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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2001
[ ] 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
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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
incorporation or organization) Identification No.)
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
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
(Title of Class)
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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, 2002, was approximately $98,649,812(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, 2002, 56,418,007 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 2002 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, 2002.
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TABLE OF CONTENTS
NATIONAL INFORMATION CONSORTIUM, INC.
FORM 10-K ANNUAL REPORT
Page
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PART I
Item 1 Business .................................................................... 1
Item 2 Properties .................................................................. 26
Item 3 Legal Proceedings ........................................................... 26
Item 4 Submission of Matters to a Vote of Security Holders ......................... 27
PART II
Item 5 Market for Registrant's Common Equity and Related Shareholder Matters ....... 28
Item 6 Selected Consolidated Financial Data ........................................ 28
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations .............................................................. 29
Item 7A Quantitative and Qualitative Disclosures About Market Risk .................. 45
Item 8 Consolidated Financial Statements and Supplementary Data .................... 46
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure .................................................................. 85
PART III
Item 10 Directors and Executive Officers of the Registrant .......................... 85
Item 11 Executive Compensation ...................................................... 85
Item 12 Security Ownership of Certain Beneficial Owners and Management .............. 85
Item 13 Certain Relationships and Related Transactions .............................. 85
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............ 85
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 14 to 15; government regulation
discussed on page 15; intellectual property and proprietary rights discussed on
pages 15 to 16; the specific risk factors discussed on pages 16 to 26; and
commitments and contingencies described in Note 18 to the consolidated financial
statements included in this Form 10-K.
PART I
ITEM 1. BUSINESS
The Company
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.
Business Overview
We are a provider of 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 two primary
divisions: our portal outsourcing businesses and our software and services
businesses. In our portal outsourcing businesses, we enter into contracts with
governments and on their behalf design, build and operate Web-based portals.
These portals consist of websites 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 self-funding 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 portal outsourcing services for
sixteen states and seven 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 marketing our portal outsourcing services to new
states, municipalities, federal agencies and international entities, and by
delivering new products and services and expanding markets within our existing
contractual relationships.
1
Our software and services businesses include our eProcurement, electronic
corporate filings, ethics & elections filings, commercial vehicle compliance
and AOL businesses. Our eProcurement business, NIC Commerce, is a provider of
Web-based electronic procurement solutions to federal and state markets. Our
electronic corporate filings business, NIC Conquest, is a provider of software
applications and services for electronic filings and document management
solutions for governments. Our corporate filings business focuses on
Secretaries of State, whose offices are state governments' principal agencies
for corporate filings. Our ethics & elections filings business, NIC
Technologies, designs and develops online ethics and election filing systems
for federal, state and local government agencies. Our commercial vehicle
compliance business, IDT, has developed business-to-government applications
that facilitate compliance with the Federal Highway Administration's Commercial
Vehicle Information System Network. We currently have contracts to provide
certain state governments with commercial vehicle electronic credentialing
services that include registration, permitting, and tax filing software. Also
included in our software and services segment is our AOL division. In August
2000, we entered into a three-year agreement with America Online, Inc. to
deliver government information, services and applications through AOL's
Government Guide.
With the exception of our IDT business, our acquired software and services
businesses have incurred significant losses since their respective dates of
acquisition. However, As further discussed in Management's Discussion and
Analysis of Financial Condition and Results of Operations and in Note 3 to the
Notes to Consolidated Financial Statements included in this Form 10-K, we have
restructured these businesses and sized their operations in an effort to
accelerate their path to profitability and to match the expected demand for
their services.
We own a 21% interest in privately held E-Filing.com, Inc., a provider of
online filing applications for legal services. This strategic investment is
expected to enable both E-Filing.com and NIC to expand access to judicial
eGovernment applications nationwide. We also own a 47% interest 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 European Business Ltd. The purpose of eGS, based in
London, England, is to deliver eGovernment services throughout Western Europe,
with initial efforts to focus on the United Kingdom.
Segment Information
Our four reportable segments as of and for the year ended December 31,
2001 consisted of our portal outsourcing segment, eGovernment products segment,
eProcurement segment and our AOL segment. The portal outsourcing segment
includes the Company's subsidiaries operating outsourced state and city-county
government portals and the corporate divisions that support portal operations.
The eGovernment products segment includes our electronic corporate filings,
ethics & elections filings and commercial vehicle compliance businesses. For
additional information relating to our reportable segments, refer to Note 22 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.
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
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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. According to market research firm Nielsen/Netratings, more than
498 million people worldwide had access to the Internet from home in December
2001. By 2004, research firm eMarketer predicts that 710 million people
worldwide will use the Internet. 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 proliferation of Internet content and the
increasing familiarity with and acceptance of the Internet by governments,
businesses and consumers.
In the United States, the U.S. Census Bureau estimates that 51% of
households had at least one computer in August 2000, and 44 million households
connected to the Internet on a weekly basis. A survey conducted by the National
Telecommunications & Information Administration in September 2001 found that
143 million Americans were Internet users, with approximately two million new
users connecting to the Internet each month.
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 grow to approximately $492 billion in 2002.
Business-to-business usage is also growing rapidly. Market research firm
Forrester estimates that business-to-business electronic commerce will exceed
$420 billion in 2002. Gartner Dataquest predicts that spending on state and
local government information technology initiatives will grow from $44 billion
in 2002 to more than $56 billion in 2005. Gartner Dataquest also predicts that
eGovernment spending for hardware, software and services will reach $6.5
billion by 2005. Forrester expects 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 also
predicts that local governments will deploy over 8,900 different eGovernment
applications by the middle of the decade.
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.
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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:
o the high cost of implementing and maintaining Internet technology in a
budget-constrained environment;
o the financial, operational and technology risks of moving from older,
established technologies to rapidly evolving Internet technologies;
o 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
o the intense competition for qualified technical personnel.
Governments also face some unique challenges that exacerbate the
difficulty of advancing to Internet-based services, including:
o lengthy and potentially politically charged appropriations processes
that make it difficult for governments to acquire resources and to
develop Internet services quickly;
o a diverse and substantially autonomous group of government agencies that
have adopted varying and fragmented approaches to providing information
and transactions over the Internet;
o 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
o 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, regulatory and security 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
In our core portal outsourcing segment, we provide Internet-based
electronic government services that meet the needs of governments, businesses
and citizens. The key elements of our service delivery are:
Customer-focused, one-stop government portal
Using our marketing and technical expertise and our government experience,
we develop, build and operate portals for 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 website
of every government agency in a specific jurisdiction from one online location.
We employ a common look and feel in the websites of all government agencies
associated with our 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. 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.
4
Compelling and flexible financial models for governments
With our self-funding business model, we allow governments to implement
comprehensive eGovernment 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 services
rapidly, efficiently and accurately, using our well-tested and reliable
infrastructure and processes. Once we establish a portal and the associated
applications, we manage transaction flows and fund ongoing costs from the fees
received from information accessed and transactions conducted through the
portal. Due to our increasing scale and market penetration, we are also able to
provide specific fee-based application development and portal outsourcing
solutions to governments who do not wish to pursue a self-funding portal
solution.
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 electronic government policymaking that involves
the formation of oversight boards to 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 government clients
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 other 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.
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 alliances, deepening the knowledge base that we have
developed from our existing operations, standardizing our eGovernment service
offerings, and coordinating our application 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.
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Increasing transactional revenues from our government portals and filing
applications
We intend to increase transactional revenues on our government portals and
through our 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 website 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
services our portals offer.
Continuing to diversify our revenue streams through our software and services
businesses
In addition to our portal outsourcing businesses, which provided the
majority of our revenues in 2001, we have made significant investments in our
software and services business over the past three years. Although the majority
of our software and services businesses have incurred significant losses since
we have acquired them, we have restructured these businesses and sized their
operations in an effort to accelerate their path to profitability and to match
the expected demand for their services. Of significance in 2001, our electronic
corporate filings business was awarded a five-year contract by the California
Secretary of State to develop and implement a comprehensive information
management and filing system. The five-year contract with the Business Programs
Division of the California Secretary of State is valued at approximately $25
million and is the largest government contract we have ever been awarded. This
award is both the nation's largest state eGovernment filing initiative on
record and the most comprehensive secretary of state outsourced filing system
project in the United States.
Continuing to pursue new strategic alliances
We intend to pursue strategic technology alliances 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 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.
Expanding our international presence
We believe our self-funding business 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. We own 47% of 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
European Business Ltd. The purpose of eGS, based in London, England, is to
deliver eGovernment products and services throughout Western Europe, with
initial efforts to focus on the United Kingdom.
Government Contracts
Our portal outsourcing businesses
Through our portal outsourcing businesses, we currently have contracts with 23
state and local government agencies. At December 31, 2001, we provided
outsourced government portal services through the following portals:
6
Year
Services
Portal Name Commenced Web Address
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RI.gov (Rhode Island) 2001 www.RI.gov
TampaGov (City of Tampa) 2001 www.TampaGov.net
AccessKent (Kent County, Michigan) 2001 www.accessKent.com
Dallas County Online (Dallas County, Texas) 2001 www.DallasCounty.org
YourOklahoma (Oklahoma) 2001 www.YourOklahoma.com
Discovering Montana (Montana) 2001 www.DiscoveringMontana.com
CityServices (City and County of San Francisco,
California) 2000 http://CityServices.SFgov.org.
TennesseeAnytime (Tennessee) 2000 www.TennesseeAnytime.org
eHawaiiGov (Hawaii) 2000 www.eHawaiiGov.org
Access Idaho (Idaho) 2000 www.accessIdaho.org
Utah.gov (Utah) 1999 www.Utah.gov
Information Resource of Maine (Maine) 1999 www.inforME.org
AccessArkansas (Arkansas) 1997 www.accessArkansas.org
CivicNet (Indianapolis and Marion County, Indiana) 1997 www.CivicNet.net
IOWAccess Network (Iowa) 1997 www.IOWAccess.org
Virginia Information Providers Network (Virginia) 1997 www.myVirginia.org
accessIndiana (Indiana) 1995 www.IN.gov
Nebraska Online (Nebraska) 1995 www.nol.org
accessKansas (Kansas) 1992 www.accessKansas.org
We have also recently entered into contracts with the State New Hampshire,
the Florida Association of Court Clerks and Washtenaw County (MI) that had not
yet become fully operational at December 31, 2001. On February 1, 2002, the
Company also entered into a three-year portal outsourcing contract with the
State of Alabama.
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:
o we have the right to develop a comprehensive Internet portal owned by
that government to deliver electronic government services;
o the portal we establish is the primary electronic and Internet interface
between the government and its citizens;
o it supports the use of the portal for all commercially valuable
applications in order to support the operation and expansion of the
portal;
o 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
o 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:
o develop, manage, market, maintain and expand that government's portal
and information and electronic commerce applications;
o assume the investment risk of building and operating that government's
portal and applications without the direct use of tax dollars;
o bear the risk of collecting transaction fees; and
o have an independent audit conducted upon that government's request.
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Currently, under our contracts with the States of Iowa, Oklahoma and New
Hampshire, Kent and Washtenaw Counties and the Florida Association of Court
Clerks, we provide consulting, development and management services for these
government portals predominantly under a fixed-price model. However, under our
contracts with the State of Oklahoma, Kent County and the Florida Association
of Court Clerks, we anticipate transaction-based revenues beginning in 2002.
We own all the software we develop under our government portal contracts.
After completion of the initial contract term, our government clients typically
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 software and services businesses
eProcurement
In the first quarter of 2000, our eProcurement business, NIC Commerce,
entered into an operating agreement with Bank of America Corporation 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's eProcurement software with Bank of America's
government purchase cards, the new company allows 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
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 also has
contracted to provide electronic procurement services under transaction-based
pricing models to the States of Colorado and Utah. However, at the end of 2001,
the Company determined it was unlikely that NIC Commerce's Colorado/Utah
project would continue beyond the pilot phase of production, which concluded in
February 2002.
We currently provide outsourced procurement portal services through the
following portals:
o South Carolina (www.scecatalog.com)
o HGAC -- Houston Galveston Area Council of Governments (www.hgacbuy.com)
NIC 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.
Electronic corporate filings
Our electronic corporate filings business, NIC Conquest, focuses on
Secretaries of State, whose offices are state governments' principal agencies
for corporate filings. We have installed or are in the process of installing
software applications for Web-enabling the back-office systems and processes
for business-to-government filings with the following states: Arkansas,
California, Colorado, Indiana, Iowa, Kansas, Minnesota, Montana, Nebraska, New
York, Oklahoma, South Dakota, Texas and Wisconsin.
In September 2001, we were awarded a five-year contract by the California
Secretary of State to develop and implement a comprehensive information
management and filing system. The five-year
8
contract to build an information management and retrieval system for the
Business Programs Division of the California Secretary of State is valued at
approximately $25 million and is the largest government contract we have ever
been awarded. This award is both the nation's largest state eGovernment filing
initiative on record and the most comprehensive secretary of state filing
system project in the United States. The new Web-enabled document management
and filing system will increase efficiency and reduce expenses for the State by
eliminating paperwork and decreasing processing and turnaround times. Upon
completion, the new system will allow agency customers, primarily from the
banking and legal communities, to search, retrieve, and submit documents
online. Customers will also be able to pay fees for a variety of transactions,
including new incorporation document filings, trademark registrations, and
Uniform Commercial Code filings. The contract includes comprehensive back
office document and revenue management systems, Web and Internet applications
that will take approximately 90% of the agency's Business Programs Division's
services online, and imaging and indexing of more than ten million historical
document pages. As part of the contract, we will provide three years of onsite
support and maintenance for the system as well as marketing consultation to
drive user adoption within the legal and banking industries.
Ethics & elections filings
Our ethics & elections filings business, NIC Technologies, designs and
develops online election and ethics filing systems for federal, state and local
government agencies. Our current government clients include the Federal
Election Commission and the State of Michigan. We have also recently installed
our filing systems in several other governments including Arkansas, California,
Hawaii, Illinois, Louisiana, Oklahoma, Texas and British Columbia.
Commercial vehicle compliance
We are a provider of business-to-government reporting and filing software
for the transportation industry. Our commercial vehicle compliance business,
IDT, currently has contracts to provide the state governments in California,
Kentucky, Maryland, Minnesota, and the Federal Motor Safety Administration,
commercial vehicle electronic credentialing services.
Our Products and Services
Our portal outsourcing businesses
Each of our portal 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.
9
Some of the products and services we currently offer in different
jurisdictions include:
Product or Service Description Primary Users
- ------------------------------------ ----------------------------------------- ----------------------------
Driver's License Records Retrieval For those businesses legally Insurance companies
authorized, offers controlled instant
look-up of driving records. Includes
commercial licenses.
Vehicle Title, Lien & Registration Provides controlled interactive title, Insurance companies,
registration and lien database lenders, citizens
access. Permits citizens to renew
their vehicle registrations online.
BillWatch (Lobbyist in a Box) Allows the user to monitor state Attorneys, lobbyists
legislative activity. Users can tag
bills by key word or bill number,
and BillWatch 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 databases on Hospitals, clinics, health
Services several health professions to verify insurers, citizens
license status.
Secretary of State Searches Allows users to access filings of Attorneys, lenders
corporations, partnerships and other
entities, including charter
documents.
Uniform Commercial Code (UCC) Permits searches of the UCC Attorneys, lenders
Searches and Filings database to verify financial liens,
and permits filings of secured
financial documents.
Professional License Renewal Permits professionals to renew their Attorneys, doctors, nurses,
licenses on line using a credit card. architects and other
licensed professionals
Driver's License Renewal Permits citizens to renew their Citizens
driver's license on line using a credit
card.
Motor Fuel EDI Project Allows motor fuel carriers to file Motor fuel carriers
their tax reports electronically.
Sales/Use Tax Filing Allows Sales and Use Tax filers to Retailers
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 for an Citizens
official birth certificate, charging the
user's credit card.
10
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, Hawaii, Idaho, Indiana,
Kansas, Maine, Montana, Nebraska, Oklahoma, Rhode Island, 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 $18.00 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.
Our software and services businesses
eProcurement
Our Web-based procurement solution is designed specifically for
governments. Our eProcurement 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 enables buyers to compare, negotiate and purchase products and services with
speed, ease and accuracy. We provide customers a procurement solution that
combines commercial off-the-shelf software with major bank purchase card
programs, creating an end-to-end procurement product. Our 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 NIC eProcurement product requires less
customization than competing products and is therefore easier and less
expensive to install.
Electronic corporate filings
Our electronic corporate filings business develops and delivers
applications that improve the back-office administration of government records
and better enables electronic filing and distribution of corporations and UCC
records. It 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.
Ethics & elections filings
Our ethics & elections filings business designs and develops online
election and ethics filing systems for federal, state and local government
agencies. We currently provide outsourcing services to maintain and operate our
filing installations with the Federal Election Commission and the State of
Michigan.
Commercial vehicle compliance
Our commercial vehicle compliance business, IDT, develops and delivers
business-to-government reporting and filing software for the transportation
industry. We have developed business-to-government applications that facilitate
compliance with the Federal Highway Administration's Commercial Vehicle
Information System Network, and we currently have contracts to provide certain
state governments with commercial vehicle electronic credentialing services
that include registration, permitting, and tax filing
11
software. Our multi-state filing portal for the trucking industry is 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.
AOL
Through our alliance with America Online, Inc., we deliver government
information, services and applications through AOL's Government Guide
(www.governmentguide.com). NIC and AOL share revenues generated from the
license or sale of advertisement on or through the Government Guide.
Revenues
We currently derive revenue from five main sources:
o transaction-based fees;
o fees for managing electronic government operations;
o software licensing and maintenance fees;
o fees for application development and hosting; and
o advertising fees from AOL.
In most of our outsourced portal businesses, our revenues are generated
from transactions, which generally include the collection of transaction-based
and subscription fees. The highest volume, most commercially valuable service
we offer is access to motor vehicle records through our insurance industry
records exchange network. This service accounted for approximately 65% of our
consolidated revenues in 1999, 48% in 2000 and 43% in 2001. We believe that
while this application will continue to be an important source of revenue, its
contribution as a percentage of our total revenues will decline as other
sources grow. ChoicePoint, which resells these records to the auto insurance
industry, accounted for approximately 48% of revenues in 1999, 34% in 2000 and
29% in 2001. ChoicePoint is our only customer to account for more than 10% of
our consolidated revenues for the past three years. In 2001, transaction-based
revenues accounted for approximately 65% of our consolidated revenues.
In our other operations, revenues are derived primarily from fees for
managing electronic government operations, software licensing and maintenance
fees, and fees for application development and hosting, and advertising fees.
In 2001, these revenues accounted for approximately 35% of our consolidated
revenues.
Sales and Marketing
We have two primary sales and marketing goals:
o to develop new sources of revenue through new government relationships;
and
o 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 most of our outsourced portal business units.
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
12
supportive, educational relationships with professional and business
organizations that may benefit from 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 specifically 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:
o expanding the number of government agencies that provide services or
information on the government portal;
o identifying new information and transactions that can be usefully and
cost-effectively delivered over the Internet; and
o 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
outsourced portal business units 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 acquired 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 Bank of America, AOL and Deloitte Consulting.
Bank of America facilitates the payment processing aspect of our NIC Commerce
business-to-business procurement, payment and reconciliation solution. We
currently deliver state government information, services and applications
through AOL's Government Guide. Deloitte Consulting brings a wealth of
experience in eGovernment implementation, strategic planning, reengineering,
change leadership, training, and integration solutions, and is a primary
subcontractor on our recently awarded corporate filings contract with the
California Secretary of State.
Technology and Operations
Over the past ten 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, website 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
13
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. More than 55% of our
employees work in the Internet services and applications development and
technology operations areas, and most 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 days 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 government entity 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:
o unique understanding of government needs;
o the quality and fit of electronic government services;
o the speed and responsiveness to the needs of businesses and citizens; and
o 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:
o large systems integrators, including American Management Systems and
SAIC;
o traditional software applications developers, including Microsoft and
Oracle;
o traditional consulting firms, including IBM, KPMG, and Accenture;
o providers of e-commerce applications, including Ariba, Commerce One,
PurchasePro.com, Digital Commerce Corporation and Official Payments
Corporation; and
o consumer-oriented government portal companies, such as ezgov.com.
14
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 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.
15
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. In one case, after
completion of one of our government contracts, a government claimed that it
owned all of the software written by NIC employees pursuant to the contract, a
claim which we vigorously disputed, as further discussed in Item 3. Legal
Proceedings in this Form 10-K.
Employees
As of December 31, 2001, we had 338 full-time employees, of which 31 were
working in corporate operations 98 were in our software and services businesses
and 209 were in our outsourced portal businesses. 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
We may need more working capital to fund operations and expand our business
We anticipate that our current resources will be sufficient to meet our
present working capital and capital expenditure requirements through the end of
2002 when we expect to begin to generate positive operating cash flow. However,
we may need to raise additional capital before this period ends to further:
o fund operations, including the costs to complete contracts in our NIC
Conquest business, for which we have recently accrued significant losses
under certain of its fixed-fee contracts, as further discussed below;
o collateralize letters of credit, which the Company is required to post as
collateral for performance on certain of its outsourced government portal
contracts and as collateral for certain performance bonds;
o support our expansion into other states, cities, municipalities and
federal agencies and internationally beyond what is contemplated in 2002
if unforeseen opportunities arise;
o expand our product and service offerings beyond what is contemplated in
2002 if unforeseen opportunities arise;
o respond to unforeseen competitive pressures; and
o acquire complementary businesses or technologies beyond what is
contemplated in 2002 if unforeseen opportunities arise.
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.
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 working capital line of credit. The sale of additional
equity securities could result in additional dilution to the Company's
shareholders. From time to time, we expect to evaluate the acquisition of or
investment in businesses and technologies that complement our various
eGovernment businesses. Acquisitions or investments might impact the Company's
liquidity requirements or cause the Company to sell additional equity
securities or issue debt securities. There can be no assurance that financing
will be available in amounts or on terms acceptable to the Company, if at all.
If adequate funds were not available on acceptable terms, our ability to
develop or enhance our products and services, take advantage of future
16
opportunities or respond to competitive pressures would be significantly
limited. This limitation could harm our business, results of operations and
financial condition. We are currently negotiating a working capital line of
credit with a bank, the purpose of which is to provide the Company with greater
operating flexibility and the resources to pursue opportunities that may
accelerate our growth and profitability. However, we cannot guarantee that such
financing will be secured or will be available in amounts or on terms acceptable
to the Company.
At December 31, 2001, the Company's total cash and marketable securities
balance was $21.3 million, of which we had posted approximately $2.8 million of
our cash and marketable securities as collateral for letters of credit, our $1
million bank line of credit in conjunction with a corporate credit card
agreement, and our $1 million bank note payable. We issue letters of credit as
collateral for performance on certain of our government contracts and as
collateral for certain performance bonds. These irrevocable letters of credit
are generally in force for one year. In conjunction our business filings
contract with the California Secretary of State, in March 2002, we issued a $5
million letter of credit as collateral for a performance bond required by the
contract. Thus, at March 11, 2002, we have posted approximately $7.8 million of
our cash and marketable securities as collateral.
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:
o difficulties in the assimilation of operations, personnel, technologies,
products and information systems of the acquired companies;
o the inability to successfully market, distribute, deploy and manage new
products and services that we have limited or no experience in managing;
o the diversion of management's attention from our core business;
o the risk that an acquired business will not perform as expected;
o risks associated with entering markets in which we have limited or no
experience;
o potential loss of key employees, particularly those of our acquired
businesses;
o adverse effects on existing business relationships with existing
suppliers and customers;
o potentially dilutive issuances of equity securities, which may be freely
tradable in the public market;
o erosion of our brand equity in the eGovernment or financial markets;
o impairment, restructuring and other charges; and
o the incurrence of debt or other expenses related to goodwill and other
intangible assets.
We cannot assure that any acquisitions we 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,
in the third and fourth quarters of 2001, we recorded impairment charges
totaling $37.0 million and $12.5 million, respectively, relating to our NIC
Commerce, NIC Technologies and NIC Conquest businesses, all of which have been
acquired since the third quarter of 1999. Also, in the third quarter of 2000 and
the fourth quarter of 2001, the Company recorded restructuring charges totaling
$0.7 million and $0.4 million, respectively, relating to its NIC Commerce and
NIC Technologies businesses. For additional information on these impairment and
restructuring charges, see Note 3 in the Notes to Consolidated Financial
Statements included in this Form 10-K.
17
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. At December 31, 1999, we had a total of 185
employees, at December 31, 2000, we had a total of 362 employees, at December
31, 2001, we had a total of 338 employees, and at February 28, 2002, we had a
total of 322 employees. To manage future growth effectively, we must maintain
and enhance our financial and accounting systems and controls, integrate new
personnel and manage expanded operations.
Our electronic corporate filings business has incurred losses under its
fixed-fee contracts in the past, and our results of operations could be harmed
if the costs that this business incurs to meet contractual commitments exceed
our current estimates
Our electronic corporate filings business, NIC Conquest, develops and
delivers applications, for a fixed development fee, that improve the
back-office administration of government records and better enable electronic
filing and distribution of corporations and UCC records. In the fourth quarter
of 1998, we determined that the balance of revenues remaining to be recognized
under our existing 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, $1.4 million in
2000 and $6.0 million in 2001 based on revised estimates relating to our
then-existing contracts. It is possible that our 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 seriously harmed.
We have incurred significant net losses in the past
We expanded rapidly following our initial public offering in July of 1999
and have incurred substantial net losses. We incurred net losses of
approximately $77.4 million for the year ended December 31, 2001, $40.3 million
for the year ended December 31, 2000 and $10.7 million for the year ended
December 31, 1999. Management has refocused the business and believes the
Company will be become cash flow positive by the end of 2002. Further, even
though we expect to achieve EBITDA profitability (earnings before interest,
income taxes, depreciation, amortization and other non-cash charges) beginning
in the first quarter of 2002 and net income (determined under generally
accepted accounting principles) by the end of 2002, we may not be able to
sustain or increase profitability on a quarterly or annual basis thereafter. We
will need to generate significantly higher revenues while containing costs and
operating expenses if we are to achieve growing profitability. We cannot be
certain that our revenues will continue to grow or that we will ever achieve
sufficient revenues to become profitable on a long-term, sustained basis.
Because we have portal outsourcing contracts with a limited number of states
and local 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 outsourced portal businesses. We have portal contracts with 23 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
18
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.
We may be unable to obtain future contracts through the request for proposal
process
A high percentage 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.
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. Transaction-based fees charged for access to motor
vehicle records through our insurance industry records exchange network
accounted for over 43% of our revenues for the year ended December 31, 2001 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 this service. 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 solutions, which could harm our business, results
of operations and financial condition.
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 outsourced portal 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.
19
The possibility of governments demanding fixed-price contracts may
significantly reduce our revenues and profits
Substantially all of our current outsourced 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
guarantee that governments will not demand fixed-price contracts in the future.
Currently, under our contracts with the States of Iowa, Oklahoma and New
Hampshire, Kent and Washtenaw Counties and the Florida Association of Court
Clerks, we provide consulting, development and management services for these
government portals predominantly under a fixed-price model. 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.
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 is derived from data resellers' use
of our portals to access motor vehicle records for sale to the automobile
insurance industry. For the year ended December 31, 2001, one of these data
resellers, ChoicePoint, accounted for approximately 29% of our revenues. Two
other resellers accounted for an additional 5% of our revenues. 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.
We may lose the right to the content distributed through our outsourced
portals, which is provided to us entirely by government entities
We do not own or create the content distributed through our outsourced
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
eProcurement, electronic corporate filings, ethics & elections filings and
commercial vehicle compliance businesses, and have recently been awarded
contracts to provide eGovernment services under our traditional self-funding
public/private business model to several 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 model.
20
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 in
part 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.
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:
o 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;
o the internal review process by the government agencies for bid
acceptance;
o the need to reach a political accommodation among various interest
groups;
o changes to the bidding procedure by the government agencies;
o changes to state legislation authorizing government's contracting with
third parties to distribute public information;
o changes in government administrations;
o the budgetary restrictions of government entities;
o the competition generated by the bidding process; and
o 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.
21
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 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 and/or
currently compete with us are as follows:
o large systems integrators, including American Management Systems and
SAIC;
o traditional software applications developers, including Microsoft and
Oracle;
o traditional consulting firms, including IBM, Deloitte Consulting, KPMG,
and Accenture;
o providers of e-commerce applications, including Ariba, Commerce One,
PurchasePro.com, Digital Commerce Corporation and Official Payments
Corporation; and
o consumer-oriented government portal companies, including ezgov.com.
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:
o the commencement, completion or termination of contracts during any
particular quarter;
o the introduction of new electronic government products and services by us
or our competitors;
o technical difficulties or system downtime affecting the Internet
generally or the operation of our electronic government products and
services;
o the amount and timing of operating costs and capital expenditures
relating to the expansion of our business operations and infrastructure;
o the result of negative cash flows due to capital investments; and
o the incurrence of significant charges related to acquisitions.
22
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 2002, 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 continued revenue growth. For example, we cannot
assure you that the use of our eProcurement 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:
o the comprehensiveness of public records available through our government
portals;
o the perceived efficiency and cost-effectiveness of accessing public
records electronically;
o the perceived efficacy of online government-to-business procurement
solutions;
o the effectiveness of security measures; and
o the increased usage and continued reliability of the Internet.
23
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 outsourced 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 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 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:
o enhance and improve the responsiveness, functionality and other features
of the government portals we offer;
o continue to develop our technical expertise;
o develop and introduce new services, applications and technology to meet
changing customer needs and preferences; and
o 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:
o Use of the Internet and other online services does not continue to
increase or increases more slowly than expected; or
o 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
24
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.
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 outsourced 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 websites 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
25
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 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 websites 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 website 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 have commenced a lawsuit captioned NATIONAL INFORMATION CONSORTIUM,
INC., Plaintiff, v. LARRY J. SINGER, in his official capacity as Chief
Information Officer and Executive Director of the Georgia Technology Authority,
and THURBERT E. BAKER, in his official capacity as Attorney General of the State
of Georgia, Defendants, pending in the United States District Court for the
Northern District of Georgia, Atlanta Division, Civil Action File No.
01-CV-2967-CC.
We filed our compliant on November 2, 2001, seeking a declaratory judgment
of copyright ownership of certain computer software written by our employees
during the term of a services contract between NIC and the State of Georgia (the
"Contract"). The compliant named Larry J. Singer, in his official capacity as
Executive Director of the Georgia Technology Authority, and Thurbert E. Baker,
in his official capacity as Attorney General of the State of Georgia, under the
doctrine of Ex Parte Young, which allows lawsuits for prospective, nonpecuniary
relief to proceed against state officials. Prior to our commencement of the
lawsuit, Mr. Singer had written a letter to us claiming that the State of
Georgia owned all of the software written by our employees pursuant to the
Contract. Singer's letter to us was written on the last working day of the
five-year Contract period, and in our view, contradicted the wording of the
Contract.
On December 3, 2001, Defendant Singer filed an answer and counterclaims
against us. The counterclaims included two counts for declaratory judgment of
copyright ownership of the same software specified in our complaint, one count
for breach of contract arising from our alleged use of the software in servicing
other state clients, and one count for unjust enrichment. Also on December 3,
2001, Defendant Thurbert E. Baker filed a motion to dismiss our compliant on the
grounds of standing and sovereign immunity.
On December 17, 2001, we filed a motion to dismiss Singer's breach of
contract and unjust enrichment counts and one of Singer's declaratory judgment
counts for failure to state a claim upon which relief may be granted. In
response to this motion, Singer withdrew his count for unjust enrichment. Also
on December 17, 2001, we filed a motion for a more definitive statement of
Singer's remaining declaratory judgment count.
26
All of the above motions are currently pending. The sole remaining claim
for money damages is Singer's breach of contract count. Singer has not specified
an amount of claimed damages, but contends that such damages would be an
undisclosed percentage of the total amount of money paid to NIC pursuant to the
Contract. The parties appear to have reached a settlement in principle on a
basis very agreeable to NIC. However, there can be no assurance until the
settlement agreement wording is negotiated and the agreement is signed that such
an outcome will be obtained.
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 2001.
27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our stock trades 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,
2002, the closing price of our common stock was $3.80.
Fiscal Year Ended December 31, 2000 High Low
- ------------------------------------- ------------------- ------------
First Quarter ....................... $ 67.88 $ 28.63
Second Quarter ...................... $ 32.38 $ 9.75
Third Quarter ....................... $ 17.75 $ 3.97
Fourth Quarter ...................... $ 4.06 $ 1.19
Fiscal Year Ended December 31, 2001 High Low
- -------------------------------------- ------- -------
First Quarter ....................... $ 5.13 $ 1.75
Second Quarter ...................... $ 3.06 $ 1.82
Third Quarter ....................... $ 3.60 $ 2.24
Fourth Quarter ...................... $ 3.57 $ 2.19
As of March 1, 2002, there were approximately 228 holders of record of
shares of our 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 additional information on the Exchange Offer
and the business acquisitions we have made since 1999, refer to Notes 4 and 5
in the Notes to Consolidated Financial Statements included in this Form 10-K.
Year Ended December 31,
--------------------------------------------------------------------
1997 1998 1999 2000 2001
--------- ----------- ------------ ------------ ------------
(in thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues .................................... $ 996 $ 8,148 $ 16,147 $ 26,971 $ 39,229
Operating loss ................................... (277) (7,205) (14,470) (52,206) (97,968)
Net loss .......................................... (277) (7,896) (10,731) (40,278) (77,444)
Net loss per share-basic and diluted .............. (0.01) (0.21) (0.23) (0.74) (1.38)
28
December 31,
--------------------------------------------------------------------
1997 1998 1999 2000 2001
--------- ----------- ------------ ------------ ------------
(in thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ......................... $ 179 $ 1,311 $ 9,527 $ 13,878 $ 17,236
Marketable securities ............................. -- -- 82,481 24,914 4,066
Total assets ...................................... 326 17,249 133,661 143,792 81,814
Bank lines of credit .............................. -- 1,024 -- -- --
Long-term debt (includes current portion of
notes payable/capital lease obligations) ......... 30 745 458 217 888
Total shareholders' equity ........................ 188 10,912 128,089 135,160 59,559
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.
The Company
We are a provider of 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 two primary
divisions: our portal outsourcing businesses and our software and services
businesses. In our portal outsourcing businesses, we enter into contracts with
governments and on their behalf design, build and operate Web-based portals.
These portals consist of websites 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 self-funding 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 portal outsourcing services for
sixteen states and seven 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 marketing our portal outsourcing services to new
states, municipalities, federal agencies and international entities, and by
delivering new applications and services and expanding markets within our
existing contractual relationships.
Our software and services businesses include our eProcurement, electronic
corporate filings, ethics & elections filings, commercial vehicle compliance and
AOL businesses. In September 1999, we acquired the net assets of NIC Commerce
(formerly eFed), a provider of Internet-based procurement solutions for
governments. NIC Commerce develops and manages Internet-based procurement
software and services for federal and state government markets. Our Web-based
procurement solution is designed specifically for governments.
In January 2000, we merged our application services division with Conquest
Softworks, LLC. NIC Conquest, the newly formed entity, serves as our electronic
corporate filings business and is a provider of
29
software applications and services for electronic filings and document
management solutions for governments. Our corporate filings business focuses on
Secretaries of State, whose offices are state governments' principal agencies
for corporate filings.
In May 2000, we acquired SDR Technologies, a provider of Internet-based
applications for governments. SDR was renamed NIC Technologies. NIC
Technologies, our ethics & elections filing business, designs and develops
online election and ethics filing systems for federal, state and local
government agencies.
In October 2000, we acquired Intelligent Decision Technologies, Ltd., a
provider of business-to-government reporting and filing software for the
transportation industry. IDT, our commercial vehicle compliance business, has
developed business-to-government applications that facilitate compliance with
the Federal Highway Administration's Commercial Vehicle Information System
Network. We currently have 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 our
consolidated statements of operations from the respective dates of acquisition.
For additional information relating to our acquired businesses, refer to Note 4
in the Notes to Consolidated Financial Statements included in this Form 10-K.
In August 2000, we entered into a three-year agreement with America
Online, Inc. to deliver government information, services and applications
through AOL's Government Guide. NIC and AOL share revenues generated from the
license or sale of advertisement on or through the Government Guide.
Strategic Alliances and Investments
In March 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 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 8 in the Notes to Consolidated Financial Statements
included in this Form 10-K.
In August 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 9 in the Notes to Consolidated Financial Statements
included in this Form 10-K.
In August 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,
30
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. Deloitte Consulting serves as a subcontractor on
NIC's business filings contract with the California Secretary of State, as
further discussed below.
In March 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. This strategic investment
is expected to enable both E-Filing.com and NIC to expand access to judicial
eGovernment applications nationwide. The investment is accounted for under the
equity method.
Also in March 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. This strategic investment was
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 May
2001, a private technology company acquired Tidemark for cash consideration of
approximately $1.6 million. We received approximately $0.7 million in cash from
the transaction and had no investment balance remaining at December 31, 2001.
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 European Business Ltd. The purpose
of eGS, based in London, England, is to deliver eGovernment products and
services throughout Western Europe, with initial efforts to focus on the United
Kingdom. In September 2001, the eGS Joint Venture Agreement was modified and
reduced our obligation to make future cash contributions to the joint venture.
The investment is accounted for under the equity method. At December 31, 2001,
our ownership was approximately 47% of the ordinary shares of eGS.
E-Filing.com and eGS 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 recorded any such
impairment losses on our investments in E-Filing.com or eGS. For additional
information on our investments in E-Filing.com, Tidemark and eGS, refer to Note
7 in the Notes to Consolidated Financial Statements included in this Form 10-K.
Business Filings Contract with California Secretary of State
On September 6, 2001, our electronic corporate filings business was awarded
a five-year contract by the California Secretary of State. The five-year
contract to build an information management and retrieval system for the
Business Programs Division of the California Secretary of State is valued at
approximately $25 million and is the largest government contract we have ever
been awarded. This award is both the nation's largest state eGovernment filing
initiative on record and the most comprehensive secretary of state outsourced
filing system project in the United States. The new Web-enabled document
management and filing system will increase efficiency and reduce expenses for
the State by eliminating paperwork and decreasing processing and turnaround
times. Upon completion, the new system will allow agency customers, primarily
from the banking and legal communities, to search, retrieve, and submit
documents online. Customers will also be able to pay fees for a variety of
transactions, including new incorporation document filings, trademark
registrations, and Uniform Commercial Code filings. The contract includes
comprehensive back office document and revenue management systems, Web and
Internet applications
31
that will take approximately 90% of the agency's Business Programs Division's
services online, and imaging and indexing of more than ten million historical
document pages. As part of the contract, we will provide three years of onsite
support and maintenance for the system as well as marketing consultation to
drive user adoption within the legal and banking industries. We will account for
revenues under this contract on the percentage of completion basis. Work on this
contract commenced in September 2001, and we believe this contract will be
profitable. In conjunction with this contract, in March 2002, we issued a letter
of credit in the amount of $5 million as collateral for a performance bond
required by the contract. The letter of credit has been fully collateralized by
our cash and marketable securities.
Overview of Business Models
We 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 primarily from our subsidiaries operating state and local
government portals on an outsourced basis. The software and services category
includes revenues and cost of revenues primarily from our eProcurement,
electronic corporate filings, ethics & elections, commercial vehicle compliance
and AOL businesses. We currently derive revenue from five main sources:
o transaction-based fees;
o fees for managing electronic government operations;
o software licensing and maintenance fees;
o fees for application development and hosting; and
o advertising fees from AOL.
Each of these revenue types and the corresponding business models are
further described below.
Our portal outsourcing businesses
In most of our outsourced portal businesses, our revenues are generated
from transactions, which generally include the collection of transaction-based
and subscription fees. The highest volume, most commercially valuable service
we offer is access to motor vehicle records, referred to as DMV records,
through our insurance industry records exchange network. This service accounted
for approximately 65% of our consolidated revenues in 1999, 48% in 2000 and 43%
in 2001. We believe that while this application will continue to be an
important source of revenue, its contribution as a percentage of our total
revenues will decline as other sources grow. ChoicePoint, which resells these
records to the auto insurance industry, accounted for approximately 48% of
revenues in 1999, 34% in 2000 and 29% in 2001. ChoicePoint is our only customer
to account for more than 10% of our consolidated revenues for the past three
years. In 2001, portal revenues accounted for approximately 68% of our
consolidated revenues.
In our outsourced portal businesses for 2001, DMV revenues represented
approximately 63% of portal revenues and non-DMV revenues represented 37%. For
a mature portal (a portal operating for more than one year), annual DMV revenue
growth has averaged approximately 1% to 3% for the past three years, whereas
non-DMV revenue growth is currently averaging approximately 50% per year.
Transaction-based revenues from our outsourced 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.
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
32
agencies for data access are accrued as accounts receivable and 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 collect the fees. The pricing of
transactions varies by the type of transaction and by state.
Currently, under our contracts with the States of Iowa, Oklahoma and New
Hampshire, Kent and Washtenaw Counties (MI) and the Florida Association of
Court Clerks, we provide consulting, development and management services for
these government portals predominantly under a fixed-price model. However,
under our contracts with Oklahoma, Kent County and Florida, we anticipate
transaction-based revenues beginning in 2002.
Our software and services businesses
eProcurement
Our eProcurement business, while traditionally deriving software licensing
and maintenance revenues from several federal agencies, also has contracted to
provide eProcurement services under a transaction-based pricing model, a trend
that began in the third quarter of 2000 when our eProcurement business modified
its business model from a software licensing and maintenance fee basis to a
transaction basis. NIC Commerce has contracted to provide electronic
procurement services under transaction-based pricing models to four state/local
government agencies: Houston-Galveston Area Council of Governments (H-GAC), the
State of South Carolina and the States of Colorado and Utah. However, at the
end of 2001, we determined it was unlikely that NIC Commerce's Colorado/Utah
project would continue beyond the pilot phase of production, which concluded in
February 2002. As our procurement portals in South Carolina and
Houston/Galveston ramp up business in 2002, we expect an increase in
transaction-based revenues from NIC Commerce. However, we anticipate decreased
year-over-year quarterly eProcurment revenues in 2002 as a result of the
planned downsizing of this business as further discussed below. In 2001, our
eProcurement business accounted for approximately 5% of our consolidated
revenues.
Electronic corporate filings
Our electronic corporate filings business derives the majority of its
revenues from fixed-price application development contracts and recognizes
revenues from long-term application development contracts on the percentage of
completion method. The average size contract for this business has historically
been approximately $1 million to $3 million. However, as further discussed
below, our five-year contract with the California Secretary of State is valued
at approximately $25 million. In 2001, our electronic corporate filings
business accounted for approximately 14% of our consolidated revenues.
Ethics & elections
Our ethics & elections business derives the majority of its revenues from
time and materials application development and maintenance outsourcing
contracts and recognizes revenues as services are provided. In 2001, our ethics
& elections business accounted for approximately 3% of our consolidated
revenues.
Commercial vehicle compliance
Our commercial vehicle compliance business currently derives the majority
of its revenues from cost-plus time and materials application development
contracts with governments and recognizes revenues as services are provided. In
2001, our commercial vehicle compliance business accounted for approximately 7%
of our consolidated revenues.
AOL
In August 2000, we entered into a three-year agreement with America
Online, Inc. to deliver government information, services and applications
through AOL's Government Guide. NIC and AOL share revenues generated from the
license or sale of advertisement on or through the Government Guide. We
recognize our share of AOL's advertising revenues when notified of the amount
due from AOL, which is approximately one month after the advertisement is
provided. In 2001, our AOL business accounted for approximately 3% of our
consolidated revenues.
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Critical Accounting Policies
Financial Reporting Release No. 60, which was recently issued by the SEC,
requests companies to include a discussion of critical accounting policies or
methods used in the preparation of financial statements. The SEC indicated that
a critical accounting policy is one which is both important to the portrayal of
the Company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. Our
significant accounting policies are described in Note 2 to the Notes to
Consolidated Financial Statements included in this Form 10-K. We have
identified the policies below as critical to our business operations and the
understanding of our results of operations. Note that the preparation of our
consolidated 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.
There can be no assurance that actual results will not differ from those
estimates.
Revenue recognition
Our electronic corporate filings business, NIC Conquest, derives the
majority of its revenues from fixed-price application development contracts and
recognizes revenues on the percentage of completion method, primarily utilizing
costs incurred to date as compared to the estimated total costs for each
contract. Revenues and profits from these contracts are based on the Company's
estimates to complete and are reviewed periodically, with adjustments recorded
in the period in which the revisions are made. Any anticipated losses on
contracts are charged to operations as soon as they are determinable. In 1999,
management determined that the balance of revenues remaining to be recognized
under existing contractual obligations was not expected to cover anticipated
costs of developing and implementing the related applications and accrued
approximately $1.2 million for the expected loss. Due to developments arising
in late March 2000 relating to subcontractor performance and technical delivery
issues, management 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 approximately $1.4
million for the expected loss. Due to developments arising in the second half
of 2001 relating to NIC Conquest's decision to migrate to a common operating
platform for its UCC and corporations filing applications, management accrued
an additional $6.0 million for expected losses on outstanding contracts where
migration was elected. These losses are included in cost of software and
services revenues in the consolidated statements of operations. At December 31,
2001, the accrual for all application development contracts held by the Company
was approximately $4.0 million, which management believes is adequate. Because
of the inherent uncertainties in estimating the costs of completion, it is at
least reasonably possible that the estimate will change in the near term.
Impairment of intangible assets
At each balance sheet date, and whenever events or changes in circumstances
warrant, management assesses the carrying 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 were to be
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. There is considerable management judgment
necessary to determine future cash flows, and accordingly, actual results could
vary significantly from such estimates.
In the third and fourth quarters of 2001, we recorded impairment charges
totaling $37.0 million and $12.5 million, respectively, relating to our NIC
Commerce, NIC Technologies and NIC Conquest businesses as further discussed
below and in Note 3 to the Notes to Consolidated Financial Statements included
in this Form 10-K.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 142 addresses the financial
34
accounting and reporting for goodwill and other intangible assets acquired in a
business combination after they have been initially recognized in the financial
statements, eliminates amortization of goodwill, and requires that goodwill be
tested for impairment at least annually. SFAS No. 142 is effective for the
Company beginning January 1, 2002. At December 31, 2001, the carrying value of
our goodwill, relating exclusively to the acquisition of IDT in October 2000,
was approximately $1.3 million. In 2001, we recognized goodwill amortization
expense of approximately $0.2 million per quarter relating to the IDT
acquisition that will no longer be recognized upon adoption of SFAS No. 142. We
have not completed an assessment of the impact of the impairment testing
required by SFAS No. 142. SFAS No. 142 requires the Company to determine if the
fair value of IDT is less than the carrying value at January 1, 2002 by June 30,
2002. If the fair value were less than the carrying value, goodwill would likely
be impaired. IDT was profitable in 2001 and is expected to be profitable in
2002. However, we have contingent purchase price obligations related to IDT (see
Note 4 in the Notes to Consolidated Financial Statements included in this Form
10-K), and issuance of additional consideration in 2002 or 2003 could result in
impairment even if our recorded goodwill at January 1, 2002 was not impaired
under SFAS No. 142.
Deferred income taxes
We recognize deferred income taxes 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
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
We have a recent history of unprofitable operations primarily due to
operating losses incurred in the companies we have acquired since September
1999. These losses have generated significant federal tax net operating losses,
or NOLs. We had available at December 31, 1999, 2000 and 2001 NOL carryforwards
for federal tax purposes of approximately $0.3 million, $29.8 million and $30.6
million that will expire in the years 2019, 2020 and 2021, respectively. We
believe it is more likely than not that we will generate sufficient taxable
income from future operations to fully utilize the NOL carryforwards prior to
expiration. The recorded amount of the deferred tax assets considered
realizable could be reduced in the near term if estimates of future taxable
income during the carryforward periods are reduced. There is considerable
management judgment necessary to determine future taxable income, and
accordingly, actual results could vary significantly from such estimates. For
additional discussion of deferred income taxes, see the "Deferred Tax Assets"
section below and Note 17 to the Notes to Consolidated Financial Statements
included in this Form 10-K.
Impairment and Restructuring Charges
In the third and fourth quarters of 2001, we recorded impairment charges
totaling $37.0 million and $12.5 million, respectively, relating to our NIC
Commerce, NIC Technologies and NIC Conquest businesses. In the third quarter
of 2000 and the fourth quarter of 2001, we recorded restructuring charges
totaling $0.7 million and $0.4 million, respectively, relating to our NIC
Commerce and NIC Technologies businesses.
35
NIC Commerce
During the third quarter of 2001, we identified indicators of possible
impairment of our goodwill and other acquired intangible assets related to the
acquisition of eFed. The impairment indicators included, but were not limited
to, the recent restructurings in this business, which included workforce
layoffs and office closings, significant underperformance of this business
relative to historical and projected future operating results, management's
reallocation of capital resources from this underperforming business to its
most profitable businesses, and significant negative industry and economic
trends within the eProcurement sector. In addition to the management and
organizational changes that have taken place at NIC Commerce since third
quarter of 2000, we continued the restructuring of this business in recent
months by eliminating the majority of its marketing and business development
staff due to poor performance, with additional headcount reductions made in
October 2001. We concluded the remaining goodwill and other intangible assets
related to the acquisition of eFed no longer had value and recognized a $9.4
million impairment loss in the third quarter of 2001. Furthermore, in December
2001, we determined it was unlikely that NIC Commerce's Colorado/Utah project
would continue beyond the pilot phase of production. This, among other factors,
led us to determine that the NIC Commerce business would be downsized further
in 2002, which will include the terminations of certain senior administrative
staff and development staff to more appropriately size operations to visible
demand. Such demand could not support the recoverability of costs NIC Commerce
had capitalized on the latest versions of its eProcurement software and $4.6
million was expensed as an impairment charge in the fourth quarter of 2001.
NIC Technologies
During the third quarter of 2001, we identified indicators of possible
impairment of our goodwill and other acquired intangible assets related to the
acquisition of SDR Technologies. The impairment indicators included, but were
not limited to, the recent restructuring in this business, which included
workforce layoffs and office closings, and the significant underperformance of
this business. NIC Technologies had been integrated as the application
development organization for our portal businesses. However, a series of
organizational restructurings completed in the third quarter of 2001 lead to
significant layoffs at NIC Technologies and a shift in application development
from what were previously centralized development operations in Westlake
Village, California and Pune, India to regionalized operations in selected
state portals. In total, less than 25 employees who were employees of the
original SDR Technologies were employed with NIC at December 31, 2001, down
from a previous high of approximately 85 employees at the date of acquisition
in May 2000. Additionally, we determined that the value of the technology
intangible relating to the SDR acquisition was impaired. We significantly
curtailed funding of all research and development-stage technology projects
that did not have demonstrable and immediate positive financial returns for the
Company. Specifically, future funding to actively develop and market the
Company's Web iVR technology was significantly scaled back. This Web iVR
technology was the primary value driver of the product technology intangible
resulting from the SDR acquisition. Goodwill related to the SDR acquisition
primarily represented the benefits we expected to receive from a centralized
application development organization. As we have now abandoned that strategy
and eliminated most of the development resources acquired with SDR, management
concluded the goodwill no longer had value. We recognized a $27.6 million
impairment loss in the third quarter of 2001 representing the unamortized
balances of goodwill and other intangible assets related to the acquisition of
SDR. Additionally, during the fourth quarter of 2001 we continued to evaluate
the recoverability of capitalized software at NIC Technologies. We determined
that the expected future cash flows of NIC Technologies would not be sufficient
to recover the capitalized software assets and $1.0 million was expensed as an
impairment charge in the fourth quarter of 2001.
NIC Conquest
Due to developments arising in the second half of 2001 relating to NIC
Conquest's decision to migrate to a common operating platform for its core UCC
and corporations filing applications, we determined that the balance of
revenues remaining to be recognized under certain application development
contractual obligations was not expected to cover anticipated costs of
developing and
36
implementing the related applications and accrued losses of approximately $6
million in the third and fourth quarters of 2001. Additionally, in the fourth
quarter of 2001, we decided to devote all resources to completing existing
contracts and not actively market the solution to new customers in the
foreseeable future. Based on this decision not to actively market the solution,
we determined that the carrying value of capitalized software development costs
relating to this business were not recoverable and had been impaired. This
assessment resulted in an impairment charge during the fourth quarter of 2001
of approximately $4.4 million. As a result of the decision to curtail marketing
and the uncertainty regarding future sales of this solution, we concluded that
the remaining unamortized balance of goodwill related to NIC Conquest was
impaired and recorded a $2.5 million impairment charge in the fourth quarter of
2001.
Restructurings
In September 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-than-expected third quarter 2000 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 these 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 of 2000 relating to employee
severance costs. Employee severance costs paid through December 31, 2000
totaled $358,000 with $280,000 paid in 2001. Cash requirements for the
restructuring were funded from available resources. Employee severance costs
related 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 made in 2001.
In addition to the management and organizational changes that have taken
place at NIC Commerce since the third quarter of 2000 as discussed above,
during the fourth quarter of 2001, we continued to evaluate the viability of
our eProcurement business. We determined it was unlikely that NIC Commerce's
Colorado/Utah project would continue beyond the pilot phase of production.
This, among other factors, led the Company to determine that the NIC Commerce
business would need to be downsized further in 2002. As a result, we incurred a
pre-tax charge of approximately $374,000 in the fourth quarter of 2001 relating
primarily to employee severance and lease abandonment costs. At December 31,
2001, $374,000 remained accrued for future payments. Cash requirements for the
restructuring will be funded from available resources. Employee severance costs
totaling approximately $350,000 relate to severance packages for nine employees
in administration and development, with all terminations expected to take place
by the end of the first quarter of 2002. The pre-tax savings from these
reductions are expected to approximate $1.1 million annually.
Presentation of Revenues and Reclassified Consolidated Statement of Operations
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. All prior period information was reclassified for comparative
purposes.
In the fourth quarter of 2001, we decided to reclassify certain
information in our consolidated statements of operations. Consistent with prior
reporting periods, we have continued to classify revenues
37
and cost of revenues into two categories: (1) portal and (2) software and
services. However, as compared to prior reporting periods, no total gross
profit line is reported, as we believe the total gross profit line is not a
meaningful presentation. Instead, cost of portal revenues and cost of software
and services revenues have been classified as separate operating expense
categories. The portal category includes revenues primarily from the Company's
subsidiaries operating enterprise-wide state and local government portals under
long-term contracts on an outsourced basis. The software and services category
includes revenues primarily from the Company's eProcurement, electronic
corporate filings, ethics & elections, commercial vehicle compliance and AOL
businesses. The primary categories of operating expenses include: cost of
portal revenues; cost of software and services revenues; general and
administrative; and sales and marketing. Cost of portal revenues consist of all
direct costs associated with operating outsourced portals including employee
compensation, telecommunications, maintenance and all other costs associated
with the provision of dedicated client service such as dedicated facilities for
our outsourced contracts. Cost of software and services revenues consist of all
direct project costs to provide software development and services such as
employee compensation, the cost of subcontractors hired as part of software and
services projects, and all other direct project costs including materials,
travel and other out-of-pocket expenses. General and administrative costs
consist primarily of corporate-level expenses relating to human resource
management, administration, legal and finance, and all costs of non-customer
service personnel from our software and services businesses, including
information systems, office rent and maintenance. Sales and marketing costs
consist primarily of corporate-level expenses relating to market development,
public relations and promotional activities including advertising, image
development and market research. All prior period information was reclassified
for comparative purposes.
Comparison of Years Ended December 31, 2001, 2000 and 1999
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.
KEY FINANCIAL METRICS 1999 2000 2001
- -------------------------------------------- ------ ------ ----------
Revenue growth 98% 67% 45%
Gross profit% -- outsourced portals 29% 21% 26%
Gross profit% -- software and services 10% 7% (23%)
General and administrative as % of revenue 25% 79% 53%
Sales and marketing as % of revenue 4% 21% 6%
REVENUES. Total revenues increased 45% to $39.2 million in 2001 as
compared to the prior year. Portal revenues were $26.7 million for 2001, a 50%
increase over the prior year. Of this increase, 29% was attributable to
revenues from our outsourced state portal business units that became
operational after December 31, 2000, including our portals in Idaho and
Tennessee, which began to generate substantive revenues in the first quarter of
2001, our Hawaii and Montana portals, which began to generate driver's license
record access, or DMV, revenues in the third quarter of 2001, and from our
contracts with the State of Oklahoma and the Florida Association of Court
Clerks. Our Oklahoma and Florida contracts are different from our traditional
self-funding outsourced portal contracts, as we receive fixed payments for the
development of these portals with the expectations of future application
development and transaction revenues. We are in the development phase of our
contract with the Florida Association of Court Clerks and are recognizing
revenues on a percentage of completion basis. Approximately 19% of the increase
in portal revenues for 2001 was attributable to an increase in same state
portal volumes (states open more than two years) and 2% was attributable to our
local portals. Excluding outsourced portal business units that became
operational after December 31, 2000 and our state portals that operate under
fixed-price models, same state portal transaction revenues for 2001 increased
22% over the prior year as a result of increased transaction volumes mainly
from our Kansas, Indiana, Virginia and Utah subsidiaries.
Software and services revenues were $12.5 million for 2001, a 36% increase
over the prior year. Of this increase, 28% was from IDT, our commercial vehicle
compliance business, which we acquired in October 2000, 12% was from our AOL
business, which began to generate substantive advertising revenues
38
subsequent to the launch of AOL's Government Guide in March 2001, and 21% was
from NIC Conquest, our electronic corporate filings business, which benefited
from its five-year, $25 million contract with the California Secretary of State
to develop and implement a comprehensive information management and filing
system. This contract commenced in September 2001, and we recognized
approximately $1.1 million in revenues during 2001 under percentage of
completion accounting. Partially offsetting these increases were decreases in
revenues from our eProcurement business (20%), and to a lesser extent, our
ethics & elections business (5%). eProcurement revenues decreased in 2001 due
to an anticipated fall-off in license and maintenance revenues, a trend that
began in the third quarter of 2000 when we modified our eProcurement business
model. As procurement portals in South Carolina and Houston/Galveston become
more fully operational in 2002, we expect an increase in transaction-based
eProcurement revenue in 2002. However, we anticipate decreased year-over-year
quarterly eProcurment revenues in 2002 as a result of the planned downsizing of
this business as further discussed above.
Total revenues increased 67% to $27.0 million in 2000 as compared to the
prior year. Portal revenues were $17.8 million for 2000, a 27% increase over
the prior year. Of this increase, 16% was attributable to revenues from our
outsourced 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. Excluding state portal business units that became operational after
June 30, 1999 and our state portals that operate under fixed-price models, same
state portal transaction revenues for 2000 increased 17% over the prior year as
a result of increased transaction volumes mainly from our Kansas, Indiana and
Virginia subsidiaries. Software and services revenues were $9.2 million for
2000, a 329% increase over the prior year, primarily reflecting incremental
revenues from businesses we have acquired since September 1999. Of this
increase, 140% 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.
COST OF PORTAL REVENUES. Cost of portal revenues increased 41% to $19.8
million in 2001 as compared to the prior year. Of this increase, 22% was
attributable to costs from our outsourced state portal business units that
became operational after December 31, 2000, 10% was attributable to our local
portals, the majority of which became operational in 2001, and 9% was
attributable to an increase in same state cost of portal revenues. Excluding
outsourced state portal business units that became operational after December
31, 2000, same state cost of portal revenues increased 10% over the prior year
primarily as a result of ongoing technology enhancements and service delivery
investment in our state portal partnerships. However, our portal gross profit
rate increased to 26% in 2001 compared to 21% for 2000. This increase was
primarily attributable to our Tennessee, Idaho and Hawaii portals, which began
to generate substantive revenues in 2001, yet were in the early stages of
development throughout most of 2000 and had not yet begun to generate revenues
at December 31, 2000. Our same state portal gross profit rate increased to 40%
in 2001 compared to 35% in 2000 and 1999, primarily as a result of increased
business and citizen adoption of existing portal applications and the addition
of new revenue generating applications and services within existing portals in
2001. We intend to continue to expand our portal operations by developing and
promoting new applications and services within our existing portals.
Accordingly, we expect our same state gross profit rate to continue to increase
in the foreseeable future.
Cost of portal revenues increased 41% to $14.1 million in 2000 as compared
to the prior year. Of this increase, 36% was attributable to costs from our
outsourced state and local portal business units that became operational after
June 30, 1999, and 6% was from an increase in same state cost of portal
revenues. Excluding outsourced portal business units that became operational
after June 30, 1999, same state cost of portal revenues increased 6% over the
prior year primarily as a result of ongoing technology enhancements and service
delivery investment in our state portal partnerships. Our portal gross profit
rate decreased to 21% in 2000 from 29% in 1999 due to our Tennessee, Idaho and
Hawaii portals, which were in the early stages of development throughout most
of 2000 and had not yet begun to generate revenues at December 31, 2000.
COST OF SOFTWARE AND SERVICES REVENUES. Cost of software and services
revenues increased 80% to $15.3 million in 2001 as compared to the prior year.
As further discussed in Note 2 in
39
the Notes to Consolidated Financial Statements included in this Form 10-K, cost
of software and services revenues for 2001, 2000 and 1999 include charges of
$6.0 million, $1.4 million and $1.1 million, respectively, for anticipated
costs in excess of revenues to be recognized under certain of our application
services contracts in our electronic corporate filings business. Excluding
these charges, cost of software and services revenues increased by 30% in 2001,
which was relatively consistent with the increase in software and services
revenues in the current year. Of this increase, 27% was attributable to our NIC
Conquest business, 19% was attributable to IDT, and 11% was attributable to our
AOL business, which commenced operations in the third quarter of 2000.
Partially offsetting these increases were decreases from our eProcurment (15%)
and ethics & elections (13%) businesses as a result of decreased revenues in
2001.
Cost of software and services revenues increased 340% to $8.5 million in
2000 as compared to the prior year. Excluding the charges noted above
pertaining to our electronic corporate filings business, cost of software and
services revenues were $7.1 million in 2000, a 786% increase over the prior
year, primarily reflecting incremental costs from businesses we have acquired
since September 1999. Of this increase, 240% was attributable to NIC Conquest,
229% was from NIC Commerce, 188% was from NIC Technologies, 115% was from AOL
and 14% was from IDT.
GENERAL AND ADMINISTRATIVE. General and administrative expenses in 2001
were $20.8 million, a 2% decrease from the prior year. In the fourth quarter of
2001, we incurred a charge of approximately $0.4 million for employee severance
and lease abandonment costs related to the restructuring of our NIC Commerce
business, as further discussed above. 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 16 to the
Notes to Consolidated Financial Statements included in this Form 10-K. During
the third quarter of 2000, the Company incurred a 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. 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 charges, general and administrative expenses for 2001 increased
4% over 2000. We expect general and administrative expenses to decrease
significantly in 2002 as a result of our continuing overhead cost containment
and efficiency efforts throughout the Company and the organizational
restructurings and headcount reductions that have taken place within our
acquired businesses since the third quarter of 2000.
General and administrative expenses in 2000 were $21.3 million, a 437%
increase over the prior year. Excluding the charges incurred in 2000 as
discussed above, general and administrative expenses for 2000 increased 396%
over 1999, primarily reflecting incremental corporate level expenses and costs
from businesses we have acquired since September 1999. Of this increase, 170%
was from NIC Commerce, 57% was from NIC Technologies, 37% was from NIC Conquest
and 7% was from IDT. Additionally, 125% of the increase was from an increase in
corporate level expenses as a result of becoming a public company in July 1999,
and our overall growth and positioning for future growth, including strategic
infrastructure investments in finance, technology and management personnel.
Excluding the charges discussed above, general and administrative expenses
as a percentage of revenue were 52%, 73% and 25% for 2001, 2000 and 1999,
respectively. The pronounced increase in 2000 was primarily attributable to an
increase in corporate level expenses since becoming a public company in July
1999 and costs from businesses we have acquired since September 1999 as further
discussed above. We anticipate general and administrative expenses as a
percentage of revenue to decrease to between 20% and 25% in 2002. We expect to
accomplish this by keeping corporate-level expenses relatively flat
year-over-year and by leveraging the relatively fixed cost structure within our
outsourced portal businesses through the continued expansion of existing and
new portal applications and services.
SALES AND MARKETING. Sales and marketing expenses were $2.3 million, a 59%
decrease from $5.6 million in 2000. Sales and marketing expenses were $0.6
million in 1999. The increase in corporate level expenses in 2000 was primarily
attributable to expenditures for marketing and public
40
relations personnel and promotional activities including advertising, image
development and market research subsequent to becoming a public company in July
1999. In 2001, we significantly curtailed public relations, brand image and
advertising expenses and consolidated our sales and marketing efforts into one
corporate-level market development department to more appropriately match
expenditures to expected market demand for our eGovernment services.
Sales and marketing expenses as a percentage of revenue were approximately
6%, 21% and 4% for 2001, 2000 and 1999, respectively. We anticipate sales and
marketing expenses as a percentage of revenue to remain between 5% and 6%
throughout 2002.
IMPAIRMENT LOSS. For additional information on the impairment losses we
recorded in 2001, refer to the discussion above under "Impairment and
Restructuring Charges" and in Note 3 in the Notes to Consolidated Financial
Statements included in this Form 10-K.
STOCK COMPENSATION. Stock compensation for 2001 and 2000 consisted
primarily of amortization of deferred compensation expense related to common
stock options granted to senior level executives and other key employees in
1998 and 1999. Stock compensation was $3.2 million for 1999, which consisted of
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 in
1999 relating to stock options. We expect to recognize approximately $1.1
million in deferred compensation in 2002, with the remaining $0.2 million to be
recognized by the end of the second quarter of 2003.
DEPRECIATION AND AMORTIZATION. The increase in depreciation and
amortization expense for 2000 as compared to 1999 was primarily due to
intangible asset amortization resulting from our four acquisitions since
September 1999 and the amortization of the fair value of fully vested warrants
issued to AOL in August 2000. Depreciation expense increased by $1.1 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.
We wrote off all remaining goodwill and purchase accounting intangible
assets relating to our business combinations with SDR Technologies, eFed and
Conquest in the third and fourth quarters of 2001. In addition, we wrote off
capitalized software development costs from our NIC Technologies, NIC Commerce
and NIC Conquest businesses in the fourth quarter of 2001. At December 31,
2001, the carrying value of the Company's remaining goodwill, relating
exclusively to our acquisition of IDT in October 2000, was approximately $1.3
million. In 2001, the Company recognized goodwill amortization expense of
approximately $0.2 million per quarter relating to the IDT acquisition that
will no longer be recognized upon adoption of SFAS No. 142 on January 1, 2002.
Accordingly, we expect amortization expense to decrease significantly in 2002
to approximately $1.6 million, the majority of which will consist of the
amortization of the fair value of the fully vested warrants we issued to AOL in
August 2000, as further discussed in Note 9 to the Note to Consolidated
Financial Statements included in this Form 10-K. Total depreciation and
amortization expense in 2002 is expected to be less than $5 million.
OPERATING LOSS. Operating loss for 2001 was $98.0 million compared to
$52.2 million for 2000 and $14.5 million for 1999. Excluding non-cash charges
for impairment losses, stock compensation, depreciation and amortization and
the charges in the fourth quarter of 2001 relating to our NIC Commerce
restructuring, the second quarter of 2000 relating to the withdrawn common
stock offering, the third quarter of 2000 relating to our corporate
restructuring and vacation liabilities, and the charges in 2001, 2000 and 1999
relating to the Company's application services contracts, operating loss would
have been $12.6 million for 2001 compared to an operating loss of $19.4 million
for 2000 and operating income of $0.8 million for 1999.
41
Earnings before interest, taxes, equity in net loss of affiliates,
depreciation, amortization, impairment losses, special charges and other
non-cash charges related to stock compensation and our application services
contracts ("EBITDA") was negative $12.6 million for 2001 compared to negative
$19.4 million for 2000 and positive $0.8 million for 1999. EBITDA from our
outsourced portals segment was a positive $4.6 million in 2001 and increased by
approximately $3.4 million from the prior year primarily due to positive
contributions from portals that became fully operational in 2001 including our
Hawaii, Idaho, Montana, Oklahoma and Tennessee portals. In 2000, our Hawaii,
Idaho and Tennessee portals were under development and incurred substantial
start up losses, contributing to the decrease in EBITDA from 1999.
EBITDA from our eGovernment products segment, which consists primarily of
our NIC Conquest, NIC Technologies and IDT subsidiaries, was negative $2.7
million in 2001 and 2000 compared to negative $0.2 million for 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.
EBITDA from our eProcurement segment was negative $4.1 million in 2001,
negative $6.2 million in 2000 and positive $0.3 million in 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. The improvement in EBITDA in 2001 was primarily
the result of the organizational restructurings and headcount reductions that
have taken place at NIC Commerce since the third quarter of 2000.
Corporate level expenses were $9.7 million in 2001, $10.7 million in 2000
and $3.0 million in 1999. Corporate level expenses for the past three years are
further discussed under the analysis of general and administrative expenses and
sales and marketing expenses above.
We expect to generate positive EBITDA for the first quarter of 2002 and
expect EBITDA to improve on a sequential quarter-over-quarter basis throughout
2002.
INTEREST INCOME. Interest income primarily reflects interest income earned
on our cash and marketable securities portfolio. We placed the proceeds from
our July 20, 1999 initial public offering in short-term, investment-grade,
interest-bearing marketable securities. Interest income 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 be lower in 2002 compared to 2001, as our cash and marketable
securities portfolio was approximately $21.3 million at December 31, 2001
compared to $38.8 million at December 31, 2000 and $92.0 million at December
31, 1999. Interest rates we currently earn are less than in prior periods.
Additionally, we do expect to consume cash in 2002 with our operations turning
cash flow positive late in the year.
EQUITY IN NET LOSS OF AFFILIATES. For the years ended December 31, 2001
and 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
eGovernment services industry, Tidemark and E-Filing.com, primarily for
strategic purposes. In the fourth quarter of 2000, we invested in eGS, a
private joint venture among Swiss venture capital firm ETF Group, London-based
venture development organization Vesta Group, and our European subsidiary, NIC
European Business Ltd. The purpose of eGS, based in London, England, is to
deliver eGovernment products and services throughout Western Europe, with
initial efforts to focus on the United Kingdom. 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. In May 2001, a private
technology company acquired Tidemark for cash consideration of approximately
$1.6 million. NIC received approximately $0.7 million in cash from the
transaction and has no investment balance remaining at December 31, 2001.
E-Filing.com and eGS 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. However, in 2002 we expect
these losses to be much lower than in 2001 and be within a range of $1 million
to $1.2 million.
INCOME TAXES. We recognized an income tax benefit in 2001, 2000 and 1999.
In 2001, the income tax benefit was less than the amount customarily expected
primarily because of expenses that are
42
not deductible for tax purposes including amortization of goodwill from the
Exchange Offer, the Conquest merger, the SDR acquisition and the IDT
acquisition, certain stock compensation costs and the goodwill relating to the
SDR acquisition and Conquest merger that was written off in the third and
fourth quarters of 2001 as part of the intangible asset impairment charge. In
2000, the income tax benefit was less than the amount customarily expected
because of expenses that are not deductible for tax purposes including
amortization of goodwill from the Exchange Offer, the Conquest merger, the SDR
acquisition, the IDT acquisition, and certain stock compensation costs. 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.
Liquidity and Capital Resources
Net cash used in operating activities was $10.8 million for 2001 compared
to $24.5 million for 2000. The decrease in cash used in operating activities is
primarily the result of a positive net change in operating assets and
liabilities as compared to the prior year and a year-over-year reduction in our
operating loss (excluding non-cash charges). Contributing to this positive net
change in operating assets and liabilities was an increase in accrued expenses,
partially due to subcontractor costs from our NIC Conquest business, and a
decrease in prepaid expenses, primarily due to the amortization of the prepaid
carriage fee under our arrangement with AOL. The increase in accounts
receivable and payable for 2001 was primarily due to our Hawaii, Idaho,
Montana, Rhode Island and Tennessee portals, all of which began to generate
substantive revenues in 2001. The statutory fees charged for data access by our
state portals are accrued as accounts receivable and accounts payable at the
time services are provided.
The 2000 increase in cash used in operating activities is primarily
attributable to funding operations (particularly 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 since
becoming a public company in July 1999 and positioning for future growth,
including planned strategic infrastructure investments in marketing, public
relations, finance, technology and management personnel. As discussed in Note 9
in the Notes to Consolidated Financial Statements included in this Form 10-K,
we 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
was recorded as a prepaid expense in the consolidated balance sheet at December
31, 2000.
Although we plan to generate positive EBITDA in 2002, we expect operating
cash flow to be modestly negative through the end of 2002, primarily due to
continued project expenditures from our NIC Conquest business. As further
discussed in Note 2 to the Note to Consolidated Financial Statements included
in this Form 10-K, due to developments arising in the second half of 2001
relating to NIC Conquest's migration to a common operating platform for its UCC
and corporations filing applications, we determined that the balance of
revenues remaining to be recognized under certain existing application
development contractual obligations was not expected to cover anticipated costs
of developing and implementing the related applications and accrued $6.0
million for expected contract losses under percentage of completion accounting.
At December 31, 2001, the loss accrual for all NIC Conquest application
development contracts was approximately $4.0 million, the majority of which
will be expended by the end of the third quarter of 2002.
Investing activities resulted in net cash generated of approximately $13.2
million in 2001 reflecting $21.4 million in net maturities of our marketable
securities portfolio used for funding operations and for capital expenditures.
Investing activities in 2001 also reflect approximately $6.6 million in
capitalized software development costs mainly from our NIC Commerce, NIC
Conquest and NIC Technologies subsidiaries and approximately $0.5 million in
proceeds from the sale of property and equipment. Investing activities for 2000
resulted in net cash generated of $30.6 million, reflecting $60.8 million in
net maturities of our marketable securities portfolio used for funding
operations and for capital expenditures ($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).
43
Investing activities for 2000 also reflect approximately $4.1 million in
capitalized software development costs mainly from our NIC Commerce and NIC
Conquest subsidiaries. Investing activities for 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 $15.1 million cash
outlay for our September 1999 eFed acquisition, and $1.8 million for capital
expenditures.
Financing activities resulted in net cash generated of approximately $1.0
million in 2001, primarily reflecting $1.0 million in cash proceeds from a bank
note payable that we used to purchase certain hardware and software components
for our NIC Commerce subsidiary. Net cash used in financing activities totaled
$1.8 million in 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 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 then existing
operating lines of credit. In addition, approximately $0.7 million was received
from employee stock purchase and stock option transactions.
At December 31, 2001, the Company's total cash and marketable securities
balance was $21.3 million compared to $38.8 million at December 31, 2000. At
December 31, 2001, we had posted approximately $2.8 million of our cash and
marketable securities as collateral for letters of credit, our $1 million bank
line of credit in conjunction with a corporate credit card agreement, and our
$1 million bank note payable. We issue letters of credit as collateral for
performance on certain of our government contracts and as collateral for
certain performance bonds. These irrevocable letters of credit are generally in
force for one year. In conjunction our business filings contract with the
California Secretary of State, in March 2002, we issued a $5 million letter of
credit as collateral for a performance bond required by the contract. Thus, at
March 11, 2002, we have posted approximately $7.8 million of our cash and
marketable securities as collateral. We believe that our currently available
liquid resources will be sufficient to meet our operating requirements and
current growth initiatives without the need of additional capital through the
end of 2002 when we expect to begin to generate positive operating cash flow.
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 working capital line of credit. The sale of additional
equity securities could result in additional dilution to the Company's
shareholders. From time to time, we expect to evaluate the acquisition of or
investment in businesses and technologies that complement our various
eGovernment businesses. Acquisitions or investments might impact the Company's
liquidity requirements or cause the Company to sell additional equity
securities or issue debt securities. There can be no assurance that financing
will be available in amounts or on terms acceptable to the Company, if at all.
We are currently negotiating a working capital line of credit with a bank, the
purpose of which is to provide the Company with greater operating flexibility
and the resources to pursue opportunities that may accelerate our growth and
profitability. However, we cannot guarantee that such financing will be secured
or will be available in amounts or on terms acceptable to the Company.
Deferred Tax Assets
At December 31, 2001, we have recorded non-current deferred tax assets in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes," totaling approximately $31.8 million. We estimate that we
must generate at least $83.8 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 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.
44
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,
----------------------------------------------
1999 2000 2001
------------- ------------- --------------
Loss before income taxes ..................................... $ (12,147) $ (55,120) $ (100,544)
Amortization of purchase accounting intangibles .............. 9,828 23,798 20,273
Impairment of intangible assets .............................. -- -- 49,494
Equity in net loss of affiliates ............................. -- 6,524 3,272
Capitalized software development costs ....................... -- (4,070) (6,635)
Disqualifying disposition of incentive stock options ......... -- (3,050) (20)
Stock compensation expense ................................... 3,188 1,760 1,525
Provision for loss on application services contracts ......... (1,023) 263 3,579
Depreciation and capitalized software amortization ........... (123) 36 (1,040)
Other ........................................................ (63) 26 (469)
--------- --------- ----------
Taxable loss (2001 is an estimate) ........................... $ (340) $ (29,833) $ (30,565)
========= ========= ==========
Our federal income tax loss carryforward of approximately $60.7 million
expires as follows: $0.3 million expires in 2019, $29.8 million expires in 2020
and $30.6 million expires in 2021. Our state income tax loss carryforwards of
approximately $60.5 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 2003, $6.6 million; 2004,
$13.1 million; thereafter, $12.1 million. We are currently paying state income
taxes in certain states. We expect to have federal taxable income before loss
carryforward utilization in 2003.
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 and the increase or decrease in the amount of interest expense we
incur on our promissory bank notes payable. Because our investments are in
short-term, investment-grade, interest-bearing marketable securities, we are
exposed to minimal risk on the principal of those investments. We ensure the
safety and preservation of our invested principal funds by limiting default
risk, market risk and investment risk. We do not use derivative financial
instruments.
INVESTMENT RISK. In the first quarter of 2000, we invested in two private
companies involved in the e-government 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.
45
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------------------
2000 2001
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 13,878,483 $ 17,235,752
Marketable securities ................................................ 24,914,405 4,065,951
Trade accounts receivable ............................................ 7,595,879 12,194,044
Deferred income taxes ................................................ 195,430 --
Prepaid expenses ..................................................... 2,051,015 1,156,278
Other current assets ................................................. 1,954,090 2,808,529
------------- --------------
Total current assets ............................................... 50,589,302 37,460,554
Property and equipment, net .......................................... 7,596,078 6,385,571
Deferred income taxes ................................................ 8,964,570 31,756,670
Other assets ......................................................... 199,948 269,736
Investments in affiliates and joint ventures ......................... 4,786,355 1,501,128
Intangible assets, net ................................................. 71,655,337 4,439,985
------------- --------------
Total assets ....................................................... $ 143,791,590 $ 81,813,644
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................... $ 4,329,743 $ 11,232,088
Accrued expenses ..................................................... 2,907,497 5,676,383
Income taxes payable ................................................. 149,502 20,600
Capital lease obligations -- current portion ......................... 194,509 13,762
Notes payable -- current portion ..................................... -- 348,332
Application services contracts ....................................... 356,508 3,961,979
Other current liabilities ............................................ 196,337 476,027
------------- --------------
Total current liabilities .......................................... 8,134,096 21,729,171
Capital lease obligation -- long-term portion .......................... 22,125 1,354
Notes payable -- long-term portion ..................................... -- 524,411
------------- --------------
Total liabilities .................................................. 8,156,221 22,254,936
------------- --------------
Commitments and contingencies (Notes 2, 3, 4, 7, 9, 15, 17 and 18)...... -- --
Minority interest ...................................................... 475,302 --
Shareholders' equity:
Common stock, no par, 200,000,000 shares authorized 56,038,571
and 56,260,197 shares issued and outstanding ....................... -- --
Additional paid-in capital ........................................... 194,822,925 195,158,906
Accumulated deficit .................................................. (56,834,476) (134,278,749)
Accumulated other comprehensive income ............................... 967 120
------------- --------------
137,989,416 60,880,277
Less notes and stock subscriptions receivable ........................ (15,000) (15,000)
Less deferred compensation expense ................................... (2,814,349) (1,306,569)
------------- --------------
Total shareholders' equity ......................................... 135,160,067 59,558,708
------------- --------------
Total liabilities and shareholders' equity ......................... $ 143,791,590 $ 81,813,644
============= ==============
The accompanying notes are an integral part of these consolidated financial
statements.
46
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-------------------------------------------------------
1999 2000 2001
------------------ ------------------ -----------------
Revenues:
Portal revenues ....................................... $ 14,010,681 $ 17,807,973 $ 26,732,743
Software and services revenues ........................ 2,136,438 9,163,303 12,495,936
-------------- -------------- --------------
Total revenues ...................................... 16,147,119 26,971,276 39,228,679
-------------- -------------- --------------
Operating expenses:
Cost of portal revenues ............................... 9,965,076 14,068,151 19,834,782
Cost of software and services revenues ................ 1,933,990 8,518,928 15,324,925
General and administrative ............................ 3,960,467 21,282,447 20,792,139
Sales and marketing ................................... 601,424 5,558,644 2,272,312
Impairment loss ....................................... -- -- 49,494,090
Stock compensation .................................... 3,188,051 1,789,874 1,525,022
Depreciation and amortization ......................... 10,968,482 27,959,636 27,953,007
-------------- -------------- --------------
Total operating expenses ............................ 30,617,490 79,177,680 137,196,277
-------------- -------------- --------------
Operating loss ......................................... (14,470,371) (52,206,404) (97,967,598)
-------------- -------------- --------------
Other income (expense):
Interest income ....................................... 2,506,890 3,742,399 967,027
Interest expense ...................................... (168,872) (48,458) (38,789)
Equity in net loss of affiliates ...................... -- (6,524,473) (3,271,876)
Other income (expense), net ........................... (14,430) (82,710) (233,189)
-------------- -------------- --------------
Total other income (expense) ........................ 2,323,588 (2,913,242) (2,576,827)
-------------- -------------- --------------
Loss before income taxes and minority interest ......... (12,146,783) (55,119,646) (100,544,425)
Income tax expense (benefit) ........................... (1,416,223) (14,592,021) (22,624,850)
-------------- -------------- --------------
Loss before minority interest .......................... (10,730,560) (40,527,625) (77,919,575)
Minority interest ...................................... -- (249,675) (475,302)
-------------- -------------- --------------
Net loss ............................................... $ (10,730,560) $ (40,277,950) $ (77,444,273)
============== ============== ==============
Net loss per share:
Basic and diluted ..................................... $ (0.23) $ (0.74) $ (1.38)
============== ============== ==============
Weighted average shares outstanding .................... 47,278,461 54,795,280 56,109,730
============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
47
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock Additional
----------------------- Paid-In Accumulated
Shares Amount Capital Deficit
-------------- -------- --------------- ---------------
Balance, January 1, 1999 .................... 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 --
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 ................ -- -- -- --
Unrealized holding gain on marketable
securities ................................. -- -- -- --
---------- -- ----------- -----------
Balance, December 31, 1999 .................. 53,165,370 -- 149,035,928 (16,556,526)
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 ............... -- -- -- --
Tax deductions relating to incentive stock
options ................................... -- -- 1,145,950 --
Unrealized holding loss on marketable
securities ................................ -- -- -- --
-- -- --------- --
Balance, December 31, 2000 ................. 56,038,571 -- 194,822,925 (56,834,476)
Net loss ................................... -- -- (77,444,273)
Stock options exercised .................... 216,626 -- 318,739 --
Deferred compensation expense
recognized ................................ -- -- -- --
Issuance of common stock to employees ...... 5,000 -- 17,242 --
Unrealized holding loss on marketable
securities ................................ -- -- -- --
---------- -- ----------- -------------
Balance, December 31, 2001 ................. 56,260,197 $ -- $195,158,906 $(134,278,749)
========== ===== ============ =============
48
Accumulated Notes
Other and Stock Deferred
Comprehensive Subscriptions Compensation
Income Receivable Expense Total
--------------- --------------- --------------- ----------------
Balance, January 1, 1999 .................... $ -- $ -- $(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 ....... -- (250,000) -- 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 -- 220,000
Unrealized holding gain on marketable
securities ................................. 1,731 -- -- 1,731
----- -------- ---------- ------------
Balance, December 31, 1999 .................. 1,731 (30,000) (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 ............ -- -- -- --
Stock subscriptions received ............... -- 15,000 -- 15,000
Tax deductions relating to incentive stock
options ................................... -- -- -- 1,145,950
Unrealized holding loss on marketable
securities ................................ (764) -- -- (764)
---- ------ -- ------------
Balance, December 31, 2000 ................. 967 (15,000) (2,814,349) 135,160,067
Net loss ................................... -- -- -- (77,444,273)
Stock options exercised .................... -- -- -- 318,739
Deferred compensation expense
recognized ................................ -- -- 1,507,780 1,507,780
Issuance of common stock to employees ...... -- -- -- 17,242
Unrealized holding loss on marketable
securities ................................ (847) -- -- (847)
------ --------- ----------- ------------
Balance, December 31, 2001 ................. $ 120 $ (15,000) $(1,306,569) $ 59,558,708
====== ========= ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
49
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------------------
1999 2000 2001
------------------ ------------------ ------------------
Cash flows from operating activities:
Net loss ..................................................... $ (10,730,560) $ (40,277,950) $ (77,444,273)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .............................. 10,968,482 27,959,636 27,953,007
Compensation expense recognized related to sale of
common stock .............................................. 1,573,950 41,588 17,242
Compensation expense recognized related to stock
options ................................................... 1,614,101 1,748,286 1,507,780
(Gain) loss on disposals of property and equipment ......... (312) 86,648 174,601
Accretion of discount on marketable securities ............. (1,968,000) (3,240,883) (568,594)
Application services contracts ............................. (1,024,031) 124,539 3,605,471
Impairment loss ............................................ -- -- 49,494,090
Deferred income taxes ...................................... (1,441,577) (14,753,234) (22,596,670)
Deferred income tax benefit relating to incentive stock
options ................................................... -- (1,145,950) --
Minority interest .......................................... -- (249,675) (475,302)
Equity in net loss of affiliates ........................... -- 6,524,473 3,271,876
Changes in operating assets and liabilities, net of effects
of acquisitions:
(Increase) in trade accounts receivable ................... (2,305,126) (991,904) (4,598,165)
(Increase) decrease in prepaid expenses ................... (231,735) (1,734,307) 894,737
(Increase) in other current assets ........................ (367,714) (229,439) (854,439)
(Increase) decrease in other assets ....................... (223,269) 39,492 (69,788)
Increase (decrease) in accounts payable ................... 1,184,597 (74,522) 6,902,345
Increase (decrease) in income taxes payable ............... 14,953 65,849 (128,902)
Increase in accrued expenses .............................. 575,692 1,782,910 2,168,884
Increase (decrease) in other current liabilities .......... 71,004 (190,837) (92,991)
-------------- -------------- --------------
Net cash used in operating activities ........................ (2,289,545) (24,515,280) (10,839,091)
-------------- -------------- --------------
Cash flows from investing activities:
Purchases of property and equipment .......................... (1,765,692) (5,417,151) (2,419,718)
Proceeds from disposals of property and equipment ............ 26,458 14,298 487,251
Capitalized software development costs ....................... (145,260) (4,069,832) (6,576,855)
Capitalized patent and trademark costs ....................... -- (106,477) --
Purchases of marketable securities ........................... (186,406,450) (267,876,755) (40,303,984)
Maturities of marketable securities .......................... 88,607,000 328,683,223 61,721,032
Sales of marketable securities ............................... 17,282,104 -- --
Acquisition of businesses, net of cash acquired .............. (15,146,544) (9,296,072) --
Proceeds from sale of affiliate .............................. -- -- 662,356
Investments in affiliates and joint ventures ................. -- (11,310,827) (347,594)
-------------- -------------- --------------
Net cash provided by (used in) investing activities .......... (97,548,384) 30,620,407 13,222,488
-------------- -------------- --------------
50
Year Ended December 31,
------------------------------------------------
1999 2000 2001
--------------- --------------- ----------------
Cash flows from financing activities:
Net proceeds from initial public offering of common
stock ..................................................... 109,439,618 -- --
Proceeds from bank lines of credit .......................... 1,251,000 -- --
Proceeds from notes payable ................................. -- -- 1,000,000
Payments on bank lines of credit ............................ (2,274,592) (2,385,815) --
Payments on notes and debentures payable .................... (842,778) (50,000) (127,257)
Payments on capital lease obligations ....................... (237,217) (197,097) (201,518)
Proceeds from issuance of common stock to employees ......... 321,518 111,579 --
Payments to repurchase common stock ......................... -- (200,938) --
Proceeds from exercise of employee stock options ............ 177,018 953,238 302,647
Proceeds from stock subscriptions receivable ................ 220,000 15,000 --
---------- ---------- --------
Net cash provided by (used in) financing activities ......... 108,054,567 (1,754,033) 973,872
----------- ---------- --------
Net increase in cash and cash equivalents .................... 8,216,638 4,351,094 3,357,269
Cash and cash equivalents, beginning of year ................. 1,310,751 9,527,389 13,878,483
----------- ---------- ----------
Cash and cash equivalents, end of year ....................... $ 9,527,389 $ 13,878,483 $ 17,235,752
============ ============ ============
Other cash flow information:
Interest paid ............................................... $ 168,872 $ 51,053 $ 39,504
============ ============ ============
Income taxes paid ........................................... $ 117,000 $ 85,323 $ 87,707
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
51
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND BASIS OF PRESENTATION
The Company
National Information Consortium, Inc. (the "Company" or "NIC") provides
federal, state and local governments with a wide range of eGovernment products
and services, including a broad range of software and applications. NIC helps
governments use the Internet by building websites 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 Uniform Commercial Code ("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 10), NIC markets the services and solicits users to complete
government-based transactions and to enter into subscriber contracts permitting
users 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 outsourced 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.
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 5). The accompanying consolidated financial statements
reflect the results of operations and cash flows of all the companies.
On September 15, 1999, NIC acquired the net assets of eFed, a provider of
Internet-based procurement software and services for governments. eFed has been
renamed NIC Commerce and is wholly owned by NIC. NIC Commerce, the Company's
eProcurement business, designs, develops and manages online procurement
software and services for federal, state and local government markets. On
January 12, 2000, NIC merged its Application Services Division with Conquest
Softworks, LLC ("Conquest"). NIC owns approximately 71.5% of the common stock
in the company, which is referred to as NIC Conquest. NIC Conquest, the
Company's electronic corporate filings business, is a provider of UCC and
corporation software applications and services that facilitate electronic
filings and document management for governments. On May 11, 2000, NIC acquired
SDR Technologies, Inc. ("SDR"), a provider of Internet-based applications for
governments. SDR has been renamed NIC Technologies and is wholly owned by NIC.
NIC Technologies, the Company's ethics & elections filings business, designs
and develops online election and ethics filing systems for federal, state and
local government agencies. 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, the
Company's commercial vehicle compliance business, 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).
52
The Company expanded rapidly following its initial public offering in July
of 1999 and has incurred substantial operating losses. Throughout this time
period, the Company's core outsourced portal operations have also grown.
Management has restructured and refocused the business on operations it
believes have demonstrable ability to produce positive cash flow and believes
the Company has sufficient financial resources to operate until the business
becomes cash flow positive. 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 its
liquidity requirements, the Company may seek to sell additional equity
securities, issue debt securities or obtain a working capital line of credit.
There can be no assurance that financing will be available in amounts or on
terms acceptable to the Company, if at all.
Basis of presentation
In the fourth quarter of 2001, the Company decided to reclassify certain
information in its consolidated statements of operations. Consistent with prior
reporting periods, the Company has continued to classify its revenues and cost
of revenues into two categories: (1) portal and (2) software and services.
However, as compared to prior reporting periods, no total gross profit line is
reported, as the Company believes the total gross profit line is not a
meaningful presentation. Instead, cost of portal revenues and cost of software
and services revenues have been classified as separate operating expense
categories. The portal category includes revenues primarily from the Company's
subsidiaries operating enterprise-wide state and local government portals under
long-term contracts on an outsourced basis. The software and services category
includes revenues primarily from the Company's eProcurement, electronic
corporate filings, ethics & elections, commercial vehicle compliance and AOL
businesses.
Under the new classification, cost of portal revenues consist of all
direct costs associated with operating outsourced portals including employee
compensation, telecommunications, maintenance and all other costs associated
with the provision of dedicated client service such as dedicated facilities for
our outsourced contracts. In prior reporting periods, many of these costs were
included in either portal cost of revenues, service development and operations
expenses, or general and administrative expenses. Cost of software and services
revenues consist of all direct project costs to provide software development
and services such as employee compensation, the cost of subcontractors hired as
part of software and services projects, and all other direct project costs
including materials, travel and other out-of-pocket expenses. This presentation
of cost of software and services revenues is consistent with prior reporting
periods, with the exception of the Company's AOL division. Under the new
reclassification, all direct costs of the Company's AOL division, including
rent, maintenance and the cash portion of the carriage fee paid to AOL (see
Note 9), are included in cost of software and services revenues. In prior
reporting periods, many of these costs for the Company's AOL business were
included in either service development and operations expenses or general and
administrative expenses. General and administrative costs consist primarily of
corporate-level expenses relating to human resource management, administration,
legal and finance, and all costs of non-customer service personnel from the
Company's software and services businesses, including information systems,
office rent and maintenance. Sales and marketing costs consist primarily of
corporate-level expenses relating to market development, public relations and
promotional activities including advertising, image development and market
research.
These reclassifications had no impact on total revenues, operating loss,
net loss or net loss per share. Information for all periods presented reflects
these new classifications. See Note 23 for additional information on the
Company's reclassified quarterly results of operations for each of the fiscal
years ending December 31, 1999, 2000 and 2001.
In July 2000, the Emerging Issues Task Force ("EITF") 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. For year-end financial reporting in
2000, 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
53
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 $40,819,009 and $50,041,671 and
decrease total cost of revenues by $40,819,009 and $50,041,671 for the years
ended December 31, 1999 and 2000, respectively. The new presentation had no
impact on operating loss, net loss or net loss per share. Revenue information
for all periods presented reflects the net presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
The accompanying consolidated financial statements consolidate the Company
together with all of its direct and indirect wholly owned and majority-owned
subsidiaries. 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 primarily 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 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.
54
Intangible assets
At each balance sheet date, or whenever events or changes in circumstances
warrant, the Company assesses the carrying 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 were to
be 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. 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 the Company's
eProcurement and electronic corporate filings businesses. 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.
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.
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 websites. The consensuses are effective for costs incurred in quarters
beginning after June 30, 2000. Such costs are included as part of the total of
internal use software development costs capitalized pursuant to SOP 98-1 noted
above. The Company expenses as incurred all employee costs to start up, operate
and maintain outsourced 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
costs are included in cost of portal revenues in the consolidated statements of
operations.
In the fourth quarter of 2001, the Company recorded an impairment loss of
approximately $9.9 million related to capitalized software development costs,
as further discussed in Note 3.
Total software development costs capitalized pursuant to SFAS No. 86 and
SOP 98-1, net of accumulated amortization, at December 31, 2000 and 2001
totaled approximately $4.0 million and $0.4 million, respectively. Capitalized
software development costs at December 31, 2001 consist primarily of corporate
accounting and financial management information systems software. Amortization
expense, excluding impairment losses, recognized during 2000 and 2001 totaled
$167,829 and $997,534, respectively.
Revenue recognition
Portal revenues
The Company recognizes revenue from providing outsourced 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. Trade accounts receivable and
accounts payable reflect the gross amounts outstanding at the balance sheet
dates.
55
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
NIC Conquest develops applications to automate certain government back-office
processes and to facilitate electronic access to government information and
corporate filings to governments. NIC Conquest recognizes revenues from
long-term application development contracts on the percentage of completion
method, primarily utilizing costs incurred to date as compared to the estimated
total costs for each contract. Revenues and profits from these application
development contracts are based on the Company's estimates to complete and are
reviewed periodically, with adjustments recorded in the period in which the
revisions are made. Any anticipated losses on contracts are charged to
operations as soon as they are determinable. In 1999, 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 $1,125,000 for the expected loss. 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. Due to developments arising in the second half of 2001 relating to NIC
Conquest's decision to migrate to a common operating platform for its UCC and
corporations filing applications, the Company accrued an additional $6,041,000
for expected losses on outstanding contracts where migration was elected. These
losses are included in cost of software and services revenues in the
consolidated statements of operations. At December 31, 2001, the accrual for
all application development contracts held by the Company was $3,961,979 which
management believes is adequate. Because of the inherent uncertainties in
estimating the costs of completion, it is at least reasonably possible that the
estimate will change in the near term. Unbilled revenues under long-term
application development contracts at December 31, 2000 and 2001 were
approximately $1.6 million and $2.3 million, respectively, and are included in
other current assets in the consolidated balance sheets.
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.
The Company recognizes its share of AOL's advertising revenues (see Note
9) when notified of the amount due from AOL, which is approximately one month
after the advertisement is provided.
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.
56
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, along with its wholly owned 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 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. The Company has not experienced any significant credit losses.
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 22).
57
Recent accounting pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 addresses the accounting and reporting for
business combinations and requires that all business combinations be accounted
for using one method, the purchase method. SFAS No. 141 is effective for all
business combinations initiated after June 30, 2001. SFAS No. 142 addresses the
financial accounting and reporting for goodwill and other intangible assets
acquired in a business combination after they have been initially recognized in
the financial statements, eliminates amortization of goodwill, and requires
that goodwill be tested for impairment at least annually. SFAS No. 142 is
effective for the Company beginning January 1, 2002. The Company's historical
consolidated financial statements will be unaffected by these new standards.
At December 31, 2001, the carrying value of the Company's goodwill,
relating exclusively to the acquisition of IDT in October 2000, was
approximately $1.3 million. In 2001, the Company recognized goodwill
amortization expense of approximately $176,000 per quarter relating to the IDT
acquisition that will no longer be recognized upon adoption of SFAS No. 142.
The Company has not completed an assessment of the impact of the impairment
testing required by SFAS No. 142. SFAS No. 142 requires the Company to
determine if the fair value of IDT is less than the carrying value at January
1, 2002 by June 30, 2002. If the fair value were less than the carrying value,
goodwill would likely be impaired. IDT was profitable in 2001 and is expected
to be profitable in 2002. However, the Company has contingent purchase prices
obligations related to IDT (see Note 4) and issuance of additional
consideration in 2002 or 2003 could result in impairment even if the Company's
recorded goodwill at January 1, 2002 was not impaired under SFAS No. 142.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment of long-lived assets, excluding
goodwill and intangible assets, to be held and used or disposed of. SFAS No.
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal years. The
adoption of SFAS No. 144 is not expected to result in any impairment of the
Company's long-lived assets in 2002.
3. IMPAIRMENT OF INTANGTIBLE ASSETS AND RESTRUCTURINGS
In the third and fourth quarters of 2001, the Company recorded impairment
charges totaling $37.0 million and $12.5 million, respectively, relating to its
NIC Commerce, NIC Technologies and NIC Conquest businesses. In the third
quarter of 2000 and the fourth quarter of 2001, the Company recorded
restructuring charges totaling $0.7 million and $0.4 million, respectively,
relating primarily to its NIC Commerce and NIC Technologies businesses.
NIC Commerce
During the third quarter of 2001, the Company identified indicators of
possible impairment of its goodwill and other acquired intangible assets
related to the acquisition of eFed. The impairment indicators included, but
were not limited to, the recent restructurings in this business, which included
workforce layoffs and office closings, significant underperformance of this
business relative to historical and projected future operating results,
management's reallocation of capital resources from this underperforming
business to its most profitable businesses, and significant negative industry
and economic trends within the eProcurement sector. In addition to the
management and organizational changes that have taken place at NIC Commerce
since third quarter of 2000, the Company continued the restructuring of this
business in recent months by eliminating the majority of its marketing and
business development staff due to poor performance, with additional headcount
reductions made in October 2001. Management concluded the remaining goodwill
and other intangible assets related to the acquisition of eFed no longer had
value and recognized a $9.4 million impairment loss in the third quarter of
2001. Furthermore, in December 2001, the Company determined it was unlikely
that NIC Commerce's Colorado/Utah project would continue beyond the pilot phase
of production. This, among other factors,
58
led the Company to determine that the NIC Commerce business would be downsized
further in 2002 which will include certain senior administrative staff and
development staff to more appropriately size operations to visible demand. Such
revised expectations of demand could not support the recoverability of costs
NIC Commerce had capitalized on the latest versions of the eProcurement
software and $4.6 million was expensed as an impairment charge in the fourth
quarter of 2001.
NIC Technologies
During the third quarter of 2001, the Company identified indicators of
possible impairment of its goodwill and other acquired intangible assets
related to the acquisition of SDR Technologies. The impairment indicators
included, but were not limited to, the recent restructuring in this business,
which included workforce layoffs and office closings, and the significant
underperformance of this business. NIC Technologies had been integrated as the
application development organization for the Company's portal businesses.
However, a series of organizational restructurings completed in the third
quarter of 2001 lead to significant layoffs at NIC Technologies and a shift in
application development from what were previously centralized development
operations in Westlake Village, California and Pune, India to regionalized
operations in selected state portals. In total, less than 25 employees who were
employees of the original SDR Technologies were employed with NIC at September
30, 2001, down from a previous high of approximately 85 employees at the date
of acquisition in May 2000. Additionally, management determined that the value
of the technology intangible relating to the SDR acquisition was impaired.
Management significantly curtailed funding of all research and
development-stage technology projects that did not have demonstrable and
immediate positive financial returns for the Company. Specifically, future
funding to actively develop and market the Company's Web iVR technology was
significantly scaled back. This Web iVR technology was the primary value driver
of the product technology intangible resulting from the SDR acquisition.
Goodwill related to the SDR acquisition primarily represented the benefits the
Company expected to receive from a centralized application development
organization. As the Company has now abandoned that strategy and eliminated
most of the development resources acquired with SDR, management concluded the
goodwill no longer had value. The Company recognized a $27.6 million impairment
loss in the third quarter of 2001 representing the unamortized balances of
goodwill and other intangible assets related to the acquisition of SDR.
Additionally, during the fourth quarter of 2001 the Company continued to
evaluate the recoverability of capitalized software at NIC Technologies.
Management determined that the expected future cash flows of NIC Technologies
would not be sufficient to recover the capitalized software assets and $1.0
million was expensed as an impairment charge in the fourth quarter of 2001.
NIC Conquest
Due to developments arising in the second half of 2001 relating to NIC
Conquest's migration to a common operating platform for its core UCC and
corporations filing applications, the Company determined that the balance of
revenues remaining to be recognized under certain application development
contractual obligations was not expected to cover anticipated costs of
developing and implementing the related applications and accrued losses of
approximately $6 million in the third and fourth quarters of 2001.
Additionally, in the fourth quarter of 2001, management decided to devote all
resources to completing existing contracts and not actively market the solution
to new customers in the foreseeable future. Based on this decision not to
actively market the solution, the Company determined that the carrying value of
capitalized software development costs relating to this business were not
recoverable and had been impaired. This assessment resulted in an impairment
charge during the fourth quarter of 2001 of approximately $4.4 million. As a
result of the decision to curtail marketing and the uncertainty regarding
future sales of this solution, management concluded that the remaining
unamortized balance of goodwill related to NIC Conquest was impaired and
recorded a $2.5 million impairment charge in the fourth quarter of 2001.
Restructurings
On September 20, 2000, the Company announced the restructuring of certain
of its eGovernment software and services businesses to more appropriately size
these operations to visible demand and more
59
efficiently align them with other initiatives across the Company. The
restructuring involved employee reductions in its corporate marketing division
and at NIC Commerce and NIC Technologies. 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 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. Employee severance costs paid in 2001
totaled $280,000. The employee severance costs related 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
taking place in 2001.
In addition to the management and organizational changes that have taken
place at NIC Commerce since third quarter of 2000 as discussed above, during
the fourth quarter of 2001, the Company continued to evaluate the viability of
its eProcurement business. NIC incurred a pre-tax charge of approximately
$374,000 in the fourth quarter of 2001 relating primarily to employee severance
and lease abandonment costs. This charge is included in general and
administrative expenses in the consolidated statements of operations. At
December 31, 2001, $374,000 remained accrued for future payments. Employee
severance costs totaling approximately $350,000 relate to severance packages
for nine employees in administration and application development, with all
terminations expected to take place by the end of the first quarter of 2002.
4. BUSINESS ACQUISITIONS
eFed
On September 15, 1999, NIC acquired the net assets of eFed, which was
renamed NIC Commerce. NIC Commerce, the Company's eProcurement business,
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.
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 related to NIC Commerce's Internet procurement software. This
asset was valued at approximately $21.8 million and was being amortized over an
estimated three-year life. The remainder of the cost was allocated to goodwill.
The goodwill was being amortized on a straight-line basis over three years. In
the third quarter of 2001, management determined that the remaining unamortized
balances of the software intangible and goodwill was impaired. See Note 3.
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,
60
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 was payable at December 31, 2001.
SDR Technologies
On May 11, 2000, NIC acquired SDR, a California corporation and provider
of Internet-based applications for governments. SDR was renamed NIC
Technologies. NIC Technologies was acquired primarily for its application
development capability but is now the Company's ethics & elections filings
business. This business designs and develops online election and ethics filing
systems for federal, state and local government agencies. 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 was 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
were 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 were 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 carried over to NIC, and
the amortization of purchase accounting intangibles was 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 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, 2001, no 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
61
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
============
Annualized
Amortization Amortization of
Purchase Price Allocation: Period Intangibles
------------- -----------
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. In the
third quarter of 2001, management determined that the remaining unamortized
balances of acquired intangibles and goodwill were impaired. See Note 3.
Conquest Softworks
On January 12, 2000, NIC merged its application services division with
Conquest Softworks, LLC ("Conquest"). Conquest, based in Durango, Colorado, was
a provider of UCC 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 was 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 related to Conquest's UCC 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 was being amortized on a
straight-line basis over three years.
62
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 was being
amortized on a straight-line basis over three years. In the fourth quarter of
2001, management determined that the remaining unamortized balances of the
software intangible and goodwill were impaired. See Note 3.
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 any public offering of equity
securities of NIC), each of the non-NIC shareholders 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.
At any time after January 12, 2002, NIC has the right to purchase all, but
not less than all, of the non-NIC shareholders' shares for 12 times Conquest's
immediately preceding 12 months' EBITDA divided by 30 million, which is the
number of outstanding Conquest shares. On March 1, 2002 (the "Call Date"), NIC
exercised its call rights to purchase all of the non-NIC shareholders' shares.
Since Conquest experienced negative EBITDA in calendar 2001, the purchase price
of the shares was $0. Absent objections from the non-NIC shareholders, NIC will
consider the 15th day following the Call Date to be the final determination of
the call exercise price and closing will occur on the 25th business day after
the Call Date, or on the next occurring business day in accordance with the
Investor's Rights Agreement (the "Rights Agreement") dated January 12, 2000.
NIC granted the non-NIC shareholders certain residual
63
rights in the Rights Agreement if Conquest experiences a change in control
within 48 months after the Call Date. If a change of control of Conquest occurs
within 12 months after the Call Date, the non-NIC shareholders would recover
35% of the difference between the price NIC paid the non-NIC shareholders and
the price NIC received for NIC Conquest in a public offering, merger or
acquisition. The non-NIC shareholders would receive approximately 26% of the
difference in price if the event occurs within 24 months of the Call Date, 18%
within 36 months of the Call Date and 9% within 48 months of the Call Date.
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, the
Company's commercial vehicle compliance business, has developed
business-to-government applications that facilitate compliance with the Federal
Highway Administration's Commercial Vehicle Information System Network. 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
were 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.
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 was 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.
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. No additional consideration was payable
at December 31, 2001.
5. 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.
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.
64
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. Because 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 related to
the government portal 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
========== ========== ========== ========== ===========
The recorded contract intangibles and goodwill have been amortized on a
straight-line basis over the life of the then existing contracts. At December
31, 2001, all recorded goodwill and contract intangibles have been fully
amortized. 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.
6. 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. However, the unaudited pro forma
information does not reflect the impairment charges recorded in 2001 related to
eFed and SDR. 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.
65
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
7. 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 was allocated to
goodwill and was amortized over 21 months ending December 31, 2001. At December
31, 2001, the carrying value of the Company's investment in E-Filing.com
totaled approximately $1.1 million, which approximates the Company's share of
E-Filing.com's underlying equity.
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 was accounted for under the equity method. 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
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 17). At December 31, 2000, the adjusted
carrying value of the Company's investment in Tidemark was approximately
$576,000. In May 2001, a private technology company acquired Tidemark for cash
consideration of approximately $1.6 million. NIC received approximately $0.7
million in cash from the transaction and has no investment balance remaining at
December 31, 2001.
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. In September 2001, the eGS Joint
Venture Agreement was modified and reduced NIC's obligation to make future cash
contributions to the joint venture. NIC Europe will be required to make
approximately $1.0 million in additional cash capital contributions in four
installments of approximately $238,000 beginning in October 2001 and as capital
needs arise. The investment is accounted for under the equity method. Through
December 31, 2001, NIC's cash contributions to eGS totaled $762,000, giving NIC
ownership of 47% of the ordinary shares of eGS. At December 31, 2001, the
carrying value of the Company's investment in eGS totaled approximately $0.4
million.
66
E-Filing.com and eGS 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 investments in E-Filing.com and
eGS.
8. 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 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.
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.
9. 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 Government Guide. NIC was to pay a $4.5 million cash carriage fee
to AOL over the initial three-year term. On January 25, 2002, NIC entered into
an amendment to the Agreement (the "Amendment"). Among other changes to the
Agreement, the Amendment extends the original three-year term of the Agreement
to 40 months (ending on December 25, 2003), eliminates AOL's right to extend
the Agreement beyond the 40-month term, reduces the cash carriage fee from $4.5
million to $2.7 million and eliminates AOL's right to receive contingent
warrants in NIC common stock if gross advertising revenues collected during the
period the Agreement is in effect meet or exceed certain levels. As of December
31, 2001, NIC has made carriage fee payments to AOL totaling $1.875 million,
and must pay the remaining $825,000 in a series of six installments of $137,500
beginning on January 25, 2002 and ending on March 25, 2003. As an additional
component of the carriage fee in the initial agreement, NIC 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 is recognizing the cash portion of the carriage fee on a straight-line
basis over the term as cost of software and services revenue in the
consolidated statement of operations. NIC is recognizing 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, the
unamortized fair value of the fully vested warrants issued to AOL had been
presented as an offset to shareholders' equity. In November 2001, the EITF
reached a consensus in Issue 00-18, "Accounting Recognition for Certain
Transactions Involving Equity Instruments Granted to Other Than Employees,"
that an asset acquired in exchange for
67
the issuance of fully vested, nonforfeitable equity instruments should not be
presented or classified as an offset to equity on the grantor's balance sheet
once the equity granted is issued for accounting purposes. Accordingly, NIC has
recorded the unamortized fair value of the fully vested warrants as an
intangible asset in the consolidated balance sheets for all periods presented.
See Note 14.
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 is funding 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 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
Government Guide.
10. OUTSOURCED GOVERNMENT PORTAL CONTRACTS
Each of the Company's outsourced government portal contracts generally has
an initial term of three to five years with provisions for renewals for various
periods at the option of the government. The Company's primary business
obligation under these contracts is to design, build and operate Internet-based
portals on behalf of governments desiring to provide access to government
information and to complete government-based transactions online. NIC typically
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 typically
responsible for funding up front investment and ongoing operational costs of
the government portals. 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 generally 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 enters into contracts to
provide consulting, development and management services to government portals
in exchange for an agreed-upon fee.
The following is a summary of the Company's larger outsourced state
government portal contracts at December 31, 2001:
Date
Services Contract Expiration Date
Subsidiary Portal Name (Government Entity) Commenced (Renewal Option Through)
- ---------- ------------------------------ --------- ------------------------
New England Interactive, Inc. ............. www.RI.gov (RI) 2001 6/19/2006 (6/19/2010)
NIC/USA, Inc. ............................. www.YourOklahoma.com (OK) 2001 6/30/2002 (6/30/2006)
Montana Interactive, Inc. ................. www.DiscoveringMontana.com (MT) 2001 1/1/2006 (1/1/2011)
NIC/USA, Inc. ............................. www.TennesseeAnytime.org (TN) 2000 8/28/2003 (8/28/2005)
Hawaii Information Consortium, Inc. ....... www.eHawaiiGov.org (HI) 2000 1/3/2003 (1/3/2007)
Idaho Information Consortium, Inc. ........ www.accessIdaho.org (ID) 2000 12/7/2002 (12/7/2006)
Utah Interactive, Inc. .................... www.Utah.gov (UT) 1999 5/6/2003 (5/6/2009)
New England Interactive, Inc. ............. www.inforME.org (ME) 1999 4/15/2002 (4/15/2006)
Arkansas Information Consortium, Inc. ..... www.accessArkansas.org (AR) 1997 6/30/2004
Iowa Interactive, Inc. .................... www.IOWAccess.org (IA) 1997 9/30/2003 (9/30/2005)
Virginia Interactive, Inc. ................ www.myVirginia.org (VA) 1997 9/1/2002 (9/1/2007)
Indiana Interactive, Inc. ................. www.IN.gov (IN) 1995 8/31/2003 (8/31/2005)
Nebraska Interactive, Inc. ................ www.nol.org (NE) 1995 1/31/2004
Kansas Information Consortium, Inc. ....... www.accessKansas.org (KS) 1992 12/31/2002
68
As of December 31, 2001, the Company has also entered into contracts with
the State of New Hampshire, the Florida Association of Court Clerks, the City
of Indianapolis and Marion County (IN), Dallas County (TX), the City and County
of San Francisco (CA), Kent County (MI), Washtenaw County (MI) and the City of
Tampa (FL). On February 1, 2002, the Company entered into a three-year portal
outsourcing contract with the State of Alabama.
11. BUSINESS FILINGS CONTRACT WITH CALIFORNIA SECRETARY OF STATE
On September 6, 2001, NIC/USA and the Company's NIC Conquest subsidiary
were awarded a five-year contract by the California Secretary of State to
develop and implement a comprehensive information management and filing system.
The five-year contract to build an information management and retrieval system
for the Business Programs Division of the California Secretary of State for
approximately $25 million is the largest government contract NIC has ever been
awarded. The Company accounts for revenues under this contract on the
percentage of completion basis. Work on this contract commenced in September
2001, and the Company believes this contract will be profitable.
12. MARKETABLE SECURITIES
The fair value of marketable securities was as follows at December 31:
2000 2001
------------- -------------
U.S. government obligations .......... $ 3,968,320 $2,500,000
Corporate debt securities ............ 20,946,085 1,565,951
----------- ----------
$24,914,405 $4,065,951
=========== ==========
All marketable debt securities held by the Company at December 31, 2000
and 2001 mature within one year. Gross realized gains and losses and unrealized
holding gains and losses were not significant for the years ended December 31,
2000 and 2001. The Company held no marketable securities prior to the
completion of its initial public offering of common stock on July 20, 1999.
At December 31, 2001, the Company has pledged approximately $2.8 million
of its marketable securities as collateral for letters of credit, its $1
million bank line of credit in conjunction with a corporate credit card
agreement, and its $1 million bank note payable (see Note 15).
13. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
2000 2001
------------- -------------
Furniture and fixtures ................. $ 1,100,956 $ 1,246,608
Equipment .............................. 7,523,472 8,163,876
Purchased software ..................... 1,859,052 2,318,258
Leasehold improvements ................. 303,522 332,520
----------- -----------
10,787,002 12,061,262
Less accumulated depreciation .......... 3,190,924 5,675,691
----------- -----------
$ 7,596,078 $ 6,385,571
=========== ===========
Depreciation expense for the years ended December 31, 1999, 2000 and 2001,
was $581,416, $1,728,559 and $2,968,384, respectively.
69
14. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31:
2000 2001
-------------- -------------
Goodwill ......................................... $45,649,243 $2,107,238
Software intangibles ............................. 24,455,641 --
Contract intangibles ............................. 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 ....................... 4,215,092 473,535
Patents and trademarks ........................... 106,477 20,463
Warrants issued to AOL ........................... 4,750,000 4,750,000
----------- ----------
98,348,841 7,351,236
Less accumulated amortization .................... 26,693,504 2,911,251
----------- ----------
$71,655,337 $4,439,985
=========== ==========
In the third and fourth quarters of 2001, the Company recorded intangible
asset impairment charges totaling $37.0 million and $12.5 million,
respectively, as further discussed in Note 3.
15. BANK NOTES PAYABLE AND OTHER DEBT OBLIGATIONS
In August 2001, the Company borrowed $1 million from a bank in the form of
a promissory note payable to finance the purchase of certain hardware and
software components for its NIC Commerce subsidiary. The note bears interest at
the bank's prime rate and is payable in 36 monthly installments of
approximately $31,000 ending in July 2004. The Company has collateralized the
note with approximately $1,100,000 in marketable securities. As a covenant of
the note agreement, the Company is required to achieve positive quarterly
EBITDA (defined as earnings before interest, taxes, depreciation and
amortization) by the quarter ending December 31, 2002.
The Company 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.
The Company issues letters of credit as collateral for performance on
certain of its outsourced government portal contracts and as collateral for
certain performance bonds. These irrevocable letters of credit are generally in
force for one year, for which the Company pays bank fees of approximately 1.5%
to 2.5% of face value per annum. The Company and its subsidiaries had unused
outstanding letters of credit totaling $718,000 and $1,168,000 at December 31,
2000 and 2001 respectively. As of December 31, 2001, all letters of credit were
fully collateralized by cash and marketable securities.
In conjunction with its business filings contract with the California
Secretary of State (see Note 11), in March 2002, the Company issued a $5
million letter of credit as collateral for a performance bond required by the
contract. The letter of credit is fully collateralized by the Company's cash
and marketable securities.
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 and the airplane was sold in 2001 for a
minimal gain.
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.
70
16. SHAREHOLDERS' EQUITY
Common stock
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
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.
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.
Common stock transactions
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 stock 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 stock 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 stock 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 stock 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 stock
compensation expense related to this transaction.
In April 2001, the Company issued 5,000 shares of common stock to an
executive of the Company for no cash consideration and recorded $17,242 in
stock compensation expense related to this transaction.
Additional paid-in capital
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 received a federal income tax deduction of
approximately $3.1 million in 2000. 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
71
deduction was credited directly to additional paid-in capital. In 2001, federal
income tax deductions relating to disqualifying dispositions were
insignificant.
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 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 4, 5, 8 and 9 above.
17. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
Year ended December 31,
-----------------------------------------------------
1999 2000 2001
--------------- ---------------- ----------------
Current income taxes:
Federal ............................ $ -- $ -- $ --
State .............................. 25,354 161,213 (28,180)
------------ ------------- -------------
Total ............................ 25,354 161,213 (28,180)
------------ ------------- -------------
Deferred income taxes:
Federal ............................ (1,295,716) (13,077,074) (20,263,475)
State .............................. (145,861) (1,676,160) (2,333,195)
------------ ------------- -------------
Total ............................ (1,441,577) (14,753,234) (22,596,670)
------------ ------------- -------------
Total income tax benefit ......... $ (1,416,223) $ (14,592,021) $ (22,624,850)
============ ============= =============
72
Significant components of the Company's deferred tax assets and
liabilities were as follows at December 31:
2000 2001
-------------- --------------
Deferred tax assets:
Net operating loss carryforward .......................................... $ 11,943,265 $ 23,440,998
Amortization and impairment of eFed goodwill and software intangible ..... 3,918,486 9,419,793
Capital loss on sale of affiliate ........................................ -- 1,796,675
Investments in affiliates ................................................ 2,577,272 1,887,489
Application services contracts ........................................... 140,821 1,542,457
Compensation related to non-qualified stock options ...................... 788,260 1,123,769
Other .................................................................... 80,988 139,025
------------ ------------
19,449,092 39,350,206
Less: Valuation allowance ................................................ (1,959,447) (7,081,251)
------------ ------------
Total .................................................................. 17,489,645 32,268,955
------------ ------------
Deferred tax liabilities:
Purchase accounting intangibles .......................................... (6,413,820) --
Depreciation ............................................................. (261,297) (282,038)
Capitalized software development costs ................................... (1,638,324) (230,247)
Other .................................................................... (16,204) --
------------ ------------
Total .................................................................. (8,329,645) (512,285)
------------ ------------
Net deferred tax asset ................................................... $ 9,160,000 $ 31,756,670
============ ============
For federal income tax purposes, the Company had available at December 31,
1999, 2000 and 2001 net operating loss ("NOL") carryforwards of approximately
$340,000, $29,833,000 and $30,564,000 that will expire in the years 2019, 2020
and 2021, 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. 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 periods are
reduced.
At December 31, 2001, the Company's ownership in NIC Conquest is less than
80%. As a result, NIC Conquest is not included in the Company's consolidated
federal income tax return. Due to developments arising in the second half of
2001 relating to NIC Conquest's migration to a common operating platform for
its core UCC and corporations filing applications, 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 losses of
approximately $6 million in the third and fourth quarters of 2001. These losses
coupled with the significant underperformance of this business and uncertainty
regarding future performance of this business cast substantial doubt as to
whether NIC Conquest's NOL carryforwards can be used in the future.
Consequently, in the fourth quarter of 2001, the Company provided a deferred
tax asset valuation allowance for the net deferred tax asset relating to NIC
Conquest in the amount of $5,284,576. 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 7). In the second quarter of 2001, the Company
sold its interest in Tidemark realizing a capital loss, which can only be
offset against capital gains for federal income tax purposes. At present, there
is substantial doubt about the Company's ability to generate capital gains in
the future. At December 31, 2001, the Company has adjusted the deferred tax
asset valuation allowance relating to Tidemark to $1,796,675.
73
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,
------------------------------------
1999 2000 2001
---------- ---------- ----------
Effective federal and state income tax rate .................. 11.7% 26.5% 22.5%
Impairment of intangible assets .............................. -- -- 6.3
Goodwill amortization relating to the Exchange Offer and other
acquisitions ................................................ 17.8 7.0 3.6
Non-deductible stock compensation expense .................... 6.6 0.4 0.2
State income taxes ........................................... (1.3) (1.8) (2.3)
Valuation allowance .......................................... -- 2.1 4.7
Other ........................................................ 0.2 0.8 --
---- ---- ----
Statutory federal income tax rate ............................ 35.0% 35.0% 35.0%
==== ==== ====
18. 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.
Future minimum noncancellable lease payments under all noncancellable
operating and capital leases at December 31, 2001 are as follows:
Fiscal Year Operating Capital
- ------------------------------------------------------ ------------- ----------
2002 ................................................. $1,111,592 $14,152
2003 ................................................. 697,387 1,418
2004 ................................................. 601,167 --
2005 ................................................. 406,020 --
2006 ................................................. 128,058 --
Thereafter ........................................... -- --
-------
15,570
Less interest ........................................ 454
-------
Present value of net minimum lease payments .......... 15,116
Less current portion ................................. 13,762
-------
Long-term portion .................................... $ 1,354
=======
Capitalized leased property and equipment consists of the following at
December 31:
2000 2001
---------- ----------
Furniture and fixtures ................. $ 95,619 $ --
Equipment .............................. 395,938 321,647
Purchased software ..................... 53,633 22,040
-------- --------
545,190 343,687
Less accumulated depreciation .......... 276,911 314,320
-------- --------
$268,279 $ 29,367
======== ========
Rent expense for operating leases for the years ended December 31, 1999,
2000 and 2001 was $402,241, $1,279,175, and $1,335,127, respectively.
74
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.
19. 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
contributions totaled $176,736, $469,088 and $349,107 for the years ended
December 31, 1999, 2000 and 2001, respectively. No discretionary contributions
were made for the years ended December 31, 1999, 2000 and 2001.
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. The first offering period under this
plan commenced on April 1, 2001 and expires on March 31, 2002. The plan will
operate on consecutive twelve month offering periods beginning on April 1 of
each year. The closing fair market value of NIC common stock on the first day
of the offering period was $3.06 per share. Approximately 37,000 shares of
Company common stock have been subscribed for in the first offering period.
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,
1999, 2000 and 2001.
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,
1999, 2000 and 2001:
75
1999 2000 2001
----------------- ----------------- -----------------
Net loss:
As reported .................... $ (10,730,560) $ (40,277,950) $ (77,444,273)
Pro forma ...................... $ (12,134,460) $ (47,148,116) $ (82,986,296)
Basic and diluted loss per share:
As reported .................... $ (0.23) $ (0.74) $ (1.38)
Pro forma ...................... $ (0.26) $ (0.86) $ (1.48)
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, 1999, 2000 and 2001:
1999 2000 2001
----------- ----------- ------------
Risk-free interest rate .................. 5.48% 6.10% 4.65%
Expected dividend yield .................. 0.00 0.00 0.00
Expected option life ..................... 4.0 years 4.0 years 4.0 years
Expected stock price volatility .......... 80% 125% 117%
Fair value of options granted ............ $ 11.14 $ 8.62 $ 2.45
A summary of the activity under the Company's stock option plans for the
years ended December 31, 1999, 2000 and 2001 is presented below:
1999 2000 2001
------------------------------ ------------------------------ -------------------------------
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 6,192,706 $ 7.80
Granted ........................... 1,798,285 $ 15.09 3,374,486 $ 10.38 3,161,361 $ 3.29
Exercised ......................... (122,954) $ 1.44 (411,524) $ 2.07 (216,659) $ 1.47
Expired ........................... -- -- (33,924) $ 12.29 (370,108) $ 18.06
Canceled .......................... (163,757) $ 2.51 (761,925) $ 21.44 (1,103,434) $ 9.60
--------- --------- ----------
Outstanding at December 31 ......... 4,025,593 $ 7.49 6,192,706 $ 7.80 7,663,866 $ 5.36
Exercisable at December 31 ......... 825,008 $ 2.18 1,674,316 $ 4.86 2,831,632 $ 5.64
Weighted average grant-date
fair value of options granted
during the year ................... $ 11.14 $ 8.62 $ 2.45
76
The following table summarizes information about stock options outstanding
under the Plan at December 31, 2001:
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Shares Contractual Exercise Shares Exercise
Range of Exercise Price Outstanding Life Price Outstanding Price
- ------------------------- ------------- ------------- ---------- ------------- ---------
$1.44-2.13............ 3,056,442 2.7 $ 1.66 1,674,621 $ 1.45
$2.19-3.26............ 949,122 4.4 $ 2.50 186,656 $ 2.45
$3.34-4.81............ 1,416,550 4.1 $ 3.88 40,751 $ 3.76
$5.06-7.44............ 832,952 2.7 $ 5.59 356,842 $ 5.31
$7.75-11.38........... 908,744 4.5 $ 10.85 274,705 $ 10.90
$12.38-18.38.......... 192,900 1.8 $ 14.05 111,824 $ 14.20
$19.32-26.38.......... 57,796 3.2 $ 22.73 37,734 $ 22.80
$29.38-43.88.......... 204,860 1.7 $ 35.64 133,664 $ 36.10
$49.38-54.25.......... 44,500 2.1 $ 51.39 14,835 $ 51.39
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. Stock 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. Stock 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.
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, stock 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. Stock 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. Stock compensation expense of $130,000 was recorded
relating to these option grants for the year ended December 31, 2000.
Including expense related to options granted prior to January 1, 1999, the
Company recognized a total of $1,614,101 of stock 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
related to options granted prior to January 1, 2000, the Company recognized a
total of $1,675,485
77
of stock compensation expense related to common stock options for the year
ended December 31, 2000. Total deferred compensation expense was $2,814,349 at
December 31, 2000. Including expense related to options granted prior to
January 1, 2001, the Company recognized a total of $1,507,780 of stock
compensation expense related to common stock options for the year ended
December 31, 2001. Total deferred compensation expense was $1,306,569 at
December 31, 2001.
20. 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 the Company believed approximated arms-length
transactions. No direct payments were made to this agency in 1999, 2000 or
2001. Aggregate insurance payments made that were brokered by this insurance
agency totaled approximately $354,000 for the year ended December 31, 1999. No
insurance payments were brokered by this agency in 2000 or 2001.
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 1999 or 2001.
21. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
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 4, 5, 8 and 9 above.
22. REPORTABLE SEGMENTS AND RELATED INFORMATION
As discussed in Note 3, during the third quarter of 2000, the Company
announced a restructuring of certain of its eGovernment software and services
businesses. In conjunction with the restructuring, the Company also reorganized
its management team to support the new corporate structure. Accordingly, NIC
changed the composition of its reportable segments to match the manner by which
the segments were internally organized and managed. In the second quarter of
2001, the Company changed the internal composition of its reportable segments
and began to allocate expenses of certain corporate departments that support
the Company's state and local portal operations to the Portals segment. In
addition, the division that manages the Company's relationship with America
Online (the "AOL division") began to generate substantive revenues during the
second quarter of 2001 and is included in a separate reportable segment. The
Company's reportable segments consist of its outsourced state and local portal
businesses ("Outsourced Portals"), its eGovernment products businesses
("Products"), its NIC Commerce government procurement business ("eProcurement")
and its AOL division ("AOL"). The Portals segment includes the Company's
subsidiaries operating state and local government portals and the corporate
divisions that support portal operations. The Products segment includes the NIC
Conquest and NIC Technologies, which were previously included in the state and
local government segment, and the IDT subsidiary. The AOL division was
previously included in unallocated corporate-level expenses. Unallocated
corporate-level expenses are reported in the reconciliation of the segment
totals to the related consolidated totals as "Other Reconciling Items." Segment
information for all periods presented has been restated to reflect the new
internal organization of the Company. Management evaluates the performance of
its segments and allocates resources to them based on revenues and earnings
before interest, taxes, equity in net loss of affiliates, depreciation,
amortization, impairment losses, one-time charges and other non-cash charges
related to stock compensation and application services contracts ("EBITDA").
There have been no significant intersegment transactions for the periods
reported. The summary of significant accounting policies applies to all
segments.
78
The table below reflects summarized financial information concerning the
Company's reportable segments for the years ended December 31:
Other
Outsourced Reconciling Consolidated
Portals Products eProcurement AOL Items Total
-------------- --------------- -------------- ------------- --------------- ----------------
1999
Revenues ......... $14,010,681 $ 565,464 $ 1,570,974 $ -- $ -- $ 16,147,119
EBITDA ........... 3,694,905 (179,648) 333,341 -- (3,037,436) 811,162
2000
Revenues ......... 17,807,935 5,533,343 3,629,897 101 -- 26,971,276
EBITDA ........... 1,164,018 (2,746,967) (6,182,594) (933,341) (10,700,110) (19,398,994)
2001
Revenues ......... 26,732,743 9,629,381 1,846,319 1,020,236 -- 39,228,679
EBITDA ........... 4,572,873 (2,651,403) (4,107,052) (721,108) (9,673,461) (12,580,151)
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:
1999 2000 2001
----------------- ----------------- -----------------
Total EBITDA for reportable segments ..................... $ 811,162 $ (19,398,994) $ (12,580,151)
Impairment of intangible assets (Note 3) ................. -- -- (49,494,090)
Application services contracts (Note 1) .................. (1,125,000) (1,350,000) (6,041,349)
Restructuring charges (Note 3) ........................... -- (638,238) (373,979)
Withdrawn secondary offering expenses (Note 16) .......... -- (834,493) --
Vacation accrual (*) ..................................... -- (235,169) --
Stock compensation ....................................... (3,188,051) (1,789,874) (1,525,022)
Depreciation and amortization ............................ (10,968,482) (27,959,636) (27,953,007)
Interest income .......................................... 2,506,890 3,742,399 967,027
Interest expense ......................................... (168,872) (48,458) (38,789)
Equity in net loss of affiliates ......................... -- (6,524,473) (3,271,876)
Other income (expense), net .............................. (14,430) (82,710) (233,189)
------------- ------------- --------------
Consolidated loss before income taxes and minority
interest ................................................ $ (12,146,783) $ (55,119,646) $ (100,544,425)
------------- ============= ==============
* In the third quarter of 2000, NIC incurred a one-time non-cash charge of
approximately $235,000 due to the adoption of a company-wide vacation
policy that required the Company to recognize a liability for earned but
unused employee vacation.
The highest volume, most commercially valuable service the Company offers
is access to motor vehicle records through the Company's outsourced government
portals, referred to as DMV records. This service accounted for approximately
74%, 73% and 63% of the Company's portal revenues in 1999, 2000 and 2001,
respectively, and approximately 65%, 48% and 43% of the Company's total
revenues in 1999, 2000 and 2001, respectively. This Company believes that while
this application will continue to be an important source of revenue, its
contribution as a percentage of revenues will decline as other sources grow.
A primary source of revenue is derived from data resellers, who use of the
Company's government portals to access DMV 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
79
and 8% of the Company's total revenues. For the year ended December 31, 2001,
one of these data resellers accounted for approximately 43% of the Company's
portal revenues and 29% of the Company's total revenues, and two other
resellers accounted for an additional 8% of the Company's portal revenues and
5% of the Company's total revenues. At December 31, 2001, one data reseller
accounting for approximately 32% of the Company's accounts receivable and
two other data resellers accounted for approximately 6%.
80
23. UNAUDITED QUARTERLY OPERATING RESULTS
The quarterly information below differs from that previously reported by
the Company due to the net revenue presentation and reclassification of certain
information in the consolidated statements of operations described in Note 1.
The net revenue presentation and reclassifications had no impact on operating
loss, net loss or net loss per share. The quarterly information below is
subject to seasonal fluctuations resulting in lower portal 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 the quarterly results for the
periods presented, refer to Notes 2, 3, 16 and 22 above.
1999
Three Months Ended
------------------------------------------------------------------------- Year Ended
March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999 December 31, 1999
---------------- --------------- -------------------- ------------------- ------------------
Revenues:
Portal revenues ............ $ 2,935,241 $ 3,369,155 3,866,326 $ 3,839,959 $ 14,010,681
Software and services
revenues ................. 167,367 40,318 473,637 1,455,116 2,136,438
------------ ------------ --------- ------------ -------------
Total revenues .......... 3,102,608 3,409,473 4,339,963 5,295,075 16,147,119
------------ ------------ --------- ------------ -------------
Operating expenses:
Cost of portal revenues..... 2,093,740 2,415,636 2,524,319 2,931,381 9,965,076
Cost of software and
services revenues ........ 276,564 831,097 353,229 473,100 1,933,990
General and
administrative ........... 264,988 441,257 813,104 2,441,118 3,960,467
Sales and marketing ........ 68,388 27,503 217,554 287,979 601,424
Impairment loss ............ -- -- -- -- --
Stock compensation ......... 1,698,770 648,157 387,783 453,341 3,188,051
Depreciation and
amortization ............. 2,001,559 1,986,928 2,420,731 4,559,264 10,968,482
------------ ------------ --------- ------------ -------------
Total operating
expenses .............. 6,404,009 6,350,578 6,716,720 11,146,183 30,617,490
------------ ------------ --------- ------------ -------------
Operating loss .............. (3,301,401) (2,941,105) (2,376,757) (5,851,108) (14,470,371)
------------ ------------ ---------- ------------ -------------
Other income (expense):
Interest income ............ 16,565 21,759 1,138,277 1,330,289 2,506,890
Interest expense ........... (36,997) (50,078) (58,159) (23,638) (168,872)
Equity in net loss of
affiliates ............... -- -- -- -- --
Other income (expense),
net ...................... -- -- (9,289) (5,141) (14,430)
------------ ------------ ---------- ------------ -------------
Total other income
(expense) ............. (20,432) (28,319) 1,070,829 1,301,510 2,323,588
------------ ------------ ---------- ------------ -------------
Loss before income taxes
and minority interest ...... (3,321,833) (2,969,424) (1,305,928) (4,549,598) (12,146,783)
Income tax expense
(benefit) .................. (22,780) (466,431) 136,018 (1,063,030) (1,416,223)
------------ ------------ ---------- ------------ -------------
Loss before minority
interest ................... (3,299,053) (2,502,993) (1,441,946) (3,486,568) (10,730,560)
Minority interest ........... -- -- -- -- --
------------ ------------ ---------- ------------ -------------
Net loss .................... $ (3,299,053) $ (2,502,993) $ (1,441,946) $ (3,486,568) $ (10,730,560)
============ ============ ============ ============ =============
Net loss per share:
Basic and diluted .......... $ (0.08) $ (0.06) $ (0.03) $ (0.07) $ (0.23)
============ ============ ============ ============ =============
Weighted average shares
outstanding ................ 42,245,595 42,493,983 51,082,782 53,130,070 47,278,461
============ ============ ============ ============ =============
81
2000
Three Months Ended
------------------------------------------------------------------------- Year Ended
March 31, 2000 June 30, 2000 September 30, 2000 December 31, 2000 December 31, 2000
---------------- --------------- -------------------- ------------------- ------------------
Revenues:
Portal revenues ............. $ 4,532,891 $ 4,414,411 $ 4,487,778 $ 4,372,893 $ 17,807,973
Software and services
revenues .................. 1,666,827 3,063,231 2,112,048 2,321,197 9,163,303
------------ ------------- ------------- ------------- -------------
Total revenues ........... 6,199,718 7,477,642 6,599,826 6,694,090 26,971,276
------------ ------------- ------------- ------------- -------------
Operating expenses:
Cost of portal revenues ..... 3,029,229 3,455,492 3,472,617 4,110,813 14,068,151
Cost of software and
services revenues ......... 2,182,238 2,157,621 1,720,294 2,458,775 8,518,928
General and
administrative ............ 3,216,261 5,310,286 6,441,816 6,314,084 21,282,447
Sales and marketing ......... 667,381 1,411,786 2,030,333 1,449,144 5,558,644
Impairment loss ............. -- -- -- -- --
Stock compensation .......... 516,664 397,862 416,274 459,074 1,789,874
Depreciation and
amortization .............. 4,586,105 6,711,885 8,362,921 8,298,725 27,959,636
------------ ------------- ------------- ------------- -------------
Total operating
expenses ............... 14,197,878 19,444,932 22,444,255 23,090,615 79,177,680
------------ ------------- ------------- ------------- -------------
Operating loss ............... (7,998,160) (11,967,290) (15,844,429) (16,396,525) (52,206,404)
------------ ------------- ------------- ------------- -------------
Other income (expense):
Interest income ............. 1,204,670 1,000,128 864,214 673,387 3,742,399
Interest expense ............ (10,729) (21,271) (7,131) (9,327) (48,458)
Equity in net loss of
affiliates ................ -- (1,683,820) (1,494,620) (3,346,033) (6,524,473)
Other income (expense),
net ....................... (2,370) (1,846) (96,507) 18,013 (82,710)
------------ ------------- ------------- ------------- -------------
Total other income
(expense) .............. 1,191,571 (706,809) (734,044) (2,663,960) (2,913,242)
------------ ------------- ------------- ------------- -------------
Loss before income taxes
and minority interest ....... (6,806,589) (12,674,099) (16,578,473) (19,060,485) (55,119,646)
Income tax expense
(benefit) ................... (2,007,781) (3,768,948) (4,953,796) (3,861,496) (14,592,021)
------------ ------------- ------------- ------------- -------------
Loss before minority
interest .................... (4,798,808) (8,905,151) (11,624,677) (15,198,989) (40,527,625)
Minority interest ............ (92,758) 67,186 4,925 (229,028) (249,675)
------------ ------------- ------------- ------------- -------------
Net loss ..................... $ (4,706,050) $ (8,972,337) $ (11,629,602) $ (14,969,961) $ (40,277,950)
============ ============= ============= ============= =============
Net loss per share:
Basic and diluted ........... $ (0.09) $ (0.16) $ (0.21) $ (0.27) $ (0.74)
============ ============= ============= ============= =============
Weighted average shares
outstanding ................. 53,259,706 54,531,767 55,489,153 55,954,971 54,795,280
============ ============= ============= ============= =============
82
2001
Three Months Ended
------------------------------------------------------------------------- Year Ended
March 31, 2001 June 30, 2001 September 30, 2001 December 31, 2001 December 31, 2001
---------------- --------------- -------------------- ------------------- ------------------
Revenues:
Portal revenues ............. $ 5,431,930 $ 6,144,014 $ 7,747,011 $ 7,409,788 $ 26,732,743
Software and services
revenues .................. 2,586,353 3,830,614 3,332,887 2,746,082 12,495,936
------------- ------------- ------------- ------------- --------------
Total revenues ........... 8,018,283 9,974,628 11,079,898 10,155,870 39,228,679
------------- ------------- ------------- ------------- --------------
Operating expenses:
Cost of portal revenues ..... 4,341,083 4,719,613 5,403,791 5,370,295 19,834,782
Cost of software and
services revenues ......... 2,270,650 2,946,418 5,986,808 4,121,049 15,324,925
General and
administrative ............ 5,618,874 5,858,868 5,079,508 4,234,889 20,792,139
Sales and marketing ......... 752,582 700,327 468,876 350,527 2,272,312
Impairment loss ............. -- -- 36,997,108 12,496,982 49,494,090
Stock compensation .......... 386,274 403,556 386,211 348,981 1,525,022
Depreciation and
amortization .............. 8,385,813 8,454,638 8,503,857 2,608,699 27,953,007
------------- ------------- ------------- ------------- --------------
Total operating
expenses ............... 21,755,276 23,083,420 62,826,159 29,531,422 137,196,277
------------- ------------- ------------- ------------- --------------
Operating loss ............... (13,736,993) (13,108,792) (51,746,261) (19,375,552) (97,967,598)
------------- ------------- ------------- ------------- --------------
Other income (expense):
Interest income ............. 462,949 260,176 164,800 79,102 967,027
Interest expense ............ (6,636) (3,671) (12,089) (16,393) (38,789)
Equity in net loss of
affiliates ................ (820,155) (676,148) (541,322) (1,234,251) (3,271,876)
Other income (expense),
net ....................... 7,458 (124,168) 42,497 (158,976) (233,189)
------------- ------------- ------------- ------------- --------------
Total other income
(expense) .............. (356,384) (543,811) (346,114) (1,330,518) (2,576,827)
------------- ------------- ------------- ------------- --------------
Loss before income taxes
and minority interest ....... (14,093,377) (13,652,603) (52,092,375) (20,706,070) (100,544,425)
Income tax expense
(benefit) ................... (3,937,945) (3,906,262) (12,926,482) (1,854,161) (22,624,850)
------------- ------------- ------------- ------------- --------------
Loss before minority
interest .................... (10,155,432) (9,746,341) (39,165,893) (18,851,909) (77,919,575)
Minority interest ............ (21,859) 10,196 (463,639) -- (475,302)
------------- ------------- ------------- ------------- --------------
Net loss ..................... $ (10,133,573) $ (9,756,537) $ (38,702,254) $ (18,851,909) $ (77,444,273)
============= ============= ============= ============= ==============
Net loss per share:
Basic and diluted ........... $ (0.18) $ (0.17) $ (0.69) $ (0.34) $ (1.38)
============= ============= ============= ============= ==============
Weighted average shares
outstanding ................. 56,040,789 56,066,794 56,089,556 56,239,814 56,109,730
============= ============= ============= ============= ==============
83
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,
2001 and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001, 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 these 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 15, 2002
84
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 2002 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.
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 ........................................... 45
Consolidated Statements of Operations ................................. 46
Consolidated Statements of Changes in Shareholders' Equity ............ 47
Consolidated Statements of Cash Flows ................................. 49
Notes to Consolidated Financial Statements ............................ 51
Report of PricewaterhouseCoopers LLP, Independent Accountants ......... 83
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
85
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)
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)
86
Exhibit
Number Description
- ----------- -----------------------------------------------------------------------------------------------
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)
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.(5)
10.36 Employment agreement between the Registrant and William F. Bradley, dated
September 1, 2000(5)
10.37 Employment agreement between the Registrant and Samuel R. Somerhalder, dated
September 1, 2000(5)
10.38 Employment agreement between the Registrant and Harry H. Herington, dated
September 1, 2000(5)
10.39 Employment agreement between the Registrant and Joseph Nemelka, dated September 1,
2000(5)
10.40 Employment agreement between the Registrant and James B. Dodd, dated September 1,
2000(5)
10.41 Employment agreement between the Registrant and Ray G. Coutermarsh, dated
September 1, 2000(5)
87
Exhibit
Number Description
- ----------- --------------------------------------------------------------------------------------
10.42 Employment agreement between the Registrant and Pradeep K. Agarwal, dated
September 1, 2000(5)
10.43 Employment agreement between the Registrant and Kevin C. Childress, dated
September 1, 2000(5)
10.44 Employment agreement between the Registrant and Stephen M. Kovzan, dated
September 1, 2000(5)
10.45 Contract Between the State of Tennessee, Department of Finance and Administration and
National Information Consortium USA, Inc., dated August 28, 2000.(5)
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.(5)
10.47 Business Programs Automation Agreement, dated September 6, 2001, between National
Information USA, Inc. and the State of California(6)
10.48 Employment agreement between the Registrant and Eric J. Bur dated April 1, 2001
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
(3) Incorporated by reference to Form 8-K filed with the SEC on May 26, 2000
(4) Incorporated by reference to Registration Statement on Form S-8, File No.
333-37000
(5) Incorporated by reference to Form 10-K filed with the SEC on April 2,
2001
(6) Incorporated by reference to Form 10-Q filed with the SEC on November 14,
2001
(b) Reports on Form 8-K.
None.
88
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 22, 2002.
NATIONAL INFORMATION CONSORTIUM, INC.
By: 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
- ---------------------- ------------------------------------------------------- ---------------
Jeffery S. Fraser Chairman and Director March 22, 2002
James B. Dodd President, Chief Executive Officer and Director March 22, 2002
(Principal Executive Officer)
Eric J. Bur Chief Financial Officer (Principal Financial Officer) March 22, 2002
Stephen M. Kovzan Vice President, Financial Operations (Principal March 22, 2002
Accounting Officer)
John L. Bunce, Jr. Director March 22, 2002
Daniel J. Evans Director March 22, 2002
Ross C Hartley Director March 22, 2002
Pete Wilson Director March 22, 2002
89