<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 8, 1999
REGISTRATION NO. 333-77939
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
NATIONAL INFORMATION CONSORTIUM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
COLORADO 7375 52-2077581
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code No.) Identification
Incorporation or Organization) No.)
</TABLE>
12 CORPORATE WOODS,
10975 BENSON STREET, SUITE 390
OVERLAND PARK, KANSAS 66210
877-234-EGOV
(Address and telephone number of principal executive offices and
principal place of business)
JEFFERY S. FRASER
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
NATIONAL INFORMATION CONSORTIUM, INC.
12 CORPORATE WOODS,
10975 BENSON STREET, SUITE 390
OVERLAND PARK, KANSAS 66210
877-234-EGOV
(Name, address, and telephone number of agent for service)
------------------------------
COPIES TO:
JOHN W. CAMPBELL, III, ESQ. NORA L. GIBSON, ESQ.
KRISTIAN E. WIGGERT, ESQ. PETER S. BUCKLAND, ESQ.
VALERIE A. VILLANUEVA, ESQ. ANGELA C. HILT, ESQ.
JACLYN LIU, ESQ. Brobeck, Phleger & Harrison LLP
Morrison & Foerster LLP Spear Street Tower, One Market
425 Market Street San Francisco, California 94105
San Francisco, California 94105-2482
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
Common Stock, no par value.................. 14,950,000 shares $11.00 $164,450,000 $45,718
</TABLE>
(1) Includes 1,950,000 shares of Common Stock subject to the Underwriters'
over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933.
(3) A registration fee of $41,561 was paid on May 6, 1999 for an aggregate
offering price of $149,500,000 and a registration fee of $4,157 is paid
herewith.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 8, 1999
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE SUCH AN OFFER OR SALE IS NOT PERMITTED.
<PAGE>
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 estimated initial public
offering price is between $9.00 and $11.00 per share.
--------------
The shares of common stock have been proposed to be listed for quotation on
the Nasdaq National Market under the symbol EGOV.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------------- ----------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to National Information Consortium, Inc., before
expenses.................................................. $ $
Proceeds to the selling shareholders, before expenses....... $ $
</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
, 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>
--------------
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.
AFTER THE OFFERING, A VOTING TRUST FOR WHICH TWO OF OUR DIRECTORS,
JEFFERY S. FRASER AND ROSS C. HARTLEY, SERVE AS TRUSTEES, WILL OWN 30,396,145
SHARES, OR APPROXIMATELY 57.9%, OF OUR OUTSTANDING COMMON STOCK. MR. FRASER IS
ALSO OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER. AS A RESULT, AFTER THE OFFERING
MESSRS. FRASER AND HARTLEY WILL EACH BENEFICIALLY OWN APPROXIMATELY 57.9% OF OUR
OUTSTANDING COMMON STOCK AND WILL 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. IN ADDITION, TWO OF OUR OTHER DIRECTORS,
JOHN L. BUNCE, JR. AND PATRICK J. HEALY, WILL EACH BENEFICIALLY OWN
APPROXIMATELY 17.2% OF OUR OUTSTANDING COMMON STOCK AFTER THE OFFERING BY VIRTUE
OF THEIR AFFILIATION WITH ENTITIES RELATED TO HELLMAN & FRIEDMAN LLC. THEREFORE,
FOUR DIRECTORS OF OUR COMPANY WILL BENEFICIALLY OWN APPROXIMATELY 75.1% OF OUR
OUTSTANDING COMMON STOCK AFTER THE OFFERING.
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.
4
<PAGE>
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
- 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.
Proposed 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;
- THE PUBLIC OFFERING PRICE WILL BE $10.00 PER SHARE;
- WE WILL COMPLETE A 4.643377 FOR 1 SPLIT OF OUR COMMON STOCK BEFORE
THIS OFFERING IS COMPLETED; AND
- 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 assumed initial public offering price of $10.00 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 $ 91,015
Total assets............................................................................ 16,633 106,533
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 99,687
</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
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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.
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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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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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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.
ANY ACQUISITIONS THAT WE UNDERTAKE COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS, DILUTE SHAREHOLDER VALUE AND HARM OUR OPERATING RESULTS
As part of our business strategy, we may seek to acquire or invest in
businesses that we feel could complement or expand our business, augment our
market coverage, enhance our technical capacities or otherwise offer growth
opportunities. We have had discussions with companies regarding our acquisition
of, or making an investment in, their business. Acquisitions could create risks
for us, including:
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- difficulties in the assimilation of acquired personnel, operations,
technologies or products;
- unanticipated costs associated with the acquisitions;
- diversion of management's time and attention that would otherwise be
available for ongoing development of our business;
- the difficulty of maintaining uniform standards, controls, procedures
and policies;
- the potential loss of key employees of acquired companies;
- adverse effects on relationships with employees and on existing
business relationships with government clients and customers; and
- use of substantial portions of our available cash, including proceeds
of this offering, to consummate the acquisition.
Any of the above risks could prevent us from realizing significant
benefits from our acquisitions and could harm our operating results. In
addition, if we consummate acquisitions through an exchange of our securities,
our shareholders could suffer significant dilution. We cannot assure you that
any particular acquisition, even if successfully completed, will generate any
additional revenue or provide any benefit to our business.
WE MAY BE UNABLE TO INTEGRATE NEW TECHNOLOGIES AND INDUSTRY STANDARDS
EFFECTIVELY
Our future success will depend on our ability to enhance and improve the
responsiveness, functionality and features of our products and services in
accordance with industry standards and to address the increasingly sophisticated
technological needs of our customers on a cost-effective and timely basis. Our
ability to remain competitive will depend, in part, on our ability to:
- enhance and improve the responsiveness, functionality and other
features of the government portals we offer;
- continue to develop our technical expertise;
- develop and introduce new services, applications and technology to
meet changing customer needs and preferences; and
- influence and respond to emerging industry standards and other
technological changes in a timely and cost-effective manner.
We cannot assure you that we will be successful in responding to the
above technological and industry challenges in a timely and cost-effective
manner. If we are unable to integrate new technologies and industry standards
effectively, our results of operations could be harmed.
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,
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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 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.
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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.
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
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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.
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
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;
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- 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, purchasers of common stock in
this offering will experience immediate and substantial dilution of
approximately $8.26 in net tangible book value per share, or approximately 82.6%
of the assumed offering price of $10.00 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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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.
20
<PAGE>
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
We estimate that we will receive net proceeds of $89,900,000 from the
sale of the 10,000,000 shares of common stock offered by us in this offering,
assuming an initial public offering price of $10.00 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.
21
<PAGE>
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 an assumed initial public offering price of
$10.00 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............................................................... 22,435 112,335
Accumulated deficit...................................................................... (9,125) (9,125)
----------- -----------
13,310 103,210
Less other............................................................................... (3,523) (3,523)
----------- -----------
Total shareholders' equity............................................................... $ 9,787 $ 99,687
----------- -----------
Total capitalization..................................................................... $ 10,171 $ 100,071
----------- -----------
----------- -----------
</TABLE>
22
<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 $91.23 million, or $1.74 per share. This represents an
immediate increase in as adjusted net tangible book value of $1.71 per share to
existing shareholders and an immediate dilution of $8.26 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share................................. $ 10.00
Net tangible book value per share as of March 31, 1999.............. $ .03
Increase per share attributable to new investors.................... 1.71
-----
As adjusted net tangible book value per share after the offering........ 1.74
-----------
Dilution per share to new investors..................................... $ 8.26
-----------
-----------
</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 4.4% $ 0.11
New
investors... 10,000,000 19.0 100,000,000 95.6
--------- --------- ----------- -----
Total..... 52,481,996 100.0% $104,645,071 100.0%
--------- --------- ----------- -----
--------- --------- ----------- -----
</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."
23
<PAGE>
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
<PAGE>
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
28
<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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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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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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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.
47
<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.
48
<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.
49
<PAGE>
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
50
<PAGE>
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.
52
<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
54
<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.
55
<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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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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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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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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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>
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<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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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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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
65
<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.
66
<PAGE>
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.
67
<PAGE>
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...................................
After 180 days post-effective date..............................
</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 aggreagate 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...........................................................
Thomas Weisel Partners LLC......................................................
First Albany Corporation........................................................
Volpe Brown Whelan & Company, LLC...............................................
---------
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 EXERCISE OVER-ALLOTMENT EXERCISE
----------------------------- -----------------------------
<S> <C> <C>
Per Share................................... $ $
Total....................................... $ $
</TABLE>
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $ .
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 $ per share. The underwriters may allow and the dealers may
reallow a concession not in excess of $ 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
70
<PAGE>
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 will be determined
by negotiation among us and the representatives of the underwriters. Among the
factors to be considered in determining the initial public offering price are
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 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
71
<PAGE>
other controlling persons, except with respect to its contractual relationship
with us pursuant to the underwriting agreement entered into in connection with
this offering.
An affiliate of one of our selling shareholders has an investment
interest in Thomas Weisel Partners LLC and Volpe Brown Whelan & Company, LLC,
National Association of Securities Dealers, Inc. ("NASD") members and
representatives of the underwriters. Accordingly, the offering of common stock
is being conducted in accordance with applicable provisions of the Conduct Rules
of the NASD, and consequently the offering price can be no higher than that
recommended by a "qualified independent underwriter" meeting certain standards.
In accordance with this requirement, Hambrecht & Quist LLC will assume the
responsibility of acting as a qualified independent underwriter in conducting
due diligence and recommending a maximum offering price in compliance with the
requirements of the Conduct Rules.
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. We have
applied for quotation of our common stock on the Nasdaq National Market. If we
receive approval for quotation on the Nasdaq National Market, then 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.
The common stock split described in Note 8 to the consolidated financial
statements has not been consummated at June 16, 1999. When it has been
consummated, we will be in a position to furnish the following report:
"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
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 June 14, 1999, the Board of Directors declared a 4.643377 for 1 stock
split on the Company's common stock whereby 3.643377 additional shares will be
issued for each share of common stock held by shareholders of record on a date
prior to the effective date of the registration statement filed by the Company
for an initial public offering of its common stock. 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
[Text design reading "e-government portals" and "www.nicusa.com."]
[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
that state government's portal.]
[Listing of the Web addresses of National Information Consortium's
portals.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
13,000,000 SHARES
[LOGO]
COMMON STOCK
---------------
PROSPECTUS
---------------
HAMBRECHT & QUIST
THOMAS WEISEL PARTNERS LLC
FAC/EQUITIES
VOLPE BROWN WHELAN & COMPANY
---------
, 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 , 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by the Registrant in connection with the
distribution of the securities being registered, other than underwriting
discounts and commissions, are included in the following table. All amounts are
estimates except the SEC filing fee, the NASD filing fee and the Nasdaq National
Market listing fee.
<TABLE>
<CAPTION>
AMOUNT
---------
<S> <C>
Securities and Exchange Commission Filing Fee................... $ 45,718
NASD Filing Fee................................................. 16,945
Nasdaq National Market Listing Fee.............................. 17,500
Accounting Fees and Expenses.................................... 300,000
Blue Sky Fees and Expenses...................................... 3,000
Legal Fees and Expenses......................................... 400,000
Transfer Agent and Registrar Fees and Expenses.................. 10,000
Printing Expenses............................................... 150,000
Miscellaneous Expenses.......................................... 56,837
---------
Total....................................................... $1,000,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 7-109-102 and 7-109-107 of the Colorado Business Corporation
Act provide that we may indemnify our directors and officers against all
liabilities and expenses actually and reasonably incurred in connect with the
defense or settlement of any judicial or administrative proceedings in which the
director or officer has have become involved by reason of his or her status as a
director or officer, if it is determined by our disinterested directors, a
committee appointed by our directors, our shareholders or an independent counsel
appointed by our directors that the director or officer acted in good faith and
in the reasonable belief that his or her conduct was not opposed to our best
interests or, in the case of criminal proceedings, unlawful. No indemnification
shall be made with respect to any claim, issue or matter in connection with a
proceeding in which the director or officer being indemnified is adjudged to be
liable to us or in connection with any proceeding in which the director or
officer being indemnified is adjudicated to have derived an improper personal
benefit. Further, indemnification in connection with a proceeding is limited to
reasonable expenses, including attorneys' fees, incurred in connection with the
proceeding.
Article V of our articles of incorporation, which is Exhibit 3.1 to this
Registration Statement, and Article VIII of our bylaws, which is Exhibit 3.2 to
this Registration Statement, 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
the same Act. Further, Article VI of our articles of incorporation provides that
our directors will not incur any personal liability from us or our shareholders
for monetary damages for breach of fiduciary duty as a director, except when the
personal liability arises from any breach of the director's duty of loyalty to
us or our shareholders, acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law, acts specified in
Section 7-108-403 of the Colorado Business Corporation Act, or any transaction
from which a director derived an improper personal benefit.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted for our directors or 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 Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is,
II-1
<PAGE>
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 in the successful defense of any action, suit,
or proceeding, is asserted by such director or officer, we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
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.
In addition to indemnification provided for in our charter documents, we
intend to enter into agreements, a form of which is Exhibit 10.1 to this
Registration Statement, to indemnify our directors and officers. These
agreements provide for the indemnification of our directors and officers for
certain expenses, including attorneys' fees, judgments, fines and settlement
amounts incurred by any such person in any action or proceeding, including any
action by us, 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, to the fullest extent permitted by
the Colorado Business Corporation Act. Furthermore, we will purchase and
maintain insurance on behalf of our directors and officers insuring them against
liabilities that they may incur in their capacities as or arising out of their
status as directors or officers.
The underwriting agreement, which is Exhibit 1.1 to this Registration
Statement, provides for indemnification by our underwriters and their officers
and directors for certain liabilities arising under the Securities Act or
otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
From our incorporation to June 15, 1999, we have granted or issued and
sold the following unregistered securities:
1. Stock options to employees, officers, directors and consultants under
our 1998 stock option plan exercisable for up to an aggregate of 2,514,003
shares of our common stock, at a weighted average exercise price of $1.44 per
share.
2. On April 21, 1998, we sold to Ms. Debra Luling 232,170 shares of our
common stock at $0.22 per share for approximately $50,000.
3. On June 29, 1998, we sold to Mr. Everett Wohlers 116,084 shares of
our common stock at $0.22 per share for approximately $25,000.
4. On June 29, 1998, we as a distribution to our shareholders, issued to
Mr. Randall Eccker 174,563 shares of our common stock for his services to our
shareholders in the sale of 10,516,547 shares of our common stock by the voting
trust, for which Messrs. Fraser and Hartley are co-trustees, to Hellman &
Friedman Capital Partners III, L.P., and affiliates.
5. On February 8, 1999, we sold to Mr. Joseph Nemelka 69,304 shares of
our common stock at $1.44 per share for approximately $100,000.
6. On February 9, 1999, we sold to Mr. James B. Dodd 173,258 shares of
our common stock at $1.44 per share for approximately $250,000.
7. On March 1, 1999, we sold to Mr. Robert P. Chandler 69,302 shares of
our common stock at $1.44 per share for approximately $100,000.
8. On March 1, 1999, we sold to Ms. Tamara Dukes 17,324 shares of our
common stock at $1.44 per share for approximately $25,000.
9. On March 1, 1999, we sold to Mr. Richard L. Brown 17,324 shares of
our common stock at $1.44 per share for approximately $25,000.
10. On May 16, 1999, we sold to Mr. Kevin C. Childress 23,727 shares of
our common stock at $5.27 per share for approximately $125,000.
The issuances of the securities in all of the transactions above were
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act by an issuer not involving a public offering,
where the purchasers represented their intention to acquire the securities for
II-2
<PAGE>
investment only and not with a view to distribution and received or had access
to adequate information about the Registrant, or were deemed to be exempted in
reliance on Rule 701 promulgated under the Securities Act as transactions
pursuant to a compensatory benefit plan or written compensation contract.
On March 31, 1998, we exchanged shares of our common stock for the
common stock of five affiliated companies--National Information Consortium USA,
Inc., Kansas Information Consortium, Inc., Indian@ Interactive, Inc., Nebrask@
Interactive, Inc. and Arkansas Information Consortium, Inc. The issuance of such
securities was exempt from the registration requirements of the Securities Act
of 1933, as amended, due to the exemptions from registration provided by
Sections 3(a)(9) and 4(2) thereof.
Appropriate legends were affixed to the stock certificates issued in the
above transactions. Similar legends were imposed in connection with any
subsequent sales of any such securities. No underwriters were employed in any of
the above transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The exhibits are as set forth in the Exhibit Index.
(b) Financial Statement Schedules
All schedules have been omitted since they are not required or are
not applicable or the required information is shown in the financial statements
or related notes.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
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 the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this Registration Statement
as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Overland
Park, State of Kansas on the 8th day of July, 1999.
<TABLE>
<S> <C> <C>
NATIONAL INFORMATION CONSORTIUM, INC.
By: /s/ JEFFERY S. FRASER*
-----------------------------------------
Jeffery S. Fraser
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman and Chief
/s/ JEFFERY S. FRASER* Executive Officer
- ------------------------------ (Principal Executive July 8, 1999
Jeffery S. Fraser Officer)
/s/ JAMES B. DODD
- ------------------------------ President, Chief Operating July 8, 1999
James B. Dodd Officer and Director
/s/ KEVIN C. CHILDRESS* Chief Financial Officer
- ------------------------------ (Principal Financial and July 8, 1999
Kevin C. Childress Accounting Officer)
/s/ JOHN L. BUNCE, JR.*
- ------------------------------ Director July 8, 1999
John L. Bunce, Jr.
/s/ DANIEL J. EVANS*
- ------------------------------ Director July 8, 1999
Daniel J. Evans
/s/ ROSS C. HARTLEY*
- ------------------------------ Director July 8, 1999
Ross C. Hartley
/s/ PATRICK J. HEALY*
- ------------------------------ Director July 8, 1999
Patrick J. Healy
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ JAMES B. DODD
-------------------------
James B. Dodd
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
- ----------- ----------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Articles of Incorporation of the Registrant+
3.2 Bylaws of the Registrant+
4.1 Reference is made to Exhibits 3.1 and 3.2+
4.2 Investor Rights Agreement dated June 30, 1998+
4.3 Specimen Stock Certificate of the Registrant+
5.1 Opinion of Morrison & Foerster LLP as to the legality of the common stock+
9.1 Voting Trust Agreement between Jeffery S. Fraser and Ross C. Hartley and certain
Holders of Shares of National Information Consortium, Inc. dated June 30, 1998 and
form of the voting trust certificate+
10.1 Form of Indemnification Agreement between the Registrant and each of its executive
officers and directors+
10.2 Registrant's 1998 Stock Option Plan, as amended and restated+
10.3 Registrant's 1999 Employee Stock Purchase Plan+
10.4 Employment Agreement between the Registrant and Jeffery S. Fraser dated July 1,
1998+
10.5 Employment Agreement between the Registrant and William F. Bradley, Jr. dated July
24, 1998+
10.6 Employment Agreement between the Registrant and Samuel R. Somerhalder dated July
24, 1998+
10.7 Employment Agreement between the Registrant and Harry H. Herington dated July 24,
1998+
10.8 Employment Agreement between the Registrant and James B. Dodd dated January 1,
1999+
10.9 Contract for Network Manager Services between the Information Network of Kansas
and Kansas Information Consortium, Inc. dated December 18, 1991 with addenda dated
October 15, 1992, August 19, 1993, May 26, 1995 and June 13, 1996 and amendment on
March 2, 1998+
10.10 Contract for Network Manager Services between the State of Indiana by and through
the Intelenet Commission and Indian@ Interactive, Inc., dated July 18, 1995+
10.11 Services Contract by and between National Information Consortium, U.S.A. and the
GeorgiaNet Authority, an agency of the State of Georgia, dated September 15, 1996+
10.12 Contract for Network Manager between Information Network of Arkansas by and
through the Information Network of Arkansas Board and Arkansas Information
Consortium, Inc. dated July 2, 1997+
10.13 Contract for Network Manager Services between the Nebraska State Records Board on
behalf of the State of Nebraska and Nebrask@ Interactive, Inc. dated December 3,
1997 with addendum No. 1 dated as of the same date+
10.14 Contract for Network Manager Services between the Commonwealth of Virginia by and
through the Virginia Information Providers Network Authority and Virginia
Interactive, LLC dated January 15, 1998+
10.15 Contract for Network Manager Services between Iowa Interactive, Inc. and the State
of Iowa by and through Information Technology Services dated April 23, 1998 with
letter addendum dated August 7, 1998
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
- ----------- ----------------------------------------------------------------------------------
<S> <C>
10.16 Contract for Network Manager Services between the Consolidated City of
Indianapolis and Marion County by and through the Enhanced Access Board of Marion
County and City-County Interactive, LLC dated August 31, 1998 with addendum dated
as of the same date+
10.17 State of Maine Contract for Special Services with New England Interactive, Inc.
dated April 14, 1999+
10.18 Employment Agreement between the Registrant and Kevin C. Childress dated May 16,
1999+
10.19 Sublease for the Registrant's offices at 12 Corporate Woods, Overlank Park dated
May 14, 1999 and Lease for the same address dated January 15, 1995 with First
Lease Modification dated October 30, 1996+
10.20 Agreement between Equifax Services and Nebrask@ Online dated March 25, 1996+
10.21 Agreement between ChoicePoint and the Information Network of Kansas dated
September 1, 1997+
10.22 Agreement between Equifax/ChoicePoint and the Information Network of Arkansas
dated September 2, 1997+
10.23 Agreement between Equifax Systems, Inc. and Access Indian@ Information Network
dated November 14, 1995+
10.24 Contract for Network Manager Services between the State of Utah and Utah
Interactive, Inc. dated as of May 7, 1999+
21.1 Subsidiaries of the Registrant+
23.1 Consent of Morrison & Foerster LLP. Reference is made to Exhibit 5.1+
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants
24.1 Power of Attorney of Kevin C. Childress+
27.1 Financial Data Schedule+
</TABLE>
- ------------------------
+ Previously filed
<PAGE>
Draft of June 30, 1999
NATIONAL INFORMATION CONSORTIUM, INC.
13,000,000 SHARES
COMMON STOCK
UNDERWRITING AGREEMENT
July __, 1999
Hambrecht & Quist LLC
Thomas Weisel Partners, LLC
FAC/Equities
Volpe Brown Whelan & Company
As Representatives of the several Underwriters
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
INTRODUCTORY. National Information Consortium, Inc., a Colorado
corporation (the "Company"), proposes to issue and sell an aggregate of Ten
Million (10,000,000) shares of its Common Stock, no par value (the "Common
Shares"); and National Information Consortium Voting Trust, dated June 30, 1999
(the "Principal Shareholder") and H & F Investors III (the "Secondary
Shareholder" and together with the Principal Shareholder, (the "Selling
Shareholders") severally propose to sell to the Underwriters (as hereinafter
defined) an aggregate of Three Million (3,000,000) Common Shares. The Ten
Million (10,000,000) Common Shares to be sold by the Company and the Three
Million (3,000,000) shares of Common Shares to be sold by the Selling
Shareholders are collectively called the "Firm Shares." In addition, the
Selling Shareholders have severally granted to the Underwriters an option to
purchase up to an additional One Million Nine Hundred Fifty Thousand (1,950,000)
Common Shares (the "Option Shares"), as provided in Section 3, each Selling
Shareholder selling up to the amount set forth opposite such Selling
Shareholder's name in SCHEDULE B. The Firm Shares and, if and to the extent
such option is exercised, the Option Shares are collectively called the
"Shares." The Common Stock is more fully described in the Registration
Statement and the Prospectus hereinafter mentioned.
The Company and each of the Selling Shareholders hereby confirms the
agreements made with respect to the purchase of the Shares by the several
underwriters, for whom you are acting, named in SCHEDULE B hereto (collectively,
the "Underwriters," which term shall also include any underwriter purchasing
Shares pursuant to Section 3(b) hereof). You represent and warrant that you
have been authorized by each of the other Underwriters to enter into this
Agreement on its behalf and to act for it in the manner herein provided.
1. REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-1 (No.
333-77939), including the related preliminary prospectus, for the registration
under the Securities Act of 1933, as amended (the "Securities Act") of the
Shares. Copies of such registration statement and of each amendment thereto, if
any, including the related preliminary prospectus (meeting the requirements of
Rule 430A of the rules and regulations of the Commission) heretofore filed by
the Company with the Commission have been delivered to you.
<PAGE>
The term Registration Statement as used in this agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Shares (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (the "Effective Date"), shall
also mean (from and after the effectiveness of such amendment) such registration
statement as so amended (including any Rule 462(b) registration statement). The
term Prospectus as used in this Agreement shall mean the prospectus, relating to
the Shares first filed with the Commission pursuant to Rule 424(b) and Rule 430A
(or if no such filing is required, as included in the Registration Statement),
in the event of any supplement or amendment to such prospectus after the
Effective Date, shall also mean (from and after the filing with the Commission
of such supplement or the effectiveness of such amendment) such prospectus as so
supplemented or amended and, if applicable, shall also mean an electronic
Prospectus as defined in Section 9(k) hereof. The term Preliminary Prospectus
as used in this Agreement shall mean each preliminary prospectus included in
such registration statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SHAREHOLDERS.
A. The Company and, to the best of its knowledge, the Principal
Shareholder, hereby represent and warrant to each Underwriter as follows:
(a) COMPLIANCE WITH REGISTRATION REQUIREMENTS. Each
Preliminary Prospectus and the Prospectus when filed complied in all material
respect with the Securities Act and, if filed by electronic transmission
pursuant to EDGAR (except as may be permitted by Regulation S-T under the
Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Shares.
Each of the Registration Statement, any Rule 462(b) Registration Statement
and any post-effective amendment thereto, at the time it became effective and
at all subsequent times, complied and will comply in all material respects
with the Securities Act and did not and will not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading. The
Prospectus, as amended or supplemented, as of its date and at all subsequent
times, did not and will not contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The representations and warranties set forth in the two
immediately preceding sentences do not apply to statements in or omissions
from the Registration Statement, any Rule 462(b) Registration Statement, or
any post-effective amendment thereto, or the Prospectus, or any amendments or
supplements thereto, made in reliance upon and in conformity with information
relating to any Underwriter furnished to the Company in writing by the
Representative expressly for use therein. There are no contracts or other
documents required to be described in the Prospectus or to be filed as
exhibits to the Registration Statement which have not been described or filed
as required.
(b) OFFERING MATERIALS FURNISHED TO UNDERWRITERS. The Company
has delivered to the Representatives four (4) complete conformed copies of the
Registration Statement and of each consent and certificate of experts filed as a
part thereof, and conformed copies of the
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Registration Statement (without exhibits) and each of the Preliminary
Prospectuses and the Prospectus, as amended or supplemented, in such
quantities and at such places as the Representatives have reasonably
requested for each of the Underwriters.
(c) DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY. The
Company has not distributed and will not distribute, prior to the latest Closing
Date (as defined in Section 5 below) and the completion of the Underwriters'
distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than a Preliminary Prospectus, the
Prospectus or the Registration Statement.
(d) THE UNDERWRITING AGREEMENT. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement of,
the Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles.
(e) AUTHORIZATION OF THE SHARES TO BE SOLD BY THE COMPANY.
The Shares to be purchased by the Underwriters from the Company have been duly
authorized for issuance and sale pursuant to this Agreement and, when issued and
delivered by the Company pursuant to this Agreement, will be validly issued,
fully paid and nonassessable.
(f) AUTHORIZATION OF THE SHARES TO BE SOLD BY THE SELLING
SHAREHOLDERS. The Shares to be purchased by the Underwriters from the Selling
Shareholders, were validly issued, fully paid and nonassessable.
(g) NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS. There
are no persons with registration or other similar rights to have any equity or
debt securities registered for sale under the Registration Statement or included
in the offering contemplated by this Agreement, other than the Selling
Shareholders with respect to the Shares included in the Registration Statement,
except for such rights as have been duly waived.
(h) NO MATERIAL ADVERSE CHANGE. Subsequent to the respective
dates as of which information is given in the Prospectus: (i) there has been no
material adverse change, or any development that could reasonably be expected to
result in a material adverse change, in the condition, financial or otherwise,
or in the earnings, business, operations or prospects, whether or not arising
from transactions in the ordinary course of business of the Company and its
subsidiaries, considered as one entity (any such change or effect, where the
context so requires, is called a "Material Adverse Change" or a "Material
Adverse Effect"); (ii) the Company and its subsidiaries, considered as one
entity, have not incurred any material liability or obligation, indirect, direct
or contingent, not in the ordinary course of business nor entered into any
material transaction or agreement not in the ordinary course of business; and
(iii) there has been no dividend or distribution of any kind declared, paid or
made by the Company or, except for dividends paid to the Company or other
subsidiaries, any of its subsidiaries on any class of capital stock or
repurchase or redemption by the Company or any of its subsidiaries of any class
of capital stock.
(i) INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, who
have expressed their opinion with respect to the consolidated financial
statements of the Company and its subsidiaries, including the related notes
thereto, filed with the Commission as a part of the Registration Statement and
included in the Prospectus (the "Financial Statements") is an independent public
or certified public accountant as required by the Securities Act.
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(j) PREPARATION OF THE FINANCIAL STATEMENTS. The Financial
Statements filed with the Commission as a part of the Registration Statement
and included in the Prospectus present fairly the consolidated financial
position of the Company and its subsidiaries as of and at the dates indicated
and the results of their operations and cash flows for the periods specified.
Such Financial Statements have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis throughout the
periods involved, except as may be expressly stated in the related notes
thereto. No other financial statements are required to be included in the
Registration Statement. The financial data set forth in the Prospectus under
the captions "Prospectus Summary--Summary Consolidated Actual and Pro Forma
Financial Information", "Selected Consolidated Actual and Pro Forma Financial
Data" and "Capitalization" fairly present the information set forth therein
on a basis consistent with that of the audited financial statements contained
in the Registration Statement. The pro forma consolidated financial
statements of the company and its subsidiaries and the related notes thereto
included under the captions "Prospectus Summary - Summary Consolidated Actual
and Pro Forma Financial Information", "Selected Consolidated Actual and Pro
Forma Financial Data" and elsewhere in the Prospectus and in the Registration
Statement present fairly the information contained therein, have been
prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements and have been properly presented on
the bases describes therein, and the assumptions used in the preparation
thereof are reasonable and the adjustments used therein are appropriate to
give effect to the transactions and circumstances referred to therein. No
other pro forma financial information is required to be included in the
Registration Statement pursuant to Regulation S-X.
(k) COMPANY'S ACCOUNTING SYSTEM. The Company and each of its
subsidiaries maintain a system of accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(l) SUBSIDIARIES OF THE COMPANY. The Company does not own or
control, directly or indirectly, any corporation, association or other entity
other than the subsidiaries listed in Exhibit 21 to the Registration Statement.
(m) INCORPORATION AND GOOD STANDING OF THE COMPANY AND ITS
SUBSIDIARIES. Each of the Company and its subsidiaries has been duly organized
and is validly existing as a corporation or limited liability company, as the
case may be, in good standing under the laws of the jurisdiction in which it is
organized with full corporate power and authority to own its properties and
conduct its business as described in the prospectus, and is duly qualified to do
business as a foreign corporation and is in good standing under the laws of each
jurisdiction which requires such qualification.
(n) CAPITALIZATION OF THE SUBSIDIARIES. All the outstanding
shares of capital stock of each subsidiary have been duly and validly authorized
and issued and are fully paid and nonassessable, and, except as otherwise set
forth in the Prospectus, all outstanding shares of capital stock of the
subsidiaries are owned by the Company either directly or through wholly owned
subsidiaries free and clear of any security interests, claims, liens or
encumbrances.
(o) NO PROHIBITION ON SUBSIDIARIES FROM PAYING DIVIDENDS OR
MAKING OTHER DISTRIBUTIONS. No subsidiary of the Company is currently
prohibited, directly or indirectly, from paying any dividends to the Company,
from making any other distribution on such subsidiary's capital stock, from
repaying to the Company any loans or advances to such
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<PAGE>
subsidiary from the Company or from transferring any of such subsidiary's
property or assets to the Company or any other subsidiary of the Company,
except as described in or contemplated by the Prospectus.
(p) CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS. The
authorized, issued and outstanding capital stock of the Company is as set forth
in the Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options or warrants described in the
Prospectus). The Common Stock (including the Shares) conform in all material
respects to the description thereof contained in the Prospectus. All of the
issued and outstanding Common Stock have been duly authorized and validly
issued, are fully paid and nonassessable and have been issued in compliance with
federal and state securities laws. None of the outstanding Common Stock were
issued in violation of any preemptive rights, rights of first refusal or other
similar rights to subscribe for or purchase securities of the Company. There
are no authorized or outstanding options, warrants, preemptive rights, rights of
first refusal or other rights to purchase, or equity or debt securities
convertible into or exchangeable or exercisable for, any capital stock of the
Company or any of its subsidiaries other than those accurately described in the
Prospectus. The description of the Company's stock option, stock bonus and
other stock plans or arrangements, and the options or other rights granted
thereunder, set forth in the Prospectus accurately and fairly presents the
information required to be shown with respect to such plans, arrangements,
options and rights.
(q) STOCK EXCHANGE LISTING. The Shares have been approved for
listing on the Nasdaq National Market, subject only to official notice of
issuance.
(r) NO CONSENTS, APPROVALS OR AUTHORIZATIONS REQUIRED. No
consent, approval, authorization, filing with or order of any court or
governmental agency or regulatory body is required in connection with the
transactions contemplated herein, except such as have been obtained or made
under the Securities Act and such as may be required (i) under the blue sky laws
of any jurisdiction in connection with the purchase and distribution of the
Shares by the Underwriters in the manner contemplated here and in the
Prospectus, (ii) by the National Association of Securities Dealers, LLC and
(iii) by the federal and provincial laws of Canada.
(s) NON-CONTRAVENTION OF EXISTING INSTRUMENTS AND AGREEMENTS.
Neither the issue and sale of the Shares nor the consummation of any other of
the transactions herein contemplated nor the fulfillment of the terms hereof
will conflict with, result in a breach or violation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, (i) the charter or by-laws of the Company or any of
its subsidiaries, (ii) the terms of any indenture, contract, lease, mortgage,
deed of trust, note agreement, loan agreement or other agreement, obligation,
condition, covenant or instrument to which the Company or any of its
subsidiaries is a party or bound or to which its or their property is subject or
(iii) any statute, law, rule, regulation, judgment, order or decree applicable
to the Company or any of its subsidiaries of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or any of its subsidiaries or any of its or their
properties.
(t) NO DEFAULTS OR VIOLATIONS. Neither the Company nor any
subsidiary is in violation or default of (i) any provision of its charter or
by-laws, (ii) the terms of any indenture, contract, lease, mortgage, deed of
trust, note agreement, loan agreement or other agreement, obligation,
condition, covenant or instrument to which it is a party or bound or to which
its property is subject or (iii) any statute, law, rule, regulation,
judgment, order or decree of any court, regulatory body, administrative
agency, governmental body, arbitrator or other authority having jurisdiction
over the Company or such subsidiary or any of its properties, as
5
<PAGE>
applicable, except any such violation or default which would not, singly or
in the aggregate, result in a Material Adverse Change except as otherwise
disclosed in the Prospectus.
(u) NO ACTIONS, SUITS OR PROCEEDINGS. No action, suit or
proceeding by or before any court or governmental agency, authority or body or
any arbitrator involving the Company or any of its subsidiaries or its or their
property is pending or, to the best knowledge of the Company, threatened that
(i) could reasonably be expected to have a Material Adverse Effect on the
performance of this Agreement or the consummation of any of the transactions
contemplated hereby or (ii) could reasonably be expected to result in a Material
Adverse Effect.
(v) ALL NECESSARY PERMITS, ETC. The Company and each
subsidiary possess such valid and current certificates, authorizations or
permits issued by the appropriate state, federal or foreign regulatory agencies
or bodies necessary to conduct their respective businesses, and neither the
Company nor any subsidiary has received any notice of proceedings relating to
the revocation or modification of, or non-compliance with, any such certificate,
authorization or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, could result in a Material Adverse
Change.
(w) TITLE TO PROPERTIES. The Company and each of its
subsidiaries has good and marketable title to all the properties and assets
reflected as owned in the Financial Statements referred to above, in each case
free and clear of any security interests, mortgages, liens, encumbrances,
equities, claims and other defects, except such as do not materially and
adversely affect the value of such property and do not materially interfere with
the use made or proposed to be made of such property by the Company or such
subsidiary. The real property, improvements, equipment and personal property
held under lease by the Company or any subsidiary are held under valid and
enforceable leases, with such exceptions as are not material and do not
materially interfere with the use made or proposed to be made of such real
property, improvements, equipment or personal property by the Company or such
subsidiary.
(x) TAX LAW COMPLIANCE. The Company and its subsidiaries have
filed all necessary federal, state and foreign income and franchise tax returns
and have paid all taxes required to be paid by any of them and, if due and
payable, any related or similar assessment, fine or penalty levied against any
of them. The Company has made adequate charges, accruals and reserves in the
applicable Financial Statements referred to above in respect of all federal,
state and foreign income and franchise taxes for all periods as to which the tax
liability of the Company or any of its subsidiaries has not been finally
determined. The Company is not aware of any tax deficiency that has been or
might be asserted or threatened against the Company that could result in a
Material Adverse Change.
(y) INTELLECTUAL PROPERTY RIGHTS. Each of the Company and
its subsidiaries owns or possesses adequate rights to use all patents, patent
rights or licenses, inventions, collaborative research agreements, trade
secrets, know-how, trademarks, service marks, trade names and copyrights
which are necessary to conduct its businesses as described in the
Registration Statement and Prospectus; the expiration of any patents, patent
rights, trade secrets, trademarks, service marks, trade names or copyrights
would not result in a Material Adverse Change that is not otherwise disclosed
in the Prospectus; the Company has not received any notice of, and has no
knowledge of, any infringement of or conflict with asserted rights of the
Company by others with respect to any patent, patent rights, inventions,
trade secrets, know-how, trademarks, service marks, trade names or
copyrights; and the Company has not received any notice of, and has no
knowledge of, any infringement of or conflict with asserted rights of others
with respect to any patent, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names or copyrights which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, might have a Material Adverse Change. There is no claim being made
against the Company regarding patents, patent rights or licenses, inventions,
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collaborative research, trade secrets, know-how, trademarks, service marks,
trade names or copyrights. The Company and its subsidiaries do not in the
conduct of their business as now or proposed to be conducted as described in
the Prospectus infringe or conflict with any right or patent of any third
party, or any discovery, invention, product or process which is the subject
of a patent application filed by any third party, known to the Company or any
of its subsidiaries, which such infringement or conflict is reasonably likely
to result in a Material Adverse Change.
(z) YEAR 2000 PREPAREDNESS. There are no issues related to
the Company's, or any of its subsidiaries', preparedness for the Year 2000
that (i) are of a character required to be described or referred to in the
Registration Statement or by the Securities Act which have not been
accurately described in the Registration Statement or Prospectus or (ii)
might reasonably be expected to result in any Material Adverse Change or that
might materially affect their properties, assets or rights. All internal
computer systems and each Constituent Component (as defined below) of those
systems and all computer-related products and each Constituent Component (as
defined below) of those products of the Company and each of its subsidiaries
fully comply with Year 2000 Qualification Requirements. "Year 2000
Qualifications Requirements" means that the internal computer systems and
each Constituent Component (as defined below) of those systems and all
computer-related products and each Constituent Component (as defined below)
of those products of the Company and each of its Subsidiaries (i) have been
reviewed to confirm that they store, process (including sorting and
performing mathematical operations, calculations and computations), input and
output data containing date and information correctly regardless of whether
the date contains dates and times before, on or after January 1, 2000, (ii)
have been designated to ensure date and time entry recognition and
calculations, and date data interface values that reflect the century, (iii)
accurately manage and manipulate data involving dates and times, including
single century formulas and multi-century formulas, and will not cause an
abnormal ending scenario within the application or generate incorrect values
or invalid results involving such dates, (iv) accurately process any date
rollover, and (v) accept and respond to two-digit year date input in a manner
that resolves any ambiguities as to the century. "Constituent Component"
means all software (including operating systems, programs, packages and
utilities), firmware, hardware, networking components, and peripherals
provided as part of the configuration. The Company has inquired of material
vendors as to their preparedness for the Year 2000 and has disclosed in the
Registration Statement or Prospectus any issues, known to the Company as a
result thereof, that might reasonably be expected to result in any Material
Adverse Change.
(aa) NO TRANSFER TAXES OR OTHER FEES. There are no transfer
taxes or other similar fees or charges under Federal law or the laws of any
state, or any political subdivision thereof, required to be paid in connection
with the execution and delivery of this Agreement or the issuance and sale by
the Company of the shares.
(bb) COMPANY NOT AN "INVESTMENT COMPANY". The Company has been
advised of the rules and requirements under the Investment Company Act of 1940,
as amended (the "Investment Company Act"). The Company is not, and after
receipt of payment for the Shares will not be, an "investment company" or an
entity "controlled" by an "investment company" within the meaning of the
Investment Company Act and will conduct its business in a manner so that it will
not become subject to the Investment Company Act.
(cc) INSURANCE. Each of the Company and its subsidiaries are
insured by recognized, financially sound and reputable institutions with
policies in such amounts and with such deductibles and covering such risks as
are generally deemed adequate and customary for their businesses including, but
not limited to, policies covering real and personal property owned or leased by
the Company and its subsidiaries against theft, damage, destruction, acts of
vandalism and earthquakes, general liability and Directors and Officers
liability. The Company has no reason to believe that it or any subsidiary will
not be able (i) to renew its existing
7
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insurance coverage as and when such policies expire or (ii) to obtain
comparable coverage from similar institutions as may be necessary or
appropriate to conduct its business as now conducted and at a cost that would
not result in a Material Adverse Change. Neither of the Company nor any
subsidiary has been denied any insurance coverage which it has sought or for
which it has applied.
(dd) LABOR MATTERS. To the best of the Company's knowledge, no
labor disturbance by the employees of the Company or any of its subsidiaries
exists or is imminent; and the Company is not aware of any existing or imminent
labor disturbance by the employees of any of its principal suppliers, that might
be expected to result in a Material Adverse Change.
(ee) NO PRICE STABILIZATION OR MANIPULATION. The Company has
not taken and will not take, directly or indirectly, any action designed to or
that might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Shares.
(ff) LOCK-UP AGREEMENTS. Each officer and director of the
company, each Selling Shareholder and each beneficial owner of one or more
percent of the outstanding issued share capital of the Company has signed an
agreement substantially in the form attached hereto as EXHIBIT A (the "Lock-up
Agreements"). The Company has provided to counsel for the Underwriters a
complete and accurate list of all securityholders of the Company and the number
and type of securities held by each securityholder. The Company has provided to
counsel for the Underwriters true, accurate and complete copies of all of the
Lock-up Agreements presently in effect or effected hereby. The Company hereby
represents and warrants that it will not release any of its officers, directors
or other Shareholders from any Lock-up Agreements currently existing or
hereafter effected without the prior written consent of Hambrecht & Quist LLC.
(gg) RELATED PARTY TRANSACTIONS. There are no business
relationships or related-party transactions involving the Company or any
subsidiary or any other person required to be described in the Prospectus which
have not been described as required.
(hh) CERTIFICATES. Any certificate signed by an officer of the
Company and delivered to the Representatives or to counsel for the Underwriters
shall be deemed to be a representation and warranty by the Company to each
Underwriter as to the matters set forth therein.
B. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS. Each
Selling Shareholder represents and warrants to each Underwriter as follows:
(a) THE UNDERWRITING AGREEMENT. This Agreement has been duly
authorized, executed and delivered by or on behalf of each such Shareholder and
is a valid and binding agreement of each such Selling Shareholder, enforceable
in accordance with its terms, except as rights to indemnification hereunder may
be limited by applicable law and except as the enforcement hereof may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles.
(b) THE CUSTODY AGREEMENT AND POWER OF ATTORNEY. Each of the
(i) Custody Agreement signed by such Selling Shareholder and [___], as custodian
(the "Custodian"), relating to the deposit of the Shares to be sold by such
Selling Shareholder (the "Custody Agreement") and (ii) Power of Attorney
appointing certain individuals named therein as such Selling Shareholder's
attorneys-in-fact (each, an "Attorney-in-Fact") to the extent set forth therein
relating to the transactions contemplated hereby and by the Prospectus (the
"Power of Attorney"), of such Selling Shareholder has been duly authorized,
executed and delivered by
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such Selling Shareholder and is a valid and binding agreement of such Selling
Shareholder, enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except as the
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles. Each Selling
Shareholder agrees that the Shares to be sold by such Selling Shareholder on
deposit with the Custodian is subject to the interests of the Underwriters,
that the arrangements made for such custody are to that extent irrevocable,
and that the obligations of such Selling Shareholder hereunder shall not be
terminated, except as provided in this Agreement or in the Custody Agreement,
by any act of the Selling Shareholder, by operation of law, by death or
incapacity of such Selling Shareholder or by the occurrence of any other
event. If such Selling Shareholder should die or become incapacitated, or in
any other event should occur, before the delivery of the Shares to be sold by
such Selling Shareholder hereunder, the documents evidencing the Shares to be
sold by such Selling Shareholder then on deposit with the Custodian shall be
delivered by the Custodian in accordance with the terms and conditions of
this Agreement as if such death, incapacity or other event had not occurred,
regardless of whether or not the Custodian shall have received notice thereof.
(c) TITLE TO SHARES TO BE SOLD. Such Selling Shareholder is
the lawful owner of the Shares to be sold by such Selling Shareholder hereunder
and upon sale and delivery of, and payment for, such Shares, as provided herein,
such Selling Shareholder will convey good and marketable title to such Shares,
free and clear of all liens, encumbrances, equities and claims whatsoever.
(d) ALL AUTHORIZATIONS OBTAINED. Such Selling Shareholder
has, and on each Closing Date (as defined below) will have, good and valid title
to all of the Shares which may be sold by such Selling Shareholder pursuant to
this Agreement on such date and the legal right and power, and all
authorizations and approvals required by law and under its trust agreement to
enter into this Agreement and its Custody Agreement and Power of Attorney, to
sell, transfer and deliver all of the Shares which may be sold by such Selling
Shareholder pursuant to this Agreement and to comply with its other obligations
hereunder and thereunder.
(e) NO FURTHER CONSENTS, AUTHORIZATION OR APPROVALS. No
consent, approval, authorization or order of any court or governmental agency or
body is required for the consummation by such Selling Shareholder of the
transactions contemplated herein, except such as may have been obtained under
the Securities Act and such as may be required under the federal and provincial
securities laws of Canada or the blue sky laws or any jurisdiction in connection
with the purchase and distribution of the Shares by the Underwriters and such
other approvals as have been obtained.
(f) NON-CONTRAVENTION. Neither the sale of the Shares being
sold by such Selling Shareholder nor the consummation of any other of the
transactions herein contemplated by such Selling Shareholder or the fulfillment
of the terms hereof by such Selling Shareholder will conflict with, result in a
breach or violation of, or constitute a default under any law or the terms of
any indenture or other agreement or instrument to which such Selling Shareholder
is party or bound, any judgment, order or decree applicable to such Selling
Shareholder or any court or regulatory body, administrative agency, governmental
body or arbitrator having jurisdiction over such Selling Shareholder.
(g) NO REGISTRATION OR OTHER SIMILAR RIGHTS. Such Selling
Shareholder does not have any registration or other similar rights to have any
equity or debt securities registered for sale by the Company under the
Registration Statement or included in the offering contemplated by this
Agreement, except for such rights as are described in the Prospectus under
"Description of Capital Stock."
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(h) NO PREEMPTIVE, CO-SALE OR OTHER RIGHTS. Such Selling
Shareholder does not have, or has waived prior to the date hereof, any
preemptive right, co-sale right or right of first refusal or other similar right
to purchase any of the Shares that are to be sold by the Company or any of the
other Selling Shareholders to the Underwriters pursuant to this Agreement; and
such Selling Shareholder does not own any warrants, options or similar rights to
acquire, and does not have any right or arrangement to acquire, any capital
stock, right, warrants, options or other securities from the Company, other than
those described in the Registration Statement and the Prospectus.
(i) DISCLOSURE MADE BY SUCH SELLING SHAREHOLDER IN THE
PROSPECTUS. All information furnished by or on behalf of such Selling
Shareholder in writing expressly for use in the Registration Statement and
Prospectus is, and on each Closing Date (as defined below) will be, true,
correct, and complete in all material respects, and does not, and on each
Closing Date will not, contain any untrue statement of a material fact or omit
to state any material fact necessary to make such information not misleading.
Such Selling Shareholder confirms as accurate the number of shares of Company
Common Stock set forth opposite such Selling Shareholder's name in the
Prospectus under the caption "Principal and Selling Shareholders" (both prior to
and after giving effect to the sale of the Shares).
(j) NO PRICE STABILIZATION OR MANIPULATION. Such Selling
Shareholder has not taken and will not take, directly or indirectly, any action
designed to or that might be reasonably expected to cause or result in
stabilization or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Shares.
(k) NO TRANSFER TAXES OR OTHER FEES. There are no transfer
taxes or other similar fees or charges under Federal law or the laws of any
state, or any political subdivision thereof, required to be paid in connection
with the execution and delivery of this Agreement or the sale by the Selling
Shareholders of the Shares.
(l) DISTRIBUTION OF OFFERING MATERIALS BY THE SELLING
SHAREHOLDERS. The Selling Shareholders have not distributed and will not
distribute, prior to the later of the latest Closing Date (as defined below) and
the completion of the Underwriters' distribution of the Shares, any offering
material in connection with the offering and sale of the Shares by such Selling
Shareholder other than a preliminary prospectus, the Prospectus or the
Registration Statement.
(m) CERTIFICATES. Any certificate signed by or on behalf of
any Selling Shareholder and delivered to the Representative or to counsel for
the Underwriters shall be deemed to be a representation and warranty by such
Selling Shareholder to each Underwriter as to the matters covered thereby.
3. PURCHASE OF THE SHARES BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and
subject to the terms and conditions herein set forth, the Company agrees to
issue and sell Ten Million (10,000,000) shares of the Firm Shares and each of
the Selling Shareholders agree to issue and sell Three Million (3,000,000)
shares of the Firm Shares to the several Underwriters and each of the
Underwriters agrees to purchase from the Company and the Selling Shareholders,
respectively, the respective aggregate number of Shares set forth opposite their
names in Schedule A and Schedule B, respectively. The price at which the Shares
shall be sold by the Company and the Selling Shareholders, respectively, and
purchased by the several Underwriters shall be $___ per share. In making this
Agreement, each Underwriter is contracting severally and not jointly; except as
provided in paragraphs (b) and (c) of this Section 3, the agreement of
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each Underwriter is to purchase only the respective number of shares of the
Shares specified in Schedule B.
(b) If for any reason one or more of the Underwriters shall
fail or refuse (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 8 or 9 hereof)
to purchase and pay for the number of shares of Firm Shares agreed to be
purchased by such Underwriter or Underwriters, the Company shall immediately
give notice thereof to you, and the non-defaulting Underwriters shall have
the right within 24 hours after the receipt by you of such notice to
purchase, or procure one or more other Underwriters to purchase, in such
proportions as may be agreed upon between you and such purchasing Underwriter
or Underwriters and upon the terms herein set forth, all or any part of the
shares of the Firm Shares which such defaulting Underwriter or Underwriters
agreed to purchase. If the non-defaulting Underwriters fail so to make such
arrangements with respect to all such shares and portion, the number of
shares of the Firm Shares which each non-defaulting Underwriter is otherwise
obligated to purchase under this Agreement shall be automatically increased
on a pro rata basis to absorb the remaining shares and portion which the
defaulting Underwriter or Underwriters agreed to purchase; PROVIDED, HOWEVER,
that the non-defaulting Underwriters shall not be obligated to purchase the
shares and portion which the defaulting Underwriter or Underwriters agreed to
purchase if the aggregate number of such shares of the Firm Shares exceeds
10% of the total number of shares of the Firm Shares which all Underwriters
agreed to purchase hereunder. If the total number of shares of the Firm
Shares which the defaulting Underwriter or Underwriters agreed to purchase
shall not be purchased or absorbed in accordance with the two preceding
sentences, the Company shall have the right, within 24 hours next succeeding
the 24-hour period above referred to, to make arrangements with other
underwriters or purchasers satisfactory to you for purchase of such shares
and portion on the terms herein set forth. In any such case, either you or
the Company shall have the right to postpone the Closing Date determined as
provided in Section 5 hereof for not more than seven business days after the
date originally fixed as the Closing Date pursuant to said Section 5 in order
that any necessary changes in the Registration Statement, the Prospectus or
any other documents or arrangements may be made. If neither the
non-defaulting Underwriters nor the Company shall make arrangements within
the 24-hour periods stated above for the purchase of all the shares of the
Shares which the defaulting Underwriter or Underwriters agreed to purchase
hereunder, this Agreement shall be terminated without further act or deed and
without any liability on the part of the Company to any non-defaulting
Underwriter and without any liability on the part of any non-defaulting
Underwriter to the Company. Nothing in this paragraph (b), and no action
taken hereunder, shall relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and
covenants herein contained, and subject to the terms and conditions herein set
forth, the Selling Shareholders grant an option to the several Underwriters to
purchase, severally and not jointly, up to One Million Nine Hundred Fifty
Thousand (1,950,000) shares in the aggregate of the Option Shares from the
Selling Shareholders at the same price per share as the Underwriters shall pay
for the Firm Shares. Said option may be exercised only to cover over-allotments
in the sale of the Firm Shares by the Underwriters and may be exercised in whole
or in part at any time (but not more than once) on or before the thirtieth day
after the date of this Agreement upon written or telegraphic notice by you to
each of the Selling Shareholders and the Company setting forth the aggregate
number of shares of the Option Shares as to which the several Underwriters are
exercising the option. Delivery of certificates for the shares of Option
Shares, and payment therefor, shall be made as provided in Section 5 hereof.
The number of shares of the Option Shares to be purchased by each Underwriter
shall be the same percentage of the total number of shares of the Option Shares
to be purchased by the several Underwriters as such Underwriter is purchasing of
the Firm Shares, as adjusted by you in such manner as you deem advisable to
avoid fractional shares.
(d) The Company and the Underwriters agree that up to
[______] of the Common Shares to be purchased by the Underwriters (the
"Directed Shares") shall be reserved for sale by the Underwriters to
eligible directors, officers, employees, business affiliates and related
persons of the Company ("eligible purchasers") as part of the distribution of
the Shares by the Underwriters, subject to the terms of this Agreement, the
applicable rules, regulations and interpretations of the National Association
of Securities Dealers, LLC and all other applicable laws, rules and
regulations. To the extent that the Directed Shares are not purchased by
eligible purchasers of the Company, the Directed Shares may be offered to the
public as part of the public offering contemplated hereby.
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4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the
Underwriters of the Shares to be purchased by them shall be as set forth in the
Prospectus. The Underwriters may from time to time change the public offering
price after the closing of the initial public offering and increase or decrease
the concessions and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the
front cover page and under "Underwriting" in the Registration Statement, any
Preliminary Prospectus and the Prospectus relating to the Shares filed by the
Company (insofar as such information relates to the Underwriters) constitutes
the only information furnished by the Underwriters to the Company and the
Selling Shareholders for inclusion in the Registration Statement, any
Preliminary Prospectus, and the Prospectus, and you on behalf of the respective
Underwriters represent and warrant to the Company and the Selling Shareholders
that the statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE SHARES.
(a) Delivery of certificates for the shares of the Firm Shares
and the Option Shares (if the option granted by Section 3(c) hereof shall have
been exercised not later than 7:00 A.M., San Francisco time, on the date two
business days preceding the Closing Date), and payment therefor, shall be made
at the office of Morrison & Foerster LLP, 425 Market Street, San Francisco, CA
94105, at 7:00 a.m., San Francisco time, on the fourth business day after the
date of this Agreement, or at such time on such other day, not later than seven
full business days after such fourth business day, as shall be agreed upon in
writing by the Company and you. The date and hour of such delivery and payment
(which may be postponed as provided in Section 3(b) hereof) are herein called
the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be
exercised after 7:00 a.m., San Francisco time, on the date two business days
preceding the Closing Date, delivery of certificates for the shares of Option
Shares, and payment therefor, shall be made at the office of Morrison & Foerster
LLP, 425 Market Street, San Francisco, CA 94105, at 7:00 a.m., San Francisco
time, on the third business day after the exercise of such option.
(c) Payment for the Shares purchased from the Company and the
Selling Shareholders shall be made to the Company and the Selling Shareholders
or their order by one or more wire transfers in same day funds. Such payment
shall be made upon delivery of certificates for the Shares to you for the
respective accounts of the several Underwriters against receipt therefor signed
by you. Certificates for the Shares to be delivered to you shall be registered
in such name or names and shall be in such denominations as you may request at
least one business day before the Closing Date, in the case of Firm Shares, and
at least one business day prior to the purchase thereof, in the case of the
Option Shares. Such certificates will be made available to the Underwriters for
inspection, checking and packaging at the offices of Lewco Securities
Corporation, 2 Broadway, New York, New York 10004 on the business day prior to
the Closing Date or, in the case of the Option Shares, by 3:00 p.m., New York
time, on the business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Shareholders for shares to be purchased by any Underwriter whose
wire transfer shall not have been received by you on the Closing Date or any
later date on which Option Shares is purchased for the account of such
Underwriter. Any such payment by you shall not relieve such Underwriter from
any of its obligations hereunder.
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6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING SHAREHOLDERS.
(a) The Company and the Selling Shareholders covenant and
agree as follows:
(i) The Company will (a) prepare and timely file with the
Commission under Rule 424(b) a Prospectus containing information previously
omitted at the time of effectiveness of the Registration Statement in reliance
on Rule 430A and (b) not file any amendment to the Registration Statement or
supplement to the Prospectus of which you shall not previously have been advised
and furnished with a copy or to which you shall have reasonably objected in
writing or which is not in compliance with the Securities Act or the rules and
regulations of the Commission.
(ii) The Company will promptly notify each Underwriter in the
event of (a) the request by the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional information,
(b) the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement, (c) the institution or notice of
intended institution of any action or proceeding for that purpose, (d) the
receipt by the Company of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction, or (e) the receipt by
it of notice of the initiation or threatening of any proceeding for such
purpose. The Company will make every reasonable effort to prevent the issuance
of such a stop order and, if such an order shall at any time be issued, to
obtain the withdrawal thereof at the earliest possible moment.
(iii) The Company will (a) on or before the Closing Date,
deliver to you a signed copy of the Registration Statement as originally filed
and of each amendment thereto filed prior to the time the Registration Statement
becomes effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (b) as promptly
as possible deliver to you and send to the several Underwriters, at such office
or offices as you may designate, as many copies of the Prospectus as you may
reasonably request, and (c) thereafter from time to time during the period in
which a prospectus is required by law to be delivered by an Underwriter or
dealer, likewise send to the Underwriters as many additional copies of the
Prospectus and as many copies of any supplement to the Prospectus and of any
amended prospectus, filed by the Company with the Commission, as you may
reasonably request for the purposes contemplated by the Securities Act.
(iv) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event relating
to or affecting the Company, or of which the Company shall be advised in writing
by you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement or
amend the Prospectus in order to make the Prospectus not misleading in the light
of the circumstances existing at the time it is delivered to a purchaser of the
Shares, the Company will forthwith prepare and file with the Commission a
supplement to the Prospectus or an amended prospectus so that the Prospectus as
so supplemented or amended will not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the time such
Prospectus is delivered to such purchaser, not misleading. If, after the
initial public offering of the Shares by the Underwriters and during such
period, the Underwriters shall propose to vary the terms of offering thereof by
reason of changes in general market conditions or otherwise, you will advise the
Company in writing of the proposed variation, and, if in the opinion either of
counsel for the Company or of counsel for the Underwriters such proposed
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variation requires that the Prospectus be supplemented or amended, the
Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus setting forth such variation. The
Company authorizes the Underwriters and all dealers to whom any of the Shares
may be sold by the several Underwriters to use the Prospectus, as from time
to time amended or supplemented, in connection with the sale of the Shares in
accordance with the applicable provisions of the Securities Act and the
applicable rules and regulations thereunder for such period.
(v) Prior to the filing thereof with the Commission, the
Company will submit to you, for your information, a copy of any post-effective
amendment to the Registration Statement and any supplement to the Prospectus or
any amended prospectus proposed to be filed.
(vi) The Company will cooperate, when and as requested by
you, in the qualification of the Shares for offer and sale under the
securities or blue sky laws of such jurisdictions as you may designate and,
during the period in which a prospectus is required by law to be delivered by
an Underwriter or dealer, in keeping such qualifications in good standing
under said securities or blue sky laws; PROVIDED, HOWEVER, that the Company
shall not be obligated to file any general consent to service of process or
to qualify as a foreign corporation in any jurisdiction in which it is not so
qualified. The Company will, from time to time, prepare and file such
statements, reports, and other documents as are or may be required to
continue such qualifications in effect for so long a period as you may
reasonably request for distribution of the Shares.
(vii) During a period of five years commencing with the date
hereof, the Company will furnish to you, and to each Underwriter who may so
request in writing, copies of all periodic and special reports furnished to
shareholders of the Company and of all information, documents and reports
filed with the Commission.
(viii) Not later than the 45th day following the end of the
fiscal quarter first occurring after the first anniversary of the Effective
Date, the Company will make generally available to its security holders an
earnings statement in accordance with Section 11(a) of the Securities Act and
Rule 158 thereunder.
(ix) The Company and the Selling Shareholders jointly and
severally agree to pay all costs and expenses incident to the performance of
their obligations under this Agreement, including all costs and expenses
incident to (a) the preparation, printing and filing with the Commission and
the National Association of Securities Dealers, Inc. (the "NASD") of the
Registration Statement, any Preliminary Prospectus and the Prospectus (b) the
furnishing to the Underwriters of copies of any Preliminary Prospectus and of
the several documents required by paragraph (iii) of this Section 6 to be so
furnished, (c) the printing of this Agreement and related documents delivered
to the Underwriters, (d) the preparation, printing and filing of all
supplements and amendments to the Prospectus referred to in paragraph (iv) of
this Section 6, (e) the furnishing to you and the Underwriters of the reports
and information referred to in paragraph vii of this Section 6 and (f) the
printing and issuance of stock certificates including the transfer agents
fees. The Selling Shareholders will pay any transfer taxes incident to the
transfer to the Underwriters of the shares of Stock being sold by the Selling
Shareholders.
(x) The Company and the Selling Shareholders jointly and
severally agree to reimburse you, for the account of the several
Underwriters, for blue sky fees and related disbursements (including counsel
fees and disbursements and cost of printing memoranda for the Underwriters)
paid by or for the account of the Underwriters or their counsel in qualifying
the Shares under state securities or blue sky laws and in the review of the
offering by the NASD.
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(xi) The Company hereby agrees that, without the prior
written consent of Hambrecht & Quist LLC on behalf of the Underwriters, which
consent shall be given or withheld in the reasonable judgement of Hambrecht &
Quist LLC, the Company will not, for a period of 180 days following the
commencement of the public offering of the Shares by the Underwriters, (the
"Lock-Up Period") directly or indirectly, (a) sell, offer, contract to sell,
make any short sale, pledge, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant
to purchase or otherwise transfer or dispose of any shares of Common Stock or
any securities convertible into or exchangeable or exercisable for or any
rights to purchase or acquire Common Stock or (b) enter into any swap or
other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (a) or (b) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing sentence
shall not apply to (A) the Shares to be sold to the Underwriters pursuant to
this Agreement (B) grants of options, warrants or other rights to purchase
Common Stock, or the issuance of Common Stock pursuant to the exercise of
such options, warrants or other rights, so long as such grants and issuances
are pursuant to a stock bonus or other stock plan or arrangement described in
the Prospectus, or (C) shares of Common Stock issued in connection with
acquisitions by the Company; provided, however, that the holders of shares
issued pursuant to the options, warrants or other rights described in (B) or
the acquisitions described in (C) agree in writing to be bound by agreements
substantially the same as the Lock-Up Agreements.
(xii) If at any time during the 25-day period after the
Registration Statement becomes effective any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price for the Shares has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company
will, after written notice from you advising the Company to the effect set
forth above, and to the extent counsel to you or to the Company shall
reasonably believe necessary, forthwith prepare, consult with you concerning
the substance of, and disseminate a press release or other public statement,
reasonably satisfactory to you, responding to or commenting on such rumor,
publication or event.
(b) COVENANTS OF THE SELLING SHAREHOLDERS. Each Selling
Shareholder further covenants and agrees with each Underwriter:
(i) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES.
Such Principal Selling Shareholder will not, during the Lock-Up Period, make a
disposition of securities (AS DEFINED IN EXHIBIT A HERETO) now owned or
hereafter acquired directly by such person or with respect to which such person
has or hereafter acquires the power of disposition, otherwise than (a) as a bona
fide gift or gifts, provided the donee or donees thereof agree in writing to be
bound by this restriction, (b) as a distribution to partners or shareholders of
such person, provided that the distributees thereof agree in writing to be bound
by the terms of this restriction, (c) with respect to dispositions of Common
Shares acquired on the open market or (d) with the prior written consent of
Hambrecht & Quist LLC. The foregoing restriction has been expressly agreed to
preclude the holder of such securities from engaging in any hedging or other
transaction which is designed to or reasonably expected to lead to or result in
a disposition of securities during the Lock-Up Period, even if such securities
would be disposed of by someone other than such holder. Such prohibited hedging
or other transactions would include, without limitation, any short sale (whether
or not against the box) or any purchase, sale or grant of any right (including,
without limitation, any put or call option) with respect to any securities or
with respect to any security (other than a broad-based market basket or index)
that includes, relates to or derives any significant part of its value from
securities. Furthermore, such person has also agreed and consented to the entry
of stop transfer instructions with the Company's transfer agent against the
transfer of the securities held by such person except in compliance with this
restriction.
(ii) DELIVERY OF FORMS W-8 AND W-9. To deliver to the
Representative prior to the First Closing Date a properly completed and
executed United States Treasury Department Form W-8 (if the Selling
Shareholder is a non-United States person) or Form W-9 (if the Selling
Shareholder is a United States Person).
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(iii) NOTIFICATION OF UNTRUE STATEMENTS, ETC. If, at anytime
prior to the date on which the distribution of the Common Shares as contemplated
herein and in the Prospectus has been completed, as determined by the
Representative, such Principal Selling Shareholder has knowledge of the
occurrence of any event as a result of which the Prospectus or the Registration
Statement, in each case as then amended or supplemented, would include an untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, such Selling Shareholder will promptly notify the Company
and the Representative.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) Each of the Company, the Principal Shareholder and the
Secondary Shareholder, jointly and severally, agrees to indemnify and hold
harmless each Underwriter and each person (including each partner or officer
thereof) who controls any Underwriter within the meaning of Section 15 of the
Securities Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Securities Act, the Exchange Act of 1934, as
amended (the "Exchange Act"), or the common law or otherwise, and the Company
agrees to reimburse each such Underwriter and controlling person for any legal
or other expenses (including, except as otherwise hereinafter provided,
reasonable fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement), or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED, HOWEVER,
that (1) the indemnity agreements of the Company and the Selling Shareholders
contained in this paragraph (a) shall not apply to any such losses, claims,
damages, liabilities or expenses if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of any Underwriter
for use in any Preliminary Prospectus or the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto and (2) the
indemnity agreement contained in this paragraph (a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Shares which is the subject thereof (or to the benefit of
any person controlling such Underwriter) if at or prior to the written
confirmation of the sale of such Shares a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (iii) of Section 6 hereof; and PROVIDED, FURTHER,
that notwithstanding the foregoing, the indemnity agreements of the Secondary
Shareholders contained in this paragraph (a) shall only apply to any such
losses, claims, damages, liabilities or expenses if such statement or omission
was made in reliance upon and in conformity with information furnished as herein
stated or otherwise furnished in writing to the Company by or on behalf of the
Secondary Shareholder for use in any Preliminary Prospectus or the Registration
Statement or the Prospectus. The indemnity agreements of the Company and the
Selling Shareholders contained in this paragraph (a) and the
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representations and warranties of the Company and the Selling Shareholders
contained in Section 2 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the
Shares.
(b) Each Underwriter severally agrees to indemnify and hold
harmless each of the Company, each of its officers who signs the Registration
Statement on his own behalf or pursuant to a power of attorney, each of its
directors, the Selling Shareholders, each other Underwriter and each person
(including each partner or officer thereof) who controls the Company, the
Selling Shareholders or any such other Underwriter within the meaning of
Section 15 of the Securities Act, from and against any and all losses,
claims, damages or liabilities, joint or several, to which such indemnified
parties or any of them may become subject under the Securities Act, the
Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any
investigation or inquiry of, or other proceeding which may be brought
against, the respective indemnified parties, in each case arising out of or
based upon (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (including the Prospectus as
part thereof and any Rule 462(b) registration statement) or any
post-effective amendment thereto (including any Rule 462(b) registration
statement) or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading or (ii) any untrue statement or alleged untrue
statement of a material fact contained in the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any
amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, if such statement or omission was made in reliance upon and in
conformity with information furnished as herein stated or otherwise furnished
in writing to the Company by or on behalf of such indemnifying Underwriter
for use in the Registration Statement or the Prospectus or any such amendment
thereof or supplement thereto. The indemnity agreement of each Underwriter
contained in this paragraph (b) shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the
Shares.
(c) Without limitation and in addition to its obligations
under the other paragraphs of this Section 7, the Company agrees to indemnify
and hold harmless Hambrecht & Quist LLC ("H&Q") and each person, if any, who
controls H&Q within the meaning of the Securities Act or the Exchange Act from
and against any loss, claim, damage, liabilities or expense, as incurred,
arising out of or based upon H&Q acting as a "qualified independent underwriter"
(within the meaning of Rule 2720 to the NASD's Conduct Rules) in connection with
the offering contemplated by this Agreement, and agrees to reimburse each such
indemnified person for any legal or other expense reasonably incurred by them in
connection with investigating, defending, settling, compromising or paying any
such loss, claim, damage, liability, expense or action; PROVIDED, HOWEVER, that
the Company shall not be liable in any such case to the extent that any such
loss, claim, damage, liability or expense results from the gross negligence or
willful misconduct of H&Q.
(d) Each party indemnified under the provision of
paragraphs (a), (b) and (c) of this Section 7 agrees that, upon the service of a
summons or other initial legal process upon it in any action or suit instituted
against it or upon its receipt of written notification of the commencement of
any investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (the "Notice") of such service
or notification to the party or
17
<PAGE>
parties from whom indemnification may be sought hereunder. No
indemnification provided for in such paragraphs shall be available to any
party who shall fail so to give the Notice if the party to whom such Notice
was not given was unaware of the action, suit, investigation, inquiry or
proceeding to which the Notice would have related and was prejudiced by the
failure to give the Notice, but the omission so to notify such indemnifying
party or parties of any such service or notification shall not relieve such
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of such
indemnity agreement. Any indemnifying party shall be entitled at its own
expense to participate in the defense of any action, suit or proceeding
against, or investigation or inquiry of, an indemnified party. Any
indemnifying party shall be entitled, if it so elects within a reasonable
time after receipt of the Notice by giving written notice (the "Notice of
Defense") to the indemnified party, to assume (alone or in conjunction with
any other indemnifying party or parties) the entire defense of such action,
suit, investigation, inquiry or proceeding, in which event such defense shall
be conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to
the indemnified party or parties; PROVIDED, HOWEVER, that (i) if the
indemnified party or parties reasonably determine that there may be a
conflict between the positions of the indemnifying party or parties and of
the indemnified party or parties in conducting the defense of such action,
suit, investigation, inquiry or proceeding or that there may be legal
defenses available to such indemnified party or parties different from or in
addition to those available to the indemnifying party or parties, then
counsel for the indemnified party or parties shall be entitled to conduct the
defense to the extent reasonably determined by such counsel to be necessary
to protect the interests of the indemnified party or parties and (ii) in any
event, the indemnified party or parties shall be entitled to have counsel
chosen by such indemnified party or parties participate in, but not conduct,
the defense. If, within a reasonable time after receipt of the Notice, an
indemnifying party gives a Notice of Defense and the counsel chosen by the
indemnifying party or parties is reasonably satisfactory to the indemnified
party or parties, the indemnifying party or parties will not be liable under
paragraphs (a) through (d) of this Section 7 for any legal or other expenses
subsequently incurred by the indemnified party or parties in connection with
the defense of the action, suit, investigation, inquiry or proceeding, except
that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred
to in clause (i) of the proviso to the preceding sentence and (B) the
indemnifying party or parties shall bear such other expenses as it or they
have authorized to be incurred by the indemnified party or parties. If,
within a reasonable time after receipt of the Notice, no Notice of Defense
has been given, the indemnifying party or parties shall be responsible for
any legal or other expenses incurred by the indemnified party or parties in
connection with the defense of the action, suit, investigation, inquiry or
proceeding.
(e) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a), (b) or (c) of this Section 7, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of the losses, claims,
damages or liabilities referred to in paragraph (a), (b) or (c) of this
Section 7 (i) in such proportion as is appropriate to reflect the relative
benefits received by each indemnifying party from the offering of the Shares
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault
of each indemnifying party in connection with the statements or omissions
that resulted in such losses, claims, damages or liabilities, or actions in
respect thereof, as well as any other relevant equitable considerations. The
relative benefits received by the Company, the Selling Shareholders and the
Underwriters shall be deemed to be in the same respective proportions as the
total net proceeds from the offering of the Shares received by each of the
Company and the Selling Shareholders and the total underwriting discount
received by the Underwriters, as set forth in the table on the cover page of
the Prospectus, bear to the aggregate public offering price of the Shares.
Relative fault
18
<PAGE>
shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by each
indemnifying party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission.
The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (e) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (e). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this paragraph (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigation,
preparing to defend or defending against any action or claim which is the
subject of this paragraph (e). Notwithstanding the provisions of this paragraph
(e), no Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this paragraph (e) to contribute are several in proportion to
their respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (d) of this Section 7).
(f) Neither the Company nor any Selling Shareholder will,
without the prior written consent of each Underwriter, settle or compromise or
consent to the entry of any judgment in any pending or threatened claim, action,
suit or proceeding in respect of which indemnification may be sought hereunder
(whether or not such Underwriter or any person who controls such Underwriter
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act is a party to such claim, action, suit or proceeding) unless such
settlement, compromise or consent includes an unconditional release of such
Underwriter and each such controlling person from all liability arising out of
such claim, action, suit or proceeding.
(g) The liability of each Selling Shareholder under the
indemnity and reimbursement agreements contained in the provisions of this
Section 7 and Section 11 hereof shall be limited to an amount equal to the
initial public offering price of the stock sold by such Selling Shareholder to
the Underwriters. The Company and the Selling Shareholders may agree, as among
themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible. No indemnification provided for in Section 7(a) by the
Principal Shareholder shall be available to any Underwriter, or any person who
controls any Underwriter within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act (each an "Underwriter Indemnified Party")
until such Underwriter Indemnified Party has first used its reasonable efforts
to pursue all remedies it may have against the Company under Section 7(a).
Notwithstanding the foregoing, if, in the reasonable judgment of any Underwriter
Indemnified Party, the applicable statute of limitations for any potential
action, suit or proceeding by such Underwriter Indemnified Party for
indemnification against the Principal Shareholder will expire, such Underwriter
Indemnified Party may name the Principal Shareholder in any action, suit or
proceeding to which the Company is also a party solely for purposes of
preserving any rights such Underwriter
19
<PAGE>
Indemnified Party may have to seek indemnification from the Principal
Shareholder after using its reasonable efforts to pursue and exhaust all
remedies it may have against the Company. Notwithstanding anything else
herein to the contrary, for purposes of this paragraph an Underwriter
Indemnified Party shall be deemed to have used its reasonable efforts to
pursue and exhaust all remedies it may have against the Company forty five
(45) days after such Underwriter Indemnified Party first delivers Notice to
the Company pursuant to paragraph (d) hereof.
8. TERMINATION. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company and each
Selling Shareholder if after the date of this Agreement trading in the Common
Stock shall have been suspended, or if there shall have occurred (i) the
engagement in hostilities or an escalation of major hostilities by the United
States or the declaration of war or a national emergency by the United States on
or after the date hereof, (ii) any outbreak of hostilities or other national or
international calamity or crisis or change in economic or political conditions
if the effect of such outbreak, calamity, crisis or change in economic or
political conditions in the financial markets of the United States would, in the
Underwriters' reasonable judgment, make the offering or delivery of the Shares
impracticable, (iii) suspension of trading in securities generally or in the
Underwriters reasonable judgement, a material adverse decline in value of
securities generally on the New York Stock Exchange, the American Stock
Exchange, or The Nasdaq Stock Market, or limitations on prices (other than
limitations on hours or numbers of days of trading) for securities on either
such exchange or system, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of, or
commencement of any proceeding or investigation by, any court, legislative body,
agency or other governmental authority which in the Underwriters' reasonable
opinion materially and adversely affects or will materially or adversely affect
the business or operations of the Company, (v) declaration of a banking
moratorium by either federal or state authorities or (vi) the taking of any
action by any federal, state or local government or agency in respect of its
monetary or fiscal affairs which in the Underwriters' reasonable opinion has a
material adverse effect on the securities markets in the United States, other
than minor changes in the Federal Reserve interest rates as announced by the
Federal Reserve Board. If this Agreement shall be terminated pursuant to this
Section 8, there shall be no liability of the Company or the Selling
Shareholders to the Underwriters and no liability of the Underwriters to the
Company or the Selling Shareholders; PROVIDED, HOWEVER, that in the event of any
such termination the Company and each of the Selling Shareholders agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and each of the Selling
Shareholders under this Agreement, including all costs and expenses referred to
in paragraphs (ix) and (x) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Shares shall be subject to the
performance by the Company and each of the Selling Shareholders of all their
obligations to be performed hereunder at or prior to the Closing Date or any
later date on which Option Shares are to be purchased, as the case may be, and
to the following further conditions:
(a) The Registration Statement shall have become effective;
and no stop order suspending the effectiveness thereof shall have been issued
and no proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Shares
hereunder and the validity and form of the certificates representing the Shares,
all corporate proceedings and other legal matters incident to the foregoing, and
the form of the Registration Statement and of the Prospectus (except as to the
financial statements contained therein), shall have been approved at or prior to
the Closing Date by Brobeck, Phleger & Harrison LLP, counsel for the
Underwriters.
20
<PAGE>
(c) You shall have received from Morrison & Foerster LLP,
counsel for the Company and the Selling Shareholders, an opinion, addressed to
the Underwriters and dated the Closing Date, covering the matters set forth in
Annex A hereto, and if Option Shares are purchased at any date after the Closing
Date, additional opinions from each such counsel, addressed to the Underwriters
and dated such later date, confirming that the statements expressed as of the
Closing Date in such opinions remain valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date,
the statements made in the Registration Statement and the Prospectus were true
and correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein,
(iv) neither the Company nor any of its subsidiaries has any material contingent
obligations which are not disclosed in the Registration Statement and the
Prospectus, (v) there are not any pending or known threatened legal proceedings
to which the Company or any of its subsidiaries is a party or of which property
of the Company or any of its subsidiaries is the subject which are material and
which are not disclosed in the Registration Statement and the Prospectus,
(vi) there are not any franchises, contracts, leases or other documents which
are required to be filed as exhibits to the Registration Statement which have
not been filed as required, (vii) the representations and warranties of the
Company herein are true and correct in all material respects as of the Closing
Date or any later date on which Option Shares is to be purchased, as the case
may be, and (viii), in the reasonable opinion of the Underwriters, there has not
been any material change in the market for securities in general or in
political, financial or economic conditions from those reasonably foreseeable as
to render it impracticable in your reasonable judgment to make a public offering
of the Shares, or a material adverse change in market levels for securities in
general (or those of companies in particular) or financial or economic
conditions which render it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any
later date on which Option Shares are purchased a certificate, dated the Closing
Date or such later date, as the case may be, and signed by the President and the
Chief Financial Officer of the Company, stating that the respective signers of
said certificate have carefully examined the Registration Statement in the form
in which it originally became effective and the Prospectus contained therein and
any supplements or amendments thereto, and that the statements included in
clauses (i) through (vii) of paragraph (d) of this Section 9 are true and
correct.
(f) You shall have received from PriceWaterhouseCoopers LLC, a
letter or letters, addressed to the Underwriters and dated the Closing Date and
any later date on which Option Shares are purchased, confirming that they are
independent public accountants with respect to the Company within the meaning of
the Securities Act and the applicable published rules and regulations thereunder
and based upon the procedures described in their letter delivered to you
concurrently with the execution of this Agreement (the "Original Letter"), but
carried out to a date not more than three business days prior to the Closing
Date or such later date on which Option Shares is purchased (i) confirming, to
the extent true, that the statements and conclusions set forth in the Original
Letter are accurate as of the Closing Date or such later date,
21
<PAGE>
as the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are
necessary to reflect any changes in the facts described in the Original
Letter since the date of the Original Letter or to reflect the availability
of more recent financial statements, data or information. The letters shall
not disclose any change, or any development involving a prospective change,
in or affecting the business or properties of the Company or any of its
subsidiaries which, in your sole judgment, makes it impractical or
inadvisable to proceed with the public offering of the Shares or the purchase
of the Option Shares as contemplated by the Prospectus.
(g) You shall have received from PriceWaterhouseCoopers LLC, a
letter stating that their review of the Company's system of internal accounting
controls, to the extent they deemed necessary in establishing the scope of their
examination of the Company's financial statements as at ____________, 1999, did
not disclose any weakness in internal controls that they considered to be
material weaknesses.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (vi) of Section 6 hereof.
(i) Prior to the Closing Date, the Shares to be issued and
sold by the Company shall have been duly authorized for quotation on the Nasdaq
National Market upon official notice of issuance.
(j) On or prior to the Closing Date, you shall have received
from all directors, officers, and beneficial holders of more than 1% of the
outstanding Common Stock shareholder agreements, in form reasonably satisfactory
to Hambrecht & Quist LLC, stating that without the prior written consent of
Hambrecht & Quist LLC on behalf of the Underwriters, such person or entity will
not, for a period of 180 days following the commencement of the public offering
of the Shares by the Underwriters, directly or indirectly, (i) sell, offer,
contract to sell, make any short sale, pledge, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any shares of Common
Stock or any securities convertible into or exchangeable or exercisable for or
any rights to purchase or acquire Common Stock or (ii) enter into any swap or
other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise.
(k) The Company shall cause to be prepared and delivered, at
its expense, within one business day from the effective date of this Agreement,
to the Representatives an "electronic Prospectus" to be used by the Underwriters
in connection with the offering and sale of the Shares. As used herein, the
term "electronic Prospectus" means a form of Prospectus, and any amendment or
supplement thereto, that meets each of the following conditions: (i) it shall be
encoded in an electronic format, satisfactory to the Representatives, that may
be transmitted electronically by the Representatives to offerees and purchasers
of the Shares for at least the Prospectus delivery period; (ii) it shall
disclose the same information as the paper Prospectus and Prospectus filed
pursuant to EDGAR, except to the extent that graphic and image material cannot
be disseminated electronically, in which case such graphic and image material
shall be replaced in the electronic Prospectus with a fair and accurate
narrative description or tabular representation of such material, as
appropriate; and (iii) it shall be in or convertible into a paper format or an
electronic format, satisfactory to the Representatives, that will allow
investors to store and have continuously ready access to the Prospectus at any
future time, without charge to investors (other than any fee charged for
subscription to the system as a whole and for on-line time). Such electronic
Prospectus may consist of a Rule 434 preliminary prospectus, together with the
applicable term sheet, provided that it otherwise satisfies the format and
conditions
22
<PAGE>
described in the immediately preceding sentence. The Company hereby confirms
that it has included or will include in the Prospectus filed pursuant to
EDGAR or otherwise with the Commission and in the Registration Statement at
the time it was declared effective an undertaking that, upon receipt of a
request by an investor or his or her representative within the Prospectus
delivery period, the Company shall transmit or cause to be transmitted
promptly, without charge, a paper copy of the Prospectus.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Brobeck, Phleger & Harrison LLP, counsel for the
Underwriters, in their reasonable professional judgment, shall be satisfied that
they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and each Selling Shareholder. Any such termination shall be without
liability of the Company or the Selling Shareholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Shareholders; PROVIDED, HOWEVER, that (i) in the event of such termination, each
of the Company and each Selling Shareholder agrees to indemnify and hold
harmless the Underwriters from all costs or expenses incident to the performance
of the obligations of the Company under this Agreement, including all costs and
expenses referred to in paragraphs (ix) and (x) of Section 6 hereof, and (ii) if
this Agreement is terminated by you because of any refusal, inability or failure
on the part of the Company or the Selling Shareholders to perform any agreement
herein, to fulfill any of the conditions herein, or to comply with any provision
hereof other than by reason of a default by any of the Underwriters, the Company
and each Selling Shareholder will reimburse the Underwriters severally upon
demand for all out-of-pocket expenses (including reasonable fees and
disbursements of counsel) that shall have been incurred by them in connection
with the transactions contemplated hereby.
10. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY AND THE SELLING
SHAREHOLDERS. The obligation of the Company and the Selling Shareholders to
deliver the Shares shall be subject to the conditions that (a) the Registration
Statement shall have become effective and (b) no stop order suspending the
effectiveness thereof shall be in effect and no proceedings therefor shall be
pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company by giving notice to
you. Any such termination shall be without liability of the Company or the
Selling Shareholders to the Underwriters and without liability of the
Underwriters to the Company or the Selling Shareholders; PROVIDED, HOWEVER, that
in the event of any such termination the Company and the Selling Shareholders
agree to indemnify and hold harmless the Underwriters from all costs or expenses
incident to the performance of the obligations of the Company under this
Agreement, including all costs and expenses referred to in paragraphs (ix) and
(x) of Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other
obligations under Section 7 of this Agreement, the Company and each Selling
Shareholder hereby agree to reimburse on a quarterly basis the Underwriters for
all reasonable legal and other expenses incurred in connection with
investigating or defending any claim, action, investigation, inquiry or other
proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in paragraph (a) of Section 7 of this
Agreement, notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the obligations under this Section 11 and the
possibility that such payments might later be held to be improper; PROVIDED,
HOWEVER, that (i) to the extent any such payment is ultimately held to be
improper, the persons receiving such payments shall promptly refund them and
(ii) such persons
23
<PAGE>
shall provide to the Company and each Selling Shareholder, upon request,
reasonable assurances of their ability to effect any refund, when and if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of the Company, each of the Selling Shareholders and the several
Underwriters and, with respect to the provisions of Section 7 hereof, the
several parties (in addition to the Company, each of the Selling Shareholders
and the several Underwriters) indemnified under the provisions of said
Section 7, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give to
any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser, as
such purchaser, of any of the Shares from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters,
shall be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush
Street, San Francisco, California 94104; if to the Company, shall be mailed,
telegraphed or delivered to it at its office, 12 Corporate Woods, 10975 Benson
Street, Suite 390, Overland Park, Kansas, 66210, Attention: James B. Dodd,
and if to the Selling Shareholders, ____________________. All notices given
by telegraph shall be promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or their respective directors or officers, and (c) delivery and
payment for the Shares under this Agreement; PROVIDED, HOWEVER, that if this
Agreement is terminated prior to the Closing Date, the provisions of paragraph
(xi) of Section 6 hereof shall be of no further force or effect.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
24
<PAGE>
Please sign and return to the Company and each of the Selling Shareholders
the enclosed duplicates of this letter, whereupon this letter will become a
binding agreement between the Company, each of the Selling Shareholders and the
several Underwriters in accordance with its terms.
Very truly yours,
National Information Consortium, Inc.
By
--------------------------------------
[Name]
[Title]
SELLING SHAREHOLDERS:
[list names]
By
--------------------------------------
Attorney-in-Fact
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
Co-Manager
By Hambrecht & Quist LLC
By
------------------------------------------------
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
25
<PAGE>
SCHEDULE A
SELLING SECURITYHOLDERS
<PAGE>
SCHEDULE B
UNDERWRITERS
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
TO BE PURCHASED
------------------------------------------------------ ----------------
<S> <C>
Hambrecht & Quist LLC . . . . . . . . . . . . . . . .
Thomas Weisel Partners LLC . . . . . . . . . . . . .
---------------
Volpe Brown Whelan & Company . . . . . . . . . . . .
FAC/Equities . . . . . . . . . . . . . . . . . . . .
---------------
---------------
Total . . . . . . . . . . . . . . .
---------------
---------------
</TABLE>
<PAGE>
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF MORRISON & FOERSTER
COUNSEL FOR THE COMPANY
AND THE SELLING SHAREHOLDERS
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, is duly qualified
as a foreign corporation and in good standing in each state of the United
States of America in which its ownership or leasing of property requires
such qualification except where the failure to be so qualified would not
have a material adverse effect on the business, properties, financial
condition or results of operations of the Company and its subsidiaries,
taken as a whole, and has full corporate power and authority to own or
lease its properties and conduct its business as described in the
Registration Statement; all the issued and outstanding capital stock of
each of the subsidiaries of the Company has been duly authorized and
validly issued and is fully paid and nonassessable, and is owned by the
Company free and clear of all liens, encumbrances and security interests,
and to the best of such counsel's knowledge, no options, warrants or other
rights to purchase, agreements or other obligations to issue or other
rights to convert any obligations into shares of capital stock or ownership
interests in such subsidiaries are outstanding;
(ii) the authorized capital stock of the Company consists of
_______ shares of Common Stock, $____ par value, of which there are
outstanding _________ shares (including the Firm Shares plus the number of
shares of Option Shares issued on the date hereof) proper corporate
proceedings have been taken validly to authorize such authorized capital
stock; all of the outstanding shares of such capital stock (including the
Firm Shares and the shares of Option Shares issued, if any) have been duly
and validly issued and are fully paid and nonassessable; any Option Shares
purchased after the Closing Date, when issued and delivered to and paid for
by the Underwriters as provided in the Underwriting Agreement, will have
been duly and validly issued and be fully paid and nonassessable; and no
preemptive rights of, or rights of refusal in favor of, shareholders exist
with respect to the Shares, or the issue and sale thereof, pursuant to the
Articles of Incorporation or Bylaws of the Company and, to the knowledge of
such counsel, there are no contractual preemptive rights that have not been
waived, rights of first refusal or rights of co-sale which exist with
respect to the Shares being sold by the Selling Shareholders or with
respect to the issue and sale of the Shares;
(iii) the Registration Statement has become effective under the
Securities Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or suspending or
preventing the use of the Prospectus is in effect and no proceedings for
that purpose have been instituted or are pending or contemplated by the
Commission;
(iv) the Registration Statement and the Prospectus (except as to
the financial statements and schedules and other financial data contained
therein, as to which such counsel need express no opinion) comply as to
form in all material respects with the requirements of the Securities Act
and with the rules and regulations of the Commission thereunder;
(v) such counsel has no reason to believe that the Registration
Statement (except as to the financial statements and schedules and other
financial data contained or incorporated by reference therein, as to which
such counsel need not express any opinion or belief) at the Effective Date
contained any untrue statement of a material fact or
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omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or that the
Prospectus (except as to the financial statements and schedules and
other financial data contained or incorporated by reference therein, as
to which such counsel need not express any opinion or belief) as of its
date or at the Closing Date (or any later date on which Option Shares
is purchased), contained or contains any untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in light of the circumstances under which
they were made, not misleading;
(vi) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to such counsel)
and 11(c) of Form S-1 is to the best of such counsel's knowledge accurately
and adequately set forth therein in all material respects or no response is
required with respect to such Item and the description of the Company's
stock option plan and the options granted and which may be granted
thereunder in the Prospectus accurately and fairly presents the information
required to be shown with respect to said plan and options to the extent
required by the Securities Act and the rules and regulations of the
Commission thereunder;
(vii) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion
of such counsel are of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement, which are not described and filed as required;
(viii) the Underwriting Agreement has been duly authorized, executed
and delivered by the Company;
(ix) the Underwriting Agreement has been duly executed and
delivered by or on behalf of the Selling Shareholders and the Custody
Agreement between the Selling Shareholders and __________, as Custodian,
and the Power of Attorney referred to in such Custody Agreement have been
duly executed and delivered by the several Selling Shareholders;
(x) the issue and sale by the Company of the shares of Shares sold
by the Company as contemplated by the Underwriting Agreement will not
conflict with, or result in a breach of, the Articles of Incorporation or
Bylaws of the Company or any of its subsidiaries or any agreement or
instrument known to such counsel to which the Company or any of its
subsidiaries is a party or any applicable law or regulation, or so far as
is known to such counsel, any order, writ, injunction or decree, of any
jurisdiction, court or governmental instrumentality;
(xi) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have waived such rights
or such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement;
(xii) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated in the Underwriting Agreement, except such as
have been obtained under the Securities Act and such as may be required
under state securities or blue sky laws in connection with the purchase and
distribution of the Shares by the Underwriters; and
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(xiii) good and marketable title to the Shares sold by the Selling
Shareholders under the Underwriting Agreement, free and clear of all liens,
encumbrances, equities, security interests and claims, has been transferred
to the Underwriters who have severally purchased such Shares under the
Underwriting Agreement, assuming for the purpose of this opinion that the
Underwriters purchased the same in good faith without notice of any adverse
claims; and
(xiv) the Stock sold by the Selling Shareholders is listed and duly
admitted to trading on the Nasdaq National Market, and the Stock issued and
sold by the Company will been duly authorized for listing by the Nasdaq
National Market Stock Exchange upon official notice of issuance.
-----------------------------
Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the United States or of the State of Colorado, upon
opinions of local counsel satisfactory in form and scope to counsel for the
Underwriters. Copies of any opinions so relied upon shall be delivered to the
Representatives and to counsel for the Underwriters and the foregoing opinion
shall also state that counsel knows of no reason the Underwriters are not
entitled to rely upon the opinions of such local counsel.
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EXHIBIT 10.15
AGREEMENT
State of Iowa Contract No. 2501.
1.0. PARTIES AND TERM.
This Agreement is effective this 23rd day of April, 1998, by and
between IOWA INTERACTIVE, INC. (Vendor) and the STATE OF IOWA, by and through
INFORMATION TECHNOLOGY SERVICES (State). The Initial Term of this contract
is from the effective date up to and including September 30, 1998. The
Initial Term of this contract is predicated on federal funding which will
expire September 30, 1998. In the event that the State obtains an extension
of time beyond September 30, 1998 from the federal funding source to expend
the funds for the purpose of completing Phases I, II, and III of the Project
for which the funds were granted, the State may elect, in its sole
discretion, to extend this Agreement for the purpose of completing Phases I,
II and III of the Project.
In the sole discretion of the State, the State may elect to extend
this Agreement beyond the Initial Term for a period not to exceed a term of
Three (3) years (the First Extension Period). Following the First Extension
Period, the State may elect to renew this Agreement in Two (2) year
increments for an additional period not to exceed Four (4) years (Subsequent
Extension Period[s]).
The State shall determine whether to renew the Agreement and shall
notify the Vendor in writing at least One Hundred Eighty (180) Days in
advance of the expiration of the First Extension Period or Subsequent
Extension Period. Within Thirty (30) Days of the notice to the Vendor, the
parties shall agree on the length of the transition period. However, the
Vendor shall not be obligated to continue to operate the Network under this
subsection beyond the One Hundred Eighty (180) Days if the Network operations
are incurring a net loss (as defined in the Project Plan) at the time of
expiration or during the period of transition unless any such loss is
reimbursed by the State during the transition period.
1.1 DEFINITIONS
As used herein, the following terms mean:
"Acceptance of Service" or "Accept Service" means the date on which
the Project is activated by the State and use of the Project is commenced for
purposes other than Testing and Acceptance following the Testing and
Acceptance period.
"Project" means the timely development and implementation of a citizen's
information network, including but not limited to Phases I, II and III as
described in the Request for Proposal #18001S (RFP) and provision of related
services for the State, as defined and specified in the RFP, and includes, but
is not limited to the purchase, maintenance and replacement of hardware,
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software, peripheral equipment, operating systems and communications
equipment and connections (collectively "Network") to be provided by the
Vendor.
"Project Plan" means the document developed by the parties which
outlines specifically the manner in which the Project will be developed,
completed and implemented, the manner by which the Vendor shall be paid, the
timelines for completion of various deliverables of the Project, and such
other matters as the parties deem necessary to effectuate this Agreement.
The Project Plan will also contain provisions regarding the establishment,
development, maintenance, operation and expansion of the Network (Phase IV),
if applicable.
"Testing and Acceptance" means that the Vendor has completed the
design, development and installation of Phases I, II and III of the Project
and has completed its notification of readiness for Project testing, the
State and the Vendor have completed the Project testing, all notices required
to be given by the Vendor to the State or the State to the Vendor have been
completed, and the Project has been accepted by the State. The Project Plan
will also contain provisions establishing criteria for Testing and Acceptance
for each of the Phases of the Project.
1.2 PROJECT COMPLETION; PAYMENT TO VENDOR
A. The Vendor shall complete phased implementation of the Project not
later than dates to be agreed by the parties, and incorporated into the
Project Plan, which is incorporated herein by reference. The Project Plan
may be modified from time-to-time with the mutual agreement and consent of
both parties; all such modifications shall be in writing signed by both
parties to this Agreement.
B. If the Vendor fails to make timely, substantial and material progress
toward the completion of the Project by the date or dates specified in
subsection A above, or in the Project Plan, the State may, in its sole
discretion, terminate the Agreement with the Vendor following notice of
default and opportunity to cure as provided in Section 1.6 herein. In the
event that the Vendor fails to complete the Project as required herein, and
the State terminates the agreement with the Vendor, the State may withhold
any outstanding payments to the Vendor, and pursue any other remedy provided
herein and by law.
C. 1. The State declares and the Vendor acknowledges that time is of the
essence in the completion of the Project, and further that the State may
suffer damages if the Vendor fails to complete the Project by the date(s)
specified. Specifically, the State may lose certain federal funding for the
development, completion and implementation of a citizens' information
network, as well as other related federal funds and may be required to
reimburse the federal government for such funds previously expended by the
State if the Vendor fails to complete the Project by the date or date(s)
specified in Subsection A above, or in the Project Plan.
2. If the Vendor fails to complete the Project by the date or date(s)
specified in subsection A above, or in the Project Plan and the State elects to
continue the Agreement with the Vendor, the State may assess the Vendor
liquidated damages in the amount of One Thousand
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Dollars and No Cents ($1,000.00) for each week (seven consecutive days) in
which the Vendor fails to complete Phases I, II and III of the Project.
Liquidated damages shall not be considered a penalty and may be deducted from
the amount of the Vendor's monthly payment. There shall be no concurrent
applications of liquidated damages due to cascading failures resulting from a
single failure.
3. If the Vendor makes timely, substantial and material progress
toward the completion of the Project but is not able to complete the Project
prior to September 30, 1998, and further, provided that the Vendor is not in
breach of a material term of the Agreement, the State will timely request an
extension of time from the federal funding source in which to complete the
Project. The State makes no representations with respect to the grant or
denial of such a request from the federal funding source with regard to an
extension.
D. The State shall pay the Vendor an amount not to exceed Five Hundred
Sixty-Two Thousand Dollars and No Cents ($562,000.00) for the timely
development and successful implementation of Phases I, II, and III of the
Project. The Vendor may invoice the State monthly in accordance with the
payment schedule set forth in Attachment 2 attached hereto and incorporated
herein by reference and subject to any adjustments identified in this
Agreement, liquidated damages or offsets pursuant to the terms and conditions
as stated in this Agreement. Payment terms for Phase IV of the Project, if
applicable, shall be incorporated into the Project Plan.
E. The Vendor shall not be reimbursed for any costs incurred by the
Vendor, including but not limited to Workers Compensation costs or insurance
premiums, unemployment compensation costs, taxes, costs of the Network (as
defined in this Agreement) or other obligations of the Vendor associated with
the provision of services requested under the RFP, except as agreed upon by
the parties and incorporated herein.
F. Upon receipt of a properly submitted and appropriately documented
invoice to the State, the State will promptly process and pay the invoice.
If State does not pay a properly submitted and appropriately documented
invoice within sixty (60) Days after presentation to the State, the Vendor
may add an interest charge not to exceed one percent (1%) per month on the
unpaid balance in accordance with Iowa Code Section 421.40, or the maximum
allowed under section 421.40, if less than one percent (1%).
1.3 TESTING AND ACCEPTANCE
A. Testing and Acceptance of the Project shall be completed not later
than the date or dates specified in the Project Plan. The State, in its sole
discretion, may require Testing and Acceptance for each major application in
the Project Plan. The State shall Accept Service from the Vendor promptly
following the installation, and Testing and Acceptance of the Project. The
Vendor shall notify the State of its readiness for Testing and Acceptance of
the Project and shall participate in and cooperate with the State in
completing Testing and Acceptance prior to the State's Acceptance of Service
from the Vendor.
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B. During the period of Testing and Acceptance, the State may accept or
reject the Project. If the State rejects the Project during Testing and
Acceptance, the State will notify the Vendor in writing of its rejection and
may include in the notification any relevant identified defects or
deficiencies in the Project, if known. The State shall not declare the
Vendor in Default of this Agreement during the initial Testing and Acceptance
period unless or until the State provides the Vendor with an additional
Fifteen (15) Days from the date of notification of rejection in which to
correct the deficiencies or defects in the Program. Upon the Vendor's
renotification of readiness for Testing and Acceptance, the State and the
Vendor shall recommence the Testing and Acceptance period. If the State
rejects the Project during the recommenced Testing and Acceptance period, the
State may declare the Vendor in default under this Agreement as specified
herein.
1.4 CORRECTION OF DEFECTS OR DEFICIENCIES; MAINTENANCE OF PROJECT
A. The Vendor shall at all times use its best efforts to maintain the
Network in such a condition throughout the term of this Agreement and any
extension thereof so as to deliver service contemplated by this Agreement on
an uninterrupted basis, Twenty-Four (24) hours a day, Seven (7) consecutive
days a week, except as provided herein. During the term of the Agreement and
any extension thereof, the Vendor, at its sole expense, shall maintain,
repair or replace any and all Network components or other materials necessary
to provide uninterrupted Twenty-Four (24) hours a day service to the State.
B. The State or its designated representative may periodically and
without notice to the Vendor monitor the performance of the Network and the
Project. In the event that the monitoring reflects that the Network is
experiencing errors in data transmission or interruption of service to the
State, the State shall notify the Vendor of service interruption or errors in
data transmission. The Vendor shall respond to commence and complete repairs
to the Network as specified in Subsection C below.
C. The Vendor shall develop a plan for regular monitoring of the
performance of the Network. The monitoring plan shall be subject to approval by
the State, and the monitoring plan shall be included in the Project Plan. In
the event that the Vendor's monitoring of the Network reflects that the Network
is experiencing errors in data transmission or interruption of service to the
State, the Vendor shall notify the State (in the manner specified in the Project
Plan) of service interruption or errors in data transmission. The Vendor shall
respond to commence repairs to correct the interruption in service or errors in
data transmission within two (2) hours of the commencement of the interruption
in service or errors in data transmission, and shall use its best efforts to
repair the Network and return the Network to normal service. The Vendor shall
respond to interruptions in service and errors in data transmission Twenty-Four
(24) hours a day, including Saturdays, Sundays and holidays. If the Vendor is
unable to respond to repair the Network within Two (2) hours of commencement of
the interruption in service or errors in data transmission, it shall escalate
its internal procedures for repairing the Network. The Vendor shall at all
times keep and maintain a service interruption log which shall be available for
inspection
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by the State.
D. The Vendor shall exercise its best efforts to limit any interruption
of service for the purpose of preventive maintenance to, repair or
replacement of or upgrading the Network to periods of minimum use. The
Vendor shall develop and adopt a preventive and routine maintenance schedule
for the Network which is subject to approval by the State, and which shall be
included in the Project Plan.
E. The Vendor shall not be subject to default for a service interruption
caused by a failure or malfunction of equipment which was not installed or
maintained by the Vendor or an affiliate, vandalism by third parties, or a
service interruption due to circumstances beyond the reasonable control of
the Vendor. Routine and preventive maintenance which is performed in
accordance with Subsection D above, shall not subject the Vendor to default.
F. In the event that the Vendor is unwilling or unable to correct the
interruption in service within Twenty-Four (24) consecutive hours following
the commencement of the service interruption (an interruption caused in whole
or in part by the Vendor or an interruption deemed to be within the control
of the Vendor), the State may make or cause to have made any repair necessary
for the continued operation of the Network and shall charge the Vendor for
such repair or replacement. The charges made to the Vendor by the State may
be offset from payments due or to become due to the Vendor. Further, if the
Vendor fails or is unwilling to repair, maintain, or replace any component of
the Network, the Vendor shall at all times during the term of this agreement
permit the State or its designated representative, reasonable access to the
Network, wherever located, for the purposes of performing maintenance,
repairs, replacement and other activities associated with the performance or
non-performance of the Network.
1.5 ASSIGNMENT OF AGREEMENT
The Vendor may not assign this Agreement to another person or entity
without the prior written consent of the State.
1.6 DEFAULT; REMEDIES OF STATE
A. The State may declare the Vendor in default of its obligations under
the Agreement for any of the following reasons:
1. Failure by the Vendor to meet the Project completion deadline(s) as
required in Section 1.2 herein.
2. Failure by the Vendor to substantially and materially conform to
the specifications as required by the Project Plan.
3. A breach of any term of this Agreement.
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4. Failure to meet the deadline(s) established herein.
5. Non-performance of this Agreement.
6. After One Hundred Twenty (120) Days from commencement of on-line
service, Four (4) or more service interruptions of a duration of Four (4) or
more hours each in a Thirty (30) Day consecutive period.
B. The State shall issue a written notice of default providing therein
for a Ten (10) Day period in which the Vendor shall have an opportunity to
cure, provided that cure is possible and feasible. Time allowed for cure of
a default shall not diminish or eliminate the Vendor's liability for
liquidated damages, if any.
C. If, after opportunity to cure, the default remains, the State may do
one or more of the following:
1. Exercise any remedy provided by law, including injunctive relief;
2. Terminate the Agreement, and
3. Obtain liquidated damages from the Vendor, as described herein.
1.7 INCORPORATED DOCUMENTS & GENERAL PROVISIONS
A. The following documents containing specifications for services
requested under Request for Proposal Number 18001S are listed below:
1. This Agreement together with any exhibits, Project Plans,
attachments or addenda, attached hereto or incorporated herein by reference.
2. Any License Agreements between the State and the Vendor for Vendor
owned software.
3. Any third party License Agreements for software owned by others and
provided by the Vendor to the State.
4. The Request for Proposal No. 18001S, including any and all addenda,
tables, exhibits and appendices, and the Vendor's Response to the Request for
Proposal, incorporated herein by reference as if set forth fully in this
Agreement. The RFP and the Vendor's Response to the RFP shall be deemed to
be of equal rank.
In the event of a conflict among the incorporated or attached documents,
the order of precedence shall be as set forth above.
B. Changes in the provisions of this Agreement may be made only in
writing signed by all parties hereto.
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C. This Agreement constitutes the entire agreement between the parties,
and any prior understanding or representation of any kind preceding this
Agreement shall not be binding upon either party except to the extent
incorporated herein.
D. All notices required to be given by either party to the other in
accordance with the terms of this Agreement shall be directed as follows:
STATE: Name: James R. Youngblood, Director or Designee
Information Technology Services
Hoover State Office Building, Level B, Des
Moines, Iowa 50319
Phone Number: 515-281-8699
Facsimile Transmission No. 515-281-6137
VENDOR: Name: W. Kent Hiller or Designee
Iowa Interactive, Inc.
Address: 210 South Prairie View Drive, #218, West Des
Moines, Iowa 50266
Phone Number: 515-490-3896
Facsimile Transmission No: 515-457-9125
1.8 ACTS OF GOD (FORCE MAJEURE)
Neither party shall be considered in default under any provision of
this Agreement if performance is delayed or made impossible by any causes
beyond the control of and without the fault of the party occasioning the
delay or impossibility of performance, including, but not limited to: acts of
God, fires, floods, severe weather, epidemics or any other natural disaster,
embargoes, or quarantines.
1.9 VENDOR'S OBLIGATIONS FOR SUBCONTRACTOR; OFFSETS AND DEDUCTIONS
A. A breach of this Agreement which is the result of a subcontractor's
conduct, negligence or failure to perform shall not excuse the Vendor from
the provisions of this Agreement.
B. Should the State obtain a money judgment against the Vendor as a
result of a breach of this Agreement, the Vendor consents to such judgment
being set-off against moneys owed the Vendor by the State under this
Agreement or any other Agreement between the Vendor and the State.
C. Amounts due to the State as liquidated damages or any other damages
may be deducted by the State without a judgment or any court action from any
money payable to the Vendor pursuant to this Agreement or any other Agreement
between the Vendor and the State. The State shall notify the Vendor in
writing of any claim for liquidated damages or any other damages on or before
the date the State deducts such sums from money payable to the Vendor.
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1.10 DEFAULT; REMEDIES OF VENDOR; EARLY TERMINATION BY VENDOR
Should the Vendor consider the State to be in default of its
obligations, the Vendor shall issue a written notice of default providing
therein for a Fifteen (15) Day period in which the State shall have an
opportunity to cure, provided that cure is possible and feasible. If, after
opportunity to cure, the default remains, the Vendor may exercise any remedy
provided by law.
The Vendor may cancel this Agreement upon reasonable notice to the
State, and subject to the orderly transition provisions contained herein, if
legislation materially alters the authority or duties of Information
Technology Services or the Vendor under this Agreement to the extent that
continued operation of the Network cannot be supported, or the financial
basis upon which the Network relies for solvent Network operations does not
materialize or is removed in the future. If the Vendor provides notice to
the State under this provision based on financial considerations, the Vendor
shall provide at least One Hundred Eighty (180) Days notice, together with a
transition plan. However, the Vendor shall not be obligated to continue to
operate the Network under this subsection beyond the One Hundred Eighty (180)
Days notice period if the Network operations are incurring a net loss as
defined in the Project Plan.
1.11 TERMINATION DUE TO NON-APPROPRIATION
Iowa Information Technology Services will make a reasonable request
for the necessary funds for the continued funding of the Project subject of
this Agreement during the budget process before the budget is submitted to
the General Assembly. Notwithstanding any other provision of this Agreement,
if funds anticipated for the continued fulfillment of the Agreement are, at
any time, not forthcoming or are insufficient, either through the failure of
the State to appropriate funds, or as a result of a deappropriation, or an
across-the-board spending reduction ordered by the Governor or the General
Assembly, or funding from a federal funding source is reduced or discontinued
for any reason, or through discontinuance or material alteration of the
Project for which funds were provided, the State shall give the Vendor
written notice as soon as practicable documenting the lack of funding.
Unless otherwise agreed to by the parties, the Agreement shall terminate on
the last day of the fiscal year for which appropriations were available.
However, in the event that an appropriation to cover the cost of this
Agreement becomes available within Sixty (60) Days subsequent to termination
under this section, the State agrees to re-enter the Agreement with the
terminated Vendor under the same provisions, terms and conditions as the
original Agreement.
1.12 TERMINATION FOR CONVENIENCE
The State may terminate this Agreement for convenience for any reason
upon Three Hundred Sixty-Five (365) Days written notice to the Vendor of the
State's intent to terminate, and the Vendor's sole remedy in the event of
termination for convenience is payment for satisfactory services rendered prior
to the date of termination for convenience, except as otherwise provided for
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herein and subject to liquidated damages and offsets as specified in this
Agreement. The notice provisions of this paragraph do not apply to the
Initial Term of the Agreement.
In the State's sole discretion and at the State's sole option, if, for
any reason, this Agreement is terminated or expires (with or without
extension), the Vendor shall continue to operate the Network in accordance
with all the terms and conditions enunciated herein, together with any
amendments and modifications in existence at the time, for a period up to
Twelve (12) months from the time of notification of termination or
expiration, whichever occurs earlier. At the time the State exercises its
rights under this section, the State shall notify the Vendor of the number of
months, during which the Vendor shall continue to operate the Network under
this provision. However, the Vendor shall not be obligated to continue to
operate the Network under this subsection if the Network operations are
incurring a net loss (as defined in the Project Plan) at the time of
termination or expiration or during the period of transition unless any such
loss is reimbursed by the State during the transition period.
1.13 REMEDIES OF VENDOR IN EVENT OF NON-APPROPRIATION OR FOR CONVENIENCE
In the event of termination of this Agreement due to non-appropriation
under Section 1.11 above or for convenience pursuant to Section 1.12 above,
the Vendor's sole and exclusive remedy is as provided for herein.
If the Agreement is terminated due to non-appropriation, the Vendor's
sole and exclusive remedy is to remove any equipment, hardware, software, and
other components of the Network furnished by the Vendor for which payment has
not been made. Additionally, the Vendor shall be entitled to collect any
amounts due to the Vendor on the date of termination of the Agreement for
non-appropriation.
In the event of termination of this Agreement for any reason, the
State shall not be liable for the payment of Unemployment Compensation to the
Vendor's employees, nor shall the State be liable to the Vendor for payment
of Workers' Compensation claims which occur during the Agreement or extend
beyond the date on which this Agreement terminates or for any other costs
incurred by the Vendor in its performance of the Agreement, except amounts,
if any, due and owing to the Vendor by the State on the date of termination.
If the State terminates this Agreement pursuant to Section 1.11 or
1.12 above prior to or effective September 30, 1998, or elects not to extend
the Agreement for the First Extension Period, the State shall purchase from
the Vendor all hardware, software furnished by the Vendor and third party
software furnished by the Vendor to the extent that the Vendor has the right
to assign such third party software, and used in the performance of the
Agreement for a price not to exceed that provided for and identified on
Attachment 2, attached hereto and incorporated herein by reference. A copy
of the list of items subject of this provision is attached hereto and
incorporated herein by reference as part of Attachment 2. The list may be
modified by the parties from time-to-time.
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If the State, in its sole discretion, elects to extend this Agreement
for the First Extension Period or a Subsequent Extension Period and
subsequently terminates the Agreement for convenience under circumstances in
which the final date of service by the Vendor pursuant to the notice of
termination for convenience is less than Sixty (60) months after April 23,
1998, the effective date of this Agreement, the Vendor's software license
price to the State shall be an amount determined by applying straight-line
monthly increment amortization over a Sixty (60) month period ($16,666 per
month) as measured from the effective date of the Agreement, April 23, 1998,
to the initial price of One Million Dollars and No Cents ($1,000,000.00).
This payment provision does not apply to any termination date or failure of
the State to extend for a Subsequent Extension period which occurs more than
Sixty (60) months after the effective date, April 23, 1998, of this
Agreement. Upon payment of the amount as specified herein, if any, the State
shall receive from the Vendor a license of the type described in Section 1.27.
The Vendor shall, in addition to the other remedies as provided in
this section, be entitled to collect any monies due to the Vendor as of the
date of termination, cancellation or expiration of the Agreement.
If the Agreement remains in effect for a period of Sixty (60) months
after the effective date, April 23, 1998, then the License of the type
described in Section 1.27, Subsection B, vests in the State without any
additional payment by the State to the Vendor.
1.14 VENDOR DUTIES
A. All records of the Vendor relating to this Agreement shall be retained
for five (5) years following the date of final payment under this Agreement.
Nothing in this Agreement shall be construed to permit or authorize the
Vendor to destroy or eliminate documents, records, or files in violation of
any statute or rule governing the Vendor's retention of records.
B. 1. The Vendor agrees that the Auditor of the State of Iowa or any
authorized representative of the State, and where federal funds are involved,
the Comptroller General of the United States or any other authorized
representatives of the United States Government, shall have access to and the
right to examine, audit, excerpt and transcribe any directly pertinent books,
documents, papers, and records of the Vendor relating directly or indirectly
to the activities of the Vendor under this Agreement.
2. The Vendor further agrees that the State or a representative of its
selection may conduct a complete technology (contract compliance) audit at
least once annually to determine whether or not the Vendor is complying with
the terms of this Agreement, the Project Plan, criteria established for
access to data, state and federal law regarding confidential records, and any
other applicable state and federal laws and regulations.
3. The Vendor shall promptly comply with and correct any
deficiencies noted in the audit reports as audit exceptions and will promptly
implement any recommendations requested by the State or its representative to
which the Vendor and the State agree. The Vendor shall not impose
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any charges on the State, the federal government or their authorized
representatives for access to any relevant documents or records, however
compiled and maintained, and shall fully cooperate with the State or federal
government and their authorized representatives in the conduct of the
financial and technology (contract compliance) audits. The State shall not
impose a charge on the Vendor for the financial or technology (contract
compliance) audit. The State may declare the Vendor in default of its
obligations under this Agreement in the event that financial or technology
audit exceptions disclose material, significant or repeated violations of the
terms of this Agreement. To the extent that audit report discloses any
discrepancies in the Vendor's charges, billings, or financial records and
following a reasonable period for review and verification of the amount of
any discrepancy by the Vendor, the Vendor shall adjust the next monthly
billing to the State, and, in any event, the adjustment shall occur within
Ninety (90) calendar days after the date of the audit report. The Vendor
shall exercise its best efforts to cooperate with the State or its
representative to assure that any verification is completed in a timely
manner.
C. The Vendor shall comply with the applicable provisions of federal,
state and local laws and regulations to insure that no employee or applicant
for employment is discriminated against because of race, religion, color,
age, sex, national origin, or disability. The Vendor shall have an
affirmative action plan, if required by law.
D. The Vendor warrants that no person or selling agency has been employed
or retained to solicit and secure this Agreement upon an agreement or
understanding for commission, percentage, brokerage or contingency excepting
bona fide employees or selling agents retained for the purpose of securing
business. In the event of breach of this subsection, which shall be
considered a material term of this Agreement, the State shall have, in
addition to the remedies contained in Section 1.6 above, a right to
liquidated damages in the sum of $50,000.00. Such damages are not a penalty
and would be assessed only because the monetary damage to the State's
competitive bidding process resulting from breach of this subsection is
difficult, if not impossible, to measure.
E. In the event that the Vendor utilizes subcontractors for the purpose
of fulfilling its obligations under this Agreement, all such subcontractors
shall be procured with appropriate attention to the principles of competition
and quality of workmanship; however, the Vendor shall not be required to
adhere to the State's competitive bidding procedures in its selection of
subcontractors. All records relating to subcontracts shall be retained as
required in Subsection A. above and available for audit or examination as
required in Subsection B. above.
F. If the Vendor is a joint entity, consisting of more than one
individual, partnership, corporation or other business organization, all such
entities shall be jointly and severally responsible for fulfilling the
activities and obligations under this Agreement, and for any default under
this Agreement. The Vendor asserts that it is not a joint entity.
G. The Vendor shall provide and pay for all labor, materials, tools,
machinery, storage of same and transportation necessary for the Vendor to
provide the services required under this Agreement, except as otherwise provided
in this Agreement. The Vendor shall be solely responsible for recruitment,
hiring, management of, training, discipline and termination, and any other
indicia of an
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employer, including payment of salaries, benefits, bonuses and the like with
respect to its employees during the term of this Agreement and any extension
thereof.
H. 1. Some data, software programs, operating systems and platforms,
including third party proprietary software and methodologies, copyrighted and
patented information and other information including, but not limited to
information contained in the State's files and records however maintained and
stored, as well as policies and activities of the State are confidential
(collectively Confidential Information). The Vendor shall preserve the
confidentiality of such Confidential Information which may be revealed to the
Vendor in its performance of this Agreement. The Vendor shall maintain
adequate and appropriate network security in accordance with standards
mutually agreed upon by the parties to insure the safeguarding of the State's
Confidential Information and other data, electronic files, systems,
applications and programs. In the event of breach of this provision, the
State may suspend this Agreement immediately upon notice to the Vendor of
default and may, in its sole discretion, terminate this Agreement with the
Vendor if the default remains uncured after Seven (7) consecutive days
following notice to the Vendor. The Vendor shall comply with all applicable
federal and State laws and regulations regarding confidentiality of the
records to which the Vendor is permitted access. The Vendor, its agents and
employees may be required to execute Confidentiality and Non-Disclosure
Agreements to obtain access to certain Confidential Information.
Provided that the Vendor has complied with the conditions specified in
this provision for safeguarding the State's Confidential Information, the
State will not terminate this Agreement with the Vendor if the Vendor shall
within Three (3) business days following notification of the breach,
determine the cause or source of the breach and take all reasonable
corrective measures to eliminate the cause or source of the breach, and to
the extent possible cure the breach.
2. Both parties agree to protect all Confidential Information provided
by one party to the other, and not to publish or disclose to any third party,
misuse, alter or destroy or make any use whatsoever of such information
without the other party's written permission by using those methods and
procedures normally used to protect one's own Confidential Information.
3. Confidential Information will remain the property of the disclosing
party, and the receiving party will not be deemed by virtue of this Agreement
or any access to the disclosing party's Confidential Information to have
acquired any right or interest in or to any such Confidential Information.
The receiving party agrees: (i) to hold the Confidential Information in
strict confidence; (ii) to limit disclosure of the Confidential Information
to the receiving party's own employees having a need to know the Confidential
Information for the purposes of this Agreement; (iii) not to disclose any
Confidential Information to any third party; (iv) to use the Confidential
Information solely and exclusively in accordance with the terms of this
Agreement in order to carry out its obligations and exercise its rights under
this Agreement; and (v) to notify the disclosing party promptly of any
unauthorized use or disclosure of the Confidential Information and to
cooperate with and assist the disclosing party in every reasonable way to
stop or minimize such unauthorized use or disclosure.
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4. The Vendor agrees that if a court of competent jurisdiction
determines that the Vendor has breached, or attempted or threatened to
breach, its confidentiality obligations to the State or the State's
proprietary rights, the State will be entitled to obtain appropriate
temporary and/or permanent injunctive relief and other measures restraining
further, attempted or threatened breaches of such obligations and the Vendor
hereby consents to a court order granting such relief. Such relief or
measures shall be in addition to, and not in lieu of, any other rights and
remedies available to the State.
5. The provisions of this section shall remain in full force and
effect and otherwise survive the expiration or termination of this Agreement
or any extension thereof for a period of Three (3) years following the last
day that the Vendor provides service, or as prescribed by statute, whichever
is longer, or as determined by the parties and included in the Project Plan.
I. The State declares and the Vendor acknowledges the purpose of this
Agreement is to facilitate efficient and effective electronic access to the
State's public records as defined in Iowa Code chapter 22, and other State
records, data (inbound and outbound), and electronic filings (collectively
Electronic Transactions) over public networks such as the Internet for the
use and benefit of governmental entities, citizens, and members of the public
generally, and further to facilitate effective and efficient interaction
between Iowa State government and its citizens using such electronic means as
the Internet. The State hereby appoints the Vendor as an agent of the State
for the limited purpose of transmitting Electronic Transactions under this
provision and such appointment is specifically limited to the Vendor's
obligations under this provision.
Electronic Transactions involving such public records or other data,
however stored, maintained, or conducted by the Vendor on the State's behalf
for the purposes enunciated in this Agreement does not represent the
assignment or sale of the records or other data to the Vendor, nor may the
Vendor pledge or obligate the records or data as security for a loan,
mortgage, or any other financing transaction. The Vendor may not, outside of
fulfilling its obligations to the State, independently package, sell, or
otherwise provide the State's data to any third party for consideration,
monetary or other gain.
J. The Vendor shall have and maintain a disaster recovery plan which
provides for the efficient and effective resumption and continuation of the
Project's activities following a disaster.
K. The Vendor shall have and maintain a secure additional off site
storage facility for Network software which shall be "backed up" daily or
periodically as appropriate and removed from the primary business location.
The Vendor shall maintain redundant capabilities for critical functions as
defined by the parties and included in the Project Plan so as to minimize any
disruption in service to the State.
L. The State may provide the Vendor with access to data contained in the
State's computer system for the purpose of the Vendor's activities under this
Agreement; however, the State shall not be liable to the Vendor for any
direct or indirect costs or expenses which may be incurred by
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the Vendor during periods when the computer system or any component is being
serviced, maintenance is being performed, the system is inoperable for any
reason, or the Vendor is unable to access the data for any reason. The Vendor
shall hold harmless the State from and against any and all liability,
including any losses, damages, including lost profits, claims, and expenses
to the Vendor occasioned by the State's failure to transmit signals
accurately, even if such outage, interruption or failure was occasioned in
whole or in part by the acts or omissions of the State.
M. Nothing in this Agreement shall be construed as creating or
constituting the relationship of a partnership or joint venture between the
parties hereto. Except as specifically authorized in this Agreement, each
party shall be deemed to be an independent contractor contracting for
services and acting toward the mutual benefits expected to be derived
herefrom. No party, unless otherwise specifically provided for herein, has
the authority to enter into any contract or create an obligation or liability
on behalf of, in the name of, or binding upon another party to this Agreement.
In the event that the Vendor collects fees pursuant to Iowa Code
chapter 22 or any other statutory provision for and on behalf of the State
under this Agreement, the State hereby appoints the Vendor as an agent for
the limited purposes of collecting, accounting for and transferring said fees
to the State.
N. The Vendor shall not load, use, transmit, store or maintain any
application which would track an individual's use of the citizen's
information network except to the extent necessary to prevent unauthorized
access to confidential data, to preserve the integrity of "firewalls", to
document a subscriber's account activity, to collect fees as authorized by
the State, to comply with a specific request by the State, or to comply with
an order of a court of competent jurisdiction.
1.15 INDEMNIFICATION; CONSEQUENTIAL AND INDIRECT DAMAGES
The Vendor shall indemnify and hold harmless the State, its officials,
agents and employees, from and against any and all claims, damages, losses,
settlements, judgments, costs and expenses, including attorney's fees
(collectively Damages), arising out of or resulting from the Vendor's
performance or attempted performance of its obligations under this Agreement;
claims for infringement of patents, trademarks, trade dress, trade secrets,
or copyrights arising from the design of the project; and, any violation of
this Agreement, to the extent that any such Damages are caused in whole or in
part by an intentional or negligent act or omission by the Vendor, any
subcontractor, agent, representative or anyone directly or indirectly
employed by any of them or anyone for whose acts any of them may be liable.
The Vendor shall indemnify and hold harmless the State, its officials,
agents and employees, from and against any and all claims by an employee of the
Vendor, its subcontractors, anyone directly or indirectly employed by any of
them, or anyone for whose acts any of them may be liable. The indemnification
under this subsection shall not be limited in any way by any limitation on the
amount or type of damages, compensation or benefits payable by or for the
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Vendor or a subcontractor under Workers Compensation Acts, disability benefit
acts or other employee benefit acts.
Neither party shall be liable to the other party for lost profits,
indirect, special, punitive or consequential damages arising under this
Agreement or from any breach or partial breach of the provisions of this
Agreement or arising out of any act or omission of any party to this
Agreement, its subcontractor, employees, servants, representatives or agents,
or arising under theories of strict liability or tort.
The obligations of the respective parties under this section shall
survive the expiration or termination of this Agreement, including any
extensions thereto, with respect to any occurrences within the term of this
Agreement.
1.16 TAXES: STATE AND LOCAL; OFFSET BY STATE
The State declares and the Vendor acknowledges that the Vendor and its
subcontractors, may be subject to certain taxes, including but not limited to
sales tax, motor vehicle fuel tax, personal or corporate income tax or other
taxes or assessments, and to licensing fees or other miscellaneous fees or
charges which may be imposed by Federal State or local law or ordinance. The
Vendor and its subcontractors shall be solely responsible for the payment of
such taxes. The Vendor shall promptly pay all such taxes, fees or charges
when due. The State is a tax exempt entity and no payment will be made for
any taxes levied on the Vendor for any purpose. If the Vendor is in arrears
in payment of any state taxes which are due and payable to the State, the
State may offset any taxes in arrears from payments to the Vendor under this
Agreement.
1.17 PROPERTY DAMAGE
The Vendor shall exercise its best efforts to prevent damage to
property of the State in the course of performing its obligations under this
Agreement. The Vendor shall restore damaged property to the extent possible
to its condition prior to the damage at the sole expense of the Vendor. Such
restoration shall be complete when judged satisfactory by the State.
1.18 SAFETY OF PERSONS AND PROPERTY; INSURANCE
The Vendor shall maintain in full force and effect during the term of
this Agreement and during any extensions or renewals thereof, liability and
property damage insurance to protect the Vendor, its subcontractors, if any,
and the State from claims for damage which may arise from operations under
this Agreement, and the amount of such insurance shall not be less than the
following:
(1) Bodily injury liability insurance in an amount to be determined
by the State for injuries, including accidental death, to any person, and
subject to the same limitation for each person, in an amount not less than
One Million Dollars and No Cents ($1,000,000.00) per occurrence.
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(2) Property damage insurance in an amount not less than One Million
Dollars and No Cents ($1,000,000.00) per occurrence.
(3) Workers' Compensation - Statutory.
The Vendor shall arrange with its insurer for notice of cancellation
of the required insurance coverages to be directed to the State in addition
to any notices of cancellation which may be directed to the Vendor. The
Vendor's insurer shall state in the certificate of insurance that no
cancellation of the insurance is effective without Ten (10) Days prior
written notice to the State. All insurance coverage required by this
Agreement shall provide coverage for all claims arising from activities
occurring during the term of the policy regardless of the date the claim is
filed or expiration of the policy.
1.19 RECEIVERSHIP
The Vendor shall immediately, and not later than two business days
after any such filing, notify the State, in writing, if: (a) the Vendor files
a voluntary petition in bankruptcy, a voluntary petition to reorganize its
business, or a voluntary petition to effect a plan or other arrangement with
creditors; (b) the Vendor files an answer admitting the jurisdiction of the
court and the material allegations of an involuntary petition filed pursuant
to the United State bankruptcy code, as amended; (c) an order for relief
under the Bankruptcy Code is entered for the Vendor, or the Vendor makes an
assignment for the benefit of creditors, applies for or consents to the
appointment of a receiver or trustee for all or any part of its property; (d)
the Vendor institutes dissolution or liquidation proceedings with respect to
its business; (e) an order is entered approving an involuntary petition to
reorganize the business of the Vendor or to effect a plan or other
arrangement with creditors or appointing a receiver or trustee for the Vendor
for all or part of its property; or (f) if a writ or warrant of attachment,
execution, distraint, levy, possession, or any similar process which may
materially affect the operation of the Vendor, is issued by any court against
all or any material part of the Vendor's property.
In the event that said petition, writ or warrant is not dismissed or a
stay of foreclosure obtained or said appointment, assignment, or proceedings
are not rescinded or terminated within One Hundred Twenty (120) Days of the
issuance, making, or commencement thereof, and the effect thereof is to
materially impede or frustrate the ability of the Vendor to fulfill its
obligations under this Agreement, then the State may terminate this Agreement
without penalty, unless: (a) within One Hundred Twenty (120) Days after the
election or appointment, any receiver or trustee of the Vendor, or the Vendor
as a debtor-in-possession in connection with any reorganization or similar
proceedings, shall have remedied any uncured failure to comply with any
provision of this Agreement; and, (b) within said One Hundred Twenty (120)
Days, the receiver or trustee, or the Vendor as a debtor-in-possession, shall
have executed an agreement with the State, which shall have been approved by
the court having jurisdiction, whereby the receiver or trustee, or the Vendor
in its capacity as a debtor-in-possession, assumes all obligations and agrees
to be bound fully by each and every provision of this Agreement.
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1.20 OBLIGATIONS BEYOND AGREEMENT TERM
The obligations of the State and the Vendor incurred or existing under
this Agreement as of the date of expiration, termination or cancellation will
survive the expiration, termination or cancellation of this Agreement and
include the following sections: Section 1.9, subsection B; Section 1.14,
subsections A, B, E, H, I, N; Section 1.15; Section 1.22; Section 1.23,
subsections A, B, C, F, G; Section 1.25; Section 1.27; and Section 1.28.
1.21 AUTHORIZATION
Each party to this Agreement represents and warrants to the other that:
1. It has the right, power and authority to enter into and perform
its obligations under this Agreement.
2. It has taken all requisite action (corporate, statutory or
otherwise) to approve execution, delivery and performance of this Agreement,
and this Agreement constitutes a legal, valid and binding obligation upon
itself in accordance with its terms.
1.22 SOVEREIGN IMMUNITY
The State specifically reserves the defense of sovereign immunity as
allowed by state or federal law or regulations for any claim arising out of
or related to the duties and obligations imposed by this Agreement.
1.23 MISCELLANEOUS
A. This Agreement shall be interpreted in accordance with the laws of the
State of Iowa, and any action relating to this Agreement shall only be
commenced in Polk County, Iowa, District Court or in the United States
District Court for the Southern District of Iowa. This provision shall not
be construed as waiving any immunity to suit or liability which may be
available to the State.
B. If any provision of this Agreement is held to be invalid or
unenforceable, the remaining provisions shall be valid and enforceable to the
extent that the essential purpose of this Agreement will not be defeated by
such an interpretation.
C. Failure of either party at any time to require strict performance of
any provision of this Agreement shall not constitute a waiver of that
provision nor in any way limit enforcement of the provision.
D. The parties agree to execute any additional documents necessary to
effectuate this Agreement.
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E. This Agreement supersedes any and all prior Agreements between the
State and the Vendor for the purpose of completing the project contemplated
by this Agreement.
F. The various rights, powers, options, elections and remedies of either
party, provided in this Agreement, shall be construed as cumulative and no
one of them is exclusive of the others or exclusive of any rights, remedies
or priorities allowed either party by law, and shall in no way affect or
impair the right of either party to pursue any other equitable or legal
remedy to which either party may be entitled as long as any default remains
in any way unremedied. unsatisfied, or undischarged.
G. The Vendor irrevocably consents to service of process by certified or
registered mail addressed to the Vendor's designated agent. The Vendor
appoints W. Kent Hiller at Des Moines, Iowa, as its agent to receive service
of process. If for any reason the Vendor's agent for service is unable to act
as such or the address of the agent changes, the Vendor shall immediately
appoint a new agent and provide the State with written notice of the change
in agent or address. Any change in the appointment of the agent or address
will be effective only upon actual receipt by the State. Nothing in this
provision will alter the right of the State to serve process in any other
manner permitted by law.
1.24 REQUIRED PROVISIONS
A. Should the Vendor fail either to include in the quoted price, or to
deliver to the State any of the requirements as specified in the RFP for
Phases I, II, and III or any negotiated agreements between the parties, the
Vendor shall be required to install the same or provide the service at the
Vendor's own expense, prior to the date on which the Agreement is implemented.
B. The Vendor shall be responsible for the performance of any
subcontractors who are retained by the Vendor in the performance of this
Agreement.
1.25 YEAR 2000 COMPLIANCE
The Vendor warrants that each item of hardware, software, firmware or
a custom designed and delivered software Project or a system which is
developed or delivered under this Agreement shall accurately process date
data, including but not limited to calculating, comparing and sequencing,
from, into, between and among the nineteenth, the twentieth and the
twenty-first centuries, including leap year calculations, when used in
accordance with the item(s) documentation provided by the Vendor. If the
items to be developed and delivered under this Agreement are to perform as a
system with other hardware and/or software, then the warranty shall apply to
the items developed and delivered and as the items process, transfer,
sequence data, or otherwise interact with other components or parts of the
system. The duration of this warranty and the remedies available to the
State for a breach of this warranty include, but are not limited to repair or
replacement of non-compliant items or systems. Nothing in this warranty
shall be construed to limit any rights or remedies of the State under this
Agreement with respect to defects in the items other than year 2000
compliance.
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1.26 PERFORMANCE BOND
On the effective date of this Agreement, the Vendor has furnished
surety satisfactory to the State for the faithful performance of the
Agreement, with the additional obligation that the Vendor shall promptly pay
all persons supplying labor or material in the performance of work pursuant
to the Agreement. The Vendor shall maintain the required surety in full
force and effect during the first contract year. If the Vendor is not in
default of a material term of this Agreement at the end of the first contract
year, the State will permit the Vendor to reduce the surety. If, however,
the Vendor is in breach of a material term of this contract at the end of the
first or any subsequent contract year, the Vendor shall maintain the surety
in the amount set for the first year of performance in full force and effect
for the subsequent year.
1.27 LICENSE AGREEMENTS; INTELLECTUAL PROPERTY
The parties agree that all license agreements for Vendor owned or
third party software to be provided by the Vendor to the State shall contain
provisions which shall make clear certain rights of the parties, including
but not limited to ownership of the software, the rights of the respective
parties in the software, the rights and obligations of the parties in the
event of insolvency of the Vendor, payments due to the Vendor for perpetual
use of the software in the event of termination or expiration of the
Agreement prior to certain milestone events, escrow of source code, ownership
of the hardware, operating systems, software, and peripheral equipment (other
than the aforementioned software), indemnification with respect to
infringements, and other related provisions. The following provisions with
respect to intellectual property shall apply to any license agreement under
this Agreement unless otherwise agreed to by the parties.
A. Warranty Regarding Intellectual Property Rights. The Vendor
warrants that, in the performance of this Agreement, the Vendor's work
product and the information, data, designs, processes, inventions,
techniques, devices, and other such intellectual property furnished, used, or
relied upon by the Vendor will not infringe any copyright, patent, trademark,
trade dress or other intellectual property right of third parties.
B. Right to Use License to Intellectual Property. The Vendor grants
the State, subject to the applicable provisions relating to payment as
specified in this Agreement, a perpetual, right-to-use only, license in and
to Network software, whether furnished to the State or developed on behalf of
the State, together with regulated access to the source code and the right to
modify the Network software. The Network components include, but are not
limited to the items identified on Attachment 1 and Attachment 2, attached
hereto and incorporated herein by reference. The parties may modify these
lists from time-to-time.
1.28 FIDELITY BOND
The Vendor shall post a fidelity bond in the amount of one million
dollars ($1,000,000). The bond shall be delivered to the State and shall be
issued by a qualified surety, licensed to do
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business in Iowa, which is acceptable to the State. The cost of this bond
shall be paid by the Vendor. The bond shall provide funds in the event that
the Vendor or State suffers any liability, loss, damage, or expense as a
result of any fraudulent or dishonest act or omission of the Vendor or any
subcontractor or any officer, employee, or agent of the Vendor or any
subcontractor or any parent or subsidiary corporation of the Vendor or any
subcontractor. Subject to annual renewal, this bond shall be in force
throughout the term of this Agreement; shall be renewed for one (1) year
following expiration (including any extensions or renewals) or termination of
this Agreement; and, further shall provide that it cannot be canceled during
the annual term of the bond. The Vendor warrants that it will maintain the
required fidelity bond coverage at all times during the term of this
Agreement without any lapse in coverage. (THIS PROVISION WILL TAKE EFFECT IF
AND WHEN, AND PRIOR TO COLLECTION OF FEES BY THE VENDOR.)
(SIGNATURE PAGES FOLLOW THIS PAGE.)
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SIGNATURE PAGE (VENDOR)
- ----------------------------------
IOWA INTERACTIVE, INC.
BY: /s/ W. Kent Hiller ( W. Kent Hiller )
-------------------------- ------------------------------
(SIGNATURE OF AUTHORIZED REPRESENTATIVE) (PLEASE PRINT NAME OF AUTHORIZED
REPRESENTATIVE)
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SIGNATURE PAGE (STATE)
STATE OF IOWA
/s/ James R. Youngblood
- ------------------------
STATE OF IOWA
BY: James R. Youngblood
------------------------
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[LETTERHEAD]
August 7, 1998
Mr. Kent Hiller
General Manager
IOWAccess Network
206 6th Avenue, Suite 1101
Des Moines, IA 50309
Dear Mr. Hiller:
Please consider this letter as notification of extension of State of Iowa
Contract No. 2501 for a period of three (3) years (First Extension Period) as
specified in Section 1.0 of the contract. All performance criteria specified
in the contract shall remain in force throughout the extension period.
Further, a project plan is required per the contract and will be expected to
be completed and forwarded to me by no later than August 31, 1998. Please
signify your agreement by signing below and returning an original, fully
executed letter to me. If you have any questions regarding this notification,
please don't hesitate to contact me.
Sincerely,
/s/ Jim Youngblood
Jim Youngblood
Director, Information Technology Services
State of Iowa
Agreed: By: /s/ W. Kent Hill Date: 8/7/98
---------------------------- ------------------
Iowa Interactive, Inc.
cc Janet Huston
Contract File, DGS
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1
of our report dated June 16, 1999, relating to the consolidated financial
statements of National Information Consortium, Inc., and of our reports dated
May 6, 1999, relating to the financial statements of Indian@ Interactive, Inc.,
Kansas Information Consortium, Inc., Nebrask@ Interactive, Inc. and Arkansas
Information Consortium, Inc., which appear in such Registration Statement. We
also consent to the references to us under the heading "Experts" in such
Registration Statement.
/s/ PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
July 7, 1999
