FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
Commission file number 000-26621
NATIONAL INFORMATION CONSORTIUM, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 52-2077581
------------------------------- ------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
12 CORPORATE WOODS, 10975 BENSON STREET, SUITE 390
OVERLAND PARK, KANSAS 66210
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(877) 234-3468
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of the registrant's common stock as of October
31, 2000 was 55,611,223.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
000'S EXCEPT FOR SHARE AMOUNTS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,545 $ 9,527
Marketable securities 37,546 82,481
Trade accounts receivable 7,736 6,010
Deferred income taxes 311 158
Prepaid expenses 2,139 279
Other current assets 2,210 614
----------- -----------
Total current assets 63,487 99,069
Property and equipment, net 6,466 2,998
Deferred income taxes 3,784 694
Other assets 211 254
Investments in affiliates 7,608 -
Intangible assets, net 70,596 30,646
----------- -----------
Total assets $ 152,152 $ 133,661
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,290 $ 3,805
Accrued expenses 2,155 873
Income taxes payable 150 84
Capital lease obligations - current portion 187 190
Notes payable - current portion - 50
Application development contracts 834 232
Other current liabilities 179 120
----------- -----------
Total current liabilities 7,795 5,354
Capital lease obligation - long-term portion 69 218
Deferred income taxes - -
----------- -----------
Total liabilities 7,864 5,572
----------- -----------
Commitments and contingencies (Note 7) - -
Minority interest 705 -
----------- -----------
Shareholders' equity:
Common stock, no par, 200,000,000 shares authorized
55,600,300 and 53,165,370 shares issued and
outstanding - -
Additional paid-in capital 193,372 149,036
Accumulated deficit (41,865) (16,557)
Accumulated other comprehensive income 10 2
----------- -----------
151,517 132,481
Less notes and stock subscriptions receivable (15) (30)
Less treasury stock (101) -
Less vested warrants issued (Note 2) (4,618) -
Less deferred compensation expense (3,200) (4,362)
----------- -----------
Total shareholders' equity 143,583 128,089
----------- -----------
Total liabilities and shareholders' equity $ 152,152 $ 133,661
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS.
1
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
000'S EXCEPT FOR PER SHARE AMOUNTS
<TABLE>
<CAPTION>
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 19,350 $ 15,691 $ 58,174 $ 40,457
Cost of revenues 14,349 11,672 41,741 30,495
-------- -------- -------- --------
Gross profit 5,001 4,019 16,433 9,962
-------- -------- -------- --------
Operating expenses:
Service development and operations 3,249 1,362 9,995 4,009
Selling, general and administrative 8,817 2,226 21,256 5,429
Stock compensation 416 388 1,331 2,735
Depreciation and amortization 8,363 2,421 19,661 6,409
-------- -------- -------- --------
Total operating expenses 20,845 6,397 52,243 18,582
-------- -------- -------- --------
Operating loss (15,844) (2,378) (35,810) (8,620)
-------- -------- -------- --------
Other income (expense):
Interest expense (6) (58) (38) (145)
Other income, net 767 1,130 2,967 1,168
Equity in net loss of affiliates (1,495) - (3,178) -
-------- -------- -------- --------
Total other income (expense) (734) 1,072 (249) 1,023
-------- -------- -------- --------
Loss before income taxes and minority interest (16,578) (1,306) (36,059) (7,597)
Income tax expense (benefit) (4,954) 136 (10,731) (353)
-------- -------- -------- --------
Loss before minority interest (11,624) (1,442) (25,328) (7,244)
Minority interest 5 - (21) -
-------- -------- -------- --------
Net loss $(11,629) $ (1,442) $(25,307) $ (7,244)
======== ======== ======== ========
Net loss per share:
Basic and diluted $ (0.21) $ (0.03) $ (0.46) $ (0.16)
======== ======== ======== ========
Weighted average shares outstanding 55,489 50,968 54,431 45,278
======== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
2
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
000's
<TABLE>
<CAPTION>
NINE-MONTHS ENDED
SEPTEMBER 30,
------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (25,307) $ (7,244)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 19,661 6,409
Compensation expense recognized related to sale of common stock 42 1,574
Compensation expense recognized related to stock options 1,289 1,161
Loss on disposals of property and equipment 101 -
Accretion of discount on marketable securities (2,804) (674)
Application development contracts 602 (363)
Deferred income taxes (10,829) (406)
Minority interest (21) -
Equity in net loss of affiliates 3,178 -
Changes in operating assets and liabilities, net of effects of
acquisitions:
(Increase) in trade accounts receivable (1,315) (1,539)
(Increase) in prepaid expenses (1,823) (124)
(Increase) in other current assets (477) (368)
Increase in other assets (20) -
Increase (decrease) in accounts payable (109) 761
Increase (decrease) in income taxes payable 66 (69)
Increase (decrease) in accrued expenses 1,069 (114)
Increase (decrease) in other current liabilities (138) 500
--------- ---------
Net cash used in operating activities (16,835) (496)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (3,855) (205)
Proceeds from disposals of property and equipment 13 -
Capitalized software development costs (2,166) -
Purchases of marketable securities (246,413) (167,470)
Maturities of marketable securities 294,160 60,000
Sales of marketable securities - 16,300
Cash outlay in exchange for convertible notes receivable (2,000) -
Acquisition of businesses, net of cash acquired (6,617) (15,039)
Investments in affiliates (10,787) -
--------- ---------
Net cash provided by (used in) investing activities 22,335 (106,414)
--------- ---------
Cash flows from financing activities:
Proceeds from bank lines of credit - 1,251
Payments on bank lines of credit (2,050) (2,268)
Payments on notes payable (50) (850)
Payments on capital lease obligations (158) (186)
Payments to purchase treasury stock (101) -
Proceeds from issuance of common stock to employees 112 475
Net proceeds from initial public offering of common stock - 109,852
Proceeds from subscriptions receivable 15 220
Proceeds from exercise of employee stock options 750 -
--------- ---------
Net cash provided by (used in) financing activities (1,482) 108,494
--------- ---------
Net increase in cash and cash equivalents 4,018 1,584
Cash and cash equivalents, beginning of year 9,527 1,311
--------- ---------
Cash and cash equivalents, end of period $ 13,545 $ 2,895
========= =========
Other cash flow information:
Interest paid $ 38 $ 145
========= =========
Income taxes paid $ 85 $ 69
========= =========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
National Information Consortium, Inc. ("NIC" or the "Company") has prepared the
consolidated interim financial statements included herein without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. In management's
opinion, the consolidated interim financial statements reflect all adjustments
(which include only normal recurring adjustments, except as disclosed) necessary
to present fairly the results of operations for the interim periods presented.
These financial statements and notes should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K, filed with the SEC on March 10, 2000, the Company's
Quarterly Reports on Form 10-Q, filed with the SEC on May 15, 2000 and August
14, 2000, and Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations included in this Form 10-Q.
1. RESTRUCTURING CHARGE
On September 20, 2000, the Company announced the restructuring of its
eGovernment applications and services businesses to more appropriately size
these operations to visible demand and more efficiently align them with other
eGovernment initiatives across NIC. The restructuring involved employee
reductions in its marketing division and at its NIC Commerce and NIC
Technologies divisions. As a result, NIC incurred a pre-tax charge of
approximately $638,000 ($389,000 on an after-tax basis) during the quarter ended
September 30, 2000 relating to employee severance costs. This charge is included
in selling, general and administrative expense in the consolidated statements of
operations. Employee severance costs paid during the three months ended
September 30, 2000 totaled $358,000, with $280,000 accrued at September 20, 2000
for future payments. The employee severance costs relate to severance packages
for 23 employees in marketing, product development and administration, 20 of
which were terminated by September 30, 2000, with three additional terminations
expected in the fourth quarter of 2000. For additional information on the
restructuring, refer to Management's Discussion and Analysis of Financial
Condition and Results of Operations included in this Form 10-Q.
2. INTERACTIVE SERVICES AGREEMENT WITH AMERICA ONLINE
On August 25, 2000 (the "Effective Date"), NIC entered into a three-year
Interactive Services Agreement (the "Agreement") with America Online, Inc.
("AOL") to deliver state government information, services and applications
through AOL's State Government Guide. NIC will pay a $4.5 million cash carriage
fee to AOL over the initial three-year term (the "Term"). NIC made an initial
cash payment to AOL totaling $1.125 million on August 25, 2000, and must pay AOL
$375,000 every three months for the next 27 months subsequent to the Effective
Date. As an additional component of the carriage fee, NIC has also issued to AOL
fully-vested common stock warrants representing the right to immediately
purchase 624,653 shares of NIC common stock at an exercise price of $6.71875 per
share. The warrants expire five years from the date of the Agreement. The
exercise price per share was calculated based on the average closing price of
NIC common stock for the four trading days prior to the August 28, 2000
announcement date of the Agreement. The fair value of the warrants issued to AOL
was determined to be approximately $4.75 million on August 25, 2000, using the
Black-Scholes option-pricing model. NIC will recognize the cash portion of the
carriage fee on a straight-line basis over the Term as selling, general and
4
<PAGE>
administrative expense in the consolidated statement of operations. NIC will
recognize the fair value of the fully vested warrants on a straight-line basis
over the Term as amortization expense in the consolidated statement of
operations. At September 30, 2000, NIC has recorded the unamortized fair value
of the fully vested warrants as a contra-equity account in the consolidated
balance sheet.
Under the terms of the Agreement, NIC will grant to AOL a royalty-free,
non-exclusive, worldwide license to use the applications developed by NIC (the
"Customized Programming and Licensed Content"). In addition, NIC will fund the
initial investment and ongoing operational costs to build, operate and maintain
the Customized Programming and Licensed Content. NIC will share with AOL a
portion of all transaction revenues generated by AOL members who access the
transaction applications NIC develops specifically for the State Government
Guide through the Customized Programming and Licensed Content. AOL and NIC will
share revenues generated from the license or sale of advertisement on or through
the State Government Guide.
AOL has the right to extend the Agreement for up to two years beyond the Term.
If the Agreement is extended, NIC may be required to pay AOL a maximum of $1.5
million in additional cash carriage fees per year beyond the Term if gross
advertising revenues meet or exceed certain levels under the Agreement. Up to
624,653 additional warrants (the "Contingent Warrants"), with an exercise price
and terms identical to the fully-vested warrants issued on August 25, 2000, are
issuable to AOL if gross advertising revenues collected during the period the
Agreement is in effect meet or exceed certain levels. One third of the
Contingent Warrants are issuable to AOL on such dates that cumulative gross
advertising revenues collected by AOL pursuant to the Agreement reach $22
million, $32 million and $40 million, respectively.
3. ACQUISITION OF SDR TECHNOLOGIES
On May 11, 2000, NIC acquired SDR Technologies, Inc., a California corporation
and provider of Internet-based applications for governments ("SDR"). SDR has
been renamed National Information Consortium Technologies, Inc. ("NIC
Technologies"). Pursuant to the Amended and Restated Agreement and Plan of
Reorganization and Merger, dated May 5, 2000 (the "Merger Agreement"), NIC
issued to SDR shareholders 1,912,097 shares of common stock and options to
purchase 229,965 shares of NIC common stock as consideration. Ten percent of the
total number of shares of NIC common stock issued has been placed in escrow as
collateral for the indemnification obligations of the selling shareholders under
the Merger Agreement. Subject to certain limitations, one half of the escrow
shares will be delivered to SDR shareholders nine months after the date of
closing and the remaining escrow shares will be delivered to the SDR
shareholders 18 months after the date of closing. The acquisition, structured to
be tax free to the SDR shareholders,
5
<PAGE>
was accounted for as a purchase, and the purchase price was approximately $39.6
million.
Prior to the acquisition date, SDR issued two $1 million convertible promissory
notes to NIC, dated January 28, 2000 and March 27, 2000, in exchange for $2
million in cash. On April 21, 2000 NIC elected to convert the promissory notes
into 67,476 shares of SDR common stock, which were automatically cancelled and
retired upon the closing of the acquisition. The principal amount of the January
28, 2000 promissory note, plus interest thereon, will be deducted from the NIC
shares held in escrow. The number of shares to be deducted from escrow relating
to the January 28, 2000 note will be based on the market price of NIC common
stock when the escrow shares are released to NIC. The principal amount of the
January 28, 2000 promissory note will be accounted for as a current receivable
until NIC receives the escrow shares. The principal amount of the March 27, 2000
promissory note was accounted for as additional purchase price and will not be
deducted from the escrow shares.
The following pro forma consolidated amounts for the nine months ended September
30, 2000 and 1999 give effect to the acquisition of SDR as if the acquisition
had occurred at the beginning of each period presented:
<TABLE>
<CAPTION>
NINE-MONTHS ENDED SEPTEMBER 30,
2000 1999
------- -------
<S> <C> <C>
Revenues $58,930 $42,356
Net loss (31,529) (17,295)
Basic and diluted loss per share $ (0.57) $ (0.37)
Weighted average shares outstanding 55,342 47,184
</TABLE>
For additional information on the SDR acquisition, including the preliminary
purchase price allocation, refer to Note 1 in the Notes to Consolidated
Financial Statements included in the Company's Quarterly Report on Form 10-Q
filed with the SEC on August 14, 2000.
4. GOVERNMENT CONTRACT WITH THE STATE OF TENNESSEE
On August 28, 2000, NIC commenced a three-year contract, with two one-year
optional renewal periods, with the State of Tennessee to develop and operate
Tennessee's government portal, TennesseeAnytime, which will provide electronic
transactions and expanded access to public information. Under the contract, NIC
will fund initial investment and ongoing operational costs. The State of
Tennessee will be entitled to a perpetual, royalty-free, irrevocable, unlimited
and nonexclusive right to use the applications NIC develops. In connection with
the revenues generated under the contract, the Company is entitled to all
revenues and is responsible for payment of statutory fees for retrieval of
public information and all network operating expenses. TennesseeAnytime became
operational in October 2000.
5. ACQUISITION OF INTELLIGENT DECISION TECHNOLOGIES
On October 13, 2000, NIC acquired Longmont, Colorado-based Intelligent Decision
Technologies, Ltd. ("IDT"), a provider of business-to-government reporting and
filing software for the transportation industry. IDT has developed unique
business-to-government applications that ensure compliance with the Federal
Highway Administration's Commercial Vehicle Information System Network. IDT
currently has contracts to provide the state governments in California,
Maryland, Minnesota, and Kentucky with commercial vehicle electronic
credentialing services that include registration, permitting, and tax filing
software. The acquisition will be accounted for as a purchase.
6
<PAGE>
The preliminary purchase price for the business was approximately $2.0 million,
consisting of $0.5 million in cash and the issuance of approximately 521,000
shares of unregistered NIC common stock. Pursuant to the Agreement and Plan of
Merger dated September 8, 2000 (the "Merger Agreement"), fifty percent of the
total number of shares of NIC common stock issued will be held in escrow as
collateral for the indemnification obligations of the selling shareholders under
the Merger Agreement. The shares of NIC common stock placed in escrow will be
held and released subject to the terms and conditions of an escrow agreement,
whereby 60 percent of the escrow shares will be delivered to the IDT
shareholders one year after the date of closing, and the remaining escrow shares
will be delivered to the IDT shareholders two years after the date of closing.
The fair value of the NIC common stock 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 October 13, 2000 closing date, which was the date final
terms were agreed to. Up to 521,000 shares of NIC common stock are payable as
additional consideration depending on the earnings performance of IDT through
the end of calendar year 2003. The preliminary purchase price of approximately
$2.0 million will be allocated to the assets acquired and liabilities assumed
based upon their estimated fair values at the date of acquisition. The
transaction was structured to be tax free to the IDT shareholders, and the
amortization of the intangible assets arising from the application of purchase
accounting will not be deductible for income tax purposes. IDT's 1999 and 2000
results of operations as a stand-alone business were not material in relation to
the consolidated financial statements of NIC.
6. SEGMENTS AND RELATED INFORMATION
As discussed in Note 1 above, during the third quarter of 2000, the Company
announced the restructuring of its eGovernment applications and services
businesses. In conjunction with the restructuring, the Company also reorganized
its management team to support the new corporate structure. Accordingly, NIC
changed the composition of its reportable segments to match the manner by which
the segments are internally organized and managed. The Company's reportable
segments consist of its state and local portal business ("Portals"), its
eGovernment products business ("Products") and its NIC Commerce government
procurement business ("Procurement"). The Portals segment includes the Company's
subsidiaries operating state and local government portals in the states of
Arkansas, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Maine, Nebraska, Utah,
and Virginia, and in the cities of San Francisco and Indianapolis/Marion County,
Indiana. The Products segment includes the NIC Conquest and NIC Technologies
subsidiaries, which were previously included in the state and local government
segment. Unallocated corporate-level expenses are reported in the reconciliation
of the segment totals to the related consolidated totals as "Other Reconciling
Items." Management evaluates the performance of its segments and allocates
resources to them based on gross profit and earnings before interest, taxes,
equity in net loss of affiliates, depreciation, amortization, one-time charges
and other non-cash charges related to stock compensation and application
development contracts ("EBITDA"). There have been no intersegment transactions
for the periods reported. The table below reflects summarized financial
information concerning the Company's reportable segments for the three months
ended September 30 (in thousands):
7
<PAGE>
<TABLE>
<CAPTION>
OTHER
RECONCILING CONSOLIDATED
PORTALS PRODUCTS PROCUREMENT ITEMS TOTAL
-------- -------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
2000
Revenues................... $ 17,238 $ 1,507 $ 605 $ - $ 19,350
Cost of revenues........... 13,106 652 591 - 14,349
-------- -------- --------- ---------
Gross profit............... 4,132 855 14 - 5,001
EBITDA..................... 1,079 (781) (2,134) (4,356) (6,192)
1999
Revenues................... 15,217 342 132 - 15,691
Cost of revenues........... 11,660 - 12 - 11,672
-------- -------- --------- ---------
Gross profit............... 3,557 342 120 - 4,019
EBITDA..................... 1,342 - 11 (922) 431
</TABLE>
The following is a reconciliation of total segment EBITDA to total consolidated
loss before income taxes and minority interest for the three months ended
September 30 (in thousands):
<TABLE>
<CAPTION>
2000 1999
---------- -----------
<S> <C> <C>
Total EBITDA for reportable segments............................. $ (6,192) $ 431
Restructuring charge............................................. (638) -
Vacation accrual................................................. (235) -
Stock compensation............................................... (416) (388)
Depreciation and amortization.................................... (8,363) (2,421)
Other income, net................................................ 767 1,130
Interest expense................................................. (6) (58)
Equity in net loss of affiliates................................. (1,495) -
---------- -----------
Consolidated loss before income taxes and minority interest......
$ (16,578) $ (1,306)
========== ===========
</TABLE>
The table below reflects summarized financial information concerning the
Company's reportable segments for the nine months ended September 30 (in
thousands):
<TABLE>
<CAPTION>
OTHER
RECONCILING CONSOLIDATED
PORTALS PRODUCTS PROCUREMENT ITEMS TOTAL
---------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
2000
Revenues................... $ 51,332 $ 3,713 $ 3,129 $ - $ 58,174
Cost of revenues........... 38,967 1,360 1,414 - 41,741
---------- ---------- ---------- ---------
Gross profit............... 12,365 2,353 1,715 - 16,433
EBITDA..................... 3,605 (1,617) (3,877) (9,871) (11,760)
1999
Revenues................... 39,776 549 132 - 40,457
Cost of revenues........... 30,483 - 12 - 30,495
---------- ---------- ----------- ---------
Gross profit............... 9,293 549 120 - 9,962
EBITDA..................... 3,137 - 11 (1,724) 1,424
</TABLE>
8
<PAGE>
The following is a reconciliation of total segment EBITDA to total consolidated
loss before income taxes and minority interest for the nine months ended
September 30 (in thousands):
<TABLE>
<CAPTION>
2000 1999
------------ ----------
<S> <C> <C>
Total EBITDA for reportable segments............................. $ (11,760) $ 1,424
Restructuring charge............................................. (638) -
Vacation accrual................................................. (235) -
Application development contracts................................ (1,350) (900)
Withdrawn secondary offering expenses............................ (835) -
Stock compensation............................................... (1,331) (2,735)
Depreciation and amortization.................................... (19,661) (6,409)
Other income, net................................................ 2,967 1,168
Interest expense................................................. (38) (145)
Equity in net loss of affiliates................................. (3,178) -
----------- ---------
Consolidated loss before income taxes and minority interest...... $ (36,059) $ (7,597)
=========== ==========
</TABLE>
7. APPLICATION DEVELOPMENT CONTRACTS
Due to developments arising in late March 2000 relating to subcontractor
performance and technical delivery issues, the Company determined that the
balance of revenues remaining to be recognized under an application development
contract with the Indiana Secretary of State was not expected to cover the
Company's current estimate of costs to develop and implement the related
application and accrued $1.35 million for the expected loss. The Company is
actively investigating remuneration from certain parties involved with the
contract. The amount cannot be determined at this time and has not been
considered in the Company's current estimate. At September 30, 2000, the accrual
for all application development contracts held by the Company was approximately
$0.8 million, which management believes is adequate. Because of the inherent
uncertainties in estimating the costs of completion, including the success of
the Company in receiving remuneration as discussed above, it is at least
reasonably possible that the estimate will change in the near term.
8. MARKETABLE SECURITIES
The fair value of marketable debt securities at September 30, 2000 and December
31, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
SEPT. 30, 2000 DEC. 31, 1999
-------------- -------------
<S> <C> <C>
U.S. government obligations............................ $ 6,965 $ 12,253
Corporate debt securities.............................. 30,581 70,228
-------- ---------
$ 37,546 $ 82,481
======== =========
</TABLE>
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.
Gross realized gains and losses and unrealized holding gains and losses through
September 30, 2000 were not significant.
9
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9. INVESTMENTS IN AFFILIATES
The Company holds certain investments in affiliates accounted for under the
equity method. The Company uses the equity method to account for equity
investments in affiliates when NIC management can exert significant influence,
but not control, over the operations of the investee. Significant influence is
generally deemed to exist if the Company has an ownership interest in the voting
stock of the investee of between 20% and 50%, although other factors, such as
representation on the investee's Board of Directors, are considered in
determining whether the equity method of accounting is appropriate. At September
30, 2000, the carrying value of the Company's equity-method investments totaled
$7.6 million.
10. INTANGIBLE ASSETS
Intangible assets consisted of the following at September 30, 2000 and December
31, 1999 (in thousands):
<TABLE>
<CAPTION>
SEPT. 30, 2000 DEC. 31, 1999
-------------- -------------
<S> <C> <C>
Goodwill..................................................... $ 56,247 $ 21,303
Software intangibles......................................... 24,456 21,790
Contract intangibles......................................... 3,865 3,465
Assembled domestic workforce intangible...................... 1,100 -
Foreign workforce agreement intangible....................... 8,800 -
Product technology intangible................................ 8,200 -
Software development costs................................... 2,311 145
Patents and trademarks....................................... 92 -
-------- --------
105,071 46,703
Less accumulated amortization................................ 34,475 16,057
-------- --------
$ 70,596 $ 30,646
======== ========
</TABLE>
11. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2000, the EITF reached a final consensus on Issue 99-19 ("EITF 99-19"),
RECORDING REVENUE GROSS AS A PRINCIPAL VERSUS NET AS AN AGENT, which provides
guidance as to the circumstances when a company should recognize revenue based
on the gross amount billed to the customer or the net amount retained. The
consensus is effective beginning in the fourth quarter of 2000. Management has
evaluated EITF 99-19 and does not believe it has an impact on the presentation
of the Company's consolidated results of operations.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
THIS FORM 10-Q INCLUDES "FORWARD-LOOKING" STATEMENTS ABOUT FUTURE FINANCIAL
RESULTS, FUTURE BUSINESS CHANGES AND OTHER EVENTS THAT HAVEN'T YET OCCURRED. FOR
EXAMPLE, STATEMENTS LIKE WE "EXPECT," WE "BELIEVE," WE "PLAN," WE "INTEND," WE
"ANTICIPATE," OR WE "ESTIMATE" ARE FORWARD-LOOKING STATEMENTS. INVESTORS SHOULD
BE AWARE THAT ACTUAL OPERATING RESULTS AND FINANCIAL PERFORMANCE MAY DIFFER
MATERIALLY FROM OUR EXPRESSED EXPECTATIONS BECAUSE OF RISKS AND UNCERTAINTIES
ABOUT THE FUTURE INCLUDING RISKS RELATED TO ECONOMIC AND COMPETITIVE CONDITIONS
AND THOSE RISKS DISCUSSED IN OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION. IN ADDITION, WE WILL NOT NECESSARILY UPDATE THE INFORMATION IN THIS
FORM 10-Q IF ANY FORWARD-LOOKING STATEMENT LATER TURNS OUT TO BE INACCURATE.
OVERVIEW
The following discussion summarizes the significant factors affecting operating
results of the Company for the three- and nine-month periods ended September 30,
2000 and 1999. This discussion and analysis should be read in conjunction with
our consolidated interim financial statements and the related notes included in
this Form 10-Q.
THIRD QUARTER 2000 RESTRUCTURING
On September 20, 2000, we announced that our third quarter operating results
would likely fall short of the consensus analyst revenue and earnings estimates.
Concurrent with this announcement, we announced the restructuring of two of our
eGovernment product businesses, NIC Commerce and NIC Technologies, the
reorganization of our management team and the consolidation of our marketing
efforts. Our lower third quarter operating results were mainly attributable to
our NIC Commerce and NIC Technologies businesses, which were affected by
industry-wide post Y2K delays in government decision-making and sales cycles
during the first half of 2000. These businesses were the main sources of revenue
shortfall versus expectations as a result of their management's ineffective
forecasting and inadequate response to market signals that new business and
revenues would be less than expectations. In addition, these businesses were the
main source of EBITDA shortfall versus expectations as a result of expenditures
for sustained development, marketing and product delivery efforts to support
these operations whose revenue and gross profit impact did not materialize as
expected during the quarter.
Our response to the inadequate performance of our NIC Technologies and NIC
Commerce businesses, both of which we have acquired since September 1999, was to
initiate a change in leadership, while simultaneously adjusting operational
processes and resources to more appropriately size these operations to visible
demand and more efficiently align them with other eGovernment initiatives across
NIC. Dan Houlihan, the former President of our largest state portal operation in
Virginia, has assumed day-to-day management responsibility of NIC Technologies
since July 2000 and will be responsible for rebalancing the operation to better
support the application development needs of NIC's growing local and state
portal businesses and other growth initiatives across NIC. We recently announced
the appointment of Chris Boehm as the new President of NIC Commerce effective
November 1, 2000. Mr. Boehm joined NIC from Comptek Research, Inc., a leading
supplier of advanced electronics and data communications systems to
international government and industry clients, where he served as President of
its software and technical services subsidiary. Mr. Boehm will be responsible
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for accelerating growth and expanding NIC's government eProcurement market share
at the local, state, federal, and international levels.
The restructuring involved employee reductions in our marketing division and at
our NIC Commerce and NIC Technologies businesses. As a result, we incurred a
pre-tax charge of approximately $638,000 ($389,000 on an after-tax basis) during
the quarter ended September 30, 2000 relating to employee severance costs.
Employee severance costs paid during the three months ended September 30, 2000
totaled $358,000, with $280,000 accrued at September 30, 2000 for severance
payments to be made in the fourth quarter of 2000. Cash requirements for the
restructuring were funded from available resources. The employee severance costs
relate to severance packages for 23 employees in marketing, product development
and administration, 20 of which were terminated by September 30, 2000, with
three additional terminations expected in the fourth quarter of 2000. The
savings from these reductions are expected to approximate $2.1 million (pre-tax)
annually.
AGREEMENT WITH AOL
On August 25, 2000, we entered into a three-year agreement
with America Online, Inc. ("AOL") to deliver state government information,
services and applications through AOL's State Government Guide. For additional
information on our agreement with AOL, refer to Note 2 in the Notes to
Consolidated Financial Statements included in this Form 10-Q. We cannot
currently estimate the timing or amount of revenues that we may earn under this
agreement.
ACQUISITION OF INTELLIGENT DECISION TECHNOLOGIES
On October 13, 2000, we acquired Intelligent Decision Technologies, Ltd.
("IDT"), a provider of business-to-government reporting and filing software for
the transportation industry. IDT has developed unique business-to-government
applications that ensure compliance with the Federal Highway Administration's
Commercial Vehicle Information System Network. IDT currently has contracts to
provide the state governments in California, Maryland, Minnesota, and Kentucky
with commercial vehicle electronic credentialing services that include
registration, permitting, and tax filing software. NIC's multi-state filing
portal for the trucking industry, which became operational in November 2000,
will be integrated into IDT's operations, allowing us to leverage our
eGovernment expertise on behalf of regulated industries such as transportation,
which are required to file periodically with multiple government entities. For
additional information on the IDT acquisition, refer to Note 5 in the Notes to
Consolidated Financial Statements included in this Form 10-Q.
ACQUISITION OF SDR TECHNOLOGIES
On May 11, 2000, we completed the acquisition of SDR Technologies, a provider of
Internet-based applications for governments. SDR designs and develops online
election and ethics filing systems for federal, state and local government
agencies and has also developed a number of Internet-based applications for tax
filings, business filings, professional licensing and automobile registrations.
SDR has been renamed National Information Consortium Technologies, Inc. ("NIC
Technologies"). For additional information on the SDR acquisition, refer to Note
3 in the Notes to Consolidated Financial Statements included in this Form 10-Q.
RESULTS OF OPERATIONS
REVENUES. Revenues for the three months ended September 30, 2000 were
$19.4 million, a 23% increase over revenues of $15.7 million for the three
months ended September 30, 1999. Of this 23% increase, 6% was attributable
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to revenues from our new state portal business units that became operational
after June 30, 1999, 7% was from an increase in revenues relating to same state
portal volumes (states open more than one year), 3% was revenues from NIC
Commerce (formerly eFed), which we acquired in September 1999, 2% was revenues
from NIC Conquest, which was formed in January 2000 through the merger of our
application services division and Conquest Softworks, LLC, and 5% was revenues
from NIC Technologies (formerly SDR Technologies), which we acquired in May
2000. Excluding acquired businesses, new state portal business units that became
operational after June 30, 1999, and our state portal contracts in Georgia and
Iowa, which we operate under a fixed-price model, same state portal transaction
revenues for the three months ended September 30, 2000 increased 9% over the
three months ended September 30, 1999 as a result of increased transaction
volumes mainly from our Virginia and Arkansas subsidiaries.
Revenues for the nine months ended September 30, 2000 were $58.2
million, a 44% increase over revenues of $40.5 million for the nine months ended
September 30, 1999. Of this 44% increase, 14% was attributable to revenues from
our state portal business units that became operational after June 30, 1999, 15%
was from an increase in revenues relating to same state portal volumes, 7% was
revenues from NIC Commerce, 5% was revenues from NIC Conquest, and 3% was
revenues from NIC Technologies. Same state portal transaction revenues for the
nine months ended September 30, 2000 increased 17% over the nine months ended
September 30, 1999 as a result of increased transaction volumes mainly from our
Virginia subsidiary.
GROSS PROFIT. Gross profit for the three months ended September 30,
2000 was $5.0 million, a 24% increase over gross profit of $4.0 million for the
three months ended September 30, 1999. Of this 24% increase, 10% was
attributable to gross profit from state portal business units that became
operational after June 30, 1999, 4% was from an increase in gross profit
relating to same state portal volumes, 10% was gross profit from NIC Conquest
and 3% was gross profit from NIC Technologies. Partially offsetting the overall
increase in gross profit was a 3% negative contribution from our NIC Commerce
subsidiary. Excluding acquired businesses, new state portal business units that
became operational after June 30, 1999, and our state portal contracts in
Georgia and Iowa, same state portal gross profit for the three months ended
September 30, 2000 increased 10% over the three months ended September 30, 1999
as a result of increased transaction volumes mainly from our Virginia
subsidiary.
The gross profit rate was approximately 26% of revenues for the three
months ended September 30, 2000 and 1999. The same state portal gross profit
rate for the three months ended September 30, 2000 was approximately 21%
compared 20% for the three months ended September 30, 1999.
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Gross profit for the nine months ended September 30, 2000 was $16.4
million, a 65% increase over gross profit of $10.0 million for the nine months
ended September 30, 1999. Of this 65% increase, 19% was attributable to gross
profit from state portal business units that became operational after June 30,
1999, 12% was from an increase in same state portal volumes, 16% was gross
profit from NIC Commerce and 19% was gross profit from NIC Conquest. Partially
offsetting the overall increase in gross profit was a 1% negative contribution
from our NIC Technologies subsidiary. Same state portal gross profit for the
nine months ended September 30, 2000 increased 19% over the nine months ended
September 30, 1999 as a result of increased transaction volumes mainly from our
Virginia subsidiary.
The gross profit rate was approximately 28% of revenues for the nine
months ended September 30, 2000 compared to 25% for the nine months ended
September 30, 1999. This increase was primarily attributable to NIC Commerce,
NIC Conquest and the state portal business units that became operational in the
third quarter of 1999, all of which have higher gross profit rates compared to
our more mature state portal business units. The same state portal gross profit
rate for the nine months ended September 30, 2000 was approximately 21% compared
to 20% for the nine months ended September 30, 1999.
We intend to continue to expand our operations by developing and
promoting new products and services and by expanding the breadth and depth of
our eGovernment product and service offerings. Gross profit rates attributable
to new business areas are likely to be different than those associated with our
existing business activities. To the extent such business areas become larger
components of our revenues, we would expect a corresponding change in our
overall gross profit rate.
SERVICE DEVELOPMENT AND OPERATIONS. Service development and operations
expenses for the three months ended September 30, 2000 were $3.2 million, a 138%
increase over $1.4 million for the three months ended September 30, 1999. Of
this 138% increase, 22% was attributable to state and local portal business
units that became operational after June 30, 1999, 8% was from an increase in
same state portal expenses, 35% was from NIC Commerce, 27% was from NIC
Technologies and 58% was from an increase in corporate level expenses. Partially
offsetting these increases was a 12% decrease from NIC Conquest as the result of
the capitalization of certain software development costs in the current quarter.
Excluding acquired businesses, new state and local portal business units that
became operational after June 30, 1999 and corporate level expenses, same state
portal service development and operations expenses for the three months ended
September 30, 2000 increased 14% over the three months ended September 30, 1999
as a result of ongoing technology enhancements and service delivery investment
in our state portal partnerships.
Service development and operations expenses for the nine months ended
September 30, 2000 were $10.0 million, a 149% increase over $4.0 million for the
nine months ended September 30, 1999. Service development and operations
expenses for the nine months ended September 30, 2000 include a $1.4 million
charge taken in the first quarter of 2000 for anticipated costs in excess of
revenues to be recognized under an application development contract with the
Indiana Secretary of State. Also, for the nine months ended September 30, 1999,
service development and operations expenses include a $0.9 million charge taken
in the second quarter of 1999 for our application development contracts.
Excluding these charges, service development and operations expenses
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for the nine months ended September 30, 2000 increased 178% over the nine months
ended September 30, 1999. Of this 178% increase, 25% was attributable to state
and local portal business units that became operational after June 30, 1999, 18%
was from an increase in same state portal expenses, 43% was from NIC Commerce,
35% was from NIC Conquest, 11% was from NIC Technologies and 46% was from an
increase in corporate level expenses. Same state portal service development and
operations expenses for the nine months ended September 30, 2000 increased 19%
over the nine months ended September 30, 1999 as a result of ongoing technology
enhancement and service delivery investment in our state portal partnerships.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses for the three months ended September 30, 2000 were $8.8
million, a 296% increase over $2.2 million for the three months ended September
30, 1999. During the third quarter of 2000, the Company incurred a one-time
charge of approximately $0.6 million for employee severance costs related to the
corporate restructuring of our NIC Commerce and NIC Technologies divisions and
the consolidation of our marketing efforts, as further discussed above and in
Note 1 in the Notes to Consolidated Financial Statements included in this Form
10-Q. The Company also incurred a one-time non-cash charge of approximately $0.2
million in the third quarter of 2000 due to the adoption of a company-wide
vacation policy that required the Company to recognize a liability for earned
but unused employee vacation. Excluding these one-time charges, selling, general
and administrative expenses increased 257% over the three months ended September
30, 1999. Of this 257% increase, 19% was attributable to new state and local
portal business units that became operational after June 30, 1999, 70% was from
NIC Commerce, 19% was from NIC Conquest, and 30% was from NIC Technologies.
Additionally, 119% of the increase was from an increase in corporate level
expenses as a result of becoming a public company in July 1999 and as a result
of our overall growth and positioning for future growth, including strategic
infrastructure investments in marketing, public relations, finance, technology
and management personnel. Excluding acquired businesses, new state portal
business units that became operational after June 30, 1999, corporate level
expenses and one-time charges, same state portal selling, general and
administrative expenses for the three months ended September 30, 2000 decreased
1% from the three months ended September 30, 1999 as a result of continuing
overhead cost containment and efficiency efforts in our more mature state
portals.
Selling, general and administrative expenses for the nine months ended
September 30, 2000 were $21.3 million, a 292% increase over $5.4 million for the
nine months ended September 30, 1999. Excluding the one-time charges incurred
during the third quarter of 2000 noted above, and the one-time charge of
approximately $0.8 million during the second quarter of 2000 relating to our
withdrawn secondary offering (as further discussed in Note 4 to the Notes to
Consolidated Financial Statements included in the Company's Quarterly Report on
Form 10-Q filed with the SEC on August 14, 2000) selling, general and
administrative expenses increased 260% over the nine months ended September 30,
1999. Of this 260% increase, 28% was attributable to new state and local portal
business units that became operational after June 30, 1999, 76% was from NIC
Commerce, 15% was from NIC Conquest, 21% was from NIC Technologies and 124% was
from corporate level expenses. Offsetting these increases by approximately 4%
was a decrease in same state portal general and administrative expenses. Same
state portal selling, general and administrative expenses for the nine months
ended September 30, 2000 decreased 7% from the nine months ended September 30,
1999 as a result of
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continuing overhead cost containment and efficiency efforts in our more mature
state portals.
STOCK COMPENSATION. Stock compensation for the nine months ended
September 30, 2000 was $1.3 million and consisted primarily of amortization of
deferred compensation expense related to common stock options granted to senior
level executives and other key employees. Stock compensation was $2.7 million
for the nine months ended September 30, 1999. In the first nine months of 1999,
we sold approximately 370,000 shares of common stock to key employees and
recognized approximately $1.6 million in compensation expense for the amount by
which the fair value of common stock sold exceeded the amount paid.
DEPRECIATION AND AMORTIZATION. The increase in depreciation and
amortization expense for the three and nine months ended September 30, 2000 was
primarily due to the amortization of intangible assets resulting from our
acquisition of SDR Technologies in May 2000, our acquisition of NIC Commerce in
September 1999, and our business combination with Conquest Softworks, LLC in
January 2000. Depreciation expense increased for the three and nine months ended
September 30, 2000 as a result of additions to property and equipment throughout
1999 and the first nine months of 2000. These increases were partially offset by
a decrease in amortization of intangible assets resulting from our March 31,
1998 exchange offer. Certain intangible assets relating to that exchange offer
became fully amortized in December 31, 1999, June 30, 2000 and August 31, 2000.
OPERATING LOSS. Operating loss for the three months ended September 30,
2000 was $15.8 million compared to $2.4 million for the three months ended
September 30, 1999. Excluding non-cash charges for stock compensation,
depreciation and amortization and the one-time charges in the third quarter of
2000 relating to our corporate restructuring and vacation liability, operating
loss would have been $6.2 million for the three months ended September 30, 2000
compared to operating income of $0.4 million for the three months ended
September 30, 1999. Operating loss for the nine months ended September 30, 2000
was $35.8 million compared to $8.6 million for the nine months ended September
30, 1999. Excluding non-cash charges for stock compensation, depreciation and
amortization, the one-time charge in the second quarter of 2000 relating to the
withdrawn common stock offering, the one-time charges in the third quarter of
2000 relating to our corporate restructuring and vacation liability, and the
charges in the second quarter of 1999 and first quarter of 2000 relating to the
Company's application development contracts, operating loss would have been
$11.7 million for the nine months ended September 30, 2000 compared to operating
income of $1.4 million for the nine months ended September 30, 1999.
Earnings before interest, taxes, equity in net loss of affiliates,
depreciation, amortization, one-time charges and other non-cash charges related
to stock compensation and our application development contracts ("EBITDA") was
negative $6.2 million for the three months ended September 30, 2000 compared to
positive $0.4 million for the three months ended September 30, 1999. EBITDA was
negative $11.7 million for the nine months ended September 30, 2000 compared to
positive $1.4 million for the nine months ended September 30, 1999. For the
three and nine months ended September 30, 2000, corporate level expenses
increased to $4.4 million and $9.9 million from $0.9 million and $1.7 million
for the three and nine months ended September 30, 1999 as a result of our
becoming a public company in July 1999 and strategic infrastructure investments
as discussed above.
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EBITDA from our state and local portal operations decreased by
approximately $0.3 million for the three months ended September 30, 2000
primarily due to start up losses in our Hawaii, Idaho and San Francisco portals.
Our Idaho and San Francisco portals began generating revenues during September
2000, while our Hawaii portal had not begun to generate substantive revenues at
September 30, 2000. We anticipate Hawaii will begin to generate more substantive
revenues in the fourth quarter of 2000 and first quarter of 2001. For the nine
months ended September 30, 2000, EBITDA from our state and local portal
operations increased by approximately $0.5 million primarily as a result of a
full nine months of operating results from our New England and Utah portals,
which began generating revenues in the third quarter of 1999, and increased same
state portal transaction volumes, mainly from our Virginia subsidiary. These
increases were partially offset by start up losses in our Hawaii, Idaho and San
Francisco portals.
For the three and nine months ended September 30, 2000, EBITDA from our
eGovernment products business, which consists of our NIC Conquest and NIC
Technologies subsidiaries, was negative $0.8 million and negative $1.6 million,
respectively, primarily resulting from payroll-related expenses for product
development and product delivery efforts at NIC Technologies, which precipitated
the third quarter 2000 restructuring (as discussed above and in Note 1 to Notes
to Consolidated Financial Statements included in this Form 10-Q). For the three
and nine months ended September 30, 2000, EBITDA from our NIC Commerce
government procurement subsidiary was negative $2.1 million and negative $3.9
million, respectively, due primarily to expenditures for business development,
marketing and public relations, which also precipitated the third quarter 2000
restructuring.
We do not expect to generate positive EBITDA by the end of fiscal 2000
or in the first quarter of fiscal 2001 as we had previously stated. Based on our
more refined 2001 projections developed in early October 2000, we do not expect
to generate positive EBITDA until 2002 because of our continued investments in
local portals, our AOL/Government Guide partnership and our new business plans
for NIC Commerce and NIC Technologies, which has been positioned to provide the
core technology and deployment base for our company-wide eGovernment growth
initiatives.
OTHER INCOME, NET. We have placed the proceeds from our July 20, 1999
initial public offering in short-term, investment-grade, interest-bearing
marketable securities. For the three months ended September 30, 2000, the
decrease in other income, net, reflects a decrease in interest income earned on
these investments due to a lower average marketable securities balance for the
three months ended September 30, 2000 versus 1999. Included in other income,
net, for the three and nine months ended September 30, 2000 is a $0.1 million
loss from disposals of property and equipment. Other income, net, for the nine
months ended September 30, 1999 reflects less than three months of interest
earned on these investments versus a full nine months of interest earned in
2000. We expect other income, net, to continue to fluctuate on a quarterly basis
in relation to the average balance of our marketable securities portfolio.
EQUITY IN NET LOSS OF AFFILIATES. For the three and nine months ended
September 30, 2000, equity in net loss of affiliates represents our share of
losses of companies in which we have equity method investments that give us the
ability to exercise significant influence, but not control, over the investees.
In the first quarter of 2000, we invested in two private companies involved in
the e-government services industry, Tidemark Computer
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Systems and E-Filing.com, primarily for strategic purposes. These companies are
in the early stage of their operations and are incurring net losses. Therefore,
we expect to continue to record losses on our equity-method investments in the
foreseeable future.
INCOME TAXES. We recognized an income tax benefit for the three and
nine months ended September 30, 2000. The income tax benefit was less than the
amount customarily expected because of expenses that are not deductible for tax
purposes including amortization of goodwill from the March 31, 1998 exchange
offer, the Conquest merger and the SDR acquisition, and certain stock
compensation costs. The income tax expense and benefit for the three and nine
months ended September 30, 1999, respectively, were different from the amounts
customarily expected because of expenses that were not deductible for tax
purposes including amortization of goodwill from the March 31, 1998 exchange
offer and certain stock compensation costs.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $16.8 million for the nine months
ended September 30, 2000 compared to $0.5 million for the nine months ended
September 30, 1999. The increase in cash used in operating activities is
primarily attributable to additional cash needs (particularly attributable to
NIC Commerce, acquired in September 1999, NIC Technologies, acquired in May
2000, and our Idaho, Hawaii and San Francisco portals, which became operational
after September 1999) and corporate level expenses as a result of our overall
growth and positioning for future growth, including planned strategic
infrastructure investments in marketing, public relations, finance, technology
and management personnel. As discussed in Note 2 in the Notes to Consolidated
Financial Statements included in this Form 10-Q, NIC made an initial cash
payment to AOL totaling $1.125 million on August 25, 2000, of which $1 million
is recorded as a prepaid expense in the consolidated balance sheet at September
30, 2000. We expect operating cash flow to be negative through at least the end
of 2001 as a result of continued investment in our corporate infrastructure and
growth strategies.
Investing activities resulted in net cash generated of approximately $22.3
million for the nine months ended September 30, 2000 reflecting $47.7 million in
net maturities of our marketable securities portfolio used for funding
operations and for purchases of property and equipment ($3.9 million), our
business combination with Conquest Softworks, LLC ($4.6 million), strategic
equity investments in Tidemark ($5.5 million) and E-Filing.com ($5.3 million),
direct costs of the SDR acquisition ($2.1 million), and the cash outlay to SDR
in exchange for convertible promissory notes ($2.0 million). Investing
activities for the nine months ended September 30, 2000 also reflect
approximately $2.2 million in capitalized software development costs mainly from
our NIC Commerce and NIC Conquest subsidiaries. Investing activities for the
nine months ended September 30, 2000 resulted in net cash used of $106.4
million, reflecting the purchase of marketable securities with the net proceeds
of our July 1999 initial public offering and the $15 million cash outlay for our
September 1999 eFed acquisition.
Net cash used in financing activities totaled $1.5 million for the nine months
ended September 30, 2000, primarily reflecting a $2.1 million cash outlay to pay
off a bank line of credit assumed in the SDR acquisition and approximately $0.9
million in proceeds from the exercise of employee stock options and issuances of
common stock to employees. Net cash provided by financing activities was $108.5
million for the nine months ended September
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30, 1999, reflecting the net proceeds received from our July 1999 initial public
offering, a portion of which was used to pay down all amounts outstanding under
our operating lines of credit.
At September 30, 2000, the Company's total cash and marketable securities
balance was $51.1 million compared to $92.0 million at December 31, 1999. We
believe that our current liquid resources will be sufficient to meet our
operating requirements and significant growth initiatives without the need of
additional capital for at least the next twelve months. However, any projections
of future cash flows are subject to substantial uncertainty. If current cash,
marketable securities and cash that may be generated from operations are
insufficient to satisfy our liquidity requirements, we may seek to sell
additional equity securities, issue debt securities or obtain a line of credit.
The sale of additional equity securities could result in additional dilution to
the Company's shareholders. From time to time, we expect to evaluate the
acquisition of or investment in businesses and technologies that complement our
various eGovernment businesses. Acquisitions or investments might impact the
Company's liquidity requirements or cause the Company to sell additional equity
securities or issue debt securities. There can be no assurance that financing
will be available in amounts or on terms acceptable to the Company, if at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. Our exposure to market risk for changes in interest
rates relates to the increase or decrease in the amount of interest income we
can earn on our short-term investments in marketable debt securities and cash
balances. Because our investments are in short-term, investment-grade,
interest-bearing marketable securities, we are exposed to minimal risk on the
principal of those investments. We ensure the safety and preservation of our
invested principal funds by limiting default risk, market risk and investment
risk. We do not use derivative financial instruments.
INVESTMENT RISK. In the first quarter of 2000, we invested in two
private companies involved in the e-government services industry, Tidemark
Computer Systems and E-Filing.com, primarily for strategic purposes. Such
investments are accounted for under the equity method, as we have the ability to
exercise significant influence, but not control, over the investees. Significant
influence is generally defined as an ownership interest of the voting stock of
an investee of between 20% and 50%, although other factors, such as
representation on the investee's Board of Directors, are considered in
determining whether the equity method is appropriate. We regularly review the
carrying value of these equity method investments and would record impairment
losses when events and circumstances indicate that such assets are permanently
impaired. To date, we have not recorded any such impairment losses. As of
September 30, 2000, the carrying value of our equity-method investments totaled
$7.6 million.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
C) RECENT SALES OF UNREGISTERED SECURITIES
Since June 30, 2000, we have granted or issued and sold the following
unregistered securities:
1. On July 1, 2000, we issued to Mr. P.K. Agarwal, our Chief Information
Officer, 2,637 shares of unregistered NIC common stock with a fair value of
approximately $30,000 for no cash consideration.
2. On October 13, 2000, we issued to Intelligent Decision Technologies, Ltd.
520,833 shares of unregistered common stock with a fair value of
approximately $1.4 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 the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
Exhibit 27 - Financial Data Schedule (for the nine months ended September 30,
2000).
B) REPORTS ON FORM 8-K
A report on Form 8-K was filed with the Securities and Exchange Commission on
July 26, 2000, amending the report on Form 8-K filed on May 26, 2000, and
included, under Item 7, the financial statements of SDR Technologies, Inc. for
the periods required by Rule 3-05(b) of Regulation S-X and the pro forma
financial information required by Article 11 of Regulation S-X.
A report on Form 8-K was filed with the Securities and Exchange Commission on
September 29, 2000, with attached Press Release of the Company dated September
20, 2000, announcing, under Item 5, that the Company will re-align its
eGovernment applications and services businesses and that it had issued an
earnings warning that it will likely fall short of third quarter 2000
expectations. The Company also announced significant cost savings measures at
two business units and the reorganization of its management team.
A report on Form 8-K was filed with the Securities and Exchange Commission on
October 13, 2000, with attached Press Release of the Company dated October 6,
2000, announcing, under Item 5, that the Company had completed the restructuring
of its eGovernment market and product development operations. The Company stated
that it had refined its 2001 outlook and projects that it will likely not
generate positive EBITDA until 2002 because of its investments in local portals,
its AOL/Government Guide partnership and continued market and core technology
development across its eGovernment businesses.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
NATIONAL INFORMATION CONSORTIUM, INC.
Dated: November 14, 2000 /S/JAMES B. DODD
----------------
James B. Dodd
President and
Chief Executive Officer
Dated: November 14, 2000 /S/KEVIN C. CHILDRESS
---------------------
Kevin C. Childress
Chief Financial Officer
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