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
Exhibit 10.18
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is entered into as of
this 1st day of October, 2004, by and between VERINEX TECHNOLOGIES, INC., a
Delaware corporation ("VTI") with its principal office in Lake Forest,
California, the shareholders of VTI listed in Section 3.5 of this Agreement
(together, the "Sellers"), and JACK HENRY & ASSOCIATES, INC., a Delaware
corporation with its principal offices in Monett, Missouri ("Purchaser").
Background Statement
--------------------
VTI is engaged in the business of providing biometric identification
software and hardware to commercial customers. The Sellers own all of the
issued and outstanding shares of the capital stock of VTI. Purchaser is
engaged in the business of providing software, data processing services and
other related services to banks, credit unions and other financial
institutions and wishes to acquire all of the issued and outstanding shares
of capital stock of VTI, thereby acquiring all of the assets, customers and
business of VTI.
Statement of Agreement
----------------------
In consideration of the premises and the mutual covenants herein
contained, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
In addition to the terms defined elsewhere in this Agreement, the
following terms shall have the meanings indicated below:
1.1 The term "Balance Sheet" means the VTI unaudited balance sheet and
accompanying statement of income attached hereto as Exhibit 1.1, which
reflect the assets and liabilities of VTI as of August 31, 2004.
1.2 The term "Contracts" means those contracts, leases, agreements,
licenses and other arrangements to which VTI is a party which commit VTI to
(a) provide software, hardware or services to its customers, or (b) for the
payment of any amount in excess of $1,000 or (c) extend for a period of one
year or more and that are listed in section 3.6(e) of the Disclosure
Schedule.
1.3 The term "Documentation" means those written materials owned by
VTI that explain any Software or hardware or the use thereof.
1.4 The term "Financial Statements" means the unaudited VTI balance
sheet and income statement for the year ended December 31, 2003, as provided
by Sellers and VTI to Purchaser, and the Balance Sheet as described in
Section 1.1 above.
1.5 The term "Permitted Liens" means: (a) liens for current taxes not
yet due and payable, (b) liens arising in the ordinary course of business
for sums not yet due and payable, but not involving any borrowed money or
the deferred purchase price for property or services, and (c) liens
disclosed on the Balance Sheet.
1.6 The term "Person" means an individual, partnership, corporation,
limited liability company, trust, joint venture, joint stock company,
association, unincorporated organization, governmental authority or other
entity.
1.7 The term "Software" means those computer software programs listed
on Exhibit 1.7 (in object code only or both source code and object code, as
indicated on Exhibit 1.7) that are owned by VTI or by third parties and
used, licensed or sublicensed by VTI.
1.8 The term "Trade Secrets" means business or technical information
that is not generally known to other Persons and that derives actual or
potential commercial value from not being generally known or readily
ascertainable to other Persons.
ARTICLE II
SALE AND PURCHASE OF SHARES
2.1 VTI Shares Acquired. On the terms and subject to the conditions
of this Agreement, on the Closing Date the Sellers shall sell and deliver to
Purchaser, and Purchaser shall purchase and accept from Sellers, all of the
issued and outstanding shares of capital stock of VTI (the "Shares"), which
Shares consist of 9,150 shares of Common Stock with a par value of $.001 per
share.
2.2 Consideration. In consideration of the transfer to it of the
Shares, Purchaser shall pay Sellers $35,000,000.00 in the aggregate (the
"Purchase Price"). The Purchase Price shall be payable to the Sellers at
the Closing by wire transfer of immediately available funds in accordance
with written instructions provided by Sellers.
2.3 Closing. The closing of the sale of the Shares (the "Closing")
shall take place on October 4, 2004 (the "Closing Date"), or such other date
as the parties may establish by mutual agreement as the Closing Date. The
parties agree that in any event, the transactions contemplated by this
Agreement shall be effective on October 1, 2004 (the "Effective Date"). The
Closing shall occur at the offices of Palmieri, Tyler, Wiener, Wilhelm &
Waldron in Irvine, California or such other location as the parties may
establish by mutual agreement. If the Closing has not occurred on or before
October 15, 2004, then this Agreement may be terminated by either the
Purchaser or the Seller Representative.
2.4 Deliveries at Closing. At the Closing:
(a) Sellers will deliver to Purchaser:
(i) Stock certificates representing the Shares, duly
endorsed by Sellers for transfer to the Purchaser and
accompanied by irrevocable stock powers executed by
Sellers in a form acceptable to Purchaser;
(ii) An Employment Agreement in the form of Exhibit
2.4(a)(ii) executed by Scott Almquist, William Watson
and Aaron Watson;
(iii) A Proprietary Rights and Confidentiality Agreement
in the form of Exhibit 2.4(a)(iii) executed by Scott
Almquist, William Watson and Aaron Watson;
(iv) Resignations of each of the directors and officers of
VTI;
(v) A Release in the form of Exhibit 2.4(a)(v) executed on
behalf of each of the Sellers, and by each of the
officers and directors of VTI;
(vi) The minute and stock books, corporate, accounting and
tax records and all other records, documents and files
of VTI;
(vii) An opinion from counsel to VTI and the Sellers
dated the Closing Date, in substantially the form of
Exhibit 2.4(a)(vii);
(viii) A Bill of Sale and Assignment of Intellectual
Property Rights in substantially the form of Exhibit
2.4(a)(viii) executed on behalf of each of the Sellers,
and by each of the officers and directors of VTI; and
(ix) All other agreements, certificates and other documents
required to be delivered by Seller on the Closing Date
pursuant to this Agreement.
(b) Purchaser will deliver to the Sellers:
(i) The Purchase Price, by wire transfer of immediately
available funds to the account of each of Sellers in the
amount as provided in Section 2.2 above;
(ii) Employment Agreements between Purchaser and Scott
Almquist, William Watson and Aaron Watson; and
(iii) All other agreements, certificates and other documents
required to be delivered by Purchaser on the Closing
Date pursuant to this Agreement.
(iv) Subject to the representations, warranties and covenants
of the Sellers in this Agreement, a Release in the form
of Exhibit 2.4(b)(iv) executed by VTI in favor of each
of the Sellers relating to actions prior to the Closing
by the Sellers as officers, directors and shareholders
of VTI.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF VTI AND SELLERS
Except as set forth in the Disclosure Schedule attached hereto, VTI and
each of the Sellers jointly and severally (except for those matters
described in Section 10.2(b)(i) as being only several as to liability)
represent and warrant to Purchaser that:
3.1 Organization and Standing. VTI is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority and possesses
all governmental franchises, licenses, permits, authorizations and approvals
necessary to enable it to own, lease or otherwise hold its properties and
assets, to carry on its business as presently conducted and to carry out the
transactions contemplated by this Agreement. VTI is duly qualified and in
good standing to do business in each jurisdiction in which the nature of its
business or the ownership, leasing or holding of its properties makes such
qualification necessary and in which the failure so to qualify would have a
material adverse effect on it or its properties.
3.2 No Subsidiaries. VTI does business only under its corporate name
and has no subsidiaries.
3.3 Authority. VTI has all requisite corporate power and authority to
execute and deliver this Agreement and to perform its obligations hereunder,
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by
all necessary corporate action on the part of VTI. This Agreement has been
duly and validly executed and delivered by an authorized officer of VTI and
constitutes the legal, valid and binding obligation of VTI enforceable in
accordance with its terms.
3.4 Consents and Approvals; No Violation. There is no requirement
applicable to VTI or any of the Sellers to make any filing with, or to
obtain any permit, authorization, consent or approval of, any governmental
authority as a condition to the lawful consummation of the transactions
contemplated by this Agreement. Except as disclosed in Exhibit 3.4, neither
the execution, delivery and performance of this Agreement by VTI or the
Sellers, nor the compliance of them with the provisions hereof will: (a)
conflict with any provision of the articles of incorporation or bylaws of
VTI; (b) result in a default (or give rise to any right of termination,
cancellation or acceleration) under any Contract; (c) result in the
imposition or creation of any lien, security interest, charge or encumbrance
upon any asset of VTI; (d) require any authorization, consent, approval or
notice under any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, agreement, contract, lease or other instrument or
arrangement to which VTI or any of the Sellers is a party, except for such
of the foregoing as to which requisite waivers or consents have been
obtained; or (e) violate any law, statute, rule, regulation, order, writ,
injunction or decree of any governmental authority.
3.5 Capital Stock of VTI. The authorized capital stock of VTI
consists of 10,000 shares of Common Stock, all with a par value of $.001 per
share, of which 9,150 shares of Common Stock are issued and outstanding.
The shares of Common Stock of VTI are issued to the Sellers in the following
amounts:
Name No. of Shares
---- -------------
Scott Almquist, as Trustee for
the Almquist Family Trust 5,700
William S. and Traci Jo Watson 1,650
Aaron and Vanessa Watson 1,100
Sean and Cynthia Walwick 700
All of the issued and outstanding shares of capital stock of VTI are duly
authorized, validly issued to the Sellers and fully paid and nonassessable
and have not been issued, and are not held, in violation of any preemptive
rights. Except as set forth above, there are no shares of capital stock or
other equity securities of VTI outstanding, and the issued and outstanding
shares as set forth above are held by the Sellers free and clear of all
liens, encumbrances, claims and restrictions. There are and on the Closing
Date will be no other issued or outstanding shares of capital stock of VTI,
and on the Closing Date there will be no (i) outstanding, warrants, options,
agreements, convertible or exchangeable securities or other commitments
pursuant to which VTI is or may become obligated to issue, sell, purchase,
return or redeem any shares of capital stock or other securities of VTI;
(ii) agreements with respect to the voting of the shares of VTI's capital
stock; or (iii) equity securities of VTI reserved for issuance for any
purpose.
3.6 VTI Assets. Except as disclosed in the Disclosure Schedule, VTI
will own at Closing good and valid title to all of the following assets,
rights and properties (the "VTI Assets"):
(a) The Software and all Documentation related thereto, including
any Proprietary Rights therein (as described in Section 3.11
below);
(b) All of the customer records, customer lists, vendor lists,
correspondence, product and service literature and materials,
design, development and maintenance records and files, technical
reports and other business documents that are presently used by
VTI;
(c) The equipment (including data processing and other computer
hardware, telecommunications equipment, media and tools),
machinery, furniture and furnishings listed in the Disclosure
Schedule, all of which is presently used by VTI, and all of which
are in reasonably good condition and repair and are adequate and
sufficient in all material respects to carry on the business of
VTI as presently conducted;
(d) The accounts receivable of VTI, including, without
limitation, those that are due and payable under the Contracts, of
which at least 99% of the value thereof are collectable in the
ordinary course of business at amounts no less than that reflected
on the Balance Sheet;
(e) Those contracts, leases, agreements, licenses and other
arrangements to which VTI is a party and that are listed in
section 3.6(e) of the Disclosure Schedule (the "Contracts");
(f) Those trademarks, service marks, patents and other rights
listed in section 3.6(f) of the Disclosure Schedule;
(g) The goodwill appurtenant to VTI's business.
At the Closing, VTI shall own all such VTI Assets free and clear of all
mortgages, liens, security interests or encumbrances of any nature
whatsoever, except for Permitted Liens. VTI's Assets include all of the
assets presently used by VTI in the operation of its business.
3.7 Leases. Except as disclosed in section 3.7 of the Disclosure
Schedule, VTI is not a party to or obligated with respect to any leases of
real or personal property. Complete and correct copies of all leases have
been delivered to Purchaser. Each such Lease is valid, subsisting and
in good standing. VTI has not sent or received any notice of default
thereunder and no event or condition exists which constitutes, or after
notice or lapse of time or both would constitute, a material default
thereunder. The leasehold interests under the Leases are subject to no lien
or other encumbrance created by VTI other than Permitted Liens.
3.8 Insurance. Section 3.8 of the Disclosure Schedule sets forth a
description of all current fire, liability, extended coverage and all other
insurance policies, copies of which have been delivered to the Purchaser.
VTI has not received any notice of cancellation with respect to any of such
insurance policies or of any unwillingness of an insurer to renew such
policies based on standard premium charges.
3.9 Bank Accounts, Signing Authority, Powers of Attorney. Except as
set forth on section 3.9 of the Disclosure Schedule , VTI has no account or
safe deposit box in any bank and no Person has any power, whether singly or
jointly, to sign any checks on behalf of VTI, to withdraw any money or other
property from any bank, brokerage or other account of VTI or to act under
any power of attorney granted by VTI at any time for any purpose. Section
3.9 of the Disclosure Schedule also sets forth the names of all Persons
authorized to borrow money or sign notes on behalf of VTI.
3.10 Liabilities. VTI has no liabilities of any nature whatsoever
which exceed $1,000 in the aggregate, whether accrued or unaccrued, known or
unknown, fixed or contingent except: (a) the obligations arising under the
Contracts; and (b) those liabilities listed in the Disclosure Schedule. VTI
is not in default with respect to any outstanding indebtedness for borrowed
money or any instrument relating thereto. Complete and correct copies of
all instruments, (including all amendments, supplements, waivers and
consents) relating to any indebtedness for borrowed money of VTI have been
furnished to Purchaser.
3.11 Proprietary Rights.
(a) VTI owns or uses under valid licenses all copyrights, know-
how, patents, trademarks and Trade Secrets, if any, (collectively,
the "Proprietary Rights") necessary for the operation of its
business as now conducted.
(b) VTI has taken efforts that are reasonable under the
circumstances to prevent the unauthorized disclosure to other
Persons of such portions of VTI's Trade Secrets as would enable
any such other Person to compete with VTI within the scope of its
business as now conducted.
(c) VTI does not use any trademark in connection with its
business in any material way, except for those trademarks listed
in section 3.11(c) of the Disclosure Schedule, and no such
trademark is registered except as otherwise indicated in section
3.11(c) of the Disclosure Schedule.
(d) Any Software used by VTI and which is material to the scope
of its business is identified in section 3.11(d) of the Disclosure
Schedule, and VTI either owns all such Software or is licensed to
use such Software in the manner that VTI presently uses such
Software in the normal course of its business. Except as set forth
in section 3.11(d) of the Disclosure Schedule, VTI has no
obligation to make any payments by way of royalty, fee, settlement
or otherwise to any Person in connection with VTI's present use of
any such Software.
(e) No claim has been asserted against VTI within the scope of
its business by any other Person: (i) that such Person has any
right, title or interest in or to any of VTI's copyrights, patents
or Trade Secrets, (ii) that such Person has the right to use any
of VTI's trademarks, (iii) to the effect that any past, present or
projected act or omission by VTI infringes any rights of such
Person to any copyright, patent, Trade Secret, know-how or
trademark, or (iv) that challenges VTI's right to use any of VTI's
copyrights, patents, Trade Secrets, know-how or trademarks.
3.12 Financial Statements. The Balance Sheet and Financial Statements
have been prepared using the accrual method of accounting, and VTI has used
the cash method of accounting to prepare and file its federal income tax
returns for the taxable year ending December 31, 2003. Consistent with such
accounting practices, the Balance Sheet and Financial Statements each fairly
present, in all material respects, the financial condition and, where
indicated, the results of operations of VTI for the periods and as of the
dates thereof. The Chief Financial Officer of VTI has certified the Balance
Sheet and the Financial Statements by signing and dating them.
3.13 Absence of Changes or Events. Except as set forth in section 3.13
of the Disclosure Schedule, or as permitted or contemplated by this
Agreement, since the date of the Balance Sheet, there has not been: (a) any
material change in the assets, liabilities, sales, income or business of VTI
or in its relationships with suppliers, customers or lessors; (b) any
acquisition or disposition by VTI of any asset or property other than in the
ordinary course of business; (c) any damage, destruction or loss, whether or
not covered by insurance, either in any case or in the aggregate, which had
or may have a material adverse affect upon the VTI Assets or VTI's business;
(d) any increase in the compensation, pension or other benefits payable or
to become payable by VTI to any of its officers or employees, or any bonus
payments or arrangements made to or with any of them; (e) any forgiveness or
cancellation of any debt or claim by VTI or any waiver of any right of
material value other than compromises of accounts receivable in amounts not
material and in the ordinary course of business; (f) any transaction by VTI
other than in the ordinary course of business; (g) any incurrence by VTI of
any material obligations or liabilities, whether absolute, accrued,
contingent or otherwise (including, without limitation, liabilities as
guarantor or otherwise with respect to obligations of others), other than
obligations and liabilities that are not material and were incurred in the
ordinary course of business; or (h) any mortgage, pledge, lien, lease,
security interest or other charge or encumbrance on any of VTI Assets.
3.14 Contracts. Each of the Contracts is a legal, valid and binding
obligation of VTI and, to the knowledge of the Sellers, the other party
thereto, enforceable in accordance with its terms, and no party to any
Contract has given notice of the termination thereof. There are no facts or
circumstances that exist and that, with the passage of time or the giving of
notice or both, would constitute a breach of or an event of default under
any of the Contracts.
3.15 Litigation. There are no lawsuits, actions, claims or legal,
administrative or arbitration proceedings or investigations pending or, to
the knowledge of VTI or any of the Sellers, threatened by or against VTI;
nor are any of the Sellers aware of the existence of any basis for any such
lawsuit, action, claim or proceeding.
3.16 Compliance with Applicable Laws. VTI is in compliance with all
applicable statutes, laws, ordinances, rules, orders and regulations of any
governmental authority, including those related to wages, hours, collective
bargaining, the payment of social security taxes and applicable
discrimination laws, the penalty for violation of which may have a material
adverse affect upon the VTI Assets or VTI's business. VTI has not received
any written communication from a governmental authority that alleges that
VTI is not in compliance with any federal, state, local or foreign laws,
ordinances, rules or regulations. There are no material licenses, permits
or other authorizations from governmental authorities necessary for the
conduct of VTI's business or the ownership or use of the VTI Assets.
3.17 Compliance with Other Instruments. VTI has complied with, and is
in compliance with, all material unwaived terms and provisions of all
Contracts, agreements and indentures to which VTI is a party and has not
received any notices of any defaults thereunder.
3.18 Disclosure. No representation or warranty made by Sellers or VTI
in this Agreement or in any exhibit or schedule to this Agreement or in any
written statement, certificate or other document to be delivered at the
Closing to the Purchaser pursuant hereto contains or will contain any untrue
statement of a material fact or omits or will omit to or otherwise fail to
state a material fact required to be stated therein or necessary to make the
statements contained therein not misleading. Sellers and VTI have made
available to Purchaser all documents and records concerning VTI and the
Seller's ownership of the capital stock thereof, and the Sellers have no
actual knowledge of any material fact relating to VTI's business which may
have a material adverse effect on the same and which has not been disclosed
to the Purchaser in writing; provided that the Sellers make no
representations or warranties in this agreement as to the future performance
of VTI, and provided further that the Sellers make no representations
or warranties in this Section or elsewhere in this Agreement as to the
effect of matters, facts, conditions or developments (including proposed
legislation or government promulgations) applicable to or affecting the
software generally or having general application to or affecting generally
the local, regional or national economy or business environment.
3.19 Employees; Labor Matters. Section 3.19 of the Disclosure Schedule
lists the names of all employees of VTI and, except as otherwise noted
thereon, the salary or wage rate for each such employee and a brief
description of the responsibilities of each such employee. Except as
otherwise disclosed in section 3.19 of the Disclosure Schedule, VTI is not a
party to nor has otherwise entered into a written or other employment
agreement with any such employee. VTI is not a party to any collective
bargaining agreement, and has not recognized or received a demand for
recognition of any collective bargaining representative with respect
thereto; and during the past three years there have been no material labor
strikes, disputes or work stoppages and, to the knowledge of VTI or either
of the Sellers, no such actions are threatened against VTI and no basis
exists therefor. There are no unfair labor practice claims or charges
pending or, to the knowledge of VTI or the Sellers, threatened against VTI.
3.20 Employee Benefit Plans; ERISA. Section 3.20 of the Disclosure
Schedule identifies each employee pension, retirement, profit sharing,
bonus, incentive, deferred compensation, hospitalization, medical, dental,
vacation, insurance, sick pay, disability, severance or other plan, fund,
program, policy, contract or arrangement providing employee benefits
maintained, promised or contributed to by VTI, whether created in writing,
through an employee manual or similar document or orally (the "Plans"). VTI
has no formal plan or commitment, whether legally binding or not, to create
any additional Plan or modify or change any existing Plan that would affect
any employee or terminate any employee of VTI. Section 3.20 of the
Disclosure Schedule sets forth all liabilities, obligations and commitments
of VTI, whether legally binding or not, to make any contributions to any
Plan or payments to any employee or any other Person with respect to any of
the plans as of the date hereof. Except as set forth in Section 3.20 of the
Disclosure Schedule: (a) all such Plans that are subject to the Employee
Retirement Income Security Act of 1974, as amended, and any successor
statute of similar import, together with the regulations thereunder
("ERISA") comply in all material respects with ERISA; (b) all contributions
to or payments under such Plans that were due and payable by VTI on or
before the date hereof have been made; and (c) none of the Plans subject to
Title IV of ERISA has been terminated, no proceeding to terminate any of
such Plans has been instituted, and there has been no complete or partial
withdrawal, cessation of facility operations or occurrence of any other
event that would result in the imposition of liability on VTI under Title IV
of ERISA.
3.21 Minute and Record Books. The minute book of VTI made available to
the Purchaser for inspection accurately records therein all material actions
taken by VTI's board of directors and shareholders. The books of account,
minute books, stock record books and other records of VTI are complete and
correct and have been maintained in accordance with sound business practices
and applicable laws.
3.22 Taxes.
(a) (i) All federal and state income tax returns and all other
tax returns required to be filed by VTI on or prior to the date hereof, the
penalty for failure to file which may have a material adverse impact upon
the VTI Assets or VTI's business, have been filed or provision has been made
therefore; (ii) all federal, state and local taxes and assessments
including, without limitation, estimated tax payments, excise, unemployment,
social security, occupation, franchise, property, sales and use taxes, and
all penalties or interest in respect thereof now or heretofore due and
payable by or with respect to VTI have been paid or are properly accrued and
reflected as liabilities in the Financial Statements; (iii) all federal,
state and local withholdings of VTI including, without limitation,
withholding taxes, social security, and any similar taxes, have been
withheld and paid over as required by law; and (iv) no extension with any
taxing authority concerning any tax liability of or with respect to VTI is
currently outstanding.
(b) VTI's federal income tax returns have never and are not now
the subject of any audit, investigation, or other action of the Internal
Revenue Service.
(c) There are no tax liens, whether imposed by any federal,
state, local or foreign taxing authority, outstanding against any of the
assets, properties or business of VTI.
(d) There are no facts or circumstances associated with VTI and
affecting the transactions contemplated by this Agreement that will cause,
or with the passage of time will result in, any material adverse tax
consequences to VTI.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants as follows:
4.1 Organization and Authority. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware and has all requisite corporate power and authority to execute
and deliver this Agreement and to carry out the transactions and perform the
obligations contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized by all necessary corporate action on the
part of Purchaser. This Agreement has been duly and validly executed and
delivered by an authorized officer of Purchaser and constitutes a legal,
valid and binding obligation of Purchaser, enforceable against Purchaser in
accordance with its terms.
4.2 Consents and Approvals; No Violation. There is no requirement
applicable to Purchaser to make any filing with, or to obtain any permit,
authorization, consent or approval of, any governmental authority as a
condition to the lawful consummation of the transactions contemplated by
this Agreement. The execution, delivery and performance of this Agreement
by Purchaser and compliance with the provisions hereof will not (a) conflict
with any provision of the certificate of incorporation or bylaws of
Purchaser, (b) violate any material law, statute, ordinance, rule or
regulation applicable to Purchaser or (c) result in a breach of or default
under any material contract or other agreement of Purchaser, the effect of
which would be to materially impair Purchaser's ability to perform its
obligations under this Agreement.
4.3 Litigation. There are no lawsuits, actions, claims or legal,
administrative or arbitration proceedings or investigations pending or, to
the knowledge of Purchaser, threatened by or against or affecting Purchaser,
any of its properties, assets, operations or business that could reasonably
be expected to materially impair Purchaser's ability to perform its
obligations under this Agreement; nor, to the best of Purchaser's knowledge,
does there exist any basis for any such lawsuit, action, claim or
proceeding.
4.4 Investment. The Shares acquired by the Purchaser pursuant to this
Agreement are being acquired for investment only and not with a view to any
public distribution thereof, and the Purchaser will not offer to sell or
otherwise dispose of the Shares so acquired by it in violation of the
Securities Act of 1933.
ARTICLE V
COVENANTS OF SELLERS AND VTI
5.1 Access. Subject to paragraph 1 of that certain Letter of Intent
(the "LOI") dated September 1, 2004 between VTI and the Purchaser, the
Sellers and VTI shall cause VTI from the date of this Agreement to and
including the Closing Date, to give Purchaser and its representatives
reasonable access during normal business hours to all of VTI's assets and
properties and all of VTI's books and records, and VTI shall furnish to
Purchaser all such contracts, documents and information with respect to
VTI's assets, properties and business as Purchaser may from time to time
reasonably request. Purchaser shall have the right to conduct such
accounting, financial, and other audits, tests and analyses, at its cost,
that it deems appropriate on or to any such assets, properties, books and
records.
5.2 Business. Until the Closing, the Sellers and VTI shall cause VTI
to:
(a) carry on its business in, and only in, the usual, regular and
ordinary course in substantially the same manner as heretofore conducted and
use best efforts to preserve intact its present business organization, keep
available the services of its present officers and employees, and preserve
its relationships with customers, suppliers and others having business
dealings with it, and promptly inform and consult with Purchaser concerning
all material operations of VTI or proposed operations which may affect the
value of VTI; provided, however, VTI may make cash distributions to its
shareholders prior to the Closing with the understanding of the parties that
there will be sufficient cash in VTI at the Closing to satisfy outstanding
checks and accrued payroll and benefits;
(b) refrain from amending its articles of incorporation or
bylaws;
(c) maintain its assets and properties in customary repair, order
and condition, reasonable wear and use excepted, and maintain insurance upon
its assets, property, officers and directors and its business in such
amounts and of such kinds comparable to that in effect on the date of this
Agreement;
(d) maintain its books, accounts and records in manner consistent
with VTI's prior practices;
(e) promptly disclose to Purchaser any information referenced in
Article III of this Agreement which because of an event occurring after the
date hereof, is incomplete or is no longer correct as of all times after the
date hereof until the Closing Date;
(f) refrain from acquiring by merging or consolidating with, or
agreeing to merge or consolidate with, or purchasing the assets of, or
otherwise acquiring any business of any corporation, partnership, limited
liability company, association or other business organization or division
thereof;
(g) refrain from soliciting, encouraging (including by way of
furnishing information) or otherwise entertain any inquiries or proposals
for (or which may reasonably be expected to lead to) the acquisition of any
of the capital stock, assets (other than assets in the ordinary course) or
business of VTI, whether directly, indirectly, or through any investment
banker, attorney, accountant or other representative retained by the Sellers
or VTI;
(h) promptly advise Purchaser orally and confirm in writing upon
learning of any change in the condition (financial or otherwise) of
properties, assets, liabilities, operations, businesses or prospects of VTI;
(i) promptly advise Purchaser orally and confirm in writing any
inquiry or proposal for the acquisition of the stock, assets and properties
(other than in the ordinary course of business) or businesses of VTI;
(j) use their best efforts to cause all of the conditions to the
obligations of Purchaser and the Sellers and VTI under this Agreement to be
satisfied on or prior to the Closing Date.
5.3 Cooperation. The Sellers and VTI will: (a) cooperate with
Purchaser in disclosing to Purchaser at VTI's place of business, all
Documentation, Software, Trade Secrets, records, other intellectual
property, technical data, new product or service development and research
data and other information used in the business of VTI; (b) cooperate with
Purchaser in connection therewith after the Closing Date in such manner as
may reasonably be required by Purchaser, including but not limited to
customer introductions and customer retention efforts; and (c) not before or
any time after Closing disclose the same to any other person or firm without
the prior written consent of Purchaser.
5.4 No Violation. Neither the Sellers nor VTI knowingly shall take
any action that would constitute a misrepresentation or breach of any
warranty contained in Article III.
5.5 Notification. The Sellers and VTI shall use their respective
best efforts to promptly notify Purchaser of any alleged misrepresentations
or breaches of warranty or covenant under this Agreement by Purchaser. The
Sellers and VTI shall cooperate in good faith to allow Purchaser to cure any
such alleged misrepresentations or breaches; provided, that nothing in this
Section 5.5 shall require the Sellers and/or VTI to expend any sum of money
or incur any obligation to cure any misrepresentation or breach of warranty
or covenant by Purchaser.
5.6 Transfer Taxes. The Sellers shall pay when due all stock transfer
or similar taxes, if any, which are required to be paid in connection with
the transfer of the Shares, and the Sellers will comply with all laws
imposing such taxes in respect of the Shares.
5.7 Confidential Information. Prior to the Closing, the Sellers and
VTI shall keep all information regarding Purchaser and the transactions
contemplated in this Agreement (the "Purchaser Confidential Information")
confidential and limit access to the Purchaser Confidential Information to
the Sellers and VTI and their agents and other representatives as necessary
to carry out the transactions contemplated by this Agreement. The Sellers
and VTI agree that until the Closing, all Purchaser Confidential Information
obtained from Purchaser or any representative thereof, shall be held in
strict confidence and shall be used for the exclusive purpose of carrying
out the transactions contemplated by this Agreement. In the event the
transactions contemplated by this Agreement are not consummated, all
Purchaser Confidential Information received by the Sellers or VTI from
Purchaser and its representatives shall be promptly returned, together with
any copies thereof, to Purchaser. The Sellers and VTI shall not disclose in
any press release or public filing or to any third person the financial
terms of the transactions contemplated by this Agreement, nor shall the
Sellers or VTI, in the event the transactions contemplated by this Agreement
are not consummated, use any of the Purchaser Confidential Information for
any competitive purpose.
5.8 Absence of Indebtedness. Prior to the Closing VTI shall satisfy
all of its indebtedness for money borrowed (excluding trade payables and
other current liabilities incurred in the ordinary course of business) so
that at the Closing VTI shall not be obligated for any such indebtedness for
money borrowed.
ARTICLE VI
COVENANTS OF PURCHASER
6.1 No Violation. Purchaser shall not knowingly take any action
which would constitute a misrepresentation or breach of warranty contained
in Article IV had such action been taken on or prior to the date of this
Agreement.
6.2 Notification. Following the Closing Date, Purchaser shall
use its best efforts to promptly notify the Sellers and VTI of any alleged
misrepresentations or breaches of warranty or covenant under this Agreement
by the Sellers and VTI. Purchaser shall cooperate in good faith to allow
the Sellers and VTI to cure any such alleged misrepresentations or breaches;
provided, that nothing in this Section 6.2 shall require Purchaser to expend
any sum of money or incur any obligation to cure any misrepresentation or
breach of warranty or covenant by the Sellers and VTI.
6.3 Confidential Information. Prior to the Closing Date,
Purchaser shall keep all information regarding VTI and the transactions
contemplated in this Agreement (the "VTI Confidential Information")
confidential and limit access to the VTI Confidential Information to
Purchaser's agents and other representatives as necessary to carry out the
transactions contemplated by this Agreement. Purchaser agrees that until
the Closing, the VTI Confidential Information obtained from VTI or the
Sellers or any representative thereof, shall be held in strict confidence
and shall be used for the exclusive purpose of carrying out the transactions
contemplated by this Agreement. In the event the transactions contemplated
by this Agreement are not consummated, all VTI Confidential Information
received by Purchaser from VTI or the Sellers and their representatives
shall be promptly returned, together with any copies thereof, to VTI or the
Sellers. Purchaser shall not disclose in any press release or public filing
or to any third person the financial terms of the transactions contemplated
by this Agreement unless such disclosures are required by applicable law or
the rules of the Nasdaq National Market System, in which case the Purchaser
shall permit the other parties an opportunity to review and comment upon
such release or announcement, nor shall Purchaser, in the event the
transactions contemplated by this Agreement are not consummated, use any of
the VTI Confidential Information for any competitive purpose.
ARTICLE VII
MUTUAL COVENANTS
7.1 Further Assurances. Subject to the terms and conditions of this
Agreement, each of the parties hereto will use all reasonable efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations
to consummate the transactions contemplated hereby.
7.2 No Brokers; Expenses. The Sellers and the Purchaser will bear
their respective brokers or finders fees incurred in connection with the
transactions provided for in this Agreement and other expenses incurred in
connection with the preparation, execution and performance of this Agreement
and the transactions contemplated hereby, including expenses of agents,
counsel and accountants, and the Sellers and VTI will cause VTI not to incur
any out-of-pocket expenses in connection with this Agreement which will be
due and payable after the Effective Date.
ARTICLE VIII
CONDITIONS PRECEDENT TO
SELLER'S AND VTI'S OBLIGATIONS
All obligations of the Sellers and VTI under this Agreement are subject
to the fulfillment, on or before the Closing date, of each of the following
conditions:
8.1 Representations and Warranties. The representations and
warranties of Purchaser contained in this Agreement or in any other
agreement, certificate or document delivered to the Sellers and/or VTI
pursuant hereto shall be true both on the Closing Date and the effective
date of such Closing as if made on and as of the Closing Date and such
effective date.
8.2 Performance of Agreements. Purchaser shall have duly performed
and complied with all agreements and conditions required by this Agreement
to be performed or complied with by it at or before the Closing Date,
including, without limitation, the execution and delivery to the Sellers and
VTI of each of the documents described in Section 2.4(b).
8.3 Purchaser Authorization. Purchaser shall have delivered to the
Sellers and VTI a certificate by Purchaser's corporate secretary in a form
satisfactory to the Sellers and VTI to the effect that Purchaser's
execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated by this Agreement have been duly authorized
by Purchaser's board of directors.
ARTICLE IX
CONDITIONS PRECEDENT TO
PURCHASER'S OBLIGATIONS
All obligations of Purchaser under this Agreement are subject to the
fulfillment, on or before the Closing Date, except as otherwise provided, of
each of the following conditions:
9.1 Representations and Warranties. The representations and
warranties of the Sellers and VTI contained in this Agreement (including the
Exhibits hereto), or in any other agreement, certificate or document
delivered to Purchaser pursuant hereto, shall be true both on the Closing
Date and the effective date of such Closing as if made again on and as of
the Closing Date and such effective date.
9.2 Performance of Agreements. The Sellers and VTI shall have duly
performed and complied with, or caused to be performed and complied with,
all agreements and conditions required by this Agreement to be performed or
complied with by the Sellers and/or VTI on or before the Closing Date,
including, without limitation, the execution and delivery to Purchaser of
each of the documents described in Section 2.4(a).
9.3 Consents and Approvals. The Sellers and VTI shall have delivered
to Purchaser all consents, approvals, release of preferential rights to
purchase shares of VTI's stock, any required consents or approvals by third
parties or governmental authorities, and all other necessary consents and
waivers required to consummate the transactions contemplated by this
Agreement.
9.4 No Changes. There shall have been no material adverse change
since the date hereof in the financial condition, results of operations,
business, prospects, assets or properties of VTI.
9.5 Audits. Purchaser shall have completed, to its satisfaction, all
legal, operational, and financial investigations, audits, due diligence, and
other reviews of VTI and any and all assets and properties of VTI.
9.6 VTI Authorization. The Sellers and VTI shall have delivered to
Purchaser a certificate of the corporate secretary of VTI in a form
satisfactory to Purchaser to the effect that the execution, delivery and
performance of this Agreement by VTI and consummation of the transactions
contemplated by this Agreement have been duly authorized by the board of
directors of VTI.
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 Expenses. Whether or not the transactions contemplated hereby are
consummated, the Sellers, VTI and Purchaser each will pay all costs and
expenses incurred by them in connection with the negotiation, preparation
and execution of this Agreement and the closing of the transactions
contemplated hereby.
10.2 Survival of Representations; Indemnification.
(a) Survival. Other than the warranties and representations set forth
in Section 3.22 hereof with respect to taxes, which shall remain in
effect for the applicable statute of limitations, and the warranties
and representations set forth herein in Sections 3.3, 3.5, 3.6, 3.11(a)
and 4.1 pertaining to title and authority, which shall remain in effect
indefinitely, all other representations, warranties, covenants and
agreements made by the parties to this Agreement or pursuant hereto
shall survive for a period of eighteen (18) months following the
Closing Date; provided, however, all claims made by virtue of such
representations, warranties and agreements shall be made under, and
subject to, the limitations set forth in this Section 10.2. To
preserve any claim for breach of any such representation, warranty or
agreement, the party claiming a breach shall be obligated to notify the
party claimed to be in breach in writing of any such breach, stating
the facts regarding such breach, before termination of the survival
period; otherwise such party's claim for breach shall be forever
barred.
(b) The Sellers' Agreement to Indemnify.
(i) Indemnification. Subject to the limitations, conditions, and
provisions set forth herein, the Sellers each agree, jointly and
severally, to indemnify, defend and hold harmless Purchaser from and
against all out of pocket funds expended to satisfy all demands,
claims, actions, losses, damages, liabilities, costs and expenses
asserted against or incurred by Purchaser resulting from a breach of
any covenant, agreement, representation or warranty of VTI and/or the
Sellers contained in this Agreement (collectively, "Purchaser
Damages"). Purchaser Damages shall be calculated after giving effect
to any insurance recoveries or tax benefits to be realized by
Purchaser for the transaction which gives rise to the Purchaser's
claim for indemnity; provided, further, the liability of Sellers
hereunder shall be several only, and not joint and several, as to any
Seller with respect to whose shares of VTI stock there is claimed any
lien, encumbrance, claim, restriction or lack of authority which
results in the breach of a representation or warranty by the Sellers
under this Agreement,
(ii) Conditions of Indemnification. The obligations and liabilities of
the Sellers under this Section 10.2(b) with respect to claims for
Purchaser Damages resulting from the assertion of liability by
third parties ("Purchaser Claims") shall be subject to the
following terms and conditions:
(A) Within 20 days after receiving notice thereof, Purchaser
will give the Seller Representative notice of any
Purchaser Claims asserted against or incurred by
Purchaser. The Seller Representative may undertake the
defense thereof by counsel of his own choosing.
Purchaser may, by counsel, participate in such
proceedings, negotiations or defense at its own expense,
but the Seller Representative shall retain control over
such litigation. In all such cases, Purchaser will give
reasonable assistance to the Seller Representative.
(B) In the event that, within 20 days after notice of any
such Purchaser Claim, the Seller Representative fails to
notify Purchaser of his intention to defend, Purchaser
will have the right to undertake the defense, compromise
or to participate in such proceedings, negotiations or
defense at any time at its own expense. Purchaser shall
not settle any such Purchaser Claim without the consent
of the Seller Representative, which consent shall not be
unreasonably withheld.
(c) Purchaser's Agreement to Indemnify.
(i) Indemnification. The Purchaser agrees to indemnify, defend
and hold harmless Sellers from and against all demands,
claims, actions, losses, damages, liabilities, costs and
expenses asserted against or incurred by Sellers resulting
from the failure of VTI to pay any amount or perform any
obligation under any of the Contracts to the extent such
payment or obligation accrues after the Closing Date, and/or
any of the liabilities as reflected on the Balance Sheet or
resulting from a breach of any covenant, agreement,
representation or warranty of Purchaser contained in this
Agreement (collectively, "Sellers Damages").
(ii) Conditions of Indemnification. The obligations and
liabilities of the Purchaser under this Section 10.2(c) with
respect to claims for Sellers Damages resulting from the
assertion of liability by third parties ("the Sellers
Claims") shall be subject to the following terms and
conditions:
(A) Within 20 days after receiving notice thereof, the
Sellers will give the Purchaser notice of any the
Sellers Claims asserted against or incurred by the
Sellers. The Purchaser may undertake the defense
thereof by counsel of its own choosing. The Sellers
may, by counsel, participate in such proceedings,
negotiations or defense at their own expense, but the
Purchaser shall retain control over such litigation. In
all such cases, the Sellers will give reasonable
assistance to the Purchaser.
(B) In the event that, within 20 days after notice of any
such Sellers Claim, the Purchaser fails to notify the
Sellers of its intention to defend, the Sellers will
have the right to undertake the defense, compromise or
to participate in such proceedings, negotiations or
defense at any time at their own expense. The Sellers
shall not settle any such Sellers Claim without the
consent of the Purchaser, which consent shall not be
unreasonably withheld.
(d) Limitations. The Sellers' and the Purchaser's respective
indemnification obligations under this Agreement by reason of a
breach of a representation or warranty shall not apply to any
Purchaser Damages or Sellers' Damages, respectively, which, in the
aggregate, are less than $350,000; provided, however, that
Sellers' and Purchaser's respective indemnification obligations
shall apply to all Purchaser Damages or Seller Damages,
respectively, including all such damages which did not meet the
foregoing threshold, if and when the aggregate of all such damages
exceed $350,000, and provided further that Sellers shall not be
liable for any Purchaser Damages to the extent that they exceed,
in the aggregate, the sum of $3,500,000. In the absence of
intentional fraud, the Indemnification provisions of this
Article X shall be the sole and exclusive remedy and procedure for
the assertion by either party of any claim or cause of action
arising out of or in connection with this Agreement and the
transaction contemplated hereby.
10.3 Further Assurances. From time to time after the Closing Date,
without further consideration, the parties will execute and deliver, or
cause to be executed and delivered, such documents to the other as the other
may reasonably request.
10.4 Amendment and Modification. This Agreement may be amended,
modified or supplemented only by the written agreement of the parties with
respect to any of the terms, conditions or provisions contained herein.
10.5 Waiver of Compliance; Consents. Except as otherwise provided in
this Agreement, any failure of any of the parties to comply with any
obligation, representation, warranty, covenant, agreement or condition
herein may be waived by the party entitled to the benefits thereof only by a
written instrument signed by the party granting such waiver, but such waiver
or failure to insist upon strict compliance with such obligation,
representation, warranty, covenant, agreement or condition shall not operate
as a waiver of, or estoppel with respect to, any subsequent or other
failure. Whenever this Agreement requires or permits consent by or on
behalf of any party hereto, such consent shall be given in writing in a
manner consistent with the requirements for a waiver of compliance as set
forth in this Section.
10.6 Notices. All notices and other communications hereunder shall be
in writing and shall be deemed given when delivered by hand (including
overnight mail service) or by facsimile transmission or three days after
deposit in the U.S. mail if mailed by registered or certified mail (return
receipt requested), postage prepaid, to the parties at the following
addresses (or at such other address for a party as shall be specified by
like notice, provided that notices of a change of address shall be effective
only upon receipt thereof);
If to the Sellers and/or VTI: Scott Almquist, Seller Representative
1 Spectrum Pointe Drive, Suite 325
Lake Forest, California 92630
Fax: (949) 598-8755
If to Purchaser: Jack Henry & Associates, Inc.
663 Highway 60
Monett, Missouri 65708
Attention: Tony Wormington
Fax: (417) 235-1765
10.7 Assignment. This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, and shall not confer upon any
other person except the parties hereto any rights or remedies hereunder.
Neither this Agreement nor any of the rights, interests or obligations
hereunder may be assigned by either party; provided, however, that Purchaser
may assign its rights and interests hereunder to a wholly owned subsidiary
of Purchaser upon the receipt of the prior written consent of the Sellers.
10.8 Governing Law; Jurisdiction The execution, interpretation and
performance of this Agreement shall be governed by the internal laws and
judicial decisions of the State of Missouri. In any action or proceeding
arising directly or indirectly from this Agreement, the prevailing party
shall be entitled to recover its attorney's fees, in addition to other costs
of suit.
10.9 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10.10 Interpretation. The article and section headings contained
in this Agreement are solely for the purpose of reference, are not part of
the agreement of the parties and shall not in any way affect the meaning or
interpretation of this Agreement. As used herein, the singular shall
include the plural and the plural the singular, and the use of any gender
shall be applicable to all genders.
10.11 Entire Agreement. This Agreement, including the Exhibits
hereto and the documents delivered pursuant to this Agreement and paragraph
1 of the LOI, embody the entire agreement and understanding of the parties
hereto in respect of the subject matter hereof. The Exhibits hereto are an
integral part of this Agreement and are incorporated by reference herein.
This Agreement supersedes all prior agreements and understandings between
the parties with respect to the transactions contemplated hereby.
10.12 Severability. If any provision of this Agreement is held
invalid or unenforceable for any reason, such invalidity or unenforceability
will not affect the validity of the remaining provisions hereof, which shall
continue in full force and effect.
10.13 Tax Matters. The Seller Representative shall cause to be
prepared at VTI's expense all income tax returns of VTI for all taxable
periods of VTI ending on or prior to the Closing Date on a basis consistent
with the returns filed for the year ended December 31, 2003 and the
transactions contemplated by this Agreement, and the Purchaser shall cause
VTI to execute, verify and timely and duly file such tax returns in the form
so prepared. The Purchaser and the Seller Representative shall cooperate
with each other in the conduct of any audit or other proceedings involving
liability for taxes of VTI for periods beginning before the Closing Date and
each may participate at its own expense, provided that the Seller
Representative shall have the right to control the conduct of any such audit
or proceeding for which the Seller Representative agrees that any resulting
tax is covered by the indemnity provisions of this Agreement. After the
Closing Date, the Purchaser, VTI and the Seller shall make available to the
other, as reasonably requested, all information, records or documents (to
the extent in their possession or control in the case of the Sellers)
relating to tax liabilities or potential tax liabilities of VTI and shall
preserve all such information, records and documents until the expiration of
any applicable statute of limitations, including extensions thereof, or such
other period as required by law. Any indemnification payments made to the
Seller or VTI or the Purchaser pursuant to this Article X shall constitute
an adjustment of the Purchase Price for tax purposes and shall be treated as
such by the Purchaser, VTI and the Sellers on their tax returns to the
extent permitted by law.
10.14 Appointment of Seller Representative.
(a) Powers of Attorney. Each Seller irrevocably constitutes and
appoints Scott Almquist (the "Seller Representative") as such
Seller's true and lawful agent, proxy and attorney-in-fact and
agent and authorizes the Representative acting for such Seller and
in such Seller's name, place and stead, in any and all capacities
to do and perform every act and thing required or permitted to be
done in connection with the below described transactions
contemplated by this Agreement, as fully to all intents and
purposes as such Person might or could do in person, including,
without limitation:
(i) Determine the presence (or absence) of claims for
indemnification against the Purchaser pursuant to Section
10.2(c) above;
(ii) Deliver all notices required to be delivered by such Seller
under this Agreement, including, without limitation, any
notice of a claim for which indemnification is sought under
Section 10.2 above;
(iii) Receive all notices required to be delivered to such
Seller under this Agreement, including, without limitation,
any notice of a claim for which indemnification is sought
under Section 10.2 above;
(iv) Take any and all action on behalf of such Seller from time to
time as the Representative may deem necessary or desirable to
defend, pursue, resolve, and/or settle claims under this
Agreement, including, without limitation, indemnification
under Section 10.2 above and the determination of amounts
under Section 2.2 above;
(v) Take the actions contemplated to be taken by the Seller
Representative pursuant to Section 10.13 above;
(vi) Exercise the right to terminate this Agreement pursuant to
Section 2.3 of this Agreement or otherwise; and
(vii) Enter into post-closing amendments to this Agreement.
(b) Replacement of the Seller Representative. Upon the death,
disability, or incapacity of the initial Seller Representative
appointed pursuant to Section 10.14 (a) above, each Seller
acknowledges and agrees that such Representative's executor,
guardian, or legal representative, as the case may be, shall (in
consultation with Sellers) appoint a replacement reasonably
believed by such person as capable of carrying out the duties and
performing the obligations of the Seller Representative hereunder
within thirty (30) days. In the event that the Seller
Representative resigns for any reason, the Representative shall
(in consultation with Sellers) select another representative to
fill such vacancy. Any substituted representative shall be deemed
the Seller Representative for all purposes of this Agreement and
the other Transaction Documents.
(c) Actions of the Representative. Each Seller agrees that Purchaser
shall be entitled to rely on any of the above described actions
taken by the Seller Representative, on behalf of Sellers, pursuant
to Section 10.14(a) above (each, an "Authorized Action"), and that
each Authorized Action shall be binding on each Seller as fully as
if such Seller had taken such Authorized Action. Sellers jointly
and severally agree to pay, and to indemnify and hold harmless the
Purchaser from and against any losses which they may suffer,
sustain, or become subject to, as the result of any claim by any
Person that an Authorized Action is not binding on, or enforceable
against Sellers.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first above written.
VTI
---
VERINEX TECHNOLOGIES, INC.
By:
---------------------------------------
Scott Almquist, President
SELLERS
-------
ALMQUIST FAMILY TRUST
By:
---------------------------------------
Scott Almquist, Trustee
---------------------------------------
William S. Watson
---------------------------------------
Traci Jo Watson
---------------------------------------
Aaron Watson
---------------------------------------
Vanessa Watson
---------------------------------------
Sean Walwick
---------------------------------------
Cynthia Walwick
PURCHASER
---------
JACK HENRY & ASSOCIATES, INC.
By:
---------------------------------------
John F. Prim, Chief Executive Officer
EXHIBIT 31.1
CERTIFICATION
-------------
I, John F.Prim, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Jack Henry &
Associates, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information ; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls
over financial reporting.
Date: November 9, 2004
/s/ John F. Prim
------------------------------
John F. Prim
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
-------------
I, Kevin D. Williams, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Jack Henry &
Associates, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information ; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls
over financial reporting.
Date: November 9, 2004 /s/ Kevin D. Williams
-------------------------------
Kevin D. Williams
Chief Financial Officer
EXHIBIT 32.1
Written Statement of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350
Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the
undersigned Chief Executive Officer of Jack Henry & Associates, Inc. (the
"Company"), hereby certify that the Quarterly Report on Form 10-Q of the
Company for the three months ended September 30, 2004 (the "Report") fully
complies with the requirements of Section 13(a) of the Securities Exchange
Act of 1934 and that information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations of
the Company.
Dated: November 9, 2004
*/s/ John F. Prim
------------------------------------
John F. Prim
Chief Executive Officer
* A signed original of this written statement required by Section 906 has
been provided to Jack Henry & Associates, Inc. and will be retained by Jack
Henry & Associates, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
EXHIBIT 32.2
Written Statement of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the
undersigned Chief Financial Officer of Jack Henry & Associates, Inc. (the
"Company"), hereby certify that the Quarterly Report on Form 10-Q of the
Company for the three months ended September 30, 2004 (the "Report") fully
complies with the requirements of Section 13(a) of the Securities Exchange
Act of 1934 and that information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations of
the Company.
Dated: November 9, 2004
*/s/ Kevin D. Williams
------------------------------------
Kevin D. Williams
Chief Financial Officer
* A signed original of this written statement required by Section 906 has
been provided to Jack Henry & Associates, Inc. and will be retained by Jack
Henry & Associates, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
