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.

The following table presents stock-based compensation expense included in the Company’s consolidated statements of income:

	Year Ended December 31,
	2012			2011			2010
Cost of portal revenues, exclusive of
depreciation & amortization	$	997,340		$	907,684		$	1,066,714
Cost of software & services revenues,
exclusive of depreciation & amortization		61,845			63,099			57,636
Selling & administrative		2,743,387			3,538,944			2,904,672
Stock-based compensation expense
before income taxes		3,802,572			4,509,727			4,029,022
Income tax benefit		(1,482,857	)		(1,820,473	)		(1,511,541	)
Net stock-based compensation expense	$	2,319,715		$	2,689,254		$	2,517,481

Stock option and restricted stock plans

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 the future growth of such business.

At December 31, 2012, a total of 4,078,668 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 2012, 2011, or 2010, 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 2012, the Board of Directors of the Company granted certain management-level employees, executive officers, and non-employee directors service-based restricted stock awards totaling 364,947 shares with a grant-date fair value totaling approximately $4.2 million.

During 2012, 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 134,982 shares, with a grant date fair value of $12.36 per share, totaling approximately $1.7 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, 2014. 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, 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.

At December 31, 2010, the three-year performance period related to the performance-based restricted stock awards granted to certain executive officers on March 4, 2008 ended. Based on the Company’s actual financial results from 2008 through 2010, 128,574 of the shares subject to the awards and 16,174 dividend shares were earned and vested on March 4, 2011.

A summary of restricted stock activity for the year ended December 31, 2012 is presented below:

	Restricted Shares			Weighted Average Grant Date Fair Value
Outstanding at January 1, 2012		1,188,193		$	8.04
Granted		499,929			11.83
Vested		(539,936	)		6.66
Canceled		(34,318	)		8.08
Outstanding at December 31, 2012		1,113,868			10.41

The fair value of restricted stock vested during the years ended December 31, 2012, 2011, and 2010 was approximately $3.6 million, $3.6 million, and $2.8 million, respectively. The weighted average grant date fair value per share of restricted stock granted during December 31, 2012, 2011, and 2010 was $11.83, $10.61, and $7.86, respectively. At December 31, 2012, the Company had approximately $6.0 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 2.4 years from December 31, 2012.

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 exercise of non-qualified stock options or vesting of restricted stock if such windfall tax benefits reduce income taxes payable. Following the with-and-without approach for utilization of tax attributes, which results in windfall tax benefits being utilized after utilization of available tax NOL carryforwards to offset current year taxable income, the Company increased additional paid-in capital for windfall tax benefits totaling approximately $1.4 million, $1.5 million, and $0.4 million, respectively, during the years ended December 31, 2012, 2011, and 2010.

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, 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. In the offering period commencing on April 1, 2009 and ending on March 31, 2010, 154,874 shares were purchased at a price of $4.39 per share, resulting in total cash proceeds to the Company of approximately $679,000. The next offering period under this plan commenced on April 1, 2012. The closing fair market value of NIC common stock on the first day of the current offering period was $12.15 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.

	March 31, 2013 Offering			March 31, 2012 Offering			March 31, 2011 Offering
Risk-free interest rate		0.19	%		0.27	%		0.42	%
Expected dividend yield		4.34	%		5.29	%		5.44	%
Expected life	1.0 year			1.0 year			1.0 year
Expected stock price volatility		37.30	%		31.26	%		40.36	%
Weighted average fair value of ESPP rights	$	3.27		$	3.00		$	2.03

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. 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 $1.7 million, $1.5 million, and $1.4 million for the years ended December 31, 2012, 2011, and 2010, respectively.