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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, 2002
[ ] 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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NIC INC.
(Exact name of registrant as specified in its charter)
Colorado 52-2077581
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 17, 2003, was approximately $51,427,000 (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 17, 2003, 58,315,914 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 2003 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 17, 2003.
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TABLE OF CONTENTS
NIC INC.
FORM 10-K ANNUAL REPORT
Page
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PART I
Item 1 Business .................................................................................. 1
Item 2 Properties ................................................................................ 24
Item 3 Legal Proceedings ......................................................................... 24
Item 4 Submission of Matters to a Vote of Security Holders ....................................... 24
PART II
Item 5 Market for Registrant's Common Equity and Related Shareholder Matters ..................... 25
Item 6 Selected Consolidated Financial Data ...................................................... 25
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 26
Item 7A Quantitative and Qualitative Disclosures About Market Risk ................................ 42
Item 8 Consolidated Financial Statements and Supplementary Data .................................. 43
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...... 78
PART III
Item 10 Directors and Executive Officers of the Registrant ........................................ 78
Item 11 Executive Compensation .................................................................... 78
Item 12 Security Ownership of Certain Beneficial Owners and Management ............................ 78
Item 13 Certain Relationships and Related Transactions ............................................ 78
Item 14 Controls and Procedures ................................................................... 79
PART IV
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................... 79
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 12 to 13; government
regulation discussed on page 13; intellectual property and proprietary rights
discussed on pages 13 to 14; the specific risk factors discussed on pages 14 to
23; and commitments and contingencies described in Notes 5, 10, 11, 12 and 14
to the consolidated financial statements included in this Form 10-K.
PART I
ITEM 1. BUSINESS
The Company
NIC Inc. (formerly 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.
Our Internet address is www.nicusa.com. Through this internet Web site, we
make available, free of charge, our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, and Current Reports on Form 8-K, and all amendments to
those reports, as soon as reasonably practicable after these reports are
electronically filed with or furnished to the Securities and Exchange
Commission.
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 divisions:
our portal outsourcing businesses and our software and services businesses. In
our primary business, portal outsourcing, we enter into contracts with
governments and on their behalf design, build and operate Web-based portals.
These portals consist of Web sites and applications that we build, which allow
businesses and citizens to access government information online and complete
transactions, including applying for a permit, retrieving driver's license
records or filing a government-mandated 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
eighteen states and nine local governments. We typically enter into three to
five year contracts with our government clients and manage operations
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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 and municipalities and by delivering new products and services to a
growing number of government entities within our existing contractual
relationships.
Our software and services businesses currently include our corporate
filings, ethics & elections, transportation and AOL businesses. During 2002, we
exited our eProcurement business, NIC Commerce, and closed down the majority of
our transportation business, IDT, as part of a broader strategic refocusing of
the Company on its profitable core outsourced portal business. Our 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 business, NIC Technologies, designs and develops online
campaign expenditure and ethics compliance systems for federal and state
government agencies. 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.
We expanded rapidly following our initial public offering in July of 1999
and have incurred substantial net losses primarily as a result of our acquired
software and services businesses. Throughout this time period, our core
outsourced portal operations have also grown and have been profitable. As part
of a broader strategic refocusing of the Company on our profitable core
outsourced portal business, we became profitable in the second half of 2002. We
expect the Company to be profitable in 2003 and have focused the business on
operations we believe have demonstrable ability to produce positive net income
and cash flow in the future.
Segment Information
Our three reportable segments as of and for the year ended December 31,
2002 consisted of our portal outsourcing segment, eGovernment products segment
and AOL segment. The portal outsourcing segment includes the Company's
subsidiaries that operate outsourced state and city-county government portals
and the corporate divisions that support portal operations. The eGovernment
products segment includes our corporate filings, ethics & elections and
transportation businesses. Although we decided to close our transportation
business in 2002, it did not qualify as a discontinued operation at December
31, 2002. In the second quarter of 2002, the results of operations of our
eProcurment business, NIC Commerce, were classified as discontinued operations.
NIC Commerce's operations were previously reported in the eProcurement segment.
For additional information relating to our reportable segments, refer to Note
17 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 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
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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
580 million people worldwide had access to the Internet in December 2002. By
2004, research firm eMarketer predicts that 725 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 49 million households
connected to the Internet on a weekly basis. A survey conducted by research
firm Harris Interactive in November 2002 found that 66% of U.S. adults are
connected to the Internet, and a total of 168 million Americans consider
themselves active Web users. The same study found that Internet usage in the
United States grew by 3% in 2002, which equates to nearly 10 million new online
users.
The volume of electronic commerce has grown in parallel with the Internet
itself. According to market research firm Gartner, Inc., the total worldwide
value of goods and services transacted online between businesses is expected to
reach $3.6 trillion in 2003. By 2005, business-to-business worldwide eCommerce
is expected to surpass $8.5 trillion. Market research firm BizRate placed the
value of consumer online retail purchases in 2002 at $47.9 billion, up 34% over
the $35.9 billion in online retail purchases in 2001.
Similar growth trends are seen for electronic government. Gartner, Inc.,
predicts that spending on state and local government information technology
initiatives will exceed $50 billion in 2005 and spending for hardware, software
and services will reach $6.2 billion by 2005. In a December 2002 survey, the
Pew Internet and American Life Project found that 62% of all Internet users in
the Unites States had sought information directly from a local, state or
federal government Web site during the last three months. In the same survey,
65% of all Americans said they expect to find relevant information and services
when they visit a government Web site.
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 administrators
can provide instantaneous responses to auto insurers' requests for driving
record data by allowing controlled access to government databases through the
Internet. This Internet-based interaction reduces costs for both government and
users and decreases response times compared to providing the same data by mail
or special purpose dial-up computer connections.
Challenges to the implementation of electronic government services
Despite the potential benefits of electronic government, barriers to
creating successful Internet-based services often preclude governments from
implementing them. Some of these barriers are similar to those the private
sector encounters, including:
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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 services generally do not address
the unique needs of electronic government. Most 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 Web
site of every government agency in a specific jurisdiction from one online
location. We employ a common look and feel in the Web sites of all government
agencies associated with our 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 24 hours per day and 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.
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
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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:
Obtain 100% renewal of all current outsourced government portal contracts
We will strive to obtain renewal of all currently profitable outsourced
government portal contracts. In the history of our company, we have never lost
a contract renewal opportunity or re-bid process and are very proud of our
highly referencable listing of more than 25 state and local government
partners. As recently as December 2002, we signed a new contract for up to
seven years with Kansas, which became our first state partner back in 1991.
Continue to add new government clients
We intend to increase the number of government clients by leveraging our
strong 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. On
January 30, 2003, we entered into a two-year portal outsourcing contract, which
includes renewal options for up to eight additional years, with the
Commonwealth of Kentucky.
Increase transactional revenues from our government portals and filing
applications
We intend to increase transactional revenues from our government portals
and through our filing systems with 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
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brochures, government voicemail recordings and inclusion of Web site information
on government communication materials. In addition, we will continue to update
our portals to highlight new government service information provided on the
portals. 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.
Broaden and standardize product and service offerings
We plan to continue our development of new online transactional products
and services that enable government agencies to interact more effectively and
efficiently 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. We will continue to work with government agencies,
professional associations and other organizations to better understand the
current and future needs of our customers.
Continue to aggressively grow operating margins and profitability
In addition to driving profitability growth through high adoption of
existing revenue generating applications and deployment of new revenue
generating applications, we will continue to drive cost containment efforts
throughout the Company and maintain a lean organizational structure that
fosters entrepreneurial decision-making and innovation and accentuates the
strong financial leverage of our business model.
Government Contracts
Our portal outsourcing businesses
Through our portal outsourcing businesses, we currently have contracts
with 26 state and local government agencies. At December 31, 2002, we provided
outsourced government portal services through the following portals:
Year
Services
Portal Name Commenced Web Address
- ----------- --------- ---------------------------
Alabama 2002 www.Alabama.gov
Vermont 2002 www.Vermont.gov
New Hampshire 2002 www.NHlicenses.com
www.NHfishandgame.com
Washtenaw County, Michigan 2002 www.eWashtenaw.com
Florida Association of Court Clerks 2002 www.MyFloridaCounty.com
Des Moines, Iowa 2002 www.DMgov.com
Iowa County Treasurers 2002 www.IowaTreasurers.org
Corpus Christi, Texas 2002 www.ccTexas.com
Rhode Island 2001 www.RI.gov
City of Tampa 2001 www.TampaGov.net
Kent County, Michigan 2001 www.accessKent.com
Dallas County, Texas 2001 www.DallasCounty.org
Oklahoma 2001 www.YourOklahoma.com
Montana 2001 www.DiscoveringMontana.com
Tennessee 2000 www.TennesseeAnytime.org
Hawaii 2000 www.eHawaiiGov.org
Idaho 2000 www.accessIdaho.org
Utah 1999 www.Utah.gov
Maine 1999 www.Maine.gov
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Year
Services
Portal Name Commenced Web Address
- ----------- ----------- ----------------------
Arkansas 1997 www.accessArkansas.org
Indianapolis and Marion County, Indiana 1997 www.CivicNet.net
Iowa 1997 www.IOWAccess.org
Virginia 1997 www.myVirginia.org
Indiana 1995 www.IN.gov
Nebraska 1995 www.Nebraska.gov
Kansas 1992 www.accessKansas.org
On January 30, 2003, the Company also entered into a two-year portal
outsourcing contract, including renewal options for up to an additional eight
years, with the Commonwealth of Kentucky.
Each of these government portals operates under a separate contract that
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 advocates 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.
Currently, under our contracts with the states of Iowa, New Hampshire and
Vermont, Kent and Washtenaw Counties, and Corpus Christi, Texas, we provide
consulting, development and management services for these government portals
predominantly under a fixed-price model. However, under our renewed contract
with the state of Iowa, we anticipate transaction-based revenues beginning in
2003.
We typically 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.
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Our software and services businesses
Corporate filings
Our 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, 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 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 California 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
also will provide three years of onsite support and maintenance for the system.
Ethics & elections
Our ethics & elections business, NIC Technologies, designs and develops
online campaign expenditure and ethics compliance systems for federal and state
government agencies. Our current government clients include the Federal
Election Commission (www.FEC.gov) and the state of Michigan. We have also
installed filing systems in several other governments including Arkansas,
California, Hawaii, Illinois, Louisiana, Oklahoma, Texas and British Columbia.
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
in-demand 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.
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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 legally authorized Insurance companies
businesses, this service offers
controlled instant look-up of
driving records. Includes
commercial licenses.
Vehicle Title, Lien & Registration Provides controlled interactive Insurance companies, lenders,
title, registration and lien citizens
database 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 Hospitals, clinics, health insurers,
Services on several health professions to citizens
verify 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 Attorneys, doctors, nurses,
their licenses on line using a architects and other licensed
credit card. 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.
Limited Criminal History Searches For those legally authorized, Schools, governments, human
provides users with the ability to resource professionals, nonprofits
request and obtain a limited working with children or
criminal history report on a handicapped adults
specified individual.
Online Birth Certificate Processes an online request for an Citizens
official birth certificate, charging
the user's credit card.
9
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 Alabama, 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 typically 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
Corporate filings
Our 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.
Ethics & elections
Our ethics & elections business designs and develops online campaign
expenditure and ethics compliance 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.
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 four main sources:
o transaction-based fees;
o fees for managing electronic government operations;
o fees for application development; 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 56% of our
consolidated revenues in 2000, 46% in 2001 and 47% in 2002. ChoicePoint, which
resells these records to the auto insurance industry, accounted for
approximately 39% of revenues in 2000, 31% in 2001 and 34% in 2002. In 2002,
transaction-based revenues accounted for approximately 64% of our consolidated
revenues.
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In our other operations, revenues are derived primarily from fees for
managing electronic government operations, software licensing and maintenance
fees, fees for application development and hosting, and advertising fees. In
2002, these revenues accounted for approximately 36% 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 sales 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 supportive, educational relationships with
professional and business organizations that may benefit from the government
service improvements our service 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.
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Strategic Acquisitions and Alliances
Since going public in July 1999, we acquired four companies that comprised
the majority of our software and services division. In 2002, we exited certain
of these businesses (eProcurment and transportation) and completed the
restructuring of the others as part of a broader strategic refocusing of the
Company on our profitable core outsourced portal business. In the last four
years, we also have formed strategic alliances with several companies,
including AOL. We currently deliver state government information, services and
applications through AOL's Government Guide. For additional information on our
acquisitions, investments and strategic alliances, refer to Management's
Discussion and Analysis of Financial Condition and Results of Operations and
the Notes to Consolidated Financial Statements included in this Form 10-K
Technology and Operations
Over the past 11 years, we have made substantial investments in the
development of Internet-based applications and operations specifically designed
to allow businesses and citizens to transact with and receive information from
governments. The scope of our technological expertise includes network
engineering as it applies to the interconnection of government systems to the
Internet, Internet security, Web-to-legacy system integration, Web-to-mainframe
integration, database design, Web site administration and Web page development.
Within this scope, we have developed and implemented a comprehensive Internet
portal framework for governments, and a broad array of stand-alone services
using a combination of our own proprietary technologies and commercially
available, licensed technologies. We believe that our technological expertise,
coupled with our in-depth understanding of governmental processes and systems,
has made us adept at rapidly creating tailored portal services that keep our
clients on the forefront of electronic government.
Each of our government clients has unique priorities and needs in the
development of its electronic government services. More than half 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
online service 24 hour per day and seven days a week, 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 the unique understanding of government needs;
o the quality and fit of electronic government services;
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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 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 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, BearingPoint, and
Accenture; and
o consumer-oriented government portal companies, such as EzGov.com.
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.
13
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 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 that we or our customers
could obtain necessary licenses from third parties at a reasonable cost or at
all.
After termination of our contracts, it is possible that governments and
their successors and affiliates may use their right of use license rights to
the software programs and other applications we have developed for them in the
operation of their portals to operate the portals themselves. Inadvertently,
they also may allow our intellectual property or other information to fall into
the hands of third parties, including our competitors. In one case, after
completion of one of our government contracts, a government claimed that it
owned all the software written by NIC employees pursuant to the contract, a
claim we vigorously and successfully disputed.
Employees
As of December 31, 2002, we had 288 full-time employees, of which 26 were
working in corporate operations 47 were in our software and services businesses
and 215 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 have incurred significant net losses in the past
We expanded rapidly following our initial public offering in July 1999 and
have incurred substantial net losses primarily as a result of our acquired
software and services businesses. We incurred net losses of approximately $7.6
million for the year ended December 31, 2002, $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. However, as part of a broader
strategic refocusing of the Company on our profitable core outsourced portal
business during 2002, we exited our eProcurement business, NIC Commerce, closed
our transportation business, IDT, and restructured the other software and
services businesses in an effort to accelerate our path to profitability. As a
result, the Company became profitable in the second half of 2002. Further, even
though we expect to be profitable in 2003, 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.
We may need more working capital to fund operations and expand our business
We believe that our current financial resources will be sufficient to meet
our present working capital and capital expenditure requirements for the next
twelve months. However, we may need to raise additional capital before this
period ends to further:
14
o fund operations, including the costs to complete contracts in our NIC
Conquest business, for which we have recently accrued significant
losses under certain 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 and municipalities beyond what
is contemplated in 2003 if unforeseen opportunities arise;
o expand our product and service offerings beyond what is contemplated
in 2003 if unforeseen opportunities arise;
o respond to unforeseen competitive pressures; and
o acquire complementary businesses or technologies beyond what is
contemplated in 2003 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, lines of credit and cash
that will be generated from operations are insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity securities, issue debt
securities or increase our working capital line of credit. The sale of
additional equity securities could result in dilution to the Company's
shareholders. 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 opportunities or
respond to competitive pressures would be significantly limited. This limitation
could harm our business, results of operations and financial condition.
Our 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 corporate filings business, NIC Conquest, develops and delivers
applications, typically 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 for secretaries of
state. 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. In 2002, we accrued approximately $3.5
million in anticipated losses due to cost overruns on contracts in Arkansas,
Minnesota and Oklahoma. We have fulfilled all obligations under our contract
with the state of Minnesota and expect to complete the majority of the
remaining work on our remaining two loss contracts with the states of Arkansas
and Oklahoma by the end of the second quarter of 2003. 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, particularly
on our contract with the California Secretary of State, which we currently
expect to be profitable, our results of operations, financial condition and
cash flows could be seriously harmed.
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
15
profitability. 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 be sure that any acquisitions we will announce will ultimately
close. Moreover, even after we close such transactions, we cannot assure 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 losses
totaling $37.0 million and $12.5 million, respectively, relating to our NIC
Commerce, NIC Technologies and NIC Conquest businesses, all of which were
acquired since the third quarter of 1999. Also, 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. Additionally, in the second quarter of 2002, we
recorded a $1.3 million impairment loss relating to our IDT business, which was
acquired in October 2000, and an impairment loss totaling $3.0 million relating
to our AOL business. For additional information on these impairment and
restructuring charges, see Note 5 in the Notes to Consolidated Financial
Statements included in this Form 10-K.
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 27 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
specified period or, in some cases, upon passing legislation. Additionally, the
contracts under which we provide management and development services can be
terminated without cause on a specified period of notice. The loss of one or
more of our larger government portal clients, if not replaced, could
dramatically reduce our revenues. If these revenue shortfalls occur, our
business and financial condition would be harmed. We cannot be certain if, when
or to what extent governments might fail to renew or terminate any or all of
their contracts with us.
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
16
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 47% of our revenues for the year ended December 31, 2002 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 filings. We cannot assure 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.
Our portal revenues could be harmed as a result of severe government budget
deficits
Although the majority of our portal revenues are derived from fees we
charge to users for transactions conducted through our portals, approximately
9% of our portal revenues in 2002 were derived from software development
services paid directly to us by governments on a time-and-materials basis. In
the event of severe budget deficits, our government clients may be required to
curtail discretionary spending on such projects and our portal revenues could
be harmed.
17
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, 2002, one of these data
resellers, ChoicePoint, accounted for approximately 34% 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 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 been awarded contracts to provide eGovernment
services under our traditional self-funding public/private business model, 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 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.
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 and federal agencies and to
broaden our product and service offerings to diversify our revenue streams
across our lines of business. We cannot assure 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
18
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
financial condition.
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, BearingPoint, and
Accenture; 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
19
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.
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. One 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.
20
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 2003, including general managers for new operations in
jurisdictions in which we obtain contracts. 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
that the products and services we offer will appeal to a sufficient number of
Internet users to generate continued revenue growth. 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.
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
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;
21
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 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.
Rapid growth in the use of the Internet is a relatively 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 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
22
government portals. Most of the agreements through which we obtain consent to
disseminate this information do not contain indemnity provisions in our favor.
These types of claims have been brought, sometimes successfully, against online
services and Web sites in the past. We cannot assure that our general liability
or errors and omissions insurance will be adequate to indemnify us for all
liability that may be imposed. Any liability that is not covered by our
insurance or is in excess of our insurance coverage could severely harm our
business operations and financial condition.
Concerns over transactional security may hinder the growth of our business
A significant barrier to electronic commerce is the secure transmission of
confidential information over public networks. Any breach in our security could
expose us to a risk of loss or litigation and possible liability. We rely on
encryption and authentication technology licensed from third parties to provide
secure transmission of confidential information. As a result of advances in
computer capabilities, new discoveries in the field of cryptography or other
developments, a compromise or breach of the algorithms we use to protect
customer transaction data may occur. Because we provide information released
from various government entities, we may represent an attractive target for
security breaches.
A compromise of our security or a perceived compromise of our security
could severely harm our business. A party who is able to circumvent our
security measures could misappropriate proprietary information, including
customer credit card information, or cause interruptions or direct damage to
our government portals. Also, should hackers obtain sensitive data and
information, or create bugs or viruses in an attempt to sabotage the
functionality of our products and services, we may receive negative publicity,
incur liability to our customers or lose the confidence of the governments with
which we contract, any of which may cause the termination or modification of
our government contracts.
We may be required to expend significant capital and other resources to
protect against the threat of security breaches or to alleviate problems caused
by these breaches. However, protection may not be available at a reasonable
price or at all.
Our systems may fail or limit user traffic, which could harm our business,
results of operations and financial condition
Most of our communications hardware and computer hardware operations for
delivering our electronic government services are located individually in each
state or city where we provide those services. We cannot assure 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 Web sites have experienced slower
response times or decreased traffic in the past and may experience the same
incidents in the future. In addition, our users depend on Internet service
providers, online service providers and other Web site operators for access to
our government portals and other online government-to-citizen and
government-to-business services. Many of these providers and operators have
experienced significant outages in the past due to system failures unrelated to
our systems, holidays and heavy user traffic, and could experience the same
outages, delays and other difficulties in the future. Any of these system
failures could harm our business, results of operations and financial
condition.
23
ITEM 2. PROPERTIES
Our principal administrative office 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. By the end of the second quarter of
2003, we expect to move our principal administrative office to another leased
space in Olathe, Kansas that will occupy approximately 7,500 square feet. 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
None.
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 2002.
24
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 17,
2003, the closing price of our common stock was $1.67.
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
Fiscal Year Ended December 31, 2002 High Low
- ----------------------------------- ------ ------
First Quarter ....................... $ 4.50 $ 3.21
Second Quarter ...................... $ 4.45 $ 1.48
Third Quarter ....................... $ 1.79 $ 1.33
Fourth Quarter ...................... $ 2.24 $ 1.39
As of March 17, 2003, there were approximately 216 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. In the second quarter of 2002, we exited our
domestic eProcurement business entirely, and have classified the results of
operations of NIC Commerce as discontinued operations for all periods
presented. For additional information on the Exchange Offer, the acquisitions
we have made since 1999 and discontinued operations, refer to Notes 4 and 5 in
the Notes to Consolidated Financial Statements included in this Form 10-K.
25
Year Ended December 31,
--------------------------------------------------------------------
1998 1999 2000 2001 2002
--------- --------- --------- --------- --------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Total revenues .................................... $ 8,148 $ 14,576 $ 23,341 $ 37,020 $ 47,545
Operating loss .................................... (7,205) (14,153) (45,280) (87,502) (7,930)
Loss from continuing operations ................... (7,896) (10,534) (35,957) (70,919) (5,575)
Net loss .......................................... (7,896) (10,731) (40,278) (77,444) (7,610)
Loss per share from continuing operations --
basic and diluted ................................ (0.21) (0.22) (0.66) (1.26) (0.10)
Net loss per share -- basic and diluted ........... (0.21) (0.23) (0.74) (1.38) (0.13)
December 31,
--------------------------------------------------------------------
1998 1999 2000 2001 2002
--------- --------- --------- --------- --------
Consolidated Balance Sheet Data:
Cash and cash equivalents ......................... $ 1,311 $ 9,527 $ 13,878 $ 17,236 $ 9,559
Cash and cash equivalents -- restricted ........... -- -- -- -- 6,300
Marketable securities ............................. -- 82,481 24,914 4,066 249
Total assets ...................................... 17,249 133,661 143,792 81,814 74,456
Bank lines of credit .............................. 1,024 -- -- -- --
Long-term debt (includes current portion of
notes payable/capital lease obligations) ......... 745 458 217 888 533
Total shareholders' equity ........................ 10,912 128,089 135,160 59,559 55,056
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 core business, portal outsourcing, we enter into contracts
with governments and on their behalf design, build and operate Web-based
portals. 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. Our portals consist of Web sites and applications
that we build, which allow businesses and citizens to access government
information online and complete transactions, including applying for a permit,
retrieving driver's license records or filing a form or report. We typically
market the services and solicit 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. We are typically responsible for funding up
front investment and ongoing operational costs of the government
26
portals. 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.
On behalf of our government clients, we enter 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
we provide and the division of revenues between the Company and the government
agency. The government must approve prices and revenue sharing agreements. We
generally own 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 our
contract were 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, we enter into contracts to provide consulting,
development and management services to government portals in exchange for an
agreed-upon fee.
Currently, we have contracts to provide portal outsourcing services for
eighteen states and nine local governments. We intend to increase our revenues
and profitability by marketing our portal outsourcing services to new states
and municipalities, increasing adoption of existing portal applications and
services, delivering new applications and services and expanding markets within
our existing contractual relationships.
Historically, our software and services businesses have included our
eProcurement, corporate filings, ethics & elections, transportation and AOL
businesses. In September 1999, we acquired the net assets of eFed, a provider
of Internet-based procurement software and services for governments. eFed was
renamed NIC Commerce and is wholly owned by NIC. In the second quarter of 2002,
we exited our domestic eProcurement business entirely and have classified the
results of operations of NIC Commerce as discontinued operations. In January
2000, we merged our Application Services Division with Conquest Softworks, LLC
and renamed the company NIC Conquest. NIC Conquest, a wholly owned subsidiary
of NIC and our corporate filings business, is a provider of UCC and corporation
software applications and services that facilitate electronic filings and
document management for secretaries of state. In May 2000, we acquired SDR
Technologies, Inc., a provider of Internet-based applications for governments.
SDR has been renamed NIC Technologies and is wholly owned by NIC. NIC
Technologies, our ethics & elections business, designs and develops online
campaign expenditure and ethics compliance systems for federal and state
government agencies. In October 2000, we acquired Intelligent Decision
Technologies, Ltd., or IDT, a provider of business-to-government reporting and
filing software for the transportation industry. In the second quarter of 2002,
we decided to wind down substantially all of IDT's operations. As of December
31, 2002, IDT did not qualify as a discontinued operation. 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 5 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. For additional information on our agreement
with AOL, refer to Note 5 in the Notes to Consolidated Financial Statements
included in this Form 10-K.
We expanded rapidly following our initial public offering in July 1999 and
have incurred substantial net losses primarily as a result of our acquired
software and services businesses. Throughout this time period, our core
outsourced portal operations have also grown and have been profitable. As part
of a broader strategic refocusing on our profitable core outsourced portal
business during 2002, we exited our eProcurement and transportation businesses
and restructured the other software and services businesses in an effort to
accelerate our path to profitability. We became profitable in the second half
of 2002 but did not generate positive cash flow from operations in 2002. We
expect the Company to be profitable in 2003 and have focused the business on
operations we believe have demonstrable ability to produce positive net income
and cash flow in the future. However, any projections of future results of
operations and 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 increase our working
capital line of credit. There can be no assurance that financing will be
available in amounts or on terms acceptable to us, if at all.
27
Overview of Business Models and Revenue Recognition
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 corporate filings,
ethics & elections, transportation and AOL businesses. We currently derive
revenue from four main sources:
o transaction-based fees;
o fees for managing portal operations;
o fees for application development; and
o advertising fees from AOL.
Each of these revenue types and the corresponding business models are
further described below.
Our portal outsourcing businesses
We categorize our portal revenues according to the underlying source of
revenue. A brief description of each category follows:
o DMV transaction-based: these are transaction fees from the sale of
driver history records, referred to as DMV records, from our state
portals to data resellers, insurance companies and other
pre-authorized customers, and are generally recurring.
o Non-DMV transaction-based: these are transaction fees other than from
the sale of DMV records for transactions conducted by businesses and
citizens through our state and local portals, and are generally
recurring. For a representative listing of non-DMV products and
services we currently offer through our state and local portals, refer
to Part I, Item 1 in this Form 10-K.
o Portal management: these are recurring fees paid to us by our
government clients for the operation of state and local portals, which
typically supplement transaction-based fees.
o Software development: these are fees from the performance of software
development projects and other time and materials services for our
government clients. While we actively market these services, they may
not have the same degree of predictability as our transaction-based or
portal management revenues.
The highest volume, most commercially valuable service we offer is access
to DMV records through our insurance industry records exchange network. This
service accounted for approximately 56% of our consolidated revenues in 2000,
46% in 2001 and 47% in 2002. 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 modestly as other sources grow. ChoicePoint,
which resells these records to the auto insurance industry, accounted for
approximately 39% of revenues in 2000, 31% in 2001 and 34% in 2002. In 2002,
portal revenues accounted for approximately 73% of our consolidated revenues.
In our outsourced portal businesses for 2002, DMV transaction-based
revenues represented approximately 64% of portal revenues, non-DMV
transaction-based revenues represented approximately 23%, software development
represented 9%, and portal management represented approximately 4%.
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
28
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 25 days of billing and remit payment to governments within 45
days of the transaction. The costs that we pay state 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, New Hampshire and
Vermont, Kent and Washtenaw Counties, and Corpus Christi, Texas, we provide
consulting, development and management services for these government portals
predominantly under fixed-price and time and materials models. However, under
our contract with the State of Iowa, we anticipate transaction-based revenues
beginning in 2003.
We expense 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 we contract typically receive a perpetual,
royalty-free license to the applications we developed. Such costs are included
in cost of portal revenues in the consolidated statements of operations.
Our software and services businesses
Corporate filings
Our corporate filings business derives the majority of its revenues from
fixed-price application development contracts and recognizes revenues 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 2002, our corporate filings
business accounted for approximately 17% of our consolidated revenues.
In September 2001, our corporate filings business was awarded a five-year
contract by the California Secretary of State to build an information
management and retrieval system for the Business Programs Division of the
California Secretary of State. This contract 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
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. We will also provide three years of onsite support and
maintenance for the system. Work on this contract commenced in September 2001,
and we currently believe this contract will be profitable.
In March 2002, we issued a $5 million performance bond to the California
Secretary of State as required by contract. The performance bond is
collateralized by a $5 million letter of credit. Prior to receiving our next
major milestone payment under the contract, we are required to increase the
amount of the performance bond to $10 million. If we are unsuccessful in
obtaining a $10 million performance bond, all remaining milestone payments to
NIC will be deferred until the date the Secretary of State officially accepts
the system and the maintenance period commences. There can be no assurance that
we will be able to obtain a $10 million performance bond or that a performance
bond will be available in amounts or on terms acceptable to us, if at all.
At December 31, 2002, our corporate filings business was primarily engaged
in servicing its contract with the California Secretary of State and completing
legacy contracts in Oklahoma and Arkansas. By the end of the second
29
quarter of 2003, we expect to complete the majority of the remaining work on
our contracts in Arkansas and Oklahoma, under which we have incurred
substantial losses in the past. This business is not actively marketing its
products and services to new government entities.
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 2002, our ethics
& elections business accounted for approximately 4% of our consolidated
revenues.
Transportation
Our transportation business 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 2002, our transportation
business accounted for approximately 3% of our consolidated revenues. We
decided to close our transportation business in 2002 and do not expect to
generate substantial revenues from this business in 2003.
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. Our contract with AOL ends in December 2003, and we anticipate a
significant decrease in revenues from our AOL business throughout 2003 as
compared to prior periods due to continued weakness in the online advertising
market. In 2002, our AOL business accounted for approximately 3% of our
consolidated revenues.
Critical Accounting Policies
A critical accounting policy is one which is both important to the
portrayal of the Company's financial condition and results of operations 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.
Management has discussed the development and selection of the critical
accounting policies described below with the Audit Committee of the Board of
Directors, and the Audit Committee has reviewed the Company's disclosure
relating to it in this Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Application development contracts
Our 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 management's estimates
to complete and are reviewed periodically, with adjustments recorded in the
period in which the revisions are made. Use of the percentage of completion
method requires that management
30
be able to reasonably estimate total contract costs and costs to complete at
each reporting date. Any anticipated losses on contracts are charged to
operations as soon as they are determinable.
Our corporate filings business has incurred substantial losses under its
fixed-price contracts in the past primarily due to cost overruns (as further
discussed in Note 10 to the Notes to Consolidated Financial Statements included
in this Form 10-K). 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, particularly on our contract with the California
Secretary of State, which we currently expect to be profitable, our results of
operations, financial condition and cash flows could be seriously harmed. At
December 31, 2002, the accrual for losses on all application development
contracts was approximately $1.6 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.
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, 2001 and 2002 NOL
carryforwards for federal tax purposes of approximately $0.3 million, $26.5
million, $21.1 million and $8.4 million that will expire in the years 2019,
2020, 2021 and 2022, respectively. As discussed above, we became profitable in
the second half of 2002. We expect the Company to be profitable and generate
taxable income in 2003 and have restructured and refocused the business on
operations we believe have demonstrable ability to produce positive taxable
income and cash flow in the future. 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 14 to the Notes to Consolidated
Financial Statements included in this Form 10-K.
Goodwill, intangible assets and long-lived assets
As further discussed below, during 2001 and 2002 we recorded impairment
losses totaling $49.5 million and $4.3 million, respectively, relating mostly
to goodwill and intangible assets arising from business combinations and
capitalized software development costs. At December 31, 2002, our recorded
intangible assets were primarily comprised of internal use software development
costs totaling approximately $0.2 million and had no recorded goodwill
remaining. Refer to Note 5 in the Notes to Consolidated Financial Statements
included in this Form 10-K for further discussion of the goodwill and
intangible asset impairment losses we recorded in 2001 and 2002.
At each balance sheet date, and whenever events or changes in
circumstances warrant, management assesses the carrying value of long-lived
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. We estimate future discounted and
undiscounted cash flows and fair values based upon historical performance,
trends, and various other factors. A significant change in the assumptions
underlying the cash flows or fair values could result in a different
determination of impairment loss and/or the amount of any impairment.
31
Impairment Losses and Restructuring Charges
In the third and fourth quarters of 2001, we recorded impairment losses
totaling $37.0 million and $12.5 million, respectively, relating to our NIC
Commerce, NIC Technologies and NIC Conquest businesses. In the second quarter
of 2002, we recorded impairment losses totaling $4.3 million relating to our
AOL and IDT 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 primarily to our NIC Commerce and NIC Technologies
businesses.
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
eFed acquisition. 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 had taken place at NIC Commerce since third quarter of 2000, we continued
the restructuring of this business 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 eFed acquisition 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 including 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 loss in
the fourth quarter of 2001.
In the second quarter of 2002, we exited our domestic eProcurement
business entirely and have classified the results of operations of NIC Commerce
as discontinued operations.
NIC Technologies
During the third quarter of 2001, we identified indicators of possible
impairment of goodwill and other acquired intangible assets related to the SDR
acquisition. 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.
Since we 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 SDR acquisition. Additionally, during the fourth quarter
of 2001 we continued to evaluate the recoverability of capitalized software at
NIC Technologies.
32
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 loss 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 fixed-price application
development contracts was not expected to cover anticipated costs of developing
and implementing the related applications and accrued losses totaling
approximately $6.0 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 loss 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
loss in the fourth quarter of 2001.
IDT
During the second quarter of 2002, we identified indicators of possible
impairment of goodwill related to the IDT acquisition. The impairment
indicators included, but were not limited to, the recent underperformance of
this business relative to plan, the expected underperformance of this business
as compared to projected future operating results, and NIC's recent strategic
refocusing on our core portal outsourcing business and away from our software
and services businesses. Specifically, we determined that that the recent
downturn in IDT's financial performance was expected to continue and would not
be temporary, as we previously expected. This was a reversal of IDT's
historical trend of profitability, and was primarily attributable to
government-imposed contract delays and funding shortfalls on the part of
governments with whom IDT had contracted.
Management reached the conclusion that it would not continue to support
IDT's business and decided to wind down IDT's operations as expeditiously and
cost-effectively as possible. Accordingly, we concluded the remaining goodwill
related to the IDT acquisition no longer had value and recognized a $1.3
million impairment loss in the second quarter of 2002.
AOL
During the second quarter of 2002, we identified indicators of possible
impairment of the cash and warrant portions of the carriage fee paid and
payable to AOL pursuant the Interactive Services Agreement between the Company
and AOL. Beginning in the second quarter of 2001, our share of revenues
generated from AOL's sale of advertisement through Government Guide had
increased steadily on a sequential quarterly basis. However, in the second
quarter of 2002, revenues from our AOL business decreased precipitously as
compared to recent quarters. This was primarily a result of lower AOL
Government Guide advertising revenues due to weakness in the overall
advertising market in general and the online advertising market in particular.
This drop in advertising revenues was in contrast to the growth in revenues our
AOL business had experienced historically. Additionally, based on recent
discussions with AOL personnel, we did not expect our AOL business to achieve
revenue growth consistent with the growth it had experienced historically. AOL
had specifically noted in their filings with the SEC at the time that they
expected the weakness in the online advertising market to continue for the
foreseeable future. Accordingly, we reduced the revenue forecast for our AOL
business for the remainder of 2002 and through the completion of our contract
with AOL in December 2003.
Management determined that the expected future cash flows of its AOL
business would not be sufficient to recover the cash carriage fee we would have
recognized over the remaining term of the contract with AOL. Through the second
quarter of 2002, we had made cash payments to AOL totaling approximately $2.3
million, with
33
approximately $500,000 recorded as a prepaid expense at June 30, 2002, and had
to pay the remaining $412,500 in a series of three quarterly installments
ending in March 2003. Additionally, management determined the future cash flows
of this business would not be sufficient to recover the unamortized carrying
amount of the fully vested warrants issued to AOL, which totaled approximately
$2.1 million at June 30, 2002. The carrying amount of the fully vested warrants
was previously recorded as an intangible asset in the consolidated balance
sheet. As a result, we recognized a $3.0 million impairment loss in the second
quarter of 2002.
Restructurings
In September 2000, we announced that our third quarter operating results
would likely fall short of 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 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
and 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 had
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 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. Approximately $412,000 of this charge has been included in
selling and administrative expenses in the consolidated statements of
operations and $226,000 related to NIC Commerce, which has been classified as a
discontinued operation. 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 had 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. This charge is
included in NIC Commerce's results as discontinued operations in the
consolidated statements of operations. At December 31, 2001, $374,000 remained
accrued for future payments. Cash requirements for the restructuring were
funded from available resources. Employee severance costs totaling
approximately $350,000 related to severance packages for nine employees in
administration and development, and all terminations were completed and
payments made by the end of the first quarter of 2002.
Discontinued Operations and Reclassifications
As further discussed above, in the second quarter of 2002, we exited our
domestic eProcurement business and have classified the results of operations of
NIC Commerce as discontinued operations for all periods presented. Also, in
2002, we decided to combine the general and administrative operating expense
classification and the sales and marketing operating expense classification
into one operating expense classification referred to as selling and
administrative. All periods presented reflect the new classification.
34
Comparison of Years Ended December 31, 2002, 2001 and 2000
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 2002 2001 2000
- --------------------- ---- ---- ----
Gross profit % -- outsourced portals 43% 26% 21%
Gross profit % -- software and services (7%) (36%) (19%)
Selling and administrative as % of revenue 28% 47% 80%
Revenue growth -- outsourced portals 32% 48% 27%
Revenue growth -- software and services 20% 92% 879%
PORTAL REVENUES. In the analysis below, we have categorized our portal
revenues according to the underlying source of revenue (in thousands).
Portal Revenue Analysis 2002 2001 2000
- ----------------------- ------- ------- -------
DMV transaction-based $22,253 $16,899 $12,987
Non-DMV transaction-based 8,065 5,208 3,297
Portal management 1,274 1,603 1,454
Software development 3,187 2,661 70
------- ------- -------
Total $34,779 $26,371 $17,808
======= ======= =======
Portal revenues for 2002 increased 32% over 2001. Of this increase, 19%
was attributable to revenues from our newer state portal business units that
had a full year of operations in 2002, including our Idaho and Tennessee
portals, which began to generate DMV revenues in early 2001, our Hawaii and
Montana portals, which began to generate DMV revenues in the third quarter of
2001, and our Oklahoma and Rhode Island portals, which began to generate DMV
revenues in the first quarter of 2002. Approximately 8% of the increase in
portal revenues for 2002 was attributable to an increase in same state portal
revenues (states in operation and generating DMV revenues for two full years)
and 5% was attributable to our local portals. Excluding our state portals that
operate under fixed-price models, same state portal revenues for 2002 increased
16% over 2001 as a result of increased transaction volumes mainly from our
Arkansas, Indiana, Kansas and Utah portals.
Portal revenues for 2001 increased 48% over 2000. Of this increase, 29%
was attributable to revenues from our portals that became operational in 2001,
17% was from an increase in revenues relating to same state portal volumes and
2% was attributable to our local portals. Excluding our state portals that
operate under fixed-price models, same state portal revenues for 2001 increased
20% over 2000 as a result of increased transaction volumes mainly from our
Indiana, Kansas, Utah and Virginia portals.
COST OF PORTAL REVENUES. Cost of portal revenues in 2002 increased 2% over
2001. An increase in costs from our newer state portals that had a full year of
operations in 2002 was partially offset by a decrease in same state cost of
portal revenues. Same state cost of portal revenues in 2002 decreased 4% from
2001 primarily as a result of strong overhead cost containment efforts.
Our portal gross profit rate increased to 43% in 2002 from 26% in 2001.
This increase was primarily attributable to our newer state portals that had a
full year of operations in 2002 as discussed above, and to an increase in our
same state portal gross profit rate, which increased to 50% in 2002 from 40% in
2001. This increase was due primarily to increased business and citizen
adoption of existing portal applications and the addition of new revenue
generating applications and services within existing portals through a
relatively fixed cost base. We intend to continue to expand our portal
operations by developing and promoting new applications and services within our
existing portals. Accordingly, we expect our same state gross profit rate to
continue to increase in the foreseeable future.
Cost of portal revenues in 2001 increased 38% over 2000. Of this increase,
22% was attributable to costs from our state portals that became operational in
2001, 11% was attributable to our local portals, the majority of which
35
became operational in 2001, and 6% was attributable to an increase in same
state cost of portal revenues. Same state cost of portal revenues in 2001
increased 12% over 2000 primarily as a result of technology enhancements and
service delivery investments mainly in our Indiana, Maine and Utah portals.
Our portal gross profit rate increased to 26% in 2001 from 21% in 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 in 2000. Our same state portal gross profit rate increased to
40% in 2001 from 35% in 2000, primarily due to increased business and citizen
adoption of existing portal applications and the addition of new revenue
generating applications and services within existing portals.
SOFTWARE AND SERVICES REVENUES. Software and services revenues for 2002
increased 20% over 2001. This increase was primarily attributable to an
increase in revenues from our corporate filings business, NIC Conquest, 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, and to a lesser extent from our ethics &
elections business, which benefited from the commencement of its five-year,
$3.75 million contract with the State of Michigan in January 2002, and our AOL
business. Total corporate filings revenues increased by $2.4 million in 2002.
In 2002, we recognized approximately $7.1 million in revenue from our contract
with the California Secretary of State compared to $1.2 million in 2001. These
increases were offset by a decrease in revenues from legacy corporate filing
contracts and our transportation business, IDT, which we have decided to close.
As previously announced, we anticipate a significant decrease in revenues from
our AOL business in 2003 as compared to prior periods due to continued weakness
in the online advertising market.
Software and services revenues for 2001 increased 92% over 2000. Of this
increase, 46% was from IDT, which we acquired in October 2000, 35% was from NIC
Conquest, which benefited from its contract with the California Secretary of
State, and 19% was from our AOL business, which began to generate substantive
advertising revenues subsequent to the launch of AOL's Government Guide in
March 2001. Partially offsetting these increases was a decrease in revenues
from our ethics & elections business.
COST OF SOFTWARE AND SERVICES REVENUES. Cost of software and services
revenues in 2002 decreased 6% from 2001. Cost of software and services revenues
for 2002, 2001 and 2000 include net charges of $3.5 million, $6.0 million, and
$1.4 million, respectively, for anticipated costs in excess of revenues to be
recognized under certain of our fixed-price application development contracts
in our corporate filings business. Excluding these charges, cost of software
and services revenues increased by 20% in 2002, which was consistent with the
increase in software and services revenues in the current year. Of this
increase, 34% was attributable to our corporate filings business and the
related development costs under its contract with the California Secretary of
State, and 8% was attributable to our ethics & elections business. Partially
offsetting these increases were decreases from our AOL business (12%) and our
and IDT business (10%), which we have decided to close. As further discussed
above, in the second quarter 2002, we determined that the expected future cash
flows of our AOL business would not be sufficient to recover the cash carriage
fee and common stock warrant amortization expense we would have recognized over
the remaining term of the contract with AOL and recorded a $3.0 million
impairment loss. As a result, the Company no longer records the cash portion of
the carriage fee expense in cost of software and services revenues. Total cash
carriage fee expense recognized in cost of software and services revenues in
2002 was $0.3 million compared to $0.9 million in 2001.
Our software and services gross profit rate for 2002 was (7%) compared to
(36%) in 2001. Excluding the charges discussed above relating to our
application development contracts, our software and services gross profit rate
for 2002 was 20% compared to 21% in 2001. We anticipate a decrease in our
software and services gross profit rate in 2003 due to the magnitude of our
contract with the California Secretary of State, which will comprise the
majority of our software and services revenues and is being recorded at an
expected gross profit rate of less than 10%. In addition, we anticipate
decreased quarterly revenues and margins from our AOL business due to continued
weakness in the online advertising market.
Cost of software and services revenues in 2001 increased 119% from 2000.
Excluding the charges discussed above relating to our application development
contracts, cost of software and services revenues in 2001 increased
36
61% from 2000. Of this increase, 37% was attributable to our corporate filings
business, 26% was attributable to IDT, which we acquired in October 2000, and
15% was attributable to our AOL business, which commenced operations in the
third quarter of 2000. Partially offsetting these increases was a decrease in
our ethics & elections businesses (17%) as a result of cost containment and
restructuring efforts and a decrease in revenues in 2001.
SELLING AND ADMINISTRATIVE. Selling and administrative expenses in 2002
decreased 24% from 2001. Contributing to this decrease was a reduction in
expenses from our corporate filings, ethics & elections and transportation
businesses resulting from our restructuring and cost containment efforts in our
software and services businesses over the past year, and from a general
decrease in corporate-level expenses. Throughout 2002, we significantly
curtailed public relations, brand image and advertising expenses and
consolidated our sales and marketing efforts into one corporate-level sales
department to more appropriately match expenditures to expected market demand
for our services.
Selling and administrative expenses in 2001 decreased 6% from 2000. 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. In the third
quarter of 2000, the Company incurred a charge of approximately $0.4 million
for employee severance costs related to the corporate restructuring of our 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,
selling and administrative expenses for 2001 increased 2% over 2000.
Excluding the 2000 charges discussed above, selling and administrative
expenses as a percentage of revenue were 28%, 48% and 74% for 2002, 2001 and
2000, respectively. We anticipate selling and administrative expenses as a
percentage of revenue to decrease to between 22% and 25% in 2003. We expect to
accomplish this by reducing expenses relating to our software and services
businesses and keeping corporate-level expenses flat year-over-year.
IMPAIRMENT LOSS. For additional information on the impairment losses we
recorded in 2002 and 2001, refer to the discussion above under "Impairment
Losses and Restructuring Charges" and in Note 5 in the Notes to Consolidated
Financial Statements included in this Form 10-K.
STOCK COMPENSATION. Stock compensation for all periods consisted primarily
of amortization of deferred compensation expense related to common stock
options granted to senior level executives and other key employees in 1998 and
1999. In the second quarter of 2002, we terminated two senior level executives
causing certain of their unvested stock options to immediately vest pursuant to
the terms of their option agreements. As a result, we recognized all remaining
deferred compensation expense relating to these two executives in the second
quarter of 2002. At December 31, 2002, all deferred compensation expense had
been recognized.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
decreased significantly in 2002 compared to prior periods as we wrote off all
remaining goodwill and purchase accounting intangible assets relating to our
business combinations with SDR Technologies, eFed and Conquest in the third and
fourth quarters of 2001. In addition, we wrote off capitalized software
development costs from our NIC Technologies, NIC Commerce and NIC Conquest
businesses in the fourth quarter of 2001. In 2002, we determined the future
cash flows of our AOL business would not be sufficient to recover the
unamortized carrying amount of the fully vested warrants issued to AOL and
recorded a $2.1 million impairment loss in the second quarter of 2002. We no
longer record amortization expense relating to these warrants. We expect
amortization expense for 2003 to be approximately $0.1 million, the majority of
which will consist of the amortization of internal use capitalized software
development costs. Total depreciation and amortization expense for 2003 is
expected to range from $2.2 to $2.4 million.
OPERATING LOSS. Operating loss for 2002 was $7.9 million compared to $87.5
million for 2001 and $45.3 million for 2000. Excluding non-cash charges for
impairment losses, stock compensation, depreciation and amortization and the
one-time charges in 2000 relating to the withdrawn common stock offering,
corporate restructuring and vacation liabilities, operating income would have
been $0.7 million for 2002 compared to an operating loss of $14.5 million for
2001 and an operating loss of $14.6 million for 2000.
37
Management evaluates the performance of its business segments and allocate
resources to them based on revenues and earnings before interest, taxes, equity
in net loss of affiliates, depreciation, amortization, impairment losses, stock
compensation and one-time charges ("EBITDA"). We believe that EBITDA provides
additional information for evaluating our ability to generate cash flow from
operations. EBITDA is a commonly used financial measure but should not be
construed as an alternative to operating income (loss) as determined in
accordance with generally accepted accounting principles, or GAAP. EBITDA as
determined by the Company may not be comparable to EBITDA as reported by other
companies. In addition, EBITDA is not intended to represent operating cash flow
as determined in accordance with GAAP. Refer to Note 17 in the Notes to
Consolidated Financial Statements included in this Form 10-K for further
discussion of our reportable segments and the reconciliation of total
reportable segment EBITDA to total consolidated loss before income taxes and
minority interest for the years ended December 31, 2002, 2001 and 2000.
Consolidated EBITDA was positive $0.7 million for 2002 compared to
negative $14.5 million for 2001 and negative $14.6 million for 2000.
EBITDA from our outsourced portals segment was a positive $12.6 million in
2002 and increased by approximately $8.0 million from 2001 primarily due to
same state EBITDA growth, an improvement in our local portal EBITDA, and
positive contributions from our newer portals that had a full year of DMV
revenues in 2002 including our Hawaii, Idaho, Montana, Oklahoma, Rhode Island
and Tennessee portals. Same state EBITDA in 2002 increased by $3.5 million, or
45%, over 2001, and EBITDA from our local portals improved by $1.5 million in
2002 as compared to 2001.
EBITDA from our outsourced portals segment was a positive $4.6 million in
2001 and increased by approximately $3.4 million from 2000 primarily due to
same state EBITDA growth and positive contributions from portals that became
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. Same state EBITDA in 2001
increased by $2.0 million, or 36%, over 2000.
EBITDA from our eGovernment products segment, which consists primarily of
our NIC Conquest, NIC Technologies and IDT subsidiaries, was negative $4.2
million in 2002, negative $8.7 million in 2001 and negative $4.1 million in
2000. As further discussed under the analysis of cost of software and services
revenues above, results from our NIC Conquest corporate filings business
include net charges of $3.5 million, $6.0 million, and $1.4 million in 2002,
2001 and 2000, respectively, for anticipated costs in excess of revenues to be
recognized under certain of our fixed-price application development contracts.
Excluding these charges, EBITDA for our eGovernment products segment would have
been negative $0.7 million in 2002 and negative $2.7 million for 2001 and 2000.
The improvement in EBITDA in 2002 was primarily attributable to a $1.9 million
improvement in EBITDA from our NIC Technologies ethics & elections business,
which benefited from the commencement of its contract with the State of
Michigan in January 2002, the renewal of its contract with the Federal Election
Commission, and the overhead cost reduction and restructuring efforts that have
taken place in this business over the past two years.
Positive EBITDA from our AOL segment for 2002 primarily reflects higher
advertising revenues and decreased carriage fee expenses in the current year as
compared to 2001, as further discussed above. In 2003, we anticipate
significantly decreased quarterly revenues and EBITDA, as compared to 2002,
from our AOL business due to continued weakness in the online advertising
market.
Corporate level expenses were $8.4 million in 2002, $9.7 million in 2001
and $10.7 million in 2000. The improvement in corporate level expenses over the
past three years is further discussed under the analysis of selling and
administrative expenses above.
INTEREST INCOME. Interest income primarily reflects interest income earned
on our cash and marketable securities portfolio, which decreased to $16.1
million at December 31, 2002 from $21.3 million at December 31, 2001 and $38.8
million at December 31, 2000. In addition, interest rates we earned in 2002
were less than in prior periods.
EQUITY IN NET LOSS OF AFFILIATES. Equity in net loss of affiliates
represents our share of losses of companies in which we have equity method
investments that give us the ability to exercise significant influence, but not
control, over the investees. In the first quarter of 2000, we invested in two
private companies involved in
38
the eGovernment services industry, Tidemark and E-Filing, primarily for
strategic purposes. In the fourth quarter of 2000, we invested in eGS, a
private joint venture among Swiss venture capital firm ETF Group, London-based
venture development organization Vesta Group, and our European subsidiary, NIC
European Business Ltd. In 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, which
has not been reflected in our results of operations after the acquisition. At
December 31, 2002, our investment balance in E-Filing was approximately $0.8
million and we had no investment balance remaining in eGS. As a result of a
recent modification to the eGS joint venture agreement, the Company will
account for its investment in eGS under the cost method beginning in fiscal
2003. Although E-Filing is incurring net losses, the losses are relatively
small and the business has sufficient financial resources to continue to
operate for a significant length of time. We regularly review the carrying
value of our 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 or eGS.
INCOME TAXES. We recognized an income tax benefit in 2002, 2001 and 2000.
In 2002, the income tax benefit approximated the amount customarily expected.
In 2001, the income tax benefit was less than the amount customarily expected
primarily because of expenses that are not deductible for tax purposes
including amortization of goodwill from the 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.
Liquidity and Capital Resources
Net cash used in operating activities was $6.4 million for 2002 compared
to $10.8 million for 2001. The decrease in cash used in operating activities
was primarily the result of a year-over-year reduction in our operating loss,
excluding non-cash charges, that was partially offset by a negative net change
in operating assets and liabilities as compared to the prior year. Contributing
to this negative net change was a decrease in accrued expenses in 2002,
including bonus payments made to our outsourced portal employees in April 2002
pursuant to a 2001 incentive compensation plan, employee severance payments
made in 2002 relating to our discontinued eProcurement business, and payments
in 2002 to subcontractors for project expenditures in our corporate filings
business, including project expenditures related our contract with the
California Secretary of State. The increase in accounts receivable and accounts
payable in 2002 was mainly attributable to an increase in revenues from our
portal business in 2002, and more specifically to our Hawaii, Oklahoma and
Rhode Island portals.
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 in
2001 was 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
in 2001, as further discussed above, 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.
We recognize revenue from providing outsourced government portal services
net of the transaction fees due to the government when the services are
provided. The fees that we must remit to the government are accrued as accounts
payable and accounts receivable at the time services are provided. As a result,
trade accounts receivable and accounts payable reflect the gross amounts
outstanding at the balance sheet dates. Gross billings for the years ended
December 31, 2002 and 2001 were approximately $150.7 million and $105.5
million, respectively. We calculate days sales outstanding by dividing trade
accounts receivable at the balance sheet date by gross billings for the period
and multiplying the resulting quotient by the number of days in that period.
Days sales outstanding for the years ended December 31, 2002 and 2001 was 35
and 42, respectively.
39
Although we plan to generate net income in 2003, we expect operating cash
flow to be modestly negative through most of 2003 turning positive in late 2003
or early 2004. This reflects expected working capital swings from our corporate
filings business due to continued legacy loss contract project expenditures and
the terms of our five-year contract with the California Secretary of State,
which back-ends most of the larger payments. At December 31, 2002, the loss
accrual for all corporate filing application development contracts was
approximately $1.6 million, the majority of which will be expended in the first
half of 2003.
Investing activities resulted in net cash generated of $2.7 million in
2002, reflecting $3.8 million in net maturities of our marketable securities
used for funding operations and for collateral purposes. In conjunction with
our contract with the California Secretary of State, in March 2002, we issued a
$5 million letter of credit as collateral for a performance bond required by
the contract. The letter of credit is fully collateralized by cash, which is
restricted for this purpose. Investing activities in 2002 also reflect
approximately $1 million of capital expenditures and $0.2 million in
contributions to the eGS joint venture.
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 reflected 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), equity investments in Tidemark ($5.5 million) and E-Filing ($5.3
million), direct costs of the SDR acquisition ($4.2 million), our acquisition
of IDT ($0.5 million), and our investment in eGS ($0.5 million). Investing
activities for 2000 also reflected approximately $4.1 million in capitalized
software development costs mainly from our NIC Commerce and NIC Conquest
subsidiaries.
Net cash used in financing activities totaled approximately $4.0 million
in 2002, primarily reflecting a $6.3 million increase in restricted cash to
collateralize our bank note payable and certain bank letters of credit issued
on behalf of the Company, $0.3 million in payments under capital leases and
$0.2 million in payments to repurchase common stock. Remaining obligations
under all capital leases will be paid in 2003 and are insignificant. We
received approximately $2.9 million in 2002 from the exercise of employee stock
options.
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 eProcurement 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.
At December 31, 2002, our total unrestricted cash and marketable
securities balance was $9.6 million compared to $18.5 million at December 31,
2001. At December 31, 2002, we had posted $6.3 million in cash and all of our
marketable securities as collateral for bank letters of credit issued on behalf
of the Company, our $0.5 million bank line of credit in conjunction with a
corporate credit card agreement, and our bank note payable. We issue letters of
credit as collateral for performance on certain of our government contracts and
as collateral for certain performance bonds. These irrevocable letters of
credit are generally in force for one year. We have explored a number of
financing alternatives to provide us additional working capital flexibility and
the resources to pursue opportunities that may accelerate our growth and
profitability. As further discussed in Note 11 in the Notes to Consolidated
Financial Statements included in this Form 10-K, in October 2002, we entered
into an agreement with a bank to refinance all of our current letters of
credit. In addition, we obtained a $0.5 million working capital line of credit
and expect to refinance our term note payable in the near future. In total, the
new financing arrangement
40
will increase our unrestricted cash balance by more than $1 million by
releasing funds which had been previously restricted as collateral to secure
letters of credit and the note payable. We will pledge approximately $5.6
million of our cash and cash equivalents as collateral under the new financing
arrangement and have given the bank a security interest in certain of our
accounts receivable and other assets. We have not yet completed all of these
transactions with the bank.
Our collateral requirements under this banking agreement may ease over
time as we continue to pay down our bank note payable and post consecutive
quarters of profitability and earnings growth. However, even though we expect
to be profitable in 2003, we may not be able to sustain our current levels of
profitability or increase profitability on a quarterly or annual basis. We will
need to generate sufficiently 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. If we
are not able to sustain profitability in 2003, our cash collateral requirements
may increase. Had the Company been required to post 100% cash collateral at
December 31, 2002 for the face value of all performance bonds (which are
supported by letters of credit), our line of credit in conjunction with a
corporate credit card agreement and our bank note payable, unrestricted cash
would have decreased and restricted cash would have increased by approximately
$1.2 million.
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 for the next twelve months and through
the period when we expect to begin to generate substantive positive operating
cash flow in either late 2003 or early 2004. Although we expect to have net
income in 2003, we anticipate that our cash balances may decrease modestly
throughout the year as a result of expected working capital swings from our
corporate filings business as further discussed above. However, any projections
of future earnings and cash flows are subject to substantial uncertainty. If
our unrestricted 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 increase
our working capital line of credit. The sale of additional equity securities
could result in dilution to the Company's shareholders. There can be no
assurance that financing will be available in amounts or on terms acceptable to
the Company, if at all.
As discussed above, on certain government contracts we are bound by
performance bond commitments. However, we have never had any defaults resulting
in draws on performance bonds. We do not have off-balance sheet arrangements or
significant exposures to liabilities that are not recorded or disclosed in our
financial statements. While we have significant operating lease commitments for
office space, those commitments are generally tied to the period of performance
under related contracts. The following table sets forth our future contractual
obligations and commercial commitments as of December 31, 2002 (in thousands):
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
- ----------------------- ------ --------- --------- --------- ---------
Operating lease obligations $3,145 $1,174 $1,615 $ 356 $--
Long-term debt obligations 551 348 203 -- --
Capital lease obligations 1 1 -- -- --
Purchase obligations -- -- -- -- --
Other long-term liabilities -- -- -- -- --
------ ------ ------ ------ ---
Total contractual cash obligations $3,697 $1,523 $1,818 $ 356 $--
====== ====== ====== ====== ===
Deferred Tax Assets
At December 31, 2002, we have recorded net deferred tax assets in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," totaling approximately $35.7 million. We
estimate that we must generate at least $90.5 million of future taxable income
to realize those deferred tax assets. We became profitable in the second half
of 2002. We expect the Company to be profitable and generate taxable income in
2003 and have focused the business on operations we believe have demonstrable
ability to produce positive taxable
41
income and cash flow in the future. To achieve a sufficient level of future
taxable income, we intend to pursue our current strategy of adding new
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. The table below reconciles loss from continuing
operations before income taxes for financial statement purposes with taxable
loss for federal income tax purposes (in thousands):
Year ended December 31,
--------------------------------
2000 2001 2002
-------- -------- --------
Loss from continuing operations before income taxes ... $(48,195) $(90,079) $ (9,107)
Loss before income taxes -- discontinued operations ... (6,925) (10,465) (3,342)
Amortization of purchase accounting intangibles ....... 23,798 20,273 (1,899)
Net operating loss relating to NIC Conquest ........... 3,366 6,224 1,820
Impairment of intangible assets ....................... -- 49,494 4,316
Equity in net loss of affiliates ...................... 6,524 3,272 1,235
Capitalized software development costs ................ (4,070) (6,635) --
Deductions related to incentive stock options ......... (3,050) (20) (535)
Stock compensation expense ............................ 1,760 1,525 1,307
Provision for loss on application development contracts 263 3,605 (2,403)
Depreciation and capitalized software amortization .... 36 2,135 (139)
Other ................................................. 26 (469) 326
-------- -------- --------
Taxable loss (2002 is an estimate) .................... $(26,467) $(21,140) $ (8,421)
======== ======== ========
Our federal income tax loss carryforward of approximately $56.3 million
expires as follows: $0.3 million expires in 2019, $26.5 million expires in
2020, $21.1 million expires in 2021 and $8.4 million expires in 2022. Our state
income tax loss carryforwards of approximately $67.4 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, $3.4 million; 2004, $4.8 million; thereafter, $27.5 million. We
are currently paying state income taxes in certain states.
Recent accounting pronouncements
The Financial Accounting Standards Board issued Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), which is effective
immediately to variable interest entities created after January 31, 2003, and
applies in the first interim period beginning after June 15, 2003 to variable
interest entities created before February 1, 2003. FIN 46 addresses the
consolidation of variable interest entities through identification of a primary
beneficiary. Management does not believe FIN 46 will have an impact on the
Company's financial statements.
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 note payable. Because our investments are in
short-term, investment-grade, interest-bearing marketable securities, we are
exposed to minimal risk on the principal of those investments. We ensure the
safety and preservation of our invested principal funds by limiting default
risk, market risk and investment risk. We do not use derivative financial
instruments. A 10% change in interest rates would not have a material effect on
our financial condition, results of operations or cash flows.
42
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NIC INC.
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
2001 2002
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 17,235,752 $ 9,559,086
Cash and cash equivalents -- restricted ................................. -- 6,300,054
Marketable securities ................................................... 4,065,951 248,816
Trade accounts receivable ............................................... 12,194,044 14,465,062
Deferred income taxes ................................................... -- 606,357
Prepaid expenses ........................................................ 1,156,278 761,016
Other current assets .................................................... 2,808,529 3,214,893
------------- -------------
Total current assets ................................................... 37,460,554 35,155,284
Property and equipment, net .............................................. 6,385,571 3,053,850
Deferred income taxes .................................................... 31,756,670 35,048,961
Other assets ............................................................. 269,736 139,004
Investments in affiliates and joint ventures ............................. 1,501,128 839,192
Goodwill, net ............................................................ 1,254,670 --
Intangible assets, net ................................................... 3,185,315 219,978
------------- -------------
Total assets ........................................................... $ 81,813,644 $ 74,456,269
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 11,232,088 $ 12,701,458
Accrued expenses ........................................................ 5,676,383 3,792,426
Notes payable -- current portion ........................................ 348,332 331,655
Application development contracts ....................................... 3,961,979 1,558,758
Other current liabilities ............................................... 511,743 814,919
------------- -------------
Total current liabilities .............................................. 21,730,525 19,199,216
Notes payable -- long-term portion ....................................... 524,411 201,255
------------- -------------
Total liabilities ...................................................... 22,254,936 19,400,471
------------- -------------
Commitments and contingencies (Notes 5, 10, 11, 12 and 14) ............... -- --
Shareholders' equity:
Common stock, no par, 200,000,000 shares authorized 56,260,197
and 58,092,346 shares issued and outstanding .......................... -- --
Additional paid-in capital .............................................. 195,158,906 197,160,262
Accumulated deficit ..................................................... (134,278,749) (141,888,742)
Accumulated other comprehensive income (loss) ........................... 120 (462)
------------- -------------
60,880,277 55,271,058
Less notes and stock subscriptions receivable ........................... (15,000) --
Less deferred compensation expense ...................................... (1,306,569) --
Less treasury stock ..................................................... -- (215,260)
------------- -------------
Total shareholders' equity ............................................. 59,558,708 55,055,798
------------- -------------
Total liabilities and shareholders' equity ............................. $ 81,813,644 $ 74,456,269
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
43
NIC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-----------------------------------------------
2000 2001 2002
------------- ------------- -------------
Revenues:
Portal revenues ..................................................... $ 17,807,973 $ 26,370,764 $ 34,778,978
Software and services revenues ...................................... 5,533,406 10,649,616 12,766,432
------------- ------------- -------------
Total revenues ..................................................... 23,341,379 37,020,380 47,545,410
------------- ------------- -------------
Operating expenses:
Cost of portal revenues, exclusive of depreciation and amortization . 14,068,151 19,472,803 19,855,320
Cost of software and services revenues, exclusive of depreciation and
amortization ...................................................... 6,604,571 14,495,097 13,687,296
Selling and administrative .......................................... 18,687,297 17,566,929 13,322,099
Impairment loss ..................................................... -- 44,834,490 4,316,230
Stock compensation .................................................. 1,789,874 1,525,022 1,306,569
Depreciation and amortization ....................................... 27,471,510 26,627,561 2,988,389
------------- ------------- -------------
Total operating expenses ........................................... 68,621,403 124,521,902 55,475,903
------------- ------------- -------------
Operating loss ....................................................... (45,280,024) (87,501,522) (7,930,493)
------------- ------------- -------------
Other income (expense):
Interest income ..................................................... 3,739,464 966,423 179,829
Interest expense .................................................... (47,311) (38,789) (49,193)
Equity in net loss of affiliates .................................... (6,524,473) (3,271,876) (1,234,938)
Other income (expense), net ......................................... (82,710) (233,189) (71,775)
------------- ------------- -------------
Total other income (expense) ....................................... (2,915,030) (2,577,431) (1,176,077)
------------- ------------- -------------
Loss from continuing operations before income taxes and minority
interest ............................................................ (48,195,054) (90,078,953) (9,106,570)
Income tax expense (benefit) ......................................... (11,988,374) (18,684,739) (3,532,040)
------------- ------------- -------------
Loss from continuing operations before minority interest ............. (36,206,680) (71,394,214) (5,574,530)
Minority interest .................................................... (249,675) (475,302) --
------------- ------------- -------------
Loss from continuing operations ...................................... (35,957,005) (70,918,912) (5,574,530)
Discontinued operations (Note 5):
Loss from discontinued operations (less applicable income tax
benefit of $2,603,647, $3,940,110 and $1,306,398) ................. (4,320,945) (6,525,361) (2,035,463)
------------- ------------- -------------
Net loss ............................................................. $ (40,277,950) $ (77,444,273) $ (7,609,993)
============= ============= =============
Basic and diluted net loss per share:
Loss per share -- continuing operations ............................. $ (0.66) $ (1.26) $ (0.10)
============= ============= =============
Loss per share -- discontinued operations ........................... $ (0.08) $ (0.12) $ (0.03)
============= ============= =============
Net loss per share .................................................. $ (0.74) $ (1.38) $ (0.13)
============= ============= =============
Weighted average shares outstanding .................................. 54,795,280 56,109,730 56,875,327
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
44
NIC INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock Additional
-------------------- Paid-in Accumulated
Shares Amount Capital Deficit
---------- ------ ------------- --------------
Balance, January 1, 2000 ........................ 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 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)
Net loss ........................................ -- -- -- (7,609,993)
Stock options exercised ......................... 1,915,094 -- 2,865,295 --
Deferred compensation expense recognized ........ -- -- -- --
Stock subscriptions received .................... -- -- -- --
Issuance of common stock under employee stock
purchase plan .................................. 32,504 -- 84,611 --
Issuance of common stock under earnout
settlement agreement ........................... 140,000 -- 197,400 --
Forfeiture of common stock issued to acquire
business ....................................... (105,961) -- -- --
Repurchase of common stock ...................... (149,488) -- -- --
Tax deductions relating to stock options ........ -- -- 196,042 --
Adjustment of deferred tax asset related to stock
options ........................................ -- -- (1,341,992) --
Unrealized holding loss on marketable securities -- -- -- --
------------- -- ------------- -------------
Balance, December 31, 2002 ...................... 58,092,346 -- $ 197,160,262 $(141,888,742)
============= == ============= =============
Accumulated Notes
Other and Stock Deferred
Comprehensive Subscriptions Compensation Treasury
Income (Loss) Receivable Expense Stock Total
------------- ------------- ------------ ----------- --------------
Balance, January 1, 2000 ........................ $ 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 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
Net loss ........................................ -- -- -- -- (7,609,993)
Stock options exercised ......................... -- -- -- -- 2,865,295
Deferred compensation expense recognized ........ -- -- 1,306,569 -- 1,306,569
Stock subscriptions received .................... -- 15,000 -- -- 15,000
Issuance of common stock under employee stock
purchase plan .................................. -- -- -- -- 84,611
Issuance of common stock under earnout
settlement agreement ........................... -- -- -- -- 197,400
Forfeiture of common stock issued to acquire
business ....................................... -- -- -- -- --
Repurchase of common stock ...................... -- -- -- (215,260) (215,260)
Tax deductions relating to stock options ........ -- -- -- -- 196,042
Adjustment of deferred tax asset related to stock
options ........................................ -- -- -- -- (1,341,992)
Unrealized holding loss on marketable securities (582) -- -- -- (582)
----------- ----------- ----------- ----------- -------------
Balance, December 31, 2002 ...................... $ (462) $ -- $ -- $ (215,260) $ 55,055,798
=========== =========== =========== =========== =============
The accompanying notes are an integral part of these consolidated financial
statements.
45
NIC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------------
2000 2001 2002
------------- ------------- -------------
Cash flows from operating activities:
Net loss ............................................ $ (40,277,950) $ (77,444,273) $ (7,609,993)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ..................... 27,959,636 27,953,007 3,379,270
Compensation expense recognized related to sale of
common stock ..................................... 41,588 17,242 --
Compensation expense recognized related to stock
options .......................................... 1,748,286 1,507,780 1,306,569
Loss on disposals of property and equipment ....... 86,648 174,601 1,769,412
Accretion of discount on marketable securities .... (3,240,883) (568,594) (4,048)
Application development contracts ................. 124,539 3,605,471 (2,403,221)
Impairment loss ................................... -- 49,494,090 4,316,230
Deferred income taxes ............................. (14,753,234) (22,596,670) (6,190,548)
Deferred income tax benefit relating to stock
options .......................................... (1,145,950) -- 1,145,950
Minority interest ................................. (249,675) (475,302) --
Equity in net loss of affiliates .................. 6,524,473 3,271,876 1,234,938
Changes in operating assets and liabilities, net of
effects of acquisitions:
(Increase) in trade accounts receivable ........... (991,904) (4,598,165) (2,634,198)
(Increase) decrease in prepaid expenses ........... (1,734,307) 894,737 (137,687)
(Increase) in other current assets ................ (229,439) (854,439) (406,364)
(Increase) decrease in other assets ............... 39,492 (69,788) 109,829
Increase (decrease) in accounts payable ........... (74,522) 6,902,345 1,469,370
Increase (decrease) in accrued expenses ........... 1,782,910 2,168,884 (1,616,942)
(Decrease) in other current liabilities ........... (124,988) (221,893) (95,562)
------------- ------------- -------------
Net cash used in operating activities ............... (24,515,280) (10,839,091) (6,366,995)
------------- ------------- -------------
Cash flows from investing activities:
Purchases of property and equipment ................. (5,417,151) (2,419,718) (967,627)
Proceeds from disposals of property and equipment ... 14,298 487,251 --
Capitalized software development costs .............. (4,069,832) (6,576,855) --
Capitalized patent and trademark costs .............. (106,477) -- --
Purchases of marketable securities .................. (267,876,755) (40,303,984) (23,745,011)
Maturities of marketable securities ................. 328,683,223 61,721,032 27,566,194
Acquisition of businesses, net of cash acquired ..... (9,296,072) -- --
Proceeds from sale of affiliate ..................... -- 662,356 --
Investments in affiliates and joint ventures ........ (11,310,827) (347,594) (191,000)
------------- ------------- -------------
Net cash provided by investing activities ........... 30,620,407 13,222,488 2,662,556
------------- ------------- -------------
46
Year Ended December 31,
--------------------------------------------
2000 2001 2002
------------ ------------ ------------
Cash flows from financing activities:
Cash and cash equivalents -- restricted ........... $ -- $ -- $ (6,300,054)
Proceeds from notes payable ....................... -- 1,000,000 --
Payments on bank lines of credit .................. (2,385,815) -- --
Payments on notes and debentures payable .......... (50,000) (127,257) (339,833)
Payments on capital lease obligations ............. (197,097) (201,518) (13,762)
Proceeds from issuance of common stock
to employees .................................... 111,579 -- --
Payments to repurchase common stock ............... (200,938) -- (215,260)
Proceeds from exercise of employee stock options .. 953,238 302,647 2,881,682
Proceeds from stock subscriptions receivable ...... 15,000 -- 15,000
------------ ------------ ------------
Net cash provided by (used in) financing activities (1,754,033) 973,872 (3,972,227)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 4,351,094 3,357,269 (7,676,666)
Cash and cash equivalents, beginning of year ....... 9,527,389 13,878,483 17,235,752
------------ ------------ ------------
Cash and cash equivalents, end of year ............. $ 13,878,483 $ 17,235,752 $ 9,559,086
============ ============ ============
Other cash flow information:
Interest paid ..................................... $ 51,053 $ 39,504 $ 49,193
============ ============ ============
Income taxes paid ................................. $ 85,323 $ 87,707 $ 94,200
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
47
NIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND BASIS OF PRESENTATION
The Company
NIC Inc., formerly 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 Web sites and
applications that allow businesses and citizens to access government
information and complete government-based transactions 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 and automobile registration renewals. 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 3), 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.
In September 1999, NIC acquired the net assets of eFed, a provider of
Internet-based procurement software and services for governments. eFed was
renamed NIC Commerce and is wholly owned by NIC. In the second quarter of 2002,
the Company exited its domestic eProcurement business entirely, and has
classified the results of operations of NIC Commerce as discontinued
operations. In January 2000, NIC merged its Application Services Division with
Conquest Softworks, LLC ("Conquest") and renamed the company NIC Conquest. NIC
Conquest, a wholly owned subsidiary of NIC and the Company's corporate filings
business, is a provider of UCC and corporation software applications and
services that facilitate electronic filings and document management for
secretaries of state. In May 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 business, designs and develops online election and ethics
filing systems for federal and state government agencies. In October 2000, NIC
acquired Intelligent Decision Technologies, Ltd. ("IDT"), a provider of
business-to-government reporting and filing software for the transportation
industry. In the second quarter of 2002, the Company decided to wind down
substantially all of IDT's operations. As of December 31, 2002, the IDT
business did not qualify as a discontinued operation. 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. These
acquired businesses comprise the majority of the Company's software and
services division. For further discussion of the Company's software and
services businesses, see Note 5.
The Company expanded rapidly following its initial public offering in July
of 1999 and has incurred substantial net losses primarily as a result of its
software and services businesses. Throughout this time period, the Company's
core outsourced portal operations have also grown and have been profitable. As
part of a broader strategic refocusing of the Company on its profitable core
outsourced portal business during 2002, NIC exited its eProcurement and
transportation businesses and restructured the other software and services
businesses in an effort to accelerate the Company's path to profitability. The
Company became profitable in the second half of 2002 (see Note 18) but did not
generate positive cash flow from operations in 2002. Management expects the
Company to be profitable in 2003 and has focused the business on operations it
believes have demonstrable ability to produce positive net income and cash flow
in the future. However, any projections of future results of operations and
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 increase its 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.
48
Basis of presentation
The Company classifies its revenues and cost of revenues into two
categories: (1) portal and (2) software and services. The portal category
includes revenues primarily from the Company's subsidiaries operating 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
corporate filings, ethics & elections, transportation and AOL businesses. As
further discussed in Note 5, results of operations of the Company's
eProcurement business have been classified as discontinued operations.
The primary categories of operating expenses include: cost of portal
revenues, cost of software and services revenues, selling and administrative,
and depreciation and amortization. Cost of portal revenues consist of all
direct costs associated with operating outsourced portals including employee
compensation, telecommunications 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. In the second quarter of 2002, the
Company decided to combine the general and administrative and the sales and
marketing operating expense classifications into one classification referred to
as selling and administrative. All periods presented reflect the new
classification. Selling and administrative costs consist primarily of
corporate-level expenses relating to human resource management, administration,
legal and finance, and all costs of non-customer service personnel from the
Company's software and services businesses, including information systems and
office rent. Selling and administrative costs also consist of corporate-level
expenses relating to market development and public relations.
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 primarily include cash on hand in the form of
bank deposits and money market funds. For purposes of the consolidated balance
sheets and consolidated statements of cash flows, the Company considers all
non-restricted highly liquid instruments purchased with an original maturity of
one month or less to be cash equivalents.
Cash and cash equivalents -- restricted
Cash and cash equivalents -- restricted consists of bank deposits and
money market funds that have been segregated to collateralize bank letters of
credit issued on behalf of the Company and the Company's bank note payable.
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
49
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 adopted Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment and Disposal of Long-Lived Assets"
("SFAS No. 144"), effective January 1, 2002. This statement supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets or Long-Lived Assets
to be Disposed Of," and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations -- Reporting
the Effects of a Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for the disposal
of a segment of the business. SFAS No. 144 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. The adoption of SFAS No.
144 did not result in any impairment of the Company's long-lived assets in
2002.
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.
Goodwill and intangible assets
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"
effective January 1, 2002. SFAS No. 142 addresses the financial accounting and
reporting for goodwill and other intangible assets acquired in a business
combination after they have been initially recognized in the financial
statements and eliminates amortization of goodwill. SFAS No. 142 requires that
the Company test goodwill for impairment annually or more frequently whenever
events occur or circumstances change which would more likely than not reduce
the fair value of a reporting unit below its carrying amount. A reporting unit
is an operating segment or one level below an operating segment. The first step
of the impairment test is to compare the estimated fair value of the reporting
unit to carrying value. If the carrying value is less than fair value, no
impairment exists. If the carrying value is greater than fair value, a second
step is performed to determine the fair value of goodwill and the amount of
impairment loss, if any. There was no impairment of goodwill upon adoption of
SFAS No. 142, and the Company had no goodwill remaining at December 31, 2002.
Refer to Note 5 for further discussion of the goodwill and intangible
impairment losses recorded by the Company in 2001 and 2002.
Prior to the adoption of SFAS No.142, the Company assessed the carrying
value of recorded goodwill 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 less than the carrying amount of the recorded goodwill,
an impairment loss would be recognized for the amount by which the carrying
value of the recorded goodwill exceeds its estimated fair value. Prior to the
adoption of SFAS No. 142, goodwill
50
was amortized using the straight-line method over its estimated period of
benefit. Had the Company been accounting for its goodwill under SFAS No. 142
for the years ended December 31, 2000 and 2001, the Company's net loss and net
loss per share would have been as follows:
Year Ended December 31,
--------------------------------
2000 2001
-------------- --------------
Net loss, as reported ........................... $ (40,277,950) $ (77,444,273)
Add: Goodwill amortization, net of tax .......... 13,159,886 12,800,385
Equity-method goodwill amortization,
net of tax ................................. 1,587,574 1,150,358
-------------- --------------
Net loss, as adjusted ........................... $ (25,530,490) $ (63,493,530)
============== ==============
Basic and diluted net loss per share, as reported $ (0.74) $ (1.38)
Add: Goodwill amortization, net of tax .......... 0.24 0.23
Equity-method goodwill amortization,
net of tax ................................. 0.03 0.02
-------------- --------------
Basic and diluted net loss per share, as adjusted $ (0.47) $ (1.13)
============== ==============
Software development costs
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.
The Company capitalizes software development costs in accordance with SFAS
No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed," primarily related to past software development activities
of the Company's corporate filings business and discontinued eProcurement
business. The Company is no longer incurring software development costs
qualifying for capitalization in these businesses. Software development costs
are amortized on a straight-line basis over the estimated economic life of the
software 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." In May 2000, the
Emerging Issues Task Force reached certain consensuses on Issue 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 would be included as part of the total of internal use software
development costs capitalized pursuant to SOP 98-1.
Intangible assets at December 31, 2002 consist primarily of internal use
capitalized software development costs for corporate accounting and financial
management information systems software. All of the Company's intangible assets
as of December 31, 2001 and 2002 were subject to amortization.
At each balance sheet date, or whenever events or changes in circumstances
warrant, the Company assesses the carrying value of 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. Refer to Note 5 for further discussion of
the impairment losses recorded by the Company in 2001 relating to capitalized
software development costs.
51
Revenue recognition
Portal revenues
The Company recognizes revenue from providing outsourced government portal
services (primarily transaction-based 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.
Revenue from service contracts to provide consulting, development and
management services to government portals is recognized as the services are
provided at rates provided for in the contract.
Software and services revenues
The Company's corporate filings business recognizes revenues from
fixed-fee, 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. See Note 10.
The Company's ethics & elections and transportation businesses recognize
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 when
notified of the amount due from AOL, which is approximately one month after the
advertisement is provided. See Note 5.
The Company's eProcurement business recognized revenues from license
agreements upon delivery and acceptance of the software application if there
was persuasive evidence of an arrangement, collection of the resulting
receivable was probable, the fee was fixed or determinable, and there was
sufficient vendor-specific objective evidence to support allocating the total
fee to all elements of these license arrangements. Where agreements provided
for evaluation or customer acceptance, revenue was recognized upon the
completion of the evaluation process and acceptance of the software by the
customer.
Stock-based compensation
The Company accounts for its stock-based compensation plans, which are
described more fully in Note 15, using the intrinsic value method prescribed in
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees." Accordingly, the Company records as compensation expense
the amount by which the fair value of common stock sold to employees exceeds
the amount paid. Any excess of fair value of the price of the Company's common
stock over the exercise price for options granted to employees or nonemployee
directors is recorded as deferred compensation expense within shareholders'
equity and amortized as stock compensation expense ratably over the vesting
period. The following table illustrates the effect on net loss and net loss per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation.
52
Year Ended December 31,
--------------------------------------------
2000 2001 2002
------------ ------------ ------------
Net loss, as reported ................................... $(40,277,950) $(77,444,273) $ (7,609,993)
Add: Stock-based employee compensation included in
reported net loss, net of related tax effects .......... 1,287,525 1,158,736 876,166
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects ............................. (8,157,691) (6,700,759) (6,229,689)
------------ ------------ ------------
Pro forma net loss ...................................... $(47,148,116) $(82,986,296) $(12,963,516)
============ ============ ============
Basic and diluted net loss per share, as reported ....... $ (0.74) $ (1.38) $ (0.13)
============ ============ ============
Basic and diluted net loss per share, pro forma ......... $ (0.86) $ (1.48) $ (0.23)
============ ============ ============
The fair value of each option grant was determined using the Black-Scholes
option-pricing model. The following assumptions were applied in determining pro
forma compensation cost for the years ended December 31, 2000, 2001 and 2002:
2000 2001 2002
---------- ---------- ----------
Risk-free interest rate ....... 6.10% 4.65% 2.95%
Expected dividend yield ....... 0.00 0.00 0.00
Expected option life .......... 4.0 years 4.0 years 3.0 years
Expected stock price volatility 125% 117% 102%
Fair value of options granted . $ 8.62 $ 2.45 $ 1.18
The Black-Scholes model was not developed for use in valuing employee
stock options, but was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. In
addition, it requires the use of subjective assumptions including expectations
of future dividends and stock price volatility. Such assumptions are only used
for making the required fair value estimate and should not be considered as
indicators of future dividend policy or stock price appreciation. Because
changes in the subjective assumptions can materially affect the fair value
estimate and because employee stock options have characteristics significantly
different from those of traded options, the use of the Black-Scholes
option-pricing model may not provide a reliable estimate of the fair value of
employee stock options.
For purposes of this pro forma disclosure, the estimated fair value of
options is amortized to expense over the option vesting periods. Such pro forma
impact on net loss and basic and diluted net loss per share is not necessarily
indicative of future effects on net income (loss) or earnings (loss) per share.
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
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.
53
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's continuing operations have not experienced any
significant credit losses.
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 17.
Reclassifications
Certain reclassifications have been made for consistent presentation among
periods presented.
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.
Recent accounting pronouncements
The Financial Accounting Standards Board issued Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), which is effective
immediately to variable interest entities created after January 31, 2003, and
applies in the first interim period beginning after June 15, 2003 to variable
interest entities created before February 1, 2003. FIN 46 addresses the
consolidation of variable interest entities through identification of a primary
beneficiary. The Company does not believe FIN 46 will have an impact on the
Company's financial statements.
3. 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
54
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 were 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.
Under a typical portal contract, the Company is required to fully
indemnify its government clients against claims that the Company's products
infringe upon the intellectual property rights of others and against claims
arising from the Company's performance or the performance of the Company's
subcontractors under the contract. The Company has never experienced such
claims.
The following is a summary of the Company's larger outsourced state
government portal contracts at December 31, 2002:
Date
Services Contract Expiration Date
Subsidiary Portal Name (Government Entity) Commenced (Renewal Option Through)
- ---------- ------------------------------------ ----------- -------------------------
Alabama Interactive, Inc. ................. www.Alabama.gov (Alabama) 2002 2/1/2004
New England Interactive, Inc. ............. www.RI.gov (Rhode Island) 2001 6/19/2006 (6/19/2010)
NIC/USA, Inc. ............................. www.YourOklahoma.com (Oklahoma) 2001 6/30/2003 (6/30/2006)
Montana Interactive, Inc. ................. www.DiscoveringMontana.com (Montana) 2001 1/1/2006 (1/1/2011)
NIC/USA, Inc. ............................. www.TennesseeAnytime.org (Tennessee) 2000 8/28/2003 (8/28/2005)
Hawaii Information Consortium, Inc. ....... www.eHawaiigov.org (Hawaii) 2000 1/3/2005 (1/3/2007)
Idaho Information Consortium, Inc. ........ www.accessIdaho.org (Idaho) 2000 12/7/2004 (12/7/2006)
Utah Interactive, Inc. .................... www.Utah.gov (Utah) 1999 5/6/2003 (5/6/2009)
New England Interactive, Inc. ............. www.Maine.gov (Maine) 1999 4/15/2006
Arkansas Information Consortium, Inc. ..... www.accessArkansas.org (Arkansas) 1997 6/30/2004
Iowa Interactive, Inc. .................... www.iowaccess.org (Iowa) 1997 9/30/2003 (9/30/2005)
Virginia Interactive, Inc. ................ www.myVirginia.org (Virginia) 1997 9/1/2007 (9/1/2012)
Indiana Interactive, Inc. ................. www.IN.gov (Indiana) 1995 8/31/2003 (8/31/2005)
Nebraska Interactive, Inc. ................ www.Nebraska.gov (Nebraska) 1995 1/31/2004
Kansas Information Consortium, Inc. ....... www.accessKansas.org (Kansas) 1992 12/31/05 (12/31/2009)
As of December 31, 2002, the Company has also entered into contracts with
the States of New Hampshire and Vermont, the Florida Association of Court
Clerks, the City of Indianapolis and Marion County (IN), Dallas County (TX),
Kent County (MI), Washtenaw County (MI), the City of Tampa (FL), the City of
Corpus Christi (Texas), the City of Des Moines (IA) and the Iowa State
Treasurers. On January 30, 2003, the Company entered into a two-year portal
outsourcing contract, including renewal options for up to an additional eight
years, with the Commonwealth of Kentucky.
4. ACCOUNTING FOR THE 1998 EXCHANGE OFFER
NIC was formed on December 18, 1997, for the sole purpose of affecting a
common stock exchange offer (the "Exchange Offer"). On March 31, 1998, the
Company exchanged its common shares for the common shares of five affiliated
companies: 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"). Ownership of the five affiliated companies was similar, but not
identical, leading to the conclusion to account for the Exchange Offer as a
business combination. Prior to consummating the Exchange Offer, the Company was
a holding company with no operations of its own. Exchange ratios were
determined proportionately based on estimated 1998 pretax earnings for each
company. No appraisal of fair market value of the separate companies was
obtained. Management determined the fair value of the consolidated company on
March 31, 1998 was $40 million. The fair value was allocated to each of the
business units based upon proportional values agreed to by the shareholders in
consummating
55
the Exchange Offer. 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 approximately $18.5 million 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, totaled
approximately $1.2 million and approximated historical carrying amounts. The
sole identifiable intangible asset related to the government portal contracts
and was valued at approximately $3.4 million, which was 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,
approximately $13.9 million, was allocated to goodwill.
The recorded contract intangibles and goodwill were amortized on a
straight-line basis over the life of the then existing contracts. At December
31, 2001, all recorded goodwill and contract intangibles had 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 was not deductible for
income tax purposes.
5. SOFTWARE AND SERVICES BUSINESSES -- ACQUISITIONS, ALLIANCES, RESTRUCTURINGS,
IMPAIRMENT LOSSES AND DISCONTINUED OPERATIONS
From September 1999 through October 2000, NIC acquired four companies and
formed one business alliance that comprise the majority of the Company's
software and services businesses. Throughout this period of rapid expansion,
the Company incurred substantial net losses primarily as a result of these
businesses. Over the past three years, these businesses have undergone
substantial organizational restructurings and consolidations resulting in
impairment losses and restructuring charges. In the third and fourth quarters
of 2001, the Company recorded impairment losses totaling $37.0 million and
$12.5 million, respectively, relating to its NIC Commerce, NIC Technologies and
NIC Conquest businesses. In the second quarter of 2002, the Company recorded
impairment losses totaling $4.3 million relating to its AOL and IDT businesses.
In the third quarter of 2000 and the fourth quarter of 2001, the Company
recorded restructuring charges totaling $638,000 and $374,000, respectively,
relating primarily to its NIC Commerce and NIC Technologies businesses. As part
of a broader strategic refocusing of the Company on its profitable core
outsourced portal business during 2002, NIC exited its eProcurement and
transportation businesses and restructured the other software and services
businesses in an effort to accelerate the Company's path to profitability.
Management has refocused these businesses on operations it believes have
demonstrable ability to produce positive net income and cash flow in the
future. However, any projections of future results of operations and cash flows
are subject to substantial uncertainty. The following is a discussion of each
of the Company's software and services businesses from acquisition/inception to
December 31, 2002.
eFed -- NIC Commerce
On September 15, 1999, NIC acquired the net assets of eFed, which was
renamed NIC Commerce. NIC Commerce, the Company's eProcurement business,
designed, developed and managed 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 have been 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 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,
consisting
56
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.
During the third quarter of 2001, the Company identified indicators of
possible impairment of its goodwill and acquired intangible asset related to
the eFed acquisition. 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 had taken place at NIC Commerce since third quarter
of 2000, the Company continued the restructuring of this business 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 identifiable intangible
asset related to the eFed acquisition 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, led the Company to determine that the NIC Commerce business would be
downsized further in 2002 including 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 loss in the fourth
quarter of 2001.
In the second quarter of 2002, the Houston-Galveston Area Council ("HGAC")
informed NIC Commerce that HGAC was terminating its eProcurement contract with
Bank of America and NIC Commerce effective May 31, 2002. HGAC cited low usage
of the system as the primary reason for terminating the contract, as historical
procurement volumes did not meet minimum requirements to keep the system
operational. As a result of the HGAC contract termination, and as part of a
broader strategic refocusing of the Company on its profitable core outsourced
portal business, NIC decided to shut down its eProcurement business. In June
2002, NIC Commerce reached an agreement to terminate its remaining eProcurement
contract with the State of South Carolina. As a result of the decision to shut
down its eProcurement business, the Company determined that certain hardware,
software and other fixed assets at NIC Commerce would no longer be useful and
recorded a loss of approximately $1.4 million in the second quarter of 2002 for
the amount by which the carrying value of the fixed assets exceeded their
estimated fair values upon disposal. As of June 30, 2002, the Company had
exited its domestic eProcurement business entirely.
The results of operations of NIC Commerce have been classified as
discontinued operations, and information presented for all periods reflects the
new classification. NIC Commerce's operations were previously reported in the
eProcurment segment. Components of amounts reflected in the Company's
consolidated statements of operations and balance sheets relating to
discontinued operations are presented in the following table:
Year Ended December 31,
--------------------------------------------
2000 2001 2002
------------ ------------ ------------
Statement of operations data
Revenues .......................................... $ 3,629,897 $ 1,846,319 $ 221,863
------------ ------------ ------------
Costs and expenses ................................ 10,066,363 6,326,744 1,747,690
Impairment loss -- capitalized software development
costs ............................................ -- 4,659,600 --
Loss on disposal of property and equipment ........ -- -- 1,425,153
Depreciation and amortization ..................... 488,126 1,325,446 390,881
------------ ------------ ------------
Operating loss .................................... (6,924,592) (10,465,471) (3,341,861)
Income tax benefit ................................ (2,603,647) (3,940,110) (1,306,398)
------------ ------------ ------------
Loss from discontinued operations ................. $ (4,320,945) $ (6,525,361) $ (2,035,463)
============ ============ ============
57
December 31,
--------------------------
2001 2002
----------- -----------
Balance sheet data:
Current assets ...................... $ 544,190 $ --
Property and equipment, net ......... 1,848,908 41,875
Other assets ........................ 3,823 --
Current liabilities ................. (1,172,747) (7,574)
----------- -----------
Net assets of discontinued operations $ 1,224,174 $ 34,301
=========== ===========
Conquest Softworks -- NIC Conquest
On January 12, 2000, NIC merged its application services division with
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 secretaries of state. 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.
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.
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 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.
The NIC shares that were issued to NIC Conquest's chief executive officer
on May 1, 2000 were delivered to an escrow account and were to be released in
equal annual installments over a three-year period, beginning one year from the
date of the exchange agreement. The first annual installment was released in
May 2001. However, the remaining two installments totaling 105,961 shares were
forfeited in 2002 pursuant to certain provisions contained in the May 1, 2000
exchange agreement. The Company retired these forfeited shares in the second
quarter of 2002. No value was associated with the retirement of these shares as
the related goodwill was impaired in the fourth quarter of 2001 as further
discussed below.
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 $6.0 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. Based on this decision not to actively market the solution,
the Company determined that the
58
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 loss in the fourth quarter of 2001.
At any time after January 12, 2002, NIC had the right to purchase all, but
not less than all, of the non-NIC shareholders' shares for 12 times NIC
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 NIC Conquest experienced negative EBITDA in
calendar 2001, the purchase price of the shares was $0. In accordance with the
terms of the Investor's Rights Agreement (the "Rights Agreement") dated January
12, 2000, the closing of this transaction occurred on April 8, 2002. NIC
granted the non-NIC shareholders certain residual rights in the Rights
Agreement if NIC Conquest experiences a change in control within 48 months
after the Call Date. If a change of control of NIC Conquest occurs within 12
months after the Call Date, the non-NIC shareholders would receive 35% of the
difference between the price NIC paid the non-NIC shareholders and the price
NIC received for NIC Conquest in a public offering, merger or acquisition. The
non-NIC shareholders would receive approximately 26% of the difference in price
if the event occurs within 24 months of the Call Date, 18% within 36 months of
the Call Date and 9% within 48 months of the Call Date.
SDR Technologies -- NIC 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 and state 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 $1.0 million convertible
promissory notes to NIC, dated January 28, 2000 and March 27, 2000, in exchange
for $2.0 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
59
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 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
Period Intangibles
Purchase Price Allocation: ------------ ---------------
Fair value of net tangible assets at May 11, 2000 ......... $ (1,743,857)
Deferred tax liability ................................... (7,585,000)
Acquired intangible assets:
Assembled domestic workforce ............................. 1,100,000 2 years $ 550,000
Foreign workforce agreement .............................. 8,800,000 5 years 1,760,000
Product technology ....................................... 8,200,000 3 years 2,733,333
Customer contracts ....................................... 400,000 2 years 200,000
Goodwill ................................................. 30,503,928 3 years 10,167,976
---------- -----------
$ 39,675,071 $15,411,309
============ ===========
The total purchase price was allocated to the tangible and identifiable
intangible assets acquired and liabilities assumed on the basis of their fair
values on the closing date. The fair value of net tangible assets acquired
approximated historical carrying amounts. Tangible assets acquired in the SDR
acquisition primarily consisted of accounts receivable and property and
equipment. Liabilities assumed consisted primarily of obligations under a
revolving line of credit, accounts payable and accrued liabilities.
During the third quarter of 2001, the Company identified indicators of
possible impairment of goodwill and other acquired intangible assets related to
the SDR acquisition. 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
60
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. Since the Company had 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 SDR acquisition.
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 loss in the fourth quarter of 2001.
Intelligent Decision Technologies -- IDT
On October 13, 2000, NIC acquired Longmont, Colorado-based IDT, a provider
of business-to-government reporting and filing software for the transportation
industry. IDT, the Company's transportation business, 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 $500,000 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 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 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 were delivered to the IDT shareholders two years after the date of
closing. As of December 31, 2002, no shares of NIC common stock remained in
escrow.
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, approximately $2.1 million, was
allocated to goodwill. 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 was not deductible for income tax purposes.
During the second quarter of 2002, the Company identified indicators of
possible impairment of goodwill related to the IDT acquisition. The impairment
indicators included, but were not limited to, the recent underperformance of
this business relative to plan, the expected underperformance of this business
as compared to projected future operating results, and NIC's recent strategic
refocusing on the Company's core portal outsourcing business. Specifically, NIC
determined that that the recent downturn in IDT's financial performance was
expected to continue and would not be temporary, as the Company previously
expected. This was a reversal of IDT's historical trend of profitability, and
was primarily attributable to government-imposed contract delays and funding
shortfalls on the part of governments with whom IDT had contracted.
Management reached the conclusion that it would not continue to support
IDT's business and decided to wind down IDT's operations as expeditiously and
cost-effectively as possible. Accordingly, the Company concluded the
61
remaining goodwill related to the IDT acquisition no longer had value and
recognized a $1.3 million impairment loss in the second quarter of 2002. The
Company may incur costs in future periods to exit this business. However, the
Company does not currently believe these costs will have a material adverse
affect on the Company's financial condition, results of operations or
liquidity. At December 31, 2002, the IDT business did not qualify as a
discontinued operation.
In the fourth quarter of 2002, the Company reached a settlement with the
former IDT shareholders to resolve any possible contingent liabilities NIC
might have related to the shutdown of IDT prior to three years from the date of
the acquisition. Under the terms of the Merger Agreement, an additional 208,333
to 520,826 shares of NIC common stock was to be issued contingent upon IDT's
meeting certain financial performance levels over three years. The Company
negotiated a settlement to issue 140,000 shares of NIC common stock to the
former IDT shareholders, which was less than the minimum incentive amount,
because IDT was only allowed about half of the contracted time period to
attempt to reach the minimum incentive level. The fair value of the common
stock issued was $197,400 and was expensed in 2002. Fair value of the common
stock was determined based on the closing market price of NIC's commons stock
on December 31, 2002, the effective date of the settlement. The shares will be
restricted for one year from the effective date of the settlement.
AOL
On August 25, 2000, NIC entered into a three-year Interactive Services
Agreement (the "Agreement") with America Online, Inc. ("AOL") to deliver
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. In January 2002, NIC entered into an amendment to the
Agreement (the "Amendment"). Among other changes to the Agreement, the
Amendment extended the original three-year term of the Agreement to 40 months
(ending on December 25, 2003), eliminated AOL's right to extend the Agreement
beyond the 40-month term, reduced the cash carriage fee from $4.5 million to
$2.7 million and eliminated 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, 2002,
NIC had made carriage fee payments to AOL totaling $2,425,000 and must pay the
remaining $275,000 in the first quarter of 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.
As further discussed below, in the second quarter of 2002, management
concluded the carrying amount of the fully vested warrants and remaining cash
carriage fee were impaired. Through the second quarter of 2002, NIC recognized
the cash portion of the carriage fee on a straight-line basis over the term as
cost of software and services revenue and recognized 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. NIC recorded the
unamortized fair value of the fully vested warrants as an intangible asset in
the consolidated balance sheets at December 31, 2001. See Note 9.
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 has funded the
initial investment and ongoing operational costs to build, operate and maintain
the Customized Programming and Licensed Content. AOL and NIC share revenues
generated from the license or sale of advertisement on or through the
Government Guide.
During the second quarter of 2002, the Company identified indicators of
possible impairment of the cash and warrant portions of the carriage fee paid
and payable to AOL. Beginning in the second quarter of 2001, NIC's share of
revenues generated from AOL's sale of advertisement through Government Guide
had increased steadily on a sequential quarterly basis. However, in the second
quarter of 2002, revenues from the Company's AOL business
62
decreased precipitously as compared to recent quarters. This was primarily a
result of lower AOL Government Guide advertising revenues due to weakness in
the overall advertising market in general and the online advertising market in
particular. This drop in advertising revenues was in contrast to the growth in
revenues the Company's AOL business had experienced historically. Additionally,
based on recent discussions with AOL personnel, the Company did not expect its
AOL business to achieve revenue growth consistent with the growth it had
experienced historically. AOL had specifically noted in their filings with the
SEC at the time that they expected the weakness in the online advertising
market to continue for the foreseeable future. Accordingly, the Company reduced
the revenue forecast for its AOL business for the remainder of 2002 and through
the completion of its contract with AOL in December 2003.
Management determined that the expected future cash flows of its AOL
business would not be sufficient to recover the cash carriage fee the Company
would have recognized over the remaining term of the contract with AOL. Through
the second quarter of 2002, the Company had made cash payments to AOL totaling
approximately $2.3 million, with approximately $500,000 recorded as a prepaid
expense at June 30, 2002, and had to pay the remaining $412,500 in a series of
three quarterly installments ending in March 2003. Additionally, management
determined the future cash flows of this business would not be sufficient to
recover the unamortized carrying amount of the fully vested warrants issued to
AOL, which totaled approximately $2.1 million at June 30, 2002. The carrying
amount of the fully vested warrants was previously recorded as an intangible
asset in the Company's consolidated balance sheet. As a result, the Company
recognized a $3.0 million impairment loss in the second quarter of 2002. The
Company is obligated to continue to operate and maintain AOL's Government Guide
through December 2003.
Restructurings
In September 2000, the Company announced the restructuring of certain of
its software and services businesses to more appropriately size these
operations to visible demand and more 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. Approximately
$412,000 of this charge has been included in selling and administrative
expenses in the consolidated statements of operations and $226,000 related to
NIC Commerce, which has been classified as a discontinued operation. 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 the fourth quarter of 2001, NIC Commerce incurred a pre-tax charge of
approximately $374,000 relating primarily to employee severance and lease
abandonment costs. This charge is included in NIC Commerce's results as
discontinued operations in the consolidated statements of operations. At
December 31, 2001, $374,000 remained accrued for future payments. Employee
severance costs totaling approximately $350,000 related to severance packages
for nine employees in administration and application development, and all
terminations were completed and payments made by the end of the first quarter
2002.
Acquisition pro forma information (unaudited)
The following unaudited pro forma consolidated amounts for the year ended
December 31, 2000 give effect to the SDR acquisition as if the acquisition had
occurred on January 1, 2000, using the amortization of goodwill and intangibles
the Company has recorded for periods subsequent to completing this acquisition.
This information does not reflect the impairment losses recorded in 2001
related to SDR. The results of operations for Conquest and IDT in 2000 as
stand-alone businesses were not material in relation to the consolidated
financial statements of NIC.
63
Year Ended
December 31,
2000
-------------
Revenues ...................................................... $ 24,097,359
Operating loss ................................................ (53,036,430)
Loss from continuing operations ............................... (42,177,853)
Net loss ...................................................... (46,498,798)
Basic and diluted loss per share -- continuing operations ..... $ (0.76)
Basic and diluted net loss per share .......................... $ (0.84)
Weighted average shares outstanding ........................... 55,398,070
6. MARKETABLE SECURITIES
The fair value of marketable securities was as follows at December 31:
2001 2002
---------- ----------
U.S. government obligations .............. $2,500,000 $ 248,816
Corporate debt securities ................ 1,565,951 --
---------- ----------
$4,065,951 $ 248,816
========== ==========
All marketable debt securities held by the Company at December 31, 2001
and 2002 mature within one year. Gross realized gains and losses and unrealized
holding gains and losses have not been significant.
At December 31, 2001, the Company had pledged $2,790,000 of its marketable
securities as collateral for letters of credit, its bank line of credit in
conjunction with a corporate credit card agreement, and its bank note payable.
As of December 31, 2002, the Company had pledged all of its marketable
securities as collateral for its bank line of credit in conjunction with a
corporate credit card agreement. See Note 11.
7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
2001 2002
----------- -----------
Furniture and fixtures ..................... $ 1,246,608 $ 1,409,076
Equipment .................................. 8,163,876 6,292,736
Purchased software ......................... 2,318,258 1,249,829
Leasehold improvements ..................... 332,520 182,652
----------- -----------
12,061,262 9,134,293
Less accumulated depreciation .............. 5,675,691 6,080,443
----------- -----------
$ 6,385,571 $ 3,053,850
=========== ===========
Depreciation expense for the years ended December 31, 2000, 2001 and 2002,
was $1,728,559, $2,968,384 and $2,519,205, respectively.
8. INVESTMENTS IN AFFILIATES AND JOINT VENTURES
In March 2000, NIC completed a $5 million cash investment in E-Filing.com,
Inc. ("E-Filing"), a provider of online filing applications for legal services,
giving NIC ownership of 21% of E-Filing, 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 was allocated to goodwill and was amortized over 21
months ending December 31, 2001. At December 31, 2002, the carrying value of
the Company's investment in E-Filing was $839,192, which approximates the
Company's share of E-Filing's underlying equity.
64
E-Filing is in the development stage of operations and is incurring net
losses. The Company regularly reviews the carrying value of its equity method
investments and records impairment losses when events and circumstances
indicate that such assets are impaired. To date, the Company has not recorded
any such impairment losses on its investment in E-Filing.
In March 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 14. In May 2001, a private technology company
acquired Tidemark for cash consideration of approximately $1.6 million. NIC
received approximately $700,000 in cash from the transaction and had no
investment balance remaining after the acquisition.
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 initial 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 joint
venture agreement was modified and reduced NIC's obligation to make future cash
contributions to the joint venture and gave NIC ownership of 47% of the
ordinary shares of eGS. In December 2002, the joint venture agreement was again
modified and, among other changes, eliminated NIC's obligation to make future
cash contributions to the joint venture, reduced NIC's ownership in the joint
venture to 20% and eliminated NIC's participation on the board of directors of
the joint venture. The investment has been accounted for under the equity
method. As a result of the most recent modification to the joint venture
agreement, the Company will account for its investment in eGS under the cost
method beginning in fiscal 2003. Through December 31, 2002, NIC's cash
contributions to eGS totaled approximately $1.0 million. At December 31, 2002,
NIC had no investment balance remaining in eGS.
9. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31:
2001 2002
------------------------- -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
---------- ------------ -------- ------------
Software development costs ......... $ 493,998 $ (123,494) $521,512 $(301,534)
Warrants issued to AOL ............. 4,750,000 (1,935,189) -- --
---------- ----------- -------- ---------
$5,243,998 $(2,058,683) $521,512 $(301,534)
========== =========== ======== =========
At December 31, 2002, intangible assets were primarily comprised of
internal use software development costs, which are being amortized using the
straight-line method over a period of three years. No significant residual
value
65
is estimated for these intangible assets. The aggregate intangible asset
amortization expense for the years ended December 31, 2000, 2001 and 2002 was
$13.1 million, $12.8 million and $0.2 million, respectively. Amortization
expense for the net carrying amount of intangible assets at December 31, 2002
is estimated to be $0.1 million in each of fiscal years 2003 and 2004. Refer to
Note 5 for further discussion of the goodwill and intangible asset impairment
charges recorded by the Company in 2001 and 2002.
10. APPLICATION DEVELOPMENT CONTRACTS
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 NIC
Conquest's current estimate of costs to develop and implement the related
application and accrued approximately $1.4 million in the first quarter of 2000
for the expected loss in cost of software and services revenues in the
consolidated statements of operations. As of December 31, 2002, the Company has
fulfilled substantially all obligations under its contract with the Indiana
Secretary of State. 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
approximately $3.4 million and $2.6 million in the third and fourth quarters of
2001, respectively, for expected losses on outstanding contracts where
migration was elected. In the second quarter of 2002, the Company accrued
approximately $4.3 million for expected losses due to project cost overruns on
outstanding contracts in Arkansas, Minnesota and Oklahoma. In the fourth
quarter of 2002, management reversed $800,000 of accruals recorded in the
second quarter of 2002 related to its contracts in Arkansas and Oklahoma as
these contracts are expected to cost less to complete than management
estimated. The Company has fulfilled all obligations under its contract with
the state of Minnesota and expects to complete the majority of the remaining
development work on its contracts with the states of Arkansas and Oklahoma by
the end of the second quarter 2003. At December 31, 2002, the accrual for all
application development contracts was approximately $1.6 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.
In September 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 and currently believes this contract will be
profitable.
Unbilled revenues under long-term application development contracts at
December 31, 2001 and 2002 were approximately $2.3 million and $2.6 million,
respectively, and are included in other current assets in the consolidated
balance sheets.
11. DEBT OBLIGATIONS AND COLLATERAL REQUIREMENTS
In August 2001, the Company borrowed $1.0 million from a bank in the form
of a promissory note payable to finance the purchase of certain hardware and
software components for its eProcurement business. 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. At December 31, 2002, the principal
balance on the note was approximately $533,000. The Company has collateralized
the note with approximately $600,000 in cash and cash equivalents.
The Company has a $500,000 line of credit with a bank in conjunction with
a corporate credit card agreement. At December 31, 2002, NIC had pledged all of
its marketable securities as collateral on the line of credit. See Note 6.
The Company issues letters of credit as collateral for performance on
certain of its outsourced government portal contracts and as collateral for
certain performance bonds. These irrevocable letters of credit are generally in
force for one year, for which the Company pays bank fees of approximately 1.5%
to 2.0% of face value per annum. In conjunction with its business filings
contract with the California Secretary of State (see Note 10), in March 2002,
the Company issued a $5 million letter of credit as collateral for a $5 million
performance bond required
66
by the contract. Prior to receiving the next major milestone payment under the
contract, the Company will be required to increase the amount of the
performance bond to $10 million. If the Company is unsuccessful in obtaining a
$10 million performance bond, all remaining milestone payments to NIC will be
deferred until the date the Secretary of State officially accepts the system
and the maintenance period commences. In total, the Company and its
subsidiaries had unused outstanding letters of credit of approximately $1.2
million and $6.2 million at December 31, 2001 and 2002, respectively. At
December 31, 2002, the Company has collateralized certain letters of credit
with approximately $5.7 million in cash and cash equivalents.
In October 2002, the Company entered into an agreement with a bank to
refinance all of its current letters of credit. In addition, the Company
obtained a $500,000 working capital line of credit and expects to refinance its
term note payable. The refinanced note will bear interest at the bank's prime
rate (with a floor of 5.5%) and will be payable in 36 monthly installments
ending in 2006. In total, the new financing arrangement will increase the
Company's unrestricted cash balance by more than $1.0 million by releasing
funds which had been previously restricted as collateral to secure letters of
credit and the note payable. The Company will pledge approximately $5.6 million
of its cash and cash equivalents as collateral under the new financing
arrangement and has given the bank a security interest in certain of its
accounts receivable and other assets. The Company has not yet completed all of
these transactions with the bank.
12. COMMITMENTS AND CONTINGENCIES
Operating leases
The Company and its subsidiaries lease office space and certain equipment
under noncancellable operating leases. Future minimum lease payments under all
noncancellable operating leases at December 31, 2002 are as follows:
Fiscal Year
- -----------
2003 ................................................ $1,174,384
2004 ................................................ 947,725
2005 ................................................ 666,566
2006 ................................................ 251,031
2007 ................................................ 104,607
Thereafter .......................................... --
Rent expense for operating leases for the years ended December 31, 2000,
2001 and 2002 was $1,279,175, $1,335,127 and $1,612,244, respectively.
Litigation
The Company is involved from time to time in legal proceedings and
litigation arising in the ordinary course of business. However, the Company is
not currently involved with any legal proceedings.
13. SHAREHOLDERS' EQUITY
Common stock
On June 30, 1998, the Company and the National Information Consortium
Voting Trust (the "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
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.
67
In April 2000, the Company sold 4,395 shares of common stock to an
employee for $11.38 per share. In June 2000, the Company sold 1,932 shares of
common stock to an employee for $12.94 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 $20.19 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.
As a condition of separation and severance from the Company in the second
quarter of 2002, a former executive had the right to request the Company to
repurchase all of the shares of the Company's common stock, totaling 149,488
shares, beneficially owned by the former executive that were held of record in
the Voting Trust for $1.44 per share. In October 2002, the former executive
exercised this right and caused the Company to repurchase his Voting Trust
units for $215,260. The shares of NIC common stock represented by the Voting
Trust units have been recorded as treasury stock in the consolidated balance
sheets.
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 compensation expense of approximately $157,000 for the excess of
fair value of the Company's common stock on the grant date over the exercise
price for options granted to certain of these employees. A portion of the tax
benefit relating to the disqualifying dispositions totaling $157,000 has been
recognized in the Company's results of operations, and the remaining tax
benefit for the excess deduction was credited directly to additional paid-in
capital. In 2001, federal income tax deductions relating to disqualifying
dispositions were insignificant.
During 2002, 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 $536,000 in 2002. For the year ended December 31, 2002, the
Company had recognized compensation expense of approximately $217,000 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 $217,000
has been recognized in the Company's results of operations, and the remaining
tax benefit for the excess deduction was credited directly to additional
paid-in capital. Also during 2002, certain current and former employees of the
Company exercised non-qualified stock options. As a result, the Company
received a federal income tax deduction of approximately $475,000 in 2002. For
the year ended December 31, 2002, the Company had recognized compensation
expense of approximately $292,000 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
exercises totaling $292,000 has been recognized in the Company's results of
operations, and the remaining tax benefit for the excess deduction of was
credited directly to additional paid-in capital.
At December 31, 2002, the Company had recognized a deferred tax asset of
approximately $1.5 million for the cumulative stock compensation expense
recognized to date related to non-qualified stock options granted to certain
employees with the fair value of the Company's common stock on the grant date
greater than the exercise price for options granted. Through December 31, 2002,
the actual tax deductions resulting from exercises of these non-qualified stock
options were less than the cumulative amount of stock compensation expense
recognized in the Company's results of operations. The write off of the related
deferred tax asset in excess of the benefits of the actual tax deductions was
debited directly to additional paid-in capital for $1,341,992, which was the
amount of excess tax deductions credited to additional
68
paid in capital from previous stock option grants, as discussed above. The
remainder of the write off of was recognized as income tax expense in the
consolidated statement of operations. See Note 14.
Withdrawn common stock offering
On February 22, 2000, the Company filed a registration statement on Form
S-1 with the SEC for an offering of approximately 8.1 million shares of the
Company's common stock. On April 5, 2000, the Company announced its intention
to withdraw the stock offering due to adverse market conditions. Direct costs
related to the withdrawn offering of approximately $835,000 were expensed in
the second quarter of 2000 and are included in selling 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 Note 5.
14. INCOME TAXES
The provision (benefit) for income taxes from continuing operations
consists of the following:
Year Ended December 31,
--------------------------------------------
2000 2001 2002
------------ ------------ ------------
Current income taxes:
Federal ............................................ $ -- $ -- $ --
State .............................................. 161,213 (28,180) 206,160
------------ ------------ ------------
Total ............................................. 161,213 (28,180) 206,160
------------ ------------ ------------
Deferred income taxes:
Federal ............................................ (10,875,018) (16,931,093) (3,210,702)
State .............................................. (1,274,569) (1,725,466) (527,498)
------------ ------------ ------------
Total ............................................. (12,149,587) (18,656,559) (3,738,200)
------------ ------------ ------------
Total income tax benefit from continuing operations $(11,988,374) $(18,684,739) $ (3,532,040)
============ ============ ============
Significant components of the Company's deferred tax assets and
liabilities were as follows at December 31:
2001 2002
------------ ------------
Deferred tax assets:
Net operating loss carryforward .................................... $ 23,440,998 $ 26,463,945
Amortization and impairment of eFed goodwill and software intangible 9,419,793 8,794,412
Capital loss on sale of affiliate .................................. 1,796,675 1,796,675
Investments in affiliates .......................................... 1,887,489 2,287,800
Application development contracts .................................. 1,542,457 606,357
Compensation related to non-qualified stock options ................ 1,123,769 --
Warrants issued to AOL ............................................. -- 821,222
Depreciation ....................................................... -- 170,835
Other .............................................................. 139,025 --
------------ ------------
39,350,206 40,941,246
Less: Valuation allowance .......................................... (7,081,251) (5,010,701)
------------ ------------
Total ............................................................. 32,268,955 35,930,545
------------ ------------
Deferred tax liabilities:
Depreciation ....................................................... (282,038) --
Capitalized software development costs ............................. (230,247) (73,199)
Other .............................................................. -- (202,028)
------------ ------------
Total ............................................................. (512,285) (275,227)
------------ ------------
Net deferred tax asset .............................................. $ 31,756,670 $ 35,655,318
============ ============
69
For federal income tax purposes, the Company had available at December 31,
1999, 2000, 2001 and 2002 net operating loss ("NOL") carryforwards of
approximately $0.3 million, $26.5 million, $21.1 million and $8.4 million that
will expire in the years 2019, 2020, 2021 and 2022, 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.
In the fourth quarter of 2002, the Company recorded a deferred tax asset
adjustment of approximately $1.5 million for compensation related to
non-qualified stock options (see Note 13).
Prior to April 8, 2002, the Company's ownership in NIC Conquest was less
than 80% (see Note 5). As a result, NIC Conquest was not included in the
Company's consolidated federal income tax return prior to this time. 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 $6.0
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 could 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. The Company acquired 100% ownership of NIC Conquest on April 8,
2002. As a result of the change in ownership, the Company released the
estimated portion of the valuation allowance that was not related to NIC
Conquest's net operating loss carryforwards generated through the date of the
change in ownership. At December 31, 2002, the deferred tax asset valuation
allowance relating to NIC Conquest was $3,214,026.
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 8). 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. In 2001, the Company adjusted
the deferred tax asset valuation allowance relating to Tidemark to $1,796,675.
The following table reconciles the effective income tax rate from
continuing operations indicated by the consolidated statements of operations
and the statutory federal income tax rate:
Year Ended December 31,
------------------------------
2000 2001 2002
---- ---- ----
Effective federal and state income tax rate .................. 24.9% 20.7% 38.8%
Impairment of intangible assets .............................. -- 7.0 4.8
Goodwill amortization relating to the Exchange Offer and other
acquisitions ................................................ 8.2 4.0 --
Non-deductible stock compensation expense .................... 0.5 0.2 1.1
State income taxes ........................................... (1.9) (2.1) (1.4)
Valuation allowance .......................................... 2.4 5.2 (9.1)
Other ........................................................ 0.9 -- 0.8
---- ---- ----
Statutory federal income tax rate ............................ 35.0% 35.0% 35.0%
==== ==== ====
15. 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
70
Directors. Expense related to Company matching contributions totaled
approximately $469,000, $349,000 and $276,000 for the years ended December 31,
2000, 2001 and 2002, respectively.
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
permit eligible employees to purchase NIC common stock through payroll
deductions up to 15% of each employee's compensation. Amounts deducted and
accumulated by the participant will be used to purchase shares of NIC's common
stock at 85% of the lower of the fair value of the common stock at the
beginning or the end of the offering period, as defined. The first offering
period under this plan commenced on April 1, 2001 and ended on March 31, 2002,
with 32,504 shares being purchased. The second offering period under this plan
commenced on April 1, 2002. The closing fair market value of NIC common stock
on the first day of the second offering period was $3.84 per share.
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.
A summary of the activity under the Company's stock option plans for the
years ended December 31, 2000, 2001 and 2002 is presented below:
2000 2001 2002
--------------------------- ----------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- ----------- -------------- ----------- --------------
Outstanding at January 1 ......... 4,025,593 $ 7.49 6,192,706 $ 7.80 7,663,866 $ 5.36
Granted .......................... 3,374,486 $ 10.38 3,161,361 $ 3.29 1,345,450 $ 1.81
Exercised ........................ (411,524) $ 2.07 (216,659) $ 1.47 (1,915,094) $ 1.51
Expired .......................... (33,924) $ 12.29 (370,108) $ 18.06 (1,221,181) $ 6.32
Canceled ......................... (761,925) $ 21.44 (1,103,434) $ 9.60 (1,114,571) $ 4.08
--------- ---------- ----------
Outstanding at December 31 ....... 6,192,706 $ 7.80 7,663,866 $ 5.36 4,758,470 $ 5.95
Exercisable at December 31 ....... 1,674,316 $ 4.86 2,831,632 $ 5.64 1,626,629 $ 9.92
Weighted average grant-date
fair value of options granted
during the year ................. $ 8.62 $ 2.45 $ 1.18
71
The following table summarizes information about stock options outstanding
under the Plan at December 31, 2002:
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
- ------------------------- ----------- ----------- -------- ----------- --------
$1.44-2.10 .............. 2,051,734 2.8 $ 1.79 353,803 $ 1.78
$2.19-3.26 .............. 374,137 3.0 $ 2.32 172,113 $ 2.29
$3.34-4.81 .............. 1,018,650 3.2 $ 3.83 261,688 $ 3.82
$5.06-7.44 .............. 163,500 3.1 $ 6.91 50,500 $ 6.90
$7.75-11.38 ............. 810,468 3.2 $ 10.88 497,747 $ 10.93
$12.56-14.36 ............ 113,450 0.8 $ 14.13 104,285 $ 14.23
$19.32-26.38 ............ 17,296 5.5 $ 21.36 14,897 $ 21.69
$30.88-43.88............. 179,735 0.7 $ 35.83 151,929 $ 36.23
$49.38-54.25 ............ 29,500 1.1 $ 51.77 19,667 $ 51.77
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, 2000 with
exercise prices less than the fair market value of the Company's common stock
on the various grant dates, the Company recognized a total of $1,675,485 of
stock compensation expense related to common stock options for the year ended
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 in the consolidated
balance sheet was $1,306,569 at December 31, 2001. The Company recognized this
$1,306,569 of stock compensation expense during the year ended December 31,
2002 and had no deferred compensation expense remaining at December 31, 2002.
16. RELATED PARTY TRANSACTIONS
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. One of
these directors is now the current Chief Executive Officer of the Company. In
2000, total payments made to this company totaled approximately $245,000. No
payments were made to this company in 2001. In 2002, total payments made to
this company totaled approximately $260,000.
17. REPORTABLE SEGMENTS AND RELATED INFORMATION
The Company's reportable segments consist of its outsourced state and
local portal businesses ("Outsourced Portals"), its eGovernment products
businesses ("Products"), and its AOL division ("AOL"). As further discussed in
Note 5, the results of operations of NIC Commerce, previously reported in the
eProcurement segment, have been classified as discontinued operations. The
Outsourced Portals segment includes the Company's subsidiaries operating
government portals and the corporate divisions that support portal operations.
The Products segment includes the Company's corporate filings business (NIC
Conquest), ethics & elections business (NIC Technologies) and transportation
business (IDT). Unallocated corporate-level expenses are reported as "Other
Reconciling Items." 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, stock compensation and one-time charges ("EBITDA"). There have been no
significant intersegment transactions for the periods reported. The summary of
significant accounting policies applies to all segments. The table below
reflects summarized financial information for the Company's reportable segments
for the years ended December 31:
72
Outsourced Other Reconciling
Portals Products AOL Items Consolidated Total
----------- ------------ ---------- ----------------- ------------------
2000
Revenues ......... $17,807,973 $ 5,533,305 $ 101 $ -- $ 23,341,379
EBITDA ........... 1,164,018 (4,096,967) (933,341) (10,700,110) (14,566,400)
2001
Revenues ......... 26,370,764 9,629,380 1,020,236 -- 37,020,380
EBITDA ........... 4,572,873 (8,692,753) (721,108) (9,673,461) (14,514,449)
2002
Revenues ......... 34,778,978 11,284,187 1,482,245 -- 47,545,410
EBITDA ........... 12,596,676 (4,216,720) 740,970 (8,440,231) 680,695
The following is a reconciliation of total segment EBITDA to total
consolidated loss from continuing operations before income taxes and minority
interest for the years ended December 31:
2000 2001 2002
------------ ------------ ------------
Total EBITDA for reportable segments .................. $(14,566,400) $(14,514,449) $ 680,695
Impairment of intangible assets (Note 5) .............. -- (44,834,490) (4,316,230)
Restructuring charges (Note 5) ........................ (412,131) -- --
Withdrawn secondary offering expenses (Note 13) ....... (834,493) -- --
Vacation accrual (*) .................................. (205,616) -- --
Stock compensation .................................... (1,789,874) (1,525,022) (1,306,569)
Depreciation and amortization ......................... (27,471,510) (26,627,561) (2,988,389)
Interest income ....................................... 3,739,464 966,423 179,829
Interest expense ...................................... (47,311) (38,789) (49,193)
Equity in net loss of affiliates ...................... (6,524,473) (3,271,876) (1,234,938)
Other income (expense), net ........................... (82,710) (233,189) (71,775)
------------ ------------ ------------
Loss from continuing operations before income taxes and
minority interest .................................... $(48,195,054) $(90,078,953) $ (9,106,570)
============ ============ ============
- ------------
* 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. Of this charge, approximately $30,000 related to
discontinued operations.
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
73%, 64% and 64% of the Company's portal revenues in 2000, 2001 and 2002,
respectively, and approximately 56%, 46% and 47% of the Company's total
revenues in 2000, 2001 and 2002, respectively.
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, 2000, one data reseller
accounted for 52% of the Company's portal revenues and 39% of the Company's
total revenues, and two other resellers accounted for an additional 12% of the
Company's portal revenues and 9% 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 31% of the Company's
total revenues, and two other resellers accounted for an additional 8% of the
Company's portal revenues and 6% of the Company's total revenues. For the year
ended December 31, 2002, one of these data resellers accounted for
approximately 47% of the Company's portal revenues and 34% of the Company's
total revenues, and two other resellers accounted for an additional 7% of the
Company's portal revenues and 5% of the Company's total revenues. At December
31, 2002, one data reseller accounting for approximately 44% of the Company's
accounts receivable and two other data resellers accounted for approximately
6%.
73
18. UNAUDITED QUARTERLY OPERATING RESULTS
The unaudited 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 5, 8,
10 and 17 above.
2000
Three Months Ended
------------------------------------------------------------ Year Ended
March 31, June 30, September 30, December 31, December 31,
2000 2000 2000 2000 2000
------------ ------------ ------------ ------------ ------------
Revenues:
Portal revenues ........................... $ 4,532,891 $ 4,414,411 $ 4,487,778 $ 4,372,893 $ 17,807,973
Software and services revenues ............ 253,713 1,952,343 1,506,960 1,820,390 5,533,406
------------ ------------ ------------ ------------ ------------
Total revenues ........................... 4,786,604 6,366,754 5,994,738 6,193,283 23,341,379
------------ ------------ ------------ ------------ ------------
Operating expenses:
Cost of portal revenues, exclusive of
depreciation and amortization ........... 3,029,229 3,455,492 3,472,617 4,110,813 14,068,151
Cost of software and services revenues,
exclusive of depreciation and
amortization ............................ 1,851,153 1,665,750 1,128,814 1,958,854 6,604,571
Selling and administrative ................ 2,580,812 4,582,384 6,067,679 5,456,422 18,687,297
Stock compensation ........................ 516,664 397,862 416,274 459,074 1,789,874
Depreciation and amortization ............. 4,565,828 6,664,307 8,165,009 8,076,366 27,471,510
------------ ------------ ------------ ------------ ------------
Total operating expenses ................. 12,543,686 16,765,795 19,250,393 20,061,529 68,621,403
------------ ------------ ------------ ------------ ------------
Operating loss ............................. (7,757,082) (10,399,041) (13,255,655) (13,868,246) (45,280,024)
------------ ------------ ------------ ------------ ------------
Other income (expense):
Interest income ........................... 1,202,349 999,926 863,809 673,380 3,739,464
Interest expense .......................... (10,636) (20,815) (6,567) (9,293) (47,311)
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) ............. 1,189,343 (706,555) (733,885) (2,663,933) (2,915,030)
------------ ------------ ------------ ------------ ------------
Loss from continuing operations before
income taxes and minority interest ........ (6,567,739) (11,105,596) (13,989,540) (16,532,179) (48,195,054)
Income tax expense (benefit) ............... (1,920,266) (3,176,289) (3,982,149) (2,909,670) (11,988,374)
------------ ------------ ------------ ------------ ------------
Loss from continuing operations before
minority interest ......................... (4,647,473) (7,929,307) (10,007,391) (13,622,509) (36,206,680)
Minority interest .......................... (92,758) 67,186 4,925 (229,028) (249,675)
------------ ------------ ------------ ------------ ------------
Loss from continuing operations ............ (4,554,715) (7,996,493) (10,012,316) (13,393,481) (35,957,005)
Discontinued operations:
Loss from discontinued operations (less
applicable income tax benefit of $87,515,
$592,659, $971,647 and $951,826) ........ (151,335) (975,844) (1,617,286) (1,576,480) (4,320,945)
------------ ------------ ------------ ------------ ------------
Net loss ................................... $ (4,706,050) $ (8,972,337) $(11,629,602) $(14,969,961) $(40,277,950)
============ ============ ============ ============ ============
Basic and dilued net loss per share:
Loss per share -- continuing operations ... $ (0.09) $ (0.14) $ (0.18) $ (0.24) $ (0.66)
============ ============ ============ ============ ============
Loss per share -- discontinued operations . $ (0.00) $ (0.02) $ (0.03) $ (0.03) $ (0.08)
============ ============ ============ ============ ============
Net loss per share ........................ $ (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
============ ============ ============ ============ ============
74
2001
Three Months Ended
---------------------------------------------------------------- Year Ended
March 31, June 30, September 30, December 31, December 31,
2001 2001 2001 2001 2001
------------- ------------- ------------- ------------- -------------
Revenues:
Portal revenues ......................... $ 5,431,930 $ 6,144,014 $ 7,747,011 $ 7,047,809 $ 26,370,764
Software and services revenues .......... 2,140,283 3,211,232 2,885,785 2,412,316 10,649,616
------------- ------------- ------------- ------------- -------------
Total revenues ......................... 7,572,213 9,355,246 10,632,796 9,460,125 37,020,380
------------- ------------- ------------- ------------- -------------
Operating expenses:
Cost of portal revenues, exclusive of
depreciation and amortization ......... 4,341,083 4,719,613 5,403,791 5,008,316 19,472,803
Cost of software and services revenues,
exclusive of depreciation and
amortization .......................... 1,823,128 2,700,836 5,842,880 4,128,253 14,495,097
Selling and administrative .............. 4,892,752 4,726,308 4,628,941 3,318,928 17,566,929
Impairment loss ......................... -- -- 36,997,108 7,837,382 44,834,490
Stock compensation ...................... 386,274 403,556 386,211 348,981 1,525,022
Depreciation and amortization ........... 8,115,985 8,156,062 8,160,350 2,195,164 26,627,561
------------- ------------- ------------- ------------- -------------
Total operating expenses ............... 19,559,222 20,706,375 61,419,281 22,837,024 124,521,902
------------- ------------- ------------- ------------- -------------
Operating loss ........................... (11,987,009) (11,351,129) (50,786,485) (13,376,899) (87,501,522)
------------- ------------- ------------- ------------- -------------
Other income (expense):
Interest income ......................... 462,701 260,176 164,800 78,746 966,423
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) ........... (356,632) (543,811) (346,114) (1,330,874) (2,577,431)
------------- ------------- ------------- ------------- -------------
Loss from continuing operations before
income taxes and minority interest ...... (12,343,641) (11,894,940) (51,132,599) (14,707,773) (90,078,953)
Income tax expense (benefit) ............. (3,164,216) (3,222,536) (12,543,764) 245,777 (18,684,739)
------------- ------------- ------------- ------------- -------------
Loss from continuing operations before
minority interest ....................... (9,179,425) (8,672,404) (38,588,835) (14,953,550) (71,394,214)
Minority interest ........................ (21,859) 10,196 (463,639) -- (475,302)
------------- ------------- ------------- ------------- -------------
Loss from continuing operations .......... (9,157,566) (8,682,600) (38,125,196) (14,953,550) (70,918,912)
Discontinued operations:
Loss from discontinued operations (less
applicable income tax benefit of
$773,729, $683,726, $382,718 and
$2,099,937) ........................... (976,007) (1,073,937) (577,058) (3,898,359) (6,525,361)
------------- ------------- ------------- ------------- -------------
Net loss ................................. $ (10,133,573) $ (9,756,537) $ (38,702,254) $ (18,851,909) $ (77,444,273)
============= ============= ============= ============= =============
Basic and dilued net loss per share:
Loss per share -- continuing operations . $ (0.16) $ (0.15) $ (0.68) $ (0.27) $ (1.26)
============= ============= ============= ============= =============
Loss per share -- discontinued operations $ (0.02) $ (0.02) $ (0.01) $ (0.07) $ (0.12)
============= ============= ============= ============= =============
Net loss per share ...................... $ (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
============= ============= ============= ============= =============
75
2002
Three Months Ended
------------------------------------------------------------ Year Ended
March 31, June 30, September 30, December 31, December 31,
2002 2002 2002 2002 2002
------------ ------------ ------------ ------------ ------------
Revenues:
Portal revenues ............................ $ 8,485,907 $ 9,002,070 $ 8,862,950 $ 8,428,051 $ 34,778,978
Software and services revenues ............. 3,610,751 3,931,627 2,805,338 2,418,716 12,766,432
------------ ------------ ------------ ------------ ------------
Total revenues ............................ 12,096,658 12,933,697 11,668,288 10,846,767 47,545,410
------------ ------------ ------------ ------------ ------------
Operating expenses:
Cost of portal revenues, exclusive of
depreciation and amortization ............ 4,958,355 4,690,127 5,065,111 5,141,727 19,855,320
Cost of software and services revenues,
exclusive of depreciation and
amortization ............................. 2,334,392 7,677,832 2,125,326 1,549,746 13,687,296
Selling and administrative ................. 3,794,712 3,781,136 3,254,586 2,491,665 13,322,099
Impairment loss ............................ -- 4,316,230 -- -- 4,316,230
Stock compensation ......................... 311,146 995,423 -- -- 1,306,569
Depreciation and amortization .............. 928,015 938,316 567,194 554,864 2,988,389
------------ ------------ ------------ ------------ ------------
Total operating expenses .................. 12,326,620 22,399,064 11,012,217 9,738,002 55,475,903
------------ ------------ ------------ ------------ ------------
Operating income (loss) ..................... (229,962) (9,465,367) 656,071 1,108,765 (7,930,493)
------------ ------------ ------------ ------------ ------------
Other income (expense):
Interest income ............................ 41,008 55,269 37,516 46,036 179,829
Interest expense ........................... (11,088) (21,564) (20,059) 3,518 (49,193)
Equity in net loss of affiliates ........... (224,201) (457,773) (286,014) (266,950) (1,234,938)
Other income (expense), net ................ -- (36,275) (54) (35,446) (71,775)
------------ ------------ ------------ ------------ ------------
Total other income (expense) .............. (194,281) (460,343) (268,611) (252,842) (1,176,077)
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations
before income taxes and minority interest .. (424,243) (9,925,710) 387,460 855,923 (9,106,570)
Income tax expense (benefit) ................ (10,179) (4,090,811) 167,943 401,007 (3,532,040)
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations
before minority interest ................... (414,064) (5,834,899) 219,517 454,916 (5,574,530)
Minority interest ........................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations .... (414,064) (5,834,899) 219,517 454,916 (5,574,530)
Discontinued operations:
Loss from discontinued operations (less
applicable income tax benefit of
$327,346, $974,227, $4,825 and $0) ....... (466,292) (1,561,590) (7,581) -- (2,035,463)
------------ ------------ ------------ ------------ ------------
Net income (loss) ........................... $ (880,356) $ (7,396,489) $ 211,936 $ 454,916 $ (7,609,993)
============ ============ ============ ============ ============
Basic and dilued net income (loss) per share:
Income (loss) per share -- continuing
operations ............................... $ (0.01) $ (0.10) $ 0.00 $ 0.01 $ (0.10)
============ ============ ============ ============ ============
Loss per share -- discontinued operations .. $ (0.01) $ (0.03) $ (0.00) $ 0.00 $ (0.03)
============ ============ ============ ============ ============
Net income (loss) per share ................ $ (0.02) $ (0.13) $ 0.00 $ 0.01 $ (0.13)
============ ============ ============ ============ ============
Weighted average shares outstanding:
Basic ...................................... 56,358,387 56,492,530 56,811,394 57,823,599 56,875,327
============ ============ ============ ============ ============
Diluted .................................... 56,358,387 56,492,530 57,006,631 57,859,897 56,875,327
============ ============ ============ ============ ============
76
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
NIC 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 NIC Inc. and its subsidiaries at December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2002, 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 7, 2003
77
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 2003 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 not
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.
The following table shows the Company's common stock authorized for
issuance under the Company's equity compensation plans as of December 31, 2002:
Number of securities to be Weighted average Number of
issued upon exercise of exercise price of securities
outstanding options, outstanding options, available for
Plan category warrants and rights warrants and rights future issuance
- ------------- -------------------------- -------------------- ---------------
Equity compensation plans approved by security
holders ..................................... 4,697,338 $ 5.96 2,074,419
Equity compensation plans not approved by
security holders (1) ........................ 61,132 $ 5.22 2,399
- ------------
(1) In connection with the Company's acquisition of SDR Technologies, Inc. in
May 2000, the Company adopted the 1999 Stock Option Plan of SDR
Technologies, Inc (the "SDR Plan"). Options to purchase 229,965 shares
were granted in connection with the acquisition of SDR. However, no
options in addition to those granted at the close of the SDR transaction
will be granted under this plan. The SDR Plan is administered by the
Compensation Committee of the Company' Board of Directors.
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.
78
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of NIC's disclosure controls and procedures (as
such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90
days prior to the filing date of this annual report (the "Evaluation Date").
Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, NIC's disclosure controls and procedures are effective in
bringing to their attention on a timely basis material information relating to
the Company (including its consolidated subsidiaries) required to be included
in the Company's periodic filings under the Exchange Act.
(b) Changes in internal controls
Since the Evaluation Date, there have not been any significant changes in
NIC's internal controls or in other factors that could significantly affect
such controls.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Index To Consolidated Financial Statements: Page
----
Consolidated Balance Sheets ........................................... 43
Consolidated Statements of Operations ................................. 44
Consolidated Statements of Changes in Shareholders' Equity ............ 45
Consolidated Statements of Cash Flows ................................. 46
Notes to Consolidated Financial Statements ............................ 48
Report of PricewaterhouseCoopers LLP, Independent Accountants ......... 77
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
Exhibit
Number Description
- ------- -----------
3.1 Articles of Incorporation of the registrant(1)
3.2 Bylaws of the registrant(1)
3.3 Articles of Amendment to Articles of Incorporation of the registrant(7)
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)
79
Exhibit
Number Description
- ------- -----------
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)
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)
80
Exhibit
Number Description
- ------- -----------
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)
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(8)
21.1 Subsidiaries of the registrant
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- ----------
(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
(7) Incorporated by reference to Form 10-Q filed with the SEC on May 14, 2002
(8) Incorporated by reference to Form 10-K filed with the SEC on March 25, 2002
(b) Reports on Form 8-K. None.
81
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 20, 2003.
NIC INC.
By: Jeffery S. Fraser
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 Chief Executive Officer March 20, 2003
(Principal Executive Officer)
Eric J. Bur Chief Financial Officer March 20, 2003
(Principal Financial Officer)
Stephen M. Kovzan Vice President, Financial Operations March 20, 2003
Chief Accounting Officer
(Principal Accounting Officer)
John L. Bunce, Jr. Director March 20, 2003
Daniel J. Evans Director March 20, 2003
Ross C Hartley Director March 20, 2003
Pete Wilson Director March 20, 2003
82
I, Jeffery S. Fraser, certify that:
1. I have reviewed this annual report on Form 10-K of NIC Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 20, 2003
/s/ Jeffery S. Fraser
- -----------------------
Jeffery S. Fraser
Chief Executive Officer
83
I, Eric J. Bur, certify that:
1. I have reviewed this annual report on Form 10-K of NIC Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 20, 2003
/s/ Eric J. Bur
- -----------------------
Eric J. Bur
Chief Financial Officer
84