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 September 30, 1999
Commission file number 333-77939
NATIONAL INFORMATION CONSORTIUM, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 52-2077581
- -------- ----------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
12 Corporate Woods, 10975 Benson Street, Suite 390
Overland Park, Kansas 66210
------------------------------------------------------
(Address of principal executive 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 November
12, 1999, was 53,114,778.
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
000's
September 30, December 31,
1999 1998
-------------------- ---------------------
ASSETS
Current assets:
Cash $ 2,895 $ 1,311
Marketable securities 91,847 -
Trade accounts receivable 5,244 2,908
Prepaid expenses 173 47
Other current assets 560 67
-------------------- ---------------------
Total current assets 100,719 4,333
Property and equipment, net 2,120 1,230
Other assets 28 17
Intangible assets, net 34,684 11,669
-------------------- ---------------------
Total assets $137,551 $ 17,249
==================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,772 $ 2,377
Accrued expenses 183 227
Income taxes payable - 69
Deferred income taxes 92 164
Bank lines of credit - 1,024
Capital lease obligations - current portion 557 235
Notes payable - current portion 50 50
Application development contracts 893 1,256
Other current liabilities 549 49
-------------------- ---------------------
Total current liabilities 6,096 5,451
Capital lease obligation - long-term portion 296 410
Notes payable - long term portion - 50
Deferred income taxes 92 426
-------------------- ---------------------
Total liabilities 6,484 6,337
-------------------- ---------------------
Commitments and contingencies - -
Shareholders' equity:
Common stock, no par, 200,000,000 shares authorized
53,111,717 and 42,066,181 shares issued and
outstanding - -
Additional paid-in capital 148,943 19,552
Accumulated deficit (13,070) (5,826)
Accumulated other comprehensive income 3 -
-------------------- ---------------------
135,876 13,726
Less notes and stock subscriptions receivable (30) -
Less deferred compensation expense (4,779) (2,814)
-------------------- ---------------------
Total shareholders' equity 131,067 10,912
-------------------- ---------------------
Total liabilities and shareholders' equity $137,551 $ 17,249
==================== =====================
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(000's except for per share amounts)
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ ----------------------------------
1999 1998 1999 1998
----------------- ---------------- --------------- ----------------
Revenues $ 15,691 $ 9,773 $40,457 $18,628
Cost of revenues 11,672 7,347 30,495 13,500
----------------- -------------- --------------- ---------------
Gross profit 4,019 2,426 9,962 5,128
----------------- -------------- --------------- ---------------
Operating expenses:
Service development and
operations 1,362 806 4,009 1,617
Selling, general and administrative 2,226 1,219 5,429 2,925
Stock compensation 388 - 2,735 259
Depreciation and amortization 2,421 1,962 6,409 3,954
----------------- -------------- --------------- ---------------
Total operating expenses 6,397 3,987 18,582 8,755
----------------- -------------- --------------- ---------------
Operating loss (2,378) (1,561) (8,620) (3,627)
----------------- -------------- --------------- ---------------
Other income (expense):
Interest expense (58) (31) (145) (50)
Other income, net 1,130 24 1,168 39
----------------- -------------- --------------- ---------------
Total other income (expense) 1,072 (7) 1,023 (11)
----------------- -------------- --------------- ---------------
Loss before income taxes (1,306) (1,568) (7,597) (3,638)
Income tax expense (benefit) 136 370 (353) 370
----------------- -------------- --------------- ---------------
Net loss $(1,442) $(1,938) $(7,244) $(4,008)
================= ============== =============== ===============
Net loss per share:
Basic and diluted $ (0.03) $ (0.05) $ (0.16) $ (0.11)
================= ============== =============== ===============
Weighted average shares
outstanding 50,968 42,066 45,278 35,636
================= ============== =============== ===============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
000's
NINE-MONTHS ENDED
SEPTEMBER 30
--------------------------
1999 1998
----------- ----------
Cash flows from operating activities:
Net loss $ (7,244) $(4,008)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 6,409 3,954
Compensation expense recognized upon
issuance of common stock 1,574 259
Compensation expense recognized related to
stock options 1,161 -
Accretion of discount on marketable securities (674) -
Application development contracts (363) -
Deferred income taxes (406) 342
Changes in operating assets and liabilities:
(Increase) in trade accounts receivable (1,539) (68)
(Increase) decrease in prepaid expenses (124) 2
(Increase) in other current assets (368) (150)
(Increase) decrease in other assets - 81
Increase (decrease) in accounts payable 761 (275)
(Decrease) in income taxes payable (69) -
Increase (decrease) in accrued expenses (114) 56
Increase (decrease) in other current liabilities 500 25
------------- -------------
Net cash provided by (used in) operating
activities (496) 218
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (205) (80)
Proceeds from disposals of property and equipment - 38
Purchases of corporate debt securities (149,048) -
Purchases of U.S. government obligations (18,422) -
Maturities of corporate debt securities 60,000 -
Sales of corporate debt securities 16,300 -
Acquisition of business (15,039) -
Cash of acquired companies - 765
------------- -------------
Net cash provided by (used in) investing activities (106,414) 723
------------- -------------
Cash flows from financing activities:
Proceeds from bank lines of credit 1,251 903
Payments on bank lines of credit (2,268) (254)
Payments on notes payable (850) (2)
Payments on capital lease obligations (186) (71)
Payments on debentures payable - (130)
Distributions to shareholders - (588)
Proceeds from issuance of common stock to employees 475 75
Net proceeds from initial public offering of common stock 109,852 -
Proceeds from subscriptions receivable 220 -
------------- -------------
Net cash provided by (used in) financing activities 108,494 (67)
------------- -------------
Net increase (decrease) in cash 1,584 874
Cash, beginning of year 1,311 179
------------- -------------
Cash, end of period $2,895 $ 1,053
============= =============
Other cash flow information:
Interest Paid $ 145 $ 50
============= =============
Income taxes paid $ 69 $ -
============= =============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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.
Certain information and disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted purusant 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
Form S-1, which became effective July 15, 1999 and Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in this Form 10-Q.
1. INITIAL PUBLIC OFFERING OF COMMON STOCK
On July 20, 1999, NIC completed an initial public offering of common stock by
selling an aggregate of 10 million new shares of common stock for net proceeds
of approximately $110 million after deducting underwriting discounts,
commissions and expenses. For additional information on the Company's initial
public offering of common stock, refer to the Company's Form S-1, which became
effective July 15, 1999. The Company has placed the net proceeds in short-term,
investment-grade, interest-bearing debt securities (see Note 6) pending uses as
described in the Company's final prospectus constituting part of the Form S-1.
2. STOCK SPLIT
On May 3, 1999, the Board of Directors authorized a common stock split in the
range of 4 for 1 to 5 for 1, and granted authority to the Company's officers to
determine the exact amount of the split. Such officers approved a 4.643377 for 1
split, to be effected by means of a dividend of 3.643377 shares of common stock
held, plus cash in lieu of fractional shares, effective for shareholders of
record on July 14, 1999. The effect of the stock split has been retroactively
reflected in the accompanying financial statements for all periods presented.
All references to the number of Company common shares and per share amounts
elsewhere in the related footnotes have also been restated as appropriate to
reflect the effect of the common stock split for all periods presented.
3. BUSINESS ACQUISITION
On September 15, 1999, NIC acquired the net assets of the business of eFed, a
provider of Internet-based procurement software and services for the government.
eFed designs, develops and manages online procurement software and services for
federal and state markets. eFed was a division of privately held Reston,
Virginia-based Electric Press, Inc. The acquisition was accounted for as a
purchase and the results of eFed's operations are included in the Company's
consolidated statements of operations from the date of acquisition. The total
purchase price for the business was approximately $29.5 million. Total
consideration included $15 million in cash from the proceeds of NIC's initial
public offering and the issuance of 606,000 shares of
unregistered common stock with a fair value of approximately $14.5 million. The
fair value of the common shares was determined based on the average closing
market price of NIC's common stock three days before and after the September 13,
1999 announcement date of the acquisition.
Additional consideration is also payable through the end of calendar year 2003
if eFed's financial results exceed certain targeted levels, which have been set
substantially above the historical experience of eFed at the time of
acquisition. On or before March 31, 2000 and annually thereafter to March 31,
2004, NIC will issue up to an additional 606,000 shares of common stock (or at
the Company's option, the cash equivalent) if eFed achieves certain revenue
targets. Consideration will be payable only if eFed's cumulative revenues exceed
$10 million with the full amount due if cumulative revenues reach $200 million
by the end of 2003. The amount of consideration due annually will be based on a
percentage determined by dividing cumulative revenue to date by $200 million and
subtracting any contingent consideration paid in a prior period. Similarly, NIC
will issue a presently indeterminable number of additional shares of common
stock if eFed's cumulative earnings before interest, income taxes, depreciation
and amortization ("EBITDA") exceeds $10 million up to a maximum of $110 million
by the end of 2003. In this instance, the contingent consideration will only be
paid in common stock and the number of potential shares will be determined by
dividing $10 million by the average of the Company's closing common stock price
for the five trading days immediately preceding the first EBITDA payment date.
An EBITDA payment date will not occur unless eFed reaches $10 million in
cumulative EBITDA in the measurement period. Such consideration, if payable,
will be recorded as additional purchase price.
Of the 606,000 shares of common stock issued to the shareholders of Electric
Press to affect the acquisition, 515,100 shares were issued as restricted stock
and 90,900 shares were delivered to an escrow account. The restricted stock is
subject to cancellation in whole or in part if certain representations,
warranties and obligations under the purchase agreement are not satisfied. If
such obligations are satisfied, 499,950 shares become unrestricted one year
after the closing date and 15,150 shares become unrestricted two years after the
closing date. The 90,900 escrowed shares are to be held in escrow until certain
existing government contracts listed in the purchase agreement are assigned to
NIC or are replaced by alternative agreements to provide the same services to
the same governmental agencies. Management expects eFed to satisfy such
obligations and that such government contracts will be assigned to NIC or
replaced by similar alternative agreements.
The total purchase price of approximately $29.5 million was allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed on
the basis of their fair values on the closing date. The fair value of net
tangible assets acquired, consisting primarily of accounts receivable, property
and equipment, accounts payable and other accrued expenses, totaled $816,000 and
approximated historical carrying amounts. The sole identifiable intangible asset
relates to eFed's Internet procurement software. This asset was valued at
approximately $21.8 million based on the net present value of projected future
net cash flows from licensing the software over its
estimated three-year life. The remainder of the cost was allocated to goodwill.
The goodwill is being amortized on a straight-line basis over three years. The
Company determined a three year life was appropriate after giving consideration
to the rapid technological changes occurring in the Internet industry, the
potential for increasing competition given the demand for electronic purchasing
products and services, and the intense competition which exists for qualified
Internet professionals.
4. ACCOUNTING FOR THE EXCHANGE OFFER
On March 31, 1998, the Company exchanged its common shares for the common shares
of five affiliated business units (the "Exchange Offer"). The Exchange Offer was
accounted for using the purchase method of accounting. Prior to consummating the
Exchange Offer, the Company was a holding company with no operations of its own.
Management determined the fair value of the consolidated company on March 31,
1998 was $40 million. The fair value was allocated to each of the business units
based upon proportional values agreed to by the shareholders in consummating the
Exchange Offer. As the shareholders of the business unit formed to pursue new
business opportunities received 54% of the Company's common shares in the
Exchange Offer, it was treated as the acquirer in applying purchase accounting.
Prior to April 1, 1998, the Company's historical financial information reflects
the results of the business unit formed to pursue new business opportunities and
not the results of the Company's business units operating in Indiana, Kansas,
Arkansas and Nebraska.
The cost of the acquired business units of approximately $18.5 million was
allocated to the tangible and identifiable intangible assets acquired and
liabilities assumed on the basis of their fair values on the Exchange Offer
date. Of the $18.5 million purchase price, $1.2 million was allocated to
tangible net assets of the acquired business units, $3.4 million was allocated
to government contract intangibles and $13.9 million was allocated to goodwill.
At September 30, 1999, goodwill and contract intangibles totaled approximately
$6 million, which is net of accumulated amortization of $11.3 million.
5. ACQUISITION PRO FORMA INFORMATION
The following pro forma consolidated amounts for the nine months ended September
30, 1999 give effect to the acquisition of eFed as if the acquisition had
occurred on January 1, 1999. The following pro forma consolidated amounts for
the nine months ended September 30, 1998 give effect to the acquisitions of the
business units in the Exchange Offer and the acquisition of eFed as if they had
occurred on January 1, 1998, using the amortization of goodwill and intangibles
the Company has recorded for periods subsequent to completing the transactions
(in thousands except for per share amounts).
Nine-months ended September 30,
1999 1998
---- ----
Revenues $42,797 $27,781
Operating loss (15,197) (11,855)
Net loss (11,421) (9,790)
Basic and diluted loss per share $(0.24) $(0.22)
Weighted average shares outstanding 46,830 43,881
6. MARKETABLE SECURITIES
The Company's marketable securities are classified as available-for-sale and
consist of short-term U.S. government obligations and corporate debt securities.
These investments are stated at fair value with any unrealized holding gains or
losses included as a component of shareholders' equity as accumulated other
comprehensive income or loss until realized. The cost of securities sold is
based on the specific identification method.
The Company held no marketable securities prior to the completion of its initial
public offering of common stock on July 20, 1999. Marketable debt securities as
of September 30, 1999 are as follows (in thousands):
Amortized Cost Fair Value
-------------- ----------
U.S. government obligations $18,541 $18,541
Corporate debt securities 73,303 73,306
------ ------
$91,844 $91,847
------- -------
------- -------
All marketable debt securities held by the Company at September 30, 1999 mature
within one year. Gross realized gains and losses and unrealized holding gains
and losses through September 30, 1999 were not significant.
7. APPLICATION SERVICE DIVISION CONTRACTS
In the fourth quarter of 1998, the Company determined that the balance of
revenues remaining to be recognized under existing application service division
contractual obligations was not expected to cover anticipated costs of
developing and implementing the related applications and accrued for the
expected loss. The Company accrued an additional $900,000 of anticipated losses
in the second quarter of 1999 based on revised estimates. The provision for
anticipated losses was determined on an individual contract basis. The Company
expects substantially all of its existing application service contractual
commitments will be satisfied by the third quarter of 2000. At September 30,
1999, the Company's remaining accrual was $893,000 which management believes is
adequate. Because of the inherent uncertainties in estimating the costs of
completion, it is at least reasonably possible that the estimates will change in
the near term.
8. CONTINGENCIES
The Company is involved in legal proceedings and litigation arising in the
ordinary course of business. In the opinion of management, the outcome of such
proceedings and litigation currently pending would not be material to the
consolidated financial position or results of operations of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion summarizes the significant factors affecting operating
results of the Company for the three month and nine month periods ended
September 30, 1999 and 1998. 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 EFED
On September 15, 1999, we completed the acquisition of eFed, a market leader in
Internet-based procurement solutions for the government. eFed designs, develops
and manages online procurement software and services for federal and state
markets. Already contracting with nine Federal agencies, eFed gives the Company
new and proven value-added applications for our existing government partners, as
well as potential new entry points into other states and other sectors of the
Federal market. For additional information relating to our acquisition of eFed,
refer to Note 3 in the Notes to Consolidated Financial Statements included in
this Form 10-Q.
REVIEW OF OPERATIONS
On March 31, 1998, we exchanged our common stock for the common stock of five
affiliated companies (the "Exchange Offer"). Prior to April 1, 1998, the
Company's historical financial information reflects the results of our business
unit formed to pursue new business opportunities, and not the results of our
business units operating in Indiana, Kansas, Arkansas and Nebraska. For example,
for the nine months ended September 30, 1998, revenues for all of our business
units were $26.5 million, while the reported revenue of $18.6 million for the
nine months ended September 30, 1998 represents nine months of one of our
business units and only six months of the other four business units. Total
expenses are likewise not comparable. The comparison of results for the nine
month period ended September 30, 1999 to the nine month period ended September
30, 1998 are therefore not necessarily meaningful.
COMPARISION OF THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUES. Revenues were $15.7 million for the three months ended
September 30, 1999 compared to $9.8 million for the three months ended September
30, 1998. This increase was primarily attributable to a $4.8 million increase in
revenues from our state business units that became operational during the second
half of 1998 and third quarter of 1999, a $0.7 million increase in same state
business volumes, and a $0.4 million increase related to our application
services and eFed divisions.
COST OF REVENUES. Cost of revenues increased to $11.7 million for the
three months ended September 30, 1999 from $7.3 million for the three months
ended September 30, 1998. This increase was primarily attributable to a $3.8
million increase from our state business units that became operational during
the second half of 1998
and third quarter of 1999 and a $0.5 million increase in same state business
volumes.
GROSS PROFIT. Gross profit increased to $4.0 million for the three
months ended September 30, 1999 from $2.4 million for the three months ended
September 30, 1998. This increase is due primarily to $1 million in gross profit
from new state business units that became operational in the second half of 1998
and third quarter of 1999, $0.2 million in gross profit from increases in same
state business volumes and $0.4 million in gross profit related to our
application services and eFed divisions.
The gross margin rate was 25.6% of revenues for the three months
ended September 30, 1999 compared to 24.8% for the three months ended
September 30, 1998. This increase was primarily attributable to increases in
same state margin rates and an increase due to new state business units that
became operational in the third quarter of 1999, which had higher margin
rates than existing state business units. In addition, our application
services division had higher revenues in the three months ended September 30,
1999 than in the three months ended September 30, 1998. Offsetting costs of
our application services division are reported in service development and
operations. Revenues from our eFed division further contributed to the
increased gross margin rate.
SERVICE DEVELOPMENT AND OPERATIONS. Service development and operations
costs increased to $1.4 million for the three months ended September 30, 1999
from $0.8 million for the three months ended September 30, 1998. As a percentage
of revenues, service development and operations costs were 8.7% for the three
months ended September 30, 1999 compared to 8.2% for the three months ended
September 30, 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative costs increased to $2.2 million for the three months ended
September 30, 1999 from $1.2 million for the three months ended September 30,
1998. This increase was primarily attributable to new state business units that
became operational in the second half of 1998 and third quarter of 1999 and
additional corporate level overhead expenses, including the addition of
corporate level marketing and management personnel.
STOCK COMPENSATION. Stock compensation for the three months ended
September 30, 1999 consisted of amortization of deferred compensation expense
related to options granted to senior level executives and other key employees in
late 1998 and 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
three months ended September 30, 1999 increased due to the amortization of the
software intangible and goodwill resulting from our acquisition of eFed on
September 15, 1999.
OPERATING LOSS. Operating loss for the three months ended September
30, 1999 was $2.4 million compared to $1.6 million for the three months ended
September 30, 1998. Excluding non-cash charges for stock compensation and
amortization of intangible assets, operating income would have been $431,000 for
the three months ended September 30, 1999 compared to $401,000 for the three
months ended September 30, 1998.
OTHER INCOME, NET. We have placed the proceeds from our initial public
offering in short-term government and investment-grade corporate debt
securities. For the three and nine months ended September 30, 1999, the increase
in other income, net, reflects interest income earned on these investments.
INCOME TAXES. Income tax expense for the three months ended
September 30, 1999 was $136,000 compared to $370,000 for the three months
ended September 30, 1998. Amortization of goodwill attributable to the
Exchange Offer and a portion of stock compensation expense are non-deductible
for tax purposes.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUES. Revenues were $40.5 million for the nine months ended
September 30, 1999 compared to $18.6 million for the nine months ended September
30, 1998. This increase was primarily attributable to $8.3 million in revenues
from our four initial business units included in reported revenues in the first
quarter of 1999 compared to none reported in 1998 prior to the March 31, 1998
Exchange Offer, an $11.8 million increase in revenues from our state business
units that became operational during the second half of 1998 and third quarter
of 1999, a $1.5 million increase in same state business volumes, and a $0.3
million increase in revenues relating to our application services and eFed
divisions. With all business units included for the entire period, combined
revenues were $26.5 million for the nine months ended September 30, 1998.
COST OF REVENUES. Cost of revenues increased to $30.5 million for the
nine months ended September 30, 1999 from $13.5 million for the nine months
ended September 30, 1998. This increase was primarily attributable to $6.5
million from our four initial business units, $9.5 million from our state
business units that became operational during the second half of 1998 and third
quarter of 1999 and $1 million from same state business unit growth. With all
business units included for the entire period, combined cost of revenues was
$19.7 million for the nine months ended September 30, 1998.
GROSS PROFIT. Gross profit increased to $10.0 million for the nine
months ended September 30, 1999 from $5.1 million for the nine months ended
September 30, 1998. This increase is primarily due to $1.8 million from our
initial four business units, $2.3 million from new state business units that
became operational in the second half of 1998 and third quarter of 1999, $0.5
million from same state business unit growth and $0.3 million from our
application services and eFed divisions. With all business units included for
the entire period, combined gross profit was $6.9 million for the nine months
ended September 30, 1998.
The gross margin rate was 24.6% of revenues for the nine months ended
September 30, 1999 compared to 27.5% for the nine months ended September 30,
1998. With the four initial business units included for the entire period, the
gross margin rate would have been 25.8% for the nine months ended September 30,
1998. The decrease is primarily due to the new state business units that became
operational in the second half of 1998, which had lower margin rates than
existing state business units.
SERVICE DEVELOPMENT AND OPERATIONS. Service development and operations
costs increased to $4.0 million for the nine months ended September 30, 1999
from $1.6 million for the nine months ended September 30, 1998. The increase was
due primarily to the $0.9 million charge taken in our application services
division in the second quarter
of 1999 for anticipated costs in excess of revenues on obligations under our
application development contracts, $0.6 million in costs from our four initial
business units, $0.4 million from our state business units that became
operational in the second half of 1998 and third quarter of 1999, and $0.2
million from same state business unit growth.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative costs increased to $5.4 million for the nine months ended
September 30, 1999 from $2.9 million for the nine months ended September 30,
1998. This increase was primarily attributable to $0.7 million in costs from our
four initial business units, $0.7 million from new business units that became
operational in the second half of 1998 and third quarter of 1999, and a $1.0
million increase in corporate level expenses, including the addition of
corporate level marketing and management personnel.
STOCK COMPENSATION. Stock compensation increased to $2.7 million for
the nine months ended September 30, 1999 from $0.3 million for the nine months
ended September 30, 1998. This increase is due to compensation expense
recognized on stock sales to senior level executives in 1999 and on stock
options granted to senior level executives and other key employees in late 1998
and 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
to $6.4 million for the nine months ended September 30, 1999 from $4.0 million
for the nine months ended September 30, 1998. This increase is due to an
additional quarter of intangible asset amortization in 1999 resulting from the
Exchange Offer and the amortization of the software intangible and goodwill
resulting from our acquisition of eFed on September 15, 1999.
OPERATING LOSS. Operating loss for the nine months ended September 30,
1999 was $8.6 million compared to $3.6 million for the nine months ended
September 30, 1998. Excluding non-cash charges for stock compensation and
amortization of intangible assets, and the second quarter charge in our
application services division, operating income would have been $1.4 million for
the nine months ended September 30, 1999 compared to $0.6 million for the nine
months ended September 30, 1998.
INCOME TAXES. Prior to July 1, 1998 we were an S corporation and did
not record income tax expense. We recognized an income tax benefit of $353,000
for the nine months ended September 30, 1999. Amortization of goodwill
attributable to the Exchange Offer and a portion of stock compensation expense
are non-deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
On July 20, 1999 we completed our initial public offering, selling an aggregate
of 10 million new shares of common stock for net proceeds of approximately $110
million after deducting underwriting discounts, commissions and expenses. The
net proceeds have been placed in short-term, investment-grade, interest-bearing
securities. We believe that these proceeds and cash flows from operations will
provide us with sufficient funds to finance our existing operations and
potential
growth of new operations for at least the next 15 months. In addition to $91.8
million of marketable securities, the Company's liquid resources at September
30, 1999 include cash on hand of approximately $2.9 million and unused operating
lines of credit totaling approximately $2.5 million. Each of our business units
maintains operating lines of credit and equipment lines of credit on identical
or substantially similar terms and conditions from the same bank.
Net cash used in operating activities was $496,000 for the nine months ended
September 30, 1999. Net cash provided by operating activities was $218,000 for
the nine months ended September 30, 1998. The decrease in cash provided by
operations is primarily attributable to increased working capital needs in the
current year as a result of the overall growth of the Company.
Investing activities resulted in net cash used of $106.4 million for the nine
months ended September 30, 1999, reflecting the purchase of marketable
securities with the net proceeds from our initial public offering and the $15
million cash outlay for our acquisition of eFed.
Cash flow provided by financing activities was $108.5 million for the nine
months ended September 30, 1999, reflecting the net proceeds received from our
initial public offering, a portion of which was used to pay down all amounts
outstanding under our operating lines of credit.
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
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software that
records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.
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 do not anticipate material problems with
network equipment, as the majority of our current configuration have 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, and we
will replace any servers that cannot be updated either in the normal replacement
cycle or on an accelerated basis.
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 have not received 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 could severely disrupt our ability to conduct our business.
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 are monitoring regularly the Year 2000 progress of those agencies
that account for high transaction and revenue volumes through our portals. We
believe that many, though not all, of these agencies have completed Year 2000
readiness implementation. 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.
We anticipate that our review of Year 2000 issues and any remediation efforts
will continue throughout calendar 1999. 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. Presently, we have included the total remaining cost of addressing Year
2000 issues within our existing information technology budget. We do not
anticipate any Year 2000 complications based on a number of assumptions,
including the assumption that we have already identified our most significant
Year 2000 issues. 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 development of
a number of our products and services, the recent installation of our networking
equipment and
servers, and the limited activities that remain to be completed, we do not
consider contingency planning to be necessary at this time.
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, financial condition and results of operations.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that involve risks and
uncertainties, which may include statements about our business strategy,
financial performance, sources and uses of funds and other plans. Also,
statements including the words "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," and similar expressions are generally intended
to identify forward-looking statements. Because these forward-looking statements
involve risks and uncertainties, actual results could differ materially from
those expressed or implied by these forward-looking statements for a number of
reasons, including those discussed in other filings with the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE 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 securities,
the Company is exposed to minimal risk on the principal of those investments. We
ensure the safety and preservation of our invested principal funds by limiting
default risks, market risk and investment risk. We do not use derivative
financial instruments.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) EXHIBITS
Exhibit 27 Financial Date Schedule (for the nine months ended September 30,
1999).
b) REPORTS ON FORM 8-K
A report on Form 8-K was filed with the Securities and Exchange Commission on
September 30, 1999 with attached Press Release of National Information
Consortium dated September 13, 1999 announcing the Company's acquisition of
eFed, a division of privately held Reston, Virginia-based Electric Press, Inc.,
and attached Asset Purchase Agreement dated as of September 10, 1999 by and
between the Company and Electric Press, Inc.
A report on Form 8-K was filed with the Securities and Exchange Commission on
November 15, 1999, amending the report on Form 8-K filed on September 30, 1999,
and included the financial statements of eFed for the periods required by Rule
3-05(b) of Regulation S-X and the pro forma financial information required by
Article 11 of Regulation S-X.
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
Date: November 15, 1999 James B. Dodd
Chief Executive Officer
Date: November 15, 1999 Kevin C. Childress
Chief Financial Officer