Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following section provides management's view of the financial condition and results of operations and should be read in conjunction with the Selected Financial Data, the audited Consolidated Financial Statements, and related notes included elsewhere in this report.

OVERVIEW

Jack Henry & Associates, Inc. (JHA) is headquartered in Monett, Missouri, employs approximately 5,200 associates nationwide, and is a leading provider of technology solutions and payment processing services primarily for financial services organizations. Its solutions serve more than 11,300 customers and are marketed and supported through three primary brands. Jack Henry Banking® supports banks ranging from community to mid-tier, multi-billion dollar institutions with information and transaction processing solutions. Symitar® is a leading provider of information and transaction processing solutions for credit unions of all sizes. ProfitStars® provides specialized products and services that enable financial institutions of every asset size and charter, and diverse corporate entities outside the financial services industry to mitigate and control risks, optimize revenue and growth opportunities, and contain costs. JHA's integrated solutions are available for in-house installation and outsourced and hosted delivery.

Each of our brands share the fundamental commitment to provide high quality business solutions, service levels that consistently exceed customer expectations, integration of solutions and practical new technologies. The quality of our solutions, our high service standards, and the fundamental way we do business typically foster long-term customer relationships, attract prospective customers, and have enabled us to capture substantial market share.

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 and generate new cross-sales opportunities across our three business brands. We provide compatible computer hardware for our in-house installations and secure processing environments for our outsourced and hosted solutions. We perform data conversions, software implementations, initial and ongoing customer training, and ongoing customer support services.

Our primary competitive advantage is customer service. Our support infrastructure and strict standards provide service levels we believe to be the highest in the markets we serve and generate high levels of customer satisfaction and retention. We consistently measure customer satisfaction using comprehensive annual surveys and random surveys we receive in our everyday business. Dedicated surveys are also used to grade specific aspects of our customer experience, including product implementation, education, and consulting services.

The majority of our revenue is derived from recurring outsourcing fees and transaction processing fees that predominantly have contract terms of five years or greater. Support and service fees also include in-house maintenance fees on primarily annual contract terms. Less predictable software license fees and hardware sales complement our primary revenue sources. We continually seek opportunities to increase revenue while at the same time containing costs to expand margins.

During the last five fiscal years, our revenues have grown from $745,593 in fiscal 2009 to $1,129,386 in fiscal 2013. Income from continuing operations has grown from $103,102 in fiscal 2009 to $176,645 in fiscal 2013. This growth has resulted primarily from internal expansion supplemented by strategic acquisitions.

We have two reportable 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.

We continue to focus on areas of our company to accomplish our ongoing objective of providing the best integrated solutions, products and customer service available to our clients. We are currently cautiously optimistic regarding ongoing economic improvement and expect our clients to continue investing in our products and services that are needed to improve their operating efficiencies and performance. We anticipate consolidation within the financial services industry to continue, including some reduced amount of bank failures and an increasing amount of merger and acquisition activity. Regulatory conditions and legislation such as the Dodd-Frank Wall Street Reform and Consumer Protection Act will continue to impact the financial services industry and potentially motivate some financial institutions to postpone discretionary spending.

A detailed discussion of the major components of the results of operations follows. All dollar amounts are in thousands and discussions compare fiscal 2013 to fiscal 2012 and compare fiscal 2012 to fiscal 2011.

RESULTS OF OPERATIONS

FISCAL 2013 COMPARED TO FISCAL 2012

In fiscal 2013, revenues increased 10% or $102,277 compared to the prior year due primarily to strong growth in all components of support and service revenues, particularly our electronic payment services and our outsourcing services. The growth in revenue and the Company's continued focus on cost management continued to drive up gross margins, which has resulted in a 13% increase in gross profit.

Operating expenses increased 13% for the year mainly due to expenses related to the impact of widespread flooding caused by Hurricane Sandy on our Lyndhurst, New Jersey item processing center. Expenses related to this event totaled $12,475 for fiscal 2013, net of $2,390 insurance recoveries received in the year. Insurance claims have been made by JHA to recover the portions of the remaining expenses incurred related to Hurricane Sandy. These open insurance recovery claims have not been finalized and no amounts have been recorded in the financial results for the year ended June 30, 2013. The amount recovered will likely be less than the amount of the expense.

Increased revenue and gross margins, partially offset by increased operating expenses, resulted in a combined 14% increase in net income for fiscal 2013.

We move into fiscal 2014 following record revenue achieved in fiscal 2013. Significant portions of our business continue to come from recurring revenue and our healthy sales pipeline is also encouraging. Our customers continue to face regulatory and operational challenges which our products and services address, and in these times they have an even greater need for our solutions that directly address institutional profitability and efficiency. Our strong balance sheet, access to extensive lines of credit, the strength of our existing product line and an unwavering commitment to superior customer service position us well to address current and future opportunities to extend our customer base and produce returns for our stockholders.

REVENUE



License Revenue	Year Ended						%
	June 30,						Change
	2013			2012
License	$	54,818		$	54,811		<1%
Percentage of total revenue	5		%	5		%

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.

License revenue has remained consistent to last year due to strong results from our core and complementary Credit Union products being offset by reduced revenue from our Alogent® products (our suite of deposit and image capture products targeted at large financial institutions) which reduced from a particularly strong prior year.

While license fees will fluctuate, recent trends indicate that our customers are increasingly electing to contract for our products via outsourced delivery rather than a traditional license as our outsourced delivery does not require an up-front capital investment in license fees. We expect this trend to continue in the long term.



Support and Service Revenue	Year Ended						%
	June 30,						Change
	2013			2012
Support and service	$	1,015,211		$	909,176		12	%
Percentage of total revenue	90		%	89		%



	Year over Year Change
	$ Change		% Change
In-House Support & Other Services	$	12,677	4	%
Electronic Payment Services	58,052		17	%
Outsourcing Services	23,017		12	%
Implementation Services	12,289		17	%
Total Increase	$	106,035

Support and service revenues are generated from annual support to assist the customer in operating their systems and to enhance and update the software, electronic payment services, outsourced data processing services and implementation services (including conversion, installation, configuration and training). There was growth in all components of support and service revenue in fiscal 2013.

In-house support and other services revenue increased due to annual maintenance fee increases as our customers’ assets grow. Revenue from our complementary products has also grown as the total number of supported in-house products has grown.

Electronic payment services continue to experience the largest growth. The revenue increases are attributable to strong performance across debit/credit card processing services, online bill payment services and ACH processing.

Outsourcing services for banks and credit unions continue to drive revenue growth as customers continue to show a preference for outsourced delivery of our solutions. We expect the trend towards outsourced product delivery to benefit outsourcing services revenue for the foreseeable future. Revenues from outsourcing services are typically earned under multi-year service contracts and therefore provide a long-term stream of recurring revenues.

Implementation services revenue increased due mainly to increased implementations of our core Banking and Credit Union platform products and related complementary products, coupled with higher merger conversion revenues from our core banking platform and outsourcing products.



Hardware Revenue	Year Ended						%
	June 30,						Change
	2013			2012
Hardware	$	59,357		$	63,122		(6	)%
Percentage of total revenue	5		%	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.

Hardware revenue decreased due to a decrease in the number of third party hardware systems and components delivered. Although there will be continuing fluctuations, we expect an overall decreasing trend in hardware sales due to the change in sales mix towards outsourcing contracts (which typically do not include hardware) and the deflationary trend of computer prices generally.

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.



	Year Ended						%
	June 30,						Change
	2013			2012

Cost of License	$	4,824		$	6,111		(21	)%
Percentage of total revenue	<1%			1		%
License Gross Profit	$	49,994		$	48,700		3	%
Gross Profit Margin	91		%	89		%
Cost of support and service	$	603,920		$	551,285		10	%
Percentage of total revenue	53		%	54		%
Support and Service Gross Profit	$	411,291		$	357,891		15	%
Gross Profit Margin	41		%	39		%
Cost of hardware	$	43,650		$	45,983		(5	)%
Percentage of total revenue	4		%	4		%
Hardware Gross Profit	$	15,707		$	17,139		(8	)%
Gross Profit Margin	26		%	27		%
TOTAL COST OF SALES	$	652,394		$	603,379		8	%
Percentage of total revenue	58		%	59		%
TOTAL GROSS PROFIT	$	476,992		$	423,730		13	%
Gross Profit Margin	42		%	41		%

Cost of license consists of the direct costs of third party software. Sales of third party software products decreased compared to last year, leading to lower related costs and slightly increased gross profit margins.

Gross profit margins in support and service increased due to economies of scale realized from increased revenues, particularly in electronic payment services.

In general, changes in cost of hardware trend consistently with hardware revenue. For the fiscal year, margins have decreased slightly, being impacted by reduced sales of higher margin products related to hardware upgrades.

OPERATING EXPENSES



Selling and Marketing	Year Ended						%
	June 30,						Change
	2013			2012
Selling and marketing	$	81,619		$	76,500		7	%
Percentage of total revenue	7		%	7		%

Dedicated sales forces, inside sales teams, technical sales support teams and channel partners conduct our sales efforts for our two reportable 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.

Selling and marketing expenses for the year have increased mainly due to higher commission expenses. This is in line with increased sales volume of long term service contracts on which commissions are paid as a percentage of total revenue.



Research and Development	Year Ended						%
	June 30,						Change
	2013			2012
Research and development	$	63,202		$	60,876		4	%
Percentage of total revenue	6		%	6		%

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 primarily due to increased salary costs.



General and Administrative	Year Ended						%
	June 30,						Change
	2013			2012
General and administrative	$	66,624		$	50,119		33	%
Percentage of total revenue	6		%	5		%

General and administrative costs include all expenses related to finance, legal, human resources, plus all administrative costs. General and administrative expenses increased compared to last year due mainly to $12,475 of expenses, net of $2,390 insurance recoveries received, related to the impact of widespread flooding caused by Hurricane Sandy on our Lyndhurst, New Jersey item processing center.



INTEREST INCOME AND EXPENSE	Year Ended						%
	June 30,						Change
	2013			2012
Interest Income	$	640		$	1,176		(46	)%
Interest Expense	$	(6,337	)	$	(5,743	)	10	%

Interest income was unusually high in the prior year, mainly from contractual interest income on previously uncollected deconversion revenues. Interest expense increased from the prior year due to costs related to the early payment of the term loan during fiscal 2013.

PROVISION FOR INCOME TAXES

The provision for income taxes was $83,205 or 32.0% of income before income taxes in fiscal 2013 compared with $76,684 or 33.1% of income before income taxes in fiscal 2012. The decrease in the effective tax rate was primarily due to the completion of the Internal Revenue Service audit of the tax returns for the fiscal years June 30, 2010 and 2011 which resulted in the recognition of previously-unrecognized tax benefits, and the retroactive extension of the Research and Experimentation Tax Credit through December 31, 2013.

NET INCOME

Net income increased from $154,984, or $1.78 per diluted share in fiscal 2012 to $176,645, or $2.04 per diluted share in fiscal 2013.

FISCAL 2012 COMPARED TO FISCAL 2011

In fiscal 2012, revenues increased 6% or $60,212 compared to the prior year due primarily to strong growth in our electronic payment services and our outsourcing services, as well as continued revenue growth in all three of our components of revenue (license, support and service, and hardware). During fiscal 2012, the Company continued to focus on cost management and also reduced interest cost through our sustained repayment of long-term debt. These changes have resulted in a 13% increase in net income.

The current condition of the U.S. financial markets continues to impact the overall demand and spending for new products and services by some of our customers. The profitability of many financial institutions continues to improve, but in many cases remains low and this appears to have resulted in some reduction of demand for new products and services. During the past four years, a number of financial institutions have closed or merged due to regulatory action. We believe that regulatory closings will continue to decline through fiscal 2013, absent a significant downturn in the economy. Furthermore, the increase in bank failures and forced consolidations has been, to some extent, offset by a general decline in the level of acquisition activity among financial institutions.

REVENUE



License Revenue	Year Ended						%
	June 30,						Change
	2012			2011
License	$	54,811		$	53,067		2	%
Percentage of total revenue	5		%	6		%

The increase in license revenue is due to strong results from our Silverlake® and Episys® core systems and related complementary products including 4|Sight™ Item Imaging and our ProfitStar® financial management and budgeting solutions. The increase was partially offset by reduced revenue from our Alogent® products (our suite of deposit and image capture products targeted at large financial institutions) and our Argo products (our suite of retail solutions, including branch sales automation) which have both reduced slightly from a particularly strong prior year.



Support and Service Revenue	Year Ended						%
	June 30,						Change
	2012			2011
Support and service	$	909,176		$	852,253		7	%
Percentage of total revenue	89		%	88		%



	Year Over Year Change
	$ Change		% Change
In-House Support & Other Services	$	6,891	2	%
Electronic Payment Services	36,546		12	%
Outsourcing Services	9,560		5	%
Implementation Services	3,926		6	%
Total Increase	$	56,923

Support and service revenues are generated from annual support to assist the customer in operating their systems and to enhance and update the software, electronic payment services, outsourced data processing services and implementation services (including conversion, installation, configuration and training). There was strong growth in support and service revenue in fiscal 2012.

In-house support and other services revenue increased due to annual maintenance fee increases (as our customers’ assets have grown) and increased revenues from our system conversion services. Revenue from our complementary products has also grown as the total number of supported in-house products has grown.

Electronic payment services continue to experience the largest growth. The revenue increases are attributable to strong performance across our electronic payment products, particularly from debit/credit card processing services, online bill payment services and ACH processing.

Implementation services revenue increased due mainly to increased Episys® credit union core product implementation revenues as well as higher online bill payment services implementation revenues.



Hardware Revenue	Year Ended						%
	June 30,						Change
	2012			2011
Hardware	$	63,122		$	61,577		3	%
Percentage of total revenue	6		%	6		%

Hardware revenue increased slightly due to an increase in the number of third party hardware systems and components delivered as existing customers upgraded their hardware systems. Although there will be continuing fluctuations, we expect there to be an overall decreasing trend in hardware sales due to the change in sales mix towards outsourcing contracts (which typically do not include hardware) and the deflationary trend of computer prices generally.

COST OF SALES AND GROSS PROFIT



Cost of Sales and Gross Profit	Year Ended						%
	June 30,						Change
	2012			2011
Cost of License	$	6,111		$	6,285		(3	)%
Percentage of total revenue	1		%	1		%
License Gross Profit	$	48,700		$	46,782		4	%
Gross Profit Margin	89		%	88		%
Cost of support and service	$	551,285		$	515,917		7	%
Percentage of total revenue	54		%	53		%
Support and Service Gross Profit	$	357,891		$	336,336		6	%
Gross Profit Margin	39		%	39		%
Cost of hardware	$	45,983		$	45,361		1	%
Percentage of total revenue	4		%	5		%
Hardware Gross Profit	$	17,139		$	16,216		6	%
Gross Profit Margin	27		%	26		%
TOTAL COST OF SALES	$	603,379		$	567,563		6	%
Percentage of total revenue	59		%	59		%
TOTAL GROSS PROFIT	$	423,730		$	399,334		6	%
Gross Profit Margin	41		%	41		%

Cost of license depends greatly on third party reseller agreement software vendor costs. During the current year, sales of third party software products has increased slightly compared to last year, but has decreased as a percentage of total license revenue leading to lower related costs and slightly increased gross profit margins.

Cost of support and service increased commensurate with the increase in support and services revenue, as evidenced by the consistent gross profit margins.

In general, changes in cost of hardware trend consistently with hardware revenue. For the fiscal year, increased sales of higher margin products related to hardware upgrades has driven higher hardware margins compared to last year.

OPERATING EXPENSES



Selling and Marketing	Year Ended						%
	June 30,						Change
	2012			2011
Selling and marketing	$	76,500		$	68,061		12	%
Percentage of total revenue	7		%	7		%



Research and Development	Year Ended						%
	June 30,						Change
	2012			2011
Research and development	$	60,876		$	63,395		(4	)%
Percentage of total revenue	6		%	7		%

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 decreased primarily due to increased capitalization of costs for ongoing software development projects, which has also driven the decreases in the percentage of total revenue.



General and Administrative	Year Ended						%
	June 30,						Change
	2012			2011
General and administrative	$	50,119		$	51,561		(3	)%
Percentage of total revenue	5		%	5		%

General and administrative costs include all expenses related to finance, legal, human resources, plus all administrative costs. General and administrative expenses decreased due mainly to decreased legal expenses compared to the same period last year.

INTEREST INCOME (EXPENSE)



INTEREST INCOME AND EXPENSE	Year Ended						%
	June 30,						Change
	2012			2011
Interest Income	$	1,176		$	125		841	%
Interest Expense	$	(5,743	)	$	(8,930	)	(36	)%

The significant increase in interest income in the current year relates mainly to contractual interest income on previously uncollected deconversion revenues of $782 following a favorable legal judgment. The related deconversion revenue not previously recognized of $1,593 is included in support and services revenue in the current fiscal year.

Interest expense decreased due mainly to decreases in the outstanding balances on our revolving credit facility and term loan through fiscal 2012, which have reduced interest costs this year compared to last year.

PROVISION FOR INCOME TAXES

The provision for income taxes was $76,684 or 33.1% of income before income taxes in fiscal 2012 compared with $70,041 or 33.8% of income before income taxes in fiscal 2011. The decrease in the effective tax rate was primarily due to the completion of the Internal Revenue Service audit of the tax returns for the fiscal years June 30, 2008 and 2009, partially offset by the Research and Experimentation Tax Credit not being extended, effective December 31, 2011.

NET INCOME

Net income increased, moving from $137,471, or $1.59 per diluted share in fiscal 2011 to $154,984, or $1.78 per diluted share in fiscal 2012.

REPORTABLE SEGMENT DISCUSSION

The Company is a provider of integrated computer systems that perform data processing (available for in-house installations or outsourced services) for banks and credit unions. The Company’s operations are classified into two reportable 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.



Bank Systems and Services
	2013			% Change		2012			% Change		2011
Revenue	$	848,058		9	%	$	778,455		4	%	$	746,892
Gross profit	$	354,373		10	%	$	321,515		2	%	$	315,994
Gross profit margin	42		%			41		%			42		%

In fiscal 2013, revenue increased 9% overall in the Bank systems and services reportable segment compared to the prior year. The increase was due mainly to 17% growth in electronic transaction processing services and an 11% increase in outsourcing services. The slight increase in margin is driven mainly by increased support and service margins due to economies of scale realized from increased revenues, particularly in electronic payment services.

In fiscal 2012, revenue increased 4% overall in the Bank systems and services reportable segment compared to the prior year. The increase was due mainly to 12% growth in electronic transaction processing services and a 4% increase in outsourcing services. The increasing proportion of support and service revenue at 40% gross margin has driven the small decrease in gross margin compared to last year.



Credit Union Systems and Services
	2013			% Change		2012			% Change		2011
Revenue	$	281,328		13	%	$	248,654		13	%	$	220,005
Gross profit	$	122,619		20	%	$	102,215		23	%	$	83,340
Gross profit margin	44		%			41		%			38		%

In fiscal 2013, revenue in the Credit Union systems and services reportable segment has increased in all three of our revenue areas (license, support & service and hardware). Support & service revenues grew 13% through increases in all components, particularly electronic payment services due to the continuing growth of our transaction processing and debit/credit card processing services and outsourcing services. Gross profit margins for the Credit Union segment have increased mainly due to increased license revenue from licenses with no related costs and increased support and service margins due to economies of scale realized from increased revenues.

In fiscal 2012, revenue in the Credit Union systems and services reportable segment has increased in all three of our revenue areas (license, support & service and hardware). Support & service revenues grew 14% through increases in all components, particularly electronic payment services due to the continuing growth of our transaction processing and debit/credit card processing services and implementation services due to increased Episys® installations. Gross profit margins for the Credit Union segment have increased mainly due to increased license revenue (achieving 93% margin) and increased electronic payment services margins from incremental transaction-based revenues.

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 $127,905 at June 30, 2013 from $157,313 at June 30, 2012. This is primarily due to repayment of the remaining $127,500 on the term loan.

The following table summarizes net cash from operating activities in the statement of cash flows:



	Year Ended June 30,
	2013			2012			2011
Net income	$	176,645		$	154,984		$	137,471
Non-cash expenses	136,955			125,377			116,788
Change in receivables	(12,739		)	(10,795		)	940
Change in deferred revenue	8,597			896			19,487
Change in other assets and liabilities	(284		)	(5,912		)	(34,554		)
Net cash provided by operating activities	$	309,174		$	264,550		$	240,132

Cash provided by operating activities increased 17% compared to last year. Cash from operations is primarily used to repay debt, pay dividends, repurchase stock and fund acquisitions and other capital expenditures. The increase compared to last year reflects increased earnings driven by continued strong revenue growth and ongoing cost control.

Cash used in investing activities for the fiscal year ended June 30, 2013 totaled $97,244 and included capital expenditures on facilities and equipment totaled $46,256, which included spend on our online bill payment data center migration and an aircraft purchase. Other uses of cash included $51,332 for the development of software and $186 for the acquisition of customer contracts. These expenditures have been partially offset by $530 proceeds from sale of assets. Cash used in investing activities for the fiscal year ended June 30, 2012 totaled $76,262. This included capital expenditures on facilities and equipment of $41,441, $37,873 for the development of software and $2,772 proceeds from sale of assets, mainly from an aircraft sale.

Financing activities used cash of $241,338 during the current year. There were cash outflows to repay long and short term borrowings on our credit facilities of $145,180, dividends paid to stockholders of $48,202 and repurchases of treasury shares of $58,126. Cash used was partially offset by $10,170 net proceeds from the issuance of stock and tax related to stock-based compensation. During fiscal 2012, net cash used by financing activities was $94,100 and

included $35,280 repayments on our lines of credit, $34,371 for the repurchase of treasury shares and $38,128 in dividend payments to shareholders, partially offset by $13,679 of net proceeds from the issuance of stock and tax related to stock-based compensation.

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 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 or short-term borrowings on its existing credit facilities. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At June 30, 2013, there were 16,754 shares in treasury stock and the Company had the remaining authority to repurchase up to 8,237 additional shares. The total cost of treasury shares at June 30, 2013 is $402,082. During fiscal 2013, the Company repurchased 1,302 treasury shares for $58,126. At June 30, 2012, there were 15,452 shares in treasury stock and the Company had the remaining authority to repurchase up to 4,539 additional shares. The total cost of treasury shares at June 30, 2012 was $343,956. During fiscal 2012, the Company repurchased 1,045 treasury shares for $34,371.

On August 26, 2013, the Company's Board of Directors declared a cash dividend of $0.20 per share on its common stock, payable on September 27, 2013 to shareholders of record on September 6, 2013. 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.

Revolving credit facility

The long term revolving credit facility 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, 2013, there was no outstanding revolving loan balance.

Term loan

The term loan had an original principal balance of $150,000, with quarterly principal payments of $5,625 that began on September 30, 2011. The remaining balance was repaid in full during fiscal 2013 and at June 30, 2013, there was no outstanding balance.

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, 2013, 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. Long term capital lease obligations were entered into of which $14,161 remains outstanding at June 30, 2013 and $6,795 will be maturing within the next twelve months. The Company also has short term capital lease obligations totaling $1,014 at June 30, 2013.

Other lines of credit

The Company renewed an unsecured bank credit line on April 29, 2012 which provides for funding of up to $5,000 and bears interest at the prime rate less 1% (2.25% at June 30, 2013). The credit line was renewed through April 29, 2014. At June 30, 2013, no amount was outstanding.

OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

At June 30, 2013, the Company’s total off balance sheet contractual obligations were $59,259. This balance consists of $22,066 of long-term operating leases for various facilities and equipment which expire from 2014 to 2019 and $37,193 of purchase commitments related to property and equipment. The contractual obligations table below excludes $4,959 of liabilities for uncertain tax positions as we are unable to reasonably estimate the ultimate amount or timing of settlement.



Contractual obligations by period as of June 30, 2013	Less than 1 year		1-3 years		3-5 years		More than 5 years		TOTAL
Operating lease obligations	$	6,673	$	10,012	$	5,348	$	33	$	22,066
Capital lease obligations	7,809		5,768		1,598		—		15,175
Notes payable, including accrued interest	120		—		—		—		120
Purchase obligations	28,243		8,950		—		—		37,193
Total	$	42,845	$	24,730	$	6,946	$	33	$	74,554

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-05, Comprehensive Income in June 2011, which was effective for the Company beginning July 1, 2012 and ASU No. 2013-02, Comprehensive Income in February 2013, which was effective for the Company beginning January 1, 2013. The updated guidance adjusted the reporting requirements related to comprehensive income. Adoption of these updates did not have any impact on the financial statements.

In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment, which was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The amendments in the update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The provisions in this update were effective for the Company beginning July 1, 2012 and its adoption did not have any impact on the financial statements.

In July 2012, the FASB issued ASU No. 2012-02, Intangibles - Goodwill and Other. The amendments in the update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. The provisions in this update will be effective for the Company beginning July 1, 2013 and we do not anticipate that this update will materially impact the financial statements.

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes. The amendments update guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The provisions in this update will be effective for the Company beginning January 1, 2014 and we do not anticipate that this update will materially impact the financial statements.

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 electronic payment services revenues are recognized based on the fair value of individual elements 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.

Capitalization of software development costs

We capitalize certain costs incurred to develop commercial software products. 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. 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 forecast 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.

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