ACQUISITION OF BUSINESS

12 Months Ended

Dec. 31, 2011

ACQUISITION OF BUSINESS

4. ACQUISITION OF BUSINESS

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

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

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

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

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

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

The acquisition was accounted for under the purchase method of accounting. Accordingly, net assets were recorded at their estimated fair values. The fair value of the identifiable assets acquired and liabilities assumed exceeded the fair value of the consideration paid, resulting in a bargain purchase. Consequently, the Company reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that the valuation procedures and resulting measures appropriately reflected all available information as of the acquisition date. As a result, the Company recognized a nonrecurring gain of approximately $2.2 million (net of tax) in the second quarter of 2009, which is included in nonrecurring gain on acquisition of business (net of tax) in the consolidated statement of income for the year ended December 31, 2009. The acquisition resulted in a gain in part because of Deloitte’s desire to designate a buyer for certain assets to be acquired from BearingPoint prior to the closing of all of the transactions contemplated under the Asset Purchase Agreement with BearingPoint and because NIC was one of the few companies in the eGovernment portal management industry with the requisite experience to be considered as a potential buyer.

The following table summarizes the purchase price allocation of net tangible and intangible assets acquired:

	May 29, 2009
Intangible assets subject to amortization:
Rights to the Framework Agreement	$	3,940,000
Rights to the Master Work Order		1,050,000
Total intangible assets		4,990,000
Prepaid expenses & other current assets		111,447
Accrued expenses		(118,800	)
Other current liabilities		(124,576	)
Deferred tax liability on nonrecurring gain on acquisition
of business		(1,173,816	)
Net assets acquired		3,684,255
Purchase price		1,500,000
Nonrecurring gain on acquisition of business, net of tax	$	2,184,255

Upon acquisition, the Company recorded a deferred tax liability of approximately $1.2 million related to the nonrecurring gain, which was netted against nonrecurring gain on acquisition of business in the consolidated statement of income for 2009, as required by authoritative accounting guidance for business acquisitions.

Results of operations of the acquired business included in the Company’s consolidated statements of income for the year ended December 31, 2009 were as follows:

	Year Ended
	December 31, 2009
Portal revenues	$	19,756,049
Operating expenses:
Cost of portal revenues, exclusive of depreciation & amortization		13,693,055
Nonrecurring gain on acquisition of business, net of tax		(2,184,255	)
Amortization of acquisition-related intangible assets		4,130,256
Depreciation & amortization		24,281
Total operating expenses		15,663,337
Operating income/income before income taxes		4,092,712
Income tax expense		(721,778	)
Net income	$	3,370,934

The Company recognized approximately $0.8 million of acquisition-related costs, including legal, accounting, and valuation services, in 2009. These costs are included in selling & administrative expenses in the consolidated statement of income for the year ended December 31, 2009. The Company’s rights under the Framework Agreement and Service Level Agreements were amortized over the seven-month period ended December 31, 2009, and the Company’s rights under the Master Work Order are being amortized over 39 months from the date of acquisition, reflecting the remaining contract terms for the agreements. For additional information on the Company’s intangible assets, see Note 5.

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

	Year Ended
	December 31, 2009
Revenues	$	147,262,679
Net income		15,719,226
Net income per common share:
Basic		0.25
Diluted		0.25

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