**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON D.C. 20549**

 

**FORM10-Q**

 

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

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2007**

 

**Commission file number 000-26621**

 

**NICINC.**

(Exact name of registrant as specified in itscharter)

 

| **Colorado**                             | ** ** | **52-2077581**      |
|------------------------------------------|------------|---------------------|
| (State or other jurisdiction of          |       | (I.R.S Employer     |
| incorporation or organization)           |       | Identification No.) |
|                                     |       |                |
| **25501 West Valley Parkway, Suite 300** |       |                |
| **Olathe, Kansas**                       |       | **66061**           |
| (Address of principal executive offices) |       | (Zip Code)          |

** **

**(877) 234-3468**

(Registrant’s telephone number, including area code)

 

**10540South Ridgeview Road**

**Olathe, Kansas 66061**

(Former name, former address or former fiscalyear, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes  x   No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):

 
| Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in rule 12b-2 of the Exchange Act).

 

Yes  o    No  x

 

The number of shares outstanding of the registrant’scommon stock as of October 31, 2007 was 61,993,182.

 

 

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**PART I - FINANCIALINFORMATION**

**Item 1.     ConsolidatedFinancial Statements**

 

**NICINC.**

**CONSOLIDATEDBALANCE SHEETS**

**(UNAUDITED)**

**thousands**

** **
| ** **                                                                                       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                       | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                       | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current assets:                                                                                  |       |                   |       |                  |       |
| Cash and cash equivalents                                                                        |       | $                      | 40,412     |                  | $          | 36,745 |   |
| Marketable securities                                                                            |       | 12,000                 |       | 45,008                |       |
| Trade accounts receivable                                                                        |       | 30,873                 |       | 28,729                |       |
| Unbilled revenues                                                                                |       | 345                    |       | 1,069                 |       |
| Deferred income taxes                                                                            |       | 5,887                  |       | 5,290                 |       |
| Prepaid expenses & other current assets                                                      |       | 1,922                  |       | 1,645                 |       |
| Total current assets                                                                             |       | 91,439                 |       | 118,486               |       |
| Property and equipment, net                                                                      |       | 4,571                  |       | 3,790                 |       |
| Deferred income taxes                                                                            |       | 12,695                 |       | 17,434                |       |
| Other assets                                                                                     |       | 708                    |       | 424                   |       |
| Total assets                                                                                     |       | $                      | 109,413    |                  | $          | 140,134 |   |
|                                                                                             |       |                   |       |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                   | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current liabilities:                                                                             |       |                   |       |                  |       |
| Accounts payable                                                                                 |       | $                      | 36,663     |                  | $          | 34,202 |   |
| Accrued expenses                                                                                 |       | 7,690                  |       | 5,911                 |       |
| Application development contracts                                                                |       | 392                    |       | 513                   |       |
| Other current liabilities                                                                        |       | 190                    |       | 255                   |       |
| Total current liabilities                                                                        |       | 44,935                 |       | 40,881                |       |
|                                                                                             |       |                   |       |                  |       |
| Other long-term liabilities                                                                      |       | 730                    |       | —                |       |
| Total liabilities                                                                                |       | 45,665                 |       | 40,881                |       |
|                                                                                             |       |                   |       |                  |       |
| Commitments and contingencies (Notes 1, 2,  4, 5 and 7)                                          |       | —                 |       | —                |       |
|                                                                                             |       |                   |       |                  |       |
| Shareholders’ equity:                                                                       |       |                   |       |                  |       |
| Common stock, no par, 200,000 shares  authorized 61,993 and 61,574 shares issued and outstanding |       | —                 |       | —                |       |
| Additional paid-in capital                                                                       |       | 165,485                |       | 210,210               |       |
| Accumulated deficit                                                                              |       | (101,569               | )          | (110,789              | )          |
|                                                                                             |       | 63,916                 |       | 99,421                |       |
| Less treasury stock                                                                              |       | (168                   | )          | (168                  | )          |
| Total shareholders’ equity                                                                  |       | 63,748                 |       | 99,253                |       |
| Total liabilities and shareholders’ equity                                                  |       | $                      | 109,413    |                  | $          | 140,134 |   |

 

*Theaccompanying Notes to Unaudited Consolidated Financial Statements are an integralpart of these statements.*

 

1

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**NICINC.**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(UNAUDITED)**

**thousandsexcept for per share amounts**

** **
| ** **                                                                              | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                              | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                              | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:                                                                               | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Portal revenues                                                                         |       | $                                | 20,699     |                            | $          | 17,214 |   | $ | 61,177 |   | $ | 51,997 |   |
| Software & services revenues                                                        |       | 859                              |       | 821                             |       | 2,491 |   | 547 |   |
| Total revenues                                                                          |       | 21,558                           |       | 18,035                          |       | 63,668 |   | 52,544 |   |
| Operating expenses:                                                                     |       |                             |       |                            |       |   |   |   |   |
| Cost of portal revenues, exclusive of  depreciation & amortization                  |       | 10,844                           |       | 9,478                           |       | 31,718 |   | 26,685 |   |
| Cost of software & services revenues,  exclusive of depreciation & amortization |       | 479                              |       | 565                             |       | 1,442 |   | 3 |   |
| Selling & administrative                                                            |       | 5,207                            |       | 3,916                           |       | 15,772 |   | 10,904 |   |
| Depreciation & amortization                                                         |       | 632                              |       | 501                             |       | 1,744 |   | 1,531 |   |
| Total operating expenses                                                                |       | 17,162                           |       | 14,460                          |       | 50,676 |   | 39,123 |   |
| Operating income                                                                        |       | 4,396                            |       | 3,575                           |       | 12,992 |   | 13,421 |   |
| Other income (expense):                                                                 |       |                             |       |                            |       |   |   |   |   |
| Interest income                                                                         |       | 362                              |       | 666                             |       | 1,260 |   | 1,544 |   |
| Gain (loss) on affiliate investments                                                    |       | 508                              |       | ––                    |       | 508 |   | (97 | ) |
| Other income (expense), net                                                             |       | ––                     |       | (49                             | )          | –– |   | (49 | ) |
| Total other income (expense)                                                            |       | 870                              |       | 617                             |       | 1,768 |   | 1,398 |   |
| Income before income taxes                                                              |       | 5,266                            |       | 4,192                           |       | 14,760 |   | 14,819 |   |
| Income tax provision                                                                    |       | 1,476                            |       | 1,733                           |       | 5,472 |   | 6,191 |   |
| Net income                                                                              |       | $                                | 3,790      |                            | $          | 2,459 |   | $ | 9,288 |   | $ | 8,628 |   |
|                                                                                    |       |                             |       |                            |       |   |   |   |   |
| Basic net income per share                                                              |       | $                                | 0.06       |                            | $          | 0.04 |   | $ | 0.15 |   | $ | 0.14 |   |
| Diluted net income per share                                                            |       | $                                | 0.06       |                            | $          | 0.04 |   | $ | 0.15 |   | $ | 0.14 |   |
|                                                                                    |       |                             |       |                            |       |   |   |   |   |
| Weighted average shares outstanding:                                                    |       |                             |       |                            |       |   |   |   |   |
| Basic                                                                                   |       | 61,905                           |       | 61,536                          |       | 61,776 |   | 61,353 |   |
| Diluted                                                                                 |       | 62,537                           |       | 61,798                          |       | 62,255 |   | 61,749 |   |

 

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

 

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**NIC INC.**

**CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY**

**(UNAUDITED)**

**thousands**

# ** **

| ** **                                                                             | ** ** | ** **            | ** ** | ** **  | ** **   | **Additional**  | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|--------------|-----------------|------------|--------------|------------|------------|------------|------------|------------|
| ** **                                                                             | ** ** | **Common Stock** | ** ** | **Paid-in** | ** **   | **Accumulated** | ** ** | **Treasury** | ** ** | ** ** | ** ** |
| ** **                                                                             | ** ** | **Shares**            | ** ** | **Amount**  | ** **   | **Capital**     | ** ** | **Deficit**  | ** ** | **Stock**  | ** ** | **Total**  | ** ** |
| **Balance, January 1, 2007**                                                           |       | 61,574                |       | $           | –– |            | $          | 210,210      |       | $          | (110,789   | )          | $          | (168 | ) | $ | 99,253 |   |
| Cumulative effect of FIN 48 (Note 4)                                                   |       | —                |       | —      |         | —          |       | (68          | )          | —     |       | (68        | )          |
| Net income                                                                             |       | —                |       | —      |         | —          |       | 9,288        |       | —     |       | 9,288      |       |
| Cash dividends on common stock (Note 3)                                                |       | —                |       | —      |         | (46,730         | )          | —       |       | —     |       | (46,730    | )          |
| Shares surrendered to pay exerciseprice of stock  options                              |       | (34                   | )          | —      |         | (247            | )          | —       |       | —     |       | (247       | )          |
| Shares surrendered upon vesting of restricted  stock to satisfy tax  withholdings |       | (43                   | )          | —      |         | (300            | )          | —       |       | —     |       | (300       | )          |
| Stock option exercises & restrictedstock vestings                                  |       | 443                   |       | —      |         | 1,053           |       | —       |       | —     |       | 1,053      |       |
| Stock-based compensation                                                               |       | —                |       | —      |         | 1,260           |       | —       |       | —     |       | 1,260      |       |
| Issuance of common stock under employee stock  purchase plan                           |       | 53                    |       | —      |         | 239             |       | —       |       | —     |       | 239        |       |
| **Balance, September 30, 2007**                                                        |       | 61,993                |       | $           | —       |            | $          | 165,485      |       | $          | (101,569   | )          | $          | (168 | ) | $ | 63,748 |   |

# ** **

*The accompanying Notes to Unaudited Consolidated Financial Statementsare an integral part of these statements.*

 

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**NIC INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

**thousands**

# ** **

| ** **                                                                         | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **September 30,**          | ** ** |
| ** **                                                                         | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| Cash flows from operating activities:                                              | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                               | 9,288      |   | $ | 8,628 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                            |       |   |   |
| Depreciation & amortization                                                    |       | 1,744                           |       | 1,531 |   |
| Stock-based compensation expense                                                   |       | 1,260                           |       | 829 |   |
| Application development contracts                                                  |       | (121                            | )          | (704 | ) |
| Deferred income taxes                                                              |       | 5,193                           |       | 5,603 |   |
| (Gain) loss on affiliate investments                                               |       | (508                            | )          | 97 |   |
| Loss on disposal of property and equipment                                         |       | —                          |       | 49 |   |
| Impairment loss on property and equipment                                          |       | 164                             |       | — |   |
| Changes in operating assets and  liabilities:                                      |       |                            |       |   |   |
| (Increase) in trade accounts receivable                                            |       | (2,144                          | )          | (5,944 | ) |
| Decrease in unbilled revenues                                                      |       | 724                             |       | 3,187 |   |
| (Increase) decrease in prepaid expenses  & other current assets                |       | (277                            | )          | 286 |   |
| Decrease in other assets                                                           |       | 2                               |       | 11 |   |
| Increase in accounts payable                                                       |       | 2,461                           |       | 5,553 |   |
| Increase (decrease) in accrued expenses                                            |       | 1,480                           |       | (1,270 | ) |
| Increase (decrease) in other current  liabilities                                  |       | (65                             | )          | 33 |   |
| (Decrease) in other long-term liabilities                                          |       | (389                            | )          | — |   |
| Net cash provided by operating activities                                          |       | 18,812                          |       | 17,889 |   |
|                                                                               |       |                            |       |   |   |
| Cash flows from investing activities:                                              |       |                            |       |   |   |
| Purchases of property and equipment                                                |       | (2,618                          | )          | (1,919 | ) |
| Capitalized internal use software  development costs                               |       | (358                            | )          | (151 | ) |
| Purchases of marketable securities                                                 |       | (12,000                         | )          | (21,500 | ) |
| Sales and maturities of marketable  securities                                     |       | 45,008                          |       | — |   |
| Proceeds from sale of affiliate                                                    |       | 508                             |       | — |   |
| Net cash provided by (used in) investing  activities                               |       | 30,540                          |       | (23,570 | ) |
|                                                                               |       |                            |       |   |   |
| Cash flows from financing activities:                                              |       |                            |       |   |   |
| Cash dividends on common stock                                                     |       | (46,730                         | )          | — |   |
| Proceeds from sale of treasury stock                                               |       | —                          |       | 65 |   |
| Proceeds from employee common stock  purchases                                     |       | 239                             |       | 157 |   |
| Proceeds from exercise of employee stock  options                                  |       | 806                             |       | 1,218 |   |
| Net cash provided by (used in) financing  activities                               |       | (45,685                         | )          | 1,440 |   |
|                                                                               |       |                            |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                              |       | 3,667                           |       | (4,241 | ) |
| Cash and cash equivalents, beginning of  period                                    |       | 36,745                          |       | 36,902 |   |
| Cash and cash equivalents, end of period                                           |       | $                               | 40,412     |   | $ | 32,661 |   |
| Other cash flow information:                                                       |       |                            |       |   |   |
| Interest paid                                                                      |       | $                               | —     |   | $ | — |   |
| Income taxes paid                                                                  |       | $                               | 741        |   | $ | 363 |   |

 

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

 

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# ** **

# **NOTESTO UNAUDITED 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”). Certaininformation and disclosures normally included in financial statements preparedin accordance with generally accepted accounting principles have been omittedpursuant to such rules and regulations. In management’s opinion, the unauditedconsolidated interim financial statements reflect all adjustments (whichinclude only normal recurring adjustments, except as disclosed) necessaryto present fairly the consolidated financial position, results of operations andcash flows of the Company and its subsidiaries as of the dates and for theinterim periods presented. These unaudited consolidated financial statementsand notes should be read in conjunction with the audited consolidated financialstatements and related notes and the Management’s Discussion and Analysis ofFinancial Condition and Results of Operations included in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2006, filed with the SEC onMarch 15, 2007, and Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations included in this Form 10-Q. Theconsolidated balance sheet data included herein as of December 31, 2006 wasderived from audited financial statements, but does not include all disclosuresrequired by accounting principles generally accepted in the United States ofAmerica.

 

The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the amounts reportedin the consolidated financial statements and accompanying notes. Actual resultscould differ from those estimates. The results of operations for the three- andnine-month periods ended September 30, 2007 are not necessarily indicativeof the results to be expected for the full year ending December 31, 2007.

 

**1.     THE COMPANY AND SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

*The Company*

 

NIC is a provider ofeGovernment services that helps governments use the Internet to reduce costsand provide a higher level of service to businesses and citizens. The Companyaccomplishes this currently through two divisions: its primary portaloutsourcing businesses and its software & services businesses.

 

In its primary portaloutsourcing business, the Company designs, builds and operates Internet-basedportals on behalf of state and local governments desiring to provide access togovernment information and to complete government-based transactions online. Theseportals consist 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 undermultiple-year contracts (see Note 2), NIC markets the services andsolicits users to complete government-based transactions and to enter intosubscriber contracts permitting users to access the portal and the governmentinformation contained therein in exchange for transactional and/or subscriptionuser fees. The Company manages operations for each contractual relationshipthrough separate local subsidiaries that operate as decentralized businesses

 

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with a high degree ofautonomy. NIC’s self-funding business model allows the Company to reduce itsgovernment partners’ financial and technology risks and generate revenues bysharing in the fees the Company collects from eGovernment transactions. TheCompany’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 is typically responsible for funding up frontinvestment and ongoing operational costs of the government portals.

 

The Company’s software &services businesses primarily include its Uniform Commercial Code (“UCC”) andcorporate filings software development business and its ethics & electionsbusiness. The Company’s UCC and corporate filings software developmentbusiness, NIC Conquest, is a provider of software applications and services forelectronic filings and document management solutions for governments. Thisbusiness focuses on Secretaries of State, whose offices are state governments’principal agencies for UCC and corporate filings. Currently, NIC Conquest isprimarily engaged in servicing its contract with the California Secretary ofState and is not actively marketing its applications and services in respect ofnew engagements. The Company’s ethics & elections business, NICTechnologies, designs and develops online campaign expenditure and ethicscompliance systems for federal and state government agencies. Currently, NICTechnologies is primarily engaged in servicing its contracts with the FederalElection Commission and the State of Michigan.

 

*Basis of presentation*

 

The Company classifies its revenues and cost of revenues into twocategories: (1) portal and (2) software & services. The portal categoryincludes revenues from the Company’s subsidiaries operating government portalsunder long-term contracts on an outsourced basis. The software & servicescategory includes revenues primarily from the Company’s software & servicesbusinesses. The primary categories of operating expenses include: cost ofportal revenues, cost of software & services revenues, selling &administrative, and depreciation & amortization. Cost of portal revenuesconsist of all direct costs associated with operating government portals on anoutsourced basis including employee compensation, telecommunications, creditcard merchant fees, and all other costs associated with the provision ofdedicated client service such as dedicated office facilities. Cost of software& services revenues consist of all direct project costs to provide softwaredevelopment and services such as employee compensation, subcontractor laborcosts, and all other direct project costs including hardware, software,materials, travel and other out-of-pocket expenses. Selling &administrative costs consist primarily of corporate-level expenses relating tohuman resource management, administration, information technology, legal,accounting and finance, and all costs of non-customer service personnel fromthe Company’s software & services businesses, including information systemsand office rent. Selling & administrative costs also consist ofcorporate-level expenses for market development and public relations.

 

*Marketable securities*

 

The Company’s marketable securities at September 30, 2007 wereclassified as available-for-sale and consisted primarily of short-term auctionrate municipal and corporate obligations. These investments are

 

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stated at fairvalue with any unrealized holding gains or losses included as a component ofshareholders’ equity as accumulated other comprehensive income or loss untilrealized. The cost of securities sold is based on the specific identificationmethod. The fair values of the Company’s marketable securities are based onquoted market prices at the reporting date. Gross realized gains and losses andunrealized holding gains and losses through September 30, 2007 were notsignificant.

 

*Earnings per share*

 

Basic earnings per share are calculated on the basis of the weightedaverage number of common shares outstanding during the period. Diluted earningsper share are calculated on the basis of the weighted average number of commonshares outstanding during the period and common stock equivalents that wouldarise from the exercise of stock options or the issuance of restricted stockawards to employees and nonemployee directors using the treasury stock method. Thefollowing table sets forth the computation of basic and diluted earnings pershare (in thousands, except per share amounts):

 
| ** **                                | ** ** | **Three months**         | ** ** | **Nine months**          | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                | ** ** | **ended Sept. 30,** | ** ** | **ended Sept. 30,** | ** ** |
| ** **                                | ** ** | **2007**                      | ** ** | **2006**                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Numerator:**                            |       |                          |       |                          |       |   |   |   |   |
| Net income                                |       | $                             | 3,790      |                          | $          | 2,459 |   | $ | 9,288 |   | $ | 8,628 |   |
| **Denominator:**                          |       |                          |       |                          |       |   |   |   |   |
| Weighted average shares – basic      |       | 61,905                        |       | 61,536                        |       | 61,776 |   | 61,353 |   |
| Stock options and restricted stock awards |       | 632                           |       | 262                           |       | 479 |   | 396 |   |
| Weighted average shares – diluted    |       | 62,537                        |       | 61,798                        |       | 62,255 |   | 61,749 |   |
| **Basic earnings per share:**             |       |                          |       |                          |       |   |   |   |   |
| Net income                                |       | $                             | 0.06       |                          | $          | 0.04 |   | $ | 0.15 |   | $ | 0.14 |   |
| **Diluted earnings per share:**           |       |                          |       |                          |       |   |   |   |   |
| Net income                                |       | $                             | 0.06       |                          | $          | 0.04 |   | $ | 0.15 |   | $ | 0.14 |   |

 

Outstanding stock options totaling approximately 0.2 million sharesduring the nine-month period ended September 30, 2007 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. Outstanding stock options totaling approximately 0.4 million and0.3 million shares during the three- and nine-month periods ended September 30,2006, respectively, were not included in the computation of diluted weightedaverage shares outstanding because their exercise prices were in excess of theaverage stock price of the Company during the periods.

 

*Income taxes*

 

In June 2006, the Financial Accounting Standards Board (“FASB”) issuedFASB Interpretation No. (“FIN”) 48, “Accountingfor Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.”  FIN 48 provides a comprehensive model for howa company should recognize, measure, present and disclose in its financialstatements uncertain tax positions that the Company has taken or expects totake on its income tax returns. FIN 48 defines the threshold for recognizing atax return position in the financial statements as “more likely than not” thatthe position is sustainable, based on its technical merits. FIN 48 alsoprovides guidance on the measurement, classification and disclosure of taxreturn positions in a company’s financial statements. The Company adopted theprovisions of FIN 48 on

 

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January 1, 2007, with the cumulative effect recorded as an adjustmentto the opening balance of accumulated deficit. See Note4 for additional discussion of the Company’s adoption of FIN 48.

 

The Company’s consolidated balance sheet as of December 31, 2006reflects a revision of approximately $4.6 million of net deferred tax assetsfrom noncurrent to current for the amount of tax net operating losscarryforwards the Company expects to utilize in 2007. A proportionate amount ofthe Company’s deferred tax asset valuation allowance was also allocated betweencurrent and noncurrent deferred tax assets.

 

*Recent accounting pronouncements*

 

In September 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements,” which defines fair value, establishes a framework for measuringfair value in generally accepted accounting principles, and expands disclosuresabout fair value measurements. SFAS No. 157 does not require any new fair valuemeasurements, but provides guidance on how to measure fair value by providing afair value hierarchy used to classify the source of the information. TheCompany will be required to adopt this standard in the first quarter of 2008. TheCompany is currently evaluating the requirements of SFAS No. 157 and has notyet determined the impact, if any, on its consolidated financial statements.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities, including an amendment of FASBStatement No. 115.”  SFAS No. 159 permits entities to choose to measuremany financial instruments and certain other items at fair value that are notcurrently required to be measured at fair value.  Unrealized gains andlosses on items for which the fair value option has been elected are reportedin earnings.  SFAS No. 159 does not affect any existing accountingliterature that requires certain assets and liabilities to be carried at fairvalue. The Company will be required to adopt this standard in the firstquarter of 2008. The Company is currently evaluating the requirements of SFASNo. 159 and has not yet determined the impact, if any, on its consolidatedfinancial statements.

 

**2.     OUTSOURCED GOVERNMENT PORTAL CONTRACTS**

 

The Company’s outsourcedgovernment portal contracts generally have an initial term of three to fiveyears with provisions for renewals for various periods at the option of the government.The Company’s primary business obligation under these contracts is to design,build and operate Internet-based portals on behalf of governments desiring toprovide access to government information and to complete government-basedtransactions online. NIC typically markets the services and solicits users tocomplete government-based transactions and to enter into subscriber contractspermitting the user to access the portal and the government informationcontained therein in exchange for transactional and/or subscription user fees. TheCompany enters into separate agreements with various agencies and divisions ofthe government to provide specific services and to conduct specifictransactions. These agreements preliminarily establish the pricing of theelectronic transactions and data access services the Company provides and thedivision of revenues between the Company and the government agency. Thegovernment must approve prices and revenue sharing agreements.

 

The Company is typicallyresponsible for funding up front investment and ongoing operational costs ofthe government portals, and generally owns

 

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all the applications developed under these contracts. After completionof a defined contract term, the government agency typically receives aperpetual, royalty-free license to the applications for use only. If theCompany’s contract were not renewed after a defined term, the government agencywould be entitled to take over the portal in place with no future obligation ofthe Company.

 

At September 30, 2007, theCompany was bound by performance bond commitments totaling approximately $2.8million on certain portal outsourcing contracts. 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 the contract.

 

The following is a summary of the Company’s twentyoutsourced state government portal management contracts at September 30, 2007: 

 
| **NIC Subsidiary**         | ** ** | **Portal Web Site (State)** | ** ** | **Year  Services  Commenced** | ** ** | **Contract Expiration  Date (Renewal  Options Through)** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|-------------------------------|------------|-------------------------------------------------------------------------|------------|
| NICUSA                          |       | www.AZ.gov (Arizona)                       |       | 2007                          |       | 6/26/2010  (6/26/2013)                                             |       |
| Vermont Information Consortium  |       | www.Vermont.gov (Vermont)                  |       | 2006                          |       | 10/15/2009  (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                          |       | 7/15/2008  (7/15/2009)                                             |       |
| Kentucky Interactive            |       | www.Kentucky.gov (Kentucky)                |       | 2003                          |       | 1/31/2009  (1/31/2013)                                             |       |
| Alabama Interactive             |       | www.Alabama.gov (Alabama)                  |       | 2002                          |       | 2/28/2008  (2/28/2012)                                             |       |
| Maine Information Network       |       | www.RI.gov (Rhode Island)                  |       | 2001                          |       | 8/7/2010  (8/7/2012)                                               |       |
| NICUSA                          |       | www.OK.gov (Oklahoma)                      |       | 2001                          |       | 6/30/2008  (6/30/2009)                                             |       |
| Montana Interactive             |       | www.MT.gov (Montana)                       |       | 2001                          |       | 12/31/2010                                                              |       |
| NICUSA                          |       | www.Tennessee.gov (Tennessee)              |       | 2000                          |       | 8/27/2010                                                               |       |
| Hawaii Information Consortium   |       | www.Hawaii.gov (Hawaii)                    |       | 2000                          |       | 1/3/2008                                                                |       |
| Idaho Information Consortium    |       | www.Idaho.gov (Idaho)                      |       | 2000                          |       | 3/31/2008                                                               |       |
| Utah Interactive                |       | www.Utah.gov (Utah)                        |       | 1999                          |       | 5/6/2009                                                                |       |
| Maine Information Network       |       | www.Maine.gov (Maine)                      |       | 1999                          |       | 1/14/2008                                                               |       |
| Arkansas Information Consortium |       | www.Arkansas.gov (Arkansas)                |       | 1997                          |       | 6/30/2008                                                               |       |
| 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                          |       | 1/31/2009  (1/31/2010)                                             |       |
| Kansas Information Consortium   |       | www.Kansas.gov (Kansas)                    |       | 1992                          |       | 12/31/2009                                                              |       |

 

In thefirst quarter of 2007, the Company received a one-year contract extension fromthe state of Idaho, which extended the contract expiration date to March 2008,and signed a new one-year contract with the state of Alabama, which includesoptions for the government to extend the contract for four additional one-year renewalterms.

 

In thesecond quarter of 2007, the Company received a one-year contract extension fromthe state of Oklahoma. In addition, the Company received a two-year contractextension from the state of Kansas, which extended the expiration date to December2009.

 

In thethird quarter of 2007, the Company finalized a three-year contract with thestate of Arizona to operate the state’s official Web site. The contractincludes renewal options under which the government can extend the contract foran additional three years. The Company also received a new three-year contractwith the state of Rhode Island, which includes an option of the government toextend the contract for one additional two-year term. In addition, the Companyreceived a one-year contract extension from the state of South Carolina.

 

9

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InNovember 2007, the Company finalized a one-year contract with the state of WestVirginia to operate the state’s official Web site. The contract contains two one-yearrenewal options under which the government can extend the contract.

 

**3.     SPECIAL CASH DIVIDEND**

 

On January 29, 2007, the Company’s Board of Directors declared aspecial cash dividend of $0.75 per share, payable to shareholders of record asof February 12, 2007. The dividend, totaling approximately $46.7 million, waspaid on February 20, 2007 on 61,686,425 outstanding shares of common stock. Adividend equivalent of $0.75 per share was also paid simultaneously on 618,038unvested shares of restricted stock granted under the Company’s 2006 StockOption and Incentive Plan. The dividend was paid out of the Company’s availablecash and marketable securities.

 

The Company has made a preliminarydetermination that the dividend will result in a partial return of capital toshareholders, with the balance being taxable to shareholders as a qualifieddividend. The exact amount of the return of capital is dependent on theearnings of the Company, computed on a tax basis, through the end of its 2007fiscal year.

 

**4.     UNCERTAIN TAX POSITIONS**

 

The Company, along with its wholly owned subsidiaries, files aconsolidated U.S. federal income tax return and separate income tax returns inmany states throughout the U.S. The Company’s tax returns are not currentlyunder examination by any of these tax authorities. The Company remains subject to U.S. federal examinationfor the tax years ended on or after December 31, 2003. State income tax returnsare generally subject to examination for a period of three to five years after filingof the respective return.

 

As a result of the implementation of FIN 48(see Note 1), the Company recognized a $68,000 increase in the liability forunrecognized tax benefits, which resulted in an increase to the January 1, 2007accumulated deficit balance of $68,000. As of January 1, 2007, after theimplementation of FIN 48, the Company’s unrecognized tax benefits were$1,119,000, all of which would affect the Company’s effective tax rate ifrecognized. This amount decreased by $511,000 and $389,000 during the three-and nine-month periods ended September 30, 2007, respectively. It is expectedthat the amount of unrecognized tax benefits will change in the next 12 months.However, the Company does not expect the change to have a significant impact onits results of operations or financial condition.

 

The Company recognizes accrued interest andpenalties associated with uncertain tax positions as part of its income taxprovision in the consolidated statements of income. Upon the adoption date ofFIN 48 and at September 30, 2007, accrued interest and penalty amounts were notmaterial.

 

**5.     CALIFORNIA SECRETARY OF STATEAPPLICATION DEVELOPMENT CONTRACT**

 

In September2001, NICUSA, Inc. and the Company’s NIC Conquest subsidiary were awarded afive-year, $25 million contract by the California Secretary of State (the “CaliforniaSOS”) to develop and implement a comprehensive information management andfiling system. The Company recognizes revenues from this contract on thepercentage of completion method, utilizing costs incurred to date as comparedto the estimated total cost. Revenues and profit (loss) from this contract arebased on the Company’s cost estimates to complete and are reviewed regularly,with

 

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adjustments recorded in the period revisionsare made. Any anticipated contract loss is charged to operations as soon asdeterminable.

 

In March 2006,the Company and the California SOS entered into an amendment (the “Amendment”)to the California Business Programs Automation Agreement (the “Agreement”). Amongother changes to the Agreement, the Amendment reduced the aggregate contractvalue to approximately $19 million and released the Company from the obligationto deliver the business filings, or BE, portion of the project, except formaintenance of hardware and delivery of BE images as expressly set forth in theAmendment. The Amendment also set forth the final criteria in order for theCalifornia SOS to accept the UCC portion of the project and move it into themaintenance and operations phase.

 

As a result ofthe Amendment, the Company recorded an adjustment under percentage ofcompletion accounting in the first quarter of 2006. The adjustment in theCompany’s consolidated statement of income for the nine-month period endedSeptember 30, 2006 resulted in a reduction of software & services revenuesof approximately $2.1 million and a reduction of cost of software &services revenues of approximately $2.1 million. The adjustment in the Company’sconsolidated balance sheet was a reduction in unbilled revenues ofapproximately $2.1 million, a reduction of accrued liabilities of approximately$1.6 million, and a reduction of application development contracts ofapproximately $0.5 million. This adjustment did not affect operating income,net income or earnings per share.

 

In June 2006,the California SOS officially accepted the UCC portion of the project, whichcommenced the 42-month maintenance and operations phase.

 

The Companyregularly reviews its cost estimates to complete and does not currently believeits estimated contract loss will exceed the $4.2 million estimate previouslyestablished. However, it is at least reasonably possible that the estimate willchange in the near term. Further, it is possible that the Company willsimilarly incur cost overruns in the future as it has in the past as a resultof unforeseen difficulties such as rising development, subcontractor andpersonnel costs or other reasons. If this occurs, the Company’s results ofoperations, financial condition and cash flows could be adversely affected.

 

For additionaldiscussion of the Company’s contract with the California SOS, refer to Note 2to the Consolidated Financial Statements included in the Company’s Form 10-Kfor the year ended December 31, 2006, filed with the SEC on March 15, 2007.

 

**6.     REPORTABLE SEGMENTS ANDRELATED INFORMATION**

 

The Company’s two reportablesegments consist of its Outsourced Portal businesses and Software &Services businesses. The Outsourced Portals segment includes the Company’ssubsidiaries operating outsourced government portals and the corporatedivisions that directly support portal operations. The Software & Servicessegment primarily includes the Company’s UCC and corporate filings softwaredevelopment business (NIC Conquest) and ethics & elections filings business(NIC Technologies). Each of the Company’s Software & Services businesses isan operating segment and has been aggregated to form the Software &Services reportable segment. Unallocated corporate-level expenses are reportedin the reconciliation of the segment totals to the related consolidated totalsas “Other Reconciling Items.”

 

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There have been no significant intersegment transactions for the periodsreported.

 

The measure of profitabilityby which management evaluates the performance of its segments and allocatesresources 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 Company has not presented information relatingto segment assets.

 

Thetable below reflects summarized financial information concerning the Company’sreportable segments for the three months ended September 30 (in thousands): 

 
| ** **                      | ** ** | **Outsourced  Portals** | ** ** | **Software  &  Services** | ** ** | **Other  Reconciling  Items** | ** ** | **Consolidated  Total** | ** **   |
|---------------------------------|------------|-------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------|--------------|
| **2007**                        | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **              | ** **   |
| Revenues                        |       | $                       | 20,699     |                          | $          | 859                           |       | $                       | –– |   | $ | 21,558 |   |
|                            |       |                    |       |                          |       |                          |       |                    |         |
| Costs & expenses            |       | 11,743                  | ** ** | 541                           |       | 4,246                         |       | 16,530                  |         |
| Depreciation & amortization |       | 594                     | ** ** | 6                             |       | 32                            |       | 632                     |         |
| Operating income (loss)         |       | $                       | 8,362      | ** **                    | $          | 312                           |       | $                       | (4,278       | ) | $ | 4,396 |   |
|                            |       |                    |       |                          |       |                          |       |                    |         |
| **2006**                        | ** ** | ** **              | ** ** |                          | ** ** | ** **                    | ** ** | ** **              | ** **   |
| Revenues                        |       | $                       | 17,214     |                          | $          | 821                           |       | $                       | –– |   | $ | 18,035 |   |
|                            |       |                    |       |                          |       |                          |       |                    |         |
| Costs & expenses            |       | 10,455                  | ** ** | 627                           |       | 2,877                         |       | 13,959                  |         |
| Depreciation & amortization |       | 457                     | ** ** | 16                            |       | 28                            |       | 501                     |         |
| Operating income (loss)         |       | $                       | 6,302      | ** **                    | $          | 178                           |       | $                       | (2,905       | ) | $ | 3,575 |   |

 

The followingis a reconciliation of total segment operating income to total consolidatedincome before income taxes for the three months ended September 30 (inthousands):  

 
| ** **                                      | ** ** | **2007**     | ** ** | **2006**     | ** ** |
|-------------------------------------------------|------------|--------------|------------|--------------|------------|
| Total operating income for reportable  segments |       | $            | 4,396      |         | $          | 3,575 |   |
| Interest income                                 |       | 362          |       | 666          |       |
| Gain (loss) on affiliate investments            |       | 508          |       | –– |       |
| Other income (expense), net                     |       | –– |       | (49          | )          |
|                                            |       |         |       |         |       |
| Consolidated income before income taxes         |       | $            | 5,266      |         | $          | 4,192 |   |

 

Thetable below reflects summarized financial information concerning the Company’sreportable segments for the nine months ended September 30 (in thousands):

 

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| ** **                      | ** ** | **Outsourced  Portals** | ** ** | **Software  &  Services** | ** ** | **Other  Reconciling  Items** | ** ** | **Consolidated  Total** | ** **   |
|---------------------------------|------------|-------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------|--------------|
| **2007**                        | ** ** | ** **              | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **              | ** **   |
| Revenues                        |       | $ 61,177           |       | $ 2,491                  |       | $ ––           |       | $ 63,668           |         |
|                            |       |                    |       |                          |       |                          |       |                    |         |
| Costs & expenses            |       | 34,619                  | ** ** | 1,646                         |       | 12,667                        |       | 48,932                  |         |
| Depreciation & amortization |       | 1,632                   | ** ** | 17                            |       | 95                            |       | 1,744                   |         |
| Operating income (loss)         |       | $                       | 24,926     | ** **                    | $          | 828                           |       | $                       | (12,762      | ) | $ | 12,992 |   |
|                            |       |                    |       |                          |       |                          |       |                    |         |
| **2006**                        | ** ** | ** **              | ** ** |                          | ** ** | ** **                    | ** ** | ** **              | ** **   |
| Revenues                        |       | $                       | 51,997     |                          | $          | 547                           |       | $                       | –– |   | $ | 52,544 |   |
|                            |       |                    |       |                          |       |                          |       |                    |         |
| Costs & expenses            |       | 29,047                  | ** ** | 513                           |       | 8,032                         |       | 37,592                  |         |
| Depreciation & amortization |       | 1,397                   | ** ** | 51                            |       | 83                            |       | 1,531                   |         |
| Operating income (loss)         |       | $                       | 21,553     | ** **                    | $          | (17                           | )          | $                       | (8,115       | ) | $ | 13,421 |   |

 

The followingis a reconciliation of total segment operating income to total consolidatedincome before income taxes for the nine months ended September 30 (inthousands):  

 
| ** **                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Total operating income for reportable  segments |       | $        | 12,992     |     | $          | 13,421 |   |
| Interest income                                 |       | 1,260    |       | 1,544    |       |
| Gain (loss) on affiliate investments            |       | 508      |       | (97      | )          |
| Other income (expense), net                     |       | —   |       | (49      | )          |
| Consolidated income before income taxes         |       | $        | 14,760     |     | $          | 14,819 |   |

 

**7.     REVOLVING CREDIT FACILITY**

 

InMay 2007, the Company entered into a $10 million unsecured credit agreementwith a bank. This revolving credit facility is available to finance workingcapital, issue letters of credit and finance general corporate purposes. The Company can obtain letters of credit inan aggregate amount of $5 million, which reduces the maximum amount availablefor borrowing under the facility. Intereston amounts borrowed is payable at a base rate or a Eurodollar rate, in eachcase 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 outstandingletters of credit are either 1% (if the Company’s consolidated leverage ratiois less than or equal to 1.25:1) or 1.25% (if the Company’s consolidatedleverage ratio is greater than 1.25:1) of face value per annum. The Companyalso pays a quarterly commitment fee on the unused portion of the facility,which is either 0.1% (if the Company’s consolidated leverage ratio is less thanor equal to 1.25:1) or 0.15% (if the Company’s consolidated leverage ratio isgreater than 1.25:1).

 

Theterms of the agreement provide for customary representations and warranties,affirmative and negative covenants, events of default, and limitations ondividends, capital expenditures and acquisitions. The Company also is requiredto maintain compliance with the following financial covenants (in each case, asdefined in the agreement):

 

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

•                  Consolidatedtangible net worth of at least $36 million

•                  Consolidatedmaximum leverage ratio of 1.5:1

 

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The credit agreement expiresin May 2009. However, letters of credit may have an expiration date of up toone year beyond the expiration date of the credit agreement.

 

At September 30, 2007, theCompany and its subsidiaries had approximately $1.3 million in unusedoutstanding letters of credit, $3.7 million in available capacity to issueadditional letters of credit and $8.7 million of unused borrowing capacityunder the facility.

 

**8.     INVESTMENTS IN AFFILIATES**

 

Asfurther discussed in Note 6 to the Consolidated Financial Statements includedin the Company’s Form 10-K for the year ended December 31, 2006, filed with theSEC on March 15, 2007, the Company owned an investment in e-GovernmentSolutions Limited (“eGS”), a private joint venture based in London, England. InSeptember 2007, a member of the joint venture purchased the Company’s 12percent ownership interest in eGS for approximately $0.5 million in cash. TheCompany had no investment balance in eGS at the date of the purchase and recordeda $0.5 million gain on the purchase in gain (loss) on affiliate investments inthe unaudited consolidated statements of income.

 

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**ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

***FORWARD-LOOKINGSTATEMENTS***

 

# ***“Safe Harbor” statement under the Private SecuritiesLitigation Reform Act of 1995: Statements in this Quarterly Report onForm 10-Q regarding NIC and its business, which are not historical facts,are “forward-looking statements” that involve risks and uncertainties. Certainmatters discussed in this report may constitute forward-looking statementswithin the meaning of the federal securities laws that inherently includecertain risks and uncertainties. Forward-looking statements include, but arenot limited to, statements of plans and objectives, statements of futureeconomic performance or financial projections, statements of assumptionsunderlying such statements, and statements of the Company’s or management’sintentions, hopes, beliefs, expectations or predictions of the future. Forexample, statements like we “expect,” we “believe,” we “plan,” we “intend” orwe “anticipate” are forward-looking statements. Investors should be aware thatour actual operating results and financial performance may differ materiallyfrom our expressed expectations because of risks and uncertainties about thefuture including those risks discussed in our 2006 Annual Report on Form 10-Kfiled with the Securities and Exchange Commission on March 15, 2007. Inaddition, we will not necessarily update the information in this QuarterlyReport on Form 10-Q if any forward-looking statement later turns out to beinaccurate. Management continuously updates and revises these estimates andassumptions based on actual conditions experienced. However, it is notpracticable to publish all revisions and, as a result, no one should assumethat results projected in or contemplated by the forward-looking statementswill continue to be accurate in the future. Investors are cautioned not to putundue reliance on any forward-looking statement.***

# ** **

*There are a number of important factors that could cause actual resultsto differ materially from those suggested or indicated by such forward-lookingstatements. These include, among others, the success of the Company in signingcontracts with new states and government agencies, including continuedfavorable government legislation; NIC’s ability to develop new services;existing states and agencies adopting those new services; acceptance ofeGovernment services by businesses and citizens; competition; and generaleconomic conditions and the other factors discussed under “CAUTIONS ABOUT FORWARDLOOKING STATEMENTS” in Part I and “RISK FACTORS” in Part I, Item 1A of NIC’s2006 Annual Report on Form 10-K filed on March 15, 2007,with the Securities and Exchange Commission.*

 

**WHAT WE DO – AN EXECUTIVE SUMMARY**

 

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

 

In our core business, portal outsourcing, we enter into contractsprimarily with state governments and design, build and operate Web-basedportals on their behalf. We enter into long-term contracts, typically three tofive years, and manage operations for each government partner through separatesubsidiaries that operate as decentralized businesses with a high degree ofautonomy. Our portals consist of Web sites and applications that we

 

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build, whichallow businesses and citizens to access government information online andcomplete transactions, including applying for a permit, retrieving driver’slicense records or filing a form or report. We help increase our governmentpartners’ revenues by expanding the distribution of their information assetsand increasing the number of financial transactions conducted with governments.We do this by marketing portal services and soliciting users to completegovernment-based transactions and to enter into subscriber contracts thatpermit users to access the portal and the government information containedtherein in exchange for transactional and/or subscription user fees. We aretypically responsible for funding up-front investment and ongoing operational costsof the government portals. Our unique self-funding business model allows us toreduce our government partners’ financial and technology risks and obtainrevenues by sharing in the fees generated from eGovernment services. Ourclients 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.

 

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 generally ownall the applications developed under these contracts. After completion of adefined contract term, the government agency typically receives a perpetual,royalty-free license to the applications for use only. If our contract were notrenewed after a defined term, the government agency would be entitled to takeover the portal in place with no future obligation of the Company. In somecases, we enter into contracts to provide consulting, development andmanagement services to government portals in exchange for an agreed-upon fee.

 

AtSeptember 30, 2007, we had contracts to provide portal outsourcing services for20 states, eighteen of which operate under our self-funding business model (seeNote 2 to the Unaudited Consolidated Financial Statements included in this Form10-Q). Our closest competitor operates one state portal. We also provide portaloutsourcing services to three local governments.

 

# **REVENUERECOGNITION**

# ** **

We classify our revenues andcost of revenues into two categories: (1) portal and (2) software &services. The portal category includes revenues and cost of revenues primarilyfrom our subsidiaries operating government portals on an outsourced basis. Thesoftware & services category includes revenues and cost of revenuesprimarily from our UCC and corporate filings and ethics & electionsbusinesses.

 

*Our portaloutsourcing businesses*

 

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

 

•                  DMV transaction-based: these are transaction fees from the saleof electronic access to driver history records, referred to as DMV records,from our state portals to data resellers, insurance companies

 

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and other pre-authorizedcustomers on behalf of our state partners, and are generally recurring.

 

•                  Non-DMV transaction-based:  these are transaction feesfrom sources other than the sale of DMV records, for transactions conducted bybusiness users and consumer users through our portals, and are generallyrecurring. For a representative listing of non-DMV services we currently offerthrough our portals, refer to Part I, Item 1 in our Form 10-K for the yearended December 31, 2006, filed with the SEC on March 15, 2007.

 

•                  Software development & portal management:  theseare fees from the performance of software development projects and other timeand materials or fixed fee services for our government partners. While weactively market portal software development services, they do not have the samedegree of predictability as our transaction-based revenues.

 

*Our software & services businesses*

 

# **UCC and corporate filings**

# ** **

Our UCC and corporatefilings software development business derives the majority of its revenues fromfixed-price application development contracts and recognizes revenues on thepercentage of completion method. At September 30, 2007, this business was primarilyengaged in servicing its contract with the California Secretary of State and nolonger markets its applications and services in respect of new engagements.

 

Ethics & elections

 

Ourethics & elections business derives the majority of its revenues from timeand materials application development and maintenance outsourcing contracts andrecognizes revenues as services are provided. At September 30, 2007, our ethics& elections business was primarily engaged in servicing its contracts withthe Federal Election Commission and the state of Michigan.

 

**CRITICALACCOUNTING POLICIES**

 

Therehave been no material changes to our critical accounting policies and estimatesfrom the information provided in Item 7, “Management’s Discussion and Analysisof Financial Condition and Results of Operations,” included in our Form 10-Kfor the year ended December 31, 2006, filed with the SEC on March 15, 2007,except as follows:

 

*UncertainTax Positions*

 

Weaccount for uncertain tax positions in accordance with FASB Interpretation No.(“FIN”) 48, “Accounting forUncertainty in Income Taxes – an interpretation of FASB Statement No. 109.”  The application of income tax law isinherently complex. Laws and regulations in this area are voluminous and areoften ambiguous. As such, we are required to make many subjective assumptionsand judgments regarding our income tax exposures. Interpretations of andguidance surrounding income tax laws and regulations change over time. As such,changes in our subjective assumptions and judgments can materially affectamounts recognized in the consolidated balance sheets and statements of income.See Notes 1 and 4 to the Unaudited Consolidated Financial Statements includedin this Form 10-Q for additional

 

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detailon our adoption of FIN 48 in the first quarter of 2007 and our uncertain taxpositions.

 

# **RESULTSOF OPERATIONS**

# ** **

Thefollowing discussion summarizes the significant factors affecting operatingresults for the three- and nine-month periods ended September 30, 2007 and 2006.This discussion and analysis should be read in conjunction with our unauditedconsolidated interim financial statements and the related notes included inthis Form 10-Q. 

 
| ** **                                                              | ** ** | **Three months  ended  September 30,** | ** ** | **Nine months  ended  September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| **Key Financial Metrics**                                     | ** ** | **2007**                                         | ** ** | **2006**                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue growth – outsourced portals                                |       | 20                                               | %          | 18                                              | %          | 18 | % | 22 | % |
| Same state revenue growth – outsourced  portals                    |       | 19                                               | %          | 8                                               | %          | 16 | % | 8 | % |
| Recurring portal revenue %                                              |       | 94                                               | %          | 95                                              | %          | 94 | % | 96 | % |
| Gross profit % - outsourced portals                                     |       | 48                                               | %          | 45                                              | %          | 48 | % | 49 | % |
| Selling & administrative expenses as %  of portal revenues          |       | 25                                               | %          | 23                                              | %          | 26 | % | 21 | % |
| Operating income margin % (operating income  as a % of portal revenues) |       | 21                                               | %          | 21                                              | %          | 21 | % | 26 | % |

 

PORTALREVENUES. In the analysis below, we have categorized our portal revenuesaccording to the underlying source of revenue (in thousands) with thecorresponding percentage change from the prior year period.

 

 
| ** **                                    | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                             | ** ** | **%Change**                                         | ** ** | **2006** | ** ** | **2007** | ** ** | **%Change** | ** ** | **2006** | ** ** |
| DMV transaction-based                         |       | $                                                    | 11,171     |                                                | 13         | % | $ | 9,844 |   | $ | 33,906 |   | 6 | % | $ | 31,858 |   |
| Non-DMV transaction-based                     |       | 7,128                                                |       | 31                                                  | %          | 5,438 |   | 20,409 |   | 20 | % | 16,997 |   |
| Software development & portal  management |       | 2,400                                                |       | 24                                                  | %          | 1,932 |   | 6,862 |   | 118 | % | 3,142 |   |
|                                          |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Total                                         |       | $                                                    | 20,699     |                                                | 20         | % | $ | 17,214 |   | $ | 61,177 |   | 18 | % | $ | 51,997 |   |

 

Portal revenues in the current quarter increased 20%, or approximately$3.5 million, over the prior year quarter. Of this increase, 18%, orapproximately $3.2 million, was attributable to an increase in same stateportal revenues (outsourced portals in operation and generating recurringrevenues for two full years), and 2%, or approximately $0.3 million, wasattributable to our new Vermont portal, which began generating DMV revenues inMarch 2007.

 

OurIndiana portal subsidiary signed a new long-term contract with the state ofIndiana that commenced on July 1, 2006. The new contract is based on a fundingmodel that includes recurring fixed monthly fees for baseline services andprimarily time and materials project-based pricing for variable services. Historically,the majority of revenues under this contract were DMV and non-DMVtransaction-based. Under the new contract, the majority of revenues areclassified as software development & portal management. Prior to July 1,2006, we defined same state revenues as those from states in operation andgenerating DMV revenues for two full years. Because the baseline revenues fromthe new Indiana contract are recurring, we have continued to include Indianaportal revenues in the calculation of same state revenue growth even though weno longer earn DMV transaction-based revenues 

 

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underthe contract. Same state portal revenues in the current quarter increased 19%over the prior year quarter due to increased transaction revenues from ourArkansas, Colorado, Kentucky, Montana and South Carolina portals, among others,in addition to increased time and materials software development revenues fromour Indiana portal.

 

Excluding Indiana, same state portal revenues in the current quarterincreased 18% over the prior year quarter, with same state DMVtransaction-based revenues increasing 11% and same state non-DMVtransaction-based revenues increasing 31% (primarily due to the addition ofseveral new revenue generating applications in existing portals). Our same state revenue growth in the currentquarter was higher than the 8% growth we achieved in the prior year quarterprimarily due to increases in same state DMV and non-DMV transaction-basedrevenue growth. Excluding Indiana, same state DMV revenue growth in the currentquarter was 11% compared to 1% in the prior year quarter. The higher growth inthe current quarter was primarily due to the effect of DMV price increases inthree of our portal states that went into effect in late 2006 and in one portalstate that went into effect in the current quarter. Absent DMV price increases,same state DMV revenues have historically grown at a rate of 1% to 3% per year.Same state non-DMV transaction based revenue growth was 26% in the prior yearquarter.

 

Portalrevenues for the nine months in the current period increased 18%, orapproximately $9.2 million, over the prior year period. Of this increase, 16%,or approximately $8.5 million, was attributable to an increase in same stateportal revenues and 2%, or approximately $0.7 million, was attributable to ournew Vermont portal. Consistent with our results in the current quarter, samestate portal revenues in the current year-to-date period increased 16% over theprior year period. Excluding Indiana, same state portal revenues in the currentyear-to-date period increased 19% over the prior year period, with same stateDMV transaction-based revenues increasing 10% and same state non-DMVtransaction-based revenues increasing 35%. Same state revenues in the prioryear-to-date period increased 8%.

 

COST OF PORTAL REVENUES.  Cost of portal revenues for the currentquarter increased 14%, or approximately $1.4 million, over the prior yearquarter. Of this increase, 10%, or approximately $0.9 million, was attributableto an increase in same state cost of portal revenues, and 2%, or approximately$0.2 million, was primarily attributable to our new Vermont portal. Additionally,we incurred approximately $0.2 million in start-up costs relating to our newArizona portal contract, which had not yet begun generating revenues as ofSeptember 30, 2007. New portal contract wins have a short-term negative effecton our gross profit percentage during the start-up phase of a portal as weincur costs to open offices, hire employees and develop the portalinfrastructure prior to the time we begin to generate revenues. We expectportal gross profit will be similarly affected in the future if we aresuccessful in winning new portal contracts.

 

The increase in same state cost of portalrevenues in the current quarter was partially attributable to additionalpersonnel in several of our portals due to our continued growth andreinvestment in our core business. Also contributing to this increase was anincrease in bank fees. A growing percentage of our non-DMV transaction-basedrevenues are generated from online services whereby users pay for informationor 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 percentageon these 

 

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transactions as compared to our other non-DMV applications. However, weplan to continue to implement these services as they contribute favorably toour operating income growth.

 

Our portal gross profit rate in the currentquarter was 48% compared to 45% in the prior year quarter, with revenues (20%)growing at a higher rate than cost of portal revenues (14%) in the currentquarter, as further discussed above. We carefully monitor our portal grossprofit percentage in an effort to balance generating a solid financial returnand delivering value to our government partners through reinvestment in ourportals.

 

Cost of portal revenues for the nine monthsin the current period increased 19%, or approximately $5.0 million, over theprior year period. Of this increase, 16%, or approximately $4.3 million, wasattributable to an increase in same state cost of portal revenues, 2%, orapproximately $0.5 million, was primarily attributable to our new Vermontportal, and 1%, or approximately $0.2 million, was attributable to our newArizona portal. Our portal gross profit rate for the nine months in the currentyear period was 48% compared to 49% in the prior year period.

 

SOFTWARE & SERVICES REVENUES. In theanalysis below, we have categorized our software & services revenues bytype of business (in thousands), with the corresponding percentage change fromthe prior year period. 

 
| ** **             | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **             | ** ** | **2007**                                             | ** ** | **%Change**                                         | ** ** | **2006** | ** ** | **2007** | ** ** | **%Change** | ** ** | **2006** | ** ** |
| Corporate filings      |       | $                                                    | 174        |                                                | (30        | )% | $ | 250 |   | $ | 535 |   | 149 | % | $ | (1,099 | ) |
| Ethics & elections |       | 637                                                  |       | 34                                                  | %          | 475 |   | 1,779 |   | 30 | % | 1,368 |   |
| Other                  |       | 48                                                   |       | (50                                                 | )%         | 96 |   | 177 |   | (36 | )% | 278 |   |
|                   |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Total                  |       | $                                                    | 859        |                                                | 5          | % | $ | 821 |   | $ | 2,491 |   | 355 | % | $ | 547 |   |

 

The increase in revenues in our ethics & elections business in thecurrent quarter and year-to-date periods is primarily due to our contract withthe Federal Election Commission, which experienced budget reductions in theprior year periods in light of federal spending on the Hurricane Katrina reliefeffort. Software & services revenues for the nine-month period endedSeptember 30, 2006 primarily reflect a revenue adjustment under percentage ofcompletion accounting relating to our contract with the California SOS, asfurther discussed in Note 5 to the Unaudited Consolidated Financial Statementsincluded in this Form 10-Q.

 

COST OF SOFTWARE &SERVICES REVENUES. Cost of software & services revenues in the prioryear-to-date period primarily reflects an expense adjustment under percentageof completion accounting relating to our contract with the California Secretaryof State as further discussed in Note 5 to the Unaudited Consolidated FinancialStatements included in this Form 10-Q.

 

SELLING & ADMINISTRATIVE. Selling & administrative expenses in thecurrent quarter and year-to-date periods increased 33% and 45%, respectively,or approximately $1.3 million and $4.9 million, over the prior year periods. Theincreases were mostly attributable to additional personnel across our corporate-leveldivisions (which affected both quarterly and year-to-date comparisons), coupledwith mid-year 2006 non-executive salary increases (mainly affectingyear-to-date comparisons) across all corporate-level

 

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divisionsthat were in addition to normal annual increases, in an effort to better alignour employee compensation structure with the general market. Ourcorporate-level headcount has increased by approximately 20% since the thirdquarter of 2006, as we have added personnel to support and enhancecorporate-wide information technology security and portal operations, inaddition to sales & marketing and growth initiatives. As a percentage ofportal revenue, selling & administrative expenses were 25% and 26% in thecurrent quarter and year-to-date periods, respectively, compared to 23% and 21%in the prior year quarter and year-to-date periods, respectively. We expect selling &administrative costs as a percentage of portal revenue to be higher throughout2007 as compared to 2006, as we plan to spend an additional $4 million to $5 million (in addition tonormal annual increases in selling & administrative costs) on businessdevelopment, marketing and operations in an effort to accelerate newstate portal contract wins and non-DMV revenue growth.

 

INTERESTINCOME.  Interest income reflectsinterest earned on our investable cash and marketable securities portfolio. Asfurther discussed in Note 3 to the Unaudited Consolidated Financial Statementsincluded in this Form 10-Q, on January 29, 2007, our Board of Directorsdeclared a special cash dividend of $0.75 per share, payable to shareholders ofrecord as of February 12, 2007. The dividend, totaling approximately $46.7million, was paid on February 20, 2007 out of our available cash and marketablesecurities. As a result of this dividend, we expect interest income for theremainder of 2007 to be lower than the prior year periods, as our averageinvestable cash and marketable securities balance will be significantly lowerin 2007 as compared to 2006.

 

GAIN (LOSS) ONAFFILIATE INVESTMENTS.  Results ofoperations for the three- and nine-month periods ended September 30, 2007include a $0.5 million gain on the sale of our remaining investment in eGS, aprivate joint venture based in London, England, as further discussed in Note 8to the Unaudited Consolidated Financial Statements included in this Form 10-Q.

 

INCOME TAXPROVISION.  Our effective tax rate forthe three- and nine-month periods ended September 30, 2007 was lower than theamount customarily expected due to the effect of decreases in the liability foruncertain tax positions totaling$511,000 and $389,000, respectively, as further discussed in Note 4 to theUnaudited Consolidated Financial Statements included in this Form 10-Q. Ourincome tax provision for the nine-month period ended September 30, 2006includes the establishment of a valuation allowance totaling approximately$101,000 for a state income tax loss carryforward that we may be unable tofully utilize. Prospectively, we currently expect our effective tax rateto be between 40% and 42%.

 

# **LIQUIDITY AND CAPITAL RESOURCES**

# ** **

*OperatingActivities*

 

We had a history of unprofitable operationsprior to 2003 primarily due to operating losses incurred in our software &services businesses. These losses generated significant federal and state taxnet operating losses, or NOLs. As a result of our NOL carryforwards, we are notcurrently paying federal income taxes, with the exception of amounts relatingto alternative minimum tax, and are only paying minimal amounts of state incometaxes in certain states. This positively impacts our operating cash flow andwill continue to positively impact our operating cash flow during the NOL

 

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carryforward periods. Based on our current projections, we currentlyexpect to fully utilize our federal NOL carryforwards by the end of 2009. Forthe nine-month periods ended September 30, 2007 and 2006, combined federal andstate income tax payments totaled approximately $0.7 million and $0.4 million,respectively.

 

*Investing Activities*

 

Investing activities in the current periodreflect the liquidation of our marketable securities portfolio to pay the $46.7million special cash dividend in February 2007, the purchase of $12.0 millionin marketable debt securities in an effort to increase investment income fromour excess cash, and $2.6 million of capital expenditures, which were for normal fixed asset additionsin our outsourced portal business, including Web servers and purchased softwareto support and enhance corporate-wide information technologysecurity and portal operations. Investingactivities in the current period also include $0.5 million in proceeds from thesale of our remaining investment in the eGS joint venture, as further discussedabove. Cash used in investing activities in the prior year periodprimarily reflects $21.5 million in purchases of marketable debt securities inan effort to increase investment income, and $1.9 million of capitalexpenditures, which were primarily fornormal fixed asset additions in our outsourced portal business, including Webservers, purchased software and office furniture and equipment, in addition tocorporate-wide spending on information technology security.

 

*Financing Activities*

 

Financing activities in the current periodprimarily reflect payment of the $46.7 million special cash dividend, inaddition to $0.8 million in proceeds from the exercise of employee stockoptions and $0.2 million in proceeds from our employee stock purchase program. Financingactivities in the prior year period primarily reflect $1.2 million in proceedsfrom the exercise of employee stock options and $0.2 million in proceeds fromour employee stock purchase program.

 

*Liquidity*

 

We recognize revenue primarily from providingoutsourced government portal services net of the transaction fees due to thegovernment when the services are provided. The fees that we must remit to thegovernment are accrued as accounts payable and accounts receivable at the timeservices are provided. As a result, trade accounts payable and accountsreceivable reflect the gross amounts outstanding at the balance sheet dates. Grossbillings for the three months ended September 30, 2007 and December 31, 2006were approximately $319.5 million and $196.9 million, respectively. The Companycalculates days sales outstanding by dividing trade accounts receivable at thebalance 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, 2007 and December 31, 2006 was 9 and13, respectively.

 

We believe that working capital isan important measure of our short-term liquidity. Working capital, defined ascurrent assets minus current liabilities, decreased to $46.5 million atSeptember 30, 2007 from $77.6 million at December 31, 2006. Our current ratio,defined as current assets divided by current liabilities, at September 30, 2007was 2.0 compared to 2.9

 

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at December 31, 2006. Thedecrease in our working capital and current ratio was attributable to the $46.7million special dividend paid out of the Company’s available cash andmarketable securities in thecurrent period as further discussed below and in Note 3 to the UnauditedConsolidated Financial Statements included in this Form 10-Q.

 

At September 30, 2007, ourtotal cash and marketable securities balance was $52.4 million compared to$81.8 million at December 31, 2006. As further discussed above, we paid aspecial cash dividend totaling $46.7 million in the current period out of theCompany’s available cash and marketable securities. We do not believe thisdividend will have a significant effect on our future liquidity. We believethat our currently available liquid resources and cash generated fromoperations will be sufficient to meet our operating requirements, capitalexpenditure requirements and current growth initiatives for at least the nexttwelve months without the need of additional capital. However, we may need to raise additionalcapital within the next twelve months to further:

 

•                  fundoperations if unforeseen costs arise;

 

•                  support ourexpansion into other states and government agencies beyond what is contemplatedif unforeseen opportunities arise;

 

•                  expand ourproduct and service offerings beyond what is contemplated if unforeseenopportunities arise;

 

•                  respond tounforeseen competitive pressures; and

 

•                  acquiretechnologies beyond what is contemplated.

 

Any projections of future earnings and cash flowsare subject to substantial uncertainty. If our available cash, marketablesecurities and cash generated from operations are insufficient to satisfy ourliquidity requirements, we may seek to sell additional equity securities orissue debt securities. The sale of additional equity securities could result indilution to the Company’s shareholders. There can be no assurance thatfinancing will be available in amounts or on terms acceptable to the Company,if at all. Further, we may also draw on the unused portion of the $10 millionunsecured line of credit we obtained in May 2007, as further discussed in Note7 to the Unaudited Consolidated Financial Statements included in this Form10-Q.

 

We issue letters of creditas collateral for performance on certain of our outsourced government portalcontracts, as collateral for certain performance bonds and as collateral forcertain office leases. These irrevocable letters of credit are generally inforce for one year, for which we pay bank fees of approximately 1.00% to 1.25%of face value per annum. We had unused outstanding letters of credit totalingapproximately $1.3 million at September 30, 2007 and December 31, 2006. We arenot currently required to cash collateralize these letters of credit. Ourcollateral requirements have eased over time as we have continued to operateprofitably and grow our earnings. However, even though we currently expect tobe profitable in fiscal 2007 and beyond, we may not be able to sustain orincrease profitability on a quarterly or annual basis. We will need to generatesufficient revenues while containing costs and operating expenses if we are toachieve sustained profitability. If we are not able to sustain profitability,our cash collateral requirements may increase. Had we been

 

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required to post 100% cash collateral at September 30, 2007 for theface value of all performance bonds (which are partially supported by lettersof credit) and our line of credit in conjunction with a corporate credit cardagreement, unrestricted cash would have decreased and restricted cash wouldhave increased by approximately $3.8 million.

 

At September 30, 2007, wewere bound by performance bond commitments totaling approximately $2.8 millionon certain government portal outsourcing contracts. These performance bonds arecollateralized by a $1 million letter of credit. We have never had any defaultsresulting in draws on performance bonds or letters of credit.

 

*Off-Balance Sheet Arrangements*

 

We do not have off-balance sheet arrangements orsignificant exposures to liabilities that are not recorded or disclosed in ourfinancial statements.

 

*Contractual Obligations*

 

While we have significant operating leasecommitments for office space, those commitments are generally tied to theperiod of performance under related contracts. In addition, as discussed aboveand in Notes 1 and 4 to the Unaudited Consolidated Financial Statementsincluded in this Form 10-Q, we adopted FIN 48 on January 1, 2007. At September30, 2007 we had approximately $0.7 million of unrecognized tax benefits. Weexpect that the amount of unrecognized tax benefits will change in the next 12months, but, at this time, cannot estimate a range of the reasonably possiblechange that may occur. However, we do not expect that such a change would havea significant impact in our results of operations or financial condition.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

*Fair Value Measurements*

 

InSeptember 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” whichdefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles, and expands disclosures about fairvalue measurements. SFAS No. 157 does not require any new fair valuemeasurements, but provides guidance on how to measure fair value by providing afair value hierarchy used to classify the source of the information. We will berequired to adopt this standard in the first quarter of 2008. We are currentlyevaluating the requirements of SFAS No. 157 and have not yet determined theimpact, if any, on our consolidated financial statements.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities, including an amendment of FASBStatement No. 115.”  SFAS No. 159 permits entities to choose to measuremany financial instruments and certain other items at fair value that are notcurrently required to be measured at fair value.  Unrealized gains andlosses on items for which the fair value option has been elected are reportedin earnings.  SFAS No. 159 does not affect any existing accountingliterature that requires certain assets and liabilities to be carried at fairvalue. We will be required to adopt this standard in the first quarterof 2008. We are currently evaluating the requirements of SFAS No. 159 and havenot yet determined the impact, if any, on our consolidated financialstatements.

 

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**ITEM 3.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

INTERESTRATE RISK. Our exposure to market risk for changes in interest rates relates tothe increase or decrease in the amount of interest income we can earn on ourshort-term investments in marketable debt securities and cash balances. Becauseour investments are in short-term, investment-grade, interest-bearingmarketable securities, we are exposed to minimal risk on the principal of thoseinvestments. We limit our exposure to credit loss by depositing our cash withhigh credit quality financial institutions. We enhance the safety andpreservation of our invested principal funds by attempting to limit defaultrisk, market risk and investment risk. We do not use derivative financialinstruments. A 10% change in interest rates would not have a material effect onour financial condition, results of operations or cash flows.

 

**ITEM 4.  CONTROLSAND PROCEDURES**

 

**a)     EVALUATIONOF DISCLOSURE CONTROLS AND PROCEDURES**

 

The Company maintains disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of1934, as amended (the “Exchange Act”)) that are designed to ensure thatmaterial information required to be disclosed in its filings under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms. Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed by an issuer inthe reports that it files or submits under the Exchange Act is accumulated andcommunicated to the issuer’s management, including its principal executive andprincipal financial officers, or persons performing similar functions, asappropriate to allow timely decisions regarding required disclosure. Underthe supervision and with the participation of our management, including ourprincipal executive and principal financial officers, or persons performingsimilar functions, we conducted an evaluation of the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisQuarterly Report on Form 10-Q. Based on this evaluation, our principalexecutive officer and our principal financial officer, or persons performingsimilar functions, concluded that our disclosure controls and procedures wereeffective as of such date.

 

**b)     CHANGESIN INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

# **Therehave been no changes in our internal control over financial reporting thatoccurred during our third fiscal quarter of 2007 that have materially affected,or are reasonably likely to materially affect, our internal control over financialreporting.**

 

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**PART II.      OTHER INFORMATION**

 

**ITEM 2.        UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

(c)             During the third quarter of 2007,the Company acquired shares of common stock surrendered by employees to payincome taxes due upon the vesting of restricted stock and to pay the exerciseprice for stock options, as follows: 

 
| ****Period****  | **** **** | ****Total  Number of  Shares  Purchased**** | **** **** | ****Average  Price  Paid per  Share**** | **** **** | ****Total Number of  Shares Purchased  as Part of  Publicly  Announced Plans  or Programs**** | **** **** | ****Maximum Number (or  Approximate Dollar  Value) of Shares  that May Yet Be  Purchased Under the  Plans or Programs**** | **** **** |
|-----------------|----------------|--------------------------------------------------|----------------|----------------------------------------------|----------------|----------------------------------------------------------------------------------------------------------------------------------|----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|
| July 24, 2007   |           | 1,223                                            |           | $                                            | 7.03           |                                                                                                                             | N/A            |                                                                                                                                                                                  | N/A            |   |
| July 28, 2007   |           | 36,192                                           |           | $                                            | 6.74           |                                                                                                                             | N/A            |                                                                                                                                                                                  | N/A            |   |
| August 15, 2007 |           | 20,500                                           |           | $                                            | 7.21           |                                                                                                                             | N/A            |                                                                                                                                                                                  | N/A            |   |
| August 17, 2007 |           | 11,254                                           |           | $                                            | 7.52           |                                                                                                                             | N/A            |                                                                                                                                                                                  | N/A            |   |
| Sept. 24, 2007  |           | 7,254                                            |           | $                                            | 7.08           |                                                                                                                             | N/A            |                                                                                                                                                                                  | N/A            |   |

 

**ITEM 6.        EXHIBITS**

 

3.1 - Amended and Restated Bylaws of NIC Inc. (a Colorado corporation),As Restated Effective November 5, 2007

 

10.1 - Restricted Stock Agreement for NIC Inc. 2006 Amended andRestated Stock Option and Incentive Plan

 

10.2 - Stock Option Agreement for NIC Inc. 2006 Amended and RestatedStock Option and Incentive Plan

 

31.1 - Certification of Chairman of the Board and Chief ExecutiveOfficer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2 - Certification of Chief Financial Officer Pursuant to Section 302of the Sarbanes-Oxley Act of 2002

 

32.1 - Section 906 Certifications of Chairman of the Board and ChiefExecutive Officer and Chief Financial Officer

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the Company has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 
|                                | NIC INC.                 |
|-------------------------------------|--------------------------|
|                                |                     |
| Dated:   November 7, 2007 | /s/ Stephen M. Kovzan    |   |
|                                | Stephen M. Kovzan        |
|                                | Chief  Financial Officer |

 

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**NIC Inc.**

**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                    | ** ** | ** ** |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| **Number**  | ** ** | **Description of Exhibit**                                                                                          |
|        |       |                                                                                                                          |       |       |
| 3.1         |       | Amended and Restated Bylaws of NIC Inc. (a Colorado corporation), As  Restated Effective November 5, 2007                     |
|        |       |                                                                                                                          |       |       |
| 10.1        |       | Restricted Stock Agreement for NIC Inc. 2006 Amended and Restated Stock  Option and Incentive Plan                            |
|        |       |                                                                                                                          |       |       |
| 10.2        |       | Stock Option Agreement for NIC Inc. 2006 Amended and Restated Stock  Option and Incentive Plan                                |
|        |       |                                                                                                                          |       |       |
| 31.1        |       | Certification of Chairman of the Board and 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 Chairman of the Board and Chief Executive  Officer and Chief Financial Officer                  |

 

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