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, 2001~~March 31, 2002

Commission file number 000-26621

NIC INC.

NATIONAL INFORMATION CONSORTIUM, INC.
(Exact name of registrant as specified in its charter)

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

12 Corporate Woods, 10975 Benson Street, Suite 390
Overland Park, Kansas		66210
(Address of principal executive offices)		(Zip Code)

(877) 234-3468
(~~Registrant's~~Registrant’s telephone number, including area code)

NATIONAL INFORMATION CONSORTIUM, INC. (Former name, if changed since last report.)

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~~registrant’s common stock as of ~~October 31, 2001~~April 30, 2002 was ~~56,226,146.~~56,486,204.

PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

~~NATIONAL INFORMATION CONSORTIUM, INC.~~NIC Inc.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

~~000's~~000’s except for share amounts

September 30,

December 31,

2001

2000

ASSETS

Current assets:

Cash and cash equivalents

$
16,237

$
13,879

Marketable securities

6,827

24,914

Trade accounts receivable

11,665

7,596

Deferred income taxes

1,234

195

Prepaid expenses

1,438

2,051

Other current assets

2,189

1,954

Total current assets

39,590

50,589

Property and equipment, net

7,241

7,596

Deferred income taxes

28,776

8,965

Other assets

207

200

Investments in affiliates

2,463

4,786

Intangible assets, net

14,102

67,433

Total assets

$
92,378

$
139,569

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accounts payable

$
7,831

$
4,330

Accrued expenses

4,790

2,907

Income taxes payable

201

150

Capital lease obligations - current portion

60

195

Note payable-current portion

341

-

Application development contracts

3,172

356

Other current liabilities

621

196

Total current liabilities

17,015

8,134

Capital lease obligation - long-term portion

4

22

Note payable - long-term portion

610

-

Total liabilities

17,628

8,156

Commitments and contingencies (Notes 3, 6 and 8)

-

-

Minority interest

-

475

Shareholders' equity:

Common stock, no par, 200,000,000 shares authorized 56,160,075 and 56,038,571 shares issued and outstanding

-

-

Additional paid-in capital

195,014

194,823

Accumulated deficit

(115,428
)
(56,835
)
Accumulated other comprehensive income

1

1

79,587

137,989

Less notes and stock subscriptions receivable

(15
)
(15
)
Less vested warrants issued

(3,167
)
(4,222
)
Less deferred compensation expense

(1,656
)
(2,814
)
Total shareholders' equity

74,750

130,938

Total liabilities and shareholders' equity

$
92,378

$
139,569

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

~~NATIONAL INFORMATION CONSORTIUM, INC.~~

~~CONSOLIDATED STATEMENTS OF OPERATIONS~~

~~(UNAUDITED)~~

~~000's except for per share amounts~~

Three-months ended

Nine-months ended

September 30,

September 30,

2001

2000

2001

2000

Revenues:

Portal revenues

$
7,146

$
4,503

$
18,966

$
13,535

Software and services revenues

3,934

2,097

10,106

6,742

Total revenues

11,080

6,600

29,072

20,277

Cost of revenues:

Cost of portal revenues

457

355

1,171

1,164

Cost of software and services revenues

6,218

1,419

10,518

5,724

Total cost of revenues (exclusive of depreciation and amortization)

6,675

1,774

11,689

6,888

Gross profit

4,405

4,826

17,383

13,389

Operating expenses:

Service development and operations

2,460

3,074

8,366

6,922

Selling, general and administrative

7,805

8,817

24,091

21,285

Impairment of intangible assets

36,997

-

36,997

-

Stock compensation

386

416

1,176

1,331

Depreciation and amortization

8,504

8,363

25,345

19,661

Total operating expenses

56,152

20,670

95,975

49,199

Operating loss

(51,747
)
(15,844
)
(78,592
)
(35,810
)

Other income (expense):

Interest expense

(12
)
(6
)
(22
)
(38
)
Other income, net

207

767

813

2,967

Equity in net loss of affiliates

(541
)
(1,495
)
(2,037
)
(3,178
)

Total other income (expense)

(346
)
(734
)
(1,246
)
(249
)

Loss before income taxes and minority interest

(52,093
)
(16,578
)
(79,838
)
(36,059
)

Income tax benefit

(12,927
)
(4,954
)
(20,770
)
(10,731
)

Loss before minority interest

(39,166
)
(11,624
)
(59,068
)
(25,328
)
Minority interest

(464
)
5

(475
)
(21
)
Net loss

$
(38,702
)
$
(11,629
)
$
(58,593
)
$
(25,307
)

Net loss per share:

Basic and diluted

$
(0.69
)
$
(0.21
)
$
(1.05
)
$
(0.46
)

Weighted average shares outstanding

56,090

55,489

56,066

54,431

	March 31, 2002			December 31, 2001
ASSETS
Current assets:
Cash and cash equivalents	$	14,546		$	17,235
Marketable securities	7,884			4,066
Trade accounts receivable	15,604			12,194
Prepaid expenses	1,041			1,156
Other current assets	1,268			2,808
Total current assets	40,343			37,459
Property and equipment, net	5,689			6,386
Deferred income taxes	32,135			31,757
Other assets	281			270
Investments in affiliates	1,281			1,501
Goodwill, net	1,255			1,255
Intangible assets, net	2,803			3,185
Total assets	$	83,787		$	81,813

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,885		$	11,232
Accrued expenses	6,038			5,676
Income taxes payable	51			21
Capital lease obligations - current portion	14			14
Note payable-current portion	326			348
Application development contracts	2,260			3,962
Other current liabilities	2,282			476
Total current liabilities	23,856			21,729
Capital lease obligation - long-term portion	1			1
Note payable - long-term portion	463			524
Total liabilities	24,320			22,254

Commitments and contingencies (Notes 4 and 7)	—			—

Shareholders’ equity:
Common stock, no par, 200,000,000 shares authorized 56,486,204 and 56,260,197 shares issued and outstanding	—			—
Additional paid-in capital	195,637			195,159
Accumulated deficit	(135,159		)	(134,279		)
Accumulated other comprehensive income	—			1
	60,478			60,881
Less notes and stock subscriptions receivable	(15		)	(15		)
Less deferred compensation expense	(996		)	(1,307		)
Total shareholders’ equity	59,467			59,559
Total liabilities and shareholders’ equity	$	83,787		$	81,813

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

~~NATIONAL INFORMATION CONSORTIUM, INC.~~NIC Inc.

CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~OPERATIONS

(UNAUDITED)

~~000's~~000’s except for per share amounts

Nine-months ended

September 30,

2001

2000

Cash flows from operating activities:

Net loss

$
(58,593
)
$
(25,307
)
Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

25,345

19,661

Compensation expense recognized related to sale of common stock

13

42

Compensation expense recognized related to stock options

1,163

1,289

Loss on disposals of property and equipment

16

101

Accretion of discount on marketable securities

(572
)
(2,804
)
Application development contracts

2,816

602

Impairment of intangible assets

36,997

-

Deferred income taxes

(20,850
)
(10,829
)
Minority interest

(475
)
(21
)
Equity in net loss of affiliates

2,037

3,178

Changes in operating assets and liabilities, net of effects of acquisitions:

(Increase) in trade accounts receivable

(4,069
)
(1,315
)
(Increase) decrease in prepaid expenses

613

(1,823
)
(Increase) in other current assets

(153
)
(477
)
(Increase) in other assets

(7
)
(20
)
Increase (decrease) in accounts payable

3,101

(109
)
Increase in accrued expenses

1,883

1,069

Increase in income taxes payable

51

66

Increase (decrease) in other current liabilities

94

(138
)

Net cash used in operating activities

(10,590
)
(16,835
)

Cash flows from investing activities:

Purchases of property and equipment

(2,091
)
(3,855
)
Proceeds from disposals of property and equipment

487

13

Capitalized software development costs

(5,740
)
(2,166
)
Purchases of marketable securities

(36,637
)
(246,413
)
Maturities of marketable securities

55,295

294,160

Acquisition of businesses, net of cash acquired

-

(8,617
)
Investments in affiliates

-

(10,787
)
Proceeds from sale of affiliate

662

-

Net cash provided by investing activities

11,976

22,335

Cash flows from financing activities:

Payments on bank lines of credit

-

(2,050
)
Proceeds from notes payable

1,000

-

Payments on notes payable

(49
)
(50
)
Payments on capital lease obligations

(153
)
(158
)
Payments to purchase treasury stock

-

(101
)
Proceeds from issuance of common stock to employees

-

112

Proceeds from subscriptions receivable

-

15

Proceeds from exercise of employee stock options

174

750

Net cash provided by (used in) financing activities

972

(1,482
)

Net increase in cash and cash equivalents

2,358

4,018

Cash and cash equivalents, beginning of year

13,879

9,527

Cash and cash equivalents, end of period

$
16,237

$
13,545

Other cash flow information:

Interest paid

$
22

$
38

Income taxes paid

$
88

$
85

	Three-months ended March 31,
	2002			2001
Revenues:
Portal revenues	$	8,586		$	5,432
Software and services revenues	3,780			2,586
Total revenues	12,366			8,018
Operating expenses:
Cost of portal revenues	5,058			4,341
Cost of software and services revenues	3,063			2,271
General and administrative	3,145			5,619
Sales and marketing	650			753
Stock compensation	311			386
Depreciation and amortization	1,163			8,386
Total operating expenses	13,390			21,756
Operating loss	(1,024		)	(13,738		)
Other income (expense):
Interest income	41			463
Interest expense	(11		)	(6		)
Equity in net loss of affiliates	(224		)	(820		)
Other income (expense), net	—			7
Total other income (expense)	(194		)	(356		)
Loss before income taxes and minority interest	(1,218		)	(14,094		)
Income tax benefit	(338		)	(3,938		)
Loss before minority interest	(880		)	(10,156		)
Minority interest	—			(22		)
Net loss	$	(880	)	$	(10,134	)

Net loss per share:
Basic and diluted	$	(0.02	)	$	(0.18	)

Weighted average shares outstanding	56,358			56,041

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

NIC Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

000’s

	Three-months ended March 31,
	2002			2001
Cash flows from operating activities:
Net loss	$	(880	)	$	(10,134	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	1,163			8,386
Compensation expense recognized related to stock options	311			386
Accretion of discount on marketable securities	(4		)	(314		)
Application development contracts	(1,702		)	(356		)
Deferred income taxes	(379		)	(3,965		)
Minority interest	—			(22		)
Equity in net loss of affiliates	224			820
Changes in operating assets and liabilities, net of effects of acquisitions:
(Increase) in trade accounts receivable	(3,410		)	(2,187		)
Decrease in prepaid expenses	115			199
(Increase) decrease in other current assets	1,540			(1,108		)
(Increase) decrease in other assets	(32		)	10
Increase in accounts payable	1,653			361
Increase in accrued expenses	446			1,366
Increase in income taxes payable	30			38
Increase (decrease) in other current liabilities	1,806			(23		)
Net cash provided by (used in) operating activities	881			(6,543		)

Cash flows from investing activities:
Purchases of property and equipment	(83		)	(665		)
Capitalized software development costs	—			(2,213		)
Purchases of marketable securities	(20,095		)	(20,833		)
Maturities of marketable securities	16,281			25,157
Net cash provided by (used in) investing activities	(3,897		)	1,446

Cash flows from financing activities:
Payments on notes payable	(83		)	—
Payments on capital lease obligations	—			(53		)
Proceeds from exercise of employee stock options	410			21
Net cash provided by (used in) financing activities	327			(32		)

Net decrease in cash and cash equivalents	(2,689		)	(5,129		)
Cash and cash equivalents, beginning of year	17,235			13,879
Cash and cash equivalents, end of period	$	14,546		$	8,750
Other cash flow information:
Interest paid	$	11		$	6
Income taxes paid	$	7		$	6

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~National Information Consortium,~~NIC Inc. ~~("NIC"~~(“NIC” or the ~~"Company"~~“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~~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, ~~2000,~~2001, filed with the SEC on ~~April 2, 2001,~~March 25, 2002, and Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q.

1. BASIS OF PRESENTATION

In July 2000, the Emerging Issues Task Force reached a final consensus on Issue 99-19 (“EITF 99-19”), “Recording Revenue Gross as a Principal versus Net as an Agent,” which provides guidance as to the circumstances when a company should recognize revenue based on the gross amount billed to the customer or the net amount retained. Management decided to present the Company’s revenues from information access fees net of the portion paid to the government. This change became effective beginning in the fourth quarter of 2000. Previously, the Company presented such revenues on a gross basis and accrued the costs that it pays to government agencies for data access as cost of revenues. The new presentation had no impact on gross profit, operating loss, net loss or net loss per share. Segment and quarterly information for all periods presented reflects the new presentation. For additional information on this change in revenue presentation, refer to Notes 1 and 22 in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 filed with the SEC on April 2, 2001.

In the fourth quarter of ~~2000,~~2001, the Company decided to reclassify certain information in its consolidated ~~statement~~statements of operations. ~~The~~Consistent with prior reporting periods, the Company ~~separated its~~has continued to classify revenues and cost of revenues into two ~~categories (portal,~~categories: (1) portal and (2) software and ~~services) for all~~services. However, as compared to prior reporting periods, ~~presented. Previously, the Company presented only one category~~no total gross profit line is reported. Instead, cost of portal revenues and ~~one category of~~ cost of ~~revenues.~~ software and services revenues have been classified as separate operating expense categories.

The portal category includes revenues ~~and cost of revenues~~ primarily from the ~~Company's~~Company’s subsidiaries operating enterprise-wide state and local government ~~portals.~~portals under long-term contracts on an outsourced basis. The software and services category includes revenues primarily from the Company’s eProcurement, electronic corporate filings, ethics & elections, commercial vehicle compliance and AOL businesses.

The primary categories of operating expenses include: cost of revenues of the Company’s Products segment, which includes its NIC Conquest, NIC Technologies and IDT subsidiaries, and the Company’s Procurement segment, which includes its NIC Commerce subsidiary. Also, cost of revenues, service development and operations expenses, and selling, general and administrative expenses have been reclassified for all periods presented. The Company now reflects the costs incurred by NIC Conquest and IDT to meet customer contractual commitments asportal revenues; cost of software and services ~~revenues. Previously, these expenses were primarily included in~~revenues; general and administrative; and sales and marketing. 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 ~~operations~~services such as employee compensation, the cost of subcontractors hired as part of software and ~~to a lesser extent, in selling, general~~services projects, and all other direct project costs including materials, travel and other out-of-pocket expenses. General and administrative ~~expenses.~~ 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, office rent and maintenance. Sales and marketing costs consist primarily of corporate-level expenses relating to market development, public relations and promotional activities including advertising, image development and market research.

These reclassifications had no impact on total revenues, operating loss, net loss or net loss per share. ~~Segment information~~Information for all periods presented reflects these new classifications. For additional information on this reclassification, refer to Notes 1 and 22 in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 filed with the SEC on April 2, 2001.

2. ~~IMPAIRMENT OF INTANGIBLE ASSETS~~

The Company assesses the value of recorded goodwill and other intangible assets for possible impairment based primarily on the ability to recover the balances from expected future cash flows on an undiscounted basis. An impairment assessment is performed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. During the three months ended September 30, 2001, the Company identified indicators of possible impairment of certain of its 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. The impairment indicators included, but were not limited to, the recent restructurings in these businesses, which included workforce layoffs and office closings, significant underperformance of these businesses relative to historical and projected future operating results, management’s reallocation of capital resources from these underperforming businesses to its most profitable businesses, and significant negative industry and economic trends.

NIC Technologies had been integrated as the application development organization for the Company’s portal businesses. However, a series of organizational restructurings completed in the third quarter of 2001 have lead to significant layoffs at NIC Technologies and a shift in application development from what were previously centralized development operations in Westlake Village, California and Pune, India to regionalized operations in selected state portals. In total, less than 25 employees who were employees of the original SDR Technologies were employed with NIC at September 30, 2001, down from a previous high of approximately 85 employees at the date of acquisition in May 2000. Additionally, management determined that the value of the technology intangible relating to the SDR acquisition was impaired. During recent months, management significantly curtailed funding of all research and development-stage technology projects that did not have demonstrable and immediate positive financial returns for the Company. Specifically, future funding to actively develop and market the Company’s Web iVR technology was significantly scaled back. This Web iVR technology was the primary value driver of the product technology intangible resulting from the SDR acquisition. Goodwill related to the SDR acquisition primarily represented the benefits the Company expected to receive from a centralized application development organization. As the Company has now abandoned that strategy and eliminated most of the development resources acquired with SDR, management concluded the goodwill no longer had value.

In addition to the management and organizational changes that have taken place at NIC Commerce since third quarter of 2000, the Company continued the restructuring of this business in recent months by eliminating the majority of its marketing and business development staff due to poor performance, with additional headcount reductions made in October 2001. Significant underperformance relative to historical and projected future operating results combined with the significant recent negative economic and industry trends within the eProcurement sector were the major indicators of possible impairment of goodwill and other intangible assets relating to the eFed acquisition.

As a result of the developments noted above, in the third quarter of 2001, the Company determined that the carrying value of goodwill and other intangible assets related to the acquisitions of SDR Technologies and eFed were not recoverable and therefore had been impaired. This assessment resulted in a pre-tax impairment charge during the three months 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.

~~Intangible assets consisted of the following at September 30, 2001 and December 31, 2000 (in thousands):~~

Sept. 30, 2001

Dec. 31, 2000

Goodwill

$
7,708

$
45,649

Software intangibles

2,666

24,456

Contract intangibles

672

1,072

Assembled domestic workforce intangible

-

1,100

Foreign workforce agreement intangible

-

8,800

Product technology intangible

-

8,200

Software development costs

9,939

4,215

Patents and trademarks

122

106

21,107

93,598

Less accumulated amortization

7,005

26,165

$
14,102

$
67,433

At September 30, 2001, remaining purchase accounting intangible assets consisted of goodwill, software intangibles and contract intangibles relating to the Company’s exchange offer in March 1999, and the acquisitions of Conquest Softworks in January 2000 and Intelligent Decision Technologies in October 2000. The Company has not recorded any provisions for impairment of goodwill or other intangible assets relating to these acquisitions.

~~3. APPLICATION DEVELOPMENT CONTRACTS~~

Due to developments arising in late August 2001 relating to NIC Conquest’s migration to a common operating platform for its Uniform Commercial Code and corporations filing applications, the Company determined that the balance of revenues remaining to be recognized under certain of its fixed price application development contracts were not expected to cover the Company’s current estimate of costs to develop and implement the related applications and accrued approximately $3.4 million for the expected loss. The loss has been expensed as cost of software and services revenues in the consolidated statement of operations. At September 30, 2001, the accrual for all application development contracts held by the Company was approximately $3.2 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.

~~4. BUSINESS FILINGS CONTRACT WITH CALIFORNIA SECRETARY OF STATE~~

On September 6, 2001, National Information Consortium USA, Inc., a wholly owned subsidiary of NIC, and the Company’s NIC Conquest subsidiary, were awarded a five-year contract by the California Secretary of State to develop and implement a comprehensive information management and filing system. The five-year contract to build an information management and retrieval system for the Business Programs Division of the California Secretary of State is valued at $25.3 million and is the largest government contract NIC has ever been awarded. For additional information on this contract, refer to Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q.

5. REPORTABLE SEGMENTS AND RELATED INFORMATION

During the third quarter of 2000, the Company announced a restructuring of its eGovernment software and services businesses. In conjunction with the restructuring, the Company also reorganized its management team to support the new corporate structure. Accordingly, NIC changed the composition of its reportable segments to match the manner by which the segments were internally organized and managed. In the second quarter of 2001, the Company changed the internal composition of its reportable segments and began to allocate expenses of certain corporate departments that support the Company’s state and local portal operations to the Portals segment. In addition, the division that manages the Company’s relationship with America Online (the “AOL division”) began to generate substantive revenues during the second quarter of 2001 and is included in a separate reportable segment. The Company’s reportable segments consist of its outsourced state and local portal businesses (“Outsourced Portals”), its eGovernment products businesses (“Products”), its NIC Commerce government procurement business (“~~Procurement”~~eProcurement”) and its AOL division (“~~Other”~~AOL”). The Outsourced Portals segment includes the ~~Company's~~Company’s subsidiaries operating outsourced state and local government portals and the corporate divisions that support portal operations. The Products segment includes the ~~NIC Conquest~~Company’s corporate filings business (NIC Conquest), ethics & elections filings business (NIC Technologies) and ~~NIC Technologies subsidiaries, which were previously included in the state and local government segment, and the IDT subsidiary. The AOL division was previously included in unallocated~~commercial vehicle compliance business (IDT). Unallocated corporate-level ~~expenses. Unallocated corporate–level~~ expenses are reported in the reconciliation of the segment totals to the related consolidated totals as ~~"Other~~“Other Reconciling Items.~~" Segment information for all periods presented has been restated to reflect the new internal organization of the Company.~~” Management evaluates the performance of its segments and allocates resources to them based on ~~gross profit~~revenues and earnings before interest, taxes, equity in net loss of affiliates, depreciation, amortization, impairment losses, one-time charges and other non-cash charges related to stock compensation and application ~~development~~services contracts ~~("EBITDA"~~(“EBITDA”). There have been no significant intersegment transactions for the periods reported.

The table below reflects summarized financial information concerning the ~~Company's~~Company’s reportable segments for the three months ended ~~September 30~~March 31 (in thousands):

																		Outsourced Portals		Products			eProcurement			AOL			Other Reconciling Items			Consolidated Total
2002
Revenues																		$	8,586	$	2,954		$	166		$	660		$	—		$	12,366
EBITDA																		2,873		26			(559		)	366			(2,256		)	450
	Portals		Products			Procurement			Other			Other Reconciling Items			Consolidated Total
2001
Revenues	$	7,747	$	2,585		$	447		$	301		$	-		$	11,080		5,432		2,140			446			—			—			8,018
Cost of revenues	1,123		5,408			144			-			-			6,675
Gross profit	6,624		(2,823		)	303			301			-			4,405

EBITDA	1,865		(646		)	(616		)	(135		)	(2,890		)	(2,422		)	907		(1,183		)	(1,480		)	(497		)	(2,713		)	(4,966		)

2000
Revenues	4,488		1,507			605			-			-			6,600
Cost of revenues	356		827			591			-			-			1,774
Gross profit	4,132		680			14			-			-			4,826

EBITDA	768		(781		)	(2,134		)	(302		)	(3,743		)	(6,192		)

The following is a reconciliation of total segment EBITDA to total consolidated loss before income taxes and minority interest for the three months ended ~~September 30~~March 31 (in thousands):

2001

2000

Total EBITDA for reportable segments

$
(2,422
)
$
(6,192
)
Impairment of intangible assets

(36,997
)
-

Application development contracts

(3,438
)
-

Restructuring charge

-

(638
)
Vacation accrual

-

(235
)
Stock compensation

(386
)
(416
)
Depreciation and amortization

(8,504
)
(8,363
)
Other income, net

207

767

Interest expense

(12
)
(6
)
Equity in net loss of affiliates

(541
)
(1,495
)

Consolidated loss before income taxes and minority interest

$
(52,093
)
$
(16,578
)

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

Portals

Products

Procurement

Other

Other Reconciling Items

Consolidated Total

2001

Revenues

$
19,323

$
7,761

$
1,512

$
476

$
-

$
29,072

Cost of revenues

1,837

9,015

837

-

-

11,689

Gross profit

17,486

(1,254
)
675

476

-

17,383

EBITDA

3,138

(2,436
)
(3,555
)
(876
)
(7,907
)
(11,636
)

2000

Revenues

13,435

3,713

3,129

-

-

20,277

Cost of revenues

1,164

4,310

1,414

-

-

6,888

Gross profit

12,271

(597
)
1,715

-

-

13,389

EBITDA

2,724

(1,553
)
(3,877
)
(335
)
(8,719
)
(11,760
)

	2002			2001
Total EBITDA for reportable segments	$	450		$	(4,966	)
Stock compensation	(311		)	(386		)
Depreciation and amortization	(1,163		)	(8,386		)
Interest income	41			463
Interest expense	(11		)	(6		)
Equity in net loss of affiliates	(224		)	(820		)
Other income (expense), net	—			7
Consolidated loss before income taxes and minority interest	$	(1,218	)	$	(14,094	)

~~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):~~5

2001

2000

Total EBITDA for reportable segments

$
(11,636
)
$
(11,760
)
Impairment of intangible assets

(36,997
)
-

Application development contracts

(3,438
)
(1,350
)
Restructuring charge

-

(638
)
Vacation accrual

-

(235
)
Withdrawn secondary offering expenses

-

(835
)
Stock compensation

(1,176
)
(1,331
)
Depreciation and amortization

(25,345
)
(19,661
)
Other income, net

813

2,967

Interest expense

(22
)
(38
)
Equity in net loss of affiliates

(2,037
)
(3,178
)

Consolidated loss before income taxes and minority interest

$
(79,838
)
$
(36,059
)

Due to developments arising in late March 2000 relating to subcontractor performance and technical delivery issues, the Company determined that the balance of revenues remaining to be recognized under an application development contract with the Indiana Secretary of State was not expected to cover the Company’s current estimate of costs to develop and implement the related application and accrued $1,350,000 for the expected loss as cost of software and services revenues in the first quarter of 2000.
On February 22, 2000, the Company filed a registration statement on Form S-1 with the SEC for an offering of approximately 8.1 million shares of the Company’s common stock. On April 5, 2000, the Company announced its intention to withdraw the stock offering due to adverse market conditions. Direct costs related to the withdrawn offering of approximately $835,000 were expensed as selling, general and administrative expenses in the second quarter of 2000. In the third quarter of 2000, the Company recorded a one-time charge of approximately $638,000 for employee severance relating to the restructuring of its NIC Commerce and NIC Technologies divisions and the consolidation of NIC’s marketing efforts and a one-time non-cash charge of approximately $235,000 due to the adoption of a company-wide vacation policy that required the Company to recognize a liability for earned but unused employee vacation.

~~6. BANK NOTE PAYABLE~~

In August 2001, the Company borrowed $1 million from a bank in the form of a promissory note payable to finance the purchase of certain hardware and software components for its NIC Commerce subsidiary. The note bears interest at the bank’s prime rate and is payable in 36 monthly installments of approximately $31,000 ending in July 2004. The Company has collateralized the note payable with approximately $1.1 million in marketable debt securities. As a covenant of the note agreement, the Company is required to achieve a positive EBITDA level by the quarter ending December 31, 2002.

7.3. MARKETABLE SECURITIES

The fair value of marketable debt securities at ~~September 30, 2001~~March 31, 2002 and December 31, ~~2000~~2001 is as follows (in thousands):

	Sept. 30, 2001		Dec. 31, 2000		March 31, 2002		Dec. 31, 2001
U.S. government obligations	$	-	$	3,968	$	5	$	2,500
State and municipal obligations	1,000		-		2,640		—
Corporate debt securities	5,827		20,946		5,239		1,566
					$	7,884	$	4,066
	$	6,827	$	24,914

The ~~Company's~~Company’s marketable securities are classified as available-for-sale and ~~consist of short-term U.S. government and state municipal obligations and corporate debt securities. These investments~~ are stated at fair value with any unrealized holding gains or losses included as a component of ~~shareholders'~~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, 2001~~March 31, 2002 were not significant.

At ~~September 30, 2001,~~March 31, 2002, the Company has pledged ~~approximately $2.7 million~~all of its marketable securities as collateral for letters of credit, performance bonds, its ~~$1 million bank~~ line of credit in conjunction with a corporate credit card agreement, and its ~~$1 million~~ bank note payable.

~~8. INVESTMENTS IN AFFILIATES~~4. APPLICATION SERVICES CONTRACTS

InDue to developments arising in the ~~first quarter~~second half of ~~2000,~~2001 relating to NIC Conquest’s decision to migrate to a common operating platform for its UCC and corporations filing applications, the Company ~~invested~~accrued approximately $6.0 million for expected losses on outstanding contracts where migration was elected. At March 31, 2002, the accrual for all application development contracts held by the Company was approximately $2.3 million, which management believes is adequate. Because of the inherent uncertainties in ~~two private companies involved~~estimating the costs of completion, it is at least reasonably possible that the estimate will change in the ~~e-government~~near term. Unbilled revenues under long-term application services ~~industry, Tidemark Computer Systems, Inc. (“Tidemark”), which was renamed Tidemark Solutions, Inc.,~~contracts at March 31, 2002 and ~~E-Filing.com, Inc. (“E-Filing”), primarily for strategic purposes. In the fourth quarter of 2000, the Company invested~~December 31, 2001 were approximately $0.8 million and $2.3 million, respectively, and are included in ~~a private joint venture, e-Government Solutions Limited (“eGS”), primarily to share~~other current assets in the ~~risk~~consolidated balance sheets. Billings in excess of ~~NIC’s international expansion~~costs at March 31, 2002 were approximately $1.7 million, and to deliver eGovernment products and services throughout Western Europe, with initial efforts to focus on the United Kingdom. Such investments have been accounted for under the equity method, as NIC has 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%, althoughare included in other ~~factors, such as representation on the investee's Board of Directors, are considered in determining whether the equity method of accounting is appropriate.~~

In May 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 at September 30, 2001.

In September 2001, the eGS Joint Venture Agreement dated September 25, 2000, among Swiss venture capital firm ETF Group, London-based venture development organization Vesta Group, and NIC European Business Limited (“NIC Europe”), a European subsidiary of NIC, was modified and reduced NIC’s obligation to make future cash contributions to the joint venture. NIC Europe will be required to make approximately $1.0 million in additional cash capital contributions in four installments of approximately $238,000 beginning in October 2001 and as capital needs arise. Through September 30, 2001, NIC’s cash contributions to eGS totaled $524,000. In October 2001, NIC contributed an additional $238,000 to the joint venture, increasing NIC’s ownership to 47% of the ordinary shares of eGS.

~~E-Filing and eGS are~~current liabilities in the early stages of operations and are incurring net losses. The Company regularly reviews the carrying value of its equity method investments and would record impairment losses when events and circumstances indicate that such assets are impaired. To date, the Company has not recorded any such impairment losses on its investments in E-Filing or eGS. At September 30, 2001, the carrying value of the Company’s equity-method investments in E-Filing and eGS totaled approximately $2.1 million and $0.4 million, respectively. For additional information on the Company’s equity method investments, refer to Note 6 in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 filed with the SEC on April 2, 2001.consolidated balance sheets.

~~9. RECENT ACCCOUNTING PRONOUNCEMENTS~~5. EMPLOYEE STOCK PURCHASE PLAN

In ~~June~~May 1999, the Company’s Board of Directors approved an employee stock purchase plan intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. A total of 2,321,688 shares of NIC common stock have been reserved for issuance under this plan. Terms of the plan permit eligible employees to purchase NIC common stock through payroll deductions up to 15% of each employee’s compensation. Amounts deducted and accumulated by the participant will be used to purchase shares of NIC’s common stock at 85% of the lower of the fair value of the common stock at the beginning or the end of the offering period, as defined. The plan will operate on consecutive twelve month offering periods beginning on April 1of each year. The first offering period under this plan commenced on April 1, 2001 and ended on March 31, 2002. Approximately 32,500 shares of Company common stock were purchased in the first offering period. The second offering period under this plan commenced on April 1, 2002. The closing fair market value of NIC common stock on the first day of the second offering period was $3.84 per share.

6. NIC CONQUEST MINORITY INTEREST

In January 2000, NIC merged its application services division with Conquest Softworks, LLC (“Conquest”) and obtained 65% ownership in the new company, which was renamed NIC Conquest. In May 2000, NIC acquired an additional 6.5% ownership interest in NIC Conquest from NIC Conquest’s then chief executive officer, giving NIC ownership of 71.5% of NIC Conquest. NIC Conquest serves as NIC’s corporate filings business.

At any time after January 12, 2002, NIC had the right to purchase all, but not less than all, of the non-NIC shareholders’ shares for 12 times Conquest’s immediately preceding 12 months’ EBITDA divided by 30 million, which is the number of outstanding Conquest shares. On March 1, 2002 (the “Call Date”), NIC exercised its call rights to purchase all of the non-NIC shareholders’ shares. Since Conquest experienced negative EBITDA in calendar 2001, the ~~Financial Accounting Standards Board (“FASB”~~purchase price of the shares was $0. In accordance with the Investor’s Rights Agreement (the “Rights Agreement”) ~~issued~~dated January 12, 2000, the closing of this transaction occurred on April 8, 2002. NIC granted the non-NIC shareholders certain residual rights in the Rights Agreement if Conquest experiences a change in control within 48 months after the Call Date. If a change of control of Conquest occurs within 12 months after the Call Date, the non-NIC shareholders would receive 35% of the difference between the price NIC paid the non-NIC shareholders and the price NIC received for NIC Conquest in a public offering, merger or acquisition. The non-NIC shareholders would receive approximately 26% of the difference in price if the event occurs within 24 months of the Call Date, 18% within 36 months of the Call Date and 9% within 48 months of the Call Date.

7. GOODWILL AND INTANGIBLE ASSETS

The Company adopted Statement of Financial Accounting Standards ~~(“SFAS”) No. 141, “Business Combinations,” and SFAS~~ No. 142, ~~“Goodwill~~Goodwill and Other Intangible ~~Assets.”~~ Assets, (“SFAS No. ~~141 addresses the accounting and reporting for business combinations and requires that all business combinations be accounted for using one method, the purchase method. SFAS No. 141 is~~142”), effective ~~for all business combinations initiated after June 30, 2001, and contains certain transition provisions, effective for the Company beginning~~ January 1, ~~2002, that apply to purchase method business combinations for which the acquisition date was before July 1, 2001.~~2002. SFAS No. 142 addresses the financial accounting and reporting for goodwill and other intangible assets acquired in a business combination after they have been initially recognized in the financial statements, eliminates amortization of goodwill, and requires that goodwill be tested for impairment at least ~~annually.~~annually, or more frequently if certain indicators arise. In the first quarter of 2002, the Company completed the initial step of a transitional impairment test required by SFAS No. 142 ~~is effective~~and determined that its goodwill was not impaired. Had the Company been accounting for its goodwill under SFAS No. 142 for the ~~Company beginning January 1, 2002.~~three months ended March 31, 2001, the Company’s net loss and loss per share would have been as follows:

Reported net loss	$	(10,134	)

Add: Goodwill amortization, net of tax	3,924
Add: Equity-method goodwill amortization, net of tax	288

Adjusted net loss	$	(5,922	)

Reported loss per share	$	(0.18	)

Add: Goodwill amortization, net of tax	0.07
Add: Equity-method goodwill amortization, net of tax	—

Adjusted loss per share	$	(0.11	)

At March 31, 2002, intangible assets were primarily comprised of the unamortized fair value of fully vested warrants issued to AOL, which is being amortized using the straight-line method over the 40 month term of the Company’s contract with AOL, and software development costs, which are being amortized using the straight-line method over a period of three years. The ~~Company anticipates that~~accumulated amortization related to intangible assets at March 31, 2002 and December 31, 2001 was approximately $2.5 million and $2.1 million, respectively. The aggregate intangible asset amortization expense for the quarter ended March 31, 2002 was $0.4 million. The estimated amortization expense for the years ending December 31, 2002, 2003, and 2004, is $1.6 million, $1.5 million and $0.1 million, respectively.

At March 31, 2002, the carrying value of the Company’s goodwill, ~~arising from~~relating exclusively to the ~~exchange offer in March 1999, and the acquisitions~~acquisition of ~~Conquest Softworks in January 2000 and Intelligent Decision Technologies~~IDT in October 2000, ~~will be~~was approximately ~~$2.9 million at December 31, 2001. The~~$1.3 million. In 2001, the Company ~~currently recognizes~~recognized goodwill amortization expense of approximately ~~$576,000~~$176,000 per quarter relating to the IDT acquisition that will no longer be recognized upon adoption of SFAS No. 142. ~~The~~IDT was profitable in 2001 and is expected to be profitable in 2002. However, the Company has contingent purchase price obligations related to IDT (see Note 4 in the Notes to Consolidated Financial Statements 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 issuance of additional consideration in 2002 or 2003 could result in impairment even though the Company’s recorded goodwill at January 1, 2002 was not ~~assessed the impact of any impairment testing required by~~impaired under SFAS No. ~~142 and is currently evaluating the full impact that adopting SFAS Nos. 141 and 142 will have on its consolidated financial position and results of operations.~~142.

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

FORWARD~~FORWARD-LOOKING~~-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~~three-month periods ended ~~September 30, 2001~~March 31, 2002 and ~~2000.~~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.

~~IMPAIRMENT~~BASIS OF ~~INTANGIBLE ASSETS~~PRESENTATION

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. The impairment charge has been recorded as a separate caption titled “Impairment of intangible assets” in the consolidated statement of operations. For additional information on the impairment charge, refer to Note 2 in the Notes to Consolidated Financial Statements included in this Form 10-Q.

~~BUSINESS FILINGS CONTRACT WITH CALIFORNIA SECRETARY OF STATE~~

On September 6, 2001, our NIC Conquest business was awarded a five-year contract by the California Secretary of State to develop and implement a comprehensive information management and filing system. The five-year contract to build an information management and retrieval system for the Business Programs Division of the California Secretary of State is valued at $25.3 million and is the largest government contract we have ever been awarded. This award is both the nation's largest state eGovernment filing initiative on record and the most comprehensive secretary of state outsourced filing system project in the United States. The new Web-enabled document management and filing system will increase efficiency and reduce expenses for the State by eliminating paperwork and decreasing processing and turnaround times. Upon completion, the new system will allow agency customers, primarily from the banking and legal communities, to search, retrieve, and submit documents online. Customers will also be able to pay fees for a variety of transactions, including new incorporation document filings, trademark registrations, and Uniform Commercial Code filings. The contract includes comprehensive back office document and revenue management systems, Web and Internet applications that will take approximately 90% of the agency's Business Programs Division's services online, and imaging and indexing of more than ten million historical document pages. As part of the contract, we will provide three years of onsite support and maintenance for the system as well as marketing consultation to drive user adoption within the legal and banking industries. We will account for revenues under this contract on the percentage of completion basis.

~~PRESENTATION OF REVENUES AND COST OF REVENUES~~

As discussed in Note 1 in the Notes to Consolidated Financial Statements included in this Form 10-Q, in the fourth quarter of ~~2000,~~2001, we ~~began~~decided to ~~recognize revenues for the access~~reclassify certain information in our consolidated statements of ~~public information net of the transaction fee due~~operations. Consistent with prior reporting periods, we have continued to ~~the government. Previously, the Company presented such revenues on a gross basis and accrued the costs that it pays to government agencies for data access as cost of revenues. We also started to~~ classify ~~our~~ 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 and cost of~~ revenues primarily from our subsidiaries operating enterprise-wide state and local government portals ~~and our AOL division.~~under long-term contracts on an outsourced basis. The software and services category includes revenues primarily from our eProcurement, electronic corporate filings, ethics & elections, commercial vehicle compliance and AOL businesses.

The primary categories of operating expenses include: cost of portal revenues; cost of software and services revenues; general and administrative; and sales and marketing. 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 ~~Company’s Products segment, which includes~~provision of dedicated client service such as dedicated facilities for our 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 ~~NIC Conquest, NIC Technologies~~cost of subcontractors hired as part of software and ~~IDT subsidiaries,~~services projects, and ~~the Company’s Procurement segment, which includes the NIC Commerce subsidiary.~~all other direct project costs including materials, travel and other out-of-pocket expenses. General 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 our software and services businesses, including information systems, office rent and maintenance. Sales and marketing costs consist primarily of corporate-level expenses relating to market development, public relations and promotional activities including advertising, image development and market research. The ~~three- and nine-month periods~~three-month period ended ~~September 30, 2000 have~~March 31, 2001 has been reclassified to present information on a comparable basis.

RESULTS OF OPERATIONS

Key Financial Metrics	Three-months ended March 31, 2002		Three-months ended March 31, 2001

Revenue growth - outsourced portals	58	%	20	%

Revenue growth - software and services	46	%	55	%

Gross profit % - outsourced portals	41	%	20	%

Gross profit % - software and services	19	%	12	%

General and administrative as % of revenue	25	%	70	%

Sales and marketing as % of revenue	5	%	9	%

REVENUES. Total revenues ~~increased 68%~~ for the current quarter ~~ended September 30, 2001 from~~increased 54% over the prior year. Portal revenues for the current quarter increased ~~59%~~58% over the prior year. Of this increase, ~~22% w~~as14% was attributable to an increase in ~~revenues relating to~~ same state portal volumes (states open more than ~~one year)~~two years) and ~~28% was~~39% was attributable to revenues from our outsourced state portal business units inthat became more fully operational after March 31, 2001, including our Idaho and Tennessee ~~which began to generate substantive revenues in March 2001, and to a lesser extent from our Hawaii and Montana contracts,~~portals, which began to generate driver’s license record access, ~~(DMV)~~or DMV, revenues in March 2001, our Hawaii and Montana portals, which began to generate DMV revenues in the third quarter of 2001, our Rhode Island portal, which generated a full quarter of DMV revenues in the current ~~quarter. Approximately 7% of the increase in~~quarter, our Oklahoma portal, ~~revenues for the current quarter was from our AOL division,~~ which began to generate ~~substantive advertising~~DMV revenues subsequent to the launch of AOL’s Government Guide in March 2001, and 2% was from our local portals in San Francisco, Tampa, Dallas County and Kent County. Excluding our less mature state portal business units in Hawaii, Idaho, Montana and Tennessee (states open less than one year) and our state portal contracts in Georgia and Iowa, which we operate primarily under a fixed-price model, same state portal transaction revenues for the quarter ended September 30, 2001 increased 23% over the prior year as a result of increased transaction volumes mainly from our Indiana, Kansas, Virginia and Utah subsidiaries.

~~Software and services revenues for~~mid-way through the current quarter, ~~increased~~ ~~88% over the prior year. Of this increase, 32% was from NIC Conquest~~ and ~~37% was from IDT, which we acquired in the fourth quarter of 2000. Approximately 44% of the increase in software and services revenues was from~~ ~~portal contracts~~our contract with ~~the State of Oklahoma and~~ the Florida Association of Court Clerks. Our ~~Oklahoma and~~ Florida ~~contracts are~~contract is different from our traditional self-funding outsourced portal contracts, as we ~~will~~ receive fixed payments for the development of ~~these portals~~this portal with the ~~hopes~~expectations of ~~garnering~~ future application development and transaction revenues. We are in the development phase of our contract with the Florida Association of Court Clerks and are recognizing revenues on a percentage of completion basis. ~~Software and services~~Approximately 5% of the increase in portal revenues ~~from NIC Conquest increased to $1.4 million~~ for the current quarter ~~an 87% increase~~was attributable to our local portals. Excluding our state portals that operate under fixed-price models, same state portal revenues in the current quarter increased 25% over the prior year as a result of ~~revenues~~increased transaction volumes mainly from ~~contracts with the states of Oklahoma~~our Kansas, Indiana, Virginia and ~~California. Revenues from IDT were $0.8 million for the quarter ended September 30, 2001. Revenues from NIC Commerce decreased 26% from the prior year due to an anticipated~~ ~~fall-off in license revenues from its eFed software product, a trend that began in the third quarter of 2000 when NIC Commerce modified its business model. As procurement portals in Colorado/~~Utah South Carolina and Houston/Galveston become more fully operational in the fourth quarter of 2001 and first quarter of 2002, we expect an increase in transaction-based revenues from NIC Commerce. However, w~~e anticipate decreased quarterly revenues from NIC Commerce through at least the end of the fourth quarter of 2001 as compared to 2000.~~subsidiaries.

~~Total revenues increased 43% for the nine months ended September 30, 2001 over the prior year. Portal~~Software and services revenues for the ~~nine months ended September 30, 2001~~current quarter increased ~~40%~~ 46% over the prior year. Of this increase, 25% was from our AOL business, which began to generate substantive advertising revenues subsequent to the launch of AOL’s Government Guide in March 2001, and 27% was from NIC Conquest, our corporate filings business, which benefited from its five-year, $25 million contract with the California 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 under percentage of completion accounting. Approximately 10% of the increase in software and services revenues for the current quarter was attributable to 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 increases were decreases in revenues from our eProcurement business (11%), and to a lesser extent, our commercial vehicle compliance business (5%). We anticipate decreased year-over-year quarterly eProcurment revenues in 2002 as a result of the planned downsizing of this business as previously announced.

COST OF PORTAL REVENUES. Cost of portal revenues for the current quarter increased 17% over the prior year. Of this increase, 12% was attributable to costs from our outsourced state portal business units that became more fully operational after March 31, 2001, 3% was attributable to our local portals and 2% was attributable to an increase in ~~revenues relating to~~ same state cost of portal ~~volumes, 17% was from our state~~revenues.

Our portal ~~business units~~gross profit rate increased to 41% in ~~Hawaii, Idaho, Tennessee and Montana, 4% was from our AOL division and 2% was from our local portals. Software and services revenues increased 50%~~2001 compared to 20% for ~~the nine months ended September 30, 2001 over the prior year.~~2000. This increase was primarily attributable to ~~an increase~~our state portal business units that began to generate substantive revenues after March 31, 2001 as discussed above. Many of these portals were in the early stages of development and had not yet begun to generate revenues ~~from~~ ~~NIC Conquest, IDT, and our portals~~ in ~~Oklahoma and Florida, and was partially offset by a decrease in license revenues from NIC Commerce,~~ ~~as further discussed above.~~

~~GROSS PROFIT. Total~~the first quarter of 2001. Our same state portal gross profit ~~decreased by 9% for the quarter ended September 30, 2001 from the prior year. Portal gross profit~~rate increased by 61% and 44% for the three- and nine-month periods ended September 30, 2001, respectively. These increases are consistent with the corresponding increases in portal revenues for the respective periods. S~~oftware and services gross profit for the current quarter decreased 437% from the prior year. As further discussed in Note 3 in the Notes~~ to Consolidated Financial Statements included in this Form 10-Q, cost of software and services revenues for three- and nine-months periods ended September 30, 2001 includes a charge of approximately $3.4 million recorded52% in the current quarter ~~for anticipated costs~~compared to 39% in ~~excess~~the prior year, primarily as a result of ~~revenues to be recognized under certain~~increased business and citizen adoption of existing portal applications and the ~~Company’s application development contracts~~ ~~relating to NIC Conquest’s migration to a common operating platform for its Uniform Commercial Code and corporations filing~~addition of new revenue generating applications~~. Excluding this charge, software~~ and services within existing portals. 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 ~~increased by 69% from the prior year. This increase was consistent with the corresponding~~rate to continue to increase in ~~software and services revenues in~~ the ~~current quarter.~~foreseeable future.

COST OF SOFTWARE AND SERVICES REVENUES. Cost of software and services revenues for ~~nine months ended September 30, 2000 includes~~the current quarter increased 35% over the prior year. Of this increase, 34% was attributable to our corporate filings business and 12% was attributable to eProcurement. Partially offsetting these increases was a ~~charge of approximately $1.4 million recoded~~decrease from our commercial vehicle compliance business (2%) due to decreased revenues in the ~~first~~current quarter, ~~of 2000 for anticipated costs in excess of revenues to be recognized under the Company’s application development~~and a decrease from our AOL business (9%). We amended our contract with AOL in January 2002. Among the ~~Indiana Secretary~~changes to the contract was a reduction in the total cash carriage fee we pay to AOL from $4.5 million to $2.7 million. We recognize the carriage fee on a straight-line basis over the term of ~~State. Excluding this charge~~the contract as cost of software and ~~the charge recorded~~services revenue. As a result, we recognized approximately $0.2 million less in carriage fee expense in the current quarter as ~~discussed above,~~compared to the prior year.

Our software and services gross profit rate increased ~~27% from~~to 19% in the current year compared to 12% in the prior year. ~~This increase was somewhat lower than our increase in revenues for the corresponding period due to decreased~~The gross profit rate from our ~~NIC Commerce business in~~software and services businesses is largely driven by the ~~current year.~~magnitude of our contract with the California Secretary of State.

~~SERVICE DEVELOPMENT~~GENERAL AND ~~OPERATIONS. Service development~~ADMINISTRATIVE. General and operations expenses consist primarily of information technology employee expenses incurred to start up, operate and maintain our government portals as well as the expenses incurred to maintain the computer system and information technology infrastructure throughout our various businesses. Service development and operationsadministrative expenses for the current quarter ~~ended September 30, 2001~~ decreased by ~~20%~~44% from the prior year. Of this decrease, 12% was attributable to a decrease in corporate expenses and 18% was attributable to NIC Commerce and NIC Technologies, primarily as a result of our restructuring and cost reduction efforts in these businesses over the past year. Partially offsetting these decreases were increases relating to state and local portal business units that became fully operational after September 30, 2000. Same state portal service development and operations expenses increased 6% over the quarter ended September 30, 2000.

~~Service development and operations expenses for the nine months ended September 30, 2001 increased by 21% over~~ the prior year. The majority of this ~~increase~~decrease was attributable to ~~state and local portal business units that became fully operational after September 30, 2000, and to~~ a ~~lesser extent~~reduction in expenses from NIC Technologies, AOL, IDT and same state portal expenses. Partially offsetting these increases were decreases relating to NIC Commerce and corporate expenses. Same state portal service development and operations expenses increased 4% over the nine months ended September 30, 2000.

~~SELLING, GENERAL AND ADMINISTRATIVE.~~ ~~Selling, general and administrative expenses for the quarter ended September 30, 2001 decreased 11% from the prior year. During the third quarter of 2000, the Company recorded a one-time charge~~ of approximately $0.6 million for employee severance costs related to the restructuring of our NIC Commerce and NIC Technologies divisions and the consolidation of our marketing efforts. The Company also recorded a one-time non-cash charge of approximately $0.2 million in the third quarter of 2000 due to the adoption of a company-wide vacation policy that required the Company to recognize a liability for earned but unused employee vacation. Excluding these one-time charges, selling, general and administrative expenses decreased by 2% from the prior year. Decreases in corporate-level expenses and expenses related to NIC Commerce and NIC Technologies, primarily as a result of our restructuring and cost reduction efforts in these businesses over the past year, ~~were partially offset by increases relating NIC Conquest, ITD, AOL~~ and ~~state and local portal business units that became fully operational after September 30, 2000. Same state portal selling,~~a reduction in corporate-level general and administrative ~~expenses increased 9% over~~expenses.

General and administrative expense as a percentage of revenue was 25% in the current quarter ~~ended September 30, 2000~~compared to 70% in the prior year. We expect general and administrative expense as a percentage of revenue to continue to decrease

throughout 2002 as a result of ~~ongoing support infrastructure investment in~~ our ~~state portal partnerships.~~continuing overhead cost containment and efficiency efforts throughout the Company.

~~Selling, general~~SALES AND MARKETING. Sales and ~~administrative~~marketing expenses for the ~~nine months ended September 30, 2001 increased 13% over~~current quarter decreased 14% from the prior year. ~~Excluding~~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.

Sales and marketing expense as a percentage of revenue was approximately 5% in the ~~one-time charges incurred during the third~~current quarter ~~of 2000 noted above, and the one-time charge of approximately $0.8 million during the second quarter of 2000 relating~~compared to our withdrawn secondary offering, selling, general and administrative expenses increased 23% over the nine months ended September 30, 2000. Of this increase, 12% was attributable to new state and local portal business units that became fully operational after September 30, 2000, 4% was from an increase9% in same state portal expenses, 5% was from NIC Conquest, 6% was from AOL, and 3% was from IDT. Partially offsetting these increases was a 7% decrease from NIC Commerce and NIC Technologies. Same state portal selling, general and administrative expenses for the nine months ended September 30, 2001 increased 16% over the prior ~~year~~year. We anticipate sales and marketing expense as a ~~result~~percentage of ~~ongoing support infrastructure investment in our state portal partnerships.~~revenue to remain between 5% and 6% throughout 2002.

DEPRECIATION AND AMORTIZATION. ~~The increase in depreciation~~Depreciation and amortization expense ~~for~~decreased significantly in the ~~nine months ended September 30, 2001 was primarily due to~~current quarter, as we wrote off all remaining goodwill and purchase accounting intangible ~~asset amortization resulting~~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 ~~acquisitions~~NIC Technologies, NIC Commerce and NIC Conquest businesses in the fourth quarter of ~~SDR Technologies in May 2000,~~2001. At March 31, 2002, the carrying value of the Company’s remaining goodwill, relating exclusively to our acquisition of IDT in October 2000, ~~and~~was approximately $1.3 million. In 2001, the Company recognized goodwill amortization expense of approximately $0.2 million per quarter relating to the IDT acquisition that will no longer be recognized upon adoption of SFAS No. 142 on January 1, 2002. Accordingly, we expect amortization expense to decrease significantly in 2002 to approximately $0.4 million per quarter, the majority of which will consist of the amortization of the fair value of the fully vested warrants we issued to ~~America Online~~AOL in August 2000. ~~Depreciation~~Total depreciation and ~~capitalized software~~ amortization expense ~~increased by $1.5 million for the nine months ended September 30, 2001, as a result of additions~~in 2002 is expected to property and equipment, the depreciation of fixed assets from our businesses that were acquired subsequent to the first quarter of 2000 and the amortization of capitalized software development costs from our NIC Commerce business. These increases were partially offset by a decrease in purchase accounting intangible asset amortization resulting from our March 31, 1998 exchange offer. Certain intangible assets relating to that exchange offer became fully amortized at June 30, 2000 and August 31, 2000.be less than $5 million.

OPERATING LOSS. Operating loss for the current quarter ~~ended September 30, 2001~~ was ~~$51.8~~$1.0 million compared to ~~$15.8~~$13.7 million ~~for~~in the ~~quarter ended September 30, 2000.~~prior year. Excluding non-cash charges for stock compensation and depreciation and amortization, ~~the one-time charges in the third quarter of 2000 relating to our corporate restructuring and vacation liability, the one-time charge~~operating income would have been $0.5 million in the current quarter ~~relating~~compared to ~~the impairment~~an operating loss of ~~intangible assets, and the charge~~$5.0 million in the current quarter relating to certain of the Company’s application development contracts, operating loss would have been $2.4 million for the quarter ended September 30, 2001 compared to $6.2 million for the quarter ended September 30, 2000. Operating loss for the nine months ended September 30, 2001 was $78.6 million compared to $35.8 million for the nine months ended September 30, 2000. Excluding the charges noted above, the charge in the first quarter of 2000 relating to the Company’s application development contract with the Indiana Secretary of State and the charge in the second quarter of 2000 relating to the withdrawn common stock offering, operating loss would have been $11.6 million for the nine months ended September 30, 2001 compared to $11.8 million for the nine months ended September 30, 2000.prior year.

Earnings before interest, taxes, depreciation, amortization and other non-cash charges related to stock compensation and equity in net loss of affiliates ~~depreciation, amortization, stock compensation, one-time charges and our application development contracts ("EBITDA"~~(“EBITDA”) was ~~negative $2.4~~positive $0.5 million ~~for~~in the current quarter ~~ended September 30, 2001~~ compared to negative ~~$6.2~~$5.0 million ~~for~~in the ~~quarter ended September 30, 2000. EBITDA for the nine months ended September 30, 2001 was negative $11.6 million compared to negative $11.8 million for the nine months ended September 30, 2000.~~

~~Positive~~prior year. EBITDA from our ~~portal~~outsourced portals segment ~~increased by approximately $1.1~~was a positive $2.9 million for quarter ended September 30, 2001 primarily due to our Tennessee and Idaho portals, which began to generate substantive revenues and positive EBITDA in March 2001, our Hawaii and Montana portals, which began to generate substantive revenues and positive EBITDA in the current quarter and our Oklahoma portal. Additionally, same state EBITDA (states open more than one year) increased by $0.6 million, or 36%, for the quarter ended September 30, 2001 primarily as a result increased same state portal transaction volumes. For the nine months ended September 30, 2001, EBITDA from the portal segment increased by approximately ~~$0.4~~$2.0 million from the prior year primarily ~~as a result of~~due to positive contributions from portals that began generating substantive revenues after March 31, 2001 including our Hawaii, Idaho, Montana, Oklahoma, Rhode Island and Tennessee ~~and Oklahoma~~ portals, which did not begin to generate EBITDA until 2001. Positive EBITDA contributions from these portals were partially offset by increased corporate-level payroll and market development expenses attributable to our local portals. Same state EBITDA increased by $1.6 million, or 32%, for the nine months ended September 30, 2001 primarily as ~~a result of increased same state portal transaction volumes.~~further discussed above.

~~For the nine months ended September 30, 2001,~~ EBITDA from our eGovernment products segment, which consists primarily of our NIC Conquest, NIC Technologies and IDT subsidiaries, decreased by approximately $0.9 million from the prior year due primarily to a decrease in EBITDA from our NIC Conquest subsidiary, which incurred increased marketing, business development and new product development expenseswas breakeven in the current ~~year.~~

~~For the~~ quarter ~~ended September 30, 2001, EBITDA from our NIC Commerce government procurement segment increased by $1.5~~compared to negative $1.2 million ~~over~~in the prior ~~year due to~~ year. The improvement in EBITDA in the current quarter was primarily the result ofour restructuring and cost reduction efforts in these businesses over the past year, and the impact of new business wins in our corporate filings business, which benefited this ~~businesses beginning~~quarter 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.

EBITDA from our eProcurement segment was negative $0.6 million in ~~the third quarter of 2000 and continuing through~~ the current quarter ~~of this year.~~ F~~or the nine months ended September 30, 2001, EBITDA from our procurement segment increased by approximately $0.3~~compared to negative $1.5 million ~~over~~in the prior year. ~~As discussed above, r~~The improvement in EBITDA in the current quarter was due primarily to ~~evenues from~~the organizational restructurings and headcount reductions that have taken place at NIC Commerce ~~decreased from~~over the ~~prior year due~~past year. We expect to ~~an anticipated~~ ~~fall-off in license revenues from its eFed software product, a trend that began in~~continue to downsize our eProcurement business throughout the ~~third quarter~~remainder of ~~2000 when NIC Commerce modified its business model.~~2002.

For the three- and nine-month periods ended September 30, 2001 and 2000, Other EBITDA is attributable to our strategic agreement with America Online. Our AOL division became fully operational in the third quarter of 2000 and did not begin to generate substantive advertising revenues until the second quarter of 2001.

~~For the three- and nine-month periods ended September 30, 2001, corporate~~Corporate level expenses decreased ~~from~~by 17% as further discussed under the ~~prior year periods primarily as a result~~analysis of ~~overall cost containment efforts at the corporate level~~general and ~~decreased~~administrative expenses and sales and marketing ~~and public relations expenses.~~expenses above.

~~We expect EBITDA to continue to improve on a sequential quarter-over-quarter basis in the fourth quarter of 2001 and to generate positive EBITDA by the end of the first quarter of 2002.~~

~~OTHER INCOME, NET. Other~~INTEREST INCOME. Interest income ~~net,~~ primarily reflects interest ~~income~~ earned on our cash and marketable securities portfolio. We expect ~~other~~interest income ~~net,~~ to ~~continue to fluctuate~~be lower in ~~relation~~2002 as compared to the ~~balance of~~prior year due to the decrease in our cash and marketable securities ~~portfolio, which was approximately $23.1 million at September 30, 2001 compared to $51.1 million at September 30, 2000.~~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. AtIn the ~~end~~first quarter of ~~March~~ 2000, we invested in two private companies involved in the ~~e-government~~eGovernment services industry, Tidemark and ~~E-Filing,~~E-Filing.com, primarily for strategic purposes. As further discussed in Note 8 in the Notes to Consolidated Financial Statements included in this Form 10-Q, Tidemark was acquired by a private technology company in May 2001, and accordingly, NIC ceased recording its share of Tidemark’s net losses upon acquisition. In the fourth quarter of 2000, we invested in eGS, a private joint venture ~~eGS, primarily to share~~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 ~~risk of our international expansion and to deliver eGovernment products and services throughout Western Europe, with initial efforts to focus on the United Kingdom. E-Filing~~current quarter. E-Filing.com and eGS are in the early stage of their operations and are incurring net ~~losses. Therefore,~~losses, and we expect to continue to record losses on our equity-method investments in the foreseeable future. However, in 2002 we expect these losses to be much lower than in 2001 and be within a range of $1 million to $1.2 million for the year.

INCOME TAXES. ~~For~~We recognized an income tax benefit in the ~~three-~~current and ~~nine-month periods ended September 30, 2001,~~prior quarters. In the current quarter, the income tax benefit was less than the amount customarily expected primarily because of expenses that are not deductible for tax purposes including certain stock compensation costs. In the prior year, 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,~~Exchange Offer, the Conquest merger, the SDR acquisition, ~~and~~ the IDT acquisition, certain stock compensation costs and the goodwill relating to the SDR acquisition that was written off in the current quarter as part of the intangible asset impairment charge. For the three- and nine-month periods ended September 30, 2000, the income tax benefit was less than the amount customarily expected because of expenses that are not deductible for tax purposes including amortization of goodwill from the exchange offer, the Conquest merger and the SDR acquisition, and certain stock compensation costs.

LIQUIDITY AND CAPITAL RESOURCES

Net cash ~~used in~~provided by operating activities was ~~$10.6~~$0.9 million ~~for~~in the ~~nine months ended September 30, 2001~~current quarter compared to ~~$16.8 million for the nine months ended September 30, 2000. The decrease in~~net cash used of $6.5 million in the prior year. The improvement in operating ~~activities~~cash flow is primarily the result of a positive net change in operating assets and liabilities ~~for the nine months ended September 30, 2001~~ as compared to the prior year and a year-over-year reduction in our operating loss ~~excluding~~(excluding non-cash ~~charges.~~charges). Contributing to this positive net change in operating assets and liabilities was an increase in ~~accrued expenses, partially due to accrued bonuses under the Company’s corporate incentive program and accrued subcontractor costs~~other current liabilities consisting of unearned revenue from our ~~NIC Conquest business, and a decrease in prepaid expenses, primarily due to~~contract with the ~~amortization~~California Secretary of ~~the prepaid carriage fee under our arrangement with AOL.~~State. The increase in accounts receivable and payable ~~for~~in the ~~nine months ended September 30, 2001~~current quarter was primarily due to our Hawaii, ~~Idaho,~~ Montana, Oklahoma and ~~Tennessee~~Rhode Island portals, all of which began to generate substantive revenues insubsequent to March 31, 2001. The statutory fees charged for data access by our state portals are accrued as accounts receivable and accounts payable at the time services are provided. ~~We expect operating cash flow to be negative through at least the end of 2001. However, we expect operating cash flow to improve throughout 2001, turning positive in 2002.~~

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 March 31, 2002 and December 31, 2001 were approximately $36.2 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 March 31, 2002 and December 31, 2001 was 39 and 40, respectively.

Cash used in investing activities for the current quarter was $3.9 million, primarily reflecting net purchases of marketable securities. In conjunction with our contract with the California Secretary of State, in March 2002, we issued a $5 million letter of credit as 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~~$1.4 million, ~~for the nine months ended September 30, 2001~~ reflecting ~~$18.7~~$4.3 million in net maturities of our marketable securities portfolio used for funding operations and for purchases of property and equipment. Investing activities for the ~~nine months ended September 30, 2001~~prior year quarter also reflect approximately ~~$5.7~~$2.2 million in

capitalized software development costs mainly from our NIC Commerce, NIC Conquest and NIC Technologies subsidiaries and approximately $0.5 million in proceeds from the sale of property and equipment. Investing activities for the nine months ended September 30, 2000 resulted in net cash generated of $22.3 million, reflecting $47.8 million in net maturities of our marketable securities portfolio used for funding operations and for purchases of property and equipment ($3.9 million), our business combination with Conquest Softworks, LLC ($4.6 million), strategic equity investments in Tidemark ($5.5 million) and E-Filing.com ($5.3 million), and direct costs of the SDR acquisition ($4.0 million). Investing activities for the nine months ended September 30, 2000 also reflect approximately $2.2 million in capitalized software development costs mainly from our NIC Commerce and NIC Conquest subsidiaries.

Financing activities in the current quarter resulted in net cash generated of approximately ~~$1.0~~$0.3 million, ~~for the nine months ended September 30, 2001~~ primarily reflecting $1.0 million in cash proceeds from a bank note payable that we used to purchase certain hardware and software components for our NIC Commerce subsidiary. Net cash used in financing activities totaled $1.5 million for the nine months ended September 30, 2000, primarily reflecting a $2.1 million cash outlay to pay off a bank line of credit assumed in the SDR acquisition and approximately $0.9$0.4 million in proceeds from the exercise of employee stock options ~~and issuances of common stock to employees.~~offset by $0.1 million in payments on our bank note payable.

At ~~September 30, 2001, the Company's~~March 31, 2002, our total cash and marketable securities balance was ~~$23.1~~$22.4 million compared to ~~$38.8~~$21.3 million compared at December 31, ~~2000.~~ 2001. At March 31, 2002, we had posted approximately $7.8 million of our cash and marketable securities as collateral for letters of credit, our line of credit in conjunction with a corporate credit card agreement, and our bank note payable.

We ~~believe~~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 ~~current liquid resources will be sufficient~~financial statements. While we have significant operating lease commitments for office space, those commitments are generally tied to ~~meet our operating requirements and significant growth initiatives without the need for additional capital for at least the next twelve months and through~~ the period ~~when~~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.

Although we expect to ~~begin~~have positive EBITDA for the balance of 2002, we anticipate that our cash balances will decrease throughout the year. This reflects expected working capital swings due to ~~generate positive operating cash flow~~the continued project expenditures from our NIC Conquest business (as further discussed in ~~2002. However, any projections~~Note 4 to the Consolidated Financial Statements included in this Form 10-Q) and the terms of ~~future cash flows~~our five-year contract with the California Secretary of State, which back-ends some of the larger payments. We are ~~subject~~currently exploring a number of financing alternatives to ~~substantial uncertainty. If current cash, marketable securities~~provide us additional working capital flexibility and ~~cash~~the resources to pursue opportunities that may accelerate our growth and profitability. We cannot guarantee that such financing will be ~~generated from operations are insufficient~~secured or will be available in amounts or on terms acceptable to ~~satisfy our liquidity requirements, we~~the Company. We may seek to sell additional equity securities, issue debt securities or obtain a working capital line of credit. The sale of additional equity securities could result in additional 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.

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.~~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 the ~~e-government~~eGovernment services industry, Tidemark and ~~E-Filing,~~E-Filing.com, primarily for strategic purposes. ~~As further discussed in Note 8 in the Notes to Consolidated Financial Statements included in this Form 10-Q, Tidemark was acquired by a private technology company in May 2001.~~ 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~~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 ~~on our investments~~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 ~~E-Filing or eGS.~~cash from the transaction and has no investment balance remaining.

PART ~~II –~~II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We commenced a lawsuit in November 2001 captioned NATIONAL INFORMATION CONSORTIUM, INC., Plaintiff, v. LARRY J. SINGER, in his official capacity as Chief Information Officer and Executive Director of the Georgia Technology Authority, and THURBERT E. BAKER, in his official capacity as Attorney General of the State of Georgia, Defendants, pending in the United States District Court for the Northern District of Georgia, Atlanta Division, Civil Action File No. 01-CV-2967-CC.

The lawsuit is more fully described in our December 31, 2001 Form 10-K filed on March 25, 2002 with the SEC. We settled the lawsuit favorably with all parties on April 26, 2002 and accordingly dismissed our suit.

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

The Company held its Annual Meeting of Shareholders on May 7, 2002. 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;

2. An amendment to the Company’s Articles of Incorporation to change the Company’s name to NIC Inc.; and

3. A proposal to ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent public accountants for the fiscal year ending December 31, 2002.

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, James B. Dodd, John L. Bunce, Jr., Dan Evans, Ross C. Hartley and Pete Wilson. In the election of directors, there were 50,565,243 votes “for” Jeffery S. Fraser and 149,139 votes “withheld”; 50,249,743 votes “for” James B. Dodd and 464,639 votes “withheld”; 50,566,043 votes “for” John L. Bunce, Jr. and 148,339 votes “withheld”; 50,560,008 votes “for” Dan Evans and 154,374 votes “withheld”; 50,559,243 votes “for” Ross C. Hartley and 155,139 votes “withheld”; 50,556,311 votes “for” Pete Wilson and 158,071 votes “withheld”.

The total votes cast pertaining to changing the Company’s name to NIC Inc. were as follows: 50,649,579 voted “for”, 56,048 voted “against” and 8,755 “abstentions”.

The total votes cast pertaining to the ratification of the appointment of PricewaterhouseCoopers LLP were as follows: 50,676,456 voted “for”, 25,786 voted “against” and 12,140 “abstentions”.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a) EXHIBITS

~~10.47 – Business Programs Automation Agreement, dated September 6, 2001, between National Information USA, Inc. and~~3.3 - Articles of Amendment to Articles of Incorporation of the ~~State of California~~registrant

b) REPORTS ON FORM 8-K

~~A report on Form 8-K was filed with the Securities and Exchange Commission on September 18, 2001, with attached Press Release of the Company dated September 7, 2001,~~ announcing, under Item 5, that the California Secretary of State has awarded the Company the nation’s largest eGovernment filing contract to develop a comprehensive information management and filing system that will support the largest filing district in the United States. The five-year contract is valued at $25 million.None.

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.

~~NATIONAL INFORMATION CONSORTIUM,~~	NIC INC.


Dated: ~~November~~May 14, ~~2001~~2002	/s/Eric J. Bur
	Eric J. Bur
	Chief Financial Officer


Dated: ~~November~~May 14, ~~2001~~2002	/s/Stephen M. Kovzan
	Stephen M. Kovzan
	Vice President, Financial Operations and Chief Accounting Officer

	September 30,			December 31,
	2001			2000
ASSETS
Current assets:
Cash and cash equivalents	$	16,237		$	13,879
Marketable securities	6,827			24,914
Trade accounts receivable	11,665			7,596
Deferred income taxes	1,234			195
Prepaid expenses	1,438			2,051
Other current assets	2,189			1,954

Total current assets	39,590			50,589
Property and equipment, net	7,241			7,596
Deferred income taxes	28,776			8,965
Other assets	207			200
Investments in affiliates	2,463			4,786
Intangible assets, net	14,102			67,433

Total assets	$	92,378		$	139,569

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	7,831		$	4,330
Accrued expenses	4,790			2,907
Income taxes payable	201			150
Capital lease obligations - current portion	60			195
Note payable-current portion	341			-
Application development contracts	3,172			356
Other current liabilities	621			196

Total current liabilities	17,015			8,134
Capital lease obligation - long-term portion	4			22
Note payable - long-term portion	610			-

Total liabilities	17,628			8,156

Commitments and contingencies (Notes 3, 6 and 8)	-			-

Minority interest	-			475

Shareholders' equity:
Common stock, no par, 200,000,000 shares authorized 56,160,075 and 56,038,571 shares issued and outstanding	-			-
Additional paid-in capital	195,014			194,823
Accumulated deficit	(115,428		)	(56,835		)
Accumulated other comprehensive income	1			1
	79,587			137,989
Less notes and stock subscriptions receivable	(15		)	(15		)
Less vested warrants issued	(3,167		)	(4,222		)
Less deferred compensation expense	(1,656		)	(2,814		)
Total shareholders' equity	74,750			130,938
Total liabilities and shareholders' equity	$	92,378		$	139,569

	Three-months ended						Nine-months ended
	September 30,						September 30,
	2001			2000			2001			2000
Revenues:
Portal revenues	$	7,146		$	4,503		$	18,966		$	13,535
Software and services revenues	3,934			2,097			10,106			6,742

Total revenues	11,080			6,600			29,072			20,277
Cost of revenues:
Cost of portal revenues	457			355			1,171			1,164
Cost of software and services revenues	6,218			1,419			10,518			5,724
Total cost of revenues (exclusive of depreciation and amortization)	6,675			1,774			11,689			6,888
Gross profit	4,405			4,826			17,383			13,389
Operating expenses:
Service development and operations	2,460			3,074			8,366			6,922
Selling, general and administrative	7,805			8,817			24,091			21,285
Impairment of intangible assets	36,997			-			36,997			-
Stock compensation	386			416			1,176			1,331
Depreciation and amortization	8,504			8,363			25,345			19,661

Total operating expenses	56,152			20,670			95,975			49,199
Operating loss	(51,747		)	(15,844		)	(78,592		)	(35,810		)

Other income (expense):
Interest expense	(12		)	(6		)	(22		)	(38		)
Other income, net	207			767			813			2,967
Equity in net loss of affiliates	(541		)	(1,495		)	(2,037		)	(3,178		)

Total other income (expense)	(346		)	(734		)	(1,246		)	(249		)

Loss before income taxes and minority interest	(52,093		)	(16,578		)	(79,838		)	(36,059		)

Income tax benefit	(12,927		)	(4,954		)	(20,770		)	(10,731		)

Loss before minority interest	(39,166		)	(11,624		)	(59,068		)	(25,328		)
Minority interest	(464		)	5			(475		)	(21		)
Net loss	$	(38,702	)	$	(11,629	)	$	(58,593	)	$	(25,307	)

Net loss per share:
Basic and diluted	$	(0.69	)	$	(0.21	)	$	(1.05	)	$	(0.46	)

Weighted average shares outstanding	56,090			55,489			56,066			54,431

	Sept. 30, 2001		Dec. 31, 2000
Goodwill	$	7,708	$	45,649
Software intangibles	2,666		24,456
Contract intangibles	672		1,072
Assembled domestic workforce intangible	-		1,100
Foreign workforce agreement intangible	-		8,800
Product technology intangible	-		8,200
Software development costs	9,939		4,215
Patents and trademarks	122		106
	21,107		93,598
Less accumulated amortization	7,005		26,165

	$	14,102	$	67,433

NATIONAL INFORMATION CONSORTIUM, INC.(Exact name of registrant as specified in its charter)

Colorado

52-2077581

Sept. 30, 2001

Dec. 31, 2000

Sept. 30, 2001

Dec. 31, 2000

NATIONAL INFORMATION CONSORTIUM, INC.
(Exact name of registrant as specified in its charter)