the Company. All other terms and conditions applicable to such options, including exercise prices, remained unchanged. This action resulted in the accelerated vesting of options to purchase 163,873 shares of common stock of the Company, or approximately six percent of the total of all then-outstanding Company options.
We accelerated the vesting of these options because we believed it was in the best interest of our shareholders to reduce future compensation expense that we would otherwise have been required to report in our statement of income upon adoption of SFAS No. 123R in the first quarter of 2006. Further, because the options had exercise prices in excess of the then-current market price, they were viewed to have limited economic value and were not achieving their objective of incentive compensation and retention. As a result of the vesting acceleration, approximately $0.5 million in aggregate future expense was eliminated.
We believe that equity-based compensation, particularly restricted stock awards, will continue to play an important role in supporting employee retention and providing individuals with long-term incentives to meet Company goals. For additional information regarding our adoption of SFAS No. 123R, see Note 11 in the Notes to Consolidated Financial Statements included in this Form 10-K.
PORTAL REVENUES. In the analysis below, we have categorized our portal revenues according to the underlying source of revenue (in thousands), with the corresponding percentage increase or decrease from the prior year period.
Portal revenues for 2006 increased 21%, or approximately $12.1 million, over 2005. Of this increase, 10%, or approximately $5.6 million, was attributable to an increase in same state portal revenues (outsourced portals in operation and generating recurring revenues for two full years) and 11%, or approximately $6.5 million, was primarily attributable to our newer portals in South Carolina ($1.5 million), which began to generate DMV revenues in June 2005, and Colorado ($5.0 million), which began to generate DMV revenues in October 2005.
Our Indiana portal subsidiary signed a new long-term contract with the state of Indiana that commenced on July 1, 2006. The new contract is based on a funding model that includes recurring fixed monthly fees for baseline services and primarily project-based pricing for variable services. Historically, the majority of revenues under this contract were DMV and non-DMV transaction-based. Under the new contract, the majority of revenues will be classified as portal management. Prior to July 1, 2006, we defined same state revenues as those from states in operation and generating DMV revenues for two full years. Because the majority of revenues from the new Indiana contract are generally recurring, we have continued to include Indiana portal revenues in the calculation of same state revenue growth even though we no longer earn DMV transaction-based revenues under the contract. Same state portal revenues in 2006 increased 10% over 2005 primarily due to increased transaction revenues from our Montana, Oklahoma, Tennessee, Utah and Virginia portals, among others.
Excluding Indiana, same state portal revenues in 2006 increased 11%, or approximately $5.1 million, over 2005, with same state DMV transaction-based revenues increasing 3%, or approximately $0.9 million, and same state non-DMV transaction-based revenues increasing 27%, or approximately $3.8 million (primarily due to the addition of several new revenue generating applications in existing portals). Our same state revenue growth in current year was lower than the 17% growth we achieved in 2005 primarily due to decreases in same state DMV and non-DMV transaction-based revenue growth. Excluding Indiana, same state DMV revenue growth in 2006 was 3% compared to 9% in 2005. The higher growth in 2005 was primarily due to the effect of modest DMV price increases in two of our larger portal states in late 2004. Absent DMV price increases, same state DMV revenues have historically grown at a rate of 1% to 3% per year. Same state non-DMV transaction based revenue growth was 41% in 2005. We expect same state non-DMV transaction growth to range from 25% to 30% in 2007.
Portal revenues for 2005 increased 19%, or approximately $9.3 million, over 2004. Of this increase, 16%, or approximately $7.9 million, was attributable to an increase in same state portal revenues and 5%, or approximately $2.2 million, was primarily attributable to our newer portals in South Carolina ($1.4 million) and Colorado ($1.1 million). Revenues related to our Vermont and New Hampshire portals, from which we primarily earned software development and portal management revenues, decreased by approximately $0.3 million in 2005. Increases in same state and new portal revenues were partially offset by a $0.8 million decrease in revenues from our local portal business, due to the wind down of certain of our less profitable local portals. In the first quarter of 2005, the Company ceased providing portal outsourcing services to Kent County, Michigan and the City of Tampa, Florida. Currently, the only local portals the Company services are those located in states where we operate an official state government portal.
Same state portal revenues in 2005 increased 17%, or approximately $7.9 million, over 2004 primarily as a result of increased transaction revenues from our Tennessee, Indiana, Arkansas, Oklahoma and Kansas portals, among others. Same state DMV transaction-based revenues increased 9%, or approximately $2.7 million, in 2005 due mainly to price increases in two of our larger portal states in late 2004. Same state non-DMV transaction-based revenues increased 41%, or approximately $5.8 million, in 2005 due to the addition of several new revenue generating applications in existing portals. Partially offsetting these increases was a 25%, or approximately $0.6 million, decrease in same state software development & portal management revenues due to our focus on recurring non-DMV transaction-based revenues, rather than on less predictable time and materials software development projects.
COST OF PORTAL REVENUES. Cost of portal revenues in 2006 increased 26%, or approximately $7.8 million, over 2005. Of this increase, 17%, or approximately $5.1 million, was attributable to an increase in same state cost of portal revenues, and 9%, or approximately $2.7 million, was primarily attributable to our newer state portal businesses in South Carolina and Colorado. Cost of portal revenues in 2006 includes approximately $0.3 million in stock-based compensation expense, as further discussed above and in Note 11 in the Notes to Consolidated Financial Statements included in this Form 10-K.
The increase in same state cost of portal revenues in 2006 was partially attributable to additional personnel in several of our portals due to our continued growth and reinvestment in our core business, coupled with mid-year 2006 non-executive salary increases across all portals that were in addition to normal annual increases, in an effort to better align our employee compensation structure with the general market. Also contributing to this increase was an increase in bank fees. A growing percentage of our non-DMV transaction-based revenues are generated from online applications whereby users pay for information or transactions via credit cards. We typically earn a percentage of the credit card transaction amount, but also must pay an associated fee to the bank that processes the credit card transaction. We earn a lower gross profit percentage on these transactions as compared to our other non-DMV applications. However, we anticipate these revenues and the associated bank fees will continue to increase in the future, as these transactions contribute favorably to our operating income growth.
Our portal gross profit percentage in 2006 was 47% compared to 49% in 2005, with cost of portal revenues growing at a higher rate than portal revenues in 2006, as further discussed above. We carefully monitor our portal gross profit percentage to strike the balance between generating a solid return for our shareholders and delivering value to our government partners through reinvestment in our portal operations. We expect our portal gross profit percentage to range from 45% to 47% in 2007.
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Cost of portal revenues in 2005 increased 18%, or approximately $4.6 million, over 2004. Of this increase, 18%, or approximately $4.6 million, was attributable to an increase in same state cost of portal revenues, and 5%, or approximately $1.2 million, was primarily attributable to new state portal businesses in South Carolina and Colorado. These increases were offset by a 5%, or $1.2 million, decrease in operating expenses from our local portals as a result of the wind down of certain of our unprofitable local portal businesses. Same state cost of portal revenues in 2005 increased 20%, or approximately $4.6 million, primarily as a result of the addition of personnel in several of our portals due to our continued growth and reinvestment in our core business. Also contributing to the increase in same state cost of portal revenues was an increase in bank fees, for reasons discussed above. Our portal gross profit percentage was 49% in 2005 and 2004.
SOFTWARE & SERVICES REVENUES. In the analysis below, we have categorized our software & services revenues by business (in thousands), with the corresponding percentage increase or decrease from the prior year period.
| | | | | | Increase/ | | | | | | |
| | | | | | (decrease) | | | | Decrease | | |
| Software & Services Revenue Analysis | | 2006 | | from 2005 | | 2005 | | from 2004 | | 2004 |
| UCC & corporate filings software development | | $ | (883 | ) | | 34 | % | | $ | (1,328 | ) | | (131 | %) | | $ | 4,264 |
| Ethics & elections | | | 1,847 | | | (18 | %) | | | 2,245 | | | — | | | | 2,247 |
| Other | | | 403 | | | (11 | %) | | | 451 | | | (36 | %) | | | 707 |
| Total | | $ | 1,367 | | | — | | | $ | 1,368 | | | (81 | %) | | $ | 7,218 |
Software & services revenues in 2006 and 2005 primarily reflect revenue adjustments under percentage of completion accounting relating to our contract with the California Secretary of State, as further discussed above and in Note 2 in the Notes to Consolidated Financial Statements included in this Form 10-K. We recognize revenue on our contract with the California Secretary of State using the percentage of completion method as we make progress, utilizing costs incurred to date as compared to the estimated total cost for the contract.
COST OF SOFTWARE & SERVICES REVENUES. Cost of software & services revenues in 2006 and 2005 primarily reflects expense adjustments under percentage of completion accounting relating to our contract with the California Secretary of State as further discussed above and in Note 2 in the Notes to Consolidated Financial Statements included in this Form 10-K. Cost of software & services revenues in 2006 includes approximately $19,000 in stock-based compensation expense, as further discussed above.
SELLING & ADMINISTRATIVE. Selling & administrative expenses in 2006 increased 21%, or approximately $2.7 million, over 2005. The increase in selling & administrative expenses was mostly attributable to additional personnel across our corporate-level divisions, coupled with mid-year 2006 non-executive salary increases across all corporate-level divisions that were in addition to normal annual increases, in an effort to better align our employee compensation structure with the general market. Our corporate-level headcount increased by approximately 30% in 2006, as we have added personnel to support and enhance corporate-wide information technology security and portal operations, in addition to sales & marketing and growth initiatives. In addition, selling & administrative expenses in 2006 include approximately $1.0 million in stock-based compensation expense, as further discussed above and in Note 11 in the Notes to Consolidated Financial Statements included in this Form 10-K. As a percentage of portal revenues, selling & administrative expenses were 22% in 2006, 22% in 2005 and 25% in 2004. We expect selling & administrative costs as a percentage of portal revenue to range from 28% to 29% in 2007, as we plan to spend an additional $4 million to $6 million (in addition to normal annual increases in selling & administrative costs) on business development, marketing and operations in an effort to accelerate new state portal contract wins and non-DMV revenue growth.
INTEREST INCOME. Interest income reflects interest earned on our investable cash and marketable securities portfolio. In 2005, we began investing our excess cash in short-term marketable debt securities, consisting primarily of auction rate government-backed obligations. Our marketable securities portfolio totaled $45.0 million at December 31, 2006, up significantly from $20.5 million at December 31, 2005. Higher short-term interest rates also contributed to the increase in interest income earned on these investments in 2006. As further discussed in Note 14 in the Notes to Consolidated Financial Statements included in this Form 10-K, on January 29, 2007, our Board of Directors declared a special cash dividend of $0.75 per share, payable to shareholders of record as of February 12, 2007. The dividend, totaling approximately $46.7 million, was paid on February 20, 2007 out
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of our available cash and marketable securities. As a result of this dividend, we expect interest income to decrease significantly in 2007, as our average investable cash and marketable securities balance will be significantly lower in 2007 as compared to 2006.
INCOME TAXES. Our effective tax rate was approximately 42% in 2006, 42% in 2005 and 40% in 2004. Our income tax provision for 2006 reflects the increase of a valuation allowance totaling approximately $177,000 for state income tax loss carryforwards that we may be unable to use, as further discussed in Note 10 in the Notes to Consolidated Financial Statements included in this Form 10-K. Prospectively, we expect our effective tax rate to be between 40% and 42%.
Liquidity and Capital Resources
Net cash provided by operating activities was $25.7 million in 2006 compared to $21.3 million in 2005. The increase in cash flow from operations was primarily the result of a year-over-year increase in operating income, excluding non-cash charges for depreciation & amortization and stock-based compensation, and the adjustments under percentage of completion accounting recorded in the current and prior year periods on our contract with the California SOS, which did not affect operating cash flow.
The increases in accounts receivable and accounts payable in 2006 were primarily attributable to an increase in fourth quarter tax payment processing from tax filing applications across our portal businesses, most notably in Hawaii ($3.3 million increase in accounts receivable and $7.2 million increase in accounts payable). Such tax payments are frequently made via ACH or credit cards at the end of the year, whereby we do not receive payment until after year-end. The majority of these tax receipts were remitted to our government partners in early January 2007. The increases in accounts receivable and accounts payable were also attributable to the general increase in revenues across our portal businesses in 2006.
The decrease in unbilled revenues in 2006 was primarily due to the first quarter 2006 adjustment under percentage of completion accounting relating to our contract with the California SOS that reduced unbilled revenues by approximately $2.1 million. Additionally, in June 2006, the California SOS officially accepted the UCC portion of the project, at which time approximately $1.5 million in milestone payments under the contract became due to us, thus reducing unbilled revenues.
The decrease in accrued expenses in 2006 was primarily due to the first quarter 2006 adjustment under percentage of completion accounting relating to our contract with the California SOS that reduced accrued liabilities by approximately $1.6 million.
Net cash provided by operating activities was $21.2 million in 2005 compared to $14.6 million in 2004. This improvement was partially the result of a year-over-year increase in operating income, excluding non-cash charges and the $5.0 million adjustment on our contract with the California Secretary of State recorded under percentage of completion accounting, which did not affect operating cash flow in 2005. The effect of the adjustment relating to the California Secretary of State contract on our consolidated balance sheet in 2005 was a reduction in unbilled revenues of approximately $3.5 million and an increase in application development contracts (a current liability) of approximately $1.5 million.
The increases in accounts receivable and payable in 2005 were partially attributable to a general increase in revenues across our portal businesses in 2005, including our South Carolina and Colorado portals (combined $2.1 million increase in accounts receivable and $1.9 million increase in accounts payable), which began to generate DMV revenues in June 2005 and October 2005, respectively. In addition, our Virginia portal entered into a contract amendment in late 2005 that required it to become the primary depositor of customer remittances, whereas customer remittances were previously deposited directly with the state. This change contributed to a $1.8 million increase in accounts receivable and a corresponding increase in accounts payable in 2005. Further, several of our state portals experienced an increase in fourth quarter tax payment processing from tax filing applications, including Idaho ($1.4 million increase in accounts receivable and $0.7 million increase in accounts payable) and Hawaii ($2.9 million increase in accounts payable), among others.
We had a history of unprofitable operations prior to 2003 primarily due to operating losses incurred in our software & services businesses. These losses generated significant federal and state tax net operating losses, or NOLs, as further discussed above. As a result of our NOL carryforwards, we are not currently paying federal
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income taxes, with the exception of minimal amounts relating to alternative minimum tax, and are only paying minimal amounts of state income taxes in certain states. This positively impacts our operating cash flow and will continue to positively impact our operating cash flow during the NOL carryforward periods. Based on our current projections, we expect to fully utilize our federal NOL carryforwards by the end of 2009. For the years ended December 31, 2006, 2005 and 2004, combined federal and state income tax payments totaled approximately $0.4 million, $0.5 million and $0.5 million, respectively.
We recognize revenue primarily from providing outsourced government portal services net of the transaction fees due to the government when the services are provided. The fees that we must remit to the government are accrued as accounts payable and accounts receivable at the time services are provided. As a result, trade accounts payable and accounts receivable reflect the gross amounts outstanding at the balance sheet dates. Gross billings for the three months ended December 31, 2006 and 2005 were approximately $196.9 million and $152.5 million, respectively. The Company calculates days sales outstanding by dividing trade accounts receivable at the balance sheet date by gross billings for the period and multiplying the resulting quotient by the number of days in that period. Days sales outstanding for each of the three-month periods ended December 31, 2006 and 2005 was 13.
We believe that working capital is an important measure of our short-term liquidity. Working capital, defined as current assets minus current liabilities, increased to $73.0 million at December 31, 2006, from $51.2 million at December 31, 2005. Our current ratio, defined as current assets divided by current liabilities, at December 31, 2006 was 2.8 compared to 2.6 at December 31, 2005. The increase in our working capital was primarily attributable to an increase in total cash and marketable securities as a result of the increase in our operating cash flow in 2006.
Cash used in investing activities in 2006 primarily reflects $24.5 million in purchases of marketable debt securities in an effort to increase the investment income from our growing cash reserves, and $2.6 million of capital expenditures, which were primarily for normal fixed asset additions in our outsourced portal business, including Web servers, purchased software and office furniture and equipment, in addition to corporate-wide spending on information technology security.
Cash used in investing activities in 2005 primarily reflects $20.5 million in net purchases of marketable debt securities in an effort to increase the investment income from our growing cash reserves, and $2.3 million of capital expenditures, which were for our new South Carolina and Colorado portals (approximately $0.9 million), in addition to normal fixed asset additions in our other outsourced portal business, including Web servers, purchased software and office furniture and equipment. Investing activities in 2005 also reflect a $3.0 million reduction in our cash collateral requirements under the financing arrangement that covered all of the Company’s then-outstanding letters of credit (as further discussed in Note 7 in the Notes to Consolidated Financial Statements included in this Form 10-K).
Investing activities in 2004 reflect $1.2 million in capital expenditures, which were partially offset by the maturity of marketable securities and proceeds from the sale of our minority investment in E-Filing (as further discussed in Note 6 in the Notes to Consolidated Financial Statements included in this Form 10-K), and a $2.4 million reduction in our cash collateral requirements under the financing arrangement that covered all of the Company’s then-outstanding letters of credit, term note payable, and working capital line of credit. Capital expenditures in 2004 were mainly attributable to computer equipment purchases relating to our move to a new data center for company-wide hosting and disaster recovery purposes, in addition to normal fixed asset additions in our portal business.
Financing activities in 2006 primarily reflect $1.2 million in proceeds from the exercise of employee stock options and $0.2 million in proceeds from our employee stock purchase program. Although we cannot predict the annual amount of proceeds we expect to receive from employee stock options in the future, we expect that our employees will continue to exercise vested stock options that have intrinsic value. At December 31, 2006, approximately 0.9 million employee stock options were exercisable at a weighted average exercise price of $4.35 per share. The closing price of our common stock on December 29, 2006 was $4.97 per share.
Financing activities in 2005 reflects $4.6 million in proceeds from the exercise of employee stock options and $0.1 million in proceeds from our employee stock purchase program.
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Financing activities in 2004 reflect $1.2 million in proceeds from the exercise of employee stock options and $0.1 million in proceeds from our employee stock purchase program. In addition, we paid off a term note payable that was used to finance the purchase of certain hardware and software components for our discontinued eProcurement business.
At December 31, 2006, our total cash and marketable securities balance was $81.8 million compared to $57.4 million at December 31, 2005. We believe that our currently available liquid resources and cash generated from operations will be sufficient to meet our operating requirements, capital expenditure requirements, current growth initiatives and special dividend payments for at least the next twelve months without the need of additional capital. On January 29, 2007, our Board of Directors declared a special cash dividend of $0.75 per share, payable to shareholders of record as of February 12, 2007. The dividend, totaling approximately $46.7 million, was paid on February 20, 2007 out of the Company’s available cash and marketable securities. We do not believe this dividend will have a significant effect on our future liquidity. However, we may need to raise additional capital within the next twelve months to further:
- fund operations if unforeseen costs arise, including the costs to fund our contract with the CaliforniaSecretary of State and subcontractors on that project;
- collateralize letters of credit, which we are required to post as collateral for performance on certainof our outsourced government portal contracts, as collateral for certain performance bonds, and ascollateral for certain office leases;
- support our expansion into other states and government agencies beyond what is contemplated ifunforeseen opportunities arise;
- expand our product and service offerings beyond what is contemplated if unforeseen opportunitiesarise;
- respond to unforeseen competitive pressures; and
- acquire technologies beyond what is contemplated.
Any projections of future earnings and cash flows are subject to substantial uncertainty. If our cash, marketable securities and cash generated from operations are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or issue debt securities. The sale of additional equity securities could result in dilution to the Company’s shareholders. There can be no assurance that financing will be available in amounts or on terms acceptable to the Company, if at all.
We issue letters of credit as collateral for performance on certain of our outsourced government portal contracts, as collateral for certain performance bonds and as collateral for certain office leases. These irrevocable letters of credit are generally in force for one year, for which we pay bank fees of approximately 1.25% to 1.75% of face value per annum. We had unused outstanding letters of credit totaling approximately $1.3 million at December 31, 2006 and $5.4 million at December 31, 2005. We are not currently required to cash collateralize these letters of credit. Our collateral requirements have eased over time as we have continued to operate profitably and grow our earnings. However, even though we expect to be profitable in fiscal 2007 and beyond, we may not be able to sustain or increase profitability on a quarterly or annual basis. We will need to generate sufficient revenues while containing costs and operating expenses if we are to achieve sustained profitability. If we are not able to sustain profitability, our cash collateral requirements may increase. Had we been required to post 100% cash collateral at December 31, 2006 for the face value of all performance bonds (which are partially supported by letters of credit) and our line of credit in conjunction with a corporate credit card agreement, unrestricted cash would have decreased and restricted cash would have increased by approximately $3.3 million.
At December 31, 2006, we were bound by performance bond commitments totaling approximately $2.3 million on certain government portal outsourcing contracts. These performance bonds are collateralized by a $1 million letter of credit. In the second quarter of 2006, the California SOS officially accepted the UCC portion of the project, at which time we were relieved of our obligation to provide a $5 million performance bond. The official elimination of the bond requirement took place in the third quarter of 2006, at which time our letter of credit collateral requirement to secure the remaining $2.3 million in outstanding portal performance bonds was reduced to $1 million. We have never had any defaults resulting in draws on performance bonds or letters of credit.
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We do not have off-balance sheet arrangements or significant exposures to liabilities that are not recorded or disclosed in our financial statements. While we have significant operating lease commitments for office space, those commitments are generally tied to the period of performance under related contracts. The following table sets forth our future contractual obligations and commercial commitments as of December 31, 2006 (in thousands):
| Contractual Obligations | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| Operating lease obligations | | $3,762 | | $ | 1,304 | | | $1,817 | | $ | 641 | | | | $— | |
| Long-term debt obligations | | — | | | — | | | — | | | — | | | | — | |
| Capital lease obligations | | — | | | — | | | — | | | — | | | | — | |
| Purchase obligations | | — | | | — | | | — | | | — | | | | — | |
| Other long-term liabilities | | — | | | — | | | — | | | — | | | | — | |
| Total contractual cash obligations | | $3,762 | | $ | 1,304 | | | $1,817 | | $ | 641 | | | | $— | |
Recent Accounting Pronouncements
Quantifying Financial Statement Errors
In September 2006, the staff of the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 was issued in order to eliminate the diversity in practice surrounding how public companies quantify financial statement misstatements. We applied the provisions of SAB No. 108 to our fiscal year ended December 31, 2006 using the cumulative effect transition method, as further discussed in Note 2 in the Notes to Consolidated Financial Statements in this Form 10-K.
Accounting for Uncertainty in Income Taxes
In July 2006, the FASB issued FASB Interpretation (“FIN”) 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements. We will be required to adopt FIN 48 in the first quarter of 2007. We are currently evaluating the requirements of FIN 48 and have not yet determined the impact on our consolidated financial statements.
Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. We will be required to adopt this standard in the first quarter of 2008. We are currently evaluating the requirements of SFAS No. 157 and have not yet determined the impact on our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. Our exposure to market risk for changes in interest rates relates to the increase or decrease in the amount of interest income we can earn on our short-term investments in marketable debt securities and cash balances. Because our investments are in short-term, investment-grade, interest-bearing marketable securities, we are exposed to minimal risk on the principal of those investments. We limit our exposure to credit loss by depositing our cash with high credit quality financial institutions. We enhance the safety and preservation of our invested principal funds by attempting to limit default risk, market risk and investment risk. We do not use derivative financial instruments. A 10% change in interest rates would not have a material effect on our financial condition, results of operations or cash flows.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NIC INC.
CONSOLIDATED BALANCE SHEETS
| | December 31, |
| | 2005 | | 2006 |
| ASSETS | | | | | | | |
| Current assets: | | | | | | | |
| Cash and cash equivalents | $ | 36,901,409 | | | $ | 36,744,872 | |
| Marketable securities | | 20,500,000 | | | | 45,008,431 | |
| Trade accounts receivable | | 22,269,136 | | | | 28,729,038 | |
| Unbilled revenues | | 2,197,713 | | | | 1,068,940 | |
| Deferred income taxes | | 421,609 | | | | 711,015 | |
| Prepaid expenses & other current assets | | 1,631,894 | | | | 1,644,816 | |
| Total current assets | | 83,921,761 | | | | 113,907,112 | |
| Property and equipment, net | | 3,327,185 | | | | 3,790,490 | |
| Unbilled revenues | | 1,395,086 | | | | — | |
| Deferred income taxes | | 28,916,194 | | | | 22,013,248 | |
| Other assets | | 285,222 | | | | 423,597 | |
| Total assets | $ | 117,845,448 | | | $ | 140,134,447 | |
| |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
| Current liabilities: | | | | | | | |
| Accounts payable | $ | 24,457,902 | | | $ | 34,201,937 | |
| Accrued expenses | | 6,642,581 | | | | 5,911,197 | |
| Application development contracts | | 1,260,631 | | | | 512,618 | |
| Other current liabilities | | 316,730 | | | | 254,510 | |
| Total current liabilities | | 32,677,844 | | | | 40,880,262 | |
| Commitments and contingencies (Notes 2, 3, 7, 8 and 14) | | — | | | | — | |
| Shareholders’ equity: | | | | | | | |
| Common stock, no par, 200,000,000 shares authorized 61,073,505 and | | | | | | | |
| 61,573,900 shares issued and outstanding | | — | | | | — | |
| Additional paid-in capital | | 207,444,750 | | | | 210,210,393 | |
| Accumulated deficit | | (122,093,098 | ) | | | (110,788,533 | ) |
| | | 85,351,652 | | | | 99,421,860 | |
| Less treasury stock | | (184,048 | ) | | | (167,675 | ) |
| Total shareholders’ equity | | 85,167,604 | | | | 99,254,185 | |
| | | | | | | | |
| Total liabilities and shareholders’ equity | $ | 117,845,448 | | | $ | 140,134,447 | |
The accompanying notes are an integral part of these consolidated financial statements.
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NIC INC.
CONSOLIDATED STATEMENTS OF INCOME
| | Year Ended December 31, |
| | 2004 | | 2005 | | 2006 |
| Revenues: | | | | | | | | | | | |
| Portal revenues | $ | 48,543,779 | | | $ | 57,875,067 | | | $ | 70,008,598 | |
| Software & services revenues | | 7,217,975 | | | | 1,367,546 | | | | 1,367,248 | |
| Total revenues | | 55,761,754 | | | | 59,242,613 | | | | 71,375,846 | |
| Operating expenses: | | | | | | | | | | | |
| Cost of portal revenues, exclusive of depreciation | | | | | | | | | | | |
| & amortization | | 24,866,146 | | | | 29,448,091 | | | | 37,249,358 | |
| Cost of software & services revenues, exclusive | | | | | | | | | | | |
| of depreciation & amortization | | 5,583,248 | | | | 5,348,438 | | | | 596,279 | |
| Selling & administrative | | 12,017,576 | | | | 12,651,948 | | | | 15,341,777 | |
| Depreciation & amortization | | 1,495,252 | | | | 1,602,879 | | | | 2,040,398 | |
| Total operating expenses | | 43,962,222 | | | | 49,051,356 | | | | 55,227,812 | |
| Operating income | | 11,799,532 | | | | 10,191,257 | | | | 16,148,034 | |
| Other income (expense): | | | | | | | | | | | |
| Interest income | | 116,037 | | | | 704,614 | | | | 2,401,504 | |
| Interest expense | | (10,852 | ) | | | — | | | | — | |
| Equity in net loss of affiliates | | (109,061 | ) | | | — | | | | (96,954 | ) |
| Other income (expense), net | | 13,906 | | | | (2,971 | ) | | | (35,187 | ) |
| Total other income | | 10,030 | | | | 701,643 | | | | 2,269,363 | |
| Income before income taxes | | 11,809,562 | | | | 10,892,900 | | | | 18,417,397 | |
| Income tax provision | | 4,704,901 | | | | 4,529,824 | | | | 7,678,396 | |
| Net income | $ | 7,104,661 | | | $ | 6,363,076 | | | $ | 10,739,001 | |
| Basic net income per share | $ | 0.12 | | | $ | 0.11 | | | $ | 0.17 | |
| Diluted net income per share | $ | 0.12 | | | $ | 0.10 | | | $ | 0.17 | |
| Weighted average shares outstanding | | | | | | | | | | | |
| Basic | | 58,988,456 | | | | 60,078,841 | | | | 61,408,552 | |
| Diluted | | 60,877,294 | | | | 61,093,788 | | | | 61,763,093 | |
The accompanying notes are an integral part of these consolidated financial statements.
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NIC INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | | | | | | | | | | | Other | | | | | | | |
| | | CommonStock | | Additional | | Accumulated | | Comprehensive | | Treasury | | | |
| | | Shares | | Amount | | Paid-in Capital | | Deficit | | Income (Loss) | | Stock | | Total |
| Balance, January 1, | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2004 | | 58,715,672 | | | $— | | | $ | 198,929,405 | | | $ | (135,560,835 | ) | | $ | (480 | ) | | $ | (204,497 | ) | | $ | 63,163,593 |
| Net income | | — | | | — | | | | — | | | | 7,104,661 | | | | — | | | | — | | | | 7,104,661 |
| Stock options | | | | | | | | | | | | | | | | | | | | | | | | | |
| exercised | | 505,378 | | | — | | | | 1,186,391 | | | | — | | | | — | | | | — | | | | 1,186,391 |
| Issuance of common | | | | | | | | | | | | | | | | | | | | | | | | | |
| stock under | | | | | | | | | | | | | | | | | | | | | | | | | |
| employee stock | | | | | | | | | | | | | | | | | | | | | | | | | |
| purchase plan | | 80,325 | | | — | | | | 116,746 | | | | — | | | | — | | | | — | | | | 116,746 |
| Tax deductions relating | | | | | | | | | | | | | | | | | | | | | | | | | |
| to stock options | | — | | | — | | | | 688,604 | | | | — | | | | — | | | | — | | | | 688,604 |
| Unrealized holding | | | | | | | | | | | | | | | | | | | | | | | | | |
| gain on marketable | | | | | | | | | | | | | | | | | | | | | | | | | |
| securities | | — | | | — | | | | — | | | | — | | | | 480 | | | | — | | | | 480 |
| Balance, December 31, | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2004 | | 59,301,375 | | | — | | | | 200,921,146 | | | | (128,456,174 | ) | | | — | | | | (204,497 | ) | | | 72,260,475 |
| Net income | | — | | | — | | | | — | | | | 6,363,076 | | | | — | | | | — | | | | 6,363,076 |
| Retirement of treasury | | | | | | | | | | | | | | | | | | | | | | | | | |
| stock | | — | | | — | | | | (20,449 | ) | | | — | | | | — | | | | 20,449 | | | | — |
| Stock options | | | | | | | | | | | | | | | | | | | | | | | | | |
| exercised | | 1,742,099 | | | — | | | | 4,640,928 | | | | — | | | | — | | | | — | | | | 4,640,928 |
| Issuance of common | | | | | | | | | | | | | | | | | | | | | | | | | |
| stock under | | | | | | | | | | | | | | | | | | | | | | | | | |
| employee stock | | | | | | | | | | | | | | | | | | | | | | | | | |
| purchase plan | | 30,031 | | | — | | | | 121,761 | | | | — | | | | — | | | | — | | | | 121,761 |
| Tax deductions relating | | | | | | | | | | | | | | | | | | | | | | | | | |
| to stock options | | — | | | — | | | | 1,781,364 | | | | — | | | | — | | | | — | | | | 1,781,364 |
| Balance, December 31, | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2005 | | 61,073,505 | | | — | | | | 207,444,750 | | | | (122,093,098 | ) | | | — | | | | (184,048 | ) | | | 85,167,604 |
| Cumulative effect | | | | | | | | | | | | | | | | | | | | | | | | | |
| of SAB No. 108 | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Note 2) | | — | | | — | | | | — | | | | 565,564 | | | | — | | | | — | | | | 565,564 |
| Net income | | — | | | — | | | | — | | | | 10,739,001 | | | | — | | | | — | | | | 10,739,001 |
| Sale of | | | | | | | | | | | | | | | | | | | | | | | | | |
| treasury stock | | 11,154 | | | — | | | | 50,004 | | | | — | | | | — | | | | 16,373 | | | | 66,377 |
| Stock options | | | | | | | | | | | | | | | | | | | | | | | | | |
| exercised | | 448,898 | | | — | | | | 1,226,638 | | | | — | | | | — | | | | — | | | | 1,226,638 |
| Stock-based | | | | | | | | | | | | | | | | | | | | | | | | | |
| compensation | | — | | | — | | | | 1,331,603 | | | | — | | | | — | | | | — | | | | 1,331,603 |
| Issuance of common | | | | | | | | | | | | | | | | | | | | | | | | | |
| stock under | | | | | | | | | | | | | | | | | | | | | | | | | |
| employee stock | | | | | | | | | | | | | | | | | | | | | | | | | |
| purchase plan | | 40,343 | | | — | | | | 157,398 | | | | — | | | | — | | | | — | | | | 157,398 |
| Balance, December 31, | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2006 | | 61,573,900 | | | $— | | | $ | 210,210,393 | | | $ | (110,788,533 | ) | | $ | — | | | $ | (167,675 | ) | | $ | 99,254,185 |
The accompanying notes are an integral part of these consolidated financial statements.
45
NIC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | Year Ended December 31, |
| | 2004 | | 2005 | | 2006 |
| Cash flows from operating activities: | | | | | | | | | | | |
| Net income | $ | 7,104,661 | | | $ | 6,363,076 | | | $ | 10,739,001 | |
| Adjustments to reconcile net income to net cash | | | | | | | | | | | |
| provided by operating activities: | | | | | | | | | | | |
| Depreciation & amortization | | 1,495,252 | | | | 1,602,879 | | | | 2,040,398 | |
| Stock-based compensation expense | | — | | | | — | | | | 1,331,603 | |
| Loss on asset disposals | | — | | | | — | | | | 35,187 | |
| Accretion of discount on marketable securities | | — | | | | — | | | | (8,431 | ) |
| Application development contracts | | (464,654 | ) | | | 1,260,631 | | | | (748,013 | ) |
| Deferred income taxes | | 4,330,885 | | | | 4,150,803 | | | | 7,179,104 | |
| Equity in net loss of affiliates | | 109,061 | | | | — | | | | 96,954 | |
| Changes in operating assets and liabilities, net | | | | | | | | | | | |
| of effects of acquisitions: | | | | | | | | | | | |
| (Increase) decrease in trade accounts receivable | | 261,348 | | | | (4,659,030 | ) | | | (6,486,896 | ) |
| Decrease in unbilled revenues | | 2,598,668 | | | | 2,211,223 | | | | 2,523,859 | |
| (Increase) decrease in prepaid expenses & | | | | | | | | | | | |
| other current assets | | 43,672 | | | | (320,014 | ) | | | 46,588 | |
| Decrease in other assets | | 23,313 | | | | 50,473 | | | | 19,117 | |
| Increase (decrease) in accounts payable | | (1,951,482 | ) | | | 10,064,135 | | | | 9,744,035 | |
| Increase (decrease) in accrued expenses | | 1,020,798 | | | | 376,804 | | | | (731,384 | ) |
| Increase (decrease) in other current liabilities | | (7,060 | ) | | | 165,426 | | | | (62,220 | ) |
| Net cash provided by operating activities | | 14,564,462 | | | | 21,266,406 | | | | 25,718,902 | |
| | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | |
| Purchases of property and equipment | | (1,189,336 | ) | | | (2,327,360 | ) | | | (2,584,948 | ) |
| Capitalized internal use software development costs | | — | | | | (68,994 | ) | | | (239,492 | ) |
| Purchases of marketable securities | | — | | | | (35,500,000 | ) | | | (24,500,000 | ) |
| Maturities of marketable securities | | 250,000 | | | | 15,000,000 | | | | — | |
| Cash and cash equivalents - restricted | | 2,363,033 | | | | 3,000,000 | | | | — | |
| Proceeds from sale of affiliate | | 300,005 | | | | — | | | | — | |
| Net cash provided by (used in) investing activities | | 1,723,702 | | | | (19,896,354 | ) | | | (27,324,440 | ) |
| | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | |
| Payments on notes payable | | (363,033 | ) | | | — | | | | — | |
| Proceeds from sale of treasury stock | | — | | | | — | | | | 64,965 | |
| Proceeds from employee common stock purchases | | 116,746 | | | | 121,761 | | | | 157,398 | |
| Proceeds from exercise of employee stock options | | 1,186,391 | | | | 4,640,928 | | | | 1,226,638 | |
| Net cash provided by financing activities | | 940,104 | | | | 4,762,689 | | | | 1,449,001 | |
| Net increase (decrease) in cash and cash equivalents | | 17,228,268 | | | | 6,132,741 | | | | (156,537 | ) |
| Cash and cash equivalents, beginning of year | | 13,540,400 | | | | 30,768,668 | | | | 36,901,409 | |
| Cash and cash equivalents, end of year | $ | 30,768,668 | | | $ | 36,901,409 | | | $ | 36,744,872 | |
| | | | | | | | | | | | |
| Other cash flow information: | | | | | | | | | | | |
| Interest paid | $ | 10,852 | | | $ | — | | | $ | — | |
| Income taxes paid | $ | 465,172 | | | $ | 450,745 | | | $ | 373,793 | |
The accompanying notes are an integral part of these consolidated financial statements.
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NIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
NIC Inc. (the “Company” or “NIC”), formerly National Information Consortium, Inc., is a provider of eGovernment services that helps governments use the Internet to reduce costs and provide a higher level of service to businesses and citizens. The Company accomplishes this currently through two divisions: its primary portal outsourcing businesses and its software & services businesses.
In its primary portal outsourcing business, the Company designs, builds and operates Internet-based portals on behalf of state and local governments desiring to provide access to government information and to complete government-based transactions online. These portals consist of Web sites and applications the Company has built that allow businesses and citizens to access government information online and complete transactions, including applying for a permit, retrieving driver’s license records or filing a government-mandated form or report. Operating under multiple-year contracts (see Note 3), NIC markets the services and solicits users to complete government-based transactions and to enter into subscriber contracts permitting users to access the portal and the government information contained therein in exchange for transactional and/or subscription user fees. The Company manages operations for each contractual relationship through separate local subsidiaries that operate as decentralized businesses with a high degree of autonomy. NIC’s self-funding business model allows the Company to reduce its government partners’ financial and technology risks and generate revenues by sharing in the fees the Company collects from eGovernment transactions. The Company’s government partners benefit through gaining a centralized, customer-focused presence on the Internet, while businesses and citizens receive a faster, more convenient and more cost-effective means to interact with governments. The Company is typically responsible for funding up front investment and ongoing operational costs of the government portals.
The Company’s software & services businesses primarily include its Uniform Commercial Code (“UCC”) and corporate filings software development business and its ethics & elections business. The Company’s UCC and corporate filings software development business, NIC Conquest, is a provider of software applications and services for electronic filings and document management solutions for governments. This business focuses on Secretaries of State, whose offices are state governments’ principal agencies for UCC and corporate filings. Currently, NIC Conquest is primarily engaged in servicing its contract with the California Secretary of State and is not actively marketing its applications and services in respect of new engagements. The Company’s ethics & elections business, NIC Technologies, designs and develops online campaign expenditure and ethics compliance systems for federal and state government agencies. Currently, NIC Technologies is primarily engaged in servicing its contracts with the Federal Election Commission and the State of Michigan.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The Company classifies its revenues and cost of revenues into two categories: (1) portal and (2) software & services. The portal category includes revenues from the Company’s subsidiaries operating government portals under long-term contracts on an outsourced basis. The software & services category includes revenues primarily from the Company’s software & services businesses. The primary categories of operating expenses include: cost of portal revenues, cost of software & services revenues, selling & administrative, and depreciation & amortization. Cost of portal revenues consist of all direct costs associated with operating government portals on an outsourced basis including employee compensation, telecommunications, credit card merchant fees, and all other costs associated with the provision of dedicated client service such as dedicated facilities. Cost of software & services revenues consist of all direct project costs to provide software development and services such as employee compensation, subcontractor labor costs, and all other direct project costs including hardware, software, materials, travel and other out-of-pocket expenses. Selling & administrative costs consist primarily of corporate-level expenses relating to human resource management, administration, information technology, legal and finance, and all costs of non-customer service personnel from the Company’s software & services businesses, including information systems and office rent. Selling & administrative costs also consist of corporate-level expenses for market development and public relations.
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The Company’s consolidated statements of cash flows for the years ended December 31, 2004 and 2005 present changes in restricted cash as an investing activity. Changes in restricted cash have previously been presented as a financing activity.
Basis of consolidation
The accompanying consolidated financial statements consolidate the Company together with all of its direct and indirect wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
Cash and cash equivalents
Cash and cash equivalents primarily include cash on hand in the form of bank deposits and money market funds. For purposes of the consolidated balance sheets and consolidated statements of cash flows, the Company considers all non-restricted highly liquid instruments purchased with an original maturity of one month or less to be cash equivalents.
Marketable securities
The Company’s marketable securities at December 31, 2005 and 2006 were classified as available-for-sale and consisted of short-term auction rate securities, flex term notes and corporate debt securities. These investments are stated at fair value with any unrealized holding gains or losses included as a component of shareholders’ equity as accumulated other comprehensive income or loss until realized. The cost of securities sold is based on the specific identification method. The fair values of the Company’s marketable securities are based on quoted market prices at the reporting date. See Note 4.
Unbilled revenues
Unbilled revenues consist of revenues earned in excess of billings under long-term application development contracts accounted for under the percentage of completion method relating to the Company’s UCC and corporate filings software development business and revenues earned in excess of billings relating to the Company’s ethics & elections and portal businesses. Unbilled revenues arise when revenues have been recorded but the amounts cannot currently be billed under the terms of the contracts. Such amounts are recoverable from customers upon various measures of performance including, among others, achievement of certain milestones and completion of services during a specified period.
At each balance sheet date, the Company makes a determination as to the portion of the unbilled receivable relating to the Company’s long-term application development contracts that will be collected within one year and records that amount as a current asset in the consolidated balance sheets. The remainder of the receivable, if any, is classified as a long-term asset. All unbilled revenues relating to the Company’s ethics & elections and portal businesses are collectible within one year of the balance sheet dates and have been classified as a current asset.
Unbilled revenues relating to the Company’s contract with the California Secretary of State at December 31, 2005 and 2006 were $3.4 million and $0.5 million. Unbilled revenues relating to the Company’s ethics & election business at December 31, 2005 and 2006 were $0.2 million and $0. Unbilled revenues relating to the Company’s portal businesses at December 31, 2005 and 2006 were $0 and $0.6 million.
Property and equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful lives of 8 years for furniture and fixtures, 3-10 years for equipment, 3-5 years for purchased software and the lesser of the term of the lease or 5 years for leasehold improvements. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in results of operations for the period. The cost of maintenance and repairs is charged to expense as incurred. Significant renewals and betterments are capitalized.
The Company periodically evaluates the carrying value of property and equipment to be held and used when events and circumstances warrant such a review. The carrying value of property and equipment is considered impaired when the anticipated undiscounted cash flows from the asset is separately identifiable and is less than
48
its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost to dispose. The Company has not recorded any impairment losses on property and equipment during the periods presented.
Software development costs and intangible assets
The Company expenses as incurred all employee costs to start up, operate and maintain government portals on an outsourced basis as costs of performance under the contracts because, after the completion of a defined contract term, the government entities with which the Company contracts typically receive a perpetual, royalty-free license to the applications the Company developed. Such costs are included in cost of portal revenues in the consolidated statements of income.
The Company accounts for the costs of developing internal use computer software in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” and Emerging Issues Task Force (“EITF”) Issue 00-2, “Accounting for Website Development Costs.” Costs capitalized pursuant to EITF Issue 00-2 would be included as part of the total of internal use software development costs capitalized pursuant to SOP 98-1.
The net carrying value of intangible assets at December 31, 2005 and 2006 was approximately $0.1 million and $0.3 million and was included in other long-term assets in the consolidated balance sheets. At December 31, 2006, intangible assets consisted of capitalized internal use software development costs, and are being amortized over a three-year period. Accumulated amortization at December 31, 2006 totaled approximately $8,000.
At each balance sheet date, or whenever events or changes in circumstances warrant, the Company assesses the carrying value of intangible assets for possible impairment based primarily on the ability to recover the balances from expected future cash flows on an undiscounted basis. If the sum of the expected future cash flows on an undiscounted basis were to be less than the carrying amount of the intangible asset, an impairment loss would be recognized for the amount by which the carrying value of the intangible asset exceeds its estimated fair value. There is considerable management judgment necessary to determine future cash flows, and accordingly, actual results could vary significantly from such estimates. The Company has not recorded any impairment losses on intangible assets during the periods presented.
Revenue recognition
Portal revenues
The Company recognizes revenue from providing outsourced government portal services (primarily transaction-based information access fees and filing fees) net of the transaction fees due to the government when the services are provided. The fees that the Company must remit to state agencies for data access and other statutory fees are accrued as accounts payable at the time services are provided. The Company must remit a certain amount or percentage of these fees to government agencies regardless of whether the Company ultimately collects the fees. As a result, trade accounts receivable and accounts payable reflect the gross amounts outstanding at the balance sheet dates.
Revenue from service contracts to provide portal consulting, application development and management services to governments is recognized as the services are provided at rates provided for in the contract.
Software & services revenues
The Company’s UCC and corporate filings software development business recognizes revenues from fixed-fee, long-term application development contracts on the percentage of completion method, utilizing costs incurred to date as compared to the estimated total costs for each contract, following the guidance outlined in Alternative B as set forth in paragraph .81 of SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” The Company primarily includes internal labor and subcontractor labor costs in actual and estimated total costs for purposes of determining the percentage of completion for each contract. The
49
Company also includes costs for hardware and software provided directly to the customer as part of the system and other direct project costs such as travel in actual and estimated total costs, but does not include such costs for determining the percentage of completion for each contract. The Company recognizes revenue and expenses for such costs with no associated profit margin. Contract revenues and estimated costs to complete are adjusted to reflect change orders when approved by the customer and the Company regarding both scope and price. Revenues and profits from these contracts are based on the Company’s estimates to complete and are reviewed periodically, with adjustments recorded in the period in which the revisions are made. Any anticipated contract losses are charged to operations as soon as determinable.
In 2001, NICUSA and the Company’s NIC Conquest subsidiary were awarded a five-year, $25 million contract by the California Secretary of State (the “California SOS”) to develop and implement a comprehensive information management and filing system. Revenues are recognized on the contract using the percentage of completion method utilizing costs incurred to date as compared to the estimated costs for the contract, as further described above. The Company believes costs incurred are a more representative measure of project progress than either the completion of billing or significant project milestones, as most of the significant milestone payments under this contract are concentrated toward the latter half of the project and do not appropriately reflect project progress and project costs incurred, especially in between milestone payment dates.
The contract contains early termination clauses that give the California SOS the right to terminate early including, among others, termination for non-appropriation of funds and termination for convenience. Such early termination clauses are generally standard in most government contracts and are not unique to the Company’s contract with the California SOS. However, in the event the contract is terminated for non-appropriation of funds, the Company would be required to take back any affected goods furnished under the contract and to relieve the California SOS of any further obligations therefrom. The Company does not recognize revenues in excess of what has been appropriated for the project. If the contract is terminated for the convenience of the State, the parties are to negotiate a settlement, which the Company believes would include billed and unbilled receivables for goods, manufacturing materials and/or services performed or delivered under the contract.
Prior to the first quarter of 2005, key elements of the Company’s obligations under the California SOS contract were subcontracted to various third parties under fixed price contracts. At the end of the first quarter of 2005, as a result of system delivery issues and the concern over the ability of one of the two remaining subcontractors to meet the criteria set forth by the California SOS, the Company determined it would assume the lead project manager role on the contract, which was previously performed by this subcontractor. As a result of this change, the Company further evaluated the status of the project and concluded that a further modification to the management and oversight structure of the project was necessary to improve performance under the contract and that additional internal project management and technical personnel would be required on the engagement. The Company also reevaluated the expected completion date of the project, which was previously estimated to be in the first quarter of 2006, and determined to revise the estimated completion date to the end of 2006. As a result of the Company’s decision to commit these additional resources and the extension of the expected project completion date, the Company recorded a $5.0 million adjustment under percentage of completion accounting in the first quarter of 2005, as the Company expected to incur a loss of approximately $4.2 million on this project, instead of a previously projected profit of approximately $1.0 million.
The adjustment in the Company’s consolidated statement of income for the year ended December 31, 2005 resulted in a reduction of software & services revenues of approximately $3.5 million and an increase in cost of software & services revenues of approximately $1.5 million. The adjustment in the Company’s consolidated balance sheet was a reduction in unbilled revenues of approximately $3.5 million and an increase in application development contracts (a current liability) of approximately $1.5 million.
In March 2006, the Company and the California SOS entered into an amendment (the “Amendment”) to the California Business Programs Automation Agreement (the “Agreement”). Among other changes to the Agreement, the Amendment reduced the aggregate contract value to approximately $19 million and released the Company from the obligation to deliver the business filings, or BE, portion of the project, except for maintenance of hardware and delivery of BE images as expressly set forth in the Amendment. The Amendment also set forth the final criteria in order for the California SOS to accept the UCC portion of the project and move it into the maintenance and operations phase.
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As a result of the Amendment, the Company recorded an adjustment under percentage of completion accounting in the first quarter of 2006. The adjustment in the Company’s consolidated statement of income for the year ended December 31, 2006 resulted in a reduction of software & services revenues of approximately $2.1 million and a reduction of cost of software & services revenues of approximately $2.1 million. The adjustment in the Company’s consolidated balance sheet was a reduction in unbilled revenues of approximately $2.1 million, a reduction of accrued liabilities of approximately $1.6 million, and a reduction of application development contracts of approximately $0.5 million. This adjustment did not affect operating income, net income or earnings per share.
In June 2006, the California SOS officially accepted the UCC portion of the project, which also commenced the 42-month maintenance and operations phase. Upon acceptance, the Company was relieved of its obligation to provide a $5 million performance bond to the California SOS. The bond was collateralized by a $5 million letter of credit. Also upon acceptance, approximately $1.5 million in milestone payments became due to the Company, thus reducing unbilled revenues.
The Company regularly reviews its cost estimates to complete and does not currently believe its estimated contract loss will exceed the $4.2 million estimate established in the first quarter of 2005. However, because of the inherent uncertainties surrounding the ultimate outcome of subcontract negotiations between the Company and its subcontractors as a result of the Amendment, it is at least reasonably possible that the estimate will change in the near term. Further, it is possible that the Company will similarly incur cost overruns in the future as it has in the past as a result of unforeseen difficulties such as rising development, subcontractor and personnel costs or other reasons. If this occurs, the Company’s results of operations, financial condition and cash flows could be adversely affected.
At December 31, 2006, the Company’s UCC and corporate filings software development business was primarily engaged in servicing the maintenance and operations obligation under its contract with the California SOS. This software & services business is not marketing its applications and services for new engagements.
The Company’s ethics & elections business recognizes revenues from professional services as the services are provided. This business has entered into contracts with the state of Michigan and the Federal Election Commission that contain general fiscal funding clauses. The Company recognizes revenue under these contracts if the probability of cancellation is determined to be a remote contingency.
Stock-based compensation
Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R (revised 2004), “Share-Based Payment,” which establishes the accounting for equity instruments exchanged for employee services. Prior to January 1, 2006, the Company accounted for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company also followed the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” See Note 11.
Income taxes
The Company, along with its wholly owned subsidiaries, files a consolidated federal income tax return. Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized.
Comprehensive income
The Company has no material components of other comprehensive income or loss and, accordingly, the Company’s comprehensive income is approximately the same as its net income for all periods presented.
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Earnings per share
Basic earnings per share are calculated on the basis of the weighted average number of common shares outstanding during the period. Diluted earnings per share are calculated on the basis of the weighted average number of common shares outstanding during the period and common stock equivalents that would arise from the exercise of stock options or the issuance of restricted stock awards to employees and nonemployee directors using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share:
| | Year ended December 31, |
| | 2004 | | 2005 | | 2006 |
| Numerator: | | | | | | | | |
| Net income | $ | 7,104,661 | | $ | 6,363,076 | | $ | 10,739,001 |
| Denominator: | | | | | | | | |
| Weighted average shares – basic | | 58,988,456 | | | 60,078,841 | | | 61,408,552 |
| Stock options and restricted stock awards | | 1,888,838 | | | 1,014,947 | | | 354,541 |
| Weighted average shares – diluted | | 60,877,294 | | | 61,093,788 | | | 61,763,093 |
| Basic net income per share | $ | 0.12 | | $ | 0.11 | | $ | 0.17 |
| Diluted net income per share | $ | 0.12 | | $ | 0.10 | | $ | 0.17 |
Outstanding stock options totaling 0.7 million, 0.6 million and 0.3 million common shares during the years ended December 31, 2004, 2005 and 2006, respectively, were not included in the computation of diluted weighted average shares outstanding because their exercise prices were in excess of the average stock price of the Company during the periods.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and accounts receivable. The Company limits its exposure to credit loss by depositing its cash with high credit quality financial institutions. The Company is subject to concentrations of credit risk and interest rate risk related to its short-term marketable securities. The Company’s credit risk is managed by limiting the amount of investments placed with any one issuer, investing primarily in government-backed debt instruments with maturities of less than one year. The Company performs ongoing credit evaluations of its customers and generally requires no collateral to secure accounts receivable.
Segment reporting
The Company reports segment information in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” SFAS No. 131 uses the “management” approach, which designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company’s segments. SFAS No. 131 also requires disclosures about products and services and major customers. See Note 12.
Quantifying Financial Statement Errors
In September 2006, the staff of the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 was issued in order to eliminate the diversity in practice surrounding how public companies quantify financial statement misstatements.
Traditionally, there have been two widely-recognized methods for quantifying the effects of financial statement misstatements: the “roll-over” method and the “iron curtain” method. The roll-over method focuses primarily on the impact of a misstatement on the income statement—including the reversing effect of prior year misstatements—but its use can lead to the accumulation of misstatements in the balance sheet. The iron-curtain method, on the other hand, focuses primarily on the effect of correcting the period-end balance sheet with less emphasis on the reversing effects of prior year errors on the income statement. Prior to application of the guidance in SAB No. 108, the Company used the roll-over method for quantifying financial statement misstatements.
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In SAB No. 108, the SEC staff established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the Company’s financial statements and the related financial statement disclosures. This model is commonly referred to as a “dual approach” because it requires quantification of errors under both the iron curtain and the roll-over methods.
SAB No. 108 permits public companies to initially apply its provisions either by (i) restating prior financial statements as if the dual approach had always been applied or (ii) recording the cumulative effect of initially applying the dual approach as adjustments to the carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings (accumulated deficit). The Company elected to record the effects of applying SAB No. 108 using the cumulative effect transition method.
The following table summarizes the effects (up to January 1, 2006) of applying the guidance in SAB No. 108:
| | Period in which the | | |
| | Misstatement Originated (1) | | |
| | Cumulative Effect Prior to | | Adjustment Recorded |
| | January 1, 2004 | | as of January 1, 2006 |
| Deferred income taxes (2) | $565,564 | | $565,564 |
| Net loss (3) | $565,564 | | |
| Accumulated deficit (4) | | | $565,564 |
____________________
| (1) | | The Company previously quantified this error under the roll-over method and concluded that it was immaterial. |
| |
| (2) | | The Company did not record tax net operating loss carryforwards acquired upon the acquisition of SDR Technologies in 2000, resulting in an overstatement of goodwill and an understatement of deferred tax assets by $565,564. The tax benefits of the net operating loss carryforwards were subsequently realized. As a result of the misstatement, the Company overstated its net loss in 2001 by overstating its impairment loss when it determined that the goodwill and other acquired intangible assets related to the SDR Technologies acquisition were impaired. |
| |
| (3) | | Represents the overstatement of the Company’s net loss resulting from this misstatement. |
| |
| (4) | | Represents the decrease in accumulated deficit recorded as of January 1, 2006 to record the initial application of SAB No. 108. |
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at 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.
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements. The Company will be required to adopt FIN 48 in the first quarter of 2007. The Company is currently evaluating the requirements of FIN 48 and has not yet determined the impact on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. The Company will be required to adopt this standard in the first quarter of 2008. The Company is currently evaluating the requirements of SFAS No. 157 and has not yet determined the impact on its consolidated financial statements.
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3. OUTSOURCED GOVERNMENT PORTAL CONTRACTS
The Company’s outsourced government portal contracts generally have an initial term of three to five years with provisions for renewals for various periods at the option of the government. The Company’s primary business obligation under these contracts is to design, build and operate Internet-based portals on behalf of governments desiring to provide access to government information and to complete government-based transactions online. NIC typically markets the services and solicits users to complete government-based transactions and to enter into subscriber contracts permitting the user to access the portal and the government information contained therein in exchange for transactional and/or subscription user fees. The Company enters into separate agreements with various agencies and divisions of the government to provide specific services and to conduct specific transactions. These agreements preliminarily establish the pricing of the electronic transactions and data access services the Company provides and the division of revenues between the Company and the government agency. The government must approve prices and revenue sharing agreements.
The Company is typically responsible for funding up front investment and ongoing operational costs of the government portals, and generally owns all the applications developed under these contracts. After completion of a defined contract term, the government agency typically receives a perpetual, royalty-free license to the applications for use only. If the Company’s contract were not renewed after a defined term, the government agency would be entitled to take over the portal in place with no future obligation of the Company.
At December 31, 2006, the Company was bound by performance bond commitments totaling approximately $2.3 million on certain portal outsourcing contracts. Under a typical portal contract, the Company is required to fully indemnify its government clients against claims that the Company’s services infringe upon the intellectual property rights of others and against claims arising from the Company’s performance or the performance of the Company’s subcontractors under the contract.
The following is a summary of the Company’s nineteen outsourced state government portal contracts at December 31, 2006:
| | | | | Year Services | | Contract Expiration Date |
| NIC Subsidiary | | Portal Web Site (State) | | Commenced | | (Renewal Options Through) |
| Vermont Information Consortium | | www.Vermont.gov (Vermont) | | 2006 | | 10/15/2009(10/14/2012) |
| Colorado Interactive | | www.Colorado.gov (Colorado) | | 2005 | | 5/19/2010(5/19/2014) |
| South Carolina Interactive | | www.SC.gov (South Carolina) | | 2005 | | 7/15/2007(7/15/2009) |
| Kentucky Interactive | | www.Kentucky.gov (Kentucky) | | 2003 | | 1/31/2009(1/31/2013) |
| Alabama Interactive | | www.Alabama.gov (Alabama) | | 2002 | | 10/31/2007(10/31/2010) |
| Maine Information Network | | www.RI.gov (Rhode Island) | | 2001 | | 6/18/2007(6/18/2011) |
| NICUSA | | www.OK.gov (Oklahoma) | | 2001 | | 6/30/2007(6/30/2009) |
| Montana Interactive | | www.MT.gov (Montana) | | 2001 | | 12/31/2010 |
| NICUSA | | www.Tennessee.gov (Tennessee) | | 2000 | | 8/27/2010 |
| Hawaii Information Consortium | | www.Hawaii.gov (Hawaii) | | 2000 | | 1/3/2008 |
| Idaho Information Consortium | | www.Idaho.gov (Idaho) | | 2000 | | 3/31/2008 |
| Utah Interactive | | www.Utah.gov (Utah) | | 1999 | | 5/6/2009 |
| Maine Information Network | | www.Maine.gov (Maine) | | 1999 | | 1/14/2008 |
| Arkansas Information Consortium | | www.Arkansas.gov (Arkansas) | | 1997 | | 6/30/2008 |
| Iowa Interactive | | www.Iowa.gov (Iowa) | | 1997 | | 3/31/2011(3/31/2012) |
| Virginia Interactive | | www.Virginia.gov (Virginia) | | 1997 | | 8/31/2012 |
| Indiana Interactive | | www.IN.gov (Indiana) | | 1995 | | 6/30/2010(6/30/2014) |
| Nebraska Interactive | | www.Nebraska.gov (Nebraska) | | 1995 | | 1/31/2009(1/31/2010) |
| Kansas Information Consortium | | www.Kansas.gov (Kansas) | | 1992 | | 12/31/2007(12/31/2009) |
During the first quarter of 2006, the Company signed a new five-year contract with the state of Iowa, which includes an option to extend the contract for an additional one-year renewal term, and was granted a five-year contract renewal from the state of Virginia. The Company also received a four-year contract extension from the state of Montana.
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During the second quarter of 2006, the Company was granted a one-year contract renewal from the State of Oklahoma, and a contract extension from the state of Maine, which extended the contract expiration date to January 2008. Also during the second quarter of 2006, the Company signed a new long-term contract with the state of Indiana that commenced on July 1, 2006. The contract includes an initial four-year term and renewal options that run through June 2014. The new contract is based on a funding model that includes recurring fixed monthly fees for baseline services and primarily project-based pricing for variable services. Historically, the majority of revenues under this contract were DMV and non-DMV transaction-based. In addition, during the second quarter of 2006, the state of Rhode Island elected to rebid its portal services contract and therefore extended the initial term of the contract with the Company by one year to allow time for the rebid process to occur. The extension is subject to being superceded if the State elects to renew the present contract, or terminated early if the state elects a different portal provider.
During the fourth quarter of 2006, the Company entered into a three-year contract with the state of Vermont, which includes an option to extend the contract for an additional three-year renewal term. In addition, the Company received a contract extension from the state of Utah, which extended the contract expiration date to May 2009, and a one-year contract extension from the state of Hawaii.
In February 2007, the Company received a one-year contract extension from the State of Idaho, which extended the contract expiration date to March 2008.
4. MARKETABLE SECURITIES
The fair value of marketable securities was as follows at December 31:
| | 2005 | | 2006 |
| Auction rate securities | $ | 20,500,000 | | $ | 35,900,000 |
| Flex term notes | | — | | | 6,000,000 |
| Corporate debt securities | | — | | | 3,108,431 |
| | $ | 20,500,000 | | $ | 45,008,431 |
All marketable securities at December 31, 2005 and 2006 mature within one year. Gross realized gains and losses and unrealized holding gains and losses for each of the periods presented were not significant.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
| | 2005 | | 2006 |
| Furniture and fixtures | $ | 1,436,369 | | | $ | 1,553,015 | |
| Equipment | | 9,425,099 | | | | 8,475,076 | |
| Purchased software | | 2,641,654 | | | | 2,731,689 | |
| Leasehold improvements | | 300,141 | | | | 398,862 | |
| | | 13,803,263 | | | | 13,158,642 | |
| Less accumulated depreciation | | (10,476,078 | ) | | | (9,368,152 | ) |
| | $ | 3,327,185 | | | $ | 3,790,490 | |
Depreciation expense for the years ended December 31, 2004, 2005 and 2006, was $1,438,253, $1,602,879 and $2,032,456, respectively.
6. INVESTMENTS IN AFFILIATES AND JOINT VENTURES
In March 2000, NIC made a $5 million cash investment in E-Filing.com, Inc. (“E-Filing”), a provider of online filing applications for legal services, giving NIC ownership of 21% of E-Filing, a non-pubic company. The investment was accounted for under the equity method. In May 2004, E-Filing repurchased the Company’s ownership interest in E-Filing for approximately $0.5 million, which approximated the carrying value of the Company’s investment at the date of the repurchase. The Company received approximately $0.3 million in cash
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and a $0.2 million subordinated promissory note with principal plus 5% interest payable annually in three equal installments on each of the first, second and third anniversary dates of the issuance of the note. The Company had no investment balance remaining in E-Filing after the repurchase. During 2006, the Company wrote off the remaining balance of the promissory note ($96,954) due to E-Filing’s deteriorated financial condition, and recorded the loss in equity in net loss of affiliates in the consolidated statement of income.
In October 2000, NIC made an initial $0.5 million cash investment in e-Government Solutions Limited (“eGS”), a private joint venture giving NIC initial ownership of 40% of the ordinary shares of eGS. The purpose of the eGS joint venture, based in London, England, was to deliver eGovernment services throughout Western Europe, with initial efforts to focus on the United Kingdom. In September 2001, the joint venture agreement was modified and reduced NIC’s obligation to make future cash contributions to the joint venture and gave NIC ownership of 47% of the ordinary shares of eGS. In December 2002, the joint venture agreement was again modified and, among other changes, eliminated NIC’s obligation to make future cash contributions to the joint venture, reduced NIC’s ownership to 20% and eliminated NIC’s participation on the board of directors. The investment had been accounted for under the equity method. As a result of the modification to the joint venture agreement in December 2002, the Company began to account for its investment in eGS under the cost method and had no investment balance remaining in eGS after the modification. NIC’s cash contributions since the inception of the joint venture have totaled approximately $1.0 million. At December 31, 2006, the Company’s ownership interest in eGS was approximately 14%.
7. DEBT OBLIGATIONS AND COLLATERAL REQUIREMENTS
The Company issues letters of credit as collateral for performance on certain of its outsourced government portal contracts, as collateral for certain performance bonds and as collateral for certain office leases. These irrevocable letters of credit are generally in force for one year, for which the Company pays bank fees of approximately 1.25% to 1.75% of face value per annum. In total, the Company and its subsidiaries had unused outstanding letters of credit of approximately $5.4 million and $1.3 million at December 31, 2005 and 2006, respectively.
The Company had a $0.5 million working capital line of credit, which was unused at December 31, 2005. The Company no longer maintains the line of credit as of December 31, 2006.
At December 31, 2004, the Company had pledged $3.0 million of its cash as collateral under the financing arrangement that covered the Company’s outstanding letters of credit and working capital line of credit, and had given the issuing bank a security interest in certain of its accounts receivable and other assets. The Company had classified cash used for collateral purposes as restricted in its consolidated balance sheets. In April 2005, the Company’s collateral requirements under this banking agreement were eliminated, and the Company is no longer required to collateralize letters of credit.
The Company has a $1.0 million line of credit with a separate bank in conjunction with a corporate credit card agreement.
In August 2001, the Company borrowed $1.0 million from a bank in the form of a promissory note payable to finance the purchase of certain hardware and software components for its discontinued eProcurement business. In 2004, the Company paid off the note in full.
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8. COMMITMENTS AND CONTINGENCIES
Operating leases
The Company and its subsidiaries lease office space and certain equipment under noncancellable operating leases. Future minimum lease payments under all noncancellable operating leases at December 31, 2006 are as follows:
| Fiscal Year | | |
| 2007 | | $1,304,467 |
| 2008 | | 984,686 |
| 2009 | | 832,531 |
| 2010 | | 582,573 |
| 2011 | | 58,918 |
| Thereafter | | — |
Rent expense for operating leases for the years ended December 31, 2004, 2005 and 2006 was approximately $1.5 million, $1.5 million and $1.8 million, respectively.
Litigation
The Company is involved from time to time in legal proceedings and litigation arising in the ordinary course of business. However, the Company is not currently involved with any legal proceedings.
9. SHAREHOLDERS’ EQUITY
Common stock
On June 30, 1998, the Company and the National Information Consortium Voting Trust (the “Voting Trust”) consisting of all the Company’s then current shareholders entered into a stock purchase agreement for the Company’s shareholders to sell a 25% interest in the Company to an investment management firm. The Company did not receive any of the proceeds from the sale. Under the Voting Trust agreement, two principal shareholders have the right to vote all of the Voting Trust’s common shares and to sell all or any part of such shares. In 2003, the Voting Trust distributed 5% of its shares of NIC common stock to its members. In 2005, the Voting Trust distributed 10% of its shares of NIC common stock to its members. In 2006, the Voting Trust sold approximately 2.1 million shares of NIC common stock in the open market. At December 31, 2005 and 2006, the Voting Trust held approximately 23.5 million shares and 21.4 million shares of NIC common stock.
Common stock transactions and additional paid-in capital
As a condition of separation and severance from the Company in the second quarter of 2002, a former executive had the right to request the Company to repurchase all of the shares of the Company’s common stock, totaling 149,488 shares, beneficially owned by the former executive that were held of record in the Voting Trust for $1.44 per share. In October 2002, the former executive exercised this right and caused the Company to repurchase his Voting Trust units for $215,260. The shares of NIC common stock represented by the Voting Trust Units have been recorded as treasury stock in the consolidated balance sheets. In 2003, the Voting Trust distributed 5% of its shares of NIC common stock to its members. This affected 7,474 shares of NIC common stock held by the Company as treasury stock. The Company retired these shares in 2003, which had an assigned value of $10,763. At December 31, 2004, the Company had 142,014 shares remaining in treasury stock. In 2005, the Voting Trust distributed 10% of its shares of NIC common stock to its members. This affected 14,201 shares of NIC common stock held by the Company as treasury stock. The Company retired these shares in February 2005, which had an assigned value of $20,449, and had 127,813 shares remaining in treasury stock at December 31, 2005. In 2006, the Voting Trust sold approximately 2.1 million shares of NIC common stock in the open market. This affected 11,154 shares of NIC common stock held by the Company as treasury stock. The Company received $64,965 in proceeds
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from the sale. These shares had an assigned value of $16,373, which was credited to treasury stock, with the remaining $50,004 credited directly to additional paid-in capital. At December 31, 2006, the Company had 116,441 shares remaining in treasury stock.
During 2004 and 2005, certain employees of the Company exercised non-qualified stock options. As a result, the Company received federal income tax deductions, or windfall tax benefits. The tax benefit for the deductions of $688,604 for 2004 and $1,781,364 for 2005 increased deferred tax assets and was credited directly to additional paid-in capital. See Note 11 for additional discussion of 2006 income tax deductions relating to the exercise of non-qualified stock options.
10. INCOME TAXES
The provision for income taxes consists of the following:
| | Year Ended December 31, |
| | 2004 | | 2005 | | 2006 |
| Current income taxes: | | | | | | | | |
| Federal | $ | 238,731 | | $ | 127,122 | | $ | 185,944 |
| State | | 135,285 | | | 251,899 | | | 313,348 |
| Total | | 374,016 | | | 379,021 | | | 499,292 |
| Deferred income taxes: | | | | | | | | |
| Federal | | 3,650,706 | | | 3,481,568 | | | 6,083,043 |
| State | | 680,179 | | | 669,235 | | | 1,096,061 |
| Total | | 4,330,885 | | | 4,150,803 | | | 7,179,104 |
| Total income tax provision | $ | 4,704,901 | | $ | 4,529,824 | | $ | 7,678,396 |
Significant components of the Company’s deferred tax assets and liabilities were as follows at December 31:
| | 2005 | | 2006 |
| Deferred tax assets: | | | | | | | |
| Net operating loss carryforwards | $ | 20,551,079 | | | $ | 15,950,998 | |
| Amortization and impairment of purchase accounting goodwill | | | | | | | |
| and software intangibles | | 7,756,085 | | | | 6,870,635 | |
| Capital losses on sale of affiliates | | 3,792,358 | | | | 3,830,703 | |
| Investment in affiliate | | 548,780 | | | | 548,780 | |
| Stock-based compensation pursuant to SFAS No. 123R | | — | | | | 519,732 | |
| Accrued contract expenses under percentage of completion accounting | | 903,038 | | | | 251,343 | |
| Application development contract loss | | 490,385 | | | | 199,408 | |
| Other | | 348,663 | | | | — | |
| | | 34,390,388 | | | | 28,171,599 | |
| Less: Valuation allowance | | (4,824,524 | ) | | | (5,040,010 | ) |
| Total | | 29,565,864 | | | | 23,131,589 | |
| Deferred tax liabilities: | | | | | | | |
| Depreciation & capitalized software development costs | | (228,061 | ) | | | (243,632 | ) |
| Other | | — | | | | (163,694 | ) |
| Total | | (228,061 | ) | | | (407,326 | ) |
| Net deferred tax asset | $ | 29,337,803 | | | $ | 22,724,263 | |
For federal income tax purposes, the Company had available at December 31, 2006, total net operating loss (“NOL”) carryforwards of approximately $39.3 million that will expire in 2020 ($1.9 million), 2021 ($27.1 million) and 2022 ($10.3 million). The Company believes it is more likely than not it will generate sufficient taxable income from future operations to fully utilize its federal NOL carryforwards prior to expiration. The amount of the deferred tax asset considered realizable relating to these NOL’s could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced.
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A portion of the Company’s total deferred tax asset valuation allowance relates to estimated state NOL carryforwards. In 2003, the Company identified certain estimated state NOL carryforwards that it had previously recognized that it might be unable to use. Based on a review of applicable state tax statutes, the Company concluded that there is substantial doubt it would be able to realize the full amount of certain estimated NOL carryforwards in states where the Company cannot file a consolidated income tax return. As a result, the Company recorded a deferred tax asset valuation allowance totaling $483,386. In 2006, the Company increased its valuation allowance by $177,141 for additional state NOL carryforwards that the Company may be unable to use.
A portion of the Company’s total deferred tax valuation allowance at December 31, 2005 totaling $3,792,358 related to capital losses realized on certain of the Company’s previous equity method investments, and $548,780 related to an expected capital loss on the Company’s investment in its European joint venture, eGS. At present, there is substantial doubt about the Company’s ability to generate capital gains in the future. The Company increased the valuation allowance relating to certain of these investments by $38,345 in 2006.
As further discussed in Note 2, the Company did not initially record tax net operating loss carryforwards acquired upon the acquisition of SDR Technologies in 2000, resulting in an understatement of deferred tax assets by $565,564. The Company recorded a $565,564 increase to deferred tax assets with an offsetting decrease to accumulated deficit as of January 1, 2006 to reflect the initial application of SAB No. 108. The table above reflects this adjustment in the balance of net operating loss carryforwards at December 31, 2006.
See Notes 9 and 11 for discussion of the accounting for income tax deductions relating to the exercise of non-qualified stock options.
The following table reconciles the effective income tax rate indicated by the consolidated statements of income and the statutory federal income tax rate:
| | Year Ended December 31, |
| | 2004 | | 2005 | | 2006 |
| Effective federal and state income tax rate | 39.8 | % | | 41.6 | % | | 41.7 | % |
| State income taxes | (4.5 | ) | | (5.5 | ) | | (4.8 | ) |
| Valuation allowance | (0.4 | ) | | — | | | (1.0 | ) |
| Other | 0.1 | | | (1.1 | ) | | (0.9 | ) |
| Statutory federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
11. STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS
Prior to January 1, 2006, the Company accounted for its stock-based compensation plans using the intrinsic value method in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no compensation expense was recognized if the exercise price of a stock option equaled or exceeded the market price of the underlying stock on the date of grant. However, stock-based compensation has been included in prior period pro-forma disclosures in the financial statement footnotes as required under SFAS No. 123, “Accounting for Stock-Based Compensation,” which was amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.”
Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123R (revised 2004), “Share-Based Payment,” which establishes the accounting for equity instruments exchanged for employee services. Under the provisions of SFAS No. 123R, stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as expense over the employee’s requisite service period (generally the vesting period of the grant).
The Company elected to adopt the modified prospective application transition method as provided by SFAS No. 123R and, accordingly, financial statement amounts for the years ended December 31, 2004 and 2005 have not been restated to reflect the fair value method of expensing stock-based compensation. For vested stock-based awards that were outstanding on January 1, 2006, the Company was not required to record any additional compensation expense. For unvested stock-based awards that were outstanding on January 1, 2006, awards that were previously included as part of the pro-forma net income and earnings per share calculations of SFAS No. 123 will be charged to expense over the remaining vesting period, without any changes in measurement. For
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all new stock-based awards that are granted or modified after January 1, 2006, the Company will use SFAS No. 123R’s measurement model, expense recognition and settlement provisions. Upon adoption of SFAS No. 123R, the Company discontinued its historical accounting practice of recognizing forfeitures when they occurred and now estimates compensation cost related to awards not expected to vest.
The following table illustrates the effect on net income and net income per share for the years ended December 31, 2004 and 2005 had the Company applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation:
| | 2004 | | 2005 |
| Net income, as reported | $ | 7,104,661 | | | $ | 6,363,076 | |
| Add: Stock-based employee compensation included in | | | | | | | |
| reported net income, net of related tax effects | | — | | | | — | |
| Deduct: Total stock-based employee compensation expense determined | | | | | | | |
| under fair value based method for all awards, net of related tax effects | | (1,813,608 | ) | | | (1,087,336 | ) |
| Pro forma net income | $ | 5,291,053 | | | $ | 5,275,740 | |
| Basic net income per share, as reported | $ | 0.12 | | | $ | 0.11 | |
| Diluted net income per share, as reported | $ | 0.12 | | | $ | 0.10 | |
| Basic net income per share, pro forma | $ | 0.09 | | | $ | 0.09 | |
| Diluted net income per share, pro forma | $ | 0.09 | | | $ | 0.09 | |
The fair value of each option grant was determined using the Black-Scholes option-pricing model. The following assumptions were applied in determining pro forma compensation cost for the years ended December 31, 2004 and 2005:
| | 2004 | | 2005 |
| Risk-free interest rate | | 3.16 | % | | | 3.90 | % |
| Expected dividend yield | | 0.00 | | | | 0.00 | |
| Expected option life | | 4.0 years | | | | 3.2 years | |
| Expected stock price volatility | | 68 | % | | | 53 | % |
| Fair value of options granted | | $ 2.95 | | | | $ 2.10 | |
The Black-Scholes option-pricing model was not developed for use in valuing employee stock options, but was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, it requires the use of subjective assumptions including expectations of future dividends and stock price volatility. Such assumptions are only used for making the required fair value estimate and should not be considered as indicators of future dividend policy or stock price appreciation, or should not be used to predict the value ultimately realized by employees who receive equity awards. Because changes in the subjective assumptions can materially affect the fair value estimate and because employee stock options have characteristics significantly different from those of traded options, the use of the Black-Scholes option-pricing model may not provide a reliable estimate of the fair value of employee stock options.
For purposes of this pro forma disclosure, the estimated fair value of options was amortized to expense over the option vesting periods. Such pro forma impact on net income and basic and diluted net income per share is not necessarily indicative of future effects on net income or earnings per share.
In 2004 and 2005, all options were granted with exercise prices equal to the market price of the Company’s common stock on the grant dates.
On October 26, 2005, the Board of Directors of the Company approved the accelerated vesting of all unvested options to purchase common stock of the Company that had an exercise price that was greater than the market price on that date. The closing price of the Company’s common stock on October 26, 2005 was $5.63 per share. As a condition of the acceleration and to prevent unintended personal benefit, the Company’s Directors, executive officers and employees must refrain from selling common stock acquired upon the exercise of accelerated options until the original vesting date or, if earlier, termination of employment with or service to the Company. All other terms and conditions applicable to such options, including exercise prices, remain unchanged. This action
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resulted in the accelerated vesting of options to purchase 163,873 shares of common stock of the Company, or approximately six percent of the total of all then outstanding Company options. Of this amount, 142,500 options had been granted to either directors or executive officers of the Company.
The Company accelerated the vesting of these options because it believed it was in the best interest of its shareholders to reduce future compensation expense that the Company would otherwise have been required to report in its statement of income upon adoption of SFAS No. 123R in the first quarter of 2006. Further, because the options had exercise prices in excess of the then-current market price, they were viewed to have limited economic value and were not achieving their objective of incentive compensation and retention. As a result of the vesting acceleration, approximately $0.5 million in aggregate future expense was eliminated. The vesting acceleration did not result in compensation expense in the Company’s statement of income, but is reflected as additional stock-based employee compensation expense in the calculation of 2005 pro forma earnings above.
The following table presents stock-based compensation expense included in the Company’s consolidated statement of income for the year ended December 31, 2006 pursuant to the provisions of SFAS No. 123R:
| | Year Ended |
| | December 31, |
| | 2006 |
| Cost of portal revenues, exclusive of depreciation & amortization | $ | 346,392 | |
| Cost of software & services revenues, exclusive of depreciation and amortization | | 19,051 | |
| Selling & administrative | | 966,160 | |
| Stock-based compensation expense before income taxes | | 1,331,603 | |
| Income tax benefit | | (519,732 | ) |
| Net stock-based compensation expense | $ | 811,871 | |
Stock option and restricted stock plans
The Company has two formal stock-option and incentive plans (the “NIC” plan and the “SDR” plan) to provide for the granting of incentive stock options, non-qualified stock options or restricted stock awards to encourage certain employees of the Company and its subsidiaries, and directors of the Company, to participate in the ownership of the Company, and to provide additional incentive for such employees and directors to promote the success of its business through sharing the future growth of such business.
The NIC plan was adopted in May 1998, amended in November 1998 and May 1999, revised in August 1999, and amended and restated in May 2004 and May 2006. The May 2006 amendment and restatement, as approved by the Company’s Board of Directors and shareholders, modified the NIC plan to allow for the granting of restricted stock awards in addition to stock options. Under the NIC plan, the Company is authorized to grant stock options and restricted stock awards for up to 9,286,754 common shares. At December 31, 2006, a total of 1,203,878 shares were available for future grants under the NIC plan. There have been no option repricings under the NIC plan.
The SDR plan was adopted in May 2000 in conjunction with NIC’s acquisition of SDR Technologies. Under the SDR plan, the Company is authorized to grant options for up to 229,965 common shares. No options that are in addition to those granted upon the close of the SDR acquisition will be granted under the SDR plan. There have been no option repricings under the SDR plan.
Stock options are generally exercisable one year from date of grant in cumulative annual installments of 25% and expire five years after the grant date. The Company did not grant any stock options during the year-ended December 31, 2006, and does not currently anticipate granting stock options in the future. Instead, the Company expects to grant only restricted stock awards, as further discussed below.
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Stock options
Summary stock option activity for the year ended December 31, 2006 is presented below:
| | | | | | | Weighted | | | |
| | | | | Weighted | | Average | | | |
| | | | | Average | | Remaining | | Aggregate |
| | | | | Exercise | | Contractual | | Intrinsic |
| | Shares | | | Price | | Life (Years) | | Value |
| Outstanding, January 1 | | 2,179,802 | | | $4.07 | | | | | |
| Granted | | — | | | — | | | | | |
| Exercised | | (448,898 | ) | | $2.73 | | | | | |
| Expired | | (142,021 | ) | | $6.62 | | | | | |
| Canceled | | (33,250 | ) | | $5.48 | | | | | |
| Outstanding, December 31 | | 1,555,633 | | | $4.19 | | 2.2 | | $ | 1,206,000 |
| Exercisable, December 31 | | 920,009 | | | $4.35 | | 2.0 | | $ | 566,000 |
The aggregate intrinsic value of options exercised during the years ended December 31, 2004, 2005 and 2006 was approximately $1.7 million, $4.5 million and $1.5 million, respectively. Cash proceeds from the exercise of employee stock options for the years ended December 31, 2004, 2005 and 2006 were approximately $1.2 million, $4.6 million and $1.2 million, respectively.
As of December 31, 2006, there was approximately $0.8 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested stock options. The Company expects to recognize this cost over a weighted-average period of 1.4 years.
Restricted stock
The Company began granting shares of restricted stock awards in the second quarter of 2006. Grants of restricted stock vest one year from the date of grant in cumulative annual installments of 25%. Restricted stock is valued at the date of grant, based on the closing market price of the Company’s common stock, and expensed using the straight-line method over the requisite service period.
Summary restricted stock activity for the year ended December 31, 2006 is presented below:
| | | | | Weighted |
| | | | | Average Grant |
| | | | | Date Fair |
| | Shares | | | Value |
| Nonvested at January 1, 2006 | | — | | | | — |
| Granted | | 603,654 | | | $ | 5.70 |
| Vested | | — | | | | — |
| Expired | | — | | | | — |
| Canceled | | (8,169 | ) | | $ | 5.68 |
| Nonvested at December 31, 2006 | | 595,485 | | | $ | 5.70 |
At December 31, 2006, the Company had approximately $2.3 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested restricted stock awards. The Company expects to recognize this cost over the next 3.6 years.
Income taxes
During 2004 and 2005, certain employees of the Company exercised non-qualified stock options. As a result, the Company received federal income tax deductions, or windfall tax benefits. The tax benefit for the deductions of approximately $0.7 million for 2004 and $1.8 million for 2005 increased deferred tax assets and was credited directly to additional paid-in capital.
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Under the guidance of footnote 82 of paragraph A94 of SFAS No. 123R, the Company is not permitted to recognize a credit to additional paid-in capital for windfall tax benefits unless such windfall tax benefits reduce income taxes payable. Since the Company is not currently paying federal income taxes (with the exception of federal alternative minimum tax), such windfall tax benefits generally increase the Company’s tax net operating loss carryforwards. Following the with-and-without approach for utilization of tax attributes, which results in windfall tax benefits being utilized after utilization of available tax net operating loss carryforwards to offset current year taxable income, the Company did not record an increase to deferred tax assets with an offsetting increase to additional paid-in capital for the windfall tax benefit of approximately $0.6 million relating to the exercise of non-qualified stock options during the year ended December 31, 2006.
Paragraph 81 of SFAS No. 123R indicates that for purposes of calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS No. 123R (i.e., the pool of additional paid-in capital, or the “APIC pool”), the Company shall include the net excess tax benefits that would have qualified as such had the entity adopted SFAS No. 123 for recognition purposes. The Company elected to use the alternative transition method described in FASB Staff Position No. FAS 123(R)-3 (the “short cut method”) for calculating the APIC pool upon adoption of SFAS No. 123R, and determined it had no such pool available.
Earnings per share
In calculating diluted earnings per share under SFAS No. 128, “Earnings Per Share,” the assumed proceeds in the treasury stock calculation are adjusted for any stock option windfall tax benefits or shortfalls that would be credited or debited, respectively, to additional paid-in capital. Upon adoption of SFAS No. 123R using the modified prospective application transition method, the Company elected to exclude the impact of pro forma deferred tax assets (i.e., the windfall or shortfall that would be recognized in the financial statements upon exercise of an award) when calculating diluted earnings per share.
Employee Stock Purchase Plan
In 1999, the Company’s Board of Directors approved an employee stock purchase plan (“ESPP”) intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. A total of 2,321,688 shares of NIC common stock have been reserved for issuance under this plan. Terms of the plan permit eligible employees to purchase NIC common stock through payroll deductions up to 15% of each employee’s compensation. Amounts deducted and accumulated by the participant are used to purchase shares of NIC’s common stock at 85% of the lower of the fair value of the common stock at the beginning or the end of the offering period, as defined in the plan.
In the offering period commencing on April 1, 2003 and ending on March 31, 2004, 80,325 shares were purchased at a price of $1.45 per share, resulting in total cash proceeds to the Company of approximately $117,000. In the offering period commencing on April 1, 2004 and ending on March 31, 2005, 30,031 shares were purchased at a price of $4.055 per share, resulting in total cash proceeds to the Company of approximately $122,000. In the offering period commencing on April 1, 2005 and ending on March 31, 2006, 40,343 shares were purchased at a price of $3.9015 per share, resulting in total cash proceeds to the Company of approximately $157,000. The next offering period under this plan commenced on April 1, 2006. The closing fair market value of NIC common stock on the first day of the current offering period was $6.10 per share.
Included in the Company’s stock-based compensation expense for the year ended December 31, 2006 is a portion of the cost (approximately $41,000) relating to the ESPP offering period ending on March 31, 2007, and a portion of the cost (approximately $12,000) relating to the ESPP offering period that ended on March 31, 2006.
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The fair values of the offerings were estimated on the dates of grant using the Black-Scholes model using the assumptions in the following table.
| | March 31, 2007 | | March 31, 2006 |
| | Offering | | Offering |
| Risk-free interest rate | | 4.77 | % | | 3.31 | % |
| Expected dividend yield | | 0.00 | % | | 0.00 | % |
| Expected life | | 1.0 year | | | 1.0 year | |
| Expected stock price volatility | | 30 | % | | 30 | % |
| Weighted average fair value of ESPP rights | | $ 1.60 | | | $ 1.18 | |
Defined Contribution 401(k) Profit Sharing Plan
The Company and its subsidiaries sponsor a defined contribution 401(k) profit sharing plan. In accordance with the plan, all full-time employees are eligible immediately upon employment. A discretionary match of up to 5% of an employee’s salary and a discretionary contribution may be made to the plan as determined by the Board of Directors. Expense related to Company matching contributions totaled approximately $0.2 million, $0.5 million and $0.5 million for the years ended December 31, 2004, 2005 and 2006, respectively.
12. REPORTABLE SEGMENTS AND RELATED INFORMATION
The Company’s two reportable segments consist of its Outsourced Portal businesses and Software & Services businesses. The Outsourced Portals segment includes the Company’s subsidiaries operating outsourced government portals and the corporate divisions that directly support portal operations. The Software & Services segment primarily includes the Company’s UCC and corporate filings software development business (NIC Conquest) and ethics & elections filings business (NIC Technologies). Each of the Company’s Software & Services businesses is an operating segment and has been aggregated to form the Software & Services reportable segment. Unallocated corporate-level expenses are reported in the reconciliation of the segment totals to the related consolidated totals as “Other Reconciling Items.” There have been no significant intersegment transactions for the periods reported. The summary of significant accounting policies applies to all segments.
The measure of profitability by which management evaluates the performance of its segments and allocates resources to them is operating income (loss). Segment asset or other segment balance sheet information is not presented to the Company’s chief operating decision maker. Accordingly, the Company has not presented information relating to segment assets.
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The table below reflects summarized financial information for the Company’s reportable segments for the years ended December 31:
| | Outsourced | | Software & | | Other | | Consolidated |
| | Portals | | Services | | Reconciling Items | | Total |
| 2004 | | | | | | | | | | | | | | |
| Revenues | | $ | 48,543,779 | | $ | 7,217,975 | | | $ | — | | | $ | 55,761,754 |
| Costs & expenses | | | 28,025,072 | | | 6,013,539 | | | | 8,428,359 | | | | 42,466,970 |
| Depreciation & amortization | | | 1,195,485 | | | 215,001 | | | | 84,766 | | | | 1,495,252 |
| Operating income (loss) | | $ | 19,323,222 | | $ | 989,435 | | | $ | (8,513,125 | ) | | $ | 11,799,532 |
| 2005 | | | | | | | | | | | | | | |
| Revenues | | $ | 57,875,067 | | $ | 1,367,546 | | | $ | — | | | $ | 59,242,613 |
| Costs & expenses | | | 31,980,570 | | | 5,779,628 | | | | 9,688,279 | | | | 47,448,477 |
| Depreciation & amortization | | | 1,376,673 | | | 140,900 | | | | 85,306 | | | | 1,602,879 |
| Operating income (loss) | | $ | 24,517,824 | | $ | (4,552,982 | ) | | $ | (9,773,585 | ) | | $ | 10,191,257 |
| 2006 | | | | | | | | | | | | | | |
| Revenues | | $ | 70,008,598 | | $ | 1,367,248 | | | $ | — | | | $ | 71,375,846 |
| Costs & expenses | | | 40,433,646 | | | 1,169,498 | | | | 11,584,270 | | | | 53,187,414 |
| Depreciation & amortization | | | 1,863,437 | | | 65,131 | | | | 111,830 | | | | 2,040,398 |
| Operating income (loss) | | $ | 27,711,515 | | $ | 132,619 | | | $ | (11,696,100 | ) | | $ | 16,148,034 |
The following is a reconciliation of total segment operating income to total consolidated income before income taxes for the years ended December 31:
| | 2004 | | 2005 | | 2006 |
| Total operating income for reportable segments | | $ | 11,799,532 | | | $ | 10,191,257 | | | $ | 16,148,034 | |
| Interest income | | | 116,037 | | | | 704,614 | | | | 2,401,504 | |
| Interest expense | | | (10,852 | ) | | | — | | | | — | |
| Equity in net loss of affiliates | | | (109,061 | ) | | | — | | | | (96,954 | ) |
| Other income (expense), net | | | 13,906 | | | | (2,971 | ) | | | (35,187 | ) |
| Income before income taxes | | $ | 11,809,562 | | | $ | 10,892,900 | | | $ | 18,417,397 | |
The highest volume, most commercially valuable service the Company offers is access to motor vehicle records through the Company’s outsourced government portals, referred to as DMV records. This service accounted for approximately 63%, 62% and 59% of the Company’s portal revenues in 2004, 2005 and 2006, respectively.
A primary source of revenue is derived from data resellers, who use the Company’s government portals to access DMV records for sale to the auto insurance industry. For the year ended December 31, 2004, one of these data resellers accounted for approximately 46% of the Company’s portal revenues and 40% of the Company’s total revenues. For the year ended December 31, 2005, one of these data resellers accounted for approximately 46% of the Company’s portal revenues and 45% of the Company’s total revenues. For the year ended December 31, 2006, one of these data resellers accounted for approximately 47% of the Company’s portal revenues and 47% of the Company’s total revenues. At December 31, 2006, this one data reseller accounted for approximately 37% of the Company’s accounts receivable.
For the year ended December 31, 2004, the Company’s Indiana, Virginia and Utah portals accounted for approximately 15%, 10% and 10%, respectively, of the Company’s portal revenues and 13%, 9% and 9%, respectively, of the Company’s consolidated revenues. For the year ended December 31, 2005, the Company’s Indiana portal accounted for approximately 16% of the Company’s portal revenues and 15% of the Company’s consolidated revenues. For the year ended December 31, 2006, the Company’s Indiana portal accounted for approximately 14% of the Company’s portal revenues and 13% of the Company’s consolidated revenues.
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For the year ended December 31, 2004, revenues from the Company’s UCC and corporate filings software development contract with the California Secretary of State accounted for approximately 56% of the Company’s software & services revenues and 7% of the Company’s total revenues. For the years ended December 31, 2005 and 2006, revenues from this contract were negative ($1,425,000) and negative ($940,000) as a result of adjustments under percentage of completion accounting as further discussed in Note 2.
13. RELATED PARTY TRANSACTIONS
The Company rented an aircraft on an hourly basis from a company that is owned by two shareholders/directors of the Company at costs that the Company believes are reasonable compared to similar services provided by third parties. One of these directors is the current Chairman and Chief Executive Officer of the Company. In 2004 and 2005, payments made to this company totaled approximately $0.4 million and $0.1 million, respectively. No payments were made to this company in 2006.
14. SUBSEQUENT EVENTS
On January 29, 2007, the Company’s Board of Directors declared a special cash dividend of $0.75 per share, payable to shareholders of record as of February 12, 2007. The dividend, totaling approximately $46.7 million, was paid on February 20, 2007 out of the Company’s available cash and marketable securities. The Company has made a preliminary determination that the dividend will result in a partial return of capital to shareholders, with the balance being taxable to shareholders as a qualified dividend. The exact amount of the return of capital is dependent on the earnings of the Company, computed on a tax basis, through the end of its 2007 fiscal year.
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15. UNAUDITED QUARTERLY OPERATING RESULTS
The unaudited quarterly information below is subject to seasonal fluctuations resulting in lower portal revenues in the fourth quarter of each calendar year, due to the smaller number of business days in the quarter and a lower volume of business-to-government and citizen-to-government transactions during the holiday periods. For additional information on significant items affecting the quarterly results for the periods presented, refer to Notes 2 and 11 above.
| 2005 | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Year Ended |
| | March 31, | | June 30, | | September 30, | | December 31, | | December 31, |
| | 2005 | | 2005 | | 2005 | | 2005 | | 2005 |
| Revenues: | | | | | | | | | | | | | | | | | | |
| Portal revenues | | $ | 13,661,349 | | | $ | 14,385,538 | | $ | 14,637,038 | | | $ | 15,191,142 | | $ | 57,875,067 | |
| Software & services revenues | | | (2,380,836 | ) | | | 1,230,792 | | | 1,321,373 | | | | 1,196,217 | | | 1,367,546 | |
| Total revenues | | | 11,280,513 | | | | 15,616,330 | | | 15,958,411 | | | | 16,387,359 | | | 59,242,613 | |
| Operating expenses: | | | | | | | | | | | | | | | | | | |
| Cost of portal revenues, exclusive | | | | | | | | | | | | | | | | | | |
| of depreciation | | | | | | | | | | | | | | | | | | |
| & amortization | | | 6,714,542 | | | | 7,093,241 | | | 7,620,286 | | | | 8,020,022 | | | 29,448,091 | |
| Cost of software & services | | | | | | | | | | | | | | | | | | |
| revenues, exclusive | | | | | | | | | | | | | | | | | | |
| of depreciation | | | | | | | | | | | | | | | | | | |
| & amortization | | | 2,377,532 | | | | 947,805 | | | 1,117,002 | | | | 906,099 | | | 5,348,438 | |
| Selling & administrative | | | 3,282,582 | | | | 3,276,607 | | | 2,947,635 | | | | 3,145,124 | | | 12,651,948 | |
| Depreciation & amortization | | | 351,521 | | | | 368,089 | | | 421,806 | | | | 461,463 | | | 1,602,879 | |
| Total operating expenses | | | 12,726,177 | | | | 11,685,742 | | | 12,106,729 | | | | 12,532,708 | | | 49,051,356 | |
| Operating income (loss) | | | (1,445,664 | ) | | | 3,930,588 | | | 3,851,682 | | | | 3,854,651 | | | 10,191,257 | |
| Other income (expense): | | | | | | | | | | | | | | | | | | |
| Interest income | | | 81,406 | | | | 154,480 | | | 196,948 | | | | 271,780 | | | 704,614 | |
| Other income (expense), net | | | (3,439 | ) | | | 538 | | | (570 | ) | | | 500 | | | (2,971 | ) |
| Total other income | | | | | | | | | | | | | | | | | | |
| (expense) | | | 77,967 | | | | 155,018 | | | 196,378 | | | | 272,280 | | | 701,643 | |
| Income (loss) before taxes | | | (1,367,697 | ) | | | 4,085,606 | | | 4,048,060 | | | | 4,126,931 | | | 10,892,900 | |
| Income tax (benefit) provision | | | (471,067 | ) | | | 1,616,175 | | | 1,660,609 | | | | 1,724,107 | | | 4,529,824 | |
| Net income (loss) | | $ | (896,630 | ) | | $ | 2,469,431 | | $ | 2,387,451 | | | $ | 2,402,824 | | $ | 6,363,076 | |
| |
| Basic net income (loss) per share: | | $ | (0.02 | ) | | $ | 0.04 | | $ | 0.04 | | | $ | 0.04 | | $ | 0.11 | |
| Diluted net income (loss) per share | | $ | (0.02 | ) | | $ | 0.04 | | $ | 0.04 | | | $ | 0.04 | | $ | 0.10 | |
| |
| Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | |
| Basic | | | 59,401,799 | | | | 59,832,421 | | | 60,271,210 | | | | 60,792,538 | | | 60,078,841 | |
| Diluted | | | 59,401,799 | | | | 60,794,518 | | | 61,226,623 | | | | 61,660,168 | | | 61,093,788 | |
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| 2006 | | | | | | | | | | | | | | | | | | |
| | Three MonthsEnded | | Year Ended |
| | March 31, | | June 30, | | September30, | | December 31, | | December 31, |
| | 2006 | | 2006 | | 2006 | | 2006 | | 2006 |
| Revenues: | | | | | | | | | | | | | | | | | | |
| Portal revenues | | $ | 16,988,892 | | | $ | 17,793,833 | | $ | 17,214,120 | | | $ | 18,011,753 | | $ | 70,008,598 | |
| Software & services revenues | | | (1,241,425 | ) | | | 967,731 | | | 821,175 | | | | 819,767 | | | 1,367,248 | |
| Total revenues | | | 15,747,467 | | | | 18,761,564 | | | 18,035,295 | | | | 18,831,520 | | | 71,375,846 | |
| Operating expenses: | | | | | | | | | | | | | | | | | | |
| Cost of portal revenues,exclusive | | | | | | | | | | | | | | | | | | |
| of depreciation | | | | | | | | | | | | | | | | | | |
| & amortization | | | 8,276,575 | | | | 8,930,990 | | | 9,477,909 | | | | 10,563,884 | | | 37,249,358 | |
| Cost of software & services | | | | | | | | | | | | | | | | | | |
| revenues, exclusive | | | | | | | | | | | | | | | | | | |
| of depreciation | | | | | | | | | | | | | | | | | | |
| & amortization | | | (1,329,170 | ) | | | 766,123 | | | 565,448 | | | | 593,878 | | | 596,279 | |
| Selling & administrative | | | 3,428,499 | | | | 3,559,951 | | | 3,915,668 | | | | 4,437,659 | | | 15,341,777 | |
| Depreciation & amortization | | | 504,590 | | | | 525,452 | | | 501,381 | | | | 508,975 | | | 2,040,398 | |
| Total operating expenses | | | 10,880,494 | | | | 13,782,516 | | | 14,460,406 | | | | 16,104,396 | | | 55,227,812 | |
| Operating income | | | 4,866,973 | | | | 4,979,048 | | | 3,574,889 | | | | 2,727,124 | | | 16,148,034 | |
| Other income (expense): | | | | | | | | | | | | | | | | | | |
| Interest income | | | 379,740 | | | | 498,347 | | | 665,655 | | | | 857,762 | | | 2,401,504 | |
| Equity in net loss of affiliates | | | (96,954 | ) | | | — | | | — | | | | — | | | (96,954 | ) |
| Other income (expense), net | | | 300 | | | | — | | | (49,185 | ) | | | 13,698 | | | (35,187 | ) |
| Total other income | | | | | | | | | | | | | | | | | | |
| (expense) | | | 283,086 | | | | 498,347 | | | 616,470 | | | | 871,460 | | | 2,269,363 | |
| Income before taxes | | | 5,150,059 | | | | 5,477,395 | | | 4,191,359 | | | | 3,598,584 | | | 18,417,397 | |
| Income tax provision | | | 2,231,509 | | | | 2,232,378 | | | 1,732,560 | | | | 1,481,949 | | | 7,678,396 | |
| Net income | | $ | 2,918,550 | | | $ | 3,245,017 | | $ | 2,458,799 | | | $ | 2,116,635 | | $ | 10,739,001 | |
| |
| Basic net income per share: | | $ | 0.05 | | | $ | 0.05 | | $ | 0.04 | | | $ | 0.03 | | $ | 0.17 | |
| Diluted net income per share | | $ | 0.05 | | | $ | 0.05 | | $ | 0.04 | | | $ | 0.03 | | $ | 0.17 | |
| |
| Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | |
| Basic | | | 61,139,586 | | | | 61,380,512 | | | 61,535,607 | | | | 61,572,351 | | | 61,408,552 | |
| Diluted | | | 61,606,781 | | | | 61,838,566 | | | 61,798,252 | | | | 61,802,623 | | | 61,763,093 | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of NIC Inc.:
We have completed integrated audits of NIC Inc.’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
CONSOLIDATED FINANCIAL STATEMENTS
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a) present fairly, in all material respects, the financial position of NIC Inc. and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements 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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in 2006.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established inInternal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control - Integrated Framework issued by the COSO. 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. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting 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. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A 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 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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
March 13, 2007
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| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures- The Company maintains a set of disclosure controls and procedures designed to ensure that material information required to be disclosed in its filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K.
Management’s Report on Internal Control Over Financial Reporting – Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework inInternal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2006. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting - As of the end of the period covered by this report, our management, including our principal executive officer and principal financial officer, concluded that there have been no changes in our internal control over financial reporting that occurred during our fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors of the Company and the executive officers of the Company will be set forth in the Company’s proxy statement related to its 2007 annual meeting of shareholders (the “Proxy Statement”) and is incorporated herein by reference since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company’s fiscal year pursuant to regulation 14A. Information required by Item 405 of Regulation S-K will be set forth in the Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to Proxy Statement, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company’s fiscal year pursuant to Regulation 14A.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS |
The information required by this item is incorporated herein by reference to the Proxy Statement, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company’s fiscal year pursuant to Regulation 14A.
The following table shows the Company’s common stock authorized for issuance under the Company’s equity compensation plans as of December 31, 2006:
| | A | | B | | C |
| | Number of securities to | | Weighted average | | |
| | be issued upon exercise of | | exercise price of | | Number of |
| | outstanding options, warrants | | outstanding options, | | securities available |
| | and rights outstanding as of | | warrants and rights | | for issuance as of |
| Plan Category | | December 31, 2006 | | shown in Column A | | December 31, 2006 |
| Equity compensation plans approved by | | | | | | | | |
| shareholders | | | | | | | | |
| • Stock options | | 1,555,633 | | | $4.19 | | | |
| • Restricted stock | | 595,485 | | | — | | | |
| Total | | 2,151,118 | | | | | | 1,203,878 |
| Employee stock purchase plan | | See Note | (1) | | See Note | (1) | | 2,089,754 |
| Equity compensation plans not approved by | | | | | | | | |
| shareholders (2) | | 14,683 | | | $2.03 | | | 2,399 |
____________________
| (1) | March 31, 2006 was the purchase date of common stock for the most recently completed offering period under the Company’s employee stock purchase plan. Therefore, as of such date, no purchase rights were outstanding. The purchase price for the offering period ended March 31, 2006 was $3.9015 per share, and the total number of shares purchased was 40,343. |
| |
| (2) | In connection with the Company’s acquisition of SDR Technologies, Inc. in May 2000, the Company adopted the 1999 Stock Option Plan of SDR Technologies, Inc (the “SDR Plan”). Options to purchase 229,965 shares were granted in connection with the acquisition of SDR. However, no options in addition to those granted at the close of the SDR transaction will be granted under this plan. The SDR Plan is administered by the Compensation Committee of the Company’ Board of Directors. |
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To the extent applicable, the information required by this item is incorporated herein by reference to the Proxy Statement, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company’s fiscal year pursuant to Regulation 14A.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to the Proxy Statement, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company’s fiscal year pursuant to Regulation 14A.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
| Index To Consolidated Financial Statements: | Page |
| Consolidated Balance Sheets | 43 |
| Consolidated Statements of Income | 44 |
| Consolidated Statements of Changes in Shareholders’ Equity | 45 |
| Consolidated Statements of Cash Flows | 46 |
| Notes to Consolidated Financial Statements | 47 |
| Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm | 69 |
All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
| Exhibit | | |
| Number | | Description |
| 3.1 | | Articles of Incorporation of the registrant(1) |
| 3.2 | | Bylaws of the registrant(1) |
| 3.3 | | Articles of Amendment to Articles of Incorporation of the registrant(7) |
| 4.1 | | Reference is made to Exhibits 3.1 and 3.2(1) |
| 4.2 | | Investor Rights Agreement dated June 30, 1998(1) |
| 4.3 | | Investors’ Rights Agreement, dated January 12, 2000(2) |
| 4.4 | | Specimen Stock Certificate of the registrant(1) |
| 9.1 | | Voting Trust Agreement between Jeffery S. Fraser and Ross C. Hartley and certain Holders of Shares of National Information Consortium, Inc. dated June 30, 1998 and form of the voting trust certificate(1) |
| 10.1 | | Form of Indemnification Agreement between the registrant and each of its executive officers and directors(1) |
| 10.2 | | Registrant’s 1998 Stock Option Plan, as amended and restated(1) |
| 10.3 | | Registrant’s 1999 Employee Stock Purchase Plan(1) |
| 10.4 | | Employment Agreement between the registrant and Jeffery S. Fraser dated July 1, 1998(1) |
| 10.5 | | Employment Agreement between the registrant and William F. Bradley, Jr. dated July 24, 1998(1) |
| 10.6 | | Employment Agreement between the registrant and Samuel R. Somerhalder dated July 24, 1998(1) |
| 10.7 | | Employment Agreement between the registrant and Harry H. Herington dated July 24, 1998(1) |
| 10.8 | | Employment Agreement between the registrant and Joseph Nemelka, dated July 24, 1998(2) |
| 10.9 | | Employment Agreement between the registrant and James B. Dodd dated January 1, 1999(1) |
| 10.10 | | Employment Agreement between the registrant and Ray G. Coutermarsh dated February 1, 2000(2) |
| 10.11 | | Employment Agreement between the registrant and Terrence Parker dated November 9, 1999(2) |
| 10.12 | | Contract for Network Manager Services between the Information Network of Kansas and Kansas Information Consortium, Inc. dated December 18, 1991 with addenda dated October 15, 1992, August 19, 1993, May 26, 1995 and June 13, 1996 and amendment on March 2, 1998(1) |
| 10.13 | | Contract for Network Manager Services between the State of Indiana by and through the Intelenet Commission and Indian@ Interactive, Inc., dated July 18, 1995(1) |
| 10.14 | | Services Contract by and between National Information Consortium, U.S.A. and the GeorgiaNet Authority, an agency of the State of Georgia, dated September 15, 1996(1) |
| 10.15 | | Contract for Network Manager between Information Network of Arkansas by and through the Information Network of Arkansas Board and Arkansas Information Consortium, Inc. dated July 2, 1997(1) |
| 10.16 | | Contract for Network Manager Services between the Nebraska State Records Board on behalf of the State of Nebraska and Nebrask@ Interactive, Inc. dated December 3, 1997 with addendum No. 1 dated as of the same date(1) |
74
| Exhibit | | |
| Number | | Description |
| 10.17 | | Contract for Network Manager Services between the Commonwealth of Virginia by and through the Virginia Information Providers Network Authority and Virginia Interactive, LLC dated January 15, 1998(1) |
| 10.18 | | Contract for Network Manager Services between Iowa Interactive, Inc. and the State of Iowa by and through Information Technology Services dated April 23, 1998 with letter addendum dated August 7, 1998(1) |
| 10.19 | | Contract for Network Manager Services between the Consolidated City of Indianapolis and Marion County by and through the Enhanced Access Board of Marion County and City-County Interactive, LLC dated August 31, 1998 with addendum dated as of the same date(1) |
| 10.20 | | State of Maine Contract for Special Services with New England Interactive, Inc. dated April 14, 1999(1) |
| 10.21 | | State of Idaho Contract for Electronic Business and portal Services with the Idaho Department of Administration and other Public Agencies, dated December 7, 1999(2) |
| 10.22 | | State of Hawaii Contract for Special Services with the State of Hawaii, dated December 29, 1999(2) |
| 10.23 | | Employment Agreement between the registrant and Kevin C. Childress dated May 16, 1999(1) |
| 10.24 | | Sublease for the registrant’s offices at 12 Corporate Woods, Overland Park dated May 14, 1999, and First Sublease Modification Agreement dated December 15, 1999, and Lease for the same address dated January 15, 1995 with First Lease Modification dated October 30, 1996(1) |
| 10.25 | | Agreement between Equifax Services and Nebrask@ Online dated March 25, 1996(1) |
| 10.26 | | Agreement between ChoicePoint and the Information Network of Kansas dated September 1, 1997(1) |
| 10.27 | | Agreement between Equifax/ChoicePoint and the Information Network of Arkansas dated September 2, 1997(1) |
| 10.28 | | Agreement between Equifax Systems, Inc. and Access Indian@ Information Network dated November 14, 1995(1) |
| 10.29 | | Contract for Network Manager Services between the State of Utah and Utah Interactive, Inc. dated as of May 7, 1999(1) |
| 10.30 | | Asset Purchase Agreement between the registrant and Electric Press, Inc, for the acquisition of eFed, a division of Electric Press, Inc., dated as of September 15, 1999(2) |
| 10.31 | | Contribution Agreement between the registrant and Conquest Softworks, LLC, dated as of January 12, 2000 Agreement(2) |
| 10.32 | | Agreement and Plan of Reorganization and Merger between the registrant and SDR Technologies, Inc., dated as of February 16, 2000(2) |
| 10.33 | | Amended and Restated Agreement and Plan of Reorganization and Merger, dated as of May 5, 2000, as amended, by and among the registrant, SDR Acquisition Corp., a California corporation and a wholly owned subsidiary of the registrant, and SDR Technologies, Inc.(3) |
| 10.34 | | Registrant’s 1999 Stock Option Plan of SDR Technologies, Inc.(4) |
| 10.35 | | Agreement and Plan of Merger, dated as of September 8, 2000, by and among the registrant, Cherry Hills Acquisition Sub, Inc., a Colorado corporation and wholly owned subsidiary of the registrant, and Intelligent Decision Technologies, Ltd.(5) |
| 10.36 | | Employment agreement between the Registrant and William F. Bradley, dated September 1, 2000(5) |
| 10.37 | | Employment agreement between the Registrant and Samuel R. Somerhalder, dated September 1, 2000(5) |
| 10.38 | | Employment agreement between the Registrant and Harry H. Herington, dated September 1, 2000(5) |
| 10.39 | | Employment agreement between the Registrant and Joseph Nemelka, dated September 1, 2000(5) |
| 10.40 | | Employment agreement between the Registrant and James B. Dodd, dated September 1, 2000(5) |
| 10.41 | | Employment agreement between the Registrant and Ray G. Coutermarsh, dated September 1, 2000(5) |
| 10.42 | | Employment agreement between the Registrant and Pradeep K. Agarwal, dated September 1, 2000(5) |
| 10.43 | | Employment agreement between the Registrant and Kevin C. Childress, dated September 1, 2000(5) |
| 10.44 | | Employment agreement between the Registrant and Stephen M. Kovzan, dated September 1, 2000(5) |
| 10.45 | | Contract Between the State of Tennessee, Department of Finance and Administration and National Information Consortium USA, Inc., dated August 28, 2000(5) |
75
| Exhibit | | |
| Number | | Description |
| 10.46 | | Self Funded Electronic Government Services Term Contract between the Department of Administration of the State of Montana and National Information Consortium USA, Inc., doing business in Montana through the subsidiary Montana Interactive, Inc., dated December 21, 2000(5) |
| 10.47 | | Business Programs Automation Agreement, dated September 6, 2001, between National Information USA, Inc. and the State of California(6) |
| 10.48 | | Employment agreement between the Registrant and Eric J. Bur dated April 1, 2001 (8) |
| 10.49 | | Employment agreement between the Registrant and Richard L. Brown, dated March 1, 1999(9) |
| 10.50 | | Amendment to Contract No. 00SA420104, SSD SOS 0010, California Business Programs Automation Project, dated March 13, 2006, between NICUSA, Inc. and the State of California, Secretary of State |
| 10.51 | | Registrant’s 2006 Amended and Restated Stock Option and Incentive Plan (10) |
| 21.1 | | Subsidiaries of the registrant |
| 23.1 | | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accountants |
| 31.1 | | Certification of Chairman of the Board and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 | | Section 906 Certifications of Chairman of the Board and Chief Executive Officer and Chief Financial Officer furnished in accordance with Securities Act Release 33-8212 |
____________________
| (1) | Incorporated by reference to Registration Statement on Form S-1, File No. 333-77939 |
| |
| (2) | Incorporated by reference to Registration Statement on Form S-1, File No. 333-30872 |
| |
| (3) | Incorporated by reference to Form 8-K filed with the SEC on May 26, 2000 |
| |
| (4) | Incorporated by reference to Registration Statement on Form S-8, File No. 333-37000 |
| |
| (5) | Incorporated by reference to Form 10-K filed with the SEC on April 2, 2001 |
| |
| (6) | Incorporated by reference to Form 10-Q filed with the SEC on November 14, 2001 |
| |
| (7) | Incorporated by reference to Form 10-Q filed with the SEC on May 14, 2002 |
| |
| (8) | Incorporated by reference to Form 10-K filed with the SEC on March 25, 2002 |
| |
| (9) | Incorporated by reference to Form 10-K filed with the SEC on March 12, 2004 |
| |
| (10) | Incorporate by reference to Registration Statement on Form S-8, File No. 333-136016 |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 15, 2007.
| By: | NIC INC.
/s/JEFFERY S. FRASER |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | | Title | | Date |
| | | | | |
| /s/JEFFERY S. FRASER | | Chairman of the Board and Chief Executive Officer | | March 15, 2007 |
| | | (Principal Executive Officer) | | |
| | | | | |
| /s/ERIC J. BUR | | Chief Financial Officer | | March 15, 2007 |
| | | (Principal Financial Officer) | | |
| | | | | |
| /s/STEPHEN M. KOVZAN | | Vice President, Financial Operations | | March 15, 2007 |
| | | Chief Accounting Officer | | |
| | | (Principal Accounting Officer) | | |
| | | | | |
| /s/HARRY H. HERINGTON | | President and Director | | March 15, 2007 |
| | | | | |
| /s/JOHN L. BUNCE, JR. | | Director | | March 15, 2007 |
| | | | | |
| /s/ART N. BURTSCHER | | Director | | March 15, 2007 |
| | | | | |
| /s/DANIEL J. EVANS | | Director | | March 15, 2007 |
| | | | | |
| /s/ROSS C. HARTLEY | | Director | | March 15, 2007 |
| | | | | |
| /s/PETE WILSON | | Director | | March 15, 2007 |
77
