FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2000
Commission file number 000-26621
NATIONAL INFORMATION CONSORTIUM, INC.
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(Exact name of registrant as specified in its charter)
COLORADO 52-2077581
- -------- ----------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
12 CORPORATE WOODS, 10975 BENSON STREET, SUITE 390
OVERLAND PARK, KANSAS 66210
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(Address of principal executive offices) (Zip Code)
(877) 234-3468
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of the registrant's common stock as of May
8, 2000 was 53,337,004.
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
000'S
MARCH 31, DECEMBER 31,
2000 1999
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,582 $ 9,527
Marketable securities 67,490 82,481
Trade accounts receivable 7,726 6,010
Deferred income taxes 528 158
Prepaid expenses 500 279
Other current assets 433 614
Notes receivable 2,000 -
----------------- -----------------
Total current assets 83,259 99,069
Property and equipment, net 3,897 2,998
Deferred income taxes 1,357 694
Other assets 477 254
Investments in affiliates 10,527 -
Intangible assets, net 32,968 30,646
----------------- -----------------
Total assets $ 132,485 $ 133,661
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,179 $ 3,805
Accrued expenses 1,167 873
Income taxes payable 115 84
Capital lease obligations - current portion 187 190
Notes payable - current portion - 50
Application development contracts 1,390 232
Other current liabilities 309 120
----------------- -----------------
Total current liabilities 7,347 5,354
Capital lease obligation - long-term portion 179 218
----------------- -----------------
Total liabilities 7,526 5,572
----------------- -----------------
Commitments and contingencies (Notes 7 and 8) - -
Minority interest 799 -
----------------- -----------------
Shareholders' equity:
Common stock, no par, 200,000,000 shares authorized
53,319,642 and 53,165,370 shares issued and
outstanding - -
Additional paid-in capital 149,425 149,036
Accumulated deficit (21,263) (16,557)
Accumulated other comprehensive income 1 2
----------------- -----------------
128,163 132,481
Less notes and stock subscriptions receivable (30) (30)
Less deferred compensation expense (3,973) (4,362)
----------------- -----------------
Total shareholders' equity 124,160 128,089
----------------- -----------------
Total liabilities and shareholders' equity $ 132,485 $ 133,661
================= =================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
1
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(000'S EXCEPT FOR PER SHARE AMOUNTS)
THREE-MONTHS ENDED
MARCH 31,
---------------------------------------
2000 1999
----------------- -----------------
Revenues $ 18,914 $ 11,455
Cost of revenues 13,420 8,604
----------------- -----------------
Gross profit 5,494 2,851
----------------- -----------------
Operating expenses:
Service development and operations 3,396 935
Selling, general and administrative 4,992 1,517
Stock compensation 517 1,699
Depreciation and amortization 4,586 2,002
----------------- -----------------
Total operating expenses 13,491 6,153
----------------- -----------------
Operating loss (7,997) (3,302)
----------------- -----------------
Other income (expense):
Interest expense (11) (37)
Other income, net 1,202 17
----------------- -----------------
Total other income (expense) 1,191 (20)
----------------- -----------------
Loss before income taxes and minority interest (6,806) (3,322)
Income tax benefit (2,008) (23)
----------------- -----------------
Loss before minority interest (4,798) (3,299)
Minority interest (93) -
----------------- -----------------
Net loss $ (4,705) $ (3,299)
================= =================
Net loss per share:
Basic and diluted $ (0.09) $ (0.08)
================= =================
Weighted average shares outstanding 53,260 42,243
================= =================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
2
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
000'S
THREE-MONTHS ENDED
MARCH 31,
----------------------------------------
2000 1999
----------------- ------------------
Cash flows from operating activities:
Net loss $ (4,705) $ (3,299)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 4,586 2,002
Compensation expense recognized related to sale of common stock - 1,489
Compensation expense recognized related to stock options 517 210
Loss on disposals of property and equipment 2 -
Accretion of discount on marketable securities (1,080) -
Application development contracts 1,158 (82)
Deferred income taxes (2,072) (24)
Minority interest (93) -
Changes in operating assets and liabilities, net of effects of
acquisitions:
(Increase) in trade accounts receivable (1,714) (787)
(Increase) in prepaid expenses (221) (56)
(Increase) decrease in other current assets 201 (188)
(Increase) decrease in other assets (223) 4
Increase in accounts payable 364 379
Increase (decrease) in income taxes payable 31 (46)
Increase in accrued expenses 294 34
Increase (decrease) in other current liabilities 189 (2)
----------------- ------------------
Net cash used in operating activities (2,766) (366)
----------------- ------------------
Cash flows from investing activities:
Purchases of property and equipment (1,038) (10)
Proceeds from disposals of property and equipment 1 -
Capitalized software development costs (396) -
Purchases of marketable securities (170,096) -
Maturities of marketable securities 186,167 -
Cash outlay in exchange for notes receivable (2,000) -
Acquisition of business (4,518) -
Cash of acquired business 87 -
Investments in affiliates (10,527) -
----------------- ------------------
Net cash used in investing activities (2,320) (10)
----------------- ------------------
Cash flows from financing activities:
Proceeds from bank lines of credit - 70
Payments on bank lines of credit - (254)
Payments on notes payable (50) (50)
Payments on capital lease obligations (50) (60)
Proceeds from issuance of common stock to employees - 475
Proceeds from exercise of employee stock options 241 -
----------------- ------------------
Net cash provided by financing activities 141 181
----------------- ------------------
Net decrease cash and cash equivalents (4,945) (195)
Cash and cash equivalents, beginning of year 9,527 1,310
----------------- ------------------
Cash and cash equivalents, end of period $ 4,582 $1,115
================= ==================
Other cash flow information:
Interest Paid $ 11 $ 37
================= ==================
Income taxes paid $ 85 $ -
================= ==================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
National Information Consortium, Inc. ("NIC" or the "Company") has prepared
the consolidated interim financial statements included herein without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and
regulations. In management's opinion, the consolidated interim financial
statements reflect all adjustments (which include only normal recurring
adjustments, except as disclosed) necessary to present fairly the results of
operations for the interim periods presented. These financial statements and
notes should be read in conjunction with the consolidated financial
statements and related notes included in the Company's Annual Report on Form
10-K, filed with the SEC on March 10, 2000, and Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in this Form 10-Q.
1. GOVERNMENT CONTRACT WITH STATE OF HAWAII
On January 3, 2000, the Company commenced a three-year contract, with two
two-year renewal periods, with the State of Hawaii to develop and operate
Hawaii's government portal, Access Hawaii, which will provide electronic
transactions and expanded access to public information. To manage the
contract, the Company has created a new subsidiary, Hawaii Information
Consortium, Inc. ("HIC"), a Hawaii corporation, which is based in Hawaii's
capital city, Honolulu. Under the contract, HIC will fund initial investment
and ongoing operational costs. Upon completion of the initial three-year term
of the contract or upon termination of the contract, the State of Hawaii will
be entitled to a perpetual for use only license for the applications HIC
developed, with no additional compensation due to HIC. In connection with the
revenues generated under the contract, HIC is entitled to retain any revenues
remaining after payment of statutory fees for retrieval of public information
and all network operating expenses. The Company anticipates Access Hawaii
will be operational in the second or third quarter of 2000.
2. BUSINESS COMBINATION WITH CONQUEST SOFTWORKS, LLC
On January 14, 2000, NIC merged its Application Services Division with
Conquest Softworks, LLC ("Conquest"). Conquest, based in Durango, Colorado,
is a provider of software applications and services for electronic filings
and document management solutions for government. NIC paid $6.5 million in
cash and contributed the net assets of its Application Services Division for
a 65% ownership in the new company, which will be referred to as NIC
Conquest. The merger has been accounted for as a purchase and the results of
NIC Conquest's operations are included in the Company's consolidated
statements of operations from the date of acquisition. Conquest's 1999
results of operations as a stand-alone business were not material in relation
to the consolidated financial statements of NIC.
The total purchase price of approximately $6.9 million was allocated to NIC's
share of tangible and identifiable intangible assets acquired and liabilities
assumed on the basis of their fair values on the closing date. The fair value
of net tangible assets acquired, consisting primarily of cash, accounts
receivable, and property and equipment, totaled approximately $1.7 million
and approximated historical carrying
4
amounts. The sole identifiable intangible asset relates to Conquest's Uniform
Commercial Code web browser software application. This asset was valued at
approximately $2.7 million based on the net present value of projected future
net cash flows from the application over its estimated three-year life
discounted by 15%. The remainder of the purchase price was allocated to
goodwill. The goodwill is being amortized on a straight-line basis over three
years.
At any time after the first anniversary of the merger or upon a change in
control of NIC (defined as a change in beneficial ownership of 40% or more of
the issued and outstanding voting securities of NIC, excluding any public
offering of equity securities of NIC), each of the non-NIC shareholders shall
have the right to put to NIC all, but not less than all, of their shares at a
price equal to a formula exercise price. In addition, NIC-Conquest may not
remove any non-NIC member from the board of directors, authorize or issue any
new equity shares senior to the common shares currently issued, amend its
articles of incorporation to alter the rights, preferences or privileges of
the shares held by non-NIC shareholders disproportionate to the shares held
by NIC, increase the authorized number of members of the board of directors,
effect a change in control in NIC-Conquest (defined as 1) the filing of a
registration statement with the SEC for the purposes of registering shares
under the Securities Act of 1933; 2) approval by the board of directors of
planning to make a public offering, to merge or to be acquired; or 3) the
receipt of any bona fide proposal or inquiry regarding the merger or
acquisition of the company or substantially all of its assets), or sell,
spin-off or otherwise distribute any business or subsidiary of the company on
a basis other than pro rata to all the shareholders without the vote or
written consent of at least one of the board members representing the
minority shareholders.
On May 1, 2000, NIC acquired an additional 6.5% ownership interest in NIC
Conquest from NIC Conquest's chief executive officer in exchange for 158,941
unregistered shares of NIC common stock. The exchange ratio was determined
based on the closing market price of NIC's common stock on the last trading
day preceding the May 1, 2000 exchange agreement. The NIC shares issued will
be delivered to an escrow account and are subject to vesting in equal annual
installments over a three year period, beginning one year from the date of
the exchange agreement. The fair market value of the NIC shares issued in
the exchange was approximately $2 million.
3. FORMATION OF LIMITED LIABILITY COMPANY WITH BANK OF AMERICA On March 3,
2000, the Company's eFed division, which has been renamed NIC Commerce,
created a jointly owned limited liability company with Bank of America
Corporation, through its subsidiary Bank of America, N.A. (USA), to offer
state and local governments a Web-based business-to-business procurement,
payment and reconciliation service. The two companies will share equally the
revenue of the limited liability company generated from transaction fees,
sales rebates from suppliers, and promotional consideration from suppliers.
NIC Commerce will primarily be responsible for providing the electronic
purchasing platform based on the NIC Commerce software, end user interface
customization, hardware and software support and maintenance services to Bank
of America and state and municipal clients, and other technical services in
support of the business endeavors of the limited liability company. In
addition, Bank of America will have the opportunity to become a strategic
investor in NIC upon the achievement of certain revenue performance criteria
by the new company. Warrants to purchase NIC stock of 420,000 up to 1,400,000
shares will become exercisable upon achieving certain cumulative revenue
targets by December 31, 2004. These warrants are priced in two equally sized
series at $34.44 and $44.77 per share. Once exercisable, Bank of America will
have the longer of December 31, 2005, or twenty-four months to execute the
warrants on the shares.
5
4. ACQUISITION OF SDR TECHNOLOGIES On May 11, 2000, NIC filed an agreement of
merger with the Secretary of State of the State of California (the
"Certificate of Merger") to acquire SDR Technologies, Inc., a California
corporation ("SDR"), for approximately 1,912,000 shares of NIC common stock
and options to purchase approximately 230,000 shares of NIC common stock.
The SDR shareholders have approved the merger, and the Company expects the
Certificate of Merger to be approved in the near future. SDR, a provider of
Internet-based applications for governments, designs and develops online
election and ethics filing systems for federal, state and local government
agencies. SDR has also developed a number of Internet-based applications for
tax filings, business filings, professional licensing, and automobile
registrations. SDR will be renamed NIC Technologies. Pursuant to the
Amended and Restated Agreement and Plan of Reorganization and Merger, dated
May 5, 2000 (the "Merger Agreement"), upon the effectiveness of the
Certificate of Merger, (i) each outstanding share of common stock of SDR
("SDR common stock"), and each outstanding share of preferred stock of SDR
will be converted into 0.59977 shares of NIC common stock, and (ii) each
outstanding option to purchase one share of SDR common stock will be
converted into an option to purchase 0.59977 shares of NIC common stock at an
exercise price specified in the Merger Agreement. Ten percent of the total
number of shares of NIC common stock to be issued pursuant to the Merger
Agreement will be held in escrow as collateral for the indemnification
obligations of the selling shareholders under the Merger Agreement. The
shares of NIC common stock placed in escrow will be held and released in
accordance with the terms and conditions of an Indemnification Escrow
Agreement. Subject to certain limitations, one half of the escrow shares
will be delivered to SDR shareholders nine months after the date of closing
and the remaining escrow shares will be delivered to the SDR shareholders 18
months after the date of closing.
The acquisition will be accounted for as a purchase. The purchase price per
share was determined to be $17.21, which was based on the average closing
market price of NIC's common stock three days before, the day of, and three
days after April 24, 2000, the date on which the parties to the Merger
Agreement agreed to the 0.59977 exchange ratio. Accordingly, the preliminary
purchase price of approximately $38.1 million will be allocated to the assets
acquired and liabilities assumed based upon their estimated fair values at
the date of acquisition. The transaction was structured to be tax free to
the SDR shareholders, and the amortization of the intangible assets arising
from the application of purchase accounting will not be deductible for income
tax purposes.
SDR issued two $1 million convertible promissory notes to NIC, dated January
28, 2000 and March 27, 2000, in exchange for $2 million in cash. On April
21, 2000 NIC elected to convert the promissory notes into 67,476 shares of
SDR common stock, which will automatically be cancelled and retired upon the
effectiveness of the Certificate of Merger. Pursuant to the Merger
Agreement, the principal amount of the January 28, 2000 promissory note
(representing approximately 20,000 NIC common shares) will be deducted from
the NIC common stock held in escrow. The principal amount of the March 27,
2000 promissory note will be additional purchase price for accounting
purposes. Additionally, 10,000 SDR common shares (representing approximately
6,000 NIC common shares) issued on May 11, 2000 upon conversion of an SDR
convertible promissory note will also be deducted from the NIC common stock
held in escrow.
5. INVESTMENTS IN AFFILIATES
On March 23, 2000, NIC completed a $5 million cash investment in
E-Filing.com, Inc. ("E-Filing.com"), a provider of online filing applications
for legal services, giving NIC ownership of 20% of E-Filing.com, a non-pubic
company, through 2,433,800 shares of Series A voting Preferred Stock. The
investment will be accounted for under the equity method. The difference
between the amount of NIC's investment ($5 million) and underlying equity
(approximately $1.4 million) in E-Filing.com has been allocated to goodwill
and will be amortized over a period expected to approximate 2 years.
6
On March 24, NIC completed a $5.5 cash investment in Tidemark Computer
Systems, Inc. ("Tidemark"), a provider of online permit applications for
local government, giving NIC ownership of approximately 27% of Tidemark, a
non-public company, through 4,530,396 shares of Series B voting Preferred
Stock. The investment will be accounted for under the equity method. The
difference between the amount of NIC's investment ($5.5 million) and
underlying equity (approximately $2.3 million) in Tidemark has been allocated
to goodwill and will be amortized over a period expected to approximate 2
years.
The Company uses the equity method to account for equity investments in
affiliates (generally 20 to 50 percent owned) when NIC management can exert
significant influence over the operations of the investee.
6. SEGMENTS AND RELATED INFORMATION
The Company's two reportable segments consist of its state and local
government business and NIC Commerce. The state and local government business
includes the Company's subsidiaries operating in the states of Arkansas,
Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Maine, Nebraska, Utah, and
Virginia and NIC Conquest. Unallocated corporate-level expenses are reported
in the reconciliation of the segment totals to the related consolidated
totals as "Other Reconciling Items." Management evaluates the performance of
its segments and allocates resources to them based on gross profit and
earnings before interest, taxes, depreciation, amortization and other
non-cash charges related to stock compensation and application development
contracts ("EBITDA"). There have been no intersegment transactions for the
periods reported. The table below reflects summarized financial information
concerning the Company's reportable segments for the three months ended March
31 (in thousands):
STATE AND
LOCAL OTHER
GOVERNMENT NIC RECONCILING CONSOLIDATED
BUSINESS COMMERCE ITEMS TOTAL
---------------- ---------------- ------------------ -------------------
2000
Revenues ........... $ 17,501 $ 1,413 $ - $ 18,914
Cost of revenues ... 13,086 334 - 13,420
---------------- ---------------- -------------------
Gross profit ....... 4,415 1,079 - 5,494
EBITDA ............. 1,013 (221) (2,336) (1,544)
1999
Revenues ........... 11,455 - - 11,455
Cost of revenues ... 8,604 - - 8,604
---------------- -------------------
Gross profit ....... 2,851 - - 2,851
EBITDA ............. 733 - (334) 399
7
The following is a reconciliation of total segment EBITDA to total
consolidated loss before income taxes for the three months ended March 31 (in
thousands):
2000 1999
-------------------- ------------------
Total EBITDA for reportable segments........................ $ $(1,544) $ $399
Application development contracts........................... (1,350) -
Stock compensation.......................................... (517) (1,699)
Depreciation and amortization............................... (4,586) (2,002)
Other income, net........................................... 1,202 17
Interest expense............................................ (11) (37)
-------------------- ------------------
Consolidated loss before income taxes....................... $ (6,806) $ (3,322)
==================== ==================
7. APPLICATION DEVELOPMENT CONTRACTS
Due to developments arising in late March 2000 relating to subcontractor
performance and technical delivery issues, the Company determined that the
balance of revenues remaining to be recognized under an application
development contract with the Indiana Secretary of State was not expected to
cover the Company's current estimate of costs to develop and implement the
related application and accrued $1.35 million for the expected loss. The
Company is actively investigating remuneration from certain parties involved
with the contract. The amount cannot be determined at this time and has not
been considered in the Company's current estimate. At March 31, 2000, the
accrual for all application development contracts held by the Company was
approximately $1.4 million, which management believes is adequate. Because of
the inherent uncertainties in estimating the costs of completion, including
the success of the Company in receiving remuneration as discussed above, it
is at least reasonably possible that the estimate will change in the near
term.
8. WITHDRAWN STOCK OFFERING
On February 22, 2000, the Company filed a registration statement on Form S-1
with the SEC for an offering of approximately 8.1 million shares of the
Company's common stock. On April 5, 2000, the Company announced its intention
to withdraw the stock offering due to adverse market conditions. Estimated
direct costs related to the withdrawn offering of approximately $1 million
will be expensed in the second quarter of 2000.
9. RECENT ACCOUNTING PRONOUNCEMENTS In March 2000, the Emerging Issues Task
Force reached certain consensuses on Issue 00-2 ("EITF 00-2"), ACCOUNTING FOR
WEBSITE DEVELOPMENT COSTS, which establishes the accounting for the costs
incurred to develop Internet web sites. The consensuses are effective for web
site development costs incurred in quarters beginning after June 30, 2000,
with an option to adopt as a cumulative effect of a change in accounting
principle. Because, after the completion of a defined contract term, the
government entities with which the Company contracts typically receive a
perpetual, royalty-free license to the applications the Company developed,
the Company currently expenses as incurred the employee costs to develop,
operate and maintain government portals. These costs are included in service
development and operations expense in the consolidated statements of
operations. The Company is in the process of evaluating the impact, if any,
of EITF 00-2 on its consolidated financial position, result of operations and
cash flows.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Form 10-Q includes "forward-looking" statements about future financial
results, future business changes and other events that haven't yet occurred.
For example, statements like we "expect," we "believe," we "plan," we
"intend," we "anticipate," or we "estimate" are forward-looking statements.
Investors should be aware that actual operating results and financial
performance may differ materially from our expressed expectations because of
risks and uncertainties about the future including risks related to economic
and competitive conditions and those risks discussed in our other filings
with the Securities and Exchange Commission. In addition, we will not
necessarily update the information in this Form 10-Q if any forward-looking
statement later turns out to be inaccurate.
OVERVIEW
The following discussion summarizes the significant factors affecting
operating results of the Company for the three-month periods ended March 31,
2000 and 1999. This discussion and analysis should be read in conjunction
with our consolidated interim financial statements and the related notes
included in this Form 10-Q.
ACQUISITION OF SDR TECHNOLOGIES
On May 11, 2000, we filed an amendment of merger with the Secretary of State
of the State of California to acquire SDR Technologies, a provider of
Internet-based applications for governments. SDR designs and develops online
election and ethics filing systems for federal, state and local government
agencies. SDR has also developed a number of Internet-based applications for
tax filings, business filings, professional licensing and automobile
registrations. For additional information on the SDR acquisition, refer to
Note 4 in the Notes to Consolidated Financial Statements included in this
Form 10-Q.
OTHER RECENT DEVELOPMENTS
On January 14, 2000, we merged our Application Services Division with
Conquest Softworks, LLC. NIC Conquest, the newly formed entity, is a provider
of software applications and services for electronic filings and document
management solutions for government. The combined entity holds contracts with
state and local governments for Web-enabling the back-office systems and
processes for business-to-government filings. Its products include UCCDataNet
State Imaging and Filing System, a comprehensive UCC office management
system; uccfile.com Web Browser Interface, which allows Web access to
filings; and County Suite Filing and Imaging Systems, which extends filing
capabilities to land records and other filing types. For additional
information on the merger, refer to Note 2 in the Notes to Consolidated
Financial Statements included in this Form 10-Q.
On March 3, 2000, NIC Commerce formed a jointly owned limited liability company
with Bank of America Corporation through its subsidiary, Bank of America, N.A.
(USA), to offer state and local governments the first Web-based
business-to-business procurement, payment and reconciliation
9
service. The two companies will share equally in revenues generated by the
limited liability company. For additional information on our strategic
business relationship with Bank of America, refer to Note 3 in the Notes to
Consolidated Financial Statements included in this Form 10-Q.
On March 23, 2000, we completed a $5 million cash investment in privately
held E-Filing.com, Inc., a leading provider of online filing applications for
legal services, giving us ownership of 20% of E-Filing.com. This strategic
investment is expected to enable both E-Filing.com and NIC to rapidly expand
access to judicial eGovernment applications nationwide. On March 24, 2000, we
completed a $5.5 million cash investment in privately held Tidemark Computer
Systems, Inc., a leading provider of eGovernment permit applications and
related services for local government, giving us ownership of approximately
27% of Tidemark. This strategic investment is expected to allow Tidemark and
NIC to help communities automate a variety of business processes through
mobile and web-based applications. For additional information on these
investments, refer to Note 5 in the Notes to Consolidated Financial
Statements included in this Form 10-Q.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2000 AND 1999
REVENUES. Revenues were $18.9 million for the three months ended
March 31, 2000 compared to $11.5 million for the three months ended March 31,
1999. This increase was primarily attributable to $2.3 million in revenues
from our state business units that became operational during the third
quarter of 1999, a $3.6 million increase in revenues relating to same state
business volumes, $1.4 million in revenues from NIC Commerce, which we
acquired in September 1999, and $0.1 million revenue increase related to NIC
Conquest, which was formed in January 2000 through the merger of our
Application Services Division and Conquest Softworks, LLC.
COST OF REVENUES. Cost of revenues increased to $13.4 million for
the three months ended March 31, 2000 from $8.6 million for the three months
ended March 31, 1999. This increase was primarily attributable to $1.6
million in cost of revenues from our state business units that became
operational during the third quarter of 1999, a $2.8 million increase
relating to same state business volumes and $0.3 million relating to NIC
Commerce.
GROSS PROFIT. Gross profit increased to $5.5 million for the three
months ended March 31, 2000 from $2.9 million for the three months ended
March 31, 1999. This increase is due primarily to $0.7 million in gross
profit from new state business units that became operational in the third
quarter of 1999, a $0.8 million increase in gross profit relating to
increases in same state business volumes and $1.1 million in gross profit
from NIC Commerce.
The gross profit rate was 29.0% of revenues for the three months
ended March 31, 2000 compared to 24.9% for the three months ended March 31,
1999. This increase was primarily attributable to NIC Commerce, which has a
substantially higher gross profit rate compared to our state and local
government businesses. In addition, the state business units that became
operational in the third quarter of 1999 have generally higher gross profit
rates than existing state business units.
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SERVICE DEVELOPMENT AND OPERATIONS. Service development and
operations costs increased to $3.4 million for the three months ended March
31, 2000 from $0.9 million for the three months ended March 31, 1999. This
increase was primarily attributable to $0.2 million from state business units
that became operational in the second half of 1999 and first quarter of 2000,
$0.5 million from NIC Conquest and $0.3 million from NIC Commerce. In
addition, we determined that the balance of revenues remaining to be
recognized under an existing application development contract was not
expected to cover anticipated costs of developing and implementing the
related application and accrued an approximate $1.4 million non-cash charge
for the expected loss, as further discussed in Note 7 in the Notes to
Consolidated Financial Statements included in this Form 10-Q.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative costs increased to $5.0 million for the three months ended
March 31, 2000 from $1.5 million for the three months ended March 31, 1999.
This increase was primarily attributable to $0.5 million from new state
business units that became operational in the second half of 1999 and first
quarter of 2000, $1.0 million from NIC Commerce, $0.2 million from NIC
Conquest and $1.9 million in additional corporate level overhead expenses as
a result of our overall growth and positioning for future growth, including
the addition of corporate level marketing, public relations, finance,
technology and management personnel. Partially offsetting these increases was
a decrease in same state general and administrative expenses of approximately
$0.1 million.
STOCK COMPENSATION. Stock compensation for the three months ended
March 31, 2000 was $0.5 million and consisted primarily of compensation
expense related to common stock options granted to senior level executives
and other key employees. Stock compensation was $1.7 million for the three
months ended March 31, 1999. In the first quarter of 1999, we sold
approximately 347,000 shares of common stock to key employees and recognized
approximately $1.5 million in compensation expense for the amount by which
the fair value of common stock sold exceeded the amount paid.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for
the three months ended March 31, 2000 increased to $4.6 million from $2.0
million for the three months ended March 31, 1999. This increase was
primarily due to the amortization of intangible assets resulting from our
acquisition of NIC Commerce on September 15, 1999, which contributed to $2.4
million in amortization expense for the three months ended March 31, 2000,
and business combination with Conquest Softworks, LLC on January 14, 2000,
which contributed to $0.5 million in amortization expense for the three
months ended March 31, 2000. Depreciation expense increased by $0.2 million
for the three months ended March 31, 2000 as a result of additions to
property and equipment throughout 1999 and the first quarter of 2000. These
increases were partially offset by a $0.5 million decrease in amortization of
intangible assets resulting from our March 31, 1998 exchange offer. Certain
intangible assets relating to that exchange offer became fully amortized as
of December 31, 1999. For additional information on the exchange offer, refer
to Note 3 in the Notes to Consolidated Financial
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Statements included in our Annual Report on Form 10-K filed with the SEC on
March 10, 2000.
OPERATING LOSS. Operating loss for the three months ended March
31, 2000 was $8.0 million compared to $3.3 million for the three months ended
March 31, 1999. Excluding non-cash charges for stock compensation,
depreciation and amortization, and the charge relating to the application
development contract as discussed above, operating loss would have been $1.5
million for the three months ended March 31, 2000 compared to operating
income of $0.4 million for the three months ended March 31, 1999.
OTHER INCOME, NET. [ib]We have placed the proceeds from our July
20, 1999 initial public offering in short-term, investment-grade,
interest-bearing marketable securities. For the three months ended March 31,
2000, the increase in other income, net, reflects interest income earned on
these investments.
INCOME TAXES. We recognized an income tax benefit of approximately
$2.0 million for the three months ended March 31, 2000. This benefit was
attributable to a taxable net loss in the current quarter. The income tax
benefit is less than the amount customarily expected because of expenses that
are not deductible for tax purposes including amortization of goodwill from
the March 31, 1998 exchange offer and the Conquest merger, and certain stock
compensation costs. We recognized an income tax benefit of $23,000 for the
three months ended March 31, 1999. The income tax benefit was less than the
amount customarily expected because of expenses that were not deductible for
tax purposes including amortization of goodwill from the March 31, 1998
exchange offer and certain stock compensation costs.
LIQUIDITY AND CAPITAL RESOURCES
In addition to $67.5 million of short-term marketable securities, our liquid
resources at March 31, 2000 included cash and cash equivalents of $4.6
million and unused operating lines of credit totaling approximately $2.5
million. However, we did not renew the lines of credit, which expired on
April 30, 2000.
On February 22, 2000, we filed a registration statement on Form S-1 with the
SEC for an offering of approximately 8.1 million shares of our common stock.
On April 5, 2000, we announced our intention to withdraw the stock offering
due to adverse market conditions. Estimated direct costs related to the
withdrawn offering of approximately $1 million will be expensed in the second
quarter of 2000.
We believe that our current financial resources will be sufficient to meet
our present working capital requirements and significant growth initiatives
without the need of additional capital for at least the next twelve months.
Net cash used in operating activities was $2.8 million for the three months
ended March 31, 2000 compared to $0.4 million for the three months ended
March 31, 1999. The increase in cash used in operating activities is
primarily attributable to additional corporate level overhead expenses as a
result of our overall growth and positioning for future growth, including
strategic infrastructure investments in marketing, public relations, finance,
technology and management personnel. We expect operating cash flow to be
negative for at least
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the next two quarters as a result of our continued investment in corporate
infrastructure and growth strategies.
Investing activities resulted in net cash used of approximately $2.3 million
for the three months ended March 31, 2000 reflecting maturities of our
marketable securities portfolio used for purchases of property and equipment
($1 million), our business combination with Conquest Softworks, LLC ($4.5
million), strategic equity investments in Tidemark ($5.5 million) and
E-Filing.com ($5 million), and the cash outlay to SDR in exchange for notes
receivable ($2 million).
From time to time, we expect to evaluate the acquisition of businesses and
technologies that complement our business. Acquisitions may involve a cash
investment.
YEAR 2000 READINESS
We have not experienced any significant software failures or the creation of
erroneous results due to the Year 2000 date change.
We have conducted an internal review of software systems that we use for
portal management, network monitoring, quality assurance, applications and
information and transaction processing. Because we developed most of these
software systems internally after the Year 2000 problem was already known, we
were largely able to anticipate four digit requirements. In connection with
ongoing reviews of our government portals, we also are reviewing our computer
infrastructure, including network equipment and servers. We did not
experience and do not anticipate any material problems with network
equipment, as the majority of our current configuration has been installed or
upgraded with Year 2000 ready systems. Similarly, we purchased most of our
servers within the past four years. With this relatively current equipment,
we do not anticipate material Year 2000 readiness problems.
We also have internally standardized the majority of our systems on a Solaris
operating system, which we are advised by our vendor is Year 2000 ready after
implementation of the latest service upgrades. We use multiple software
systems for internal business purposes, including accounting, electronic
mail, service development, human resources, customer service and support and
sales tracking systems. The majority of these applications have been
purchased, upgraded or internally developed within the last three years.
We have made inquiries of vendors of systems we believe to be mission
critical to our business regarding their Year 2000 readiness. Although we
have received various assurances, we did not receive affirmative
documentation of Year 2000 readiness from any of these vendors and we have
not performed any operational tests on our internal systems. We generally do
not have contractual rights with third-party providers should their equipment
or software fail due to Year 2000 issues. If this third-party equipment or
software does not operate properly with regard to Year 2000, we may incur
unexpected expenses to remedy any problems. These expenses could potentially
include purchasing replacement hardware and software. We have not determined
the state of readiness of some of our third-party suppliers of information
and services, phone companies, long distance carriers, financial institutions
and electric companies, the failure of any one of which
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could severely disrupt our ability to conduct our business. However, we have
not experienced any problems.
Concurrently with our analysis of our internal systems, we have surveyed
third-party entities with which we transact business, including government
clients, critical vendors and financial institutions, for Year 2000
readiness. While no major issues have been discovered, we cannot be certain
their systems will not impact our operations. Our government clients
typically have addressed Year 2000 issues on an agency-by-agency basis under
an overall Year 2000 program. We cannot estimate the effect, if any, that
non-ready systems of these entities could have on our business, results of
operations or financial condition, and there can be no assurances that the
impact, if any, would not be material. However, we have not experienced any
problems.
We anticipate that our review of Year 2000 issues will continue throughout
2000. The costs incurred to date to remediate our Year 2000 issues have not
been material. If any Year 2000 issues are uncovered with respect to these
systems or our other internal systems, we believe that we will be able to
resolve these problems without material difficulty, as replacement systems
are available on commercially reasonable terms. We did not experience any
Year 2000 complications as a result of the date change, and we do not
anticipate any Year 2000 complications in the future based on a number of
assumptions. However, these assumptions may not be accurate, which could
cause our actual results to differ materially from those anticipated. In view
of our Year 2000 review and remediation efforts to date, the recent passing
of the date change to the year 2000, the recent development of a number of
our products and services and the recent installation of our networking
equipment and servers, we do not consider Year 2000 contingency planning to
be necessary.
Our applications operate in complex network environments and directly and
indirectly interact with a number of external hardware and software systems.
We are unable to predict to what extent our business may be affected if our
systems or the systems that operate in conjunction with our systems
experience a material Year 2000 failure. The most likely worst case scenarios
are that the Internet infrastructure fails or the internal systems of our
government clients fail, either of which would render us unable to provide
products and services, which would harm our business. Additionally, known or
unknown errors or defects that affect the operation of our software and
systems could result in delay or loss of revenue, interruption of services,
cancellation of contracts and memberships, diversion of development
resources, damage to our reputation, increased service and warranty costs,
and litigation costs, any of which could harm our business, results of
operations and financial condition.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relate to the
increase or decrease in the amount of interest income we can earn on our
short-term investments in marketable debt securities and cash balances.
Because our investments are in short-term, investment-grade, interest-bearing
marketable securities, we are exposed to minimal risk
on the principal of those investments. We ensure the safety and preservation
of our invested principal funds by limiting default risk, market risk and
investment risk. We do not use derivative financial instruments.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) EXHIBITS
Exhibit 27 Financial Data Schedule (for the three months ended March 31,
2000).
b) REPORTS ON FORM 8-K
A report on Form 8-K was filed with the SEC on January 28, 2000, with
attached Press Releases of the Company dated January 14, 2000, announcing the
Company had entered into a definitive contract to merge its Application
Services Division with Conquest Softworks, LLC and announcing that eFed,
Inc., a wholly owned subsidiary of the Company, had entered into a letter of
intent with Bank of America to form a jointly owned limited liability company
for the purposes of offering state and local governments the first Web-based
business-to-business procurement, payment and reconciliation service.
A report on Form 8-K was filed with the SEC on March 1, 2000, with attached
Press Release of the Company dated February 17, 2000, announcing the Company
had entered into a definitive agreement to acquire SDR Technologies, Inc., a
provider of Internet-based applications for governments.
A report on Form 8-K was filed with the SEC on April 10, 2000, with attached
Press Release of the Company dated April 6, 2000, announcing the Company had
completed a $5 million cash investment in E-Filing.com, Inc., and with
attached Press Release of the Company dated April 7, 2000, announcing the
Company had completed a $5.5 million cash investment in Tidemark Computer
Systems, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL INFORMATION CONSORTIUM, INC.
Dated: May 15, 2000 /s/James B. Dodd
----------------
James B. Dodd
President and
Chief Executive Officer
Dated: May 15, 2000 /s/Kevin C. Childress
---------------------
Kevin C. Childress
Chief Financial Officer
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