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, 2005

Commission file number 000-26621

NIC INC.

(Exact name of registrant as specified in its charter)

Colorado	52-2077581
(State or other jurisdiction of	(I.R.S Employer
incorporation or organization)	Identification No.)
10540 South Ridgeview Road
Olathe, Kansas	66061
(Address of principal executive offices)	(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 June 30, 2005 was 60,030,662.

PART I - FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

NIC INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

thousands except for share amounts

	June 30,			December 31,
	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	34,898		$	30,769
Cash and cash equivalents - restricted	—			3,000
Marketable securities	8,000			—
Trade accounts receivable	22,323			17,610
Unbilled revenues	1,133			3,400
Deferred income taxes	807			433
Prepaid expenses & other current assets	1,025			1,312
Total current assets	68,186			56,524
Property and equipment, net	2,360			2,603
Unbilled revenues	979			2,404
Deferred income taxes	30,543			31,274
Other assets	204			266
Total assets	$	102,272		$	93,071
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	19,372		$	14,394
Accrued expenses	5,200			6,266
Application development contracts	1,458			—
Other current liabilities	120			151
Total current liabilities	26,150			20,811
Commitments and contingencies (Notes 2 and 3)	—			—
Shareholders’ equity:
Common stock, no par, 200,000,000 shares authorized 60,030,662 and 59,301,375 shares issued and outstanding	—			—
Additional paid-in capital	203,189			200,921
Accumulated deficit	(126,883		)	(128,456		)
	76,306			72,465
Less treasury stock	(184		)	(205		)
Total shareholders’ equity	76,122			72,260
Total liabilities and shareholders’ equity	$	102,272		$	93,071

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

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NIC INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

thousands except for per share amounts

	Three-months ended					Six-months ended
	June 30,					June 30,
	2005		2004			2005			2004
Revenues:
Portal revenues	$	14,386	$	12,255		$	28,047		$	24,486
Software & services revenues	1,231		2,082			(1,150		)	4,271
Total revenues	15,617		14,337			26,897			28,757
Operating expenses:
Cost of portal revenues, exclusive of depreciation & amortization	7,093		6,189			13,808			12,042
Cost of software & services revenues, exclusive of depreciation & amortization	948		1,649			3,325			3,729
Selling & administrative	3,277		2,945			6,559			6,177
Depreciation & amortization	368		380			720			769
Total operating expenses	11,686		11,163			24,412			22,717
Operating income	3,931		3,174			2,485			6,040
Other income (expense):
Interest income	155		23			236			44
Interest expense	—		(4		)	—			(9		)
Equity in net loss of affiliates	—		(40		)	—			(109		)
Other income (expense), net	—		—			(3		)	—
Total other income (expense)	155		(21		)	233			(74		)
Income before income taxes	4,086		3,153			2,718			5,966
Income tax provision	1,616		1,327			1,145			2,538
Net income	$	2,470	$	1,826		$	1,573		$	3,428
Basic net income per share	$	0.04	$	0.03		$	0.03		$	0.06
Diluted net income per share	$	0.04	$	0.03		$	0.03		$	0.06
Weighted average shares outstanding:
Basic	59,832		58,870			59,618			58,807
Diluted	60,794		60,884			60,736			60,950

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,
	2005			2004
Cash flows from operating activities:
Net income	$	1,573		$	3,428
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation & amortization	720			769
Application development contracts	1,458			(19		)
Deferred income taxes	1,037			2,376
Equity in net loss of affiliates	—			109
Changes in operating assets and liabilities:
(Increase) in trade accounts receivable	(4,713		)	(2,685		)
Decrease in unbilled revenues	3,692			3,715
Decrease in prepaid expenses & other current assets	293			348
Decrease in other assets	62			2
Increase (decrease) in accounts payable	4,978			(1,470		)
Increase (decrease) in accrued expenses	(1,066		)	1,314
(Decrease) in other current liabilities	(31		)	(15		)
Net cash provided by operating activities	8,003			7,872
Cash flows from investing activities:
Purchases of property and equipment	(478		)	(855		)
Purchases of marketable securities	(23,000		)	—
Maturities of marketable securities	15,000			250
Proceeds from sale of affiliate	—			300
Net cash used in investing activities	(8,478		)	(305		)
Cash flows from financing activities:
Cash and cash equivalents - restricted	3,000			77
Payments on note payable	—			(77		)
Proceeds from employee common stock purchases	122			117
Proceeds from exercise of employee stock options	1,482			216
Net cash provided by financing activities	4,604			333
Net increase in cash and cash equivalents	4,129			7,900
Cash and cash equivalents, beginning of period	30,769			13,540
Cash and cash equivalents, end of period	$	34,898		$	21,440
Other cash flow information:
Interest paid	$	—		$	9
Income taxes paid	$	449		$	224

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/A for the year ended December 31, 2004, filed with the SEC on March 16, 2005, and Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Marketable securities

The Company’s marketable securities at June 30, 2005 were classified as available-for-sale and consisted of short-term auction rate government-backed obligations. These investments are stated at fair value with any unrealized holding gains or losses included as a component of shareholders’ equity as accumulated other comprehensive income or loss until realized. The cost of securities sold is based on the specific identification method. The fair values of the Company’s marketable securities are based on quoted market prices at the reporting date.  Gross realized gains and losses and unrealized holding gains and losses through June 30, 2005 were not significant.

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 employee common stock options and common stock warrants 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				Six-months
	Ended June 30,				Ended June 30,
	2005		2004		2005		2004
Numerator:
Net income	$	2,470	$	1,826	$	1,573	$	3,428
Denominator:
Weighted average shares - basic	59,832		58,870		59,618		58,807
Employee common stock options	962		2,014		1,118		2,143
Weighted average shares - diluted	60,794		60,884		60,736		60,950
Basic earnings per share:
Net income	$	0.04	$	0.03	$	0.03	$	0.06
Diluted earnings per share:
Net income	$	0.04	$	0.03	$	0.03	$	0.06

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Outstanding employee common stock options totaling 0.5 million and 0.7 million shares during the three- and six-month periods ended June 30, 2005, 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- and six-month periods ended June 30, 2005 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 totaling 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 common stock warrants issued to AOL totaling 0.6 million common shares during the three-month period 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 period.

Stock-based compensation

The Company accounts for its stock-based compensation plans using the intrinsic value method prescribed in Accounting Principles Board Opinion (“APB”) 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 (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation (in thousands, except per share amounts):

	Three-months						Six-months
	Ended June 30,						Ended June 30,
	2005			2004			2005			2004
Net income, as reported	$	2,470		$	1,826		$	1,573		$	3,428
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	(161		)	(531		)	(483		)	(1,138		)
Pro forma net income	$	2,309		$	1,295		$	1,090		$	2,290
Basic and diluted net income per share, as reported	$	0.04		$	0.03		$	0.03		$	0.06
Basic and diluted net income per share, pro forma	$	0.04		$	0.02		$	0.02		$	0.04

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

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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.

The following table summarizes information about the Company’s employee common stock options outstanding at June 30, 2005:

	Options Outstanding				Options Exercisable
Range of Exercise Price	Shares Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Shares Outstanding	Weighted Average Exercise Price
$1.53-2.24	533,748	1.0	$	1.95	504,749	$	1.95
$2.30-3.40	1,279,550	2.9	$	3.05	353,552	$	2.89
$3.47-5.18	794,741	2.0	$	3.97	516,081	$	3.84
$5.46-8.19	479,450	2.4	$	6.76	242,052	$	6.96
$9.50-19.32	27,300	0.1	$	10.66	27,300	$	10.66
	3,114,789	2.2	$	3.73	1,643,734	$	3.65

Recent accounting pronouncements

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R (revised 2004), “Share-Based Payment,” that requires companies to expense the grant-date fair value of stock options and other equity-based compensation issued to employees.  SFAS No. 123R eliminates the use of the intrinsic value method prescribed in APB No. 25 that the Company currently uses to account for its stock-based compensation plans.  SFAS No. 123R is effective for annual periods beginning after June 15, 2005.  The Company will be required to adopt SFAS No. 123R in the first quarter of 2006.  The Company currently expects to use the modified prospective transition method, which would not require the Company to restate its financial statements prior to the effective date of SFAS No. 123R.  For vested stock option awards that are outstanding on the effective date of SFAS No. 123R, the modified prospective method would not require the Company to record any additional compensation expense.  For unvested stock option awards that are outstanding on the effective date, awards that were previously included as part of the pro forma net income and earnings per share calculations of SFAS No. 123 would be charged to expense over the remaining vesting period, without any changes in measurement.  For all new stock option awards that are granted or modified after the effective date, the Company would use SFAS No. 123R’s measurement model, expense recognition, and settlement provisions.  Based on the expected remaining unrecognized fair value of stock option awards the Company estimated for purposes of preparing its current SFAS No. 123 pro forma disclosures above, the effect of adopting SFAS No. 123R in 2006 on net income

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is expected to be approximately $0.8 million, or approximately $0.01 per share.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

2. CALIFORNIA SECRETARY OF STATE APPLICATION DEVELOPMENT CONTRACT

In September 2001, NICUSA and the Company’s NIC Conquest subsidiary were awarded a five-year contract by the California Secretary of State (the “California SOS”) to develop and implement a comprehensive information management and filing system.  The contract with the Business Programs Division of the California SOS is valued at approximately $25 million.  The Company recognizes revenues from this contract on the percentage of completion method, utilizing costs incurred to date as compared to the estimated total cost.  Revenues and profit (loss) from this contract are based on the Company’s estimates to complete and are reviewed periodically, with adjustments recorded in the period in which the revisions are made.  Any anticipated contract loss is charged to operations as soon as determinable.

Prior to the first quarter of 2005, key elements of the Company’s obligations under the California SOS contract were subcontracted to various third parties under fixed price contracts.  At the end of the first quarter of 2005, as a result of system delivery issues and the concern over the ability of one of the two remaining subcontractors to meet the criteria set forth by the California SOS, the Company determined it would assume the lead project manager role on the contract, previously performed by this subcontractor.  As a result of this change, the Company further evaluated the status of the project and concluded that a further modification to the management and oversight structure of the project was necessary to improve performance under the contract and that additional internal project management and technical personnel would be required on the engagement.  The Company also reevaluated the expected completion date of the project, which was previously estimated to be in the first quarter of 2006, and determined to revise the estimated completion date to the end of 2006.  As a result of the Company’s decision to commit these additional resources and the extension of the expected project completion date, the Company recorded a $5.0 million adjustment under percentage of completion accounting in the first quarter of 2005, as the Company expects to incur a loss of approximately $4.2 million on this project, instead of a previously projected profit of approximately $1.0 million.

The effect of the adjustment under percentage of completion accounting in the Company’s consolidated statements of income resulted in a reduction of software & services revenues of approximately $3.5 million and an increase in cost of software & services revenues of approximately $1.5 million.  The effect of the adjustment in the Company’s consolidated balance sheets was a reduction in unbilled revenues of approximately $3.5 million and an increase in application development contracts (a current liability) of approximately $1.5 million.  The following table summarizes information about the Company’s cost estimates and percentage of completion on its contract with the California SOS at June 30, 2005 (in millions):

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Contract value	$	25.0
Project cost incurred to date	19.6
Estimated costs to complete	9.6
Estimated total costs	29.2
Estimated loss on contract	$	(4.2	)
Percent complete	67		%

At June 30, 2005, management believes its estimates of total contract costs and costs to complete are reasonable.  However, it is possible that the Company will similarly incur cost overruns in the future as a result of unforeseen difficulties in the creation of an application called for in the contract, unforeseen challenges in ensuring compatibility with existing systems, rising development, subcontractor and personnel costs or other reasons. If this occurs, the Company’s results of operations, financial condition and cash flows could be seriously harmed.  Because of the inherent uncertainties in estimating cost of completion, it is at least reasonably possible that the estimate will change in the near term.

In March 2002, the Company issued a $5 million performance bond to the California SOS required by the contract, which is collateralized by a $5 million letter of credit.  In 2004, the Company received milestone payments totaling approximately $6.6 million for the delivery of the UCC filing system into production and acceptance testing.  Of the $6.6 million in milestone payments received, approximately $1.0 million related to work that had not been fully completed at June 30, 2005.  The Company is scheduled to receive two additional milestone payments of approximately $3.3 million each in the future.  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 California SOS and commencement of the associated maintenance period.  Upon acceptance of the business entity filing system and commencement of the associated maintenance period, the Company will no longer be required to provide a performance bond under this contract.  The Company has never had any defaults resulting in draws on performance bonds.

Unbilled revenues relating to the Company’s contract with the California SOS at June 30, 2005 and December 31, 2004 were approximately $1.9 million and $5.6 million, respectively.

At June 30, 2005, the Company’s corporate filings business was primarily engaged in servicing its contract with the California SOS.  This software & services business is not actively marketing its applications and services to new government entities.

3. CREDIT FACILITIES 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 $5.3 million and $6.4 million at June 30, 2005 and December 31, 2004, respectively.  At December 31, 2004, the Company was required to

8

collateralize certain letters of credit with $3.0 million of its cash and cash equivalents.  In April 2005, the Company’s cash collateral requirements under its current banking agreement were eliminated, and the Company is no longer required to cash collateralize letters of credit.

The Company has a $500,000 working capital line of credit, which was unused at June 30, 2005 and December 31, 2004.

At December 31, 2004, the Company had pledged $3.0 million of its cash as collateral under the financing arrangement that covers the Company’s outstanding letters of credit 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 classifies cash used for collateral purposes as restricted in its consolidated balance sheets.

4. INCOME TAXES

In 2005 and 2004, certain employees and directors of the Company exercised non-qualified stock options.  As a result, the Company received federal income tax deductions.  The tax benefit for the deductions of approximately $371,000 and $73,000 for the three-month periods ended June 30, 2005 and 2004, respectively, and approximately $680,000 and $171,000 for the six-month periods ended June 30, 2005 and 2004, respectively, were credited directly to additional paid-in capital.

In October 2004, the American Jobs Creation Act of 2004 was enacted into law.  The new law contains provisions that could impact the Company. These provisions provide for, among other things, a special deduction from U.S. taxable income equal to a stipulated percentage of qualified income from domestic production activities (as defined) beginning in 2005.  This provision is complex and subject to numerous limitations.  The Company is still studying the new law, including the technical provisions related to the complex provision noted above.  The effect on the Company of the new law, if any, has not yet been determined, in part because the Company has not definitively determined whether its operations qualify for the special deduction. If the Company determines it qualifies for the special deduction, the tax benefit of such special deduction would be recognized in the period earned.

5. 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 government portals and the corporate divisions that support portal operations.  The Software & Services segment primarily includes the Company’s corporate filings (NIC Conquest) and ethics & elections filings (NIC Technologies) businesses.  Each of the Company’s Software & Services businesses is an operating segment and has been aggregated to form the Software & Services reportable segment. 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 measure of profitability by which management evaluates the performance of its segments and allocates resources to them is operating income (loss).  Segment asset or other segment balance sheet information is not presented to the Company’s chief operating decision maker.  Accordingly, the Company has not presented information relating to segment assets.

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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
2005
Revenues	$	14,386	$	1,231	$	—		$	15,617
Costs & expenses	7,772		1,124		2,422			11,318
Depreciation & amortization	299		49		20			368
Operating income (loss)	6,315		58		(2,442		)	3,931
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

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):

	2005		2004
Total operating income for reportable segments	$	3,931	$	3,174
Interest income	155		23
Interest expense	—		(4		)
Equity in net loss of affiliates	—		(40		)
Consolidated income before income taxes	$	4,086	$	3,153

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
2005
Revenues	$	28,047	$	(1,150	)	$	—		$	26,897
Costs & expenses	15,090		3,658			4,944			23,692
Depreciation & amortization	586		96			38			720
Operating income (loss)	12,371		(4,904		)	(4,982		)	2,485
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

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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):

	2005			2004
Total operating income for reportable segments	$	2,485		$	6,040
Interest income	236			44
Interest expense	—			(9		)
Equity in net loss of affiliates	—			(109		)
Other income (expense), net	(3		)	—
Consolidated income before income taxes	$	2,718		$	5,966

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

FORWARD-LOOKING STATEMENTS

“Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995: Statements in this Quarterly Report on Form 10-Q regarding NIC and its business, which are not historical facts, are “forward-looking statements” that involve risks and uncertainties.   Certain matters discussed in this report may constitute forward-looking statements within the meaning of the federal securities laws that inherently include certain risks and uncertainties. For example, statements like we “expect,” we “believe,” we “plan,” we “intend” or we “anticipate” are forward-looking statements. Investors should be aware that our 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 Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on March 16, 2005. Other factors not presently identified may also cause actual results to differ.  In addition, we will not necessarily update the information in this Quarterly Report on Form 10-Q if any forward-looking statement later turns out to be inaccurate. Management continuously updates and revises these estimates and assumptions based on actual conditions experienced.  However, it is not practicable to publish all revisions and, as a result, no one should assume that results projected in or contemplated by the forward-looking statements will continue to be accurate in the future.

OVERVIEW

The following discussion summarizes the significant factors affecting operating results of the Company for the three- and six-month periods ended June 30, 2005 and 2004.  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.

FIRST QUARTER 2005 CHARGE - CALIFORNIA SECRETARY OF STATE CONTRACT

Results of operations for the six-month period ended June 30, 2005 include a $5.0 million charge we recorded on our software & services engagement with the California Secretary of State in the first quarter of 2005, as further discussed in Note 2 in the Notes to Consolidated Financial Statements included in this Form 10-Q.  Prior to the first quarter of 2005, key elements of our obligations under the California SOS contract were subcontracted to various third parties under fixed price contracts.  At the end of the first quarter of 2005, as a result of system delivery issues and the concern over the ability of one of the two remaining subcontractors to meet the criteria set forth by the California SOS, we determined we would assume the lead project manager role on the contract, previously performed by this subcontractor.  As a result of this change, we further evaluated the status of the project and concluded that a further modification to the management and oversight structure of the project was necessary to improve performance under the contract and that additional internal project management and technical personnel would be required on the engagement.  We also reevaluated the expected completion date of the project, which was previously estimated to be in the first quarter of 2006, and determined to revise the estimated completion date to the end of 2006.  As a result of our decision to commit these additional resources and the extension of the

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expected project completion date, we recorded a $5.0 million charge in the first quarter of 2005 for the anticipated contract loss.

As part of a broad strategic refocusing of the Company on our core outsourced portal business, we became profitable in the second half of 2002 and have been profitable since that time except for the first quarter of 2005, as a result of the $5.0 million charge we recorded on our software & services engagement with the California Secretary of State.  We expect the Company to continue to be profitable and have focused the business on operations we believe have demonstrable ability to produce positive net income and sustainable cash flow in the future.  However, any projections of future results of operations and cash flows are subject to substantial uncertainty.

At June 30, 2005, our corporate filings software & services business was primarily engaged in servicing its contract with the California SOS.  This business is not actively marketing its applications and services to new government entities.

RESULTS OF OPERATIONS

	Three-months ended June 30,				Six-months ended June 30,
Key Financial Metrics	2005		2004		2005		2004
Revenue growth - outsourced portals	17	%	21	%	15	%	23	%
Same state revenue growth - outsourced portals	18	%	18	%	17	%	20	%
Revenue growth - software & services	(41	)%	(24	)%	(127	)%	(22	)%
Gross profit % - outsourced portals	51	%	49	%	51	%	51	%
Gross profit % - software & services	23	%	21	%	N/A	*	13	%
Selling & administrative as % of revenue	21	%	21	%	24	%	21	%
Operating income margin %	25	%	22	%	9	%	21	%

* Metric not meaningful due to $5.0 million charge on California Secretary of State engagement in the first quarter of 2005.

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 electronic access to driver history records, referred to as DMV records, from our state portals to data resellers, insurance companies and other pre-authorized customers on behalf of our state partners, and are generally recurring.

•Non-DMV transaction-based: these are transaction fees from sources other than the sale of DMV records, for transactions conducted by business users and consumer users through our portals, and are generally recurring.  For a representative listing of non-DMV services we currently offer through our portals, refer to Part I, Item 1 of our December 31, 2004 Form 10-K/A filed with the SEC on March 16, 2005.

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

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

	Three-Months Ended June 30,						Six-Months Ended June 30,
(in thousands)	2005		% Change		2004		2005		%Change		2004
DMV transaction-based	$	8,650	13	%	$	7,650	$	17,300	11	%	$	15,529
Non-DMV transaction-based	5,295		47	%	3,597		9,647		39	%	6,940
Software development & portal management	441		(56	)%	1,008		1,100		(45	)%	2,017
Total	$	14,386	17	%	$	12,255	$	28,047	15	%	$	24,486

Portal revenues in the current quarter increased 17%, or approximately $2.1 million, over the prior year quarter.  Of this increase, 18%, or approximately $2.2 million, was attributable to an increase in same state portal revenues (states in operation and generating DMV revenues for two full years), and approximately 1%, or $0.2 million, was attributable to our South Carolina portal, which began generating DMV revenues in June 2005.  These increases were partially offset by a $0.2 million decrease in revenues from our local portal business, primarily due to the continued wind down of certain of our less profitable local portals.  We expect local portal revenues to continue to decrease on a year-over-year basis for the balance of 2005.  In the first quarter of 2005, the Company ceased providing portal outsourcing services to Kent County, Michigan and the City of Tampa, Florida.  Currently, the only local portals the Company services are those located in states where we operate an official state government portal.

Same state portal revenues in the current quarter increased 18%, or approximately $2.2 million, over the prior year quarter primarily as a result of increased transaction revenues from our Indiana, Tennessee, Oklahoma, Kansas and Maine portals, among others.  Same state DMV transaction-based revenues increased 10%, or approximately $0.8 million, in the current quarter due mainly to modest price increases in two of our portal states.  Same state non-DMV transaction-based revenues increased 50%, or approximately $1.8 million, in the current quarter due to the addition of several new revenue generating applications in existing portals.  Partially offsetting these increases was a 48%, or approximately $0.4 million, decrease in same state software development revenues, as we continue to focus our growth efforts on recurring non-DMV transaction-based revenues, rather than on less predictable time and materials software development projects.

Portal revenues for the six months in the current period increased 15%, or approximately $3.6 million, over the prior year period, primarily due to an increase in same state portal revenues and a month of revenues from our South Carolina portal.  These increases were partially offset by a $0.5 million decrease in revenues from our local portal business, as further discussed above.  Same state portal revenues in the current year-to-date period increased 17%, or approximately $4.0 million, over the prior year period.

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COST OF PORTAL REVENUES.  Cost of portal revenues for the current quarter increased 15%, or approximately $0.9 million, over the prior year quarter.  This increase was primarily attributable to an increase in same state cost of portal revenues as a result of the addition of personnel in several of our portals due to our continued growth and reinvestment in our core business. Also contributing to this increase was an increase in bank fees.  A growing percentage of our non-DMV transaction-based revenues are generated from online applications whereby users pay for information or transactions via credit cards.  We typically earn a percentage of the credit card transaction amount, but also must pay an associated fee to the bank that processes the credit card transaction.  We earn a lower gross profit percentage on these transactions as compared to our other non-DMV applications.  However, we anticipate these revenues and the associated credit card fees will continue to increase in the future, as these transactions contribute favorably to our operating income growth.  Additionally, we incurred approximately $0.2 million in start-up costs relating to our new South Carolina portal contract, which began to generate revenues in the current quarter.  New portal contract wins can have a short-term negative impact on our gross profit percentage during the start-up phase of a portal, as we incur costs to develop and implement the portal infrastructure prior to the time we begin to generate transaction revenues.  Our portal gross profit could be similarly impacted in the future if we are successful in winning new portal contracts.

Our portal gross profit rate in the current quarter increased to 51% compared to 50% in the prior year quarter, while on a same state basis, our portal gross profit rate decreased to 52% in the current quarter compared to 53% in the prior year quarter.  Although same state portal revenues grew by 18% in the current quarter, same state cost of portal revenues increased by approximately 20%, as further discussed above.  We carefully monitor our portal gross profit percentage to strike the balance between generating a solid financial return and delivering value to our government partners through reinvestment in our portals.

Cost of portal revenues for the six months in the current period increased 15%, or approximately $1.8 million, over the prior year period.  Of this increase, 17%, or approximately $2.1 million was attributable to an increase in same state cost of portal revenues, and 3%, or approximately $0.4 million, was attributable to our South Carolina portal.  Partially offsetting these increases was a $0.7 million decrease from our local portals, as further discussed above.  Our portal gross profit rate for the six months in the current and prior year periods was 51%.  Our same state portal gross profit rate was 53% in the current year-to-date period compared to 54% in the prior year period.

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

	Three-Months Ended June 30,						Six-Months Ended June 30,
(in thousands)	2005		%Change		2004		2005			%Change		2004
Corporate filings	$	573	(57	)%	$	1,324	$	(2,576	)	(194	)%	$	2,748
Ethics & elections	544		(4	)%	566		1,153			2	%	1,133
Transportation	88		(14	)%	102		167			(20	)%	208
AOL & other	26		(71	)%	90		106			(42	)%	182
Total	$	1,231	(41	)%	$	2,082	$	(1,150	)	(127	)%	$	4,271

Software & services revenues in the current quarter decreased 41%, or approximately $0.9 million, from the prior year quarter mainly due to a decrease in revenues from our corporate filings business.  We recognized approximately $0.5 million in revenue from our contract with the California Secretary of State in the current quarter compared to $1.3 million in the prior year quarter.  We recognize revenue on our contract with the California Secretary of State using the percentage of completion method as we make progress, utilizing costs incurred to date as compared to the estimated total cost for the contract.

Software & services revenues for the six months in the current period decreased by 127%, or approximately $5.4 million, from the prior year period mainly due to the effect of the first quarter 2005 accounting adjustment under percentage of completion accounting relating to our contract with the California Secretary of State, which resulted in a $3.5 million reduction in software & services revenues, as further discussed above and in Note 2 in the Notes to Consolidated Financial Statements included in this Form 10-Q.

COST OF SOFTWARE & SERVICES REVENUES.  The decrease in cost of software & services revenues in the current quarter was mostly 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.

Cost of software & services revenues for the six months in the current period includes a charge of $1.5 million due to the effect of the accounting adjustment under percentage of completion accounting relating to our contract with the California Secretary of State as further discussed above and in Note 2 in the Notes to Consolidated Financial Statements included in this Form 10-Q.  In the prior year period, we reduced our expected profit margin on this contract from approximately 6% to 4% due to an increase in total estimated costs to complete as a result of adding additional project management resources to the project.  This margin adjustment adversely affected our software & services gross profit rate in the prior year period.

SELLING & ADMINISTRATIVE.  Selling & administrative expenses increased by 11%, or approximately $0.3 million, in the current quarter as a result of a general increase in corporate-level administrative expenses, including business development, marketing, auditing and employee compensation.  Selling & administrative expenses as a percentage of revenue were 21% in the current and prior year quarters.  Selling & administrative expenses as a percentage of

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revenue increased to 24% for the six months in the current period from 21% in the prior year period, mainly due to the effect of the accounting adjustment under percentage of completion accounting recorded in the first quarter of 2005 relating to our contract with the California Secretary of State, which resulted in a $3.5 million reduction in software & services revenues.

INCOME TAX PROVISION.  Our effective tax rate was approximately 40% and 42% in the current quarter and year-to-date periods compared to 42% and 43% in the prior year quarter and year-to-date periods.  Our income tax provision in the prior year 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 be between 40% and 41%.

LIQUIDITY AND CAPITAL RESOURCES

Despite a year-over-year increase in operating income (excluding the $5.0 million charge for the anticipated contract loss on our contract with the California Secretary of State, which did not affect operating cash flow in the current period), cash flow from operations increased by only $0.1 million in the current period, as cash flow from operations in the prior year period includes $6.1 million in payments received from the California Secretary of State in June 2004.  These payments from the California Secretary of State contributed to the significant decrease in other current assets in the prior year period.  The increase in accounts receivable and payable in the current period was attributable to a general increase in revenues across our portal businesses in the current period, including our South Carolina portal, which began to generate DMV revenues in June 2005.  In addition, the timing of payments to certain of our government partners contributed to the increase in accounts payable in the current period.  The decrease in accrued expenses in the current period was attributable to several factors including payments to subcontractors on the California Secretary of State project, bonus payments to management-level employees pursuant to a 2004 incentive plan and payments to employees for 401(k) plan Company matching contributions.

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 payable and accounts receivable reflect the gross amounts outstanding at the balance sheet dates.  Gross billings for the three-months ended June 30, 2005 and December 31, 2004 were approximately $55.0million and $48.3 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 the three-month periods ended June 30, 2005 and December 31, 2004 was 37 and 34, respectively.

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 $42.0 million at June 30, 2005 from $35.7 million at December 31, 2004.  Our current ratio, defined as current assets divided by current liabilities, was 2.6 at June 30, 2005 and 2.7 at December 31, 2004.

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Cash used in investing activities in the current period primarily reflects $8.0 million in net purchases of marketable debt securities in an effort to increase the investment income from our growing cash reserves.  Cash used in investing activities in the prior year period reflects $0.9 million of capital expenditures, mainly for computer equipment purchases relating to our move to a new data center for company-wide hosting and disaster recovery purposes, and $0.3 million in proceeds from the sale of our minority investment in E-Filing.com.

Financing activities in the current period reflect a $3.0 million reduction in our cash collateral requirements under the financing arrangement that covers all of the Company’s outstanding letters of credit, as further discussed in Note 3 in the Notes to Consolidated Financial Statements included in this Form 10-Q.  Cash provided by financing activities in the current period also reflects approximately $1.6 million in proceeds from the exercise of employee stock options and our employee stock purchase program.  Financing activities in the prior year period primarily reflect approximately $0.3 million in proceeds from the exercise of employee stock options and our employee stock purchase program.

At June 30, 2005, our total unrestricted cash and marketable securities balance was $42.9 million compared to $30.8 million at December 31, 2004.  At December 31, 2004, we had posted $3.0 million in cash as collateral for bank letters of credit issued on behalf of the Company.  However, as further discussed in Note 3 of the Notes to Consolidated Financial Statements in this Form 10-Q, in April 2005, the cash collateral requirements under our current banking agreement were eliminated, and we are no longer required to cash collateralize letters of credit.  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 have eased over time as we have continued to operate profitably and grow our earnings.  However, even though we expect to be profitable in 2005 and beyond, we may not be able to sustain or increase profitability on a quarterly or annual basis.  We will need to generate sufficient revenues while containing costs and operating expenses if we are to achieve sustained profitability.  If we are not able to sustain profitability, our cash collateral requirements may increase.  Had we been required to post 100% cash collateral at June 30, 2005 for the face value of all performance bonds (which are partially supported by letters of credit) and our line of credit in conjunction with a corporate credit card agreement, unrestricted cash would have decreased and restricted cash would have increased by approximately $7.8 million.

We do not believe the $5.0 million charge we recorded in the first quarter of 2005 relating to the California Secretary of State project will have a significant impact on our future liquidity, as the additional estimated costs to complete will be incurred relatively evenly over the remaining course of the contract.  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 at least 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;

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•collateralize letters of credit, which we are required to post as collateral for performance on certain of our 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, marketable securities 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, 2005, 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 on our contract with the California Secretary of State, which is collateralized by a $5 million letter of credit.  Upon acceptance of the business entity filing system and commencement of the associated maintenance period, we will no longer be required to provide a performance bond under this contract.  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.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 123R (revised 2004), “Share-Based Payment,” that requires companies to expense the grant-date fair value of stock options and other equity-based compensation issued to employees.  SFAS No. 123R eliminates the use of the intrinsic value method prescribed in APB No. 25 that we currently use to account for our stock-based compensation plans.  SFAS No. 123R is effective for annual periods beginning after June 15, 2005.  We will be required to adopt SFAS No. 123R in the first quarter of 2006.  We currently expect to use the modified prospective transition method, which would not require us to restate our financial statements prior to the effective date of SFAS No. 123R. For vested stock option awards that are outstanding on the effective date of SFAS No. 123R, the modified prospective method would not require us to record any additional compensation expense.  For unvested stock option awards that are outstanding on the effective date, awards that were previously included as part of the

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pro forma net income and earnings per share calculations of SFAS No. 123 would be charged to expense over the remaining vesting period, without any changes in measurement.  For all new stock option awards that are granted or modified after the effective date, we would use SFAS No. 123R’s measurement model, expense recognition, and settlement provisions.  Based on the expected remaining unrecognized fair value of stock option awards we estimated for purposes of preparing our current SFAS No. 123 pro forma disclosures (see Note 1 in the Notes to Consolidated Financial Statements included in this Form 10-Q), the effect of adopting SFAS No. 123R in 2006 on net income is expected to be approximately $0.8 million, or approximately $0.01 per share.

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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 short-term investments in marketable debt securities and cash balances.  Because our investments are in short-term, investment-grade, interest-bearing marketable securities, we are exposed to minimal risk on the principal of those investments. We limit our exposure to credit loss by depositing our cash 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.  Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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 3, 2005.  At the meeting, the following matters were voted upon by the shareholders:

1.The election of six (6) directors to serve for the upcoming year; and

2.A proposal to ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accountants for the fiscal year ending December 31, 2005.

The Board of Directors of the Company is composed of six (6) 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., Art N. Burtscher, Daniel J. Evans, Ross C. Hartley and Pete Wilson.  In the election of directors, there were 55,917,866 votes “for” Jeffery S. Fraser and 401,800 votes “withheld”; 50,899,181 votes “for” John L. Bunce, Jr. and 5,420,486 votes “withheld”; 55,986,209 votes “for” Art N. Burtscher and 333,458 votes “withheld”; 55,980,014 votes “for” Daniel J. Evans and 339,653 votes “withheld”; 55,928,312 votes “for” Ross C. Hartley and 391,354 votes “withheld”; 56,092,572 votes “for” Pete Wilson and 227,095 votes “withheld”.

The total votes cast pertaining to the ratification of the appointment of PricewaterhouseCoopers LLP were as follows: 56,164,757 voted “for”, 151,842 voted “against” and 3,067 “abstentions”.

ITEM 6.  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

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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 5, 2005	/s/Eric J. Bur
	Eric J. Bur
	Chief Financial Officer
Dated:  August 5, 2005	/s/Stephen M. Kovzan
	Stephen M. Kovzan
	Vice President, Financial Operations and Chief Accounting Officer

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