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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transaction period from to
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COMMISSION FILE NUMBER 000-26621
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NATIONAL INFORMATION CONSORTIUM, INC.
(Exact name of registrant as specified in its charter)
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COLORADO 52-2077581
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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12 CORPORATE WOODS, 10975 BENSON STREET, SUITE 390, OVERLAND PARK, KANSAS 66210
(Address of principal executive office, including Zip Code)
Registrant's telephone number, including area code: (877) 234-3468
Securities registered pursuant to Section 12(b) of the Act: None
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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none none
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
(Title of Class)
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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 / /
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of voting stock held by non-affiliates of the
registrant, as of March 1, 2000, was approximately $879,458,269 (based on the
closing price for shares of the registrant's common stock as reported by the
Nasdaq National Market for the last trading day prior to that date). Shares of
common stock held by each executive officer, director and holder of 5% or more
of the outstanding common stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
On March 1, 2000, 53,299,035 shares of the registrant's common stock, no par
value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be issued in
connection with its Annual Meeting of Shareholders to be held in 2000 are
incorporated by reference into Part III of this Form 10-K.
Except as otherwise stated, the information contained in this Form 10-K is
as of March 1, 2000.
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TABLE OF CONTENTS
NATIONAL INFORMATION CONSORTIUM, INC.
FORM 10-K ANNUAL REPORT
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PART I
Item 1 Business.................................................... 1
Item 2 Properties.................................................. 25
Item 3 Legal Proceedings........................................... 25
Item 4 Submission of Matters to a Vote of Security Holders......... 25
PART II
Item 5 Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 26
Item 6 Selected Consolidated Financial Data........................ 27
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 28
Item 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 37
Item 8 Consolidated Financial Statements and Supplementary Data.... 38
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 70
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 70
Item 11 Executive Compensation...................................... 70
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 70
Item 13 Certain Relationships and Related Transactions.............. 70
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................... 71
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CAUTIONS ABOUT FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements about
events, products or financial performance that may not exist, or may not have
occurred. For example, statements like we "expect," we "believe," we "plan," we
"intend" or we "anticipate" are forward-looking statements. Investors should be
aware that our 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.
In addition, we will not necessarily update the information in this Annual
Report on Form 10-K if any forward-looking statement later turns out to be
inaccurate. Details about risks affecting various aspects of our business are
included throughout this Form 10-K. Investors should read all of these risks
carefully, and should pay particular attention to risks affecting the following
areas: competition issues discussed on page 12; government regulation discussed
on page 13; intellectual property and proprietary rights discussed on page 13;
the specific risk factors discussed on pages 14 to 24; and commitments and
contingencies described in note 13 to the consolidated financial statements
included in this Form 10-K.
PART I
ITEM 1. BUSINESS
OVERVIEW
National Information Consortium, Inc. was formed on December 18, 1997, for
the sole purpose of affecting an exchange of common stock, in a transaction
referred to as the Exchange Offer, to combine under common ownership five
separate affiliated entities under which we conducted our business operations.
The five companies were National Information Consortium USA, Inc., Kansas
Information Consortium, Inc., Indiana Interactive, Inc., Nebraska Interactive,
Inc. and Arkansas Information Consortium, Inc. The Exchange Offer was
consummated on March 31, 1998, and has been accounted for as a business
combination. National Information Consortium USA, Inc. is the entity whose
shareholders received the largest portion of the Company's common stock shares
and was treated as the accounting acquirer with the purchase method of
accounting being applied to the four other companies. 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 $109.4 million after
deducting underwriting discounts, commissions and expenses. On February 22,
2000, we filed a registration statement on Form S-1 for an offering of
approximately 8.1 million shares of our common stock. We intend to issue four
million new shares of common stock with the remainder to be offered by selling
shareholders. The offering has not yet been declared effective by the Securities
and Exchange Commission.
We are a provider of Internet-based, electronic government services that
help governments use the Internet to reduce costs and provide a higher level of
service to businesses and citizens. We accomplish this currently through three
different businesses: our portal business, our eFed business and our NIC
Conquest business. In our portal business, we enter into contracts with
governments and on their behalf design, build and operate Internet-based
portals. These portals consist of Web sites and applications that we build,
which allow businesses and citizens to access government information online and
complete transactions, including applying for a permit, retrieving driver's
license records or filing a form or report. Our unique business model allows us
to reduce our government clients' financial and technology risks and obtain
revenues by sharing in the fees we generate from electronic government services.
Our clients benefit because they gain a centralized, customer-focused presence
on the Internet. Businesses and citizens gain a faster, more convenient and more
cost-effective means to interact with governments.
Currently, we provide Internet-based electronic government portal services
for nine states and one local government. In addition, the states of Hawaii and
Idaho have recently selected us as an electronic government services provider,
and we have entered into contracts to implement our services in those states. We
typically enter into three to five year contracts with our government clients
and manage
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operations for each contractual relationship through separate subsidiaries that
operate as decentralized business units with a high degree of autonomy. We
intend to increase our revenues by replicating our model in other states,
municipalities, federal agencies and international entities, and by delivering
new products and services and expanding markets within our existing contractual
relationships.
Our eFed subsidiary is a leading provider of Internet-based electronic
procurement solutions to governments. eFed designs, develops and manages online
procurement software and services for federal and state markets. eFed's
procurement solution allows buyers to search, compare and buy products and
services across multiple contracts using the Internet. It also allows senior
government procurement officials to better manage and reduce expenses associated
with the procurement process.
On March 3, 2000, eFed entered into an operating agreement with Bank of
America Corporation, through its subsidiary Bank of America N.A. (USA), to
create a limited liability company to offer state and local governments the
first Web-based business-to-business procurement, payment and reconciliation
solution. By bundling eFed's software with Bank of America's government purchase
cards, the new company will allow customers to place orders online through their
preferred suppliers, request a quote from businesses for services, process
transactions, initiate payments and reconcile accounts.
Our NIC Conquest business was formed in January 2000 by combining our
Application Services Division, previously known as our Application Development
Division, with Conquest Softworks, LLC. Both of these businesses provided
software applications and services for electronic filings and document
management solutions for government. Our NIC Conquest business focuses on
Secretaries of State, whose offices are state governments' principal agencies
for corporate filings.
On February 16, 2000, we signed a definitive agreement to acquire SDR
Technologies, which is the leading developer of online elections and ethics
filing systems. In addition, SDR has developed a number of Internet-based
applications for tax filings, business filings, professional licensing, and
automobile registrations.
SEGMENT INFORMATION
Our two reportable segments as of and for the year ended December 31, 1999
consisted of our state and local government business and our eFed division. The
state and local government business includes our direct and indirect
wholly-owned subsidiaries operating in the states of Virginia, Iowa, Georgia,
Arkansas, Indiana, Kansas, Nebraska, Maine, Utah and Idaho and our Application
Services Division. For additional information relating to our reportable
segments, refer to note 18 in the notes to consolidated financial statements
included in this Form 10-K.
INDUSTRY BACKGROUND
THE MARKET FOR GOVERNMENT-TO-BUSINESS AND GOVERNMENT-TO-CITIZEN TRANSACTIONS
Government regulation of commercial and consumer activities
requires billions of transactions and exchanges of large volumes of information
between government agencies and businesses and citizens. These transactions and
exchanges include driver's license records retrieval, motor vehicle
registrations, tax returns, permit applications and requests for
government-gathered information. Government agencies typically defray the cost
of processing these transactions and of storing, retrieving and distributing
information through a combination of general tax revenues, service fees and
charges for direct access to public records. According to the official
statistics of the U.S. Census Bureau, federal, state and local governments
collected a total of $451 billion in charges and miscellaneous fees from
businesses and citizens in 1995. Additionally, states generated $26 billion in
fees for motor vehicle, corporation and other licenses in 1995.
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THE LIMITS OF TRADITIONAL GOVERNMENT TRANSACTION METHODS
Traditionally, government agencies have transacted, and in many cases
continue to transact, with businesses and citizens using processes that are
inconvenient and labor-intensive, require extensive paperwork and use large
amounts of scarce staff resources. Transactions and information requests are
often made in person or by mail and are processed manually, increasing the
potential for errors and the need for numerous revisions and follow-up. Even
newer methods, including telephone response systems, tape exchanges and dial-up
computer networks, rely on multiple systems and potentially incompatible data
formats, and require significant expertise and expenditures to introduce and
maintain. As a result, businesses and citizens often have no choice but to face
costly delays to complete essential tasks. These delays include waiting in line
at a government agency, waiting for answers by telephone or waiting for
responses by mail. Businesses and citizens encounter further inconvenience and
delay because they usually can work with government agencies only during normal
business hours. Even when electronic alternatives are available, they often
require a cumbersome process of multiple contacts with different government
agencies. Increases in the level of economic activity and in the population have
exacerbated these problems and increased the demand for new services.
GROWTH OF THE INTERNET AND ELECTRONIC COMMERCE
The Internet has emerged as a global medium, enabling millions of people
worldwide to share information, communicate and conduct business electronically.
International Data Corporation, a market research firm, estimates that the
number of Web users will grow from approximately 142 million worldwide in 1998
to over 502 million worldwide by the end of 2003. This growth is expected to be
driven by the large and growing number of PCs installed in homes and offices,
the decreasing cost of PCs, easier, faster and cheaper access to the Internet,
improvements in network infrastructure, the proliferation of Internet content
and the increasing familiarity with and acceptance of the Internet by
governments, businesses and consumers. In addition, the volume of electronic
commerce has grown in parallel with the Internet itself. According to
International Data Corporation, transactions on the Internet are expected to
increase from approximately $32 billion in 1998 to approximately $426 billion in
2002. Business-to-business usage is also growing rapidly. Forrester Research, a
market research firm, estimates that business-to-business electronic commerce
will grow from $17 billion in 1998 to $327 billion in 2002.
EMERGENCE OF THE INTERNET AS A MEDIUM FOR ELECTRONIC GOVERNMENT
The growing acceptance of the Internet and electronic commerce presents a
significant opportunity for the development of electronic government, in which
government agencies conduct transactions and distribute information over the
Internet. By using the Internet, government agencies can increase the number and
efficiency of interactions with constituents without increasing expenditures or
demands on current personnel. In addition, regardless of physical distance,
businesses and citizens can obtain government information quickly and easily
over the Internet. For example, motor vehicle administrations can provide
instantaneous responses to auto insurers' requests for driving record data by
allowing controlled access to government databases through the Internet. This
Internet-based interaction reduces costs for both government and users and
decreases response times compared to providing the same data by mail or special
purpose dial-up computer connections.
CHALLENGES TO THE IMPLEMENTATION OF ELECTRONIC GOVERNMENT SERVICES
Despite the potential benefits of electronic government, barriers to
creating successful Internet-based services often preclude governments from
implementing them. Some of these barriers are similar to those the private
sector encounters, including:
- the high cost of implementing and maintaining Internet technology in a
budget-constrained environment;
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- the financial, operational and technology risks of moving from older,
established technologies to rapidly evolving Internet technologies;
- the need to quickly assess the requirements of potential customers and
cost-effectively design and implement electronic government services that
are tailored to meet these requirements; and
- the intense competition for qualified technical personnel.
Governments also face some unique challenges that exacerbate the difficulty
of advancing to Internet-based services, including:
- lengthy and political appropriations processes that make it difficult for
governments to acquire resources and to develop Internet services quickly;
- a diverse and substantially autonomous group of government agencies that
have adopted varying and fragmented approaches to providing information
and transactions over the Internet;
- a lack of a marketing function that assures that services are designed to
meet the needs of businesses and citizens and that they are aware of their
availability; and
- security and privacy concerns that are amplified by the confidential
nature of the information and transactions available from and conducted
with governments and the view that government information is part of the
public trust.
We believe traditional private sector Internet services generally do not
address the unique needs of electronic government. Most Internet service
providers do not fully understand and are not well-equipped to deal with the
unique political and regulatory structures of governments. These providers,
including large systems integrators, typically take a time-and-materials,
project-based pricing approach that may not adequately balance the
responsiveness to change of a successful Internet business with the longer time
horizons and extended commitment periods of government projects.
WHAT WE PROVIDE TO GOVERNMENTS
We provide an Internet-based electronic government service that meets the
needs of governments, businesses and citizens. The key elements of our service
are:
CUSTOMER-FOCUSED, ONE-STOP GOVERNMENT PORTAL
Using our marketing and technical expertise and our government experience,
we design, build and operate portals for each of our government clients that are
designed to meet their needs as well as those of businesses and citizens. Our
portals are designed to create a single point of presence on the Internet for
our government clients that allows businesses and citizens to reach the Web site
of every government agency in a specific jurisdiction from one online location.
We employ a common look and feel in the Web sites of all government agencies
associated with our electronic government portals and make them useful,
appealing and easy to use. In addition to developing and managing the government
portal, we develop applications that, in one location on the Internet, allow
businesses and citizens to complete processes that have traditionally required
separate interaction with several different government agencies, including
establishing and obtaining required permits for a new business enterprise. These
applications also permit businesses and citizens to conduct transactions with
government agencies and to obtain information from them 24 hours per day, seven
days per week. We also help our government clients to generate awareness and
educate businesses and citizens about the availability and potential benefits of
electronic government services. Similarly, our eFed business allows governments
to implement procurement solutions from a one-stop Internet location.
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COMPELLING FINANCIAL MODEL FOR GOVERNMENTS
We allow governments to implement comprehensive electronic government
services at minimal cost and risk. We take on the responsibility and cost of
designing, building and operating government portals and applications, with
minimal use of government resources. We employ our technological resources and
accumulated expertise to help governments avoid the risks of selecting and
investing in new technologies. We implement our electronic government services
rapidly, efficiently and accurately, using our well-tested and reliable
infrastructure and processes. Once we establish a government portal and
associated applications, we manage transaction flows and fund ongoing costs from
the fees received from information accessed and transactions conducted through
the portal. Our eFed business, while traditionally deriving revenues from
software licensing and maintenance, also offers governments a transaction-based
pricing model.
FOCUSED RELATIONSHIP WITH GOVERNMENTS
We form relationships with governments by developing an in-depth
understanding of their interests and then aligning our interests with theirs. By
tying our revenues to the development of successful services and applications,
we work to assure government agencies and constituents that we are focused on
their needs. Moreover, we have pioneered, and encourage our clients to adopt a
model for electronic government policymaking that involves the formation of
oversight boards that bring together interested government agencies, business
and consumer groups and other important government constituencies in a single
forum. We work within this forum to maintain constant contact with government
agencies and constituents and strive to ensure their participation in the
development of electronic government services. We attempt to understand and
facilitate the resolution of potential political disputes among these
participants to maximize the benefits of our services. We also design our
services to observe relevant privacy and security regulations, so that they meet
the same high standards of integrity, confidentiality and public service as
government agencies would observe in their own actions.
OUR STRATEGY
Our objective is to strengthen our position as the leading provider of
Internet-based electronic government services. Key strategies to achieve this
objective include:
CONTINUING TO ADD NEW STATE AND FEDERAL GOVERNMENT CLIENTS
We intend to increase the number of our government clients by leveraging our
relationships with current government clients, our reputation for providing
proven electronic government services and our technology and government process
knowledge base. Our portals and our procurement and filing applications are
designed to deliver our services quickly, easily and cost-effectively to new
federal and state governments and agencies. We intend to continue marketing our
products and services to new states, multi-state cooperative organizations and
federal agencies. Our expansion efforts include developing relationships and
sponsors throughout an individual government entity, pursuing strategic
technology alliances, making presentations at conferences of government
executives with responsibility for information technology policy, and developing
contacts with organizations that act as forums for discussions between these
executives.
BROADENING PRODUCT AND SERVICE OFFERINGS
We plan to continue our development of new products and services designed
for efficient online transactions with federal, state and local government
agencies, enabling government agencies to interact more effectively online with
businesses, citizens and other government agencies. We will increase our
development efforts by leveraging our experience, developing strategic
technology alliances and deepening the knowledge base that we have developed
from our operations. We will continue to work with
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government agencies, professional associations and other organizations to better
understand the current and future needs of our customers.
INCREASING TRANSACTIONAL REVENUES FROM OUR GOVERNMENT PORTALS AND PROCUREMENT
AND FILING APPLICATIONS
We intend to increase transactional revenues on our government portals and
through our procurement and filing systems through both expanded marketing
initiatives and new product offerings. We will continue to work with our
government clients to create awareness of the online alternatives to traditional
government interaction, through initiatives such as informational brochures,
government voicemail recordings and inclusion of Web site information on
government invoices. In addition, we will continue to update our portals to
highlight new government service information provided on the portals. We also
intend to expand our revenues through the development and marketing of new
products and services, such as transaction-based procurement and filing systems.
We plan to work with professional associations to directly and indirectly
communicate to their members the potential convenience, ease of use and other
benefits of the electronic government services our portals offer.
CONTINUING TO DIVERSIFY OUR REVENUE STREAMS ACROSS NUMEROUS BUSINESS LINES
In addition to our portal business, which provided the vast majority of our
revenues in 1999, we are making investments in our eFed and our NIC Conquest
businesses to expand their respective operations. eFed derived the majority of
its revenues in 1999 from software licensing and maintenance. Currently, our
eFed business is pursuing a growth strategy based increasingly on transaction
fees for procurements undertaken on the eFed system. Our NIC Conquest business
derives its revenues from fixed-price contracts with governments. These
contracts are expected to carry higher margins than our portal business and to
be obtained through shorter sales cycles.
Due to our increasing scale and market penetration, we are also able to
provide specific fee-based product solutions to governments who do not wish to
pursue an enterprise-wide portal solution. We expect these revenues, while not
transaction-driven, to derive from shorter sales cycles and result in higher
margins than our portal business.
FURTHER PENETRATING LOCAL MARKETS
Currently we have one contract for an enterprise-wide portal in a local
government, Indianapolis/ Marion County, Indiana. We intend to increase our
number of major local clients by offering both our enterprise portal solution as
well as individual application solutions provided on a fee basis. We also expect
to offer procurement solutions through eFed to major localities and election
filing applications on a local basis through SDR Technologies.
EXPANDING OUR INTERNATIONAL PRESENCE
We believe our enterprise-wide model and its financial attractiveness have
significant applicability to international governments. We intend to expand
internationally, most likely through the transfer of our technology, know-how,
track record, capital and business model into joint ventures involving entities
whose trust relationships in their home markets resemble our own.
CONTINUING TO PURSUE NEW ACQUISITIONS AND NEW STRATEGIC ALLIANCES
We intend to pursue acquisitions of companies and strategic technology
alliances that we believe will increase the number of products and services we
can offer to government clients and the citizens and businesses that interact
with them. We expect to pursue acquisitions of businesses that will expand our
research and development team and create opportunities to add new state, local
or federal government agency clients. We also intend to pursue strategic
technology and business alliances that will enable us to
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further develop business relationships with potential clients and/or improve our
infrastructure and our operating platforms.
GOVERNMENT CONTRACTS
OUR PORTAL BUSINESS
Through our portal business, we have contracts with 12 state and local
government agencies. We currently provide our government portal services to nine
states and one city-county government through the following portals:
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YEAR
SERVICES POPULATION
PORTAL NAME COMMENCED SERVED WEB ADDRESS
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Utah Interactive, Inc............................... 1999 2,000,000 www.state.ut.us
Information Resource of Maine....................... 1999 1,244,000 www.state.me.us
Information Network of Arkansas..................... 1997 2,538,000 www.state.ar.us
CivicNet (Indianapolis and Marion County,
Indiana).......................................... 1997 813,000 www.civicnet.net
IOWAccess Network................................... 1997 2,862,000 www.iowaccess.org
Virginia Information Providers Network.............. 1997 6,791,000 www.vipnet.org
GeorgiaNet Authority................................ 1996 7,642,000 www.state.ga.us
Access Indiana Information Network.................. 1995 5,899,000 www.state.in.us
Nebraska Online..................................... 1995 1,663,000 www.state.ne.us
Information Network of Kansas....................... 1992 2,629,000 www.state.ks.us
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We have also recently entered into contracts with the States of Hawaii and
Idaho.
Each of these government portals operates under a separate contract, which
generally has an initial term of three to five years. Under a typical contract,
a government agrees that:
- we have the right to develop a comprehensive Internet portal owned by that
government to deliver electronic government services;
- the portal we establish is the primary electronic and Internet interface
between the government and its citizens;
- it supports the use of the portal for all commercially valuable
applications in order to support the operation and expansion of the
portal;
- it sponsors access to agencies for the purpose of entering into agreements
with these agencies to develop applications for their data and
transactions and to link their Web pages to the portal; and
- it establishes a policy making and fee approval board, which typically
includes agency members, business customers and others, to establish
prices for products and services and to set other policies.
In return, we agree to:
- develop, manage, market, maintain and expand that government's portal and
information and electronic commerce applications;
- assume the investment risk of building and operating that government's
portal and applications without the direct use of tax dollars;
- bear the risk of collecting transaction fees; and
- have an independent audit conducted upon that government's request.
Under our contracts with Georgia and Iowa, we provide consulting,
development and management services for these government portals predominantly
under a fixed-price model. If future contracts follow
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this fixed-price model, our revenues and profits could suffer as a result of
cost overruns or the failure to realize potential revenue increases from
increased demand for fee-based transactions.
We own all the software we develop under our government portal contracts.
After completion of the initial contract term, our government clients receive a
perpetual, royalty-free license to use the software only in their own portals.
We also enter into separate agreements with various agencies and divisions
of our government clients for the sale of electronic access to public records
and to conduct other transactions. These agreements preliminarily establish the
pricing of the electronic transactions and data access services we provide and
the allocation of revenues between us and the agency. These terms are then
submitted to the policy making and fee approval board for approval.
OUR EFED BUSINESS
eFed is the only commercial off-the-shelf Web-based procurement solution
designed specifically for governments. eFed's software and supplier network
allows government buyers to order products and services from multiple contracts
and commercial sources, based on value, product information and contract terms
and conditions. It is the leading provider of electronic procurement solutions
that enable buyers to compare, negotiate and purchase products and services with
speed, ease and accuracy.
OUR NIC CONQUEST BUSINESS
Through the combination of our Application Services Division with Conquest
Softworks, LLC, we now hold 65% of the outstanding stock of the combined entity.
NIC Conquest develops and licenses software applications with the following ten
states and four local governments for Web-enabling the back-office systems and
processes for business-to-government filings:
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STATES COUNTIES
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Arkansas Apache County, Arizona
Colorado Greenlee County, Arizona
Indiana LaPaz County, Arizona
Kansas Oklahoma County, Oklahoma
Montana
Nebraska
Oklahoma
South Dakota
Texas
Wisconsin
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SDR TECHNOLOGIES
On February 16, 2000, we signed a definitive agreement to acquire SDR
Technologies, which is the leading developer of online elections and ethics
filing systems. SDR's government clients include Arkansas, California, Hawaii,
Illinois, Louisiana, Michigan, Missouri, Oklahoma, Texas, Washington,
Washington, D.C. and British Columbia.
REVENUES
We derive revenues from five sources:
- the sale of electronic access to public records;
- subscription and transaction-based fees;
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- software licensing and maintenance fees;
- fees for managing electronic government operations; and
- fees and charges for government application development.
In ten of our 14 existing major operations, our revenues are generated from
transactions, which generally include the sale of electronic access to public
records on behalf of the government and the collection of subscription and
transaction-based fees. Our transaction-based fees consist of filing fees and
access fees, but do not include subscription fees. Among the highest volume,
most commercially valuable products and services we offer are access to motor
vehicle records and corporate filings, which accounted for over 89% of our
revenues in 1999. ChoicePoint, which resells these records to the auto insurance
industry, accounted for approximately 67% of our revenues in 1999.
In our other four major operations, revenues are derived primarily from
software licensing and maintenance fees, management fees for certain government
operations and fees for application development. In 1999, these four operations
accounted for less than 8% of our revenues.
OUR PRODUCTS AND SERVICES
OUR PORTAL BUSINESS
Each of our business units works with its government clients to implement,
develop, manage and enhance a comprehensive, Internet-based portal to deliver
electronic government services to their constituents. Citizens and businesses
use these portals to gain access to Web-based interactive applications in order
to conduct transactions with the government and gain access to public service
information.
Our portals are designed to provide user-friendly and convenient access to
useful government information and services and include numerous fee-based
transaction services and applications that we have developed. These fee-based
services and applications allow businesses and citizens to access constantly
changing government information and to file necessary government documents,
including retrieval of driver's license records, motor vehicle registrations,
tax returns, and permit applications. The types of products and services and the
fees charged vary in each jurisdiction according to the unique preferences of
that jurisdiction. In an effort to reduce the frustration businesses and
citizens often encounter when dealing with multiple government agencies, we
handle cross-agency communications whenever feasible and shield businesses and
citizens from the complexity of older, mainframe-based systems that agencies
commonly use, creating an intuitive and efficient interaction with governments.
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Some of the products and services we currently offer in different
jurisdictions include:
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PRODUCT OR SERVICE DESCRIPTION PRIMARY USERS
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Driver's License Records Retrieval Offers controlled instant look-up of Insurance companies
driving records by license number, name
and birth date, or social security
number. Includes commercial licenses.
Vehicle Title, Lien & Registration Provides controlled interactive title, Insurance companies, lenders
registration and lien database access.
BillWatch (Lobbyist in a Box) Allows the user to monitor state Attorneys, lobbyists
legislative activity. Users can tag
bills by key word or bill number, and
BillWatch-C- will send an e-mail when a
change occurs in the status of the
bill.
Health Professional License Services Allows users to search databases on Hospitals, clinics, health
several health professions. insurers, citizens
Secretary of State Searches Allows users to access filings of Attorneys, lenders
corporations, partnerships and other
entities, including charter documents.
UCC Searches Permits searches of the UCC database. Attorneys, lenders
Professional License Renewal Permits professionals to renew their Attorneys, doctors, other
licenses on line using a credit card. licensed professionals
Motor Fuel EDI Project Allows motor fuel carriers to file Motor fuel carriers
their tax reports electronically.
Sales/Use Tax Filing Allows Sales and Use Tax filers to file Retailers
the required forms online. The
electronic forms handle the computation
in the form and write the data out so
that it can be entered into the
Department of Revenue's databases
without the need for the information to
be re-keyed in the Department's office.
Online Birth Certificate Processes an online request for an Citizens
official birth certificate, charging
the user's credit card.
</TABLE>
One of the largest consumers of our products and services is ChoicePoint, a
data reseller that uses our electronic government portals to access motor
vehicle records for sale to the auto insurance industry. Currently, ChoicePoint
has entered into contracts with our subsidiaries, or the networks our
subsidiaries operate, to request these records from the states of Arkansas,
Indiana, Kansas, Nebraska, Virginia, Utah and Maine. Under the terms of these
contracts, we provide ChoicePoint with driver's license and traffic records that
vary by contract, for fees that currently range from $3.00 to $11.00 per record
requested. We collect the entire fee, of which a certain portion is remitted to
the state. Each of these contracts may be terminated at any time after 60-days'
notice and may be terminated immediately at the option of any party upon a
material breach of the contract by the other party. Furthermore, each of these
contracts is immediately terminable if the state statute allowing for the public
release of these records is repealed.
In addition to these products and services, we also provide customer service
and support. Our customer service representatives serve as a liaison between our
government clients and businesses and citizens. Representatives are available
24 hours a day, seven days a week to address any problems that might arise on
the portals we operate.
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OUR EFED BUSINESS
eFed provides its customers a procurement solution which combines commercial
off-the-shelf software with major bank purchase card programs, creating an
end-to-end procurement product. eFed's software is structured to adhere to
strict government business rules while its workflow characteristics remain
intuitive and user-friendly. Because it is based on commercial off-the-shelf
technology, the eFed product requires less customization than competing products
and is therefore easier and less expensive to install.
OUR NIC CONQUEST BUSINESS
Our NIC Conquest business develops and delivers applications that improve
the back-office administration of government records and better enable
electronic filing and distribution. These applications often are highly
customized for specific government or agency needs, and have been developed
under separate contracts outside of our core contractual arrangements with
governments.
SALES AND MARKETING
We have two primary sales and marketing goals:
- to develop new sources of revenue through new government relationships;
and
- to retain and grow our revenue streams from existing government
relationships.
We have well-established sales and marketing processes for achieving these
goals, which are managed by our national market development division and a
marketing department within each business unit.
DEVELOPING NEW SOURCES OF REVENUE
We focus our new government sales and marketing efforts on increasing the
number of state, local, federal and international governments and government
agencies that are receptive to a public/private model for delivering information
and/or completing transactions over the Internet. We meet regularly with
interested government officials to educate them on the public/private model and
its potential advantages for their jurisdictions. Members of our management team
are also regular speakers at conferences devoted to the application of Internet
technologies to facilitate the relationship between governments and their
citizens. In states where we believe interest is significant, we seek to develop
supportive, educational relationships with professional and business
organizations that may benefit from the government service improvements our
Internet delivery strategy can produce.
Once a government decides to implement a public/private model for managing
Internet access to resources and transactions, it typically starts a selection
process that operates under special rules that apply to government purchasing.
These rules typically require open bidding by possible service providers against
a list of requirements established by the government under existing procedures
or procedures especially created for the Internet provider selection process. We
respond to requests for bids with a proposal that outlines in detail our
philosophy and plans for implementing our business model. Once our proposal is
selected, we enter into negotiations for a contract.
GROWING EXISTING MARKETS
In our existing government relationships, our marketing efforts focus on:
- expanding the number of government agencies that provide services or
information on the government portal;
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- identifying new information and transactions that can be usefully and
cost-effectively delivered over the Internet; and
- increasing the number of potential users who do business with governments
over the Internet.
Although each government's unique political and economic environment drives
different marketing and development priorities, we have found many of our core
applications to be relevant across multiple jurisdictions. Each of our business
units' operations has a director of marketing and additional marketing staff
that regularly meet with government, business and consumer representatives to
discuss potential new services. We also promote the use of existing services to
existing and new customers through speaking engagements and targeted advertising
to organizations for professionals, including lawyers, bankers and insurance
agents, that have a need for regular interaction with government.
We have recently implemented a centralized marketing function to identify
products and services that have been developed and implemented successfully for
one government and replicate them in other jurisdictions.
ACQUISITIONS AND STRATEGIC ALLIANCES
Since August 1999, we have completed or announced our intention to complete
the acquisition of two companies, eFed and SDR, and strategic alliances with two
companies, Oracle and Bank of America. eFed is a leading provider of online
government procurement services to federal, state and local governments, and SDR
is a leading provider of online elections and ethics filing systems. Oracle is a
leading provider of electronic commerce services, and we intend to implement
Oracle's OracleO Internet Platform for our electronic government solutions. Bank
of America will facilitate the payment processing aspect of our
business-to-business procurement, payment and reconciliation solution.
TECHNOLOGY AND OPERATIONS
Over the past eight years, we have made substantial investments in the
development of Internet-based applications and operations specifically designed
to allow businesses and citizens to transact with and receive information from
governments. The scope of our technological expertise includes network
engineering as it applies to the interconnection of government systems to the
Internet, Internet security, Web-to-legacy system integration, Web-to-mainframe
integration, database design, Web site administration and Web page development.
Within this scope, we have developed and implemented a comprehensive Internet
portal framework for governments, and a broad array of stand-alone services
using a combination of our own proprietary technologies and commercially
available, licensed technologies. We believe that our technological expertise,
coupled with our in-depth understanding of governmental processes and systems,
has made us adept at rapidly creating tailored portal services that keep our
clients on the forefront of electronic government.
Each of our government clients has unique priorities and needs in the
development of its electronic government services. Over 60% of our employees
work in the Internet services and applications development and operations areas,
and nearly all are focused on a single government client's application needs.
Our employees develop an understanding of a specific government's application
priorities, technical profiles and information technology personnel and
management. At the same time, all of our development directors are trained by
experienced technical staff from our other operations on our standard technical
framework, and there is frequent and growing communication and cooperation,
which ensures that our government clients can make use of the most advanced
electronic government services we have developed throughout our organization.
Most of our portals and applications are physically hosted in each
jurisdiction in which we operate on servers that we own or lease. We also
provide links to sites that are maintained by government agencies or
organizations that we do not manage. Our business units provide uninterrupted
24 hour per day, seven day
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a week online service, and all of our operations maintain fault-tolerant,
redundant systems, with thorough backup and security and disaster recovery
procedures.
We believe our systems and applications are scalable and can easily be
replicated from one state to another. We focus on sustaining low-overhead
operations, with all major investments driven by the objective of deploying the
highest value-added technology and applications to each operation.
Finally, we have designed our government portals and applications to be
compatible with virtually any existing system and to be rapidly deployable. We
have implemented a government portal in as little as seven days from the award
of a contract, and have begun generating revenues from data access transactions
in as little as 30 days. To enable this level of speed and efficiency, we
license commercially available technology whenever possible and focus on the
integration and customization of these off-the-shelf hardware and software
components when necessary. We expect that commercially licensed technology will
continue to be available at reasonable costs.
COMPETITION
We believe that the principal factors upon which our businesses compete are:
- understanding of government needs;
- the quality and fit of electronic government services;
- the speed and responsiveness to the needs of businesses and citizens; and
- cost-effectiveness.
We believe we compete favorably with respect to the above-listed factors. In
most cases, the principal substitute for our services is a government-designed
and managed service that integrates other vendors' technologies, products and
services. Companies that have expertise in marketing and providing technical
electronic services to government entities may begin to compete with us by
further developing their services and increasing their focus on this piece of
their business and market shares. Examples of companies that may compete with us
are the following:
- large systems integrators, including American Management Systems, Inc.,
Sapient Corporation and SAIC;
- traditional software applications developers, including Microsoft and
Oracle;
- traditional consulting firms, including IBM, KPMG Peat Marwick,
Deloitte & Touche and Andersen Consulting;
- providers of ecommerce applications, including Ariba, Commerce One,
PurchasePro.com and Digital Commerce Corporation;
- consumer-oriented government portal companies, such as govWorks.com and
EZgov.com; and
- Web service companies, including Whittman-Hart/USWeb, AppNet
Systems, Inc., and Verio Inc.
Many of our potential competitors are national or international in scope and
may have greater resources than we do. These resources could enable our
potential competitors to initiate severe price cuts or take other measures in an
effort to gain market share. Additionally, in some geographic areas, we may face
competition from smaller consulting firms with established reputations and
political relationships with potential government clients. If we do not compete
effectively or if we experience any pricing pressures, reduced margins or loss
of market share resulting from increased competition, our business and financial
condition may be adversely affected.
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GOVERNMENT REGULATION
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Laws and regulations may be adopted
in the future, however, that address these issues including user privacy,
pricing, and the characteristics and quality of products and services. An
increase in regulation or the application of existing laws to the Internet could
significantly increase our cost of operations and harm our business. For
example, the Federal Communications Commission, or FCC, is currently reviewing
its regulatory position that Internet access service is not "telecommunications"
and may decide that Internet service providers must pay a percentage of their
gross revenues as a "universal service contribution." If the FCC were to require
universal service contributions from providers of Internet access or Internet
backbone services, our costs of doing business may increase, and we may not be
able to recover these costs from our customers. Additionally, state public
utility commissions generally have declined to review potential regulation of
such services, but may chose to do so in the future. As a result, our business
and financial condition could be harmed.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We rely on a combination of nondisclosure and other contractual arrangements
with governments, our employees and third parties, and privacy and trade secret
laws to protect and limit the distribution of the proprietary applications,
documentation and processes we have developed in connection with the electronic
government products and services we offer. Despite our precautions, third
parties may succeed in misappropriating our intellectual property or
independently developing similar intellectual property. If we fail to adequately
protect our intellectual property rights and proprietary information or if we
become involved in litigation relating to our intellectual property rights and
proprietary technology, our business could be harmed. Any actions we take may
not be adequate to protect our proprietary rights, and other companies may
develop technologies that are similar or superior to our proprietary technology.
Additionally, it is possible that we could in the future become subject to
claims alleging infringement of third-party intellectual property rights. Any
claims could subject us to costly litigation, and may require us to pay damages
and develop non-infringing intellectual property or acquire licenses to the
intellectual property that is the subject of the alleged infringement.
Additionally, licenses may not be available on acceptable terms or at all.
Litigation regarding intellectual property rights is common in the Internet
and software industries. We expect third-party infringement claims involving
Internet technologies and software products and services to increase. If an
infringement claim is filed against us, we may be prevented from using certain
technologies and may incur significant costs resolving the claim.
We have in the past received letters suggesting that we are infringing on
the intellectual rights of others, and we may from time to time encounter
disputes over rights and obligations concerning intellectual property. Although
we believe that our intellectual property rights are sufficient to allow us to
market our existing products without incurring liability to third parties, we
cannot assure you that our products and services do not infringe on the
intellectual property rights of third parties.
In addition, we have agreed, and may agree in the future, to indemnify
certain of our customers against claims that our products infringe upon the
intellectual property rights of others. We could incur substantial costs in
defending ourselves and our customers against infringement claims. In the event
of a claim of infringement, we and our customers may be required to obtain one
or more licenses from third parties. We cannot assure you that we or our
customers could obtain necessary licenses from third parties at a reasonable
cost or at all.
After termination of our contracts, it is possible that governments and
their successors and affiliates may use their right of use license rights to the
software programs and other applications we have developed for them in the
operation of their portals to operate the portals themselves. Inadvertently,
they also may
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<PAGE>
allow our intellectual property or other information to fall into the hands of
third parties, including our competitors.
EMPLOYEES
As of December 31, 1999, we had 185 full-time employees, of which 28 were
working in our corporate operations and 157 were located in our business units.
Of our employees, 40 were in sales and marketing, 100 were in service
development and operations and 45 were in finance, business development and
administration. Our future success will depend, in part, on our ability to
continue to attract, retain and motivate highly qualified technical and
management personnel, for whom competition is intense. From time to time, we
also employ independent contractors to support our research and development,
marketing, sales and support and administrative organizations. Our employees are
not covered by any collective bargaining agreement, and we have never
experienced a work stoppage. We believe that our relations with our employees
are good.
OTHER FACTORS AFFECTING OUR BUSINESS
BECAUSE WE HAVE PORTAL SERVICE CONTRACTS WITH A LIMITED NUMBER OF STATES AND
CITY GOVERNMENTS, THE TERMINATION OF CERTAIN OF THESE CONTRACTS MAY HARM OUR
BUSINESS
Currently, virtually all of our revenues are derived from the operation of
our portal business. We have portal contracts with 11 states and one local
government. These contracts typically have initial terms of three to five years
with optional renewal periods of one to five years. However, any renewal is
optional and a government may terminate its contract prior to the expiration
date upon specific cause events that are not cured within a period of ten to
180 days or, in some cases, upon passing legislation. Additionally, the
contracts under which we provide management and development services can be
terminated without cause on a specified period of notice. The loss of one or
more of our larger government portal clients, if not replaced, could
dramatically reduce our revenues. If these revenue shortfalls occur, our
business and financial condition would be harmed. We cannot be certain if, when
or to what extent governments might fail to renew or terminate any or all of
their contracts with us.
WE MAY BE UNABLE TO OBTAIN FUTURE CONTRACTS THROUGH THE REQUEST FOR PROPOSAL
PROCESS
Much of our current revenues is derived from contracts with governments and
government agencies that operate under special rules that apply to government
purchasing. Where this process applies, there are special rules that typically
require open bidding by possible service providers like us against a list of
requirements established by governments under existing or specially-created
procedures. To respond successfully to these requests for proposals, commonly
known as RFPs, we must estimate accurately our cost structure for servicing a
proposed contract, the time required to establish operations for the proposed
client and the likely terms of any other proposals submitted. We also must
assemble and submit a large volume of information within the strict time
schedule mandated by an RFP. Whether or not we are able to respond successfully
to RFPs in the future will significantly impact our business. We cannot
guarantee that we will win any bids in the future through the RFP process, or
that any winning bids will ultimately result in contracts. Even though we have
broadened our product and service offerings, we still depend on the RFP process
for a substantial part of our future contracts. Therefore, our business, results
of operations and financial condition would be harmed if we fail to obtain
profitable future contracts through the RFP process.
OUR ACQUISITIONS AND STRATEGIC ALLIANCES ENTAIL NUMEROUS RISKS AND UNCERTAINTIES
As part of our business strategy, we have made and will continue to make
acquisitions or enter into strategic alliances that we believe will complement
our existing businesses, increase traffic to our government clients' sites,
enhance our services, broaden our software and applications offerings or
technological
15
<PAGE>
capabilities or increase our revenues. On September 15, 1999, we acquired all of
the assets of the eFed division of Electric Press, Inc. and thereby began
offering online government procurement services to federal, state and local
governments. On January 12, 2000, we strengthened our existing online systems
for Secretaries of State by combining our Application Services Division with
Conquest Softworks, LLC. On February 16, 2000, we signed a definitive agreement
to acquire SDR Technologies, Inc., a company which develops and provides online
elections and ethics filings for state and local governments. These acquisitions
and future acquisitions or joint ventures could present numerous risks and
uncertainties, including:
- difficulties in the assimilation of operations, personnel, technologies,
products and information systems of the acquired companies;
- the inability to successfully market, distribute, deploy and manage new
products and services that we have limited or no experience in managing;
- the diversion of management's attention from our core business;
- the risk that an acquired business will not perform as expected;
- risks associated with entering markets in which we have limited or no
experience;
- potential loss of key employees, particularly those of the purchased
organizations;
- adverse effects on existing business relationships with existing suppliers
and customers;
- potentially dilutive issuances of equity securities, which may be freely
tradeable in the public market;
- significant charges; and
- the incurrence of debt or other expenses related to goodwill and other
intangible assets.
We cannot assure you that any acquisitions we have announced or will
announce, including our recently signed agreement with SDR Technologies, will
ultimately close. Moreover, even after we close such transactions, we cannot
assure you that we will be able to successfully integrate the new businesses or
any other businesses, products or technologies we may acquire in the future.
WE HAVE INCURRED NET LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE
FORESEEABLE FUTURE
We incurred net losses of approximately $10.7 million for the year ended
December 31, 1999 and approximately $7.9 million for the year ended
December 31, 1998. We also expect to incur significant operations expenses and
will need to generate increased revenues to achieve profitability. Further, even
if we achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis. As a result, we will need to
generate significantly higher revenues while containing costs and operating
expenses if we are to achieve profitability. We cannot be certain that our
revenues will continue to grow or that we will ever achieve sufficient revenues
to become profitable.
WE MAY BE UNABLE TO SUSTAIN THE USAGE LEVELS OF CURRENT PRODUCTS AND SERVICES
THAT PROVIDE A SIGNIFICANT PERCENTAGE OF OUR REVENUES
We obtain a high proportion of our revenues from a limited number of
products and services. Subscription-based and transaction-based fees charged for
access to motor vehicle records and corporate filings accounted for over 89% of
our revenues for the year ended December 31, 1999 and are expected to continue
to account for a significant portion of our revenues in the near future.
Regulatory changes or the development of alternative information sources could
materially reduce our revenues from these products and services. A reduction in
revenues from currently popular products and services would harm our business,
results of operations and financial condition.
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IF OUR POTENTIAL CUSTOMERS ARE NOT WILLING TO SWITCH TO OR ADOPT OUR ONLINE
GOVERNMENTAL PORTALS AND OTHER ELECTRONIC SERVICES, OUR GROWTH AND REVENUES WILL
BE LIMITED
The failure to generate a large customer base would harm our growth and
revenues. This failure could occur for several reasons. Our future revenues and
profits depend upon the widespread acceptance and use of the Internet as an
effective medium for accessing public information, particularly as a medium for
government procurement and filings. We cannot assure you that customer
acceptance and use of the Internet will continue to grow. Additionally, we face
intense competition in all sectors of our business. As a result, our efforts to
create a larger customer base may be more difficult than expected even if we are
perceived to offer products and services superior to those of our competitors.
Further, because the government-to-citizen and government-to-business portal
access and electronic filing market is relatively new, potential customers in
this market may be confused or uncertain about the relative merits of each
electronic government solution and of which solution to adopt, if any. Confusion
and uncertainty in the marketplace may inhibit customers from adopting our
solution, which could harm our business, results of operations and financial
condition.
THE FEES WE COLLECT FOR MANY OF OUR PRODUCTS AND SERVICES ARE SUBJECT TO
REGULATION THAT COULD LIMIT GROWTH OF OUR REVENUES AND PROFITABILITY
We collect user fees on behalf of government agencies and, under the terms
of our government contracts, we remit a portion of the fees to state agencies.
Generally, our contracts provide that the amount of any fees we retain is set by
governments to provide us with a reasonable return or profit or, in one case, a
specified return on equity. We have limited control over the level of fees we
are permitted to retain. Our business, results of operations and financial
condition may be harmed if the level of fees we are permitted to retain in the
future is too low or if our costs rise without a commensurate increase in fees.
THE POSSIBILITY OF GOVERNMENTS DEMANDING FIXED-PRICE CONTRACTS MAY SIGNIFICANTLY
REDUCE OUR REVENUES AND PROFITS
Substantially all of our present contracts are on a transaction-fee basis,
through which our fees vary depending on the number of Internet users who access
our products and services. However, we cannot assure you that governments will
not demand fixed-price contracts in the future. Currently, we earn fees under
our contracts with the states of Georgia and Iowa predominantly on a fixed-price
basis. We may, from time to time, enter into other fixed-price contracts. Our
failure to estimate accurately the resources and time required for an
engagement, to manage governments' expectations effectively regarding the scope
of services to be delivered for an estimated price or to complete fixed-price
engagements within budget, on time and to governments' satisfaction could expose
us to risks associated with cost overruns and, potentially, to penalties, which
may harm our business, results of operations and financial condition.
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS AND
FAILURE TO MANAGE OUR GROWTH COULD STRAIN OUR MANAGEMENT AND OTHER RESOURCES
Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We have acquired a number of new businesses or combined with
existing entities to create new businesses, including eFed and NIC Conquest,
which have strained our management resources. Future expansion efforts could be
expensive and put a strain on our management and other resources. We have
increased, and plan to continue to increase, the scope of our operations at a
rapid rate. Our headcount has grown and will continue to grow substantially. At
December 31, 1998, we had a total of 95 employees, at December 31, 1999, we had
a total of 185 employees, and at February 18, 2000, we had a total of 213
employees. In addition, we expect to hire a significant number of new employees
in the near future. To manage future growth effectively, we must maintain and
enhance our financial and accounting systems and controls, integrate new
personnel and manage expanded operations.
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BECAUSE A MAJOR PORTION OF OUR CURRENT REVENUES IS GENERATED FROM A SMALL NUMBER
OF USERS, THE LOSS OF ANY OF THESE USERS MAY HARM OUR BUSINESS AND FINANCIAL
CONDITION
Our revenues are primarily derived from data resellers' use of our
electronic government portals to access motor vehicle records for sale to the
automobile insurance industry. For the year ended December 31, 1999, one of
these data resellers, ChoicePoint, accounted for approximately 67% of our
revenues. Two other resellers accounted for an additional 11% of our revenues
during the year ended December 31, 1999. It is possible that these users will
develop alternative data sources or new business processes that would materially
diminish their use of our portals. The loss of all or a substantial portion of
business from any of these entities would harm our business and financial
condition.
WE MAY LOSE THE RIGHT TO THE CONTENT DISTRIBUTED THROUGH OUR GOVERNMENT PORTALS,
WHICH IS PROVIDED TO US ENTIRELY BY GOVERNMENT ENTITIES
We do not own or create the content distributed through our government
portals. We depend on the governments with which we contract to supply
information and data feeds to us on a timely basis to allow businesses and
citizens to complete transactions and obtain government information. We cannot
assure you that these data sources will continue to be available in the future.
Government entities could terminate their contracts to provide data. Changes in
regulations could mean that governments no longer collect some types of data or
that the data is protected by more stringent privacy rules preventing uses now
made of it. Moreover, our data sources are not always subject to exclusive
agreements, so that data included in our products and services also may be
included in those of our potential competitors. In addition, we are dependent
upon the accuracy and reliability of government computer systems and data
collection for the content of our portals. The loss or the unavailability of our
data sources in the future, or the loss of our exclusive right to distribute
some of the data sources, could harm our business, results of operations and
financial condition.
THE GROWTH IN OUR REVENUES MAY BE LIMITED BY THE NUMBER OF STATES THAT CHOOSE TO
PROVIDE ELECTRONIC GOVERNMENT SERVICES AND TO ADOPT OUR BUSINESS MODEL AND BY
THE FINITE NUMBER OF STATES WITH WHICH WE MAY CONTRACT FOR OUR ELECTRONIC
GOVERNMENT SERVICES
Although we have recently introduced new products and services through our
recently acquired subsidiary, eFed, our revenues are generated principally from
contracts with state governments to provide electronic government services on
behalf of those governments to complete transactions and distribute public
information electronically. The growth in our revenues largely depends on
government entities adopting our public/private model. We cannot assure you that
government entities will choose to provide electronic government services at
all, or that they will not provide such services themselves without private
assistance or adopting our public/private model.
In addition, as there is a finite number of states remaining with which we
can contract for our services, future increases in our revenues will depend on
our ability to expand our business model to include multi-state cooperative
organizations, local governments, federal agencies and international entities.
We cannot assure you that we will succeed in our expansion into new markets or
that our services will be adaptable to those new markets.
OUR BUSINESS WITH VARIOUS GOVERNMENT ENTITIES OFTEN REQUIRES SPECIFIC GOVERNMENT
LEGISLATION TO BE PASSED FOR US TO INITIATE AND MAINTAIN OUR GOVERNMENT
CONTRACTS
Because a central part of our business includes the execution of contracts
with governments under which we remit a portion of user fees charged to
businesses and citizens to state agencies, it is often necessary for governments
to draft and adopt specific legislation before the government can circulate an
RFP to which we can respond. Furthermore, the maintenance of our government
contracts requires the continued acceptance of enabling legislation and any
implementing regulations. In the past, various entities
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that use the portals we operate to obtain government products and services have
challenged the authority of governments to electronically provide these products
and services exclusively through portals like those we operate. A successful
challenge in the future could result in a proliferation of alternative ways to
obtain these products and services, which would harm our business, results of
operations and financial condition. The repeal or modification of any enabling
legislation would also harm our business, results of operations and financial
condition.
BECAUSE A LARGE PORTION OF OUR BUSINESS RELIES ON A CONTRACTUAL BIDDING PROCESS
WHOSE PARAMETERS ARE ESTABLISHED BY GOVERNMENTS, THE LENGTH OF OUR SALES CYCLES
IS UNCERTAIN AND CAN LEAD TO SHORTFALLS IN REVENUES
Our dependence on a bidding process to initiate many new projects, the
parameters of which are established by governments, results in uncertainty in
our sales cycles because the duration and the procedures for each bidding
process vary significantly according to each government entity's policies and
procedures. The time between the date of initial contact with a government for a
bid and the award of the bid may range from as little as 180 days to up to
36 months. The bidding process is subject to factors over which we have little
or no control, including:
- political acceptance of the concept of government agencies contracting
with third parties to distribute public information, which has been
offered traditionally only by the government agencies often without
charge;
- the internal review process by the government agencies for bid acceptance;
- the need to reach a political accommodation among various interest groups;
- changes to the bidding procedure by the government agencies;
- changes to state legislation authorizing government's contracting with
third parties to distribute public information;
- changes in government administrations;
- the budgetary restrictions of government entities;
- the competition generated by the bidding process; and
- the possibility of cancellation or delay by the government entities.
Even though we have diversified our business to include services and
products that are not subject to the bidding process, we are still dependent on
the bidding process for a significant part of our business. Therefore, any
material delay in the bidding process, changes to the bidding practices and
policies, the failure to receive the bid or the failure to execute a contract
may disrupt our financial results for a particular period and harm our business
and financial condition.
OUR APPLICATION SERVICES DIVISION HAS INCURRED LOSSES UNDER ITS FIXED-FEE
CONTRACTS, AND OUR RESULTS OF OPERATIONS COULD BE HARMED IF THE COSTS THAT OUR
RECENTLY CREATED NIC CONQUEST BUSINESS INCURS TO MEET CONTRACTUAL COMMITMENTS
EXCEED OUR CURRENT ESTIMATES
Our Application Services Division developed and implemented back-office
government software applications for a fixed development fee. Since we combined
our Application Services Division with Conquest Softworks, LLC in January 2000,
we have expanded our applications to include back-end software applications and
services for electronic filings and document management solutions for
governments at a fixed fee. Our NIC Conquest business has assumed most of the
contractual obligations of our Application Services Division. In the fourth
quarter of 1998, we determined that the balance of revenues remaining to be
recognized under our existing Application Services Division contractual
obligations was not expected to cover anticipated costs of developing and
implementing the related applications. Estimated costs in excess of fixed
contract prices of $1.3 million for completing these applications were
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expensed in the fourth quarter of 1998. We accrued an additional $1.1 million of
anticipated losses in 1999 based on revised estimates. It is possible that NIC
Conquest's costs will similarly exceed revenues in the future, as a result of
unforeseen difficulties in the creation of an application called for in a
contract, unforeseen challenges in ensuring compatibility with existing systems,
rising development and personnel costs or other reasons. If this occurs, our
business, results of operations and financial condition could be harmed.
ENTRANCE OF POTENTIAL COMPETITORS INTO THE MARKETPLACE COULD HARM OUR ABILITY TO
MAINTAIN OR IMPROVE OUR POSITION IN THE MARKET
Many companies exist that provide one or more parts of the products and
services we offer. In most cases, the principal substitute for our services is a
government-designed and managed approach that integrates other vendors'
technologies, products and services. Companies that have expertise in marketing
and providing technical services to government entities may begin to compete
with us by further developing their services and increasing their focus on this
piece of their business and market shares. Examples of companies that may
compete with us are the following:
- large systems integrators, including American Management Systems, Inc.,
Sapient Corporation and SAIC;
- traditional software applications developers, including Microsoft and
Oracle;
- traditional consulting firms, including IBM, KPMG Peat Marwick,
Deloitte & Touche and Andersen Consulting;
- providers of ecommerce applications, including Ariba, Commerce One,
PurchasePro.com and Digital Commerce Corporation;
- consumer-oriented government portal companies, including govWorks.com and
EZgov.com; and
- Web service companies, including Whittman-Hart/USWeb, AppNet
Systems, Inc., and Verio Inc.
Many of our potential competitors are national or international in scope and
may have greater resources than we do. These resources could enable our
potential competitors to initiate severe price cuts or take other measures to
gain market share. Many of our current and potential competitors have longer
operating histories, significantly greater financial, technical, marketing and
other resources than us, significantly greater name recognition and a larger
installed base of customers. Additionally, in some geographic areas, we may face
competition from smaller consulting firms with established reputations and
political relationships with potential government clients. If we do not compete
effectively or if we experience any pricing pressures, reduced margins or loss
of market share resulting from increased competition, our business and financial
condition may be harmed.
THE SEASONALITY OF USE FOR SOME OF OUR ELECTRONIC GOVERNMENT PRODUCTS AND
SERVICES MAY HARM OUR FOURTH QUARTER RESULTS OF EACH CALENDAR YEAR
The use of some of our electronic government products and services is
seasonal, particularly the accessing of drivers' records, resulting in lower
revenues in the fourth quarter of each calendar year, due to the smaller number
of business days in this quarter and a lower volume of government-to-business
and government-to-citizen transactions during the holiday period. As a result,
seasonality is likely to cause our quarterly results to fluctuate, which could
harm our business and financial condition and could harm the trading price of
our common stock.
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OUR QUARTERLY RESULTS OF OPERATIONS ARE VOLATILE AND DIFFICULT TO PREDICT. IF WE
FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, THE MARKET
PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY
Our future revenues and results of operations may vary significantly from
quarter to quarter due to a number of factors, many of which are outside of our
control, and any of which may harm our business. These factors include:
- the commencement, completion or termination of contracts during any
particular quarter;
- the introduction of new electronic government products and services by us
or our competitors;
- technical difficulties or system downtime affecting the Internet generally
or the operation of our electronic government products and services;
- the amount and timing of operating costs and capital expenditures relating
to the expansion of our business operations and infrastructure;
- the result of negative cash flows due to capital investments; and
- the incurrence of significant charges related to acquisitions.
Due to the factors noted above, our revenues in a particular quarter may be
lower than we anticipate and if we are unable to reduce spending in that
quarter, our results of operations for that quarter may be harmed. You should
not rely on quarter-to-quarter comparisons of our results of operations as an
indication of future performance. It is possible that in some future periods our
results of operations may be below the expectations of public market analysts
and investors. If this occurs, the price of our common stock may decline.
IF WE FAIL TO COORDINATE OR EXPAND OUR OPERATIONAL PROCEDURES AND CONTROLS, WE
MAY NOT EFFECTIVELY MANAGE OUR GROWTH
Our growth rate may increase rapidly in response to the acceptance of our
products and services under new or existing government contracts. If we cannot
manage our growth effectively, we may not be able to coordinate the activities
of our technical, accounting and marketing staffs, and our business could be
harmed. We intend to plan for the acceptance of new bids by a number of
governmental entities so that we may be ready to begin operations as soon as
possible after acceptance of a bid. Additionally, we plan to continue our
expansion of electronic filing services into new local, state and federal
markets. As part of this plan of growth, we must implement new operational
procedures and controls to expand, train and manage our employees and to
coordinate the operations of our various subsidiaries. If we cannot manage the
growth of our government portals, staff, software installation and maintenance
teams, offices and operations, our business may be harmed.
WE MAY BE UNABLE TO HIRE, INTEGRATE OR RETAIN QUALIFIED PERSONNEL
The recent growth in our business has resulted in an increase in the
responsibilities for both existing and new management personnel. Some of our
personnel are presently serving in more than one executive capacity. The loss of
any of our executives could harm our business.
In addition, we expect that we will need to hire additional personnel in all
areas in 2000, including general managers for new operations in jurisdictions in
which we obtain contracts. Competition for personnel in the Internet industry is
intense. We may not be able to retain our current key employees or attract,
integrate or retain other qualified employees in the future. If we do not
succeed in attracting new personnel or integrating, retaining and motivating our
current personnel, our business could be harmed. In addition, new employees
generally require substantial training in the presentation, policies and
positioning of our government portals and other services. This training will
require substantial resources and management attention.
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TO BE SUCCESSFUL, WE MUST DEVELOP AND MARKET COMPREHENSIVE, EFFICIENT,
COST-EFFECTIVE AND SECURE ELECTRONIC ACCESS TO PUBLIC INFORMATION AND NEW
PRODUCTS AND SERVICES
Our success depends in part upon our ability to attract a greater number of
Internet users to access public information electronically by delivering a
comprehensive composite of public information and an efficient, cost-effective
and secure method of electronic access and transactions. Moreover, in order to
increase revenues in the future, we must continue to develop products and
services that businesses and citizens will find valuable, and there is no
guarantee that we will be able to do so. If we are unable to develop products
and services that allow us to attract, retain and expand our current user base,
our revenues and future results of operations may be harmed. We cannot assure
you that the products and services we offer will appeal to a sufficient number
of Internet users to generate continued revenue growth. For example, we cannot
assure you that the use of eFed, our online procurement software services, by
local, state and federal governments will continue to grow. Our ability to
attract Internet users to our government portals depends on several factors,
including:
- the comprehensiveness of public records available through our government
portals;
- the perceived efficiency and cost-effectiveness of accessing public
records electronically;
- the perceived efficacy of online government-to-business procurement
solutions;
- the effectiveness of security measures; and
- the increased usage and continued reliability of the Internet.
DEFICIENCIES IN OUR PERFORMANCE UNDER A GOVERNMENT CONTRACT COULD RESULT IN
CONTRACT TERMINATION, REPUTATIONAL DAMAGE OR FINANCIAL PENALTIES
Each government entity with which we contract has the authority to require
an independent audit of our performance. The scope of audits could include
inspections of income statements, balance sheets, fee structures, collections
practices, service levels and our compliance with applicable laws, regulations
and standards. We cannot assure you that a future audit will not find any
material performance deficiencies that would result in an adjustment to our
revenues and result in financial penalties. Moreover, the consequent negative
publicity could harm our reputation among other governments with which we would
like to contract. All of these factors could harm our business, results of
operations and financial condition.
WE MAY NEED MORE WORKING CAPITAL TO EXPAND OUR BUSINESS
We anticipate that our current resources will be sufficient to meet our
present working capital and capital expenditure requirements for at least the
next nine to twelve months. However, we may need to raise additional capital
before this period ends to do the following:
- expand our services and products offerings;
- acquire complementary businesses or technologies;
- support our expansion into other states, cities, municipalities and
federal agencies and internationally; and
- respond to competitive pressures.
Our future liquidity and capital requirements will depend upon numerous
factors, including the success of our existing and new product and service
offerings and potentially competing technological and market developments. We
may be required to raise additional funds through public or private financing,
strategic relationships or other arrangements. We cannot assure you that such
additional funding, if needed, will be available on terms acceptable to us, or
at all. If adequate funds are not available on acceptable terms, our ability to
develop or enhance our products and services, take advantage of future
opportunities or respond to competitive pressures would be significantly
limited. This limitation could harm our business, results of operations and
financial condition.
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WE MAY BE UNABLE TO INTEGRATE NEW TECHNOLOGIES AND INDUSTRY STANDARDS
EFFECTIVELY
Our future success will depend on our ability to enhance and improve the
responsiveness, functionality and features of our products and services in
accordance with industry standards and to address the increasingly sophisticated
technological needs of our customers on a cost-effective and timely basis. Our
ability to remain competitive will depend, in part, on our ability to:
- enhance and improve the responsiveness, functionality and other features
of the government portals we offer;
- continue to develop our technical expertise;
- develop and introduce new services, applications and technology to meet
changing customer needs and preferences; and
- influence and respond to emerging industry standards and other
technological changes in a timely and cost-effective manner.
We cannot assure you that we will be successful in responding to the above
technological and industry challenges in a timely and cost-effective manner. If
we are unable to integrate new technologies and industry standards effectively,
our results of operations could be harmed.
WE COULD STILL FACE PROBLEMS RELATED TO THE YEAR 2000 ISSUE
To date, our customers have not reported any problems with our government
portals or software applications and products as a result of the commencement of
the year 2000, and we have not experienced any impairment in our internal
operations with the year 2000 issue. Nevertheless, computer experts have warned
that there may still be residual consequences stemming from the change in
centuries and, if these consequences become widespread, they could result in
claims against us, a decrease in revenues generated by our government portals
and software applications and products and services, increased operating
expenses and other business interruptions.
WE DEPEND ON THE INCREASING USE OF THE INTERNET AND ON THE GROWTH OF ONLINE
GOVERNMENT INFORMATION SYSTEMS. IF THE USE OF THE INTERNET AND ELECTRONIC
GOVERNMENT INFORMATION SYSTEMS DO NOT GROW AS ANTICIPATED, OUR BUSINESS WILL BE
SERIOUSLY HARMED
Our business depends on the increased acceptance and use of the Internet as
a medium for accessing public information and completing government filings and
procurement contracts. Rapid growth in the use of the Internet is a recent
phenomenon. As a result, acceptance and use may not continue to develop at
historical rates and a sufficiently broad base of individual and business
customers may not adopt or continue to use the Internet as a medium for
accessing government portals and other online services. Demand and market
acceptance for recently introduced services and products over the Internet are
subject to a high level of uncertainty, and there exist few proven services and
products.
Our business would be seriously harmed if:
- Use of the Internet and other online services does not continue to
increase or increases more slowly than expected; or
- The technology underlying the Internet and other online services does not
effectively support any expansion that may occur.
IF THE INTERNET INFRASTRUCTURE FAILS TO DEVELOP OR BE ADEQUATELY MAINTAINED, OUR
BUSINESS WOULD BE HARMED BECAUSE USERS MAY NOT BE ABLE TO ACCESS OUR GOVERNMENT
PORTALS
Our success depends on the increase in Internet usage generally and in
particular as a means to access public information electronically. This in part
requires the development and maintenance of the Internet
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infrastructure. If this infrastructure fails to develop or be adequately
maintained, our business would be harmed because users may not be able to access
our government portals. Among other things, this development and maintenance
will require a reliable network backbone with the necessary speed, data
capacity, security and timely development of complementary products for
providing reliable Internet access and services.
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. If the Web
continues to experience increased numbers of users, frequency of use or
increased bandwidth requirements, the Internet infrastructure may not be able to
support these increased demands or perform reliably. The Internet has
experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure, and could face such outages and delays in the
future. These outages and delays could reduce the level of Internet usage and
traffic on our government portals. Such outages and delays would also hinder our
customers' ability to file UCC documents online, renew professional licenses
electronically, file fuel tax applications and complete online government
purchase orders and requisitions. In addition, the Internet could lose its
viability due to delays in the development or adoption of new standards and
protocols to handle increased levels of activity or due to increased
governmental regulation. If the Internet infrastructure is not adequately
developed or maintained, use of our government portals and our
government-to-citizen and government-to-business services may be reduced.
WE MAY BE HELD LIABLE FOR CONTENT THAT WE OBTAIN FROM GOVERNMENT AGENCIES
Because we aggregate and distribute sometimes private and sensitive public
information over the Internet, we may face potential liability for defamation,
libel, negligence, invasion of privacy, copyright or trademark infringement, and
other claims based on the nature and content of the material that is published
on our government portals. Most of the agreements through which we obtain
consent to disseminate this information do not contain indemnity provisions in
our favor. These types of claims have been brought, sometimes successfully,
against online services and Web sites in the past. We cannot assure you that our
general liability insurance will be adequate to indemnify us for all liability
that may be imposed. Any liability that is not covered by our insurance or is in
excess of our insurance coverage could severely harm our business operations and
financial condition.
CONCERNS OVER TRANSACTIONAL SECURITY MAY HINDER THE GROWTH OF OUR BUSINESS
A significant barrier to electronic commerce is the secure transmission of
confidential information over public networks. Any breach in our security could
expose us to a risk of loss or litigation and possible liability. We rely on
encryption and authentication technology licensed from third parties to provide
secure transmission of confidential information. As a result of advances in
computer capabilities, new discoveries in the field of cryptography or other
developments, a compromise or breach of the algorithms we use to protect
customer transaction data may occur. Because we provide information released
from various government entities, we may represent an attractive target for
security breaches.
A compromise of our security or a perceived compromise of our security could
severely harm our business. A party who is able to circumvent our security
measures could misappropriate proprietary information, including customer credit
card information, or cause interruptions or direct damage to our government
portals. Also, should hackers obtain sensitive data and information, or create
bugs or viruses in an attempt to sabotage the functionality of our products and
services, we may receive negative publicity, incur liability to our customers or
lose the confidence of the governments with which we contract, any of which may
cause the termination or modification of our government contracts.
We may be required to expend significant capital and other resources to
protect against the threat of security breaches or to alleviate problems caused
by these breaches. However, protection may not be available at a reasonable
price or at all.
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OUR SYSTEMS MAY FAIL OR LIMIT USER TRAFFIC, WHICH COULD HARM OUR BUSINESS,
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Our communications hardware and computer hardware operations for delivering
our electronic government services are located individually in each state or
city where we provide those services. We cannot assure you that during the
occurrence of fire, floods, earthquakes, power loss, telecommunications
failures, break-ins and similar events that the modem banks and direct dial-up
connections we have to serve as back-up systems will not prevent damage to our
systems or cause interruptions to our services. Computer viruses, electronic
break-ins or other similar disruptive problems could cause users to stop
visiting our government portals and could cause our clients to terminate
agreements with us. If any of these circumstances occurred, our business could
be harmed. Our insurance policies may not adequately compensate us for any
losses that may occur due to any failures of or interruptions in our systems.
Our government portals must accommodate a high volume of traffic and deliver
frequently updated information. These government portals may experience
interruptions due to any failure or delay by government agencies in the
transmission or receipt of this information. Due to holidays and technical
problems with state computer systems, our Web sites have experienced slower
response times or decreased traffic in the past and may experience the same
incidents in the future. In addition, our users depend on Internet service
providers, online service providers and other Web site operators for access to
our government portals and other online government-to-citizen and
government-to-business services. Many of these providers and operators have
experienced significant outages in the past due to system failures unrelated to
our systems, holidays and heavy user traffic, and could experience the same
outages, delays and other difficulties in the future. Any of these system
failures could harm our business, results of operations and financial condition.
ITEM 2. PROPERTIES
Our principal administrative facility occupies a total of approximately
3,000 square feet at 12 Corporate Woods, 10975 Benson Street, Suite 390,
Overland Park, Kansas 66210. All of our subsidiaries also lease their
facilities. We believe our current facilities are adequate to meet our needs for
the foreseeable future. We do not anticipate acquiring property or buildings in
the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We may from time to time become a party to various legal proceedings arising
in the ordinary course of our business. However, we are not currently subject to
any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the fourth
quarter of fiscal 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Since July 15, 1999, the date of our initial public offering, our stock has
traded on the Nasdaq National Market under the symbol "EGOV." The following
table shows the range of high and low closing sales prices reported on the
Nasdaq National Market for the periods indicated. On March 1, 2000, the closing
price of our common stock was $50.625.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1999 HIGH LOW
- ----------------------------------- -------- --------
<S> <C> <C>
Third Quarter (from July 15, 1999)........................ $28.25 $ 12.81
Fourth Quarter............................................ $39.63 $ 24.38
</TABLE>
As of March 1, 2000, there were approximately 158 holders of record of
shares of the Company's common stock.
RECENT SALES OF UNREGISTERED SECURITIES
For the year ended December 31, 1999, we have granted or issued and sold the
following unregistered securities:
1. On February 8, 1999, we sold to Mr. Joseph Nemelka 69,304 shares of our
common stock at $1.44 per share for approximately $100,000.
2. On February 9, 1999, we sold to Mr. James B. Dodd 173,258 shares of our
common stock at $1.44 per share for approximately $250,000.
3. On March 1, 1999, we sold to Mr. Robert P. Chandler 69,302 shares of our
common stock at $1.44 per share for approximately $100,000.
4. On March 1, 1999, we sold to Ms. Tamara Dukes 17,324 shares of our common
stock at $1.44 per share for approximately $25,000.
5. On March 1, 1999, we sold to Mr. Richard L. Brown 17,324 shares of our
common stock at $1.44 per share for approximately $25,000.
6. On May 16, 1999, we sold to Mr. Kevin C. Childress 23,727 shares of our
common stock at $5.27 per share for approximately $125,000.
7. On September 15, 1999, we issued to Electric Press, Inc., 606,000 shares of
unregistered common stock with a fair value of approximately $14.5 million.
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 had access to adequate
information about us or were deemed to be exempted in reliance on Rule 701
promulgated under the Securities Act as transactions pursuant to a compensatory
benefit plan or written compensation contract.
DIVIDEND POLICY
Other than dividends paid while we were an S corporation, we have never
declared or paid any cash dividends on shares of our common stock and do not
anticipate declaring or paying dividends on our common stock in the foreseeable
future. We expect that we will retain all available earnings generated by our
operations for the development and growth of our business. Any future
determination as to the payment of dividends will be made at the discretion of
our Board of Directors and will depend on our
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operating results, financial condition, capital requirements, general business
conditions and such other factors as the Board of Directors deems relevant.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with the consolidated financial statements and related notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included in this Form 10-K. On March 31, 1998, we exchanged our
common stock for the common stock of five affiliated companies in a transaction
referred to as the Exchange Offer. Prior to the completion of the Exchange
Offer, we were a holding company with no operations of our own. The Exchange
Offer consolidated five business units as operating subsidiaries under a holding
company. Prior to April 1, 1998, our 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. Accordingly, the historical comparison of our consolidated statement
of operation data set forth below for the year ended December 31, 1999, against
the years ended December 31, 1998, 1997, 1996 and 1995 is not necessarily
meaningful. For additional information on the Exchange Offer, refer to note 3 in
the notes to consolidated financial statements included in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues........................................... $ 3 $ 236 $ 966 $28,624 $ 56,966
Cost of revenues................................... -- 21 5 21,211 42,191
Gross profit....................................... 3 215 991 7,413 14,775
Operating income (loss)............................ (9) 8 (277) (7,205) (14,470)
Net income (loss).................................. (9) 8 (277) (7,896) (10,730)
Net income (loss) per share-basic and diluted...... (0.47) 0.00 (0.01) (0.21) (0.23)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ -- $ -- $ 179 $ 1,311 $ 9,527
Marketable securities.............................. -- -- -- -- 82,481
Total assets....................................... 14 110 326 17,249 133,661
Bank lines of credit............................... -- -- -- 1,024 --
Long-term debt (includes current portion of notes
payable/capital lease obligations)............... -- -- 30 745 458
Total shareholders' equity......................... (15) 95 188 10,912 128,089
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
This Form 10-K 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" or we
"anticipate" 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. In addition, we
will not necessarily update the information in this Form 10-K if any
forward-looking statement later turns out to be inaccurate. Details about risks
affecting various aspects of our business are discussed throughout this
Form 10-K. Investors should read all of these risks carefully.
OVERVIEW
In this section, we are providing more detailed information about our
operating results and changes in financial position over the past three years.
This section should be read in conjunction with the consolidated financial
statements and related notes included in this Form 10-K.
We are a provider of Internet-based, electronic government services that
help governments use the Internet to reduce costs and provide a higher level of
service to businesses and citizens. We enter into contracts with governments and
on their behalf design, build and operate Internet-based portals. These portals
consist of Web sites and applications that we build, which allow businesses and
citizens to access government information online and complete transactions,
including applying for a permit, retrieving driver's license records or filing a
form or report. We also provide an online system for government procurement
through our recently acquired subsidiary, eFed, as further discussed below. In
addition, on February 16, 2000, we signed a definitive agreement to acquire SDR
Technologies Inc. ("SDR"), which is the leading developer of online elections
and ethics filing systems as further discussed below. Our unique business model
allows us to reduce our government clients' financial and technology risks and
obtain revenue by charging fees for electronic government services and remitting
a portion to our government clients. Our clients benefit because they gain a
centralized, customer-focused presence on the Internet, and businesses and
citizens gain a faster, more convenient and more cost-effective means to
interact with governments.
We currently provide Internet-based electronic government services for the
state governments of Arkansas, Georgia, Indiana, Iowa, Kansas, Maine, Nebraska,
Utah and Virginia and the city-county government of the City of Indianapolis and
Marion County, Indiana. We have recently been selected to provide services to
and have entered into contracts with the states of Hawaii and Idaho. We
typically enter into three to five year contracts with our government clients
and manage operations through separate subsidiaries that operate as
decentralized business units with a high degree of autonomy. Under these
contracts, each local business unit helps its government client implement,
develop, manage and enhance a single, comprehensive portal for conducting
transactions and delivering information to businesses and citizens online, and
we remit to the government a share of the fee revenue we obtain through use of
the portal for transactions. In our government contracts with Georgia and Iowa,
we provide consulting, development and management services for these government
portals predominantly under a fixed-price model. Subscription-based and
transaction-based fees charged for access to motor vehicle records and corporate
filings accounted for over 89% of our revenues for the years ended December 31,
1999 and 1998. We believe that while these applications will continue to be
important sources of revenues, their contributions as a percentage of our total
revenues will decline as other sources grow.
We charge for access to records on a per-record basis and, depending upon
government policies, also on a fixed or sliding scale bulk basis. Our fees are
set by negotiation with the government agencies that control the records and are
typically approved by a government sanctioned oversight body. We recognize
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revenues from transactions on an accrual basis and bill end-user customers
primarily on a monthly basis. We typically receive a majority of payments via
electronic funds transfer and credit card within 20 days of billing and remit
payment to governments within 60 days of the transaction. Government agency fees
and amounts payable to the primary contracting governmental entities are also
accrued as cost of revenues and accounts payable at the time revenues are
recognized.
Revenues from state portal business units are highly correlated to
population, but are also affected by pricing policies established by government
entities for public records, the number and growth of commercial enterprises and
the government entity's development of policy and information technology
infrastructure supporting electronic government.
Substantially all of our cost of revenues consist of payments we make to our
government clients. The pricing, costs and gross margin derived from these
transactions vary by the type of transaction and by state.
ACQUISITION OF EFED
On September 15, 1999, we completed the acquisition of eFed, a market leader
in Internet-based procurement solutions for governments. eFed designs, develops
and manages online procurement software and services for federal and state
markets. Already contracting with 11 federal agencies, eFed provides new and
proven value-added applications to our existing government partners, as well as
potential new entry points into other federal, state and local sectors. For
additional information relating to our acquisition of eFed, refer to note 4 in
the notes to consolidated financial statements included in this Form 10-K.
On March 3, 2000, eFed entered into an operating agreement with Bank of
America Corporation, through its subsidiary Bank of America, N.A. (USA), to
create a limited liability company to offer state and local governments the
first Web-based business-to-business procurement, payment and reconciliation
service. The two companies will share revenues generated by the limited
liability company. In addition, the letter of intent provides that Bank of
America will have the opportunity to become a strategic investor in our company
upon the achievement of certain revenue performance criteria by the new company.
Warrants of 0.75% up to 2.5% of the current fully diluted shares of our
outstanding common stock will become exercisable upon achieving certain
cumulative revenue targets by December 31, 2004. These warrants are priced in
two equally sized series at $34.44 and $44.77. Once exercisable, Bank of America
will have until the later of December 31, 2005, or 24 months to exercise the
warrants on the shares. For additional information on our strategic business
relationship with Bank of America, refer to note 20 in the notes to consolidated
financial statements included in this Form 10-K.
PENDING ACQUISITION OF SDR TECHNOLOGIES, INC.
On February 16, 2000, we signed a definitive agreement to acquire SDR, a
provider of Internet-based applications for governments, in exchange for
approximately 2.1 million shares of our common stock. 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. The SDR acquisition will be accounted for as a
purchase and is expected to close by the end of March 2000. For additional
information on the acquisition of SDR, refer to note 20 in the notes to
consolidated financial statements included in this Form 10-K.
OTHER RECENT DEVELOPMENTS
On January 14, 2000, we merged our Application Services Division with
Conquest Softworks, LLC. The combined entity holds contracts with state and
local governments for Web-enabling the back-office systems and processes for
business-to-government filings. NIC Conquest, the newly formed entity, is a
provider of software applications and services for electronic filings and
document management solutions for government. Its products include UCCDataNet
State Imaging and Filing System, a comprehensive UCC office management system;
uccfile.com Web Browser Interface, which allows Web access to filings;
29
<PAGE>
and County Suite Filing and Imaging Systems, which extends filing capabilities
to land records and other filing types. We own approximately 65% of NIC
Conquest. NIC Conquest employees and other shareholders who were previously
shareholders of Conquest Softworks, LLC own the remainder. During the first
quarter of 2000, it is estimated that NIC Conquest will incur approximately
$500,000 in non-cash compensation expenses related to the sale of common stock
to employees in connection with this transaction. For additional information on
the merger, refer to note 20 in the notes to consolidated financial statements
included in this Form 10-K.
On February 22, 2000, we filed a registration statement on Form S-1 for an
offering of approximately 8.1 million shares of our common stock. We intend to
issue four million new shares of common stock with the remainder to be offered
by selling shareholders. The offering has not yet been declared effective by the
Securities and Exchange Commission.
RESULTS OF OPERATIONS
On March 31, 1998, we exchanged our common stock for the common stock of
five affiliated companies, in a transaction referred to as the Exchange Offer.
Prior to the completion of the Exchange Offer, we were a holding company with no
operations of our own. Our Exchange Offer consolidated five business units as
operating subsidiaries under our holding company.
Prior to April 1, 1998, our 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 year ended December 31, 1998, revenues for all of
our business units were $36.5 million, while the reported revenues of
$28.6 million for the year ended December 31, 1998 represents 12 months of one
of our business units and only nine months of the other four business units.
Total expenses are likewise not comparable. Accordingly, we believe that the
historical comparison of our results of operations for the year ended
December 31, 1999 against the year ended December 31, 1998, and the year ended
December 31, 1998 against the year ended December 31, 1997, is not necessarily
meaningful. For additional information on the Exchange Offer, refer to note 3 in
the notes to consolidated financial statements included in this Form 10-K.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
REVENUES. Revenues were $57.0 million for the year ended December 31, 1999
compared to $28.6 million for the year ended December 31, 1998. This increase
was primarily attributable to $8.3 million in revenues from our four initial
business units included in reported revenues in the first quarter of 1999
compared to none reported in 1998 prior to the March 31, 1998 Exchange Offer, a
$16.1 million increase in revenues from our state business units that became
operational during the second half of 1998 and third quarter of 1999, a
$2.0 million increase in same state business volumes, a $1.6 million increase in
revenues relating to our eFed division and a $400,000 increase in revenues from
our Application Services Division. With all business units included for the
entire period, combined revenues were $36.5 million for the year ended
December 31, 1998.
Revenues increased to $28.6 million for the year ended December 31, 1998
from $1.0 million for the year ended December 31, 1997. The increase in 1998 was
primarily attributable to $23.1 million in revenues from our four initial
business units subsequent to March 31, 1998 and $4.5 million in revenues from
the addition of new state business units that became operational during the
latter part of 1998.
Total revenues for our four initial business units were $31.0 million for
the year ended December 31, 1998 and $23.4 million for the year ended
December 31, 1997. The increase was primarily attributable to a $5.6 million
revenue increase from one of the initial business units that became operational
during the latter part of 1997 and to increases in same state business volumes.
30
<PAGE>
COST OF REVENUES. Cost of revenues increased to $42.2 million for the year
ended December 31, 1999 from $21.2 million for the year ended December 31, 1998.
This increase was primarily attributable to $6.5 million from our four initial
business units included in reported cost of revenues in the first quarter of
1999 compared to none reported in 1998 prior to the March 31, 1998 Exchange
Offer, $12.8 million from our state business units that became operational
during the second half of 1998 and third quarter of 1999 and $1.7 million from
same state business unit growth. With all business units included for the entire
period, combined cost of revenues was $27.4 million for the year ended
December 31, 1998.
Cost of revenues increased to $21.2 million for the year ended December 31,
1998 from $5,000 for the year ended December 31, 1997. The increase in 1998 was
primarily attributable to $18.1 million in cost of revenues for our four initial
business units and $3.1 million in cost of revenues from the addition of new
state business units.
Total cost of revenues for our four initial business units was
$24.3 million for the year ended December 31, 1998 and $18.4 million for the
year ended December 31, 1997. This increase was mainly due to $4.9 million in
cost of revenues from the business unit that became operational in the latter
part of 1997 and to the cost of revenues associated with the increase in same
state business volumes.
GROSS PROFIT. Gross profit increased to $14.8 million for the year ended
December 31, 1999 from $7.4 million for the year ended December 31, 1998. This
increase is primarily due to $1.8 million from our initial four business units,
$3.4 million from new state business units that became operational in the second
half of 1998 and third quarter of 1999, $300,000 from same state business unit
growth, $1.5 million from our eFed division and $400,000 from our Application
Services Division. Offsetting costs of our Application Services Division are
reported in service development and operations in the consolidated statements of
operations. With all business units included for the entire period, combined
gross profit was $9.1 million for the year ended December 31, 1998.
The gross margin rate was 26.0% of revenues for the year ended December 31,
1999 compared to 25.9% for the year ended December 31, 1998. With the four
initial business units included for the entire period, the gross margin rate
would have been 25.0% for the year ended December 31, 1998. The slight increase
in gross margin rate in 1999 is primarily attributable to the margins achieved
by our eFed division, which has a significantly higher margin rate than our
state business units.
Gross profit increased to $7.4 million for the year ended December 31, 1998
from $991,000 for the year ended December 31, 1997. The increase in 1998 was
primarily attributable to $5.0 million in cost of revenues for our four initial
business units and $1.4 million in cost of revenues from the addition of new
state business units.
Total gross profit for our four initial business units was $6.7 million for
the year ended December 31, 1998 and $5.0 million for the year ended
December 31, 1997. This increase was mainly due to $700,000 of gross profit from
the business unit that became operational in the latter part of 1997 and to the
gross profit associated with the increase in same state business volumes. The
gross margin rate for our four initial business units was 21.6% for the year
ended December 31, 1998 and 21.4% for the year ended December 31, 1997.
SERVICE DEVELOPMENT AND OPERATIONS. Service development and operations
costs increased to $5.9 million for the year ended December 31, 1999 from
$3.9 million for the year ended December 31, 1998. The increase was due
primarily to $600,000 from our initial four business units, $700,000 from new
state business units that became operational in the second half of 1998 and
second half of 1999, $500,000 from same state expense increases, and $400,000
from our eFed division. In the fourth quarter of 1998, we recorded a
$1.3 million non-cash charge in our Application Services Division for
anticipated costs in excess of revenues on obligations under our application
services contracts. We recorded additional non-cash charges totaling
$1.1 million in 1999 for additional expected losses on our application services
contracts.
31
<PAGE>
Service development and operations costs increased to $3.9 million for the
year ended December 31, 1998 from $224,000 for the year ended December 31, 1997.
The increase in 1998 was primarily attributable to $1.8 million from our four
initial business units, $500,000 from additional state business units, and from
our Application Services Division, for which we recorded a $1.3 million charge
in the fourth quarter of 1998 as discussed above.
Total service development and operations costs for our four initial business
units were $2.2 million for the year ended December 31, 1998 and $1.1 million
for the year ended December 31, 1997. This increase was primarily due to
$500,000 in costs incurred by one of our initial business units for work
performed for our Application Services Division, $200,000 from the business unit
that became operational in the latter part of 1997, and costs associated with
the development of new applications.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
costs increased to $9.2 million for the year ended December 31, 1999 from
$4.2 million for the year ended December 31, 1998. This increase was primarily
attributable to $700,000 in costs from our four initial business units,
$1.2 million from new business units that became operational in the second half
of 1998 and third quarter of 1999, $800,000 from our eFed division, and a
$2.2 million increase in corporate level expenses as a result of our overall
growth, including the addition of corporate level marketing, finance and
management personnel.
Selling, general and administrative costs increased to $4.2 million for the
year ended December 31, 1998 from $660,000 for the year ended December 31, 1997.
The increase in 1998 was primarily attributable to $2.4 million from our four
initial business units and $1.0 million from the addition of new state business
units.
Total selling, general and administrative costs for our four initial
business units were $3.2 million for the year ended December 31, 1998 and
$2.5 million for the year ended December 31, 1997. This increase was primarily
attributable to $300,000 in costs from the business unit that became operational
in the latter part of 1997 and an overall increase in insurance, recruiting and
payroll-related expenses attributable to the growth in the other initial
business units.
STOCK COMPENSATION. Stock compensation increased to $3.2 million for the
year ended December 31, 1999 from $600,000 for the year ended December 31, 1998.
This increase was due to compensation expense recognized on stock sales to
senior level executives in the first half of 1999 and on stock options granted
to senior level executives and other key employees in late 1998 and 1999. From
February 1999 through May 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. In addition, we recognized approximately $1.6 million in
compensation expense for the year ended December 31, 1999 relating to stock
options.
Stock compensation increased to $600,000 for the year ended December 31,
1998 from $400,000 for the year ended December 31, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$11.0 million for the year ended December 31, 1999 from $5.9 million for the
year ended December 31, 1998. This increase is due to an additional quarter of
intangible asset amortization in 1999 resulting from the Exchange Offer of
$1.9 million and the amortization of the software intangible and goodwill
resulting from our acquisition of eFed on September 15, 1999 of $2.8 million.
The remainder of the increase is attributable to additional depreciation
expense, as additions to property and equipment in 1999 were approximately
$1.8 million.
Depreciation and amortization increased to $5.9 million for the year ended
December 31, 1998 from $14,000 for the year ended December 31, 1997. The 1998
expense consisted primarily of amortization of goodwill and intangible assets
resulting from the completion of the Exchange Offer.
OPERATING LOSS. Operating loss for the year ended December 31, 1999 was
$14.5 million compared to $7.2 million for the year ended December 31, 1998.
Excluding non-cash charges for stock compensation,
32
<PAGE>
depreciation and amortization, and the loss contract charges in our Application
Services Division, operating income would have been $800,000 for the year ended
December 31, 1999 compared to $500,000 for the year ended December 31, 1998. Pro
forma operating income would have been $1.0 million for the year ended
December 31, 1998.
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 year ended December 31, 1999, the increase in
other income, net, primarily reflects interest income earned on these
investments.
INCOME TAXES. We recognized an income tax benefit of approximately
$1.4 million for the year ended December 31, 1999. This provision was partially
attributable to a taxable net loss in the current year. The income tax benefit
is less than the amount customarily expected because of expenses that are not
deductible for tax purposes including amortization of goodwill from the Exchange
Offer and certain stock compensation costs. In addition, certain temporary
differences gave rise to deferred tax assets relating to non-qualified stock
option expense and intangible asset amortization as a result of the eFed
acquisition. These deferred tax assets were partially offset by deferred tax
liabilities relating to depreciation, discount accretion on our marketable
securities, and amortization of contract intangibles as a result of our
March 31, 1998 Exchange Offer. We recognized an income tax provision of $659,000
for the year ended December 31, 1998. This provision was attributable to a
one-time $1.4 million provision for deferred taxes on our conversion to a C
corporation and to goodwill amortization relating to the Exchange Offer and a
portion of stock compensation being non-deductible for tax purposes. For the
year ended December 31, 1997, we were an S corporation and did not record income
tax expense.
33
<PAGE>
SELECTED HISTORICAL QUARTERLY OPERATING RESULTS
The following table presents certain historical consolidated statement of
operations data for our 12 most recent quarters ended December 31, 1999. Actual
results of operations data are presented for all periods. In management's
opinion, this unaudited information has been prepared on the same basis as the
audited annual financial statements and includes all adjustments, consisting
only of normal recurring adjustments, necessary for fair presentation of the
unaudited information for the quarters presented. You should read this
information in conjunction with the consolidated financial statements, including
the notes thereto, included elsewhere in this Form 10-K. The results of
operations for any quarter are not necessarily indicative of results that we
might achieve for any subsequent periods. In addition, the quarterly results of
operations prior to April 1, 1998 only reflect the results of our business unit
formed to pursue new business opportunities.
<TABLE>
<CAPTION>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- --------- ---------- --------- --------- --------- ---------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 200 $ 216 $ 285 $ 295 $ 361 $ 8,494 $ 9,773 $ 9,996
Cost of revenues........ -- -- 2 3 1 6,152 7,347 7,711
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 200 216 283 292 360 2,342 2,426 2,285
------- ------- ------- ------- ------- ------- ------- -------
Operating Expenses:
Service, development
and operations...... 44 48 53 79 135 676 806 2,268
Selling, general and
administrative...... 111 162 145 242 325 1,381 1,219 1,317
Stock compensation.... -- -- 146 224 -- 259 -- 310
Depreciation and
amortization........ 2 2 3 7 24 1,968 1,962 1,968
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 157 212 347 552 484 4,284 3,987 5,863
------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)................ 43 4 (64) (260) (124) (1,942) (1,561) (3,578)
------- ------- ------- ------- ------- ------- ------- -------
Other income (expense):
Interest expense...... -- -- -- -- -- (19) (31) (38)
Other income, net..... -- -- -- -- -- 15 24 17
------- ------- ------- ------- ------- ------- ------- -------
Total other income
(expense)........... -- -- -- -- -- (4) (7) (21)
Income (loss) before
income taxes.......... 43 4 (64) (260) (124) (1,946) (1,568) (3,599)
Income taxes............ -- -- -- -- -- -- 370 289
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 43 $ 4 $ (64) $ (260) $ (124) $(1,946) $(1,938) $(3,888)
======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per
share:
Basic and diluted..... $ 0.00 $ 0.00 $ (0.00) $ (0.01) $ (0.01) $ (0.05) $ (0.05) $ (0.09)
======= ======= ======= ======= ======= ======= ======= =======
Weighted average
shares
outstanding......... 20,532 20,536 20,826 21,527 22,679 41,946 42,066 42,066
======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999
--------- --------- ---------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues................ $11,455 $13,311 $15,691 $16,509
Cost of revenues........ 8,604 10,220 11,672 11,696
------- ------- ------- -------
Gross profit............ 2,851 3,091 4,019 4,813
------- ------- ------- -------
Operating Expenses:
Service, development
and operations...... 935 1,655 1,362 1,924
Selling, general and
administrative...... 1,518 1,742 2,226 3,727
Stock compensation.... 1,699 648 388 453
Depreciation and
amortization........ 2,001 1,987 2,421 4,559
------- ------- ------- -------
Total operating
expenses............ 6,153 6,032 6,397 10,663
------- ------- ------- -------
Operating income
(loss)................ (3,302) (2,941) (2,378) (5,850)
------- ------- ------- -------
Other income (expense):
Interest expense...... (37) (50) (58) (24)
Other income, net..... 17 22 1,130 1,325
------- ------- ------- -------
Total other income
(expense)........... (20) (28) 1,072 1,301
Income (loss) before
income taxes.......... (3,322) (2,969) (1,306) (4,549)
Income taxes............ (23) (466) 136 (1,063)
------- ------- ------- -------
Net income (loss)....... $(3,299) $(2,503) $(1,442) $(3,486)
======= ======= ======= =======
Net income (loss) per
share:
Basic and diluted..... $ (0.08) $ (0.06) $ (0.03) $ (0.07)
======= ======= ======= =======
Weighted average
shares
outstanding......... 42,243 42,494 50,968 53,130
======= ======= ======= =======
</TABLE>
We expect results of operations to fluctuate significantly in the future as
a result of a variety of factors, many of which are outside of our control. See
"Other Factors Affecting Our Business--Our quarterly operating results are
volatile and difficult to predict" and "--The seasonality of use for some of our
electronic government products and services may harm our fourth quarter results
of each calendar year" for more information on quarterly fluctuations and
seasonality and how it affects our business.
We believe that period-to-period comparisons of our results of operations
will not necessarily be meaningful and you should not rely on them as an
indication of future performance. It is possible that in
34
<PAGE>
some future periods our results of operations may be below the expectations of
public market analysts and investors. In such event, the trading price of our
common stock may decline.
LIQUIDITY AND CAPITAL RESOURCES
On July 20, 1999, we completed our initial public offering, selling an
aggregate of 10 million new shares of common stock for net proceeds of
approximately $109.4 million after deducting underwriting discounts, commissions
and expenses. The net proceeds have been placed in short-term, investment-grade,
interest-bearing marketable securities. In addition to $82.5 million of
short-term marketable securities, our liquid resources at December 31, 1999
include cash and cash equivalents of approximately $9.5 million and unused
operating lines of credit totaling approximately $2.5 million. Each of our
business units maintains operating lines of credit and equipment lines of credit
on identical or substantially similar terms and conditions from the same bank.
Net cash used in operating activities was approximately $2.3 million for the
year ended December 31, 1999 compared to net cash provided by operating
activities of $354,000 for the year ended December 31, 1998. The increase in
cash used in operations is primarily attributable to increased working capital
needs in the current year as a result of our overall growth. Corporate level
expenses increased in the current year as a result of strategic infrastructure
investments, including the addition of corporate level marketing, finance and
management personnel. We expect operating cash flow to be negative for at least
the first two quarters of 2000 as a result of our continued investment in
corporate infrastructure and growth strategies.
Investing activities resulted in net cash used of approximately
$97.5 million for the year ended December 31, 1999, reflecting the purchase of
marketable securities with the net proceeds from our initial public offering and
the $15.0 million cash outlay for our acquisition of eFed.
Cash flow provided by financing activities was $108.1 million for the year
ended December 31, 1999, reflecting the net proceeds received from our initial
public offering, a portion of which was used to pay down all amounts outstanding
under our operating lines of credit. In addition, approximately $719,000 was
received from employee stock purchase and stock option transactions.
We anticipate that our current resources will be sufficient to meet our
present working capital and capital expenditure requirements for the next nine
to twelve 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.
YEAR 2000 READINESS
Many currently installed computer systems and software products were 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 not experienced any
significant software failures or the creation of erroneous results due to the
Year 2000 date change.
We have conducted an internal review of software systems that we use for
portal management, network monitoring, quality assurance, applications and
information and transaction processing. Because we developed most of these
software systems internally after the Year 2000 problem was already known, we
were largely able to anticipate four digit requirements. In connection with
ongoing reviews of our government portals, we also are reviewing our computer
infrastructure, including network equipment and servers. We did not experience
and do not anticipate any material problems with network equipment, as the
majority of our current configuration 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 have replaced any servers that could
not be updated either in the normal replacement cycle or on an accelerated
basis.
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<PAGE>
We also have internally standardized the majority of our systems on a
Solaris operating system, which we are advised by our vendor is Year 2000 ready
after implementation of the latest service upgrades. We use multiple software
systems for internal business purposes, including accounting, electronic mail,
service development, human resources, customer service and support and sales
tracking systems. The majority of these applications have been purchased,
upgraded or internally developed within the last three years.
We have made inquiries of vendors of systems we believe to be mission
critical to our business regarding their Year 2000 readiness. Although we have
received various assurances, we have not received affirmative documentation of
Year 2000 readiness from any of these vendors and we have not performed any
operational tests on our internal systems. We generally do not have contractual
rights with third-party providers should their equipment or software fail due to
Year 2000 issues. If this third-party equipment or software does not operate
properly with regard to Year 2000, we may incur unexpected expenses to remedy
any problems. These expenses could potentially include purchasing replacement
hardware and software. We have not determined the state of readiness of some of
our third-party suppliers of information and services, phone companies, long
distance carriers, financial institutions and electric companies, the failure of
any one of which could severely disrupt our ability to conduct our business.
However, we have not experienced any problems.
Concurrently with our analysis of our internal systems, we have surveyed
third-party entities with which we transact business, including government
clients, critical vendors and financial institutions, for Year 2000 readiness.
While no major issues have been discovered, we cannot be certain their systems
will not impact our operations. Our government clients typically have addressed
Year 2000 issues on an agency-by-agency basis under an overall Year 2000
program. We are monitoring regularly the Year 2000 progress of those agencies
that account for high transaction and revenue volumes through our portals. We
believe that many, though not all, of these agencies have completed Year 2000
readiness implementation. We cannot estimate the effect, if any, that non-ready
systems of these entities could have on our business, results of operations or
financial condition, and there can be no assurances that the impact, if any,
would not be material. However, we have not experienced any problems.
We anticipate that our review of Year 2000 issues will continue throughout
2000. The costs incurred to date to remediate our Year 2000 issues have not been
material. If any Year 2000 issues are uncovered with respect to these systems or
our other internal systems, we believe that we will be able to resolve these
problems without material difficulty, as replacement systems are available on
commercially reasonable terms. Presently, we have included the total remaining
cost of addressing Year 2000 issues within our existing information technology
budget. We did not experience any Year 2000 complications as a result of the
date change, and we do not anticipate any Year 2000 complications in the future
based on a number of assumptions. However, these assumptions may not be
accurate, which could cause our actual results to differ materially from those
anticipated. In view of our Year 2000 review and remediation efforts to date,
the recent passing of the date change to the year 2000, the recent development
of a number of our products and services and the recent installation of our
networking equipment and servers, we do not consider Year 2000 contingency
planning to be necessary.
Our applications operate in complex network environments and directly and
indirectly interact with a number of external hardware and software systems. We
are unable to predict to what extent our business may be affected if our systems
or the systems that operate in conjunction with our systems experience a
material Year 2000 failure. The most likely worst case scenarios are that the
Internet infrastructure fails or the internal systems of our government clients
fail, either of which would render us unable to provide products and services,
which would harm our business. Additionally, known or unknown errors or defects
that affect the operation of our software and systems could result in delay or
loss of revenue, interruption of services, cancellation of contracts and
memberships, diversion of development resources, damage to our reputation,
increased service and warranty costs, and litigation costs, any of which could
harm our business, results of operations and financial condition.
36
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relate to the
increase or decrease in the amount of interest income we can earn on our
short-term investments in marketable debt securities and cash balances. Because
our investments are in short-term, investment-grade, interest-bearing
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 risks, market risk and investment risk. We do not use
derivative financial instruments.
37
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,310,751 $ 9,527,389
Marketable securities..................................... -- 82,480,760
Trade accounts receivable................................. 2,908,043 6,009,925
Deferred income taxes..................................... -- 157,663
Prepaid expenses.......................................... 47,133 278,868
Other current assets...................................... 67,311 614,044
----------- ------------
Total current assets.................................... 4,333,238 99,068,649
Property and equipment, net................................. 1,229,415 2,998,376
Deferred income taxes....................................... -- 693,802
Other assets................................................ 17,183 253,665
Intangible assets, net...................................... 11,669,059 30,646,446
----------- ------------
Total assets............................................ $17,248,895 $133,660,938
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,376,505 $ 3,804,996
Accrued expenses.......................................... 227,106 872,795
Income taxes payable...................................... 68,700 83,653
Deferred income taxes..................................... 164,234 --
Bank lines of credit...................................... 1,023,592 --
Capital lease obligations--current portion................ 235,323 189,931
Notes payable--current portion............................ 50,000 50,000
Application services contracts............................ 1,256,000 231,969
Other current liabilities................................. 49,465 120,469
----------- ------------
Total current liabilities............................... 5,450,925 5,353,813
Capital lease obligation--long-term portion................. 409,989 218,164
Notes payable--long term portion............................ 50,000 --
Deferred income taxes....................................... 425,878 --
----------- ------------
Total liabilities....................................... 6,336,792 5,571,977
----------- ------------
Commitments and contingencies (Notes 4, 10, 13 and 20)...... -- --
Shareholders' equity:
Common stock, no par, 200,000,000 shares authorized
42,066,181 and 53,165,370 shares issued and
outstanding............................................. -- --
Additional paid-in capital................................ 19,551,646 149,035,928
Accumulated deficit....................................... (5,825,966) (16,556,526)
Accumulated other comprehensive income.................... -- 1,731
----------- ------------
.......................................................... 13,725,680 132,481,133
Less notes and stock subscriptions receivable............. -- (30,000)
Less deferred compensation expense........................ (2,813,577) (4,362,172)
----------- ------------
Total shareholders' equity.............................. 10,912,103 128,088,961
----------- ------------
Total liabilities and shareholders' equity.............. $17,248,895 $133,660,938
=========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
38
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
---------- ----------- ------------
<S> <C> <C> <C>
Revenues............................................... $ 996,550 $28,623,656 $ 56,966,128
Cost of revenues....................................... 5,168 21,210,632 42,190,835
---------- ----------- ------------
Gross profit......................................... 991,382 7,413,024 14,775,293
---------- ----------- ------------
Operating expenses:
Service development and operations................... 224,128 3,884,810 5,876,294
Selling, general and administrative.................. 660,254 4,241,780 9,212,837
Stock compensation................................... 370,235 568,869 3,188,051
Depreciation and amortization........................ 13,679 5,922,396 10,968,482
---------- ----------- ------------
Total operating expenses............................. 1,268,296 14,617,855 29,245,664
---------- ----------- ------------
Operating loss......................................... (276,914) (7,204,831) (14,470,371)
---------- ----------- ------------
Other income (expense):
Interest expense..................................... -- (88,161) (168,872)
Other income, net.................................... 111 55,839 2,492,460
---------- ----------- ------------
Total other income (expense)......................... 111 (32,322) 2,323,588
---------- ----------- ------------
Loss before income taxes............................... (276,803) (7,237,153) (12,146,783)
Income tax expense (benefit)........................... -- 658,813 (1,416,223)
---------- ----------- ------------
Net loss............................................... $ (276,803) $(7,895,966) $(10,730,560)
========== =========== ============
Net loss per share:
Basic and diluted.................................... $ (0.01) $ (0.21) $ (0.23)
========== =========== ============
Weighted average shares outstanding.................... 20,857,785 37,242,423 47,278,461
========== =========== ============
Pro forma tax provision (unaudited)-Note 12:
Net loss............................................. $ (276,803) $(7,895,966)
Pro forma provision for income taxes................. 36,438 (1,516,894)
---------- -----------
Pro forma net loss................................... $ (313,241) $(6,379,072)
========== ===========
Pro forma basic and diluted loss per share........... $ (0.02) $ (0.17)
========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
39
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES ACCUMULATED
COMMON STOCK ADDITIONAL AND STOCK DEFERRED OTHER
--------------------- PAID-IN ACCUMULATED SUBSCRIPTIONS COMPENSATION COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE EXPENSE INCOME
---------- -------- ------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1997.................... 20,357,609 $ -- $ 102,600 $ (7,552) $ -- $ -- $ --
Net loss.................. -- -- -- (276,803) -- -- --
Distributions to
shareholders............ -- -- -- (130,327) -- -- --
Issuance of common stock
to employees............ 1,930,600 -- 524,835 -- (25,000) -- --
---------- ---- ------------ ------------ --------- ----------- ------
Balance, December 31,
1997.................... 22,288,209 -- 627,435 (414,682) (25,000) -- --
Common stock issued in
exchange................ 19,255,155 -- 18,539,814 -- -- -- --
Net loss.................. -- -- -- (7,895,966) -- -- --
Distributions to
shareholders............ -- -- -- (838,367) -- -- --
Termination of Subchapter
S election.............. -- -- (3,323,049) 3,323,049 -- -- --
Issuance of common stock
to employees............ 522,817 -- 583,333 -- -- -- --
Stock options granted with
exercise price less than
fair market value at
date of grant........... -- -- 3,124,113 -- -- (2,855,390) --
Deferred compensation
expense recognized...... -- -- -- -- -- 41,813 --
Stock subscriptions
received................ -- -- -- -- 25,000 -- --
---------- ---- ------------ ------------ --------- ----------- ------
Balance, December 31,
1998.................... 42,066,181 -- 19,551,646 (5,825,966) -- (2,813,577) --
Net loss.................. -- -- -- (10,730,560) -- -- --
Stock options granted with
exercise price less than
fair market value at
date of grant........... -- -- 3,436,752 -- -- (3,144,152) --
Stock options exercised... 122,954 -- 177,018 -- -- -- --
Stock options cancelled... -- -- (274,056) -- -- 274,056 --
Deferred compensation
expense recognized...... -- -- -- -- -- 1,321,501 --
Issuance of common stock
to employees............ 370,235 -- 2,198,950 -- (250,000) -- --
Issuance of common stock
from initial public
offering, net of
expenses................ 10,000,000 -- 109,439,618 -- -- -- --
Issuance of common stock
to acquire business..... 606,000 -- 14,506,000 -- -- -- --
Stock subscriptions
received................ -- -- -- -- 220,000 -- --
Unrealized holding gain on
marketable securities... -- -- -- -- -- -- 1,731
---------- ---- ------------ ------------ --------- ----------- ------
Balance, December 31,
1999.................... 53,165,370 $ -- $149,035,928 $(16,556,526) $ (30,000) $(4,362,172) $1,731
========== ==== ============ ============ ========= =========== ======
<CAPTION>
TOTAL
------------
<S> <C>
Balance, January 1,
1997.................... $ 95,048
Net loss.................. (276,803)
Distributions to
shareholders............ (130,327)
Issuance of common stock
to employees............ 499,835
------------
Balance, December 31,
1997.................... 187,753
Common stock issued in
exchange................ 18,539,814
Net loss.................. (7,895,966)
Distributions to
shareholders............ (838,367)
Termination of Subchapter
S election.............. --
Issuance of common stock
to employees............ 583,333
Stock options granted with
exercise price less than
fair market value at
date of grant........... 268,723
Deferred compensation
expense recognized...... 41,813
Stock subscriptions
received................ 25,000
------------
Balance, December 31,
1998.................... 10,912,103
Net loss.................. (10,730,560)
Stock options granted with
exercise price less than
fair market value at
date of grant........... 292,600
Stock options exercised... 177,018
Stock options cancelled... --
Deferred compensation
expense recognized...... 1,321,501
Issuance of common stock
to employees............ 1,948,950
Issuance of common stock
from initial public
offering, net of
expenses................ 109,439,618
Issuance of common stock
to acquire business..... 14,506,000
Stock subscriptions
received................ 220,000
Unrealized holding gain on
marketable securities... 1,731
------------
Balance, December 31,
1999.................... $128,088,961
============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
40
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
--------- ----------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(276,803) $(7,895,966) $ (10,730,560)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 13,679 5,922,396 10,968,482
Compensation expense recognized related to sale of
common stock.......................................... 370,235 258,333 1,573,950
Compensation expense recognized related to stock
options............................................... -- 310,536 1,614,101
(Gain) loss on disposals of property and equipment...... 1,200 (12,639) (312)
Accretion of discount on marketable securities.......... -- -- (1,968,000)
Application services contracts.......................... -- 1,256,000 (1,024,031)
Deferred income taxes................................... -- 590,113 (1,441,577)
Changes in operating assets and liabilities, net of
effects of acquisitions:
(Increase) in trade accounts receivable................. (1,471) (21,980) (2,305,126)
(Increase) decrease in prepaid expenses................. (21,849) 3,335 (231,735)
(Increase) in other current assets...................... -- (54,956) (367,714)
(Increase) in other assets.............................. -- (8,103) (223,269)
Increase (decrease) in accounts payable................. 56,681 (184,889) 1,184,597
Increase in income taxes payable........................ -- 68,700 14,953
Increase in accrued expenses............................ 19,199 80,472 575,692
Increase in other current liabilities................... 17,119 43,034 71,004
--------- ----------- -------------
Net cash provided by (used in) operating activities....... 177,990 354,386 (2,289,545)
--------- ----------- -------------
Cash flows from investing activities:
Purchases of property and equipment....................... (112,521) (255,203) (1,765,692)
Proceeds from disposals of property and equipment......... 5,026 42,736 26,458
Proceeds from notes receivable from shareholders.......... -- 55,000 --
Capitalized software development costs.................... -- -- (145,260)
Purchases of marketable securities........................ -- -- (186,406,450)
Maturities of marketable securities....................... -- -- 88,607,000
Sales of marketable securities............................ -- -- 17,282,104
Acquisition of business................................... -- -- (15,146,544)
Cash of acquired companies................................ -- 764,908 --
--------- ----------- -------------
Net cash provided by (used in) investing activities....... (107,495) 607,441 (97,548,384)
--------- ----------- -------------
Cash flows from financing activities:
Net proceeds from initial public offering of common
stock................................................... -- -- 109,439,618
Proceeds from bank lines of credit........................ -- 1,190,285 1,251,000
Payments on bank lines of credit.......................... -- (270,084) (2,274,592)
Proceeds from notes payable............................... 29,942 -- --
Payments on notes payable................................. -- (29,942) (842,778)
Payments on capital lease obligations..................... -- (101,533) (237,217)
Payments on debentures payable............................ -- (130,130) --
Distributions to shareholders............................. (130,327) (588,367) --
Proceeds from issuance of common stock to employees....... 129,600 75,000 321,518
Proceeds from exercise of employee stock options.......... -- -- 177,018
Proceeds from subscriptions receivable.................... -- 25,000 220,000
--------- ----------- -------------
Net cash provided by financing activities................. 29,215 170,229 108,054,567
--------- ----------- -------------
Net increase in cash and cash equivalents................... 99,710 1,132,056 8,216,638
Cash and cash equivalents, beginning of year................ 78,985 178,695 1,310,751
--------- ----------- -------------
Cash and cash equivalents, end of year...................... $ 178,695 $ 1,310,751 $ 9,527,389
========= =========== =============
Other cash flow information:
Interest paid............................................. $ -- $ 54,707 $ 168,872
========= =========== =============
Income taxes paid......................................... $ -- $ -- $ 117,000
========= =========== =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
41
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND BASIS OF PRESENTATION
National Information Consortium, Inc. (the "Company" or "NIC") was formed on
December 18, 1997, for the sole purpose of effecting a common stock exchange
offer (the "Exchange Offer") to combine under common ownership five separate
affiliated entities under which the Company conducted its business operations.
The five companies were National Information Consortium USA, Inc. ("NIC/USA"),
Kansas Information Consortium, Inc. ("KIC"), Indiana Interactive, Inc. ("III"),
Nebraska Interactive, Inc. ("NII") and Arkansas Information Consortium, Inc.
("AIC"). The Exchange Offer was consummated on March 31, 1998, and has been
accounted for as a business combination. NIC/USA is the entity whose
shareholders received the largest portion of the Company's common stock shares
and was treated as the accounting acquirer with the purchase method of
accounting being applied to the four other companies (see Note 3). The
accompanying consolidated financial statements reflect the acquisitions on
March 31, 1998, with the results of operations and cash flows subsequent to that
date reflecting the results of all the companies, and prior to that date only
the operations of NIC/USA.
NIC provides federal, state and local governments with e-government
services, including a broad range of software and applications. NIC helps
governments use the Internet by building Web sites and applications that allow
businesses and citizens to access government information and to complete
government-based transactions online. Some examples of applications include:
professional license renewals, Internet tax filings, driver's license and motor
vehicle record searches, automated UCC file searches and automobile registration
renewals. The Company's primary business activity is to design, build and
operate Internet-based portals on behalf of state and local governments desiring
to provide access to government information and to complete government-based
transactions online. Operating under multiple-year contracts (see Note 6), NIC
markets the services and solicits users to complete government-based
transactions and to enter into subscriber contracts permitting the user to
access the portal and the government information contained therein in exchange
for transactional and/or subscription user fees. The Company is responsible for
funding up front investment and ongoing operational costs of the government
portals. In addition, the Company enters into service contracts to provide
consulting, development and management services to government portals in
exchange for a negotiated fee. As of December 31, 1999, NIC had signed portal
contracts with Arkansas, Georgia, Idaho, Indiana, Indianapolis and Marion County
(Indiana), Iowa, Kansas, Maine, Nebraska, Utah and Virginia.
On September 15, 1999, NIC acquired the net assets of the business of eFed,
a provider of Internet-based procurement software and services for the
government. eFed designs, develops and manages online procurement software and
services for federal and state government markets. eFed was a division of
privately held Reston, Virginia-based Electric Press, Inc. The acquisition was
accounted for as a purchase and the results of eFed's operations are included in
the Company's consolidated statements of operations from the date of acquisition
(see Note 4).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements consolidate NIC/USA with
its wholly-owned subsidiaries for periods prior to the Exchange Offer and the
Company together with all of its direct and indirect wholly owned subsidiaries,
including NIC/USA, for periods subsequent to the Exchange Offer. All significant
intercompany balances and transactions have been eliminated. The Company and
NIC/USA had no partially owned subsidiaries at December 31, 1999.
42
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of commercial bank deposits and
money market funds with original maturities of one month or less.
MARKETABLE SECURITIES
The Company's marketable securities are classified as available-for-sale and
consist of short-term U.S. government obligations and corporate debt securities.
These investments are stated at fair value with any unrealized holding gains or
losses included as a component of shareholders' equity as accumulated other
comprehensive income or loss until realized. The cost of securities sold is
based on the specific identification method. The fair values of the company's
marketable securities are based on quoted market prices at the reporting date.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over estimated useful
lives of 8 years for furniture and fixtures, 3-10 years for equipment,
3-5 years for purchased software and the lesser of the term of the lease or
5 years for leasehold improvements. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in operations for the
period. The cost of maintenance and repairs is charged to expense as incurred;
significant renewals and betterments are capitalized.
The Company periodically evaluates the carrying value of property and
equipment to be held and used when events and circumstances warrant such a
review. The carrying value of property and equipment is considered impaired when
the anticipated undiscounted cash flows from the asset is separately
identifiable and is less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
value of the asset. Fair value is determined primarily using the anticipated
cash flows discounted at a rate commensurate with the risk involved. Losses on
assets to be disposed of are determined in a similar manner, except that fair
values are reduced for the cost to dispose.
INTANGIBLE ASSETS
At each balance sheet date, the Company assesses the value of recorded
goodwill and other intangible assets for possible impairment based primarily on
the ability to recover the balances from expected future cash flows on an
undiscounted basis. If the sum of the expected future cash flows on an
undiscounted basis is less than the carrying amount of the intangible asset, an
impairment loss would be recognized for the amount by which the carrying value
of the intangible asset exceeds its estimated fair value. The Company has not
recorded any provisions for possible impairment of goodwill or intangible
assets.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." eFed
develops Internet-based procurement software products for license to federal,
state and local governments. Capitalized software development costs are included
in intangible assets, net, in the consolidated balance sheet. Software
development costs are amortized on a straight-line
43
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
basis over the estimated economic life of the software, generally three years,
commencing when each product is available for general release. Capitalized
software development costs since the date of acquisition of eFed were $145,260,
which have not begun to be amortized at December 31, 1999.
INTERNAL USE SOFTWARE
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which establishes guidelines
for the accounting for the costs of all computer software developed or obtained
for internal use. SOP 98-1 became effective January 1, 1999. The adoption of SOP
98-1 did not have a material impact on the Company's consolidated financial
statements.
REVENUE RECOGNITION
The Company recognizes revenue from providing electronic government portal
services (primarily information access and filing fees) when the services are
provided. The costs that the Company pays state agencies for data access are
accrued as cost of revenues and accounts payable at the time revenue from the
sale of public information is recognized. The Company must remit a certain
amount or percentage of these fees to government agencies regardless of whether
the Company ultimately collects the fees. Filing fees are becoming a more
significant portion of the Company's government portal services, but were not
material in 1999 and prior years. The Company intends to recognize these
revenues net of the portion paid to the government beginning in the year 2000.
Revenue from service contracts to provide consulting, development and
management services to government portals is recognized as the services are
provided at rates provided for in the contract.
eFed recognizes revenues from license agreements upon delivery and
acceptance of the software application if there is persuasive evidence of an
arrangement, collection of the resulting receivable is probable, the fee is
fixed or determinable, and there is sufficient vendor-specific objective
evidence to support allocating the total fee to all elements of these license
arrangements. Where agreements provide for evaluation or customer acceptance,
revenue is recognized upon the completion of the evaluation process and
acceptance of the software by the customer.
eFed recognizes revenues from professional services as the services are
provided. If a transaction includes both license and service elements, the
license fee is recognized on delivery and acceptance of the software, provided
services do not include significant customization or modification of the base
product, and the payment terms for licenses are not subject to additional
acceptance criteria. In cases where license fee payments are contingent on the
acceptance of services, recognition of revenues is deferred for both the license
and the service elements until the acceptance criteria are met. Software
maintenance revenues are recognized ratably over the term of the support
contract, typically one year.
The Company has an application services division that develops applications
to automate certain government back-office processes to facilitate electronic
access. The Company recognizes revenues from application service contracts on
the percentage of completion method, utilizing labor hours incurred to date as
compared to the estimated total labor hours for each contract. Any anticipated
losses on contracts are charged to operations as soon as they are determinable.
In the fourth quarter of 1998, the Company determined that the balance of
revenues remaining to be recognized under existing application service
44
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
division contractual obligations was not expected to cover anticipated costs of
developing and implementing the related applications and accrued $1,256,000 for
the expected loss. The Company accrued an additional $1,125,000 of anticipated
losses in 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 December 31, 1999, the
Company's remaining accrual was approximately $232,000 which management believes
is adequate. Because of the inherent uncertainties in estimating the costs of
completion, it is at least reasonably possible that the estimates will change
within the near term.
INCOME TAXES
The Company changed its income tax status from an S corporation to a C
corporation on July 1, 1998. The Company, along with its subsidiaries, files a
consolidated federal income tax return.
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end based on enacted laws and statutory
tax rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized.
SERVICE DEVELOPMENT AND OPERATIONS COSTS
The Company expenses as incurred the employee costs to develop, operate and
maintain the government portals. These costs are included in service development
and operations expense in the consolidated statements of operations.
APPLICATION DEVELOPMENT COSTS
As discussed above, the Company, through a development division, is
developing applications under customer contracts that automate certain
government back-office processes to facilitate electronic access. Costs incurred
to meet customer contractual commitments to develop these applications are
considered costs of performance under the contracts and have been expensed as
incurred. These costs are included in service development and operations expense
in the consolidated statements of operations.
STOCK-BASED COMPENSATION
The Company has elected to account for its stock-based compensation plan
using the intrinsic value method prescribed in Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." SFAS
No. 123, "Accounting for Stock-Based Compensation," establishes accounting and
disclosure requirements using a fair-value-based method of accounting for
stock-based compensation plans. The Company has elected the method of accounting
prescribed by APB No. 25 as described above, and has adopted the disclosure
requirements of SFAS No. 123.
Accordingly, the Company records as compensation expense the amount by which
the fair value of common stock sold to employees and consultants exceeds the
amount paid. Any excess of fair value of the price of common stock over the
exercise price for options granted to employees is recorded as deferred
compensation expense within shareholders' equity and amortized as expense
ratably over the vesting period.
45
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE LOSS
Effective January 1, 1999, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." The Company has no material components of other
comprehensive income or loss and, accordingly, the Company's comprehensive loss
is approximately the same as its net loss for all periods presented.
LOSS PER SHARE
The Company computes net loss per share in accordance with the provisions of
SFAS No. 128, "Earnings Per Share" and SEC Staff Accounting Bulletin No. 98.
Under SFAS No. 128 and SAB No. 98, basic net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
shares outstanding for the period. Diluted net loss per share is the same as
basic net loss per share because common stock issuable upon exercise of employee
stock options is antidilutive.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
marketable securities and accounts receivable. The Company limits its exposure
to credit loss by depositing its cash and cash equivalents with high credit
quality financial institutions. The Company is subject to concentrations of
credit risk and interest rate risk related to its short-term marketable
securities. The Company's credit risk is managed by limiting the amount of
investments placed with any one issuer, investing primarily in debt instruments
of the U.S. Government and its agencies and high quality corporate issues
generally with maturities of one year or less. The Company performs ongoing
credit evaluations of its customers' financial condition and generally requires
no collateral to secure accounts receivable. Due to the high credit worthiness
of the Company's customers, consisting mainly of data resellers and insurance
companies, the Company considers accounts receivable to be fully collectible.
Accordingly, no allowance for doubtful accounts is required. The Company has not
experienced any significant credit losses.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
SEGMENT REPORTING
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," became applicable to the Company during the year ended
December 31, 1999. SFAS No. 131 uses the "management" approach, which designates
the internal organization that is used by management for making operating
decisions and assessing performance as the source of the Company's segments.
SFAS No. 131 also requires disclosures about products and services, geographical
areas and major customers. The adoption of SFAS No. 131 did not affect the
Company's results of operations or financial position (see Note 18).
46
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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: NIC/USA, KIC, III, NII and AIC.
Starting in 1991 with the state of Kansas, the Company's founders established an
S corporation for business conducted within each state in which it was awarded a
contract. By 1996, the Company had expanded into four states and decided to
pursue future business opportunities through NIC/USA, leaving the four other
business units to pursue opportunities solely within those states.
Ownership of the five affiliated business units was similar, but not
identical, leading to the conclusion to account for the Exchange Offer as a
business combination. Prior to consummating the Exchange Offer, the Company was
a holding company with no operations of its own. Exchange ratios were determined
proportionately based on estimated 1998 pretax earnings for each company. No
appraisal of fair market value of the separate companies was obtained.
Management determined the fair value of the consolidated company on March 31,
1998 was $40 million. The fair value was allocated to each of the business units
based upon proportional values agreed to by the shareholders in consummating the
Exchange Offer.
Shareholders of NIC/USA, III, KIC, AIC and NII received 22,288,209,
10,099,461, 4,179,039, 3,032,009 and 1,944,646 shares of the Company's common
shares which were valued for purchase accounting at $21,460,187, $9,724,259,
$4,023,785, $2,919,368 and $1,872,401, respectively. As the shareholders of
NIC/USA received 54% of the Company's common shares, NIC/USA was treated as the
acquirer in applying purchase accounting.
The cost of the acquired business units of $18,539,813 was allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed on
the basis of their fair values on the Exchange Offer date. The fair value of net
tangible assets, consisting primarily of cash, accounts receivable, property and
equipment, accounts payable and debt, approximated historical carrying amounts.
The sole identifiable intangible asset relates to the government contracts and
was valued at the net present value of projected future cash flows over the
lives of the existing contracts discounted by 15%. Developed applications were
not assigned a value because each state has a perpetual right of use license to
applications developed if the Company's relationship is terminated. The
remainder of the cost was allocated to goodwill. The purchase price and
allocation by acquired business unit and in total is summarized as follows:
<TABLE>
<CAPTION>
III KIC AIC NII TOTAL
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Fair market value at March 31,
1998............................. $9,724,259 $4,023,785 $2,919,368 $1,872,401 $18,539,813
========== ========== ========== ========== ===========
Allocated to:
Tangible net assets.............. 464,766 311,159 304,529 108,897 1,189,351
Contract intangibles............. 1,911,321 433,611 447,994 672,387 3,465,313
Goodwill......................... 7,348,172 3,279,015 2,166,845 1,091,117 13,885,149
---------- ---------- ---------- ---------- -----------
$9,724,259 $4,023,785 $2,919,368 $1,872,401 $18,539,813
========== ========== ========== ========== ===========
Government contract expiration
date............................. 8/31/00 12/31/99 6/30/00 1/31/02
</TABLE>
As a result of rapid technological changes occurring in the Internet
industry and the intense competition for qualified Internet professionals,
recorded contract intangibles and goodwill are amortized on a straight-line
basis over the life of the then existing contracts. There can be no assurance
the contracts will be renewed when they expire at terms that will be beneficial
to the Company. At the time of the Exchange Offer, the Company and each of the
business units were S corporations. The Exchange Offer
47
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACCOUNTING FOR THE EXCHANGE OFFER (CONTINUED)
was tax free to the shareholders. The historical tax basis in the assets and
liabilities carries over to the Company, and the amortization of the goodwill
and contract intangibles is not deductible for income tax purposes.
4. BUSINESS ACQUISITION
On September 15, 1999, NIC acquired the net assets of the business of eFed,
a provider of Internet-based procurement software and services for the
government. eFed designs, develops and manages online procurement software and
services for federal and state markets. eFed was a division of privately held
Reston, Virginia-based Electric Press, Inc. The acquisition was accounted for as
a purchase and the results of eFed's operations are included in the Company's
consolidated statements of operations from the date of acquisition. The total
purchase price for the business was approximately $29.5 million. Total
consideration included $15 million in cash from the proceeds of NIC's initial
public offering and the issuance of 606,000 shares of unregistered common stock
with a fair value of approximately $14.5 million. The fair value of the common
shares was determined based on the average closing market price of NIC's common
stock three days before, the day of, and three days after the September 13, 1999
announcement date of the acquisition.
Additional consideration is also payable through the end of calendar year
2003 if eFed's financial results exceed certain targeted levels, which have been
set substantially above the historical experience of eFed at the time of
acquisition. On or before March 31, 2000 and annually thereafter to March 31,
2004, NIC will issue up to an additional 606,000 shares of common stock (or at
the Company's option, the cash equivalent) if eFed achieves certain revenue
targets. Consideration will be payable only if eFed's cumulative revenues exceed
$10 million with the full amount due if cumulative revenues reach $200 million
by the end of 2003. The amount of consideration due annually will be based on a
percentage determined by dividing cumulative revenue to date by $200 million and
subtracting any contingent consideration paid in a prior period. Similarly, NIC
will issue a presently indeterminable number of additional shares of common
stock if eFed's cumulative earnings before interest, income taxes, depreciation
and amortization ("EBITDA") exceeds $10 million up to a maximum of $110 million
by the end of 2003. In this instance, the contingent consideration will only be
paid in common stock and the number of potential shares will be determined by
dividing $10 million by the average of the Company's closing common stock price
for the five trading days immediately preceding the first EBITDA payment date.
An EBITDA payment date will not occur unless eFed reaches $10 million in
cumulative EBITDA in the measurement period. Such consideration, if payable,
will be recorded as additional purchase price.
Of the 606,000 shares of common stock issued to the shareholders of Electric
Press to affect the acquisition, 515,100 shares were issued as restricted stock
and 90,900 shares were delivered to an escrow account. The restricted stock is
subject to cancellation in whole or in part if certain representations,
warranties and obligations under the purchase agreement are not satisfied. If
such obligations are satisfied, 499,950 shares become unrestricted one year
after the closing date and 15,150 shares become unrestricted two years after the
closing date. The 90,900 escrowed shares are to be held in escrow until certain
existing government contracts listed in the purchase agreement are assigned to
NIC or are replaced by alternative agreements to provide the same services to
the same governmental agencies. Management expects eFed to satisfy such
obligations and that such government contracts will be assigned to NIC or
replaced by similar alternative agreements.
The total purchase price of approximately $29.5 million was allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed on
the basis of their fair values on the closing date. The
48
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS ACQUISITION (CONTINUED)
fair value of net tangible assets acquired, consisting primarily of accounts
receivable, property and equipment, accounts payable and other accrued expenses,
totaled $816,000 and approximated historical carrying amounts. The sole
identifiable intangible asset relates to eFed's Internet procurement software.
This asset was valued at approximately $21.8 million based on the net present
value of projected future net cash flows from licensing the software over its
estimated three-year life discounted by 15%. The remainder of the cost was
allocated to goodwill. The goodwill is being amortized on a straight-line basis
over three years.
5. ACQUISITION PRO FORMA INFORMATION
The following unaudited pro forma consolidated amounts for the year ended
December 31, 1998 give effect to the acquisitions of the business units in the
Exchange Offer and the acquisition of eFed as if they had occurred on
January 1, 1998, using the amortization of goodwill and intangibles the Company
has recorded for periods subsequent to completing the transactions. The
following unaudited pro forma consolidated amounts for the year ended
December 31, 1999 give effect to the acquisition of eFed as if the acquisition
had occurred on January 1, 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
Revenues......................................... $ 38,177,141 $ 59,306,306
Operating loss................................... (15,626,238) (21,047,543)
Net loss......................................... (13,801,255) (14,753,107)
Basic and diluted loss per share................. $ (0.31) $ (0.30)
Weighted average shares outstanding.............. 43,920,054 48,435,330
</TABLE>
6. GOVERNMENT PORTAL CONTRACTS
Each of the Company's government portal contracts generally has an initial
term of three to five years. The Company enters into separate agreements with
various agencies and divisions of the government to provide specific services
and to conduct specific transactions. These agreements preliminarily establish
the pricing of the electronic transactions and data access services the Company
provides and the division of revenues between the Company and the government
agency. The government must approve prices and revenue sharing agreements. The
Company owns all the applications developed under these contracts. After
completion of a defined contract term, the government agency typically receives
a perpetual, royalty-free license to the applications for use only. If the
Company's contract is not renewed after a defined term the government agency
would be entitled to take over the portal in place with no future obligation of
the Company. In some cases, the Company provides management services to
government-owned portals in exchange for an agreed-upon fee.
The following is a summary of the significant terms of operating agreements
that Company's larger business units have entered into with government agencies.
VIRGINIA INTERACTIVE, INC. (VI)
On July 30, 1997, VI, a wholly owned subsidiary of NIC/USA, entered into a
contract to provide electronic government services to the Virginia Information
Providers Network Authority (the "Virginia Authority"). VI is responsible for
managing and marketing the government portal as well as funding up
49
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. GOVERNMENT PORTAL CONTRACTS (CONTINUED)
front investment and ongoing operational costs. The contract is for a period of
five years, commencing September 1, 1997, with the Virginia Authority having a
five-year renewal option. If the Virginia Authority extends the contract through
2007, it is entitled to a perpetual license for applications developed at no
additional compensation to VI.
User fees received by the VI business unit are disbursed (1) first for the
payment of operating expenses (primarily telecommunication costs), (2) then to
the Virginia Authority in accordance with interagency agreements negotiated by
VI on behalf of the Virginia Authority and for the reasonable and necessary
expenses of the Virginia Authority, and (3) then all remaining funds to VI.
INDIANA INTERACTIVE, INC. (III)
The III business unit develops, operates, maintains and expands electronic
government services for electronic access to public information for the Access
Indiana Information Network ("AIIN"). AIIN is a State of Indiana government
instrumentality created by the Indiana legislature for the purpose of providing
electronic access to state, county and local information required by Indiana
businesses and citizens. III is responsible for managing and marketing the
government portal as well as funding up-front investment and ongoing operational
costs. The contract with AIIN and the interagency agreements with various
government agencies include limitations and provisions for the rates III can
charge and the amount of remuneration to AIIN and each government agency. The
initial contract expires September 2000 but may be renewed, or amended and
renewed, for up to an additional five years. AIIN is entitled to a perpetual for
use only license to the applications developed for no additional compensation to
III.
III's wholly-owned subsidiary, City-County Interactive, L.L.C. (the
"Subsidiary"), was formed in 1997 to provide electronic government services for
CivicNet, formerly CivicLink, the electronic gateway service for the city of
Indianapolis and Marion County, Indiana. In addition, the Subsidiary is to
further operate, manage and expand CivicNet.
In connection with the revenues generated under the contract with AIIN, AIIN
receives 2% of gross revenues per annum, before all other payments. The
data-providing entities are then paid in accordance with interagency agreements.
The remaining balance is retained by III.
ARKANSAS INFORMATION CONSORTIUM, INC. (AIC)
AIC serves as a provider of electronic government services, by a contract
signed in July 1997 between AIC and the Information Network of Arkansas ("INA"),
a public instrumentality created by legislation in the State of Arkansas (the
"State"). AIC is responsible for managing and marketing the government portal as
well as funding up-front investment and ongoing operational costs. The contract
is for one three-year term through June 30, 2000, with four one-year renewals at
the option of INA. If the State decides to extend the contract through June 30,
2003, or at anytime thereafter, the INA shall be entitled to a perpetual for use
only license to the applications developed for no additional compensation to
AIC. Prior to June 30, 2003, the INA reserves the right to negotiate terms to
license the applications.
Network transaction fees received pursuant to the agreement with INA are
disbursed first for payment of certain operating expenses for the government
portal (primarily telecommunication costs). Five percent of the amount by which
gross revenues for the portal exceed the amount payable to government agencies
is then distributed to the INA. The balance is retained by AIC.
50
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. GOVERNMENT PORTAL CONTRACTS (CONTINUED)
KANSAS INFORMATION CONSORTIUM, INC. (KIC)
KIC was incorporated August 15, 1991 to serve as a provider of electronic
government services to develop, operate, maintain and expand a government portal
for electronic access to public information for the Information Network of
Kansas ("INK"). INK is a State of Kansas government instrumentality created by
the Kansas legislature for the purpose of providing electronic access to state,
county and local information required by Kansas businesses and citizens. KIC is
responsible for managing and marketing the government portal as well as funding
up-front investment and ongoing operational costs. The contract with INK
includes limitations and provisions for the rates KIC can charge and the amount
of remuneration to INK and each government agency. The contract was to expire on
December 31, 1999, but was renewed until December 31, 2002, unless earlier
terminated by INK for cause. INK shall have the option, upon termination or
expiration of the contract, to require KIC to provide electronic government
services in accordance with the terms of the contract for a period of up to
twelve months from the time of the expiration or notification of termination.
INK is entitled to a perpetual for use only license to the applications
developed for no additional compensation to KIC.
In connection with the revenues generated under the contract with INK, INK
receives 2.0% of gross revenue, per annum, payable monthly, before all other
payments. KIC may then receive a 25.0% rate of return per annum on its risk
capital from net income before taxes. The remaining net income before taxes is
shared 66.7% with KIC and 33.3% with INK. Risk capital is defined in the
contract as the sum of paid-in capital, corporate loans with a payback period
exceeding one year, and noncancelable obligations under corporate leases.
NEBRASKA INTERACTIVE, INC. (NII)
NII was incorporated November 22, 1994 for the purpose of operating as a
provider of electronic government services for the public information portal of
the State of Nebraska ("Nebraska Online"). NII developed and operates the public
information portal to provide businesses and citizens with electronic access to
state, county and local information via the Internet. NII is responsible for
managing and marketing the portal as well as funding up-front investment and
ongoing operational costs.
On December 3, 1997, NII entered into a contract with the Nebraska State
Records Board ("NSRB") to provide electronic government services to enhance,
operate, maintain and expand the existing portal that was developed by NII under
its 1995 contract with the Nebraska Library Commission ("NLC") and various
government agencies. The contract includes limitations and provisions for the
rates NII can charge and the amount of remuneration to each government agency.
The contract will expire on January 31, 2002 unless earlier terminated by the
NSRB for cause. The NSRB shall have the option, upon termination or expiration
of the contract, to require NII to provide electronic government services in
accordance with the terms of the contract for a period of up to twelve months
from the time of the expiration or notice of termination, whichever is earlier.
On January 1, 2002, the NSRB will be entitled to a perpetual for use only
license to the applications developed for no additional compensation to NII.
In connection with the revenues generated under the contract with the NSRB,
the NSRB receives 4.5% of the first $89,000 in gross profit and 2% of gross
profit thereafter. Gross profit is defined in the contract as the difference
between NII's gross revenues and amounts paid to government agencies and for
certain telecommunication expenses.
51
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. GOVERNMENT PORTAL CONTRACTS (CONTINUED)
NATIONAL INFORMATION CONSORTIUM U.S.A., INC. (NIC/USA)
A service contract was entered into between NIC/USA and the GeorgiaNet
Authority ("GANET"), an agency of the State of Georgia, on September 15, 1996.
Pursuant to the contract, NIC/USA must dedicate a minimum number of full time
employees to assist GANET in creating and providing an information access
program. Pursuant to the contract, GANET is entitled to a perpetual use license
to the applications developed at no additional compensation to NIC/USA. However,
if GANET terminates the contract prior to September 2001, GANET must pay NIC/USA
a fee ranging from $500,000 to $1,000,000 (based on the date of termination) in
order to receive a license for the applications. The contract must be renewed by
GANET on a yearly basis. In the event fees received by GANET from its customers
are insufficient to cover its obligations to NIC/USA, the contract shall
terminate without further obligation of GANET.
In connection with the revenues generated under the contract with GANET,
GANET pays NIC/USA $800,000 per year, in equal amounts of $200,000 on a
quarterly basis. In addition, GANET pays NIC/USA 5% of gross GANET revenues from
non-bulk fees per quarter.
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.
52
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. GOVERNMENT PORTAL CONTRACTS (CONTINUED)
IDAHO INFORMATION CONSORTIUM, INC.(IIC)
IIC was incorporated in July 1999 for the purpose of operating as a provider
of electronic government services for the State of Idaho. On December 7, 1999,
IIC entered into a three-year contract, with two two-year renewal periods, with
the State of Idaho to develop and operate Idaho's government portal, Access
Idaho, which will provide electronic transactions and expanded access to public
information. Under the contract, IIC will fund initial investment and ongoing
operational costs. Upon termination or expiration of the contract, the State of
Idaho will be entitled to a perpetual for use only license for the applications
IIC developed, with no additional compensation due to IIC.
In connection with the revenues generated under the contract, IIC 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.
7. MARKETABLE SECURITIES
The Company held no marketable securities prior to the completion of its
initial public offering of common stock on July 20, 1999. The fair value of
marketable debt securities as of December 31, 1999 is as follows:
<TABLE>
<S> <C>
U.S. government obligations................................. $12,252,850
Corporate debt securities................................... 70,227,910
-----------
$82,480,760
===========
</TABLE>
All marketable debt securities held by the Company at December 31, 1999
mature within one year. Gross realized gains and losses and unrealized holding
gains and losses through December 31, 1999 were not significant.
8. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Furniture and fixtures............................... $ 210,209 $ 652,411
Equipment............................................ 1,530,636 3,192,576
Purchased software................................... 101,484 281,481
Leasehold improvements............................... 39,285 163,556
---------- ----------
1,881,614 4,290,024
Less accumulated depreciation........................ 652,199 1,291,648
---------- ----------
$1,229,415 $2,998,376
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1998 and 1999,
was $13,559, $236,699 and $581,416, respectively.
53
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Goodwill........................................... $13,885,149 $21,302,573
Software intangible................................ -- 21,790,000
Contract intangibles............................... 3,465,313 3,465,313
Software development costs......................... -- 145,260
----------- -----------
17,350,462 46,703,146
Less accumulated amortization...................... 5,681,403 16,056,700
----------- -----------
$11,669,059 $30,646,446
=========== ===========
</TABLE>
10. BANK LINES OF CREDIT AND OTHER DEBT OBLIGATIONS
NIC/USA has a $1,000,000 operating line of credit from a bank that bears
interest at the bank's index rate (8.5% at December 31, 1999). The expiration
date on the line is April 30, 2000. At December 31, 1998 and 1999, $370,000 and
$0, respectively, was outstanding on the line. The line is collateralized by
NIC/ USA's assets and guaranteed by the parent company. NIC/USA entered into a
$225,000 equipment line of credit with a bank in January 1998. The line bears
interest at the bank's reference rate plus 1.75% (10.25% at December 31, 1999).
There is no given expiration date on the line. At December 31, 1998 and 1999, no
amounts were outstanding on the line. The line is collateralized by the related
equipment and guaranteed by the parent company. NIC/USA has issued to GANET an
irrevocable letter of credit in the amount of $200,000. The letter expires on
October 31, 2000.
On January 19, 1999, NIC/USA purchased an airplane and financed the purchase
by borrowing $544,000 from a bank in the form of a note payable. The note was
paid in full during 1999.
VI entered into a $250,000 operating line of credit with a bank in
May 1998. The line bears interest at the bank's index rate (8.5% at
December 31, 1999). The expiration date on the line is April 30, 2000. At
December 31, 1998 and 1999, $218,750 and $0, respectively, was outstanding on
the line. The line is collateralized by VI's assets and guaranteed by the parent
company. VI entered into a $225,000 equipment line of credit with a bank in
April 1998. The line bears interest at the bank's reference rate plus 1.75%
(10.25% at December 31, 1999). There is no given expiration date on the line. At
December 31, 1998 and 1999, there were no amounts outstanding on the line. The
line is collateralized by the related equipment and guaranteed by the parent
company.
Iowa Interactive, Inc. entered into a $225,000 equipment line of credit with
a bank in April 1998. The line bears interest at the bank's reference rate plus
1.75% (10.25% at December 31, 1999). There is no given expiration date on the
line. At December 31, 1998 and 1999, no amounts were outstanding on the line.
The line is collateralized by the related equipment and guaranteed by the parent
company. Iowa Interactive, Inc has issued to the State of Iowa an irrevocable
letter of credit in the amount of $50,000. The letter expires on April 30, 2000.
III has a $400,000 operating line of credit from a bank that bears interest
at the bank's index rate (8.5% at December 31, 1999). The expiration date on the
line is April 30, 2000. At December 31, 1998 and 1999, $192,136 and $0,
respectively, was outstanding on the line. The line is collateralized by the
III's assets and guaranteed by the parent company. III had a $150,000 operating
line of credit with a bank that expired
54
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. BANK LINES OF CREDIT AND OTHER DEBT OBLIGATIONS (CONTINUED)
on November 1, 1999. At December 31, 1998, $18,209 was outstanding on the line.
III has a $225,000 equipment line of credit with a bank that bears interest at
the bank's reference rate plus 1.75% (10.25% at December 31, 1999). There is no
given expiration date on the line. At December 31, 1998 and 1999, there were no
amounts outstanding on the line. The line is collateralized by the related
equipment and guaranteed by the parent company.
KIC has a $250,000 operating line of credit from a bank that bears interest
at the bank's index rate (8.5% at December 31, 1999). The expiration date on the
line is April 30, 2000. At December 31, 1998 and 1999, $179,497 and $0,
respectively, was outstanding on the line. The line is collateralized by KIC's
assets and guaranteed by the parent company. KIC has a $225,000 equipment line
of credit with a bank that bears interest at the bank's reference rate plus
1.75% (10.25% at December 31, 1999). There is no given expiration date on the
line. At December 31, 1998 and 1999, no amounts were outstanding on the line.
The line is collateralized by the related equipment and guaranteed by the parent
company.
AIC has a $150,000 operating line of credit from a bank that bears interest
at the bank's index rate (8.5% at December 31, 1999). The expiration date on the
line is April 30, 2000. At December 31, 1998 and 1999, no amounts were
outstanding on the line. The line is collateralized by AIC's assets and
guaranteed by the parent company. AIC has a $225,000 equipment line of credit
with a bank that bears interest at the bank's reference rate plus 1.75% (10.25%
at December 31, 1999). There is no given expiration date on the line. At
December 31, 1998 and 1999, no amounts were outstanding on the line. The line is
collateralized by the related equipment and guaranteed by the parent company. In
March 1998, AIC agreed to pay a shareholder $19,500 for past services and
reacquired the shareholder's shares of AIC. The remaining balance of $6,500 is
due in 2000.
NII has a $100,000 line of credit with a bank that bears interest at the
bank's index rate (8.5% at December 31, 1999). The expiration date on the line
is April 30, 2000. At December 31, 1998 and 1999, $45,000 and $0, respectively,
was outstanding on the line. The line is collateralized by NII's assets and
guaranteed by the parent company. NII has a $225,000 equipment line of credit
with a bank that bears interest at the bank's reference rate plus 1.75% (10.25%
at December 31, 1999). There is no given expiration date on the line. At
December 31, 1998 and 1999, no amounts were outstanding on the line. The line is
collateralized by the related equipment and guaranteed by the parent company. In
March 1998, NII agreed to pay a shareholder $130,500 for past services and
reacquired the shareholder's shares of NII. The remaining balance of $43,500 is
due in 2000.
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 (8.5% at
December 31, 1999). The expiration date on the line is April 30, 2000. At
December 31, 1999, no amounts were outstanding on the line. The line 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 (8.5% at
December 31, 1999). The expiration date on the line is April 30, 2000. At
December 31, 1999, no amounts were outstanding on the line. The line is
collateralized by UII's assets and guaranteed by the parent company.
IIC has issued to the State of Idaho an irrevocable letter of credit in the
amount of $500,000. The letter expires on December 7, 2000.
55
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SHAREHOLDERS' EQUITY
COMMON STOCK
The Company's Board of Directors had authorized 13,500,000 shares of common
stock for issuance by the Company at December 31, 1998. In April 1999, the
Company was reincorporated in the state of Colorado and changed the par value of
its common stock from $.01 per share to no par. On May 6, 1999, the Company
increased its authorized shares to 200,000,000.
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 for each share 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 consolidated
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 July 20, 1999, the Company completed its initial public offering of
common stock by selling an aggregate of 10 million new shares of common stock
for net proceeds of approximately $109.4 million after deducting underwriting
discounts, commissions and expenses. The Company has placed the net proceeds
from its initial public offering in short-term, investment-grade,
interest-bearing debt securities (see Note 7) pending the use of the proceeds to
increase new market development efforts, increase marketing efforts aimed at
raising transaction volume, create new products and services, further develop
common infrastructure and operating platforms, and make potential acquisitions.
A portion of the proceeds has also been used for working capital needs and to
pay the cash portion of the September 15, 1999 acquisition of eFed (see
Note 4).
In the first six months of 1998, the Company made $588,367 of S corporation
cash distributions to common shareholders. NIC/USA made $130,327 of
distributions to its shareholders in 1997.
On June 30, 1998, the Company and a voting trust consisting of all the
Company's then current shareholders entered into a stock purchase agreement for
the Company's shareholders to sell a 25% interest in the Company to an
investment management firm. The Company did not receive any of the proceeds from
the sale. Under the voting trust agreement, two principal shareholders have the
right to vote all of the voting trust's common shares and to sell all or any
part of such shares. One common shareholder has the right, only upon termination
within the first three years of employment with the Company, to cause the
Company to repurchase 173,258 shares of common stock purchased by the
shareholder on February 9, 1999, at the $1.44 price per share paid by the
shareholder.
At December 31, 1997 and as of March 31, 1998, the date of the Exchange
Offer, NIC/USA had 1,000,000 common shares authorized and 112,330 common shares
issued and outstanding. However, as NIC/USA was considered the accounting
acquirer, its historical outstanding share information has been adjusted for the
Exchange Offer exchange ratio. Shareholders of NIC/USA received 198.42 Company
common shares for each share held of NIC/USA on March 31, 1998. Retroactive
adjustments are also made for purposes of calculating and reporting earnings per
share.
56
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SHAREHOLDERS' EQUITY (CONTINUED)
COMMON STOCK TRANSACTIONS
From August 1997 through December 1997, NIC/USA sold 5,130 and 4,500 shares
of its common stock to employees at prices of $29.24 and $1.00 per share,
respectively. The Company recorded $370,235 in compensation expense related to
these transactions.
From April 1998 through June 1998, the Company sold 348,254 shares of common
stock to two employees at $0.22 per share. The Company recorded $258,333 in
compensation expense related to these transactions.
On June 30, 1998, the Company issued 174,563 shares of its common stock and
made an S corporation distribution of those shares, which were valued at $1.43
per share, to its shareholders. These shares were given to a consultant as
compensation for services rendered to the Company's shareholders with the
investment management firm sale. In connection with the transaction, the Company
also paid $57,077 in professional fees on behalf of the shareholders which were
also distributed as an S corporation distribution. These shares have been
treated as outstanding for all periods prior to the Exchange Offer for purposes
of calculating and reporting earnings per share.
From January 1999 through May 1999, the Company sold 346,512 shares of
common stock to five employees at $1.44 per share. The Company recorded
$1,489,124 in compensation expense related to these transactions. In May 1999,
the Company sold 23,727 shares of common stock to an employee at $5.27 per
share. The Company recorded $84,826 in compensation expense related to this
transaction.
In connection with the acquisition of eFed on September 15, 1999, 606,000
shares of common stock were issued to the selling shareholders. Of the 606,000
shares, 515,100 shares were issued as restricted stock and 90,900 shares were
delivered to an escrow account. The restricted stock is subject to cancellation
in whole or in part if certain representations, warranties and obligations under
the purchase agreement are not satisfied. If such obligations are satisfied,
499,950 shares become unrestricted one year after the closing date and 15,150
shares become unrestricted two years after the closing date. The 90,900 escrowed
shares are to be held in escrow until certain existing government contracts
listed in the purchase agreement are assigned to NIC or are replaced by
alternative agreements to provide the same services to the same governmental
agencies.
ADDITIONAL PAID-IN CAPITAL
The Company offset its accumulated deficit on the date of Subchapter S
election termination against its additional paid-in capital as reflected in the
consolidated statements of changes in shareholders' equity.
12. INCOME TAXES
On July 1, 1998, the Company changed its income tax status from an S
corporation to a C corporation. The Company recognized a net deferred tax
liability of approximately $1,374,000 representing the tax effects of temporary
differences between the book and tax bases of assets and liabilities on that
date. The effect of recognizing the deferred tax liability has been included in
the consolidated statement of operations for the year ended December 31, 1998.
Inasmuch as the Company was an S corporation for the entire 1997 year,
federal and state income taxes on the Company's operations were the
responsibilities of the Company's shareholders. As a result, no income tax
benefit or expense is reported for 1997.
57
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1999
--------- ------------
<S> <C> <C>
Current income taxes:
Federal............................................. $ 56,045 $ --
State............................................... 12,655 25,354
-------- -----------
Total............................................. 68,700 25,354
-------- -----------
Deferred income taxes:
Federal............................................. 540,345 (1,295,716)
State............................................... 49,768 (145,861)
-------- -----------
Total............................................. 590,113 (1,441,577)
-------- -----------
Total income tax expense (benefit)................ $658,813 $(1,416,223)
======== ===========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
were as follows at December 31:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accounts payable and accrued expenses.............. $ 721,757 $ --
Application services contracts..................... 479,922 88,987
Compensation related to non-qualified stock
options.......................................... 59,842 394,980
Amortization of eFed goodwill and software
intangible....................................... -- 864,639
Net operating loss carryforward.................... -- 677,673
Other.............................................. 28,130 7,718
---------- ----------
Total............................................ 1,289,651 2,033,997
---------- ----------
Deferred tax liabilities:
Accrued revenue.................................... (897,097) --
Contract intangibles............................... (881,346) (392,434)
Depreciation....................................... (62,324) (173,383)
Accreted discount on marketable securities......... -- (585,541)
Other.............................................. (38,996) (31,174)
---------- ----------
Total............................................ (1,879,763) (1,182,532)
---------- ----------
Net deferred tax (liability) asset................... $ (590,112) $ 851,465
========== ==========
</TABLE>
For tax purposes, the Company had available, at December 31, 1999, a net
operating loss ("NOL") carryforward of approximately $1,731,000, which will
expire in the year 2019. The Company believes it is more likely than not it will
generate sufficient taxable income from future operations to fully utilize the
NOL carryforward prior to its expiration. Consequently, the Company has not
provided a valuation allowance for this deferred tax asset.
58
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
The following table reconciles the effective income tax rate indicated by
the consolidated statements of operations and the statutory federal income tax
rate:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1998 1999
-------- --------
<S> <C> <C>
Effective federal and state income tax rate................. (9.1)% 11.7%
Goodwill amortization relating to the Exchange Offer........ 15.5 17.8
S to C corporation adjustment............................... 19.7 --
Pretax loss as an S corporation (six months)................ 10.4 --
Non-deductible stock compensation expense................... -- 6.6
State income taxes.......................................... (1.3) (1.3)
Other....................................................... (0.2) 0.2
---- ----
Statutory federal income tax rate........................... 35.0% 35.0%
==== ====
</TABLE>
The unaudited pro forma provision for income taxes for the years ended
December 31, 1997 and 1998 included on the consolidated statements of operations
present the Company's results of operations as if it were a C corporation for
the entire period. The pro forma provision for income taxes for the year ended
December 31, 1998 represents the incremental provision for the six month period
the Company was an S corporation together with removing the $1,374,000
cumulative effect recorded in 1998 as discussed above. The pro forma provision
for income taxes was calculated based on enacted tax laws and statutory tax
rates applicable to the periods presented taking into account permanent
differences.
13. COMMITMENTS AND CONTINGENCIES
LEASES
The Company and its subsidiaries lease office space and certain equipment
under noncancelable operating leases. Capital lease agreements require the
Company and its subsidiaries to pay all taxes, fees, assessments or other
charges.
Future minimum noncancelable lease payments under all noncancelable
operating and capital leases at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR OPERATING CAPITAL
- ----------- --------- --------
<S> <C> <C>
2000.................................................... $545,601 $217,180
2001.................................................... 459,016 213,918
2002.................................................... 342,130 17,877
2003.................................................... 55,315 --
2004.................................................... 4,009 --
--------
448,975
Less interest........................................... 40,880
--------
Present value of net minimum lease payments............. 408,095
Less current portion.................................... 189,931
--------
Long-term portion....................................... $218,164
========
</TABLE>
59
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Capitalized leased property and equipment consists of the following at
December 31:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Furniture and fixtures.................................. $117,911 $ 70,651
Equipment............................................... 766,153 528,350
Purchased software...................................... 81,795 60,003
-------- --------
965,859 659,004
Less accumulated depreciation........................... 314,026 246,243
-------- --------
$651,833 $412,761
======== ========
</TABLE>
Rent expense for noncancelable operating leases for the years ended
December 31, 1997, 1998 and 1999 was $2,099, $354,192 and $402,241,
respectively.
LITIGATION
The Company is involved in legal proceedings and litigation arising in the
ordinary course of business. In the opinion of management, the outcome of such
proceedings and litigation currently pending would not be material to the
consolidated financial position, liquidity or results of operations of the
Company.
14. EMPLOYEE BENEFIT AND STOCK OPTION PLANS
DEFINED CONTRIBUTION 401(k) PROFIT SHARING PLAN
The Company and its subsidiaries sponsor a defined contribution 401(k)
profit sharing plan. In accordance with the plan, all full-time employees are
eligible immediately upon employment. A discretionary match of up to 5% of an
employee's salary and a discretionary contribution may be made to the plan as
determined by the Board of Directors. Expense related to Company matching
contributions totaled $14,031, $94,571 and $176,736, for the years ended
December 31, 1997, 1998 and 1999, respectively. No discretionary contributions
were made for the years ended December 31, 1997, 1998 and 1999.
EMPLOYEE STOCK PURCHASE PLAN
In May 1999, the Company's Board of Directors approved an employee stock
purchase plan intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code. A total of 2,321,688 shares of NIC
common stock have been reserved for issuance under this plan. Terms of the plan
will permit eligible employees to purchase NIC common stock through payroll
deductions up to 15% of each employee's compensation. Amounts deducted and
accumulated by the participant will be used to purchase shares of NIC's common
stock at 85% of the lower of the fair value of the common stock at the beginning
or the end of the offering period, as defined. No offering of stock was made to
employees during 1999. Accordingly, no shares were issued in 1999 pursuant to
the plan.
1998 STOCK OPTION PLAN
The Company has adopted a formal stock option plan to provide for the
granting of either incentive stock options or non-qualified stock options to
encourage certain employees of the Company and its subsidiaries, and certain
directors of the Company, to participate in the ownership of the Company, and to
provide additional incentive for such employees and directors to promote the
success of its business
60
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. EMPLOYEE BENEFIT AND STOCK OPTION PLANS (CONTINUED)
through sharing the future growth of such business. The plan was adopted
effective May 5, 1998 and amended November 3, 1998 and May 4, 1999. The Company
is authorized to grant options for up to 9,286,754, common shares under the
plan. Employee options are generally exercisable one year from date of grant in
cumulative annual installments of 33% and expire four years after the grant
date.
The Company accounts for the plan using the intrinsic value method
prescribed in APB No. 25. SFAS No. 123 requires certain disclosures regarding
expense and value of options granted using the fair-value-based method even
though the Company follows APB No. 25. Had compensation cost for the Company's
plan been determined in accordance with SFAS No. 123, the Company's net loss and
loss per share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net loss
As reported.................................... $ (7,895,966) $(10,730,560)
Pro forma...................................... $ (8,005,301) $(12,134,460)
Basic and diluted loss per share:
As reported.................................... $ (0.21) $ (0.23)
Pro forma...................................... $ (0.21) $ (0.26)
</TABLE>
For purposes of complying with the disclosure provisions of SFAS No. 123 and
as permitted by the Financial Accounting Standards Board for nonpublic
companies, prior to NIC's initial public offering in July 1999, the fair value
of each option grant was determined on the date of the grant using the minimum
value option pricing model. The minimum value model does not consider expected
volatility in stock price. Subsequent to the offering, the fair value of each
option grant was determined using the Black-Scholes option pricing model. Except
for the volatility assumption, which is only used under the Black-Scholes model,
the following assumptions were applied in determining pro forma compensation
cost for the years ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
---------- ---------
<S> <C> <C>
Risk-free interest rate..................................... 4.54% 5.48%
Expected dividend yield..................................... 0.00 0.00
Expected option life........................................ 4.62 years 4.0 years
Expected stock price volatility............................. 0.001% 80%
Fair value of options granted............................... $1.45 $11.14
</TABLE>
61
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. EMPLOYEE BENEFIT AND STOCK OPTION PLANS (CONTINUED)
A summary of the Company's stock option plan as of December 31, 1998 and
1999 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1998 1999
-------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at January 1...................... -- 2,514,019 $ 1.44
Granted..................................... 2,534,812 $1.44 1,798,285 $15.09
Exercised................................... -- -- (122,954) $ 1.44
Canceled.................................... (20,793) $1.44 (163,757) $ 2.51
--------- ---------
Outstanding at December 31.................... 2,514,019 $1.44 4,025,593 $ 7.49
Exercisable at December 31.................... 199,317 $1.44 825,008 $ 2.18
Weighted average grant-date fair value of
options granted during the year............. $1.45 $11.14
</TABLE>
The following table summarizes information about stock options outstanding
under the Plan at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------------
AVERAGE WEIGHTED WEIGHTED
SHARES REMAINING AVERAGE SHARES AVERAGE
RANGE OF EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- ----------------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.44.......................... 2,432,672 3.5 $ 1.44 725,357 $ 1.44
$5.27.......................... 717,302 4.3 $ 5.27 69,651 $ 5.27
$10.00-$14.36.................. 183,609 3.4 $14.12 30,000 $12.91
$23.28-$34.88.................. 602,260 3.8 $28.21 -- --
$35.00-$37.13.................. 89,750 3.8 $36.83 -- --
</TABLE>
During 1998, the exercise price of all options granted under the plan was
$1.44, which was less than the fair market value of the stock on the various
grant dates. From September 1998 through December 1998, the Company granted
2,534,812 common stock options with an exercise price of $1.44 per share.
Compensation expense of $310,536 was recorded in 1998 relating to these option
grants with $2,813,577 of compensation expense deferred at December 31, 1998 to
be amortized over the vesting period of the options.
In December 1998, the Company granted 1,393,010 common stock options
(1,046,500 non-qualified options and 346,510 incentive options) to an executive
of the Company under two separate stock option agreements covered by the Plan.
Non-qualified stock options totaling 60,712 vested immediately with the
remainder of the options exercisable one year from date of grant in cumulative
annual installments of 25%. The non-qualified stock options expire ten years
after the grant date. Incentive stock options totaling 69,302 vested immediately
with the remainder of the options exercisable one year from date of grant in
cumulative annual installments of 25%. The incentive stock options expire five
years from the date of grant.
From January 1999 through May 1999, the Company granted 191,767 common stock
options with a vesting period of three years and an exercise price of $1.44 per
share, which was less than the fair market
62
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. EMPLOYEE BENEFIT AND STOCK OPTION PLANS (CONTINUED)
value of the stock on the various grant dates. Compensation expense of
approximately $213,000 was recorded relating to these options for the year ended
December 31, 1999, with approximately $496,000 of compensation expense deferred
at December 31, 1999 to be amortized over the three-year vesting periods of the
option grants. In April 1999, the Company granted 20,791 common stock options
with a vesting period of three years and an exercise price of $5.27 per share,
which was less than the fair market value of the stock on the grant date.
Compensation expense of approximately $16,000 was recorded relating to these
options for the year ended December 31, 1999, with approximately $58,000 of
compensation expense deferred at December 31, 1999 to be amortized over the
three year vesting periods of the option grants.
In May 1999, the Company granted 696,511 common stock options (601,636
non-qualified options and 94,875 incentive options) to an executive of the
Company employee at an exercise price of $5.27 per share, which was less than
the fair market value of the stock on the grant date, under two separate stock
option agreements covered by the Plan. Non-qualified stock options totaling
50,669 vested immediately with the remainder of the options exercisable one year
from date of grant in cumulative annual installments of 25%. The non-qualified
stock options expire ten years after the grant date. Incentive stock options
totaling 18,975 vested immediately with the remainder of the options exercisable
one year from date of grant in cumulative annual installments of 25%. The
incentive stock options expire five years from the date of grant. Relating to
this executive's stock options, compensation expense of approximately $598,000
was recorded for the year ended December 31, 1999, with approximately $1,892,000
of compensation expense deferred at December 31, 1999, to be amortized over the
vesting period of the options.
In August of 1999, the Company granted 10,000 common stock options with
immediate vesting to a director of the Company with an exercise price of $10 per
share, which was less than the fair market value of the stock on the grant date.
Compensation expense of approximately $44,000 was recorded relating to this
option grant for the year ended December 31, 1999.
Including expense recognized in connection with options granted prior to
January 1, 1999, the Company recognized a total of $1,614,101 of compensation
expense related to common stock options for the year ended December 31, 1999.
Total deferred compensation expense was $4,362,172 at December 31, 1999.
16. RELATED PARTY TRANSACTIONS
The Company and its subsidiaries purchase business and health insurance
through an insurance agency that is controlled by a shareholder and director of
the Company at costs that the Company believes approximate arms-length
transactions. In 1998, a payment of $8,345 was made directly to this insurance
agency. No direct payments were made in 1997 or 1999. Aggregate insurance
payments made that were brokered by this insurance agency totaled approximately
$50,000, $478,000 and $354,000 for the years ended December 31, 1997, 1998 and
1999, respectively.
17. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
NIC/USA financed the purchase of $335,646 of property and equipment in 1998
under capital leases.
KIC sold certain assets during 1998 which were then leased back from the
purchaser over a period of three years. The resulting lease is being accounted
for as a capital lease. The purchaser paid down KIC's bank line of credit in
1998 by $28,666 as part of this sale-leaseback transaction.
63
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
(CONTINUED)
III sold certain assets during 1998 which were then leased back from the
purchaser over a period of three years. The resulting lease is being accounted
for as a capital lease. The purchaser paid down III's bank line of credit in
1998 by $169,287 as part of this sale-leaseback transaction.
AIC financed the purchase of $13,083 of property and equipment in 1998 under
capital leases.
NII financed the purchase of $7,114 of property and equipment in 1998 under
capital leases.
As discussed in Note 4, on September 15, 1999, NIC acquired the net assets
of the business of eFed, a provider of Internet-based procurement software and
services for the government. The total purchase price for the business was
approximately $29.5 million. A portion of the purchase price included the
issuance of 606,000 shares of unregistered common stock with a fair value of
approximately $14.5 million. The fair value of net tangible assets acquired,
consisting primarily of accounts receivable, property and equipment, accounts
payable and other accrued expenses, totaled $816,000.
18. SEGMENT AND RELATED INFORMATION
The Company's two reportable segments consist of its state and local
government business and the eFed division. The state and local government
business includes the Company's direct and indirect wholly-owned subsidiaries
operating in the states of Virginia, Iowa, Georgia, Arkansas, Indiana, Kansas,
Nebraska, Maine, Utah and Idaho and its application services division.
Unallocated corporate-level expenses are reported in the reconciliation of the
segment totals to the related consolidated totals as "other reconciling items."
Management evaluates the performance of its segments and allocates resources to
them based on gross profit and earnings before interest, taxes, depreciation,
amortization and non-cash charges related to stock compensation and the
Company's application services division ("EBITDA"). 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 $1,256,000 for the expected loss. The Company
accrued an additional $1,125,000 of anticipated losses in 1999 based on revised
estimates. The summary of significant accounting policies applies to both of the
segments. There have been no intersegment transactions for the periods reported.
64
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SEGMENT AND RELATED INFORMATION (CONTINUED)
The table below reflects summarized financial information concerning the
Company's reportable segments for the years ending December 31:
<TABLE>
<CAPTION>
STATE AND
LOCAL OTHER
GOVERNMENT RECONCILING CONSOLIDATED
BUSINESS EFED ITEMS TOTAL
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
1997
Revenues................... $ 996,550 $ -- $ -- $ 996,550
Cost of revenues........... 5,168 -- -- 5,168
----------- -----------
Gross profit............... 991,382 -- -- 991,382
EBITDA..................... 107,000 -- -- 107,000
1998
Revenues................... 28,623,656 -- -- 28,623,656
Cost of revenues........... 21,210,632 -- -- 21,210,632
----------- -----------
Gross profit............... 7,413,024 -- -- 7,413,024
EBITDA..................... 1,005,921 -- (463,487) 542,434
1999
Revenues................... 55,395,154 1,570,974 -- 56,966,128
Cost of revenues........... 42,126,957 63,878 -- 42,190,835
----------- ---------- -----------
Gross profit............... 13,268,197 1,507,096 -- 14,775,293
EBITDA..................... 3,864,068 333,341 (3,386,247) 811,162
</TABLE>
A reconciliation of total segment EBITDA to total consolidated loss before
income taxes for the years ended December 31, 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------- ----------- ------------
<S> <C> <C> <C>
Total EBITDA for reportable segments.................... $ 107,000 $ 542,434 $ 811,162
Application development contracts....................... -- (1,256,000) (1,125,000)
Stock compensation...................................... (370,235) (568,869) (3,188,051)
Depreciation and amortization........................... (13,679) (5,922,396) (10,968,482)
Other income, net....................................... 111 55,839 2,492,460
Interest expense........................................ -- (88,161) (168,872)
--------- ----------- ------------
Consolidated loss before income taxes................... $(276,803) $(7,237,153) $(12,146,783)
========= =========== ============
</TABLE>
A primary source of revenue is derived from data resellers use of the
Company's government portals to access motor vehicle records for sale to the
auto insurance industry. For the year ended December 31, 1998, one data reseller
accounted for 60% of the Company's revenues and two other resellers accounted
for an additional 11% of the Company's revenues. For the year ended
December 31, 1999, one of these data resellers accounted for approximately 67%
of the Company's revenues and two other resellers accounted for an additional
11% of the Company's revenues. At December 31, 1999, one data reseller accounted
for approximately 45% of the Company's accounts receivable and two other data
resellers accounted for approximately 12%.
65
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. UNAUDITED QUARTERLY OPERATING RESULTS (IN THOUSANDS EXCEPT FOR PER SHARE
AMOUNTS)
<TABLE>
<CAPTION>
QUARTER
-----------------------------------------
1(ST) 2(ND) 3(RD) 4(TH)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1998
Revenues.................................. $ 361 $ 8,494 $ 9,773 $ 9,996
Operating loss............................ (124) (1,942) (1,561) (3,578)
Net loss.................................. (124) (1,946) (1,938) (3,888)
Basic and diluted loss per share.......... $(0.01) $ (0.05) $ (0.05) $ (0.09)
</TABLE>
<TABLE>
<CAPTION>
QUARTER
-----------------------------------------
1(ST) 2(ND) 3(RD) 4(TH)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1999
Revenues................................ $11,455 $13,311 $15,691 $16,509
Operating loss.......................... (3,302) (2,941) (2,378) (5,850)
Net loss................................ (3,299) (2,503) (1,442) (3,486)
Basic and diluted loss per share........ $ (0.08) $ (0.06) $ (0.03) $ (0.07)
</TABLE>
The quarterly results of operations reflect the effect of the Exchange Offer
on March 31, 1998, with the results of operations prior to that date reflecting
only the operations of NIC/USA. The quarterly data is subject to seasonal
fluctuations resulting in lower revenues in the fourth quarter of each calendar
year, due to the smaller number of business days in the quarter and a lower
volume of business-to-government and citizen-to-government transactions during
the holiday periods.
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 approximately
$1.3 million for the expected loss. The Company accrued an additional $900,000
of anticipated losses in the second quarter of 1999 and $225,000 in the fourth
quarter of 1999 based on revised estimates.
20. SUBSEQUENT EVENTS
On January 3, 2000, the Company commenced a three-year contract, with two
two-year renewal periods, with the State of Hawaii to develop and operate
Hawaii's government portal, Access Hawaii, which will provide electronic
transactions and expanded access to public information. To manage the contract,
the Company has created a new subsidiary, Hawaii Information Consortium, Inc.
("HIC"), a Hawaii corporation, which will be based in Hawaii's capitol city,
Honolulu. Under the contract, HIC will fund initial investment and ongoing
operational costs. Upon completion of the initial three-year term of the
contract or upon termination of the contract, the State of Hawaii will be
entitled to a perpetual for use only license for the applications HIC developed,
with no additional compensation due to HIC. In connection with the revenues
generated under the contract, HIC is entitled to retain any revenues remaining
after payment of statutory fees for retrieval of public information and all
network operating expenses. The Company anticipates Access Hawaii will be
operational in the first quarter of 2000.
On January 14, 2000, NIC merged its application services division with
Conquest Softworks, LLC ("Conquest"). Conquest, based in Durango, Colorado, is a
provider of software applications and services for electronic filings and
document management solutions for government. NIC contributed $6.5 million in
cash and the net assets of its application services division for a 65% ownership
in the new company, which
66
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. SUBSEQUENT EVENTS (CONTINUED)
will be referred to as NIC Conquest. NIC will eventually own approximately 60%
of NIC-Conquest with the remainder to be owned by NIC-Conquest employees and
other shareholders who were previously shareholders of Conquest. During the
first quarter of 2000, NIC-Conquest may incur non-cash compensation charges for
the amount by which the fair value of NIC-Conquest common stock to be sold to
employees exceeds the amount paid. The merger will be accounted for as a
purchase, and on a pro forma basis, would not have a material effect on the
Company's financial statements for the year ended December 31, 1999. At any time
after the first anniversary of the merger or upon a change in control of NIC
(defined as a change in beneficial ownership of 40% or more of the issued and
outstanding voting securities of NIC, excluding any public offering of equity
securities of NIC), each of the non-NIC shareholders shall have the right to put
to NIC all, but not less than all, of their shares at a price equal to a formula
exercise price. In addition, NIC-Conquest may not remove any non-NIC member from
the board of directors, authorize or issue any new equity shares senior to the
common shares currently issued, amend its articles of incorporation to alter the
rights, preferences or privileges of the shares held by non-NIC shareholders
disproportionate to the shares held by NIC, increase the authorized number of
members of the board of directors, effect a change in control in NIC-Conquest
(defined as 1) the filing of a registration statement with the Securities and
Exchange Commission for the purposes of registering shares under the Securities
Act of 1933; 2) approval by the board of directors of planning to make a public
offering, to merge or to be acquired; or 3) the receipt of any bona fide
proposal or inquiry regarding the merger or acquisition of the company or
substantially all of its assets), or sell, spin-off or otherwise distribute any
business or subsidiary of the company on a basis other than pro rata to all the
shareholders without the vote or written consent of at least one of the board
members representing the minority shareholders.
On January 14, 2000, eFed signed a letter of intent with Bank of America
Corporation, through its subsidiary Bank of America, N.A. (USA), to create a
limited liability company to offer state and local governments a Web-based
business-to-business procurement, payment and reconciliation service. The two
companies will share equally the revenue of the limited liability company
generated from transaction fees, sales rebates from suppliers, and promotional
consideration from suppliers. eFed will primarily be responsible for providing
the electronic purchasing platform based on the eFed software, end user
interface customization, hardware and software support and maintenance services
to Bank of America and state and municipal clients, and other technical services
in support of the business endeavors of the limited liability company. In
addition, Bank of America will have the opportunity to become a strategic
investor in NIC upon the achievement of certain revenue performance criteria by
the new company. Warrants of 0.75% up to 2.5% of the current fully diluted
shares of outstanding NIC common stock will become exercisable upon achieving
certain cumulative revenue targets by December 31, 2004. These warrants are
priced in two equally sized series at $34.44 and $44.77. Once exercisable, Bank
of America will have the longer of December 31, 2005, or twenty-four months to
execute the warrants on the shares.
On February 16, 2000, NIC entered into a definitive merger agreement to
acquire SDR Technologies, Inc. ("SDR"), a provider of Internet-based
applications for governments, in exchange for 2,081,189 shares of unregistered
NIC common stock. 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. The SDR acquisition will
be accounted for as a purchase and is expected to close by the end of
March 2000. At December 31, 1999, SDR's total assets were approximately $900,000
and total liabilities were approximately $3 million. For the year ended
December 31, 1999, SDR had net sales of approximately $2.6 million and incurred
a net loss of approximately $984,000. Based on a preliminary purchase price and
purchase
67
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. SUBSEQUENT EVENTS (CONTINUED)
price allocation, intangible assets arising from the transaction are expected to
total approximately $122.2 million (unaudited) and will be amortized over a
period expected to approximate three years. The transaction is structured to be
tax free to the SDR shareholders, and the amortization of the intangible assets
will not be deductible for income tax purposes. Pursuant to the Agreement and
Plan of Reorganization and Merger, outstanding SDR shares at the closing date
will be converted to NIC common stock based upon the exchange ratio of
approximately 0.5857 NIC shares for each SDR share. The preliminary purchase
price per share was determined to be $58.29, which was based on the average
closing market price of NIC's common stock one day before, the day of, and one
day after the February 17, 2000 announcement date of the acquisition. However,
the average closing market price of NIC's common stock three days before, the
day of, and three days after the announcement date of the acquisition will be
used to determine the final purchase price per share. The following unaudited
pro forma consolidated amounts for the year ended December 31, 1999 give effect
to the acquisitions of eFed (see Note 4) and SDR as if the acquisitions had
occurred on January 1, 1999. These amounts do not purport to be indicative of
what would have occurred had the acquisitions actually been made as of such date
or the results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
Revenues.................................................... $ 61,940,873
Operating loss.............................................. (62,652,831)
Net loss.................................................... (56,100,619)
Basic and diluted loss per share............................ $ (1.11)
Weighted average shares outstanding......................... 50,516,519
</TABLE>
On February 16, 2000, NIC signed a letter of intent to purchase a 20%
ownership interest in a privately held Internet commerce company. In exchange
for $5 million in cash, NIC will receive preferred stock convertible into common
stock. The investment is expected to be accounted for under the equity method.
68
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
National Information Consortium, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
National Information Consortium, Inc. and its subsidiaries (the "Company") at
December 31, 1998 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on the financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
February 17, 2000
69
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors of the Company and the executive
officers of the Company will be set forth under the caption "Management" in the
Company's proxy statement related to its 2000 annual meeting of shareholders
(the "Proxy Statement") and is incorporated herein by reference since such Proxy
Statement will be filed with the Securities and Exchange Commission no later
than 120 days after the end of the Company's fiscal year pursuant to
regulation 14A. Information required by Item 405 of Regulation S-K will be set
forth under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
"Executive Compensation" in the Proxy Statement, since such Proxy Statement will
be filed with the Securities and Exchange Commission not later than 120 days
after the end of the Company's fiscal year pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
"Share Ownership" in the Proxy Statement, since such Proxy Statement will be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the Company's fiscal year pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To the extent applicable the information required by this item is
incorporated herein by reference to "Compensation Committee Interlocks and
Insider Participation" and "Certain Relationships and Related Transactions" in
the Proxy Statement, since such Proxy Statement will be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
Company's fiscal year pursuant to Regulation 14A.
70
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets............................... 38
Consolidated Statements of Operations..................... 39
Consolidated Statements of Changes in Shareholders'
Equity.................................................. 40
Consolidated Statements of Cash Flows..................... 41
Notes to Consolidated Financial Statements................ 42
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................. 69
</TABLE>
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
3.1 Articles of Incorporation of the registrant*
3.2 Bylaws of the registrant*
4.1 Reference is made to Exhibits 3.1 and 3.2*
4.2 Investor Rights Agreement dated June 30, 1998*
4.3 Investors' Rights Agreement, dated January 12, 2000**
4.4 Specimen Stock Certificate of the registrant*
9.1 Voting Trust Agreement between Jeffery S. Fraser and Ross C.
Hartley and certain Holders of Shares of National
Information Consortium, Inc. dated June 30, 1998 and form of
the voting trust certificate*
10.1 Form of Indemnification Agreement between the registrant and
each of its executive officers and directors*
10.2 Registrant's 1998 Stock Option Plan, as amended and
restated*
10.3 Registrant's 1999 Employee Stock Purchase Plan*
10.4 Employment Agreement between the registrant and Jeffery S.
Fraser dated July 1, 1998*
10.5 Employment Agreement between the registrant and William F.
Bradley, Jr. dated July 24, 1998*
10.6 Employment Agreement between the registrant and Samuel R.
Somerhalder dated July 24, 1998*
10.7 Employment Agreement between the registrant and Harry H.
Herington dated July 24, 1998*
10.8 Employment Agreement between the registrant and Joseph
Nemelka, dated July 24, 1998**
10.9 Employment Agreement between the registrant and James B.
Dodd dated January 1, 1999*
10.10 Employment Agreement between the registrant and Ray G.
Coutermarsh dated February 1, 2000**
10.11 Employment Agreement between the registrant and Terrence
Parker dated November 9, 1999**
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
10.12 Contract for Network Manager Services between the
Information Network of Kansas and Kansas Information
Consortium, Inc. dated December 18, 1991 with addenda dated
October 15, 1992, August 19, 1993, May 26, 1995 and June 13,
1996 and amendment on March 2, 1998*
10.13 Contract for Network Manager Services between the State of
Indian@ by and through the Intelenet Commission and Indian@
Interactive, Inc., dated July 18, 1995*
10.14 Services Contract by and between National Information
Consortium, U.S.A. and the GeorgiaNet Authority, an agency
of the State of Georgia, dated September 15, 1996*
10.15 Contract for Network Manager between Information Network of
Arkansas by and through the Information Network of Arkansas
Board and Arkansas Information Consortium, Inc. dated July
2, 1997*
10.16 Contract for Network Manager Services between the Nebrask@
State Records Board on behalf of the State of Nebrask@ and
Nebrask@ Interactive, Inc. dated December 3, 1997 with
addendum No. 1 dated as of the same date*
10.17 Contract for Network Manager Services between the
Commonwealth of Virginia by and through the Virginia
Information Providers Network Authority and Virginia
Interactive, LLC dated January 15, 1998*
10.18 Contract for Network Manager Services between Iowa
Interactive, Inc. and the State of Iowa by and through
Information Technology Services dated April 23, 1998 with
letter addendum dated August 7, 1998*
10.19 Contract for Network Manager Services between the
Consolidated City of Indianapolis and Marion County by and
through the Enhanced Access Board of Marion County and City-
County Interactive, LLC dated August 31, 1998 with addendum
dated as of the same date*
10.20 State of Maine Contract for Special Services with New
England Interactive, Inc. dated April 14, 1999*
10.21 State of Idaho Contract for Electronic Business and portal
Services with the Idaho Department of Administration and
other Public Agencies, dated December 7, 1999**
10.22 State of Hawaii Contract for Special Services with the State
of Hawaii, dated December 29, 1999**
10.23 Employment Agreement between the registrant and Kevin C.
Childress dated May 16, 1999*
10.24 Sublease for the registrant's offices at 12 Corporate Woods,
Overland Park dated May 14, 1999, and First Sublease
Modification Agreement dated December 15, 1999, and Lease
for the same address dated January 15, 1995 with First Lease
Modification dated October 30, 1996*
10.25 Agreement between Equifax Services and Nebrask@ Online dated
March 25, 1996*
10.26 Agreement between ChoicePoint and the Information Network of
Kansas dated September 1, 1997*
10.27 Agreement between Equifax/ChoicePoint and the Information
Network of Arkansas dated September 2, 1997*
10.28 Agreement between Equifax Systems, Inc. and Access Indian@
Information Network dated November 14, 1995*
10.29 Contract for Network Manager Services between the State of
Utah and Utah Interactive, Inc. dated as of May 7, 1999*
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
10.30 Asset Purchase Agreement between the registrant and Electric
Press, Inc, for the acquisition of eFed, a division of
Electric Press, Inc., dated as of September 15, 1999**
10.31 Contribution Agreement between the registrant and Conquest
Softworks, LLC, dated as of January 12, 2000 Agreement**
10.32 Agreement and Plan of Reorganization and Merger between the
registrant and SDR Technologies, Inc., dated as of February
16, 2000**
21.1 Subsidiaries of the registrant
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Incorporated by reference to Registration Statement on Form S-1, File
No. 333-77939
** Incorporated by reference to Registration Statement on Form S-1, File
No. 333-30872
(b) REPORTS ON FORM 8-K.
A report on form 8-K was filed with the Securities and Exchange commission
on November 15, 1999, amending the report on Form 8-K filed on September 30,
1999, and included the financial statements of eFed for the period required by
Rule 3-05(b) of Regulation S-X and the pro forma financial information required
by Article 11 of Regulation S-X.
A report on Form 8-K was filed with the Securities and Exchange Commission
on January 28, 2000, with attached Press Releases of the Company dated
January 14, 2000, announcing the Company had entered into a definitive contract
to merge its Applications Services Division with Conquest Softworks, LLC and
announcing that eFed, Inc., a wholly owned subsidiary of the Company, had
entered into a letter of intent with Bank of America to form a jointly owned
limited liability company for the purposes of offering state and local
governments the first Web-based business-to-business procurement, payment and
reconciliation solution.
A report on Form 8-K was filed with the Securities and Exchange Commission
on March 1, 2000, with attached Press Release of the Company dated February 17,
2000, announcing the Company had entered into a definitive agreement to acquire
SDR Technologies, Inc., a provider of Internet-based applications for
governments.
73
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on , 2000.
<TABLE>
<S> <C> <C>
NATIONAL INFORMATION CONSORTIUM, INC.
By: /s/ JAMES B. DODD
-----------------------------------------
James B. Dodd
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JEFFERY S. FRASER
------------------------------------------- Chairman and Director March , 2000
Jeffery S. Fraser
President, Chief Executive
/s/ JAMES B. DODD Officer and Director
------------------------------------------- (Principal Executive March , 2000
James B. Dodd Officer)
/s/ KEVIN C. CHILDRESS Chief Financial Officer
------------------------------------------- (Principal Financial and March , 2000
Kevin C. Childress Accounting Officer)
/s/ JOHN L. BUNCE, JR.
------------------------------------------- Director March , 2000
John L. Bunce, Jr.
/s/ DANIEL J. EVANS
------------------------------------------- Director March , 2000
Daniel J. Evans
/s/ ROSS C. HARTLEY
------------------------------------------- Director March , 2000
Ross C Hartley
/s/ PATRICK J. HEALY
------------------------------------------- Director March , 2000
Patrick J. Healy
/s/ PETE WILSON
------------------------------------------- Director March , 2000
Pete Wilson
</TABLE>
74
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION
- ------------------ -----------------
<S> <C> <C>
1. Kansas Information Consortium, Inc. Kansas, U.S.
2. Indiana Interactive, Inc. Indiana, U.S.
2a. City-County Interactive, Inc. Indiana, U.S.
3. National Information Consortium, U.S.A., Inc. Kansas, U.S.
4. Arkansas Information Consortium, Inc. Arkansas, U.S.
5. Nebraska Interactive, Inc. Nebraska, U.S.
6. Virginia Interactive, LLC Virginia, U.S.
7. Iowa Interactive, Inc. Iowa, U.S.
8. New England Interactive, Inc. Maine, U.S.
9. Utah Interactive, Inc. Utah, U.S.
10. Hawaii Information Consortium, Inc. Hawaii, U.S.
11. Idaho Information Consortium, Inc. Idaho, U.S.
12. eFed, Inc. Virginia, U.S.
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-83171) of National Information Consortium, Inc.
of our report dated February 17, 2000 relating to the consolidated financial
statements, which appears in this Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
March 10, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 9,527,389
<SECURITIES> 82,480,760
<RECEIVABLES> 6,009,925
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 99,068,649
<PP&E> 2,998,376
<DEPRECIATION> 0
<TOTAL-ASSETS> 133,660,938
<CURRENT-LIABILITIES> 5,353,813
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 128,088,961
<TOTAL-LIABILITY-AND-EQUITY> 133,660,938
<SALES> 0
<TOTAL-REVENUES> 56,966,128
<CGS> 0
<TOTAL-COSTS> 42,190,835
<OTHER-EXPENSES> 29,245,664
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (168,872)
<INCOME-PRETAX> (12,146,783)
<INCOME-TAX> (1,416,223)
<INCOME-CONTINUING> (10,730,560)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,730,560)
<EPS-BASIC> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
