Jack Henry & Associates
Annual Report 2011

Plain-text annual report

FY 11 | A mIssIon sTaTemenT To protect and increase the value of our stockholders’ investment by providing quality products and services to our customers. In accomplishing this we feel it is important to: • • Concentrate our activities on what we know best – information systems and services for financial institutions. Provide outstanding commitment and service to our customers so that the perceived value of our products and services is consistent with the real value. • Maintain a work environment that is personally, professionally, and financially rewarding for our employees. guIdIng prIncIples We have maintained the focused work ethic and ideals established by our co-founders – Jack Henry and Jerry Hall – 35 years ago. The time-tested fundamentals guiding our company are: • • • Do the right thing, Do whatever it takes, and Have fun. Table of Contents Financial Highlights .........................................01 Performance Graph ..........................................18 Shareholders’ Letter .........................................02 Selected Financial Data ....................................19 Jack Henry & Associates, Inc. Overview ............06 Management’s Discussion and Analysis ...........19 Jack Henry Banking Overview ..........................08 Symitar Overview .............................................10 ProfitStars Overview ........................................12 iPay Technologies Overview .............................14 Market for Registrant’s Common Equity ...........17 Quantitative and Qualitative Disclosures about Mark Risk .............................35 Financial Statements and Supplementary Data ........................................36 Quarterly Financial Information .......................63 fInancIal HIgHlIgHT s (In millions except per share) FY 11 | 01 $967 $837 $746 $137 $118 $103 $1.59 $1.38 $1.22 2009 2010 2011 2009 2010 2011 2009 2010 2011 Revenue Net Income Diluted Earnings per share $1,561 $1,506 $1,051 $880 $750 $627 $0.40 $0.36 $0.32 2009 2010 2011 2009 2010 2011 2009 2010 2011 Total Assets StockHolder’s Equity Dividends Declared per share To our sHareHolders, fiscal year 2011 marked our 35th year in business, 25th year as a public company, and another year of company- wide progress and solid financial performance with revenue, earnings, and operating cash flow reaching record highs. our company continued to prosper in a highly competitive and consolidating industry by providing high-quality banking and business solutions and service levels that exceed customer expectations. and we effectively responded to the challenging economy by maintaining our proven business strategy and conservative business principles and performance management. during fiscal year 2011 (ended June 30), total revenue increased to a record $967 million. net income was $137 million or $1.59 per diluted share, as compared to net income of $118 million or $1.38 per diluted share reported in fiscal year 2010. We generated strong cash flow from operating activities of $240 million, return on assets was nine percent, and return on equity was 17 percent. We generated excellent profitability with a 22 percent operating margin. our revenue mix for the year consisted of $53 million in software license fees or six percent of total revenue, $852 million in support and services or 88 percent of total revenue, and $62 million in hardware sales or six percent of total revenue. recurring revenue, which provides the financial stability to support our ongoing growth, was approximately 80 percent in fiscal year 2011, compared to 78 and 75 percent in fiscal years 2010 and 2009, respectively. We expect all three components of our recurring revenue – software maintenance fees, outsourcing services, and electronic payment processing – to continue to increase. Backlog, which consists of contracted sales of products and services that were not delivered by fiscal year-end, reached $359 million, a nine percent increase over the $329 million reported last year. our ability to reduce operating expenses once again positively impacted the year’s financial performance and we continue to evaluate practical near- and long-term opportunities to contain costs. despite our strategic focus on expense reduction, we determined it was appropriate to restore our associates’ salaries – our largest expense – which had been reduced as an alternative to layoffs. staff reductions would have negatively impacted the specialized workforce we need as the economy recovers and product sales and implementations return to historic levels. FY 11 | 03 Jack Prim We also completed the integration of our three most recent acquisitions during the fiscal year. goldleaf financial solutions, Inc., which was acquired in october 2010, was integrated into our profitstars brand. pemco Technologies, which was acquired in october 2010, was rebranded as JHa payment processing solutions™ (pps). ipay Technologies, which was acquired in June 2010, established our fourth primary brand. each of these acquisitions expanded our product and service offering with proven solutions, added loyal customers to our client roster, generated cross-sales opportunities among our respective customer bases, increased our market presence and potential, and diversified our revenue stream. We are pleased with the performance of each of these acquisitions and the increased value that they provide to our customers and shareholders. as we enter a new fiscal year, we will continue to refine our proven business strategy as necessary and maintain our company-wide focus on providing the high quality products and services our diverse customers and prospects need to attract and serve their customers, successfully compete in their markets, control operating costs, and improve operations. We believe we have significant opportunities to continue to grow our business organically, particularly with our electronic payment processing business. our strategic and financial position combined with our customers’ loyalty, our associates’ dedication to our mission, and our shareholders’ commitment to our company give us confidence in our ability to continue to execute in an economic environment that remains challenging and uncertain. Jack Prim, Chief Executive Officer Tony Wormington, President Kevin Williams, Chief Financial Officer & Treasurer TONY WOrmiNGTON kEViN WiLLiamS THIngs You mIgHT noT knoW aBOUT Jack HENrY & aSSOciaTES Jack Henry Banking is the primary technology provider for more than 18 percent of u.s. banks. symitar is the primary technology provider for 10 percent of credit unions. profitstars has client relationships with 60 percent of u.s. banks and 18 percent of credit unions. profitstars has client relationships with 56 of the largest 100 banks, including five of the top 10, and 60 of the largest 100 credit unions, including seven of the top 10. ipay has client relationships with more than 25 percent of u.s. banks and 23 percent of credit unions. outsourcing continued to be the delivery method of choice in fY11: • 70 percent of new core bank clients chose outsourced delivery • 26 existing core bank clients elected to migrate from in-house processing to outsourcing • 40 percent of our core bank client base is now outsourced • 51 percent of our new core credit union clients chose outsourced delivery • 7 existing core credit union clients elected to migrate from in-house processing to outsourcing • 26 percent of our core credit union client base is now outsourced on behalf of our outsourced clients, our five data centers collectively: • Processed 10.5+ million deposit/loan accounts daily • Processed 33+ million checks monthly • Processed 20+ million ATM and debit “on-us” transactions monthly • Processed 15+ million incoming ACH transactions monthly • Generated 2+ million paper statements and 213,000+ electronic statements monthly FY 11 | 05 during the past 20 years as consolidation has reduced the total number of financial institutions by approximately half, Jack Henry & associates has continued to show strong revenue growth. Compound Annual Growth Rate (CAGR) 21% Total Financial Institutions JHA Revenue 28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1 9 9 1 2 9 9 1 3 9 9 1 4 9 9 1 5 9 9 1 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 2 0 0 2 3 0 0 2 4 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 $967,000 $870,000 $820,000 $770,000 $720,000 $670,000 $620,000 $570,000 $520,000 $470,000 $420,000 $370,000 $320,000 $270,000 $220,000 $170,000 $120,000 $70,000 $20,000 Jack HenrY & assocIaTes Jack Henry & associates was founded in 1976 to support community banks with in-house data processing systems. Today, Jack Henry & associates is a financially sound, service-focused company that sells and supports more than 250 products and services that financial institutions of all asset sizes and charters, diverse business outside the financial industry, and other technology providers need to capitalize on business opportunities and solve operational challenges. We deliver our technology-driven products and services through four primary brands: • Jack Henry Banking – Our original business line provides community and mid-tier banks with core and complementary solutions that process financial transactions and automate information management and business processes. • Symitar – Founded in 1985 and acquired by Jack Henry & Associates in 2000, Symitar provides credit unions of all sizes with core and complementary solutions that process financial transactions and automate information management and business processes. • ProfitStars – Founded in 2006 to consistently brand the specialized products and services assembled through our focused diversification acquisition strategy, ProfitStars provides financial services organizations of all asset sizes and charters, and diverse businesses outside the financial industry with highly specialized financial performance, imaging and payments processing, information security and risk management, and retail delivery solutions. • iPay Technologies – Founded in 2001 and acquired by Jack Henry & Associates in 2010, iPay Technologies provides consumer and small business electronic bill payment solutions and person-to-person electronic payment services to community and mid-tier banks, credit unions of all sizes, and other companies that provide information processing and online banking solutions. each brand shares a fundamental commitment to provide high quality business solutions, service levels that consistently exceed customer expectations, full integration of appropriate solutions and practical new technologies, customer-driven enhancements, and integrity-based business relationships. We currently serve more than 11,300 diverse customers. The quality of our solutions, our high service levels, and the fundamental way we do business typically foster long-term and highly referenceable customer relationships, attract prospective customers, and have enabled us to capture substantial market share. our primary competitive advantage is the level of customer service we provide. our support infrastructure and strict service standards provide service levels we believe to be the highest in the markets we serve, resulting in high levels of customer satisfaction and retention. We accurately measure customer satisfaction using comprehensive annual surveys and more than 80,000 random surveys initiated by the service requests we received this year. dedicated surveys are also used to grade specific aspects of our customer experience, including product implementation, education, and consulting services. The results of this year’s surveys once again confirmed that our service quality exceeded our customers’ expectations. our continuous survey process also helps us identify specific opportunities to enhance our support infrastructure and enhance the day-to-day service experience we provide. Through internal product development, disciplined acquisitions, and alliances with companies offering niche solutions that complement our proprietary solutions we regularly introduce new products and services that expand our offering and generate new cross-sales opportunities within and among our four brands. despite the growing complexity of the markets and businesses we serve, the rapid advances in the technologies powering our solutions, and our highly competitive business environment, our consistent business strategy and conservative business principles have enabled us to: FY 11 | 07 • Prosper in our consolidating and competitive industry. • Provide and support an extensive and growing product and service offering. • Earn a large, loyal customer base. • Capture substantial market share. • Maintain a corporate culture that values integrity-based business relationships and recognizes premier customer service as our primary competitive advantage. • Provide rewarding opportunities for our workforce. • Maintain a strong balance sheet. • Produce consistent returns for our stockholders. We believe we are strategically and financially positioned to continue our progress and performance by focusing on six primary growth drivers: • Maintaining our levels of customer satisfaction and retention by delivering high-quality business solutions and exceptional customer service. • Increasing market share with targeted sales efforts. • Expanding our existing customer relationships by cross selling additional products and services. • Introducing new products and services that enhance our customers’ existing technology platforms and leverage advancing technologies. Increasing recurring revenue by optimizing outsourcing opportunities, transaction-based processing fees, and ongoing software • maintenance and support fees. • Pursuing disciplined acquisitions that complement our internal growth, continue our focused diversification, add proven solutions that expand our existing offering, and expand our presence in the markets we serve. Jack Henry & Associates, Inc. Banks Credit Unions iPay Technologies JHA Banking ProfitStars iPay Technologies Symitar Securities Firms Insurance Companies Healthcare Non-Profits Retailers Public Sector Utilities Manufacturing /Processing Jack HenrY BankIng ™ Jack Henry Banking is a leading provider of the core and complementary solutions banks need to process financial transactions, automate business processes, and manage mission-critical information. We now serve as the primary technology partner for approximately 1,500 banks ranging from community banks to multi-billion dollar mid-tier banks and multi-bank holding companies. our nationwide customer base includes more than 20 percent of mid- tier banks with assets ranging from $1 billion to $30 billion. our technology platforms have been selected to replace every major competitive alternative marketed today and enable diverse banks to implement solutions tailored to support their unique operating environments and evolving business strategies. Jack Henry Banking provides: • Three highly scalable, functionally distinct core systems. • More than 100 complementary solutions that enhance our core system functionality and enable banks to respond to unique business opportunities and operational issues. • In-house, outsourced, and hosted delivery alternatives. • State-of-the-art integration. • Connectivity between our core and complementary solutions and third-party products. • Scalable hardware platforms. • Production-proven change management, conversion, and installation service. • The support infrastructure required to serve our customers as a single point of contact, support, and accountability 24/7/365. • Initial and ongoing education. • Professional services. • Regional and national user meetings and educational conferences. • Forms and operating supplies. • Marketing support. • Operational assessments. • Regulatory compliance. DETaiLED iNfOrmaTiON aBOUT Jack HENrY BaNkiNG aND iTS PrODUc T aND SErVicE OffEriNG iS aVaiLaBLE aT WWW.JackHENrYBaNkiNG.cOm. FY 11 | 09 “I have always considered Jack Henry Banking to be more like a partner to our bank rather than just a provider of bank products and services. as an administrator of systems and services, you need a company with people that you can rely on or lean on when making the hard decisions to keep a community bank competing and progressing with technology. Jack Henry Banking has provided us with the tools and opportunities to succeed.”    Randy Miller, Senior Vice President First State Bank of Middlebury Middlebury, Indiana “Jack Henry Banking allows american Business Bank to remain competitive with the larger banks by offering the same types of products and services. Jack Henry continues to acquire businesses which allow our bank to remain on the cutting-edge. Jack Henry Banking provides more of a partnership relationship to our bank rather than just a vendor relationship.” Debbie Dair, Senior Vice President American Business Bank Los Angeles, California “The Bank of southside Virginia purchased its first banking software package from Jack Henry in the early ’80s. since its inception, I have noticed that the company’s philosophy – “do the right Thing, do whatever it Takes, and Have fun” – is believed, enforced, and practiced. Thirty years later, they still provide the quality service standards that the company’s founders, Jack Henry and Jerry Hall, implemented. We value our relationship and commend them for superior products supported by their professional personnel.” Carol C. Chappell, First Vice President and Cashier The Bank of Southside Virginia Carson, Virginia “Jack Henry Banking offers all of the products and services we need and they are fully integrated to the core system, saving time, creating more efficiency in daily operations, and preventing the frustration and costs associated with interfaces. It is a partnership. We have a relationship where we can work together to solve a problem rather than finger point.” Susan W. Barrett, CPA, Senior Vice President & Operations Officer the little bank, Inc. Greenville, North Carolina sYmITar™ symitar is a leading provider of the core and complementary solutions credit unions of all asset sizes need to process financial transactions and automate information management and business processes. symitar is the primary technology partner for more than 700 credit unions, including 58 of the 167 credit unions with assets exceeding $1 billion as of June 30, 2011. Throughout symitar’s 27-year history, its flagship episys® system has maintained a 98 percent customer retention rate which we consider to be a strong endorsement of our product and service quality and business practices. our technology platforms enable diverse credit unions to implement solutions customized to support their dynamic operating environments and business strategies. symitar provides: Three highly scalable, functionally distinct core systems. • Two highly scalable, functionally distinct core systems. • More than 50 complementary solutions and back-office efficiency tools that enhance our core system functionality and enable credit unions to respond to unique business opportunities and operational issues. • In-house, outsourced, and hosted delivery alternatives. • State-of-the-art integration. • Connectivity between our core and complementary solutions and third-party products. • Scalable hardware platforms. • Production-proven change management, conversion, and installation services. • The support infrastructure required to serve our customers as a single point of contact, support, and accountability 24/7/365. • Initial and ongoing education. • Professional services. • Regional and national user meetings and educational conferences. • Forms and operating supplies. • Marketing support. • Operational assessments. • Regulatory compliance. deTaIled InformaTIon aBouT sYmITar and ITs producT and serVIce offerIng Is aVaIlaBle aT WWW.sYmITar.com. FY 11 | 11 “as the result of our conversion to symitar, we were able to improve member service while reducing our member service staff by more than 10 percent. during the years since our conversion, we have found symitar’s software development to be innovative and their customer focus has been excellent. We are very pleased with the results that we have been able to achieve because of our partnership with symitar.” Jim Jordan, Chief Executive Officer Schools Financial Credit Union Sacramento, California “switching to symitar has proved to be one of the best business decisions I’ve made during my almost 30 years in the credit union business. I have dealt with various data processors over the years and I have found symitar to be a leader when staying on the cutting-edge of new technology. Whether I’m dealing with tech support, my rep, or looking for upgrades and new products, I am always dealt with on a personal and professional level.” Rick Williams, President/Chief Executive Officer HealthCare Assoc. FCU Cincinnati, Ohio “symitar’s commitment to customer service and client satisfaction differentiates them from the competition. Their employees are not just committed to performing their duties, they genuinely care about the client’s needs. everyone within the organization has the same level of commitment in meeting customers’ needs and ensuring their satisfaction. This commitment empowers their customers with confidence and provides them with competitive advantages.” Karl Mann, Vice President Information Technology Associated Credit Union Norcross Georgia “symitar’s flexibility allows us to be quicker to market with products, more adaptable to changes in the industry, and gives us an edge over our competition. symitar continues to develop new products and offer new technologies that keep our organization on the leading-edge of financial services. also, symitar’s ease of customization has helped our organization become much more efficient and productive. symitar is an outstanding vendor and partner. They demonstrate integrity in all they do, from their sales presentations, to their contracts, to their installations, and ongoing support.” Marty O’Connell, SVP/CIO 66 Federal Credit Union Bartlesville, Oklahoma profITsTars® The profitstars division of Jack Henry & associates is a leading software, solutions, and technology innovator. It supports financial institutions that range from the largest institutions in the world to the smallest community institutions as well as businesses outside the financial industry. profitstars’ solutions strategically complement its customers’ existing technology platforms with proven financial performance, imaging and payments processing, information security and risk management, and retail delivery solutions. These products and services have been implemented by approximately 12,000 domestic and international customers including the banks and credit unions served by Jack Henry Banking, symitar, and ipay Technologies; 56 of the largest 100 banks; and 60 of the largest 100 credit unions. profitstars’ client roster also includes securities firms, insurance companies, healthcare providers, non-profit organizations, the public sector, utilities, retailers, and manufacturing and processing entities. These specialized solutions, which were assembled through 18 strategic acquisitions, enable its customers to capitalize on specific revenue and growth opportunities, mitigate and control financial and operational risks, and contain operating costs with: • Financial performance solutions. • • Imaging and payment processing solutions. Information security and risk management solutions. • Retail delivery solutions. • In-house, outsourced, and hosted delivery. • Production-proven change management, conversion, and installation. • Hardware. • Initial and ongoing education. • 24/7/365 support. • Regulatory compliance. • Forms and operating supplies. • Marketing support. • National user meetings and educational conferences. • Professional services. We continue to establish strategic partnerships with Independent sales organizations (Isos) and Value added resellers (Vars) that have the expertise to sell select profitstars solutions in new markets and specific segments of our nontraditional markets. These third-party sales initiatives are natural extensions of profitstars’ direct sales initiatives, and are an increasingly important component of the sales model targeting businesses outside the financial industry. deTaIled InformaTIon aBouT profITsTars and ITs producT and serVIce offerIng Is aVaIlaBle aT WWW.profITsTars.com FY 11 | 13 “The decision to do business with a software partner is often driven by software features, but with profitstars, the people behind the product make the difference. They are part of our team in supporting our valuable customer relationships.” Daniel Robbins, Senior Vice President – Director of Retail Support Atlantic Southern Bank Macon, Georgia “These products have helped keep us relevant within our customer base and have ultimately allowed us to continue growing our deposit base and profits. all of the profitstars team members that support us are responsive, professional, knowledgeable, and we enjoy our long-standing relationship with each of them.” Robert Rothrock, Senior Vice President NexBank, SSB Dallas, Texas “relationships mean a lot to us, whether they are with our customers or our vendors. We strive to have strong relationships that enable us to do business smoothly and with ease. profitstars gives that same ‘community’ feel that we look to achieve. They work with us as a partner toward a common goal.” Ellen M. May, IT Manager Cayuga Lake National Bank Union Springs, NY “The companies that JHa has purchased and placed under the profitstars umbrella provide us with the technology to take our customer and profit management to the next level. By utilizing rpm, margin maximizer, and synapsys® we are able to make better pricing decisions based upon the entire customer relationship, not only from a profitability and roe standpoint but also by taking into consideration other pertinent information captured in synapsys. our holding company – Westar Bank Holding company, Inc. – was just named the best performing community bank between $500 million and $5 billion in assets for 2010 and I believe that our profitstars tools contributed to our strong performance.” Anita G. Werner, Vice President/CRM Program Manager Bank of the West El Paso, Texas ipaY TecHnologIes ipay Technologies is a leading provider of consumer and small business electronic bill payment solutions and person-to-person electronic payment services to community and mid-tier banks, credit unions of all sizes, and other technology providers. Through strategic partnerships with more than 50 providers of information processing and online banking solutions, ipay supports more financial institutions with online bill payment solutions than any other provider in the united states. We currently serve more than 3,700 domestic financial institutions, including approximately 40 percent of the community banks and more than half of the credit unions that offer electronic bill payment services. our highly configurable electronic payments platform and turnkey online bill payment solutions, which can be integrated with any online banking platform, include: • Consumer online bill pay. • Small business online bill pay. • Person-to-person payments. • Bill presentment. • Remittance solutions. • Alternative payments. • Account-to-account transfers. • Expedited bill pay. • Online invoicing. • Turnkey implementations and operations. • End-user service and support. deTaIled InformaTIon aBouT ipaY and ITs serVIce offerIng Is aVaIlaBle aT WWW.IpaYTecHnologIes.com. FY 11 | 15 “I have worked with a variety of technology companies in the financial services marketplace. Without hesitation, the staff at ipay and their commitment to the customer experience is unmatched. I continue to be extremely impressed with ipay’s attention to anticipating our needs as a partner. We couldn’t be happier with how our teams and solutions complement one another.” Paul Walker, Vice President, Sales and Marketing Q2 eBanking Austin, Texas “ipay’s technology and customer service is comparable to none. Their customer support and consistent technological advances stay ahead of the competition. The ipay teams are both knowledgeable and professional and it is, and continues to be, an exceptional business. anyone who has had to work with vendors knows the angst to finding the company they can depend on to provide exceptional service and ipay has proven over and over again that it is outstanding in all categories.” Romaine Russo, Assistant Vice President, Electronic Banking QNB Bank Quakertown, Pennsylvania “What differentiates ipay’s technology from the competition? I can say confidently that it is the service. I used to sell products to credit unions and ipay was great to work with. They made the installation and implementation so easy. I began working at alabama Telco credit union in 2006 and when we began looking at bill payment providers I stated, ‘There is only one option – ipay.’” Stanton Davis, Vice President Alabama Telco Credit Union Birmingham, Alabama “ipay has enabled us to offer a bill payment solution to our members that is very easy-to-use and interfaces with our core processor. The customer service has always been exceptional and we consider ipay a valued business partner.” Laura H. Ryll, Executive Vice President/Chief Operating Officer Gwinnett Federal Credit Union Lawrenceville, Georgia MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Company’s common stock is quoted on the NASDAQ Global Select Market (“NASDAQ”), formerly known as the NASDAQ National Market, under the symbol “JKHY”. The following table sets forth, for the periods indicated, the high and low sales price per share of the common stock as reported by NASDAQ. Fourth Quarter Third Quarter Second Quarter First Quarter Fiscal 2011 High $34.17 33.94 29.97 26.30 Low $28.45 28.96 25.35 23.19 Fiscal 2010 High $26.50 24.88 24.75 24.66 Low $22.55 21.01 22.22 19.56 The Company established a practice of paying quarterly dividends at the end of fiscal 1990 and has paid dividends with respect to every quarter since that time. Quarterly dividends per share paid on the common stock for the two most recent fiscal years ended June 30, 2011 and 2010 are as follows: Fiscal 2011 Fiscal 2010 $0.105 0.105 0.095 0.095 Fourth Quarter Third Quarter Second Quarter First Quarter The declaration and payment of any future dividends will continue to be at the discretion of our Board of Directors and will depend upon, among other factors, our earnings, capital requirements, contractual restrictions, and operating and financial condition. The Company does not currently foresee any changes in its dividend practices. $0.095 0.095 0.085 0.085 Information regarding the Company’s equity compensation plans is set forth under the caption “Equity Compensation Plan Information” in the Company’s definitive Proxy Statement and is incorporated herein by reference. On August 19, 2011, there were approximately 42,000 holders of the Company’s common stock. On that same date the last sale price of the common shares as reported on NASDAQ was $25.88 per share. FY 11 | 17 PERFORMANCE GRAPH The following chart presents a comparison for the five-year period ended June 30, 2011, of the market performance of the Company’s common stock with the S & P 500 Index and an index of peer companies selected by the Company: This comparison assumes $100 was invested on June 30, 2006, and assumes reinvestments of dividends. Total returns are calculated according to market capitalization of peer group members at the beginning of each period. Peer companies selected are in the business of providing specialized computer software, hardware and related services to financial institutions and other businesses. Companies in the peer group are Bottomline Technology, Inc., Cerner Corp., DST Systems, Inc., Euronet Worldwide, Inc., Fair Isaac Corp., Fidelity National Financial, Inc., Fiserv, Inc., Online Resources Corp., S1 Corp., SEI Investments Company, Telecommunications Systems, Inc., and Tyler Technologies Corp. SELECTED FINANCIAL DATA (1) Revenue includes license sales, support and service revenues, and hardware sales, less returns and allowances. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the “Selected Financial Data” and the consolidated financial statements and related notes included elsewhere in this report. Overview JHA provides integrated computer systems for in-house and outsourced data processing to commercial banks, credit unions and other financial institutions. We have developed and acquired banking and credit union application software systems that we market, together with compatible computer hardware, to these financial institutions. We also perform data conversion and software implementation services for our systems and provide continuing customer support services after the systems are implemented. For our customers who prefer not to make an up-front capital investment in software and hardware, we provide our full range of products and services on an outsourced basis through our six data centers in five physical locations and six item-processing centers located throughout the United States. We derive revenues from three primary sources:  software license fees;  ongoing outsourcing fees, transaction processing fees, and support and service fees, which include implementation services; and  hardware sales, which include all non-software remarketed products. Over the last five fiscal years, our revenues have grown from $666,467 in fiscal 2007 to $966,897 in fiscal 2011. Income from continuing operations has grown from $105,644 in fiscal 2007 to $137,471 in fiscal 2011. This growth has resulted primarily from internal expansion supplemented by strategic acquisitions, allowing us to develop and acquire new products and services for approximately 11,300 customers who utilize our software systems or services as of June 30, 2011. FY 11 | 19 Our three most recent acquisitions were completed in fiscal 2010. All of these acquisitions were accounted for using the purchase method of accounting and our consolidated financial statements include the results of operations of the acquired companies from their respective acquisition dates. We have two business segments: bank systems and services and credit union systems and services. The respective segments include all related license, support and service, and hardware sales along with the related cost of sales. A detailed discussion of the major components of the results of operations follows. All dollar amounts are in thousands and discussions compare fiscal 2011 to fiscal 2010 and compare fiscal 2010 to fiscal 2009. Results of Operations FISCAL 2011 COMPARED TO FISCAL 2010 In fiscal 2011, revenues increased 16% or $130,311 compared to the prior year due primarily to strong organic growth and the prior year acquisitions of Goldleaf Financial Solutions, Inc. (“GFSI”), PEMCO Technology Services, Inc. (“PTSI”) and iPay Technologies Holding Company, LLC (“iPay”). During fiscal 2011, the Company’s management continued to focus on cost management that, when combined with the growth in revenue, resulted in a 17% increase in net income. Slow recovery from the US financial crisis remains a primary concern as it continues to threaten our customers and our industry. The profits of many financial institutions remain low and this has resulted in some reduction of demand for new products and services. During the past two years, a number of financial institutions have failed or been subject to government intervention. To date, such actions have not materially impacted our revenue or results of operations. In each of the past two years, approximately 1% of all financial institutions in the United States have closed or merged due to regulatory action. We believe that the number of regulatory actions will continue to decline through fiscal 2012, absent a significant downturn in the economy. The increase in bank failures and forced consolidations has been offset to some extent by a general decline in the level of acquisition activity among financial institutions. A consolidation can benefit us when a newly combined institution is processed on our platform, or elects to move to one of our platforms, and can negatively impact us when a competing platform is elected. Consolidations and acquisitions also positively impact our financial results in the short-term due to early termination fees which are generally provided for in multi-year outsourced contracts. These fees are primarily generated when an existing outsourced client is acquired by another financial institution and can vary from period to period based on the number and size of clients that are acquired and how early in the contract term the contract is terminated. We generally do not receive contract termination fees when a financial institution is subject to a government action or from a customer that has selected in-house processing. Despite the difficult economic climate, we remain cautiously optimistic, with increasing portions of our business coming from recurring revenue, increases in backlog and an encouraging sales pipeline. Our customers will continue to face regulatory and operational challenges which our products and services address, and in these times they have an even greater need for some of our solutions that directly address institutional profitability and efficiency. We continue to have a strong balance sheet, access to extensive lines of credit, and an unwavering commitment to superior customer service, and we believe that we are well positioned to address current opportunities as well as those which will arise as the economic recovery strengthens. Our cautious optimism was expressed through our acquisitions of GFSI, PTSI and iPay during fiscal 2010 and these acquisitions, the three largest in our Company’s history, combined with our existing solutions present us with opportunities to extend our customer base and produce returns for our stockholders. REVENUE License Revenue License Percentage of total revenue $ 53,067 6% $ 52,225 6% 2% Year ended June 30, % Change 2011 2010 License revenue represents the sale and delivery of application software systems contracted with us by the customer. We license our proprietary software products under standard license agreements that typically provide the customer with a non-exclusive, non-transferable right to use the software on a single computer and for a single financial institution location. The increase in license revenue for the current year is primarily due to increased organic revenue from our Alogent® products (our suite of deposit and image capture products targeted at large financial institutions) and an additional quarter of revenues from GFSI (acquired in the second quarter of fiscal 2010). This increase has been partially offset by decreases in our core software and imaging software license revenues, for which the average deal size was smaller compared to a year ago. We believe our customers are continuing to postpone major capital investments in technology, including software, due to the slowly recovering economy. In addition, our customers are increasingly electing to contract for our products via outsourced delivery rather than a traditional license agreement. Our outsourced delivery does not require our customers to make a large, up-front capital investment in license fees. Support and Service Revenue Year ended June 30, % Change 2011 2010 Support and service Percentage of total revenue $ 852,253 88% $ 720,504 86% 18% Year Over Year Change $ Change % Change In-House Support & Other Services Electronic Payment Services Outsourcing Services Implementation Services Total Increase $ 16,286 93,870 15,574 6,019 $ 131,749 6% 43% 10% 9% Support and service revenues are generated from implementation services (including conversion, installation, configuration and training), annual support to assist the customer in operating their systems and to enhance and update the software, outsourced data processing services and electronic payment services. There was strong growth in all support and service revenue components in fiscal 2011. In-house support and other services revenue increased as the acquisition of GFSI contributed additional revenue of $5,648 compared to a year ago. Additionally, annual maintenance fees have increased as our customers’ assets have grown and revenue from our complementary products has grown as the total number of supported in-house customers has grown. Electronic payment services includes ATM, debit and credit card transaction processing, online bill payment services, remote deposit capture and transaction processing services, with revenues being primarily derived from transaction fees typically under five-year service contracts with our customers. Electronic payment services continued to experience the largest percentage revenue growth. The revenue growth is attributable to the acquisitions of GFSI, PTSI and iPay, which combined to add $68,663 during the current year, and organic revenue growth within electronic payment services, excluding the effects of the acquisitions, continues to be strong with an increase of 12% over the prior fiscal year. Outsourcing services are performed through our data and item processing centers, with revenues primarily derived from monthly usage or transaction fees typically under five-year service contracts with our customers. Outsourcing services for banks and credit unions continue to drive revenue growth as customers continue to choose outsourcing for the delivery of our solutions. We expect the trend towards outsourced product delivery to benefit outsourcing services revenue for the foreseeable future. FY 11 | 21 The increase in implementation services revenue is primarily related to acquisition related revenues of $2,683 for GFSI (acquired in the second quarter of fiscal 2010) and increased revenue from merger conversions of $3,754 for existing customers that acquired other financial institutions. Hardware Revenue Year ended June 30, % Change 2011 2010 Hardware Percentage of total revenue 61,577 6% The Company has entered into remarketing agreements with several hardware manufacturers under which we sell computer hardware, hardware maintenance and related services to our customers. Revenue related to hardware sales is recognized when the hardware is shipped to our customers. 63,857 8% $ -4% $ ‘Hardware revenue decreased slightly due to a decrease in the number of hardware systems and components delivered compared to last year. Hardware revenue has been generally commensurate with the trends in license revenue; however, we expect the overall decreasing trend in hardware sales to continue due to the trend towards outsourcing contracts, which typically do not include hardware. COST OF SALES AND GROSS PROFIT Cost of license represents the cost of software from third party vendors through remarketing agreements associated with license fee revenue. These costs are recognized when license revenue is recognized. Cost of support and service represents costs associated with conversion and implementation efforts, ongoing support for our in-house customers, operation of our data and item centers providing services for our outsourced customers, electronic payment services and direct operating costs. These costs are recognized as they are incurred. Cost of hardware consists of the direct and indirect costs of purchasing the equipment from the manufacturers and delivery to our customers. These costs are recognized at the same time as the related hardware revenue is recognized. Ongoing operating costs to provide support to our customers are recognized as they are incurred. Cost of Sales and Gross Profit Year ended June 30, % Change 2011 2010 Cost of License Percentage of total revenue License Gross Profit Gross Profit Margin $ 6,285 1% $ 46,782 88% Cost of support and service Percentage of total revenue $ 515,917 53% Support and Service Gross Profit Gross Profit Margin $ 336,336 39% Cost of hardware Percentage of total revenue Hardware Gross Profit Gross Profit Margin TOTAL COST OF SALES Percentage of total revenue TOTAL GROSS PROFIT Gross Profit Margin $ 45,361 5% $ 16,216 26% $ 567,563 59% $ 399,334 41% $ 5,827 1% $ 46,398 89% $ 438,476 52% $ 282,028 39% $ 47,163 6% $ 16,694 26% $ 491,466 59% $ 345,120 41% 8% 1% 18% 19% -4% -3% 15% 16% Cost of license depends greatly on third party reseller agreement software vendor costs. During the current year, these costs have increased as a percentage of license revenue as complementary software sales that have associated third party vendor costs have increased. Cost of support and service increased for the year commensurate with the increase in support and services revenue. Support and service gross profit has increased over the prior year as a result of the acquisitions of GFSI, PTSI and iPay, which combined to contribute additional support and service gross profit of $38,177 over last year. Support and service gross profit margin remained consistent year over year with the additional combined margins for GFSI and iPay of 45% being offset by lower margins achieved for PTSI of 30%. Cost of hardware has fluctuated in line with hardware revenue for the current year. OPERATING EXPENSES Selling and Marketing Year ended June 30, % Change 2011 2010 Selling and marketing Percentage of total revenue $ 68,061 7% $ 60,875 7% 12% Dedicated sales forces, inside sales teams, technical sales support teams and channel partners conduct our sales efforts for our two market segments, and are overseen by regional sales managers. Our sales executives are responsible for pursuing lead generation activities for new core customers. Our account executives nurture long- term relationships with our client base and cross sell our many complementary products and services. FY 11 | 23 For the 2011 fiscal year, selling and marketing expenses increased primarily due to increasing personnel costs, including commission expenses, for the additional employees acquired in the fiscal 2010 acquisitions, which added $6,001 to this line during the current year. Selling and marketing expenses have remained consistent as a percentage of total revenue due to the continued focus on cost management throughout the Company. Research and Development Year ended June 30, % Change 2011 2010 Research and development Percentage of total revenue $ 63,395 7% $ 50,820 6% 25% We devote significant effort and expense to develop new software, service products and continually upgrade and enhance our existing offerings. Typically, we upgrade our various core and complementary software applications 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. Research and development expenses increased due to the acquisitions in fiscal 2010 and increased personnel, consultant, and independent contractor costs compared to the same period a year ago. This also caused the increase from 6% of total revenue in fiscal 2010 to 7% in fiscal 2011. General and Administrative Year ended June 30, % Change 2011 2010 General and administrative Percentage of total revenue $ 51,561 5% $ 51,172 6% 1% General and administrative costs include all expenses related to finance, legal, human resources, plus all administrative costs. General and administrative expenses increased slightly for the year due to additional personnel and other costs from the prior year acquisitions. This increase was partially offset by one-time acquisition transaction costs incurred in fiscal 2010 of $4,237 with no comparable costs in fiscal 2011. INTEREST INCOME (EXPENSE) Interest income decreased 22% from $161 to $125 due primarily to lower interest rates on invested balances. Interest expense increased from $1,618 to $8,930 due to increased borrowings made in the fourth quarter of fiscal 2010 to consummate the acquisition of iPay. PROVISION FOR INCOME TAXES The provision for income taxes was $70,041 or 33.8% of income before income taxes in fiscal 2011 compared with $62,926 or 34.8% of income before income taxes fiscal 2010. The decrease in the effective tax rate was primarily due to the extension of the Research and Experimentation Credit (“R&E Credit”), effective January 1, 2010, as well as the increase in the applicable deduction percentage for Domestic Production Activities (IRC Section 199), effective for fiscal 2011. NET INCOME Net income increased, moving from $117,870, or $1.38 per diluted share in fiscal 2010 to $137,471, or $1.59 per diluted share in fiscal 2011. FISCAL 2010 COMPARED TO FISCAL 2009 In fiscal 2010, revenues increased 12% or $90,993 compared to the prior year due primarily to the current year acquisition of GFSI, PTSI and iPay. During fiscal 2010, the Company’s management engaged in various cost- cutting efforts that, when combined with the growth in revenue, resulted in a 14% increase in net income. The US financial crisis is a primary concern at this time as it affects our customers and our industry. The profits of many financial institutions have decreased and this has resulted in some reduction of demand for new products and services. We remain cautiously optimistic, however, with increasing portions of our business coming from recurring revenue, increases in backlog and an encouraging sales pipeline in specific areas. Our customers will continue to face regulatory and operational challenges which our products and services address, and in these times they have an even greater need for some of our solutions that directly address institutional profitability and efficiency. We face these times with a strong balance sheet and an unwavering commitment to superior customer service, and we believe that we are well positioned to address current opportunities as well as those which will arise when the economic rebound strengthens. Our cautious optimism has been expressed through our acquisitions of GFSI, PTSI and iPay during the year ended June 30, 2010. These are the three largest acquisitions in our Company’s history and present us with opportunities to extend our customer base and produce returns for our stockholders. REVENUE License Revenue Year Ended June 30, % Change 2010 2009 License Percentage of total revenue $ 52,225 6% $ 58,434 8% -11% License revenue represents the delivery and acceptance of application software systems contracted with us by the customer. We license our proprietary software products under standard license agreements that typically provide the customer with a non-exclusive, non-transferable right to use the software on a single computer and for a single financial institution location. The decrease in license revenue for the current year is due mostly to decreases in complementary product license revenue compared to the prior year. Overall, license revenue from our core software products were up 16% from the prior year. In addition, our acquisition of GFSI in October added $5,638 in license revenue during fiscal 2010. These gains were more than offset by decreases in license revenue for most of our complementary software products. These decreases in complementary software product license revenue result from the recent economic downturn, as we have seen some of our customers postpone making non-essential capital investments in technology, including software. In addition, our customers are often electing to contract for our products via outsourced delivery rather than a traditional license agreement. Our outsourced delivery does not require our customers to make a large, up-front capital investment in license fees or hardware. Support and Service Revenue Year Ended June 30, % Change 2010 2009 Support and service Percentage of total revenue $ 720,504 $ 614,242 +17% 86% 82% FY 11 | 25 Year Over Year Change $ Change % Change In-House Support & Other Services $ 17,952 EFT Support Outsourcing Services Implementation Services Total Increase 67,451 15,223 5,636 $ 106,262 7% 45% 11% 10% Support and service revenues are generated from implementation services (including conversion, installation, configuration and training), annual support to assist the customer in operating their systems and to enhance and update the software, outsourced data processing services and EFT Support services. There was strong growth in all support and service revenue components in fiscal 2010. In-house support and other services increased mostly as a result of the acquisition of GFSI, which added revenue of $15,527 since acquisition. EFT support experienced the largest percentage growth. Most of the revenue growth in EFT is attributable to the acquisition of GFSI, PTSI and iPay. Combined, the acquisitions added $55,020 to this line during the current year. However, organic revenue growth within EFT support continues to be strong with an increase of 8% over the prior fiscal year. Outsourcing services for banks and credit unions continue to drive revenue growth as customers continue to choose outsourcing for the delivery of our solutions. We expect the trend towards outsourced product delivery to benefit outsourcing services revenue for the foreseeable future. The increase in implementation services revenue is primarily related to the acquisition of GFSI, which added $4,452 in implementation revenue for the current year. Hardware Revenue Year Ended June 30, % Change 2010 2009 Hardware Percentage of total revenue $ 63,857 8% $ 72,917 10% -12% The Company has entered into remarketing agreements with several hardware manufacturers under which we sell computer hardware, hardware maintenance and related services to our customers. Revenue related to hardware sales is recognized when the hardware is shipped to our customers. Hardware revenue decreased mainly due to a decrease in the number of hardware systems and components delivered in the current year compared to a year ago. Hardware revenue has been generally commensurate with the trends in license revenue; however, while hardware revenue has benefitted from the acquisition of GFSI, it has not benefitted to the same degree as license revenue. GFSI added hardware revenue of $1,301 since its acquisition. COST OF SALES AND GROSS PROFIT Cost of license represents the cost of software from third party vendors through remarketing agreements. These costs are recognized when license revenue is recognized. Cost of support and service represents costs associated with conversion and implementation efforts, ongoing support for our in-house customers, operation of our data and item centers providing services for our outsourced customers, EFT processing services and direct operating costs. These costs are recognized as they are incurred. Cost of hardware consists of the direct and related costs of purchasing the equipment from the manufacturers and delivery to our customers. These costs are recognized at the same time as the related hardware revenue is recognized. Ongoing operating costs to provide support to our customers are recognized as they are incurred. Cost of Sales and Gross Profit Year Ended June 30, % Change 2010 2009 Cost of License Percentage of total revenue License Gross Profit Gross Profit Margin $ 5,827 1% $ 6,885 1% $ 46,398 89% $ 51,549 88% Cost of support and service Percentage of total revenue $ 438,476 52% $ 385,837 52% Support and Service Gross Profit Gross Profit Margin $ 282,028 39% $ 228,405 37% Cost of hardware Percentage of total revenue Hardware Gross Profit Gross Profit Margin TOTAL COST OF SALES Percentage of total revenue TOTAL GROSS PROFIT Gross Profit Margin $ 47,163 6% $ 53,472 7% $ 16,694 26% $ 19,445 27% $ 491,466 59% $ 446,194 60% $ 345,120 41% $ 299,399 40% -15% -10% +14% +23% -12% -14% +10% +15% The current year decrease in cost of license is generally commensurate with the related trends in license revenue. Cost of license depends greatly on third party reseller agreement software vendor costs. During the current year, these costs have decreased as a percentage of license revenue as complementary software sales that have associated third party vendor costs have decreased. Cost of support and service increased for the year commensurate with the increase in support and services revenue. Combined, the companies acquired during fiscal 2010 added $50,480 to this line. Support and services gross profit margin has increased for the year due to cost control measures undertaken by the Company and as EFT support services, with higher margins than other components of Support and services revenue, have become a larger percentage of that revenue line. Cost of hardware has fluctuated in line with hardware revenue for the current year, with slightly leaner margins resulting from a shift in sales mix. OPERATING EXPENSES Selling and M arketing Year Ended June 30, % Change 2010 2009 Selling and marketing Percentage of total revenue $ 60,875 7% $ 54,931 7% +11% Dedicated sales forces, inside sales teams, technical sales support teams and channel partners conduct our sales efforts for our two market segments, and are overseen by regional sales managers. Our sales executives are responsible for pursuing lead generation activities for new core customers. Our account executives nurture long- term relationships with our client base and cross sell our many complementary products and services. FY 11 | 27 For the 2010 fiscal year, selling and marketing expenses increased primarily due to current year acquisitions, which added $10,272 to this line during the current year. The acquisition-related increases were partially offset by decreases in selling and marketing personnel costs throughout the rest of the Company, which were the result of cost-cutting measures undertaken by management. Research and Development Year Ended June 30, % Change 2010 2009 Research and development Percentage of total revenue $ 50,820 6% $ 42,901 6% +18% We devote significant effort and expense to develop new software, service products and continually upgrade and enhance our existing offerings. Typically, we upgrade our various core and complementary software applications 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. Research and development expenses increased for the current year due primarily to current year acquisitions, which added $8,126 in expense during fiscal 2010. General and Administrative Year Ended June 30, % Change 2010 2009 General and administrative Percentage of total revenue $ 51,172 6% $ 43,681 6% +17% General and administrative costs include all expenses related to finance, legal, human resources, plus all administrative costs. General and administrative expenses increased for the year due to current year acquisitions, including costs directly related to the acquisition transactions. Combined, the acquired companies added $7,700 of general and administrative costs during fiscal 2010, including $4,237 of one-time acquisition transaction costs. INTEREST INCOME (EXPENSE) Interest income decreased 79% from $781 to $161 due primarily to lower interest rates on invested balances. Interest expense increased 19% from $1,357 to $1,618 due to primarily to borrowings made in the fourth quarter of fiscal 2010 to consummate the acquisition of iPay. PROVISION FOR INCOME TAXES The provision for income taxes was $62,926 or 34.8% of income before income taxes in fiscal 2010 compared with $54,208 or 34.5% of income before income taxes fiscal 2009. The increase was primarily due to the expiration of the Research and Experimentation Credit (“R&E Credit”), effective January 1, 2010, as well as increases in the rate at which deferred tax liabilities are expected to reverse in future years. These increases were mostly offset by additional benefits received through an extensive analysis of the Domestic Production Activities Deduction (IRC Section 199). NET INCOME Net income increased, moving from $103,102, or $1.22 per diluted share in fiscal 2009 to $117,870, or $1.38 per diluted share in fiscal 2010. Business Segment Discussion Bank Systems and Services Revenue Gross Profit $746,892 $315,994 11% 12% $672,282 $283,100 9% 14% $617,711 $247,812 2011 % Change 2010 % Change 2009 Gross Profit Margin 42% 42% 40% In fiscal 2011, revenue increased 11% overall in the bank systems and services business segment compared to the prior year. The increase is due primarily to the acquisitions of GFSI and iPay, which added $40,150 of additional revenue in fiscal 2011, mainly in support and services in the bank systems and services business segment which increased 14% over the prior year, coupled with electronic payment services organic revenue growth of nearly 12% over the prior year. Gross profit margin remained consistent year over year, with GFSI and iPay margins performing within expectations. In fiscal 2010, revenue increased 9% overall in the bank systems and services business segment compared to the prior year. Most of the increase is due to the acquisition of GFSI, which added $44,794 of revenue in fiscal 2010. In addition, EFT support experienced organic revenue growth of nearly 10% over the prior year and Data Center Maintenance had organic growth of 12% within the bank systems and services business segment. Gross profit margin increased from the prior year primarily due to cost control measures, particularly related to personnel costs, undertaken by management during fiscal 2010. Credit Union Systems and Services 2011 % Change 2010 % Change 2009 Revenue Gross Profit $220,005 $83,340 34% 34% $164,304 $62,020 28% 20% $127,882 $51,587 Gross Profit Margin 38% 38% 40% In fiscal 2011, revenues in the credit union systems and services business segment increased 34% from fiscal 2010. All components of revenue increased, particularly support and service revenue, which increased by 38% over the prior year. This was due primarily to the acquisitions of PTSI and iPay, which added revenue of $38,482 to current year revenue, and electronic payment services which experienced 11% organic revenue growth. Gross profit margins have remained constant as a result of strong iPay margins being offset by slightly lower margins from the PTSI products. In fiscal 2010, revenues in the credit union systems and services business segment increased 28% from fiscal 2009. Support and service revenue, which is the largest component of total revenues for the credit union segment, experienced strong growth in most revenue components. In particular, EFT Support experienced 163% revenue growth over the prior year due primarily to the acquisition of PTSI, which added revenue of $33,839 to fiscal 2011 revenue. Gross profit margins decreased from the prior year as license revenue, which carries the largest margins, decreased as a percentage of total revenue. Liquidity and Capital Resources We have historically generated positive cash flow from operations and have generally used funds generated from operations and short-term borrowings on our revolving credit facility to meet capital requirements. We expect this trend to continue in the future. The Company’s cash and cash equivalents decreased to $63,125 at June 30, 2011 from $125,518 at June 30, 2010. The decrease is primarily due to the repayment of long and short term debt in the year. The following table summarizes net cash from operating activities in the statement of cash flows: FY 11 | 29 Net income Non-cash expenses Change in receivables Change in deferred revenue Change in other assets and liabilities Year ended June 30, 2011 2010 2009 $ 137,471 116,788 940 19,487 (34,554) $ 117,870 92,317 (1,539) 10,775 (725) $ 103,102 74,397 21,214 21,943 (14,068) Net cash from operating activities $ 240,132 $ 218,698 $ 206,588 Cash provided by operations increased 10% for the fiscal year ended June 30, 2011 compared to the prior fiscal year. This increase is primarily attributable to the increase in net income, which grew through continued strong organic growth and the incremental earnings provided by the fiscal 2010 acquisitions. Cash used in investing activities for the fiscal year ended June 2011 included capital expenditures on facilities and equipment of $32,085, including computer equipment purchases and the final costs relating to the construction of our new Branson, Missouri and Springfield, Missouri facilities. Other major uses of cash included $26,954 for the development of software. Cash used in investing activities for the fiscal year ended June 2010 was $505,715 and includes a net cash outlay for acquisitions of $426,652, capital expenditures of $54,509, and capitalized software development of $25,586. Net cash from financing activities for the current fiscal year includes $229,455 net repayment on our credit facilities and the payment of dividends of $34,391. Cash used was partially offset by net proceeds of $20,359 from the exercise of stock options, the sale of common stock (through the employee stock purchase plan) and excess tax benefits from stock option exercises. During fiscal 2010, net cash from financing activities for the current fiscal year was $294,284 and includes $303,160 net borrowing on our credit facilities, proceeds of $28,522 from the exercise of stock options and the sale of common stock (through the employee stock purchase plan) and $661 excess tax benefits from stock option exercises. Cash from financing activities was partially offset by the payment of dividends of $30,461 and debt acquisition costs of $7,598. At June 30, 2011, the Company had negative working capital of $26,561; however, the largest component of current liabilities was deferred revenue of $276,837, which primarily relates to our annual in-house maintenance agreements. The cash outlay necessary to provide the services related to these deferred revenues is significantly less than this recorded balance. In addition, we continue to have access to unused lines of credit in excess of $160,000 and continue to generate substantial cash inflows from operations. Therefore, we do not anticipate any liquidity problems arising from this condition. US financial markets and many of the largest US financial institutions have been shaken by negative developments over the last three years in the mortgage markets and the general economy. While the effects of these events continue to impact our customers, we have not experienced any significant issues with our current collection efforts, and we believe that any future impact to our liquidity would be minimized by our access to available lines of credit. The Company generally uses existing resources and funds generated from operations to meet its capital requirements. Capital expenditures in the fiscal year were made primarily for additional equipment, new facilities, and the improvement of existing facilities. These additions were funded from cash generated by operations. The Board of Directors has authorized the Company to repurchase shares of its common stock. Under this authorization, the Company may finance its share repurchases with available cash reserves of short-term borrowings on its existing credit facility. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At June 30, 2011, there were 14,407 shares in treasury stock and the Company had the remaining authority to repurchase up to 5,584 additional shares. The total cost of treasury shares at June 30, 2011 is $309,585. There were no repurchases of treasury stock in fiscal 2011 or 2010. On August 19, 2011, the Company’s Board of Directors declared a cash dividend of $0.105 per share on its common stock payable on September 28, 2011, to stockholders of record on September 8, 2011. Current funds from operations are adequate for this purpose. The Board has indicated that it plans to continue paying dividends as long as the Company’s financial picture continues to be favorable. The Company has a bank credit facility agreement that includes a revolving loan, a term loan and a bullet term loan. Revolving credit facilities The revolving loan allows short-term borrowings of up to $150,000, which may be increased by the Company at any time until maturity to $250,000. The revolving loan terminates June 4, 2015. At June 30, 2011, no amount was outstanding. Term loan The term loan has an original principal balance of $150,000, with quarterly principal payments of $5,625 beginning on September 30, 2011, and the remaining balance due June 4, 2015. At June 30, 2011, the outstanding balance was bearing interest at a rate of 2.25%. Of the $150,000 outstanding, $22,500 will be maturing within the next twelve months. Bullet term loan The bullet term loan had an original principal balance of $100,000. The full balance, which would have been due on December 4, 2010, was paid in full on July 8, 2010. Each of the above loans bear interest at a variable rate equal to (a) a rate based on LIBOR or (b) an alternate base rate (the greater of (a) the Federal Funds Rate plus 0.5%, (b) the Prime Rate or (c) LIBOR plus 1.0%), plus an applicable percentage in each case determined by the Company’s leverage ratio. The loans are secured by pledges of capital stock of certain subsidiaries of the Company. The loans are also guaranteed by certain subsidiaries of the Company. The credit facility is subject to various financial covenants that require the Company to maintain certain financial ratios as defined in the agreement. As of June 30, 2011, the Company was in compliance with all such covenants. Capital leases The Company has entered into various capital lease obligations for the use of certain computer equipment. At June 30, 2011, $3,016 was outstanding, all of which will be maturing in the next twelve months. Included in property and equipment are assets under capital leases totaling $5,540, which have accumulated depreciation totaling $365. Other lines of credit The Company has an unsecured bank credit line which provides for funding of up to $5,000 and bears interest at the prime rate less 1% (2.25% at June 30, 2011). The credit line was renewed through April 29, 2012. At June 30, 2011, no amount was outstanding. The Company renewed a bank credit line on March 7, 2011 which provides for funding of up to $8,000 and bears interest at the Federal Reserve Board’s prime rate (3.25% at June 30, 2011). The credit line expires March 7, 2012 and is secured by $1,000 of investments. At June 30, 2011, no amount was outstanding. Off Balance Sheet Arrangements and Contractual Obligations At June 30, 2011 the Company’s total off balance sheet contractual obligations were $36,887. This balance consists of $26,187 of long-term operating leases for various facilities and equipment which expire from 2012 to 2017 and the remaining $10,700 is for purchase commitments related to property and equipment. The table excludes $9,399 of liabilities for uncertain tax positions as we are unable to reasonably estimate the ultimate amount or timing of settlement. FY 11 | 31 Contractual obligations by period as of June 30, 2011 Less than 1 year 1-3 years 3-5 years More than 5 years TOTAL Operating lease obligations Capital lease obligations Notes payable, including accrued interest Purchase obligations $ 7,185 3,016 $ 10,511 - $ 7,004 - $ 1,487 - $ 26,187 3,016 23,087 10,700 45,431 - 82,508 - - - 151,026 10,700 Total $43,988 $55,942 $89,512 $1,487 $190,929 Recent Accounting Pronouncements In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, Multiple-Deliverable Revenue Arrangements, which is effective for arrangements beginning or changed during fiscal years starting after June 15, 2010. This new standard eliminates the use of the residual method of revenue recognition and requires the allocation of consideration to each deliverable using the relative selling price method. This new guidance did not have a material impact on revenue recognition because nearly all of the Company’s revenue arrangements are subject to Accounting Standards Codification (“ASC”) Topic 985. Such arrangements are considered out of scope for this ASU. In October 2009, the FASB also issued ASU No. 2009-14, Software: Certain Revenue Arrangements that Include Software Elements, which is also effective for arrangements beginning or changed during fiscal years starting after June 15, 2010. This revision to Software (Topic 985) drops from its scope all tangible products containing both software and non-software components that operate together to deliver the product’s functions. The majority of the Company’s software arrangements are not tangible products with software components; therefore, this update did not materially impact the company. The FASB issued ASU No. 2011-04, Fair Value Measurement in May 2011, which is effective for the Company beginning July 1, 2012 and is to be applied prospectively. The updated explanatory guidance on measuring fair value will be adopted by the Company at that time and is not expected to have a significant impact on our fair value calculations. No additional fair value measurements are required as a result of the update. The FASB also issued ASU No. 2011-05, Comprehensive Income in June 2011, which is effective for the Company beginning January 1, 2012 and will be applied retrospectively. The updated guidance requires non-owner changes in stockholders’ equity to be reported either in a single continuous statement of comprehensive income or in two separate but consecutive statements, rather than as part of the statement of changes in stockholders’ equity. No changes in disclosure will be required as a result of the update. Critical Accounting Policies We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The significant accounting policies are discussed in Note 1 to the consolidated financial statements. The preparation of consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, as well as disclosure of contingent assets and liabilities. We base our estimates and judgments upon historical experience and other factors believed to be reasonable under the circumstances. Changes in estimates or assumptions could result in a material adjustment to the consolidated financial statements. We have identified several critical accounting estimates. An accounting estimate is considered critical if both: (a) the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment involved, and (b) the impact of changes in the estimates and assumptions would have a material effect on the consolidated financial statements. Revenue Recognition We recognize revenue in accordance with generally accepted accounting principles and with guidance provided within Staff Accounting Bulletins issued by the Securities and Exchange Commission. The application of these pronouncements requires judgment, including whether a software arrangement includes multiple elements, whether any elements are essential to the functionality of any other elements, and whether vendor-specific objective evidence (“VSOE”) of fair value exists for those elements. Customers receive certain elements of our products over time. Changes to the elements in a software arrangement or in our ability to identify VSOE for those elements could materially impact the amount of earned and unearned revenue reflected in the financial statements. License Fee Revenue. For software license agreements that do not require significant modification or customization of the software, the Company recognizes software license revenue when persuasive evidence of an arrangement exists, delivery of the product has occurred, the license fee is fixed and determinable and collection is probable. The Company’s software license agreements generally include multiple products and services or “elements.” None of these elements alone are deemed to be essential to the functionality of the other elements Generally accepted accounting principles require revenue earned on software arrangements involving multiple elements to be allocated to each element based on VSOE of fair value. Fair value is determined for license fees based upon the price charged when sold separately. When we determine that VSOE does not exist for one or more of the delivered elements of a software arrangement, but does exist for all of the undelivered elements, revenue is recognized following the residual method allowed by current accounting pronouncements. Under the residual method, a residual amount of the total arrangement fee is recognized as revenue for the delivered elements after the established fair value of all undelivered elements has been deducted. Support and Service Fee Revenue. Implementation services are generally for installation, implementation, and configuration of our systems and for training of our customer’s employees. These services are not considered essential to the functionality of the related software. VSOE of fair value is established by pricing used when these services are sold separately. Generally, revenue is recognized when services are completed. On certain larger implementations, revenue is recognized based on milestones during the implementation. Milestones are triggered by tasks completed or based on direct labor hours. Maintenance support revenue is recognized pro-rata over the contract period, typically one year. VSOE of fair value is determined based on contract renewal rates. Outsourced data processing services and ATM, debit card, and other transaction processing services revenues are recognized in the month the transactions were processed or the services were rendered. Hardware Revenue: Hardware revenue is recognized upon delivery to the customer, when title and risk of loss are transferred. In most cases, we do not stock in inventory the hardware products we sell, but arrange for third-party suppliers to drop-ship the products to our customers on our behalf. Some of our hardware revenues are derived under “arrangements” as defined within U.S. GAAP. To the extent hardware revenue is part of such an arrangement and is not deemed essential to the functionality of any of the other elements to the arrangement, it is recognized based on VSOE of fair value at the time of delivery. The Company also remarkets maintenance contracts on hardware to our customers. Hardware maintenance revenue is recognized ratably over the agreement period. Depreciation and Amortization Expense The calculation of depreciation and amortization expense is based on the estimated economic lives of the underlying property, plant and equipment and intangible assets, which have been examined for their useful life and determined that no impairment exists. We believe it is unlikely that any significant changes to the useful lives of our tangible and intangible assets will occur in the near term, but rapid changes in technology or changes in market conditions could result in revisions to such estimates that could materially affect the carrying value of these assets and the Company’s future consolidated operating results. All long lived assets are tested for valuation and potential impairment on a scheduled annual basis. FY 11 | 33 Capitalization of Software Development Costs We capitalize certain costs incurred to develop commercial software products and to develop or purchase internal- use software. Significant estimates and assumptions include: determining the appropriate period over which to amortize the capitalized costs based on the estimated useful lives, estimating the marketability of the commercial software products and related future revenues, and assessing the unamortized cost balances for impairment. For commercial software products, determining the appropriate amortization period is based on estimates of future revenues from sales of the products. We consider various factors to project marketability and future revenues, including an assessment of alternative solutions or products, current and historical demand for the product, and anticipated changes in technology that may make the product obsolete. A significant change in an estimate related to one or more software products could result in a material change to our results of operations. Estimates Used to Determine Current and Deferred Income Taxes We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. We also must determine the likelihood of recoverability of deferred tax assets, and adjust any valuation allowances accordingly. Considerations include the period of expiration of the tax asset, planned use of the tax asset, and historical and projected taxable income as well as tax liabilities for the tax jurisdiction to which the tax asset relates. Valuation allowances are evaluated periodically and will be subject to change in each future reporting period as a result of changes in one or more of these factors. Also, liabilities for uncertain tax positions require significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position. Changes in judgment as to recognition or measurement of tax positions can materially affect the estimate of the effective tax rate and consequently, affect our financial results. Assumptions Related to Purchase Accounting and Goodwill We account for our acquisitions using the purchase method of accounting. This method requires estimates to determine the fair values of assets and liabilities acquired, including judgments to determine any acquired intangible assets such as customer-related intangibles, as well as assessments of the fair value of existing assets such as property and equipment. Liabilities acquired can include balances for litigation and other contingency reserves established prior to or at the time of acquisition, and require judgment in ascertaining a reasonable value. Third party valuation firms may be used to assist in the appraisal of certain assets and liabilities, but even those determinations would be based on significant estimates provided by us, such as forecasted revenues or profits on contract- related intangibles. Numerous factors are typically considered in the purchase accounting assessments, which are conducted by Company professionals from legal, finance, human resources, information systems, program management and other disciplines. Changes in assumptions and estimates of the acquired assets and liabilities would result in changes to the fair values, resulting in an offsetting change to the goodwill balance associated with the business acquired. As goodwill is not amortized, goodwill balances are regularly assessed for potential impairment. Such assessments require an analysis of future cash flow projections as well as a determination of an appropriate discount rate to calculate present values. Cash flow projections are based on management-approved estimates, which involve the input of numerous Company professionals from finance, operations and program management. Key factors used in estimating future cash flows include assessments of labor and other direct costs on existing contracts, estimates of overhead costs and other indirect costs, and assessments of new business prospects and projected win rates. The Company’s most recent assessment indicates that no reporting units are currently at risk of impairment; however, significant changes in the estimates and assumptions used in purchase accounting and goodwill impairment testing could have a material effect on the consolidated financial statements. Forward Looking Statements Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including without limitation, in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” and similar expressions. Forward- looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section titled “Risk Factors” (Part I, Item 1A of the Jack Henry & Associates, Inc. Form 10-K for the year ended June 30, 2011). We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk refers to the risk that a change in the level of one or more market prices, interest rates, indices, volatilities, correlations or other market factors such as liquidity, will result in losses for a certain financial instrument or group of financial instruments. We are currently exposed to credit risk on credit extended to customers and interest risk on outstanding debt. We do not currently use any derivative financial instruments. We actively monitor these risks through a variety of controlled procedures involving senior management. Based on the controls in place and the credit worthiness of the customer base, we believe the credit risk associated with the extension of credit to our customers will not have a material adverse effect on our consolidated financial position or results of operations. Based on our outstanding debt with variable interest rates as of June 30, 2011, a 1% increase in our borrowing rate would increase annual interest expense in fiscal 2012 by approximately $1,500. FY 11 | 35 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements Report of Independent Registered Public Accounting Firm Management’s Annual Report on Internal Control over Financial Reporting Report of Independent Registered Public Accounting Firm Financial Statements Consolidated Statements of Income Years Ended June 30, 2011, 2010, and 2009 Consolidated Balance Sheets, June 30, 2011 and 2010 Consolidated Statements of Changes in Stockholders’ Equity Years Ended June 30, 2011, 2010 and 2009 Consolidated Statements of Cash Flows, Years Ended June 30, 2011, 2010 and 2009 Notes to Consolidated Financial Statements 37 38 39 40 41 42 43 44 FINANCIAL STATEMENT SCHEDULES There are no schedules included because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Jack Henry & Associates, Inc. Monett, Missouri We have audited the accompanying consolidated balance sheets of Jack Henry & Associates, Inc. and subsidiaries (the “Company”) as of June 30, 2011 and 2010, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 as of June 30, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period June 30, 2011, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of June 30, 2011, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 29, 2011 expressed an unqualified opinion on the Company’s internal control over financial reporting. /s/ DELOITTE & TOUCHE LLP Kansas City, Missouri August 29, 2011 FY 11 | 37 MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of Jack Henry & Associates, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes policies and procedures pertaining to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements. All internal controls, no matter how well designed, have inherent limitations. Therefore, even where internal control over financial reporting is determined to be effective, it can provide only reasonable assurance. Projections of any evaluation of effectiveness to future periods are subject to the risk controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Management’s annual report on internal control over financial reporting now includes an assessment of the internal control over financial reporting of iPay Technologies Holding Company, LLC, acquired on June 4, 2010, which was excluded from the fiscal 2010 annual report on internal control over financial reporting. Integration of the wholly- owned subsidiary was completed during the fourth quarter of the year ended June 30, 2011 and is not considered to have materially affected, or is reasonably likely to materially affect, the internal control over financial reporting. As of the end of the Company’s 2011 fiscal year, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined the Company’s internal control over financial reporting as of June 30, 2011 was effective. The Company’s internal control over financial reporting as of June 30, 2011 has been audited by the Company’s independent registered public accounting firm, as stated in their report appearing on the next page. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Jack Henry & Associates, Inc. Monett, Missouri We have audited the internal control over financial reporting of Jack Henry & Associates, Inc. and subsidiaries (the “Company”) as of June 30, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2011, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended June 30, 2011 of the Company and our report dated August 29, 2011 expressed an unqualified opinion on those financial statements. /s/ DELOITTE & TOUCHE LLP Kansas City, Missouri August 29, 2011 FY 11 | 39  FY 11 | 41 FY 11 | 43 JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Per Share Amounts) NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of the Company Jack Henry & Associates, Inc. and Subsidiaries (“JHA” or the “Company”) is a provider of integrated computer systems and services that has developed and acquired a number of banking and credit union software systems. The Company’s revenues are predominately earned by marketing those systems to financial institutions nationwide together with computer equipment (hardware) and by providing the conversion and software implementation services for financial institutions to utilize JHA software systems, and by providing other related services. JHA also provides continuing support and services to customers using in-house or outsourced systems. Consolidation The consolidated financial statements include the accounts of JHA and all of its subsidiaries, which are wholly- owned, and all intercompany accounts and transactions have been eliminated. 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 as of 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 derives revenue from the following sources: license fees, support and service fees and hardware sales. There are no rights of return, condition of acceptance or price protection in the Company’s sales contracts. License Fee Revenue: For software license agreements that do not require significant modification or customization of the software, the Company recognizes software license revenue when persuasive evidence of an arrangement exists, delivery of the product has occurred, the license fee is fixed and determinable and collection is probable. The Company’s software license agreements generally include multiple products and services or “elements.” None of these elements are deemed to be essential to the functionality of the other elements. Accounting principles generally accepted in the Unites States of America (“U.S. GAAP”) generally require revenue earned on software arrangements involving multiple elements to be allocated to each element based on vendor-specific objective evidence (“VSOE”) of fair value. Fair value is determined for license fees based upon the price charged when sold separately or, if the product is not yet sold separately, the price determined by management with relevant authority. In the event that we determine that VSOE does not exist for one or more of the delivered elements of a software arrangement, but does exist for all of the undelivered elements, revenue is recognized using the residual method. Under the residual method, a residual amount of the total arrangement fee is recognized as revenue for the delivered elements after the established fair value of all undelivered elements has been deducted. Arrangements with customers that include significant customization, modification, or production of software are accounted for under contract accounting, with the revenue being recognized using the percentage-of-completion method. Support and Service Fee Revenue: Implementation services are generally for installation, training, implementation, and configuration. These services are not considered essential to the functionality of the related software. VSOE of fair value is established by pricing used when these services are sold separately or, if the services are not yet sold separately, the price determined by management with relevant authority. Generally revenue is recognized when services are completed. On certain larger implementations, revenue is recognized based on milestones during the implementation. Milestones are triggered by tasks completed or based on direct labor hours. Maintenance support revenue is recognized pro-rata over the contract period, typically one year. VSOE of fair value is determined based on contract renewal rates. Outsourced data processing and ATM, debit card, and other transaction processing services revenue is recognized in the month the transactions are processed or the services are rendered. Hardware Revenue: Hardware revenue is recognized upon delivery to the customer, when title and risk of loss are transferred. In most cases, we do not stock in inventory the hardware products we sell, but arrange for third-party suppliers to drop-ship the products to our customers on our behalf. To the extent hardware revenue is part of such an arrangement and is not deemed essential to the functionality of any of the other elements to the arrangement, it is recognized based on VSOE of fair value at the time of delivery. The Company also remarkets maintenance contracts on hardware to our customers. Hardware maintenance revenue is recognized ratably over the agreement period. Prepaid Cost of Product Costs for remarketed hardware and software maintenance contracts, which are prepaid, are recognized ratably over the life of the contract, generally one to five years, with the related revenue amortized from deferred revenues. Deferred Revenues Deferred revenues consist primarily of prepaid annual software support fees and prepaid hardware maintenance fees. Hardware maintenance contracts are multi-year; therefore, the deferred revenue and maintenance are classified in accordance with the terms of the contract. Software and hardware deposits received 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 the product is ready for general availability. Software development costs that are capitalized are evaluated on a product-by-product basis annually and are assigned an estimated economic life based on the type of product, market characteristics, and maturity of the market for that particular product. The Company’s amortization policy for these capitalized costs is to amortize the costs in accordance with U.S. GAAP. Generally, these costs are amortized based on current and estimated future revenue from the product or on a straight-line basis, whichever yields greater amortization expense. Cash Equivalents The Company considers all highly liquid investments with maturities of three months or less at the time of acquisition to be cash equivalents. Investments The Company invests its cash that is not required for current operations primarily in U.S. government securities and money market accounts. 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. The amortized cost of held-to-maturity securities is $1,000 at both June 30, 2011 and 2010. Fair 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. FY 11 | 45 Property and Equipment And Intangible Assets 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 consist of goodwill, customer relationships, computer software, and trade names acquired in business acquisitions in addition to internally developed computer software. The amounts are amortized, with the exception of those with an indefinite life (such as goodwill), over an estimated economic benefit period, generally five to twenty years, using the straight-line method. The Company reviews its long-lived assets and identifiable intangible assets with finite lives for impairment whenever events or changes in circumstances have indicated that the carrying amount of its assets might not be recoverable. The Company evaluates goodwill and other indefinite-lived intangible assets for impairment of value on an annual basis as of January 1 and between annual tests if events or changes in circumstances indicate that the asset might be impaired. Comprehensive Income Comprehensive income for each of the years ended June 30, 2011, 2010, and 2009 equals the Company’s net income. Business Segment Information In accordance with U.S. GAAP, the Company’s operations are classified as two business segments: bank systems and services and credit union systems and services (see Note 13). Revenue by type of product and service is presented on the face of the consolidated statements of income. Substantially all the Company’s revenues are derived from operations and assets located within the United States of America. Common Stock The Board of Directors has authorized the Company to repurchase shares of its common stock. Under this authorization, the Company may finance its share repurchases with available cash reserves or short-term borrowings on its existing credit facility. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At June 30, 2011, there were 14,407 shares in treasury stock and the Company had the remaining authority to repurchase up to 5,584 additional shares. The total cost of treasury shares at June 30, 2011 is $309,585. There were no repurchases of treasury stock in fiscal 2011 or 2010. 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 diluted share to the extent they are dilutive. The difference between basic and diluted weighted average shares outstanding is the dilutive effect of outstanding stock options (see Note 10). 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 would be established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based upon the technical merits of the position. The tax benefits recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Also, interest and penalties expense are recognized on the full amount of deferred benefits for uncertain tax positions. Our policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. Recent Accounting Pronouncements In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, Multiple-Deliverable Revenue Arrangements, which is effective for arrangements beginning or changed during fiscal years starting after June 15, 2010. This new standard eliminates the use of the residual method of revenue recognition and requires the allocation of consideration to each deliverable using the relative selling price method. This new guidance did not have a material impact on revenue recognition because nearly all of the Company’s revenue arrangements are subject to Accounting Standards Codification (“ASC”) Topic 985. Such arrangements are considered out of scope for this ASU. In October 2009, the FASB also issued ASU No. 2009-14, Software: Certain Revenue Arrangements that Include Software Elements, which is also effective for arrangements beginning or changed during fiscal years starting after June 15, 2010. This revision to Software (Topic 985) drops from its scope all tangible products containing both software and non-software components that operate together to deliver the product’s functions. The majority of the Company’s software arrangements are not tangible products with software components; therefore, this update did not materially impact the company. The FASB issued ASU No. 2011-04, Fair Value Measurement in May 2011, which is effective for the Company beginning July 1, 2012 and is to be applied prospectively. The updated explanatory guidance on measuring fair value will be adopted by the Company at that time and is not expected to have a significant impact on our fair value calculations. No additional fair value measurements are required as a result of the update. The FASB also issued ASU No. 2011-05, Comprehensive Income in June 2011, which is effective for the Company beginning January 1, 2012 and will be applied retrospectively. The updated guidance requires non-owner changes in stockholders’ equity to be reported either in a single continuous statement of comprehensive income or in two separate but consecutive statements, rather than as part of the statement of changes in stockholders’ equity. No changes in disclosure will be required as a result of the update. NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS Fair values for held-to-maturity securities are based on quoted market prices. For cash equivalents, amounts receivable or payable and short-term borrowings, fair values approximate carrying value, based on the short-term nature of the assets. The fair value of long term debt also approximates carrying value as estimated using discounting cash flows based on the Company’s current incremental borrowing rates or quoted prices in active markets. NOTE 3: PROPERTY AND EQUIPMENT The classification of property and equipment, together with their estimated useful lives is as follows: June 30, 2011 2010 Estimated Useful Life Land Land improvements Buildings Leasehold improvements Equipment and furniture Aircraft and equipment Construction in progress Less accumulated depreciation Property and equipment, net $ $ 25,011 25,882 137,580 24,440 230,346 41,605 8,972 493,836 223,650 270,186 5-20 years 20-30 years 5-20 years (1) 5-8 years 6-12 years 24,911 19,838 103,744 21,012 211,698 40,192 53,596 474,991 200,321 274,670 $ $ (1) Lesser of lease term or estimated useful life The Company had material commitments to purchase property and equipment related to the construction of new facilities, totaling $1,622 and $4,153 at June 30, 2011 and 2010, respectively. Property and equipment included $332 and $723 that was in accrued liabilities at June 30, 2011 and 2010, respectively. Also, the Company acquired $6,020 and $8,896 of computer equipment through capital leases for the years ended June 30, 2011 and 2010, respectively. These amounts were excluded from capital expenditures on the statement of cash flows. FY 11 | 47 NOTE 4: OTHER ASSETS Goodwill Changes in the carrying amount of goodwill for the years ended June 30, 2011 and 2010, by reportable segments, are: Banking Systems and Services Credit Union Systems and Services Total Balance, as of July 1, 2009 Goodwill acquired during the year Balance, as of June 30, 2010 Goodwill acquired during the year Balance, as of June 30, 2011 $ $ $ 267,602 136,347 403,949 - 403,949 24,798 104,773 129,571 - 129,571 $ $ $ 292,400 241,120 533,520 - 533,520 The banking systems and services segment additions for fiscal 2010 relate primarily to the acquisitions of iPay and GFSI. The credit union systems and services segment additions for fiscal 2010 relate to the acquisitions of iPay and PTSI. See Note 12 for further details. Trade names & Customer relationships Information regarding other identifiable intangible assets is as follows: June 30, Carrying Amount 2011 Accumulated Amortization Net Carrying Amount 2010 Accumulated Amortization Net Customer relationships $ 278,617 $ (99,484) $ 179,133 $ 279,273 $ (82,945) $ 196,328 Trade names 11,064 (467) 10,597 11,064 (249) 10,815 Totals $ 289,681 $ (99,951) $ 189,730 $ 290,337 $ (83,194) $ 207,143 Most of our trade name assets have been determined to have indefinite lives and are not amortized. Customer relationships have lives ranging from five to 20 years. Computer software Computer software includes the unamortized cost of software products developed or acquired by the Company, which are capitalized and amortized over useful lives ranging from five to ten years. Following is an analysis of the computer software capitalized: Carrying Amount Accumulated Amortization Total Balance, July 1, 2009 Acquired software Capitalized development cost Disposals Amortization expense Balance, June 30, 2010 Capitalized development cost Disposals Amortization expense Balance, June 30, 2011 $ 129,271 $ (46,592) $ 82,679 30,801 25,586 (783) - 184,875 (4,870) - 16 (17,782) (69,228) 25,931 25,586 (767) (17,782) 115,647 26,954 (2,371) - 209,458 $ - 1,795 (31,189) (98,622) $ 26,954 (576) (31,189) 110,836 $ Amortization expense for all intangible assets was $48,602, $34,919, and $25,288 for the fiscal years ended June 30, 2011, 2010, and 2009, respectively. The estimated aggregate future amortization expense for each of the next five years for all intangible assets remaining as of June 30, 2011, is as follows: Year Software Customer Relationships 2012 2013 2014 2015 2016 29,543 23,541 19,629 13,575 6,263 16,169 14,805 14,805 14,050 13,427 Total 45,712 38,346 34,434 27,625 19,690 NOTE 5: DEBT The Company’s outstanding long and short term debt is as follows: June 30, 2011 2010 LONG TERM DEBT Long term revolving credit facility Term loan Capital leases Other borrowings Less current maturities Long-term debt, net of current maturities $ - 150,000 - 1,015 151,015 23,076 127,939 $ $ $ 120,000 150,000 5,689 2,244 277,933 5,201 272,732 SHORT TERM DEBT Bullet term loan Capital Leases Current maturities of long-term debt Other borrowings Notes payable and current maturities of long term debt - 3,016 23,076 - 26,092 $ 100,000 - 5,201 762 105,963 $ FY 11 | 49 The following table summarizes the annual principal payments required as of June 30, 2011: Years ended June 30, 2012 2013 2014 2015 2016 Thereafter 26,092 22,879 22,552 22,508 60,000 - $ 154,031 The Company has a bank credit facility agreement that includes a revolving loan, a term loan and a bullet term loan. Revolving Credit Facilities The long term revolving loan allows for borrowings of up to $150,000, which may be increased by the Company at any time until maturity to $250,000. The revolving loan terminates June 4, 2015. At June 30, 2011, no amount was outstanding. Term Loan The term loan has an original principal balance of $150,000, with quarterly principal payments of $5,625 beginning on September 30, 2011, and the remaining balance due June 4, 2015. At June 30, 2011, the outstanding balance was bearing interest at a rate of 2.25%. Of the $150,000 outstanding, $22,500 will be maturing within the next twelve months. Bullet Term Loan The bullet term loan had an original principal balance of $100,000. The full balance, which would have been due on December 4, 2010, was paid in full on July 8, 2010. Each of the above loans bear interest at a variable rate equal to (a) a rate based on LIBOR or (b) an alternate base rate (the greater of (a) the Federal Funds Rate plus 0.5%, (b) the Prime Rate or (c) LIBOR plus 1.0%), plus an applicable percentage in each case determined by the Company’s leverage ratio. The loans are secured by pledges of capital stock of certain subsidiaries of the Company. The loans are also guaranteed by certain subsidiaries of the Company. The credit facility is subject to various financial covenants that require the Company to maintain certain financial ratios as defined in the agreement. As of June 30, 2011, the Company was in compliance with all such covenants. Capital Leases The Company has entered into various capital lease obligations for the use of certain computer equipment. At June 30, 2011, $3,016 was outstanding, all of which will be maturing in the next twelve months. Included in property and equipment are assets under capital leases totaling $5,540, which have accumulated depreciation totaling $365. Other Lines of Credit The Company has an unsecured bank credit line which provides for funding of up to $5,000 and bears interest at the prime rate less 1% (2.25% at June 30, 2011). The credit line was renewed through April 29, 2012. At June 30, 2011, no amount was outstanding. The Company renewed a bank credit line on March 7, 2011 which provides for funding of up to $8,000 and bears interest at the Federal Reserve Board’s prime rate (3.25% at June 30, 2011).The credit line expires March 7, 2012 and is secured by $1,000 of investments. At June 30, 2011, no amount was outstanding. Interest The Company paid interest of $8,000, $759, and $1,606 in 2011, 2010, and 2009 respectively. During fiscal 2011, the Company incurred a total of $8,930 of interest expense. NOTE 6: LEASE COMMITMENTS The Company leases certain property under operating leases which expire over the next 7 years, but certain of the leases contain options to extend the lease term. All lease payments are based on the lapse of time but include, in some cases, payments for operating expenses and property taxes. There are no purchase options on real estate leases at this time, but most real estate leases have one or more renewal options. Certain leases on real estate are subject to annual escalations for increases in operating expenses and property taxes. Lease Payments As of June 30, 2011, net future minimum lease payments are as follows: Years Ending June 30, 2012 2013 2014 2015 2016 Thereafter Total 7,185 5,672 4,839 3,966 3,038 1,487 26,187 $ $ Rent expense was $8,985, $9,733, and $8,314 in 2011, 2010, and 2009, respectively. NOTE 7: INCOME TAXES The provision for income taxes from continuing operations consists of the following: Year ended June 30, 2011 2010 2009 Current: Federal State Deferred: Federal State $ 43,334 6,180 $ 39,994 6,238 $ 39,616 7,527 18,276 2,251 70,041 $ 14,327 2,367 62,926 $ 7,345 (280) 54,208 $ FY 11 | 51 The tax effects of temporary differences related to deferred taxes shown on the balance sheets were: Deferred tax assets: Deferred revenue Expense reserves (bad debts, insurance, franchise tax and vacation) Net operating loss carryforwards Other, net Deferred tax liabilities: Accelerated tax depreciation Accelerated tax amortization Other, net June 30, 2011 2010 $ 5,372 $ 3,875 8,086 11,097 1,122 25,677 6,730 12,222 514 23,341 (29,971) (81,265) (18,713) (129,949) (17,425) (73,355) (16,307) (107,087) Net deferred tax liability before valuation allowance (104,272) (83,746) Valuation allowance Net deferred tax liability (306) (306) $ (104,578) $ (84,052) The deferred taxes are classified on the balance sheets as follows: 2011 2010 Deferred income taxes (current) Deferred income taxes (long-term) $ (15,274) (89,304) (104,578) $ $ $ (10,449) (73,603) (84,052) The following analysis reconciles the statutory federal income tax rate to the effective income tax rates reflected above: Computed "expected" tax expense Increase (reduction) in taxes resulting from: State income taxes, net of federal income tax benefits Research and development credit Permanent book/tax differences Section 199 - prior year benefits Deferred tax adjustments Valuation Allowance Other (net) Year Ended June 30, 2011 2010 2009 35.0% 35.0% 35.0% 2.6% -2.0% -2.0% -0.2% 0.5% 0.0% -0.1% 2.5% -0.7% -0.9% -1.8% 0.7% 0.0% 0.0% 2.7% -3.0% -0.4% 0.0% 0.0% 0.2% 0.0% 33.8% 34.8% 34.5% An adjustment was made during fiscal 2011 to reflect a $3,802 reduction to the net deferred tax liability assumed upon the acquisition of iPay in fiscal 2010. Further details are provided in Note 12. As of June 30, 2011, we have $24,876 of net operating loss (“NOL”) carryforwards pertaining to the acquisition of GFSI, which are expected to be utilized after the application of IRC Section 382. Separately, as of June 30, 2011, we had state NOL carryforwards of $2,379. These losses have varying expiration dates, ranging from 2012 to 2029. Based on state tax rules which restrict our usage of these losses, we believe it is more likely than not that $306 of these losses will expire unutilized. Accordingly, a valuation allowance of $306 has been recorded against these assets as of June 30, 2011 and 2010. The Company paid income taxes of $60,515, $42,116, and $62,965 in 2011, 2010, and 2009, respectively. At June 30, 2010, the Company had $7,187 of unrecognized tax benefits. At June 30, 2011, the Company had $8,897 of unrecognized tax benefits, of which, $6,655, if recognized, would affect our effective tax rate. We had accrued interest and penalties of $1,030 and $890 related to uncertain tax positions at June 30, 2011 and 2010, respectively. A reconciliation of the unrecognized tax benefits for the years ended June 30, 2011 and 2010 follows: Balance at July 1, 2009 Additions for current year tax positions Reductions for current year tax positions Additions for prior year tax positions Reductions for prior year tax positions Settlements Reductions related to expirations of statute of limitations Balance at June 30, 2010 Additions for current year tax positions Reductions for current year tax positions Additions for prior year tax positions Reductions for prior year tax positions Settlements Unrecognized Tax Benefits $ 5,518 691 (39) 2,049 (298) - (734) 7,187 1,338 - 599 - - Reductions related to expirations of statute of limitations Balance at June 30, 2011 (227) 8,897 $ During the fiscal year ended June 30, 2010, the Internal Revenue Service commenced an examination of the Company’s U.S. federal income tax returns for fiscal years ended June 2008 through 2009 that is anticipated to be completed by the end of calendar year 2011. At this time, it is anticipated that the examination will not result in a material change to the Company’s financial position. The U.S. federal and state income tax returns for June 30, 2008 and all subsequent years still remain subject to examination as of June 30, 2011 under statute of limitations rules. We anticipate potential changes resulting from our IRS examination and expiration of statutes of limitations could reduce the unrecognized tax benefits balance by $3,000 - $4,000 within twelve months of June 30, 2011. NOTE 8: INDUSTRY AND SUPPLIER CONCENTRATIONS The Company sells its products to banks, credit unions, and financial institutions throughout the United States and generally does not require collateral. All billings to customers are due 30 days from date of billing. Reserves (which are insignificant at June 30, 2011, 2010 and 2009) are maintained for potential credit losses. In addition, the Company purchases most of its computer hardware and related maintenance for resale in relation to installation of JHA software systems from two suppliers. There are a limited number of hardware suppliers for these required items. If these relationships were terminated, it could have a significant negative impact on the future operations of the Company. NOTE 9: STOCK BASED COMPENSATION PLANS Our pre-tax operating income for the years ended June 30, 2011, 2010 and 2009 includes $4,723, $3,251 and $2,272 of stock-based compensation costs, respectively. Total compensation cost for the years ended June 30, 2011, 2010 and 2009 includes $4,209, $2,347, and $1,620 relating to the restricted stock plan, respectively. FY 11 | 53 1996 SOP and 2005 NSOP The Company previously issued options to employees under the 1996 Stock Option Plan (“1996 SOP”) and currently issues options to outside directors under the 2005 Non-Qualified Stock Option Plan (“2005 NSOP”). The 1996 SOP was adopted by the Company on October 29, 1996, for its employees. Terms and vesting periods of the options were determined by the Compensation Committee of the Board of Directors when granted and for options outstanding include vesting periods up to four years. Shares of common stock were reserved for issuance under this plan at the time of each grant, which must be at or above fair market value of the stock at the grant date. The options terminate 30 days after termination of employment, three months after retirement, one year after death or 10 years after the date of grant. In October 2002, the stockholders approved an increase in the number of stock options available from 13.0 million to 18.0 million shares. The plan terminated by its terms on October 29, 2006, although options previously granted under the 1996 SOP are still outstanding and vested. The 2005 NSOP was adopted by the Company on September 23, 2005, for its outside directors. Generally, options are exercisable beginning six months after grant at an exercise price equal to 100% of the fair market value of the stock at the grant date. For individuals who have served less than four continuous years, 25% of all options will vest after one year of service, 50% shall vest after two years, and 75% shall vest after three years of service on the Board. The options terminate upon surrender of the option, upon the expiration of one year following notification of a deceased optionee, or 10 years after grant. 700 shares of common stock have been reserved for issuance under this plan with a maximum of 100 for each director. As of June 30, 2011, there were 480 shares available for future grants under the plan. A summary of option plan activity under the plans is as follows: Number of Shares Weighted Average Exercise Price Aggregate Intrinsic Value Outstanding July 1, 2008 Granted Forfeited Exercised Outstanding June 30, 2009 Granted Forfeited Exercised Outstanding June 30, 2010 Granted Forfeited Exercised Outstanding June 30, 2011 Vested and Expected to Vest June 30, 2011 Exercisable June 30, 2011 3,977 50 (19) (248) 3,760 50 (71) (1,842) 1,897 - (47) (860) 990 990 990 $17.42 17.45 20.77 12.28 17.75 23.65 26.64 16.70 18.58 - 27.84 21.46 $15.65 $15.65 $15.65 $14,216 $14,216 $14,216 There were no options granted during fiscal 2011. The weighted-average fair value of options granted during fiscal 2010 and fiscal 2009 was $8.90 and $7.87, respectively. The only options granted during fiscal years 2010 and 2009 were to non-employee members of the Company’s board of directors. The assumptions used in estimating fair value and resulting compensation expenses at the grant dates are as follows: Weighted Average Assumptions: Expected life (years) Volatility Risk free interest rate Dividend yield Year Ended June 30, 2010 2009 6.67 33% 3.0% 1.52% 3.72 30% 1.4% 1.72% The option pricing model assumptions such as expected life, volatility, risk-free interest rate, and dividend yield impact the fair value estimate. These assumptions are subjective and generally require significant analysis and judgment to develop. When estimating fair value, some of the assumptions were based on or determined from external data (for example, the risk-free interest rate) and other assumptions were derived from our historical experience with share- based payment arrangements (e.g., volatility, expected life and dividend yield). The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances. As of June 30, 2011, there was no unrecognized compensation costs related to stock options since all options have now vested. The weighted average remaining contractual term on options currently exercisable as of June 30, 2011 was 2.75 years. Following is an analysis of stock options outstanding and exercisable as of June 30, 2011: Range of Weighted-Average Remaining Weighted-Average Exercise Prices Shares Contractural Life in Years Exercise Price Outstanding Exercisable Outstanding Outstanding Exercisable $10.84 - $11.50 $11.51 - $18.55 $18.56 - $21.53 $21.54 - $23.40 $23.41 - $23.65 $23.66 - $24.97 $24.98 - $25.00 $25.01 - $25.65 $25.66 - $25.72 $25.73 - $28.52 $ 10.84 - $28.52 531 122 143 85 50 1 2 5 1 50 990 531 122 143 85 50 1 2 5 1 50 990 1.78 4.56 2.01 2.37 8.37 0.38 0.41 0.35 0.15 6.34 2.75 $ 10.84 $ 10.84 17.43 20.05 22.37 23.65 24.97 25.00 25.65 25.72 28.52 17.43 20.05 22.37 23.65 24.97 25.00 25.65 25.72 28.52 $ 15.65 $ 15.65 The income tax benefits from stock option exercises totaled $2,298, $4,666 and $1,233 for the years ended June 30, 2011, 2010 and 2009, respectively. The total intrinsic value of options exercised was $6,342, $12,694 and $1,999 for the fiscal years ended June 30, 2011, 2010 and 2009, respectively. Restricted Stock Plan The Restricted Stock Plan was adopted by the Company on November 1, 2005, for its employees. Up to 3,000 shares of common stock are available for issuance under the plan. Upon issuance, shares of restricted stock are subject to forfeiture and to restrictions which limit the sale or transfer of the shares during the restriction period. The restrictions will be lifted over periods ranging from three to seven years from grant date. On certain awards, the restrictions may be lifted sooner if certain targets for shareholder return are met. FY 11 | 55 The following table summarizes non-vested share awards as of June 30, 2011, as well as activity for the year then ended: Weighted Average Grant Date Fair Value Shares Non-vested shares at July 1, 2009 Granted Vested Forfeited Non-vested shares at June 30, 2010 Granted Vested Forfeited Non-vested shares at June 30, 2011 267 139 (19) - 387 102 (59) (14) 416 $ $ 21.66 22.59 22.36 - 21.96 24.54 23.75 21.88 22.34 The non-vested share awards will not participate in dividends during the restriction period. As a result, the weighted- average fair value of the non-vested share awards is based on the fair market value of the Company’s equity shares on the grant date, less the present value of the expected future dividends to be declared during the restriction period. At June 30, 2011, there was $3,860 of compensation expense that has yet to be recognized related to non-vested restricted stock share awards, which will be recognized over a weighted-average period of 1.49 years. An amendment to the Restricted Stock Plan was adopted by the Company on August 20, 2010, for its executive officers. Unit awards will be made to employees remaining in continuous employment throughout the performance period and vary based on the Company’s percentile ranking in Total Shareholder Return (“TSR”) over the performance period compared to a peer group of companies. TSR is defined as the change in the stock price through the performance period plus dividends per share paid during the performance period, all divided by the stock price at the beginning of the performance period. It is the intention of the Company to settle the unit awards in shares of the Company’s stock. The following table summarizes non-vested unit awards as of June 30, 2011, as well as activity for the year then ended: Non-vested shares at July 1, 2010 Granted Vested Forfeited Non-vested shares at June 30, 2011 Weighted Average Grant Date Fair Value - 15.77 - - 15.77 $ Units - 293 - - 293 The assumptions used in this model to estimate fair value and resulting values are as follows: Weighted Average Assumptions at measurement date: Volatility Risk free interest rate Dividend yield Stock Beta 37% 0.9% 1.60% 0.89 At June 30, 2011, there was $3,389 of compensation expense that has yet to be recognized related to non-vested restricted stock unit awards, which will be recognized over a weighted-average period of 2.20 years. NOTE 10: EARNINGS PER SHARE The following table reflects the reconciliation between basic and diluted net income per share: Net Income Year Ended June 30, 2011 137,471 $ 2010 117,870 $ 2009 103,102 $ Common share information: Weighted average shares outstanding for basic EPS Dilutive effect of stock options and restricted stock Shares for diluted EPS 85,948 739 86,687 84,558 823 85,381 84,118 712 84,830 Basic Earnings per Share $ 1.60 $ 1.39 $ 1.23 Diluted Earnings per Share $ 1.59 $ 1.38 $ 1.22 Per share information is based on the weighted average number of common shares outstanding for each of the fiscal years. Stock options and restricted stock have been included in the calculation of income per share to the extent they are dilutive. Stock options and restricted stock to purchase approximately 12 shares for fiscal 2011, 602 shares for fiscal 2010, and 1,267 shares for fiscal 2009, were not dilutive and therefore, were not included in the computations of diluted income per common share amounts. NOTE 11: EMPLOYEE BENEFIT PLANS The Company established an employee stock purchase plan in 2006. The plan allows the majority of employees the opportunity to directly purchase shares of the Company at a 15% discount. The plan does not meet the criteria as a non-compensatory plan. As a result, the Company records the total dollar value of the stock discount given to employees under the plan as expense. Total expense recorded by the Company under the plan for the year ended June 30, 2011, 2010 and 2009 was $434, $345 and $333 respectively. The Company has a defined contribution plan for its employees, the 401(k) Retirement Savings Plan (the “Plan”). The Plan is subject to the Employee Retirement Income Security Act of 1975 (“ERISA”) as amended. Under the Plan, the Company matches 100% of full time employee contributions up to 5% of compensation subject to a maximum of $5 per year. In order to receive matching contributions, employees must be 18 years of age and be employed for at least six months. The Company has the option of making a discretionary contribution; however, none has been made for any of the three most recent fiscal years. The total matching contributions for the Plan were $11,076, $9,369, and $8,341 for fiscal 2011, 2010, and 2009, respectively. NOTE 12: BUSINESS ACQUISITIONS Fiscal 2010 Acquisitions: iPay Technologies Holding Company, LLC On June 4, 2010, the Company acquired all of the equity interests of iPay, a provider of online bill payment solutions for both banks and credit unions, for $301,143 paid in cash. The cash used for this acquisition was funded primarily through borrowings on available lines of credit and certain term notes issued concurrent with the acquisition. The acquisition of iPay expanded the Company’s presence in the growing electronic payments industry, strengthened the Company’s electronic payments offering, and increased recurring revenue. Through the Company’s measurement period evaluation of the preliminary purchase price allocation, we identified a $2,817 decrease in the current deferred tax liability assumed, a $985 decrease in the long term deferred tax liability assumed and a $216 increase in accrued expenses assumed, with a corresponding $3,586 decrease in the goodwill arising from the acquisition. The measurement period adjustment was attributable to new information gathered related to the deferred tax liability of iPay in preparation of its final tax return. The measurement period adjustment was made retrospectively on the acquisition date, June 4, 2010, and did not impact the consolidated income statement. FY 11 | 57 Management has completed the purchase price allocation of iPay and its assessment of the fair value of acquired assets and liabilities assumed. The recognized amounts of identifiable assets acquired and liabilities assumed, based upon their fair values as of June 4, 2010, updated for the retrospective adjustment, are set forth below: The goodwill of $188,759 arising from this acquisition consists largely of the growth potential, synergies and economies of scale expected from combining the operations of the Company with those of iPay, together with the value of iPay’s assembled workforce. Goodwill from this acquisition has been allocated between our Banking Systems and Services and our Credit Union Systems and Services segments based upon the extent to each segment is expected to benefit from the synergies of the combination. Approximately 80% of the goodwill is expected to be deductible for income tax purposes. The fair value of current assets acquired included accounts receivable of $1,403, all of which was deemed to be collectible. During fiscal year 2010, the Company incurred $2,280 in costs related to the acquisition of iPay. These costs included fees for legal, accounting, valuation and other professional fees. These costs were included within general and administrative expenses. The results of iPay’s operations included in the Company’s consolidated statement of operations from the acquisition date to June 30, 2010 included revenue of $3,526 and after-tax net income of $38. PEMCO Technology Services, Inc. On October 29, 2009, the Company acquired all of the issued and outstanding shares of PTSI, a provider of payment processing solutions primarily for the credit union industry, for $61,841 paid in cash. The cash used for this acquisition was funded using borrowings against available lines of credit. The acquisition of PTSI broadened the Company’s product offerings within its electronic payments business and expanded the Company’s presence in the credit union market beyond its core client base. The recognized amounts of identifiable assets acquired and liabilities assumed, based upon their fair values as of October 29, 2009 are set forth below: Current assets (inclusive of cash acquired of $2,275) Long-term assets Identifiable intangible assets Total liabilities assumed Total identifiable net assets Goodwill Net assets acquired $ 9,448 1,222 34,912 (3,572) 42,010 19,831 61,841 $ The goodwill of $19,831 arising from this acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company with those of PTSI, together with the value of PTSI’s assembled workforce. All of the goodwill from this acquisition was assigned to the Credit Union Systems and Services segment. The Company and the former shareholder of PTSI jointly made an Internal Revenue Code Section 338(h) (10) election for this acquisition. This election allows treatment of this acquisition as an asset acquisition, which permits the Company to amortize goodwill for tax purposes. The fair value of current assets acquired includes accounts receivable of $4,686, all of which was deemed collectible. During fiscal 2010, the Company incurred $249 in costs related to the acquisition of PTSI. These costs included fees for legal, accounting, valuation and other professional fees. These costs were included within general and administrative expenses. The results of PTSI’s operations included in the Company’s consolidated statement of operations from the acquisition date to June 30, 2010 included revenue of $33,738 and after tax net income of $3,289. Goldleaf Financial Solutions, Inc. On October 1, 2009, the Company acquired all of the issued and outstanding shares of GFSI, a provider of integrated technology and payment processing solutions to financial institutions of all sizes. According to the terms of the merger agreement, each share of GFSI stock issued and outstanding was converted into the right to receive $0.98 in cash, for a total cash outlay of $19,085. The acquisition of GFSI has broadened the Company’s market presence, strengthened our competitive position by diversifying our product and service offerings and provided significant cost synergies to the combined organization. In addition to the cash paid to acquire the outstanding shares of GFSI, the Company also paid $48,532 in cash at closing to settle various outstanding obligations of GFSI, resulting in a total cash outlay of $67,617. This cash outlay was funded using existing operating cash. The recognized amounts of identifiable assets acquired and liabilities assumed, based upon their fair values as of October 1, 2009 are set forth below: Current assets (inclusive of cash acquired of $1,319) Long-term assets Identifiable intangible assets Total liabilities assumed Total identifiable net assets Goodwill Net assets acquired $ 12,952 7,466 39,845 (25,727) 34,536 33,081 67,617 $ The goodwill of $33,081 arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company with those of GFSI, together with the value of GFSI’s assembled workforce. All of the goodwill was assigned to the Banking Systems and Services segment. None of this goodwill is expected to be deductible for income tax purposes. The fair value of current assets acquired includes trade accounts receivable with a fair value of $8,089. The gross amount receivable is $8,769, of which $680 was expected to be uncollectible. In addition, the Company acquired an investment in direct financing leases, which includes lease payments receivable of $4,210, all of which was assumed to be collectible. During fiscal 2010, the Company incurred $1,708 in costs related to the acquisition of GFSI. These costs included fees for legal, accounting, valuation and other professional fees. These costs were included within general and administrative expenses. The results of GFSI’s operations included in the Company’s consolidated statement of operations from the acquisition date to June 30, 2010 included revenue of $44,794 and after tax net income of $1,204. The accompanying consolidated statements of income for the fiscal years ended June 30, 2011, 2010 and 2009 do not include any revenues and expenses related to these acquisitions prior to the respective closing dates of each acquisition. The following unaudited pro forma consolidated financial information is presented as if these acquisitions had occurred at the beginning of the periods presented. In addition, this unaudited pro forma financial information is provided for illustrative purposes only and should not be relied upon as necessarily being indicative of the historical results that would have been obtained if these acquisitions had actually occurred during those periods, or the results that may be obtained in the future as a result of these acquisitions. FY 11 | 59 NOTE 13: BUSINESS SEGMENT INFORMATION The Company is a provider of integrated computer systems that perform data processing (available for in-house or service bureau installations) for banks and credit unions. The Company’s operations are classified into two business segments: bank systems and services (“Bank”) and credit union systems and services (“Credit Union”). The Company evaluates the performance of its segments and allocates resources to them based on various factors, including prospects for growth, return on investment, and return on revenue. The Company measures the performance of its segments on gross profit. For the Year Ended June 30, 2011 Credit Union Total Bank REVENUE License Support and service Hardw are Total revenue COST OF SALES Cost of license Cost of support and service Cost of hardw are Total cost of sales $ 37,424 665,297 44,171 746,892 $ 15,643 186,956 17,406 220,005 $ 53,067 852,253 61,577 966,897 5,008 394,040 31,850 430,898 1,277 121,877 13,511 136,665 6,285 515,917 45,361 567,563 GROSS PROFIT $ 315,994 $ 83,340 399,334 OPERATING EXPENSES INTEREST INCOME (EXPENSE) INCOME BEFORE INCOME TAXES 183,017 (8,805) $ 207,512  For the Year Ended June 30, 2010 Credit Union Total Bank $ 38,117 585,470 48,695 672,282 $ 14,108 135,034 15,162 164,304 $ 52,225 720,504 63,857 836,586 4,732 348,489 35,961 389,182 1,095 89,987 11,202 102,284 $ 283,100 $ 62,020 5,827 438,476 47,163 491,466 345,120 162,867 (1,457) $ 180,796 For the Year Ended June 30, 2009 Credit Union Total Bank $ 45,169 514,748 57,794 617,711 $ 13,265 99,494 15,123 127,882 $ 58,434 614,242 72,917 745,593 6,113 321,489 42,297 369,899 772 64,348 11,175 76,295 6,885 385,837 53,472 446,194 299,399 141,513 (576) $ 157,310 REVENUE License Support and service Hardw are Total revenue COST OF SALES Cost of license Cost of support and service Cost of hardw are Total cost of sales GROSS PROFIT OPERATING EXPENSES INTEREST INCOME (EXPENSE) INCOME BEFORE INCOME TAXES REVENUE License Support and service Hardw are Total revenue COST OF SALES Cost of license Cost of support and service Cost of hardw are Total cost of sales OPERATING EXPENSES INTEREST INCOME (EXPENSE) INCOME BEFORE INCOME TAXES Depreciation expense, net Bank systems and services Credit Unions systems and services Total Amortization expense, net Bank systems and services Credit Unions systems and services Total Capital expenditures Bank systems and services Credit Unions systems and services Total GROSS PROFIT $ 247,812 $ 51,587 For the Year Ended June 30, 2011 2010 2009 $ $ 38,830 3,082 41,912 $ $ 35,507 13,095 48,602 $ $ 23,730 8,355 32,085 $ $ 34,497 2,092 36,589 $ $ 27,675 7,244 34,919 $ $ 51,392 3,117 54,509 $ $ 36,816 2,043 38,859 $ $ 22,779 2,509 25,288 $ $ 30,752 810 31,562 FY 11 | 61 For the Year Ended June 30, 2011 2010 Property and equipment, net Bank systems and services Credit Unions systems and services Total Intangible assets, net Bank systems and services Credit Unions systems and services Total $ $ 235,929 34,257 270,186 $ $ 594,507 239,579 834,086 $ $ 241,596 33,074 274,670 $ $ 611,245 245,065 856,310 The Company has not disclosed any additional asset information by segment, as the information is not produced internally and its preparation is impracticable. NOTE 14: SUBSEQUENT EVENTS In accordance with ASC Topic 855, Subsequent Events, the Company has evaluated any significant events occurring from the date of these financial statements through the date they were issued. The effects of any such events upon conditions existing as of the balance sheet date have been reflected within the financial statements to the extent that the effects were material. Any significant events occurring after the balance sheet date that do not relate to conditions existing as of that date are disclosed below. On August 19, 2011, the Company’s Board of Directors declared a quarterly cash dividend of $0.105 per share of common stock, payable on September 28, 2011 to shareholders of record on September 8, 2011. QUARTERLY FINANCIAL INFORMATION (unaudited) QUARTERLY FINANCIAL INFORMATION (unaudited) REVENUE License Support and service Hardware Total revenue COST OF SALES Cost of license Cost of support and service Cost of hardware Total cost of sales Quarter 1 For the Year Ended June 30, 2011 Quarter 2 Quarter 4 Quarter 3 Total $ 9,459 210,610 14,753 234,822 $ 15,460 212,378 14,797 242,635 $ 13,025 210,074 17,086 240,185 $ 15,123 219,191 14,941 249,255 $ 53,067 852,253 61,577 966,897 1,178 125,806 10,805 137,789 2,079 126,857 10,880 139,816 1,145 131,010 12,740 144,895 1,883 132,244 10,936 145,063 6,285 515,917 45,361 567,563 GROSS PROFIT 97,033 102,819 95,290 104,192 399,334 OPERATING EXPENSES Selling and marketing Research and development General and administrative Total operating expenses 16,362 15,390 12,506 44,258 16,979 15,837 15,014 47,830 16,929 15,716 12,142 44,787 17,791 16,452 11,899 46,142 68,061 63,395 51,561 183,017 OPERATING INCOME 52,775 54,989 50,503 58,050 216,317 INTEREST INCOME (EXPENSE) Interest income Interest expense Total interest income (expense) 17 (2,892) (2,875) 32 (2,487) (2,455) 61 (1,710) (1,649) 15 (1,841) (1,826) 125 (8,930) (8,805) INCOME BEFORE INCOME TAXES 49,900 52,534 48,854 56,224 207,512 PROVISION FOR INCOME TAXES 18,129 16,489 15,773 19,650 70,041 NET INCOME $ 31,771 $ 36,045 $ 33,081 $ 36,574 $ 137,471 Diluted net income per share Diluted weighted average shares outstanding Basic net income per share Basic weighted average shares outstanding $ 0.37 $ 0.42 $ 0.38 $ 0.42 $ 1.59 86,147 86,523 86,972 87,090 86,687 $ 0.37 $ 0.42 $ 0.38 $ 0.42 $ 1.60 85,469 85,770 86,218 86,335 85,948 FY 11 | 63 QUARTERLY FINANCIAL INFORMATION (unaudited) REVENUE License Support and service Hardware Total revenue COST OF SALES Cost of license Cost of support and service Cost of hardware Total cost of sales Quarter 1 For the Year Ended June 30, 2010 Quarter 2 Quarter 4 Quarter 3 Total $ 11,402 155,926 15,003 182,331 $ 12,013 184,143 14,705 210,861 $ 16,391 182,090 17,068 215,549 $ 12,419 198,345 17,081 227,845 $ 52,225 720,504 63,857 836,586 1,120 95,810 11,010 107,940 1,091 110,026 10,664 121,781 1,804 114,667 12,565 129,036 1,812 117,973 12,924 132,709 5,827 438,476 47,163 491,466 GROSS PROFIT 74,391 89,080 86,513 95,136 345,120 OPERATING EXPENSES Selling and marketing Research and development General and administrative Total operating expenses 12,125 10,148 10,181 32,454 14,866 12,339 14,512 41,717 16,765 14,001 12,088 42,854 17,119 14,332 14,391 45,842 60,875 50,820 51,172 162,867 OPERATING INCOME 41,937 47,363 43,659 49,294 182,253 INTEREST INCOME (EXPENSE) Interest income Interest expense Total interest income (expense) 41 (90) (49) 4 (143) (139) 9 (186) (177) 107 (1,199) (1,092) 161 (1,618) (1,457) INCOME BEFORE INCOME TAXES 41,888 47,224 43,482 48,202 180,796 PROVISION FOR INCOME TAXES 15,614 17,247 11,847 18,218 62,926 NET INCOME $ 26,274 $ 29,977 $ 31,635 $ 29,984 $ 117,870 Diluted net income per share Diluted weighted average shares outstanding Basic net income per share Basic weighted average shares outstanding $ 0.31 $ 0.35 $ 0.37 $ 0.35 $ 1.38 84,823 85,224 85,480 85,998 85,381 $ 0.31 $ 0.36 $ 0.37 $ 0.35 $ 1.39 83,870 84,341 84,694 85,325 84,558 Board of dIrecTors michael e. Henry Chairman Jack Henry & Associates Monett, Missouri John f. “Jack” prim Chief Executive Officer Jack Henry & Associates Monett, Missouri Jerry d. Hall Vice Chairman and Executive Vice President Jack Henry & Associates Monett, Missouri matthew c. flanigan Senior Vice President and Chief Financial Officer Leggett & Platt, Incorporated Carthage, Missouri craig r. curry Chairman of the Board Central Bank Lebanon, Missouri Wesley a. Brown Managing Director St. Charles Capital, LLC Denver, Colorado marla k. shepard President and Chief Executive Officer California Coast Credit Union San Diego, California eXecuTIVe offIcers michael e. Henry Chairman John f. “Jack” prim Chief Executive Officer Tony l. Wormington President Jerry d. Hall Vice Chairman and Executive Vice President kevin d. Williams Chief Financial Officer and Treasurer mark s. forbis Vice President and Chief Technology Officer annual meeTIng The annual meeting of shareholders will be held on Thursday, November 17 at 11:00 a.m. Central at Jack Henry & Associates’ Corporate Headquarters, Monett, Missouri. form 10-k A copy of the company’s Form 10-K is available upon request to the Chief Financial Officer at the corporate headquarters address or from our website at www.jackhenry.com. Transfer agenT and regIsTrar Computershare Trust Company, N.A. P.O. Box 43078 Providence, RI 02940 FY 11 | 65 663 Highway 60 p.o. Box 807 monett, mo 65708 417-235-6652 417-235-4281 – fax www.jackhenry.com 

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