<PAGE>
Filed pursuant to
Rule 424(b)(3)
PROSPECTUS
13,000,000 SHARES
[LOGO]
COMMON STOCK
This is an initial public offering of common stock by National Information
Consortium, Inc. Of the 13,000,000 shares of common stock being sold in this
offering, 10,000,000 shares are being sold by us and 3,000,000 shares are being
sold by the selling shareholders. We will not receive any of the proceeds from
the sale of shares by the selling shareholders.
--------------
The shares of common stock have been approved for quotation on the Nasdaq
National Market under the symbol EGOV.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------------- -----------
<S> <C> <C>
Initial public offering price.............................. $12.00 $156,000,000
Underwriting discounts and commissions..................... $ 0.84 $10,920,000
Proceeds to National Information Consortium, Inc., before
expenses................................................. $11.16 $111,600,000
Proceeds to the selling shareholders, before expenses...... $11.16 $33,480,000
</TABLE>
The selling shareholders have granted the underwriters an option for a
period of 30 days to purchase up to 1,950,000 additional shares of common stock.
--------------
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
-------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
HAMBRECHT & QUIST
THOMAS WEISEL PARTNERS LLC
FAC/EQUITIES
VOLPE BROWN WHELAN & COMPANY
<PAGE>
July 15, 1999
<PAGE>
INSIDE FRONT COVER
National Information Consortium
Enabling online interaction with government.
[Picture of people standing in line with arrow pointing at picture and
text accompanying arrow stating "You are here."]
[Text design reading "before e-government."]
<PAGE>
GATEFOLD 1
<TABLE>
<S> <C>
[Picture of person using computer at office
with arrow pointing at picture and text
accompanying arrow reading "You will be
here."]
</TABLE>
[Text design reading "after e-government."]
<TABLE>
<S> <C>
[Picture of person using computer at home
with arrow pointing at picture and text
accompanying arrow reading "and here."]
</TABLE>
<PAGE>
GATEFOLD 2
National Information Consortium
[Text design reading "Premium Services".]
[Screen shot of one of National Information Consortium's government portals
on the Internet showing a selection of services, with explanatory information
for each service.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary........................................... 4
Risk Factors................................................. 8
Forward-Looking Statements................................... 20
How We Intend to Use the Proceeds from the Offering.......... 21
Dividend Policy.............................................. 21
Capitalization............................................... 22
Dilution..................................................... 23
Selected Consolidated Actual and Pro Forma Financial Data.... 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 25
Business..................................................... 37
Management................................................... 48
Certain Transactions......................................... 60
Principal and Selling Shareholders........................... 62
Description of Capital Stock................................. 65
Shares Eligible for Future Sale.............................. 68
Underwriting................................................. 70
Legal Matters................................................ 73
Experts...................................................... 73
Where You Can Find Additional Information About Us........... 73
Index to Consolidated Financial Statements................... F-1
</TABLE>
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All brand names and trademarks appearing in this prospectus are the
property of their respective holders.
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER BEFORE INVESTING IN THE COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS
BEFORE MAKING AN INVESTMENT DECISION.
CONTROL OF OUR COMPANY BY INSIDERS
After the offering, four of our company's directors, one of whom is
Jeffery S. Fraser, our Chairman and Chief Executive Officer, will beneficially
own approximately 75.1% of our outstanding common stock. As a result, these
directors will have, among other rights, the ability to control the election of
directors and approve any corporate actions that must be submitted for a vote of
shareholders.
NATIONAL INFORMATION CONSORTIUM, INC.
National Information Consortium, Inc. is 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, renewing a
license or filing a report. Our unique business model allows us to reduce our
government clients' financial and technology risks and obtain revenue by sharing
in the fees governments 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.
Government's 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 renewals, motor vehicle registrations, tax
returns, permit applications and requests for government-gathered information.
Traditionally, government agencies have transacted, and in many cases continue
to transact, with businesses and citizens using processes that are expensive,
inconvenient, labor-intensive and require extensive paperwork. Electronic
alternatives have often been unavailable, technically challenging and costly to
implement, or fragmented among different government agencies. The growing
acceptance of the Internet and electronic commerce presents a significant
opportunity for the development of electronic government, in which government
agencies can quickly and cost-effectively conduct transactions and distribute
information over the Internet.
Despite the potential benefits of electronic government, government
entities encounter a unique set of challenges in implementing and maintaining
Internet-based electronic government services. In addition to the conventional
barriers the private sector confronts, including high costs, technological risk,
the need for customized and rapid deployment, and the scarcity of qualified
personnel, governments also face the intricacies of the political process, a
diverse constituent base, limited marketing capabilities and heightened security
requirements due to public trust concerns.
We have pioneered the development of Internet-based electronic
government products and services that address these unique government challenges
and meet the needs of businesses and citizens. The key elements of our approach
are:
- a customer-focused, one-stop government portal that provides a single
point of presence on the Web for all government agencies and permits
businesses and citizens to conduct transactions and process
information requests 24 hours a day, seven days a week;
- a cost-efficient financial model that minimizes the use of government
resources and up-front investment and is quickly and easily deployed;
and
4
<PAGE>
- a contractual relationship with governments that aligns our interests
with those of government and encourages the participation of
interested government agencies, business and consumer groups and other
important government entities. We work with each of our government
clients to maximize their use of Internet technology, while addressing
issues critical to them including the privacy and security of
citizens.
We plan to strengthen our position as the leading provider of electronic
government services. Key elements of our strategy are to:
- continue to penetrate new markets, including other states, multi-state
cooperative organizations, local governments and federal agencies, and
to expand our services into international markets;
- broaden product and service offerings with new Internet-based
applications, including sales and use tax payments, enabling
government agencies, businesses and citizens to interact more
effectively online;
- increase transaction volumes from existing and new customers by
generating awareness and educating potential business and consumer
users about the availability and benefits of electronic government
services;
- enhance the capability and efficiency of our business units by
aggregating best practices across our organization and strengthening
corporate operational and administrative functions, including product
development, training and recruiting; and
- attract, retain and train specialized and qualified personnel through
performance incentives, targeted hiring and development programs.
We currently provide Internet-based electronic government services for
the state governments of Arkansas, Georgia, Indiana, Iowa, Kansas, Maine,
Nebraska, and Virginia and the city-county government of the City of
Indianapolis and Marion County, Indiana. We have also been selected to provide
services to and have entered into a contract with the state of Utah. 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 receive a share of the fee revenue governments 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.
We were incorporated in Delaware in December 1997 and reincorporated in
Colorado in April 1999. In 1998, we completed an exchange offer, through which
we consolidated our individual business units that deliver electronic government
services into our present company as subsidiaries. Our headquarters are located
at 12 Corporate Woods, 10975 Benson Street, Suite 390, Overland Park, Kansas
66210 and our telephone number is 877-234-EGOV. Our Web site is www.nicusa.com.
Any reference contained in this prospectus to our Web site, or to any other Web
site, shall not be deemed to incorporate information from those sites into this
prospectus.
--------------
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by us...................... 10,000,000 shares
Common stock offered by the selling 3,000,000 shares
shareholders..................................
Common stock to be outstanding after this 52,481,996 shares
offering......................................
Use of proceeds................................. - increased marketing efforts;
- creation of new products and services;
- further development of infrastructure;
- working capital;
- general corporate purposes; and
- potential aquisitions.
Nasdaq National Market Symbol................... EGOV
</TABLE>
--------------
The number of shares of common stock to be outstanding after this
offering is based on the number of shares outstanding as of March 31, 1999 and
does not include the following:
- 2,514,003 shares of common stock subject to options issued at a
weighted average exercise price of $1.44 per share granted under our
1998 stock option plan; or
- 9,025,137 shares of common stock reserved for future issuance under
our 1998 stock option plan and our 1999 employee stock purchase plan.
Please see "Capitalization" for a more complete discussion regarding the
outstanding shares of our common stock and options to purchase our common stock
and other related matters.
--------------
UNLESS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS:
- ASSUMES THAT THE UNDERWRITERS WILL NOT EXERCISE THEIR OPTION TO
PURCHASE ADDITIONAL SHARES OF COMMON STOCK TO COVER OVER-ALLOTMENTS,
IF ANY; AND
- REFLECTS A 4.643377 FOR 1 SPLIT OF OUR COMMON STOCK.
PRO FORMA INFORMATION GIVES EFFECT TO THE EXCHANGE OFFER WE COMPLETED IN
MARCH 1998 AS IF THE EXCHANGE OFFER OCCURRED AT THE BEGINNING OF THE PERIOD
PRESENTED.
PLEASE SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--EXCHANGE OFFER" FOR MORE DETAILED INFORMATION ABOUT
THE EXCHANGE OFFER.
6
<PAGE>
SUMMARY CONSOLIDATED ACTUAL AND PRO FORMA FINANCIAL INFORMATION
The following summary consolidated actual and pro forma financial
information should be read in conjunction with our consolidated financial
statements and their related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in this prospectus. The
consolidated statement of operations data for the years ended December 31, 1997
and 1998 labeled "Actual" are derived from, and are qualified by reference to,
the audited financial statements included in this prospectus. The consolidated
statement of operations data for the year ended December 31, 1998 and the three
months ended March 31, 1998 labeled "Pro Forma" are unaudited and derived from
and qualified by reference to the pro forma consolidated statements of
operations included in this prospectus. The consolidated statement of operations
data for the three month periods ended March 31, 1998 and 1999 and the
consolidated balance sheet data at March 31, 1999 labeled "Actual" are derived
from, and qualified by reference to, our unaudited interim financial statements
included in this prospectus. The as adjusted consolidated balance sheet data
summarized below gives effect to the receipt of the estimated net proceeds from
the sale of 10,000,000 shares of common stock offered by us in this offering at
an initial public offering price of $12.00 per share, after deducting
underwriting discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------- ------------------------
1997 1998 1998
----------- ---------------------- ------------------------
ACTUAL ACTUAL PRO FORMA ACTUAL PRO FORMA
----------- --------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................................... $ 996 $ 28,624 $ 36,532 $ 361 $ 8,270
Cost of revenues........................................... 5 21,211 27,394 1 6,184
Gross profit............................................... 991 7,413 9,138 360 2,086
Operating loss............................................. (277) (7,205) (8,737) (124) (1,655)
Net loss................................................... $ (277) $ (7,896) $ (9,430) $ (124) $ (1,658)
Net loss per share--basic and diluted...................... $ (0.01) $ (0.21) $ (0.22) $ (0.01) $ (0.04)
Weighted average shares outstanding........................ 20,858 37,242 41,950 22,679 41,934
<CAPTION>
1999
---------
ACTUAL
---------
<S> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................................... $ 11,455
Cost of revenues........................................... 8,604
Gross profit............................................... 2,851
Operating loss............................................. (3,302)
Net loss................................................... $ (3,299)
Net loss per share--basic and diluted...................... $ (0.08)
Weighted average shares outstanding........................ 42,243
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash.................................................................................... $ 1,115 $ 109,195
Total assets............................................................................ 16,633 124,713
Bank lines of credit.................................................................... 839 839
Long-term debt (includes current portion of notes payable/capital lease obligations).... 1,179 1,179
Total shareholders' equity.............................................................. 9,787 117,867
</TABLE>
7
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON STOCK.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. ANY OF THE
FOLLOWING RISKS COULD MATERIALLY HARM OUR BUSINESS, OPERATING RESULTS AND
FINANCIAL CONDITION AND COULD RESULT IN A COMPLETE LOSS OF YOUR INVESTMENT.
RISKS PARTICULAR TO NATIONAL INFORMATION CONSORTIUM
BECAUSE WE HAVE SERVICE CONTRACTS WITH A LIMITED NUMBER OF STATES AND CITY
GOVERNMENTS, THE TERMINATION OF ANY OF THESE CONTRACTS MAY HARM OUR BUSINESS
Currently, we have contracts with eight states and one local government,
and have been selected to provide services to and have entered into a contract
with the state of Utah. These contracts typically have initial terms of three to
five years with option 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
10 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 decision by one or
more governments not to renew an existing contract or any termination of one or
more of these contracts will result in significant revenue shortfalls. 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.
OUR REVENUE GROWTH IS LIMITED BY THE NUMBER OF STATES THAT CHOOSE TO PROVIDE
ELECTRONIC GOVERNMENT SERVICES AND TO ADOPT OUR BUSINESS MODEL AND THE FINITE
NUMBER OF STATES WITH WHICH WE MAY CONTRACT FOR OUR ELECTRONIC GOVERNMENT
SERVICES
We contract with state governments to provide electronic government
services on the state government's behalf to complete transactions and
distribute public information electronically. Our revenue growth 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 government, 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.
WE MAY BE UNABLE TO OBTAIN FUTURE CONTRACTS THROUGH THE REQUEST FOR PROPOSAL
PROCESS
Once a government decides to adopt a public/private model for electronic
government, it starts a selection process that operates under special rules that
apply to government purchasing. These rules 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. Our business, financial condition and operating results
would be harmed if we fail to obtain profitable future contracts through the RFP
process.
8
<PAGE>
THE FEES WE COLLECT FOR OUR PRODUCTS AND SERVICES ARE SUBJECT TO REGULATION THAT
COULD LIMIT OUR REVENUE GROWTH AND PROFITABILITY
We collect user fees on behalf of government agencies and, under the
terms of our government contracts, we retain a portion of the fees. Generally,
our contracts provide that the amount of any fees we retain is set by the
government 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 or
subscription 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 the government's 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 the
government's satisfaction could expose us to risks associated with cost overruns
and, potentially, to penalties, which may harm our business, operating results
and financial condition.
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, financing statements, corporation and court
information accounted for over 90% of our revenues for the year ended December
31, 1998 on a pro forma basis and are expected to continue to account for a
significant portion of our revenue 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.
BECAUSE A MAJOR PORTION OF OUR CURRENT REVENUES ARE GENERATED FROM A SMALL
NUMBER OF USERS, THE LOSS OF ANY OF THESE USERS MAY HARM OUR BUSINESS AND
FINANCIAL CONDITION
The primary source of our revenue is derived from data resellers' use of
our electronic government portals to access motor vehicle records for sale to
the auto insurance industry. For the year ended December 31, 1998, one of these
data resellers, ChoicePoint, accounted for approximately 60% of our revenues.
Two other resellers accounted for an additional 11% of our revenue during the
year ended December 31, 1998. 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.
OUR BUSINESS WITH VARIOUS GOVERNMENT ENTITIES OFTEN REQUIRES SPECIFIC GOVERNMENT
LEGISLATION TO BE PASSED FOR US TO INITIATE AND MAINTAIN OUR GOVERNMENT
CONTRACTS
Because our business includes the execution of contracts with
governments under which we receive a portion of user fees charged to businesses
and citizens, it is often necessary for governments to draft and adopt specific
legislation before the government can circulate an RFP to which we can respond.
9
<PAGE>
Furthermore, the maintenance of our government contracts requires the continued
acceptance of enabling legislation and any implementing regulations. In the
past, various entities 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 WE RELY ON A CONTRACTUAL BIDDING PROCESS WHOSE PARAMETERS ARE
ESTABLISHED BY GOVERNMENTS, THE LENGTH OF OUR SALES CYCLES IS UNCERTAIN AND CAN
LEAD TO REVENUE SHORTFALLS
Our dependence on a bidding process to initiate 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.
Any 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 DEVELOPMENT DIVISION HAS INCURRED LOSSES UNDER ITS FIXED-FEE
CONTRACTS, AND OUR RESULTS OF OPERATIONS COULD BE HARMED IF THE COSTS OUR
APPLICATION DEVELOPMENT DIVISION INCURS TO MEET CONTRACTUAL COMMITMENTS IN THE
FUTURE EXCEEDS OUR CURRENT ESTIMATES
Our application development division develops and implements back-office
government software applications for a fixed development fee. In the fourth
quarter of 1998, we determined that the balance of revenues remaining to be
recognized under our existing application development 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 expensed
in the fourth quarter of 1998. Based on our most recent monthly review of our
current application development contracts, we expect to accrue an additional
$0.9 million of anticipated losses in the second quarter of 1999. It is possible
that application development costs will similarly exceed revenues in the future,
as a result of unforeseen difficulties in the creation of an application called
for in a
10
<PAGE>
contract, unforeseen challenges in ensuring compatibility with existing systems,
rising development, personnel costs or other reasons. If this occurs, our
business, financial condition and results of operations would 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.
and Sapient Corporation;
- traditional consulting firms, including International Business
Machines Corporation and Science Applications International
Corporation; and
- Web service companies, including USWeb/CKS, 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 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.
THE UNPREDICTABILITY OF OUR QUARTER-TO-QUARTER RESULTS MAY HARM THE TRADING
PRICE OF OUR COMMON STOCK
Our future revenues and operating results 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; and
- the amount and timing of operating costs and capital expenditures
relating to the expansion of our business operations and
infrastructure.
11
<PAGE>
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 operating results 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.
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, would harm our business, operating results and
financial condition.
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. 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 acquire new businesses, we also may have difficulties integrating new
operations, technologies and personnel. If we cannot manage the growth of our
government portals, staff, 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. Many of our
personnel are presently serving in both an executive capacity and as general
managers of our government portals. The loss of any of our executives,
particularly Jeffery S. Fraser, our Chief Executive Officer, and James B. Dodd,
our President and Chief Operating Officer, would likely harm our business.
In addition, we expect that we will need to hire additional personnel in
all areas in 1999, 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. This training
will require substantial resources and management attention.
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<PAGE>
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 operating results 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. 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 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. 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.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY AS A CONSOLIDATED COMPANY, IT MAY BE
DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS
In March 1998, we completed an exchange offer through which we
consolidated our individual business units that deliver our electronic
government services into our present company as subsidiaries. Accordingly, we
only have a limited operating history as a consolidated company on which to base
an evaluation of our business and prospects. You must consider our business in
the light of the risks, expenses and problems frequently encountered by
companies like us, particularly recently consolidated companies in new and
rapidly evolving markets like the Internet. These risks include whether we will
be able to take advantage of economies of scale for the following:
- cost-effective use of our company-wide managerial and administrative
resources;
- efficient allocation of operating and financial resources among the
individual business units;
- efficient integration of new marketing and sales strategies and
technological improvements among the individual business units; and
- the addition of new business units without overburdening our current
management and operational resources.
We may not be able to successfully address these risks and as a result
our business, operating results and financial condition may be harmed.
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<PAGE>
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY 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. 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.
UPON THE COMPLETION OF THE INITIAL TERM OF OUR GOVERNMENT CONTRACTS, GOVERNMENTS
OBTAIN A PERPETUAL RIGHT OF USE LICENSE TO OUR SOFTWARE PROGRAMS AND OTHER
APPLICATIONS
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 launch competing services. Inadvertently, they
also may allow our intellectual property or other information to fall into the
hands of third parties, including our competitors.
WE MAY NEED MORE WORKING CAPITAL TO EXPAND OUR BUSINESS
We anticipate that our current cash resources, combined with the net
proceeds from this offering, will be sufficient to meet our present working
capital and capital expenditure requirements for the next 18 months following
the date of this prospectus. However, we may need to raise additional capital
before this period ends to do the following:
- support our expansion into other states, cities, municipalities,
federal agencies and internationally;
- respond to competitive pressures; and
- acquire complementary businesses or technologies.
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, operating results and
financial condition.
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
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<PAGE>
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.
RISKS TYPICAL OF THE INTERNET INDUSTRY
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 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. 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 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, negligence, invasion of privacy 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 the 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 conditions.
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
15
<PAGE>
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 incur 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.
GOVERNMENTAL REGULATION OF THE INTERNET MAY RESTRICT THE OPERATION AND GROWTH OF
OUR BUSINESS
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 may, in the future, reconsider
its ruling 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 Federal Communications
Commission 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. As a
result, our business and financial condition could be harmed.
OUR BUSINESS MAY BE NEGATIVELY AFFECTED BY YEAR 2000 ISSUES
We cannot assure you that the software systems that we use for portal
management, network monitoring, quality assurance, applications and information
and transaction processing do not contain undetected errors or defects
associated with Year 2000 data functions. Further, we cannot assure you that our
network systems acquired from third parties do not contain undetected errors or
defects. If any such errors or defects do exist, we may incur material costs to
resolve them.
Because our products and services depend significantly on information
provided by and transactions conducted with our government clients, our ability
to deliver services and transactions properly to our customers depends on these
government clients being Year 2000 ready. We cannot assure you that our
government clients are Year 2000 ready. If they are not, their information
systems may be disrupted and our ability to provide services and transactions
curtailed. Our business, results of operations and financial condition would be
harmed as a result.
In addition, the software and systems of financial institutions, utility
companies, Internet access companies, third-party service providers and others
outside of our control may not be Year 2000 ready. If these entities are not
Year 2000 ready, a systemic failure beyond our control could result, including a
prolonged Internet, telecommunications or general electrical failure. This type
of failure would make it difficult or impossible to use the Internet or access
our government portals. If a prolonged failure of this type occurs, our business
and financial condition would be harmed.
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<PAGE>
OUR SYSTEMS MAY FAIL OR LIMIT USER TRAFFIC
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. 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.
RISKS PARTICULAR TO THIS OFFERING
OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR SHAREHOLDERS WILL RETAIN SIGNIFICANT
CONTROL OVER US AFTER THIS OFFERING, WHICH WILL ALLOW THEM TO INFLUENCE THE
OUTCOME OF MATTERS SUBMITTED TO SHAREHOLDERS FOR APPROVAL
After this offering, executive officers, directors and holders of 5% or
more of our outstanding common stock will, in the aggregate, own approximately
75.1% of our outstanding common stock. In addition, as of March 31, 1999,
31,896,145 shares of our outstanding common stock have been placed in a voting
trust, representing approximately 75.1% of our outstanding common stock prior to
this offering. The voting trust is selling 1,500,000 shares of common stock in
this offering, which will reduce the number of shares it holds to 30,396,145, or
approximately 57.9% of our outstanding common stock. The trustees of this voting
trust are Messrs. Fraser and Hartley, both of whom serve as directors of our
company. As a result, Messrs. Fraser and Hartley have, among other rights, the
ability to control the election of directors and approve corporate actions that
must be submitted for a vote of shareholders.
The interests of these affiliates may conflict with the interests of
other shareholders, and the actions they take or approve may be contrary to
those desired by the other shareholders. This concentration of ownership may
also have the effect of delaying, preventing or deterring an acquisition of our
company by a third party.
OUR MANAGEMENT WILL RETAIN BROAD DISCRETION IN THE USE OF PROCEEDS FROM THIS
OFFERING AND MAY USE THE PROCEEDS IN WAYS THAT MAY NOT INCREASE OUR OPERATING
RESULTS OR MARKET VALUE
We intend to use all of the net proceeds from the sale of the common
stock for increased marketing efforts, creation of new products and services,
further development of infrastructure, working capital, general corporate
purposes and potential acquisitions. However, our management will retain
significant flexibility in applying the net proceeds of this offering and may
use the proceeds in ways in which you do not agree. Until the proceeds are
needed, we plan to invest them in investment-grade, interest-bearing securities.
The failure of our management to apply such funds effectively could harm our
business.
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<PAGE>
THE SIGNIFICANT NUMBER OF SHARES OF COMMON STOCK THAT WILL BE ELIGIBLE FOR SALE
IN THE NEAR FUTURE MAY HARM THE MARKET PRICE OF OUR COMMON STOCK
The market price of our common stock could drop as a result of sales of
a large number of shares of our common stock in the market after this offering,
or the perception that such sales could occur. These factors also could make it
more difficult for us to raise funds through future offerings of our common
stock.
Based on the number of shares of common stock outstanding as of March
31, 1999, there will be 52,481,996 shares of common stock outstanding
immediately after this offering. All of the shares sold in this offering will be
freely transferable without restriction or further registration under the
Securities Act, except for shares purchased by our "affiliates" as defined in
Rule 144 of the Securities Act. Upon completion of this offering, 39,481,996
shares will be "restricted securities" as defined in Rule 144. These restricted
securities may be sold in the future without registration under the Securities
Act to the extent permitted under Rule 144, Rule 701 or an exemption under the
Securities Act. In addition, entities affiliated with Hellman & Friedman will
hold an aggregate of 9,016,547 shares of these restricted securities after the
offering and will have registration rights that could allow these entities to
sell all of their shares freely through a registration statement filed under the
Securities Act. In connection with this offering, holders of all shares of
restricted securities have agreed not to sell their shares without the prior
written consent of Hambrecht & Quist LLC for a period of 180 days from the date
of this prospectus.
As of March 31, 1999, 2,514,003 shares of common stock were issuable
upon exercise of outstanding options. Of those options, options to purchase
726,010 shares will be vested and fully exercisable 180 days after commencement
of this offering. In connection with this offering, holders of outstanding
options have agreed not to sell any shares of common stock they acquire as a
result of option exercises without the prior written consent of Hambrecht &
Quist LLC for a period of 180 days from the date of this prospectus, subject to
exceptions for holders whose employment terminates during the 180 day period.
OUR STOCK PRICE, LIKE THAT OF OTHER INTERNET COMPANIES, MAY BE VOLATILE
The market price of our common stock is likely to be highly volatile.
Our stock price could fluctuate in response to a variety of factors, including:
- actual or anticipated variations in quarterly operating results;
- announcements of new contracts or applications;
- announcements of significant acquisitions, strategic partnerships,
joint ventures or
capital commitments;
- changes in financial estimates by securities analysts; and
- other events or factors that may be beyond our control.
The stock market has experienced significant price and volume
fluctuations and the market prices of securities of technology companies,
particularly Internet-related companies, have been highly volatile, often
unrelated to the operating performance of such companies. Investors may not be
able to resell their shares of our common stock at or above the initial public
offering price. In the past, securities class action litigation has often been
instituted against a company following periods of volatility in the company's
stock price. This type of litigation could result in substantial costs and could
divert our management's attention and resources.
INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE DILUTION AND A DISPARITY IN
STOCK PURCHASE PRICE
The initial public offering price is expected to be substantially higher
than the pro forma net tangible book value per share of the outstanding common
stock immediately after the offering. Accordingly,
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<PAGE>
purchasers of common stock in this offering will experience immediate and
substantial dilution of approximately $9.92 in net tangible book value per
share, or approximately 82.6% of the initial public offering price of $12.00 per
share. In contrast, existing shareholders paid an average price of $0.11 per
share. Investors will incur additional dilution upon the exercise of outstanding
stock options and warrants. Furthermore, any additional equity financing may be
dilutive to shareholders and debt financing, if available, may involve
restrictive covenants, which may limit our operating flexibility with respect to
certain business matters. If additional funds are raised through the issuance of
equity securities, the percentage ownership of our shareholders will be reduced.
Shareholders may experience additional dilution in net book value per share and
such equity securities may have rights, preferences and privileges senior to
those of the holders of our common stock.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS COULD PREVENT OR DELAY A
CHANGE OF CONTROL AND, AS A RESULT, NEGATIVELY IMPACT OUR SHAREHOLDERS
Our articles of incorporation provide that our board of directors may
not for a period of three years engage in a business combination with an
interested shareholder unless the business combination is approved in a
prescribed manner. Furthermore, our bylaws limit the ability of shareholders to
raise matters at a meeting of shareholders without giving advance notice. The
anti-takeover provisions in our articles of incorporation and bylaws may have
the effect of delaying, deterring or preventing changes in control or management
of our company, even if such change in control or management would be beneficial
to shareholders. These provisions also could limit the price that some investors
might be willing to pay in the future for shares of our common stock.
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<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks
and uncertainties, which may include statements about our:
- business strategy;
- plans for hiring additional personnel;
- plans for entering into agreements with states to create, develop and
manage government portals;
- plans for the introduction of new electronic government products and
services;
- anticipated sources of funds, including the proceeds from this
offering, to fund our operations for the 18 months following the date
of this prospectus; and
- plans, objectives, expectations and intentions contained in this
prospectus that are not historical facts.
When used in this prospectus, the words "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions are
generally intended to identify forward-looking statements. In addition, this
prospectus includes statistical data about the Internet that comes from
information published by sources including International Data Corporation and
Forrester Research. Because these forward-looking statements involve risks and
uncertainties, actual results could differ materially from those expressed or
implied by these forward-looking statements for a number of reasons, including
those discussed under "Risk Factors" and elsewhere in this prospectus. We assume
no obligation to update any forward-looking statements.
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<PAGE>
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
We estimate that we will receive net proceeds of $108,080,000 from the
sale of the 10,000,000 shares of common stock offered by us in this offering, at
the initial public offering price of $12.00 per share and after deducting the
estimated underwriting discounts and offering expenses. We will not receive any
of the proceeds from the sale of shares by the selling shareholders.
While we cannot predict with certainty how the proceeds of this offering
will be used, we currently intend to use them as follows:
- to increase our new market development efforts;
- to increase marketing efforts aimed at raising transaction volume;
- to create new products and services; and
- to further develop common infrastructure and operating platforms.
We expect to use the remaining net proceeds from this offering for
working capital and other general corporate purposes. In addition, in the
ordinary course of business we evaluate potential acquisitions of businesses and
technologies. Although we have no current commitments or agreements with respect
to any acquisition, we might in the future use a portion of the remaining
proceeds to pay for acquisitions.
Pending these uses, the net proceeds of this offering will be invested
in short-term, investment-grade, interest-bearing investments or accounts.
The amounts we actually spend for these purposes may vary significantly
and will depend on a number of factors, including our future revenue and cash
generated by operations and the other factors described under "Risk Factors."
Therefore, we will have broad discretion in the way we use the net proceeds. See
"Risk Factors--Our management will retain broad discretion in the use of
proceeds from this offering and may use the proceeds in ways in which you do not
agree" for more information.
DIVIDEND POLICY
Other than dividends paid while we were a corporation formed under
Subchapter S of the Internal Revenue Code, we have never declared or paid any
cash dividends on shares of our common stock. We intend to retain any future
earnings for future growth and do not anticipate paying any cash dividends in
the foreseeable future.
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CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
- on an actual basis, giving effect to our reincorporation in Colorado
in April 1999 and an increase in our authorized shares of common stock
in May 1999; and
- as adjusted to give effect to the receipt of the estimated net
proceeds from the sale of 10,000,000 shares of common stock offered by
us in this offering at the initial public offering price of $12.00 per
share, after deducting underwriting discounts and commissions and
estimated offering expenses.
The number of shares of common stock to be outstanding after this
offering is based on the number of shares outstanding as of March 31, 1999 and
does not include the following:
- 2,514,003 shares of common stock subject to options issued at a
weighted average exercise price of $1.44 per share granted under our
1998 stock option plan; or
- 9,025,137 shares of common stock reserved for future issuance under
our 1998 stock option plan and our 1999 employee stock purchase plan.
The information below is qualified by, and should be read in conjunction
with, our financial statements and the notes to those statements appearing at
the end of this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------
ACTUAL AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Capital lease obligations-- long-term portion............................................ $ 384 $ 384
----------- -----------
Shareholders' equity:
Common stock, no par value; 200,000,000 shares authorized; 42,481,996 shares issued and
outstanding, actual; 52,481,996 shares issued and outstanding, as adjusted............. $ -- $ --
Additional paid-in capital............................................................... 22,435 130,515
Accumulated deficit...................................................................... (9,125) (9,125)
----------- -----------
13,310 121,390
Less other............................................................................... (3,523) (3,523)
----------- -----------
Total shareholders' equity............................................................... $ 9,787 $ 117,867
----------- -----------
Total capitalization..................................................................... $ 10,171 $ 118,251
----------- -----------
----------- -----------
</TABLE>
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<PAGE>
DILUTION
As of March 31, 1999, our actual net tangible book value was
approximately $1.33 million or $.03 per share. Actual net tangible book value
per share represents the amount of total actual tangible assets less total
actual liabilities, divided by the shares of common stock outstanding as of
March 31, 1999. After giving effect to the sale of the 10,000,000 shares of
common stock we are offering, after deducting the underwriting discount and
estimated offering expenses, our adjusted net tangible book value as of March
31, 1999 would have been $109.41 million, or $2.08 per share. This represents an
immediate increase in as adjusted net tangible book value of $2.05 per share to
existing shareholders and an immediate dilution of $9.92 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share................................. $ 12.00
Net tangible book value per share as of March 31, 1999.............. $ .03
Increase per share attributable to new investors.................... 2.05
-----
As adjusted net tangible book value per share after the offering........ 2.08
-----------
Dilution per share to new investors..................................... $ 9.92
-----------
-----------
</TABLE>
The following table sets forth, on a pro forma basis, as of March 31,
1999 the difference between the number of shares of common stock purchased, the
total consideration paid and the average price per share paid by the existing
shareholders and the new investors purchasing shares of common stock in this
offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- --------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing
shareholders.. 42,481,996 81.0% $ 4,645,071 3.7% $ 0.11
New
investors... 10,000,000 19.0 120,000,000 96.3 $ 12.00
--------- --------- ----------- -----
Total..... 52,481,996 100.0% $124,645,071 100.0%
--------- --------- ----------- -----
--------- --------- ----------- -----
</TABLE>
The foregoing discussion and tables assume no exercise of any of the
2,514,003 stock options with a weighted average exercise price of $1.44
outstanding as of March 31, 1999.
Sales by the selling shareholders to this offering will reduce the
number of shares of common stock held by existing shareholders to 39,481,996 or
approximately 75.2% (37,531,996 shares, or approximately 71.5%, if the
underwriters' over-allotment option is exercised in full) of the total number of
shares of common stock outstanding upon the closing of this offering and will
increase the number of shares held by new public investors to 13,000,000 or
approximately 24.8% (14,950,000 shares, or approximately 28.5%, if the
underwriters' over-allotment option is exercised in full) of the total number of
shares of common stock outstanding after this offering. See "Principal and
Selling Shareholders."
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SELECTED CONSOLIDATED ACTUAL AND PRO FORMA FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and their related notes,
our pro forma consolidated statements of operations and their related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this prospectus. No financial data is reported for 1994
as we had no meaningful operations during that year. The consolidated statement
of operations data for the year ended December 31, 1995 and the consolidated
balance sheet data as of December 31, 1995 and 1996 are unaudited and derived
from financial statements not included in this prospectus. The consolidated
statement of operations data for the years ended December 31, 1996, 1997 and
1998 and the consolidated balance sheet data as of December 31, 1997 and 1998
labeled "Actual" are derived from, and are qualified by reference to, our
audited financial statements included in this prospectus. The consolidated
statement of operations data for the year ended December 31, 1998 and the three
month period ending March 31, 1998 labeled "Pro Forma" are unaudited and derived
from and qualified by reference to our pro forma consolidated statements of
operations and their related notes included in this prospectus. The consolidated
statement of operations data for the three month period ended March 31, 1998 and
1999 and the consolidated balance sheet data as of March 31, 1999 labeled
"Actual" are unaudited and derived from and qualified by reference to our
unaudited interim financial statements included in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
YEAR ENDED DECEMBER 31, ----------------------------
---------------------------------------------
1998 1998 1999
------------------ ------------------ -------
1995
------
1996 1997
------ -------
ACTUAL ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
------------------------ ------- --------- ------- --------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................... $ 3 $ 236 $ 996 $28,624 $36,532 $ 361 $ 8,270 $11,455
Cost of revenues........................... -- 21 5 21,211 27,394 1 6,184 8,604
------ ------ ------- ------- --------- ------- --------- -------
Gross profit............................. 3 215 991 7,413 9,138 360 2,086 2,851
Operating expenses:
Service development and operations....... -- 38 224 3,885 4,327 135 577 935
Selling, general and administrative...... 12 168 660 4,242 5,087 325 1,171 1,518
Stock compensation....................... -- -- 370 569 574 -- 5 1,699
Depreciation and amortization -- 1 14 5,922 7,887 24 1,988 2,001
------ ------ ------- ------- --------- ------- --------- -------
Total operating expenses............... 12 207 1,268 14,618 17,875 484 3,741 6,153
------ ------ ------- ------- --------- ------- --------- -------
Operating income (loss).................... (9) 8 (277) (7,205 ) (8,737) (124 ) (1,655) (3,302 )
------ ------ ------- ------- --------- ------- --------- -------
Other income (expense):
Interest expense......................... -- -- -- (88 ) (105) -- (17) (37 )
Other income (expense), net.............. -- -- -- 56 71 -- 15 17
------ ------ ------- ------- --------- ------- --------- -------
Total other income (expense)........... -- -- -- (32 ) (34) -- (3) (20 )
------ ------ ------- ------- --------- ------- --------- -------
Income (loss) before income taxes.......... (9) 8 (277) (7,237 ) (8,771) (124 ) (1,658) (3,322 )
Income tax expense (benefit)............... -- -- -- 659 659 -- -- (23 )
------ ------ ------- ------- --------- ------- --------- -------
Net income (loss).......................... $ (9) $ 8 $ (277) $(7,896) $(9,430) $ (124 ) $(1,658) $(3,299)
------ ------ ------- ------- --------- ------- --------- -------
------ ------ ------- ------- --------- ------- --------- -------
Net income (loss) per share:
Basic and diluted........................ $(0.47) $ 0.00 $ (0.01) $(0.21 ) $ (0.22) $(0.01 ) $ (0.04) $(0.08 )
------ ------ ------- ------- --------- ------- --------- -------
------ ------ ------- ------- --------- ------- --------- -------
Weighted average shares outstanding........ 19 6,005 20,858 37,242 41,950 22,679 41,934 42,243
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------- ---------
1995 1996 1997 1998 1999
------ ------ ------ ------- ---------
ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL
------ ------ ------ ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash............................................................................... $ -- $ -- $ 179 $1,311 $ 1,115
Total assets....................................................................... 14 110 326 17,249 16,633
Bank lines of credit............................................................... -- -- -- 1,024 839
Long-term debt (includes current portion of notes payable/capital lease
obligations)..................................................................... -- -- 30 745 1,179
Total shareholders' equity......................................................... (15) 95 188 10,912 9,787
</TABLE>
24
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR
FINANCIAL STATEMENTS AND THE RELATED NOTES APPEARING AT THE END OF THIS
PROSPECTUS. OUR DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED UPON
CURRENT EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS OUR PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. ACTUAL RESULTS AND THE TIMING OF EVENTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH UNDER
"RISK FACTORS," "BUSINESS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are a provider of Internet-based electronic government services that
help governments reduce costs and provide a higher level of service to
businesses and citizens. We form relationships with governments and on their
behalf design, build and operate Internet-based portals that allow businesses
and citizens to complete transactions and obtain government information online.
We typically enter into three to five year contracts with our government clients
and manage operations for each client through separate subsidiaries that operate
as decentralized business units with a high degree of autonomy. Under these
contracts, each business unit focuses solely on providing comprehensive
electronic government products and services for that client, and receives a
share of the revenue the client generates through its portal while the contract
is in effect. 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. By establishing a local business unit
for each government client, we have been able to develop a management culture
and incentive system that focuses on locally-based service that distinguishes us
from divisions of larger traditional technology providers.
We were founded in 1991 when our first business unit was selected to
provide electronic government services in Kansas under a public/private model.
Since then, we have created business units to serve the eight states of
Arkansas, Georgia, Indiana, Iowa, Kansas, Maine, Nebraska and Virginia, and one
city-county government, the City of Indianapolis and Marion County, Indiana. We
have been selected by the state of Utah to provide our electronic government
services and have entered into a contract with the state of Utah for our
software.
In 1997, we contracted with one of our government clients to develop,
for a fixed fee, back-office database management software which would enable
improved electronic filing, storage, management and distribution of Uniform
Commercial Code (UCC) and other corporate records. We formed a separate
application development division to develop, maintain and implement the core
technology for these applications, and subsequently entered into development
contracts with four additional states to implement similar back-office software.
EXCHANGE OFFER
Starting with our contract with the State of Kansas, our founders
established a separate S corporation for business conducted within each state
where they were awarded a public/private model contract. On March 31, 1998, we
completed an exchange offer to combine our business units, which previously
operated as five separate affiliated companies, into one consolidated company
with each business unit as a subsidiary of our company. The exchange offer was
accounted for using the purchase accounting method. The $17.3 million excess of
the fair market value over the net book value of the acquired business units has
been partially allocated to intangible assets that relate to our existing
government contracts. The contracts were valued at the net present value of
projected future cash flows over the lives of the existing contracts. The
remainder of the excess was allocated to goodwill. See Note 3 of the notes to
our consolidated financial statements that appear at the end of this prospectus
for additional discussion of the accounting for the exchange offer.
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<PAGE>
BUSINESS MODEL
We derive revenues from four sources:
- the sale of electronic access to public records on behalf of
government;
- subscription and transaction-based fees;
- fees for managing electronic government operations; and
- fees and charges for government application development.
In seven of our nine existing subsidiaries, 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 driver's
license and motor vehicle records, which accounted for over 90% of our pro forma
revenues in 1998. We believe that while these two applications will continue to
be important sources of transaction revenue early in our government contracts,
their contribution as a percentage of our total revenues in existing government
contracts will decline as other sources grow. For our initial four business
units revenues from other government products and services grew 107% in 1998
over 1997.
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
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.
In our government contracts with Georgia and Iowa, we provide
consulting, development and management services to state-operated government
portals predominantly under a fixed-price model. Revenues from these service
contracts are recognized when service is provided and billed at rates and
intervals provided for in the contract. Fees from providing management services
constituted less than 5% of our pro forma revenues in 1998.
Our application development division develops and implements back-office
government software applications for a fixed development fee, which is
recognized as revenue on a percentage of completion basis. The development and
sale of software applications represented less than 1% of our pro forma revenues
in 1998. In the fourth quarter of 1998, we determined that the balance of
revenues remaining to be recognized in 1999 under our existing application
development 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 expensed in the fourth quarter of 1998. Based
on our most recent monthly review of our current application development
contracts, we expect to accrue an additional $0.9 million of anticipated losses
in the second quarter of 1999. We expect substantially all of our existing
application development contractual commitments will be satisfied by the third
quarter of 2000. The current fixed-price contracts do not, and we believe in the
future will not, represent a significant percentage of our revenues.
Revenues from individual 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 (IT)
infrastructure supporting electronic government.
Pro forma 1998 revenues increased 50% over combined 1997 revenues. By
combined we are referring to adding our historical reported revenues to those
reported by our initial four business units for 1997 prior to our exchange
offer. Approximately 83% of this revenue growth from 1997 to 1998 was
attributable to revenues from our business units that conducted operations for
substantially less than a full year in 1997. We believe that the formation
26
<PAGE>
of contractual relationships with additional government entities will continue
to be the primary contributor to our revenue growth in the foreseeable future.
Substantially all of our cost of revenues consist of payments we make to
our government clients for access to public records we distribute over the
Internet to businesses and citizens, and the remainder consist of
telecommunications costs. The pricing, costs and gross margin derived from these
records vary by the type of public record and by state.
The majority of our operating expenses are personnel-related, and
directly associated with the development and marketing of electronic government
services in our business units. All nine business units have largely the same
operational design and a similar cost structure. Each of our business units has
a president, a marketing group and a service development and operations group
which together focus on the rapid development and deployment of Internet
applications to meet the needs of governments, businesses and citizens in that
particular venue. The amortization of goodwill and intangible assets related to
our exchange offer is the other major component of operating expenses.
Since the inception of our first business unit in Kansas, we have used
stock purchase and stock option programs for key employees as compensation to
attract strong business and technical talent. We have recorded compensation
expense for some of our stock and options grants. The expense is equal to the
excess of the fair market price on the date of grant or sale over the option
exercise or stock sale price. As of March 31, 1999, we recorded deferred
compensation of approximately $3.4 million. For the stock options granted,
deferred compensation is being amortized over the vesting periods of the stock
options. We recognized a total of approximately $569,000 in stock compensation
expense in 1998 and approximately $1.7 million in stock compensation expense in
the three months ended March 31, 1999.
GOVERNMENT CONTRACTS
In December 1991, we entered into a contract with the Information
Network of Kansas, a public instrumentality created by legislation in the State
of Kansas, to provide electronic access to public information via the Internet.
Under the contract, we are responsible for managing and marketing the government
portal for Kansas, as well as funding initial investment and ongoing operational
costs. The contract includes limitations and provisions for the rates we can
charge and the amount of remuneration to the Information Network of Kansas and
each government agency. The initial contract was to expire in December 1996, but
was renewed until December 1999. The Information Network of Kansas has the right
to terminate the contract extension for cause, but must provide us a period of
180 days to cure any breach or deficiency. Under the contract, "cause" includes,
but is not limited to, (a) a material breach by us of any contractual terms; (b)
fraud, misappropriation or embezzlement by us or our officers and directors; and
(c) amendment to the enabling statute that renders our operation of the
government portal unfeasible. Additionally, the Information Network of Kansas
may terminate the contract at any time, and without cause, if directed to do so
by state statute. Furthermore, the Information Network of Kansas has the option,
upon termination or expiration of the contract, to require us to provide
electronic government services in accordance with the terms of the contract for
a period of up to 12 months from the time of the expiration or notification of
termination. Under the contract, the Information Network of Kansas is entitled
to a perpetual for use only license to the applications developed, with no
additional compensation due to us. The Information Network of Kansas receives
2.0% of gross revenue generated under the contract payable monthly, before all
other payments. After this payment, we are entitled to a portion of net income
before taxes sufficient to give us an annualized rate of return of 25.0% on our
risk capital. Any remaining net income before taxes is shared 66.7% in our favor
and 33.3% with the Information Network of Kansas. Risk capital is defined in the
contract as the sum of paid-in capital, corporate loans with a payback period
exceeding one year, and noncancellable obligations under corporate leases.
In July 1995, we entered into a contract with the Access Indiana
Information Network, a public instrumentality created by legislation in the
State of Indiana, to provide electronic access to public information via the
Internet. Under the contract, we are responsible for managing and marketing the
government portal for Indiana, as well as funding up-front investment and
ongoing operational costs. The contract includes limitations and provisions for
the rates we can charge and the amount of remuneration to the Access Indiana
Information Network and each
27
<PAGE>
government agency. The initial contract expires August 2000 unless terminated by
the Access Indiana Information Network for cause. Under the contract, "cause"
includes, but is not limited to, (a) a material breach by us of any contractual
terms; (b) fraud, misappropriation or embezzlement by us or our officers and
directors; and (c) amendment to the enabling statute that renders our operation
of the government portal unfeasible. The contract also may be renewed, or
amended and renewed, for up to an additional five years. Additionally, the
Access Indiana Information Network may terminate the contract at any time, and
without cause, if directed to do so by state statute. Upon completion of the
initial contractual term in August 2000, the Access Indiana Information Network
is entitled to a perpetual for use only license to the applications developed,
with no additional compensation due to us. The Access Indiana Information
Network receives 2.0% of gross revenues generated under the contract before all
other payments. Government agencies that provide data to the portal are then
paid in accordance with inter-agency agreements. We retain the remaining
revenue. Additionally, the government body supervising the Access Indiana
Information Network may, at its sole discretion, require us to expend up to
25.0% of our annual net earnings on special projects for enhancement of the
government portal.
In September 1996, we entered into a contract with the GeorgiaNet
Authority, an agency of the State of Georgia. The contract expires in September
2001 and may be renewed on an annual basis thereafter unless earlier terminated
by the GeorgiaNet Authority. Termination may occur upon, but is not limited to,
(a) a 90-day written notice by the GeorgiaNet Authority for any reason; (b) a
material breach by us of any contractual terms and our failure to remedy the
breach within the 20-day cure period; and (c) a bankruptcy proceeding on our
part. Furthermore, in the event fees the GeorgiaNet Authority receives from its
customers are insufficient to cover its obligations to us, the contract shall
terminate without further obligation by the GeorgiaNet Authority. Under the
contract, the GeorgiaNet Authority is entitled to a perpetual for use only
license to the applications developed, with no additional compensation due to
us. However, if the GeorgiaNet Authority terminates the contract prior to
September 2001, it must pay us a fee in an amount to be based on the termination
date to receive a license for the applications. The GeorgiaNet Authority
currently pays us $800,000 per year under this contract, in equal amounts of
$200,000, on a quarterly basis. In addition, the GeorgiaNet Authority currently
pays us 5.0% per quarter of the gross revenues generated by the GeorgiaNet
Authority from transactions not involving requests for multiple data files.
In July 1997, we entered into a contract to provide electronic
government services to the Virginia Information Providers Network Authority.
Under the contract, we are responsible for managing and marketing the government
portal as well as funding initial investment and ongoing operational costs. The
contract extends through August 2002 with a five year renewal option. The
Virginia Information Providers Network Authority has the right to terminate the
contract for cause, but must provide us a period of 60 days to cure any breach
or deficiency. Under the contract, "cause" includes, but is not limited to, (a)
a material breach by us of any contractual terms; (b) fraud, misappropriation or
embezzlement by us or our officers and directors; and (c) amendment to the
enabling statute that renders our operation of the government portal unfeasible.
Additionally, the Virginia Information Providers Network Authority may terminate
the contract at any time, and without cause, if directed to do so by state
statute. Furthermore, the Virginia Information Providers Network Authority has
the option, upon termination or expiration of the contract, to require us to act
in accordance with the terms of the contract for a period of up to 12 months
from the time of the expiration or notice of termination, whichever is earlier.
Upon completion of the contractual term in August 2007, the Virginia Information
Providers Network Authority is entitled to a perpetual for use only license for
the applications we developed, with no additional compensation due to us. Under
the contract, we are entitled to retain any revenues generated under the
contract that remain after payment of all network operating expenses, any
payments payable to state agencies and various other expenses.
We entered into a contract in July 1997 with the Information Network of
Arkansas, a public instrumentality created by legislation in the State of
Arkansas, to provide electronic access to public information via the Internet.
Under the contract, we are responsible for managing and marketing the government
portal for Arkansas, as well as funding initial investment and ongoing
operational costs. The contract extends through June 2000 with an option by the
Information Network of Arkansas to extend the contract for four additional
one-year terms. The Information Network of Arkansas has the right to terminate
the contract for cause, but must provide us a period of 30 days to cure any
breach or deficiency. Under the contract, "cause" includes, but is not limited
to, (a) a material breach by us of any
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<PAGE>
contractual terms; (b) fraud, misappropriation or embezzlement by us or our
officers and directors; and (c) amendment to the enabling statute that renders
our operation of the government portal unfeasible. Additionally, the Information
Network of Arkansas may terminate the contract at any time, and without cause,
if directed to do so by state statute. Furthermore, the Information Network of
Arkansas has the option, upon termination or expiration of the contract, to
require us to act in accordance with the terms of the contract for a period of
up to 12 months from the time of the expiration or notice of termination,
whichever is earlier. Upon completion of the initial contractual term in June
2000, the Information Network of Arkansas will be entitled to a perpetual for
use only license to the applications we developed with no additional
compensation to us. The Information Network of Arkansas currently receives 5.0%
of the difference between the gross network revenues and the amount payable to
state agencies. We are entitled to retain any remaining revenues after these
payments and the payment of any network operating expenses.
We entered into a contract with the Nebraska State Records Board in
December 1997 to enhance, operate, maintain and expand the existing portal that
was developed by us under an earlier contract with the Nebraska Library
Commission and various state agencies. The contract will expire in January 2002
unless earlier terminated by the Nebraska State Records Board for cause or
amended and renewed for an additional period. The Nebraska State Records Board
has the right to terminate the contract for cause, but must provide us a period
of not less than 60 nor more than 180 days to cure any breach or deficiency.
Under the contract, "cause" includes, but is not limited to, (a) a material
breach by us of any contractual terms; (b) fraud, misappropriation or
embezzlement by us or our officers and directors; and (c) amendment to the
enabling statute that renders our operation of the government portal unfeasible.
Additionally, the Nebraska State Records Board may terminate the contract at any
time, and without cause, if directed to do so by state statute. Furthermore, the
Nebraska State Records Board has the option, upon termination or expiration of
the contract, to require us to act in accordance with the terms of the contract
for a period of up to 12 months from the time of the expiration or notice of
termination, whichever is earlier. Upon completion of the initial contractual
term in January 2002, the Nebraska State Records Board will be entitled to a
perpetual for use only license to the applications we developed, with no
additional compensation due to us. In connection with the revenues generated
under the contract, the Nebraska State Records Board currently receives 4.5% of
the first $89,000 in gross revenues and 2.0% of any gross revenues greater than
that amount, computed and payable monthly, less Internet and telecommunications
service costs to be remitted to other Nebraska state agencies. We are entitled
to retain any remaining revenues after payment of (a) the specified payment
above; (b) any network operating costs and (c) various other expenses.
In April 1998, we entered into a contract with the State of Iowa to
implement a project plan for the creation of an information access program to
provide electronic access to public information via the Internet on the
government portal IOWAccess Network. Under the contract, we are responsible for
creating, developing and managing the government portal for Iowa. The initial
contract was to expire on September 1998, but was renewed until September 2001
unless earlier terminated by the IOWAccess Network. Termination may occur upon,
but is not limited to, (a) a 365-day notice from the State of Iowa for any
reason; (b) a material breach by us of any contractual terms and our failure to
remedy the breach within the ten-day cure period; and (c) our failure to satisfy
the specifications and time-tables outlined in the project plan. Additionally,
the IOWAccess Network may terminate the contract upon failure of the Iowa
legislature to appropriate sufficient funds to operate the government portal.
Furthermore, the IOWAccess Network has the option, upon termination or
expiration of the contract, to require us to provide electronic government
services in accordance with the terms of the contract for a period of up to 12
months from the time of the expiration or notification of termination. Under the
contract, upon the completion of the initial contractual term in September 2001,
the IOWAccess Network is entitled to a perpetual use license to the applications
we developed, with no additional compensation due to us. In connection with
implementing the project plan for the information access program, the State of
Iowa currently pays us an amount not to exceed $1,000,000, payable in monthly
installments. The Iowa legislature has approved funding for the information
access program through Iowa's fiscal 2000, which ends on June 30, 2000. We are
currently negotiating with the IOWAccess Network about the scope of our duties
under this contract. It is possible that these negotiations could lead to a
reduction in our duties with a corresponding reduction in fees, which could harm
our operating results.
In August 1998, we entered into a contract with CivicNet, formerly
CivicLink, the electronic gateway service for the city of Indianapolis and
Marion County, Indiana, to provide electronic access to public information via
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the Internet. Under the contract, we are responsible for operating, managing and
expanding CivicNet. The contract includes limitations and provisions for the
rates we can charge and the amount of remuneration to the CivicNet. The contract
expires in December 2002 with an option by CivicNet to renew the contract for up
to two additional three-year terms. CivicNet has the option to terminate the
contract earlier for cause, but must provide us a period of sixty days to cure
any breach or deficiency. Under the contract "cause" includes, but is not
limited to, (a) a material breach by us of any contractual terms; (b) fraud,
misappropriation or embezzlement by us or our officers and directors; and (c)
amendment to the enabling statute that renders our operation of the government
portal unfeasible. Additionally, CivicNet may terminate the contract at any
time, and without cause, if directed to do so by statute. Furthermore, CivicNet
has the option, upon termination or expiration of the contract, to require us to
provide electronic government services in accordance with the terms of the
contract for a period of up to 12 months from the time of the expiration or
notification of termination. Upon the completion of the initial contractual term
in December 2002, CivicNet is entitled to a perpetual for use only license to
the applications developed, with no additional compensation due to us.
We entered into a contract with the State of Maine in March 1999 to
develop and operate Maine's government portal that will provide electronic
transactions and expanded access to public information. Under the contract, we
will fund initial investment and ongoing operational costs. The initial term of
the contract extends to April 2002, unless earlier terminated or extended
according to two two-year renewal periods. The State of Maine has the right to
terminate the contract for cause, but must provide us a period of 30 days to
cure any breach or deficiency. Under the contract, "cause" includes, but is not
limited to, (a) a material breach by us of any contractual terms; (b) fraud,
misappropriation or embezzlement by us or our officers and directors; and (c)
amendment to the enabling statute that renders our operation of the government
portal unfeasible. Additionally, the State of Maine has the option, upon
termination or expiration of the contract, to require us to act in accordance
with the terms of the contract for a period of up to 12 months from the time of
the expiration or notice of termination, whichever is earlier. 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 we developed,
with no additional compensation due to us. In connection with the revenue
generated under the contract, we are entitled to retain any revenues remaining
after payment of (a) all network operating expenses; (b) statutory fees for
retrieval of public information; and (c) various other expenses.
In May 1999, we entered into a contract with the State of Utah to
provide coordinated network development and management for the State of Utah's
online government services. The contract extends to May 2003, unless earlier
terminated or extended according to three two-year renewal periods. The State of
Utah has the right to terminate the contract for cause, but must provide us a
period of 60 days to cure any breach or deficiency. Under the contract, "cause"
includes, but is not limited to, (a) a material breach by us of any terms of the
contract; (b) fraud, misappropriation or embezzlement by us or our officers and
directors; and (c) amendment to the enabling statute that renders our operation
of the government portal unfeasible. Additionally, the State of Utah may
terminate the contract at any time, and without cause, if directed to do so by
state statute. Furthermore, the State of Utah has the option, upon termination
or expiration of the contract, to require us to act in accordance with the terms
of the contract for a period of up to 12 months from the time of the expiration
or notice of termination, whichever is earlier. Upon completion of the initial
four-year term of the contract, or if the contract is terminated by the State of
Utah for cause, the State of Utah will be entitled to a perpetual for use only
license for the applications we developed, with no additional compensation due
to us. We are entitled to retain any revenues generated under the contract that
remain after payment of (a) all network operating expenses; (b) statutory fees
for retrieval of public information; and (c) various other expenses.
The decision by one or more governments not to renew or to terminate an
existing contract will result in significant revenue shortfalls. 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. In addition, it is possible
that governments and their successors may use their right of use license rights
under their contracts and employ the software and other applications we have
developed for them to launch competing services. They may inadvertently allow
this intellectual property or other information to fall into the hands of third
parties, including our competitors. Either of these events would result in the
loss of potential revenue from and a decrease in the value of the software and
applications that we have developed.
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RESULTS OF OPERATIONS
Prior to the completion of our exchange offer in March 1998, 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 consolidated results of
operations reflect only 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 three months ended
March 31, 1999, revenues were $11.5 million, which represents all of our
business units while the $361,000 reported for the three months ended March 31,
1998 represents primarily our operations in Georgia. Total operating expenses
are likewise not comparable. Accordingly, we believe that historical comparison
of our results of operations for the three months ended March 31, 1999 against
the three months ended March 31, 1998, the year ended December 31, 1998 against
the year ended December 31, 1997 and the year ended December 31, 1997 against
the year ended December 31, 1996 is not necessarily meaningful.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 1998
REVENUES. Revenues increased to $11.5 million for the three months
ended March 31, 1999 from $361,000 for the three months ended March 31, 1998.
This increase was primarily attributable to the $8.3 million in revenues from
our four initial business units included in reported revenues subsequent to the
March 31, 1998 exchange offer and $2.8 million in revenues from new state
business units becoming fully operational during the latter part of 1998.
Revenues for our four initial business units totaled $7.9 million for the three
months ended March 31, 1998.
COST OF REVENUES. Cost of revenues increased to $8.6 million for the
three months ended March 31, 1999 from $1,000 for the three months ended March
31, 1998. This increase was primarily attributable to $6.5 million in the cost
of the revenues of our four initial business units and $2.1 million from the
additional state business units that became fully operational during the latter
part of 1998. Cost of revenues for our four initial business units totaled $6.2
million for the three months ended March 31, 1998.
SERVICE DEVELOPMENT AND OPERATIONS. Service development and operations
costs increased to $935,000 for the three months ended March 31, 1999 from
$135,000 for the three months ended March 31, 1998. The increase was primarily
attributable to $472,000 in costs from our four initial business units, $163,000
in costs from additional state business units, and the increase in size of our
application development division. Service development and operations costs of
our four initial business units totaled $442,000 for the three months ended
March 31, 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative costs increased to $1.5 million for the three months ended March
31, 1999 from $325,000 for the three months ended March 31, 1998. The increase
was due primarily to $698,000 in costs from our four initial business units,
$199,000 in costs from additional state business units and an increase in
corporate level overhead expenses, including the addition of corporate
personnel. Selling, general and administrative costs for our four initial
business units totaled $851,000 for the three months ended March 31, 1998 as
compared to $698,000 for the three months ended March 31, 1999. The decrease
compared to March 31, 1999 is due primarily to a decrease in professional fees.
STOCK COMPENSATION. Stock compensation was $1.7 million for the three
months ended March 31, 1999. There was no stock compensation expense for the
three months ended March 31, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
to $2.0 million for the three months ended March 31, 1999 from $24,000 for the
three months ended March 31, 1998. This increase is primarily attributable to
amortization of goodwill and intangible assets resulting from the
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completion of the exchange offer. Depreciation and amortization for our four
initial business units totaled $71,000 for the three months ended March 31,
1998.
INCOME TAXES. On March 31, 1998 we were an S corporation and did not
record income tax expense. We recognized an income tax benefit of $23,000 for
the three months ended March 31, 1999. Goodwill amortization and a portion of
stock compensation is non-deductible for tax purposes.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
REVENUES. Revenues increased to $28.6 million for the year ended
December 31, 1998 from $1.0 million for the year ended December 31, 1997 and
$236,000 for the year ended December 31, 1996. 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.
COST OF REVENUES. 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
and $21,000 for the year ended December 31, 1996. 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.
SERVICE DEVELOPMENT AND OPERATIONS. 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 and $38,000 for the year ended
December 31, 1996. The increase in 1998 was primarily attributable to $1.8
million from our four initial business units, $472,000 from additional state
business units, and from the increase in size of our application development
division, for which we recorded a $1.3 million charge in the fourth quarter for
anticipated losses for obligations under our application development contracts.
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
$531,000 in costs incurred by one of our initial business units for work
performed for our application development division, $160,000 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 $4.2 million for the year ended December 31,
1998 from $660,000 for the year ended December 31, 1997 and $168,000 for the
year ended December 31, 1996. 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 $269,000 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.
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STOCK COMPENSATION. Stock compensation increased to $569,000 for the
year ended December 31, 1998 from $370,000 for the year ended December 31, 1997.
There was no stock compensation expense for the year ended December 31, 1996.
DEPRECIATION AND AMORTIZATION. 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. Depreciation and amortization expense for the year
ended December 31, 1996 was negligible. The 1998 expense consisted primarily of
amortization of goodwill and intangible assets resulting from the completion of
the exchange offer.
INCOME TAXES. 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 and a portion of stock compensation being non-deductible
for tax purposes. For the years ended December 31, 1997 and 1996, we were an S
corporation and did not record income tax expense.
SELECTED HISTORICAL QUARTERLY OPERATING RESULTS
The following table presents certain historical consolidated statement
of operations data for our nine most recent quarters ended March 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 prospectus. 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>
QUARTER ENDED
--------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues....................... $ 200 $ 216 $ 285 $ 295 $ 361 $8,494 $9,773 $9,996 $11,455
Cost of revenues............... -- -- 2 3 1 6,152 7,347 7,711 8,604
-------- -------- --------- -------- -------- -------- --------- -------- --------
Gross profit................... 200 216 283 292 360 2,342 2,426 2,285 2,851
-------- -------- --------- -------- -------- -------- --------- -------- --------
Operating Expenses:
Service, development and
operations................. 44 48 53 79 135 676 806 2,268 935
Selling, general and
administrative............. 111 162 145 242 325 1,381 1,219 1,317 1,518
Stock compensation........... -- -- 146 224 -- 259 -- 310 1,699
Depreciation and
amortization............... 2 2 3 7 24 1,968 1,962 1,968 2,001
-------- -------- --------- -------- -------- -------- --------- -------- --------
Total operating expenses..... 157 212 347 552 484 4,284 3,987 5,863 6,153
-------- -------- --------- -------- -------- -------- --------- -------- --------
Operating income (loss)........ 43 4 (64) (260) (124) (1,942) (1,561) (3,578) (3,302)
-------- -------- --------- -------- -------- -------- --------- -------- --------
Other income (expense):
Interest expense............. -- -- -- -- -- (19) (31) (38) (37)
Other income (expense),
net........................ -- -- -- -- -- 15 24 17 17
-------- -------- --------- -------- -------- -------- --------- -------- --------
Total other income........... -- -- -- -- -- (4) (7) (21) (20)
Income (loss) before income
taxes........................ 43 4 (64) (260) (124) (1,946) (1,568) (3,599) (3,322)
Income taxes................... -- -- -- -- -- -- 370 289 (23)
-------- -------- --------- -------- -------- -------- --------- -------- --------
Net income (loss).............. $ 43 $ 4 $ (64) $ (260) $ (124) $(1,946) $(1,938) $(3,888) $(3,299)
-------- -------- --------- -------- -------- -------- --------- -------- --------
-------- -------- --------- -------- -------- -------- --------- -------- --------
Net income (loss) per share:
Basic and diluted............ $ 0.00 $ 0.00 $(0.00) $(0.01) $(0.01) $(0.05) $(0.05) $(0.09) $ (0.08)
-------- -------- --------- -------- -------- -------- --------- -------- --------
-------- -------- --------- -------- -------- -------- --------- -------- --------
Weighted average shares
outstanding................ 20,532 20,536 20,826 21,527 22,679 41,946 42,066 42,066 42,243
-------- -------- --------- -------- -------- -------- --------- -------- --------
-------- -------- --------- -------- -------- -------- --------- -------- --------
</TABLE>
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We expect operating results to fluctuate significantly in the future as
a result of a variety of factors, many of which are outside of our control. See
"Risk Factors--The unpredictability of our quarter to quarter results may
adversely affect the trading price of our common stock" and "--The seasonality
of use for some of our electronic government products and services may adversely
affect 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 operating results
will not necessarily be meaningful and you should not rely on them as an
indication of future performance. It is possible that in some future periods our
operating results 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
Prior to the exchange offer, each of our business units funded its
initial development and organizational costs from stock sales to employees and
private investors. Since March 31, 1998, initial development and organizational
costs related to new business units have been funded by net cash generated from
operations in existing business units. In most cases, our business units have
generated positive cash flow from operations within the first ninety days
following initial service implementation, and have thereafter begun to fund all
activities from operating cash flow. As of March 31, 1999, we had approximately
$1.1 million in cash and cash equivalents.
Net cash used in operating activities was $366,000 for the three months
ended March 31, 1999. The difference between the net loss of $3.3 million and
net cash used was attributable to over $3.6 million in non-cash charges,
primarily amortization of intangibles and stock compensation. This difference
was offset by an increase in accounts receivable of $787,000, which was due to
increased volume in our largest business unit. The difference between the net
loss of $7.9 million and net cash provided by operating activities of $354,000
during the year ended December 31, 1998 was attributable to the non-cash charges
in amortization of intangibles and non-cash expense recognized for application
development contracts.
Investing activities resulted in net cash used of $10,000 in the three
months ended March 31, 1999, and net cash provided of $607,000 in the year ended
December 31, 1998. The cash provided from investing activities in the year ended
December 31, 1998 was attributable to cash of $765,000 held by the business
units we consolidated in connection with our exchange offer, offset by cash
invested in property and equipment of $255,000.
Cash flows provided from financing activities were $181,000 for the
three months ended March 31, 1999, and $170,000 for the year ended December 31,
1998. Cash flows provided from financing activities for the three months ended
March 31, 1999 were primarily attributable to issuances of our common stock to
executives and a board member during the period. Cash flows provided from
financing activities for the year ended December 31, 1998 were primarily
attributable to cash flows from borrowings of $1.2 million, offset by cash used
for payments on notes, leases, debentures and distributions to shareholders
totaling $588,000.
Cash provided and/or used for operating, investing and financing
activities during the periods ended March 31, 1998, December 31, 1997, and
December 31, 1996 reflected the cash flow from our business unit formed to
pursue new business opportunities, and is not comparable to cash flow patterns
reflected in our consolidated operations.
Each of our business units maintains operating lines of credit and
equipment lines of credit on identical or substantially similar terms and
conditions from the same bank. The total amount outstanding on our bank lines of
credit for our business units totaled $839,000 as of March 31, 1999.
We believe that the net proceeds from this offering, together with the
existing cash balances and financing arrangements, will provide us with
sufficient funds to finance our operations through at least the
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next 18 months. If the cash we generate from our operations is insufficient to
satisfy our liquidity requirements after this 18 month period, we may need to
sell additional equity or debt securities or obtain additional credit
facilities. The sale of additional equity or convertible debt securities may
result in additional dilution to our shareholders. We may not be able to raise
any additional capital or on acceptable terms or at all.
From time to time, we expect to evaluate the acquisition of businesses
and technologies that complement our business. Acquisitions may involve a cash
investment.
YEAR 2000 READINESS
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. As a result,
software that records only the last two digits of the calendar year may not be
able to distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.
We have conducted an internal review of software systems that we use for
portal management, network monitoring, quality assurance, applications and
information and transaction processing. Because we developed most of these
software systems internally after the Year 2000 problem was already known, we
were largely able to anticipate four digit requirements. In connection with
ongoing reviews of our government portals, we also are reviewing our computer
infrastructure, including network equipment and servers. We do not anticipate
material problems with network equipment, as the majority of our current
configuration have been installed or upgraded with Year 2000 ready systems.
Similarly, we purchased most of our servers within the past four years. With
this relatively current equipment, we do not anticipate material Year 2000
readiness problems, and we will replace any servers that cannot be updated
either in the normal replacement cycle or on an accelerated basis.
We also have internally standardized the majority of our systems on a
Solaris operating system, which we are advised by our vendor is Year 2000 ready
after implementation of the latest service upgrades. We use multiple software
systems for internal business purposes, including accounting, electronic mail,
service development, human resources, customer service and support and sales
tracking systems. The majority of these applications have either been purchased,
upgraded or internally developed within the last three years.
We have made inquiries of vendors of systems we believe to be mission
critical to our business regarding their Year 2000 readiness. Although we have
received various assurances, we have not received affirmative documentation of
Year 2000 readiness from any of these vendors and we have not performed any
operational tests on our internal systems. We generally do not have contractual
rights with third party providers should their equipment or software fail due to
Year 2000 issues. If this third-party equipment or software does not operate
properly with regard to Year 2000, we may incur unexpected expenses to remedy
any problems. These expenses could potentially include purchasing replacement
hardware and software. We have not determined the state of readiness of some of
our third-party suppliers of information and services, phone companies, long
distance carriers, financial institutions and electric companies, the failure of
any one of which could severely disrupt our ability to conduct our business.
Concurrently with our analysis of our internal systems, we have begun to
survey third-party entities with which we transact business, including
government clients, critical vendors and financial institutions, for Year 2000
readiness. We expect to complete this survey in the third quarter of 1999. Our
government clients typically have addressed Year 2000 issues on an
agency-by-agency basis under an overall Year 2000 program. We are monitoring
regularly the Year 2000 progress of those agencies which account for high
transaction and revenue volumes through our portals. We believe that many,
though not all, of these agencies have completed Year 2000 readiness
implementation. We cannot estimate the effect, if any, that non-ready systems of
these entities could have on our business, results of operations or financial
condition, and there can be no assurance that the impact, if any, would not be
material.
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We anticipate that our review of Year 2000 issues and any remediation
efforts will continue throughout calendar 1999. The costs incurred to date to
remediate our Year 2000 issues have not been material. If any Year 2000 issues
are uncovered with respect to these systems or our other internal systems, we
believe that we will be able to resolve these problems without material
difficulty, as replacement systems are available on commercially reasonable
terms. Presently, we have included the total remaining cost of addressing Year
2000 issues within our existing information technology budget. We do not
anticipate any Year 2000 complications based on a number of assumptions,
including the assumption that we have already identified our most significant
Year 2000 issues. However, these assumptions may not be accurate, which could
cause our actual results to differ materially from those anticipated. In view of
our Year 2000 review and remediation efforts to date, the recent development of
a number of our products and services, the recent installation of our networking
equipment and servers, and the limited activities that remain to be completed,
we do not consider contingency planning to be necessary at this time.
Our applications operate in complex network environments and directly
and indirectly interact with a number of external hardware and software systems.
We are unable to predict to what extent our business may be affected if our
systems or the systems that operate in conjunction with our systems experience a
material Year 2000 failure. The most likely worst case scenarios are that the
Internet infrastructure fails or the internal systems of our government clients
fail, either of which would render us unable to provide products and services,
which would harm our business. Additionally, known or unknown errors or defects
that affect the operation of our software and systems could result in delay or
loss of revenue, interruption of services, cancellation of contracts and
memberships, diversion of development resources, damage to our reputation,
increased service and warranty costs, and litigation costs, any of which could
harm our business, financial condition and results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 131,
"Disclosure about Segments of an Enterprise and Related Information," which
establishes standards for the way public business enterprises report information
in annual statements and interim financial reports regarding operating segments,
products and services, geographic areas and major customers. This statement is
effective for financial statements for periods beginning after December 15,
1997. The adoption of this statement did not have a significant impact on the
way we report information in our annual statements and interim financial
reports.
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. We are required to adopt SOP 98-1 effective
January 1, 1999. The adoption of SOP 98-1 did not have a material impact on our
consolidated financial statements.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates
primarily to the increase or decrease in the amount of interest income we can
earn on our cash balances and on the increase or decrease in the amount of
interest expense we must pay with respect to our various outstanding debt
instruments. The risk associated with fluctuating interest expense is limited,
however, to the exposure related to those debt instruments and credit facilities
which are tied to market rates and we do not believe it is material. We do not
use derivative financial instruments. We ensure the safety and preservation of
our invested principal funds by limiting default risks, market risk and
investment risk.
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BUSINESS
OVERVIEW
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, renewing a license or filing a report. Our
unique business model allows us to reduce our government clients' financial and
technology risks and obtain revenue by sharing in the fees governments 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 services for
eight states and one local government. The state of Utah has recently selected
us as an electronic government services provider, and we have entered into a
contract to implement our services in that state. We typically enter into three
to five year contracts with our government clients and manage 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 services and
expanding markets within our existing contractual relationship.
INDUSTRY BACKGROUND
THE MARKET FOR GOVERNMENT-TO-BUSINESS AND GOVERNMENT-TO-CITIZEN TRANSACTIONS
Government's 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 renewals, 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 revenue, 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.
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.
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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 97 million worldwide in 1998 to
approximately 320 million worldwide by the end of 2002. 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;
- 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;
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- 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 businesses, citizens and governments. 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, implement and manage 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.
COMPELLING FINANCIAL MODEL
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
a share of fees received from information accessed and transactions conducted
through the portal.
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
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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 a provider of
Internet-based electronic government services. Key strategies to achieve this
objective include:
CONTINUE TO PENETRATE NEW MARKETS
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. We have designed our services and infrastructure so that we can
deploy our services quickly, easily and cost-effectively in new locations. We
intend to market our one-stop approach to other states, multi-state cooperative
organizations, local governments and federal agencies. In the future, we may
expand our services into international markets. Our expansion efforts will
include developing relationships and sponsors throughout an individual
government entity, 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.
BROADEN PRODUCT AND SERVICE OFFERINGS
We intend to develop new product and service offerings to enable
government agencies and businesses and citizens to interact more effectively
online. We will increase our development efforts by leveraging our experience
and deepening the knowledge base that we have developed from our operations. We
will continue to work with government agencies, professional associations and
other organizations to better understand the current and future needs of our
customers.
INCREASE TRANSACTION VOLUMES FROM EXISTING AND NEW CUSTOMERS
We intend to increase traffic to our government portals through both
targeted and broad marketing initiatives. We will continue to work with our
government clients to create awareness of the online alternatives to traditional
government interaction, through initiatives including 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 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.
ENHANCE CAPABILITY AND EFFICIENCY OF CORE BUSINESS OPERATIONS
We will continue to enhance our business model by increasing the overall
capability and efficiency of each government business unit. On a corporate
level, we will work with each business unit to share and coordinate the
implementation of best practices across our organization and to create new
products and services in response to the needs of businesses and citizens. We
intend to strengthen our operational and administrative functions to provide
standardized services in areas that benefit from economies of scale, including
new market development and human resources management. In addition, we will
continue to use performance incentives, including stock-based compensation and
local manager
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bonuses, to encourage each business unit to raise customer satisfaction,
continuously develop new products and services and lower overall business unit
costs.
ATTRACT, RETAIN AND TRAIN SPECIALIZED AND QUALIFIED PERSONNEL
We believe that attracting, training and retaining specialized talent is
critical to executing our growth strategy. We intend to continue to improve
employee retention through challenging and entrepreneurial work assignments and
incentive programs, including equity interests in our company. We strive to
foster a creative, open atmosphere in which we encourage each employee to make
valuable contributions. We intend to hire employees with experience in
government processes who also have specific technical, marketing or contract
negotiation skills. In addition, we intend to improve the quality and retention
of our workforce through increased centralized training programs.
GOVERNMENT CONTRACTS
We provide electronic government services to eight states and one
city-county government through the following portals:
<TABLE>
<CAPTION>
YEAR
SERVICES POPULATION
PORTAL NAME COMMENCED SERVED WEB ADDRESS
- ------------------------------------------------ ----------- ----------- -----------------
<S> <C> <C> <C>
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 Indian@ Information Network.............. 1995 5,899,000 www.state.in.us
Nebrask@ Online................................. 1995 1,663,000 www.state.ne.us
Information Network of Kansas................... 1992 2,629,000 www.state.ks.us
</TABLE>
- ------------------------
Source: 1998 estimated population information from the U.S. Census Bureau Web
site at www.census.gov.
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
the government to deliver electronic government services;
- the portal we establish is the primary electronic and Internet
interface between the government and its citizens;
- the government supports the use of the portal for all commercially
valuable applications in order to support the operation and expansion
of the portal;
- the government 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
- the government 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.
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In return, we agree to:
- develop, manage, market, maintain and expand the government's portal
and information and electronic commerce applications;
- assume the investment risk of building and operating the 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 the government's request.
We own all the software we develop under these 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.
For a summary of each separate government contract, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Government
Contracts."
We enter into separate agreements with various agencies and divisions of
our government clients to provide specific services and to conduct specific
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.
In May 1999, we entered into a contract with the state of Utah to
provide electronic government services on terms similar to those of our services
in the table above. We are in the process of setting up operations under this
contract.
We derive revenues from four sources:
- the sale of electronic access to public records on behalf of
government;
- subscription and transaction-based fees;
- fees for managing electronic government operations; and
- fees and charges for government application development.
In seven of our nine existing subsidiaries, 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 driver's
license and motor vehicle records, which accounted for over 90% of our pro forma
revenues in 1998. ChoicePoint, which resells these records to the auto insurance
industry, accounted for approximately 60% of our revenue in 1998. We believe
that while these two applications will continue to be important sources of
transaction revenue early in our government contracts, their contribution as a
percentage of our total revenues in existing government contracts will decline
as other sources grow. If revenues from these two applications were to decline,
including through a loss of our contracts with ChoicePoint, or if we are unable
to develop additional applications that generate significant revenues, our
results of operations will be harmed. In addition, the fees we collect for our
products and services are subject to regulation that could reduce our future
revenues, growth and profitability.
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 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.
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OUR PRODUCTS AND SERVICES
Each of our business units works with its government client to
implement, develop, manage, and enhance a comprehensive, Internet-based portal
to deliver electronic government services to the government's 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 driver's license renewals, 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 way to deal with government.
Some of the products and services we currently offer in different
jurisdictions include:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRODUCT OR SERVICE DESCRIPTION PRIMARY USERS
<S> <C> <C>
Driver's License Offers controlled instant look-up of driving Insurance companies
Records Search records by license number, name and birth date,
or social security number. Includes commercial
licenses.
Vehicle Title, Provides controlled interactive title, Insurance companies,
Lien & registration and lien database access. lenders
Registration
BillWatch-TM- Allows the user to monitor state legislative Attorneys, lobbyists
(Lobbyist in a activity. Users can tag bills by key word or
Box-Registered Trademark-) bill number, and BillWatch-TM- will send an
e-mail when a change occurs in the status of
the bill.
Health Allows users to search databases on several Hospitals, clinics,
Professional health professions. health insurers,
License Services citizens
Secretary of State Allows users to access filings of corporations, Attorneys, lenders
Searches partnerships and other entities, including
charter documents.
UCC Searches Permits searches of the UCC database. Attorneys, lenders
Professional Permits professionals to renew their licenses Attorneys, doctors,
License Renewal on line using a credit card. other licensed
professionals
</TABLE>
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We also have a number of products and services in development,
including:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRODUCT OR SERVICE DESCRIPTION PRIMARY USERS
<S> <C> <C>
Motor Fuel EDI Allows motor fuel carriers to file their tax Motor fuel carriers
Project reports electronically.
Sales/Use Tax Allows Sales and Use Tax filers to file the Retailers
Filing 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 Processes an online request for an official Citizens
Certificate birth certificate, charging the user's credit
card.
</TABLE>
Our application development division develops and delivers applications
that improve the back-office administration of government records, and that
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.
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 and Nebraska. 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 receive
a portion of this fee, which varies by state, and the state receives the
remainder. 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.
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 completing transactions over the Internet. We meet regularly with
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<PAGE>
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. We have
responded to a number of requests for comprehensive electronic government
services proposals from governments and have been awarded and entered into
contracts in each case.
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;
- 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 the
government 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.
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 standalone 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.
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<PAGE>
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 area,
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, 7 day 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 deployed. 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 we 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.
and Sapient Corporation;
- traditional consulting firms, including International Business
Machines Corporation and Science Applications International
Corporation; and
- Web service companies, including USWeb/CKS, 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
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<PAGE>
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 materially adversely
affected.
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
software, documentation and processes we have developed in connection with the
electronic government products and services we offer. 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.
Although we believe that our products and services do not infringe on
the intellectual property rights of others and that we have all rights needed to
use the intellectual property employed in our business, 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, upon the completion of the initial term of our government
contracts, governments and their successors and affiliates obtain a perpetual
right of use license to the software programs and other applications we have
developed for them in the operation of the networks. It is possible that
governments may use their limited license rights after termination of our
contracts to launch competing services, or inadvertently allow our intellectual
property or other information to fall into the hands of third parties, including
our competitors.
EMPLOYEES
As of March 31, 1999, we had 102 full-time employees, of which 6 were
working in our corporate operations and 96 were located in our business units.
Of our employees, 18 were in sales and marketing, 63 were in service development
and operations and 21 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.
FACILITIES
Our principal administrative facility occupies a total of approximately
1,800 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.
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.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our
executive officers and directors as of June 15, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- ------------------------------------------------------
<S> <C> <C>
Jeffery S. Fraser.............. 39 Chairman, Chief Executive Officer and Director
James B. Dodd.................. 42 President, Chief Operating Officer and Director
Kevin C. Childress............. 41 Chief Financial Officer
William F. Bradley, Jr......... 44 Executive Vice President--Strategy, Policy & Legal,
General Counsel and Secretary
Samuel R. Somerhalder.......... 57 Executive Vice President--Operations and
Administration
Harry H. Herington............. 39 Executive Vice President--Marketing and Technology
Services, and Assistant Secretary
John L. Bunce, Jr.............. 40 Director
Daniel J. Evans................ 73 Director
Ross C. Hartley................ 51 Director
Patrick J. Healy............... 32 Director
</TABLE>
- ------------------------
JEFFERY S. FRASER, one of our founders, has served as our Chairman and
Chief Executive Officer since January 1999 and as one of our directors since our
formation. Mr. Fraser served as our President and Chief Executive Officer from
April 1998 to December 1998 and President and Chief Executive Officer of our
subsidiary, National Information Consortium USA, Inc., from January 1993 to
April 1998. Additionally, from January 1992 to September 1998, he served as
President and Chief Executive Officer of our subsidiary, Kansas Information
Consortium, Inc. Mr. Fraser holds a B.S. in human resource management and an
M.S. in information systems from Friends University in Wichita, Kansas.
JAMES B. DODD has served as our President, Chief Operating Officer and a
director since January 1999. Prior to joining us, Mr. Dodd spent 14 years with
the Sprint Corporation, a telecommunications company, where he served in various
senior management positions including, most recently, as Vice President and
General Manager of Sprint's Consumer Internet Access Group. Other positions he
held at Sprint included Vice President of Consumer International Marketing from
1992 to 1994, and Vice President of Consumer Product Management and Development
from 1995 to 1996. Mr. Dodd earned a CPA in 1982 and holds a B.A. in economics
from Stanford University and an M.B.A. from the Harvard Business School.
KEVIN C. CHILDRESS has served as our Chief Financial Officer since May
1999. Prior to joining us, Mr. Childress served as a Managing Director and head
of the food and beverage industry group at BT Alex. Brown, Inc., an investment
banking firm, from 1992 to 1999. Prior to joining BT Alex. Brown, Mr. Childress
was with Salomon Brothers Inc. for 11 years, part of which time was spent as the
manager of the firm's Chicago-based midwest municipal finance group. Mr.
Childress holds a B.A. in economics and political science from Stanford
University.
WILLIAM F. BRADLEY, JR. has served as our Secretary since May 1998,
General Counsel since July 1998 and Executive Vice President--Strategy, Policy &
Legal since January 1999. From May 1998 to February 1999, Mr. Bradley served as
one of our directors. He also serves as President, Chief Executive Officer and a
director of our subsidiary, Indian@ Interactive, Inc. Mr. Bradley is also the
General Manager for City-County Interactive, LLC, a subsidiary of Indian@
Interactive, Inc., which manages CivicNet for the city of Indianapolis and
Marion County, Indiana. From July 1989 to December 1994, Mr. Bradley was an
associate and later a law partner at Hinkle, Eberhart & Elkouri, LLC, a law firm
in Kansas. Mr. Bradley holds a B.A. in English from the University of Kansas,
Lawrence, and a J.D. degree from the University of Kansas School of Law.
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<PAGE>
SAMUEL R. SOMERHALDER has served as our Executive Vice President of
Operations and Administration since January 1999. From May 1998 to November
1998, Mr. Somerhalder served as one of our directors. He also serves as
President, Chief Executive Officer and a director of our subsidiary, Nebrask@
Interactive, Inc., which manages Nebraska Online for which he has served as the
General Manager since January 1995. From November 1994 to April 1996, he also
served as Secretary of Nebrask@ Interactive, Inc. Prior to joining us, Mr.
Somerhalder was the Senior Vice President of Marketing for First Commerce
Technologies, Inc., an information technology company, from October 1991 to
January 1995. Mr. Somerhalder holds a B.S. in business administration from
Kansas State University.
HARRY H. HERINGTON has served as our Executive Vice President of
Marketing and Technology Services since January 1999. He served as one of our
directors from May 1998 to February 1999. He also serves as President of
National Information Consortium USA, Inc., which manages GeorgiaNet, for which
Mr. Herington is the General Manager. From September 1995 to September 1996, Mr.
Herington served as the General Manager of Kansas Information Consortium, Inc.
Prior to accepting his present position with us, Mr. Herington was the Associate
General Counsel for the League of Kansas Municipalities from August 1992 to
September 1995. Mr. Herington holds a B.A. in photo journalism from Wichita
State University in Kansas and a J.D. degree from the University of Kansas
School of Law.
JOHN L. BUNCE, JR. has served as one of our directors since June 1998.
Mr. Bunce is a Managing Director and a member of the executive committee of
Hellman & Friedman LLC, a direct investment firm, which he joined as an
associate in 1988. Hellman & Friedman LLC is an affiliate of Hellman & Friedman
Capital Partners III, L.P., H&F Orchard Partners III, L.P. and H&F International
Partners III, L.P. Mr. Bunce also serves as a director of Western Wireless
Corporation, a cellular telecommunications company, Voicestream Wireless
Corporation, a telecommunications provider of personal communications services
(PCS), Bronner Slosberg Humphrey, Co., a direct marketing and interactive
agency, Falcon International Communications L.P., a cable company, and
MobileMedia Corporation, a paging and messaging services company. Mr. Bunce
holds a B.A. in international relations from Stanford University and an M.B.A.
from the Harvard Business School.
DANIEL J. EVANS has served as one of our directors since November 1998.
He is the chairman of and serves as a consultant for Daniel J. Evans Associates
Consulting, a consulting company in Washington, since May 1989. Mr. Evans
currently serves as a director of Puget Sound Energy, an investor-owned electric
utility company, Flow International, a robotics company, Western Wireless
Corporation, a wireless communications company, and Tera Computer, a computer
manufacturing company. He also served as a U.S. Senator from September 1983 to
January 1989 and the Governor of the State of Washington from January 1965 to
January 1977. Mr. Evans holds a B.S. and an M.S. in civil engineering from the
University of Washington.
ROSS C. HARTLEY, one of our founders, has served as one of our directors
since our formation. From its incorporation to March 1999, Mr. Hartley served as
Vice President of Marketing of Kansas Information Consortium, Inc. Mr. Hartley
also has served as President of The Hartley Insurance Group, an insurance
company in Kansas, since 1974. He also serves as a director of Empire District
Electric Company, an investor-owned electric utility company. Mr. Hartley holds
a B.S. in mathematics from Baker University in Baldwin City, Kansas and a J.D.
degree from the University of Kansas School of Law.
PATRICK J. HEALY has served as one of our directors since June 1998. Mr.
Healy is a Managing Director of Hellman & Friedman LLC, a direct investment
firm, having joined Hellman & Friedman LLC as an associate in 1994. Hellman &
Friedman LLC is an affiliate of Hellman & Friedman Capital Partners III, L.P.,
H&F Orchard Partners III, L.P. and H&F International Partners III, L.P.
Currently, he also serves as a director of Bronner Slosberg Humphrey, Co., a
direct marketing and interactive agency. Mr. Healy holds an A.B. in economics
from Harvard College and an M.B.A. from the Harvard Business School.
All directors hold office until the next annual meeting of the
shareholders and until their successors have been duly elected and qualified.
Executive officers are elected by and serve at the direction of the board of
directors.
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KEY EMPLOYEES
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- ------------------------------------------------------
<S> <C> <C>
Richard L. Brown............... 36 President, Chief Operating Officer and a director of
Utah Interactive, Inc.
Robert P. Chandler............. 39 President, Chief Executive Officer and a director of
Arkansas Information Consortium, Inc. and General
Manager of the Information Network of Arkansas
Tamara Dukes................... 36 President, Chief Executive Officer and a director of
New England Interactive, Inc. and General Manager of
InforME Network
Steven Gill.................... 38 Director of Finance of National Information Consortium
W. Kent Hiller................. 32 President, Chief Executive Officer and a director of
Iowa Interactive, Inc. and General Manager of
IOWAccess Network
Daniel Houlihan................ 53 President, Chief Executive Officer and a director of
Virginia Interactive, LLC and General Manager of
Virginia Information Providers Network
Debra Luling................... 32 President, Chief Executive Officer and a director of
Kansas Information Consortium, Inc. and General
Manager of the Information Network of Kansas
Joseph Nemelka................. 30 President of Market Development Division of National
Information Consortium and Chief Executive Officer and
a director of Utah Interactive, Inc.
Keith Schraad.................. 38 President of Georgia Division of National Information
Consortium USA and General Manager of GeorgiaNet
Authority
</TABLE>
- ------------------------
RICHARD L. BROWN has served since March 1999 as President, Chief
Operating Officer and a director of our subsidiary, Utah Interactive, Inc. Mr.
Brown served as the Director of Marketing and Operations of our subsidiary,
Indiana Interactive, Inc., from June 1998 to March 1999 and a marketing
executive from April 1998 to June 1998. Prior to joining us, Mr. Brown founded
and was Chief Executive Officer of Community Ventures in Living, Ltd., a
community-based non-profit organization in Indiana which assisted individuals
with disabilities. Mr. Brown holds a B.S. in economics from Purdue University.
ROBERT P. CHANDLER has served since March 1999 as President and Chief
Executive Officer of our subsidiary, Arkansas Information Consortium, Inc.,
which manages the Information Network of Arkansas for which he serves as the
General Manager. He also has served as Secretary and a director of Arkansas
Information Consortium, Inc., since January 1997. Prior to joining us, Mr.
Chandler served as a Territory Director of ALLTEL Information Services Inc., an
information services provider in the telecommunications and financial services
industries, from January 1994 to September 1996 and as the Director of Sales and
Marketing at the same company from May 1997 to February 1999. From October 1996
to April 1997, he served as the Director of Sales and Marketing for eCommLink,
Inc., a software solutions provider in the financial services industry, a
company for which he was also a founding member. Mr. Chandler holds a B.S. in
marketing from Kansas State University and an M.B.A. from the University of
Kansas School of Business.
TAMARA DUKES has served since March 1999 as President, Chief Executive
Officer and a director of our subsidiary, New England Interactive, Inc. which
manages Information Resource of Maine, for which she serves as the General
Manager. Ms. Dukes served as Director of Marketing for Access Indiana
Information Network from January 1998 through May 1998 and IOWAccess Network
from June 1998 through February 1999. Prior to joining us, Ms. Dukes founded
Tamara Downham Dukes Marketing Consultants, a marketing consulting company, in
1996, where she served as a principal from 1996 to January 1998. Additionally,
Ms. Dukes created, produced and sold radio advertising campaigns for WGLM
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Radio in Lafayette, Indiana from January 1995 to January 1998. Ms. Dukes holds a
B.A. in communication from Wheaton College.
STEVEN GILL has served as our Director of Finance since February 1999.
Prior to joining us, Mr. Gill spent 11 years with Payless ShoeSource, Inc., a
retail shoe company, where he served in various positions including, most
recently, Assistant Controller, and other positions including Director of
Financial Planning and Analysis, Functional Controller, Manager of Real Estate
and Construction Planning and Analysis, and Manager of Corporate Financial
Planning and Analysis. Mr. Gill holds a B.S. in statistics from Brigham Young
University and an M.B.A. from the Brigham Young University's Marriott Graduate
School of Management.
W. KENT HILLER has served since November 1997 as President, Chief
Executive Officer and a director of our subsidiary, Iowa Interactive, Inc.,
which manages the IOWAccess Network for which he serves as the General Manager.
From April 1996 to November 1997, he served as Director of Development for
Indiana Interactive, Inc. Prior to joining us, Mr. Hiller was a network
engineering manager for the state of Indiana from March 1995 to April 1996. From
January 1989 to March 1995, he held various positions in both engineering and
software development for the Space & Defense Group of The Boeing Company, an
aerospace company. Mr. Hiller holds a B.S. in mechanical engineering from Purdue
University and an M.B.A. from the Seattle University School of Business.
DANIEL HOULIHAN has served since September 1997 as President, Chief
Executive Officer and a director of our subsidiary, Virginia Interactive, LLC,
which manages Virginia Information Providers Network for which he serves as the
General Manager. From October 1996 to August 1997, Mr. Houlihan served as Vice
President of Operations for Kansas Information Consortium, Inc. Prior to joining
us, he served as Chief Information Officer from December 1995 to October 1996
and the Director of Information Services Division from June 1993 to December
1995 for the State of Indiana. Mr. Houlihan holds a B.A. in political science
from Creighton University and an M.B.A. with a specialization in information
systems from the Florida Institute of Technology.
DEBRA LULING has served since May 1998 as President, Chief Executive
Officer and a director of Kansas Information Consortium, Inc., which manages
Information Network of Kansas for which she serves as the General Manager. She
also served as the Director of Marketing from November 1996 to May 1998 and a
marketing representative from January 1996 November 1996 for Kansas Information
Consortium, Inc. Prior to joining us, Ms. Luling served from June 1993 to
December 1995 as the director of marketing activities for NewTek, Inc., a
computer hardware and software manufacturer in the desktop video industry, where
she oversaw the marketing and public relations efforts. Ms. Luling holds a B.S.
in journalism from the University of Kansas.
JOSEPH NEMELKA has served since March 1999 as President of our Market
Development Division. Mr. Nemelka also serves as Chief Executive Officer and a
director of our subsidiary, Utah Interactive, Inc. From July 1997 to March 1999,
he served as President and Chief Executive Officer of Arkansas Information
Consortium, Inc. Prior to joining us, Mr. Nemelka served as a marketing
associate for Kansas Information Consortium, Inc. from October 1995 to August
1996 and for Indiana Interactive, Inc. from August 1996 to October 1996. From
October 1996 to July 1997, he served as a project manager for the Georgia
division of our subsidiary National Information Consortium USA. Mr. Nemelka
holds a B.A. in political science from Brigham Young University and a J.D.
degree from the University of Kansas School of Law.
KEITH SCHRAAD has served since March 1999 as President of the Georgia
division of National Information Consortium/USA, which manages GeorgiaNet
Authority for which he serves as the General Manager. From October 1998 until
March 1999, he served as a project manager for National Information Consortium
USA. Additionally, from October 1997 to October 1998 he served as a marketing
associate for Kansas Information Consortium, Inc. Prior to joining us, Mr.
Schraad served as a Kansas State Senator and was an aide to U.S. Senator Robert
Dole. Mr. Schraad holds a B.A. in general studies from the University of Kansas
and a J.D. degree from the Washburn University School of Law.
51
<PAGE>
COMPOSITION OF THE BOARD OF DIRECTORS
Under our articles of incorporation and bylaws, the board of directors
has the power to set the number of directors at not less than three nor more
than 10. The number of members of the board of directors is currently set at
six. We intend to add one additional independent director prior to the closing
of this offering.
BOARD COMMITTEES
The board of directors has established a compensation committee and an
audit committee. The compensation committee, consisting of Messrs. Hartley and
Bunce, reviews and approves the salaries, bonuses and other compensation payable
to our executive officers and administers and makes recommendations concerning
our employee benefit plans.
The audit committee, consisting of Messrs. Hartley and Evans, and an
additional independent director to be elected prior to the closing of this
offering, recommends the selection of independent public accountants to the
board of directors, reviews the scope and results of the audit and other
services provided by our independent accountants, and reviews our accounting
practices and systems of internal accounting controls.
VOTING TRUST
As of March 31, 1999, a portion of our outstanding common stock,
totaling 31,896,145 shares and representing approximately 75.1% of the
outstanding common stock prior to the offering is held in a voting trust, for
which Messrs. Fraser and Hartley serve as trustees. The voting trust is selling
1,500,000 shares of common stock in this offering, which will reduce the number
of shares it holds to 30,396,145, or approximately 57.9% of our outstanding
common stock. A total of 24,170,249 shares (23,033,549 shares after the
offering, assuming a pro rata allocation of shares sold by the voting trust) in
the voting trust are held for the benefit of affiliates of our company. The
address of each of the trustees is c/o Jeffery S. Fraser, 1811 Wakarusa Drive,
Suite 100, Lawrence, Kansas 66047. The trustees have dispositive and exclusive
voting power over all shares held by the voting trust, including without
limitation, the right to vote for the election of directors, authorize an
amendment to the articles of incorporation or bylaws, and authorize a merger or
consolidation of the company. Additionally, the trustees are empowered to
perform any and all acts necessary and appropriate for the organization and
operation of the voting trust.
The voting trust certificates are transferable upon surrender of the
same according to the rules established by the trustees. The voting trust
expires on (a) June 30, 2018, (b) upon mutual assent of the trustees with
written notification to holders of the voting trust certificates, or (c) upon
deadlock between the trustees and failure to remedy the deadlock after 90 days.
DIRECTOR COMPENSATION
Directors who are also our employees currently receive no additional
compensation for their services as directors of our company. Directors who are
not our employees do not receive a fee for attendance in person at meetings of
the board of directors or committees of the board of directors, but are
reimbursed for travel expenses and other out-of-pocket costs incurred in
connection with their attendance of meetings.
In the past, Messrs. Fraser, Bradley, Somerhalder, Herington and Hartley
received consulting fees for their services, including serving as directors for
our subsidiaries.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of our compensation committee serves as a member of the board
of directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or compensation
committee.
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<PAGE>
There are no family relationships among any of our directors or
executive officers other than between Mr. Fraser and Mr. Somerhalder, who is Mr.
Fraser's brother-in-law.
EXECUTIVE COMPENSATION
The following table contains information in summary form concerning the
compensation paid to our chief executive officer and each of our most highly
compensated executive officers whose total salary, bonus and other compensation
exceeded $100,000 during the year ended December 31, 1998. In accordance with
the rules of the SEC, the compensation described in this table does not include
perquisites and other personal benefits received by the executive officers named
in the table below which do not exceed the lesser of $50,000 or 10% of the total
salary and bonus reported for these officers.
1998 SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ALL OTHER 1998
1998 ANNUAL COMPENSATION
COMPENSATION --------------------------
---------------------- TOTAL HEALTH CONSULTING
SALARY BONUS INSURANCE FEES 401(K) MATCH
--------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Jeffery S. Fraser ...................... $ 202,591 -- $ 13,799 $ 51,500 $ 2,733
Chairman and Chief Executive
Officer
William F. Bradley, Jr. ................ 110,509 -- 11,912 18,000 2,733
Secretary, General Counsel and
Executive Vice President--Strategy,
Policy & Legal
Samuel R. Somerhalder .................. 101,004 -- 13,758 12,000 2,733
Executive Vice President--
Operations and Administration
Harry H. Herington ..................... 83,999 -- 14,263 32,000 2,733
Executive Vice President--
Marketing and Technology Services
</TABLE>
- ------------------------
Consulting fees consist of fees we paid to the executive officers in the
table above for their services as directors of our subsidiaries, as well as for
business advisory services they performed for our subsidiaries.
Mr. Fraser served as a director of each of our subsidiaries. Mr. Bradley
served as a director of our subsidiary, Indian@ Interactive, Inc., and, briefly,
as a director of our subsidiary, Nebrask@ Interactive, Inc. Mr. Somerhalder
served as a director of our subsidiary, Nebrask@ Interactive, Inc. Mr. Herington
served as a director of our subsidiaries, Nebrask@ Interactive, Inc, Kansas
Information Consortium, Inc., Indian@ Interactive, Inc. and Arkansas Information
Consortium, Inc.
OPTION GRANTS AND EXERCISES DURING FISCAL 1998
No stock options were granted to or exercised by each of the executive
officers listed in the summary compensation table above during fiscal 1998.
AGGREGATED OPTION EXERCISES IN 1998 AND FISCAL YEAR END OPTION VALUES
None of the executive officers listed in the summary compensation table
above exercised or held options in 1998.
53
<PAGE>
EMPLOYMENT AGREEMENTS
JEFFERY S. FRASER
On July 24, 1998, Jeffery S. Fraser entered into an employment agreement
with us to serve as our President. Mr. Fraser currently serves as our Chairman
and Chief Executive Officer. The employment agreement provides Mr. Fraser with
an annual base salary of $249,000. Should we terminate Mr. Fraser's employment
without cause, before July 1, 2000, we must pay Mr. Fraser one year's base
salary in equal monthly payments on the first day of the month for each of the
twelve months following his termination. Should we terminate Mr. Fraser's
employment without cause after such time, but prior to July 1, 2001, we must pay
Mr. Fraser the equivalent of his base salary for the number of months remaining
until July 1, 2001. Should we terminate Mr. Fraser's employment without cause on
or after July 1, 2001, Mr. Fraser will not be entitled to severance pay, except
as provided in our severance benefit plan, if any, in effect on the termination
date. Cause is defined in the agreement as: (a) indictment or conviction for any
felony or crime involving dishonesty; (b) willful participation in any fraud
against us; (c) willful breach of Mr. Fraser's duties to us; (d) intentional
damage to any of our property; or (e) conduct by Mr. Fraser which our board of
directors determines to be inappropriate for his position.
Should we terminate Mr. Fraser's employment for cause, we must pay Mr.
Fraser all compensation due on the date of termination.
Under the terms of his agreement, Mr. Fraser may terminate his
employment with us in writing at any time for any reason. In connection with his
employment agreement, Mr. Fraser entered into a proprietary information and
inventions agreement and a non-competition agreement. Should Mr. Fraser's
employment with us terminate for any reason, the agreements provide collectively
that Mr. Fraser: (a) will not use any of our proprietary information without our
prior written consent; (b) will not use any confidential information to compete
against us or any of our employees; and (c) will not, for three years following
termination, solicit any of our employees or customers.
JAMES B. DODD
On January 1, 1999, James B. Dodd entered into an employment agreement
with us to serve as our President and Chief Operating Officer. This agreement
provides Mr. Dodd with an annual base salary of $200,000. Should we terminate
Mr. Dodd's employment without cause, as similarly defined in Mr. Fraser's
employment agreement, before January 1, 2002, we must pay Mr. Dodd his
then-current salary in equal monthly payments on the first day of the month for
each of the eighteen months following his termination. Should we terminate Mr.
Dodd's employment without cause on or after January 1, 2002, Mr. Dodd will not
be entitled to severance pay, except as provided in our severance benefit plan,
if any, in effect on the termination date.
Should we terminate Mr. Dodd's employment for cause, we must pay Mr.
Dodd all compensation due on the date of termination.
Under the terms of his agreement, Mr. Dodd may terminate his employment
with us in writing at any time for any reason. In connection with his employment
agreement, Mr. Dodd entered into a proprietary information and inventions
agreement and a non-competition agreement. Should Mr. Dodd's employment with us
terminate for any reason, the agreements provide collectively that Mr. Dodd: (a)
will not use any of our proprietary information without our prior written
consent; (b) will not use any confidential information to compete against us or
any of our employees; and (c) will not, for three years following termination,
solicit any of our employees or customers.
KEVIN C. CHILDRESS
On May 16, 1999, Kevin C. Childress entered into an employment agreement
with us to serve as our Chief Financial Officer. This agreement provides Mr.
Childress with an annual base salary of $175,000. Should we terminate Mr.
Childress' employment without cause, as similarly defined in Mr. Fraser's
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<PAGE>
employment agreement, before May 16, 2002, we must pay Mr. Childress his
then-current salary in equal monthly payments on the first day of the month for
each of the eighteen months following his termination. Should we terminate Mr.
Childress' employment without cause on or after May 16, 2002, Mr. Childress will
not be entitled to severance pay, except as provided in our severance benefit
plan, if any, in effect on the termination date.
Should we terminate Mr. Childress' employment for cause, we must pay Mr.
Childress all compensation due on the date of termination.
Under the terms of his agreement, Mr. Childress may terminate his
employment with us in writing at any time for any reason. In connection with his
employment agreement, Mr. Childress entered into a proprietary information and
inventions agreement and a non-competition agreement. Should Mr. Childress'
employment with us terminate for any reason, the agreements provide collectively
that Mr. Childress: (a) will not use any of our proprietary information without
our prior written consent; (b) will not use any confidential information to
compete against us or any of our employees; and (c) will not, for three years
following termination, solicit any of our employees or customers.
WILLIAM F. BRADLEY, JR.
On July 24, 1998, William F. Bradley Jr., entered into an employment
agreement with us to serve as our Subsidiary President. In addition Mr. Bradley
serves as our Secretary, General Counsel, and Executive Vice President of
Strategy, Policy & Legal. The employment agreement provides Mr. Bradley with an
annual base salary of $140,000. Should we terminate Mr. Bradley's employment
without cause, as similarly defined in Mr. Fraser's employment agreement, before
July 1, 2000, we must pay Mr. Bradley one year's base salary in equal monthly
payments on the first day of the month for each of the twelve months following
his termination. Should we terminate Mr. Bradley's employment without cause
after such time, but prior to July 1, 2001, we must pay Mr. Bradley the
equivalent of his base salary for the number of months remaining until July 1,
2001. Should we terminate Mr. Bradley's employment without cause on or after
July 1, 2001, Mr. Bradley will not be entitled to severance pay, except as
provided in our severance benefit plan, if any, in effect on the termination
date.
Should we terminate Mr. Bradley's employment for cause, we must pay Mr.
Bradley all compensation due on the date of termination.
Under the terms of his agreement, Mr. Bradley may terminate his
employment with us in writing at any time for any reason. In connection with his
employment agreement, Mr. Bradley entered into a proprietary information and
inventions agreement and a non-competition agreement. Should Mr. Bradley's
employment with us terminate for any reason, the agreements provide collectively
that Mr. Bradley: (a) will not use any of our proprietary information without
our prior written consent; (b) will not use any confidential information to
compete against us or any of our employees; and (c) will not, for three years
following termination, solicit any of our employees or customers.
SAMUEL R. SOMERHALDER
On July 24, 1998, Samuel R. Somerhalder entered into an employment
agreement with us to serve as our Subsidiary President. In addition, Mr.
Somerhalder serves as our Executive Vice President of Operations and
Administration. The employment agreement provides Mr. Somerhalder with an annual
base salary of $115,000. Should we terminate Mr. Somerhalder's employment
without cause, as similarly defined in Mr. Fraser's employment agreement, before
July 1, 2000, we must pay Mr. Somerhalder one year's base salary in equal
monthly payments on the first day of the month for each of the twelve months
following his termination. Should we terminate Mr. Somerhalder's employment
without cause after such time, but prior to July 1, 2001, we must pay Mr.
Somerhalder the equivalent of his base salary for the number of months remaining
until July 1, 2001. Should we terminate Mr. Somerhalder's employment without
cause on or after July 1, 2001, Mr. Somerhalder will not be entitled to
severance pay, except as provided in our severance benefit plan, if any, in
effect on the termination date.
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<PAGE>
Should we terminate Mr. Somerhalder's employment for cause, we must pay
Mr. Somerhalder all compensation due on the date of termination.
Under the terms of his agreement, Mr. Somerhalder may terminate his
employment with us in writing at any time for any reason. In connection with his
employment agreement, Mr. Somerhalder entered into a proprietary information and
inventions agreement and a non-competition agreement. Should Mr. Somerhalder's
employment with us terminate for any reason, the agreements provide collectively
that Mr. Somerhalder: (a) will not use any of our proprietary information
without our prior written consent; (b) will not use any confidential information
to compete against us or any of our employees; and (c) will not, for three years
following termination, solicit any of our employees or customers.
HARRY H. HERINGTON
On July 24, 1998, Harry H. Herington entered into an employment
agreement with us to serve as our Subsidiary President. In addition, Mr.
Herington serves as our Executive Vice President of Marketing and Technology
Services. The employment agreement provides Mr. Herington with an annual base
salary of $125,000. Should we terminate Mr. Herington's employment without
cause, as similarly defined in Mr. Fraser's employment agreement, before July 1,
2000, we must pay Mr. Herington one year's base salary in equal monthly payments
on the first day of the month for each of the twelve months following his
termination. Should we terminate Mr. Herington's employment without cause after
such time, but prior to July 1, 2001, we must pay Mr. Herington the equivalent
of his base salary for the number of months remaining until July 1, 2001. Should
we terminate Mr. Herington's employment without cause on or after July 1, 2001,
Mr. Herington will not be entitled to severance pay, except as provided in our
severance benefit plan, if any, in effect on the termination date.
Should we terminate Mr. Herington's employment for cause, we must pay
Mr. Herington all compensation due on the date of termination.
Under the terms of his agreement, Mr. Herington may terminate his
employment with us in writing at any time for any reason. In connection with his
employment agreement, Mr. Herington entered into a proprietary information and
inventions agreement and a non-competition agreement. Should Mr. Herington's
employment with us terminate for any reason, the agreements provide collectively
that Mr. Herington: (a) will not use any of our proprietary information without
our prior written consent; (b) will not use any confidential information to
compete against us or any of our employees; and (c) will not, for three years
following termination, solicit any of our employees or customers.
BENEFIT PLANS
AMENDED AND RESTATED 1998 STOCK OPTION PLAN
The 1998 plan was adopted and approved by our board of directors and by
our shareholders in May 1998, at which time a total of 4,643,377 shares of
common stock were reserved for issuance under this plan. In November 1998, the
1998 plan was amended to reserve a total of 7,893,741 shares of common stock for
issuance under this plan. In May 1999, the 1998 plan was amended to reserve a
total of 9,286,754 shares of common stock for issuance under this plan. At March
31, 1999, options to purchase 69,302 shares of common stock granted under the
1998 plan had been exercised, options to purchase 2,514,003 shares of common
stock were outstanding and options to purchase 6,703,449 shares of common stock
remained available for grant. The outstanding options were exercisable at a
weighted average exercise price of $1.44 per share. Outstanding options to
purchase an aggregate of 1,211,085 shares were held by employees who are not
officers or directors of our company.
Our board of directors has delegated administration of the 1998 plan to
its compensation committee. The compensation committee is made up of not less
than two nor more than five non-employee directors within the meaning under Rule
16b-3 of the Exchange Act. Awards under the 1998 plan may consist of incentive
stock options, which are stock options that qualify under Section 422 of
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<PAGE>
the Internal Revenue Code, or non-qualified stock options, which are stock
options that do not qualify under that provision.
The compensation committee may grant incentive stock options to
employees and officers of our company or any of our subsidiaries, and
non-qualified stock options to employees, officers or directors of our company
or any of our subsidiaries. The compensation committee may set the terms of such
grants, subject to the restrictions in the 1998 plan. Incentive stock option
grants are subject to the following limitations:
- the term of any incentive stock option may not be longer than ten
years;
- the term of any incentive stock option granted to an individual
possessing more than 10% of the combined voting power of our company
or a subsidiary may not be longer than five years;
- the aggregate fair market value of all shares underlying incentive
stock options granted to an individual that first become exercisable
in any calendar year may not exceed $100,000;
- the exercise price of incentive stock options may not be less than the
greater of the par value of the underlying shares or the fair market
value of the underlying shares on the grant date; and
- the exercise price of any incentive stock option granted to an
individual possessing more than 10% of the combined voting power of
our company or a subsidiary may not be less than 110% of the fair
market value of the underlying shares on the grant date.
During an optionee's lifetime, only an optionee can exercise an
incentive stock option or non-qualified stock option. He or she cannot transfer
such options other than by will or the laws of descent and distribution. If an
optionee's status as an employee or director of our company or any of our
subsidiaries terminates for any reason other than termination because of death,
disability, for cause or on account of voluntary termination, then the optionee
may exercise, in the 30 day period following the termination, that portion of
the options that is exercisable at the time of the termination unless such
options terminate or expire sooner by their terms. If an optionee's employment
by our company or any of our subsidiaries is terminated for cause, as defined in
the 1998 plan, or if an optionee voluntarily terminates his or her employment
with our company or with any of our subsidiaries, then any option held by the
optionee shall be terminated immediately and forfeited without any payment from
our company or our subsidiaries. In the event the optionee becomes disabled or
dies while the optionee is an employee or director of our company, then the
options vested as of the date of disability or death may be exercised prior to
the earlier of their expiration date or 12 months from the date of the
optionee's disability or death.
In the event of (a) a merger, consolidation or reorganization in which
we are not the surviving company or (b) the acquisition by another company of
all or substantially all of our assets, then every option outstanding under the
1998 plan may be assumed or replaced with new options of comparable value by the
surviving, continuing, successor or acquiring company. In the event that the
outstanding options are neither assumed nor replaced, the compensation committee
may provide that an optionee can exercise his or her options within the period
of 30 days prior to the merger, consolidation, reorganization or acquisition.
Additionally, in connection with change of control situations in which a person,
other than one of our shareholders, directors or officers, acquires greater than
50% of the combined voting power of the company or less than a majority of the
directors are persons who were nominated or selected by our board of directors,
the compensation committee may accelerate the time at which options granted
under the 1998 plan may be exercised by an optionee.
The 1998 plan will terminate automatically in 2008 unless sooner
terminated by the board of directors. The board of directors has the authority
to amend, suspend or terminate the 1998 plan, subject to shareholder approval of
some of the amendments. However, no action may be taken which will affect
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any shares of common stock previously issued and sold or any option previously
granted under the 1998 plan without the optionee's consent.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our stock purchase plan was approved by the board of directors and our
shareholders in May 1999. Our stock purchase plan is intended to qualify as an
employee stock purchase plan under Section 423 of the Internal Revenue Code in
order to provide our employees with an opportunity to purchase our stock through
payroll deductions. An aggregate of 2,321,688 shares of common stock has been
reserved for issuance and are available for purchase under the stock purchase
plan, subject to adjustment in the event of a stock split, stock dividend or
other similar change in our common stock or our capital structure. All employees
of our company and of our affiliates who have been employed for a continuous
period, as determined by the board or committee administering the stock purchase
plan but which will not exceed two years, preceding the offering are eligible to
participate in our stock purchase plan, provided that no employee of our company
or of our affiliates whose customary employment is for less than five months in
any calendar year and less than 20 hours per week are eligible to participate in
our stock purchase plan. Non-employee directors, consultants, and employees
subject to the rules or laws of a foreign jurisdiction that prohibit or make
impractical their participation in a stock purchase plan are not eligible to
participate in our stock purchase plan. Participation in our stock purchase plan
is also subject to the following limitations: (a) no employee will be eligible
for the grant of a stock purchase right if immediately after the right is
granted the employee would own more than five percent of the total combined
voting power of all of our or our affiliates' classes of stock, and (b) an
eligible employee may be granted a purchase right only to the extent that the
right does not permit the employee to purchase stock with a fair market value of
greater than $25,000 for each calendar year.
Our stock purchase plan will be administered by the board of directors
or a committee appointed by the board consisting of three or more board members.
The committee will have complete authority to determine the employees who will
receive stock purchase rights and will designate offering periods not to exceed
27 months. The committee will establish one or more purchase dates during an
offering period during which stock purchase rights may be exercised and common
stock may be purchased.
In the event we dissolve, liquidate, merge or consolidate through a
merger in which we are not the surviving corporation, effectuate a reverse
merger in which we are the surviving corporation but our shares of common stock
outstanding prior to the merger are converted into other property, whether in
the form of securities, cash or otherwise, or are acquired by any person, entity
or group, as defined by the Exchange Act or any successive provisions, holding
at least 50% of our combined voting power, then, the board or committee
administering the stock purchase plan may (a) allow the surviving or acquiring
corporation to assume the outstanding rights or substitute similar rights for
those participating under the stock purchase plan, (b) have the existing rights
under the stock purchase plan remain in full force and effect or (c) allow those
participating under the stock purchase plan to use their accumulated payroll
deductions to purchase our common stock immediately prior to the transactions
described above, provided that their rights under the ongoing offering period
will be terminated.
On the first day of each offer period, a participating employee is
granted a purchase right. A purchase right is a form of option to be
automatically exercised on the forthcoming exercise dates within the offer
period during which authorized deductions are to be made from the pay of
participants and credited to their accounts under the stock purchase plan. When
the purchase right is exercised, the participant's withheld salary is used to
purchase our shares of common stock. The price per share at which our shares of
common stock are to be purchased under the stock purchase plan during any
offering period is the lesser of (a) 85% of the fair market value of our common
stock on the date of the commencement of the offer period or (b) 85% of the fair
market value of our common stock on the purchase date. The participant's
purchase right is exercised in this manner on each exercise date arising in the
offer period unless, on any purchase date, the fair market value of our common
stock is lower than the fair market value of our common stock on the first day
of the offering period. If so, the participant's participation in
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<PAGE>
the original offering period is terminated, and the participant is automatically
enrolled in the next offering period which will commence on the next day.
Payroll deductions may range up to 15% of a participant's regular base
pay, exclusive of bonuses, overtime, shift-premiums, commissions, reimbursements
or other expense allowances. Participants may not make direct cash payments to
their accounts. The board or committee administering the stock purchase plan may
establish the maximum number of our shares of common stock that any employee may
purchase under the stock purchase plan during an offering period. The Internal
Revenue Code imposes additional limitations on the amount of common stock that
may be purchased during any calendar year.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our articles of incorporation and bylaws provide that we will indemnify
any person entitled to indemnity under the Colorado Business Corporation Act, as
it now exists or as amended, against all liability and expenses to the fullest
extent permitted by Colorado law. However, we will not indemnify any person in
connection with any proceeding initiated by this person, unless the proceeding
is authorized by a majority of our board of directors. In addition to
indemnification provided for in our charter documents, upon the closing of this
offering, we will have entered into agreements to indemnify our directors and
officers. To the fullest extent permitted by the Colorado Business Corporation
Act, these agreements, among other things, provide for the indemnification of
our directors and officers for some of the expenses, including attorneys' fees,
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by us or in the right of the company,
arising out of such person's services as one of our directors or officers, any
of our subsidiaries or any other company or enterprise to which such person
provides services at our request. Furthermore, we plan to purchase and maintain
insurance on behalf of our directors and officers to insure them against
liabilities that they may incur in their capacities as or arising out of their
status as directors and officers. We believe that these provisions and
agreements will assist us in attracting and retaining qualified persons to serve
as directors and officers.
Section 7-109-102 of the Colorado Business Corporation Act provides that
a corporation may indemnify a director from liability incurred in connection
with a proceeding in which the director is made a party because of his or her
status as a director, except upon adjudication in connection with the particular
proceeding that (a) the director was liable to the corporation or (b) the
director was liable because he or she derived an improper personal benefit.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted for our directors and officers under the provisions
contained in our charter documents, the Colorado Business Corporation Act or
otherwise, we have been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities, other than the payment by us of expenses incurred or
paid by one of our directors or officers, the successful defense of any action,
suit, or proceeding is asserted by such director or officer, we will submit to a
court of appropriate jurisdiction the question whether such indemnification by
us is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue, unless in the opinion of our
counsel the matter has been settled by controlling precedent.
There is no pending litigation or proceeding involving one of our
directors or officers as to which indemnification is being sought, nor are we
aware of any pending or threatened litigation that may result in claims for
indemnification by any director or officer.
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<PAGE>
CERTAIN TRANSACTIONS
Mr. Hartley, one of our founders, is the President of The Hartley
Insurance Agency, an insurance company, which acts as our insurance agent and
broker. In 1998, a payment of $8,345 was made directly to The Hartley Insurance
Agency. However, the aggregate insurance payment we made that was brokered by
The Hartley Insurance Agency totaled $478,392, including the $8,345 payment made
directly to The Hartley Insurance Agency.
We have periodically leased aircraft from Sky King Leasing, a Kansas
corporation, of which Mr. Fraser, one of our founders, Mr. Hartley and
Christopher L. Shults, one of our five percent shareholders, each approximately
have a 25% interest. In 1998, we made payments totaling $24,223 to Sky King
Leasing.
On January 8, 1998, we entered into an agreement with each of Messrs.
Fraser and Hartley to provide their respective estates with a right to require
us to repurchase some or all shares of our common stock owned by them upon their
death. These agreements were terminated on July 1, 1998.
In March 1998, we completed an exchange offer in which shareholders in
our local operating networks exchanged their stock for shares of our common
stock. Messrs. Fraser, Hartley, Bradley, Somerhalder and Herington received an
aggregate of 21,614,414 shares of our common stock in the exchange offer.
On June 30, 1998, Messrs. Fraser and Hartley entered into a voting trust
agreement under which they act as joint trustees for a voting trust which holds,
as of March 31, 1999, 31,896,145 shares of our common stock. See "Description of
Capital Stock--Voting Trust."
On June 30, 1998, the voting trust described above sold to Hellman &
Friedman Capital Partners III, L.P. and its affiliates H&F International
Partners III, L.P. and H&F Orchard Partners III, L.P., collectively, 10,516,547
shares of our common stock at a price of $1.43 per share for an aggregate of
approximately $15,000,000. In connection with this sale, we entered into an
investor rights agreement with Hellman & Friedman and its affiliates in which we
granted them rights to register shares of our common stock in the future. See
"Description of Capital Stock" for a more detailed description.
On December 31, 1998, we issued to Mr. James B. Dodd options to purchase
1,393,013 shares of our common stock at an exercise price of $1.44 per share.
This grant resulted in a noncash compensation charge of $197,660 to us for the
period ended December 31, 1998, based on the difference between the exercise
price and the fair value of our common stock on the date of the grant. We will
take an additional compensation charge of approximately $1.9 million for this
grant, amortized over a four year period. On February 9, 1999, we sold to Mr.
Dodd 173,258 shares of our common stock at $1.44 per share for an aggregate of
approximately $250,000. A compensation charge of $620,888 was taken by us in
connection with this stock purchase.
On May 16, 1999, we sold to Kevin C. Childress 23,727 shares of our
common stock at $5.27 per share for an aggregate of approximately $125,000. A
compensation charge of $84,826 was taken by us in connection with this stock
purchase. Additionally, we issued to Mr. Childress options to purchase 696,511
shares of our common stock at an exercise price of $5.27 per share. This grant
resulted in a noncash compensation charge of $249,000 to us for the period ended
June 30, 1999 based on the difference between the exercise price and the fair
value of our common stock on the date of the grant. We will take an additional
compensation charge of approximately $2.2 million for this grant, amortized over
a four to five year period.
We intend to enter into indemnification agreements with each of our
directors and officers. These indemnification agreements will require us to
indemnify these individuals to the fullest extent permitted by Colorado law.
We have also entered into various employment agreements with our
officers. See "Management-- Employment Agreements" for a more detailed
description.
We believe that all of the transactions set forth above were made on
terms no less favorable to us than could have been obtained from unaffiliated
third parties. We intend that all future transactions,
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<PAGE>
including loans, between us and our officers, directors, principal shareholders
and their affiliates will be approved by a majority of the board of directors,
including a majority of the independent and disinterested outside directors on
the board of directors, and will be on terms no less favorable to us than could
be obtained from unaffiliated third parties.
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth the beneficial ownership of our common
stock as of March 31, 1999 and as adjusted to reflect the sale of the shares of
common stock in this offering by:
- each person or entity known by us to own beneficially more than five
percent of our common stock;
- our chief executive officer, each of the executive officers named in
the summary compensation table and each of our directors;
- all of our executive officers and directors as a group; and
- all other selling shareholders.
The Beneficial ownership is calculated based on 42,481,996 shares of our
common stock outstanding as of March 31, 1999 and 52,481,996 shares outstanding
immediately following the completion of this offering. Beneficial ownership is
determined in accordance with the rules of the SEC and generally includes voting
or investment power with respect to securities. Unless otherwise indicated, each
person or entity named in the table has sole voting power and investment power,
or shares voting and investment power with his or her spouse, with respect to
all shares of capital stock listed as owned by such person. Shares issuable upon
the exercise of options that are currently exercisable or become exercisable
within sixty days of March 31, 1999 are considered outstanding for the purpose
of calculating the percentage of outstanding shares of our common stock held by
the individual, but not for the purpose of calculating the percentage of
outstanding shares of our common stock held by any other individual.
The number of shares being offered and shares beneficially owned after
the offering assume a pro rata allocation among beneficiaries of the voting
trust of the 1,500,000 shares being sold by the voting trust and a pro rata
allocation among the Hellman & Friedman entities of the aggregate of 1,500,000
shares those entities are selling in the offering.
The address of each of the executive officers and directors is c/o
National Information Consortium, Inc., 12 Corporate Woods, 10975 Benson Street,
Suite 390, Overland Park, Kansas 66210.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
SHARES BENEFICIALLY OWNED OWNED AFTER
PRIOR TO OFFERING OFFERING
----------------------------- NUMBER OF SHARES -----------
NAME AND ADDRESS NUMBER PERCENTAGE BEING OFFERED NUMBER
- ----------------------------------------------------------- ------------- -------------- ----------------- -----------
<S> <C> <C> <C> <C>
5% SHAREHOLDERS
Jeffery S. Fraser and Ross C. Hartley, co-trustees of
National Information Consortium Voting Trust, dated June
30, 1998 c/o Jeffery S. Fraser
1811 Wakarusa Drive, Suite 100
Lawrence, KS 66047....................................... 31,896,145 75.1% 1,500,000 30,396,145
Hellman & Friedman Capital Partners III, L.P. c/o Hellman &
Friedman LLC
One Maritime Plaza
San Francisco, CA 94111.................................. 9,601,607 22.6 1,369,200 8,232,407
H&F Orchard Partners III, L.P.
c/o Hellman & Friedman LLC
One Maritime Plaza
San Francisco, CA 94111.................................. 704,609 1.7 100,800 603,809
H&F International Partners III, L.P
c/o Hellman & Friedman LLC
One Maritime Plaza
San Francisco, CA 94111.................................. 210,331 * 30,000 180,331
Christopher L. and Linda D. Shults
633 North Wheatland Place
Wichita, KS 67235........................................ 2,229,851 5.2 104,850 2,125,001
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Jeffery S. Fraser.......................................... 31,896,145 75.1 1,500,000 30,396,145
James B. Dodd.............................................. 303,272 * 8,100 295,172
William F. Bradley, Jr..................................... 2,132,679 5.0 100,350 2,032,329
Samuel R. Somerhalder...................................... 2,345,123 5.5 110,250 2,234,873
Harry H. Herington......................................... 1,202,021 * 56,550 1,145,471
John L. Bunce, Jr.......................................... 10,516,547 24.8 1,500,000 9,016,547
Daniel J. Evans............................................ 69,302 * -- 69,302
<CAPTION>
NAME AND ADDRESS PERCENTAGE
- ----------------------------------------------------------- ---------------
<S> <C>
5% SHAREHOLDERS
Jeffery S. Fraser and Ross C. Hartley, co-trustees of
National Information Consortium Voting Trust, dated June
30, 1998 c/o Jeffery S. Fraser
1811 Wakarusa Drive, Suite 100
Lawrence, KS 66047....................................... 57.9%
Hellman & Friedman Capital Partners III, L.P. c/o Hellman &
Friedman LLC
One Maritime Plaza
San Francisco, CA 94111.................................. 15.7
H&F Orchard Partners III, L.P.
c/o Hellman & Friedman LLC
One Maritime Plaza
San Francisco, CA 94111.................................. 1.2
H&F International Partners III, L.P
c/o Hellman & Friedman LLC
One Maritime Plaza
San Francisco, CA 94111.................................. *
Christopher L. and Linda D. Shults
633 North Wheatland Place
Wichita, KS 67235........................................ 4.1
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Jeffery S. Fraser.......................................... 57.9
James B. Dodd.............................................. *
William F. Bradley, Jr..................................... 3.9
Samuel R. Somerhalder...................................... 4.3
Harry H. Herington......................................... 2.2
John L. Bunce, Jr.......................................... 17.2
Daniel J. Evans............................................ *
</TABLE>
62
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Ross C. Hartley............................................ 31,896,145 75.1 1,500,000 30,396,145
Patrick J. Healy........................................... 10,516,547 24.8 1,500,000 9,016,547
All executive officers and directors as a group (10
persons)................................................. 42,612,010 100.0 3,000,000 39,612,010
<CAPTION>
Ross C. Hartley............................................ 57.9
Patrick J. Healy........................................... 17.2
All executive officers and directors as a group (10
persons)................................................. 75.3
</TABLE>
- ------------------------------
* Less than 1%.
For a description of the voting trust and the rights and powers of the
trustees, see "Description of Capital Stock--Voting Trust."
H&F Investors III, a California general partnership, is the sole general
partner of Hellman & Friedman Capital Partners III, L.P., a California limited
partnership, H&F Orchard Partners III, L.P., a California limited partnership,
and H&F International Partners III, L.P., a California limited partnership.
Messrs. Bunce and Healy are Managing Directors of Hellman & Friedman LLC, an
affiliate of H&F Investors III. The managing general partner of H&F Investors
III is Hellman & Friedman Associates III, L.P., a California limited
partnership, and the general partners of Hellman & Friedman Associates III are
H&F Management III, L.L.C., a California limited liability company, and H&F
Investors III, Inc., a California corporation. The sole shareholder of H&F
Investors III, Inc. is the Hellman Family Revocable Trust. The investment
decisions of H&F Investors III, Inc. and H&F Management III, L.L.C. are made by
an executive committee, of which Mr. Bunce is a member. The executive committee
indirectly exercises voting and investment power with respect to the shares of
our common stock held by Hellman & Friedman Capital Partners III, H&F Orchard
Partners III and H&F International Partners III, and could be deemed to
beneficially own such shares. The executive committee disclaims such beneficial
ownership except to the extent of its indirect pecuniary interest in such
shares.
Shares held by Mr. Bunce and Mr. Healy consist of shares owned by
Hellman & Friedman Capital Partners III, L.P., H&F Orchard Partners III, L.P.
and H&F International Partners III, L.P. Mr. Bunce and Mr. Healy each disclaim
beneficial ownership of all shares of our common stock held by Hellman &
Friedman Capital Partners III, H&F Orchard Partners III and H&F International
Partners III, except to the extent of their individual indirect pecuniary
interest in those shares.
Shares held by Mr. and Mrs. Shults include 2,229,851 shares held for the
benefit of Mr. and Mrs. Shults in the voting trust for which Messrs. Fraser and
Hartley act as co-trustees.
Shares held by Mr. Fraser include 24,445,425 shares held in the voting
trust for which Mr. Fraser acts as a co-trustee and 7,450,720 shares held in the
voting trust of which a family trust established for the benefit of Mr. Fraser
is the beneficial owner.
Shares held by Mr. Dodd include 173,258 shares held for the benefit of
Mr. Dodd in the voting trust for which Messrs. Fraser and Hartley act as
co-trustees and 130,014 shares subject to options exercisable within 60 days of
March 31, 1999.
Shares held by Mr. Bradley include 2,132,679 shares held for the benefit
of Mr. Bradley in the voting trust for which Messrs. Fraser and Hartley act as
co-trustees.
Shares held by Mr. Somerhalder include 2,345,123 shares held for the
benefit of Mr. Somerhalder or his wife in the voting trust for which Messrs.
Fraser and Hartley act as co-trustees. These shares include 206,630 shares held
by Mr. Somerhalder's wife, Jean Somerhalder, as custodian to Chloe V. Fraser,
206,630 shares held by Mrs. Somerhalder as custodian to Jacob B. Fraser, 206,630
shares held by Mrs. Somerhalder as custodian to Joshua D. Fraser, 206,630 shares
held by Mrs. Somerhalder as custodian to Matthew S. Fraser and 206,630 shares
held by Mrs. Somerhalder as custodian to William N. Fraser.
Shares held by Mr. Herington include 1,202,021 shares held for the
benefit of Mr. Herington in the voting trust for which Messrs. Fraser and
Hartley act as co-trustees.
Shares held by Mr. Evans include 41,442 shares held in the Evans family
revocable trust.
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<PAGE>
Shares held by Mr. Hartley include 23,412,278 shares held in the voting
trust for which Mr. Hartley acts as a co-trustee and 8,483,867 shares held for
the benefit of Mr. Hartley or his children in the voting trust. Shares held for
the benefit of Mr. Hartley or his children include 371,470 shares held in an
irrevocable trust established for the benefit of Hillary L. Hartley, 371,470
shares held in an irrevocable trust established for the benefit of Antonia C.
Hartley and 371,470 shares held in an irrevocable trust established for the
benefit of William R. Hartley.
Shares held by all executive officers and directors as a group include
31,896,145 shares held in the voting trust for which Messrs. Fraser and Hartley
act as co-trustees and 130,014 shares subject to options exercisable within 60
days of March 31, 1999.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue up to 200,000,000 shares of common stock,
with no par value per share.
The following summary of certain provisions of our common stock does not
purport to be complete and is subject to, and qualified in its entirety by, the
provisions of our articles of incorporation, which are included as an exhibit to
the registration statement of which this prospectus is a part, and by the
provisions of applicable law.
COMMON STOCK
As of March 31, 1999, there were 42,481,996 shares of common stock
outstanding that were held of record or beneficially through a voting trust by
approximately 53 persons. There will be 52,481,996 shares of common stock
outstanding, assuming no exercise of the underwriters' over-allotment option and
no exercise of outstanding options, after giving effect to the sale of the
common stock we are offering.
The holders of our common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the shareholders. We do not
have cumulative voting rights in the election of directors, and accordingly,
holders of a majority of the shares voting are able to elect all of the
directors. Subject to preferences that may be granted to any then outstanding
preferred stock, holders of common stock are entitled to receive ratably such
dividends as may be declared by the board of directors out of funds legally
available for such purpose as well as any distributions to the shareholders. In
the event of our liquidation, dissolution or winding up, holders of common stock
are entitled to share ratably in all of our assets remaining after payment of
liabilities and the liquidation preference of any then outstanding preferred
stock. Holders of common stock have no preemptive or other subscription of
conversion rights. There are no redemption or sinking fund provisions applicable
to the common stock.
VOTING TRUST
As of March 31, 1999, a portion of our outstanding common stock,
totaling 31,896,145 shares and representing approximately 75.1% of the
outstanding common stock prior to the offering, is held in a voting trust, for
which Messrs. Fraser and Hartley serve as trustees. The voting trust is selling
1,500,000 shares of common stock in this offering, which will reduce the number
of shares it holds to 30,396,145, or approximately 57.9% of our outstanding
common stock. A total of 24,170,249 shares (23,033,549 shares after the
offering, assuming a pro rata allocation of shares sold by the voting trust) in
the voting trust are held for the benefit of affiliates of our company. The
address of each of the trustees is c/o Jeffery S. Fraser, 1811 Wakarusa Drive,
Suite 100, Lawrence, Kansas 66047. The trustees have dispositive and exclusive
voting power over all shares held by the voting trust, including without
limitation, the right to vote for the election of directors, authorize an
amendment to the articles of incorporation or bylaws, and authorize a merger or
consolidation of the company. Additionally, the trustees are empowered to
perform any and all acts necessary and appropriate for the organization and
operation of the voting trust.
The voting trust certificates are transferable upon surrender of the
same according to the rules established by the trustees. The voting trust
expires on (a) June 30, 2018, (b) upon mutual assent of the trustees with
written notification to holders of the voting trust certificates or (c) upon
deadlock between the trustees and failure to remedy the deadlock after 90 days.
REGISTRATION RIGHTS
According to an investor rights agreement between us and one of our
shareholders, Hellman & Friedman, and its affiliates, H&F International Partners
and H&F Orchard Partners, after the closing of the offering, Hellman & Friedman
and its affiliates will be entitled to demand that we file a registration
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<PAGE>
statement with respect to the registration of shares of our common stock under
the Securities Act. We are not required to effect:
- more than two registrations;
- a registration during the 180 day period following the effective date
of this registration statement; or
- a registration for a period not to exceed 90 days, if our board of
directors has made a good faith determination that it would be
seriously detrimental to us and our shareholders for a registration
statement to be filed.
Furthermore, according to the terms of this investor rights agreement,
after the closing of this offering, Hellman & Friedman and its affiliates will
be entitled to piggyback registration rights in connection with any registration
by us of our securities for our own account or the account of other
shareholders. In the event that we propose to register any shares of common
stock under the Securities Act, the holders of the piggyback registration rights
are entitled to receive notice and are entitled to include their shares of
common stock in the registration statement.
At any time after we become eligible to file a registration statement on
Form S-3, Hellman & Friedman and its affiliates also may require us to file an
unlimited number of registration statements on Form S-3 under the Securities Act
with respect to their shares of common stock. We are not required to effect more
than two such registrations in any twelve-month period.
The registration rights of Hellman & Friedman and its affiliates
terminate on the earlier of (a) the fifth anniversary of the date of this
offering or (b) the date when the shares held by them constitute less than 1% of
our outstanding common stock and may be sold under Rule 144 during any
three-month period. We are generally required to bear all of the expenses of all
registrations under the investor rights agreement, except underwriting discounts
and commissions. The registration rights agreement also contains a commitment by
us to indemnify the holders of registration rights.
ANTITAKEOVER EFFECTS OF PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS
Provisions of our articles of incorporation and bylaws restrict
transactions and business combinations between our company and an interested
shareholder owning 15% or more of our outstanding voting stock, for a period of
three years from the date the shareholder becomes an interested shareholder.
Subject to some exceptions, unless the transaction is approved by our board of
directors and the holders of at least two-thirds of our outstanding voting
stock, excluding shares held by the interested shareholder, these provisions
prohibit significant business transactions. These prohibited business
transactions include a merger with, disposition of assets to, or receipt of
disproportionate financial benefits by the interested shareholder, or any other
transaction that would increase the interested shareholder's proportionate
ownership of our voting stock. The prohibition does not apply if, upon
consummation of the transaction in which any person becomes an interested
shareholder, the interested shareholder owns at least 85% of our outstanding
voting stock. This calculation does not include shares held by persons who are
both directors and officers or shares authorized under employee stock plans in
which the employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer.
Our bylaws provide that all shareholder action may be effected at a duly
called meeting of shareholders or by a consent in writing. The bylaws also
provide that the president or secretary at the request in writing of a majority
of the board of directors or at the request in writing of shareholders owning a
majority of the issued and outstanding capital stock of the company entitled to
vote may call a special meeting of shareholders. Furthermore, our bylaws limit
the ability of shareholders to raise matters at a meeting of shareholders
without giving advance notice.
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These provisions in our articles of incorporation and bylaws will make
it more difficult for our existing shareholders to replace the board of
directors as well as for another party to obtain control by replacing the board
of directors. Since the board of directors has the power to retain and discharge
our officers, these provisions could also make it more difficult for existing
shareholders or another party to effect a change in management.
These and other provisions also may have the effect of deterring,
preventing or delaying changes in control or management. These provisions are
intended to enhance the likelihood of continued stability in the composition of
the board of directors and in the policies furnished by the board of directors
and to discourage types of transactions that may involve an actual or threatened
change of control. These provisions are designed to reduce our vulnerability to
an unsolicited acquisition proposal. The provisions also are intended to
discourage tactics that may be used in proxy fights. However, such provisions
could have the effect of discouraging others from making tender offers for our
shares and, as a consequence, they also may inhibit fluctuations in the market
price of our shares that could result from actual or rumored takeover attempts.
These provisions also may have the effect of preventing changes in our
management.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe. Its
address is 150 Royall Street, Canton, Massachusetts 02021, and its telephone
number is (781) 575-3400.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding 52,481,996
shares of common stock based upon shares outstanding at March 31, 1999, assuming
no exercise of the underwriters' over-allotment option. Excluding the 13,000,000
shares of common stock offered hereby and assuming no exercise of the
underwriters' over-allotment option, as of the effective date of the
registration statement, there will be 39,481,996 shares of common stock
outstanding, all of which are "restricted" shares under the Securities Act. All
restricted shares are subject to lock-up agreements with the underwriters
pursuant to which the holders of the restricted shares have agreed not to sell,
pledge or otherwise dispose of such shares for a period of 180 days after the
date of this prospectus. Hambrecht & Quist LLC may release the shares subject to
the lock-up agreements in whole or in part at any time with or without notice.
However, Hambrecht & Quist LLC has no current plans to do so.
The following table indicates approximately when the 39,481,996 shares
of our common stock that are not being sold in the offering but which will be
outstanding at the time the offering is complete will be eligible for sale into
the public market:
<TABLE>
<CAPTION>
ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN PUBLIC MARKET
- ---------------------------------------------------------------------------
<S> <C>
At effective date............................................... 0
180 days after effective date................................... 39,308,744
After 180 days post-effective date.............................. 173,252
</TABLE>
Most of the restricted shares that will become available for sale in the
public market beginning 180 days after the effective date will be subject to
volume and other resale restrictions pursuant to Rule 144 because the holders
are our affiliates. The general provisions of Rule 144 are described below.
In general, under Rule 144, any of our affiliates, or person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for at
least one year, will be entitled to sell in any three-month period a number of
shares that does not exceed the GREATER of:
- 1% of the then outstanding shares of the common stock, approximately
524,819 shares immediately after this offering, OR
- the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the SEC.
Sales pursuant to Rule 144 are subject to requirements relating to
manner of sale, notice and availability of current public information about us.
A person, or persons whose shares are aggregated, who is not deemed to have been
one of our affiliates at any time during the 90 days immediately preceding the
sale and who has beneficially owned his or her shares for at least two years is
entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations described above.
In addition to rights of sale under Rule 144, entities affiliated with
Hellman & Friedman that will hold an aggregate of 9,016,547 shares of
outstanding restricted securities after the offering have registration rights
that would allow their shares to be freely sold through a registration statement
filed under the Securities Act. See "Description of Capital Stock--Registration
Rights."
As of March 31, 1999, 9,286,754 shares were reserved for issuance under
our amended and restated 1998 stock option plan, of which options to purchase
2,514,003 shares were then outstanding and 130,014 were then exercisable. We
intend to file, within 180 days after the date of this prospectus, a
registration statement under the Securities Act to register the 9,286,754 shares
under our 1998 stock
option plan and the 2,321,688 shares of common stock reserved for issuance under
our employee stock purchase plan. Upon registration, all of these shares will be
freely tradable when issued, subject to Rule 144 volume limitations applicable
to affiliates and lock-up agreements.
68
<PAGE>
LOCK-UP AGREEMENTS
All officers and directors and some of the holders of common stock and
options to purchase common stock have agreed pursuant to "lock-up" agreements
that they will not offer, sell, contract to sell, pledge, grant any option to
sell, or otherwise dispose of, directly or indirectly, any shares of common
stock or securities convertible or exchangeable for common stock, or warrants or
other rights to purchase common stock for a period of 180 days after the date of
this prospectus without the prior written consent of Hambrecht & Quist LLC.
69
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement and
the underwriters named below, through their representatives, Hambrecht & Quist
LLC, Thomas Weisel Partners LLC, FAC/ Equities, a division of First Albany
Corporation, and Volpe Brown Whelan & Company, LLC have severally agreed to
purchase from us the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- -------------------------------------------------------------------------------- ---------
<S> <C>
Hambrecht & Quist LLC........................................................... 3,420,000
Thomas Weisel Partners LLC...................................................... 1,900,000
First Albany Corporation........................................................ 1,140,000
Volpe Brown Whelan & Company, LLC............................................... 1,140,000
BancBoston Robertson Stephens, Inc.............................................. 400,000
Bear, Stearns & Co. Inc......................................................... 400,000
Deutsche Banc Alex. Brown....................................................... 400,000
Donaldson, Lufkin & Jenrette Securities Corporation............................. 400,000
A.G. Edwards & Sons, Inc........................................................ 400,000
PaineWebber Incorporated........................................................ 400,000
Salomon Smith Barney Inc........................................................ 400,000
Charles Schwab & Co., Inc....................................................... 400,000
S.G. Cowen Securities........................................................... 400,000
George K. Baum and Company...................................................... 200,000
Dain Rauscher Wessels........................................................... 200,000
First Union Capital Markets..................................................... 200,000
Legg Mason Wood Walker Inc...................................................... 200,000
Regen MacKenzie Incorporated.................................................... 200,000
SoundView Technology Group, Inc................................................. 200,000
Stifel, Nicolaus & Company, Incorporated........................................ 200,000
C.E. Unterberg, Towbin.......................................................... 200,000
U.S. BancCorp Piper Jaffray..................................................... 200,000
---------
Total......................................................................... 13,000,000
---------
---------
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in our business and the receipt of certain
certificates, opinions and letters from us, our counsel and the independent
accountants. The nature of the underwriters' obligation is such that they are
committed to purchase all shares of common stock offered if any shares are
purchased.
The following tables show the per share and total underwriting discounts
and commissions we will pay to the underwriters. These amounts are shown
assuming both no exercise and full exercise of the underwriters' over-allotment
option to purchase additional shares.
UNDERWRITING DISCOUNTS AND COMMISSIONS PAYABLE BY US
AND THE SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
WITH WITHOUT
OVER-ALLOTMENT OVER-ALLOTMENT
EXERCISE EXERCISE
---------------------- ----------------------
<S> <C> <C>
Per Share................................... $ 0.84 $ 0.84
Total....................................... $ 12,558,000 $ 10,920,000
</TABLE>
70
<PAGE>
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $1,000,000.
The underwriters propose to offer the shares of common stock directly to
the public at the initial public offering price set forth on the cover page of
this prospectus and to selected dealers at such price less a concession not in
excess of $0.50 per share. The underwriters may allow and the dealers may
reallow a concession not in excess of $0.10 per share to other dealers. After
the initial public offering of the shares, the offering price and other selling
terms may be changed by the underwriters. The representatives have informed us
that the underwriters do not intend to confirm discretionary sales of more than
5% of the shares of common stock offered in this offering.
The selling shareholders have granted to the underwriters an option,
exercisable no later than 30 days after the date of this prospectus, to purchase
up to 1,950,000 additional shares of common stock at the initial public offering
price, less the underwriting discount set forth on the cover page of this
prospectus. To the extent that the underwriters exercise this option, each of
the underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of common stock to be purchased by
it shown in the above table bears to the total number of shares of common stock
offered hereby. The selling shareholders will be obligated, pursuant to the
option, to sell shares to the underwriters to the extent the option is
exercised. The underwriters may exercise this option only to cover
over-allotments made in connection with the sale of shares of common stock
offered hereby.
The offering of shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The underwriters have advised us that they do not intend to confirm
discretionary sales in excess of 5% of the shares of common stock offered under
this prospectus.
The selling shareholders and us have each agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the underwriters may be required
to make in respect thereof.
Our shareholders, including executive officers, directors and the
selling shareholders, have agreed not to, without the prior written consent of
Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of common
stock or options to acquire shares of common stock or securities exchangeable
for or convertible into shares of common stock owned by them during the 180-day
period following the date of this prospectus. We have agreed that we will not,
without the prior written consent of Hambrecht & Quist LLC, offer, sell or
otherwise dispose of any shares of common stock or options to acquire shares of
common stock or securities exchangeable for or convertible into shares of common
stock during the 180-day period following the date of this prospectus, except
that we may issue shares upon the exercise of options granted prior to the date
hereof, and may grant additional options under our stock option plans, provided
that, without the prior written consent of Hambrecht & Quist LLC, the additional
options shall not be exercisable during that period.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock was determined by
negotiation among us and the representatives of the underwriters. Among the
factors considered in determining the initial public offering price were
prevailing market and economic conditions, our revenues and earnings, market
valuations of other companies engaged in activities similar to ours, estimates
of our business potential and our prospects, the present state of our business
operations, our management and other factors deemed relevant.
Persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the common stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering
71
<PAGE>
transaction means the placing of any bid on behalf of the underwriting syndicate
or the effecting of any purchase to reduce a short position created in
connection with the offering. A penalty bid means an arrangement that permits
the underwriters to reclaim a selling concession from a syndicate member in
connection with the offering when shares of common stock sold by the syndicate
member are purchased in syndicate covering transactions. Such transactions may
be effected on the Nasdaq National Market, in the over-the-counter market, or
otherwise. This stabilizing, if commenced, may be discontinued at any time.
A prospectus in electronic format is being made available on a Web site
maintained by Hambrecht & Quist LLC. In addition, some broker-dealers may choose
to make a prospectus in electronic format available on Web sites maintained by
them.
Thomas Weisel Partners LLC, one of the representatives of the
underwriters, was organized and registered as a broker-dealer in December 1998.
Since December 1998, Thomas Weisel Partners has been named as a lead or
co-manager on 39 filed public offerings of equity securities, of which 17 have
been completed, and has acted as a syndicate member in an additional 17 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with us
pursuant to the underwriting agreement entered into in connection with this
offering.
72
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
us by Morrison & Foerster LLP, San Francisco, California. Certain legal matters
in connection with the offering will be passed upon for the underwriters by
Brobeck, Phleger & Harrison LLP, San Francisco, California.
EXPERTS
The audited financial statements included in this prospectus have been
so included in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT US
We have filed with Securities and Exchange Commission in Washington,
D.C. a Registration Statement on Form S-1 under the Securities Act with respect
to the common stock offered in this prospectus. This prospectus, filed as part
of the registration statement, does not contain all of the information set forth
in the registration statement and its exhibits and schedules, portions of which
have been omitted as permitted by the rules and regulations of the SEC. For
further information about us and the common stock, we refer you to the
registration statement and to its exhibits and schedules. Statements in this
prospectus about the contents of any contract, agreement or other document are
not necessarily complete and, in each instance, we refer you to the copy of such
contract, agreement or document filed as an exhibit to the registration
statement, and each such statement being qualified in all respects by reference
to the document to which it refers. Anyone may inspect the registration
statement and its exhibits and schedules without charge at the public reference
facilities the SEC maintains at 450 Fifth Street, N.W., Washington, D.C. 20549
and at the regional offices of the SEC located at 7 World Trade Center, Suite
1300, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois, 60661. You may obtain copies of all or any part of these materials
from the SEC upon payment to the SEC of prescribed fees. You may also inspect
these reports and other information without charge at a Web site maintained by
the SEC. The address of this site is http://www.sec.gov.
Upon completion of this offering, we will become subject to the
informational requirements of the Exchange Act and, in accordance therewith,
file reports, proxy statements and other information with the SEC. You will be
able to inspect and copy these reports, proxy statements and other information
at the public reference facilities maintained by the SEC and at the SEC's
regional offices at the addresses noted above. You also will be able to obtain
copies of this material from the Public Reference Section of the SEC as
described above, or inspect them without charge at the SEC's Web site. Our
common stock has been approved for quotation on the Nasdaq National Market. Upon
completion of this offering, you will be able to inspect reports, proxy and
information statements and other information concerning us at the National
Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C.
20006.
73
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
NATIONAL INFORMATION CONSORTIUM, INC.
Report of PricewaterhouseCoopers LLP, Independent Accountants....................... F-3
Consolidated Balance Sheets......................................................... F-4
Consolidated Statements of Operations............................................... F-5
Consolidated Statements of Changes in Shareholders' Equity.......................... F-6
Consolidated Statements of Cash Flows............................................... F-7
Notes to Consolidated Financial Statements.......................................... F-8
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
Report of PricewaterhouseCoopers LLP, Independent Accountants....................... F-26
Consolidated Balance Sheets......................................................... F-27
Consolidated Statements of Income................................................... F-28
Consolidated Statements of Changes in Shareholders' Equity.......................... F-29
Consolidated Statements of Cash Flows............................................... F-30
Notes to Consolidated Financial Statements.......................................... F-31
KANSAS INFORMATION CONSORTIUM, INC.
Report of PricewaterhouseCoopers LLP, Independent Accountants....................... F-37
Balance Sheets...................................................................... F-38
Statements of Income................................................................ F-39
Statements of Changes in Shareholders' Equity....................................... F-40
Statements of Cash Flows............................................................ F-41
Notes to Financial Statements....................................................... F-42
ARKANSAS INFORMATION CONSORTIUM, INC.
Report of PricewaterhouseCoopers LLP, Independent Accountants....................... F-46
Balance Sheets...................................................................... F-47
Statements of Operations............................................................ F-48
Statements of Changes in Shareholders' Equity....................................... F-49
Statements of Cash Flows............................................................ F-50
Notes to Financial Statements....................................................... F-51
NEBRASK@ INTERACTIVE, INC.
Report of PricewaterhouseCoopers LLP, Independent Accountants....................... F-55
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Balance Sheets...................................................................... F-56
Statements of Income................................................................ F-57
Statements of Changes in Shareholders' Equity....................................... F-58
Statements of Cash Flows............................................................ F-59
Notes to Financial Statements....................................................... F-60
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Overview............................................................................ F-64
Pro Forma Consolidated Statements of Operations..................................... F-65
Notes to Pro Forma Consolidated Financial Information............................... F-67
</TABLE>
F-2
<PAGE>
REPORT OF PRICEWATERHOUSECOOPERS LLP, 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 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. 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 generally
accepted auditing standards 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
June 16, 1999, except as to the second paragraph of Note 8 which is as of July
14, 1999
F-3
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
-------- -----------
MARCH 31,
1999
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................................................... $178,695 $ 1,310,751 $ 1,115,136
Trade accounts receivable................................................................. 6,932 2,908,043 3,694,625
Prepaid expenses.......................................................................... 21,849 47,133 103,420
Other current assets...................................................................... 6,247 67,311 255,410
-------- ----------- ------------
Total current assets.................................................................... 213,723 4,333,238 5,168,591
Property and equipment, net................................................................. 112,203 1,229,415 1,684,850
Other assets................................................................................ 120 17,183 4,790
Intangible assets, net...................................................................... -- 11,669,059 9,775,258
-------- ----------- ------------
Total assets............................................................................ $326,046 $17,248,895 $16,633,489
-------- ----------- ------------
-------- ----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 56,681 $ 2,376,505 $ 2,755,641
Accrued expenses.......................................................................... 34,551 227,106 261,122
Income taxes payable...................................................................... -- 68,700 22,700
Deferred income taxes..................................................................... -- 164,234 254,068
Bank lines of credit...................................................................... -- 1,023,592 839,452
Capital lease obligations--current portion................................................ -- 235,323 201,233
Notes payable--current portion............................................................ 5,019 50,000 594,000
Application development contracts......................................................... -- 1,256,000 1,174,471
Other current liabilities................................................................. 17,119 49,465 47,865
-------- ----------- ------------
Total current liabilities............................................................... 113,370 5,450,925 6,150,552
Capital lease obligations--long term portion................................................ -- 409,989 384,019
Note payable--long term portion............................................................. 24,923 50,000 --
Deferred income taxes....................................................................... -- 425,878 312,098
-------- ----------- ------------
Total liabilities....................................................................... 138,293 6,336,792 6,846,669
-------- ----------- ------------
Commitments and contingencies (Notes 10 and 11)
Shareholders' equity:
Common stock, no par, 200,000,000 shares authorized, 22,288,209, 42,066,181 and 42,481,996
shares issued and outstanding........................................................... -- -- --
Additional paid-in capital................................................................ 627,435 19,551,646 22,435,331
Accumulated deficit....................................................................... (414,682) (5,825,966) (9,125,019)
-------- ----------- ------------
212,753 13,725,680 13,310,312
Less notes and stock subscriptions receivable............................................. (25,000) -- (125,000)
Less deferred compensation expense........................................................ -- (2,813,577) (3,398,492)
-------- ----------- ------------
Total shareholders' equity.............................................................. 187,753 10,912,103 9,786,820
-------- ----------- ------------
Total liabilities and shareholders' equity.............................................. $326,046 $17,248,895 $16,633,489
-------- ----------- ------------
-------- ----------- ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- ---------------------
1996 1997 1998 1998 1999
--------- --------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................ $ 235,971 $ 996,550 $28,623,656 $ 361,358 $11,455,065
Cost of revenues................ 21,248 5,168 21,210,632 690 8,603,698
--------- --------- ---------- --------- ----------
Gross profit.................. 214,723 991,382 7,413,024 360,668 2,851,367
--------- --------- ---------- --------- ----------
Operating expenses:
Service development and
operations.................. 38,248 224,128 3,884,810 134,932 934,871
Selling, general and
administrative.............. 168,399 660,254 4,241,780 325,290 1,517,568
Stock compensation............ -- 370,235 568,869 -- 1,698,770
Depreciation and
amortization................ 297 13,679 5,922,396 24,031 2,001,559
--------- --------- ---------- --------- ----------
Total operating expenses...... 206,944 1,268,296 14,617,855 484,253 6,152,768
--------- --------- ---------- --------- ----------
Operating income (loss)......... 7,779 (276,914) (7,204,831) (123,585) (3,301,401)
--------- --------- ---------- --------- ----------
Other income (expense):
Interest expense.............. -- -- (88,161) (628) (36,995)
Other income, net............. -- 111 55,839 -- 16,565
--------- --------- ---------- --------- ----------
Total other income
(expense)................... -- 111 (32,322) (628) (20,430)
--------- --------- ---------- --------- ----------
Income (loss) before income
taxes......................... 7,779 (276,803) (7,237,153) (124,213) (3,321,831)
Income tax expense (benefit).... -- -- 658,813 -- (22,778)
--------- --------- ---------- --------- ----------
Net income (loss)............... $ 7,779 $(276,803) $(7,895,966) $(124,213) $(3,299,053)
--------- --------- ---------- --------- ----------
--------- --------- ---------- --------- ----------
Net income (loss) per share:
Basic and diluted............. $ 0.00 $ (0.01) $ (0.21) $ (0.01) $ (0.08)
--------- --------- ---------- --------- ----------
--------- --------- ---------- --------- ----------
Weighted average shares
outstanding (Note 8)........ 6,004,625 20,857,785 37,242,423 22,679,122 42,242,941
--------- --------- ---------- --------- ----------
--------- --------- ---------- --------- ----------
Pro forma tax provision
(unaudited)--Note 9:
Net income (loss)............. $ 7,779 $(276,803) $(7,895,966) $(124,213)
Pro forma provision for income
taxes....................... 3,034 36,438 (1,516,894) (48,443)
--------- --------- ---------- ---------
Pro forma net income (loss)... $ 4,745 $(313,241) $(6,379,072) $ (75,770)
--------- --------- ---------- ---------
--------- --------- ---------- ---------
Pro forma basic and diluted
income (loss) per share..... $ 0.00 $ (0.02) $ (0.17) $ 0.00
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL AND STOCK DEFERRED
--------------------- PAID-IN ACCUMULATED SUBSCRIPTIONS COMPENSATION
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE EXPENSE TOTAL
---------- --------- ----------- ------------ ------------- ------------ -----------
<C> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY
1,
1996... 19,841 $ -- $ 100 $ (15,331) $ -- $ -- $ (15,231)
Net
income... 7,779 7,779
Issuance
of
common
stock... 20,337,768 -- 102,500 -- -- -- 102,500
---------- --------- ----------- ------------ ------------- ------------ -----------
BALANCE,
DECEMBER
31,
1996... 20,357,609 -- 102,600 (7,552) -- -- 95,048
Net
loss... -- -- -- (276,803) -- -- (276,803)
Distributions
to
shareholders... -- -- -- (130,327) -- -- (130,327)
Issuance
of
common
stock... 1,930,600 -- 524,835 -- (25,000) -- 499,835
---------- --------- ----------- ------------ ------------- ------------ -----------
BALANCE,
DECEMBER
31,
1997... 22,288,209 -- 627,435 (414,682) (25,000) -- 187,753
Common
stock
issued
in
exchange... 19,255,155 -- 18,539,814 -- -- -- 18,539,814
Net
loss... -- -- -- (7,895,966) -- -- (7,895,966)
Distributions
to
shareholders... -- -- -- (838,367) -- -- (838,367)
Termination
of
Subchapter
S
election... -- -- (3,323,049) 3,323,049 -- -- --
Issuance
of
common
stock... 522,817 -- 583,333 -- -- -- 583,333
Stock
options
granted
with
exercise
price
less
than
fair
market
value
at
date
of
grant.. -- -- 3,124,113 -- -- (2,855,390) 268,723
Deferred
compensation
expense
recognized... -- -- -- -- -- 41,813 41,813
Stock
subscription
received... -- -- -- -- 25,000 -- 25,000
---------- --------- ----------- ------------ ------------- ------------ -----------
BALANCE,
DECEMBER
31,
1998... 42,066,181 -- 19,551,646 (5,825,966) -- (2,813,577) 10,912,103
Net
loss
(unaudited)... -- -- -- (3,299,053) -- -- (3,299,053)
Stock
options
granted
with
exercise
price
less
than
fair
market
value
at
date
of
grant
(unaudited)... -- -- 794,561 -- -- (794,561) --
Stock
options
exercised
(unaudited)... 69,303 -- 100,000 -- -- -- 100,000
Deferred
compensation
expense
recognized
(unaudited)... -- -- -- -- -- 209,646 209,646
Issuance
of
common
stock
(unaudited)... 346,512 -- 1,989,124 -- (125,000) -- 1,864,124
---------- --------- ----------- ------------ ------------- ------------ -----------
BALANCE,
MARCH
31,
1999
(unaudited)... 42,481,996 $ -- $22,435,331 $ (9,125,019) $(125,000) $(3,398,492) $ 9,786,820
---------- --------- ----------- ------------ ------------- ------------ -----------
---------- --------- ----------- ------------ ------------- ------------ -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- -----------------------
1996 1997 1998 1998 1999
--------- --------- ----------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ 7,779 $(276,803) $(7,895,966) $(124,213) $ (3,299,053)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization.................. 297 13,679 5,922,396 24,031 2,001,559
Compensation expense recognized upon issuance
of common stock.............................. -- 370,235 258,333 -- 1,489,124
Compensation expense recognized upon granting
of stock options............................. -- -- 268,723 -- --
Recognition of deferred compensation expense... -- -- 41,813 -- 209,646
(Gain) loss on disposals of property and
equipment.................................... -- 1,200 (12,639) -- --
Application development contracts.............. -- -- 1,256,000 -- (81,529)
Deferred income taxes.......................... -- -- 590,113 -- (23,946)
Changes in operating assets and liabilities:
(Increase) in trade accounts receivable........ (11,708) (1,471) (21,980) (110,991) (786,582)
(Increase) decrease in prepaid expenses........ -- (21,849) 3,335 -- (56,287)
(Increase) in other current assets............. -- -- (54,956) (10,805) (188,099)
(Increase) decrease in other assets............ -- -- (8,103) (3,505) 3,574
Increase (decrease) in accounts payable........ -- 56,681 (184,889) 15,265 379,136
Increase in accrued expenses................... -- 19,199 80,472 4,092 34,016
Increase (decrease) in income taxes payable.... -- -- 68,700 -- (46,000)
Increase (decrease) in other current
liabilities.................................. 15,351 17,119 43,034 (17,119) (1,600)
--------- --------- ----------- --------- ------------
Net cash provided by (used in) operating
activities................................... 11,719 177,990 354,386 (223,245) (366,041)
--------- --------- ----------- --------- ------------
Cash flows from investing activities:
Purchase of property and equipment............... (19,676) (112,521) (255,203) (46,881) (10,374)
Proceeds from disposals of property and
equipment...................................... -- 5,026 42,736 -- --
Proceeds from notes receivable from
shareholders................................... -- -- 55,000 -- --
Cash of acquired companies....................... -- -- 764,908 -- --
--------- --------- ----------- --------- ------------
Net cash provided by (used in) investing
activities..................................... (19,676) (107,495) 607,441 (46,881) (10,374)
--------- --------- ----------- --------- ------------
Cash flows from financing activities:
Proceeds from bank lines of credit............... -- -- 1,190,285 150,000 70,000
Payments on bank lines of credit................. -- -- (270,084) -- (254,140)
Proceeds from notes payable...................... -- 29,942 -- -- --
Payments on notes payable........................ (29,251) -- (29,942) (1,617) (50,000)
Payments on capital lease obligations............ -- -- (101,533) -- (60,060)
Payments on debentures payable................... -- -- (130,130) -- --
Distributions to shareholders.................... -- (130,327) (588,367) -- --
Proceeds from issuance of common stock........... 102,500 129,600 75,000 -- 475,000
Proceeds from subscriptions receivable........... -- -- 25,000 -- --
--------- --------- ----------- --------- ------------
Net cash provided by financing activities........ 73,249 29,215 170,229 148,383 180,800
--------- --------- ----------- --------- ------------
Net increase (decrease) in cash.................... 65,292 99,710 1,132,056 (121,743) (195,615)
Cash, beginning of year............................ 13,693 78,985 178,695 178,695 1,310,751
--------- --------- ----------- --------- ------------
Cash, end of period................................ $ 78,985 $ 178,695 $ 1,310,751 $ 56,952 $ 1,115,136
--------- --------- ----------- --------- ------------
--------- --------- ----------- --------- ------------
Other cash flow information:
Interest paid.................................... $ -- $ -- $ 54,707 $ -- $ 36,995
--------- --------- ----------- --------- ------------
--------- --------- ----------- --------- ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-7
<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") is a
provider of Internet-based electronic government services, which are integrated
packages of hardware and software, that help governments use the Internet to
reduce costs and provide a higher level of service to businesses and citizens.
The Company was formed as a Delaware corporation 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"), Indian@ Interactive, Inc. ("III"), Nebrask@ 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 is 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.
As of December 31, 1998, the Company provides electronic government
services for seven states and one local government. The Company's primary
business activity is to design, build and operate Internet-based portals for
governments under multi-year contracts (see Note 4). In addition, the Company
enters into contracts to provide consulting, development and management services
to government portals in exchange for a negotiated fee. The Company also has a
development division that develops applications to automate certain government
back-office processes to facilitate electronic access.
The Company negotiates contracts with government agencies desiring to
include their information on the government portal. The Company markets the
services and solicits users to enter into subscriber contracts permitting the
user to access the portal and the government information contained therein in
exchange for a transactional or subscription user fee. The Company is
responsible for funding up front investment and ongoing operational costs.
Through separate wholly-owned subsidiaries, NIC/USA operates in Virginia and
Iowa, and has a service contract with the state of Georgia. Following the
Exchange Offer, the Company has wholly-owned subsidiaries operating in the
states of Arkansas, Indiana, Kansas and Nebraska in addition to the operations
of NIC/USA.
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 have no partially owned subsidiaries.
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, 3-8 years for
equipment, 3-5 years for purchased software and 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
F-8
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
REVENUE RECOGNITION
The Company recognizes revenues from providing electronic government
services (primarily transaction and information access fees) when the service is
provided. The Company must remit a certain percentage of these fees to
government agencies regardless of whether the Company ultimately collects the
fees. Government agency fees and amounts payable to the primary contracting
governmental entities (see Note 4) are accrued as cost of revenues and accounts
payable at the time the revenue is recognized.
Revenue from service contracts is recognized as the services are
provided at rates provided for in the contract.
The Company recognizes revenues from application development contracts
on the percentage of completion method, utilizing labor hours incurred to date
as compared to the estimated total labor hours for each contract. Included in
the measurement of percentage of completion are the internal costs of developing
the core technology which is a deliverable under the Company's current
contracts. 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 its most recent cost estimates exceeded the remaining revenues to be
recognized. The Company accrued $1.3 million of estimated costs in excess of
revenues for satisfying remaining obligations under the contracts. The provision
for anticipated losses was determined on an individual contract basis. 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
F-9
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 COSTS
The Company expenses as incurred the employee costs to develop,
implement, 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 an application under customer contracts that automates certain
government back-office processes to facilitate electronic access. Costs of
developing this application 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." Statement of
Financial Accounting Standards ("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.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist primarily of cash and accounts
receivable. The Company limits its exposure to credit loss by depositing its
cash with high credit quality financial institutions. 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.
F-10
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes standards for reporting financial information regarding operating
segments, products and services, geographic areas and major customers. The
statement is effective for financial statements for periods beginning after
December 15, 1997. As the Company operates in one business segment, the adoption
of this statement did not have a significant impact on the Company's financial
statements.
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 is effective January 1, 1999. The
adoption of SOP 98-1 did not have a material impact on the Company's
consolidated financial statements.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying consolidated balance sheet as of March 31, 1999, the
consolidated statements of operations and cash flows for the three months ended
March 31, 1999 and 1998 and the consolidated statement of changes in
shareholders' equity for the three months ended March 31, 1999 are unaudited.
In the opinion of management, these statements have been prepared on the
same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the results of these periods. The data disclosed in the notes to
financial statements for these periods are unaudited.
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.
F-11
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACCOUNTING FOR THE EXCHANGE OFFER (CONTINUED)
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 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 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.
The following unaudited pro forma consolidated amounts give effect to
the acquisitions of the business units as if they had occurred on January 1,
1997, using the amortization of goodwill and contract intangible the Company has
and will record for periods subsequent to the Exchange Offer:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------- THREE MONTHS ENDED
1997 1998 MARCH 31, 1998
---------- ---------- -------------------
<S> <C> <C> <C>
Revenues...................... $24,382,184 $36,532,345 $ 8,270,047
Operating loss................ (6,863,442) (8,736,631) (1,655,386)
Net loss...................... (6,931,996) (9,429,917) (1,658,166)
Basic and diluted loss per
share....................... $ (0.17) $ (0.22) $ (0.04)
Weighted average shares
outstanding................. 40,112,940 41,950,418 41,934,277
</TABLE>
4. GOVERNMENT CONTRACTS
Each of the Company's government 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
F-12
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. GOVERNMENT CONTRACTS (CONTINUED)
pricing of the electronic transactions and data access services the Company
provides and the division of revenues between the Company and the government
agency. Prices and revenue sharing agreements must be approved by the
government. The Company owns all the applications developed under these
contracts. After completion of a defined contract term, the government agency
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 Company's larger business units that
have entered into agreements with government agencies and the significant terms
of those operating agreements.
VIRGINIA INTERACTIVE, LLC (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 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.
F-13
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. GOVERNMENT CONTRACTS (CONTINUED)
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 disbursed to AIC.
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 initial contract was to expire on December 31, 1996, but was renewed until
December 31, 1999 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 noncancellable obligations under corporate leases.
NEBRASK@ 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 ("Nebrask@ 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")
F-14
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. GOVERNMENT CONTRACTS (CONTINUED)
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.
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.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Furniture and fixtures............................... $ -- $ 210,209
Equipment............................................ 125,048 1,530,636
Purchased software................................... -- 101,484
Leasehold improvements............................... -- 39,285
--------- ---------
125,048 1,881,614
Less accumulated depreciation........................ 12,845 652,199
--------- ---------
$ 112,203 $1,229,415
--------- ---------
--------- ---------
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1997 and
1998, was $177, $13,559 and $236,699, respectively.
F-15
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31, 1999
1997 1998 (UNAUDITED)
---------- ---------- -------------------
<S> <C> <C> <C>
Goodwill....................... $ -- $13,885,149 $13,885,149
Contract intangibles........... -- 3,465,313 3,465,313
---------- ---------- -------------------
-- 17,350,462 17,350,462
Less accumulated
amortization................. -- 5,681,403 7,575,204
---------- ---------- -------------------
$ -- $11,669,059 $ 9,775,258
---------- ---------- -------------------
---------- ---------- -------------------
</TABLE>
7. 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 (7.75% at December 31, 1998). The expiration
date on the line is April 30, 1999. At December 31, 1997 and 1998, $0 and
$370,000 was outstanding on the line. The line is collateralized by NIC/USA's
assets and guaranteed by various affiliated companies. The line was renewed on
April 30, 1999 with a maturity date of April 30, 2000.
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%
(9.50% at December 31, 1998). There is no given expiration date on the line. At
December 31, 1998, no amounts were outstanding on the line. The line is
collateralized by the related equipment and guaranteed by the parent company.
In December 1997, NIC/USA borrowed $29,942 from a bank in the form of a
note payable collateralized by an automobile. The note was repaid in full in
1998.
In October 1998, NIC/USA issued to GANET, an irrevocable letter of
credit in the amount of $200,000 that expires October 31, 1999.
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 bears interest at 7.75% and matures January 19, 2000. The loan is to be
repaid in eleven monthly installments of $6,529 commencing February 19, 1999
with a final lump-sum payment of $513,707 on January 19, 2000. The note is
collateralized by the airplane.
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 (7.75% at December 31,
1998). The expiration date on the line is April 30, 2000. At December 31, 1998,
$218,750 was outstanding on the line. The line is collateralized by VI's assets
and guaranteed by various affiliated companies.
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% (9.50% at
December 31, 1998). There is no given expiration date on the line. At December
31, 1998, 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% (9.50% at December 31, 1998). There is no given expiration date on
the line. At December 31, 1998, no amounts were outstanding on the line. The
line is collateralized by the related equipment and guaranteed by the parent
company.
F-16
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. BANK LINES OF CREDIT AND OTHER DEBT OBLIGATIONS (CONTINUED)
III has a $400,000 operating line of credit from a bank that bears
interest at the bank's index rate (7.75% at December 31, 1998). The expiration
date on the line is April 30, 2000. At December 31, 1998, $192,136 was
outstanding on the line. The line is collateralized by the III's assets and
guaranteed by various affiliated companies.
III has a $150,000 operating line of credit with a bank that bears
interest at the bank's prime rate plus 0.50% (8.25% at December 31, 1998). The
expiration date on the line is November 1, 1999. At December 31, 1998, $18,209
was outstanding on the line. The line is collateralized by III's assets.
III has a $225,000 equipment line of credit with a bank which bears
interest at the bank's reference rate plus 1.75% (9.50% at December 31, 1998).
There is no given expiration date on the line. At December 31, 1998, 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 (7.75% at December 31, 1998). The expiration
date on the line is April 30, 2000. At December 31, 1998, $179,497 was
outstanding on the line. The line is collateralized by KIC's assets and
guaranteed by various affiliated companies.
KIC has a $225,000 equipment line of credit with a bank which bears
interest at the bank's reference rate plus 1.75% (9.50% at December 31, 1998).
There is no given expiration date on the line. At December 31, 1998, 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 (7.75% at December 31, 1998). The expiration
date on the line is April 30, 2000. At December 31, 1998, 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 which bears
interest at the bank's reference rate plus 1.75% (9.50% at December 31, 1998).
There is no given expiration date on the line. At December 31, 1998, 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 5,005 shares of NII. An initial payment of
$6,500 was made with the remaining balance of $13,000 due in two annual
installments of $6,500 in 1999 and 2000.
AIC has issued to the State of Arkansas an irrevocable letter of credit
in the amount of $50,000.
NII has a $100,000 line of credit with a bank that bears interest at the
bank's index rate (7.75% at December 31, 1998). The expiration date on the line
is April 30, 2000. At December 31, 1998, $45,000 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 which bears
interest at the bank's reference rate plus 1.75% (9.50% at December 31, 1998).
There is no given expiration date on the line. At December 31, 1998, 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 5,250 shares of NII. An initial
payment of $43,500 was made with the remaining balance of $87,000 due in two
annual installments of $43,500 in 1999 and 2000.
F-17
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. BANK LINES OF CREDIT AND OTHER DEBT OBLIGATIONS (CONTINUED)
The operating line of credit agreements contain various covenants
relating to reporting requirements and financial ratios. At December 31, 1998,
the Company was either in compliance with these covenants or had received
waivers on any violations of these covenants.
8. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
COMMON STOCK
The Company's Board of Directors has 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.
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 entered into by the
Company's 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 Company's common shares, except those held by the investment management firm
and to sell all or any part of such shares. The investment management investors
also have certain registration rights, a right of first refusal to purchase any
common shares proposed to be sold by the voting trust, a right to participate in
any sale by the voting trust and certain other rights. The Company's bylaws give
the Company the right of first refusal to purchase any common shares desired to
be sold by a shareholder at the lesser of a third party offered price or a
formula price. One common shareholder has the right, only upon termination
within the first three years of employment, 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.
F-18
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE (CONTINUED)
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 is 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.
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 this transaction. From September 1998 through
December 1998, the Company granted 2,534,796 common stock options with an
exercise price of $1.44 per share. Compensation expense of $310,536 was recorded
in 1998 and deferred compensation expense of $2,813,577 was recorded at December
31, 1998 which is being expensed ratably over the vesting period for 2,314,686
options that have future vesting requirements. The vesting period is three years
for $1,920,320 of deferred compensation and four years for the remaining
$893,257.
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.
From January 1999 through March 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. From January
1999 through March 1999, the Company granted 187,123 common stock options with
an exercise price of $1.44 per share and a vesting period of three years.
Compensation expense of $11,702 was recorded relating to these options in the
three months ended March 31, 1999 with $782,859 of compensation expense deferred
at March 31, 1999. Including expense recognized in connection with the options
granted prior to January 1, 1999, the Company recognized a total of $209,646 of
compensation expense related to common stock options in the three months ended
March 31, 1999. Total deferred compensation expense was $3,398,492 at March 31,
1999.
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.
F-19
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE (CONTINUED)
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.
EARNINGS PER SHARE
The Company computes net income (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 income (loss) per
share is computed by dividing the net income (loss) for the period by the
weighted average number of common shares outstanding for the period. Treated as
outstanding for all periods prior to the Exchange Offer is an issuance of
174,563 of common shares to all common shareholders on July 1, 1998 for no
consideration to the Company as described above. Diluted net income (loss) per
share is the same as basic net income (loss) per share because common stock
issuable upon exercise of employee stock options is antidilutive.
The following sets forth the calculation of earnings per share for the
actual and pro forma periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PRO FORMA
------------------------------------- THREE THREE THREE
1998 MONTHS ENDED MONTHS ENDED MONTHS ENDED
1997 PRO FORMA 1998 MARCH 31, 1998 MARCH 31, 1998 MARCH 31, 1999
ACTUAL (UNAUDITED) ACTUAL (UNAUDITED) (UNAUDITED) (UNAUDITED)
---------- ------------ ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net loss................ $ (276,803) $(9,429,917) $(7,895,966) $ (1,658,166) $ (124,213) $ (3,299,053)
Basic and diluted loss
per share............. $ (0.01) $ (0.22) $ (0.21) $ (0.04) $ (0.01) $ (0.08)
Weighted-average common
shares outstanding.... 20,857,785 41,950,418 37,242,423 41,934,277 22,679,122 42,242,941
</TABLE>
9. 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 temporary differences
between the book and tax bases of assets and liabilities on that date. No
deferred tax liability was recorded for goodwill. The effect of recognizing the
deferred tax liability has been included in the consolidated statement of
operations for the year ended December 31, 1998.
F-20
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
Income tax expense for the year ended December 31, 1998 consisted of the
following:
<TABLE>
<S> <C>
Current income taxes:
Federal........................................................ $ 56,045
State.......................................................... 12,655
---------
Total........................................................ 68,700
---------
Deferred income taxes, net:
Federal........................................................ 540,345
State.......................................................... 49,768
---------
Total........................................................ 590,113
---------
Total income taxes........................................... $ 658,813
---------
---------
</TABLE>
The unaudited pro forma provision for income taxes for the years ended
December 31, 1996, 1997 and 1998 and the three-months ended March 31, 1998
presented 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.
Significant components of the Company's deferred tax assets and
liabilities at December 31, 1998, are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Accrued accounts payable...................................... $ 721,757
Application development contracts............................. 479,922
Compensation related to non-qualified stock options........... 59,842
Other......................................................... 28,130
---------
Total....................................................... 1,289,651
---------
Deferred tax liabilities:
Accrued revenue............................................... 897,097
Contract intangibles.......................................... 881,346
Depreciation.................................................. 62,324
Other......................................................... 38,996
---------
Total....................................................... 1,879,763
---------
Net deferred tax liability...................................... $ 590,112
---------
---------
</TABLE>
F-21
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
The following table is a reconciliation between the effective income tax
rate indicated by the consolidated statements of operations and the statutory
federal income tax rate for the year ended December 31, 1998:
<TABLE>
<S> <C>
Effective federal and state income tax rate (provision).............. (9.1)%
Goodwill amortization (six months)................................... 15.5
S to C corporation adjustment........................................ 19.7
Pretax loss as an S corporation (six months)......................... 10.4
State income taxes................................................... (1.3)
Other................................................................ (0.2)
---------
Statutory federal income tax rate.................................... 35.0%
---------
---------
</TABLE>
10. CAPITAL LEASE OBLIGATIONS
The Company and its subsidiaries lease various property and equipment
under capital leases. The agreements require the company and its subsidiaries to
pay all taxes, fees, assessments or other charges.
Capitalized leased property and equipment consists of the following at
December 31, 1998:
<TABLE>
<S> <C>
Furniture and fixtures............................................ $ 117,911
Equipment......................................................... 766,153
Purchased software................................................ 81,795
---------
965,859
Less accumulated depreciation..................................... 314,026
---------
$ 651,833
---------
---------
</TABLE>
Future minimum noncancellable lease payments under these capital leases
at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- ------------------------------------------------------------------
<S> <C>
1999.............................................................. $ 280,884
2000.............................................................. 217,180
2001.............................................................. 213,918
2002.............................................................. 17,787
---------
729,769
Less interest..................................................... 84,457
---------
Present value of net minimum lease payments....................... 645,312
Less current portion.............................................. 235,323
---------
Long-term portion................................................. $ 409,989
---------
---------
</TABLE>
F-22
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. OPERATING LEASES
The Company and its subsidiaries lease office space and certain
equipment under operating leases. The future minimum lease payments under
noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- --------------------------------------------------------------------------------
<S> <C>
1999............................................................................ $ 408,412
2000............................................................................ 320,125
2001............................................................................ 248,143
2002............................................................................ 209,932
2003............................................................................ 24,989
------------
$ 1,211,601
------------
------------
</TABLE>
Total rent expense for the years ended December 31, 1996, 1997 and 1998
was $0, $2,099 and $354,192 respectively.
12. EMPLOYEE BENEFIT 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 and a discretionary
contribution may be made to the plan as determined by the Board of Directors.
Company contributions totaled $1,731, $14,031, and $94,571 for the years ended
December 31, 1996, 1997 and 1998, respectively.
13. STOCK OPTION PLAN
The Company has adopted a formal stock option plan (the "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 through sharing the future
growth of such business. The Company is authorized to grant options for up to
9,286,754, common shares under the Plan, of which 2,534,796 have been granted in
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. The
weighted-average grant-date fair value of options granted during the year was
$2.68. 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.
On December 31, 1998, the Company granted 1,393,013 options (1,046,501
non-qualified options and 346,512 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.
F-23
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK OPTION PLAN (CONTINUED)
Stock option activity for the year ended December 31, 1998, was as
follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED AVERAGE PRICE
--------- -------------------------
<S> <C> <C>
Outstanding at January 1.................. -- --
Granted................................. 2,534,796 $ 1.44
Exercised............................... -- --
Forfeited............................... 20,793 $ 1.44
---------
Outstanding at December 31................ 2,514,003 $ 1.44
Exercisable at December 31................ 199,317 $ 1.44
</TABLE>
For all options outstanding at December 31, 1998, the exercise price was
$1.44 per share and the weighted-average remaining contractual life was 6.7
years.
The Company accounts for the Plan using the intrinsic value method
prescribed in Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees." Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," 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 consistent with SFAS
No. 123, the Company's net loss and loss per share would have been as follows
for the year ended December 31, 1998:
<TABLE>
<S> <C>
Net loss
As reported.................................................... $(7,895,966)
Pro forma...................................................... $(7,906,551)
Basic and diluted loss per share:
As reported.................................................... $ (0.21)
Pro forma...................................................... $ (0.21)
</TABLE>
The Company used the minimum value option pricing model, as permitted by
the Financial Accounting Standards Board for nonpublic companies, to determine
the fair value of grants made in 1998. The minimum value model does not consider
expected volatility in stock price. The following assumptions were applied in
determining pro forma compensation cost for the year ended December 31, 1998:
<TABLE>
<S> <C>
Risk-free interest rate.......................................... 5.00%
Expected dividend yield.......................................... 0.00%
Expected option life............................................. 6.6 years
Expected stock price volatility.................................. 0.001%
Fair value of options granted.................................... $1.60
</TABLE>
14. CONCENTRATION OF CREDIT
For the year ended December 31, 1998, the Company derived 71% of its
revenues from two data resellers.
F-24
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. RELATED PARTY TRANSACTIONS
The Company and its subsidiaries pay their Board members director fees
for services rendered. Total expense incurred for the year ended December 31,
1998 was $130,500. No director fees were paid in either 1997 or 1996.
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. Insurance expense for the years ended December 31, 1996, 1997 and
1998 was approximately $3,000, $50,000 and $444,600, respectively.
16. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
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.
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.
F-25
<PAGE>
REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Indian@ Interactive, Inc. and subsidiary
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Indian@ Interactive, Inc. and subsidiary (the "Company") at December 31, 1997
and 1996, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards 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
May 6, 1999
F-26
<PAGE>
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- --------- MARCH 31,
1998
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................................... $ 280,918 $ 964 $ 380,209
Trade accounts receivable.............................. 860,777 1,505,464 1,203,141
Receivable from employees.............................. -- -- 1,000
Due from related companies............................. -- -- 662
Prepaid expenses....................................... 10,042 16,531 14,359
--------- --------- -----------
Total current assets............................. 1,151,737 1,522,959 1,599,371
--------- --------- -----------
Property and equipment, net.............................. 372,222 375,426 363,196
--------- --------- -----------
Other assets:
Note receivable from shareholder....................... 25,000 15,000 15,000
Deposits and other..................................... 10,464 13,988 250
Organization costs, net of accumulated amortization of
$5,815, $10,627, and $11,830......................... 18,244 13,432 12,229
--------- --------- -----------
Total other assets............................... 53,708 42,420 27,479
--------- --------- -----------
Total assets..................................... $1,577,667 $1,940,805 $1,990,046
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Checks issued in excess of bank balance................ $ -- $ 117,405 $ --
Accounts payable....................................... 724,411 876,710 1,089,165
Accrued expenses....................................... 44,756 25,671 55,617
Due to related companies............................... -- 528 4,527
Bank lines of credit................................... 119,196 92,923 92,923
Current portion of capital lease obligations........... 99,603 141,632 144,499
--------- --------- -----------
Total current liabilities........................ 987,966 1,254,869 1,386,731
--------- --------- -----------
Long-term liabilities:
Debentures payable to related parties.................. 90,000 90,000 90,000
Capital lease obligations, net of current portion...... 167,536 97,370 48,549
--------- --------- -----------
Total long-term liabilities...................... 257,536 187,370 138,549
--------- --------- -----------
Total liabilities................................ 1,245,502 1,442,239 1,525,280
--------- --------- -----------
Commitments and contingencies (Notes 6 and 7)............
Shareholders' equity:
Common stock, no par value; 100,000 shares authorized,
87,250, 88,122 and 88,122 shares issued and
outstanding.......................................... 18,825 18,825 18,825
Additional paid-in capital............................. 156,174 183,557 183,557
Retained earnings...................................... 157,166 296,184 262,384
--------- --------- -----------
Total shareholders' equity....................... 332,165 498,566 464,766
--------- --------- -----------
Total liabilities and shareholders' equity....... $1,577,667 $1,940,805 $1,990,046
--------- --------- -----------
--------- --------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-27
<PAGE>
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
---------------------- MARCH 31, 1998
1996 1997 (UNAUDITED)
---------- ---------- --------------
<S> <C> <C> <C>
Revenues........................................... $11,658,194 $12,524,065 $3,541,101
Cost of revenues................................... 9,623,884 10,040,041 2,727,257
---------- ---------- --------------
Gross profit................................. 2,034,310 2,484,024 813,844
---------- ---------- --------------
Operating expenses:
Service development and operations............... 359,689 480,492 225,425
Selling, general and administrative.............. 814,997 1,070,667 424,581
Stock compensation............................... -- 13,431 --
Depreciation and amortization.................... 83,448 107,332 31,841
---------- ---------- --------------
Total operating expenses..................... 1,258,134 1,671,922 681,847
---------- ---------- --------------
Operating income............................. 776,176 812,102 131,997
---------- ---------- --------------
Other income (expense):
Interest income.................................. 21,514 20,192 6,804
Interest expense................................. (34,867) (32,330) (9,634)
Miscellaneous income............................. -- 3,412 1,820
Gain on disposals of property and equipment...... -- 401 --
---------- ---------- --------------
Total other expense, net..................... (13,353) (8,325) (1,010)
---------- ---------- --------------
Net income................................... $ 762,823 $ 803,777 $ 130,987
---------- ---------- --------------
---------- ---------- --------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-28
<PAGE>
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES DUE
COMMON STOCK ADDITIONAL ON COMMON
---------------------- PAID-IN RETAINED STOCK
SHARES AMOUNT CAPITAL EARNINGS PURCHASES TOTAL
----------- --------- ----------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996......... 87,250 $ 87,250 $ 156,174 $ (24,911) $ (68,425) $ 150,088
Net income....................... -- -- -- 762,823 -- 762,823
Change in par value of common
stock.......................... -- (68,425) -- -- 68,425 --
Distributions to shareholders.... -- -- -- (580,746) -- (580,746)
----------- --------- ----------- --------- ----------- --------------
BALANCE, DECEMBER 31, 1996....... 87,250 18,825 156,174 157,166 -- 332,165
Net income....................... -- -- -- 803,777 -- 803,777
Issuance of common stock......... 872 -- 27,383 -- -- 27,383
Distributions to shareholders.... -- -- -- (664,759) -- (664,759)
----------- --------- ----------- --------- ----------- --------------
BALANCE, DECEMBER 31, 1997....... 88,122 18,825 183,557 296,184 -- 498,566
Net income (unaudited)........... -- -- -- 130,987 -- 130,987
Distributions to shareholders
(unaudited).................... -- -- -- (164,787) (164,787)
----------- --------- ----------- --------- ----------- --------------
BALANCE, MARCH 31, 1998
(UNAUDITED).................... 88,122 $ 18,825 $ 183,557 $ 262,384 $ -- $ 464,766
----------- --------- ----------- --------- ----------- --------------
----------- --------- ----------- --------- ----------- --------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-29
<PAGE>
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- --------- THREE MONTHS
ENDED
MARCH 31, 1998
---------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 762,823 $ 803,777 $ 130,987
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 83,448 107,332 31,841
Gain on disposals of property and equipment............. -- (401) --
Compensation expense recognized upon issuance of common
stock................................................. -- 13,431 --
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable...... (86,475) (644,687) 302,323
Decrease (increase) in receivable from employees...... 3,400 -- (1,000)
(Increase) in due from related companies.............. -- -- (662)
Decrease (increase) in prepaid expenses............... (6,799) (6,489) 2,172
Decrease (increase) in deposits and other............. (10,214) (3,524) 13,738
Increase (decrease) in accounts payable............... (17,435) 152,299 212,455
Increase (decrease) in accrued expenses............... 26,261 (19,085) 29,946
Increase in due to related companies.................. -- 528 3,999
--------- --------- ---------------
Net cash provided by operating activities............. 755,009 403,181 725,799
--------- --------- ---------------
Cash flows from investing activities:
Purchases of property and equipment....................... (237,287) (110,607) (18,408)
Proceeds from disposals of property and equipment......... -- 5,284 --
Proceeds from repayments of note receivable from
shareholder............................................. -- 10,000 --
--------- --------- ---------------
Net cash used in investing activities................. (237,287) (95,323) (18,408)
--------- --------- ---------------
Cash flows from financing activities:
Checks issued in excess of bank balance................... -- 117,405 (117,405)
Proceeds from bank lines of credit........................ 362,405 97,202 --
Payment on bank lines of credit........................... -- (19,834) --
Payments on capital lease obligations..................... (46,187) (131,778) (45,954)
Distributions to shareholders............................. (580,746) (664,759) (164,787)
Proceeds from issuance of common stock.................... -- 13,952 --
--------- --------- ---------------
Net cash used in financing activities................... (264,528) (587,812) (328,146)
--------- --------- ---------------
Net increase (decrease) in cash............................. 253,194 (279,954) 379,245
Cash, beginning of year..................................... 27,724 280,918 964
--------- --------- ---------------
Cash, end of period......................................... $ 280,918 $ 964 $ 380,209
--------- --------- ---------------
--------- --------- ---------------
Other cash flow information:
Interest paid............................................. $ 34,867 $ 32,330 $ 8,135
--------- --------- ---------------
--------- --------- ---------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-30
<PAGE>
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
INDIAN@ INTERACTIVE, INC.
Indian@ Interactive, Inc. (the "Company") was incorporated March 6, 1995
to design, build and operate Internet-based portals that allow businesses and
citizens to complete transactions and obtain government information online for
the Intelenet Commission ("Intelenet"). Intelenet 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. The Company is responsible for managing and
marketing the government portal as well as funding up front investment and
ongoing operational costs. The contract with Intelenet and the interagency
agreements with various state agencies include limitations and provisions for
the rates the Company can charge and the amount of remuneration to Intelenet and
each state agency. The initial contract expires September 2000 but may be
renewed, or amended and renewed, for up to an additional five years. Intelenet
is entitled to a perpetual for use only license to the applications development
for no additional compensation to the Company.
In October 1997, the Company entered into a computer system agreement
with the Indiana Secretary of State ("SOS"). The system is intended to automate
many of SOS's internal operations and provide the public electronic access to
certain SOS data.
On March 31, 1998, the shareholders of the Company exchanged all of the
issued and outstanding common stock shares for shares of common stock in
International Information Consortium, Inc. whose name was later changed to
National Information Consortium, Inc. ("NIC"). As a result, NIC became the sole
shareholder of the Company.
CITY-COUNTY INTERACTIVE, L.L.C.
The Company's wholly-owned subsidiary, City-County Interactive, L.L.C.
(the "Subsidiary"), was formed in 1997 to assume the role of electronic
government services provider for CivicNet, formerly CivicLink, the government
portal for the city of Indianapolis and Marion County, Indiana. In addition, the
Subsidiary is to further operate, manage and expand CivicNet.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the Company
and its subsidiary. All significant intercompany accounts and transactions have
been eliminated in consolidation.
ACCOUNTS RECEIVABLE
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. 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 income for the period.
The cost of maintenance and repairs is charged to expense as incurred;
significant renewals and betterments are capitalized.
F-31
<PAGE>
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
REVENUE RECOGNITION
The Company recognizes revenues from providing electronic government
services (primarily transaction fees) when the service is provided. The Company
must remit a certain percentage of fees to state agencies regardless of whether
the Company ultimately collects the fees. In connection with the revenues
generated under the contract with Intelenet, Intelenet 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 the Company.
ORGANIZATION COSTS
During the period ended December 31, 1995, the Company incurred
organization costs totaling $24,059. The organization costs are being amortized
on a straight-line basis over a period of five years.
SERVICE DEVELOPMENT COSTS
The Company expenses as incurred the employee costs to develop,
implement, operate and maintain the government portal.
STOCK BASED COMPENSATION
The Company records as compensation expense the amount by which the fair
value of common stock sold to employees exceeds the amount paid.
INCOME TAXES
The Company has elected to be taxed as a small business corporation
under provisions of Subchapter S of the Internal Revenue Code. Under such
provisions, the shareholders are taxed individually on their respective shares
of the Company's taxable income. Therefore, no provision for income tax expense
has been made. The Company changed its income tax status from an S corporation
to a C corporation effective July 1, 1998.
USE OF ESTIMATES
The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-32
<PAGE>
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying balance sheet as of March 31, 1998, and the related
statements of income, changes in shareholders' equity and cash flows for the
three months ended March 31, 1998 are unaudited.
In the opinion of management, these statements have been prepared on the
same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the results of this period. The data disclosed in the notes to the
financial statements for this period is unaudited.
2. CONCENTRATION OF CREDIT
For the years ended December 31, 1997 and 1996, the Company derived 77%
and 80%, respectively, of its transaction fees from two data resellers. At
December 31, 1997 and 1996, 79% and 81%, respectively, of its accounts
receivable were from the same two data resellers.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- USEFUL
1996 1997 LIVES
--------- --------- ---------
<S> <C> <C> <C>
Furniture....................... $ 75,996 $ 77,641 8 years
Equipment....................... 320,920 420,423 5 years
Software........................ 60,464 64,739 3 years
--------- ---------
457,380 562,803
Less accumulated depreciation... 85,158 187,377
--------- ---------
$ 372,222 $ 375,426
--------- ---------
--------- ---------
</TABLE>
Depreciation expense for the years ended December 31, 1997 and 1996 was
$102,520 and $78,637, respectively.
4. BANK LINES OF CREDIT
INDIAN@ INTERACTIVE, INC.
The Company has a $100,000 operating line of credit from a bank which
was increased to $150,000 in October 1997. The interest rate on the line equals
the bank's prime rate plus 0.50% (9.00% at December 31, 1997). The line expired
on November 1, 1998. There were no amounts outstanding on the line of credit at
December 31, 1997 and 1996. The line is collateralized by the Company's assets
as well as personal guarantees of three of the Company's shareholders.
The Company obtained an additional $200,000 operating line of credit
with a bank in December 1997 which was subsequently increased to $400,000 in
1998. The interest rate on the line equals the bank's index rate (8.50% at
December 31, 1997). The line matures April 30, 2000. There were no amounts
outstanding on the line of credit at December 31, 1997. The line of credit is
collateralized by the Company assets and guaranteed by various affiliated
companies.
F-33
<PAGE>
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BANK LINES OF CREDIT (CONTINUED)
The Company has a $600,000 equipment line of credit from a bank which
bears interest at the bank's prime rate plus 0.50% (9.00% at December 31, 1997).
The line expired on November 1, 1998. At December 31, 1997 and 1996, $79,508 and
$119,196, respectively, of equipment purchases were outstanding on the line.
During January 1997, $100,300 of the existing balance on the line of $119,196
was refinanced through a sale-leaseback with the bank. The line is
collateralized by the Company's assets as well as personal guarantees of three
of the Company's shareholders.
The Company obtained an additional $225,000 equipment line of credit
from a bank in April 1998. The interest rate on the line equals the bank's
reference rate plus 1.75%. There is no given expiration date on the line. The
line is collateralized by the related equipment and guaranteed by an affiliated
company.
The line of credit agreements contain various covenants relating to
reporting requirements and financial ratios. At December 31, 1997 and 1996, the
Company was either in compliance with these covenants or had received waivers on
any violations of these covenants.
CITY-COUNTY INTERACTIVE, L.L.C.
The Subsidiary has a $100,000 operating line of credit with a bank which
bears interest at the bank's prime rate plus 0.50%. (9.00% at December 31,
1997). The line expired November 1, 1998. There were no amounts outstanding on
the line of credit at December 31, 1997 and 1996. The line is collateralized by
the Subsidiary's assets as well as the guarantee of the Company and personal
guarantees of three of the Company's shareholders.
The Subsidiary has a $75,000 equipment line of credit from a bank which
bears interest at the bank's prime rate plus 0.50% (9.00% at December 31, 1997).
The line expired on November 1, 1998. At December 31, 1997 and 1996, $13,415 and
$0, respectively, of equipment purchases were outstanding on the line. The line
is collateralized by the Subsidiary's assets as well as the guarantee of the
Company and personal guarantees of three of the Company's shareholders.
5. DEBENTURES PAYABLE TO RELATED PARTIES
Debentures payable at December 31, 1997 and 1996 consist of $90,000 of
10% debentures issued to two shareholders. These debentures are due in one
installment in October 2000. The Company called the debentures in May 1998. Due
to the early call, the Company was required to pay a 5.0% premium.
6. CAPITAL LEASE OBLIGATIONS
The Company leases various equipment under agreements with original
terms of three years. The agreements require the Company to pay all taxes, fees,
assessments or other charges.
F-34
<PAGE>
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL LEASE OBLIGATIONS (CONTINUED)
Capitalized leased property at December 31, 1997 and 1996, consists of:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Furniture and fixtures.................. $ 72,507 $ 72,507
Equipment............................... 281,460 281,460
Software................................ 59,656 59,656
--------- ---------
413,623 413,623
Less accumulated depreciation........... 78,113 163,090
--------- ---------
$ 335,510 $ 250,533
--------- ---------
--------- ---------
</TABLE>
Future minimum lease payments under these capital leases at December 31,
1997 are as follows:
<TABLE>
<S> <C>
FISCAL YEAR
1998............................................ $ 155,874
1999............................................ 97,510
2000............................................ 3,262
---------
256,646
Less interest................................... (17,644)
---------
Present value of net minimum lease payments..... 239,002
Less current portion............................ (141,632)
---------
Long-term portion............................... $ 97,370
---------
---------
</TABLE>
7. OPERATING LEASES
The Company leases its office space, an apartment and certain equipment
under operating leases. Future minimum lease payments under noncancellable
leases at December 31, 1997 are as follows:
<TABLE>
<S> <C>
FISCAL YEAR
1998............................................ $ 69,972
1999............................................ 58,120
2000............................................ 50,503
---------
$ 178,595
---------
---------
</TABLE>
Total rent expense for the years ended December 31, 1997 and 1996 was
$71,554 and $64,518, respectively.
On June 1, 1998, the Company leased additional office space which
increased the future minimum lease payments to $77,502, $73,310 and $63,700 for
the years ending December 31, 1998, 1999 and 2000, respectively.
8. RELATED PARTY TRANSACTIONS
The Company pays its Board members director fees for services rendered.
Total expense incurred was $54,000 and $36,000 for the years ended December 31,
1997 and 1996, respectively.
F-35
<PAGE>
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
Interest expense on debentures payable to related parties totaled $9,000
for the years ended December 31, 1997 and 1996.
The note receivable from shareholder of $15,000 was paid in full in July
1998.
The Company purchases business and health insurance through an insurance
agency that is controlled by a shareholder of the Company. Insurance expense
totaled approximately $65,000 and $43,000 for the years ended December 31, 1997
and 1996, respectively.
The Company rents an aircraft on an hourly basis from Sky King Leasing,
a company with common shareholders. The amount paid to Sky King Leasing was
approximately $10,500 and $19,500 in 1997 and 1996, respectively.
The Company is affiliated, through common ownership, with several
companies that also serve as electronic government services providers for
various states. The Company is a partial guarantor of certain line of credit
agreements entered into by these affiliated companies. The total amounts
available and outstanding under such agreements at December 31, 1997 was
$1,075,000 and $192,089.
9. EMPLOYEE BENEFIT PLAN
The Company, in conjunction with affiliated companies, maintains a
401(k) profit sharing plan. In accordance with the plan, all employees are
eligible immediately upon employment. A discretionary match and a discretionary
contribution may be made to the plan as determined by the Board of Directors.
Company contributions totaled $18,432 and $16,319 for the years ended December
31, 1997 and 1996, respectively.
10. COMMON STOCK
CHANGE IN PAR VALUE OF COMMON STOCK
During 1996, the Company amended the corporate bylaws to change the par
value of common stock from $1.00 par to no par with a total stated value of
$18,825. In conjunction with the amendment, notes due on common stock purchases
were forgiven.
RESTRICTIONS ON TRANSFERABILITY OF COMMON STOCK
The Articles of Incorporation of the Company stipulate that should any
shareholder desire to sell or transfer their respective shares of common stock,
such stock must first be offered to the Company. Any stock not purchased by the
Company within a specified time frame must then be offered to the remaining
shareholders. The purchase price must be equivalent to the price that would be
paid by a non-shareholder.
11. SUPPLEMENTARY CASH FLOW DISCLOSURES
The Company sold certain assets during 1996 which were leased back from
the purchaser over a period of three years. The resulting leases are being
accounted for as capital leases. The purchaser paid down $103,641 of the
Company's bank line of credit during 1997 and $313,323 during 1996.
F-36
<PAGE>
REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Kansas Information Consortium, Inc.
In our opinion, the accompanying balance sheets and the related statements of
income, of changes in shareholders' equity and of cash flows present fairly, in
all material respects, the financial position of Kansas Information Consortium,
Inc. (the "Company") at December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards 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
May 6, 1999
F-37
<PAGE>
KANSAS INFORMATION CONSORTIUM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- --------- MARCH 31,
1998
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 36,571 $ 136,379 $ 179,413
Trade accounts receivable................................ 483,092 542,979 626,303
Receivable from employees................................ 3,246 968 9,432
Due from related companies............................... -- 22,348 982
Prepaid expenses......................................... 23,353 16,870 10,930
--------- --------- -----------
Total current assets................................... 546,262 719,544 827,060
Property and equipment, net................................ 131,770 151,522 155,165
Deposits and other......................................... 2,145 625 25
--------- --------- -----------
Total assets........................................... $ 680,177 $ 871,691 $ 982,250
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 405,715 $ 445,054 $ 481,516
Accrued expenses......................................... 5,127 23,784 40,893
--------- --------- -----------
Total current liabilities.............................. 410,842 468,838 522,409
Bank lines of credit....................................... 100 178,674 148,682
Debentures payable to related parties...................... 75,000 -- --
--------- --------- -----------
Total liabilities...................................... 485,942 647,512 671,091
--------- --------- -----------
Commitments and contingencies (Note 6).....................
Shareholders' equity:
Common stock, $1 par value; 500,000 shares authorized,
250,000 issued and 224,750, 229,250 and 229,250
outstanding............................................ 250,000 250,000 250,000
Additional paid-in capital............................... 8,870 22,146 22,146
Retained earnings........................................ (6,385) (19,717) 67,263
--------- --------- -----------
252,485 252,429 339,409
Less common stock subscriptions receivable................. (25,500) -- --
Less treasury stock, at cost............................... (32,750) (28,250) (28,250)
--------- --------- -----------
Total shareholders' equity............................. 194,235 224,179 311,159
--------- --------- -----------
Total liabilities and shareholders' equity............. $ 680,177 $ 871,691 $ 982,250
--------- --------- -----------
--------- --------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-38
<PAGE>
KANSAS INFORMATION CONSORTIUM, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1996 1997
--------- --------- THREE MONTHS
ENDED
MARCH 31, 1998
--------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues............................................. $5,009,204 $6,067,362 $1,625,488
Cost of revenues..................................... 3,681,547 4,576,795 1,174,015
--------- --------- --------------
Gross profit..................................... 1,327,657 1,490,567 451,473
--------- --------- --------------
Operating expenses:
Service development and operations................. 300,044 387,083 99,685
Selling, general and administrative................ 783,971 812,306 190,994
Stock compensation................................. 3,870 13,276 --
Depreciation....................................... 44,983 32,496 9,971
--------- --------- --------------
Total operating expenses......................... 1,132,868 1,245,161 300,650
--------- --------- --------------
Operating income................................. 194,789 245,406 150,823
--------- --------- --------------
Other income (expense):
Interest income.................................... 1,909 822 401
Interest expense................................... (18,072) (13,056) (4,639)
Loss on disposals of property and equipment........ (11,214) (43,144) --
--------- --------- --------------
Total other expense, net......................... (27,377) (55,378) (4,238)
--------- --------- --------------
Net income....................................... $ 167,412 $ 190,028 $ 146,585
--------- --------- --------------
--------- --------- --------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-39
<PAGE>
KANSAS INFORMATION CONSORTIUM, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK COMMON STOCK
-------------------- PAID-IN RETAINED -------------------- SUBSCRIPTIONS
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT RECEIVABLE
--------- --------- ----------- ----------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996................ 250,000 $ 250,000 $ 1,400 $ (35,795) (28,250) $ (35,750) $ (25,500)
Net income.............................. -- -- -- 167,412 -- -- --
Distributions to shareholders........... -- -- -- (138,002) -- -- --
Sales of treasury stock................. -- -- 7,470 -- 3,000 3,000 --
--------- --------- ----------- ----------- --------- --------- -------------
BALANCE, DECEMBER 31, 1996.............. 250,000 250,000 8,870 (6,385) (25,250) (32,750) (25,500)
Net income.............................. -- -- -- 190,028 -- -- --
Distributions to shareholders........... -- -- -- (203,360) -- -- --
Sales of treasury stock................. -- -- 13,276 -- 4,500 4,500 --
Payment received for subscribed stock... -- -- -- -- -- -- 25,500
--------- --------- ----------- ----------- --------- --------- -------------
BALANCE, DECEMBER 31, 1997.............. 250,000 250,000 22,146 (19,717) (20,750) (28,250) --
Net income (unaudited).................. -- -- -- 146,585 -- -- --
Distributions to shareholders
(unaudited)........................... -- -- -- (59,605) -- -- --
--------- --------- ----------- ----------- --------- --------- -------------
BALANCE, MARCH 31, 1998 (UNAUDITED)..... 250,000 $ 250,000 $ 22,146 $ 67,263 (20,750) $ (28,250) $ --
--------- --------- ----------- ----------- --------- --------- -------------
--------- --------- ----------- ----------- --------- --------- -------------
<CAPTION>
TOTAL
---------
<S> <C>
BALANCE, JANUARY 1, 1996................ $ 154,355
Net income.............................. 167,412
Distributions to shareholders........... (138,002)
Sales of treasury stock................. 10,470
---------
BALANCE, DECEMBER 31, 1996.............. 194,235
Net income.............................. 190,028
Distributions to shareholders........... (203,360)
Sales of treasury stock................. 17,776
Payment received for subscribed stock... 25,500
---------
BALANCE, DECEMBER 31, 1997.............. 224,179
Net income (unaudited).................. 146,585
Distributions to shareholders
(unaudited)........................... (59,605)
---------
BALANCE, MARCH 31, 1998 (UNAUDITED)..... $ 311,159
---------
---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-40
<PAGE>
KANSAS INFORMATION CONSORTIUM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- --------- THREE MONTHS
ENDED
MARCH 31, 1998
---------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 167,412 $ 190,028 $ 146,585
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation........................................ 44,983 32,496 9,971
Loss on disposals of property and equipment......... 11,214 43,144 --
Compensation expense recognized upon sales of
treasury stock.................................... 3,870 13,276 --
Changes in operating assets and liabilities:
(Increase) in trade accounts receivable............. (159,828) (59,887) (83,324)
Decrease (increase) in receivable from employees.... (3,246) 2,278 (8,464)
Decreases (increase) in due from related
companies......................................... -- (22,348) 21,366
Decrease (increase) in prepaid expenses............. (5,984) 6,483 5,940
Decrease (increase) in deposits and other........... (699) 1,520 600
Increase in accounts payable........................ 118,081 39,339 36,462
Increase (decrease) in accrued expenses............. (4,547) 18,657 17,109
--------- --------- ---------------
Net cash provided by operating activities......... 171,256 264,986 146,245
--------- --------- ---------------
Cash flows from investing activities:
Purchases of property and equipment................... (62,960) (96,151) (13,613)
Proceeds from disposals of property and equipment..... 56,775 759 --
--------- --------- ---------------
Net cash used in investing activities............. (6,185) (95,392) (13,613)
--------- --------- ---------------
Cash flows from financing activities:
Proceeds from bank lines of credit.................... 90,321 215,941 --
Payments on bank lines of credit...................... (164,981) (37,367) (29,993)
Payments on debentures payable to related parties..... (25,000) (75,000) --
Distributions to shareholders......................... (138,002) (203,360) (59,605)
Proceeds from sale of treasury stock.................. 6,600 4,500 --
Proceeds from common stock subscriptions receivable... -- 25,500 --
--------- --------- ---------------
Net cash used in financing activities............. (231,062) (69,786) (89,598)
--------- --------- ---------------
Net increase (decrease) in cash......................... (65,991) 99,808 43,034
Cash, beginning of year................................. 102,562 36,571 136,379
--------- --------- ---------------
Cash, end of period..................................... $ 36,571 $ 136,379 $ 179,413
--------- --------- ---------------
--------- --------- ---------------
Other cash flow information:
Interest paid......................................... $ 20,168 $ 14,310 $ 4,639
--------- --------- ---------------
--------- --------- ---------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-41
<PAGE>
KANSAS INFORMATION CONSORTIUM, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. Kansas Information Consortium, Inc. (the "Company") was
incorporated August 15, 1991 to design, build and operate Internet-based portals
that allow businesses and citizens to complete transactions and obtain
government information online 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. The Company 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 the Company can charge and the
amount of remuneration to INK and each state agency. The initial contract was to
expire on December 31, 1996, but was renewed until December 31, 1999 unless
earlier terminated by INK for cause. INK shall have the option, upon termination
or expiration of the contract, to require the Company to act 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 applications developed for no additional compensation to
the Company.
On March 31, 1998, the shareholders of the Company exchanged all of
their issued and outstanding common stock shares for shares of common stock in
International Information Consortium, Inc. whose name was later changed to
National Information Consortium, Inc. ("NIC"). As a result, NIC became the sole
shareholder of the Company.
ACCOUNTS RECEIVABLE.
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required.
PROPERTY AND EQUIPMENT.
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. 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 income 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.
REVENUE RECOGNITION
The Company recognizes revenues from providing electronic government
services (primarily transaction fees) when the service is provided. The Company
must remit a certain percentage of transaction fees to state agencies regardless
of whether the Company ultimately collects the fees. 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. The Company 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
F-42
<PAGE>
KANSAS INFORMATION CONSORTIUM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
is shared 66.7% with the Company 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 noncancellable obligations under corporate
leases.
SERVICE DEVELOPMENT COSTS.
The Company expenses as incurred the employee costs to develop,
implement, operate and maintain the government portal.
STOCK-BASED COMPENSATION.
The Company records as compensation expense the amount by which the fair
value of common stock sold to employees exceeds the amount paid.
INCOME TAXES.
The Company has elected to be taxed as a small business corporation
under provisions of Subchapter S of the Internal Revenue Code. Under such
provisions, the shareholders are taxed individually on their respective shares
of the Company's taxable income. Therefore, no provision for income tax expense
has been made. The Company changed its income tax status from an S corporation
to a C corporation effective July 1, 1998.
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.
UNAUDITED INTERIM FINANCIAL INFORMATION.
The accompanying balance sheet as of March 31, 1998, and the related
statements of income, changes in shareholders' equity and cash flows for the
three months ended March 31, 1998 are unaudited.
In the opinion of management, these statements have been prepared on the
same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the results of this period. The data disclosed in the notes to the
financial statements for this period is unaudited.
2. CONCENTRATION OF CREDIT
For the years ended December 31, 1997 and 1996, the Company derived 84%
and 72%, respectively, of its transaction fees from six data resellers. At
December 31, 1997 and 1996, 84% and 80%, respectively, of its accounts
receivable were from the same six data resellers.
F-43
<PAGE>
KANSAS INFORMATION CONSORTIUM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- USEFUL
1996 1997 LIVES
--------- --------- -----------
<S> <C> <C> <C>
Furniture and fixtures..................... $ 77,519 $ 84,419 8 years
Equipment.................................. 170,578 116,195 5-8 years
Software................................... 25,103 -- 5 years
Leasehold improvements..................... 15,457 15,457 5 years
--------- ---------
288,657 216,071
Less accumulated depreciation.............. 156,887 64,549
--------- ---------
$ 131,770 $ 151,522
--------- ---------
--------- ---------
</TABLE>
Depreciation expense for the years ended December 31, 1997 and 1996 was
$32,496 and $44,983, respectively.
4. BANK LINES OF CREDIT
The Company obtained a $250,000 line of credit from a bank in May 1997.
The interest rate on the line equals the prime rate as per the Wall Street
Journal (8.50% at December 31, 1997). The line matures May 1, 1999. At December
31, 1997, $178,674 was outstanding on the line of credit. The line of credit is
collateralized by the Company's assets.
The Company obtained an additional $250,000 line of credit from a bank
in December 1997. The interest rate on the line equals the bank's index rate
(8.50% at December 31, 1997). The line matures April 30, 2000. There were no
amounts outstanding on the line of credit at December 31, 1997. The line of
credit is collateralized by the Company's assets and guaranteed by various
affiliated companies.
The Company obtained a $225,000 equipment line of credit from a bank in
April 1998. The interest rate on the line equals the bank's reference rate plus
1.75%. There is no given expiration date on the line. The line is collateralized
by the related equipment and guaranteed by an affiliated company.
The Company had a $50,000 line of credit from a bank with a maturity
date of March 30, 1998, which was repaid during 1997. At December 31, 1997 and
1996, $0 and $100, respectively, was outstanding on the line of credit.
5. DEBENTURES PAYABLE TO RELATED PARTIES
The Company had $75,000 of 10% debentures with a maturity date of
October 31, 2001 which were repaid during 1997.
F-44
<PAGE>
KANSAS INFORMATION CONSORTIUM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. OPERATING LEASES
The Company leases its office space and certain equipment under
operating leases. The future minimum lease payments under noncancellable
operating leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------------------------------------------------------------
<S> <C>
1998............................................................. $ 118,374
1999............................................................. 105,041
2000............................................................. 38,374
2001............................................................. 38,374
2002............................................................. 31,980
-----------
$ 332,143
-----------
-----------
</TABLE>
Total rent expense for the years ended December 31, 1997 and 1996 was
$137,161 and $66,143, respectively.
7. RELATED PARTY TRANSACTIONS
The Company pays its Board members director fees for services rendered.
Total expense incurred was $41,000 and $45,000 for the years ended December 31,
1997 and 1996, respectively.
The Company purchases business and health insurance through an insurance
agency that is controlled by a shareholder of the Company. Insurance expense
totaled approximately $58,000 and $86,000 in 1997 and 1996, respectively.
The Company rents an aircraft on an hourly basis from Sky King Leasing,
a company with common shareholders. The amount paid to Sky King Leasing was
approximately $18,000 and $8,500 in 1997 and 1996, respectively.
During 1997, a shareholder of the Company sold a vehicle to the Company
for $30,000.
8. EMPLOYEE BENEFIT PLAN
The Company, in conjunction with affiliated companies, maintains a
401(k) profit sharing plan. In accordance with the plan, all employees are
eligible immediately upon employment. A discretionary match and a discretionary
contribution may be made to the plan as determined by the Board of Directors.
Company contributions totaled $37,178 and $10,611 for the years ended December
31, 1997 and 1996, respectively.
9. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company sold certain assets during 1996 which were leased back from
the purchaser over a period of three years. The resulting lease is being
accounted for as an operating lease. The purchaser paid down on the Company's
bank line of credit in 1996 by $51,929 as part of this sale-leaseback
transaction.
F-45
<PAGE>
REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Arkansas Information Consortium, Inc.
In our opinion, the accompanying balance sheet and the related statement of
operations, of changes in shareholders' equity, and of cash flows present
fairly, in all material respects, the financial position of Arkansas Information
Consortium, Inc. (the "Company") at December 31, 1997, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
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 audit provides a
reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
May 6, 1999
F-46
<PAGE>
ARKANSAS INFORMATION CONSORTIUM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------- MARCH 31, 1998
--------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash....................................................... $ 72,916 $ 104,345
Trade accounts receivable.................................. 585,989 734,639
Interest receivable from shareholders...................... 1,786 2,773
Prepaid expenses........................................... 778 924
------------- --------------
Total current assets................................... 661,469 842,681
------------- --------------
Property and equipment, net.................................. 123,492 141,410
------------- --------------
Other assets:
Deposits................................................... 3,000 3,000
Organization costs, net of accumulated amortization of $315
and $504................................................. 3,466 3,277
Notes receivable from shareholders......................... 40,000 40,000
------------- --------------
Total other assets..................................... 46,466 46,277
------------- --------------
Total assets........................................... $ 831,427 $1,030,368
------------- --------------
------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 534,760 $ 656,689
Accrued expenses........................................... 5,620 15,766
Due to related party....................................... 4,510 254
Note payable to former shareholder--current portion........ -- 6,500
------------- --------------
Total current liabilities.............................. 544,890 679,209
Debentures payable........................................... 40,130 40,130
Note payable to former shareholder--long-term portion........ -- 6,500
------------- --------------
Total liabilities...................................... 585,020 725,839
------------- --------------
Commitments and contingencies (Note 6)
Shareholders' equity:
Common stock:
Series A $1 par, 500,000 voting shares authorized,
272,059 shares issued and outstanding.................. 272,059 272,059
Series B $1 par, 500,000 non-voting shares authorized,
220,881 shares issued, 220,881 and 215,876 shares
outstanding............................................ 220,881 220,881
Retained earnings........................................ (246,533) (174,026)
------------- --------------
246,407 318,914
Less treasury stock, at cost............................... -- (14,385)
------------- --------------
Total shareholders' equity............................. 246,407 304,529
------------- --------------
Total liabilities and shareholders' equity............. $ 831,427 $1,030,368
------------- --------------
------------- --------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-47
<PAGE>
ARKANSAS INFORMATION CONSORTIUM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------- THREE MONTHS
ENDED
MARCH 31, 1998
--------------
(UNAUDITED)
<S> <C> <C>
Revenues..................................................... $ 2,346,889 $2,041,142
Cost of revenues............................................. 2,077,144 1,802,776
------------- --------------
Gross profit........................................... 269,745 238,366
------------- --------------
Operating expenses:
Service development and operations......................... 90,447 56,808
Selling, general and administrative........................ 187,567 100,425
Stock compensation......................................... 232,384 5,115
Depreciation and amortization.............................. 8,232 6,236
------------- --------------
Total operating expenses............................... 518,630 168,584
------------- --------------
Operating income (loss)................................ (248,885) 69,782
------------- --------------
Other income (expense):
Interest income............................................ 4,083 3,628
Interest expense........................................... (1,731) (903)
------------- --------------
Total other income..................................... 2,352 2,725
------------- --------------
Net income (loss)...................................... $ (246,533) $ 72,507
------------- --------------
------------- --------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-48
<PAGE>
ARKANSAS INFORMATION CONSORTIUM, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A AND B
COMMON STOCK TREASURY STOCK
-------------------- RETAINED ----------------------
SHARES AMOUNT EARNINGS SHARES AMOUNT TOTAL
--------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997.................. -- $ -- $ -- -- $ -- $ --
Issuance of common stock.................. 492,940 492,940 -- -- -- 492,940
Net loss.................................. -- -- (246,533) -- -- (246,533)
--------- --------- --------- ----------- --------- ---------
Balance, December 31, 1997................ 492,940 492,940 (246,533) -- -- 246,407
Net income (unaudited).................... -- -- 72,507 -- -- 72,507
Purchase of treasury stock (unaudited).... -- -- -- (5,005) (14,385) (14,385)
--------- --------- --------- ----------- --------- ---------
Balance, March 31, 1998 (unaudited)....... 492,940 $ 492,940 $(174,026) (5,005) $ (14,385) $ 304,529
--------- --------- --------- ----------- --------- ---------
--------- --------- --------- ----------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-49
<PAGE>
ARKANSAS INFORMATION CONSORTIUM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------- THREE MONTHS
ENDED
MARCH 31, 1998
--------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................... $(246,533) $ 72,507
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.............................. 8,232 6,236
Issuance of common stock for services...................... 232,384 --
Expense recognized upon repurchase of treasury stock....... -- 5,115
Changes in operating assets and liabilities:
(Increase) in trade accounts receivable.................. (585,989) (148,650)
(Increase) in interest receivable from shareholders...... (1,786) (987)
(Increase) in prepaid expenses........................... (778) (145)
(Increase) in deposits................................... (3,000) --
Increase in accounts payable............................. 534,760 121,929
Increase in accrued expenses............................. 5,620 10,146
Increase (decrease) in due to related party.............. 4,510 (4,256)
------------- --------------
Net cash provided by (used in) operating
activities......................................... (52,580) 61,895
------------- --------------
Cash flows from investing activities:
Purchases of property and equipment........................ (131,409) (23,966)
Organization costs......................................... (3,781) --
------------- --------------
Net cash used in investing activities................ (135,190) (23,966)
------------- --------------
Cash flows from financing activities:
Proceeds from issuance of debentures....................... 40,130 --
Proceeds from issuance of common stock..................... 220,556 --
Purchase of treasury stock................................. -- (6,500)
------------- --------------
Net cash provided by (used in) financing
activities......................................... 260,686 (6,500)
------------- --------------
Net increase in cash......................................... 72,916 31,429
Cash, beginning of year...................................... -- 72,916
------------- --------------
Cash, end of period.......................................... $ 72,916 $ 104,345
------------- --------------
------------- --------------
Other cash flow information:
Interest paid.............................................. $ 128 $ 903
------------- --------------
------------- --------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-50
<PAGE>
ARKANSAS INFORMATION CONSORTIUM, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Arkansas Information Consortium, Inc. (the "Company") was incorporated
in October 1996 to design, build and operate Internet-based portals that allow
businesses and citizens to complete transactions and obtain government
information online, as defined by a contract signed in July 1997 between the
Company and the Information Network of Arkansas ("INA"), a public
instrumentality created by legislation in the State of Arkansas (the "State"),
to provide electronic access via the Internet to public information. The Company
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, INA shall be entitled to a perpetual for use
only license to the applications developed for no additional compensation to the
Company. Prior to June 30, 2003, INA reserves the right to negotiate terms for
licensure of applications.
On March 31, 1998, substantially all of the shareholders of the Company
exchanged their shares for common stock shares in International Information
Consortium, Inc., whose name was later changed to National Information
Consortium, Inc. ("NIC"). As a result, NIC became the sole shareholder of the
Company. Only one shareholder did not participate in the exchange. In March
1998, the Company agreed to pay this shareholder $19,500 for past services and
reacquired the shareholder's 5,005 shares in the Company. The reacquired shares
were recorded as treasury stock at fair market value, which totaled $14,385. An
initial payment of $6,500 was made with the remaining balance recorded as a note
payable due in two annual installments of $6,500 in 1999 and 2000. The
difference between $19,500 and the fair value of the reacquired stock was
recorded as expense in the amount of $5,115.
ACCOUNTS RECEIVABLE
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts has been recorded.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. 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.
ORGANIZATION COSTS
Organization costs represent legal costs incurred by the Company
relating to its incorporation and formation and are being amortized using the
straight-line method over five years.
F-51
<PAGE>
ARKANSAS INFORMATION CONSORTIUM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company has elected to be treated as a small business corporation
under provisions of Subchapter S of the Internal Revenue Code. Under such
provisions, the shareholders are taxed individually on their respective shares
of the Company's taxable income. Therefore, no provision for income tax has been
made. The Company changed its income tax status from an S corporation to a C
corporation effective July 1, 1998.
REVENUE RECOGNITION
The Company recognizes revenues from providing electronic government
services (primarily transaction fees) when the service is provided. The Company
must remit a certain percentage of transaction fees to state agencies regardless
of whether the Company ultimately collects the fees. In addition, transaction
fees received pursuant to the agreement with INA are disbursed first for payment
of network operating expenses, then to INA 5% of the amount by which gross
revenues exceed the amount payable to state agencies, and the balance to the
Company.
SERVICE DEVELOPMENT COSTS
The Company expenses as incurred the employee costs to develop,
implement, operate and maintain the government portal.
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.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying balance sheet as of March 31, 1998, and the related
statements of operations, cash flows and changes in shareholders' equity for the
three months ended March 31, 1998 are unaudited.
In the opinion of management, these statements have been prepared on the
same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the results of this period. The data disclosed in the notes to the
financial statements for this period is unaudited.
2. CONCENTRATION OF CREDIT
For the year ended December 31, 1997, the Company derived 99% of its
transaction fees from three data resellers. The same three data resellers
represent 99% of accounts receivable at December 31, 1997.
F-52
<PAGE>
ARKANSAS INFORMATION CONSORTIUM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1997:
<TABLE>
<CAPTION>
USEFUL
LIVES
-----------
<S> <C> <C>
Equipment............................................ $ 125,706 3-8 years
Leasehold improvements............................... 5,703 5 years
---------
131,409
Less accumulated depreciation........................ 7,917
---------
$ 123,492
---------
---------
</TABLE>
Depreciation expense for the year ended December 31, 1997 was $7,917.
4. DEBENTURES PAYABLE
Debentures payable at December 31, 1997 consists of $40,130 of 9%
debentures issued to seven individuals as part of the initial capitalization of
the Company. In May 1998, the Company entered into a $150,000 bank line of
credit agreement, which is guaranteed by NIC. Proceeds from the line of credit
totaling $40,000 were used to repay the debentures. The line of credit was
repaid in August 1998.
5. BANK LINES OF CREDIT AND LETTER OF CREDIT
The Company obtained a $150,000 operating line of credit from a bank in
May 1998. The interest rate on the line equals the bank's index rate (8.50% at
the inception of the line). The expiration date on the line is April 30, 2000.
The line is collateralized by the Company's assets and guaranteed by an
affiliated company.
The Company obtained a $225,000 equipment line of credit from a bank in
April 1998. There is no given expiration date on the line. The line is
collateralized by the related equipment and guaranteed by an affiliated company.
The Company has issued to the State an irrevocable letter of credit in
the amount of $50,000.
6. OPERATING LEASES
The Company leases its office space and certain equipment under
operating leases. Future minimum lease payments under noncancellable operating
leases are as follows at December 31, 1997:
<TABLE>
<CAPTION>
FISCAL YEAR
- ------------------------------------------------------------------
<S> <C>
1998.............................................................. $ 42,322
1999.............................................................. 43,024
2000.............................................................. 22,328
2001.............................................................. 936
2002.............................................................. 936
---------
$ 109,546
---------
---------
</TABLE>
The lease for office space is a six year lease that runs through 2003
with annual rent of $42,000 per year for years four through six, which is not
included above. In the event that the Company's contract with INA was not
renewed, the Company may terminate the lease at the end of the third, fourth or
fifth
F-53
<PAGE>
ARKANSAS INFORMATION CONSORTIUM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. OPERATING LEASES (CONTINUED)
years, upon written notice given 90 days before the end of that year. Under no
other circumstances can the Company terminate the lease.
Total rent expense for the year ended December 31, 1997 was $18,364.
7. RELATED PARTY TRANSACTIONS
The Company pays its Board members director fees for services rendered.
Total expense incurred was $6,000 for the three month period ended March 31,
1998. No director fees were paid in 1997.
The Company is affiliated, through common ownership, with several
companies that also serve as electronic government services providers for
various states. The Company is a partial guarantor of certain line of credit
agreements entered into by these affiliated companies. The total amounts
available and outstanding under such agreements at December 31, 1997 were
$1,050,000 and $178,674.
Notes receivable from shareholders at December 31, 1997 represents two
notes paying interest at 10% per annum which were originally issued in exchange
for shares of the Company's stock and payable in three years. The notes were
paid in full in July 1998.
During the start-up phase of the organization, an affiliated company
paid expenses on behalf of the Company totaling approximately $96,000, all of
which has been reimbursed by the Company. Of this amount, approximately, $3,800
was recorded as organization costs with the remaining $92,200 expensed as
incurred.
The Company rents an aircraft on an hourly basis from Sky King Leasing,
which has common shareholders with the Company. The amount paid to Sky King
Leasing for the year ended December 31, 1997 was approximately $8,300.
The Company purchases business and health insurance through an insurance
agency that is controlled by a shareholder of the Company. Insurance expense for
the year ended December 31, 1997 was approximately $13,900.
8. EMPLOYEE BENEFIT PLAN
The Company, in conjunction with affiliated companies, maintains a
401(k) profit sharing plan. In accordance with the plan, all employees are
eligible immediately upon employment. A discretionary match and a discretionary
contribution may be made to the plan as determined by the Board of Directors.
Company contributions totaled $4,301 for the year ended December 31, 1997.
9. COMMON STOCK
The initial capitalization of the Company in June 1997 consisted of
492,940 shares of $1 par common stock issued to approximately 35 individual
investors. Cash was received for 220,556 of the shares and a note receivable was
issued for 40,000 of the shares. The remaining 232,384 shares were issued in
exchange for previous services rendered and were expensed at the $1 par amount
which was the same price per share paid by the other investors.
The Articles of Incorporation of the Company stipulate that should any
shareholder desire to sell or transfer their respective shares of common stock,
such stock must first be offered to the Company. Any stock not purchased by the
Company within a specified time period must then be offered to the remaining
shareholders. The purchase price must be equivalent to the price that would be
paid by a non-shareholder.
F-54
<PAGE>
REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Nebrask@ Interactive, Inc.
In our opinion, the accompanying balance sheets and the related statements of
income, of changes in shareholders' equity and of cash flows present fairly, in
all material respects, the financial position of Nebrask@ Interactive, Inc. (the
"Company") at December 31, 1997 and 1996 and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards 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
May 6, 1999
F-55
<PAGE>
NEBRASK@ INTERACTIVE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
MARCH 31,
1998
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 83,955 $ 129,676 $ 100,941
Trade accounts receivable................................. 179,730 316,162 320,499
Prepaid expenses.......................................... -- -- 2,407
--------- --------- -----------
Total current assets.................................. 263,685 445,838 423,847
Property and equipment, net................................. 129,917 110,158 104,259
Other....................................................... 2,743 2,336 2,235
--------- --------- -----------
Total assets.......................................... $ 396,345 $ 558,332 $ 530,341
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 119,836 $ 227,340 $ 263,914
Accrued expenses.......................................... 257 5,167 10,790
Bank line of credit--current portion...................... 24,789 -- --
Capital lease obligation.................................. 60,148 -- --
Note payable to former shareholder--current portion....... -- -- 43,500
Dividends payable......................................... -- 47,848 --
--------- --------- -----------
Total current liabilities............................. 205,030 280,355 318,204
Bank line of credit--long-term portion...................... 23,563 89,412 59,740
Note payable to former shareholder--long-term portion....... -- -- 43,500
--------- --------- -----------
Total liabilities..................................... 228,593 369,767 421,444
--------- --------- -----------
Commitments and contingencies (Notes 5 and 6)
Shareholders' equity:
Common stock--$1 par value, 100,000 shares authorized,
50,167, 50,367 and 50,367 issued and 50,167, 50,367 and
45,117 outstanding...................................... 50,167 50,367 50,367
Additional paid-in capital................................ 72,535 75,585 75,585
Retained earnings......................................... 45,050 62,613 72,384
--------- --------- -----------
167,752 188,565 198,336
Less treasury stock, at cost.............................. -- -- (89,439)
--------- --------- -----------
Total shareholders' equity............................ 167,752 188,565 108,897
--------- --------- -----------
Total liabilities and shareholders' equity............ $ 396,345 $ 558,332 $ 530,341
--------- --------- -----------
--------- --------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-56
<PAGE>
NEBRASK@ INTERACTIVE, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1996 1997
--------- --------- THREE MONTHS
ENDED
MARCH 31, 1998
---------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues............................................ $2,324,176 $2,447,318 $ 706,059
Cost of revenues.................................... 1,613,978 1,710,699 479,090
--------- --------- ---------------
Gross profit.................................... 710,198 736,619 226,969
--------- --------- ---------------
Operating expenses:
Service development and operations................ 129,575 126,510 59,912
Selling, general and administrative............... 358,902 393,355 134,994
Stock compensation................................ 1,232 1,978 --
Depreciation and amortization..................... 37,852 36,701 22,664
--------- --------- ---------------
Total operating expenses...................... 527,561 558,544 217,570
--------- --------- ---------------
Operating income.............................. 182,637 178,075 9,399
--------- --------- ---------------
Other income (expense):
Interest income................................... 7,877 5,951 1,974
Interest expense.................................. (16,949) (4,552) (1,602)
Loss on disposal of property and equipment........ (174) (8,713) --
--------- --------- ---------------
Total other income (expense).................. (9,246) (7,314) 372
--------- --------- ---------------
Net income.................................... $ 173,391 $ 170,761 $ 9,771
--------- --------- ---------------
--------- --------- ---------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-57
<PAGE>
NEBRASK@ INTERACTIVE, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
------------------------ PAID-IN RETAINED --------------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL
----------- ----------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996......... 50,000 $ 50,000 $ 70,225 $ 20,435 -- $ -- $ 140,660
Net income....................... -- -- -- 173,391 -- -- 173,391
Distributions to shareholders.... -- -- -- (148,776) -- -- (148,776)
Issuance of common stock......... 167 167 2,310 -- -- -- 2,477
----------- ----------- ----------- ----------- --------- --------- ---------
Balance, December 31, 1996....... 50,167 50,167 72,535 45,050 -- -- 167,752
Net income....................... -- -- -- 170,761 -- -- 170,761
Distributions to shareholders.... -- -- -- (153,198) -- -- (153,198)
Issuance of common stock......... 200 200 3,050 -- -- -- 3,250
----------- ----------- ----------- ----------- --------- --------- ---------
Balance, December 31, 1997....... 50,367 50,367 75,585 62,613 -- -- 188,565
Net income (unaudited)........... -- -- -- 9,771 -- -- 9,771
Distributions to shareholders
(unaudited).................... -- -- -- -- -- -- --
Purchase of treasury stock
(unaudited).................... -- -- -- -- (5,250) (89,439) (89,439)
----------- ----------- ----------- ----------- --------- --------- ---------
Balance, March 31, 1998
(unaudited).................... 50,367 $ 50,367 $ 75,585 $ 72,384 (5,250) $ (89,439) $ 108,897
----------- ----------- ----------- ----------- --------- --------- ---------
----------- ----------- ----------- ----------- --------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-58
<PAGE>
NEBRASK@ INTERACTIVE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- ---------
THREE MONTHS
ENDED
MARCH 31, 1998
--------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 173,391 $ 170,761 $ 9,771
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 37,852 36,701 22,664
Loss on disposals of property and equipment.......... 174 8,713 --
Expense recognized upon purchase of treasury stock... -- -- 41,061
Compensation expense recognized upon issuance of
common stock....................................... 1,232 1,978 --
Changes in operating assets and liabilities:
(Increase) in trade accounts receivable............ (20,665) (136,432) (4,337)
(Increase) in prepaid expenses..................... -- -- (2,407)
Increase in accounts payable....................... 15,060 107,504 36,574
Increase in accrued expenses....................... 4 4,910 5,623
--------- --------- --------------
Net cash provided by operating activities........ 207,048 194,135 108,949
--------- --------- --------------
Cash flows from investing activities:
Purchases of property and equipment.................. (1,734) (25,248) (16,664)
Proceeds from disposals of property and equipment.... 1,200 -- --
Proceeds from repayments of note receivable from
related party...................................... 10,220 -- --
--------- --------- --------------
Net cash provided by (used in) investing
activities..................................... 9,686 (25,248) (16,664)
--------- --------- --------------
Cash flows from financing activities:
Proceeds from bank line of credit.................... -- 85,000 --
Payments on bank line of credit...................... (32,176) (43,940) (29,672)
Payments on capital lease obligation................. (83,227) (60,148) --
Distributions to shareholders........................ (148,776) (105,350) (47,848)
Proceeds from issuance of common stock............... 1,245 1,272 --
Purchase of treasury stock........................... -- -- (43,500)
--------- --------- --------------
Net cash used in financing activities............ (262,934) (123,166) (121,020)
--------- --------- --------------
Net increase (decrease) in cash........................ (46,200) 45,721 (28,735)
Cash, beginning of year................................ 130,155 83,955 129,676
--------- --------- --------------
Cash, end of period.................................... $ 83,955 $ 129,676 $ 100,941
--------- --------- --------------
--------- --------- --------------
Other cash flow information:
Interest paid........................................ $ 16,949 $ 4,552 $ 1,602
--------- --------- --------------
--------- --------- --------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-59
<PAGE>
NEBRASK@ INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Nebrask@ Interactive, Inc., (the "Company") was incorporated on November
22, 1994 to design, build and operate Internet-based portals for the State of
Nebraska ("Nebrask@ Online") that allow businesses and citizens to complete
transactions and obtain government information online. The Company is
responsible for managing and marketing the portal as well as funding up front
investment and ongoing operational costs.
On December 3, 1997, the Company entered into a contract to provide
electronic government services for the Nebraska State Records Board ("NSRB") to
enhance, operate, maintain and expand the
existing portal that was developed by the Company under its 1995 contract with
the Nebraska Library Commission ("NLC") and various state agencies. The contract
includes limitations and provisions for the rates the Company can charge and the
amount of remuneration to each state 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 the
Company to act in accordance with the terms of the contract for a period of up
to twelve months from the time of 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 the
Company.
On March 31, 1998, substantially all of the shareholders of the Company
exchanged their shares for common stock shares in International Information
Consortium, Inc., whose name was later changed to National Information
Consortium, Inc. ("NIC"). As a result, NIC became the sole shareholder of the
Company. Only one shareholder did not participate in the exchange. In March
1998, the Company agreed to pay this shareholder $130,500 for past services and
reacquired the shareholder's 5,250 shares in the Company. The reacquired shares
were recorded as treasury stock at fair market value, which totaled $89,439. An
initial payment of $43,500 was made with the remaining balance recorded as a
note payable due in two annual installments of $43,500 in 1999 and 2000. The
difference between $130,500 and the fair value of the reacquired stock was
recorded as expense in the amount of $41,061.
ACCOUNTS RECEIVABLE
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required.
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 the assets. 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 income 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
F-60
<PAGE>
NEBRASK@ INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
INCOME TAXES
The Company has elected to be treated as a small business corporation
under provisions of Subchapter S of the Internal Revenue Code. Under such
provisions, the shareholders are taxed individually on their respective shares
of the Company's taxable income. Therefore, no provision for income tax has been
made. The Company changed its income tax status from an S corporation to a C
corporation effective July 1, 1998.
REVENUE RECOGNITION
The Company recognizes revenues from providing electronic government
services (primarily transaction fees) when the service is provided. The Company
must remit a certain percentage of transaction fees to state agencies regardless
of whether the Company ultimately collects the fees. In addition, 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
the Company's gross revenues and amounts paid to state agencies and for certain
telecommunication expenses.
SERVICE DEVELOPMENT COSTS
The Company expenses as incurred the employee costs to develop,
implement, operate and maintain the government portal.
STOCK-BASED COMPENSATION
The Company records as compensation expense the amount by which the fair
value of common stock sold to employees exceeds the amount paid.
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.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying balance sheet as of March 31, 1998, and the related
statements of income, cash flows and changes in shareholders' equity for the
three months ended March 31, 1998 are unaudited.
In the opinion of management, these statements have been prepared on the
same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the results of this period. The data disclosed in the notes to the
financial statements for this period is unaudited.
F-61
<PAGE>
NEBRASK@ INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CONCENTRATION OF CREDIT
For the year ended December 31, 1997, the Company derived 86% of its
transaction fees from four data resellers. At December 31, 1997, 89% of its
accounts receivable were from five data resellers. For the year ended December
31, 1996, the Company derived 83% of its transaction fees from three data
resellers. At December 31, 1996, 89% of its accounts receivable were from the
same three data resellers.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- USEFUL
1996 1997 LIVES
--------- --------- -----------
<S> <C> <C> <C>
Furniture and fixtures..................... $ 718 $ 718 8 years
Purchased software......................... 14,020 18,320 3 years
Equipment.................................. 163,592 170,398 5-8 years
--------- ---------
178,330 189,436
Less accumulated depreciation.............. 48,413 79,278
--------- ---------
$ 129,917 $ 110,158
--------- ---------
--------- ---------
</TABLE>
Depreciation expense for the years ended December 31, 1997 and 1996 was
$36,294 and $37,446, respectively.
4. BANK LINE OF CREDIT
The Company has a $100,000 line of credit with a bank which bears
interest at a rate equal to an index (8.50% at December 31, 1997). The maturity
date of the line is April 30, 2000. At December 31, 1997 and 1996, the amount
outstanding under the line was $89,412 and $48,352, respectively. The line is
collateralized by the Company's assets and guaranteed by affiliated companies.
The Company obtained a $225,000 equipment line of credit from a bank in
April 1998. The interest rate on the line equals the bank's reference rate plus
1.75%. There is no given expiration date on the line. The line is collateralized
by the related equipment and guaranteed by an affiliated company.
5. CAPITAL LEASE OBLIGATION
At December 31, 1996, the Company had a noncancellable capital lease
obligation with a bank for computer equipment totaling $60,148, which was repaid
in August 1997.
F-62
<PAGE>
NEBRASK@ INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. OPERATING LEASES
The Company leases its office space and certain equipment under
operating leases. The future minimum lease payments under noncancellable
operating leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- ---------------------------------------------------
<S> <C>
1998............................................... $ 28,626
1999............................................... 28,626
2000............................................... 11,296
2001............................................... 7,830
---------
$ 76,378
---------
---------
</TABLE>
Total rent expense for the years ended December 31, 1997 and 1996 was
$22,992 and $21,475, respectively.
7. RELATED PARTY TRANSACTIONS
The Company purchases business and health insurance through an insurance
agency that is controlled by a shareholder of the Company. Insurance expense
totaled approximately $34,400 and $37,800 for the years ended December 31, 1997
and 1996, respectively.
The Company rents an aircraft on an hourly basis from Sky King Leasing,
which has common shareholders with the Company. The amount paid to Sky King
Leasing was approximately $4,700 and $6,600 for the years ended December 31,
1997 and 1996, respectively.
The Company is affiliated, through common ownership, with several
companies that also serve as electronic government services providers for
various states. The Company is a partial guarantor of certain line of credit
agreements entered into by these affiliated companies. The total amounts
available and outstanding under such agreements at December 31, 1997 were
$950,000 and $178,674.
8. EMPLOYEE BENEFIT PLAN
The Company, in conjunction with affiliated companies, maintains a
401(k) profit sharing plan. In accordance with the plan, all employees are
eligible immediately upon employment. A discretionary match and a discretionary
contribution may be made to the plan as determined by the Board of Directors.
Company contributions totaled $8,163 and $9,319 for the years ended December 31,
1997 and 1996, respectively.
9. RESTRICTIONS ON TRANSFERABILITY OF COMMON STOCK
The Articles of Incorporation of the Company stipulate that should any
shareholders desire to sell or transfer their respective shares of common stock,
such stock must first be offered to the Company. Any stock not purchased by the
Company within a specified time frame must then be offered to the remaining
shareholders. The purchase price must be equivalent to the price that would be
paid by a non-shareholder.
F-63
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
OVERVIEW
On March 31, 1998, National Information Consortium, Inc. (the "Company"
or "NIC") exchanged its common shares for the common shares of five affiliated
companies (the "Exchange Offer") in a transaction accounted for using the
purchase method of accounting. Prior to consummating the Exchange Offer, the
Company was a holding company with no operations of its own. Shareholders of one
of the affiliated companies, National Information Consortium USA, Inc.
("NIC/USA") received 54% of the Company's common shares and NIC/USA has been
treated as the acquirer in applying purchase accounting.
The following unaudited pro forma consolidated statements of operations
give effect to the acquisition by NIC/USA of Kansas Information Consortium, Inc.
("KIC"), Indian@ Interactive, Inc. ("III"), Nebrask@ Interactive, Inc. ("NII")
and Arkansas Information Consortium, Inc. ("AIC") (the "Acquired Companies").
The unaudited pro forma consolidated statements of operations are based on the
individual statements of operations of the Company and the Acquired Companies
appearing elsewhere in this Prospectus, and combine the results of operations of
the Company and the Acquired Companies for the three month period ended March
31, 1998 and the year ended December 31, 1998 as if the transaction occurred on
January 1, 1998. The pro forma adjustments include the elimination of all
intercompany transactions. These unaudited pro forma consolidated statements of
operations should be read in conjunction with the historical financial
statements and notes thereto of the Company and the Acquired Companies included
elsewhere in this Prospectus.
The unaudited pro forma consolidated statements of operations are not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of the beginning of the periods presented
and should not be construed as being representative of future operating results.
F-64
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
NIC III KIC AIC NII ELIMINATIONS ADJUSTMENTS PRO FORMA
---------- --------- --------- --------- --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $ 370,288 $3,541,101 $1,625,487 $2,041,142 $ 706,059 $ (14,030)(D) $ -- $8,270,047
Cost of revenues........... 690 2,727,257 $1,174,015 1,802,776 479,090 -- -- 6,183,828
---------- --------- --------- --------- --------- ----------- ----------- ----------
Gross profit............. 369,598 813,844 451,472 238,366 226,969 (14,030) -- 2,086,219
---------- --------- --------- --------- --------- ----------- ----------- ----------
Operating expenses:
Service development and
operations............. 148,962 225,425 99,685 56,808 59,912 (14,030)(D) -- 576,762
Selling, general and
administrative......... 320,190 424,581 190,994 100,425 134,994 -- -- 1,171,184
Stock compensation....... -- -- -- 5,115 -- -- -- 5,115
Depreciation and
amortization........... 24,031 31,841 9,971 6,236 22,664 -- 1,893,801(A) 1,988,544
---------- --------- --------- --------- --------- ----------- ----------- ----------
Total operating
expenses............... 493,183 681,847 300,650 168,584 217,570 (14,030) 1,893,801 3,741,605
---------- --------- --------- --------- --------- ----------- ----------- ----------
Operating income (loss).... (123,585) 131,997 150,822 69,782 9,399 -- (1,893,801) (1,655,386)
---------- --------- --------- --------- --------- ----------- ----------- ----------
Other income (expense):
Interest expense......... (628) (9,633) (4,639) (903) (1,602) -- -- (17,405)
Other income, net........ -- 8,623 400 3,628 1,974 -- -- 14,625
---------- --------- --------- --------- --------- ----------- ----------- ----------
Total other income
(expense).............. (628) (1,010) (4,239) 2,725 372 -- -- (2,780)
---------- --------- --------- --------- --------- ----------- ----------- ----------
Income (loss) before income
taxes.................... (124,213) 130,987 146,583 72,507 9,771 -- (1,893,801) (1,658,166)
Income taxes (C)........... -- -- -- -- -- -- -- --
---------- --------- --------- --------- --------- ----------- ----------- ----------
Net income (loss).......... $ (124,213) $ 130,987 $ 146,583 $ 72,507 $ 9,771 $ -- ($1,893,801) $(1,658,166)
---------- --------- --------- --------- --------- ----------- ----------- ----------
---------- --------- --------- --------- --------- ----------- ----------- ----------
Net loss per share:
Basic and diluted........ $ (0.01) $ (0.04)
---------- ----------
---------- ----------
Weighted average shares
outstanding............ 22,679,122 19,255,155(B) 41,934,277
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.
F-65
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
NIC III(E) KIC(E) AIC(E) NII(E) ELIMINATIONS ADJUSTMENTS PRO FORMA
---------- ---------- --------- --------- --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $28,623,656 $3,541,101 $1,625,488 $2,041,142 $ 706,059 $ (5,101)(D) $ -- $36,532,345
Cost of revenues......... 21,210,632 2,727,257 1,174,015 1,802,776 479,090 -- -- 27,393,770
---------- ---------- --------- --------- --------- ----------- ----------- ----------
Gross profit........... 7,413,024 813,844 451,473 238,366 226,969 (5,101) -- 9,138,575
---------- ---------- --------- --------- --------- ----------- ----------- ----------
Operating expenses:
Service development and
operations........... 3,884,810 225,425 99,685 56,808 59,912 -- -- 4,326,640
Selling, general and
administrative....... 4,241,780 424,581 190,994 100,425 134,994 (5,101)(D) -- 5,087,673
Stock compensation..... 568,869 -- -- 5,115 -- -- -- 573,984
Depreciation and
amortization......... 5,922,396 31,841 9,971 6,236 22,664 -- 1,893,801(A) 7,886,909
---------- ---------- --------- --------- --------- ----------- ----------- ----------
Total operating
expenses............. 14,617,855 681,847 300,650 168,584 217,570 (5,101) 1,893,801 17,875,206
---------- ---------- --------- --------- --------- ----------- ----------- ----------
Operating income
(loss)................. (7,204,831) 131,997 150,823 69,782 9,399 -- (1,893,801) (8,736,631)
---------- ---------- --------- --------- --------- ----------- ----------- ----------
Other income (expense):
Interest expense....... (88,161) (9,634) (4,639) (903) (1,602) -- -- (104,939)
Other income, net...... 55,839 8,624 401 3,628 1,974 -- -- 70,466
---------- ---------- --------- --------- --------- ----------- ----------- ----------
Total other income
(expense)............ (32,322) (1,010) (4,238) 2,725 372 -- -- (34,473)
---------- ---------- --------- --------- --------- ----------- ----------- ----------
Income (loss) before
income
taxes.................. (7,237,153) 130,987 146,585 72,507 9,771 -- (1,893,801) (8,771,104)
Income taxes (C)......... 658,813 -- -- -- -- -- -- 658,813
---------- ---------- --------- --------- --------- ----------- ----------- ----------
Net income (loss)........ $(7,895,966) $ 130,987 $ 146,585 $ 72,507 $ 9,771 $ -- ($1,893,801) $(9,429,917)
---------- ---------- --------- --------- --------- ----------- ----------- ----------
---------- ---------- --------- --------- --------- ----------- ----------- ----------
Net income (loss) per
share:
Basic and diluted...... $ (0.21) $ (0.22)
---------- ----------
---------- ----------
Weighted average shares
outstanding.......... 37,242,423 4,707,995(B) 41,950,418
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.
F-66
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following adjustments were applied to the Company's historical
consolidated statements of operations for the periods indicated to arrive at the
pro forma consolidated financial information.
(A) Represents amortization expense related to the contract intangibles and
goodwill resulting from the application of purchase accounting for the
Acquired Companies. For the three months ended March 31, 1998, the
adjustment represents the amortization for the first three months following
the Exchange Offer. The Company's consolidated results for the year ended
December 31, 1998 already reflect amortization for the nine months following
the Exchange Offer. The adjustment represents an additional three months
amortization to arrive at a full year.
(B) For the three months ended March 31, 1998, represents the Company's common
shares issued to the shareholders of the Acquired Companies in the Exchange
Offer. For the year ended December 31, 1998, represents incremental shares
needed to reflect the common shares outstanding for a full year.
(C) For three months ended March 31, 1998, all of the companies were S
corporations. No provision for income taxes has been included.
(D) To eliminate intercompany revenues and expenses.
(E) Represents the Acquired Companies results of operations for the three months
ended March 31, 1998. The Company's results of operations already include
the Acquired Companies results of operations for the nine months subsequent
to the March 31, 1998 Exchange Offer.
F-67
<PAGE>
INSIDE BACK COVER
National Information Consortium
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[Map of the United States with maps of individual states in which
National Information Consortium has contracted to operate government portals
rising from map into foreground. Each individual state map contains the logo of
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[Listing of the Web addresses of National Information Consortium's
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<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
13,000,000 SHARES
[LOGO]
COMMON STOCK
---------------
PROSPECTUS
---------------
HAMBRECHT & QUIST
THOMAS WEISEL PARTNERS LLC
FAC/EQUITIES
VOLPE BROWN WHELAN & COMPANY
---------
July 15, 1999
--------------
YOU SHOULD RELY ONLY ON INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES
TO PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN ANY SUCH JURISDICTION. PERSONS WHO COME INTO POSSESSION OF
THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO
INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND
THE DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
UNTIL AUGUST 9, 1999, ALL DEALERS THAT BUY, SELL OR TRADE IN OUR COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
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