10-Q

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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549

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

For the quarterly period ended June 30, 2004

Commission file number 000-26621

NIC INC.(Exact name of registrant as specified in its charter)

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

10540 South Ridgeview Road Olathe, Kansas (Address of principal executive offices)	66061 (Zip Code)
(877) 234-3468 (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act)

Yes ý    No o

The number of shares outstanding of the registrant's common stock as of July 31, 2004 was 58,926,611.

PART I—FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

NIC Inc.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
thousands except for share amounts

			June 30, 2004			December 31, 2003
ASSETS
Current assets:
	Cash and cash equivalents		$	21,440		$	13,540
	Cash and cash equivalents—restricted			5,286			5,363
	Marketable securities			—			249
	Trade accounts receivable			20,556			17,871
	Deferred income taxes			173			181
	Prepaid expenses			665			698
	Other current assets			4,918			8,845
		Total current assets		53,038			46,747
Property and equipment, net				3,107			2,992
Deferred income taxes				32,968			35,169
Other assets				268			110
Investments in affiliates				—			644
Intangible assets, net				49			77
		Total assets	$	89,430		$	85,739
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	14,875		$	16,345
	Accrued expenses			6,559			5,245
	Note payable-current portion			158			156
	Application development contracts			446			465
	Other current liabilities			143			158
		Total current liabilities		22,181			22,369
Note payable—long-term portion				128			207
		Total liabilities		22,309			22,576
Commitments and contingencies (Notes 1 and 2)				—			—
Shareholders' equity:
	Common stock, no par, 200,000,000 shares authorized 58,902,525 and 58,715,672 shares issued and outstanding			—			—
	Additional paid-in capital			199,459			198,929
	Accumulated deficit			(132,133	)		(135,561	)
				67,326			63,368
	Less treasury stock			(205	)		(205	)
		Total shareholders' equity		67,121			63,163
		Total liabilities and shareholders' equity	$	89,430		$	85,739

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

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NIC Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
thousands except for per share amounts

			Three-months ended June 30,						Six-months ended June 30,
			2004			2003			2004			2003
Revenues:
	Portal revenues		$	12,255		$	10,149		$	24,486		$	19,939
	Software & services revenues			2,082			2,757			4,271			5,487
		Total revenues		14,337			12,906			28,757			25,426
Operating expenses:
	Cost of portal revenues, exclusive of depreciation & amortization			6,189			5,285			12,042			10,365
	Cost of software & services revenues, exclusive of depreciation & amortization			1,649			2,242			3,729			4,386
	Selling & administrative			2,945			2,937			6,177			6,057
	Depreciation & amortization			380			450			769			942
	Total operating expenses			11,163			10,914			22,717			21,750
Operating income				3,174			1,992			6,040			3,676
Other income (expense):
	Interest income			23			30			44			59
	Interest expense			(4	)		(4	)		(9	)		(9	)
	Equity in net loss of affiliates			(40	)		262			(109	)		202
	Total other income (expense)			(21	)		288			(74	)		252
Income before income taxes				3,153			2,280			5,966			3,928
Income tax provision				1,327			923			2,538			1,582
Net income			$	1,826		$	1,357		$	3,428		$	2,346
Basic and diluted net income per share			$	0.03		$	0.02		$	0.06		$	0.04
Weighted average shares outstanding:
	Basic			58,870			58,234			58,807			58,184
	Diluted			60,884			58,654			60,950			58,411

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

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NIC Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
thousands

			Six-months ended June 30,
			2004			2003
Cash flows from operating activities:
	Net income		$	3,428		$	2,346
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation & amortization		769			942
		Application development contracts		(19	)		(732	)
		Deferred income taxes		2,547			1,461
		Deferred income tax benefit related to stock options		(171	)		—
		Equity in net loss of affiliates		109			(202	)
	Changes in operating assets and liabilities:
		(Increase) in trade accounts receivable		(2,685	)		(2,236	)
		Decrease in prepaid expenses		33			297
		(Increase) decrease in other current assets		4,030			(3,320	)
		Decrease in other assets		2			14
		Increase (decrease) in accounts payable		(1,470	)		1,514
		Increase in accrued expenses		1,431			734
		(Decrease) in other current liabilities		(15	)		(398	)
	Net cash provided by operating activities			7,989			420
Cash flows from investing activities:
	Purchases of property and equipment			(855	)		(622	)
	Maturities of marketable securities			250			—
	Proceeds from sale of affiliate			300			—
	Net cash used in investing activities			(305	)		(622	)
Cash flows from financing activities:
	Cash and cash equivalents—restricted			77			863
	Payments on note payable			(77	)		(96	)
	Proceeds from exercise of employee stock options			216			133
	Net cash provided by financing activities			216			900
Net increase in cash and cash equivalents				7,900			698
Cash and cash equivalents, beginning of period				13,540			9,559
Cash and cash equivalents, end of period			$	21,440		$	10,257
Other cash flow information:
	Interest paid		$	9		$	9
	Income taxes paid		$	233		$	220

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

        NIC Inc. ("NIC" or the "Company") has prepared the consolidated interim financial statements included herein without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. In management's opinion, the consolidated interim financial statements reflect all adjustments (which include only normal recurring adjustments, except as disclosed) necessary to present fairly the results of operations for the interim periods presented. These financial statements and notes should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003, filed with the SEC on March 12, 2004, and Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q.

1.     APPLICATION DEVELOPMENT CONTRACTS

        In the second quarter of 2002, the Company accrued approximately $4.3 million in cost of software & services revenues for expected losses due to project cost overruns on outstanding contracts in Arkansas, Minnesota and Oklahoma. In the fourth quarter of 2002, the Company reversed $800,000 of accruals recorded in the second quarter of 2002 related to its contracts in Arkansas and Oklahoma as these contracts were expected to cost less to complete than management estimated. At December 31, 2002, the Company had fulfilled all obligations under its contract with the state of Minnesota. At June 30, 2004, the Arkansas and Oklahoma systems had been accepted and are currently in the maintenance phase. At June 30, 2004, the accrual for remaining application development contracts in Arkansas and Oklahoma was approximately $0.4 million, which management believes is adequate. Because of the inherent uncertainties in estimating the costs of completion, it is at least reasonably possible that the estimate will change in the near term.

        Unbilled revenues under long-term application development contracts, relating solely to the Company's contract with the California Secretary of State, at June 30, 2004 and December 31, 2003 were approximately $4.4 million and $8.5 million, respectively, and are included in other current assets in the consolidated balance sheets.

2.     DEBT OBLIGATIONS AND COLLATERAL REQUIREMENTS

        The Company issues letters of credit as collateral for performance on certain of its outsourced government portal contracts and as collateral for certain performance bonds. These irrevocable letters of credit are generally in force for one year, for which the Company pays bank fees of approximately 1.5% to 2.0% of face value per annum. In total, the Company and its subsidiaries had unused outstanding letters of credit of approximately $6.4 million at June 30, 2004 and December 31, 2003. At June 30, 2004, the Company has collateralized certain letters of credit with approximately $5.0 million in cash and cash equivalents.

        In conjunction with its business filings contract with the California Secretary of State, in March 2002, the Company issued a $5 million letter of credit as collateral for a $5 million performance bond required by the contract. In the second quarter of 2004, the Company received milestone payments totaling approximately $6.1 million for the delivery of the UCC filing system into production and parallel testing. Of the $6.1 million in milestone payments received, approximately $1.0 million related to work to be performed in the third quarter of 2004, and approximately $1.2 will be paid to certain subcontractors in the third quarter of 2004. The Company is scheduled to receive two additional $3.3 million milestone payments over the course of the next year. The first payment will be for the delivery of the business entity filing system into acceptance testing. The second payment will be for the acceptance of the business entity filing system by the Secretary of State and commencement of the

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associated maintenance period. The Company currently expects acceptance of the business entity filing system and commencement of the associated maintenance period to take place in the first half of 2005. Upon acceptance of the business entity filing system and commencement of the associated maintenance period, the Company is no longer required to provide a performance bond under this contract.

        At June 30, 2004 and December 31, 2003, the Company's term note payable had a balance of approximately $286,000 and $363,000, respectively, and was fully collateralized by cash and cash equivalents. In July 2004, the Company paid off the note in full.

        The Company has a $500,000 working capital line of credit, which was unused at June 30, 2004 and December 31, 2003.

        At June 30, 2004 and December 31, 2003, the Company had pledged a total of approximately $5.3 million and $5.4 million, respectively, of its cash and cash equivalents as collateral under the financing arrangement that covers all of the Company's outstanding letters of credit, term note payable and working capital line of credit, and has given the bank a security interest in certain of its accounts receivable and other assets.

        The Company has a $500,000 line of credit with a separate bank in conjunction with a corporate credit card agreement. At December 31, 2003, NIC had pledged all of its marketable securities as collateral on the line of credit. At June 30, 2004, the Company is no longer required to collateralize the line of credit.

3.     REPORTABLE SEGMENTS AND RELATED INFORMATION

        The Company's two reportable segments consist of its Outsourced Portal businesses and Software & Services businesses. The Outsourced Portals segment includes the Company's subsidiaries operating outsourced state and local government portals and the corporate divisions that support portal operations. The Software & Services segment includes the Company's corporate filings business (NIC Conquest), ethics & elections filings business (NIC Technologies), commercial vehicle compliance business (IDT) and AOL division. Unallocated corporate-level expenses are reported in the reconciliation of the segment totals to the related consolidated totals as "Other Reconciling Items." There have been no significant intersegment transactions for the periods reported.

        The table below reflects summarized financial information concerning the Company's reportable segments for the three months ended June 30 (in thousands):

	Outsourced Portals		Software & Services		Other Reconciling Items			Consolidated Total
2004
Revenues	$	12,255	$	2,082	$	—		$	14,337
Costs & expenses		7,008		1,703		2,072			10,783
Depreciation & amortization		303		56		21			380
Operating income (loss)		4,944		323		(2,093	)		3,174
2003
Revenues		10,149		2,757		—			12,906
Costs & expenses		5,844		2,416		2,204			10,464
Depreciation & amortization		359		52		39			450
Operating income (loss)		3,946		289		(2,243	)		1,992

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

	2004			2003
Total operating income for reportable segments	$	3,174		$	1,992
Interest income		23			30
Interest expense		(4	)		(4	)
Equity in net loss of affiliates		(40	)		262
Consolidated income before income taxes	$	3,153		$	2,280

        The table below reflects summarized financial information concerning the Company's reportable segments for the six months ended June 30 (in thousands):

	Outsourced Portals		Software & Services		Other Reconciling Items			Consolidated Total
2004
Revenues	$	24,486	$	4,271	$	—		$	28,757
Costs & expenses		13,759		3,861		4,328			21,948
Depreciation & amortization		612		114		43			769
Operating income (loss)		10,115		296		(4,371	)		6,040
2003
Revenues		19,939		5,487		—			25,426
Costs & expenses		11,557		4,817		4,434			20,808
Depreciation & amortization		743		118		81			942
Operating income (loss)		7,639		552		(4,515	)		3,676

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

	2004			2003
Total operating income for reportable segments	$	6,040		$	3,676
Interest income		44			59
Interest expense		(9	)		(9	)
Equity in net loss of affiliates		(109	)		202
Consolidated income before income taxes	$	5,966		$	3,928

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4.     EARNINGS PER SHARE

        Basic earnings per share are calculated on the basis of the weighted average number of common shares outstanding during the period. Diluted earnings per share are calculated on the basis of the weighted average number of common shares outstanding during the period and common stock equivalents that would arise from the exercise of warrants and employee common stock options using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

	Three-months Ended June 30,				Six-months Ended June 30,
	2004		2003		2004		2003
Numerator:
Net income	$	1,826	$	1,357	$	3,428	$	2,346
Denominator:
Weighted average shares—basic		58,870		58,234		58,807		58,184
Warrants and employee common stock options		2,014		420		2,143		227
Weighted average shares—diluted		60,884		58,654		60,950		58,411
Basic earnings per share:
Net income	$	0.03	$	0.02	$	0.06	$	0.04
Diluted earnings per share:
Net income	$	0.03	$	0.02	$	0.06	$	0.04

        Outstanding employee common stock options totalling 0.7 million shares during the three- and six-month periods ended June 30, 2004 were not included in the computation of diluted weighted average shares outstanding because their exercise prices were in excess of the average stock price of the Company during the periods. Outstanding employee common stock options totalling 2.4 million and 2.8 million shares during the three- and six-month periods ended June 30, 2003, respectively, were not included in the computation of diluted weighted average shares outstanding because their exercise prices were in excess of the average stock price of the Company during the periods. Outstanding common stock warrants issued to AOL totaling 0.6 million common shares during the three-month period ended June 30, 2004 and the three- and six-month periods ended June 30, 2003, were not included in the computation of diluted weighted average shares outstanding because their exercise prices were in excess of the average stock price of the Company during the periods.

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5.     STOCK-BASED COMPENSATION

        The Company accounts for its stock-based compensation plans using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The following table illustrates the effect on net income and net income per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation (in thousands, except per share amounts):

	Three-months Ended June 30,						Six-months Ended June 30,
	2004			2003			2004			2003
Net income, as reported	$	1,826		$	1,357		$	3,428		$	2,346
Add: Stock-based employee compensation included in reported net income, net of related tax effects		—			—			—			—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(531	)		(753	)		(1,138	)		(2,188	)
Pro forma net income	$	1,295		$	604		$	2,290		$	158
Basic and diluted net income per share, as reported	$	0.03		$	0.02		$	0.06		$	0.04
Basic and diluted net income per share, pro forma	$	0.02		$	0.01		$	0.04		$	0.00

        The fair value of each option grant was determined using the Black-Scholes option-pricing model. The Black-Scholes model was not developed for use in valuing employee stock options, but was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, it requires the use of subjective assumptions including expectations of future dividends and stock price volatility. Such assumptions are only used for making the required fair value estimate and should not be considered as indicators of future dividend policy or stock price appreciation. Because changes in the subjective assumptions can materially affect the fair value estimate and because employee stock options have characteristics significantly different from those of traded options, the use of the Black-Scholes option-pricing model may not provide a reliable estimate of the fair value of employee stock options.

        For purposes of this pro forma disclosure, the estimated fair value of options is amortized to expense over the option vesting periods. Such pro forma impact on net income and basic and diluted net income per share is not necessarily indicative of future effects on net income or earnings per share.

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6.     INVESTMENTS IN AFFILIATES

        As further discussed in Note 8 in the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 filed with the SEC on March 12, 2004, in March 2000, NIC made a $5 million cash investment in E-Filing.com, Inc. ("E-Filing"), a provider of online filing applications for legal services, giving NIC ownership of 21% of E-Filing, a non-pubic company, through 2,433,800 shares of Series A voting Preferred Stock. The investment has been accounted for under the equity method. In May 2004, E-Filing repurchased the Company's ownership interest in E-Filing for $535,000, which approximated the carrying value of the Company's investment at the date of the repurchase. The Company received $300,000 in cash and a $235,000 subordinated promissory note with principal plus 5% interest payable annually in three equal installments on each of the first, second and third anniversary dates of the issuance of the note. The Company has no investment balance remaining in E-Filing after the repurchase.

        As further discussed in Note 8 in the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 filed with the SEC on March 12, 2004, in March 2000, NIC made a cash investment in Tidemark Computer Systems, Inc., which was subsequently renamed Tidemark Solutions, Inc. ("Tidemark"), giving NIC ownership of approximately 27% of Tidemark, a non-public company. The investment was accounted for under the equity method. In May 2001, a private technology company acquired Tidemark for cash consideration of approximately $1.6 million. NIC received approximately $700,000 in cash from the transaction and had no investment balance remaining after the acquisition. NIC realized a gain of approximately $300,000 from the transaction, which the Company deferred until the end of the two-year indemnification period following the closing of the acquisition that covered the selling shareholders' representations and warranties made in the acquisition agreement. The Company recognized this gain in May 2003, which is included in Equity in net loss of affiliates in the consolidated statements of operations for the three- and six-month periods ended June 30, 2003.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Form 10-Q includes "forward-looking" statements about future financial results, future business changes and other events that haven't yet occurred. For example, statements like we "expect," we "believe," we "plan," we "intend," we "anticipate," or we "estimate" are forward-looking statements. Investors should be aware that actual operating results and financial performance may differ materially from our expressed expectations because of risks and uncertainties about the future including risks related to economic and competitive conditions and those risks discussed in our other filings with the Securities and Exchange Commission. In addition, we will not necessarily update the information in this Form 10-Q if any forward-looking statement later turns out to be inaccurate.

OVERVIEW

        The following discussion summarizes the significant factors affecting operating results of the Company for the three- and six-month periods ended June 30, 2004 and 2003. This discussion and analysis should be read in conjunction with our consolidated interim financial statements and the related notes included in this Form 10-Q.

RESULTS OF OPERATIONS

	Three-months ended June 30,				Six-months ended June 30,
Key Financial Metrics
	2004		2003		2004		2003
Revenue growth—outsourced portals	21	%	13	%	23	%	14	%
Same state revenue growth—outsourced portals	18	%	5	%	20	%	5	%
Revenue growth—software & services	(24	)%	(30	)%	(22	)%	(27	)%
Gross profit %—outsourced portals	49	%	48	%	51	%	48	%
Gross profit %—software & services	21	%	19	%	13	%	20	%
Selling & administrative as % of revenue	21	%	23	%	21	%	24	%
Operating income margin %	22	%	15	%	21	%	14	%

        PORTAL REVENUES. We categorize our portal revenues according to the underlying source of revenue. A brief description of each category follows:

•

DMV transaction-based: these are transaction fees from the sale of driver history records, referred to as DMV records, from our state portals to data resellers, insurance companies and other pre-authorized customers, and are generally recurring.



•

Non-DMV transaction-based: these are transaction fees other than from the sale of DMV records for transactions conducted by businesses and citizens through our state and local portals, and are generally recurring. For a representative listing of non-DMV services we currently offer through our state and local portals, refer to Part I, Item 1 of our December 31, 2003 Form 10-K filed with the SEC on March 12, 2004.



•

Portal management: these are recurring fees paid to us by our government clients for the operation of state and local portals, which typically supplement transaction-based fees.



•

Software development: these are fees from the performance of software development projects and other time and materials services for our government clients. While we actively market these services, they may not have the same degree of predictability as our transaction-based or portal management revenues.

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	Three-Months Ended June 30,				Six-Months Ended June 30,
(in thousands) Portal Revenue Analysis
	2004		2003		2004		2003
DMV transaction-based	$	7,650	$	6,187	$	15,529	$	12,218
Non-DMV transaction-based		3,597		2,820		6,940		5,261
Portal management		102		299		204		599
Software development		906		843		1,813		1,861
Total	$	12,255	$	10,149	$	24,486	$	19,939

        Portal revenues for the current quarter increased 21%, or approximately $2.1 million, over the prior year quarter. Of this increase, 17%, or approximately $1.7 million, was attributable to an increase in same state portal revenues (states in operation and generating DMV revenues for two full years), and 6%, or approximately $0.6 million, was primarily attributable to our Kentucky portal, which began to generate DMV revenues in mid-September 2003. These increases were partially offset by a decrease in revenues from our local portal business, primarily due to the continued wind down of certain of our unprofitable local portal businesses. We expect local portal revenues to continue to decrease on a year-over-year basis for the balance of 2004. Same state portal revenues in the current quarter increased 18%, or approximately $1.7 million, over the prior year quarter primarily as a result of increased transaction revenues from our Indiana, Montana, Tennessee and Utah portals. Our same state revenue growth in the current quarter was higher than the 5% growth we achieved in the prior year quarter due in part to a 13% increase (approximately $0.8 million) in same state DMV transaction-based revenues. This increase was mainly attributable to modest price increases in two of our portal states, as previously disclosed. In addition, same state non-DMV transaction-based revenues increased 37%, or approximately $1.0 million, in the current quarter due to the addition of several new revenue generating applications in existing portals.

        Portal revenues for the six months in the current period increased 23%, or approximately $4.5 million, over the prior year period. Of this increase, 17%, or approximately $3.5 million, was attributable to an increase in same state portal revenues and 8%, or approximately $1.7 million, was mostly attributable to our Kentucky portal. These increases were partially offset by a decrease in revenues from our local portal business, as further discussed above. Same state portal revenues in the current year-to-date period increased 20%, or approximately $3.5 million, over the prior year period.

        COST OF PORTAL REVENUES. Cost of portal revenues for the current quarter increased 17%, or approximately $0.9 million, over the prior year quarter. Of this increase, 16%, or approximately $0.9 million, was attributable to an increase in same state cost of portal revenues and 2%, or approximately $0.1 million, was primarily attributable to our newer Kentucky portal. These increases were offset by a decrease in expenses from our local portals as a result of the continued wind down of certain of our unprofitable local portal businesses.

        Our portal gross profit rate in the current quarter increased to 49% from 48% in the prior year quarter. This increase was primarily attributable to a full quarter of operations in 2004 from our Kentucky portal. Our same state portal gross profit rate was approximately 53% in the current and prior year quarters. We are generally able to increase our same state portal gross profit rate by increasing user adoption of existing portal applications, building new non-DMV revenue generating applications, and on occasion, increasing the per transaction prices of services offered through the portals. We intend to continue to expand our portal operations by developing and promoting new non-DMV applications and services within existing portals. Accordingly, we expect our same state gross profit rate to continue to increase modestly in the foreseeable future.

        Cost of portal revenues for the six months in the current period increased 16%, or approximately $1.7 million, over the prior year period. Of this increase, 14%, or approximately $1.5 million was attributable to an increase in same state cost of portal revenues, and 4% was attributable to our newer

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portals, including Kentucky and Alabama. Partially offsetting these increases was a decrease from our local portals as a result of our cost reduction efforts in certain of our local portals over the past year in an effort to improve profitability.

        Our portal gross profit rate in the current year-to-date period increased to 51% from 48% in the prior year period. Our same state portal gross profit rate was 52% in the current year-to-date period compared to 51% in the prior year period.

        SOFTWARE & SERVICES REVENUES. In the analysis below, we have categorized our software & services revenues by type of business:

	Three-Months Ended June 30,				Six-Months Ended June 30,
(in thousands) Software & Services Revenue Analysis
	2004		2003		2004		2003
Corporate Filings—California SOS	$	1,275	$	2,031		2,632	$	3,827
Corporate filings—Legacy contracts		49		36		116		92
Ethics & Elections		566		537		1,133		1,210
Transportation		102		109		208		210
AOL		53		15		94		108
Other		37		29		88		40
Total	$	2,082	$	2,757	$	4,271	$	5,487

        Software and services revenues for the three- and six-month periods ended June 30, 2004 decreased by 24%, or approximately $0.7 million, and 22%, or approximately $1.2 million, respectively, from the prior year periods mainly due to a decrease in revenues from our corporate filings business. We recognized approximately $1.3 million and $2.6 million in revenue from our contract with the California Secretary of State for the three- and six-month periods ended June 30, 2004 compared to $2.0 million and $3.8 million in the prior year periods, respectively. We recognize revenues and profit on our contract with the California Secretary of State using the percentage of completion method as we make progress, primarily utilizing costs incurred to date as compared to the estimated total cost for the contract.

        COST OF SOFTWARE & SERVICES REVENUES. The decrease in cost of software & services revenues for the three- and six-month periods ended June 30, 2004 was mainly due to a decrease in project costs incurred on our contract with the California Secretary of State, and was relatively consistent with the corresponding decrease in project revenues as further discussed above. Additionally, in the first quarter of 2004, we reduced our expected profit margin on this contract from approximately 6% to 4% due to an increase in estimated costs to complete the contract. This margin adjustment adversely affected our software & services gross profit rate for the six-month period ended June 30, 2004.

        SELLING & ADMINISTRATIVE. Selling & administrative expenses as a percentage of revenue decreased to 21% in the current quarter from 23% in the prior year quarter. On a year-to-date basis, selling & administrative expenses as a percentage of revenue decreased to 21% in the current period from 24% in the prior year period. We expect selling & administrative expenses as a percentage of revenues to continue to decline as our revenues grow and our corporate-level expenses remain relatively flat year over year.

        DEPRECIATION & AMORTIZATION. Depreciation expense decreased for the three- and six-month periods ended June 30, 2004 as certain capital expenditures made after our initial public offering in 1999 have become fully depreciated. We expect depreciation & amortization expense for fiscal 2004 to range from $1.6 to $1.8 million.

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        INCOME TAX PROVISION. Our effective tax rate was between 42% and 43% in the current periods compared to 40% in the prior year periods. Our income tax provision in the current periods was more than the amount customarily expected due primarily to an increase in the state portion of our income tax provision attributable to certain states in which we are currently paying income taxes. Prospectively, we expect our effective tax rate to range from 40% to 43%.

LIQUIDITY AND CAPITAL RESOURCES

        Net cash provided by operating activities was $8.0 million for the current period compared to $0.4 million in the prior year period. The increase in cash flow from operations was primarily the result of $6.1 million in payments received from the California Secretary of State at the end of the current quarter and partially due to a year-over-year increase in operating income, excluding non-cash charges. These payments from the California Secretary of State contributed to the significant decrease in other current assets in the current period, reducing unbilled revenues. We have been recognizing revenues on this contract under percentage of completion accounting as progress is made on the project. The increase in accrued expenses in the current period was partially due to accrued subcontractor costs on this project, as we are not required to pay certain subcontractors until we receive major milestone payments under the contract. Approximately $1.2 million of the payments received in the second quarter of 2004 will be paid to certain subcontractors in the third quarter of 2004. For additional discussion of the major milestone payments under our contract with the California Secretary of State, refer to Note 2 in the Notes to Consolidated Financial Statements in this Form 10-Q.

        We recognize revenue from providing outsourced government portal services net of the transaction fees due to the government when the services are provided. The fees that the Company must remit to the government are accrued as accounts payable and accounts receivable at the time services are provided. As a result, trade accounts receivable and accounts payable reflect the gross amounts outstanding at the balance sheet dates. Gross billings for the three-months ended June 30, 2004 and December 31, 2003 were approximately $49.9 million and $45.0 million, respectively. The Company calculates days sales outstanding by dividing trade accounts receivable at the balance sheet date by gross billings for the period and multiplying the resulting quotient by the number of days in that period. Days sales outstanding for each of the three-month periods ended June 30, 2004 and December 31, 2003 was 37.

        We believe that working capital is an important measure of our short-term liquidity. Working capital, defined as current assets minus current liabilities, increased to $30.9 million at June 30, 2004 from $24.4 million at December 31, 2003. Our current ratio, defined as current assets divided by current liabilities, was 2.4 at June 30, 2004 and 2.1 at December 31, 2003. The increase in working capital in the current quarter was due to an increase in cash and accounts receivable and a decrease in accounts payable, which was partially offset by a decrease in other current assets and an increase in accrued liabilities, as further discussed above.

        Cash used in investing activities in the current year period reflects approximately $0.9 million in capital expenditures offset by the maturity of marketable securities (as further discussed in Note 2 in the Notes to Consolidated Financial Statements included in this Form 10-Q) and proceeds from our minority investment in E-Filing (as further discussed in Note 6 in the Notes to Consolidated Financial Statements included in this Form 10-Q). The increase in capital expenditures in the current period was mostly attributable to computer equipment purchases relating to our recent move to a new data center for company-wide hosting and disaster recovery purposes.

        Financing activities in the current period resulted in net cash generated of approximately $0.2 million, reflecting proceeds from the exercise of employee stock options. Financing activities in the prior year period resulted in net cash generated of approximately $0.9 million, primarily reflecting a decrease in restricted cash and cash equivalents.

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        At June 30, 2004, our total unrestricted cash balance was $21.4 million compared to $13.5 million at December 31, 2003. At June 30, 2004, we had posted $5.3 million in cash as collateral for bank letters of credit issued on behalf of the Company and our bank note payable, which we paid off in full in July 2004. As of June 30, 2004 we are no longer required to collateralize our $500,000 line of credit in conjunction with a corporate credit card agreement, which was previously collateralized by approximately $250,000 in marketable securities. We issue letters of credit as collateral for performance on certain of our government contracts and as collateral for certain performance bonds. These irrevocable letters of credit are generally in force for one year. Our collateral requirements under our current banking agreement may ease over time as we continue to produce consecutive quarters of profitability and earnings growth. However, even though we expect to be profitable for the remainder of 2004 and beyond, we may not be able to sustain our current levels of profitability or increase profitability on a quarterly or annual basis. We will need to generate sufficiently higher revenues while containing costs and operating expenses if we are to achieve growing profitability. We cannot be certain that our revenues will continue to grow or that we will ever achieve sufficient revenues to become profitable on a long-term, sustained basis. If we are not able to sustain profitability, our cash collateral requirements may increase. Had the Company been required to post 100% cash collateral at June 30, 2004 for the face value of all performance bonds (which are supported by letters of credit), our line of credit in conjunction with a corporate credit card agreement and our bank note payable, unrestricted cash would have decreased and restricted cash would have increased by approximately $2.8 million.

        We believe that our currently available liquid resources and cash generated from operations will be sufficient to meet our operating requirements, capital expenditure requirements, and current growth initiatives for the next twelve months without the need of additional capital. However, we may need to raise additional capital before this period ends to further:

•

fund operations, including the costs to fund our contract with the California Secretary of State and subcontractors on that project;



•

collateralize letters of credit, which the Company is required to post as collateral for performance on certain of its outsourced government portal contracts and as collateral for certain performance bonds;



•

support our expansion into other states and government agencies beyond what is contemplated if unforeseen opportunities arise;



•

expand our product and service offerings beyond what is contemplated if unforeseen opportunities arise;



•

respond to unforeseen competitive pressures; and



•

acquire complementary technologies beyond what is contemplated if unforeseen opportunities arise.

        Any projections of future earnings and cash flows are subject to substantial uncertainty. If our unrestricted cash and cash generated from operations are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities, issue debt securities, or increase our working capital line of credit. The sale of additional equity securities could result in dilution to the Company's shareholders. There can be no assurance that financing will be available in amounts or on terms acceptable to the Company, if at all.

        At June 30, 2004, we were bound by performance bond commitments totaling approximately $7.3 million on certain government contracts. Of this amount, $5 million relates to the performance bond requirement on our contract with the California Secretary of State. However, we have never had any defaults resulting in draws on performance bonds. We do not have off-balance sheet arrangements or significant exposures to liabilities that are not recorded or disclosed in our financial statements. While we have significant operating lease commitments for office space, those commitments are generally tied to the period of performance under related contracts.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        INTEREST RATE RISK. Our exposure to market risk for changes in interest rates relates to the increase or decrease in the amount of interest income we can earn on our cash balances and the increase or decrease in the amount of interest expense we incur on our bank note payable, which we paid off in full in July 2004. We limit our exposure to credit loss by depositing our cash and cash equivalents with high credit quality financial institutions. We ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and investment risk. We do not use derivative financial instruments. A 10% change in interest rates would not have a material effect on our financial condition, results of operations or cash flows.

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ITEM 4. CONTROLS AND PROCEDURES

a)    EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

        The Company maintains a set of disclosure controls and procedures designed to ensure that material information required to be disclosed in its filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The Company's Chief Executive Officer and Chief Financial Officer have evaluated these disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q and have determined that such disclosure controls and procedures were adequately designed and operating effectively.

b)    CHANGES IN INTERNAL CONTROLS

        Subsequent to the evaluation by the Company's Chief Executive Officer and Chief Financial Officer, there were no significant changes in internal controls over financial reporting that could significantly affect such controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART II. OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        The Company held its Annual Meeting of Shareholders on May 4, 2004. At the meeting, the following matters were voted upon by the shareholders:

1.

The election of five (5) Directors to serve for the upcoming year;



2.

A proposal to approve the 2004 Amended and Restated Stock Option Plan;



3.

A proposal to ratify the appointment of PricewaterhouseCoopers LLP as the Company's independent public accountants for the fiscal year ending December 31, 2004.

        The Board of Directors of the Company is composed of five (5) members. The following were the nominees of management voted upon and elected by the holders of the Company's common stock as of the record date: Jeffery S. Fraser, John L. Bunce, Jr., Daniel J. Evans, Ross C. Hartley and Pete Wilson. In the election of directors, there were 52,608,156 votes "for" Jeffery S. Fraser and 2,974,772 votes "withheld"; 52,217,415 votes "for" John L. Bunce, Jr. and 3,365,513 votes "withheld"; 52,266,068 votes "for" Daniel J. Evans and 3,316,860 votes "withheld"; 54,255,769 votes "for" Ross C. Hartley and 1,327,159 votes "withheld"; 53,953,419 votes "for" Pete Wilson and 1,629,509 votes "withheld".

        The total votes cast pertaining to the approval of the 2004 Amended and Restated Stock Option Plan were as follows: 36,197,539 voted "for", 7,236,599 voted "against" and 89,143 "abstentions".

        The total votes cast pertaining to the ratification of the appointment of PricewaterhouseCoopers LLP were as follows: 53,544,555 voted "for", 2,028,941 voted "against" and 9,450 "abstentions".

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a)    EXHIBITS

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 furnished in accordance with Securities Act Release 33-8212

b)    REPORTS ON FORM 8-K

        A Report on Form 8-K was filed with the Securities and Exchange Commission on July 30, 2004, with attached press release of the Company dated July 29, 2004, announcing second quarter operating results for fiscal 2004.

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SIGNATURES

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

	NIC INC.
Dated: August 9, 2004	/s/ Eric J. Bur Eric J. Bur Chief Financial Officer
Dated: August 9, 2004	/s/ Stephen M. Kovzan Stephen M. Kovzan Vice President, Financial Operations and Chief Accounting Officer

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PART I—FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements

NIC Inc. CONSOLIDATED BALANCE SHEETS (UNAUDITED) thousands except for share amounts
NIC Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) thousands except for per share amounts
NIC Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) thousands

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES

PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES

EX-31.1

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Exhibit 31.1

CERTIFICATION

I, Jeffery S. Fraser, certify that

1.

I have reviewed this quarterly report on Form 10-Q of NIC Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 9, 2004

/s/ Jeffery S. Fraser Jeffery S. Fraser
Chairman of the Board and
Chief Executive Officer

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CERTIFICATION

EX-31.2

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Exhibit 31.2

CERTIFICATION

I, Eric J. Bur, certify that

1.

I have reviewed this quarterly report on Form 10-Q of NIC Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 9, 2004

/s/ Eric J. Bur Eric J. Bur
Chief Financial Officer

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CERTIFICATION

EX-32.1

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Exhibit 32.1

CERTIFICATION OF PERIODIC REPORT

        The undersigned Chairman of the Board and Chief Executive Officer and Chief Financial Officer of NIC Inc. (the "Company) each hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

        (1)   the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2004 (the "Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

        (2)   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 9, 2004

/s/ Jeffery S. Fraser Jeffery S. Fraser
Chairman of the Board and
Chief Executive Officer

/s/ Eric J. Bur Eric J. Bur
Chief Financial Officer

        A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

        This certification "accompanies" the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q, irrespective of any general incorporation language contained in such filing).

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CERTIFICATION OF PERIODIC REPORT