UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 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 file number 0-14112 JACK HENRY & ASSOCIATES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 43-1128385 ---------------------------- --------------- (State or Other Jurisdiction I.R.S. Employer of Incorporation) Identification No.) 663 Highway 60, P.O. Box 807, Monett, MO 65708 ---------------------------------------------- Address of Principle Executive Offices (Zip Code) 417-235-6652 ---------------------------------------------------- (Registrant's telephone number, including area code) N/A --------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of January 26, 2006, Registrant has 91,560,148 shares of common stock outstanding ($0.01 par value)
JACK HENRY & ASSOCIATES, INC. CONTENTS Page PART I FINANCIAL INFORMATION Reference ITEM 1 Financial Statements Condensed Consolidated Balance Sheets December 31, 2005 and June 30, 2005 (Unaudited) 3 Condensed Consolidated Statements of Income for the Three and Six Months Ended December 31, 2005 and 2004 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2005 and 2004 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 ITEM 3 Quantitative and Qualitative Disclosures about Market Risk 16 ITEM 4 Controls and Procedures 16 PART II OTHER INFORMATION ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds 17 ITEM 6 Exhibits 17
PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Data) (Unaudited) December 31, June 30, 2005 2005 ---------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 38,249 $ 11,608 Investments, at amortized cost 2,661 993 Receivables 102,841 209,922 Prepaid expenses and other 15,725 14,986 Prepaid cost of product 17,646 20,439 Deferred income taxes 2,540 2,345 ---------- ---------- Total current assets 179,662 260,293 PROPERTY AND EQUIPMENT, net 246,167 243,191 OTHER ASSETS: Prepaid cost of product 12,759 10,413 Computer software, net of amortization 37,651 29,488 Other non-current assets 8,095 6,868 Customer relationships, net of amortization 66,579 68,475 Trade names 4,009 4,010 Goodwill 210,956 191,415 ---------- ---------- Total other assets 340,049 310,669 ---------- ---------- Total assets $ 765,878 $ 814,153 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 7,673 $ 15,895 Accrued expenses 20,525 24,844 Accrued income taxes 869 3,239 Note payable 25,000 45,000 Deferred revenues 106,318 157,605 ---------- ---------- Total current liabilities 160,385 246,583 LONG TERM LIABILITIES: Deferred revenues 16,493 13,331 Deferred income taxes 41,638 37,085 ---------- ---------- Total long term liabilities 58,131 50,416 ---------- ---------- Total liabilities 218,516 296,999 STOCKHOLDERS' EQUITY Preferred stock - $1 par value; 500,000 shares authorized, none issued - - Common stock - $0.01 par value: 250,000,000 shares authorized; Shares issued at 12/31/05 were 92,691,960 Shares issued at 06/30/05 were 92,050,778 927 920 Additional paid-in capital 205,822 195,878 Retained earnings 363,141 330,308 Less treasury stock at cost 1,240,500 shares at 12/31/05, 553,300 shares at 06/30/05 (22,528) (9,952) ---------- ---------- Total stockholders' equity 547,362 517,154 ---------- ---------- Total liabilities and stockholders' equity $ 765,878 $ 814,153 ========== ========== See notes to condensed consolidated financial statements
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per Share Data) (Unaudited) Three Months Ended Six Months Ended December 31, December 31, -------------------- -------------------- 2005 2004 2005 2004 ------- ------- ------- ------- REVENUE License $ 20,836 $ 22,148 $ 37,744 $ 41,699 Support and service 106,524 87,726 205,925 171,374 Hardware 20,057 26,086 40,731 46,983 ------- ------- ------- ------- Total 147,417 135,960 284,400 260,056 COST OF SALES Cost of license 1,061 1,734 1,912 3,343 Cost of support and service 66,356 60,946 130,593 116,976 Cost of hardware 14,517 18,531 29,857 34,426 ------- ------- ------- ------- Total 81,934 81,211 162,362 154,745 GROSS PROFIT 65,483 54,749 122,038 105,311 OPERATING EXPENSES Selling and marketing 12,300 11,920 23,740 22,652 Research and development 8,003 6,741 14,752 12,883 General and administrative 11,130 8,127 18,935 15,592 ------- ------- ------- ------- Total 31,433 26,788 57,427 51,127 OPERATING INCOME 34,050 27,961 64,611 54,184 INTEREST INCOME (EXPENSE) Interest income 425 359 868 818 Interest expense (132) (14) (307) (17) ------- ------- ------- ------- Total 293 345 561 801 INCOME BEFORE INCOME TAXES 34,343 28,306 65,172 54,985 PROVISION FOR INCOME TAXES 12,707 10,614 24,114 20,619 ------- ------- ------- ------- NET INCOME $ 21,636 $ 17,692 $ 41,058 $ 34,366 ======= ======= ======= ======= Diluted net income per share $ 0.23 $ 0.19 $ 0.44 $ 0.37 ======= ======= ======= ======= Diluted weighted average shares outstanding 93,637 92,957 93,818 92,721 ======= ======= ======= ======= Basic net income per share $ 0.24 $ 0.20 $ 0.45 $ 0.38 ======= ======= ======= ======= Basic weighted average shares outstanding 91,352 90,650 91,457 90,468 ======= ======= ======= ======= See notes to condensed consolidated financial statements
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) Six Months Ended December 31, ----------------------- 2005 2004 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 41,058 $ 34,366 Adjustments to reconcile net income from operations to cash from operating activities: Depreciation 16,176 14,563 Amortization 5,134 4,254 Deferred income taxes 3,124 2,930 (Gain) loss on disposal of property and equipment 113 1,061 Stock- based compensation 257 - Changes in operating assets and liabilities, net of acquisitions: Receivables 107,342 88,210 Prepaid expenses, prepaid cost of product, and other (1,484) 113 Accounts payable (8,488) (2,098) Accrued expenses (5,037) (1,457) Income taxes (including tax benefit of $3,453 and $1,730 from exercise of stock options) 1,056 (3,582) Deferred revenues (52,023) (44,150) ---------- ---------- Net cash from operating activities 107,228 94,210 CASH FLOWS FROM INVESTING ACTIVITIES: Payment for acquisitions, net (19,177) (109,910) Capital expenditures (18,971) (23,570) Computer software developed (8,109) (3,162) Proceeds from investments 2,000 2,000 Purchase of investments (1,982) (1,992) Proceeds from sale of property and equipment - 3 Other, net 212 70 ---------- ---------- Net cash from investing activities (46,027) (136,561) CASH FLOWS FROM FINANCING ACTIVITIES: Note payable, net (20,000) 10,000 Purchase of treasury stock (12,576) - Dividends paid (8,225) (7,239) Proceeds from issuance of common stock upon exercise of stock options 5,888 7,987 Proceeds from sale of common stock, net 353 360 ---------- ---------- Net cash from financing activities (34,560) 11,108 ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 26,641 $ (31,243) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 11,608 $ 53,758 ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 38,249 $ 22,515 ========== ========== Net cash paid for income taxes was $19,915 and $21,284 for the six months ended December 31, 2005 and 2004, respectively. The Company paid interest of $454 and $4 for the six months ended December 31, 2005 and 2004, respectively. See notes to condensed consolidated financial statements
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Per Share Amounts) (Unaudited) NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF THE COMPANY Jack Henry & Associates, Inc. and Subsidiaries ("JHA" or the "Company") is a leading provider of integrated computer systems that has developed 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 financial institutions 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-BASED COMPENSATION In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123 (R), "Share- Based Payment", ("SFAS 123(R)"), a revision of SFAS No. 123 "Share-Based Payment". SFAS 123 (R) supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and amends SFAS No. 95 "Statement of Cash Flows". 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. 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 is using the modified-prospective transition method with the Black-Scholes model for estimating the fair value of equity compensation. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 107, "Share-Based Payment" that provided additional guidance to public companies relating to share-based payment transactions and the implementation of SFAS 123(R), including guidance regarding valuation methods and related assumptions, classification of compensation expense and income tax effects of share-based 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 exercise prices higher than the market price of the Company's stock on such date. As a result of this action, the vesting of 202 options was accelerated by an average of 15 months. No other changes to these options were made. The weighted average exercise price of these accelerated options was $21.15, and exercise prices of the affected options ranged 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 began July 1, 2005, SFAS 123(R) requires 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). For the first six months of fiscal 2006, there was $257 in compensation expense from equity-based awards. The adoption of SFAS 123 (R) did not materially impact the Company's consolidated financial statements. The following table illustrates the effect on net income and net income per share for the first half of fiscal 2005 had the Company accounted for its stock-based awards under the fair value method of SFAS 123. Three Months Ended Six Months Ended December 31, December 31, 2004 2004 ------------ ------------ Net income, as reported $ 17,692 $ 34,366 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect 338 605 -------- -------- Pro forma net income $ 17,354 $ 33,761 ======== ======== Diluted net income per share As reported $ 0.19 $ 0.37 Pro forma $ 0.19 $ 0.36 Basic net income per share As reported $ 0.20 $ 0.38 Pro forma $ 0.19 $ 0.37 COMPREHENSIVE INCOME Comprehensive income for the three and six-month periods ended December 31, 2005 and 2004 equals the Company's net income. COMMON STOCK The Board of Directors has authorized the Company to repurchase shares of its common stock. 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. At June 30, 2005, there were 553 shares in treasury stock and the Company had the remaining authority to repurchase up to 4,437 shares. During the six months ended December 31, 2005, the Company repurchased 687 treasury shares for $12,576. The total cost of treasury shares at December 31, 2005 is $22,528. At December 31, 2005, there were 1,241 shares in treasury stock and the Company had the authority to repurchase up to 3,750 shares. INTERIM FINANCIAL STATEMENTS The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America applicable to interim condensed consolidated financial statements, and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. The condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and accompanying notes, which are included in its Annual Report on Form 10-K ("Form 10-K") for the year ended June 30, 2005. The accounting policies followed by the Company are set forth in Note 1 to the Company's consolidated financial statements included in its Form 10-K for the year ended June 30, 2005. In the opinion of management of the Company, the accompanying condensed consolidated financial statements reflect all adjustments necessary (consisting solely of normal recurring adjustments) to present fairly the financial position of the Company as of December 31, 2005, and the results of its operations and its cash flows for the three and six-month periods ended December 31, 2005 and 2004. The results of operations for the three and six-month periods ended December 31, 2005 are not necessarily indicative of the results to be expected for the entire year. NOTE 2. ADDITIONAL INTERIM FOOTNOTE INFORMATION The following additional information is provided to update the notes to the Company's annual consolidated financial statements for the developments during the three and six months ended December 31, 2005. ACQUISITIONS On November 1, 2005, the Company acquired all of the capital stock of Profitstar, Inc. ("Profitstar"). Profitstar is a leading provider of asset/liability management, risk management, profitability accounting and financial planning software and related services to banks, credit unions and other financial institutions. The purchase price for Profitstar, $19,177 paid in cash, was preliminarily allocated to the assets and liabilities acquired based on then estimated fair values at the acquisition date, resulting in an allocation of ($4,889) to working capital, $1,234 to deferred tax liability, $1,871 capitalized software, $1,420 to customer relationships, and $19,541 to goodwill. The acquired goodwill has been allocated to the bank segment and is non-deductible for federal income tax purposes. The following unaudited pro forma consolidated financial information is presented as if the acquisitions completed in fiscal 2005 had occurred at the beginning of the earliest period 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 Three Months Ended Six Months Ended December 31, December 31, ------------------- ------------------- 2005 2004 2005 2004 ------- ------- ------- ------- Revenue $148,652 $145,714 $288,500 $282,856 Gross profit 66,244 59,547 124,929 116,606 ------- ------- ------- ------- Net Income $ 21,785 $ 18,782 $ 41,532 $ 37,703 ======= ======= ======= ======= Earnings per share - diluted $ 0.23 $ 0.20 $ 0.44 $ 0.41 ======= ======= ======= ======= Diluted Shares 93,637 92,957 93,818 92,271 ======= ======= ======= ======= Earnings per share - basic $ 0.24 $ 0.21 $ 0.45 $ 0.42 ======= ======= ======= ======= Basic Shares 91,352 90,650 91,457 90,468 ======= ======= ======= ======= LINES OF CREDIT 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 December 31, 2005). The credit line expires March 22, 2006 and is secured by $1,000 of investments. At December 31, 2005, no amount was outstanding. An unsecured revolving bank credit facility allows borrowing of up to $150,000 which may be increased by the Company at any time prior to April 20, 2008 to $225,000. The unsecured revolving bank credit facility bears interest at a rate equal to (a) LIBOR or (b) an alternate base rate (the greater of (a) the Federal Funds Rate plus 1/2% or (b) the Prime Rate), plus an applicable percentage in each case determined by the Company's leverage ratio. The new unsecured revolving credit line terminates April 19, 2010. At June 30, 2005, the revolving bank credit facility balance was $45,000. At December 31, 2005, the revolving bank credit facility balance was $25,000. NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS 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 4. SHARES USED IN COMPUTING NET INCOME PER SHARE Three Months Ended Six Months Ended December 31, December 31, --------------- --------------- 2005 2004 2005 2004 ------ ------ ------ ------ Weighted average number of common shares outstanding - basic 91,352 90,650 91,457 90,468 Common stock equivalents 2,285 2,307 2,361 2,253 ------ ------ ------ ------ Weighted average number of common and common equivalent shares outstanding - diluted 93,637 92,957 93,818 92,721 ====== ====== ====== ====== Per share information is based on the weighted average number of common shares outstanding for the periods ended December 31, 2005 and 2004. Stock options have been included in the calculation of income per share to the extent they are dilutive. Non-dilutive stock options to purchase approximately 1,710 and 1,723 shares and 1,714 and 1,780 shares for the three and six-month periods ended December 31, 2005 and 2004, respectively, were not included in the computation of diluted income per common share. NOTE 5. BUSINESS SEGMENT INFORMATION The Company is a leading provider of integrated computer systems that perform data processing (both in-house and outsourced) for banks and credit unions. The Company's operations are classified into two business segments: bank systems and services and credit union systems and services. The Company evaluates the performance of its segments and allocates resources to them based on various factors, including prospects for growth, return on investment, and return on revenue. <TABLE> Three Months Ended Three Months Ended December 31, 2005 December 31, 2004 ---------------------------- ---------------------------- Bank Credit Union Total Bank Credit Union Total ------- ------------ ------- ------- ------------ ------- <S> <C> <C> <C> <C> <C> <C> REVENUE License $ 14,604 $ 6,232 $ 20,836 $ 16,864 $ 5,284 $ 22,148 Support and service 88,558 17,966 106,524 73,926 13,800 87,726 Hardware 14,673 5,384 20,057 20,514 5,572 26,086 ------- ------- ------- ------- ------- ------- Total 117,835 29,582 147,417 111,304 24,656 135,960 ------- ------- ------- ------- ------- ------- COST OF SALES Cost of license 568 493 1,061 1,117 617 1,734 Cost of support and service 53,906 12,450 66,356 48,451 12,495 60,946 Cost of hardware 10,205 4,312 14,517 14,166 4,365 18,531 ------- ------- ------- ------- ------- ------- Total 64,679 17,255 81,934 63,734 17,477 81,211 ------- ------- ------- ------- ------- ------- GROSS PROFIT $ 53,156 $ 12,327 $ 65,483 $ 47,570 $ 7,179 $ 54,749 ======= ======= ======= ======= ======= ======= Six Months Ended Six Months Ended December 31, 2005 December 31, 2004 ---------------------------- ---------------------------- Bank Credit Union Total Bank Credit Union Total ------- ------------ ------- ------- ------------ ------- <S> <C> <C> <C> <C> <C> <C> REVENUE License $ 26,920 $ 10,824 $ 37,744 $ 29,382 $ 12,317 $ 41,699 Support and service 171,285 34,640 205,925 145,166 26,208 171,374 Hardware 31,050 9,681 40,731 36,572 10,411 46,983 ------- ------- ------- ------- ------- ------- Total 229,255 55,145 284,400 211,120 48,936 260,056 ------- ------- ------- ------- ------- ------- COST OF SALES Cost of license 880 1,032 1,912 1,535 1,808 3,343 Cost of support and service 105,839 24,754 130,593 94,152 22,824 116,976 Cost of hardware 22,322 7,535 29,857 26,282 8,144 34,426 ------- ------- ------- ------- ------- ------- Total 129,041 33,321 162,362 121,969 32,776 154,745 ------- ------- ------- ------- ------- ------- GROSS PROFIT $100,214 $ 21,824 $122,038 $ 89,151 $ 16,160 $105,311 ======= ======= ======= ======= ======= ======= </TABLE> December 31, June 30, ----------- ----------- 2005 2005 ----------- ----------- Property and equipment, net Bank systems and services $ 212,190 $ 208,541 Credit Union systems and services 33,977 34,650 ----------- ----------- Total $ 246,167 $ 243,191 =========== =========== Identified intangible assets, net Bank systems and services $ 266,937 $ 241,054 Credit Union systems and services 52,258 52,334 ----------- ----------- Total $ 319,195 $ 293,388 =========== =========== ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Background and Overview We provide integrated computer systems for in-house and outsourced data processing to commercial banks, credit unions and other financial institutions. We have developed and acquired banking and credit union application software systems that we market, together with compatible computer hardware, to these financial institutions. We also perform data conversion and software implementation services of 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 for the three and six-month periods ended December 31, 2005 follows. All amounts are in thousands and discussions compare the current three and six- month periods ended, December 31, 2005, to the prior year three and six- month periods ended December 31, 2004. REVENUE License Revenue Three Months Ended % Six Months Ended % December 31, Change December 31, Change ---------------- ------ ---------------- ------ 2005 2004 2005 2004 ---- ---- ---- ---- License $ 20,836 $ 22,148 -6% $ 37,744 $ 41,699 -9% Percentage of total revenue 14% 16% 13% 16% License revenue represents the delivery of application software systems contracted with us by the customer. We license our proprietary software products under standard license agreements that typically provide the customer with a non-exclusive, non-transferable right to use the software on a single computer and for a single financial institution location. The reduction in license revenue for the quarter and year to date can be largely attributed to the continued increasing demand, especially by banks, for item and data processing delivered through our outsourcing services. Outsourcing services do not require software license agreements and therefore the financial institution's initial capital outlay is dramatically reduced by the choice of this delivery alternative. Support and Service Revenue Three Months Ended % Six Months Ended % December 31, Change December 31, Change ---------------- ------ ---------------- ------ 2005 2004 2005 2004 ---- ---- ---- ---- Support and service $106,524 $ 87,726 +21% $205,925 $171,374 +20% Percentage of total revenue 72% 65% 73% 66% Qtr over Qtr Change Year over Year Change ------------------- --------------------- $ Change % Increase $ Change % Increase -------- ---------- -------- ---------- In-house support & other services $ 8,109 +19% $ 17,694 +22% EFT support 4,091 +31% 7,339 +29% Outsourcing services 5,061 +23% 5,552 +13% Implementation services 1,537 +15% 3,966 +19% ------- ------- Total Increase $ 18,798 $ 34,551 ======= ======= Support and service fees are generated from implementation services (including conversion, installation, implementation, 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 (EFT Support) services. There was strong growth in all support and service revenue components for the second quarter and the first half of fiscal 2006, particularly due to in-house annual support revenue from previously performed software implementations, together with recent acquisitions contributing approximately 9% of the support revenue for both the quarter and the year. Another main element is the on-going demand for EFT support (ATM and debit card transaction processing services). EFT support experienced the strongest quarter over quarter revenue growth due to increased customer activity and expansion of our customer base. Outsourcing services also continue to grow as we add new customers and increase volume. Implementation services revenue increased due to new license implementations contracted in prior quarters, as well as merger conversions for our existing customers. Hardware Revenue Three Months Ended % Six Months Ended % December 31, Change December 31, Change ---------------- ------ ---------------- ------ 2005 2004 2005 2004 ---- ---- ---- ---- Hardware $ 20,057 $ 26,086 -23% $ 40,731 $ 46,983 -13% Percentage of total revenue 14% 19% 14% 18% Company has entered into remarketing agreements with several hardware manufacturers under which we sell computer hardware, hardware maintenance and related services to our customers. Revenue related to hardware sales is recognized when the hardware is shipped to our customers. Hardware revenue decreased mainly due to a decrease in the number of hardware systems delivered for the current quarter and the first half of the current year as compared to the same periods last year. Hardware revenue in the prior year's quarter was 19% and 18% prior year to date of the total revenue, while hardware revenue is 14% of revenue for both the current quarter and year to date. We expect this decrease as a percentage of total revenue to continue as the entire industry is experiencing the impact of rising equipment processing power and decreasing equipment prices. This is also impacted by increased demand for outsourcing services, as significant sales of hardware normally accompany only in-house sales. BACKLOG Our backlog increased 10% at December 31, 2005 to $213,800 ($63,800 in-house and $150,000 outsourcing) from $194,500 ($68,400 in-house and $126,100 outsourcing) at December 31, 2004. The current quarter backlog increased 4% from September 30, 2005, where backlog was $205,800 ($63,400 in-house and $142,400 outsourcing). 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 processing 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 Three Months Ended % Six Months Ended % December 31, Change December 31, Change ---------------- ------ ---------------- ------ 2005 2004 2005 2004 ---- ---- ---- ---- Cost of License $ 1,061 $ 1,734 -39% $ 1,912 $ 3,343 -43% Percentage of total revenue 1% 1% 1% 1% License Gross Profit $ 19,775 $ 20,414 -3% $ 35,832 $ 38,356 -7% Gross Profit Margin 95% 92% 95% 92% Cost of support and service $ 66,356 $ 60,946 +9% $130,593 $116,976 +12% Percentage of total revenue 45% 45% 46% 45% Support and Service Gross Profit $ 40,168 $ 26,780 +50% $ 75,332 $ 54,398 +38% Gross Profit Margin 38% 31% - - Cost of hardware $ 14,517 $ 18,531 -22% $ 29,857 $ 34,426 -13% Percentage of total revenue 10% 14% 10% 13% Hardware Gross Profit $ 5,540 $ 7,555 -27% $ 10,874 $ 12,557 -13% Gross Profit Margin 28% 29% 27% 27% TOTAL COST OF SALES $ 81,934 $ 81,211 +1% $162,362 $154,745 +5% Percentage of total revenue 56% 60% 57% 60% TOTAL GROSS PROFIT $ 65,483 $ 54,749 +20% $122,038 $105,311 +16% Gross Profit Margin 44% 40% 43% 40% Cost of license decreased for the current quarter and the first half of fiscal 2006 due to a decrease in the delivery of third party software, compared to last year. Cost of support and service increased for the quarter and year to date in fiscal 2006 due to additional headcount and depreciation expense for new facilities and equipment primarily due to acquisitions of businesses, as compared to last year. Cost of hardware decreased due to a decrease in hardware sales and a change in product sales mix during the current quarter and the first half of fiscal 2006. Hardware incentives and rebates received from vendors fluctuate quarterly and annually due to changing thresholds established by the vendors. Gross margin on license revenue increased to 95% for the current quarter and the first half of the fiscal year compared to 92% for both the same periods last year due to a decrease in third party software sales, where the gross margins on third party software is significantly lower than our owned products. For the quarter and first half of fiscal 2006, gross profit decreased while gross margin increased, which is attributable to a decrease in license revenue. The gross profit increase for the second quarter and year to date in support and service is due to consistent revenue growth. Gross margin for support and service grew to 38% for the current quarter and 37% for the six-month period, due to the continuation of company-wide cost control measures. Hardware gross margin decreased from 29% in the second quarter last year to 28% in the second quarter of the current year, but remained even at 27% for the six months in both years, primarily due to sales mix and vendor rebates on hardware delivered. OPERATING EXPENSES Selling and Marketing Three Months Ended % Six Months Ended % December 31, Change December 31, Change ---------------- ------ ---------------- ------ 2005 2004 2005 2004 ---- ---- ---- ---- Selling and marketing $ 12,300 $ 11,920 +3% $ 23,740 $ 22,652 +5% Percentage of total revenue 8% 9% 8% 9% Dedicated sales forces, inside sales teams, technical sales support teams and channel partners 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 team is responsible for marketing and sales of specific complementary products and services to our existing core customers. For the three and six months ended December 31, 2005, selling and marketing expenses increased due to additional headcount, primarily from new personnel gained through recent acquisitions, plus the related employee costs. Selling and marketing expense decreased slightly as a percentage of sales to 8% of revenue as compared to 9% of revenue for both periods of last fiscal year. Research and Development Three Months Ended % Six Months Ended % December 31, Change December 31, Change ---------------- ------ ---------------- ------ 2005 2004 2005 2004 ---- ---- ---- ---- Research and development $ 8,003 $ 6,741 +19% $ 14,752 $ 12,883 +15% Percentage of total revenue 5% 5% 5% 5% 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 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 increased primarily due to employee related costs from increased headcount for ongoing development of new products and enhancements to existing products, plus depreciation and equipment maintenance expense for upgrading technology equipment. Research and development expenses increased for the second quarter and the first half of 2006 by 19% and 15% respectively; however they remained at 5% of total revenue for both years. General and Administrative Three Months Ended % Six Months Ended % December 31, Change December 31, Change ---------------- ------ ---------------- ------ 2005 2004 2005 2004 ---- ---- ---- ---- General and administrative $ 11,130 $ 8,127 +37% $ 18,935 $ 15,592 +21% Percentage of total revenue 8% 6% 7% 6% General and administrative costs include all expenses related to finance, legal, human resources, employee benefits, plus all administrative costs. General and administrative expenses increased for the second quarter and the first half of fiscal year 2006, primarily due to growth in employee related costs, additional accounting and professional fees, and increased expenses related to our annual User Group Conference compared to the same periods last year. INTEREST INCOME (EXPENSE) - Net interest income for the three months ended December 31, 2005 reflects a decrease of $52 when compared to the same period last year. Interest income increased $66, while interest expense increased $118. Net interest income for the current six month period reflects a decrease of $240, with interest income increasing $50 and interest expense increasing $290. For both periods, the modest increases in interest income are due to higher cash and cash equivalent balances while the additional interest expense is due to borrowings on the revolving bank credit facility. PROVISION FOR INCOME TAXES - The provision for income taxes was $12,707 and $24,114 for the three and six-month periods ended December 31, 2005 compared with $10,614 and $20,619 for the same periods last year. For the current fiscal year, the rate of income taxes is currently estimated at 37.0% of income before income taxes compared to 37.5% as reported for the same periods in fiscal 2005, prior to adjustment. The decrease reflects changes in estimated state tax rates and from our reevaluation of changes in state tax laws in relation to our tax structure during fiscal 2005. In the fourth quarter of fiscal 2005, an adjustment was made to the provision for income taxes to adjust the effective tax rate to 37.0% for the entire year. NET INCOME - Net income increased 22% for the three months ended December 31, 2005. Net income for the second quarter of fiscal 2006 was $21,636 or $0.23 per diluted share compared to $17,692 or $0.19 per diluted share in the same period last year. Net income also increased for the six-month period ended December 31, 2005 to $41,058 or $0.44 per diluted share compared to $34,366 or $0.37 per diluted share for the same six month period last year. BUSINESS SEGMENT DISCUSSION The Company is a leading provider of integrated computer systems that perform data processing (available for in-house or outsourced installations) for banks and credit unions. The Company's operations are classified into two business segments: bank systems and services ("Bank") and credit union systems and services ("Credit Union"). The Company evaluates the performance of its segments and allocates resources to them based on various factors, including prospects for growth, return on investment, and return on revenue. Bank Systems and Services Three Months Ended Percent Six Months Ended Percent December 31, Increase December 31, Increase -------------------------- ------------------------- 2005 2004 2005 2004 ------- ------- ------- ------- Revenue $117,835 $111,304 +6% $229,255 $211,120 +9% Gross Profit $ 53,156 $ 47,570 +12% $100,214 $ 89,151 +12% Gross Profit Margin 45% 43% 44% 42% Revenue growth in bank systems and services is attributable to the increase in support and service revenue related to maintenance for in-house and outsourced customers, implementation services, plus the ongoing steady increase in ATM and debit card processing activity. We expect this increase to continue as we further improve our processes and continue to create demand and value for our customers. License and hardware revenue decreased for the current quarter and six-month period primarily due to the sales mix and products delivered during the first half of the year compared to the prior year. Bank segment gross profit increased from the last year and the gross profit margin increased from 43% to 45%. Credit Union Systems and Services Three Months Ended Percent Six Months Ended Percent December 31 Increase December 31, Increase -------------------------- ------------------------- 2005 2004 2005 2004 ------- ------- ------- ------- Revenue $ 29,582 $ 24,656 +20% $ 55,145 $ 48,936 +13% Gross Profit $ 12,327 $ 7,179 +72% $ 21,824 $ 16,160 +35% Gross Profit Margin 42% 29% 40% 33% Revenue in the credit union system and services segment grew substantially in the support and service component directly relating to maintenance for in-house and outsourced customers, along with ATM and debit card processing activity. Support and service revenue continues to expand in our credit union segment with quarter over quarter increases improving. This growth in support and service was supplemented by an increase in license revenue and offset by a slight decrease in hardware revenue. The decrease in hardware revenue is due to sales mix and reduction in the amount of hardware shipped during the quarter. Credit union gross profit increased from the prior year and the gross profit margin increased from 29% to 42% due to continued delivery of products and services that carry higher margins like ATM/Debit card processing and outsourcing services as we continue to improve operating procedures, leverage our resources and gain new customers. FINANCIAL CONDITION Liquidity The Company's cash and cash equivalents increased to $38,249 at December 31, 2005, from $11,608 million at June 30, 2005 and from $22,515 at December 31, 2004. The increase in the cash balance from June 30, 2005 is primarily due to collection of our June 2005 annual maintenance billings, offset by the use of cash as outlined below in investing and financing activities. Cash provided by operations totaled $107,228 in the current year compared to $94,210 last year. Cash provided by operations consisted of $41,058 net income, depreciation and amortization expense of $21,310, plus a combined increase of $3,494 in deferred income taxes, the gain on disposal of property and equipment and stock-based compensation expense. The balance consists of the change in receivables of $107,342 less the change of $15,009 for prepaid and accrued expenses, and accounts payable, less $52,023 for the change in deferred revenues, plus the change in income taxes of $1,056. For fiscal year 2005, cash flow from operations consisted of $34,366 in net income, depreciation and amortization expense of $18,817, plus a combined increase of $3,991 in deferred income taxes and the loss on disposal of property and equipment. The balance consisted of the change in receivables of $88,210 less the change of $7,024 for prepaid and accrued expenses, accounts payable, and income taxes, minus $44,150 change in deferred revenues. Net cash used in investing activities for the current year was $46,027 and included payment for the Profitstar acquisition of $19,177, capital expenditures of $18,971, and capitalized software development of $8,109. In the first half of fiscal 2005, net cash used in investing activities of $136,561 and consisted mainly of $109,910 in payment for acquisitions, $23,570 in capital expenditures and $3,162 for capitalized software development. Net cash from financing activities of $34,560 included a net repayment of the revolving bank credit facility of $20,000, payment of dividends of $8,225 and the purchase of treasury stock of $12,576. Cash used was offset by proceeds of $6,241 from the exercise of stock options and sale of common stock. For the first half of fiscal 2005, cash used in financing activities was $7,239 for dividends paid, offset by $10,000 proceeds from a note payable and the proceeds from the exercise of stock options and sale of common stock of $8,347 for a net cash increase of $11,108. Capital Requirements and Resources The Company generally uses existing resources and funds generated from operations to meet its capital requirements. Capital expenditures totaling $18,971 and $23,570 for the six-month periods ended December 31, 2005 and 2004, respectively, were made for facilities and additional equipment. These additions were funded from cash generated by operations. Total consolidated capital expenditures for the Company are not expected to exceed $50,000 for fiscal year 2006. 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 December 31, 2005). The credit line expires March 22, 2006 and is secured by $1,000 of investments. At December 31, 2005, no amount was outstanding. An unsecured revolving bank credit facility allows borrowing of up to $150,000, which may be increased by the Company at any time prior to April 20, 2008 to $225,000. The unsecured revolving bank credit facility bears interest at a rate equal to (a) LIBOR or (b) an alternate base rate (the greater of (a) the Federal Funds Rate plus 1/2% or (b) the Prime Rate), plus an applicable percentage in each case determined by the Company's leverage ratio. The new unsecured revolving credit line terminates April 19, 2010. At June 30, 2005, the revolving bank credit facility balance was $45,000. At December 31, 2005, the revolving bank credit facility balance was $25,000. The Board of Directors has authorized the Company to repurchase shares of its common stock. 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. At June 30, 2005, there were 553,300 shares in treasury stock and the Company had the remaining authority to repurchase up to 4,437,316 shares. During the six months ended December 31, 2005, the Company repurchased 687,200 treasury shares for $12,576. The total cost of treasury shares at December 31, 2005 is $22,528. At December 31, 2005, there were 1,240,500 shares in treasury stock and the Company had the authority to repurchase up to 3,750,116 shares. Subsequent to December 31, 2005, the Company's Board of Directors declared a cash dividend of $.055 per share on its common stock payable on March 2, 2006, to stockholders of record on February 16, 2006. Current funds from operations are adequate for this purpose. The Board has indicated that it plans to continue paying dividends as long as the Company's financial condition continues to be favorable. Critical Accounting Policies The Company regularly reviews its selection and application of significant accounting policies and related financial disclosures. The application of these accounting policies requires that management make estimates and judgments. The estimates that affect the application of our most critical accounting policies and require our most significant judgments are outlined in Management's Discussion and Analysis of Financial Condition and Results of Operations - "Critical Accounting Policies" - contained in our annual report on Form 10-K for the year ended June 30, 2005. Forward Looking Statements The Management's Discussion and Analysis of Results of Operations and Financial Condition and other portions of this report contain forward- looking statements within the meaning of federal securities laws. Actual results are subject to risks and uncertainties, including both those specific to the Company and those specific to the industry, which could cause results to differ materially from those contemplated. The risks and uncertainties include, but are not limited to, the matters detailed at Risk Factors in its Annual Report on Form 10-K for the fiscal year ended June 30, 2005. Undue reliance should not be placed on the forward-looking statements. The Company does not undertake any obligation to publicly update any forward-looking statements. CONCLUSION The Company's results of operations and its financial position continue to be strong with increased earnings, increased gross margin growth, and strong cash flow for the three and six months ended December 31, 2005. This reflects the continuing attitude of cooperation and commitment by each employee, management's ongoing cost control efforts and our commitment to deliver top quality products and services to the markets we serve. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk refers to the risk that a change in the level of one or more market prices, interest rates, indices, volatilities, correlations or other market factors such as liquidity, will result in losses for a certain financial instrument or group of financial instruments. We are currently exposed to credit risk on credit extended to customers and interest risk on investments in U.S. government securities. We actively monitor these risks through a variety of controlled procedures involving senior management. We do not currently use any derivative financial instruments. Based on the controls in place, credit worthiness of the customer base and the relative size of these financial instruments, we believe the risk associated with these exposures will not have a material adverse effect on our consolidated financial position or results of operations. ITEM 4. CONTROLS AND PROCEDURES An evaluation was carried out under the supervision and with the participation of our management, including our Company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operations of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation as of the end of the period covered by this report, the CEO and CFO concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic SEC filings. There was no change in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (c) Issuer Purchases of Equity Securities The following shares of the Company were repurchased for the three month period ended December, 31, 2005: Maximum Number Total Total Number of of Shares that Number Average Shares Purchased as May Yet Be of Shares Price Part of Publicly Purchased Under Period Purchased of Share Announced Plans the Plans (1) -------------------- --------- -------- ------------------- --------------- October 1-31, 2005 350,000 $ 18.16 350,000 3,750,116 November 1-30, 2005 - - - 3,750,116 December 1-31, 2005 - - - 3,750,116 --------- -------- ------------------- --------------- 350,000 $ 18.16 350,000 3,750,116 ========= ======== =================== =============== (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. EXHIBITS 31.1 Certification of the Chief Executive Officer dated February 8, 2006. 31.2 Certification of the Chief Financial Officer dated February 8, 2006. 32.1 Written Statement of the Chief Executive Officer dated February 8, 2006. 32.2 Written Statement of the Chief Financial Officer dated February 8, 2006. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized. JACK HENRY & ASSOCIATES, INC. Date: February 8, 2006 /s/ John F. Prim --------------------- John F. Prim Chief Executive Officer Date: February 8, 2006 /s/ Kevin D. Williams --------------------- Kevin D. Williams Chief Financial Officer and Treasurer