At December 31, 2004, the IDT business did not qualify as a discontinued operation. 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.
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. Under the terms of the Agreement, NIC received advertising revenues as the exclusive provider of AOL’s Government Guide content. AOL and NIC shared revenues generated from the license or sale of advertisement by AOL on or through the Government Guide. In return for this exclusive right, NIC paid to AOL carriage payments in the form of cash and fully vested warrants to purchase NIC common stock, as further discussed below. NIC also provided AOL content that improved the quality of government guide, and granted to AOL a royalty-free, non-exclusive, worldwide license to use the content and applications developed by NIC (the “Customized Programming and Licensed Content”). In addition, NIC funded the initial investment and ongoing operational costs to develop, operate and maintain the Customized Programming and Licensed Content.
NIC was to pay a $4.5 million cash carriage fee to AOL over the initial three-year term of the Agreement. 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 by $1.8 million (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 was in effect met or exceeded certain levels.
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 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 warrants expire five years from the date of the Agreement, and include both physical and net share settlement alternatives, which are controlled by AOL. The maximum number of shares to net settle the warrants could never be greater than the number of warrants issued to AOL. The warrants do not include a cash settlement alternative.
In Issue 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” the EITF reached a consensus that the measurement date for an award that is nonforfeitable and that vests and is exercisable immediately could be the date the parties enter into a contract, even though the services have not yet been performed. Accordingly, the Company determined that the proper accounting treatment for the warrant portion of the carriage fee was to account for the fair value cost of the warrants at the 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. The EITF reached a consensus in Issue 00-18, “Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees,” that an asset acquired in exchange for the issuance of fully vested, nonforfeitable equity instruments should not be presented or classified as an offset to equity on the grantor’s balance sheet once the equity granted is issued for accounting purposes. Accordingly, NIC recorded the fair value of the fully vested warrants as an intangible asset and permanent equity in its consolidated balance sheets.
Through the second quarter of 2002, NIC recognized the fair value of the fully vested warrants on a straight-line basis over the term as amortization expense and recognized the cash portion of the carriage fee on a straight-line basis over the term as cost of software & services revenues in the consolidated statement of operations.
During the second quarter of 2002, the Company identified indicators of 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 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 discussions with AOL personnel at the time, 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.
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. As discussed above, 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.
In June 2003, NIC entered into a second amendment to the Agreement (the “Second Amendment”). Among other changes to the Agreement and Amendment, the Second Amendment extended the term of the Agreement from 40 months to 52 months (ending on December 31, 2004), reduced the cash carriage fee by $137,500 (from $2,700,000 to $2,562,500) and provided NIC the right to terminate the Agreement if quarterly advertising revenues did not reach $27,000 (the “Quarterly Minimum Revenue Share Target”) for any calendar quarter after April 1, 2003. The Quarterly Minimum Revenue Target increased to $33,000 in 2004. In the event of a shortfall of the Quarterly Minimum Revenue Share Target, AOL could elect to pay NIC the difference between the actual quarterly revenue amount and the Quarterly Minimum Revenue Share Target (the “Shortfall Payment”). If AOL were to make a Shortfall Payment, NIC’s notice of termination would be deemed withdrawn.
As of June 30, 2003, NIC had made all cash carriage fee payments due to AOL. During the second quarter of 2003, the Company reversed $137,500 of carriage fee expense in cost of software and services revenues, since this amount was no longer owed to AOL as a result of the Second Amendment. This amount was previously accrued as payable to AOL when the Company recorded the $3.0 million impairment loss in the second quarter of 2002.
The Company’s contract with AOL expired on December 31, 2004, and was not renewed.
NIC Conquest
In January 2000, NIC merged its application services division with Conquest, acquiring a 65% ownership in the new company, which was renamed NIC Conquest. The merger was accounted for as a purchase. In May 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 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 that the Company recorded upon the issuance of the shares was impaired 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
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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.
At December 31, 2004, NIC Conquest was primarily engaged in servicing the contract with the California Secretary of State. This business is not actively marketing its applications and services to new government entities.
| 5. | | PROPERTY AND EQUIPMENT |
Property and equipment consisted of the following at December 31:
| | | | 2003
| | 2004
|
|---|
| Furniture and fixtures | | | | $ | 1,580,789 | | | $ | 1,278,091 | |
| Equipment | | | | | 7,232,505 | | | | 8,186,499 | |
| Purchased software | | | | | 1,688,843 | | | | 1,887,284 | |
| Leasehold improvements | | | | | 208,069 | | | | 218,971 | |
| | | | | | 10,710,206 | | | | 11,570,845 | |
| Less accumulated depreciation | | | | | 7,718,610 | | | | 8,968,141 | |
| | | | | $ | 2,991,596 | | | $ | 2,602,704 | |
Depreciation expense for the years ended December 31, 2002, 2003 and 2004, was $2,519,205, $1,640,638 and $1,438,253 respectively.
| 6. | | 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. In May 2004, E-Filing repurchased the Company’s ownership interest in E-Filing for $535,000, which approximated the carrying value of the Company’s investment at the date of the repurchase. The Company received approximately $300,000 in cash and a $235,000 subordinated promissory note with principal plus 5% interest payable annually in three equal installments on each of the first, second and third anniversary dates of the issuance of the note. The Company had no investment balance remaining in E-Filing after the repurchase.
In March 2000, NIC completed a $5.5 million cash investment in Tidemark Computer Systems, Inc., which was subsequently renamed Tidemark Solutions, 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. 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. NIC realized a gain of approximately $300,000 from the transaction, which the Company deferred until the end of the two-year indemnification period following the closing of the acquisition that covered the selling shareholders’ representations and warranties made in the acquisition agreement. The Company recognized this gain in May 2003, which is included in Equity in net loss of affiliates in the consolidated statement of operations for the year ended December 31, 2003.
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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, was to deliver eGovernment 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 had been accounted for under the equity method. As a result of the modification to the joint venture agreement in December 2002, the Company began to 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. At December 31, 2004, the Company’s ownership interest in eGS was approximately 14%.
| 7. | | DEBT OBLIGATIONS AND COLLATERAL REQUIREMENTS |
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 total, the Company and its subsidiaries had unused outstanding letters of credit of approximately $6.4 million at December 31, 2003 and 2004. The Company is currently required to collateralize certain letters of credit with its cash and cash equivalents. During the third quarter of 2004, the Company’s cash collateral requirements pertaining to letters of credit under its current banking agreement were reduced from $5 million to $3 million.
In conjunction with its business filings contract with the California Secretary of State, in March 2002, the Company issued a $5 million letter of credit as collateral for a $5 million performance bond required by the contract. In 2004, the Company received milestone payments totaling approximately $6.6 million for the delivery of the UCC filing system into production and acceptance testing. Of the $6.6 million in milestone payments received, approximately $0.6 million related to work that had not been fully completed at December 31, 2004. The Company is scheduled to receive two additional milestone payments of approximately $3.3 million in the future, currently estimated to be over the course of the next 12 to 15 months. The first payment will be for the delivery of the business entity filing system into acceptance testing. The second payment will be for the acceptance of the business entity filing system by the Secretary of State and commencement of the associated maintenance period. Upon acceptance of the business entity filing system and commencement of the associated maintenance period, the Company will no longer be required to provide a performance bond under this contract.
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. At December 31, 2003, the note payable had a balance of approximately $363,000 and was fully collateralized by cash and cash equivalents. In July 2004, the Company paid off the note in full and had no balance remaining at December 31, 2004.
The Company has a $500,000 working capital line of credit, which was unused at December 31, 2003 and 2004.
At December 31, 2003 and 2004, the Company had pledged a total of approximately $5.4 million and $3.0 million, respectively, of its cash and cash equivalents as collateral under the financing arrangement that covers all of the Company’s outstanding letters of credit, term note payable and working capital line of credit, and has given the bank a security interest in certain of its accounts receivable and other assets. At December 31, 2003 and 2004, the Company classified $5.4 million and $3.0 million, respectively, of its cash and cash equivalents as restricted in its consolidated balance sheets.
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The Company has a $500,000 line of credit with a separate bank in conjunction with a corporate credit card agreement. At December 31, 2003, NIC had pledged all of its marketable securities as collateral on the line of credit. At December 31, 2004, the Company is no longer required to collateralize the line of credit.
| 8. | | 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, 2004 are as follows:
Fiscal Year
| | | |
|
|---|
| 2005 | | | | $ | 1,304,993 | |
| 2006 | | | | | 827,952 | |
| 2007 | | | | | 474,091 | |
| 2008 | | | | | 153,275 | |
| 2009 | | | | | 1,055 | |
| Thereafter | | | | | — | |
Rent expense for operating leases for the years ended December 31, 2002, 2003 and 2004 was approximately $1,612,000, $1,603,000 and $1,491,000, 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.
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. In 2003, the Voting Trust distributed 5% of its shares of NIC common stock to its members. At December 31, 2003 and 2004, the Voting Trust held approximately 26.1 million shares of NIC common stock. On January 28, 2005, the Voting Trust distributed 10% of its shares of NIC common stock to its members. After the distribution, the Voting Trust held approximately 23.5 million shares of NIC common stock.
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.
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. In 2003, the Voting Trust distributed 5% of its shares
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of NIC common stock to its members. This affected 7,474 shares of NIC common stock held by the Company as treasury stock. The Company retired these shares in 2003, which had an assigned value of $10,763. At December 31, 2004, the Company had 142,014 shares remaining in treasury stock. In January 2005, the Voting Trust distributed 10% of its shares of NIC common stock to its members. This affected 14,201 shares of NIC common stock held by the Company as treasury stock. The Company retired these shares in February 2005, which had an assigned value of $20,449, and has 127,813 shares remaining in treasury stock.
Additional paid-in capital
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 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 paid in capital in prior years from previous stock option grants. The remainder of the write off was recognized as income tax expense in the consolidated statement of operations. See Note 10.
During 2003 and 2004, certain employees of the Company exercised non-qualified stock options. As a result, the Company received federal income tax deductions. The tax benefit for the deductions of $546,623 for 2003 and $688,604 for 2004 were credited directly to additional paid-in capital.
Business acquisitions and other transactions
For additional information relating to business acquisitions and other transactions involving the issuance of common stock or warrants, refer to Note 4.
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The provision (benefit) for income taxes from continuing operations consists of the following:
| | | | Year Ended December 31,
| |
|---|
| | | | 2002
| | 2003
| | 2004
|
|---|
Current income taxes:
| | | | | | | | | | | | | | |
| Federal | | | | $ | — | | | $ | — | | | $ | 238,731 | |
| State | | | | | 206,160 | | | | 332,735 | | | | 135,285 | |
| Total | | | | | 206,160 | | | | 332,735 | | | | 374,016 | |
Deferred income taxes:
| | | | | | | | | | | | | | |
| Federal | | | | | (3,210,702 | ) | | | 596,104 | | | | 3,650,706 | |
| State | | | | | (527,498 | ) | | | 256,314 | | | | 680,179 | |
| Total | | | | | (3,738,200 | ) | | | 852,418 | | | | 4,330,885 | |
Total income tax provision (benefit)
from continuing operations | | | | $ | (3,532,040 | ) | | $ | 1,185,153 | | | $ | 4,704,901 | |
Significant components of the Company’s deferred tax assets and liabilities were as follows at December 31:
| | | | 2003
| | 2004
|
|---|
Deferred tax assets:
| | | | | | | | | | |
| Net operating loss carryforward | | | | $ | 25,647,102 | | | $ | 21,538,469 | |
Amortization and impairment of purchase accounting goodwill
and software intangibles | | | | | 9,526,987 | | | | 8,641,536 | |
| Capital loss on sale of affiliate | | | | | 1,927,748 | | | | 3,792,358 | |
| Investments in affiliates | | | | | 2,364,802 | | | | 548,780 | |
Accrued contract expenses under percentage of
completion accounting | | | | | — | | | | 1,462,734 | |
| Application development contract losses | | | | | 180,748 | | | | — | |
| Other | | | | | 159,448 | | | | 335,574 | |
| | | | | | 39,806,835 | | | | 36,319,451 | |
| Less: Valuation allowance | | | | | (4,292,550 | ) | | | (4,341,138 | ) |
| Total | | | | | 35,514,285 | | | | 31,978,313 | |
Deferred tax liabilities:
| | | | | | | | | | |
| Depreciation | | | | | (144,799 | ) | | | (271,071 | ) |
| Capitalized software development costs | | | | | (19,963 | ) | | | — | |
| Total | | | | | (164,762 | ) | | | (271,071 | ) |
| Net deferred tax asset | | | | $ | 35,349,523 | | | $ | 31,707,242 | |
For federal income tax purposes, the Company had available at December 31, 2004, total net operating loss (“NOL”) carryforwards of approximately $59.4 million that will expire in 2020 ($22.0 million), 2021 ($27.1 million) and 2022 ($10.3 million). 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.
Prior to April 8, 2002, the Company’s ownership in NIC Conquest was less than 80% (see Note 4). 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
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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 and other deferred tax assets could be used in the future. Consequently, in the fourth quarter of 2001, the Company provided a deferred tax asset valuation allowance of $5,284,576 for the net deferred tax asset relating to NIC Conquest. The Company acquired 100% ownership of NIC Conquest on April 8, 2002. As a result of the change in ownership, the Company released the portion of the valuation allowance that was not related to NIC Conquest’s tax NOL carryforwards generated through the date of the change in ownership. The NIC Conquest deferred tax asset valuation allowance was $3,214,026 at December 31, 2002.
In the fourth quarter of 2003, the Company completed an internal reorganization and legal entity restructuring plan to simplify NIC’s corporate structure, standardize business development and contracting practices, increase internal operating efficiencies through reduced administrative costs, and concentrate all companies under one subsidiary, NICUSA. As of December 31, 2003, most operating subsidiaries had been or were in the process of being converted to single member limited liability companies (LLCs) directly owned by NICUSA. Management believes the restructuring will be treated as tax-free reorganizations or liquidations. As a result of the restructuring, certain NOL carryforwards relating to the Company’s NIC Conquest business that were generated prior to the date the Company acquired 100% ownership of NIC Conquest can now be utilized by NICUSA. Consequently, in the fourth quarter of 2003, the Company released the deferred tax asset valuation allowance relating to NIC Conquest totaling $3,214,026.
In the fourth quarter of 2003, management identified certain deferred tax assets pertaining to section 197 intangible asset amortization that the Company had not recognized since the acquisition of NIC Conquest in January 2000. The Company believes that it is more likely than not that it will be able to utilize this deferred tax asset in the future. Accordingly, in the fourth quarter of 2003, the Company recognized an additional deferred tax asset totaling $1,483,386. The Company also identified certain estimated state NOL carryforwards that it had previously recognized that it may be unable to use. Based on a review of applicable state tax statutes, the Company concluded that there is substantial doubt it would be able to realize the full amount of certain estimated NOL carryforwards in states where the Company cannot file a consolidated income tax return. As a result, in the fourth quarter of 2003, the Company reduced its net deferred tax asset by $483,386.
In 2000, the Company recorded a deferred tax asset valuation allowance of $1,959,447 to offset the deferred tax asset the Company had recognized relating to its investment in Tidemark (see Note 6). 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 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. NIC realized a book gain of approximately $300,000 from the Tidemark sale, which the Company deferred until the end of the two-year indemnification period following the closing of the acquisition that covered the selling shareholders’ representations and warranties made in the acquisition agreement. The Company recognized this gain in May 2003 and adjusted the deferred tax valuation allowance relating to Tidemark to $1,927,748.
In the fourth quarter of 2003, the Company recorded a deferred tax asset valuation allowance of $1,816,022 to offset the deferred tax asset applicable to the excess of the Company’s tax over book basis of its investment in E-Filing. E-Filing’s business had not developed as fast as the Company had expected, and the Company believed that the most likely outcome was that the investment would eventually be sold. A sale at the carrying value would produce a capital loss, and at present, there is doubt about the Company’s ability to generate capital gains in the future. In the second quarter of 2004, the Company sold its interest in E-Filing, realizing a capital loss, and adjusted the deferred tax allowance relating to E-Filing to $1,864,610. See note 6.
In the fourth quarter of 2003, the Company recorded a deferred tax asset valuation allowance of $548,780 to offset the deferred tax asset the Company had recognized relating to its investment in eGS (see Note 6). eGS had incurred significant historical operating losses and the business had not developed as fast as the Company had
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expected. The Company currently believes that the most likely outcome is that the investment will eventually be sold. A sale at the carrying value would produce a capital loss, and at present, there is doubt about the Company’s ability to generate capital gains in the future.
In 2002, the Company recorded a deferred tax asset adjustment of approximately $1.5 million for compensation related to non-qualified stock options, which reduced additional paid-in capital (see Note 9).
In October 2004, the American Jobs Creation Act of 2004 was enacted into law. The new law contains provisions that could impact the Company. These provisions provide for, among other things, a special deduction from U.S. taxable income equal to a stipulated percentage of qualified income from domestic production activities (as defined) beginning in 2005. This provision is complex and subject to numerous limitations. The Company is still studying the new law, including the technical provisions related to the complex provision noted above. The effect on the Company of the new law, if any, has not yet been determined, in part because the Company has not definitively determined whether its operations qualify for the special deduction. If the Company determines it qualifies for the special deduction, the tax benefit of such special deduction would be recognized in the period earned.
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,
| |
|---|
| | | | 2002
| | 2003
| | 2004
|
|---|
| Effective federal and state income tax rate | | | | | 38.8 | % | | | 15.8 | % | | | 39.8 | % |
| Adjustment related to NIC Conquest | | | | | — | | | | 22.1 | | | | — | |
| Reduction of state NOL carryforwards | | | | | — | | | | (5.8 | ) | | | — | |
| Impairment of intangible assets | | | | | 4.8 | | | | — | | | | — | |
| Non-deductible stock compensation expense | | | | | 1.1 | | | | — | | | | — | |
| State income taxes | | | | | (1.4 | ) | | | (5.1 | ) | | | (4.5 | ) |
| Valuation allowance | | | | | (9.1 | ) | | | 9.4 | | | | (0.4 | ) |
| Other | | | | | 0.8 | | | | (1.4 | ) | | | 0.1 | |
| Statutory federal income tax rate | | | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % |
| 11. | | EMPLOYEE BENEFIT AND STOCK OPTION PLANS |
Defined Contribution 401(k) Profit Sharing Plan
The Company and its subsidiaries sponsor a defined contribution 401(k) profit sharing plan. In accordance with the plan, all full-time employees are eligible immediately upon employment. A discretionary match of up to 5% of an employee’s salary and a discretionary contribution may be made to the plan as determined by the Board of Directors. Expense related to Company matching contributions totaled approximately $276,000, $207,000 and $222,000 for the years ended December 31, 2002, 2003 and 2004, 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 commenced on April 1, 2002 and ended on March 31, 2003, with 48,731 shares being purchased. The third offering period commenced on April 1, 2003 and ended on March 31, 2004, with 80,325 being purchased. The fourth offering period commenced on April 1, 2004. The closing fair market
66
value of NIC common stock on the first day of the fourth offering period was $6.00 per share. Approximately 22,000 shares of NIC common stock are expected to be purchased in the fourth offering period.
Stock Option Plans
The Company has two formal stock option plans (the “NIC” plan and the “SDR” plan) to provide for the granting of either incentive stock options or non-qualified stock options to encourage certain employees of the Company and its subsidiaries, and certain directors of the Company, to participate in the ownership of the Company, and to provide additional incentive for such employees and directors to promote the success of its business through sharing the future growth of such business. The NIC plan was adopted in May 1998 and amended in November 1998, May 1999 and May 2004. 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 to five years after the grant date. At December 31, 2004, a total of 1,261,825 options were available for future grants under the NIC plan. 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, 2002, 2003 and 2004 is presented below:
| | | | 2002
| | 2003
| | 2004
| |
|---|
| | | | Shares
| | Weighted
Average
Exercise Price
| | Shares
| | Weighted
Average
Exercise Price
| | Shares
| | Weighted
Average
Exercise Price
|
|---|
| Outstanding at January 1 | | | | | 7,663,866 | | | $ | 5.36 | | | | 4,758,470 | | | $ | 5.95 | | | | 4,566,539 | | | $ | 3.98 | |
| Granted | | | | | 1,345,450 | | | $ | 1.81 | | | | 1,880,243 | | | $ | 3.45 | | | | 540,750 | | | $ | 5.07 | |
| Exercised | | | | | (1,915,094 | ) | | $ | 1.51 | | | | (574,595 | ) | | $ | 2.02 | | | | (505,378 | ) | | $ | 2.35 | |
| Expired | | | | | (1,221,181 | ) | | $ | 6.32 | | | | (973,210 | ) | | $ | 14.44 | | | | (159,806 | ) | | $ | 18.52 | |
| Canceled | | | | | (1,114,571 | ) | | $ | 4.08 | | | | (524,369 | ) | | $ | 2.69 | | | | (163,380 | ) | | $ | 3.12 | |
| Outstanding at December 31 | | | | | 4,758,470 | | | $ | 5.95 | | | | 4,566,539 | | | $ | 3.98 | | | | 4,278,725 | | | $ | 3.80 | |
| Exercisable at December 31 | | | | | 1,626,629 | | | $ | 9.92 | | | | 1,395,010 | | | $ | 5.52 | | | | 2,163,798 | | | $ | 3.76 | |
| Weighted average grant-date fair value of options granted during the year | | | | | | | | $ | 1.18 | | | | | | | $ | 2.24 | | | | | | | $ | 2.95 | |
In 2002, all options were granted with exercise prices equal to the market price of the Company’s common stock on the grant date. In 2003, the Company granted 1,633,200 options with exercise prices equal to the market price of the Company’s common stock on the grant date. The weighted average exercise price of such shares was $3.45 and the weighted average grant-date fair value was $2.29. Additionally, in 2003, the Company granted 247,043 options with exercise prices that exceeded the market price of the Company’s common stock on the grant date. The weighted average exercise price of such shares was $3.45 and the weighted average grant-date fair value was $1.93. In 2004, all options were granted with exercise prices equal to the market price of the Company’s common stock on the grant date.
67
The following table summarizes information about stock options outstanding under the Plan at December 31, 2004:
| | | | Options Outstanding
| | Options Exercisable
| |
|---|
Range of Exercise Price
| | | | Shares
Outstanding
| | Weighted
Average
Remaining
Contractual
Life
| | Weighted
Average
Exercise
Price
| | Shares
Outstanding
| | Weighted
Average
Exercise
Price
|
|---|
| $1.53–2.24 | | | | | 1,068,334 | | | | 1.1 | | | $ | 1.85 | | | | 941,338 | | | $ | 1.82 | |
| $2.30–3.40 | | | | | 1,471,613 | | | | 3.4 | | | $ | 3.03 | | | | 351,681 | | | $ | 3.01 | |
| $3.47–5.18 | | | | | 913,559 | | | | 2.3 | | | $ | 3.91 | | | | 457,084 | | | $ | 3.77 | |
| $5.46–8.19 | | | | | 611,200 | | | | 3.6 | | | $ | 6.56 | | | | 199,676 | | | $ | 7.02 | |
| $9.50–12.57 | | | | | 213,719 | | | | 0.4 | | | $ | 10.41 | | | | 213,719 | | | $ | 10.41 | |
| $19.32 | | | | | 300 | | | | 5.4 | | | $ | 19.32 | | | | 300 | | | $ | 19.32 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Including expense related to options granted prior to January 1, 2002 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 $1,306,569 of stock compensation expense related to common stock options for the year ended December 31, 2002. The Company recognized no stock compensation expense related to common stock options in 2003 and 2004.
| 12. | | RELATED PARTY TRANSACTIONS |
The Company rents an aircraft on an hourly basis from a company that is owned by two shareholders/directors of the Company at costs that the Company believes are reasonable compared to similar services provided by third parties. One of these directors is the current Chairman and Chief Executive Officer of the Company. In 2002, 2003 and 2004, payments made to this company totaled approximately $260,000, $565,000 and $399,000, respectively.
| 13. | | REPORTABLE SEGMENTS AND RELATED INFORMATION |
The Company’s two reportable segments consist of its Outsourced Portal businesses and Software & Services businesses. The Outsourced Portals segment includes the Company’s subsidiaries operating outsourced state and local government portals and the corporate divisions that support portal operations. The Software & Services segment includes the Company’s corporate filings business (NIC Conquest), ethics & elections filings business (NIC Technologies), commercial vehicle compliance business (IDT) and AOL division. Each of the Company’s Software & Services businesses is an operating segment and has been aggregated to form the Software & Services reportable segment. Unallocated corporate-level expenses are reported in the reconciliation of the segment totals to the related consolidated totals as “Other Reconciling Items.” There have been no significant intersegment transactions for the periods reported. The summary of significant accounting policies applies to all segments.
The measure of profitability by which management evaluates the performance of its segments and allocates resources to them is operating income (loss). Segment asset or other segment balance sheet information is not presented to the Company’s chief operating decision maker. Accordingly, the Company has not presented information relating to segment assets.
In the second quarter of 2002, the results of operations of NIC Commerce were classified as discontinued operations with information presented for all periods reflecting the new classification. For segment reporting purposes, NIC Commerce’s operations were previously reported in the eProcurement segment.
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The table below reflects summarized financial information for the Company’s reportable segments for the years ended December 31:
| | | | Outsourced
Portals
| | Software &
Services
| | Other Reconciling
Items
| | Consolidated Total
|
|---|
2002
| | | | | | | | | | | | | | | | | | |
| Revenues | | | | $ | 34,778,978 | | | $ | 12,766,432 | | | $ | — | | | $ | 47,545,410 | |
| Costs & expenses | | | | | 22,182,302 | | | | 16,242,182 | | | | 8,440,231 | | | | 46,864,715 | |
| Impairment loss | | | | | — | | | | 4,316,230 | | | | — | | | | 4,316,230 | |
| Stock compensation | | | | | — | | | | — | | | | 1,306,569 | | | | 1,306,569 | |
| Depreciation & amortization | | | | | 1,661,876 | | | | 1,146,755 | | | | 179,758 | | | | 2,988,389 | |
| Operating income (loss) | | | | $ | 10,934,800 | | | $ | (8,938,735 | ) | | $ | (9,926,558 | ) | | $ | (7,930,493 | ) |
| 2003
| | | | | | | | | | | | | | | | | | |
| Revenues | | | | $ | 40,209,000 | | | $ | 10,622,209 | | | $ | — | | | $ | 50,831,209 | |
| Costs & expenses | | | | | 24,146,551 | | | | 9,374,568 | | | | 8,189,028 | | | | 41,710,147 | |
| Depreciation & amortization | | | | | 1,407,626 | | | | 229,819 | | | | 145,719 | | | | 1,783,164 | |
| Operating income (loss) | | | | $ | 14,654,823 | | | $ | 1,017,822 | | | $ | (8,334,747 | ) | | $ | 7,337,898 | |
| 2004
| | | | | | | | | | | | | | | | | | |
| Revenues | | | | $ | 48,543,779 | | | $ | 7,217,975 | | | $ | — | | | $ | 55,761,754 | |
| Costs & expenses | | | | | 28,025,072 | | | | 6,013,539 | | | | 8,428,359 | | | | 42,466,970 | |
| Depreciation & amortization | | | | | 1,195,485 | | | | 215,001 | | | | 84,766 | | | | 1,495,252 | |
| Operating income (loss) | | | | $ | 19,323,222 | | | $ | 989,435 | | | $ | (8,513,125 | ) | | $ | 11,799,532 | |
The following is a reconciliation of total segment operating income (loss) to total consolidated income (loss) from continuing operations before income taxes for the years ended December 31:
| | | | 2002
| | 2003
| | 2004
|
|---|
| Total operating income (loss) for reportable segments | | | | $ | (7,930,493 | ) | | $ | 7,337,898 | | | $ | 11,799,532 | |
| Interest income | | | | | 179,829 | | | | 100,215 | | | | 116,037 | |
| Interest expense | | | | | (49,193 | ) | | | (20,927 | ) | | | (10,852 | ) |
| Equity in net loss of affiliates | | | | | (1,234,938 | ) | | | 106,716 | | | | (109,061 | ) |
| Other income (expense), net | | | | | (71,775 | ) | | | (10,842 | ) | | | 13,906 | |
Income (loss) from continuing operations
before income taxes | | | | $ | (9,106,570 | ) | | $ | 7,513,060 | | | $ | 11,809,562 | |
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 64%, 62% and 63% of the Company’s portal revenues in 2002, 2003 and 2004, respectively, and approximately 47%, 49% and 55% of the Company’s total revenues in 2002, 2003 and 2004, respectively.
A primary source of revenue is derived from data resellers, who use the Company’s government portals to access DMV records for sale to the auto insurance industry. For the year ended December 31, 2002, one of these data resellers accounted for approximately 48% of the Company’s portal revenues and 35% of the Company’s total revenues. For the year ended December 31, 2003, one of these data resellers accounted for approximately 47% of the Company’s portal revenues and 37% of the Company’s total revenues. For the year ended December 31, 2004, one of these data resellers accounted for approximately 46% of the Company’s portal revenues and 40% of the Company’s total revenues. At December 31, 2004, this one data reseller accounted for approximately 50% of the Company’s accounts receivable.
For the year ended December 31, 2002, revenues from the Company’s business filings contract with the California Secretary of State accounted for approximately 55% of the Company’s software & services revenues and 15% of the Company’s total revenues. For the year ended December 31, 2003, revenues from this contract accounted for approximately 68% of the Company’s software & services revenues and 14% of the Company’s total revenues. For the year ended December 31, 2004, revenues from this contract accounted for approximately 56% of the Company’s software & services revenues and 7% of the Company’s total revenues.
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| 14. | | 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 items affecting the quarterly results for the periods presented, refer to Notes 2, 4, 6, and 10 above.
2002
| | | | Three Months Ended
| |
|---|
| | | | March 31,
2002
| | June 30,
2002
| | September 30,
2002
| | December 31,
2002
| | Year Ended
December 31,
2002
|
|---|
Revenues:
| | | | | | | | | | | | | | | | | | | | | | |
| Portal revenues | | | | $ | 8,485,907 | | | $ | 9,002,070 | | | $ | 8,862,950 | | | $ | 8,428,051 | | | $ | 34,778,978 | |
| Software & 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 & amortization | | | | | 4,958,355 | | | | 4,690,127 | | | | 5,065,111 | | | | 5,141,727 | | | | 19,855,320 | |
| Cost of software & services revenues, exclusive of depreciation & amortization | | | | | 2,334,392 | | | | 7,677,832 | | | | 2,125,326 | | | | 1,549,746 | | | | 13,687,296 | |
| Selling & 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 & 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 | | | | | (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 | | | | | (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 diluted 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 | ) | | $ | — | | | $ | (0.03 | ) |
| 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 | |
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2003
| | | | Three Months Ended
| |
|---|
| | | | March 31,
2003
| | June 30,
2003
| | September 30,
2003
| | December 31,
2003
| | Year Ended
December 31,
2003
|
|---|
Revenues:
| | | | | | | | | | | | | | | | | | | | | | |
| Portal revenues | | | | $ | 9,789,726 | | | $ | 10,149,381 | | | $ | 9,941,519 | | | $ | 10,328,374 | | | $ | 40,209,000 | |
| Software & services revenues | | | | | 2,729,696 | | | | 2,756,739 | | | | 2,930,874 | | | | 2,204,900 | | | | 10,622,209 | |
| Total revenues | | | | | 12,519,422 | | | | 12,906,120 | | | | 12,872,393 | | | | 12,533,274 | | | | 50,831,209 | |
Operating expenses:
| | | | | | | | | | | | | | | | | | | | | | |
| Cost of portal revenues, exclusive of depreciation & amortization | | | | | 5,079,740 | | | | 5,285,988 | | | | 5,415,040 | | | | 5,805,222 | | | | 21,585,990 | |
| Cost of software & services revenues, exclusive of depreciation & amortization | | | | | 2,143,536 | | | | 2,241,781 | | | | 2,276,224 | | | | 1,781,230 | | | | 8,442,771 | |
| Selling & administrative | | | | | 3,120,430 | | | | 2,936,847 | | | | 2,852,553 | | | | 2,771,556 | | | | 11,681,386 | |
| Depreciation & amortization | | | | | 491,985 | | | | 449,771 | | | | 471,238 | | | | 370,170 | | | | 1,783,164 | |
| Total operating expenses | | | | | 10,835,691 | | | | 10,914,387 | | | | 11,015,055 | | | | 10,728,178 | | | | 43,493,311 | |
| Operating income | | | | | 1,683,731 | | | | 1,991,733 | | | | 1,857,338 | | | | 1,805,096 | | | | 7,337,898 | |
Other income (expense):
| | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | | | 28,782 | | | | 29,979 | | | | 21,198 | | | | 20,256 | | | | 100,215 | |
| Interest expense | | | | | (5,222 | ) | | | (4,257 | ) | | | (5,977 | ) | | | (5,471 | ) | | | (20,927 | ) |
| Equity in net loss of affiliates | | | | | (60,000 | ) | | | 261,450 | | | | (40,734 | ) | | | (54,000 | ) | | | 106,716 | |
| Other income (expense), net | | | | | 1,002 | | | | 424 | | | | (12,437 | ) | | | 169 | | | | (10,842 | ) |
| Total other income (expense) | | | | | (35,438 | ) | | | 287,596 | | | | (37,950 | ) | | | (39,046 | ) | | | 175,162 | |
| Income before taxes | | | | | 1,648,293 | | | | 2,279,329 | | | | 1,819,388 | | | | 1,766,050 | | | | 7,513,060 | |
| Income tax expense (benefit) * | | | | | 659,321 | | | | 922,844 | | | | 736,961 | | | | (1,133,973 | ) | | | 1,185,153 | |
| Net income | | | | $ | 988,972 | | | $ | 1,356,485 | | | $ | 1,082,427 | | | $ | 2,900,023 | | | $ | 6,327,907 | |
| Basic and diluted net income per share | | | | $ | 0.02 | | | $ | 0.02 | | | $ | 0.02 | | | $ | 0.05 | | | $ | 0.11 | |
Weighted average shares outstanding:
| | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | | | 58,134,548 | | | | 58,233,537 | | | | 58,356,861 | | | | 58,592,905 | | | | 58,330,793 | |
| Diluted | | | | | 58,168,711 | | | | 58,653,630 | | | | 59,402,423 | | | | 60,847,076 | | | | 59,269,291 | |
| * | | The income tax benefit in the fourth quarter of 2003 was the result of adjustments recorded to deferred taxes, which increased net income by $1,849,000 and basic and diluted net income per share by $0.03. See Note 10. |
71
2004
| | | | Three Months Ended
| | Year Ended
| |
|---|
| | | | March 31,
2004
| | June 30,
2004
| | September 30,
2004
| | December 31,
2004
| | December 31,
2004
|
|---|
Revenues:
| | | | | | | | | | | | | | | | | | | | | | |
| Portal revenues | | | | $ | 12,231,058 | | | $ | 12,254,642 | | | $ | 11,877,593 | | | $ | 12,180,486 | | | $ | 48,543,779 | |
| Software & services revenues | | | | | 2,188,401 | | | | 2,082,451 | | | | 1,549,748 | | | | 1,397,375 | | | | 7,217,975 | |
| Total revenues | | | | | 14,419,459 | | | | 14,337,093 | | | | 13,427,341 | | | | 13,577,861 | | | | 55,761,754 | |
Operating expenses:
| | | | | | | | | | | | | | | | | | | | | | |
| Cost of portal revenues, exclusive of depreciation & amortization | | | | | 5,852,605 | | | | 6,189,219 | | | | 6,266,511 | | | | 6,557,811 | | | | 24,866,146 | |
| Cost of software & services revenues, exclusive of depreciation & amortization | | | | | 2,080,284 | | | | 1,648,960 | | | | 719,918 | | | | 1,134,086 | | | | 5,583,248 | |
| Selling & administrative | | | | | 3,232,196 | | | | 2,944,504 | | | | 3,052,580 | | | | 2,788,296 | | | | 12,017,576 | |
| Depreciation & amortization | | | | | 388,525 | | | | 380,202 | | | | 361,134 | | | | 365,391 | | | | 1,495,252 | |
| Total operating expenses | | | | | 11,553,610 | | | | 11,162,885 | | | | 10,400,143 | | | | 10,845,584 | | | | 43,962,222 | |
| Operating income | | | | | 2,865,849 | | | | 3,174,208 | | | | 3,027,198 | | | | 2,732,277 | | | | 11,799,532 | |
Other income (expense):
| | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | | | 21,394 | | | | 22,893 | | | | 30,903 | | | | 40,847 | | | | 116,037 | |
| Interest expense | | | | | (4,875 | ) | | | (4,386 | ) | | | (1,591 | ) | | | — | | | | (10,852 | ) |
| Equity in net loss of affiliates | | | | | (69,497 | ) | | | (39,564 | ) | | | — | | | | — | | | | (109,061 | ) |
| Other income (expense), net | | | | | — | | | | — | | | | 13,906 | | | | — | | | | 13,906 | |
| Total other income (expense) | | | | | (52,978 | ) | | | (21,057 | ) | | | 43,218 | | | | 40,847 | | | | 10,030 | |
| Income before taxes | | | | | 2,812,871 | | | | 3,153,151 | | | | 3,070,416 | | | | 2,773,124 | | | | 11,809,562 | |
| Income tax expense | | | | | 1,210,998 | | | | 1,327,223 | | | | 1,121,557 | | | | 1,045,123 | | | | 4,704,901 | |
| Net income | | | | $ | 1,601,873 | | | $ | 1,825,928 | | | $ | 1,948,859 | | | $ | 1,728,001 | | | $ | 7,104,661 | |
| Basic and diluted net income per share | | | | $ | 0.03 | | | $ | 0.03 | | | $ | 0.03 | | | $ | 0.03 | | | $ | 0.12 | |
Weighted average shares outstanding:
| | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | | | 58,744,048 | | | | 58,870,499 | | | | 59,065,376 | | | | 59,269,962 | | | | 58,988,456 | |
| Diluted | | | | | 61,016,219 | | | | 60,884,362 | | | | 60,952,430 | | | | 60,652,227 | | | | 60,877,294 | |
72
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of NIC Inc.:
We have completed an integrated audit of NIC Inc.’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedules
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a) present fairly, in all material respects, the financial position of NIC Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements 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.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established inInternal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
73
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
February 28, 2005
74
| ITEM 9. | | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | | CONTROLS AND PROCEDURES |
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures — The Company maintains a set of disclosure controls and procedures designed to ensure that material information required to be disclosed in its filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K.
Management’s Report on Internal Control Over Financial Reporting — Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework inInternal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2004. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| ITEM 9B. | | OTHER INFORMATION |
None.
75
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 captions “Board of Directors” and “Executive Officers” in the Company’s proxy statement related to its 2005 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, 2004:
Plan category
| | | | Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
| | Weighted average
exercise price of
outstanding options,
warrants and rights
| | Number of
securities
available for
future issuance
|
|---|
| Equity compensation plans approved by security holders | | | | | 4,249,048 | | | $ | 3.81 | | | | 1,261,825 | |
| Equity compensation plans not approved by security holders (1) | | | | | 29,677 | | | $ | 1.85 | | | | 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’s 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.
| ITEM 14. | | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this item is incorporated herein by reference to “Independent Public Accountants” 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.
76
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 | | | | | 42 | |
| Consolidated Statements of Operations | | | | | 43 | |
| Consolidated Statements of Changes in Shareholders’ Equity | | | | | 44 | |
| Consolidated Statements of Cash Flows | | | | | 45 | |
| Notes to Consolidated Financial Statements | | | | | 47 | |
| Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm | | | | | 73 | |
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) |
| 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) |
77
Exhibit
Number
| | | | Description
|
|---|
| 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) |
| 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) |
78
Exhibit
Number
| | | | Description
|
|---|
| 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) |
| 10.49 | | | | Employment agreement between the Registrant and Richard L. Brown, dated March 1, 1999(9) |
| 21.1 | | | | Subsidiaries of the registrant |
| 23.1 | | | | Consent of PricewaterhouseCoopers LLP, Independent Accountants |
| 31.1 | | | | Certification of Chairman of the Board and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | | | | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 | | | | Section 906 Certifications of Chairman of the Board and Chief Executive Officer and Chief Financial Officer furnished in accordance with Securities Act Release 33-8212 |
| (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 |
| (9) | | Incorporated by reference to Form 10-K filed with the SEC on March 12, 2004 |
The registrant has filed the following reports on Form 8-K since September 30, 2004:
A Report on Form 8-K was filed with the Securities and Exchange Commission on October 1, 2004, with attached press release of the Company dated October 1, 2004, announcing that it will hold a conference call with analysts and investors on Monday, October 4, 2004 at 9:00 a.m. (EDT) to comment on the state of Florida’s decision to terminate all enterprise IT outsourcing contracts.
A Report on Form 8-K was filed with the Securities and Exchange Commission on October 28, 2004, with attached press release of the Company dated October 28, 2004, announcing third quarter operating results for fiscal 2004.
A Report on Form 8-K was filed with the Securities and Exchange Commission on January 27, 2005, with attached press release of the Company dated January 27, 2005, announcing 2004 fourth quarter and fiscal 2004 operating results.
A Report on Form 8-K was filed with the Securities and Exchange Commission on January 28, 2005, with attached press release of the Company dated January 28, 2005, announcing that the trustees of the National Information Consortium Voting Trust have distributed ten percent of the NIC shares held by the trust to its beneficial holders, seven of which are affiliates of the Company.
79
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 4, 2005.
NIC INC.
By: /s/ 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
|
|---|
| /s/ Jeffery S. Fraser | | | | Chairman and Chief Executive Officer
(Principal Executive Officer) | | March 4, 2005 |
| /s/ Eric J. Bur | | | | Chief Financial Officer
(Principal Financial Officer) | | March 4, 2005 |
| /s/ Stephen M. Kovzan | | | | Vice President, Financial Operations
Chief Accounting Officer
(Principal Accounting Officer) | | March 4, 2005 |
| /s/ John L. Bunce, Jr. | | | | Director | | March 4, 2005 |
/s/ Art N. Burtscher | | | | Director | | March 4, 2005 |
| /s/ Daniel J. Evans | | | | Director | | March 4, 2005 |
| /s/ Ross C Hartley | | | | Director | | March 4, 2005 |
/s/ Pete Wilson | | | | Director | | March 4, 2005 |
80
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary
| | | | Jurisdiction of
Incorporation
|
|---|
| | 1. NICUSA, Inc.* | | | | Kansas, U.S. |
| 2. Kansas Information Consortium, Inc.** | | | | Kansas, U.S. |
| 3. Interactive, LLC** | | | | Indiana, U.S. |
| 4. Arkansas Information Consortium, LLC** | | | | Arkansas, U.S. |
| 5. Nebraska Interactive, LLC** | | | | Nebraska, U.S. |
| 6. Virginia Interactive, LLC** | | | | Virginia, U.S. |
| 7. Iowa Interactive, LLC** | | | | Iowa, U.S. |
| 8. Montana Interactive, LLC** | | | | Montana, U.S. |
| 9. New England Interactive, LLC** | | | | Maine, U.S. |
| 10. Utah Interactive, LLC** | | | | Utah, U.S. |
| 11. Hawaii Information Consortium, LLC** | | | | Hawaii, U.S. |
| 12. Idaho Information Consortium, LLC** | | | | Idaho, U.S. |
| 13. NIC Commerce, LLC** | | | | Colorado, U.S. |
| 14. NIC Conquest, LLC** | | | | Colorado, U.S. |
| 15. National Information Consortium Technologies, LLC** | | | | California, U.S. |
| 16. Intelligent Decision Technologies, LLC** | | | | Colorado, U.S. |
| 17. National Online Registries, LLC** | | | | Colorado, U.S. |
| 18. Bay Area Interactive, LLC** | | | | California, U.S. |
| 19. Florida Information Consortium, Inc.** | | | | Florida, U.S. |
| 20. Michigan Local Interactive, LLC** | | | | Michigan, U.S. |
| 21. Texas Local Interactive, LLC** | | | | Texas, U.S. |
| 22. Alabama Interactive, LLC** | | | | Alabama, U.S. |
| 23. NIC European Business Limited* | | | | London, England |
| 24. Kentucky Interactive, LLC** | | | | Kentucky, U.S. |
| 25. NIC Solution, LLC** | | | | Colorado, U.S. |
| 26. National Retail Registries, LLC** | | | | Colorado, U.S. |
| * | | Wholly-owned subsidiary of NIC Inc. |
| ** | | Wholly-owned subsidiary of NICUSA, Inc. |
81
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-83171 and 333-37000) of NIC Inc. of our report dated February 28, 2005 relating to the consolidated financial statements, which appears in this Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
March 4, 2005
82
Exhibit 31.1
CERTIFICATION
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 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 report; |
| 3. | | Based on my knowledge, the financial statements, and other financial information included in this 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 report; |
| 4. | | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
| a) | | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; |
| b) | | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| c) | | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a) | | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 4, 2005
/s/ Jeffery S. Fraser
Jeffery S. Fraser
Chairman of the Board and
Chief Executive Officer
83
Exhibit 31.2
CERTIFICATION
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 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 report; |
| 3. | | Based on my knowledge, the financial statements, and other financial information included in this 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 report; |
| 4. | | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
| a) | | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; |
| b) | | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| c) | | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a) | | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 4, 2005
/s/ Eric J. Bur
Eric J. Bur
Chief Financial Officer
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Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned Chairman of the Board and Chief Executive Officer and Chief Financial Officer of NIC Inc. (the “Company”) each hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Annual Report on Form 10-K of the Company for the year ended December 31, 2004 (the “Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 4, 2005
/s/ Jeffery S. Fraser
Jeffery S. Fraser
Chairman of the Board and
Chief Executive Officer
/s/ Eric J. Bur
Eric J. Bur
Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
This certification “accompanies” the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K, irrespective of any general incorporation language contained in such filing).
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