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 5,600 associates nationwide, and is a leading provider of technology solutions and payment processing services primarily for financial services organizations. Its solutions serve nearly 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 at inception. 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 $836,586 in fiscal 2010 to $1,210,053 in fiscal 2014. Income from continuing operations has grown from $117,870 in fiscal 2010 to $201,136 in fiscal 2014. This growth has resulted primarily from internal expansion.

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 our objective of providing the best integrated solutions, products and customer service to our clients. We are cautiously optimistic regarding ongoing economic improvement and expect our clients to continue investing in our products and services to improve their operating efficiencies and performance. We anticipate that consolidation within the financial services industry will continue. 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 could 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 2014 to fiscal 2013 and compare fiscal 2013 to fiscal 2012.

RESULTS OF OPERATIONS

FISCAL 2014 COMPARED TO FISCAL 2013

In fiscal 2014, revenues increased 7% or $80,667 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 9% increase in gross profit.

Operating expenses decreased 2% for the year mainly due to $12,436 of expenses in the prior year related to the impact of Hurricane Sandy flooding on our Lyndhurst, New Jersey item processing center. Provision for income taxes increased over the prior year. The prior year provision for income tax was low due to the tax impact of the Lyndhurst, New Jersey expenses and the release of previously unrecognized tax benefits. Increased revenue and gross margin, coupled with the above changes, resulted in a combined 14% increase in net income for fiscal 2014.

We move into fiscal 2015 following record revenue achieved in fiscal 2014. 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.

REVENUE



License Revenue	Year Ended June 30,						% Change
	2014			2013
License	$	53,009		$	54,818		(3	)%
Percentage of total revenue	4		%	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 decreased slightly due mainly to a decrease in license revenue from complementary products, particularly our remote deposit capture suite of products.

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
	2014			2013
Support and service	$	1,098,386		$	1,015,211		8	%
Percentage of total revenue	91		%	90		%

	Year over Year
	$ Change			% Change
In-House Support & Other Services	$	14,851		5		%
Electronic Payment Services	37,158			9		%
Outsourcing Services	21,408			10		%
Implementation Services	9,758			11		%
Total Increase	$	83,175

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 support and service revenue components in fiscal 2014.

In-house support and other services revenue increased due to annual maintenance fee increases for both core and complementary products as our customers’ assets grow and due to maintenance fees associated with new software implemented.

Electronic payment services continue to experience the largest dollar growth. The revenue increases are attributable to strong performance across debit/credit card transaction 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 credit union core products.



Hardware Revenue	Year Ended June 30,						% Change
	2014			2013
Hardware	$	58,658		$	59,357		(1	)%
Percentage of total revenue	5		%	5		%

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 slightly. Although there will be continuing quarterly 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 general deflationary trend of computer prices.

COST OF SALES AND GROSS PROFIT

Cost of license represented the cost of software from third party vendors through remarketing agreements associated with license fee revenue. These costs were recognized when license revenue was recognized. Cost of support and service represented 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 were recognized as they were incurred. Cost of hardware consisted of the direct and indirect costs of purchasing the equipment from the manufacturers and delivery to our customers. These costs were recognized at the same time as the related hardware revenue was recognized. Ongoing operating costs to provide support to our customers were recognized as they were incurred.



	Year Ended June 30,						% Change
	2014			2013
Cost of License	$	4,273		$	4,824		(11	)%
Percentage of total revenue	<1%			<1%
License Gross Profit	$	48,736		$	49,994		(3	)%
Gross Profit Margin	92		%	91		%
Cost of support and service	$	643,443		$	603,920		7	%
Percentage of total revenue	53		%	53		%
Support and Service Gross Profit	$	454,943		$	411,291		11	%
Gross Profit Margin	41		%	41		%
Cost of hardware	$	43,708		$	43,650		—	%
Percentage of total revenue	4		%	4		%
Hardware Gross Profit	$	14,950		$	15,707		(5	)%
Gross Profit Margin	25		%	26		%
TOTAL COST OF SALES	$	691,424		$	652,394		6	%
Percentage of total revenue	57		%	58		%
TOTAL GROSS PROFIT	$	518,629		$	476,992		9	%
Gross Profit Margin	43		%	42		%

Cost of license consists of the direct costs of third party software. Sales of third party software products decreased slightly compared to last year, causing a slight increase in gross profit margins.

Gross profit margins in support and service remained consistent with the prior year.

In general, changes in cost of hardware trend consistently with hardware revenue. For the fiscal year, margins are slightly lower due to decreased sales of higher margin hardware upgrade products.

OPERATING EXPENSES



Selling and Marketing	Year Ended June 30,						% Change
	2014			2013
Selling and marketing	$	86,570		$	81,619		6	%
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 increased mainly due to higher commission expenses and a general increase in sales headcount and related salaries. 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
	2014			2013
Research and development	$	66,748		$	63,202		6	%
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 headcount and related salaries.



General and Administrative	Year Ended June 30,						% Change
	2014			2013
General and administrative	$	53,312		$	66,624		(20	)%
Percentage of total revenue	4		%	6		%

General and administrative costs include all expenses related to finance, legal, human resources, plus all administrative costs.

General and administrative expenses in the current year includes $2,900 of insurance recoveries of costs related to the impact of Hurricane Sandy flooding on our Lyndhurst, New Jersey item processing center, whereas the prior year includes $12,436 of expenses related to the same event. General and administrative expenses, excluding the Lyndhurst expenses and subsequent insurance recoveries, increased slightly year-over-year due to additional headcount and related salaries.



INTEREST INCOME AND EXPENSE	Year Ended June 30,						% Change
	2014			2013
Interest Income	$	377		$	640		(41	)%
Interest Expense	$	(1,105	)	$	(6,337	)	(83	)%

Interest income fluctuated due to changes in invested balances and yields on invested balances. Interest expense decreased due to full repayment of our term loan in the fourth quarter of fiscal 2013.

PROVISION FOR INCOME TAXES

The provision for income taxes was $110,135 or 35.4% of income before income taxes in fiscal 2014 compared with $83,205 or 32.0% of income before income taxes in fiscal 2013. The increase in the effective tax rate was primarily due to the recognition of previously unrecognized tax benefits during the prior year quarter following the close of an Internal Revenue Service audit of fiscal years 2010 and 2011, as well as the retroactive extension of the research and experimentation credit during the prior year quarter.

NET INCOME

Net income increased from $176,645, or $2.04 per diluted share, in fiscal 2013 to $201,136, or $2.36 per diluted share, in fiscal 2014.

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 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.

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

REVENUE



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

License revenue remained consistent with the prior 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.



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 grew. Revenue from our complementary products also grew as the total number of supported in-house products grew.

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

Outsourcing services for banks and credit unions continued to drive revenue growth as customers continue to show a preference for outsourced delivery of our solutions. 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		%

Hardware revenue decreased due to a decrease in the number of third party hardware systems and components delivered.

COST OF SALES AND GROSS PROFIT



	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 consisted of the direct costs of third party software. Sales of third party software products decreased compared to the prior 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 trended consistently with hardware revenue. For the fiscal year, margins decreased slightly, 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 conducted our sales efforts for our two reportable segments, and were overseen by regional sales managers. Our sales executives were responsible for pursuing lead generation activities for new core customers. Our account executives nurtured long-term relationships with our client base and cross sold our many complementary products and services.

Selling and marketing expenses for the year increased mainly due to higher commission expenses. This is in line with increased sales volume of long term service contracts on which commissions were 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		%

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 included all expenses related to finance, legal, human resources, plus all administrative costs. General and administrative expenses increased compared to the prior 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.

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
	2014			% Change		2013			% Change		2012
Revenue	$	912,976		8	%	$	848,058		9	%	$	778,455
Gross profit	$	384,070		8	%	$	354,373		10	%	$	321,515
Gross profit margin	42		%			42		%			41		%

In fiscal 2014, revenue increased 8% overall in the Bank systems and services reportable segment compared to the prior year. The increase was due mainly to increased support and service revenue. Within support and service revenue, the increase was driven by 12% year-over-year growth in electronic payment services revenues from transaction processing and a 10% increase in outsourcing services revenue. Gross profit margins remain consistent year-over-year.

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 was driven mainly by increased support and service margins due to economies of scale realized from increased revenues, particularly in electronic payment services.



Credit Union Systems and Services
	2014			% Change		2013			% Change		2012
Revenue	$	297,077		6	%	$	281,328		13	%	$	248,654
Gross profit	$	134,559		10	%	$	122,619		20	%	$	102,215
Gross profit margin	45		%			44		%			41		%

In fiscal 2014, revenue in the Credit Union segment increased 6% over the prior year, driven by all components of support & service revenue. In particular, electronic payment services increased due to the continuing growth of our transaction processing and debit/credit card processing services and in-house maintenance revenues also increased. Gross profit margins for the Credit Union segment increased mainly due to economies of scale realized from growing transaction volume in our payment processing services.

In fiscal 2013, revenue in the Credit Union systems and services reportable segment 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 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.

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 $70,377 at June 30, 2014 from $127,905 at June 30, 2013. The decrease from June 30, 2013 is primarily due to the Banno acquisition and ongoing purchases of treasury stock.

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



	Year Ended
	June 30,
	2014			2013
Net income	$	201,136		$	176,645
Non-cash expenses	135,704			133,334
Change in receivables	7,498			(12,739		)
Change in deferred revenue	15,072			8,597
Change in other assets and liabilities	(17,751		)	3,337
Net cash provided by operating activities	$	341,659		$	309,174

Cash provided by operating activities increased 11% compared to last year. Cash from operations is primarily used to repay debt, pay dividends, repurchase stock and other capital expenditures.

Cash used in investing activities for the fiscal year ended June 30, 2014 totaled $131,780 and included capital expenditures on facilities and equipment of $33,185, which mainly included the purchase of aircraft and computer equipment. Other uses of cash included $27,894 of payments for the acquisition of Banno, $62,194 for the development of software and $16,288 for the purchase and development of internal use software. These expenditures have been partially offset by $7,781 proceeds received primarily from sale of aircraft. 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 spending 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 were partially offset by $530 proceeds from sale of assets.

Financing activities used cash of $267,407 during the fiscal year ended June 30, 2014. Cash used was mainly dividends paid to stockholders of $71,251, $175,699 for the purchase of treasury shares, and repayments of capital leases of $22,158. Cash used was partially offset by $1,701 net proceeds from the issuance of stock and tax related to stock-based compensation. During the fourth quarter, the Company also borrowed $25,000 against its revolving line of credit

and the full amount of the borrowing was repaid in the same period. Financing activities used cash of $241,338 during fiscal 2013. 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.

At June 30, 2014, the Company had negative working capital of $44,435; however, the largest component of current liabilities was deferred revenue of $312,002, 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 $150,000 and continue to generate substantial cash inflows from operations. Therefore, we do not anticipate any liquidity problems arising from this condition.

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. At June 30, 2014, the Company had $24,223 of purchase commitments related to property and equipment. We anticipate that these commitments will be funded by 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, 2014, there were 19,795 shares in treasury stock and the Company had the remaining authority to repurchase up to 5,196 additional shares. The total cost of treasury shares at June 30, 2014 is $577,781. During fiscal 2014, the Company repurchased 3,041 treasury shares for $175,699. At June 30, 2013, there were 16,754 shares in treasury stock and the Company had authority to repurchase up to 8,237 additional shares.

On August 22, 2014, the Company's Board of Directors declared a cash dividend of $0.22 per share on its common stock, payable on September 26, 2014 to shareholders of record on September 5, 2014. 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.

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 $7,757 remains outstanding at June 30, 2014 of which $4,028 will be maturing within the next twelve months. The Company also has short term capital lease obligations totaling $1,379 at June 30, 2014.

Other lines of credit

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 credit facility bears 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 credit facility is secured by pledges of capital stock of certain subsidiaries of the Company and 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, 2014, the Company was in compliance with all such covenants. The revolving loan terminates June 4, 2015 and at June 30, 2014, there was no outstanding revolving loan balance.

The Company renewed an unsecured bank credit line on March 3, 2014 which provides for funding of up to $5,000 and bears interest at the prime rate less 1%. The credit line was renewed through April 30, 2017. At June 30, 2014, no amount was outstanding.

OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

At June 30, 2014, the Company’s total off balance sheet contractual obligations were $55,370. This balance consists of $31,147 of long-term operating leases for various facilities and equipment which expire from 2015 to 2021 and $24,223 of purchase commitments related to property and equipment. The contractual obligations table below excludes $8,620 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, 2014	Less than 1 year		1-3 years		3-5 years		More than 5 years		TOTAL
Operating lease obligations	$	7,851	$	14,024	$	7,469	$	1,803	$	31,147
Capital lease obligations	5,407		3,729		—		—		9,136
Purchase obligations	24,223		—		—		—		24,223
Total	$	37,481	$	17,753	$	7,469	$	1,803	$	64,506

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers in May 2014. The new standard will supersede much of the existing authoritative literature for revenue recognition. The standard and related amendments will be effective for the Company for its annual reporting period beginning July 1, 2017, including interim periods within that reporting period. Early application is not permitted. Entities are allowed to transition to the new standard by either recasting prior periods or recognizing the cumulative effect. The Company is currently evaluating the newly issued guidance, including which transition approach will be applied and the estimated impact it will have on our consolidated 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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