1
EXHIBIT 99.3
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS OF JACK HENRY &
ASSOCIATES, INC.
Independent Auditors' Report.............................. F-2
Consolidated Statements of Income for the Years Ended June
30, 1997, 1998 and 1999................................ F-3
Consolidated Balance Sheets at June 30, 1998 and 1999..... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended June 30, 1997, 1998 and 1999....... F-5
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1997, 1998 and 1999........................... F-6
Notes to Consolidated Financial Statements................ F-7
F-1
2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Jack Henry & Associates, Inc.:
We have audited the accompanying consolidated balance sheets of Jack Henry
& Associates, Inc. and Subsidiaries (the "Company") as of June 30, 1999 and
1998, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended June 30, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Jack Henry & Associates, Inc.
and Subsidiaries at June 30, 1999 and 1998, and the results of their operations
and their cash flows for the three years in the period ended June 30, 1999 in
conformity with accounting principles generally accepted in the United States of
America.
/S/ DELOITTE & TOUCHE LLP
St. Louis, Missouri
August 23, 1999
(September 8, 1999 as to Note 13 and July 6, 2000 as to Note 14
and the effects of the stock split described in Note 1)
F-2
3
JACK HENRY & ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED
JUNE 30,
------------------------------
1997 1998 1999
-------- -------- --------
Revenues
Software licensing and installation............ $ 31,930 $ 39,484 $ 47,181
Maintenance/support and service................ 37,510 46,835 71,278
Hardware sales................................. 56,816 61,916 75,068
-------- -------- --------
Total revenues............................... 126,256 148,235 193,527
-------- -------- --------
Cost of Sales
Cost of hardware............................... 41,016 43,335 54,661
Cost of services............................... 32,001 37,674 52,582
-------- -------- --------
Total cost of sales.......................... 73,017 81,009 107,243
-------- -------- --------
Gross profit..................................... 53,239 67,226 86,284
-------- -------- --------
Operating Expenses
Selling and marketing expense.................. 12,750 15,124 14,030
Research and development expense............... 3,012 4,163 5,183
General and administrative expense............. 9,607 11,675 17,347
-------- -------- --------
Total operating expense...................... 25,369 30,962 36,560
-------- -------- --------
Operating income from continuing operations...... 27,870 36,264 49,724
-------- -------- --------
Other Income (Expense)
Interest income................................ 738 1,319 1,619
Interest expense............................... (40) (34) (93)
Other, net..................................... 109 348 363
-------- -------- --------
Total other income........................... 807 1,633 1,889
-------- -------- --------
Income from continuing operations before taxes... 28,677 37,897 51,613
Provision for income taxes....................... 10,185 13,692 18,887
-------- -------- --------
Income from continuing operations.............. 18,492 24,205 32,726
Loss from discontinued operations................ (450) (668) (758)
-------- -------- --------
Net income....................................... $ 18,042 $ 23,537 $ 31,968
======== ======== ========
Diluted Earnings Per Share:
Income from continuing operations.............. $ 0.46 $ 0.58 $ 0.77
Loss from discontinued operations.............. (0.01) (0.02) (0.02)
-------- -------- --------
Net income..................................... $ 0.45 $ 0.57 $ 0.75
======== ======== ========
Diluted weighted average shares outstanding...... 40,214 41,593 42,641
======== ======== ========
Basic Earnings Per Share:
Income from continuing operations.............. $ 0.49 $ 0.61 $ 0.81
Loss from discontinued operations.............. (0.01) (0.02) (0.02)
-------- -------- --------
Net Income..................................... $ 0.47 $ 0.59 $ 0.79
======== ======== ========
Basic weighted average shares outstanding........ 38,025 39,770 40,337
======== ======== ========
See Notes to Consolidated Financial Statements.
F-3
4
JACK HENRY & ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30,
---------------------
1998 1999
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 24,733 $ 3,376
Investments, at amortized cost..................... 3,229 6,702
Trade receivables.................................. 43,348 52,239
Income taxes receivable............................ 1 1,244
Prepaid cost of product............................ 4,046 9,106
Prepaid expenses and other......................... 8,036 9,109
-------- --------
Total........................................... 83,393 81,776
-------- --------
Property and equipment, net.......................... 31,492 66,192
-------- --------
Other Assets:
Intangible assets, net of amortization............. 15,272 25,181
Computer software, net of amortization............. 2,838 3,015
Other.............................................. 835 1,096
-------- --------
Total........................................... 18,945 29,292
-------- --------
Total assets.................................. $133,830 $177,260
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................... $ 8,130 $ 5,036
Short-term borrowings.............................. 400 399
Accrued expenses................................... 5,758 8,484
Accrued income taxes............................... 236 66
Deferred revenues.................................. 33,096 44,664
Current portion of long-term debt.................. 15 16
-------- --------
Total........................................... 47,635 58,665
-------- --------
Long-term debt....................................... 239 211
-------- --------
Deferred income taxes................................ 2,365 2,586
-------- --------
Total liabilities............................... 50,239 61,462
-------- --------
Stockholders' Equity:
Preferred stock; $1 par value; 500,000 shares
authorized; none issued......................... -- --
Common stock; $.01 par value; 50,000,000 shares
authorized; shares issued 1998 -- 20,194,870;
1999 -- 20,517,090.............................. 202 205
Additional paid-in capital......................... 26,267 32,210
Retained earnings.................................. 57,122 83,383
-------- --------
Total stockholders' equity...................... 83,591 115,798
-------- --------
Total liabilities and stockholders' equity...... $133,830 $177,260
======== ========
See Notes to Consolidated Financial Statements.
F-4
5
JACK HENRY & ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED JUNE 30,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
Preferred Shares (500,000 authorized):.......... -- -- --
Common Shares (50,000,000 authorized):
Shares, beginning of year..................... 13,358,563 20,023,689 20,194,870
Shares issued upon exercise of stock
options..................................... 618,750 104,465 314,277
Shares issued for Employee Stock Purchase
Plan........................................ 1,659 5,926 7,943
Shares issued for acquisitions................ 56,144 60,790 --
Stock dividend................................ 5,988,573 -- --
----------- ----------- -----------
20,023,689 20,194,870 20,517,090
Less: Held in treasury........................ (15,410) -- --
----------- ----------- -----------
Shares, end of year......................... 20,008,279 20,194,870 20,517,090
=========== =========== ===========
Common Stock -- Par Value $.01 Per Share:
Balance, beginning of year.................... $ 133 $ 200 $ 202
Shares issued upon exercise of stock
options..................................... 6 2 3
Shares issued for acquisitions................ 1 -- --
Stock dividend................................ 60 -- --
Stock split................................... -- -- --
----------- ----------- -----------
Balance, end of year........................ 200 202 205
----------- ----------- -----------
Additional Paid-in Capital:
Balance, beginning of year.................... 18,434 22,467 26,267
Shares issued upon exercise of stock
options..................................... 2,788 1,620 3,264
Shares issued for Employee Stock Purchase
Plan........................................ 42 176 312
Shares issued for acquisitions................ (306) 1,228 150
Stock dividend................................ (60) -- --
Sale of treasury stock........................ (451) -- --
Tax benefit on exercise on exercise of
options..................................... 2,020 776 2,217
----------- ----------- -----------
Balance, end of year........................ 22,467 26,267 32,210
----------- ----------- -----------
Treasury Stock:
Balance, beginning of year.................... -- (293) --
Purchases of treasury stock................... (7,469) -- (5)
Sales of treasury stock....................... 6,871 -- 5
Shares issued for acquisitions................ 305 293 --
----------- ----------- -----------
Balance, end of year........................ (293) -- --
----------- ----------- -----------
Retained Earnings:
Balance, beginning of year.................... 23,844 38,175 57,122
Retained deficit of acquired businesses....... (80) (62) (19)
Net income.................................... 18,042 23,537 31,968
Dividends (1997 -- $.10 per share;
1998 -- $.12 per share;
1999 -- $.145 per share;........... (3,631) (4,528) (5,688)
----------- ----------- -----------
Balance, end of year........................ 38,175 57,122 83,383
----------- ----------- -----------
Total stockholders' equity...................... $ 60,549 $ 83,591 $ 115,798
=========== =========== ===========
See Notes to Consolidated Financial Statements.
F-5
6
JACK HENRY & ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED JUNE 30,
------------------------------
1997 1998 1999
-------- -------- --------
Cash Flows from Operating Activities:
Income from continuing operations................... $ 18,492 $ 24,205 $ 32,726
Adjustments to Reconcile Income from Continuing
Operations to Cash from Operating Activities
Depreciation and amortization..................... 5,212 6,362 7,901
Provision for deferred income taxes............... 322 478 221
Gain on sale of investment........................ -- -- --
Other............................................. 87 89 157
Changes In:
Trade receivables................................. (8,181) (12,215) (8,540)
Prepaid expenses and other........................ (2,057) (2,814) (6,397)
Accounts payable.................................. 429 1,532 (3,308)
Accrued expenses.................................. 2,499 155 2,716
Income taxes...................................... 65 890 805
Deferred revenues................................. 3,088 7,625 11,568
-------- -------- --------
Net cash from continuing operations............. 19,956 26,307 37,849
-------- -------- --------
Cash flows from discontinued operations............... (819) (1,075) (608)
-------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures................................ (13,714) (9,949) (38,884)
Purchases of investments............................ (5,887) (3,177) (6,708)
Proceeds from maturities of investments............. 3,002 5,800 3,100
Proceeds from sale of investment.................... -- -- --
Other assets........................................ (2,500) -- --
Purchases of customer contracts..................... (33) -- (7,105)
Computer software developed/purchased............... (191) (281) (867)
Acquisition costs, net of cash acquired............. (282) (1,046) (5,905)
Other, net.......................................... (12) (346) (241)
-------- -------- --------
Net cash from investing activities................ (19,617) (8,999) (56,610)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock upon exercise
of stock options.................................. 1,532 1,463 3,267
Proceeds from sale of common stock.................. 10,655 201 462
Dividends paid...................................... (3,631) (4,528) (5,688)
Short-term borrowings, net.......................... -- 200 (2)
Principal payments on long-term debt................ (3,585) (71) (27)
Purchase of treasury stock.......................... (5,444) -- (5)
Proceeds from sale of treasury stock................ 5,646 -- 5
-------- -------- --------
Net cash from financing activities................ 5,173 (2,735) (1,988)
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents......................................... 4,693 13,498 (21,357)
Cash and cash equivalents, beginning of year.......... 6,542 11,235 24,733
-------- -------- --------
Cash and cash equivalents, end of year................ $ 11,235 $ 24,733 $ 3,376
======== ======== ========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year for:
Interest............................................ $ 40 $ 34 $ 93
======== ======== ========
Income taxes........................................ $ 8,443 $ 10,601 $ 13,988
======== ======== ========
See Notes to Consolidated Financial Statements.
F-6
7
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS AND 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. The
Company's revenues are predominately earned by marketing those systems to
financial institutions nationwide along with the computer equipment (hardware)
and by providing the conversion and software customization services necessary
for a financial institution to install a JHA software system. JHA also provides
continuing support and maintenance services to customers using the systems.
CONSOLIDATION
The consolidated financial statements include the accounts of JHA and all
of its wholly-owned subsidiaries and all significant intercompany accounts and
transactions have been eliminated.
POOLING OF INTERESTS TRANSACTIONS
The consolidated financial statements for all periods presented have been
restated to include Peerless Group, Inc. ("Peerless") which was acquired on
December 16, 1998. The acquisition was accounted for as a pooling of interests
and therefore all periods have been adjusted to reflect the acquisition as if it
had occurred at the beginning of the earliest period reported (see Note 12).
The consolidated financial statements for all periods presented have been
restated to include Sys-Tech, Inc. ("Sys-Tech"),which was acquired on June 1,
2000. The acquisition was accounted for as a pooling of interests and therefore
all periods have been adjusted to reflect the acquisition as if it had occurred
at the beginning of the earliest period reported (see Note 14).
Prior to the consummation of the pooling, Sys-Tech's year end was September
30. Therefore, the consolidated statements of income and cash flows for the
years ended June 30, 1997, 1998 and 1999 reflect the results of operations and
cash flows for the Company for the years then ended combined with Sys-Tech for
the years ended September 30, 1997, 1998 and 1999, respectively. The
consolidated balance sheets as of June 30, 1998 and 1999 reflect the financial
position of the Company on those dates combined with the financial position of
Sys-Tech as of September 30, 1998 and 1999, respectively. As a result of the
Company and Sys-Tech having different fiscal year ends, Sys-Tech's results of
operations for the three month period ended September 30, 1999 have been
included in the consolidated statements of income for the year ended June 30,
1999. Revenues, net loss from continuing operations and net loss of Sys-Tech for
the three month period ended September 30, 1999 were $1,402,000 $378,000 and
$264,000 respectively.
COMMON STOCK SPLIT
On January 31, 2000, the Company's Board of Directors declared a 100% stock
dividend on its common stock, effectively a 2 for 1 stock split. The stock
dividend was paid March 2, 2000 to stockholders of record at the close of
business on February 17, 2000. All per share and shares outstanding data in the
consolidated statements of income and the notes to the consolidated financial
statements have been retroactively restated to reflect the stock split.
F-7
8
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
REVENUE RECOGNITION
The Company's various sources of revenue and the methods of revenue
recognition are as follows:
SOFTWARE LICENSING FEES
Initial licensing fees are recognized upon delivery of the unmodified
software. Monthly software usage charges are recognized ratably over the
contract period.
SOFTWARE INSTALLATION AND RELATED SERVICES
Fees for these services are recognized as the services are performed
on hourly contracts and at completion on fixed-fee contracts.
MAINTENANCE/SUPPORT FEES
Fees from these contracts are recognized ratably over the life of the
contract.
HARDWARE
Revenues from sales of hardware are recognized upon direct shipment by
the supplier to the Company's customers. Costs of items purchased and
remarketed are reported as cost of hardware in cost of sales.
DEFERRED REVENUES
Deferred revenues consist primarily of prepaid annual software and hardware
maintenance fees. Software and hardware deposits are also reflected as deferred
revenues.
COMPUTER SOFTWARE DEVELOPMENT
The Company capitalizes new product development costs incurred from the
point at which technological feasibility has been established through the point
at which customer installations begin. The capitalized costs, which include
salaries and related expenses, equipment/facility costs and other direct
expenses, are amortized to expense based on estimated revenues over the
estimated product life (generally five years).
INCOME PER SHARE
Per share information is based on the weighted average number of common
shares outstanding during the year. Stock options have been included in the
calculation of income per share to the extent they are dilutive. Reconciliation
from basic to diluted weighted average shares outstanding is the dilutive effect
of outstanding stock options.
F-8
9
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
INVESTMENTS
The Company invests its cash that is not required for current operations
primarily in U.S. government securities.
The Company has the positive intent and ability to hold its debt securities
until maturity and accordingly, these securities are classified as
held-to-maturity and are carried at historical cost adjusted for amortization of
premiums and accretion of discounts. Premiums and discounts are amortized and
accreted, respectively, to interest income using the level-yield method over the
period to maturity. The held-to-maturity securities typically mature in less
than one year. Interest on investments in debt securities is included in income
when earned.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated principally using
the straight-line method over the estimated useful lives of the assets.
INTANGIBLE ASSETS
Intangible assets consist of excess purchase price over the fair value of
net assets acquired, customers, software maintenance/support contracts and
marketing agreements acquired in business acquisitions. The amounts are
amortized over an estimated economic benefit period, generally five to fifteen
years using the straight-line method.
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances have indicated that
the carrying amount of its assets might not be recoverable.
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," which established standards
for the reporting and display of comprehensive income and its components.
Comprehensive income is defined as net income plus certain items that are
recorded directly to shareholder's equity. Comprehensive income for each of the
years in the period ended June 30, 1999 equals the Company's net income.
BUSINESS SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," which establishes standards for the
disclosure required related to segments of an enterprise.
The Company is a leading provider of financial data processing systems for
financial institutions. In accordance with SFAS No. 131, the Company's
operations are classified as one business segment. The financial performance and
productivity of the Company is monitored as a single unit as all products and
services relate to one line of business, providing comprehensive services for
data processing to the financial institution industry. Revenue by type of
product and service is presented on the face of the statements of income.
F-9
10
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is likely that a deferred tax asset will not be realized.
RECENT ACCOUNTING PRONOUNCEMENTS
In October, 1997, the Accounting Standards Executive Committee of the
American Institute of Public Accountants ("AcSEC") issued Statement of Position
("SOP") 97-2, "Software Revenue Recognition". The Company adopted SOP 97-2
effective July 1, 1998. SOP 97-2 generally requires revenue earned on software
arrangements involving multiple elements to be allocated to each element based
on the relative fair values of the elements. In March 1998, AcSEC issued SOP
98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software
Recognition", which deferred portions of SOP 97-2 for one year. Revenues in
fiscal year 1999 from the sales of software are recognized in accordance with
the enacted portions of SOP 97-2 and the Company's management anticipates that
the adoption of SOP 98-4 in fiscal year 2000 will not have a material impact on
the Company's result of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. This new standard is not anticipated to
have a material impact on the Company's financial position and results of
operations.
The Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," on
December 3, 1999. SAB No. 101, as amended, provides the SEC Staff's views on
selected revenue recognition issues and is effective no later than the fourth
fiscal quarter for years beginning after December 15, 1999, which for the
Company is the beginning of its fourth quarter of fiscal year 2001. The Company
has not completed the process of evaluating the impact that will result from
adopting SAB No. 101 and therefore, is unable to determine the impact that the
adoption will have on its financial position and results of operations.
RECLASSIFICATION
Where appropriate, prior years' financial information has been reclassified
to conform with the current years' presentation. The statements of cash flows
are prepared using the indirect method, which represents a reclassification of
the prior years' presentation using the direct method.
F-10
11
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2: INVESTMENTS
The amortized cost and approximate fair values of held-to-maturity
securities at June 30, 1998 and 1999 are included in the following table. Fair
market values of these securities did not differ significantly from amortized
cost due to the nature of the securities and minor interest rate fluctuations
during the periods.
1998 1999
------ ------
(IN THOUSANDS)
U.S. treasury notes......................................... $3,101 $6,583
Accrued interest............................................ 128 119
------ ------
Total.................................................. $3,229 $6,702
====== ======
NOTE 3: FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values for held-to-maturity securities are based on quoted market
prices (See Note 2). For all other financial instruments, including amounts
receivable and payable, short-term borrowings and long-term debt, fair values
approximate carrying value, based on the short-term nature of the assets and
liabilities and the variability of the interest rates on the borrowings.
NOTE 4: PROPERTY AND EQUIPMENT
The classification of property and equipment, together with their estimated
useful lives is as follows:
JUNE 30,
------------------ ESTIMATED
1998 1999 USEFUL LIFE
------- ------- -----------
(IN THOUSANDS)
Land........................................................ $ 830 $ 2,830
Land improvements........................................... 708 1,154 5-20 years
Buildings................................................... 5,624 16,444 25-30 years
Equipment and furniture..................................... 24,334 34,809 5-8 years
Aircraft.................................................... 10,565 18,957 8-10 years
Construction in process..................................... 2,554 11,174
------- -------
44,615 85,368
Less accumulated depreciation............................... 13,123 19,176
------- -------
Property and equipment, net................................. $31,492 $66,192
======= =======
NOTE 5: OTHER ASSETS
Following is an analysis of intangible assets:
YEAR ENDED JUNE 30,
-----------------------
1998 1999
------- -------
(IN THOUSANDS)
Balance, beginning of year.................................. $15,469 $15,272
Intangible assets........................................... 1,339 11,999
Amortization................................................ (1,536) (2,090)
------- -------
Balance, end of year........................................ $15,272 $25,181
======= =======
F-11
12
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Computer software includes the unamortized cost of software products
developed or acquired by the Company which were required to be capitalized by
generally accepted accounting principles. The costs are amortized over an
estimated economic benefit period, generally five years. Following is an
analysis of the computer software costs:
YEAR ENDED JUNE 30,
---------------------
1998 1999
------ ------
(IN THOUSANDS)
Balance, beginning of year.................................. $3,071 $2,838
Software development costs capitalized...................... 281 515
Software acquired........................................... -- 352
Amortization................................................ (514) (690)
------ ------
Balance, end of year........................................ $2,838 $3,015
====== ======
NOTE 6: LINES OF CREDIT AND LONG-TERM DEBT
LINES OF CREDIT
The Company has an $8,000,000 line of credit at June 30, 1999, which is
payable upon demand or at March 15, 2000, and is secured by $1,000,000 of
investments with the remainder unsecured. Borrowings under the line bear
interest at a floating prime rate (7.75% at June 30, 1999). The Company also had
a similar line of credit at June 30, 1998. There were no amounts outstanding
under the line at June 30, 1999, or 1998. Utilization of the line was minimal
during each of the last three fiscal years.
Sys-Tech has a line of credit with a maximum loan amount of $400,000,
bearing interest at the lender's prime rate plus one-half (10.0% at June 30,
1999). Amounts outstanding are $400,000 and $399,000 as of June 30, 1998 and
1999, respectively. The line is payable on demand or at August 20, 2000 and is
secured by the accounts receivable and other current assets of Sys-Tech.
LONG-TERM DEBT
Sys-Tech has a note payable with an original loan amount of $400,000,
bearing interest at 10%, payable monthly, due August 4, 2001. The note is
secured by specific real estate.
YEAR ENDED JUNE 30,
-------------------
1998 1999
---- ----
(IN THOUSANDS)
Long-Term Debt.............................................. $254 $227
Less current maturities..................................... 15 16
---- ----
$239 $211
==== ====
Future maturities of long-term debt as of June 30, 1999 is as follows:
2000........................................................ $ 16
2001........................................................ 18
2002........................................................ 193
----
$227
====
F-12
13
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7: INCOME TAXES
The provision for income taxes on income from continuing operations
consists of the following:
YEAR ENDED JUNE 30,
---------------------------------
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
Current:
Federal................................................... $ 8,954 $12,044 $16,860
State..................................................... 909 1,170 1,806
Deferred:
Federal................................................... 297 431 204
State..................................................... 25 47 17
------- ------- -------
$10,185 $13,692 $18,887
======= ======= =======
Effective Rate.............................................. 36% 36% 37%
======= ======= =======
The tax effects of temporary differences related to deferred taxes shown on
the balance sheets were:
YEAR ENDED JUNE 30,
--------------------
1998 1999
-------- --------
(IN THOUSANDS)
Deferred Tax Assets:
Carryforwards (operating losses, capital losses, credits,
etc.).................................................. $ 68 $ 347
Expense reserves (bad debts, insurance, franchise tax,
vacation, etc.)........................................ 588 624
Intangible assets......................................... 535 1,236
------- -------
1,191 2,207
Deferred Tax Liabilities:
Excess tax depreciation................................... (2,998) (4,104)
Excess tax amortization................................... (526) (674)
Other, net................................................ (32) (15)
------- -------
(3,556) (4,793)
------- -------
Net deferred tax liability.................................. $(2,365) $(2,586)
======= =======
The following analysis reconciles the statutory federal income tax rate to
the effective income tax rates reflected above:
YEAR ENDED JUNE 30,
------------------------
1997 1998 1999
---- ---- ----
Computed "expected" tax expense (benefit)................... 35% 35% 35%
Increase (Reduction) in Taxes Resulting From:
State income taxes, net of federal income tax benefits.... 3 3 3
Research & Development Credit............................. (1) (1) --
Other..................................................... (1) (1) (1)
-- --- ---
36% 36% 37%
== === ===
Net operating less carryforwards of $847,000 (from acquisitions) and
capital loss carryforwards of $57,000 expire through the year 2014.
F-13
14
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8: INDUSTRY AND SUPPLIER CONCENTRATIONS
The Company sells its products to banks and financial institutions
throughout the United States and generally does not require collateral. Adequate
reserves (which are insignificant at June 30, 1999, and 1998) are maintained for
potential credit losses.
In addition, the Company purchases most of its computer equipment
(hardware) and related maintenance for resale in relation to installation of JHA
software systems from one supplier. There are a limited number of hardware
suppliers for these required materials.
NOTE 9: STOCK OPTION PLANS
The Company has two stock option plans: the 1996 Stock Option Plan ("1996
SOP") and the Non-Qualified Stock Option Plan ("NSOP").
The 1996 SOP was adopted by the Company October 29, 1996, for its
employees. This plan replaced the terminating 1987 SOP. Terms of the options are
determined by the Compensation Committee of the Board of Directors when granted
and for options outstanding include vesting periods up to 2 1/2 years. Shares of
common stock are reserved for issuance under this plan at the time of each grant
which must be at or above fair market value at the grant date. The options
terminate upon termination of employment, three months after retirement, one
year after death or ten years after grant. As of June 30, 1999, there were
2,264,000 shares available for future grants under the plan from the original
5,500,000 shares approved by the stockholders.
The NSOP was adopted by the Company on October 31, 1995, for its outside
directors. Options are exercisable beginning six months after grant at a price
equal to 100% of the fair market value of the stock at the grant date. The
options terminate when director status ends, upon surrender of the option or ten
years after grant. A total of 600,000 shares of common stock have been reserved
for issuance under this plan with a maximum of 150,000 for each director.
A summary of the activity of all of the Company's stock option plans is:
YEAR ENDED JUNE 30,
------------------------------------
1997 1998 1999
---------- --------- ---------
Options outstanding, beginning of year:.................... 2,913,602 3,120,260 4,322,184
Options granted............................................ 189,500 1,434,854 694,774
Options exercised.......................................... (1,320,450) (208,930) (645,778)
Options forfeited.......................................... (15,000) (24,000) (32,800)
Increase in options outstanding due to 50% stock
dividend................................................. 1,352,608 -- --
---------- --------- ---------
Options outstanding, end of year:.......................... 3,120,260 4,322,184 4,338,380
========== ========= =========
Currently exercisable...................................... 2,995,262 3,038,268 3,322,406
========== ========= =========
Weighted-average exercise price for options outstanding.... $ 5.494 $ 8.324 $ 10.791
========== ========= =========
Weighted-average exercise price for options granted........ $ 10.928 $ 12.547 $ 21.306
========== ========= =========
Weighted-average exercise price for options exercised...... $ 2.526 $ 6.072 $ .187
========== ========= =========
Weighted-average fair value of options granted............. $ 2.888 $ 4.934 $ 9.608
========== ========= =========
F-14
15
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is an analysis of stock options outstanding (O) and exercisable
(E) as of June 30, 1999:
WEIGHTED-AVERAGE
REMAINING CONTRACTUAL WEIGHTED-AVERAGE
SHARES LIFE IN YEARS EXERCISE PRICE
---------------------- --------------------- ----------------
RANGE OF EXERCISE PRICES O E O O E
------------------------ --------- --------- --------------------- ------ ------
$2 to 5.............................. 794,598 794,598 4.61 $ 2.90 $ 2.90
6 to 9............................... 1,205,640 1,205,640 6.47 7.56 7.56
10 to 12............................. 1,281,568 763,968 8.28 11.94 11.86
13 to 19............................. 486,840 219,240 8.89 15.43 14.00
19 to 28............................. 569,734 338,960 9.32 22.11 22.14
--------- --------- ---- ------ ------
$2 to 28............................. 4,338,380 3,322,406 7.31 $10.79 $ 9.35
========= ========= ==== ====== ======
OPTIONS
FORFEITED:
RANGE OF WEIGHTED-AVERAGE
FISCAL YEAR EXERCISE PRICE SHARES EXERCISE PRICE
----------- -------------- ------ ----------------
1997..................................................... $ 6 to 9 15,000 $ 8.96
--------- ------ ------
1998..................................................... $12 to 13 24,000 $12.07
--------- ------ ------
1999..................................................... $12 to 22 32,800 $18.71
--------- ------ ------
As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company has elected to continue to follow Accounting Principles Board
("APB") No. 25 "Accounting for Stock Issued to Employees," in accounting for
stock-based awards to employees. Under APB No. 25, the Company generally
recognizes no compensation expense with respect to such awards, since the
exercise price of the stock options awarded are equal to the fair market value
of the underlying security on the grant date.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 for awards granted after December 31, 1994, as if the
Company had accounted for its stock-based awards to employees under the fair
value method of SFAS No. 123. The fair value of the Company's stock-based awards
to employees was estimated as of the date of the grant using a Black-Scholes
option pricing model.
The Company's pro forma information for continuing operations follows:
YEAR ENDED JUNE 30,
-----------------------------
1997 1998 1999
------- ------- -------
(In thousands, except per share data)
Net income.................................. As reported..... $18,492 $24,205 $32,726
======= ======= =======
Pro forma....... $18,261 $22,150 $27,453
======= ======= =======
Diluted earnings per share.................. As reported..... $ .46 $ .58 $ .77
======= ======= =======
Pro forma....... $ .45 $ .53 $ .64
======= ======= =======
Basic earnings per share.................... As reported..... $ .49 $ .61 $ .81
======= ======= =======
Pro forma....... $ .48 $ .56 $ .68
======= ======= =======
Assumptions:
Expected life (years)..................... 2.16 2.16 2.97
Volatility................................ 40% 40% 56%
Risk free interest rate................... 5.9% 6.1% 5.0%
Dividend yield............................ .35% .35% .35%
F-15
16
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10: EMPLOYEE BENEFIT PLANS
STOCK PURCHASE PLAN -- The Company established an employee stock purchase
plan on January 1, 1996. The plan allows the majority of employees the
opportunity to directly purchase shares of the Company. Purchase prices for all
participants are based on the closing bid price on the last business day of each
month.
401(K) EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP") -- The Company has a 401(k)
Employee Stock Ownership Plan (the "Plan") covering substantially all employees
of the Company and its subsidiaries. As of July 1, 1987, the plan was amended
and restated to include most of the existing ESOP provisions and to add salary
reduction contributions allowed under Section 401(k) of the Internal Revenue
Code and to require employer matching contributions. The Company matches 100% of
employee contributions up to 5% of compensation subject to a maximum of $5,000.
The Company has the option of making a discretionary contribution to the Plan,
however, none has been made for any of the three most recent fiscal years. The
Company assumed responsibility for the Peerless Employee 401(k) Plan as of
acquisition date (see Note 12), and will merge it into the Plan as of December
31, 1999. The total expense related to the Plans was $723,000, $952,000, and
$1,321,000 for 1997, 1998, and 1999, respectively.
NOTE 11: DISCONTINUED OPERATIONS
In the last quarter of 1996, the Company discontinued the operations of its
BankVision Software, Ltd. subsidiary ("BankVision") which it planned to sell by
December 31, 1996. The estimated loss on disposal recorded in 1996 consisted of
the following:
Estimated loss on sale, net of applicable income tax
benefit................................................... $2,390,000
Operating losses from April 1, 1996, through June 30, 1996,
net of income tax benefit of $78,000...................... 130,000
Estimated operating losses from July 1, 1996, to anticipated
disposal date, net of income tax benefit of $38,000....... 100,000
----------
$2,620,000
==========
The planned sale of BankVision was not concluded as of June 30, 1999. Thus,
additional losses of $450,000, $668,000 and $758,000 were reported for the
discontinued BankVision unit for the years ended June 30, 1997, 1998 and 1999,
respectively. Several issues which were raised during negotiations for the sale
of BankVision caused a delay in the Company's plan for disposing of this
subsidiary. These issues have now been addressed. The Company is currently
honoring commitments to existing customers and anticipates final resolution
regarding its discontinued operations by January 31, 2000. The Company has
notified customers that maintenance contracts will not be renewed upon normal
expiration. (See Note 13).
NOTE 12: BUSINESS ACQUISITIONS
POOLING OF INTERESTS TRANSACTIONS
The Company acquired all the outstanding shares of Peerless on December 16,
1998, for approximately $36,000,000 (1,654,000 shares) in Company stock.
The Company acquired all the outstanding shares of Financial Software
Systems, Inc. on September 2, 1997, for $600,000 in Company stock.
The Company acquired all the outstanding shares of G. G. Pulley &
Associates, Inc. on July 1, 1997, for $5,000,000 in Company stock.
F-16
17
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company acquired all the outstanding shares of Liberty Banking
Services, Inc. on September 1, 1996, for $2,000,000 in Company stock.
Prior years' consolidated financial statements have been restated for the
effect of the pooling transactions. The following table presents a
reconciliation of revenue and net income previously reported by the Company and
Peerless to those presented in the accompanying consolidated financial
statements. (See Note 13 for the impact of the Sys-Tech pooling).
THREE MONTHS ENDED
FISCAL 1997 FISCAL 1998 SEPTEMBER 30, 1998
----------- ----------- ------------------
(In thousands) (UNAUDITED)
Revenues:
JHA................................................. $ 82,600 $113,423 $40,728
Peerless............................................ 38,151 29,124 8,921
-------- -------- -------
Combined............................................ $120,751 $142,547 $49,649
======== ======== =======
Net Income JHA........................................ $ 15,305 $ 21,569 $ 8,296
Peerless............................................ 2,514 1,713 497
-------- -------- -------
Combined............................................ $ 17,819 $ 23,282 $ 8,793
======== ======== =======
PURCHASE TRANSACTIONS
On November 25, 1998, the Company acquired all the outstanding shares of
Digital Data Services, Inc. common stock for $2,750,000 in cash.
On July 1, 1998, the Company acquired all the outstanding shares of Hewlett
Computer Services, Inc. common stock for $2,250,000 in cash.
On December 12, 1997, the Company acquired all the outstanding shares of
Vertex, Inc. common stock for $1,905,000 in Company stock and $1,095,000 in
cash.
The consolidated operations of the Company include the operations of the
acquirees from their acquisition dates for acquisitions accounted for as
purchases. Pro Forma information for acquisitions accounted for as purchases is
not presented as the impact was not material.
NOTE 13: SUBSEQUENT EVENTS
SALE OF SUBSIDIARY
On September 7, 1999, the Company completed the sale of its BankVision
subsidiary (see discontinued operations, Note 11) for $1,000,000. Under the
terms of the agreement, the purchaser, made a $500,000 down payment and executed
promissory notes to pay $250,000 (plus interest) in each of the next two years.
The net assets of the subsidiary, as of that date, approximately equal the sales
proceeds, and as a result, the Company expects the transaction to have minimal
effect on its financial results for fiscal year 2000.
OPEN SYSTEM GROUP ACQUISITION
On September 8, 1999, the Company's wholly-owned subsidiary Open System
Group, Inc. ("OSG"), completed the acquisition of BancTec, Inc.'s community
banking business, providing software, account processing capabilities and data
center operations to over 800 community banks throughout the United States and
the Caribbean. Revenues from these acquired community banking operations total
approximately $17,000,000 and $43,000,000 for the six months ended June 30, 1999
and calendar 1998,
F-17
18
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. The total value of the transaction was approximately $56,136,000,
of which $50,000,000 was in cash, the assumption of approximately $5,475,000
liabilities and $661,000 in transaction costs. The purchase price was paid with
approximately $25,000,000 cash from operations and $25,000,000 proceeds from a
line of credit with a commercial lender. The line of credit provides for
advances of up to $40,000,000, bears interest at variable LIBOR-Based Rates
(5.98% as of September 7, 1999) and is due September 7, 2000.
NOTE 14: SYS-TECH, INC. ACQUISITION
On June 1, 2000, the Company acquired all the outstanding shares of
Sys-Tech for approximately $16,000,000 (417,000 shares) in Company stock.
Prior years' consolidated financial statements have been restated for the
effect of this pooling transaction. The following table presents a
reconciliation of revenue and net income previously reported by the Company, as
restated for the Peerless transaction, and Sys-Tech to those presented in the
accompanying consolidated financial statements.
FISCAL 1997 FISCAL 1998 FISCAL 1999
----------- ----------- -----------
(In Thousands)
Revenues:
JHA.......................................... $120,751 $142,547 $184,504
Sys-Tech..................................... 5,505 5,688 9,023
-------- -------- --------
Combined..................................... $126,256 $148,235 $193,527
======== ======== ========
Net Income:
JHA.......................................... $ 17,819 $ 23,282 $ 31,768
Sys-Tech..................................... 223 255 200
-------- -------- --------
Combined..................................... $ 18,042 $ 23,537 $ 31,968
======== ======== ========
NOTE 15: ADDITIONAL SUBSEQUENT EVENTS (UNAUDITED)
With respect to the OSG acquisition discussed in Note 13, the Company
allocated the purchase price to the assets and liabilities acquired based on
their estimated fair values at the acquisition date, resulting in allocations of
$39,000,000, $5,315,000 and $1,000,000 to acquired customer relationships,
goodwill and acquired software, respectively. The customer contracts, goodwill
and software will be amortized on a straight-line basis over 20, 20 and 10 years
respectively.
On April 1, 2000, the Company acquired all the outstanding shares of
BancData Solutions, Inc. ("BDS"), for $5,000,000 in cash. BDS is a provider of a
variety of service bureau options to community banks, primarily in southern
California. Systems are AS/400 based and are already using the JHA core
application system. The excess purchase price over the fair value of net assets
acquired of $3,963,000 was allocated to customers and is being amortized on a
straight-line basis over 20 years.
On June 7, 2000, the Company completed the acquisition of Symitar Systems,
Inc. ("Symitar"), a provider of in-house data processing solutions for credit
unions. Symitar provides 237 credit unions throughout the United States with its
comprehensive line of software and services that run on the IBM RS/6000.
Revenues from these operations totaled approximately $33,000,000 and $36,000,000
for years ended December 31, 1999 and 1998, respectively. The purchase price of
$44,000,000 in cash was paid with proceeds from a line of credit with a
commercial lender. The line of credit which originally provided for advances of
up to $40,000,000 and was due September 7, 2000, was renewed and increased to
provide for
F-18
19
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
advances of up to $75,000,000, bears interest at variable LIBOR-Based Rates
(7.63% as of June 7, 2000) and is due June 15, 2001.
The purchase price for Symitar was preliminarily allocated to the assets
and liabilities acquired based on their estimated fair values at the acquisition
date, pending final determination of the fair value of certain acquired
intangible assets. The preliminary allocation has resulted in acquired customers
of approximately $41,300,000 and acquired software of $2,000,000 which will be
amortized on a straight-line basis over 20 years and 10 years, respectively.
The three acquisitions discussed above were accounted for using the
purchase method. Accordingly, the accompanying consolidated statements of income
do not include any revenues and expenses related to these acquisitions prior to
their respective closing dates.
The following unaudited proforma condensed information is presented as if
the OSG and Symitar acquisitions had occurred at the beginning of the earliest
period presented. The pro forma results for BDS were not included as amounts are
not material.
YEAR ENDED
JUNE 30,
--------------------
1998 1999
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenues............................................ $212,200 $274,682
Income from continuing operations................... 21,524 33,205
Net income.......................................... 20,856 32,447
Diluted Earnings Per Share:
Income from continuing operations................. .52 .78
Net income........................................ $ .50 $ .76
These unaudited pro forma results have been prepared for comparative
purposes only and do not necessarily reflect the results of operations which
would have actually resulted had the acquisition occurred as of the beginning of
the earliest period presented, or of future results of operations.
F-19