Jack Henry & Associates, Inc. (JKHY) - Description of business

Company Description
Jack Henry & Associates, Inc. ("JHA" or the "Company") is a leading provider of integrated computer systems providing data processing and management information to banks, credit unions, other financial and non-financial institutions in the United States. The Company was formed in 1976 and made its initial public offering in 1985. Since formation, JHA has grown by developing highly specialized products and services for its financial institution customers, acquiring organizations that complement and add to the infrastructure of the Company, retaining satisfied customers and adding new customers.We offer an integrated suite of data processing system solutions to improve our customers' management of their entire internal/office applications and customer/member interaction processes, as well as specialized data processing solutions to meet specific business needs. We believe our solutions enable our customers to provide better service to their customers and compete more effectively against other banks, credit unions, and alternative financial institutions. Our customers have two options for our completely integrated suites of products and services. Customers can install our comprehensive systems in-house, as we offer data conversion, hardware, and software installation for the implementation of our systems. We will also perform outsourcing services with our entire suite of products and services, from complete internal/office processing to fraud protection, for our customers who prefer not to acquire hardware and software. Outsourcing services are provided through 6 data centers and 23 item-processing centers located across the United States. To ensure proper product performance and reliability, we offer continuing customer service, which provides us with continuing client relationships and recurring revenue.Our gross revenue has grown from $396.7 million in fiscal 2002 to $592.2 million in fiscal 2006, representing a compound annual growth rate over this five-year period of 10%. Net income from continuing operations has grown from $57.1 million in fiscal 2002 to $89.9 million in fiscal 2006, also a compound annual growth rate of 10%. Industry BackgroundAccording to the Automation in Banking 2006 report, United States financial institutions, including commercial banks, thrifts and credit unions, increased spending on hardware, software, services and telecommunications to $50.2 billion in calendar 2005 from $40.7 billion in calendar 2001, representing a compound annual growth rate of 6%. In addition, the report indicated there was an increase in industry spending of 9.5% from December 31, 2004 to December 31, 2005.The Federal Deposit Insurance Corporation ("FDIC") reported there were approximately 9,000 commercial and savings banks in the United States as of December 31, 2005. Consolidation within the banking and savings services industry has resulted in a 2% compound annual decline in the population of commercial and savings banks from calendar years 2001 to 2005. Even with the decline in the population, aggregate assets of these banks increased at an annual compound rate of 8% between calendar year 2001 and 2005. Comparing calendar year 2005 to 2004, new bank and savings charters increased 40% and mergers decreased 2%. Our bank systems and services segment, which represented approximately 80% of our total revenues in fiscal 2006, is primarily commercial banks with less than $30.0 billion in assets, of which there were approximately 8,800 at December 31, 2005, and our specialized, non-core solutions service banks of all asset sizes and charters, including the top 100 banks in the United States and international banks.Our other market segment is credit union systems and services within the United States. The Credit Union National Association reported there were approximately 9,000 credit unions in the United States as of December 31, 2005. This segment represented approximately 20% of our total revenues in fiscal 2006. These are primarily cooperative, not-for-profit financial institutions organized to promote savings and provide credit and services to their members. Although the number of these credit unions has declined at a 3% compound annual rate between calendar year 2001 and 2005, their aggregate assets have increased at a compound annual growth rate of 9% to $694.2 billion at December 31, 2005.Commercial and savings banks and credit unions play an important role in the geographic and demographic communities and with the customers they serve. Typically, customers and members of these financial institutions rely on them because of their ability to provide personalized, relationship-based services while focusing on retail, commercial and business needs. We believe these core strengths will allow our financial institution customers to effectively compete with other banks, credit unions and alternative financial institutions. In order to succeed and to maintain strong customer relationships, we believe these banks and credit unions must: * focus on excellence in delivery to customers/members of their primary products and service offerings; * sell more products and services to existing customers through utilization of customer relationship management ("CRM") products; * deploy products and services that enable customers to conduct their banking transactions through the channel of their choice, such as internet banking and bill payment, electronic account statements, interactive voice response systems and ATM delivery channels; * capitalize on deposit growth opportunities through technological solutions that allow for remote deposit capture at the merchant's place of business; * manage by using products and services that deliver business intelligence assimilated and analyzed on an automated basis; * implement advanced technologies and services, such as enhanced security protection, imaging for all transactions and platform automation; * use advanced technologies in back-office processes to improve operating efficiency and control costs, while increasing service and lowering costs to their customers; * introduce new revenue generating products and services complementing traditional banking services, such as insurance products; and * manage risks by implementing technology that monitors and tracks transactions for fraud and criminal behavior.According to Automation in Banking 2006 and Callahan & Associates 2005 in calendar 2005 approximately 56% of all commercial banks and 65% of all credit unions with assets over $25 million utilized in-house hardware and software systems to perform all of their core systems and data processing functions. Off-site data processing centers provided system services on an outsourced basis for 44% of all banks and 35% of all credit unions. For a number of years, we have been expanding our outsourcing services and capacity to include all of our core and complementary solution products.Internet banking, on-line bill payment, and other services for individuals, plus cash management, Automated Clearing House ("ACH") management and other services for the commercial customers of financial institutions continue to grow rapidly within the industry. Callahan and Associates' 2006 Credit Union Technology Survey respondents indicated that 98% of credit unions already offer internet home banking, 90% offer on-line bill pay, and 85% offer e-statements.According to Callahan & Associates 2006 Credit Union Technology Survey initiated in April 2006 82% of the respondents stated on-line multi-factor authentication or biometrics technology was a spending priority in 2006. Our SolutionsHistorically we have been a single-source provider of a comprehensive and flexible suite of integrated products and services that address the information and security technology, and data processing needs of financial institutions on various hardware platforms and operating systems. With our acquisitions over the last several years we have expanded our business to also provide targeted and specialized solutions that address business problems for financial institutions and diverse corporate entities. Our business derives revenues from three primary sources of revenue: * software licenses; * support and service fees which include implementation services; and * hardware sales, which includes all non-software remarketed products.We develop software applications designed primarily for use on hardware supporting IBM and UNIX/NT operating systems. Our marketed product and service offerings are centered on five core proprietary software applications, each comprising the core data processing and information management functions of a commercial and savings bank or credit union. Any of these core systems can be utilized either through an in-house or outsourced delivery method depending on the financial institution's management style and philosophy. Key functions of each of our core software applications include deposits, loans, general ledger, and customer information file. Our software applications make extensive use of parameters allowing our customers to tailor the software to their needs without needing to customize or program the software. Our software applications are designed to provide maximum flexibility in meeting our customer data processing requirements within a single, integrated system. To complement our core software applications, we offer approximately 100 integrated complementary products and services for use on an in-house or an outsourced basis by financial institutions.The financial services industry today is highly competitive, with new entrants competing for market share of traditional banking services, including the formation of banking affiliates by insurance companies, brokerage firms and even retailers. We believe our integrated solutions provide our customers with tools and strategies to increase revenues, contain costs, and deliver premium customer services. Specifically our integrated products and services enable them to: * Implement Advanced Technologies with Full Functionality. Our comprehensive suites of products and services are designed to meet our customers' information technology needs through custom- tailored solutions using proprietary software products. Our clients can either perform these functions themselves on an in- house basis through the implementation of our software systems or contract with us on an outsourced basis while we perform these daily services for them. * Rapidly Deploy New Products and Services. Once a financial institution has implemented our core software, either in-house or on an outsourced basis, we can quickly and efficiently implement additional applications and functions. This allows our customers to rapidly deploy new products and services for their clients and members while generating new revenue streams. We offer state- of-the-art solutions with the latest technology which allows financial institutions to concentrate on critical business processes while attending to the needs of their customers. Our products include a full suite of ATM management products, a suite of fraud detection and prevention products, a suite of document and check image products, ACH and remote merchant capture and electronic clearing services and a fingerprint authentication solution utilizing biometric security. * Focus on Customer Relationships. Our products and services allow our customers to stay focused on their primary business of gaining, maintaining and expanding their customer relationships while providing the latest technology in financial products and services. * Access Outsourcing Solutions to Improve Operating Efficiency. Customers utilizing our outsourcing solutions benefit from access to all of our products and services without having to maintain personnel to update and run these systems and without having to make large up-front capital expenditures to implement these advanced technologies. * Solve Complex Business Operating Needs. Our customers' businesses have become more complex and carry added regulatory and reporting burdens distinct to financial institutions. Customers using our unique products specifically developed to satisfy niche, complex business issues can contain costs, and have increased levels of accuracy and provide assurance that the customer is in compliance with regulatory requirements. * Manage Risk. We offer a range of solutions that help our customers manage operational risks, including disaster recovery services, biometric security, and software designed to detect and react to fraudulent transactions. Our StrategyOur objective is to grow our revenue and earnings organically, supplemented by strategic acquisitions. The key components of our business strategy are to: * Provide High Quality, Value-Added Products and Services to Our Clients. We compete on the basis of providing our customers with the highest-value products and services in the market. We believe we have achieved a reputation as a premium product and service provider. * Continue to Expand Our Product and Service Offerings. We continually upgrade our core software applications and expand our complementary product and service offerings to respond to technological advances and the changing requirements of our clients. For example, we offer several turn-key solutions that enable financial institutions to rapidly deploy sophisticated and state-of-the-art new products and services. Our integrated solutions enable our customers to offer competitive services relative to larger banks and alternative financial institutions. We intend to continue to expand Internet solutions, security solutions, exception management reporting, document management solutions and other products and services. * Expand Our Existing Customer Relationships. We seek to increase the information technology and security products and services we provide to those customers that do not utilize our full range of products and services. In this way, we are able to increase revenues from current customers with minimal additional sales and marketing expenses. * Extend Our Markets. We now market and sell products and services to virtually any financial institution regardless of what core processing solution is utilized, effectively extending our targeted market for selected complementary products to over 16,000 additional financial institutions in the United States, as well as additional vertical industries. * Adopt Open Integration Standards. We are increasing our utilization of more open integration standards through Service Oriented Architecture and Web Services through our jXchange integration tools enabling increased interoperability between our products and services and those of third parties. * Expand Our Customer Base. We seek to establish long-term relationships with new customers through our sales and marketing efforts and selected acquisitions. As of June 30, 2006, we have over 8,700 customers, an increase of 211% from fiscal 2001 with 2,800 customers. * Build Recurring Revenue. We enter into contracts with customers to provide services that meet their ongoing information technology needs. We offer ongoing software support for our in-house customers. Additionally, we provide data processing for our outsourcing customers and ATM and debit card transaction switching services, both on contracts that typically extend for periods of five to ten years. * Maximize Economies of Scale. We strive to develop and maintain a sufficiently large client base to create economies of scale, enabling us to provide value-priced products and services to our clients while expanding our operating margins. * Attract and Retain Capable Employees. We believe attracting and retaining high-quality employees is essential to our continued growth and success. Our corporate culture focuses on the needs of employees; a strategy which has continued since our inception. Our AcquisitionsTo complement and accelerate our internal growth, we have selectively acquired companies that provide us with one or more of the following: * products and services to complement our existing offerings; * new customers; * entry into new markets within financial services as well as other vertical markets; and/or * additional outsourcing capabilities.When evaluating acquisition opportunities, we focus on companies with highly demanded products and/or services, a strong employee base and management team and excellent customer relationships. Since the start of fiscal 2002, we have completed the following acquisitions: Fiscal Year Company or Product Name Products and Services ---- ----------------------- --------------------- 2006 ProfitStar Asset/Liability Management, Budgeting and Profitability Solutions 2005 Tangent Analytics Business Intelligence Solutions 2005 Stratika Profitability Solutions 2005 Synergy, Inc. Document Imaging 2005 TWS, Inc. ATM Image/ Item Processing 2005 Optinfo, Inc. Enterprise Exception Management 2005 Verinex Technologies Biometric Security Solutions 2005 Select Payment Processing Payment Processing Solutions 2005 Banc Insurance Services Insurance Agency Outsourcing 2004 Call Report Analyzer, Y9 Regulatory Reporting 2004 e-ClassicSystems, Inc. Software products to manage ATM networks 2004 PowerPay.ach, .rck, and .arc Suite of Automated Clearing House products 2004 Yellow Hammer Software, Inc. Fraud Protection for financial institutions 2003 National Bancorp Data Item Processing services Services, LLC 2003 Credit Union Solutions, Inc. Data processing systems and services for smaller credit unions 2002 Transcend Systems Group Customer Relationship Management software and related services 2002 System Legacy Solutions Image data conversion systems Our Products and ServicesChanging technologies, business practices and financial products have resulted in issues of compatibility, scalability and increased complexity for the hardware and software used in many financial institutions. We have responded to these issues by developing a fully integrated suite of products and services consisting of core software systems, hardware, and complementary products and services.We provide our full range of products and services to financial institutions on either an in-house or outsourced basis. For those customers who prefer to purchase systems for their financial institution, we offer to contract to sell computer hardware with the licenses for core and complementary software. We also offer to contract to provide installation, data conversion, training, ongoing support, and other services to assist customers in management of operation efficiencies.We also offer our full suite of software products and services on an outsourced basis to customers who do not wish to maintain, update, and run these systems or to make large up-front capital expenditures to implement these advanced technologies. Our principal outsourcing service is the delivery of mission-critical data processing services using our data centers located within the United States. We provide our outsourcing services through an extensive national data and service center network, comprised of 6 data centers and 23 item-processing centers. We monitor and maintain our network on a seven-day, 24-hour basis. Customers typically pay monthly fees on service contracts of up to 5 years for these services.While it is our goal to provide the full suite of solutions a financial institution may require, we recognize the reality that a number of our clients will wish to deploy some technology solutions provided by other companies. Accordingly, we have developed enhanced integration capabilities with third party solutions. This is particularly important as we continue to expand our presence in the mid-tier banking space, defined as banks ranging from $1.0 to $30.0 billion in assets.Information regarding the classification of our business into separate segments serving the banking and credit union industries is set forth in Note 13 to the Consolidated Financial Statements (see item 8 below). Hardware SystemsOur software operates on a variety of hardware systems. We have entered into remarketing agreements with IBM Corporation, Avnet, Inc. and other hardware providers which allow us to purchase hardware at a discount and sell (remarket) it to our customers. We currently sell the IBM System i ("iSeries"), System p ("pSeries") and xSeries servers; IBM workstations; Dell servers and workstations; NCR, BancTec and Unisys check transports; and a variety of other devices that complement our software solutions.We have a long-term strategic relationship with IBM, dating to the initial design of our first core software applications 30 years ago. In addition to our remarketing agreement with IBM, which we regularly renew, we have been named a "Premier Business Partner'' of IBM for the last fourteen consecutive years. Our relationship with IBM provides us with a substantial and ongoing source of revenue.Biometrics is one of the latest technologies in security for financial and non-financial institutions. We offer a fingerprint scanner along with flexible, state-of-the-art software components which provide the framework for the complete suite of applications.In continuing our belief of being a 'complete solution', we also offer a full line of financial institution forms required for day-to-day operations, year-end tax forms, plus office and operating supplies for their equipment. Core Software ApplicationsEach of our core software systems consists of several fully-integrated application modules, such as deposits, loans, general ledger, and the customer information file, which is a centralized file containing customer data for all applications. While our core software is fully functional off the shelf, we can custom-tailor these modules utilizing parameters determined by our customers. The applications can be connected to a wide variety of peripheral hardware devices used in financial institutions' operations. Our software is designed to provide maximum flexibility in meeting our customers' data processing requirements within a single system to minimize data entry and improve operational efficiencies.For a customer who chooses to acquire in-house capabilities, we generally license our core system under a standard license agreement, which provides the customer with a fully paid, nonexclusive, nontransferable right to use the software on a single computer and at a single location. The same core software system can be delivered on an outsourced basis as well.Our core software applications are differentiated broadly by customer size, scalability, functionality, customer competitive environment and, to a lesser extent, cost. Our core applications include: Bank Systems and Services Segment * Silverlake System[R] operates on the IBM System iSeries processing platform and is used primarily by banks with total assets ranging from $500 million to $30.0 billion; however, banks of smaller size, including progressive de novo banks, are also selecting Silverlake Systems; * CIF 20/20[R] operates on the IBM System iSeries processing platform and is primarily used by and targeted to banks ranging from de novo up to $1.0 billion in assets; * Core Director[R] operates on the Windows Server-based platform employing client/server technology and is primarily used by and targeted to banks ranging from de novo up to $1.0 billion in assets. Credit Union Systems and Services Segment * Episys[R] operates on the IBM System pSeries processing platform with a UNIX/NT operating system and is used primarily by credit unions with total assets greater than $50.0 million. According to Callahan and Associates 2006 Credit Union Directory, our Episys[R] core product is the most widely installed data processing solution among credit unions with assets exceeding $25.0 million in the United States. * Cruise[R] operates on the IBM xSeries platform, utilizing Microsoft SQL Server with a 100% Windows[R] interface, allowing all data available with 'point and click' simplicity. Cruise is used primarily by credit unions with total assets under $50.0 million. Complementary Products and ServicesIn years past our strategy has been focused on two fronts; acquiring new core banking and credit union clients, and selling additional complementary products and services to those banks and credit unions that were using our core solutions. We did not generally offer our complementary products and services to banks or credit unions that were not using one of our core processing solutions. With our acquisitions in recent years, we are now marketing and selling selected complementary products and solutions through our ProfitStars brand to banks and credit unions regardless of which core processing solution the financial institutions are using. Thus, we now have essentially two categories of complementary products: 1) those that we offer only to those banks or credit unions that use one of our core processing solutions, and 2) those that we offer to any financial institution regardless of core provider.We offer the banks and credit unions using Jack Henry core processing systems approximately 100 complementary products or services. We have also acquired a number of complementary products and services that are marketed and sold through our ProfitStars brand to diverse financial institutions and other businesses that do not have Jack Henry core processing systems. These products and services have been developed and designed to assist banks, credit unions, and other businesses accomplish specific business strategies. Our complementary products and services are categorized into product families by particular business strategy needs. Some of the product families and a sample of some of the solutions offered within each family are as follows: Business Intelligence * Synapsys[R] is an enterprise-wide relationship management solution for both retail and commercial customers that integrates sales management, customer profiling, automated sales tracking, profitability assessment, lead generation, and referral tracking capabilities. * Synapsys[R] MCIF Wizard is the marketing central information file and data mining solution that empowers customers to develop highly targeted marketing and cross-selling campaigns and automatically track the results. * Intelligence Warehouse / Intelligence Manager is a business intelligence and analytics solution for our Silverlake customers designed to capture data from any number of sources and store all data in one data warehouse. This Intelligence Warehouse then serves as the foundation for developing business insights, to report on user defined performance and event driven metrics. These insights are delivered to the Intelligence Manager desktop in the form of user defined interactive "dashboards" to give users an "at a glance" view of activities and performance measurements within their financial institution. * ARGOKeys[R] is the ARGO Data Resource Corporation/JHA joint solution for our Silverlake customers that provide branch sales and automation solutions, including a deposit platform, a lending platform with an advanced automated decision module, and a complete CRM solution, all of which are fully integrated with our core and teller systems. * Relationship Profitability Management[TM] provides enterprise profitability solutions for banks and credit unions. RPM provides detailed profitability measurement systems for customized product, account, customer, relationship, branch, regional, and organizational profitability measurements. * PROFITability[R] is the cost accounting analysis system that supports organizational and product profitability analysis. True organizational profitability of a branch, department or region can be easily determined, with the capabilities to review allocated expenses and generate accurate adjusted earnings for each organization. Product profitability is generated by comparing individual products from a post-allocated perspective, which allows banks to accurately determine the profitability of each product and compare it to other products. * PROFITstar ALM/Budgeting is the asset/liability management and budgeting system that provides the robust functionality to perform sophisticated modeling; ad hoc balance sheet and income statements with multiple interest rate scenarios. This system also allows institutions to track "what-if" scenarios with strategic monitors that automatically create audit trails; analyze market risk in response to regulatory requirements and determine the accurate value for FAS107 reporting; and create detailed, summary, and variance budget reports. * Business Analytics[TM] is a Web-based business intelligence framework which integrates enterprise-wide systems to pull information together from many sources and put it into a usable format for strategic decision reporting through the use of a dash board. * eEMS[TM] is an enterprise risk management solution consisting of four integrated modules. nBalance[R] is a real-time, rules-based data reconciliation module. Exception Manager automates the research and resolution of data discrepancies. Case Manager automates the workflow to resolve and repair exceptions. Our Risk and Control Console provides an analytic tool to deliver business intelligence about operational risk. Retail Delivery * InTouch Voice Response[R] is a fully-automated interactive voice response system for 24-hour telephone-based customer account management. * OnTarget[TM] is an integrated deposit platform, lending platform, and teller solution for our Core Director and Banker II customers through a partnering alliance with ARGO. * Streamline Platform Automation[R] is an automated new account origination and documentation preparation solution that integrates new customer data, including signature cards, disclosure statements, and loan applications into the core customer data files on a real-time basis for our iSeries customers. * Vertex Teller Automation System[TM] is an online teller automation system that enables tellers to process transactions more efficiently and with greater accuracy. * Insurance Agency Outsourcing[TM] provides a complete outsourced insurance agency custom-branded for a financial institution. Business Banking * NetTeller[R] Cash Management solution offers commercial banking customers flexibility and online access to their accounts with ACH, wire transfer, reporting and account management capabilities. * Mutual Fund Sweep is a deposit management solution that enables banks to transfer commercial customers' excess deposits into interest bearing overnight mutual fund investments. * Remote Deposit Capture is a web-based image capture, storage and processing solution which enables corporations and merchants to electronically convert paper checks of all types into ACH and/or Check 21 items. * ACH Check Conversion is a web-enabled service that allows businesses to electronically convert paper checks they receive in the mail, lockbox or in a drop box into ACH items. * Point of Purchase Check Conversion ("POP") is a web-enabled software solution that allows a business to electronically convert paper checks received in-person into ACH items. * Represented Check ("RCK") is web-enabled software that allows a financial institution to electronically re-present paper checks that have been returned to their commercial customers for insufficient funds. * Internet Checks ("WEB") is web-enabled software that allows a business to accept paper checks on their Internet website and electronically convert the payments into ACH items. * Telephone Checks ("TEL") is web-enabled software that allows a business to accept paper checks over the telephone and electronically convert the payments into ACH items. * Preauthorized Payment and Deposit ("PPD") is web-enabled software that allows a business to process recurring check payments as ACH items. * Cash Concentration or Disbursement ("CCD") is web-enabled software that allows a business to collect and distribute business to business payments as ACH items. Internet Banking * NetTeller[R] Online Banking[TM] is an Internet-based home banking system that provides secure, real-time account information and transaction capabilities for individual commercial customers. * NetTeller[R] MemberConnect Web[TM] is an Internet-based home banking system that provides secure, real-time account information and transaction capabilities for credit union members. * NetTeller[R] BillPay[TM] is an on-line bill pay solution for financial institutions which allows their customers to make payments to any payee in North America. * DirectLine[R] OFX allows NetTeller[R] customers to offer a direct connect service utilizing personal financial management tools for their customers. * eStatements is a suite of products which include an electronic document generation and delivery system for statements and notices to both bank and credit union customers. Electronic Funds Transfer * ATM Manager Pro[R] is a suite of software modules that provides reporting and operational analysis tools to ATM owners. * PassPort.atm[TM] can drive and monitor all types of lease lines and dial-up ATM's, along with the switch processing services connecting financial institutions to regional and national networks. * PassPort.dc[TM] allows financial institutions to issue, support, and manage signature based Visa[R] Check or MasterMoney[TM] debit cards worldwide. * PassPort.pro[TM] provides for online authorization, driving and monitoring of a financial institution's own network of up to hundreds of ATMs. * ImageCenter ATM is software that automates ATM deposits with image capture and processing, courier tracking and monitoring, fraud detection and prevention, and balancing. Asset Management and Protection * PROFITstar ALM/Budgeting[TM] provides tools that allow institutions to monitor and plan asset/liability exposures and general budgets. Multiple scenarios can be created and compared, with built-in strategic monitors and automated audit trails. * Biodentify[R] is a biometric fingerprint security solution that uses physical biometrics which are unique to every individual. The system provides wizard-based registration, single-touch identification, plus event logging for auditing and regulatory compliance. * Centurion Disaster Recovery[R] provides multi-tiered disaster recovery protection, including comprehensive disaster planning and procedures. * Fraud Detective[TM] is a suite of software modules that enables banks and credit unions to detect and react to suspicious transaction_based fraud. The system also alerts financial institutions of other fraudulent activity, such as money laundering and kiting. * Call Report Analyzer[TM] is Windows-based software designed to allow banks to accurately and efficiently file regulatory reports required by the FDIC. * Call Report Y-9 Report Analyzer[TM] allows banks to electronically file other regulatory reports ("Y-9C, Y-9LP, Y-11S, or Y-9SP") * TimeTrack Payroll System[TM] is an integrated payroll accounting and human resources software system. * Demand Account Reclassification calculates appropriate reserve requirements based upon reclassification opportunities of deposited funds. Item and Document Imaging * 4|sight[TM] item image solution is our new generation of imaging products, which allows our customers to create and store digital check images for inclusion in monthly statements, and facilitate their customer support services. * ImageCenter Check[TM] is a turnkey image-based item processing platform designed for the unique requirements of credit unions. * SuperIMAGE[R] is a check image system that provides enhanced integration, automation, and dependability in item imaging for high-volume environments. * Synergy Intelligent Document Imaging[TM] is a suite of product modules for companies of all sizes for intelligent document imaging by capturing, archiving and retrieval of paper based and electronic documents. * Check 21 solutions are a series of products enabling banks and credit unions to capture, package and send electronic check image cash letters for clearing transit items instead of sending cash letters of the actual physical checks for clearing. * ImageCenter ATM Deposit Management[TM] is software designed to capture images of deposited items at the ATM and route the images to the processing center for image clearing. Professional Services and Education * FormSmart[R] provides day-to-day financial institution operating forms, year-end tax forms and other printing and office supplies. * Intellix[TM] is a consulting service specifically for our bank system and services segment. This service assists customers to fully utilize their core software products by developing workflow processes and re-engineering processes to capitalize on the capabilities provided within our core software. * Know-It-All Education[TM] offers multiple educational classes on our products and services through various formats, including self- paced electronic modules, internet classes with instructors, on- site training, and classes at numerous Jack Henry facilities. * Matrix Network Services[R] provides network design, implement- ation, security and related consulting services to financial institutions. Implementation and TrainingAlthough not a requirement, the majority of our customers contract separately with us for implementation and training services in connection with their purchase of in-house systems. The complete implementation process of a core system typically includes planning, design, data conversion, and testing. At the culmination of this process, one of our implementation teams travels to our customer's facilities to ensure the smooth transfer of data to the new system. Separate charges for implementation fees are billed to our customers on either a fixed fee or hourly charge model depending on the system. Implementation and training services are also provided in connection with new outsourcing customers, and are billed separately at the time of implementation.Both in connection with implementation of new systems and on an ongoing basis, we provide extensive training services and programs related to our products and services. Training is provided in our regional training centers, at meetings and conferences, onsite at our customers' locations, or online with JHA Webex. Training can be customized to meet our customers' requirements. The large majority of our customers acquire training services from us, both to improve their employees' proficiency and productivity and to make full use of the complete functionality of our systems. Generally, training services are paid for on an hourly basis or as an annual subscription, representing blocks of training time that can be used by our customers in a flexible fashion. Support and ServicesFollowing the implementation of our integrated software at a customer site, we provide ongoing software support services to assist our customers in operating the systems. We also offer support services for hardware systems, primarily through our hardware suppliers, providing customers who have contracted for this service with "one-call" system support covering hardware and software applications.Support is provided through a 24-hour telephone service available to our customers seven days a week. Our experienced support staff can resolve most questions and problems quickly. For more complicated issues, our staff, with our customers' permission and assistance, can log on to our customers' systems remotely. We maintain our customers' software largely through releases which contain enhancements and additional features and functionality. Updates are issued also when required by changes in applicable laws and regulations. We provide support services on all of our core systems as well as our complementary software products regardless of whether it is delivered in-house or outsourced.In 2005, we introduced expanded company-wide support tools and capabilities through a suite of customer relationship management products from PeopleSoft which we refer to internally as jSource. jSource provides the ability for customers to utilize the internet to initiate support services, request customization and to track the status of any customer initiated projects online. The system is designed to provide us with comprehensive views of our customers and the ability to view events, sales activity or service- related issues that may transpire with each customer. jSource was initially deployed for customer service and our sales departments and will be expanded into the marketing aspects of our business throughout the next 12 to 18 months.Nearly all of our in-house customers contract for annual support services from us. These services are a significant source of recurring revenue, and are contracted for on an annual basis and are typically priced at approximately 18 to 20% of the particular software product's license fee. These fees generally increase as our customers' asset base increases and as they increase the level of functionality of their system by purchasing additional complementary products. Software support fees are generally billed during June and are paid in advance for the entire fiscal year, with pro-ration for new contracts that start during the year at the time of final conversion. Hardware support fees are also paid in advance for the entire contract period that ranges from one to five years. Most contracts automatically renew annually unless our customer or we give notice of termination at least 60 days prior to expiration. Identical support is provided to our outsourced customers by the same support personnel, but is included as part of their overall monthly fees and therefore not billed separately. Research and DevelopmentWe devote significant effort and expense to develop new software, service products and continually upgrade and enhance our existing offerings. Typically, we upgrade our core software applications and complementary products once per year. We believe our research and development efforts are highly efficient because of the extensive experience of our research and development staff and because our product development is highly customer- driven. Through our regular contact with customers through formalized product Focus Groups, Change Control Boards, structured strategic meetings, at annual user group meetings, sales contacts and our ongoing maintenance services, our customers inform us of the new products and functionalities they desire. Research and development expenses for fiscal 2006, 2005, and 2004 were $31.9 million, $27.7 million, and $23.7 million, respectively. Sales and MarketingOur primary markets consist of commercial banks and credit unions with some products being utilized in other verticals and sold through our sales staff or channel partners.Dedicated sales forces, inside sales teams, and technical sales support teams conduct our sales efforts for our two market segments, and are overseen by regional sales managers. Our dedicated sales executives are responsible for sales activities focused on acquiring new core customers. Our account executives nurture long-term relationships with our client base and cross sell our many complementary products and services. Our inside sales force markets specific complementary products and services to our existing customers. We also have a dedicated sales force responsible for new customers for our acquired businesses targeted outside our core customer base. All sales force personnel have responsibility for a specific territory. The sales support teams write business proposals and contracts and prepare responses to request-for-proposals regarding our software and hardware solutions. All of our sales professionals receive a base salary and performance-based commission compensation.In 2006 we introduced a new branding strategy for many of our recently acquired companies. Today we market our products and solutions under three primary brands: Jack Henry & Associates, Symitar and our newest brand, ProfitStars. Each brand is focused on well defined markets with well defined solutions. Jack Henry & Associates markets and sells core processing solutions and integrated complementary products to US commercial banks with assets up to $30.0 billion. Symitar markets and sells core processing solutions and integrated complementary products to US credit unions. Our newest brand, ProfitStars, markets and sells specialized solutions to US banks and credit unions of all sizes, as well as to international financial institutions and other diverse businesses.With the development of ProfitStars, we have assimilated many of our recent acquisitions into one common brand, creating an opportunity to increase the awareness of this single brand as opposed to promoting each of the acquisitions separately. This also provides us the opportunity to enhance cross sales of additional ProfitStars solutions to existing ProfitStars clients. The ProfitStars solutions can be sold to any bank or credit union regardless of core system, asset size or charter, as well as to our existing Jack Henry & Associates and Symitar clients.Our marketing efforts consist of sponsorship and attendance at trade shows, e-mail newsletters, print media advertisement placements, telemarketing, and national and regional marketing campaigns. We also conduct a number of national user group meetings each year, which enable us to keep in close contact with our customers and demonstrate new products and services to them.We continue to sell and support selected products and solutions in the Caribbean, and now have approximately 40 installations in Europe and South America as a result of our recent acquisitions. Our international sales have accounted for less than 1% of our total revenues in each of the three years ended June 30, 2006, 2005, and 2004. BacklogOur backlog consists of contracted in-house products and services (prior to delivery) and the remaining portion of outsourcing contracts, which are typically for five-year periods, and approximately represents the minimum guaranteed payments over the remainder of the contract period. Our backlog at June 30, 2006 was $66.4 million for in-house products and services and $155.6 million for outsourcing services, with a total backlog of $222.0 million. Of the $155.6 million amount of the backlog for outsourcing service at June 30, 2006, approximately $114.3 million is not expected to be realized during fiscal 2007 due to the long-term nature of many of our outsourcing service contracts. Backlog at June 30, 2005 was $64.0 million for in-house products and services and $135.1 million for outsourcing services, with a total backlog of $199.1 million. Our in-house backlog is subject to seasonal variations and can fluctuate quarterly. Our outsourcing backlog continues to experience solid growth with new contracting activity and as we recognize revenue throughout the coming fiscal year, the backlog is expected to remain constant due to the revenue surpassing the new contracting activity. CompetitionThe market for companies providing technology solutions to financial institutions is competitive, and we expect continued strong competition from both existing competitors and companies entering our existing or future markets. Some of our current competitors have longer operating histories, larger customer bases, and greater financial resources. The principal competitive factors affecting the market for our services include comprehensiveness of the applications, features and functionality, flexibility and ease of use, customer support, references from existing customers and price. We compete with large vendors that offer transaction processing products and services to financial institutions, including Fidelity National Information Services, Inc., Fiserv, Inc., Open Solutions, Inc., and Metavante (a subsidiary of Marshall and Isley Corporation). In addition, we compete with a number of providers that offer one or more specialized products or services. There has been significant consolidation over the last decade among providers of information technology products and services to financial institutions, and we believe this consolidation will continue in the future. Intellectual Property, Patents, and TrademarksAlthough we believe that our success depends upon our technical expertise more than on our proprietary rights, our future success and ability to compete depends in part upon our proprietary technology. We have registered or filed applications for our primary trademarks. Most of our technology is not patented. Instead, we rely on a combination of contractual rights and copyrights, trademarks and trade secrets to establish and protect our proprietary technology. We generally enter into confidentiality agreements with our employees, consultants, resellers, customers, and potential customers. We restrict access to and distribution of our source code and further limit the disclosure and use of other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain or use our products or technology. We cannot be certain that the steps taken by us in this regard will be adequate to prevent misappropriation of our technology, or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology. Government RegulationThe financial services industry is subject to extensive and complex federal and state regulation. Our current and prospective customers, which consist of financial institutions such as community/regional banks and credit unions, operate in markets that are subject to substantial regulatory oversight and supervision. We must ensure our products and services work within the extensive and evolving regulatory requirements applicable to our customers, including but not limited to those under the federal truth-in- lending and truth-in-savings rules, the Privacy of Consumer Financial Information regulations, usury laws, the Equal Credit Opportunity Act, the Fair Housing Act, the Electronic Funds Transfer Act, the Fair Credit Reporting Act, the Bank Secrecy Act, the USA Patriot Act, the Gramm-Leach- Bliley Act, and the Community Reinvestment Act. The compliance of our products and services with these requirements depends on a variety of factors including the particular functionality, the interactive design and the classification of customers, and the manner in which the customer utilizes the system. Our customers must assess and determine what is required of them under these regulations and they contract with us to assist them, through our products and services in meeting their regulatory needs. It is not possible to predict the impact any of these regulations could have on our business in the future.We are not chartered by the Office of the Comptroller of Currency, the Board of Governors of the Federal Reserve System, the National Credit Union Administration or other federal or state agencies that regulate or supervise depository institutions. The services provided by our OutLink Data Centers are subject to examination by the Federal Financial Institution Examination Council regulators under the Bank Service Company Act. On occasion these services are also subject to examination by state banking authorities.We provide outsourced data and item processing through our geographically dispersed OutLink Data Centers, electronic transaction processing through PassPort ATM and Select Payment, Internet banking through NetTeller and MemberConnect online banking, and bank business recovery services through Centurion Disaster Recovery. As a service provider to financial institutions, our operations are governed by the same regulatory requirements as those imposed on financial institutions. We are subject to periodic review by Federal Financial Institution Examination Council regulators who have broad supervisory authority to remedy any shortcomings identified in such reviews. EmployeesAs of June 30, 2006 and 2005, we had 3,310 and 2,989 full time employees, respectively. Of our employees, approximately 660 are employed in the credit union segment of our business, with the remainder employed in the bank business segment or in general and administrative functions that serve both segments. Our employees are not covered by a collective bargaining agreement and there have been no labor-related work stoppages. We consider our relationship with our employees to be good. Available InformationOur internet website is easily accessible to the public at www.jackhenry.com. Our key corporate governance documents and our Code of Conduct addressing matters of business ethics are available in the "Investor Relations" portion of the website, together with archives of press releases and other materials. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other filings and amendments thereto that we make with the U.S. Securities and Exchange Commission (the "SEC") are available free of charge on the website as soon as reasonably practicable after such reports have been filed with or furnished to the SEC. Item 1A. Risk FactorsThe Company's business and the results of its operations are affected by numerous factors and uncertainties, some of which are beyond our control. The following is a description of some of the important risks and uncertainties that may cause the actual results of the Company's operations in future periods to differ from those expected or desired.Changes in the banking and credit union industry could reduce demand for our products. Cyclical fluctuations in economic conditions affect profitability and revenue growth at commercial banks and credit unions. Unfavorable economic conditions negatively affect the spending of banks and credit unions, including spending on computer software and hardware. Such conditions could reduce both our sales to new customers and upgrade/complementary product sales to existing customers.We may not be able to manage growth. We have grown both internally and through acquisitions. Our expansion has and will continue to place significant demands on our administrative, operational, financial and management personnel and systems. We may not be able to enhance and expand our product lines, manage costs, adapt our infrastructure and modify our systems to accommodate future growth.If we fail to adapt our products and services to changes in technology, we could lose existing customers and be unable to attract new business. The markets for our software and hardware products and services are characterized by changing customer requirements and rapid technological changes. These factors and new product introductions by our existing competitors or by new market entrants could reduce the demand for our existing products and services and we may be required to develop or acquire new products and services. Our future success is dependent on our ability to enhance our existing products and services in a timely manner and to develop or acquire new products and services. If we are unable to develop or acquire new products and services as planned, or if we fail to sell our new or enhanced products and services, we may incur unanticipated expenses or fail to achieve anticipated revenues.Security problems could damage our reputation and business. We rely on standard encryption, network and Internet security systems, most of which we license from third parties, to provide the security and authentication necessary to effect secure transmission of data. Computer networks and the Internet are vulnerable to unauthorized access, com