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 September 30, 2002

 

Commission file number  000-26621

 

 

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

 

The number of shares outstanding of the registrant’s common stock as of October 31, 2002 was 58,101,834.

 

 

PART I - FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

 

NIC Inc.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

000’s except for share amounts

 

		September 30, 2002			December 31, 2001
ASSETS
Current assets:
Cash and cash equivalents		$	8,375		$	17,235
Marketable securities		7,162			4,066
Trade accounts receivable		14,637			12,194
Deferred income taxes		1,208			—
Prepaid expenses		649			1,156
Other current assets		2,560			2,808
Total current assets		34,591			37,459
Property and equipment, net		3,560			6,386
Deferred income taxes		35,860			31,757
Other assets		178			270
Investments in affiliates		1,105			1,501
Goodwill, net		—			1,255
Intangible assets, net		256			3,185
Total assets		$	75,550		$	81,813
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	11,259		$	11,232
Accrued expenses		4,996			5,676
Income taxes payable		—			21
Capital lease obligations - current portion		7			14
Note payable-current portion		332			348
Application development contracts		3,104			3,962
Other current liabilities		1,020			476
Total current liabilities		20,718			21,729
Capital lease obligation - long-term portion		—			1
Note payable - long-term portion		303			524
Total liabilities		21,021			22,254
Commitments and contingencies (Notes 4 and 8)		—			—
Shareholders’ equity:
Common stock, no par, 200,000,000 shares authorized, 57,347,336 and 56,260,197 shares issued and outstanding		—			—
Additional paid-in capital		196,873			195,159
Accumulated deficit		(142,344		)	(134,279		)
Accumulated other comprehensive income		—			1
		54,529			60,881
Less notes and stock subscriptions receivable		—			(15		)
Less deferred compensation expense		—			(1,307		)
Total shareholders’ equity		54,529			59,559
Total liabilities and shareholders’ equity		$	75,550		$	81,813

 

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)

000’s except for per share amounts

 

		Three-months ended September 30,						Nine-months ended September 30,
		2002			2001			2002			2001
Revenues:
Portal revenues		$	8,898		$	7,747		$	26,634		$	19,323
Software and services revenues		2,805			2,886			10,347			8,237
Total revenues		11,703			10,633			36,981			27,560
Operating expenses:
Cost of portal revenues		5,100			5,404			14,996			14,465
Cost of software and services revenues		2,125			5,843			12,137			10,392
Selling and administrative		3,255			4,629			10,831			14,223
Impairment loss		—			36,997			4,316			36,997
Stock compensation		—			386			1,307			1,176
Depreciation and amortization		567			8,160			2,433			24,432
Total operating expenses		11,047			61,419			46,020			101,685
Operating income (loss)		656			(50,786		)	(9,039		)	(74,125		)
Other income (expense):
Interest income		38			165			134			887
Interest expense		(20		)	(12		)	(53		)	(22		)
Equity in net loss of affiliates		(286		)	(541		)	(968		)	(2,037		)
Other income (expense), net		—			42			(36		)	(74		)
Total other income (expense)		(268		)	(346		)	(923		)	(1,246		)
Income (loss) from continuing operations before income taxes and minority interest		388			(51,132		)	(9,962		)	(75,371		)
Income tax provision (benefit)		168			(12,543		)	(3,933		)	(18,930		)
Income (loss) from continuing operations before minority interest		220			(38,589		)	(6,029		)	(56,441		)
Minority interest		—			(464		)	—			(476		)
Income (loss) from continuing operations		220			(38,125		)	(6,029		)	(55,965		)
Discontinued operations (Note 2):
Loss from discontinued operations (less applicable income tax benefit of $5, $383, $1,307 and $1,840)		(8		)	(577		)	(2,036		)	(2,627		)
Net income (loss)		$	212		$	(38,702	)	$	(8,065	)	$	(58,592	)
Basic and diluted earnings (loss) per share:
Earnings (loss) per share - continuing operations		$	0.00		$	(0.68	)	$	(0.11	)	$	(1.00	)
Loss per share - discontinued operations		$	(0.00	)	$	(0.01	)	$	(0.03	)	$	(0.05	)
Net earnings (loss) per share		$	0.00		$	(0.69	)	$	(0.14	)	$	(1.05	)
Weighted average shares outstanding:
Basic		56,811			56,090			56,556			56,066
Diluted		57,006			56,090			56,556			56,066

 

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)

000’s

 

		Nine-months ended September 30,
		2002			2001
Cash flows from operating activities:
Net loss		$	(8,065	)	$	(58,592	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,824			25,345
Compensation expense recognized related to sale of common stock		—			13
Compensation expense recognized related to stock options		1,307			1,163
Loss on disposal of property and equipment		1,459			16
Accretion of discount on marketable securities		(4		)	(572		)
Application development contracts		(858		)	2,816
Impairment loss		4,316			36,997
Deferred income taxes		(5,311		)	(20,850		)
Minority interest		—			(476		)
Equity in net loss of affiliates		968			2,037
Changes in operating assets and liabilities:
(Increase) in trade accounts receivable		(2,806		)	(4,069		)
(Increase) decrease in prepaid expenses		(25		)	613
(Increase) decrease in other current assets		248			(153		)
(Increase) decrease in other assets		71			(7		)
Increase in accounts payable		27			3,101
Increase (decrease) in accrued expenses		(595		)	1,883
Increase (decrease) in income taxes payable		(21		)	51
Increase in other current liabilities		131			94
Net cash used in operating activities		(6,334		)	(10,590		)
Cash flows from investing activities:
Purchases of property and equipment		(644		)	(2,091		)
Proceeds from disposal of property and equipment		—			487
Capitalized software development costs		—			(5,740		)
Purchases of marketable securities		(20,999		)	(36,637		)
Maturities of marketable securities		17,907			55,295
Investments in affiliates and joint ventures		(191		)	—
Proceeds from sale of affiliate		—			662
Net cash provided by (used in) investing activities		(3,927		)	11,976
Cash flows from financing activities:
Proceeds from notes payable		—			1,000
Payments on notes payable		(237		)	(49		)
Payments on capital lease obligations		(8		)	(153		)
Proceeds from exercise of employee stock options		1,646			174
Net cash provided by financing activities		1,401			972
Net increase (decrease) in cash and cash equivalents		(8,860		)	2,358
Cash and cash equivalents, beginning of year		17,235			13,879
Cash and cash equivalents, end of period		$	8,375		$	16,237
Other cash flow information:
Interest paid		$	41		$	22
Income taxes paid		$	90		$	88

 

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, 2001, filed with the SEC on March 25, 2002, and Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q.

 

1.              BASIS OF PRESENTATION

 

In the fourth quarter of 2001, the Company decided to reclassify certain information in its consolidated statements of operations. Consistent with prior reporting periods, the Company has continued to classify revenues and cost of revenues into two categories: (1) portal and (2) software and services.  However, as compared to prior reporting periods, no total gross profit line is reported.  Instead, cost of portal revenues and cost of software and services revenues have been classified as separate operating expense categories.

 

The portal category includes revenues primarily from the Company’s subsidiaries operating enterprise-wide state and local government portals under long-term contracts on an outsourced basis.  The software and services category includes revenues primarily from the Company’s electronic corporate filings, ethics & elections, commercial vehicle compliance and AOL businesses.  As further discussed in Note 2 below, results of operations of the Company’s eProcurement business have been classified as discontinued operations.

 

In the second quarter of 2002, the Company decided to combine the general and administrative operating expense classification and the sales and marketing operating expense classification into one operating expense classification referred to as selling and administrative.  The primary categories of operating expenses include: cost of portal revenues; cost of software and services revenues; and selling and administrative.  Cost of portal revenues consist of all direct costs associated with operating outsourced portals including employee compensation, telecommunications, maintenance and all other costs associated with the provision of dedicated client service such as dedicated facilities for the Company’s outsourced contracts.  Cost of software and services revenues consist of all direct project costs to provide software development and services such as employee compensation, the cost of subcontractors hired as part of software and services projects, and all other direct project costs including materials, travel and other out-of-pocket expenses.  Selling and administrative costs consist primarily of corporate-level expenses relating to human resource management, administration, legal and finance, and all costs of non-customer service personnel from the Company’s software and services businesses, including information systems and office rent.  Selling and administrative costs also consist of corporate-level expenses relating to market development, public relations and

 

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promotional activities including advertising, image development and market research.

 

These reclassifications had no impact on net loss or net loss per share.  Information for all periods presented reflects these new classifications.

 

2.     DISCONTINUED OPERATIONS

 

As more fully described in Note 2 of the Notes to Consolidated Financial Statements included in the Company’s second quarter Form 10-Q filed with the SEC on August 14, 2002, the results of operations of the Company’s eProcurment business, NIC Commerce, have been classified as a discontinued operation.  Information presented for all periods reflects the new classification.  For segment reporting purposes, NIC Commerce’s operations were previously reported in the eProcurment segment.  Components of amounts reflected in the Company’s consolidated statements of operations and balance sheets relating to discontinued operations are presented in the following table (in thousands):

 

		Three-months Ended Sept. 30,						Nine-months Ended Sept. 30,
		2002			2001			2002			2001
Statement of operations data
Revenues		$	—		$	447		$	222		$	1,512
Costs and expenses		13			1,063			1,748			5,067
Loss on disposal of property and equipment		—			—			1,425			—
Depreciation and amortization		—			344			392			912
Operating loss		(13		)	(960		)	(3,343		)	(4,467		)
Income tax benefit		(5		)	(383		)	(1,307		)	(1,840		)
Loss from discontinued operations		$	(8	)	$	(577	)	$	(2,036	)	$	(2,627	)

 

		Sept. 30, 2002			Dec. 31, 2001
Balance sheet data
Current assets		$	2		$	544
Property and equipment, net		41			1,849
Other assets		—			4
Current liabilities		(9		)	(1,173		)
Net assets		$	34		$	1,224

 

3.              EARNINGS (LOSS) PER SHARE

 

Basic earnings (loss) per share are calculated on the basis of the weighted average number of common shares outstanding during the period.  Diluted earnings (loss) 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 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):

 

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		Three-months Ended Sept. 30,						Nine-months Ended Sept. 30,
		2002			2001			2002			2001
Numerator:
Income (loss) from continuing operations		$	220		$	(38,125	)	$	(6,029	)	$	(55,965	)
Loss from discontinued operations		(8		)	(577		)	(2,036		)	(2,627		)
Net income (loss)		$	212		$	(38,702	)	$	(8,065	)	$	(58,592	)
Denominator:
Weighted average shares - basic		56,811			56,090			56,556			56,066
Employee common stock options		195			—			—			—
Weighted average shares - diluted		57,006			56,090			56,556			56,066
Basic earnings (loss) per share:
Income (loss) from continuing operations		$	0.00		$	(0.68	)	$	(0.11	)	$	(1.00	)
Loss from discontinued operations		$	(0.00	)	$	(0.01	)	$	(0.03	)	$	(0.05	)
Net income (loss)		$	0.00		$	(0.69	)	$	(0.14	)	$	(1.05	)
Diluted earnings (loss) per share:
Income (loss) from continuing operations		$	0.00		$	(0.68	)	$	(0.11	)	$	(1.00	)
Loss from discontinued operations		$	(0.00	)	$	(0.01	)	$	(0.03	)	$	(0.05	)
Net income (loss)		$	0.00		$	(0.69	)	$	(0.14	)	$	(1.05	)

 

Employee common stock options exercisable for 4.9 million and 7.9 million common shares during the three-month periods ended September 30, 2002 and 2001, and 5.8 million and 7.9 million common shares during the nine-month periods ended September 30, 2002 and 2001, were not included in the computation of diluted weighted average shares outstanding because the effect of such options was antidilutive.

 

4.     APPLICATION DEVELOPMENT CONTRACTS

 

In the second quarter of 2002, the Company accrued approximately $4.3 million in cost of software and services revenues for expected losses under percentage-of-completion accounting in its NIC Conquest corporate filings business due to project cost overruns on outstanding contracts in Arkansas, Minnesota and Oklahoma.  The Company has fulfilled all obligations under its contract with the State of Minnesota and expects to complete the majority of the remaining work on its contracts with the states of Arkansas and Oklahoma by the end of 2002.  At September 30, 2002, the accrual for all application development contracts held by the Company was approximately $3.1 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 at September 30, 2002 and December 31, 2001 were approximately $2.1 million and $2.3 million, respectively, and are included in other current assets in the consolidated balance sheets.  Of these balances at September 30, 2002 and December 31, 2001, approximately $1.8 million and $1.2 million, respectively, related to the Company’s contract with the California Secretary of State.

 

5.     REPORTABLE SEGMENTS AND RELATED INFORMATION

 

The Company’s reportable segments consist of its outsourced state and local portal businesses (“Outsourced Portals”), its eGovernment products businesses

 

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(“Products”), and its AOL division (“AOL”).  As further discussed in Note 2 above, in the second quarter of 2002, the results of operations of NIC Commerce were classified as discontinued operations with information presented for all periods reflecting the new classification.  For segment reporting purposes, NIC Commerce’s operations were previously reported in the eProcurment segment.  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 Products segment includes the Company’s corporate filings business (NIC Conquest), ethics & elections filings business (NIC Technologies) and commercial vehicle compliance business (IDT).  Unallocated corporate–level expenses are reported in the reconciliation of the segment totals to the related consolidated totals as “Other Reconciling Items.”  Management evaluates the performance of its segments and allocates resources to them based on revenues and earnings before interest, taxes, depreciation, amortization, discontinued operations, impairment losses and other non-cash charges related to stock compensation and equity in net loss of affiliates (“EBITDA”).  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 September 30 (in thousands):

 

		Outsourced Portals			Products			AOL			Other Reconciling Items			Consolidated Total
2002
Revenues		$	8,898		$	2,519		$	286		$	—		$	11,703
EBITDA		3,420			(144		)	180			(2,233		)	1,223
2001
Revenues		7,747			2,585			301			—			10,633
EBITDA		1,865			(4,083		)	(135		)	(2,890		)	(5,243		)

 

The following is a reconciliation of total segment EBITDA to total consolidated income (loss) before income taxes and minority interest for the three months ended September 30 (in thousands):

 

		2002			2001
Total EBITDA for reportable segments		$	1,223		$	(5,243	)
Impairment loss		—			(36,997		)
Stock compensation		—			(386		)
Depreciation and amortization		(567		)	(8,160		)
Interest income		38			165
Interest expense		(20		)	(12		)
Equity in net loss of affiliates		(286		)	(541		)
Other income (expense), net		—			42
Consolidated income (loss) from continuing operations before income taxes and minority interest		$	388		$	(51,132	)

 

The table below reflects summarized financial information concerning the Company’s reportable segments for the nine months ended September 30 (in thousands):

 

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		Outsourced Portals			Products			AOL			Other Reconciling Items			Consolidated Total
2002
Revenues		$	26,634		$	9,148		$	1,199		$	—		$	36,981
EBITDA		9,832			(4,398		)	525			(6,942		)	(983		)
2001
Revenues		19,323			7,761			476			—			27,560
EBITDA		3,138			(5,778		)	(876		)	(8,004		)	(11,520		)

 

The following is a reconciliation of total segment EBITDA to total consolidated loss before income taxes and minority interest for the nine months ended September 30 (in thousands): 

 

		2002			2001
Total EBITDA for reportable segments		$	(983	)	$	(11,520	)
Impairment loss		(4,316		)	(36,997		)
Stock compensation		(1,307		)	(1,176		)
Depreciation and amortization		(2,433		)	(24,432		)
Interest income		134			887
Interest expense		(53		)	(22		)
Equity in net loss of affiliates		(968		)	(2,037		)
Other income (expense), net		(36		)	(74		)
Consolidated loss from continuing operations before income taxes and minority interest		$	(9,962	)	$	(75,371	)

 

6.     MARKETABLE SECURITIES

 

The fair value of marketable debt securities is as follows (in thousands):

 

		Sept. 30, 2002			Dec. 31, 2001
U.S. government obligations		$	162		$	2,500
State and municipal obligations		2,000			—
Corporate debt securities		5,000			1,566
		$	7,162		$	4,066

 

The Company’s marketable securities are classified as available-for-sale and 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 September 30, 2002 were not significant.

 

At September 30, 2002, the Company has pledged all of its marketable securities as collateral for letters of credit, performance bonds, its line of credit in conjunction with a corporate credit card agreement, and its bank note payable.  See Note 8.

 

7.     GOODWILL AND INTANGIBLE ASSETS

 

The Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, (“SFAS No. 142”), effective January 1, 2002.  SFAS No. 142 addresses the financial accounting and reporting for goodwill and other intangible assets acquired in a business combination after

 

8

 

they have been initially recognized in the financial statements, eliminates amortization of goodwill, and requires that goodwill be tested for impairment at least annually, or more frequently if certain indicators arise.  Refer to Note 4 in the Notes to Consolidated Financial Statements included in the Company’s Form 10-Q filed with the SEC on August 14, 2002 for further discussion of the goodwill and intangible impairment charges recorded by the Company in the second quarter of 2002.  Also refer to Note 3 in the Notes to Consolidated Financial Statements included in the Company’s Form 10-K filed with the SEC on March 25, 2002 for further discussion of the goodwill and intangible impairment charges recorded by the Company in 2001.  Had the Company been accounting for its goodwill under SFAS No. 142 for the three- and nine- month periods ended September 30, 2001, the Company’s net loss and loss per share would have been as follows:

 

		Three-months ended Sept. 30, 2001			Nine-months ended Sept. 30, 2001
Reported net loss		$	(38,702	)	$	(58,592	)
Add: Goodwill amortization, net of tax		3,926			11,776
Add: Equity-method goodwill amortization, net of tax		288			863
Adjusted net loss		$	(34,488	)	$	(45,953	)
Reported loss per share		$	(0.69	)	$	(1.05	)
Add: Goodwill amortization, net of tax		0.07			0.21
Add: Equity-method goodwill amortization, net of tax		—			0.02
Adjusted loss per share		$	(0.62	)	$	(0.82	)

 

At September 30, 2002, intangible assets were primarily comprised of internal use software development costs, which are being amortized using the straight-line method over a period of three years.  The accumulated amortization related to intangible assets at September 30, 2002 and December 31, 2001 was approximately $0.3 million and $2.1 million, respectively.  The aggregate intangible asset amortization expense for the three- and nine-month periods ended September 30, 2002 was $38,000 and $0.8 million, respectively.  The estimated amortization expense for the years ending December 31, 2002, 2003, and 2004, is $0.9 million, $0.1 million and $0.1 million, respectively.

 

8.     SUBSEQUENT EVENTS

 

In October 2002, the Company entered into an agreement with a new bank to refinance all of its current letters of credit (totaling approximately $6.1 million) that have been issued to guarantee performance on certain of its outsourced government portal contracts and as collateral for certain performance bonds.  In addition, the Company expects to obtain a $0.5 million working capital line of credit and to refinance its term note payable, which had a balance of approximately $0.6 million at September 30, 2002.  The refinanced note will bear interest at the new bank’s prime rate (with a floor of 5.5%) and will be payable in 30 monthly installments ending in mid-2005.  The new financing arrangement will increase the Company’s unrestricted cash balance by more than $1 million by releasing funds which had been previously restricted as collateral to secure letters of credit and the note payable.

 

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The Company will pledge approximately $5.6 million of its cash and marketable securities as collateral under the new financing arrangement and has given the bank a security interest in certain of its accounts receivable and other assets. The Company has not yet completed these transactions with the new bank, but expects closing to occur in the fourth quarter of 2002.

 

As a condition of separation and severance from the Company in the second quarter of 2002, a former executive had the right to request the Company to repurchase all of the shares of the Company’s common stock, totaling 149,488 shares, beneficially owned by the former executive that were held of record in the National Information Consortium Voting Trust (the “Voting Trust”) for $1.44 per share.  In October 2002, the former executive exercised this right and caused the Company to repurchase his Voting Trust shares for approximately $215,000.  The former executive also had approximately 1.4 million common stock options that were, at the date of termination from the Company, exercisable at a price of $1.44 per share.  The last date available for exercise of these options was October 30, 2002.  In the third quarter of 2002, the former executive exercised approximately 0.7 million of these options and exercised the remainder in October 2002.

 

In October 2002, the Company reached a verbal settlement with the former shareholders of Intelligent Decision Technologies, Ltd. (“IDT”) to resolve any possible contingent liabilities NIC might have related to the shut-down of IDT prior to three years from the date of the Company’s acquisition of IDT.  NIC acquired IDT on October 13, 2000.  Under the terms of the merger agreement, a portion of the merger consideration, ranging from 208,333 to 520,826 shares of NIC common stock, was to be contingent upon IDT’s meeting certain performance goals over three years.  The Company negotiated a settlement and will issue 140,000 shares to the former IDT shareholders, which was less than the minimum incentive amount, because IDT was only allowed about half of the contracted time period to attempt to reach the minimum incentive level. The settlement is not final until the former IDT shareholders sign certain liability releases.  The shares will be restricted for one year from the effective date of the settlement.  For additional information on the Company’s acquisition of IDT, refer to Note 4 to the Notes to Consolidated Financial Statements included in the Company’s December 31, 2001 Form 10-K filed with the SEC on March 25, 2002.  This settlement will not have a material effect on the Company’s results of operations.

 

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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 nine-month periods ended September 30, 2002 and 2001.  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 Sept. 30,				Nine-months ended Sept. 30,
Key Financial Metrics		2002		2001		2002		2001
Gross profit % - outsourced portals		43	%	30	%	44	%	25	%
Gross profit % - software and services		24	%	-103	%	-17	%	-26	%
Selling and administrative as % of revenue		28	%	44	%	29	%	52	%
Revenue growth - outsourced portals		15	%	73	%	38	%	44	%
Revenue growth - software and services		-3	%	92	%	26	%	122	%

 

PORTAL REVENUES. Portal revenues for the current quarter increased 15% over the prior year.  Of this increase, 8% was attributable to an increase in same state portal revenues (states in operation more than two years), 5% was attributable to our local portals and 2% was attributable to revenues from our outsourced state portal business units that became more fully operational after September 30, 2001.  Excluding our state portals that operate under fixed-price models, same state portal revenues in the current quarter increased 16% over the prior year primarily as a result of increased transaction volumes mainly from our Kansas, Indiana, Arkansas, Utah and Tennessee portals.  The prior year quarter includes approximately $0.9 million in portal software development revenues from portal contracts with the State of Oklahoma and the Florida Association of Court Clerks.  In both of these contracts, we received fixed payments for the up-front development of these portals and are currently receiving the more traditional transaction-based revenues.

 

Portal revenues for the nine months in the current year increased 38% over the prior year.  Of this increase, 11% was attributable to an increase in revenues relating to same state portal revenues and transaction volumes, and

 

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22% was from recent portal installations, including our Hawaii and Montana portals, which began to generate DMV revenues in the third quarter of 2001, our Rhode Island portal, which began to generate DMV revenues in March 2002, and our Oklahoma portal, which began to generate DMV revenues mid-way through the first quarter of 2002.  Approximately 5% of the increase in portal revenues in the current period was from our local portals.  Same state portal revenues in the current period increased 21% over the prior year primarily as a result of increased transaction volumes mainly from our Kansas, Indiana, Virginia, and Utah portals.

 

In the analysis below, we have categorized 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 products and services we currently offer through our state and local portals, refer to Part I, Item 1 of our December 31, 2001 Form 10-K filed with the SEC on March 25, 2002.

 

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 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.

 

		Three-months ended Sept. 30,						Nine-months ended Sept. 30,
Portal Revenue Analysis		2002			2001			2002			2001
DMV transaction-based		$	5,689		$	4,475		$	17,001		$	12,432
Non-DMV transaction-based		1,892			1,110			5,798			3,549
Portal management		310			465			941			1,322
Software development		1,007			1,697			2,894			2,020
Total		$	8,898		$	7,747		$	26,634		$	19,323

 

SOFTWARE AND SERVICES REVENUES. Software and services revenues for the current quarter decreased 3% from the prior year.  Revenues from our commercial vehicle compliance business decreased by approximately $0.6 million in the current quarter.  As previously announced, we have decided close this business and expect decreased quarterly revenues, as compared to the prior year, from this business in the fourth quarter of 2002.  This decrease was partially offset by an increase in revenues from our ethics & elections business and our corporate filings business, which benefited from its five-year, $25 million contract with the California

 

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Secretary of State to develop and implement a comprehensive information management and filing system. This contract commenced in September 2001, and we recognized approximately $1.7 million in revenues in the current quarter as compared to $0.4 million in the prior year quarter.

 

Software and services revenues increased 26% for the nine months in the current year over the prior year.  This increase was primarily attributable to an increase in revenues from our corporate filings business and its contract with the California Secretary of State, and to a lesser extent from our ethics & elections and AOL businesses.  For the nine-month period ended September 30, 2002 we recognized approximately $5.8 million in revenue from our contract with the California Secretary of State compared to $0.4 million in the prior year period.  These increases were partially offset by a decrease in revenues from our commercial vehicle compliance business.

 

COST OF PORTAL REVENUES.  Cost of portal revenues for the current quarter decreased 6% from the prior year.  Of this decrease, 5% was attributable to a decrease in same state cost of portal revenues and 1% was from our local portals.  The prior quarter includes approximately $0.2 million in portal software development costs relating to our Oklahoma portal that are not recurring.  Cost of portal revenues for the nine months in the current year increased 4% over the prior year primarily due to costs from our outsourced state portal business units that became more fully operational after September 30, 2001.

 

Our portal gross profit rate increased to 43% in the current quarter compared to 30% in the prior year.  This increase was primarily attributable to our state portal business units that began to generate substantive revenues after September 30, 2001 as discussed above. Many of these portals were in the early stages of development and had not yet begun to generate revenues in the third quarter of 2001.  Our same state portal gross profit rate increased to 49% in the current quarter compared to 39% in the prior year, primarily as a result of increased business and citizen adoption of existing portal applications and the addition of new revenue generating applications and services within existing portals through a relatively fixed cost base.  We intend to continue to expand our portal operations by developing and promoting new applications and services within our existing portals.  Accordingly, we expect our same state gross profit rate to continue to increase, as compared to prior year quarters, in the foreseeable future.  On a year-to-date basis, the increases in our portal gross profit rate and same state gross profit rate in the current year were consistent with those for the current quarter.

 

COST OF SOFTWARE AND SERVICES REVENUES.  Cost of software and services revenues for the current quarter decreased 64% from the prior year.  Cost of software and services revenues for three- and nine-month periods ended September 30, 2001 includes a charge of $3.4 million for anticipated costs in excess of revenues to be recognized under certain of our application development contracts in our corporate filings business.  Excluding these charges, cost of software and services revenues decreased by 12% in the current quarter, primarily due to decreased expenses relating to our commercial vehicle compliance business and our AOL business.

 

As further discussed in Note 4 in the Notes to Consolidated Financial Statements included in the Company’s second quarter 2002 Form 10-Q filed with the SEC on August 14, 2002, we determined that the expected future cash flows of our AOL business would not be sufficient to recover the cash carriage fee and common stock warrant amortization

 

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we would have recognized over the remaining term of the contract with AOL and recorded a $3.0 million impairment charge in the second quarter of 2002. As a result, the Company no longer records the cash portion of the carriage fee expense in cost of software and services revenues, which approximated $0.2 million in the prior year quarter.

 

Excluding the $3.4 million charge discussed above, our software and services gross profit rate increased to 24% in the current quarter compared to 17% in the prior year, primarily due to improved margins from our Conquest and AOL businesses.  However, as previously discussed, we anticipate decreased quarterly revenues and margins, as compared to the prior year, from our AOL business for the foreseeable future due to continued weakness in the online advertising market.

 

Cost of software and services revenues for the nine-month period ended September 30, 2002 includes a charge of $4.3 million for anticipated costs in excess of revenues to be recognized under certain of our application development contracts in our corporate filings business (see Note 4 in the Notes to Consolidated Financial Statements included in this Form 10-Q). Excluding the charges in the current and prior years relating to our corporate filings business, the increase in our software and services gross profit rate on a year-to-date basis was consistent with the increase for the current quarter.

 

SELLING AND ADMINISTRATIVE.  Selling and administrative expenses for the three- and nine-month periods ended September 30, 2002 decreased by 30% and 24% from the prior year.  Contributing to this decrease was a reduction in expenses from our corporate filings and ethics & elections businesses and from a general decrease in corporate-level expenses.  Additionally, throughout 2001, we significantly curtailed public relations, brand image and advertising expenses and consolidated our sales and marketing efforts into one corporate-level market development department to more appropriately match expenditures to expected market demand for our eGovernment services.

 

Selling and administrative expense as a percentage of revenue for the three- and nine-month periods ended September 30, 2002 was 28% and 29%.  We expect selling and administrative expense as a percentage of revenue to continue to decrease throughout 2002 as a result of our continuing overhead cost containment and efficiency efforts throughout the Company.

 

IMPAIRMENT LOSS.  In the second quarter of 2002, we identified indicators of possible impairment of goodwill relating to our IDT business and other intangible assets and carriage fee payments relating our AOL business.  Our subsequent impairment assessment relating to IDT resulted in a non-cash impairment charge of $1.3 million.  Our subsequent impairment assessment relating to AOL resulted in an impairment charge totaling $3.0 million, of which $2.1 million related to the unamortized carrying amount of fully vested warrants issued to AOL.  During the quarter ended September 30, 2001, we identified indicators of possible impairment of certain of our goodwill and other intangible assets related to the acquisitions of SDR Technologies and eFed, which are now referred to as NIC Technologies and NIC Commerce, respectively.  Our subsequent impairment assessment resulted in a non-cash impairment charge for the three- and nine-month periods ended September 30, 2001 of approximately $37 million to record the amount by which the carrying amounts of the goodwill and other intangible assets exceeded their respective fair values.

 

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STOCK COMPENSATION.  Stock compensation for the current and prior year periods consisted primarily of amortization of deferred compensation expense related to common stock options granted to senior level executives and other key employees in 1998 and 1999.  In the second quarter of 2002, we terminated two senior level executives causing certain of their unvested stock options to immediately vest pursuant to the terms of their option agreements.  As a result, we recognized approximately $0.7 million in deferred compensation expense relating to these two executives in the second quarter of 2002.  At June 30, 2002, all deferred compensation expense had been recognized.

 

DEPRECIATION AND AMORTIZATION.  Depreciation and amortization expense has decreased significantly in the current year, as we wrote off all remaining goodwill and purchase accounting intangible assets relating to our business combinations with SDR Technologies, eFed and Conquest in the third and fourth quarters of 2001.  In addition, we wrote off capitalized software development costs from our NIC Technologies, NIC Commerce and NIC Conquest businesses in the fourth quarter of 2001.  In the current year, we determined the future cash flows of our AOL business would not be sufficient to recover the unamortized carrying amount of the fully vested warrants issued to AOL and recorded a $2.1 million impairment charge in the second quarter of 2002.  Accordingly, we expect amortization expense for the fourth quarter of 2002 to be less than $0.1 million, the majority of which will consist of the amortization of internal use capitalized software development costs.  Total quarterly depreciation and amortization expense for the fourth quarter of 2002 is expected to be approximately $0.6 million.

 

OPERATING INCOME (LOSS).  Operating income for the current quarter was $0.7 million compared to an operating loss of $50.8 million in the prior year.  Excluding impairment charges and non-cash charges for stock compensation and depreciation and amortization, operating income would have been $1.2 in the current quarter compared to an operating loss of $5.2 million in the prior year.  Operating loss for the nine-month period ended September 30, 2002 was $9.0 million compared to $74.1 million in the prior year.  Excluding impairment charges and non-cash charges for stock compensation and depreciation and amortization, operating loss would have been $1.0 million for the nine-month period ended September 30, 2002 compared to $11.5 million in the prior year.

 

Earnings before interest, taxes, depreciation, amortization, discontinued operations, impairment losses and other non-cash charges related to stock compensation and equity in net loss of affiliates (“EBITDA”) was positive $1.2 million in the current quarter compared to negative $5.2 million in the prior year.

 

EBITDA from our outsourced portals segment was a positive $3.4 million in the current quarter and increased by approximately $1.6 million from the prior year primarily due to same state revenue growth and positive contributions from portals that began generating substantive revenues after September 30, 2001 including our Oklahoma and Rhode Island portals.  EBITDA from our outsourced portals segment was a positive $9.8 million for the nine-month period ended September 30, 2002 and increased by approximately $6.7 from the prior year primarily due to same state revenue growth and a full nine months of contributions in the current year from our portals in Hawaii, Idaho, Montana, Oklahoma, Rhode Island and Tennessee.

 

EBITDA from our Products segment for the nine-month period ended September 30, 2002 was negatively affected by a $4.3 million charge relating

 

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to our corporate filings business as further discussed above.  EBITDA for the three- and nine-month periods ended September 30, 2001 was negatively affected by a $3.4 million charge relating to our corporate filings business as further discussed above.  Excluding these charges, EBITDA from our products segment would have been near breakeven for the three- and nine-month periods ended September 30, 2002 compared to negative $0.6 million and negative $2.3 million for the three- and nine-month periods ended September 30, 2001.  This improvement in EBITDA in the current year periods was primarily the result of our restructuring and cost reduction efforts in these businesses over the past year, and the impact of new business in our corporate filings business, which benefited this year from its five-year, $25 million contract with the California Secretary of State, and our ethics & elections business, which benefited from the commencement of its five-year, $3.75 million contract with the State of Michigan.  Partially offsetting these improvements was a decrease in EBITDA from our commercial vehicle compliance business, which we have decided to close.

 

Positive EBITDA from our AOL segment for the nine-month period ended September 30, 2002 primarily reflects higher advertising revenues in the current year and decreased carriage fee expenses in the current quarter as compared to the prior year, as further discussed under the analysis of cost of software and services revenues above.  Beginning in the second quarter of 2001, our share of revenues generated from AOL’s sale of advertisement through Government Guide had increased steadily on a sequential quarterly basis.  However, in the second quarter of 2002, revenues from our AOL business decreased precipitously as compared to prior quarters.  As previously discussed, we anticipate decreased quarterly revenues and EBITDA, as compared to the prior year, from our AOL business for the foreseeable future due to continued weakness in the online advertising market.

 

Corporate level expenses decreased in the current year periods as further discussed under the analysis of selling and administrative expenses above.

 

INTEREST INCOME.  Interest income primarily reflects interest earned on our cash and marketable securities portfolio.  We expect interest income to be lower in 2002 as compared to the prior year due to the decrease in our cash and marketable securities portfolio.  In addition, interest rates we currently earn are less than in prior periods.

 

EQUITY IN NET LOSS OF AFFILIATES.  Equity in net loss of affiliates represents our share of losses of companies in which we have equity method investments that give us the ability to exercise significant influence, but not control, over the investees.  In the first quarter of 2000, we invested in two private companies involved in the eGovernment services industry, Tidemark and E-Filing.com, primarily for strategic purposes.  In the fourth quarter of 2000, we invested in eGS, a private joint venture among Swiss venture capital firm ETF Group, London-based venture development organization Vesta Group, and our European subsidiary, NIC European Business Ltd.  In May 2001, a private technology company acquired Tidemark.  Thus, Tidemark was not reflected in our results of operations in the current periods.

 

Our investment in eGS as September 30, 2002 was approximately $0.2 million.  If capital needs arise, we would be required to make approximately $0.2 million in additional cash capital contributions to eGS.  eGS is in the early stage of operations and is incurring net losses.  Our investment in

 

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E-Filing.com as of September 30, 2002 was approximately $0.9 million.  Although E-Filing.com is incurring net losses, the losses are relatively small and the business has sufficient financial resources to continue to operate for a significant length of time.  We regularly review the carrying value of these equity method investments and record impairment losses when events and circumstances indicate that such assets are impaired. To date, we have not recorded any such impairment losses on our investments in E-Filing.com and eGS.

 

INCOME TAXES.  The income tax provision in the current quarter was slightly more than the amount customarily expected primarily because of expenses that are not deductible for tax purposes.  In the prior year periods, the income tax benefit was less than the amount customarily expected primarily because of expenses that are not deductible for tax purposes including amortization of goodwill from the March 31, 1998 exchange offer, the Conquest merger, the SDR acquisition, the IDT acquisition, and certain stock compensation costs.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Net cash used in operating activities was $6.3 million for the nine-month period ended September 30, 2002 compared to $10.6 million in the prior year.  The improvement in operating cash flow is primarily the result of a year-over-year reduction in our operating loss (excluding non-cash charges) that was partially offset by a negative net change in operating assets and liabilities as compared to the prior year.  Contributing to this negative net change was a decrease in accrued expenses in the current period.  This decrease was attributable to several factors including bonus payments made to our outsourced portal employees in April 2002 pursuant to a 2001 incentive compensation plan, employee severance costs relating to our discontinued eProcurement business, and payments to subcontractors for project expenditures in our corporate filings business (as further discussed in Note 4 to the Consolidated Financial Statements included in this Form 10-Q) including project expenditures related our contract with the California Secretary of State.  The increase in accounts receivable in the current period was mainly attributable to an increase in revenues from our portal business in the current period as compared to the prior year, and more specifically to our Hawaii, Oklahoma and Rhode Island portals, which began to generate substantive revenues in the current period.

 

The Company recognizes 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-month periods ended September 30, 2002 and December 31, 2001 were approximately $38.6 million and $27.8 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-months periods ended September 30, 2002 and December 31, 2001 was 35 and 40, respectively.

 

Cash used in investing activities for the current period was $3.9 million, primarily reflecting net purchases of marketable securities and purchases of property and equipment.  In conjunction with our contract with the California Secretary of State, in March 2002, we issued a $5 million letter of credit as

 

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collateral for a performance bond required by the contract. The letter of credit is fully collateralized by our marketable securities.  Investing activities in the prior year resulted in net cash generated of approximately $12.0 million, reflecting $18.7 million in net maturities of our marketable securities portfolio used for funding operations and for purchases of property and equipment.  Investing activities for the prior year also reflect approximately $5.7 million in capitalized software development costs mainly from our NIC Commerce, NIC Conquest and NIC Technologies subsidiaries.

 

Financing activities in the current period resulted in net cash generated of approximately $1.4 million, primarily reflecting $1.6 million in proceeds from the exercise of employee stock options (see Note 8 in the Notes to Consolidated Financial Statements included in this Form 10-Q) offset by payments on our bank note payable.

 

At September 30, 2002, our total cash and marketable securities balance was $15.5 million compared to $21.3 million at December 31, 2001.  At September 30, 2002, we had pledged all of our marketable securities ($7.2 million) as collateral for letters of credit, our line of credit in conjunction with a corporate credit card agreement, and our bank note payable.

 

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.  We do not have significant off-balance sheet risk or 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.  Additionally, although on certain contracts we are bound by performance bond commitments, we have not had any defaults resulting in draws on performance bonds.

 

We believe that our current financial resources will be sufficient to operate the business until we become cash flow positive.  Although we expect to have net income for the balance of 2002, we anticipate that our cash balances may decrease modestly for the remainder of the current year.  This reflects expected working capital swings due to continued project expenditures from our NIC Conquest business (as further discussed in Note 4 in the Notes to Consolidated Financial Statements included in this Form 10-Q) and the terms of our five-year contract with the California Secretary of State, which back-ends some of the larger payments.

 

We have explored a number of financing alternatives to provide us additional working capital flexibility and the resources to pursue opportunities that may accelerate our growth and profitability.  As further discussed in Note 8 in the Notes to Consolidated Financial Statements included in this Form 10-Q, in October 2002, we entered into an agreement with a new bank to refinance all of our current letters of credit and expect to obtain a $0.5 million working capital line of credit.  In addition, we expect to refinance our term note payable with the new bank, which had a balance of approximately $0.6 million at September 30, 2002.  The new financing arrangement will increase the Company’s unrestricted cash balance by more than $1 million, by releasing funds which had been previously restricted as collateral to secure letters of credit and the note payable.

 

Any projections of future cash flows are subject to substantial uncertainty.  If current cash, marketable securities and cash that may be generated from

 

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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.  From time to time, we expect to evaluate the acquisition of or investment in businesses and technologies that complement our various eGovernment businesses.  Acquisitions or investments might impact the Company’s liquidity requirements or cause the Company to sell additional equity securities or issue debt securities.  There can be no assurance that financing will be available in amounts or on terms acceptable to the Company, if at all.

 

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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 and the increase or decrease in the amount of interest expense we incur on our promissory bank note payable.  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 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.

 

INVESTMENT RISK.  In the first quarter of 2000, we invested in two private companies involved in eGovernment services industry, Tidemark and E-Filing.com, primarily for strategic purposes. In the fourth quarter of 2000, we invested in a private joint venture, eGS, primarily to share in the risk of our international expansion and to deliver eGovernment products and services throughout Western Europe, with initial efforts to focus on the United Kingdom.  Such investments are accounted for under the equity method, as we have the ability to exercise significant influence, but not control, over the investees. Significant influence is generally defined as an ownership interest of the voting stock of an investee of between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method is appropriate. We regularly review the carrying value of these equity method investments and would record impairment losses when events and circumstances indicate that such assets are impaired.  In the fourth quarter of 2000, we recorded a noncash impairment loss of approximately $2.1 million relating to our investment in Tidemark. To date, we have not recorded any such impairment losses for E-Filing.com or eGS.  In the second quarter of 2001, a private technology company acquired Tidemark for cash consideration of approximately $1.6 million.  NIC received approximately $0.7 million in cash from the transaction and has no investment balance remaining.

 

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ITEM 4.  CONTROLS AND PROCEDURES

 

a)  EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of NIC’s disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, NIC’s disclosure controls and procedures are effective in bringing to their attention on a timely basis material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic filings under the Exchange Act.

 

b)  CHANGES IN INTERNAL CONTROLS

 

Since the Evaluation Date, there have not been any significant changes in NIC’s internal controls or in other factors that could significantly affect such controls.

 

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PART II.  OTHER INFORMATION

 

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

 

a)              EXHIBITS

 

99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

99.2 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

b)     REPORTS ON FORM 8-K

 

None.

 

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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:    November 14, 2002	/s/ Eric J. Bur
	Eric J. Bur
	Chief Financial Officer
Dated:    November 14, 2002	/s/ Stephen M. Kovzan
	Stephen M. Kovzan
	Vice President, Financial Operations and Chief Accounting Officer

 

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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 quarterly 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 quarterly report;

 

3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;

 

4.  The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)  designed such disclosure controls and procedures 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 quarterly report is being prepared;

 

b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.  The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.  The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

Date:  November 14, 2002
/s/ Jeffery S. Fraser
Jeffery S. Fraser
Chief Executive Officer

 

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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 quarterly 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 quarterly report;

 

3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;

 

4.  The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)  designed such disclosure controls and procedures 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 quarterly report is being prepared;

 

b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.  The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.  The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

Date:  November 14, 2002
/s/ Eric J. Bur
Eric J. Bur
Chief Financial Officer

 

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