JKHY-2012.6.30-10K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
(X)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the fiscal year ended June 30, 2012
OR
 
 
( )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________ to ________________

Commission file number 0-14112

JACK HENRY & ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
43-1128385
(State or Other Jurisdiction of Incorporation)
 
(I.R.S Employer Identification No.)

663 Highway 60, P.O. Box 807, Monett, MO 65708
(Address of Principle Executive Offices)
(Zip Code)

417-235-6652
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock ($0.01 par value)
 
NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:   None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ X ]  No [  ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes [   ]  No [ X ]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ]  No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [ X ]  No [  ]




Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” ”accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  [X]
  
Accelerated filer  [  ]
 
 
 
Non-accelerated filer    [  ]
(Do not check if a smaller reporting company)
Smaller reporting company [  ]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  
Yes [  ] No [ X ]

As of August 22, 2012, the Registrant had 86,151,011 shares of Common Stock outstanding ($0.01 par value). On December 31, 2011, the aggregate market value of the Common Stock held by persons other than those who may be deemed affiliates of Registrant was $2,766,705,073 (based on the average of the reported high and low sales prices on NASDAQ on December 31, 2011).



DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's Notice of  Annual Meeting of Stockholders and Proxy Statement for its 2012 Annual Meeting of Stockholders (the "Proxy Statement"), to the Table of Contents below, are incorporated by reference into Part II, Item 5 and into Part III of this Report.  




TABLE OF CONTENTS
PART I
 
Page Reference
 
 
 
ITEM 1.
BUSINESS
 4
 
 
 
ITEM 1A.
RISK FACTORS
 12
 
 
 
ITEM 1B.
UNRESOLVED STAFF COMMENTS
 14
 
 
 
ITEM 2.
PROPERTIES
 14
 
 
 
ITEM 3.
LEGAL PROCEEDINGS
 15
 
 
 
ITEM 4.
MINE SAFETY DISCLOSURES
 15
 
 
 
PART II
 
 
 
 
 
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
 
 
ITEM 6.
SELECTED FINANCIAL DATA
 
 
 
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
 
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
 
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
 
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
 
 
ITEM 9A.
CONTROLS AND PROCEDURES
 
 
 
ITEM 9B.
OTHER INFORMATION
 
 
 
PART III
 
 
 
 
 
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
 
 
ITEM 11.
EXECUTIVE COMPENSATION
 
 
 
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
 
 
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
 
 
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 
 
PART IV
 
 
 
 
 
ITEM 15
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


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In this report, all references to “JHA”, the “Company”, “we”, “us”, and “our”, refer to Jack Henry & Associates, Inc., and its consolidated subsidiaries.

FORWARD LOOKING STATEMENTS
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including without limitation, in Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section titled “Risk Factors” (Part I, Item 1A of this Form 10-K). We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

PART I
ITEM 1.  BUSINESS
Jack Henry & Associates, Inc. was founded in 1976 as a provider of core information processing solutions for community banks. Today, the Company’s extensive array of products and services includes processing transactions, automating business processes, and managing information for more than 11,900 financial institutions and diverse corporate entities.
JHA provides its products and services through three marketed brands:
Jack Henry Banking is a leading provider of integrated data processing systems to more than 1,330 banks ranging from de novo or start-up institutions to mid-tier banks with assets of up to $30 billion. Our banking solutions support both in-house and outsourced operating environments with three functionally distinct core processing platforms and more than 100 integrated complementary solutions.
Symitar is a leading provider of core data processing solutions for credit unions of all sizes, with over 750 credit union customers. Symitar markets two functionally distinct core processing platforms and more than 50 integrated complementary solutions that support both in-house and outsourced operating environments.
ProfitStars is a leading provider of highly specialized products and services to financial institutions that are primarily not core customers of the Company. ProfitStars offers highly specialized financial performance, imaging and payments processing, information security and risk management, retail delivery, and online and mobile solutions. ProfitStars’ products and services enhance the performance of financial services organizations of all asset sizes and charters, and diverse corporate entities with approximately 11,000 domestic and international customers.
Our products and services enable our customers to implement technology solutions that can be tailored to support their unique growth, service, operational, and performance goals. Our solutions also enable financial institutions to offer the high-demand products and services required to compete more successfully, and to capitalize on evolving trends shaping the financial services industry.
We are committed to exceeding our customers’ service-related expectations. We measure and monitor customer satisfaction using formal annual surveys and online surveys initiated each day by routine support requests. The results of this extensive survey process confirm that our service consistently exceeds our customers’ expectations and generates excellent customer retention rates.
We also focus on establishing long-term customer relationships, continually expanding and strengthening those relationships with cross sales of additional products and services, earning new traditional and nontraditional clients, and ensuring each product offering is highly competitive.
The majority of our revenue is derived from recurring outsourcing fees, transaction processing fees, and support and service fees that generally have contract terms of five years or greater. Less predictable software license fees, paid by customers implementing our software solutions in-house, and hardware sales, including all non-software products that we re-market in order to support our software systems, complement our primary revenue sources.
JHA’s gross revenue has grown from $742.9 million in fiscal 2008 to $1,027.1 million in fiscal 2012, representing a compound annual growth rate during this challenging five-year period of 7 percent. Net income from continuing operations has grown from $105.3 million to $155.0 million during this same five-year period, representing a compound

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annual growth rate of 8 percent. Information regarding the classification of our business into separate segments serving the banking and credit union industries is set forth in Note 13 to the Consolidated Financial Statements (see Item 8).
JHA’s progress and performance have been guided by the focused work ethic and fundamental ideals fostered by the Company’s founders over three decades ago:
Do the right thing,
Do whatever it takes, and
Have fun.
We recognize that our associates and their collective contribution are ultimately responsible for JHA’s past, present, and future success. Recruiting and retaining high-quality employees is essential to our ongoing growth and financial performance, and we have established a corporate culture that sustains high levels of employee satisfaction.
Industry Background    
Jack Henry Banking primarily serves commercial banks and savings institutions with up to $30.0 billion in assets. According to the Federal Deposit Insurance Corporation (“FDIC”), there were more than 7,300 commercial banks and savings institutions in this asset range as of December 31, 2011. Jack Henry Banking currently supports over 1,330 of these banks with its core information processing platforms and complementary products and services.  
Symitar serves credit unions of all asset sizes. According to the Credit Union National Association (“CUNA”), there were more than 7,300 domestic credit unions as of December 31, 2011. Symitar currently supports nearly 750 of these credit unions with core information processing platforms and complementary products and services.
ProfitStars serves financial services organizations of all asset sizes and charters and other diverse corporate entities. ProfitStars currently supports nearly 11,000 institutions with specialized solutions for generating additional revenue and growth, increasing security, mitigating operational risks, and controlling operating costs.
The FDIC reports the number of commercial banks and savings institutions declined 15 percent from the beginning of calendar year 2008 to the end of calendar year 2011. Although the number of banks declined at a 3 percent compound annual rate during this period, aggregate assets increased at a compound annual rate of 5 percent and totaled $12.6 trillion as of December 31, 2011. Comparing calendar years 2011 to 2010, new bank charters decreased 73 percent and mergers increased 1 percent.
CUNA reports the number of credit unions also declined 15 percent from the beginning of calendar year 2008 to the end of calendar year 2011. Although the number of credit unions declined at a 3 percent compound annual rate during this period, aggregate assets increased at a compound annual rate of 6 percent and totaled $982.1 billion as of December 31, 2011.
Community and mid-tier banks and credit unions are important in the communities and to the consumers they serve. Bank customers and credit union members rely on these institutions to provide personalized, relationship-based service and competitive financial products and services available through the customer’s delivery channel of choice. Institutions are recognizing that attracting and retaining customers/members in today’s highly competitive financial industry and realizing near and long term performance goals are often technology-dependent. Financial institutions must implement technological solutions that enable them to:
Maximize performance with accessible, accurate, and timely business intelligence information;
Offer the high-demand products and services needed to successfully compete with traditional competitors and non-traditional competitors created by convergence within the financial services industry;
Enhance the customer/member experience at varied points of contact;
Expand existing customer/member relationships and strengthen exit barriers by cross selling additional products and services;
Capitalize on new revenue and deposit growth opportunities;
Increase operating efficiencies and reduce operating costs;
Implement e-commerce strategies that provide the convenience-driven services required in today’s financial services industry;
Protect mission-critical information assets and operational infrastructure;
Protect customers/members from fraud and related financial losses;
Maximize the day-to-day use of technology and return on technology investments; and
Ensure full regulatory compliance.
JHA’s extensive product and service offering enables diverse financial institutions to capitalize on these business

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opportunities and respond to these business challenges. We strive to establish a long-term, value-added technology partnership with each customer, and to continually expand our offering with the specific solutions our customers need to prosper in the evolving financial services industry.
Mission Statement
JHA’s mission is to protect and increase the value of its stockholders' investment by providing quality products and services to our customers by:
Concentrating our activities on what we know best - information systems and services for financial institutions;
Providing outstanding commitment and service to our customers so that the perceived value of our products and services is consistent with the real value; and
Maintaining a work environment that is personally, professionally, and financially rewarding to our employees.
Business Strategy
Our fundamental business strategy is to generate organic revenue and earnings growth supplemented by strategic acquisitions. We execute this strategy by:
Providing commercial banks and credit unions with core software systems that provide excellent functionality, and support in-house and outsourced operating environments with identical functionality.
Expanding each core customer relationship by cross-selling complementary products and services that enhance the functionality provided by our core information processing systems.
Maintaining a company-wide commitment to customer service that consistently exceeds our customers’ expectations and generates high levels of customer retention.
Capitalizing on our focused diversification acquisition strategy.
Focused Diversification Acquisition Strategy
JHA’s acquisition strategy, which complements and accelerates our organic growth, focuses on successful companies that provide in-demand products and services, excellent customer relationships, and strong management teams and employee bases.
Historically, our acquisition strategy focused on companies that:    
Expanded our base of core financial institution customers,
Expanded our suite of complementary products and services that were cross sold to existing customers,  
Enabled our entry into adjacent markets within the financial services industry; and/or
Provided additional outsourcing capabilities/opportunities.
In 2004, we adopted our focused diversification acquisition strategy and began acquiring companies and highly specialized products that are:
Sold to existing core customers;
Sold outside JHA’s base of core bank and credit union customers to financial services organizations of all charters and asset sizes;
Selectively sold outside the financial services industry to diverse corporate entities; and
Selectively sold internationally.
Since our focused diversification strategy was adopted, JHA has completed 19 acquisitions that support it and assembled three distinct product brands that enable users to:
Generate additional revenue and growth opportunities,
Increase security and mitigate operational risks, and /or
Control operating costs.
These products and services enable us to expand our reach well beyond our traditional markets with solutions that are appropriate for virtually any financial services organization, including thousands of institutions that we previously did not sell to.
Following are the acquisitions that have been made in the last five fiscal years to support JHA’s focused diversification:  

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Fiscal Year
Company or Product Name
Products and Services
2010
iPay Technologies
Internet and telephone bill payment services
2010
PEMCO Technology Services
Payment processing solutions for credit unions
2010
Goldleaf Financial Solutions
Integrated technology and payment processing solutions
2008
AudioTel
Check and document imaging and electronic banking
2008
Gladiator Technology
Information Technology Security Services
Solutions
Our proprietary solutions are marketed through three business brands:  
Jack Henry Banking supports commercial banks with information and transaction processing platforms that provide enterprise-wide automation. Its solutions encompass three functionally distinct core processing systems and more than 100 complementary solutions, including business intelligence and bank management, retail and business banking, internet banking and electronic funds transfer (“EFT”), risk management and protection, and item and document imaging solutions. Our banking solutions have state-of-the-art functional capabilities, and we can provide the hardware required by each software system. Our banking solutions can be delivered in-house or through outsourced implementation, and are backed by a company-wide commitment to provide exceptional personal service. Jack Henry Banking is a recognized market leader, currently supporting nearly 1,330 banks with its technology platforms.
Symitar supports credit unions of all sizes with information and transaction processing platforms that provide enterprise-wide automation. Its solutions include two functionally distinct core processing systems and more than 50 complementary solutions, including business intelligence and credit union management, member and member business services, Internet banking and EFT, risk management and protection, and item and document imaging solutions. Our credit union solutions also have state-of-the-art functional capabilities, and we can provide the hardware required by each software system. Our credit union solutions can be delivered in-house or through outsourced implementation, and are also backed by our company-wide commitment to provide exceptional personal service.  
ProfitStars is a leading provider of specialized products and services assembled through our focused diversification acquisition strategy. These solutions are compatible with a wide variety of information technology platforms and operating environments, and include proven solutions for generating additional revenue and growth, increasing security and mitigating operational risks, and/or controlling operating costs. ProfitStars’ products and services are enhancing the performance of financial services organizations of all asset sizes and charters, and diverse corporate entities with nearly 11,000 domestic and international customers. These distinct products and services can be implemented individually or as solution suites to address specific business problems and enable effective responses to dynamic industry trends.
We will continue to develop and maintain functionally robust, integrated solutions that are supported with high service levels; regularly enhanced using an interactive customer enhancement process; compliant with relevant regulations; updated with proven advances in technology; and consistent with JHA’s reputation as a premium product and service provider.
Core Software Systems
Core software systems primarily consist of the integrated applications required to process deposit, loan, and general ledger transactions, and to maintain centralized customer/member information.
Jack Henry Banking markets three core software systems to banks and Symitar markets two core software systems to credit unions. These core systems are available for in-house installation at customer sites or financial institutions can outsource ongoing information processing to JHA based on the core processing solution most compatible with their specific operational requirements.
Jack Henry Banking’s three core banking platforms are:  
SilverLake® is a robust IBM® System i™-based system primarily designed for commercial-focused banks with assets ranging from $500 million to $30 billion. However, an increasing number of progressive smaller banks, including de novo, or recently chartered start-up banks, are now selecting SilverLake. This system has been implemented by over 420 banks, and now automates approximately 6 percent of the domestic banks with assets less than $30 billion.
CIF 20/20® is a parameter-driven, easy-to-use system that now supports nearly 690 banks ranging from de novo institutions to those with assets exceeding $2 billion. CIF 20/20 is the most widely used IBM System i-based core processing system in the community bank market.

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Core Director® is a Windows®-based, client/server system that now supports over 220 banks ranging from de novo institutions to those with assets exceeding $1 billion. Core Director is a cost-efficient operating platform and provides intuitive point-and-click operation.
Symitar’s two functionally distinct core credit union platforms are:  
Episys® is a robust IBM System p™-based system primarily designed for credit unions with more than $50 million in assets. It has been implemented by over 570 credit unions and is ranked as the system implemented by more credit unions with assets exceeding $25 million than any other alternative.
Cruise® is a Windows-based, client/server system designed primarily for credit unions with less than $50 million in assets. It has been implemented by more than 180 credit unions, is cost-efficient, and provides intuitive point-and-click, drag-and-drop operation.
Customers electing to install our solutions in-house license the proprietary software systems based on initial license fees. The large majority of these customers pay ongoing annual software maintenance fees. We also re-market the hardware and peripheral equipment that is required by our software solutions; and we contract to perform software implementation, data conversion, training, ongoing support, and other related services. In-house customers generally license our core software systems under a standard license agreement that provides a fully paid, nonexclusive, nontransferable right to use the software on a single computer at a single location.
Customers can eliminate the significant up-front capital expenditures required by in-house installations and the responsibility for operating information and transaction processing infrastructures by outsourcing these functions to JHA. Our outsourcing services are provided through a national network of data centers in five physical locations and four image-enabled item processing centers. Customers electing to outsource their core processing typically sign contracts for five or more years that include transaction-based processing fees and minimum guaranteed payments during the contract period.
We support the dynamic business requirements of our core bank and credit union clients with ongoing enhancements to each core system, the regular introduction of new integrated complementary products, the ongoing integration of practical new technologies, and regulatory compliance initiatives. JHA also serves each core customer as a single point of contact, support, and accountability.
Complementary Products and Services  
We provide more than 100 complementary products and services that are sold to our core bank and credit union customers, and selectively sold by our ProfitStars division to financial services organizations that use other core processing systems.
These complementary solutions enable core bank and credit union clients to respond to evolving customer/member demands, expedite speed-to-market with competitive offerings, increase operating efficiency, address specific operational issues, and generate new revenue streams. The highly specialized solutions sold by ProfitStars enable diverse financial services organizations and corporate entities to generate additional revenue and growth opportunities, increase security and mitigate operational risks, and control operating costs. As part of ProfitStars, iPay Technologies, our most recent acquisition, provides a configurable electronic payments platform and turnkey online bill payment solutions that can integrate with any online banking platform.
JHA regularly introduces new products and services based on demand for integrated complementary solutions from our existing core clients, and based on the growing demand among financial services organizations and corporate entities for specialized solutions capable of increasing revenue and growth opportunities, mitigating and controlling operational risks, and containing costs. The Company’s Industry Research department solicits customer guidance on the business solutions they need, formally evaluates available solutions and competitive offerings, and manages the introduction of new product offerings. JHA’s new complementary products and services are developed internally, acquired, or provided through strategic alliances.
Hardware Systems
Hardware sales support our software systems and include non-JHA products that we re-market.
Our software systems operate on a variety of hardware platforms. We have established remarketing agreements with IBM Corporation, Avnet, Inc., and other hardware providers that allow JHA to purchase hardware at a discount and resell it directly to our customers. We currently sell the IBM Power Systems and System x servers; Lenovo workstations; Dell servers and workstations; Burroughs, RDM, Panini, Digital Check, Canon check scanners; and other devices that complement our software solutions.
Implementation and Training
While it is not essential, the majority of our core bank and credit union customers contract with us for implementation

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and training services in connection with their in-house systems.
A complete core system implementation typically includes detailed planning, project management, data conversion, and testing. Our experienced implementation teams travel to customer facilities to help manage the process and ensure that all data is transferred from the legacy system to the JHA system being implemented. Our implementation fees are fixed or hourly based on the core system being installed.
Implementation and training services also are provided in connection with new customers outsourcing their information processing to JHA.
We also provide extensive initial and ongoing education to our customers. Know-It-All Education is a comprehensive training program that supports new customers with basic training and longtime customers with continuing education. The curricula provide the ongoing training financial institutions need to maximize the use of JHA’s core and complementary products, to optimize ongoing system enhancements, and to fully understand dynamic year-end legislative and regulatory requirements. Each basic, intermediate, and advanced course is delivered by system experts, supported by professional materials and training tools, and incorporates different educational media in a blended learning approach. Know-It-All Education supports distinct learning preferences with a variety of delivery channels, including classroom-based courses offered in JHA’s regional training centers, Internet-based live instruction, eLearning courses, on-site training, and train-the-trainer programs.
Support and Services
We serve our customers as a single point of contact and support for the complex solutions we provide. The Company’s comprehensive support infrastructure incorporates:
Exacting service standards;
Trained support staffs available 24 hours-a-day, 365 days-a-year;
Assigned account managers;
Sophisticated support tools, resources, and technology; and
A best practices methodology developed and refined through the company-wide, day-to-day experience supporting more than 11,900 diverse clients.
JHA’s experience converting diverse banks and credit unions to our core platforms from every competitive platform also provides highly effective change management and control processes.
Most in-house customers contract for annual software support services, and this represents a significant source of recurring revenue for JHA. These support services are typically priced at approximately 18 to 20 percent of the respective product’s software license fee. These fees generally increase as customer assets increase and as additional complementary products are purchased. Annual software support fees are typically billed during June and are paid in advance for the entire fiscal year, with pro-ration for new product implementations that occur during the year. Hardware support fees also are usually paid in advance for entire contract periods which typically range from one to five years. Most support contracts automatically renew unless the customer or JHA gives notice of termination at least 60 days prior to contract expiration.
High levels of support are provided to our outsourced customers by the same support infrastructure utilized for in-house customers. However, these support fees are included as part of monthly outsourcing fees.
JHA regularly measures customer satisfaction using formal annual surveys and online surveys initiated each year by routine support requests. This process shows that we consistently exceed our customers’ service-related expectations.
Backlog
Backlog consists of contracted in-house products and services that have not been delivered. Backlog also includes the minimum monthly payments for the remaining portion of multi-year outsourcing contracts, and typically includes the minimum payments guaranteed for the remainder of the contract period.
Backlog as of June 30, 2012 totaled $435.3 million, consisting of $92.7 million for in-house products and services, and $342.6 million for outsourcing services. Approximately $268.3 million of the outsourcing services backlog as of June 30, 2012 is not expected to be realized during fiscal 2013 due to the long-term nature of many outsourcing contracts. Backlog as of June 30, 2011 totaled $358.8 million, consisting of $79.1 million for in-house products and services, and $279.7 million for outsourcing services.
Our in-house backlog is subject to seasonal variations and can fluctuate quarterly. Our outsourcing backlog continues to experience growth based on new contracting activities and renewals of multi-year contracts, and although the appropriate portion of this revenue will be recognized during fiscal 2013, the backlog is expected to trend up gradually for the foreseeable future due to renewals of existing relationships and new contracting activities.

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Research and Development
We invest significant resources in ongoing research and development to develop new software solutions and services, and enhance existing solutions with additional functionality and features required to ensure regulatory compliance. Our core and complementary systems are typically enhanced once each year. Product-specific enhancements are largely customer-driven with recommended enhancements formally gathered through focus groups, change control boards, strategic initiatives meetings, annual user group meetings, and ongoing customer contact. We also continually evaluate and implement process improvements that expedite the delivery of new products and enhancements to our customers, and reduce related costs.
Research and development expenses for fiscal years 2012, 2011, and 2010 were $60.9 million, $63.4 million, and $50.8 million, respectively. Capitalized software for fiscal years 2012, 2011, and 2010 was $37.9 million, $27.0 million, and $25.6 million, respectively.
Sales and Marketing
JHA serves established, well defined markets that provide ongoing sales and cross-sales opportunities.
Jack Henry Banking sells core processing systems and integrated complementary solutions to domestic commercial banks with assets up to $30.0 billion. Symitar sells core processing systems and integrated complementary solutions to domestic credit unions of all asset sizes. The marketing and sales initiatives within these business lines are primarily focused on identifying banks and credit unions evaluating alternative core information and transaction processing solutions. Jack Henry Banking also has been successfully selling its core and complementary solutions to a significant number of the de novo banks chartered in recent years. ProfitStars sells specialized niche solutions that complement existing technology platforms to domestic financial services organizations of all asset sizes and charters.
Dedicated sales forces support each of JHA’s three business brands. Sales executives are responsible for the activities required to earn new customers in assigned territories, and regional account executives are responsible for nurturing customer relationships and cross selling additional products and services. Our sales professionals receive base salaries and performance-based commission compensation. Brand-specific sales support staff provide a variety of services, including product and service demonstrations, responses to prospect-issued requests-for-proposals, and proposal and contract generation. A centralized marketing department supports all three business lines with lead generation and brand-building activities, including participation in state-specific, regional, and national trade shows; print and online advertising; telemarketing; customer newsletters; ongoing promotional campaigns; and media relations. JHA also hosts annual national user group meetings which provide opportunities to network with existing clients and demonstrate new products and services.
jhaDirect sells specific complementary solutions, and business forms and supplies that are compatible with JHA’s software solutions. jhaDirect’s offering consists of more than 4,000 items, including tax and custom forms, ATM and teller supplies, check imaging and reader/sorter supplies, magnetic media, laser printers and supplies, loan coupon books, and much more. New items are regularly added in response to dynamic regulatory requirements and to support JHA’s ever-expanding product and service suite.
JHA sells select products and services in the Caribbean and, as a result of recent acquisitions, Europe and South America. International sales account for less than one percent of JHA’s total revenue in each of the three years ended June 30, 2012, 2011, and 2010.
Competition
The market for companies providing technology solutions to financial services organizations is competitive, and we expect that competition from both existing competitors and companies entering our existing or future markets will remain strong. Some of JHA’s current competitors have longer operating histories, larger customer bases, and greater financial resources. The principal competitive factors affecting the market for technology solutions include product/service functionality, price, operating flexibility and ease-of-use, customer support, and existing customer references. For more than a decade there has been significant consolidation among providers of products and services designed for financial institutions, and this consolidation is expected to continue in the future.
Jack Henry Banking and Symitar compete with large vendors that provide information and transaction processing solutions to banks and credit unions, including Fidelity National Information Services, Inc.; Fiserv, Inc.; Open Solutions, Inc.; and Harland Financial Solutions – Ultradata.  ProfitStars competes with an array of disparate vendors that provide niche solutions to financial services organizations and corporate entities.
Intellectual Property, Patents, and Trademarks  
Although we believe our success depends upon our technical expertise more than our proprietary rights, our future success and ability to compete depend in part upon our proprietary technology. We have registered or filed applications

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for our primary trademarks. Most of our technology is not patented. Instead, we rely on a combination of contractual rights, copyrights, trademarks, and trade secrets to establish and protect our proprietary technology. We generally enter into confidentiality agreements with our employees, consultants, resellers, customers, and potential customers. Access to and distribution of our Company’s source code is restricted, and the disclosure and use of other proprietary information is further limited. Despite our efforts to protect our proprietary rights, unauthorized parties can attempt to copy or otherwise obtain, or use our products or technology. We cannot be certain that the steps taken in this regard will be adequate to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology.
Regulatory Compliance
JHA maintains a strict corporate commitment to address compliance issues and implement requirements imposed by the federal regulators prior to the effective date of such requirements when adequate prior notice is given. JHA’s comprehensive compliance program is provided by a team of compliance analysts and auditors that possess extensive regulatory agency and financial institution experience, and a thorough working knowledge of JHA and our solutions. These compliance professionals leverage multiple channels to remain informed about potential and recently enacted regulatory requirements, including regular discussions on emerging topics with the Federal Financial Institutions Examination Council (“FFIEC”) examination team and training sessions sponsored by various professional associations.
JHA has a proven process to inform internal contacts of new and revised regulatory requirements. Upcoming regulatory changes also are presented to the Company’s product-specific change control boards and the necessary product changes are included in the ongoing product development cycle. A representative of JHA’s compliance organization serves on every change control board to ensure that the regulatory perspective is addressed in proposed product/service changes. We publish newsletters to keep our customers informed of regulatory changes that could impact their operations. Periodically, customer advisory groups are assembled to discuss significant regulatory changes, such as recent changes to the FDIC’s overdraft fee guidance.
Internal audits of our systems, networks, operations, and applications are conducted and specialized outside firms are periodically engaged to perform testing and validation of our systems, processes, and security. Ensuring that confidential information remains private is a high priority, and JHA’s initiatives to protect confidential information include regular third-party application reviews intended to better secure information access. Additional third-party reviews are performed throughout the organization, such as vulnerability tests, intrusion tests, and SSAE 16 reviews. The FFIEC conducts annual reviews throughout the Company and issues reports that are reviewed by the JHA Audit Committee of the Board of Directors.
Government Regulation
The financial services industry is subject to extensive and complex federal and state regulation. All financial institutions are subject to substantial regulatory oversight and supervision, with increased attention to consumer regulations with the addition of the Consumer Financial Protection Bureau. Our products and services must comply with the extensive and evolving regulatory requirements applicable to our customers, including but not limited to those mandated by federal truth-in-lending and truth-in-savings rules, the Privacy of Consumer Financial Information regulations, usury laws, the Equal Credit Opportunity Act, the Fair Housing Act, the Electronic Funds Transfer Act, the Fair Credit Reporting Act, the Bank Secrecy Act, the USA Patriot Act, the Gramm-Leach-Bliley Act, and the Community Reinvestment Act. The compliance of JHA’s products and services with these requirements depends on a variety of factors, including the particular functionality, the interactive design, the classification of customers, and the manner in which the customer utilizes the products and services. Our customers are contractually responsible for assessing and determining what is required of them under these regulations and then we assist them in meeting their regulatory needs through our products and services. The impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act is still evolving as the regulations are written to implement the various provisions of the law. We cannot predict the impact these regulations, any future amendments to these regulations or any newly implemented regulations will have on our business in the future.
JHA is not chartered by the Office of the Comptroller of Currency, the Board of Governors of the Federal Reserve System, the National Credit Union Administration or other federal or state agencies that regulate or supervise depository institutions.
Operating as a service provider to financial institutions, JHA’s operations are governed by the same regulatory requirements as those imposed on financial institutions, and subject to periodic reviews by FFIEC regulators who have broad supervisory authority to remedy any shortcomings identified in such reviews.
JHA provides outsourced data and item processing through geographically dispersed OutLink Data Centers, electronic transaction processing through our PassPort and Enterprise Payments Solutions, Internet banking through

11


NetTeller, ProfitStars Teleweb, and MemberConnect online solutions, and business recovery services through Centurion Disaster Recovery.
The services provided by our OutLink Data Centers are subject to examination by the Federal Financial Institution Examination Council regulators under the Bank Service Company Act. These outsourcing services also are subject to examination by state banking authorities on occasion.
Employees
As of June 30, 2012 and 2011, JHA had 4,872 and 4,667 full-time employees, respectively. Of our full-time employees, approximately 862 are employed in the credit union segment of our business, with the remainder employed in the bank segment or in general and administrative functions that serve both segments. Our employees are not covered by a collective bargaining agreement and there have been no labor-related work stoppages.
Available Information
JHA’s Website is easily accessible to the public at www.jackhenry.com. The “For Investors" portion of the Website provides key corporate governance documents, the code of conduct, an archive of press releases, and other relevant Company information. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other filings and amendments thereto that are made with the U.S. Securities and Exchange Commission (SEC) also are available free of charge on our Website as soon as reasonably practical after these reports have been filed with or furnished to the SEC.

ITEM 1A.  RISK FACTORS
The Company’s business and the results of its operations are affected by numerous factors and uncertainties, some of which are beyond our control. The following is a description of some of the important risks and uncertainties that may cause the actual results of the Company’s operations in future periods to differ from those expected or desired.
Our business may be adversely impacted by U.S. and global market and economic conditions. We derive most of our revenue from products and services we provide to the financial services industry. Given this concentration, we may be particularly exposed to the current difficult and unsettled economic climate. If the economic environment remains poor, it may result in significant decreases in demand by current and potential clients for our products and services, which could have a material adverse effect on our business, results of operations and financial condition.
Changes in the banking and credit union industry could reduce demand for our products. Cyclical fluctuations in economic conditions affect profitability and revenue growth at commercial banks and credit unions. Unfavorable economic conditions negatively affect the spending of banks and credit unions, including spending on computer software and hardware. Such conditions could reduce both our sales to new customers and upgrade/complementary product sales to existing customers. The Company could also experience the loss of customers due to their financial failure.
Competition or general economic conditions may result in decreased demand or require price reductions or other concessions to customers which could result in lower margins and reduce income. We vigorously compete with a variety of software vendors in all of our major product lines. We compete on the basis of product quality, reliability, performance, ease of use, quality of support and services, integration with other products and pricing. Some of our competitors may have advantages over us due to their size, product lines, greater marketing resources, or exclusive intellectual property rights. If competitors offer more favorable pricing, payment or other contractual terms, warranties, or functionality, or if general economic conditions decline such that customers are less willing or able to pay the cost of our products and services, we may need to lower prices or offer favorable terms in order to successfully compete.
Security problems could damage our reputation and business. We rely on industry-standard encryption, network and Internet security systems, most of which we license from third parties, to provide the security and authentication necessary to effect secure transmission of data. Our services and infrastructure are increasingly reliant on the Internet. Computer networks and the Internet are vulnerable to unauthorized access, computer viruses and other disruptive problems such as denial of service attacks and other forms of cyber-terrorism. Individual personal computers can be stolen, and customer data media can be lost in shipment. Under state and proposed federal laws requiring consumer notification of security breaches, the costs to remediate security breaches can be substantial. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments may render our security measures inadequate. Security risks may result in liability to us and also may deter financial institutions from purchasing our products. We will continue to expend significant capital and other resources protecting against the threat of security breaches, and we may need to expend resources alleviating problems caused by breaches. Eliminating computer viruses and addressing other security problems may result in interruptions, delays or cessation of service to users, any of which could harm our business.
Failures associated with payment transactions could result in a financial loss. The volume and dollar amount

12


of payment transactions that we process is very large and continues to grow. We settle funds on behalf of financial institutions, other businesses and consumers and receive funds from clients, card issuers, payment networks and consumers on a daily basis for a variety of transaction types. Transactions facilitated by us include debit card, credit card, electronic bill payment transactions, Automated Clearing House (“ACH”) payments and check clearing that supports consumers, financial institutions and other businesses. If the continuity of operations, integrity of processing, or ability to detect or prevent fraudulent payments were compromised in connection with payments transactions, this could result in a financial as well as reputational loss to us. In addition, we rely on various financial institutions to provide ACH services in support of funds settlement for certain of our products. If we are unable to obtain such ACH services in the future, that could have a material adverse effect on our business, financial position and results of operations. In addition, we may issue credit to consumers, financial institutions or other businesses as part of the funds settlement. A default on this credit by a counterparty could result in a financial loss to us.
If we fail to adapt our products and services to changes in technology, we could lose existing customers and be unable to attract new business. The markets for our software and hardware products and services are characterized by changing customer requirements and rapid technological changes. These factors and new product introductions by our existing competitors or by new market entrants could reduce the demand for our existing products and services and we may be required to develop or acquire new products and services. Our future success is dependent on our ability to enhance our existing products and services in a timely manner and to develop or acquire new products and services. If we are unable to develop or acquire new products and services as planned, or if we fail to sell our new or enhanced products and services, we may incur unanticipated expenses or fail to achieve anticipated revenues.
Consolidation and failures of financial institutions will continue to reduce the number of our customers and potential customers. Our primary market consists of approximately 7,300 commercial and savings banks and 7,300 credit unions. The number of commercial banks and credit unions has decreased because of failures over the last few years and mergers and acquisitions over the last several decades and is expected to continue to decrease as more consolidation occurs.
The services we provide to our customers are subject to government regulation that could hinder the development of portions of our business or impose constraints on the way we conduct our operations. The financial services industry is subject to extensive and complex federal and state regulation. As a supplier of services to financial institutions, portions of our operations are examined by the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the National Credit Union Association, among other regulatory agencies. These agencies regulate services we provide and the manner in which we operate, and we are required to comply with a broad range of applicable laws and regulations. In addition, existing laws, regulations, and policies could be amended or interpreted differently by regulators in a manner that has a negative impact on our existing operations or that limits our future growth or expansion. Our customers are also regulated entities, and actions by regulatory authorities could determine both the decisions they make concerning the purchase of data processing and other services and the timing and implementation of these decisions. Concerns are growing with respect to the use, confidentiality, and security of private customer information. Regulatory agencies, Congress and state legislatures are considering numerous regulatory and statutory proposals to protect the interests of consumers and to require compliance with standards and policies that have not been defined.
The software we provide to our customers is also affected by government regulation. We are generally obligated to our customers to provide software solutions that comply with applicable federal and state regulations. In particular, numerous new regulations have been proposed and are still being written to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Substantial software research and development and other corporate resources have been and will continue to be applied to adapt our software products to this evolving, complex and often unpredictable regulatory environment. Our failure to provide compliant solutions could result in significant fines or consumer liability on our customers, for which we may bear ultimate liability.
An operational failure in our outsourcing facilities could cause us to lose customers. Damage or destruction that interrupts our outsourcing operations could damage our relationship with customers and may cause us to incur substantial additional expense to repair or replace damaged equipment. Our back-up systems and procedures may not prevent disruption, such as a prolonged interruption of our transaction processing services. In the event that an interruption of our network extends for more than several hours, we may experience data loss or a reduction in revenues by reason of such interruption. In addition, a significant interruption of service could have a negative impact on our reputation and could lead our present and potential customers to choose other service providers.
Our growth may be affected if we are unable to find or complete suitable acquisitions. We have augmented the growth of our business with a number of acquisitions and we plan to continue to acquire appropriate businesses, products and services. This strategy depends on our ability to identify, negotiate and finance suitable acquisitions. Substantial recent merger and acquisition activity in our industry has affected the availability and pricing of such

13


acquisitions. If we are unable to acquire suitable acquisition candidates, we may experience slower growth.
Acquisitions may be costly and difficult to integrate. We have acquired a number of businesses in the last several years and will continue to explore acquisitions in the future. We may not be able to successfully integrate acquired companies. We may encounter problems with the integration of new businesses including: financial control and computer system compatibility; unanticipated costs; unanticipated quality or customer problems with acquired products or services; differing regulatory  and industry standards; diversion of management's attention; adverse effects on existing business relationships with suppliers and customers; loss of key employees; and significant amortization expenses related to acquired assets. To finance future acquisitions, we may have to increase our borrowing or sell equity or debt securities to the public. If we fail to integrate our acquisitions, our business, financial condition and results of operations could be materially and adversely affected. Failed acquisitions could also produce material and unpredictable impairment charges as we periodically review our acquired assets.
The loss of key employees could adversely affect our business. We depend on the contributions and abilities of our senior management. Our Company has grown significantly in recent years and our management remains concentrated in a small number of key employees. If we lose one or more of our key employees, we could suffer a loss of sales and delays in new product development, and management resources would have to be diverted from other activities to compensate for this loss. We do not have employment agreements with any of our executive officers.
If others claim that we have infringed their intellectual property rights, we could be liable for significant damages. We have agreed to indemnify many of our customers against claims that our products and services infringe on the proprietary rights of others. We anticipate that the number of infringement claims will increase as the number of our software solutions and services increases and the functionality of our products and services expands. Any such claims, whether with or without merit, could be time-consuming, result in costly litigation and may not be resolved on terms favorable to us.
We may not be able to manage growth. We have grown both internally and through acquisitions. Our expansion has and will continue to place significant demands on our administrative, operational, financial and management personnel and systems. We may not be able to enhance and expand our product lines, manage costs, adapt our infrastructure and modify our systems to accommodate future growth.
Expansion of services to non-traditional customers could expose us to new risks. Some of our recent acquisitions include business lines that are marketed outside our traditional, regulated, and litigation-averse base of financial institution customers. These non-regulated customers may entail greater operational, credit and litigation risks than we have faced before and could result in increases in bad debts and litigation costs.
Failure to achieve favorable renewals of service contracts could negatively affect our outsourcing business. Our contracts with our customers for outsourced data processing services generally run for a period of five or more years. Because of the rapid growth of our outsourcing business over the last five years, we will experience greater numbers of these contracts coming up for renewal over the next few years. Renewal time presents our customers with the opportunity to consider other providers or to renegotiate their contracts with us. If we are not successful in achieving high renewal rates upon favorable terms, our outsourcing revenues and profit margins will suffer.

ITEM 1B.   UNRESOLVED STAFF COMMENTS
None.

ITEM 2.   PROPERTIES
We own 154 acres located in Monett, Missouri on which we maintain nine office buildings, plus shipping & receiving and maintenance buildings. We also own buildings in Houston, Texas; Allen, Texas; Albuquerque, New Mexico; Birmingham, Alabama; Lenexa, Kansas; Angola, Indiana; Shawnee Mission, Kansas; Rogers, Arkansas; Oklahoma City, Oklahoma; Elizabethtown, Kentucky; Springfield, Missouri and San Diego, California. Our owned facilities represent approximately 1,000,000 square feet of office space in ten states. We have 39 leased office facilities in 21 states, which total approximately 374,000 square feet. All of our owned and leased office facilities are for normal business purposes.
Of our facilities, the credit union segment uses office space totaling approximately 151,000 square feet in ten facilities. The majority of our San Diego, California offices are used in the credit union segment, as are portions of nine other office facilities. The remainder of our leased and owned facilities, approximately 1,223,000 square feet of office space, is primarily devoted to serving our bank segment or supports our whole business.
We own four aircraft. Many of our customers are located in communities that do not have an easily accessible commercial airline service. We primarily use our airplanes in connection with implementation, sales of systems and internal

14


requirements for day-to-day operations. Transportation costs for implementation and other customer services are billed to our customers. We lease property, including real estate and related facilities, at the Monett, Missouri municipal airport.

ITEM 3.  LEGAL PROCEEDINGS
We are subject to various routine legal proceedings and claims arising in the ordinary course of business. We do not expect that the results in any of these legal proceedings will have a material adverse effect on our business, financial condition, results of operations or cash flows.

ITEM 4.  MINE SAFETY DISCLOSURES
None.

PART II
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is quoted on the NASDAQ Global Select Market (“NASDAQ”), formerly known as the NASDAQ National Market, under the symbol “JKHY”. The following table sets forth, for the periods indicated, the high and low sales price per share of the common stock as reported by NASDAQ.
 
 
Fiscal 2012
 
Fiscal 2011
 
 
High
 
Low
 
High
 
Low
Fourth Quarter
 
$
34.76

 
$
32.17

 
$
34.17

 
$
28.45

Third Quarter
 
35.37

 
32.11

 
33.94

 
28.96

Second Quarter
 
34.50

 
27.33

 
29.97

 
25.35

First Quarter
 
31.15

 
24.41

 
26.30

 
23.19

The Company established a practice of paying quarterly dividends at the end of fiscal 1990 and has paid dividends with respect to every quarter since that time. Quarterly dividends per share paid on the common stock for the two most recent fiscal years ended June 30, 2012 and 2011 are as follows:
 
 
Fiscal 2012
 
Fiscal 2011
Fourth Quarter
 
$
0.115

 
$
0.105

Third Quarter
 
0.115

 
0.105

Second Quarter
 
0.105

 
0.095

First Quarter
 
0.105

 
0.095

The declaration and payment of any future dividends will continue to be at the discretion of our Board of Directors and will depend upon, among other factors, our earnings, capital requirements, contractual restrictions, and operating and financial condition. The Company does not currently foresee any changes in its dividend practices.
Information regarding the Company's equity compensation plans is set forth under the caption "Equity Compensation Plan Information" in the Company's definitive Proxy Statement and is incorporated herein by reference.
On August 22, 2012, there were approximately 43,000 holders of the Company’s common stock. On that same date the last sale price of the common shares as reported on NASDAQ was $37.13 per share.
Issuer Purchases of Equity Securities
The following shares of the Company were repurchased during the quarter ended June 30, 2012:


Table of Contents

 
Total Number of Shares Purchased
 
Average Price of Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans (1)
April 1 - April 30, 2012

 
$

 

 
5,583,981

May 1 - May 31, 2012
717,099

 
32.92

 
717,099

 
4,866,882

June 1 - June 30, 2012
328,330

 
32.78

 
328,330

 
4,538,552

Total
1,045,429

 
32.88

 
1,045,429

 
4,538,552

(1) Purchases made under the stock repurchase authorization approved by the Company's Board of Directors on October 4, 2002 with respect to 3.0 million shares, increased by 2.0 million shares on April 29, 2005, by 5.0 million shares on August 28, 2006, by 5.0 million shares on February 4, 2008, and by 5.0 million shares on August 25, 2008. These authorizations have no specific dollar or share price targets and no expiration dates.
Performance Graph
The following chart presents a comparison for the five-year period ended June 30, 2012, of the market performance of the Company’s common stock with the S & P 500 Index and an index of peer companies selected by the Company:
The following information depicts a line graph with the following values:
 
2007
2008
2009
2010
2011
2012
JKHY
100.00

84.98

82.97

96.96

123.57

144.10

Old Peer Group
100.00

73.12

72.29

76.75

107.02

126.72

New Peer Group
100.00

73.30

71.10

79.71

106.69

124.52

S & P 500
100.00

86.88

64.10

73.35

95.87

101.09

This comparison assumes $100 was invested on June 30, 2007, and assumes reinvestments of dividends. Total returns are calculated according to market capitalization of peer group members at the beginning of each period. Peer companies selected are in the business of providing specialized computer software, hardware and related services to financial institutions and other businesses. In fiscal year 2012, we changed our peer group of companies used for this analysis to maintain alignment with peer companies selected by our Compensation Committee for use in determining compensation for executive management. Companies in the New Peer Group are Bottomline Technology, Inc., Cerner

16

Table of Contents

Corp., DST Systems, Inc., Euronet Worldwide, Inc., Fair Isaac Corp., Fidelity National Information Services, Inc., Fiserv, Inc., Online Resources Corp., SEI Investments Company, Telecommunications Systems, Inc., and Tyler Technologies Corp.
Companies in the Old Peer Group are Bottomline Technology, Inc., Cerner Corp., DST Systems, Inc., Euronet Worldwide, Inc., Fair Isaac Corp., Fidelity National Financial, Inc., Fiserv, Inc., Online Resources Corp., S1 Corp., SEI Investments Company, Telecommunications Systems, Inc., and Tyler Technologies Corp.

ITEM 6.   SELECTED FINANCIAL DATA
Selected Financial Data
(In Thousands, Except Per Share Data)
 
 
YEAR ENDED JUNE 30,
Income Statement Data
 
2012

 
2011

 
2010

 
2009

 
2008

Revenue (1)
 
$
1,027,109

 
$
966,897

 
$
836,586

 
$
745,593

 
$
742,926

Income from continuing operations
 
$
154,984

 
$
137,471

 
$
117,870

 
$
103,102

 
$
105,287

Basic net income per share, continuing operations
 
$
1.79

 
$
1.60

 
$
1.39

 
$
1.23

 
$
1.19

Diluted net income per share, continuing operations
 
$
1.78

 
$
1.59

 
$
1.38

 
$
1.22

 
$
1.17

Dividends declared per share
 
$
0.44

 
$
0.40

 
$
0.36

 
$
0.32

 
$
0.28

Balance Sheet Data
 
 
 
 
 
 
 
 
 
 
Working capital
 
$
66,406

 
$
(26,561
)
 
$
(51,283
)
 
$
15,239

 
$
(11,418
)
Total assets
 
$
1,619,492

 
$
1,505,797

 
$
1,560,560

 
$
1,050,700

 
$
1,021,044

Long-term debt
 
$
106,166

 
$
127,939

 
$
272,732

 
$

 
$
24

Stockholders’ equity
 
$
983,056

 
$
879,776

 
$
750,372

 
$
626,506

 
$
601,451

(1) Revenue includes license sales, support and service revenues, and hardware sales, less returns and allowances.

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 4,900 associates nationwide, and is a leading provider of technology solutions and payment processing services primarily for financial services organizations. Its solutions serve more than 11,900 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 marketed 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

17

Table of Contents

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, transaction processing fees, and support and service fees that generally have contract terms of five years or greater. 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 $742,926 in fiscal 2008 to $1,027,109 in fiscal 2012. Income from continuing operations has grown from $105,287 in fiscal 2008 to $154,984 in fiscal 2012. This growth has resulted primarily from internal expansion supplemented by strategic acquisitions.
Our three most recent acquisitions were completed in fiscal 2010. All of these acquisitions were accounted for using the purchase method of accounting and our consolidated financial statements include the results of operations of the acquired companies from their respective acquisition dates.
We have two 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 are cautiously optimistic regarding ongoing economic improvement and expect to continue investing in the products and services our clients need to improve their operating efficiencies and performance. We anticipate consolidation within the financial services industry to continue, including bank failures and increased merger and acquisition activity. Regulatory conditions and legislation such as the Dodd-Frank Wall Street Reform Act 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 2012 to fiscal 2011 and compare fiscal 2011 to fiscal 2010.

RESULTS OF OPERATIONS
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.
We move into fiscal 2013 with cautious optimism following strong fourth quarter fiscal 2012 results. Significant portions of our business continue to come from recurring revenue, and increases in backlog coupled with a healthy sales pipeline are 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.


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Table of Contents

REVENUE
License Revenue
Year Ended
 
%
 
June 30,
 
Change
 
2012
 
2011
 
 
License
$
54,811

 
$
53,067

 
3
%
Percentage of total revenue
5
%
 
6
%
 
 
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.
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.
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
 
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.
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 Episys® credit union core product implementation revenues as well as higher online bill payment services implementation revenues.

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Table of Contents

Hardware Revenue
Year Ended
 
%
 
June 30,
 
Change
 
2012
 
2011
 
 
Hardware
$
63,122

 
$
61,577

 
3
%
Percentage of total revenue
6
%
 
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 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 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
 
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.

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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
%
 
 
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
 
2012
 
2011
 
 
Research and development
$
60,876

 
$
63,395

 
(4
)%
Percentage of total revenue
6
%
 
7
%
 
 
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 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 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,

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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.

FISCAL 2011 COMPARED TO FISCAL 2010
In fiscal 2011, revenues increased 16% or $130,311 compared to the prior year due primarily to strong organic growth and the prior year acquisitions of Goldleaf Financial Solutions, Inc. (“GFSI”), PEMCO Technology Services, Inc. (“PTSI”) and iPay Technologies Holding Company, LLC (“iPay”). During fiscal 2011, the Company’s management continued to focus on cost management that, when combined with the growth in revenue, resulted in a 17% increase in net income.
Slow recovery from the US financial crisis remains a primary concern as it continues to threaten our customers and our industry. The profits of many financial institutions remain low and this has resulted in some reduction of demand for new products and services. During the past two years, a number of financial institutions have failed or been subject to government intervention. To date, such actions have not materially impacted our revenue or results of operations.
In each of the past two years, approximately 1% of all financial institutions in the United States have closed or merged due to regulatory action. We believe that the number of regulatory actions will continue to decline through fiscal 2012, absent a significant downturn in the economy. The increase in bank failures and forced consolidations has been offset to some extent by a general decline in the level of acquisition activity among financial institutions. A consolidation can benefit us when a newly combined institution is processed on our platform, or elects to move to one of our platforms, and can negatively impact us when a competing platform is elected. Consolidations and acquisitions also positively impact our financial results in the short-term due to early termination fees which are generally provided for in multi-year outsourced contracts. These fees are primarily generated when an existing outsourced client is acquired by another financial institution and can vary from period to period based on the number and size of clients that are acquired and how early in the contract term the contract is terminated. We generally do not receive contract termination fees when a financial institution is subject to a government action or from a customer that has selected in-house processing.
Despite the difficult economic climate, we remain cautiously optimistic, with increasing portions of our business coming from recurring revenue, increases in backlog and an encouraging sales pipeline. Our customers will continue to face regulatory and operational challenges which our products and services address, and in these times they have an even greater need for some of our solutions that directly address institutional profitability and efficiency. We continue to have a strong balance sheet, access to extensive lines of credit, and an unwavering commitment to superior customer service, and we believe that we are well positioned to address current opportunities as well as those which will arise as the economic recovery strengthens. Our cautious optimism was expressed through our acquisitions of GFSI, PTSI and iPay during fiscal 2010 and these acquisitions, the three largest in our Company’s history, combined with our existing solutions present us with opportunities to extend our customer base and produce returns for our stockholders.

REVENUE
License Revenue
Year Ended
 
%
 
June 30,
 
Change
 
2011
 
2010
 
 
License
$
53,067

 
$
52,225

 
2
%
Percentage of total revenue
6
%
 
6
%
 
 
License revenue represents the sale and delivery of application software systems contracted with us by the customer. We license our proprietary software products under standard license agreements that typically provide the customer with a non-exclusive, non-transferable right to use the software on a single computer and for a single financial institution location.
The increase in license revenue for the current year is primarily due to increased organic revenue from our Alogent® products (our suite of deposit and image capture products targeted at large financial institutions) and an additional quarter of revenues from GFSI (acquired in the second quarter of fiscal 2010).
This increase has been partially offset by decreases in our core software and imaging software license revenues, for which the average deal size was smaller compared to a year ago. We believe our customers are continuing to postpone major capital investments in technology, including software, due to the slowly recovering economy. In addition, our customers are increasingly electing to contract for our products via outsourced delivery rather than a traditional license

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agreement. Our outsourced delivery does not require our customers to make a large, up-front capital investment in license fees.
Support and Service Revenue
Year Ended
 
%
 
June 30,
 
Change
 
2011
 
2010
 
 
Support and service
$
852,253

 
$
720,504

 
18
%
Percentage of total revenue
88
%
 
86
%
 
 
 
Year Over Year Change
 
 
 
$ Change
 
% Change

 
 
In-House Support & Other Services
$
16,286

 
6
%
 
 
Electronic Payment Services
93,870

 
43
%
 
 
Outsourcing Services
15,574

 
10
%
 
 
Implementation Services
6,019

 
9
%
 
 
Total Increase
$
131,749

 
 
 
 
Support and service revenues are generated from implementation services (including conversion, installation, configuration and training), annual support to assist the customer in operating their systems and to enhance and update the software, outsourced data processing services and electronic payment services. There was strong growth in all support and service revenue components in fiscal 2011.
In-house support and other services revenue increased as the acquisition of GFSI contributed additional revenue of $5,648 compared to a year ago. Additionally, annual maintenance fees have increased as our customers’ assets have grown and revenue from our complementary products has grown as the total number of supported in-house customers has grown.
Electronic payment services includes ATM, debit and credit card transaction processing, online bill payment services, remote deposit capture and transaction processing services, with revenues being primarily derived from transaction fees typically under five-year service contracts with our customers. Electronic payment services continued to experience the largest percentage revenue growth. The revenue growth is attributable to the acquisitions of GFSI, PTSI and iPay, which combined to add $68,663 during the current year, and organic revenue growth within electronic payment services, excluding the effects of the acquisitions, continues to be strong with an increase of 12% over the prior fiscal year.
Outsourcing services are performed through our data and item processing centers, with revenues primarily derived from monthly usage or transaction fees typically under five-year service contracts with our customers. Outsourcing services for banks and credit unions continue to drive revenue growth as customers continue to choose outsourcing for the delivery of our solutions. We expect the trend towards outsourced product delivery to benefit outsourcing services revenue for the foreseeable future.
The increase in implementation services revenue is primarily related to acquisition related revenues of $2,683 for GFSI (acquired in the second quarter of fiscal 2010) and increased revenue from merger conversions of $3,754 for existing customers that acquired other financial institutions.
Hardware Revenue
Year Ended
 
%
 
June 30,
 
Change
 
2011
 
2010
 
 
Hardware
$
61,577

 
$
63,857

 
(4
)%
Percentage of total revenue
6
%
 
8
%
 
 
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 due to a decrease in the number of hardware systems and components delivered compared to last year. Hardware revenue has been generally commensurate with the trends in license revenue; however, we expect the overall decreasing trend in hardware sales to continue due to the trend towards outsourcing contracts, which typically do not include hardware.
COST OF SALES AND GROSS PROFIT
Cost of license represents the cost of software from third party vendors through remarketing agreements associated

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with license fee revenue. These costs are recognized when license revenue is recognized. Cost of support and service represents costs associated with conversion and implementation efforts, ongoing support for our in-house customers, operation of our data and item centers providing services for our outsourced customers, electronic payment services and direct operating costs. These costs are recognized as they are incurred. Cost of hardware consists of the direct and indirect costs of purchasing the equipment from the manufacturers and delivery to our customers. These costs are recognized at the same time as the related hardware revenue is recognized. Ongoing operating costs to provide support to our customers are recognized as they are incurred.
Cost of Sales and Gross Profit
Year Ended
 
%
 
June 30,
 
Change
 
2011
 
2010
 
 
Cost of License
$
6,285

 
$
5,827

 
8
 %
Percentage of total revenue
1
%
 
1
%
 
 
License Gross Profit
$
46,782

 
$
46,398

 
1
 %
Gross Profit Margin
88
%
 
89
%
 
 
Cost of support and service
$
515,917

 
$
438,476

 
18
 %
Percentage of total revenue
53
%
 
52
%
 
 
Support and Service Gross Profit
$
336,336

 
$
282,028

 
19
 %
Gross Profit Margin
39
%
 
39
%
 
 
Cost of hardware
$
45,361

 
$
47,163

 
(4
)%
Percentage of total revenue
5
%
 
6
%
 
 
Hardware Gross Profit
$
16,216

 
$
16,694

 
(3
)%
Gross Profit Margin
26
%
 
26
%
 
 
TOTAL COST OF SALES
$
567,563

 
$
491,466

 
15
 %
Percentage of total revenue
59
%
 
59
%
 
 
TOTAL GROSS PROFIT
$
399,334

 
$
345,120

 
16
 %
Gross Profit Margin
41
%
 
41
%
 
 
Cost of license depends greatly on third party reseller agreement software vendor costs. During the current year, these costs have increased as a percentage of license revenue as complementary software sales that have associated third party vendor costs have increased.
Cost of support and service increased for the year commensurate with the increase in support and services revenue. Support and service gross profit has increased over the prior year as a result of the acquisitions of GFSI, PTSI and iPay, which combined to contribute additional support and service gross profit of $38,177 over last year. Support and service gross profit margin remained consistent year over year with the additional combined margins for GFSI and iPay of 45% being offset by lower margins achieved for PTSI of 30%.
Cost of hardware has fluctuated in line with hardware revenue for the current year.
OPERATING EXPENSES
Selling and Marketing
Year Ended
 
%
 
June 30,
 
Change
 
2011
 
2010
 
 
Selling and marketing
$
68,061

 
$
60,875

 
12
%
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.
For the 2011 fiscal year, selling and marketing expenses increased primarily due to increasing personnel costs, including commission expenses, for the additional employees acquired in the fiscal 2010 acquisitions, which added $6,001 to this line during the current year. Selling and marketing expenses have remained consistent as a percentage of total

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revenue due to the continued focus on cost management throughout the Company.
Research and Development
Year Ended
 
%
 
June 30,
 
Change
 
2011
 
2010
 
 
Research and development
$
63,395

 
$
50,820

 
25
%
Percentage of total revenue
7
%
 
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 due to the acquisitions in fiscal 2010 and increased personnel, consultant, and independent contractor costs compared to the same period a year ago. This also caused the increase from 6% of total revenue in fiscal 2010 to 7% in fiscal 2011.
General and Administrative
Year Ended
 
%
 
June 30,
 
Change
 
2011
 
2010
 
 
General and administrative
$
51,561

 
$
51,172

 
1
%
Percentage of  total revenue
5
%
 
6
%
 
 
General and administrative costs include all expenses related to finance, legal, human resources, plus all administrative costs.
General and administrative expenses increased slightly for the year due to additional personnel and other costs from the prior year acquisitions. This increase was partially offset by one-time acquisition transaction costs incurred in fiscal 2010 of $4,237 with no comparable costs in fiscal 2011.
INTEREST INCOME (EXPENSE)
Interest income decreased 22% from $161 to $125 due primarily to lower interest rates on invested balances. Interest expense increased from $1,618 to $8,930 due to increased borrowings made in the fourth quarter of fiscal 2010 to consummate the acquisition of iPay.
PROVISION FOR INCOME TAXES
The provision for income taxes was $70,041 or 33.8% of income before income taxes in fiscal 2011 compared with $62,926 or 34.8% of income before income taxes fiscal 2010. The decrease in the effective tax rate was primarily due to the extension of the Research and Experimentation Credit (“R&E Credit”), effective January 1, 2010, as well as the increase in the applicable deduction percentage for Domestic Production Activities (IRC Section 199), effective for fiscal 2011.
NET INCOME
Net income increased, moving from $117,870, or $1.38 per diluted share in fiscal 2010 to $137,471, or $1.59 per diluted share in fiscal 2011.

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
 
 
 
 
 
 
 
 
 
 
2012
 
% Change
 
2011
 
% Change
 
2010
Revenue
$
778,455

 
4
%
 
$
746,892

 
11
%
 
$
672,282

Gross profit
$
321,515

 
2
%
 
$
315,994

 
12
%
 
$
283,100

Gross profit margin
41
%
 
 

 
42
%
 
 
 
42
%

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Table of Contents

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.
In fiscal 2011, revenue increased 11% overall in the bank systems and services reportable segment compared to the prior year. The increase was due primarily to the acquisitions of GFSI and iPay, which added $40,150 of additional revenue in fiscal 2011, mainly in support and services in the bank systems and services reportable segment which increased 14% over the prior year, coupled with electronic payment services organic revenue growth of nearly 12% over the prior year. Gross profit margin remained consistent year over year, with GFSI and iPay margins performing within expectations.
Credit Union Systems and Services
 
 
 
 
 
 
 
 
 
2012
 
% Change
 
2011
 
% Change
 
2010
Revenue
$
248,654

 
13
%
 
$
220,005

 
34
%
 
$
164,304

Gross profit
$
102,215

 
23
%
 
$
83,340

 
34
%
 
$
62,020

Gross profit margin
41
%
 
 
 
38
%
 
 
 
38
%
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.
In fiscal 2011, revenues in the credit union systems and services reportable segment increased 34% from fiscal 2010. All components of revenue increased, particularly support and service revenue, which increased by 38% over the prior year. This was due primarily to the acquisitions of PTSI and iPay, which added revenue of $38,482 to current year revenue, and electronic payment services which experienced 11% organic revenue growth. Gross profit margins have remained constant as a result of strong iPay margins being offset by slightly lower margins from the PTSI products.

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 increased to $157,313 at June 30, 2012 from $63,125 at June 30, 2011. The cash balance at June 30, 2011 was lower than the balance at June 30, 2012 primarily due to repayments of the $100,000 bullet loan and the $120,000 revolving credit facility during last fiscal year.
The following table summarizes net cash from operating activities in the statement of cash flows:
 
Year Ended June 30,
 
2012
 
2011
 
2010
Net income
$
154,984

 
$
137,471

 
$
117,870

Non-cash expenses
125,377

 
116,788

 
92,317

Change in receivables
(10,795
)
 
940

 
(1,539
)
Change in deferred revenue
896

 
19,487

 
10,775

Change in other assets and liabilities
(5,912
)
 
(34,554
)
 
(725
)
Net cash provided by operating activities
$
264,550

 
$
240,132

 
$
218,698

Cash provided by operating activities increased 10% compared to last year. Cash from operations is primarily used to repay debt, pay dividends and fund acquisitions and other capital expenditures. The increase compared to last year reflects increased earnings driven by continued strong revenue growth, ongoing cost control and decreased interest costs.
Cash used in investing activities for the fiscal year ended June 30, 2012 totaled $76,262. The largest use of of cash included capital expenditures on facilities and equipment of $41,441, including build-out of our Allen, TX facility, computer equipment purchases and related purchased software. Other major uses of cash included $37,873 for the development of software and $720 for the acquisition of customer contracts. This expenditure has been partially offset

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Table of Contents

by $2,772 proceeds from sale of assets, mainly from an aircraft sale. Cash used in investing activities for the fiscal year ended June 30, 2011 was $59,038 and included capital expenditures for facilities and equipment of $32,085 and $26,954 for the development of software.
Financing activities used cash of $94,100 during the current year. There were cash outflows to repay long and short term borrowings on our credit facilities of $35,280, dividends paid to stockholders of $38,128 and repurchases of treasury shares of $34,371. Cash used was partially offset by $13,679 net proceeds from the issuance of stock and tax related to stock-based compensation. During fiscal 2011, net cash used by financing activities was $243,487 and included $229,854 repayments on our lines of credit and $34,391 in dividend payments to shareholders, partially offset by $20,359 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, 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 is $343,956. During fiscal 2012, the Company repurchased 1,045 treasury shares for $34,371. There were no repurchases of treasury stock in fiscal 2011.
On August 24, 2012, the Company's Board of Directors declared a cash dividend of $0.115 per share on its common stock, payable on September 28, 2012 to shareholders of record on September 7, 2012. Current funds from operations are adequate for this purpose. The Board has indicated that it plans to continue paying dividends as long as the Company's financial picture continues to be favorable.
The Company has entered into a bank credit facility agreement that includes a revolving loan and a term loan.
Revolving credit facility
The long term revolving loan allows for borrowings of up to $150,000, which may be increased by the Company at any time until maturity to $250,000. The revolving loan terminates June 4, 2015. At June 30, 2012, 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 outstanding balance on June 4, 2015 is due and payable on that date. At June 30, 2012, the outstanding balance of $127,500 was bearing interest at a rate of 2.47%, and $22,500 will be maturing within the next twelve months.
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, 2012, 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 $3,518 remains outstanding at June 30, 2012 and $2,352 will be maturing within the next twelve months. The Company also has short term capital lease obligations totaling $206 at June 30, 2012.
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, 2012). The credit line was renewed through April 29, 2014. At June 30, 2012, no amount was outstanding.

OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
At June 30, 2012 the Company’s total off balance sheet contractual obligations were $35,371. This balance consists of $23,426 of long-term operating leases for various facilities and equipment which expire from 2013 to 2018 and the

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remaining $11,945 is for purchase commitments related to property and equipment. The contractual obligations table below excludes $6,385 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, 2012
 
Less than
1 year
 
1-3 years
 
3-5 years
 
More than
5 years
 
TOTAL

Operating lease obligations
 
$
6,852

 
$
9,697

 
$
5,427

 
$
1,450

 
$
23,426

Capital lease obligations
 
2,558

 
1,166

 

 

 
3,724

Notes payable, including accrued interest
 
23,103

 
45,000

 
60,000

 

 
128,103

Purchase obligations
 
11,945

 

 

 

 
11,945

Total
 
$
44,458

 
$
55,863

 
$
65,427

 
$
1,450

 
$
167,198


RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-04, Fair Value Measurement in May 31, 2011, which became effective for the Company on January 1, 2012. The updated explanatory guidance on measuring fair value did not have a significant impact on our fair value calculations and no additional fair value measurements were required as a result of the update.
The FASB also issued ASU No. 2011-05, Comprehensive Income in June 2011, which is effective for the Company beginning July 1, 2012 and will be applied retrospectively. The updated guidance requires non-owner changes in stockholders' equity to be reported either in a single continuous statement of comprehensive income or in two separate but consecutive statements, rather than as part of the statement of changes in stockholders' equity. No changes in disclosure are anticipated as a result of the update.
In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment, which is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, although early adoption is permitted. 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 will be effective for the Company beginning July 1, 2012.
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.

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

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the amount of earned and unearned revenue reflected in the financial statements.
License Fee Revenue.  For software license agreements that do not require significant modification or customization of the software, the Company recognizes software license revenue when persuasive evidence of an arrangement exists, delivery of the product has occurred, the license fee is fixed and determinable and collection is probable. The Company’s software license agreements generally include multiple products and services or “elements.”  None of these elements alone are deemed to be essential to the functionality of the other elements. Generally accepted accounting principles require revenue earned on software arrangements involving multiple elements to be allocated to each element based on VSOE of fair value. Fair value is determined for license fees based upon the price charged when sold separately. When we determine that VSOE does not exist for one or more of the delivered elements of a software arrangement, but does exist for all of the undelivered elements, revenue is recognized following the residual method allowed by current accounting pronouncements. Under the residual method, a residual amount of the total arrangement fee is recognized as revenue for the delivered elements after the established fair value of all undelivered elements has been deducted.
Support and Service Fee Revenue.  Implementation services are generally for installation, implementation, and configuration of our systems and for training of our customer’s employees. These services are not considered essential to the functionality of the related software. VSOE of fair value is established by pricing used when these services are sold separately. Generally, revenue is recognized when services are completed. On certain larger implementations, revenue is recognized based on milestones during the implementation. Milestones are triggered by tasks completed or based on direct labor hours.
Maintenance support revenue is recognized pro-rata over the contract period, typically one year. VSOE of fair value is determined based on contract renewal rates.
Outsourced data processing services and ATM, debit card, and other transaction processing services revenues are recognized in the month the transactions were processed or the services were rendered.
Hardware Revenue:  Hardware revenue is recognized upon delivery to the customer, when title and risk of loss are transferred. In most cases, we do not stock in inventory the hardware products we sell, but arrange for third-party suppliers to drop-ship the products to our customers on our behalf. Some of our hardware revenues are derived under “arrangements” as defined within U.S. GAAP. To the extent hardware revenue is part of such an arrangement and is not deemed essential to the functionality of any of the other elements to the arrangement, it is recognized based on VSOE of fair value at the time of delivery. The Company also remarkets maintenance contracts on hardware to our customers. Hardware maintenance revenue is recognized ratably over the agreement period.
Depreciation and Amortization Expense
The calculation of depreciation and amortization expense is based on the estimated economic lives of the underlying property, plant and equipment and intangible assets, which have been examined for their useful life and determined that no impairment exists. We believe it is unlikely that any significant changes to the useful lives of our tangible and intangible assets will occur in the near term, but rapid changes in technology or changes in market conditions could result in revisions to such estimates that could materially affect the carrying value of these assets and the Company’s future consolidated operating results. All long lived assets are tested for valuation and potential impairment on a scheduled annual basis.
Capitalization of software development costs
We capitalize certain costs incurred to develop commercial software products and to develop or purchase internal-use software. Significant estimates and assumptions include: determining the appropriate period over which to amortize the capitalized costs based on the estimated useful lives, estimating the marketability of the commercial software products and related future revenues, and assessing the unamortized cost balances for impairment. For commercial software products, determining the appropriate amortization period is based on estimates of future revenues from sales of the products. We consider various factors to project marketability and future revenues, including an assessment of alternative solutions or products, current and historical demand for the product, and anticipated changes in technology that may make the product obsolete. A significant change in an estimate related to one or more software products could result in a material change to our results of operations.
Estimates used to determine current and deferred income taxes
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. We also must determine the likelihood of recoverability of deferred tax assets, and adjust any valuation allowances accordingly. Considerations include the period of expiration of the tax asset, planned use of the tax asset, and historical and projected taxable

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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.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk refers to the risk that a change in the level of one or more market prices, interest rates, indices, volatilities, correlations or other market factors such as liquidity, will result in losses for a certain financial instrument or group of financial instruments. We are currently exposed to credit risk on credit extended to customers and interest risk on outstanding debt. We do not currently use any derivative financial instruments. We actively monitor these risks through a variety of controlled procedures involving senior management.
Based on the controls in place and the credit worthiness of the customer base, we believe the credit risk associated with the extension of credit to our customers will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Based on our outstanding debt with variable interest rates as of June 30, 2012, a 1% increase in our borrowing rate would increase annual interest expense in fiscal 2013 by less than $1,300.


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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Financial Statement Schedules
There are no schedules included because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Jack Henry & Associates, Inc.
Monett, Missouri

We have audited the accompanying consolidated balance sheets of Jack Henry & Associates, Inc. and subsidiaries (the “Company”) as of June 30, 2012 and 2011, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Jack Henry & Associates, Inc. and subsidiaries as of June 30, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period June 30, 2012, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of June 30, 2012, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 27, 2012 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP
Kansas City, Missouri
August 27, 2012


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MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Jack Henry & Associates, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes policies and procedures pertaining to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements. All internal controls, no matter how well designed, have inherent limitations. Therefore, even where internal control over financial reporting is determined to be effective, it can provide only reasonable assurance. Projections of any evaluation of effectiveness to future periods are subject to the risk controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
As of the end of the Company’s 2012 fiscal year, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined the Company’s internal control over financial reporting as of June 30, 2012 was effective.
The Company’s internal control over financial reporting as of June 30, 2012 has been audited by the Company’s independent registered public accounting firm, as stated in their report appearing on the next page.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Jack Henry & Associates, Inc.
Monett, Missouri
We have audited the internal control over financial reporting of Jack Henry & Associates, Inc. and subsidiaries (the “Company”) as of June 30, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2012, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended June 30, 2012 of the Company and our report dated August 27, 2012 expressed an unqualified opinion on those financial statements.

/s/ DELOITTE & TOUCHE LLP
Kansas City, Missouri
August 27, 2012


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JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
 
 
 
 
 
 
 
Year Ended June 30,
 
2012
 
2011
 
2010
REVENUE
 
 
 
 
 
License
$
54,811

 
$
53,067

 
$
52,225

Support and service
909,176

 
852,253

 
720,504

Hardware
63,122

 
61,577

 
63,857

Total revenue
1,027,109

 
966,897

 
836,586

 
 
 
 
 
 
COST OF SALES
 
 
 
 
 
Cost of license
6,111

 
6,285

 
5,827

Cost of support and service
551,285

 
515,917

 
438,476

Cost of hardware
45,983

 
45,361

 
47,163

Total cost of sales
603,379

 
567,563

 
491,466

 
 
 
 
 
 
GROSS PROFIT
423,730

 
399,334

 
345,120

 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
 
Selling and marketing
76,500

 
68,061

 
60,875

Research and development
60,876

 
63,395

 
50,820

General and administrative
50,119

 
51,561

 
51,172

Total operating expenses
187,495

 
183,017

 
162,867

 
 
 
 
 
 
OPERATING INCOME
236,235

 
216,317

 
182,253

 
 
 
 
 
 
INTEREST INCOME (EXPENSE)
 
 
 
 
 
Interest income
1,176

 
125

 
161

Interest expense
(5,743
)
 
(8,930
)
 
(1,618
)
Total interest income (expense)
(4,567
)
 
(8,805
)
 
(1,457
)
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
231,668

 
207,512

 
180,796

 
 
 
 
 
 
PROVISION FOR INCOME TAXES
76,684

 
70,041

 
62,926

 
 
 
 
 
 
NET INCOME
$
154,984

 
$
137,471

 
$
117,870

 
 
 
 
 
 
Diluted earnings per share
$
1.78

 
$
1.59

 
$
1.38

Diluted weighted average shares outstanding
87,287

 
86,687

 
85,381

 
 
 
 
 
 
Basic earnings per share
$
1.79

 
$
1.60

 
$
1.39

Basic weighted average shares outstanding
86,599

 
85,948

 
84,558

 
 
 
 
 
 
Cash dividends paid per share
$
0.440

 
$
0.400

 
$
0.360


See notes to consolidated financial statements.

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JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
 
 
June 30,
2012
 
June 30,
2011
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
157,313

 
$
63,125

Investments, at amortized cost

 
1,000

Receivables, net
218,305

 
207,510

Income tax receivable
8,476

 
17,116

Prepaid expenses and other
61,261

 
45,938

Prepaid cost of product
23,294

 
19,261

Total current assets
468,649

 
353,950

PROPERTY AND EQUIPMENT, net
276,730

 
270,186

OTHER ASSETS:
 
 
 
Non-current prepaid cost of product
21,344

 
19,083

Computer software, net of amortization
115,785

 
110,836

Other non-current assets
30,523

 
28,492

Customer relationships, net of amortization
162,561

 
179,133

Trade names, net of amortization
10,380

 
10,597

Goodwill
533,520

 
533,520

Total other assets
874,113

 
881,661

Total assets
$
1,619,492

 
$
1,505,797

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
16,317

 
$
12,829

Accrued expenses
58,260

 
49,479

Deferred income tax liability
26,256

 
15,274

Notes payable and current maturities of long term debt
25,503

 
26,092

Deferred revenues
275,907

 
276,837

Total current liabilities
402,243

 
380,511

LONG TERM LIABILITIES:
 
 
 
Non-current deferred revenues
20,093

 
18,267

Non-current deferred income tax liability
100,932

 
89,304

Debt, net of current maturities
106,166

 
127,939

Other long-term liabilities
7,002

 
10,000

Total long term liabilities
234,193

 
245,510

Total liabilities
636,436

 
626,021

STOCKHOLDERS' EQUITY
 
 
 
Preferred stock - $1 par value; 500,000 shares authorized, none issued

 

Common stock - $0.01 par value; 250,000,000 shares authorized;
      Shares issued at 06/30/12 were 101,482,461
      Shares issued at 06/30/11 were 100,766,173
1,015

 
1,008

Additional paid-in capital
381,919

 
361,131

Retained earnings
944,078

 
827,222

Less treasury stock at cost
      15,452,064 shares at 06/30/12, 14,406,635 shares at 06/30/11
(343,956
)
 
(309,585
)
Total stockholders' equity
983,056

 
879,776

Total liabilities and equity
$
1,619,492

 
$
1,505,797

See notes to consolidated financial statements.

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JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands, Except Share and Per Share Data)
 
 
 
YEAR ENDED JUNE 30,
 
2012
 
2011
 
2010
 
 
 
 
 
 
PREFERRED SHARES:

 

 

 
 
 
 
 
 
COMMON SHARES:
 
 
 
 
 
Shares, beginning of year
100,766,173

 
99,808,367

 
98,020,796

Shares issued for equity-based payment arrangements
594,428

 
857,348

 
1,689,457

Shares issued for Employee Stock Purchase Plan
121,860

 
100,458

 
98,114

Shares, end of year
101,482,461

 
100,766,173

 
99,808,367

 
 
 
 
 
 
COMMON STOCK - PAR VALUE  $0.01 PER SHARE:
 
 
 
 
 
Balance, beginning of year
$
1,008

 
$
998

 
$
980

Shares issued for equity-based payment arrangements
6

 
9

 
17

Shares issued for Employee Stock Purchase Plan
1

 
1

 
1

Balance, end of year
$
1,015

 
$
1,008

 
$
998

 
 
 
 
 
 
ADDITIONAL PAID-IN CAPITAL:
 
 
 
 
 
Balance, beginning of year
$
361,131

 
$
334,817

 
$
298,378

Shares issued upon exercise of stock options
6,886

 
16,837

 
26,569

Shares issued for Employee Stock Purchase Plan
3,321

 
2,456

 
1,953

Tax benefits from share-based compensation
3,631

 
2,298

 
4,666

Stock-based compensation expense
6,950

 
4,723

 
3,251

Balance, end of year
$
381,919

 
$
361,131

 
$
334,817

 
 
 
 
 
 
RETAINED EARNINGS:
 
 
 
 
 
Balance, beginning of year
$
827,222

 
$
724,142

 
$
636,733

Net income
154,984

 
137,471

 
117,870

Dividends
(38,128
)
 
(34,391
)
 
(30,461
)
Balance, end of year
$
944,078

 
$
827,222

 
$
724,142

 
 
 
 
 
 
TREASURY STOCK:
 
 
 
 
 
Balance, beginning of year
$
(309,585
)
 
$
(309,585
)
 
$
(309,585
)
Purchase of treasury shares
(34,371
)
 

 

Balance, end of year
$
(343,956
)
 
$
(309,585
)
 
$
(309,585
)
 
 
 
 
 
 
TOTAL STOCKHOLDERS' EQUITY
$
983,056

 
$
879,776

 
$
750,372

See notes to consolidated financial statements.


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JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
 
Year Ended
 
June 30,
 
2012
 
2011
 
2010
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
Net Income
$
154,984

 
$
137,471

 
$
117,870

Adjustments to reconcile net income to net cash from
     operating activities:
 
 
 
 
 
Depreciation
45,322

 
41,912

 
36,589

Amortization
49,297

 
48,602

 
34,919

Change in deferred income taxes
22,610

 
20,526

 
16,694

Expense for stock-based compensation
6,950

 
4,723

 
3,251

(Gain)/loss on disposal of assets
1,198

 
1,025

 
864

Changes in operating assets and liabilities:
 
 
 
 
 
Change in receivables  
(10,795
)
 
940

 
(1,539
)
Change in prepaid expenses, prepaid cost of product and other
(22,962
)
 
(24,543
)
 
(6,458
)
Change in accounts payable
3,488

 
(671
)
 
630

Change in accrued expenses
7,770

 
1,593

 
741

Change in income taxes
5,792

 
(10,933
)
 
4,362

Change in deferred revenues
896

 
19,487

 
10,775

Net cash from operating activities
264,550

 
240,132

 
218,698

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
Payment for acquisitions, net of cash acquired

 

 
(426,653
)
Capital expenditures
(41,441
)
 
(32,085
)
 
(54,509
)
Proceeds from sale of assets
2,772

 

 
1,032

Customer contracts acquired
(720
)
 

 

Computer software developed
(37,873
)
 
(26,954
)
 
(25,586
)
Proceeds from investments
3,000

 
4,000

 
4,000

Purchase of investments
(2,000
)
 
(3,999
)
 
(3,999
)
Net cash from investing activities
(76,262
)
 
(59,038
)
 
(505,715
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
Borrowings on credit facilities

 
399

 
448,647

Repayments on credit facilities
(35,280
)
 
(229,854
)
 
(145,487
)
Purchase of treasury stock
(34,371
)
 

 

Dividends paid
(38,128
)
 
(34,391
)
 
(30,461
)
Debt acquisition costs

 

 
(7,598
)
Excess tax benefits from stock-based compensation
3,465

 
1,056

 
661

Proceeds from issuance of common stock upon exercise of stock options
11,004

 
19,375

 
31,204

Minimum tax withholding payments related to share based compensation
(4,112
)
 
(2,529
)
 
(4,635
)
Proceeds from sale of common stock, net
3,322

 
2,457

 
1,953

Net cash from financing activities
(94,100
)
 
(243,487
)
 
294,284

NET CHANGE IN CASH AND CASH EQUIVALENTS
$
94,188

 
$
(62,393
)
 
$
7,267

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
$
63,125

 
$
125,518

 
$
118,251

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
157,313

 
$
63,125

 
$
125,518


See notes to consolidated financial statements

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JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)

NOTE 1.    NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
Jack Henry & Associates, Inc. and Subsidiaries (“JHA” or the “Company”) is a provider of integrated computer systems and services that has developed and acquired a number of banking and credit union software systems. The Company's revenues are predominately earned by marketing those systems to financial institutions nationwide together with computer equipment (hardware) and by providing the conversion and software implementation services for financial institutions to utilize JHA software systems, and by providing other related services. JHA also provides continuing support and services to customers using in-house or outsourced systems.
CONSOLIDATION
The consolidated financial statements include the accounts of JHA and all of its subsidiaries, which are wholly-owned, and all intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company derives revenue from the following sources:  license fees, support and service fees and hardware sales. There are no rights of return, condition of acceptance or price protection in the Company’s sales contracts.
License Fee Revenue:  For software license agreements that do not require significant modification or customization of the software, the Company recognizes software license revenue when persuasive evidence of an arrangement exists, delivery of the product has occurred, the license fee is fixed and determinable and collection is probable. The Company’s software license agreements generally include multiple products and services or “elements.”  None of these elements are deemed to be essential to the functionality of the other elements. Accounting principles generally accepted in the Unites States of America (“U.S. GAAP”) generally require revenue earned on software arrangements involving multiple elements to be allocated to each element based on vendor-specific objective evidence (“VSOE”) of fair value. Fair value is determined for license fees based upon the price charged when sold separately or, if the product is not yet sold separately, the price determined by management with relevant authority. In the event that we determine that VSOE does not exist for one or more of the delivered elements of a software arrangement, but does exist for all of the undelivered elements, revenue is recognized using the residual method. Under the residual method, a residual amount of the total arrangement fee is recognized as revenue for the delivered elements after the established fair value of all undelivered elements has been deducted.
Arrangements with customers that include significant customization, modification, or production of software are accounted for under contract accounting, with the revenue being recognized using the percentage-of-completion method.
Support and Service Fee Revenue: Implementation services are generally for installation, training, implementation, and configuration. These services are not considered essential to the functionality of the related software. VSOE of fair value is established by pricing used when these services are sold separately or, if the services are not yet sold separately, the price determined by management with relevant authority. Generally revenue is recognized when services are completed. On certain larger implementations, revenue is recognized based on milestones during the implementation. Milestones are triggered by tasks completed or based on direct labor hours.
Maintenance support revenue is recognized pro-rata over the contract period, typically one year. VSOE of fair value is determined based on contract renewal rates.
Outsourced data processing and ATM, debit card, and other transaction processing services revenue is recognized in the month the transactions are processed or the services are rendered.
Hardware Revenue:  Hardware revenue is recognized upon delivery to the customer, when title and risk of loss are transferred. In most cases, we do not stock in inventory the hardware products we sell, but arrange for third-party suppliers to drop-ship the products to our customers on our behalf. To the extent hardware revenue is part of such an

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arrangement and is not deemed essential to the functionality of any of the other elements to the arrangement, it is recognized based on 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.
Revenue-based taxes collected from customers and remitted to governmental authorities are presented on a net basis (i.e. excluded from revenues).
PREPAID COST OF PRODUCT
Costs for remarketed hardware and software maintenance contracts, which are prepaid, are recognized ratably over the life of the contract, generally one to five years, with the related revenue amortized from deferred revenues.
DEFERRED REVENUES
Deferred revenues consist primarily of prepaid annual software support fees and prepaid hardware maintenance fees. Hardware maintenance contracts are multi-year; therefore, the deferred revenue and maintenance are classified in accordance with the terms of the contract. Software and hardware deposits received are also reflected as deferred revenues.
COMPUTER SOFTWARE DEVELOPMENT
The Company capitalizes new product development costs incurred from the point at which technological feasibility has been established through the point at which the product is ready for general availability. Software development costs that are capitalized are evaluated on a product-by-product basis annually and are assigned an estimated economic life based on the type of product, market characteristics, and maturity of the market for that particular product. These costs are amortized based on current and estimated future revenue from the product or on a straight-line basis, whichever yields greater amortization expense.
CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three months or less at the time of acquisition to be cash equivalents.
INVESTMENTS
The Company invests its cash that is not required for current operations primarily in U.S. government securities and money market accounts. The Company has the positive intent and ability to hold its debt securities until maturity and accordingly, these securities are classified as held-to-maturity and are carried at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized and accreted, respectively, to interest income using the level-yield method over the period to maturity. The held-to-maturity securities typically mature in less than one year. Interest on investments in debt securities is included in income when earned.
There were no held-to-maturity securities at June 30, 2012. At June 30, 2011, the amortized cost of held-to-maturity securities was $1,000. Fair values of these securities did not differ significantly from amortized cost due to the nature of the securities and minor interest rate fluctuations during the periods.
PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS
Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets.
Intangible assets consist of goodwill, customer relationships, computer software, and trade names acquired in business acquisitions in addition to internally developed computer software. The amounts are amortized, with the exception of those with an indefinite life (such as goodwill), over an estimated economic benefit period, generally five to twenty years.
The Company reviews its long-lived assets and identifiable intangible assets with finite lives for impairment whenever events or changes in circumstances have indicated that the carrying amount of its assets might not be recoverable. The Company evaluates goodwill and other indefinite-lived intangible assets for impairment of value on an annual basis as of January 1 and between annual tests if events or changes in circumstances indicate that the asset might be impaired.
COMPREHENSIVE INCOME