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 June 30, 1999
Commission file number 333-77939
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 ( ) No (X)
The number of shares outstanding of the registrant's common stock as of
August 16, 1999, was 52,505,723.
PART 1 - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
000's
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
ASSETS
Current assets:
Cash $ 1,263 $ 1,311
Trade accounts receivable 3,880 2,908
Prepaid expenses 112 47
Deferred income taxes 140 -
Other current assets 79 67
--------- --------
Total current assets 5,474 4,333
Property and equipment, net 1,693 1,230
Other assets 591 17
Intangible assets, net 7,881 11,669
--------- --------
Total assets $ 15,639 $ 17,249
--------- --------
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,878 $ 2,377
Accrued expenses 62 227
Income taxes payable - 69
Deferred income taxes - 164
Bank lines of credit 1,725 1,024
Capital lease obligations - current portion 173 235
Notes payable - current portion 577 50
Application development contracts 1,396 1,256
Other current liabilities 274 49
--------- --------
Total current liabilities 7,085 5,451
Capital lease obligation - long-term portion 340 410
Notes payable - long term portion - 50
Deferred income taxes 262 426
--------- --------
Total liabilities 7,687 6,337
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Commitments and contingencies - -
Shareholders' equity:
Common stock, no par, 200,000,000 shares authorized
42,066,181 and 42,505,723 shares issued and
outstanding - -
Additional paid-in capital 25,006 19,552
Accumulated deficit (11,628) (5,826)
--------- --------
13,378 13,726
Less notes and stock subscriptions receivable (230) -
Less deferred compensation expense (5,196) (2,814)
--------- --------
Total shareholders' equity 7,952 10,912
--------- --------
Total liabilities and shareholders' equity $ 15,639 $ 17,249
--------- --------
--------- --------
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 SIX-MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenues $ 13,311 $ 8,494 $ 24,766 $ 8,855
Cost of revenues 10,220 6,152 18,823 6,153
-------- -------- -------- --------
Gross profit 3,091 2,342 5,943 2,702
-------- -------- -------- --------
Operating expenses:
Service development and
operations 1,655 676 2,647 811
Selling, general and administrative 1,742 1,381 3,203 1,706
Stock compensation 648 259 2,347 259
Depreciation and amortization 1,987 1,968 3,988 1,992
-------- -------- -------- --------
Total operating expenses 6,032 4,284 12,185 4,768
-------- -------- -------- --------
Operating loss (2,941) (1,942) (6,242) (2,066)
-------- -------- -------- --------
Other income (expense):
Interest expense (50) (19) (87) (19)
Other income, net 22 15 38 15
-------- -------- -------- --------
Total other income (expense) (28) (4) (49) (4)
-------- -------- -------- --------
Loss before income taxes (2,969) (1,946) (6,291) (2,070)
Income tax expense (benefit) (466) - (489) -
-------- -------- -------- --------
Net loss $ (2,503) $ (1,946) $ (5,802) $ (2,070)
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per share:
Basic and diluted $ (0.06) $ (0.05) $ (0.14) $ (0.06)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average shares
outstanding 42,494 41,946 42,370 32,366
-------- -------- -------- --------
-------- -------- -------- --------
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
SIX-MONTHS ENDED
JUNE 30,
--------------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net loss $(5,802) $(2,070)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 3,988 1,992
Compensation expense recognized upon
issuance of common stock 1,574 259
Compensation expense recognized related to
stock options 773 -
Application development contracts 140 -
Deferred income taxes (468) -
Changes in operating assets and liabilities:
(Increase) in trade accounts receivable (972) (71)
(Increase) decrease in prepaid expenses (65) (6)
(Increase) in other current assets (11) (124)
(Increase) decrease in other assets (583) 10
Increase (decrease) in accounts payable 501 (90)
(Decrease) in income taxes payable (69) -
Increase (decrease) in accrued expenses (164) 32
Increase (decrease) in other current liabilities 224 (5)
-------- --------
Net cash used in operating
activities (934) (73)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (110) (48)
Proceeds from disposals of property and
equipment - 38
Cash of acquired companies - 765
-------- --------
Net cash provided by (used in) investing activities (110) 755
-------- --------
Cash flows from financing activities:
Proceeds from bank lines of credit 1,170 653
Payments on bank lines of credit (469) (21)
Payments on notes payable (67) (2)
Payments on capital lease obligations (133) (35)
Payments on debentures payable - (130)
Distributions to shareholders - (463)
Proceeds from issuance of common stock 475 75
Proceeds from subscriptions receivable 20 -
-------- --------
Net cash provided by financing activities 996 77
-------- --------
Net increase (decrease) in cash (48) 759
Cash, beginning of year 1,311 179
-------- --------
Cash, end of period $ 1,263 $ 938
-------- --------
-------- --------
Other cash flow information:
Interest Paid $ 87 $ 26
-------- --------
-------- --------
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
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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 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 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 securities pending uses as described in the Company's
final prospectus constituting part of the Form S-1.
2. GOVERNMENT CONTRACTS
During the quarter ended June 30, 1999, the Company entered into two
additional government contracts to provide services and conduct
transactions online to facilitate the access of public information.
NEW ENGLAND INTERACTIVE, INC. (NEI)
NEI was incorporated in 1999 for the purpose of operating as a provider
of electronic government services for the New England region. On April
15, 1999, NEI entered into a three-year contract, with two two-year
renewal periods, with the State of Maine to develop and operate Maine's
government portal that will provide electronic transactions and expanded
access to public information. Under the contract, NEI will fund initial
investment and ongoing operational costs. Upon completion of the initial
contractual term in April 2002, the State of Maine will be entitled to a
perpetual for use only license for the applications NEI developed, with
no additional compensation due to NEI. In connection with the revenues
generated under the contract, NEI is entitled to retain any revenues
remaining after payment of all network operating expenses, statutory fees
for retrieval of public information and various other expenses.
UTAH INTERACTIVE, INC. (UII)
UII was formed in 1999 to provide electronic access to public records in
Utah. In May 1999, UII entered into a contract with the State of Utah
(the "State") to provide coordinated network development and management
for the State's online government services. The contract extends to May
2003 with the option for three two-year renewal periods. Under the
contract, UII will fund initial investment and ongoing operational costs.
Upon completion of the initial four-year term of the contract, or if the
contract is terminated by the State for cause, the State will be entitled
to a perpetual for use only license for the applications UII developed,
with no additional compensation due to UII. In connection with the
revenues generated under the contract, UII retains any revenues that
remain after payment of all network operating expenses, statutory fees
for retrieval of public information and various other expenses.
3. 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
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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 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 June 30, 1999, goodwill and contract
intangibles totaled $7.9 million, which is net of accumulated
amortization of $9.4 million.
The following unaudited pro forma consolidated amounts for the six months
ended June 30, 1998 give effect to the acquisitions of the business units
as if they had occurred on January 1, 1998, using the amortization of
goodwill and contract intangibles the Company has recorded for periods
subsequent to March 31, 1998 (in thousands except for per share amount):
Revenues $ 16,764
Operating loss (3,597)
Net loss (3,601)
Basic and diluted loss per share $ (0.09)
Weighted average shares outstanding 41,833
4. BANK LINES OF CREDIT
On April 30, 1999, NEI entered into a $100,000 operating line of credit
agreement with a bank that bears interest at the bank's prime rate plus
0.5% (7.75% at June 30, 1999). The expiration date on the line is April
30, 2000. At June 30, 1999, $80,000 was outstanding on the line which is
collateralized by NEI's assets and guaranteed by the parent company.
On April 30, 1999, UII entered into a $200,000 operating line of credit
agreement with a bank that bears interest at the bank's prime rate plus
0.5% (7.75% at June 30, 1999). The expiration date on the line is April
30, 2000. At June 30, 1999, $90,000 was outstanding on the line which is
collateralized by UII's assets and guaranteed by the parent company.
5. STOCK SPLIT AND SHAREHOLDERS' EQUITY
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.
On May 16, 1999, the Company sold 23,727 shares of common stock to an
employee at $5.27 per share for an aggregate of approximately $125,000.
The Company recorded approximately $85,000 in compensation expense
related to this transaction. In addition, the Company issued this
employee options to purchase 696,511 shares of NIC common stock at an
exercise price of $5.27 per share. Relating to this transaction,
compensation expense of approximately $318,000 was recorded during the
three months ended June 30, 1999 with approximately $2.2 million of
compensation expense deferred at June 30, 1999, to be amortized over the
vesting period of the options. Including expense recognized in
connection with options granted prior to April 1, 1999, the Company
recognized a total of approximately $314,000 and $524,000 of compensation
expense related to common stock options for the three and six month
periods ended June 30, 1999, respectively. Total deferred compensation
expense was approximately $5.2 million at June 30, 1999.
5
6. 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 June 30, 1999, the Company's remaining
accrual was $1,396,000 which management believes is adequate. However,
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.
7. 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 financial position or results of operations of the
Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion summarizes the significant factors affecting
operating results for the three month and six month periods ended June 30,
1999 and June 30, 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.
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 six months ended June 30, 1998, revenues for
all of our business units were $16.8 million, while the reported revenue of
$8.9 million for the six months ended June 30, 1998 represents six months of
one of our business units and only three months of the other four business
units. Total expenses are likewise not comparable. The comparison of results
for the six month period ended June 30, 1999 to the six month period ended
June 30, 1998 are therefore not necessarily meaningful.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES. Revenues were $13.3 million for the three months ended June
30, 1999 compared to $8.5 million for the three months ended June 30, 1998.
This increase was primarily attributable to the $4.3 million increase in
revenues from new state business units that became operational during the
second half of 1998, and to increases in same state business volumes.
COST OF REVENUES. Cost of revenues increased to $10.2 million for the
three months ended June 30, 1999 from $6.2 million for the three months ended
June 30, 1998. This increase was primarily attributable to the $3.5 million
increase from new state business units that became operational in the second
half of 1998, and to increases in same state business volumes.
GROSS PROFIT. Gross profit increased to $3.1 million for the three
months ended June 30, 1999 from $2.3 million for the three months ended June
30, 1998. The increase is due primarily to gross profit from new state
business units that became operational in the second half of 1998.
The gross margin rate was 23.2% of revenues for the three months ended
June 30, 1999 compared to 27.6% for the three months ended June 30, 1998.
This anticipated decrease was due primarily 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; and to our application services
division, which had lower revenues in the three month period ended June 30,
1999 than in the three month period ended June 30, 1998.
SERVICE, DEVELOPMENT AND OPERATIONS. Service, development and operations
costs increased to $1.7 million for the three months ended June 30, 1999 from
$676,000 for the three months ended June 30, 1998. The increase was due
primarily to a $900,000 charge taken in our application services division for
anticipated costs in excess of revenues on obligations under our application
development contracts. As a percentage of revenues, service, development and
operations costs were 6.1% for the three months ended June 30, 1999
(excluding the special charge) compared to 8.0% for the three months ended
June 30, 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
costs increased to $1.7 million for the three months ended June 30, 1999 from
$1.4 million for the three months ended June 30, 1998. This increase was
primarily attributable to new state business units that became operational in
the second half of 1998 and additional corporate level overhead expenses. As
a percentage of revenues, selling, general and administrative costs were
12.7% for the three months ended June 30, 1999 compared to 16.3% for the
three months ended June 30, 1998.
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STOCK COMPENSATION. Stock compensation increased to $648,000 for the
three months ended June 30, 1999 from $259,000 for the three months ended
June 30, 1998. This increase is due primarily to stock sales made and stock
options granted to senior level executives and other key employees in late
1998 and 1999.
OPERATING LOSS. Operating loss for the three months ended June 30, 1999
was $2.9 million compared to $1.9 million for the three months ended June 30,
1998. This increase was primarily attributable to the $900,000 charge taken
in our application services division and the $389,000 increase in stock
compensation charges. Excluding non-cash charges for stock compensation and
amortization of intangible assets, and the charge in our application services
division, operating income would have been $501,000 for the three months
ended June 30, 1999 compared to $211,000 for the three months ended June 30,
1998. This increase is primarily attributable to new state business units
that became operational in the second half of 1998 and to increases in same
state business volumes.
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 $466,000
for the three months ended June 30, 1999. Amortization of goodwill and a
portion of stock compensation expense is non-deductible for tax purposes.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES. Revenues were $24.8 million for the six months ended June 30,
1999 compared to $8.9 million for the six months ended June 30, 1998. This
increase was primarily attributable to the $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 Exchange
Offer, and $7.0 million in revenues from new state business units that became
operational during the second half of 1998. With all business units included
for the entire period, combined revenues were $16.8 million for the six
months ended June 30, 1998.
COST OF REVENUES. Cost of revenues increased to $18.8 million for the
six months ended June 30, 1999 from $6.2 million for the six months ended
June 30, 1998. This increase was primarily attributable to the $6.5 million
in cost of revenues of our four initial business units and $5.7 million from
new state business units that became operational in the second half of 1998.
With all business units included for the entire period, combined cost of
revenues was $12.3 million for the six months ended June 30, 1998.
GROSS PROFIT. Gross profit increased to $5.9 million for the six months
ended June 30, 1999 from $2.7 million for the six months ended June 30, 1998.
The increase is primarily due to the $1.2 million in gross profit from new
state business units that became operational in the second half of 1998 and
$1.8 million from our four initial business units. With all business units
included for the entire period, combined gross profit was $4.4 million for
the six months ended June 30, 1998.
The gross margin rate was 24.0% of revenues for the six months ended
June 30, 1999 compared to 30.5% for the six months ended June 30, 1998. This
anticipated decrease was due primarily to our four initial business units.
With the four business units included for the entire period, the gross margin
rate would have been 26.4% for the six months ended June 30, 1998. The
remaining decrease is 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 $2.6 million for the six months ended June 30, 1999 from
$811,000 for the six months ended June 30, 1998. The increase was due
primarily to the $900,000 charge taken in our application services division,
$472,000 in costs from our four initial business units in the first quarter
of 1999, and $200,000 from new state business units that became operational
in the second half of 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
costs increased to $3.2 million for the six months ended June 30, 1999 from
$1.7 million for the six months ended June 30, 1998.
8
This increase was primarily attributable to $244,000 from new business units
that became operational in the second half of 1998, $698,000 in costs for our
four initial business units in the first quarter of 1999, and an increase in
corporate level expenses, including the addition of corporate level personnel.
STOCK COMPENSATION. Stock compensation increased to $2.3 million for the
six months ended June 30, 1999 from $259,000 for the six months ended June
30, 1998. This increase is due primarily to stock sales and stock options
granted to senior level executives and other key employees in late 1998 and
1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
to $4.0 million for the six months ended June 30, 1999 from $2.0 million for
the six months ended June 30, 1998. This expense consists primarily of
amortization of goodwill and intangible assets resulting from the completion
of the Exchange Offer on March 31, 1998. The increase is due to an additional
quarter of amortization in 1999.
OPERATING LOSS. Operating loss for the six months ended June 30, 1999
was $6.2 million compared to $2.1 million for the six months ended June 30,
1998. This increase was primarily attributable to the $2.0 million increase
in depreciation and amortization, the $2.1 million increase in stock
compensation charges, and the $900,000 charge taken in our application
services division. Excluding non-cash charges for stock compensation and
amortization of intangible assets, and the charge in our application services
division, operating income would have been $793,000 for the six months ended
June 30, 1999 compared to $87,000 for the six months ended June 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 $489,000
for the six months ended June 30, 1999. Amortization of goodwill and a
portion of stock compensation expense is non-deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $934,000 for the six months ended
June 30, 1999. The difference between the net loss of $5.8 million and net
cash used was attributable to over $6.3 million in non-cash charges relating
to the amortization of intangible assets and stock compensation. This
difference was offset by an increase in accounts receivable of $972,000 which
was due to increased volumes in our largest business unit, and an increase in
other assets of $583,000 which was primarily due to deferred expenses related
to our initial public offering.
Investing activities resulted in net cash used of $110,000 in the six months
ended June 30, 1999 for purchases of property and equipment.
Cash flow provided from financing activities was $1.0 million for the six
months ended June 30, 1999, and was derived primarily from $701,000 in net
borrowings on our bank lines of credit and $475,000 from issuances of common
stock to employees.
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. The total amount outstanding on our bank lines of credit
was approximately $1.7 million as of June 30, 1999.
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 18 months.
From time to time, we expect to evaluate the acquisition of businesses and
technologies that complement our business. Acquisitions may involve a cash
investment.
9
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 either 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 begun to
survey third-party entities with which we transact business, including
government clients, critical vendors and financial institutions, for Year
2000 readiness. We expect to complete this survey in the third quarter of
1999. 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 which 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
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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 and cash balances and on the increase or decrease in
the amount of interest expense we must pay with respect to our various
outstanding debt instruments. 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. The risk associated with fluctuating
interest expense is limited to the exposure related to those debt instruments
and credit facilities which are tied to market rates, and we do not believe
it is material. 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 Date Schedule (for the six months ended
June 30, 1999).
(b) REPORTS ON FORM 8-K
None.
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: James B. Dodd
President and
Chief Operating Officer
Date: Kevin C. Childress
Chief Financial Officer