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, 2000
Commission file number 000-26621
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
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(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
August 4, 2000 was 55,450,646.
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
000's except for share amounts
June 30, December 31,
2000 1999
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 8,540 $ 9,527
Marketable securities 52,452 82,481
Trade accounts receivable 9,376 6,010
Deferred income taxes 416 158
Prepaid expenses 766 279
Other current assets 1,632 614
--------- --------
Total current assets 73,182 99,069
Property and equipment, net 5,609 2,998
Deferred income taxes - 694
Other assets 307 254
Investments in affiliates 9,103 -
Intangible assets, net 76,997 30,646
--------- --------
Total assets $165,198 $133,661
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,202 $ 3,805
Accrued expenses 2,028 873
Income taxes payable 129 84
Capital lease obligations - current portion 187 190
Notes payable - current portion - 50
Application development contracts 1,083 232
Other current liabilities 169 120
--------- -------
Total current liabilities 8,798 5,354
Capital lease obligation - long-term portion 133 218
Deferred income taxes 1,295 -
--------- -------
Total liabilities 10,226 5,572
--------- --------
Commitments and contingencies (Note 3) - -
Minority interest 700 -
--------- --------
Shareholders' equity:
Common stock, no par, 200,000,000 shares authorized
55,437,044 and 53,165,370 shares issued and
outstanding - -
Additional paid-in capital 188,220 149,036
Accumulated deficit (30,236) (16,557)
Accumulated other comprehensive income 6 2
--------- --------
157,990 132,481
Less notes and stock subscriptions receivable (30) (30)
Less treasury stock (101) -
Less deferred compensation expense (3,587) (4,362)
--------- ---------
Total shareholders' equity 154,272 128,089
--------- ---------
Total liabilities and shareholders' equity $165,198 $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 Six-months ended
June 30, June 30,
------------------------- ------------------------
2000 1999 2000 1999
------------ ------------ ------------ ----------
Revenues $ 19,910 $ 13,311 $ 38,824 $ 24,766
Cost of revenues 13,971 10,220 27,392 18,823
------- ------- ------- ------
Gross profit 5,939 3,091 11,432 5,943
------- ------- ------- ------
Operating expenses:
Service development and operations 3,350 1,655 6,746 2,647
Selling, general and administrative 7,447 1,742 12,439 3,203
Stock compensation 398 648 915 2,347
Depreciation and amortization 6,712 1,987 11,298 3,988
------- ------- ------- ------
Total operating expenses 17,907 6,032 31,398 12,185
------- ------- ------- ------
Operating loss (11,968) (2,941) (19,966) (6,242)
------- ------- ------- ------
Other income (expense):
Interest expense (21) (50) (31) (87)
Other income, net 998 22 2,200 38
Equity in net loss of affiliates (1,684) - (1,684) -
------- ------- ------- ------
Total other income (expense) (707) (28) 485 (49)
------- ------- ------- ------
Loss before income taxes and minority interest (12,675) (2,969) (19,481) (6,291)
Income tax benefit (3,769) (466) (5,777) (489)
------- ------- ------- ------
Loss before minority interest (8,906) (2,503) (13,704) (5,802)
Minority interest 67 - (25) -
------- ------- ------- ------
Net loss $ (8,973) $ (2,503) $(13,679) $ (5,802)
======= ======= ======= ======
Net loss per share:
Basic and diluted $ (0.16) $ (0.06) $ (0.25) $ (0.14)
======= ======= ======= ======
Weighted average shares outstanding 54,532 42,494 53,896 42,370
======= ======= ======= ======
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,
-----------------------------------
2000 1999
--------------- ----------------
ASSETS
Cash flows from operating activities:
Net loss $(13,679) $ (5,802)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 11,298 3,988
Compensation expense recognized related to sale of common stock 12 1,574
Compensation expense recognized related to stock options 903 773
Loss on disposals of property and equipment 4 -
Accretion of discount on marketable securities (2,029) -
Application development contracts 851 140
Deferred income taxes (5,853) (468)
Minority interest (25) -
Equity in net loss of affiliates 1,684 -
Changes in operating assets and liabilities, net of effects of
acquisitions:
(Increase) in trade accounts receivable (2,955) (972)
(Increase) in prepaid expenses (450) (65)
(Increase) decrease in other current assets 27 (11)
(Increase) decrease in other assets (25) (583)
Increase in accounts payable 802 501
Increase (decrease) in income taxes payable 45 (69)
Increase (decrease) in accrued expenses 502 (164)
Increase (decrease) in other current liabilities (147) 224
------- -------
Net cash used in operating activities (9,035) (934)
------- -------
Cash flows from investing activities:
Purchases of property and equipment (2,377) (110)
Proceeds from disposals of property and equipment 1 -
Capitalized software development costs (998) -
Purchases of marketable securities (215,069) -
Maturities of marketable securities 247,130 -
Cash outlay in exchange for convertible notes receivable (2,000) -
Acquisition of businesses (6,247) -
Cash of acquired business 129 -
Investments in affiliates (10,787) -
------- -------
Net cash provided by (used in) investing activities 9,782 (110)
------- -------
Cash flows from financing activities:
Proceeds from bank lines of credit - 1,170
Payments on bank lines of credit (2,050) (469)
Payments on notes payable (50) (67)
Payments on capital lease obligations (96) (133)
Payments to purchase treasury stock (101) -
Proceeds from issuance of common stock to employees 112 475
Proceeds from subscriptions receivable - 20
Proceeds from exercise of employee stock options 451 -
------- -------
Net cash provided by (used in) financing activities (1,734) 996
------- -------
Net decrease cash and cash equivalents (987) (48)
Cash and cash equivalents, beginning of year 9,527 1,311
------- -------
Cash and cash equivalents, end of period $ 8,540 $ 1,263
======= =======
Other cash flow information:
Interest paid $ 31 $ 87
======= =======
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. ACQUISITION OF SDR TECHNOLOGIES
On May 11, 2000, NIC acquired SDR Technologies, Inc., a California corporation
and provider of Internet-based applications for governments ("SDR"). 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. SDR has been renamed NIC Technologies. Pursuant to the
Amended and Restated Agreement and Plan of Reorganization and Merger, dated May
5, 2000 (the "Merger Agreement"), each outstanding share of common stock of SDR
and each outstanding share of preferred stock of SDR was converted into 0.59977
share of NIC common stock, and each outstanding option to purchase one share of
SDR common stock was converted into an option to purchase 0.59977 share of NIC
common stock. Based on the exchange ratio, NIC issued to SDR shareholders
1,912,097 shares of common stock and options to purchase 229,965 shares of NIC
common stock as consideration. Ten percent of the total number of shares of NIC
common stock issued pursuant to the Merger Agreement 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 was accounted
for as a purchase, and the purchase price was approximately $39.6 million.
The purchase price per share was determined to be $17.21, which was based on the
average closing market price of NIC's common stock three days before, the day
of, and three days after April 24, 2000, the date on which the parties to the
Merger Agreement agreed to the 0.59977 exchange ratio. The fair value of the
options issued was accounted for as a component of the total purchase price. The
transaction was structured to be tax free to the SDR shareholders. The
historical tax basis in the assets and liabilities will carry over to NIC, and
the amortization of purchase accounting intangibles will not be deductible for
income tax purposes.
Prior to the acquisition date, SDR issued two $1 million convertible promissory
notes to NIC, dated January 28, 2000 and March 27, 2000, in
4
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 were
automatically cancelled and retired upon the closing of the acquisition. The
principal amount of the January 28, 2000 promissory note, plus interest thereon,
will be deducted from the NIC shares held in escrow. The number of shares to be
deducted from escrow relating to the January 28, 2000 note will be based on the
market price of NIC common stock when the escrow shares are released to NIC. The
principal amount of the January 28, 2000 promissory note will be accounted for
as a current receivable until NIC receives the escrow shares. The principal
amount of the March 27, 2000 promissory note was accounted for as additional
purchase price and will not be deducted from the escrow shares. Additionally,
10,000 SDR common shares (representing 5,998 NIC common shares) issued on May
11, 2000 upon conversion of an SDR convertible promissory note will also be
deducted from the NIC shares in escrow. The total purchase price was reduced by
$103,225, the fair value of the 5,998 NIC common shares to be deducted from
escrow. Accordingly, the number of NIC issued and outstanding shares as of the
closing date of the acquisition was reduced by 5,998 shares.
Below is a table of the purchase price, preliminary purchase price allocation
and annual amortization of the intangible assets acquired:
PURCHASE PRICE:
Fair value of common stock issued........................ $32,898,312
Fair value of common stock options issued................ 3,703,912
Direct acquisition costs................................. 2,118,446
Fair value of March 27, 2000 promissory note............. 1,000,000
Fair value of common stock to be deducted from escrow.... (103,225)
------------
$39,617,445
============
ANNUAL
PRELIMINARY PURCHASE PRICE ALLOCATION: AMORTIZATION AMORTIZATION
PERIOD OF INTANGIBLES
------------ ----------------
Fair value of net tangible assets at May 11, 2000........ $(1,743,857)
Deferred tax liability................................... (7,585,000)
Acquired intangible assets:
Assembled domestic workforce............................. 1,100,000 2 years $ 550,000
Foreign workforce agreement.............................. 8,800,000 5 years 1,760,000
Product technology....................................... 8,200,000 3 years 2,733,333
Customer contracts....................................... 400,000 2 years 200,000
Goodwill................................................. 30,446,302 3 years 10,148,767
----------- -----------
$ 39,617,445 $15,392,100
=========== ===========
The total purchase price was allocated to the tangible and identifiable
intangible assets acquired and liabilities assumed on the basis of their fair
values on the closing date. The fair value of net tangible assets acquired
approximated historical carrying amounts. Tangible assets acquired in the SDR
acquisition primarily consisted of accounts receivable and property and
equipment. Liabilities assumed consisted primarily of obligations under a
revolving line of credit, accounts payable and accrued liabilities. The purchase
price allocation is preliminary, but the Company does not expect any
5
adjustments that would have a material effect on its consolidated financial
position or results of operations. Approximately $1,678,000 of the direct
acquisition costs had been paid at June 30, 2000.
The following pro forma consolidated amounts for the six months ended June 30,
2000 and 1999 give effect to the acquisition of SDR as if the acquisition had
occurred at the beginning of each period presented:
SIX-MONTHS ENDED JUNE 30,
2000 1999
------ -------
Revenues $ 39,580 $ 26,230
Net loss (19,900) (12,293)
Basic and diluted loss per share $ (0.36) $ (0.28)
Weighted average shares outstanding 55,268 44,277
2. SEGMENTS AND RELATED INFORMATION
The Company's two reportable segments consist of its state and local government
business and its NIC Commerce government procurement business. The state and
local government business includes the Company's subsidiaries operating state
and local government portals in the states of Arkansas, Georgia, Hawaii, Idaho,
Indiana, Iowa, Kansas, Maine, Nebraska, Utah, and Virginia, and in the cities of
San Francisco and Indianapolis/Marion County, Indiana. The state and local
government business also includes the NIC Conquest and NIC Technologies
subsidiaries. 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, equity in net loss of affiliates, depreciation, amortization,
one-time charges 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 June 30 (in thousands):
NIC STATE OTHER
LOCAL NIC RECONCILING CONSOLIDATED
GOVERNMENT COMMERCE ITEMS TOTAL
----------------- ------------- ------------ --------------
2000
Revenues.................. $ 18,799 $ 1,111 $ - $ 19,910
Cost of revenues.......... 13,482 489 - 13,971
------- ----- ------
Gross profit.............. 5,317 622 - 5,939
EBITDA..................... 679 (1,522) (3,180) (4,023)
1999
Revenues.................. 13,311 - - 13,311
Cost of revenues.......... 10,220 - - 10,220
------- ------
Gross profit.............. 3,091 - - 3,091
EBITDA.................... 1,062 - (468) 594
The following is a reconciliation of total segment EBITDA to total consolidated
loss before income taxes and minority interest for the three months ended June
30 (in thousands):
6
2000 1999
------------- ------------
Total EBITDA for reportable segments............ $ (4,023) $ 594
Application development contracts............... - (900)
Withdrawn secondary offering expenses........... (835) -
Stock compensation.............................. (398) (648)
Depreciation and amortization................... (6,712) (1,987)
Other income, net............................... 998 22
Interest expense................................ (21) (50)
Equity in net loss of affiliates................ (1,684) -
-------- --------
Consolidated loss before income taxes and
minority interest............................... $ (12,675) $ (2,969)
======== ========
The table below reflects summarized financial information concerning the
Company's reportable segments for the six months ended June 30 (in thousands):
NIC STATE OTHER
AND LOCAL NIC RECONCILING CONSOLIDATED
GOVERNMENT COMMERCE ITEMS TOTAL
------------- ------------- --------------- --------------
2000
Revenues.................. $ 36,300 $ 2,524 $ - $ 38,824
Cost of revenues.......... 26,569 823 - 27,392
--------- --------- --------
Gross profit.............. 9,731 1,701 - 11,432
EBITDA.................... 1,692 (1,743) (5,517) (5,568)
1999
Revenues.................. 24,766 - - 24,766
Cost of revenues.......... 18,823 - - 18,823
--------- --------
Gross profit.............. 5,943 - - 5,943
EBITDA.................... 1,795 - (802) 993
The following is a reconciliation of total segment EBITDA to total consolidated
loss before income taxes and minority interest for the six months ended June 30
(in thousands):
2000 1999
------------- ------------
Total EBITDA for reportable segments................... $ (5,568) $ 993
Application development contracts...................... (1,350) (900)
Withdrawn secondary offering expenses.................. (835) -
Stock compensation..................................... (915) (2,347)
Depreciation and amortization.......................... (11,298) (3,988)
Other income, net...................................... 2,200 38
Interest expense....................................... (31) (87)
Equity in net loss of affiliates....................... (1,684) -
-------- -------
Consolidated loss before income taxes
and minority interest.................................. $ (19,481) $ (6,291)
======== =======
3. 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
7
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 June 30, 2000, the accrual for
all application development contracts held by the Company was approximately $1.1
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.
4. 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. Direct costs
related to the withdrawn offering of approximately $0.8 million were expensed in
the second quarter of 2000.
5. ACQUISITION OF ADDITIONAL INTEREST IN NIC CONQUEST
On May 1, 2000, NIC acquired an additional 6.5 percent ownership interest in NIC
Conquest from NIC Conquest's chief executive officer in exchange for 158,941
unregistered shares of NIC common stock, giving NIC ownership of 71.5 percent of
NIC Conquest. The exchange ratio was determined based on the closing market
price of NIC's common stock on the last trading day preceding the May 1, 2000
exchange agreement. The NIC shares issued will be delivered to an escrow account
and will be released from escrow 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 and was allocated to NIC's 6.5 percent share of tangible and intangible
assets acquired and liabilities assumed on the basis of their fair values on
date of the share exchange. The fair value of net tangible assets acquired,
consisting primarily of cash, accounts receivable, and property and equipment,
totaled approximately $0.2 million and approximated historical carrying amounts.
The remainder of the purchase price was allocated to goodwill, which will be
amortized on a straight-line basis over three years.
6. MARKETABLE SECURITIES
The fair value of marketable debt securities at June 30, 2000 and December 31,
1999 is as follows (in thousands):
JUNE 30, 2000 DECEMBER 31, 1999
--------------- -----------------
U.S. government obligations.............. $ 4,408 $12,253
Corporate debt securities................ 48,044 70,228
------ ------
$52,452 $82,481
====== ======
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 fair values of the Company's
marketable securities are based on quoted market
8
prices at the reporting date. Gross realized gains and losses and unrealized
holding gains and losses through June 30, 2000 were not significant.
7. INVESTMENTS IN AFFILIATES
The Company holds certain investments in affiliates accounted for under the
equity method. The Company uses the equity method to account for equity
investments in affiliates when NIC management can exert significant influence,
but not control, over the operations of the investee. Significant influence is
generally deemed to exist if the Company has an ownership interest in the voting
stock of the investee of between 20% and 50%, although other factors, such as
representation on the investee's Board of Directors, are considered in
determining whether the equity method of accounting is appropriate. At June 30,
2000, the carrying value of the Company's equity-method investments totaled $9.1
million.
8. INTANGIBLE ASSETS
Intangible assets consisted of the following at June 30, 2000 and December 31,
1999 (in thousands):
JUNE 30, 2000 DECEMBER 31, 1999
-------------- -----------------
Goodwill.................................... $ 56,187 $21,303
Software intangibles........................ 24,456 21,790
Contract intangibles........................ 3,865 3,465
Assembled domestic workforce intangible..... 1,100 -
Foreign workforce agreement intangible...... 8,800 -
Product technology intangible............... 8,200 -
Software development costs.................. 1,144 145
-------- ------
103,752 46,703
Less accumulated amortization............... 26,755 16,057
-------- ------
$ 76,997 $30,646
======== ======
9. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2000, the Emerging Issues Task Force ("EITF") 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 costs incurred in quarters beginning after
June 30, 2000, with an option to adopt as a cumulative effect of a change in
accounting principle. The Company expenses as incurred the employee costs to
develop, operate and maintain government portals as costs of performance under
the contracts because, after the completion of a defined contract term, the
government entities with which the Company contracts typically receive a
perpetual, royalty-free license to the applications the Company developed. Such
costs are included in service development and operations expense in the
consolidated statements of operations. The adoption of EITF 00-2 is not expected
to have a material impact on the Company's consolidated financial position or
results of operations.
In July 2000, the EITF reached a final consensus on Issue 99-19 ("EITF 99-19"),
RECORDING REVENUE GROSS AS A PRINCIPAL VERSUS NET AS AN AGENT, which provides
guidance as to the circumstances when a company should recognize revenue based
on the gross amount billed to the customer or the net amount retained. The
consensus is effective beginning in the fourth quarter of 2000. Based on the
Company's initial analysis, the adoption of EITF 99-19 is not expected to have
an impact on the presentation of the Company's consolidated results of
operations.
9
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- and six-month periods ended June 30, 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 completed the acquisition of 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.
SDR has been renamed NIC Technologies. For additional information on the SDR
acquisition, refer to Note 1 in the Notes to Consolidated Financial Statements
included in this Form 10-Q.
RESULTS OF OPERATIONS
REVENUES. Revenues for the three months ended June 30, 2000 were $19.9
million, a 50% increase over revenues of $13.3 million for the three months
ended June 30, 1999. Of this 50% increase, 18% was attributable to revenues from
our new state portal business units that became operational during the third
quarter of 1999, 9% was from an increase in revenues relating to same state
portal volumes (states open more than one year), 8% was revenues from NIC
Commerce (formerly eFed), which we acquired in September 1999, 11% was revenues
from NIC Conquest, which was formed in January 2000 through the merger of our
application services division and Conquest Softworks, LLC, and 3% was revenues
from NIC Technologies (formerly SDR Technologies), which we acquired in May
2000. Excluding acquired businesses, new state portal business units that became
operational after June 30, 1999, and our state portals contracts in Georgia and
Iowa, which we operate under a fixed-price model, same state portal transaction
revenues for the three months ended June 30, 2000 increased 11% over the three
months ended June 30, 1999 as a result of increased transaction volumes mainly
from our Virginia subsidiary.
Revenues for the six months ended June 30, 2000 were $38.8 million, a
57% increase over revenues of $24.8 million for the six months ended June 30,
10
2000. Of this 57% increase, 19% was attributable to revenues from our state
portal business units that became operational during the third quarter of 1999,
20% was from an increase in revenues relating to same state portal volumes, 10%
was revenues from NIC Commerce, 6% was revenues from NIC Conquest, and 2% was
revenues from NIC Technologies. Same state portal transaction revenues for the
six months ended June 30, 2000 increased 21% over the six months ended June 30,
1999 as a result of increased transaction volumes mainly from our Virginia
subsidiary.
GROSS PROFIT. Gross profit for the three months ended June 30, 2000 was
$5.9 million, a 92% increase over gross profit of $3.1 million for the three
months ended June 30, 1999. Of this 92% increase, 25% was attributable to gross
profit from state portal business units that became operational in the third
quarter of 1999, 7% was from an increase in gross profit relating to same state
portal volumes, 20% was gross profit from NIC Commerce and 48% was gross profit
from NIC Conquest. Partially offsetting the overall increase in gross profit was
an 8% negative contribution from our NIC Technologies subsidiary. Excluding
acquired businesses, new state portal business units that became operational
after June 30, 1999, and our state portal contracts in Georgia and Iowa, same
state portal gross profit for the three months ended June 30, 2000 increased 15%
over the three months ended June 30, 1999 as a result of increased transaction
volumes mainly from our Virginia subsidiary.
The gross profit rate was approximately 30% of revenues for the three
months ended June 30, 2000 compared to approximately 23% for the three months
ended June 30, 1999. This increase was primarily attributable to NIC Commerce
and NIC Conquest, which have substantially higher gross profit rates compared to
our state and local portal 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. The same state portal gross
profit rate for the three months ended June 30, 2000 was approximately 21%
compared 20% for the three months ended June 30, 1999.
Gross profit for the six months ended June 30, 2000 was $11.4 million,
a 92% increase over gross profit of $5.9 million for the six months ended June
30, 1999. Of this 92% increase, 25% was attributable to gross profit from state
portal business units that became operational in the third quarter of 1999, 17%
was from an increase in same state portal volumes, 29% was gross profit from NIC
Commerce and 26% was gross profit from NIC Conquest. Partially offsetting the
overall increase in gross profit was a 4% negative contribution from our NIC
Technologies subsidiary. Same state portal gross profit for the six months ended
June 30, 2000 increased 24% over the six months ended June 30, 1999 as a result
of increased transaction volumes mainly from our Virginia subsidiary.
The gross profit rate was approximately 29% of revenues for the six
months ended June 30, 2000 compared to 24% for the six months ended June 30,
1999. This increase was primarily attributable to NIC Commerce, NIC Conquest and
the state portal business units that became operational in the third quarter of
1999. The same state portal gross profit rate for the three six months ended
June 30, 2000 was approximately 21% compared 20% for the six months ended June
30, 1999.
We intend to continue to expand our operations by developing and
promoting new products and services and by expanding the breadth and depth of
our e-government product and service offerings. Gross profit rates
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attributable to new business areas are likely to be different than those
associated with our existing business activities. To the extent such business
areas become larger components of our revenues, we would expect a corresponding
change in our overall gross profit rate.
SERVICE DEVELOPMENT AND OPERATIONS. Service development and operations
expenses for the three months ended June 30, 2000 were $3.4 million, a 102%
increase over $1.7 million for the three months ended June 30, 1999. Excluding a
$0.9 million non-cash charge taken in the second quarter of 1999 in our
application services division for anticipated costs in excess of revenues to be
recognized under our application development contracts, service development and
operations expenses for the three months ended June 30, 2000 increased 344% over
the three months ended June 30, 1999. Of this 344% increase, 34% was
attributable to state portal business units that became operational in the
second half of 1999 and first quarter of 2000, 42% was from an increase in same
state portal expenses, 126% was from NIC Conquest, 72% was from NIC Commerce and
70% was from an increase in corporate level development expenses. Excluding
acquired businesses, new state portal business units that became operational
after June 30, 1999, corporate level expenses and the non-cash charge related to
our application development contracts, same state portal service development and
operations expenses for the three months ended June 30, 2000 increased 49% over
the three months ended June 30, 1999 as a result of ongoing technology
enhancements and service delivery investment in our state portal partnerships.
Service development and operations expenses for the six months ended
June 30, 2000 were $6.7 million, a 155% increase over $2.6 million for the six
months ended June 30, 1999. Service development and operations expenses for the
six months ended June 30, 2000, include a $1.4 million non-cash charge taken in
the first quarter of 2000 for anticipated costs in excess of revenues to be
recognized under an application development contract with the Indiana Secretary
of State. In addition, for the six months ended June 30, 1999, service
development and operations expenses include a $0.9 million non-cash charge for
our application development contracts as discussed above. Excluding these
charges, service development and operations expenses for the six months ended
June 30, 2000 increased 209% over the six months ended June 30, 1999. Of this
209% increase, 26% was attributable to state portal business units that became
operational in the second half of 1999 and first quarter of 2000, 25% was from
an increase in same state portal expenses, 72% was from NIC Conquest, 49% was
from NIC Commerce and 37% was from an increase in corporate level development
expenses. Same state portal service development and operations expenses for the
six months ended June 30, 2000 increased 30% over the six months ended June 30,
1999 as a result of ongoing technology enhancement and service delivery
investment in our state portal partnerships.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses for the three months ended June 30, 2000 were $7.4
million, a 327% increase over $1.7 million for the three months ended June 30,
1999. Excluding a one-time cash charge of approximately $0.8 million during the
second quarter of 2000 related to our withdrawn common stock offering, as
further discussed in Note 4 to the Notes to Consolidated Financial Statements
included in this Form 10-Q, selling, general and administrative expenses
increased 278% over the three months ended June 30, 1999. Of this 278% increase,
29% was attributable to state portal business units that became operational in
the second half of 1999 and first quarter of
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2000, 92% was from NIC Commerce, 9% was from NIC Conquest, and 27% was from NIC
Technologies. Additionally, 130% of the increase was from an increase in
corporate level expenses as a result of becoming a public company in July 1999
and as a result of our overall growth and positioning for future growth,
including planned strategic infrastructure investments in marketing, public
relations, finance, technology and management personnel. Offsetting these
increases by approximately 9% was a decrease in same state portal general and
administrative expenses. Excluding acquired businesses, new state portal
business units that became operational after June 30, 1999 and corporate level
expenses, same state portal selling, general and administrative expenses for the
three months ended June 30, 2000 decreased 13% from the three months ended June
30, 1999 as a result of continuing cost containment and efficiency efforts in
our more mature state portals.
Selling, general and administrative expenses for the six months ended
June 30, 2000 were $12.4 million, a 288% increase over $3.2 million for the six
months ended June 30, 1999. Excluding the one-time cash charge related to our
withdrawn common stock offering in the second quarter of 2000 as discussed
above, selling, general and administrative expenses increased 262% over the
three months ended June 30, 1999. Of this 262% increase, 32% was attributable to
new state business units that became operational in the second half of 1999 and
first quarter of 2000, 81% was from NIC Commerce, 12% was from NIC Conquest, 14%
was from NIC Technologies and 130% was from corporate level expenses. Offsetting
these increases by approximately 7% was a decrease in same state portal general
and administrative expenses. Same state portal selling, general and
administrative expenses for the six months ended June 30, 2000 decreased 10%
from the six months ended June 30, 1999 as a result of continuing cost
containment and efficiency efforts in our more mature state portals.
STOCK COMPENSATION. For the three months ended June 30, 2000, the
majority of stock compensation expense consisted of amortization of deferred
compensation expense related to common stock options granted to senior level
executives and other key employees. Stock compensation was higher for the three
months ended June 30, 1999 as a result of approximately $0.3 million in stock
compensation expense related to the sale of common stock and issuance of common
stock options with immediate vesting to an executive of the Company.
Stock compensation for the six months ended June 30, 2000 was $0.9
million and consisted primarily of amortization of deferred compensation
expense related to common stock options granted to senior level executives and
other key employees. Stock compensation was $2.4 million for the six months
ended June 30, 1999. In the first six months of 1999, we sold approximately
370,000 shares of common stock to key employees and recognized approximately
$1.6 million in compensation expense for the amount by which the fair value of
common stock sold exceeded the amount paid.
DEPRECIATION AND AMORTIZATION. The increase in depreciation and
amortization expense for the three and six months ended June 30, 2000 was
primarily due to the amortization of intangible assets resulting from our
acquisition of SDR Technologies in May 2000, our acquisition of NIC Commerce in
September 1999, and our business combination with Conquest Softworks, LLC in
January 2000. Depreciation expense increased for the three and six months ended
June 30, 2000 as a result of additions to property and equipment throughout 1999
and the first six months of 2000. These increases were partially offset by a
decrease in amortization of intangible assets resulting
13
from our March 31, 1998 exchange offer. Certain intangible assets relating to
that exchange offer became fully amortized as of December 31, 1999.
OPERATING LOSS. Operating loss for the three months ended June 30, 2000
was $12.0 million compared to $2.9 million for the three months ended June 30,
1999. Excluding non-cash charges for stock compensation, depreciation and
amortization, the one-time cash charge in the second quarter of 2000 relating to
the withdrawn common stock offering, and the non-cash charge in the second
quarter of 1999 relating to the Company's application development contracts,
operating loss would have been $4.0 million for the three months ended June 30,
2000 compared to operating income of $0.6 million for the three months ended
June 30, 1999. Operating loss for the six months ended June 30, 2000 was $20.0
million compared to $6.2 million for the six months ended June 30, 1999.
Excluding non-cash charges for stock compensation, depreciation and
amortization, the one-time cash charge in the second quarter of 2000 relating to
the withdrawn common stock offering, and the non-cash charges in the second
quarter of 1999 and first quarter of 2000 relating to the Company's application
development contracts, operating loss would have been $5.6 million for the six
months ended June 30, 2000 compared to operating income of $1.0 million for the
six months ended June 30, 1999.
Earnings before interest, taxes, equity in net loss of affiliates,
depreciation, amortization, one-time charges and other non-cash charges related
to stock compensation and application development contracts ("EBITDA") was
negative $4.0 million for the three months ended June 30, 2000 compared to
positive $0.6 million for the three months ended June 30, 1999. EBITDA was
negative $5.6 million for the six months ended June 30, 2000 compared to
positive $1.0 million for the six months ended June 30, 1999. For the three and
six months ended June 30, 2000, corporate level expenses were $3.1 million and
$5.5 million, respectively, as a result of our becoming a public company in July
1999 and planned strategic infrastructure investments as discussed above. For
the three and six months ended June 30, 2000, EBITDA from our NIC Commerce
procurement subsidiary was a negative $1.5 million and $1.7 million,
respectively, due primarily to expenditures for marketing and public relations.
EBITDA from our state and local government operations, which consists of our
state and local government portals and our NIC Conquest and NIC Technologies
subsidiaries, decreased for the three and six months ended June 30, 2000 by $0.4
million and $0.1 million, respectively, primarily due to losses from our newly
acquired NIC Technologies subsidiary and start up expenses in our Hawaii, Idaho
and San Francisco portals which had not begun to generate revenues at June 30,
2000. We anticipate that these portals will begin to generate revenues in the
third quarter of 2000. We expect EBITDA to be negative for at least the next
quarter as a result of our continued investment in corporate infrastructure and
growth strategies, but expect to generate positive EBITDA by the end of fiscal
2000 or in the first quarter of fiscal 2001.
OTHER INCOME, NET. 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 and six months ended June 30, 2000, the
increase in other income, net, reflects interest income earned on these
investments.
EQUITY IN NET LOSS OF AFFILIATES. For the three and six months ended
June 30, 2000, equity in net loss of affiliates represents our share of
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losses of companies in which we have equity method investments that give us the
ability to exercise significant influence, but not control, over the investees.
In the first quarter of 2000, we invested in two private companies involved in
the e-government services industry, Tidemark Computer Systems and E-Filing.com,
primarily for strategic purposes. These companies are in the early stage of
their operations and are incurring net losses. Therefore, we expect to continue
to record losses on our equity-method investments in the foreseeable future.
INCOME TAXES. We recognized an income tax benefit for the three and six
months ended June 30, 2000. The income tax benefit was less than the amount
customarily expected because of expenses that are not deductible for tax
purposes including amortization of goodwill from the March 31, 1998 exchange
offer, the Conquest merger and the SDR acquisition, and certain stock
compensation costs. We recognized an income tax benefit for the three and six
months ended June 30, 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
Net cash used in operating activities was $9.0 million for the six months ended
June 30, 2000 compared to $0.9 million for the six months ended June 30, 1999.
The increase in cash used in operating activities is primarily attributable to
additional working capital needs and corporate level expenses as a result of our
overall growth and positioning for future growth, including planned strategic
infrastructure investments in marketing, public relations, finance, technology
and management personnel. We expect operating cash flow to be negative for at
least the next quarter as a result of our continued investment in corporate
infrastructure and growth strategies.
Investing activities resulted in net cash generated of approximately $9.8
million for the six months ended June 30, 2000 reflecting $32 million in net
maturities of our marketable securities portfolio used for funding operations
and for purchases of property and equipment ($2.4 million), our business
combination with Conquest Softworks, LLC ($4.6 million), strategic equity
investments in Tidemark ($5.5 million) and E-Filing.com ($5.3 million), direct
costs of the SDR acquisition ($1.5 million), and the cash outlay to SDR in
exchange for convertible promissory notes ($2 million). Investing activities for
the six months ended June 30, 2000 also reflect approximately $1 million in
capitalized software development costs in our NIC Commerce and NIC Conquest
subsidiaries.
Net cash used in financing activities totaled $1.7 million for the six months
ended June 30, 2000, primarily reflecting a $2.1 million cash outlay to pay off
a bank line of credit assumed in the SDR acquisition and approximately $0.6
million in proceeds from the exercise of employee stock options and issuances of
common stock to employees. Net cash provided by financing activities was $1.0
million for the six months ended June 30, 1999, primarily reflecting $0.7
million in net borrowings under bank lines of credit and $0.5 million in
proceeds from the issuance of common stock to employees.
At June 30, 2000, the Company's total cash and marketable securities balance was
$61.0 million compared to $92.0 million at December 31, 1999. We believe that
our current liquid resources and cash that may be generated from operations will
be sufficient to meet our operating requirements and
15
significant growth initiatives without the need of additional capital for at
least the next twelve months. However, any projections of future cash flows are
subject to substantial uncertainty. If current cash, marketable securities and
cash that may be generated from operations are insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity securities, issue
debt securities or obtain a line of credit. The sale of additional equity
securities could result in additional dilution to the Company's shareholders.
From time to time, we expect to evaluate the acquisition of or investment in
businesses and technologies that complement our business. Acquisitions or
investments might impact the Company's liquidity requirements or cause the
Company to sell additional equity securities or issue debt securities. There can
be no assurance that financing will be available in amounts or on terms
acceptable to the Company, if at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. Our exposure to market risk for changes in interest
rates relates to the increase or decrease in the amount of interest income we
can earn on our short-term investments in marketable debt securities and cash
balances. 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.
INVESTMENT RISK. In the first quarter of 2000, we invested in two
private companies involved in the e-government services industry, Tidemark
Computer Systems and E-Filing.com, primarily for strategic purposes. Such
investments are accounted for under the equity method, as we have the ability to
exercise significant influence, but not control, over the investees. Significant
influence is generally defined as an ownership interest of the voting stock of
an investee of between 20% and 50%, although other factors, such as
representation on the investee's Board of Directors, are considered in
determining whether the equity method is appropriate. We regularly review the
carrying value of these equity method investments and would record impairment
losses when events and circumstances indicate that such assets are permanently
impaired. To date, we have not recorded any such impairment losses. As of June
30, 2000, the carrying value of our equity-method investments totaled $9.1
million.
16
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
c) RECENT SALES OF UNREGISTERED SECURITIES
For the three months ended June 30, 2000, we have granted or issued and sold the
following unregistered securities:
1. On April 24, 2000, the Company sold to Mr. Ray Coutermarsh, our Executive
Vice President of Local Markets, 4,395 shares of NIC common stock at
$11.375 per share for approximately $50,000.
2. On May 1, 2000, the Company acquired an additional 6.5% ownership interest
in NIC Conquest from Mr. William Birdsall, 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 will be released from escrow 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. On June 28, 2000, the Company sold to Mr. Scott Somerhalder, President of
Idaho Information Consortium, a wholly owned subsidiary of the Company,
1,932 shares of our common stock at $12.9375 per share for approximately
$25,000.
4. On June 28, 2000, the Company sold to Mr. Keith Schraad, President of our
portal operations in the State of Georgia, 2,828 shares of our common stock
at $8.84 per share for approximately $25,000.
The issuances of securities in all the transactions above were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act by an issuer not involving a public offering, where the
purchasers represented their intention to acquire the securities for investment
only and not with a view to distribution and received or has access to adequate
information about the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 2, 2000. At the
meeting, the following matters were voted upon by the shareholders:
1. The election of seven (7) Directors to serve for the upcoming year; and
2. A proposal to ratify the appointment of PricewaterhouseCoopers LLP as the
Company's independent public accountants for the fiscal year ending December
31, 2000
The Board of Directors of the Company is composed of seven (7) members. The
following were the nominees of management voted upon and elected by the holders
of the Company's common stock as of the record date: Jeffery S. Fraser, James B.
Dodd, John L. Bunce, Jr., Dan Evans, Ross C. Hartley, Patrick J. Healy and Pete
Wilson. In the election of directors, there were 50,268,066 votes "for" Jeffery
S. Fraser and 275,464 votes "withheld"; 50,528,066 votes "for" James B. Dodd and
15,464 votes "withheld"; 50,528,066 votes "for" John L. Bunce, Jr. and 15,464
votes "withheld"; 50,528,291 votes "for" Dan Evans and 15,239 votes "withheld";
17
50,527,766 votes "for" Ross C. Hartley and 15,764 votes "withheld"; 50,528,066
votes "for" Patrick J. Healy and 15,464 votes "withheld"; 50,526,654 votes "for"
Pete Wilson and 16,876 votes "withheld".
The total votes cast concerning the ratification of the appointment of
PricewaterhouseCoopers LLP were as follows: 50,531,932 voted "for", 5,125 voted
"against" and 6,473 "abstentions".
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
Exhibit 27 Financial Data Schedule (for the six months ended June 30, 2000).
b) REPORTS ON FORM 8-K
A report on Form 8-K was filed with the Securities and Exchange Commission 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.
A report on Form 8-K was filed with the Securities and Exchange Commission on
May 26, 2000, with attached Press Release of the Company dated May 15, 2000
announcing the Company's acquisition of SDR Technologies, Inc., and attached
Amended and Restated Agreement and Plan of Reorganization and Merger, dated as
of May 5, 2000, as amended, by and among NIC, SDR Acquisition Corp., a
California corporation and a wholly owned subsidiary of NIC, and SDR.
A report on Form 8-K was filed with the Securities and Exchange Commission on
July 26, 2000, amending the report on Form 8-K filed on May 26, 2000, and
included the financial statements of SDR Technologies, Inc. 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.
18
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: August 14, 2000 /S/ JAMES B. DODD
-------------------------------------
James B. Dodd
President and
Chief Executive Officer
Dated: August 14, 2000 /S/ KEVIN C. CHILDRESS
-------------------------------------
Kevin C. Childress
Chief Financial Officer
19