Cover
1997 Annual Report - Jack Henry & Associates, Inc.
Where Tradition Meets Technology
Picture of a terminal.
Page 1
Picture of a bank interior from years ago.
TRADITION: Tradition provides us with a solid foundation ... based on
historical strengths, refined from generation to generation.
Page 2
Picture of the same bank interior updated to the 90's.
TECHNOLOGY: In its finest form, technology should enhance each of our lives.
It acts as an enabler to human potential, unimaginable to generations before.
Page 3
JACK HENRY MISSION
Our mission, briefly, is to protect and to increase the value of our
stockholders' investment by providing quality products and services to our
customers. To accomplish this, we intend to:
* Concentrate on what we know and do best information systems and
services for banks and financial institutions.
* Provide outstanding commitment and service to our customers, so
that the perceived value of our products and services is always
consistent with their real value.
* Maintain a work environment that is personally and financially
rewarding to our employees.
Page 4
CONTENTS
At a Glance 1
To Our Shareholders 3
Results 3
Liberty Banking Services Acquisition 4
GG Pulley & Associates Acquisition 5
Success with Recently Introduced Products and Services5
Outlook 7
Where Tradition Meets Technology 8
Trends in the Banking Industry 8
JHA s Competitive Advantage 8
The JHA Culture 9
GG Pulley Acquisition Expands JHA s Item Processing Capabilities 10
A New Approach to User Meetings 10
Outsourcing Offerings 11
Check Imaging 11
Internet Banking Through NetTeller 12
ATM Electronic Services 12
Quarterly Financial Information 13
Selected Financial Information 14
Independent Auditors Report 15
Statements of Income 16
Balance Sheets 17
Statements of Cash Flow 18
Management s Discussion and Analysis 19
Corporate Directory 21
Jack Henry & Associates, Inc. at a Glance
WHAT WE DO
Founded in 1976, Jack Henry & Associates, Inc. (JHA), is a leading provider of
integrated computer systems and services for the banking industry. JHA provides
data processing solutions through proprietary applications software, which
operates on IBM mid-range computers. We offer a total-solution approach: JHA
typically sells both hardware and software. We also provide installation,
conversion, software customization, training, customer support, and related
services.
The core software products offer basic functions such as checking, time
deposits, loans, and general ledger. Ancillary offerings comprise loan
servicing, cash management, and customer profitability analysis among others.
MARKET
Banks and other financial institutions, primarily in the United States
CUSTOMERS
1,435 customers
STRATEGY
Our growth plan includes:
additional customers for our core systems
successful complementary product offerings
new products to meet customers needs
acquisitions that expand our existing product lines or customer base in
the banking industry
TWO CORE SYSTEMS
CIF 20/20
for small to mid-size banks, typically with less than $300 million in assets
Silverlake System
for mid-size to large banks, with assets up to $10 billion
CHOICES
In-house:
A total turnkey solution software, hardware, installation services, and ongoing
customer support that allows customers to manage data processing at their own
sites.
Outsourcing offering (primarily through service bureau):
This solution gives customers the same capabilities as the in-house offering,
but uses JHA s data centers for processing. Customers pay monthly usage fees on
multi-year service contracts. JHA also offers facilities management services for
large banks.
REMARKETER OF IBM HARDWARE
Through our remarketing of the successful AS/400 , JHA is the largest provider
of IBM mid-range computers to the banking industry. JHA also offers ancillary
IBM products and services.
COMPLEMENTARY PRODUCTS & SERVICES THAT INTEGRATE WITH CORE SYSTEMS
ATM services:
Automatic teller machine software and regional and national switching services
for electronic transactions.
Disaster Recovery services:
Disaster planning and recovery services, with access to seven regional JHA hot
sites that give our clients an immediate capability to process their own data.
Forms and supplies:
All the processing forms, magnetic media, and data processing supplies required
by a bank.
Internet banking:
Online banking capability for bank s customers through JHA s NetTeller offering
(web site:www.netteller.com).
Item processing:
Software and reader/sorters that capture and process critical details from
checks and other transaction documents.
Check imaging:
Digital images of checks stored
in the computer for customer statements, for research, and ultimately for the
clearing of payments between banks.
Platform automation:
A sophisticated front-end application that allows bank employees to enter
customer data directly in to the bank s host computer and thereby to enter the
data automatically on the disclosure documents.
Jack Henry & Associates, Inc., was No. 49 on Forbes magazine s 1996 list of The
World s Best Small Companies.
It was No. 22 on Financial World magazine s 1997 list of The Best 100 Growth
Companies.
LOCATIONS
Monett, Missouri(headquarters)
Albuquerque, New Mexico
Angola, Indiana
Charlotte, North Carolina
Danbury, Connecticut
Englewood, Colorado
Houston, Texas (2 offices)
Overland Park, Kansas
St. Paul, Minnesota
RECENT ACQUISITIONS
GG Pulley & Associates (July 97)
Image and item processing
Liberty Banking Services(Sept 96)
Service bureau
Central Interchange (Sept 95)
ATM services
Liberty Software (June 95)
Bank systems provider
SECTOR (June 95)
Bank systems provider
CommLink Corporation (July 94)
ATM services
To Our Shareholders
In fiscal 1997, we again achieved excellent growth in both revenues and
earnings. Our in-house core information systems showed solid gains. We continued
to build on our recent acquisitions and the products we introduced in the past
two years. We were particularly pleased to see strong demand for our service
bureau offering, an alternate service for banks that prefer to outsource data
processing. Our recently introduced product offerings platform, check image,
and Internet banking are being well received, as is our newly introduced
report retrieval module. Our CommLink ATM division showed exceptionally strong
performance. Additionally, a greater percentage of our customers are using our
disaster recovery services and our forms and supplies offerings.
We continued to pursue acquisitions actively during the year. We acquired
Liberty Banking Services, Inc., a service bureau organization in Colorado. We
also announced the proposed acquisition of GG Pulley & Associates, Inc. (GGPA),a
well-respected provider of image and item processing products and services for
banks and other financial institutions. The GGPA acquisition was closed in July
1997.
JHA continued to invest aggressively in facilities, in technology, and most
importantly, in human resources. We further expanded the facilities at our
Monett, Missouri, headquarters. We also doubled the space at our newly acquired
facility in Englewood, Colorado, to add training facilities and a hot site for
disaster recovery services. We continued to upgrade existing products and to
introduce new ones, which expanded the Jack Henry integrated product offering.
At fiscal year-end 1997, JHA had 404 employees, up from 330 the prior year. The
caliber and commitment of these associates are critical elements for JHA to
carry out its growth plans.
Pie charts located on the side of the page.
Pie Chart depicting Revenue Sources for FY '93:
Maintenance/Support 18%
Software & Installation 29%
Hardware 53%
Pie Chart depicting Revenue Sources for FY '97:
Maintenance/Support 33%
Software & Installation 28%
Hardware 39%
Bar graphs located on the side of the page.
Bar Graph depicting "NUMBER OF ASSOCIATES":
For FYE 97 - 404
For FYE 96 - 330
For FYE 95 - 215
For FYE 94 - 164
For FYE 93 - 154
Bar Graph depicting "REVENUES" from continuing operations:
For FYE 97 - 82,600,000
For FYE 96 - 67,558,000
For FYE 95 - 46,124,000
For FYE 94 - 38,390,000
For FYE 93 - 32,589,000
Results
Fiscal 1997 was JHA s seventh consecutive year of record revenues, net income
and earnings per share from continuing operations. Since fiscal 1990, we have
seen compounded annual growth rates of 27% in revenues and 46% in net earnings
per share from continuing operations. The fourth quarter of fiscal 1997 marked
the 30th consecutive period that year-to-year quarterly comparisons have shown
increased earnings results.
Total revenues for fiscal 1997 increased to $82.6 million, compared with $67.6
million in fiscal 1996 a gain of 22%. Our record revenues and earnings reflect
the excellent demand for both our Silverlake and CIF 20/20 systems. Records were
set in all three of our revenue areas: software, hardware, and
maintenance/support and services. Maintenance and service revenue, our most
predictable income stream, continues to be an important element of our growth.
It accounted for 33% of total revenues in fiscal 1997, up from 18% just five
years ago. This revenue source has benefited from acquisitions, particularly the
fiscal 1995 Liberty software and CommLink ATM acquisitions. The Liberty software
acquisition gave us more than 300 new customers and a service bureau operation.
It also expanded a number of other services, such as disaster recovery.
Our gross profit margin was 50% of total revenues in fiscal 1997, unchanged from
the fiscal 1996 margin percentage. The decline in our operating expenses to 21%
of total revenues in fiscal 1997, reflects our constant attention to cost
controls and efficiencies. Net income from continuing operations totaled $15.8
million, or $0.83 per share, an increase of 28% from the $12.3 million, or $0.65
per share, earned in fiscal 1996. Our discontinued BankVision operation incurred
a loss of $450,000, or $0.03 per share, versus a $2.6 million net loss, or $0.14
per share, in fiscal 1996. We are examining alternatives for the divestiture of
BankVision.
Our per share results have been adjusted to reflect the 50% stock dividend
(effectively a 3-for-2 stock split) paid on March 13, 1997. This action brought
JHA s number of shares outstanding to 17.9 million. We again increased our
quarterly cash dividend during the year. We are now paying $0.22 per share
annually on the newly split shares, an increase of 18% over the same time last
year.
We completed fiscal 1997 with an order backlog of $29.7 million. Service bureau
and complementary product and service offerings account for an increasing
portion of the total.
Bar graphs located on the side of the page.
Bar Graph depicting "GROSS PROFIT" from continuing operations:
For FYE 97 - 41,524,000
For FYE 96 - 33,965,000
For FYE 95 - 23,178,000
For FYE 94 - 17,877,000
For FYE 93 - 14,009,000
Bar Graph depicting "GROSS MARGIN" percentages:
For FYE 97 - 50.30%
For FYE 96 - 50.30%
For FYE 95 - 50.30%
For FYE 94 - 46.60%
For FYE 93 - 43.30%
Bar Graph depicting "INCOME FROM CONTINUING OPERATIONS":
For FYE 97 - 15,755,000
For FYE 96 - 12,268,000
For FYE 95 - 7,978,000
For FYE 94 - 6,259,000
For FYE 93 - 5,272,000
Bar Graph depicting "EARNINGS PER SHARE" from continuing operations:
For FYE 97 - $.83
For FYE 96 - $.65
For FYE 95 - $.44
For FYE 94 - $.35
For FYE 93 - $.30
The Liberty Banking Services Acquisition
In September 1996, we purchased Liberty Banking Services, Inc. (LBSI), a service
bureau operation in Englewood, Colorado, serving 13 banks. LBSI, which was
acquired for $2 million in Jack Henry stock, was accounted for as a pooling of
interests. This acquisition has further solidified our position in the service
bureau market and has already contributed to Jack Henry s profitability in
fiscal 1997. It gave us an excellent business base and a new location in the
Rocky Mountain region. With the Englewood facility in place, we were able to
capture a significant number of new service bureau accounts in California.
The GG Pulley & Associates, Inc., Acquisition
In July 1997, JHA acquired GG Pulley & Associates, Inc. (GGPA), a leading
provider of image and item processing products and services for banks, thrifts,
and other financial institutions. GGPA was acquired for $5 million in JHA stock.
This merger will be accounted for as a pooling of interests. GGPA brings
approximately $6 million in annual revenues, and it effectively doubles the
number of JHA s item processing customers. We expect this transaction to be
additive to our earnings in fiscal 1998.
GG Pulley, located in Albuquerque, New Mexico, is highly respected in the
banking industry. Its item processing products provide the necessary capability
for institutions that have high transaction volume. GGPA s proprietary software
is used in more than 935 operations. Annual maintenance contracts cover 166
customers. JHA itself has also offered item processing for many years, but only
to JHA core application customers. GGPA enables us to sell item processing
software outside our customer base under the GG Pulley name, and it provides the
resources and expertise to expand our current product offerings. Through GGPA,
we can establish new banking relationships.
GG Pulley will operate as an independent subsidiary of JHA, because it will be
marketed principally outside the JHA customer base. Our CommLink subsidiary
already operates with this structure for the same reason. We are gratified that
George G. Pulley, who founded GGPA in 1980, will continue as president of JHA s
newest subsidiary. Pulley, who was the primary shareholder of GGPA, is now a
significant shareholder of JHA. For many years, we have been impressed with the
quality of GGPA s products and its method of doing business and serving
customers. We are proud to welcome the employees of GGPA into the JHA
organization.
Success with Recently Introduced Products and Services
During fiscal 1997, we made important strides in marketing our SERVICE BUREAU
offering. We added a significant number of banks in California. We had 56
service bureau customers at fiscal year-end 1997, up from 38 last year. We
expect this operation to grow at a healthy rate.
The Jack Henry alliance with IBM GLOBAL SERVICES, the division of International
Business Machines Corporation that was formerly known as Integrated Systems
Solutions Corporation (ISSC), remains an important contributor. In the third
quarter of fiscal 1997, JHA successfully completed its largest full customer
conversion a multi-billion dollar bank served through the IBM Global
Services alliance. This activated site is already generating additional interest
in JHA s ability to provide software and services for banks larger than its
traditional markets. In fiscal 1997, we also converted several banks to the
Arkansas service bureau that operates using the IBM Global Services alliance.
Our CHECK IMAGE sales activity was strong in fiscal 1997, although demand was
somewhat below our expectations. We know that our customers are interested in
check imaging, because we sold significantly more proof of deposit (POD) systems
than we had estimated. A POD system (an item processing system) is required by a
bank as the foundation for an image solution. We believe that many of the banks
that have purchased our POD systems will add check imaging in the future.
Our PLATFORM AUTOMATION product showed excellent gains again last year.
Customers have enthusiastically received this product, which allows a single
front-end entry of customer information to the host computer to generate the
required legal documents. Platform sales have been limited by the different
reporting requirements of various states, but we have already introduced the
product in 26 states.
NETTELLER, our Internet banking product, has exceeded our expectations. Demand
for this product continues to build at a rapid pace. We have sold over 30
NetTeller systems thus far. JHA now has its own Internet banking web site
(www.netteller.com) maintained in Overland Park, Kansas. Our Internet banking
software is flexible and cost-effective for customers. Banks can limit their
access to only those particular products that they believe are appropriate for
their customers.
REPORT RETRIEVAL, which was introduced in January 1997, is another complementary
product integrated with the JHA core systems. Report retrieval allows users to
archive and automatically retrieve reports on hard disks, magnetic media or
optical drives. That allows bank employees to view information online and print
selected reports of their choice.
During the year, we introduced GRAPHICAL USER INTERFACE capability for our CIF
20/20 system. Our user banks were excited about this new addition, and many
banks using this option have told us that they are achieving productivity gains
through this enhancement. We are now developing this point-and-click capability
for our Silverlake system.
We continued to have solid growth in FORMS AND SUPPLIES. We are focusing more on
value-added items, such as specialized forms. To market to customers more
effectively, we will use professional telemarketing more extensively. We will
continually strive to have the most up-to-date products that our customers want.
The geographic spread and advanced capability of our DISASTER RECOVERY SERVICES
operations is highly attractive to our customers. More than 400 JHA customers
now subscribe to this service, up from about 100 just three years ago. In
addition to JHA contingency sites, we market IBM recovery services. We also
write business recovery plans step-by-step outlines of what banks need to do to
recover from a disaster. We expect to achieve further penetration of our
customer base with this service.
Outlook
In fiscal 1998, we again expect to achieve strong gains in revenues and
earnings. We anticipate that we will maintain strong growth within our product
and service areas. We expect continued solid growth in our core product
offerings CIF 20/20 and Silverlake. This will come both from new customers and
from conversions to JHA systems by many customers who now use the older legacy
systems that we have acquired in the past.
Earnings growth will also come from the related recurring maintenance and
service revenues that accompany the sale of new systems. We expect to reap
further benefits from recent acquisitions and from our other investments. Both
our in-house offerings and our outsourcing services offer excellent growth
opportunities. We expect to show gains in Internet banking services, service
bureau, platform, item processing, check imaging, disaster recovery services,
forms and supplies, and ATM services. We believe that all of these should help
contribute to continued significant annual earnings growth in future years.
Our broad range of products gives us an increasingly diverse earnings base. In
the future, our business mix should favor the higher-margin software and
services segments. New products in technologies that are complementary to our
core offering should account for a major and increasing portion of annual
revenues. We will continue to control expenses. We are always finding ways to
increase productivity.
Our financial position is strong: $53 million in shareholders equity, no debt,
and $14 million in cash and investments at 1997 fiscal year end. That gives us
an excellent base for the future. JHA continues to pursue acquisitions of
complementary technologies, product lines, and businesses. We expect that future
acquisitions will be closely aligned with our current product and service
offerings and will benefit our existing customer base.
We will continue to build and fine-tune our resources people, products,
facilities, and related infrastructure items. Hiring and retaining quality
employees is essential to JHA s success. We have their all-important commitment
and cooperation in delivering top-quality products and services to the banking
and financial services markets.
August 22,1997
Michael E. Henry
Chairman and
Chief Executive Officer
Michael R. Wallace
President &
Chief Operating Officer
Photograph of Michael E. Henry, Chairman and Chief Executive Officer.
Photograph of Michael R. Wallace, President and Chief Operating Officer.
Where Tradition Meets Technology
TRENDS IN THE BANKING INDUSTRY
Banks are constantly looking for ways to reduce operating costs and to improve
customer service. Technology is one of their best tools in this endeavor. So the
technology budgets in the banking industry have been growing in excess of
inflation for several years. We expect that trend to continue. Remaining viable
in the banking industry takes significant investments in computer technology.
The larger banks are driving this process, and often are on the bleeding edge.
Smaller banks, with limited financial resources, tend to wait until the
technology is proven and more affordable. Once the technology is accepted, the
more progressive community banks may become interested in it. Locally owned
banks realize that they will need to spend more on technology in the next few
years to compete effectively in a consolidating industry.
Consolidation will continue to occur in the industry as banks seek to increase
market share through acquisitions. The survivors will be the institutions that
focus on the needs of their customers. Technology-based services such as check
imaging and electronic transactions will be part of this requirement. There is
always a place for both service-oriented community banks and large institutions
that offer an array of services at a low cost.
Despite the accelerating industry consolidation, there are still approximately
9,600 banks in the United States. Community banks are clearly the largest
segment of the banking market with more than a 90% share. There is also a
resurgence of de novo banks, often started by talented people who don t feel
comfortable working for the bigger organizations or individuals whose jobs have
been eliminated through a merger. These entrepreneurs see the need for a more
traditional and personalized approach to banking, over the mass-market approach
of the larger banking organizations.
Banks have three options when they choose technology services. Fifty-eight
percent of banks use IN-HOUSE SYSTEMS. They purchase turnkey operations that
include software, hardware, and related services from vendors of bank
information systems. The in-house systems area is the only market segment that
has grown a decade ago it accounted for only 34% of the total. Thirty-seven
percent of banks use OUTSOURCING for their data processing needs. This segment
has declined from 55% just a decade ago, but it is still an important part of
the market. Outsourcing is usually done through a service bureau, where the bank
uses the provider s software to process its transactions on the vendor s offsite
computers. Only 5% of banks typically, very large banks have chosen to design
PROPRIETARY MANAGEMENT INFORMATION SYSTEMS. This figure has dropped from 11% in
the past ten years.
JHA S COMPETITIVE ADVANTAGE
Jack Henry has been providing computing solutions to the banking market for more
than 20 years. Our long experience has not only built software and service
capability; it has also given us significant market presence and reinforced
invaluable personal relationships between JHA employees and customer banks. This
is an important asset, given the inherently conservative nature of banking.
JHA is well positioned to take advantage of the technology trends in the banking
industry. Historically, we have focused on small to mid-size banks. But with the
enhanced capability of the IBM AS/400, we can now provide systems to all but
about the largest 100 banks in the United States. JHA believes that its products
are capable of serving banks with up to $10 billion in assets.
Jack Henry has increased its customers at an aggressive rate in the past decade,
despite the banking industry s consolidation. As we gain recognition for the
performance and flexibility of our software and for our superior service
capability, an increasing number of community banks are using JHA s products .
Our CIF 20/20 offering continues to be an excellent sales performer.
Consolidation and growth in the banking industry have resulted in more banks in
the $100 million to $300 million range. That is the typical size bank that buys
the CIF 20/20 product. The Silverlake product, through the advanced capability
of the AS/400, can serve even large banks, the ones that were once limited to
using mainframe computer systems. The demand for Silverlake is also increasing
as banks continue to acquire other banks.
We are closely aligned with IBM as our hardware vendor for our host system and
the various other products and services we offer. IBM hardware is installed in
44% of banks in the United States. This has risen from a 38% share in 1990. IBM
is the preferred hardware platform for banks with less than $500 million in
assets. JHA has more customers than any other IBM provider in the banking
industry. Our position as the leading remarketer of the IBM AS/400 has been
further strengthened by the GG Pulley acquisition. Jack Henry recently was named
an IBM Premier Business Partner for the fifth consecutive year. JHA s alliance
with IBM Global Services is also a testament to the strength of the IBM/JHA
relationship.
Although many of JHA s competitors primarily use interfaces and partnerships
with other software organizations, JHA writes most of its own software. All JHA
products are integrated into its core systems. JHA s strategy of providing a
complete, integrated solution is unique. Having our own software gives us
improved profitability, exceptional flexibility, and the ability to solve
problems with speed. It provides efficiencies too. Systems are easier to install
and support when consistent programming methods are used. The products will
continue to be enhanced with new releases and support. Our clients can
customize our software and make modifications to meet their specific needs.
JHA is prepared for the year 2000 dilemma the fact that a large amount of
computer software is challenged in dealing with dates beyond 1999. CIF 20/20 and
Silverlake, JHA s flagship systems, were written to accommodate the year 2000
requirement from the outset. We are now taking the steps to make our acquired
software products compliant. We expect to have this completed by 1998. The
heightened awareness of the year 2000 challenges will probably force more banks
to abandon their older legacy systems within the next few years. We believe that
the year 2000 issue will fuel additional business activity for JHA. It should
present unprecedented opportunities for our service bureau, as well as in-house
system sales.
As a financially strong leader, Jack Henry is also benefiting from the
consolidation of bank industry vendors. JHA has gained market share partially by
adding the core system customers of acquired vendors. We have also made
acquisitions that fill in product lines or give us advanced capabilities. For
future acquisitions, we are considering companies that are experts in areas
where we don t yet have full capabilities, such as electronic solutions.
Opportunities will emerge that will allow JHA to expand the suite of product and
service offerings.
The 1995 Liberty software acquisition offers significant growth potential to
JHA. Jack Henry continues to focus on providing excellent support to Liberty
customers. With more than 300 of our customers still on the Liberty product, we
have the opportunity to move these customers to the CIF 20/20 and Silverlake
systems in future years.
In the future, JHA s success will depend on its ability to enhance current
products and to introduce new products that keep pace with technological
developments and emerging industry standards. We are prepared to address the
increasingly sophisticated needs of our customers. Our large customer base gives
us the economies of scale, and thus the affordability to continue developing new
products. By developing only those products that its customers indicate they
want, JHA has a high probability of gaining strong product acceptance. JHA asks
its customer banks at user meetings to help identify potential products,
upgrades or enhancements that they perceive as important. Our customers actually
assist us in the initial design process. Although JHA devotes a significant
amount of time and expense to development, customer participation helps to keep
our development efforts extremely efficient.
THE JHA CULTURE
The way we treat our employees and customers is key to our product and service
excellence and financial success. Maintaining Jack Henry s special culture is
our biggest challenge. We cultivate an open, relaxed environment. Executive
management meets with all new employees to communicate the Jack Henry way of
doing business and treating customers. Our employees see their JHA
responsibilities as a career step, not just a job. They understand JHA s goals
and the value of satisfied customers. This friendly attitude permeates our
organization. We also get a better buy-in from customers because of the JHA
way of doing things. Our customers recognize our commitment to delivering high-
quality products that serve their needs.
The family feeling that people notice at Jack Henry gives us a competitive edge.
Our employees certainly appreciate it, and we ve found that it acts as a
valuable morale builder. We have loyal, happy employees. As JHA continues its
rapid growth strategy, our employees must be committed and willing to accept the
pace of change and deal with it. The JHA culture allows us to work well in
challenging situations. We get exceptional performance from our employees at
critically challenging times. Additionally, our flexible structure allows us to
swing our resources back and forth between different systems.
We have excellent employee tenure. Many Jack Henry people have up to 15 or more
years invested with us. This kind of loyalty is rare in a technology company. We
work hard to provide our people with internal opportunities. We look for ways to
help them grow in their careers and then recognize the people who make special
achievements and contributions.
Jack Henry s proven track record in acquisitions is a major reason that
potential acquisition candidates consider our company to be an attractive exit
strategy. We handle the employees and customers carefully. We seek to achieve a
scenario in which all parties win. Because we appreciate the special skills,
knowledge and relationships that acquired principals and employees bring to JHA,
we work to create a future for them here. We have a gradual migration policy for
customers. We do not force our acquired customers to move to our systems. We
make every effort to ensure that they are served well under their existing
systems.
GG PULLEY ACQUISITION EXPANDS JHA S ITEM PROCESSING CAPABILITIES
Item processing, also referred to as proof of deposit (POD), involves taking
information such as bank number, customer number, check number, and
transaction amount from checks and other transaction documents and capturing
it magnetically with a reader/sorter. This information is stored on the AS/400
in a transaction file that is used during nightly runs to make sure that the
funds are in the appropriate accounts and that the debits balance with the
corresponding credits.
GGPA s capability in item processing is much broader than JHA s. GGPA sells to
thrifts, to savings and loans, and to banks outside the JHA customer base. Its
systems can be installed in banks larger than those JHA typically services. So,
GGPA item processing software can be used for some of JHA s large customers,
such as JHA s Silverlake customers and those banks served through the IBM Global
Services contracts.
GGPA adds the item processing resources that JHA needs for its long-term
strategy. It supports more types of machines in item processing than JHA does.
This acquisition further strengthens our relationship with IBM, because GGPA was
also an IBM remarketer. GGPA can open doors for JHA s core systems. Like
CommLink, it will act as a good lead and will give us advance notice when a bank
is considering a core system change.
JHA and Pulley have followed parallel paths on image software. Pulley s image
solution is compatible with the JHA solution. Imaging is still a relatively
small piece of GGPA s business. The merger gives JHA flexibility and options we
didn t have before.
A NEW APPROACH TO USER MEETINGS
A new format was established a tour JHA user group meeting last April in Denver.
For the first time, we combined the Silverlake and CIF 20/20 user groups,
because we are delivering the same message to both groups. It was an
overwhelming success and a great vehicle for our customers and our vendors. This
meeting was by far the largest gathering of Jack Henry users ever.
There were 73 JHA employees and 500 bankers in attendance representing some 300
banks. We also had a record number of vendors attending. This audience allowed
JHA to bring more resources to the user group meeting. We held breakout sessions
on all product areas.
At the April meeting, our customers had access to a larger group of JHA
management and staff, better training ideas, and all of our products and
services. Many important topics were discussed and bankers had extensive time to
ask questions of JHA managers. User group meetings have proved to be an
outstanding forum for communications and enhanced networking with other
community bankers. Customers can learn from each other, even when they are on
different systems. We also invite competing ancillary product vendors, because
we believe that it is important that bankers see a variety of competitive
offerings before they choose the solutions for their particular banks.
OUTSOURCING OFFERINGS
Over the past two years, JHA has gained excellent access to the service bureau
market. Before the 1995 Liberty software acquisition, we were exclusively a
vendor of in-house systems. The Liberty Banking Systems, Inc. (LBSI) acquisition
in September 1996 increased JHA s service bureau access to the Rocky Mountain
region and the West Coast. Our strategic alliance with IBM Global Services has
also given us greater visibility in outsourcing through both service bureau and
facilities management capabilities to larger banks. We now have service bureaus
at four locations: St. Paul, Minnesota; Charlotte, North Carolina; Englewood,
Colorado; and Houston, Texas.
Service bureaus present an outstanding business opportunity. Service bureaus now
allow JHA to offer its products and services to more than 95% of the U.S.
banking market. Our service bureau offerings are expected to grow rapidly over
the next three to five years, as year 2000 issues and technological change
prompt many community banks to outsource data processing.
Outsourcing provides stable and recurring revenue, similar to our steady
software maintenance revenues. However, when we sell a service bureau system,
that means our initial revenues are realized more slowly. They are accounted for
over the life of the contract, rather than through license fees paid upfront.
This creates along-term annuity for JHA. It will have a positive impact on
earnings growth over the long term.
IBM Global Services is a leading provider of information technology services to
financial institutions and industrial companies. The IBM Global Services
alliance allows JHA a better potential to penetrate the service bureau business
for banks with more than $350 million in assets. This alliance further enhances
our ability to introduce JHA software to larger banks through either service
bureaus or facilities management choices.
CHECK IMAGING
We believe that check imaging will become a significant part of our business.
JHA s proprietary check-imaging software is integrated with our core systems.
This technology provides significant savings by reducing costs of errors in
initial check handling, storage, shipping and postage. Imaging also allows for
greater responsiveness when bank customers need research and payment
verification.
Community banks will eventually need to have imaging capabilities to be
competitive. Recent advances in imaging cameras, data storage, and laser
printing devices have made check-imaging technology affordable to almost all
banks. But Jack Henry stands out as providing a cost-effective, integrated
offering in check image. Banks using JHA s core systems can purchase an
integrated product as a competitive advantage in the marketplace.
INTERNET BANKING THROUGH NETTELLER
During fiscal 1996, we started getting requests from our customers to introduce
Internet banking. We knew that the system we would introduce had to be
affordable. NetTeller, our Internet banking product, was introduced in May 1996
and is a cost-effective solution. NetTeller is flexible enough so banks can
customize it for their particular requirements. Banks usually personalize the
NetTeller product by directing customers to it through the banks home page. JHA
can design and maintain the home pages. The NetTeller software interfaces into
our core applications, so that customers always get the most up-to-date
information. For example, customers can even use our check imaging software with
NetTeller. They can download images of checks on their own personal computers
for viewing.
Internet banking is so new that there have been only a limited number of
installations thus far. To its credit, Jack Henry has more such installations
completed than any other vendor. As always, JHA was quick in developing and
introducing a cost-effective, flexible product. Demand for this product is
strong and growing.
ATM ELECTRONIC SERVICES
CommLink provides ATM services with national network transaction capability to
JHA banks, to banks that don t use JHA as their provider, and also to
nonfinancial institutions. CommLink s primary geographic area is Texas and
several other Southern states, but it is gradually broadening its range.
In fiscal 1997, CommLink benefited from customer growth and an increased level
of switching transactions. To ensure growth, profitability and stability, we at
Jack Henry have upgraded our infrastructure for improved coordination and
communications with JHA headquarters. This ensures that service levels remain
consistent throughout our company. It should also help us better identify
candidates for both JHA core systems and CommLink ATM services.
CommLink has an excellent product in the marketplace. Demand for it continues to
be strong. CommLink is a cost-efficient operation, and it is price competitive
in the marketplace. Additionally, it gives JHA a strong base in the early stages
of anticipated electronic transaction growth. We expect CommLink to show
aggressive growth over the next several years.
QUARTERLY FINANCIAL INFORMATION
(In thousands, except
QUARTERS per share data)
FY 1997 FIRST SECOND THIRD FOURTH TOTAL
Revenues 18,350 21,348 22,061 20,841 82,600
Cost of sales 8,505 11,348 11,749 9,474 41,076
Income before income taxes 6,152 6,102 6,041 6,792 25,087
Income from continuing
operations 3,803 3,778 3,735 4,439 15,755
Loss from discontinued
operations 0 (150) (89) (211) (450)
Net income 3,803 3,628 3,646 4,228 15,305
Net income per share from
continuing operations .20 .20 .20 .23 .83
Net income per share .20 .19 .19 .22 .80
FY 1996 FIRST SECOND THIRD FOURTH TOTAL
Revenues 16,150 16,519 16,561 18,328 67,558
Cost of sales 7,911 8,270 8,721 8,691 33,593
Income before income taxes 4,974 4,501 4,471 5,927 19,873
Income from continuing 3,095 2,759 2,761 3,653 12,268
operations
Net income (loss) from
discontinued operations 0 0 0 (2,620) (2,620)
Net income 3,095 2,759 2,761 1,033 9,648
Net income per share from
continuing operations .17 .15 .15 .19 .65
Net income per share .17 .15 .15 .05 .51
Selected Financial Information
(In Thousands, Except Per Share Information)
Year Ended June 30,
INCOME STATEMENT DATA 1997 1996 1995 1994 1993
Gross revenue (1) $82,600 $67,558 $46,124 $38,390 $32,589
Income from continuing opera- $15,755 $12,268 $ 7,978 $ 6,259 $ 5,272
tions
Income (loss) from discontinued
operations (net of ap-
plicable income taxes)(2) $(450) $(2,620) $ - $ - $ 101
Extraordinary income from
Unisys settlement - - - - $ 886
Net Income $ 15,305 $ 9,648 $ 7,978 $ 6,259 $ 6,259
Income(loss) per share(3):
Continuing Operations $ .83 $ .65 $ .44 $ .35 $ .30
Discontinued Operations $ (.03) $ (.14) - - $ .01
Extraordinary Income - - - - $ .05
Net Income $ .80 $ .51 $ .44 $ .35 $ .36
Dividends Declared Per Share $ .20 $ .17 $ .15 $ .13 $ .11
JUNE 30,
BALANCE SHEET DATA 1997 1996 1995 1994 1993
Working capital $15,490 $ 6,895 $ (666) $11,181 $ 7,394
Total assets $82,069 $60,401 $58,721 $38,347 $29,908
Long-term debt - - - - -
Stockholders' equity $52,782 $37,418 $29,484 $23,650 $17,639
Notes:
(1) Gross revenue includes software licensing and installation revenues;
support revenues; and hardware sales and commissions; less sales returns and
allowances.
(2) Income and losses from any discontinued operations is reported as such
from the appropriate date in each respective case.
(3) Prior year amounts have been adjusted to reflect the 50% stock dividends
paid in prior years.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Jack Henry & Associates, Inc.
We have audited the consolidated balance sheet of Jack Henry & Associates, Inc.
and its subsidiaries (the "Company") as of June 30, 1997 and the related
consolidated statements of income, stockholders equity, and cash flows for the
year then ended. Such consolidated financial statements and our report thereon
dated August 15, 1997, expressing an unqualified opinion (which are not included
herein) are referred to in the proxy statement for the 1997 annual meeting of
stockholders. The accompanying condensed consolidated financial statements are
the responsibility of the Company s management. Our responsibility is to
express an opinion on such condensed consolidated financial statements in
relation to the complete consolidated financial statements. The consolidated
financial statements of the Company for the years ended June 30, 1996 and 1995
were audited by other auditors whose report, dated August 22, 1996, expressed an
unqualified opinion on those statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of June 30, 1997 and the related condensed
consolidated statement of income and of cash flows for the year then ended is
fairly stated in all material respects in relation to the basic consolidated
financial statements from which it has been derived.
DELOITTE & TOUCHE LLP
August 15, 1997
St Louis, Missouri
Jack Henry & Associates, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
Year Ended June 30,
1997 1996 1995
Revenues $82,600 $67,558 $46,124
Cost of sales 41,076 33,593 22,946
GROSS PROFIT $41,524 $33,965 $23,178
OPERATING EXPENSES 17,283 14,759 11,375
OPERATING INCOME FROM CONTINUING OPERATIONS $24,241 $19,206 $11,803
OTHER INCOME, NET 846 667 839
INCOME FROM CONT. OPERATIONS BEFORE INCOME TAXES $25,087 $19,873 $12,642
PROVISION FOR INCOME TAXES 9,332 7,605 4,664
INCOME FROM CONTINUING OPERATIONS $15,755 $12,268 $ 7,978
LOSS FROM DISCONTINUED OPERATIONS 450 2,620 -
NET INCOME $15,305 $ 9,648 $ 7,978
INCOME FROM CONTINUING OPERATIONS PER SHARE $ .83 $ .65 $ .44
LOSS FROM DISCONTINUED OPERATIONS PER SHARE $ .03 $ .14 $ -
NET INCOME PER SHARE $ .80 $ .51 $ .44
WEIGHTED AVERAGE SHARES OUTSTANDING 19,072 18,726 18,074
The accompanying notes are an integral part of these condensed consolidated
financial statements.
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
JUNE 30,
ASSETS 1997 1996
Current assets:
Cash and cash equivalents $ 7,948 $ 4,952
Investments 5,919 3,128
Trade receivables 22,703 15,990
Income taxes receivable 1,982 889
Prepaid expenses and other 4,177 3,187
Total $42,729 $28,146
Property and equipment, net 21,869 13,612
Other assets 17,471 18,643
Total assets $82,069 $60,401
Liabilities and stockholders equity
Current liabilities:
Accounts payable and accrued expenses $ 6,559 $ 5,183
Deferred revenue 20,680 16,068
Total $27,239 $21,251
Deferred income taxes 2,048 1,732
Total liabilities $29,287 $22,983
Stockholders Equity:
Common stock 185 119
Less treasury shares (293) -
Additional paid-in capital 14,744 10,711
Retained earnings 38,146 26,588
Total stockholders equity $52,782 $37,418
Total liabilities and stockholders equity $82,069 $60,401
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Jack Henry & Associates, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended June 30,
1997 1996 1995
Cash flows from continuing operating activities $19,480 $14,671 $ 9,657
Cash flows to discontinued operations 819 151 -
Cash flows to investing activities 13,691 9,767 5,906
Cash flows to financing activities 1,974 3,224 2,270
Net increase in cash $ 2,996 $ 1,529 $ 1,481
Cash and cash equivalents at beginning of year 4,952 3,423 1,942
Cash and cash equivalents at end of year $ 7,948 $ 4,952 $ 3,423
The accompanying notes are an integral part of these condensed consolidated
financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
These financial statements have been condensed from the audited consolidated
financial statements of Jack Henry & Associates, Inc. The footnotes to the
audited financial statements, and the Statement of Changes in Stockholders'
Equity, are not included in this presentation.
Management's Discussion and Analysis of the Financial Statements, which is
included in this summary annual report, describes the impact on these condensed
consolidated financial statements of the significant events and activities of
the Company. The discussion provides additional information to assist in
understanding the Company's results of operations and financial position,
although it is not a part of the condensed consolidated financial statements.
Jack Henry & Associates, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
RESULTS OF OPERATIONS
Introduction - All of the revenues (and costs and expenses) in the statement of
operations relate to JHA's continuing operations, i.e., the installation and
support of banking software systems that JHA developed and the marketing of the
JHA software along with computer hardware manufactured by others to provide a
complete data processing system for in-house or outsourced operations in finan-
cial institutions.
Total revenues, presented in the statement of operations, include software
licensing and installation revenues; maintenance/support and services revenues;
and hardware sales and commissions which includes revenues from the sale of
forms and supplies.
Business operations for FY '97 and '96 continues to reflect JHA's success in its
market niche. JHA s approach of expanding its product and service offerings to
provide a top quality, comprehensive data processing installation for its
customers helps to drive their success. Results of operations for JHA's banking
system business in each of the last two fiscal years are discussed separately
below.
Bar graph located on the side of the page.
Bar Graph depicting "TOTAL ASSETS":
For FYE 97 - 82,069,000
For FYE 96 - 60,841,000
For FYE 95 - 58,721,000
For FYE 94 - 38,347,000
For FYE 93 - 29,908,000
page 18
Bar Graph depicting "AFTER TAX MARGIN" from continuing operations percentage:
For FYE 97 - 19.07%
For FYE 96 - 18.20%
For FYE 95 - 17.30%
For FYE 94 - 16.30%
For FYE 93 - 16.20%
FY '97
REVENUE - The Company continued great strides forward with each major component
of revenue contributing to the record $82,600,000, - a 22% increase. Increased
demand for the Company s flagship products continued to be a driving force in
the revenue growth. Other significant growth contributors were electronic
transaction fees, service bureau and customer support fees - all increasing at
similar levels.
COST OF SALES - Cost of sales increased 22%, equaling the rate of revenue
growth. Cost of hardware increased 26% while cost of services only increased
18%.
GROSS PROFIT - Gross profit increased 22%, consistent with the revenue
increase. This change helped to keep the gross margin at 50%, the same level
as last year.
OPERATING EXPENSES - The 17% increase in operating expenses was favorable when
compared to the revenue and gross profit increase. The selling and marketing
increase (21%) was directly related to the increase in revenues.
OTHER INCOME - Other income rose 27% over last year, primarily due to the
increased amount of invested funds throughout the current year than during last
year.
DISCONTINUED OPERATIONS - The Company incurred a $450,000 loss from discontinued
operations, down significantly from last year. Due to a planned sale not
closing, the Company is further evaluating its options regarding BankVision.
FY '96
REVENUE - Total revenues which set another new record were $67,558,000, up 46%
over last year. Each major component of revenue increased significantly above
the previous year's mark. The Company has had six consecutive years of each
revenue component increasing and establishing new record levels.
Increased demand for the Company's application software was the driving force
for software and installation revenues. Acquisitions provided $10,900,000 of
the increase with additional demand and increased electronic transaction fees
the next most significant contributors to the maintenance/support and service
increase. Hardware revenues experienced increases primarily as a result of
increased demand and increased forms and supply sales through acquisitions.
Each major component of revenue is expected to increase, but not necessarily at
the same rate as the past year. Also, over the longer term, the hardware
component of revenue could become a smaller and smaller portion.
COST OF SALES - Cost of sales increased 46%, consistent with the revenue
increase. Each major component had an increase with the most significant
increase occurring in cost of services. Acquisitions during the last 13 months
contributed $6,800,000 to the cost of services increase.
GROSS PROFIT - Overall gross profit increased 47%, in line with the increase
in total revenues. Further, the gross margin percentage was at 50%, unchanged
from last year's rate.
OPERATING EXPENSES - The 30% increase in operating expenses was quite low
compared to the 47% increase in gross profit. This strongly supports the
Company's ability to leverage more profit to the bottom line as it continues
growing. Selling and marketing costs experienced the largest increase. This
increase in spending is directly related to the increase in revenues and the
resulting gross profit.
OTHER INCOME - The overall level of other income is down from last year due
primarily to lower levels of invested funds during the current year and higher
cash outlays for acquisitions.
Bar graphs located on the side of the page.
Bar Graph depicting "RETURN ON BEGINNING EQUITY" percentages:
For FYE 97 - 40.90%
For FYE 96 - 34.20%
For FYE 95 - 33.70%
For FYE 94 - 35.50%
For FYE 93 - 50.50%
Bar Graph depicting "SHAREHOLDERS' EQUITY" in millions:
For FYE 97 - 52,782,000
For FYE 96 - 37,858,000
For FYE 95 - 29,484,000
For FYE 94 - 23,650,000
For FYE 93 - 17,639,000
Bar Graph depicting "DIVIDENDS DECLARED PER SHARE":
For FYE 97 - $.20
For FYE 96 - $.17
For FYE 95 - $.15
For FYE 94 - $.13
For FYE 93 - $.11
FINANCIAL CONDITION
Liquidity - JHA's liquidity position (cash plus short-term investments minus
working capital borrowings) at June 30, 1997 increased significantly from last
year. The total was $13,867,000 versus $8,080,000 last year. The Company
generated significantly higher cash flows from operations, but the additional
outlays for capital expenditures (some of which resulted from acquisitions) and
dividends held liquidity growth to its current level. Working capital more than
doubled from $6,895,000 last year to $15,490,000 in the current year.
The Company believes its liquid assets on hand and those generated from
operations are sufficient to meet its cash requirements for FY '98. Cash and
investments are expected to increase during the first quarter of FY '98 as the
annual software maintenance billings in trade receivables at June 30, 1997 are
collected. The Company expects to utilize its $4,000,000 credit line minimally
during the next fiscal year.
Capital Requirements and Resources - JHA generally uses existing resources and
funds generated from operations to meet its capital requirements. Capital
expenditures of $10,313,000 were made for expansion of facilities and additional
equipment to provide for the Company's current and future growth. The most
significant individual outlays were for upgrades and additions to the corporate
aircraft. The Company has no long-term debt and anticipates capital
expenditures could approach $6,000,000 during the next fiscal year. These will
be funded from funds generated by operations.
Subsequent to June 30, 1997, the Company's Board of Directors declared a cash
dividend of $.055 per share on its common stock payable on September 23, 1997 to
stockholders of record as of September 8, 1997. Current funds from operations
should be adequate for this purpose. The Board has indicated that it plans to
continue paying dividends so long as the Company's financial picture continues
to be favorable.
CORPORATE DIRECTORY
BOARD OF DIRECTORS:
MICHAEL E. HENRY, Chairman and Chief Executive Officer
MICHAEL R. WALLACE, President and Chief Operating Officer
JOHN W. "JACK" HENRY, Vice Chairman and Senior Vice President
JERRY D. HALL, Executive Vice President
*JAMES J. ELLIS, Managing Partner, Ellis/Rosier Financial Services,
Dallas, TX
*BURTON O. GEORGE, Former Chairman,
First National Bank of Berryville,
Berryville, AR
*GEORGE R. CURRY, Chairman,
Central Bank,
Lebanon, MO
*Member of Audit & Compensation Committees
OTHER INFORMATION:
TRANSFER AGENT & REGISTRAR:
UMB Bank, N.A.
P.O. Box 419226
Kansas City, MO 64141-6226
816-860-7761
EXECUTIVE OFFICERS:
MICHAEL E. HENRY, Chairman and Chief Executive Officer
MICHAEL R. WALLACE, President and Chief Operating Officer
JOHN W. "JACK" HENRY, Senior Vice President
JERRY D. HALL, Executive Vice President
TERRY W. THOMPSON, Chief Financial Officer, Vice President and Treasurer
MARGUERITE P. BUTTERWORTH, Vice President
COMPANIES:
PARENT COMPANY:
JACK HENRY & ASSOCIATES, INC.
663 Highway 60
P.O. Box 807
Monett, MO 65708
417-235-6652 (FAX) 417-235-8406
SUBSIDIARIES:
JACK HENRY INTERNATIONAL, LTD.
Monett, MO
BANKVISION SOFTWARE, LTD.
Monett, MO
COMMLINK CORP.
Houston, TX
FORM 10K
A copy of the Company's 10-K is available upon request to the Chief Financial
Officer at the address above.
