Jack Henry and Associates, Inc.

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Jack Henry and Associates, Inc.

663 Highway 60
PO Box 807
Monett, Missouri 65708
U.S.A.
(417) 235-6652
Fax: (417)235-8406

Public Company
Incorporated: 1977
Employees: 350
Sales: $46.12 million (1995)
Stock Exchanges: NASDAQ
SICs: 7373 Computer Integrated Systems Design

Jack Henry and Associates, Inc. (JHA) is a leading supplier of in-house integrated computer systems for community banks in the United States. While most of JHA’s customers are banks and other financial institutions with assets of less than $2 billion, upgrades to the IBM computers that run JHA’s core software have expanded the company’s potential market to include banks with assets of up to $10 billion. The company’s main products are the CIF 20/20 and the Silverlake System, both of which run on IBM midrange computers. These turnkey systems, which are virtually complete and require little modification, support the core operations of banks and other financial institutions. While banks may access JHA software through service bureaus and facilities management operations, JHA’s marketing strategy is designed to convince banks that it is feasible and more efficient to operate their computer systems themselves. JHA often bundles its software with IBM hardware, and the company is known for its high level of customer service, including maintenance and support.

Starting Up in the 1970s

Through acquisitions and strategic alliances, JHA has improved its position in the banking software industry since it was founded in 1976. That year, John W. “Jack” Henry, Jerry D. Hall, and a third person founded the company as a partnership to develop, market, maintain, and support integrated data processing systems for in-house automation of standard banking and accounting applications in commercial banks and other financial institutions. The company targeted community banks and marketed a bank automation system that used IBM’s System/36 midrange computer. The firm was first incorporated in Missouri in 1977 but remained a private company until 1985. Its headquarters were established in Monett, Missouri, a small city located in the southwest corner of the state.

JHA reincorporated in Delaware on November 12, 1985, making an initial public offering on November 20 of that year. Approximately 1.1 million shares were offered at $6.75 per share, with the company realizing $6.21 per share. Of the shares, 725,000 were sold by the company and 375,000 by selling stockholders. Henry and Hall owned about 60 percent of the outstanding common stock of the company following the public offering. By this time revenues had grown to approximately $12.5 million, up from $5.5 million the year before. The company’s main sources of revenue were software licensing and installation, maintenance and support, and hardware, with hardware sales accounting for most of 1985’s new revenue. JHA had 46 employees, plus 22 employees in its unconsolidated affiliates, at the end of 1985.

Growth and Challenges in the 1980s

In 1986 JHA attempted to expand into financial services, acquiring FinSer Capital Corporation, a securities brokerage operation based in San Antonio. The new acquisition became a wholly owned subsidiary of JHA, but after three unprofitable years, JHA divested it in May 1989, transferring ownership to FinSer’s chairman and CEO, Fred L. Baker, following a 40 percent drop in gross revenues that was attributed to generally poor performance in the industry at that time.

On March 31, 1988, JHA entered into a product development and marketing agreement with Unisys, a Detroit-based supplier of mainframe computers and related equipment. The next day IBM terminated its agreement with JHA. Under the original agreement between JHA and Unisys, JHA software would have been installed on more than 300 of the Unisys A Series computers, which were comparable to IBM System/36 midrange computers. However, the deal with Unisys soured, and JHA filed suit for breach of contract against Unisys a year later, in July 1989. Claiming that Unisys failed to pay approximately $1.7 million due on May 30, JHA sought $13.5 million, an amount that would have been due under the remaining portion of the contract. At the same time it filed the lawsuit, JHA announced that it had reestablished a remarketing agreement with IBM.

Henceforth the company would devote practically all of its efforts to two software systems that ran on IBM hardware: the CIF 20/20, which was designed for community banks with assets of less than $200 million and ran on the IBM System/36 midrange computer; and the Silverlake System, which ran on IBM’s AS/400 system, a higher-grade midrange computer than the System/36, and was designed for mid-sized institutions with $100 million to $2 billion in assets. A new generation of AS/400 computers that was introduced in the early 1990s allowed the Silverlake System to service institutions with assets of up to $10 billion. The software systems were often sold bundled with IBM System/36 or IBM AS/400 systems through the re-marketing agreement with IBM.

In June 1990 JHA announced a promising merger with Peerless Systems, Inc., a bank software company based in Richardson, Texas, with about 250 customers. The merger would have resulted in a banking software vendor with revenues projected at $20 million and about 850 customers, but in July JHA unexpectedly called it off. After four weeks of negotiations, it appeared that it would have taken too long to reach an agreement. One possible problem affecting negotiations may have been JHA’s continuing lawsuit against Unisys.

New Leadership in the 1990s

In August, Colin McAllister quit as CEO at JHA, after serving for two years. Under McAllister, JHA had become embroiled in its lawsuit with Unisys, attempted to diversify into financial services by acquiring FinSer, and failed to consummate a promising merger with Peerless. President Jerry D. Hall immediately assumed the duties of CEO.

In 1990 JHA paid its first dividend, $.28 per share, a practice it has continued to follow. The declaration may have been motivated in part as a move to bolster the stock price, which was trading in the $1.5—$3.5 range that year. The company reported negative income on revenues of $15 million.

The next year, fiscal 1991, saw the beginning of five consecutive years of profitability, with revenues increasing from $20.737 million in 1991 to $46.124 in 1995. Net income grew from $2.181 million in 1991 to $7.978 million in 1995. The stock price began to recover in 1991, trading in the $1.5 to $6.125 range. The number of employees increased by about 20 percent to 110, a trend that would continue for the next several years.

In January 1992 JHA acquired the banking software contracts of Bankers Own Software Systems (BOSS), the first of four acquisitions of bank software system businesses that it would consummate over the next few years. In December it acquired the business operations of Fremont Software, Inc., of Fremont, Indiana. Like JHA, Fremont marketed banking software and was an authorized remarketer of IBM computer equipment to small and medium-sized banks. These acquisitions served to expand JHA’s customer base.

The end of 1992 also saw a favorable out-of-court settlement with Unisys, which agreed to pay $4 million to JHA. JHA was to receive $3.464,000 in cash, with the remaining $536.000 to be paid by eliminating charges against Unisys. JHA announced the settlement income would be added to working capital and that the company was pleased to reach a settlement, noting that a continuing legal battle could have significantly drained its resources.

Finally, in 1992 Michael E. Henry, the son of founder Jack Henry, was named to the board of directors and became vice-president of research and development. He had been with the firm since 1979. Michael R. Wallace also joined the board and was named vice-president of installation services. These two promotions marked the beginning of an orderly management change to a younger generation of executives that would be completed in 1994, when Michael E. Henry became chairman and chief executive officer and Michael R. Wallace, by then president, assumed the additional role of chief operating officer.

JHA continued to seek ways to expand its business in 1993. In January it announced the formation of a marketing alliance with BankVision Software, Ltd., of Durango, Colorado. By August JHA purchased BankVision for $2 million in stock and future payments based on earnings. BankVision added about 35 domestic customers, but its primary focus was to provide software and services for the international banking community.

By the end of 1993 JHA reported that it had software installed at more than 910 banks and financial institutions worldwide. Revenues had reached $32.6 million, net income was up to $6.259 million, and the stock was trading in the $10.25 to $17 range (adjusted). For the first time the number of stockholders had dramatically increased to nearly 2,000, and the company employed some 154 workers.

Company Perspectives:

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.

By 1994 the company had more than 3,000 stockholders, but the stock price was down in the $6.5 to $11.25 range due to flat earnings. JHA bolstered its stock price by increasing the quarterly dividend and reporting an increase in earnings by the end of the calendar year. Revenues were more heavily weighted toward the two most profitable segments, software and service, a trend JHA officials expected to continue.

In mid-1994 JHA acquired CommLink Corp., described in the company’s annual report as “a rapidly growing electronic transactions company that handles automated teller machine (ATM) switching and point-of-sale (POS) technology for both financial and nonfinancial institutions.” JHA paid $2.5 million, plus potential payments based on specific performance targets. CommLink, based in Houston, Texas, would operate as a subsidiary of JHA and be run by Thomas D. McCarlet, its founder, president, and CEO. CommLink had a customer base of approximately 100 customers for its ATM products and services. JHA regarded this as an important complementary service that could be marketed to its existing bank customers, to banks not served by JHA, and also to nonfinancial institutions such as gas stations and casinos that might someday have their own ATM cards.

The CommLink acquisition was followed in September 1995 by the acquisition of Central Interchange (CI), a small ATM provider located in Kansas City, Missouri, for common shares valued at $250.000. CommLink and CI together provided ATM networking products and services to more than 150 customers.

Always looking for new services to market to its established customer base, JHA formed a new division to develop, market, and support its own line of check imaging systems in October of 1994. After JHA developed software that would allow banks to electronically scan and store digitized images of checks that had cleared, the first test site became operable during fiscal 1995, with general release of imaging software expected to occur by December 31, 1996. This was regarded by JHA as a promising future source of revenue and profitability. Recent advances in check imaging technology had made it affordable for community banks. By offering its own imaging product, JHA became the first company to offer such an integrated product to its customers. Banks could access the check images immediately for their customers, and having check imaging capability gave smaller community banks a competitive edge over larger regional banks, many of which did not yet offer check imaging.

In 1995 JHA made several significant deals that further expanded its customer base and added new services that it could market. The first was a “technical services alliance” with Integrated Systems Solutions Corp. (ISSC), a subsidiary of IBM. The deal stemmed from the longstanding relationship between JHA and IBM. JHA had more than 1,000 installations of software on IBM’s AS/400 computer line. Under the agreement, ISSC could use JHA’s Silverlake System in service bureau arrangements, whereby several banks operated out of a single data center, or in facilities management contracts, where IBM installed and maintained a computer system on-site at the bank’s location. Now IBM was able to offer banks with assets in the $500 million to $10 billion range an outsourcing option based on the AS/400, using JHA’s Silverlake software. This represented a new market for JHA software in terms of the size of the banks it could service. The first contract realized from the arrangement with ISSC resulted in a $617,000 contribution to net income in the first quarter of fiscal 1996 for JHA, and JHA expected two or three such contracts per year, not all of them of the same magnitude.

In June 1995 JHA purchased two banking software businesses, significantly increasing its customer base. The first involved the SECTOR business unit of Nationar, located in Dan-bury, Connecticut, with a customer base of 34 customers concentrated in the northeast. Like JHA, SECTOR marketed software to banks. It was a cash transaction in the neighborhood of $883,000, with two possible future payments dependent on customers renewing their contracts with JHA.

The second, and perhaps the most important acquisition in the history of the company, involved Broadway& Seymour’s community banking business, which JHA acquired for approximately $12 million. The transaction price included fees for certain distribution and marketing rights and fees for management services to be provided by B&S during the 12 months following the sale. Of the $12 million, JHA paid $6 million in cash and $6 million in installments through April 1, 1996.

As a result of the acquisition, JHA gained about 340 bank customers in 35 states of the Liberty banking system, thus increasing its customer base by one-third. The new subsidiary was called Liberty Software, Inc., with headquarters in Charlotte, North Carolina, and had approximately 150 employees. The subsidiary also provided revenue from service bureau contracts, disaster recovery, and a forms and supplies business.

In early 1995 JHA announced the restructuring of its unprofitable BankVision subsidiary, which was involved in developing and marketing international banking software. The unit was relocated from Durango, Colorado, to JHA’s corporate headquarters in Monett, Missouri, in June. The division’s president, Raymond L. Walters, was relieved of his duties as a result of the restructuring. JHA officials expected BankVision to negatively impact earnings for the current quarter and possibly the next. The BankVision unit was expected to break even or even become profitable during fiscal year 1996 beginning July 1, 1995.

William M. Caraway, senior vice-president of JHA, was named BankVision’s president. He kept his sales and marketing duties for JHA. According to the company’s annual report, the reorganization “eliminated significant overhead and minimized the loss potential for the BankVision operation.” The reorganization gave JHA better control over its international operations and allowed the company to better focus its international marketing efforts. The company planned to expand BankVision more conservatively, and its major focus would be developing the Latin American market. However, at the end of fiscal 1996, JHA discontinued BankVision, taking a $1.68 million loss.

The Mid-1990s and Beyond

As a result of these acquisitions and reorganizations, 1995 was the best year financially in the history of the company. Revenues increased 20 percent to $46.1 million, and all major revenue categories showed significant gains. As demand for bank software took off, JHA reported a $16.4 million order backlog at the end of fiscal 1995, a 56 percent increase from the previous year’s levels. Forty percent of the increase in order backlog was attributed to the company’s core business, while the balance came from the newly formed Liberty Software subsidiary that was acquired in 1995 from Broadway& Seymour.

American Banker, which tracks JHA and other bank technology stocks, reported that JHA led all bank technology stocks with a 154 percent gain. According to American Banker, bank technology stocks gained an average of 35 percent during 1995, which was comparable to the one-third gains posted in 1995 by the Dow Jones industrial average and Standard& Poor’s index of 500 stocks. During the year JHA stock traded in the $8.75 to $25.50 range.

According to American Banker, analyst Kevin J. Dyches of George K. Baum& Co. attributed JHA’s stock gain to its June acquisition of the community banking software business of Broadway& Seymour Inc. The acquisition resulted in a 33 percent increase in JHA’s customer base, and Dyches was quoted as saying, “At that time their market value was about $150 million, and they bought a company that was one-third their size for $12 million.” The acquisition turned an immediate profit for JHA in the subsequent quarter.

In March 1995 JHA announced plans to develop a home banking software system that would become available through the Internet and online service CompuServe. JHA would develop the new product for Block Financial, owner of CompuServe and a wholly owned subsidiary of H&R Block, Inc., and offer it to its banking clients. The software package would allow a bank’s customers to check account balances, pay bills, and get stock quotes using their personal computers. They would also have access to nonfinancial services as well as tax software from H&R Block through Block Financial’s web site. A final agreement was reached with Block Financial in May 1996.

By March 1996 JHA’s customer base had risen to 1,240 financial institutions. Financially, the company was in excellent condition. Its balance sheet remained debt-free, and the company was able to finance its acquisitions using its sizeable cash reserves and excess cash flow. JHA was poised for exceptional earnings growth from its acquisitions and core business. From 1993 to 1996, it increased its market share from eight to 12 percent of the nation’s banks. According to a Sovereign Equity Management Corporation research analysis, JHA enjoyed several strategic advantages over its competitors. Its flexible software was among the most popular in the industry. It was the leading banking industry reseller of IBM hardware, which had the dominant share of the bank hardware market. Its superior service reputation was based on regular software upgrades, frequent regional and national user meetings, and timely responses to customer calls. And its low-cost operations had led to bigger net margins.