UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission Number 0-14112
JACK HENRY AND ASSOCIATES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 43-1128385
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
663 Highway 60, P.O. Box 807, Monett, MO 65708
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(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (417) 235-6652
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock ($0.01 par value) NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes [ X ] No [ ]
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Act.
Yes [ ] No [ X ]
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition
of "accelerated filer and large accelerated filer" in Rule 12b-2) of the
Exchange Act.
Large Accelerated Filer [ X ] Accelerated Filer [ ]
Non-Accelerated Filer [ ]
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No [ X ]
As of August 18, 2006, the Registrant had 91,219,608 shares of Common
Stock outstanding ($0.01 par value). On that date, the aggregate
market value of the Common Stock held by persons other than those who
may be deemed affiliates of Registrant was $1,494,716,214 (based on the
average of the reported high and low sales prices on NASDAQ on such
date).
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Company's Notice of Annual Meeting of Stockholders
and Proxy Statement for its 2006 Annual Meeting of Stockholders (the "Proxy
Statement"), as described in the footnotes to the Table of Contents below,
are incorporated by reference into Part II, Item 5 and into Part III of
this Report.
TABLE OF CONTENTS
PART I Page Reference
ITEM 1. BUSINESS 4
ITEM 1A. RISK FACTORS 17
ITEM 1B. UNRESOLVED STAFF COMMENTS 20
ITEM 2. PROPERTIES 20
ITEM 3. LEGAL PROCEEDINGS 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES (1) 21
ITEM 6. SELECTED FINANCIAL DATA 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 67
ITEM 9A. CONTROLS AND PROCEDURES 67
ITEM 9B. OTHER INFORMATION 67
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT (2) 68
ITEM 11. EXECUTIVE COMPENSATION (3) 68
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS (4) 68
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (5) 68
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES (6) 68
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 68
(1) Proxy Statement section entitled "Equity Compensation Plan Information"
(2) Proxy Statement sections entitled "Election of Directors", "Corporate
Governance," "Audit Committee Report," "Executive Officers and
Significant Employees," and "Section 16(a) Beneficial Ownership
Reporting Compliance."
(3) Proxy Statement sections entitled "Executive Compensation",
"Compensation Committee Report", "Corporate Governance", and
"Company Performance."
(4) Proxy Statement sections entitled "Stock Ownership of Certain
Stockholders," and "Equity Compensation Plan Information."
(5) Proxy Statement section entitled "Certain Relationships and Related
Transactions."
(6) Proxy Statement sections entitled "Audit Committee Report" and
"Independent Registered Public Accounting Firm - Audit and Non-Audit
Fees."
PART I
Item 1. Business
Jack Henry & Associates, Inc. ("JHA" or the "Company") is a leading provider
of integrated computer systems providing data processing and management
information to banks, credit unions, other financial and non-financial
institutions in the United States. The Company was formed in 1976 and made
its initial public offering in 1985. Since formation, JHA has grown by
developing highly specialized products and services for its financial
institution customers, acquiring organizations that complement and add to
the infrastructure of the Company, retaining satisfied customers and adding
new customers.
We offer an integrated suite of data processing system solutions to improve
our customers' management of their entire internal/office applications
and customer/member interaction processes, as well as specialized data
processing solutions to meet specific business needs. We believe our
solutions enable our customers to provide better service to their customers
and compete more effectively against other banks, credit unions, and
alternative financial institutions. Our customers have two options for our
completely integrated suites of products and services. Customers can install
our comprehensive systems in-house, as we offer data conversion, hardware,
and software installation for the implementation of our systems. We will
also perform outsourcing services with our entire suite of products and
services, from complete internal/office processing to fraud protection, for
our customers who prefer not to acquire hardware and software. Outsourcing
services are provided through 6 data centers and 23 item-processing centers
located across the United States. To ensure proper product performance and
reliability, we offer continuing customer service, which provides us with
continuing client relationships and recurring revenue.
Our gross revenue has grown from $396.7 million in fiscal 2002 to $592.2
million in fiscal 2006, representing a compound annual growth rate over this
five-year period of 10%. Net income from continuing operations has grown
from $57.1 million in fiscal 2002 to $89.9 million in fiscal 2006, also a
compound annual growth rate of 10%.
Industry Background
According to the Automation in Banking 2006 report, United States financial
institutions, including commercial banks, thrifts and credit unions,
increased spending on hardware, software, services and telecommunications to
$50.2 billion in calendar 2005 from $40.7 billion in calendar 2001,
representing a compound annual growth rate of 6%. In addition, the report
indicated there was an increase in industry spending of 9.5% from December
31, 2004 to December 31, 2005.
The Federal Deposit Insurance Corporation ("FDIC") reported there were
approximately 9,000 commercial and savings banks in the United States as of
December 31, 2005. Consolidation within the banking and savings services
industry has resulted in a 2% compound annual decline in the population of
commercial and savings banks from calendar years 2001 to 2005. Even with
the decline in the population, aggregate assets of these banks increased at
an annual compound rate of 8% between calendar year 2001 and 2005.
Comparing calendar year 2005 to 2004, new bank and savings charters
increased 40% and mergers decreased 2%. Our bank systems and services
segment, which represented approximately 80% of our total revenues in fiscal
2006, is primarily commercial banks with less than $30.0 billion in assets,
of which there were approximately 8,800 at December 31, 2005, and our
specialized, non-core solutions service banks of all asset sizes and
charters, including the top 100 banks in the United States and international
banks.
Our other market segment is credit union systems and services within the
United States. The Credit Union National Association reported there were
approximately 9,000 credit unions in the United States as of December 31,
2005. This segment represented approximately 20% of our total revenues in
fiscal 2006. These are primarily cooperative, not-for-profit financial
institutions organized to promote savings and provide credit and services to
their members. Although the number of these credit unions has declined at a
3% compound annual rate between calendar year 2001 and 2005, their aggregate
assets have increased at a compound annual growth rate of 9% to $694.2
billion at December 31, 2005.
Commercial and savings banks and credit unions play an important role in the
geographic and demographic communities and with the customers they serve.
Typically, customers and members of these financial institutions rely on
them because of their ability to provide personalized, relationship-based
services while focusing on retail, commercial and business needs. We
believe these core strengths will allow our financial institution customers
to effectively compete with other banks, credit unions and alternative
financial institutions. In order to succeed and to maintain strong customer
relationships, we believe these banks and credit unions must:
* focus on excellence in delivery to customers/members of their
primary products and service offerings;
* sell more products and services to existing customers through
utilization of customer relationship management ("CRM") products;
* deploy products and services that enable customers to conduct
their banking transactions through the channel of their choice,
such as internet banking and bill payment, electronic account
statements, interactive voice response systems and ATM delivery
channels;
* capitalize on deposit growth opportunities through technological
solutions that allow for remote deposit capture at the merchant's
place of business;
* manage by using products and services that deliver business
intelligence assimilated and analyzed on an automated basis;
* implement advanced technologies and services, such as enhanced
security protection, imaging for all transactions and platform
automation;
* use advanced technologies in back-office processes to improve
operating efficiency and control costs, while increasing service
and lowering costs to their customers;
* introduce new revenue generating products and services
complementing traditional banking services, such as insurance
products; and
* manage risks by implementing technology that monitors and tracks
transactions for fraud and criminal behavior.
According to Automation in Banking 2006 and Callahan & Associates 2005 in
calendar 2005 approximately 56% of all commercial banks and 65% of all
credit unions with assets over $25 million utilized in-house hardware and
software systems to perform all of their core systems and data processing
functions. Off-site data processing centers provided system services on an
outsourced basis for 44% of all banks and 35% of all credit unions. For a
number of years, we have been expanding our outsourcing services and
capacity to include all of our core and complementary solution products.
Internet banking, on-line bill payment, and other services for individuals,
plus cash management, Automated Clearing House ("ACH") management and other
services for the commercial customers of financial institutions continue to
grow rapidly within the industry. Callahan and Associates' 2006 Credit Union
Technology Survey respondents indicated that 98% of credit unions already
offer internet home banking, 90% offer on-line bill pay, and 85% offer
e-statements.
According to Callahan & Associates 2006 Credit Union Technology Survey
initiated in April 2006 82% of the respondents stated on-line multi-factor
authentication or biometrics technology was a spending priority in 2006.
Our Solutions
Historically we have been a single-source provider of a comprehensive and
flexible suite of integrated products and services that address the
information and security technology, and data processing needs of financial
institutions on various hardware platforms and operating systems. With our
acquisitions over the last several years we have expanded our business to
also provide targeted and specialized solutions that address business
problems for financial institutions and diverse corporate entities. Our
business derives revenues from three primary sources of revenue:
* software licenses;
* support and service fees which include implementation services; and
* hardware sales, which includes all non-software remarketed products.
We develop software applications designed primarily for use on hardware
supporting IBM and UNIX/NT operating systems. Our marketed product
and service offerings are centered on five core proprietary software
applications, each comprising the core data processing and information
management functions of a commercial and savings bank or credit union.
Any of these core systems can be utilized either through an in-house
or outsourced delivery method depending on the financial institution's
management style and philosophy. Key functions of each of our core
software applications include deposits, loans, general ledger, and customer
information file. Our software applications make extensive use of
parameters allowing our customers to tailor the software to their needs
without needing to customize or program the software. Our software
applications are designed to provide maximum flexibility in meeting our
customer data processing requirements within a single, integrated system.
To complement our core software applications, we offer approximately 100
integrated complementary products and services for use on an in-house or an
outsourced basis by financial institutions.
The financial services industry today is highly competitive, with new
entrants competing for market share of traditional banking services,
including the formation of banking affiliates by insurance companies,
brokerage firms and even retailers. We believe our integrated solutions
provide our customers with tools and strategies to increase revenues,
contain costs, and deliver premium customer services. Specifically our
integrated products and services enable them to:
* Implement Advanced Technologies with Full Functionality. Our
comprehensive suites of products and services are designed to meet
our customers' information technology needs through custom-
tailored solutions using proprietary software products. Our
clients can either perform these functions themselves on an in-
house basis through the implementation of our software systems or
contract with us on an outsourced basis while we perform these
daily services for them.
* Rapidly Deploy New Products and Services. Once a financial
institution has implemented our core software, either in-house or
on an outsourced basis, we can quickly and efficiently implement
additional applications and functions. This allows our customers
to rapidly deploy new products and services for their clients and
members while generating new revenue streams. We offer state-
of-the-art solutions with the latest technology which allows
financial institutions to concentrate on critical business
processes while attending to the needs of their customers. Our
products include a full suite of ATM management products, a suite
of fraud detection and prevention products, a suite of document
and check image products, ACH and remote merchant capture and
electronic clearing services and a fingerprint authentication
solution utilizing biometric security.
* Focus on Customer Relationships. Our products and services allow
our customers to stay focused on their primary business of
gaining, maintaining and expanding their customer relationships
while providing the latest technology in financial products and
services.
* Access Outsourcing Solutions to Improve Operating Efficiency.
Customers utilizing our outsourcing solutions benefit from access
to all of our products and services without having to maintain
personnel to update and run these systems and without having to
make large up-front capital expenditures to implement these
advanced technologies.
* Solve Complex Business Operating Needs. Our customers' businesses
have become more complex and carry added regulatory and reporting
burdens distinct to financial institutions. Customers using our
unique products specifically developed to satisfy niche, complex
business issues can contain costs, and have increased levels of
accuracy and provide assurance that the customer is in compliance
with regulatory requirements.
* Manage Risk. We offer a range of solutions that help our
customers manage operational risks, including disaster recovery
services, biometric security, and software designed to detect and
react to fraudulent transactions.
Our Strategy
Our objective is to grow our revenue and earnings organically, supplemented
by strategic acquisitions. The key components of our business strategy are
to:
* Provide High Quality, Value-Added Products and Services to Our
Clients. We compete on the basis of providing our customers with
the highest-value products and services in the market. We believe
we have achieved a reputation as a premium product and service
provider.
* Continue to Expand Our Product and Service Offerings. We
continually upgrade our core software applications and expand our
complementary product and service offerings to respond to
technological advances and the changing requirements of our
clients. For example, we offer several turn-key solutions that
enable financial institutions to rapidly deploy sophisticated
and state-of-the-art new products and services. Our integrated
solutions enable our customers to offer competitive services
relative to larger banks and alternative financial institutions.
We intend to continue to expand Internet solutions, security
solutions, exception management reporting, document management
solutions and other products and services.
* Expand Our Existing Customer Relationships. We seek to increase
the information technology and security products and services we
provide to those customers that do not utilize our full range of
products and services. In this way, we are able to increase
revenues from current customers with minimal additional sales and
marketing expenses.
* Extend Our Markets. We now market and sell products and services
to virtually any financial institution regardless of what core
processing solution is utilized, effectively extending our
targeted market for selected complementary products to over 16,000
additional financial institutions in the United States, as well as
additional vertical industries.
* Adopt Open Integration Standards. We are increasing our
utilization of more open integration standards through Service
Oriented Architecture and Web Services through our jXchange
integration tools enabling increased interoperability between our
products and services and those of third parties.
* Expand Our Customer Base. We seek to establish long-term
relationships with new customers through our sales and marketing
efforts and selected acquisitions. As of June 30, 2006, we have
over 8,700 customers, an increase of 211% from fiscal 2001 with
2,800 customers.
* Build Recurring Revenue. We enter into contracts with customers
to provide services that meet their ongoing information technology
needs. We offer ongoing software support for our in-house
customers. Additionally, we provide data processing for our
outsourcing customers and ATM and debit card transaction switching
services, both on contracts that typically extend for periods of
five to ten years.
* Maximize Economies of Scale. We strive to develop and maintain a
sufficiently large client base to create economies of scale,
enabling us to provide value-priced products and services to our
clients while expanding our operating margins.
* Attract and Retain Capable Employees. We believe attracting and
retaining high-quality employees is essential to our continued
growth and success. Our corporate culture focuses on the needs of
employees; a strategy which has continued since our inception.
Our Acquisitions
To complement and accelerate our internal growth, we have selectively
acquired companies that provide us with one or more of the following:
* products and services to complement our existing offerings;
* new customers;
* entry into new markets within financial services as well as other
vertical markets; and/or
* additional outsourcing capabilities.
When evaluating acquisition opportunities, we focus on companies with highly
demanded products and/or services, a strong employee base and management
team and excellent customer relationships. Since the start of fiscal 2002,
we have completed the following acquisitions:
Fiscal
Year Company or Product Name Products and Services
---- ----------------------- ---------------------
2006 ProfitStar Asset/Liability Management,
Budgeting and Profitability
Solutions
2005 Tangent Analytics Business Intelligence Solutions
2005 Stratika Profitability Solutions
2005 Synergy, Inc. Document Imaging
2005 TWS, Inc. ATM Image/ Item Processing
2005 Optinfo, Inc. Enterprise Exception Management
2005 Verinex Technologies Biometric Security Solutions
2005 Select Payment Processing Payment Processing Solutions
2005 Banc Insurance Services Insurance Agency Outsourcing
2004 Call Report Analyzer, Y9 Regulatory Reporting
2004 e-ClassicSystems, Inc. Software products to manage ATM
networks
2004 PowerPay.ach, .rck, and .arc Suite of Automated Clearing House
products
2004 Yellow Hammer Software, Inc. Fraud Protection for financial
institutions
2003 National Bancorp Data Item Processing services
Services, LLC
2003 Credit Union Solutions, Inc. Data processing systems and
services for smaller credit unions
2002 Transcend Systems Group Customer Relationship Management
software and related services
2002 System Legacy Solutions Image data conversion systems
Our Products and Services
Changing technologies, business practices and financial products have
resulted in issues of compatibility, scalability and increased complexity
for the hardware and software used in many financial institutions. We
have responded to these issues by developing a fully integrated suite of
products and services consisting of core software systems, hardware, and
complementary products and services.
We provide our full range of products and services to financial institutions
on either an in-house or outsourced basis. For those customers who prefer to
purchase systems for their financial institution, we offer to contract to
sell computer hardware with the licenses for core and complementary
software. We also offer to contract to provide installation, data
conversion, training, ongoing support, and other services to assist
customers in management of operation efficiencies.
We also offer our full suite of software products and services on an
outsourced basis to customers who do not wish to maintain, update, and run
these systems or to make large up-front capital expenditures to implement
these advanced technologies. Our principal outsourcing service is the
delivery of mission-critical data processing services using our data centers
located within the United States. We provide our outsourcing services
through an extensive national data and service center network, comprised of
6 data centers and 23 item-processing centers. We monitor and maintain our
network on a seven-day, 24-hour basis. Customers typically pay monthly fees
on service contracts of up to 5 years for these services.
While it is our goal to provide the full suite of solutions a financial
institution may require, we recognize the reality that a number of our
clients will wish to deploy some technology solutions provided by other
companies. Accordingly, we have developed enhanced integration capabilities
with third party solutions. This is particularly important as we continue
to expand our presence in the mid-tier banking space, defined as banks
ranging from $1.0 to $30.0 billion in assets.
Information regarding the classification of our business into separate
segments serving the banking and credit union industries is set forth in
Note 13 to the Consolidated Financial Statements (see item 8 below).
Hardware Systems
Our software operates on a variety of hardware systems. We have entered
into remarketing agreements with IBM Corporation, Avnet, Inc. and other
hardware providers which allow us to purchase hardware at a discount and
sell (remarket) it to our customers. We currently sell the IBM System i
("iSeries"), System p ("pSeries") and xSeries servers; IBM workstations;
Dell servers and workstations; NCR, BancTec and Unisys check transports; and
a variety of other devices that complement our software solutions.
We have a long-term strategic relationship with IBM, dating to the initial
design of our first core software applications 30 years ago. In addition to
our remarketing agreement with IBM, which we regularly renew, we have been
named a "Premier Business Partner'' of IBM for the last fourteen consecutive
years. Our relationship with IBM provides us with a substantial and ongoing
source of revenue.
Biometrics is one of the latest technologies in security for financial and
non-financial institutions. We offer a fingerprint scanner along with
flexible, state-of-the-art software components which provide the framework
for the complete suite of applications.
In continuing our belief of being a 'complete solution', we also offer a
full line of financial institution forms required for day-to-day operations,
year-end tax forms, plus office and operating supplies for their equipment.
Core Software Applications
Each of our core software systems consists of several fully-integrated
application modules, such as deposits, loans, general ledger, and the
customer information file, which is a centralized file containing customer
data for all applications. While our core software is fully functional
off the shelf, we can custom-tailor these modules utilizing parameters
determined by our customers. The applications can be connected to a wide
variety of peripheral hardware devices used in financial institutions'
operations. Our software is designed to provide maximum flexibility in
meeting our customers' data processing requirements within a single system
to minimize data entry and improve operational efficiencies.
For a customer who chooses to acquire in-house capabilities, we generally
license our core system under a standard license agreement, which provides
the customer with a fully paid, nonexclusive, nontransferable right to use
the software on a single computer and at a single location. The same core
software system can be delivered on an outsourced basis as well.
Our core software applications are differentiated broadly by customer size,
scalability, functionality, customer competitive environment and, to a
lesser extent, cost. Our core applications include:
Bank Systems and Services Segment
* Silverlake System[R] operates on the IBM System iSeries processing
platform and is used primarily by banks with total assets ranging
from $500 million to $30.0 billion; however, banks of smaller
size, including progressive de novo banks, are also selecting
Silverlake Systems;
* CIF 20/20[R] operates on the IBM System iSeries processing
platform and is primarily used by and targeted to banks ranging
from de novo up to $1.0 billion in assets;
* Core Director[R] operates on the Windows Server-based platform
employing client/server technology and is primarily used by and
targeted to banks ranging from de novo up to $1.0 billion in
assets.
Credit Union Systems and Services Segment
* Episys[R] operates on the IBM System pSeries processing platform
with a UNIX/NT operating system and is used primarily by credit
unions with total assets greater than $50.0 million. According to
Callahan and Associates 2006 Credit Union Directory, our Episys[R]
core product is the most widely installed data processing solution
among credit unions with assets exceeding $25.0 million in the
United States.
* Cruise[R] operates on the IBM xSeries platform, utilizing
Microsoft SQL Server with a 100% Windows[R] interface, allowing
all data available with 'point and click' simplicity. Cruise is
used primarily by credit unions with total assets under $50.0
million.
Complementary Products and Services
In years past our strategy has been focused on two fronts; acquiring new
core banking and credit union clients, and selling additional complementary
products and services to those banks and credit unions that were using our
core solutions. We did not generally offer our complementary products and
services to banks or credit unions that were not using one of our core
processing solutions. With our acquisitions in recent years, we are now
marketing and selling selected complementary products and solutions through
our ProfitStars brand to banks and credit unions regardless of which core
processing solution the financial institutions are using. Thus, we now have
essentially two categories of complementary products: 1) those that we offer
only to those banks or credit unions that use one of our core processing
solutions, and 2) those that we offer to any financial institution
regardless of core provider.
We offer the banks and credit unions using Jack Henry core processing
systems approximately 100 complementary products or services. We have also
acquired a number of complementary products and services that are marketed
and sold through our ProfitStars brand to diverse financial institutions and
other businesses that do not have Jack Henry core processing systems. These
products and services have been developed and designed to assist banks,
credit unions, and other businesses accomplish specific business strategies.
Our complementary products and services are categorized into product
families by particular business strategy needs. Some of the product
families and a sample of some of the solutions offered within each family
are as follows:
Business Intelligence
* Synapsys[R] is an enterprise-wide relationship management solution
for both retail and commercial customers that integrates sales
management, customer profiling, automated sales tracking,
profitability assessment, lead generation, and referral tracking
capabilities.
* Synapsys[R] MCIF Wizard is the marketing central information file
and data mining solution that empowers customers to develop highly
targeted marketing and cross-selling campaigns and automatically
track the results.
* Intelligence Warehouse / Intelligence Manager is a business
intelligence and analytics solution for our Silverlake customers
designed to capture data from any number of sources and store all
data in one data warehouse. This Intelligence Warehouse then
serves as the foundation for developing business insights, to
report on user defined performance and event driven metrics.
These insights are delivered to the Intelligence Manager desktop
in the form of user defined interactive "dashboards" to give users
an "at a glance" view of activities and performance measurements
within their financial institution.
* ARGOKeys[R] is the ARGO Data Resource Corporation/JHA joint
solution for our Silverlake customers that provide branch sales
and automation solutions, including a deposit platform, a lending
platform with an advanced automated decision module, and a
complete CRM solution, all of which are fully integrated with our
core and teller systems.
* Relationship Profitability Management[TM] provides enterprise
profitability solutions for banks and credit unions. RPM
provides detailed profitability measurement systems for customized
product, account, customer, relationship, branch, regional, and
organizational profitability measurements.
* PROFITability[R] is the cost accounting analysis system that
supports organizational and product profitability analysis. True
organizational profitability of a branch, department or region can
be easily determined, with the capabilities to review allocated
expenses and generate accurate adjusted earnings for each
organization. Product profitability is generated by comparing
individual products from a post-allocated perspective, which
allows banks to accurately determine the profitability of each
product and compare it to other products.
* PROFITstar ALM/Budgeting is the asset/liability management and
budgeting system that provides the robust functionality to perform
sophisticated modeling; ad hoc balance sheet and income statements
with multiple interest rate scenarios. This system also allows
institutions to track "what-if" scenarios with strategic monitors
that automatically create audit trails; analyze market risk in
response to regulatory requirements and determine the accurate
value for FAS107 reporting; and create detailed, summary, and
variance budget reports.
* Business Analytics[TM] is a Web-based business intelligence
framework which integrates enterprise-wide systems to pull
information together from many sources and put it into a usable
format for strategic decision reporting through the use of a dash
board.
* eEMS[TM] is an enterprise risk management solution consisting of
four integrated modules. nBalance[R] is a real-time, rules-based
data reconciliation module. Exception Manager automates the
research and resolution of data discrepancies. Case Manager
automates the workflow to resolve and repair exceptions. Our Risk
and Control Console provides an analytic tool to deliver business
intelligence about operational risk.
Retail Delivery
* InTouch Voice Response[R] is a fully-automated interactive voice
response system for 24-hour telephone-based customer account
management.
* OnTarget[TM] is an integrated deposit platform, lending platform,
and teller solution for our Core Director and Banker II customers
through a partnering alliance with ARGO.
* Streamline Platform Automation[R] is an automated new account
origination and documentation preparation solution that integrates
new customer data, including signature cards, disclosure
statements, and loan applications into the core customer data
files on a real-time basis for our iSeries customers.
* Vertex Teller Automation System[TM] is an online teller automation
system that enables tellers to process transactions more
efficiently and with greater accuracy.
* Insurance Agency Outsourcing[TM] provides a complete outsourced
insurance agency custom-branded for a financial institution.
Business Banking
* NetTeller[R] Cash Management solution offers commercial banking
customers flexibility and online access to their accounts with
ACH, wire transfer, reporting and account management capabilities.
* Mutual Fund Sweep is a deposit management solution that enables
banks to transfer commercial customers' excess deposits into
interest bearing overnight mutual fund investments.
* Remote Deposit Capture is a web-based image capture, storage and
processing solution which enables corporations and merchants to
electronically convert paper checks of all types into ACH and/or
Check 21 items.
* ACH Check Conversion is a web-enabled service that allows
businesses to electronically convert paper checks they receive in
the mail, lockbox or in a drop box into ACH items.
* Point of Purchase Check Conversion ("POP") is a web-enabled
software solution that allows a business to electronically convert
paper checks received in-person into ACH items.
* Represented Check ("RCK") is web-enabled software that allows a
financial institution to electronically re-present paper checks
that have been returned to their commercial customers for
insufficient funds.
* Internet Checks ("WEB") is web-enabled software that allows a
business to accept paper checks on their Internet website and
electronically convert the payments into ACH items.
* Telephone Checks ("TEL") is web-enabled software that allows a
business to accept paper checks over the telephone and
electronically convert the payments into ACH items.
* Preauthorized Payment and Deposit ("PPD") is web-enabled software
that allows a business to process recurring check payments as ACH
items.
* Cash Concentration or Disbursement ("CCD") is web-enabled software
that allows a business to collect and distribute business to
business payments as ACH items.
Internet Banking
* NetTeller[R] Online Banking[TM] is an Internet-based home banking
system that provides secure, real-time account information and
transaction capabilities for individual commercial customers.
* NetTeller[R] MemberConnect Web[TM] is an Internet-based home
banking system that provides secure, real-time account information
and transaction capabilities for credit union members.
* NetTeller[R] BillPay[TM] is an on-line bill pay solution for
financial institutions which allows their customers to make
payments to any payee in North America.
* DirectLine[R] OFX allows NetTeller[R] customers to offer a direct
connect service utilizing personal financial management tools for
their customers.
* eStatements is a suite of products which include an electronic
document generation and delivery system for statements and notices
to both bank and credit union customers.
Electronic Funds Transfer
* ATM Manager Pro[R] is a suite of software modules that provides
reporting and operational analysis tools to ATM owners.
* PassPort.atm[TM] can drive and monitor all types of lease lines
and dial-up ATM's, along with the switch processing services
connecting financial institutions to regional and national
networks.
* PassPort.dc[TM] allows financial institutions to issue, support,
and manage signature based Visa[R] Check or MasterMoney[TM] debit
cards worldwide.
* PassPort.pro[TM] provides for online authorization, driving and
monitoring of a financial institution's own network of up to
hundreds of ATMs.
* ImageCenter ATM is software that automates ATM deposits with image
capture and processing, courier tracking and monitoring, fraud
detection and prevention, and balancing.
Asset Management and Protection
* PROFITstar ALM/Budgeting[TM] provides tools that allow
institutions to monitor and plan asset/liability exposures and
general budgets. Multiple scenarios can be created and compared,
with built-in strategic monitors and automated audit trails.
* Biodentify[R] is a biometric fingerprint security solution that
uses physical biometrics which are unique to every individual.
The system provides wizard-based registration, single-touch
identification, plus event logging for auditing and regulatory
compliance.
* Centurion Disaster Recovery[R] provides multi-tiered disaster
recovery protection, including comprehensive disaster planning and
procedures.
* Fraud Detective[TM] is a suite of software modules that enables
banks and credit unions to detect and react to suspicious
transaction_based fraud. The system also alerts financial
institutions of other fraudulent activity, such as money
laundering and kiting.
* Call Report Analyzer[TM] is Windows-based software designed to
allow banks to accurately and efficiently file regulatory reports
required by the FDIC.
* Call Report Y-9 Report Analyzer[TM] allows banks to electronically
file other regulatory reports ("Y-9C, Y-9LP, Y-11S, or Y-9SP")
* TimeTrack Payroll System[TM] is an integrated payroll accounting
and human resources software system.
* Demand Account Reclassification calculates appropriate reserve
requirements based upon reclassification opportunities of
deposited funds.
Item and Document Imaging
* 4|sight[TM] item image solution is our new generation of imaging
products, which allows our customers to create and store digital
check images for inclusion in monthly statements, and facilitate
their customer support services.
* ImageCenter Check[TM] is a turnkey image-based item processing
platform designed for the unique requirements of credit unions.
* SuperIMAGE[R] is a check image system that provides enhanced
integration, automation, and dependability in item imaging for
high-volume environments.
* Synergy Intelligent Document Imaging[TM] is a suite of product
modules for companies of all sizes for intelligent document
imaging by capturing, archiving and retrieval of paper based and
electronic documents.
* Check 21 solutions are a series of products enabling banks and
credit unions to capture, package and send electronic check image
cash letters for clearing transit items instead of sending cash
letters of the actual physical checks for clearing.
* ImageCenter ATM Deposit Management[TM] is software designed to
capture images of deposited items at the ATM and route the images
to the processing center for image clearing.
Professional Services and Education
* FormSmart[R] provides day-to-day financial institution operating
forms, year-end tax forms and other printing and office supplies.
* Intellix[TM] is a consulting service specifically for our bank
system and services segment. This service assists customers to
fully utilize their core software products by developing workflow
processes and re-engineering processes to capitalize on the
capabilities provided within our core software.
* Know-It-All Education[TM] offers multiple educational classes on
our products and services through various formats, including self-
paced electronic modules, internet classes with instructors, on-
site training, and classes at numerous Jack Henry facilities.
* Matrix Network Services[R] provides network design, implement-
ation, security and related consulting services to financial
institutions.
Implementation and Training
Although not a requirement, the majority of our customers contract
separately with us for implementation and training services in connection
with their purchase of in-house systems. The complete implementation
process of a core system typically includes planning, design, data
conversion, and testing. At the culmination of this process, one of our
implementation teams travels to our customer's facilities to ensure
the smooth transfer of data to the new system. Separate charges for
implementation fees are billed to our customers on either a fixed fee or
hourly charge model depending on the system. Implementation and training
services are also provided in connection with new outsourcing customers, and
are billed separately at the time of implementation.
Both in connection with implementation of new systems and on an ongoing
basis, we provide extensive training services and programs related to our
products and services. Training is provided in our regional training
centers, at meetings and conferences, onsite at our customers' locations, or
online with JHA Webex. Training can be customized to meet our customers'
requirements. The large majority of our customers acquire training services
from us, both to improve their employees' proficiency and productivity and
to make full use of the complete functionality of our systems. Generally,
training services are paid for on an hourly basis or as an annual
subscription, representing blocks of training time that can be used by our
customers in a flexible fashion.
Support and Services
Following the implementation of our integrated software at a customer site,
we provide ongoing software support services to assist our customers in
operating the systems. We also offer support services for hardware systems,
primarily through our hardware suppliers, providing customers who have
contracted for this service with "one-call" system support covering
hardware and software applications.
Support is provided through a 24-hour telephone service available to our
customers seven days a week. Our experienced support staff can resolve most
questions and problems quickly. For more complicated issues, our staff,
with our customers' permission and assistance, can log on to our customers'
systems remotely. We maintain our customers' software largely through
releases which contain enhancements and additional features and
functionality. Updates are issued also when required by changes in
applicable laws and regulations. We provide support services on all of our
core systems as well as our complementary software products regardless of
whether it is delivered in-house or outsourced.
In 2005, we introduced expanded company-wide support tools and capabilities
through a suite of customer relationship management products from PeopleSoft
which we refer to internally as jSource. jSource provides the ability for
customers to utilize the internet to initiate support services, request
customization and to track the status of any customer initiated projects
online. The system is designed to provide us with comprehensive views of
our customers and the ability to view events, sales activity or service-
related issues that may transpire with each customer. jSource was initially
deployed for customer service and our sales departments and will be expanded
into the marketing aspects of our business throughout the next 12 to 18
months.
Nearly all of our in-house customers contract for annual support services
from us. These services are a significant source of recurring revenue, and
are contracted for on an annual basis and are typically priced at
approximately 18 to 20% of the particular software product's license fee.
These fees generally increase as our customers' asset base increases and as
they increase the level of functionality of their system by purchasing
additional complementary products. Software support fees are generally
billed during June and are paid in advance for the entire fiscal year, with
pro-ration for new contracts that start during the year at the time of final
conversion. Hardware support fees are also paid in advance for the entire
contract period that ranges from one to five years. Most contracts
automatically renew annually unless our customer or we give notice of
termination at least 60 days prior to expiration. Identical support is
provided to our outsourced customers by the same support personnel, but is
included as part of their overall monthly fees and therefore not billed
separately.
Research and Development
We devote significant effort and expense to develop new software, service
products and continually upgrade and enhance our existing offerings.
Typically, we upgrade our core software applications and complementary
products once per year. We believe our research and development efforts are
highly efficient because of the extensive experience of our research and
development staff and because our product development is highly customer-
driven. Through our regular contact with customers through formalized
product Focus Groups, Change Control Boards, structured strategic meetings,
at annual user group meetings, sales contacts and our ongoing maintenance
services, our customers inform us of the new products and functionalities
they desire. Research and development expenses for fiscal 2006, 2005, and
2004 were $31.9 million, $27.7 million, and $23.7 million, respectively.
Sales and Marketing
Our primary markets consist of commercial banks and credit unions with some
products being utilized in other verticals and sold through our sales staff
or channel partners.
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 dedicated sales executives are
responsible for sales activities focused on acquiring 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. We also have a dedicated sales force responsible for
new customers for our acquired businesses targeted outside our core
customer base. All sales force personnel have responsibility for a specific
territory. The sales support teams write business proposals and contracts
and prepare responses to request-for-proposals regarding our software and
hardware solutions. All of our sales professionals receive a base salary
and performance-based commission compensation.
In 2006 we introduced a new branding strategy for many of our recently
acquired companies. Today we market our products and solutions under
three primary brands: Jack Henry & Associates, Symitar and our newest
brand, ProfitStars. Each brand is focused on well defined markets with
well defined solutions. Jack Henry & Associates markets and sells core
processing solutions and integrated complementary products to US commercial
banks with assets up to $30.0 billion. Symitar markets and sells core
processing solutions and integrated complementary products to US credit
unions. Our newest brand, ProfitStars, markets and sells specialized
solutions to US banks and credit unions of all sizes, as well as to
international financial institutions and other diverse businesses.
With the development of ProfitStars, we have assimilated many of our recent
acquisitions into one common brand, creating an opportunity to increase the
awareness of this single brand as opposed to promoting each of the
acquisitions separately. This also provides us the opportunity to enhance
cross sales of additional ProfitStars solutions to existing ProfitStars
clients. The ProfitStars solutions can be sold to any bank or credit union
regardless of core system, asset size or charter, as well as to our existing
Jack Henry & Associates and Symitar clients.
Our marketing efforts consist of sponsorship and attendance at trade shows,
e-mail newsletters, print media advertisement placements, telemarketing, and
national and regional marketing campaigns. We also conduct a number of
national user group meetings each year, which enable us to keep in close
contact with our customers and demonstrate new products and services to
them.
We continue to sell and support selected products and solutions in the
Caribbean, and now have approximately 40 installations in Europe and South
America as a result of our recent acquisitions. Our international sales
have accounted for less than 1% of our total revenues in each of the three
years ended June 30, 2006, 2005, and 2004.
Backlog
Our backlog consists of contracted in-house products and services (prior to
delivery) and the remaining portion of outsourcing contracts, which are
typically for five-year periods, and approximately represents the minimum
guaranteed payments over the remainder of the contract period. Our backlog
at June 30, 2006 was $66.4 million for in-house products and services and
$155.6 million for outsourcing services, with a total backlog of $222.0
million. Of the $155.6 million amount of the backlog for outsourcing
service at June 30, 2006, approximately $114.3 million is not expected to be
realized during fiscal 2007 due to the long-term nature of many of our
outsourcing service contracts. Backlog at June 30, 2005 was $64.0 million
for in-house products and services and $135.1 million for outsourcing
services, with a total backlog of $199.1 million. Our in-house backlog is
subject to seasonal variations and can fluctuate quarterly. Our outsourcing
backlog continues to experience solid growth with new contracting activity
and as we recognize revenue throughout the coming fiscal year, the backlog
is expected to remain constant due to the revenue surpassing the new
contracting activity.
Competition
The market for companies providing technology solutions to financial
institutions is competitive, and we expect continued strong competition from
both existing competitors and companies entering our existing or future
markets. Some of our current competitors have longer operating histories,
larger customer bases, and greater financial resources. The principal
competitive factors affecting the market for our services include
comprehensiveness of the applications, features and functionality,
flexibility and ease of use, customer support, references from existing
customers and price. We compete with large vendors that offer transaction
processing products and services to financial institutions, including
Fidelity National Information Services, Inc., Fiserv, Inc., Open Solutions,
Inc., and Metavante (a subsidiary of Marshall and Isley Corporation). In
addition, we compete with a number of providers that offer one or more
specialized products or services. There has been significant consolidation
over the last decade among providers of information technology products and
services to financial institutions, and we believe this consolidation will
continue in the future.
Intellectual Property, Patents, and Trademarks
Although we believe that our success depends upon our technical expertise
more than on our proprietary rights, our future success and ability to
compete depends in part upon our proprietary technology. We have registered
or filed applications for our primary trademarks. Most of our technology is
not patented. Instead, we rely on a combination of contractual rights and
copyrights, trademarks and trade secrets to establish and protect our
proprietary technology. We generally enter into confidentiality agreements
with our employees, consultants, resellers, customers, and potential
customers. We restrict access to and distribution of our source code and
further limit the disclosure and use of other proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy or otherwise obtain or use our products or technology.
We cannot be certain that the steps taken by us in this regard
will be adequate to prevent misappropriation of our technology, or that
our competitors will not independently develop technologies that are
substantially equivalent or superior to our technology.
Government Regulation
The financial services industry is subject to extensive and complex federal
and state regulation. Our current and prospective customers, which consist
of financial institutions such as community/regional banks and credit
unions, operate in markets that are subject to substantial regulatory
oversight and supervision. We must ensure our products and services work
within the extensive and evolving regulatory requirements applicable to our
customers, including but not limited to those under the federal truth-in-
lending and truth-in-savings rules, the Privacy of Consumer Financial
Information regulations, usury laws, the Equal Credit Opportunity Act, the
Fair Housing Act, the Electronic Funds Transfer Act, the Fair Credit
Reporting Act, the Bank Secrecy Act, the USA Patriot Act, the Gramm-Leach-
Bliley Act, and the Community Reinvestment Act. The compliance of our
products and services with these requirements depends on a variety of
factors including the particular functionality, the interactive design and
the classification of customers, and the manner in which the customer
utilizes the system. Our customers must assess and determine what is
required of them under these regulations and they contract with us to assist
them, through our products and services in meeting their regulatory needs.
It is not possible to predict the impact any of these regulations could have
on our business in the future.
We are not chartered by the Office of the Comptroller of Currency, the Board
of Governors of the Federal Reserve System, the National Credit Union
Administration or other federal or state agencies that regulate or supervise
depository institutions. The services provided by our OutLink Data Centers
are subject to examination by the Federal Financial Institution Examination
Council regulators under the Bank Service Company Act. On occasion these
services are also subject to examination by state banking authorities.
We provide outsourced data and item processing through our geographically
dispersed OutLink Data Centers, electronic transaction processing through
PassPort ATM and Select Payment, Internet banking through NetTeller
and MemberConnect online banking, and bank business recovery services
through Centurion Disaster Recovery. As a service provider to financial
institutions, our operations are governed by the same regulatory
requirements as those imposed on financial institutions. We are subject to
periodic review by Federal Financial Institution Examination Council
regulators who have broad supervisory authority to remedy any shortcomings
identified in such reviews.
Employees
As of June 30, 2006 and 2005, we had 3,310 and 2,989 full time employees,
respectively. Of our employees, approximately 660 are employed in the
credit union segment of our business, with the remainder employed in the
bank business segment or in general and administrative functions that serve
both segments. Our employees are not covered by a collective bargaining
agreement and there have been no labor-related work stoppages. We consider
our relationship with our employees to be good.
Available Information
Our internet website is easily accessible to the public at
www.jackhenry.com. Our key corporate governance documents and our Code of
Conduct addressing matters of business ethics are available in the "Investor
Relations" portion of the website, together with archives of press releases
and other materials. Our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and other filings and amendments
thereto that we make with the U.S. Securities and Exchange Commission (the
"SEC") are available free of charge on the website as soon as reasonably
practicable after such reports have been filed with or furnished to the SEC.
Item 1A. Risk Factors
The Company's business and the results of its operations are affected by
numerous factors and uncertainties, some of which are beyond our control.
The following is a description of some of the important risks and
uncertainties that may cause the actual results of the Company's operations
in future periods to differ from those expected or desired.
Changes in the banking and credit union industry could reduce demand for our
products. Cyclical fluctuations in economic conditions affect profitability
and revenue growth at commercial banks and credit unions. Unfavorable
economic conditions negatively affect the spending of banks and credit
unions, including spending on computer software and hardware. Such
conditions could reduce both our sales to new customers and
upgrade/complementary product sales to existing customers.
We may not be able to manage growth. We have grown both internally
and through acquisitions. Our expansion has and will continue to place
significant demands on our administrative, operational, financial and
management personnel and systems. We may not be able to enhance and expand
our product lines, manage costs, adapt our infrastructure and modify our
systems to accommodate future growth.
If we fail to adapt our products and services to changes in technology, we
could lose existing customers and be unable to attract new business. The
markets for our software and hardware products and services are
characterized by changing customer requirements and rapid technological
changes. These factors and new product introductions by our existing
competitors or by new market entrants could reduce the demand for our
existing products and services and we may be required to develop or acquire
new products and services. Our future success is dependent on our ability
to enhance our existing products and services in a timely manner and to
develop or acquire new products and services. If we are unable to develop
or acquire new products and services as planned, or if we fail to sell our
new or enhanced products and services, we may incur unanticipated expenses
or fail to achieve anticipated revenues.
Security problems could damage our reputation and business. We rely on
standard encryption, network and Internet security systems, most of which we
license from third parties, to provide the security and authentication
necessary to effect secure transmission of data. Computer networks and the
Internet are vulnerable to unauthorized access, computer viruses and other
disruptive problems. Individual personal computers can be stolen, and
customer data tapes can be lost in shipment. Under state and proposed
federal laws requiring consumer notification of security breaches, the costs
to remediate security breaches can be substantial. Advances in computer
capabilities, new discoveries in the field of cryptography or other events
or developments may render our security measures inadequate. Security risks
may result in liability to us and also may deter financial institutions from
purchasing our products. We will continue to expend significant capital and
other resources protecting against the threat of security breaches, and we
may need to expend resources alleviating problems caused by breaches.
Eliminating computer viruses and addressing other security problems may
result in interruptions, delays or cessation of service to users, any of
which could harm our business.
Our growth may be affected if we are unable to find or complete suitable
acquisitions. We have augmented the growth of our business with a number of
acquisitions and we plan to continue to acquire appropriate businesses,
products and services. This strategy depends on our ability to identify,
negotiate and finance suitable acquisitions. Substantial recent merger and
acquisition activity in our industry has affected the availability and
pricing of such acquisitions. If we are unable to acquire suitable
acquisition candidates, we may experience slower growth.
Acquisitions may be costly and difficult to integrate. We have acquired a
number of businesses in the last few years and will continue to explore
acquisitions in the future. We may not be able to successfully integrate
acquired companies. We may encounter problems with the integration of new
businesses including: financial control and computer system compatibility;
unanticipated costs; unanticipated quality or customer problems with
acquired products or services; differing regulatory and industry standards;
diversion of management's attention; adverse effects on existing business
relationships with suppliers and customers; loss of key employees; and
significant amortization expenses related to acquired assets. To finance
future acquisitions, we may have to increase our borrowing or sell equity or
debt securities to the public. Without additional acquisitions, we may not
be able to grow and to develop new products and services as quickly as we
have in the past to meet the competition. If we fail to integrate our
acquisitions, our business, financial condition and results of operations
could be materially and adversely affected. Failed acquisitions could also
produce material and unpredictable impairment charges as we periodically
review our acquired assets.
Competition or general economic conditions may result in decreased demand or
require price reductions or other concessions to customers which could
result in lower margins and reduce income. We vigorously compete with a
variety of software vendors in all of our major product lines. We compete
on the basis of product quality, reliability, performance, ease of use,
quality of support, integration with other products and pricing. Some of
our competitors may have advantages over us due to their size, product
lines, greater marketing resources, or exclusive intellectual property
rights. If competitors offer more favorable pricing, payment or other
contractual terms, warranties, or functionality, or if general economic
conditions decline such that customers are less willing or able to pay the
cost of our products, we may need to lower prices or offer favorable terms
in order to successfully compete.
The loss of key employees could adversely affect our business. We depend on
the contributions and abilities of our senior management. Our Company has
grown significantly in recent years and our management remains concentrated
in a small number of key employees. If we lose one or more of our key
employees, we could suffer a loss of sales and delays in new product
development, and management resources would have to be diverted from other
activities to compensate for this loss. We do not have employment
agreements with any of our executive officers.
Consolidation of financial institutions will continue to reduce the number
of our customers and potential customers. Our primary market consists of
approximately 9,000 commercial and savings banks and 9,000 credit unions.
The number of commercial banks and credit unions has decreased because of
mergers and acquisitions over the last several decades and is expected to
continue to decrease as more consolidation occurs.
The services we provide to our customers are subject to government
regulation that could hinder the development of portions of our business or
impose constraints on the way we conduct our operations. The financial
services industry is subject to extensive and complex federal and state
regulation. As a supplier of services to financial institutions, portions
of our operations are examined by the Office of the Comptroller of the
Currency, the Federal Reserve Board and the Federal Deposit Insurance
Corporation, among other regulatory agencies. These agencies regulate
services we provide and the manner in which we operate, and we are required
to comply with a broad range of applicable laws and regulations. In
addition, existing laws, regulations, and policies could be amended or
interpreted differently by regulators in a manner that has a negative impact
on our existing operations or that limits our future growth or expansion.
Our customers are also regulated entities, and actions by regulatory
authorities could determine both the decisions they make concerning the
purchase of data processing and other services and the timing and
implementation of these decisions. Concerns are growing with respect to the
use, confidentiality, and security of private customer information.
Regulatory agencies, Congress and state legislatures are considering
numerous regulatory and statutory proposals to protect the interests of
consumers and to require compliance with standards and policies that have
not been defined.
The software we provide to our customers is also affected by government
regulation. We are generally obligated to our customers to provide software
solutions that comply with applicable federal and state regulations.
Substantial software research and development and other corporate resources
have been and will continue to be applied to adapt our software products to
this evolving, complex and often unpredictable regulatory environment. Our
failure to provide compliant solutions could result in significant fines or
consumer liability on our customers, for which we may bear ultimate
liability.
As technology becomes less expensive and more advanced, purchase prices of
hardware are declining and our revenues and profits from remarketing
arrangements may decrease. Computer hardware technology is rapidly
developing. Hardware manufacturers are producing less expensive and more
powerful equipment each year, and we expect this trend to continue into the
future. As computer hardware becomes less expensive, revenues and profits
derived from our hardware remarketing may decrease and become a smaller
portion of our revenues and profits.
An operational failure in our outsourcing facilities could cause us to lose
customers. Damage or destruction that interrupts our outsourcing operations
could damage our relationship with customers and may cause us to incur
substantial additional expense to repair or replace damaged equipment. Our
back-up systems and procedures may not prevent disruption, such as a
prolonged interruption of our transaction processing services. In the event
that an interruption of our network extends for more than several hours, we
may experience data loss or a reduction in revenues by reason of such
interruption. In addition, a significant interruption of service could have
a negative impact on our reputation and could lead our present and potential
customers to choose other service providers.
If our strategic relationship with IBM were terminated, it could have a
negative impact on the continuing success of our business. We market and
sell IBM hardware and equipment to our customers under an IBM Business
Partner Agreement and resell maintenance on IBM hardware products to our
customers. Much of our software is designed to be compatible with the
IBM hardware that is run by a majority of our customers. If IBM were
to terminate or fundamentally modify our strategic relationship, our
relationship with our customers and our revenues and earnings could suffer.
We could also lose software market share or be required to redesign existing
products or develop new products for new hardware platforms.
If others claim that we have infringed their intellectual property rights,
we could be liable for significant damages. We have agreed to indemnify
many of our customers against claims that our products and services infringe
on the proprietary rights of others. We anticipate that the number of
infringement claims will increase as the number of our software solutions
and services increases and the functionality of our products and services
expands. Any such claims, whether with or without merit, could be time-
consuming, result in costly litigation and may not be resolved on terms
favorable to us.
Expansion of services to non-traditional customers could expose us to new
risks. Some of our recent acquisitions include business lines that are
marketed outside our traditional, regulated, and litigation-averse base of
financial institution customers. These non-regulated customers may entail
greater operational, credit and litigation risks than we have faced before
and could result in increases in bad debts and litigation costs.
Increases in service revenue as a percentage of total revenues may decrease
overall margins. We continue to experience a trend of a greater proportion
of our products being sold as outsourcing services rather than in-house
licenses. We realize lower margins on service revenues than on license
revenues. Thus, if service revenue increases as a percentage of total
revenue, our gross margins will be lower and our operating results may be
impacted.
Failure to achieve favorable renewals of service contracts could negatively
affect our outsourcing business. Our contracts with our customers for
outsourced data processing services generally run for a period of 3-5 years.
Because of the rapid growth of our outsourcing business over the last five
years, we will experience greater numbers of these contracts coming up for
renewal over the next few years. Renewal time presents our customers with
the opportunity to consider other providers or to renegotiate their
contracts with us. If we are not successful in achieving high renewal rates
upon favorable terms, our outsourcing revenues and profit margins will
suffer.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We own approximately 154 acres located in Monett, Missouri on which we
maintain nine office buildings and shipping & receiving and maintenance
buildings. We also own buildings in Houston, Texas; Allen, Texas;
Albuquerque, New Mexico; Birmingham, Alabama; Lenexa, Kansas; Angola,
Indiana; Shawnee Mission, Kansas; Rogers, Arkansas; Oklahoma City, Oklahoma
and San Diego, California. Our owned facilities represent approximately
793,000 square feet of office space in nine states. We have 46 leased
office facilities in 25 states, which total approximately 333,000 square
feet. Approximately 26% or 46,000 square feet of the office space in Allen,
TX is leased to an outside tenant. The balance of our owned and leased
office facilities are for normal business purposes.
Of our facilities, the credit union business segment uses office space
totaling approximately 122,000 square feet in seven facilities. The majority
of our San Diego, California offices are used in the credit union business
segment, as are portions of six other office facilities. The remainder of
our leased and owned facilities, approximately 1,004,000 square feet of
office space, is primarily devoted to serving our bank business segment or
supports our whole business.
We own six aircraft. Many of our customers are located in communities that
do not have an easily accessible commercial airline service. We primarily
use our airplanes in connection with implementation, sales of systems and
internal requirements for day-to-day operations. Transportation costs for
implementation and other customer services are billed to our customers. We
lease property, including real estate and related facilities, at the Monett,
Missouri municipal airport.
Item 3. Legal Proceedings
We are subject to various routine legal proceedings and claims arising in
the ordinary course of business. We do not expect that the results in any of
these legal proceedings will have a material adverse effect on our business,
financial condition, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
The Company's common stock is quoted on the NASDAQ Global Select Market
("NASDAQ"), formerly known as the NASDAQ National Market, under the symbol
"JKHY". The following table sets forth, for the periods indicated, the high
and low sales price per share of the common stock as reported by NASDAQ.
Fiscal 2006 High Low
-------------------------------------
First Quarter $19.80 $18.04
Second Quarter 19.62 16.56
Third Quarter 22.98 19.09
Fourth Quarter 23.77 18.14
Fiscal 2005 High Low
-------------------------------------
First Quarter $20.13 $17.17
Second Quarter 20.55 18.50
Third Quarter 21.96 17.79
Fourth Quarter 19.19 15.35
The Company established a practice of paying quarterly dividends at the end
of fiscal 1990 and has paid dividends with respect to every quarter since
that time. Quarterly dividends per share paid on the common stock for the
two most recent fiscal years ended June 30, 2006 and 2005 are as follows:
Fiscal 2006 Dividend
----------------------------
First Quarter $0.045
Second Quarter 0.045
Third Quarter 0.055
Fourth Quarter 0.055
Fiscal 2005 Dividend
----------------------------
First Quarter $0.040
Second Quarter 0.040
Third Quarter 0.045
Fourth Quarter 0.045
The declaration and payment of any future dividends will continue to be at
the discretion of our Board of Directors and will depend upon, among other
factors, our earnings, capital requirements, contractual restrictions, and
operating and financial condition. The Company does not currently foresee
any changes in its dividend practices.
Information regarding the Company's equity compensation plans is set forth
under the caption "Equity Compensation Plan Information" in the Company's
definitive Proxy Statement and is incorporated herein by reference.
On August 18, 2006, there were approximately 44,757 holders of the Company's
common stock. On that same date the last sale price of the common shares as
reported on NASDAQ was $18.92 per share.
Issuer Purchases of Equity Securities
The following shares of the Company were repurchased during the quarter
ended June 30, 2006:
Total Number Maximum Number
Average of Shares of Shares that
Total Number Price Purchased as May Yet Be
of Shares Paid Per Part of Publicly Purchased Under
Period Purchased Share Announced Plans the Plans (1)
---------------------- --------- ------- --------------- ---------------
April 1-April 30, 2006 - $ 0.00 - 3,750,116
May 1 - May 31, 2006 1,076,862 $ 19.28 1,076,862 2,673,254
June 1 - June 30, 2006 448,700 $ 18.91 448,700 2,224,554
--------- ------- --------------- --------------
Total 1,525,562 $ 19.17 1,525,562 2,224,554
========= ======= =============== ==============
(1) Purchases made under the stock repurchase authorization approved by the
Company's Board of Directors on October 4, 2002 with respect to 6.0 million
shares, which was increased by 2.0 million shares on April 29, 2005. On
August 25, 2006, following the end of the quarter, the Company's Board of
Directors approved an additional 5.0 million share increase to the stock
repurchase authorization. These authorizations have no specific dollar or
share price targets and no expiration dates.
Item 6. Selected Financial Data
Selected Financial Data
(In Thousands, Except Per Share Data)
YEAR ENDED JUNE 30,
---------------------------------------------------
Income Statement Data 2006 2005 2004 2003 2002
--------------------- ---------------------------------------------------
Revenue (1) $592,205 $535,863 $467,415 $404,627 $396,657
Net income $ 89,924 $ 75,501 $ 62,315 $ 49,397 $ 57,065
Diluted net income per share $ 0.96 $ 0.81 $ 0.68 $ 0.55 $ 0.62
Dividends declared per share $ 0.20 $ 0.17 $ 0.15 $ 0.14 $ 0.13
Balance Sheet Data
------------------
Working capital $ 42,918 $ 13,710 $ 85,818 $ 70,482 $ 67,321
Total assets $906,067 $814,153 $653,614 $548,575 $486,142
Long-term debt 421 $ - $ - $ - $ -
Stockholders' equity $575,212 $517,154 $442,918 $365,223 $340,739
(1) Revenue includes license sales, support and service revenues, and
hardware sales, less returns and allowances.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with the
"Selected Financial Data" and the consolidated financial statements and
related notes included elsewhere in this report.
OVERVIEW
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 implementation services for our systems and provide
continuing customer support services after the systems are implemented. 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 six data centers and 23 item-processing
centers located throughout the United States.
A detailed discussion of the major components of the results of operations
follows. All amounts are in thousands and discussions compare fiscal 2006
to fiscal 2005 and compare fiscal 2005 to fiscal 2004.
We derive revenues from three primary sources of revenue:
- software licenses;
- support and service fees, which include implementation services; and
- hardware sales, which includes all non-software remarketed products.
Over the last five fiscal years, our revenues have grown from $396,657 in
fiscal 2002 to $592,205 in fiscal 2006. Net income has grown from $57,065
in fiscal 2002 to $89,924 in fiscal 2006. This growth has resulted primarily
from internal expansion supplemented by strategic acquisitions, allowing us
to develop and acquire new products and services for approximately 2,300
customers who utilize our core software systems as of June 30, 2006.
Since the start of fiscal 2002, we have completed 17 acquisitions. All
of these acquisitions were accounted for using the purchase method of
accounting and our consolidated financial statements include the results of
operations of the acquired companies from their respective acquisition
dates.
License revenue represents the sale and delivery of application software
systems contracted with us by the customer. We license our proprietary
software products under standard license agreements 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.
Support and services fees are generated from implementation services
contracted with us by the customer, ongoing support services to assist the
customer in operating the systems and to enhance and update the software,
and from providing outsourced data processing services and ATM and debit
card processing services. Outsourcing services are performed through our
data and item centers. Revenues from outsourced item and data processing and
ATM and debit card processing services are derived from monthly usage fees
typically under five-year service contracts with our customers.
Cost of license fees represents the third party vendor costs associated with
license fee revenue.
Cost of services represents costs associated with conversion and
implementation 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.
We have entered into remarketing agreements with several hardware
manufacturers under which we sell computer hardware and related services to
our customers. Cost of hardware consists of the direct and related costs of
purchasing the equipment from the manufacturers and delivery to our
customers.
We have two business segments: bank systems and services and credit union
systems and services. The respective segments include all related license,
support and service, and hardware sales along with the related cost of
sales.
RESULTS OF OPERATIONS
FISCAL 2006 COMPARED TO FISCAL 2005
Fiscal 2006 showed strong growth in support and service revenues and
improved gross and operating margins, which allowed us to leverage an 11%
increase in total revenue to a 19% increase in net income.
REVENUE
License Revenue
Year Ended June 30, % Change
------------------- --------
2006 2005
-------- --------
License $ 84,014 $ 82,374 2%
Percentage of total revenue 14% 15%
License revenue represents the delivery and acceptance of application
software systems contracted by us with 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 by $1,640 compared to last fiscal year mainly due
to growth in delivery and acceptance of software systems within the banking
segment, partially offset by a decrease in the credit union segment which
had experienced record revenues in fiscal 2005. Year-to-date license revenue
in fiscal 2006 experienced growth in many software solutions. The leading
elements were Synergy Intelligent Document Imaging[TM] (our intelligent
document imaging and archiving solution), Silverlake System[R] (our
flagship software solution for larger banks), Biodentify[R] (our biometric
fingerprint security solution), and Fraud Detective[TM] (our anti-fraud and
anti-money laundering software solution). In addition, both PROFITability[R]
(our product profitability solution) and PROFITstar ALM/Budgeting (our
asset/liability and budgeting solution), which were acquired during fiscal
2006, contributed to license revenue growth.
Support and Service Revenue
Year Ended June 30, % Change
------------------- --------
2006 2005
-------- --------
Support and service $ 425,661 $ 364,076 17%
Percentage of total revenue 72% 68%
Year Over Year Change $ Change % Change
-------- --------
In-House Support & Other Services $ 26,932 16%
EFT Support 18,357 32%
Outsourcing Services 13,714 15%
Implementation Services 2,582 6%
--------
Total Increase $ 61,585
========
Support and service revenues are generated from implementation services
(including conversion, installation, configuration and training), annual
support to assist the customer in operating their systems and to enhance and
update the software, outsourced data processing services and ATM and debit
card processing services.
There was strong growth in all of the support and service revenue
components. In-house support and other services increased primarily from
additional software licenses sold during the previous twelve months. EFT
support, including ATM and debit card transaction processing services,
experienced the largest percentage of growth. Our daily transaction counts
are rapidly growing as we have added customers and as our customers continue
to experience consistent organic growth in ATM and debit card transactions.
Outsourcing services for banks and credit unions also continue to drive
revenue growth at a strong pace as we add new bank and credit union
customers and open new data processing sites. We expect growth in
outsourcing to continue as we add services from recent acquisitions to our
existing and new customers. Implementation services reflect growth as
contracting activity continues for new license implementation as well as
for conversion activities for our existing customers who have acquired
institutions that had used other software systems.
Hardware Revenue
Year Ended June 30, % Change
------------------- --------
2006 2005
-------- --------
Hardware $ 82,530 $ 89,413 -8%
Percentage of total revenue 14% 17%
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 continued to decrease as in prior years due to the overall
rising equipment processing power and decreasing equipment prices. The
Company experienced growth in revenues related to IBM iSeries machines,
which was offset by a decrease in revenues related to pSeries machines.
These changes are consistent with the changes experienced with our license
revenues. In addition, the Company discontinued offering certain services
related to uninterruptible power supply equipment during fiscal 2005 which
led to a decrease sales of that equipment during fiscal 2006.
COST OF SALES AND GROSS PROFIT
Cost of license represents the cost of software from third party vendors
through remarketing agreements. These costs are recognized when license
revenue is recognized. Cost of support and service represents costs
associated with conversion and implementation 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 operating 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. These costs are recognized at the same time as the related
hardware revenue is recognized. Ongoing operating costs to provide support
to our customers are recognized as they are incurred.
Cost of Sales and Gross Profit
Year Ended June 30, % Change
------------------- --------
2006 2005
-------- --------
Cost of License $ 2,717 $ 5,547 -51%
Percentage of total revenue >1% 1%
License Gross Profit $ 81,297 $ 76,827 +6%
Gross Profit Margin 97% 93%
-------------------
Cost of support and service $ 272,383 $ 244,097 +12%
Percentage of total revenue 46% 46%
Support and Service Gross Profit $ 153,278 $ 119,979 +28%
Gross Profit Margin 36% 33%
-------------------
Cost of hardware $ 60,658 $ 63,769 -5%
Percentage of total revenue 10% 12%
Hardware Gross Profit $ 21,872 $ 25,644 -15%
Gross Profit Margin 27% 29%
-------------------
TOTAL COST OF SALES $ 335,758 $ 313,413 +7%
Percentage of total revenue 57% 58%
TOTAL GROSS PROFIT $ 256,447 $ 222,450 +15%
Gross Profit Margin 43% 42%
Cost of license decreased for the fiscal year due to fewer third party
reseller agreement software vendor costs. Gross profit margin on license
revenue increased because a smaller percentage of the revenue growth was
attributable to these reseller agreements. Cost of support and service
increased for the year primarily due to additional personnel costs
(including a 9% increase in headcount) and costs related to the expansion
of infrastructure (including depreciation, amortization, and maintenance
contracts) as compared to last year. The gross profit margin increased to
36% from 33% in support and service, primarily due to efficiencies gained as
recent acquisitions have become more fully integrated and to a shift in
sales mix toward services with slightly higher margins, such as our ATM and
debit card processing services. Cost of hardware decreased for the year, in
line with the decrease in hardware sales, primarily due to the types of
equipment sold, with varying vendor incentives in the current year.
Incentives and rebates received from vendors fluctuate quarterly and
annually due to changing thresholds established by the vendors. Hardware
gross profit margin decreased due to the number of hardware shipments, sales
mix and vendor rebates received throughout the year.
OPERATING EXPENSES
Selling and Marketing
Year Ended June 30, % Change
------------------- --------
2006 2005
-------- --------
Selling and marketing $ 50,007 $ 46,630 +7%
Percentage of total revenue 8% 9%
Dedicated sales forces, inside sales teams, technical sales support teams
and channel partners conduct our sales efforts for our 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 2006 fiscal year, the selling and marketing expenses increase was
due to growth in personnel costs and additional expenses related to product
promotion, and generally correlates to the increase in revenue.
Research and Development
Year Ended June 30, % Change
------------------- --------
2006 2005
-------- --------
Research and development $ 31,874 $ 27,664 +15%
Percentage of total revenue 5% 5%
We devote significant effort and expense to develop new software, to service
products and to continually upgrade and enhance our existing offerings. We
upgrade our various core and complementary software applications throughout
the year. We believe our research and development efforts are highly
efficient because of the extensive experience of our research and
development staff and because our product development is highly customer-
driven.
Research and development expenses grew primarily due to employee costs
associated with a 21% increase in headcount for ongoing development of new
products and enhancements to existing products, and depreciation and
equipment maintenance expense. Research and development expenses remained
at 5% of total revenue for both fiscal years.
General and Administrative
Year Ended June 30, % Change
------------------- --------
2006 2005
-------- --------
General and administrative $ 35,208 $ 29,087 +21%
Percentage of total revenue 6% 5%
General and administrative expense increased primarily due to employee costs
associated with a 27% increase in headcount and increases in employee
benefit costs. Also impacting the increase was growth in overhead related
costs such as insurance, professional services and maintenance contracts.
INTEREST INCOME (EXPENSE)
Interest income increased 78% from $1,162 to $2,066 due primarily to larger
invested balances coupled with higher interest rates on invested balances.
Interest expense increased 249% from $388 to $1,355 due to borrowings on the
revolving bank credit facilities.
PROVISION FOR INCOME TAXES
The provision for income taxes was $50,145 or 35.8% of income before income
taxes in fiscal 2006 compared with $44,342 or 37.0% of income before income
taxes fiscal 2005. The decrease in the percentage for fiscal 2006 is due to
several factors, including the Section 199 Deduction for Domestic Production
Activities, which is new this year. Also impacting this year's tax rate was
the Company's tax treatment of the deduction for meals and entertainment
expenses, as well as changes in the estimated state tax rates and from our
re-evaluation of changes in state tax laws in relationship to our tax
structure.
NET INCOME
Net income increased 19% from $75,501, or $0.81 per diluted share in fiscal
2005 to $89,923, or $0.96 per diluted share in fiscal 2006.
FISCAL 2005 COMPARED TO FISCAL 2004
Fiscal 2005 showed strong growth in revenues and improved gross and
operating margins, which allowed us to leverage a 15% increase in revenues
to a 21% increase in net income.
REVENUE
License Revenue
Year Ended June 30, % Change
------------------- --------
2005 2004
-------- --------
License $ 82,374 $ 62,593 +32%
Percentage of total revenue 15% 13%
License revenue represents the delivery and acceptance 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 by $19,781 from fiscal 2004 to fiscal 2005 mainly
due to growth in delivery and acceptance of software systems within both the
bank and credit union segments. License revenue in fiscal 2005 experienced
growth in many software solutions. The leading elements were Episys[R] (our
flagship software solution for larger credit unions), third party credit
union ancillary software solutions, Silverlake System[R] (our flagship
software solution for larger banks), 4|sight[TM] (our complementary image
solution), and Fraud Detective[TM] (our anti-fraud and anti-money laundering
software solution).
Support and Service Revenue
Year Ended June 30, % Change
------------------- --------
2005 2004
-------- --------
Support and service $ 364,076 $ 311,287 +17%
Percentage of total revenue 68% 67%
Year Over Year Change $ Change % Change
-------- --------
In-House Support & Other Services $ 23,264 16%
EFT Support 15,577 43%
Outsourcing Services 11,016 13%
Implementation Services 2,932 7%
--------
Total Increase $ 52,789
========
Support and service revenues are generated from implementation services
(including conversion, installation, configuration and training), annual
support to assist the customer in operating their systems and to enhance and
update the software, outsourced data processing services and ATM and debit
card processing services.
There was strong growth in all of the support and service revenue
components. In-house support and other services increased primarily from
additional software licenses sold during the previous twelve months. EFT
support, including ATM and debit card transaction processing services,
experienced the largest percentage of growth. Our daily transaction counts
are rapidly growing as our customers continue to experience consistent
organic growth in ATM and debit card transactions as well as strong new
customer contracting activity. Outsourcing services for banks and credit
unions also continue to drive revenue growth at a strong pace as we add new
bank and credit union customers and open new data processing sites. We
expect growth in outsourcing to continue as we add services from recent
acquisitions to our existing and new customers. Implementation services
reflect growth as contracting activity continues for new license
implementation as well as merger conversions for our existing customers.
Hardware Revenue
Year Ended June 30, % Change
------------------- --------
2005 2004
-------- --------
Hardware $ 89,413 $ 93,535 -4%
Percentage of total revenue 17% 20%
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 continued to decrease as in prior years due to the overall
rising equipment processing power and decreasing equipment prices. There
was an increase in servers and the related components. Hardware maintenance
revenue which represents 1.9% of the hardware revenue increased due to
maintenance contracts acquired relating to acquisitions.
COST OF SALES AND GROSS PROFIT
Cost of license represents the cost of software from third party vendors
through remarketing agreements. These costs are recognized when license
revenue is recognized. Cost of support and service represents costs
associated with conversion and implementation 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 operating 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. These costs are recognized at the same time as the related
hardware revenue is recognized. Ongoing operating costs to provide support
to our customers are recognized as they are incurred.
Cost of Sales and Gross Profit
Year Ended June 30, % Change
------------------- --------
2005 2004
-------- --------
Cost of License $ 5,547 $ 4,738 +17%
Percentage of total revenue 1% 1%
License Gross Profit $ 76,827 $ 57,855 +33%
Gross Profit Margin 93% 92%
-------------------
Cost of support and service $ 244,097 $ 207,730 +18%
Percentage of total revenue 46% 44%
Support and Service Gross Profit $ 119,979 $ 103,557 +16%
Gross Profit Margin 33% 33%
-------------------
Cost of hardware $ 63,769 $ 66,969 -5%
Percentage of total revenue 12% 14%
Hardware Gross Profit $ 25,644 $ 26,566 -3%
Gross Profit Margin 29% 28%
-------------------
TOTAL COST OF SALES $ 313,413 $ 279,437 +12%
Percentage of total revenue 58% 60%
TOTAL GROSS PROFIT $ 222,450 $ 187,978 +18%
Gross Profit Margin 42% 40%
Cost of license increased for the fiscal year due to more third party
reseller agreement software vendor costs. These costs increased primarily
in the prior quarters of the current fiscal year. Gross profit margin on
license revenue increased slightly due to the associated costs for third
party software marketed through reseller agreements. Cost of support and
service increased for the year, in line with the support and service revenue
increase, primarily due to additional personnel costs and costs relating to
the expanding infrastructure (including depreciation, amortization, and
maintenance contracts) as compared to the same periods last year. The gross
profit margin remained at 33% in support and service for both fiscal years,
primarily due to increased headcount relating to support and service,
facility costs related to new acquisitions, and depreciation expense of new
equipment. Cost of hardware decreased for the year, in line with the
decrease in hardware sales, primarily due to the types of equipment sold,
with varying vendor incentives in the current year. Incentives and rebates
received from vendors fluctuate quarterly and annually due to changing
thresholds established by the vendors. Hardware gross profit margin
increased minimally due to the number of hardware shipments, sales mix and
vendor rebates received throughout the year.
OPERATING EXPENSES
Selling and Marketing
Year Ended June 30, % Change
------------------- --------
2005 2004
-------- --------
Selling and marketing $ 46,630 $ 35,964 +30%
Percentage of total revenue 9% 8%
Dedicated sales forces, inside sales teams, technical sales support teams
and channel partners conduct our sales efforts for our 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 2005 fiscal year, selling and marketing expenses increased due to
commissions and expenses related to revenue growth with a direct correlation
to license and hardware revenue. Sales force head count from acquisitions
during fiscal 2005 also contributed to the additional expenses for the year.
Research and Development
Year Ended June 30, % Change
------------------- --------
2005 2004
-------- --------
Research and development $ 27,664 $ 23,674 +17%
Percentage of total revenue 5% 5%
We devote significant effort and expense to develop new software; to
service products and to continually upgrade and enhance our existing
offerings. Typically, we upgrade all of our core and complementary software
applications once per year. We believe our research and development efforts
are highly efficient because of the extensive experience of our research and
development staff and because our product development is highly customer-
driven.
Research and development expenses grew primarily due to employee costs
associated with increased headcount for ongoing development of new
products and enhancements to existing products, depreciation and equipment
maintenance expense and employees added from acquisitions. Research and
development expenses remained at 5% of total revenue for both fiscal years.
General and Administrative
Year Ended June 30, % Change
------------------- --------
2005 2004
-------- --------
General and administrative $ 29,087 $ 29,534 -2%
Percentage of total revenue 5% 6%
General and administrative expense decreased due to overall cost control
measures implemented throughout the year. In addition, General and
administrative expenses decreased due to a loss on disposal of assets of
approximately $1,000 along with assets being fully depreciated during fiscal
2005.
INTEREST INCOME (EXPENSE)
Interest income increased 16% from $1,006 to $1,162 due primarily to higher
interest rates on invested balances. Interest expense increased 263% from
$107 to $388 due to borrowings on the revolving bank credit facilities.
PROVISION FOR INCOME TAXES
The provision for income taxes was $44,342 or 37.0% of income before income
taxes in fiscal 2005 compared with $37,390 or 37.5% of income before income
taxes fiscal 2004. The decrease in the percentage for fiscal 2005 is due to
changes in the estimated state tax rates and from our reevaluation of
changes in state tax laws in relationship to our tax structure.
NET INCOME
Net income increased 21% from $62,315, or $0.68 per diluted share in fiscal
2004 to $75,501, or $0.81 per diluted share in fiscal 2005.
BUSINESS SEGMENT DISCUSSION
Bank Systems and Services
2006 % Change 2005 % Change 2004
-------- -------- -------- -------- --------
Revenue $ 482,886 +13% $ 428,695 +12% $ 382,084
Gross Profit $ 214,817 +18% $ 181,792 +18% $ 154,646
Gross Profit Margin 44% 42% 40%
In fiscal 2006, the revenue increase in the bank systems and services
business segment is primarily due to improved license sales for most
products and continued growth in support and service revenue. Gross profit
increased due to growth in license and support and service revenue, which
carry a higher gross profit margin. Support and service revenue, which is
the largest component of total revenues for the banking segment, experienced
growth in ATM and debit card processing services and in in-house
maintenance. The increase in maintenance revenue was largely driven by
recent acquisition activity. Hardware revenue, which usually carries a
lower gross profit margin, decreased by 10%. The mix of revenue combined
with improved procedures and overall cost controls allowed us to leverage
our resources, resulting in a steady increase to our profit margin year over
year.
In fiscal 2005, the revenue increase in the bank systems and services
business segment is primarily due to improved license sales for most
products and continued growth in support and service revenue. Gross profit
increased in fiscal 2005, due to growth in license and support and service
revenue, which carry a higher gross profit margin. There was a decrease in
hardware revenue, which usually carries a lower gross profit margin. The
mix of revenue combined with improved procedures and overall cost controls
allowed us to leverage our resources, resulting in a steady increase to our
profit margin year over year.
Credit Union Systems and Services
2006 % Change 2005 % Change 2004
-------- -------- -------- -------- --------
Revenue $ 109,319 +2% $ 107,168 +26% $ 85,331
Gross Profit $ 41,630 +2% $ 40,658 +22% $ 33,332
Gross Profit Margin 38% 38% 39%
In fiscal 2006, revenues in the credit union systems and services business
segment increased slightly from fiscal 2005. This increase is mainly due to
strong growth in support and service revenue, mostly offset by a decrease in
license revenue from fiscal 2005 when license revenue was at a historically
high level. Support and service revenue, which is the largest component of
total revenues for the credit union segment, experienced growth in ATM and
debit card processing services and in in-house maintenance. In addition,
our data center maintenance revenue grew by 39% over fiscal 2005, which is
consistent with our expansion of outsourcing solutions within this segment.
Gross profit in this business segment remained flat in fiscal 2006 compared
to fiscal 2005.
Revenues in the credit union systems and services business segment increased
substantially in fiscal 2005 from fiscal 2004. This increase is mainly due
to strong growth in support and service revenue from new services introduced
in the prior year, with the outsourced area experiencing the greatest
increase. Gross profit in this business segment decreased slightly in
fiscal 2005 from fiscal 2004 mainly due to the decrease in hardware margin
relating to the sales mix and vendor rebates.
LIQUIDITY AND CAPITAL RESOURCES
We have historically generated positive cash flow from operations and have
generally used existing resources and funds generated from operations to
meet capital requirements. We expect this trend to continue in the future.
The Company's cash and cash equivalents increased to $74,139 at June 30,
2006 from $11,608 at June 30, 2005.
The following table summarizes net cash from operating activities in the
statement of cash flows:
Year ended June 30,
-----------------------------------
2006 2005 2004
--------- --------- ---------
Net income $ 89,924 $ 75,501 $ 62,315
Non-cash expenses 52,788 45,244 41,352
Change in deferred revenue 10,561 16,909 10,673
Change in assets and liabilities 16,165 (29,379) (1,531)
--------- --------- ---------
Net cash from operating activities $ 169,438 $ 108,275 $ 112,809
========= ========= =========
Cash provided by operations increased $61,163 to $169,438 for the fiscal
year ended June 30, 2006 as compared to $108,275 for the fiscal year ended
June 30, 2005. The increase consists of an increase in net income of
$14,423, an increase in depreciation and amortization expense of $4,863, a
total increase of $2,681 in deferred income taxes, expense for stock-based
compensation, loss on disposal of property and equipment and other expenses.
In addition, receivables were lower at June 30, 2006 compared to 2005 due to
the timing of our annual maintenance billings, which occurred earlier in the
year. This resulted in a net cash inflow from operations of $30,413. Cash
used for the prepayment of expenses was $18,625 in fiscal 2006, up from
$7,015 in fiscal 2005, primarily due to the renewal of several maintenance
contracts during the fourth quarter of fiscal 2006. A decrease in accounts
payable with increases in accrued expenses, income taxes and deferred
revenues created a further net cash inflow from operations of $14,938.
Cash used in investing activities for the fiscal year ended June 2006 was
$77,190, which included capital expenditures of $45,396, primarily for an
accounting software system conversion of $10,300 and building infrastructure
within the company. The acquisition of Profitstar, Inc. and earn-out
payments made for prior acquisitions used $20,745 in fiscal 2006, while
$16,079 was used for software development costs. The proceeds from sale of
equipment were $4,255. Financing activities used cash of $29,717, primarily
to purchase treasury stock of $41,819 and for dividends of $18,383, offset
by cash provided by proceeds from issuance of stock upon exercise of stock
options of $19,928, the sale of stock of $694, borrowings of $5,120 and the
excess tax benefits from stock-based compensation of $4,743.
In 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 in 2002. Through fiscal 2004, a total of 3,009,384
shares had been repurchased by the Company under these authorizations.
Repurchases through fiscal 2004 were funded with cash from operations.
During fiscal 2004 there were 2,009,694 shares and 37,776 shares reissued
from treasury stock for the shares exercised under the employee stock option
plan and purchased under the employee stock purchase plan, respectively. At
June 30, 2004, there were 315,651 shares remaining in treasury stock.
During fiscal 2005 there were 306,027 shares and 9,624 shares reissued from
treasury stock for the shares exercised under the employee stock option plan
and purchased under the employee stock purchase plan, respectively,
depleting the existing treasury shares.
In April 2005, the Board of Directors increased the existing stock
repurchase authorization by 2.0 million shares. Under this authorization,
the Company may finance its share repurchases with available cash reserves
or short-term borrowings on its existing credit facility. The share
repurchase program does not include specific price targets or timetables and
may be suspended at any time. As of June 30, 2005, 553,300 shares had been
repurchased during the fiscal year for $9,952.
During the year ended June 30, 2006, 2,212,762 shares were repurchased for
$41,819. At June 30, 2006, there were 2,766,062 shares remaining in treasury
stock and the Company had the remaining authority to repurchase up to
2,224,554 shares.
Subsequent to June 30, 2006, the Company's Board of Directors declared a
cash dividend of $.055 per share on its common stock payable on September
18, 2006, to stockholders of record on September 8, 2006. 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.
The Company renewed a credit line on March 22, 2006 which provides for
funding of up to $8,000 and bears interest at the prime rate (8.25% at June
30, 2006). The credit line expires March 22, 2007 and is secured by $1,000
of investments. There were no outstanding amounts at June 30, 2006 or 2005.
The Company obtained a bank credit line on April 28, 2006 which provides for
funding of up to $5,000 and bears interest at the prime rate less 1% (8.25%
at June 30, 2006). The credit line matures on April 30, 2008. At June 30,
2006, no amount was outstanding.
The unsecured revolving bank credit facility allows borrowing of up to
$150,000, which may be increased by the Company at any time until April 2008
to $225,000. The unsecured revolving bank credit facility bears interest at
a rate equal to (a) LIBOR or (b) an alternate base rate (the greater of (a)
the Federal Funds Rate plus 1/2% or (b) the Prime Rate), plus an applicable
percentage in each case determined by the Company's leverage ratio. The
unsecured revolving credit line terminates April 19, 2010. At June 30,
2006, the revolving bank credit facility balance was $50,000.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
At June 30, 2006 the Company's total off-balance sheet contractual
obligations were $19.1 million. This balance consists of $15.7 million of
long-term operating leases for various facilities which expire from 2006 to
2011 and the remaining $3.4 million is for purchase commitments related to
property and equipment. The Company also has contingent earn-out obligations
of up to $27.0 million to the sellers in three acquisitions completed during
fiscal year 2005. These amounts are payable over two to four years based
variously upon gross revenues, net earnings and net operating income
achieved by the individual acquired business units.
Contractural obligations by Less than More than
period as of June 30, 2006 1 year 1-3 years 3-5 years 5 years TOTAL
--------------------------- --------- --------- --------- ------- -------
Operating lease obligations $ 4,760 $7,402 $3,488 $40 $15,690
Capital lease obligations 241 421 - - 662
Note payable 50,000 - - - 50,000
Purchase obligations 3,417 - - - 3,417
--------- --------- --------- ------- -------
Total $58,418 $7,823 $3,488 $40 $69,769
========= ========= ========= ======= =======
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance with
accounting principles generally accepted in the United States ("U.S.
GAAP"). The significant accounting policies are discussed in Note 1
to the consolidated financial statements. The preparation of consolidated
financial statements in accordance with U.S. GAAP requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, as well as disclosure of contingent
assets and liabilities. We base our estimates and judgments upon historical
experience and other factors believed to be reasonable under the
circumstances. Changes in estimates or assumptions could result in a
material adjustment to the consolidated financial statements.
We have identified several critical accounting estimates. An accounting
estimate is considered critical if both: (a) the nature of the estimates or
assumptions is material due to the levels of subjectivity and judgment
involved, and (b) the impact of changes in the estimates and assumptions
would have a material effect on the consolidated financial statements.
Revenue Recognition
We recognize revenue in accordance with the provisions of Statement of
Position ("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-
9, "Software Revenue Recognition, with Respect to Certain Transactions," and
clarified by Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in
Financial Statements," SAB 104, "Revenue Recognition," and Emerging Issues
Task Force Issue No. 00-21 ("EITF 00-21"), "Accounting for Revenue
Arrangements with Multiple Deliverables." The application of these
pronouncements requires judgment, including whether a software arrangement
includes multiple elements, whether any elements are essential to the
functionality of any other elements, and whether vendor-specific objective
evidence ("VSOE") of fair value exists for those elements. Customers
receive certain elements of our products over time. Changes to the elements
in a software arrangement or in our ability to identify VSOE for those
elements could materially impact the amount of earned and unearned revenue
reflected in the financial statements.
License Fee Revenue. For software license agreements that do not require
significant modification or customization of the software, the Company
recognizes software license revenue when persuasive evidence of an
arrangement exists, delivery of the product has occurred, the license fee is
fixed and determinable and collection is probable. The Company's software
license agreements generally include multiple products and services or
"elements." None of these elements are deemed to be essential to the
functionality of the other elements. SOP 97-2, as amended by SOP 98-9,
generally requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on Vendor Specific
Objective Evidence ("VSOE") of fair value. Fair value is determined for
license fees based upon the price charged when sold separately. In the
event that we determine that VSOE does not exist for one or more of the
delivered elements of a software arrangement, but does exist for all of the
undelivered elements, revenue is recognized the residual method allowed by
SOP 98-9. Under the residual method, a residual amount of the total
arrangement fee is recognized as revenue for the delivered elements after
the established fair value of all undelivered elements has been deducted.
Support and Service Fee Revenue. Implementation services are generally for
installation, training, implementation, and configuration. These services
are not considered essential to the functionality of the related software.
VSOE of fair value is established by pricing used when these services
are sold separately. Generally revenue is recognized when services are
completed. On certain larger implementations, revenue is recognized based
on milestones during the implementation. Milestones are triggered by tasks
completed or based on direct labor hours.
Maintenance support revenue is recognized pro-rata over the contract period,
typically one year. VSOE of fair value is determined based on contract
renewal rates.
Outsourced data processing services and ATM, debit card, and other
transaction processing services revenues are recognized in the month the
transactions were processed or the services were rendered.
Hardware Revenue. Hardware revenue is recognized upon delivery to the
customer, when title and risk of loss are transferred. In most cases, we do
not stock in inventory the hardware products we sell, but arrange for third-
party suppliers to drop-ship the products to our customers on our behalf.
For these transactions, the Company follows the guidance provided in EITF
99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent."
Based upon the indicators provided within this consensus, the Company
records the revenue related to our drop-ship transactions at gross and the
related costs are included in cost of hardware. The Company also remarkets
maintenance contracts on hardware to our customers. Hardware maintenance
revenue is recognized ratably over the agreement period.
Depreciation and Amortization Expense
The calculation of depreciation and amortization expense is based on the
estimated economic lives of the underlying property, plant and equipment and
intangible assets, which have been examined for their useful life and
determined that no impairment exists. We believe it is unlikely that any
significant changes to the useful lives of our tangible and intangible
assets will occur in the near term, but rapid changes in technology or
changes in market conditions could result in revisions to such estimates
that could materially affect the carrying value of these assets and the
Company's future consolidated operating results. All long lived assets are
tested for valuation and potential impairment on a scheduled annual basis.
Capitalization of software development costs
We capitalize certain costs incurred to develop commercial software products
and to develop or purchase internal-use software. Significant estimates and
assumptions include: determining the appropriate period over which to
amortize the capitalized costs based on the estimated useful lives,
estimating the marketability of the commercial software products and related
future revenues, and assessing the unamortized cost balances for impairment.
For commercial software products, determining the appropriate amortization
period is based on estimates of future revenues from sales of the products.
We consider various factors to project marketability and future revenues,
including an assessment of alternative solutions or products, current and
historical demand for the product, and anticipated changes in technology
that may make the product obsolete. A significant change in an estimate
related to one or more software products could result in a material change
to our results of operations.
Estimates used to determine deferred income taxes
We make certain estimates and judgments in determining income tax expense
for financial statement purposes. These estimates and judgments occur in the
calculation of certain tax assets and liabilities, which arise from
differences in the timing of recognition of revenue and expense for tax and
financial statement purposes. We also must determine the likelihood of
recoverability of deferred tax assets, and adjust any valuation allowances
accordingly. Considerations include the period of expiration of the tax
asset, planned use of the tax asset, and historical and projected taxable
income as well as tax liabilities for the tax jurisdiction to which the tax
asset relates. Valuation allowances are evaluated periodically and will be
subject to change in each future reporting period as a result of changes in
one or more of these factors.
Assumptions related to purchase accounting and goodwill
We account for our acquisitions using the purchase method of accounting.
This method requires estimates to determine the fair values of assets
and liabilities acquired, including judgments to determine any acquired
intangible assets such as customer-related intangibles, as well as
assessments of the fair value of existing assets such as property and
equipment. Liabilities acquired can include balances for litigation and
other contingency reserves established prior to or at the time of
acquisition, and require judgment in ascertaining a reasonable value. Third
party valuation firms may be used to assist in the appraisal of certain
assets and liabilities, but even those determinations would be based on
significant estimates provided by us, such as forecasted revenues or profits
on contract-related intangibles. Numerous factors are typically considered
in the purchase accounting assessments, which are conducted by Company
professionals from legal, finance, human resources, information systems,
program management and other disciplines. Changes in assumptions and
estimates of the acquired assets and liabilities would result in changes to
the fair values, resulting in an offsetting change to the goodwill balance
associated with the business acquired.
As goodwill is not amortized, goodwill balances are regularly assessed for
potential impairment. Such assessments require an analysis of future cash
flow projections as well as a determination of an appropriate discount
rate to calculate present values. Cash flow projections are based on
management-approved estimates, which involve the input of numerous Company
professionals from finance, operations and program management. Key factors
used in estimating future cash flows include assessments of labor and other
direct costs on existing contracts, estimates of overhead costs and other
indirect costs, and assessments of new business prospects and projected win
rates. Significant changes in the estimates and assumptions used in purchase
accounting and goodwill impairment testing can have a material effect on the
consolidated financial statements.
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, the matters
discussed in the Management's Discussion and Analysis of Financial Condition
and Results of Operations and other portions of this report contain forward-
looking statements within the meaning of federal securities laws. Actual
results are subject to risks and uncertainties, including both those
specific to the Company and those specific to the industry, which could
cause results to differ materially from those contemplated. The risks and
uncertainties include, but are not limited to, the matters detailed in "Risk
Factors" in Item 1A of this report. Undue reliance should not be placed
on the forward-looking statements. The Company does not undertake any
obligation to publicly update any forward-looking statements.
Potential risks and uncertainties which could adversely affect the Company
include: the financial health of the banking industry, our ability to
continue or effectively manage growth, adapting our products and services to
changes in technology, changes in our strategic relationships, price
competition, loss of key employees, consolidation in the banking industry,
increased government regulation, network or internet security problems,
declining computer hardware prices, and operational problems in our
outsourcing facilities and others listed in "Risk Factors" at Item 1A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk refers to the risk that a change in the level of one or more
market prices, interest rates, indices, volatilities, correlations or other
market factors such as liquidity, will result in losses for a certain
financial instrument or group of financial instruments. We are currently
exposed to credit risk on credit extended to customers and interest risk on
investments in U.S. government securities. We actively monitor these risks
through a variety of controlled procedures involving senior management. We
do not currently use any derivative financial instruments. Based on the
controls in place, credit worthiness of the customer base and the relative
size of these financial instruments, we believe the risk associated with
these instruments will not have a material adverse effect on our
consolidated financial position or results of operations.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Report of Independent Registered Public Accounting Firm 39
Management's Annual Report on Internal Control over
Financial Reporting 40
Report of Independent Registered Public Accounting Firm 41
Financial Statements
Consolidated Statements of Income,
Years Ended June 30, 2006, 2005, and 2004 42
Consolidated Balance Sheets, June 30, 2006 and 2005 43
Consolidated Statements of Changes in Stockholders' Equity,
Years Ended June 30, 2006, 2005, and 2004 44
Consolidated Statements of Cash Flows,
Years Ended June 30, 2006, 2005, and 2004 45
Notes to Consolidated Financial Statements 46
Financial Statement Schedules
There are no schedules included because they are not applicable or the
required information is shown in the consolidated financial statements or
notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Jack Henry & Associates, Inc.
Monett, Missouri
We have audited the accompanying consolidated balance sheets of Jack Henry &
Associates, Inc. and subsidiaries (the "Company") as of June 30, 2006 and
2005, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended
June 30, 2006. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Jack Henry & Associates and
subsidiaries at June 30, 2006 and 2005, and the results of their operations
and their cash flows for each of the three years in the period ended June
30, 2006, in conformity with accounting principles generally accepted in the
United States of America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of June 30, 2005,
based on the criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated September 11, 2006 expressed an unqualified
opinion on management's assessment of the effectiveness of the Company's
internal control over financial reporting and an unqualified opinion on the
effectiveness of the Company's internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
St. Louis, Missouri
September 11, 2006
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Jack Henry & Associates, Inc. is responsible for
establishing and maintaining adequate internal control over financial
reporting. The Company's internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of the Company's consolidated
financial statements for external reporting purposes in accordance with
accounting principles generally accepted in the United States of America.
The Company's internal control over financial reporting includes policies
and procedures pertaining to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and dispositions of
assets; provide reasonable assurance transactions are recorded as necessary
to permit preparation of consolidated financial statements in accordance
with accounting principles generally accepted in the United States of
America, and receipts and expenditures are being made only in accordance
with authorizations of management and the directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's consolidated financial
statements. All internal controls, no matter how well designed, have
inherent limitations. Therefore, even where internal control over financial
reporting is determined to be effective, it can provide only reasonable
assurance. Projections of any evaluation of effectiveness to future periods
are subject to the risk controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate.
As of the end of the Company's 2006 fiscal year, management conducted an
assessment of the effectiveness of the Company's internal control over
financial reporting based on the framework established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Based on this assessment, management has
determined the Company's internal control over financial reporting as of
June 30, 2006 was effective.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of June 30, 2006 has been audited by the
Company's independent registered public accounting firm, as stated in their
report appearing on the next page, which expresses unqualified opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting as of June 30, 2006.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Jack Henry & Associates, Inc.
Monett, Missouri
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control over Financial Reporting,
that Jack Henry & Associates, Inc. and subsidiaries (the "Company")
maintained effective internal control over financial reporting as of June
30, 2006, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and
an opinion on the effectiveness of the Company's internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding
of internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other
personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not
be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of June 30, 2006, is
fairly stated, in all material respects, based on the criteria established
in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion,
the Company maintained, in all material respects, effective internal control
over financial reporting as of June 30, 2006, based on the criteria
established in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended June 30, 2006 of the Company and our
report dated September 11, 2006 expressed an unqualified opinion on those
financial statements.
/s/ DELOITTE & TOUCHE LLP
St. Louis, Missouri
September 11, 2006
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
YEAR ENDED JUNE 30,
-------------------------------
2006 2005 2004
-------- -------- --------
REVENUE
License $ 84,014 $ 82,374 $ 62,593
Support and service 425,661 364,076 311,287
Hardware 82,530 89,413 93,535
-------- -------- --------
Total 592,205 535,863 467,415
COST OF SALES
Cost of license 2,717 5,547 4,738
Cost of support and service 272,383 244,097 207,730
Cost of hardware 60,658 63,769 66,969
-------- -------- --------
Total 335,758 313,413 279,437
-------- -------- --------
GROSS PROFIT 256,447 222,450 187,978
OPERATING EXPENSES
Selling and marketing 50,007 46,630 35,964
Research and development 31,874 27,664 23,674
General and administrative 35,209 29,087 29,534
-------- -------- --------
Total 117,090 103,381 89,172
-------- -------- --------
OPERATING INCOME 139,357 119,069 98,806
INTEREST INCOME (EXPENSE)
Interest income 2,066 1,162 1,006
Interest expense (1,355) (388) (107)
-------- -------- --------
Total 711 774 899
-------- -------- --------
INCOME BEFORE INCOME TAXES 140,068 119,843 99,705
PROVISION FOR INCOME TAXES 50,145 44,342 37,390
-------- -------- --------
NET INCOME $ 89,923 $ 75,501 $ 62,315
======== ======== ========
Diluted net income per share $ 0.96 $ 0.81 $ 0.68
======== ======== ========
Diluted weighted average shares outstanding 93,787 92,998 91,859
======== ======== ========
Basic net income per share $ 0.98 $ 0.83 $ 0.70
======== ======== ========
Basic weighted average shares outstanding 91,484 90,891 89,325
======== ======== ========
See notes to consolidated financial statements.
JACK HENRY & ASSOCIATES, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
JUNE 30,
--------------------------
2006 2005
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 74,139 $ 11,608
Investments, at amortized cost 2,181 993
Receivables 180,295 209,922
Prepaid expenses and other 24,402 14,986
Prepaid cost of product 22,228 20,439
Deferred income taxes 3,165 2,345
---------- ----------
Total current assets 306,410 260,293
PROPERTY AND EQUIPMENT, net 251,632 243,191
OTHER ASSETS:
Prepaid cost of product 15,191 10,413
Computer software, net of amortization 43,840 29,488
Other non-current assets 9,285 6,868
Customer relationships, net of amortization 63,162 68,475
Trade names 4,009 4,010
Goodwill 212,538 191,415
---------- ----------
Total other assets 348,025 310,669
---------- ----------
Total assets $ 906,067 $ 814,153
========== ==========
LIABILITES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 14,525 $ 15,895
Accrued expenses 29,012 24,844
Accrued income taxes 3,312 3,239
Note payable and current maturities
of capital lease 50,241 45,000
Deferred revenues 166,402 157,605
---------- ----------
Total current liabilities 263,492 246,583
LONG TERM LIABILITIES:
Deferred revenues 19,317 13,331
Deferred income taxes 47,430 37,085
Other long-term liabilities,
net of current maturities 616 -
---------- ----------
Total long term liabilities 67,363 50,416
---------- ----------
Total liabilities 330,855 296,999
STOCKHOLDERS' EQUITY
Preferred stock - $1 par value; 500,000
shares authorized, none issued - -
Common stock - $0.01 par value: 250,000,000
shares authorized;
Shares issued at 06/30/06 were 93,955,663
Shares issued at 06/30/05 were 92,050,778 939 920
Additional paid-in capital 224,195 195,878
Retained earnings 401,849 330,308
Less treasury stock at cost 2,766,062 shares
at 06/30/06, 553,300 shares at 06/30/05 (51,771) (9,952)
---------- ----------
Total stockholders' equity 575,212 517,154
---------- ----------
Total liabilities and stockholders' equity $ 906,067 $ 814,153
========== ==========
See notes to consolidated financial statements.
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands, Except Share and Per Share Data)
YEAR ENDED JUNE 30,
------------------------------------
2006 2005 2004
---------- ---------- ----------
PREFERRED SHARES: - - -
========== ========== ==========
COMMON SHARES:
Shares, beginning of year 92,050,778 90,519,856 90,519,856
Shares issued upon exercise of
stock options 1,869,659 1,381,085 -
Shares issued for Employee Stock
Purchase Plan 35,226 32,111 -
Shares issued in acquisition - 117,726 -
---------- ---------- ----------
Shares, end of year 93,955,663 92,050,778 90,519,856
========== ========== ==========
COMMON STOCK - PAR VALUE $0.01 PER SHARE:
Balance, beginning of year $ 920 $ 905 $ 905
Shares issued upon exercise of
stock options 19 14 -
Shares issued in acquisition - 1 -
---------- ---------- ----------
Balance, end of year $ 939 $ 920 $ 905
---------- ---------- ----------
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of year $ 195,878 $ 175,706 $ 169,299
Shares issued upon exercise of
stock options 19,909 14,250 21,661
Shares issued for Employee Stock
Purchase Plan 694 780 719
Shares issued in acquisition - 2,240 -
Tax benefit on exercise of
stock options 7,260 6,858 6,408
Stock-based compensation 454 - -
Cost of treasury shares reissued - (3,956) (22,381)
---------- ---------- ----------
Balance, end of year $ 224,195 $ 195,878 $ 175,706
---------- ---------- ----------
RETAINED EARNINGS:
Balance, beginning of year $ 330,308 $ 271,433 $ 233,396
Net income 89,924 75,501 62,315
Reissuance of treasury shares - (1,170) (10,870)
Dividends (2006- $0.20 per share;
2005-$0.17 per share;
2004-$0.15 per share) (18,383) (15,456) (13,408)
---------- ---------- ----------
Balance, end of year $ 401,849 $ 330,308 $ 271,433
---------- ---------- ----------
TREASURY STOCK:
Balance, beginning of year $ (9,952) $ (5,126) $ (38,377)
Purchase of treasury shares (41,819) (9,952) -
Reissuance of treasury shares upon
exercise of stock options - 4,970 32,638
Reissuance of treasury shares for
Employee Stock Purchase Plan - 156 613
---------- ---------- ----------
Balance, end of year $ (51,771) $ (9,952) $ (5,126)
---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY $ 575,212 $ 517,154 $ 442,918
========== ========== ==========
See notes to consolidated financial statements.
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
YEAR ENDED JUNE 30,
--------------------------------
2006 2005 2004
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 89,924 $ 75,501 $ 62,315
Adjustments to reconcile net income
from continuing operations:
from operating activities:
Depreciation 33,442 29,795 26,790
Amortization 10,332 9,116 6,750
Deferred income taxes 8,291 5,275 5,588
Expense for stock-based compensation 454 - -
Loss on disposal of property and equipment 269 1,058 2,293
Other, net - - (69)
Changes in operating assets and
liabilities, net of acquisitions:
Receivables 30,413 (35,017) (17,897)
Prepaid expenses, prepaid cost
of product, and other (18,625) (7,015) 1,636
Accounts payable (1,636) 5,160 (471)
Accrued expenses 3,450 3,303 3,414
Income taxes (including tax benefit
of $6,858 in fiscal 2005 and $6,408
in fiscal 2004 from exercise of
stock options) 2,563 4,190 11,787
Deferred revenues 10,561 16,909 10,673
-------- -------- --------
Net cash from operating activities 169,438 108,275 112,809
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for acquisitions, net (20,745) (119,501) (48,288)
Capital expenditures (45,396) (58,046) (49,141)
Purchase of investments (4,519) (4,976) (3,991)
Proceeds from sale of property
and equipment 4,255 170 971
Proceeds from investments 5,037 5,000 4,633
Computer software developed (16,079) (7,846) (4,409)
Other, net 257 137 188
-------- -------- --------
Net cash from investing activities (77,190) (185,062) (100,037)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock upon exercise of stock options 19,928 14,264 21,661
Proceeds from sale of common stock, net 694 781 719
Note payable 5,120 45,000 -
Excess tax benefits from stock-based
compensation 4,743 - -
Purchase of treasury stock (41,819) (9,952) -
Dividends paid (18,383) (15,456) (13,408)
-------- -------- --------
Net cash from financing activities (29,717) 34,637 8,972
-------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ 62,531 $ (42,150) $ 21,744
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 11,608 53,758 32,014
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 74,139 $ 11,608 $ 53,758
======== ======== ========
See notes to consolidated financial statements.
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Amounts)
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 and
acquired a number of 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 implementation
services for a financial institution to utilize a JHA software system. JHA
also provides continuing support and services to customers using in-house or
outsourced systems.
CONSOLIDATION
The consolidated financial statements include the accounts of JHA and all of
its subsidiaries, which are wholly-owned, and all significant inter-company
accounts and transactions have been eliminated.
STOCK-BASED COMPENSATION
Effective July 1, 2005, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123 (R), "Share-Based Payment", ("SFAS
123(R)"), a revision of SFAS 123, using the modified prospective application
transition method. SFAS 123(R) requires all share-based payments to
employees, including grants of stock options, to be recognized in the
consolidated statements of income, in lieu of pro forma disclosures as
provided above. The Company will continue to use the Black-Scholes option
pricing model used under SFAS 123 for the purposes of determining
compensation expense related to options granted. The adoption of SFAS 123(R)
did not have a significant impact on our financial position or our results
of operations. Prior to the adoption of SFAS 123(R), benefits of tax
deductions in excess of recognized compensation costs were reported as
operating cash flows. SFAS 123(R) requires excess tax benefits be reported
as a financing cash inflow rather than as a reduction of taxes paid. The
Company has calculated its additional paid in capital pool ("APIC pool")
based on the actual income tax benefits received from exercises of stock
options granted after the effective date of SFAS 123 using the long method.
The APIC pool is available to absorb any tax deficiencies subsequent to the
adoption of SFAS 123(R). At June 30, 2006, the APIC pool was $27,349.
Prior to July 1, 2005, in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), no
compensation expense was recorded for stock options. The Company provides
below the pro forma net income disclosures required by SFAS No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123").
Year Ended June 30,
----------------------
2005 2004
--------- ---------
Net income, as reported $ 75,501 $ 62,315
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 1,614 7,187
--------- ---------
Pro forma net income $ 73,887 $ 55,128
========= =========
Diluted net income per share
As reported $ 0.81 $ 0.68
Pro forma $ 0.79 $ 0.60
Basic net income per share
As reported $ 0.83 $ 0.70
Pro forma $ 0.81 $ 0.62
If the Company had adopted SFAS 123(R) for fiscal years 2005 and 2004, net
cash from financing activities would have been increased by $4,084 and
$3,151 for the years ended June 30, 2005 and 2004, respectively and net cash
from operating activities would have decreased by $4,084 and $3,151 for the
same periods, respectively.
On June 29, 2005, the Board of Directors approved the immediate vesting of
all stock options previously granted under the 1996 Stock Option Plan ("1996
SOP") that had exercise prices higher than the market price on such date.
As a result of this action, the vesting of 201,925 options was accelerated
by an average of 15 months. No other changes to these options were made.
The weighted average exercise price of these accelerated options was $21.15,
and exercise prices of the affected options range from $18.64 to $25.00.
The accelerated options constituted only 2.1% of the company's outstanding
options, at the date of the acceleration. No options held by any directors
or executive officers of the Company were accelerated or affected in any
manner by this action.
The purpose of accelerating vesting of the options was to enable to Company
to reduce the impact of recognizing future compensation expense associated
with these options upon adoption of Statement of Financial Accounting
Standards No. 123(R), "Share-Based Payment" ("SFAS 123(R)"). The aggregate
pre-tax expense for the shares subject to acceleration that, absent the
acceleration of vesting, would have been reflected in the Company's
consolidated financial statements beginning in fiscal 2006 was estimated to
be a total of approximately $802 (approximately $510 in fiscal 2006,
approximately $185 in fiscal 2007, approximately $89 in fiscal 2008 and
approximately $18 in fiscal 2009). These estimates are not adjusted for any
actual or estimated future forfeitures.
The weighted-average fair value of options granted during fiscal 2006,
fiscal 2005 and fiscal 2004 was $10.13, $6.97, and $7.43, respectively. The
only options granted during fiscal 2006 were to non-employee members of the
Company's board of directors. The assumptions used in estimating fair value
and resulting compensation expenses are as follows:
Year Ended June 30,
-----------------------------------
2006 2005 2004
--------- --------- ---------
Weighted Average Assumptions:
Expected life (years) 7.65 3.53 3.88
Volatility 42% 48% 53%
Risk free interest rate 4.4% 3.1% 1.6%
Dividend yield 0.89% 0.88% 0.75%
The option pricing model assumptions such as expected life, volatility,
risk-free interest rate, and dividend yield impact the fair value estimate.
These assumptions are subjective and generally require significant analysis
and judgment to develop. When estimating fair value, some of the
assumptions were based on or determined from external data (for example,
the risk-free interest rate) and other assumptions were derived from
our historical experience with share-based payment arrangements (e.g.,
volatility, expected life and dividend yield). The appropriate weight to
place on historical experience is a matter of judgment, based on relevant
facts and circumstances.
Our net income for the year ended June 30, 2006 includes $454 of stock-based
compensation costs.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
REVENUE RECOGNITION
The Company derives revenue from the following sources: license fees,
support and service fees and hardware sales. There are no rights of return,
condition of acceptance or price protection in the Company's sales
contracts.
License Fee Revenue: For software license agreements that do not require
significant modification or customization of the software, the Company
recognizes software license revenue when persuasive evidence of an
arrangement exists, delivery of the product has occurred, the license fee is
fixed and determinable and collection is probable. The Company's software
license agreements generally include multiple products and services or
"elements." None of these elements are deemed to be essential to the
functionality of the other elements. Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," as amended, generally requires revenue
earned on software arrangements involving multiple elements to be allocated
to each element based on vendor-specific objective evidence ("VSOE") of fair
value. Fair value is determined for license fees based upon the price
charged when sold separately or, if the product is not yet sold separately,
the price determined by management with relevant authority. In the event
that we determine that VSOE does not exist for one or more of the delivered
elements of a software arrangement, but does exist for all of the
undelivered elements, revenue is recognized using the residual method
allowed by SOP 98-9, "Software Revenue Recognition, with Respect to Certain
Transactions". Under the residual method, a residual amount of the total
arrangement fee is recognized as revenue for the delivered elements after
the established fair value of all undelivered elements has been deducted.
Support and Service Fee Revenue: Implementation services are generally for
installation, training, implementation, and configuration. These services
are not considered essential to the functionality of the related software.
VSOE of fair value is established by pricing used when these services are
sold separately or, if the services are not yet sold separately, the price
determined by management with relevant authority. Generally revenue is
recognized when services are completed. On certain larger implementations,
revenue is recognized based on milestones during the implementation.
Milestones are triggered by tasks completed or based on direct labor hours.
Maintenance support revenue is recognized pro-rata over the contract period,
typically one year. VSOE of fair value is determined based on contract
renewal rates.
Outsourced data processing and ATM, debit card, and other transaction
processing services revenue is recognized in the month the transactions are
processed or the services are rendered.
Hardware Revenue: Hardware revenue is recognized upon delivery to the
customer, when title and risk of loss are transferred. In most cases, we do
not stock in inventory the hardware products we sell, but arrange for third-
party suppliers to drop-ship the products to our customers on our behalf.
For these transactions, the Company follows the guidance provided in
Emerging Issues Task Force Issue ("EITF") No. 99-19, "Reporting Revenue
Gross as a Principal versus Net as an Agent." Based upon the indicators
provided within this consensus, the Company records the revenue related to
our drop-ship transactions at gross and the related costs are included in
cost of hardware. The Company also remarkets maintenance contracts on
hardware to our customers. Hardware maintenance revenue is recognized
ratably over the agreement period.
PREPAID COST OF PRODUCT
Costs for remarketed hardware and software maintenance contracts, which are
prepaid, are recognized ratably over the life of the contract, generally one
to five years, with the related revenue amortized from deferred revenues.
DEFERRED REVENUES
Deferred revenues consist primarily of prepaid annual software support fees
and prepaid hardware maintenance fees. Hardware maintenance contracts are
multi-year; therefore, the deferred revenue and maintenance are classified
in accordance with the terms of the contract. Software and hardware
deposits received are also reflected as deferred revenues.
COMPUTER SOFTWARE DEVELOPMENT
The Company capitalizes new product development costs incurred from the
point at which technological feasibility has been established through the
point at which the product is ready for general availability. Software
development costs that are capitalized are evaluated on a product-by-product
basis annually and are assigned an estimated economic life based on the type
of product, market characteristics, and maturity of the market for that
particular product. The Company's amortization policy for these capitalized
costs is to amortize the costs in accordance with SFAS 86, "Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed".
Generally, these costs are amortized based on current and estimated future
revenue from the product or on a straight-line basis, whichever yields
greater amortization expense.
CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less at the time of acquisition to be cash equivalents.
INVESTMENTS
The Company invests its cash that is not required for current operations
primarily in U.S. government securities, money market accounts and
certificates of deposit. The Company has the positive intent and ability to
hold its debt securities until maturity and accordingly, these securities
are classified as held-to-maturity and are carried at historical cost
adjusted for amortization of premiums and accretion of discounts. Premiums
and discounts are amortized and accreted, respectively, to interest income
using the level-yield method over the period to maturity. The held-to-
maturity securities typically mature in less than one year. Interest on
investments in debt securities is included in income when earned.
The amortized cost of held-to-maturity securities is $2,181 and $993 at June
30, 2006 and 2005, respectively. Fair values of these securities did not
differ significantly from amortized cost due to the nature of the securities
and minor interest rate fluctuations during the periods.
PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS
Property and equipment is stated at cost and depreciated principally using
the straight-line method over the estimated useful lives of the assets.
Intangible assets consist of goodwill, customer relationships, computer
software, and trade names acquired in business acquisitions in addition to
internally developed computer software. The amounts are amortized, with the
exception of goodwill and trade names, over an estimated economic benefit
period, generally five to twenty years, using the straight-line method.
The Company reviews its long-lived assets and identifiable intangible assets
with finite lives for impairment whenever events or changes in circumstances
have indicated that the carrying amount of its assets might not be
recoverable. The Company evaluates goodwill and trade names for impairment
of value on an annual basis and between annual tests if events or changes in
circumstances indicate that the asset might be impaired.
COMPREHENSIVE INCOME
Comprehensive income for each of the years ended June 30, 2006, 2005 and
2004 equals the Company's net income.
BUSINESS SEGMENT INFORMATION
In accordance with SFAS No. 131, "Disclosure About Segments of an Enterprise
and Related Information", the Company's operations are classified as two
business segments: bank systems and services and credit union systems and
services (see Note 13). Revenue by type of product and service is presented
on the face of the consolidated statements of income. Substantially all the
Company's revenues are derived from operations and assets located within the
United States of America.
COMMON STOCK
In 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 in 2002. Through fiscal 2004, a total of 3,009,384
shares had been repurchased by the Company under these authorizations.
Repurchases through fiscal 2004 were funded with cash from operations.
During fiscal 2004, there were 2,009,694 shares and 37,776 shares reissued
from treasury stock for the shares exercised under the employee stock option
plan and purchased under the employee stock purchase plan, respectively. At
June 30, 2004, there were 315,651 shares remaining in treasury stock.
During fiscal 2005, there were 306,027 shares and 9,624 shares reissued from
treasury stock for the shares exercised under the employee stock option plan
and purchased under the employee stock purchase plan, respectively.
In April 2005, the Board of Directors increased the existing stock
repurchase authorization by 2.0 million shares to 8.0 million shares. Under
this authorization, the Company may finance its share repurchases with
available cash reserves or short-term borrowings on its existing credit
facility. The share repurchase program does not include specific price
targets or timetables and may be suspended at any time. During the year
ended June 30, 2005, 553,300 shares were repurchased for $9,952.
During the year ended June 30, 2006, 2,212,762 shares were repurchased for
$41,819. At June 30, 2006, there were 2,766,062 shares remaining in treasury
stock and the Company had the remaining authority to repurchase up to
2,224,554 shares.
INCOME PER SHARE
Per share information is based on the weighted average number of common
shares outstanding during the year. Stock options have been included in the
calculation of income per diluted share to the extent they are dilutive.
The difference between basic and diluted weighted average shares outstanding
is the dilutive effect of outstanding stock options (see Note 10).
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance would be established to reduce deferred
tax assets if it is more likely than not that a deferred tax asset will not
be realized.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued FASB Staff Position No. 109-1,
"Application of FASB Statement No. 109 ("SFAS 109"), Accounting for Income
Taxes, to the Tax Deduction on Qualified Production Activities Provided by
the American Jobs Creation Act of 2004" ("FSP 109-1"). FSP 109-1 clarifies
the manufacturer's deduction provided for under the American Jobs Creation
Act of 2004 ("AJCA") should be accounted for as a special deduction in
accordance with SFAS 109. Pursuant to the AJCA, the deduction for qualified
production activities is effective for the Company's fiscal year ending June
30, 2006. The effect of the estimated deduction to be taken in the 2006
consolidated federal income tax return is expected to result in
approximately $527 of tax benefit for the fiscal year ended June 30, 2006.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.3"
("SFAS 154"). SFAS 154 changes the requirements for the accounting for, and
reporting of, a change in accounting principle. SFAS 154 requires that a
voluntary change in accounting principle be applied retrospectively with all
prior period financial statements presented using the accounting principle.
SFAS 154 is effective for accounting changes and corrections of errors in
fiscal years beginning after December 15, 2005. The Company will comply
with the provisions of SFAS 154 when applicable.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109"
("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements and prescribes a
recognition threshold and measurement attribute for financial statement
recognition and measurement of a tax position taken or expected to be taken
in a tax return. This Interpretation also provides related guidance on
derecognition, classification, interest and penalties, accounting in interim
periods and disclosure. FIN 48 is effective for the Company beginning
July 1, 2007. The Company is currently evaluating the impact of this
Interpretation.
NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values for held-to-maturity securities are based on quoted market
prices. For all other financial instruments, including amounts receivable
or payable and short-term and long-term borrowings, fair values approximate
carrying value, based on the short-term nature of the assets and liabilities
and the variability of the interest rates on the borrowings.
NOTE 3: PROPERTY AND EQUIPMENT
The classification of property and equipment, together with their estimated
useful lives is as follows:
June 30,
----------------------- Estimated
2006 2005 Useful Life
---------- ---------- -----------
Land $ 18,174 $ 15,598
Land improvements 18,163 17,873 5-20 years
Buildings 90,916 80,790 25-30 years
Leasehold improvements 18,985 16,140 5-10 years (1)
Equipment and furniture 150,665 133,931 5-8 years
Aircraft and equipment 41,499 50,523 8-10 years
Construction in progress 12,637 19,681
---------- ----------
$ 351,039 $ 334,536
Less accumulated depreciation 99,407 91,345
---------- ----------
Propery and equipment, net $ 251,632 $ 243,191
========== ==========
(1) Lesser of lease term or economic life
At June 30, 2006 and 2005, the Company had commitments of approximately
$3,400 and $4,600, respectively, to purchase property and equipment.
NOTE 4: OTHER ASSETS
Changes in the carrying amount of goodwill for the years ended June 30, 2006
and 2005, by reportable segments, are:
Banking Credit Union
Systems Systems
and and
Services Services Total
-------- -------- ---------
Balance, as of July 1, 2004 $ 65,899 $ 17,229 $ 83,128
Goodwill acquired during the year 100,718 7,569 108,287
-------- -------- ---------
Balance, as of June 30, 2005 166,617 24,798 191,415
Goodwill acquired during the year 21,123 - 21,123
-------- -------- ---------
Balance, as of June 30, 2006 $ 187,740 $ 24,798 $ 212,538
======== ======== =========
The Banking Systems and Services segment additions for fiscal 2006 relate
primarily to the acquisition of Profitstar, Inc., with additional amounts
relating to earn-out payments made on earlier acquisitions. The additions
for fiscal 2005 relate to various acquisitions. See Note 12-Business
Acquisitions for further details.
Information regarding other identifiable intangible assets is as follows:
June 30,
2006 2005
---------------------------- -----------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------- --------- ------- ------- --------- -------
Customer
relationships $110,664 $ (47,502) $ 63,162 $109,244 $ (40,769) $ 68,475
Trade names 4,009 - 4,009 4,010 - 4,010
------- --------- ------- ------- --------- -------
Totals $114,673 $ (47,502) $ 67,171 $113,254 $ (40,769) $ 72,485
======= ========= ======= ======= ========= =======
Trade names have been determined to have indefinite lives and are not
amortized. Customer relationships have lives ranging from five to 20 years.
Computer software includes the unamortized cost of software products
developed or acquired by the Company, which are capitalized and amortized
over five to ten years.
Following is an analysis of the computer software capitalized:
Carrying Accumulated
Amount Amortization Total
-------- -------- ---------
Balance, July 1, 2004 $ 26,454 $ (8,072) $ 18,382
Acquired software 6,666 - 6,666
Disposals (3,580) 3,401 (179)
Capitalizated development cost 7,846 - 7,846
Amortization expense - (3,227) (3,227)
-------- -------- ---------
Balance, June 30, 2005 37,386 (7,898) 29,488
Acquired software 1,872 - 1,872
Disposals (1,228) 1,228 -
Capitalizated development cost 16,079 - 16,079
Amortization expense - (3,599) (3,599)
-------- -------- ---------
Balance, June 30, 2006 $ 54,109 $ (10,269) $ 43,840
======== ======== =========
Amortization expense for all intangible assets was $10,332, $9,116 and
$6,750 for the fiscal years ended June 30, 2006, 2005, and 2004,
respectively. The estimated aggregate future amortization expense for each
of the next five years for all intangible assets remaining as of June 30,
2006, is as follows:
Customer
Year Relationship Software Total
---- ------------ -------- -------
2007 $5,941 $3,742 $9,683
2008 5,847 3,282 9,129
2009 5,722 2,180 7,902
2010 5,171 1,460 6,631
2011 4,682 1,219 5,901
NOTE 5: DEBT
The Company obtained a bank credit line on April 28, 2006 which provides for
funding of up to $5,000 and bears interest at the prime rate less 1% (8.25%
at June 30, 2006). The credit line matures on April 30, 2008. At June 30,
2006, no amount was outstanding.
The Company renewed a credit line on March 22, 2006 which provides for
funding of up to $8,000 and bears interest at the prime rate (8.25% at June
30, 2006). The credit line expires March 22, 2007 and is secured by $1,000
of investments. There were no outstanding amounts at June 30, 2006 or 2005.
The Company obtained an unsecured revolving bank credit facility on April
19, 2005 which allows borrowing of up to $150,000, which may be increased by
the Company at any time until April 2008 to $225,000. The unsecured
revolving bank credit facility bears interest at a rate equal to (a) LIBOR
or (b) an alternate base rate (the greater of (a) the Federal Funds Rate
plus 1/2% or (b) the Prime Rate), plus an applicable percentage in each case
determined by the Company's leverage ratio. The unsecured revolving credit
line terminates April 19, 2010. At June 30, 2006, the outstanding revolving
bank credit facility balance was $50,000 ($25,000 at 6.20% and $25,000 at
6.21% at June 30, 2006).
During fiscal year 2006, a capital lease obligation of $737 was incurred
when the Company entered into a lease for the use of certain computer
equipment. At June 30, 2006, $662 was outstanding, of which $241 is
included in current maturities. Maturities of capital lease payments by
fiscal year are $241 in fiscal 2007, $241 in fiscal 2008 and $180 in fiscal
2009.
The Company paid interest of $1,439, $171, and $107 in 2006, 2005, and 2004,
respectively.
NOTE 6: LEASE COMMITMENTS
The Company leases certain property under operating leases which expire over
the next six years. All operating leases are non-cancelable. All lease
payments are based on the lapse of time but include, in some cases, payments
for operating expenses and property taxes. There are no purchase options on
real estate leases at this time, but most real estate leases have one or
more renewal options. Certain leases on real estate are subject to annual
escalations for increases in operating expenses and property taxes.
As of June 30, 2006, net future minimum lease payments under non-cancelable
terms are as follows:
Years Ending June 30, Real Estate Leases
--------------------- ------------------
2007 $ 4,760
2008 4,154
2009 3,248
2010 2,293
2011 1,195
Thereafter 40
------
Total $15,690
======
Rent expense for all operating leases amounted to $5,372, $4,169, and $4,233
in 2006, 2005, and 2004, respectively.
NOTE 7: INCOME TAXES
The provision for income taxes consists of the following:
Year ended June 30,
----------------------------------
2006 2005 2004
-------- -------- --------
Current:
Federal $ 38,385 $ 35,221 $ 28,096
State 3,469 3,846 3,706
Deferred:
Federal 7,831 4,982 5,306
State 460 293 282
-------- -------- --------
$ 50,145 $ 44,342 $ 37,390
======== ======== ========
The tax effects of temporary differences related to deferred taxes shown on
the balance sheets were:
June 30,
----------------------
2006 2005
-------- --------
Deferred tax assets:
Carryforwards (operating losses) $ 601 $ 2,797
Expense reserves (bad debts, insurance,
franchise tax and vacation) 2,531 1,481
Intangible assets 1,070 615
Other, net 802 866
-------- --------
5,004 5,759
-------- --------
Deferred tax liabilities:
Accelerated tax depreciation (25,856) (25,336)
Accelerated tax amortization (23,412) (15,163)
-------- --------
(49,268) (40,499)
-------- --------
Net deferred tax liability $ (44,264) $ (34,740)
======== ========
The deferred taxes are classified on the balance sheets as follows:
June 30,
----------------------
2006 2005
-------- --------
Deferred income taxes (current) $ 3,165 $ 2,345
Deferred income taxes (long-term) (47,430) (37,085)
-------- --------
$ (44,265) $ (34,740)
======== ========
The following analysis reconciles the statutory federal income tax rate to
the effective income tax rates reflected above:
Year Ended June 30,
----------------------------
2006 2005 2004
---- ---- ----
Computed "expected" tax expense (benefit) 35.0% 35.0% 35.0%
Increase (reduction) in taxes
resulting from:
State income taxes, net of federal
income tax benefits 2.0% 2.2% 2.2%
Research and development credit -1.0% -1.5% -1.5%
Permanent book/tax differences -0.5% 0.5% 0.4%
Other (net) 0.3% 0.7% 1.4%
---- ---- ----
35.8% 37.0% 37.5%
==== ==== ====
Net operating loss carryforwards of $5,514 (from acquisitions) expire
through the year 2024. $3,891 is available for use in the Company's June
30, 2006 federal income tax returns leaving $1,623 available for subsequent
years. The Company paid income taxes of $34,301, $34,891, and $20,314 in
2006, 2005, and 2004, respectively.
The Company's federal income tax returns for the years ended June 30, 1999 -
June 30, 2001 have been examined by the Internal Revenue Service ("IRS").
The Company appealed certain proposed adjustments. The appeal was settled
in fiscal 2006.
NOTE 8: INDUSTRY AND SUPPLIER CONCENTRATIONS
The Company sells its products to banks, credit unions, and financial
institutions throughout the United States and generally does not require
collateral. All billings to customers are due net 30 days from date of
billing. Reserves (which are insignificant at June 30, 2006 and 2005) are
maintained for potential credit losses.
In addition, the Company purchases most of its computer hardware and related
maintenance for resale in relation to installation of JHA software systems
from two suppliers. There are a limited number of hardware suppliers for
these required materials. If these relationships were terminated, it could
have a significant negative impact on the future operations of the Company.
NOTE 9: STOCK OPTION PLANS
The Company currently issues options under two stock option plans: the 1996
Stock Option Plan ("1996 SOP") and the Non-Qualified Stock Option Plan
("NSOP").
1996 SOP
The 1996 SOP was adopted by the Company on October 29, 1996, for its
employees. Terms and vesting periods of the options are determined by the
Compensation Committee of the Board of Directors when granted and for
options outstanding include vesting periods up to four years. Shares of
common stock are reserved for issuance under this plan at the time of each
grant, which must be at or above fair market value of the stock at the grant
date. The options terminate 30 days after termination of employment, three
months after retirement, one year after death or 10 years after grant. In
October 2002, the stockholders approved an increase in the number of stock
options available from 13.0 million to 18.0 million shares.
On April 11, 2003, the Company granted approximately 3,670,000 stock options
to approximately 2,100 full time employees, or 94% of all full time
employees as of that date. The options were issued at the exercise price of
$10.84 per share, which represented the fair market value of the stock as of
that date and vest in two equal portions based on stock price performance or
on specific dates. The two portions vested and became fully exercisable
when the Company's common stock achieved a closing market price of 125% or
more and 150% or more, respectively, of the exercise price for 10
consecutive trading days. Such options fully vested during the first
quarter of fiscal 2004. As of June 30, 2005, there were 2,344,533 shares
available for future grants under the plan from the 18,000,000 shares
approved by the stockholders.
On June 29, 2005, the Board of Directors approved the immediate vesting of
all stock options previously granted under the 1996 SOP that had exercised
prices higher than the market price on such date (See Note 1).
NSOP
The NSOP was adopted by the Company on September 23, 2005, for its outside
directors. Options are exercisable beginning six months after grant at an
exercise price equal to 100% of the fair market value of the stock at the
grant date. The options terminate upon surrender of the option, upon the
expiration of one year following notification of a deceased optionee, or 10
years after grant. 700,000 shares of common stock have been reserved for
issuance under this plan with a maximum of 100,000 for each director. As of
June 30, 2006, there were 660,000 shares available for future grants under
the plan.
A summary of option plan activity under the plans is as follows:
Number of Weighted Average Aggregate
Shares Exercise Price Intrinsic Value
---------- -------------- ---------------
Outstanding July 1, 2003 13,300,254 $ 13.19
Granted 192,167 18.65
Forfeited (98,391) 21.59
Exercised (2,009,694) 10.78
---------- --------------
Outstanding June 30, 2004 11,384,336 13.64
Granted 224,300 18.56
Forfeited (155,127) 19.70
Exercised (1,687,112) 8.43
---------- --------------
Outstanding June 30, 2005 9,766,397 14.55
Granted 40,000 18.47
Forfeited (236,345) 21.23
Exercised (1,869,659) 10.58
---------- --------------
Outstanding June 30, 2006 7,700,393 $ 15.34 $ 39,309
========== ============== ===============
Exercisable June 30, 2006 7,582,753 $ 15.30 $ 39,069
========== ============== ===============
As of June 30, 2006, there was $582 of total unrecognized compensation costs
related to stock options that have not yet vested. These costs are expected
to be recognized over a weighted average period of 3.0 years.
For the year ended June 30, 2005, 306,027 shares and 9,624 shares were
reissued from treasury stock for shares exercised in the employee stock
option plan and the employee stock purchase plan (See Note 11),
respectively.
For the year ended June 30, 2004, 2,009,694 shares and 37,776 shares were
reissued from treasury stock for shares exercised in the employee stock
option plan and the employee stock purchase plan (See Note 11),
respectively.
Following is an analysis of stock options outstanding and exercisable as of
June 30, 2006:
Weighted-Average
Remaining
Range of Contractural Weighted-Average
Exercise Prices Shares Life in Years Exercise Price
--------------- ------------------------ ------------- ------------------------
Outstanding Exercisable Outstanding Outstanding Exercisable
----------- ----------- ----------- ----------- -----------
$ 6.03 - $10.75 1,480,434 1,480,434 2.11 $ 8.19 $ 8.19
$10.76 - $10.84 1,393,707 1,393,707 6.78 10.84 10.84
$10.85 - $16.49 233,450 223,013 4.21 12.09 12.04
$16.50 - $16.88 2,780,510 2,780,510 3.76 16.88 16.88
$16.89 - $25.65 1,373,292 1,266,089 5.73 21.09 21.35
$25.66 - $31.00 439,000 439,000 4.81 27.70 27.70
--------------- ---------- ---------- ----------- ----------- -----------
$ 6.03 - $31.00 7,700,393 7,582,753 4.41 $15.34 $15.30
=============== ========== ========== =========== =========== ===========
Cash received from stock option exercises for the year ended June 30, 2006
was $19,928. The income tax benefits from stock option exercises totaled
$7,260 for the year ended June 30, 2006.
The total intrinsic value of options exercised was $19,622 and $18,239 for
the fiscal years ended June 30, 2006 and 2005, respectively.
RESTRICTED STOCK PLAN
The Restricted Stock Plan was adopted by the Company on November 1, 2005,
for its employees. Up to 3,000,000 shares of common stock are available for
issuance under the plan. Upon issuance, shares of restricted stock are
subject to forfeiture and to restrictions which limit the sale or transfer
of the shares during the restriction period. As of June 30, 2006, no
restricted stock has been issued.
NOTE 10: EARNINGS PER SHARE
The following table reflects the reconciliation between basic and diluted
net income per share:
Year Ended June 30,
-------------------
2006 2005 2004
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Net Average Per Share Net Average Per Share Net Average Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
------ ------ ---- ------ ------ ---- ------ ------ ----
Basic Income Per Share:
Net income available to
common stockholders $89,924 91,484 $0.98 $75,501 90,891 $0.83 $62,315 89,325 $0.70
Effect of dilutive
securities:
Stock options - 2,303 (0.02) - 2,107 (0.02) - 2,534 (0.02)
------ ------ ---- ------ ------ ---- ------ ------ ----
Diluted Income Per Share:
Net income available to
common stockholders $89,924 93,787 $0.96 $75,501 92,998 $0.81 $62,315 91,859 $0.68
====== ====== ==== ====== ====== ==== ====== ====== ====
Stock options to purchase approximately 1,504,811 shares for fiscal 2006,
1,791,614 shares for fiscal 2005, and 1,758,583 shares for fiscal 2004, were
not dilutive and therefore, were not included in the computations of diluted
income per common share amounts.
NOTE 11: EMPLOYEE BENEFIT PLANS
The Company established an employee stock purchase plan in 1996. The plan
allows the majority of employees the opportunity to directly purchase shares
of the Company. Purchase prices for all participants are based on the
closing bid price on the last business day of the month.
The Company has a defined contribution plans for its employees, the 401(k)
Retirement Savings Plan (the "Plan"). The plan is subject to the Employee
Retirement Income Security Act of 1975 ("ERISA") as amended. Under the Plan,
the Company matches 100% of full time employee contributions up to 5% of
compensation subject to a maximum of $5 per year. Employees must be 18
years of age and be employed for at least six months. The Company has the
option of making a discretionary contribution; however, none has been made
for any of the three most recent fiscal years. The total matching
contributions for the Plan were $6,530, $5,212, and $4,487 for fiscal 2006,
2005, and 2004, respectively.
The Company also had an Employee Stock Ownership Plan (the "ESOP" Plan),
which it terminated as of January 1, 2005. No contribution had been made to
the ESOP Plan for any of the three most recent fiscal years.
NOTE 12: BUSINESS ACQUISITIONS
Fiscal 2006 Acquisition:
On November 1, 2005, the Company acquired all of the capital stock of
Profitstar, Inc. ("Profitstar"). Profitstar is a leading provider of
asset/liability management, risk management, profitability accounting and
financial planning software and related services to banks, credit unions and
other financial institutions. The purchase price for Profitstar, $19,317
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 ($4,905) to working capital, $1,233 to
deferred tax liability, $1,871 to capitalized software, $1,420 to customer
relationships, and $19,698 to goodwill. The acquired goodwill has been
allocated to the bank segment. On August 15, 2006, the Company and the
former shareholders of Profitstar, Inc. jointly made a Section 338(h)(10)
election for this acquisition. This election allows treatment of this
acquisition as an asset acquisition, which permits the Company to amortize
the capitalized software, customer relationships and goodwill for tax
purposes. This election is expected to increase goodwill by $720 due to
the elimination of previously recorded deferred tax liabilities and to
additional consideration paid to the former shareholders of Profitstar, Inc.
Fiscal 2005 Acquisitions:
On March 2, 2005, the Company acquired all of the membership interests in
Tangent Analytics, LLC, ("Tangent"), a developer of business intelligence
software systems. The purchase price for Tangent, $4,000 paid in cash, was
allocated to the assets and liabilities acquired based on then estimated
fair values at the acquisition date, resulting in an allocation of ($140) to
working capital, $89 to deferred tax liability, $241 to capitalized software
and $4,128 to goodwill. Contingent purchase consideration of up to $4,042
may be paid over the next two years based upon Tangent's earnings before
interest, depreciation, taxes and amortization. In fiscal 2006, $958 was
paid to the former members of Tangent as part of this contingent
consideration. This amount was included in goodwill at June 30, 2006. The
acquired goodwill has been allocated to the bank segment and is deductible
for federal income tax.
Effective January 1, 2005, the Company acquired all of the membership
interests in RPM Intelligence, LLC, doing business as Stratika ("Stratika").
Stratika provides customer and product profitability solutions for financial
institutions. The purchase price for Stratika, $6,241 paid in cash, was
allocated to the assets and liabilities acquired based on then estimated
fair values at the acquisition date, resulting in an allocation of $9 to
working capital, $156 to deferred tax liability, $422 to capitalized
software and $5,963 to goodwill. Contingent purchase consideration of up to
$9,752 may be paid over the next two years based upon the net operating
income of Stratika. In fiscal 2006, $248 was paid to the former members of
Stratika as part of this contingent consideration. This amount was included
in goodwill at June 30, 2006. The acquired goodwill has been allocated to
the bank segment and is deductible for federal income tax.
On December 17, 2004, the Company acquired certain assets of SERSynergy[TM]
("Synergy"), a division of SER Solutions, Inc. Synergy is a market leader
for intelligent document management for financial institutions. The purchase
price for Synergy, $34,466 paid in cash, was allocated to the assets and
liabilities acquired based on then estimated fair values at the acquisition
date, resulting in an allocation of ($3,216) to working capital, $248 to
deferred tax liability, $2,541 to capitalized software, $6,145 to customer
relationships, and $29,243 to goodwill. The acquired goodwill has been
allocated to the bank segment and is deductible for federal income tax.
Effective December 1, 2004, the Company acquired the capital stock of TWS
Systems, Inc. and three affiliated corporations (collectively "TWS"). TWS
is a leading provider of image-based item processing solutions for credit
unions. The purchase price for TWS, $10,885 paid in cash, was allocated to
the assets and liabilities acquired, based on then estimated fair values at
the acquisition date, resulting in an allocation of ($157) to working
capital, 1,759 to deferred tax liability, $2,110 to capitalized software,
$2,645 to customer relationships, and $7,569 to goodwill. The acquired
goodwill has been allocated to the credit union segment and is non-
deductible for federal income tax.
On November 23, 2004, the Company acquired the capital stock of Optinfo,
Inc. ("Optinfo"). Optinfo is a leading provider of enterprise exception
management software and services. The purchase price for Optinfo, $12,927
paid in cash and $2,240 of vested options to acquire common stock, was
allocated to the assets and liabilities acquired based on then estimated
fair values at the acquisition date, resulting in an allocation of $705 to
working capital, $1,346 to deferred tax asset, $156 to deferred tax
liability, $421 to capitalized software, and $12,806 to goodwill. The
acquired goodwill has been allocated to the bank segment and is non-
deductible for federal income tax.
Effective October 1, 2004, the Company acquired the capital stock of Verinex
Technologies, Inc. ("Verinex"). Verinex is a leading developer and
integrator of biometric security solutions. The purchase price for Verinex,
$35,000 paid in cash, was allocated to the assets and liabilities acquired
based on then estimated fair values at the acquisition date, resulting in an
allocation of $574 to working capital, $1,729 to deferred tax liability,
$464 to capitalized software, $4,208 to customer relationships, and $31,457
to goodwill. The acquired goodwill has been allocated to the bank segment
and is non-deductible for federal income tax.
Effective October 1, 2004, the Company acquired Select Payment Processing,
Inc. ("SPP") by merger. SPP is a provider of an innovative electronic
payment processing solution for financial institutions. The purchase price
for SPP, $12,000 paid in cash, was allocated to the assets and liabilities
acquired based on then estimated fair values at the acquisition date,
resulting in an allocation of $7 to working capital, $938 to deferred tax
asset, $1,729 to deferred tax liability, $467 to capitalized software and
$10,570 to goodwill. The acquired goodwill has been allocated to the bank
segment and is non-deductible for federal income tax.
On September 1, 2004, the Company acquired Banc Insurance Services, Inc.
("BIS") in Massachusetts. BIS is a provider of turnkey outsourced insurance
agency solutions for financial institutions. The purchase price for BIS,
$6,700 paid in cash, was allocated to the assets and liabilities acquired
based on then estimated fair values at the acquisition date, resulting in an
allocation of $56 to working capital and $6,549 to goodwill. Contingent
purchase consideration may be paid over the next four years based upon BIS
gross revenues which could result in additional allocations to goodwill of
up to $13,181. In fiscal 2006, $219 was paid to the former owners of BIS as
part of this agreement. This amount was included in goodwill at June 30,
2006. The acquired goodwill has been allocated to the bank segment and is
non-deductible for federal income tax.
The accompanying consolidated statements of income for the fiscal year ended
June 30, 2006 and 2005 do not include any revenues and expenses related
to these acquisitions prior to the respective closing dates of each
acquisition. The following unaudited pro forma consolidated financial
information is presented as if these acquisitions had occurred at the
beginning of the periods presented. In addition, this unaudited pro forma
financial information is provided for illustrative purposes only and should
not be relied upon as necessarily being indicative of the historical results
that would have been obtained if these acquisitions had actually occurred
during those periods, or the results that may be obtained in the future as a
result of these acquisitions.
Pro Forma (unaudited) Year Ended June 30,
--------------------
2006 2005
-------- --------
Revenue $ 596,305 $ 563,746
Gross profit 259,338 237,458
-------- --------
Net Income $ 90,398 $ 79,495
======== ========
Earnings per share - diluted $ 0.96 $ 0.85
======== ========
Diluted shares 93,787 92,998
======== ========
Earnings per share - basic $ 0.99 $ 0.87
======== ========
Basic shares 91,484 90,891
======== ========
Fiscal 2004 Acquisitions
On February 2, 2004, the Company acquired all of the common stock of Yellow
Hammer Software, Inc. ("YHS"). The purchase price for YHS, $19,769 paid in
cash, was allocated to the assets and liabilities acquired based on then
estimated fair values at the acquisition date, resulting in the allocation
of ($637) to working capital, $706 to capitalized software, $1,200 to
customer relationships, $17,737 to goodwill and $330 to trade names. The
acquired goodwill was allocated to the bank segment and is non-deductible
for federal income tax.
On February 19 and April 1, 2004, the Company acquired specific assets
consisting of a suite of Automated Clearing House payment products. The
purchase price for ACH, $6,100 paid in cash, was allocated as follows: ($39)
to working capital, $4,837 to goodwill, $1,000 to non-compete which is
included in customer relationships, and $304 to capitalized software. The
acquired goodwill was allocated to the bank segment and is non-deductible
for federal income tax.
On May 1, 2004, the Company acquired all of the outstanding stock of e-
ClassicSystems, Inc. ("e-Classic"). The purchase price for e-Classic,
$15,000 paid in cash, was allocated to the assets and liabilities acquired
based on then estimated fair values at the acquisition date, resulting in
the allocation of ($7) to working capital, $1,493 to capitalized software,
$990 to customer relationships, and $11,383 to goodwill. The acquired
goodwill was allocated to the bank segment and is non-deductible for federal
income tax.
On June 1, 2004, the Company acquired specific assets consisting of a suite
of regulatory reporting products. The purchase price, $8,000 paid in cash,
was allocated as follows: ($1,164) to working capital, $4,629 to goodwill,
$3,852 to customer relationships and $690 to capitalized software. The
acquired goodwill was allocated to the bank segment and is deductible for
federal income tax.
NOTE 13: BUSINESS SEGMENT INFORMATION
The Company is a leading provider of integrated computer systems that
perform data processing (available for in-house or service bureau
installations) for banks and credit unions. The Company's operations are
classified into two business segments: bank systems and services ("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.
For the Year Ended June 30, 2006
----------------------------------------
Bank Credit Union Total
---------- ---------- ----------
REVENUE
License $ 66,165 $ 17,849 $ 84,014
Support and service 354,210 71,451 425,661
Hardware 62,511 20,019 82,530
---------- ---------- ----------
Total 482,886 109,319 592,205
---------- ---------- ----------
COST OF SALES
Cost of license 1,671 1,046 2,717
Cost of support and service 221,300 51,083 272,383
Cost of hardware 45,098 15,560 60,658
---------- ---------- ----------
Total 268,069 67,689 335,758
---------- ---------- ----------
GROSS PROFIT $ 214,817 $ 41,630 $ 256,447
========== ========== ==========
For the Year Ended June 30, 2005
----------------------------------------
Bank Credit Union Total
---------- ---------- ----------
REVENUE
License $ 53,563 $ 28,811 $ 82,374
Support and service 305,696 58,380 364,076
Hardware 69,436 19,977 89,413
---------- ---------- ----------
Total 428,695 107,168 535,863
---------- ---------- ----------
COST OF SALES
Cost of license 2,402 3,145 5,547
Cost of support and service 196,140 47,957 244,097
Cost of hardware 48,361 15,408 63,769
---------- ---------- ----------
Total 246,903 66,510 313,413
---------- ---------- ----------
GROSS PROFIT $ 181,792 $ 40,658 $ 222,450
========== ========== ==========
For the Year Ended June 30, 2004
----------------------------------------
Bank Credit Union Total
---------- ---------- ----------
REVENUE
License $ 38,338 $ 24,255 $ 62,593
Support and service 268,249 43,038 311,287
Hardware 75,497 18,038 93,535
---------- ---------- ----------
Total 382,084 85,331 467,415
---------- ---------- ----------
COST OF SALES
Cost of license 2,444 2,294 4,738
Cost of support and service 171,359 36,371 207,730
Cost of hardware 53,635 13,334 66,969
---------- ---------- ----------
Total 227,438 51,999 279,437
---------- ---------- ----------
GROSS PROFIT $ 154,646 $ 33,332 $ 187,978
========== ========== ==========
For the Year Ended June 30,
-----------------------------------
2006 2005 2004
--------- --------- ---------
Depreciation expense, net
Bank systems and services $ 30,818 $ 27,248 $ 25,970
Credit Unions systems and services 2,624 2,547 820
--------- --------- ---------
Total $ 33,442 $ 29,795 $ 26,790
========= ========= =========
Amortization expense, net
Bank systems and services $ 8,421 $ 7,356 $ 5,301
Credit Unions systems and services 1,911 1,760 1,449
--------- --------- ---------
Total $ 10,332 $ 9,116 $ 6,750
========= ========= =========
Capital expenditures, net
Bank systems and services $ 43,681 $ 49,360 $ 23,505
Credit Unions systems and services 1,715 8,686 25,636
--------- --------- ---------
Total $ 45,396 $ 58,046 $ 49,141
========= ========= =========
For the Year Ended June 30,
---------------------------
2006 2005
--------- ---------
Property and equipment, net
Bank systems and services $ 217,438 $ 208,541
Credit Unions systems and services 34,194 34,650
--------- ---------
Total $ 251,632 $ 243,191
========= =========
Identified intangible assets, net
Bank systems and services $ 271,259 241,054
Credit Unions systems and services 52,290 52,334
--------- ---------
Total $ 323,549 $ 293,388
========= =========
The Company has not disclosed any additional asset information by segment,
as the information is not produced internally and its preparation is
impracticable.
NOTE 14: SUBSEQUENT EVENTS
On August 24, 2006, the Company's Board of Directors declared a quarterly
cash dividend of $.055 per share of common stock, payable on September 22,
2006, to shareholders of record on September 8, 2006.
Also on August 24, 2006, the Company's Board of Directors increased its
stock repurchase authorization by 5.0 million shares, bringing the total
authorized for repurchase since 2001 to 13.0 million shares. Through the
date of this increase, the Company has repurchased approximately 5.9 million
shares under these authorizations, leaving approximately 7.1 million shares
authorized for future repurchases.
QUARTERLY FINANCIAL INFORMATION (unaudited)
For the Year Ended June 30, 2006
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
------- ------- ------- ------- -------
REVENUE
License $ 16,908 $ 20,836 $ 20,566 $ 25,704 $ 84,014
Support and service 99,401 106,524 106,083 113,653 425,661
Hardware 20,674 20,057 18,846 22,953 82,530
------- ------- ------- ------- -------
Total 136,983 147,417 145,495 162,310 592,205
------- ------- ------- ------- -------
COST OF SALES
Cost of license 851 1,061 222 583 2,717
Cost of support and service 64,237 66,356 67,962 73,828 272,383
Cost of hardware 15,340 14,517 13,629 17,172 60,658
------- ------- ------- ------- -------
Total 80,428 81,934 81,813 91,583 335,758
------- ------- ------- ------- -------
GROSS PROFIT 56,555 65,483 63,682 70,727 256,447
------- ------- ------- ------- -------
OPERATING EXPENSES
Selling and marketing 11,440 12,300 12,292 13,975 50,007
Research and development 6,749 8,003 8,435 8,687 31,874
General and administrative 7,805 11,130 8,239 8,035 35,209
------- ------- ------- ------- -------
Total 25,994 31,433 28,966 30,697 117,090
------- ------- ------- ------- -------
OPERATING INCOME 30,561 34,050 34,716 40,030 139,357
INTEREST INCOME (EXPENSE)
Interest income 443 425 731 467 2,066
Interest expense (175) (132) (590) (458) (1,355)
------- ------- ------- ------- -------
Total 268 293 141 9 711
------- ------- ------- ------- -------
INCOME BEFORE INCOME TAXES 30,829 34,343 34,857 40,039 140,068
PROVISION FOR INCOME TAXES 11,407 12,707 11,397 14,634 50,145
------- ------- ------- ------- -------
NET INCOME $ 19,422 $ 21,636 $ 23,460 $ 25,405 $ 89,923
======= ======= ======= ======= =======
Diluted net income per share $ 0.21 $ 0.23 $ 0.25 $ 0.27 $ 0.96
======= ======= ======= ======= =======
Diluted weighted average shares
outstanding 93,998 93,637 94,390 93,124 $ 93,787
======= ======= ======= ======= =======
Basic net income per share $ 0.21 $ 0.24 $ 0.26 $ 0.28 $ 0.98
======= ======= ======= ======= =======
Basic weighted average shares
outstanding 91,562 91,352 91,952 91,068 91,484
======= ======= ======= ======= =======
QUARTERLY FINANCIAL INFORMATION (unaudited)
For the Year Ended June 30, 2005
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
------- ------- ------- ------- -------
REVENUE
License $ 19,551 $ 22,148 $ 20,943 $ 19,732 $ 82,374
Support and service 83,648 87,726 92,509 100,193 364,076
Hardware 20,897 26,086 20,930 21,500 89,413
------- ------- ------- ------- -------
Total 124,096 135,960 134,382 141,425 535,863
------- ------- ------- ------- -------
COST OF SALES
Cost of license 1,609 1,734 1,085 1,119 5,547
Cost of support and service 56,030 60,946 61,436 65,685 244,097
Cost of hardware 15,895 18,531 14,584 14,759 63,769
------- ------- ------- ------- -------
Total 73,534 81,211 77,105 81,563 313,413
------- ------- ------- ------- -------
GROSS PROFIT 50,562 54,749 57,277 59,862 222,450
------- ------- ------- ------- -------
OPERATING EXPENSES
Selling and marketing 10,732 11,920 11,598 12,380 46,630
Research and development 6,142 6,741 7,738 7,043 27,664
General and administrative 7,465 8,127 6,915 6,580 29,087
------- ------- ------- ------- -------
Total 24,339 26,788 26,251 26,003 103,381
------- ------- ------- ------- -------
OPERATING INCOME 26,223 27,961 31,026 33,859 119,069
INTEREST INCOME (EXPENSE)
Interest income 459 359 171 173 1,162
Interest expense (3) (14) (110) (261) (388)
------- ------- ------- ------- -------
Total 456 345 61 (88) 774
------- ------- ------- ------- -------
INCOME BEFORE INCOME TAXES 26,679 28,306 31,087 33,771 119,843
PROVISION FOR INCOME TAXES 10,005 10,614 11,658 12,065 44,342
------- ------- ------- ------- -------
NET INCOME $ 16,674 $ 17,692 $ 19,429 $ 21,706 $ 75,501
======= ======= ======= ======= =======
Diluted net income per share $ 0.18 $ 0.19 $ 0.21 $ 0.23 $ 0.81
======= ======= ======= ======= =======
Diluted weighted average shares
outstanding 92,485 92,957 93,421 93,127 92,998
======= ======= ======= ======= =======
Basic net income per share $ 0.18 $ 0.20 $ 0.21 $ 0.24 $ 0.83
======= ======= ======= ======= =======
Basic weighted average shares
outstanding 90,286 90,650 91,212 91,414 90,891
======= ======= ======= ======= =======
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
Item 9A. Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, 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
operation of our disclosure controls and procedures pursuant to Exchange Act
Rules 13a-15 and 15d-15. Based upon that evaluation, the CEO and CFO
concluded that our disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company
(including our consolidated subsidiaries) required to be included in our
periodic SEC filings.
The Management's Report on Internal Control over Financial Reporting
required by this Item 9A is in Item 8, "Financial Statements and
Supplementary Data." Our independent registered accounting firm, Deloitte &
Touche LLP, audited management's assessment and independently assessed the
effectiveness of the Company's internal control over financial reporting.
Deloitte & Touche LLP has issued an attestation report concurring with
management's assessment, which is included in Item 8 of this Form 10-K.
During the fiscal quarter ending June 30, 2006, there has been no change in
internal control over financial reporting that has materially affected, or
is reasonably likely to affect, the Company's internal control over
financial reporting.
Attached as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K are
certifications of the CEO and the CFO, which are required in accord with
Rule 13a-14 of the Securities Exchange Act of 1934 (the Exchange Act). This
Controls and Procedures section includes the information concerning the
controls evaluation referred to in the certifications and it should be read
in conjunction with the certifications.
Item 9B. Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
See the information under the captions "Election of Directors", "Corporate
Governance", "Audit Committee Report", "Executive Officers and Significant
Employees" and "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's definitive Proxy Statement which is incorporated herein by
reference.*
Item 11. Executive Compensation
See the information under captions "Executive Compensation", "Compensation
Committee Report", "Corporate Governance" and "Company Performance" in the
Company's definitive Proxy Statement which is incorporated herein by
reference.*
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
See the information under the captions "Stock Ownership of Certain
Stockholders" and "Equity Compensation Plan Information" in the Company's
definitive Proxy Statement which is incorporated herein by reference.*
Item 13. Certain Relationships and Related Transactions
See the information under the caption "Certain Relationships and Related
Transactions" in the Company's definitive Proxy Statement which is
incorporated herein by reference.*
Item 14. Principal Accountant Fees and Services
See the information under the captions "Audit Committee Report" and
"Independent Registered Public Accounting Firm" in the Company's definitive
Proxy Statement which is incorporated herein by reference.*
*Incorporated by reference pursuant to Rule 12b-23 and General Instruction
G(3) to Form 10-K.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Report:
(1) The following Consolidated Financial Statements of the Company and its
subsidiaries and the Report of Independent Registered Public Accounting Firm
thereon appear under Item 8 of this Report:
- Report of Independent Registered Public Accounting Firm
- Consolidated Statements of Income for the Years Ended June 30, 2006,
2005 and 2004
- Consolidated Balance Sheets as of June 30, 2006 and 2005
- Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended June 30, 2006, 2005 and 2004
- Consolidated Statements of Cash Flows for the Years Ended June 30,
2006, 2005 and 2004
- Notes to the Consolidated Financial Statements
(2) The following Financial Statement Schedules filed as part of this Report
appear under Item 8 of this Report:
There are no schedules included because they are not applicable or the
required information is shown in the Consolidated Financial Statements
or Notes thereto.
(3) All exhibits not followed herewith are incorporated by reference to a
prior filing as indicated, pursuant to Rule 12b-32:
Index to Exhibits
-----------------
Exhibit No. Description
----------- -----------
3.1.7 Restated Certificate of Incorporation, attached as Exhibit
3.1.7 to the Company's Annual Report on Form 10-K for the
Year ended June 30, 2003.
3.2.1 Amended and Restated Bylaws, attached as Exhibit A to the
Company's Quarterly Report on Form 10-Q for the Quarter ended
March 31, 1996.
10.1 The Company's 1987 Stock Option Plan, as amended as of
October 27, 1992, attached as Exhibit 19.1 to the Company's
Quarterly Report on Form 10-Q for the Quarter ended September
30, 1992.
10.3 The Company's 1995 Non-Qualified Stock Option Plan, attached
as Exhibit 10.3 to the Company's Annual Report on Form 10-K
for the Year Ended June 30, 1996.
10.8 Form of Indemnity Agreement which has been entered into as of
August 27, 1996, between the Company and each of its
Directors and Executive Officers, attached as Exhibit 10.8 to
the Company's Annual Report on Form 10-K for the Year Ended
June 30, 1996.
10.9 The Company's 1996 Stock Option Plan, attached as Exhibit
10.9 to the Company's Annual Report on Form 10-K for the Year
Ended June 30, 1997.
10.18 Stock Purchase Agreement with Verinex Technologies, Inc.
dated October 1, 2004 attached as Exhibit 10.18 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended
September 30, 2004.
10.19 Asset Purchase Agreement with SER Systems, Inc. and SER
Solutions, Inc. dated December 17, 2004 attached as Exhibit
10.19 to the Company's Quarterly Report on Form 10-Q for the
Quarter ended December 31, 2004.
10.20 Credit Agreement with Wachovia Bank, National Association as
Administrative Agent, attached as Exhibit 10.20 to the
Company's Current Report on Form 8-K filed April 21, 2005.
10.21 Amendment to the Company's 1996 Stock Option Plan, attached
as Exhibit 10.1 to the Company's Current Report on Form 8-K
filed July 5, 2005.
10.22 2006 Executive Bonus Plan, attached as Exhibit 10.22 to
the Company's Current Report on Form 8-K filed September 2,
2005.
10.23 2006 General Manager Bonus Plan, attached as Exhibit 10.23 to
the Company's Current Report on Form 8-K filed September 2,
2005.
10.24 Form of Termination Benefits Agreement, attached as Exhibit
10.24 to the Company's Current Report on Form 8-K filed
September 2, 2005.
10.25 2007 Executive Bonus Plan, attached as Exhibit 10.25 to the
Company's Current Report on Form 8-K filed September 5, 2006.
10.26 2007 General Manager Bonus Plan, attached as Exhibit 10.26
to the Company's Current Report on Form 8-K filed September
5, 2006.
10.27 The Company's Restricted Stock Plan, attached hereto.
10.28 The Company's 2005 Non-Qualified Stock Option Plan,
originally attached as Exhibit B to the Company's Proxy
Statement filed October 4, 2005, also attached hereto.
21.1 List of the Company's subsidiaries.
23.1 Consent of Independent Registered Public Accounting Firm.
32.1 Certification of Chief Executive Officer.
32.2 Certification of Chief Financial Officer.
32.3 Written Statement of the Chief Executive Officer Pursuant to
18 U.S.C. Section 1350.
32.4 Written Statement of the Chief Financial Officer Pursuant to
18 U.S.C. Section 1350.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized this 12th
day of September, 2006.
JACK HENRY & ASSOCIATES, INC., Registrant
By /s/ John F. Prim
-----------------------
John F. Prim
-----------------------
Chief Executive Officer
-----------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Capacity Date
--------- -------- ----
/s/ Michael E. Henry Chairman of the Board and September 12, 2006
---------------------- Director
Michael E. Henry
/s/ John F. Prim Chief Executive Officer September 12, 2006
----------------------
John F. Prim
/s/ Kevin D. Williams Chief Financial Officer September 12, 2006
---------------------- and Treasurer (Principal
Kevin D. Williams Accounting Officer)
/s/ John W. Henry Vice Chairman, Senior Vice September 12, 2006
---------------------- President and Director
John W. Henry
/s/ Jerry D. Hall Executive Vice President and September 12, 2006
---------------------- Director
Jerry D. Hall
/s/ Joseph J. Maliekel Director September 12, 2006
----------------------
Joseph J. Maliekel
/s/ James J. Ellis Director September 12, 2006
----------------------
James J. Ellis
/s/ Craig R. Curry Director September 12, 2006
----------------------
Craig R. Curry
/s/ Wesley A. Brown Director September 12, 2006
----------------------
Wesley A. Brown
[ Exhibits are omitted, but are available upon request directed to Kevin D.
Williams, Chief Financial Officer and Treasurer, at the address set forth on
the cover page and are also available in the Form 10-K posted at our
investor relations website, www.jackhenry.com/ir/.]
Exhibit 10.27
JACK HENRY & ASSOCIATES, INC.
RESTRICTED STOCK PLAN
Adopted by the Stockholders and Amended by the Board of Directors November
1, 2005
1. Purpose of the Plan. The Jack Henry & Associates, Inc. Restricted
Stock Plan ("Plan") is intended to provide Jack Henry & Associates, Inc.
(the "Corporation") with a means to assist in the recruiting, retaining and
rewarding of employees and members of the Board of Directors and to motivate
such individuals to exert their best efforts on behalf of the Corporation by
providing incentives through the granting of shares of stock.
2. Definitions. The following terms shall have the following meanings:
a. "Act" means the Securities Exchange Act of 1934, as amended, or
any successor thereto.
b. "Award" means any grant of restricted stock under the Plan.
c. "Award Agreement" means an agreement entered into between the
Corporation and a Participant, as such agreement may be amended
from time to time, setting forth the terms and provisions
applicable to any Award.
d. "Board" means the Board of Directors of the Corporation.
e. "Change in Control" means (i) the purchase or other acquisition by
any person, entity or group of persons, within the meaning of Section 13(d)
or 14(d) of the Act (excluding, for this purpose, the Corporation or
its subsidiaries or any employee benefit plan or related trust of the
Corporation or its subsidiaries), of beneficial ownership, within the
meaning of Rule 13d-3 promulgated under the Act, of 20% or more of the
combined voting power of the Corporation's then-outstanding voting
securities entitled to vote generally in the election of directors in any
transaction or series of transactions; (ii) when individuals who, as of the
date hereof, constituting the Board ("Incumbent Board") cease for any reason
to constitute at least a majority of the Board, provided that any person who
becomes a director subsequent to the date hereof whose election, or
nomination for election by the Corporation's shareholders, was approved in
advance by a vote of at least a majority of the directors then comprising
the Incumbent Board excluding members of its Incumbent Board who are no
longer serving as directors (other than an individual whose initial
assumption of office is in connection with an actual or threatened election
contest relating to the election of directors of the Corporation, as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the Act,
or an individual approved by the Incumbent Board as result of an agreement
intended to avoid or settle an actual or threatened contest) shall be, for
purposes of this section, considered as though such person were a member of
the Incumbent Board; (iii) consummation of a reorganization, merger or
consolidation, in each case following such reorganization, merger or
consolidation: (a) persons who were the shareholders of the Corporation
immediately prior to such reorganization, merger or consolidation
immediately thereafter own 50% or less of the combined voting power entitled
to vote generally in the election of directors of the reorganized, merged or
consolidated corporation's then-outstanding voting securities, or (b) less
than a majority of members of the board or other governing body of
such reorganized, merged or consolidated corporation were members of the
Incumbent Board at the time of the execution of the initial agreement or the
approval of the transaction by the Board; or (iv) approval by shareholders
of a liquidation or dissolution of the Corporation (and the Corporation
shall commence such liquidation or dissolution), or consummation of the sale
of all or substantially all of the assets of the Corporation (in one
transaction or a series of transactions).
f. "Code" means the Internal Revenue Code of 1986, as amended, or any
successor thereto.
g. "Common Stock" means common stock of the Corporation, par value
$0.01.
h. "Director" means an individual actively serving as a member of the
Board.
i. "Family Member" means any child, stepchild, grandchild, parent,
stepparent, spouse, former spouse, sibling, niece, nephew, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law,
including adoptive relationships, any person sharing the Participant's
household (other than a tenant or employee), a trust in which the foregoing
persons have more than 50% of the beneficial interests, a foundation in
which the Participant or the foregoing persons control the management of
assets and any other entity in which the Participant or the foregoing
persons own more than 50% of the voting interests.
j. "Incapacitated" means a mental or physical illness that entitles
the Participant to receive benefits under a long-term disability plan of the
Corporation, or if there is no such plan or the Participant is not covered
by such a plan or the Participant is not an employee of the Corporation, a
mental or physical illness that renders the Participant totally and
permanently incapable of performing the Participant's duties for the
Corporation. Notwithstanding the foregoing, Incapacity shall not qualify
under this Plan if it is the result of (i) a willfully self-inflected injury
or willfully self-induced sickness; or (ii) an injury or disease contracted,
suffered, or incurred while participating in a criminal offense. The
determination of Incapacity for purposes of this Plan shall be made by a
physician satisfactory to the Board and shall not be construed to be an
admission of incapacity for any other purpose.
k. "Participant" means an employee or a Director of the Corporation
or its subsidiaries, who is selected by the Board to receive an Award.
l. "Permitted Transferee" means any Family Member of a Participant or
a trust maintained exclusively for the benefit of , or a partnership all of
the interests in which are held by, one or more of the Participant and his
or her Family Members.
3. Stock Subject to the Plan. Subject to the adjustments described in
Section 8, 3,000,000 shares of Common Stock (the "Restricted Stock") are
authorized for Awards under the Plan. Such shares may come from authorized
but unissued shares of Common Stock and/or from previously issued shares of
Common Stock that have been reacquired by the Corporation. In the event any
Award shall expire or terminate for any reason, the shares subject to the
Award shall again be available for the purposes of the Plan. Subject to the
adjustments described in Section 8, the number of shares of Common Stock
that may be granted to all Participants in the aggregate as Awards under the
Plan in any fiscal year of the Corporation shall not exceed 500,000 shares.
4. Administration of the Plan. The Plan shall be administered by the
Board, which may from time to time delegate all or any part of its authority
under this Plan to a committee of the Board (or subcommittee thereof)
appointed by the Board. A majority of the committee (or subcommittee) shall
constitute a quorum, and the action of the members of the committee (or
subcommittee) present at any meeting at which a quorum is present, or acts
unanimously approved in writing, shall be the acts of the committee (or
subcommittee). To the extent of any such delegation, references in this
Plan to the Board shall be deemed to be references to any such committee (or
subcommittee). The interpretation and construction by the Board of any
provision of the Plan or of any agreement, notification or document
evidencing the grant of an Award and any determination by the Board pursuant
to any provision of this Plan or any such agreement, notification or
document shall be conclusive. No member of the Board shall be liable for
any such action or determination made in good faith.
5. Eligibility. Awards may be granted to any employee or Director of the
Corporation or its subsidiaries pursuant to the sole discretion of the Board
in accordance with Section 4.
6. Awards; Vesting.
a. Awards. Awards may be granted to Participants in such amounts and
upon such terms, and at any time and from time to time, as shall be
determined by the Board and set forth in an Award Agreement duly executed on
behalf of the Corporation and accepted by the Participant.
b. Performance-Based Awards. The Board may, in its sole and absolute
discretion, determine that certain Awards should be subject to such
requirements so that they are deductible by the Corporation under Code
Section 162(m). If the Board so determines, such Awards shall be considered
performance-based awards subject to the terms of this Section 6.b., as
provided in the Award Agreement. A performance-based Award shall be granted
by the Board in a manner to satisfy the requirements of Code Section 162(m)
and the regulations thereunder. The performance measures to be used for
purposes of a performance-based Award shall be determined by a committee or
subcommittee of the Board, consisting solely of outside directors (as
defined in Treasury Regulations Section 1.162-27(e) (3), in its sole and
absolute discretion, no later than 90 days after the commencement of the
period of service to which such performance criteria relates or, if earlier,
the date on which 25% of such period of service elapses. Performance
objectives need not be the same with respect to all performance-based Awards
granted under the Plan. Each of the performance criteria is to be
specifically defined in advance by the committee or subcommittee and may
include or exclude specified items of an unusual or non-recurring nature.
The criteria upon which the committee or subcommittee shall establish
performance objectives shall include but not be limited to: earnings per
share of stock; book value per share of stock; net income (before or after
taxes); operating income; return on invested capital, assets or equity; cash
flow return on investments which equals net cash flows divided by owners'
equity; earnings before interest or taxes; gross revenues or revenue growth;
market share; expense management; improvements in capital structure; profit
margins; stock price; total stockholder return; free cash flow; or working
capital. Performance-based Awards shall be forfeited if the applicable
performance objective(s) are not achieved or if the Plan is not approved by
the shareholders of the Corporation as described in Section 14. Such
committee or subcommittee shall determine whether, with respect to a
performance period, the applicable performance goals have been met with
respect to an Award and, if they have, to so certify in writing and
ascertain the amount of the applicable performance-based Award. The
committee or subcommittee shall have the discretion to adjust performance-
based awards downward. Unless the shareholders of the Corporation shall
have first approved thereof, no amendment of the Plan shall be effective
which would increase the maximum amount which can be paid under a
performance-based Award, which would change the specified performance
objectives for payment of performance-based Awards, or which would modify
the requirements as to eligibility for participation in performance-based
Awards under the Plan. In no event shall the total amount of a performance-
based Award paid to any Participant in any fiscal year of the Corporation
exceed 50,000 shares of Common Stock.
c. Vesting. Any shares of Restricted Stock awarded shall be
nontransferable by the Participant during the period described in the Award
Agreement and shall be subject to the risk of forfeiture described in the
Award Agreement. Prior to the time shares become transferable, the shares
of Restricted Stock shall bear a legend indicating their nontransferability,
and, unless otherwise provided in the Award Agreement, if the Participant
ceases to be a Director or terminates employment with Corporation prior to
the time a restriction lapses, and/or if the performance criteria specified
in the Award Agreement are not achieved, if applicable, the Participant
shall forfeit any shares of Restricted Stock which are still subject to the
restrictions at the time of termination of such employment or service, or
expiration of the performance period. When an Award is granted, the
Participant shall become vested in such shares in accordance with the terms
of the Award Agreement, which except as otherwise provided in Section 6.b.
with respect to performance-based Awards, shall generally provide for a
graded vesting schedule. However, the Board may at any time accelerate the
vesting schedule, in its sole discretion. Additionally, in the event of a
Change in Control or death or Incapacity of the Participant, unless
otherwise provided in the Award Agreement, all previously granted shares of
Restricted Stock not yet free of the restrictions of described herein shall
become immediately free of such restrictions.
d. Timing of Awards. An Award shall be deemed to be made on the date
on which the Board, by formal action of its members duly recorded in the
records thereof, makes an award of shares of Restricted Stock to a
Participant, provided that such award is evidenced by an Award Agreement in
the manner set forth in 6.a above within a reasonable time after the date of
the Board action. Notwithstanding the foregoing, the Board may, in the
records of its formal action, designate a future date on which an Award
shall be made.
e. Restricted Stock. Restricted Stock may be granted in the form of
shares registered in the name of the Participant but held by the Corporation
or an escrow agent designated by the Corporation until the restrictions on
the Award lapse, subject to forfeiture, as provided in the applicable Award
Agreement. The Board, in the applicable Award Agreement, may, in its sole
discretion, award all or any rights of a shareholder with respect to the
shares of Restricted Stock during the period that they remain subject to
restrictions, including without limitation, the right to vote the shares and
receive dividends.
f. Requirements for Issuance. No shares of Restricted Stock will be
issued or transferred pursuant to an Award unless and until all then
applicable requirements imposed by federal and state securities and other
laws, rules and regulations and by any regulatory agency having jurisdiction
over the Corporation, the Common Stock or the Awards, or by any stock
exchange or securities quotation system upon which the Common Stock may be
listed, have been fully met. As a condition precedent to the issuance of
shares of Restricted Stock pursuant to the grant of an Award, the
Corporation may require the Participant to take any reasonable action to
meet such requirements.
7. Nontransferability of Award. Except as otherwise provided in this
Section 7, Awards may not be transferred by a Participant other than by
will or the laws of descent and distribution. Any attempted transfer,
assignment, pledge, hypothecation or other disposition except as herein
provided, including, without limitation, any disposition, attachment,
divorce, trustee process or similar process, whether legal or equitable
shall be null and void and without effect. Notwithstanding anything herein
to the contrary, to the extent provided in the Award Agreement, an Award may
be transferred by the Participant, without consideration and subject to the
provisions of this Plan (including, but not limited to, the vesting and
forfeiture provisions of Section 6.c.), to a Permitted Transferee of such
Participant.
8. Adjustments. Notwithstanding any other provisions of the Plan, in the
event of changes in the capitalization of the Corporation by reason of a
recapitalization, merger, consolidation, split-up, stock split, combination
or exchange of shares of stock and the like (each, an "Adjustment Event"),
the aggregate number of shares of common stock available under the Plan will
be appropriately adjusted by the Board such that the Adjustment Event does
not adversely effect the rights of the Participants under the Plan, whose
determination shall be conclusive.
9. Amendment and Termination; Term. The Board may at any time terminate
the Plan or make such modifications to the Plan as the Board shall deem
advisable; provided, however, that the Board may not, without further
approval by the shareholders of the Corporation, increase the maximum number
of shares as to which Awards may be granted under the Plan (except under the
anti-dilution provisions of Section 8), increase the maximum amount which
can be paid under a performance-based Award, change the specified
performance objectives for payment of performance-based Awards, modify the
requirements as to eligibility for participation in performance-based
Awards, or make any other amendments or modifications which require
shareholder approval under applicable law, regulation or stock exchange
rule. Unless otherwise terminated earlier by the Board, the Plan shall
terminate on the date which is 10 years after the date the Plan is adopted
by the Board or, if earlier, approved by the shareholders of the
Corporation. No termination or amendment to the Plan may, without the
consent of the affected Participant, have a material adverse effect on the
rights of such Participant under such Award.
10. No Continued Right to Employment. Nothing in the Plan or in any
Award granted pursuant to the Plan shall be considered or construed as
creating a contract of employment for any specified period of time or shall
confer on any individual any right to continue in the employment or service
of the Corporation or interfere in any way with the right of the Corporation
to terminate his or her employment at any time.
11. Withholding. The Corporation at the time any payment is made under
the Plan is authorized to withhold from such payment any amount necessary to
satisfy income tax withholding requirements in respect of such payment; and
for this purpose, may withhold the necessary number of shares to satisfy
such requirement. Alternatively, if the participant shall pay to the
Corporation such cash amount as may be necessary to satisfy such withholding
requirements, he or she shall be entitled to receive delivery of all shares
due hereunder.
12. Non-Waiver of Rights. The Corporation's failure to enforce at any
time any of the provisions of this Plan or any Award Agreement or to require
at any time performance by the Participant of any of the provisions hereof
shall in no way be construed to be a waiver of such provisions or to affect
either the validity of this Plan, any Award Agreement, or any part hereof,
or the right of the Corporation thereafter to enforce each and every
provision in accordance with the terms of the Plan and any Award Agreement.
13. Severability. Any word, phrase, clause, sentence or other provision
herein which violates or is prohibited by any applicable law, court decree
or public policy shall be modified as necessary to avoid the violation or
prohibition and so as to make this Plan and any Award Agreement enforceable
as fully as possible under applicable law, and if such cannot be so
modified, the same shall be ineffective to the extent of such violation or
prohibition without invalidating or affecting the remaining provisions
herein.
14. Effectiveness of the Plan. The Plan shall become effective after
both its adoption by the Board and the further approval of the Plan by the
shareholders of the Corporation given within 12 months of the date the Plan
is adopted by the Board at a regular meeting of the shareholders or at a
special meeting duly called and held for such purposes.
15. Choice of Law. The Plan shall be governed by and construed according
to the laws of the State of Delaware, without regard to the principles of
conflicts of law which might otherwise apply.
16. Successors. All obligations of the Corporation under this Plan shall
be binding on any successor to the Corporation whether the existence of such
successor is the result of a direct or indirect purchase, merger,
consolidation, or otherwise, of all or substantially all of the business
and/or assets of the Corporation.
Exhibit 10.28
JACK HENRY & ASSOCIATES, INC.
2005 NON-QUALIFIED STOCK OPTION PLAN
Adopted by the Stockholders November 1, 2005
Jack Henry & Associates, Inc. (the "Company"), a Delaware corporation,
hereby formulates and adopts the following 2005 Non-Qualified Stock Option
Plan (the "Plan") for non-employee directors of the Company.
1. Purpose. The purpose of the Plan is to obtain for the Company the
benefits of the additional incentive inherent in the ownership of Common
Stock, $.01 par value per share, of the Company ("Common Stock"), by
selected non-employee directors of the Company who are important to the
success and the growth of the business of the Company, to help the Company
retain the services of such persons, and to compensate such persons for
their service on the Board of Directors.
2. Stock Option Committee. The Board of Directors of the Company
shall appoint from among its members a Non-Qualified Stock Option Committee
(the "Committee"), consisting of no fewer than two directors, none of whom
shall be eligible to participate under the Plan. The Committee shall select
one of its members as Chairman and shall adopt such rules and regulations as
it shall deem appropriate concerning the holding of its meetings and the
transaction of its business. A majority of the whole Committee shall
constitute a quorum, and the act of a majority of the members of the
Committee shall be the act of the Committee. Any member of the Committee
may be removed at any time either with or without cause by resolution
adopted by the Board of Directors of the Company; and any vacancy on the
Committee may at any time be filled by resolution adopted by the Board of
Directors.
3. Stock Subject to Options. Subject to the provisions of paragraph
13, the number of shares of Common Stock subject at any one time to options
granted under the Plan plus the number of such shares then outstanding
pursuant to exercises of options granted under the Plan shall not exceed an
aggregate of 700,000 shares. If and to the extent that options granted
under the Plan terminate or expire in accordance with paragraph 8 without
having been exercised, new options may be granted with respect to the shares
covered by such terminated or expired options, provided that the granting
and terms of such new options shall in all respects comply with the
provisions of the Plan.
There shall be reserved at all times for sale under the Plan a number
of shares of Common Stock (either authorized and unissued shares or shares
held in the Company's treasury, or both) equal to the maximum number of
shares which may be purchased pursuant to options granted or that may be
granted under the Plan.
Shares transferred by the Company upon the exercise of any option
granted under the Plan may be shares of authorized and unissued Common
Stock, shares of issued Common Stock held in the Company's treasury, or
both.
4. Administration. The Committee shall have the authority and
responsibility, within the limitations of the Plan, as amended or modified
from time to time, to calculate the "fair market value" of shares subject to
grant in accordance with paragraph 7, the terms and provisions of the
respective Option Agreements (which need not be identical), and to make all
other determinations necessary or advisable for administering the Plan.
Any or all powers and functions of the Committee may at any time
and from time to time be exercised by the Board of Directors or the
Executive Committee thereof; provided, however, that such powers and
functions of the Committee may be exercised by the Board of Directors or the
Executive Committee, as the case may be, only if, at the time of such
exercise, a majority of the members of the entire Board of Directors or the
Executive Committee, as the case may be, and a majority of the directors
acting in the particular matter, are not eligible to participate under the
Plan.
5. Eligible Participants. Options may be granted under the Plan only
to non-employee directors of the Company. A "non-employee director" shall
mean a director who is not at the time of the grant to him of any option
under the Plan, or at any time within one year prior thereto, an employee of
the Company or its subsidiaries. A non-employee director receiving any
option under the Plan is hereinafter referred to as an "Optionee".
6. Grant of Options.
(a) Annual Grants. On the third business day following the day
of each annual meeting of the stockholders of the Company, each non-
employee director shall automatically and without further action of the
Board or the Committee be granted a non-statutory stock option (a stock
option which does not qualify under Sections 422 or 423 of the Internal
Revenue Code of 1986) to purchase 10,000 shares of Common Stock,
subject to adjustment and substitution as set forth below. If the
number of shares then remaining available for the grant of stock
options under the Plan is not sufficient for each non-employee director
to be granted an option for 10,000 shares (or the number of adjusted or
substituted shares), then each non-employee director shall be granted
an option for a number of whole shares equal to the number of shares
then remaining available divided by the number of non-employee
directors, disregarding any fractions of a share.
(b) Grant Limitation. Notwithstanding any other provision of
this Plan, no non-employee director may be granted options to purchase
more than 100,000 shares of Common Stock pursuant to the Plan.
7. Price.
(a) The option price of each share of Common Stock purchasable
under any option granted under the Plan shall be 100% of the "fair
market value" thereof at the time the option is granted.
(b) The option price shall become immediately due upon exercise
of the option and shall be payable in one of the alternative forms
specified below: (1) full payment by certified check payable to the
Company; (2) full payment in shares of Common Stock having a fair
market value on the Exercise Date (as such term is defined below) equal
to the option price, which shares shall have been held for more than
six months by the individual; or (3) any combination of certified check
payable to the Company and/or shares of Common Stock valued at fair
market value on the Exercise Date, equal in the aggregate to the option
price. For purposes of this subsection (b), the Exercise Date shall be
the date on which written notice of the exercise of the option is
delivered to the Company, together with payment of the option price for
the purchased shares.
(c) The "fair market value" of a share on a particular date shall
be: (1) if shares of Common Stock are listed on such date on one or
more national securities exchanges or the Nasdaq Stock Market, the last
reported sale price of a share on such date as recorded on the
composite tape system or on the Nasdaq Stock Market, or if no sale of
Common Stock took place on such date, the last reported sale price of a
share on the most recent day on which a sale of a share took place as
recorded by on such exchange or the Nasdaq Stock Market, as the case
may be; or (2) if Common Stock is not listed on such date on any
national securities exchange or the Nasdaq Stock Market, the mean
between the last closing bid and asked quotations of a share of Common
Stock on such date (or if none, on the most recent date on which there
were bid and asked quotations of a share), as reported by the Nasdaq
Stock Market, the National Quotation Bureau, Incorporated, or other
similar service selected by the Board of Directors or the Committee.
8. Exercisability, Vesting and Duration of Options. No option
granted under the Plan shall be exercisable until six months after the date
of grant. Subject to the foregoing, all options granted under the Plan
shall be fully vested and exercisable after the fourth anniversary of the
date of the director's first election or appointment to the Board of
Directors of the Company (the "Initial Service Date"). For directors who
have served less than four continuous years, and subject to the first
sentence of this paragraph 8, options granted under the Plan shall vest and
become exercisable as follows:
(a) with respect to 25% of the shares subject to option, after
the expiration of one year from the Initial Service Date;
(b) with respect to 50% of the shares subject to option, after
the expiration of two years from the Initial Service Date;
(c) with respect to 75% of the shares subject to option, after
the expiration of three years from the Initial Service Date.
Provided, however, that any option granted under the Plan shall become
exercisable in its entirety upon the Optionee's death, illness, disability
or retirement as determined by the Committee; and provided further that no
portion of any option not theretofore exercisable shall become exercisable
following the removal or termination of the Optionee as a director of the
Company, for any reason other than his or her death, illness, disability or
retirement as determined by the Committee.
The unexercised portion of any vested option granted under the Plan
shall automatically and without notice terminate and become null and void at
the time of the earliest to occur of the following: (i) the expiration of
ten years from the date on which such option was granted; (ii) the
expiration of one year following the issuance of letters testamentary or
letters of administration to the executor or administrator of a deceased
Optionee or Permitted Transferee (as defined in paragraph 10); or (iii) the
surrender by the Optionee or Permitted Transferee to the Company of any such
option (whether or not in exchange for any other option).
9. Exercise of Options. Options granted under the Plan shall be
exercised by the Optionee (or by his executors or administrators, or
Permitted Transferee, as provided in paragraph 10) as to all or part of the
shares covered thereby, by the giving of written notice of the exercise
thereof to the Company at its principal business office, specifying the
number of shares to be purchased, specifying a business day, not less than
10 days nor more than 15 days from the date such notice is given, for the
payment of the purchase price against delivery of the shares being purchased
and specifying the method of payment of such purchase price.
Subject to the provisions of paragraph 17, the Company shall cause
certificates for the shares so purchased to be delivered to the Optionee or
his executors or administrators or Permitted Transferee at its principal
business office, against payment of the full purchase price, on the date
specified in the notice of exercise.
10. Non-Transferability of Options. For the first six months after the
date of grant, no option granted under the Plan shall be transferable by
the Optionee other than by will, or if the Optionee dies intestate by the
laws of descent and distribution. In the event of the Optionee's death,
options held by him at death shall thereafter be exercisable, as provided in
subparagraph 8(ii), by such person(s) entitled to do so under the will of
the Optionee or, if the Optionee shall fail to make testamentary disposition
of the stock option or shall die intestate, by the legal representative of
the Optionee.
Options may be transferred, following the first six months after the
date of grant and during the lifetime of an Optionee, to any "Permitted
Transferee". Any such options shall remain subject to all of the terms and
conditions of this Plan, including but not limited to the provisions on
vesting and exercisability set forth in paragraph 8. "Permitted Transferee"
shall include members of the immediate family of the Optionee, any trust
established for the benefit of the Optionee or the Optionee's immediate
family members, or any charity qualified under S501(c)(3) of the Internal
Revenue Code. For this purpose, "immediate family member" shall mean the
Optionee's spouse, children, step-children, grandchildren and step-
grandchildren, and any partnership, corporation, limited liability company
or other entity, all the beneficial interests in which are held by the
Optionee or immediate family members. Permitted Transferees may only
transfer options to other Permitted Transferees of the Optionee. The
Company may disregard any transfer of an option which has not been properly
registered with the Company or its agents. In the event of the death of a
Permitted Transferee who held options at death, such options shall
thereafter be exercisable, as provided in subparagraph 8(ii), by such
person(s) entitled to do so under the will of the Permitted Transferee, or
if such holder shall fail to make testamentary disposition of the stock
option or shall die intestate, by the legal representative of the Permitted
Transferee.
11. Rights of Optionee. Neither the Optionee nor his Permitted
Transferees, executors or administrators shall have any of the rights of a
stockholder of the Company with respect to the shares subject to an option
granted under the Plan until certificates for such shares shall have been
issued upon the exercise of such option.
12. Right to Terminate. Nothing in the Plan or in any option granted
under the Plan shall confer upon any Optionee the right to continue as a
director of the Company or affect the right of the stockholders of the
Company to terminate the Optionee as a director at any time, or the right of
the Board of Directors to elect or remove directors, subject, however, to
the provisions of Delaware law.
13. Adjustment of Shares. If any change is made in the shares subject
to the Plan or subject to any option granted under the Plan (through merger,
consolidation, reorganization, recapitalization, stock dividend, split-up,
combination of shares, exchange of shares, issuance of rights to subscribe,
or change in capital structure), appropriate adjustments or substitutions
shall be made by the Committee in or for such shares (including adjustments
in the maximum number of shares subject to the Plan and the number of such
shares and price per share subject to the Plan and the number of such shares
and price per shares subject to outstanding options) as the Committee in its
sole discretion shall deem equitable to prevent dilution or enlargement of
option rights; provided, however, that in the case of any transaction (or
series of transactions carried out within a period of twelve consecutive
months) in which the Company is consolidated or merged with another
corporation (other than a subsidiary or other affiliated company of the
Company), or in which substantially all of the properties or assets of the
Company are acquired by another person, firm or corporation (other than one
or more subsidiaries or other affiliated companies of the Company), and in
which the stockholders of the Company receive, either directly or
indirectly, as consideration, cash and/or non-equity securities or a package
which does not include an amount of equity securities (as defined in Section
3(a)(11) of the Exchange Act) equal to more than 20% of the aggregate value
of such package as conclusively determined by the Committee, the Committee
shall, alternatively, have the right to terminate all then outstanding
options (in which event such options shall not be subject to the above
described adjustments) by causing written notice of such termination to be
given to each Optionee not less than 30 days prior to the date on which such
consolidation, merger or acquisition is expected to become effective and, if
applicable, the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such consolidation, merger or
acquisition. In providing such notice, the Board of Directors may, in its
discretion, with respect to options, waive the restrictions on exercise
pursuant to paragraph 8 and permit such option or options to become
immediately exercisable. Such notice shall be deemed duly given when
delivered personally, or mailed first-class postage prepaid, to each
Optionee at his address appearing in the records of the Company, and failure
to give such notice to any Optionee, or any defect therein, shall not affect
the termination of an option held by any other Optionee.
14. Amendment of the Plan. The Board may, from time to time, amend or
modify the Plan in all respects, except that without stockholder approval no
such amendment or modification may (a) increase the total number of shares
reserved for options thereunder (other than an increase merely reflecting an
adjustment as described in paragraph 13), (b) change the option price from
100% of the "fair market value" on the date of grant, (c) change the class
of non-employee directors eligible to receive options, or (d) extend the
period of exercise beyond ten years from the date of grant. Rights and
obligations under any option previously granted under the Plan may not be
altered or impaired by any such amendment or modification of the Plan except
upon consent of the person to whom such option was granted.
15. Termination or Suspension of the Plan. The Board of Directors may
at any time suspend or terminate the Plan. The Plan, unless sooner
terminated, shall terminate at the close of business on November 30, 2015.
An option may not be granted while the Plan is suspended or after it is
terminated. Rights and obligations under any option granted while the Plan
is in effect shall not be altered or impaired by suspension or termination
of the Plan, except upon the consent of the person to whom such option and
right were granted.
16. Form of Agreements with Optionees. Subject to the limitations of
the Plan as amended or modified from time to time, every option granted
under the Plan shall be in such form and shall contain such terms and
conditions (which need not be identical) as the Committee, in its
discretion, may determine. The rights and obligations under any such form
of option granted under the Plan shall not be altered or impaired, except
upon consent of the person to whom such option and right were granted.
17. Purchase for Investment. If the Committee in its discretion
determines that as a matter of law such procedure is or may be desirable, it
may require the Optionee, upon any exercise of an option granted hereunder
or any portion thereof and as a condition to the Company's obligation to
deliver certificates representing the shares subject to exercise, to execute
and deliver to the Company a written statement, in form satisfactory to
legal counsel for the Company, representing and warranting that his purchase
or receipt of shares of Common Stock upon exercise thereof shall be for his
own account, for investment and not with a view to the resale or
distribution thereof and that any subsequent offer for sale or sale of any
such shares shall be made either pursuant to (a) a Registration Statement on
an appropriate form under the Securities Act of 1933, as amended (the
"Securities Act"), which Registration Statement has become effective and is
current with respect to the shares being offered and sold or (b) a specific
exemption from the registration requirements of the Securities Act, but in
claiming such exemption the Optionee shall, prior to any offer for sale or
sale of such shares, obtain a favorable written opinion from counsel for or
approved by the Company as to the availability of such exemption.
The Company may endorse an appropriate legend referring to the
foregoing restriction upon the certificate or certificates representing any
shares issued or transferred to the Optionee upon exercise of any option
granted under the Plan and may issue "stop transfer" instructions to its
transfer agent in respect of such shares.
18. Listing of Shares and Related Matters. If at any time the Board
of Directors shall determine, in its sole discretion, that the listing,
registration or qualification of the shares covered by the Plan upon any
national securities exchange or market system or under any state or federal
law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition of, or in connection with, the sale or
purchase of shares under the plan, no shares will be delivered unless and
until such listing, registration, qualification, consent or approval shall
have been effected or obtained, or otherwise provided for, free of any
conditions not acceptable to the Board of Directors.
19. Governing Law. The Plan and all options which may be granted
under the Plan shall be governed by, and construed in accordance with, the
laws of the State of Delaware from time to time obtaining, without regard to
the principles of conflicts of laws which might otherwise apply.
20. Gender. Unless the context of the Plan otherwise requires, the
masculine, feminine or neuter gender each shall include the other genders
and the singular shall include the plural.
21. Effective Date of Plan. The Plan shall become effective upon
approval by the affirmative vote of the holders of a majority of the Common
Stock present in person or by proxy and entitled to vote at a duly called
and convened meeting of such holders.
Exhibit 21.1 Jack Henry and Associates, Inc. Subsidiaries Jack Henry & Associates, Inc. Jack Henry Services, L.P. Jack Henry Systems, L.P. Jack Henry Software/Commlink, L.P. Symitar Systems, Inc. System Legacy Solutions, Inc. Check Collect, Inc. Select Payment Processing, Inc. E-ClassicSystems, Inc. Banc Insurance Services, Inc. Banc Insurance Agency, Inc. Jack Henry ACH, LP Jack Henry, L.L.C. Verinex Technologies, Inc. Optinfo, Inc. TWS Systems, Inc. JHA Synergy, Inc. RPM Intelligence, LLC Tangent Analytics, LLC Profitstar, Inc. Jack Henry International, Ltd.
Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement Numbers 33-65231, 33-65251, 333-16989, 333-63912, 333-101680, 333-130078, and 333-130079 on Form S-8 of our reports dated September 11, 2006, relating to the financial statements of Jack Henry & Associates, Inc., and management's report on the effectiveness of internal control over financial reporting appearing in the Annual Report on Form 10-K of Jack Henry & Associates, Inc. for the year ended June 30, 2006. /s/ DELOITTE & TOUCHE LLP St. Louis, Missouri September 11, 2006
Exhibit 31.1
CERTIFICATION
I, John F. Prim, certify that:
1. I have reviewed this annual report on Form 10-K 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 annual 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) 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) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) 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
d) 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: September 12, 2006
/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 annual report on Form 10-K 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 annual 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) 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) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) 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
d) 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 September 12, 2006
/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 Annual Report on Form 10-K of the
Company for the fiscal year ended June 30, 2006 (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: September 12, 2006
/s/ John F. Prim
------------------------------
John F. Prim
Chief Executive Officer
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 Annual Report on Form 10-K of the
Company for the fiscal year ended June 30, 2006 (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: September 12, 2006
/s/ Kevin D. Williams
------------------------------
Kevin D. Williams
Chief Financial Officer