**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

# **WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended March 31,2009**

 

**Commission file number 000-26621**

 

**NIC INC.**

(Exact name of registrant as specified in its charter)

 

| **Colorado**                                                     | ** ** | **52-2077581**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

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

(Address of principal executive offices) (Zip Code)

 

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

 

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

 

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

 

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

 
| Large accelerated filer  o                     | Accelerated filer x         |
|------------------------------------------------|-----------------------------|
|                                           |                        |
| Non-accelerated filer o                        | Smaller reporting company o |
| (Do not check if a  smaller reporting company) |                        |

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

Yes o No x

 

The number of shares outstanding of the registrant’s common stock as of April 30,2009 was 62,919,731.

 

 

 

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**PART I - FINANCIAL INFORMATION**

**Item 1.  Consolidated Financial Statements**

 

**NIC INC.**

**CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

**thousands**

 
| ** **                                                                                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                       | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| **ASSETS**                                                                                       | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                  |       |               |       |                  |       |
| Cash and cash  equivalents                                                                       |       | $                  | 46,690     |                  | $          | 60,373 |   |
| Trade accounts  receivable                                                                       |       | 34,935             |       | 37,497                |       |
| Unbilled  revenues                                                                               |       | 428                |       | 359                   |       |
| Deferred income  taxes, net                                                                      |       | 3,923              |       | 4,293                 |       |
| Prepaid expenses &  other current assets                                                |       | 2,330              |       | 2,273                 |       |
| Total current  assets                                                                            |       | 88,306             |       | 104,795               |       |
| Property and  equipment, net                                                                     |       | 6,330              |       | 6,641                 |       |
| Deferred income  taxes, net                                                                      |       | 5,479              |       | 6,727                 |       |
| Other assets                                                                                     |       | 1,277              |       | 1,249                 |       |
| Total assets                                                                                     |       | $                  | 101,392    |                  | $          | 119,412 |   |
|                                                                                             |       |               |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                    | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                            |       |               |       |                  |       |
| Accounts payable                                                                                 |       | $                  | 40,567     |                  | $          | 41,792 |   |
| Accrued expenses                                                                                 |       | 6,974              |       | 8,407                 |       |
| Application  development contracts                                                               |       | 165                |       | 202                   |       |
| Other current  liabilities                                                                       |       | 1,115              |       | 898                   |       |
| Total current  liabilities                                                                       |       | 48,821             |       | 51,299                |       |
|                                                                                             |       |               |       |                  |       |
| Other long-term  liabilities                                                                     |       | 769                |       | 894                   |       |
| Total  liabilities                                                                               |       | 49,590             |       | 52,193                |       |
|                                                                                             |       |               |       |                  |       |
| Commitments and  contingencies (Note 5)                                                          |       | —             |       | —                |       |
|                                                                                             |       |               |       |                  |       |
| Shareholders’  equity:                                                                      |       |               |       |                  |       |
| Common stock, no  par, 200,000 shares authorized 62,920 and 62,779 shares issued and outstanding |       | —             |       | —                |       |
| Additional  paid-in capital                                                                      |       | 136,005            |       | 154,200               |       |
| Accumulated  deficit                                                                             |       | (84,203            | )          | (86,981               | )          |
| Total  shareholders’ equity                                                                 |       | 51,802             |       | 67,219                |       |
| Total  liabilities and shareholders’ equity                                                 |       | $                  | 101,392    |                  | $          | 119,412 |   |

 

 

*The accompanying Notes to UnauditedConsolidated Financial Statements are an integral part of these statements.*

 

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**NIC INC.**

**CONSOLIDATED STATEMENTS OF INCOME**

**(UNAUDITED)**

**thousands except for per shareamounts**

 
| ** **                                                                                         | ** ** | **Three-months ended** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                         | ** ** | **March 31,**     | ** ** |
| ** **                                                                                         | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Revenues:                                                                                          | ** ** | ** **             | ** ** | ** ** | ** ** |
| Portal revenues                                                                                    |       | $                      | 26,404     |   | $ | 23,796 |   |
| Software &  services revenues                                                             |       | 1,006                  |       | 883 |   |
| Total revenues                                                                                     |       | 27,410                 |       | 24,679 |   |
| Operating  expenses:                                                                               |       |                   |       |   |   |
| Cost of portal  revenues, exclusive of depreciation & amortization                             |       | 14,892                 |       | 12,704 |   |
| Cost of  software & services revenues, exclusive of depreciation &  amortization |       | 616                    |       | 433 |   |
| Selling &  administrative                                                                 |       | 6,271                  |       | 5,963 |   |
| Depreciation &  amortization                                                              |       | 936                    |       | 847 |   |
| Total operating  expenses                                                                          |       | 22,715                 |       | 19,947 |   |
| Operating income                                                                                   |       | 4,695                  |       | 4,732 |   |
| Other income  (expense):                                                                           |       |                   |       |   |   |
| Interest income                                                                                    |       | 41                     |       | 333 |   |
| Other expense,  net                                                                                |       | (1                     | )          | (19 | ) |
| Total other  income (expense)                                                                      |       | 40                     |       | 314 |   |
| Income before  income taxes                                                                        |       | 4,735                  |       | 5,046 |   |
| Income tax  provision                                                                              |       | 1,957                  |       | 2,058 |   |
| Net income                                                                                         |       | $                      | 2,778      |   | $ | 2,988 |   |
|                                                                                               |       |                   |       |   |   |
| Basic net income  per share (Note 1)                                                               |       | $                      | 0.04       |   | $ | 0.05 |   |
| Diluted net  income per share (Note 1)                                                             |       | $                      | 0.04       |   | $ | 0.05 |   |
|                                                                                               |       |                   |       |   |   |
| Weighted average  shares outstanding (Note 1):                                                     |       |                   |       |   |   |
| Basic                                                                                              |       | 62,796                 |       | 62,119 |   |
| Diluted                                                                                            |       | 62,844                 |       | 62,479 |   |

 

*Theaccompanying Notes to Unaudited Consolidated Financial Statements are anintegral part of these statements.*

 

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**NIC INC.**

**CONSOLIDATEDSTATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY**

**(UNAUDITED)**

**thousands**

 
| ** **                                                                       | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **  | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------|------------|-------------|------------|-----------------|------------|-------------|------------|------------|------------|
| ** **                                                                       | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
| ** **                                                                       | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit** | ** ** | **Total**  | ** ** |
| **Balance,  January 1, 2009**                                               |       | 62,779           |       | $           | —     |            | $          | 154,200     |       | $          | (86,981    | ) | $ | 67,219 |   |
| Net income                                                                       |       | —           |       | —      |       | —          |       | 2,778       |       | 2,778      |       |
| Cash dividends  on common stock (Note 3)                                         |       | —           |       | —      |       | (19,150         | )          | —      |       | (19,150    | )          |
| Shares  surrendered upon vesting of restricted stock to satisfy tax withholdings |       | (15              | )          | —      |       | (78             | )          | —      |       | (78        | )          |
| Restricted stock  vestings                                                       |       | 51               |       | —      |       | —          |       | —      |       | —     |       |
| Stock-based  compensation                                                        |       | —           |       | —      |       | 568             |       | —      |       | 568        |       |
| Issuance of  common stock under employee stock purchase plan                     |       | 105              |       | —      |       | 465             |       | —      |       | 465        |       |
| **Balance,  March 31, 2009**                                                |       | 62,920           |       | $           | —     |            | $          | 136,005     |       | $          | (84,203    | ) | $ | 51,802 |   |

 

*Theaccompanying Notes to Unaudited Consolidated Financial Statements are anintegral part of these statements.*

 

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**NIC INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

**thousands**

 
| ** **                                                                         | ** ** | **Three-months ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**     | ** ** |
| ** **                                                                         | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Cash flows from  operating activities:                                             |       |                   |       |   |   |
| Net income                                                                         |       | $                      | 2,778      |   | $ | 2,988 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                   |       |   |   |
| Depreciation &  amortization                                              |       | 936                    |       | 847 |   |
| Stock-based  compensation expense                                                  |       | 568                    |       | 521 |   |
| Application  development contracts                                                 |       | (37                    | )          | (37 | ) |
| Deferred income  taxes                                                             |       | 1,618                  |       | 1,762 |   |
| Loss on disposal  of property and equipment                                        |       | 1                      |       | 19 |   |
| Changes in  operating assets and liabilities:                                      |       |                   |       |   |   |
| (Increase)  decrease in trade accounts receivable                                  |       | 2,562                  |       | (4,364 | ) |
| (Increase)  decrease in unbilled revenues                                          |       | (69                    | )          | 397 |   |
| (Increase)  decrease in prepaid expenses & other current assets           |       | (57                    | )          | 489 |   |
| Increase  (decrease) in accounts payable                                           |       | (1,225                 | )          | 4,180 |   |
| (Decrease) in  accrued expenses                                                    |       | (1,511                 | )          | (1,117 | ) |
| Increase  (decrease) in other current liabilities                                  |       | 217                    |       | (14 | ) |
| (Decrease) in  other long-term liabilities                                         |       | (125                   | )          | — |   |
| Net cash provided  by operating activities                                         |       | 5,656                  |       | 5,671 |   |
|                                                                               |       |                   |       |   |   |
| Cash flows from  investing activities:                                             |       |                   |       |   |   |
| Purchases of  property and equipment                                               |       | (545                   | )          | (1,277 | ) |
| Capitalized  internal use software development costs                               |       | (109                   | )          | (183 | ) |
| Purchases of  investments                                                          |       | —                 |       | (1,000 | ) |
| Sales and  maturities of investments                                               |       | —                 |       | 11,650 |   |
| Net cash (used  in) provided by investing activities                               |       | (654                   | )          | 9,190 |   |
|                                                                               |       |                   |       |   |   |
| Cash flows from  financing activities:                                             |       |                   |       |   |   |
| Cash dividends  on common stock                                                    |       | (19,150                | )          | (15,709 | ) |
| Proceeds from  employee common stock purchases                                     |       | 465                    |       | 280 |   |
| Proceeds from  exercise of employee stock options                                  |       | —                 |       | 761 |   |
| Net cash used in  financing activities                                             |       | (18,685                | )          | (14,668 | ) |
|                                                                               |       |                   |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                              |       | (13,683                | )          | 193 |   |
| Cash and cash  equivalents, beginning of period                                    |       | 60,373                 |       | 38,236 |   |
| Cash and cash  equivalents, end of period                                          |       | $                      | 46,690     |   | $ | 38,429 |   |
| Other cash flow  information:                                                      |       |                   |       |   |   |
| Income taxes  paid                                                                 |       | $                      | 792        |   | $ | 367 |   |

 

*Theaccompanying Notes to Unaudited Consolidated Financial Statements are anintegral part of these statements.*

 

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**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe amounts reported in the consolidated financial statements and accompanyingnotes. Actual results could differ from those estimates. The results ofoperations for the three-month period ended March 31, 2009 are notnecessarily indicative of the results to be expected for the full year ending December 31,2009.

 

**1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

*The Company*

 

NIC Inc. is aprovider of eGovernment services that helps governments use the Internet toincrease internal efficiencies and provide a higher level of service tobusinesses and citizens.  The Companyaccomplishes this currently through two divisions: its primary portaloutsourcing businesses and its software & services businesses.

 

In its primaryportal outsourcing business, the Company designs, builds and operatesInternet-based portals on behalf of state and local governments desiring toprovide access to government information and to complete government-basedtransactions online.  These portalsconsist of Web sites and applications the Company has built that allowbusinesses and citizens to access government information online and completetransactions, including applying for a permit, retrieving driver’s licenserecords or filing a government-mandated form or report.  Operating under multiple-year contracts (seeNote 2), NIC markets the services and solicits users to completegovernment-based transactions and to enter into subscriber contracts permittingusers to access the portal and the government information contained therein inexchange for transactional and/or subscription user fees. The Company managesoperations for each contractual relationship through separate localsubsidiaries that operate as decentralized businesses with a high degree ofautonomy.  NIC’s self-funding businessmodel allows the Company to reduce its government partners’ financial andtechnology risks and generate revenues by sharing in the fees the Companycollects from eGovernment transactions. The Company’s government partners benefit through gaining a centralized,customer-focused presence on the Internet, while businesses and citizensreceive a faster, more convenient and more cost-effective means to interactwith governments.  The Company istypically responsible for funding up front investment and ongoing operationalcosts of the government portals.

 

The Company’ssoftware & services businesses primarily include its UniformCommercial Code (“UCC”) and corporate filings software development business andits ethics & elections business. The Company’s UCC and corporate filings software development business,NIC Conquest, is primarily a provider of software applications and services forelectronic filings and document management solutions for the CaliforniaSecretary of State and is not actively marketing its applications and servicesin respect of new engagements.  NICoffers UCC applications through several of its state portals, typically throughthe Secretary of State’s office; however, transactional revenues associatedwith these applications are not associated with NIC Conquest and are includedin portal revenues.  The 

 

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Company’s ethics &elections business, NIC Technologies, designs and develops online campaignexpenditure and ethics compliance systems for federal and state governmentagencies. Currently, NIC Technologies is primarily engaged in servicing itscontracts with the Federal Election Commission and the state of Michigan.

 

*Basis ofpresentation*

 

The Company classifies its revenues and cost of revenues into twocategories: (1) portal and (2) software & services.  The portal category includes revenues fromthe Company’s subsidiaries operating government portals under long-termcontracts on an outsourced basis.  Thesoftware & services category includes revenues primarily from theCompany’s software & services businesses.  The primary categories of operating expensesinclude: cost of portal revenues, cost of software & servicesrevenues, selling & administrative, and depreciation &amortization.  Cost of portal revenuesconsist of all direct costs associated with operating government portals on anoutsourced basis including employee compensation (including stock-basedcompensation), telecommunications, merchant fees required to process creditcard and automated clearinghouse transactions, and all other costs associatedwith the provision of dedicated client service such as dedicatedfacilities.  Cost of software &services revenues consist of all direct project costs to provide softwaredevelopment and services such as employee compensation (including stock-basedcompensation), subcontractor labor costs, and all other direct project costsincluding hardware, software, materials, travel and other out-of-pocketexpenses.  Selling &administrative costs consist primarily of corporate-level expenses relating tohuman resource management, administration, information technology, security,legal and finance, and all costs of non-customer service personnel from theCompany’s software & services businesses, including informationsystems and office rent.  Selling & administrative costs also consistof stock-based compensation and corporate-level expenses for market developmentand public relations.

 

*Fair Value Measurements*

 

In September 2006,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, *Fair Value Measurements*, which defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  SFAS No. 157 does notrequire any new fair value measurements, but provides guidance on how tomeasure fair value by providing a fair value hierarchy used to classify thesource of the information.  Except forthe portion of SFAS No. 157 that addresses nonfinancial assets andliabilities that are recognized or disclosed at fair value in the financialstatements on a nonrecurring basis, which was deferred for one year, theCompany adopted the provisions of SFAS No. 157 on January 1, 2008.  The partial adoption of SFAS No. 157 on January 1,2008 did not have a significant impact on the unaudited consolidated financialstatements of the Company.  The Companyadopted the requirements of SFAS No. 157 that address nonfinancial assetsand liabilities effective January 1, 2009. The adoption of the remaining portion of SFAS No. 157 on January 1,2009 did not have a significant impact on the unaudited consolidated financialstatements of the Company.

 

SFAS No. 157establishes a three-level hierarchy that prioritizes the inputs to valuationtechniques used to measure the fair value of financial instruments.  The valuation hierarchy is based upon thetransparency of inputs to the valuation of an asset or liability as of themeasurement date.  The three levels aredefined as follows:

 

| Level 1 |   | Inputs to the valuation methodology are unadjusted quoted prices for  identical assets or liabilities in active markets.                                                                                                                                                  |
|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                      |
| Level 2 |   | Inputs to the valuation methodology include quoted prices for similar  assets and liabilities in active markets, and inputs that are observable for  the asset or liability, either directly or indirectly, for substantially the  full term of the financial instrument. |
|    |   |                                                                                                                                                                                                                                                                      |
| Level 3 |   | Inputs to the valuation methodology are unobservable and significant to  the fair value measurement.                                                                                                                                                                      |

 

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

 

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*Earningsper Share*

 

In June 2008, the FASB issuedFASB Staff Position Emerging Issues Task Force 03-6-1, *DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities* (FSP-EITF 03-6-1).  Under FSP-EITF 03-6-1, unvested share-basedpayment awards that contain non-forfeitable rights to dividends or dividendequivalents (whether paid or unpaid) are participating securities and shall beincluded in the computation of earnings per share pursuant to the two-classmethod.  The two-class method is anearnings allocation formula that treats a participating security as having rightsto undistributed earnings that would otherwise have been available to commonshareholders.  The Company’sservice-based restricted stock awards contain non-forfeitable rights todividends and are considered participating securities.  Upon adoption of this standard in the firstquarter of 2009, the service-based restricted stock awards were included in thecalculation of earnings per share using the two-class method for thethree-month periods ended March 31, 2009 and 2008.  Unvested service-based restricted shares totaled approximately1.0 million and 0.8 million at March 31, 2009 and 2008, respectively.  Basic earnings per share is calculated byfirst allocating earnings between common shareholders and participatingsecurities.  The earnings attributable tothe common shareholders is divided by the weighted average number of commonshares outstanding during the period. Diluted earnings per share is calculated by giving effect to thedilutive potential common shares outstanding during the period.  The dilutive effect of the stock options andthe employee stock purchase plan is determined based on the treasury stockmethod.  The dilutive effect of theservice-based restricted stock awards is based on the more dilutive of thetreasury stock method or the two-class method assuming a reallocation ofundistributed earnings to common shareholders after considering the dilutiveeffect of potential common shares other than the participating unvestedrestricted awards.

 

The following table setsforth the changes to the computation of basic and diluted earnings per share(in thousands, except per share amounts) pursuant to FSP-EITF 03-6-1:

 

| ** **                                    | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                    | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| ** **                                    | ** ** | ** **                            | ** ** | **As  Originally  Reported** | ** ** | **Effect of  Change** | ** ** | **As  Adjusted** | ** ** |
| **Numerator:**                                |       |                                  |       |   |   |   |   |   |   |
| Net income                                    |       | $                                     | 2,778      |   | $ | 2,988 |   | $ | — |   | $ | 2,988 |   |
| Income allocated  to participating securities |       | 290                                   |       | — |   | 200 |   | 200 |   |
| Net income  available to common shareholders  |       | $                                     | 2,488      |   | $ | 2,988 |   | $ | (200 | ) | $ | 2,788 |   |
| **Denominator:**                              | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average  shares – basic         |       | 62,796                                |       | 62,119 |   | — |   | 62,119 |   |
| Stock options  and restricted shares          |       | 48                                    |       | 512 |   | (152 | ) | 360 |   |
| Weighted average  shares – diluted       |       | 62,844                                |       | 62,631 |   | (152 | ) | 62,479 |   |
|                                          |       |                                  |       |   |   |   |   |   |   |
| **Basic  earnings per share:**                | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                    |       | $                                     | 0.04       |   | $ | 0.05 |   | $ | (0.00 | ) | $ | 0.05 |   |
|                                          |       |                                  |       |   |   |   |   |   |   |
| **Diluted  net income per share:**            | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                    |       | $                                     | 0.04       |   | $ | 0.05 |   | $ | (0.00 | ) | $ | 0.05 |   |

 

Outstanding stockoptions totaling approximately 2,000 shares and 20,000 shares for thethree-month periods ended March 31, 2009 and 2008, respectively, were notincluded in the computation of diluted weighted average shares outstandingbecause their exercise prices were in excess of the average stock price of theCompany during the periods, and would result in the options beinganti-dilutive.

 

*Concentrationof credit risk*

 

Financial instruments that potentially subject the Companyto significant concentrations of credit risk consist primarily of cash and cashequivalents and accounts receivable. During November 2008, the Federal Deposit Insurance Corporation (“FDIC”)adopted the Temporary Liquidity Guarantee Program to strengthen investorconfidence and encourage liquidity in the banking system by providing fullcoverage on non-interest bearing deposit transaction accounts, regardless ofdollar amount, for participating banks through December 31, 2009.  At March 31, 2009, the amount of cash indomestic non-interest bearing commercial checking accounts was approximately$30.9 million, while

 

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the amount of cash held in interest-bearing sweep accountsand money market funds was approximately $15.8 million.  The Company attempts to limit its exposure tocredit loss by investing the cash held in its sweep accounts and money marketfunds primarily in U.S. government money market accounts that purchase U.S.agency instruments or direct obligations of the U.S. Treasury or repurchaseagreements secured by U.S. agency instruments. The Company performs ongoing credit evaluations of its customers andgenerally requires no collateral to secure accounts receivable.

 

**2. OUTSOURCED GOVERNMENT PORTAL CONTRACTS**

 

The Company’s outsourced government portal contracts generally have aninitial term of three to five years with provisions for renewals for variousperiods at the option of the government. The Company’s primary business obligation under these contracts is todesign, build and operate Internet-based portals on behalf of governmentsdesiring to provide access to government information and to completegovernment-based transactions online. NIC typically markets the services andsolicits users to complete government-based transactions and to enter intosubscriber contracts permitting the user to access the portal and thegovernment information contained therein in exchange for transactional and/orsubscription user fees.  The Companyenters into separate agreements with various agencies and divisions of thegovernment to provide specific services and to conduct specific transactions.These agreements preliminarily establish the pricing of the electronictransactions and data access services the Company provides and the division ofrevenues between the Company and the government agency. The governmentoversight authority must approve prices and revenue sharing agreements.  The Company has limited control over thelevel of fees it is permitted to retain. Any changes made to the amount or percentage of fees retained by NIC, orto the amounts charged for the services offered, could adversely affect theprofitability of the respective contract to NIC.

 

The Company is typically responsible for funding up front investment andongoing operational costs of the government portals, and generally owns all theapplications developed under these contracts. After completion of a definedcontract term, the government agency typically receives a perpetual,royalty-free license to the applications for use only. If the Company’scontract were not renewed after a defined term, the government agency would beentitled to take over the portal in place with no future obligation of theCompany.

 

A government may terminate its contract prior to the expiration date uponspecific cause events that are not cured within a specified period and, incertain circumstances, upon passing legislation.  Six contracts under which the Companyprovides portal outsourcing services can be terminated without cause on aspecified period of notice. Collectively, revenues generated from contracts that can be terminatedwithout cause represented 29% of the Company’s portal revenues for the three-monthsended March 31, 2009.  In the eventthat any of these contracts would be terminated without cause, the terms of therespective contract may require the government to pay a fee to the Company inorder to continue to use the Company’s software in its portal.  In addition, the loss of one or more of theCompany’s larger state portal partners, such as Indiana, Colorado, Utah,Virginia, Tennessee, Arkansas, Alabama or Kentucky, as a result of theexpiration, termination or failure to renew the respective contract, if suchpartner is not replaced, could significantly reduce the Company’s revenues.

 

At March 31, 2009, the Company was bound by performance bondcommitments totaling approximately $3.3 million on certain portal outsourcingcontracts.  Under a typical portalcontract, the Company is required to fully indemnify its government clientsagainst claims that the Company’s services infringe upon the intellectualproperty rights of others and against claims arising from the Company’sperformance or the performance of the Company’s subcontractors under thecontract.

 

9

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The following is a summary of the Company’s twenty-one outsourced stategovernment portal contracts at March 31, 2009:

 
| **NIC Subsidiary**              | ** ** | **Portal Web Site (State)** | ** ** | **Year  Services**

**Commenced** | ** ** | **Contract Expiration Date  (Renewal Options Through)** |
|---------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|---------------------------------------------------------|
| West Virginia Interactive       |       | www.WV.gov (West Virginia)  |       | 2007                              |       | 6/30/2009 (6/30/2010)                                   |
| NICUSA, AZ Division             |       | www.AZ.gov (Arizona)        |       | 2007                              |       | 6/26/2010 (6/26/2013)                                   |
| Vermont Information Consortium  |       | www.Vermont.gov (Vermont)   |       | 2006                              |       | 10/14/2012                                              |
| Colorado Interactive            |       | www.Colorado.gov (Colorado) |       | 2005                              |       | 5/19/2010 (5/19/2014)                                   |
| South Carolina Interactive      |       | www.SC.gov (South Carolina) |       | 2005                              |       | 7/15/2009                                               |
| Kentucky Interactive            |       | www.Kentucky.gov (Kentucky) |       | 2003                              |       | 5/31/09 (1/31/2013)                                     |
| Alabama Interactive             |       | www.Alabama.gov (Alabama)   |       | 2002                              |       | 2/28/2010 (2/28/2012)                                   |
| Rhode Island Interactive        |       | www.RI.gov (Rhode Island)   |       | 2001                              |       | 8/7/2010 (8/7/2012)                                     |
| Oklahoma Interactive            |       | www.OK.gov (Oklahoma)       |       | 2001                              |       | 6/30/2009                                               |
| Montana Interactive             |       | www.MT.gov (Montana)        |       | 2001                              |       | 12/31/2010                                              |
| NICUSA, TN Division             |       | www.TN.gov (Tennessee)      |       | 2000                              |       | 8/27/2010                                               |
| Hawaii Information Consortium   |       | www.Hawaii.gov (Hawaii)     |       | 2000                              |       | 1/3/2013 (unlimited 3-year renewal options)             |
| Idaho Information Consortium    |       | www.Idaho.gov (Idaho)       |       | 2000                              |       | 6/30/2011 (6/30/2015)                                   |
| Utah Interactive                |       | www.Utah.gov (Utah)         |       | 1999                              |       | 6/5/2009                                                |
| Maine Information Network       |       | www.Maine.gov (Maine)       |       | 1999                              |       | 3/14/2012 (3/14/2018)                                   |
| Arkansas Information Consortium |       | www.Arkansas.gov (Arkansas) |       | 1997                              |       | 6/30/2010                                               |
| Iowa Interactive                |       | www.Iowa.gov (Iowa)         |       | 1997                              |       | 3/31/2011 (3/31/2012)                                   |
| Virginia Interactive            |       | www.Virginia.gov (Virginia) |       | 1997                              |       | 8/31/2012                                               |
| Indiana Interactive             |       | www.IN.gov (Indiana)        |       | 1995                              |       | 6/30/2010 (6/30/2014)                                   |
| Nebraska Interactive            |       | www.Nebraska.gov (Nebraska) |       | 1995                              |       | 1/31/2010                                               |
| Kansas Information Consortium   |       | www.Kansas.gov (Kansas)     |       | 1992                              |       | 12/31/2012 (12/31/2016)                                 |

 

During the first quarterof 2009, the Company received a one-year contract extension from the state ofNebraska.

 

**3. SPECIAL CASH DIVIDEND**

 

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

 

The dividend mayresult in a partial return of capital to shareholders, with the balance beingtaxable to shareholders as a qualified dividend.  The exact amount of the return of capital, ifany, is dependent on the earnings and profits of the Company through the end ofits 2009 fiscal year.

 

**4.  STOCK BASEDCOMPENSATION**

 

During the first quarter of 2009, the Board ofDirectors of the Company granted certain management-level employees, executiveofficers and non-employee directors service-based restricted stock awardstotaling 120,757 shares with a grant-date fair value of $5.52 per share,totaling approximately $0.7 million. Such restricted stock awards vest beginning one year from the date ofgrant in cumulative annual installments of 25%. Restricted stock is valued at the date of grant, based on the closingmarket price of the Company’s common stock, and expensed using thestraight-line method over the requisite service period.

 

During the first quarter of 2009, the Board ofDirectors of the Company also granted certain executive officersperformance-based restricted stock awards pursuant to the terms of the Company’sexecutive compensation program totaling 185,145 shares, with a grant date fairvalue of $5.52 per share, totaling approximately $1.0 million, which representsthe maximum number of shares able to be earned by the executive officers at theend of a three-year performance period ending December 31, 2011.  The actual number of shares earned will bebased on the Company’s

 

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performance related to the following performancecriteria over the performance period:

 

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

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

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

 

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

 

| ** **                                                        | ** ** | ** **    | ** ** | **Performance Levels** | ** ** |
|-------------------------------------------------------------------|------------|---------------|------------|------------------------|------------|
| **Performance Threshold**                                         | ** ** | **Threshold** | ** ** | **Target**             | ** ** | **Superior** | ** ** |
| Operating income  growth (three-year compound annual growth rate) |       | 15            | %          | 20                     | %          | 25 | % |
| Total revenue  growth (three-year compound annual growth rate)    |       | 15            | %          | 20                     | %          | 25 | % |
| Cash flow return  on invested capital (three-year average)        |       | 15            | %          | 20                     | %          | 25 | % |

 

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

 

**5.  COMMITMENTS AND CONTINGENCIES**

 

*SECInvestigation*

 

As furtherdiscussed in Note 8 in the Notes to the Consolidated Financial Statementsincluded in the Company’s Form 10-K for the year ended December 31,2008, filed with the SEC on March 13, 2009, the Company has been thesubject of an informal SEC inquiry of expense reporting by certain officers ofthe Company and certain potentially related matters. In connection with thatinquiry, a review was undertaken by the Audit Committee of the Company’s Boardof Directors, with the assistance of outside, independent counsel, whichfocused on such expense reporting. The review revealed that expensereimbursement deficiencies occurred during the period from January 2004through October 2006 related to Jeffery S. Fraser, who was then theCompany’s Chairman of the Board and Chief Executive Officer, that these expensereimbursement deficiencies were isolated to Mr. Fraser and that the amountof such deficiencies was not material to the Company’s financial condition orresults of operations.  During the secondquarter of 2008, the Company received notice from the SEC that a formal orderof investigation had been issued with respect to these matters.  As is frequently the case in such situations,the SEC has taken the step of obtaining a formal order of investigation toensure the thoroughness of its investigation. The Company believes the investigation conducted by the NIC’s Audit Committeewas thorough and independent and it is not anticipated that the SECinvestigation will reveal any significant additional instances of misreportingof expenses by employees.  However, therecan be no assurance that the SEC will not take any action that could adverselyaffect the Company as a result of the matters it is reviewing.

 

*Litigation*

 

The Company isinvolved from time to time in legal proceedings and litigation arising in theordinary course of business. However, the Company is not currently involvedwith any legal proceedings.

 

**6.  REPORTABLESEGMENTS AND RELATED INFORMATION**

 

The Company’s two reportable segments consist of its Outsourced Portalbusinesses and Software & Services businesses.  The Outsourced Portals segment includes theCompany’s subsidiaries operating outsourced government portals and thecorporate divisions that directly support portal operations.  The Software & Services segmentprimarily includes the Company’s UCC and corporate filings software developmentbusiness (NIC Conquest), which provides software applications and services forelectronic filings and document management solutions to the CaliforniaSecretary

 

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of State, and the Company’s ethics & elections filings business(NIC Technologies), which designs and develops online campaign expenditure andethics compliance systems for the Federal Election Commission and the state ofMichigan.  Each of the Company’s Software &Services businesses is an operating segment and has been aggregated to form theSoftware & Services reportable segment. Unallocated corporate-levelexpenses are reported in the reconciliation of the segment totals to therelated consolidated totals as “Other Reconciling Items.”  There have been no significant intersegmenttransactions for the periods reported.

 

The measure of profitability by which management evaluates the performanceof its segments and allocates resources to them is operating income(loss).   Segment asset or other segmentbalance sheet information is not presented to the Company’s chief operatingdecision maker.  Accordingly, the Companyhas not presented information relating to segment assets.

 

The table below reflectssummarized financial information concerning the Company’s reportable segmentsfor the three months ended March 31 (in thousands):

 
| ** **                            | ** ** | **Outsourced  Portals** | ** ** | **Software  &  Services** | ** ** | **Other  Reconciling  Items** | ** ** | **Consolidated  Total** | ** ** |
|---------------------------------------|------------|-------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------|------------|
| **2009**                              | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues                              |       | $                       | 26,404     |                          | $          | 1,006                         |       | $                       | —     |   | $ | 27,410 |   |
|                                  |       |                    |       |                          |       |                          |       |                    |       |
| Costs &  expenses            |       | 15,509                  |       | 743                           |       | 5,527                         |       | 21,779                  |       |
| Depreciation &  amortization |       | 821                     |       | 16                            |       | 99                            |       | 936                     |       |
| Operating income  (loss)              |       | $                       | 10,074     |                          | $          | 247                           |       | $                       | (5,626     | ) | $ | 4,695 |   |
|                                  |       |                    |       |                          |       |                          |       |                    |       |
| **2008**                              | ** ** |                    |       |                          |       |                          |       |                    | ** ** |
| Revenues                              |       | $                       | 23,796     |                          | $          | 883                           |       | $                       | —     |   | $ | 24,679 |   |
|                                  |       |                    |       |                          |       |                          |       |                    |       |
| Costs &  expenses            |       | 13,619                  |       | 541                           |       | 4,940                         |       | 19,100                  |       |
| Depreciation &  amortization |       | 744                     |       | 9                             |       | 94                            |       | 847                     |       |
| Operating income  (loss)              |       | $                       | 9,433      |                          | $          | 333                           |       | $                       | (5,034     | ) | $ | 4,732 |   |

 

The following is a reconciliation of total segment operating income tototal consolidated income before income taxes for the three months ended March 31(in thousands):

 
| ** **                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Total operating  income for reportable segments |       | $        | 4,695      |     | $          | 4,732 |   |
| Interest income                                 |       | 41       |       | 333      |       |
| Other expense,  net                             |       | (1       | )          | (19      | )          |
|                                            |       |     |       |     |       |
| Consolidated  income before income taxes        |       | $        | 4,735      |     | $          | 5,046 |   |

 

**7.  SUBSEQUENTEVENT**

 

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

 

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

 

·                  Consolidatedminimum annual EBITDA of at least $12 million, computed quarterly on a rolling12-month basis

·                  Consolidatedtangible net worth of at least $36 million

·                  Consolidatedmaximum leverage ratio of 1.5:1

 

The Company was in compliance with each of thecovenants listed above at March 31, 2009. The Company issues letters of credit as collateral for performance oncertain of its outsourced government portal contracts, as collateral forcertain performance bonds and as collateral for certain office leases.  In total, the Company and its subsidiarieshad unused outstanding letters of credit of approximately $1.3 million at March 31,2009 and December 31, 2008.  TheCompany had $3.7 million in available capacity to issue additional letters ofcredit and $8.7 million of unused borrowing capacity at March 31, 2009under the facility.  The credit agreementexpires in May 2011.  However,letters of credit may have an expiration date of up to one year beyond theexpiration date of the credit agreement.

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

***FORWARD-LOOKINGSTATEMENTS***

 

# **“Safe Harbor” statement under the Private Securities Litigation ReformAct of 1995: Statements in this Quarterly Report on Form 10-Q regardingNIC and its business, which are not current or historical facts, are “forward-lookingstatements” that involve risks and uncertainties.   Certain matters discussed in this report mayconstitute forward-looking statements within the meaning of the federalsecurities laws that inherently include certain risks and uncertainties.Forward-looking statements include, but are not limited to, statements of plansand objectives, statements of future economic performance or financialprojections, statements of assumptions underlying such statements, andstatements 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 awarethat our actual operating results and financial performance may differmaterially from our expressed expectations because of risks and uncertaintiesabout the future including those risks discussed in this Quarterly Report on Form 10-Qand in our 2008 Annual Report on Form 10-K filed with the Securities andExchange Commission on March 13, 2009. In addition, we will notnecessarily update the information in this Quarterly Report on Form 10-Q ifany forward-looking statement later turns out to be inaccurate. Investors arecautioned not to put undue reliance on any forward-looking statement.**

 

                There are a number of important factors that couldcause actual results to differ materially from those suggested or indicated bysuch forward-looking statements.  Theseinclude, among others, the success of the Company in signing contracts with newstates and government agencies, including continued favorable governmentlegislation; NIC’s ability to develop new services; existing states andagencies adopting those new services; acceptance of eGovernment services bybusinesses and citizens; competition; and general economic conditions(including the recent deterioration in general economic conditions) and theother factors discussed under “CAUTIONS ABOUT FORWARD LOOKING STATEMENTS” in Part Iand “RISK FACTORS” in Part I, Item 1A of NIC’s 2008 Annual Report on Form 10-Kfiled on March 13, 2009 with the Securities and Exchange Commission (“SEC”).  Investors should read all of thesediscussions of risks carefully.

 

**WHAT WEDO – AN EXECUTIVE SUMMARY**

 

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

 

                In our core business, portaloutsourcing, we enter into contracts primarily with state governments anddesign, build and operate Web-based portals on their behalf. We enter intolong-term contracts, typically three to five years, and manage operations foreach government partner through separate subsidiaries that operate asdecentralized businesses with a high degree of autonomy. Our portals consist ofWeb sites and applications that we build, which allow businesses and citizensto access government information online and complete transactions, includingapplying for a permit, retrieving driver’s license records or filing a form orreport. We help increase our government partners’ revenues by expanding thedistribution of their information assets and increasing the number of financialtransactions conducted with governments. We do this by marketing portal services and soliciting users to completegovernment-based transactions and to enter into subscriber contracts thatpermit users to access the portal and the government information containedtherein in exchange for transactional and/or subscription user fees. We aretypically responsible for funding up-front investment and ongoing operationalcosts of the government portals.  Ourunique self-funding business model allows us to reduce our government partners’financial and technology risks and obtain revenues by sharing in the feesgenerated from eGovernment services. Our partners benefit because they gain acentralized, customer-focused presence on the Internet. Businesses and citizensgain a faster, more convenient and more cost-effective means to interact withgovernments.

 

                On behalf of our governmentpartners, we enter into separate agreements with various agencies and divisionsof 

 

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thegovernment to provide specific services and to conduct specific transactions.These agreements preliminarily establish the pricing of the transaction anddata access services we provide and the division of revenues between theCompany and the government agency. The government must approve prices andrevenue sharing agreements. We have limited control over the level of fees weare permitted to retain.  Any changesmade to the amount or percentage of fees retained by us, or to the amountscharged for the services offered, could adversely affect the profitability ofthe respective contract to us.  Wegenerally own all the applications developed under these contracts. Aftercompletion of a defined contract term, the government agency typically receivesa perpetual, royalty-free license to the applications for use only. If ourcontract were not renewed after a defined term, the government agency would beentitled to take over the portal in place with no future obligation of theCompany. In some cases, we enter into contracts to provide consulting,application development and portal management services to governments inexchange for an agreed-upon fee.

 

                A government may terminate itscontract prior to the expiration date upon specific cause events that are notcured within a specified period and, in certain circumstances, upon passage oflegislation.  Six contracts under whichwe provide portal outsourcing services can be terminated without cause on aspecified period of notice. Collectively, revenues generated from contracts that can be terminatedwithout cause represented 29% of our portal revenues for the three-months endedMarch 31, 2009.  In the event thatany of these contracts would be terminated without cause, the terms of therespective contract may require the government to pay a fee to us in order tocontinue to use our software in its portal. In addition, the loss of one or more of our larger state portalpartners, such as Indiana, Colorado, Utah, Virginia, Tennessee, Arkansas,Alabama or Kentucky, as a result of the expiration, termination or failure torenew the respective contract, if such partner is not replaced, couldsignificantly reduce our revenues.

 

                Currently, we have contracts toprovide portal outsourcing services for 21 states.  Our closest competitor operates one stateportal.

 

**REVENUERECOGNITION**

 

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

#### * *

#### *Our portal outsourcing businesses*

 

                We categorize our portal revenues according to theunderlying source of revenue.  A briefdescription of each category follows:

 

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

 

·                  Non-DMV transaction-based: these are transaction fees from sourcesother than the sale of DMV records, for transactions conducted by businessusers and consumer users through our portals, and are generally recurring.  For a representative listing of non-DMVservices we currently offer through our portals, refer to Part I, Item 1in our Form 10-K for the year ended December 31, 2008, filed with theSEC on March 13, 2009.

 

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

 

·                  Portal software development: these are revenues from the performanceof application development projects and other time and materials services forour government partners.  While weactively market these services, they do not have the same degree ofpredictability as our transaction-based or portal management 

 

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revenues.  As aresult, these revenues are excluded from our recurring portal revenuepercentage.

 

*Our software & servicesbusinesses*

 

# **UCC andcorporate filings**

 

                Our UCC and corporate filingssoftware development business derives the majority of its revenues fromfixed-price application development contracts and recognizes revenues on thepercentage of completion method.  At March 31,2009, this business was primarily engaged in servicing its contract with theCalifornia Secretary of State, and no longer markets its applications andservices for any new engagements.

 

Ethics &elections

 

                Our ethics & elections business derives themajority of its revenues from time and materials application development andmaintenance outsourcing contracts and recognizes revenues as services areprovided.  At March 31, 2009, ourethics & elections business was primarily engaged in servicing itscontracts with the Federal Election Commission and the state of Michigan.

 

**CRITICALACCOUNTING POLICIES**

 

                There have been no material changes in our criticalaccounting policies and estimates from the information provided in Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,”included in our Form 10-K for the year ended December 31, 2008, filedwith the SEC on March 13, 2009.

# ** **

# **RESULTS OF OPERATIONS**

 

                The following discussion summarizes the significantfactors affecting operating results for the three-month periods ended March 31,2009 and 2008.  This discussion andanalysis should be read in conjunction with our unaudited consolidated interimfinancial statements and the related notes included in this Form 10-Q.

 
| ** **                                                              | ** ** | **Three Months Ended   March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **Key Financial Metrics**                                               | ** ** | **2009**                                | ** ** | **2008** | ** ** |
| Revenue growth –  outsourced portals                               |       | 11                                      | %          | 20 | % |
| Same state  revenue growth – outsourced portals                    |       | 10                                      | %          | 12 | % |
| Recurring portal  revenue %                                             |       | 91                                      | %          | 91 | % |
| Gross profit % -  outsourced portals                                    |       | 44                                      | %          | 47 | % |
| Selling &  administrative expenses as % of portal revenues     |       | 24                                      | %          | 25 | % |
| Operating income  margin % (operating income as a % of portal revenues) |       | 18                                      | %          | 20 | % |

 

                PORTAL REVENUES. In the analysis below, we have categorized our portal revenues accordingto the underlying source of revenue (in thousands), with the correspondingpercentage increase or decrease from the prior year period.

 
| ** **                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------|------------|---------------------------------------|------------|
| **Portal Revenue Analysis**  | ** ** | **2009**                              | ** ** | **% Change** | ** ** | **2008** | ** ** |
| DMV  transaction-based       |       | $                                     | 12,372     |   | 3 | % | $ | 11,978 |   |
| Non-DMV  transaction-based   |       | 9,616                                 |       | 28 | % | 7,509 |   |
| Portal  management           |       | 1,937                                 |       | (6 | %) | 2,067 |   |
| Portal software  development |       | 2,479                                 |       | 11 | % | 2,242 |   |
|                         |       |                                  |       |   |   |   |   |
| Total                        |       | $                                     | 26,404     |   | 11 | % | $ | 23,796 |   |

 

                Portal revenues in the current quarter increased 11%,or approximately $2.6 million, over the prior year quarter.  This increase was mainly attributable to a10% increase, or approximately $2.3 million, in same state portal revenues 

 

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(outsourced portals inoperation and generating recurring revenue for two full years) and a 1%increase, or approximately $0.3 million, in revenues from our newer portals,including Arizona ($0.1 million), which began to generate revenues in October 2007and West Virginia ($0.2 million), which began to generate DMV revenues in February 2008.

 

                Our Indiana portal subsidiary operates under along-term contract with the state of Indiana that is based on a funding modelthat includes recurring fixed monthly fees for baseline services and primarilyproject-based pricing for variable services, rather than transaction-basedrevenues for DMV and non-DMV services. Excluding Indiana, same state portal revenues in the current quarterincreased 11% over the prior year quarter, with same state DMVtransaction-based revenues increasing 2% and same state non-DMVtransaction-based revenues increasing 31% (primarily due to the addition ofseveral new revenue generating applications in existing portals).  Our same state revenue growth in the currentquarter was lower than the growth we achieved in the prior year quarterprimarily due to lower portal software development revenue growth, which wasthe result of a few significant high-margin time and materials projects in theprior year.  Same state DMV revenuegrowth in the current quarter was 2% compared to 0% in the prior year quarter.  Absent DMV price increases, same state DMV revenueshave historically grown at a rate of 1% to 3% per year.  Portal same state non-DMV transaction basedrevenue growth was 38% in the prior year quarter.  Same state portal revenues in 2009 increased10% over 2008 primarily due to increased transaction revenues from our Alabama,Colorado, Idaho, Iowa, Maine and Utah portals, among others.

 

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

 
| ** **                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|
| **Cost of Portal Revenue Analysis** | ** ** | **2009**                              | ** ** | **% Change** | ** ** | **2008** | ** ** |
| Fixed costs                         |       | $                                     | 11,342     |   | 16 | % | $ | 9,748 |   |
| Variable costs                      |       | 3,550                                 |       | 20 | % | 2,956 |   |
|                                |       |                                  |       |   |   |   |   |
| Total                               |       | $                                     | 14,892     |   | 17 | % | $ | 12,704 |   |

 

                Cost of portal revenues for the current quarterincreased 17%, or approximately $2.2 million, over the prior year quarter.  Of this increase, 15%, or approximately $1.9million, was attributable to an increase in same state cost of portal revenues,and 2%, or $0.3 million, was primarily attributable to our newer state portalbusinesses in Arizona and West Virginia.

 

                The increase in same state cost of portal revenues inthe current quarter was partially attributable to additional personnel inseveral of our portals due to our continued growth and reinvestment in our corebusiness, coupled with increased employee compensation and health insuranceexpenses.  Also contributing to thisincrease was an increase in variable bank fees, particularly from our portalsin Alabama and Idaho.  A growingpercentage of our non-DMV transaction-based revenues are generated from onlineapplications whereby users pay for information or transactions via creditcards.  We typically earn a percentage ofthe credit card transaction amount, but also must pay an associated fee to thebank that processes the credit card transaction.  We earn a lower gross profit percentage onthese transactions as compared to our other non-DMV applications.  However, we plan to continue to implementthese services as they contribute favorably to our operating income growth.

 

                Our portal gross profit percentage was 44% in thecurrent year quarter, down from 47% in the prior year quarter.  The decrease in 2009 was due to the increasein cost of portal revenues, as described above. We carefully monitor our portalgross profit percentage to strike the balance between generating a solid returnfor our shareholders and delivering value to our government partners throughreinvestment in our portal operations (which we believe also benefits ourshareholders).  We currently expect ourportal gross profit percentage to be in the mid-40% range in 2009.

 

                SOFTWARE & SERVICES REVENUES.  In the analysis below, we have categorizedour software & services revenues by business (in thousands), with thecorresponding percentage increase or decrease from the prior 

 

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year period.

 
| ** **                                             | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|
| **Software & Services Revenue Analysis**      | ** ** | **2009**                              | ** ** | **%****Change** | ** ** | **2008** | ** ** |
|                                                   |       |                                  |       |   |   |   |   |
| Ethics &  elections                           |       | $                                     | 679        |   | (1 | %) | $ | 686 |   |
| UCC &  corporate filings software development |       | 153                                   |       | 2 | % | 150 |   |
| Other                                                  |       | 174                                   |       | 270 | % | 47 |   |
|                                                   |       |                                  |       |   |   |   |   |
| Total                                                  |       | $                                     | 1,006      |   | 14 | % | $ | 883 |   |

 

                Software & servicesrevenues in the current quarter increased 14%, or approximately $0.1 million,over the prior year quarter.  Thisincrease was primarily due to a consulting services engagement with a privatecompany.

 

                COST OF SOFTWARE &SERVICES REVENUES.  Cost of software &services revenues in the current quarter increased 42%, or approximately $0.2million, over the prior year quarter.  Thisincrease was primarily attributable to an increase in salary expense andsubcontractor consulting costs to support new contract initiatives in ourethics & elections business and a consulting services engagement witha private company. 

 

                SELLING & ADMINISTRATIVE. Selling & administrative expenses in the current quarterincreased 5%, or approximately $0.3 million, over the prior year quarter.  This increase was primarily attributable to increasedsales and marketing expenses associated with active portal opportunities inaddition to higher stock-based compensation of approximately $0.1 million forannual grants of restricted stock to certain management-level employees,executive officers and non-employee directors.  As discussed in Note 5 in theNotes to the Unaudited Consolidated Financial Statements in this Form 10-Qand Item 1A, Item 3 and Note 8 in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008, filed with the SEC on March 13,2009, we have been the subject of an informal SEC inquiry of expense reportingby certain officers of our Company and certain potentially relatedmatters.  In connection with the informalSEC inquiry, a review was undertaken by the Audit Committee of our Board ofDirectors, with the assistance of outside, independent counsel, which focusedon such expense reporting.  The SECissued a formal order of investigation in the second quarter of 2008.  Selling & administrative expensesfor the current quarter and the prior year quarter include approximately $0.4million and $0.5 million, respectively, of legal fees and other expensesincurred in connection with the ongoing SEC investigation and the AuditCommittee review.  We could continue toincur significant legal fees and other expenses in connection with the ongoingSEC investigation.

 

                As a percentage of portalrevenues, selling & administrative expenses were 24% in the currentquarter compared to 25% in the prior year quarter.  We currently expect selling & administrative costs as apercentage of portal revenue to range from 22% to 23% in 2009, which reflectsonly modest corporate overhead growth.

                 DEPRECIATION &AMORTIZATION – Depreciation & amortization expense in the firstquarter of 2009 increased 11%, or approximately $0.1 million, over the prior yearquarter.  This increase was primarilyattributable to capital expenditures for normal fixed asset additions in ouroutsourced portal business, including Web servers, purchased software andoffice furniture and equipment to support and enhance corporate-wideinformation technology security and portal operations

 

                Asa percentage of portal revenues, depreciation & amortization was 4% inboth the current and prior year quarters. We currently expectdepreciation and amortization expense as a percentage of portal revenues torange from 3% to 4% in 2009, as we will continue to make key informationtechnology infrastructure and security investments to support the long-termexpansion of our portal business.

 

                INTEREST INCOME.  Interest income reflects interest earned onour investable cash and investment portfolio. Interest income in the currentquarter decreased 88%, or approximately $0.3 million, from the prior yearquarter due primarily to the declining short-term interest rate environment andour current investment strategy to invest excess cash in government-backedsecurities and treasury sweep accounts. Furthermore, we increased the balances in several of our non-interestbearing commercial checking accounts in an effort to reduce bank fees, as theearnings credit we receive for holding funds in these accounts is higher thanthe interest rate we would receive from investing in government-backed securities.  We currently expect interest income in 2009to be lower than in 2008 due to the lower short-term interest rate 

 

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environmentand our current investment strategy.

 

# **Liquidity and Capital Resources**

 

*OperatingActivities*

 

Net cash provided byoperating activities was $5.7 million in both the current quarter and prioryear quarters.  The decrease in accountsreceivable (and accounts payable) in the current year quarter was primarilyattributable to an increase in payment processing services in several of ourportals during the fourth quarter of 2008 and the related timing of cashreceipts and payments to our government partners in the current quarter.

 

The decrease in accruedexpenses in the current quarter was primarily attributable to cash payments in2009 for management and executive-level bonuses pursuant to the 2008 annualcash incentive plan, 401(k) matching contributions and employee stockpurchase plan purchases.

 

We had a history ofunprofitable operations prior to 2003 primarily due to operating lossesincurred in our software & services businesses.  These losses generated significant federaland state tax net operating losses, or NOLs. As a result of our NOL carryforwards, we are not currently payingfederal income taxes, with the exception of the alternative minimum tax, andare paying income taxes in only certain states. This positively impacts our operating cash flow and will continue topositively impact our operating cash flow during the NOL carryforward periods. TheCompany had available at March 31, 2009, total NOL carryforwards ofapproximately $3.8 million that will expire in 2022.  Based on our current projections, wecurrently expect to fully utilize our federal NOL carryforwards by the end of2009.  For the three-month periods ended March 31,2009 and 2008, combined federal and state income tax payments totaledapproximately $0.8 million and $0.4 million, respectively.

 

*Investing Activities*

 

Investing activities inthe current quarter primarily reflects $0.5 million of capital expenditures,which were for normal fixed asset additions in our outsourced portal business,including Web servers, purchased software and office equipment. Cash providedby investing activities in the prior year quarter primarily reflects thepartial liquidation of our investment portfolio to pay the $15.7 million specialcash dividend in February 2008, and $1.3 million of capital expenditures,which were primarily for normal fixed asset additions in our outsourced portalbusiness.

 

*FinancingActivities*

 

                Financing activities in the current quarter primarilyreflect payment of the $19.2 million special cash dividend in February 2009,partially offset by the receipt of $0.5 million in proceeds from our employeestock purchase program.  Financingactivities in the prior year quarter primarily reflect the payment of the $15.7million special cash dividend in February 2008, partially offset by thereceipt of $0.8 million in proceeds from the exercise of employee stock optionsfor cash and $0.3 million in proceeds from our employee stock purchase program.

 

*Liquidity*

 

                We recognize revenue primarily from providingoutsourced government portal services net of the transaction fees due to thegovernment when the services are provided. The fees that we must remit to thegovernment are accrued as accounts payable and accounts receivable at the timeservices are provided. As a result, trade accounts payable and accountsreceivable reflect the gross amounts outstanding at the balance sheetdates.  Gross billings for thethree-months ended March 31, 2009 and December 31, 2008 were approximately$320.2****million and $432.8 million,respectively.  The Company calculatesdays sales outstanding by dividing trade accounts receivable at the balancesheet date by gross billings for the period and multiplying the resulting quotientby the number of days in that period.  Dayssales outstanding for the three-month periods ended March 31, 2009 and  December 31,2008 were 10 and 8, respectively.

 

                Webelieve that working capital is an important measure of our short-termliquidity.  Working capital, 

 

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defined as current assets minus current liabilities,decreased to $39.5 million at March 31, 2009, from $53.5 million at December 31,2008.  Our current ratio, defined ascurrent assets divided by current liabilities, at March 31, 2009 was 1.8compared to 2.0 at December 31, 2008. The decrease inour working capital and current ratio was primarily attributable to the $19.2million special dividend paid out of our available cash and cash equivalents inthe current quarter as further discussed below and in Note 3 in the Notes tothe Unaudited Consolidated Financial Statements included in this Form 10-Q.

 

                At March 31, 2009, ourtotal cash and cash equivalent balance was $46.7 million compared to $60.4million at December 31, 2008.  Webelieve that our currently available liquid resources and cash generated fromoperations will be sufficient to meet our operating requirements, capitalexpenditure requirements, current growth initiatives and special dividend paymentsfor at least the next twelve months without the need of additionalcapital.  We have a $10 million unsecuredrevolving credit facility with a bank. This revolving credit facility is available to finance working capital,issue letters of credit and finance general corporate purposes.  We can obtain letters of credit in anaggregate amount of $5 million, which reduces the maximum amount available forborrowing under the facility.  In total,we had $3.7 million in available capacity to issue additional letters of creditand $8.7 million of unused borrowing capacity at March 31, 2009 under thefacility.    Letters of credit may havean expiration date of up to one year beyond the expiration date of the creditagreement.  As further discussed in Note 7in the Notes to Unaudited Consolidated Financial Statements in this Form 10-Q,on May 1, 2009, we entered into an amendment to extend the credit facilityto May 1, 2011.

 

                On February 3, 2009, ourBoard of Directors declared a special cash dividend of $0.30 per share, payableto shareholders of record as of February 17, 2009.  On February 27, 2009,we paid the special cash dividend totalling approximately $19.2 million out ofavailable cash.  We do not believe thatthis dividend will have a significant effect on our future liquidity.  However,we may need to raise additional capital within the next twelve months tofurther:

 

·                  fund operations if unforeseen costs arise;

 

·                  support our expansion into other states andgovernment agencies beyond what is contemplated if unforeseen opportunitiesarise;

 

·                  expand our product and service offerings beyond whatis contemplated if unforeseen opportunities arise;

 

·                  respond to unforeseen competitive pressures; and

 

·                  acquire technologies beyond what is contemplated.

 

                Any projections offuture earnings and cash flows are subject to substantial uncertainty. If ourcash, cash generated from operations and the unused portion of our line ofcredit are insufficient to satisfy our liquidity requirements, we may seek tosell additional equity securities or issue debt securities.  The sale of additional equity securitiescould result in dilution to the Company’s shareholders.  Recently, credit and capital markets haveexperienced unusual volatility and disruption, and equity and debt financinghave become more expensive and difficult to obtain. There can be no assurancethat financing will be available in amounts or on terms acceptable to theCompany, if at all.

 

                We issue letters ofcredit as collateral for performance on certain of our outsourced governmentportal contracts, as collateral for certain performance bonds and as collateralfor certain office leases.  Theseirrevocable letters of credit are generally in force for one year.  We had unused outstanding letters of credittotaling approximately $1.3 million at March 31, 2009.  We are not currently required to cashcollateralize these letters of credit. However, even though we currently expect to be profitable in fiscal 2009and beyond, we may not be able to sustain or increase profitability on aquarterly or annual basis.  We will needto generate sufficient revenues while containing costs and operating expensesif we are to achieve sustained profitability. If we are not able to sustain profitability, our cash collateral requirementsmay increase.  Had we been required topost 100% cash collateral at March 31, 2009 for the face value of allperformance bonds (which are partially supported by letters of credit) and ourline of credit in conjunction with a corporate credit card agreement,unrestricted cash would have decreased by approximately $4.3 million and wouldhave been classified as restricted cash.

 

                AtMarch 31, 2009, we were bound by performance bond commitments totalingapproximately $3.3 million on 

 

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certain government portal outsourcing contracts.  These performance bonds are collateralized bya $1.0 million letter of credit.  We havenever had any defaults resulting in draws on performance bonds or letters ofcredit.

 

*Off-BalanceSheet Arrangements, Contractual Obligations and Income Tax Uncertainties*

 

                We do not haveoff-balance sheet arrangements that are not recorded or disclosed in ourfinancial statements.  While we havesignificant operating lease commitments for office space, those commitments aregenerally tied to the period of performance under related contracts.  We have income tax uncertainties ofapproximately $0.5 million at March 31, 2009.  These obligations are classified asnon-current liabilities on our consolidated balance sheet, as resolution isexpected to take more than a year.  Weestimate that these matters could be resolved in one to three years.  However, the ultimate timing of resolution isuncertain.

 

**RECENTACCOUNTING PRONOUNCEMENTS**

 

*Fair Value Measurements*

 

                In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurements*, which definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting principles, and expands disclosures about fair value measurements.  SFAS No. 157 does not require any newfair value measurements, but provides guidance on how to measure fair value byproviding a fair value hierarchy used to classify the source of theinformation.  Except for the portion of SFASNo. 157 that addresses nonfinancial assets and nonfinancial liabilitiesthat are recognized or disclosed at fair value in the financial statements on anonrecurring basis, which has been deferred for one additional year, we adoptedthis standard effective January 1, 2008. The partial adoption of SFAS No. 157 on January 1, 2008 didnot have a significant impact on our unaudited consolidated financialstatements.  We adopted the requirementsof SFAS No. 157 that address nonfinancial assets and liabilities effectiveJanuary 1, 2009.  The adoption ofthe remaining portion of SFAS No. 157 on January 1, 2009 did not havea significant impact on our unaudited consolidated financial statements.

 

*Share-Based Payments*

 

In June 2008, theFASB issued FASB Staff Position Emerging Issues Task Force 03-6-1, *Determining Whether Instruments Granted in Share-Based PaymentTransactions Are Participating Securities* (FSP-EITF 03-6-1).  Under FSP-EITF 03-6-1, unvested share-basedpayment awards that contain non-forfeitable rights to dividends or dividendequivalents (whether paid or unpaid) are participating securities and shall beincluded in the computation of earnings per share pursuant to the two-classmethod.  The two-class method is anearnings allocation formula that treats a participating security as havingrights to undistributed earnings that would otherwise have been available tocommon shareholders.  The Company’sservice-based restricted stock awards contain non-forfeitable rights todividends and are considered participating securities. Upon adoption of thisstandard in the first quarter of 2009, the service-based restricted stockawards were included in the calculation of earnings per share using thetwo-class method for the three-month periods ended March 31, 2009 and2008, respectively.  Unvestedservice-based restricted shares totaled 1.0 million and 0.8 million at March 31,2009 and 2008, respectively. Basic earnings per share is calculated byfirst allocating earnings between common shareholders and participatingsecurities.  The earnings attributable tothe common shareholders is divided by the weighted average number of commonshares outstanding during the period. Diluted earnings per share is calculated by giving effect to thedilutive potential common shares outstanding during the period.  The dilutive effect of the stock options andthe employee stock purchase plan is determined based on the treasury stockmethod.  The dilutive effect of the service-basedrestricted stock awards is based on the more dilutive of the treasury stockmethod or the two-class method assuming a reallocation of undistributedearnings to common shareholders after considering the dilutive effect ofpotential common shares other than the participating unvested restrictedawards. The adoption of this standard did not have a significant impact on ourbasic or diluted earnings per share at March 31, 2009 and 2008.  For additional information on our adoption ofFSP-EITF 03-6-1 in the first quarter of 2009, refer to Note 1 in the Notes tothe Unaudited Consolidated Financial Statements included in this Form 10-Q.

 

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**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

INTEREST RATE RISK.  Our cash and cash equivalents are subject tomarket risk due to changes in interest rates. Cash held in sweep accounts is invested primarily in U.S. governmentmoney market accounts that purchase U.S. agency instruments or directobligations of the U.S. Treasury or repurchase agreements secured by U.S.agency instruments.  Interest ratesrelated to these floating rate securities may produce less income than expectedif interest rates fall.  Current yieldsassociated with these securities have been decreasing due to the increaseddemand for more conservative investments in light of the current credit crisis.  Due in part to these factors, our futureinterest income may fall short of expectations due to changes in interestrates, but is not expected to materially impact results of operations.

 

Borrowings under our lineof credit bear interest at a floating rate. Interest on amounts borrowed is payable at abase rate equal to the higher of the Federal Funds Rate plus 0.5% or the bank’sprime rate.  We currently have noprincipal amounts of indebtedness outstanding under our line of credit.

 

We do not use derivativefinancial instruments.  A 10% change ininterest rates would not have a material effect on our financial condition,results of operations or cash flows.

 

# **ITEM 4. CONTROLS AND PROCEDURES**

 

**a)****             ****EVALUATION OF DISCLOSURE CONTROLSAND PROCEDURES**

 

The Company maintainsdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) promulgated under the Securities Exchange Act of 1934, asamended (the “Exchange Act”)) that are designed to ensure that materialinformation required to be disclosed in its filings under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms. Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by an issuer in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to the issuer’smanagement, including its principal executive and principal financial officers,or persons performing similar functions, as appropriate to allow timelydecisions regarding required disclosure. Under the supervision and with theparticipation of our management, including our principal executive officer andprincipal financial officer, we conducted an evaluation of the effectiveness ofour disclosure controls and procedures as of the end of the period covered bythis Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and ourprincipal financial officer concluded that our disclosure controls andprocedures were effective as of such date.

 

**b)CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

# **                There have been nochanges in our internal control over financial reporting that occurred duringour first fiscal quarter of 2009 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.**

 

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**PART II.OTHER INFORMATION**

 

**ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

 

                (c)           During the first quarter of 2009, the Company acquiredshares of common stock surrendered by employees to pay income taxes due uponthe vesting of restricted stock as follows:

 
| ****Period****          | **** **** | ****Total  Number of  Shares  Purchased**** | **** **** | ****Average  Price Paid  per Share**** | **** **** | ****Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs**** | **** **** | ****Maximum Number (or  Approximate Dollar Value) of  Shares that May Yet Be  Purchased Under the Plans or  Programs**** | **** **** |
|-------------------------|----------------|---------------------------------------------|----------------|----------------------------------------|----------------|---------------------------------------------------------------------------------------------------|----------------|-------------------------------------------------------------------------------------------------------------------------------|----------------|
| January 29,  2009  |           | 1,680                                       |           | $                                      | 5.15           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |
| February 4,  2009  |           | 6,339                                       |           | $                                      | 5.37           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |
| February 12,  2009 |           | 753                                         |           | $                                      | 4.55           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |
| February 25,  2009 |           | 153                                         |           | $                                      | 5.00           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |
| March 4,  2009     |           | 6,550                                       |           | $                                      | 4.81           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |

 

**ITEM 5.  OTHER INFORMATION**

 

On May 1, 2009, theCompany entered into an amendment to extend its $10 million unsecured revolvingcredit agreement with a bank to May 1, 2011.  The Company can obtain letters of credit inan aggregate amount of $5 million, which reduces the maximum amount availablefor borrowing under the facility. Interest on amounts borrowed is payable at a base rate or a Eurodollarrate, in each case as defined in the agreement. The base rate is equal to the higher of the Federal Funds Rate plus 0.5%or the bank’s prime rate.  Fees on outstandingletters of credit are either 1.5% (if the Company’s consolidated leverage ratiois less than or equal to 1.25:1) or 1.75% (if the Company’s consolidatedleverage ratio is greater than 1.25:1) of the face value per annum.  The Company will pay a one-time fee of$37,500 related to the amendment to the credit facility.

 

On May 5, 2009, the Shareholdersof the Company approved an amendment to the 2006 Amended and Restated StockOption and Incentive Plan (the “Plan”) to increase the number of shares ofCommon Stock which may be issued under the Plan from 9,286,754 shares to 14,286,754shares.

 

**ITEM6.  EXHIBITS**

 

10.1 – Amended CreditAgreement Dated as of May 1, 2009 between NIC Inc., as borrower, and Bankof America, N.A., as Lender and L/C Issuer

 

31.1 - Certification ofChief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Actof 2002

 

31.2 - Certification ofChief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Actof 2002

 

32.1 - Section 906Certifications of Chief Executive Officer and Chief Financial Officer

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, theCompany has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                    |                    | NIC INC. |
|-------------------------|-------------------------|----------|
|                    |                    |
| Dated: May 5, 2009 | /s/Stephen M. Kovzan    |
|                    | Stephen M. Kovzan       |
|                    | Chief Financial Officer |

 

24

 

**NIC Inc.**

**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                 |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Exhibit**                                                                                                                 |
|        |       |                                                                                                                                       |
| 10.1        |       | Amended 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 |
|        |       |                                                                                                                                       |
| 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                                                    |

 

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