** **

**UNITED STATES SECURITIESAND EXCHANGE COMMISSION**

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

# ** **

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

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

 

**Commission file number 000-26621**

 

**NIC INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                      | ** ** | **52-2077581**                         |
|-------------------------------------------------------------------|------------|----------------------------------------|
| (State or other  jurisdiction of

incorporation or  organization) |       | (I.R.S. Employer

Identification  No.) |

 

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

(Address of principal executive offices) (Zip Code)

 

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

 

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Indicate by 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 o  No x

 

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  No o

 

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 October 31,2009 was 63,205,112.

 

 

 

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**PART I- FINANCIAL INFORMATION**

**Item1.  Consolidated Financial Statements**

 

**NICINC.**

**CONSOLIDATEDBALANCE SHEETS**

**(UNAUDITED)**

**thousands**

 
| ** **                                                                                              | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| **ASSETS**                                                                                              | ** ** | ** **                  | ** ** | ** **                 | ** ** |
| Current  assets:                                                                                        |       |                        |       |                       |       |
| Cash  and cash equivalents                                                                              |       | $                           | 66,633     |                       | $          | 60,373 |   |
| Trade  accounts receivable                                                                              |       | 39,783                      |       | 37,497                     |       |
| Unbilled  revenues                                                                                      |       | 392                         |       | 359                        |       |
| Deferred  income taxes, net                                                                             |       | 1,199                       |       | 4,293                      |       |
| Prepaid  expenses & other current assets                                                       |       | 2,138                       |       | 2,273                      |       |
| Total  current assets                                                                                   |       | 110,145                     |       | 104,795                    |       |
| Property  and equipment, net                                                                            |       | 6,504                       |       | 6,641                      |       |
| Intangible  assets, net (Note 4)                                                                        |       | 3,743                       |       | 1,105                      |       |
| Deferred  income taxes, net                                                                             |       | 4,143                       |       | 6,727                      |       |
| Other  assets                                                                                           |       | 199                         |       | 144                        |       |
| Total  assets                                                                                           |       | $                           | 124,734    |                       | $          | 119,412 |   |
|                                                                                                    |       |                        |       |                       |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                          | ** ** | ** **                  | ** ** | ** **                 | ** ** |
| Current  liabilities:                                                                                   |       |                        |       |                       |       |
| Accounts  payable                                                                                       |       | $                           | 46,592     |                       | $          | 41,792 |   |
| Accrued  expenses                                                                                       |       | 13,320                      |       | 8,407                      |       |
| Application  development contracts                                                                      |       | 90                          |       | 202                        |       |
| Other  current liabilities                                                                              |       | 1,174                       |       | 898                        |       |
| Total  current liabilities                                                                              |       | 61,176                      |       | 51,299                     |       |
|                                                                                                    |       |                        |       |                       |       |
| Other  long-term liabilities                                                                            |       | 444                         |       | 894                        |       |
| Total  liabilities                                                                                      |       | 61,620                      |       | 52,193                     |       |
|                                                                                                    |       |                        |       |                       |       |
| Commitments  and contingencies (Notes 2, 5, 6 and 8)                                                    |       | —                      |       | —                     |       |
|                                                                                                    |       |                        |       |                       |       |
| Shareholders’  equity (Note 7):                                                                    |       |                        |       |                       |       |
| Common  stock, $0.0001 par, 200,000 shares authorized, 63,142 and 62,779 shares  issued and outstanding |       | 6                           |       | 6                          |       |
| Additional  paid-in capital                                                                             |       | 138,460                     |       | 154,194                    |       |
| Accumulated  deficit                                                                                    |       | (75,352                     | )          | (86,981                    | )          |
| Total  shareholders’ equity                                                                        |       | 63,114                      |       | 67,219                     |       |
| Total  liabilities and shareholders’ equity                                                        |       | $                           | 124,734    |                       | $          | 119,412 |   |

 

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

 

2

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**NICINC.**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(UNAUDITED)**

**thousandsexcept for per share amounts**

 
| ** **                                                                                         | ** ** | **Three-months ended** | ** ** | **Nine-months ended**  | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                         | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                         | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues:                                                                                          | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Portal  revenues                                                                                   |       | $                      | 36,236     |                   | $          | 24,147 |   | $ | 93,408 |   | $ | 72,564 |   |
| Software &  services revenues                                                             |       | 1,018                  |       | 794                    |       | 3,058 |   | 2,758 |   |
| Total  revenues                                                                                    |       | 37,254                 |       | 24,941                 |       | 96,466 |   | 75,322 |   |
| Operating  expenses:                                                                               |       |                   |       |                   |       |   |   |   |   |
| Cost  of portal revenues, exclusive of depreciation & amortization                             |       | 21,133                 |       | 13,502                 |       | 53,743 |   | 39,214 |   |
| Cost  of software & services revenues, exclusive of depreciation &  amortization |       | 609                    |       | 541                    |       | 1,847 |   | 1,681 |   |
| Selling &  administrative                                                                 |       | 6,163                  |       | 5,520                  |       | 19,589 |   | 17,305 |   |
| Nonrecurring  gain on acquisition of business, net of tax (Note 3)                                 |       | —                 |       | —                 |       | (2,184 | ) | — |   |
| Depreciation &  amortization                                                              |       | 2,779                  |       | 903                    |       | 5,347 |   | 2,648 |   |
| Total  operating expenses                                                                          |       | 30,684                 |       | 20,466                 |       | 78,342 |   | 60,848 |   |
| Operating  income                                                                                  |       | 6,570                  |       | 4,475                  |       | 18,124 |   | 14,474 |   |
| Other  income (expense):                                                                           |       |                   |       |                   |       |   |   |   |   |
| Interest  income                                                                                   |       | 3                      |       | 140                    |       | 48 |   | 583 |   |
| Other  expense, net                                                                                |       | —                 |       | (5                     | )          | — |   | (24 | ) |
| Total  other income (expense)                                                                      |       | 3                      |       | 135                    |       | 48 |   | 559 |   |
| Income  before income taxes                                                                        |       | 6,573                  |       | 4,610                  |       | 18,172 |   | 15,033 |   |
| Income  tax provision                                                                              |       | 2,453                  |       | 1,550                  |       | 6,543 |   | 5,805 |   |
| Net  income                                                                                        |       | $                      | 4,120      |                   | $          | 3,060 |   | $ | 11,629 |   | $ | 9,228 |   |
|                                                                                               |       |                   |       |                   |       |   |   |   |   |
| Basic  net income per share (Note 1)                                                               |       | $                      | 0.06       |                   | $          | 0.05 |   | $ | 0.18 |   | $ | 0.14 |   |
| Diluted  net income per share (Note 1)                                                             |       | $                      | 0.06       |                   | $          | 0.05 |   | $ | 0.18 |   | $ | 0.14 |   |
|                                                                                               |       |                   |       |                   |       |   |   |   |   |
| Weighted  average shares outstanding (Note 1):                                                     |       |                   |       |                   |       |   |   |   |   |
| Basic                                                                                              |       | 63,062                 |       | 62,724                 |       | 62,933 |   | 62,449 |   |
| Diluted                                                                                            |       | 63,179                 |       | 62,834                 |       | 63,019 |   | 62,689 |   |

 

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

 

3

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**NIC INC.**

**CONSOLIDATED STATEMENT OF CHANGES INSHAREHOLDERS’ 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                                                                                                     |       | —           |       | —      |       | —          |       | 11,629      |       | 11,629     |       |
| Cash  dividends on common stock (Note 7)                                                                        |       | —           |       | —      |       | (19,150         | )          | —      |       | (19,150    | )          |
| Shares  surrendered upon exercise of stock options and vesting of restricted stock to  satisfy tax withholdings |       | (95              | )          | —      |       | (648            | )          | —      |       | (648       | )          |
| Stock  option exercises and restricted stock vestings                                                           |       | 353              |       | —      |       | 90              |       | —      |       | 90         |       |
| Stock-based  compensation                                                                                       |       | —           |       | —      |       | 2,121           |       | —      |       | 2,121      |       |
| Tax  deductions relating to stock-based compensation (Note 9)                                                   |       | —           |       | —      |       | 1,388           |       | —      |       | 1,388      |       |
| Issuance  of common stock under employee stock purchase plan                                                    |       | 105              |       | —      |       | 465             |       | —      |       | 465        |       |
| **Balance, September 30, 2009**                                                                            |       | 63,142           |       | $           | 6          |            | $          | 138,460     |       | $          | (75,352    | ) | $ | 63,114 |   |

 

*The accompanying Notes to Unaudited ConsolidatedFinancial Statements are an integral part of these statements.*

 

4

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**NIC INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

**thousands**

 
| ** **                                                                                                                | ** ** | **Nine-months ended**  | ** **   |
|---------------------------------------------------------------------------------------------------------------------------|------------|------------------------|--------------|
| ** **                                                                                                                | ** ** | **September 30,** | ** **   |
| ** **                                                                                                                | ** ** | **2009**               | ** **   | **2008** | ** ** |
| Cash  flows from operating activities:                                                                                    |       |                   |         |   |   |
| Net  income                                                                                                               |       | $                      |  11,629 |   | $ |  9,228 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities,  excluding the effects of acquisition: |       |                   |         |   |   |
| Depreciation &  amortization                                                                                     |       | 5,347                  |         | 2,648 |   |
| Stock-based  compensation expense                                                                                         |       | 2,121                  |         | 1,829 |   |
| Application  development contracts                                                                                        |       | (112                   | )            | (107 | ) |
| Deferred  income taxes                                                                                                    |       | 4,504                  |         | 5,332 |   |
| Nonrecurring  gain on acquisition of business, net of tax (Note 3)                                                        |       | (2,184                 | )            | — |   |
| Loss  on disposal of property and equipment                                                                               |       | —                 |         | 24 |   |
| Changes  in operating assets and liabilities, net of acquisition:                                                         |       |                   |         |   |   |
| (Increase)  in trade accounts receivable                                                                                  |       | (2,286                 | )            | (5,132 | ) |
| (Increase)  decrease in unbilled revenues                                                                                 |       | (33                    | )            | 372 |   |
| Decrease  (increase) in prepaid expenses & other current assets                                                  |       | 246                    |         | (146 | ) |
| (Increase)  in other assets                                                                                               |       | (55                    | )            | (10 | ) |
| Increase  in accounts payable                                                                                             |       | 4,800                  |         | 7,638 |   |
| Increase  in accrued expenses                                                                                             |       | 4,146                  |         | 929 |   |
| Increase  in other current liabilities                                                                                    |       | 152                    |         | 918 |   |
| (Decrease)  increase in other long-term liabilities                                                                       |       | (450                   | )            | 322 |   |
| Net cash  provided by operating activities                                                                                |       | 27,825                 |         | 23,845 |   |
|                                                                                                                      |       |                   |         |   |   |
| Cash  flows from investing activities:                                                                                    |       |                   |         |   |   |
| Purchases  of property and equipment                                                                                      |       | (2,458                 | )            | (3,118 | ) |
| Capitalized  internal use software development costs                                                                      |       | (400                   | )            | (561 | ) |
| Purchases  of investments                                                                                                 |       | —                 |         | (1,000 | ) |
| Sales  and maturities of investments                                                                                      |       | —                 |         | 11,675 |   |
| Acquisition  of business (Note 3)                                                                                         |       | (1,500                 | )            | — |   |
| Net  cash (used in) provided by investing activities                                                                      |       | (4,358                 | )            | 6,996 |   |
|                                                                                                                      |       |                   |         |   |   |
| 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                                                                         |       | 90                     |         | 1,862 |   |
| Tax  deductions related to stock-based compensation (Note 9)                                                              |       | 1,388                  |         | — |   |
| Net  cash used in financing activities                                                                                    |       | (17,207                | )            | (13,567 | ) |
|                                                                                                                      |       |                   |         |   |   |
| Net  increase in cash and cash equivalents                                                                                |       | 6,260                  |         | 17,274 |   |
| Cash  and cash equivalents, beginning of period                                                                           |       | 60,373                 |         | 38,236 |   |
| Cash  and cash equivalents, end of period                                                                                 |       | $                      |  66,633 |   | $ |  55,510 |   |
|                                                                                                                      |       |                   |         |   |   |
| Other  cash flow information:                                                                                             |       |                   |         |   |   |
| Income  taxes paid                                                                                                        |       | $                      |  800    |   | $ |  577 |   |

 

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

 

5

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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 inconjunction with the audited consolidated financial statements and relatednotes and Management’s Discussion and Analysis of Financial Condition andResults of Operations included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008, filed with the SEC on March 13,2009, and Item 2. Management’s Discussion and Analysis of Financial Conditionand Results 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 accountingprinciples requires management to make estimates and assumptions that affectthe amounts reported in the consolidated financial statements and accompanyingnotes. Actual results could differ from those estimates. The results ofoperations for the three- and nine-month periods ended September 30, 2009are not necessarily indicative of the results to be expected for the full yearending 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 to increaseinternal efficiencies and provide a higher level of service to businesses andcitizens.  The Company accomplishes thiscurrently through two divisions: its primary portal outsourcing businesses andits 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 ethics &elections business and its Uniform Commercial Code (“UCC”) and corporatefilings software development business. The Company’s ethics & elections business, NIC Technologies,designs and develops online campaign expenditure and ethics compliance systemsfor federal and state government agencies. Currently, NIC Technologies isprimarily engaged in servicing its contracts with the Federal ElectionCommission and the state of Michigan. During the third quarter of 2009, NIC Technologies entered into a newcontract with the U.S. Department of Transportation, Federal Motor CarrierSafety Administration (“FMCSA”) to develop and manage a National Motor CarrierPre-Employment Screening System.

 

6

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The contract hasan initial one-year term, with four single-year renewals at the option of theFMCSA.  The Company’s UCC and corporatefilings software development business, NIC Conquest, is primarily a provider ofsoftware applications and services for electronic filings and documentmanagement solutions for the California Secretary of State and is not actively marketingits applications and services in respect of new engagements.  NIC offers UCC applications through severalof its state portals, typically through the Secretary of State’s office;however, transactional revenues associated with these applications are notassociated with NIC Conquest and are included in portal revenues.

 

*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.  In 2009, selling &administrative costs also include acquisition-related costs for the currentportal management contract in the state of Texas.  See Note 3 for additional informationregarding this acquisition.

 

Capitalized internal use software development costs are included inintangible assets in the Company’s consolidated balance sheets at September 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 authoritative guidance for fair value measurements, which defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  This authoritativeguidance does not require any new fair value measurements, but providesguidance on how to measure fair value by providing a fair value hierarchy usedto classify the source of the information. In February 2008, the FASB issued authoritative guidance whichallowed for the delay of the effective date of the authoritative guidance forfair value measurements for one year for all nonfinancial assets andliabilities, except those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis. The Company adopted the provisions of the guidance for financial assetsand liabilities effective January 1, 2008, and for nonfinancial assets andliabilities effective January 1, 2009. The adoption of these provisions did not have an impact on the unauditedconsolidated financial statements of the Company.

 

7

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Fair value isdefined as the exit price, or the amount that would be received to sell anasset or paid to transfer a liability in an orderly transaction between marketparticipants as of the measurement date. The guidance establishes a three-level hierarchy that prioritizes theinputs to valuation techniques used to measure the fair value of financialinstruments.  The valuation hierarchy isbased upon the transparency of inputs to the valuation of an asset or liabilityas of the measurement date.  The threelevels are defined 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 September 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 issuedauthoritative guidance to determine whether instruments granted in share-basedpayment transactions are participating securities.  Unvested share-based payment awards thatcontain non-forfeitable rights to dividends or dividend equivalents (whetherpaid or unpaid) are considered participating securities and are included in thecomputation of earnings per share pursuant to the two-class method for allperiods presented.  The two-class methodis an earnings allocation formula that treats a participating security ashaving rights to undistributed earnings that would otherwise have beenavailable to common shareholders.  TheCompany’s service-based restricted stock awards contain non-forfeitable rightsto dividends and are considered participating securities.  The Company adopted this standard effective January 1,2009.  Accordingly, service-basedrestricted stock awards were included in the calculation of earnings per shareusing the two-class method for the three-and nine-month periods ended September 30,2009 and 2008.  Unvestedservice-based restricted shares totaled approximately 1.1 million and 1.0million at September 30, 2009 and 2008, respectively.  Basic earnings per share is calculated byfirst allocating earnings between common shareholders and participatingsecurities.  Earnings attributable tocommon shareholders are divided by the weighted average number of common sharesoutstanding during the period.  Dilutedearnings per share is calculated by giving effect to dilutive potential commonshares outstanding during the period. The dilutive effect of stock options and the employee stock purchaseplan is determined based on the treasury stock method.  The dilutive effect of service-basedrestricted stock awards is based on the more dilutive of the treasury stockmethod or the two-class method assuming a reallocation of undistributedearnings to common shareholders after considering the dilutive effect ofpotential common shares other than the participating unvested restrictedawards.

 

8

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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):

 
| ** **                                          | ** ** | **Three months ended September 30,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                          | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| ** **                                          | ** ** | ** **                                | ** ** | **As  Originally  Reported** | ** ** | **Effect of  Change** | ** ** | **As  Adjusted** | ** ** |
| **Numerator:**                                      |       |                                      |       |   |   |   |   |   |   |
| Net  income                                         |       | $                                         | 4,120      |   | $ | 3,060 |   | $ | — |   | $ | 3,060 |   |
| Less:  Income allocated to participating securities |       | (67                                       | )          | — |   | (45 | ) | (45 | ) |
| Net  income available to common shareholders        |       | $                                         | 4,053      |   | $ | 3,060 |   | $ | (45 | ) | $ | 3,015 |   |
| **Denominator:**                                    |       |                                      |       |   |   |   |   |   |   |
| Weighted  average shares — basic               |       | 63,062                                    |       | 62,724 |   | — |   | 62,724 |   |
| Stock  options and restricted shares                |       | 117                                       |       | 247 |   | (137 | ) | 110 |   |
| Weighted  average shares — diluted             |       | 63,179                                    |       | 62,971 |   | (137 | ) | 62,834 |   |
|                                                |       |                                      |       |   |   |   |   |   |   |
| **Basic earnings per share:**                       |       |                                      |       |   |   |   |   |   |   |
| Net  income                                         |       | $                                         | 0.06       |   | $ | 0.05 |   | $ | (0.00 | ) | $ | 0.05 |   |
|                                                |       |                                      |       |   |   |   |   |   |   |
| **Diluted net income per share:**                   |       |                                      |       |   |   |   |   |   |   |
| Net  income                                         |       | $                                         | 0.06       |   | $ | 0.05 |   | $ | (0.00 | ) | $ | 0.05 |   |
|                                                |       |                                      |       |   |   |   |   |   |   |
| ** **                                          | ** ** | **Nine months ended September 30,**  | ** ** |
| ** **                                          | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| ** **                                          | ** ** | ** **                                | ** ** | **As  Originally  Reported** | ** ** | **Effect of  Change** | ** ** | **As  Adjusted** | ** ** |
| **Numerator:**                                      |       |                                      |       |   |   |   |   |   |   |
| Net  income                                         |       | $                                         | 11,629     |   | $ | 9,228 |   | $ | — |   | $ | 9,228 |   |
| Less:  Income allocated to participating securities |       | (290                                      | )          | — |   | (200 | ) | (200 | ) |
| Net  income available to common shareholders        |       | $                                         | 11,339     |   | $ | 9,228 |   | $ | (200 | ) | $ | 9,028 |   |
| **Denominator:**                                    |       |                                      |       |   |   |   |   |   |   |
| Weighted  average shares — basic               |       | 62,933                                    |       | 62,449 |   | — |   | 62,449 |   |
| Stock  options and restricted shares                |       | 86                                        |       | 415 |   | (175 | ) | 240 |   |
| Weighted  average shares — diluted             |       | 63,019                                    |       | 62,864 |   | (175 | ) | 62,689 |   |
|                                                |       |                                      |       |   |   |   |   |   |   |
| **Basic earnings per share:**                       |       |                                      |       |   |   |   |   |   |   |
| Net  income                                         |       | $                                         | 0.18       |   | $ | 0.15 |   | $ | (0.01 | ) | $ | 0.14 |   |
|                                                |       |                                      |       |   |   |   |   |   |   |
| **Diluted net income per share:**                   |       |                                      |       |   |   |   |   |   |   |
| Net  income                                         |       | $                                         | 0.18       |   | $ | 0.15 |   | $ | (0.01 | ) | $ | 0.14 |   |

 

Outstanding stockoptions totaling approximately 20,000 shares for each of the three- andnine-month periods ended September 30, 2008 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.  There were no outstanding stock optionsexcluded from the computation of diluted weighted average shares outstandingduring 2009.

 

9

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*Concentrationof credit risk*

 

Financial instruments that potentially subjectthe Company to significant concentrations of credit risk consist primarily ofcash 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 September 30,2009, the amount of cash in domestic non-interest bearing commercial checkingaccounts was approximately $59.3 million, while the amount of cash held ininterest-bearing sweep accounts and money market funds was approximately $7.3million.  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 revisedthe authoritative guidance for business combinations, and established newprinciples and requirements for how the acquirer in a business combinationrecognizes and measures in its financial statements identifiable assetsacquired, liabilities assumed, and any noncontrolling interest in the acquiree;recognizes and measures goodwill acquired in the business combination or a gainfrom a bargain purchase; and determines what information should be disclosed toenable users of the financial statements to evaluate the nature and financialeffects of the business combination.  Theguidance changes the accounting treatment for certain specificacquisition-related items including: expensing acquisition-related costs as incurred,valuing non-controlling interests at fair value at the acquisition date, andexpensing restructuring costs associated with an acquired business.  The guidance was effective for the Company asof January 1, 2009 and will be applied prospectively to businesscombinations that have an acquisition date on or after January 1,2009.  See Note 3.

 

In May 2009, the FASB issuedauthoritative guidance which establishes general standards of accounting forand disclosures of events that occur after the balance sheet date but beforefinancial statements are issued or are available to be issued.  Although there is new terminology, thestandard is based on the same principles as those that currently exist in theauditing standards.  The guidance, whichincludes a new required disclosure of the date through which an entity hasevaluated subsequent events, was adopted by the Company during the interimperiod ended June 30, 2009.  TheCompany has performed an evaluation of subsequent events through November 5,2009.

 

**2. OUTSOURCED GOVERNMENT PORTAL CONTRACTS**

 

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

 

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

 

10

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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 31%and 36% of the Company’s portal revenues for the three and nine-month periodsended September 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 its portal.  In addition, the loss of one or more of theCompany’s larger state portal partners, such as Alabama, Arkansas, Colorado,Indiana, Kentucky, Tennessee, Texas, Utah or Virginia, as a result of theexpiration, termination or failure to renew the respective contract, if suchpartner is not replaced, could significantly reduce the Company’s revenues andprofitability.

 

At September 30, 2009, the Company was bound by performance bondcommitments totaling approximately $4.5 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 September 30, 2009 together with the yearthe Company commenced providing services to the state:

 
| **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                         |       | 8/31/2016                                               |
| 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                         |       | 8/19/2012 (8/19/2015)                                   |
| 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                         |       | 11/30/2009                                              |
| 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)                                 |

 

During the thirdquarter of 2009, the Company entered into a new seven-year contract with thestate of Texas to manage the state’s official government portal.  The new contract commences on January 1,2010 and runs through August 31, 2016. As discussed in Note 3, the Company acquired the current portalmanagement contracts for the state of Texas during the second quarter of 2009,which contracts expire on December 31, 2009, except that certain masterwork order projects expire on August 31, 2012 and other master work orderprojects expire on August 31, 2014. The new seven-year contract commencing January 1, 2010 will haveterms substantially different than the current Texas portal management contractsacquired in the second quarter of 2009.  The Company also received a new three-yearcontract from the state of Kentucky, which includes options for the governmentto extend the contract for three additional one-year renewal terms.

 

11

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**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’sright, title and interest in and to the following:

 
| (1) | the Texas Electronic Framework Agreement dated May 5, 2000, as  amended and renewed, between the Department of Information Resources, an  agency of the state of Texas (“DIR”), and the predecessor to BearingPoint  (“Framework Agreement”), and related service level agreements with various  governmental agencies and entities in the State of Texas (“Service Level  Agreements”) (all of which expire on December 31, 2009); |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | the Master Work Order Agreement dated May 17, 2008 (“Master  Work Order”), including the underlying Master Work Order Projects attached  thereto as exhibits (“Master Work Order Projects”), between the DIR and  BearingPoint (with certain Master Work Order Projects expiring  August 31, 2012 and others expiring August 31, 2014); and                                                                                              |
| (3) | certain contracts with subcontractors and service providers relating  to the provision of products and services pursuant to Framework Agreement,  the Service Level Agreements and the Master Work Order. In addition, the  Company is licensing from Deloitte certain intellectual property relating to  the acquired contracts.                                                                                                                                           |

 

The Company paid Deloitte $1.5 million in cash in exchange for 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.  Accordingly, net assets wererecorded at their estimated fair values. The preliminary fair value of the identifiable assets acquired andliabilities assumed exceeded the fair value of the consideration paid,resulting in a bargain purchase. Consequently, the Company reassessed the recognition and measurement ofidentifiable assets acquired and liabilities assumed and concluded that thevaluation procedures and resulting measures appropriately reflected allavailable information as of the acquisition date.  As a result, the Company recognized apreliminary, 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 statement of income for the nine-month period ended September 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.  Based on additional information the Companyobtained during the three-month period ended September 30, 2009, theCompany recorded an immaterial retroactive adjustment to the fair valuemeasurement for prepaid expenses & other current assets.  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                       |       | 111                   |       |
| Accrued  expenses                                                       |       | (119                  | )          |
| Other  current liabilities                                              |       | (124                  | )          |
| Deferred  tax liability on nonrecurring gain on acquisition of business |       | (1,174                | )          |
| Net  assets acquired                                                    |       | 3,684                 |       |
| Purchase  price                                                         |       | 1,500                 |       |
| Nonrecurring  gain on acquisition of business (net of tax)              |       | $                     | 2,184      |   |

 

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 September 30, 2009, the balance ofthe deferred tax liability was approximately $0.5 million and is included indeferred income taxes, net, a noncurrent asset in the consolidated balance sheet.

 

Results of operations ofthe acquired business included in the Company’s consolidated statements ofincome for the three- and nine-month periods ended September 30, 2009 wereas follows (in thousands):

 
| ** **                                                 | ** ** | **Three months  ended September  30, 2009** | ** ** | **Nine months  ended September  30, 2009** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| Portal  revenues                                           |       | $                                           | 8,773      |                                       | $          | 11,656 |   |
|                                                       |       |                                        |       |                                       |       |
| Operating  expenses:                                       |       |                                        |       |                                       |       |
| Cost  of portal revenues                                   |       | 5,622                                       |       | 7,655                                      |       |
| Nonrecurring  gain on acquisition of business (net of tax) |       | —                                      |       | (2,184                                     | )          |
| Depreciation  and amortization                             |       | 1,769                                       |       | 2,399                                      |       |
| Total  operating expenses                                  |       | 7,391                                       |       | 7,870                                      |       |
| Operating  income/income before income taxes               |       | 1,382                                       |       | 3,786                                      |       |
| Income  tax expense                                        |       | (515                                        | )          | (599                                       | )          |
| Net  income                                                |       | $                                           | 867        |                                       | $          | 3,187 |   |

 

The Company recognized approximately $0.5 million ofacquisition-related costs, including legal, accounting, and valuation services,in the second quarter of 2009.  Thesecosts are included in selling & administrative expenses in theconsolidated statements of income for the nine-month period ended September 30,2009.  The Company’s rights under theFramework Agreement and Service Level Agreements will be amortized over sevenmonths and the Company’s rights under the Master Work Order will be amortizedover 39 months, reflecting the remaining contract terms for the agreements. For additional information on the Company’s intangible assets, see Note4.

 

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.

 
| ** **                                 | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands, except per share  data)** | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| Revenues                                   |       | $                                         | 110,843    |   | $ | 101,658 |   |
| Net  income                                |       | 12,157                                    |       | 12,366 |   |
| Net  income per common share               |       |                                      |       |   |   |
| Basic                                      |       | $                                         | 0.19       |   | $ | 0.20 |   |
| Diluted                                    |       | $                                         | 0.19       |   | $ | 0.20 |   |

 

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 September 30,2009 and December 31, 2008 consisted of the following (in thousands):

 
| ** **                                 | ** ** | **September 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 (Texas) |       | $                           | 3,940      |                          | $          | (2,289               | )          | $ | 1,651 |   | $ | — |   | $ | — |   | $ | — |   | 7 months |   |
|                                       |       |                        |       |                          |       |                 |       |   |   |   |   |   |   |   |   |
| Rights  to the Master Work Order (Texas)   |       | 1,050                       |       | (110                          | )          | 940                  |       | — |   | — |   | — |   | 39 months |   |
|                                       |       |                        |       |                          |       |                 |       |   |   |   |   |   |   |   |   |
| Capitalized  software                      |       | 1,956                       |       | (804                          | )          | 1,152                |       | 1,555 |   | (450 | ) | 1,105 |   | 36 months |   |
|                                       |       |                        |       |                          |       |                 |       |   |   |   |   |   |   |   |   |
|                                       |       | $                           | 6,946      |                          | $          | (3,203               | )          | $ | 3,743 |   | $ | 1,555 |   | $ | (450 | ) | $ | 1,105 |   |   |   |

 

Amortization expensetotaling approximately $1.9 million and $2.8 million for the three- andnine-month periods ended September 30, 2009, respectively, is included indepreciation and amortization in the consolidated statements of income.  Amortization expense totaling approximately$0.1 million and $0.2 million for the three- and nine-month periods ended September 30,2008, respectively, is included in depreciation and amortization in theconsolidated statements of income.  TheCompany expects to recognize approximately $1.7 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 $0.1million of intangible asset amortization expense related to capitalizedsoftware during the fourth quarter of 2009. The estimated amortization expenserelated to 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 September 30,2009.  The Company issues letters ofcredit as collateral for performance on certain of its outsourced governmentportal contracts, as collateral for certain performance bonds and as collateralfor certain office leases.  The Companyhas never had any defaults resulting in draws on performance bonds or lettersof credit.  In total, the Company and itssubsidiaries had unused outstanding letters of credit of approximately $1.3million at September 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 unused borrowingcapacity at September 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, whowas then the Company’s Chairman of the Board and Chief Executive Officer, thatthese expense reimbursement deficiencies were isolated to Mr. Fraser andthat 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 investigationconducted by 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, the SEC subsequentlyexpanded the scope of its inquiry with respect to Mr. Fraser to cover theperiod commencing with the Company’s initial public offering in 1999 throughthe beginning of the Review Period (the "Extended ReviewPeriod").  The NIC Audit Committeeis currently conducting its own review of expense reimbursements to Mr. Fraserduring the Extended Review Period and is unable at this time to comment on theextent of any misreporting of expenses during that period. 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.

 

15

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*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.

 

**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. Thereincorporation did not result in a change in the trading status of the Company’scommon stock, which continues to trade on the NASDAQ Global Select Market underthe symbol “EGOV.” In addition, the reincorporation did not affect any of theCompany’s material contracts with any third parties. In accordance with theplan of conversion, the directors and executive officers of the Companycontinue to serve for the terms for which they were elected or appointed.  The reincorporation did not alter anyshareholder’s percentage ownership interest or number of shares of common stockowned in the Company. Pursuant to the plan of conversion, each share of commonstock in the Colorado-incorporated Company, no par value, automaticallyconverted into one share of common stock in the Delaware-incorporated Company,par value $0.0001 per share. Accordingly, shareholders were not required toundertake any exchange of the Company’s shares of common stock. In addition,each outstanding option to purchase shares of the Colorado-incorporated Company’scommon stock under the Company’s stock benefit plans automatically convertedinto an option to purchase the same number of shares of common stock of theDelaware-incorporated Company.  As a result of the change in par value of theCompany’s common stock, the Company reclassified approximately $6,000 fromadditional paid-in capital to common stock in its consolidated balance sheet atDecember 31, 2008.  For additionalinformation on the Company’s reincorporation to Delaware, refer to the Company’sForm 8-K filed with the 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 service-based restricted stock granted under theCompany’s 2006 Stock Option and Incentive Plan. The dividend 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. UNCERTAIN TAX POSITIONS**

 

TheCompany, along with its wholly owned subsidiaries, files a consolidated U.S.federal income tax return and separate income tax returns in many statesthroughout the U.S.  The Company’s taxreturns are not currently under examination by any of these taxauthorities.  The Company remains subjectto U.S. federal examination for the tax years ended on or after December 31,2006.  State income tax returns aregenerally subject to examination for a period of three to five years afterfiling of the respective return.

 

16

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A reconciliation of the beginning and ending amount of the consolidatedliability for unrecognized income tax benefits is as follows (in thousands):

 
| ** **                                  | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                  | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                  |       |                                       |       |                                      |       |   |   |   |   |
| Beginning  balance                          |       | $                                          | 468        |                                      | $          | 714 |   | $ | 468 |   | $ | 714 |   |
| Additions  for tax positions of prior years |       | 1                                          |       | 1                                         |       | 1 |   | 1 |   |
| Expiration  of the statute of limitations   |       | (136                                       | )          | (247                                      | )          | (136 | ) | (247 | ) |
| Ending  balance                             |       | $                                          | 333        |                                      | $          | 468 |   | $ | 333 |   | $ | 468 |   |

 

All of the Company’s unrecognized income tax benefits would affect theCompany’s effective tax rate if recognized. For the three- and nine-month periods ended September 30, 2009, theliability for unrecognized income tax benefits decreased by approximately $0.1million for tax years that have closed. For the three- and nine-month periods ended September 30, 2008, theliability for unrecognized income tax benefits decreased by approximately $0.2million, as the Company considered additional information relating to itsuncertain tax positions.  It is expectedthat the amount of unrecognized tax benefits will change in the next 12months.  However, the Company does notexpect the change to have a significant impact on its results of operations orfinancial condition.

 

The Company recognizes accrued interest and penalties associated withuncertain tax positions as part of its income tax provision in the consolidatedstatements of income.  At September 30,2009 and 2008, accrued interest and penalty amounts were not material.

 

**9. STOCK BASED COMPENSATION**

 

*Restricted Stock*

 

During the third quarterof 2009, the Board of Directors of the Company granted certain management-levelemployees and non-employee directors service-based restricted stock awardstotaling 292,465 shares, with a grant-date fair value of $7.91 per share,totaling approximately $2.3 million. During the nine-month period ended September 30, 2009, the Board ofDirectors of the Company granted certain management-level employees, executiveofficers and non-employee directors service-based restricted stock awardstotaling 481,648 shares, with a grant date fair value totaling approximately$3.4 million.  Such restricted stockawards vest beginning one year from the date of grant in cumulative annualinstallments of 25%.  Restricted stock isvalued at the date of grant, based on the closing market price of the Company’scommon stock, and expensed using the straight-line method over the requisiteservice 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.  Shares granted represent the maximum numberof shares able to be earned by the executive officers at the end of athree-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 oninvested capital (three-year average) — 50% weighting

 

17

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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-basedrestricted stock is valued at the date of grant, based on the closing marketprice of the Company’s common stock, and expensed over the requisite serviceperiod, beginning on the date of grant, based upon the probable number ofshares expected to vest.

 

The following table presents stock-basedcompensation expense included in the Company’s consolidated statements ofincome for the three- and nine-month periods ended September 30 (inthousands):

 
| ** **                                                                                  | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| Cost  of portal revenues, exclusive of depreciation & amortization                 |       | $                                          | 167        |                                      | $          | 183 |   | $ | 529 |   | $ | 528 |   |
| Cost  of software & services revenues, exclusive of depreciation and  amortization |       | 8                                          |       | 11                                        |       | 25 |   | 21 |   |
| Selling &  administrative                                                          |       | 555                                        |       | 407                                       |       | 1,549 |   | 1,212 |   |
|                                                                                        |       |                                       |       |                                      |       |   |   |   |   |
| Stock-based  compensation expense before income taxes                                       |       | 730                                        |       | 601                                       |       | 2,103 |   | 1,761 |   |
|                                                                                        |       |                                       |       |                                      |       |   |   |   |   |
| Income  tax benefit                                                                         |       | (285                                       | )          | (235                                      | )          | (821 | ) | (688 | ) |
|                                                                                        |       |                                       |       |                                      |       |   |   |   |   |
| Net  stock-based compensation expense                                                       |       | $                                          | 445        |                                      | $          | 366 |   | $ | 1,282 |   | $ | 1,073 |   |

 

*Income Taxes*

 

Under authoritative guidance related to theaccounting for stock-based compensation, the Company is permitted to recognizea credit to additional paid-in capital for federal income tax deductions, orwindfall tax benefits, resulting from the exercise of non-qualified stockoptions or vesting of restricted stock if such windfall tax benefits reduceincome taxes payable.  Following thewith-and-without approach for utilization of tax attributes, which results inwindfall tax benefits being utilized after utilization of available tax NOLcarryforwards to offset current year taxable income, the Company increaseddeferred tax assets and additional paid-in capital for windfall tax benefitstotaling approximately $0.4 million and $1.4 million during the three- andnine-month periods ended September 30, 2009.

 

**10. 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 ethics & elections filings business(NIC Technologies), which designs and develops online campaign expenditure andethics compliance systems for the Federal Election Commission and the state ofMichigan, and 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.  Each of the Company’sSoftware & Services businesses is an operating segment and has beenaggregated to form the

 

18

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Software & Services reportable segment. Unallocatedcorporate-level expenses are reported in the reconciliation of the segmenttotals to the related consolidated totals as “Other Reconciling Items.”  There have been no significant intersegmenttransactions for the periods reported.

 

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

 

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

 
| ** **                            | ** ** | **Outsourced  Portals** | ** ** | **Software  &  Services** | ** ** | **Other  Reconciling  Items** | ** ** | **Consolidated  Total** | ** ** |
|---------------------------------------|------------|-------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------|------------|
| **2009**                              | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues                              |       | $                       | 36,236     |                          | $          | 1,018                         |       | $                       | —     |   | $ | 37,254 |   |
|                                  | ** ** | ** **              |       |                          | ** ** | ** **                    |       |                    |       |
| Costs &  expenses            |       | 22,625                  |       | 737                           |       | 4,543                         |       | 27,905                  |       |
| Depreciation &  amortization |       | 2,658                   |       | 17                            |       | 104                           |       | 2,779                   |       |
| Operating  income (loss)              |       | $                       | 10,953     |                          | $          | 264                           |       | $                       | (4,647     | ) | $ | 6,570 |   |
|                                  | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **              | ** ** |
|                                  |       |                    |       |                          |       |                          |       |                    |       |
| **2008**                              | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues                              |       | $                       | 24,147     |                          | $          | 794                           |       | $                       | —     |   | $ | 24,941 |   |
|                                  | ** ** | ** **              |       |                          | ** ** | ** **                    |       |                    |       |
| Costs &  expenses            |       | 14,319                  |       | 411                           |       | 4,833                         |       | 19,563                  |       |
| Depreciation &  amortization |       | 782                     |       | 24                            |       | 97                            |       | 903                     |       |
| Operating  income (loss)              |       | $                       | 9,046      |                          | $          | 359                           |       | $                       | (4,930     | ) | $ | 4,475 |   |

 

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

 
| ** **                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Total  operating income for reportable segments |       | $        | 6,570      |     | $          | 4,475 |   |
| Interest  income                                |       | 3        |       | 140      |       |
|                                            |       |     |       |     |       |
| Consolidated  income before income taxes        |       | $        | 6,573      |     | $          | 4,610 |   |

 

19

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

 
| ** **                                                 | ** ** | **Outsourced  Portals** | ** ** | **Software  &  Services** | ** ** | **Other  Reconciling  Items** | ** ** | **Consolidated  Total** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------|------------|
| **2009**                                                   | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues                                                   |       | $                       | 93,408     |                          | $          | 3,058                         |       | $                       | —     |   | $ | 96,466 |   |
|                                                       | ** ** | ** **              |       |                          | ** ** | ** **                    |       |                    |       |
| Costs &  expenses                                 |       | 57,648                  |       | 2,256                         |       | 15,275                        |       | 75,179                  |       |
| Depreciation &  amortization                      |       | 4,994                   |       | 48                            |       | 305                           |       | 5,347                   |       |
| Nonrecurring  gain on acquisition of business (net of tax) |       | (2,184                  | )          | —                        |       | —                        |       | (2,184                  | )          |
| Operating  income (loss)                                   |       | $                       | 32,950     |                          | $          | 754                           |       | $                       | (15,580    | ) | $ | 18,124 |   |
|                                                       | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **              | ** ** |
|                                                       |       |                    |       |                          |       |                          |       |                    |       |
| **2008**                                                   | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues                                                   |       | $                       | 72,564     |                          | $          | 2,758                         |       | $                       | —     |   | $ | 75,322 |   |
|                                                       | ** ** | ** **              |       |                          | ** ** | ** **                    |       |                    |       |
| Costs &  expenses                                 |       | 42,440                  |       | 2,282                         |       | 13,478                        |       | 58,200                  |       |
| Depreciation &  amortization                      |       | 2,314                   |       | 66                            |       | 268                           |       | 2,648                   |       |
| Operating  income (loss)                                   |       | $                       | 27,810     |                          | $          | 410                           |       | $                       | (13,746    | ) | $ | 14,474 |   |

 

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

 
| ** **                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Total  operating income for reportable segments |       | $        | 18,124     |     | $          | 14,474 |   |
| Interest  income                                |       | 48       |       | 583      |       |
| Other  expense, net                             |       | —   |       | (24      | )          |
|                                            |       |     |       |     |       |
| Consolidated  income before income taxes        |       | $        | 18,172     |     | $          | 15,033 |   |

 

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

 

***FORWARD-LOOKINGSTATEMENTS***

 

# **“Safe Harbor” statement under the PrivateSecurities Litigation Reform Act of 1995: Statements in this Quarterly Reporton Form 10-Q regarding NIC and its business, which are not current orhistorical facts, are “forward-looking statements” that involve risks anduncertainties.  Forward-lookingstatements include, but are not limited to, statements of plans and objectives,statements of future economic performance or financial projections, statementsof assumptions underlying such statements, and statements of the Company’s ormanagement’s intentions, hopes, beliefs, expectations or predictions of thefuture.  For example, statements like we “expect,”we “believe,” we “plan,” we “intend” or we “anticipate” are forward-lookingstatements. Investors should be aware that our actual operating results andfinancial performance may differ materially from our expressed expectationsbecause of risks and uncertainties about the future including those risksdiscussed in this Quarterly Report on Form 10-Q and in our 2008 AnnualReport on Form 10-K filed with the Securities and Exchange Commission (“SEC”)on March 13, 2009.**

# ** **

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, NIC’s ability tosuccessfully integrate into its operations the recently acquired current portalmanagement contracts and the new portal management contract with governmentagencies in the state of Texas, which are discussed in Notes 2 and 3 in theNotes to the Unaudited Consolidated Financial Statements included in this Form 10-Q;the success of the Company in signing contracts with new states and governmentagencies, including continued favorable government legislation; NIC’s abilityto develop new services; existing states and agencies adopting those newservices; 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.

 

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.

 

**WHAT WEDO — AN EXECUTIVE SUMMARY**

 

We are a leading provider of eGovernment services that help governments usethe 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 by expandingthe distribution of their information assets and increasing the number offinancial 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 percentageof fees retained by us, or to the amounts charged for the services offered,could adversely 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 31%and 36% of our portal revenues for the three and nine-month periods ended September 30,2009, respectively.  In the event thatany of these contracts would be terminated without cause, the terms of therespective contract may require the government to pay a fee to us in order tocontinue to use our software in its portal. In addition, the loss of one or more of our larger state portalpartners, such as Alabama, Arkansas, Colorado, Indiana, Kentucky, Tennessee,Texas, Utah or Virginia, as a result of the expiration, termination or failureto renew the respective contract, if such partner is not replaced, could significantlyreduce our revenues and profitability.

 

*Texas PortalManagement Contracts*

 

As discussed in Note 3 in the Notes to the Unaudited ConsolidatedFinancial Statements, we acquired the current portal management contracts forthe state of Texas during the second quarter of 2009, which contracts expire onDecember 31, 2009, except that certain master work order projects expireon August 31, 2012 and other master work order projects expire on August 31,2014 (collectively, the “Acquired Texas Contracts”).

 

As discussed in Note 2 in the Notes to the Unaudited ConsolidatedFinancial Statements, during the third quarter of 2009 we entered into a newseven-year contract with the state of Texas to manage the state’s officialgovernment portal (the “New Texas Contract”). The New Texas Contract commences on January 1, 2010 and runsthrough August 31, 2016.  We willnot begin earning revenues under the New Texas Contract until 2010. The NewTexas Contract will have terms substantially different than the Acquired TexasContracts.

 

**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 ethics &elections business with the Federal Election Commission and the state ofMichigan and our UCC and corporate filings business with the CaliforniaSecretary of State.  We currently deriverevenues from three main sources: transaction-based fees, time andmaterials-based fees for application development, and fixed fees for portalmanagement services.  Each of theserevenue types and the corresponding business models are further describedbelow.

 

#### *Ourportal 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 predictable and 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 

 

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predictable andrecurring.  For a representative listingof non-DMV services we currently offer through our portals, refer to Part I,Item 1 in our Form 10-K for the year ended December 31, 2008, filedwith the SEC on March 13, 2009.

 

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

 

 

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

 

*Our software & servicesbusinesses*

 

NICTechnologies

 

Our ethics &elections business, NIC Technologies, currently derives the majority of itsrevenues from time and materials application development and maintenanceoutsourcing contracts and recognizes revenues as services are provided.  At September 30, 2009, our ethics &elections business was primarily engaged in servicing its contracts with theFederal Election Commission and the state of Michigan.  During the third quarter of 2009, NICTechnologies entered into a new contract with the U.S. Department ofTransportation, Federal Motor Carrier Safety Administration (“FMCSA”) todevelop and manage a National Motor Carrier Pre-Employment ScreeningSystem.  The contract has an initialone-year term, with four single-year renewals at the option of the FMCSA.  The system will be developed and maintainedusing a self-funded, transaction-based business model.

 

# **NIC Conquest**

# ** **

Our UCC and corporate filings software development business, NIC Conquest,derives the majority of its revenues from fixed-price application developmentcontracts and recognizes revenues on the percentage of completion method.  At September 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.

 

**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 Acquired Texas Contracts, as further discussed in Note 3 inthe Notes to the Unaudited Consolidated Financial Statements included in this Form 10-Q,we have significant intangible assets on our consolidated balance sheet at September 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.  Intangible assets are amortized over theirestimated useful lives, which approximates the underlying contractual terms ofthe assets.  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 

 

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recognized for the amountby which the carrying value of the intangible asset exceeds its estimated fairvalue.  There is considerable judgmentnecessary to determine future cash flows, and accordingly, actual results couldvary significantly from such estimates.

 

# **RESULTS OF OPERATIONS**

# ** **

The following discussionsummarizes the significant factors affecting operating results for the three-and nine-month periods ended September 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.

 
| ** **                                                              | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **Key Financial Metrics**                                               | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenue growth — outsourced portals                                |       | 50                                         | %          | 17                                        | %          | 29 | % | 19 | % |
| Same state revenue growth — outsourced portals                     |       | 14                                         | %          | 10                                        | %          | 12 | % | 12 | % |
| Recurring portal revenue %                                              |       | 87                                         | %          | 94                                        | %          | 89 | % | 92 | % |
| Gross profit % - outsourced portals                                     |       | 42                                         | %          | 44                                        | %          | 42 | % | 46 | % |
| Selling & administrative expenses as % of  portal revenues     |       | 17                                         | %          | 23                                        | %          | 21 | % | 24 | % |
| Operating income margin % (operating income as a %  of portal revenues) |       | 18                                         | %          | 19                                        | %          | 19 | % | 20 | % |

 

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  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **2009**                                   | ** ** | **%  Change**                             | ** ** | **2008** | ** ** | **2009** | ** ** | **%  Change** | ** ** | **2008** | ** ** |
| DMV transaction-based       |       | $                                          | 15,862     |                                      | 35         | % | $ | 11,745 |   | $ | 41,403 |   | 17 | % | $ | 35,445 |   |
| Non-DMV transaction-based   |       | 13,745                                     |       | 56                                        | %          | 8,800 |   | 35,702 |   | 40 | % | 25,427 |   |
| Portal management           |       | 1,883                                      |       | (11                                       | )%         | 2,104 |   | 5,674 |   | (9 | )% | 6,238 |   |
| Portal software development |       | 4,746                                      |       | 217                                       | %          | 1,498 |   | 10,629 |   | 95 | % | 5,454 |   |
|                        |       |                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Total                       |       | $                                          | 36,236     |                                      | 50         | % | $ | 24,147 |   | $ | 93,408 |   | 29 | % | $ | 72,564 |   |

 

Portal revenues in thecurrent quarter increased 50%, or approximately $12.1 million, over the prioryear quarter.  Of this increase, 36%, orapproximately $8.8 million, was attributable to our Acquired Texas Contracts,which we acquired in May 2009, and 14%, or approximately $3.3 million, wasattributable to an increase in same state portal revenues (outsourced portalsin operation and generating recurring revenues for two full periods).  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 theAcquired Texas 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 remaining flat and samestate non-DMV transaction-based revenues increasing 27% (primarily due to theaddition of several new revenue generating applications in existing portals).  Same state DMV revenue growth in the currentquarter was flat compared to an increase of 2% in the prior year quarter.  Absent DMV price increases, same state DMVrevenues have historically grown at a rate of 1% to 3% per year. We believe ourDMV revenues for over the past year have been adversely affected by negativemacroeconomic conditions, which we currently expect may continue throughout theremainder of 2009. As a result, we currently expect same-

 

24

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state DMV revenue growthto be flat or slightly negative in 2009. Portal same state non-DMV transaction based revenue growth was 26% inthe prior year quarter.  IncludingIndiana and Arizona, same state portal revenues in the third quarter of 2009increased 14% over 2008 primarily due to increased transaction revenues fromour Alabama, Arkansas, Colorado, Idaho and Tennessee portals, among others.

 

Portal revenues for thenine months in the current fiscal year increased 29%, or approximately $20.8million, over the prior year period.  Ofthis increase, 17%, or approximately $11.9 million, was attributable to our newportals including West Virginia ($0.3 million), which began to generate DMVrevenues in February 2008, and Texas ($11.6 million) and 12%, orapproximately $8.9 million, was attributable to an increase in same stateportal revenues.  Same state portalrevenues in the current year-to-date period increased 12% over the prior yearperiod.  Excluding Indiana and Arizona,same state portal revenues in the current year-to-date periods increased 12%over the prior year period, with same state DMV transaction-based revenuesremaining flat and same state non-DMV transaction-based revenues increasing30%, primarily due to the addition of several new revenue generating applicationsin existing portals.

 

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  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **     | ** ** | **2009**                                   | ** ** | **%  Change**                             | ** ** | **2008** | ** ** | **2009** | ** ** | **%  Change** | ** ** | **2008** | ** ** |
| Fixed costs    |       | $                                          | 15,124     |                                      | 43         | % | $ | 10,583 |   | $ | 39,263 |   | 27 | % | $ | 31,016 |   |
| Variable costs |       | 6,009                                      |       | 106                                       | %          | 2,919 |   | 14,480 |   | 77 | % | 8,198 |   |
|           |       |                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Total          |       | $                                          | 21,133     |                                      | 57         | % | $ | 13,502 |   | $ | 53,743 |   | 37 | % | $ | 39,214 |   |

 

Cost of portalrevenues for the current quarter increased 57%, or approximately $7.6 million,over the prior year quarter.  Of thisincrease, 44%, or $5.9 million, was attributable to our new state portalbusinesses in Texas ($5.7 million) and start-up costs in our New Mexico portalbusiness ($0.2 million), which is expected to begin to generate revenues in thefourth quarter of 2009, and 13%, or approximately $1.7 million, wasattributable to an increase in same state cost of portal revenues.

 

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 costs.  Also contributing to this increase was anincrease in variable merchant fees to process credit card transactions,particularly from our portals in Alabama and Idaho.  A growing percentage of our non-DMVtransaction-based revenues are generated from online applications whereby userspay 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 44% 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 profitpercentage from our 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).

 

25

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Cost of portal revenues for the nine months in the current fiscal yearincreased 37%, or approximately $14.5 million, over the prior period.  Of this increase, 21%, or approximately $8.2million, was primarily attributable to our newer Texas, New Mexico and WestVirginia portals, and 16%, or approximately $6.3 million, was attributable toan increase in same state cost of portal revenues.  The increase in same state cost of portalrevenues for the nine-month period ended September 30, 2009 wasattributable to additional personnel in several of our portal businesses,coupled with higher employee health insurance costs, and higher variable merchantfees to process credit card transactions, as further discussed above.  Our portal gross profit rate for the ninemonths in the current year period was 42% compared to 46% in the prior yearperiod, for reasons further discussed 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.

 
| ** **                                             | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                             | ** ** | **2009**                                   | ** ** | **%  Change**                             | ** ** | **2008** | ** ** | **2009** | ** ** | **%  Change** | ** ** | **2008** | ** ** |
| Ethics & elections                            |       | $                                          | 689        |                                      | 22         | % | $ | 565 |   | $ | 2,146 |   | 11 | % | $ | 1,933 |   |
| UCC & corporate filings software  development |       | 174                                        |       | 18                                        | %          | 147 |   | 482 |   | 9 | % | 441 |   |
| Other                                                  |       | 155                                        |       | 89                                        | %          | 82 |   | 430 |   | 12 | % | 384 |   |
|                                                   |       |                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Total                                                  |       | $                                          | 1,018      |                                      | 28         | % | $ | 794 |   | $ | 3,058 |   | 11 | % | $ | 2,758 |   |

 

Software and services revenues in the current quarter increased 28%, orapproximately $0.2 million, over the prior year quarter.  This increase was primarily attributable to acombination of additional projects for the Federal Election Commission (“FEC”)and a consulting services engagement with a private company.  Software and services revenues on ayear-to-date basis increased 11%, or approximately $0.3 million, over the prioryear period.  This increase was alsoattributable to additional FEC projects and a consulting services engagementwith a private company.

 

SELLING & ADMINISTRATIVE.  Selling & administrative expenses inthe current quarter and year-to-date periods increased 9% and 13%,respectively, or approximately $0.5 million and $2.3 million, over the prioryear periods.  The increase in selling &administrative expenses in the current quarter was primarily attributable to higher personnel costsof approximately $0.2 million to support and enhance corporate wide informationtechnology security and portal operations and higher legal costs ofapproximately $0.3 million related to the ongoing SEC investigation.  Asdiscussed in Note 5 in the Notes to the Unaudited Consolidated FinancialStatements in this Form 10-Q and Item 1A, Item 3 and Note 8 in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2008,filed with the SEC on March 13, 2009, we have been the subject of aninformal SEC inquiry of expense reporting by certain officers of our Companyand certain potentially related matters. In connection with the informal SEC inquiry, a review was undertaken bythe Audit Committee of our Board of Directors, with the assistance of outside,independent counsel, which focused on such expense reporting.  The SEC issued a formal order ofinvestigation in the second quarter of 2008. Selling & administrative expenses for the three- and nine-monthperiods ended September 30, 2009 include approximately $0.3 million and$0.9 million, respectively, of legal fees and other expenses incurred inconnection with the ongoing SEC investigation and the Audit Committeereview.  Selling &administrative expenses for the nine-month period ended September 30, 2008include approximately $0.5 million of legal fees and other expenses incurred inconnection with the ongoing SEC investigation and the Audit Committeereview.  We currently expect to continueto incur significant legal fees and other expenses in connection with theongoing SEC investigation.  The increasein selling & administrative expenses on a year-to-date basis is alsoattributable to acquisition-related costs of approximately $0.5 million relatedto the Acquired Texas Contracts, increased sales and marketing expenses ofapproximately $0.2 million associated with active state portal procurementopportunities, higher incentive compensation and benefit expense ofapproximately $0.5 million, higher personnel costs of approximately $0.4million to support and enhance corporate wide information technology securityand portal operations, and higher stock-based compensation of approximately$0.3 million for annual grants of restricted stock to certain management-levelemployees, executive officers and non-employee directors.

 

26

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As a percentage of portal revenues, selling & administrativeexpenses were 17% and 21%, respectively, in the current quarter andyear-to-date periods compared to 23% and 24% in the prior year periods.  The decrease in selling &administrative expenses as a percentage of portal revenues in the current yearperiods was primarily a result of revenues from the Acquired Texas Contracts(which totalled $8.8 million and $11.7 million, respectively, for the currentquarter and year-to-date periods).

 

NONRECURRING GAIN ON ACQUISITION OF BUSINESS (NET OF TAX).  For the nine-month period ended September 30,2009, we recognized a nonrecurring gain of approximately $2.2 million (net of tax) on the acquisition of the AcquiredTexas Contracts, as further discussed in Note 3 in the Notes to the Unaudited Consolidated Financial Statements includedin this Form 10-Q.

 

DEPRECIATION & AMORTIZATION.  Depreciation & amortization expensein the current quarter and year-to date periods increased 208% and 102%,respectively, or approximately $1.9 million and $2.7 million, over the prioryear periods.  This increase wasprimarily attributable to intangible asset amortization expense related to theAcquired Texas Contracts acquisition in the second quarter of 2009, whichtotaled approximately $1.8 million and $2.4 million, respectively, in thecurrent quarter and year-to-date periods. We currently expect torecognize approximately $1.7 million of intangible asset amortization expenserelated to the Acquired Texas Contracts acquisition in the fourth quarter of2009.  The remaining increase in depreciation and amortization related tocapital expenditures in the current and prior periods for normal fixed assetadditions in our outsourced portal business, including Web servers, purchasedsoftware and office furniture and equipment to support and enhancecorporate-wide information technology security and portal operations.

 

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 98%and 92%, respectively, or approximately $0.1 million and $0.5 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 increased the balancesin several of our non-interest bearing commercial checking accounts in aneffort to reduce bank fees, as the earnings credit we receive for holding fundsin these accounts is higher than the interest rate we would receive frominvesting in government-backed securities. We currently expect interest income for fiscal 2009 to be lower than forfiscal 2008 due to the lower short-term interest rate environment and ourcurrent investment strategy.

 

INCOME TAXES. Including the tax impact related to the nonrecurring gain onacquisition of business of approximately $1.2 million, our effective tax ratewas approximately 37% and 40%, respectively, for the three- and nine-monthperiods ended September 30, 2009. Our effective tax rate for the three- and nine-month periods ended September 30,2009 was lower than the amount customarily expected due to the effect of adecrease in the liability for uncertain tax positions totaling approximately$0.1 million, as further discussed in Note 8 in the Notes to the UnauditedConsolidated Financial Statements included in this Form 10-Q.  Our effective tax rate for the three- andnine-month periods ended September 30, 2008 was lower than the amountcustomarily expected due to the effect of a decrease in the liability foruncertain tax positions totaling approximately $0.2 million, as furtherdiscussed in Note 8 in the Notes to the Unaudited Consolidated FinancialStatements included in this Form 10-Q.

 

# **Liquidity and Capital Resources**

# ** **

*OperatingActivities*

 

Net cash provided byoperating activities was $27.8 million in the current period as compared to$23.8 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 Acquired Texas Contracts contributed approximately $4.0 millionof the increase in accounts payable and $3.2 million of the increase in accruedexpenses in the current period.

 

The increase in accountspayable in the prior year period was partially attributable to the timing ofcash 

 

27

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paymentsassociated with excise tax filing applications, most notably in Hawaii (whichincreased accounts payable $5.7 million in 2008).

 

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 did not pay federal incometaxes through September 30, 2009, with the exception of the alternativeminimum tax, and are paying income taxes in only certain states.  This has positively impacted our operatingcash flow during the NOL carryforward period. We currently expect to fully utilize our federal NOL carryforwards in2009 and begin making federal estimated tax payments in the fourth quarter of2009.  For the nine-month periods ended September 30,2009 and 2008, combined federal and state income tax payments totaledapproximately $0.8 million and $0.6 million, respectively.

 

*Investing Activities*

 

Investing activities inthe current period primarily reflect $1.5 million in cash paid to acquire theAcquired Texas Contracts and $2.5 million of capital expenditures, which werefor normal fixed asset additions in our outsourced portal business, includingWeb servers, purchased software and office equipment. In addition, wecapitalized approximately $0.4 million of internal-use software developmentcosts relating to the standardization of customer management, billing andpayment processing systems that support our portal operations and accountingsystems.  Cash provided by investingactivities in the prior year period primarily reflects the partial liquidation ofour investment portfolio to pay the $15.7 million special cash dividend in February 2008,and $3.1 million of capital expenditures, which were primarily for normal fixedasset additions in our outsourced portal business.  In addition, we capitalized approximately$0.6 million of internal-use software development costs in the prior yearperiod.

 

*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 $1.4 million related to stock-based compensation (see Note 9in 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 $0.3 million in proceeds from ouremployee 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.  Grossbillings for the three-months ended September 30, 2009 and December 31,2008 were approximately $418.3****millionand $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 September 30, 2009 and  December 31,2008 were 9 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 $49.0 million at September 30, 2009, from $53.5 million at December 31,2008.  Our current ratio, defined ascurrent assets divided by current liabilities, at September 30, 2009 was1.8 compared 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 theAcquired Texas Contracts in the second quarter of 2009.

 

At September 30, 2009, our total cash and cash equivalent balance was$66.6 million compared to $60.4 million at December 31, 2008.  We believe that our currently availableliquid resources and cash generated from

 

28

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operationswill be sufficient to meet our operating requirements, capital expenditure requirements,current growth initiatives and special dividend payments (if any) for at leastthe next twelve months without the need of additional capital.  We have a $10 million unsecured revolvingcredit facility with a bank.  Thisrevolving credit facility is available to finance working capital, issueletters of credit and finance general corporate purposes.  We can obtain letters of credit in anaggregate amount of $5 million, which reduces the maximum amount available forborrowing under the facility.  In total,we had $3.7 million in available capacity to issue additional letters of creditand $8.7 million of unused borrowing capacity at September 30, 2009 underthe facility.  The credit facilityexpires in May 2011.  However,letters of credit may have an expiration date of up to one year beyond theexpiration date of the credit agreement.

 

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 service offerings beyond what iscontemplated 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 portalcontracts, as collateral for certain performance bonds and as collateral forcertain office leases.  These irrevocableletters of credit are generally in force for one year.  We had unused outstanding letters of credittotaling approximately $1.3 million at September 30, 2009.  We are not currently required to cashcollateralize these letters of credit. However, even though we currently expect to be profitable in the future,we may not be able to sustain or increase profitability on a quarterly orannual basis.  We will need to generatesufficient revenues while containing costs and operating expenses if we are toachieve sustained profitability.  If weare not able to sustain profitability, our cash collateral requirements mayincrease.  Had we been required to post100% cash collateral at September 30, 2009 for the face value of allperformance bonds (which are partially supported by letters of credit) and ourline of credit in conjunction with a corporate credit card agreement,unrestricted cash would have decreased by approximately $5.5 million and wouldhave been classified as restricted cash.

 

At September 30, 2009, we werebound by performance bond commitments totaling approximately $4.5 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 $0.3 million at September 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.

 

29

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**RECENTACCOUNTING PRONOUNCEMENTS**

 

Refer to Note 1 inthe Notes to the Unaudited Consolidated Financial Statements included in this Form 10-Qfor a description of recent accounting pronouncements.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT 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, resultsof 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 by thisQuarterly 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 inour internal control over financial reporting that occurred during our thirdfiscal quarter of 2009 that have materially affected, or are reasonably likelyto materially affect, our internal control over financial reporting.**

 

30

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**PART II.OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

As further discussed inNote 8 in the Notes to the Consolidated Financial Statements included in theCompany’s Form 10-K for the year ended December 31, 2008, filed with the SEC onMarch 13, 2009, the Company has been the subject of an informal SEC inquiry ofexpense reporting by certain officers of the Company and certain potentiallyrelated matters. In connection with that inquiry, a review was undertaken bythe Audit Committee of the Company’s Board of Directors, with the assistance ofoutside, independent counsel, which focused on such expense reporting. Thereview revealed that expense reimbursement deficiencies occurred during theperiod from January 2004 through October 2006 (the "Review Period")related to Jeffery S. Fraser, who was then the Company’s Chairman of the Boardand Chief Executive Officer, that these expense reimbursement deficiencies wereisolated to Mr. Fraser and that the amount of such deficiencies was notmaterial to the Company’s financial condition or results of operations.  During the second quarter of 2008, theCompany received notice from the SEC that a formal order of investigation hadbeen issued with respect to these matters. As is frequently the case in such situations, the SEC has taken the stepof obtaining a formal order of investigation to ensure the thoroughness of itsinvestigation.  The Company believes theinvestigation conducted by NIC’s Audit Committee was thorough and independentand it is not anticipated that the SEC investigation will reveal anysignificant additional instances of misreporting of expenses by employeesduring the Review Period.  However, theSEC subsequently expanded the scope of its inquiry with respect to Mr. Fraserto cover the period commencing with the Company’s initial public offering in1999 through the beginning of the Review Period (the “Extended ReviewPeriod”).  The NIC Audit Committee iscurrently conducting its own review of expense reimbursements to Mr. Fraserduring the Extended Review Period and is unable at this time to comment on theextent of any misreporting of expenses during that period.  There can be no assurance that the SEC willnot take any action that could adversely affect the Company as a result of thematters it is reviewing.

 

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

 

(c)                                  During the thirdquarter of 2009, the Company acquired shares of common stock surrendered byemployees to pay income taxes due upon the vesting of restricted stock or theexercise of options as follows:

 
| ****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**** | **** **** |
|-------------------------|----------------|---------------------------------------------|----------------|----------------------------------------|----------------|---------------------------------------------------------------------------------------------------|----------------|-------------------------------------------------------------------------------------------------------------------------------|----------------|
| July 24,  2009     |           | 1,271                                       |           | $                                      | 7.85           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |
| July28,  2009           |           | 48,302                                      |           | $                                      | 7.56           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |
| July 30,  2009     |           | 2,642                                       |           | $                                      | 7.69           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |
| August 1,  2009    |           | 18,548                                      |           | $                                      | 7.59           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |
| August 5,  2009    |           | 113                                         |           | $                                      | 7.90           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |
| August 6,  2009    |           | 30                                          |           | $                                      | 7.98           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |
| August 12,  2009   |           | 530                                         |           | $                                      | 7.98           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |
| August 13,  2009   |           | 189                                         |           | $                                      | 8.00           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |
| August 14,  2009   |           | 839                                         |           | $                                      | 7.81           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |
| August 20,  2009   |           | 174                                         |           | $                                      | 7.79           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |
| August 21,  2009   |           | 187                                         |           | $                                      | 8.00           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |
| August 31,  2009   |           | 507                                         |           | $                                      | 7.50           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |
| September 4,  2009 |           | 78                                          |           | $                                      | 7.99           |                                                                                              | N/A            |                                                                                                                          | N/A            |   |

 

**ITEM6.  EXHIBITS**

 

10.1 – Form ofIndemnification Agreement (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 an exhibit with a  corresponding exhibit number to the Form 8-K filed with the SEC 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, theCompany has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

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

 

32

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**NIC Inc.**

**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                |
|-------------|------------|-----------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Exhibit**                                                                      |
|        |       |                                                                                                      |
| 10.1        |       | Form of  Indemnification Agreement (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                   |

 

----

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

 

33

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