NIC Inc.
Annual Report 2013

Plain-text annual report

It’s All About Access Anatomy of Modern Government N I C 2013 AN N UAL R E P ORT NIC 2013 ANNUAL REPORT Our lifeblood is coming up with new ways to apply technology to improve government. HAR RY H E R I N GTON Chief Executive Officer and Chairman of the Board, NIC Inc. 2 LETTER TO STOCKHOLDERS Paraphrasing what Winston Churchill once said, Representative democracy is the worst form of government ever conceived, except for every other kind ever tried. It’s true! We all have our complaints: too bureaucratic, overwhelming, unresponsive, uncaring. I have a slightly different take. Government is composed of focused, caring, hardworking public servants—many people who could make better money in the business world, but choose government to make a difference. The problem is bureaucracy. Because in this complicated world it has to be. The frustration comes when we need to interact with government. But you know what? This is the 21st century. Smart people invent better ways of doing things. It happens by utilizing technology. And interacting with our imperfect-but-still-best-ever form of government is something technology can help us do better—in fact, much better. It’s the whole reason we created NIC. For over 20 years we’ve been the people behind eGovernment, creating the technology that makes it click. In the process of connecting citizens directly to their government, we make it more accessible, more reactive, easier to understand, and simpler to deal with. The whole premise of government “of the people, by the people and for the people” finally becomes more than just a blue- sky notion. It becomes a hands-on reality. We build services without any guarantees that anyone will use them. And, if no one uses them, there’s no return on our investment. This singular focus has been successful in building our business, and continues to deliver advantages to our partners every day. Our lifeblood is coming up with new ways to apply technology to improve government. And the majority of the costs to develop and manage an online service do not require appropriated taxpayer dollars. In technology more than most fields, it’s the details. And it always takes a laser focus to get them right. Behind the scenes it’s complicated, but to the user, it’s simple. As devices get smaller and more mobile, the services we build must work on them. Our philosophy is “mobile first.” If an app doesn’t work on a small handheld screen over the local coffee shop Wi-Fi, it simply doesn’t work. As I mentioned earlier, we’re well aware of the delicate nature of our relationship to government. Partners but separate. We know the various governments we work with so intimately because we have to. We consider ourselves the R&D shop to the partners we serve and public servants to the people they serve. It’s a unique blend. And as we begin doing things on an even larger scale for the federal government, we become even more conscious of the need for passion and patience. It helps that our headquarters are in the heartland—in Kansas, not D.C. It gives us perspective and serves as a constant reinforcement of our culture of caring. We go so far as to encourage every one of our people to give back. We ask them to find community causes that interest them. And we support them in their efforts. It’s part of what makes us what we are: not just another remote government contractor but real people in the communities we serve—the people behind eGovernment. Our single defining purpose is to make government more accessible to everyone through technology. Together we’re making good government great. Chief Executive Officer and Chairman of the Board, NIC Inc. 3 NIC 2013 ANNUAL REPORT Connecting People to Their Government Some barriers are meant to be broken. The Berlin Wall fell. Apartheid ended. Men landed on the moon. It is not the people versus the government. The people are the technology, security, and funding—all of which is largely and purposely government. Connecting with government is not a privilege, but a unnoticeable to citizens or business owners as they make their way right. Sometimes that access happens by breaking down barriers of through government online services or mobile applications. But, it is racial, gender, and class inequality. Oftentimes, that access is more that carefully balanced and strategically planned infrastructure upon subtle—breaking down the barriers to government through technology which our reputation depends and from which our financial success is with the swipe of a tablet to retrieve necessary information, or just derived. It constitutes the anatomy of modern eGovernment. a few clicks to complete a required business filing. Millions of these everyday connections between the people and their government are 2013 may be remembered as the turning point when “dot gov” became what NIC is all about. It is our sole, defining purpose. And yet, making the primary means of government for millions of Americans. And NIC eGovernment connections ‘click’ requires a vast infrastructure of was there, making government accessible one transaction at a time. partnership, user experience, innovation, mobility, payment processing, 4 AL A BA MA Services Commenced: 2002 Alabama.gov’s user-friendly design was recognized for the third consecutive year with a Communicator Award from the International Academy of Visual Arts. AR KA N SAS Services Commenced: 1997 Arkansas.gov was recognized as a finalist in the 2013 “Best of the Web” competition. C OLO RAD O Services Commenced: 2005 The Colorado Department of Motor Vehicles continued to receive accolades for the “Save Time. Renew Online!” campaign, with a W3 Award from the International Academy of Visual Arts. CO N N E CTI CUT Services Commenced: 2014 In January 2014, NIC through its Connecticut Interactive subsidiary, secured a five-year contract with renewals that can extend the agreement through 2020. DE L A wAR E Services Commenced: 2011 The portal helped launch the Veteran’s Directory, which was recognized as one of the best business-to-government eGov services of 2013. HAwAI I Services Commenced: 2000 Hawaii.gov was recognized as a finalist in the 2013 “Best of the Web” competition. I DAH O Services Commenced: 2000 The state signed a two-year contract extension with Idaho Information Consortium through June 2015. I N D I A NA Services Commenced: 1995 The myBMV website was recognized as one of the best government-to-citizen eGov services of 2013. I OwA Services Commenced: 1997 The portal assisted the Iowa Motor Vehicle Division in creating the State’s first multi- lingual mobile application. KAN S AS Services Commenced: 1992 The state signed a one-year contract extension with Kansas Information Consortium through Dec. 2014. K E NT U CKY Services Commenced: 2003 The commonwealth signed a one-year contract extension with Kentucky Interactive through Aug. 2014. MAI N E Services Commenced: 1999 The state signed a two-year contract extension with Maine Information Network through June 2016. In addition, Maine.gov took fifth place in the 2013 “Best of the Web” competition. MARYLAN D Services Commenced: 2011 In 2013, the portal helped launch MD Prepares, the state’s official emergency management mobile application. MI S S I S S I PPI Services Commenced: 2011 MS.gov was recognized as a finalist in the 2013 “Best of the Web” competition. M ONTANA Services Commenced: 2001 The Prescription Drug Registry received an honorable mention for outstanding eGov services launched in 2013. NE B RAS KA Services Commenced: 1995 Nebraska.gov was recognized as a finalist in the 2013 “Best of the Web” competition. NE w JE R S EY Services Commenced: 2009 The state signed a one-year contract extension with New Jersey Interactive through June 2014. OK LAH OMA Services Commenced: 2001 The state signed a one-year contract extension with Oklahoma Interactive through Dec. 2014. OR E G ON Services Commenced: 2011 The Oregon Secretary of State’s Business Xpress was recognized as one of the best business-to-government eGov services of 2013. PE N N SYLVAN IA Services Commenced: 2012 In 2013, the portal helped mobile-enable hundreds of state agency websites. R H OD E I S LAN D Services Commenced: 2001 RI.gov was recognized as a finalist in the 2013 “Best of the Web” competition. S OUTH CAR OLI NA Services Commenced: 2005 SC.gov took fourth place in the 2013 “Best of the Web” competition ranking of state web portals. NIC PORTALS TE N N E S S E E Services Commenced: 2000 TN.gov received top honors taking first place in the 2013 “Best of the Web” competition. TE XAS Services Commenced: 2009 Texas.gov was recognized as a finalist in the 2013 “Best of the Web” competition. UTAH Services Commenced: 1999 Utah.gov took second place in the 2013 “Best of the Web” competition ranking of state web portals. VE R M ONT Services Commenced: 2006 The state signed a new contract with Vermont Information Consortium to manage its eGov services for up to six years. wE ST VI R G I N IA Services Commenced: 2007 The state signed a one-year contract extension with West Virginia Interactive through June 2014. wI S CON S I N Services Commenced: 2013 In 2013, NIC through its Wisconsin Interactive Network subsidiary, secured a new partnership with the state of Wisconsin. The contract term is for five years with state renewal options through 2023. N Ew M E X I CO (S TATE AG E N CY PARTN E R) Services Commenced: 2009 The Department of Motor Vehicles and its parent, the New Mexico Taxation and Revenue Department signed a one-year contract extension with New Mexico Interactive through 2014. VI R G I N IA (S TATE AG E N CY PARTN E R) Services Commenced: 2013 In 2013, Virginia Interactive signed contracts with two of its largest legacy agency partners, the Virginia Supreme Court and the Department of Game & Inland Fisheries, to continue operating eGov services on behalf of the agencies. PR E-E M PLOYM E NT S CR E E N I N G PR OG RAM Services Commenced: 2009 The Pre-Employment Screening Program received an honorable mention as an outstanding government-to-business eGov service in 2013. 5 NIC 2013 ANNUAL REPORT NIC Leadership Team R O B E RT w . K NAPP Chief Operating Officer AI M I M. D AU G HTE RY Chief Accounting Officer Robert W. Knapp was appointed to the position of Chief Operating Aimi M. Daughtery has served as the Company’s Chief Accounting Officer in January 2012. From February 2009 until this appointment, Officer since January 2011. Ms. Daughtery joined the Company he served as the Company’s Executive Vice President. Mr. Knapp in November 2007 and served as the Company’s Controller until joined the Company in November 1999 and has served in various January 2011. Prior to joining the Company, Ms. Daughtery served as management capacities, including Director of Marketing for the the Controller of Mediware Information Systems, Inc. for one year Company’s Indiana portal subsidiary, President and General Manager and served as a Manager of Financial Planning and Analysis at Wells of the Company’s Kansas portal subsidiary, Regional Manager, and Fargo Financial for one year. Prior to these positions, Ms. Daughtery most recently Vice President of Portal Operations. Prior to joining worked at Deloitte & Touche LLP for 12 years, most recently serving the Company, Mr. Knapp was a director of information systems with as an audit Senior Manager until her departure. Ms. Daughtery is Alltel. Mr. Knapp holds a B.S. in business administration and an a Certified Public Accountant and holds a B.A. in accounting from M.B.A from the University of Tulsa. Buena Vista University. PiCtureD left tO right: R OB E RT w . K NAPP, Chief Operating Officer; A I M I M . DAU G HTE RY, Chief Accounting Officer; wI L L IA M F. B R AD L E Y, J R. , executive Vice President, Chief Administrative Officer, general Counsel, and Secretary; HAR RY H. H E R I N GTO N, Chief executive Officer and Chairman of the Board; R ON TH OR N B U R G H, Senior Vice President of Business Development; S TE P H E N M . KOVZ AN Chief financial Officer 6 NIC LEADERSHIP wI L LI AM F. B RAD LEY, J R. R ON TH OR N B U R G H executive Vice President, Chief Administrative Officer, Senior Vice President of Business Development general Counsel, and Secretary Ron Thornburgh is the Senior Vice President of Business William F. Bradley, Jr. was appointed to the positions of Executive Development, where he leads the Company’s national sales team and Vice President and Chief Administrative Officer in January 2012. marketing efforts. Mr. Thornburgh began his career in the Kansas From May 2006 until this appointment, he served as the Company’s Secretary of State’s office. Starting as a student in the mailroom, he Chief Operating Officer. He has served as the Company’s Secretary worked his way through the ranks and was elected in 1994 to the since May 1998 and General Counsel since July 1998. In addition, first of four terms in office. In 2002 he was recognized as a Digital Mr. Bradley served as a director from May 1998 to February 1999, Government “Agent of Change” by the Massachusetts Institute and Executive Vice President of Strategy, Policy and Legal from July of Technology after leading Kansas to national prominence with 1998 to May 2006. From January 1995 to the present, he has served the introduction of the Kansas Online Uniform Commercial Code in various executive capacities with the Company’s subsidiaries, filing system in July 2001. He has served on several government including President and CEO of Indiana Interactive from September association and nonprofit boards, including five-time honorary 1995 to May 2001. Prior to joining the Company in 1995, he was chairman of the Kansas Law Enforcement Special Olympics Torch engaged in the private practice of law in Kansas for 14 years. From Run and Past President of the National Association of Secretaries of June 1987 to September 1993, as a volunteer, Mr. Bradley organized State. Mr. Thornburgh holds a B.S. degree in Criminal Justice from and led the ad hoc group that created the Information Network of Washburn University. Kansas (INK), a quasi-state entity. He served as INK’s first chairman as it procured and then oversaw the outsourced state portal ST E PH E N M. KOVZA N contracts in Kansas. Mr. Bradley holds a B.A. degree in English from Chief financial Officer the University of Kansas, and a J.D. degree from the University of Stephen M. Kovzan has served as the Company’s Chief Financial Kansas School of Law. Officer since August 2007. Mr. Kovzan joined the Company in October 1999 and served as the Company’s Controller until September 2000, HAR RY H. H E R I N GTON at which time he became the Company’s Vice President of Financial Chief executive Officer and Chairman of the Board Operations and Chief Accounting Officer, serving as such until Harry H. Herington is the Company’s Chief Executive Officer and August 2007. Prior to joining the Company, Mr. Kovzan served as a Chairman of the Board. Mr. Herington joined NIC in 1995, and is business assurance manager with PricewaterhouseCoopers LLP. Mr. considered one of the early founders that helped transform the Kovzan is a Certified Public Accountant and holds a B.S. in business small Kansas start-up into a nationally recognized company. During administration from the University of Tulsa and an M.S. in business his career at NIC he has served in various operational capacities from the University of Kansas. leading the Company’s core business and became CEO and Chairman in 2008. In 2012, he received the Ernst & Young Entrepreneur of the Year® Award for technology in the Central Midwest Region. Before joining NIC, Mr. Herington began his career in law enforcement in Texas and Kansas, later serving as the Associate General Counsel for the League of Municipalities. Mr. Herington holds a B.S. degree from Wichita State University and a J.D. degree from the University of Kansas School of Law. 7 NIC 2013 ANNUAL REPORT Better Access = Better Government We know that the nation that goes all-in on innovation today will own the global economy tomorrow. PR E S I D E NT OBA MA State of the Union Address, Jan. 2014 We agree with the President—100 percent. And, NIC is doing its part to push innovation in the area of eGovernment services. We believe innovation includes how government interacts with businesses and citizens online. In 2013, NIC launched more than 650 new online services. We’ve only scratched the surface of how government can be more accessible online. We believe that whatever can be conducted over the Internet, definitely should be. 8 Here are a few examples of new services we helped launch in 2013: N E B RAS KA AD D S TO CLI CK D MV The suite of online services offered by Nebraska’s Department of Motor Vehicles at ClickDMV.ne.gov continued to expand this year with the addition of an online service to receive a second or replacement handicap parking permit, as well as the Ignition Interlock Permit Eligibility online service. The replacement handicap parking permit service eliminates the need for handicapped drivers to make a trip to the DMV, saving 160 disabled citizens a month a trip to the Nebraska DMV for a second or replacement handicap parking permit. Last year, the Nebraska DMV received more than 86,000 calls related to those charged with driving under the influence, including inquiries about ignition interlock permits, driver license reinstatement requirements, driver license points, and more. Now users can check their eligibility status and get many other related questions answered online. A r kAn sAs U nClAI m e d P roP e rT y In Arkansas, the state has nearly $170 million in assets that remain as unclaimed property. This includes assets such as dormant bank accounts, life insurance benefits, and utility deposits, for which a rightful owner cannot be found. The new site, developed in partnership by NIC’s Little Rock team and the Office of the State Auditor, allows users to log in and check for their unclaimed property among real-time data, and then submit a claim. The new system has reduced claims processing times from 30 to 7 days. mArylAn d Ce nTrAl B Us I n e s s lI Ce n s I nG s ysTe m The first of its kind in Maryland, NIC’s team in Annapolis helped launch the Central Business Licensing System in February. The new system allows business owners to register a new business or establish a tax account through a single site, reducing the time required to register a new business from 10 weeks to 5-7 days. “With the launch of Maryland’s first online business registration system, we take another important step forward in breaking down barriers to job creation,” said Maryland Gov. Martin O’Malley. “Today, we’re officially launching another tool for more efficient, more streamlined government; a tool for easing the administrative burden on businesses and therefore helping entrepreneurial Marylanders create jobs and expand opportunity.” Today, we’re officially launching another tool for more efficient, more streamlined government; a tool for easing the administrative burden on businesses... MART I N O’MALLEY Maryland Governor NEw SERVICES 9 NIC 2013 ANNUAL REPORT Quick stats QU I Ck s TAT 00 1: NIC’s services not only make government more accessible, they make our country safer. The Company continues to see strong results from its self-funded federal service, the Pre-Employment Screening Program (PSP). This study estimated: A 2013 study by the Federal motor Carrier safety Administration found that trucking and bus companies using the Pre-employment screening Program decreased both their crash rates and instances of drivers placed out-of- service due to safety violations. within the 12-month time frame of the study 1 0 QU ICk sTAT 0 02: NIC’s Director of Integrated Marketing, Hillary Hartley, was the second NIC employee in 18 months to be selected by the White House to participate in the Presidential Innovation Fellows program. NEw SERVICES QU ICk sTAT 0 03: In 2013, the University of Utah surveyed nearly 1,500 companies regarding online government business services in Arkansas, Indiana, and Kansas, revealing: 1 1 NIC 2013 ANNUAL REPORT keep in Touch Have you heard of Luke Wroblewski? He is the former Chief Design Architect at Yahoo! and Lead User Interface Designer at eBay. He spoke to our technology innovation teams this past fall at our design accordingly—code written once and used across multiple annual Tech Conference. His message? It echoed our mantra, devices. Today, mobile first is somewhat synonymous with touch first— “mobile first.” incorporating elements that work with all of the desktop devices that allow for navigation directly by touching the screen rather than clicking It is the leading aspect of our Company’s research-and-development a mouse or keyboard. mindset and an area that evolves with every advancement in mobile technology. In fact, NIC has been developing mobile solutions since Wherever government connections can take place, we believe 2002. There was a time when mobile first meant taking a lean accessing government should be as easy as using the interactive version of a website and coding it to render properly on a mobile device of your choice. Who knows where future technology will lead, device. From there, mobile advanced to responsive design that would but wherever that is, NIC will be leading the way in harnessing it to automatically detect the device being used and scale content and make government more accessible. 1 2 Providing real-time traffic information can help motorists avoid delays and, in turn, reduce congestion on our roadways. The SmartWay App is easy to navigate, and can be customized to provide only the information the user wants. We’re pleased so many travelers are taking advantage of this free resource. J OH N S CH R OE R TDOT Commissioner MOBILE 1 3 In 2013, NIC launched a total of 326 native and responsive-designed mobile applications. Here are a few of the highlights: Te n n e s s e e s mArT WAy moB I le AP P In its first six months, the Tennessee SmartWay mobile application was downloaded more than 100,000 times. Created in partnership with the Tennessee Department of Transportation (TDOT), the application allows motorists to avoid troubles on Tennessee highways. The application monitors traffic speeds, allows users to save any TDOT road camera as a favorite, sends incident notifications related to users’ specific routes, and more. P e n n sylvAn IA moB I le W e B With the launch of the Pennsylvania portal, our team in Harrisburg went to work to quickly redesign the PA.gov portal and place 113 agency pages into responsive design. This allowed main agency pages to be viewed properly from any type of mobile device. In the first three months after the pages were placed into responsive design, nearly 20 percent of total traffic came from a mobile device. k An sAs Cr I m I nAl H I sT ory r eC or d s eArCH In partnership with the Kansas Bureau of Investigation, NIC’s team in Topeka updated the State’s Criminal History Record Search service, making it mobile-enabled. In addition to working across multiple mobile devices, the enhanced service also uses KanAccess, a new Kansas.gov login process that allows users to manage Kansas.gov services with a single sign on. NIC 2013 ANNUAL REPORT 5 TOP NEW NIC native mobile Apps Convenience is key to further the adoption of EVs, which are part of Hawaii’s clean transportation future and move us toward reducing our dependency on imported oil. The EV Stations Hawaii app is a great example of our state using new technology to advance the widespread use of electric vehicles in Hawaii. NE I L AB E R CR OM B I E Hawaii Governor 1 . e v sTATIon s HAWAI I 4. re eF d eF e n de r Named the best “Energy Mobile App” by the Web One of the first mobile application games launched by Marketing Association, the EV Stations Hawaii mobile NIC, Reef Defender helps kids learn that what happens application leads drivers to locate publicly available on land affects the ocean. The application features the electric vehicle charging stations throughout Hawaii. The ancient Hawaiian technique of using a system of land and app is complete with a map and directions to the nearest sea stewardship involving the entire ahupua’a (watershed). charging station. 2 . m ArylAn d P r e PAr e s 5. m s.Gov moB I le The enhanced mobile application for the official website Launched in partnership with the Maryland Emergency of the State of Mississippi provides quick reference to Management Agency, the Maryland Prepares mobile state agencies, services, alerts, social media, news, application provides emergency information and alerts on- and more. the-go in the event of an emergency. Users can send an “I’m Safe” message via text messaging, email, or social networks. 3 . myev e nTs2Go Used by organizations including the National Governors Association and the Idaho Department of Education, MyEvents2Go places conference and event information at your fingertips. Features include a conference agenda, speaker bios, travel information, and more. 1 4 MOBILE Quick stats QU I Ck s TAT 00 4: NIC puts its mobile-first philosophy into action. By mId-2013 oF All nIC PArTner sTATe P orTAl s ITe s Were moBI le-enAB led vs. 31% of non-NIC state sites. QU I Ck s TAT 00 5: QU ICk sTAT 00 6: In 2013, nIC sUBmITTed on AverAGe, 3 neW moBI le APPLICATIONS To vAr IoUs APP sT ores (ITU n e s , G o o G le P lA y, eTC. ) eve ry W e e k! According to recent data from the PeW r eseArCH CenTer’s “InTerneT And Amer ICAn lIFe” ProjeCT, oF U.s. AdUlTs oWn Cell PHones, and 56% of those are smartphones. QU ICk sTAT 007: nIC moBIle APP doWnloAded mosT oFTen I n 2013? THe mArylAnd PrACTICe drIvInG TesT – doWnloAded more THAn 1 5 NIC 2013 ANNUAL REPORT open for Business In the anatomy of modern eGovernment, 24/7 connection is the expectation, not the exception. Secure payment processing is a key component in keeping government “storefronts” open online around the clock. In 2013, NIC processed $25 billion securely on behalf of its government partners. Sometimes, simply providing a government agency with the ability to accept credit cards makes a big difference in making government more accessible. When payment options are limited, it creates an unnecessary barrier for citizens and businesses to connect with government. We have been bringing this access to local municipalities for years, and in 2013 we added Winfield, West Virginia; Sayre, Oklahoma; and Murfreesboro, Tennessee, to the list of cities whose residents can now use credit or debit cards to pay for a variety of government services. 1 6 PAYMENTS & S ECURITY NIC Services is the division that manages the Company’s payment processing system that enables our partners to accept debit and credit cards. NIC Services launched its largest partnership in 2013 with a new service in the state of North Carolina —an online lien agency system, LiensNC.com. We believe in good governance of industry. Sometimes this results in developing new eGovernment services for agencies such as the Secretary of State’s office. Other times, good governance of industry happens outside of government—as is the case with LiensNC.com. In response to legislation that passed in North Carolina, the owner of construction projects that meet the statutory criteria must appoint an authorized lien agency. Also, anyone furnishing labor or materials in connection with construction projects, such as contractors, subcontractors, suppliers, etc. must give written notice to a designated mechanical lien agent of the owner to preserve their lien rights. The new LiensNC.com service allows these interested parties to efficiently and securely record their lien rights through a web- based online system. What’s unique about the LiensNC partnership, is that it is not part of a larger state contract. Rather, the partnership is with LiensNC LLC, a coalition of nine title insurance underwriters in North Carolina. Chief Security Officer Jayne Friedland Holland emphasizes cybersecurity to partners and works with them constantly on ways to better safeguard critical government data and sensitive personal information. None of the convenience of various payment forms really matters unless the payments are processed securely. Our Security team speaks to our partners extensively about government cybersecurity and along with portal security teams, helps our partners protect personal information to the best of their ability and helps them understand compliance with the Payment Card Industry’s Data Security Standards. JAYN E FR I E D LAN D H OLLAN D Chief Security Officer Earlier this year, NIC’s Chief Security Officer Jayne Friedland Holland, shared with Computerworld magazine one of the “15 Ways to Protect eCommerce Sites:” “Employees also need to be educated on the laws and policies that affect customer data and be trained on the actions required to keep it safe.” In June, she shared in a guest column for Government Security News, “Passwords are the first line of defense in protecting against hackers and malicious software.” 1 7 NIC 2013 ANNUAL REPORT What Are Good Connections Worth? Connecting people with government continues to be a growing need and a thriving business. 2013 was one of NIC’s strongest years yet as we continued to see record growth from our eGovernment services. The DPS Direct suite of services launched on behalf of the Texas Department of Public Safety during the third quarter of 2012, continued to perform strongly throughout 2013, as did the New Jersey Temporary Vehicle Tag t s m s e B 0 0 1 l l a C o m panie s i n a i e m r C a11# 0 13 F o e 2 rBes ma G a Z i n registration service—these among other services helped contribute to NIC’s record ranks companies with annual revenue between $5 levels of same state non-DMV revenue growth. million and $1 billion that have been publicly traded for at least a year. Criteria include earnings growth, sales Helping people connect with their government also continued to bring national growth and return on equity—in the past 12 months and recognition to NIC in 2013. In May, NIC was once again selected to the Barron’s over 5 years—as well as stock performance. This is the 400 Index. Making this index for at least two consecutive years places NIC in a very highest ranking NIC has received from Forbes, and the exclusive group—just 1.5 percent of all companies in North America remain on the list Company continues to be the only Kansas company to for two consecutive years. By November, NIC received more good news that Forbes make the list. ranked us no. 11 on its list of the “100 Best Small Companies in America.” The list 1 8 FINANCIALS FInAnCIAl H IGHlIGHTs: million In ToTAl revenUes UP 19% over 2012 oPerATInG margins, ComPAred WITH 20% In 2012 mIllIon In OPERATING INCOME million In ToTAl PorTAl revenUes 1 9 NIC 2013 ANNUAL REPORT FInAnCIAl H IGHlIGHTs: 27% sAme sTATe non-dmv revenUe GroWTH o v er 2012 $23 million reTUrned To sToCkHolders sPeCIAl CAsH dIvIdend oF $0.35 Per sHAre deClAr ed In oCToBer 201 3 $0.49 eArnInGs Per sHAre In 2013 UP 23% From 2012 eGov’s sToCk PrICe InCreAsed neArly 52% In 2013 kAnsAs CITy sTAr noTed By THe strongest performing stocks AmonG PUBlICly TrAded kAnsAs CITy ComPAnIes As one oF THe 2 0 2013 was one of NIC’s strongest years yet as we continued to see record growth from our eGovernment services. FINANCIALS mIllIon or per share has been returned To sToCkHolders I n sPeCIAl CAs H dIvI dends sInCe 2007. eArn InG s Per sHAre ToTAl r evenUes (I n mIllIons) $0.50 $0.45 $0.40 $0.35 $0.30 $0.25 $0.20 $0.15 $0.10 $0.05 $0.00 2 1 . 0 $ 4 0 0 2 0 1 . 0 $ 5 0 0 2 7 1 . 0 $ 6 0 0 2 9 1 . 0 $ 7 0 0 2 9 1 . 0 $ 8 0 0 2 2 2 . 0 $ 9 0 0 2 8 2 . 0 $ 0 1 0 2 5 3 . 0 $ 1 1 0 2 0 4 . 0 $ 2 1 0 2 9 4 . 0 $ 3 1 0 2 $250 $200 $150 $100 $50 $0 8 . 5 5 $ 4 0 0 2 2 . 9 5 $ 5 0 0 2 4 . 1 7 $ 6 0 0 2 8 . 5 8 $ 7 0 0 2 6 . 0 0 1 $ 8 0 0 2 9 . 2 3 1 $ 9 0 0 2 5 . 1 6 1 $ 0 1 0 2 9 . 0 8 1 $ 1 1 0 2 2 . 0 1 2 $ 2 1 0 2 3 . 9 4 2 $ 3 1 0 2 2 1 NIC 2013 ANNUAL REPORT A Home Game Has Advantages At NIC, we know that creating access to government cannot happen from a remote corporate headquarters. It takes place one local, dedicated, capital city team at a time working to bring access to government in the customized way that is necessary for that state. And, while we believe access to government is a key way to improving people’s lives, we also invest our time, talents, and resources in the communities in which we serve. To us, giving back to the community is not only our corporate culture, it’s our way of life. It’s in our DNA. It’s who we are as an NIC family. Less than 24 hours after the devastating May 20, 2013 tornado in Moore, Okla., NIC’s Oklahoma City team worked with the Governor to launch the OKStrong disaster recovery website. Following the development of the OKStrong site, the team worked with State Chief Information Officer Alex Pettit to build additional Donor Connect operated similar to a bridal registry providing a list online services to assist with recovery efforts, launching Owner of donations that were needed by local non-profit organizations, Connect, Pet Connect, and Donor Connect online services. Owner allowing individuals to upload a form stating they would fulfill a Connect served as a photo gallery and allowed citizens to upload particular donation need, and then tracking the remaining balance images of items they found, descriptions of the items, and contact of items that were still needed. This suite of services that would information. Pet Connect provided an online gallery of pets have normally taken a team more than two weeks to develop, was displaced by the tornado that were taken to area pet shelters, and launched within just four days. 2 2 COMMUNITY I firmly believe the No. 1 job I have is to set the culture of the company. That’s going to drive success. That’s going to drive integrity. That’s going to drive everything about the company. N I C CE O HAR RY H E R I N GTO N As quoted in the May 19, 2013 “Corner Office” column in the New York Times Each year, NIC recognizes the individuals that go above and beyond in giving back to their community with the Citizen and Team of the Year awards. In 2013, NIC’s Corporate Communications Specialist, Dessi Tomova, won the Citizen of the Year award for organizing and participating in several local community involvement activities. She played a key role in increasing NIC corporate employee participation in a variety of community and wellness initiatives. NIC’s Hawaii team won the Company’s Team of the Year award for their work to clean up area beaches, clearing trails, adopting families during the holidays, and more. The Hawaii team also created a dedicated website that tracks their community involvement, complete with employee profiles that list their favorite charities and recent participation. Wellness plays a big role in NIC’s culture and its volunteer efforts. Several times a year, NIC teams are competing in charity run-walks or donating blood. These efforts culminated with NIC being named as one of the healthiest employers in Greater Kansas City in December 2013. Ride4Cops, which NIC’s CEO Harry Herington founded in 2009, was featured on NBC’s Today Show. Accompanied by governors, secretaries of state, and attorneys general, Harry led by example in his spare time, and took his message of supporting families of fallen officers to eight states in 2013: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, Rhode Island, and Vermont. In August, the Massachusetts Ride4Cops ceremony in Boston paid tribute to MIT Officer Sean Collier who was murdered earlier in the year in conjunction with the Boston Marathon bombing. Harry shared with the Today Show, “The most rewarding part is the family members. I was unprepared for the emotion—they are so grateful that someone remembers their fallen hero—remembers them as a person.” B E S U R E T O V I S I T: R I D E4C O P S.C O M 2 3 NIC 2013 ANNUAL REPORT Awards The Best of Web 1st Place Tennessee 2nd Place Utah 4th Place South Carolina 5th Place Maine Finalists Arkansas, Hawaii, Mississippi, Nebraska, Rhode Island, and Texas. 2 4 AwARDS AAmv A PACe A WAr d Honorable mention Texas, TV Commercials, “Hector” silver: Professional services Honorable mentions: Arkansas, Arkansas.gov Government-to-Business Indiana, Economic Development Corporation and “The Hendersons” silver: educational Website Project Information Management System B e sT F IT I nTeG rAT or AWAr ds Best Fit Integrator exceptional service Award Arkansas, Education Services: Arkansas Career Pathways Data Management System Best Fit Integrator long Term service Award South Carolina, “Palmetto Pay” Payment Processing Solutions Indiana, Learn More Indiana NIC Technologies, Department of Transportation, Pre-Employment Screening silver: mobile Websites for education Program Indiana, Learn More Indiana silver: mobile marketing for education Hawaii, Electronic Marriage and Civil Union Winner: Government-to-Citizen Indiana, Learn More Indiana dIG ITAl Gove r n m e nT ACH I eve m e nT A WAr d Winner: Government-to-Government Arkansas, Arkansas Centralized Electronic Best Fit Integrator Performance Award Network of Sex Offender Registry (CENSOR) Arkansas, Licensing: Arkansas State Board of Oklahoma, Oklahoma Office of Management Nursing Online License Application System and Enterprise Services’ Legislative Analysis B e sT oF sTATe Winner: Best Web-Based Community Winner: Government Internal Application Utah, Utah.gov B ronz e QU I ll AWAr d Honorable mention Texas, 2012 Texas.gov Marketing Campaign Texas, 2012 Texas.gov Online ads Texas, 2012 Texas.gov TV Commercials Arkansas, Arkansas State Jobs Applicant Tracking Module Winners: Government-to-Business Delaware, Veteran Directory (GIC) with Single Sign-on provisioned by Delaware Interactive Hawaii, Hawaii Maintains Sustainable Fisheries Registration System Indiana, myBMV website Indiana, INSPECT, Prescription Drug Monitoring System Mississippi, Department of Wildlife, Hunting and Fishing License Suite Tennessee, Department of Transportation’s SmartWay mobile application Utah, My Case Honorable mention: Government-to-Citizen Montana, Montana’s Prescription Drug Registry driving digital Government Award Nebraska, Nebraska Handicap Parking Permit Application and Management System Oklahoma, Governor Mary Fallin’s Governors Appointment Suite of Services dAvey AWAr d Gold: Government Website Arkansas, Arkansas.gov silver: Government Website Maine, Maine.gov Maryland, Maryland.gov with Electronic Fishing Trip Reporting exCe lle nCe.Gov A WAr d Kansas, Kansas Courts Mobile Services Finalist New Jersey, Alcotest Inquiry System Oregon, Oregon Secretary of State’s Business Xpress Utah, One-Stop Business Registration 2 5 NIC 2013 ANNUAL REPORT Awards G m I s e lITe A CH I eve r AWAr d Gold: Website/Government PTI Portal redesign South Carolina, SC.gov Maryland, Maryland.gov leader in Innovative Application of Web 2.0 Technologies and Civic/social media Tools Gold: mobile & Web-Based Technology/ Delaware, Public Integrity Reporting System H e r m e s Cr eATIve A WAr d Gold Mississippi, Mississippi Department of Wildlife, mobile Website Maryland, Maryland.gov Fisheries, & Parks Android Mobile Application moB I le We B A WAr d Winner Utah, MDI 2.0 Hor Izon AWAr d Bronze Utah, Utah.gov IACA m e r IT A WAr d merit Award Best energy mobile Application sTevI e AWAr d Hawaii, EV Stations Hawaii Customer service department of the y ear, Public services & education outstanding mobile Government Website Texas, Texas.gov Maryland, Maryland.gov nAGW P I n nACle A WAr d Innovator Award for emerging media s U m m IT Cr eATIve A WAr d South Carolina, UCC Online - SC Secretary of State state/ nGo Hawaii, eHawaii.gov I nTe rACTIve m e dIA A WAr d (I mA) Government: ImA Best in Class Award nAsCIo A WAr d outstanding Achievement Maryland, Maryland.gov silver: Government Indiana, Indiana State Fair Arkansas, Arkansas.gov Arkansas, Gov2Go Maryland, Maryland.gov Mississippi, MS.gov Texas, Texas.gov Utah, Utah.gov outstanding Achievement Delaware, Delaware.gov HTML5 Professional License Delaware, Delaware State Police Mobile CrimeStoppers App for iOS and Android Nebraska, Nebraska Handicap Parking Permit Application and Management System Bronze: Government Indiana, IN.gov Maine, Maine.gov Finalist: Fast Track Utah, Bill Watch TH e Com m U n ICATor AWAr d silver: education Indiana, Learn More Indiana Finalist: open Government Initiatives Gold: Government Utah, uGATE Indiana, IN.gov mArCom A WAr d Gold: design (Web)/Website redesign Maryland, Maryland.gov Finalist: Government-to-Citizen Utah, My Case silver: Government Indiana, Indiana State Fair Maine, Maine.gov 2 6 Gold: Homepage Indiana, IN.gov silver: Homepage Mississippi, MS.gov silver: Integrated Campaign - Business-to- Consumer Texas, 2012 Texas.gov Advertising Campaign silver: structure and navigation Mississippi, MS.gov silver: Travel/Tourism Indiana, Indiana State Fair Gold: visual Appeal Indiana, IN.gov silver: v isual Appeal Indiana, Learn More Indiana Indiana, Indiana State Fair silver: Web application and services Alabama, Alabama.gov Texas, Texas Driver License Renewal UTAH I n nov ATIon A WAr d We B AWA r d Honorable mention Government standard of excellence Utah, Utah.Gov Master Index Maine, Maine.gov vI s UAl e xCe lle nCe I n TH e m U lTI m e dIA ArTs (ve mA) Government Website Winners Alabama, Alabama.gov Maryland, Maryland.gov Utah, Utah.gov W3 AWAr d Gold: Alabama, Alabama.gov outstanding Website, Government Mississippi, MS.gov outstanding Achievement Texas, Texas.gov Best Government rich media online Campaign Texas, Texas.gov 2012 Online Advertising Colorado, Save Time. Renew Online! Marketing Campaign Campaign Maryland, Maryland.gov silver: Colorado, Colorado.gov Hawaii, eHawaii.gov Indiana, IN.gov Mississippi, MS.gov Rhode Island, RI.gov South Carolina, SC.gov Winner: Best of Government Utah, Utah.gov We sTe r n ATTor n eys G e n e rAl AWAr d (WAGGy) Best redesign Arkansas, Attorney General website AwARDS 2 7 NIC 2013 ANNUAL REPORT Board of Directors G OV. PETE wI LS ON Director Governor Wilson, 80, is a Principal at Bingham Consulting Group, a business consulting firm. He previously served as Governor and U.S. Senator for the state of California and Mayor of San Diego. He is also a Director of The Irvine Corporation and U.S. Telepacific Corporation. He became an NIC Director in 1999. R OS S C. HARTLEY Director Mr. Hartley, 66, is a co-founder of NIC and former President of The Hartley Insurance Group. He is also a Director of the Empire District Electric Company. He became a Director of the original companies that ultimately formed NIC Inc. beginning in 1991, and later an NIC Director upon the Company’s formation in 1998. G OV. C. B RAD H E N RY Director Governor Henry, 50, is of counsel to the law firm of Lester, Loving and Davies in Edmond, Okla., and is a founding member of Henry- Adams Companies, LLC. He was appointed by President Obama to the federal Council of Governors. He previously served as the Governor of Oklahoma, and was only the third governor in the state to serve two consecutive terms. He became an NIC Director in 2011. P i C t u r e D l e f t tO r i g h t : G OV. PETE wI LS ON, R OS S C . HAR T LE Y , G OV. C. B RAD H E N RY, ALE XAN D E R C . K E M P E R, KAR E N S . EVAN S, G OV. DAN I E L J. EVAN S, wI LLIAM M . L YON S, AR T N. B U R TS CH E R, HAR RY H. H E R I N GTO N 2 8 CORPORATE & STOCKHOLDER INFORMATION ALE XAN D E R C. K E M PE R Director wI LLIAM M. LYON S Director Mr. Kemper, 48, is Chairman of The Collectors Fund, a private Mr. Lyons, 58, is the former President and CEO of American Century equity fund, and Chairman and Chief Executive Officer of C2FO, Companies, Inc., a Kansas City-based investment manager. Mr. Lyons a trade settlement company. He is a Director of UMB Financial is also a Director of Morningstar, Inc. and the NASDAQ Stock Market, Corp., AXA, ArtUSA, and several privately held companies. He NASDAQ OMX BX, and NASDAQ OMX PHLX (all wholly owned became an NIC Director in 2007. subsidiaries of the NASDAQ OMX Group (NASDAQ: NDAQ )). He KAR E N S. EVAN S Director became an NIC Director in 2009. ART N. B U RTS CH E R Ms. Evans, 54, is an independent consultant and the National lead independent Director Director of U.S. Cyber Challenge, a nationwide talent search and Mr. Burtscher, 63, is President-Western Region of Westwood skills development program focused on the cyber workforce. Trust. He is also a Director of Novation, and several privately held She previously served as the de facto Chief Information Officer companies. He became an NIC Director in 2004 and was named under President George W. Bush. She became an NIC Director Lead Director in 2008. in 2011. G OV. DAN I E L J. EVAN S Director HAR RY H. H E R I N GTON Chairman of the Board and Chief executive Officer Mr. Herington, 54, is the Chief Executive Officer of NIC and Governor Evans, 88, is Chairman of Daniel J. Evans Associates previously served as the Company’s President, Chief Operating Consulting, a public policy consulting firm, and previously served Officer, and Executive Vice President of Portal Operations. He as Governor and U.S. Senator for the state of Washington. He is became an NIC Director in 2006. also a Director of Costco Wholesale Corporation and Archimedes Technology Group. He became an NIC Director in 1998. Committee Memberships AU dIT C om m IT Te e Art N. Burtscher, Chair · Karen S. Evans · Alexander C. Kemper · William M. Lyons C o m P e n sAT Ion C om m IT Te e Alexander C. Kemper, Chair · Art N. Burtscher · Daniel J. Evans C. Brad Henry · Pete Wilson C or P orATe Gov e r nAnCe & nom I nATI nG C om m IT Te e William M. Lyons, Chair · Daniel J. Evans · Karen S. Evans · Ross C. Hartley C. Brad Henry · Pete Wilson Contacting the Board of Directors Communications to NIC’s Board of Directors should be sent via e-mail to board@egov.com or in writing to: Board of directors, n IC Inc. 25501 West Valley Parkway, Suite 300 Olathe, Kansas 66061 The Board’s committee charters, the Company’s Code of Business Conduct and Ethics, and Corporate Governance Principles and Best Practices may be found on the Company’s website at www.egov.com/ Investors/CorporateGov and may be obtained in print by contacting the Investor Relations Department at invest@egov.com or (913) 498-EGOV. 2 9 NIC 2013 ANNUAL REPORT NIC 2013 ANNUAL REPORT Corporate Information 3 0 CORPORATE & STOCKHOLDER INFORMATION Outside Counsel Independent Registered Public Accountants stinson l eonard street ll P PricewaterhouseCoopers llP 1201 Walnut Street Suite 2900 Kansas City, Missouri 64106 (816) 842-8600 www.stinsonleonard.com 1100 Walnut Street Suite 1300 Kansas City, Missouri 64106 (816) 472-7921 www.PwC.com Stockholder Information A n n UAl m e eT I nG The Annual Meeting of NIC Inc. stockholders will be held on May 6, 2014 at The Oread, 1200 Oread Avenue, Lawrence, KS 66044. A formal notice about how to access the proxy statement and proxy form (along with the 2013 Form 10-K), will be mailed in advance of the meeting to all stockholders of record entitled to vote. Stockholders are encouraged to attend the meeting, but those unable to do so are asked to sign and return the proxy form. sT o Ck l I sT I nG NIC Inc.’s common stock is traded on NASDAQ Global Select market under the symbol “EGOV.” I nv e sT or r e lAT Ion s Copies of NIC’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and other publications are available free of charge upon request. Inquiries should be directed to: Angela davied Director of Corporate Communications & Investor Relations 25501 West Valley Parkway, Suite 300 Olathe, Kansas 66061 (913) 754-7054 (877) 234-EGOV adavied@egov.com Important information is included in the most recent Form 10-K, which is included in this annual report. These documents can also be viewed online at www.egov.com/Investors. r eG I sTe r An d TrAn s F e r AG e nT Computershare 250 Royall Street Canton, MA 02021 (781) 575-2000 www.computershare.com 3 1 NIC 2013 ANNUAL REPORT Credits Bernstein-rein TrAde mAr k s & r eG I sTe r e d s e rvICe m Ar k s Kansas City, Missouri www.bernstein-rein.com NIC Inc. is a registered service mark of NIC Inc. The NIC logo and “The People Behind eGovernment” are registered trademarks of NIC Inc. Certain Blue ocean Consulting other name and logos protected by trademark appear in this report. Rather than list Olathe, Kansas www.1boc.com the names and entities that own these trademarks or insert a trademark symbol with each mention of the trademark, NIC Inc. states that it is using the names only for informational purposes and to the benefit of the trademark owner with no intention of infringing upon that trademark. ©2014 NIC Inc. NIC is an equal opportunity employer. 3 2  _________________________________________________________________________________________________________________________ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2013  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transaction period from to Commission file number 000-26621 NIC INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 52-2077581 (I.R.S. Employer Identification No.) 25501 West Valley Parkway, Suite 300, Olathe, Kansas 66061 (Address of principal executive offices, including Zip Code) Registrant's telephone number, including area code: (877) 234-3468 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Common Stock, $0.0001 par value per share Name of Each Exchange on Which Registered The NASDAQ Stock Market, LLC Securities registered pursuant to Section 12(g) of the Act: None ___________ Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No  Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No  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 No  Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No  Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer  Non-accelerated filer  (Do not check if a smaller reporting company) Accelerated filer  Smaller reporting company  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No  The aggregate market value of voting stock held by non-affiliates of the registrant, as of June 30, 2013, was approximately $991,897,097 (based on the closing price for shares of the registrant’s common stock as reported by the NASDAQ Global Select Market on that date). Shares of common stock held by each executive officer, director and holder of 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status for purposes of this calculation is not intended as a conclusive determination of affiliate status for other purposes. On February 12, 2014, 65,035,010 shares of the registrant’s common stock, $0.0001 par value per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s definitive Proxy Statement to be issued in connection with its Annual Meeting of Stockholders to be held in 2014 are incorporated by reference into Part III of this Form 10-K. TABLE OF CONTENTS NIC INC. FORM 10-K ANNUAL REPORT Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Item 10. Item 11. Item 12. Item 13. Item 14. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures PART I PART II Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PART III Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services Item 15. Exhibits, Financial Statement Schedules PART IV Page 1 12 21 21 22 22 22 24 25 35 36 58 58 58 59 59 59 60 60 60  PART I CAUTIONS ABOUT FORWARD LOOKING STATEMENTS Statements in this Annual Report on Form 10-K regarding NIC Inc. and its subsidiaries (the “Company,” “NIC,” “we,” “our,” or “us”) 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 NIC’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 risks related to economic and competitive conditions. Any forward-looking statements made in this Form 10-K speak only as of the date of this report. We will not necessarily update the information in this Annual Report on Form 10-K if any forward-looking statement later turns out to be inaccurate. No one should assume that results projected in or contemplated by the forward-looking statements will continue to be accurate in the future. Details about risks affecting various aspects of our business are included throughout this Form 10-K. Investors should read all of these risks carefully, and should pay particular attention to risks affecting competition issues discussed on page 11, the other specific risk factors discussed on pages 12 to 21, the factors discussed in the introduction to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and commitments and contingencies described in Notes 2, 3, 6, 7 and 9 to the Consolidated Financial Statements included in this Form 10-K. Other factors not presently identified may also cause actual results to differ. AVAILABLE INFORMATION Our website address is http://www.egov.com. Through this website, we make available, free of charge, on the Investor Relations section of our website (http://www.egov.com/Investors/Financials/Pages/SEC.aspx) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to these reports (if any), as soon as reasonably practicable after these reports are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). We also make available through our website other reports filed with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including our proxy statements and reports filed by officers and directors under Section 16(a) of the Exchange Act. We do not intend for information contained in our website to be part of this Annual Report on Form 10-K. The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 100F Street NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding the issuers that file electronically with the SEC. FREQUENTLY USED TERMS In this Annual Report on Form 10-K, we use the terms “NIC,” “the Company,” “we,” “our,” and “us” to refer to NIC Inc. and its subsidiaries, unless the context otherwise requires. All references to years, unless otherwise noted, refer to our fiscal year, which ends on December 31. We use the term “eGovernment” to refer to electronic government, and we use the term “portal” to refer to an official government website outsourced to NIC. We use the term “enterprise-wide” to refer to our portals that provide state-wide services to multiple government agencies, which excludes our New Mexico portal, which serves only the New Mexico Motor Vehicle Division and its parent (the New Mexico Taxation and Revenue Department) and our agreements to provide eGovernment services for two state agencies in the Commonwealth of Virginia. We also use the term “partner” to refer to our government clients, with whom we have contractual relationships for eGovernment services. INDUSTRY AND MARKET DATA Industry and market data and survey and study results disclosed in this Form 10-K were obtained from industry, university, public interest, government and general publications. We have not independently verified the industry and market data or survey or study results obtained from these publications. Actual future industry and market conditions and results may differ materially from the conditions and results forecasted or reported in these publications. ITEM 1. BUSINESS Business Overview NIC is a leading provider of eGovernment services that helps governments use the Internet to reduce internal costs, increase efficiencies, and provide a higher level of service to businesses and citizens. We accomplish this currently through two channels: our primary outsourced portal businesses and our software & services businesses. In our primary outsourced portal businesses, we generally enter into long-term contracts with state and local governments to design, build, and operate Internet-based, enterprise-wide portals on their behalf. These portals consist of websites and applications we have built that allow businesses and citizens to access government information online and complete secure transactions, such as applying for a permit, retrieving government records, or filing a government-mandated form or report. The business model supporting most of our long-term contracts is a self-funded model. Our self-funded business model is one where we absorb the costs to build the portal’s technical 1 infrastructure and develop eGovernment services. After a service has launched, we and our government partners share a portion of the fees generated from electronic transactions, which are paid by the end users of the service. Our government partners benefit by reducing their financial and technology risks, increasing their operational efficiencies, and 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. We are typically responsible for funding up-front investment and ongoing operations and maintenance costs of the government portals. We typically enter into multi-year contracts with our government partners and manage operations for each contractual relationship through separate local subsidiaries that operate as decentralized businesses with a high degree of autonomy. Our business plan is to increase our revenues by delivering new services to a growing number of government entities within our existing contractual relationships and by signing long-term portal contracts with new government partners. Our software & services businesses operate primarily through NIC Technologies, LLC (“NIC Technologies”), our subsidiary, which provides software development and services, other than enterprise-wide outsourced portal services, to state and local governments as well as federal agencies. Segment Information Our Outsourced Portals segment is our only reportable segment and generally includes our subsidiaries that operate outsourced state and local government portals and the corporate divisions that support portal operations. The Other Software & Services category primarily includes our subsidiaries that provide software development and services, other than enterprise-wide outsourced portal services, to state and local governments as well as federal agencies. For additional information relating to our reportable and operating segments, refer to Note 11 in the Notes to Consolidated Financial Statements included in this Form 10-K. Industry Background The market for business-to-government and citizen-to-government transactions Government regulation of commercial and consumer activities requires billions of transactions and exchanges of large volumes of information between government agencies and the businesses they regulate and the citizens they serve. These transactions and exchanges include, but are not limited to: motor vehicle driver history record retrieval, motor vehicle registrations, tax returns, permit applications, and requests for government-gathered information. Government agencies typically defray the cost of processing these transactions and of storing, retrieving, and distributing information through a combination of general tax revenues, service fees, and charges for direct access to public records. The limits of traditional government transaction methods Traditionally, government agencies have transacted, and in many cases continue to transact, with businesses and citizens using processes that are inconvenient and labor-intensive, require extensive paperwork, and use outmoded technology and large amounts of scarce staff resources. Transactions and information requests are often made in person or by mail, which increases the potential for the compromise of sensitive personal information or errors that require revisions and follow-ups, particularly if the transactions and information requested are processed manually. Even newer methods, including telephone response systems, rely on multiple systems and potentially incompatible data formats, and require significant expertise and expenditures to introduce and maintain. As a result, businesses and citizens often have no choice but to face costly delays to complete essential tasks. These delays include waiting in line at a government agency, for answers by telephone, for responses by mail, or for payments by check. In addition, government agencies may not use modern methods of electronic payment, leaving businesses and citizens unable to pay certain fees online or at the counter using credit/debit cards or electronic checks, or government agencies may require advance payment rather than monthly billing. Businesses and citizens encounter further inconvenience and delay because they usually can work with government agencies only during normal business hours. Even when electronic alternatives are available, they often require a cumbersome process of multiple contacts with different government agencies or outdated payment methods. Increases in the level of economic activity and in the population have exacerbated these problems and increased the demand for new services. Growth of the Internet, electronic commerce, and eGovernment The Internet is a global medium that enables billions of people worldwide to share information, communicate, and conduct business electronically. The Pew Research Center, a nonprofit, nonpartisan group that provides information on the issues shaping America, launched the Pew Internet & American Life Project to study the social impact of the Internet. According to the Project’s Spring 2013 survey on Internet access, 85% of all American adults use the Internet, compared to just 64% of all American adults 10 years ago. Nearly all, 91%, use a search engine to find information on the Internet, with 67% using the Internet to visit a local, state, or federal government website. In addition, Americans continue to access the Internet through various devices: 61% of American adults have a laptop computer, 58% have a desktop computer, 56% have a smartphone, 26% own an e-book reader, and 34% own a tablet computer. Among smartphone owners, young adults, minorities, those with no college experience, and those with lower household income levels are more likely than other groups to say that their phone is their main source of Internet access. 2 This recent data points to a rapid increase in mobile technology use. One goal of the White House 2012 Digital Government Strategy: “Building a 21st Century Platform to Better Serve the American People,” is to “enable the American people and an increasingly mobile workforce to access high-quality digital government information and services anywhere, anytime, on any device.” According to a 2013 Pew study, 63% of all cell phone owners use the device to access the Internet – up from 38% just three years ago. In addition the Pew study noted that “21% of all adult cell phone owners now do most of their online browsing using their mobile phone – and not some other device such as a desktop or laptop computer.” In its “Analytical Perspectives of the Budget of U.S. Government,” the Office of Management and Budget of the Obama Administration stated that it is committed to building a 21st century government that is more efficient and effective for the American people, with information technology as a critical component of reaching that goal. Therefore, the federal government is planning to invest $82.0 billion on information technology (“IT”) in fiscal year 2014. According to IT consultancy Gartner, worldwide IT spending is estimated to reach $3.8 trillion by the end of 2014, $100 billion more than 2013. Acceptance of the Internet as a medium for eGovernment The acceptance of the Internet and electronic commerce presents a significant opportunity for the development of eGovernment, in which government agencies conduct transactions and distribute information over the Internet. By using the Internet, government agencies can increase the volume and efficiency of interactions with constituents without significantly increasing expenditures or demands on current personnel. In addition, regardless of physical distance, businesses and citizens can obtain government information quickly and easily over the Internet. For example, motor vehicle administrators can provide instantaneous responses to auto insurers’ requests for driving record data by allowing controlled access to government databases through the Internet. This online interaction reduces costs for both government and users and decreases response times compared to providing the same data by mail. Challenges to the implementation of eGovernment services Despite the potential benefits of eGovernment, barriers to creating successful Internet-based services occasionally preclude governments from implementing them. Some of these barriers are similar to those the private sector encounters, including: ● ● ● ● the high cost of implementing and maintaining Internet technology in a budget-constrained environment; the need to quickly assess the requirements of potential customers and cost-effectively design and implement eGovernment services that are tailored to meet these requirements; the intense competition for qualified technical personnel; and the need for updated Internet and mobile friendly payment methods, that are secure and compliant with Payment Card Industry standards. Governments also face some unique challenges that exacerbate the difficulty of advancing to Internet-based services, including: ● ● ● ● ● ● lengthy and potentially politically charged appropriations processes that make it difficult for governments to acquire resources and to develop Internet services quickly; a diverse and substantially autonomous group of government agencies that have adopted varying and fragmented approaches to providing information and transactions over the Internet; a lack of marketing expertise to ensure that services are designed to meet the needs of businesses and citizens, to increase the awareness of the availability of the services, and to drive adoption of the online service delivery channel; security and privacy concerns that are amplified by the confidential nature of the information and transactions available from and conducted with governments and the view that government information is part of the public trust; changes in administration and turnover in government personnel among influencers and key decision makers; and barriers to use of credit/debit cards and electronic check payments. We believe many private sector service providers generally do not address the unique needs of enterprise-wide eGovernment. Most service providers do not fully understand and are not well-equipped to deal with the unique political, regulatory, and security structures of governments. These providers, including large systems integrators, typically take a time-and-materials, project-based pricing approach and provide “off-the-shelf” solutions designed for other industries that may not adequately address the needs of government. 3 What We Provide to Governments We provide Internet-based eGovernment services designed to meet the needs of governments, businesses, and citizens. The key elements of our service delivery are: Customer-focused, one-stop government portal Using our marketing and technical expertise and our government experience, we generally design, build, and operate Internet-based portals on an enterprise-wide basis for our state and local government partners and Internet-based services for our federal partners that are designed to meet their needs as well as those of the businesses and citizens they serve. Our enterprise-wide outsourced portals are designed to create a single point of presence on the Internet that allows businesses and citizens to reach the website of every government agency in a specific jurisdiction from one online location. We strive to employ a common look and feel in the websites of all government agencies associated with each state’s government portal and make them useful, appealing, and easy to use. In addition to developing and managing the government portal, we develop applications that allow businesses and citizens to complete processes that have traditionally required separate offline interactions with several different government agencies or older generation electronic access. These applications permit businesses and citizens to conduct transactions with government agencies and to obtain information 24 hours per day and seven days per week using the latest technology and payment methods. We also help our government partners generate awareness and educate businesses and citizens about the availability and potential benefits of eGovernment services. Compelling and flexible financial models for governments With our self-funded business model, we allow governments to implement comprehensive eGovernment services at minimal cost and risk. We take on the responsibility and cost of designing, building, and operating government portals and applications, with minimal use of government resources. We employ our technological resources and accumulated expertise to help governments avoid the risks of selecting and investing in new and often untested technologies that may be implemented by unproven third-party providers. We implement our services rapidly, efficiently, and accurately, using our well-tested and reliable infrastructure and processes. Once we establish a portal and the associated applications, we manage transaction flows, data exchange and payment processing, and we fund ongoing costs from the fees received from portal users, who access information and conduct transactions through the portal. A 2013 study by the University of Utah of nearly 1,500 businesses in three NIC partner states, found that 95% approve of their state’s eGovernment services, with 90% preferring to conduct business with state government online and 96% saying that eGovernment services save their business time. In addition, the majority of the businesses surveyed said they believe fees associated with eGovernment services are reasonable and that eGovernment services reinforce the perception that the state is business-friendly. A 2012 study by the University of Utah found that by placing just nine high-volume services online and by utilizing NIC’s self-funded business model, the state of Utah avoided approximately $61 million in costs related to the operations of its official web portal and the development of online services from fiscal years 2007 through 2011. We are also able to provide specific fee-based application and outsourced portal solutions to governments who cannot or do not wish to pursue a self-funded portal solution. Focused relationship with governments We form relationships with governments by developing an in-depth understanding of their interests and then aligning our interests with theirs. By tying our revenues to the development of successful services and applications, we work to assure government agencies and constituents that we are focused on their needs. Moreover, we have pioneered and encourage our partners to adopt a model for eGovernment policymaking that involves the formation of oversight boards to bring together interested government agencies, business and consumer groups, and other vested interest constituencies in a single forum. We work within this forum to maintain constant contact with government agencies and constituents and strive to ensure their participation in the development of eGovernment services. We attempt to understand and facilitate the resolution of potential disputes among these participants to maximize the benefits of our services. We also design our services to observe relevant privacy and security regulations, so that they meet the same high standards of integrity, confidentiality, and public service as government agencies strive to observe in their own actions. 4 Government Contracts Our outsourced enterprise-wide state contracts The following is a summary of the portals in each state through which we provide enterprise-wide outsourced portal services to multiple government agencies at December 31, 2013: NIC Portal Entity Wisconsin Interactive Network, LLC Pennsylvania Interactive, LLC* NICUSA, OR Division NICUSA, MD Division Delaware Interactive, LLC Mississippi Interactive, LLC New Jersey Interactive, LLC Texas NICUSA, LLC West Virginia Interactive, LLC NICUSA, AZ Division Portal Website (State) www.wisconsin.gov (Wisconsin) www.pa.gov (Pennsylvania) www.oregon.gov (Oregon) www.maryland.gov (Maryland) www.delaware.gov (Delaware) www.ms.gov (Mississippi) www.nj.gov (New Jersey) www.Texas.gov (Texas) www.WV.gov (West Virginia) www.AZ.gov (Arizona) Vermont Information Consortium, LLC www.Vermont.gov (Vermont) www.Colorado.gov (Colorado) Colorado Interactive, LLC www.SC.gov (South Carolina) South Carolina Interactive, LLC www.Kentucky.gov (Kentucky) Kentucky Interactive, LLC www.Alabama.gov (Alabama) Alabama Interactive, LLC www.RI.gov (Rhode Island) Rhode Island Interactive, LLC www.OK.gov (Oklahoma) Oklahoma Interactive, LLC www.MT.gov (Montana) Montana Interactive, LLC www.TN.gov (Tennessee) NICUSA, TN Division www.eHawaii.gov (Hawaii) Hawaii Information Consortium, LLC www.Idaho.gov (Idaho) www.Utah.gov (Utah) www.Maine.gov (Maine) Idaho Information Consortium, LLC Utah Interactive, LLC Maine Information Network, LLC Arkansas Information Consortium, LLC www.Arkansas.gov (Arkansas) Iowa Interactive, LLC Indiana Interactive, LLC Nebraska Interactive, LLC Kansas Information Consortium, Inc. www.Iowa.gov (Iowa) www.IN.gov (Indiana) www.Nebraska.gov (Nebraska) www.Kansas.gov (Kansas) Year Services Commenced 2013 2012 2011 2011 2011 2011 2009 2009 2007 2007 2006 2005 2005 2003 2002 2001 2001 2001 2000 2000 2000 1999 1999 1997 1997 1995 1995 1992 Contract Expiration Date (Renewal Options Through) 5/13/2018 (5/13/2023) 11/30/2017 (11/30/2022) 11/22/2021 8/10/2016 (8/10/2019) 9/25/2014 (9/25/2017) 12/31/2015 (12/31/2021) 6/30/2014 8/31/2016 (8/31/2018) 6/30/2014 In transition period – 3/26/2014 (6/26/2014) 6/8/2016 (6/8/2019) 5/18/2014 7/15/2014 8/31/2014 (8/31/2015) 2/28/2015 (2/28/2017) 2/28/2014 12/31/2014 12/31/2015 (12/31/2020) 9/30/2014 (3/30/2016) 1/3/2016 (unlimited 3-year renewal options) 6/30/2015 6/5/2016 (6/5/2019) 7/1/2016 (3/14/2018) 6/30/2018 3/31/2014 7/1/2014 1/31/2016 12/31/2014 (12/31/2017) *See Note 2 in the Notes to Consolidated Financial Statements included in this Form 10-K for discussion of the Pennsylvania contract. Contract Developments During the first quarter of 2013, we received a one-year contract extension from the state of Kansas, a two-year contract extension from the state of Nebraska and a four-month contract extension from the state of Vermont. Additionally, we received a five-month contract extension from the state of Rhode Island. During the second quarter of 2013, we were awarded a five-year contract by the state of Wisconsin to manage its government portal, which includes an option for the government to extend the contract up to an additional five years. In addition, we were awarded a new three-year contract from the state of Vermont, which includes an option for the government to extend the contract for one additional three-year period. We also received a two-year contract extension from the state of Idaho, one-year contract extensions from the Commonwealth of Kentucky and the state of New Jersey, and six-month contract extensions from the state of Iowa and the state of Arizona with respect to the expiring Arizona portal contract. During the third quarter of 2013, we received a two-year contract extension from the state of Maine. In addition, we received a six-month contract extension from the state of West Virginia and a three-month contract extension from the state of Iowa. During the fourth quarter of 2013, we received a one-year contract extension from the state of Oklahoma, a six-month contract extension from the state of West Virginia and a three-month contract extension from the state of Arizona with respect to the expiring Arizona portal contract. During the first quarter of 2014, we were awarded a three-year contract with the state of Connecticut to manage its government portal, which includes renewal options for the government to extend the contract up to an additional three years. In addition, the Company received a three-month contract extension from the state of Iowa and a two-month contract extension from the state of Rhode Island. 5 Portal Agreements Our outsourced government portals operate under separate contracts that generally have an initial multi-year term. Under a typical self-funded contract, a government agrees that: ● ● ● ● ● ● ● ● ● ● we have the right to develop a comprehensive Internet portal owned by that government to deliver eGovernment services; the portal we establish is the primary electronic and Internet interface between the government and its businesses and citizens; it will advocate the use of the portal for all commercially valuable applications in order to support the operation and expansion of the portal; it will sponsor access to agencies and local governments for the purpose of our entering into agreements with these agencies to develop applications for their data and transactions and to link their Web pages to the portal; and it will establish a policy-making and fee approval authority, which typically includes agency members, business customers, and others, to establish prices for services and to set other policies. In return, we agree to: develop, manage, market, maintain, and expand that government’s portal and information and electronic commerce applications; assume the investment risk of building and operating that government’s portal and applications without the direct use of tax dollars; process electronic payments; bear the risk of collecting transaction fees; and have an independent audit conducted upon that government’s request. We typically own all the intellectual property in connection with the applications we develop under our government portal contracts. After completion of a defined contract term, our government partner typically receives a perpetual, royalty-free license to use the software only in its own portal. However, certain customer management, billing, and payment processing software applications that we have developed and standardized centrally and that are utilized by our portal businesses, are being provided to an increasing number of our government partners on a software-as-a-service, or “SaaS,” basis, and thus would not be included in any royalty-free license. If our contract was not renewed after a defined term or if our contract was terminated by our government partner for cause, the government agency would be entitled to take over the portal in place with no future obligation of or to us, except as otherwise provided in the contract and except for the services we provide on a SaaS basis, which would be available to our partners on a fee-for-service basis. We also provide certain payment processing services on a SaaS basis to a few private sector companies and to state and local agencies in states where we do not maintain an enterprise-wide outsourced portal contract, and may continue to market these services to other entities in the future. Historically, however, revenues from these services have not been material. 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. We also enter into separate agreements with various agencies and divisions of our government partners for the sale of electronic access to public records and to conduct other transactions. These agreements preliminarily establish the pricing of the electronic transactions and data access services we provide and the amounts we must remit to the agency. These terms are then submitted to the policy-making and fee approval authority for approval. Generally, our contracts provide that the amount of any fees we retain is set by governments to provide us with a reasonable return or profit. 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 materially affect the profitability of the respective contract to us. We do have the general ability to control certain of our expenses in the event of a reduction in the amount or percentage of fees we retain; however, there may be a lag in the time it takes to do so should we determine it is necessary. Any renewal of these contracts beyond the initial term by the government is optional and a government may terminate its contract prior to the expiration date if we breach a material contractual obligation and fail to cure such breach within a specified period or upon the occurrence of other events or circumstances specified in the contract. In addition, 15 contracts under which we provide enterprise-wide outsourced state portal services can be terminated by the other party without cause on a specified period of notice. Collectively, revenues generated from these contracts represented 57% of our total consolidated revenues for the year ended December 31, 2013. In the event that any of these contracts is 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, Montana, New Jersey, Pennsylvania, Tennessee, Texas, or Utah, 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. See the discussion below under “Expiring Contracts” regarding the expiration of our contracts with the Commonwealth of Virginia and the state of Arizona. 6 Our other outsourced state contracts Our subsidiary, New Mexico Interactive, LLC, has a contract to manage eGovernment services for the New Mexico Motor Vehicle Division (“MVD”) and its parent, the New Mexico Taxation and Revenue Department. During the second quarter of 2013, we received a one-year contract extension from the MVD to manage the state’s driver history database through June 30, 2014. During the second quarter of 2013, our subsidiary, Virginia Interactive, LLC (“VI” or “Virginia Interactive”), signed an agreement with the Department of Game and Inland Fisheries to provide eGovernment services from September 1, 2013 through February 28, 2015, which includes an option for the agency to extend the contract for one additional six-month period through August 31, 2015. During the third quarter of 2013, VI signed an agreement with the Office of the Executive Secretary of the Supreme Court of Virginia to provide eGovernment services from September 1, 2013 through August 31, 2014, which includes an option for the agency to extend the contract for one additional 12-month period through August 31, 2015. Our software & services businesses NIC Technologies has a contract with the Federal Motor Carrier Safety Administration (“FMCSA”) to develop and manage the FMCSA’s Pre-Employment Screening Program (“PSP”) for motor carriers nationwide, using the self-funded, transaction-based business model. During the first quarter of 2014, the FMCSA exercised a one-year renewal option for the PSP contract, extending its term through February 16, 2015. NIC Technologies also designs and develops online campaign expenditure and ethics compliance systems for federal and state government agencies. Its contract with the state of Michigan expires on March 31, 2014, and its contract with the Federal Election Commission (“FEC”) expired on June 30, 2013. For the year ended December 31, 2013, revenues from the FEC contract accounted for less than 1% of our total consolidated revenues. Any renewal of these software & services contracts beyond the initial term is optional and a government agency may terminate its contract prior to the expiration date if we breach a material contractual obligation and fail to cure such breach within a specified period or upon the occurrence of other events or circumstances specified in the contract. The contract with the FMCSA can be terminated by the other party without cause on a specified period of notice. The loss of the contract with the FMCSA, as a result of the expiration, termination, or failure to renew the contract, if not replaced, could significantly reduce our revenues and profitability. In addition, we have limited control over the level of fees we are permitted to retain under the contract with the FMCSA. Any changes made to the amount or percentage of fees retained by us, or to the amounts charged for the services offered, could materially affect the profitability of this contract to us. Expiring contracts As of December 31, 2013, there were 15 contracts under which we provide outsourced portal services or software development and services that have expiration dates within the 12-month period following December 31, 2013. Collectively, revenues generated from these contracts represented 38% of our total consolidated revenues for the year ended December 31, 2013. As described above, if a contract is not renewed after a defined term, the government partner would be entitled to take over the portal in place with no future obligation by us, except as otherwise provided in the contract and except for the services we provide on a SaaS basis, which would be available to the government agency on a fee-for-service basis. The contract under which our subsidiary, Virginia Interactive, provided outsourced portal services to agencies of the Commonwealth of Virginia expired on August 31, 2012. As more fully disclosed in a Form 8-K filed by us with the SEC on April 18, 2012, VI chose not to agree to terms mandated by the Commonwealth of Virginia for a new contract. VI provided transition services as required by the contract through August 31, 2013. The costs we incurred in transitioning out of VI’s contract with the Commonwealth of Virginia, including employee retention bonuses, operating lease termination costs, and fixed asset impairment, did not have a material impact on our consolidated results of operations, cash flows, or financial condition. For the year ended December 31, 2013, revenues from the legacy Virginia portal contract accounted for approximately 2% of our total consolidated revenues. During the first quarter of 2013, our subsidiary, NICUSA, Inc. (“NICUSA”), chose not to respond to a request for proposal issued by the state of Arizona for a new contract. The contract under which NICUSA provided outsourced portal services to agencies of the state of Arizona expired on June 26, 2013. However, during the second quarter of 2013, we received a six-month contract extension from the state of Arizona to provide transition services through December 26, 2013, which included options for the government to extend the contract for two additional three-month periods. During the fourth quarter of 2013, the state of Arizona exercised a three-month renewal option, extending its contract term through March 26, 2014. We have evaluated the costs which may be incurred in transitioning out of NICUSA’s contract with the state of Arizona, including employee retention bonuses, operating lease termination costs, and fixed asset impairment, which are not expected to have a material impact on our consolidated results of operations, cash flows, or financial condition. For the year ended December 31, 2013, revenues from the Arizona portal contract accounted for approximately 1% of our total consolidated revenues. 7 Our Portal Service Offerings We work with our state and local government partners to develop, manage, and enhance comprehensive, enterprise-wide, Internet-based portals to deliver eGovernment services to their constituents. Our portals are designed to provide user-friendly, convenient, secure multi-channel access, including mobile access, to in-demand government information and services, and include numerous fee-based transaction services and applications that we have developed. These fee-based services and applications allow businesses and citizens to access constantly changing government information and to file necessary government documents. The types of services and the fees charged vary in each portal installation according to the unique preferences of that jurisdiction. In an effort to reduce the frustration businesses and citizens often encounter when dealing with multiple government agencies, we handle cross-agency communications whenever feasible and shield businesses and citizens from the complexity of older, mainframe-based systems that agencies commonly use, creating an intuitive and efficient interaction with governments. We also provide industry- compliant payment processing systems that accommodate credit/debit cards and electronic checks, as applicable. Some of the online services we currently offer in different jurisdictions include: Product or Service Motor Vehicle Driver History Record Retrieval Description For those legally authorized businesses, this service offers controlled instant look-up of driving history records. Includes commercial licenses. Primary Users Insurance companies Vehicle Title, Lien & Registration Provides controlled interactive title, Insurance companies, lenders, citizens registration, and lien database access. Permits citizens to renew their vehicle registrations online. Motor Vehicle Inspections Allows licensed state inspection stations Businesses to file certified motor vehicle and emissions testing inspections online. Temporary Vehicle Tags Records temporary vehicle tag Automobile dealerships, citizens, law registration of a newly purchased car in real time with the state and issues a customized temporary plate for display on the vehicle. enforcement Driver’s License Renewal Permits citizens to renew their driver’s license online using a credit/debit card. Citizens Hunting and Fishing Licenses Permits citizens to obtain and pay for outdoor recreation licenses over the Internet or from point-of-purchase retail kiosks. Citizens Health Professional License Services Allows users to search databases on several health professions to verify license status. Hospitals, clinics, health insurers, citizens Professional License Renewal Permits professionals to renew their Attorneys, doctors, nurses, architects, and licenses online using a credit/debit card. other licensed professionals Business Registrations and Renewals Allows business owners to search for and reserve a business name, submit and pay for the business registration, and renew the business registration on an annual basis. Businesses Secretary of State Business Searches Allows users to access filings of Attorneys, lenders corporations, partnerships, and other entities, including charter documents. Uniform Commercial Code (UCC) Searches and Filings Permits searches of the UCC database to verify financial liens, and permits filings of secured financial documents. Attorneys, lenders 8 Product or Service Limited Criminal History Searches Description For those legally authorized, provides Primary Users Schools, governments, human resource professionals, nonprofits working with children or handicapped adults Legal professionals, citizens users with the ability to obtain a limited criminal history report on a specified individual. Allows authorized users to search court record databases, make payments for court fines, and in some cases electronically file court documents. Provides authorized access to birth, death, marriage, domestic partnership and civil union certificates. Citizens Court Services Vital Records Income and Property Tax Payments Allows users to file and pay for a variety of state and local income and property taxes. Businesses and citizens Payment Processing Permits use of the Internet for secure Businesses and citizens industry-compliant credit/debit card and electronic check payment processing both online and at the point of retail sale for government agency transactions. In addition to these services, we also provide customer service and support. Our customer service representatives serve as a liaison between our government partners and businesses and citizens. Revenues In our outsourced state and local portal businesses, we currently earn revenues from three main sources: transaction-based fees, time and materials-based fees for application development, and fixed fees for portal management services. In most of our outsourced portal businesses, the majority of our revenues are generated from transactions, which generally include the collection of transaction-based fees and subscription fees from users. The following table reflects the underlying sources of portal revenues as a percentage of total portal revenues for the years ended December 31: Percentage of Portal Revenues: Transaction-based Time and materials fees for application development Fixed fees for portal management 2013 2012 2011 90% 6% 4% 87% 8% 5% 86% 9% 5% The following table identifies each type of service, customer, and portal partner that accounted for 10% or more of our total consolidated revenues in any of the past three years: Type of Service Motor Vehicle Driver History Record Retrieval (This is the highest volume, most commercially valuable service we offer) Motor Vehicle Registrations Customer LexisNexis Risk Solutions (Resells motor vehicle driver history records to the insurance industry) Portal Partner Texas Percentage of Total Consolidated Revenues 2013 2011 2012 34% 34% 36% 13% 22% 10% 23% * 28% 23% 21% 21% * Motor Vehicle Registrations accounted for less than 10% of our total consolidated revenues in 2011. 9 Our contracts with data resellers, including LexisNexis Risk Solutions, are generally self-renewing until canceled by one side or the other, and generally may be terminated at any time after a 60-day notice. These contracts may be terminated immediately at the option of any party upon a material breach of the contract by the other party. Furthermore, these contracts are immediately terminable if the state statute allowing for the public release of these records is repealed. Sales and Marketing We have two primary sales and marketing goals: ● ● to retain and grow our revenue streams from existing government relationships; and to develop new sources of revenues through new government relationships. We have well-established sales and marketing processes for achieving these goals, which are managed by our national sales division and a marketing department within most of our outsourced portal businesses. Developing new sources of revenue We focus our new government sales and marketing efforts on increasing the number of governments and government agencies that are receptive to a public/private model for delivering information and/or completing transactions over the Internet. We meet regularly with interested government officials to educate them on the public/private model and its potential advantages for their jurisdictions. Members of our management team are also regular speakers at conferences devoted to the application of Internet technologies to facilitate the relationship between governments and their citizens. In states where we believe interest is significant, we seek to develop supportive, educational relationships with professional and business organizations that may benefit from the government service improvements our service delivery can produce. We also focus our corporate marketing efforts on key government decision makers through the use of print media, advertising, white paper development, media relations, and corporate communications. In addition, we continue to develop relationships with key government decision makers to expand our opportunities to manage eGovernment services in the federal arena. Once a government decides to implement a public/private model for managing Internet access to information resources and transactions, it typically starts a selection process that operates under special rules that apply to government purchasing. These rules typically require open bidding by possible service providers against a list of requirements established by the government under existing procedures or procedures specifically created for the Internet provider selection process. We respond to requests for bids with a proposal that outlines in detail our philosophy and plans for implementing our business model. Once our proposal is selected, we enter into negotiations for a contract. Growing existing markets In our existing state and local government relationships, our marketing efforts focus on: ● ● ● ● expanding the number of government agencies that provide services or information on the government portal; identifying new information and transactions that can be usefully and cost-effectively delivered over the Internet; working with the governance authorities in our existing markets to ensure that online services are priced in a manner to encourage usage; and increasing the number of potential users who do business with governments over the Internet. Although each government’s unique political and economic environment drives different marketing and development priorities, we have found many of our core applications to be relevant across multiple jurisdictions. Most of our enterprise-wide outsourced portal businesses have a director of marketing and additional marketing staff who meet regularly with government, business, and consumer representatives to discuss potential new services. We also promote the use of our extensive library of unique revenue-generating eGovernment services to existing and new customers through speaking engagements and targeted advertising to organizations for professionals, including lawyers, bankers, and insurance agents who have a need for regular interaction with government. We identify services that have been developed and implemented successfully for one government and replicate them in other jurisdictions. Technology and Operations Over the past 22 years, we have made substantial investments in the development of Internet-based applications and operations specifically designed to allow businesses and citizens to transact with and receive information from governments. The scope of our technological expertise includes network engineering as it applies to the interconnection of government systems to the Internet, Internet security, Web-to-legacy system integration, Web-to-mainframe integration, Web-to-mobile integration, database design, website administration, Web page development, and payment processing. Within this scope, we have developed and implemented a comprehensive Internet portal framework for governments, and a broad array of stand-alone products and services using a combination of our own proprietary technologies and commercially available, licensed technologies. We believe that our 10 technological expertise, coupled with our in-depth understanding of governmental processes and systems, has made us adept at rapidly creating tailored portal services that keep our partners on the forefront of eGovernment. Each of our government partners has unique priorities and needs in the development of its eGovernment services. More than half of our employees work in the Internet services, application development, and technology operations areas, and most are focused on a single government partner’s application needs. Our employees develop an understanding of a specific government’s application priorities, technical profiles, and information technology personnel and management. At the same time, all of our development directors are trained by experienced technical staff from our other operations, and there is frequent communication and collaboration, which ensures that our government partners can make use of the most advanced eGovernment services we have developed throughout our organization. Some of our portals and applications are physically hosted in each jurisdiction in which we operate on servers that we own or lease. The rest of our portals and applications are hosted at a central data facility operated by a third party, with backup at a similar facility in another location. We also provide links to sites that are maintained by government agencies or organizations that we do not manage. Our businesses provide uninterrupted online service 24 hours per day and seven days a week, and our operations maintain extensive backup, security, and disaster recovery procedures. History has proven that our systems and applications are scalable and can easily be replicated from one government entity to another. We focus on sustaining low-overhead operations, with all major investments driven by the objective of deploying the highest value-added technology and applications to each operation. Finally, we have designed our government portals and applications to be compatible with virtually any existing system and to be rapidly deployable. To enable speed and efficiency of deployment, we license commercially available technology whenever possible and focus on the integration and customization of these “off-the-shelf” hardware and software components when necessary. While we expect that commercially licensed technology will continue to be available at reasonable costs, there can be no assurance that the licenses for such third-party technologies will not be terminated or that we will be able to license third-party technology and applications for future services. While we do not believe that any one individual technology or application we license is material to our business, changes in or the loss of third party licenses could lead to a material increase in the costs of licensing or to our products becoming inoperable or their performance being materially reduced, with the result that we may need to incur additional development or procurement costs in an attempt to ensure continued performance of our services. We regard our intellectual property as important to our success. We rely on a combination of nondisclosure and other contractual arrangements with governments, our employees, subcontractors and other third parties, copyrights and privacy and trade secret laws to protect and limit the distribution of the proprietary software applications, documentation, and processes we have developed in connection with the eGovernment services we offer. Competition We face intense competition in all sectors of our business. We believe that the principal factors upon which our businesses compete are: ● ● ● ● our unique understanding of government needs; the quality and fit of eGovernment services; speed and responsiveness to the needs of businesses and citizens; and cost-effectiveness. We believe we compete favorably with respect to the above-listed factors. In most cases, the principal alternative for our services is a government-designed and managed service that integrates other vendors’ technologies, products, and services. Companies that have expertise in marketing and providing technical electronic services to government entities compete with us by further developing their services and increasing their focus on this segment of their business. Many of our potential competitors are national or international in scope and have greater resources than we do. Additionally, in some geographic areas, we may face competition from smaller consulting firms with established reputations and political relationships with potential government partners. Examples of companies that may compete and/or currently compete with us are the following: ● ● ● ● large systems integrators, including CGI and Unisys; traditional software applications developers, including Microsoft and Oracle; traditional consulting firms, including IBM Corp. and Accenture, Ltd.; and electronic transaction payment processors, including ACI Worldwide, Inc. (which acquired Official Payments Holdings, Inc. in 2013) and Link2Gov Corp. 11 Seasonality The use of some of our eGovernment services is seasonal, particularly the accessing of motor vehicle driver history records, resulting in lower revenues from this service in the fourth quarter of each calendar year, due to the lower number of business days in this quarter and a lower volume of transactions during the holiday period. Employees As of December 31, 2013, we had 773 full-time employees, of which 140 were working in corporate operations, 619 were in our outsourced portal businesses and 14 were in our software & services businesses. Our future success will depend, in part, on our ability to continue to attract, retain, and motivate highly qualified technical and management personnel. We also employ independent contractors to support our application development, marketing, sales, and administrative departments. Our employees are not covered by any collective bargaining agreement, and we have never experienced a work stoppage. We believe that our relations with our employees are good. ITEM 1A. RISK FACTORS Our operations are subject to a number of risks and uncertainties, including those described below. If any of these risks actually occur, our business, financial condition, and results of operations could be materially adversely affected. In that case, the value of our common stock could decline substantially. Security breaches or unauthorized access to sensitive information and/or personal information that we store, process, use or transmit in our business may harm our reputation and adversely affect our business and results of operations. A significant challenge to electronic commerce is the secure transmission of sensitive and/or personal information over information technology networks and systems which process, transmit and store electronic information, and manage or support a variety of business processes. The collection, maintenance, use, disclosure, and disposal of sensitive and personal information by our businesses are regulated at the state and federal levels. Furthermore, we are required to comply with the Payment Card Industry’s Data Security Standards, or PCI DSS, and the rules and standards promulgated by the National Automated Clearing House Association, or NACHA, because we provide online payment and electronic check processing services. Because we provide the electronic transmission of sensitive and personal information released from and filed with various government entities and we perform online payment and electronic check processing services, we face the risk of a security breach, whether through computer hacking, acts of vandalism or theft, malware, computer viruses, or other forms of cyber attack that could lead to significant disruptions or compromises of our information technology networks and systems or the unauthorized release or use of sensitive or personal information. We rely on encryption and authentication technology purchased or licensed from third parties to provide the security and authentication tools to effectively secure transmission of confidential information, including user credit card information and banking data. Advances in computer capabilities, new discoveries in the field of cryptography, threats that evolve ahead of tools designed to counter them, or other developments may result in the breach or compromise of technology used by us to protect transaction data. Data breaches can also occur as a result of non-technical issues, such as so-called “social engineering.” Despite the various security measures we have in place to protect sensitive and personal information from unauthorized disclosure and to ensure compliance with applicable laws and regulations, our information technology networks and systems and those of our third party vendors and service providers can never be made completely secure against security incidents, and a breach may still occur. Even the most well protected information, networks, systems, and facilities remain potentially vulnerable, because (i) attempted security breaches or disruptions may occur in the future, (ii) the techniques used in such attempts are constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected for an extended period and (iii) the security methodologies, protocols, systems and procedures used for protection are implemented by humans at each level, and human errors may occur. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, or if such measures are implemented, and even if appropriate training is conducted in support of such measures, human errors may still occur. It is virtually impossible for us to entirely mitigate this risk. A party, whether internal or external, who is able to circumvent our security measures could misappropriate information, including, but not limited to user credit card information or other sensitive and personal information, or cause interruptions or direct damage to our government portals or their users. Under payment card rules and our contracts with our credit card processors, if there is a breach of payment card information that we store, process, or transmit, we could be liable to the payment card issuers for their cost of issuing new cards and related expenses, and to partners for costs of notification and remediation, and for any damages to users under state laws or our partner contracts. If we fail to follow Payment Card Industry Data Security Standards, we could incur significant fines imposed by the Payment Card Industry or jeopardize our ability to give customers the option of using payment cards to fund their payments or pay their fees, even if there is no compromise of personal information. In addition, if we fail to follow NACHA security requirements, we may be liable for substantial fines and penalties, cease and desist orders, and other sanctions that could restrict or eliminate our ability to provide certain of our services in one or more states or accept certain types of transactions in one or more states, or could force us to make costly changes to our business practices. If we were unable to accept payment cards or process checks electronically, our business would be negatively impacted. 12 In addition, any noncompliance with privacy laws or a security breach involving the misappropriation, loss or other unauthorized access, use or disclosure of sensitive or personal information, or other significant disruption involving our information technology networks and systems (whether or not caused by a breach of our contractual obligations or our negligence), may lead to negative publicity, impair our ability to conduct our business, or cause us to incur potentially significant liability, damages or remediation costs. It may also cause the governments with whom we contract to lose confidence in us, any of which may cause the termination or modification of our government contracts and impair our ability to win future contracts. Actual or anticipated attacks and risks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, to train employees, and to engage third party security experts and consultants. Our technology errors and omissions insurance may not protect against all of the costs, liabilities, and other adverse effects arising from a security breach or system failure. If we fail to reasonably maintain the security of confidential information, we may suffer significant reputational and financial losses and our results of operations, cash flows, financial condition, and liquidity may be adversely affected. Because we have outsourced portal and software development and service contracts with a limited number of governments, the termination or non-renewal of certain of these contracts may harm our business. Currently, we have 29 portals (which includes our Connecticut portal that was awarded a three-year contract by the state of Connecticut in the first quarter of 2014 to manage the state’s government portal) through which we provide enterprise-wide outsourced portal services to state governments. These contracts typically have multi-year terms with provisions for renewals for various periods at the option of the government. However, a government typically has the option to terminate its contract prior to the expiration date if we breach a material contractual obligation and fail to cure such breach within a specified period or upon the occurrence of other events or circumstances specified in our contracts. In addition, we currently have 15 contracts under which we provide enterprise-wide outsourced state portal services that can be terminated by the other party without cause on a specified period of notice. Collectively, revenues generated from these contracts represented 57% of our total consolidated revenues for the year ended December 31, 2013. The Texas portal, which is one of the 15 contracts noted above, accounted for approximately 23% of our total consolidated revenues for the year ended December 31, 2013. In the event that any of these contracts is 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. Also, the contract with the FMCSA can be terminated by the other party without cause on a specified period of notice. Furthermore, we currently have 15 contracts under which we provide enterprise-wide outsourced portal services or software development and services that have expiration dates within the 12-month period following December 31, 2013. Collectively, revenues generated from these contracts represented 38% of our total consolidated revenues for the year ended December 31, 2013. Our Arizona portal contract was extended by the state of Arizona to March 26, 2014, in order for NICUSA to provide transition services in connection with the June 26, 2013 expiration of the contract. For the year ended December 31, 2013, revenues from the Arizona portal contract accounted for approximately 1% of our total consolidated revenues. If a contract is not renewed after a defined term, the government partner would be entitled to take over the portal in place with no future obligation to us, except as otherwise provided in the contract and except for the services we provide on a software-as-a-service, or SaaS, basis, which would be available to the government agency on a fee-for-service basis. The loss of a contract with one or more states or the FMCSA, as a result of the expiration, termination, or failure to renew the contract, if not replaced, could significantly reduce our revenues and profitability. If these revenue shortfalls were to occur, our business, results of operations, cash flows, and financial condition would be harmed. We cannot be certain if, when, or to what extent, governments might fail to renew or terminate any or all of their contracts with us. Because we generally grant our government partners fully-paid, perpetual licenses to use and modify the software and applications we develop, and such licenses continue upon a termination by them for cause or the natural expiration of our portal contracts, our government partners could elect to take over the operation and maintenance of our portal software themselves, or hire a competitor to operate and maintain our portal software. Any such decision to do so could adversely affect our revenues and profits. After termination for cause or the natural expiration of our portal contracts, it is possible that governments and their contractors may operate the portals themselves using the perpetual use license we typically are contractually obligated to provide to them. This license generally permits the government to use and modify the software programs and other applications we have developed for them in the operation of their portals (excluding software applications that we provide on a SaaS basis) on a perpetual, royalty-free basis. This perpetual use license could make it easier and more cost effective for our customers to elect not to enter into a new contract with us after the expiration of one of our portal contracts. Any such election could adversely affect our revenues and profits. Additionally, anyone using our software programs and other applications may inadvertently allow our intellectual property or other information to fall into the hands of third parties, including our competitors. In the event that a contract is terminated prior to the natural expiration of the term without cause, the terms of the respective contract typically require the government to pay a fee to us in order to continue to use our software in its portal. 13 The growth in our revenues may be limited by the number of governments and government agencies that choose to provide eGovernment services using our business model and by the finite number of governments with which we may contract for our eGovernment services. Our revenues are generated principally from contracts with state governments and government agencies within a state to provide eGovernment services on behalf of those government entities to complete transactions and distribute public information electronically. The growth in our revenues largely depends on government entities adopting our business model. We cannot assure that government entities will choose to provide eGovernment services or continue to provide eGovernment services at current levels, or that they will provide such services with private assistance or by adopting our model. Generally, under our self-funded business model, we initially generate a high proportion of our revenues from a limited number of transaction-based services we provide on behalf of a limited number of government agencies within a state, as other agencies consider participating in the portal. The failure to secure contracts with certain government agencies, particularly those agencies that control motor vehicle driver history records, could result in revenue levels insufficient to support a portal’s operations on a self-sustained, profitable basis. In addition, as there is a finite number of states remaining with which we can contract for our services, future increases in our revenues may depend, in part, on our ability to expand our business model to include multi-state cooperative organizations, local governments, and federal agencies and to broaden our service offerings to diversify our revenue streams across our lines of business. We cannot assure that we will succeed in expanding into new markets, broadening our service offerings, or that our services will be adaptable to those new markets. Some government partners may require specific government legislation to be passed for us to initiate and maintain our government contracts, and any failure to pass such legislation or any repeal or modification of or successful challenge to such legislation could adversely affect our business and results of operations. Because a central part of our business includes the execution of contracts with governments under which we remit a portion of user fees charged to businesses and citizens to state agencies, it is sometimes necessary for governments to draft and adopt specific legislation before the government can circulate a request for proposal (“RFP”) to which we can respond or can otherwise award such a contract. Furthermore, the maintenance of our government contracts requires the continued acceptance of our approach, including any enabling legislation and any implementing regulations. In the past, various entities that use the portals we operate to obtain government information have challenged the authority of governments to electronically provide these services exclusively through portals like those we operate, and other parties have challenged the contract awarding process in particular instances. A successful challenge in the future could result in a proliferation of alternative ways to obtain these services, which would harm our business, results of operations, cash flows, and financial condition. The repeal or modification of any enabling legislation or other legal challenge would also harm our business, results of operations, cash flows, and financial condition. We earn a significant percentage of our revenues from a limited number of services and customers, and any reduction in demand for those services from those customers could adversely affect our results of operations. We obtain a high proportion of our revenues from a limited number of services. A significant portion of our revenues is derived from data resellers’ use of our portals to access motor vehicle driver history records for the automobile insurance industry. Transaction-based fees charged for access to motor vehicle driver history records accounted for approximately 34% of our total consolidated revenues for the year ended December 31, 2013. One of these data resellers, LexisNexis Risk Solutions, accounted for approximately 22% of our total consolidated revenues during this period, or approximately three-quarters of our revenues earned for access to motor vehicle driver history records. This service is expected to continue to account for a significant portion of our revenues in the near future. However, regulatory changes or the development or increased use of alternative information sources, such as credit scoring, could materially reduce our revenues from this service. Our contracts with data resellers generally may be terminated at any time after a 60-day notice and may be terminated immediately at the option of any party in certain circumstances. A reduction in revenues from currently popular services would harm our business, results of operations, cash flows, and financial condition. We could suffer significant losses and liability if our operations, systems or platforms are disrupted or fail to perform properly or effectively. The continued efficiency and proper functionality of our technical systems, platforms, and operational infrastructure is integral to our performance. As we grow, we continue to purchase equipment and to upgrade our technology and network infrastructure to handle increased traffic on our Internet-based portals. We may experience occasional system interruptions and delays that make our applications and eGovernment services unavailable or slow to respond and prevent businesses and citizens from accessing information and services on our government portals. Any such interruptions or delays in the future could cause users to stop visiting our government portals and could cause our government partners to penalize us or terminate agreements with us. Our operations, systems and platforms may also be disrupted or fail due to catastrophic events such as natural disasters, telecommunications failures, power outages, cyber-attacks, terrorist attacks, or other catastrophic events. If any of these circumstances occurred, our business could be harmed. The Internet-based services for some of our portals and applications are physically hosted individually by the state or city where we provide services on servers that we typically own or lease. Our other portals and applications are hosted at a leased Computer Data Center (“CDC”) on servers that we own with a near real-time backup CDC located in a different geographic region 14 of the country. CDC servers are virtually segmented by government partner while housing more than one government partner’s services. An outage in one of the servers hosted outside one of the CDCs could affect that government partner’s services. An outage at both of our leased CDCs, or at one CDC and to the connection to our backup facility, could affect more than one government partner’s services. Any of these system failures could harm our business, results of operations, cash flows, and financial condition. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures of or interruptions in our systems. Our portal revenues could be harmed as a result of government budget deficits. The majority of our portal revenues are derived from fees we charge to users for transactions conducted through our portals and share with our government partners. Budget-strapped governments may seek to reduce our transaction revenues from our self-funded business model or our profit margin on transactions, or may decide to operate the portals themselves. In addition, approximately 6% of our portal revenues in 2013 were derived from time and materials-based fees for application development and approximately 4% of our portal revenues in 2013 were derived from fixed fees for portal management services, both of which are paid directly to us by governments. In the event of budget deficits, our government clients may be required to curtail discretionary spending on such projects and our portal revenues could be harmed. If our rate of growth continues or accelerates, we may not effectively manage our growth, which would adversely affect our business and our results of operations. Our growth rate may continue or may accelerate if we experience increased acceptance of our services under new or existing government contracts. If we cannot manage our growth effectively, we may not be able to coordinate the activities of our technical, accounting, and marketing staffs, and our business could be harmed. As part of our growth plan, we must implement new operational procedures and internal controls to expand, train, and manage our employees and to coordinate the operations of our various subsidiaries. If we cannot successfully implement our recently awarded eGovernment contracts in a timely and cost-effective manner or effectively manage the growth of our government portals, staff, software installation and maintenance teams, offices and operations, our business and results of operations may be adversely affected. Our business will be adversely affected if we are unable to hire, integrate, train, or retain the qualified personnel that our business requires. The growth in our business has resulted in an increase in the responsibilities for both existing and new management personnel. Some of our personnel are presently serving in more than one managerial capacity. Furthermore, compensation paid to executive and management personnel may not reflect market rates that could be obtained elsewhere. The loss of any of our executives or key employees could harm our business. In addition, we currently expect that we will need to hire additional personnel in all areas throughout 2014, including personnel for new operations in jurisdictions in which we may obtain contracts. We may not be able to retain our current key employees or attract, integrate, or retain other qualified employees in the future. If we do not succeed in attracting new personnel or integrating, retaining, and motivating our current personnel, our business could be harmed. In addition, new employees generally require substantial training in the presentation, policies, and positioning of our government portals and other services. This training will require substantial resources and management attention. Because a major portion of our accounts receivable is generated from a small number of users, negative trends in their businesses could cause us significant credit loss and negatively impact our results of operations and financial condition. LexisNexis Risk Solutions and other data resellers that represent a significant portion of our business have a period of time, generally within 25 days of billing, to remit payment. As a result, we are subject to a significant concentration of credit risk that these users will not pay for their purchases. Our credit risk may increase due to liquidity or solvency issues experienced by these users. At December 31, 2013, LexisNexis Risk Solutions accounted for approximately 23% of our consolidated accounts receivable. In addition, our business is generally subject to the risk that our customers and counterparties will fail to meet their obligations when due. While we perform ongoing credit evaluations of our customers, we generally do not require collateral to secure accounts receivable. If we were unable to collect a major portion of our accounts receivable, we may suffer significant losses and our results of operations, cash flows, financial condition, and liquidity may be adversely affected. Increases in credit/debit card association and automated clearing house fees may result in the loss of customers or a reduction in our earnings. From time to time, credit/debit card and electronic check processors increase the fees (interchange and assessment fees) that they charge companies such as us. We could attempt to pass these increases along to our government client customers, but this might result in the loss of those customers. If we elect not to pass along such increased fees to our government client customers in the future, we may have to absorb all or a portion of such increases thereby increasing our operating costs and reducing our earnings. We may suffer substantial harm to our business if our government partners are not satisfied with our services or services provided by our third-party credit/debit card or electronic check processors. We depend to a large extent on our relationships with our government partners, our reputation for high quality professional services and our commitment to preserving public trust to attract and retain customers. Through these relationships, we estimate that 15 we processed nearly $25 billion of credit/debit card and electronic check payments for our government partners in 2013. As a result, if one of our government partners is not satisfied with our services or services provided by our third-party credit/debit card or electronic check processors, it may be more damaging to our business than to other businesses. We depend on subcontractors or the third parties with whom we partner for certain projects, deliverables, or financial transaction processes. If these parties fail to satisfy their obligations to us or we are unable to maintain these relationships, our operating results and business prospects could be adversely affected. Certain large and complex projects and certain transactions require that we utilize subcontractors or that our services and solutions integrate with the software, systems, or infrastructure requirements of other vendors and service providers. Our ability to serve our clients and deliver and implement our solutions in a timely manner depends on our ability to retain and maintain relationships with subcontractors, vendors, and service providers and the ability of these subcontractors, vendors, and service providers to meet their obligations in a timely manner, as well as on our effective oversight of their performance. There is a risk that we may have disputes with our subcontractors arising from, among other things, the quality and timeliness of work performed by the subcontractors or customer concerns about the subcontractors. Disputes with subcontractors could lead to litigation. Adverse judgments or settlements in legal disputes may result in significant monetary damages or injunctive relief against us. In addition, if any of our subcontractors fails to perform on a timely basis the agreed-upon services, our ability to fulfill our obligations as a prime contractor may be jeopardized. Subcontractor performance deficiencies could result in the termination of our contract for default. A termination for default could expose us to liability for damages and have an adverse effect on our business prospects, results of operations, cash flows, and financial condition and our ability to compete for future contracts and orders. We may become subject to liability under rules and standards for processing electronic direct debit payments from bank accounts and credit card payments. Our electronic check processing for online payments made by direct debit to a bank account is governed by rules and standards promulgated by the NACHA, an industry trade association of banking institutions and regional automated clearing house associations. Under those rules, we may become potentially liable for failing to handle transactions in accordance with those rules, or for failing to return funds within the prescribed time frame to the bank account of the person or entity disputing our authorization to debit those funds, before the dispute regarding our authorization is resolved. Our agreements with governmental agencies at the state, federal, and local levels transfer this obligation for rapid funds return during dispute resolution to the government agencies affected, but in the event that such return does not happen, we may be potentially liable notwithstanding the government’s failure, and we may not be able to obtain reimbursement from the government involved or from the individual user or entity that initiated the debit without authorization. If this were to happen, our business, results of operations, cash flows, and financial condition may be adversely affected. Our credit card and electronic check processing is also subject to the applicable rules of the particular card association or clearinghouse and applicable law. Additionally, we may become subject to laws governing money transmitters and anti-money laundering for certain services we offer. If our interpretations, or those of our government partners, of any laws, rules, regulations, or standards are determined to be incorrect, we could be exposed to significant financial liability, substantial fines and penalties, cease and desist orders, and other sanctions that could restrict or eliminate our ability to provide certain of our services in one or more states or accept certain types of transactions in one or more states, or could force us to make costly changes to our business practices. Even if we are not forced to change our business practices, the costs of compliance and obtaining necessary licenses and regulatory approvals could be substantial. We may become liable for violations of the Driver Privacy Protection Act as adopted federally or in each state. We act as an outsourced manager on behalf of states, for electronic access to records pertaining to motor vehicles and motor vehicle operators (driver history records) by users and certain permitted resellers. These records are the largest group of records for which we process electronic access for state agencies, and are processed in the majority of our portal states. These records contain “personal information” and “sensitive personal information” as defined by the federal Driver Privacy Protection Act, and state versions of that Act adopted in every state (collectively, the “DPPA”). The DPPA regulates categories and circumstances under which “personal information” and “sensitive personal information” may be disclosed to requestors. Each state has procedures for complying with the DPPA, and such procedures may vary from state to state. We closely follow each respective state’s existing compliance procedures for general access, with our electronic access. If we fail to follow such procedures, or we grant access to users not in compliance with such procedures, or if such procedures are deemed inadequate in some way, our business, results of operations, cash flows, and financial condition may be adversely affected. The DPPA permits statutory damages to be awarded to the subjects of such records, even without proof of actual damage, for certain infringements or violations of the DPPA. We may be potentially liable for such damages in such instances, and we may have no recourse against the state, or the state may not be jointly and severally liable with us. We may become liable for violations of the Fair Credit Reporting Act as adopted federally. Our PSP service for the FMCSA requires that PSP record data be disclosed in compliance with the Fair Credit Reporting Act (“FCRA”). We may also have other online services that are or become subject to the FCRA. If we fail to follow such procedures, or we grant access to users not in compliance with such procedures, or if such procedures are deemed inadequate in some way, or if other services we offer are deemed subject to the FCRA, we may become subject to monetary fines, penalties or damages, and our business, results of operations, cash flows, and financial condition may be adversely affected. The FCRA permits statutory damages 16 to be awarded to the subjects of such records, even without proof of actual damage, for certain infringements or violations of the FCRA. In addition, any failure to comply with the FCRA may result in reputational damage. We may become liable for violations of the Safe, Accountable, Efficient Transportation Equity Act: A Legacy for Users if we disclose Pre-employment Screening Program (PSP) record data improperly. A federal law known as the Safe, Accountable, Efficient Transportation Equity Act: A Legacy for Users (“SAFETEA-LU”) limits access to PSP record data to commercial driving operator applicants, their prospective employers, and the employers’ agents, and can only be used in screening applicants for employment. Because the service is only useful if data access is quick and easy, we employ sophisticated systems of online agreements and validation information gathering, plus third party verification systems, to verify the identity and bona fides of any requestor. These systems may be incomplete or contain errors or omissions, or their operation may be flawed, resulting in improper disclosure or disclosure for an improper purpose or to improper persons. If we fail to follow appropriate procedures, or we grant access to users not in compliance with such procedures, or if such procedures are deemed inadequate in some way, we may become subject to monetary fines, penalties, or damages, and our business, results of operations, cash flows, and financial condition may be adversely affected. Furthermore, the magnitude of the potential number of transactions accessed through our PSP service may result in monetary damages that are correspondingly large. In addition, any failure to comply with SAFETEA-LU may result in reputational damage. Compliance with changing regulation of corporate governance, public disclosure and other regulatory requirements or industry standards may result in additional expenses. Changing laws, regulations, and standards relating to corporate governance, public disclosure and other regulatory requirements or industry standards, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ Global Select Market rules, or Payment Card Industry standards are creating uncertainty for companies such as ours. These new or changed laws, regulations, and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining adequate and appropriate standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations, and standards have resulted in, and certain regulations could continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. Further, as a result of increasing regulation, our board members and executive officers could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which could harm our business. If our efforts to comply with new or changed laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities in the laws themselves or related to practice, our reputation may be harmed. If our competitors become more successful in developing and selling products for government-managed services, then our business could be adversely affected. The principal alternative to our model is a government-designed and managed service that utilizes other vendors’ technologies, products, and services. Companies that have expertise in marketing and providing technical electronic services to government entities compete with us by further developing their services and increasing their focus on this area of their businesses. Many of our potential competitors are national or international in scope and have greater resources than we do. These resources could enable our potential competitors to initiate severe price cuts or take other measures in an effort to gain market share. Additionally, in some geographic areas, we may face competition from smaller consulting firms with established reputations and political relationships with potential government partners. If we do not compete effectively or if we experience any pricing pressures, reduced profit margins or loss of market share resulting from increased competition, our business, results of operations, cash flows, and financial condition may be adversely affected. Our intellectual property rights are valuable and any inability to protect them could harm our company. We regard our intellectual property as important to our success. We rely on a combination of nondisclosure and other contractual arrangements with governments, our employees, subcontractors, and other third parties, copyrights and privacy and trade secret laws to protect and limit the distribution of the proprietary applications, documentation and processes we have developed in connection with the eGovernment services we offer. Despite our precautions, third parties may succeed in misappropriating our intellectual property or independently developing similar intellectual property. If we fail to adequately protect our intellectual property rights and proprietary information or if we become involved in litigation relating to our intellectual property rights and proprietary technology, our business could be harmed. Any actions we take may not be adequate to protect our proprietary rights, and other companies may develop technologies that are similar or superior to our proprietary technology. The fees we collect for many of our services are subject to government regulation that could limit growth of our revenues and profitability. Under the terms of our self-funded outsourced government portal contracts, we remit a portion of the transaction fees we collect to state agencies. Generally, our contracts provide that the amount of any transaction fees we charge is set by governments to 17 provide us with a reasonable return or profit. We have limited control over the level of transaction fees we are permitted to retain. Our business, results of operations, cash flows, and financial condition may be harmed if the level of fees we are permitted to retain in the future is too low or if our costs rise without a commensurate increase in fees. Because we have certain outsourced portal contracts that contain performance bond requirements and/or indemnification provisions, we may suffer monetary liability and damages if claims arise under such contracts. In addition, any failure to meet such obligations, whether or not a performance bond is in place, may result in reputational damage. We are bound by performance bond commitments on certain outsourced portal contracts. Performance deficiencies by us or our subcontractors could result in a default of a performance bond, which could expose us to liability and have an adverse effect on our business prospects, on our financial condition, and on our ability to compete for future outsourced portal contracts. Further, under certain of our outsourced portal contracts, we are required to fully indemnify our government clients against claims arising from our performance or the performance of our subcontractors. If we fail to meet our contractual obligations, our performance or our subcontractors’ performance gives rise to claims, if our government partners are otherwise held liable for claims related to the services provided under our contracts, or if our government partners seek to hold us liable for claims or damages related to the services provided under our contracts, we could be subject to legal liability, monetary damages and loss of customer relationships. Our business will suffer if we lose the right to provide access to the content filed or distributed through our outsourced portals or we are held liable for the content that we pass to users from government entities. We do not own or create the content filed or distributed through our outsourced portals. We depend on the governments with which we contract to supply information and data feeds to us on a timely basis to allow businesses and citizens to complete transactions and obtain government information. We cannot assure that these data sources will continue to be available in the future. Government entities could terminate their contracts to provide data. Changes in regulations could mean that governments no longer collect some types of data or that the data is protected by more stringent privacy rules preventing uses now made of it. Moreover, our data sources are not always subject to exclusive agreements, so that data included in our services also may be included in those of our potential competitors. In addition, we depend upon the accuracy and reliability of government computer systems and data collection for the content distributed through our portals. The loss, unavailability, or inaccuracy of our data sources in the future, or the loss of our exclusive right to distribute some of the data sources, could harm our business, results of operations, cash flows, and financial condition. Because we aggregate and distribute sometimes private and sensitive public information over the Internet, we may face potential liability for defamation, libel, negligence, invasion of privacy, copyright or trademark infringement, and other claims based on the nature and content of the material that is published on or distributed through our outsourced government portals. Most of the agreements through which we obtain consent to disseminate this information do not contain indemnity provisions in our favor. These types of claims have been brought, sometimes successfully, against online services and websites in the past. We cannot assure that our general liability or errors and omissions insurance will be adequate to indemnify us for all liability that may be imposed. Any liability that is not covered by our insurance or is in excess of our insurance coverage could severely harm our business operations and financial condition. Because a large portion of our business relies on a contractual bidding process whose parameters are established by governments, the length of our sales cycles is uncertain and could lead to shortfalls in our financial results for a particular period and harm our financial condition. Our dependence on a bidding process to initiate many new projects, the parameters of which are established by governments, results in uncertainty in our sales cycles because the duration and the procedures for each bidding process vary significantly according to each government entity’s policies and procedures. The time between the date of initial contact with a government for a bid and the award of the bid may range from as little as 180 days to up to several years. The bidding process is subject to factors, over which we have little or no control, including: ● ● ● ● ● ● ● ● political acceptance of the concept of government agencies contracting with third parties to receive or distribute public information, which has been offered traditionally only by the government agencies and often without charge; the internal review process by the government agencies for bid acceptance; the need to reach a political accommodation among various interest groups; changes to the bidding procedure by the government agencies; changes to state legislation authorizing government’s contracting with third parties to receive or distribute public information; changes in government administrations; the budgetary restrictions of government entities; the competition generated by the bidding process; 18 ● ● the possibility of cancellation or delay by the government entities; and government’s manner of drafting bid documents, which may partially, or not at all, utilize our method of providing eGovernment services. We depend on the bidding process for a significant part of our business. Therefore, any material delay in the bidding process, changes to bidding practices and policies, the failure to receive the award of a bid, or the failure to execute a contract may disrupt our financial results for a particular period and harm our financial condition. We may need more working capital to fund operations and expand our business, and any failure to obtain such needed working capital would adversely affect our business. We believe that our current financial resources and cash generated from operations will be sufficient to meet our present working capital and capital expenditure requirements for at least the next 12 months. However, we may need to raise additional capital before this period ends to further: ● ● ● ● ● fund operations, if unforeseen costs or revenue shortfalls arise; support our expansion into other states and government agencies beyond what is contemplated in 2014 if unforeseen opportunities arise; expand our product and service offerings beyond what is contemplated in 2014 if unforeseen opportunities arise; respond to unforeseen competitive pressures; and acquire technologies beyond what is contemplated. Our future liquidity and capital requirements will depend upon numerous factors, including the success of our existing and new service offerings and potentially competing technological and market developments. However, any projections of future cash flows are subject to substantial uncertainty. If current cash, lines of credit, and cash generated from operations are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities, issue debt securities, or draw on the unused portion of our line of credit. The sale of additional equity securities could result in dilution to our stockholders. From time to time, we expect to evaluate the acquisition of or investment in businesses and technologies that complement our various eGovernment businesses. Acquisitions or investments might affect our liquidity requirements or cause us to sell additional equity securities or issue debt securities. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. If adequate funds were not available on acceptable terms, our ability to develop or enhance our applications and services, take advantage of future opportunities, or respond to competitive pressures would be significantly limited. This limitation could harm our business, results of operations, cash flows, and financial condition. The seasonality of use for some of our eGovernment services may harm our quarterly results. The use of some of our eGovernment services is seasonal, particularly the accessing of motor vehicle driver history records, resulting in lower revenues from this service under existing portal contracts in the fourth quarter of each calendar year, due to the smaller number of business days in this quarter and a lower volume of transactions during the holiday period. Our quarterly results of operations may be volatile and difficult to predict. If our quarterly results of operations fail to meet the expectations of public market analysts or investors, the market price of our common stock may decrease significantly. Our future revenues and results of operations may vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control, and any of which may harm our business. These factors include: ● ● ● ● ● ● the commencement, completion, or termination of contracts during any particular quarter; the introduction of new eGovernment services by us or our competitors; technical difficulties or system downtime affecting the Internet generally or the operation of our eGovernment services; the amount and timing of operating costs and capital expenditures relating to the expansion of our business operations and infrastructure; the result of negative cash flows due to capital investments; and the incurrence of significant charges related to acquisitions. Due to the factors noted above, our financial performance in a particular quarter may be lower than we anticipate and if we are unable to reduce spending in that quarter, our results of operations for that quarter may be harmed. One should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. It is possible that in some future 19 periods our results of operations may be below the expectations of public market analysts and investors. If this occurs, the price of our common stock may decline. We may be subject to intellectual property infringement claims, which are costly to defend and could limit our ability to use certain technologies in the future. We may become subject to claims alleging infringement of third-party intellectual property rights. Our portal contracts require us to indemnify our government partners for infringing software we build or use. Any claims could subject us to costly litigation, and may require us to pay damages and develop non-infringing intellectual property or acquire licenses to the intellectual property that is the subject of the alleged infringement. Licenses for such intellectual property may not be available on acceptable terms or at all. Litigation regarding intellectual property rights is common in the Internet and software industries. We expect third-party infringement claims involving Internet technologies and software products and services to increase. If an infringement claim is filed against us, we may be prevented from using certain technologies and may incur significant costs resolving the claim. We cannot assure that our applications and services do not infringe on the intellectual property rights of third parties. In addition, we have agreed, and expect that we may agree in the future, to indemnify certain of our customers against claims that our services infringe upon the intellectual property rights of others. We could incur substantial costs in defending ourselves and our customers against infringement claims. In the event of a claim of infringement, we and our customers may be required to obtain one or more licenses from third parties. We cannot assure that we or our customers could obtain necessary licenses from third parties at a reasonable cost or at all. We depend on technology licensed to us by third parties, and the loss of access to, or improper management of the licensing of, this technology could delay implementation of our services or force us to pay higher license fees or fines. We license numerous third-party technologies and applications that we incorporate into our existing service offerings, and on which, in the aggregate, we are substantially dependent. There can be no assurance that the licenses for such third-party technologies will not be terminated or that we will be able to license third-party technology and applications for future services. While we do not believe that one individual technology or application we license is material to our business, changes in or the loss of third party licenses could lead to a material increase in the costs of licensing, or to our products becoming inoperable or their performance being materially reduced. The result could be that we may need to incur additional development or procurement costs in an attempt to ensure continued performance of our services, and either the cost of such undertakings or the failure to successfully complete such undertakings could have a material adverse effect on our business, results of operations, cash flows, and financial condition. Additionally, because of the decentralized nature of our operations, licensing of third party technology can be complex and difficult to track and continually monitor. Our inability to do so could result in fines, an increase in licensing fees, or the temporary inability to utilize the third party technology until licensing issues are resolved. We are subject to independent audits as requested by our government customers. Deficiencies in our performance under a government contract could result in contract termination, reputational damage, or financial penalties. Each government entity with which we contract for outsourced portal services has the authority to require an independent audit of our performance and financial management of contracted operations in each respective state. The scope of audits could include inspections of income statements, balance sheets, fee structures, collections practices, service levels, security practices, and our compliance with contract provisions and applicable laws, regulations, and standards. We cannot assure that a future audit will not find any material performance deficiencies that would result in an adjustment to our revenues and result in financial penalties. Moreover, the consequent negative publicity could harm our reputation among other governments with which we would like to contract. All of these factors could harm our business, results of operations, cash flows, and financial condition. A prolonged economic slowdown could harm our operations. A prolonged economic slowdown or recession could materially impact our operations to the extent it results in reduced demand for Internet-based access to governmental services. In addition, it may hinder our efforts to obtain new business by distracting the attention of governments or impairing the ability of governments to hear or act upon our value proposition due to reduced personnel or turnover. These same factors may also jeopardize our renewal or rebid opportunities on existing contracts. If current market and economic conditions deteriorate, we may experience adverse impacts on our business, results of operations, cash flows, and financial condition. Our cash could be adversely affected if any of the financial institutions in which we hold our cash fails or becomes subject to other adverse conditions in the financial or credit markets. Our cash primarily includes cash on hand in the form of bank deposits. We maintain our cash with major financial institutions. Deposits with these financial institutions exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. At December 31, 2013, the amount of cash covered by FDIC deposit insurance was $10.1 million, and $64.1 million of cash was above the FDIC deposit insurance limits. These balances could be impacted if one or more of the financial institutions with which we deposit funds fails or becomes subject to other adverse conditions in the financial or credit markets. To date, we have experienced no loss or lack of access to our invested cash; however, we can provide no assurance that access to our invested cash will not be impacted or that we will not lose deposited funds in excess of FDIC insurance limits as a result of the failure or insolvency of any these financial institutions or adverse conditions in the financial and credit markets. 20 We may be unable to integrate new technologies and industry standards effectively, which may adversely affect our business and results of operations. Our future success will depend on our ability to enhance and improve the responsiveness, functionality, and features of our services in accordance with industry standards and to address the increasingly sophisticated technological needs of our customers on a cost-effective and timely basis. Our ability to remain competitive will depend, in part, on our ability to: ● ● ● ● enhance and improve the responsiveness, functionality, and other features of the government portals we offer; continue to develop our technical expertise; develop and introduce new services, applications, and technology to meet changing customer needs and preferences; and influence and respond to emerging industry standards and other technological changes in a timely and cost-effective manner. We cannot assure that we will be successful in responding to the above technological and industry challenges in a timely and cost-effective manner. If we are unable to integrate new technologies and industry standards effectively, our business could be harmed. Our strategic alliances and potential acquisitions may entail numerous risks and uncertainties which could adversely affect our business and results of operations. As part of our business strategy, we have made and may continue to enter into strategic alliances or to make acquisitions that we believe will complement our existing businesses, increase traffic to our government partners’ sites, enhance our services, broaden our software and applications offerings or technological capabilities, or increase our profitability. Future alliances or acquisitions could present numerous risks and uncertainties, including: ● ● ● ● ● ● ● ● ● ● ● the inability to successfully market, distribute, deploy, and manage new products and services that we have limited or no experience in managing; the diversion of management’s attention from our core business; risks associated with entering markets in which we have limited or no experience; adverse effects on existing business relationships with existing suppliers and customers; erosion of our brand equity in the eGovernment or financial markets; difficulties in the assimilation of operations, personnel, technologies, and information systems of the acquired companies; the risk that an acquired business will not perform as expected or will have profit margins significantly lower than ours; potential loss of key employees, particularly those of acquired businesses; potentially dilutive issuances of equity securities, which may be freely tradable in the public market; impairment, restructuring, and other charges related to goodwill and other long-lived intangible assets; and the incurrence of debt and related interest and other expenses. We cannot assure that we will be able to successfully integrate products or technologies of strategic alliances or new businesses we may acquire in the future. We also may not realize cost efficiencies or synergies that we anticipate. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Our principal administrative office occupies a total of approximately 29,000 square feet of leased space at 25501 West Valley Parkway, Suite 300, Olathe, Kansas 66061. All of our subsidiaries also lease their facilities. We do not own any real property and do not currently anticipate acquiring real property or buildings in the foreseeable future. 21 ITEM 3. LEGAL PROCEEDINGS Litigation We are involved from time to time in legal proceedings and litigation arising in the ordinary course of business. However, we are not currently a party to any material legal proceedings. As discussed in Note 7 in the Notes to Consolidated Financial Statements included in this Form 10-K with respect to the prior civil action by the SEC against our Chief Financial Officer, we were not a party to the civil action, but were obligated to provide indemnification in certain circumstances (including advancing certain defense costs) to our Chief Financial Officer in accordance with our certificate of incorporation and bylaws and our indemnification agreement with him. On December 2, 2013, a federal jury of seven persons in Kansas City, Kansas, cleared our Chief Financial Officer of any liability in connection with all alleged violations brought by the SEC against him. The SEC’s right to appeal the outcome of the trial has expired and the civil action by the SEC against our Chief Financial Officer is concluded. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock trades on the NASDAQ Global Select Market under the symbol “EGOV.” The following table shows the range of high and low sales prices reported on the NASDAQ Global Select Market for the periods indicated. Fiscal Year Ended December 31, 2013 First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year Ended December 31, 2012 First Quarter Second Quarter Third Quarter Fourth Quarter High Low $ 19.35 19.30 24.15 25.99 $ 15.62 15.51 16.68 20.54 High Low $ 13.81 12.70 15.42 16.83 $ 11.25 9.95 12.59 13.58 As of February 12, 2014, there were approximately 236 holders of record of shares of our common stock. Dividend Policy On October 28, 2013, our Board of Directors declared a special cash dividend of $0.35 per share, payable to stockholders of record as of November 8, 2013. The dividend, totaling approximately $23.0 million, was paid on January 2, 2014, out of our available cash. On November 5, 2012, our Board of Directors declared a special cash dividend of $0.25 per share, payable to stockholders of record as of November 23, 2012. The dividend, totaling approximately $16.3 million, was paid on December 5, 2012, out of our available cash. Any future determination as to the payment of dividends will be made at the discretion of our Board of Directors and will depend on our operating results, financial condition, capital requirements, general business conditions, and such other factors as our Board of Directors deems relevant. 22 Performance Graph The performance graph below compares the annual change in our cumulative total stockholder return on our common stock during a period commencing on December 31, 2008, and ending on December 31, 2013 (as measured by dividing (i) the sum of (A) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment and (B) the difference between our share price at the end and the beginning of the measurement period; by (ii) the share price at the beginning of the measurement period) with the cumulative total return of each of: (a) the NASDAQ Composite (U.S.) Index and (b) a Peer Group, assuming a $100 investment on December 31, 2008. On February 27, 2009, we paid a special cash dividend of $0.30 per share; on February 26, 2010, we paid a special cash dividend of $0.30 per share; on December 30, 2010, we paid a special cash dividend of $0.25 per share; on January 3, 2012, we paid a special cash dividend of $0.25 per share; and on December 5, 2012, we paid a special cash dividend of $0.25 per share, all of which are included in the presentation of our performance. We did not pay any other dividends on our common stock during the period commencing on December 31, 2008, and ending on December 31, 2013. The stock price performance on the graph below is not necessarily indicative of our future price performance. Comparison of Cumulative Total Return Among NIC Inc., NASDAQ Composite (U.S.) Index and Peer Group Total Return to Shareholders (Assumes $100 investment on 12/31/2008) $700.00 $600.00 $500.00 $400.00 $300.00 $200.00 $100.00 $0.00 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013 NIC Nasdaq Peer Group Total Return Analysis NIC Inc. NASDAQ Composite Peer Group 12/31/2008 $ 100.00 $ 100.00 $ 100.00 12/31/2009 12/31/2010 $ 210.67 $ 238.75 $ 168.22 $ 143.89 $ 157.67 $ 133.41 12/31/2011 $ 327.26 $ 165.19 $ 189.32 12/31/2012 $ 416.06 $ 191.47 $ 224.70 12/31/2013 $ 633.26 $ 264.84 $ 295.19 The Peer Group consists of five companies, each with a business focus similar to that of NIC. While not all of the companies provide services exclusively to governments, the services provided are similar to those we provide. The members of the Peer Group are as follows: Towers Watson & Co (TW), Accenture, Ltd. (ACN), International Business Machines Corp. (IBM), Maximus, Inc. (MMS), and ACI Worldwide, Inc. (ACIW). Watson Wyatt Worldwide, Inc. was included in the Peer Group until January 1, 2010, when it merged with Towers Perrin to form Towers Watson & Co (TW). Official Payments Holdings, Inc. (OPAY) was included in the Peer Group until November 5, 2013, when it was acquired by ACI Worldwide, Inc. The performance graph and related text are being furnished to and not filed with the SEC, and will not be deemed to be “soliciting material” or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate such information by reference into such a filing. 23 Share Repurchases During the fourth quarter of 2013, we acquired and cancelled shares of common stock surrendered by employees to pay income taxes due upon the vesting of restricted stock or the exercise of options as follows: Period October 24, 2013 October 25, 2013 October 27, 2013 November 5, 2013 Total Number of Shares Purchased 731 233 129 276 Average Price Paid per Share 25.16 $ 24.90 24.90 23.34 ITEM 6. SELECTED FINANCIAL DATA Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs N/A N/A N/A N/A Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs N/A N/A N/A N/A The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and related Notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in this Form 10-K (amounts in thousands in the tables below, except per share data). Consolidated Statement of Income Data: Total revenues Operating income Net income Net income per share - basic Net income per share - diluted 2013 $ 249,279 52,610 32,038 0.49 0.49 Year Ended December 31, 2011 2012 2010 $ 210,172 43,192 26,339 0.40 0.40 $ 180,899 38,508 22,942 0.35 0.35 $ 161,534 29,398 18,363 0.28 0.28 2009 $ 132,886 22,021 13,946 0.22 0.22 As discussed in Note 4 in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the SEC on March 16, 2010, we acquired the then-current portal management contracts for the state of Texas (collectively, the “Acquired Texas Contracts”) in the second quarter of 2009. The Acquired Texas Contracts expired on December 31, 2009, except certain Master Work Order projects expired on August 31, 2012 and others will expire on August 31, 2014. 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 commenced on January 1, 2010 and runs through August 31, 2016. We did not begin earning revenues under the New Texas Contract until 2010. Consolidated Balance Sheet Data: Total assets Long-term debt (includes current portion 2013 2012 December 31, 2011 2010 2009 $ 179,974 $ 145,140 $ 144,354 $ 111,376 $ 123,608 of notes payable/capital lease obligations) - - - - - Dividends declared per share: October 28, 2013 November 5, 2012 October 24, 2011 December 3, 2010 February 1, 2010 February 3, 2009 Total stockholders' equity 0.35 - - - - - 91,936 - 0.25 - - - - 78,924 - - 0.25 - - - 65,077 - - - 0.25 0.30 - 53,270 - - - - - 0.30 66,559 As further discussed in Note 8 in the Notes to Consolidated Financial Statements included in this Form 10-K, we declared a special cash dividend in October 2013 totaling approximately $23.0 million, which was paid out of our available cash in January 2014; we declared a special cash dividend in November 2012 totaling approximately $16.3 million, which was paid out of our available cash in December 2012; we declared a special cash dividend in October 2011 totaling approximately $16.2 million, which was paid out of our available cash in January 2012; we declared and paid a special cash dividend totaling approximately $16.2 million out of our available cash in December 2010; we declared and paid a special cash dividend totaling approximately $19.3 million out of our available cash in February 2010; and we declared and paid a special cash dividend totaling approximately $19.2 million out of our available cash in February 2009. 24 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Caution about Forward-Looking Statements Statements in this Annual Report on Form 10-K 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 regarding the planned implementation of new portal contracts, 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 2013 Annual Report on Form 10-K. 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 recently awarded eGovernment contracts; NIC’s ability to implement its new portal contracts in a timely and cost-effective manner; NIC’s ability to successfully increase the adoption and use of eGovernment services; the possibility of reductions in fees or revenues as a result of budget deficits, government shutdowns, or changes in government policy; the success of the Company in renewing existing contracts and in signing contracts with new states and federal government agencies; 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; the possibility of security breaches through cyber attacks and any resulting liability; 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 this 2013 Annual Report on Form 10-K. Investors should read all of these discussions of risks carefully. All forward-looking statements made in this Form 10-K speak only as of the date of this report. We will not necessarily update the information in this 2013 Annual Report on Form 10-K 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 internal costs, increase efficiencies, and provide a higher level of service to businesses and citizens. We accomplish this currently through two channels: our primary outsourced portal businesses and our software & services businesses. In our primary outsourced portal business, we generally enter into contracts primarily with state and local governments to design, build, and operate Internet-based enterprise-wide portals on their behalf. We typically enter into multi-year contracts and manage operations for each government partner through separate local subsidiaries that operate as decentralized businesses with a high degree of autonomy. Our portals consist of websites and applications that we build, which allow businesses and citizens to access government information through multiple online channels, including mobile, and complete secure transactions, including applying for a permit, retrieving government records, or filing a government-mandated 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 operations and maintenance costs of the government portals. Our unique self-funded business model allows us to generate revenues by sharing in the fees collected from eGovernment transactions. Our partners benefit because they reduce their financial and technology risks, increase their operational efficiencies, and gain a centralized, customer-focused presence on the Internet, while businesses and citizens gain a faster, more convenient, and more cost-effective means to interact with governments. 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 electronic transactions and data access services we provide and the division of revenues between the Company and the government agency. The government oversight authority 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 materially affect the profitability of the respective contract to us. We typically own all the intellectual property in connection with the applications developed under these contracts. After completion of a defined contract term, the government partner typically receives a perpetual, royalty-free license to use the software only in its own portal. However, certain customer management, billing and payment processing software applications that we have developed and standardized centrally and that are utilized by our portal businesses, are being provided to an increasing number of our government partners on a software-as-a-service, or “SaaS,” basis, and thus would not be included in any royalty-free license. If our contract was not renewed after a defined term or if our contract was terminated by our government partner for cause, the government agency would be entitled to take over the portal in place with no future obligation of the Company, except as otherwise provided in the 25 contract and except for the services we provide on a SaaS basis, which would be available to our partners on a fee-for-service basis. We also provide certain payment processing services on a SaaS basis to a few private sector companies and non-NIC portal states, and may continue to market these services to other entities in the future. Historically, however, revenues from these services have not been significant. 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. Our objective is to strengthen our position as the leading provider of Internet-based eGovernment services. Key strategies to achieve this objective include: ● ● ● Renew all current outsourced government portal contracts – First and foremost, we will strive to obtain renewal of all currently profitable outsourced government portal contracts. As of December 31, 2013, there were 15 contracts under which we provide enterprise-wide outsourced portal services or software development and services (which excludes our Arizona portal contract under which we are currently providing transition services to the state of Arizona that will end on March 26, 2014) that have expiration dates within the 12-month period following December 31, 2013. Win new portal contracts – A key objective of ours is to win new portal contracts with state and federal government agencies. We continue to invest in business development and marketing efforts through a combination of strategic advertising and public relations initiatives. We have responded to several active portal procurement opportunities and realized significant benefits from our investment, including contracts with new government partners in recent years. During the fourth quarter of 2012, we entered into a five-year contract with the Commonwealth of Pennsylvania, which includes an option for the state to extend the contract up to an additional five years. During the second quarter of 2013, we were awarded a five-year contract by the state of Wisconsin, which includes an option for the government to extend the contract up to an additional five years. During the first quarter of 2014, we were awarded a three-year contract by the state of Connecticut, which includes an option for the government to extend the contract up to an additional three years. Our goal is to continue expanding our number of government partners by leveraging our strong relationships with current government partners and our reputation for providing proven eGovernment services. We intend to continue marketing our services to new governments in state, local, and federal jurisdictions. Our expansion efforts include developing relationships and sponsors throughout an individual government entity, pursuing strategic technology alliances, making presentations at conferences of government executives with responsibility for information technology policy, and developing contacts with organizations that act as forums for discussions between these executives. Increase transactional revenues from our existing government portals – Part of our strategy is to increase transactional revenues from our existing government portals by building new applications and services, taking successful applications and services and implementing them in our other government portal states, and increasing the adoption of existing portal applications and services within each state where we operate. We intend to accomplish this with new service offerings, increased operational focus, and expanded marketing initiatives. In addition, we will work closely with the governance authority for each of our partner portals to evaluate the pricing of new and existing services to encourage higher usage and increased revenue streams. We plan to continue our development of new secure online transactional services that enable government agencies to interact more effectively and efficiently with businesses, citizens, and other government agencies through multiple online channels, including mobile. We will continue to work with government agencies, professional associations, and other organizations to better understand the current and future needs of our customers. We will continue to work with our government partners to create awareness of the online alternatives to traditional government interaction through initiatives such as informational brochures, government voicemail recordings, and inclusion of website information on government communication materials. In addition, we will continue to update our portals to highlight new government service information provided on the portals. We plan to work with professional associations to directly and indirectly communicate to their members the potential convenience, ease of use, and other benefits of the services our portals offer. In addition to overall portal revenue growth, which includes both organic revenue growth and growth from new portal contracts, an important financial metric that we use to gauge our success in increasing transactional revenues in our existing portal businesses is same state revenue growth. We define same state revenues as those from states in operation and generating revenues for two full periods. Our long-term goal has been to grow same state revenues at least 10% per year. Same state portal revenues grew 14% in 2013 and 10% in 2012. Our same state revenue growth in 2013 was higher than our growth in 2012 primarily due to increased same state non-DMV, transaction-based revenues. Non-DMV, transaction-based revenues consist of transaction fees generated by means other than from providing electronic access to motor vehicle driver history, or DMV, records. As non-DMV, transaction-based revenues continue to become a larger component of overall portal revenues, our growth in same state non-DMV, transaction-based revenues becomes more important to our overall growth as a company. Same state non-DMV, transaction-based revenues grew 27% in 2013 compared to 19% in 2012. As further discussed below, the increase in the same state non-DMV, transaction-based revenue growth rate in 2013 was primarily due to the deployment and increased adoption of key revenue generating services in certain portals, including a motor vehicle inspection service with the Texas Department of Public Safety (“DPS”), which was in operation for a full year in 2013 compared to four months in the prior year following its launch in September 2012. 26 Growth in DMV transaction-based revenues is also an important factor in our goals for overall same state revenue growth. Historically, DMV price increases have been relatively infrequent, and our ability to grow same state DMV revenues has been limited, as such revenues have been driven by broader economic factors outside of our control. Absent DMV price increases, same state DMV revenue growth has historically ranged from flat to 1% per year. Same state DMV revenues increased by 5% in 2013 and decreased by 1% in 2012. As further discussed below, the increase in the same state DMV transaction-based revenue growth rate in 2013 was mainly due to an increase in transaction volumes at our Texas portal, among several others. ● Continue to grow profitability – In addition to driving same state revenue growth, part of our strategy is to increase profitability by driving cost containment efforts throughout the Company and maintaining a lean organizational structure that fosters entrepreneurial decision-making and innovation, and accentuates the financial leverage of our business model. An important financial metric that we use to gauge our portal profitability is portal gross profit percentage, or gross profit rate, which is calculated by dividing portal gross profit (portal revenues minus cost of portal revenues, excluding depreciation and amortization) by portal revenues. Our portal gross profit rate was 39% in 2013 and 38% in both 2012 and 2011. We carefully monitor our portal gross profit percentage to strike the balance between generating a solid return for our stockholders and delivering value to our government partners through reinvestment in our portal operations (which we believe also benefits our stockholders). As further discussed below, the increase in the portal gross profit rate in 2013 was mainly due to higher same state revenue growth and higher revenues from our newer portals in Oregon and Maryland, and was partially offset by start-up dilution from our new Pennsylvania and Wisconsin portals. We also view selling & administrative costs, expressed as a percentage of total consolidated revenues, to be an important indicator of the relative year-over-year growth in our corporate level expenses. Selling & administrative costs as a percentage of total consolidated revenues were 16% in all periods presented. Finally, our consolidated operating income margin (operating income divided by total consolidated revenues) is an important measure of our overall profitability. This metric was 21% in 2013, 20% in 2012, and 21% in 2011. The increase in our 2013 consolidated operating income margin was primarily attributable to an increase in portal gross profits, which was primarily driven by same state revenue growth, and an increase in software & services gross profits, due mainly to strong results from our contract with the FMCSA to operate the PSP and a new construction lien service in North Carolina, which commenced in April 2013. The decrease in our 2012 consolidated operating income margin was primarily attributable to start-up costs from our Oregon portal. Overview of Business Models and 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 state and local government portals on an outsourced basis. The software & services category primarily includes revenues and cost of revenues from our subsidiaries that provide software development and services, other than enterprise-wide outsourced portal services, to state and local governments as well as federal agencies. We currently earn 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 outsourced portal 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 for providing electronic access to motor vehicle 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 providing electronic access to 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 this Form 10-K. Portal management: these are revenues from the performance of fixed fee portal management services for our government partners in the states of Arizona, Indiana, and Delaware and are generally 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. The highest volume, most commercially valuable service we offer is electronic access to DMV records. This service 27 accounted for approximately 34%, 34%, and 36% of our total consolidated revenues in 2013, 2012, and 2011, respectively. We believe that while this service will continue to be an important source of revenue, its contribution as a percentage of total consolidated revenues on an individual portal basis will decline modestly as other sources grow. LexisNexis Risk Solutions, which resells these records to the auto insurance industry, accounted for approximately 22%, 23%, and 28%, of total consolidated revenues in 2013, 2012, 2011, respectively. In addition, we offer a service in several of our states for online motor vehicle registration and licensing. This service accounted for approximately 13% and 10%, respectively, of our total consolidated revenues in 2013 and 2012, and it accounted for less than 10% of our total consolidated revenues in 2011. In our outsourced portal businesses for 2013, DMV transaction-based revenues represented approximately 36% of portal revenues, non-DMV transaction-based revenues represented approximately 54%, portal software development revenues represented approximately 6%, and portal management revenues represented approximately 4%. Approximately 75% of our transaction-based revenues related to business-to-government transactions, with 25% related to citizen-to-government transactions. Transaction-based revenues from our outsourced state portal business units are highly correlated to state population, but are also affected by pricing policies established by government entities for public records, the number and growth of commercial enterprises, and the government entity’s development of policy and information technology infrastructure supporting electronic government. LexisNexis Risk Solutions and other data resellers and companies who access DMV records have entered into contracts with the portals our subsidiaries operate to request these records from the various states with which we have contracts. Under the terms of these contracts, we provide data resellers with driver’s license and traffic records that vary by contract, for fees that currently range from $2.00 to $27.50 per record requested. The fees charged to all entities that access DMV records are the same for records of a particular state. We typically collect the entire fee, of which a certain portion is remitted to the state by statute. These contracts are generally self-renewing until canceled by one side or the other, and generally may be terminated at any time after a 60-day notice. These contracts may be terminated immediately at the option of any party upon a material breach of the contract by the other party. Furthermore, these contracts are immediately terminable if the state statute allowing for the public release of these records is repealed. We charge for electronic access to records on a per-record basis and, depending upon government policies, also on a fixed or sliding scale bulk basis. Our fees are set by negotiation with the government agencies that control the records and are typically approved by a government sanctioned oversight authority. Generally, our contracts provide that the amount of any fees we retain is set by governments to provide us with a reasonable return or profit. We have limited control over the level of fees we are permitted to retain. We recognize revenues from transactions (primarily transaction-based information access fees and filing fees) on an accrual basis net of the transaction fee due to the government, and we bill end-user customers primarily on a monthly basis. We typically receive a majority of payments via electronic funds transfer and credit/debit card within 25 days of billing and remit payment to governments within 30 to 45 days of the transaction. The costs that we pay state agencies for data access are accrued as accounts receivable and accounts payable at the time revenue from the access of public information is recognized. We typically must remit a certain amount or percentage of these fees to government agencies regardless of whether we ultimately collect the fees. The pricing of transactions varies by the type of transaction and by state. We expense as incurred all employee costs to start up, operate, and maintain outsourced government portals as costs of performance under the contracts because, after the completion of a defined contract term, the government entity with which we contract typically receives a perpetual, royalty-free license to the applications we developed, except applications provided on a SaaS basis. Such costs are included in cost of portal revenues in the consolidated statements of income. Our software & services businesses NIC Technologies currently earns a significant portion of its revenues from its contract with the FMCSA to develop and manage the PSP for motor carriers nationwide, using a self-funded, transaction-based business model. NIC Technologies recognizes revenues from this contract (primarily transaction-based information access fees) when the services are provided. NIC Technologies also earns a portion of its revenues from fixed fee and time and materials application development and outsourced maintenance contracts with other government agencies and recognizes revenues as services are provided. Critical Accounting Policies Many estimates and assumptions involved in the application of generally accepted accounting principles have a material impact on our reported financial condition and operating performance and on the comparability of such reported information over different reporting periods. A critical accounting policy is one which is both important to the portrayal of our financial condition and results of operations and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates and assumptions about the effect of matters that are inherently uncertain. Our significant accounting policies are described in Note 2 in the Notes to Consolidated Financial Statements included in this Form 10-K. We have identified the policies below as critical to our business operations and the understanding of our results of operations. Note that the preparation of our consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. 28  Uncertain Tax Positions The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. We are also subject to periodic audits by government tax authorities of our income tax returns. 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. Changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income. See Notes 2 and 9 in the Notes to Consolidated Financial Statements included in this Form 10-K for additional detail on our uncertain tax positions. Deferred Income Taxes We recognize deferred income taxes for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted laws and statutory rates applicable in each tax jurisdiction to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. We are required to make many subjective assumptions and judgments in determining deferred income tax assets and liabilities. Changes in our assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income. For additional discussion of deferred income taxes, see Notes 2 and 9 in the Notes to Consolidated Financial Statements included in this Form 10-K. Stock-based Compensation We measure stock-based compensation cost for service-based restricted stock awards at the grant date based on the calculated fair value of the award, and recognize an expense over the employee’s requisite service period (generally the vesting period of the grant). We measure stock-based compensation cost for performance-based restricted stock awards at the date of grant, based on the fair value of shares expected to be earned at the end of the performance period, and recognize an expense over the performance period based upon the probable number of shares expected to vest. We also estimate and exclude compensation cost related to awards not expected to vest based upon estimated forfeitures. Measuring stock-based compensation cost of restricted stock awards requires judgment, including estimating the probable number of shares expected to vest. In addition, estimating the number of performance-based restricted stock awards expected to be earned is dependent on our expectations of future operating results over a specified performance period in relation to specified performance criteria. Changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income. See Note 10 in the Notes to Consolidated Financial Statements included in this Form 10-K for additional detail on our stock-based compensation. Financial Analysis of Years Ended December 31, 2013, 2012, and 2011 In this section, we are providing more detailed information about our operating results and changes in financial position over the past three years. This section should be read in conjunction with the Consolidated Financial Statements and related Notes included in this Form 10-K. Due to the expiration of Virginia Interactive’s contract with the Commonwealth of Virginia on August 31, 2013, the operating results for our legacy Virginia portal have been removed from the same state category for the year ended December 31, 2013 as the portal no longer meets the definition of a same state portal (portals in operation and generating revenues for two full periods). Results of Operations Key Financial Metrics Revenue growth - outsourced portals Same state revenue growth - outsourced portals Recurring portal revenue as a % of total portal revenues Gross profit % - outsourced portals Revenue growth - software & services Gross profit % - software & services Selling & administrative expenses as a % of total revenues Operating income margin % (operating income as a % of total revenues) 2013 2012 2011 19% 14% 94% 39% 20% 69% 16% 21% 17% 10% 92% 38% 11% 66% 16% 20% 10% 8% 91% 38% 67% 62% 16% 21% 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 increase or decrease from the prior year period. Portal Revenue Analysis DMV transaction-based Non-DMV transaction-based Portal software development Portal management Total 2013 % Change 2012 % Change 2011 $ 83,671 127,898 13,309 10,305 235,183 $ 18% 26% (20%) 7% 19% $ 70,896 101,216 16,660 9,643 198,415 $ 9% 24% 7% 14% 17% $ 64,985 81,313 15,515 8,463 170,276 $ Portal revenues for 2013 increased 19%, or approximately $36.8 million, over 2012. Of this increase, (i) 14%, or approximately $27.0 million, was attributable to an increase in same state portal revenues (portals in operation and generating revenues for two full periods); and (ii) 5%, or approximately $9.8 million, was attributable to increases of $11.8 million from our newer portals, including Pennsylvania, which began generating revenues under the self-funded model in October 2013, as further discussed below; Wisconsin, which began generating revenues in September 2013; Oregon, which began generating revenues in June 2012; and Maryland, which began generating revenues in May 2012; partially offset by a $2.0 million decrease in portal revenues from our legacy Virginia portal due to the contract expiration on August 31, 2013, as further discussed above. As further discussed in Note 2 in the Notes to Consolidated Financial Statements in this Form 10-K, we elected not to pursue collection of approximately $5.1 million of outstanding accounts receivable from the Commonwealth of Pennsylvania for eGovernment services provided from January 1, 2013 to June 30, 2013, and recorded a non-cash pre-tax charge in cost of portal revenues of approximately $5.1 million (approximately $0.05 per share on an after-tax basis) in the third quarter of 2013 to write-off amounts due from the Commonwealth through June 30, 2013. We did not recognize revenue under the contract subsequent to June 30, 2013, until the contract became self-funded in October 2013. Same state portal revenues in 2013 increased 14%, or approximately $27.0 million, over 2012 due to increased revenues from our Texas, New Jersey and Colorado portals, among others. Our same state revenue growth in 2013 was higher than the 10% revenue growth we achieved in 2012 due mainly to higher same state non-DMV transaction-based revenue growth of 27% and, to a lesser extent, higher same state DMV transaction-based revenue growth of 5%, offset partially by a 20% decrease in same state portal software development revenues. The increase in non-DMV transaction-based revenues in 2013 was attributable to strong performance from several key applications, including tax filings and motor vehicle registrations in New Jersey and Texas, court record searches in Colorado and Texas, and the motor vehicle inspection service for the Texas DPS as part of the DPS Direct suite of services that we are implementing for the DPS. Our same state non-DMV transaction-based revenue growth was 19% in 2012. The increase in same state DMV transaction-based revenues in 2013 was mainly due to an increase in transaction volumes at our Texas portal, among others, and to a lesser extent, a DMV price increase at a medium sized portal that became effective in the third quarter of 2013. Same state DMV transaction-based revenue decreased 1% in 2012. Absent DMV price increases, same state DMV revenue growth has historically ranged from flat to 1% per year. We believe our DMV revenues in 2012 were negatively affected by weak broader macroeconomic conditions. Our same state portal software development revenue decreased 20% in 2013 as compared to a 5% increase in 2012, primarily due to the expiration of certain Master Work Order projects in Texas on August 31, 2012, as previously disclosed. Portal revenues for 2012 increased 17%, or approximately $28.1 million, over 2011. Of this increase, (i) 10%, or approximately $15.8 million, was attributable to an increase in same state portal revenues (portals in operation and generating revenues for two full periods); and (ii) 7%, or approximately $12.3 million, was attributable to increases from newer portals, including Maryland, which began generating revenues in May 2012; Oregon, which began generating revenues in June 2012; Delaware, which began generating revenues in October 2011; Mississippi, which began generating revenues in May 2011; and New Jersey, which began generating revenues in April 2011. Same state portal revenues in 2012 increased 10%, or approximately $15.8 million, over 2011 due to increased revenues from our Texas, Montana, Indiana, Hawaii and Colorado portals, among others. Our same state revenue growth in 2012 was driven mainly by same state non-DMV transaction-based revenue growth of 19% and same state portal software development revenue growth of 5%, which was partially offset by a 1% decrease in same state DMV transaction-based revenues. The increase in non-DMV transaction-based revenues in 2012 was attributable to strong performance from several key applications, including a motor vehicle inspection service with the Texas DPS as part of the DPS Direct suite of services launched in September 2012, payment processing, motor vehicle registrations, and tax filings. 30 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 costs such as employee compensation (including stock-based compensation), provision for losses on accounts receivable, subcontractor labor costs, 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 primarily include bank fees required to process credit/debit card and automated clearinghouse transactions and, to a lesser extent, costs associated with revenue share arrangements with our state partners. Cost of Portal Revenue Analysis Fixed costs Variable costs Total 2013 % Change 2012 % Change 2011 $ 94,615 48,439 143,054 $ 18% 11% 16% $ 80,046 43,523 123,569 $ 21% 13% 18% $ 66,172 38,558 104,730 $ Cost of portal revenues in 2013 increased 16%, or approximately $19.5 million, over 2012. Of this increase, (i) 9%, or approximately $10.7 million, was attributable to an increase in same state cost of portal revenues; and (ii) 7%, or approximately $8.8 million, was attributable to increases of $9.8 million in our newer portals in Wisconsin, Oregon, Maryland and Pennsylvania, including a $5.1 million accounts receivable write-off for amounts we elected not to pursue from the Commonwealth of Pennsylvania, as further discussed above and in Note 2 in the Notes to Consolidated Financial Statements; partially offset by a $1.0 million decrease in cost of portal revenues at our legacy Virginia portal due to the contract expiration on August 31, 2013, as further discussed above. The increase in same state cost of portal revenues in 2013 was partially attributable to higher employee compensation and benefit costs across various portals and certain costs related to the motor vehicle inspection service as part of the Texas DPS, as further discussed above. In addition, the increase in 2013 was partially attributable to an increase in variable costs to process credit/debit card transactions, due mainly to higher transaction volumes from our portals in Texas, New Jersey and Colorado, among others. A significant percentage of our non-DMV transaction-based revenues are generated from online applications whereby users pay for information or transactions via credit/debit cards. We typically earn a percentage of the credit/debit card transaction amount, but also must pay an associated interchange fee to the bank that processes the credit/debit 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. Cost of portal revenues in 2012 increased 18%, or approximately $18.8 million, over 2011. Of this increase, (i) 8%, or approximately $8.8 million, was attributable to an increase in same state cost of portal revenues; and (ii) 10%, or approximately $10.0 million, was attributable to our newer portals in Maryland, Oregon, Delaware, Mississippi and New Jersey. The increase in same state cost of portal revenues in 2012 was partially attributable to higher employee compensation and benefit costs across various portals and certain nonrecurring costs in Texas associated with the implementation of the motor vehicle inspection service for the Texas DPS. In addition, the increase in 2012 was partially attributable to an increase in variable fees to process credit/debit card transactions, particularly from our portals in Texas, Indiana, Montana and Colorado, among others. Our portal gross profit percentage was 39% in 2013, up from 38% in both 2012 and 2011, due mainly to higher same state revenue growth and higher revenues from our newer portals in Oregon and Maryland, partially offset by start-up dilution from our Pennsylvania and Wisconsin portals (collectively, $3.4 million), as further discussed above. We carefully monitor our portal gross profit percentage to strike the balance between generating a solid return for our stockholders and delivering value to our government partners through reinvestment in our portal operations (which we believe also benefits our stockholders). 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. Software & Services Revenue Analysis NIC Technologies Other Total 2013 % Change 2012 % Change 2011 $ $ 10,611 3,485 14,096 5% 105% 20% $ $ 10,061 1,697 11,758 10% 17% 11% $ 9,174 1,449 10,623 $ Software & services revenues increased 20% and 11%, or approximately $2.3 million and $1.1 million, in 2013 and 2012, respectively, due mainly to (i) higher revenues of $1.1 million and $1.5 million in 2013 and 2012, respectively, from our contract with the FMCSA as a result of increased adoption of the PSP compared to prior periods; and (ii) a new construction lien service in North Carolina which commenced in April 2013 and generated approximately $1.2 million of revenues in 2013. COST OF SOFTWARE & SERVICES REVENUES. Cost of software & services revenues increased 8%, or approximately $0.3 million, in 2013 due mainly to the launch of the new construction lien service in North Carolina, as further discussed above. Cost of software & services revenues were flat in 2012. Our software & services gross profit percentage was 69%, 66% and 62% in 2013, 2012 and 2011, respectively. Our software and services gross profit percentage increased in 2013 due mainly 31 to higher revenues from the PSP and our new construction lien service in North Carolina, as described above. Our software and services gross profit percentage increased in 2012 due primarily to higher revenues from the PSP, as described above. SELLING & ADMINISTRATIVE. Selling & administrative expenses in 2013 increased 25%, or approximately $8.1 million, over 2012. The increase was due mainly to (i) higher net costs related to the previously disclosed SEC matter, as further described below; (ii) higher management incentive compensation as a result of our strong operating results in 2013; and (iii) higher personnel and software and maintenance costs to support and enhance our corporate-wide information technology and security infrastructure as a result of our growth. As discussed in Note 7 in the Notes to Consolidated Financial Statements included in this Form 10-K, throughout 2013 we continued to incur obligations to advance legal fees and other expenses to our Chief Financial Officer in connection with the previously disclosed civil action by the SEC against him. We were not a party to the civil action, but were obligated to provide indemnification in certain circumstances (including advancing certain defense costs) to our Chief Financial Officer in accordance with our certificate of incorporation and bylaws and our indemnification agreement with him. Our directors’ and officers’ liability insurance carrier agreed to reimburse us for certain reasonable costs of defense advanced by us to our Chief Financial Officer in the SEC civil action, subject to the policy limits of the applicable insurance policy. During the fourth quarter of 2013, the policy limits of our directors’ and officers’ liability insurance were reached for claims related to the SEC matter and, therefore, we will not be entitled to any further reimbursements from our insurance carrier in excess of the limits. We do not currently expect to incur any additional costs related to the SEC matter in 2014. On December 2, 2013, a federal jury of seven persons in Kansas City, Kansas, cleared our Chief Financial Officer of any liability in connection with all alleged violations of certain provisions of the federal securities laws in the civil action brought by the SEC against him. The SEC’s right to appeal the outcome of the trial has expired and the civil action against our Chief Financial Officer is concluded. Selling & administrative expenses in 2013 included approximately $12.8 million of legal fees and other third-party costs related to the previously disclosed SEC matter. These expenses were reduced by approximately $8.8 million of reimbursement from our directors’ and officers’ liability insurance carrier, resulting in a net expense of approximately $4.0 million related to the SEC matter for 2013. In 2012, we incurred approximately $4.5 million of legal fees and other third-party costs related to the SEC matter. These expenses were reduced by approximately $4.0 million of insurance reimbursement resulting in a net expense of approximately $0.5 million for 2012. In 2011, we incurred approximately $4.2 million of legal fees and other third-party costs related to the SEC matter and the related derivative action. These expenses were reduced by approximately $4.5 million of insurance reimbursement and approximately $0.2 million of reimbursement from Jeffery S. Fraser, our former Chairman of the Board and Chief Executive Officer, related to the settlement of a derivative action, resulting in a net decrease in expense of approximately $0.5 million for 2011. In 2013, legal fees and other third-party costs related to the SEC matter, net of insurance and other reimbursements, increased approximately $3.5 million from 2012 as described above, while other selling & administrative expenses increased by approximately $4.6 million, due mainly to higher management incentive compensation as a result of our strong operating results in 2013 and higher personnel and software and maintenance costs to support and enhance our corporate-wide information technology and security infrastructure as a result of our growth. In 2012, legal fees and other third-party costs related to the SEC matter and derivative action, net of insurance and other reimbursements, increased approximately $1.0 million from 2011 as described above, while other selling & administrative expenses increased by approximately $3.1 million, due mainly to higher personnel and software and maintenance costs to support and enhance corporate-wide information technology, security and portal operations. As a percentage of total consolidated revenues, selling & administrative expenses were 16% in all periods presented. DEPRECIATION & AMORTIZATION. Depreciation & amortization expense in 2013 increased 32%, or approximately $2.0 million, over 2012. This increase was primarily attributable to (i) capital expenditures to implement the motor vehicle inspection service for the Texas DPS as part of the DPS Direct suite of services, which launched in September 2012; and (ii) capital expenditures for our centralized hosting environment to support and enhance corporate-wide information technology and security infrastructure. Depreciation & amortization expense in 2012 increased 38%, or approximately $1.7 million, over 2011. This increase was primarily attributable to (i) capital expenditures to implement the motor vehicle inspection service for the Texas DPS as part of the DPS Direct suite of services; (ii) capital expenditures for our centralized hosting environment to support and enhance corporate-wide information technology and security infrastructure; and (iii) capital expenditures for new state portal contracts. As a percentage of total consolidated revenues, depreciation & amortization was 3% in all periods presented. We will continue to make key information technology infrastructure and security investments to support the long-term expansion of our portal business. INCOME TAXES. Our effective tax rate was approximately 39% in 2013 and 2012, and 40% in 2011. On January 2, 2013, the American Taxpayer Relief Act of 2012 (the “Act”) was signed into law. The Act retroactively extended the federal research and development credit under Internal Revenue Code Section 41, which previously expired at the end of 2011, through the end of 2013. In accordance with authoritative accounting guidance, we recognized the impact of this legislation for the 2012 tax year in 2013, when the Act was signed into law. For the 2013 tax year, we recognized a favorable benefit related to the federal research and 32 development tax credit totaling approximately $0.5 million for the year ended December 31, 2012, which was recognized in 2013, and approximately $0.3 million for the year ended December 31, 2013. Our effective tax rate for 2012 was lower than the rate in 2011 due to several factors, including the favorable outcome of an Internal Revenue Service examination and the related decrease in the liability for uncertain tax positions, along with changes in state taxes primarily due to a change in apportionment methodology for certain states. Liquidity and Capital Resources Operating Activities NIC INC. CONSOLIDATED STATEMENTS OF INCOME Revenues: Portal revenues Software & services revenues Total revenues Year Ended December 31, 2012 2013 2011 $ 235,183,005 14,095,660 $ 198,414,662 11,757,514 $ 170,276,434 10,622,737 249,278,665 210,172,176 180,899,171 Operating expenses: Cost of portal revenues, exclusive of depreciation & amortization (Note 2) 143,054,274 123,568,705 104,729,936 Cost of software & services revenues, exclusive of depreciation & amortization Selling & administrative Depreciation & amortization 4,356,608 40,924,642 8,333,089 4,041,223 32,851,946 6,518,532 4,030,917 28,731,758 4,898,488 Total operating expenses 196,668,613 166,980,406 142,391,099 Operating income Other expense, net Income before income taxes Income tax provision Net income 52,610,052 (51,301) 52,558,751 20,520,660 43,191,770 (16,211) 43,175,559 16,836,811 38,508,072 (34,820) 38,473,252 15,530,770 $ 32,038,091 $ 26,338,748 $ 22,942,482 Basic net income per share (Note 2) $ 0.49 $ 0.40 $ 0.35 Diluted net income per share (Note 2) $ 0.49 $ 0.40 $ 0.35 Weighted average shares outstanding: Basic Diluted 64,888,978 64,954,366 64,500,244 64,564,664 64,017,813 64,156,669 The accompanying notes are an integral part of these consolidated financial statements. 38 Net cash provided by operating activities was $40.9 million in 2013 compared to $28.4 million in 2012. The increase in cash flow from operations in 2013 was primarily the result of (i) a year-over-year increase in operating income, excluding non-cash charges for depreciation & amortization, the provision for losses on accounts receivable, including the write-off of the $5.1 million Pennsylvania receivable, and stock-based compensation; and (ii) a year-over-year increase in other long-term liabilities related to unrecognized tax benefits associated with changes in our state taxes primarily due to a change in apportionment methodology for certain states. Net cash provided by operating activities was $28.4 million in 2012 compared to $30.6 million in 2011. The decrease in cash flow from operations was primarily the result of (i) a year-over-year increase in prepaid expenses and other current assets, due mainly to the timing of estimated income tax payments and amounts receivable from our directors’ and officers’ liability insurance carrier; and (ii) a reduction of accounts payable in 2012 (as opposed to an increase in accounts payable in 2011) due to the timing of payments to certain government partners. These reductions to cash flow from operations were partially offset by a year-over-year increase in operating income, excluding non-cash charges for depreciation & amortization and stock-based compensation, and a smaller increase in accounts receivable in 2012 due to the timing of collections related to tax filing applications in 2011. Investing Activities Net cash used in investing activities of $8.2 million in 2013 primarily consisted of $6.7 million of capital expenditures, which were for normal fixed asset additions in our outsourced portal businesses including additional capital expenditures in our new state portals and in our centralized hosting environment to support and enhance corporate-wide information technology and security infrastructure, including Web servers, purchased software, and office equipment. Net cash used in investing activities of $13.5 million in 2012 primarily consisted of $12.8 million of capital expenditures, which were for (i) fixed asset additions and capital expenditures to implement the motor vehicle inspection service for the Texas DPS; and (ii) normal fixed asset additions in our outsourced portal businesses including additional capital expenditures in our new state portals and in our centralized hosting environment to support and enhance our corporate-wide information technology and security infrastructure, including Web servers, purchased software, and office equipment. Net cash used in investing activities of $6.6 million in 2011 primarily consisted of $6.1 million of capital expenditures, which were for normal fixed asset additions in our outsourced portal businesses including additional capital expenditures in our new state portals and in our centralized hosting environment to support and enhance corporate-wide information technology security, including Web servers, purchased software, and office equipment. In addition, in 2013, 2012 and 2011, we capitalized approximately $1.5 million, $0.7 million and $0.5 million, respectively, of internal-use software development costs relating to the standardization of customer management, billing and payment processing systems that support our portal operations and accounting systems. The increase in 2013 reflects software development costs for certain centrally developed and standardized customer management, billing, and payment processing software applications that we are providing to an increasing number of our government partners on a SaaS basis. Financing Activities Net cash used in financing activities of $20.8 million in 2013 reflects the classification of $23.0 million of our available cash as restricted to pay the $0.35 per share special cash dividend we declared on October 28, 2013, which was paid on January 2, 2014. Financing activities in 2013 also reflect the receipt of $0.9 million from our employee stock purchase program and tax deductions of approximately $1.3 million related to stock-based compensation (see Note 10 in the Notes to the Consolidated Financial Statements included in this Form 10-K). Net cash used in financing activities of $14.2 million in 2012 reflects the payment of a $16.3 million special cash dividend, partially offset by $0.8 million in proceeds from our employee stock purchase program and tax deductions of approximately $1.4 million related to stock-based compensation. Net cash used in financing activities of $14.1 million in 2011 reflects the classification of $16.2 million of our available cash as restricted to pay the $0.25 per share special cash dividend we declared on October 24, 2011, which was paid on January 3, 2012. Financing activities in 2011 also reflect tax deductions of approximately $1.5 million related to stock-based compensation and the receipt of $0.7 million from our employee stock purchase program. 33 Liquidity We recognize revenue primarily from providing outsourced government portal services net of the transaction fees due to the government when the services are provided. We recognize accounts receivable at the time these services are provided, and also accrue the related fees that we must remit to the government as accounts payable at such time. As a result, trade accounts receivable and accounts payable reflect the gross amounts outstanding at the balance sheet dates. Gross billings for the three-months ended December 31, 2013 and 2012 were approximately $833.4 million and $1.1 billion, respectively. We calculate 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 December 31, 2013 and 2012 was six and five days, respectively. We believe our working capital and current ratio are important measures of our short-term liquidity. Working capital, defined as current assets minus current liabilities, increased to $79.4 million at December 31, 2013, from $65.0 million at December 31, 2012. The increase in our working capital is primarily due to operating income generated from our operations, excluding non-cash charges, as further described above. Our current ratio, defined as current assets divided by current liabilities, was 2.0 at both December 31, 2013 and December 31, 2012. Excluding cash restricted for the payment of dividend and the related dividend payable at December 31, 2013, our current ratio would have been 2.3 at December 31, 2013. At December 31, 2013, our unrestricted cash balance was $74.2 million compared to $62.4 million at December 31, 2012. We believe that our currently available liquid resources and cash generated from operations will be sufficient to fund our operating requirements, capital expenditure requirements, current growth initiatives, and dividend payments, if any, for at least the next 12 months without the need of additional capital. We have a $10.0 million unsecured revolving credit facility with a bank that is available to finance working capital, issue letters of credit and finance general corporate purposes. We can obtain letters of credit in an aggregate amount of $5.0 million, which reduces the maximum amount available for borrowing under the facility. In total, we had $3.4 million in available capacity to issue additional letters of credit and $8.4 million of unused borrowing capacity at December 31, 2013 under the facility. We were in compliance with all of the financial covenants under the revolving credit facility at December 31, 2013. We issue letters of credit as collateral for certain office leases, and to a lesser extent, as collateral for performance on certain of our outsourced government portal contracts. These irrevocable letters of credit are generally in force for one year. Letters of credit may have an expiration date of up to one year beyond the May 1, 2015 expiration date of the credit agreement. We had unused outstanding letters of credit totaling approximately $1.6 million at December 31, 2013. We are not currently required to cash collateralize these letters of credit. At December 31, 2013, we were bound by performance bond commitments totaling approximately $6.1 million on certain outsourced government portal contracts. We have never had any defaults resulting in draws on performance bonds. Had we been required to post 100% cash collateral at December 31, 2013 for the face value of all performance bonds, letters of credit, and our line of credit in conjunction with a corporate credit card agreement, unrestricted cash would have decreased by approximately $8.7 million and would have been classified as restricted cash. We currently expect our capital expenditures to be approximately $6.5 million to $7.0 million in fiscal 2014, which we intend to fund from our cash flows from operations and existing cash reserves. This estimate includes capital expenditures for normal fixed asset additions in our outsourced portal businesses and in our centralized hosting environment to support and enhance corporate-wide information technology security, including Web servers, purchased software, and office equipment. On October 28, 2013, we declared a $0.35 per share special cash dividend totaling approximately $23.0 million that was paid out of our available cash on January 2, 2014. We do not believe that this dividend will have a significant effect on our future liquidity. We may need to raise additional capital within the next 12 months to further: fund operations if unforeseen costs arise; 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 cash generated from operations and the unused portion of our line of credit 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 our stockholders. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. 34 Off-Balance Sheet Arrangements and Contractual Obligations We do not have off-balance sheet arrangements that are not recorded or disclosed in our financial statements. The following table sets forth our future contractual obligations and commercial commitments as of December 31, 2013 (in thousands): Contractual Obligations Operating lease obligations Income tax uncertainties Long-term debt obligations Capital lease obligations Purchase obligations Other long-term liabilities Total $ 13,230 1,760 - - - - Less than 1 Year $ 4,078 - - - - - Payments Due by Period 1-3 Years 3-5 Years $ 5,817 1,760 - - - - $ 3,031 - - - - - More than 5 Years 304 $ - - - - - Total contractual cash obligations $ 14,990 $ 4,078 $ 7,577 $ 3,031 $ 304 While we have significant operating lease commitments for office space, except for our headquarters those commitments are generally tied to the period of performance under related portal contracts. We have income tax uncertainties of approximately $1.8 million at December 31, 2013. These obligations are classified as non-current on our consolidated balance sheet, as resolution is expected to take more than a year. We estimate that these matters could be resolved in one to three years as reflected in the table above. However, the ultimate timing of resolution is uncertain. See Notes 2 and 9 in the Notes to Consolidated Financial Statements included in this Form 10-K for further discussion on income taxes. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK. Our cash is held entirely in domestic non-interest bearing transaction accounts. Borrowings under our line of credit bear interest at a floating rate. Interest on amounts borrowed is payable at a Eurodollar rate or a base rate equal to the higher of the Federal Funds Rate plus 0.5% or the bank’s prime rate. We currently have no principal amounts of indebtedness outstanding under our line of credit. We do not use derivative financial instruments. 35 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of NIC Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, changes in stockholders’ equity and cash flows present fairly, in all material respects, the financial position of NIC Inc. and its subsidiaries at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP Kansas City, Missouri February 27, 2014 36 NIC INC. CONSOLIDATED BALANCE SHEETS December 31, 2013 2012 ASSETS Current assets: Cash Cash restricted for payment of dividend Trade accounts receivable, net (Note 2) Deferred income taxes, net Prepaid expenses & other current assets Total current assets Property and equipment, net Intangible assets, net Other assets Total assets $ 74,245,467 22,982,447 52,818,352 1,037,888 11,568,395 $ 62,358,266 - 55,261,023 886,969 9,340,344 162,652,549 15,167,051 1,864,297 289,968 179,973,865 $ 127,846,602 16,024,724 1,015,846 252,765 145,139,937 $ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable Accrued expenses Dividend payable Other current liabilities Total current liabilities Deferred income taxes, net Other long-term liabilities Total liabilities $ 39,111,916 20,822,443 22,982,447 347,743 83,264,549 $ 43,663,847 18,948,077 - 207,577 62,819,501 2,431,568 2,341,461 88,037,578 2,050,230 1,345,836 66,215,567 Commitments and contingencies (Notes 2, 3, 6, 7 and 9) - - Stockholders' equity: Common stock, $0.0001 par, 200,000,000 shares authorized, 64,992,587 and 64,628,105 shares issued and outstanding Additional paid-in capital Retained earnings (accumulated deficit) Total stockholders' equity Total liabilities and stockholders' equity 6,500 88,396,700 3,533,087 91,936,287 179,973,865 $ 6,463 84,308,249 (5,390,342) 78,924,370 145,139,937 $ The accompanying notes are an integral part of these consolidated financial statements. 37 NIC INC. CONSOLIDATED STATEMENTS OF INCOME Revenues: Portal revenues Software & services revenues Total revenues Year Ended December 31, 2012 2013 2011 $ 235,183,005 14,095,660 $ 198,414,662 11,757,514 $ 170,276,434 10,622,737 249,278,665 210,172,176 180,899,171 Operating expenses: Cost of portal revenues, exclusive of depreciation & amortization (Note 2) 143,054,274 123,568,705 104,729,936 Cost of software & services revenues, exclusive of depreciation & amortization Selling & administrative Depreciation & amortization 4,356,608 40,924,642 8,333,089 4,041,223 32,851,946 6,518,532 4,030,917 28,731,758 4,898,488 Total operating expenses 196,668,613 166,980,406 142,391,099 Operating income Other expense, net Income before income taxes Income tax provision Net income 52,610,052 (51,301) 52,558,751 20,520,660 43,191,770 (16,211) 43,175,559 16,836,811 38,508,072 (34,820) 38,473,252 15,530,770 $ 32,038,091 $ 26,338,748 $ 22,942,482 Basic net income per share (Note 2) $ 0.49 $ 0.40 $ 0.35 Diluted net income per share (Note 2) $ 0.49 $ 0.40 $ 0.35 Weighted average shares outstanding: Basic Diluted 64,888,978 64,954,366 64,500,244 64,564,664 64,017,813 64,156,669 The accompanying notes are an integral part of these consolidated financial statements. 38 NIC INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Common Stock Shares 63,705,851 Amount 6,371 $ - - Balance, January 1, 2011 Net income Dividends declared Dividend equivalents on performance-based restricted stock awards Restricted stock vestings Shares surrendered and cancelled upon vesting of restricted stock to satisfy tax withholdings Stock-based compensation Tax deductions relating to stock-based compensation Shares issuable in lieu of dividend payments on unvested performance-based restricted stock awards Issuance of common stock under employee stock purchase plan Balance, December 31, 2011 Net income Dividends declared Dividend equivalents on performance-based restricted stock awards Restricted stock vestings Shares surrendered and cancelled upon vesting of restricted stock to satisfy tax withholdings Stock-based compensation Tax deductions relating to stock-based compensation Shares issuable in lieu of dividend payments on unvested performance-based restricted stock awards Issuance of common stock under employee stock purchase plan Balance, December 31, 2012 Net income Dividends declared Dividend equivalents on performance-based restricted stock awards Dividend equivalents cancelled upon forfeiture of performance-based restricted stock awards Restricted stock vestings Shares surrendered and cancelled upon vesting of restricted stock to satisfy tax withholdings Stock-based compensation Tax deductions relating to stock-based compensation Shares issuable in lieu of dividend payments on unvested performance-based restricted stock awards Issuance of common stock under employee stock purchase plan Balance, December 31, 2013 - - - 532,870 (164,213) - - - 103,593 64,178,101 - - - 539,936 (167,977) - - - 78,045 64,628,105 - - - - 401,794 (124,890) - - Additional Paid-in Capital 107,934,910 $ - (16,230,966) (109,610) 119,904 (1,921,564) 4,509,727 1,509,039 336,404 651,590 96,799,434 - (16,337,681) (97,070) 203,605 (2,113,139) 3,802,572 1,351,115 (106,589) 806,002 84,308,249 - - - 49,909 82,580 (2,276,151) 4,025,960 1,302,005 - 53 (16) - - - 10 6,418 - - - 54 (17) - - - 8 6,463 - - - - 40 (12) - - Retained Earnings (Accumulated Deficit) (54,671,572) $ 22,942,482 - - - - - - - - (31,729,090) 26,338,748 - - - - - - - - (5,390,342) 32,038,091 (22,982,447) $ Total 53,269,709 22,942,482 (16,230,966) (109,610) 119,957 (1,921,580) 4,509,727 1,509,039 336,404 651,600 65,076,762 26,338,748 (16,337,681) (97,070) 203,659 (2,113,156) 3,802,572 1,351,115 (106,589) 806,010 78,924,370 32,038,091 (22,982,447) (132,215) (132,215) - - - - - - - $ 3,533,087 49,909 82,620 (2,276,163) 4,025,960 1,302,005 (314) 904,471 91,936,287 $ - 87,578 64,992,587 - 9 6,500 $ (314) 904,462 88,396,700 $ The accompanying notes are an integral part of these consolidated financial statements. 39 NIC INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2012 2013 2011 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization Provision for losses on accounts receivable (Note 2) Stock-based compensation expense Deferred income taxes Loss on disposal of property and equipment Changes in operating assets and liabilities: (Increase) in trade accounts receivable, net (Increase) decrease in prepaid expenses & other current assets (Increase) in other assets Increase (decrease) in accounts payable Increase (decrease) in accrued expenses Increase (decrease) in other current liabilities Increase (decrease) in other long-term liabilities Net cash provided by operating activities Cash flows from investing activities: Purchases of property and equipment Proceeds from sale of property and equipment Capitalized internal use software development costs Net cash used in investing activities Cash flows from financing activities: Cash dividends on common stock Cash restricted for payment of dividend Proceeds from employee common stock purchases Tax deductions related to stock-based compensation Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Other cash flow information: Non-cash investing activities: $ 32,038,091 $ 26,338,748 $ 22,942,482 8,333,089 5,229,277 4,025,960 (1,069,988) 51,301 (2,786,606) (927,644) (37,203) (4,502,022) (586,798) 222,786 863,096 40,853,339 6,518,532 259,630 3,802,572 734,208 16,219 (6,214,772) (1,918,230) (8,992) (1,374,212) 397,072 101,795 (262,995) 28,389,575 4,898,488 313,378 4,509,727 788,258 37,857 (7,560,160) 1,308,384 (358) 3,439,367 (92,038) (265,026) 282,254 30,602,613 (6,717,034) 16,153 (1,489,286) (8,190,167) (12,776,316) - (713,501) (13,489,817) (6,136,666) 7,711 (450,770) (6,579,725) - (22,982,447) 904,471 1,302,005 (20,775,971) (16,337,681) - 806,010 1,351,115 (14,180,556) - (16,230,966) 651,600 1,509,039 (14,070,327) 11,887,201 62,358,266 719,202 61,639,064 9,952,561 51,686,503 $ 74,245,467 $ 62,358,266 $ 61,639,064 Capital expenditures accrued but not yet paid $ 185,001 $ 144,559 $ - Cash payments: Income taxes paid Cash dividends on common stock previously restricted for payment of dividend 15,939,214 $ $ - $ $ 14,107,555 16,230,966 11,726,661 $ $ - The accompanying notes are an integral part of these consolidated financial statements. 40 NIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY NIC Inc. (the “Company” or “NIC”) is a leading provider of eGovernment services that helps governments use the Internet to reduce internal costs, increase efficiencies and provide a higher level of service to businesses and citizens. The Company accomplishes this currently through two channels: its primary outsourced portal businesses and its software & services businesses. In its primary outsourced portal businesses, the Company generally designs, builds, and operates Internet-based portals on an enterprise-wide basis on behalf of state and local governments desiring to provide access to government information and to complete secure government-based transactions through multiple online channels, including mobile devices. These portals consist of websites and applications the Company has built that allow businesses and citizens to access government information online and complete transactions, such as applying for a permit, retrieving government records, or filing a government-mandated form or report. Operating under multiple-year contracts (see Note 3), NIC markets the services and solicits users to complete government-based transactions and to enter into subscriber contracts permitting users to access the portal and the government information contained therein in exchange for transactional and/or subscription user fees. The Company typically manages operations for each contractual relationship through separate local subsidiaries that operate as decentralized businesses with a high degree of autonomy. NIC’s self-funded business model allows the Company to generate revenues by sharing in the fees the Company collects from eGovernment transactions. The Company’s government partners benefit through reducing their financial and technology risks, increasing their operational efficiencies, and 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 operations and maintenance costs of the outsourced government portals. The Company’s software & services businesses primarily include its subsidiaries that provide software development and services, other than enterprise-wide outsourced portal services, to state and local governments as well as federal agencies (see Note 3). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The Company classifies its revenues and cost of revenues into two categories: (1) portal and (2) software & services. The portal category generally includes revenues and cost of revenues from the Company’s subsidiaries operating enterprise-wide outsourced portals on behalf of state and local governments. The software & services category primarily includes revenues and cost of revenues from the Company’s subsidiaries that provide software development and services, other than enterprise-wide outsourced portal services, to state and local governments as well as federal agencies. 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 consists of all direct costs associated with operating government portals on an outsourced basis including employee compensation (including stock-based compensation), provision for losses on accounts receivable, subcontractor labor costs, telecommunications, fees required to process credit/debit card and automated clearinghouse transactions, and all other costs associated with the provision of dedicated client service such as dedicated facilities. For the year ended December 31, 2013, cost of portal revenues also includes a non-cash pre-tax charge of approximately $5.1 million (approximately $0.05 per share on an after-tax basis) to write-off accounts receivable due from the Commonwealth of Pennsylvania for eGovernment services provided from January 1, 2013 through June 30, 2013, as further discussed below. Cost of software & services revenues consists 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, finance and accounting, internal audit 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 addition, selling & administrative costs include legal fees and other third-party costs, net of directors’ and officers’ liability insurance reimbursements received, incurred in connection with the previously disclosed SEC matter, which concluded in December 2013 (see Note 7). Certain income statement amounts for the year ended December 31, 2012 have been reclassified, resulting in a reduction in both portal revenues and cost of portal revenues by approximately $1.0 million. The reclassification had no effect on prior year operating income, net income or earnings per share. Certain other prior year amounts have been reclassified to conform to the 2013 presentation. Basis of consolidation The accompanying consolidated financial statements consolidate the Company together with all of its direct and indirect wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. 41 Cash and cash equivalents Cash and cash equivalents primarily include cash on hand in the form of bank deposits. For purposes of the consolidated balance sheets and consolidated statements of cash flows, the Company considers all non-restricted highly liquid instruments purchased with an original maturity of one month or less to be cash equivalents. Cash restricted for payment of dividend Restricted cash represents cash which is restricted for use by NIC. On October 28, 2013, the Company’s Board of Directors declared a special cash dividend of $0.35 per share, payable to stockholders of record as of November 8, 2013. The dividend, totaling approximately $23.0 million, was paid on January 2, 2014. Cash used to pay the special dividend was classified as restricted at December 31, 2013. Trade accounts receivable The Company records trade accounts receivable at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts. The Company calculates this allowance based on its history of write-offs, the level of past-due accounts, and its relationship with, and the economic status of, its customers. Trade accounts receivable are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received. As previously disclosed in prior filings with the Securities and Exchange Commission (“SEC”), the Company had not collected amounts due from the Commonwealth of Pennsylvania (the “Commonwealth”) totaling approximately $5.1 million for eGovernment services provided by the Company’s subsidiary, Pennsylvania Interactive, LLC, from January 1, 2013 to June 30, 2013. At June 30, 2013, the Company believed these amounts were fully collectible based upon legal review and preliminary discussions with Commonwealth administration officials. Due to the preliminary nature of those discussions, the Company was unable to estimate the amount or range of amounts, if any, that it would not be able to collect from the Commonwealth, as of June 30, 2013. On September 9, 2013, the Company filed a Form 8-K with the SEC disclosing that, due to certain developments, including further discussions with Commonwealth officials, on September 6, 2013, the Company elected not to pursue collection of outstanding accounts receivable from the Commonwealth and recorded a non-cash pre-tax charge of approximately $5.1 million (approximately $0.05 per share on an after-tax basis) in the third quarter of 2013 to write-off amounts due from the Commonwealth through June 30, 2013. The charge is included in cost of portal revenues of the Company’s consolidated statements of income for the year ended December 31, 2013. The Company continued to provide eGovernment services under the contract with the Commonwealth, but did not recognize revenues under the contract subsequent to June 30, 2013 until the contract became self-funded in October 2013. The Company’s allowance for doubtful accounts at both December 31, 2013 and 2012 was $0.6 million. Property and equipment Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful lives of 8 years for furniture and fixtures, 3-10 years for equipment, 3-5 years for purchased software, and the lesser of the term of the lease or 5 years for leasehold improvements. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in results of operations for the period. The cost of maintenance and repairs is charged to expense as incurred. Significant betterments are capitalized. The Company periodically evaluates the carrying value of property and equipment to be held and used when events and circumstances warrant such a review. The carrying value of property and equipment is considered impaired when the anticipated undiscounted cash flows from the asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost to dispose. The Company did not record any material impairment losses on property and equipment during the periods presented. Software development costs and intangible assets The Company expenses as incurred all employee costs to start up, operate, and maintain government portals on an outsourced basis as costs of performance under the contracts because, after the completion of a defined contract term, the government entity with which the Company contracts typically receives a perpetual, royalty-free license to the applications the Company developed, excluding applications provided on a SaaS basis. Such costs are included in cost of portal revenues in the consolidated statements of income. The Company accounts for the costs of developing internal use computer software in accordance with authoritative accounting guidance for internal use computer software, whereby certain costs of developing internal use computer software are capitalized and amortized over their estimated useful life. For internal use computer software, the estimated economic life is typically 36 months from the date the software is placed in production. At December 31, 2013 and 2012, such costs are included in intangible assets in the consolidated balance sheets. 42 The Company carries intangible assets at cost less accumulated amortization. Intangible assets are generally amortized on a straight-line basis over estimated economic lives of the respective assets. At each balance sheet date, or whenever events or changes in circumstances warrant, the Company assesses the carrying value of intangible assets for possible impairment based primarily on the ability to recover the balances from expected future cash flows on an undiscounted basis. If the sum of the expected future cash flows on an undiscounted basis were to be less than the carrying amount of the intangible asset, an impairment loss would be recognized for the amount by which the carrying value of the intangible asset exceeds its estimated fair value. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. The Company has not recorded any impairment losses on intangible assets during the periods presented. Accrued expenses As of each balance sheet date, the Company estimates expenses which have been incurred but not yet paid or for which invoices have not yet been received. Significant components of accrued expenses consist primarily of employee compensation and benefits (including bonuses, vacation, health insurance and employer 401(k) contributions), third-party professional service fees, payment processing fees, and miscellaneous other accruals. Revenue recognition Portal revenues The Company recognizes revenue from providing enterprise-wide outsourced government portal services (primarily transaction-based information access fees and filing fees) net of the transaction fees due to the government when the services are provided. The fees that the Company must remit to state agencies for data access and other statutory fees are accrued as accounts payable at the time services are provided. The Company must remit a certain amount or percentage of these fees to government agencies regardless of whether the Company ultimately collects the fees. As a result, trade accounts receivable and accounts payable reflect the gross amounts outstanding at the balance sheet dates. Revenue from service contracts to provide portal consulting, application development, and management services to governments is recognized as the services are provided at rates provided for in the contract. Amounts received prior to providing services are recorded as unearned revenue. At each balance sheet date, the Company makes a determination as to the portion of unearned revenue that will be earned within one year and records that amount in other current liabilities in the consolidated balance sheets. The remainder, if any, is recorded in other long-term liabilities. Unearned revenues at December 31, 2013 and 2012 were approximately $0.3 million and $0.2 million, respectively, and were recorded in other current liabilities in the consolidated balance sheets. Software & services revenues The Company’s software & services revenues primarily include revenues from subsidiaries that provide software development and services, other than enterprise-wide outsourced portal services, to state and local governments as well as federal agencies. NIC Technologies currently earns a significant portion of its revenues from its contract with the U.S. Department of Transportation, Federal Motor Carrier Safety Administration (“FMCSA”) to develop and manage the FMCSA’s Pre-Employment Screening Program (“PSP”) for motor carriers nationwide, using a self-funded, transaction-based business model. NIC Technologies recognizes revenue from its contract with the FMCSA (primarily transaction-based information access fees) when the services are provided. NIC Technologies also earns a portion of its revenues from fixed fee and time and materials application development and outsourced maintenance contracts with other government agencies and recognizes revenues as the services are provided. Its contract with the state of Michigan contains a general fiscal funding clause. The Company recognizes revenue under this contract if the probability of cancellation is determined to be a remote contingency. Stock-based compensation The Company measures stock-based compensation cost for service-based restricted stock awards at the grant date based on the calculated fair value of the award, and recognizes an expense over the employee’s requisite service period (generally the vesting period of the grant). The Company measures stock-based compensation cost for performance-based restricted stock awards at the date of grant, based on the fair value of shares expected to be earned at the end of the performance period, and recognizes an expense over the performance period based upon the probable number of shares expected to vest. The Company estimates and excludes compensation cost related to awards not expected to vest based upon estimated forfeitures. See Note 10 for additional information. Income taxes The Company, along with its wholly owned subsidiaries, files a consolidated federal income tax return. Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. 43 The Company does not recognize a tax benefit for uncertain tax positions unless management’s assessment concludes that it is “more likely than not” that the position is sustainable, based on its technical merits. If the recognition threshold is met, the Company recognizes a tax benefit based upon the largest amount of the tax benefit that is greater than 50% likely to be realized. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense in the consolidated statements of income. Fair value of financial instruments The carrying values of the Company’s accounts receivable and accounts payable approximate fair value. Comprehensive income The Company has no material components of other comprehensive income or loss and, accordingly, the Company’s comprehensive income is approximately the same as its net income for all periods presented. Earnings per share 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 stockholders. The Company’s service-based restricted stock awards contain non-forfeitable rights to dividends and are considered participating securities. Accordingly, service-based restricted stock awards were included in the calculation of earnings per share using the two-class method for all periods presented. Unvested service-based restricted shares totaled approximately 0.7 million at December 31, 2013, 2012, and 2011. Basic earnings per share is calculated by first allocating earnings between common stockholders and participating securities. Earnings attributable to common stockholders 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 shares related to the Company’s 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 stockholders after considering the dilutive effect of potential common shares other than the participating unvested restricted stock awards. The dilutive effect of performance-based restricted stock awards is based on the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share: 2013 December 31, 2012 2011 Numerator: Net income Less: Income allocated to participating securities Net income available to common stockholders Denominator: Weighted average shares - basic Performance-based restricted stock awards Weighted average shares - diluted Basic net income per share: Net income Diluted net income per share: Net income Concentration of credit risk $ $ 32,038,091 (325,182) 31,712,909 $ $ 26,338,748 (299,518) 26,039,230 $ $ 22,942,482 (294,022) 22,648,460 64,888,978 65,388 64,954,366 64,500,244 64,420 64,564,664 64,017,813 138,856 64,156,669 $ 0.49 $ 0.40 $ 0.35 $ 0.49 $ 0.40 $ 0.35 Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and accounts receivable. The Company limits its exposure to credit loss by depositing its cash with high credit quality financial institutions. The Federal Deposit Insurance Corporation (“FDIC”) provides deposit insurance coverage up to $250,000 per depositor for deposit accounts at each FDIC-insured depository institution. At December 31, 2013, the amount of cash covered by FDIC deposit insurance was approximately $10.1 million, and approximately $64.1 million of cash was above the FDIC deposit insurance limit. The Company performs ongoing credit evaluations of its customers and generally requires no collateral to secure accounts receivable. Segment reporting The Company reports segment information in accordance with authoritative accounting guidance for segment disclosures 44 based upon the “management” approach, which designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company’s segments. Authoritative guidance for segment disclosures also requires disclosures about products and services and major customers. See Note 11. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recent accounting pronouncements In July 2013, the Financial Accounting Standards Board (“FASB”) issued new guidance regarding the financial statement presentation of an unrecognized tax benefit (“UTB”) when a net operating loss (“NOL”) carryforward, a similar tax loss, or a tax credit carryforward exists. The new guidance requires that an entity must present a UTB, or a portion of a UTB, in the financial statements as a reduction to a deferred tax asset for an NOL carryforward, a similar tax loss, or a tax credit carryforward except when certain conditions exist. The new guidance is effective for the Company beginning January 1, 2014. The guidance must be applied to all UTBs that exist as of the effective date and may be applied retrospectively to prior reporting periods presented. The Company has evaluated the requirements of this new guidance and does not believe there will be a material impact on its consolidated financial statements. 3. OUTSOURCED GOVERNMENT CONTRACTS Outsourced Portal Contracts The Company’s outsourced government portal contracts generally have an initial multi-year term with provisions for renewals for various periods at the option of the government. The Company’s primary business obligation under these contracts is generally to design, build, and operate Internet-based portals on an enterprise-wide basis 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 materially affect the profitability of the respective contract to NIC. The Company is typically responsible for funding the up-front investment and ongoing operations and maintenance costs of the government portals, and generally owns all of the intellectual property in connection with the applications developed under these contracts. After completion of a defined contract term, the government partner typically receives a perpetual, royalty-free license to use the software only in its own portal. However, certain customer management, billing and payment processing software applications that the Company has developed and standardized centrally and that are utilized by the Company’s portal businesses, are being provided to an increasing number of government partners on a software-as-a-service, or “SaaS,” basis, and thus would not be included in any royalty-free license. If the Company’s contract were not to be renewed after a defined term or if our contract was terminated by our government partner for cause, the government agency would be entitled to take over the portal in place with no future obligation of the Company, except as otherwise provided in the contract and except for services provided by the Company on a SaaS basis, which would be available to the partners on a fee-for-service basis. Any renewal of these contracts beyond the initial term by the government is optional and a government may terminate its contract prior to the expiration date if we breach a material contractual obligation and fail to cure such breach within a specified period or upon the occurrence of other events or circumstances specified in our contract. In addition, 15 contracts under which the Company provides enterprise-wide outsourced state portal services can be terminated by the other party without cause on a specified period of notice. Collectively, revenues generated from these contracts represented 57% of the Company’s total consolidated revenues for the year ended December 31, 2013. In the event that any of these contracts is 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, Montana, New Jersey, Pennsylvania, Tennessee, Texas, or Utah, 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. See the discussion below under “Expiring Contracts” regarding the expiration of the Company’s contracts with the Commonwealth of Virginia and the state of Arizona. At December 31, 2013, the Company was bound by performance bond commitments totaling approximately $6.1 million on certain outsourced portal 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 45 from the Company’s performance or the performance of the Company’s subcontractors under the contract. The Company has never had any defaults resulting in draws on performance bonds. See also Note 6. The following is a summary of the portals in each state through which the Company provides enterprise-wide outsourced portal services to multiple government agencies as of December 31, 2013: NIC Portal Entity Wisconsin Interactive Network, LLC Pennsylvania Interactive, LLC* NICUSA, OR Division NICUSA, MD Division Delaware Interactive, LLC Mississippi Interactive, LLC New Jersey Interactive, LLC Texas NICUSA, LLC West Virginia Interactive, LLC NICUSA, AZ Division Portal Website (State) www.wisconsin.gov (Wisconsin) www.pa.gov (Pennsylvania) www.oregon.gov (Oregon) www.maryland.gov (Maryland) www.delaware.gov (Delaware) www.ms.gov (Mississippi) www.nj.gov (New Jersey) www.Texas.gov (Texas) www.WV.gov (West Virginia) www.AZ.gov (Arizona) Vermont Information Consortium, LLC www.Vermont.gov (Vermont) www.Colorado.gov (Colorado) Colorado Interactive, LLC www.SC.gov (South Carolina) South Carolina Interactive, LLC www.Kentucky.gov (Kentucky) Kentucky Interactive, LLC www.Alabama.gov (Alabama) Alabama Interactive, LLC www.RI.gov (Rhode Island) Rhode Island Interactive, LLC www.OK.gov (Oklahoma) Oklahoma Interactive, LLC www.MT.gov (Montana) Montana Interactive, LLC www.TN.gov (Tennessee) NICUSA, TN Division www.eHawaii.gov (Hawaii) Hawaii Information Consortium, LLC www.Idaho.gov (Idaho) www.Utah.gov (Utah) www.Maine.gov (Maine) Idaho Information Consortium, LLC Utah Interactive, LLC Maine Information Network, LLC Arkansas Information Consortium, LLC www.Arkansas.gov (Arkansas) Iowa Interactive, LLC Indiana Interactive, LLC Nebraska Interactive, LLC Kansas Information Consortium, Inc. www.Iowa.gov (Iowa) www.IN.gov (Indiana) www.Nebraska.gov (Nebraska) www.Kansas.gov (Kansas) Year Services Commenced 2013 2012 2011 2011 2011 2011 2009 2009 2007 2007 2006 2005 2005 2003 2002 2001 2001 2001 2000 2000 2000 1999 1999 1997 1997 1995 1995 1992 Contract Expiration Date (Renewal Options Through) 5/13/2018 (5/13/2023) 11/30/2017 (11/30/2022) 11/22/2021 8/10/2016 (8/10/2019) 9/25/2014 (9/25/2017) 12/31/2015 (12/31/2021) 6/30/2014 8/31/2016 (8/31/2018) 6/30/2014 In transition period – 3/26/2014 (6/26/2014) 6/8/2016 (6/8/2019) 5/18/2014 7/15/2014 8/31/2014 (8/31/2015) 2/28/2015 (2/28/2017) 2/28/2014 12/31/2014 12/31/2015 (12/31/2020) 9/30/2014 (3/30/2016) 1/3/2016 (unlimited 3-year renewal options) 6/30/2015 6/5/2016 (6/5/2019) 7/1/2016 (3/14/2018) 6/30/2018 3/31/2014 7/1/2014 1/31/2016 12/31/2014 (12/31/2017) *See Note 2 for discussion of the Pennsylvania contract. During the first quarter of 2013, the Company received a one-year contract extension from the state of Kansas, a two-year contract extension from the state of Nebraska and a four-month contract extension from the state of Vermont. Additionally, the Company received a five-month contract extension from the state of Rhode Island. During the second quarter of 2013, the Company was awarded a five-year contract by the state of Wisconsin to manage its government portal, which includes an option for the government to extend the contract up to an additional five years. In addition, the Company was awarded a new three-year contract from the state of Vermont, which includes an option for the government to extend the contract for one additional three-year period. The Company also received a two-year contract extension from the state of Idaho, one-year contract extensions from the Commonwealth of Kentucky and the state of New Jersey, and six-month contract extensions from the state of Iowa and the state of Arizona with respect to the expiring Arizona portal contract. During the third quarter of 2013, the Company received a two-year contract extension from the state of Maine. In addition, the Company received a six-month contract extension from the state of West Virginia and a three-month contract extension from the state of Iowa. During the fourth quarter of 2013, the Company received a one-year contract extension from the state of Oklahoma, a six-month contract extension from the state of West Virginia and a three-month contract extension from the state of Arizona with respect to the expiring Arizona portal contract. During the first quarter of 2014, the Company was awarded a three-year contract with the state of Connecticut to manage its government portal, which includes renewal options for the government to extend the contract up to an additional three years. In addition, the Company received a three-month contract extension from the state of Iowa and a two-month contract extension from the state of Rhode Island. 46 Other Outsourced State Contracts The Company’s subsidiary, New Mexico Interactive, LLC, has a contract to manage eGovernment services for the New Mexico Motor Vehicle Division (“MVD”) and its parent, the New Mexico Taxation and Revenue Department. During the second quarter of 2013, the Company received a one-year contract extension from the MVD to manage the state’s driver history database through June 30, 2014. During the second quarter of 2013, the Company’s subsidiary, Virginia Interactive, signed an agreement with the Department of Game and Inland Fisheries to provide eGovernment services from September 1, 2013 through February 28, 2015, which includes an option for the agency to extend the contract for one additional six-month period through August 31, 2015. During the third quarter of 2013, VI signed an agreement with the Office of the Executive Secretary of the Supreme Court of Virginia to provide eGovernment services from September 1, 2013 through August 31, 2014, which includes an option for the agency to extend the contract for one additional 12-month period through August 31, 2015. Outsourced Federal Contracts NIC Technologies has a contract with the FMCSA to develop and manage the FMCSA’s PSP for motor carriers nationwide, using the self-funded, transaction-based business model. During the first quarter of 2014, the FMCSA exercised a one-year renewal option for the PSP contract, extending its term through February 16, 2015. As previously disclosed, the Company’s contract with the Federal Election Commission (“FEC”) to design and develop online federal campaign expenditure and ethics compliance systems expired on June 30, 2013. For the year ended December 31, 2013, revenues from the FEC contract accounted for less than 1% of the Company’s total consolidated revenues. Any renewal of the contract with the FMCSA beyond the initial term is at the option of the FMCSA and the contract can be terminated by the FMCSA without cause on a specified period of notice. The loss of the contract as a result of the expiration, termination or failure to renew the contract, if not replaced, could significantly reduce the Company’s revenues and profitability. In addition, the Company has limited control over the level of fees it is permitted to retain under the contract with the FMCSA. Any changes made to the amount or percentage of fees retained by the Company, or to the amounts charged for the services offered, could materially affect the profitability of this contract. Expiring Contracts As of December 31, 2013, there were 15 contracts under which the Company provides enterprise-wide outsourced portal services or software development and services that have expiration dates within the 12-month period following December 31, 2013. Collectively, revenues generated from these contracts represented 38% of the Company’s total consolidated revenues for the year ended December 31, 2013. As described above, if a contract is not renewed after a defined term, the government partner would be entitled to take over the portal in place with no future obligation of the Company, except as otherwise provided in the contract and except for the services the Company provides on a SaaS basis, which would be available to the government agency on a fee-for-service basis. The contract under which the Company’s subsidiary, Virginia Interactive, provided outsourced portal services to agencies of the Commonwealth of Virginia expired on August 31, 2012. As more fully disclosed in a Form 8-K filed by the Company with the SEC on April 18, 2012, VI chose not to agree to terms mandated by the Commonwealth of Virginia for a new contract. VI provided transition services as required by the contract through August 31, 2013. The costs incurred in transitioning out of VI’s contract with the Commonwealth of Virginia, including employee retention bonuses, operating lease termination costs, and fixed asset impairment, did not have a material impact on the Company’s consolidated results of operations, cash flows, or financial condition. For the year ended December 31, 2013, revenues from the legacy Virginia portal contract accounted for approximately 2% of the Company’s total consolidated revenues. The Company continues to provide eGovernment services to two agencies of the Commonwealth of Virginia, as further discussed above under Other Outsourced State Contracts. During the first quarter of 2013, the Company’s subsidiary, NICUSA, Inc. (“NICUSA”), chose not to respond to a request for proposal issued by the state of Arizona for a new contract. The contract under which NICUSA provided outsourced portal services to agencies of the state of Arizona expired on June 26, 2013. However, during the second quarter of 2013, the Company received a six-month contract extension from the state of Arizona to provide transition services through December 26, 2013, which included options for the government to extend the contract for two additional three-month periods. During the fourth quarter of 2013, the state of Arizona exercised a three-month renewal option, extending its contract term through March 26, 2014.The Company has evaluated the costs which may be incurred in transitioning out of NICUSA’s contract with the state of Arizona, including employee retention bonuses, operating lease termination costs, and fixed asset impairment, which are not expected to have a material impact on the Company’s consolidated results of operations, cash flows, or financial condition. For the year ended December 31, 2013, revenues from the Arizona portal contract accounted for approximately 1% of the Company’s total consolidated revenues. 47 4. INTANGIBLE ASSETS, NET Intangible assets, net consisted of the following at December 31: December 31, 2013 December 31, 2012 Gross Carrying Value Accumulated Amortization Net Book Value Gross Carrying Value Accumulated Amortization Net Book Value Internal use capitalized software $ 5,187,674 $ (3,323,377) $ 1,864,297 $ 3,698,387 $ (2,682,541) $ 1,015,846 Amortization expense for internal use capitalized software totaling approximately $0.6 million for each of the years ended December 31, 2013, 2012, and 2011 is included in depreciation & amortization in the consolidated statements of income. The total estimated intangible asset amortization expense in future years related to assets that have been released into production is as follows: Fiscal Year 2014 2015 2016 5. PROPERTY AND EQUIPMENT, NET Property and equipment, net consisted of the following at December 31: Equipment Purchased software Furniture and fixtures Leasehold improvements Less accumulated depreciation Property and equipment, net $ 764,378 582,831 266,053 1,613,262 $ $ 2013 26,917,914 9,782,079 4,410,355 1,170,354 42,280,702 (27,113,651) $ 2012 23,745,101 8,706,287 3,916,476 1,096,717 37,464,581 (21,439,857) $ 15,167,051 $ 16,024,724 Depreciation expense for the years ended December 31, 2013, 2012, and 2011 was $7.7 million, $5.7 million, and $4.0 million, respectively. 6. DEBT OBLIGATIONS AND COLLATERAL REQUIREMENTS On June 28, 2013, the Company entered into an amendment to extend its $10.0 million unsecured revolving credit agreement with a bank to May 1, 2015. 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 $5.0 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 0.50% 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 terms of the agreement provide for customary representations and warranties, affirmative and negative covenants and events of default. The amendment also continues to require the Company to maintain compliance with the following financial covenants (in each case, as defined in the agreement): ● ● ● Consolidated minimum annual EBITDA of at least $12.0 million, computed quarterly on a rolling 12-month basis; Consolidated tangible net worth of at least $36.0 million; and Consolidated maximum leverage ratio of 1.5:1. The Company was in compliance with each of the covenants listed above at December 31, 2013. The Company issues letters of credit as collateral for certain office leases, and to a lesser extent, as collateral for performance on certain of its outsourced government portal contracts. These irrevocable letters of credit are generally in force for one year. In total, the Company and its subsidiaries had unused outstanding letters of credit of approximately $1.6 million at December 31, 2013. The Company is not currently required to cash collateralize these letters of credit. The Company had $3.4 million in available capacity to issue additional letters of credit and $8.4 million of unused borrowing capacity at December 31, 2013 under the facility. Letters of credit may have an expiration date of up to one year beyond the expiration date of the credit agreement. 48 The Company has a $1.0 million line of credit with a bank in conjunction with a corporate credit card agreement. At December 31, 2013, the Company was bound by performance bond commitments totaling approximately $6.1 million on certain outsourced government portal contracts. The Company has never had any defaults resulting in draws on performance bonds. Had the Company been required to post 100% cash collateral at December 31, 2013 for the face value of all performance bonds, letters of credit and its line of credit in conjunction with a corporate credit card agreement, unrestricted cash would have decreased by approximately $8.7 million and would have been classified as restricted cash. 7. COMMITMENTS AND CONTINGENCIES Operating leases The Company and its subsidiaries lease office space and certain equipment under noncancellable operating leases. Future minimum lease payments under all noncancellable operating leases at December 31, 2013 are as follows: Fiscal Year 2014 2015 2016 2017 2018 Thereafter $ 4,078,149 3,529,052 2,288,001 1,617,494 1,413,079 304,354 Rent expense for operating leases for the years ended December 31, 2013, 2012, and 2011 was approximately $4.2 million, $3.8 million, and $3.4 million, respectively. SEC Matter On January 12, 2011, the Company and its Chairman of the Board and Chief Executive Officer, Harry Herington, reached a settlement with the SEC resolving the previously disclosed SEC matter relating to the reimbursement and disclosure of expenses to Jeffery S. Fraser, the Company’s former Chairman of the Board and Chief Executive Officer. NIC and Mr. Herington agreed to the settlement without admitting or denying the allegations in the SEC complaint. The settlements were approved by the U.S. District Court for the District of Kansas. Stephen M. Kovzan, NIC’s Chief Financial Officer, informed the Company that he was unable to reach a settlement with the SEC on terms that he felt were acceptable. The SEC filed a civil complaint against him in the U.S. District Court for the District of Kansas on January 12, 2011, alleging violations of certain provisions of the federal securities laws detailed in that complaint relating to the reporting and disclosure of expenses by Mr. Fraser. On December 2, 2013, a federal jury of seven persons in Kansas City, Kansas, cleared Mr. Kovzan of any liability in connection with all alleged violations brought by the SEC against him. The SEC’s right to appeal the outcome of the trial has expired and the civil action against Mr. Kovzan is concluded. During 2013, the Company continued to incur obligations to advance legal fees and other expenses to Mr. Kovzan in connection with the civil action by the SEC against him. The Company was not a party to the civil action, but was obligated to provide indemnification in certain circumstances (including advancing certain defense costs) to Mr. Kovzan in accordance with the Company’s certificate of incorporation and bylaws and its indemnification agreement with him. The Company’s directors’ and officers’ liability insurance carrier agreed to reimburse the Company for certain reasonable costs of defense advanced by the Company to Mr. Kovzan in the SEC civil action, subject to the policy limits of the applicable insurance policy. During the fourth quarter of 2013, the policy limits of the Company’s directors’ and officers’ liability insurance were reached for claims related to the SEC matter and, therefore, the Company will not be entitled to any further reimbursements from its insurance carrier in excess of the limits. The Company does not currently expect to incur any additional costs related to the SEC matter in 2014. Selling & administrative expenses for the year ended December 31, 2013 include approximately $12.8 million of legal fees and other third-party costs related to the SEC matter. These expenses were reduced by approximately $8.8 million of reimbursement from the Company’s directors’ and officers’ liability insurance carrier, a portion of which is expected to be collected subsequent to December 31, 2013, resulting in a net expense of approximately $4.0 million related to the SEC matter in 2013. Selling & administrative expenses for the year ended December 31, 2012 include approximately $4.5 million of legal fees and other third-party costs related to the SEC matter. These expenses were reduced by approximately $4.0 million of reimbursement from the Company’s directors’ and officers’ liability insurance carrier, resulting in a net expense of approximately $0.5 million related to the SEC matter in 2012. Selling & administrative expenses for the year ended December 31, 2011 include approximately $4.2 million of legal fees and other third-party costs related to the SEC matter and derivative action discussed below. These expenses were reduced by approximately $4.5 million of reimbursement from the Company’s directors’ and officers’ liability insurance carrier and approximately $0.2 million of reimbursement from Mr. Fraser as part of the derivative action settlement, resulting in a net decrease in expense of approximately $0.5 million in 2011. 49 Derivative Action As previously disclosed, the parties to the derivative lawsuit (Gene Sidore, derivatively on behalf of NIC Inc. vs. William F. Bradley, Jr., John L. Bunce, Jr., Art N. Burtscher, Daniel J. Evans, Jeffery S. Fraser, Ross C. Hartley, Harry H. Herington, Alexander C. Kemper, Stephen M. Kovzan, William M. Lyons, Pete Wilson, and NIC Inc. (as nominal defendant), case No. 2:10-cv-02466 (U.S. District Court for the District of Kansas)) agreed to a settlement. On October 11, 2011, the court granted final approval of the settlement, which can no longer be appealed. Under the settlement, the Company agreed to (i) implement or maintain certain agreed governance procedures relating to, among other things, enhanced Audit Committee responsibilities, Director nomination procedures, Director stock ownership guidelines, executive compensation and expense review and oversight, and the process for certain public disclosures, and (ii) pay plaintiff $5,000 as a case contribution and award, and the plaintiff’s counsel $495,000 in attorney’s fees and costs. Both amounts were reimbursed by the Company’s directors’ and officers’ liability insurance carrier. The Company also agreed not to oppose any efforts by plaintiff and his counsel to recover for the benefit of the stockholders the sums paid to the SEC in connection with the enforcement action SEC v. NIC Inc., et al., No 2:11-cv-02016 (D. Kan.). In exchange, plaintiff and the Company generally released all individual defendants from any and all claims made against them, or that could have been made against them, in the derivative lawsuit. In conjunction with the settlement negotiations in the derivative lawsuit, the Company and the derivative plaintiff Mr. Sidore reached a comprehensive settlement with its former CEO and Chairman, Jeffery S. Fraser, for expenses paid by the Company to Mr. Fraser from 1999 through 2003. The parties, including derivative plaintiff Mr. Sidore, agreed to resolve the matter through payment from Mr. Fraser to the Company in the amount of $225,000, as well as a comprehensive mutual release of claims as between the Company and Mr. Fraser, including a release by Mr. Fraser of any further claims for indemnification, under the Company’s bylaws or otherwise, for future matters arising out of or related to the facts alleged in the derivative lawsuit or the SEC matter, which was settled by the Company and Mr. Herington as described above. In October 2011, the Company received the $225,000 reimbursement from Mr. Fraser and the Audit Committee review of expenses paid by the Company to Mr. Fraser was concluded. NIC Technologies, LLC Complaint As previously disclosed, the Company’s subsidiary, NIC Technologies, LLC was a defendant in a lawsuit filed in the U.S. District Court for the District of Maryland by Micro Focus (US), Inc. and Micro Focus (IP) Limited (collectively, “Micro Focus”), alleging: (i) breach of contract regarding the software license for software used to compile code running on two NIC Technologies’ internal servers to deliver FEC services; and (ii) copyright infringement of the software covered by the licenses. The complaint in the lawsuit sought damages of at least $3,487,500 and a declaratory judgment. On July 29, 2011, the parties finalized a settlement of $195,000, which was paid by NIC Technologies, LLC to Micro Focus, in exchange for an appropriate release of all liability, no admissions of liability by either party, and dismissal with prejudice. 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 a party to any material legal proceedings. 8. STOCKHOLDERS’ EQUITY On October 28, 2013, the Company’s Board of Directors declared a special cash dividend of $0.35 per share, payable to stockholders of record as of November 8, 2013. The dividend, totaling approximately $23.0 million, was paid on January 2, 2014 on 64,987,854 outstanding shares of common stock. A dividend equivalent of $0.35 per share was also paid simultaneously on 676,281 unvested shares of service-based restricted stock granted under the Company’s 2006 Amended and Restated Stock Option and Incentive Plan. The dividend was paid out of the Company’s available cash. On November 5, 2012, the Company’s Board of Directors declared a special cash dividend of $0.25 per share, payable to stockholders of record as of November 23, 2012. The dividend, totaling approximately $16.3 million, was paid on December 5, 2012 on 64,623,372 outstanding shares of common stock. A dividend equivalent of $0.25 per share was also paid simultaneously on 727,354 unvested shares of service-based restricted stock granted under the Company’s 2006 Amended and Restated Stock Option and Incentive Plan. The dividend was paid out of the Company’s available cash. On October 24, 2011, the Company’s Board of Directors declared a special cash dividend of $0.25 per share, payable to stockholders of record as of December 19, 2011. The dividend, totaling approximately $16.2 million, was paid on January 3, 2012 on 64,173,368 outstanding shares of common stock. A dividend equivalent of $0.25 per share was also paid simultaneously on 750,497 unvested shares of service-based restricted stock granted under the Company’s 2006 Amended and Restated Stock Option and Incentive Plan. The dividend was paid out of the Company’s available cash. In addition, holders of performance-based restricted stock granted under the Company’s 2006 Amended and Restated Stock Option and Incentive Plan accrued dividend equivalents, for each of the dividends declared noted above, that could be earned and become payable in the form of shares of common stock at the end of the respective performance period to the extent that the underlying shares of restricted stock were earned. 50 9. INCOME TAXES The provision for income taxes consists of the following: Current income taxes: Federal State Total Deferred income taxes: Federal State Total Total income tax provision 2013 Year Ended December 31, 2012 2011 $ 18,436,209 3,154,439 21,590,648 $ 14,891,245 1,211,358 16,102,603 $ 12,655,924 2,086,588 14,742,512 (1,111,536) 41,548 (1,069,988) 20,520,660 $ 691,961 42,247 734,208 16,836,811 $ 449,566 338,692 788,258 15,530,770 $ Deferred income taxes on the balance sheet result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. Significant components of the Company’s deferred tax assets and liabilities were as follows at December 31: Deferred tax assets: Amortization of internal use software development costs Stock-based compensation Accrued vacation Amortization of software intangibles Federal benefit of state uncertain tax positions State net operating loss carryforwards Deferred rent Allowance for doubtful accounts Other Less: Valuation allowance Total Deferred tax liabilities: Depreciation & capitalized internal use software and development costs Nonrecurring gain on acquisition of business Total Net deferred tax liability 2013 2012 $ 1,461,246 1,289,584 762,293 638,894 431,387 326,586 233,923 226,359 59,912 5,430,184 (310,369) 5,119,815 $ 1,231,729 1,270,998 576,187 1,493,102 - 401,591 274,857 236,494 194,556 5,679,514 (291,249) 5,388,265 (5,382,498) (1,130,997) (6,513,495) (1,393,680) $ (5,410,640) (1,140,886) (6,551,526) (1,163,261) $ The Company has identified certain estimated state net operating loss (“NOL”) carryforwards that it might be unable to use. Based on a review of applicable state tax statutes, the Company concluded that there is substantial doubt it would be able to realize the full amount of certain estimated NOL carryforwards in states where the Company cannot file a consolidated income tax return or where future taxable income will not be sufficient to utilize the state NOL before it expires. As a result, the Company recorded a deferred tax asset valuation allowance totaling $0.3 million at both December 31, 2013 and 2012. The Company’s net deferred tax liability at December 31, 2013 is primarily attributable to differences between book and tax depreciation on property and equipment purchased during 2013 and 2012. The portion of the Company’s deferred tax liability related to the nonrecurring gain on acquisition of business for certain assets acquired through the Company’s wholly-owned subsidiary Texas NICUSA, LLC in 2009 was approximately $1.1 million at both December 31, 2013 and 2012. See Note 10 for discussion of the accounting for income tax deductions relating to the vesting of restricted stock. 51 The following table reconciles the statutory federal income tax rate and the effective income tax rate indicated by the consolidated statements of income: Statutory federal income tax rate State income taxes Nondeductible expenses Uncertain tax positions Federal and state tax credits Other Effective federal and state income tax rate 2013 Year Ended December 31, 2012 2011 35.0% 3.2 1.4 1.2 (2.0) 0.2 39.0% 35.0% 1.0 2.5 0.3 - 0.2 39.0% 35.0% 4.4 2.0 0.4 (1.7) 0.3 40.4% On January 2, 2013, the American Taxpayer Relief Act of 2012 (the “Act”) was signed into law. The Act retroactively extended the federal research and development credit under Internal Revenue Code Section 41 (which previously expired at the end of 2011) through the end of 2013. In accordance with authoritative accounting guidance, the Company recognized the impact of this legislation for the 2012 tax year in 2013, when the Act was signed into law. For the 2013 tax year, the Company recognized a favorable benefit related to the federal research and development tax credit totaling approximately $0.5 million for the year ended December 31, 2012, which was recognized in 2013, and approximately $0.3 million for the year ended December 31, 2013. The Company’s effective tax rate for 2012 was lower than the rate in 2011 due to several factors, including the favorable outcome of an Internal Revenue Service (“IRS”) examination and the related decrease in the liability for uncertain tax positions, along with changes in state taxes primarily due to a change in apportionment methodology for certain states. The following table provides a reconciliation of the beginning and ending amount of the consolidated liability for unrecognized income tax benefits (included in other long-term liabilities in the consolidated balance sheets) for the years ended December 31, 2013, 2012 and 2011: 2013 2012 2011 Balance at January 1 Additions for tax positions of prior years Reductions for tax positions of prior years Additions for tax positions of current years Settlements Expiration of the statute of limitations Balance at December 31 $ 688,575 439,550 - 632,309 - - $ 1,760,434 $ $ 586,606 262,865 (347,492) 186,596 - - 688,575 397,825 247,429 - - (48,218) (10,430) 586,606 $ $ It is reasonably possible that events will occur during the next 12 months that would cause the total amount of unrecognized tax benefits to increase or decrease. However, the Company does not expect such increases or decreases to be material to its financial condition or results of operations. 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 remains subject to U.S. federal examination for the tax years ended on or after December 31, 2010. Additionally, any net operating losses that were generated in prior years and utilized through 2010 may also be subject to examination by the IRS. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The Company recognizes accrued interest and penalties associated with uncertain tax positions as part of income tax expense in the consolidated statements of income. At December 31, 2013, 2012 and 2011, accrued interest and penalty amounts were not material. 10. STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS The Company accounts for equity instruments exchanged for employee services pursuant to authoritative accounting guidance for share-based payments, whereby stock-based compensation cost for service-based restricted stock awards is measured at the grant date based on the calculated fair value of the award, and is recognized as expense over the employee’s requisite service period (generally the vesting period of the grant). Stock-based compensation cost for performance-based restricted stock awards is measured at the grant date based on the fair value of shares expected to be earned at the end of the performance period, and is recognized as expense over the performance period based upon the probable number of shares expected to vest. The Company estimates and excludes compensation cost related to awards not expected to vest based upon estimated forfeitures. 52 The following table presents stock-based compensation expense included in the Company’s consolidated statements of income: Cost of portal revenues, exclusive of depreciation & amortization Cost of software & services revenues, exclusive of depreciation & amortization Selling & administrative Stock-based compensation expense before income taxes Income tax benefit Net stock-based compensation expense Stock option and restricted stock plans 2013 Year Ended December 31, 2012 2011 $ 1,100,396 $ 997,340 $ 907,684 48,128 2,877,436 61,845 2,743,387 63,099 3,538,944 4,025,960 (1,571,867) 2,454,093 $ 3,802,572 (1,482,857) 2,319,715 $ 4,509,727 (1,820,473) 2,689,254 $ The Company has a formal stock-option and incentive plan (the “NIC plan”) to provide for the granting of incentive stock options, non-qualified stock options, or restricted stock awards to encourage certain employees of the Company and its subsidiaries, and directors of the Company to participate in the ownership of the Company and to provide additional incentive for such employees and directors to promote the success of its business through sharing in the future growth of such business. At December 31, 2013, a total of 3,746,926 shares were available for future grants under the NIC plan. There have been no option repricings under the NIC plan, and all then-outstanding stock options were exercised or expired in 2010. The Company did not grant any stock options in 2013, 2012, or 2011, and does not currently anticipate granting stock options in the future. Instead, the Company currently expects to grant only restricted stock awards. Restricted stock Grants of service-based restricted stock generally vest beginning one year from the date of grant in cumulative annual installments of 25%. During 2013, the Board of Directors of the Company granted certain management-level employees, executive officers, and non-employee directors service-based restricted stock awards totaling 289,333 shares with a grant-date fair value totaling approximately $4.8 million. During 2013, the Board of Directors of the Company also granted to certain executive officers performance-based restricted stock awards pursuant to the terms of the Company’s executive compensation program totaling 115,696 shares, with a grant date fair value of $16.24 per share, totaling approximately $1.9 million, which represents 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, 2015. 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); Total consolidated revenue growth (three-year compound annual growth rate); and Cash flow return on invested capital (three-year average). At the end of the three-year period, the executive officers are eligible to receive up to a specified number of shares based upon the Company’s performance relative to these performance criteria over the performance period. In addition, the executive officers will accrue dividend equivalents for any cash dividend declared during the performance period, payable in the form of shares of Company common stock, based upon the maximum number of shares to be earned by the executive officers for each performance-based restricted stock award. Such hypothetical cash dividend payment shall be divided by the fair value of the Company’s common stock on the dividend payment date to determine the maximum number of notional shares to be awarded. At the end of the three-year performance period and on the date some or all of the shares are paid under the agreement, a pro rata number of notional dividend shares will be converted into an equivalent number of dividend shares paid and granted to the executive officers based upon the actual number of underlying shares earned during the performance period. At December 31, 2013, the three-year performance period related to the performance-based restricted stock awards granted to certain executive officers on March 7, 2011 ended. Based on the Company’s actual financial results from 2011 through 2013, 85,365 of the shares subject to the awards and 4,350 dividend shares were earned and will vest on March 7, 2014. At December 31, 2012, the three-year performance period related to the performance-based restricted stock awards granted to certain executive officers on February 1, 2010 ended. Based on the Company’s actual financial results from 2010 through 2012, 78,747 of the shares subject to the awards and 8,013 dividend shares were earned and vested on February 1, 2013. At December 31, 2011, the three-year performance period related to the performance-based restricted stock awards granted to certain executive officers on February 3, 2009 ended. Based on the Company’s actual financial results from 2009 through 2011, 172,751 of the shares subject to the awards and 25,008 dividend shares were earned and vested on February 3, 2012. 53 A summary of restricted stock activity for the year ended December 31, 2013 is presented below: Outstanding at January 1, 2013 Granted Vested Canceled Outstanding at December 31, 2013 Weighted Average Grant Date Fair Value 10.41 $ 16.54 8.80 10.22 13.42 Restricted Shares 1,113,868 405,029 (401,794) (73,287) 1,043,816 The fair value of restricted stock vested during the years ended December 31, 2013, 2012, and 2011 was approximately $3.5 million, $3.6 million, and $3.6 million, respectively. The weighted average grant date fair value per share of restricted stock granted during the years ended December 31, 2013, 2012, and 2011 was $16.54, $11.83, and $10.61, respectively. At December 31, 2013, the Company had approximately $6.7 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested restricted stock awards. The Company expects to recognize this cost over the next 2.5 years from December 31, 2013. Income taxes 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 vesting of restricted stock if such windfall tax benefits reduce income taxes payable. Following the with-and-without approach for utilization of tax attributes, the Company increased additional paid-in capital for windfall tax benefits totaling approximately $1.3 million, $1.4 million, and $1.5 million, respectively, during the years ended December 31, 2013, 2012, and 2011. Earnings per share In calculating diluted earnings per share, the assumed proceeds in the treasury stock calculation are adjusted for any stock option windfall tax benefits or shortfalls that would be credited or debited, respectively, to additional paid-in capital. Upon adoption of authoritative accounting guidance for share-based payments, the Company elected to exclude the impact of pro forma deferred tax assets (i.e., the windfall or shortfall that would be recognized in the financial statements upon exercise of an award) when calculating diluted earnings per share. Employee Stock Purchase Plan In 1999, the Company’s Board of Directors approved an employee stock purchase plan (“ESPP”) intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. A total of 2,321,688 shares of NIC common stock have been reserved for issuance under this plan. Terms of the plan permit eligible employees to purchase NIC common stock through payroll deductions up to the lesser of 15% of each employee’s compensation or $25,000. Amounts deducted and accumulated by the participant are used to purchase shares of NIC’s common stock at 85% of the lower of the fair value of the common stock at the beginning or the end of the offering period, as defined in the plan. In the offering period commencing on April 1, 2012 and ending on March 31, 2013, 87,578 shares were purchased at a price of $10.33 per share, resulting in total cash proceeds to the Company of approximately $904,000. In the offering period commencing on April 1, 2011 and ending on March 31, 2012, 78,045 shares were purchased at a price of $10.33 per share, resulting in total cash proceeds to the Company of approximately $806,000. In the offering period commencing on April 1, 2010 and ending on March 31, 2011, 103,593 shares were purchased at a price of $6.29 per share, resulting in total cash proceeds to the Company of approximately $652,000. The next offering period under this plan commenced on April 1, 2013. The closing fair market value of NIC common stock on the first day of the current offering period was $19.12 per share. The fair values of the offerings were estimated on the dates of grant using the Black-Scholes model using the assumptions in the following table. Risk-free interest rate Expected dividend yield Expected life Expected stock price volatility Weighted average fair value of ESPP rights March 31, 2014 Offering March 31, 2013 Offering March 31, 2012 Offering 0.14% 3.73% 1.0 year 28.84% 4.59 $ 0.19% 4.34% 1.0 year 37.30% 3.27 $ 0.27% 5.29% 1.0 year 31.26% 3.00 $ 54 The Black-Scholes option-pricing model was not developed for use in valuing employee stock options, but was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, it requires the use of subjective assumptions including expectations of future dividends and stock price volatility. Such assumptions are only used for making the required fair value estimate and should not be considered as indicators of future dividend policy or stock price appreciation, or should not be used to predict the value ultimately realized by employees who receive equity awards. Because changes in the subjective assumptions can materially affect the fair value estimate and because employee stock options have characteristics significantly different from those of traded options, the use of the Black-Scholes option-pricing model may not provide a reliable estimate of the fair value of employee stock options. Defined Contribution 401(k) Profit Sharing Plan The Company and its subsidiaries sponsor a defined contribution 401(k) profit sharing plan. In accordance with the plan, all full-time employees are eligible immediately upon employment and non-full time employees are eligible upon reaching 1,000 hours of service in the relevant period. A discretionary match by the Company of an employee’s contribution of up to 5% of base salary and a discretionary contribution may be made to the plan as determined by the Board of Directors. Expense related to Company matching contributions totaled approximately $1.8 million, $1.7 million, and $1.5 million for the years ended December 31, 2013, 2012, and 2011, respectively. 11. REPORTABLE SEGMENTS AND RELATED INFORMATION The Outsourced Portals segment is the Company’s only reportable segment and generally includes the Company’s subsidiaries operating enterprise-wide outsourced state and local government portals and the corporate divisions that directly support portal operations. The Other Software & Services category primarily includes the Company’s subsidiaries that provide software development and services, other than enterprise-wide outsourced portal services, to state and local governments as well as federal agencies. Each of the Company’s businesses within the Other Software & Services category is an operating segment and has been grouped together to form the Other Software & Services category, as none of the operating segments meets the quantitative threshold of a separately reportable segment. Unallocated corporate-level expenses are reported in the reconciliation of the segment totals to the related consolidated totals as “Other Reconciling Items.” There have been no significant intersegment transactions for the periods reported. The summary of significant accounting policies applies to all reportable and operating segments. The measure of profitability by which management, including the Company’s chief operating decision maker, evaluates the performance of its segments and allocates resources to them is operating income (loss). Segment assets 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 for the Company’s reportable and operating segments for the years ended December 31: 2013 Revenues Costs & expenses Depreciation & amortization Operating income (loss) 2012 Revenues Costs & expenses Depreciation & amortization Operating income (loss) 2011 Revenues Costs & expenses Depreciation & amortization Operating income (loss) Outsourced Portals Other Software & Services $ $ $ $ $ $ 235,183,005 153,204,265 8,001,597 73,977,143 198,414,662 131,559,290 6,225,114 60,630,258 170,276,434 110,994,019 4,571,950 54,710,465 $ $ $ $ 14,095,660 4,665,185 53,475 9,377,000 11,757,514 4,397,608 60,557 7,299,349 10,622,737 4,362,317 58,108 6,202,312 $ $ Other Reconciling Items $ - 30,466,074 278,017 (30,744,091) $ $ - 24,504,976 232,861 (24,737,837) $ $ - 22,136,275 268,430 (22,404,705) $ Consolidated Total $ 249,278,665 188,335,524 8,333,089 52,610,052 $ $ $ $ 210,172,176 160,461,874 6,518,532 43,191,770 180,899,171 137,492,611 4,898,488 38,508,072 $ 55 The following is a reconciliation of total segment operating income to total consolidated income before income taxes for the years ended December 31: Total segment operating income Other reconciling items Other expense, net Consolidated income before income taxes $ $ $ 2013 83,354,143 (30,744,091) (51,301) 52,558,751 2012 67,929,607 (24,737,837) (16,211) 43,175,559 $ $ $ 2011 60,912,777 (22,404,705) (34,820) 38,473,252 The highest volume, most commercially valuable service the Company offers is access to motor vehicle driver history records through the Company’s outsourced government portals, referred to as DMV records. This service accounted for approximately 34%, 34%, and 36% of the Company’s total consolidated revenues in 2013, 2012, and 2011, respectively. In addition, the Company offers a service in several states for online motor vehicle registration and licensing. This service accounted for approximately 13% and 10% of the Company’s total consolidated revenues in 2013 and 2012, respectively. No other services accounted for 10% or more of the Company’s total consolidated revenues for the years ended December 31, 2013, 2012, or 2011. A primary source of revenue is derived from data resellers, who use the Company’s government portals to access DMV records for sale to the auto insurance industry. For the years ended December 31, 2013, 2012, and 2011, one of these data resellers accounted for approximately 22%, 23%, and 28% of the Company’s total consolidated revenues, respectively. At December 31, 2013 and 2012, this one data reseller accounted for approximately 23% and 21%, respectively, of the Company’s accounts receivable. For the years ended December 31, 2013, 2012, and 2011, the Company’s Texas portal accounted for approximately 23%, 21%, and 21% of the Company’s total consolidated revenues, respectively. No other state portal contract accounted for more than 10% of the Company’s total consolidated revenues for the years ended December 31, 2013, 2012, or 2011. 56 12. UNAUDITED QUARTERLY OPERATING RESULTS The unaudited quarterly information below is subject to seasonal fluctuations resulting in lower portal revenues in the fourth quarter of each calendar year (on an individual portal basis, and excluding revenues from new outsourced government portal contracts awarded or acquired during the year), due to the lower number of business days in the quarter and a lower volume of business-to-government and citizen-to-government transactions during the holiday periods. 2013 Three Months Ended Revenues: Portal revenues Software & services revenues Total revenues Operating expenses: Cost of portal revenues, exclusive of March 31, 2013 June 30, 2013 September 30, 2013 December 31, 2013 $ 58,042,459 3,182,291 61,224,750 $ 62,093,296 3,844,035 65,937,331 $ 57,721,350 3,608,409 61,329,759 $ (1) 57,325,900 3,460,925 60,786,825 Year Ended December 31, 2013 $ 235,183,005 14,095,660 249,278,665 depreciation & amortization 32,761,919 34,899,128 39,755,133 35,638,094 143,054,274 Cost of software & services revenues, exclusive of depreciation & amortization Selling & administrative Depreciation & amortization Total operating expenses Operating income Other income (expense), net Income before income taxes Income tax provision Net income 1,103,195 9,609,051 2,026,623 45,500,788 15,723,962 (19,233) 15,704,729 5,747,849 9,956,880 $ 1,188,765 10,057,707 2,049,189 48,194,789 17,742,542 (1,649) 17,740,893 6,933,086 10,807,807 $ 928,301 10,387,621 2,144,842 53,215,897 8,113,862 4,362 8,118,224 3,025,500 5,092,724 $ 1,136,347 10,870,263 2,112,435 49,757,139 11,029,686 (34,781) 10,994,905 4,814,225 6,180,680 $ 4,356,608 40,924,642 8,333,089 196,668,613 52,610,052 (51,301) 52,558,751 20,520,660 32,038,091 $ Basic net income per share Diluted net income per share $ $ 0.15 0.15 $ $ 0.16 0.16 $ $ 0.08 0.08 $ $ 0.09 0.09 $ $ 0.49 0.49 Weighted average shares outstanding: Basic Diluted 64,709,515 64,709,515 64,889,767 64,889,767 64,961,138 64,968,858 64,991,597 65,060,718 64,888,978 64,954,366 (1) The Company’s higher effective tax rate in the fourth quarter of 2013 (44%) was driven primarily by changes in state taxes, including true-ups upon the filing of state returns in the fourth quarter of 2013, which lowered earnings per share by approximately $0.01. 2012 Three Months Ended Revenues: Portal revenues Software & services revenues Total revenues Operating expenses: Cost of portal revenues, exclusive of March 31, 2012 June 30, 2012 September 30, 2012 December 31, 2012 $ 45,711,804 3,031,317 48,743,121 $ 49,042,468 2,939,332 51,981,800 $ 50,197,700 3,008,474 53,206,174 $ (1) 53,462,690 2,778,391 56,241,081 Year Ended December 31, 2012 $ 198,414,662 11,757,514 210,172,176 depreciation & amortization 28,750,896 30,549,948 31,794,232 32,473,629 123,568,705 Cost of software & services revenues, exclusive of depreciation & amortization Selling & administrative Depreciation & amortization Total operating expenses Operating income Other expense, net Income before income taxes Income tax provision Net income 957,423 7,935,303 1,391,337 39,034,959 9,708,162 (890) 9,707,272 4,079,721 5,627,551 $ 1,008,078 8,382,643 1,400,470 41,341,139 10,640,661 1,079,460 8,218,715 1,657,607 42,750,014 10,456,160 - - 10,640,661 4,546,917 6,093,744 $ 10,456,160 4,461,320 5,994,840 $ 996,262 8,315,285 2,069,118 43,854,294 12,386,787 (15,321) 12,371,466 3,748,853 8,622,613 $ 4,041,223 32,851,946 6,518,532 166,980,406 43,191,770 (16,211) 43,175,559 16,836,811 26,338,748 $ Basic net income per share Diluted net income per share $ $ 0.09 0.09 $ $ 0.09 0.09 $ $ 0.09 0.09 $ $ 0.13 0.13 $ $ 0.40 0.40 Weighted average shares outstanding: Basic Diluted 64,296,996 64,296,996 64,488,837 64,488,837 64,585,659 64,603,817 64,627,150 64,696,246 64,500,244 64,564,664 (1) The Company’s lower effective tax rate (30%) in the fourth quarter of 2012 was due to several factors, including the favorable outcome of an IRS examination and the related decrease in the liability for uncertain tax positions, along with changes in state taxes, which increased earnings per share between $0.01 and $0.02. 57  ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures – The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) that are designed to ensure that material information required to be disclosed in its filings under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’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 Exchange 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 of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of such date. Management’s Report on Internal Control Over Financial Reporting – Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued in 1992 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2013. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2013 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein. Changes in Internal Control over Financial Reporting – As of the end of the period covered by this report, our management, including our principal executive officer and principal financial officer, concluded that there have been no changes in our internal control over financial reporting that occurred during our fourth fiscal quarter of 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. 58  PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information under “Election of Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Structure and Practices of the Board of Directors – Corporate Governance Principles and Best Practices and Code of Business Conduct and Ethics, – Committees of the Board, – Nomination of Directors and – Involvement in Certain Legal Proceedings” set forth in the Company’s definitive proxy statement related to its 2014 annual meeting of stockholders (the “Proxy Statement”), which will be filed with the SEC not later than 120 days after the end of the Company’s fiscal year pursuant to Regulation 14A, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under “Executive Compensation,” “Report of the Compensation Committee,” “Compensation Discussion and Analysis,” “Compensation Tables,” “Compensation Committee Interlocks and Insider Participation,” “Employment Agreements and Severance Payments,” and “Structure and Practices of the Board of Directors – Committees of the Board” and “Director Compensation” set forth in the Proxy Statement, which will be filed with the SEC not later than 120 days after the end of the Company’s fiscal year pursuant to Regulation 14A, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information under “Security Ownership of Certain Beneficial Owners and Management” set forth in the Proxy Statement, which will be filed with the SEC not later than 120 days after the end of the Company’s fiscal year pursuant to Regulation 14A, is incorporated herein by reference. Equity Compensation Plan Information The following table provides information regarding securities to be issued upon the exercise of outstanding options, warrants and rights and securities available for issuance under the Company’s equity compensation plans as of December 31, 2013: A B C Number of securities to be issued upon exercise of outstanding options, warrants and rights outstanding as of December 31, 2013 Weighted average exercise price of outstanding options, warrants and rights shown in Column A Number of securities available for future issuance as of December 31, 2013 - $ - See Note (2) See Note (2) - - - $ - See Note (1) 3,746,926 1,446,136 - 5,193,062 Plan Category Equity compensation plans approved by stockholders: Restricted stock awards Employee stock purchase plan Equity compensation plans not approved by stockholders Total (1) The amount shown excludes 1,043,816 shares subject to outstanding unvested restricted stock awards. (2) March 31, 2013 was the purchase date of common stock for the most recently completed offering period under the Company’s employee stock purchase plan. Therefore, as of such date, no purchase rights were outstanding. The purchase price for the offering period ended March 31, 2013, was $10.33 per share, and the total number of shares purchased was 87,578. 59 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information under “Certain Relationships and Related Transactions”, “Election of Directors,” and “Structure and Practices of the Board of Directors – Independence” set forth in the Proxy Statement, which will be filed with the SEC not later than 120 days after the end of the Company’s fiscal year pursuant to Regulation 14A, is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information under “Ratification of Appointment of Independent Registered Public Accounting Firm” set forth in the Proxy Statement, which will be filed with the SEC not later than 120 days after the end of the Company’s fiscal year pursuant to Regulation 14A, is incorporated herein by reference. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) (1) The following documents are filed as part of this report: Financial Statements. The consolidated financial statements and related notes, together with the report of PricewaterhouseCoopers LLP, appear in Part II, Item 8, Consolidated Financial Statements and Supplementary Data of this Form 10-K. Index To Consolidated Financial Statements: Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Changes in Stockholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Page 36 37 38 39 40 41 (2) (3) Financial Statement Schedules. All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. Exhibits. Pursuant to the rules and regulations of the Securities and Exchange Commission, we have filed or incorporated by reference the documents referenced below as exhibits to this Annual Report on Form 10-K. The documents include agreements to which the Company is a party or has a beneficial interest. The agreements have been filed to provide investors with information regarding their respective terms. The agreements are not intended to provide any other factual information about the Company or its business or operations. In particular, the assertions embodied in any representations, warranties and covenants contained in the agreements may be subject to qualifications with respect to knowledge and materiality different from those applicable to investors and may be qualified by information in confidential disclosure schedules not included with the exhibits. These disclosure schedules may contain information that modifies, qualifies and creates exceptions to the representations, warranties and covenants set forth in the agreements. Moreover, certain representations, warranties and covenants in the agreements may have been used for the purpose of allocating risk between the parties, rather than establishing matters as facts. In addition, information concerning the subject matter of the representations, warranties and covenants may have changed after the date of the respective agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures. Accordingly, investors should not rely on the representations, warranties and covenants in the agreements as characterizations of the actual state of facts about the Company or its business or operations on the date hereof. The exhibits that are required to be filed or incorporated by reference herein are listed in the Exhibit Index below (following the signatures page of this report). 60 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES Date: February 27, 2014 NIC INC. By: /s/ Harry Herington Harry Herington, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Harry Herington Harry Herington /s/ Stephen M. Kovzan Stephen M. Kovzan /s/ Aimi Daughtery Aimi Daughtery /s/ Art N. Burtscher Art N. Burtscher /s/ Daniel J. Evans Daniel J. Evans /s/ Karen S. Evans Karen S. Evans /s/ Ross C. Hartley Ross C. Hartley /s/ C. Brad Henry C. Brad Henry /s/ Alexander C. Kemper Alexander C. Kemper /s/ William M. Lyons William M. Lyons /s/ Pete Wilson Pete Wilson Chairman of the Board and Chief Executive Officer (Principal Executive Officer) February 27, 2014 Chief Financial Officer (Principal Financial Officer) Chief Accounting Officer (Principal Accounting Officer) February 27, 2014 February 27, 2014 Lead Independent Director February 27, 2014 February 27, 2014 February 27, 2014 February 27, 2014 February 27, 2014 February 27, 2014 February 27, 2014 February 27, 2014 Director Director Director Director Director Director Director 61 Exhibit Index Exhibit Number Description 3.1 Certificate of Incorporation of NIC Inc., a Delaware corporation (1) 3.2 Bylaws of NIC Inc., a Delaware corporation (2) 4.1 Reference is made to Exhibits 3.1 and 3.2 4.2 Specimen Stock Certificate of the registrant (3) 10.1 Form of Indemnification Agreement between the registrant and each of its executive officers and directors (4)** 10.2 Registrant’s 1999 Employee Stock Purchase Plan (4) ** 10.3 Employment agreement between the Registrant and Harry Herington, dated February 5, 2013 (5) ** 10.4 Employment agreement between the Registrant and William F. Bradley, dated February 5, 2013 (6) ** 10.5 Employment agreement between the Registrant and Stephen M. Kovzan, dated February 5, 2013 (7) ** 10.6 Employment agreement between the Registrant and Robert W. Knapp, dated February 5, 2013 (8) ** 10.7 Employment agreement between the Registrant and Ron E. Thornburgh, dated February 5, 2013 (9) ** 10.8 Registrant’s 2006 Amended and Restated Stock Option and Incentive Plan (10) ** 10.9 Form of Restricted Stock Agreement for NIC Inc. 2006 Amended and Restated Stock Option and Incentive Plan (11) ** 10.10 Form of Stock Option Agreement for NIC Inc. 2006 Amended and Restated Stock Option and Incentive Plan (12) ** 10.11 NIC Inc. Compensation Program For Certain Executive Officers (13) ** 10.12 NIC Inc. Management Annual Incentive Plan, dated February 25, 2013 (14) ** 10.13 Form of Performance-Based Restricted Stock Agreement under the NIC Inc. 2006 Amended and Restated Stock Option and Incentive Plan, as amended February 5, 2013 (15) ** 10.14 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 (16) 10.15 Amendment No. 1 to Credit Agreement Dated as of May 1, 2009 between NIC Inc., as Borrower, and Bank of America, N.A., as Lender and L/C Issuer (17) 10.16 Form of Indemnification Agreement (18) 10.17 NIC Inc. 2006 Amended and Restated Stock Option and Incentive Plan, as amended (19) ** 10.18 Amendment to Registrant’s 1999 Employee Stock Purchase Plan (20) ** 10.19 Amendment No. 2 to Credit Agreement Dated as of May 1, 2011 between NIC Inc., as Borrower, and Bank of America, N.A., as Lender and L/C Issuer (21) 10.20 NIC Sales Commission Bonus Plan, Senior Vice President of Business Development, as amended February 5, 2013 (22) ** 10.21 NIC Profit Sharing and Incentive Program, Senior Vice President of Business Development, as amended February 5, 2013 (23) ** 10.22 NIC Inc. Executive Incentive Plan (24) ** 10.23 Amendment No. 3 to Credit Agreement Dated as of June 28, 2013 between NIC Inc., as Borrower, and Bank of America, N.A., as Lender and L/C Issuer (25) 21.1 Subsidiaries of the registrant 23.1 Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm 31.1 Certification of 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 Chief Executive Officer and Chief Financial Officer 101 The following financial information from NIC Inc.’s Annual Report on Form 10-K for the year ended December 31, 2013, formatted in XBRL (Extensible Business Reporting Language) includes (i) Consolidated Balance Sheets at December 31, 2013 and December 31, 2012, (ii) Consolidated Statements of Income for the years ended December 31, 2013, 2012, and 2011 (iii) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2013, 2012, and 2011 (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012, and 2011, and (v) the Notes to Consolidated Financial Statements (submitted electronically herewith). (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Incorporated by reference from Exhibit 3.2 to the Form 8-K filed with the SEC on May 11, 2009 and incorporated herein by reference. Incorporated by reference from Exhibit 3.3 to the Form 8-K filed with the SEC on May 11, 2009 and incorporated herein by reference. Incorporated by reference from Exhibit 4.3 to Amendment No. 1 to the Registration Statement on Form S-1, File No. 333-77939, filed with the SEC on June 18, 1999. Filed as an exhibit with a corresponding exhibit number to the Registration Statement on Form S-1, File No. 333-77939, filed with the SEC on May 6, 1999, and incorporated herein by reference. Incorporated by reference to Exhibit 10.3 to the Form 10-K filed with the SEC on February 28, 2013. Incorporated by reference to Exhibit 10.4 to the Form 10-K filed with the SEC on February 28, 2013. Incorporated by reference to Exhibit 10.5 to the Form 10-K filed with the SEC on February 28, 2013. Incorporated by reference to Exhibit 10.6 to the Form 10-K filed with the SEC on February 28, 2013. Incorporated by reference to Exhibit 10.7 to the Form 10-K filed with the SEC on February 28, 2013. Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-8, File No. 333-136016, filed with the SEC on July 25, 2006. 62 (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) (21) (22) (23) (24) (25) Incorporated by reference to Exhibit 10.1 to the Form 10-Q filed with the SEC on November 11, 2007, File No. 000-26621. Incorporated by reference to Exhibit 10.2 to the Form 10-Q filed with the SEC on November 11, 2007, File No. 000-26621. Incorporated by reference to the Form 8-K filed with the SEC on March 6, 2008, File No. 000-26621. Incorporated by reference to Exhibit 10.15 to the Form 10-K filed with the SEC on February 28, 2013. Incorporated by reference to Exhibit 10.17 to the Form 10-K filed with the SEC on February 28, 2013. Incorporated by reference to Exhibit 10.52 to the Form 10-Q filed with the SEC on May 5, 2007, File No. 000-26621. Incorporated by reference to Exhibit 10.1 to the Form 10-Q filed with the SEC on May 5, 2009. Incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on May 11, 2009. Incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the SEC on May 11, 2009. Incorporated by reference to Exhibit 10.1 to the Form 10-Q filed with the SEC on May 7, 2010. Incorporated by reference to Exhibit 10.1 to the Form 10-Q filed with the SEC on May 4, 2011. Incorporated by reference to Exhibit 10.24 to the Form 10-K filed with the SEC on February 28, 2013. Incorporated by reference to Exhibit 10.26 to the Form 10-K filed with the SEC on February 28, 2013. Incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on May 2, 2012. Incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on July 1, 2013. ** Management contracts and compensatory plans and arrangements required to be filed as Exhibits pursuant to Item 15(b) of this report. We have not included in this Form 10-K the exhibits filed with our Form 10-K as filed electronically with the U.S. Securities and Exchange Commission (“SEC”). We will provide copies of such exhibits to the Form 10-K upon the written request of any stockholder made to the following department: Investor Relations, 25501West Valley Parkway, Suite 300, Olathe, Kansas 66061. Alternatively, the exhibits can be obtained from the Form 10-K on our website, www.egov.com/Investors, or directly from the SEC’s website at www.sec.gov. 63 nIC InC. 25501 West Valley Parkway, Suite 300 Olathe, Kansas 66061 (913) 498 3472 | (877) 234-EGOV egov.com 

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