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 March 31, 2007
Commission file number 000-26621
NIC INC.
(Exact name of registrant as specified in its charter)
|
Colorado |
|
52-2077581 |
|
(State or other jurisdiction of |
|
(I.R.S Employer |
|
incorporation or organization) |
|
Identification No.) |
|
10540 South Ridgeview Road |
|
66061 |
|
(Address of principal executive offices) |
|
(Zip Code) |
(877)
234-3468
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer x Non-accelerated filer o
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 April 30, 2007 was 61,759,316.
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
NIC INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
thousands
|
|
|
March 31, |
|
December 31, |
|
||
|
|
|
2007 |
|
2006 |
|
||
|
ASSETS |
|
|
|
|
|
||
|
Current assets: |
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
33,083 |
|
$ |
36,745 |
|
|
Marketable securities |
|
— |
|
45,008 |
|
||
|
Trade accounts receivable |
|
37,437 |
|
28,729 |
|
||
|
Unbilled revenues |
|
205 |
|
1,069 |
|
||
|
Deferred income taxes |
|
817 |
|
711 |
|
||
|
Prepaid expenses & other current assets |
|
1,196 |
|
1,645 |
|
||
|
Total current assets |
|
72,738 |
|
113,907 |
|
||
|
Property and equipment, net |
|
4,324 |
|
3,790 |
|
||
|
Deferred income taxes |
|
21,302 |
|
22,013 |
|
||
|
Other assets |
|
459 |
|
424 |
|
||
|
Total assets |
|
$ |
98,823 |
|
$ |
140,134 |
|
|
|
|
|
|
|
|
||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
||
|
Current liabilities: |
|
|
|
|
|
||
|
Accounts payable |
|
$ |
34,697 |
|
$ |
34,202 |
|
|
Accrued expenses |
|
5,970 |
|
5,911 |
|
||
|
Application development contracts |
|
474 |
|
513 |
|
||
|
Other current liabilities |
|
258 |
|
255 |
|
||
|
Total current liabilities |
|
41,399 |
|
40,881 |
|
||
|
|
|
|
|
|
|
||
|
Other long-term liabilities |
|
1,119 |
|
— |
|
||
|
Total liabilities |
|
42,518 |
|
40,881 |
|
||
|
|
|
|
|
|
|
||
|
Commitments and contingencies (Notes 2, 4, 5 and 7) |
|
— |
|
— |
|
||
|
|
|
|
|
|
|
||
|
Shareholders’ equity: |
|
|
|
|
|
||
|
Common stock, no par, 200,000 shares authorized 61,759 and 61,574 shares issued and outstanding |
|
— |
|
— |
|
||
|
Additional paid-in capital |
|
164,584 |
|
210,210 |
|
||
|
Accumulated deficit |
|
(108,111 |
) |
(110,789 |
) |
||
|
|
|
56,473 |
|
99,421 |
|
||
|
Less treasury stock |
|
(168 |
) |
(168 |
) |
||
|
Total shareholders’ equity |
|
56,305 |
|
99,253 |
|
||
|
Total liabilities and shareholders’ equity |
|
$ |
98,823 |
|
$ |
140,134 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
1
NIC INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
thousands except for per share amounts
|
|
|
Three-months ended |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
Revenues: |
|
|
|
|
|
||
|
Portal revenues |
|
$ |
19,868 |
|
$ |
16,989 |
|
|
Software & services revenues |
|
766 |
|
(1,241 |
) |
||
|
Total revenues |
|
20,634 |
|
15,748 |
|
||
|
Operating expenses: |
|
|
|
|
|
||
|
Cost of portal revenues, exclusive of depreciation & amortization |
|
10,454 |
|
8,277 |
|
||
|
Cost of software & services revenues, exclusive of depreciation & amortization |
|
470 |
|
(1,329 |
) |
||
|
Selling & administrative |
|
5,120 |
|
3,428 |
|
||
|
Depreciation & amortization |
|
536 |
|
505 |
|
||
|
Total operating expenses |
|
16,580 |
|
10,881 |
|
||
|
Operating income |
|
4,054 |
|
4,867 |
|
||
|
Other income (expense): |
|
|
|
|
|
||
|
Interest income |
|
580 |
|
380 |
|
||
|
Equity in net loss of affiliates |
|
— |
|
(97 |
) |
||
|
Total other income (expense) |
|
580 |
|
283 |
|
||
|
Income before income taxes |
|
4,634 |
|
5,150 |
|
||
|
Income tax provision |
|
1,888 |
|
2,232 |
|
||
|
Net income |
|
$ |
2,746 |
|
$ |
2,918 |
|
|
Basic net income per share |
|
$ |
0.04 |
|
$ |
0.05 |
|
|
Diluted net income per share |
|
$ |
0.04 |
|
$ |
0.05 |
|
|
Weighted average shares outstanding: |
|
|
|
|
|
||
|
Basic |
|
61,652 |
|
61,129 |
|
||
|
Diluted |
|
61,969 |
|
61,596 |
|
||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
2
NIC INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)
thousands
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|||||
|
|
|
Common Stock |
|
Paid-in |
|
Accumulated |
|
Treasury |
|
|
|
|||||||
|
|
|
Shares |
|
Amount |
|
Capital |
|
Deficit |
|
Stock |
|
Total |
|
|||||
|
Balance, January 1, 2007 |
|
61,574 |
|
$ |
— |
|
$ |
210,210 |
|
$ |
(110,789 |
) |
$ |
(168 |
) |
$ |
99,253 |
|
|
Cumulative effect of FIN 48 (Note 4) |
|
— |
|
— |
|
— |
|
(68 |
) |
— |
|
(68 |
) |
|||||
|
Net income |
|
— |
|
— |
|
— |
|
2,746 |
|
— |
|
2,746 |
|
|||||
|
Cash dividends on common stock (Note 3) |
|
— |
|
— |
|
(46,730 |
) |
— |
|
— |
|
(46,730 |
) |
|||||
|
Stock options exercised |
|
133 |
|
— |
|
454 |
|
— |
|
— |
|
454 |
|
|||||
|
Stock-based compensation |
|
— |
|
— |
|
411 |
|
— |
|
— |
|
411 |
|
|||||
|
Issuance of common stock under employee stock purchase plan |
|
52 |
|
— |
|
239 |
|
— |
|
— |
|
239 |
|
|||||
|
Balance, March 31, 2007 |
|
61,759 |
|
$ |
— |
|
$ |
164,584 |
|
$ |
(108,111 |
) |
$ |
(168 |
) |
$ |
56,305 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
3
NIC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
thousands
|
|
|
Three-months ended |
|
||||
|
|
|
March 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
||
|
Net income |
|
$ |
2,746 |
|
$ |
2,918 |
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
||
|
Depreciation & amortization |
|
536 |
|
505 |
|
||
|
Stock based compensation expense |
|
411 |
|
200 |
|
||
|
Application development contracts |
|
(39 |
) |
(556 |
) |
||
|
Deferred income taxes |
|
1,656 |
|
2,071 |
|
||
|
Equity in net loss of affiliates |
|
— |
|
97 |
|
||
|
Changes in operating assets and liabilities: |
|
|
|
|
|
||
|
(Increase) in trade accounts receivable |
|
(8,708 |
) |
(4,358 |
) |
||
|
Decrease in unbilled revenues |
|
864 |
|
2,029 |
|
||
|
(Increase) decrease in prepaid expenses & other current assets |
|
449 |
|
(113 |
) |
||
|
Decrease in other assets |
|
— |
|
9 |
|
||
|
Increase in accounts payable |
|
495 |
|
7,893 |
|
||
|
Increase (decrease) in accrued expenses |
|
59 |
|
(1,983 |
) |
||
|
Increase (decrease) in other current liabilities |
|
3 |
|
(141 |
) |
||
|
Net cash provided by (used in) operating activities |
|
(1,528 |
) |
8,571 |
|
||
|
Cash flows from investing activities: |
|
|
|
|
|
||
|
Purchases of property and equipment |
|
(1,046 |
) |
(785 |
) |
||
|
Capitalized internal use software development costs |
|
(59 |
) |
(46 |
) |
||
|
Purchases of marketable securities |
|
— |
|
(5,000 |
) |
||
|
Sales and maturities of marketable securities |
|
45,008 |
|
— |
|
||
|
Net cash provided by (used in) investing activities |
|
43,903 |
|
(5,831 |
) |
||
|
Cash flows from financing activities: |
|
|
|
|
|
||
|
Cash dividends on common stock |
|
(46,730 |
) |
— |
|
||
|
Proceeds from sale of treasury stock |
|
— |
|
65 |
|
||
|
Proceeds from employee common stock purchases |
|
239 |
|
157 |
|
||
|
Proceeds from exercise of employee stock options |
|
454 |
|
307 |
|
||
|
Net cash provided by (used in) financing activities |
|
(46,037 |
) |
529 |
|
||
|
Net increase (decrease) in cash and cash equivalents |
|
(3,662 |
) |
3,269 |
|
||
|
Cash and cash equivalents, beginning of period |
|
36,745 |
|
36,902 |
|
||
|
|
|
|
|
|
|
||
|
Cash and cash equivalents, end of period |
|
$ |
33,083 |
|
$ |
40,171 |
|
|
|
|
|
|
|
|
||
|
Other cash flow information: |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Interest paid |
|
$ |
— |
|
$ |
— |
|
|
Income taxes paid |
|
$ |
263 |
|
$ |
363 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
4
NIC Inc. (“NIC” or the “Company”) has prepared the consolidated interim financial statements included herein 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 omitted pursuant to such rules and regulations. In management’s opinion, the consolidated interim financial statements reflect all adjustments (which include only normal recurring adjustments, except as disclosed) necessary to state fairly the results of operations for the interim periods presented. These consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, filed with the SEC on March 15, 2007, 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, 2006 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
NIC Inc., 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 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 Uniform Commercial Code (“UCC”) and corporate filings software development
5
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.
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.
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 (in thousands, except per share amounts):
6
|
|
Three Months |
|
|||||
|
|
|
Ended March 31, |
|
||||
|
|
|
2007 |
|
2006 |
|
||
|
Numerator: |
|
|
|
|
|
||
|
Net income |
|
$ |
2,746 |
|
$ |
2,918 |
|
|
Denominator: |
|
|
|
|
|
||
|
Weighted average shares — basic |
|
61,652 |
|
61,129 |
|
||
|
Stock options and restricted stock awards |
|
317 |
|
467 |
|
||
|
Weighted average shares — diluted |
|
61,969 |
|
61,596 |
|
||
|
Basic earnings per share: |
|
|
|
|
|
||
|
Net income |
|
$ |
0.04 |
|
$ |
0.05 |
|
|
Diluted earnings per share: |
|
|
|
|
|
||
|
Net income |
|
$ |
0.04 |
|
$ |
0.05 |
|
Outstanding stock options totaling approximately 0.4 million shares for each of the three-month periods ended March 31, 2007 and 2006 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.
Income taxes
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” FIN 48 provides a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on its income tax returns. FIN 48 defines the threshold for recognizing a tax return position in the financial statements as “more likely than not” that the position is sustainable, based on its technical merits. FIN 48 also provides guidance on the measurement, classification and disclosure of tax return positions in a company’s financial statements. The Company adopted the provisions of FIN 48 on January 1, 2007, with the cumulative effect recorded as an adjustment to the opening balance of accumulated deficit. See Note 4 for additional discussion of the Company’s adoption of FIN 48.
Recent accounting pronouncements
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, if any, on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses
7
on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. 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. 159 and has not yet determined the impact, if any, on its consolidated financial statements.
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 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 March 31, 2007, 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.
8
The following is a summary of the Company’s nineteen outsourced state government portal contracts at March 31, 2007:
|
NIC Subsidiary |
|
Portal Web Site (State) |
|
Year |
|
Contract Expiration |
|
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 |
|
2/28/2008 (2/28/2012) |
|
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) |
In the first quarter of 2007, the Company received a one-year contract extension from the state of Idaho, which extended the contract expiration date to March 2008, and signed a new one-year contract with the state of Alabama, which includes options to extend the contract for four additional one-year renewal terms.
3. SPECIAL CASH DIVIDEND
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 on 61,686,425 outstanding shares of common stock. A dividend equivalent of $0.75 per share was also paid simultaneously on 618,038 unvested shares of restricted stock granted under the Company’s 2006 Stock Option and Incentive Plan. The dividend was paid 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.
4. 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, 2003. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return.
As a result of the implementation of FIN 48 (see Note 1), the Company recognized a $68,000 increase in the liability for unrecognized tax benefits,
9
which resulted in an increase to the January 1, 2007 accumulated deficit balance of $68,000. As of January 1, 2007, after the implementation of FIN 48, the Company’s unrecognized tax benefits were $1,119,000, all of which would affect the Company’s effective tax rate if recognized. There have been no significant changes to this amount during the quarter ended March 31, 2007. It is expected that the amount of unrecognized tax benefits will change in the next 12 month. 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 March 31, 2007, accrued interest and penalty amounts were not material.
5. CALIFORNIA SECRETARY OF STATE APPLICATION DEVELOPMENT CONTRACT
In September 2001, NICUSA, Inc. 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. The Company recognizes revenues from this contract on the percentage of completion method, utilizing costs incurred to date as compared to the estimated total cost. Revenues and profit (loss) from this contract are based on the Company’s cost estimates to complete and are reviewed periodically, with adjustments recorded in the period revisions are made. Any anticipated contract loss is charged to operations as soon as determinable.
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.
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 three-month period ended March 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 commenced the 42-month maintenance and operations phase.
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
10
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.
For additional discussion of the Company’s contract with the California SOS, refer to Note 2 to the consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2006, filed with the SEC on March 15, 2007.
6. 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 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 March 31 (in thousands):
|
|
|
Outsourced |
|
Software |
|
Other |
|
Consolidated |
|
||||
|
2007 |
|
|
|
|
|
|
|
|
|
||||
|
Revenues |
|
$ |
19,868 |
|
$ |
766 |
|
$ |
— |
|
$ |
20,634 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Costs & expenses |
|
11,345 |
|
549 |
|
4,150 |
|
16,044 |
|
||||
|
Depreciation & amortization |
|
498 |
|
6 |
|
32 |
|
536 |
|
||||
|
Operating income (loss) |
|
$ |
8,025 |
|
$ |
211 |
|
$ |
(4,182 |
) |
$ |
4,054 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
2006 |
|
|
|
|
|
|
|
|
|
||||
|
Revenues |
|
$ |
16,989 |
|
$ |
(1,241 |
) |
$ |
— |
|
$ |
15,748 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Costs & expenses |
|
8,946 |
|
(1,003 |
) |
2,433 |
|
10,376 |
|
||||
|
Depreciation & amortization |
|
458 |
|
20 |
|
27 |
|
505 |
|
||||
|
Operating income (loss) |
|
$ |
7,585 |
|
$ |
(258 |
) |
$ |
(2,460 |
) |
$ |
4,867 |
|
11
The following is a reconciliation of total segment operating income to total consolidated income before income taxes for the three months ended March 31 (in thousands):
|
|
|
2007 |
|
2006 |
|
||
|
Total operating income for reportable segments |
|
$ |
4,054 |
|
$ |
4,867 |
|
|
Interest income |
|
580 |
|
380 |
|
||
|
Equity in net loss of affiliates |
|
— |
|
(97 |
) |
||
|
|
|
|
|
|
|
||
|
Consolidated income before income taxes |
|
$ |
4,634 |
|
$ |
5,150 |
|
7. SUBSEQUENT EVENT — REVOLVING CREDIT FACILITY
In May 2007, the Company entered into a $10 million unsecured credit agreement with a bank. 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% (if the Company’s consolidated leverage ratio is less than or equal to 1.25:1) or 1.25% (if the Company’s consolidated leverage ratio is greater than 1.25:1) of face value per annum. The Company also pays a quarterly commitment fee on the unused portion of the facility, which is either 0.1% (if the Company’s consolidated leverage ratio is less than or equal to 1.25:1) or 0.15% (if the Company’s consolidated leverage ratio is greater than 1.25:1).
The terms of the agreement provide for customary representations and warranties, affirmative and negative covenants, events of default, and limitations on dividends, capital expenditures and acquisitions. 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 credit agreement expires in May 2009. However, letters of credit may have an expiration date of up to one year beyond the expiration date of the credit agreement.
The Company has a separate credit agreement with another bank for the issuance of letters of credit. 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. In total, the Company and its subsidiaries had unused outstanding letters of credit of approximately $1.3 million at March 31, 2007. It is the Company’s intention to cancel these letters of credit upon their expiration dates throughout 2007 and reissue them under the new revolving credit facility.
12
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
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. 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 clients 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.
13
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 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, development and management services to government portals in exchange for an agreed-upon fee.
Currently, we have contracts to provide portal outsourcing services for nineteen states, eighteen of which operate under our self-funding business model (see Note 2 in the Notes to Consolidated Financial Statements included in this Form 10-Q). Our closest competitors operate no more than one state portal each. We also provide portal outsourcing services to three local governments.
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 UCC and corporate filings and ethics & elections 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 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 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, 2006, filed with the SEC on March 15, 2007.
· Software development & portal management: these are fees from the performance of software development projects and other time and materials or fixed fee services for our government partners. While we actively market portal software development services, they do not have the same degree of predictability as our transaction-based revenues.
14
Our software & services businesses
Our UCC and corporate filings software development business derives the majority of its revenues from fixed-price application development contracts and recognizes revenues on the percentage of completion method. At March 31, 2007, this business was primarily engaged in servicing its contract with the California Secretary of State and no longer markets its applications and services in respect of new engagements.
Ethics & elections
Our ethics & elections business derives the majority of its revenues from time and materials application development and maintenance outsourcing contracts and recognizes revenues as services are provided. At March 31, 2007, our ethics & elections business was primarily engaged in servicing its contracts with the Federal Election Commission and the state of Michigan.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to 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, 2006, filed with the SEC on March 15, 2007, except as follows:
Uncertain Tax Positions
We account for uncertain tax positions in accordance with FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes” — an interpretation of FASB Statement No. 109.” The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income. See Notes 1 and 4 in the Notes to Consolidated Financial Statements included in this Form 10-Q for additional detail on our adoption of FIN 48 in the first quarter of 2007 and our uncertain tax positions.
The following discussion summarizes the significant factors affecting operating results for the three-month periods ended March 31, 2007 and 2006. This discussion and analysis should be read in conjunction with our consolidated interim financial statements and the related notes included in this Form 10-Q.
15
|
|
|
Three Months Ended |
|
||||
|
Key Financial Metrics |
|
|
|
2007 |
|
2006 |
|
|
Revenue growth — outsourced portals |
|
17 |
% |
24 |
% |
||
|
Same state revenue growth — outsourced portals |
|
16 |
% |
8 |
% |
||
|
Recurring portal revenue % |
|
93 |
% |
97 |
% |
||
|
Gross profit % — outsourced portals |
|
47 |
% |
51 |
% |
||
|
Selling & administrative expenses as % of portal revenues |
|
26 |
% |
20 |
% |
||
|
Operating income margin % (operating income as a % of portal revenues) |
|
20 |
% |
29 |
% |
||
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 change from the prior year period.
|
|
|
Three Months Ended March 31, |
|
||||||
|
|
|
2007 |
|
%Change |
|
2006 |
|
||
|
DMV transaction-based |
|
$ |
11,460 |
|
3 |
% |
$ |
11,176 |
|
|
Non-DMV transaction-based |
|
6,015 |
|
14 |
% |
5,263 |
|
||
|
Software development & portal management |
|
2,393 |
|
335 |
% |
550 |
|
||
|
|
|
|
|
|
|
|
|
||
|
Total |
|
$ |
19,868 |
|
17 |
% |
$ |
16,989 |
|
Portal revenues in the current quarter increased 17%, or approximately $2.9 million, over the prior year quarter. Of this increase, 16%, or approximately $2.8 million, was attributable to an increase in same state portal revenues (outsourced portals in operation and generating recurring revenues for two full years), and 1%, or approximately $0.1 million, was attributable to our new Vermont portal, which began generating DMV revenues in March 2007.
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 are classified as software development & 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 baseline revenues from the new Indiana contract are 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 the current quarter increased 16% over the prior year quarter due to increased transaction revenues from our Kentucky, Montana, Arkansas and Utah portals, among others.
Excluding Indiana, same state portal revenues in the current quarter increased 19% over the prior year quarter, with same state DMV transaction-based revenues increasing 10% and same state non-DMV transaction-based revenues increasing 38% (primarily due to the addition of several new revenue generating applications in existing portals). Our same state revenue growth in the current quarter was higher than the 8% growth we achieved in the prior
16
year quarter primarily due to increases in same state DMV and non-DMV transaction-based revenue growth. Excluding Indiana, same state DMV revenue growth in the current quarter was 10% compared to 3% in the prior year quarter. The higher growth in the current quarter was primarily due to the effect of modest DMV price increases in three of our portal states that went into effect in late 2006. 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 22% in the prior year quarter.
COST OF PORTAL REVENUES. Cost of portal revenues for the current quarter increased 26%, or approximately $2.2 million, over the prior year quarter. Of this increase, 25%, or approximately $2.1 million, was attributable to an increase in same state cost of portal revenues, and 1%, or approximately $0.1 million, was primarily attributable to our new Vermont portal.
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 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 rate in the current quarter was 47% compared to 51% in the prior year quarter, with cost of portal revenues growing at a higher rate (26%) than portal revenues (17%), as further discussed above. We carefully monitor our portal gross profit percentage in an effort to balance generating a solid financial return and delivering value to our government partners through reinvestment in our portals. We expect our portal gross profit percentage to range from 45% to 47% in 2007.
SOFTWARE & SERVICES REVENUES. In the analysis below, we have categorized our software & services revenues by type of business (in thousands), with the corresponding percentage change from the prior year period.
|
|
|
Three-Months Ended March 31, |
|
||||||
|
|
|
2007 |
|
%Change |
|
2006 |
|
||
|
UCC & corporate filings software development |
|
$ |
172 |
|
110 |
% |
$ |
(1,781 |
) |
|
Ethics & elections |
|
528 |
|
17 |
|
452 |
|
||
|
Other |
|
66 |
|
(25 |
)% |
88 |
|
||
|
|
|
|
|
|
|
|
|
||
|
Total |
|
$ |
766 |
|
162 |
% |
$ |
(1,241 |
) |
17
Software & services revenues in the prior year quarter primarily reflect a revenue adjustment under percentage of completion accounting relating to our contract with the California Secretary of State, as further discussed in Note 5 in the Notes to Consolidated Financial Statements included in this Form 10-Q. 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 the prior year quarter primarily reflects an expense adjustment under percentage of completion accounting relating to our contract with the California Secretary of State as further discussed in Note 5 in the Notes to Consolidated Financial Statements included in this Form 10-Q.
SELLING & ADMINISTRATIVE. Selling & administrative expenses in the current quarter increased 49%, or approximately $1.7 million, over the prior year quarter. 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 has increased by approximately 20% since the first quarter of 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. Finally, stock-based compensation included in selling & administrative expenses in the current quarter increased by approximately $0.2 million over the prior year quarter due mainly to restricted stock awards that were granted to employees and non-employee directors subsequent to the first quarter of 2006. As a percentage of portal revenue, selling & administrative expenses were 26% in the current quarter compared to 20% in the prior year quarter. We expect selling & administrative costs as a percentage of portal revenue to be higher throughout 2007 as compared to 2006, 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. As further discussed in Note 3 in the Notes to Consolidated Financial Statements included in this Form 10-Q, 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 our available cash and marketable securities. As a result of this dividend, we expect interest income to decrease significantly for the remainder of 2007, as our average investable cash and marketable securities balance will be significantly lower in 2007 as compared to 2006.
INCOME TAX PROVISION. Our effective tax rate was approximately 41% in the current quarter compared to 43% in the prior year quarter. Our income tax provision in the prior year quarter was higher than the amount customarily expected due primarily to the establishment of a valuation allowance for a state income tax loss carryforward that we may be unable to
18
fully utilize. Prospectively, we expect our effective tax rate to be between 40% and 42%.
Our negative operating cash flow in the current quarter, an atypical working capital timing situation that should reverse in the second quarter of 2007, was primarily due to a substantial build in accounts receivable and the timing of payments to certain of our government partners, which affected accounts payable. We typically see an increase in both accounts receivable and accounts payable in the first quarter of every year due to increases in revenues across our portal businesses as compared to the fourth quarter of the previous year, which is our seasonally lowest quarter due to the smaller number of business days and a lower volume of business-to-government and citizen-to-government transactions during the holiday periods. While a general increase in revenues in the current quarter contributed to an increase in our accounts receivable, a substantial portion of the increase (approximately $3.0 million) was attributable to a build in accounts receivable relating to our new Indiana portal contract. As discussed above, we signed a new 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. As part of the transition process from the old contract to the new, we had not yet been paid at the end of the current quarter for baseline and variable services performed since July 2006. However, we received approximately $5.0 million from the state of Indiana in April 2007, and prospectively, anticipate receiving payments on a monthly basis under this contract.
Accounts payable at the end of 2006 were temporarily high due in part to an increase in fourth quarter tax payment processing from tax filing applications across our portal businesses, most notably in Hawaii. Such tax payments are frequently made via ACH or credit cards at the end of the year, whereby we do not receive payment or remit collected cash until after year end. The majority of these year-end tax receipts were remitted to our government partners in early January 2007.
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 a result of our NOL carryforwards, we are not currently paying federal 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 three-month periods ended March 31, 2007 and 2006, combined federal and state income tax payments totaled approximately $0.3 million and $0.4 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
19
the three months ended March 31, 2007 and December 31, 2006 were approximately $241.3 million and $196.9 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 the three-month periods ended March 31, 2007 and December 31, 2006 was 14 and 13, respectively.
We believe that working capital is an important measure of our short-term liquidity. Working capital, defined as current assets minus current liabilities, decreased to $31.3 million at March 31, 2007 from $73.0 million at December 31, 2006. Our current ratio, defined as current assets divided by current liabilities, at March 31, 2007 was 1.8 compared to 2.8 at December 31, 2006. The decrease in our working capital and current ratio was attributable to the $46.7 million special dividend paid out of the Company’s available cash and marketable securities in the current quarter as further discussed below and in Note 3 in the Notes to Consolidated Financial Statements included in this Form 10-Q.
Investing activities in the current quarter primarily reflect the liquidation of our marketable securities portfolio to pay the $46.7 million special cash dividend, and $1.0 million of capital expenditures, which were for normal fixed asset additions in our outsourced portal business, including Web servers, purchased software and office equipment. Cash used in investing activities in the prior year quarter primarily reflects $5.0 million in purchases of marketable debt securities in an effort to increase the investment income from our excess cash reserves, and $0.8 million of capital expenditures, which were primarily for normal fixed asset additions in our outsourced portal business.
Financing activities in the current quarter primarily reflect payment of the $46.7 million special cash dividend, in addition to $0.5 million in proceeds from the exercise of employee stock options and $0.2 million in proceeds from our employee stock purchase program. Financing activities in the prior year quarter primarily reflect $0.3 million in proceeds from the exercise of employee stock options and $0.2 million in proceeds from our employee stock purchase program.
At March 31, 2007, our total cash and marketable securities balance was $33.1 million compared to $81.8 million at December 31, 2006. As further discussed above, we paid a special cash dividend totaling $46.7 million in the current quarter 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. We believe that our currently available liquid resources and cash generated from operations will be sufficient to meet our operating requirements, capital expenditure requirements and current growth initiatives for at least the next twelve months without the need of additional capital. 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 California Secretary of State and subcontractors on that project;
· collateralize letters of credit, which we are required to post as collateral for performance on certain of our outsourced government
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portal contracts, as collateral for certain performance bonds, and as collateral for certain office leases;
· support our expansion into other states and government agencies beyond what is contemplated if unforeseen opportunities arise;
· expand our product and service offerings beyond what is contemplated if unforeseen opportunities arise;
· 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 available 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. Further, we may also draw on the unused portion of the $10 million unsecured line of credit we obtained in May 2007, as further discussed in Note 7 in the Notes to Consolidated Financial Statements included in this Form 10-Q.
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 March 31, 2007 and December 31, 2006. 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 March 31, 2007 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 March 31, 2007, 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. We have never had any defaults resulting in draws on performance bonds or letters of credit.
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
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space, those commitments are generally tied to the period of performance under related contracts.
RECENT ACCOUNTING PRONOUNCEMENTS
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, if any, on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. We will be required to adopt this standard in the first quarter of 2008. We are currently evaluating the requirements of SFAS No. 159 and have not yet determined the impact, if any, on our consolidated financial statements.
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ITEM 3. 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 4. CONTROLS AND PROCEDURES
a) EVALUATION 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 Quarterly Report on Form 10-Q.
b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
9.2 – First Amendment dated December 15, 1999 to 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
10.52 – Credit Agreement Dated as of May 2, 2007 between NIC Inc., as borrower, and Bank of America, N.A., as Lender and L/C Issuer
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
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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NIC INC. |
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Dated: May 7, 2007 |
/s/Eric J. Bur |
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Eric J. Bur |
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Chief Financial Officer |
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Dated: May 7, 2007 |
/s/Stephen M. Kovzan |
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Stephen M. Kovzan |
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Vice President, Financial |
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