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 December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 0-14112
JACK HENRY & ASSOCIATES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 43-1128385
---------------------------- ---------------
(State or other jurisdiction I.R.S. Employer
of incorporation) Identification No.)
663 Highway 60, P. O. Box 807, Monett, MO 65708
------------------------------------------------
(Address of principal executive offices)
(Zip Code)
417-235-6652
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
---------------------------------------------------------------------
(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
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 January 24, 2003, Registrant had 87,687,789 shares of common
stock outstanding ($.01 par value).
JACK HENRY & ASSOCIATES, INC.
CONTENTS
PART I FINANCIAL INFORMATION PAGE NO.
Item 1 Financial Statements
Condensed Consolidated Balance Sheets 3
December 31, 2002, (Unaudited) and June 30, 2002
Condensed Consolidated Statements of Income for the 4
Three and Six Months Ended December 31, 2002 and
2001 (Unaudited)
Condensed Consolidated Statements of Cash Flows for 5
the Six Months Ended December 31, 2002 and 2001
(Unaudited)
Notes to the Condensed Consolidated Financial 6
Statements (Unaudited)
Item 2 Management's Discussion and Analysis of Results of 9
Operations and Financial Condition
Item 3 Quantitative and Qualitative Disclosure about Market 12
Risk
Item 4 Controls and Procedures 13
PART II OTHER INFORMATION
Item 5 Other Information 13
Item 6 Exhibits and Reports on Form 8-K 13
Part I. Financial Information
Item 1. Financial Statements
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
DECEMBER 31, JUNE 30,
2002 2002
----------- -----------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 30,209 $ 17,765
Investments, at amortized cost 998 997
Trade receivables 74,090 131,431
Prepaid cost of product 16,310 17,663
Prepaid expenses and other 12,522 11,221
Deferred income taxes 800 900
----------- -----------
Total $ 134,929 $ 179,977
PROPERTY AND EQUIPMENT, net $ 188,201 $ 173,775
OTHER ASSETS:
Goodwill 42,503 40,335
Trade names 3,699 3,699
Customer relationships, net of amortization 61,778 63,130
Computer software, net of amortization 10,689 7,499
Prepaid cost of product 12,767 12,992
Other non-current assets 5,015 4,735
----------- -----------
Total $ 136,451 $ 132,390
----------- -----------
Total assets $ 459,581 $ 486,142
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 9,929 $ 9,051
Accrued expenses 10,731 11,352
Accrued income taxes 1,087 225
Deferred revenues 61,738 92,028
----------- -----------
Total $ 83,485 $ 112,656
DEFERRED REVENUES 16,415 16,947
DEFERRED INCOME TAXES 19,300 15,800
----------- -----------
Total liabilities $ 119,200 $ 145,403
STOCKHOLDERS' EQUITY:
Preferred stock - $1 par value; 500,000
shares authorized; None issued - -
Common stock - $.01 par value; shares
authorized 250,000,000; Shares issued
at 12/31/02 and 6/30/02 90,519,856 905 905
Additional paid-in capital 168,166 168,061
Retained earnings 217,417 201,162
Treasury stock at cost; 2,839,067 shares
at 12/31/02; 1,568,910 shares at 6/30/02 (46,107) (29,389)
----------- -----------
Total stockholders' equity $ 340,381 $ 340,739
----------- -----------
Total liabilities and stockholders' equity $ 459,581 $ 486,142
=========== ===========
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 Six Months Ended
December 31, December 31,
------------------- --------------------
2002 2001 2002 2001
------- ------- ------- -------
REVENUES
License $ 13,807 $ 16,017 $ 25,876 $ 30,788
Support and service 57,339 48,745 111,180 97,850
Hardware sales 24,163 26,783 45,733 49,039
Customer reimbursements 7,254 6,682 13,752 13,117
------- ------- ------- -------
Total $102,563 $ 98,227 $196,541 $190,794
COST OF SALES
Cost of license 975 131 1,766 387
Cost of services 39,605 34,032 75,017 65,980
Cost of hardware 17,863 18,371 34,027 33,250
Customer reimbursement
expenses 7,254 6,682 13,752 13,117
------- ------- ------- -------
Total $ 65,697 $ 59,216 $124,562 $112,734
------- ------- ------- -------
GROSS PROFIT $ 36,866 $ 39,011 $ 71,979 $ 78,060
OPERATING EXPENSES
Selling and marketing 7,661 6,975 14,860 13,544
Research and development 3,962 3,543 7,513 6,453
General and administrative 7,012 8,657 13,748 16,162
------- ------- ------- -------
Total $ 18,635 $ 19,175 $ 36,121 $ 36,159
------- ------- ------- -------
OPERATING INCOME $ 18,231 $ 19,836 $ 35,858 $ 41,901
INTEREST INCOME (EXPENSE)
Interest income 191 571 378 1,390
Interest expense (32) (41) (55) (88)
------- ------- ------- -------
Total $ 159 $ 530 $ 323 $ 1,302
------- ------- ------- -------
INCOME BEFORE INCOME TAXES $ 18,390 $ 20,366 $ 36,181 $ 43,203
PROVISION FOR INCOME TAXES 6,713 7,332 13,206 15,553
------- ------- ------- -------
NET INCOME $ 11,677 $ 13,034 $ 22,975 $ 27,650
======= ======= ======= =======
Diluted income per share $ .13 $ .14 $ .26 $ .30
======= ======= ======= =======
Diluted weighted average
shares outstanding 88,812 92,247 89,196 92,485
======= ======= ======= =======
Basic net income per share $ .13 $ .15 $ .26 $ .31
======= ======= ======= =======
Basic weighted average
shares outstanding 87,680 88,982 87,882 88,967
======= ======= ======= =======
See notes to condensed consolidated financial statements.
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended
December 31,
-----------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 22,975 $ 27,650
Adjustments to reconcile net income to cash
from operating activities:
Depreciation 11,917 9,921
Amortization 3,126 3,305
Deferred income taxes 3,600 (486)
Other, net (27) (57)
Changes in:
Trade receivables 57,486 25,235
Prepaid expenses and other (18) (3,113)
Accounts payable 867 (8,610)
Accrued expenses (623) (1,442)
Income taxes (including tax benefit from
exercise of stock options) 972 6,284
Deferred revenues (30,941) (9,137)
-------- --------
Net cash from operating activities $ 69,334 $ 49,550
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures $ (26,303) $ (23,145)
Purchase of investments (1,993) (996)
Proceeds from maturity of investments 2,000 1,000
Purchase of customer contracts (304) -
Payment for acquisition, net (4,151) (2,923)
Computer software developed/purchased (2,726) (402)
Other, net 25 30
-------- --------
Net cash from investing activities $ (33,452) $ (26,436)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon
exercise of stock options $ 470 $ 6,830
Proceeds from sale of common stock, net 402 391
Dividends paid (6,145) (5,339)
Principal payments on notes payable - (45)
Purchase of treasury stock (18,165) (6,708)
-------- --------
Net cash from financing activities $ (23,438) $ (4,871)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 12,444 $ 18,243
Cash and cash equivalents at
beginning of period 17,765 18,589
-------- --------
Cash and cash equivalents at
end of period $ 30,209 $ 36,832
======== ========
See notes to condensed consolidated financial statements
Net cash paid for income taxes was $8,635 and $9,312 for the six months
ended December 31, 2002 and 2001, respectively.
The Company paid interest of $55 and $72 for the six months ended
December 31, 2002 and 2001, respectively.
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
Jack Henry & Associates, Inc. ("JHA" or the "Company") is a computer
software company, which has developed or acquired several banking and credit
union software systems. The Company's revenues are predominately earned by
marketing those systems to financial institutions nationwide together with
computer equipment (hardware) and by providing the conversion and software
customization services for a financial institution to install a JHA software
system. JHA also provides continuing support and services to customers
using the systems either in-house or outsourced.
CONSOLIDATION
The condensed consolidated financial statements include the accounts of JHA
and all of its wholly owned subsidiaries and all significant intercompany
accounts and transactions have been eliminated.
COMPREHENSIVE INCOME
Comprehensive income for each of the three and six-month periods ended
December 31, 2002 and 2001, equals the Company's net income.
RECLASSIFICATION
Where appropriate, prior period financial information has been reclassified
to conform with the current period's presentation.
OTHER SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by the Company are set forth in Note 1 to
the Company's consolidated financial statements included in its Annual
Report on Form 10-K ("Form 10-K") for the fiscal year ended June 30, 2002.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No.144, Accounting for
the Impairment or Disposal of Long-Lived Assets, was issued in August 2001.
This Statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This Statement supersedes SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of, and the accounting and reporting provisions
of Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business (as previously
defined in that Opinion). The provisions of this Statement are effective
for financial statements issued for fiscal years beginning after
December 15, 2001 (July 1, 2002 for JHA), and interim periods within those
fiscal years, with early application encouraged. The adoption of this
standard on July 1, 2002 did not have a material effect on the Company's
consolidated financial position or results of operations.
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections. Under this new standard,
gains and losses from extinguishments of debt should be classified as
extraordinary items only if they meet the criteria in APB Opinion No. 30.
Applying the provision of APB Opinion No. 30 will distinguish transactions
that are part of an entity's recurring operations from those that are
unusual or infrequent or that meet the criteria for classification as an
extraordinary item. The adoption of this standard on July 1, 2002, did not
have a material effect on the Company's consolidated financial position or
results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which is effective for any activity
initiated after December 31, 2002. This standard addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). This standard
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value only when the
liability is incurred. The accounting for similar events and circumstances
will be the same, thereby improving the comparability and representational
faithfulness of reported financial information. The adoption of this
standard on January 1, 2003 did not have a material impact on its
consolidated financial position or results of operations.
Effective November 22, 2002, the Emerging Issues Task Force ("EITF") reached
a consensus regarding EITF Issue No. 02-16, Accounting by a Customer,
Including a Reseller, for Cash Consideration Received from a vendor. This
consensus requires that payments from a vendor be classified as a reduction
to the price of the vendor's goods and taken as a reduction to cost of sales
unless the payments are (1) a reimbursement for costs incurred to sell the
product or (2) a payment for assets or services provided. The consensus
also requires that payments from a vendor be recognized as a reduction to
cost of sales on a rational and systematic basis. This consensus is
effective for fiscal years beginning after December 15, 2002 (July 1, 2003
for JHA). The Company does not expect the adoption of this consensus to
have a material impact on its consolidated financial position or results of
operation.
In November 2002, FASB Interpretations No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and
107 ("FIN 45") was issued. FIN 45 elaborates on the disclosures to be made
by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that is has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing a
guarantee. The initial recognition and initial measurement provisions of
this Interpretation are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of the guarantor's
fiscal year-end. The disclosure requirements in this Interpretation are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of this Interpretation on January 1, 2003
did not have a material effect on the Company's consolidated financial
position or results of operations.
3. 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 Form 10-K for the year
ended June 30, 2002.
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 December 31, 2002, the results of
its operations and its cash flows for the three and six-month periods ended
December 31, 2002 and 2001.
The results of operations for the period ended December 31, 2002 are not
necessarily indicative of the results to be expected for the entire year.
4. ADDITIONAL INTERIM FOOTNOTE INFORMATION
The following additional information is provided to update the notes to the
Company's annual consolidated financial statements for developments during
the six months, ended December 31, 2002:
Stock Repurchase Program
On October 4, 2002, the Company's Board of Directors increased its existing
stock repurchase authorization by 3.0 million shares to 6.0 million total
shares. On September 21, 2001, the Board of Directors had originally
approved a program to repurchase up to 3.0 million shares of common stock.
As of December 31, 2002, 3,009,384 shares have been purchased for $49.1
million. During the three and six-month periods ended December 31, 2002,
the Company purchased 249,200 and 1,356,200 shares for $2.3 million and
$18.2 million, respectively. During the three and six-month periods ended
December 31, 2002, the Company issued 5,737 and 54,687 shares upon exercise
of stock options and 16,141 and 31,356 shares to the Employee Stock Purchase
Plan, respectively, leaving a balance of 2,839,067 treasury shares at a cost
of $46.1 million at December 31, 2002.
Acquisition of Credit Union Solutions, Inc. (CUSI)
On November 15, 2002, the Company acquired all the outstanding shares
of CUSI for $5.0 million in cash. CUSI provides in-house data processing
software, related hardware and services to smaller credit unions, primarily
those with assets less than $50 million. This acquisition expands the
potential market for the Company, as the Company's existing core products
were too expensive to sell to credit unions of this size. The purchase
price for CUSI was allocated to the assets and liabilities acquired based on
then estimated fair values at the acquisition date, resulting in allocation
to goodwill of $2.2 million, software of $1.2 million, and customer
contracts of $0.7 million, of which software and customer contracts are
being amortized on a straight-line basis over a period of ten and twenty
years, respectively. The accompanying consolidated financial statements do
not include any revenues and expenses related to this acquisition prior to
the closing date.
5. SHARES USED IN COMPUTING NET INCOME PER SHARE
(In Thousands)
Three Months Ended Six Months Ended
December 31, December 31,
--------------- -----------------
2002 2001 2002 2001
------ ------ ------ ------
Weighted average number of common
shares outstanding - basic 87,680 88,982 87,882 88,967
Common stock equivalents 1,132 3,265 1,314 3,518
------ ------ ------ ------
Weighted average number of common
and common equivalent shares
outstanding - diluted 88,812 92,247 89,196 92,485
====== ====== ====== ======
Per share information is based on the weighted average number of common
shares outstanding for the periods ended December 31, 2002 and 2001. 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 6,173,368 shares and
658,228 shares for the three month periods ended December 31, 2002 and 2001,
respectively, were not included in the computation of diluted income per
common share.
6. BUSINESS SEGMENT INFORMATION
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 evaluates the performance of the
banking and credit union segments and allocates resources to them based on
various factors, including prospects for growth, return on investment and
return on revenues.
(In Thousands)
Three Months Ended Six Months Ended
December 31, December 31,
--------------- -----------------
2002 2001 2002 2001
------- ------- ------- -------
Revenues
Bank systems and services $ 87,768 $ 83,500 $168,470 $162,527
Credit union systems and services 14,795 14,727 28,071 28,267
------- ------- ------- -------
Total $102,563 $ 98,227 $196,541 $190,794
======= ======= ======= =======
Gross Profit
Bank systems and services $ 33,328 $ 34,657 $ 64,261 $ 68,830
Credit union systems and services 3,538 4,354 7,718 9,230
------- ------- ------- -------
Total $ 36,866 $ 39,011 $ 71,979 $ 78,060
======= ======= ======= =======
(In Thousands)
December 31, June 30,
2002 2002
-------- --------
Property and equipment, net
Bank systems and services $ 185,779 $ 170,882
Credit union systems and services 2,422 2,893
-------- --------
Total $ 188,201 $ 173,775
======== ========
Intangible assets, net
Bank systems and services $ 17,590 $ 49,531
Credit union systems and services 58,576 24,797
-------- --------
Total $ 76,166 $ 74,328
======== ========
Goodwill
Bank systems and services $ 25,495 $ 25,491
Credit union systems and services 17,008 14,844
-------- --------
Total $ 42,503 $ 40,335
======== ========
7. SUBSEQUENT EVENT
Acquisition of National Bancorp Data Services, LLC (NBDS)
On January 1, 2003, the Company acquired all the outstanding membership
interests in NBDS for $2.1 million in cash. NBDS provides item processing
and imaging services to financial institutions in the greater Chicago,
Illinois area. This acquisition expands our geographic footprint for item
processing centers and expands the potential market for outsourcing
customers. The purchase price for NBDS was allocated to the assets and
liabilities acquired based on then estimated fair values at the acquisition
date. The accompanying consolidated financial statements do not include any
revenues and expenses related to this acquisition.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Background and Overview
Jack Henry and Associates, Inc. provides integrated computer systems for in-
house and outsourced data processing to commercial banks with under $10.0
billion in total assets, credit unions and other financial institutions. The
Company has developed and acquired banking and credit union application
software systems that we market, together with compatible computer hardware,
to financial institutions throughout the United States. The Company also
performs data conversion and software installation for the implementation of
our systems and provides continuing customer support and services after the
systems are installed. For our customers who prefer not to make an up-front
investment in software and hardware, we provide our full range of products
and services on an outsourced basis through our eight data centers and
fifteen item processing centers, as of January 1, 2003, located across the
United States.
A detailed discussion of the major components of the results of operations
for the three and six-month periods ended December 31, 2002 compared to the
same period in the previous year follows:
REVENUE - Revenues increased 4% to $102.6 million for the three months ended
December 31, 2002 from $98.2 million for the same period last year. Non-
hardware revenues increased 10% to $78.4 million, accounting for 76% of
second quarter fiscal 2003 revenues, compared to $71.4 million in the second
quarter a year ago, representing 73% of revenue. License fee revenues
decreased 14% to $13.8 million compared to $16.0 million in the second
quarter a year ago. Support and services revenues increased 18% to $57.3
million for the three months ended December 31, 2002 compared to $48.7
million in the same period in the previous year. Hardware revenues
decreased 10% to $24.2 million and represented 24% of total revenues for the
second quarter compared to $26.8 million or 27% of total revenues in the
same period in the previous year.
For the six months ended December 31, 2002, revenues increased 3% to $196.5
million from $190.8 million for the same period last year. Non-hardware
revenues increased 6% to $150.8 million, accounting for 77% of the year to
date revenues, compared to $141.8 million for the same period a year ago,
representing 74% of revenue. License fee revenues decreased 16% to $25.9
million compared to $30.8 million for the same period a year ago. Support
and services revenues increased 14% to $111.2 million for the six months
ended December 31, 2002 compared to $97.9 million last year. Hardware
revenues decreased 7% to $45.7 million and represented 23% of total revenues
for the six months ended December 31, 2002, compared to $49.0 million or 26%
of total revenues for the same period last year.
Support and services revenue growth for the three and six months ended
December 31, 2002 compared to the same periods last year is composed of
$2.3 million and $5.6 million growth in outsourcing services, $1.5 million
and $2.9 million growth in ATM and debit card processing services, $4.7
million and $5.9 million growth in in-house support revenue and $0.2 million
increase and $1.1 million decrease in installation services, respectively.
We believe that the current decline in licensing and hardware revenue is due
to the industry-wide softness and reduction in spending in the capital goods
marketplace. Our complementary and credit union products have remained
strong contributors during these weak economic times. Based on current
economic conditions and sales forecast, we do not anticipate significant
changes in revenue mix or gross profit in the near term. However, we remain
confident that when the market recovers, we will be positioned to generate
strong sales.
Our backlog increased at December 31, 2002 to $158.0 million ($57.6 in-house
and $100.4 outsourcing) from $141.7 million ($52.8 in-house and $88.9
outsourcing) at June 30, 2002 and $132.1 million ($52.3 in-house and $79.8
outsourcing) at December 31, 2001.
COST OF SALES - Cost of sales increased 11% for the three months ended
December 31, 2002 from $59.2 million in December 31, 2001 to $65.7 million.
Cost of licensing increased $0.8 million to $1.0 million for the three
months ended December 31, 2002, compared to $0.1 million, in the same period
in the prior year. Cost of services and customer reimbursements increased
15% to $46.9 million from $40.7 million. Cost of hardware decreased 3% to
$17.9 million for the three months ended December 31, 2002 from $18.3
million for the same three-month period last year.
Cost of sales increased 10% for the six months ended December 31, 2002 from
$112.7 million in December 31, 2001 to $124.6 million. Cost of licensing
increased $1.4 million to $1.8 million compared to $0.4 million. Cost of
services and customer reimbursements increased 12% to $88.8 million from
$79.1 million. Cost of hardware increased 2% to $34.0 million for the six
months ended December 31, 2002 from $33.2 million for the same six months
last year.
Cost of services and customer reimbursements increased for the three and
six-months ended December 31, 2002, primarily due to the increase in
outsourcing, ATM and debit card transactions processing and in-house support
revenue. While license sales decreased, the cost of software increased due
to our increased sales of third party software. Total employee related
expense increased 13% and 11% or $3.1 million and $4.8 million,
respectively, for the three and six-month periods ended December 31, 2002 to
support the increase in support and services revenues. The increase in
employee expenses includes an 11% increase in personnel headcount this year
as compared to the prior year. There was also an overall increase of 14% or
$1.8 million in depreciation and amortization expense for the six months
ended December 31, 2002 compared to the prior year due to capital
expenditures being placed in services during the prior twelve months.
Cost of hardware decreased 3% for the second quarter compared to the 10%
decrease in hardware revenues due to the industry wide continued slow down
in technology spending coupled with the effect of reduced incentives from
hardware suppliers. The cost of hardware increased 2% for the six months
ended December 31, 2002 compared to the 7% decrease in hardware revenue. In
addition, the changes in revenue and cost of hardware were significantly
impacted by large hardware discounts offered by vendors and passed through
to the customers, which created an increase in units sold, but at reduced
levels of total revenue and profit margins. These special discounts, as
distinguished from dealer incentives, were offered for a limited time and we
do not anticipate them to be repeated in the near term. Based on current
economic conditions and vendor incentives being offered, we do not
anticipate other significant changes in hardware costs and related margins
in the immediate future.
GROSS PROFIT - Gross profit decreased 6% to $36.9 million or 36% of revenue
compared to $39.0 million or 40% of revenue in the second quarter of 2002.
Non-hardware margin was 39% for this quarter compared to 43% in the same
quarter last year. Hardware margin was 26% compared to 31% in the second
quarter a year ago.
Gross profit decreased 8% to $72.0 million or 37% of revenue for the six
months ended December 31, 2002, compared to $78.0 million or 41% of revenue
for the same period in the prior year. Non-hardware margin was 40% for the
six months ended December 31, 2002 compared to 44% for the same period last
year. For the first half of 2003, hardware margin was 26% compared to 32%
for the same period last year.
Gross profit margins decreased due to the various reasons and observations
described above.
OPERATING EXPENSES - Total operating expenses decreased 3% to $18.6 million
in the three months ended December 31, 2002 compared to $19.2 million in the
same period for the prior year. Selling and marketing expenses increased
10%, research and development expenses increased 12% and general and
administrative expenses decreased 19% in the same three- month period.
For the six months ending December 31, 2002 and 2001, operating expenses
remained the same at $36.1 million. Selling and marketing expenses
increased 10%, research and development expenses increased 16% and general
and administrative expenses decreased 15% for the same six-month period.
Selling and marketing expense increased 10% for the quarter and six months
ended December 31, 2002, primarily due to a similar increase in personnel
costs related to increased size of our sales force. Research and
development increased 12% and 16% for the three and six-months ended
December 31, 2002, respectively, primarily due to increases in personnel to
allow for continued development of new products and improvement of existing
products. General and administrative expenses decreased 19% and 15% for the
quarter and six-months ended December 31, 2002, respectively, mainly due to
continued efforts to control expenses by management and lower employee
benefit costs this year in our self-insured health care benefits. Health
care benefits included in general and administrative expense decreased $1.0
million and $1.7 million for the quarter and six-months ended December 31,
2002, compared to the same periods last year.
INTEREST INCOME (EXPENSE) - Net interest income for the three and six months
ended December 31, 2002 reflects decreases of $372,000 and $979,000,
respectively, when compared to the same periods last year due to lower
interest rates on our cash investments and decreased borrowings.
PROVISION FOR INCOME TAXES - The provision for income taxes was $6.7
million, or 36.5% of income before income taxes for the three months ended
December 31, 2002 compared with $7.3 million or 36% of income before income
taxes for the same period last year. The provision for income taxes was
$13.2 million, or 36.5% of income before income taxes for the six months
ended December 31, 2002 compared with $15.6 million or 36% of income before
income taxes for the same period last year
NET INCOME - Net income for the second quarter was $11.7 million or $.13 per
diluted share compared to $13.0 million, or $.14 per diluted share in the
same period last year. For the six months ended December 31, 2002, net
income was $23.0 million or $.26 per diluted share compared to $27.7 million
or $.30 per diluted share for the same period last year.
Business Segment Discussion
Revenues in the bank systems and services business segment increased 5% from
$83.5 million to $87.8 million for the three months ended December 31, 2001
and 2002, respectively. Gross profit decreased 4% from $34.7 million in the
second quarter of the previous year to $33.3 million in the current second
quarter. Gross profit margin decreased 9% to 38% from 41% for the current
second quarter compared to the same quarter in the previous year.
Revenues in the bank systems and services business segment increased 4% from
$162.5 million to $168.5 million for the six months ended December 31, 2001
and 2002, respectively. Gross profit decreased 7% from $68.8 million for
the six months ended December 31, 2001 to $64.3 million for the same period
ended December 31, 2002. Gross profit margin decreased 10% to 38% from 42%
for the current six months compared to the same period in the previous year.
Revenues in the credit union systems and services business segment remained
flat at $14.7 million for the second quarter ended December 31, 2002 and
2001. Gross profit decreased 19% from $4.4 million in the second quarter of
the previous year to $3.5 million in the current second quarter. Gross
profit margin decreased in the current second quarter compared to the same
quarter in the previous year from 30% to 24%. The credit union segment
gross profit margin was also impacted by increases in personnel costs,
customer reimbursements and reduction in hardware margins due to reduced
vendor incentives.
Revenues in the credit union systems and services business segment decreased
slightly by 1% to $28.0 million in the first half of fiscal 2003 from $28.2
million. Gross profit decreased 16% from $9.2 million in the first half of
the previous year to $7.7 million in the current six months of fiscal 2003.
Gross profit margin decreased this year as compared to the same period last
year from 33% to 28%.
All gross profit margins decreased in the three and six month periods ending
December 31, 2002 primarily due to a decline in licensing revenue relating
to an industry wide software slowdown along with higher employee costs,
higher depreciation expense and reduced vendor incentives disclosed above.
FINANCIAL CONDITION
Liquidity
The Company's cash and cash equivalents and investments increased to $31.2
million at December 31, 2002, from $18.7 million at June 30, 2002. Cash
provided by operations was $69.3 million for the six months ended December
31, 2002 as compared to $49.6 million for the six months ended December 31,
2001, primarily due to collection of annual in-house support fees billed at
June 30, 2002 resulting in a reduction in trade receivables of $57.5 million
offset by a reduction in deferred revenues of $30.9 million. Cash used in
investing activities for the six months ended December 31, 2002, of $33.5
million included capital expenditures of $26.3 million, primarily for
expansion at our Monett and Birmingham offices, plus acquisitions and
capitalization of software costs aggregating $6.9 million. Financing
activities used cash of $23.4 million during the six months ended December
31, 2002, of which the majority was used to purchase treasury stock for
$18.2 million. In addition, dividends paid during the first six-month
period ended December 31, 2002, were $6.1 million.
JHA has available credit lines totaling $58.0 million at December 31, 2002.
Capital Requirements and Resources
JHA generally uses existing resources and funds generated from operations
to meet its capital requirements. Capital expenditures totaling $26.3
million and $23.1 million for the six month periods ended December 31, 2002
and 2001, respectively, were made for expansion of facilities and additional
equipment. These were funded from cash generated by operations. The total
consolidated capital expenditures of JHA are not expected to exceed $52
million for fiscal year 2003.
On September 21, 2001, the Company's Board of Directors approved a stock
buyback of the Company's common stock of up to 3.0 million shares, and
approved an increase on October 4, 2002 to 6.0 million shares. Stock
buybacks totaling $18.2 million and $6.7 million for the six months periods
ended December 31, 2002 and 2001, respectively, were funded with cash from
operations.
The Company paid a $.035 per share cash dividend on December 3, 2002 to
stockholders of record on November 19, 2002, which was funded from
operations. In addition, the Company's Board of Directors, subsequent to
December 31, 2002, declared a quarterly cash dividend of $.035 per share on
its common stock payable February 27, 2003 to stockholders of record on
February 12, 2003. This dividend will be funded with cash generated from
operations.
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, 2002.
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, 2002. Undue reliance should not be placed on the forward-looking
statements. The Company does not undertake any obligation to publicly update
any forward-look statements.
CONCLUSION
JHA's results of operations and its financial position continued to be
favorable as of and for the six months ended December 31, 2002. This
reflects the continuing attitude of cooperation and commitment by each
employee, management's ongoing cost control efforts and commitment to
deliver top quality products and services to the markets it serves.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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
Evaluation of Controls and Procedures
Within 90 days prior to the filing of this report, under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer (CEO) and Chief Financial Officer (CFO), an
evaluation of the effectiveness of the Company's disclosure controls and
procedures was performed. Based on this evaluation, the CEO and CFO have
concluded that the Company's disclosure controls and procedures are
effective to ensure that material information is recorded, processed,
summarized and reported by management of the Company on a timely basis in
order to comply with the Company's disclosure obligations under the
Securities Exchange Act of 1934 and the SEC rules thereunder.
There have been no significant changes in our internal controls or in other
factors that could significantly affect those controls subsequent to the
date of their last evaluation.
PART II. OTHER INFORMATION
ITEM 5. Other Information
On December 18, 2002, the Board of Directors appointed Joseph J. Maliekel to
fill the empty seventh seat on the Board. Mr. Maliekel is an outside,
independent Board member. He has been employed for the last three years as
Director of External Reporting for Monsanto Company in St. Louis, Missouri
and prior to joining Monsanto he was a Senior Manager with Deloitte & Touche
LLP. Mr. Maliekel is 42. Because of his auditing and other accounting
experience, the Board has determined that Mr. Maliekel is an "audit
committee financial expert" and he has been appointed as an additional
member of the Audit Committee.
On January 2, 2003, pursuant to a succession plan announced by the Company
on May 14, 2002, Terry Thompson retired from his position as President of
the Company and Jack Prim, previously Chief Operating Officer, was appointed
by the Board to be the new President. Tony Wormington, previously General
Manager of Technology Services, was appointed Chief Operating Officer. Mr.
Prim, age 48, has more than 25 years of industry experience. He joined the
Company in 1995 and has served as General Manager of the Company's Liberty
division and then as Chief Operating Officer from May 2001. He earned his
BA in Business Administration from the University of North Carolina at
Charlotte and his Masters in Business Administration from Queens College in
Charlotte, North Carolina. He will continue to reside in Charlotte.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Written Statement of the Chief Executive Officer dated
February 14, 2003.
99.2 Written Statement of the Chief Financial Officer dated
February 14, 2003.
(b) Reports on Form 8-K
On November 19, 2002, the Company filed a Form 8-K with respect to the
acquisition of Credit Union Solutions, Inc.
On January 3, 2003, the Company filed a Form 8-K with respect to the
acquisition of National Bancorp Data Services, LLC.
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 behalf of the undersigned thereunto duly authorized.
JACK HENRY & ASSOCIATES, INC.
Date: February 14, 2003 /s/ Michael E. Henry
--------------------
Michael E. Henry
Chairman of the Board
Chief Executive Officer
Date: February 14, 2003 /s/ Kevin D. Williams
---------------------
Kevin D. Williams
Treasurer and Chief Financial Officer
CERTIFICATION
-------------
I, Michael E. Henry, 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-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, 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 in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; 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;
and
6. The registrant's other certifying officer and I have indicated in this
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 14, 2003
/s/ Michael E. Henry
------------------------------
Michael E. Henry
Chief Executive Officer
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-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, 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 in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; 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;
and
6. The registrant's other certifying officer and I have indicated in this
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 14, 2003
/s/ Kevin D. Williams
-------------------------------
Kevin D. Williams
Chief Financial Officer
EXHIBIT 99.1
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 quarter ended December 31, 2002 (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: February 14, 2003
/s/ Michel E. Henry
--------------------------------
Michael E. Henry
Chief Executive Officer
EXHIBIT 99.2
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 quarter ended December 31, 2002 (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: February 14, 2003
/s/ Kevin D. Williams
--------------------------------
Kevin D. Williams
Chief Financial Officer