UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission file number 0-14112
JACK HENRY & ASSOCIATES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 43-1128385
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(State or Other Jurisdiction I.R.S. Employer
of Incorporation) Identification No.)
663 Highway 60, P.O. Box 807, Monett, MO 65708
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Address of Principle Executive Offices
(Zip Code)
417-235-6652
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(Registrant's Telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since
last report)
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 whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2 of the Exchange Act.) Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of October 26, 2004, Registrant has 90,456,308 shares of common stock
outstanding ($.01 par value)
JACK HENRY & ASSOCIATES, INC.
CONTENTS
Page
PART I FINANCIAL INFORMATION Reference
ITEM 1 Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2004 and June 30, 2004 (Unaudited) 3
Condensed Consolidated Statements of Income
for the Three Months Ended September 30, 2004
and 2003 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended September 30, 2004
and 2003 (Unaudited) 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
ITEM 3 Quantitative and Qualitative Disclosures about
Market Risk 15
ITEM 4 Controls and Procedures 15
PART II OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security Holders 16
ITEM 6 Exhibits 16
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
(Unaudited)
September 30, June 30,
2004 2004
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 119,845 $ 53,758
Investments, at amortized cost 998 998
Trade receivables 75,294 169,873
Prepaid expenses and other 13,188 14,023
Prepaid cost of product 16,140 19,086
Deferred income taxes 1,570 1,320
----------- -----------
Total 227,035 259,058
PROPERTY AND EQUIPMENT, net 220,491 215,100
OTHER ASSETS:
Prepaid cost of product 7,466 6,758
Computer software, net of amortization 19,215 18,382
Other non-current assets 5,356 5,791
Customer relationships, net of amortization 60,024 61,368
Trade names 4,029 4,029
Goodwill 89,677 83,128
----------- -----------
Total 185,767 179,456
----------- -----------
Total assets $ 633,293 $ 653,614
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,154 $ 9,171
Accrued expenses 14,724 21,509
Accrued income taxes 8,897 6,258
Deferred revenues 106,882 136,302
----------- -----------
Total 135,657 173,240
DEFERRED REVENUES 8,348 8,694
DEFERRED INCOME TAXES 30,055 28,762
----------- -----------
Total liabilities 174,060 210,696
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
9/30/04 and 6/30/04 were 90,519,856 905 905
Additional paid-in capital 176,298 175,706
Retained earnings 283,543 271,433
Less treasury stock at cost 93,148 shares
at 9/30/04, 315,651 shares at 6/30/04 (1,513) (5,126)
----------- -----------
Total stockholders' equity 459,233 442,918
----------- -----------
Total liabilities and stockholders' equity $ 633,293 $ 653,614
=========== ===========
See notes to condensed consolidated financial statements
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
September 30,
-------------------------
2004 2003
----------- -----------
REVENUE
License $ 19,551 $ 12,960
Support and service 83,648 72,524
Hardware 20,897 23,456
----------- -----------
Total 124,096 108,940
COST OF SALES
Cost of licens 1,609 913
Cost of support and service 56,030 49,049
Cost of hardware 15,895 16,321
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Total 73,534 66,283
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GROSS PROFIT 50,562 42,657
OPERATING EXPENSES
Selling and marketing 10,732 8,772
Research and development 6,142 5,319
General and administrative 7,465 7,005
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Total 24,339 21,096
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OPERATING INCOME 26,223 21,561
INTEREST INCOME (EXPENSE)
Interest income 459 287
Interest expense (3) (26)
----------- -----------
Total 456 261
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INCOME BEFORE INCOME TAXES 26,679 21,822
PROVISION FOR INCOME TAXES 10,005 7,965
----------- -----------
NET INCOME $ 16,674 $ 13,857
=========== ===========
Diluted net income per share $ 0.18 $ 0.15
=========== ===========
Diluted weighted average shares outstanding 92,485 91,069
=========== ===========
Basic net income per share $ 0.18 $ 0.16
=========== ===========
Basic weighted average shares outstanding 90,286 88,515
=========== ===========
See notes to condensed consolidated financial statements
JACK HENRY AND ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
September 30,
-----------------------
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 16,674 $ 13,857
Adjustments to reconcile net income from
operations to cash from operating activities:
Depreciation 6,905 6,408
Amortization 2,052 1,550
Deferred income taxes 1,043 2,095
Loss on disposal of property and equipment 285 4
Other, net (3) (2)
Changes in operating assets and liabilities,
net of acquisitions:
Trade receivables 94,617 85,357
Prepaid expenses, prepaid cost of product,
and other 3,458 1,062
Accounts payable (4,036) (1,925)
Accrued expenses (6,785) (6,539)
Income taxes (including tax benefit of $592
and $1,981 from exercise of stock options) 3,231 4,337
Deferred revenues (29,766) (21,482)
-------- --------
Net cash from operating activities 87,675 84,722
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (12,487) (17,675)
Purchase of investments (997) (998)
Proceeds from sale of property and equipment 3 10
Proceeds from investments 1,000 1,000
Computer software developed (1,541) (507)
Payment for acquisitions, net of cash acquired (6,665) -
Other, net 50 48
-------- --------
Net cash from investing activities (20,637) (18,122)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon
exercise of stock options 2,481 7,345
Proceeds from sale of common stock, net 180 179
Dividends paid (3,612) (3,106)
-------- --------
Net cash from financing activities (951) 4,418
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 66,087 $ 71,018
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 53,758 $ 32,014
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 119,845 $ 103,032
======== ========
Net cash paid for income taxes was $5,743 and $1,033 for the three months
ended September 30, 2004 and 2003, respectively. The Company paid interest
of $2 and $26 for the three months ended September 30, 2004 and 2003,
respectively.
See notes to condensed consolidated financial statements
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts In Thousands, Except Per Share Amounts)
(Unaudited)
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
Jack Henry & Associates, Inc. and Subsidiaries ("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 utilize 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 subsidiaries, which are wholly- owned, 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.
The following table illustrates the effect on net income and net income per
share 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:
Three Months Ended
September 30,
2004 2003
-------- --------
Net income, as reported $ 16,674 $ 13,857
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects 268 6,500
-------- --------
Pro forma net income $ 16,406 $ 7,357
======== ========
Diluted net income per share
As reported $ 0.18 $ 0.15
Pro forma $ 0.18 $ 0.08
Basic net income per share
As reported $ 0.18 $ 0.16
Pro forma $ 0.18 $ 0.08
COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended September 30, 2004
and 2003 equals the Company's net income.
INTERIM FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q of the Securities
and Exchange Commission and in accordance with accounting principles
generally accepted in the United States of America applicable to interim
condensed consolidated financial statements, and do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States of America for complete consolidated financial
statements. The condensed consolidated financial statements should be read
in conjunction with the Company's audited consolidated financial statements
and accompanying notes, which are included in its Annual Report on Form 10-K
("Form 10-K") for the year ended June 30, 2004. The accounting policies
followed by the Company are set forth in Note 1 to the Company's
consolidated financial statements included in its Form 10-K for the fiscal
year ended June 30, 2004.
In the opinion of management of the Company, the accompanying condensed
consolidated financial statements reflect all adjustments necessary
(consisting solely of normal recurring adjustments) to present fairly the
financial position of the Company as of September 30, 2004, and the results
of its operations and its cash flows for the three month period ended
September 30, 2004 and 2003.
The results of operations for the period ended September 30, 2004 are not
necessarily indicative of the results to be expected for the entire year.
ADDITIONAL INTERIM FOOTNOTE INFORMATION
The following additional information is provided to update the notes to the
Company's annual consolidated financial statements for the developments
during the three months ended September 30, 2004.
Acquisitions:
On September 1, 2004, the Company acquired Banc Insurance Services, Inc.
("BIS") in Massachusetts. BIS is a leading provider of turnkey outsourced
insurance agency solutions for financial institutions. The purchase price
for BIS, paid in cash, was preliminarily allocated to the assets and
liabilities acquired based on then estimated fair values at the acquisition
date, resulting in a net allocation of $20 to working capital, $97 to
property and equipment and $6,549 to goodwill. The acquired goodwill has
been allocated to the banking segment and is non-deductible for federal
income tax. Contingent purchase consideration may be paid over the next
five years based upon BIS gross revenues which could result in additional
allocations to goodwill of up to $13,400. Pro forma results of this
acquisition were not material and therefore not presented.
RECLASSIFICATION
Where appropriate, prior period financial information has been reclassified
to conform to the current period's presentation.
NOTE 2. SHARES USED IN COMPUTING NET INCOME PER SHARE
Three Months Ended
September 30,
2004 2003
-------- --------
Weighted average number of
common shares outstanding - basic 90,286 88,515
Common stock equivalents 2,199 2,554
-------- --------
Weighted average number of common
and common equivalent shares
outstanding - diluted 92,485 91,069
======== ========
Per share information is based on the weighted average number of common
shares outstanding for the three month periods ended September 30, 2004 and
2003. Stock options have been included in the calculation of income per
share to the extent they are dilutive. Non-dilutive stock options to
purchase approximately 1,790 and 1,788 shares for the three-month periods
ended September 30, 2004 and 2003, respectively, were not included in the
computation of diluted income per common share.
NOTE 3.BUSINESS SEGMENT INFORMATION
The Company is a leading provider of integrated computer systems that
perform data processing (both in-house and outsourced) 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.
Three Months Ended Three Months Ended
September 30, 2004 September 30, 2003
---------------------------- ----------------------------
Bank Credit Union Total Bank Credit Union Total
------- ------------ ------- ------- ------------ -------
REVENUE
License $ 12,518 $ 7,033 $ 19,551 $ 8,831 $ 4,129 $ 12,960
Support and service 71,240 12,408 83,648 63,147 9,377 72,524
Hardware 16,058 4,839 20,897 19,586 3,870 23,456
------- ------- ------- ------- ------- -------
Total 99,816 24,280 124,096 91,564 17,376 108,940
------- ------- ------- ------- ------- -------
COST OF SALES
Cost of license 418 1,191 1,609 475 438 913
Cost of support and service 45,701 10,329 56,030 40,816 8,233 49,049
Cost of hardware 12,116 3,779 15,895 13,707 2,614 16,321
------- ------- ------- ------- ------- -------
Total 58,235 15,299 73,534 54,998 11,285 66,283
------- ------- ------- ------- ------- -------
GROSS PROFIT $ 41,581 $ 8,981 $ 50,562 $ 36,566 $ 6,091 $ 42,657
======= ======= ======= ======= ======= =======
September 30, June 30,
2004 2004
-------- --------
Property and equipment, net
Bank systems and services $ 188,184 $ 187,242
Credit Union systems and services 32,307 27,858
-------- --------
Total $ 220,491 $ 215,100
======== ========
Identified intangible assets, net
Bank systems and services $ 132,053 $ 125,650
Credit Union systems and services 40,892 41,257
-------- --------
Total $ 172,945 $ 166,907
======== ========
NOTE 4. SUBSEQUENT EVENTS
On October 5, 2004, the Company announced its acquisition of California
based Verinex Technologies ("Verinex") effective October 1, 2004. Verinex is
a leading developer and integrator of biometric security solutions. The
purchase price for Verinex, paid in cash, was preliminarily allocated to the
assets and liabilities acquired based on then estimated fair values at the
acquisition date, resulting in an allocation of $575 to working capital, $25
to property and equipment, $464 to capitalized software, $4,208 to customer
relationships, and $29,728 to goodwill. The acquired goodwill has been
allocated to the banking segment and is non-deductible for federal income
tax.
On October 5, 2004, the Company announced it had finalized the acquisition
of Texas based Select Payment Processing, Inc. ("SPP") effective October 1,
2004. SPP is a provider of an innovative electronic payment processing
solution for financial institutions. The purchase price for SPP, paid in
cash, was preliminarily allocated to the assets and liabilities acquired
based on then estimated fair values at the acquisition date, resulting in an
allocation of ($44) to working capital, $190 to property and equipment, $467
to capitalized software and $11,388 to goodwill. The acquired goodwill has
been allocated to the banking segment and is non-deductible for federal
income tax.
On October 19, 2004, the Company renewed a bank credit line that provides
for funding of up to $25,000 and bears interest at variable LIBOR-based
rate. As of September 30, 2004, there were no amounts outstanding.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Background and Overview
We provide integrated computer systems for in-house and outsourced data
processing to commercial banks, 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 these financial institutions. 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 seven data centers and 20
item-processing centers located throughout the United States.
The first quarter of fiscal year 2005 showed strong growth in revenues and
improved gross and operating margins, which allowed us to leverage a 14%
increase in revenues to a 20% increase in net income compared to the same
period last year.
A detailed discussion of the major components of the results of operations
for the three months ended September 30, 2004 follows. All amounts are in
thousands and discussions compare the current three-month period ended,
September 30, 2004 to the prior three-month period ended September 30, 2003.
REVENUE
License Revenue Three Months Ended
September 30,
-----------------------
2004 2003
-------- --------
License $ 19,551 $ 12,960
Percentage of total revenue 16% 12%
Change from prior year +51%
License revenue represents the delivery of application software systems
contracted with us by the customer. We license our proprietary software
products under standard license agreements that 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.
License revenue increased mainly due to growth in delivery within both
segments with the credit union segment experiencing the largest increase for
the quarter with continued strength in new core installations. The Check 21
legislation, which will allow financial institutions to clear image
documents electronically, has continued to provide solid interest and sales
in our complementary image products, especially our 4|sight solution. One
of our newer offerings, Detective, a software for fraud and anti-money
laundering solution in the financial institution industry was an important
element in the license increase for the quarter.
Support and Service Revenue Three Months Ended
September 30,
-----------------------
2004 2003
-------- --------
Support and service $ 83,648 $ 72,524
Percentage of total revenue 67% 67%
Change from prior year +15%
Support and services fees are generated from installation services, annual
support services to assist the customer in operating the systems and to
enhance and update the software, from providing outsourced data processing
services and ATM and debit card processing services.
There was strong growth in support and service revenue components for the
first quarter of fiscal 2005, which was offset by a slight decrease in
installation services.
Support and Service Revenue Q1 Fiscal 2005 Compared to Q1 Fiscal 2004
-----------------------------------------
$ Increase/Decrease % Increase/Decrease
------------------- -------------------
In-House Support $ 5,894 17%
ATM and Debit Card Services $ 3,751 47%
Outsourcing Services $ 2,321 13%
Installation Services $ (842) -8%
-------- --------
Total Increase $ 11,124 15%
======== ========
The support and service revenue growth is primarily due to the in-house
support increase arising out of software installations performed during the
previous twelve months. ATM and debit card transaction processing services
together with outsourcing services for banks and credit unions continue to
drive revenue growth at a strong pace as we leverage our resources
effectively and expand our customer base. Installation revenue was off
slightly due to timing and number of installations performed during the
current first quarter compared to the same period last year.
Hardware Revenue Three Months Ended
September 30,
-----------------------
2004 2003
-------- --------
Hardware $ 20,897 $ 23,456
Percentage of total revenue 17% 21%
Change from prior year -11%
The Company has entered into remarketing agreements with several hardware
manufacturers under which we sell computer hardware, hardware maintenance
and related services to our customers. Revenue related to hardware sales is
recognized when the hardware is shipped to our customers.
Hardware revenue decreased for the quarter due to a decrease in the number
of hardware systems delivered and the dollar value of the systems overall.
Hardware revenue in the prior year's quarter was 21% of the total revenue,
while in the current quarter it is 17% of the total revenue. We expect this
decrease as a percentage of total revenue to continue as the entire industry
is experiencing the impact of rising equipment processing power and
decreasing equipment prices.
BACKLOG
Our backlog increased 5% at September 30, 2004 to $185,100 ($63,000 in-house
and $122,100 outsourcing) from $176,500 ($60,200 in-house and $116,300
outsourcing) at September 30, 2003. Backlog decreased 3% from $191,300
($67,200 in-house and $124,100 outsourcing) at June 30, 2004.
COST OF SALES AND GROSS PROFIT
Cost of license represents the cost of software from our third party
vendors. Cost of support and service 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. Cost of
hardware consists of the direct and related costs of purchasing the
equipment from the manufacturers and delivery to our customers and the
ongoing operation costs to provide support to our customers. These costs
are recognized at the same time as the related hardware revenue is
recognized.
Cost of Sales and Gross Profit Three Months Ended
September 30,
-----------------------
2004 2003
-------- --------
Cost of License $ 1,609 $ 913
Percentage of total revenue 1% 1%
Change from prior year +76%
License Gross Profit $ 17,942 $ 12,047
Gross Profit Margin 92% 93%
Change from prior year +49%
-------------------------------------------------------------------
Cost of support and service $ 56,030 $ 49,049
Percentage of total revenue 45% 45%
Change from prior year +14%
Support and Service Gross $ 27,618 $ 23,475
Gross Profit Margin 33% 32%
Change from prior year +18%
-------------------------------------------------------------------
Cost of hardware $ 15,895 $ 16,321
Percentage of total revenue 13% 15%
Change from prior year -3%
Hardware Gross Profit $ 5,002 $ 7,135
Gross Profit Margin 24% 30%
Change from prior year -30%
-------------------------------------------------------------------
TOTAL COST OF SALES $ 73,534 $ 66,283
Percentage of total revenue 59% 61%
Change from prior year +11%
TOTAL GROSS PROFIT $ 50,562 $ 42,657
Gross Profit Margin 41% 39%
Change from prior year +19%
Cost of license increased by $696 for the current quarter due to increased
third party software vendor costs, lowering the gross profit margin
slightly. Cost of support and service increased 14% or $6,981, due to
increased headcount and depreciation expense for the new outsourcing
facilities and equipment as compared to last year. Cost of hardware
decreased 3% or $426 due to product sales mix and change in vendor
incentives for the current period. Incentives and rebates received from
vendors fluctuate quarterly and annually due to changing thresholds
established by the vendors.
GROSS PROFIT - Gross margin on license revenue decreased slightly to 92% for
the current quarter compared to same quarter last year with a 93% gross
margin due to increased third party software vendor costs. The gross
profit increase in support and service is due to continued strong revenue
growth, with approximately 88% of the support and service revenue for the
current quarter being recurring. Last year 85% of revenue was recurring.
Gross margin for support and service grew to 33% for the current quarter due
to the continuation of company-wide cost control measures and improved
processes. Hardware gross margin in the first quarter of fiscal 2005
decreased from 30% to 24% in the first quarter of fiscal 2004 primarily due
to decreases in incentives and rebates earned from vendors which fluctuate
quarterly and annually, plus the timing of hardware shipments and sales mix.
OPERATING EXPENSES
Selling and Marketing Three Months Ended
September 30,
-----------------------
2004 2003
-------- --------
Selling and marketing $ 10,732 $ 8,772
Percentage of total revenue 9% 8%
Change from prior year +22%
Dedicated sales forces, inside sales teams, and technical sales support
teams conduct our sales efforts for our two market segments, and are
overseen by regional sales managers. Our sales executives are responsible
for pursuing lead generation activities for new core customers. Our account
executives nurture long-term relationships with our client base and cross
sell our many complementary products and services. Our inside sales force
markets specific complementary products and services to our existing
customers.
For the three months ended September 30, 2004, selling and marketing
expenses increased primarily due to increased headcount and the associated
costs of the new sales teams that joined us as part of our recent
acquisitions.
Research and Development Three Months Ended
September 30,
-----------------------
2004 2003
-------- --------
Research and development $ 6,142 $ 5,319
Percentage of total revenue 5% 5%
Change from prior year +15%
We devote significant effort and expense to develop new software, service
products and continually upgrade and enhance our existing offerings.
Typically, we upgrade all of our core and complementary software
applications annually. 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.
Research and development expenses increased primarily due to employee
related costs in relation to increased headcount for ongoing development of
new products and enhancements to existing products plus depreciation and
maintenance expense for upgrading technology equipment. Research and
development expenses increased in the initial quarter of 2005 by 15%,
however they remained at 5% of total revenue for both years.
General and Administrative Three Months Ended
September 30,
-----------------------
2004 2003
-------- --------
General and administrative $ 7,465 $ 7,005
Percentage of total revenue 6% 6%
Change from prior year +7%
General and administrative expense increased for the quarter primarily due
to increased employee cost plus insurance expenses relating to our
additional facilities and acquisitions compared to the same period last
year. Although general and administrative expenses increased in the initial
quarter of 2005 by 7%, they remained at 6% of total revenue for both years.
INTEREST INCOME (EXPENSE) - Net interest income for the three months ended
September 30, 2004 reflects an increase of $172 when compared to the same
period last year due to the higher cash and cash equivalent balances.
PROVISION FOR INCOME TAXES - The provision for income taxes was $10,005 for
the three months ended September 30, 2004 compared with $7,965 for the same
period last year. For the current fiscal year, the rate of income taxes is
estimated at 37.5% of income before income taxes compared to 36.5% for the
same quarter in fiscal 2004. The change reflects an overall increase in the
effective state income tax rate.
NET INCOME - Net income increased 20% for the three months ended September
30, 2004. Net income for the first quarter of fiscal 2005 was $16,674 or
$0.18 per diluted share compared to $13,857 or $0.15 per diluted share in
the same period last year.
BUSINESS SEGMENT DISCUSSION
The Company is a leading provider of integrated computer systems that
perform data processing (available for in-house or outsourced installations)
for banks and credit unions. The Company's operations are classified
into two business segments: bank systems and services ("Bank") and credit
union systems and services ("Credit Union"). 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.
Bank Systems and Services
Three Months Ended
September 30,
-----------------------
2004 2003 Percent Increase
-------- -------- ----------------
Revenue $ 99,816 $ 91,564 9%
Gross Profit $ 41,581 $ 36,566 14%
Gross Profit Margin 42% 40%
Revenue in the bank segment increased 9% to $99,816 in the current period.
Gross profit increased 14% from $36,566 in the first quarter of the previous
year to $41,581 in the current first quarter. Gross margin increased from
40% last year to 42%.
License revenue for the bank segment increased 42% from $8,831 in the three
months ended September 30, 2003 to $12,518 for the three months ended
September 30, 2004. Bank support and service revenue increased 13% to
$71,240 for the first quarter of fiscal 2005 from $63,147 for the same
quarter last year. The support and service revenue increase of $8,093
represents a decrease of $345 for install revenue, $2,846 growth in ATM and
debit card processing, $1,729 growth in outsourcing services and $3,863
increase for in-house support revenue. Hardware revenue in the bank segment
decreased 18% from $19,586 to $16,058 for the three months ended September
30, 2004 compared to the same period last year.
Revenue growth is attributable to the significant increase in license
revenue related to new core customers, migrations, and complimentary
products together with the steady increase in support and services relating
to maintenance for in-house and outsourced customers, and a strong increase
in ATM and debit card processing activity.
This segment increased gross profit for the initial quarter of 2005 due to
our revenue growth and continued leveraging of resources and infrastructure
combined with companywide cost controls.
Credit Union Systems and Services
Three Months Ended
September 30,
-----------------------
2004 2003 Percent Increase
-------- -------- ----------------
Revenue $ 24,280 $ 17,376 40%
Gross Profit $ 8,981 $ 6,091 47%
Gross Profit Margin 37% 35%
Revenue in the credit union segment increased 40% to $24,280 in the current
period compared to the same period last year. Gross profit increased 47%
from $6,091 in the first quarter of the previous year to $8,981 in the
current year first quarter. Gross margin increased from 35% in the first
quarter last year to 37% in the same period this year due to very strong
revenue growth while maintaining and controlling cost through continued
leveraging of resources and infrastructure.
License revenue for the credit union segment increased 70% from $4,129 in
the three months ended September 30, 2003 to $7,033 for the three months
ended September 30, 2004. Credit union support and service revenue
increased 32% to $12,408 in the current quarter compared to $9,377 for the
same period in the previous year. The support and service revenue increase
of $3,031 represents a slight decrease of $497 for installation services,
$905 growth in ATM and debit card processing, $592 growth in outsourcing
services and $2,031 growth for in-house support revenue. In-house support
revenue had a 33% increase primarily due to license installations in the
previous twelve months. Hardware revenue in the credit union segment
increased 25% from $3,870 for the previous year's initial quarter to $4,839
for the current quarter.
Revenue growth is attributable to the growth in license revenue together
with the steady increase in support and services relating to maintenance for
in-house and outsourced customers, and ATM and debit card processing
activity, which is growing rapidly in our credit union segment.
This segment increased gross profit for the initial quarter of 2005 due to
our revenue growth and continued leveraging of resources and infrastructure
combined with companywide cost controls.
FINANCIAL CONDITION
Liquidity
The Company's cash and cash equivalents increased to $119,845 at September
30, 2004, from $53,758 million at June 30, 2004 and $103,032 at September
30, 2003. The increase is primarily due to collection of our June 2004
annual maintenance billings. Cash provided by operations increased $2,953
to $87,675 for the three months ended September 30, 2004 as compared to
$84,722 for the same period last year. This is primarily due to the
increase in net income for the first quarter of $2,817, compared to the same
quarter last year.
Cash used in investing activities for the current period totaled $20,637.
The largest use of cash was for capital expenditures in the amount of
$12,487 primarily for equipment final occupancy preparations of our new
San Diego, CA location and purchase of internal software, while cash used
for acquisitions was $6,665 and cash for software development used $1,541.
Financing activities used cash of $951 during the three months ended
September 30, 2004, mainly to pay dividends in the first quarter of $3,612,
offset by $2,661 from the proceeds from the issuance of stock for stock
options exercised and the sale of treasury sales to the employee stock
purchase plan.
Capital Requirements and Resources
The Company generally uses existing resources and funds generated from
operations to meet its capital requirements. Capital expenditures totaling
$12,487 and $17,675 for the three-month periods ended September 30, 2004 and
2003, respectively, which were made for expansion of facilities and
additional equipment. These additions were funded from cash generated by
operations. Total consolidated capital expenditures for the Company are not
expected to exceed $45,000 for fiscal year 2005.
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 operations. At June 30, 2004, there were
315,651 shares remaining in treasury stock. During the three months ended
September 30, 2004, treasury shares of 212,879 and 9,624 were reissued for
the shares exercised in the employee stock option plan and the employee
stock purchase plan, respectively. At September 30, 2004, there were 93,148
shares remaining in treasury stock.
Subsequent to September 30, 2004, the Company's Board of Directors declared
a cash dividend of $.04 per share on its common stock payable on November
30, 2004, to stockholders of record on November 16, 2004. 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.
Critical Accounting Policies
The Company regularly reviews its selection and application of significant
accounting policies and related financial disclosures. The application of
these accounting policies requires that management make estimates and
judgments. The estimates that affect the application of our most critical
accounting policies and require our most significant judgments are outlined
in Management's Discussion and Analysis of Financial Condition and Results
of Operations - "Critical Accounting Policies" - contained in our annual
report on Form 10-K for the year ended June 30, 2004.
Forward Looking Statements
The Management's Discussion and Analysis of Results of Operations and
Financial Condition 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 at
Risk Factors in its Annual Report on Form 10-K for the fiscal year ended
June 30, 2004. 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.
CONCLUSION
The Company's results of operations and its financial position continue to
be strong with increased earnings, increased gross margin growth, strong
cash flow and no debt as of and for the three months ended September 30,
2004. This reflects the continuing attitude of cooperation and commitment
by each employee, management's ongoing cost control efforts and our
commitment to deliver top quality products and services to the markets we
serve.
ITEM 3. 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 exposures will not have a material adverse effect on our consolidated
financial position or results of operations.
ITEM 4. 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 II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Stockholders of Jack Henry & Associates, Inc. was
held on October 26 2004 for the purpose of electing a board of directors.
Proxies for the meeting were solicited pursuant to Section 14 (a) of
the Securities and Exchange Act of 1934 and there was no solicitation
in opposition to management's recommendations. Management's nominees for
director, all incumbents, were elected with the number of votes for and
withheld as indicated below:
For Withheld
---------- ----------
John W. Henry 81,445,191 3,688,680
Jerry D. Hall 83,285,929 1,847,942
Michael E. Henry 83,210,543 1,923,328
James J. Ellis 82,736,178 2,397,693
Burton O George 83,146,282 1,987,589
Craig R. Curry 83,193,943 1,939,928
Joseph J. Maliekel 83,120,413 2,013,428
ITEM 6. EXHIBITS
10.18 Stock Purchase Agreement between the Company and Verinex Technologies,
Inc. dated October 1, 2004.
31.1 Certification of the Chief Executive Officer dated November 9, 2004.
31.2 Certification of the Chief Financial Officer dated November 9, 2004.
32.1 Written Statement of the Chief Executive Officer dated November 9,
2004.
32.2 Written Statement of the Chief Financial Officer dated November 9,
2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report on Form 10-Q to be signed
on its behalf by the undersigned thereunto duly authorized.
JACK HENRY & ASSOCIATES, INC.
Date: November 9, 2004 /s/ John F. Prim
---------------------
John F. Prim
Chief Executive Officer
Date: November 9, 2004 /s/ Kevin D. Williams
---------------------
Kevin D. Williams
Chief Financial Officer and Treasurer