FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURI- TIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1998 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 of incorporation) (I.R.S. Employer Identification No.) 663 Highway 60, P. O. Box 807, Monett, MO 65708 (Address of principal executive offices) (Zip Code) 417-235-6652 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at January 31, 1999 Common Stock, $.01 par value 19,972,745 JACK HENRY & ASSOCIATES, INC. CONTENTS Page No. PART I. FINANCIAL INFORMATION Item I - Financial Statements Condensed Consolidated Balance Sheets - December 31, 1998, (Unaudited) and June 30, 1998 3-4 Condensed Consolidated Statements of Operations for the Quarter and Six Months Ended December 31, 1998 and 1997 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 1998 and 1997 (Unaudited) 6 Notes to the Condensed Consolidated Financial Statements 7-8 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition 8-10 Part II. OTHER INFORMATION Item 5 - Other Information 10 Item 6 - Exhibits and Reports on Form 8-K 10 Part I. Financial Information Item 1. Financial Statements JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands of Dollars, Except Share Data) December 31, 1998 June 30, (Unaudited) 1998 ASSETS Current assets: Cash and cash equivalents $ 34,684 $ 24,683 Investments 1,509 3,217 Trade receivables 27,610 42,615 Income taxes receivable 1,477 - Prepaid expenses and other 10,320 8,174 Total current assets $ 75,600 $ 78,689 Property and equipment, net $ 43,951 $ 30,918 Other assets: Intangible assets, net of amortization $ 22,115 $ 15,272 Computer software 3,358 3,616 Other non-current assets 3,755 3,683 Total other assets $ 29,228 $ 22,571 Total assets $148,779 $132,178 December 31, 1998 June 30, (Unaudited) 1998 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,944 $ 8,119 Accrued expenses 6,912 5,634 Accrued income taxes payable - 136 Deferred revenue 35,071 33,151 Total current liabilities $ 47,297 $ 47,040 Deferred income taxes 2,526 2,526 Total liabilities $ 50,453 $ 49,566 Stockholders' equity: Preferred stock - $1.00 par value; 500,000 shares authorized; none issued - - Common stock - $0.01 par value; 50,000,000 shares authorized; 19,963,596 outstanding @ 12/31/98 19,777,458 outstanding @ 06/30/98 $ 200 $ 198 Less Treasury Stock (6) - Additional paid-in capital 28,738 26,206 Retained earnings 69,394 56,208 Total stockholders' equity $ 98,326 $ 82,612 Total liabilities and stockholders' equity $148,779 $132,178 The accompanying notes are an integral part of these condensed consolidated financial statements. JACK HENRY & ASSOCIATES, INC. CONDENSED CONSOLIDATED FINANCIAL INFORMATION (Unaudited) (In Thousands, Except Per Share Data) <TABLE> <S><C> Quarter Ended Six Months Ended December 31, December 31, Revenues: 1998 1997 1998 1997 Software licensing & installation $13,507 $ 9,322 $28,302 $17,443 Maintenance/support & service 16,763 11,191 31,112 21,916 Hardware sales & commissions 17,059 14,864 36,601 21,956 Total revenues $47,329 $35,377 $96,015 $61,315 Cost of sales: Cost of hardware 11,740 9,901 25,981 14,569 Cost of services 13,698 9,615 25,712 17,714 Total cost of sales $25,438 $19,516 $51,693 $32,283 Gross profit $21,891 $15,861 $44,322 $29,032 46% 45% 46% 47% Operating expenses: Selling and marketing 3,842 3,741 7,914 6,715 Research and development 1,512 1,300 3,032 2,494 General and administrative 5,584 2,536 8,695 4,755 Total operating expenses $10,938 $ 7,577 $19,641 $13,964 Operating income $10,953 $ 8,284 $24,681 $15,068 Other income: Interest income 510 325 977 635 Other, net 142 91 174 196 Total other income $ 652 $ 416 $ 1,151 $ 831 Income before income taxes $11,605 $ 8,700 $25,832 $15,899 Provision for income taxes 4,485 3,191 9,942 5,533 Income from continuing operations $ 7,120 $ 5,509 $15,890 $10,366 Income (loss) from discontinued opera- (249) 54 (227) (207) tions Net income $ 6,871 $ 5,563 $15,663 $10,159 Diluted earnings per share: Income from continuing operations $ .34 $ .27 $ .75 $ .51 Income (loss) from discontinued (.01) - (.01) (.01) operations Net income $ .33 $ .27 $ .74 $ .50 Diluted weighted average shares 21,180 20,437 21,090 20,388 outstanding Basic earnings per share: Income from continuing operations $ .36 $ .28 $ .80 $ .53 Income (loss) from discontinued (.01) - (.01) (.01) operations Net income $ .35 $ .28 $ .79 $ .52 Basic weighted average shares 19,932 19,566 19,872 19,522 outstanding </TABLE> 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 of Dollars) (Unaudited) Six Months Ended December 31, 1998 1997 Cash flows - operating activities: Cash received from customers $113,340 $62,641 Cash paid to suppliers and employees (70,093) (43,533) Interest and dividends received, net 1,144 692 Income taxes paid, net (12,107) (2,772) Other, net (84) (6) Net cash flow provided by operating activities $ 32,200 $17,022 Cash flows from discontinued operations (264) (522) Cash flows from investing activities: Proceeds on sale of property & equipment $ 5 $ 56 Capital expenditures (14,703) (3,512) Short-term investment activity, net 1,600 2,381 Computer software development (183) (63) Acquisition costs, net (7,835) (842) Net cash used in investing activities $(21,116) $(1,980) Cash flows from financing activities: Proceeds from issuance of common stock upon exercise of stock options $ 2,226 $ 285 Proceeds from sale of common stock 134 272 Dividends paid (2,477) (2,066) Principal payments on notes payable (696) (139) Purchase of treasury stock (6) (387) Net cash used in financing activities $ (819) $(2,035) Net increase in cash and cash equivalents $10,001 $12,485 Cash and cash equivalents at beginning of period 24,683 11,108 Cash and cash equivalents at end of period $ 34,684 $23,593 The accompanying notes are an integral part of these condensed consolidated financial statements. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Summary of Significant Accounting Policies Description of the Company - Jack Henry & Associates, Inc. ("JHA" or the "Company") is a computer software company which has developed several banking software systems. It markets those systems to financial institutions throughout the United States along with the computer equipment (hardware) and provides the conversion and software services necessary for a financial institution to install a JHA software system. It also provides continuing maintenance and support services to customers using the system. All of these related activities are considered a single business segment. Consolidation - The consolidated financial statements include the accounts of JHA and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidation. Other Significant Accounting Policies - The accounting policies followed by the Company are set forth in Note 1 to the Company's consolidated financial statements included in its Annual Report on Form 10-K ("Form 10-K") for the fiscal year ended June 30, 1998. 2. Interim Financial Statements The accompanying condensed financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission and in accordance with generally accepted accounting principles applicable to interim financial statements, and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes of the Company for the year ended June 30, 1998, which are included in its Form 10-K. In the opinion of management of the Company, the accompanying condensed 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, 1998, and the results of its operations and its cash flows for the quarter and six month periods then ended. The results of operations for the periods ended December 31, 1998, are not necessarily indicative of the results to be expected for the entire year. 3. Additional Interim Footnote Information The following additional information is provided to update the notes to the Company's annual financial statements for developments during the quarter ended December 31, 1998: Acquisition of Peerless Group, Inc. - December 16, 1998: JHA acquired all the outstanding shares of Peerless Group, Inc.( Peerless ), for approximately 827,000 shares of Company stock. Peerless, a wholly owned subsidiary, was a publicly owned company that installs and supports integrated information systems for community banks and credit unions throughout the United States. This acquisition was accounted for as a pooling-of-interests and all prior periods have been restated to reflect the acquisition as if it had occurred at the beginning of the period reported. Acquisition of Digital Data Services, Inc. (DDSI) - November 25, 1998: DDSI, acquired for $2.75 million in cash, is a provider of a variety of service bureau options to community banks, primarily in the state of Florida. Systems are AS/400 based and are already using the JKHY core application system. This acquisition was accounted for as a purchase and DDSI s results of operations from the date of acquisition have been included in the Company s results of operations. 4. Income Per Share Information Earnings per common share are computed by dividing income by the basic and diluted weighted average number of shares of common stock and dilutive common stock equivalents outstanding for the quarter and six month periods ended December 31, 1998 and 1997. The difference between basic and diluted weighted average shares outstanding is due to employee stock options. Item 2. - Management's Discussion and Analysis of Results of Operations and Financial Condition
RESULTS OF OPERATIONS Background and Overview The Company is a leading provider of integrated computer systems and ATM networking products that perform data processing (available for in-house or service bureau installations) for banks and credit unions. The Company was founded in 1976. Its proprietary applications software, which operates on IBM computers, is offered under two systems: CIF 20/20 , typically for banks with less than $300 million in assets, and the Silverlake System , for banks with assets up to $10 billion. JHA frequently sells hardware with its software products. It also provides customer support and related services. The Company's software systems and products have been installed at over 1800 banks and credit unions. Year 2000 The Company has established a Year 2000 (Y2K) Committee. This Committee has prepared a documented, systematic approach (the Y2K Plan) to review all products and internal systems for Y2K compliance. The Company s Board of Directors have reviewed and approved the Plan as required by the banking regulators of all service bureau providers. The Company believes the products it currently sells are Y2K compliant and that the majority, if not all, of its internal systems will be Y2K compliant by March 31, 1999. The estimated cost of the above efforts is not reasonably determinable at the current time and is not expected to be material to the Company s financials. A detailed discussion of the major components of the results of operations for the quarter and the six months ended December 31, 1998, as compared to the same periods in the previous year follows. Revenues Revenues increased 34% to $47,329,000 in the quarter ended December 31, 1998. The Company's non-hardware products and services (higher margin sales) increased 48% over last year. Six month revenues this year were $96,015,000, up 57% over the last year's corresponding period. Software licensing and installation increased 62%. Maintenance, support and service revenues increased 42%. Hardware sales were up 67% over last year. The backlog of sales at December 31, 1998, was $80,206,000. Backlog at January 31, 1999 was $79,466,000. Cost of Sales The 30% increase in cost of sales for the second quarter of FY '99 is relatively consistent with the increase in revenues. A portion of the increase results from the increase in hardware revenues and the related increase in cost of hardware sales. Cost of services increased 42% primarily due to growth and future growth expected in the Company's core business, slightly less than the 48% increase in non-hardware revenues. Cost of sales increased 60% for the first six months of fiscal '99, relatively 1 CIF 20/20 is a trademark of Jack Henry & Associates, Inc. 2 Silverlake System is a registered trademark of Jack Henry & Associates, Inc. consistent with the 57% increase in revenues. Cost of hardware increased 78%, slightly more than the 67% increase in hardware revenue. Cost of services increased 45% compared to a 51% increase in non-hardware revenues. Gross Profit Gross profit increased to $21,891,000 in the second quarter ended December 31, 1998, a 38% increase over last year. The gross margin percentage was 46% of sales compared to 45% last year. The six month gross profit this year was up 53% at $44,322,000. The gross margin percentage for the first six months was 46%, similar to last year's rate of 47%. Operating Expenses Total operating expenses increased 44% in the quarter compared to last year s period. This is slightly more than the gross profit increase of 38%. Selling expenses increased 3% while research and development expenses increased 16%. General and administrative expenses increased by 40% without one time transaction costs of $2,040,000 relating to the acquisition of Peerless. The $19,641,000 in the first six months of fiscal '99 for operating expenses was a 41% increase. This is relatively consistent with the 53% increase in gross profits. Other Income and Expense Other income for the quarter ended December 31, 1998, was up 57% when compared to the same period last year. This results primarily from increased interest income because the Company had more cash invested during the period. The year- to-date 39% increase is due to the same reasons. Net Income Net income from continuing operations for the second quarter was $7,120,000, or $.34 per diluted share, an increase of 29%, compared to $5,509,000, or $.27 per diluted share in the same period last year. Net income from continuing operations for the six months ended December 31, 1998 was $15,890,000, or $.80 per share (up 53%), compared to $10,366,000, or $.51 per share during the same period last year. FINANCIAL CONDITION Liquidity The Company's cash and cash equivalents and investments increased to $36,193,000 at December 31, 1998, up from $27,900,000 at June 30, 1998. JHA has available credit lines totaling $5,000,000, although the Company expects their use to be minimal during FY '99. The Company currently has no short-term or long-term debt obligations. Capital Requirements and Resources JHA generally uses existing resources and funds generated from operations to meet its capital requirements. Capital expenditures totaling $14,703,000 for the six months ended December 31, 1998, were made for expansion of its facilities and additional equipment. These were funded from cash generated by operations. The consolidated capital expenditures of JHA could exceed $18,000,000 for FY '99. The Company paid a $.065 per share cash dividend on December 10, 1998 to stockholders of record November 19, 1998 which was funded from working capital. In addition, the Company's Board of Directors, subsequent to December 31, 1998, declared a quarterly cash dividend of $.08 per share on its common stock payable March 10, 1999 to stockholders of record on February 17, 1999. This will be funded out of working capital. CONCLUSION JHA's results of operations and its financial position continued to be quite favorable during the quarter ended December 31, 1998. This reflects the continuing attitude of cooperation and commitment by each employee, management's ongoing cost control efforts and the Company s commitment to deliver top quality products and services to the markets it serves. PART II. OTHER INFORMATION Item 5. Other Information On December 16, 1998, the Company issued 826,931 shares of fully paid and non- assessable JHA common stock, valued at approximately $39.4 million to the shareholders of Peerless, as total consideration for a transaction whereby all of the outstanding capital stock of Peerless was acquired by the Company. These shares of the Company s common stock were issued pursuant to a registration statement under the Securities Act of 1933. Item 6. Exhibits and Reports on Form 8-K The Company filed one current report on Form 8-K on December 17, 1998, reporting the completion of the Company s acquisition of Peerless, and describing certain details of the transaction. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on behalf by the undersigned thereunto duly authorized. JACK HENRY & ASSOCIATES, INC. Date: February 12, 1999 /s/ Michael E. Henry Michael E. Henry Chairman of the Board and Chief Executive Officer Date: February 12, 1999 /s/ Terry W. Thompson Terry W. Thompson Vice President and Chief Financial Officer