Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSACTION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER 000-26621
--------------------------
NATIONAL INFORMATION CONSORTIUM, INC.
(Exact name of registrant as specified in its charter)
COLORADO 52-2077581
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12 CORPORATE WOODS, 10975 BENSON STREET, SUITE 390, OVERLAND PARK, KANSAS 66210
(Address of principal executive office, including Zip Code)
Registrant's telephone number, including area code: (877) 234-3468
Securities registered pursuant to Section 12(b) of the Act: None
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
(Title of Class)
--------------------------
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 /X/ No / /
Indicate by a check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of voting stock held by non-affiliates of the
registrant, as of March 1, 2001 was approximately $110,599,397 (based on the
closing price for shares of the registrant's common stock as reported by the
Nasdaq National Market for the last trading day prior to that date). Shares of
common stock held by each executive officer, director and holder of 5% or more
of the outstanding common stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
On March 1, 2001, 56,041,425 shares of the registrant's common stock, no par
value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be issued in
connection with its Annual Meeting of Shareholders to be held in 2001 are
incorporated by reference into Part III of this Form 10-K.
Except as otherwise stated, the information contained in this Form 10-K is
as of March 1, 2001.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
NATIONAL INFORMATION CONSORTIUM, INC.
FORM 10-K ANNUAL REPORT
PAGE
--------
PART I
Item 1 Business.................................................... 1
Item 2 Properties.................................................. 28
Item 3 Legal Proceedings........................................... 28
Item 4 Submission of Matters to a Vote of Security Holders......... 28
PART II
Item 5 Market for Registrant's Common Equity and Related
Shareholder Matters....................................... 29
Item 6 Selected Consolidated Financial Data........................ 29
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 30
Item 7A Quantitative and Qualitative Disclosures About Market
Risk...................................................... 42
Item 8 Consolidated Financial Statements and Supplementary Data.... 43
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 86
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 86
Item 11 Executive Compensation...................................... 86
Item 12 Security Ownership of Certain Beneficial Owners and
Management................................................ 86
Item 13 Certain Relationships and Related Transactions.............. 86
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 87
CAUTIONS ABOUT FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements about
events, products or financial performance that may not exist, or may not have
occurred. For example, statements like we "expect," we "believe," we "plan," we
"intend" or we "anticipate" are forward-looking statements. Investors should be
aware that our actual operating results and financial performance may differ
materially from our expressed expectations because of risks and uncertainties
about the future including risks related to economic and competitive conditions.
In addition, we will not necessarily update the information in this Annual
Report on Form 10-K if any forward-looking statement later turns out to be
inaccurate. Details about risks affecting various aspects of our business are
included throughout this Form 10-K. Investors should read all of these risks
carefully, and should pay particular attention to risks affecting the following
areas: competition issues discussed on pages 15 to 16; government
regulation discussed on page 16; intellectual property and proprietary rights
discussed on pages 16 to 17; the specific risk factors discussed on pages 17 to
28; and commitments and contingencies described in note 16 to the consolidated
financial statements included in this Form 10-K.
PART I
ITEM 1. BUSINESS
OVERVIEW
National Information Consortium, Inc. was formed on December 18, 1997, for
the sole purpose of affecting an exchange of common stock, in a transaction
referred to as the Exchange Offer, to combine under common ownership five
separate affiliated entities under which we conducted our business operations.
The five companies were National Information Consortium USA, Inc., Kansas
Information Consortium, Inc., Indiana Interactive, Inc., Nebraska
Interactive, Inc. and Arkansas Information Consortium, Inc. The Exchange Offer
was consummated on March 31, 1998, and has been accounted for as a business
combination. National Information Consortium USA, Inc. is the entity whose
shareholders received the largest portion of the Company's common stock shares
and was treated as the accounting acquirer with the purchase method of
accounting being applied to the four other companies. On July 20, 1999, we
completed our initial public offering, selling an aggregate of 10 million new
shares of common stock for net proceeds of approximately $109.4 million after
deducting underwriting discounts, commissions and expenses.
We are a provider of Internet-based, electronic government services that
help governments use the Internet to reduce costs and provide a higher level of
service to businesses and citizens. We accomplish this currently through three
different business segments: our state and local portal businesses, our
government procurement business and our eGovernment products businesses. In our
portal businesses, we enter into contracts with governments and on their behalf
design, build and operate Internet-based portals. These portals consist of Web
sites and applications that we build, which allow businesses and citizens to
access government information online and complete transactions, including
applying for a permit, retrieving driver's license records or filing a form or
report. Our unique business model allows us to reduce our government clients'
financial and technology risks and obtain revenues by sharing in the fees we
generate from electronic government services. Our clients benefit because they
gain a centralized, customer-focused presence on the Internet. Businesses and
citizens gain a faster, more convenient and more cost-effective means to
interact with governments.
Currently, we have contracts to provide Internet-based electronic government
portal services for thirteen states and four local governments. We typically
enter into three to five year contracts with our government clients and manage
operations for each contractual relationship through separate subsidiaries that
operate as decentralized business units with a high degree of autonomy. We
intend to increase our revenues by replicating our model in other states,
municipalities, federal agencies and
1
international entities, and by delivering new products and services and
expanding markets within our existing contractual relationships.
NIC Commerce, our procurement business, is a leading provider of
Internet-based electronic procurement solutions to governments. NIC Commerce
designs, develops and manages online procurement software and services for
federal and state markets. NIC Commerce's procurement solution allows buyers to
search, compare and buy products and services across multiple contracts using
the Internet. It also allows senior government procurement officials to better
manage and reduce expenses associated with the procurement process. NIC
Commerce, while traditionally deriving software licensing and maintenance
revenues from several federal agencies, also has contracted to provide
electronic procurement services under a transaction-based pricing model to five
state/local government agencies.
Our eGovernment products businesses include our NIC Conquest, NIC
Technologies and IDT subsidiaries. Our NIC Conquest business was formed in
January 2000 by combining our application services division with Conquest
Softworks, LLC. Both of these businesses provided software applications and
services for electronic filings and document management solutions for
government. Our NIC Conquest business focuses on Secretaries of State, whose
offices are state governments' principal agencies for corporate filings.
On May 11, 2000, we acquired SDR Technologies, Inc., a provider of
Internet-based applications for governments. SDR has been renamed National
Information Consortium Technologies, Inc. and is referred to as NIC
Technologies. NIC Technologies designs and develops online election and ethics
filing systems for federal, state and local government agencies. Through
development divisions in Westlake Village, California and Pune, India, NIC
Technologies also serves as our centralized development business that builds
standardized revenue-generating applications that can be deployed across our
state and local portals in a timely and effective manner.
On October 13, 2000, we acquired Intelligent Decision Technologies, Ltd., a
provider of business-to-government reporting and filing software for the
transportation industry. IDT has developed business-to-government applications
that facilitate compliance with the Federal Highway Administration's Commercial
Vehicle Information System Network. IDT currently has contracts to provide
certain state governments with commercial vehicle electronic credentialing
services that include registration, permitting, and tax filing software. Our
multi-state filing portal for the trucking industry, which became operational in
November 2000, will be integrated into IDT's operations, allowing us to leverage
our eGovernment expertise on behalf of regulated industries such as
transportation, which are required to file periodically with multiple government
entities.
On March 23, 2000, we completed a $5 million cash investment in privately
held E-Filing.com, Inc., a provider of online filing applications for legal
services, giving us ownership of 21% of E-Filing.com at December 31, 2000. This
strategic investment is expected to enable both E-Filing.com and NIC to expand
access to judicial eGovernment applications nationwide.
On March 24, 2000, we completed a $5.5 million cash investment in privately
held Tidemark Computer Systems, Inc., a provider of eGovernment permit
applications and related services for local government, giving us ownership of
approximately 27% of Tidemark at December 31, 2000. This strategic investment is
expected to allow Tidemark and NIC to help communities automate a variety of
business processes through mobile and web-based applications.
In October 2000, we completed an initial $524,000 cash investment in
e-Government Solutions Limited, or eGS, a private joint venture among Swiss
venture capital firm ETF Group, London-based venture development organization
Vesta Group, and our European subsidiary, NIC Europe, giving us ownership of 40%
of eGS at December 31, 2000. The purpose eGS, based in London, England, is to
2
deliver eGovernment products and services throughout Western Europe, with
initial efforts to focus on the United Kingdom.
SEGMENT INFORMATION
Our three reportable segments as of and for the year ended December 31, 2000
consisted of our state and local portal segment, our eGovernment products
segment, and our government procurement segment. Our portal segment includes our
subsidiaries operating state and local government portals. Our eGovernment
products segment includes our NIC Conquest, NIC Technologies and IDT
subsidiaries. Our government procurement segment includes our NIC Commerce
subsidiary. For additional information relating to our reportable segments,
refer to note 21 in the notes to consolidated financial statements included in
this Form 10-K.
INDUSTRY BACKGROUND
THE MARKET FOR GOVERNMENT-TO-BUSINESS AND GOVERNMENT-TO-CITIZEN TRANSACTIONS
Government regulation of commercial and consumer activities
requires billions of transactions and exchanges of large volumes of information
between government agencies and businesses and citizens. These transactions and
exchanges include driver's license record retrieval, motor vehicle
registrations, tax returns, permit applications and requests for
government-gathered information. Government agencies typically defray the cost
of processing these transactions and of storing, retrieving and distributing
information through a combination of general tax revenues, service fees and
charges for direct access to public records. According to the official
statistics of the U.S. Census Bureau, federal, state and local governments
collected a total of $451 billion in charges and miscellaneous fees from
businesses and citizens in 1995. Additionally, states generated $26 billion in
fees for motor vehicle, corporation and other licenses in 1995.
THE LIMITS OF TRADITIONAL GOVERNMENT TRANSACTION METHODS
Traditionally, government agencies have transacted, and in many cases
continue to transact, with businesses and citizens using processes that are
inconvenient and labor-intensive, require extensive paperwork and use large
amounts of scarce staff resources. Transactions and information requests are
often made in person or by mail and are processed manually, increasing the
potential for errors and the need for numerous revisions and follow-up. Even
newer methods, including telephone response systems, tape exchanges and dial-up
computer networks, rely on multiple systems and potentially incompatible data
formats, and require significant expertise and expenditures to introduce and
maintain. As a result, businesses and citizens often have no choice but to face
costly delays to complete essential tasks. These delays include waiting in line
at a government agency, waiting for answers by telephone or waiting for
responses by mail. Businesses and citizens encounter further inconvenience and
delay because they usually can work with government agencies only during normal
business hours. Even when electronic alternatives are available, they often
require a cumbersome process of multiple contacts with different government
agencies. Increases in the level of economic activity and in the population have
exacerbated these problems and increased the demand for new services.
GROWTH OF THE INTERNET, ELECTRONIC COMMERCE AND EGOVERNMENT
The Internet has emerged as a global medium, enabling millions of people
worldwide to share information, communicate and conduct business electronically.
International Data Corporation, a market research firm, estimates that the
number of Web users will grow from approximately 142 million worldwide in 1998
to over 502 million worldwide by the end of 2003. This growth is expected to be
driven by the large and growing number of PCs installed in homes and offices,
the decreasing cost of PCs, easier, faster and cheaper access to the Internet,
improvements in network infrastructure, the
3
proliferation of Internet content and the increasing familiarity with and
acceptance of the Internet by governments, businesses and consumers. In
addition, the volume of electronic commerce has grown in parallel with the
Internet itself. According to International Data Corporation, transactions on
the Internet are expected to increase from approximately $32 billion in 1998 to
approximately $426 billion in 2002. Business-to-business usage is also growing
rapidly. Forrester Research, a market research firm, estimates that
business-to-business electronic commerce will grow from $17 billion in 1998 to
$327 billion in 2002. Gartner Group, a market research firm, predicts that
spending on eGovernment initiatives, including hardware, software and services,
in 2001 will top $2.1 billion, reaching $6.5 billion by 2005. Forrester Research
predicts that states will process over 52 million online government transactions
by 2004, and the number is expected to grow to 122 million transactions per year
in 2006. With the nation's 35,000 cities and towns generating the majority of
demand for applications, Forrester Research predicts that local governments will
deploy over 8,900 different eGovernment applications by 2006.
EMERGENCE OF THE INTERNET AS A MEDIUM FOR ELECTRONIC GOVERNMENT
The growing acceptance of the Internet and electronic commerce presents a
significant opportunity for the development of electronic government, in which
government agencies conduct transactions and distribute information over the
Internet. By using the Internet, government agencies can increase the number and
efficiency of interactions with constituents without increasing expenditures or
demands on current personnel. In addition, regardless of physical distance,
businesses and citizens can obtain government information quickly and easily
over the Internet. For example, motor vehicle administrations can provide
instantaneous responses to auto insurers' requests for driving record data by
allowing controlled access to government databases through the Internet. This
Internet-based interaction reduces costs for both government and users and
decreases response times compared to providing the same data by mail or special
purpose dial-up computer connections.
CHALLENGES TO THE IMPLEMENTATION OF ELECTRONIC GOVERNMENT SERVICES
Despite the potential benefits of electronic government, barriers to
creating successful Internet-based services often preclude governments from
implementing them. Some of these barriers are similar to those the private
sector encounters, including:
- the high cost of implementing and maintaining Internet technology in a
budget-constrained environment;
- the financial, operational and technology risks of moving from older,
established technologies to rapidly evolving Internet technologies;
- the need to quickly assess the requirements of potential customers and
cost-effectively design and implement electronic government services that
are tailored to meet these requirements; and
- the intense competition for qualified technical personnel.
Governments also face some unique challenges that exacerbate the difficulty
of advancing to Internet-based services, including:
- lengthy and political appropriations processes that make it difficult for
governments to acquire resources and to develop Internet services quickly;
- a diverse and substantially autonomous group of government agencies that
have adopted varying and fragmented approaches to providing information
and transactions over the Internet;
- a lack of a marketing function that assures that services are designed to
meet the needs of businesses and citizens and that they are aware of their
availability; and
4
- security and privacy concerns that are amplified by the confidential
nature of the information and transactions available from and conducted
with governments and the view that government information is part of the
public trust.
We believe traditional private sector Internet services generally do not
address the unique needs of electronic government. Most Internet service
providers do not fully understand and are not well-equipped to deal with the
unique political and regulatory structures of governments. These providers,
including large systems integrators, typically take a time-and-materials,
project-based pricing approach that may not adequately balance the
responsiveness to change of a successful Internet business with the longer time
horizons and extended commitment periods of government projects.
WHAT WE PROVIDE TO GOVERNMENTS
We provide an Internet-based electronic government service that meets the
needs of governments, businesses and citizens. The key elements of our service
are:
CUSTOMER-FOCUSED, ONE-STOP GOVERNMENT PORTAL
Using our marketing and technical expertise and our government experience,
we design, build and operate portals for each of our government clients that are
designed to meet their needs as well as those of businesses and citizens. Our
portals are designed to create a single point of presence on the Internet for
our government clients that allows businesses and citizens to reach the Web site
of every government agency in a specific jurisdiction from one online location.
We employ a common look and feel in the Web sites of all government agencies
associated with our electronic government portals and make them useful,
appealing and easy to use. In addition to developing and managing the government
portal, we develop applications that, in one location on the Internet, allow
businesses and citizens to complete processes that have traditionally required
separate interaction with several different government agencies, including
establishing and obtaining required permits for a new business enterprise. These
applications also permit businesses and citizens to conduct transactions with
government agencies and to obtain information from them 24 hours per day,
seven days per week. We also help our government clients to generate awareness
and educate businesses and citizens about the availability and potential
benefits of electronic government services. Similarly, our NIC Commerce business
allows governments to implement procurement solutions from a one-stop Internet
location.
COMPELLING FINANCIAL MODEL FOR GOVERNMENTS
We allow governments to implement comprehensive electronic government
services at minimal cost and risk. We take on the responsibility and cost of
designing, building and operating government portals and applications, with
minimal use of government resources. We employ our technological resources and
accumulated expertise to help governments avoid the risks of selecting and
investing in new technologies. We implement our electronic government services
rapidly, efficiently and accurately, using our well-tested and reliable
infrastructure and processes. Once we establish a government portal and
associated applications, we manage transaction flows and fund ongoing costs from
the fees received from information accessed and transactions conducted through
the portal. Our NIC Commerce business, while traditionally deriving revenues
from software licensing and maintenance, also offers governments a
transaction-based-pricing model.
FOCUSED RELATIONSHIP WITH GOVERNMENTS
We form relationships with governments by developing an in-depth
understanding of their interests and then aligning our interests with theirs. By
tying our revenues to the development of successful services and applications,
we work to assure government agencies and constituents that we are focused on
their needs. Moreover, we have pioneered, and encourage our clients to adopt a
model for
5
electronic government policymaking that involves the formation of oversight
boards that bring together interested government agencies, business and consumer
groups and other important government constituencies in a single forum. We work
within this forum to maintain constant contact with government agencies and
constituents and strive to ensure their participation in the development of
electronic government services. We attempt to understand and facilitate the
resolution of potential political disputes among these participants to maximize
the benefits of our services. We also design our services to observe relevant
privacy and security regulations, so that they meet the same high standards of
integrity, confidentiality and public service as government agencies would
observe in their own actions.
OUR STRATEGY
Our objective is to strengthen our position as the leading provider of
Internet-based electronic government services. Key strategies to achieve this
objective include:
CONTINUING TO ADD NEW STATE AND FEDERAL GOVERNMENT CLIENTS AND FURTHER PENETRATE
LOCAL MARKETS
We intend to increase the number of our government clients by leveraging our
relationships with current government clients, our reputation for providing
proven electronic government services and our technology and government process
knowledge base. Our portals and our procurement and filing applications are
designed to deliver our services quickly, easily and cost-effectively to new
federal, state and local governments and agencies. We intend to continue
marketing our products and services to new local governments, states,
multi-state cooperative organizations and federal agencies. Our expansion
efforts include developing relationships and sponsors throughout an individual
government entity, pursuing strategic technology alliances, making presentations
at conferences of government executives with responsibility for information
technology policy, and developing contacts with organizations that act as forums
for discussions between these executives.
Currently we have four contracts for enterprise-wide portals in local
government: Indianapolis/ Marion County, Indiana; the City of San Francisco,
California; the City of Tampa, Florida; and Dallas County, Texas. We intend to
increase our number of major local clients by offering both our enterprise
portal solution as well as individual application solutions provided on a fee
basis. We also expect to offer procurement solutions through NIC Commerce to
major localities and election filing applications on a local basis through NIC
Technologies.
EXPANDING OUR INTERNATIONAL PRESENCE
We believe our enterprise-wide model and its financial attractiveness have
significant applicability to international governments. We intend to expand
internationally, most likely through the transfer of our technology, know-how,
track record, capital and business model into joint ventures involving entities
whose trust relationships in their home markets resemble our own. In October
2000, we made an initial investment in e-Government Solutions Limited, or eGS, a
private joint venture among Swiss venture capital firm ETF Group, London-based
venture development organization Vesta Group, and our European subsidiary, NIC
Europe, giving us ownership of 40% of eGS. The purpose eGS, based in London,
England, is to deliver eGovernment products and services throughout Western
Europe, with initial efforts to focus on the United Kingdom.
BROADENING AND STANDARDIZING PRODUCT AND SERVICE OFFERINGS
We plan to continue our development of new products and services designed
for efficient online transactions with federal, state and local government
agencies, enabling government agencies to interact more effectively online with
businesses, citizens and other government agencies. We will increase and improve
our development efforts by leveraging our experience, developing strategic
technology
6
alliances, deepening the knowledge base that we have developed from our existing
operations, standardizing our eGovernment services and product offerings, and
coordinating our product development process across all Company operations
making it a new competitive advantage. We will continue to work with government
agencies, professional associations and other organizations to better understand
the current and future needs of our customers.
INCREASING TRANSACTIONAL REVENUES FROM OUR GOVERNMENT PORTALS AND PROCUREMENT
AND FILING APPLICATIONS
We intend to increase transactional revenues on our government portals and
through our procurement and filing systems through both expanded marketing
initiatives and new product offerings. We will continue to work with our
government clients to create awareness of the online alternatives to traditional
government interaction, through initiatives such as informational brochures,
government voicemail recordings and inclusion of Web site information on
government invoices. In addition, we will continue to update our portals to
highlight new government service information provided on the portals. We also
intend to expand our revenues through the development and marketing of new
products and services, such as transaction-based procurement and filing systems.
We plan to work with professional associations to directly and indirectly
communicate to their members the potential convenience, ease of use and other
benefits of the electronic government services our portals offer.
CONTINUING TO DIVERSIFY OUR REVENUE STREAMS ACROSS NUMEROUS BUSINESS LINES
In addition to our portal businesses, which provided the majority of our
revenues in 2000, we are making investments in our NIC Commerce, NIC Conquest,
NIC Technologies and IDT businesses to expand their respective operations.
During 2000, NIC Commerce derived the majority of its revenues from software
licensing and maintenance. Currently, our NIC Commerce is pursuing a growth
strategy based increasingly on transaction fees for procurements undertaken on
the NIC Commerce system. Our NIC Conquest business derives its revenues from
fixed-price application development contracts with governments. These contracts
are expected to be obtained through shorter sales cycles.
Due to our increasing scale and market penetration, we are also able to
provide specific fee-based product solutions to governments who do not wish to
pursue an enterprise-wide portal solution. We expect these revenues, while not
transaction-driven, to derive from shorter sales cycles than our portal
businesses.
CONTINUING TO PURSUE NEW STRATEGIC ALLIANCES, MERGERS AND ACQUISITIONS
We intend to pursue strategic technology alliances, mergers and acquisitions
that we believe will increase the number of products and services we can offer
to government clients and the citizens and businesses that interact with them
and alliances that will increase our operating leverage and drive
business-to-government and citizen-to-government transactions and adoption of
our eGovernment services. We also intend to pursue strategic technology and
business alliances that will enable us to further develop business relationships
with potential clients and/or improve our infrastructure and our operating
platforms.
7
GOVERNMENT CONTRACTS
OUR PORTAL BUSINESSES
Through our portal businesses, we currently have contracts with 17 state and
local government agencies. At December 31, 2000, we provided our government
portal services to twelve states and two city-county governments through the
following portals:
YEAR
SERVICES POPULATION
PORTAL NAME COMMENCED SERVED WEB ADDRESS
- ----------- --------- ---------- ------------------------
CityServices (City and County of San
Francisco, California). ................... 2000 747,000 http://cityservices.sfgov.org
TennesseeAnytime. ........................... 2000 5,484,000 www.tennesseeanytime.org
eHawaiiGov. ................................. 2000 1,185,000 www.ehawaiigov.com
Access Idaho................................. 2000 1,252,000 www.accessidaho.com
eUtah. ...................................... 1999 2,130,000 www.e-utah.org
Information Resource of Maine................ 1999 1,253,000 www.informe.org
AccessArkansas............................... 1997 2,551,000 www.accessarkansas.org
CivicNet (Indianapolis and Marion County,
Indiana)................................... 1997 811,000 www.civicnet.net
IOWAccess Network............................ 1997 2,869,000 www.iowaccess.org
Virginia Information Providers Network....... 1997 6,791,000 www.vipnet.org
Georgia Technology Authority................. 1996 7,788,000 www.ganet.org
AccessIndiana................................ 1995 5,943,000 www.in.gov
Nebraska Online.............................. 1995 1,666,000 www.nol.org
AccessKansas................................. 1992 2,654,000 www.accesskansas.org
We have also recently entered into contracts with the State of Montana, the
City of Tampa (FL), and Dallas County (TX), and serve as a subcontractor to
Deloitte Consulting on the New City of Ottawa (Canada) portal.
Each of these government portals operates under a separate contract, which
generally has an initial term of three to five years. Under a typical contract,
a government agrees that:
- we have the right to develop a comprehensive Internet portal owned by that
government to deliver electronic government services;
- the portal we establish is the primary electronic and Internet interface
between the government and its citizens;
- it supports the use of the portal for all commercially valuable
applications in order to support the operation and expansion of the
portal;
- it sponsors access to agencies for the purpose of entering into agreements
with these agencies to develop applications for their data and
transactions and to link their Web pages to the portal; and
- it establishes a policy making and fee approval board, which typically
includes agency members, business customers and others, to establish
prices for products and services and to set other policies.
In return, we agree to:
- develop, manage, market, maintain and expand that government's portal and
information and electronic commerce applications;
8
- assume the investment risk of building and operating that government's
portal and applications without the direct use of tax dollars;
- bear the risk of collecting transaction fees; and
- have an independent audit conducted upon that government's request.
Under our contracts with Georgia and Iowa, we provide consulting,
development and management services for these government portals predominantly
under a fixed-price model. If future contracts follow this fixed-price model,
our revenues and profits could suffer as a result of cost overruns or the
failure to realize potential revenue increases from increased demand for
fee-based transactions.
We own all the software we develop under our government portal contracts.
After completion of the initial contract term, our government clients receive a
perpetual, royalty-free license to use the software only in their own portals.
We also enter into separate agreements with various agencies and divisions
of our government clients for the sale of electronic access to public records
and to conduct other transactions. These agreements preliminarily establish the
pricing of the electronic transactions and data access services we provide and
the amounts we must remit to the agency. These terms are then submitted to the
policy-making and fee approval board for approval.
OUR NIC COMMERCE BUSINESS
NIC Commerce is the only commercial off-the-shelf Web-based procurement
solution designed specifically for governments. NIC Commerce's eFed software and
supplier network allows government buyers to order products and services from
multiple contracts and commercial sources, based on value, product information
and contract terms and conditions. It is the leading provider of electronic
procurement solutions that enable buyers to compare, negotiate and purchase
products and services with speed, ease and accuracy. NIC Commerce, while
traditionally deriving software licensing and maintenance revenues from several
federal agencies, also has contracted to provide electronic procurement services
under a transaction-based pricing model to five state/local governments as
discussed below.
On March 3, 2000, NIC Commerce entered into an operating agreement with Bank
of America Corporation, through its subsidiary Bank of America N.A. (USA), to
create a limited liability company to offer state and local governments the
first Web-based business-to-business procurement, payment and reconciliation
solution. By bundling NIC Commerce's software with Bank of America's government
purchase cards, the new company will allow customers to place orders online
through their preferred suppliers, request a quote from businesses for services,
process transactions, initiate payments and reconcile accounts. Government
agencies are also able to personalize their services to reflect preferred
suppliers, contract requirements and other conditions through the browser-based
catalog. The venture, called Banc of America Purchase Street, LLC, is the first
web-based solution to integrate various shopping and payment functions for the
public sector. Banc of America Purchase Street, LLC has recently contracted to
provide electronic procurement services under transaction-based pricing models
to two state/local government agencies: Houston-Galveston Area Council of
Governments (H-GAC) and the State of South Carolina. NIC Commerce also has
contracted to provide electronic procurement services under transaction-based
pricing models to the States of Colorado, Utah and Hawaii. All such contracts
under transaction-based models are expected to become operational during 2001.
NIC Commerce has also recently contracted with the following Federal
government agencies to provide procurement services under traditional software
licensing and maintenance arrangements: the National Institutes of Health--IT
Acquisition and Assessment Center, the U.S. Air Force IT Superstore, the U.S.
Navy and the U.S. Army.
9
OUR NIC CONQUEST BUSINESS
Our NIC Conquest business focuses on Secretaries of State, whose offices are
state governments' principal agencies for corporate filings. NIC Conquest has
contracted with the following thirteen states and five local governments to
develop and license software applications for Web-enabling the back-office
systems and processes for business-to-government filings:
STATES COUNTIES
- ------ --------
Arkansas Apache County, Arizona
Colorado Greenlee County, Arizona
Indiana LaPaz County, Arizona
Iowa Broward County, Florida
Kansas Oklahoma County, Oklahoma
Minnesota
Montana
Nebraska
New York
Oklahoma
South Dakota
Texas
Wisconsin
OUR NIC TECHNOLOGIES BUSINESS
NIC Technologies designs and develops online election and ethics filing
systems for federal, state and local government agencies. NIC Technologies'
government clients include Arkansas, California, Hawaii, Illinois, Louisiana,
Michigan, Oklahoma, Texas, Washington, Washington, D.C. and British Columbia.
OUR IDT BUSINESS
IDT is a provider of business-to-government reporting and filing software
for the transportation industry. IDT currently has contracts to provide the
state governments in California, Maryland, Minnesota and Kentucky with
commercial vehicle electronic credentialing services that include registration,
permitting, and tax filing software.
REVENUES
We currently derive revenues from five sources:
- transaction-based fees;
- subscription fees;
- software licensing and maintenance fees;
- fees for managing electronic government operations; and
- fees and charges for government application development.
In 15 of our 21 existing larger operations, our revenues are generated from
transactions, which generally include the collection of subscription and
transaction-based fees. Among the highest volume, most commercially valuable
products and services we offer are access to motor vehicle records and corporate
filings, which accounted for over 66% of our revenues in 1999 and over 49% of
our revenues in 2000. ChoicePoint, which resells these records to the auto
insurance industry, accounted for approximately 48% of revenues in 1999 and 34%
of our revenues in 2000.
10
In our other six larger operations, revenues are derived primarily from
software licensing and maintenance fees, management fees for certain government
operations and fees for application development. In 2000, these six operations
accounted for approximately 40% of our revenues.
OUR PRODUCTS AND SERVICES
OUR PORTAL BUSINESSES
Each of our business units works with its government clients to implement,
develop, manage and enhance a comprehensive, Internet-based portal to deliver
electronic government services to their constituents. Citizens and businesses
use these portals to gain access to Web-based interactive applications in order
to conduct transactions with the government and gain access to public
information.
Our portals are designed to provide user-friendly and convenient access to
useful government information and services and include numerous fee-based
transaction services and applications that we have developed. These fee-based
services and applications allow businesses and citizens to access constantly
changing government information and to file necessary government documents,
including driver's license record retrieval, motor vehicle registration renewal,
tax return filings, and permit applications. The types of products and services
and the fees charged vary in each jurisdiction according to the unique
preferences of that jurisdiction. In an effort to reduce the frustration
businesses and citizens often encounter when dealing with multiple government
agencies, we handle cross-agency communications whenever feasible and shield
businesses and citizens from the complexity of older, mainframe-based systems
that agencies commonly use, creating an intuitive and efficient interaction with
governments.
Some of the products and services we currently offer in different
jurisdictions include:
PRODUCT OR SERVICE DESCRIPTION PRIMARY USERS
- ------------------ ----------------------------- -----------------------------
Driver's License Records For those businesses legally Insurance companies
Retrieval authorized, offers controlled
instant look-up of driving
records. Includes commercial
licenses.
Vehicle Title, Lien & Provides controlled Insurance companies, lenders,
Registration interactive title, citizens
registration and lien
database access. Permits
citizens to renew their
vehicle registrations online.
BillWatch (Lobbyist in a Box) Allows the user to monitor Attorneys, lobbyists
state legislative activity.
Users can tag bills by key
word or bill number, and
BillWatch-C- will send an e-
mail when a change occurs in
the status of the bill.
Legislative activity can be
monitored via wireless
access.
Health Professional License Allows users to search Hospitals, clinics, health
Services databases on several health insurers, citizens
professions to verify license
status.
11
PRODUCT OR SERVICE DESCRIPTION PRIMARY USERS
- ------------------ ----------------------------- -----------------------------
Secretary of State Searches Allows users to access Attorneys, lenders
filings of corporations,
partnerships and other
entities, including charter
documents.
UCC Searches and Filings Permits searches of the UCC Attorneys, lenders
database to verify financial
liens, and permits filings of
secured financial documents.
Professional License Renewal Permits professionals to Attorneys, doctors, other
renew their licenses on line licensed professionals
using a credit card.
Driver's License Renewal Permits citizens to renew Citizens
their driver's license on
line using a credit card
Motor Fuel EDI Project Allows motor fuel carriers to Motor fuel carriers
file their tax reports
electronically.
Sales/Use Tax Filing Allows Sales and Use Tax Retailers
filers to file the required
forms online. The electronic
forms handle the computation
in the form and write the
data out so that it can be
entered into the Department
of Revenue's databases
without the need for the
information to be re-keyed in
the Department's office.
Online Birth Certificate Processes an online request Citizens
for an official birth
certificate, charging the
user's credit card.
One of the largest consumers of our products and services is ChoicePoint, a
data reseller that uses our electronic government portals to access motor
vehicle records for sale to the auto insurance industry. Currently, ChoicePoint
has entered into contracts with the networks our subsidiaries operate to request
these records from the states of Arkansas, Idaho, Indiana, Kansas, Maine,
Nebraska, Tennessee, Utah and Virginia. Under the terms of these contracts, we
provide ChoicePoint with driver's license and traffic records that vary by
contract, for fees that currently range from $3.00 to $11.00 per record
requested. We collect the entire fee, of which a certain portion is remitted to
the state. Each of these contracts may be terminated at any time after 60-days'
notice and may be terminated immediately at the option of any party upon a
material breach of the contract by the other party. Furthermore, each of these
contracts is immediately terminable if the state statute allowing for the public
release of these records is repealed.
In addition to these products and services, we also provide customer service
and support. Our customer service representatives serve as a liaison between our
government clients and businesses and citizens. Representatives are available 24
hours a day, seven days a week to address any problems that might arise on the
portals we operate.
12
OUR NIC COMMERCE BUSINESS
NIC Commerce provides its customers a procurement solution that combines
commercial off-the-shelf software with major bank purchase card programs,
creating an end-to-end procurement product. NIC Commerce's eFed software is
structured to adhere to strict government business rules while its workflow
characteristics remain intuitive and user-friendly. Because it is based on
commercial off-the-shelf technology, the eFed product requires less
customization than competing products and is therefore easier and less expensive
to install.
OUR NIC CONQUEST BUSINESS
Our NIC Conquest business develops and delivers applications that improve
the back-office administration of government records and better enable
electronic filing and distribution. These applications often are highly
customized for specific government or agency needs, and have been developed
under separate contracts outside of our core contractual arrangements with
governments. Our NIC Conquest business focuses on Secretaries of State, whose
offices are state governments' principal agencies for corporate filings. Its
products include: UCCDataNet State Imaging and Filing System, a comprehensive
UCC office management system; uccfile.com Web Browser Interface, which allows
Web access to filings; and County Suite Filing and Imaging Systems, which
extends filing capabilities to land records and other filing types.
OUR IDT BUSINESS
Our IDT business develops and delivers business-to-government reporting and
filing software for the transportation industry. IDT has developed
business-to-government applications that facilitate compliance with the Federal
Highway Administration's Commercial Vehicle Information System Network. IDT
currently has contracts to provide certain state governments with commercial
vehicle electronic credentialing services that include registration, permitting,
and tax filing software. Our multi-state filing portal for the trucking
industry, which became operational in November 2000, will be integrated into
IDT's operations, allowing us to leverage our eGovernment expertise on behalf of
regulated industries such as transportation, which are required to
file periodically with multiple government entities.
SALES AND MARKETING
We have two primary sales and marketing goals:
- to develop new sources of revenue through new government relationships;
and
- to retain and grow our revenue streams from existing government
relationships.
We have well-established sales and marketing processes for achieving these
goals, which are managed by our national market development division and a
marketing department within each business unit.
DEVELOPING NEW SOURCES OF REVENUE
We focus our new government sales and marketing efforts on increasing the
number of state, local, federal and international governments and government
agencies that are receptive to a public/private model for delivering information
and/or completing transactions over the Internet. We meet regularly with
interested government officials to educate them on the public/private model and
its potential advantages for their jurisdictions. Members of our management team
are also regular speakers at conferences devoted to the application of Internet
technologies to facilitate the relationship between governments and their
citizens. In states where we believe interest is significant, we seek to develop
supportive, educational relationships with professional and business
organizations that may benefit from
13
the government service improvements our Internet delivery strategy can produce.
We also focus our marketing efforts on key government decision makers through
the use of print media and corporate communications.
Once a government decides to implement a public/private model for managing
Internet access to resources and transactions, it typically starts a selection
process that operates under special rules that apply to government purchasing.
These rules typically require open bidding by possible service providers against
a list of requirements established by the government under existing procedures
or procedures especially created for the Internet provider selection process. We
respond to requests for bids with a proposal that outlines in detail our
philosophy and plans for implementing our business model. Once our proposal is
selected, we enter into negotiations for a contract.
GROWING EXISTING MARKETS
In our existing government relationships, our marketing efforts focus on:
- expanding the number of government agencies that provide services or
information on the government portal;
- identifying new information and transactions that can be usefully and
cost-effectively delivered over the Internet; and
- increasing the number of potential users who do business with governments
over the Internet.
Although each government's unique political and economic environment drives
different marketing and development priorities, we have found many of our core
applications to be relevant across multiple jurisdictions. Each of our business
units' operations has a director of marketing and additional marketing staff
that regularly meet with government, business and consumer representatives to
discuss potential new services. We also promote the use of existing services to
existing and new customers through speaking engagements and targeted advertising
to organizations for professionals, including lawyers, bankers and insurance
agents, that have a need for regular interaction with government. We have
implemented a centralized marketing function to identify products and services
that have been developed and implemented successfully for one government and
replicate them in other jurisdictions.
STRATEGIC ACQUISITIONS, INVESTMENTS AND ALLIANCES
Since August 1999, we have: completed the acquisitions of four companies,
eFed, Conquest Softworks, SDR and IDT; made equity-method investments in two
private companies and one joint venture, Tidemark, E-Filing.com and eGS; and
formed strategic alliances with several companies, including Oracle, Bank of
America, AOL and Deloitte Consulting. Our acquisitions and equity-method
investments are further described above. Oracle is a leading provider of
electronic commerce services, and we have implemented Oracle's Oracle Internet
Platform for our electronic government solutions. Bank of America will
facilitate the payment processing aspect of our NIC Commerce
business-to-business procurement, payment and reconciliation solution. We will
deliver state government information, services and applications through AOL's
State Government Guide. Deloitte Consulting brings a wealth of experience in
eGovernment implementation, strategic planning, reengineering, change
leadership, training, and integration solutions.
TECHNOLOGY AND OPERATIONS
Over the past nine years, we have made substantial investments in the
development of Internet-based applications and operations specifically designed
to allow businesses and citizens to transact with and receive information from
governments. The scope of our technological expertise includes network
engineering as it applies to the interconnection of government systems to the
Internet, Internet security, Web-to-legacy system integration, Web-to-mainframe
integration, database design, Web site
14
administration and Web page development. Within this scope, we have developed
and implemented a comprehensive Internet portal framework for governments, and a
broad array of stand-alone services using a combination of our own proprietary
technologies and commercially available, licensed technologies. We believe that
our technological expertise, coupled with our in-depth understanding of
governmental processes and systems, has made us adept at rapidly creating
tailored portal services that keep our clients on the forefront of electronic
government.
Each of our government clients has unique priorities and needs in the
development of its electronic government services. Over 55% of our employees
work in the Internet services and applications development and operations areas,
and nearly all are focused on a single government client's application needs.
Our employees develop an understanding of a specific government's application
priorities, technical profiles and information technology personnel and
management. At the same time, all of our development directors are trained by
experienced technical staff from our other operations on our standard technical
framework, and there is frequent and growing communication and cooperation,
which ensures that our government clients can make use of the most advanced
electronic government services we have developed throughout our organization.
Most of our portals and applications are physically hosted in each
jurisdiction in which we operate on servers that we own or lease. We also
provide links to sites that are maintained by government agencies or
organizations that we do not manage. Our business units provide uninterrupted 24
hour per day, seven day a week online service, and all of our operations
maintain fault-tolerant, redundant systems, with thorough backup and security
and disaster recovery procedures.
We believe our systems and applications are scalable and can easily be
replicated from one state to another. We focus on sustaining low-overhead
operations, with all major investments driven by the objective of deploying the
highest value-added technology and applications to each operation.
Finally, we have designed our government portals and applications to be
compatible with virtually any existing system and to be rapidly deployable. We
have implemented a government portal in as little as seven days from the award
of a contract, and have begun generating revenues from data access transactions
in as little as 30 days. To enable this level of speed and efficiency, we
license commercially available technology whenever possible and focus on the
integration and customization of these off-the-shelf hardware and software
components when necessary. We expect that commercially licensed technology will
continue to be available at reasonable costs.
COMPETITION
We believe that the principal factors upon which our businesses compete are:
- understanding of government needs;
- the quality and fit of electronic government services;
- the speed and responsiveness to the needs of businesses and citizens; and
- cost-effectiveness.
We believe we compete favorably with respect to the above-listed factors. In
most cases, the principal substitute for our services is a government-designed
and managed service that integrates other vendors' technologies, products and
services. Companies that have expertise in marketing and providing technical
electronic services to government entities have begun to compete with us by
further developing their services and increasing their focus on this piece of
their business and market shares. Examples of companies that may compete with us
are the following:
- large systems integrators, including American Management Systems, Sapient
and SAIC;
- traditional software applications developers, including Microsoft and
Oracle;
15
- traditional consulting firms, including IBM, KPMG, and Accenture (formerly
Andersen Consulting);
- providers of e-commerce applications, including Ariba, Commerce One,
PurchasePro.com, Digital Commerce Corporation and Official Payments
Corporation;
- consumer-oriented government portal companies, such as ezgov.com; and
- Web service companies, including marchFirst and Verio.
Many of our potential competitors are national or international in scope and
may have greater resources than we do. These resources could enable our
potential competitors to initiate severe price cuts or take other measures in an
effort to gain market share. Additionally, in some geographic areas, we may face
competition from smaller consulting firms with established reputations and
political relationships with potential government clients. If we do not compete
effectively or if we experience any pricing pressures, reduced margins or loss
of market share resulting from increased competition, our business and financial
condition may be adversely affected.
GOVERNMENT REGULATION
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Laws and regulations may be adopted
in the future, however, that address these issues including user privacy,
pricing, and the characteristics and quality of products and services. An
increase in regulation or the application of existing laws to the Internet could
significantly increase our cost of operations and harm our business. For
example, the Federal Communications Commission, or FCC, is currently reviewing
its regulatory position that Internet access service is not "telecommunications"
and may decide that Internet service providers must pay a percentage of their
gross revenues as a "universal service contribution." If the FCC were to require
universal service contributions from providers of Internet access or Internet
backbone services, our costs of doing business may increase, and we may not be
able to recover these costs from our customers. Additionally, state public
utility commissions generally have declined to review potential regulation of
such services, but may chose to do so in the future. As a result, our business
and financial condition could be harmed.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We rely on a combination of nondisclosure and other contractual arrangements
with governments, our employees and third parties, and privacy and trade secret
laws to protect and limit the distribution of the proprietary applications,
documentation and processes we have developed in connection with the electronic
government products and services we offer. Despite our precautions, third
parties may succeed in misappropriating our intellectual property or
independently developing similar intellectual property. If we fail to adequately
protect our intellectual property rights and proprietary information or if we
become involved in litigation relating to our intellectual property rights and
proprietary technology, our business could be harmed. Any actions we take may
not be adequate to protect our proprietary rights, and other companies may
develop technologies that are similar or superior to our proprietary technology.
Additionally, it is possible that we could in the future become subject to
claims alleging infringement of third-party intellectual property rights. Any
claims could subject us to costly litigation, and may require us to pay damages
and develop non-infringing intellectual property or acquire licenses to the
intellectual property that is the subject of the alleged infringement.
Additionally, licenses may not be available on acceptable terms or at all.
Litigation regarding intellectual property rights is common in the Internet
and software industries. We expect third-party infringement claims involving
Internet technologies and software products and
16
services to increase. If an infringement claim is filed against us, we may be
prevented from using certain technologies and may incur significant costs
resolving the claim.
We have in the past received letters suggesting that we are infringing on
the intellectual rights of others, and we may from time to time encounter
disputes over rights and obligations concerning intellectual property. Although
we believe that our intellectual property rights are sufficient to allow us to
market our existing products without incurring liability to third parties, we
cannot assure you that our products and services do not infringe on the
intellectual property rights of third parties.
In addition, we have agreed, and may agree in the future, to indemnify
certain of our customers against claims that our products infringe upon the
intellectual property rights of others. We could incur substantial costs in
defending ourselves and our customers against infringement claims. In the event
of a claim of infringement, we and our customers may be required to obtain one
or more licenses from third parties. We cannot assure you that we or our
customers could obtain necessary licenses from third parties at a reasonable
cost or at all.
After termination of our contracts, it is possible that governments and
their successors and affiliates may use their right of use license rights to the
software programs and other applications we have developed for them in the
operation of their portals to operate the portals themselves. Inadvertently,
they also may allow our intellectual property or other information to fall into
the hands of third parties, including our competitors.
EMPLOYEES
As of December 31, 2000, we had 362 full-time employees, of which 44 were
working in our corporate operations and 318 were located in our business units.
Of our employees, 76 were in sales and marketing, 204 were in service
development and operations and 82 were in finance, business development and
administration. Our future success will depend, in part, on our ability to
continue to attract, retain and motivate highly qualified technical and
management personnel, for whom competition is intense. From time to time, we
also employ independent contractors to support our research and development,
marketing, sales and support and administrative organizations. Our employees are
not covered by any collective bargaining agreement, and we have never
experienced a work stoppage. We believe that our relations with our employees
are good.
OTHER FACTORS AFFECTING OUR BUSINESS
BECAUSE WE HAVE PORTAL SERVICE CONTRACTS WITH A LIMITED NUMBER OF STATES AND
CITY GOVERNMENTS, THE TERMINATION OF CERTAIN OF THESE CONTRACTS MAY HARM OUR
BUSINESS
Currently, the majority of our revenues are derived from the operation of
our portal businesses. We have portal contracts with 17 state and local
governments. These contracts typically have initial terms of three to
five years with optional renewal periods of one to five years. However, any
renewal is optional and a government may terminate its contract prior to the
expiration date upon specific cause events that are not cured within a period of
ten to 180 days or, in some cases, upon passing legislation. Additionally, the
contracts under which we provide management and development services can be
terminated without cause on a specified period of notice. The loss of one or
more of our larger government portal clients, if not replaced, could
dramatically reduce our revenues. If these revenue shortfalls occur, our
business and financial condition would be harmed. We cannot be certain if, when
or to what extent governments might fail to renew or terminate any or all of
their contracts with us.
17
WE MAY BE UNABLE TO OBTAIN FUTURE CONTRACTS THROUGH THE REQUEST FOR PROPOSAL
PROCESS
Much of our current revenues is derived from contracts with governments and
government agencies that operate under special rules that apply to government
purchasing. Where this process applies, there are special rules that typically
require open bidding by possible service providers like us against a list of
requirements established by governments under existing or specially-created
procedures. To respond successfully to these requests for proposals, commonly
known as RFPs, we must estimate accurately our cost structure for servicing a
proposed contract, the time required to establish operations for the proposed
client and the likely terms of any other proposals submitted. We also must
assemble and submit a large volume of information within the strict time
schedule mandated by an RFP. Whether or not we are able to respond successfully
to RFPs in the future will significantly impact our business. We cannot
guarantee that we will win any bids in the future through the RFP process, or
that any winning bids will ultimately result in contracts. Even though we have
broadened our product and service offerings, we still depend on the RFP process
for a substantial part of our future contracts. Therefore, our business, results
of operations and financial condition would be harmed if we fail to obtain
profitable future contracts through the RFP process.
OUR ACQUISITIONS AND STRATEGIC ALLIANCES ENTAIL NUMEROUS RISKS AND UNCERTAINTIES
As part of our business strategy, we have made and may continue to make
acquisitions or enter into strategic alliances that we believe will complement
our existing businesses, increase traffic to our government clients' sites,
enhance our services, broaden our software and applications offerings or
technological capabilities or increase our revenues.
These acquisitions and future acquisitions or joint ventures could present
numerous risks and uncertainties, including:
- difficulties in the assimilation of operations, personnel, technologies,
products and information systems of the acquired companies;
- the inability to successfully market, distribute, deploy and manage new
products and services that we have limited or no experience in managing;
- the diversion of management's attention from our core business;
- the risk that an acquired business will not perform as expected;
- risks associated with entering markets in which we have limited or no
experience;
- potential loss of key employees, particularly those of the purchased
organizations;
- adverse effects on existing business relationships with existing suppliers
and customers;
- potentially dilutive issuances of equity securities, which may be freely
tradable in the public market;
- significant charges; and
- the incurrence of debt or other expenses related to goodwill and other
intangible assets.
We cannot assure you that any acquisitions we have announced or will
announce will ultimately close. Moreover, even after we close such transactions,
we cannot assure you that we will be able to successfully integrate the new
businesses or any other businesses, products or technologies we may acquire in
the future. For example, on September 20, 2000, we announced that our third
quarter operating results would likely fall short of the consensus analyst
revenue and earnings estimates. Concurrent with this announcement, we announced
the restructuring of our NIC Commerce and NIC Technologies businesses, the
reorganization of our management team and the consolidation of our marketing
efforts. Our lower third quarter operating results were mainly attributable to
our NIC
18
Commerce and NIC Technologies businesses, which were affected by industry-wide
post Y2K delays in government decision-making and sales cycles during the first
half of 2000. These businesses were the main sources of revenue shortfall versus
expectations as a result of their management's ineffective forecasting and
inadequate response to market signals that new business and revenues would be
less than expectations. In addition, these businesses were the main source of
EBITDA shortfall versus expectations as a result of expenditures for sustained
development, marketing and product delivery efforts to support these operations
whose revenue and gross profit impact did not materialize as expected during the
quarter. Our response to the inadequate performance of our NIC Technologies and
NIC Commerce businesses, both of which we have acquired since September 1999,
was to initiate a change in leadership, while simultaneously adjusting
operational processes and resources to more appropriately size these operations
to visible demand and more efficiently align them with other eGovernment
initiatives across NIC. The restructuring involved employee reductions in our
marketing division and at our NIC Commerce and NIC Technologies businesses. As a
result, we incurred a pre-tax charge of approximately $638,000 in the third
quarter relating to employee severance costs.
WE HAVE INCURRED NET LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE
FORESEEABLE FUTURE
We incurred net losses of approximately $40.3 million for the year ended
December 31, 2000, $10.7 million for the year ended December 31, 1999 and
$7.9 million for the year ended December 31, 1998. We also expect to incur
significant operating expenses and will need to generate increased revenues to
achieve profitability. Further, even though we expect to achieve profitability,
we may not be able to sustain or increase profitability on a quarterly or annual
basis. As a result, we will need to generate significantly higher revenues while
containing costs and operating expenses if we are to achieve profitability. We
cannot be certain that our revenues will continue to grow or that we will ever
achieve sufficient revenues to become profitable.
WE MAY BE UNABLE TO SUSTAIN THE USAGE LEVELS OF CURRENT PRODUCTS AND SERVICES
THAT PROVIDE A SIGNIFICANT PERCENTAGE OF OUR REVENUES
We obtain a high proportion of our revenues from a limited number of
products and services. Subscription-based and transaction-based fees charged for
access to motor vehicle records and corporate filings accounted for over 49% of
our revenues for the year ended December 31, 2000 and are expected to continue
to account for a significant portion of our revenues in the near future.
Regulatory changes or the development of alternative information sources could
materially reduce our revenues from these products and services. A reduction in
revenues from currently popular products and services would harm our business,
results of operations and financial condition.
IF OUR POTENTIAL CUSTOMERS ARE NOT WILLING TO SWITCH TO OR ADOPT OUR ONLINE
GOVERNMENTAL PORTALS AND OTHER ELECTRONIC SERVICES, OUR GROWTH AND REVENUES
WILL BE LIMITED
The failure to generate a large customer base would harm our growth and
revenues. This failure could occur for several reasons. Our future revenues and
profits depend upon the widespread acceptance and use of the Internet as an
effective medium for accessing public information, particularly as a medium for
government procurement and filings. We cannot assure you that customer
acceptance and use of the Internet will continue to grow. Additionally, we face
intense competition in all sectors of our business. As a result, our efforts to
create a larger customer base may be more difficult than expected even if we are
perceived to offer products and services superior to those of our competitors.
Further, because the government-to-citizen and government-to-business portal
access and electronic filing market is relatively new, potential customers in
this market may be confused or uncertain about the relative merits of each
electronic government solution and of which solution to adopt, if any. Confusion
and uncertainty in the marketplace may inhibit customers from adopting our
solution, which could harm our business, results of operations and financial
condition.
19
THE FEES WE COLLECT FOR MANY OF OUR PRODUCTS AND SERVICES ARE SUBJECT TO
REGULATION THAT COULD LIMIT GROWTH OF OUR REVENUES AND PROFITABILITY
Under the terms of our government contracts, we remit a portion of the fees
we collect to state agencies. Generally, our contracts provide that the amount
of any fees we retain is set by governments to provide us with a reasonable
return or profit or, in one case, a specified return on equity. We have limited
control over the level of fees we are permitted to retain. Our business, results
of operations and financial condition may be harmed if the level of fees we are
permitted to retain in the future is too low or if our costs rise without a
commensurate increase in fees.
THE POSSIBILITY OF GOVERNMENTS DEMANDING FIXED-PRICE CONTRACTS MAY SIGNIFICANTLY
REDUCE OUR REVENUES AND PROFITS
Substantially all of our current portal contracts are on a transaction-fee
basis, through which our fees vary depending on the number of Internet users who
access our products and services. However, we cannot assure you that governments
will not demand fixed-price contracts in the future. Currently, we earn fees
under our contracts with the states of Georgia and Iowa predominantly on a
predominantly fixed-price basis. We may, from time to time, enter into other
fixed-price contracts. Our failure to estimate accurately the resources and time
required for an engagement, to manage governments' expectations effectively
regarding the scope of services to be delivered for an estimated price or to
complete fixed-price engagements within budget, on time and to governments'
satisfaction could expose us to risks associated with cost overruns and,
potentially, to penalties, which may harm our business, results of operations
and financial condition.
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS AND
FAILURE TO MANAGE OUR GROWTH COULD STRAIN OUR MANAGEMENT AND OTHER RESOURCES
Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We have acquired a number of new businesses or combined with
existing entities to create new businesses, including NIC Commerce, NIC
Conquest, NIC Technologies and IDT, which have strained our management
resources. Any future expansion efforts could be expensive and put a strain on
our management and other resources. We have increased, and plan to continue to
increase, the scope of our operations at a rapid rate. Our headcount has grown
and will continue to grow substantially. At December 31, 1998, we had a total of
95 employees, at December 31, 1999, we had a total of 185 employees, at December
31, 2000, we had a total of 362 employees, and at February 28, 2001, we had a
total of 381 employees. In addition, we expect to hire a modest number of new
employees in the near future. To manage future growth effectively, we must
maintain and enhance our financial and accounting systems and controls,
integrate new personnel and manage expanded operations.
BECAUSE A MAJOR PORTION OF OUR CURRENT REVENUES IS GENERATED FROM A SMALL NUMBER
OF USERS, THE LOSS OF ANY OF THESE USERS MAY HARM OUR BUSINESS AND FINANCIAL
CONDITION
A significant portion of our revenues are derived from data resellers' use
of our electronic government portals to access motor vehicle records for sale to
the automobile insurance industry. For the year ended December 31, 2000, one of
these data resellers, ChoicePoint, accounted for approximately 34% of our
revenues. Two other resellers accounted for an additional 8% of our revenues
during the year ended December 31, 2000. It is possible that these users will
develop alternative data sources or new business processes that would materially
diminish their use of our portals. The loss of all or a substantial portion of
business from any of these entities would harm our business and financial
condition.
20
WE MAY LOSE THE RIGHT TO THE CONTENT DISTRIBUTED THROUGH OUR GOVERNMENT PORTALS,
WHICH IS PROVIDED TO US ENTIRELY BY GOVERNMENT ENTITIES
We do not own or create the content distributed through our government
portals. We depend on the governments with which we contract to supply
information and data feeds to us on a timely basis to allow businesses and
citizens to complete transactions and obtain government information. We cannot
assure you that these data sources will continue to be available in the future.
Government entities could terminate their contracts to provide data. Changes in
regulations could mean that governments no longer collect some types of data or
that the data is protected by more stringent privacy rules preventing uses now
made of it. Moreover, our data sources are not always subject to exclusive
agreements, so that data included in our products and services also may be
included in those of our potential competitors. In addition, we are dependent
upon the accuracy and reliability of government computer systems and data
collection for the content of our portals. The loss or the unavailability of our
data sources in the future, or the loss of our exclusive right to distribute
some of the data sources, could harm our business, results of operations and
financial condition.
THE GROWTH IN OUR REVENUES MAY BE LIMITED BY THE NUMBER OF GOVERNMENTS THAT
CHOOSE TO PROVIDE ELECTRONIC GOVERNMENT SERVICES AND TO ADOPT OUR BUSINESS
MODEL AND BY THE FINITE NUMBER OF GOVERNMENTS WITH WHICH WE MAY CONTRACT FOR
OUR ELECTRONIC GOVERNMENT SERVICES
Although we have recently introduced new products and services through our
NIC Commerce, NIC Conquest, SDR Technologies and IDT subsidiaries, and have
recently been awarded contracts to provide eGovernment services under our
traditional business model to several municipal/local governments, our revenues
are generated principally from contracts with state governments to provide
electronic government services on behalf of those governments to complete
transactions and distribute public information electronically. The growth in our
revenues largely depends on government entities adopting our public/private
model. We cannot assure you that government entities will choose to provide
electronic government services at all, or that they will not provide such
services themselves without private assistance or adopting our public/private
model.
In addition, as there is a finite number of states remaining with which we
can contract for our services, future increases in our revenues will depend on
our ability to expand our business model to include multi-state cooperative
organizations, local governments, federal agencies and international entities
and to broaden our product and service offerings to diversify our revenue
streams across our lines of business. We cannot assure you that we will succeed
in expanding into new markets, broadening our product and service offerings, or
that our services will be adaptable to those new markets.
OUR BUSINESS WITH VARIOUS GOVERNMENT ENTITIES OFTEN REQUIRES SPECIFIC GOVERNMENT
LEGISLATION TO BE PASSED FOR US TO INITIATE AND MAINTAIN OUR GOVERNMENT
CONTRACTS
Because a central part of our business includes the execution of contracts
with governments under which we remit a portion of user fees charged to
businesses and citizens to state agencies, it is often necessary for governments
to draft and adopt specific legislation before the government can circulate an
RFP to which we can respond. Furthermore, the maintenance of our government
contracts requires the continued acceptance of enabling legislation and any
implementing regulations. In the past, various entities that use the portals we
operate to obtain government products and services have challenged the authority
of governments to electronically provide these products and services exclusively
through portals like those we operate. A successful challenge in the future
could result in a proliferation of alternative ways to obtain these products and
services, which would harm our business, results of operations and financial
condition. The repeal or modification of any enabling legislation would also
harm our business, results of operations and financial condition.
21
BECAUSE A LARGE PORTION OF OUR BUSINESS RELIES ON A CONTRACTUAL BIDDING PROCESS
WHOSE PARAMETERS ARE ESTABLISHED BY GOVERNMENTS, THE LENGTH OF OUR SALES
CYCLES IS UNCERTAIN AND CAN LEAD TO SHORTFALLS IN REVENUES
Our dependence on a bidding process to initiate many new projects, the
parameters of which are established by governments, results in uncertainty in
our sales cycles because the duration and the procedures for each bidding
process vary significantly according to each government entity's policies and
procedures. The time between the date of initial contact with a government for a
bid and the award of the bid may range from as little as 180 days to up to
36 months. The bidding process is subject to factors over which we have little
or no control, including:
- political acceptance of the concept of government agencies contracting
with third parties to distribute public information, which has been
offered traditionally only by the government agencies often without
charge;
- the internal review process by the government agencies for bid acceptance;
- the need to reach a political accommodation among various interest groups;
- changes to the bidding procedure by the government agencies;
- changes to state legislation authorizing government's contracting with
third parties to distribute public information;
- changes in government administrations;
- the budgetary restrictions of government entities;
- the competition generated by the bidding process; and
- the possibility of cancellation or delay by the government entities.
Even though we have diversified our business to include services and
products that are not subject to the bidding process, we are still dependent on
the bidding process for a significant part of our business. Therefore, any
material delay in the bidding process, changes to the bidding practices and
policies, the failure to receive the bid or the failure to execute a contract
may disrupt our financial results for a particular period and harm our business
and financial condition.
OUR APPLICATION SERVICES DIVISION HAS INCURRED LOSSES UNDER ITS FIXED-FEE
CONTRACTS IN THE PAST, AND OUR RESULTS OF OPERATIONS COULD BE HARMED IF THE
COSTS THAT OUR RECENTLY CREATED NIC CONQUEST BUSINESS INCURS TO MEET
CONTRACTUAL COMMITMENTS EXCEED OUR CURRENT ESTIMATES
Our application services division developed and implemented back-office
government software applications for a fixed development fee. In the fourth
quarter of 1998, we determined that the balance of revenues remaining to be
recognized under our existing application services division contractual
obligations was not expected to cover anticipated costs of developing and
implementing the related applications. Estimated costs in excess of fixed
contract prices of $1.3 million for completing these applications were expensed
in the fourth quarter of 1998. We accrued additional anticipated losses of
$1.1 million in 1999 and $1.4 million in the first quarter of 2000 based on
revised estimates. Since we combined our application services division with
Conquest Softworks, LLC in January 2000, we have expanded our applications to
include back-end software applications and services for electronic filings and
document management solutions for governments at a fixed fee. Our NIC Conquest
business has assumed most of the contractual obligations of our application
services division. It is possible that NIC Conquest's costs will similarly
exceed revenues in the future, as a result of unforeseen difficulties in the
creation of an application called for in a contract, unforeseen challenges in
ensuring compatibility with existing systems, rising development and personnel
costs or other reasons. If this occurs, our business, results of operations and
financial condition could be harmed.
22
ENTRANCE OF POTENTIAL COMPETITORS INTO THE MARKETPLACE COULD HARM OUR ABILITY TO
MAINTAIN OR IMPROVE OUR POSITION IN THE MARKET
Many companies exist that provide one or more parts of the products and
services we offer. In most cases, the principal substitute for our services is a
government-designed and managed approach that integrates other vendors'
technologies, products and services. Companies that have expertise in marketing
and providing technical services to government entities have begun to compete
with us by further developing their services and increasing their focus on this
piece of their business and market shares. Examples of companies that may
compete with us are the following:
- large systems integrators, including American Management Systems, Sapient
and SAIC;
- traditional software applications developers, including Microsoft and
Oracle;
- traditional consulting firms, including IBM, KPMG, and Accenture (formerly
Andersen Consulting);
- providers of e-commerce applications, including Ariba, Commerce One,
PurchasePro.com, Digital Commerce Corporation and Official Payments
Corporation;
- consumer-oriented government portal companies, including ezgov.com; and
- Web service companies, including marchFirst and Verio.
Many of our current and potential competitors are national or international
in scope and may have greater resources than we do. These resources could enable
our competitors to initiate severe price cuts or take other measures to gain
market share. Many of our current and potential competitors have longer
operating histories, significantly greater financial, technical, marketing and
other resources than us, significantly greater name recognition and a larger
installed base of customers. Additionally, in some geographic areas, we may face
competition from smaller consulting firms with established reputations and
political relationships with potential government clients. If we do not compete
effectively or if we experience any pricing pressures, reduced margins or loss
of market share resulting from increased competition, our business and financial
condition may be harmed.
THE SEASONALITY OF USE FOR SOME OF OUR ELECTRONIC GOVERNMENT PRODUCTS AND
SERVICES MAY HARM OUR FOURTH QUARTER RESULTS OF EACH CALENDAR YEAR
The use of some of our electronic government products and services is
seasonal, particularly the accessing of drivers' records, resulting in lower
revenues in the fourth quarter of each calendar year, due to the smaller number
of business days in this quarter and a lower volume of government-to-business
and government-to-citizen transactions during the holiday period. As a result,
seasonality is likely to cause our quarterly results to fluctuate, which could
harm our business and financial condition and could harm the trading price of
our common stock.
OUR QUARTERLY RESULTS OF OPERATIONS ARE VOLATILE AND DIFFICULT TO PREDICT. IF WE
FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, THE
MARKET PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY
Our future revenues and results of operations may vary significantly from
quarter to quarter due to a number of factors, many of which are outside of our
control, and any of which may harm our business. These factors include:
- the commencement, completion or termination of contracts during any
particular quarter;
- the introduction of new electronic government products and services by us
or our competitors;
- technical difficulties or system downtime affecting the Internet generally
or the operation of our electronic government products and services;
23
- the amount and timing of operating costs and capital expenditures relating
to the expansion of our business operations and infrastructure;
- the result of negative cash flows due to capital investments; and
- the incurrence of significant charges related to acquisitions.
Due to the factors noted above, our revenues in a particular quarter may be
lower than we anticipate and if we are unable to reduce spending in that
quarter, our results of operations for that quarter may be harmed. You should
not rely on quarter-to-quarter comparisons of our results of operations as an
indication of future performance. It is possible that in some future periods our
results of operations may be below the expectations of public market analysts
and investors. If this occurs, the price of our common stock may decline.
IF WE FAIL TO COORDINATE OR EXPAND OUR OPERATIONAL PROCEDURES AND CONTROLS, WE
MAY NOT EFFECTIVELY MANAGE OUR GROWTH
Our growth rate may increase rapidly in response to the acceptance of our
products and services under new or existing government contracts. If we cannot
manage our growth effectively, we may not be able to coordinate the activities
of our technical, accounting and marketing staffs, and our business could be
harmed. We intend to plan for the acceptance of new bids by a number of
governmental entities so that we may be ready to begin operations as soon as
possible after acceptance of a bid. Additionally, we plan to continue our
expansion of eGovernment products and services into new local, state and federal
markets. As part of this plan of growth, we must implement new operational
procedures and controls to expand, train and manage our employees and to
coordinate the operations of our various subsidiaries. If we cannot manage the
growth of our government portals, staff, software installation and maintenance
teams, offices and operations, our business may be harmed.
WE MAY BE UNABLE TO HIRE, INTEGRATE OR RETAIN QUALIFIED PERSONNEL
The recent growth in our business has resulted in an increase in the
responsibilities for both existing and new management personnel. Some of our
personnel are presently serving in more than one executive capacity. The loss of
any of our executives could harm our business.
In addition, we expect that we will need to hire additional personnel in all
areas in 2001, including general managers for new operations in jurisdictions in
which we obtain contracts. Competition for personnel in the Internet industry is
intense. We may not be able to retain our current key employees or attract,
integrate or retain other qualified employees in the future. If we do not
succeed in attracting new personnel or integrating, retaining and motivating our
current personnel, our business could be harmed. In addition, new employees
generally require substantial training in the presentation, policies and
positioning of our government portals and other services. This training will
require substantial resources and management attention.
TO BE SUCCESSFUL, WE MUST DEVELOP AND MARKET COMPREHENSIVE, EFFICIENT,
COST-EFFECTIVE AND SECURE ELECTRONIC ACCESS TO PUBLIC INFORMATION AND NEW
PRODUCTS AND SERVICES
Our success depends in part upon our ability to attract a greater number of
Internet users to access public information electronically by delivering a
comprehensive composite of public information and an efficient, cost-effective
and secure method of electronic access and transactions. Moreover, in order to
increase revenues in the future, we must continue to develop products and
services that businesses and citizens will find valuable, and there is no
guarantee that we will be able to do so. If we are unable to develop products
and services that allow us to attract, retain and expand our current user base,
our revenues and future results of operations may be harmed. We cannot assure
you that the products and services we offer will appeal to a sufficient number
of Internet users to generate
24
continued revenue growth. For example, we cannot assure you that the use of NIC
Commerce, our online procurement software services, by local, state and federal
governments will continue to grow. Our ability to attract Internet users to our
government portals depends on several factors, including:
- the comprehensiveness of public records available through our government
portals;
- the perceived efficiency and cost-effectiveness of accessing public
records electronically;
- the perceived efficacy of online government-to-business procurement
solutions;
- the effectiveness of security measures; and
- the increased usage and continued reliability of the Internet.
DEFICIENCIES IN OUR PERFORMANCE UNDER A GOVERNMENT CONTRACT COULD RESULT IN
CONTRACT TERMINATION, REPUTATIONAL DAMAGE OR FINANCIAL PENALTIES
Each government entity with which we contract for portal services has the
authority to require an independent audit of our performance. The scope of
audits could include inspections of income statements, balance sheets, fee
structures, collections practices, service levels and our compliance with
applicable laws, regulations and standards. We cannot assure you that a future
audit will not find any material performance deficiencies that would result in
an adjustment to our revenues and result in financial penalties. Moreover, the
consequent negative publicity could harm our reputation among other governments
with which we would like to contract. All of these factors could harm our
business, results of operations and financial condition.
WE MAY NEED MORE WORKING CAPITAL TO EXPAND OUR BUSINESS
We anticipate that our current resources will be sufficient to meet our
present working capital and capital expenditure requirements for at least the
next twelve months. However, we may need to raise additional capital before this
period ends to further:
- expand our services and products offerings;
- acquire complementary businesses or technologies;
- support our expansion into other states, cities, municipalities and
federal agencies and internationally; and
- respond to competitive pressures.
Our future liquidity and capital requirements will depend upon numerous
factors, including the success of our existing and new product and service
offerings and potentially competing technological and market developments. We
may be required to raise additional funds through public or private financing,
strategic relationships or other arrangements. We cannot assure you that such
additional funding, if needed, will be available on terms acceptable to us, or
at all. If adequate funds were not available on acceptable terms, our ability to
develop or enhance our products and services, take advantage of future
opportunities or respond to competitive pressures would be significantly
limited. This limitation could harm our business, results of operations and
financial condition.
WE MAY BE UNABLE TO INTEGRATE NEW TECHNOLOGIES AND INDUSTRY STANDARDS
EFFECTIVELY
Our future success will depend on our ability to enhance and improve the
responsiveness, functionality and features of our products and services in
accordance with industry standards and to
25
address the increasingly sophisticated technological needs of our customers on a
cost-effective and timely basis. Our ability to remain competitive will depend,
in part, on our ability to:
- enhance and improve the responsiveness, functionality and other features
of the government portals we offer;
- continue to develop our technical expertise;
- develop and introduce new services, applications and technology to meet
changing customer needs and preferences; and
- influence and respond to emerging industry standards and other
technological changes in a timely and cost-effective manner.
We cannot assure you that we will be successful in responding to the above
technological and industry challenges in a timely and cost-effective manner. If
we are unable to integrate new technologies and industry standards effectively,
our results of operations could be harmed.
WE DEPEND ON THE INCREASING USE OF THE INTERNET AND ON THE GROWTH OF ONLINE
GOVERNMENT INFORMATION SYSTEMS. IF THE USE OF THE INTERNET AND ELECTRONIC
GOVERNMENT INFORMATION SYSTEMS DO NOT GROW AS ANTICIPATED, OUR BUSINESS WILL
BE SERIOUSLY HARMED
Our business depends on the increased acceptance and use of the Internet as
a medium for accessing public information and completing government filings and
procurement contracts. Rapid growth in the use of the Internet is a recent
phenomenon. As a result, acceptance and use may not continue to develop at
historical rates and a sufficiently broad base of individual and business
customers may not adopt or continue to use the Internet as a medium for
accessing government portals and other online services. Demand and market
acceptance for recently introduced services and products over the Internet are
subject to a high level of uncertainty, and there exist few proven services and
products.
Our business would be seriously harmed if:
- Use of the Internet and other online services does not continue to
increase or increases more slowly than expected; or
- the technology underlying the Internet and other online services does not
effectively support any expansion that may occur.
IF THE INTERNET INFRASTRUCTURE FAILS TO DEVELOP OR BE ADEQUATELY MAINTAINED, OUR
BUSINESS WOULD BE HARMED BECAUSE USERS MAY NOT BE ABLE TO ACCESS OUR
GOVERNMENT PORTALS
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. If the Web
continues to experience increased numbers of users, frequency of use or
increased bandwidth requirements, the Internet infrastructure may not be able to
support these increased demands or perform reliably. The Internet has
experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure, and could face such outages and delays in the
future. These outages and delays could reduce the level of Internet usage and
traffic on our government portals. Such outages and delays would also hinder our
customers' ability to file UCC documents online, renew professional licenses
electronically, file fuel tax applications and complete online government
purchase orders and requisitions. In addition, the Internet could lose its
viability due to delays in the development or adoption of new standards and
protocols to handle increased levels of activity or due to increased
governmental regulation. If the Internet infrastructure is not adequately
developed or maintained, use of our government portals and our
government-to-citizen and government-to-business services may be reduced.
26
Our success depends on the increase in Internet usage generally and in
particular as a means to access public information electronically. This in
part requires the development and maintenance of the Internet infrastructure. If
this infrastructure fails to develop or be adequately maintained, our business
would be harmed because users may not be able to access our government portals.
Among other things, this development and maintenance will require a reliable
network backbone with the necessary speed, data capacity, security and timely
development of complementary products for providing reliable Internet access and
services.
WE MAY BE HELD LIABLE FOR CONTENT THAT WE OBTAIN FROM GOVERNMENT AGENCIES
Because we aggregate and distribute sometimes private and sensitive public
information over the Internet, we may face potential liability for defamation,
libel, negligence, invasion of privacy, copyright or trademark infringement, and
other claims based on the nature and content of the material that is published
on our government portals. Most of the agreements through which we obtain
consent to disseminate this information do not contain indemnity provisions in
our favor. These types of claims have been brought, sometimes successfully,
against online services and Web sites in the past. We cannot assure you that our
general liability insurance will be adequate to indemnify us for all liability
that may be imposed. Any liability that is not covered by our insurance or is in
excess of our insurance coverage could severely harm our business operations and
financial condition.
CONCERNS OVER TRANSACTIONAL SECURITY MAY HINDER THE GROWTH OF OUR BUSINESS
A significant barrier to electronic commerce is the secure transmission of
confidential information over public networks. Any breach in our security could
expose us to a risk of loss or litigation and possible liability. We rely on
encryption and authentication technology licensed from third parties to provide
secure transmission of confidential information. As a result of advances in
computer capabilities, new discoveries in the field of cryptography or other
developments, a compromise or breach of the algorithms we use to protect
customer transaction data may occur. Because we provide information released
from various government entities, we may represent an attractive target for
security breaches.
A compromise of our security or a perceived compromise of our security could
severely harm our business. A party who is able to circumvent our security
measures could misappropriate proprietary information, including customer credit
card information, or cause interruptions or direct damage to our government
portals. Also, should hackers obtain sensitive data and information, or create
bugs or viruses in an attempt to sabotage the functionality of our products and
services, we may receive negative publicity, incur liability to our customers or
lose the confidence of the governments with which we contract, any of which may
cause the termination or modification of our government contracts.
We may be required to expend significant capital and other resources to
protect against the threat of security breaches or to alleviate problems caused
by these breaches. However, protection may not be available at a reasonable
price or at all.
OUR SYSTEMS MAY FAIL OR LIMIT USER TRAFFIC, WHICH COULD HARM OUR BUSINESS,
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Most of our communications hardware and computer hardware operations for
delivering our electronic government services are located individually in each
state or city where we provide those services. We cannot assure you that during
the occurrence of fire, floods, earthquakes, power loss, telecommunications
failures, break-ins and similar events that the modem banks and direct dial-up
connections we have to serve as back-up systems will not prevent damage to our
systems or cause interruptions to our services. Computer viruses, electronic
break-ins or other similar disruptive problems could cause users to stop
visiting our government portals and could cause our clients to
27
terminate agreements with us. If any of these circumstances occurred, our
business could be harmed. Our insurance policies may not adequately compensate
us for any losses that may occur due to any failures of or interruptions in our
systems.
Our government portals must accommodate a high volume of traffic and deliver
frequently updated information. These government portals may experience
interruptions due to any failure or delay by government agencies in the
transmission or receipt of this information. Due to holidays and technical
problems with state computer systems, our Web sites have experienced slower
response times or decreased traffic in the past and may experience the same
incidents in the future. In addition, our users depend on Internet service
providers, online service providers and other Web site operators for access to
our government portals and other online government-to-citizen and
government-to-business services. Many of these providers and operators have
experienced significant outages in the past due to system failures unrelated to
our systems, holidays and heavy user traffic, and could experience the same
outages, delays and other difficulties in the future. Any of these system
failures could harm our business, results of operations and financial condition.
ITEM 2. PROPERTIES
Our principal administrative facility occupies a total of approximately
3,000 square feet of leased space at 12 Corporate Woods, 10975 Benson Street,
Suite 390, Overland Park, Kansas 66210. All of our subsidiaries also lease their
facilities. We believe our current facilities are adequate to meet our needs for
the foreseeable future. We do not anticipate acquiring property or buildings in
the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We may from time to time become a party to various legal proceedings arising
in the ordinary course of our business. However, we are not currently subject to
any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the fourth
quarter of fiscal 2000.
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Since July 15, 1999, the date of our initial public offering, our stock has
traded on the Nasdaq National Market under the symbol "EGOV." The following
table shows the range of high and low closing sales prices reported on the
Nasdaq National Market for the periods indicated. On March 1, 2001, the closing
price of our common stock was $3.03.
HIGH LOW
-------- --------
FISCAL YEAR ENDED DECEMBER 31, 1999
Third Quarter (from July 15, 1999).......................... $28.25 $12.81
Fourth Quarter.............................................. $39.63 $24.38
HIGH LOW
-------- --------
FISCAL YEAR ENDED DECEMBER 31, 2000
First Quarter............................................... $67.88 $28.63
Second Quarter.............................................. $32.38 $ 9.75
Third Quarter............................................... $17.75 $ 3.97
Fourth Quarter.............................................. $ 4.06 $ 1.19
As of March 1, 2001, there were approximately 195 holders of record of
shares of the Company's common stock.
DIVIDEND POLICY
Other than dividends paid while we were an S corporation, we have never
declared or paid any cash dividends on shares of our common stock and do not
anticipate declaring or paying dividends on our common stock in the foreseeable
future. We expect that we will retain all available earnings generated by our
operations for the development and growth of our business. Any future
determination as to the payment of dividends will be made at the discretion of
our Board of Directors and will depend on our operating results, financial
condition, capital requirements, general business conditions and such other
factors as the Board of Directors deems relevant.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with the consolidated financial statements and related notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included in this Form 10-K. On March 31, 1998, we exchanged our
common stock for the common stock of five affiliated companies in a transaction
referred to as the Exchange Offer. Prior to the completion of the Exchange
Offer, we were a holding company with no operations of our own. The Exchange
Offer consolidated five business units as operating subsidiaries under a holding
company. Prior to April 1, 1998, our historical financial information reflects
the results of our business unit formed to pursue new business opportunities and
not the results of our business units operating in Indiana, Kansas, Arkansas and
Nebraska. For
29
additional information on the Exchange Offer, refer to Note 3 in the notes to
consolidated financial statements included in this Form 10-K.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues.................................... $236 $ 996 $ 8,148 $ 16,147 $ 26,971
Total cost of revenues............................ 21 5 2,973 3,227 8,979
Gross profit...................................... 215 991 5,175 12,920 17,992
Operating income (loss)........................... 8 (277) (7,205) (14,470) (52,206)
Net income (loss)................................. 8 (277) (7,896) (10,731) (40,278)
Net income (loss) per share-basic and diluted..... 0.00 (0.01) (0.21) (0.23) (0.74)
DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......................... $ -- $179 $ 1,311 $ 9,527 $ 13,878
Marketable securities............................. -- -- -- 82,481 24,914
Total assets...................................... 110 326 17,249 133,661 139,569
Bank lines of credit.............................. -- -- 1,024 -- --
Long-term debt (includes current portion of notes
payable/capital lease obligations).............. -- 30 745 458 217
Total shareholders' equity........................ 95 188 10,912 128,089 130,938
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
This Form 10-K 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" or we
"anticipate" 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. In addition, we
will not necessarily update the information in this Form 10-K if any
forward-looking statement later turns out to be inaccurate. Details about risks
affecting various aspects of our business are discussed throughout this
Form 10-K. Investors should read all of these risks carefully.
OVERVIEW
In this section, we are providing more detailed information about our
operating results and changes in financial position over the past three years.
This section should be read in conjunction with the consolidated financial
statements and related notes included in this Form 10-K.
We are a provider of Internet-based, electronic government services that
help governments use the Internet to reduce costs and provide a higher level of
service to businesses and citizens. We enter into contracts with governments and
on their behalf design, build and operate Internet-based portals. These portals
consist of Web sites and applications that we build, which allow businesses and
citizens to access government information online and complete transactions,
including applying for a permit, retrieving driver's license records or filing a
form or report. Our unique business model allows us to reduce our
30
government clients' financial and technology risks and obtain revenue by
charging fees for electronic government services and remitting a portion to our
government clients. Our clients benefit because they gain a centralized,
customer-focused presence on the Internet, and businesses and citizens gain a
faster, more convenient and more cost-effective means to interact with
governments. We also provide Internet-based applications and services for
government procurement through our NIC Commerce business. Focusing on
Secretaries of State, our NIC Conquest business builds Uniform Commercial Code
and corporation software applications and provides online services that
facilitate electronic filing and document management for governments. NIC
Technologies designs and develops online election and ethics filing systems for
federal, state and local government agencies. IDT provides
business-to-government reporting and filing software for the transportation
industry.
At December 31, 2000, we had signed contracts to provide Internet-based
electronic government services for the state governments of Arkansas, Georgia,
Hawaii, Idaho, Indiana, Iowa, Kansas, Maine, Montana, Nebraska, Tennessee, Utah
and Virginia and the city-county governments of the City of Indianapolis and
Marion County (IN), Dallas County (TX), the City of San Francisco (CA) and the
City of Tampa (FL). We also serve as a subcontractor to Deloitte Consulting on
the New City of Ottawa (Canada) portal. We typically enter into three to five
year contracts with our government clients and manage operations through
separate subsidiaries that operate as decentralized business units with a high
degree of autonomy. Under these contracts, each local business unit helps its
government client implement, develop, manage and enhance a single, comprehensive
portal for conducting transactions and delivering information to businesses and
citizens online, and we remit to the government a portion of the fee we obtain
through use of the portal for information and transactions. In our government
contracts with Georgia and Iowa, we provide consulting, development and
management services for those government portals predominantly under a
fixed-price model. Subscription-based and transaction-based fees charged for
access to motor vehicle records and corporate filings accounted for over 49% and
66% of our revenues for the years ended December 31, 2000 and 1999. We believe
that while these applications will continue to be important sources of revenues,
their contributions as a percentage of our total revenues will decline as other
sources grow.
We charge for access to records on a per-record basis and, depending upon
government policies, also on a fixed or sliding scale bulk basis. Our fees are
set by negotiation with the government agencies that control the records and are
typically approved by a government sanctioned oversight body. We recognize
revenues from transactions (primarily information access fees and filing fees)
on an accrual basis net of the transaction fee due to the government, and we
bill end-user customers primarily on a monthly basis. We typically receive a
majority of payments via electronic funds transfer and credit card within
20 days of billing and remit payment to governments within 60 days of the
transaction. The costs that we pay state agencies for data access are accrued as
accounts payable at the time revenue from the access of public information is
recognized. We must remit a certain amount or percentage of these fees to
government agencies regardless of whether we ultimately collects the fees. The
pricing of these transactions vary by the type of transaction and by state.
Costs of portal revenues consist primarily of telecommunications and data
processing costs and payments to certain of our state government clients under
revenue- and/or profit-sharing arrangements.
Revenues from state portal business units are highly correlated to
population, but are also affected by pricing policies established by government
entities for public records, the number and growth of commercial enterprises and
the government entity's development of policy and information technology
infrastructure supporting electronic government.
BUSINESS ACQUISITIONS
On September 15, 1999, we acquired the net assets of NIC Commerce (formerly
eFed), a market leader in Internet-based procurement solutions for governments.
NIC Commerce develops and manages online procurement software and services for
federal and state government markets. Contracting with
31
several state and federal agencies, NIC Commerce provides value-added
applications to its government partners, as well as potential new entry points
for NIC into other federal, state and local sectors. NIC Commerce, while
traditionally deriving software licensing and maintenance revenues from several
federal agencies, also has contracted to provide electronic procurement services
under a transaction-based pricing model to five state/local government agencies.
These contracts are expected to begin producing revenues in 2001.
On January 12, 2000, we merged our application services division with
Conquest Softworks, LLC. NIC Conquest, the newly formed entity, is a provider of
software applications and services for electronic filings and document
management solutions for governments. The combined entity holds contracts with
state and local governments for Web-enabling the back-office systems and
processes for business-to-government filings. Its products include: UCCDataNet
State Imaging and Filing System, a comprehensive UCC office management system;
uccfile.com Web Browser Interface, which allows Web access to filings; and
County Suite Filing and Imaging Systems, which extends filing capabilities to
land records and other filing types. Our NIC Conquest business derives the
majority of its revenues from fixed-price application development contracts with
governments and recognizes revenues on the percentage of completion method,
primarily utilizing labor hours incurred to date as compared to the estimated
total labor hours for each contract.
On May 11, 2000, we acquired SDR Technologies, a provider of Internet-based
applications for governments. SDR has been renamed NIC Technologies. NIC
Technologies designs and develops online election and ethics filing systems for
federal, state and local government agencies and also serves as our centralized
development business that builds standardized revenue-generating applications
that can be deployed across our state and local portals in a timely and
effective manner. NIC Technologies derives the majority of its revenues from
time and materials application development and maintenance contracts with
governments and recognizes revenues as services are provided.
On October 13, 2000, we acquired Intelligent Decision Technologies, Ltd., a
provider of business-to-government reporting and filing software for the
transportation industry. IDT has developed business-to-government applications
that facilitate compliance with the Federal Highway Administration's Commercial
Vehicle Information System Network. IDT currently has contracts to provide
certain state governments with commercial vehicle electronic credentialing
services that include registration, permitting, and tax filing software. Our
multi-state filing portal for the trucking industry, which became operational in
November 2000, will be integrated into IDT's operations, allowing us to leverage
our eGovernment expertise on behalf of regulated industries such as
transportation, which are required to file periodically with multiple government
entities. IDT derives the majority of its revenues from cost-plus time and
materials application development contracts with governments and recognizes
revenues as services are provided.
All business acquisitions in 1999 and 2000 were accounted for as purchases
and the results of the acquired companies' operations have been included in our
consolidated statements of operations from the respective dates of acquisition.
For additional information relating to our business acquisitions, refer to
note 4 in the notes to consolidated financial statements included in this
Form 10-K.
STRATEGIC ALLIANCES AND INVESTMENTS
On March 3, 2000, NIC Commerce entered into an operating agreement with Bank
of America Corporation, through its subsidiary Bank of America, N.A. (USA), to
create a limited liability company to offer state and local governments the
first Web-based business-to-business procurement, payment and reconciliation
service. By bundling NIC Commerce's software with Bank of America's government
purchase cards, the new company will allow customers to place orders online
through their preferred suppliers, request a quote from businesses for services,
process transactions, initiate payments and reconcile accounts. Government
agencies are also able to personalize their services to reflect preferred
32
suppliers, contract requirements and other conditions through the browser-based
catalog. The venture, called Banc of America Purchase Street, LLC, is the first
web-based solution to integrate various shopping and payment functions for the
public sector. Banc of America Purchase Street, LLC has recently contracted to
provide electronic procurement services under transaction-based pricing models
to two state/local government agencies: Houston-Galveston Area Council of
Governments and the State of South Carolina. For additional information on our
strategic business relationship with Bank of America, refer to note 7 in the
notes to consolidated financial statements included in this Form 10-K.
On August 25, 2000, we entered into a three-year agreement with America
Online, Inc. to deliver state government information, services and applications
through AOL's Government Guide. For additional information on our agreement with
AOL, refer to note 8 in the notes to consolidated financial statements included
in this Form 10-K.
On August 28, 2000, we announced a strategic alliance with Deloitte
Consulting to deliver new services and business models to accelerate the
evolution toward next-generation eGovernment. NIC and Deloitte Consulting will
deliver end-to-end eGovernment solutions that will help governments around the
world operate more efficiently and be more responsive to citizen and business
needs. The NIC-Deloitte Consulting alliance will leverage our expertise in
establishing and operating enterprise-wide eGovernment portals and Deloitte
Consulting's experience in eGovernment implementation, strategic planning,
reengineering, change leadership, training, and integration solutions. Under the
terms of this agreement, NIC and Deloitte Consulting will identify and provide
new services, technologies and ventures to target cross-jurisdiction, vertical
or specific solutions for government transactions. The companies will also
identify cross-selling and co-marketing opportunities and will expand
international market reach for transaction-funded government portals by creating
offerings for the Americas, Europe and Asia Pacific, and other global regions.
The companies will support both traditional fee-for-service projects and
transaction-funded enterprise-wide business models. The alliance is
non-exclusive.
On March 23, 2000, we completed a $5 million cash investment in privately
held E-Filing.com, Inc., a provider of online filing applications for legal
services, giving us ownership of 21% of E-Filing.com at December 31, 2000. This
strategic investment is expected to enable both E-Filing.com and NIC to expand
access to judicial eGovernment applications nationwide.
On March 24, 2000, we completed a $5.5 million cash investment in privately
held Tidemark Computer Systems, Inc., a provider of eGovernment permit
applications and related services for local government, giving us ownership of
approximately 27% of Tidemark at December 31, 2000. This strategic investment is
expected to allow Tidemark and NIC to help communities automate a variety of
business processes through mobile and web-based applications. At December 31,
2000, we were closely monitoring our investment in Tidemark due to significant
liquidity issues inasmuch as Tidemark's current liquid resources were sufficient
to meet operating requirements only through the end of April 2001. At the end of
2000, Tidemark was in various stages of merger and acquisition discussions with
several companies. We expected Tidemark would be successful in merging its
operations with or being acquired by another company. Based on information
received in the latter half of March 2001 from a company looking to acquire
Tidemark, we determined that we would not be able to recover the entire carrying
value of our investment. Accordingly, in the fourth quarter of 2000, we adjusted
the carrying value of our investment to its estimated fair value resulting in a
noncash impairment loss of approximately $2.1 million. In addition, we recorded
a deferred tax asset valuation allowance of approximately $2.0 million to offset
the deferred tax asset we had recognized relating to our investment in Tidemark.
E-Filing.com and Tidemark are in the early stage of their operations and are
incurring net losses. We regularly review the carrying value of these equity
method investments and record impairment losses when events and circumstances
indicate that such assets are impaired. To date, we have not
33
recorded any such impairment losses on our investment in E-Filing.com. For
additional information on our investments in E-Filing.com and Tidemark, refer to
note 6 in the notes to consolidated financial statements included in this
Form 10-K.
In October 2000, we completed an initial $524,000 cash investment in
e-Government Solutions Limited, or eGS, a private joint venture among Swiss
venture capital firm ETF Group, London-based venture development organization
Vesta Group, and our European subsidiary, NIC Europe, giving us ownership of 40%
of eGS. The purpose eGS, based in London, England, is to deliver eGovernment
products and services throughout Western Europe, with initial efforts to focus
on the United Kingdom. For additional information on the eGS joint venture,
refer to note 6 in the notes to consolidated financial statements included in
this Form 10-K.
OTHER RECENT DEVELOPMENTS
On September 20, 2000, we announced that our third quarter operating results
would likely fall short of the consensus analyst revenue and earnings estimates.
Concurrent with this announcement, we announced the restructuring of two of our
eGovernment product businesses, NIC Commerce and NIC Technologies, the
reorganization of our management team and the consolidation of our marketing
efforts. Our lower-than-expected third quarter operating results were mainly
attributable to our NIC Commerce and NIC Technologies businesses, which were
affected by industry-wide post Y2K delays in government decision-making and
sales cycles during the first half of 2000. These businesses were the main
sources of revenue shortfall versus expectations as a result of their
management's ineffective forecasting and inadequate response to market signals
that new business and revenues would be less than expectations. In addition,
these businesses were the main source of EBITDA shortfall versus expectations as
a result of expenditures for sustained development, marketing and product
delivery efforts to support these operations whose revenue and gross profit
impact did not materialize as expected during the quarter.
Our response to the inadequate performance of our NIC Technologies and NIC
Commerce businesses, both of which we have acquired since September 1999, was to
initiate a change in leadership, while simultaneously adjusting operational
processes and resources to more appropriately size these operations to visible
demand and more efficiently align them with other eGovernment initiatives across
NIC. Dan Houlihan, the former President of our largest state portal operation in
Virginia, has assumed day-to-day management responsibility of NIC Technologies
since July 2000 and is responsible for rebalancing the operation to better
support the application development needs of NIC's growing local and state
portal businesses and other growth initiatives across NIC. We announced the
appointment of Chris Boehm as the new President of NIC Commerce effective
November 1, 2000. Mr. Boehm joined NIC from Comptek Research, Inc., a leading
supplier of advanced electronics and data communications systems to
international government and industry clients, where he served as President of
its software and technical services subsidiary. Mr. Boehm will be responsible
for accelerating growth and expanding NIC's government eProcurement market share
at the local, state, federal, and international levels.
The restructuring involved employee reductions in our marketing division and
at our NIC Commerce and NIC Technologies businesses. As a result, we incurred a
pre-tax charge of approximately $638,000 in the third quarter relating to
employee severance costs. Employee severance costs paid through December 31,
2000 totaled $358,000 with $280,000 accrued at December 31, 2000 for future
payments. Cash requirements for the restructuring were funded from available
resources. The employee severance costs relate to severance packages for 23
employees in marketing, product development and administration, 21 of which were
terminated by December 31, 2000, with two additional terminations expected in
the first quarter of 2001. The pre-tax savings from these reductions are
expected to approximate $2.1 million annually.
34
MARCH 31, 1998 EXCHANGE OFFER
On March 31, 1998, we exchanged our common stock for the common stock of
five affiliated companies, in a transaction referred to as the Exchange Offer.
Prior to the completion of the Exchange Offer, we were a holding company with no
operations of our own. Our Exchange Offer consolidated five business units as
operating subsidiaries under our holding company.
Prior to April 1, 1998, our historical financial information reflects the
results of our business unit formed to pursue new business opportunities, and
not the results of our business units operating in Indiana, Kansas, Arkansas and
Nebraska. For example, for the year ended December 31, 1998, revenues for all of
our business units were $10.0 million, while the reported revenues of
$8.1 million for the year ended December 31, 1998 represents 12 months of one of
our business units and only nine months of the other four business units. Total
expenses are likewise not comparable. Accordingly, we believe that the
historical comparison of our results of operations for the year ended
December 31, 1999 against the year ended December 31, 1998 is not necessarily
meaningful. For additional information on the Exchange Offer, refer to note 3 in
the notes to consolidated financial statements included in this Form 10-K.
PRESENTATION OF REVENUES AND COST OF REVENUES
In the fourth quarter of 2000, we began to recognize revenues for the access
of public information net of the transaction fee due 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. The portal
category includes revenues and cost of revenues of the Company's subsidiaries
operating state and local government portals. The software and services
category includes revenues and cost of revenues of the Company's Products
segment, which includes the NIC Conquest, NIC Technologies and IDT subsidiaries,
and the Company's Procurement segment, which includes the NIC Commerce
subsidiary. All prior periods have been reclassified to present information on a
comparable basis.
COMPARISON OF YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
REVENUES. Total revenues increased 67% to $27.0 million for the year ended
December 31, 2000 from $16.1 million for the year ended December 31, 1999.
Portal revenues were $17.9 million for the year ended December 31, 2000, a 28%
increase over $14.0 million for the year ended December 31, 1999. Of this 28%
increase, 17% was attributable to revenues from our state portal business units
that became operational after June 30, 1999 and 11% was from an increase in
revenues relating to same state portal volumes (states open more than one year).
Excluding state portal business units that became operational after June 30,
1999 and our state portal contracts in Georgia and Iowa, which we operate under
a fixed-price model, same state portal transaction revenues for the year ended
December 31, 2000 increased 17% over the year ended December 31, 1999 as a
result of increased transaction volumes mainly from our Virginia and Indiana
subsidiaries. Software and services revenues were $9.1 million for the year
ended December 31, 2000, a 324% increase over $2.1 million for the year ended
December 31, 1999. Of this 324% increase, 135% was attributable to NIC Conquest,
which was formed in January 2000 through the merger of our application services
division and Conquest Softworks, LLC, 96% was from NIC Commerce, which we
acquired in September 1999, 78% was from NIC Technologies, which we acquired in
May 2000, and 15% was from IDT, which we acquired in October 2000.
Total revenues increased 98% to $16.1 million for the year ended
December 31, 1999 from $8.1 million for the year ended December 31, 1998. Portal
revenues were $14.0 million for the year ended December 31, 1999, a 81% increase
over $7.8 million for the year ended December 31, 1998. Of
35
this 81% increase, 27% was attributable to revenues from our four initial
business units included in reported revenues in the first quarter of 1999
compared to none reported in 1998 prior to the March 31, 1998 Exchange Offer,
44% was from our state business units that became operational during the second
half of 1998 and third quarter of 1999 and 10% was from an increase in same
state business volumes. With all business units included for the entire period,
combined portal revenues were $9.5 million for the year ended December 31, 1998.
Software and services revenues were $2.1 million for the year ended
December 31, 1999, a 438% increase over $0.4 million for the year ended
December 31, 1998. Of this 438% increase, 43% was attributable to increased
revenues from our application services division (now NIC Conquest) and the
remainder was from NIC Commerce, which we acquired in September 1999.
GROSS PROFIT. Total gross profit increased 39% to $18.0 million for the year
ended December 31, 2000 from $12.9 million for the year ended December 31, 1999.
Portal gross profit reached $16.5 million for the year ended December 31, 2000,
a 30% increase over $12.7 million for the year ended December 31, 1999. Of this
30% increase, 18% was attributable to gross profit from portal business units
that became operational after June 30, 1999 and 12% was from an increase in
gross profit relating to same state portal volumes. Excluding new state portal
business units that became operational after June 30, 1999 and our state portal
contracts in Georgia and Iowa, same state portal gross profit for the year ended
December 31, 2000 increased 18% over the year ended December 31, 1999 as a
result of increased transaction volumes mainly from our Virginia and Indiana
subsidiaries. The portal gross profit rate was approximately 92% for the year
ended December 31, 2000 compared to 91% for the year ended December 31, 1999.
The same state portal gross profit rate for the year ended December 31, 2000 was
approximately 90% compared to 89% for the year ended December 31, 1999.
Total gross profit increased 150% to $12.9 million for the year ended
December 31, 1999 from $5.2 million for the year ended December 31, 1998. Portal
gross profit reached $12.7 million for the year ended December 31, 1999, an 81%
increase over $7.0 million for the year ended December 31, 1998. Of this 81%
increase, 26% was attributable to gross profit from our initial four business
units, 48% was from new state business units that became operational in the
second half of 1998 and third quarter of 1999 and 7% was from same state
business unit growth. With all business units included for the entire period,
combined portal gross profit was $6.7 million for the year ended December 31,
1998. The portal gross profit rate was approximately 91% for the years ended
December 31, 1999 and 1998.
Software and services gross profit was $1.5 million for the year ended
December 31, 2000, $0.2 million for the year ended December 31, 1999, and
$(1.9 million) for the year ended December 31, 1998. The majority of the
increase in 2000 was attributable to gross profit from our NIC Commerce, NIC
Technologies and IDT businesses, all of which were acquired subsequent to the
second quarter of 1999, and to an increase in gross profit from our NIC Conquest
business (formerly our application services division), which was formed in
January 2000. Cost of software and services revenues for the years ended
December 31, 2000, 1999 and 1998 include charges of $1.4 million, $1.1 million
and $1.3 million, respectively, for anticipated costs in excess of revenues to
be recognized under certain of our application development contracts.
We intend to continue to expand our operations by developing and promoting
new products and services and by expanding the breadth and depth of our
eGovernment product and service offerings. Gross profit rates attributable to
new business areas are likely to be different than those associated with our
existing business activities. To the extent such business areas become larger
components of our revenues, we would expect a corresponding change in our
overall gross profit rate.
SERVICE DEVELOPMENT AND OPERATIONS. Service development and operations
expenses consist primarily of the 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
36
infrastructure throughout our various businesses. Service development and
operations expenses for the year ended December 31, 2000 were $10.3 million, a
156% increase over $4.0 million for the year ended December 31, 1999. Of this
156% increase, 28% was attributable to state and local portal business units
that became operational after June 30, 1999, 16% was from an increase in same
state portal expenses, 45% was from NIC Commerce, 20% was from NIC Technologies
and 47% was from an increase in corporate level expenses. Excluding acquired
businesses, new state and local portal business units that became operational
after June 30, 1999 and corporate level expenses, same state portal service
development and operations expenses increased 20% over the year ended
December 31, 1999 as a result of ongoing technology enhancements and service
delivery investment in our state portal partnerships.
Service development and operations expenses for the year ended December 31,
1999 were $4.0 million, a 144% increase over $1.6 million for the year ended
December 31, 1998. Of this 144% increase, 35% was attributable to our four
initial business units, 45% was from new state business units that became
operational in the second half of 1998 and third quarter of 1999, 32% was from
an increase in same state portal expenses, 22% was from NIC Commerce, 10% was
from an increase in corporate level expenses.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the year ended December 31, 2000 were $30.1 million, a 227%
increase over $9.2 million for the year ended December 31, 1999. In the second
quarter of 2000, the Company incurred a one-time charge of approximately
$0.8 million relating to our withdrawn secondary stock offering as further
discussed in note 14 to the notes to consolidated financial statements included
in this Form 10-K. During the third quarter of 2000, the Company incurred a
one-time charge of approximately $0.6 million for employee severance costs
related to the corporate restructuring of our NIC Commerce and NIC Technologies
divisions and the consolidation of our marketing efforts, as further discussed
above and in note 20 to the notes to consolidated financial statements included
in this Form 10-K. The Company also incurred 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 for the year ended December 31,
2000 increased 209% over the year ended December 31, 1999. Of this 209%
increase, 21% was attributable to new state and local portal business units that
became operational after June 30, 1999, 53% was from NIC Commerce, 16% was from
NIC Conquest, 15% was from NIC Technologies and 3% was from IDT. Additionally,
98% of the increase was from an increase in corporate level expenses as a result
of becoming a public company in July 1999 and as a result of our overall growth
and positioning for future growth, including strategic infrastructure
investments in marketing, public relations, finance, technology and management
personnel. Excluding acquired businesses, new state portal business units that
became operational after June 30, 1999, corporate level expenses and one-time
charges, same state portal selling, general and administrative expenses for the
year ended December 31, 2000 decreased 3% from the year ended December 31, 1999
as a result of continuing overhead cost containment and efficiency efforts in
our more mature state portals.
Selling, general and administrative expenses for the year ended
December 31, 1999 were $9.2 million, a 117% increase over $4.2 million for the
year ended December 31, 1998. Of this 117% increase, 16% was attributable to our
four initial business units, 28% was from new state business units that became
operational in the second half of 1998 and third quarter of 1999 and 19% was
from NIC Commerce. Additionally, 53% of the increase was from corporate level
expenses as a result of becoming a public company in July 1999 and as a result
of our overall growth and positioning for future growth, including the addition
of corporate level marketing, public relations, finance, technology and
management personnel.
37
STOCK COMPENSATION. Stock compensation for the year ended December 31, 2000
was $1.8 million and consisted primarily of amortization of deferred
compensation expense related to common stock options granted to senior level
executives and other key employees. Stock compensation increased to
$3.2 million for the year ended December 31, 1999 from $0.6 million for the year
ended December 31, 1998. This increase was due to compensation expense
recognized on stock sales to senior level executives in the first half of 1999
and on stock options granted to senior level executives and other key employees
in late 1998 and 1999. From February 1999 through May 1999, we sold
approximately 370,000 shares of common stock to key employees and recognized
approximately $1.6 million in compensation expense for the amount by which the
fair value of common stock sold exceeded the amount paid. In addition, we
recognized approximately $1.6 million in compensation expense for the year ended
December 31, 1999 relating to stock options.
DEPRECIATION AND AMORTIZATION. The increase in depreciation and amortization
expense for the year ended December 31, 2000 was primarily due to intangible
asset amortization resulting from our acquisitions of NIC Commerce in
September 1999, SDR Technologies in May 2000, Conquest Softworks, LLC in
January 2000, IDT in October 2000, and the amortization of the fair value of
fully vested warrants issued to AOL in August 2000 (refer to notes 4 and 8 in
the notes to consolidated financial statements included in this Form 10-K).
Depreciation expense increased by $1.3 million for the year ended December 31,
2000 as a result of additions to property and equipment throughout 2000 and the
depreciation of fixed assets from our acquired businesses. These increases were
partially offset by a decrease in intangible asset amortization resulting from
our March 31, 1998 Exchange Offer. Certain intangible assets relating to that
exchange offer became fully amortized in December 31, 1999, June 30, 2000 and
August 31, 2000.
Depreciation and amortization increased to $11.0 million for the year ended
December 31, 1999 from $5.9 million for the year ended December 31, 1998. This
increase is due to an additional quarter of intangible asset amortization in
1999 resulting from the Exchange Offer of $1.9 million and intangible asset
amortization resulting from our acquisition of eFed on September 15, 1999 of
$2.8 million. The remainder of the increase was attributable to additional
depreciation expense as a result of additions to property and equipment
throughout 1999.
OPERATING LOSS. Operating loss for the year ended December 31, 2000 was
$52.2 million compared to $14.5 million for the year ended December 31, 1999.
Excluding non-cash charges for stock compensation, depreciation and amortization
and the one-time charges in the second quarter of 2000 relating to the withdrawn
common stock offering, the one-time charges in the third quarter of 2000
relating to our corporate restructuring and vacation liability, and the charges
in 1999 and 2000 relating to the Company's application development contracts,
operating loss would have been $19.4 million for the year ended December 31,
2000 compared to operating income of $0.8 million for the year ended
December 31, 1999.
Earnings before interest, taxes, equity in net loss of affiliates,
depreciation, amortization, one-time charges and other non-cash charges related
to stock compensation and our application development contracts ("EBITDA") was
negative $19.4 million for the year ended December 31, 2000 compared to positive
$0.8 million for the year ended December 31, 1999. EBITDA from our state and
local portal segment decreased by approximately $0.2 million for the year ended
December 31, 2000 primarily due to start up losses in our Hawaii, Idaho,
Tennessee and San Francisco portals. Our Idaho and San Francisco portals began
generating modest revenues during September 2000, while our Hawaii and Tennessee
portals had not begun to generate revenues at December 31, 2000. We anticipate
Hawaii and Tennessee will begin to generate more substantive revenues in the
first and second quarters of 2001. Excluding the state and local portals that
incurred start up losses in 2000, EBITDA from our portal operations increased by
$2.2 million primarily as a result of a full twelve months of operating results
from our New England and Utah portals, which began generating revenues in the
third quarter of 1999,
38
and increased same state portal transaction volumes, primarily from our Virginia
and Indiana subsidiaries.
For the year ended December 31, 2000, EBITDA from our eGovernment products
segment, which consists primarily of our NIC Conquest and NIC Technologies
subsidiaries, was negative $2.7 million compared to negative $0.2 million for
the year ended December 31, 1999. The decrease in EBITDA in 2000 was primarily
the result of payroll-related expenses for product development and product
delivery efforts at NIC Technologies, which precipitated the third quarter 2000
restructuring as discussed above and in note 20 to notes to consolidated
financial statements included in this Form 10-K. For the year ended
December 31, 2000, EBITDA from our NIC Commerce government procurement segment
was negative $6.2 million compared to positive $0.3 million for the year ended
December 31, 1999. The decrease in EBITDA in 2000 was due primarily to
expenditures for business development, marketing and public relations, which
also precipitated the third quarter 2000 restructuring at NIC Commerce.
For the year ended December 31, 2000, corporate level expenses increased to
$14.3 million from $3.4 million for the year ended December 31, 1999 as a result
of our becoming a public company in July 1999 and strategic infrastructure
investments as discussed above.
Operating loss for the year ended December 31, 1999 was $14.5 million
compared to $7.2 million for the year ended December 31, 1998. Excluding
non-cash charges for stock compensation, depreciation and amortization, and the
charges in 1999 and 1998 relating to the Company's application development
contracts, operating income would have been $0.8 million for the year ended
December 31, 1999 compared to $0.5 million for the year ended December 31, 1998.
EBITDA was $0.8 million for the year ended December 31, 1999 compared to
$0.5 million for the year ended December 31, 1998. Including our initial four
business units for the first three months of 1998, pro forma operating income
and EBITDA would have been $1.0 million for the year ended December 31, 1998.
We do not expect to generate positive EBITDA until 2002 because of our
continued investments in local portals, our AOL/Government Guide partnership and
our new business plans for NIC Commerce and NIC Technologies, which has been
positioned to provide the core technology and deployment base for our
company-wide eGovernment growth initiatives. However, we expect EBITDA to
improve on a sequential quarter-over-quarter basis throughout 2001.
OTHER INCOME, NET. Other income, net, primarily reflects interest income
earned on our cash and marketable securities portfolio. We have placed the
proceeds from our July 20, 1999 initial public offering in short-term,
investment-grade, interest-bearing marketable securities. Other income, net, for
the year ended December 31, 1999 reflects less than six months of interest
earned on these investments versus a full year of interest earned in 2000. We
expect other income, net, to continue to fluctuate in relation to the average
balance of our cash and marketable securities portfolio, which was approximately
$38.8 million at December 31, 2000 compared to $92.0 million at December 31,
1999.
EQUITY IN NET LOSS OF AFFILIATES. For the year ended December 31, 2000,
equity in net loss of affiliates represents our share of losses of companies in
which we have equity method investments that give us the ability to exercise
significant influence, but not control, over the investees. In the first quarter
of 2000, we invested in two private companies involved in the e-government
services industry, Tidemark Computer Systems and E-Filing.com, primarily for
strategic purposes. These companies are in the early stage of their operations
and are incurring net losses. Therefore, we expect to continue to record losses
on our equity-method investments in the foreseeable future. As noted above, in
the fourth quarter of 2000, we incurred a noncash impairment loss of
approximately $2.1 million relating to our investment in Tidemark.
INCOME TAXES. We recognized an income tax benefit for the years ended
December 31, 2000 and 1999. In 2000, the income tax benefit was less than the
amount customarily expected because of
39
expenses that are not deductible for tax purposes including amortization of
goodwill from the Exchange Offer, the Conquest merger, the SDR acquisition, the
IDT acquisition, and certain stock compensation costs. Also, in the fourth
quarter of 2000, we provided a valuation allowance for the future tax benefit on
the losses we recognized on our investment in Tidemark. In 1999, 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 and certain stock compensation costs. We recognized an income tax
provision of $659,000 for the year ended December 31, 1998. This provision was
attributable to a one-time $1.4 million provision for deferred taxes on our
conversion to a C corporation and to goodwill amortization relating to the
Exchange Offer and a portion of stock compensation being non-deductible for tax
purposes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $24.5 million for the year ended
December 31, 2000 compared to $2.3 million for the year ended December 31, 1999.
The increase in cash used in operating activities is primarily attributable to
additional cash needs (particularly attributable to NIC Commerce, acquired in
September 1999, NIC Technologies, acquired in May 2000, and our Idaho, Hawaii,
Tennessee and San Francisco portals, which became operational after
November 1999) and corporate level expenses as a result of our overall growth
and positioning for future growth, including planned strategic infrastructure
investments in marketing, public relations, finance, technology and management
personnel. As discussed in note 8 in the notes to consolidated financial
statements included in this Form 10-K, NIC made an initial cash payment to AOL
totaling $1.125 million in August 2000 and an additional payment of $375,000 in
November 2000, of which $1.0 million is recorded as a prepaid expense in the
consolidated balance sheet at December 31, 2000. We expect operating cash flow
to be negative through at least the end of 2001 as a result of continued
investment in our corporate infrastructure and growth strategies. However, we
expect operating cash flow to improve throughout 2001, turning positive in 2002.
Investing activities resulted in net cash generated of approximately
$30.6 million for the year ended December 31, 2000 reflecting $60.8 million in
net maturities of our marketable securities portfolio used for funding
operations and for purchases of property and equipment ($5.4 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),
direct costs of the SDR acquisition ($4.2 million), our acquisition of IDT
($0.5 million), and our investment in eGS ($0.5 million). Investing activities
for the year ended December 31, 2000 also reflect approximately $4.1 million in
capitalized software development costs mainly from our NIC Commerce and NIC
Conquest subsidiaries. Investing activities for the year ended December 31, 1999
resulted in net cash used of $97.5 million, reflecting the purchase of
marketable securities with the net proceeds of our July 1999 initial public
offering, the $15 million cash outlay for our September 1999 eFed acquisition,
and $1.8 million for purchases of property and equipment.
Net cash used in financing activities totaled $1.8 million for the year
ended December 31, 2000, primarily reflecting $2.3 million to pay off bank lines
of credit assumed in the SDR ($2.0 million) and IDT ($0.3 million) acquisitions,
$1.1 million in proceeds from the exercise of employee stock options and
issuances of common stock to employees, $0.2 million in payments to repurchase
common stock and $0.2 million in payments under capital leases. Net cash
provided by financing activities was $108.1 million for the year ended
December 31, 1999, reflecting the net proceeds received from our July 1999
initial public offering, a portion of which was used to pay down all amounts
outstanding under our operating lines of credit. In addition, approximately
$0.7 million was received from employee stock purchase and stock option
transactions.
At December 31, 2000, the Company's total cash and marketable securities
balance was $38.8 million compared to $92.0 million at December 31, 1999. We
believe that our current liquid
40
resources will be sufficient to meet our operating requirements and significant
growth initiatives without the need of additional capital for at least the next
twelve months and through the period when we expect to begin to generate
positive operating cash flow in 2002. However, any projections of future cash
flows are subject to substantial uncertainty. If current cash, marketable
securities and cash that may be generated from operations are insufficient to
satisfy our liquidity requirements, we may seek to sell additional equity
securities, issue debt securities or obtain a 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.
DEFERRED TAX ASSETS
At December 31, 2000, we have recorded net current and non-current deferred
tax assets in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes," totaling approximately $9.2 million. We
estimate that we must generate at least $24.2 million of future taxable income
to realize those deferred tax assets and have considered additional expected
taxable losses prior to our projections of taxable income. To achieve a
sufficient level of future taxable income, we intend to pursue our current
strategy of adding new local, state and federal government clients, broadening
and standardizing our product and service offerings, and increasing
transactional revenues from our existing government portals and procurement and
filing applications. Based on information currently known to management, we
believe it is more likely than not that the Company will realize the deferred
tax assets.
The table below reconciles loss before income taxes for financial statement
purposes with taxable loss for federal income tax purposes (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Loss before income taxes.................................... $(55,120) $(12,147) $(7,237)
Amortization of purchase accounting intangibles............. 23,798 9,828 5,681
Equity in net loss of affiliates............................ 6,524 -- --
Capitalized software development costs...................... (4,070) -- --
Disqualifying disposition of incentive stock options........ (3,050) -- --
Stock compensation expense.................................. 1,760 3,188 569
Provision for loss on application services contracts........ 263 (1,023) 1,256
Depreciation................................................ 36 (123) (48)
Other....................................................... 459 (4) (288)
-------- -------- -------
Taxable loss (2000 is an estimate).......................... $(29,400) $ (281) $ (67)
======== ======== =======
Our federal income tax loss carryforward of approximately $29.4 million
expires in 2020, and our state income tax loss carryforwards of approximately
$31.9 million may be used over various periods ranging from 5 to 20 years. We
anticipate that net temporary differences should reverse and become available as
tax deductions as follows: during 2001, $0.1 million; 2002, $0.2 million; 2003,
$0.7 million; 2004, $0.7 million; thereafter, $4.8 million.
41
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. Our exposure to market risk for changes in interest
rates relates to the increase or decrease in the amount of interest income we
can earn on our short-term investments in marketable debt securities and cash
balances. Because our investments are in short-term, investment-grade,
interest-bearing marketable securities, we are exposed to minimal risk on the
principal of those investments. We 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 services industry, Tidemark Computer
Systems and E-Filing.com, primarily for strategic purposes. In the fourth
quarter of 2000, we invested in a private joint venture, eGS, primarily to share
in the risk of our international expansion and to deliver eGovernment products
and services throughout Western Europe, with initial efforts to focus on the
United Kingdom. Such investments are accounted for under the equity method, as
we have the ability to exercise significant influence, but not control, over the
investees. Significant influence is generally defined as an ownership interest
of the voting stock of an investee of between 20% and 50%, although other
factors, such as representation on the investee's Board of Directors, are
considered in determining whether the equity method is appropriate. We regularly
review the carrying value of these equity method investments and would record
impairment losses when events and circumstances indicate that such assets are
impaired. As discussed above in Management's Discussion and Analysis of
Financial Condition and Results of Operations, in the fourth quarter of 2000, we
recorded a noncash impairment loss of approximately $2.1 million relating to our
investment in Tidemark. To date, we have not recorded any such impairment losses
for E-Filing.com or eGS.
42
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------
1999 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 9,527,389 $ 13,878,483
Marketable securities..................................... 82,480,760 24,914,405
Trade accounts receivable................................. 6,009,925 7,595,879
Deferred income taxes..................................... 157,663 195,430
Prepaid expenses.......................................... 278,868 2,051,015
Other current assets...................................... 614,044 1,954,090
------------ ------------
Total current assets.................................... 99,068,649 50,589,302
Property and equipment, net................................. 2,998,376 7,596,078
Deferred income taxes....................................... 693,802 8,964,570
Other assets................................................ 253,665 199,948
Investments in affiliates and joint ventures................ -- 4,786,355
Intangible assets, net...................................... 30,646,446 67,433,117
------------ ------------
Total assets............................................ $133,660,938 $139,569,370
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,804,996 $ 4,329,743
Accrued expenses.......................................... 872,795 2,907,497
Income taxes payable...................................... 83,653 149,502
Capital lease obligations--current portion................ 189,931 194,509
Notes payable--current portion............................ 50,000 --
Application services contracts............................ 231,969 356,508
Other current liabilities................................. 120,469 196,337
------------ ------------
Total current liabilities............................... 5,353,813 8,134,096
Capital lease obligation--long-term portion................. 218,164 22,125
------------ ------------
Total liabilities....................................... 5,571,977 8,156,221
------------ ------------
Commitments and contingencies (Notes 4, 6, 8, 13, and 16)... -- --
Minority interest........................................... -- 475,302
Shareholders' equity:
Common stock, no par, 200,000,000 shares authorized
53,165,370 and 56,038,571shares issued and
outstanding............................................. -- --
Additional paid-in capital................................ 149,035,928 194,822,925
Accumulated deficit....................................... (16,556,526) (56,834,476)
Accumulated other comprehensive income.................... 1,731 967
------------ ------------
132,481,133 137,989,416
Less notes and stock subscriptions receivable............. (30,000) (15,000)
Less vested warrants issued............................... -- (4,222,220)
Less deferred compensation expense........................ (4,362,172) (2,814,349)
------------ ------------
Total shareholders' equity.............................. 128,088,961 130,937,847
------------ ------------
Total liabilities and shareholders' equity.............. $133,660,938 $139,569,370
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
43
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1999 2000
----------- ------------ ------------
Revenues:
Portal revenues.................................... $ 7,751,592 $ 14,010,681 $ 17,908,908
Software and services revenues..................... 396,811 2,136,438 9,062,368
----------- ------------ ------------
Total revenues................................... 8,148,403 16,147,119 26,971,276
----------- ------------ ------------
Cost of revenues:
Cost of portal revenues............................ 715,375 1,292,948 1,397,361
Cost of software and services revenues............. 2,257,919 1,933,990 7,581,923
----------- ------------ ------------
Total cost of revenues (exclusive of depreciation
and amortization).............................. 2,973,294 3,226,938 8,979,284
----------- ------------ ------------
Gross profit......................................... 5,175,109 12,920,181 17,991,992
----------- ------------ ------------
Operating expenses:
Service development and operations................. 1,646,895 4,021,182 10,303,380
Selling, general and administrative................ 4,241,780 9,212,837 30,145,506
Stock compensation................................. 568,869 3,188,051 1,789,874
Depreciation and amortization...................... 5,922,396 10,968,482 27,959,636
----------- ------------ ------------
Total operating expenses......................... 12,379,940 27,390,552 70,198,396
----------- ------------ ------------
Operating loss....................................... (7,204,831) (14,470,371) (52,206,404)
----------- ------------ ------------
Other income (expense):
Interest expense................................... (88,161) (168,872) (48,458)
Other income, net.................................. 55,839 2,492,460 3,659,689
Equity in net loss of affiliates................... -- -- (6,524,473)
----------- ------------ ------------
Total other income (expense)..................... (32,322) 2,323,588 (2,913,242)
----------- ------------ ------------
Loss before income taxes and minority interest....... (7,237,153) (12,146,783) (55,119,646)
Income tax expense (benefit)......................... 658,813 (1,416,223) (14,592,021)
----------- ------------ ------------
Loss before minority interest........................ (7,895,966) (10,730,560) (40,527,625)
Minority interest.................................... -- -- (249,675)
----------- ------------ ------------
Net loss............................................. $(7,895,966) $(10,730,560) $(40,277,950)
=========== ============ ============
Net loss per share:
Basic and diluted.................................. $ (0.21) $ (0.23) $ (0.74)
=========== ============ ============
Weighted average shares outstanding.................. 37,242,423 47,278,461 54,795,280
=========== ============ ============
Pro forma tax provision (unaudited)--Note 15:
Net loss........................................... $(7,895,966)
Pro forma provision for income taxes............... (1,516,894)
-----------
Pro forma net loss................................. $(6,379,072)
===========
Pro forma basic and diluted loss per share........... $ (0.17)
===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
44
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED NOTES
COMMON STOCK ADDITIONAL OTHER AND STOCK
----------------------- PAID-IN ACCUMULATED COMPREHENSIVE SUBSCRIPTIONS
SHARES AMOUNT CAPITAL DEFICIT INCOME RECEIVABLE
---------- ---------- ------------ ------------ ------------- -------------
BALANCE, JANUARY 1, 1998........... 22,288,209 $ -- $ 627,435 $ (414,682) $ -- $(25,000)
Common stock issued in exchange.... 19,255,155 -- 18,539,814 -- -- --
Net loss........................... -- -- -- (7,895,966) -- --
Distributions to shareholders...... -- -- -- (838,367) -- --
Termination of Subchapter S
election......................... -- -- (3,323,049) 3,323,049 -- --
Issuance of common stock to
employees........................ 522,817 -- 583,333 -- -- --
Stock options granted with exercise
price less than fair market value
at date of grant................. -- -- 3,124,113 -- -- --
Deferred compensation expense
recognized....................... -- -- -- -- -- --
Stock subscriptions received....... -- -- -- -- -- 25,000
---------- ---------- ------------ ------------ ----- --------
BALANCE, DECEMBER 31, 1998......... 42,066,181 -- 19,551,646 (5,825,966) -- --
Net loss........................... -- -- -- (10,730,560) -- --
Stock options granted with exercise
price less than fair market value
at date of grant................. -- -- 3,436,752 -- -- --
Stock options exercised............ 122,954 -- 177,018 -- -- --
Stock options cancelled............ -- -- (274,056) -- -- --
Deferred compensation expense
recognized....................... -- -- -- -- -- --
Issuance of common stock to
employees........................ 370,235 -- 2,198,950 -- -- (250,000)
Issuance of common stock from
initial public offering, net of
expenses......................... 10,000,000 -- 109,439,618 -- -- --
Issuance of common stock to acquire
business......................... 606,000 -- 14,506,000 -- -- --
Stock subscriptions received....... -- -- -- -- -- 220,000
Unrealized holding gain on
marketable securities............ -- -- -- -- 1,731 --
---------- ---------- ------------ ------------ ----- --------
BALANCE, DECEMBER 31, 1999......... 53,165,370 -- 149,035,928 (16,556,526) 1,731 (30,000)
Net loss........................... -- -- -- (40,277,950) -- --
Stock options granted with exercise
price less than fair market value
at date of grant................. -- -- 130,000 -- -- --
Stock options exercised............ 421,524 -- 953,238 -- -- --
Stock options cancelled............ -- -- (2,337) -- -- --
Deferred compensation expense
recognized....................... -- -- -- -- -- --
Issuance of common stock to
employees........................ 11,792 -- 141,579 -- -- --
Issuance of common stock to acquire
business......................... 2,454,885 -- 35,092,795 -- -- --
Issuance of common stock options to
acquire business................. -- -- 3,703,912 -- -- --
Repurchase and retirement of common
stock............................ (15,000) -- (128,140) -- -- --
Issuance of vested warrants........ -- -- 4,750,000 -- -- --
Amortization of vested warrants.... -- -- -- -- -- --
Stock subscriptions received....... -- -- -- -- -- 15,000
Tax deductions relating to
incentive stock options.......... -- -- 1,145,950 -- -- --
Unrealized holding loss on
marketable securities............ -- -- -- -- (764) --
---------- ---------- ------------ ------------ ----- --------
BALANCE, DECEMBER 31, 2000......... 56,038,571 $ -- $194,822,925 $(56,834,476) $ 967 $(15,000)
========== ========== ============ ============ ===== ========
VESTED DEFERRED
WARRANTS COMPENSATION
ISSUED EXPENSE TOTAL
----------- ------------ ------------
BALANCE, JANUARY 1, 1998........... $ -- $ -- $ 187,753
Common stock issued in exchange.... -- -- 18,539,814
Net loss........................... -- -- (7,895,966)
Distributions to shareholders...... -- -- (838,367)
Termination of Subchapter S
election......................... -- -- --
Issuance of common stock to
employees........................ -- -- 583,333
Stock options granted with exercise
price less than fair market value
at date of grant................. -- (2,855,390) 268,723
Deferred compensation expense
recognized....................... -- 41,813 41,813
Stock subscriptions received....... -- -- 25,000
----------- ----------- ------------
BALANCE, DECEMBER 31, 1998......... -- (2,813,577) 10,912,103
Net loss........................... -- -- (10,730,560)
Stock options granted with exercise
price less than fair market value
at date of grant................. -- (3,144,152) 292,600
Stock options exercised............ -- -- 177,018
Stock options cancelled............ -- 274,056 --
Deferred compensation expense
recognized....................... -- 1,321,501 1,321,501
Issuance of common stock to
employees........................ -- -- 1,948,950
Issuance of common stock from
initial public offering, net of
expenses......................... -- -- 109,439,618
Issuance of common stock to acquire
business......................... -- -- 14,506,000
Stock subscriptions received....... -- -- 220,000
Unrealized holding gain on
marketable securities............ -- -- 1,731
----------- ----------- ------------
BALANCE, DECEMBER 31, 1999......... -- (4,362,172) 128,088,961
Net loss........................... -- -- (40,277,950)
Stock options granted with exercise
price less than fair market value
at date of grant................. -- -- 130,000
Stock options exercised............ -- -- 953,238
Stock options cancelled............ -- 2,337 --
Deferred compensation expense
recognized....................... -- 1,545,486 1,545,486
Issuance of common stock to
employees........................ -- -- 141,579
Issuance of common stock to acquire
business......................... -- -- 35,092,795
Issuance of common stock options to
acquire business................. -- -- 3,703,912
Repurchase and retirement of common
stock............................ -- -- (128,140)
Issuance of vested warrants........ (4,750,000) -- --
Amortization of vested warrants.... 527,780 -- 527,780
Stock subscriptions received....... -- -- 15,000
Tax deductions relating to
incentive stock options.......... -- -- 1,145,950
Unrealized holding loss on
marketable securities............ -- -- (764)
----------- ----------- ------------
BALANCE, DECEMBER 31, 2000......... $(4,222,220) $(2,814,349) $130,937,847
=========== =========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
45
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1999 2000
----------- ------------ ------------
Cash flows from operating activities:
Net loss.................................................. $(7,895,966) $(10,730,560) $(40,277,950)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 5,922,396 10,968,482 27,959,636
Compensation expense recognized related to sale of
common stock........................................... 258,333 1,573,950 41,588
Compensation expense recognized related to stock
options................................................ 310,536 1,614,101 1,748,286
(Gain) loss on disposals of property and equipment...... (12,639) (312) 86,648
Accretion of discount on marketable securities.......... -- (1,968,000) (3,240,883)
Application services contracts.......................... 1,256,000 (1,024,031) 124,539
Deferred income taxes................................... 590,113 (1,441,577) (14,753,234)
Deferred income tax benefit relating to incentive stock
options................................................ -- -- (1,145,950)
Minority interest....................................... -- -- (249,675)
Equity in net loss of affiliates........................ -- -- 6,524,473
Changes in operating assets and liabilities, net of
effects of acquisitions:
(Increase) in trade accounts receivable................. (21,980) (2,305,126) (991,904)
(Increase) decrease in prepaid expenses................. 3,335 (231,735) (1,734,307)
(Increase) in other current assets...................... (54,956) (367,714) (229,439)
(Increase) decrease in other assets..................... (8,103) (223,269) 39,492
Increase (decrease) in accounts payable................. (184,889) 1,184,597 (74,522)
Increase in income taxes payable........................ 68,700 14,953 65,849
Increase in accrued expenses............................ 80,472 575,692 1,782,910
Increase (decrease) in other current liabilities........ 43,034 71,004 (190,837)
----------- ------------ ------------
Net cash provided by (used in) operating activities....... 354,386 (2,289,545) (24,515,280)
----------- ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment....................... (255,203) (1,765,692) (5,417,151)
Proceeds from disposals of property and equipment......... 42,736 26,458 14,298
Capitalized software development costs.................... -- (145,260) (4,069,832)
Capitalized patent and trademark costs.................... -- -- (106,477)
Proceeds from notes receivable from shareholders.......... 55,000 -- --
Purchases of marketable securities........................ -- (186,406,450) (267,876,755)
Maturities of marketable securities....................... -- 88,607,000 328,683,223
Sales of marketable securities............................ -- 17,282,104 --
Acquisition of businesses, net of cash acquired........... 764,908 (15,146,544) (9,296,072)
Investments in affiliates and joint ventures.............. -- -- (11,310,827)
----------- ------------ ------------
Net cash provided by (used in) investing activities....... 607,441 (97,548,384) 30,620,407
----------- ------------ ------------
46
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1999 2000
----------- ------------ ------------
Cash flows from financing activities:
Net proceeds from initial public offering of common
stock................................................... -- 109,439,618 --
Proceeds from bank lines of credit........................ 1,190,285 1,251,000 --
Payments on bank lines of credit.......................... (270,084) (2,274,592) (2,385,815)
Payments on notes and debentures payable.................. (160,072) (842,778) (50,000)
Payments on capital lease obligations..................... (101,533) (237,217) (197,097)
Distributions to shareholders............................. (588,367) -- --
Proceeds from issuance of common stock to employees....... 75,000 321,518 111,579
Payments to repurchase common stock....................... -- -- (200,938)
Proceeds from exercise of employee stock options.......... -- 177,018 953,238
Proceeds from stock subscriptions receivable.............. 25,000 220,000 15,000
----------- ------------ ------------
Net cash provided by (used in) financing activities....... 170,229 108,054,567 (1,754,033)
----------- ------------ ------------
Net increase in cash and cash equivalents................... 1,132,056 8,216,638 4,351,094
Cash and cash equivalents, beginning of year................ 178,695 1,310,751 9,527,389
----------- ------------ ------------
Cash and cash equivalents, end of year...................... $ 1,310,751 $ 9,527,389 $ 13,878,483
=========== ============ ============
Other cash flow information:
Interest paid............................................. $ 54,707 $ 168,872 $ 51,053
=========== ============ ============
Income taxes paid......................................... $ -- $ 117,000 $ 85,323
=========== ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
47
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND BASIS OF PRESENTATION
National Information Consortium, Inc. (the "Company" or "NIC") provides
federal, state and local governments with a wide range of e-government products
and services, including a broad range of software and applications. NIC helps
governments use the Internet by building Web sites and applications that allow
businesses and citizens to access government information and complete
government-based transactions online. Certain of these applications allow
governments to procure goods and services online. Some examples of applications
include: professional license renewals, Internet tax filings, driver's license
and motor vehicle record searches, automated UCC file searches, automobile
registration renewals and online procurement software. The Company's primary
business activity is to design, build and operate Internet-based portals on
behalf of state and local governments desiring to provide access to government
information and to complete government-based transactions online. Operating
under multiple-year contracts (see Note 9), NIC markets the services and
solicits users to complete government-based transactions and to enter into
subscriber contracts permitting the user to access the portal and the government
information contained therein in exchange for transactional and/or subscription
user fees. The Company is responsible for funding up front investment and
ongoing operational costs of the government portals. In addition, the Company
enters into service contracts to provide consulting, development and management
services to government portals in exchange for a negotiated fee. At
December 31, 2000, NIC had signed portal contracts with the states of Arkansas,
Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Maine, Montana, Nebraska,
Tennessee, Utah and Virginia and the cities and/or municipalities of
Indianapolis and Marion County (IN), Dallas County (TX), the City of San
Francisco (CA) and the City of Tampa (FL).
NIC was formed on December 18, 1997, for the sole purpose of effecting a
common stock exchange offer (the "Exchange Offer") to combine under common
ownership five separate affiliated entities under which the Company conducted
its business operations. The five companies were National Information Consortium
USA, Inc. ("NIC/USA"), Kansas Information Consortium, Inc. ("KIC"), Indiana
Interactive, Inc. ("III"), Nebraska Interactive, Inc. ("NII") and Arkansas
Information Consortium, Inc. ("AIC"). The Exchange Offer was consummated on
March 31, 1998, and has been accounted for as a business combination. NIC/USA is
the entity whose shareholders received the largest portion of the Company's
common stock shares and was treated as the accounting acquirer with the purchase
method of accounting being applied to the four other companies (see Note 3). The
accompanying consolidated financial statements reflect the acquisitions on
March 31, 1998, with the results of operations and cash flows subsequent to that
date reflecting the results of all the companies, and prior to that date only
the operations of NIC/USA.
On September 15, 1999, NIC acquired the net assets of eFed, a provider of
Internet-based procurement software and services for governments. eFed designs,
develops and manages online procurement software and services for federal and
state government markets. eFed has been renamed NIC Commerce and is wholly owned
by NIC. On January 12, 2000, NIC merged its Application Services Division with
Conquest Softworks, LLC ("Conquest"). Conquest is a provider of Uniform
Commercial Code and corporation software applications and services that
facilitate electronic filings and document management for governments. NIC owns
approximately 71.5% of the common stock in the newly formed company, which is
referred to as NIC Conquest. On May 11, 2000, NIC acquired SDR
Technologies, Inc. ("SDR"), a provider of Internet-based applications for
governments. SDR designs and develops online election and ethics filing systems
for federal, state and local government agencies and has also developed a number
of Internet-based applications for tax filings, business filings, professional
licensing, and automobile registrations. SDR has been renamed NIC Technologies
and is
48
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND BASIS OF PRESENTATION (CONTINUED)
wholly owned by NIC. On October 13, 2000, NIC acquired Intelligent Decision
Technologies, Ltd. ("IDT"), a provider of business-to-government reporting and
filing software for the transportation industry. IDT has developed
business-to-government applications that facilitate compliance with the Federal
Highway Administration's Commercial Vehicle Information System Network. IDT
currently has contracts to provide certain state governments with commercial
vehicle electronic credentialing services that include registration, permitting,
and tax filing software. All business acquisitions in 1999 and 2000 were
accounted for as purchases and the results of the acquired companies' operations
have been included in the Company's consolidated statements of operations from
the respective dates of acquisition (see Note 4).
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. The consensus was effective beginning in the fourth quarter
of 2000. In March 2001, management re-evaluated its initial conclusions on EITF
99-19 and decided to present the Company's revenues from information access fees
net of the portion paid to the government for all periods presented. 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 effect
of this new presentation was to decrease total revenues by $20,475,253,
$40,819,009 and $50,041,671 and decrease total cost of revenues by $20,475,253,
$40,819,009 and $50,041,671 for the years ended December 31, 1998, 1999 and
2000, respectively. 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.
In the fourth quarter of 2000, the Company decided to reclassify certain
information in its consolidated statements of operations. The Company has
separated its revenues and cost of revenues into two categories (portal,
software and services) for all periods presented. Previously, the Company
presented only one category of revenues and one category of cost of revenues.
The portal category includes revenues and cost of revenues of the Company's
subsidiaries operating state and local government portals. The software and
services category includes revenues and cost of revenues of the Company's
Products segment, which includes the NIC Conquest, NIC Technologies and IDT
subsidiaries, and the Company's Procurement segment, which includes the 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 as
cost of revenues. Previously, these expenses were primarily included in service
development and operations and, to a lesser extent, in selling, general and
administrative expenses. The effect of these reclassifications was to increase
total cost of revenues by $2,237,915, $1,855,112 and $4,133,020 and decrease
service development and operations expenses by $2,237,915, $1,855,112 and
$4,093,723 for the years ended December 31, 1998, 1999 and 2000, respectively.
Selling, general and administrative expenses decreased by $39,297 for the year
ended December 31, 2000. These reclassifications had no impact on total
revenues, operating loss, net loss or net loss per share. Segment information
for all periods presented reflects these new classifications.
49
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements consolidate NIC/USA with
its wholly owned subsidiaries for periods prior to the Exchange Offer and the
Company together with all of its direct and indirect wholly owned and
majority-owned subsidiaries, including NIC/USA, for periods subsequent to the
Exchange Offer. All significant intercompany balances and transactions have been
eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of commercial bank deposits and
money market funds with original maturities of one month or less.
MARKETABLE SECURITIES
The Company's marketable securities are classified as available-for-sale and
consist of short-term U.S. government 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' 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.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over estimated useful
lives of 8 years for furniture and fixtures, 3-10 years for equipment, 3-5 years
for purchased software and the lesser of the term of the lease or 5 years for
leasehold improvements. When assets are retired or otherwise disposed of, the
cost and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in results of operations for the period. The
cost of maintenance and repairs is charged to expense as incurred; significant
renewals and betterments are capitalized.
The Company periodically evaluates the carrying value of property and
equipment to be held and used when events and circumstances warrant such a
review. The carrying value of property and equipment is considered impaired when
the anticipated undiscounted cash flows from the asset is separately
identifiable and is less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
value of the asset. Fair value is determined primarily using the anticipated
cash flows discounted at a rate commensurate with the risk involved. Losses on
assets to be disposed of are determined in a similar manner, except that fair
values are reduced for the cost to dispose. The Company has not recorded any
provisions for possible impairment of property and equipment. There is
considerable management judgement necessary to determine future cash flows, and
accordingly, actual results could vary significantly from such estimates.
INVESTMENTS IN AFFILIATES AND JOINT VENTURES
The Company holds certain investments in affiliates and joint ventures
accounted for under the equity method. The Company uses the equity method to
account for equity investments in affiliates and joint ventures when NIC
management can exert significant influence, but not control, over the operations
of the investee or joint venture. Significant influence is generally deemed to
exist if the
50
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company has an ownership interest in the voting stock of the investee or joint
venture of between 20% and 50%, although other factors, such as representation
on the Board of Directors, are considered in determining whether the equity
method of accounting is appropriate. The Company regularly reviews the carrying
value of these equity method investments and would record impairment losses when
events and circumstances indicate that such assets are impaired.
INTANGIBLE ASSETS
At each balance sheet date, 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. If the sum of the expected future cash flows on an
undiscounted basis was less than the carrying amount of the intangible asset, an
impairment loss would be recognized for the amount by which the carrying value
of the intangible asset exceeds its estimated fair value. The Company has not
recorded any provisions for possible impairment of goodwill or intangible
assets. For purposes of evaluating the intangible assets relating to the SDR
acquisition, the Company utilizes the expected cash flows from its portal
businesses and NIC Technologies as NIC Technologies is now integrated as the
application development organization for the Company's portal businesses. For
NIC Commerce, NIC Conquest and IDT, the Company utilizes the expected cash flows
resulting solely from these businesses. There is considerable management
judgement necessary to determine future cash flows, and accordingly, actual
results could vary significantly from such estimates.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," primarily
related to certain software development activities of NIC Commerce and NIC
Conquest. Software development costs are amortized on a straight-line basis over
the estimated economic life of the software, generally three years, commencing
when each product is available for general release. Capitalized software
development costs at December 31, 1999 totaled $145,260. No amortization expense
was recognized in 1999, as such costs had not begun to be amortized. Capitalized
software development costs, net of accumulated amortization, at December 31,
2000 totaled $3,160,511. Amortization expense recognized in 2000 totaled
$149,654.
INTERNAL USE SOFTWARE
The Company accounts for the costs of developing internal use computer
software in accordance with the American Institute of Certified Public
Accountants Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." SOP 98-1
establishes guidelines for the accounting for the costs of all computer software
developed or obtained for internal use and became effective January 1, 1999. The
adoption of SOP 98-1 did not have a material impact on the Company's
consolidated financial statements. At December 31, 2000, total capitalized
internal use software development costs, net of accumulated amortization, were
$886,752. Amortization expense recognized in 2000 totaled $18,175.
In May 2000, the Emerging Issues Task Force ("EITF") reached certain
consensuses on Issue 00-2 ("EITF 00-2"), "Accounting for Website Development
Costs," which establishes the accounting for the costs incurred to develop
Internet web sites. The consensuses are effective for costs incurred in
51
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
quarters beginning after June 30, 2000. The Company expenses as incurred all
employee costs to start up, operate and maintain government portals as costs of
performance under the contracts because, after the completion of a defined
contract term, the government entities with which the Company contracts
typically receive a perpetual, royalty-free license to the applications the
Company developed. Such are included in service development and operations
expense in the consolidated statements of operations. However, subsequent to the
acquisition of SDR in May 2000, the Company began to centralize and standardize
the development of revenue-generating Internet applications that could be
deployed across the Company's portals and began capitalizing website application
development costs pursuant to EITF 00-2. At December 31, 2000, capitalized
development costs relating to these applications, net of accumulated
amortization, totaled $580,041. Such costs are included as part of the total of
internal use software development costs capitalized pursuant to SOP 98-1 noted
above.
REVENUE RECOGNITION
PORTAL REVENUES
The Company recognizes revenue from providing electronic government portal
services (primarily information access fees and filing fees) net of the
transaction fees due to the government when the services are provided. The fees
that the Company must remit to state agencies for data access are accrued as
accounts payable at the time services are provided. The Company must remit a
certain amount or percentage of these fees to government agencies regardless of
whether the Company ultimately collects the fees. Costs of portal revenues
consist primarily of telecommunications and data processing costs and payments
to certain of the Company's state government clients under revenue-and/or
profit-sharing arrangements (see Note 9).
Revenue from service contracts to provide consulting, development and
management services to government portals is recognized as the services are
provided at rates provided for in the contract.
SOFTWARE AND SERVICES REVENUES
The Company recognizes revenues from license agreements upon delivery and
acceptance of the software application if there is persuasive evidence of an
arrangement, collection of the resulting receivable is probable, the fee is
fixed or determinable, and there is sufficient vendor-specific objective
evidence to support allocating the total fee to all elements of these license
arrangements. Where agreements provide for evaluation or customer acceptance,
revenue is recognized upon the completion of the evaluation process and
acceptance of the software by the customer.
The Company recognizes revenues from professional services as the services
are provided. If a transaction includes both license and service elements, the
license fee is recognized on delivery and acceptance of the software, provided
services do not include significant customization or modification of the base
product, and the payment terms for licenses are not subject to additional
acceptance criteria. In cases where license fee payments are contingent on the
acceptance of services, recognition of revenues is deferred for both the license
and the service elements until the acceptance criteria are met. Software
maintenance revenues are recognized ratably over the term of the support
contract, typically one year.
NIC Conquest develops applications to automate certain government
back-office processes and to facilitate electronic access to and filing of
government information. NIC Conquest recognizes revenues
52
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
from application development contracts on the percentage of completion method,
primarily utilizing labor hours incurred to date as compared to the estimated
total labor hours for each contract. Any anticipated losses on contracts are
charged to operations as soon as they are determinable. In the fourth quarter of
1998, the Company determined that the balance of revenues remaining to be
recognized under existing application development contractual obligations was
not expected to cover anticipated costs of developing and implementing the
related applications and accrued $1,256,000 for the expected loss. The Company
accrued an additional $1,125,000 of anticipated losses in 1999 based on revised
estimates. 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. These losses
are included in cost of software and services revenues in the consolidated
statements of operations. At December 31, 2000, the accrual for all application
development contracts held by the Company was approximately $357,000, 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.
SERVICE DEVELOPMENT AND OPERATIONS COSTS
Service development and operations costs consist primarily of the employee
expenses incurred to start up, operate and maintain the Company's government
portals as well as the expenses incurred to maintain the computer system and
information technology infrastructure throughout the Company's various
businesses.
STOCK-BASED COMPENSATION
The Company has elected to account for its stock-based compensation plan
using the intrinsic value method prescribed in Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." SFAS
No. 123, "Accounting for Stock-Based Compensation," establishes accounting and
disclosure requirements using a fair-value-based method of accounting for
stock-based compensation plans. The Company has elected the method of accounting
prescribed by APB No. 25 as described above, and has adopted the disclosure
requirements of SFAS No. 123.
Accordingly, the Company records as compensation expense the amount by which
the fair value of common stock sold to employees and consultants exceeds the
amount paid. Any excess of fair value of the price of common stock over the
exercise price for options granted to employees is recorded as deferred
compensation expense within shareholders' equity and amortized as expense
ratably over the vesting period.
INCOME TAXES
The Company changed its income tax status from an S corporation to a C
corporation on July 1, 1998. The Company, along with its subsidiaries, files a
consolidated federal income tax return.
Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year end based on enacted laws and
statutory tax rates applicable to the periods in which the differences are
53
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
COMPREHENSIVE LOSS
The Company has no material components of other comprehensive income or loss
and, accordingly, the Company's comprehensive loss is approximately the same as
its net loss for all periods presented.
LOSS PER SHARE
The Company computes net loss per share in accordance with the provisions of
SFAS No. 128, "Earnings Per Share" and SEC Staff Accounting Bulletin No. 98.
Under SFAS No. 128 and SAB No. 98, basic net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
shares outstanding for the period. Diluted net loss per share is the same as
basic net loss per share because common stock issuable upon exercise of employee
stock options is antidilutive.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
marketable securities and accounts receivable. The Company limits its exposure
to credit loss by depositing its cash and cash equivalents with high credit
quality financial institutions. The Company is subject to concentrations of
credit risk and interest rate risk related to its short-term marketable
securities. The Company's credit risk is managed by limiting the amount of
investments placed with any one issuer, investing primarily in debt instruments
of the U.S. Government and its agencies and high quality corporate issues
generally with maturities of less than one year. The Company performs ongoing
credit evaluations of its customers' financial condition and generally requires
no collateral to secure accounts receivable. Due to the high credit worthiness
of the Company's customers, consisting mainly of data resellers, insurance
companies and governmental entities, the Company considers accounts receivable
to be fully collectible. Accordingly, no allowance for doubtful accounts has
been recorded.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
SEGMENT REPORTING
The Company reports segment information in accordance with SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS
No. 131 uses the "management" approach, which designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's segments. SFAS No. 131 also
requires disclosures about products and services, geographical areas and major
customers (see Note 21).
54
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACCOUNTING FOR THE EXCHANGE OFFER
On March 31, 1998, the Company exchanged its common shares for the common
shares of five affiliated business units: NIC/USA, KIC, III, NII and AIC.
Starting in 1991 with the state of Kansas, the Company's founders established an
S corporation for business conducted within each state in which it was awarded a
contract. By 1996, the Company had expanded into four states and decided to
pursue future business opportunities through NIC/USA, leaving the four other
business units to pursue opportunities solely within those states.
Ownership of the five affiliated business units was similar, but not
identical, leading to the conclusion to account for the Exchange Offer as a
business combination. Prior to consummating the Exchange Offer, the Company was
a holding company with no operations of its own. Exchange ratios were determined
proportionately based on estimated 1998 pretax earnings for each company. No
appraisal of fair market value of the separate companies was obtained.
Management determined the fair value of the consolidated company on March 31,
1998 was $40 million. The fair value was allocated to each of the business units
based upon proportional values agreed to by the shareholders in consummating the
Exchange Offer.
Shareholders of NIC/USA, III, KIC, AIC and NII received 22,288,209,
10,099,461, 4,179,039, 3,032,009 and 1,944,646 shares of the Company's common
shares which were valued for purchase accounting at $21,460,187, $9,724,259,
$4,023,785, $2,919,368 and $1,872,401, respectively. As the shareholders of
NIC/USA received 54% of the Company's common shares, NIC/USA was treated as the
acquirer in applying purchase accounting.
The cost of the acquired business units of $18,539,813 was allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed on
the basis of their fair values on the Exchange Offer date. The fair value of net
tangible assets, consisting primarily of cash, accounts receivable, property and
equipment, accounts payable and debt, approximated historical carrying amounts.
The sole identifiable intangible asset relates to the government contracts and
was valued at the net present value of projected future cash flows over the
lives of the existing contracts discounted by 15%. Developed applications were
not assigned a value because each state has a perpetual right of use license to
applications developed if the Company's relationship is terminated. The
remainder of the cost was allocated to goodwill. The purchase price and
allocation by acquired business unit and in total is summarized as follows:
III KIC AIC NII TOTAL
---------- ---------- ---------- ---------- -----------
Fair market value at March 31,
1998............................ $9,724,259 $4,023,785 $2,919,368 $1,872,401 $18,539,813
========== ========== ========== ========== ===========
Allocated to:
Tangible net assets............. 464,766 311,159 304,529 108,897 1,189,351
Contract intangibles............ 1,911,321 433,611 447,994 672,387 3,465,313
Goodwill........................ 7,348,172 3,279,015 2,166,845 1,091,117 13,885,149
---------- ---------- ---------- ---------- -----------
$9,724,259 $4,023,785 $2,919,368 $1,872,401 $18,539,813
========== ========== ========== ========== ===========
Government contract expiration
date at the time of the Exchange
Offer........................... 8/31/00 12/31/99 6/30/00 1/31/02
As a result of rapid technological changes occurring in the Internet
industry and the intense competition for qualified Internet professionals,
recorded contract intangibles and goodwill are amortized on a straight-line
basis over the life of the then existing contracts. At the time of the
55
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACCOUNTING FOR THE EXCHANGE OFFER (CONTINUED)
Exchange Offer, the Company and each of the business units were S corporations.
The Exchange Offer was tax free to the shareholders. The historical tax basis in
the assets and liabilities carries over to the Company, and the amortization of
the goodwill and contract intangibles is not deductible for income tax purposes.
4. BUSINESS ACQUISITIONS
EFED
On September 15, 1999, NIC acquired the net assets of eFed, which has been
renamed NIC Commerce. NIC Commerce designs, develops and manages online
procurement software and services for federal and state markets. eFed was a
division of privately held Reston, Virginia-based Electric Press, Inc. The
acquisition was accounted for as a purchase and the results of NIC Commerce's
operations are included in the Company's consolidated statements of operations
from the date of acquisition. The total purchase price for the business was
approximately $29.5 million. Total consideration included $15 million in cash
from the proceeds of NIC's initial public offering and the issuance of 606,000
shares of unregistered common stock with a fair value of approximately
$14.5 million. The fair value of the common shares was determined based on the
average closing market price of NIC's common stock three days before, the day
of, and three days after the September 13, 1999 announcement date of the
acquisition.
Additional consideration is also payable through the end of calendar year
2003 if NIC Commerce's financial results exceed certain targeted levels, which
have been set substantially above historical experience at the time of
acquisition. On or before March 31, 2000 and annually thereafter to March 31,
2004, NIC will issue up to an additional 606,000 shares of common stock (or at
the Company's option, the cash equivalent) if NIC Commerce achieves certain
revenue targets. Consideration will be payable only if NIC Commerce's cumulative
revenues exceed $10 million with the full amount due if cumulative revenues
reach $200 million by the end of 2003. The amount of consideration due annually
will be based on a percentage determined by dividing cumulative revenue to date
by $200 million and subtracting any contingent consideration paid in a prior
period. Similarly, NIC will issue a presently indeterminable number of
additional shares of common stock if NIC Commerce's cumulative earnings before
interest, income taxes, depreciation and amortization ("EBITDA") exceeds
$10 million up to a maximum of $110 million by the end of 2003. In this
instance, the contingent consideration will only be paid in common stock and the
number of potential shares will be determined by dividing $10 million by the
average of the Company's closing common stock price for the five trading days
immediately preceding the first EBITDA payment date. An EBITDA payment date will
not occur unless NIC Commerce reaches $10 million in cumulative EBITDA in the
measurement period. Such consideration, if payable, will be recorded as
additional purchase price. No additional consideration is payable at
December 31, 2000.
Of the 606,000 shares of common stock issued to the shareholders of Electric
Press to affect the acquisition, 515,100 shares were issued as restricted stock
and 90,900 shares were delivered to an escrow account. The restricted stock is
subject to cancellation in whole or in part if certain representations,
warranties and obligations under the purchase agreement are not satisfied. Of
the 515,100 restricted shares, 499,950 became unrestricted one year after the
closing date and 15,150 will become unrestricted two years after the closing
date. The 90,900 escrowed shares have been released from escrow, as certain
existing government contracts listed in the purchase agreement were assigned to
56
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS ACQUISITIONS (CONTINUED)
NIC or were replaced by alternative agreements to provide the same services to
the same governmental agencies.
The total purchase price of approximately $29.5 million was allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed on
the basis of their fair values on the closing date. The fair value of net
tangible assets acquired, consisting primarily of accounts receivable, property
and equipment, accounts payable and other accrued expenses, totaled $816,000 and
approximated historical carrying amounts. The sole identifiable intangible asset
relates to NIC Commerce's Internet procurement software. This asset was valued
at approximately $21.8 million based on the net present value of projected
future net cash flows from licensing the software over its estimated three-year
life discounted by 15%. The remainder of the cost was allocated to goodwill. The
goodwill is being amortized on a straight-line basis over three years.
SDR TECHNOLOGIES
On May 11, 2000, NIC acquired SDR, a California corporation and provider of
Internet-based applications for governments. SDR designs and develops online
election and ethics filing systems for federal, state and local government
agencies and has also developed a number of Internet-based applications for tax
filings, business filings, professional licensing, and automobile registrations.
SDR has been renamed NIC Technologies. Pursuant to the Amended and Restated
Agreement and Plan of Reorganization and Merger, dated May 5, 2000 (the "Merger
Agreement"), each outstanding share of common stock of SDR and each outstanding
share of preferred stock of SDR was converted into 0.59977 share of NIC common
stock, and each outstanding option to purchase one share of SDR common stock was
converted into an option to purchase 0.59977 share of NIC common stock. Based on
the exchange ratio, NIC issued to SDR shareholders 1,912,097 shares of common
stock and options to purchase 229,965 shares of NIC common stock as
consideration. Ten percent of the total number of shares of NIC common stock
issued pursuant to the Merger Agreement will be held in escrow as collateral for
the indemnification obligations of the selling shareholders under the Merger
Agreement. The shares of NIC common stock placed in escrow will be held and
released in accordance with the terms and conditions of an indemnification
escrow agreement. Subject to NIC's claims against escrow shares discussed below
and to certain other limitations, one half of the escrow shares were to be
delivered to SDR shareholders nine months after the date of closing and any
remaining escrow shares will be delivered to the SDR shareholders 18 months
after the date of closing. The acquisition was accounted for as a purchase, and
the purchase price was approximately $39.7 million.
The purchase price per share was determined to be $17.21, which was based on
the average closing market price of NIC's common stock three days before, the
day of, and three days after April 24, 2000, the date on which the parties to
the Merger Agreement agreed to the 0.59977 exchange ratio. The fair value of the
options issued was accounted for as a component of the total purchase price. The
transaction was structured to be tax free to the SDR shareholders. The
historical tax basis in the assets and liabilities has carried over to NIC, and
the amortization of purchase accounting intangibles is not deductible for income
tax purposes.
Prior to the acquisition date, SDR issued two $1 million convertible
promissory notes to NIC, dated January 28, 2000 and March 27, 2000, in exchange
for $2 million in cash. On April 21, 2000, NIC elected to convert the promissory
notes into 67,476 shares of SDR common stock, which were automatically cancelled
and retired upon the closing of the acquisition. Pursuant to the Merger
57
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS ACQUISITIONS (CONTINUED)
Agreement, the principal amount of the January 28, 2000 promissory note, plus
interest thereon, was to be deducted from the NIC shares held in escrow. The
number of shares to be deducted from escrow relating to the January 28, 2000
note was to be based on the market price of NIC common stock when the escrow
shares were released to NIC. NIC and the former SDR shareholders agreed to use
the August 10, 2000 closing price of NIC common stock of $7.8125 per share to
determine the number of shares to be deducted from escrow. The August 10, 2000
date was based on the date the former SDR shareholders received NIC's July 14,
2000 notice of claim against these escrow shares. As a result, NIC received
130,981 shares as indemnification for the January 28, 2000 promissory note. The
principal amount of the January 28, 2000 promissory note was accounted for as a
current receivable until NIC received the escrow shares, at which time the
receivable and a corresponding amount of additional paid-in capital was
reversed. At December 31, 2000, 54,229 shares of NIC common stock remained in
escrow. The principal amount of the March 27, 2000 promissory note was accounted
for as additional purchase price and was not deducted from the escrow shares.
Additionally, 10,000 SDR common shares (representing 5,998 NIC common shares)
issued on May 11, 2000 upon conversion of an SDR convertible promissory were
deducted from the NIC shares in escrow. The total purchase price was reduced by
$103,225, the fair value of the 5,998 NIC common shares to be deducted from
escrow. Accordingly, the number of NIC issued and outstanding shares as of the
closing date of the acquisition was reduced by 5,998 shares.
Below is a table of the purchase price, purchase price allocation and annual
amortization of the intangible assets acquired:
PURCHASE PRICE:
Fair value of common stock issued......................... $32,898,312
Fair value of common stock options issued................. 3,703,912
Direct acquisition costs.................................. 2,176,072
Fair value of March 27, 2000 promissory note.............. 1,000,000
Fair value of common stock to be deducted from escrow..... (103,225)
-----------
$39,675,071
===========
58
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS ACQUISITIONS (CONTINUED)
ANNUALIZED
AMORTIZATION AMORTIZATION OF
PERIOD INTANGIBLES
------------ ---------------
PURCHASE PRICE ALLOCATION:
Fair value of net tangible assets at May 11, 2000... $(1,743,857)
Deferred tax liability.............................. (7,585,000)
ACQUIRED INTANGIBLE ASSETS:
Assembled domestic workforce........................ 1,100,000 2 years $ 550,000
Foreign workforce agreement......................... 8,800,000 5 years 1,760,000
Product technology.................................. 8,200,000 3 years 2,733,333
Customer contracts.................................. 400,000 2 years 200,000
Goodwill............................................ 30,503,928 3 years 10,167,976
----------- -----------
$39,675,071 $15,411,309
=========== ===========
The total purchase price was allocated to the tangible and identifiable
intangible assets acquired and liabilities assumed on the basis of their fair
values on the closing date. The fair value of net tangible assets acquired
approximated historical carrying amounts. Tangible assets acquired in the SDR
acquisition primarily consisted of accounts receivable and property and
equipment. Liabilities assumed consisted primarily of obligations under a
revolving line of credit, accounts payable and accrued liabilities.
CONQUEST SOFTWORKS
On January 12, 2000, NIC merged its application services division with
Conquest Softworks, LLC ("Conquest"). Conquest, based in Durango, Colorado, is a
provider of Uniform Commercial Code and corporation software applications and
services that facilitate electronic filings and document management for
governments. NIC paid $6.5 million in cash and contributed the net assets of its
application services division for a 65% ownership in the new company, which has
been renamed NIC Conquest. The merger has been accounted for as a purchase and
the results of NIC Conquest's operations are included in the Company's
consolidated statements of operations from the date of acquisition. Conquest's
1999 results of operations as a stand-alone business were not material in
relation to the consolidated financial statements of NIC.
The total purchase price of approximately $7.0 million was allocated to
NIC's share of tangible and identifiable intangible assets acquired and
liabilities assumed on the basis of their fair values on the closing date. The
fair value of net tangible assets acquired, consisting primarily of cash,
accounts receivable, and property and equipment, totaled approximately
$1.7 million and approximated historical carrying amounts. The sole identifiable
intangible asset relates to Conquest's Uniform Commercial Code web browser
software application. This asset was valued at approximately $2.7 million based
on the net present value of projected future net cash flows from the application
over its estimated three-year life discounted by 15%. The remainder of the
purchase price was allocated to goodwill. The goodwill is being amortized on a
straight-line basis over three years.
At any time after January 12, 2001 or upon a change in control of NIC
(defined as a change in beneficial ownership of 40% or more of the issued and
outstanding voting securities of NIC, excluding
59
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS ACQUISITIONS (CONTINUED)
any public offering of equity securities of NIC), each of the non-NIC
shareholders shall have the right to put to NIC all, but not less than all, of
their shares at a price equal to a put exercise price per share. The put
exercise price per share will be a dollar amount determined as follows: (i) if a
non-NIC shareholder put is exercised after January 12, 2001 but not upon the
occurrence of a change in control of NIC, the put exercise price per share will
be a dollar amount equal to the quotient obtained by dividing (A) the product of
seven times NIC Conquest's EBITDA (defined as earnings before income taxes,
depreciation and amortization) for the immediately preceding twelve months by
(B) the total number of NIC Conquest shares issued and outstanding on the put
exercise date; or (ii) if a non-NIC shareholder put is exercised after
January 12, 2002 and upon the occurrence of a change in control of NIC, the put
exercise price per share will be a dollar amount equal to the quotient obtained
by dividing (A) the product of twelve times NIC Conquest's EBITDA for the
immediately preceding twelve months by (B) the total number of NIC Conquest
shares issued and outstanding on the put exercise date; or (iii) if a non-NIC
shareholder put is before January 12, 2002 and upon the occurrence of a change
in control of NIC, the put exercise price will be a dollar amount equal to the
greater of the amount determined under the formula provided in (ii) above or the
quotient obtained by dividing the sum of $30,000,000 by the total number of NIC
Conquest shares issued and outstanding on the put exercise date.
In addition, NIC Conquest may not remove any non-NIC member from the board
of directors, authorize or issue any new equity shares senior to the common
shares currently issued, amend its articles of incorporation to alter the
rights, preferences or privileges of the shares held by non-NIC shareholders
disproportionate to the shares held by NIC, increase the authorized number of
members of the board of directors, effect a change in control in NIC Conquest
(defined as 1) the filing of a registration statement with the SEC for the
purposes of registering shares under the Securities Act of 1933; 2) approval by
the board of directors of planning to make a public offering, to merge or to be
acquired; or 3) the receipt of any bona fide proposal or inquiry regarding the
merger or acquisition of the company or substantially all of its assets), or
sell, spin-off or otherwise distribute any business or subsidiary of the company
on a basis other than pro rata to all the shareholders without the vote or
written consent of at least one of the board members representing the minority
shareholders.
On May 1, 2000, NIC acquired an additional 6.5% ownership interest in NIC
Conquest from NIC Conquest's chief executive officer in exchange for 158,941
unregistered shares of NIC common stock, giving NIC ownership of 71.5% of NIC
Conquest. The exchange ratio was determined based on the closing market price of
NIC's common stock on the last trading day preceding the May 1, 2000 exchange
agreement. The NIC shares issued were delivered to an escrow account and will be
released from escrow in equal annual installments over a three-year period,
beginning one year from the date of the exchange agreement. The fair market
value of the NIC shares issued in the exchange was approximately $2 million and
was allocated to NIC's 6.5% share of tangible and intangible assets acquired and
liabilities assumed on the basis of their fair values on date of the share
exchange. The fair value of net tangible assets acquired, consisting primarily
of cash, accounts receivable, and property and equipment, totaled approximately
$0.2 million and approximated historical carrying amounts. The remainder of the
purchase price was allocated to goodwill, which will be amortized on a
straight-line basis over three years.
60
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS ACQUISITIONS (CONTINUED)
INTELLIGENT DECISION TECHNOLOGIES
On October 13, 2000, NIC acquired Longmont, Colorado-based Intelligent
Decision Technologies, Ltd. ("IDT"), a provider of business-to-government
reporting and filing software for the transportation industry. IDT has developed
business-to-government applications that facilitate compliance with the Federal
Highway Administration's Commercial Vehicle Information System Network. IDT
currently has contracts to provide the state governments in California,
Maryland, Minnesota, and Kentucky with commercial vehicle electronic
credentialing services that include registration, permitting, and tax filing
software. The acquisition was accounted for as a purchase. The purchase price
for the business was approximately $2.0 million, consisting of $0.5 million in
cash and the issuance of 520,826 shares of unregistered NIC common stock.
Pursuant to the Agreement and Plan of Merger dated September 8, 2000 (the
"Merger Agreement"), fifty percent of the total number of shares of NIC common
stock issued will be held in escrow as collateral for the indemnification
obligations of the selling shareholders under the Merger Agreement. The shares
of NIC common stock placed in escrow will be held and released subject to the
terms and conditions of an escrow agreement, whereby 60 percent of the escrow
shares will be delivered to the IDT shareholders one year after the date of
closing, and the remaining escrow shares will be delivered to the IDT
shareholders two years after the date of closing.
Up to 520,826 shares of NIC common stock are payable as additional
consideration depending on the earnings performance of IDT through the end of
calendar year 2003. Consideration will be payable only if IDT's cumulative
earnings before interest, income taxes, depreciation and amortization ("EBITDA")
reach $275,000, with the full amount due if cumulative EBITDA reaches $700,000
by the end of 2003. At April 1, 2001 or on the first business day of any quarter
thereafter until December 31, 2003 in which IDT's cumulative EBITDA equals
$275,000, NIC will be required to issue 208,333 shares (the "Initial EBITDA
Payment"). The number of shares to be issued each quarter after the Initial
EBITDA Payment until December 31, 2003 will be based on a percentage determined
by dividing, by $700,000, the difference between cumulative EBITDA to date and
the initial EBITDA amount with respect to which the Initial EBITDA Payment was
made. Such consideration, if payable, will be recorded as additional purchase
price.
The fair value of the NIC common stock was determined based on the average
closing market price of NIC's common stock three days before, the day of, and
three days after the October 13, 2000 closing date, which was the date final
terms were agreed to. The purchase price of approximately $2.0 million was
allocated to the assets acquired and liabilities assumed based upon their
estimated fair values at the date of acquisition. The fair value of net tangible
assets acquired, consisting primarily of accounts receivable, property and
equipment, accounts payable and other accrued expenses, and a short-term line of
credit, totaled $(118,663) and approximated historical carrying amounts. The
remainder of the purchase price was allocated to goodwill (approximately
$2.1 million). The goodwill is being amortized on a straight-line basis over
three years. The transaction was structured to be tax free to the IDT
shareholders, and the amortization of the goodwill arising from the application
of purchase accounting is not deductible for income tax purposes. IDT's 1999 and
2000 results of operations as a stand-alone business were not material in
relation to the consolidated financial statements of NIC.
61
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS ACQUISITIONS (CONTINUED)
RESTRUCTURING CHARGE
On September 20, 2000, the Company announced the restructuring of its
eGovernment applications and services businesses to more appropriately size
these operations to visible demand and more efficiently align them with other
eGovernment initiatives across NIC. The restructuring involved employee
reductions in its marketing division and at its NIC Commerce and NIC
Technologies divisions. As a result, NIC incurred a pre-tax charge of
approximately $638,000 in the third quarter of 2000 relating to employee
severance costs. For additional information on the restructuring charge, refer
to note 20.
5. ACQUISITION PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma consolidated amounts for the year ended
December 31, 1999 give effect to the acquisitions of eFed and SDR as if they had
occurred on January 1, 1999, using the amortization of goodwill and intangibles
the Company has recorded for periods subsequent to completing the acquisitions.
The following unaudited pro forma consolidated amounts for the year ended
December 31, 2000 give effect to the acquisition of SDR as if the acquisition
had occurred on January 1, 2000. The results of operations for Conquest and IDT
in 1999 and 2000 as stand-alone businesses were not material in relation to the
consolidated financial statements of NIC.
YEAR ENDED DECEMBER 31,
---------------------------
1999 2000
------------ ------------
Revenues......................................... $ 21,121,864 $ 27,727,256
Operating loss................................... (37,297,670) (59,962,810)
Net loss......................................... (28,703,704) (46,498,798)
Basic and diluted loss per share................. $ (0.57) $ (0.84)
Weighted average shares outstanding.............. 50,210,448 55,398,070
6. INVESTMENTS IN AFFILIATES AND JOINT VENTURES
On March 23, 2000, NIC completed a $5 million cash investment in
E-Filing.com, Inc. ("E-Filing.com"), a provider of online filing applications
for legal services, giving NIC ownership of 21% of E-Filing.com, a non-pubic
company, through 2,433,800 shares of Series A voting Preferred Stock. The
investment has been accounted for under the equity method. The difference
between the amount of NIC's investment (approximately $5.3 million) and
underlying equity (approximately $1.4 million) in E-Filing.com has been
allocated to goodwill and is being amortized over 2 years. At December 31, 2000,
the carrying value of the Company's investment in E-Filing.com totaled
$3,686,155.
On March 24, 2000, NIC completed a $5.5 million cash investment in Tidemark
Computer Systems, Inc. ("Tidemark"), a provider of online permit applications
for local government, giving NIC ownership of approximately 27% of Tidemark, a
non-public company, through 4,530,396 shares of Series B voting Preferred Stock.
The investment has been accounted for under the equity method. The difference
between the amount of NIC's investment ($5.5 million) and underlying equity
(approximately $2.3 million) in Tidemark was allocated to goodwill and was being
amortized over 2 years. At December 31, 2000, NIC was closely monitoring its
investment in Tidemark due to significant liquidity issues inasmuch as
Tidemark's current liquid resources were sufficient to meet operating
requirements only through the end of April 2001. At the end of 2000, Tidemark
was in various stages of merger and
62
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENTS IN AFFILIATES AND JOINT VENTURES (CONTINUED)
acquisition discussions with several companies. NIC expected Tidemark would be
successful in merging its operations with or being acquired by another company.
Based on information received in the latter half of March 2001 from a company
looking to acquire Tidemark, NIC determined that it would not be able to recover
the entire carrying value of its investment. Accordingly, in the fourth quarter
of 2000, NIC adjusted the carrying value of its investment, primarily relating
to goodwill, to its estimated fair value resulting in a noncash impairment loss
of approximately $2.1 million. The estimated fair value of Tidemark was based on
NIC's underlying equity in Tidemark's net book value at December 31, 2000. The
yearly amortization of such goodwill was approximately $1.6 million. The
impairment loss is included in Equity in net loss of affiliates in the
consolidated statement of operations. In addition, NIC recorded a deferred tax
asset valuation allowance of approximately $2.0 million to offset the deferred
tax asset the Company had recognized relating to its investment in Tidemark (see
Note 15). At December 31, 2000, the adjusted carrying value of the Company's
investment in Tidemark was $575,851.
E-Filing.com and Tidemark are in the early stage of their operations and are
incurring net losses. The Company regularly reviews the carrying value of these
equity method investments and records 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 investment in E-Filing.com.
In October 2000, NIC made an initial $524,000 cash investment in
e-Government Solutions Limited ("eGS"), a private joint venture 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, giving NIC ownership of 40% of the ordinary shares of eGS.
The purpose of the eGS joint venture, based in London, England, is to deliver
eGovernment products and services throughout Western Europe, with initial
efforts to focus on the United Kingdom. As capital needs arise, NIC Europe will
be required to make approximately $1.6 million in additional cash capital
contributions to eGS in three installments of $524,000 beginning as early as
three months, six months and nine months after the date of NIC's initial cash
contribution. The investment in eGS will be accounted for under the equity
method. eGS is in the early stages of its operations and incurred an
insignificant amount of expenses in the fourth quarter of 2000.
7. FORMATION OF LIMITED LIABILITY COMPANY WITH BANK OF AMERICA
On March 3, 2000, NIC Commerce created a jointly owned limited liability
company with Bank of America Corporation, through its subsidiary Bank of
America, N.A. (USA), to offer state and local governments a Web-based
business-to-business procurement, payment and reconciliation service. The two
companies will share the revenue that the limited liability company will
generate from transaction fees, sales rebates from suppliers to governments, and
promotional consideration from suppliers to governments. NIC Commerce will
primarily be responsible for providing the electronic purchasing platform based
on the NIC Commerce software, end user interface customization, hardware and
software support and maintenance services to Bank of America and state and
municipal clients, and other technical services in support of the business
endeavors of the limited liability company. The limited liability company,
called Banc of America Purchase Street, LLC, has recently contracted to provide
electronic procurement services under transaction-based pricing models to two
state/local government agencies, Houston-Galveston Area Council of Governments
(H-GAC) and the State of South Carolina. These procurement portals are expected
to become operational during 2001.
63
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. FORMATION OF LIMITED LIABILITY COMPANY WITH BANK OF AMERICA (CONTINUED)
Bank of America will have the opportunity to become a strategic investor in
NIC upon the achievement of certain revenue performance criteria by the new
company. Warrants to purchase NIC common stock of 420,000 up to 1,400,000 shares
will become exercisable upon achieving certain cumulative revenue targets by
December 31, 2004. These warrants are priced in two equally sized series at
$34.44 and $44.77 per share. Once exercisable, Bank of America will have the
longer of December 31, 2005, or twenty-four months to execute the warrants on
the shares.
8. INTERACTIVE SERVICES AGREEMENT WITH AMERICA ONLINE
On August 25, 2000 (the "Effective Date"), NIC entered into a three-year
Interactive Services Agreement (the "Agreement") with America Online, Inc.
("AOL") to deliver state government information, services and applications
through AOL's State Government Guide. NIC will pay a $4.5 million cash carriage
fee to AOL over the initial three-year term (the "Term"). NIC made an initial
cash payment to AOL totaling $1.125 million on August 25, 2000, and must pay AOL
$375,000 every three months for the next 27 months subsequent to the Effective
Date. As an additional component of the carriage fee, NIC has also issued to AOL
fully-vested common stock warrants representing the right to immediately
purchase 624,653 shares of NIC common stock at an exercise price of $6.71875 per
share. The warrants expire five years from the date of the Agreement. The
exercise price per share was calculated based on the average closing price of
NIC common stock for the four trading days prior to the August 28, 2000
announcement date of the Agreement. The fair value of the warrants issued to AOL
was determined to be approximately $4.75 million on August 25, 2000, using the
Black-Scholes option-pricing model. NIC will recognize the cash portion of the
carriage fee on a straight-line basis over the Term as selling, general and
administrative expense in the consolidated statement of operations. NIC will
recognize the fair value of the fully vested warrants on a straight-line basis
over the Term as amortization expense in the consolidated statement of
operations. At December 31, 2000, NIC has recorded the unamortized fair value of
the fully vested warrants as a contra-equity account in the consolidated balance
sheet.
Under the terms of the Agreement, NIC has granted to AOL a royalty-free,
non-exclusive, worldwide license to use the applications developed by NIC (the
"Customized Programming and Licensed Content"). In addition, NIC will fund the
initial investment and ongoing operational costs to build, operate and maintain
the Customized Programming and Licensed Content. NIC will share with AOL a
portion of all transaction revenues generated by AOL members who access the
transaction applications NIC develops specifically for the State Government
Guide through the Customized Programming and Licensed Content. AOL and NIC will
share revenues generated from the license or sale of advertisement on or through
the State Government Guide.
AOL has the right to extend the Agreement for up to two years beyond the
Term. If the Agreement is extended, NIC may be required to pay AOL a maximum of
$1.5 million in additional cash carriage fees per year beyond the Term if gross
advertising revenues meet or exceed certain levels under the Agreement. Up to
624,653 additional warrants (the "Contingent Warrants"), with an exercise price
and terms identical to the fully-vested warrants issued on August 25, 2000, are
issuable to AOL if gross advertising revenues collected during the period the
Agreement is in effect meet or exceed certain levels. One third of the
Contingent Warrants are issuable to AOL on such dates that cumulative gross
advertising revenues collected by AOL pursuant to the Agreement reach
$22 million, $32 million and $40 million, respectively.
64
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GOVERNMENT PORTAL CONTRACTS
Each of the Company's government portal contracts generally has an initial
term of three to five years. The Company enters into separate agreements with
various agencies and divisions of the government to provide specific services
and to conduct specific transactions. These agreements preliminarily establish
the pricing of the electronic transactions and data access services the Company
provides and the division of revenues between the Company and the government
agency. The government must approve prices and revenue sharing agreements. The
Company owns all the applications developed under these contracts. After
completion of a defined contract term, the government agency typically receives
a perpetual, royalty-free license to the applications for use only. If the
Company's contract is not renewed after a defined term, the government agency
would be entitled to take over the portal in place with no future obligation of
the Company. In some cases, the Company provides management services to
government-owned portals in exchange for an agreed-upon fee.
The following is a summary of the significant terms of operating agreements
that the Company's larger business units have entered into with government
agencies.
VIRGINIA INTERACTIVE, INC. (VI)
On July 30, 1997, the VI business unit entered into a contract to provide
electronic government services to the Virginia Information Providers Network
Authority (the "Virginia Authority"). VI is responsible for managing and
marketing the government portal as well as funding up front investment and
ongoing operational costs. The contract is for a period of five years,
commencing September 1, 1997, with the Virginia Authority having a five-year
renewal option. If the Virginia Authority extends the contract through 2007, it
is entitled to a perpetual license for applications developed at no additional
compensation to VI.
User fees received by the VI business unit are disbursed (1) first for the
payment of operating expenses (primarily telecommunication costs), (2) then to
the Virginia Authority in accordance with interagency agreements negotiated by
VI on behalf of the Virginia Authority and for the reasonable and necessary
expenses of the Virginia Authority, and (3) then all remaining funds to VI.
INDIANA INTERACTIVE, INC. (III)
The III business unit develops, operates, maintains and expands electronic
government services for electronic access to public information for the
Intelenet Commission. The Intelenet Commission is a State of Indiana body
corporate and politic created by the Indiana legislature for the purpose of
providing electronic access to state, county and local information required by
Indiana businesses and citizens. III is responsible for managing and marketing
the government portal as well as funding up-front investment and ongoing
operational costs. The contract with the Intelenet Commission and the
interagency agreements with various government agencies include limitations and
provisions for the rates III can charge and the amount of remuneration to the
Intelenet Commission and each government agency. The initial contract was to
expire at the end of August 2000 but was renewed for an additional three years.
The new contract expires at the end of August 2003, but may be renewed, or
amended and renewed, for up to an additional two years. The Intelenet Commission
is entitled to a perpetual for use only license to the applications developed
for no additional compensation to III.
III's wholly-owned subsidiary, City-County Interactive, L.L.C. (the
"Subsidiary"), was formed in 1997 to provide electronic government services for
CivicNet, formerly CivicLink, the electronic gateway
65
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GOVERNMENT PORTAL CONTRACTS (CONTINUED)
service for the city of Indianapolis and Marion County, Indiana. In addition,
the Subsidiary is to further operate, manage and expand CivicNet.
In connection with the revenues generated under the contract, the Intelenet
Commission receives 2% of gross revenues per annum, before all other payments.
The data-providing entities are then paid in accordance with interagency
agreements. The remaining balance is retained by III.
ARKANSAS INFORMATION CONSORTIUM, INC. (AIC)
AIC serves as a provider of electronic government services, by a contract
signed in July 1997 between AIC and the Information Network of Arkansas ("INA"),
a public instrumentality created by legislation in the State of Arkansas (the
"State"). AIC is responsible for managing and marketing the government portal as
well as funding up-front investment and ongoing operational costs. The contract
is for one three-year term through June 30, 2000, with four one-year renewals at
the option of INA. The State exercised its first renewal option and extended the
contract through June 30, 2001. If the State decides to extend the contract
through June 30, 2003, or at anytime thereafter, the INA shall be entitled to a
perpetual for use only license to the applications developed for no additional
compensation to AIC. Prior to June 30, 2003, the INA reserves the right to
negotiate terms to license the applications.
Network transaction fees received pursuant to the agreement with INA are
disbursed first for payment of certain operating expenses for the government
portal (primarily telecommunication costs). Five percent of the amount by which
gross revenues for the portal exceed the amount payable to government agencies
is then distributed to the INA. The balance is retained by AIC.
KANSAS INFORMATION CONSORTIUM, INC. (KIC)
KIC was incorporated August 15, 1991 to serve as a provider of electronic
government services to develop, operate, maintain and expand a government portal
for electronic access to public information for the Information Network of
Kansas ("INK"). INK is a State of Kansas government instrumentality created by
the Kansas legislature for the purpose of providing electronic access to state,
county and local information required by Kansas businesses and citizens. KIC is
responsible for managing and marketing the government portal as well as funding
up-front investment and ongoing operational costs. The contract with INK
includes limitations and provisions for the rates KIC can charge and the amount
of remuneration to INK and each government agency. The contract was to expire on
December 31, 1999, but was renewed until December 31, 2002, unless earlier
terminated by INK for cause. INK shall have the option, upon termination or
expiration of the contract, to require KIC to provide electronic government
services in accordance with the terms of the contract for a period of up to
twelve months from the time of the expiration or notification of termination.
INK is entitled to a perpetual for use only license to the applications
developed for no additional compensation to KIC.
In connection with the revenues generated under the contract with INK, INK
receives 2.0% of gross revenue, per annum, payable monthly, before all other
payments. KIC may then receive a 25.0% rate of return per annum on its risk
capital from net income before taxes. The remaining net income before taxes is
shared 66.7% with KIC and 33.3% with INK. Risk capital is defined in the
contract as the sum of paid-in capital, corporate loans with a payback period
exceeding one year, and noncancellable obligations under corporate leases.
66
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GOVERNMENT PORTAL CONTRACTS (CONTINUED)
NEBRASKA INTERACTIVE, INC. (NII)
NII was incorporated November 22, 1994 for the purpose of operating as a
provider of electronic government services for the public information portal of
the State of Nebraska ("Nebraska Online"). NII developed and operates the public
information portal to provide businesses and citizens with electronic access to
state, county and local information via the Internet. NII is responsible for
managing and marketing the portal as well as funding up-front investment and
ongoing operational costs.
On December 3, 1997, NII entered into a contract with the Nebraska State
Records Board ("NSRB") to provide electronic government services to enhance,
operate, maintain and expand the existing portal that was developed by NII under
its 1995 contract with the Nebraska Library Commission ("NLC") and various
government agencies. The contract includes limitations and provisions for the
rates NII can charge and the amount of remuneration to each government agency.
The contract was to expire on January 31, 2002. However, in January 2001, the
NSRB extended the contract through January 2004, unless earlier terminated by
the NSRB for cause. The NSRB shall have the option, upon termination or
expiration of the contract, to require NII to provide electronic government
services in accordance with the terms of the contract for a period of up to
twelve months from the time of the expiration or notice of termination,
whichever is earlier. On January 1, 2002, the NSRB will be entitled to a
perpetual for use only license to the applications developed for no additional
compensation to NII.
In connection with the revenues generated under the contract with the NSRB,
the NSRB receives 4.5% of the first $89,000 in gross profit and 2% of gross
profit thereafter. Gross profit is defined in the contract as the difference
between gross revenues and amounts paid to government agencies and for certain
telecommunication expenses.
NATIONAL INFORMATION CONSORTIUM U.S.A., INC. (NIC/USA)
A service contract was entered into between NIC/USA and the GeorgiaNet
Authority ("GANET"), an agency of the State of Georgia, on September 15, 1996.
Pursuant to the contract, NIC/USA must dedicate a minimum number of full time
employees to assist GANET in creating and providing an information access
program. Pursuant to the contract, GANET is entitled to a perpetual use license
to the applications developed at no additional compensation to NIC/USA. However,
if GANET terminates the contract prior to September 2001, GANET must pay NIC/USA
a fee ranging from $500,000 to $1,000,000 (based on the date of termination) in
order to receive a license for the applications. The contract must be renewed by
GANET on a yearly basis. In the event fees received by GANET from its customers
are insufficient to cover its obligations to NIC/USA, the contract shall
terminate without further obligation of GANET.
In connection with the revenues generated under the contract with GANET,
GANET pays NIC/ USA $800,000 per year, in equal amounts of $200,000 on a
quarterly basis. In addition, GANET pays NIC/USA 5% of gross GANET revenues from
non-bulk fees per quarter.
On August 28, 2000, NIC/USA commenced a three-year contract, with two
one-year optional renewal periods, with the State of Tennessee to develop and
operate Tennessee's government portal, TennesseeAnytime, which will provide
electronic transactions and expanded access to public information. Under the
contract, NIC will fund initial investment and ongoing operational costs. The
67
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GOVERNMENT PORTAL CONTRACTS (CONTINUED)
State of Tennessee will be entitled to a perpetual, royalty-free, irrevocable,
unlimited and nonexclusive right to use the applications NIC/USA develops.
In connection with the revenues generated under the contract, the Company is
responsible for payment of statutory fees for retrieval of public information
and all network operating expenses. TennesseeAnytime became operational in
October 2000.
NEW ENGLAND INTERACTIVE, INC. (NEI)
NEI was incorporated in 1999 for the purpose of operating as a provider of
electronic government services for the New England region. On April 15, 1999,
NEI entered into a three-year contract, with two two-year renewal periods, with
the State of Maine to develop and operate Maine's government portal that will
provide electronic transactions and expanded access to public information. Under
the contract, NEI will fund initial investment and ongoing operational costs.
Upon completion of the initial contractual term in April 2002, the State of
Maine will be entitled to a perpetual for use only license for the applications
NEI developed, with no additional compensation due to NEI.
In connection with the revenues generated under the contract, NEI is
entitled to retain any revenues remaining after payment of all network operating
expenses, statutory fees for retrieval of public information and various other
expenses.
UTAH INTERACTIVE, INC. (UII)
UII was formed in 1999 to provide electronic access to public records in
Utah. In May 1999, UII entered into a contract with the State of Utah (the
"State") to provide coordinated network development and management for the
State's online government services. The contract extends to May 2003 with the
option for three two-year renewal periods. Under the contract, UII will fund
initial investment and ongoing operational costs. Upon completion of the initial
four-year term of the contract, or if the contract is terminated by the State
for cause, the State will be entitled to a perpetual for use only license for
the applications UII developed, with no additional compensation due to UII.
In connection with the revenues generated under the contract, UII retains
any revenues that remain after payment of all network operating expenses,
statutory fees for retrieval of public information and various other expenses.
IDAHO INFORMATION CONSORTIUM, INC. (IIC)
IIC was incorporated in July 1999 for the purpose of operating as a provider
of electronic government services for the State of Idaho. On December 7, 1999,
IIC entered into a three-year contract, with two two-year renewal periods, with
the State of Idaho to develop and operate Idaho's government portal, Access
Idaho, which will provide electronic transactions and expanded access to public
information. Under the contract, IIC will fund initial investment and ongoing
operational costs. Upon termination or expiration of the contract, the State of
Idaho will be entitled to a perpetual for use only license for the applications
IIC developed, with no additional compensation due to IIC.
In connection with the revenues generated under the contract, IIC is
entitled to retain any revenues remaining after payment of all network operating
expenses, statutory fees for retrieval of public information and various other
expenses.
68
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GOVERNMENT PORTAL CONTRACTS (CONTINUED)
HAWAII INFORMATION CONSORTIUM, INC. (HIC)
On January 3, 2000, HIC commenced a three-year contract, with two two-year
renewal periods, with the State of Hawaii to develop and operate Hawaii's
government portal, Access Hawaii, which will provide electronic transactions and
expanded access to public information. Under the contract, HIC will fund initial
investment and ongoing operational costs. Upon completion of the initial
three-year term of the contract or upon termination of the contract, the State
of Hawaii will be entitled to a perpetual for use only license for the
applications HIC developed, with no additional compensation due to HIC.
In connection with the revenues generated under the contract, HIC is
entitled to retain any revenues remaining after payment of statutory fees for
retrieval of public information and all network operating expenses.
10. MARKETABLE SECURITIES
The fair value of marketable debt securities was as follows at December 31:
1999 2000
----------- -----------
U.S. government obligations........................ $12,252,850 $ 3,968,320
Corporate debt securities.......................... 70,227,910 20,946,085
----------- -----------
$82,480,760 $24,914,405
=========== ===========
All marketable debt securities held by the Company at December 31, 1999 and
2000 mature within one year. Gross realized gains and losses and unrealized
holding gains and losses were not significant for the years ended December 31,
1999 and 2000. The Company held no marketable securities prior to the completion
of its initial public offering of common stock on July 20, 1999.
11. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
1999 2000
---------- -----------
Furniture and fixtures.............................. $ 652,411 $ 1,100,956
Equipment........................................... 3,192,576 7,523,472
Purchased software.................................. 281,481 1,859,052
Leasehold improvements.............................. 163,556 303,522
---------- -----------
4,290,024 10,787,002
Less accumulated depreciation....................... 1,291,648 3,190,924
---------- -----------
$2,998,376 $ 7,596,078
========== ===========
Depreciation expense for the years ended December 31, 1998, 1999 and 2000,
was $236,699, $581,416 and $1,728,559, respectively.
69
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31:
1999 2000
----------- -----------
Goodwill........................................... $21,302,573 $45,649,243
Software intangibles............................... 21,790,000 24,455,641
Contract intangibles............................... 3,465,313 1,072,388
Assembled domestic workforce intangible............ -- 1,100,000
Foreign workforce agreement intangible............. -- 8,800,000
Product technology intangible...................... -- 8,200,000
Software development costs......................... 145,260 4,215,092
Patents and trademarks............................. -- 106,477
----------- -----------
46,703,146 93,598,841
Less accumulated amortization...................... 16,056,700 26,165,724
----------- -----------
$30,646,446 $67,433,117
=========== ===========
13. BANK LINES OF CREDIT AND OTHER DEBT OBLIGATIONS
NIC has a $1 million line of credit with a bank in conjunction with a
corporate credit card agreement. NIC has pledged approximately $500,000 in
marketable securities as collateral on the line of credit.
On January 19, 1999, NIC/USA purchased an airplane and financed the purchase
by borrowing $544,000 from a bank in the form of a note payable. The note was
paid in full during 1999.
NIC/USA has issued to an office leasing company an irrevocable letter of
credit in the amount of $118,043. The letter expires on September 15, 2001. Iowa
Interactive, Inc has issued to the State of Iowa an irrevocable letter of credit
in the amount of $50,000. The letter expires on April 30, 2001. NEI has issued
to the State of Maine an irrevocable letter of credit in the amount of $50,000.
The letter expires on May 14, 2001. IIC has issued to the State of Idaho an
irrevocable letter of credit in the amount of $500,000. The letter expires on
December 3, 2001.
In March 1998, NII and AIC agreed to pay a shareholder $150,000 for past
services and reacquired the shareholder's shares of NII and AIC. The remaining
balance at December 31, 1999 of $50,000 was paid in 2000.
14. SHAREHOLDERS' EQUITY
COMMON STOCK
The Company's Board of Directors had authorized 13,500,000 shares of common
stock for issuance by the Company at December 31, 1998. In April 1999, the
Company was reincorporated in the state of Colorado and changed the par value of
its common stock from $.01 per share to no par. On May 6, 1999, the Company
increased its authorized shares to 200,000,000.
On May 3, 1999, the Board of Directors authorized a common stock split in
the range of 4 for 1 to 5 for 1, and granted authority to the Company's officers
to determine the exact amount of the split. Such officers approved a 4.643377
for 1 split to be effected by means of a dividend of 3.643377 shares
70
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SHAREHOLDERS' EQUITY (CONTINUED)
of common stock for each share of common stock held, plus cash in lieu of
fractional shares, effective for shareholders of record on July 14, 1999. The
effect of the stock split has been retroactively reflected in the accompanying
consolidated financial statements for all periods presented. All references to
the number of Company common shares and per share amounts elsewhere in the
related footnotes have also been restated as appropriate to reflect the effect
of the common stock split for all periods presented.
On July 20, 1999, the Company completed its initial public offering of
common stock by selling an aggregate of 10 million new shares of common stock
for net proceeds of approximately $109.4 million after deducting underwriting
discounts, commissions and expenses. The Company has placed the net proceeds
from its initial public offering in short-term, investment-grade,
interest-bearing debt securities pending the use of the proceeds to increase new
market development efforts, increase marketing efforts aimed at raising
transaction volume, create new products and services, further develop common
infrastructure and operating platforms, and make acquisitions.
In the first six months of 1998, the Company made $588,367 of S corporation
cash distributions to common shareholders.
On June 30, 1998, the Company and a voting trust consisting of all the
Company's then current shareholders entered into a stock purchase agreement for
the Company's shareholders to sell a 25% interest in the Company to an
investment management firm. The Company did not receive any of the proceeds from
the sale. Under the voting trust agreement, two principal shareholders have the
right to vote all of the voting trust's common shares and to sell all or any
part of such shares. One common shareholder has the right, only upon termination
within the first three years of employment with the Company, to cause the
Company to repurchase 173,258 shares of common stock purchased by the
shareholder on February 9, 1999, at the $1.44 price per share paid by the
shareholder. The right is exercisable only upon the Company's decision to
terminate employment.
At December 31, 1997 and as of March 31, 1998, the date of the Exchange
Offer, NIC/USA had 1,000,000 common shares authorized and 112,330 common shares
issued and outstanding. However, as NIC/USA was considered the accounting
acquirer, its historical outstanding share information has been adjusted for the
Exchange Offer exchange ratio. Shareholders of NIC/USA received 198.42 Company
common shares for each share held of NIC/USA on March 31, 1998. Retroactive
adjustments are also made for purposes of calculating and reporting earnings per
share.
COMMON STOCK TRANSACTIONS
From April 1998 through June 1998, the Company sold 348,254 shares of common
stock to two employees at $0.22 per share. The Company recorded $258,333 in
compensation expense related to these transactions.
On June 30, 1998, the Company issued 174,563 shares of its common stock and
made an S corporation distribution of those shares, which were valued at $1.43
per share, to its shareholders. These shares were given to a consultant as
compensation for services rendered to the Company's shareholders with the
investment management firm sale. In connection with the transaction, the Company
also paid $57,077 in professional fees on behalf of the shareholders that were
also distributed as an S corporation distribution. These shares have been
treated as outstanding for all periods prior to the Exchange Offer for purposes
of calculating and reporting earnings per share.
71
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SHAREHOLDERS' EQUITY (CONTINUED)
From January 1999 through May 1999, the Company sold 346,512 shares of
common stock to five employees at $1.44 per share. The Company recorded
$1,489,124 in compensation expense related to these transactions. In May 1999,
the Company sold 23,727 shares of common stock to an employee at $5.27 per
share. The Company recorded $84,826 in compensation expense related to this
transaction.
In April 2000, the Company sold 4,395 shares of common stock to an employee
for $11.375 per share. In June 2000, the Company sold 1,932 shares of common
stock to an employee for $12.9375 per share. In June 2000, the Company sold
2,828 shares of common stock to an employee for $8.84 per share and recorded
$11,588 in compensation expense related to this transaction. In June 2000, the
Company repurchased 5,000 shares of common stock from an employee for $20.1875
per share. These shares were canceled and retired in October 2000. In
July 2000, the Company issued 2,637 shares of common stock to an executive of
the Company for no cash consideration and recorded $30,000 in compensation
expense related to this transaction. In March 2000, an outside director of the
company exercised 10,000 non-qualified stock options at an exercise price of $10
per share. In November 2000, the Company rescinded this stock option exercise
and returned the $100,000 in proceeds from the option exercise to the director.
The Company recorded $72,800 in compensation expense related to this
transaction.
ADDITIONAL PAID-IN CAPITAL
The Company offset its accumulated deficit on the date of Subchapter S
election termination against its additional paid-in capital as reflected in the
consolidated statement of changes in shareholders' equity.
During 2000, certain employees of the Company had disqualifying dispositions
of common stock obtained through the exercise of incentive stock options. As a
result, the Company will receive a federal income tax deduction of approximately
$3.1 million in the current year. Through December 31, 2000, the Company had
recognized cumulative compensation expense of approximately $157,000 for the
excess of fair value of the Company's common stock on the grant date over the
exercise price for options granted to certain of these employees. A portion of
the tax benefit relating to the disqualifying dispositions totaling $157,000 has
been recognized in the Company's results of operations, and the remaining tax
benefit for the excess deduction was credited directly to additional paid-in
capital.
WITHDRAWN COMMON STOCK OFFERING
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 in the
second quarter of 2000 and are included in selling, general and administrative
expenses in the consolidated statement of operations.
BUSINESS ACQUISITIONS
For additional information relating to business acquisitions and other
transactions involving the issuance of common stock, common stock options or
warrants, refer to Notes 3, 4, 7 and 8 above.
72
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. INCOME TAXES
On July 1, 1998, the Company changed its income tax status from an S
corporation to a C corporation. The Company recognized a net deferred tax
liability of approximately $1,374,000 representing the tax effects of temporary
differences between the book and tax bases of assets and liabilities on that
date. The effect of recognizing the deferred tax liability has been included in
the consolidated statement of operations for the year ended December 31, 1998.
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1999 2000
-------- ----------- ------------
Current income taxes:
Federal............................................... $ 56,045 $ -- $ --
State................................................. 12,655 25,354 161,213
-------- ----------- ------------
Total............................................... 68,700 25,354 161,213
-------- ----------- ------------
Deferred income taxes:
Federal............................................... 540,345 (1,295,716) (13,077,074)
State................................................. 49,768 (145,861) (1,676,160)
-------- ----------- ------------
Total............................................... 590,113 (1,441,577) (14,753,234)
-------- ----------- ------------
Total income tax expense (benefit).................. $658,813 $(1,416,223) $(14,592,021)
======== =========== ============
73
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
were as follows at December 31:
1999 2000
---------- ----------
Deferred tax assets:
Application services contracts..................... $ 88,987 $ 140,821
Compensation related to non-qualified stock
options.......................................... 394,980 788,260
Amortization of eFed goodwill and software
intangible....................................... 864,639 3,918,486
Net operating loss carryforward.................... 677,673 11,943,265
Investments in affiliates.......................... -- 2,577,272
Other.............................................. 7,718 80,988
---------- ----------
2,033,997 19,449,092
Less: Valuation allowance.......................... -- (1,959,447)
---------- ----------
Total............................................ 2,033,997 17,489,645
---------- ----------
Deferred tax liabilities:
Purchase accounting intangibles.................... (392,434) (6,413,820)
Depreciation....................................... (173,383) (261,297)
Capitalized software development costs............. -- (1,638,324)
Accreted discount on marketable securities......... (585,541) --
Other.............................................. (31,174) (16,204)
---------- ----------
Total............................................ (1,182,532) (8,329,645)
---------- ----------
Net deferred tax asset............................... $ 851,465 $9,160,000
========== ==========
For tax purposes, the Company had available at December 31, 1998, 1999 and
2000 net operating loss ("NOL") carryforwards of approximately $67,000, $281,000
and $29,400,000 that will expire in the years 2018, 2019 and 2020, respectively.
The Company believes it is more likely than not it will generate sufficient
taxable income from future operations to fully utilize the NOL carryforwards
prior to expiration. Consequently, the Company has not provided a valuation
allowance for these deferred tax assets. The amount of the deferred tax asset
considered realizable relating to these NOL's could be reduced in the near term
if estimates of future taxable income during the carryforward period are
reduced. In the fourth quarter of 2000, the Company recorded a deferred tax
asset valuation allowance of $1,959,447 to offset the deferred tax asset the
Company had recognized relating to its investment in Tidemark (see Note 6). The
valuation allowance is appropriate because the excess of the tax loss over book
loss which would be realized on the dispositon of Tidemark would give rise to a
capital loss for tax reporting purposes, and the Company has no foreseeable
capital gain income against which to offset such loss. Thus, the realization of
this item would not give rise to a future tax benefit under current
expectations.
74
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. INCOME TAXES (CONTINUED)
The following table reconciles the effective income tax rate indicated by
the consolidated statements of operations and the statutory federal income tax
rate:
YEAR ENDED
DECEMBER 31,
------------------------------------
1998 1999 2000
-------- -------- --------
Effective federal and state income tax rate........... (9.1)% 11.7% 26.5%
Goodwill amortization relating to the Exchange Offer
and other acquisitions.............................. 15.5 17.8 7.0
S to C corporation adjustment......................... 19.7 -- --
Pretax loss as an S corporation (six months).......... 10.4 -- --
Non-deductible stock compensation expense............. -- 6.6 0.4
State income taxes.................................... (1.3) (1.3) (1.8)
Valuation allowance relating to investment in
Tidemark............................................ -- -- 3.6
Other................................................. (0.2) 0.2 (0.7)
---- ---- ----
Statutory federal income tax rate..................... 35.0% 35.0% 35.0%
==== ==== ====
The unaudited pro forma provision for income taxes for the year ended
December 31, 1998 represents the incremental provision for the six month period
the Company was an S corporation together with removing the $1,374,000
cumulative effect recorded in 1998 as discussed above. The pro forma provision
for income taxes was calculated based on enacted tax laws and statutory tax
rates applicable to the period presented taking into account permanent
differences.
16. COMMITMENTS AND CONTINGENCIES
LEASES
The Company and its subsidiaries lease office space and certain equipment
under noncancellable operating leases. Capital lease agreements require the
Company and its subsidiaries to pay all taxes, fees, assessments or other
charges.
75
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum noncancellable lease payments under all noncancellable
operating and capital leases at December 31, 2000 are as follows:
FISCAL YEAR OPERATING CAPITAL
- ----------- ---------- ----------
2001................................................. $1,271,684 $ 205,243
2002................................................. 1,018,541 20,519
2003................................................. 604,387 1,418
2004................................................. 505,561 --
2005................................................. 332,448 --
Thereafter........................................... 128,058 --
----------
227,180
Less interest........................................ 10,546
----------
Present value of net minimum lease payments.......... 216,634
Less current portion................................. 194,509
----------
Long-term portion.................................... $ 22,125
==========
Capitalized leased property and equipment consists of the following at
December 31:
1999 2000
-------- --------
Furniture and fixtures.................................. $ 70,651 $ 95,619
Equipment............................................... 528,350 395,938
Purchased software...................................... 60,003 53,633
-------- --------
659,004 545,190
Less accumulated depreciation........................... 246,243 276,911
-------- --------
$412,761 $268,279
======== ========
Rent expense for operating leases for the years ended December 31, 1998,
1999 and 2000 was $354,192, $402,241 and $1,279,175, respectively.
LITIGATION
The Company is involved in legal proceedings and litigation arising in the
ordinary course of business. In the opinion of management, the outcome of such
proceedings and litigation currently pending would not be material to the
consolidated financial position, liquidity or results of operations of the
Company.
17. EMPLOYEE BENEFIT AND STOCK OPTION PLANS
DEFINED CONTRIBUTION 401(K) PROFIT SHARING PLAN
The Company and its subsidiaries sponsor a defined contribution
401(k) profit sharing plan. In accordance with the plan, all full-time employees
are eligible immediately upon employment. A discretionary match of up to 5% of
an employee's salary and a discretionary contribution may be made to the plan as
determined by the Board of Directors. Expense related to Company matching
76
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. EMPLOYEE BENEFIT AND STOCK OPTION PLANS (CONTINUED)
contributions totaled $94,571, $176,736 and $469,088 for the years ended
December 31, 1998, 1999 and 2000, respectively. No discretionary contributions
were made for the years ended December 31, 1998, 1999 and 2000.
EMPLOYEE STOCK PURCHASE PLAN
In 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
will 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. No offering of stock was made to
employees during 1999 or 2000. Accordingly, no shares have been issued pursuant
to the plan.
STOCK OPTION PLANS
The Company has two formal stock option plans (the "NIC" plan and the "SDR"
plan) to provide for the granting of either incentive stock options or
non-qualified stock options to encourage certain employees of the Company and
its subsidiaries, and certain directors of the Company, to participate in the
ownership of the Company, and to provide additional incentive for such employees
and directors to promote the success of its business through sharing the future
growth of such business. The NIC plan was adopted in May 1998 and amended in
November 1998 and May 1999. Under the NIC plan, the Company is authorized to
grant options for up to 9,286,754 common shares. Employee options are generally
exercisable one year from date of grant in cumulative annual installments of 25%
to 33% and expire four years after the grant date. The SDR plan was adopted in
May 2000 in conjunction with NIC's acquisition of SDR. Under the SDR plan, the
Company is authorized to grant options for up to 229,965 common shares. No
options that are in addition to those granted upon the close of the SDR
acquisition will be granted under the SDR plan. There have been no option
repricings under the plans for the years ended December 31, 1998, 1999 and 2000.
The Company accounts for the plans using the intrinsic value method
prescribed in APB No. 25. SFAS No. 123 requires certain disclosures regarding
expense and value of options granted using the fair-value-based method even
though the Company follows APB No. 25. Had compensation cost for the Company's
plans been determined in accordance with SFAS No. 123, the Company's net loss
and loss per share would have been as follows for the years ended December 31,
1998, 1999 and 2000:
1998 1999 2000
----------- ------------ ------------
Net loss:
As reported........................ $(7,895,966) $(10,730,560) $(40,277,950)
Pro forma.......................... $(8,005,301) $(12,134,460) $(47,148,116)
Basic and diluted loss per share:
As reported........................ $ (0.21) $ (0.23) $ (0.74)
Pro forma.......................... $ (0.21) $ (0.26) $ (0.86)
77
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. EMPLOYEE BENEFIT AND STOCK OPTION PLANS (CONTINUED)
For purposes of complying with the disclosure provisions of SFAS No. 123 and
as permitted by the Financial Accounting Standards Board for nonpublic
companies, prior to NIC's initial public offering in July 1999, the fair value
of each option grant was determined on the date of the grant using the minimum
value option pricing model. The minimum value model does not consider expected
volatility in stock price. Subsequent to the offering, the fair value of each
option grant was determined using the Black-Scholes option pricing model. Except
for the volatility assumption, which is only used under the Black- Scholes
model, the following assumptions were applied in determining pro forma
compensation cost for the years ended December 31, 1998, 1999 and 2000:
1998 1999 2000
------------- ------------ ------------
Risk-free interest rate...................... 4.54% 5.48% 6.10%
Expected dividend yield...................... 0.00 0.00 0.00
Expected option life......................... 4.62 years 4.0 years 4.0 years
Expected stock price volatility.............. 0.001% 80% 125%
Fair value of options granted................ $ 1.45 $ 11.14 $ 8.62
A summary of the activity under the Company's stock option plans for
the years ended December 31, 1998, 1999 and 2000 is presented below:
1998 1999 2000
-------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- ---------- -------------- ---------- --------------
Outstanding at January 1..... -- -- 2,514,019 $ 1.44 4,025,593 $ 7.49
Granted.................... 2,534,812 $1.44 1,798,285 $15.09 3,372,507 $10.38
Exercised.................. -- -- (122,954) $ 1.44 (411,524) $ 2.07
Expired.................... -- -- -- -- (33,924) $12.29
Canceled................... (20,793) $1.44 (163,757) $ 2.51 (761,925) $21.44
--------- ---------- ----------
Outstanding at December 31... 2,514,019 $1.44 4,025,593 $ 7.49 6,190,727 $ 7.69
Exercisable at
December 31................ 199,317 $1.44 825,008 $ 2.18 1,674,316 $ 4.86
Weighted average grant-date
fair value of options
granted during the year.... $1.45 $11.14 $ 8.62
78
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. EMPLOYEE BENEFIT AND STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about stock options outstanding
under the Plan at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE WEIGHTED
SHARES CONTRACTUAL EXERCISE SHARES AVERAGE
RANGE OF EXERCISE PRICE OUTSTANDING LIFE PRICE OUTSTANDING EXERCISE PRICE
- ----------------------- ----------- ----------- -------- ----------- --------------
$1.44-2.13............... 2,324,447 2.8 $ 1.46 1,227,457 $ 1.45
$2.19-3.06............... 844,875 4.9 $ 2.41 25,000 $ 2.69
$3.34-4.06............... 115,000 4.5 $ 3.77 20,000 $ 3.88
$5.06-7.44............... 723,952 3.4 $ 5.39 182,947 $ 5.27
$7.75-11.38.............. 1,368,829 5.3 $10.87 10,000 $11.38
$12.38-18.38............. 214,584 2.8 $14.00 70,247 $14.36
$19.32-26.38............. 187,296 3.2 $23.09 62,571 $23.06
$29.38-43.88............. 324,744 2.9 $34.16 76,094 $35.24
$45.75-65.88............. 87,000 3.1 $51.80 -- --
During 1998, the exercise price of all options granted under the plan was
$1.44, which was less than the fair market value of the stock on the various
grant dates. From September 1998 through December 1998, the Company granted
2,534,812 common stock options with an exercise price of $1.44 per share.
Compensation expense of $310,536 was recorded in 1998 relating to these option
grants, with $2,813,577 of compensation expense deferred at December 31, 1998 to
be amortized over the vesting period of the options.
In December 1998, the Company granted 1,393,010 common stock options
(1,046,500 non-qualified options and 346,510 incentive options) to an executive
of the Company under two separate stock option agreements covered by the Plan.
Non-qualified stock options totaling 60,712 vested immediately with the
remainder of the options exercisable one year from date of grant in cumulative
annual installments of 25%. The non-qualified stock options expire ten years
after the grant date. Incentive stock options totaling 69,302 vested immediately
with the remainder of the options exercisable one year from date of grant in
cumulative annual installments of 25%. The incentive stock options expire five
years from the date of grant.
From January 1999 through May 1999, the Company granted 191,767 common stock
options with a vesting period of three years and an exercise price of $1.44 per
share, which was less than the fair market value of the stock on the various
grant dates. Compensation expense of approximately $213,000 was recorded
relating to these options for the year ended December 31, 1999, with
approximately $496,000 of compensation expense deferred at December 31, 1999 to
be amortized over the three-year vesting periods of the option grants. In
April 1999, the Company granted 20,791 common stock options with a vesting
period of three years and an exercise price of $5.27 per share, which was less
than the fair market value of the stock on the grant date. Compensation expense
of approximately $16,000 was recorded relating to these options for the year
ended December 31, 1999, with approximately $58,000 of compensation expense
deferred at December 31, 1999 to be amortized over the three year vesting
periods of the option grants.
79
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. EMPLOYEE BENEFIT AND STOCK OPTION PLANS (CONTINUED)
In May 1999, the Company granted 696,511 common stock options (601,636
non-qualified options and 94,875 incentive options) to an executive of the
Company at an exercise price of $5.27 per share, which was less than the fair
market value of the stock on the grant date, under two separate stock option
agreements covered by the Plan. Non-qualified stock options totaling 50,669
vested immediately with the remainder of the options exercisable one year from
date of grant in cumulative annual installments of 25%. The non-qualified stock
options expire ten years after the grant date. Incentive stock options totaling
18,975 vested immediately with the remainder of the options exercisable one year
from date of grant in cumulative annual installments of 25%. The incentive stock
options expire five years from the date of grant. Relating to this executive's
stock options, compensation expense of approximately $598,000 was recorded for
the year ended December 31, 1999, with approximately $1,892,000 of compensation
expense deferred at December 31, 1999, to be amortized over the vesting period
of the options.
In August of 1999, the Company granted 10,000 common stock options with
immediate vesting to a director of the Company with an exercise price of $10 per
share, which was less than the fair market value of the stock on the grant date.
Compensation expense of approximately $44,000 was recorded relating to this
option grant for the year ended December 31, 1999.
In February of 2000, the Company made two grants of 10,000 common stock
options with immediate vesting to two directors of the Company with an exercise
price of $36.88 per share, which was less than the fair market value of the
stock on the grant date. Compensation expense of $130,000 was recorded relating
to these option grants for the year ended December 31, 2000.
Including expense recognized in connection with options granted prior to
January 1, 1999, the Company recognized a total of $1,614,101 of compensation
expense related to common stock options for the year ended December 31, 1999.
Total deferred compensation expense was $4,362,172 at December 31, 1999.
Including expense recognized in connection with options granted prior to
January 1, 2000, the Company recognized a total of $1,675,485 of compensation
expense related to common stock options for the year ended December 31, 2000.
Total deferred compensation expense was $2,814,350 at December 31, 2000.
18. RELATED PARTY TRANSACTIONS
The Company and its subsidiaries purchased business and health insurance
through an insurance agency that was controlled by a shareholder and director of
the Company at costs that the Company believed approximated arms-length
transactions. In 1998, a payment of $8,345 was made directly to this insurance
agency. No direct payments were made in 1999 or 2000. Aggregate insurance
payments made that were brokered by this insurance agency totaled approximately
$478,000 and $354,000 for the years ended December 31, 1998 and 1999,
respectively. No insurance payments were brokered by this agency in 2000.
During 2000, the Company rented an aircraft on an hourly basis from a
company that was controlled by two shareholders/directors of the Company at
costs that the Company believed approximated arms-length transactions. In 2000,
total payments made to this company totaled $244,700. No payments were made to
this company in 1998 or 1999.
80
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Certain subsidiaries of the Company financed the purchase of $355,843 of
property and equipment in 1998 under capital leases.
KIC sold certain assets during 1998 that were then leased back from the
purchaser over a period of three years. The resulting lease is being accounted
for as a capital lease. The purchaser paid down KIC's bank line of credit in
1998 by $28,666 as part of this sale-leaseback transaction. III sold certain
assets during 1998 that were then leased back from the purchaser over a period
of three years. The resulting lease is being accounted for as a capital lease.
The purchaser paid down III's bank line of credit in 1998 by $169,287 as
part of this sale-leaseback transaction.
For additional information on noncash investing and financing activities
relating to business acquisitions involving the issuance of common stock, common
stock options or warrants, refer to Notes 3, 4, 7 and 8 above.
20. RESTRUCTURING CHARGE
On September 20, 2000, the Company announced the restructuring of its
eGovernment applications and services businesses to more appropriately size
these operations to visible demand and more efficiently align them with other
eGovernment initiatives across NIC. The restructuring involved employee
reductions in its marketing division and at its NIC Commerce and NIC
Technologies divisions. As a result, NIC incurred a pre-tax charge of
approximately $638,000 in the third quarter of 2000 relating to employee
severance costs. This charge is included in selling, general and administrative
expenses in the consolidated statements of operations. Employee severance costs
paid through December 31, 2000 totaled $358,000, with $280,000 accrued at
December 31, 2000 for future payments. The employee severance costs relate to
severance packages for 23 employees in marketing, product development and
administration, 21 of which were terminated by December 31, 2000, with two
additional terminations expected in the first quarter of 2001.
21. REPORTABLE SEGMENTS AND RELATED INFORMATION
As discussed in Note 20 above, during the third quarter of 2000, the Company
announced the restructuring of its eGovernment applications 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 are internally organized and managed. The Company's reportable
segments consist of its state and local portal businesses ("Portals"), its
eGovernment products businesses ("Products") and its NIC Commerce government
procurement business ("Procurement"). The Portals segment includes the Company's
subsidiaries operating state and local government portals. The Products segment
includes the NIC Conquest and NIC Technologies subsidiaries, which were
previously included in the state and local government segment, and the IDT
subsidiary. Unallocated corporate-level expenses are reported in the
reconciliation of the segment totals to the related consolidated totals as
"Other Reconciling Items." Management evaluates the performance of its segments
and allocates resources to them based on gross profit and earnings before
interest, taxes, equity in net loss of affiliates, depreciation, amortization,
one-time charges and other non-cash charges related to stock compensation and
application development contracts ("EBITDA"). There have been no significant
intersegment transactions for the periods reported. The summary of significant
accounting policies applies to all segments.
81
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. REPORTABLE SEGMENTS AND RELATED INFORMATION (CONTINUED)
In the fourth quarter of 1998, the Company determined that the balance of
revenues remaining to be recognized under existing application development
contractual obligations was not expected to cover anticipated costs of
developing and implementing the related applications and accrued $1,256,000 for
the expected loss. The Company accrued an additional $900,000 of anticipated
losses in the second quarter of 1999 and $225,000 in the fourth quarter of 1999
based on revised estimates. 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.
Also in 2000, the Company recorded one-time pre-tax charges of approximately
$834,000 relating to NIC's withdrawn secondary stock offering in April 2000 and
approximately $638,000 in the third quarter for employee severance relating to
the restructuring of its NIC Commerce and NIC Technologies divisions and the
consolidation of NIC's marketing efforts. NIC also incurred a one-time non-cash
charge of approximately $235,000 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.
The table below reflects summarized financial information concerning the
Company's reportable segments for the years ended December 31:
OTHER CONSOLIDATED
PORTALS PRODUCTS PROCUREMENT RECONCILING ITEMS TOTAL
----------- ----------- ----------- ----------------- ------------
1998
Revenues................... $ 7,751,592 $ 396,811 $ -- $ -- $ 8,148,403
Cost of revenues........... 715,375 2,257,919 -- -- 2,973,294
----------- ----------- ----------- ------------
Gross profit............... 7,036,217 (1,861,108) -- -- 5,175,109
EBITDA..................... 1,611,089 (605,168) -- (463,487) 542,434
1999
Revenues................... 14,010,681 565,464 1,570,974 -- 16,147,119
Cost of revenues........... 1,292,948 1,870,112 63,878 -- 3,226,938
----------- ----------- ----------- ------------
Gross profit............... 12,717,733 (1,304,648) 1,507,096 -- 12,920,181
EBITDA..................... 4,043,716 (179,648) 333,341 (3,386,247) 811,162
2000
Revenues................... 17,908,908 5,432,471 3,629,897 -- 26,971,276
Cost of revenues........... 1,397,361 5,667,566 1,914,357 -- 8,979,284
----------- ----------- ----------- ------------
Gross profit............... 16,511,547 (235,095) 1,715,540 -- 17,991,992
EBITDA..................... 3,803,280 (2,746,967) (6,182,594) (14,272,713) (19,398,994)
82
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. REPORTABLE SEGMENTS AND RELATED INFORMATION (CONTINUED)
The following is a reconciliation of total segment EBITDA to total
consolidated loss before income taxes and minority interest for the years ended
December 31:
1998 1999 2000
----------- ------------ ------------
Total EBITDA for reportable segments................. $ 542,434 $ 811,162 $(19,398,994)
Restructuring charge................................. -- -- (638,238)
Vacation accrual..................................... -- -- (235,168)
Application development contracts.................... (1,256,000) (1,125,000) (1,350,000)
Withdrawn secondary offering expenses................ -- -- (834,493)
Stock compensation................................... (568,869) (3,188,051) (1,789,874)
Depreciation and amortization........................ (5,922,396) (10,968,482) (27,959,637)
Other income, net.................................... 55,839 2,492,460 3,659,689
Interest expense..................................... (88,161) (168,872) (48,458)
Equity in net loss of affiliates..................... -- -- (6,524,473)
----------- ------------ ------------
Consolidated loss before income taxes and minority
interest........................................... $(7,237,153) $(12,146,783) $(55,119,646)
=========== ============ ============
A primary source of revenue is derived from data resellers' use of the
Company's government portals to access motor vehicle records for sale to the
auto insurance industry. For the year ended December 31, 1999, one data reseller
accounted for 56% of the Company's portal revenues and 48% of the Company's
total revenues, and two other resellers accounted for an additional 9% of the
Company's portal revenues and 8% of the Company's total revenues. For the year
ended December 31, 2000, one of these data resellers accounted for approximately
51% of the Company's portal revenues and 34% of the Company's total revenues,
and two other resellers accounted for an additional 12% of the Company's portal
revenues and 8% of the Company's total revenues. At December 31, 2000, one data
reseller accounted for approximately 37% of the Company's accounts receivable
and two other data resellers accounted for approximately 11%.
83
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. UNAUDITED QUARTERLY OPERATING RESULTS (IN THOUSANDS EXCEPT FOR PER SHARE
AMOUNTS)
QUARTER
-----------------------------------------
1ST 2ND 3RD 4TH
-------- -------- -------- --------
1999
Revenues................................. $ 3,103 $ 3,409 $ 4,340 $ 5,295
Gross profit............................. 2,575 2,260 3,678 4,407
Operating loss........................... (3,302) (2,941) (2,378) (5,850)
Net loss................................. (3,299) (2,503) (1,442) (3,486)
Basic and diluted net loss per share..... $ (0.08) $ (0.06) $ (0.03) $ (0.07)
QUARTER
-----------------------------------------
1ST 2ND 3RD 4TH
-------- -------- -------- --------
2000
Revenues.............................. $ 6,200 $ 7,478 $ 6,600 $ 6,693
Gross profit.......................... 3,678 4,885 4,826 4,603
Operating loss........................ (7,997) (11,968) (15,844) (16,397)
Net loss.............................. (4,705) (8,973) (11,629) (14,971)
Basic and diluted net loss per
share............................... $ (0.09) $ (0.16) $ (0.21) $ (0.27)
The quarterly information above for revenues differs from that previously
reported by the Company due to the net revenue presentation described in
Note 1. The effect of this new presentation was to decrease previously reported
revenues by $8,352, $9,902 $11,351 and $11,214 for the quarterly periods ended
March 31, June 30, September 30, and December 31, 1999, respectively, and by
$12,714, $12,432, $12,750 and $12,146 for the quarterly periods ended March 31,
June 30, September 30, and December 31, 2000, respectively. The new presentation
had no impact on gross profit, operating loss, net loss or net loss per share.
The quarterly information above for gross profit differs from that previously
reported by the Company due to the reclassification of cost of revenues
described in Note 1. The effect of this reclassification was to decrease
previously reported gross profit by $276, $831, $341 and $407 for the quarterly
periods ended March 31, June 30, September 30, and December 31, 1999,
respectively, and by $1,816, $1,054, $175, and $1,088 for the quarterly periods
ended March 31, June 30, September 30, and December 31, 2000, respectively. The
reclassification had no impact on operating loss, net loss or net loss per
share. The information above for the fourth quarter of 2000 differs from that
previously reported by the Company due to the noncash impairment loss relating
to the Company's investment in Tidemark described in Note 6. The effect of the
impairment loss was to decrease previously reported net loss by $3,205 and basic
and diluted net loss per share by $0.06. The quarterly information is subject to
seasonal fluctuations resulting in lower revenues in the fourth quarter of each
calendar year, due to the smaller number of business days in the quarter and a
lower volume of business-to-government and citizen-to-government transactions
during the holiday periods. For additional information on significant charges
affecting our quarterly results for the periods presented, refer to Note 21
above.
84
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
National Information Consortium, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows, present fairly, in all material respects, the financial position of
National Information Consortium, Inc. and its subsidiaries at December 31, 2000
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on the financial statements based on our
audits. We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
March 23, 2001
85
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors of the Company and the executive
officers of the Company will be set forth under the caption "Management" in the
Company's proxy statement related to its 2001 annual meeting of shareholders
(the "Proxy Statement") and is incorporated herein by reference since such Proxy
Statement will be filed with the Securities and Exchange Commission no later
than 120 days after the end of the Company's fiscal year pursuant to
regulation 14A. Information required by Item 405 of Regulation S-K will be set
forth under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
"Executive Compensation" in the Proxy Statement, since such Proxy Statement will
be filed with the Securities and Exchange Commission not later than 120 days
after the end of the Company's fiscal year pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
"Share Ownership" in the Proxy Statement, since such Proxy Statement will be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the Company's fiscal year pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To the extent applicable the information required by this item is
incorporated herein by reference to "Compensation Committee Interlocks and
Insider Participation" and "Certain Relationships and Related Transactions" in
the Proxy Statement, since such Proxy Statement will be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
Company's fiscal year pursuant to Regulation 14A.
86
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
PAGE
--------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets............................... 43
Consolidated Statements of Operations..................... 44
Consolidated Statements of Changes in Shareholders'
Equity.................................................. 45
Consolidated Statements of Cash Flows..................... 46
Notes to Consolidated Financial Statements................ 48
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................. 85
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
3.1 Articles of Incorporation of the registrant(1)
3.2 Bylaws of the registrant(1)
4.1 Reference is made to Exhibits 3.1 and 3.2(1)
4.2 Investor Rights Agreement dated June 30, 1998(1)
4.3 Investors' Rights Agreement, dated January 12, 2000(2)
4.4 Specimen Stock Certificate of the registrant(1)
9.1 Voting Trust Agreement between Jeffery S. Fraser and Ross C.
Hartley and certain Holders of Shares of National
Information Consortium, Inc. dated June 30, 1998 and form of
the voting trust certificate(1)
10.1 Form of Indemnification Agreement between the registrant and
each of its executive officers and directors(1)
10.2 Registrant's 1998 Stock Option Plan, as amended and
restated(1)
10.3 Registrant's 1999 Employee Stock Purchase Plan(1)
10.4 Employment Agreement between the registrant and Jeffery S.
Fraser dated July 1, 1998(1)
10.5 Employment Agreement between the registrant and William F.
Bradley, Jr. dated July 24, 1998(1)
10.6 Employment Agreement between the registrant and Samuel R.
Somerhalder dated July 24, 1998(1)
10.7 Employment Agreement between the registrant and Harry H.
Herington dated July 24, 1998(1)
10.8 Employment Agreement between the registrant and Joseph
Nemelka, dated July 24, 1998(2)
10.9 Employment Agreement between the registrant and James B.
Dodd dated January 1, 1999(1)
10.10 Employment Agreement between the registrant and Ray G.
Coutermarsh dated February 1, 2000(2)
10.11 Employment Agreement between the registrant and Terrence
Parker dated November 9, 1999(2)
87
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
10.12 Contract for Network Manager Services between the
Information Network of Kansas and Kansas Information
Consortium, Inc. dated December 18, 1991 with addenda dated
October 15, 1992, August 19, 1993, May 26, 1995 and
June 13, 1996 and amendment on March 2, 1998(1)
10.13 Contract for Network Manager Services between the State of
Indiana by and through the Intelenet Commission and Indian@
Interactive, Inc., dated July 18, 1995(1)
10.14 Services Contract by and between National Information
Consortium, U.S.A. and the GeorgiaNet Authority, an agency
of the State of Georgia, dated September 15, 1996(1)
10.15 Contract for Network Manager between Information Network of
Arkansas by and through the Information Network of Arkansas
Board and Arkansas Information Consortium, Inc. dated
July 2, 1997(1)
10.16 Contract for Network Manager Services between the Nebraska
State Records Board on behalf of the State of Nebraska and
Nebrask@ Interactive, Inc. dated December 3, 1997 with
addendum No. 1 dated as of the same date(1)
10.17 Contract for Network Manager Services between the
Commonwealth of Virginia by and through the Virginia
Information Providers Network Authority and Virginia
Interactive, LLC dated January 15, 1998(1)
10.18 Contract for Network Manager Services between Iowa
Interactive, Inc. and the State of Iowa by and through
Information Technology Services dated April 23, 1998 with
letter addendum dated August 7, 1998(1)
10.19 Contract for Network Manager Services between the
Consolidated City of Indianapolis and Marion County by and
through the Enhanced Access Board of Marion County and City-
County Interactive, LLC dated August 31, 1998 with addendum
dated as of the same date(1)
10.20 State of Maine Contract for Special Services with New
England Interactive, Inc. dated April 14, 1999(1)
10.21 State of Idaho Contract for Electronic Business and portal
Services with the Idaho Department of Administration and
other Public Agencies, dated December 7, 1999(2)
10.22 State of Hawaii Contract for Special Services with the State
of Hawaii, dated December 29, 1999(2)
10.23 Employment Agreement between the registrant and Kevin C.
Childress dated May 16, 1999(1)
10.24 Sublease for the registrant's offices at 12 Corporate Woods,
Overland Park dated May 14, 1999, and First Sublease
Modification Agreement dated December 15, 1999, and Lease
for the same address dated January 15, 1995 with First Lease
Modification dated October 30, 1996(1)
10.25 Agreement between Equifax Services and Nebrask@ Online dated
March 25, 1996(1)
10.26 Agreement between ChoicePoint and the Information Network of
Kansas dated September 1, 1997(1)
10.27 Agreement between Equifax/ChoicePoint and the Information
Network of Arkansas dated September 2, 1997(1)
10.28 Agreement between Equifax Systems, Inc. and Access Indian@
Information Network dated November 14, 1995(1)
10.29 Contract for Network Manager Services between the State of
Utah and Utah Interactive, Inc. dated as of May 7, 1999(1)
88
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
10.30 Asset Purchase Agreement between the registrant and Electric
Press, Inc, for the acquisition of eFed, a division of
Electric Press, Inc., dated as of September 15, 1999(2)
10.31 Contribution Agreement between the registrant and Conquest
Softworks, LLC, dated as of January 12, 2000 Agreement(2)
10.32 Agreement and Plan of Reorganization and Merger between the
registrant and SDR Technologies, Inc., dated as of
February 16, 2000(2)
10.33 Amended and Restated Agreement and Plan of Reorganization
and Merger, dated as of May 5, 2000, as amended, by and
among the registrant, SDR Acquisition Corp., a California
corporation and a wholly owned subsidiary of the registrant,
and SDR Technologies, Inc.(3)
10.34 Registrant's 1999 Stock Option Plan of SDR
Technologies, Inc.(4)
10.35 Agreement and Plan of Merger, dated as of September 8, 2000,
by and among the registrant, Cherry Hills Acquisition
Sub, Inc., a Colorado corporation and wholly owned
subsidiary of the registrant, and Intelligent Decision
Technologies, Ltd.
10.36 Employment agreement between the Registrant and William F.
Bradley, dated September 1, 2000
10.37 Employment agreement between the Registrant and Samuel R.
Somerhalder, dated September 1, 2000
10.38 Employment agreement between the Registrant and Harry H.
Herington, dated September 1, 2000
10.39 Employment agreement between the Registrant and Joseph
Nemelka, dated September 1, 2000
10.40 Employment agreement between the Registrant and James B.
Dodd, dated September 1, 2000
10.41 Employment agreement between the Registrant and Ray G.
Coutermarsh, dated September 1, 2000
10.42 Employment agreement between the Registrant and Pradeep K.
Agarwal, dated September 1, 2000
10.43 Employment agreement between the Registrant and Kevin C.
Childress, dated September 1, 2000
10.44 Employment agreement between the Registrant and Stephen M.
Kovzan, dated September 1, 2000
10.45 Contract Between the State of Tennessee, Department of
Finance and Administration and National Information
Consortium USA, Inc., dated August 28, 2000.
10.46 Self Funded Electronic Government Services Term Contract
between the Department of Administration of the State of
Montana and National Information Consortium USA, Inc.,
doing business in Montana through the subsidiary Montana
Interactive, Inc., dated December 21, 2000.
21.1 Subsidiaries of the registrant
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
- ------------------------
(1) Incorporated by reference to Registration Statement on Form S-1,
File No. 333-77939
(2) Incorporated by reference to Registration Statement on Form S-1,
File No. 333-30872
89
(3) Incorporated by reference to Form 8-K filed with the Securities and Exchange
Commission on May 26, 2000
(4) Incorporated by reference to Registration Statement on Form S-8,
File No. 333-37000
(b) REPORTS ON FORM 8-K.
A report on Form 8-K was filed with the Securities and Exchange Commission
on October 13, 2000, with attached Press Release of the Company dated
October 6, 2000, announcing, under Item 5, that the Company had completed the
restructuring of its eGovernment market and product development operations. The
Company stated that it had refined its 2001 outlook and projects that it will
likely not generate positive EBITDA until 2002 because of its investments in
local portals, its AOL/ Government Guide partnership and continued market and
core technology development across its eGovernment businesses.
90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 30, 2001.
NATIONAL INFORMATION CONSORTIUM, INC.
BY: /S/ JAMES B. DODD
-----------------------------------------
James B. Dodd
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JEFFERY S. FRASER Chairman and Director
------------------------------------------- March 30, 2001
Jeffery S. Fraser
President, Chief Executive
/s/ JAMES B. DODD Officer and Director
------------------------------------------- (Principal Executive March 30, 2001
James B. Dodd Officer)
/s/ KEVIN C. CHILDRESS Chief Financial Officer
------------------------------------------- (Principal Financial March 30, 2001
Kevin C. Childress Officer)
/s/ STEPHEN M. KOVZAN Vice President, Financial
------------------------------------------- Operations (Principal March 30, 2001
Stephen M. Kovzan Accounting Officer)
/s/ JOHN L. BUNCE, JR. Director
------------------------------------------- March 30, 2001
John L. Bunce, Jr.
/s/ DANIEL J. EVANS Director
------------------------------------------- March 30, 2001
Daniel J. Evans
/s/ ROSS C HARTLEY Director
------------------------------------------- March 30, 2001
Ross C Hartley
/s/ PETE WILSON Director
------------------------------------------- March 30, 2001
Pete Wilson
91