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EX-31.2 - EX-31.2 - NIC INCa09-30835_1ex31d2.htm
EX-32.1 - EX-32.1 - NIC INCa09-30835_1ex32d1.htm
EX-31.1 - EX-31.1 - NIC INCa09-30835_1ex31d1.htm

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2009

 

Commission file number 000-26621

 

NIC INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

52-2077581

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

25501 West Valley Parkway, Suite 300, Olathe, Kansas 66061

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (877) 234-3468

 


 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

The number of shares outstanding of the registrant’s common stock as of October 31, 2009 was 63,205,112.

 

 

 



 

PART I - FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

 

NIC INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

thousands

 

 

 

September 30, 2009

 

December 31, 2008

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

66,633

 

$

60,373

 

Trade accounts receivable

 

39,783

 

37,497

 

Unbilled revenues

 

392

 

359

 

Deferred income taxes, net

 

1,199

 

4,293

 

Prepaid expenses & other current assets

 

2,138

 

2,273

 

Total current assets

 

110,145

 

104,795

 

Property and equipment, net

 

6,504

 

6,641

 

Intangible assets, net (Note 4)

 

3,743

 

1,105

 

Deferred income taxes, net

 

4,143

 

6,727

 

Other assets

 

199

 

144

 

Total assets

 

$

124,734

 

$

119,412

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

46,592

 

$

41,792

 

Accrued expenses

 

13,320

 

8,407

 

Application development contracts

 

90

 

202

 

Other current liabilities

 

1,174

 

898

 

Total current liabilities

 

61,176

 

51,299

 

 

 

 

 

 

 

Other long-term liabilities

 

444

 

894

 

Total liabilities

 

61,620

 

52,193

 

 

 

 

 

 

 

Commitments and contingencies (Notes 2, 5, 6 and 8)

 

 

 

 

 

 

 

 

 

Shareholders’ equity (Note 7):

 

 

 

 

 

Common stock, $0.0001 par, 200,000 shares authorized, 63,142 and 62,779 shares issued and outstanding

 

6

 

6

 

Additional paid-in capital

 

138,460

 

154,194

 

Accumulated deficit

 

(75,352

)

(86,981

)

Total shareholders’ equity

 

63,114

 

67,219

 

Total liabilities and shareholders’ equity

 

$

124,734

 

$

119,412

 

 

The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.

 

2



 

NIC INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

thousands except for per share amounts

 

 

 

Three-months ended

 

Nine-months ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Revenues:

 

 

 

 

 

 

 

 

 

Portal revenues

 

$

36,236

 

$

24,147

 

$

93,408

 

$

72,564

 

Software & services revenues

 

1,018

 

794

 

3,058

 

2,758

 

Total revenues

 

37,254

 

24,941

 

96,466

 

75,322

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of portal revenues, exclusive of depreciation & amortization

 

21,133

 

13,502

 

53,743

 

39,214

 

Cost of software & services revenues, exclusive of depreciation & amortization

 

609

 

541

 

1,847

 

1,681

 

Selling & administrative

 

6,163

 

5,520

 

19,589

 

17,305

 

Nonrecurring gain on acquisition of business, net of tax (Note 3)

 

 

 

(2,184

)

 

Depreciation & amortization

 

2,779

 

903

 

5,347

 

2,648

 

Total operating expenses

 

30,684

 

20,466

 

78,342

 

60,848

 

Operating income

 

6,570

 

4,475

 

18,124

 

14,474

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

3

 

140

 

48

 

583

 

Other expense, net

 

 

(5

)

 

(24

)

Total other income (expense)

 

3

 

135

 

48

 

559

 

Income before income taxes

 

6,573

 

4,610

 

18,172

 

15,033

 

Income tax provision

 

2,453

 

1,550

 

6,543

 

5,805

 

Net income

 

$

4,120

 

$

3,060

 

$

11,629

 

$

9,228

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share (Note 1)

 

$

0.06

 

$

0.05

 

$

0.18

 

$

0.14

 

Diluted net income per share (Note 1)

 

$

0.06

 

$

0.05

 

$

0.18

 

$

0.14

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding (Note 1):

 

 

 

 

 

 

 

 

 

Basic

 

63,062

 

62,724

 

62,933

 

62,449

 

Diluted

 

63,179

 

62,834

 

63,019

 

62,689

 

 

The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.

 

3



 

NIC INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

thousands

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Common Stock

 

Paid-in

 

Accumulated

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Total

 

Balance, January 1, 2009, as originally reported

 

62,779

 

$

 

$

154,200

 

$

(86,981

)

$

67,219

 

Change in par value of common stock (Note 7)

 

 

6

 

(6

)

 

 

Balance, January 1, 2009, as adjusted

 

62,779

 

6

 

154,194

 

(86,981

)

67,219

 

Net income

 

 

 

 

11,629

 

11,629

 

Cash dividends on common stock (Note 7)

 

 

 

(19,150

)

 

(19,150

)

Shares surrendered upon exercise of stock options and vesting of restricted stock to satisfy tax withholdings

 

(95

)

 

(648

)

 

(648

)

Stock option exercises and restricted stock vestings

 

353

 

 

90

 

 

90

 

Stock-based compensation

 

 

 

2,121

 

 

2,121

 

Tax deductions relating to stock-based compensation (Note 9)

 

 

 

1,388

 

 

1,388

 

Issuance of common stock under employee stock purchase plan

 

105

 

 

465

 

 

465

 

Balance, September 30, 2009

 

63,142

 

$

6

 

$

138,460

 

$

(75,352

)

$

63,114

 

 

The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.

 

4



 

NIC INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

thousands

 

 

 

Nine-months ended

 

 

 

September 30,

 

 

 

2009

 

2008

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

 11,629

 

$

 9,228

 

Adjustments to reconcile net income to net cash provided by operating activities, excluding the effects of acquisition:

 

 

 

 

 

Depreciation & amortization

 

5,347

 

2,648

 

Stock-based compensation expense

 

2,121

 

1,829

 

Application development contracts

 

(112

)

(107

)

Deferred income taxes

 

4,504

 

5,332

 

Nonrecurring gain on acquisition of business, net of tax (Note 3)

 

(2,184

)

 

Loss on disposal of property and equipment

 

 

24

 

Changes in operating assets and liabilities, net of acquisition:

 

 

 

 

 

(Increase) in trade accounts receivable

 

(2,286

)

(5,132

)

(Increase) decrease in unbilled revenues

 

(33

)

372

 

Decrease (increase) in prepaid expenses & other current assets

 

246

 

(146

)

(Increase) in other assets

 

(55

)

(10

)

Increase in accounts payable

 

4,800

 

7,638

 

Increase in accrued expenses

 

4,146

 

929

 

Increase in other current liabilities

 

152

 

918

 

(Decrease) increase in other long-term liabilities

 

(450

)

322

 

Net cash provided by operating activities

 

27,825

 

23,845

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(2,458

)

(3,118

)

Capitalized internal use software development costs

 

(400

)

(561

)

Purchases of investments

 

 

(1,000

)

Sales and maturities of investments

 

 

11,675

 

Acquisition of business (Note 3)

 

(1,500

)

 

Net cash (used in) provided by investing activities

 

(4,358

)

6,996

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Cash dividends on common stock

 

(19,150

)

(15,709

)

Proceeds from employee common stock purchases

 

465

 

280

 

Proceeds from exercise of employee stock options

 

90

 

1,862

 

Tax deductions related to stock-based compensation (Note 9)

 

1,388

 

 

Net cash used in financing activities

 

(17,207

)

(13,567

)

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

6,260

 

17,274

 

Cash and cash equivalents, beginning of period

 

60,373

 

38,236

 

Cash and cash equivalents, end of period

 

$

 66,633

 

$

 55,510

 

 

 

 

 

 

 

Other cash flow information:

 

 

 

 

 

Income taxes paid

 

$

 800

 

$

 577

 

 

The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.

 

5



 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The consolidated interim financial statements of NIC Inc. and its subsidiaries (“NIC” or the “Company”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.  In management’s opinion, the unaudited consolidated interim financial statements reflect all adjustments (which include only normal recurring adjustments, except as disclosed) necessary to present fairly the consolidated financial position, results of operations and cash flows of the Company and its subsidiaries as of the dates and for the interim periods presented.  These unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 13, 2009, and Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q.  The consolidated balance sheet data included herein as of December 31, 2008 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for the three- and nine-month periods ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year ending December 31, 2009.

 

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The Company

 

NIC Inc. is a provider of eGovernment services that helps governments use the Internet to increase internal efficiencies 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 2), 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 ethics & elections business and its Uniform Commercial Code (“UCC”) and corporate filings software development business.  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.  During the third quarter of 2009, NIC Technologies entered into a new contract with the U.S. Department of Transportation, Federal Motor Carrier Safety Administration (“FMCSA”) to develop and manage a National Motor Carrier Pre-Employment Screening System.

 

6



 

The contract has an initial one-year term, with four single-year renewals at the option of the FMCSA.  The Company’s UCC and corporate filings software development business, NIC Conquest, is primarily a provider of software applications and services for electronic filings and document management solutions for the California Secretary of State and is not actively marketing its applications and services in respect of new engagements.  NIC offers UCC applications through several of its state portals, typically through the Secretary of State’s office; however, transactional revenues associated with these applications are not associated with NIC Conquest and are included in portal revenues.

 

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 (including stock-based compensation), telecommunications, merchant fees required to process credit card and automated clearinghouse transactions, 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 (including stock-based 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, security, 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 stock-based compensation and corporate-level expenses for market development and public relations.  In 2009, selling & administrative costs also include acquisition-related costs for the current portal management contract in the state of Texas.  See Note 3 for additional information regarding this acquisition.

 

Capitalized internal use software development costs are included in intangible assets in the Company’s consolidated balance sheets at September 30, 2009 and December 31, 2008.  Such amounts were previously included in other long-term assets.

 

Certain amounts in the 2008 financial statements have been reclassified to conform to the 2009 presentation.

 

Fair Value Measurements

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance for 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.  This authoritative guidance 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.  In February 2008, the FASB issued authoritative guidance which allowed for the delay of the effective date of the authoritative guidance for fair value measurements for one year for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis.  The Company adopted the provisions of the guidance for financial assets and liabilities effective January 1, 2008, and for nonfinancial assets and liabilities effective January 1, 2009.  The adoption of these provisions did not have an impact on the unaudited consolidated financial statements of the Company.

 

7



 

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date.  The guidance establishes a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure the fair value of financial instruments.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.  The three levels are defined as follows:

 

Level 1

Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.

 

 

Level 2

Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

 

Level 3

Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  At September 30, 2009 and December 31, 2008, the Company did not have any financial instruments that were required to be measured at fair value.

 

Intangible Assets

 

The Company carries intangible assets at cost less accumulated amortization.  Intangible assets are generally amortized on a straight-line basis over the estimated economic lives of the respective assets.  At each balance sheet date or whenever 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.  See Note 4.

 

Earnings per Share

 

In June 2008, the FASB issued authoritative guidance to determine whether instruments granted in share-based payment transactions are participating securities.  Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating securities and are included in the computation of earnings per share pursuant to the two-class method for all periods presented.  The two-class method is an earnings allocation formula that treats a participating security as having rights to undistributed earnings that would otherwise have been available to common shareholders.  The Company’s service-based restricted stock awards contain non-forfeitable rights to dividends and are considered participating securities.  The Company adopted this standard effective January 1, 2009.  Accordingly, service-based restricted stock awards were included in the calculation of earnings per share using the two-class method for the three-and nine-month periods ended September 30, 2009 and 2008.  Unvested service-based restricted shares totaled approximately 1.1 million and 1.0 million at September 30, 2009 and 2008, respectively.  Basic earnings per share is calculated by first allocating earnings between common shareholders and participating securities.  Earnings attributable to common shareholders are divided by the weighted average number of common shares outstanding during the period.  Diluted earnings per share is calculated by giving effect to dilutive potential common shares outstanding during the period.  The dilutive effect of stock options and the employee stock purchase plan is determined based on the treasury stock method.  The dilutive effect of service-based restricted stock awards is based on the more dilutive of the treasury stock method or the two-class method assuming a reallocation of undistributed earnings to common shareholders after considering the dilutive effect of potential common shares other than the participating unvested restricted awards.

 

8



 

The following table sets forth the changes to the computation of basic and diluted earnings per share (in thousands, except per share amounts):

 

 

 

Three months ended September 30,

 

 

 

2009

 

2008

 

 

 

 

 

As
Originally
Reported

 

Effect of
Change

 

As
Adjusted

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

4,120

 

$

3,060

 

$

 

$

3,060

 

Less: Income allocated to participating securities

 

(67

)

 

(45

)

(45

)

Net income available to common shareholders

 

$

4,053

 

$

3,060

 

$

(45

)

$

3,015

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average shares — basic

 

63,062

 

62,724

 

 

62,724

 

Stock options and restricted shares

 

117

 

247

 

(137

)

110

 

Weighted average shares — diluted

 

63,179

 

62,971

 

(137

)

62,834

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Net income

 

$

0.06

 

$

0.05

 

$

(0.00

)

$

0.05

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per share:

 

 

 

 

 

 

 

 

 

Net income

 

$

0.06

 

$

0.05

 

$

(0.00

)

$

0.05

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

 

2009

 

2008

 

 

 

 

 

As
Originally
Reported

 

Effect of
Change

 

As
Adjusted

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

11,629

 

$

9,228

 

$

 

$

9,228

 

Less: Income allocated to participating securities

 

(290

)

 

(200

)

(200

)

Net income available to common shareholders

 

$

11,339

 

$

9,228

 

$

(200

)

$

9,028

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average shares — basic

 

62,933

 

62,449

 

 

62,449

 

Stock options and restricted shares

 

86

 

415

 

(175

)

240

 

Weighted average shares — diluted

 

63,019

 

62,864

 

(175

)

62,689

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Net income

 

$

0.18

 

$

0.15

 

$

(0.01

)

$

0.14

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per share:

 

 

 

 

 

 

 

 

 

Net income

 

$

0.18

 

$

0.15

 

$

(0.01

)

$

0.14

 

 

Outstanding stock options totaling approximately 20,000 shares for each of the three- and nine-month periods ended September 30, 2008 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, and would result in the options being anti-dilutive.  There were no outstanding stock options excluded from the computation of diluted weighted average shares outstanding during 2009.

 

9



 

Concentration of credit risk

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.  During November 2008, the Federal Deposit Insurance Corporation (“FDIC”) adopted the Temporary Liquidity Guarantee Program to strengthen investor confidence and encourage liquidity in the banking system by providing full coverage on non-interest bearing deposit transaction accounts, regardless of dollar amount, for participating banks through December 31, 2009.  At September 30, 2009, the amount of cash in domestic non-interest bearing commercial checking accounts was approximately $59.3 million, while the amount of cash held in interest-bearing sweep accounts and money market funds was approximately $7.3 million.  The Company attempts to limit its exposure to credit loss by investing the cash held in its sweep accounts and money market funds primarily in U.S. government money market accounts that purchase U.S. agency instruments or direct obligations of the U.S. Treasury or repurchase agreements secured by U.S. agency instruments.  The Company performs ongoing credit evaluations of its customers and generally requires no collateral to secure accounts receivable.

 

Recent Accounting Pronouncements

 

In December 2007, the FASB revised the authoritative guidance for business combinations, and established new principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information should be disclosed to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  The guidance changes the accounting treatment for certain specific acquisition-related items including: expensing acquisition-related costs as incurred, valuing non-controlling interests at fair value at the acquisition date, and expensing restructuring costs associated with an acquired business.  The guidance was effective for the Company as of January 1, 2009 and will be applied prospectively to business combinations that have an acquisition date on or after January 1, 2009.  See Note 3.

 

In May 2009, the FASB issued authoritative guidance which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  Although there is new terminology, the standard is based on the same principles as those that currently exist in the auditing standards.  The guidance, which includes a new required disclosure of the date through which an entity has evaluated subsequent events, was adopted by the Company during the interim period ended June 30, 2009.  The Company has performed an evaluation of subsequent events through November 5, 2009.

 

2. 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 oversight authority must approve prices and revenue sharing agreements.  The Company has limited control over the level of fees it is permitted to retain.  Any changes made to the amount or percentage of fees retained by NIC, or to the amounts charged for the services offered, could adversely affect the profitability of the respective contract to NIC.

 

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.

 

10



 

A government may terminate its contract prior to the expiration date upon specific cause events that are not cured within a specified period and, in certain circumstances, upon passing legislation.  Eight contracts under which the Company provides portal outsourcing services can be terminated without cause on a specified period of notice;  collectively, revenues generated from these contracts represented 31% and 36% of the Company’s portal revenues for the three and nine-month periods ended September 30, 2009, respectively.  In the event that any of these contracts would be terminated without cause, the terms of the respective contract may require the government to pay a fee to the Company in order to continue to use the Company’s software in its portal.  In addition, the loss of one or more of the Company’s larger state portal partners, such as Alabama, Arkansas, Colorado, Indiana, Kentucky, Tennessee, Texas, Utah or Virginia, as a result of the expiration, termination or failure to renew the respective contract, if such partner is not replaced, could significantly reduce the Company’s revenues and profitability.

 

At September 30, 2009, the Company was bound by performance bond commitments totaling approximately $4.5 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 twenty-three outsourced state government portal contracts at September 30, 2009 together with the year the Company commenced providing services to the state:

 

NIC Subsidiary

 

Portal Web Site (State)

 

Year Services
Commenced

 

Contract Expiration Date
(Renewal Options Through)

New Mexico Interactive, LLC

 

TBD

 

2009

 

6/1/2010 (6/1/2013)

Texas NICUSA, LLC

 

www.TexasOnline.com (Texas)

 

2009

 

8/31/2016

West Virginia Interactive

 

www.WV.gov (West Virginia)

 

2007

 

6/30/2010

NICUSA, AZ Division

 

www.AZ.gov (Arizona)

 

2007

 

6/26/2010 (6/26/2013)

Vermont Information Consortium

 

www.Vermont.gov (Vermont)

 

2006

 

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

 

7/15/2014

Kentucky Interactive

 

www.Kentucky.gov (Kentucky)

 

2003

 

8/19/2012 (8/19/2015)

Alabama Interactive

 

www.Alabama.gov (Alabama)

 

2002

 

2/28/2010 (2/28/2012)

Rhode Island Interactive

 

www.RI.gov (Rhode Island)

 

2001

 

8/7/2010 (8/7/2012)

Oklahoma Interactive

 

www.OK.gov (Oklahoma)

 

2001

 

11/30/2009

Montana Interactive

 

www.MT.gov (Montana)

 

2001

 

12/31/2010

NICUSA, TN Division

 

www.TN.gov (Tennessee)

 

2000

 

8/27/2010

Hawaii Information Consortium

 

www.Hawaii.gov (Hawaii)

 

2000

 

1/3/2013 (unlimited 3-year renewal options)

Idaho Information Consortium

 

www.Idaho.gov (Idaho)

 

2000

 

6/30/2011 (6/30/2015)

Utah Interactive

 

www.Utah.gov (Utah)

 

1999

 

6/5/2013 (6/5/2019)

Maine Information Network

 

www.Maine.gov (Maine)

 

1999

 

3/14/2012 (3/14/2018)

Arkansas Information Consortium

 

www.Arkansas.gov (Arkansas)

 

1997

 

6/30/2010

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

 

1/31/2010

Kansas Information Consortium

 

www.Kansas.gov (Kansas)

 

1992

 

12/31/2012 (12/31/2016)

 

During the third quarter of 2009, the Company entered into a new seven-year contract with the state of Texas to manage the state’s official government portal.  The new contract commences on January 1, 2010 and runs through August 31, 2016.  As discussed in Note 3, the Company acquired the current portal management contracts for the state of Texas during the second quarter of 2009, which contracts expire on December 31, 2009, except that certain master work order projects expire on August 31, 2012 and other master work order projects expire on August 31, 2014.  The new seven-year contract commencing January 1, 2010 will have terms substantially different than the current Texas portal management contracts acquired in the second quarter of 2009.  The Company also received a new three-year contract from the state of Kentucky, which includes options for the government to extend the contract for three additional one-year renewal terms.

 

11



 

3. ACQUISITION OF BUSINESS

 

On May 29, 2009, the Company, through its indirect wholly-owned subsidiary Texas NICUSA, LLC (“TXNICUSA”), completed the acquisition of certain assets from BearingPoint, Inc. (“BearingPoint”), including the current portal management contract for TexasOnline, the official Web site of the state of Texas, through December 31, 2009.  The acquired assets were part of BearingPoint’s North American Public Services Unit which BearingPoint previously agreed to sell to Deloitte LLP (“Deloitte”) pursuant to an Asset Purchase Agreement dated March 23, 2009 (“Asset Purchase Agreement”).  BearingPoint had previously filed for relief under Chapter 11 of the U.S. Bankruptcy Code in February 2009.  Pursuant to the terms of the Asset Purchase Agreement, Deloitte designated the Company as the acquirer of certain designated contracts and assets, and the Company acquired the rights to the designated contracts and the assets directly from BearingPoint.

 

The assets acquired by the Company included all of BearingPoint’s right, title and interest in and to the following:

 

(1)

the Texas Electronic Framework Agreement dated May 5, 2000, as amended and renewed, between the Department of Information Resources, an agency of the state of Texas (“DIR”), and the predecessor to BearingPoint (“Framework Agreement”), and related service level agreements with various governmental agencies and entities in the State of Texas (“Service Level Agreements”) (all of which expire on December 31, 2009);

(2)

the Master Work Order Agreement dated May 17, 2008 (“Master Work Order”), including the underlying Master Work Order Projects attached thereto as exhibits (“Master Work Order Projects”), between the DIR and BearingPoint (with certain Master Work Order Projects expiring August 31, 2012 and others expiring August 31, 2014); and

(3)

certain contracts with subcontractors and service providers relating to the provision of products and services pursuant to Framework Agreement, the Service Level Agreements and the Master Work Order. In addition, the Company is licensing from Deloitte certain intellectual property relating to the acquired contracts.

 

The Company paid Deloitte $1.5 million in cash in exchange for the designation of the Company as the acquirer of the designated contracts and assets from BearingPoint.  The Company funded the purchase price from its existing cash resources.  In addition, the Company has designated Deloitte as the subcontractor on certain of the Master Work Order Projects under the Master Work Order.

 

The acquisition was accounted for under the purchase method of accounting.  Accordingly, net assets were recorded at their estimated fair values.  The preliminary fair value of the identifiable assets acquired and liabilities assumed exceeded the fair value of the consideration paid, resulting in a bargain purchase.  Consequently, the Company reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that the valuation procedures and resulting measures appropriately reflected all available information as of the acquisition date.  As a result, the Company recognized a preliminary, nonrecurring gain of approximately $2.2 million (net of tax) in the second quarter of 2009, which is included in gain on acquisition of business (net of tax) in the consolidated statement of income for the nine-month period ended September 30, 2009.  The acquisition resulted in a gain in part because of Deloitte’s desire to designate a buyer for certain assets to be acquired from BearingPoint prior to the closing of all of the transactions contemplated under the Asset Purchase Agreement with BearingPoint and because NIC was one of the few companies in the eGovernment portal management industry with the requisite experience to be considered as a potential buyer.

 

12



 

The Company is currently in the process of finalizing the valuation for certain acquired assets; therefore, the fair value measurements at May 29, 2009 and the gain on acquisition of business are preliminary and subject to further adjustment.  The allocation of the purchase price to the assets acquired will be finalized as necessary, up to one year after the acquisition closing date, as information becomes available.  Based on additional information the Company obtained during the three-month period ended September 30, 2009, the Company recorded an immaterial retroactive adjustment to the fair value measurement for prepaid expenses & other current assets.  The following table summarizes the preliminary purchase price allocation of net tangible and intangible assets acquired (in thousands):

 

 

 

May 29, 2009

 

 

 

 

 

Intangible assets subject to amortization:

 

 

 

Rights to the Framework Agreement

 

$

3,940

 

Rights to the Master Work Order

 

1,050

 

Total intangible assets

 

4,990

 

Prepaid expenses & other current assets

 

111

 

Accrued expenses

 

(119

)

Other current liabilities

 

(124

)

Deferred tax liability on nonrecurring gain on acquisition of business

 

(1,174

)

Net assets acquired

 

3,684

 

Purchase price

 

1,500

 

Nonrecurring gain on acquisition of business (net of tax)

 

$

2,184

 

 

Upon acquisition, the Company recorded a deferred tax liability of approximately $1.2 million related to the excess of the book value of net assets acquired over the tax basis.  At September 30, 2009, the balance of the deferred tax liability was approximately $0.5 million and is included in deferred income taxes, net, a noncurrent asset in the consolidated balance sheet.

 

Results of operations of the acquired business included in the Company’s consolidated statements of income for the three- and nine-month periods ended September 30, 2009 were as follows (in thousands):

 

 

 

Three months
ended September
30, 2009

 

Nine months
ended September
30, 2009

 

Portal revenues

 

$

8,773

 

$

11,656

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Cost of portal revenues

 

5,622

 

7,655

 

Nonrecurring gain on acquisition of business (net of tax)

 

 

(2,184

)

Depreciation and amortization

 

1,769

 

2,399

 

Total operating expenses

 

7,391

 

7,870

 

Operating income/income before income taxes

 

1,382

 

3,786

 

Income tax expense

 

(515

)

(599

)

Net income

 

$

867

 

$

3,187

 

 

The Company recognized approximately $0.5 million of acquisition-related costs, including legal, accounting, and valuation services, in the second quarter of 2009.  These costs are included in selling & administrative expenses in the consolidated statements of income for the nine-month period ended September 30, 2009.  The Company’s rights under the Framework Agreement and Service Level Agreements will be amortized over seven months and the Company’s rights under the Master Work Order will be amortized over 39 months, reflecting the remaining contract terms for the agreements.  For additional information on the Company’s intangible assets, see Note 4.

 

13



 

The following unaudited pro forma information presents consolidated financial results as if the acquisition was completed as of January 1, 2009 and 2008, respectively.  This supplemental pro forma information has been prepared for comparative purposes only and is not intended to be indicative of what the Company’s results would have been had the acquisition been completed on January 1, 2008 or January 1, 2009, nor does it purport to be indicative of any future results.

 

 

 

Nine months ended
September 30,

 

(in thousands, except per share data)

 

2009

 

2008

 

Revenues

 

$

110,843

 

$

101,658

 

Net income

 

12,157

 

12,366

 

Net income per common share

 

 

 

 

 

Basic

 

$

0.19

 

$

0.20

 

Diluted

 

$

0.19

 

$

0.20

 

 

These amounts have been calculated after applying the Company’s accounting policies and adjusting the results to reflect the $2.2 million nonrecurring gain on acquisition of business (net of tax) and additional amortization expense that would have been incurred assuming the fair value adjustments to the net assets acquired had been applied from January 1, 2009 or 2008, as applicable, together with the consequential tax effects.

 

4. INTANGIBLE ASSETS

 

Intangible assets as of September 30, 2009 and December 31, 2008 consisted of the following (in thousands):

 

 

 

September 30, 2009

 

December 31, 2008

 

 

 

 

 

Gross
Carrying
Value

 

Accumulated
Amortization

 

Net
Book
Value

 

Gross
Carrying
Value

 

Accumulated
Amortization

 

Net
Book
Value

 

Useful
Life

 

Rights to the Framework Agreement (Texas)

 

$

3,940

 

$

(2,289

)

$

1,651

 

$

 

$

 

$

 

7 months

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rights to the Master Work Order (Texas)

 

1,050

 

(110

)

940

 

 

 

 

39 months

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capitalized software

 

1,956

 

(804

)

1,152

 

1,555

 

(450

)

1,105

 

36 months

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

6,946

 

$

(3,203

)

$

3,743

 

$

1,555

 

$

(450

)

$

1,105

 

 

 

 

Amortization expense totaling approximately $1.9 million and $2.8 million for the three- and nine-month periods ended September 30, 2009, respectively, is included in depreciation and amortization in the consolidated statements of income.  Amortization expense totaling approximately $0.1 million and $0.2 million for the three- and nine-month periods ended September 30, 2008, respectively, is included in depreciation and amortization in the consolidated statements of income.  The Company expects to recognize approximately $1.7 million of intangible asset amortization expense related to the acquisition of contracts with government agencies in the state of Texas as described in Note 3 and approximately $0.1 million of intangible asset amortization expense related to capitalized software during the fourth quarter of 2009. The estimated amortization expense related to intangible assets in future years is as follows (in thousands):

 

Fiscal Year

 

 

 

2010

 

$

730

 

2011

 

566

 

2012

 

269

 

 

 

$

1,565

 

 

14



 

5. DEBT OBLIGATIONS AND COLLATERAL REQUIREMENTS

 

On May 1, 2009, the Company entered into an amendment to extend its $10 million unsecured revolving credit agreement with a bank to May 1, 2011.  This revolving credit facility is available to finance working capital, issue letters of credit and finance general corporate purposes.  The Company can obtain letters of credit in an aggregate amount of $5 million, which reduces the maximum amount available for borrowing under the facility.  Interest on amounts borrowed is payable at a base rate or a Eurodollar rate, in each case as defined in the agreement.  The base rate is equal to the higher of the Federal Funds Rate plus 0.5% or the bank’s prime rate.  Fees on outstanding letters of credit are either 1.50% (if the Company’s consolidated leverage ratio is less than or equal to 1.25:1) or 1.75% (if the Company’s consolidated leverage ratio is greater than 1.25:1) of face value per annum.  The Company paid a one-time upfront fee of $37,500 related to the credit facility amendment.

 

The terms of the agreement provide for customary representations and warranties, affirmative and negative covenants and events of default.  The Company also is required to maintain compliance with the following financial covenants (in each case, as defined in the agreement):

 

·                  Consolidated minimum annual EBITDA of at least $12 million, computed quarterly on a rolling 12-month basis

·                  Consolidated tangible net worth of at least $36 million

·                  Consolidated maximum leverage ratio of 1.5:1

 

The Company was in compliance with each of the covenants listed above at September 30, 2009.  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.  The Company has never had any defaults resulting in draws on performance bonds or letters of credit.  In total, the Company and its subsidiaries had unused outstanding letters of credit of approximately $1.3 million at September 30, 2009 and December 31, 2008.  The Company had $3.7 million in available capacity to issue additional letters of credit and $8.7 million of unused borrowing capacity at September 30, 2009 under the facility.  The credit agreement expires in May 2011.  However, letters of credit may have an expiration date of up to one year beyond the expiration date of the credit agreement.

 

6. COMMITMENTS AND CONTINGENCIES

 

SEC Investigation

 

As further discussed in Note 8 in the Notes to the Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2008, filed with the SEC on March 13, 2009, the Company has been the subject of an informal SEC inquiry of expense reporting by certain officers of the Company and certain potentially related matters. In connection with that inquiry, a review was undertaken by the Audit Committee of the Company’s Board of Directors, with the assistance of outside, independent counsel, which focused on such expense reporting. The review revealed that expense reimbursement deficiencies occurred during the period from January 2004 through October 2006 (the “Review Period”) related to Jeffery S. Fraser, who was then the Company’s Chairman of the Board and Chief Executive Officer, that these expense reimbursement deficiencies were isolated to Mr. Fraser and that the amount of such deficiencies was not material to the Company’s financial condition or results of operations.  During the second quarter of 2008, the Company received notice from the SEC that a formal order of investigation had been issued with respect to these matters.  As is frequently the case in such situations, the SEC has taken the step of obtaining a formal order of investigation to ensure the thoroughness of its investigation.  The Company believes the investigation conducted by NIC’s Audit Committee was thorough and independent and it is not anticipated that the SEC investigation will reveal any significant additional instances of misreporting of expenses by employees during the Review Period.  However, the SEC subsequently expanded the scope of its inquiry with respect to Mr. Fraser to cover the period commencing with the Company’s initial public offering in 1999 through the beginning of the Review Period (the "Extended Review Period").  The NIC Audit Committee is currently conducting its own review of expense reimbursements to Mr. Fraser during the Extended Review Period and is unable at this time to comment on the extent of any misreporting of expenses during that period. There can be no assurance that the SEC will not take any action that could adversely affect the Company as a result of the matters it is reviewing.

 

15



 

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.

 

7. SHAREHOLDERS’ EQUITY

 

On May 7, 2009, the Company completed a reincorporation from the state of Colorado to the state of Delaware pursuant to a plan of conversion, as approved by the shareholders at the annual meeting of shareholders held on May 5, 2009.  Following the reincorporation, the Company was deemed for all purposes of the laws of the states of Delaware and Colorado to be the same entity as prior to the reincorporation. The reincorporation did not result in any change in the name, federal tax identification number, business, physical location, assets, liabilities or net worth of the Company. The reincorporation did not result in a change in the trading status of the Company’s common stock, which continues to trade on the NASDAQ Global Select Market under the symbol “EGOV.” In addition, the reincorporation did not affect any of the Company’s material contracts with any third parties. In accordance with the plan of conversion, the directors and executive officers of the Company continue to serve for the terms for which they were elected or appointed.  The reincorporation did not alter any shareholder’s percentage ownership interest or number of shares of common stock owned in the Company. Pursuant to the plan of conversion, each share of common stock in the Colorado-incorporated Company, no par value, automatically converted into one share of common stock in the Delaware-incorporated Company, par value $0.0001 per share. Accordingly, shareholders were not required to undertake any exchange of the Company’s shares of common stock. In addition, each outstanding option to purchase shares of the Colorado-incorporated Company’s common stock under the Company’s stock benefit plans automatically converted into an option to purchase the same number of shares of common stock of the Delaware-incorporated Company.  As a result of the change in par value of the Company’s common stock, the Company reclassified approximately $6,000 from additional paid-in capital to common stock in its consolidated balance sheet at December 31, 2008.  For additional information on the Company’s reincorporation to Delaware, refer to the Company’s Form 8-K filed with the SEC on May 11, 2009.

 

On February 3, 2009, the Company’s Board of Directors declared a special cash dividend of $0.30 per share, payable to shareholders of record as of February 17, 2009.  The dividend, totaling approximately $19.2 million, was paid on February 27, 2009 on 62,792,786 outstanding shares of common stock.  A dividend equivalent of $0.30 per share was also paid simultaneously on 1,040,446 unvested shares of service-based restricted stock granted under the Company’s 2006 Stock Option and Incentive Plan.  The dividend was paid out of the Company’s available cash.

 

The dividend may 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, if any, is dependent on the earnings and profits of the Company through the end of its 2009 fiscal year.

 

8. UNCERTAIN TAX POSITIONS

 

The Company, along with its wholly owned subsidiaries, files a consolidated U.S. federal income tax return and separate income tax returns in many states throughout the U.S.  The Company’s tax returns are not currently under examination by any of these tax authorities.  The Company remains subject to U.S. federal examination for the tax years ended on or after December 31, 2006.  State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return.

 

16



 

A reconciliation of the beginning and ending amount of the consolidated liability for unrecognized income tax benefits is as follows (in thousands):

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

468

 

$

714

 

$

468

 

$

714

 

Additions for tax positions of prior years

 

1

 

1

 

1

 

1

 

Expiration of the statute of limitations

 

(136

)

(247

)

(136

)

(247

)

Ending balance

 

$

333

 

$

468

 

$

333

 

$

468

 

 

All of the Company’s unrecognized income tax benefits would affect the Company’s effective tax rate if recognized.  For the three- and nine-month periods ended September 30, 2009, the liability for unrecognized income tax benefits decreased by approximately $0.1 million for tax years that have closed.  For the three- and nine-month periods ended September 30, 2008, the liability for unrecognized income tax benefits decreased by approximately $0.2 million, as the Company considered additional information relating to its uncertain tax positions.  It is expected that the amount of unrecognized tax benefits will change in the next 12 months.  However, the Company does not expect the change to have a significant impact on its results of operations or financial condition.

 

The Company recognizes accrued interest and penalties associated with uncertain tax positions as part of its income tax provision in the consolidated statements of income.  At September 30, 2009 and 2008, accrued interest and penalty amounts were not material.

 

9. STOCK BASED COMPENSATION

 

Restricted Stock

 

During the third quarter of 2009, the Board of Directors of the Company granted certain management-level employees and non-employee directors service-based restricted stock awards totaling 292,465 shares, with a grant-date fair value of $7.91 per share, totaling approximately $2.3 million.  During the nine-month period ended September 30, 2009, the Board of Directors of the Company granted certain management-level employees, executive officers and non-employee directors service-based restricted stock awards totaling 481,648 shares, with a grant date fair value totaling approximately $3.4 million.  Such restricted stock awards vest beginning 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.

 

During the first quarter of 2009, the Board of Directors of the Company also granted certain executive officers performance-based restricted stock awards pursuant to the terms of the Company’s executive compensation program totaling 185,145 shares, with a grant date fair value of $5.52 per share, totaling approximately $1.0 million.  Shares granted represent the maximum number of shares able to be earned by the executive officers at the end of a three-year performance period ending December 31, 2011.  The actual number of shares earned will be based on the Company’s performance related to the following performance criteria over the performance period:

 

·                  Operating income growth (three-year compound annual growth rate) — 25% weighting

·                  Total revenue growth (three-year compound annual growth rate) — 25% weighting

·                  Cash flow return on invested capital (three-year average) — 50% weighting

 

17



 

At the end of the three-year period, the executive officers will receive a number of shares per the following schedule of threshold, target or superior Company performance for the performance criteria:

 

 

 

Performance Levels

 

Performance Threshold

 

Threshold

 

Target

 

Superior

 

Operating income growth (three-year compound annual growth rate)

 

15

%

20

%

25

%

Total revenue growth (three-year compound annual growth rate)

 

15

%

20

%

25

%

Cash flow return on invested capital (three-year average)

 

15

%

20

%

25

%

 

For each performance criteria, no shares will be awarded if threshold performance is not achieved, and no additional shares will be awarded for performance in excess of the superior level.  For amounts between the threshold and target levels or between the target and superior levels, straight line interpolation, rounded up to the next whole share, will be used to determine the portion of the award that becomes vested.  Performance-based restricted stock is valued at the date of grant, based on the closing market price of the Company’s common stock, and expensed over the requisite service period, beginning on the date of grant, based upon the probable number of shares expected to vest.

 

The following table presents stock-based compensation expense included in the Company’s consolidated statements of income for the three- and nine-month periods ended September 30 (in thousands):

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Cost of portal revenues, exclusive of depreciation & amortization

 

$

167

 

$

183

 

$

529

 

$

528

 

Cost of software & services revenues, exclusive of depreciation and amortization

 

8

 

11

 

25

 

21

 

Selling & administrative

 

555

 

407

 

1,549

 

1,212

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense before income taxes

 

730

 

601

 

2,103

 

1,761

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit

 

(285

)

(235

)

(821

)

(688

)

 

 

 

 

 

 

 

 

 

 

Net stock-based compensation expense

 

$

445

 

$

366

 

$

1,282

 

$

1,073

 

 

Income Taxes

 

Under authoritative guidance related to the accounting for stock-based compensation, the Company is permitted to recognize a credit to additional paid-in capital for federal income tax deductions, or windfall tax benefits, resulting from the exercise of non-qualified stock options or vesting of restricted stock if such windfall tax benefits reduce income taxes payable.  Following the with-and-without approach for utilization of tax attributes, which results in windfall tax benefits being utilized after utilization of available tax NOL carryforwards to offset current year taxable income, the Company increased deferred tax assets and additional paid-in capital for windfall tax benefits totaling approximately $0.4 million and $1.4 million during the three- and nine-month periods ended September 30, 2009.

 

10. 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 ethics & elections filings business (NIC Technologies), which designs and develops online campaign expenditure and ethics compliance systems for the Federal Election Commission and the state of Michigan, and the Company’s UCC and corporate filings software development business (NIC Conquest), which provides software applications and services for electronic filings and document management solutions to the California Secretary of State.  Each of the Company’s Software & Services businesses is an operating segment and has been aggregated to form the

 

18



 

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 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.

 

The table below reflects summarized financial information concerning the Company’s reportable segments for the three months ended September 30 (in thousands):

 

 

 

Outsourced
Portals

 

Software
&
Services

 

Other
Reconciling
Items

 

Consolidated
Total

 

2009

 

 

 

 

 

 

 

 

 

Revenues

 

$

36,236

 

$

1,018

 

$

 

$

37,254

 

 

 

 

 

 

 

 

 

 

 

Costs & expenses

 

22,625

 

737

 

4,543

 

27,905

 

Depreciation & amortization

 

2,658

 

17

 

104

 

2,779

 

Operating income (loss)

 

$

10,953

 

$

264

 

$

(4,647

)

$

6,570

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

 

 

 

 

 

 

 

Revenues

 

$

24,147

 

$

794

 

$

 

$

24,941

 

 

 

 

 

 

 

 

 

 

 

Costs & expenses

 

14,319

 

411

 

4,833

 

19,563

 

Depreciation & amortization

 

782

 

24

 

97

 

903

 

Operating income (loss)

 

$

9,046

 

$

359

 

$

(4,930

)

$

4,475

 

 

The following is a reconciliation of total segment operating income to total consolidated income before income taxes for the three months ended September 30 (in thousands):

 

 

 

2009

 

2008

 

Total operating income for reportable segments

 

$

6,570

 

$

4,475

 

Interest income

 

3

 

140

 

 

 

 

 

 

 

Consolidated income before income taxes

 

$

6,573

 

$

4,610

 

 

19



 

The table below reflects summarized financial information concerning the Company’s reportable segments for the nine months ended September 30 (in thousands):

 

 

 

Outsourced
Portals

 

Software
&
Services

 

Other
Reconciling
Items

 

Consolidated
Total

 

2009

 

 

 

 

 

 

 

 

 

Revenues

 

$

93,408

 

$

3,058

 

$

 

$

96,466

 

 

 

 

 

 

 

 

 

 

 

Costs & expenses

 

57,648

 

2,256

 

15,275

 

75,179

 

Depreciation & amortization

 

4,994

 

48

 

305

 

5,347

 

Nonrecurring gain on acquisition of business (net of tax)

 

(2,184

)

 

 

(2,184

)

Operating income (loss)

 

$

32,950

 

$

754

 

$

(15,580

)

$

18,124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

 

 

 

 

 

 

 

Revenues

 

$

72,564

 

$

2,758

 

$

 

$

75,322

 

 

 

 

 

 

 

 

 

 

 

Costs & expenses

 

42,440

 

2,282

 

13,478

 

58,200

 

Depreciation & amortization

 

2,314

 

66

 

268

 

2,648

 

Operating income (loss)

 

$

27,810

 

$

410

 

$

(13,746

)

$

14,474

 

 

The following is a reconciliation of total segment operating income to total consolidated income before income taxes for the nine months ended September 30 (in thousands):

 

 

 

2009

 

2008

 

Total operating income for reportable segments

 

$

18,124

 

$

14,474

 

Interest income

 

48

 

583

 

Other expense, net

 

 

(24

)

 

 

 

 

 

 

Consolidated income before income taxes

 

$

18,172

 

$

15,033

 

 

20



 

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

 

FORWARD-LOOKING STATEMENTS

 

“Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995: Statements in this Quarterly Report on Form 10-Q regarding NIC and its business, which are not current or historical facts, are “forward-looking statements” that involve risks and uncertainties.  Forward-looking statements include, but are not limited to, statements of plans and objectives, statements of future economic performance or financial projections, statements of assumptions underlying such statements, and statements of the Company’s or management’s intentions, hopes, beliefs, expectations or predictions of the future.  For example, statements like we “expect,” we “believe,” we “plan,” we “intend” or we “anticipate” are forward-looking statements. Investors should be aware that our actual operating results and financial performance may differ materially from our expressed expectations because of risks and uncertainties about the future including those risks discussed in this Quarterly Report on Form 10-Q and in our 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 13, 2009.

 

There are a number of important factors that could cause actual results to differ materially from those suggested or indicated by such forward-looking statements.  These include, among others, NIC’s ability to successfully integrate into its operations the recently acquired current portal management contracts and the new portal management contract with government agencies in the state of Texas, which are discussed in Notes 2 and 3 in the Notes to the Unaudited Consolidated Financial Statements included in this Form 10-Q; the success of the Company in signing contracts with new states and government agencies, including continued favorable government legislation; NIC’s ability to develop new services; existing states and agencies adopting those new services; acceptance of eGovernment services by businesses and citizens; competition; and general economic conditions (including the recent deterioration in general economic conditions) and the other factors discussed under “CAUTIONS ABOUT FORWARD LOOKING STATEMENTS” in Part I and “RISK FACTORS” in Part I, Item 1A of NIC’s 2008 Annual Report on Form 10-K filed on March 13, 2009 with the SEC.  Investors should read all of these discussions of risks carefully.

 

We will not necessarily update the information in this Quarterly Report on Form 10-Q if any forward-looking statement later turns out to be inaccurate. Investors are cautioned not to put undue reliance on any forward-looking statement.

 

WHAT WE DO — AN EXECUTIVE SUMMARY

 

We are a leading provider of eGovernment services that help governments use the Internet to reduce costs and provide a higher level of service to businesses and citizens. We accomplish this currently through two divisions: our core portal outsourcing businesses and our software & services businesses.

 

In our core business, portal outsourcing, we enter into contracts primarily with state governments and design, build and operate Web-based portals on their behalf. Currently, we have contracts to provide portal outsourcing services for 23 states.  We enter into long-term contracts, typically three to five years, and manage operations for each government partner through separate subsidiaries that operate as decentralized businesses with a high degree of autonomy. Our portals consist of Web sites and applications that we build, which 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 form or report. We help increase our government partners’ revenues by expanding the distribution of their information assets and increasing the number of financial transactions conducted with governments.  We do this by marketing portal services and soliciting users to complete government-based transactions and to enter into subscriber contracts that permit users to access the portal and the government information contained therein in exchange for transactional and/or subscription user fees. We are typically responsible for funding up-front investment and ongoing operational costs of the government portals.  Our unique self-funding business model allows us to reduce our government partners’ financial and technology risks and obtain revenues by sharing in the fees generated from eGovernment services. Our partners benefit because they gain a centralized, customer-focused presence on the Internet. Businesses and citizens gain a faster, more convenient and more cost-effective means to interact with governments.

 

21



 

On behalf of our government partners, we enter 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 transaction and data access services we provide and the division of revenues between the Company and the government agency. The government must approve prices and revenue sharing agreements. We have limited control over the level of fees we are permitted to retain.  Any changes made to the amount or percentage of fees retained by us, or to the amounts charged for the services offered, could adversely affect the profitability of the respective contract to us.  We generally own 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 our 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. In some cases, we enter into contracts to provide consulting, application development and portal management services to governments in exchange for an agreed-upon fee.

 

A government may terminate its contract prior to the expiration date upon specific cause events that are not cured within a specified period and, in certain circumstances, upon passage of legislation.  Eight contracts under which we provide portal outsourcing services can be terminated without cause on a specified period of notice; collectively, revenues generated from these contracts represented 31% and 36% of our portal revenues for the three and nine-month periods ended September 30, 2009, respectively.  In the event that any of these contracts would be terminated without cause, the terms of the respective contract may require the government to pay a fee to us in order to continue to use our software in its portal.  In addition, the loss of one or more of our larger state portal partners, such as Alabama, Arkansas, Colorado, Indiana, Kentucky, Tennessee, Texas, Utah or Virginia, as a result of the expiration, termination or failure to renew the respective contract, if such partner is not replaced, could significantly reduce our revenues and profitability.

 

Texas Portal Management Contracts

 

As discussed in Note 3 in the Notes to the Unaudited Consolidated Financial Statements, we acquired the current portal management contracts for the state of Texas during the second quarter of 2009, which contracts expire on December 31, 2009, except that certain master work order projects expire on August 31, 2012 and other master work order projects expire on August 31, 2014 (collectively, the “Acquired Texas Contracts”).

 

As discussed in Note 2 in the Notes to the Unaudited Consolidated Financial Statements, during the third quarter of 2009 we entered into a new seven-year contract with the state of Texas to manage the state’s official government portal (the “New Texas Contract”).  The New Texas Contract commences on January 1, 2010 and runs through August 31, 2016.  We will not begin earning revenues under the New Texas Contract until 2010. The New Texas Contract will have terms substantially different than the Acquired Texas Contracts.

 

REVENUE RECOGNITION

 

We classify our revenues and cost of revenues into two categories: (1) portal and (2) software & services.  The portal category includes revenues and cost of revenues primarily from our subsidiaries operating government portals on an outsourced basis.  The software & services category includes revenues and cost of revenues primarily from our ethics & elections business with the Federal Election Commission and the state of Michigan and our UCC and corporate filings business with the California Secretary of State.  We currently derive revenues from three main sources: transaction-based fees, time and materials-based fees for application development, and fixed fees for portal management services.  Each of these revenue types and the corresponding business models are further described below.

 

Our portal outsourcing businesses

 

We categorize our portal revenues according to the underlying source of revenue.  A brief description of each category follows:

 

·                  DMV transaction-based: these are transaction fees from the sale of electronic access to driver history records, referred to as DMV records, from our state portals to data resellers, insurance companies and other pre-authorized customers on behalf of our state partners, and are generally predictable and recurring.

 

·                  Non-DMV transaction-based: these are transaction fees from sources other than the sale of DMV records, for transactions conducted by business users and consumer users through our portals, and are generally

 

22



 

predictable and recurring.  For a representative listing of non-DMV services we currently offer through our portals, refer to Part I, Item 1 in our Form 10-K for the year ended December 31, 2008, filed with the SEC on March 13, 2009.

 

·                  Portal management:  these are revenues from the performance of fixed fee portal management services for our government partners in the states of Arizona and Indiana, and are generally predictable and recurring.

 

 

·                  Portal software development: these are revenues from the performance of application development projects and other time and materials services for our government partners.  While we actively market these services, they do not have the same degree of predictability as our transaction-based or portal management revenues.  As a result, these revenues are excluded from our recurring portal revenue percentage.

 

Our software & services businesses

 

NIC Technologies

 

Our ethics & elections business, NIC Technologies, currently derives the majority of its revenues from time and materials application development and maintenance outsourcing contracts and recognizes revenues as services are provided.  At September 30, 2009, our ethics & elections business was primarily engaged in servicing its contracts with the Federal Election Commission and the state of Michigan.  During the third quarter of 2009, NIC Technologies entered into a new contract with the U.S. Department of Transportation, Federal Motor Carrier Safety Administration (“FMCSA”) to develop and manage a National Motor Carrier Pre-Employment Screening System.  The contract has an initial one-year term, with four single-year renewals at the option of the FMCSA.  The system will be developed and maintained using a self-funded, transaction-based business model.

 

NIC Conquest

 

Our UCC and corporate filings software development business, NIC Conquest, derives the majority of its revenues from fixed-price application development contracts and recognizes revenues on the percentage of completion method.  At September 30, 2009, this business was primarily engaged in servicing its contract with the California Secretary of State, and no longer markets its applications and services for any new engagements.

 

CRITICAL ACCOUNTING POLICIES

 

There have been no material changes in our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Form 10-K for the year ended December 31, 2008, filed with the SEC on March 13, 2009, except as follows:

 

Intangible Assets

 

As a result of our recent acquisition of the Acquired Texas Contracts, as further discussed in Note 3 in the Notes to the Unaudited Consolidated Financial Statements included in this Form 10-Q, we have significant intangible assets on our consolidated balance sheet at September 30, 2009.  We used the discounted cash flow method to estimate the fair value of these intangible assets.  In order to determine the fair value of these assets, we are required to make assumptions regarding estimated future cash flows, discount rates and other factors.  We are currently in the process of finalizing the valuation for certain of these acquired assets; therefore, the fair value measurements as of the acquisition date and the nonrecurring gain (net of tax) we recognized on acquisition are preliminary and subject to change.  The allocation of the purchase price to the assets acquired will be finalized as necessary, up to one year after the acquisition closing date, as information becomes available.  Intangible assets are amortized over their estimated useful lives, which approximates the underlying contractual terms of the assets.  At each balance sheet date, and whenever events or changes in circumstances warrant, management assesses the carrying value of recorded 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

 

23



 

recognized for the amount by which the carrying value of the intangible asset exceeds its estimated fair value.  There is considerable judgment necessary to determine future cash flows, and accordingly, actual results could vary significantly from such estimates.

 

RESULTS OF OPERATIONS

 

The following discussion summarizes the significant factors affecting operating results for the three- and nine-month periods ended September 30, 2009 and 2008.  This discussion and analysis should be read in conjunction with our unaudited consolidated interim financial statements and the related notes included in this Form 10-Q.

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

Key Financial Metrics

 

2009

 

2008

 

2009

 

2008

 

Revenue growth — outsourced portals

 

50

%

17

%

29

%

19

%

Same state revenue growth — outsourced portals

 

14

%

10

%

12

%

12

%

Recurring portal revenue %

 

87

%

94

%

89

%

92

%

Gross profit % - outsourced portals

 

42

%

44

%

42

%

46

%

Selling & administrative expenses as % of portal revenues

 

17

%

23

%

21

%

24

%

Operating income margin % (operating income as a % of portal revenues)

 

18

%

19

%

19

%

20

%

 

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.

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2009

 

%
Change

 

2008

 

2009

 

%
Change

 

2008

 

DMV transaction-based

 

$

15,862

 

35

%

$

11,745

 

$

41,403

 

17

%

$

35,445

 

Non-DMV transaction-based

 

13,745

 

56

%

8,800

 

35,702

 

40

%

25,427

 

Portal management

 

1,883

 

(11

)%

2,104

 

5,674

 

(9

)%

6,238

 

Portal software development

 

4,746

 

217

%

1,498

 

10,629

 

95

%

5,454

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

36,236

 

50

%

$

24,147

 

$

93,408

 

29

%

$

72,564

 

 

Portal revenues in the current quarter increased 50%, or approximately $12.1 million, over the prior year quarter.  Of this increase, 36%, or approximately $8.8 million, was attributable to our Acquired Texas Contracts, which we acquired in May 2009, and 14%, or approximately $3.3 million, was attributable to an increase in same state portal revenues (outsourced portals in operation and generating recurring revenues for two full periods).  See Note 3 in the Notes to the Unaudited Consolidated Financial Statements included in this Form 10-Q for additional information regarding our second quarter 2009 acquisition of the Acquired Texas Contracts.

 

Our Indiana and Arizona portal subsidiaries operate under contracts that are based on a funding model that includes recurring fixed monthly fees for baseline services and primarily project-based pricing for variable services, rather than transaction-based revenues for DMV and non-DMV services.  Excluding Indiana and Arizona, same state portal revenues in the current quarter increased 15% over the prior year quarter, with same state DMV transaction-based revenues remaining flat and same state non-DMV transaction-based revenues increasing 27% (primarily due to the addition of several new revenue generating applications in existing portals).  Same state DMV revenue growth in the current quarter was flat compared to an increase of 2% in the prior year quarter.  Absent DMV price increases, same state DMV revenues have historically grown at a rate of 1% to 3% per year. We believe our DMV revenues for over the past year have been adversely affected by negative macroeconomic conditions, which we currently expect may continue throughout the remainder of 2009. As a result, we currently expect same-

 

24



 

state DMV revenue growth to be flat or slightly negative in 2009.  Portal same state non-DMV transaction based revenue growth was 26% in the prior year quarter.  Including Indiana and Arizona, same state portal revenues in the third quarter of 2009 increased 14% over 2008 primarily due to increased transaction revenues from our Alabama, Arkansas, Colorado, Idaho and Tennessee portals, among others.

 

Portal revenues for the nine months in the current fiscal year increased 29%, or approximately $20.8 million, over the prior year period.  Of this increase, 17%, or approximately $11.9 million, was attributable to our new portals including West Virginia ($0.3 million), which began to generate DMV revenues in February 2008, and Texas ($11.6 million) and 12%, or approximately $8.9 million, was attributable to an increase in same state portal revenues.  Same state portal revenues in the current year-to-date period increased 12% over the prior year period.  Excluding Indiana and Arizona, same state portal revenues in the current year-to-date periods increased 12% over the prior year period, with same state DMV transaction-based revenues remaining flat and same state non-DMV transaction-based revenues increasing 30%, primarily due to the addition of several new revenue generating applications in existing portals.

 

COST OF PORTAL REVENUES.  In the analysis below, we have categorized our cost of portal revenues between fixed and variable costs (in thousands), with the corresponding percentage increase or decrease from the prior year period.  Fixed costs include such costs as employee compensation, telecommunication and all other costs associated with the provision of dedicated client service such as dedicated facilities.  Variable costs consist of costs that vary with our level of portal revenues and include bank fees required to process credit card and automated clearinghouse transactions and costs associated with revenue share arrangements with our state partners.

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2009

 

%
Change

 

2008

 

2009

 

%
Change

 

2008

 

Fixed costs

 

$

15,124

 

43

%

$

10,583

 

$

39,263

 

27

%

$

31,016

 

Variable costs

 

6,009

 

106

%

2,919

 

14,480

 

77

%

8,198

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

21,133

 

57

%

$

13,502

 

$

53,743

 

37

%

$

39,214

 

 

Cost of portal revenues for the current quarter increased 57%, or approximately $7.6 million, over the prior year quarter.  Of this increase, 44%, or $5.9 million, was attributable to our new state portal businesses in Texas ($5.7 million) and start-up costs in our New Mexico portal business ($0.2 million), which is expected to begin to generate revenues in the fourth quarter of 2009, and 13%, or approximately $1.7 million, was attributable to an increase in same state cost of portal revenues.

 

The increase in same state cost of portal revenues in the current quarter was partially attributable to additional personnel in several of our portals due to our continued growth and reinvestment in our core business, coupled with increased employee compensation and health insurance costs.  Also contributing to this increase was an increase in variable merchant fees to process credit card transactions, particularly from our portals in Alabama and Idaho.  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 plan to continue to implement these services as they contribute favorably to our operating income growth.

 

Our portal gross profit percentage was 42% in the current year quarter, down from 44% in the prior year quarter.  The decrease in 2009 was due to the increase in cost of portal revenues, as described above.  In addition, the portal gross profit percentage from our Acquired Texas Contracts is lower than our company-wide average.  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 (which we believe also benefits our shareholders).

 

25



 

Cost of portal revenues for the nine months in the current fiscal year increased 37%, or approximately $14.5 million, over the prior period.  Of this increase, 21%, or approximately $8.2 million, was primarily attributable to our newer Texas, New Mexico and West Virginia portals, and 16%, or approximately $6.3 million, was attributable to an increase in same state cost of portal revenues.  The increase in same state cost of portal revenues for the nine-month period ended September 30, 2009 was attributable to additional personnel in several of our portal businesses, coupled with higher employee health insurance costs, and higher variable merchant fees to process credit card transactions, as further discussed above.  Our portal gross profit rate for the nine months in the current year period was 42% compared to 46% in the prior year period, for reasons further discussed above.

 

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.

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2009