**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

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

# ** **

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended****June 30, 2009**

 

**Commission file number 000-26621**

 

**NIC INC.**

(Exact name of registrant as specified in its charter)

 

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

 

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

(Address of principal executive offices) (Zip Code)

 

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

 

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Indicate by checkmark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x  No o

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes o  Noo

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer or a smaller reporting company. See the definitions of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 
| 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 July 31,2009 was 63,050,330.

 

 

 

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**PART I – FINANCIAL INFORMATION**

**Item 1.  Consolidated Financial Statements**

 

**NIC INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(UNAUDITED)**

**thousands**

 
| ** **                                                                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                              | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| **ASSETS**                                                                                              |       |              |       |                  |       |
| Current  assets:                                                                                        |       |              |       |                  |       |
| Cash  and cash equivalents                                                                              |       | $                 | 56,763     |                  | $          | 60,373 |   |
| Trade  accounts receivable                                                                              |       | 40,239            |       | 37,497                |       |
| Unbilled  revenues                                                                                      |       | 381               |       | 359                   |       |
| Deferred  income taxes, net                                                                             |       | 2,162             |       | 4,293                 |       |
| Prepaid  expenses & other current assets                                                       |       | 2,162             |       | 2,273                 |       |
| Total  current assets                                                                                   |       | 101,707           |       | 104,795               |       |
| Property  and equipment, net                                                                            |       | 6,240             |       | 6,641                 |       |
| Intangible  assets, net                                                                                 |       | 5,513             |       | 1,105                 |       |
| Deferred  income taxes, net                                                                             |       | 5,292             |       | 6,727                 |       |
| Other  assets                                                                                           |       | 148               |       | 144                   |       |
| Total  assets                                                                                           |       | $                 | 118,900    |                  | $          | 119,412 |   |
|                                                                                                    |       |              |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                          |       |              |       |                  |       |
| Current  liabilities:                                                                                   |       |              |       |                  |       |
| Accounts  payable                                                                                       |       | $                 | 48,069     |                  | $          | 41,792 |   |
| Accrued  expenses                                                                                       |       | 10,406            |       | 8,407                 |       |
| Application  development contracts                                                                      |       | 128               |       | 202                   |       |
| Other  current liabilities                                                                              |       | 1,314             |       | 898                   |       |
| Total  current liabilities                                                                              |       | 59,917            |       | 51,299                |       |
|                                                                                                    |       |              |       |                  |       |
| Other  long-term liabilities                                                                            |       | 616               |       | 894                   |       |
| Total  liabilities                                                                                      |       | 60,533            |       | 52,193                |       |
|                                                                                                    |       |              |       |                  |       |
| Commitments  and contingencies (Notes 2, 5 and 6)                                                       |       | —            |       | —                |       |
|                                                                                                    |       |              |       |                  |       |
| Shareholders’  equity (Note 7):                                                                    |       |              |       |                  |       |
| Common  stock, $0.0001 par, 200,000 shares authorized, 62,949 and 62,779 shares  issued and outstanding |       | 6                 |       | 6                     |       |
| Additional  paid-in capital                                                                             |       | 137,725           |       | 154,194               |       |
| Accumulated  deficit                                                                                    |       | (79,364           | )          | (86,981               | )          |
| Total  shareholders’ equity                                                                        |       | 58,367            |       | 67,219                |       |
| Total  liabilities and shareholders’ equity                                                        |       | $                 | 118,900    |                  | $          | 119,412 |   |

 

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

 

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**NIC INC.**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(UNAUDITED)**

**thousandsexcept for per share amounts**

 
| ** **                                                                                         | ** ** | **Three-months ended  June 30,** | ** ** | **Six-months ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                         | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues:                                                                                          | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Portal  revenues                                                                                   |       | $                                     | 30,768     |                                | $          | 24,621 |   | $ | 57,172 |   | $ | 48,417 |   |
| Software &  services revenues                                                             |       | 1,034                                 |       | 1,081                               |       | 2,040 |   | 1,964 |   |
| Total  revenues                                                                                    |       | 31,802                                |       | 25,702                              |       | 59,212 |   | 50,381 |   |
| Operating  expenses:                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Cost  of portal revenues, exclusive of depreciation & amortization                             |       | 17,718                                |       | 13,006                              |       | 32,609 |   | 25,711 |   |
| Cost  of software & services revenues, exclusive of depreciation &  amortization |       | 623                                   |       | 707                                 |       | 1,239 |   | 1,140 |   |
| Selling &  administrative                                                                 |       | 7,155                                 |       | 5,822                               |       | 13,426 |   | 11,785 |   |
| Nonrecurring  gain on acquisition of business, net of tax (Note 3)                                 |       | (2,249                                | )          | —                              |       | (2,249 | ) | — |   |
| Depreciation &  amortization                                                              |       | 1,632                                 |       | 899                                 |       | 2,569 |   | 1,745 |   |
| Total  operating expenses                                                                          |       | 24,879                                |       | 20,434                              |       | 47,594 |   | 40,381 |   |
| Operating  income                                                                                  |       | 6,923                                 |       | 5,268                               |       | 11,618 |   | 10,000 |   |
| Other  income (expense):                                                                           |       |                                  |       |                                |       |   |   |   |   |
| Interest  income                                                                                   |       | 5                                     |       | 110                                 |       | 45 |   | 443 |   |
| Other  expense, net                                                                                |       | —                                |       | —                              |       | — |   | (20 | ) |
| Total  other income (expense)                                                                      |       | 5                                     |       | 110                                 |       | 45 |   | 423 |   |
| Income  before income taxes                                                                        |       | 6,928                                 |       | 5,378                               |       | 11,663 |   | 10,423 |   |
| Income  tax provision                                                                              |       | 2,089                                 |       | 2,198                               |       | 4,046 |   | 4,255 |   |
| Net  income                                                                                        |       | $                                     | 4,839      |                                | $          | 3,180 |   | $ | 7,617 |   | $ | 6,168 |   |
|                                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Basic  net income per share (Note 1)                                                               |       | $                                     | 0.08       |                                | $          | 0.05 |   | $ | 0.12 |   | $ | 0.10 |   |
| Diluted  net income per share (Note 1)                                                             |       | $                                     | 0.08       |                                | $          | 0.05 |   | $ | 0.12 |   | $ | 0.10 |   |
|                                                                                               |       |                                  |       |                                |       |   |   |   |   |
| Weighted  average shares outstanding (Note 1):                                                     |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                                                              |       | 62,935                                |       | 62,497                              |       | 62,867 |   | 62,309 |   |
| Diluted                                                                                            |       | 63,028                                |       | 62,721                              |       | 62,937 |   | 62,601 |   |

 

*The accompanying Notes to UnauditedConsolidated Financial Statements are an integral 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, as originally reported**                        |       | 62,779           |       | $           | —     |            | $          | 154,200     |       | $          | (86,981    | ) | $ | 67,219 |   |
| Change  in par value of common stock (Note 7)                                    |       | —           |       | 6           |       | (6              | )          | —      |       | —     |       |
| **Balance, January 1, 2009, as adjusted**                                   |       | 62,779           |       | $           | 6          |            | $          | 154,194     |       | $          | (86,981    | ) | $ | 67,219 |   |
| Net  income                                                                      |       | —           |       | —      |       | —          |       | 7,617       |       | 7,617      |       |
| Cash  dividends on common stock (Note 7)                                         |       | —           |       | —      |       | (19,150         | )          | —      |       | (19,150    | )          |
| Shares  surrendered upon vesting of restricted stock to satisfy tax withholdings |       | (21              | )          | —      |       | (112            | )          | —      |       | (112       | )          |
| Stock  option exercises and restricted stock vestings                            |       | 86               |       | —      |       | 27              |       | —      |       | 27         |       |
| Stock-based  compensation                                                        |       | —           |       | —      |       | 1,384           |       | —      |       | 1,384      |       |
| Tax  deductions relating to stock-based compensation (Note 8)                    |       | —           |       | —      |       | 917             |       | —      |       | 917        |       |
| Issuance  of common stock under employee stock purchase plan                     |       | 105              |       | —      |       | 465             |       | —      |       | 465        |       |
| **Balance, June 30, 2009**                                                  |       | 62,949           |       | $           | 6          |            | $          | 137,725     |       | $          | (79,364    | ) | $ | 58,367 |   |

 

*The accompanying Notes to Unaudited Consolidated FinancialStatements are an integral part of these statements.*

 

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**NIC INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

**thousands**

 
| ** **                                                                                                                    | ** ** | **Six-months ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                    | ** ** | **2009**                            | ** ** | **2008** | ** ** |
| Cash  flows from operating activities:                                                                                        | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Net  income                                                                                                                   |       | $                                   | 7,617      |   | $ | 6,168 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities,  excluding the effects of the acquisition: |       |                                |       |   |   |
| Depreciation &  amortization                                                                                         |       | 2,569                               |       | 1,745 |   |
| Stock-based  compensation expense                                                                                             |       | 1,384                               |       | 1,228 |   |
| Application  development contracts                                                                                            |       | (74                                 | )          | (71 | ) |
| Deferred  income taxes                                                                                                        |       | 2,349                               |       | 3,633 |   |
| Nonrecurring  gain on acquisition of business, net of tax (Note 3)                                                            |       | (2,249                              | )          | — |   |
| Loss  on disposal of property and equipment                                                                                   |       | —                              |       | 20 |   |
| Changes  in operating assets and liabilities, net of acquisition:                                                             |       |                                |       |   |   |
| (Increase)  in trade accounts receivable                                                                                      |       | (2,742                              | )          | (6,239 | ) |
| (Increase)  decrease in unbilled revenues                                                                                     |       | (22                                 | )          | 129 |   |
| Decrease  in prepaid expenses & other current assets                                                                 |       | 330                                 |       | 496 |   |
| (Increase)  in other assets                                                                                                   |       | (4                                  | )          | — |   |
| Increase  in accounts payable                                                                                                 |       | 6,277                               |       | 1,466 |   |
| Increase  in accrued expenses                                                                                                 |       | 1,768                               |       | 58 |   |
| Increase  in other current liabilities                                                                                        |       | 292                                 |       | 269 |   |
| (Decrease)  in other long-term liabilities                                                                                    |       | (278                                | )          | — |   |
| Net  cash provided by operating activities                                                                                    |       | 17,217                              |       | 8,902 |   |
|                                                                                                                          |       |                                |       |   |   |
| Cash  flows from investing activities:                                                                                        |       |                                |       |   |   |
| Purchases  of property and equipment                                                                                          |       | (1,321                              | )          | (2,228 | ) |
| Capitalized  internal use software development costs                                                                          |       | (265                                | )          | (408 | ) |
| Purchases  of investments                                                                                                     |       | —                              |       | (1,000 | ) |
| Sales  and maturities of investments                                                                                          |       | —                              |       | 11,650 |   |
| Acquisition  of business (Note 3)                                                                                             |       | (1,500                              | )          | — |   |
| Net  cash (used in) provided by investing activities                                                                          |       | (3,086                              | )          | 8,014 |   |
|                                                                                                                          |       |                                |       |   |   |
| 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                                                                             |       | 27                                  |       | 1,852 |   |
| Tax  deductions related to stock-based compensation (Note 8)                                                                  |       | 917                                 |       | — |   |
| Net  cash used in financing activities                                                                                        |       | (17,741                             | )          | (13,577 | ) |
|                                                                                                                          |       |                                |       |   |   |
| Net  increase (decrease) in cash and cash equivalents                                                                         |       | (3,610                              | )          | 3,339 |   |
| Cash  and cash equivalents, beginning of period                                                                               |       | 60,373                              |       | 38,236 |   |
| Cash  and cash equivalents, end of period                                                                                     |       | $                                   | 56,763     |   | $ | 41,575 |   |
|                                                                                                                          |       |                                |       |   |   |
| Other  cash flow information:                                                                                                 |       |                                |       |   |   |
| Income  taxes paid                                                                                                            |       | $                                   | 792        |   | $ | 469 |   |

 

*The accompanying Notes to UnauditedConsolidated Financial Statements are an integral 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) necessaryto present fairly the consolidated financial position, results of operationsand cash flows of the Company and its subsidiaries as of the dates and for theinterim periods presented.  Theseunaudited consolidated financial statements and notes should be read in conjunctionwith the audited consolidated financial statements and related notes andManagement’s Discussion and Analysis of Financial Condition and Results ofOperations included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2008, filed with the SEC on March 13, 2009,and Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations included in this Form 10-Q.  The consolidated balance sheet data includedherein as of December 31, 2008 was derived from audited financialstatements, but does not include all disclosures required by accountingprinciples generally accepted in the United States of America.

 

The preparation offinancial statements in conformity with generally accepted accounting principlesrequires management to make estimates and assumptions that affect the amountsreported in the consolidated financial statements and accompanying notes.Actual results could differ from those estimates. The results of operations forthe three- and six-month periods ended June 30, 2009 are not necessarilyindicative 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.

 

Capitalized internal use software development costs are included inintangible assets in the Company’s consolidated balance sheets at June 30,2009 and December 31, 2008.  Suchamounts were previously included in other long-term assets.

 

Certain amounts in the 2008 financial statements have been reclassified toconform to the 2009 presentation.

 

*Fair Value Measurements*

 

In September 2006, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 157, *Fair Value Measurements* (“SFAS No. 157”), which definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting 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. 157on January 1, 2008 did not have an impact on the unaudited consolidatedfinancial statements of the Company.  TheCompany adopted the requirements of SFAS No. 157 that address nonfinancialassets and liabilities effective January 1, 2009.  The adoption of the remaining portion of SFASNo. 157 on January 1, 2009 did not have an impact on the unauditedconsolidated financial statements of the Company.

 

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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 June 30, 2009 and December 31,2008, the Company did not have any financial instruments that were required tobe measured at fair value.

 

*IntangibleAssets*

 

The Company carries intangible assets at cost less accumulatedamortization.  Intangible assets aregenerally amortized on a straight-line basis over the estimated economic livesof the respective assets.  At eachbalance sheet date or whenever changes in circumstances warrant, the Company assesses the carrying valueof intangible assets for possible impairment based primarily on the ability torecover the balances from expected future cash flows on an undiscounted basis.If the sum of the expected future cash flows on an undiscounted basis were tobe less than the carrying amount of the intangible asset, an impairment losswould be recognized for the amount by which the carrying value of theintangible asset exceeds its estimated fair value.  There is considerable management judgment necessary todetermine future cash flows, and accordingly, actual results could varysignificantly from such estimates. The Company has not recorded any impairmentlosses on intangible assets during the periods presented.  See Note 4.

 

*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 for all periods presented.  Thetwo-class method is an earnings allocation formula that treats a participatingsecurity as having rights to undistributed earnings that would otherwise havebeen available to common shareholders. The Company’s service-based restricted stock awards containnon-forfeitable rights to dividends and are considered participatingsecurities.  The Company adopted thisstandard effective January 1, 2009; therefore, service-based restrictedstock awards were included in the calculation of earnings per share using thetwo-class method for the three-and six-month periods ended June 30, 2009and 2008.  Unvested service-basedrestricted shares totaled approximately 1.0 million and 0.9 million at June 30,2009 and 2008, respectively.  Basicearnings per share is calculated by first allocating earnings between commonshareholders and participating securities. Earnings attributable to common shareholders are divided by the weightedaverage number of common shares outstanding during the period.  Diluted earnings per share is calculated bygiving effect to dilutive potential common shares outstanding during theperiod.  The dilutive effect of stockoptions and the employee stock purchase plan is determined based on thetreasury stock method.  The dilutiveeffect of service-based restricted stock awards is based on the more dilutiveof the treasury 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.

 

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The following table sets forth thechanges to the computation of basic and diluted earnings per share (inthousands, except per share amounts) pursuant to FSP-EITF 03-6-1:

 
| ** **                                    | ** ** | **Three months ended June 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|
| ** **                                    | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                                    | ** ** | ** **                           | ** ** | **As  Originally Reported** | ** ** | **Effect of  Change** | ** ** | **As  Adjusted** | ** ** |
| **Numerator:**                                |       |                                 |       |   |   |   |   |   |   |
| Net  income                                   |       | $                                    | 4,839      |   | $ | 3,180 |   | $ | — |   | $ | 3,180 |   |
| Income  allocated to participating securities |       | 75                                   |       | — |   | 43 |   | 43 |   |
| Net  income available to common shareholders  |       | $                                    | 4,764      |   | $ | 3,180 |   | $ | (43 | ) | $ | 3,137 |   |
| **Denominator:**                              |       |                                 |       |   |   |   |   |   |   |
| Weighted  average shares – basic         |       | 62,935                               |       | 62,497 |   | — |   | 62,497 |   |
| Stock  options and restricted shares          |       | 93                                   |       | 459 |   | (235 | ) | 224 |   |
| Weighted  average shares – diluted       |       | 63,028                               |       | 62,956 |   | (235 | ) | 62,721 |   |
|                                          |       |                                 |       |   |   |   |   |   |   |
| **Basic earnings per share:**                 |       |                                 |       |   |   |   |   |   |   |
| Net  income                                   |       | $                                    | 0.08       |   | $ | 0.05 |   | $ | (0.00 | ) | $ | 0.05 |   |
|                                          |       |                                 |       |   |   |   |   |   |   |
| **Diluted net income per share:**             |       |                                 |       |   |   |   |   |   |   |
| Net  income                                   |       | $                                    | 0.08       |   | $ | 0.05 |   | $ | (0.00 | ) | $ | 0.05 |   |

 
| ** **                                    | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------|------------|
| ** **                                    | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| ** **                                    | ** ** | ** **                         | ** ** | **As  Originally  Reported** | ** ** | **Effect of  Change** | ** ** | **As  Adjusted** | ** ** |
| **Numerator:**                                |       |                               |       |   |   |   |   |   |   |
| Net  income                                   |       | $                                  | 7,617      |   | $ | 6,168 |   | $ | — |   | $ | 6,168 |   |
| Income  allocated to participating securities |       | 290                                |       | — |   | 200 |   | 200 |   |
| Net  income available to common shareholders  |       | $                                  | 7,327      |   | $ | 6,168 |   | $ | (200 | ) | $ | 5,968 |   |
| **Denominator:**                              |       |                               |       |   |   |   |   |   |   |
| Weighted  average shares – basic         |       | 62,867                             |       | 62,309 |   | — |   | 62,309 |   |
| Stock  options and restricted shares          |       | 70                                 |       | 486 |   | (194 | ) | 292 |   |
| Weighted  average shares – diluted       |       | 62,937                             |       | 62,795 |   | (194 | ) | 62,601 |   |
|                                          |       |                               |       |   |   |   |   |   |   |
| **Basic earnings per share:**                 |       |                               |       |   |   |   |   |   |   |
| Net  income                                   |       | $                                  | 0.12       |   | $ | 0.10 |   | $ | (0.00 | ) | $ | 0.10 |   |
|                                          |       |                               |       |   |   |   |   |   |   |
| **Diluted net income per share:**             |       |                               |       |   |   |   |   |   |   |
| Net  income                                   |       | $                                  | 0.12       |   | $ | 0.10 |   | $ | (0.00 | ) | $ | 0.10 |   |

 

Outstanding stockoptions totaling approximately 300 shares for each of the three- and six-monthperiods ended June 30, 2009, respectively, were not included in thecomputation of diluted weighted average shares outstanding because theirexercise prices were in excess of the average stock price of the Company duringthe periods, and would result in the options being anti-dilutive.  Outstanding stock options totalingapproximately 20,000 shares for each of the three- and six-month periods ended June 30,2008 were not included in the computation of diluted weighted average sharesoutstanding because their exercise prices were in excess of the average stockprice of the Company during the periods, and would result in the options beinganti-dilutive.

 

9

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*Concentrationof credit risk*

 

Financial instruments that potentiallysubject the Company to significant concentrations of credit risk consistprimarily of cash and cash equivalents and accounts receivable.  During November 2008, the FederalDeposit Insurance Corporation (“FDIC”) adopted the Temporary LiquidityGuarantee Program to strengthen investor confidence and encourage liquidity inthe banking system by providing full coverage on non-interest bearing deposittransaction accounts, regardless of dollar amount, for participating banksthrough December 31, 2009.  At June 30,2009, the amount of cash in domestic non-interest bearing commercial checkingaccounts was approximately $36.7 million, while the amount of cash held ininterest-bearing sweep accounts and money market funds was approximately $20.1million.  The Company attempts to limitits exposure to credit loss by investing the cash held in its sweep accountsand money market funds primarily in U.S. government money market accounts thatpurchase U.S. agency instruments or direct obligations of the U.S. Treasury orrepurchase agreements secured by U.S. agency instruments.  The Company performs ongoing creditevaluations of its customers and generally requires no collateral to secureaccounts receivable.

 

*Recent Accounting Pronouncements*

 

In December 2007, the FASB issuedSFAS No. 141 (Revised 2007), *Business Combinations*(“SFAS No. 141(R)”).  SFAS No. 141(R) establishesprinciples and requirements for how the acquirer in a business combinationrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, and any noncontrolling interest in theacquiree.  SFAS No. 141(R) alsoprovides guidance for recognizing and measuring the goodwill acquired in thebusiness combination or a gain from a bargain purchase and determining whatinformation should be disclosed to enable users of the financial statements toevaluate the nature and financial effects of the business combination.  SFAS No. 141(R) changes theaccounting treatment for certain specific acquisition-related items including:expensing acquisition-related costs as incurred, valuing non-controllinginterests at fair value at the acquisition date and expensing restructuringcosts associated with an acquired business. SFAS No. 141(R) was effective for the Company as of January 1,2009 and will be applied prospectively to business combinations that have an acquisitiondate on or after January 1, 2009. See Note 3.

 

In May 2009, the FASB issued SFAS No. 165,*Subsequent Events* (“SFAS No. 165”).  SFAS No. 165 establishes generalstandards of accounting for and disclosures of events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued.  Although there is newterminology, the standard is based on the same principles as those thatcurrently exist in the auditing standards. SFAS No. 165, which includes a new required disclosure of the datethrough which an entity has evaluated subsequent events, is effective for theCompany during the interim period ended June 30, 2009.

 

In June 2009, the FASB approved the *FASB Accounting Standards Codification* (“Codification”) asthe single source of authoritative nongovernmental U.S. GAAP to be released on July 1,2009. The Codification is not intended to change current U.S. GAAP, but isintended to simplify user access to all authoritative U.S. GAAP by providingall the authoritative literature related to a particular topic in one place.All existing accounting standard documents will be superseded and all otheraccounting literature not included in the Codification will be considerednonauthoritative.  The Codification is effectivefor the Company during the interim periods ending September 30, 2009 andis not expected to have an impact on the Company’s consolidated financialcondition or results of operations.  TheCompany is currently evaluating the impact to its financial reporting processof providing Codification references in its public filings.

 

**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

 

10

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revenue sharing agreements.  TheCompany has limited control over the level of fees it is permitted toretain.  Any changes made to the amountor percentage of fees retained by NIC, or to the amounts charged for theservices offered, could adversely affect the profitability of the respectivecontract 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.  Eight contracts under which the Companyprovides portal outsourcing services can be terminated without cause on aspecified period of notice; collectively, revenues generated from these contracts represented 36%and 38% of the Company’s portal revenues for the three and six-month periodsended June 30, 2009, respectively. In the event that any of these contracts would be terminated withoutcause, the terms of the respective contract may require the government to pay afee to the Company in order to continue to use the Company’s software in itsportal.  In addition, the loss of one ormore of the Company’s larger state portal partners, such as Alabama, Arkansas,Colorado, Indiana, Kentucky, Tennessee, Texas, Utah or Virginia, as a result ofthe expiration, termination or failure to renew the respective contract, ifsuch partner is not replaced, could significantly reduce the Company’srevenues.

 

At June 30, 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.

 

The following is a summary of the Company’s twenty-three outsourced stategovernment portal contracts at June 30, 2009:

 
| **NIC Subsidiary**               | ** ** | **Portal Web Site (State)**  | ** ** | **Year Services  Commenced** | ** ** | **Contract Expiration Date  (Renewal Options Through)** | ** ** |
|----------------------------------|------------|------------------------------|------------|------------------------------|------------|---------------------------------------------------------|------------|
| New Mexico  Interactive, LLC     |       | TBD                          |       | 2009                         |       | 6/1/2010 (6/1/2013)                                     |       |
| Texas NICUSA,  LLC               |       | www.TexasOnline.com (Texas)  |       | 2009                         |       | 12/31/2009                                              |       |
| West Virginia  Interactive       |       | www.WV.gov (West Virginia)   |       | 2007                         |       | 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                         |       | 7/15/2014                                               |       |
| Kentucky  Interactive            |       | www.Kentucky.gov  (Kentucky) |       | 2003                         |       | 8/31/2009 (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                         |       | 9/30/2009                                               |       |
| 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                         |       | 6/5/2013 (6/5/2019)                                     |       |
| 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)                                 |       |

 

11

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During the second quarter of 2009, the Company acquired the current portalmanagement contract for the state of Texas. See Note 3 for additional information regarding this acquisition.  In addition, the Company finalized a one-yearcontract with the New Mexico Motor Vehicle Division to manage the state’sdriver history database.  The contractincludes three one-year renewal options under which the government can extendthe contract for an additional three years. The Company also entered into a new four-year contract with the state ofUtah, which includes an option for the government to extend the contract forsix additional one-year renewal terms, and a new five-year contract with thestate of South Carolina.  In addition,the Company received a one-year contract extension from the state of WestVirginia. See also Note 10, SubsequentEvents.

 

**3.ACQUISITION OF BUSINESS**

 

On May 29, 2009, the Company, through its indirect wholly-ownedsubsidiary Texas NICUSA, LLC (“TXNICUSA”), completed the acquisition of certainassets from BearingPoint, Inc. (“BearingPoint”), including the currentportal management contract for TexasOnline, the official Web site of the stateof Texas, through December 31, 2009. The acquired assets were part of BearingPoint’s North American PublicServices Unit which BearingPoint previously agreed to sell to Deloitte LLP (“Deloitte”)pursuant to an Asset Purchase Agreement dated March 23, 2009 (“AssetPurchase Agreement”).  BearingPoint hadpreviously filed for relief under Chapter 11 of the U.S. Bankruptcy Code in February 2009.  Pursuant to the terms of the Asset PurchaseAgreement, Deloitte designated the Company as the acquirer of certaindesignated contracts and assets, and the Company acquired the rights to the designated contractsand the assets directly from BearingPoint.

 

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

 

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

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

(3)          certain contracts withsubcontractors and service providers relating to the provision of products andservices pursuant to Framework Agreement, the Service Level Agreements and theMaster Work Order.  In addition, theCompany is licensing from Deloitte certain intellectual property relating tothe acquired contracts.

 

The Company paid Deloitte $1.5 million in cash in exchange for thedesignation of the Company as the acquirer of the designated contracts and assetsfrom BearingPoint.  The Company fundedthe purchase price from its existing cash resources.  In addition, the Company has designatedDeloitte as the subcontractor on certain of the Master Work Order Projectsunder the Master Work Order.

 

The acquisition was accounted for under the purchase method ofaccounting in accordance with SFAS No. 141(R).  Accordingly, net assets were recorded attheir estimated fair values.  Thepreliminary fair value of the identifiable assets acquired and liabilitiesassumed exceeded the fair value of the consideration paid, resulting in abargain purchase.  Consequently, theCompany reassessed the recognition and measurement of identifiable assetsacquired and liabilities assumed and concluded that the valuation proceduresand resulting measures appropriately reflect all available information as ofthe acquisition date.  As a result, theCompany recognized a preliminary, nonrecurring gain of approximately $2.2 million (net of tax) in thesecond quarter of 2009, which is included in gain on acquisition of business(net of tax) in the consolidated statements of income for the three- and six-month periods ended June 30,2009.  The acquisition resulted in a gainin part because of Deloitte’s desire to designate a buyer for certain assets tobe acquired from BearingPoint prior to the closing of all of the transactionscontemplated under the Asset Purchase Agreement with BearingPoint and becauseNIC was one of the few companies in the eGovernment portal management industrywith the requisite experience to be considered as a potential buyer.

 

12

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The Company iscurrently in the process of finalizing the valuation for certain acquiredassets; therefore, the fair value measurements at May 29, 2009 and thegain on acquisition of business are preliminary and subject to furtheradjustment.  The allocation of thepurchase price to the assets acquired will be finalized as necessary, up to oneyear after the acquisition closing date, as information becomes available.  The following table summarizes thepreliminary purchase price allocation of net tangible and intangible assetsacquired (in thousands):

 
| ** **                                                              | ** ** | **May 29, 2009** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------|------------|
|                                                                    |       |                  |       |
| Intangible  assets subject to amortization:                             |       |                  |       |
| Rights  to the Framework Agreement                                      |       | $                     | 3,940      |   |
| Rights  to the Master Work Order                                        |       | 1,050                 |       |
| Total  intangible assets                                                |       | 4,990                 |       |
| Prepaid  expenses & other current assets                       |       | 219                   |       |
| Accrued  expenses                                                       |       | (119                  | )          |
| Other  current liabilities                                              |       | (124                  | )          |
| Deferred  tax liability on nonrecurring gain on acquisition of business |       | (1,217                | )          |
| Net  assets acquired                                                    |       | 3,749                 |       |
| Purchase  price                                                         |       | 1,500                 |       |
| Nonrecurring  gain on acquisition of business (net of tax)              |       | $                     | 2,249      |   |

 

Upon acquisition, theCompany recorded a deferred tax liability of approximately $1.2 million relatedto the excess of the book value of net assets acquired over the tax basis.  At June 30, 2009, the balance of thedeferred tax liability was approximately $0.9 million and is included indeferred income taxes, net, a noncurrent asset in the consolidated balancesheet.

 

Results of operations ofthe acquired business since the acquisition date included in the Company’sconsolidated statements of income for the three- and six-month periods ended June 30,2009 were as follows (in thousands):

 
| ** **                                                 | ** ** | **For the period  from May 29, 2009  to June 30, 2009** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| Portal  revenues                                           |       | $                                                                 | 2,884      |   |
|                                                       |       |                                                              |       |
| Operating  expenses:                                       |       |                                                              |       |
| Cost  of portal revenues                                   |       | 2,033                                                             |       |
| Nonrecurring  gain on acquisition of business (net of tax) |       | (2,249                                                            | )          |
| Depreciation  and amortization                             |       | 629                                                               |       |
| Total  operating expenses                                  |       | 413                                                               |       |
| Operating  income/income before income taxes               |       | 2,471                                                             |       |
| Income  tax expense                                        |       | (83                                                               | )          |
| Net  income                                                |       | $                                                                 | 2,388      |   |

 

During the second quarter of 2009, the Company recognizedapproximately $0.5 million of acquisition-related costs, including legal,accounting, and valuation services. These costs are included in selling & administrative expensesin the consolidated statements of income for the three- and six-month periodsended June 30, 2009.  The Company’srights under the Framework Agreement and Service Level Agreements will be amortizedover seven months and the Company’s rights under the Master Work Order will beamortized over 39 months, reflecting the remaining contract terms for theagreements.  For additional information on the Company’sintangible assets, see Note 4.

 

13

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The following unaudited pro forma information presents consolidatedfinancial results as if the acquisition was completed as of January 1,2009 and 2008, respectively.  Thissupplemental pro forma information has been prepared for comparative purposesonly and is not intended to be indicative of what the Company’s results wouldhave been had the acquisition been completed on January 1, 2008 or January 1,2009, nor does it purport to be indicative of any future results.

 
| **(in thousands, except per share  data)** | ** ** | **For the six months ended June  30,** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| Revenues                                   |       | $                                      | 73,589     |   | $ | 68,021 |   |
| Net  income                                |       | 7,738                                  |       | 11,378 |   |
| Net  income per common share               |       |                                   |       |   |   |
| Basic                                      |       | $                                      | 0.12       |   | $ | 0.18 |   |
| Diluted                                    |       | $                                      | 0.12       |   | $ | 0.18 |   |

 

These amounts have beencalculated after applying the Company’s accounting policies and adjusting theresults to reflect the $2.2 million nonrecurring gain on acquisition ofbusiness (net of tax) and additional amortization expense that would have beenincurred assuming the fair value adjustments to the net assets acquired hadbeen applied from January 1, 2009 or 2008, as applicable, together withthe consequential tax effects.

 

**4. INTANGIBLE ASSETS**

 

Intangible assets as of June 30,2009 and December 31, 2008 consisted of the following (in thousands):

 
| ** **                         | ** ** | **June 30, 2009**     | ** ** | **December 31, 2008**    | ** ** | ** **           | ** ** |
|------------------------------------|------------|----------------------------|------------|-------------------------------|------------|----------------------|------------|
| ** **                         | ** ** | **Gross  Carrying  Value** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Book  Value** | ** ** | **Gross  Carrying  Value** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Book  Value** | ** ** | **Useful  Life** | ** ** |
| Rights  to the Framework Agreement |       | $                          | 3,940      |                          | $          | (600                 | )          | $ | 3,340 |   | $ | — |   | $ | — |   | $ | — |   | 7 months |   |
| Rights  to the Master Work Order   |       | 1,050                      |       | (29                           | )          | 1,021                |       | — |   | — |   | — |   | 39 months |   |
| Capitalized  software              |       | 1,819                      |       | (667                          | )          | 1,152                |       | 1,555 |   | (450 | ) | 1,105 |   | 36 months |   |
|                               |       | $                          | 6,809      |                          | $          | (1,296               | )          | $ | 5,513 |   | $ | 1,555 |   | $ | (450 | ) | $ | 1,105 |   |   |   |

 

Amortization expensetotaling approximately $0.8 million and $0.9 million for the three- andsix-month periods ended June 30, 2009, respectively, is included indepreciation and amortization in the consolidated statements of income.  Amortization expense totaling approximately$0.1 million for each of the three- and six-month periods ended June 30,2008, respectively, is included in depreciation and amortization in theconsolidated statements of income.   TheCompany expects to recognize approximately $3.5 million of intangible assetamortization expense related to the acquisition of contracts with governmentagencies in the state of Texas as described in Note 3 and approximately $0.3million of intangible asset amortization expense related to capitalizedsoftware in the second half of 2009. The estimated amortization expense relatedto intangible assets in future years is as follows (in thousands):

 
| **Fiscal Year** | ** ** | ** ** | ** **  |
|-----------------|------------|------------|-------------|
| 2010            |       | $          | 730         |   |
| 2011            |       | 566        |        |
| 2012            |       | 269        |        |
|            |       | $          |  1,565 |   |

 

14

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**5.****DEBT OBLIGATIONS AND COLLATERAL REQUIREMENTS**

 

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 generalcorporate purposes.  The Company canobtain letters of credit in an aggregate amount of $5 million, which reducesthe maximum amount 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 paid a one-time upfront fee of $37,500 related to the creditfacility amendment.

 

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):

 

·                  Consolidated minimum annual EBITDA of at least $12million, computed quarterly on a rolling 12-month basis

·                  Consolidated tangible net worth of atleast $36 million

·                  Consolidated maximum leverage ratio of1.5:1

 

The Company was incompliance with each of the covenants listed above at June 30, 2009.  The Company issues letters of credit ascollateral for performance on certain of its outsourced government portalcontracts, as collateral for certain performance bonds and as collateral forcertain office leases.  The Company hasnever had any defaults resulting in draws on performance bonds or letters ofcredit.  In total, the Company and itssubsidiaries had unused outstanding letters of credit of approximately $1.3million at June 30, 2009 and December 31, 2008.  The Company had $3.7 million in availablecapacity to issue additional letters of credit and $8.7 million of unusedborrowing capacity at June 30, 2009 under the facility.  The credit agreement expires in May 2011.  However, letters of credit may have anexpiration date of up to one year beyond the expiration date of the creditagreement.

 

**6.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 (the “Review Period”) related to Jeffery S. Fraser,who was then the Company’s Chairman of the Board and Chief Executive Officer,that these expense reimbursement deficiencies were isolated to Mr. Fraserand that the amount of such deficiencies was not material to the Company’sfinancial condition or results of operations. During the second quarter of 2008, the Company received notice from theSEC that a formal order of investigation had been issued with respect to thesematters.  As is frequently the case insuch situations, the SEC has taken the step of obtaining a formal order ofinvestigation to ensure the thoroughness of its investigation.  The Company believes the investigation conductedby the NIC’s Audit Committee was thorough and independent and it is notanticipated that the SEC investigation will reveal any significant additionalinstances of misreporting of expenses by employees during the ReviewPeriod.  However, there can be noassurance that the SEC will not take any action that could adversely affect theCompany 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.

 

15

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**7. SHAREHOLDERS’ EQUITY**

 

On May 7, 2009, the Company completed a reincorporation from thestate of Colorado to the state of Delaware pursuant to a plan of conversion, asapproved by the shareholders at the annual meeting of shareholders held on May 5,2009.  Following the reincorporation, the Company was deemedfor all purposes of the laws of the states of Delaware and Colorado to be thesame entity as prior to the reincorporation. The reincorporation did not resultin any change in the name, federal tax identification number, business,physical location, assets, liabilities or net worth of the Company. The reincorporationdid not result in a change in the trading status of the Company’s common stock,which continues to trade on the NASDAQ Global Select Market under the symbol “EGOV.”In addition, the reincorporation did not affect any of the Company’s materialcontracts with any third parties. In accordance with the plan of conversion,the directors and executive officers of the Company continue to serve for theterms for which they were elected or appointed. The reincorporation did not alter any shareholder’s percentage ownershipinterest or number of shares of common stock owned in the Company. Pursuant tothe plan of conversion, each share of common stock in the Colorado-incorporatedCompany, no par value, automatically converted into one share of common stock inthe Delaware-incorporated Company, par value $0.0001 per share. Accordingly,shareholders were not required to undertake any exchange of the Company’sshares of common stock. In addition, each outstanding option to purchase sharesof the Colorado-incorporated Company’s common stock under the Company’s stockbenefit plans automatically converted into an option to purchase the samenumber of shares of common stock of the Delaware-incorporated Company.  As aresult of the change in par value of the Company’s common stock, the Companyreclassified approximately $6,000 from additional paid-in capital to commonstock in its consolidated balance sheet at December 31, 2008.  For additional information on the Company’sreincorporation to Delaware, refer to the Company’s Form 8-K filed withthe SEC on May 11, 2009.

 

On February 3, 2009,the Company’s Board of Directors declared a special cash dividend of $0.30 pershare, payable to shareholders of record as of February 17, 2009.  The dividend, totaling approximately $19.2million, was paid on February 27, 2009 on 62,792,786 outstanding shares ofcommon stock. ** **Adividend equivalent of $0.30 per share was also paid simultaneously on1,040,446 unvested shares of restricted stock granted under the Company’s 2006Stock Option and Incentive Plan.  Thedividend was paid out of the Company’s available cash.

 

The dividend may resultin a partial return of capital to shareholders, with the balance being taxableto shareholders as a qualified dividend. The exact amount of the return of capital, if any, is dependent on theearnings and profits of the Company through the end of its 2009 fiscal year.

 

**8. STOCK BASED COMPENSATION**

 

*Restricted Stock*

 

During the first andsecond quarters of 2009, the Board of Directors of the Company granted certainmanagement-level employees, executive officers and non-employee directorsservice-based restricted stock awards totaling 120,757 and 68,426 shares,respectively, with grant-date fair values of $5.52 and $5.73 per share,totaling approximately $0.7 million and $0.4 million.  Such restricted stock awards vest beginningone year from the date of grant in cumulative annual installments of 25%.  Restricted stock is valued at the date ofgrant, based on the closing market price of the Company’s common stock, andexpensed using the straight-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 performance related to the following performancecriteria over the performance period:

 

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

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

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

 

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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.

 

See Note 10, Subsequent Events.

 

*Income Taxes*

 

Under the guidance of footnote 82 of paragraphA94 of SFAS No. 123R (revised 2004), *Share-Based Payment*,the Company is permitted to recognize a credit to additional paid-in capitalfor federal income tax deductions, or windfall tax benefits, resulting from theexercise of non-qualified stock options or vesting of restricted stock if suchwindfall tax benefits reduce income taxes payable.  Following the with-and-without approach forutilization of tax attributes, which results in windfall tax benefits beingutilized after utilization of available tax NOL carryforwards to offset currentyear taxable income, the Company increased deferred tax assets and additionalpaid-in capital for windfall tax benefits totaling approximately $0.9 millionduring the second quarter of 2009.

 

**9. REPORTABLE SEGMENTS 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 of State, and the Company’s ethics & elections filingsbusiness (NIC Technologies), which designs and develops online campaignexpenditure and ethics compliance systems for the Federal Election Commissionand the state of Michigan.  Each of theCompany’s Software & Services businesses is an operating segment andhas been aggregated to form the Software & Services reportablesegment. Unallocated corporate-level expenses are reported in thereconciliation of the segment totals to the related consolidated totals as “OtherReconciling Items.”  There have been nosignificant intersegment transactions 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.

 

17

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The table below reflectssummarized financial information concerning the Company’s reportable segmentsfor the three months ended June 30 (in thousands):

 
| ** **                                                 | ** ** | **Outsourced  Portals** | ** ** | **Software  &  Services** | ** ** | **Other  Reconciling  Items** | ** ** | **Consolidated  Total** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------|------------|
| **2009**                                                   | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues                                                   |       | $                       | 30,768     |                          | $          | 1,034                         |       | $                       | —     |   | 31,802 |   |
|                                                       | ** ** | ** **              | ** ** |                          | ** ** | ** **                    |       |                    |       |
| Costs &  expenses                                 |       | 19,004                  |       | 776                           |       | 5,716                         |       | 25,496                  |       |
| Depreciation &  amortization                      |       | 1,512                   |       | 16                            |       | 104                           |       | 1,632                   |       |
| Nonrecurring  gain on acquisition of business (net of tax) |       | (2,249                  | )          | —                        |       | —                        |       | (2,249                  | )          |
| Operating  income (loss)                                   |       | $                       | 12,501     |                          | $          | 242                           |       | $                       | (5,820     | ) | $ | 6,923 |   |
|                                                       | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **              | ** ** |
| **2008**                                                   | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues                                                   |       | $                       | 24,621     |                          | $          | 1,081                         |       | $                       | —     |   | $ | 25,702 |   |
|                                                       | ** ** | ** **              | ** ** |                          | ** ** | ** **                    |       |                    |       |
| Costs &  expenses                                 |       | 14,048                  |       | 952                           |       | 4,535                         |       | 19,535                  |       |
| Depreciation &  amortization                      |       | 787                     |       | 24                            |       | 88                            |       | 899                     |       |
| Operating  income (loss)                                   |       | $                       | 9,786      |                          | $          | 105                           |       | $                       | (4,623     | ) | $ | 5,268 |   |

 

The following is a reconciliation of total segment operating income tototal consolidated income before income taxes for the three months ended June 30(in thousands):

 
| ** **                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Total  operating income for reportable segments |       | $        | 6,923      |     | $          | 5,268 |   |
| Interest  income                                |       | 5        |       | 110      |       |
|                                            |       |     |       |     |       |
| Consolidated  income before income taxes        |       | $        | 6,928      |     | $          | 5,378 |   |

 

The table below reflectssummarized financial information concerning the Company’s reportable segmentsfor the six months ended June 30 (in thousands):

 
| ** **                                                 | ** ** | **Outsourced  Portals** | ** ** | **Software  &  Services** | ** ** | **Other  Reconciling  Items** | ** ** | **Consolidated  Total** | ** **         |
|------------------------------------------------------------|------------|-------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------|--------------------|
| **2009**                                                   | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **              | ** **         |
| Revenues                                                   |       | $                       | 57,172     |                          | $          | 2,040                         |       | $                       |     |   | $ | 59,212 |   |
|                                                       | ** ** | ** **              | ** ** |                          | ** ** | ** **                    |       |                    |               |
| Costs &  expenses                                 |       | 35,022                  |       | 1,519                         |       | 10,733                        |       | 47,274                  |               |
| Depreciation &  amortization                      |       | 2,333                   |       | 32                            |       | 204                           |       | 2,569                   |               |
| Nonrecurring  gain on acquisition of business (net of tax) |       | (2,249                  | )          | —                        |       | —                        |       | (2,249                  | )                  |
| Operating  income (loss)                                   |       | $                       | 22,066     |                          | $          | 489                           |       | $                       | (10,937            | ) | $ | 11,618 |   |
|                                                       | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **              | ** **         |
| **2008**                                                   | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **              | ** **         |
| Revenues                                                   |       | $                       | 48,417     |                          | $          | 1,964                         |       | $                       | —             |   | $ | 50,381 |   |
|                                                       | ** ** | ** **              | ** ** |                          | ** ** | ** **                    |       |                    |               |
| Costs &  expenses                                 |       | 27,667                  |       | 1,675                         |       | 9,294                         |       | 38,636                  |               |
| Depreciation &  amortization                      |       | 1,530                   |       | 42                            |       | 173                           |       | 1,745                   |               |
| Operating  income (loss)                                   |       | $                       | 19,220     |                          | $          | 247                           |       | $                       | (9,467             | ) | $ | 10,000 |   |

 

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The following is a reconciliation of total segment operating income tototal consolidated income before income taxes for the six months ended June 30(in thousands):

 
| ** **                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Total  operating income for reportable segments |       | $        | 11,618     |     | $          | 10,000 |   |
| Interest  income                                |       | 45       |       | 443      |       |
| Other  expense, net                             |       | —   |       | (20      | )          |
|                                            |       |     |       |     |       |
| Consolidated  income before income taxes        |       | $        | 11,663     |     | $          | 10,423 |   |

 

**10. SUBSEQUENT EVENTS**

 

During the third quarterof 2009, the Company entered into a new seven-year contract with the state ofTexas to manage the state’s official government portal.  The new contract commences on January 1,2010 and runs through August 31, 2016. 

 

During the third quarter of 2009, the Board of Directors of the Companygranted certain directors and non-executive management-level employeesservice-based restricted stock awards totaling 288,643 shares, with grant-datefair values of $7.91 per share, totaling approximately $2.3 million.  Such restricted stock awards vest beginningone year from the date of grant in cumulative annual installments of 25%.  Restricted stock is valued at the date ofgrant, based on the closing market price of the Company’s common stock, andexpensed using the straight-line method over the requisite service period.

 

The Company hasperformed an evaluation of subsequent events through August 7, 2009, whichis the date the financial statements were issued.

 

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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 (“SEC”) on March 13, 2009. In addition, we will notnecessarily update the information in this Quarterly Report on Form 10-Qif any forward-looking statement later turns out to be inaccurate. Investorsare cautioned not to put undue reliance on any forward-looking statement.**

# ** **

There are a numberof important factors that could cause actual results to differ materially fromthose suggested or indicated by such forward-looking statements.  These include, among others, the success ofthe Company in signing contracts with new states and government agencies,including continued favorable government legislation; the ability of NIC tosuccessfully integrate into its operations the recently acquired current portalmanagement contracts with government agencies in the state of Texas (the “TexasContracts”), which are discussed in Note 3 in the Notes to the UnauditedConsolidated Financial Statements included in this Form 10-Q; NIC’sability to develop new services; existing states and agencies adopting thosenew services; acceptance of eGovernment services by businesses and citizens;competition; and general economic conditions (including the recentdeterioration in general economic conditions) and the other factors discussedunder “CAUTIONS ABOUT FORWARD LOOKING STATEMENTS” in Part I and “RISKFACTORS” in Part I, Item 1A of NIC’s 2008 Annual Report on Form 10-Kfiled on March 13, 2009 with the SEC. Investors should read all of these discussions of risks carefully.

 

**WHAT WEDO — AN EXECUTIVE SUMMARY**

 

We are a leading provider of eGovernment services that help governmentsuse the Internet to reduce costs and provide a higher level of service tobusinesses and citizens. We accomplish this currently through two divisions:our core portal outsourcing businesses and our software & servicesbusinesses.

 

In our core business, portal outsourcing, we enter into contractsprimarily with state governments and design, build and operate Web-basedportals on their behalf. Currently, we have contracts to provide portaloutsourcing services for 23 states.  Weenter into long-term contracts, typically three to five years, and manageoperations for each government partner through separate subsidiaries thatoperate as decentralized businesses with a high degree of autonomy. Our portalsconsist of Web sites and applications that we build, which allow businesses andcitizens to access government information online and complete transactions,including applying for a permit, retrieving driver’s license records or filinga form or report. We help increase our government partners’ revenues byexpanding the distribution of their information assets and increasing the numberof financial transactions conducted with governments.  We do this by marketing portal services andsoliciting users to complete government-based transactions and to enter intosubscriber contracts that permit users to access the portal and the governmentinformation contained therein in exchange for transactional and/or subscriptionuser fees. We are typically responsible for funding up-front investment andongoing operational costs of the government portals.  Our unique self-funding business model allowsus to reduce our government partners’ financial and technology risks and obtainrevenues by sharing in the fees generated from eGovernment services. Ourpartners benefit because they gain a centralized, customer-focused presence onthe Internet. Businesses and citizens gain a faster, more convenient and morecost-effective means to interact with governments.

 

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On behalf of our government partners, we enter into separate agreementswith various agencies and divisions of the government to provide specificservices and to conduct specific transactions. These agreements preliminarilyestablish the pricing of the transaction and data access services we provideand the division of revenues between the Company and the government agency. Thegovernment must approve prices and revenue sharing agreements. We have limitedcontrol over the level of fees we are permitted to retain.  Any changes made to the amount or percentage offees retained by us, or to the amounts charged for the services offered, couldadversely affect the profitability of the respective contract to us.  We generally own all the applicationsdeveloped under these contracts. After completion of a defined contract term,the government agency typically receives a perpetual, royalty-free license tothe applications for use only. If our contract were not renewed after a definedterm, the government agency would be entitled to take over the portal in placewith no future obligation of the Company. In some cases, we enter intocontracts to provide consulting, application development and portal managementservices to governments in exchange for an agreed-upon fee.

 

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 passage of legislation.  Eight contracts under which we provide portaloutsourcing services can be terminated without cause on a specified period ofnotice; collectively, revenues generated from these contracts represented 36%and 38% of our portal revenues for the three and six-month periods ended June 30,2009, respectively.  In the event thatany of these contracts would be terminated without cause, the terms of the respectivecontract may require the government to pay a fee to us in order to continue touse our software in its portal.  Inaddition, the loss of one or more of our larger state portal partners, such asAlabama, Arkansas, Colorado, Indiana, Kentucky, Tennessee, Texas, Utah orVirginia, as a result of the expiration, termination or failure to renew therespective contract, if such partner is not replaced, could significantlyreduce our revenues.

 

*Texas PortalManagement Contract Acquisition and New Texas Portal Management Contract*

 

See Note 3 in the Notes to the Unaudited Consolidated Financial Statementsincluded in this Form 10-Q for additional information regarding our secondquarter 2009 acquisition of the Texas Contracts.

 

As discussed inNote 10 in the Notes to the Unaudited Consolidated Financial Statements, onJuly 31, 2009 we entered into a new seven-year contract with the state of Texasto manage the state’s official government portal.  The new contract commences on January 1, 2010and runs through August 31, 2016.  Wewill not begin earning revenues under the new contract until 2010. The newcontract will have terms substantially different than the current TexasContracts we acquired in the second quarter of 2009.

 

**REVENUERECOGNITION**

 

We classify our revenues and cost of revenues into two categories: (1) portaland (2) software & services. The portal category includes revenues and cost of revenues primarilyfrom our subsidiaries operating government portals on an outsourced basis.  The software & services categoryincludes revenues and cost of revenues primarily from our UCC and corporatefilings business with the California Secretary of State and our ethics &elections business with the Federal Election Commission and the state ofMichigan.  We currently derive revenuesfrom three main sources: transaction-based fees, time and materials-based feesfor application development and fixed fees for portal management services.  Each of these revenue types and the correspondingbusiness models are further described below.

 

#### *Our portal outsourcing businesses*

#### * *

We categorize ourportal revenues according to the underlying source of revenue.  A brief description 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 

 

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our government partners in the states of Arizona andIndiana, and are 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 of predictabilityas our transaction-based or portal management revenues.  As a result, these revenues are excluded fromour recurring portal revenue percentage.

 

*Our software & servicesbusinesses*

 

# **UCC andcorporate filings**

# ** **

Our UCC and corporate filings software development business derives themajority of its revenues from fixed-price application development contracts andrecognizes revenues on the percentage of completion method.  At June 30, 2009, this business wasprimarily engaged in servicing its contract with the California Secretary ofState, and no longer markets its applications and services for any newengagements.

 

Ethics &elections

 

Our ethics &elections business derives the majority of its revenues from time and materialsapplication development and maintenance outsourcing contracts and recognizesrevenues as services are provided.  At June 30,2009, our ethics & elections business was primarily engaged inservicing its contracts with the Federal Election Commission and the state ofMichigan.

 

**CRITICALACCOUNTING POLICIES**

 

There have been nomaterial changes in our critical accounting policies and estimates from theinformation provided in Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” included in our Form 10-Kfor the year ended December 31, 2008, filed with the SEC on March 13,2009, except as follows:

 

*Intangible Assets*

 

As a result of our recentacquisition of the Texas Contracts, as further discussed in Note 3 in the Notesto the Unaudited Consolidated Financial Statements included in this Form 10-Q,we have significant intangible assets on our consolidated balance sheet at June 30,2009.  We used the discounted cash flowmethod to estimate the fair value of these intangible assets.  In order to determine the fair value of theseassets, we are required to make assumptions regarding estimated future cashflows, discount rates and other factors. We are currently in the process of finalizing thevaluation for certain of these acquired assets; therefore, the fair valuemeasurements as of the acquisition date and the nonrecurring gain (net of tax)we recognized on acquisition are preliminary and subject to change.  The allocation of the purchase price to theassets acquired will be finalized as necessary, up to one year after theacquisition closing date, as information becomes available.  At each balance sheet date, and whenever events orchanges in circumstances warrant, management assesses the carrying value ofrecorded intangible assets for possible impairment based primarily on theability to recover the balances from expected future cash flows on anundiscounted basis.  If the sum of theexpected future cash flows on an undiscounted basis were to be less than thecarrying amount of the intangible asset, an impairment loss would be recognizedfor the amount by which the carrying value of the intangible asset exceeds itsestimated fair value.  There isconsiderable judgment necessary to determine future cash flows, andaccordingly, actual results could vary significantly from such estimates.

 

# **RESULTS OF OPERATIONS**

# ** **

The following discussionsummarizes the significant factors affecting operating results for the three-and six-month periods ended June 30, 2009 and 2008.  This discussion and analysis should be readin conjunction with our unaudited consolidated interim financial statements andthe related notes included in this Form 10-Q.

 

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| ** **                                                              | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **Key Financial Metrics**                                               | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenue growth – outsourced portals                                |       | 25                                    | %          | 19                                  | %          | 18 | % | 20 | % |
| Same state revenue growth – outsourced portals                     |       | 13                                    | %          | 13                                  | %          | 12 | % | 13 | % |
| Recurring portal revenue %                                              |       | 89                                    | %          | 92                                  | %          | 90 | % | 91 | % |
| Gross profit % - outsourced portals                                     |       | 42                                    | %          | 47                                  | %          | 43 | % | 47 | % |
| Selling & administrative expenses as % of  portal revenues     |       | 23                                    | %          | 24                                  | %          | 23 | % | 24 | % |
| Operating income margin % (operating income as a %  of portal revenues) |       | 23                                    | %          | 21                                  | %          | 20 | % | 21 | % |

 

PORTALREVENUES.  In the analysis below, we havecategorized our portal revenues according to the underlying source of revenue(in thousands), with the corresponding percentage increase or decrease from theprior year period.

 
| ** **                  | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                  | ** ** | **2009**                              | ** ** | **%  Change**                       | ** ** | **2008** | ** ** | **2009** | ** ** | **%  Change** | ** ** | **2008** | ** ** |
| DMV transaction-based       |       | $                                     | 13,169     |                                | 12         | % | $ | 11,790 |   | $ | 25,541 |   | 8 | % | $ | 23,700 |   |
| Non-DMV transaction-based   |       | 12,342                                |       | 36                                  | %          | 9,050 |   | 21,958 |   | 32 | % | 16,627 |   |
| Portal management           |       | 1,853                                 |       | (10                                 | )%         | 2,067 |   | 3,790 |   | (8 | )% | 4,134 |   |
| Portal software development |       | 3,404                                 |       | 99                                  | %          | 1,714 |   | 5,883 |   | 49 | % | 3,956 |   |
|                        |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |
| Total                       |       | $                                     | 30,768     |                                | 25         | % | $ | 24,621 |   | $ | 57,172 |   | 18 | % | $ | 48,417 |   |

 

Portal revenues in thecurrent quarter increased 25%, or approximately $6.1 million, over the prioryear quarter.  This increase was mainlyattributable to a 13% increase, or approximately $3.2 million, in same stateportal revenues (outsourced portals in operation and generating recurringrevenues for two full years) and a 12% increase, or approximately $2.9 million,in revenues from our new Texas Contracts, which we acquired in May 2009.  See Note 3 in the Notes to the UnauditedConsolidated Financial Statements included in this Form 10-Q foradditional information regarding our second quarter 2009 acquisition of theTexas Contracts.

 

Our Indiana andArizona portal subsidiaries operate under contracts that are based on a fundingmodel that includes recurring fixed monthly fees for baseline services andprimarily project-based pricing for variable services, rather thantransaction-based revenues for DMV and non-DMV services.  Excluding Indiana and Arizona, same stateportal revenues in the current quarter increased 15% over the prior yearquarter, with same state DMV transaction-based revenues decreasing 1% and samestate non-DMV transaction-based revenues increasing 32% (primarily due to theaddition of several new revenue generating applications in existingportals).  Same state DMV revenue growthin the current quarter decreased 1% compared to an increase of 1% in the prioryear quarter.  Absent DMV priceincreases, same state DMV revenues have historically grown at a rate of 1% to3% per year. We believe our DMV revenues for over the past year have beenadversely affected by negative macroeconomic conditions, which we currentlyexpect may continue throughout 2009. As a result, we currently expect same-stateDMV revenue growth to be flat or slightly negative in 2009.  Portal same state non-DMV transaction basedrevenue growth was 25% in the prior year quarter.  Same state portal revenues in the secondquarter of 2009 increased 13% over 2008 primarily due to increased transactionrevenues from our Alabama, Arkansas, Colorado, Idaho and Iowa portals, amongothers.

 

Portal revenues for thesix months in the current fiscal year increased 18%, or approximately $8.8million, over the prior year period.  Ofthis increase, 12%, or approximately $5.6 million, was attributable to anincrease in same state portal revenues and 6%, or approximately $3.2 million,was attributable to our new portals including West Virginia ($0.3 million),which began to generate DMV revenues in February 2008, and Texas ($2.9million).  Same state portal revenues inthe current year-to-date period increased 12% over the prior year period.  Excluding Indiana and Arizona, same stateportal revenues in the current year-to-date periods increased 13% over theprior

 

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year period, with samestate DMV transaction-based revenues remaining flat and same state non-DMVtransaction-based revenues increasing 31%.

 

COST OF PORTALREVENUES.  In the analysis below, we havecategorized our cost of portal revenues between fixed and variable costs (inthousands), with the corresponding percentage increase or decrease from theprior year period.  Fixed costs includesuch costs as employee compensation, telecommunication and all other costsassociated with the provision of dedicated client service such as dedicatedfacilities.  Variable costs consist ofcosts that vary with our level of portal revenues and include bank feesrequired to process credit card and automated clearinghouse transactions andcosts associated with revenue share arrangements with our state partners.

 
| ** **     | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **     | ** ** | **2009**                              | ** ** | **%  Change**                       | ** ** | **2008** | ** ** | **2009** | ** ** | **%  Change** | ** ** | **2008** | ** ** |
| Fixed costs    |       | $                                     | 12,931     |                                | 25         | % | $ | 10,315 |   | $ | 24,138 |   | 18 | % | $ | 20,432 |   |
| Variable costs |       | 4,787                                 |       | 78                                  | %          | 2,691 |   | 8,471 |   | 60 | % | 5,279 |   |
|           |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |
| Total          |       | $                                     | 17,718     |                                | 36         | % | $ | 13,006 |   | $ | 32,609 |   | 27 | % | $ | 25,711 |   |

 

Cost of portalrevenues for the current quarter increased 36%, or approximately $4.7 million,over the prior year quarter.  Of thisincrease, 20%, or approximately $2.6 million, was attributable to an increasein same state cost of portal revenues, and 16%, or $2.1 million, wasattributable to our new state portal businesses in Texas ($2.0 million) and NewMexico ($0.1 million).

 

The increase insame state cost of portal revenues in the current quarter was partiallyattributable to additional personnel in several of our portals due to ourcontinued growth and reinvestment in our core business, coupled with increasedemployee compensation and health insurance expenses.  Also contributing to this increase was anincrease in variable bank fees, particularly from our portals in Alabama andIdaho.  A growing percentage of ournon-DMV transaction-based revenues are generated from online applicationswhereby users pay for information or transactions via credit cards.  We typically earn a percentage of the creditcard transaction amount, but also must pay an associated fee to the bank thatprocesses the credit card transaction. We earn a lower gross profit percentage on these transactions ascompared to our other non-DMV applications. However, we plan to continue to implement these services as theycontribute favorably to our operating income growth.

 

Our portal grossprofit percentage was 42% in the current year quarter, down from 47% in theprior year quarter.  The decrease in 2009was due to the increase in cost of portal revenues, as described above.  In addition, the portal gross profit percentagefrom our newly acquired Texas Contracts is lower than our company-wideaverage.  We carefully monitor our portal gross profit percentage to strike thebalance between generating a solid return for our shareholders and deliveringvalue to our government partners through reinvestment in our portal operations(which we believe also benefits our shareholders).  We currently expect our portal gross profitpercentage to be approximately 40% in 2009.

 

Cost of portal revenues for the six months in the current fiscal yearincreased 27%, or approximately $6.9 million, over the prior period.  Of this increase, 18%, or approximately $4.7million, was attributable to an increase in same state cost of portal revenues,and 9%, or approximately $2.2 million, was primarily attributable to our newerTexas, New Mexico and West Virginia portals. Our portal gross profit rate for the six months in the current yearperiod was 43% compared to 47% in the prior year period, for reasons furtherdiscussed above.

 

SOFTWARE &SERVICES REVENUES.  In the analysisbelow, we have categorized our software & services revenues bybusiness (in thousands), with the corresponding percentage increase or decreasefrom the prior year period.

 

24

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| ** **                                             | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                             | ** ** | **2009**                              | ** ** | **%  Change**                       | ** ** | **2008** | ** ** | **2009** | ** ** | **%****Change** | ** ** | **2008** | ** ** |
| Ethics & elections                            |       | $                                     | 778        |                                | 14         | % | $ | 683 |   | $ | 1,457 |   | 7 | % | $ | 1,368 |   |
| UCC & corporate filings software  development |       | 155                                   |       | 8                                   | %          | 143 |   | 308 |   | 5 | % | 294 |   |
| Other                                                  |       | 101                                   |       | (60                                 | )%         | 255 |   | 275 |   | (9 | )% | 302 |   |
|                                                   |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |
| Total                                                  |       | $                                     | 1,034      |                                | (4         | )% | $ | 1,081 |   | $ | 2,040 |   | 4 | % | $ | 1,964 |   |

 

SELLING & ADMINISTRATIVE.  Selling & administrative expenses inthe current quarter and year-to-date periods increased 23% and 14%,respectively, or approximately $1.3 million and $1.6 million, over the prioryear periods.  The increase in selling &administrative expenses in the current quarter was primarily attributable toacquisition-related costs of approximately $0.5 million related to the TexasContracts, increased sales and marketing expenses of approximately $0.3 millionassociated with active state portal procurement opportunities, higher personnelcosts of approximately $0.2 million to support and enhance corporate wideinformation technology security and portal operations, higher stock-basedcompensation of approximately $0.1 million for annual grants of restrictedstock to certain management-level employees, executive officers andnon-employee directors, and higher legal costs of approximately $0.1 millionrelated to the ongoing SEC investigation.  As discussed in Note 5 in the Notes to theUnaudited Consolidated Financial Statements in this Form 10-Q and Item 1A,Item 3 and Note 8 in the Company’s Annual Report on Form 10-K for the yearended December 31, 2008, filed with the SEC on March 13, 2009, wehave been the subject of an informal SEC inquiry of expense reporting bycertain officers of our Company and certain potentially related matters.  In connection with the informal SEC inquiry,a review was undertaken by the Audit Committee of our Board of Directors, withthe assistance of outside, independent counsel, which focused on such expensereporting.  The SEC issued a formal orderof investigation in the second quarter of 2008. Selling & administrative expenses for the three- and six-monthperiods ended June 30, 2009 include approximately $0.2 million and $0.6million, respectively, of legal fees and other expenses incurred in connectionwith the ongoing SEC investigation and the Audit Committee review.  Selling & administrative expensesfor the three- and six-month periods ended June 30, 2008 includeapproximately $0.1 million and $0.5 million, respectively, of legal fees andother expenses incurred in connection with the ongoing SEC investigation andthe Audit Committee review.  We currentlyexpect to continue to incur significant legal fees and other expenses inconnection with the ongoing SEC investigation. The remaining year-to-date increase in selling & administrativeexpenses is primarily attributable to increased sales and marketing expensesassociated with active state portal procurement opportunities in addition tohigher stock-based compensation for annual grants of restricted stock, asfurther discussed above.

 

As a percentage of portal revenues, selling & administrativeexpenses were 23% in the current quarter and year-to-date periods compared to25% in the prior year periods.  We currently expect selling & administrative costs as a percentage of portalrevenues to range from 20% to 21% in 2009.

 

NONRECURRING GAIN ON ACQUISITION OF BUSINESS (NET OF TAX).  We recognized a nonrecurring gain of approximately$2.2 million (net of tax) in thesecond quarter of 2009 on the acquisition of the Texas Contracts, as furtherdiscussed in Note 3 in the Notes to theUnaudited Consolidated Financial Statements included in this Form 10-Q.

 

DEPRECIATION & AMORTIZATION.  Depreciation & amortization expensein the current quarter and year-to date periods increased 82% and 47%,respectively, or approximately $0.7 million and $0.8 million, over the prioryear periods.  This increase wasprimarily attributable to intangible asset amortization expense related to theTexas Contracts acquisition in the second quarter of 2009, which totaledapproximately $0.6 million in both the current quarter and year-to-dateperiods.  We currently expect to recognize approximately $3.5million of intangible asset amortization expense related to the Texas Contractsacquisition in the second half of 2009.  The remaining increase related to capitalexpenditures in the current and prior periods for normal fixed asset additionsin our outsourced portal business, including Web servers, purchased softwareand office furniture and equipment to support and enhance corporate-wideinformation technology security and portal operations.

 

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INTEREST INCOME.  Interest incomereflects interest earned on our investable cash and investment portfolio.Interest income in the current quarter and year-to-date periods decreased 96%and 90%, respectively, or approximately $0.1 million and $0.4 million, from theprior year periods due primarily to the declining short-term interest rateenvironment and our current investment strategy to invest excess cash ingovernment-backed securities and treasury sweep accounts.  Furthermore, we have recently increased thebalances in several of our non-interest bearing commercial checking accounts inan effort to reduce bank fees, as the earnings credit we receive for holdingfunds in these accounts is higher than the interest rate we would receive frominvesting in government-backed securities. We currently expect interest income in 2009 to be lower than in 2008 dueto the lower short-term interest rate environment and our current investmentstrategy.

 

INCOME TAXES. Including the tax impact related to the nonrecurring gain onacquisition of business of approximately $1.2 million, our effective tax ratewas approximately 41% for the three- and six-month periods ended June 30,2009.

 

# **Liquidity and Capital Resources**

# ** **

*OperatingActivities*

 

Net cash provided byoperating activities was $17.2 million in the current period as compared to$8.9 million in the prior year period. The increase in cash flow from operations in the current period wasprimarily the result of a year-over-year increase in operating income,excluding non-cash charges for depreciation & amortization,stock-based compensation and a nonrecurring gain on acquisition of business(net of tax), combined with the timing of payments to certain of our governmentpartners, which affected accounts payable, and increases in accruedexpenses.  Post-acquisition activityrelated to the recently acquired Texas Contracts contributed approximately $2.0million of the increase in accounts payable and $2.0 million of the increase inaccrued expenses in the current period. In addition, the timing of payments related to tax filing applicationsin Hawaii contributed to an increase in accounts payable of approximately $6.5million in the current period.

 

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 carryforwardperiods.  We currently expect to fullyutilize our federal NOL carryforwards by the end of 2009.   For the six-month periods ended June 30,2009 and 2008, combined federal and state income tax payments totaledapproximately $0.8 million and $0.5 million, respectively.

 

*Investing Activities*

 

Investing activities inthe current period primarily reflect $1.5 million in cash paid to acquire theTexas Contracts and $1.3 million of capital expenditures, which were for normalfixed asset additions in our outsourced portal business, including Web servers,purchased software and office equipment. Cash provided by investing activitiesin the prior year period primarily reflects the partial liquidation of ourinvestment portfolio to pay the $15.7 million special cash dividend in February 2008,and $2.2 million of capital expenditures, which were primarily for normal fixedasset additions in our outsourced portal business.

 

*FinancingActivities*

 

Financingactivities in the current period primarily reflect payment of the $19.2 millionspecial cash dividend in February 2009, partially offset by tax deductionsof approximately $0.9 million related to stock-based compensation (see Note 8in the Notes to the Unaudited Consolidated Financial Statements included inthis Form 10-Q) and the receipt of $0.5 million in proceeds from ouremployee stock purchase program. Financing activities in the prior year period primarily reflect thepayment of the $15.7 million special cash dividend in February 2008,partially offset by the receipt of $1.9 million in proceeds from the exerciseof employee stock options for cash and

 

26

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$0.3 million in proceedsfrom our employee stock purchase program.

 

*Liquidity*

 

We recognizerevenue primarily from providing outsourced government portal services net ofthe transaction fees due to the government when the services are provided. Thefees that we must remit to the government are accrued as accounts payable andaccounts receivable at the time services are provided. As a result, tradeaccounts payable and accounts receivable reflect the gross amounts outstandingat the balance sheet dates.  Gross billingsfor the three-months ended June 30, 2009 and December 31, 2008 wereapproximately $613.4****million and$432.8 million, respectively.  TheCompany calculates days sales outstanding by dividing trade accounts receivableat the balance sheet date by gross billings for the period and multiplying theresulting quotient by the number of days in that period.  Days sales outstanding for thethree-month periods ended June 30, 2009 and  December 31,2008 were 6 and 8, respectively.

 

We believe that working capital is an importantmeasure of our short-term liquidity. Working capital, defined as current assets minus current liabilities,decreased to $41.8 million at June 30, 2009, from $53.5 million at December 31,2008.  Our current ratio, defined ascurrent assets divided by current liabilities, at June 30, 2009 was 1.7compared 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 first quarter of 2009 and, to a lesser extent, the acquisition of thecurrent Texas Contracts in the second quarter of 2009.

 

At June 30, 2009, our total cash and cash equivalent balance was$56.8 million compared to $60.4 million at December 31, 2008.  We believe that our currently availableliquid resources and cash generated from operations will be sufficient to meetour operating requirements, capital expenditure requirements, current growthinitiatives and special dividend payments for at least the next twelve months withoutthe need of additional capital.  We havea $10 million unsecured revolving credit facility with a bank.  This revolving credit facility is availableto finance working capital, issue letters of credit and finance generalcorporate purposes.  We can obtainletters of credit in an aggregate amount of $5 million, which reduces themaximum amount available for borrowing under the facility.  In total, we had $3.7 million in availablecapacity to issue additional letters of credit and $8.7 million of unusedborrowing capacity at June 30, 2009 under the facility.  The credit facility expires in May 2011.  However, letters of credit may have anexpiration date of up to one year beyond the expiration date of the creditagreement.

 

On February 27, 2009, we paid a special cash dividend of approximately$19.2 million out of available cash.  Wedo not currently believe that this dividend will have a significant effect onour future liquidity needs.  However, we may need to raise additional capitalwithin the next twelve months to further:

 

·                  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 projectionsof future earnings and cash flows are subject to substantial uncertainty. Ifour cash, 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 securities couldresult 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 of credit ascollateral for performance on certain of our outsourced government portal

 

27

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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 June 30, 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 collateralrequirements may increase.  Had we beenrequired to post 100% cash collateral at June 30, 2009 for the face valueof all performance bonds (which are partially supported by letters of credit)and our line of credit in conjunction with a corporate credit card agreement,unrestricted cash would have decreased by approximately $4.3 million and wouldhave been classified as restricted cash.

 

At June 30, 2009, we werebound by performance bond commitments totaling approximately $3.3 million oncertain 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 have off-balance sheetarrangements that are not recorded or disclosed in our financialstatements.  While we have significantoperating lease commitments for office space, those commitments are generallytied to the period of performance under related contracts.  We have income tax uncertainties ofapproximately $0.5 million at June 30, 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**

 

Refer to Note 1 in the Notes to the UnauditedConsolidated Financial Statements included in this Form 10-Q for adescription of recent accounting pronouncements.

 

28

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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 creditcrisis.  Due in part to these factors,our future interest income may fall short of expectations due to changes ininterest rates, 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 no changes in our internal control over financialreporting that occurred during our second fiscal quarter of 2009 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.**

 

29

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**PART II.OTHER INFORMATION**

 

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

 

(c)           During the secondquarter of 2009, the Company acquired shares of common stock surrendered byemployees to pay income taxes due upon the vesting of restricted stock asfollows:

 
| ****Date****       | **** **** | ****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**** | **** **** |
|--------------------|----------------|---------------------------------------------|----------------|----------------------------------------|----------------|---------------------------------------------------------------------------------------------------|----------------|-------------------------------------------------------------------------------------------------------------------------------|----------------|
| May 1,  2009  |           | 1,849                                       |           | $                                      | 5.57           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |
| May 6,  2009  |           | 1,812                                       |           | $                                      | 5.75           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |
| June 1,  2009 |           | 1,812                                       |           | $                                      | 7.00           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

The Company held itsAnnual Meeting of Shareholders on May 5, 2009.  At the meeting, the following matters werevoted upon by the shareholders:

 

1.               The election of seven (7) Directors to serve forthe upcoming year;

 

 

2.               A proposal to approve a plan of conversion toreincorporate from Colorado to Delaware;

 

 

3.               A proposal to include provisions in the Company’sDelaware certificate of incorporation authorizing an additional 20,000,000shares of capital stock designated as “blank check” preferred stock;

 

4.               A proposal to amend the 2006 Amended and RestatedStock Option and Incentive Plan;

 

5.               A proposal to ratify the appointment ofPricewaterhouseCoopers LLP as the Company’s independent registered publicaccountants for the fiscal year ending December 31, 2009; and

 

6.               A proposal to approve the adjournment of the AnnualMeeting, if necessary.

 

Prior to the AnnualMeeting, the Board of Directors consisted of eight directors.  Effective May 5, 2009, John L. Buncecompleted his term as a director of the Company having declined to stand forreelection.  Pursuant to the Company’sBylaws, the Board set the number of directors that shall constitute the Boardat seven, effective as of the date of the Annual Meeting.  The following were the Company’s nomineesvoted upon and elected by the holders of the Company’s common stock: Harry H.Herington, Art N. Burtscher, Daniel J. Evans, Jeffery S. Fraser, Ross C.Hartley, Alexander C. Kemper, and Pete Wilson. In the election of the directors, there were 55,730,088 votes “for”Harry H. Herington and 3,491,146 votes “withheld”; 56,694,943 votes “for” ArtN. Burtscher and 2,526,291 votes “withheld”; 56,348,496 votes “for” Daniel J.Evans and 2,872,738 votes “withheld”; 56,278,781 votes “for” Jeffery S. Fraserand 2,942,453 votes “withheld”; 56,567,279 votes “for” Ross C. Hartley and2,653,955 votes “withheld”; 56,334,222 votes “for” Alexander C. Kemper and2,887,012 votes “withheld”; and 56,725,105 votes “for” Pete Wilson and2,496,129 votes “withheld”.

 

The total votes castpertaining to the proposed plan of conversion to reincorporate from Colorado toDelaware were as follows: 34,157,402 votes “for”, 16,629,280 votes “against”;44,590 abstained and 8,389,691 broker non-votes.

 

30

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The total votes castpertaining to the proposed inclusion of a provision in the Company’s Delawarecertificate of incorporation authorizing an additional 20,000,000 shares ofcapital stock designated as “blank check” preferred stock were as follows:29,505,384 votes “for”, 21,262,919 votes “against”; 62,970 abstained and 8,389,691broker non-votes.  The affirmative voteof the holders of a majority of all outstanding shares of common stock entitledto vote thereon was required in order for this proposal to pass.  There were 63,827,355 shares outstanding andentitled to vote thereon; therefore, this proposal did not receive enoughaffirmative votes to pass.

 

The total votes castpertaining to the proposed amendment to the 2006 Amended and Restated StockOption and Incentive Plan to increase the number of shares of Common Stockwhich may be issued under the Plan from 9,286,754 to 14,286,754 shares were asfollows: 44,422,593 votes “for”, 6,136,305 votes “against”; 272,375 abstainedand 8,389,691 broker non-votes.

 

The total votes castpertaining to the ratification of the appointment of PricewaterhouseCoopers LLPas the Company’s independent registered public accountants for the fiscal yearending December 31, 2009 were as follows: 58,514,022 votes “for”, 648,426votes “against” and 58,786 abstained.

 

The total votes castpertaining to the adjournment of the Annual Meeting, if necessary orappropriate, to solicit additional proxies if there were not sufficient votesfor approval of certain non-routine voting items were as follows:  37,962,601 votes “for”, 20,426,396 votes “against”and 832,237 abstained.

 

**ITEM6.  EXHIBITS**

 

2.1 - Plan of Conversion,dated as of May 7, 2009 (1)

 

3.1- Certificate ofConversion, dated as of May 7, 2009 (1)

 

3.2 - Certificate ofIncorporation of NIC Inc., a Delaware corporation (1)

 

3.3 - Bylaws of NIC Inc.,a Delaware corporation (1)

 

10.1 - Form ofIndemnification Agreement (1)

 

10.2 – NIC Inc. 2006Amended and Restated Stock Option and Incentive Plan, as amended (1)

 

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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(1)**                                 **Filed as anexhibit with a corresponding exhibit number to the Form 8-K filed with theSEC on May 11, 2009 and incorporated herein by reference.

 

31

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Companyhas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 
|                        | NIC INC.                |
|-----------------------------|-------------------------|
|                        |                    |
| Dated: August 7,  2009 | /s/Stephen M. Kovzan    |
|                        | Stephen M. Kovzan       |
|                        | Chief Financial Officer |

 

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**NIC Inc.**

**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                |
|-------------|------------|-----------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Exhibit**                                                                                |
|        |       |                                                                                                      |
| 2.1         |       | Plan of Conversion,  dated as of May 7, 2009 (1)                                                     |
|        |       |                                                                                                      |
| 3.1         |       | Certificate of  Conversion, dated as of May 7, 2009 (1)                                              |
|        |       |                                                                                                      |
| 3.2         |       | Certificate of  Incorporation of NIC Inc., a Delaware corporation (1)                                     |
|        |       |                                                                                                      |
| 3.3         |       | Bylaws of NIC Inc., a  Delaware corporation (1)                                                           |
|        |       |                                                                                                      |
| 10.1        |       | Form of  Indemnification Agreement (1)                                                               |
|        |       |                                                                                                      |
| 10.2        |       | NIC Inc. 2006 Amended  and Restated Stock Option and Incentive Plan, as amended (1)                       |
|        |       |                                                                                                      |
| 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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(1)**                                 **Filed as an exhibit with a corresponding exhibit number to the Form 8-Kfiled with the SEC on May 11, 2009 and incorporated herein by reference.

 

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