UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(X)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2011

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)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 Web site, 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 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.

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of May 4, 2011, Registrant has 86,328,760 shares of common stock outstanding ($0.01 par value).

---

		JACK HENRY & ASSOCIATES, INC.
	CONTENTS
	PART I	FINANCIAL INFORMATION	Page Reference
	ITEM 1	Financial Statements
		Condensed Consolidated Balance Sheets
		March 31, 2011 and June 30, 2010 (Unaudited)	4
		Condensed Consolidated Statements of Income for the Three and Nine Months
		Ended March 31, 2011 and 2010 (Unaudited)	5
		Condensed Consolidated Statements of Cash Flows for the Nine Months
		Ended March 31, 2011 and 2010 (Unaudited)	6
		Notes to Condensed Consolidated Financial Statements (Unaudited)	7
	ITEM 2	Management's Discussion and Analysis of Financial Condition and Results of
		Operations	14
	ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	22
	ITEM 4	Controls and Procedures	22
	PART II	OTHER INFORMATION
	ITEM 6	Exhibits	22

---

---

---

---

JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Per Share Amounts)

(Unaudited)

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.

Fair value of financial instruments

Fair values for held-to-maturity securities are based on quoted market prices. For cash equivalents, amounts receivable or payable and short-term borrowings, fair values approximate carrying value, based on the short-term nature of the assets and liabilities. The fair value of the long term debt also approximates carrying value as estimated using discounted cash flows based on the Company’s current incremental borrowing rates or quoted prices in active markets.

Comprehensive income

Comprehensive income for the three and nine month periods ended March 31, 2011 and 2010 equals the Company’s net income.

Interim financial statements

The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America applicable to interim condensed consolidated financial statements, and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. The condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes, which are included in its Annual Report on Form 10-K  (“Form 10-K”) for the year ended June 30, 2010. The accounting policies followed by the Company are set forth in Note 1 to the Company's consolidated financial statements included in its Form 10-K for the fiscal year ended June 30, 2010.

In the opinion of the management of the Company, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary (consisting solely of normal recurring adjustments) to present fairly the financial position of the Company as of March 31, 2011, and the results of its operations for the three and nine-month periods ended March 31, 2011 and 2010, and its cash flows for the nine-month periods ended March 31, 2011 and 2010.

The results of operations for the period ended March 31, 2011 are not necessarily indicative of the results to be expected for the entire year.

NOTE 2.

ADDITIONAL INTERIM FOOTNOTE INFORMATION

The following additional information is provided to update the notes to the Company’s annual consolidated financial statements for developments during the three and nine-month periods ended March 31, 2011.

Common stock

The Board of Directors has authorized the Company to repurchase shares of its common stock. Under this authorization, the Company may finance its share repurchases with available cash reserves or short-term borrowings on its existing credit facilities. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At June 30, 2010 and March 31, 2011, there were 14,407 shares in treasury stock and the Company had the remaining authority to repurchase up to 5,584 additional shares. The total cost of treasury shares at March 31, 2011 is $309,585. There were no repurchases of treasury stock during the nine months ended March 31, 2011.

Commitments and contingencies

For fiscal 2011, the Board of Directors approved bonus plans for its executive officers and general managers for the current fiscal year. Under the plan, bonuses may be paid following the end of the current fiscal year based upon achievement of operating income targets and upon attainment of a superior return on average assets in comparison with a group of peer companies selected by the Compensation Committee. For general managers, one half of each manager’s bonus is contingent upon meeting individual business unit objectives established by the executive officer to whom the general manager reports.

The Company has entered into agreements that provide its executive officers with compensation totaling two years’ base salary and target bonus in the event the Company terminates the executive without cause within the period from 90 days before to two years after a change in control of the Company. The Company has also entered into agreements that provide its general managers with compensation totaling one year of base salary and target bonus under circumstances identical to those contained in the executive officer agreements.

NOTE 3.

RECENT ACCOUNTING PRONOUNCEMENTS

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-13, Multiple-Deliverable Revenue Arrangements, which is effective for arrangements beginning or changed during fiscal years starting after June 15, 2010. This new standard eliminates the use of the residual method of revenue recognition and requires the allocation of consideration to each deliverable using the relative selling price method. This new guidance did not have a material impact on revenue recognition because nearly all of the Company’s revenue arrangements are subject to Accounting Standards Codification Topic 985. Such arrangements are considered out of scope for this ASU.

In October 2009, the FASB also issued Accounting Standard Update No. 2009-14, Software: Certain Revenue Arrangements that Include Software Elements, which is also effective for arrangements beginning or changed during fiscal years starting after June 15, 2010. This revision to Software (Topic 985) drops from its scope all tangible products containing both software and non-software components that operate together to deliver the product's functions. The majority of the Company’s software arrangements are not tangible products with software components; therefore, this update did not materially impact the company.

NOTE 4.

DEBT

The Company’s outstanding long and short term debt is as follows:

	March 31,		June 30,
	2011		2010
LONG TERM DEBT
Long term revolving credit facility	$       90,000		$     120,000
Term loan	150,000		150,000
Capital leases	2,347		5,689
Other borrowings	1,237		2,244
	243,584		277,933
Less current maturities	18,997		5,201
Long-term debt, net of current maturities	$     224,587		$     272,732
SHORT TERM DEBT
Bullet term loan	$              -		$     100,000
Capital leases	1,105		-
Current maturities of long-term debt	18,997		5,201
Other borrowings	-		762
Notes payable and current maturities of long term debt	$       20,102		$     105,963

The Company has entered into a bank credit facility agreement that includes a revolving loan, a term loan and a bullet 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 March 31, 2011, the outstanding revolving loan balance was $90,000, which was bearing interest at a rate of 2.31%.

Subsequent to the period end, the Company reduced the outstanding revolving loan balance to $80,000 via a $10,000 repayment made on April 8, 2011.

Term loan

The term loan has an original principal balance of $150,000, with quarterly principal payments of $5,625 beginning on September 30, 2011, and the remaining balance due June 4, 2015. At March 31, 2011, the outstanding balance was bearing interest at a rate of 2.31%. Of the $150,000 outstanding, $16,875 will be maturing within the next twelve months.

Bullet term loan

The bullet term loan had an original principal balance of $100,000. The full balance, which would have been due on December 4, 2010, was paid in full on July 8, 2010.

Each of the above loans bear interest at a variable rate equal to (a) a rate based on LIBOR or (b) an alternate base rate (the greater of (a) the Federal Funds Rate plus 0.5%, (b) the Prime Rate or (c) LIBOR plus 1.0%), plus an applicable percentage in each case determined by the Company's leverage ratio. The loans are secured by pledges of capital stock of certain subsidiaries of the Company. The loans are also guaranteed by certain subsidiaries of the Company. The credit facility is subject to various financial covenants that require the Company to maintain certain financial ratios as defined in the agreement. As of March 31, 2011, the Company was in compliance with all such covenants.

Capital leases

The Company has entered into various capital lease obligations for the use of certain computer equipment. Long term capital lease obligations were entered into during the year of which $2,347 remains outstanding at March 31, 2011 and $1,460 will be maturing within the next twelve months. The Company also has short term capital lease obligations totaling $1,105 at March 31, 2011.

Other lines of credit

The Company renewed an unsecured bank credit line on April 29, 2010 which provides for funding of up to $5,000 and bears interest at the prime rate less 1% (2.25% at March 31, 2011). The credit line was renewed through April 29, 2012. At March 31, 2011, no amount was outstanding.

The Company renewed a bank credit line on March 7, 2011 which provides for funding of up to $8,000 and bears interest at the Federal Reserve Board’s prime rate (3.25% at March 31, 2011). The credit line expires March 7, 2012 and is secured by $1,000 of investments. At March 31, 2011, no amount was outstanding.

NOTE 5.

INCOME TAXES

The effective tax rate of 32.3% of income before income taxes for the quarter ended March 31, 2011 is higher than 27.2% for the same quarter in fiscal 2010 primarily due to one-time benefits provided by the Domestic Production Activities Deduction (IRC Section 199), recognized during the quarter ended March 31, 2010.

At March 31, 2011, the Company had $7,928 of gross unrecognized tax benefits, $6,217 of which, if recognized would affect our effective tax rate. Our policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. As of March 31, 2011, we had accrued interest and penalties of $948 related to uncertain tax positions.

During the fiscal year ended June 30, 2010, the Internal Revenue Service commenced an examination of the Company’s U.S. federal income tax returns for fiscal years ended June 2008 through 2009 that is anticipated to be completed by the end of calendar 2011. At this time, it is anticipated that the examination will not result in a material change to the Company’s financial position. The U.S. federal and state income tax returns for June 30, 2007 and all subsequent years still remain subject to examination as of March 31, 2011 under statute of limitations rules. We anticipate potential changes resulting from our IRS examination and expiration of statutes of limitations could reduce the unrecognized tax benefits balance by approximately $2,000 - $3,000 within twelve months of March 31, 2011.

NOTE 6.

STOCK-BASED COMPENSATION

For the three months ended March 31, 2011 and 2010, there was $1,233 and $911, respectively, in compensation expense from equity-based awards. Pre-tax operating income for the first nine months of fiscal 2011 and 2010 includes $3,438 and $2,408 of equity-based compensation costs, respectively. During the fiscal year the Company adopted an amendment to the Restricted Stock Plan to provide unit awards to employees. The Company issued both unit awards and share awards under the Restricted Stock Plan during the nine months ended March 31, 2011. The Company previously issued options to employees under the 1996 Stock Option Plan (“1996 SOP”) and to outside directors under the 2005 Non-Qualified Stock Option Plan (“2005 NSOP”). No stock options were issued under the 1996 SOP or the 2005 NSOP during the nine months ended March 31, 2011.

2005 NSOP and 1996 SOP

Changes in stock options outstanding and exercisable are as follows:

2005 NSOP & 1996 SOP – Stock options
		Number of Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value
Outstanding July 1, 2010		1,897		$      18.58
Granted		-		-
Forfeited		(46)		28.31
Exercised		(838)		21.59
Outstanding March 31, 2011		1,013		$      15.66		$      18,477
Vested March 31, 2011		1,013		$      15.66		$      18,477
Exercisable March 31, 2011		1,013		$      15.66		$      18,477

Compensation cost related to outstanding options has been fully recognized. The weighted-average remaining contractual term on options currently exercisable as of March 31, 2011 was 2.99 years.

Restricted Stock Plan

The amendment to the Restricted Stock Plan was adopted by the Company on August 20, 2010, for its executive officers. Unit awards will be made to employees remaining in continuous employment throughout the performance period and vary based on the Company’s percentile ranking in Total Shareholder Return (“TSR”) over the performance period compared to a peer group of companies. TSR is defined as the change in the stock price through the performance period plus dividends per share paid during the performance period, all divided by the stock price at the beginning of the performance period. It is the intention of the Company to settle the unit awards in shares of the Company’s stock.

The following table summarizes non-vested unit awards as of March 31, 2011, as well as activity for the nine months then ended:

Unit awards		Shares		Weighted Average Grant Date Fair Value
Non-vested units at July 1, 2010		-		$              -
Granted		293		15.77
Vested		-		-
Forfeited		-		-
Non-vested units at March 31, 2011		293		$      15.77

The assumptions used in this model to estimate fair value and resulting values are as follows:

Weighted Average Assumptions at measurement date:
Volatility		37%
Risk free interest rate		0.9%
Dividend yield		1.60%
Stock Beta		0.89

At March 31, 2011, there was $3,773 of compensation expense that has yet to be recognized related to non-vested restricted stock unit awards, which will be recognized over a weighted-average period of 2.45 years.

The following table summarizes non-vested share awards as of March 31, 2011, as well as activity for the nine months then ended:

Share awards		Shares		Weighted Average Grant Date Fair Value
Non-vested shares at July 1, 2010		387		$       21.96
Granted		102		24.54
Vested		(59)		23.75
Forfeited		(14)		21.88
Non-vested shares at March 31, 2011		416		$       22.34

At March 31, 2011, there was $4,630 of compensation expense that has yet to be recognized related to non-vested restricted stock share awards, which will be recognized over a weighted-average period of 1.74 years.

NOTE 7.

EARNINGS PER SHARE

The following table reflects the reconciliation between basic and diluted earnings per share:

Per share information is based on the weighted average number of common shares outstanding for the periods ended March 31, 2011 and 2010. Stock options and restricted stock have been included in the calculation of income per share to the extent they are dilutive. No anti-dilutive stock options and restricted stock were excluded for the three month period ended March 31, 2011 (671 shares were excluded for the same period last year). Anti-dilutive stock options and restricted stock to purchase approximately 107 and 649 shares for the nine-month periods ended March 31, 2011 and 2010, respectively, were not included in the computation of diluted income per common share.

NOTE 8.

BUSINESS ACQUISITIONS

iPay Technologies Holding Company, LLC

On June 4, 2010, the Company acquired all of the equity interests of iPay Technologies Holding Company, LLC (“iPay”), a leading provider of online bill payment solutions for both banks and credit unions, for $301,143 paid in cash.

Through the Company’s ongoing evaluation of the preliminary purchase price allocation, it identified a $2,817 decrease in the current deferred tax liability assumed, a $985 decrease in the long term deferred tax liability assumed and a $216 increase in accrued expenses assumed, with a corresponding $3,586 decrease in the goodwill arising from the acquisition. The measurement period adjustment was attributable to new information gathered related to the deferred tax liability of iPay in the preparation of its final tax return. The measurement period adjustment was made retrospectively on the acquisition date, June 4, 2010, and did not impact the consolidated income statement. The recognized amounts of identifiable assets acquired and liabilities assumed, based upon their fair values as of June 4, 2010, updated for the retrospective adjustment, are set forth below:

Current assets (inclusive of cash acquired of $353)		$       3,692
Long-term assets		6,362
Identifiable intangible assets		116,286
Total liabilities assumed		(13,956)
Total identifiable net assets		112,384
Goodwill		188,759
Net assets acquired		$   301,143

Management continues to assess the fair value of acquired assets and liabilities and evaluate the income tax implications of this business combination and the final purchase price allocation will be reported at a later date.

The accompanying consolidated statements of income for the three and nine-month periods ended March 31, 2010 do not include any revenues and expenses prior to the closing dates of each of the fiscal 2010 acquisitions, being Goldleaf Financial Solutions, Inc. (“GFSI”), PEMCO Technology Services, Inc. (“PTSI”) and iPay which were acquired on October 1, 2009, October 29, 2009, and June 4, 2010, respectively. The following unaudited pro forma consolidated financial information is presented as if these acquisitions had occurred at the beginning of the periods presented. In addition, this unaudited pro forma financial information is provided for illustrative purposes only and should not be relied upon as necessarily being indicative of the historical results that would have been obtained if these acquisitions had actually occurred during those periods, or the results that may be obtained in the future as a result of these acquisitions.

NOTE 9.

BUSINESS SEGMENT INFORMATION

The Company is a leading provider of integrated computer systems that perform data processing (both in-house and outsourced) for banks and credit unions. The Company’s operations are classified into two business segments: bank systems and services and credit union systems and services. 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.

		March 31,		June 30,
		2011		2010
Property and equipment, net
Bank systems and services		$      236,106		$   241,596
Credit Union systems and services		34,018		33,074
Total		$      270,124		$   274,670
Intangible assets, net
Bank systems and services		$      596,381		$   611,245
Credit Union systems and services		242,998		245,065
Total		$      839,379		$   856,310

NOTE 10.

SUBSEQUENT EVENTS

On May 6, 2011, the Company’s Board of Directors declared a cash dividend of $0.105 per share on its common stock, payable on June 2, 2011 to shareholders of record on May 20, 2011.

On April 8 2011, the Company reduced the outstanding balance on its primary revolving credit facility to $80,000 via a $10,000 repayment.

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements included in this Form 10-Q.

RESULTS OF OPERATIONS

Background and Overview

We provide integrated computer systems for both in-house installations and outsourced data processing to commercial banks, credit unions and other financial institutions. We have developed and acquired banking and credit union application software systems that we market, together with compatible computer hardware, to these financial institutions. For in-house installations we also perform data conversion and software implementation services regarding our systems and provide continuing customer support services after the systems are implemented. For our customers who prefer not to make an up-front capital investment in software and hardware, we provide our full range of products and services on an outsourced basis through our eight data centers in six physical locations and eight image-enabled item-processing centers located throughout the United States.

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 have decreased, resulting 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 been subject to regulatory action. We believe that the number of regulatory actions will continue to decline through the remainder of calendar 2011, absent a significant downturn in the economy. 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. 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 selected. Consolidations and acquisitions also impact our financial results in the short-term due to early contract 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.

We remain cautiously optimistic, however, 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 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 has been expressed through our acquisitions of GFSI, PTSI and iPay during the year ended June 30, 2010. These are the three largest acquisitions in our Company’s history and present us with opportunities to extend our customer base and produce returns for our stockholders.

A detailed discussion of the major components of the results of operations for the three and nine-month periods ended March 31, 2011 follows. All amounts are in thousands and discussions compare the current three and nine-month periods ended March 31, 2011, to the prior year three and nine-month periods ended March 31, 2010, respectively.

REVENUE

License revenue represents the 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 quarter decrease is related to decreases in our core software license revenue, particularly for Silverlake® (our flagship core software solution for larger banks), for which the average deal size was smaller compared to a year ago. We believe our customers are continuing to postpone capital investments in technology, including software, due to the slowly recovering economy. In addition, our customers are increasingly electing to contract for our products via outsourced delivery rather than a traditional license agreement. Our outsourced delivery does not require our customers to make a large, up-front capital investment in license fees. The quarter decrease has been partly offset by increased revenue from our Alogent® products (our suite of deposit and image capture products targeted at large financial institutions).

The year-to-date decrease also relates to the decreases in our core software license revenue, partially offset by increased revenue from our Alogent® products and an additional quarter of revenues from GFSI (acquired in the second quarter of fiscal 2010).

Support and services fees 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 for both the current quarter and year over year.

In-house support revenue increased for the quarter and year-to-date as the number of supported in-house customers has grown and annual maintenance fees have increased as our customers’ assets grow. In addition, the acquisition of GFSI contributed a further $5,648 year-to-date to in-house support revenue compared to a year ago.

Electronic payment services continued to experience the largest percentage growth. The quarterly revenue increase is partly attributable to the acquisitions of iPay which added $12,948 of acquisition related growth. Combined, the acquisitions of GFSI, PTSI and iPay added $59,643 year-to-date. Revenue growth within electronic payment services, excluding the effect of the acquisitions, continues to be strong with a quarterly increase of 13% over the prior fiscal year’s third quarter and a year-to-date increase of 11% over the first nine months of fiscal 2010.

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. Revenues from outsourcing services are typically under five-year service contracts therefore providing long-term, recurring revenues.

Implementation services revenue increased for the quarter due to increased installations of our Alogent® products. The increase for the nine months to March 31, 2011 is primarily related to the acquisition of GFSI (acquired in the second quarter of fiscal 2010) and increased revenue from merger conversions for existing customers that acquired other financial institutions.

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 in the quarter but decreased slightly year-to-date, due to a decrease in the number of hardware systems and components delivered. Despite the slight increase in the current quarter, we expect the overall decreasing trend in hardware sales to continue due to the trend towards outsourcing contracts, which typically do not include hardware.

BACKLOG

Our backlog increased 3% at March 31, 2011 to $335,500 ($76,900 in-house and $258,600 outsourcing) from $325,100 ($77,900 in-house and $247,200 outsourcing) at March 31, 2010. The current quarter backlog decreased 3% from December 31, 2010, when backlog was $342,700 ($78,700 in-house and $264,000 outsourcing).

COST OF SALES AND GROSS PROFIT

Cost of license represents the cost of software from third party vendors through remarketing agreements. These costs are recognized when license revenue is recognized. Cost of support and service represents costs associated with conversion and implementation efforts, ongoing support for our in-house customers, operation of our data and item processing centers providing services for our outsourced customers, electronic payment processing services and direct operating costs. These costs are recognized as they are incurred. Cost of hardware consists of the direct and related costs of purchasing the equipment from the manufacturers and delivery to our customers. These costs are recognized at the same time as the related hardware revenue is recognized. Ongoing operating costs to provide support to our customers are recognized as they are incurred.

Cost of license depends greatly on third party reseller agreement software vendor costs. During the current quarter sales of these third party vendor licenses decreased leading to lower related costs. For the year-to-date, cost of license has increased as complementary software sales that have associated third party vendor costs have increased.

Cost of support and service increased for the quarter commensurate with the increase in support and services revenue, with slightly improved gross profit margins. Support and service gross profits have increased over the prior year as a result of the acquisitions of GFSI and iPay, which combined to contribute gross profit of $11,839 for the current quarter and $35,448 year-to-date.

Changes in cost of hardware are consistent with hardware revenue for the current quarter and year-to-date.

OPERATING EXPENSES

Selling and marketing expenses consist of dedicated sales forces, inside sales teams, technical sales support teams and channel partners that conduct our sales efforts for our two market segments, and are overseen by regional sales managers. Our sales executives are responsible for pursuing lead generation activities for new core customers. Our account executives nurture long-term relationships with our client base and cross sell our many complementary products and services.

Selling and marketing expenses for the three months ended March 31 are consistent with the same period last year. Selling and marketing expenses have decreased slightly as a percentage of total revenue for the quarter. For the nine-month periods ended March 31, 2011, selling and marketing expenses increased mainly due to increasing personnel costs, including commission expenses due to the additional employees acquired through the fiscal 2010 acquisitions. Selling and marketing expenses have remained consistent as a percentage of total revenue for the year-to-date.

We devote significant effort and expense to develop new software, to service products and to continually upgrade and enhance our existing offerings. Typically, we upgrade all of our core and complementary software applications once per year. We believe our research and development efforts are highly efficient because of the extensive experience of our research and development staff and because our product development is highly customer-driven.

Research and development expenses increased for the three and nine-month periods ended March 31, 2011 primarily due to the acquisitions in fiscal 2010 which increased personnel, consultant, and independent contractor costs compared to the same period a year ago. This also caused the increase from 6% in fiscal 2010 to 7% of total revenue in fiscal 2011.

General and administrative costs include all expenses related to finance, legal, human resources, plus all administrative costs. General and administrative expenses for the quarter remained consistent with the same period last year, and costs reduced slightly to 5% of total revenue compared to 6% for the third quarter last year. General and administrative expense for the nine-month period increased from last year due mainly to increased personnel costs relating to the acquisitions in fiscal 2010 and increased depreciation, while remaining consistent at 6% as a percentage of total revenue with the same period last year.

INTEREST INCOME AND EXPENSE – Interest income for the three and nine-month periods ended March 31, 2011 fluctuated due to changes in invested balances and yields on invested balances. Interest expense increased $1,524 for the quarter and $6,670 for the year-to-date, due to increased borrowings on the revolving bank credit facility and term loan borrowings to fund the iPay acquisition, which as of March 31, 2011 totaled $240,000 bearing interest at 2.31%, compared to $60,000 balance as of March 31, 2010 bearing interest at a weighted-average rate of 0.66%.

Interest expense is expected to reduce slightly in the final quarter of the fiscal year due to the debt repayment discussed in Note 10 to the condensed consolidated financial statements.

PROVISION FOR INCOME TAXES – The provision for income taxes was $15,773 and $50,391 for the three and nine-month periods ended March 31, 2011 compared with $11,847 and $44,708 for the same periods last year. As of the end of the current quarter, the rate of income taxes is estimated at 32.3 % of income before income taxes compared to 27.2% as reported for the same quarter in fiscal 2010. The percentage increase was primarily due to one-time benefits provided by the Domestic Production Activities Deduction (IRC Section 199), recognized during the same quarter in fiscal 2010.

NET INCOME – Net Income increased 4.6% for the three months ended March 31, 2011. For the third quarter of fiscal 2011, it was $33,081 or $0.38 per diluted share compared to $31,635, or $0.37 per diluted share in the same period last year. Net Income also increased for the nine-month period ended March 31, 2011 to $100,897 or $1.17 per diluted share compared to $87,886 or $1.03 per diluted share, for the same nine month period last year.

BUSINESS SEGMENT DISCUSSION

The Company is a leading 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 business segments: bank systems and services (“Bank”) and credit union systems and services (“Credit Union”). The Company evaluates the performance of its segments and allocates resources to them based on various factors, including prospects for growth, return on investment, and return on revenue.

Revenue in the Bank Systems and Services segment increased quarterly through 12% growth in support and service revenue ($17,344), partially offset by a 30% decline in license revenue ($3,633) compared to the same period a year ago. Year-to-date support and service revenue increased 16%, which was partially offset by a decrease of 9% in license revenue and a 5% decrease in hardware revenues. Quarter and year-to-date gross profit margins have remained consistent.