Jack Henry and Associates RCMP Recommendation James Falkoff 12/6/05

RCMP Position  Purchased 200 shares at $36/share on December 10,  After two stock splits, RCMP now owns 800 shares at a cost basis of $9/share.  Current share price: $19.13  13.3% CAGR, vs. 12.0% for the S&P MidCap 400 and -0.7% for the S&P 500.  Constitutes 5.7% of the RCMP portfolio (after AEOS & DELL sales).

Company Overview  Corporate History  Jack Henry and Jerry Hall found Jack Henry & Associates. The company develops software systems for small banks.  JKHY is listed on the NASDAQ.  JKHY sets out on a mission to become a one-stop shop for all the technology needs of small banks. The company begins making acquisitions of complementary technology solutions.  One third of the nation’s small- and mid-size banks rely on Jack Henry solutions. Jack Henry and Jerry Hall still sit on the Board of Directors, as does Mike Henry, Jack’s son.

Company Overview  Business Description:  Provides data processing solutions to small banks and credit unions (assets under $30 billion).  Customers either install systems in-house or outsource their operations to Jack Henry.  3 sources of revenue:  Software licensing  Support and Service  Hardware

Macroeconomic Review  GICS Sector: Information Technology  Sub-industry: Application Software  Neutral industry outlook. Spending expected to accelerate in a few key areas such as security while others experience slower growth.  Commoditization of software industry. Competition from international (Indian, Eastern European) developers.  Peer Group: Accounting and Financial Software  Consolidation: Number of commercial banks has declined by 3% annually over past five years. Credit unions have consolidated at the same rate.  Sarbanes-Oxley compliance a major information technology hurdle and source of IT spending.

Macroeconomic Review  Competition:  Major competitors:  Fiserv Inc.: Closest competitor. Focuses on financial data processing services. (Mkt. Cap $8.5B)  Marshall & Ilsley Corp.: A multibank holding company that offers financial technology services through its Metavante unit. ($10.2B)  Automatic Data Processing Inc. ($27.1B)  First Data Corp. ($31.8B).

Stock Facts  Price: $19.13  52wk Range: $ $21.96  Mkt. Cap: $1.75B  P/E (ttm):  Div & Yield: $0.18 (0.90%)

Stock Market Performance

Business Description  Core Systems  Can be used in-house or outsourced.  Provide core processing functionality: deposits, loans, etc.  5 core systems:  Silverlake System: for banks with $500 million to $30 billion in assets  CIF 20/20: for banks with less than $1 billion in assets  Core Director: for banks with less than $1 billion in assets (Windows-based)  Episys: for credit unions with greater than $50 million in assets  Cruise: for credit unions with less than $50 million in assets

Business Description  Complementary Products (around 100)  Allow the company to offer custom-tailored, integrated suites of software solutions.  Expose the company to high-growth areas, like security, risk management, online bill pay, and electronic funds transfer.  Product offering expanded through acquisitions of small companies providing specialized technology solutions. 17 Acquisitions since the start of FY02.

Business Description  Examples of complementary products  Synapsis: Relationship management (customer profiling, referral tracking, etc.)  NetTeller: Online home banking system with real-time account information and transaction capabilities.  Remote Deposit Capture: Peforms image capture, storage, and processing for paper checks.  PassPort: Drives and monitors ATM networks.  Biodentify: Biometric fingerprint security.  Centurion Disaster Recovery: Disaster recovery protection.

Business Description  Strategy  Expand existing customer relationships to garner more revenue with little marketing expense.  Expand customer base.  Increase sales outside core customer base.  Build recurring revenue through service and outsourcing contracts.  Maximize economies of scale to increase margins.

Recent Trends

 Q1 FY06 Results:  License revenue down 13.5%  Support and Service revenue up 18.8%  Hardware revenue down 1.1%  License margin up to 95.0% from 91.8%  Support and Service margin up to 35.4% from 33.0%  Hardware margin up to 25.8% from 23.9%

Forecasting Assumptions  Support and Service: Fairly constant sales growth on stable margins. Rationale:  Historical stability of performance in this segment.  Management’s emphasis on this segment in conference calls and the 10K’s description of business strategy.  Hardware: Flat sales on declining margins. Rationale:  Falling P and rising Q should offset one another.  Macro trend toward lower margins on computer hardware.

Forecasting Assumptions  License: ???  Historically volatile segment.  Unexpected dropoff in Q1 license revenue.  Management anticipates a ramp-up as the year progresses. Estimates 20% yoy revenue growth.  Unbroken upward trend in license margins.

Volatility of License Segment

2001  Q %  Q %  Q3 77.8%  Q4 21.7% 2004  Q1 7.4%  Q %  Q3 46.9%  Q4 83.0% 2002  Q1 -9.3%  Q2 -6.0%  Q3 -3.9%  Q4 -1.7% 2005  Q1 50.9%  Q2 78.6%  Q3 36.7%  Q4 -9.9% 2003  Q %  Q %  Q %  Q % 2006  Q %

Scenario Analysis

Valuation  Given the established forecasting assumptions for the service and hardware segments, and assuming license margins remain strong for the next few years before slowly tapering off, here are the DCF valuations for three license revenue scenarios. Bad FY06 and FY07 $17.17 Recession $18.99 Tapered Growth $21.53

SWOT Analysis Strengths  Industry knowledge.  Customer relationships.  Provides custom-tailored, integrated solutions. integrated solutions.Weaknesses  Little control over when customers purchase licenses. purchase licenses. Opportunities  Potential to increase market share. share.  Shifting product mix.  Market for complementary products outside base of core products outside base of core systems customers. systems customers.Threats  Integration of acquisitions may fail.  Bank consolidation could lead to cancelled contracts. cancelled contracts.  New competitors always a threat.

Recommendation  Recommendation: Hold  Management is following through on its strategy.  Stock’s price reflects uncertainty in the license segment.  Potential for positive surprises to lift the stock price.