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, 2005 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. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 43-1128385 ------------------------------- ---------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 663 Highway 60, P.O. Box 807, Monett, MO 65708 ---------------------------------------------- (Address of Principal Executive Offices) Registrant's telephone number, including area code: (417) 235-6652 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock ($0.01 par value) ----------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best 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. [ X ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes [ X ] No [ ] 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 17, 2005, the Registrant had 91,620,750 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 $1,480,344,116 (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 2005 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 3 ITEM 2. PROPERTIES 17 ITEM 3. LEGAL PROCEEDINGS 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (1) 18 ITEM 6. SELECTED FINANCIAL DATA 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 32 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 58 ITEM 9A. CONTROLS AND PROCEDURES 58 ITEM 9B. OTHER INFORMATION 58 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (2) 59 ITEM 11. EXECUTIVE COMPENSATION (3) 59 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS (4) 59 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (5) 59 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES (6) 59 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 59 (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", and "Company Performance." (4) Proxy Statement sections entitled "Stock Ownership of Certain Stockholders," "Election of Directors," 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 a complete, integrated suite of data processing system solutions to improve our customers' management of their entire back-office and customer/member interaction processes. We believe our solutions enable our financial institution customers to provide better service to their customers and compete more effectively against other banks, credit unions, and alternative financial institutions. Our customers either install and use our systems in-house or outsource these operations to us. We perform data conversion and hardware and software installation for the implementation of our systems and integrated applications. We also provide continuing customer support services to ensure proper product performance and reliability, which provides us with continuing client relationships and recurring revenue. For our customers who prefer not to acquire hardware and software, we provide outsourcing services through 6 data centers and 22 item-processing centers located across the United States. Our gross revenue has grown from $366.9 million in fiscal 2001 to $535.9 million in fiscal 2005, representing a compound annual growth rate over this five-year period of 17%. Net income from continuing operations has grown from $55.6 million in fiscal 2001 to $75.5 million in fiscal 2005, also a compound annual growth rate of 17%. Industry Background According to the Automation in Banking 2005 report, United States financial institutions, including commercial banks, thrifts and credit unions, increased spending on hardware, software, services and telecommunications to $45.9 billion in calendar 2004 from $38.3 billion in calendar 2000, representing a compound annual growth rate of 5%. There was an increase in industry spending of 8% from December 31, 2003 to December 31, 2004. The Federal Deposit Insurance Corporation ("FDIC") reported there were approximately 9,000 commercial and savings banks in the United States as of December 31, 2004. Our bank systems and services segment, which represented approximately 80% of our total revenues in fiscal 2005, is primarily commercial banks with less than $30.0 billion in assets, of which there were approximately 8,900 at December 31, 2004. Consolidation within the banking and savings services industry has resulted in a 3% compound annual decline in the population of commercial banks from calendar years 2000 to 2004. Even with the decline in the population, aggregate assets of these banks increased at an annual compound rate of 8% between calendar year 2000 and 2004. Comparing calendar year 2004 to 2003, new bank charters increased 8% and mergers increased 17%. Our other market segment is credit union systems and services within the United States. The National Credit Union Association reported there were approximately 9,200 credit unions in the United States as of December 31, 2004. This segment represented approximately 20% of our total revenues in fiscal 2005. 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 2000 and 2004, their aggregate assets have increased at a compound annual growth rate of 10% to $661.8 billion at December 31, 2004. Commercial 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 2005 and Callahan & Associates 2004 in calendar 2004 approximately 56% of all commercial banks and 75% of all credit unions utilized in-house hardware and software systems to perform all of their core systems and data processing functions. Off-site data processing centers provided system services on an outsourced basis for 44% of all banks and 25% of all credit unions. For a number of years, we have been expanding our outsourcing services and capacity to include all of our core 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' 2005 Credit Union Technology Survey reported 91% of credit union respondents now offer internet home banking and 87% offer on-line bill pay. In the banking industry Grant Thornton's Twelfth Annual Survey of Bank Executives reports that 7 in 10 bankers promoted internet banking and bill payment to retain deposits in 2004 and 6 in 10 report plans to emphasize these services in 2005. According to Callahan & Associates 2004 Credit Union Technology Survey released in April 2005 95% of the respondents stated multi-factor authentication or biometrics technology was a spending priority in 2005, while 63% of respondents indicated new full service ATM deployment was necessary in 2005. Our Solution We are 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. 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 proprietary software applications, each comprising the core data processing and information management functions of a commercial bank or credit union. Any of these core systems can be utilized either through an in-house or outsourced delivery method depending on the financial institution's management style and philosophy. Key functions of each of our core software applications include deposits, loans, 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 provide 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 suite of products and services is designed to meet our customers' information technology needs through custom- tailored solutions using proprietary software products. Our clients can either perform these functions themselves on an in- house basis through the implementation of our software systems or outsource those functions to us. * Rapidly Deploy New Products and Services. Once a financial institution has implemented our core software, either in-house or on an outsourced basis, we can quickly and efficiently 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. * Integrate with Other Solutions. Our open system architecture "jXchange" will allow for easier integration between products, whether it is a JHA product or an application from another vendor, to allow the customer to best meet their particular needs. * 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 unique 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, 2005, we have over 6,900 customers, an increase of 142% from fiscal 2000 with 2,850 customers. * Build Recurring Revenue. We enter into contracts with customers to provide services that meet their ongoing information technology needs. We provide 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 contributed to low employee turnover. Our Acquisitions To complement and accelerate our internal growth, we selectively acquire 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 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 ---- ----------------------- --------------------- 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 in-house facilities, we contract to sell computer hardware with the licenses for core and complementary software. We also contract to provide installation, data conversion, training and ongoing support, and other services along with 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 22 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 are deploying 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 to $30 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 eServer systems (iSeries, pSeries and xSeries); 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 29 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 thirteen consecutive years. Our relationship with IBM provides us with a substantial and ongoing source of revenue. Biometrics is the latest technology 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. 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 iSeries processing platform and is used primarily by banks with total assets ranging from $500 million to $30.0 billion; * CIF 20/20[R] operates on the IBM 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 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 2005 Credit Union Directory, our Episys[R] core product is the most widely installed data processing solution among credit unions with assets exceeding $25 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 to banks and credit unions regardless of which core processing solutions the financial institutions are using. Thus, in today's environment 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, which are primarily those products and services we acquired in 2004 and 2005. We offer the banks and credit unions using Jack Henry core processing systems approximately 100 complementary products or services. These products have been developed and designed to assist banks and credit unions accomplish specific business strategies. Our complementary products are categorized into product families by particular business strategy needs. 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. * ARGOKeys[R] is the ARGO/JHA joint solution for our Silverlake customers that provides 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. * Stratika RPM[TM] is a Relationship Profitability Manager that 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. * 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. * 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[TM] 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. * Banc Insurance Services[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. * Accounts Receivable Check Conversion ("ARC") is a web-enabled service that allows a business 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] Bill Pay[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 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[TM] 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 * 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. * 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. * TWS ATM Deposit Management/Image Capture[TM] enables 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 required in connection with new outsourcing customers, and are billed separately at the time of installation. 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 rolled out for customer service and will be expanded into the sales and 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 at June 30 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 services once per year. We believe our research and development efforts are highly efficient because of the extensive experience of our research and development staff and because our product development is highly customer- driven. Through our regular contact with customers 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 2005, 2004, and 2003 were $27.7 million, $23.7 million, and $15.9 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. 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 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, 2005, 2004, and 2003. 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, 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. Of the $135.1 million amount of the backlog for outsourcing service at June 30, 2005, approximately $98.0 million is not expected to be realized in our current fiscal year due to the long-term nature of many of our outsourcing service contracts. Backlog at June 30, 2004 was $67.2 million for in-house products and services and $124.1 million for outsourcing services, with a total backlog of $191.3 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 fragmented, 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 Financial Inc., Fiserv, Inc., and Metavante. In addition, we compete with a number of providers that offer one or more specialized products or services. There has been significant consolidation among providers of information technology products and services to financial institutions, and we believe this consolidation will continue in the future. Intellectual Property, Patents, and Trademarks Although we believe that our success depends upon our technical expertise more than on our proprietary rights, our future success and ability to compete depends in part upon our proprietary technology. We have registered or filed applications for our primary trademarks. 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. Our customers must assess and determine what is required of them under these regulations and they contract with us to ensure that our products and services conform to their regulatory needs It is not possible to predict the impact any of these regulations could have on our business in the future. We are not chartered by the Office of the Comptroller of Currency, the Board of Governors of the Federal Reserve System, the National Credit Union Administration or other federal or state agencies that regulate or supervise depository institutions. The services provided by our OutLink Data Centers are subject to examination by the Federal Financial Institution Examination Council regulators under the Bank Service Company Act. On occasion these services are also subject to examination by state banking authorities. We provide outsourced data and item processing through our geographically dispersed OutLink Data Centers, electronic transaction processing through PassPort ATM and Select Payment, Internet banking through NetTeller, Internet Teller 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, 2005 and 2004, we had 2,989 and 2,533 full time employees, respectively. Of our employees, approximately 600 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. 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 risk factors and uncertainties that may cause the actual results of the Company's operations in future periods to differ materially from those currently expected or desired. Changes within the banking and credit union industry could reduce demand for our products. In the current environment of low interest rates, revenue growth at many commercial banks and credit unions has stagnated. Many banks and credit unions have been slow to resume their capital spending, including spending on computer software and hardware, affecting 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 cannot assure you that we will be able to enhance and expand our product lines, manage costs, adapt our infrastructure and modify our systems to accommodate future growth. If we fail to adapt our products and services to changes in technology, we could lose existing customers and be unable to attract new business. The markets for our software and hardware products and services are characterized by changing customer requirements and rapid technological changes. These factors and new product introductions by our existing competitors or by new market entrants could reduce the demand for our existing products and services and we may be required to develop or acquire new products and services. Our future success is dependent on our ability to enhance our existing products and services in a timely manner and to develop or acquire new products and services. If we are unable to develop or acquire new products and services as planned, or fail to achieve timely market acceptance of our new or enhanced products and services, we may incur unanticipated expenses, lose sales or fail to achieve anticipated revenues. 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 year and will continue to explore acquisitions in the future. We may not be able to successfully integrate acquired companies. We may encounter problems in connection with the integration of new businesses including: financial control and computer system compatibility; unanticipated costs; unanticipated quality or customer problems with acquired products or services; diversion of management's attention; adverse effects on existing business relationships with suppliers and customers; loss of key employees; and significant amortization expenses related to identifiable intangible assets. Without additional acquisitions, we may not be able to grow and to develop new products and services as quickly as we have in the past to meet competitive challenges. If our integration strategies fail, our business, financial condition and results of operations could be materially and adversely affected. If our strategic relationship with IBM were terminated, it could have a negative impact on the continuing success of our business. We have developed a strategic relationship with IBM. As part of this collaborative relationship, we market and sell IBM hardware and equipment to our customers under an IBM Business Partner Agreement and resell maintenance on IBM hardware products to our customers. Much of our software is designed to be compatible with the IBM hardware that is run by a majority of our customers. If IBM were to terminate or fundamentally modify our strategic relationship, our relationship with our customers and our revenues and earnings could suffer. We could also lose software market share or be required to redesign existing products or develop new products that would be compatible with the hardware used by our customers. Competition may result in price reductions and decreased demand for our products and services. We expect that competition in the markets we serve will remain vigorous. We compete on the basis of product quality, reliability, performance, ease of use, quality of support, integration with other products and pricing. We cannot guarantee that we will be able to compete successfully with our existing competitors or with companies entering our markets in the future. Certain of our competitors have strong financial, marketing and technological resources and, in some cases, a larger customer base than we do. They may be able to adapt more quickly to new or emerging technologies or to devote greater resources to the promotion and sale of their products and services. The loss of key employees could adversely affect our business. We depend to a significant extent on the contributions and abilities of our senior management. Our Company has grown significantly in recent years and our management remains concentrated in a small number of key employees. If we lose one or more of our key employees, we could suffer a loss of sales and delays in new product development, and management resources would have to be diverted from other activities to compensate for this loss. We do not have employment agreements with any of our executive officers. We do, however, have a management succession plan in place. 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 banks (includes savings & loans) and 9,200 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, which will reduce our number of potential customers. Because of this consolidation, some of our existing customers could terminate, or refuse to renew their contracts with us and potential customers could break off negotiations with us. The services we provide to our customers are subject to government regulation that could hinder our ability to develop portions of our business or impose additional constraints on the way we conduct our operations. The financial services industry is subject to extensive and complex federal and state regulation. As a supplier of services to financial institutions, some of our operations are examined by the Office of the Comptroller of the Currency, the Federal Reserve Board and the Federal Deposit Insurance Corporation, among other regulatory agencies. These agencies regulate services we provide and the manner in which we operate, and we are required to comply with a broad range of applicable laws and regulations. In addition, existing laws, regulations, and policies could be amended or interpreted differently by regulators in a manner that has a negative impact on our existing operations or that limits our future growth or expansion. Our customers are also regulated entities, and actions by regulatory authorities could determine both the decisions they make concerning the purchase of data processing and other services and the timing and implementation of these decisions. The provision of financial services over the Internet has raised concerns with respect to the use, confidentiality, and security of private customer information. Regulatory agencies, Congress and state legislatures are considering numerous regulatory and statutory proposals to protect the interests of consumers and to require compliance by the industry with standards and policies that have not been defined. Network or Internet security problems could damage our reputation and business. We rely on standard network and Internet security systems, most of which we license from third parties, to provide the security and authentication necessary to effect secure transmission of data. Computer networks and the Internet are vulnerable to unauthorized access, computer viruses and other disruptive problems. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other events or developments may render our security measures inadequate. Someone who is able to circumvent security measures could misappropriate proprietary information or cause interruptions in our operations or those of our customers. Security risks may result in liability to us and also may deter financial institutions from purchasing our products. We may need to expend significant capital or other resources protecting against the threat of security breaches or alleviating problems caused by breaches. Eliminating computer viruses and alleviating other security problems may result in interruptions, delays or cessation of service to users, any of which could harm our business. As technology becomes less expensive and more advanced, purchase prices of hardware may decline and our revenues and profits from remarketing arrangements may decrease. Computer hardware technology is rapidly developing. Hardware manufacturers are producing less expensive and more powerful equipment each year, and we expect this trend to continue into the future. As computer hardware becomes less expensive, revenues and profits derived from our hardware remarketing may decrease and become a smaller portion of our revenues and profits. An operational failure in our outsourcing facilities could cause us to lose customers. Damage or destruction that interrupts our provision of outsourcing services could damage our relationship with certain customers and may cause us to incur substantial additional expense to repair or replace damaged equipment. Although we have installed back-up systems and procedures to prevent or reduce disruption, we cannot assure you that we will not suffer a prolonged interruption of our transaction processing services. In the event that an interruption of our network extends for more than several hours, we may experience data loss or a reduction in revenues by reason of such interruption. In addition, a significant interruption of service could have a negative impact on our reputation and could lead our present and potential customers to choose service providers other than us. If others claim that we have infringed their intellectual property rights, we could be liable for significant damages. We do not believe that any of our products or services infringe the proprietary rights of third parties. We cannot be sure, however, that others will not make infringement claims, and we have agreed to indemnify many of our customers against those claims. We anticipate that the number of infringement claims will increase as the number of software solutions and services increases and the functionality of our products and services expands. Any of those 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. Competitive pressures in our industry or general economic conditions may require that we reduce our prices or offer other favorable terms to customers on our products and services which could result in lower margins and reduce net income. We compete with a variety of software vendors in all of our major product lines. 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 other favorable terms in order to successfully compete. The accounting treatment for employee stock options has changed, which will affect our earnings and cause us to reconsider our business practices. We previously accounted for the issuance of stock options under APB Opinion No. 25 and recognized no compensation expense for employee stock options. With the recent adoption of Statement of Financial Accounting Standards No. 123(R), we will be required in FY2006 to recognize compensation expense for granted stock options based upon a calculation of their fair values at date of grant. We have decided to reduce the number of stock options granted to employees and to rely instead on alternative forms of equity compensation, such as grants of restricted stock. This could affect our ability to retain existing employees and attract qualified candidates, and also could increase the cash compensation we would have to pay them. 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 impact 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 revenues from outsourcing and associated profit margins could be negatively impacted. Item 2. Properties We own approximately 153 acres located in Monett, Missouri on which we maintain eight office 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 778,000 square feet of office space in nine states. We have 48 leased office facilities in 24 states, which total approximately 291,000 square feet. All of the space is utilized for normal business purposes. Of our facilities, the credit union business segment uses office space totaling approximately 121,500 square feet in six facilities. The majority of our San Diego, California offices are used in the credit union business segment, as are portions of five other office facilities. The remainder of our leased and owned facilities, approximately 948,000 square feet of office space, is primarily devoted to serving our bank business segment or supports our whole business. We own seven 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 National Market ("NASDAQ") 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 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 Fiscal 2004 High Low ------------------------------------- First Quarter $19.75 $16.25 Second Quarter 22.04 17.46 Third Quarter 21.00 17.70 Fourth Quarter 20.16 17.70 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, 2005 and 2004 are as follows: Fiscal 2005 Dividend ---------------------------- First Quarter $0.040 Second Quarter 0.040 Third Quarter 0.045 Fourth Quarter 0.045 Fiscal 2004 Dividend ---------------------------- First Quarter $0.035 Second Quarter 0.035 Third Quarter 0.040 Fourth Quarter 0.040 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 17, 2005, there were approximately 49,238 holders of the Company's common stock. On that same date the last sale price of the common shares as reported on NASDAQ was $18.86 per share. Issuer Purchases of Equity Securities The following shares of the Company were repurchased during the quarter ended June 30, 2005: 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, - $ - - 4,990,616 May 1 - May 31, 2005 304,800 $ 17.66 304,800 4,685,816 June 1 - June 30, 2005 248,500 $ 18.39 248,500 4,437,316 --------- ------- --------------- -------------- Total 553,300 $ 17.99 553,300 4,437,316 ========= ======= =============== ============== (1) Purchases made under the stock repurchase authorization approved by the Company's Board of Directors on October 4, 2002 with respect to 3.0 million shares, which was increased by 2.0 million shares on April 29, 2005. These authorizations have no specific dollar or share price targets and no expiration dates. Item 6. Selected Financial Data <TABLE> Selected Financial Data (In Thousands, Except Per Share Data) YEAR ENDED JUNE 30, --------------------------------------------------- Income Statement Data 2005 2004 2003 2002 2001(1) --------------------- --------------------------------------------------- <S> <C> <C> <C> <C> <C> Revenue (2) $535,863 $467,415 $404,627 $396,657 $366,903 Net income $ 75,501 $ 62,315 $ 49,397 $ 57,065 $ 55,631 Diluted income per share $ 0.81 $ 0.68 $ 0.55 $ 0.62 $ 0.61 Dividends declared per share $ 0.17 $ 0.15 $ 0.14 $ 0.13 $ 0.11 Balance Sheet Data ------------------ Working capital $ 13,710 $ 85,818 $ 70,482 $ 67,321 $ 65,032 Total assets $814,153 $653,614 $548,575 $486,142 $433,121 Long-term debt $ - $ - $ - $ - $ 228 Stockholders' equity $517,154 $442,918 $365,223 $340,739 $302,504 (1) Revenue for the year ended June 30, 2001, has been restated for the adoption of Emerging Issues Task Force Issue No. 01-14, "Income Statement Characterization of Reimbursements Received for 'Out of Pocket' Expenses Incurred". (2) Revenue includes license sales, support and service revenues, and hardware sales, less returns and allowances. </TABLE> 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 22 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 2005 to fiscal 2004 along with fiscal 2004 to fiscal 2003. 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 $366,903 in fiscal 2001 to $535,863 in fiscal 2005. Income from continuing operations has grown from $55,631 in fiscal 2001 to $75,501 in fiscal 2005. 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, 2005. Since the start of fiscal 2001, we have completed 16 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 2005 COMPARED TO FISCAL 2004 Fiscal 2005 showed strong growth in license and support and service revenues and improved gross and operating margins, which allowed us to leverage a 15% increase in total revenue to a 21% increase in net income. The Company has made acquisitions which have had little effect on the results of operations. 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 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 $19,781 compared to last fiscal year mainly due to growth in delivery and acceptance of software systems within both the bank and credit union segments. Year-to-date 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 $ 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. FISCAL 2004 COMPARED TO FISCAL 2003 Fiscal 2004 showed strong growth in revenues and improved gross and operating margins, which allowed us to leverage a 16% increase in revenues to a 26% increase in net income. REVENUE License Revenue Year Ended June 30, % Change ------------------- -------- 2004 2003 -------- -------- License $ 62,593 $ 48,284 +30% Percentage of total revenue 13% 12% 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 grew by $14,309 compared to last fiscal year due to increased delivery of software relating to the timing of installations. Support and Service Revenue Year Ended June 30, % Change ------------------- -------- 2004 2003 -------- -------- Support and service $ 311,287 $ 260,452 +20% Percentage of total revenue 67% 64% Year Over Year Change $ Change % Change -------- -------- In-House Support & Other Services $ 23,867 19% EFT Support 9,557 36% Outsourcing Services 11,849 17% Implementation Services 5,562 15% -------- Total Increase $ 50,835 ======== Support and service revenues are generated from implementation services (including conversion, implementation, configuration and training), annual support services to assist the customer in operating their systems and to enhance and update the software, outsourced data processing services and EFT support (including ATM and debit card processing services). In-house support and other services increased due to our continued implementation of core and complementary products during the fiscal year, for which most of these customers contract for ongoing support service, beginning upon final implementation. Outsourcing services experienced growth in volume with existing customers and installations of new customers, which led to expansion of our data centers. EFT services (including ATM and debit card processing) were offered to the credit union segment this year, which contributed to the growth. Implementation services grew over the prior year correlating to the increase of license revenue. Recurring revenue (support and service revenue less implementation services) increased to 57% of total revenue in fiscal 2004 from 55% of total fiscal 2003 revenue. Hardware Revenue Year Ended June 30, % Change ------------------- -------- 2004 2003 -------- -------- Hardware $ 93,535 $ 95,891 -2% Percentage of total revenue 20% 24% 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 remained relatively flat year over year, while decreasing to 20% of revenues compared with 24% of fiscal 2003 revenues primarily due to the increase in our license revenue and expansion and growth in our support and service revenue for the year. 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, plus the ongoing operating costs to provide support to our customers. These costs are recognized at the same time as the related hardware revenue is recognized. Cost of Sales and Gross Profit Year Ended June 30, % Change ------------------- -------- 2004 2003 -------- -------- Cost of License $ 4,738 $ 3,890 +22% Percentage of total revenue 1% 1% License Gross Profit $ 57,855 $ 44,394 +30% Gross Profit Margin 92% 92% ------------------- Cost of support and service $ 207,730 $ 178,256 +17% Percentage of total revenue 44% 44% Support and Service Gross $ 103,557 $ 82,196 +26% Gross Profit Margin 33% 32% ------------------- Cost of hardware $ 66,969 $ 69,145 -3% Percentage of total revenue 14% 17% Hardware Gross Profit $ 26,566 $ 26,746 -1% Gross Profit Margin 28% 28% ------------------- TOTAL COST OF SALES $ 279,437 $ 251,291 +11% Percentage of total revenue 60% 62% TOTAL GROSS PROFIT $ 187,978 $ 153,336 +23% Gross Profit Margin 40% 38% The increase in total cost of sales is primarily due to a 12% increase in employee related expenses for increased headcount and a 24% increase in depreciation and amortization expense included in the cost of support and service. This is due mainly to our efforts to continue improving operating efficiencies by investing and upgrading technology equipment. Both fiscal years' cost of support and service remained constant at 44% of total revenue. Cost of license increased mainly due to obligations to third party vendors for the software we resell. The decrease in cost of hardware correlates to the decrease in hardware revenue. Gross margin increased from 38% to 40% in fiscal 2004 due to overall increase in revenue while exercising cost control. Gross margin on license revenue remained consistent at 92% for both fiscal years. The gross profit improvement is due to a significant increase in the delivery of the Company's core and complementary software licenses. For fiscal 2004, delivery of third party license revenue and cost remained flat when compared with fiscal 2003. The increase in gross margin for support and service is primarily due to increased volumes, increased number of customers, and continued leveraging of resources of employees and equipment in our outsourcing and ATM/Debit card processing services. Hardware gross margin for fiscal 2004 and fiscal 2003 remained even at 28%. OPERATING EXPENSES Selling and Marketing Year Ended June 30, % Change ------------------- -------- 2004 2003 -------- -------- Selling and marketing $ 35,964 $ 30,664 +17% Percentage of total revenue 8% 8% Change from prior year Dedicated sales forces, inside sales teams, and technical sales support teams conduct our sales efforts for our two market segments, and are overseen by regional sales managers. Our sales executives are responsible for pursuing lead generation activities for new core customers. Our account executives nurture long-term relationships with our client base and cross sell our many complementary products and services. Our inside sales force markets specific complementary products and services to our existing customers. The increase in selling and marketing expenses relates to higher employee related expenses in fiscal 2004 compared with fiscal 2003, which is relatively in line with the growth in revenue. Research and Development Year Ended June 30, % Change ------------------- -------- 2004 2003 -------- -------- Research and development $ 23,674 $ 15,892 +49% Percentage of total revenue 5% 4% We devote significant effort and expense to develop new software, service products and continually upgrade and enhance our existing offerings. Typically, we upgrade all of our core and complementary software applications annually. We believe our research and development efforts are highly efficient because of the extensive experience of our research and development staff and because our product development is highly customer- driven. The increase in research and development expense is primarily attributable to a 45% increase in employee related expenses. The increase includes standard salary increases along with additional employee headcount for ongoing development of new products and enhancements to existing products in both segments of our business. General and Administrative Year Ended June 30, % Change ------------------- -------- 2004 2003 -------- -------- General and administrative $ 29,534 $ 29,509 <1% Percentage of total revenue 6% 7% General and administrative expenses remained flat year over year. This is due to overall cost control measures implemented throughout the year. INTEREST INCOME (EXPENSE) Interest income increased 60% from $630 to $1,006 due to higher invested balances. Interest expense decreased 3% from $110 in fiscal 2003 to $107 in fiscal 2004. PROVISION FOR INCOME TAXES The provision for income taxes was $37,390 or 37.5% of income before income taxes in fiscal 2004 compared with $28,394, or 36.5% of income before income taxes in fiscal 2003. The increase in the percentage for fiscal 2004 is due to changes in various state tax laws and the allocation of income amongst states. NET INCOME Net income increased 26% from $49,397, or $0.55 per diluted share in fiscal 2003 to $62,315, or $0.68 per diluted share in fiscal 2004. BUSINESS SEGMENT DISCUSSION Bank Systems and Services 2005 % Increase 2004 % Increase 2003 ------- ---------- ------- ---------- ------- Revenue $428,695 12% $382,084 11% $343,127 Gross Profit $181,792 18% $154,646 15% $134,995 Gross Profit Margin 42% 40% 39% 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. 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. In fiscal 2004, revenues in the bank systems and services business segment increased primarily due to improved license sales for most products and continued growth in support and service revenue. Gross profit in this business segment increased due the revenue mix, combined with improved procedures and overall cost controls. Credit Union Systems and Services 2005 % Increase 2004 % Increase 2003 ------- ---------- ------ ---------- ------ Revenue $107,168 26% $85,331 39% $61,500 Gross Profit $ 40,658 22% $33,332 82% $18,341 Gross Profit Margin 38% 39% 30% 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. Revenues in the credit union systems and services business segment increased in fiscal 2004 from fiscal 2003 primarily due to improved license sales and strong growth in support and service revenue from new services introduced this year. Gross profit in this business segment increased in fiscal 2004 from fiscal 2003 due to additional products and services sold which carry a higher gross profit margin, continued leverage of existing resources, improved processes and procedures combined with overall cost controls. 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 decreased to $11,608 at June 30, 2005, from $53,758 at June 30, 2004. Cash provided by operations decreased $4,534 to $108,275 for the fiscal year ended June 30, 2005 as compared to $112,809 for the fiscal year ended June 30, 2004. The decrease consists of an increase in net income of $13,186, an increase in depreciation and amortization expense of $5,371, a total decrease of $1,479 in deferred income taxes, loss on disposal of property and equipment and other expenses. Net income was affected by the following items: $17,120 in the use of trade receivables, $8,651 in prepaid expenses, $5,520 in accounts payable and accrued expenses, $6,236 in deferred revenues and a decrease of $7,597 in accrued income taxes. Cash used in investing activities for the fiscal year ended June 2005 was $185,062, which included capital expenditures of $58,046, primarily for a new building in Allen, TX of $13,000, computer equipment and software of $28,300, and building infrastructure within the company. Acquisitions of eight companies, which expanded our product offerings and expanded our potential market, used $119,501 in fiscal 2005, while $7,846 was used for software development costs. Financing activities generated cash of $34,637, primarily from the proceeds from issuance of stock upon exercise of stock options of $14,264, the sale of common stock of $781 and a short term note payable of $45,000. Generated cash was offset by dividends paid to stockholders of $15,456 and the purchase of treasury stock of $9,952. 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 3,00,9384 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. At June 30, 2005, there were 553,300 shares remaining in treasury stock and the Company had the remaining authority to repurchase up to 4,437,316 shares. Subsequent to June 30, 2005, the Company's Board of Directors declared a cash dividend of $.045 per share on its common stock payable on September 19, 2005, to stockholders of record on September 8, 2005. 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 bank credit line on March 22, 2005 which provides for funding of up to $8,000 and bears interest at the prime rate (6.00% at June 30, 2005). The credit line expires March 22, 2006 and is secured by $1,000 of investments. At June 30, 2005, no amount was outstanding. In October 2004, the Company renewed a bank credit line that provided for funding up to $25,000 and bore interest at a variable LIBOR-based rate. At March 31, 2005, there was a 30-day note outstanding for $14,000 under such credit line. The credit line was terminated and the outstanding note of $14,000 was paid in full on April 19, 2005, using the proceeds of a loan under a new unsecured revolving bank credit facility, entered into on the same date. The new unsecured revolving bank credit facility allows borrowing of up to $150,000, which may be increased by the Company at any time in the next three years 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 new unsecured revolving credit line terminates April 19, 2010. At June 30, 2005, the revolving bank credit facility balance was $45,000. CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS At June 30, 2005 the Company's total off-balance sheet contractual obligations were $14.3 million. This balance consists of $9.7 million of long-term operating leases for various facilities which expire from 2006 to 2011 and the remaining $4.6 million is for purchase commitments related to property and equipment. The Company also has contingent earn-out obligations of up to $28.4 million to the sellers in three acquisitions completed during fiscal year 2005. These amounts are payable over three to five years based variously upon gross revenues, net earnings and net operating income achieved by the individual acquired business units. The Company's new unsecured revolving bank credit facility allows borrowing of up to $150,000, which may be increased at any time in the next three years to $225,000. The unsecured revolving credit ling terminates on April 19, 2010. At June 30, 2005 the revolving bank credit facility balance was $45,000. The balance was subsequently paid in full on August 8, 2005. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (R), "Share-Based Payment" ("SFAS 123(R)"), a revision of SFAS 123. SFAS 123 (R) supersedes APB 25 and amends Statement of Financial Accounting Standards No. 95 "Statement of Cash Flows" ("SFAS 95"). SFAS 123(R) is similar to the approach described in SFAS 123 except that SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated statements of income, in lieu of pro forma disclosure as provided above. SFAS 123 (R) is effective for fiscal periods beginning after June 15, 2005. The Company adopted the provisions of SFAS 123 (R) as of July 1, 2005, the first day of fiscal 2006 and currently intends to use the modified-prospective method and use the Black-Scholes model for estimating the fair value of equity compensation. In December 2004, the FASB issued SFAS No. 153 ("SFAS 153"), Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29, effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, and therefore effective for the Company on July 1, 2005. SFAS No. 153 requires that exchanges of productive assets be accounted for at fair value unless fair value cannot be reasonably determined or the transaction lacks commercial substance. SFAS No. 153 is not expected to have a material effect on the Company's consolidated financial statements. In December 2004, the FASB issued Staff Position 109-1, "Application on FASB Statement No. 109, Accounting for Income Taxes, for the Tax Deduction Provided to U.S. Based Manufacturers by the American Jobs Creation Act of 2004" ("FSP 109-1"). FSP 109-1 clarifies how to apply Statement No. 109 to the new law's tax deduction for income attributable to "Domestic production activities." The Company is currently evaluating the impact of the new law. 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 implementation of SFAS 154 is not expected to have a material impact on the Company's consolidated financial statements. CRITICAL ACCOUNTING POLICIES We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. The significant accounting policies are discussed in Note 1 to the consolidated financial statements. Certain of these accounting policies as discussed below require management to make estimates and assumptions about future events that could materially affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. 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 Company derives revenues from the following sources: license fees, support and service fees and hardware sales. 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. Software implementation services are generally for training, implementation, and configuration of licensed software. 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, for implementation services under $50,000, 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. VSOE of fair value is determined based on pricing used when the items are sold separately. 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. FORWARD LOOKING STATEMENTS Except for the historical information contained herein, the matters discussed in the Management's Discussion and Analysis of Financial Condition and Results of Operations and other portions of this report contain forward- looking statements within the meaning of federal securities laws. Actual results are subject to risks and uncertainties, including both those specific to the Company and those specific to the industry, which could cause results to differ materially from those contemplated. The risks and uncertainties include, but are not limited to, the matters detailed in "Risk Factors" in Item 1 of the Company's 2005 Form 10-K annual report filed with the Securities and Exchange Commission. Undue reliance should not be placed on the forward-looking statements. The Company does not undertake any obligation to publicly update any forward-looking statements. Potential risks and uncertainties which could adversely affect the Company include: the financial health of the banking industry, our ability to continue or effectively manage growth, adapting our products and services to changes in technology, changes in our strategic relationships, price competition, loss of key employees, consolidation in the banking industry, increased government regulation, network or internet security problems, declining computer hardware prices, and operational problems in our outsourcing facilities and others listed in "Risk Factors" of Item 1. 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 33 Management's Annual Report on Internal Control over Financial Reporting 34 Report of Independent Registered Public Accounting Firm 35 Financial Statements Consolidated Statements of Income, Years Ended June 30, 2005, 2004, and 2003 36 Consolidated Balance Sheets, June 30, 2005 and 2004 37 Consolidated Statements of Changes in Stockholders' Equity, Years Ended June 30, 2005, 2004, and 2003 38 Consolidated Statements of Cash Flows, Years Ended June 30, 2005, 2004, and 2003 39 Notes to Consolidated Financial Statements 40 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, 2005 and 2004, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2005. 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, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2005, 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 12, 2005 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 12, 2005
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. Jack Henry & Associates, Inc.'s internal control system was designed to provide reasonable assurance to the company's management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Jack Henry & Associates, Inc. management assessed the effectiveness of the company's internal control over financial reporting as of June 30, 2005. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on our assessment, we believe that, as of June 30, 2005, the company's internal control over financial reporting is effective based on those criteria. Jack Henry & Associates, Inc. independent registered public accounting firm has issued an audit report on our assessment of the company's internal control over financial reporting, which report is included herein.
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, 2005, 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, 2005, 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, 2005, 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, 2005 of the Company and our report dated September 12, 2005 expressed an unqualified opinion on those financial statements. /s/ DELOITTE & TOUCHE LLP St. Louis, Missouri September 12, 2005
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per Share Data) YEAR ENDED JUNE 30, ------------------------------- 2005 2004 2003 -------- -------- -------- REVENUE License $ 82,374 $ 62,593 $ 48,284 Support and service 364,076 311,287 260,452 Hardware 89,413 93,535 95,891 -------- -------- -------- Total 535,863 467,415 404,627 COST OF SALES Cost of license 5,547 4,738 3,890 Cost of support and service 244,097 207,730 178,256 Cost of hardware 63,769 66,969 69,145 -------- -------- -------- Total 313,413 279,437 251,291 -------- -------- -------- GROSS PROFIT 222,450 187,978 153,336 OPERATING EXPENSES Selling and marketing 46,630 35,964 30,664 Research and development 27,664 23,674 15,892 General and administrative 29,087 29,534 29,509 -------- -------- -------- Total 103,381 89,172 76,065 -------- -------- -------- OPERATING INCOME 119,069 98,806 77,271 INTEREST INCOME (EXPENSE) Interest income 1,162 1,006 630 Interest expense (388) (107) (110) -------- -------- -------- Total 774 899 520 -------- -------- -------- INCOME BEFORE INCOME TAXES 119,843 99,705 77,791 PROVISION FOR INCOME TAXES 44,342 37,390 28,394 -------- -------- -------- NET INCOME $ 75,501 $ 62,315 $ 49,397 ======== ======== ======== Diluted net income per share $ 0.81 $ 0.68 $ 0.55 ======== ======== ======== Diluted weighted average shares outstanding 92,998 91,859 89,270 ======== ======== ======== Basic net income per share $ 0.83 $ 0.70 $ 0.56 ======== ======== ======== Basic weighted average shares outstanding 90,891 89,325 87,866 ======== ======== ======== 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, -------------------------- 2005 2004 ---------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 11,608 $ 53,758 Investments, at amortized cost 993 998 Receivables 209,922 169,873 Prepaid expenses and other 14,986 14,023 Prepaid cost of product 20,439 19,086 Deferred income taxes 2,345 1,320 ---------- ---------- Total current assets 260,293 259,058 PROPERTY AND EQUIPMENT, net 243,191 215,100 OTHER ASSETS: Prepaid cost of product 10,413 6,758 Computer software, net of amortization 29,488 18,382 Other non-current assets 6,868 5,791 Customer relationships, net of amortization 68,475 61,368 Trade names 4,010 4,029 Goodwill 191,415 83,128 ---------- ---------- Total other assets 310,669 179,456 ---------- ---------- Total assets $ 814,153 $ 653,614 ========== ========== LIABILITES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 15,895 $ 9,171 Accrued expenses 24,844 21,509 Accrued income taxes 3,239 6,258 Note payable 45,000 - Deferred revenues 157,605 136,302 ---------- ---------- Total current liabilities 246,583 173,240 LONG TERM LIABILITIES: Deferred revenues 13,331 8,694 Deferred income taxes 37,085 28,762 ---------- ---------- Total long term liabilities 50,416 37,456 ---------- ---------- Total liabilities 296,999 210,696 STOCKHOLDERS' EQUITY Preferred stock - $1 par value; 500,000 shares authorize, none issued - - Common stock - $0.01 par value: 250,000,000 shares authorized; Shares issued at 06/30/05 were 92,050,778 Shares issued at 06/30/04 were 90,519,856 920 905 Additional paid-in capital 195,878 175,706 Retained earnings 330,308 271,433 Less treasury stock at cost 553,300 shares at 06/30/05, 315,651 shares at 06/30/04 (9,952) (5,126) ---------- ---------- Total stockholders' equity 517,154 442,918 ---------- ---------- Total liabilities and stockholders' equity $ 814,153 $ 653,614 ========== ========== 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, ------------------------------------ 2005 2004 2003 ---------- ---------- ---------- PREFERRED SHARES: - - - ========== ========== ========== COMMON SHARES: Shares, beginning of year 90,519,856 90,519,856 90,519,856 Shares issued upon exercise of stock options 1,381,085 - - Shares issued for Employee Stock Purchase Plan 32,111 - - Shares issued in acquisition 117,726 - - ---------- ---------- ---------- Shares, end of year 92,050,778 90,519,856 90,519,856 ========== ========== ========== COMMON STOCK - PAR VALUE $0.01 PER SHARE: Balance, beginning of year $ 905 $ 905 $ 905 Shares issued upon exercise of stock options 14 - - Shares issued for Employee Stock Purchase Plan - - - Shares issued in acquisition 1 - - ---------- ---------- ---------- Balance, end of year $ 920 $ 905 $ 905 ---------- ---------- ---------- ADDITIONAL PAID-IN CAPITAL: Balance, beginning of year $ 175,706 $ 169,299 $ 168,061 Shares issued upon exercise of stock options 14,250 21,661 3,539 Shares issued for Employee Stock Purchase Plan 780 719 771 Shares issued in acquisition 2,240 - - Tax benefit on exercise of stock options 6,858 6,408 1,227 Cost of treasury shares reissued (3,956) (22,381) (4,299) ---------- ---------- ---------- Balance, end of year $ 195,878 $ 175,706 $ 169,299 ---------- ---------- ---------- RETAINED EARNINGS: Balance, beginning of year $ 271,433 $ 233,396 $ 201,162 Net income 75,501 62,315 49,397 Reissuance of treasury shares (1,170) (10,870) (4,873) Dividends (2005-$0.17 per share; 2004-$0.15 per share; 2003-$0.14 per share) (15,456) (13,408) (12,290) ---------- ---------- ---------- Balance, end of year $ 330,308 $ 271,433 $ 233,396 ---------- ---------- ---------- TREASURY STOCK: Balance, beginning of year $ (5,126) $ (38,377) $ (29,389) Purchase of treasury shares (9,952) - (18,165) Reissuance of treasury shares upon exercise of stock options 4,970 32,638 8,187 Reissuance of treasury shares for Employee Stock Purchase Plan 156 613 990 ---------- ---------- ---------- Balance, end of year $ (9,952) $ (5,126) $ (38,377) ---------- ---------- ---------- TOTAL STOCKHOLDERS' EQUITY $ 517,154 $ 442,918 $ 365,223 ========== ========== ========== See notes to consolidated financial statements.
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) YEAR ENDED JUNE 30, -------------------------------- 2005 2004 2003 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 75,501 $ 62,315 $ 49,397 Adjustments to reconcile net income from continuing operations to cash from operating activities: Depreciation 29,795 26,790 24,025 Amortization 9,116 6,750 6,169 Deferred income taxes 5,275 5,588 7,940 (Gain) loss on disposal of property and equipment 1,058 2,293 (29) Other, net - (69) 671 Changes in operating assets and liabilities, net of acquisitions: Trade receivables (35,017) (17,897) (19,675) Prepaid expenses, prepaid cost of product, and other (7,015) 1,636 (647) Accounts payable 5,160 (471) 555 Accrued expenses 3,303 3,414 5,896 Income taxes (including tax benefit of $6,858, $6,408, and $1,227 from exercise of stock options). 4,190 11,787 1,428 Deferred revenues 16,909 10,673 23,131 -------- -------- -------- Net cash from operating activities 108,275 112,809 98,861 CASH FLOWS FROM INVESTING ACTIVITIES: Payment for acquisitions, net (119,501) (48,288) (6,537) Capital expenditures (58,046) (49,141) (45,958) Purchase of investments (4,976) (3,991) (3,988) Purchase of customer contracts - - (304) Proceeds from sale of property and equipment 170 971 38 Proceeds from investments 5,000 4,633 4,000 Computer software developed (7,846) (4,409) (5,162) Other, net 137 188 (561) -------- -------- -------- Net cash from investing activities (185,062) (100,037) (58,472) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock upon exercise of stock options 14,264 21,661 3,539 Proceeds from sale of common stock, net 781 719 776 Dividends paid (15,456) (13,408) (12,290) Note payable 45,000 - - Purchase of treasury stock (9,952) - (18,165) -------- -------- -------- Net cash from financing activities 34,637 8,972 (26,140) -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (42,150) $ 21,744 $ 14,249 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 53,758 $ 32,014 $ 17,765 -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 11,608 $ 53,758 $ 32,014 ======== ======== ======== 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 intercompany accounts and transactions have been eliminated. STOCK OPTIONS In accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), no compensation expense is recorded for stock options or other stock-based awards that are granted to employees with an exercise price equal to or above the common stock price on the grant date. In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 establishes fair value as the measurement basis for equity instruments issued in exchange for goods or services and stock-based compensation plans. Fair value may be measured using quoted market prices, option-pricing models or other reasonable estimation methods. SFAS 123 permits the Company to choose between adoption of the fair value based method or disclosing pro forma net income (loss) information. The Statement was effective for transactions entered into after December 31, 1995. Through fiscal 2005, the Company accounted for stock- based compensation in accordance with APB 25, as amended, and provides below the pro forma disclosures required by SFAS 123 as amended by Statement of Financial Accounting Standards No. 148 "Accounting for Stock-Based Compensation Transition and Disclosure" ("SFAS 148"). Pro forma information regarding net income and net income per share is required by SFAS 123. The Company computes fair value for this purpose using the Black-Scholes option valuation model. Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The weighted average fair value of options granted was $6.97, $7.43 and $4.68 for 2005, 2004, and 2003, respectively, using the Black-Scholes option pricing model. The assumptions used in this model to estimate fair value and resulting values are as follows: Year Ended June 30, ----------------------------------- 2005 2004 2003 --------- --------- --------- Weighted Average Assumptions: Expected life (years) 3.53 3.88 4.35 Volatility 48% 53% 55% Risk free interest rate 3.1% 1.6% 1.3% Dividend yield 0.88% 0.75% 1.16% The following table illustrates the effect on net income and net income per share if the Company had applied the fair value recognition provisions of SFAS 123 (in thousands, except per share amounts): Year Ended June 30, ----------------------------------- 2005 2004 2003 --------- --------- --------- Net income, as reported $ 75,501 $ 62,315 $ 49,397 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 6,572 --------- --------- --------- Pro forma net income $ 73,887 $ 55,128 $ 42,825 ========= ========= ========= Diluted net income per share As reported $ 0.81 $ 0.68 $ 0.55 Pro forma $ 0.79 $ 0.60 $ 0.48 Basic net income per share As reported $ 0.83 $ 0.70 $ 0.56 Pro forma $ 0.81 $ 0.62 $ 0.49 In December 2004, the FASB issued SFAS No. 123 (R), "Share-Based Payment" ("SFAS 123(R)"), a revision of SFAS 123. SFAS 123 (R) supersedes APB 25 and amends Statement of Financial Accounting Standards No. 95 "Statement of Cash Flows" ("SFAS 95"). SFAS 123(R) is similar to the approach described in SFAS 123 except that SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated statements of income, in lieu of pro forma disclosure as provided above. SFAS 123 (R) is effective for fiscal periods beginning after June 15, 2005. The Company adopted the provisions of SFAS 123 (R) as of July 1, 2005, the first day of fiscal 2006 and currently intends to use the modified-prospective method and use the Black-Scholes model for estimating the fair value of equity compensation. 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 exercised 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 is $21.15, and exercise prices of the affected options range from $18.64 to $25.00. The accelerated options constitute only 2.1% of the company's outstanding options. 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 the Company to reduce the impact of recognizing future compensation expense associated with these options upon adoption of SFAS 123(R). Commencing with the Company's fiscal year that begins July 1, 2005, SFAS 123(R) will require that the Company recognize compensation expense equal to the fair value of equity-based compensation awards over the vesting period of each such award. 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 is 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). See "Recent Accounting Pronouncements," below for additional information related to stock options. For options currently outstanding, the adoption of the fair value method under SFAS 123(R) is not expected to have a significant impact on the Company's consolidated statements of income and, the Company's overall financial position will not be affected by the adoption of SFAS 123(R). The actual impact of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future and other factors. 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 recognizes 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 Company derives revenues 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. SOP 97-2, 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. 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. Software implementation services are generally for training, implementation, and configuration of licensed software. 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, for implementation services under $50,000 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 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. VSOE of fair value is determined based on pricing used when the items are sold separately. 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 initially amortized on a straight-line basis, and are monitored on a regular basis to assess that the amortization method is still appropriate and that the remaining estimated life of the asset is reasonable (generally five to ten years). CASH EQUIVALENTS The Company considers all highly liquid investments with maturities of three months or less at the time of acquisition to be cash equivalents. INVESTMENTS The Company invests its cash that is not required for current operations primarily in U.S. government securities and money market accounts. The Company has the positive intent and ability to hold its debt securities until maturity and accordingly, these securities are classified as held-to- maturity and are carried at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized and accreted, respectively, to interest income using the level-yield method over the period to maturity. The held-to-maturity securities typically mature in less than one year. Interest on investments in debt securities is included in income when earned. The amortized cost of held-to-maturity securities is $993 and $998 at June 30, 2005 and 2004, respectively. Fair market values of these securities did not differ significantly from amortized cost due to the nature of the securities and minor interest rate fluctuations during the periods. PROPERTY AND EQUIPMENT 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 three years ended June 30, 2005 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 3,00,9384 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. As of June 30, 2005, 553,300 shares had been repurchased during the fiscal year for $9,952. At June 30, 2005, there were 553,300 shares remaining in treasury stock and the Company had the remaining authority to repurchase up to 4,437,316 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 SFAS No. 123 (R), "Share-Based Payment" ("SFAS 123(R)"), a revision of SFAS 123. SFAS 123 (R) supersedes APB 25 and amends Statement of Financial Accounting Standards No. 95 "Statement of Cash Flows" ("SFAS 95"). SFAS 123(R) is similar to the approach described in SFAS 123 except that SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated statements of income, in lieu of pro forma disclosure as provided above. SFAS 123 (R) is effective for fiscal periods beginning after June 15, 2005. The Company adopted the provisions of SFAS 123 (R) as of July 1, 2005, the first day of fiscal 2006 and currently intends to use the modified-prospective method and use the Black-Scholes model for estimating the fair value of equity compensation. In December 2004, the FASB issued SFAS No. 153 ("SFAS 153"), Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29, effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, and therefore effective for the Company on July 1, 2005. SFAS No. 153 requires that exchanges of productive assets be accounted for at fair value unless fair value cannot be reasonably determined or the transaction lacks commercial substance. SFAS No. 153 is not expected to have a material effect on the Company's consolidated financial statements. In December 2004, the FASB issued Staff Position 109-1, "Application on FASB Statement No. 109, Accounting for Income Taxes, for the Tax Deduction Provided to U.S. Based Manufacturers by the American Jobs Creation Act of 2004" ("FSP 109-1"). FSP 109-1 clarifies how to apply Statement No. 109 to the new law's tax deduction for income attributable to "Domestic production activities." The Company is currently evaluating the impact of the new law on the Company's consolidated financial statements. 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 implementation of SFAS 154 is not expected to have a material impact on the Company's consolidated financial statements. NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS Fair values for held-to-maturity securities are based on quoted market prices. For all other financial instruments, including amounts receivable or payable and short-term borrowings, fair values approximate carrying value, based on the short-term nature of the assets and liabilities and the variability of the interest rates on the borrowings. NOTE 3: PROPERTY AND EQUIPMENT The classification of property and equipment, together with their estimated useful lives is as follows: June 30, ----------------------- Estimated 2005 2004 Useful Life ---------- ---------- ----------- Land $ 15,598 $ 9,458 Land improvements 17,873 16,418 5-20 years Buildings 80,790 59,984 25-30 years Leasehold improvements 16,140 13,103 5-10 years(1) Equipment and furniture 133,931 108,703 5-8 years Aircraft and equipment 50,523 49,478 8-10 years Construction in progress 19,681 32,218 ---------- ---------- $ 334,536 $ 289,362 Less accumulated depreciation 91,345 74,262 ---------- ---------- Propery and equipment, net $ 243,191 $ 215,100 ========== ========== (1) Lesser of lease term or economic life At June 30, 2005 and 2004, the Company had commitments of approximately $4,600 and $6,900, respectively, to purchase property and equipment. NOTE 4: OTHER ASSETS Changes in the carrying amount of goodwill for the years ended June 30, 2005 and 2004, by reportable segments, are: Banking Credit Union Systems Systems and and Services Services Total -------- -------- --------- Balance, as of July 1, 2003 $ 27,314 $ 17,229 $ 44,543 Goodwill acquired during the year 38,585 - 38,585 -------- -------- --------- Balance, as of June 30, 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 ======== ======== ========= Information regarding other identifiable intangible assets is as follows: June 30, 2005 2004 ---------------------------- ----------------------------- Carrying Accumulated Carrying Accumulated Amount Amortization Net Amount Amortization Net ------- --------- ------- ------- --------- ------- Customer relationships $109,244 $ (40,769) $ 68,475 $ 96,254 $ (34,886) $ 61,368 Trade names 4,010 - 4,010 4,029 - 4,029 ------- --------- ------- ------- --------- ------- Totals $113,254 $ (40,769) $ 72,485 $100,283 $ (34,886) $ 65,397 ======= ========= ======= ======= ========= ======= Trade names have been determined to have indefinite lives and are no longer 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, 2003 $ 18,854 $ (6,354) $ 12,500 Acquired software 3,191 - 3,191 Capitalizated development cost 4,409 - 4,409 Amortization expense - (1,718) (1,718) -------- -------- --------- Balance, June 30, 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 ======== ======== ========= Amortization expense for all intangible assets was $9,116, $6,750 and $6,169 for the fiscal years ended June 30, 2005, 2004, and 2003, respectively. The estimated aggregate future amortization expense for each of the next five years for all intangible assets remaining as of June 30, 2005, is as follows: Customer Year Relationship Software Total ---- ------------ -------- ------- 2006 $6,422 $3,428 $9,850 2007 5,947 3,150 9,097 2008 5,657 3,128 8,785 2009 5,563 2,694 8,257 2010 5,444 1,611 7,055 NOTE 5: LINES OF CREDIT The Company renewed a credit line on March 22, 2005 which provides for funding of up to $8,000 and bears interest at the prime rate (6.00% at June 30, 2005). The credit line expires March 22, 2006 and is secured by $1,000 of investments. There were no outstanding amounts at June 30, 2005 or 2004. In October 2004, the Company renewed a bank credit line that provided for funding up to $25,000 and bore interest at a variable LIBOR-based rate. At March 31, 2005, there was a 30-day note outstanding for $14,000 under such credit line. The credit line was terminated and the outstanding note of $14,000 was paid in full on April 19, 2005, using the proceeds of a loan under a new unsecured revolving bank credit facility, entered into on the same date. The new unsecured revolving bank credit facility allows borrowing of up to $150,000, which may be increased by the Company at any time in the next three years 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 new unsecured revolving credit line terminates April 19, 2010. At June 30, 2005, the outstanding revolving bank credit facility balance was $45,000 ($15,000 at 6.00%, $15,000 at 4.27% and $15,000 at 4.15% at June 30, 2005). The Company paid interest of $171, $107, and $110 in 2005, 2004, and 2003, respectively. NOTE 6: LEASE COMMITMENTS The Company leases certain property under operating leases which expire over the next seven years. As of June 30, 2005, net future minimum lease payments under non-cancelable terms are as follows: Years Ending June 30, 2006 $ 3,112 2007 2,668 2008 1,910 2009 1,072 2010 583 Thereafter 277 ------ Total $ 9,622 ====== Rent expense for all operating leases amounted to $4,169, $4,233, and $3,921 in 2005, 2004, and 2003, respectively. NOTE 7: INCOME TAXES The provision for income taxes consists of the following: Year ended June 30, ---------------------------------- 2005 2004 2003 -------- -------- -------- Current: Federal $ 35,221 $ 28,096 $ 19,001 State 3,846 3,706 1,453 Deferred: Federal 4,982 5,306 7,577 State 293 282 363 -------- -------- -------- $ 44,342 $ 37,390 $ 28,394 ======== ======== ======== The tax effects of temporary differences related to deferred taxes shown on the balance sheets were: June 30, ---------------------- 2005 2004 -------- -------- Deferred tax assets: Carryforwards (operating losses) $ 2,797 $ 1,094 Expense reserves (bad debts, insurance, franchise tax and vacation) 1,481 754 Intangible assets 615 583 Other, net 866 565 -------- -------- 5,759 2,996 -------- -------- Deferred tax liabilities: Accelerated tax depreciation (25,336) (22,992) Accelerated tax amortization (15,163) (7,446) -------- -------- (40,499) (30,438) -------- -------- Net deferred tax liability $ (34,740) $ (27,442) ======== ======== The deferred taxes are classified on the balance sheets as follows: June 30, ---------------------- 2005 2004 -------- -------- Deferred income taxes (current) $ 2,345 $ 1,320 Deferred income taxes (long-term) (37,085) (28,762) -------- -------- $ (34,740) $ (27,442) ======== ======== The following analysis reconciles the statutory federal income tax rate to the effective income tax rates reflected above: Year Ended June 30, ---------------------------- 2005 2004 2003 ---- ---- ---- 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 3.5% 4.0% 2.5% Research and development credit -1.5% -1.5% -1.0% ---- ---- ---- 37.0% 37.5% 36.5% ==== ==== ==== Net operating loss carryforwards of $9,258 (from acquisitions) expire through the year 2024. $1,699 is available for use in the Company's June 30, 2005 federal income tax returns leaving $7,559 available for subsequent years. The Company paid income taxes of $34,891, $20,314, and $19,025 in 2005, 2004, and 2003, 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"). In connection with the examination of these returns, the IRS has proposed to disallow research & experimentation ("R&E") credits claimed on these returns. The Company has appealed this proposal, but a final determination has not yet been received. The complete disallowance of these credits would increase the Company's federal income tax liability by approximately $1,500 plus interest. The Company believes that the R&E credits claimed for these years are appropriate and has contested the disallowance of these credits. While there can be no assurance that the Company will prevail in contesting this disallowance, it believes the facts or the relevant tax law does not support any such disallowance. Consequently, the Company has not accrued any liability in connection with this matter. NOTE 8: INDUSTRY AND SUPPLIER CONCENTRATIONS The Company sells its products to banks, credit unions, and financial institutions throughout the United States and generally does not require collateral. All billings to customers are due net 30 days from date of billing. Reserves (which are insignificant at June 30, 2005 and 2004) 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 October 31, 1995, 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. 1,200,000 shares of common stock have been reserved for issuance under this plan with a maximum of 300,000 for each director. As of June 30, 2005, there were 445,833 shares available for future grants under the plan. Changes in stock options outstanding are as follows: Number of Weighted Average Shares Exercise Price ---------- -------------- Outstanding July 1, 2002 10,217,569 $ 13.90 Granted 3,897,150 10.92 Forfeited (313,925) 17.89 Exercised (501,740) 7.04 Expired 1,200 6.39 ---------- -------------- Outstanding June 30, 2003 13,300,254 13.19 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 ========== ============== 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, 2005: Weighted-Average Remaining Range of Contractural Weighted-Average Exercise Prices Shares Life in Years Exercise Price --------------- ------------------------ ------------- ------------------------ Outstanding Exercisable Outstanding Outstanding Exercisable ----------- ----------- ----------- ----------- ----------- $ 3.15 - $ 9.44 1,817,817 1,817,817 2.22 $ 6.38 $ 6.38 $ 9.45 - $10.75 413,500 413,500 3.68 10.38 10.38 $10.76 - $10.84 1,848,822 1,848,822 7.78 10.84 10.84 $10.85 - $16.49 310,581 249,646 5.32 12.02 11.89 $16.50 - $16.88 3,314,210 3,314,210 4.76 16.88 16.88 $16.89 - $31.00 2,061,467 1,889,532 6.40 22.58 23.01 --------------- ---------- ---------- ----------- ----------- ----------- $ 3.15 - $31.00 9,766,397 9,533,527 5.18 $14.55 $14.51 =============== ========== ========== =========== =========== =========== NOTE 10: EARNINGS PER SHARE <TABLE> The following table reflects the reconciliation between basic and diluted net income per share: Year Ended June 30, ------------------- 2005 2004 2003 ---------------------------- ---------------------------- ---------------------------- Weighted Weighted Weighted Net Average Per Share Net Average Per Share Net Average Per Share Income Shares Amount Income Shares Amount Income Shares Amount ------ ------ ---- ------ ------ ---- ------ ------ ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Basic Income Per Share: Net income available to common stockholders $75,501 90,891 $0.83 $62,315 89,325 $0.70 $49,397 87,866 $0.56 Effect of dilutive securities: Stock options - 2,107 (0.02) - 2,534 (0.02) - 1,404 (0.01) ------ ------ ---- ------ ------ ---- ------ ------ ---- Diluted Income Per Share: Net income available to common stockholders $75,501 92,998 $0.81 $62,315 91,859 $0.68 $49,397 89,270 $0.55 ====== ====== ==== ====== ====== ==== ====== ====== ==== </TABLE> Stock options to purchase approximately 1,791,614 shares for fiscal 2005, 1,758,583 shares for fiscal 2004, and 5,972,949 shares for fiscal 2003, 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 $5,212, $4,487, and $4,139 for fiscal 2005, 2004, and 2003, respectively. The Company also had an Employee Stock Ownership Plan (the "ESOP" Plan), which it terminated as of January 1, 2005 and is in the process of completing its liquidation. No contribution had been made to the ESOP Plan for any of the three most recent fiscal years. NOTE 12: BUSINESS ACQUISITIONS PURCHASE TRANSACTIONS 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 $5,000 may be paid over the next three years based upon Tangent's earnings before interest, depreciation, taxes and amortization. The acquired goodwill has been allocated to the bank segment and is non-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 $10,000 may be paid over the next three years based upon the net operating income of Stratika. The acquired goodwill has been allocated to the bank segment and is non-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 five years based upon BIS gross revenues which could result in additional allocations to goodwill of up to $13,400. 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, 2005 and 2004 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, -------------------- 2005 2004 -------- -------- Revenue $ 553,389 $ 503,368 Gross profit 229,825 201,138 -------- -------- Net Income $ 78,092 $ 66,309 ======== ======== Earnings per share - diluted $ 0.84 $ 0.72 ======== ======== Diluted Shares 92,998 91,859 ======== ======== Earnings per share - basic $ 0.86 $ 0.74 ======== ======== Basic Shares 90,891 89,325 ======== ======== 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. Fiscal 2003 Acquisitions On January 1, 2003, the Company acquired all the outstanding membership interests in National Bancorp Data Services, LLC ("NBDS"). The purchase price for NBDS, $2,100 paid in cash, was allocated to the assets and liabilities acquired based on then estimated fair values at the acquisition date resulting in allocation of $300 to working capital and $1,800 to goodwill. The acquired goodwill was allocated to the bank segment and is non-deductible for federal income tax. On November 15, 2002, the Company acquired all the outstanding shares of Credit Union Solutions, Inc. ("CUSI"). The purchase price for CUSI, $5,000 paid in cash, was allocated to the assets and liabilities acquired based on then estimated fair values at the acquisition date. This resulted in an allocation of $97 to working capital, $2,408 to goodwill, capitalized software of $1,222 and customer contracts of $710. The acquired goodwill was allocated to the credit union segment and is non-deductible for federal income tax. The accompanying consolidated financial statements do not include any revenues and expenses related to these acquisitions prior to their respective closing dates. Pro forma results of acquisitions completed in 2004 and 2003 were not material, therefore such amounts have not been presented. 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, 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, 2003 ---------------------------------------- Bank Credit Union Total ---------- ---------- ---------- REVENUE License $ 29,275 $ 19,009 $ 48,284 Support and service 234,095 26,357 260,452 Hardware 79,757 16,134 95,891 ---------- ---------- ---------- Total 343,127 61,500 404,627 ---------- ---------- ---------- COST OF SALES Cost of license 1,834 2,056 3,890 Cost of support and service 148,921 29,335 178,256 Cost of hardware 57,377 11,768 69,145 ---------- ---------- ---------- Total 208,132 43,159 251,291 ---------- ---------- ---------- GROSS PROFIT $ 134,995 $ 18,341 $ 153,336 ========== ========== ========== For the Year Ended June 30, ----------------------------------- 2005 2004 2003 --------- --------- --------- Depreciation expense, net Bank systems and services $ 27,248 $ 25,970 $ 23,370 Credit Unions systems and services 2,547 820 655 --------- --------- --------- Total $ 29,795 $ 26,790 $ 24,025 ========= ========= ========= Amortization expense, net Bank systems and services $ 7,356 $ 5,301 $ 4,787 Credit Unions systems and services 1,760 1,449 1,382 --------- --------- --------- Total $ 9,116 $ 6,750 $ 6,169 ========= ========= ========= Capital expenditures, net Bank systems and services $ 49,360 $ 23,505 $ 45,759 Credit Unions systems and services 8,686 25,636 199 --------- --------- --------- Total $ 58,046 $ 49,141 $ 45,958 ========= ========= ========= For the Year Ended June 30, --------------------------- 2005 2004 --------- --------- Property and equipment, net Bank systems and services $ 208,541 $ 187,242 Credit Unions systems and services 34,650 27,858 --------- --------- Total $ 243,191 $ 215,100 ========= ========= Identified intangible assets, net Bank systems and services $ 238,503 $ 125,650 Credit Unions systems and services 50,575 41,257 --------- --------- Total $ 289,078 $ 166,907 ========= ========= The Company has not disclosed any additional asset information by segment, as the information is not produced internally and its preparation is impracticable. <TABLE> QUARTERLY FINANCIAL INFORMATION (unaudited) For the Year Ended June 30, 2005 Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> 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 ======= ======= ======= ======= ======= QUARTERLY FINANCIAL INFORMATION (unaudited) For the Year Ended June 30, 2004 Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> REVENUE License $ 12,960 $ 12,400 $ 15,343 $ 21,890 $ 62,593 Support and service 72,524 76,717 78,353 83,693 311,287 Hardware 23,456 23,613 26,012 20,454 93,535 ------- ------- ------- ------- ------- Total 108,940 112,730 119,708 126,037 467,415 ------- ------- ------- ------- ------- COST OF SALES Cost of license 913 252 1,131 2,442 4,738 Cost of support and service 49,049 51,696 52,073 54,912 207,730 Cost of hardware 16,321 16,073 19,185 15,390 66,969 ------- ------- ------- ------- ------- Total 66,283 68,021 72,389 72,744 279,437 ------- ------- ------- ------- ------- GROSS PROFIT 42,657 44,709 47,319 53,293 187,978 ------- ------- ------- ------- ------- OPERATING EXPENSES Selling and marketing 8,772 8,531 8,634 10,027 35,964 Research and development 5,319 5,912 6,344 6,099 23,674 General and administrative 7,005 7,673 6,842 8,014 29,534 ------- ------- ------- ------- ------- Total 21,096 22,116 21,820 24,140 89,172 ------- ------- ------- ------- ------- OPERATING INCOME 21,561 22,593 25,499 29,153 98,806 INTEREST INCOME (EXPENSE) Interest income 287 281 248 190 1,006 Interest expense (26) (3) (52) (26) (107) ------- ------- ------- ------- ------- Total 261 278 196 164 899 ------- ------- ------- ------- ------- INCOME BEFORE INCOME TAXES 21,822 22,871 25,695 29,317 99,705 PROVISION FOR INCOME TAXES 7,965 8,348 9,379 11,698 37,390 ------- ------- ------- ------- ------- NET INCOME $ 13,857 $ 14,523 $ 16,316 $ 17,619 $ 62,315 ======= ======= ======= ======= ======= Diluted net income per share $ 0.15 $ 0.16 $ 0.18 $ 0.19 $ 0.68 ======= ======= ======= ======= ======= Diluted weighted average shares outstanding 91,069 92,000 92,077 92,291 91,859 ======= ======= ======= ======= ======= Basic net income per share $ 0.16 $ 0.16 $ 0.18 $ 0.20 $ 0.70 ======= ======= ======= ======= ======= Basic weighted average shares outstanding 88,515 89,231 89,654 89,899 89,325 ======= ======= ======= ======= ======= </TABLE> 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, 2005, 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" and "Company Performance" in the Company's definitive Proxy Statement which is incorporated herein by reference.* Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters See the information under the captions "Stock Ownership of Certain Stockholders", "Election of Directors" and "Equity Compensation Plan Information" in the Company's definitive Proxy Statement which is incorporated herein by reference.* Item 13. Certain Relationships and Related Transactions See the information under the caption "Certain Relationships and Related Transactions" in the Company's definitive Proxy Statement which is incorporated herein by reference.* Item 14. Principal Accountant Fees and Services See the information under the captions "Audit Committee Report" and "Independent 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, 2005, 2004 and 2003 - Consolidated Balance Sheets as of June 30, 2005 and 2004 - Consolidated Statements of Changes in Stockholders' Equity for the Years Ended June 30, 2005, 2004 and 2003 - Consolidated Statements of Cash Flows for the Years Ended June 30, 2005, 2004 and 2003 - 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. 10.17 IBM Business Partner Agreement dated January 1, 2003, attached as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the Year Ended June 30, 2003. 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-Kfiled 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 2006 Independent Director Compensation Plan, attached as Exhibit 10.24 to the Company's Current Report on Form 8-K filed September 2, 2005. 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. 32.1 Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. 32.2 Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.
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 26th day of August, 2005. 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 13, 2005 ---------------------- Director Michael E. Henry /s/ John F. Prim Chief Executive Officer September 13, 2005 ---------------------- John F. Prim /s/ Kevin D. Williams Chief Financial Officer September 13, 2005 ---------------------- and Treasurer (Principal Kevin D. Williams Accounting Officer) /s/ John W. Henry Vice Chairman, Senior Vice September 13, 2005 ---------------------- President and Director John W. Henry /s/ Jerry D. Hall Executive Vice President and September 13, 2005 ---------------------- Director Jerry D. Hall /s/ Joseph J. Maliekel Director September 13, 2005 ---------------------- Joseph J. Maliekel /s/ James J. Ellis Director September 13, 2005 ---------------------- James J. Ellis /s/ Craig R. Curry Director September 13, 2005 ---------------------- Craig R. Curry [ Exhibits are omitted, but are available upon request directed to Kevin D. Williams, CFO 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/.]