ 205
Expense reserves (bad debts, insurance,
franchise tax and vacation) 705 710
Intagible assets 680 840
Other, net 295 195
------- -------
1,835 1,950
------- -------
Deferred tax liabilities:
Accelerated tax depreciation (19,450) (14,330)
Accelerated tax amortization (5,225) (2,520)
------- -------
(24,675) (16,850)
------- -------
Net deferred tax liability $(22,840) $(14,900)
======= =======
The deferred taxes are classified on the balance sheet as follows:
(In Thousands)
June 30,
--------------------
2003 2002
------- -------
Deferred income taxes (current) $ 1,000 $ 900
Deferred income taxes (long-term) (23,840) (15,800)
------- -------
$(22,840) $(14,900)
======= =======
The following analysis reconciles the statutory federal income tax rate to
the effective income tax rates reflected above:
(In Thousands)
Year Ended June 30,
----------------------------
2003 2002 2001
---- ---- ----
Computed "expected" tax expense (benefit) 35.0% 35.0% 35.0%
Increase (reduction) in taxes
resulting from:
State income taxes, net of federal
income tax benefits 2.5% 2.0% 2.0%
Research and development credit -1.0% -1.0% -1.0%
---- ---- ----
36.5% 36.0% 36.0%
==== ==== ====
Net operating loss carryforwards of $433,000 (from acquisitions) expire
through the year 2014. The Company paid income taxes of $19,025,000,
$15,900,000, and $3,580,000 in 2003, 2002, and 2001, respectively.
The Company's federal income tax returns for the years ended June 30, 1999 -
June 30, 2001, are currently under examination by the Internal Revenue
Service ("IRS"). In connection with the examination of these returns, the
IRS is proposing to disallow research & experimentation ("R&E") credits
claimed on these returns. The complete disallowance of these credits would
increase the Company's federal income tax liability by approximately $1.5
million plus interest. The Company believes that the R&E credits claimed
for these years are appropriate and intends to contest any disallowance of
these credits. While there can be no assurance that the Company would
prevail in contesting any disallowance, it believes any such disallowance is
not supported by the facts or the relevant tax law. Consequently, the
Company has not accrued any liability in connection with this matter.
NOTE 8: INDUSTRY AND SUPPLIER CONCENTRATIONS
The Company sells its products to banks, credit unions and financial
institutions throughout the United States and generally does not require
collateral. All billings to customers are due net 30 days from date of
billing. Reserves (which are insignificant at June 30, 2003 and 2002) 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").
1996 SOP
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. In October 2002, the stockholders
approved an increase in the number of stock options available from 13.0
million to 18.0 million shares.
On April 11, 2003, the Company granted approximately 3,670,000 stock options
to approximately 2,100 full time employees, or 94% of all full time
employees as of that date. The options were issued at the exercise price of
$10.84 per share, which represented the fair market value of the stock as of
that date and vest in two equal portions based on stock price performance or
on specific dates. The first portion vests and becomes fully exercisable
two years following the grant date, but may vest earlier if the Company's
common stock achieves a closing market price of 125% or more of the exercise
price for 10 consecutive trading days. Such options vested prior to June
30, 2003. The second portion vests four years following the grant date, but
may vest earlier if the common stock achieves a closing market price of 150%
or more of the exercise price on 10 or more consecutive trading days. As of
June 30, 2003, there were 2,420,815 shares available for future grants under
the plan from the 18,000,000 shares approved by the stockholders.
NSOP
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, 2003, there were 532,500 shares available
for future grants under the plan.
Changes in stock options outstanding are as follows:
Number of Weighted Average
Shares Exercise Price
---------- ------
Outstanding July 1, 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
Granted 3,897,150 10.92
Forfeited (313,925) 17.89
Exercised (501,740) 7.04
Expired 1,200 6.39
---------- ------
Outstanding June 30, 2003 13,300,254 $ 13.19
========== ======
For the year ended June 30, 2003, there were 501,740 shares and 60,249
shares reissued from treasury stock for the shares exercised in the employee
stock option plan and the employee stock purchase plan (See Note 11),
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.
Following is an analysis of stock options outstanding and exercisable as of
June 30, 2003:
Weighted-Average
Remaining
Range of Contractural Weighted-Average
Exercise Prices Shares Life in Years Exercise Price
--------------- ------------------------ ------------- ------------------------
Outstanding Exercisable Outstanding Outstanding Exercisable
----------- ----------- ----------- ----------- -----------
$ 1.67 - $ 6.03 2,262,210 2,262,210 3.22 $ 4.59 $ 4.59
$ 6.04 - $10.75 1,296,534 1,296,534 5.52 9.13 9.13
$10.76 - $10.84 3,538,550 1,714,775 9.78 10.84 10.84
$10.85 - $11.95 308,700 179,700 7.46 11.52 11.53
$11.96 - $16.88 4,044,760 3,977,910 6.80 16.81 16.86
$16.89 - $31.00 1,849,500 1,493,917 7.73 23.42 23.60
----------- ----------- ----------- ----------- -----------
$ 1.67 - $31.00 13,300,254 10,925,046 7.00 $13.19 $13.29
=============== =========== =========== =========== =========== ===========
NOTE 10: EARNINGS PER SHARE
The following table reflects the reconciliation between Basic and Diluted
net income per share:
(In Thousands, Except Per Share Data)
Year ended June 30,
-------------------
2003 2002 2001
--------------------------- ---------------------------- ----------------------------
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 $49,397 87,866 $0.56 $57,065 89,316 $0.64 $55,631 86,834 $0.64
Effect of dilutive
securities:
Stock options $ - 1,404 $0.01 $ - 3,051 $0.02 $ - 4,510 $0.03
------ ------ ---- ------ ------ ---- ------ ------ ----
Diluted Income Per Share:
Net income available to
common stockholders $49,397 89,270 $0.55 $57,065 92,367 $0.62 $55,631 91,344 $0.61
====== ====== ==== ====== ====== ==== ====== ====== ====
Stock options to purchase approximately 5,972,949 shares for fiscal 2003,
690,858 shares for fiscal 2002, and 102,591 shares for fiscal 2001, 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.
401(k) Employee Stock Ownership Plan - The Company had a 401(k) Employee
Stock Ownership Plan (the "Predecessor Plan") covering substantially all
employees of the Company and its subsidiaries. As of July 1, 1987, the
Predecessor 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. In June 2002, the Company's Board of Directors approved an
action to separate the Predecessor Plan into the Employee Stock Ownership
Plan (The "ESOP" Plan) and the 401(k) Retirement Savings Plan (the "Plan").
The separation of plans was effective on July 1, 2002. Both plans are
subject to the Employee Retirement Income Security Act of 1975 ("ERISA") as
amended.
Under the Plan, the Company matches 100% of full time employee contributions
up to 5% of compensation subject to a maximum of $5,000. Employees must be
18 years of age and be employed for at least six months. Under the ESOP
plan, employees must be 21 years of age and employed full time for at least
six months. Under the ESOP Plan and the Plan, the Company has the option of
making a discretionary contribution; however, none has been made for any of
the three most recent fiscal years. The total matching contributions for
both the ESOP Plan and the Plan were $4,139,000, $3,862,000, and $2,986,000
for fiscal 2003, 2002, and 2001, respectively.
NOTE 12: BUSINESS ACQUISITIONS
PURCHASE TRANSACTIONS
On January 1, 2003, the Company acquired all the outstanding membership
interests in National Bancorp Data Services, LLC ("NBDS") for $2.1 million
in cash. NBDS provides item processing and imaging services to financial
institutions in the greater Chicago, Illinois area. This acquisition
expanded the geographic footprint for item processing centers and expands
the potential market for outsourcing customers. The purchase price for NBDS
was allocated to the assets and liabilities acquired based on then estimated
fair values at the acquisition date resulting in allocation to goodwill of
$1.8 million.
On November 15, 2002, the Company acquired all the outstanding shares
of Credit Union Solutions, Inc. ("CUSI") for $5.0 million in cash. CUSI
provides in-house data processing software, related hardware and services to
smaller credit unions, primarily those with assets less than $50 million.
This acquisition expanded the potential market for the Company, as the
Company's existing core products were too expensive to sell to credit unions
of this size. The purchase price for CUSI was allocated to the assets and
liabilities acquired based on then estimated fair values at the acquisition
date, resulting in allocation to goodwill of $2.4 million, software of $1.2
million, and customer contracts of $0.7 million, of which software and
customer contracts are being amortized on a straight-line basis over periods
of ten and twenty years, respectively.
On January 1, 2002, the Company acquired all the outstanding shares of
Transcend Systems Group ("TSG") for $7.3 million in cash and 117,738
restricted shares of the Company's common stock valued at $2.4 million, for
a total consideration to the TSG shareholders of $9.7 million. As part of
the purchase price, the Company also advanced to TSG $.85 million 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 $8.5 million,
software of $.9 million, and customer contracts of $1.1 million, 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 million 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 $2.6 million and
software $.45 million of which software is being amortized on a straight-
line basis over 10 years.
The four 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.
NOTE 13: 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,
-----------------------------------
2003 2002 2001
--------- --------- ---------
Revenue
Bank systems and services $ 343,126 $ 339,342 $ 318,011
Credit Unions systems and services 61,501 57,315 48,892
--------- --------- ---------
Total $ 404,627 $ 396,657 $ 366,903
========= ========= =========
Gross Profit
Bank systems and services $ 134,995 $ 143,555 $ 138,143
Credit Unions systems and services 18,341 17,665 13,454
--------- --------- ---------
Total $ 153,336 $ 161,220 $ 151,597
========= ========= =========
Property and equipment, net
Bank systems and services $ 192,846 $ 170,882 $ 136,166
Credit Unions systems and services 3,200 2,893 2,273
--------- --------- ---------
Total $ 196,046 $ 173,775 $ 138,439
========= ========= =========
Identified Intangible assets, net
Bank systems and services $ 77,520 $ 75,022 $ 66,264
Credit Unions systems and services 42,580 39,641 40,931
--------- --------- ---------
Total $ 120,100 $ 114,663 $ 107,195
========= ========= =========
Depreciation expense, net
Bank systems and services $ 23,370 $ 20,328 $ 12,148
Credit Unions systems and services 655 557 391
--------- --------- ---------
Total $ 24,025 $ 20,885 $ 12,539
========= ========= =========
Amortization expense, net
Bank systems and services $ 4,787 $ 5,295 $ 7,077
Credit Unions systems and services 1,382 1,290 2,272
--------- --------- ---------
Total $ 6,169 $ 6,585 $ 9,349
========= ========= =========
Captial expenditures, net
Bank systems and services $ 45,759 $ 48,451 $ 55,474
Credit Unions systems and services 199 1,058 2,307
--------- --------- ---------
Total $ 45,958 $ 49,509 $ 57,781
========= ========= =========
The Company has not disclosed any additional asset information by segment,
as the information is not produced internally and its preparation is
impracticable.
NOTE 14: 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
(In Thousands, Except Per Share Data)
(Unaudited)
FY 2003 First Second Third Fourth
Quarter Quarter Quarter Quarter
9-30-02 12-31-02 03-31-03 06-30-03 Total
------- ------- ------- ------- --------
REVENUE
License $ 12,069 $ 13,807 $ 10,446 $ 11,962 $ 48,284
Support and service 59,884 64,252 66,552 69,764 260,452
Hardware 22,025 24,504 21,900 27,462 95,891
------- ------- ------- ------- --------
Total $ 93,978 $102,563 $ 98,898 $109,188 $ 404,627
------- ------- ------- ------- --------
COST OF SALES
Cost of license $ 791 $ 975 $ 829 $ 1,295 $ 3,890
Cost of support and service 41,455 46,518 43,870 46,413 178,256
Cost of hardware 16,619 18,204 15,796 18,526 69,145
------- ------- ------- ------- --------
Total $ 58,865 $ 65,697 $ 60,495 $ 66,234 $ 251,291
------- ------- ------- ------- --------
GROSS PROFIT $ 35,113 $ 36,866 $ 38,403 $ 42,954 $ 153,336
Income before taxes $ 17,791 $ 18,390 $ 19,396 $ 22,214 $ 77,791
Net Income $ 11,298 $ 11,677 $ 12,316 $ 14,106 $ 49,397
Diluted income per share $ 0.13 $ 0.13 $ 0.14 $ 0.16 $ 0.55
FY 2002 First Second Third Fourth
Quarter Quarter Quarter Quarter
9-30-01 12-31-01 03-31-02 06-30-02 Total
------- ------- ------- ------- --------
REVENUE
License $ 14,771 $ 16,017 $ 17,657 $ 18,131 $ 66,576
Support and service 55,322 55,166 57,044 61,212 228,744
Hardware 22,474 27,044 25,083 26,736 101,337
------- ------- ------- ------- --------
Total $ 92,567 $ 98,227 $ 99,784 $106,079 $ 396,657
------- ------- ------- ------- --------
COST OF SALES
Cost of license $ 257 $ 131 $ 1,070 $ 1,051 $ 2,509
Cost of support and service 38,164 40,453 41,121 41,785 161,523
Cost of hardware 15,097 18,632 17,501 20,175 71,405
------- ------- ------- ------- --------
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 taxes $ 22,837 $ 20,366 $ 21,184 $ 24,086 $ 88,473
Net Income $ 14,616 $ 13,034 $ 13,558 $ 15,857 $ 57,065
Diluted income per share $ 0.16 $ 0.14 $ 0.15 $ 0.17 $ 0.62
FY 2001 First Second Third Fourth
Quarter Quarter Quarter Quarter
9-30-00 12-31-00 3-31-01 6-30-01 Total
------- ------- ------- ------- --------
REVENUE
License $ 16,277 $ 17,035 $ 18,376 $ 18,444 $ 70,132
Support and service 42,154 44,508 47,229 51,872 185,763
Hardware 23,239 24,206 32,598 30,965 111,008
------- ------- ------- ------- --------
Total $ 81,670 $ 85,749 $ 98,203 $101,281 $ 366,903
------- ------- ------- ------- --------
COST OF SALES
Cost of license $ 236 $ 1,141 $ 547 $ 608 $ 2,532
Cost of support and service 30,644 33,930 34,771 36,863 136,208
Cost of hardware 16,158 15,911 23,203 21,294 76,566
------- ------- ------- ------- --------
Total $ 47,038 $ 50,982 $ 58,521 $ 58,765 $ 215,306
------- ------- ------- ------- --------
GROSS PROFIT $ 34,632 $ 34,767 $ 39,682 $ 42,516 $ 151,597
Income before taxes $ 18,569 $ 20,125 $ 23,966 $ 24,263 $ 86,923
Net Income $ 11,884 $ 12,880 $ 15,338 $ 15,529 $ 55,631
Diluted income per share $ 0.13 $ 0.14 $ 0.17 $ 0.17 $ 0.61
FY 2000 First Second Third Fourth
Quarter Quarter Quarter Quarter
9-30-99 12-31-99 3-31-00 6-30-00 Total
------- ------- ------- ------- --------
REVENUE
License $ 7,842 $ 5,815 $ 10,337 $ 15,161 $ 39,155
Support and service 27,059 30,464 33,658 38,822 130,003
Hardware 11,572 20,937 18,144 20,030 70,683
------- ------- ------- ------- --------
Total $ 46,473 $ 57,216 $ 62,139 $ 74,013 $ 239,841
------- ------- ------- ------- --------
COST OF SALES
Cost of license $ 75 $ 441 $ 256 $ 245 $ 1,017
Cost of support and service 18,152 23,450 21,966 25,505 89,073
Cost of hardware 8,240 15,341 12,761 15,293 51,635
------- ------- ------- ------- --------
Total $ 26,467 $ 39,232 $ 34,983 $ 41,043 $ 141,725
------- ------- ------- ------- --------
GROSS PROFIT $ 20,006 $ 17,984 $ 27,156 $ 32,970 $ 98,116
Income before taxes $ 12,734 $ 6,260 $ 15,390 $ 17,381 $ 51,765
Net Income $ 8,207 $ 4,201 $ 10,176 $ 11,434 $ 34,018
Diluted income per share $ 0.09 $ 0.05 $ 0.12 $ 0.13 $ 0.40
Item 9 Changes in and Disagreements With Accountants on Accounting and
------ ---------------------------------------------------------------
Financial Disclosures
---------------------
None.
Item 9A Controls and Procedures
------- -----------------------
An evaluation was carried out under the supervision and with the
participation of our management, including our Company's Chief Executive
Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the
design and operations of our disclosure controls and procedures pursuant to
Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation as of the
end of the period covered by this report, the CEO and CFO concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to us (including our consolidated
subsidiaries) required to be included in our periodic SEC filings. There
have not been any significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the
date of evaluation.
PART III
Item 10 Directors and Executive Officers of the Registrant
------- --------------------------------------------------
See the information under the captions "Election of Directors", "Corporate
Governance", "Audit Committee Report", "Executive Officers and Significant
Employees" and "Section 16(a) Beneficial Ownership Reporting Compliance" 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 and
------- ------------------------------------------------------------------
Related Stockholder Matters
---------------------------
See the information under the captions "Stock Ownership of Certain
Stockholders" , "Election of Directors" and "Equity Compensation Plan
Information" 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.*
Item 14. Principal Accountant Fees and Services
-------- --------------------------------------
See the information under the captions "Audit Committee Report" and
"Independent Auditors - Audit and Non-Audit Fees" 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.
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:
(1) 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, 2003,
2002 and 2001.
- Consolidated Balance Sheets as of June 30, 2003 and 2002.
- Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended June 30, 2003, 2002 and 2001.
- Consolidated Statements of Cash Flows for the Years Ended June 30,
2003, 2002 and 2001.
- Notes to the Consolidated Financial Statements.
(2) 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.
(3) All exhibits not followed herewith are incorporated by reference to a
prior filing as indicated, pursuant to Rule 12b-32:
Index to Exhibits
-----------------
Exhibit No. Description
----------- -----------
3.1.7 Restated Certificate of Incorporation.
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.
10.8 Form of Indemnity Agreement which has been entered into as of
August 27, 1996, between the Company and each of its
Directors and Executive Officers, attached as Exhibit 10.8 to
the Company's Annual Report on Form 10-K for the Year Ended
June 30, 1996.
10.9 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.
10.16 Loan and Note Modification Agreement dated March 14, 2003,
between the Company and Commerce Bank, N.A.
10.17 IBM Business Partner Agreement dated January 1, 2003. *
21.1 List of the Company's subsidiaries.
23.1 Consent of Independent Auditors.
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Written Statement of the Chief Executive Officer Pursuant to
18 U.S.C. Section 1350
32.2 Written Statement of the Chief Financial Officer Pursuant to
18 U.S.C. Section 1350
* Confidential treatment requested for portions of this exhibit.
(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:
- On April 18, 2003, the Company filed a report on Form 8-K which
reported fiscal 2003 third quarter financial results under Item 12.
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
22nd day of September, 2003.
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 22, 2003
---------------------- Chief Executive Officer
Michael E. Henry and Director
/s/ Kevin D. Williams Chief Financial Officer September 22, 2003
---------------------- and Treasurer (Principal
Kevin D. Williams Accounting Officer)
/s/ John W. Henry Vice Chairman, Senior Vice September 22, 2003
---------------------- President and Director
/s/ Jerry D. Hall Executive Vice President September 22, 2003
---------------------- and Director
Jerry D. Hall
/s/ Joseph J. Maliekel Director September 22, 2003
----------------------
Joseph J. Maliekel
/s/ James J. Ellis Director September 22, 2003
----------------------
James J. Ellis
/s/ Burton O. George Director September 22, 2003
----------------------
Burton O. George
/s/ George R. Curry Director September 22, 2003
----------------------
George R. Curry
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Annual Report on Form 10-K to be signed
on behalf of the undersigned thereunto duly authorized.
JACK HENRY & ASSOCIATES, INC.
Date: September 22, 2003 /s/ Michael E. Henry
--------------------
Michael E. Henry
Chairman of the Board
Chief Executive Officer
Date: September 22, 2003 /s/ Kevin D. Williams
---------------------
Kevin D. Williams
Chief Financial Officer and Treasurer