<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 22, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
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 of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
</TABLE>
------------------------------
12 CORPORATE WOODS
10975 BENSON STREET, SUITE 390
OVERLAND PARK, KANSAS 66210
(877) 234-EGOV
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
JAMES B. DODD
PRESIDENT 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, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
JOHN W. CAMPBELL, III, ESQ. NORA L. GIBSON, ESQ.
RUSSELL J. WOOD, ESQ. MICHELLE KWAN MONTOYA, ESQ.
PHOENIX CAI, ESQ. ANGELA C. HILT, ESQ.
Morrison & Foerster LLP Brobeck, Phleger & Harrison LLP
425 Market Street Spear Street Tower, One Market
San Francisco, California 94105-2482 San Francisco, California 94105
(415) 268-7000 (415) 442-0900
Facsimile (415) 268-7522 Facsimile (415) 442-1010
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement is declared 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 statement 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,
check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED (1)(2) SHARE (3) PRICE (3) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, without par value...... 9,315,000 $53.00 $493,695,000 $130,336
</TABLE>
(1) Includes 4,100,000 shares of common stock that are being sold by the selling
shareholders.
(2) Includes 1,215,000 shares of common stock that the underwriters have the
option to purchase from certain of the selling shareholders solely to cover
over-allotments, if any.
(3) Determined in accordance with Rule 457(c) under the Securities Act of 1933,
as amended, as the average of the bid and the asked price of the common
stock on the Nasdaq National Market on February 14, 2000.
------------------------------
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 WHICH 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 FEBRUARY , 2000
THE INFORMATION IN THIS 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 WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
8,100,000 Shares
[LOGO]
Common Stock
-----------
We are selling 4,000,000 shares of common stock and the selling shareholders
are selling 4,100,000 shares of common stock. We will not receive any of the
proceeds from the sale of shares by the selling shareholders.
Our common stock is traded on the Nasdaq National Market under the symbol
"EGOV." The last reported sale price of our common stock on February 18, 2000
was $55.875 per share.
The underwriters have an option to purchase a maximum of 1,215,000
additional shares to cover over-allotments of shares from certain of the selling
shareholders.
Investing in our common stock involves risks. See "Risk Factors" on page 6.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions Us Shareholders
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Per Share................................. $ $ $ $
Total..................................... $ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about ,
2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse First Boston
Chase H&Q Thomas Weisel Partners LLC Banc of America Securities LLC
FAC/Equities George K. Baum & Company
The date of this prospectus is , 2000
<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."]
GATEFOLD 1
[Picture of person using computer at office with arrow pointing at picture and
text accompanying arrow reading "You will be here."]
[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>
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.]
INSIDE BACK COVER
National Information Consortium
[Text design reading "Powering e-government" and "www.nicusa.com."]
[Listing of the Web addresses of National Information Consortium's portals.]
[Map of the United States and British Columbia, Canada with the individual
states in which National Information Consortium conducts business and British
Columbia colored in yellow. Listing of the states and British Columbia by type
of National Information Consortium's business.]
<PAGE>
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PROSPECTUS SUMMARY.................... 2
RISK FACTORS.......................... 6
CAUTIONARY NOTICE REGARDING
FORWARD-LOOKING STATEMENTS.......... 20
HOW WE INTEND TO USE THE PROCEEDS FROM
THE OFFERING........................ 21
DIVIDEND POLICY....................... 21
CAPITALIZATION........................ 22
PRICE RANGE OF OUR COMMON STOCK....... 23
DILUTION.............................. 24
SELECTED CONSOLIDATED ACTUAL AND PRO
FORMA FINANCIAL DATA................ 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 26
</TABLE>
<TABLE>
BUSINESS.............................. 35
<CAPTION>
PAGE
--------
<S> <C>
MANAGEMENT............................ 48
CERTAIN TRANSACTIONS.................. 60
PRINCIPAL AND SELLING SHAREHOLDERS.... 62
DESCRIPTION OF CAPITAL STOCK.......... 66
SHARES ELIGIBLE FOR FUTURE SALE....... 69
UNDERWRITING.......................... 71
NOTICE TO CANADIAN RESIDENTS.......... 74
LEGAL MATTERS......................... 75
EXPERTS............................... 75
WHERE YOU CAN FIND ADDITIONAL
INFORMATION ABOUT US................ 75
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>
--------------
You should rely only on the information contained in this prospectus or to
which we have referred you. We and the selling shareholders have not authorized
anyone to provide you with information that is different. This prospectus may
only be used where it is legal to sell the securities being offered in this
prospectus. The information in this prospectus may only be accurate on the date
of this prospectus.
ALL BRAND NAMES AND TRADEMARKS APPEARING IN THIS PROSPECTUS ARE THE PROPERTY
OF THEIR RESPECTIVE HOLDERS.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<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.
NATIONAL INFORMATION CONSORTIUM, INC.
National Information Consortium, Inc. is the leading provider of
Internet-based, electronic government services that help governments use the
Internet to reduce costs and provide a higher level of service to businesses and
citizens. We accomplish this through the following businesses:
- OUR PORTAL BUSINESS enters into three to five year contracts with
governments and on their behalf designs, builds and operates
Internet-based portals which allow businesses and citizens to access
government information online and complete transactions, including
applying for permits, searching for public information, retrieving
driver's license records or filing forms and reports;
- OUR EFED BUSINESS provides online infrastructure and software applications
that allow government agencies to cost-effectively automate procurement
from private businesses; and
- OUR NIC CONQUEST BUSINESS develops and delivers to government clients
software that enables back-office systems and processes for
business-to-government filings over the Internet.
In addition, on February 16, 2000, we signed a definitive agreement to
acquire SDR Technologies, Inc., the leading developer and provider of online
elections and ethics filing systems.
Our unique business model allows us to share in the fees governments
generate from electronic government services, while reducing the associated
financial and technology risks of our government clients. Our clients benefit
because they gain a centralized, customer-focused presence on the Internet,
while businesses and citizens benefit from a faster, more convenient and more
cost-effective means to interact with governments.
In the majority of our operations, our revenues are generated from
transactions, which generally include the sale of electronic access to public
records on behalf of governments, and the collection of subscription and
transaction-based fees. In addition, we collect fees for managing electronic
government operations, developing government applications, and licensing and
maintaining software.
Government regulation of commercial and consumer activities entails billions
of transactions and exchanges of large volumes of information between government
agencies, businesses and citizens. These transactions and exchanges include
driver's license records retrieval, motor vehicle registrations, tax returns,
permit applications and requests for government-gathered information.
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 that require extensive paperwork. Electronic
alternatives have often been unavailable, technologically challenging, 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 with and
distribute information to businesses and citizens over the Internet.
Despite the potential benefits of electronic government, government entities
face a unique set of challenges in implementing and maintaining Internet-based
electronic government services. In addition to the conventional barriers the
private sector encounters, including high costs, technological risk, the need
for customized and rapid deployment and the scarcity of qualified personnel,
governments also confront the intricacies of the political process, a diverse
constituent base, limited marketing capabilities and heightened security
requirements due to public trust concerns.
2
<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. As part of our solution, we provide:
- customer-focused, one-stop government portals and applications that offer
a single point of presence on the Internet for government agencies, and
permit 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 governments' up-front
investments and use of resources and is quickly and easily deployed; and
- a contractual relationship with governments that encourages the
participation of interested government agencies, businesses and consumer
groups. 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 concerns of businesses and citizens.
We plan to strengthen our position as the leading provider of electronic
government products and services. Key elements of our strategy include:
- continuing to penetrate new markets, including other states, multi-state
cooperative organizations and federal agencies;
- broadening product and service offerings with new Internet-based
businesses and applications to enable government agencies, businesses and
citizens to interact more effectively online;
- increasing transaction volume and revenues from existing and new customers
by generating awareness and educating potential business and consumer
users about the availability and benefits of electronic government
services;
- continuing to diversify our revenues across numerous business lines by
making strategic acquisitions and investments in complementary businesses;
- intensifying our focus on local government markets by offering both portal
solutions and individual application solutions; and
- expanding our services into international markets.
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.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by us................... 4,000,000 shares
Common stock offered by the selling
shareholders............................... 4,100,000 shares
Common stock to be outstanding after this
offering................................... 57,300,632 shares
Use of proceeds.............................. We intend to use the net proceeds of this
offering primarily to pursue acquisitions,
create new products and services, increase
market development, further develop
infrastructure platforms, increase our
marketing efforts and for other general
corporate purposes.
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 December 31, 1999 and does
not include the following:
- approximately 2,100,000 shares of common stock to be issued in connection
with our pending acquisition of SDR Technologies, Inc.;
- 3,890,331 shares of common stock subject to options at a weighted average
exercise price of $7.65 per share granted under our 1998 stock option
plan, assuming the issuance and sale of 84,593 and 50,669 shares of common
stock in this offering after the exercise of options by James B. Dodd and
Kevin C. Childress, respectively; or
- 7,459,895 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.
------------------------
PRO FORMA INFORMATION GIVES EFFECT TO OUR ACQUISITION OF EFED AND OUR
PENDING ACQUISITION OF SDR TECHNOLOGIES, INC. AS IF THESE TRANSACTIONS OCCURRED
AT THE BEGINNING OF THE PERIOD PRESENTED. PLEASE SEE OUR AUDITED CONSOLIDATED
FINANCIAL STATEMENTS INCLUDED IN THIS PROSPECTUS AND "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" FOR MORE DETAILED
INFORMATION ABOUT THESE TRANSACTIONS.
UNLESS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS WILL NOT EXERCISE THEIR OPTION TO PURCHASE ADDITIONAL SHARES OF
COMMON STOCK TO COVER OVER-ALLOTMENTS, IF ANY, AND DOES NOT GIVE EFFECT TO THE
PENDING ACQUISITION OF SDR TECHNOLOGIES, INC.
4
<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 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,
1998 and 1999 and the consolidated balance sheet data, at December 31, 1999,
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, 1999 labeled "Pro
Forma" is unaudited and derived from and qualified by reference to the pro forma
consolidated statement of operations and related notes 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 by us of
4,000,000 shares of common stock offered by us in this offering at a public
offering price of $55.875 per share, after deducting underwriting discounts and
commissions and estimated offering expenses, and the receipt of $388,840 by us
from the exercise of options to purchase 84,593 and 50,669 shares of common
stock by James B. Dodd and Kevin C. Childress, respectively.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999 1999
ACTUAL ACTUAL ACTUAL PRO FORMA
-------- -------- -------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.............................................. $ 996 $28,624 $ 56,966 $ 61,941
Cost of revenues...................................... 5 21,211 42,191 43,598
Gross profit.......................................... 991 7,413 14,775 18,343
Operating loss........................................ (277) (7,205) (14,470) (62,653)
Net loss.............................................. $ (277) $(7,896) $(10,730) $(56,100)
Net loss per share--basic and diluted................. $ (0.01) $ (0.21) $ (0.23) $ (1.11)
Weighted average shares outstanding................... 20,858 37,242 47,278 50,517
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 9,527 $ 9,527
Marketable securities....................................... 82,481 295,112
Total assets................................................ 133,661 346,292
Long-term debt (includes current portion of notes payable/
capital lease obligations)................................ 458 458
Total shareholders' equity.................................. 128,089 340,720
</TABLE>
5
<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, RESULTS OF OPERATIONS AND
FINANCIAL CONDITION AND COULD RESULT IN A COMPLETE LOSS OF YOUR INVESTMENT.
RISKS PARTICULAR TO NATIONAL INFORMATION CONSORTIUM
BECAUSE WE HAVE PORTAL SERVICE CONTRACTS WITH A LIMITED NUMBER OF STATES AND
CITY GOVERNMENTS, THE TERMINATION OF CERTAIN OF THESE CONTRACTS MAY HARM OUR
BUSINESS
Currently, virtually all of our revenues are derived from the operation of
our portal business. We have portal contracts with 11 states and one local
government. These contracts typically have initial terms of three to five years
with optional renewal periods of one to five years. However, any renewal is
optional and a government may terminate its contract prior to the expiration
date upon specific cause events that are not cured within a period of ten to
180 days or, in some cases, upon passing legislation. Additionally, the
contracts under which we provide management and development services can be
terminated without cause on a specified period of notice. The loss of one or
more of our larger government portal clients, if not replaced, could
dramatically reduce our revenues. If these revenue shortfalls occur, our
business and financial condition would be harmed. We cannot be certain if, when
or to what extent governments might fail to renew or terminate any or all of
their contracts with us.
WE MAY BE UNABLE TO OBTAIN FUTURE CONTRACTS THROUGH THE REQUEST FOR PROPOSAL
PROCESS
Much of our current revenues is derived from contracts with governments and
government agencies that operate under special rules that apply to government
purchasing. Where this process applies, there are special rules that typically
require open bidding by possible service providers like us against a list of
requirements established by governments under existing or specially-created
procedures. To respond successfully to these requests for proposals, commonly
known as RFPs, we must estimate accurately our cost structure for servicing a
proposed contract, the time required to establish operations for the proposed
client and the likely terms of any other proposals submitted. We also must
assemble and submit a large volume of information within the strict time
schedule mandated by an RFP. Whether or not we are able to respond successfully
to RFPs in the future will significantly impact our business. We cannot
guarantee that we will win any bids in the future through the RFP process, or
that any winning bids will ultimately result in contracts. Even though we have
broadened our product and service offerings, we still depend on the RFP process
for a substantial part of our future contracts. Therefore, our business, results
of operations and financial condition would be harmed if we fail to obtain
profitable future contracts through the RFP process.
OUR ACQUISITIONS AND STRATEGIC ALLIANCES ENTAIL NUMEROUS RISKS AND UNCERTAINTIES
As part of our business strategy, we have made and will continue to make
acquisitions or enter into strategic alliances that we believe will complement
our existing businesses, increase traffic to our government clients' sites,
enhance our services, broaden our software and applications offerings or
technological capabilities or increase our revenues. On September 15, 1999, we
acquired all of the assets of the eFed division of Electric Press, Inc. and
thereby began offering online government procurement services to federal, state
and local governments. On January 12, 2000, we strengthened our existing online
systems for Secretaries of State by combining our Application Services Division
with Conquest Softworks, LLC. On February 16, 2000, we signed a definitive
agreement to acquire SDR Technologies, Inc., a company which develops and
provides online elections and ethics filings for state
6
<PAGE>
and local governments. These acquisitions and future acquisitions or joint
ventures could present numerous risks and uncertainties, including:
- difficulties in the assimilation of operations, personnel, technologies,
products and information systems of the acquired companies;
- the inability to successfully market, distribute, deploy and manage new
products and services that we have limited or no experience in managing;
- the diversion of management's attention from our core business;
- the risk that an acquired business will not perform as expected;
- risks associated with entering markets in which we have limited or no
experience;
- potential loss of key employees, particularly those of the purchased
organizations;
- adverse effects on existing business relationships with existing suppliers
and customers;
- potentially dilutive issuances of equity securities, which may be freely
tradeable in the public market;
- significant charges; and
- the incurrence of debt or other expenses related to goodwill and other
intangible assets.
We cannot assure you that any acquisitions we have announced or will announce,
including our recently signed agreement with SDR Technologies, will ultimately
close. Moreover, even after we close such transactions, we cannot assure you
that we will be able to successfully integrate the new businesses or any other
businesses, products or technologies we may acquire in the future.
WE HAVE INCURRED NET LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE
FORESEEABLE FUTURE
We incurred net losses of approximately $10.7 million for the year ended
December 31, 1999 and approximately $7.9 million for the year ended
December 31, 1998. We also expect to incur significant operations expenses and
will need to generate increased revenues to achieve profitability. Further, even
if we achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis. As a result, we will need to
generate significantly higher revenues while containing costs and operating
expenses if we are to achieve profitability. We cannot be certain that our
revenues will continue to grow or that we will ever achieve sufficient revenues
to become profitable.
WE MAY BE UNABLE TO SUSTAIN THE USAGE LEVELS OF CURRENT PRODUCTS AND SERVICES
THAT PROVIDE A SIGNIFICANT PERCENTAGE OF OUR REVENUES
We obtain a high proportion of our revenues from a limited number of
products and services. Subscription-based and transaction-based fees charged for
access to motor vehicle records and corporate filings accounted for over 89% of
our revenues for the year ended December 31, 1999 and are expected to continue
to account for a significant portion of our revenues in the near future.
Regulatory changes or the development of alternative information sources could
materially reduce our revenues from these products and services. A reduction in
revenues from currently popular products and services would harm our business,
results of operations and financial condition.
IF OUR POTENTIAL CUSTOMERS ARE NOT WILLING TO SWITCH TO OR ADOPT OUR ONLINE
GOVERNMENTAL PORTALS AND OTHER ELECTRONIC SERVICES, OUR GROWTH AND REVENUES WILL
BE LIMITED
The failure to generate a large customer base would harm our growth and
revenues. This failure could occur for several reasons. Our future revenues and
profits depend upon the widespread acceptance and use of the Internet as an
effective medium for accessing public information, particularly
7
<PAGE>
as a medium for government procurement and filings. We cannot assure you that
customer acceptance and use of the Internet will continue to grow. Additionally,
we face intense competition in all sectors of our business. As a result, our
efforts to create a larger customer base may be more difficult than expected
even if we are perceived to offer products and services superior to those of our
competitors. Further, because the government-to-citizen and
government-to-business portal access and electronic filing market is relatively
new, potential customers in this market may be confused or uncertain about the
relative merits of each electronic government solution and of which solution to
adopt, if any. Confusion and uncertainty in the marketplace may inhibit
customers from adopting our solution, which could harm our business, results of
operations and financial condition.
THE FEES WE COLLECT FOR MANY OF OUR PRODUCTS AND SERVICES ARE SUBJECT TO
REGULATION THAT COULD LIMIT GROWTH OF OUR REVENUES AND PROFITABILITY
We collect user fees on behalf of government agencies and, under the terms
of our government contracts, we remit a portion of the fees to state agencies.
Generally, our contracts provide that the amount of any fees we retain is set by
governments to provide us with a reasonable return or profit or, in one case, a
specified return on equity. We have limited control over the level of fees we
are permitted to retain. Our business, results of operations and financial
condition may be harmed if the level of fees we are permitted to retain in the
future is too low or if our costs rise without a commensurate increase in fees.
THE POSSIBILITY OF GOVERNMENTS DEMANDING FIXED-PRICE CONTRACTS MAY SIGNIFICANTLY
REDUCE OUR REVENUES AND PROFITS
Substantially all of our present contracts are on a transaction-fee basis,
through which our fees vary depending on the number of Internet users who access
our products and services. However, we cannot assure you that governments will
not demand fixed-price contracts in the future. Currently, we earn fees under
our contracts with the states of Georgia and Iowa predominantly on a fixed-price
basis. We may, from time to time, enter into other fixed-price contracts. Our
failure to estimate accurately the resources and time required for an
engagement, to manage governments' expectations effectively regarding the scope
of services to be delivered for an estimated price or to complete fixed-price
engagements within budget, on time and to governments' satisfaction could expose
us to risks associated with cost overruns and, potentially, to penalties, which
may harm our business, results of operations and financial condition.
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS AND
FAILURE TO MANAGE OUR GROWTH COULD STRAIN OUR MANAGEMENT AND OTHER RESOURCES
Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We have acquired a number of new businesses or combined with
existing entities to create new businesses, including eFed and NIC Conquest,
which have strained our management resources. Future expansion efforts could be
expensive and put a strain on our management and other resources. We have
increased, and plan to continue to increase, the scope of our operations at a
rapid rate. Our headcount has grown and will continue to grow substantially. At
December 31, 1998, we had a total of 95 employees, at December 31, 1999, we had
a total of 185 employees, and at February 18, 2000, we had a total of 213
employees. In addition, we expect to hire a significant number of new employees
in the near future. To manage future growth effectively, we must maintain and
enhance our financial and accounting systems and controls, integrate new
personnel and manage expanded operations.
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BECAUSE A MAJOR PORTION OF OUR CURRENT REVENUES IS GENERATED FROM A SMALL NUMBER
OF USERS, THE LOSS OF ANY OF THESE USERS MAY HARM OUR BUSINESS AND FINANCIAL
CONDITION
Our revenues are primarily derived from data resellers' use of our
electronic government portals to access motor vehicle records for sale to the
automobile insurance industry. For the year ended December 31, 1999, one of
these data resellers, ChoicePoint, accounted for approximately 67% of our
revenues. Two other resellers accounted for an additional 11% of our revenues
during the year ended December 31, 1999. It is possible that these users will
develop alternative data sources or new business processes that would materially
diminish their use of our portals. The loss of all or a substantial portion of
business from any of these entities would harm our business and financial
condition.
WE MAY LOSE THE RIGHT TO THE CONTENT DISTRIBUTED THROUGH OUR GOVERNMENT PORTALS,
WHICH IS PROVIDED TO US ENTIRELY BY GOVERNMENT ENTITIES
We do not own or create the content distributed through our government
portals. We depend on the governments with which we contract to supply
information and data feeds to us on a timely basis to allow businesses and
citizens to complete transactions and obtain government information. We cannot
assure you that these data sources will continue to be available in the future.
Government entities could terminate their contracts to provide data. Changes in
regulations could mean that governments no longer collect some types of data or
that the data is protected by more stringent privacy rules preventing uses now
made of it. Moreover, our data sources are not always subject to exclusive
agreements, so that data included in our products and services also may be
included in those of our potential competitors. In addition, we are dependent
upon the accuracy and reliability of government computer systems and data
collection for the content of our portals. The loss or the unavailability of our
data sources in the future, or the loss of our exclusive right to distribute
some of the data sources, could harm our business, results of operations and
financial condition.
THE GROWTH IN OUR REVENUES MAY BE LIMITED BY THE NUMBER OF STATES THAT CHOOSE TO
PROVIDE ELECTRONIC GOVERNMENT SERVICES AND TO ADOPT OUR BUSINESS MODEL AND BY
THE FINITE NUMBER OF STATES WITH WHICH WE MAY CONTRACT FOR OUR ELECTRONIC
GOVERNMENT SERVICES
Although we have recently introduced new products and services through our
recently acquired subsidiary, eFed, our revenues are generated principally from
contracts with state governments to provide electronic government services on
behalf of those governments to complete transactions and distribute public
information electronically. The growth in our revenues largely depends on
government entities adopting our public/private model. We cannot assure you that
government entities will choose to provide electronic government services at
all, or that they will not provide such services themselves without private
assistance or adopting our public/private model.
In addition, as there is a finite number of states remaining with which we
can contract for our services, future increases in our revenues will depend on
our ability to expand our business model to include multi-state cooperative
organizations, local governments, federal agencies and international entities.
We cannot assure you that we will succeed in our expansion into new markets or
that our services will be adaptable to those new markets.
OUR BUSINESS WITH VARIOUS GOVERNMENT ENTITIES OFTEN REQUIRES SPECIFIC GOVERNMENT
LEGISLATION TO BE PASSED FOR US TO INITIATE AND MAINTAIN OUR GOVERNMENT
CONTRACTS
Because a central part of our business includes the execution of contracts
with governments under which we remit a portion of user fees charged to
businesses and citizens to state agencies, it is often necessary for governments
to draft and adopt specific legislation before the government can circulate an
RFP to which we can respond. Furthermore, the maintenance of our government
contracts requires the continued acceptance of enabling legislation and any
implementing regulations. In the past, various entities that use the portals we
operate to obtain government products and services have challenged the
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authority of governments to electronically provide these products and services
exclusively through portals like those we operate. A successful challenge in the
future could result in a proliferation of alternative ways to obtain these
products and services, which would harm our business, results of operations and
financial condition. The repeal or modification of any enabling legislation
would also harm our business, results of operations and financial condition.
BECAUSE A LARGE PORTION OF OUR BUSINESS RELIES ON A CONTRACTUAL BIDDING PROCESS
WHOSE PARAMETERS ARE ESTABLISHED BY GOVERNMENTS, THE LENGTH OF OUR SALES CYCLES
IS UNCERTAIN AND CAN LEAD TO SHORTFALLS IN REVENUES
Our dependence on a bidding process to initiate many new projects, the
parameters of which are established by governments, results in uncertainty in
our sales cycles because the duration and the procedures for each bidding
process vary significantly according to each government entity's policies and
procedures. The time between the date of initial contact with a government for a
bid and the award of the bid may range from as little as 180 days to up to
36 months. The bidding process is subject to factors over which we have little
or no control, including:
- political acceptance of the concept of government agencies contracting
with third parties to distribute public information, which has been
offered traditionally only by the government agencies often without
charge;
- the internal review process by the government agencies for bid acceptance;
- the need to reach a political accommodation among various interest groups;
- changes to the bidding procedure by the government agencies;
- changes to state legislation authorizing government's contracting with
third parties to distribute public information;
- changes in government administrations;
- the budgetary restrictions of government entities;
- the competition generated by the bidding process; and
- the possibility of cancellation or delay by the government entities.
Even though we have diversified our business to include services and
products that are not subject to the bidding process, we are still dependent on
the bidding process for a significant part of our business. Therefore, any
material delay in the bidding process, changes to the bidding practices and
policies, the failure to receive the bid or the failure to execute a contract
may disrupt our financial results for a particular period and harm our business
and financial condition.
OUR APPLICATION SERVICES DIVISION HAS INCURRED LOSSES UNDER ITS FIXED-FEE
CONTRACTS, AND OUR RESULTS OF OPERATIONS COULD BE HARMED IF THE COSTS THAT OUR
RECENTLY CREATED NIC CONQUEST BUSINESS INCURS TO MEET CONTRACTUAL COMMITMENTS
EXCEED OUR CURRENT ESTIMATES
Our Application Services Division developed and implemented back-office
government software applications for a fixed development fee. Since we combined
our Application Services Division with Conquest Softworks, LLC in January 2000,
we have expanded our applications to include back-end software applications and
services for electronic filings and document management solutions for
governments at a fixed fee. Our NIC Conquest business has assumed most of the
contractual obligations of our Application Services Division. In the fourth
quarter of 1998, we determined that the balance of revenues remaining to be
recognized under our existing Application Services Division contractual
obligations was not expected to cover anticipated costs of developing and
implementing the related applications. Estimated costs in excess of fixed
contract prices of $1.3 million for completing
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these applications were expensed in the fourth quarter of 1998. We accrued an
additional $1.1 million of anticipated losses in 1999 based on revised
estimates. It is possible that NIC Conquest's costs will similarly exceed
revenues in the future, as a result of unforeseen difficulties in the creation
of an application called for in a contract, unforeseen challenges in ensuring
compatibility with existing systems, rising development and personnel costs or
other reasons. If this occurs, our business, results of operations and financial
condition could be harmed.
ENTRANCE OF POTENTIAL COMPETITORS INTO THE MARKETPLACE COULD HARM OUR ABILITY TO
MAINTAIN OR IMPROVE OUR POSITION IN THE MARKET
Many companies exist that provide one or more parts of the products and
services we offer. In most cases, the principal substitute for our services is a
government-designed and managed approach that integrates other vendors'
technologies, products and services. Companies that have expertise in marketing
and providing technical services to government entities may begin to compete
with us by further developing their services and increasing their focus on this
piece of their business and market shares. Examples of companies that may
compete with us are the following:
- large systems integrators, including American Management Systems, Inc.,
Sapient Corporation and SAIC;
- traditional software applications developers, including Microsoft and
Oracle;
- traditional consulting firms, including IBM, KPMG Peat Marwick,
Deloitte & Touche and Andersen Consulting;
- providers of ecommerce applications, including Ariba, Commerce One,
PurchasePro.com and Digital Commerce Corporation;
- consumer-oriented government portal companies, including govWorks.com and
EZgov.com; and
- Web service companies, including Whittman-Hart/USWeb, AppNet
Systems, Inc., and Verio Inc.
Many of our potential competitors are national or international in scope and
may have greater resources than we do. These resources could enable our
potential competitors to initiate severe price cuts or take other measures to
gain market share. Many of our current and potential competitors have longer
operating histories, significantly greater financial, technical, marketing and
other resources than us, significantly greater name recognition and a larger
installed base of customers. Additionally, in some geographic areas, we may face
competition from smaller consulting firms with established reputations and
political relationships with potential government clients. If we do not compete
effectively or if we experience any pricing pressures, reduced margins or loss
of market share resulting from increased competition, our business and financial
condition may be harmed.
THE SEASONALITY OF USE FOR SOME OF OUR ELECTRONIC GOVERNMENT PRODUCTS AND
SERVICES MAY HARM OUR FOURTH QUARTER RESULTS OF EACH CALENDAR YEAR
The use of some of our electronic government products and services is
seasonal, particularly the accessing of drivers' records, resulting in lower
revenues in the fourth quarter of each calendar year, due to the smaller number
of business days in this quarter and a lower volume of government-to-business
and government-to-citizen transactions during the holiday period. As a result,
seasonality is likely to cause our quarterly results to fluctuate, which could
harm our business and financial condition and could harm the trading price of
our common stock.
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OUR QUARTERLY RESULTS OF OPERATIONS ARE VOLATILE AND DIFFICULT TO PREDICT. IF WE
FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, THE MARKET
PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY
Our future revenues and results of operations may vary significantly from
quarter to quarter due to a number of factors, many of which are outside of our
control, and any of which may harm our business. These factors include:
- the commencement, completion or termination of contracts during any
particular quarter;
- the introduction of new electronic government products and services by us
or our competitors;
- technical difficulties or system downtime affecting the Internet generally
or the operation of our electronic government products and services;
- the amount and timing of operating costs and capital expenditures relating
to the expansion of our business operations and infrastructure;
- the result of negative cash flows due to capital investments; and
- the incurrence of significant charges related to acquisitions.
Due to the factors noted above, our revenues in a particular quarter may be
lower than we anticipate and if we are unable to reduce spending in that
quarter, our results of operations for that quarter may be harmed. You should
not rely on quarter-to-quarter comparisons of our results of operations as an
indication of future performance. It is possible that in some future periods our
results of operations may be below the expectations of public market analysts
and investors. If this occurs, the price of our common stock may decline.
IF WE FAIL TO COORDINATE OR EXPAND OUR OPERATIONAL PROCEDURES AND CONTROLS, WE
MAY NOT EFFECTIVELY MANAGE OUR GROWTH
Our growth rate may increase rapidly in response to the acceptance of our
products and services under new or existing government contracts. If we cannot
manage our growth effectively, we may not be able to coordinate the activities
of our technical, accounting and marketing staffs, and our business could be
harmed. We intend to plan for the acceptance of new bids by a number of
governmental entities so that we may be ready to begin operations as soon as
possible after acceptance of a bid. Additionally, we plan to continue our
expansion of electronic filing services into new local, state and federal
markets. As part of this plan of growth, we must implement new operational
procedures and controls to expand, train and manage our employees and to
coordinate the operations of our various subsidiaries. If we cannot manage the
growth of our government portals, staff, software installation and maintenance
teams, offices and operations, our business may be harmed.
WE MAY BE UNABLE TO HIRE, INTEGRATE OR RETAIN QUALIFIED PERSONNEL
The recent growth in our business has resulted in an increase in the
responsibilities for both existing and new management personnel. Some of our
personnel are presently serving in more than one executive capacity. The loss of
any of our executives could harm our business.
In addition, we expect that we will need to hire additional personnel in all
areas in 2000, including general managers for new operations in jurisdictions in
which we obtain contracts. Competition for personnel in the Internet industry is
intense. We may not be able to retain our current key employees or attract,
integrate or retain other qualified employees in the future. If we do not
succeed in attracting new personnel or integrating, retaining and motivating our
current personnel, our business could be harmed. In addition, new employees
generally require substantial training in the presentation, policies and
positioning of our government portals and other services. This training will
require substantial resources and management attention.
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TO BE SUCCESSFUL, WE MUST DEVELOP AND MARKET COMPREHENSIVE, EFFICIENT,
COST-EFFECTIVE AND SECURE ELECTRONIC ACCESS TO PUBLIC INFORMATION AND NEW
PRODUCTS AND SERVICES
Our success depends in part upon our ability to attract a greater number of
Internet users to access public information electronically by delivering a
comprehensive composite of public information and an efficient, cost-effective
and secure method of electronic access and transactions. Moreover, in order to
increase revenues in the future, we must continue to develop products and
services that businesses and citizens will find valuable, and there is no
guarantee that we will be able to do so. If we are unable to develop products
and services that allow us to attract, retain and expand our current user base,
our revenues and future results of operations may be harmed. We cannot assure
you that the products and services we offer will appeal to a sufficient number
of Internet users to generate continued revenue growth. For example, we cannot
assure you that the use of eFed, our online procurement software services, by
local, state and federal governments will continue to grow. Our ability to
attract Internet users to our government portals depends on several factors,
including:
- the comprehensiveness of public records available through our government
portals;
- the perceived efficiency and cost-effectiveness of accessing public
records electronically;
- the perceived efficacy of online government-to-business procurement
solutions;
- the effectiveness of security measures; and
- the increased usage and continued reliability of the Internet.
DEFICIENCIES IN OUR PERFORMANCE UNDER A GOVERNMENT CONTRACT COULD RESULT IN
CONTRACT TERMINATION, REPUTATIONAL DAMAGE OR FINANCIAL PENALTIES
Each government entity with which we contract has the authority to require
an independent audit of our performance. The scope of audits could include
inspections of income statements, balance sheets, fee structures, collections
practices, service levels and our compliance with applicable laws, regulations
and standards. We cannot assure you that a future audit will not find any
material performance deficiencies that would result in an adjustment to our
revenues and result in financial penalties. Moreover, the consequent negative
publicity could harm our reputation among other governments with which we would
like to contract. All of these factors could harm our business, results of
operations and financial condition.
WE MAY 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. Despite our precautions, third
parties may succeed in misappropriating our intellectual property or
independently developing similar intellectual property. If we fail to adequately
protect our intellectual property rights and proprietary information or if we
become involved in litigation relating to our intellectual property rights and
proprietary technology, our business could be harmed. Any actions we take may
not be adequate to protect our proprietary rights and other companies may
develop technologies that are similar or superior to our proprietary technology.
Additionally, it is possible that we could in the future become subject to
claims alleging infringement of third-party intellectual property rights. Any
claims could subject us to costly litigation, and may require us to pay damages
and develop non-infringing intellectual property or acquire licenses to the
intellectual property that is the subject of the alleged infringement.
Additionally, licenses may not be available on acceptable terms or at all.
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IF THIRD PARTIES CLAIM THAT WE INFRINGE UPON THEIR INTELLECTUAL PROPERTY, OUR
ABILITY TO USE CERTAIN TECHNOLOGIES AND PRODUCTS COULD BE LIMITED AND WE MAY
INCUR SIGNIFICANT COSTS TO RESOLVE THESE CLAIMS
Litigation regarding intellectual property rights is common in the Internet
and software industries. We expect third-party infringement claims involving
Internet technologies and software products and services to increase. If an
infringement claim is filed against us, we may be prevented from using certain
technologies and may incur significant costs resolving the claim.
We have in the past received letters suggesting that we are infringing on
the intellectual rights of others, and we may from time to time encounter
disputes over rights and obligations concerning intellectual property. Although
we believe that our intellectual property rights are sufficient to allow us to
market our existing products without incurring liability to third parties, we
cannot assure you that our products and services do not infringe on the
intellectual property rights of third parties.
In addition, we have agreed, and may agree in the future, to indemnify
certain of our customers against claims that our products infringe upon the
intellectual property rights of others. We could incur substantial costs in
defending ourselves and our customers against infringement claims. In the event
of a claim of infringement, we and our customers may be required to obtain one
or more licenses from third parties. We cannot assure you that we or our
customers could obtain necessary licenses from third parties at a reasonable
cost or at all.
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, WHICH THEY COULD USE TO OPERATE THE PORTALS THEMSELVES
After termination of our contracts, it is possible that governments and
their successors and affiliates may use their right of use license rights to the
software programs and other applications we have developed for them in the
operation of their portals to operate the portals themselves. Inadvertently,
they also may 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 resources, combined with the net proceeds
from this offering, will be sufficient to meet our present working capital and
capital expenditure requirements for at least 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:
- expand our services and products offerings;
- acquire complementary businesses or technologies;
- support our expansion into other states, cities, municipalities and
federal agencies and internationally; and
- respond to competitive pressures.
Our future liquidity and capital requirements will depend upon numerous
factors, including the success of our existing and new product and service
offerings and potentially competing technological and market developments. We
may be required to raise additional funds through public or private financing,
strategic relationships or other arrangements. We cannot assure you that such
additional funding, if needed, will be available on terms acceptable to us, or
at all. If adequate funds are not available on acceptable terms, our ability to
develop or enhance our products and services, take advantage of future
opportunities or respond to competitive pressures would be significantly
limited. This limitation could harm our business, results of operations and
financial condition.
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WE MAY BE UNABLE TO INTEGRATE NEW TECHNOLOGIES AND INDUSTRY STANDARDS
EFFECTIVELY
Our future success will depend on our ability to enhance and improve the
responsiveness, functionality and features of our products and services in
accordance with industry standards and to address the increasingly sophisticated
technological needs of our customers on a cost-effective and timely basis. Our
ability to remain competitive will depend, in part, on our ability to:
- enhance and improve the responsiveness, functionality and other features
of the government portals we offer;
- continue to develop our technical expertise;
- develop and introduce new services, applications and technology to meet
changing customer needs and preferences; and
- influence and respond to emerging industry standards and other
technological changes in a timely and cost-effective manner.
We cannot assure you that we will be successful in responding to the above
technological and industry challenges in a timely and cost-effective manner. If
we are unable to integrate new technologies and industry standards effectively,
our results of operations could be harmed.
WE COULD STILL FACE PROBLEMS RELATED TO THE YEAR 2000 ISSUE
To date, our customers have not reported any problems with our government
portals or software applications and products as a result of the commencement of
the year 2000, and we have not experienced any impairment in our internal
operations with the year 2000 issue. Nevertheless, computer experts have warned
that there may still be residual consequences stemming from the change in
centuries and, if these consequences become widespread, they could result in
claims against us, a decrease in revenues generated by our government portals
and software applications and products and services, increased operating
expenses and other business interruptions.
RISKS RELATED TO THE INTERNET INDUSTRY
WE DEPEND ON THE INCREASING USE OF THE INTERNET AND ON THE GROWTH OF ONLINE
GOVERNMENT INFORMATION SYSTEMS. IF THE USE OF THE INTERNET AND ELECTRONIC
GOVERNMENT INFORMATION SYSTEMS DO NOT GROW AS ANTICIPATED, OUR BUSINESS WILL BE
SERIOUSLY HARMED
Our business depends on the increased acceptance and use of the Internet as
a medium for accessing public information and completing government filings and
procurement contracts. Rapid growth in the use of the Internet is a recent
phenomenon. As a result, acceptance and use may not continue to develop at
historical rates and a sufficiently broad base of individual and business
customers may not adopt or continue to use the Internet as a medium for
accessing government portals and other online services. Demand and market
acceptance for recently introduced services and products over the Internet are
subject to a high level of uncertainty, and there exist few proven services and
products.
Our business would be seriously harmed if:
- Use of the Internet and other online services does not continue to
increase or increases more slowly than expected; or
- The technology underlying the Internet and other online services does not
effectively support any expansion that may occur.
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IF THE INTERNET INFRASTRUCTURE FAILS TO DEVELOP OR BE ADEQUATELY MAINTAINED, OUR
BUSINESS WOULD BE HARMED BECAUSE USERS MAY NOT BE ABLE TO ACCESS OUR GOVERNMENT
PORTALS
Our success depends on the increase in Internet usage generally and in
particular as a means to access public information electronically. This in part
requires the development and maintenance of the Internet infrastructure. If this
infrastructure fails to develop or be adequately maintained, our business would
be harmed because users may not be able to access our government portals. Among
other things, this development and maintenance will require a reliable network
backbone with the necessary speed, data capacity, security and timely
development of complementary products for providing reliable Internet access and
services.
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. If the Web
continues to experience increased numbers of users, frequency of use or
increased bandwidth requirements, the Internet infrastructure may not be able to
support these increased demands or perform reliably. The Internet has
experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure, and could face such outages and delays in the
future. These outages and delays could reduce the level of Internet usage and
traffic on our government portals. Such outages and delays would also hinder our
customers' ability to file UCC documents online, renew professional licenses
electronically, file fuel tax applications and complete online government
purchase orders and requisitions. In addition, the Internet could lose its
viability due to delays in the development or adoption of new standards and
protocols to handle increased levels of activity or due to increased
governmental regulation. If the Internet infrastructure is not adequately
developed or maintained, use of our government portals and our
government-to-citizen and government-to-business services may be reduced.
WE MAY BE HELD LIABLE FOR CONTENT THAT WE OBTAIN FROM GOVERNMENT AGENCIES
Because we aggregate and distribute sometimes private and sensitive public
information over the Internet, we may face potential liability for defamation,
libel, negligence, invasion of privacy, copyright or trademark infringement, and
other claims based on the nature and content of the material that is published
on our government portals. Most of the agreements through which we obtain
consent to disseminate this information do not contain indemnity provisions in
our favor. These types of claims have been brought, sometimes successfully,
against online services and Web sites in the past. We cannot assure you that our
general liability insurance will be adequate to indemnify us for all liability
that may be imposed. Any liability that is not covered by our insurance or is in
excess of our insurance coverage could severely harm our business operations and
financial condition.
CONCERNS OVER TRANSACTIONAL SECURITY MAY HINDER THE GROWTH OF OUR BUSINESS
A significant barrier to electronic commerce is the secure transmission of
confidential information over public networks. Any breach in our security could
expose us to a risk of loss or litigation and possible liability. We rely on
encryption and authentication technology licensed from third parties to provide
secure transmission of confidential information. As a result of advances in
computer capabilities, new discoveries in the field of cryptography or other
developments, a compromise or breach of the algorithms we use to protect
customer transaction data may occur. Because we provide information released
from various government entities, we may represent an attractive target for
security breaches.
A compromise of our security or a perceived compromise of our security could
severely harm our business. A party who is able to circumvent our security
measures could misappropriate proprietary information, including customer credit
card information, or cause interruptions or direct damage to our government
portals. Also, should hackers obtain sensitive data and information, or create
bugs or viruses in an attempt to sabotage the functionality of our products and
services, we may receive
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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, or FCC, is currently reviewing
its regulatory position that Internet access service is not "telecommunications"
and may decide that Internet service providers must pay a percentage of their
gross revenues as a "universal service contribution." If the FCC were to require
universal service contributions from providers of Internet access or Internet
backbone services, our costs of doing business may increase, and we may not be
able to recover these costs from our customers. Additionally, state public
utility commissions generally have declined to review potential regulation of
such services, but may chose to do so in the future. As a result, our business
and financial condition could be harmed.
OUR SYSTEMS MAY FAIL OR LIMIT USER TRAFFIC, WHICH COULD HARM OUR BUSINESS,
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Our communications hardware and computer hardware operations for delivering
our electronic government services are located individually in each state or
city where we provide those services. We cannot assure you that during the
occurrence of fire, floods, earthquakes, power loss, telecommunications
failures, break-ins and similar events that the modem banks and direct dial-up
connections we have to serve as back-up systems will not prevent damage to our
systems or cause interruptions to our services. Computer viruses, electronic
break-ins or other similar disruptive problems could cause users to stop
visiting our government portals and could cause our clients to terminate
agreements with us. If any of these circumstances occurred, our business could
be harmed. Our insurance policies may not adequately compensate us for any
losses that may occur due to any failures of or interruptions in our systems.
Our government portals must accommodate a high volume of traffic and deliver
frequently updated information. These government portals may experience
interruptions due to any failure or delay by government agencies in the
transmission or receipt of this information. Due to holidays and technical
problems with state computer systems, our Web sites have experienced slower
response times or decreased traffic in the past and may experience the same
incidents in the future. In addition, our users depend on Internet service
providers, online service providers and other Web site operators for access to
our government portals and other online government-to-citizen and
government-to-business services. Many of these providers and operators have
experienced significant outages in the past due to system failures unrelated to
our systems, holidays and heavy user traffic, and could experience the same
outages, delays and other difficulties in the future. Any of these system
failures could harm our business, results of operations and financial condition.
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RISKS RELATED 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 57.2%
of our outstanding common stock. In addition, as of January 31, 2000, 27,469,884
shares of our outstanding common stock have been placed in a voting trust,
representing approximately 51.6% of our outstanding common stock prior to this
offering. The trustees of this voting trust are Messrs. Fraser and Hartley, both
of whom serve as directors of our company. As a result, Messrs. Fraser and
Hartley have, among other rights, the ability to control the election of
directors and approve corporate actions that must be submitted for a vote of
shareholders. The voting trust is selling 2,905,378 shares of common stock in
this offering, which will reduce the number of shares it holds to 24,564,506, or
approximately 42.9% of our outstanding common stock based on the number of
shares of common stock outstanding after this offering. As co-trustees of the
voting trust, Messrs. Fraser and Hartley will have the ability to control up to
42.9% of the outstanding voting control of the common shares. In addition,
Jeffery S. Fraser, our Chairman and former Chief Executive Officer, is selling
676,441 shares of common stock in this offering, which will reduce the number of
shares over which he has direct economic benefit to 5,719,251, or approximately
10.0% of our outstanding common stock after this offering.
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 RESULTS OF
OPERATIONS OR MARKET VALUE
We anticipate that we may use all of the net proceeds from the sale of the
common stock for any one of the following purposes:
- to pursue new acquisitions, strategic investments, strategic alliances and
partnerships;
- to create new products and services;
- to increase our new market development efforts by further expanding into
local, state and international markets;
- to further develop common infrastructure and operating platforms; and
- to increase marketing efforts aimed at raising transaction volume.
We intend to use any proceeds that remain for working capital and general
corporate purposes. 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
Sales of a substantial number of shares of our common stock in the public
market after this offering could cause the market price of our common stock to
decline. Additionally, the perception that such sales could occur could
adversely affect the market price of our common stock. These factors also could
make it more difficult for us to raise funds through future offerings of our
common stock.
18
<PAGE>
Based on the number of shares of common stock outstanding as of
December 31, 1999, there will be 57,300,632 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, 265,838 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, 515,100 shares of our common stock will be
tradeable after satisfaction of certain performance conditions by our eFed
subsidiary. In connection with this offering, all of our executive officers,
directors and holders of more than 5% of our outstanding common stock have
agreed not to sell their shares without the prior written consent of Credit
Suisse First Boston Corporation for a period not to exceed 90 days from the date
of this prospectus, and others are subject to market stand-off agreements.
As of December 31, 1999, 3,890,331 shares of common stock were issuable upon
exercise of outstanding options, assuming the issuance and sale of 84,593 and
50,669 shares of common stock in this offering after the exercise of options by
James B. Dodd and Kevin C. Childress, respectively. Of those options, options to
purchase shares will be vested and fully exercisable 90 days after
commencement of this offering.
OUR STOCK PRICE, LIKE THAT OF OTHER INTERNET COMPANIES, MAY BE HIGHLY VOLATILE
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 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. Our stock price could fluctuate in
response to a variety of factors, including:
- actual or anticipated variations in quarterly results of operations;
- announcements of new technological innovations, contracts or applications;
- announcements of significant acquisitions, strategic partnerships, joint
venture or capital commitments;
- new products and services offered by us or our competitors;
- changes in financial estimates by securities analysts;
- additions or departures of key personnel; and
- other events or factors that may be beyond our control.
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.
19
<PAGE>
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that have been made
under the provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements 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. We caution you that any
forward-looking statements made in this prospectus are not guarantees of future
performance and involve significant risks and uncertainties. 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. All forward-looking
statements attributable to us are expressly qualified in their entirety by the
foregoing cautionary statement.
20
<PAGE>
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
We estimate that we will receive net proceeds of $212,631,000 from the sale
of the 4,000,000 shares of common stock offered by us in this offering, at the
assumed public offering price of $55.875 per share, after deducting the
estimated underwriting discounts and offering expenses, and the receipt of
$388,840 by us from the exercise of options to purchase 84,593 and 50,669 shares
of common stock by James B. Dodd and Kevin C. Childress, respectively. We will
not receive any of the proceeds from the sale of shares by the selling
shareholders or any of the proceeds to the selling shareholders upon an exercise
by the underwriters of their over-allotment option.
While we cannot predict with certainty how the proceeds of this offering
will be used, we currently intend to use them as follows:
- to pursue new acquisitions, strategic investments, strategic alliances and
partnerships;
- to create new products and services;
- to increase our new market development efforts by further expanding into
local, state and international markets;
- to further develop common infrastructure and operating platforms; and
- to increase marketing efforts aimed at raising transaction volume.
We expect to use the remaining net proceeds from this offering for working
capital and other general corporate purposes. Pending these uses, the net
proceeds of this offering will be invested in short-term, investment-grade,
interest-bearing securities or accounts.
The amounts we actually spend for these purposes may vary significantly and
will depend on a number of factors, including our future revenues 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" for more information.
DIVIDEND POLICY
Other than dividends paid while we were an S corporation, we have never
declared or paid any cash dividends on shares of our common stock. 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 December 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 4,000,000 shares of common stock offered by us in this
offering at the assumed public offering price of $55.875 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses, and the receipt of $388,840 by us from the exercise of options
to purchase 84,593 and 50,669 shares of common stock by James B. Dodd and
Kevin C. Childress, respectively.
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of December 31, 1999 and does
not include the following:
- approximately 2,100,000 shares of common stock to be issued in connection
with our pending acquisition of SDR Technologies, Inc.;
- 3,890,331 shares of common stock subject to options issued at a weighted
average exercise price of $7.65 per share granted under our 1998 stock
option plan, assuming the issuance and sale of 84,593 and 50,669 shares of
common stock in this offering after the exercise of options by James B.
Dodd and Kevin C. Childress; or
- 7,459,895 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>
DECEMBER 31, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Capital lease obligations, long-term portion................ $ 218 $ 218
-------- --------
Shareholders' equity:
Common stock, no par value; 200,000,000 shares authorized;
53,165,370 shares issued and outstanding, actual;
57,300,632 shares issued and outstanding, as adjusted..... -- --
Additional paid-in capital.................................. 149,036 361,667
Accumulated deficit......................................... (16,557) (16,557)
Accumulated other comprehensive income...................... 2 2
-------- --------
Total....................................................... 132,481 345,112
Less deferred compensation expense and other................ (4,392) (4,392)
-------- --------
Total shareholders' equity.................................. $128,089 $340,720
-------- --------
Total capitalization........................................ $128,307 $340,938
======== ========
</TABLE>
22
<PAGE>
PRICE RANGE OF OUR COMMON STOCK
Our common stock trades on the Nasdaq National Market under the symbol
"EGOV." The following table sets forth the range of high and low closing sales
prices of our common stock for the periods indicated:
<TABLE>
<CAPTION>
FISCAL 1999 HIGH LOW
- ----------- -------- --------
<S> <C> <C>
Third Quarter (from July 15, 1999)......................... $28.25 $ 12.81
Fourth Quarter............................................. $39.63 $ 24.38
<CAPTION>
FISCAL 2000
- -----------
First Quarter (through February 18, 2000). $ 61.25 $ 28.625
<S> <C> <C>
</TABLE>
The market price for our common stock is highly volatile and fluctuates in
response to a wide variety of factors. The last reported sale price for our
common stock on the Nasdaq National Market was $55.875 on February 18, 2000.
23
<PAGE>
DILUTION
As of December 31, 1999, our actual net tangible book value was
approximately $97.4 million or $1.83 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
December 31, 1999. After giving effect to the sale of the 4,000,000 shares of
common stock we are offering at an assumed public offering price of $55.875 per
share, after deducting the underwriting discount and estimated offering
expenses, and after the receipt of $388,840 by us from the exercise of options
to purchase 84,593 and 50,669 shares of common stock by James B. Dodd and
Kevin C. Childress, respectively, our adjusted net tangible book value as of
December 31, 1999 would have been $310 million, or $5.41 per share. This
represents an immediate increase in as adjusted net tangible book value of $3.58
per share to existing shareholders and an immediate dilution of $50.465 per
share to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $55.875
Net tangible book value per share as of December 31,
1999.................................................... $1.830
Increase per share attributable to new investors.......... 3.580
------
As adjusted net tangible book value per share after the
offering.................................................. 5.410
-------
Dilution per share to new investors......................... $50.465
=======
</TABLE>
The foregoing discussion and table assume no exercise of any of the
3,890,331 shares of common stock subject to options issued at a weighted average
exercise price of $7.65 per share granted under our 1998 Stock Option Plan and
does not include the effect of approximately 2,100,000 shares of common stock to
be issued in connection with our pending acquisition of SDR Technologies, Inc.
24
<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 the related notes,
our pro forma consolidated financial information and the 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 year ended December 31, 1995 and the consolidated
balance sheet data as of December 31, 1995 are unaudited and derived from
financial statements not included in this prospectus. The consolidated statement
of operations data for the year ended December 31, 1996 and the consolidated
balance sheet data as of December 31, 1996 and 1997 are derived from audited
financial statements not included in this prospectus. The consolidated statement
of operations data for the years ended December 31, 1997, 1998 and 1999 and the
consolidated balance sheet data as of December 31, 1998 and 1999 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, 1999 and the consolidated
balance sheet data as of December 31, 1999, labeled "Pro Forma" are unaudited
and derived from and qualified by reference to our pro forma consolidated
statement of operations and pro forma condensed consolidated balance sheet and
the related notes included in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1995 1996 1997 1998 1999 1999
ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL PRO FORMA
-------- -------- -------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $ 3 $ 236 $ 996 $28,624 $ 56,966 $ 61,941
Cost of revenues.......................................... -- 21 5 21,211 42,191 43,598
------ ------ ------- ------- -------- --------
Gross profit............................................ 3 215 991 7,413 14,775 18,343
------ ------ ------- ------- -------- --------
Operating expenses:
Service development and operations...................... -- 38 224 3,885 5,876 5,876
Selling, general and administrative..................... 12 168 660 4,242 9,213 12,906
Stock compensation...................................... -- -- 370 569 3,188 3,506
Depreciation and amortization........................... -- 1 14 5,922 10,968 58,708
------ ------ ------- ------- -------- --------
Total operating expenses.............................. 12 207 1,268 14,618 29,245 80,996
------ ------ ------- ------- -------- --------
Operating income (loss)................................... (9) 8 (277) (7,205) (14,470) (62,653)
------ ------ ------- ------- -------- --------
Other income (expense):
Interest expense........................................ -- -- -- (88) (169) (306)
Other income, net....................................... -- -- -- 56 2,493 2,496
------ ------ ------- ------- -------- --------
Total other income (expense).......................... -- -- -- (32) 2,324 2,190
------ ------ ------- ------- -------- --------
Income (loss) before income taxes......................... (9) 8 (277) (7,237) (12,146) (60,463)
Income tax (benefit)...................................... -- -- -- 659 (1,416) (4,363)
------ ------ ------- ------- -------- --------
Net income (loss)......................................... $ (9) $ 8 $ (277) $(7,896) $(10,730) $(56,100)
====== ====== ======= ======= ======== ========
Net income (loss) per share:
Basic and diluted....................................... $(0.47) $ 0.00 $ (0.01) $ (0.21) $ (0.23) $ (1.11)
====== ====== ======= ======= ======== ========
Weighted average shares outstanding....................... 19 6,005 20,858 37,242 47,278 50,517
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1995 1996 1997 1998 1999 1999
ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL PRO FORMA
-------- -------- -------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................... $ -- $ -- $179 $ 1,311 $ 9,527 $ 9,601
Marketable securities......................... -- -- -- -- 82,481 82,481
Total assets.................................. 14 110 326 17,249 133,661 256,802
Bank lines of credit.......................... -- -- -- 1,024 -- 1,950
Long-term debt (includes current portion of
notes payable/capital lease obligations).... -- -- 30 745 458 950
Total shareholders' equity.................... (15) 95 188 10,912 128,089 248,278
</TABLE>
25
<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 SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING OUR
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997. THIS
DISCUSSION AND ANALYSIS 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 OF BUSINESS
We are a provider of Internet-based, electronic government services that
help governments use the Internet to reduce costs and provide a higher level of
service to businesses and citizens. We enter into contracts with governments and
on their behalf design, build and operate Internet-based portals. These portals
consist of Web sites and applications that we build, which allow businesses and
citizens to access government information online and complete transactions,
including applying for a permit, retrieving driver's license records or filing a
form or report. We also provide an online system for government procurement
through our recently acquired subsidiary, eFed, as further discussed below. In
addition, on February 16, 2000, we signed a definitive agreement to acquire SDR
Technologies Inc. ("SDR"), which is the leading developer of online elections
and ethics filing systems as further discussed below. Our unique business model
allows us to reduce our government clients' financial and technology risks and
obtain revenue by charging fees for electronic government services and remitting
a portion to our government clients. Our clients benefit because they gain a
centralized, customer-focused presence on the Internet, and businesses and
citizens gain a faster, more convenient and more cost-effective means to
interact with governments.
We currently provide Internet-based electronic government services for the
state governments of Arkansas, Georgia, Indiana, Iowa, Kansas, Maine, Nebraska,
Utah and Virginia and the city-county government of the City of Indianapolis and
Marion County, Indiana. We have recently been selected to provide services to
and have entered into contracts with the states of Hawaii and Idaho. We
typically enter into three to five year contracts with our government clients
and manage operations through separate subsidiaries that operate as
decentralized business units with a high degree of autonomy. Under these
contracts, each local business unit helps its government client implement,
develop, manage and enhance a single, comprehensive portal for conducting
transactions and delivering information to businesses and citizens online, and
we remit to the government a share of the fee revenue we obtain through use of
the portal for transactions. In our government contracts with Georgia and Iowa,
we provide consulting, development and management services for these government
portals predominantly under a fixed-price model. Subscription-based and
transaction-based fees charged for access to motor vehicle records and corporate
filings accounted for over 89% of our revenues for the years ended December 31,
1999 and 1998. We believe that while these applications will continue to be
important sources of revenues, their contributions as a percentage of our total
revenues will decline as other sources grow.
We charge for access to records on a per-record basis and, depending upon
government policies, also on a fixed or sliding scale bulk basis. Our fees are
set by negotiation with the government agencies that control the records and are
typically approved by a government sanctioned oversight body. We recognize
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.
26
<PAGE>
Government agency fees and amounts payable to the primary contracting
governmental entities are also accrued as cost of revenues and accounts payable
at the time revenues are recognized.
Revenues from state portal business units are highly correlated to
population, but are also affected by pricing policies established by government
entities for public records, the number and growth of commercial enterprises and
the government entity's development of policy and information technology
infrastructure supporting electronic government.
Substantially all of our cost of revenues consist of payments we make to our
government clients. The pricing, costs and gross margin derived from these
transactions vary by the type of transaction and by state.
ACQUISITION OF EFED
On September 15, 1999, we completed the acquisition of eFed, a market leader
in Internet-based procurement solutions for governments. eFed designs, develops
and manages online procurement software and services for federal and state
markets. Already contracting with 11 federal agencies, eFed provides new and
proven value-added applications to our existing government partners, as well as
potential new entry points into other federal, state and local sectors. For
additional information relating to our acquisition of eFed, refer to note 4 in
the notes to consolidated financial statements included in this prospectus.
On January 14, 2000, eFed signed a letter of intent with Bank of America
Corporation, through its subsidiary Bank of America, N.A. (USA), to create a
limited liability company to offer state and local governments the first
Web-based business-to-business procurement, payment and reconciliation service.
The two companies will share revenues generated by the limited liability
company. In addition, the letter of intent provides that Bank of America will
have the opportunity to become a strategic investor in our company upon the
achievement of certain revenue performance criteria by the new company. Warrants
of 0.75% up to 2.5% of the current fully diluted shares of our outstanding
common stock will become exercisable upon achieving certain cumulative revenue
targets by December 31, 2004. These warrants are priced in two equally sized
series at $34.44 and $44.77. Once exercisable, Bank of America will have until
the later of December 31, 2005, or 24 months to exercise the warrants on the
shares. For additional information on our strategic business relationship with
Bank of America, refer to note 20 in the notes to consolidated financial
statements included in this prospectus.
PENDING ACQUISITION OF SDR TECHNOLOGIES, INC.
On February 16, 2000, we signed a definitive agreement to acquire SDR, a
provider of Internet-based applications for governments, in exchange for
approximately 2.1 million shares of our common stock. SDR designs and develops
online election and ethics filing systems for federal, state and local
government agencies. SDR has also developed a number of Internet-based
applications for tax filings, business filings, professional licensing, and
automobile registrations. The SDR acquisition will be accounted for as a
purchase and is expected to close by the end of March 2000. For additional
information on the acquisition of SDR, refer to note 20 in the notes to
consolidated financial statements included in this prospectus.
OTHER RECENT DEVELOPMENTS
On January 14, 2000, we merged our Application Services Division with
Conquest Softworks, LLC. The combined entity holds contracts with state and
local governments for Web-enabling the back-office systems and processes for
business-to-government filings. NIC Conquest, the newly formed entity, is a
provider of software applications and services for electronic filings and
document management solutions for government. Its products include UCCDataNet
State Imaging and Filing System, a comprehensive UCC office management system;
uccfile.com Web Browser Interface, which allows Web access to
27
<PAGE>
filings; and County Suite Filing and Imaging Systems, which extends filing
capabilities to land records and other filing types. We own approximately 65% of
NIC Conquest. NIC Conquest employees and other shareholders who were previously
shareholders of Conquest Softworks, LLC own the remainder. During the first
quarter of 2000, it is estimated that NIC Conquest will incur approximately
$500,000 in non-cash compensation expenses related to the sale of common stock
to employees in connection with this transaction. For additional information on
the merger, refer to note 20 in the notes to consolidated financial statements
included in this prospectus.
RESULTS OF OPERATIONS
On March 31, 1998, we exchanged our common stock for the common stock of
five affiliated companies, in a transaction referred to as the Exchange Offer.
Prior to the completion of the Exchange Offer, we were a holding company with no
operations of our own. Our Exchange Offer consolidated five business units as
operating subsidiaries under our holding company.
Prior to April 1, 1998, our historical financial information reflects the
results of our business unit formed to pursue new business opportunities, and
not the results of our business units operating in Indiana, Kansas, Arkansas and
Nebraska. For example, for the year ended December 31, 1998, revenues for all of
our business units were $36.5 million, while the reported revenues of
$28.6 million for the year ended December 31, 1998 represents 12 months of one
of our business units and only nine months of the other four business units.
Total expenses are likewise not comparable. Accordingly, we believe that the
historical comparison of our results of operations for the year ended
December 31, 1999 against the year ended December 31, 1998, and the year ended
December 31, 1998 against the year ended December 31, 1997, is not necessarily
meaningful. For additional information on the Exchange Offer, refer to note 3 in
the notes to consolidated financial statements included in this prospectus.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
REVENUES. Revenues were $57.0 million for the year ended December 31, 1999
compared to $28.6 million for the year ended December 31, 1998. This increase
was primarily attributable to $8.3 million in revenues from our four initial
business units included in reported revenues in the first quarter of 1999
compared to none reported in 1998 prior to the March 31, 1998 Exchange Offer, a
$16.1 million increase in revenues from our state business units that became
operational during the second half of 1998 and third quarter of 1999, a
$2.0 million increase in same state business volumes, a $1.6 million increase in
revenues relating to our eFed division and a $400,000 increase in revenues from
our Application Services Division. With all business units included for the
entire period, combined revenues were $36.5 million for the year ended
December 31, 1998.
Revenues increased to $28.6 million for the year ended December 31, 1998
from $1.0 million for the year ended December 31, 1997. The increase in 1998 was
primarily attributable to $23.1 million in revenues from our four initial
business units subsequent to March 31, 1998 and $4.5 million in revenues from
the addition of new state business units that became operational during the
latter part of 1998.
Total revenues for our four initial business units were $31.0 million for
the year ended December 31, 1998 and $23.4 million for the year ended
December 31, 1997. The increase was primarily attributable to a $5.6 million
revenue increase from one of the initial business units that became operational
during the latter part of 1997 and to increases in same state business volumes.
COST OF REVENUES. Cost of revenues increased to $42.2 million for the year
ended December 31, 1999 from $21.2 million for the year ended December 31, 1998.
This increase was primarily attributable to $6.5 million from our four initial
business units included in reported cost of revenues in the first quarter of
1999 compared to none reported in 1998 prior to the March 31, 1998 Exchange
Offer, $12.8 million from our state business units that became operational
during the second half of 1998 and
28
<PAGE>
third quarter of 1999 and $1.7 million from same state business unit growth.
With all business units included for the entire period, combined cost of
revenues was $27.4 million for the year ended December 31, 1998.
Cost of revenues increased to $21.2 million for the year ended December 31,
1998 from $5,000 for the year ended December 31, 1997. The increase in 1998 was
primarily attributable to $18.1 million in cost of revenues for our four initial
business units and $3.1 million in cost of revenues from the addition of new
state business units.
Total cost of revenues for our four initial business units was
$24.3 million for the year ended December 31, 1998 and $18.4 million for the
year ended December 31, 1997. This increase was mainly due to $4.9 million in
cost of revenues from the business unit that became operational in the latter
part of 1997 and to the cost of revenues associated with the increase in same
state business volumes.
GROSS PROFIT. Gross profit increased to $14.8 million for the year ended
December 31, 1999 from $7.4 million for the year ended December 31, 1998. This
increase is primarily due to $1.8 million from our initial four business units,
$3.4 million from new state business units that became operational in the second
half of 1998 and third quarter of 1999, $300,000 from same state business unit
growth, $1.5 million from our eFed division and $400,000 from our Application
Services Division. Offsetting costs of our Application Services Division are
reported in service development and operations in the consolidated statements of
operations. With all business units included for the entire period, combined
gross profit was $9.1 million for the year ended December 31, 1998.
The gross margin rate was 26.0% of revenues for the year ended December 31,
1999 compared to 25.9% for the year ended December 31, 1998. With the four
initial business units included for the entire period, the gross margin rate
would have been 25.0% for the year ended December 31, 1998. The slight increase
in gross margin rate in 1999 is primarily attributable to the margins achieved
by our eFed division, which has a significantly higher margin rate than our
state business units.
Gross profit increased to $7.4 million for the year ended December 31, 1998
from $991,000 for the year ended December 31, 1997. The increase in 1998 was
primarily attributable to $5.0 million in cost of revenues for our four initial
business units and $1.4 million in cost of revenues from the addition of new
state business units.
Total gross profit for our four initial business units was $6.7 million for
the year ended December 31, 1998 and $5.0 million for the year ended
December 31, 1997. This increase was mainly due to $700,000 of gross profit from
the business unit that became operational in the latter part of 1997 and to the
gross profit associated with the increase in same state business volumes. The
gross margin rate for our four initial business units was 21.6% for the year
ended December 31, 1998 and 21.4% for the year ended December 31, 1997.
SERVICE DEVELOPMENT AND OPERATIONS. Service development and operations
costs increased to $5.9 million for the year ended December 31, 1999 from
$3.9 million for the year ended December 31, 1998. The increase was due
primarily to $600,000 from our initial four business units, $700,000 from new
state business units that became operational in the second half of 1998 and
second half of 1999, $500,000 from same state expense increases, and $400,000
from our eFed division. In the fourth quarter of 1998, we recorded a
$1.3 million non-cash charge in our Application Services Division for
anticipated costs in excess of revenues on obligations under our application
services contracts. We recorded additional non-cash charges totaling
$1.1 million in 1999 for additional expected losses on our application services
contracts.
Service development and operations costs increased to $3.9 million for the
year ended December 31, 1998 from $224,000 for the year ended December 31, 1997.
The increase in 1998 was primarily attributable to $1.8 million from our four
initial business units, $500,000 from additional state
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business units, and from our Application Services Division, for which we
recorded a $1.3 million charge in the fourth quarter of 1998 as discussed above.
Total service development and operations costs for our four initial business
units were $2.2 million for the year ended December 31, 1998 and $1.1 million
for the year ended December 31, 1997. This increase was primarily due to
$500,000 in costs incurred by one of our initial business units for work
performed for our Application Services Division, $200,000 from the business unit
that became operational in the latter part of 1997, and costs associated with
the development of new applications.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
costs increased to $9.2 million for the year ended December 31, 1999 from
$4.2 million for the year ended December 31, 1998. This increase was primarily
attributable to $700,000 in costs from our four initial business units,
$1.2 million from new business units that became operational in the second half
of 1998 and third quarter of 1999, $800,000 from our eFed division, and a
$2.2 million increase in corporate level expenses as a result of our overall
growth, including the addition of corporate level marketing, finance and
management personnel.
Selling, general and administrative costs increased to $4.2 million for the
year ended December 31, 1998 from $660,000 for the year ended December 31, 1997.
The increase in 1998 was primarily attributable to $2.4 million from our four
initial business units and $1.0 million from the addition of new state business
units.
Total selling, general and administrative costs for our four initial
business units were $3.2 million for the year ended December 31, 1998 and
$2.5 million for the year ended December 31, 1997. This increase was primarily
attributable to $300,000 in costs from the business unit that became operational
in the latter part of 1997 and an overall increase in insurance, recruiting and
payroll-related expenses attributable to the growth in the other initial
business units.
STOCK COMPENSATION. Stock compensation increased to $3.2 million for the
year ended December 31, 1999 from $600,000 for the year ended December 31, 1998.
This increase was due to compensation expense recognized on stock sales to
senior level executives in the first half of 1999 and on stock options granted
to senior level executives and other key employees in late 1998 and 1999. From
February 1999 through May 1999, we sold approximately 370,000 shares of common
stock to key employees and recognized approximately $1.6 million in compensation
expense for the amount by which the fair value of common stock sold exceeded the
amount paid. In addition, we recognized approximately $1.6 million in
compensation expense for the year ended December 31, 1999 relating to stock
options.
Stock compensation increased to $600,000 for the year ended December 31,
1998 from $400,000 for the year ended December 31, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$11.0 million for the year ended December 31, 1999 from $5.9 million for the
year ended December 31, 1998. This increase is due to an additional quarter of
intangible asset amortization in 1999 resulting from the Exchange Offer of
$1.9 million and the amortization of the software intangible and goodwill
resulting from our acquisition of eFed on September 15, 1999 of $2.8 million.
The remainder of the increase is attributable to additional depreciation
expense, as additions to property and equipment in 1999 were approximately
$1.8 million.
Depreciation and amortization increased to $5.9 million for the year ended
December 31, 1998 from $14,000 for the year ended December 31, 1997. The 1998
expense consisted primarily of amortization of goodwill and intangible assets
resulting from the completion of the Exchange Offer.
OPERATING LOSS. Operating loss for the year ended December 31, 1999 was
$14.5 million compared to $7.2 million for the year ended December 31, 1998.
Excluding non-cash charges for stock
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<PAGE>
compensation, depreciation and amortization, and the loss contract charges in
our Application Services Division, operating income would have been $800,000 for
the year ended December 31, 1999 compared to $500,000 for the year ended
December 31, 1998. Pro forma operating income would have been $1.0 million for
the year ended December 31, 1998.
OTHER INCOME, NET. We have placed the proceeds from our July 20, 1999
initial public offering in short-term, investment-grade, interest-bearing
marketable securities. For the year ended December 31, 1999, the increase in
other income, net, primarily reflects interest income earned on these
investments.
INCOME TAXES. We recognized an income tax benefit of approximately $1.4
million for the year ended December 31, 1999. This provision was partially
attributable to a taxable net loss in the current year. The income tax benefit
is less than the amount customarily expected because of expenses that are not
deductible for tax purposes including amortization of goodwill from the Exchange
Offer and certain stock compensation costs. In addition, certain temporary
differences gave rise to deferred tax assets relating to non-qualified stock
option expense and intangible asset amortization as a result of the eFed
acquisition. These deferred tax assets were partially offset by deferred tax
liabilities relating to depreciation, discount accretion on our marketable
securities, and amortization of contract intangibles as a result of our
March 31, 1998 Exchange Offer. We recognized an income tax provision of $659,000
for the year ended December 31, 1998. This provision was attributable to a
one-time $1.4 million provision for deferred taxes on our conversion to a C
corporation and to goodwill amortization relating to the Exchange Offer and a
portion of stock compensation being non-deductible for tax purposes. For the
year ended December 31, 1997, we were an S corporation and did not record income
tax expense.
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SELECTED HISTORICAL QUARTERLY OPERATING RESULTS
The following table presents certain historical consolidated statement of
operations data for our 12 most recent quarters ended December 31, 1999. Actual
results of operations data are presented for all periods. In management's
opinion, this unaudited information has been prepared on the same basis as the
audited annual financial statements and includes all adjustments, consisting
only of normal recurring adjustments, necessary for fair presentation of the
unaudited information for the quarters presented. You should read this
information in conjunction with the consolidated financial statements, including
the notes thereto, included elsewhere in this 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>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................. $ 200 $ 216 $ 285 $ 295 $ 361 $ 8,494 $ 9,773 $ 9,996
Cost of revenues......................... -- -- 2 3 1 6,152 7,347 7,711
------ ------ ------ ------ ------ ------- ------- -------
Gross profit............................. 200 216 283 292 360 2,342 2,426 2,285
------ ------ ------ ------ ------ ------- ------- -------
Operating Expenses:
Service, development and operations.... 44 48 53 79 135 676 806 2,268
Selling, general and administrative.... 111 162 145 242 325 1,381 1,219 1,317
Stock compensation..................... -- -- 146 224 -- 259 -- 310
Depreciation and amortization.......... 2 2 3 7 24 1,968 1,962 1,968
------ ------ ------ ------ ------ ------- ------- -------
Total operating expenses............... 157 212 347 552 484 4,284 3,987 5,863
------ ------ ------ ------ ------ ------- ------- -------
Operating income (loss).................. 43 4 (64) (260) (124) (1,942) (1,561) (3,578)
------ ------ ------ ------ ------ ------- ------- -------
Other income (expense):
Interest expense....................... -- -- -- -- -- (19) (31) (38)
Other income, net...................... -- -- -- -- -- 15 24 17
------ ------ ------ ------ ------ ------- ------- -------
Total other income (expense)........... -- -- -- -- -- (4) (7) (21)
Income (loss) before income taxes........ 43 4 (64) (260) (124) (1,946) (1,568) (3,599)
Income taxes............................. -- -- -- -- -- -- 370 289
------ ------ ------ ------ ------ ------- ------- -------
Net income (loss)........................ $ 43 $ 4 $ (64) $ (260) $ (124) $(1,946) $(1,938) $(3,888)
====== ====== ====== ====== ====== ======= ======= =======
Net income (loss) per share:
Basic and diluted...................... $ 0.00 $ 0.00 $(0.00) $(0.01) $(0.01) $ (0.05) $ (0.05) $ (0.09)
====== ====== ====== ====== ====== ======= ======= =======
Weighted average shares outstanding.... 20,532 20,536 20,826 21,527 22,679 41,946 42,066 42,066
====== ====== ====== ====== ====== ======= ======= =======
<CAPTION>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999
-------- -------- --------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues................................. $11,455 $13,311 $15,691 $16,509
Cost of revenues......................... 8,604 10,220 11,672 11,696
------- ------- ------- -------
Gross profit............................. 2,851 3,091 4,019 4,813
------- ------- ------- -------
Operating Expenses:
Service, development and operations.... 935 1,655 1,362 1,924
Selling, general and administrative.... 1,518 1,742 2,226 3,727
Stock compensation..................... 1,699 648 388 453
Depreciation and amortization.......... 2,001 1,987 2,421 4,559
------- ------- ------- -------
Total operating expenses............... 6,153 6,032 6,397 10,663
------- ------- ------- -------
Operating income (loss).................. (3,302) (2,941) (2,378) (5,850)
------- ------- ------- -------
Other income (expense):
Interest expense....................... (37) (50) (58) (24)
Other income, net...................... 17 22 1,130 1,325
------- ------- ------- -------
Total other income (expense)........... (20) (28) 1,072 1,301
Income (loss) before income taxes........ (3,322) (2,969) (1,306) (4,549)
Income taxes............................. (23) (466) 136 (1,063)
------- ------- ------- -------
Net income (loss)........................ $(3,299) $(2,503) $(1,442) $(3,486)
======= ======= ======= =======
Net income (loss) per share:
Basic and diluted...................... $ (0.08) $ (0.06) $ (0.03) $ (0.07)
======= ======= ======= =======
Weighted average shares outstanding.... 42,243 42,494 50,968 53,130
======= ======= ======= =======
</TABLE>
We expect results of operations to fluctuate significantly in the future as
a result of a variety of factors, many of which are outside of our control. See
"Risk Factors--Our quarterly operating results are volatile and difficult to
predict" and "--The seasonality of use for some of our electronic government
products and services may harm our fourth quarter results of each calendar year"
for more information on quarterly fluctuations and seasonality and how it
affects our business.
We believe that period-to-period comparisons of our results of operations
will not necessarily be meaningful and you should not rely on them as an
indication of future performance. It is possible that in some future periods our
results of operations may be below the expectations of public market analysts
and investors. In such event, the trading price of our common stock may decline.
LIQUIDITY AND CAPITAL RESOURCES
On July 20, 1999, we completed our initial public offering, selling an
aggregate of 10 million new shares of common stock for net proceeds of
approximately $109.4 million after deducting underwriting discounts, commissions
and expenses. The net proceeds have been placed in short-term, investment-
grade, interest-bearing marketable securities. In addition to $82.5 million of
short-term marketable securities, our liquid resources at December 31, 1999
include cash and cash equivalents of
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approximately $9.5 million and unused operating lines of credit totaling
approximately $2.5 million. Each of our business units maintains operating lines
of credit and equipment lines of credit on identical or substantially similar
terms and conditions from the same bank.
Net cash used in operating activities was approximately $2.3 million for the
year ended December 31, 1999 compared to net cash provided by operating
activities of $354,000 for the year ended December 31, 1998. The increase in
cash used in operations is primarily attributable to increased working capital
needs in the current year as a result of our overall growth. Corporate level
expenses increased in the current year as a result of strategic infrastructure
investments, including the addition of corporate level marketing, finance and
management personnel. We expect operating cash flow to be negative for at least
the first two quarters of 2000 as a result of our continued investment in
corporate infrastructure and growth strategies.
Investing activities resulted in net cash used of approximately
$97.5 million for the year ended December 31, 1999, reflecting the purchase of
marketable securities with the net proceeds from our initial public offering and
the $15.0 million cash outlay for our acquisition of eFed.
Cash flow provided by financing activities was $108.1 million for the year
ended December 31, 1999, reflecting the net proceeds received from our initial
public offering, a portion of which was used to pay down all amounts outstanding
under our operating lines of credit. In addition, approximately $719,000 was
received from employee stock purchase and stock option transactions.
We anticipate that our current resources, 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.
From time to time, we expect to evaluate the acquisition of businesses and
technologies that complement our business. Acquisitions may involve a cash
investment.
YEAR 2000 READINESS
Many currently installed computer systems and software products were coded
to accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results. We have not experienced any
significant software failures or the creation of erroneous results due to the
Year 2000 date change.
We have conducted an internal review of software systems that we use for
portal management, network monitoring, quality assurance, applications and
information and transaction processing. Because we developed most of these
software systems internally after the Year 2000 problem was already known, we
were largely able to anticipate four digit requirements. In connection with
ongoing reviews of our government portals, we also are reviewing our computer
infrastructure, including network equipment and servers. We did not experience
and do not anticipate any material problems with network equipment, as the
majority of our current configuration have been installed or upgraded with Year
2000 ready systems. Similarly, we purchased most of our servers within the past
four years. With this relatively current equipment, we do not anticipate
material Year 2000 readiness problems, and have replaced any servers that could
not be updated either in the normal replacement cycle or on an accelerated
basis.
We also have internally standardized the majority of our systems on a
Solaris operating system, which we are advised by our vendor is Year 2000 ready
after implementation of the latest service upgrades. We use multiple software
systems for internal business purposes, including accounting, electronic mail,
service development, human resources, customer service and support and sales
tracking systems. The majority of these applications have been purchased,
upgraded or internally developed within the last three years.
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We have made inquiries of vendors of systems we believe to be mission
critical to our business regarding their Year 2000 readiness. Although we have
received various assurances, we have not received affirmative documentation of
Year 2000 readiness from any of these vendors and we have not performed any
operational tests on our internal systems. We generally do not have contractual
rights with third-party providers should their equipment or software fail due to
Year 2000 issues. If this third-party equipment or software does not operate
properly with regard to Year 2000, we may incur unexpected expenses to remedy
any problems. These expenses could potentially include purchasing replacement
hardware and software. We have not determined the state of readiness of some of
our third-party suppliers of information and services, phone companies, long
distance carriers, financial institutions and electric companies, the failure of
any one of which could severely disrupt our ability to conduct our business.
However, we have not experienced any problems.
Concurrently with our analysis of our internal systems, we have surveyed
third-party entities with which we transact business, including government
clients, critical vendors and financial institutions, for Year 2000 readiness.
While no major issues have been discovered, we cannot be certain their systems
will not impact our operations. Our government clients typically have addressed
Year 2000 issues on an agency-by-agency basis under an overall Year 2000
program. We are monitoring regularly the Year 2000 progress of those agencies
that account for high transaction and revenue volumes through our portals. We
believe that many, though not all, of these agencies have completed Year 2000
readiness implementation. We cannot estimate the effect, if any, that non-ready
systems of these entities could have on our business, results of operations or
financial condition, and there can be no assurances that the impact, if any,
would not be material. However, we have not experienced any problems.
We anticipate that our review of Year 2000 issues will continue throughout
2000. The costs incurred to date to remediate our Year 2000 issues have not been
material. If any Year 2000 issues are uncovered with respect to these systems or
our other internal systems, we believe that we will be able to resolve these
problems without material difficulty, as replacement systems are available on
commercially reasonable terms. Presently, we have included the total remaining
cost of addressing Year 2000 issues within our existing information technology
budget. We did not experience any Year 2000 complications as a result of the
date change, and we do not anticipate any Year 2000 complications in the future
based on a number of assumptions. However, these assumptions may not be
accurate, which could cause our actual results to differ materially from those
anticipated. In view of our Year 2000 review and remediation efforts to date,
the recent passing of the date change to the year 2000, the recent development
of a number of our products and services and the recent installation of our
networking equipment and servers, we do not consider Year 2000 contingency
planning to be necessary.
Our applications operate in complex network environments and directly and
indirectly interact with a number of external hardware and software systems. We
are unable to predict to what extent our business may be affected if our systems
or the systems that operate in conjunction with our systems experience a
material Year 2000 failure. The most likely worst case scenarios are that the
Internet infrastructure fails or the internal systems of our government clients
fail, either of which would render us unable to provide products and services,
which would harm our business. Additionally, known or unknown errors or defects
that affect the operation of our software and systems could result in delay or
loss of revenue, interruption of services, cancellation of contracts and
memberships, diversion of development resources, damage to our reputation,
increased service and warranty costs, and litigation costs, any of which could
harm our business, results of operations and financial condition.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relate to the
increase or decrease in the amount of interest income we can earn on our
short-term investments in marketable debt securities and cash balances. Because
our investments are in short-term, investment-grade, interest-bearing
securities, we are exposed to minimal risk on the principal of those
investments. We ensure the safety and preservation of our invested principal
funds by limiting default risks, market risk and investment risk. We do not use
derivative financial instruments.
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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 accomplish this currently through three
different businesses: our portal business, our eFed business and our NIC
Conquest business. In our portal business, we enter into contracts with
governments and on their behalf design, build and operate Internet-based
portals. These portals consist of Web sites and applications that we build,
which allow businesses and citizens to access government information online and
complete transactions, including applying for a permit, retrieving driver's
license records or filing a form or report. Our unique business model allows us
to reduce our government clients' financial and technology risks and obtain
revenues by sharing in the fees we generate from electronic government services.
Our clients benefit because they gain a centralized, customer-focused presence
on the Internet. Businesses and citizens gain a faster, more convenient and more
cost-effective means to interact with governments.
Currently, we provide Internet-based electronic government portal services
for nine states and one local government. In addition, the states of Hawaii and
Idaho have recently selected us as an electronic government services provider,
and we have entered into contracts to implement our services in those states. We
typically enter into three to five year contracts with our government clients
and manage operations for each contractual relationship through separate
subsidiaries that operate as decentralized business units with a high degree of
autonomy. We intend to increase our revenues by replicating our model in other
states, municipalities, federal agencies and international entities, and by
delivering new products and services and expanding markets within our existing
contractual relationships.
Our eFed subsidiary is a leading provider of Internet-based electronic
procurement solutions to governments. eFed designs, develops and manages online
procurement software and services for federal and state markets. eFed's
procurement solution allows buyers to search, compare and buy products and
services across multiple contracts using the Internet. It also allows senior
government procurement officials to better manage and reduce expenses associated
with the procurement process.
On January 14 of this year, eFed and Bank of America Corporation announced a
plan to create a limited liability company to offer state and local governments
the first Web-based business-to-business procurement, payment and reconciliation
solution. By bundling eFed's software with Bank of America's government purchase
cards, the new company will allow customers to place orders online through their
preferred suppliers, request a quote from businesses for services, process
transactions, initiate payments and reconcile accounts.
Our NIC Conquest business was formed in January 2000 by combining our
Application Services Division, previously known as our Application Development
Division, with Conquest Softworks, LLC. Both of these businesses provided
software applications and services for electronic filings and document
management solutions for government. Our NIC Conquest business focuses on
Secretaries of State, whose offices are state governments' principal agencies
for corporate filings.
On February 16, 2000, we signed a definitive agreement to acquire SDR
Technologies, which is the leading developer of online elections and ethics
filing systems. In addition, SDR has developed a number of Internet-based
applications for tax filings, business filings, professional licensing, and
automobile registrations.
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INDUSTRY BACKGROUND
THE MARKET FOR GOVERNMENT-TO-BUSINESS AND GOVERNMENT-TO-CITIZEN TRANSACTIONS
Government regulation of commercial and consumer activities requires
billions of transactions and exchanges of large volumes of information between
government agencies and businesses and citizens. These transactions and
exchanges include driver's license records retrieval, motor vehicle
registrations, tax returns, permit applications and requests for
government-gathered information. Government agencies typically defray the cost
of processing these transactions and of storing, retrieving and distributing
information through a combination of general tax revenues, service fees and
charges for direct access to public records. According to the official
statistics of the U.S. Census Bureau, federal, state and local governments
collected a total of $451 billion in charges and miscellaneous fees from
businesses and citizens in 1995. Additionally, states generated $26 billion in
fees for motor vehicle, corporation and other licenses in 1995.
THE LIMITS OF TRADITIONAL GOVERNMENT TRANSACTION METHODS
Traditionally, government agencies have transacted, and in many cases
continue to transact, with businesses and citizens using processes that are
inconvenient and labor-intensive, require extensive paperwork and use large
amounts of scarce staff resources. Transactions and information requests are
often made in person or by mail and are processed manually, increasing the
potential for errors and the need for numerous revisions and follow-up. Even
newer methods, including telephone response systems, tape exchanges and dial-up
computer networks, rely on multiple systems and potentially incompatible data
formats, and require significant expertise and expenditures to introduce and
maintain. As a result, businesses and citizens often have no choice but to face
costly delays to complete essential tasks. These delays include waiting in line
at a government agency, waiting for answers by telephone or waiting for
responses by mail. Businesses and citizens encounter further inconvenience and
delay because they usually can work with government agencies only during normal
business hours. Even when electronic alternatives are available, they often
require a cumbersome process of multiple contacts with different government
agencies. Increases in the level of economic activity and in the population have
exacerbated these problems and increased the demand for new services.
GROWTH OF THE INTERNET AND ELECTRONIC COMMERCE
The Internet has emerged as a global medium, enabling millions of people
worldwide to share information, communicate and conduct business electronically.
International Data Corporation, a market research firm, estimates that the
number of Web users will grow from approximately 142 million worldwide in 1998
to over 502 million worldwide by the end of 2003. This growth is expected to be
driven by the large and growing number of PCs installed in homes and offices,
the decreasing cost of PCs, easier, faster and cheaper access to the Internet,
improvements in network infrastructure, the proliferation of Internet content
and the increasing familiarity with and acceptance of the Internet by
governments, businesses and consumers. In addition, the volume of electronic
commerce has grown in parallel with the Internet itself. According to
International Data Corporation, transactions on the Internet are expected to
increase from approximately $32 billion in 1998 to approximately $426 billion in
2002. Business-to-business usage is also growing rapidly. Forrester Research, a
market research firm, estimates that business-to-business electronic commerce
will grow from $17 billion in 1998 to $327 billion in 2002.
EMERGENCE OF THE INTERNET AS A MEDIUM FOR ELECTRONIC GOVERNMENT
The growing acceptance of the Internet and electronic commerce presents a
significant opportunity for the development of electronic government, in which
government agencies conduct transactions and distribute information over the
Internet. By using the Internet, government agencies can increase the
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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;
- a lack of a marketing function that assures that services are designed to
meet the needs of businesses and citizens and that they are aware of their
availability; and
- security and privacy concerns that are amplified by the confidential
nature of the information and transactions available from and conducted
with governments and the view that government information is part of the
public trust.
We believe traditional private sector Internet services generally do not
address the unique needs of electronic government. Most Internet service
providers do not fully understand and are not well-equipped to deal with the
unique political and regulatory structures of governments. These providers,
including large systems integrators, typically take a time-and-materials,
project-based pricing approach that may not adequately balance the
responsiveness to change of a successful Internet business with the longer time
horizons and extended commitment periods of government projects.
WHAT WE PROVIDE TO GOVERNMENTS
We provide an Internet-based electronic government service that meets the
needs of governments, businesses and citizens 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, build and operate portals for each of our government clients that are
designed to meet their needs as well as
37
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those of businesses and citizens. Our portals are designed to create a single
point of presence on the Internet for our government clients that allows
businesses and citizens to reach the Web site of every government agency in a
specific jurisdiction from one online location. We employ a common look and feel
in the Web sites of all government agencies associated with our electronic
government portals and make them useful, appealing and easy to use. In addition
to developing and managing the government portal, we develop applications that,
in one location on the Internet, allow businesses and citizens to complete
processes that have traditionally required separate interaction with several
different government agencies, including establishing and obtaining required
permits for a new business enterprise. These applications also permit businesses
and citizens to conduct transactions with government agencies and to obtain
information from them 24 hours per day, seven days per week. We also help our
government clients to generate awareness and educate businesses and citizens
about the availability and potential benefits of electronic government services.
Similarly, our eFed business allows governments to implement procurement
solutions from a one-stop Internet location.
COMPELLING FINANCIAL MODEL FOR GOVERNMENTS
We allow governments to implement comprehensive electronic government
services at minimal cost and risk. We take on the responsibility and cost of
designing, building and operating government portals and applications, with
minimal use of government resources. We employ our technological resources and
accumulated expertise to help governments avoid the risks of selecting and
investing in new technologies. We implement our electronic government services
rapidly, efficiently and accurately, using our well-tested and reliable
infrastructure and processes. Once we establish a government portal and
associated applications, we manage transaction flows and fund ongoing costs from
the fees received from information accessed and transactions conducted through
the portal. Our eFed business, while traditionally deriving revenues from
software licensing and maintenance, also offers governments a transaction-based
pricing model.
FOCUSED RELATIONSHIP WITH GOVERNMENTS
We form relationships with governments by developing an in-depth
understanding of their interests and then aligning our interests with theirs. By
tying our revenues to the development of successful services and applications,
we work to assure government agencies and constituents that we are focused on
their needs. Moreover, we have pioneered, and encourage our clients to adopt a
model for electronic government policymaking that involves the formation of
oversight boards that bring together interested government agencies, business
and consumer groups and other important government constituencies in a single
forum. We work within this forum to maintain constant contact with government
agencies and constituents and strive to ensure their participation in the
development of electronic government services. We attempt to understand and
facilitate the resolution of potential political disputes among these
participants to maximize the benefits of our services. We also design our
services to observe relevant privacy and security regulations, so that they meet
the same high standards of integrity, confidentiality and public service as
government agencies would observe in their own actions.
OUR STRATEGY
Our objective is to strengthen our position as the leading provider of
Internet-based electronic government services. Key strategies to achieve this
objective include:
CONTINUING TO ADD NEW STATE AND FEDERAL GOVERNMENT CLIENTS
We intend to increase the number of our government clients by leveraging our
relationships with current government clients, our reputation for providing
proven electronic government services and our technology and government process
knowledge base. Our portals and our procurement and filing
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applications are designed to deliver our services quickly, easily and
cost-effectively to new federal and state governments and agencies. We intend to
continue marketing our products and services to new states, multi-state
cooperative organizations and federal agencies. Our expansion efforts include
developing relationships and sponsors throughout an individual government
entity, pursuing strategic technology alliances, making presentations at
conferences of government executives with responsibility for information
technology policy, and developing contacts with organizations that act as forums
for discussions between these executives.
BROADENING PRODUCT AND SERVICE OFFERINGS
We plan to continue our development of new products and services designed
for efficient online transactions with federal, state and local government
agencies, enabling government agencies to interact more effectively online with
businesses, citizens and other government agencies. We will increase our
development efforts by leveraging our experience, developing strategic
technology alliances and deepening the knowledge base that we have developed
from our operations. We will continue to work with government agencies,
professional associations and other organizations to better understand the
current and future needs of our customers.
INCREASING TRANSACTIONAL REVENUES FROM OUR GOVERNMENT PORTALS AND
PROCUREMENT AND FILING APPLICATIONS
We intend to increase transactional revenues on our government portals and
through our procurement and filing systems through both expanded marketing
initiatives and new product offerings. We will continue to work with our
government clients to create awareness of the online alternatives to traditional
government interaction, through initiatives such as informational brochures,
government voicemail recordings and inclusion of Web site information on
government invoices. In addition, we will continue to update our portals to
highlight new government service information provided on the portals. We also
intend to expand our revenues through the development and marketing of new
products and services, such as transaction-based procurement and filing systems.
We plan to work with professional associations to directly and indirectly
communicate to their members the potential convenience, ease of use and other
benefits of the electronic government services our portals offer.
CONTINUING TO DIVERSIFY OUR REVENUE STREAMS ACROSS NUMEROUS BUSINESS LINES
In addition to our portal business, which provided the vast majority of our
revenues in 1999, we are making investments in our eFed and our NIC Conquest
businesses to expand their respective operations. eFed derived the majority of
its revenues in 1999 from software licensing and maintenance. Currently, our
eFed business is pursuing a growth strategy based increasingly on transaction
fees for procurements undertaken on the eFed system. Our NIC Conquest business
derives its revenues from fixed-price contracts with governments. These
contracts are expected to carry higher margins than our portal business and to
be obtained through shorter sales cycles.
Due to our increasing scale and market penetration, we are also able to
provide specific fee-based product solutions to governments who do not wish to
pursue an enterprise-wide portal solution. We expect these revenues, while not
transaction-driven, to derive from shorter sales cycles and result in higher
margins than our portal business.
FURTHER PENETRATING LOCAL MARKETS
Currently we have one contract for an enterprise-wide portal in a local
government, Indianapolis/ Marion County, Indiana. We intend to increase our
number of major local clients by offering both our enterprise portal solution as
well as individual application solutions provided on a fee basis. We also expect
to offer procurement solutions through eFed to major localities and election
filing applications on a local basis through SDR Technologies.
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EXPANDING OUR INTERNATIONAL PRESENCE
We believe our enterprise-wide model and its financial attractiveness have
significant applicability to international governments. We intend to expand
internationally, most likely through the transfer of our technology, know-how,
track record, capital and business model into joint ventures involving entities
whose trust relationships in their home markets resemble our own.
CONTINUING TO PURSUE NEW ACQUISITIONS AND NEW STRATEGIC ALLIANCES
We intend to pursue acquisitions of companies and strategic technology
alliances that we believe will increase the number of products and services we
can offer to government clients and the citizens and businesses that interact
with them. We expect to pursue acquisitions of businesses that will expand our
research and development team and create opportunities to add new state, local
or federal government agency clients. We also intend to pursue strategic
technology and business alliances that will enable us to further develop
business relationships with potential clients and/or improve our infrastructure
and our operating platforms.
GOVERNMENT CONTRACTS
OUR PORTAL BUSINESS
Through our portal business, we have contracts with 12 state and local
government agencies. We currently provide our government portal services to nine
states and one city-county government through the following portals:
<TABLE>
<CAPTION>
YEAR
SERVICES POPULATION
PORTAL NAME COMMENCED SERVED WEB ADDRESS
- ---------------------------------------------------- --------- ---------- -----------------
<S> <C> <C> <C>
Utah Interactive, Inc............................... 1999 2,000,000 www.state.ut.us
Information Resource of Maine....................... 1999 1,244,000 www.state.me.us
Information Network of Arkansas..................... 1997 2,538,000 www.state.ar.us
CivicNet (Indianapolis and Marion County,
Indiana).......................................... 1997 813,000 www.civicnet.net
IOWAccess Network................................... 1997 2,862,000 www.iowaccess.org
Virginia Information Providers Network.............. 1997 6,791,000 www.vipnet.org
GeorgiaNet Authority................................ 1996 7,642,000 www.state.ga.us
Access Indiana Information Network.................. 1995 5,899,000 www.state.in.us
Nebraska Online..................................... 1995 1,663,000 www.state.ne.us
Information Network of Kansas....................... 1992 2,629,000 www.state.ks.us
</TABLE>
We have also recently entered into contracts with the states of Hawaii and
Idaho.
Each of these government portals operates under a separate contract, which
generally has an initial term of three to five years. Under a typical contract,
a government agrees that:
- we have the right to develop a comprehensive Internet portal owned by that
government to deliver electronic government services;
- the portal we establish is the primary electronic and Internet interface
between the government and its citizens;
- it supports the use of the portal for all commercially valuable
applications in order to support the operation and expansion of the
portal;
- it sponsors access to agencies for the purpose of entering into agreements
with these agencies to develop applications for their data and
transactions and to link their Web pages to the portal; and
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- it establishes a policy making and fee approval board, which typically
includes agency members, business customers and others, to establish
prices for products and services and to set other policies.
In return, we agree to:
- develop, manage, market, maintain and expand that government's portal and
information and electronic commerce applications;
- assume the investment risk of building and operating that government's
portal and applications without the direct use of tax dollars;
- bear the risk of collecting transaction fees; and
- have an independent audit conducted upon that government's request.
Under our contracts with Georgia and Iowa, we provide consulting,
development and management services for these government portals predominantly
under a fixed-price model. If future contracts follow this fixed-price model,
our revenues and profits could suffer as a result of cost overruns or the
failure to realize potential revenue increases from increased demand for
fee-based transactions.
We own all the software we develop under our government portal contracts.
After completion of the initial contract term, our government clients receive a
perpetual, royalty-free license to use the software only in their own portals.
We also enter into separate agreements with various agencies and divisions
of our government clients for the sale of electronic access to public records
and to conduct other transactions. These agreements preliminarily establish the
pricing of the electronic transactions and data access services we provide and
the allocation of revenues between us and the agency. These terms are then
submitted to the policy making and fee approval board for approval.
OUR EFED BUSINESS
eFed is the only commercial off-the-shelf Web-based procurement solution
designed specifically for governments. eFed's software and supplier network
allows government buyers to order products and services from multiple contracts
and commercial sources, based on value, product information and contract terms
and conditions. It is the leading provider of electronic procurement solutions
that enable buyers to compare, negotiate and purchase products and services with
speed, ease and accuracy.
OUR NIC CONQUEST BUSINESS
Through the combination of our Application Services Division with Conquest
Softworks, LLC, we now hold 65% of the outstanding stock of the combined entity.
NIC Conquest develops and licenses software applications with the following ten
states and four local governments for Web-enabling the back-office systems and
processes for business-to-government filings:
<TABLE>
<CAPTION>
STATES COUNTIES
- ------ --------
<S> <C>
Arkansas Apache County, Arizona
Colorado Greenlee County, Arizona
Indiana LaPaz County, Arizona
Kansas Oklahoma County, Oklahoma
Montana
Nebraska
Oklahoma
South Dakota
Texas
Wisconsin
</TABLE>
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<PAGE>
SDR TECHNOLOGIES
On February 16, 2000, we signed a definitive agreement to acquire SDR
Technologies, which is the leading developer of online elections and ethics
filing systems. SDR's government clients include Arkansas, California, Hawaii,
Illinois, Louisiana, Michigan, Missouri, Oklahoma, Texas, Washington,
Washington, D.C. and British Columbia.
REVENUES
We derive revenues from five sources:
- the sale of electronic access to public records;
- subscription and transaction-based fees;
- software licensing and maintenance fees;
- fees for managing electronic government operations; and
- fees and charges for government application development.
In ten of our 14 existing major operations, our revenues are generated from
transactions, which generally include the sale of electronic access to public
records on behalf of the government and the collection of subscription and
transaction-based fees. Our transaction-based fees consist of filing fees and
access fees, but do not include subscription fees. Among the highest volume,
most commercially valuable products and services we offer are access to motor
vehicle records and corporate filings, which accounted for over 89% of our
revenues in 1999. ChoicePoint, which resells these records to the auto insurance
industry, accounted for approximately 67% of our revenues in 1999.
In our other four major operations, revenues are derived primarily from
software licensing and maintenance fees, management fees for certain government
operations and fees for application development. In 1999, these four operations
accounted for less than 8% of our revenues.
OUR PRODUCTS AND SERVICES
OUR PORTAL BUSINESS
Each of our business units works with its government clients to implement,
develop, manage and enhance a comprehensive, Internet-based portal to deliver
electronic government services to their constituents. Citizens and businesses
use these portals to gain access to Web-based interactive applications in order
to conduct transactions with the government and gain access to public service
information.
Our portals are designed to provide user-friendly and convenient access to
useful government information and services and include numerous fee-based
transaction services and applications that we have developed. These fee-based
services and applications allow businesses and citizens to access constantly
changing government information and to file necessary government documents,
including retrieval of driver's license records, motor vehicle registrations,
tax returns, and permit applications. The types of products and services and the
fees charged vary in each jurisdiction according to the unique preferences of
that jurisdiction. In an effort to reduce the frustration businesses and
citizens often encounter when dealing with multiple government agencies, we
handle cross-agency communications whenever feasible and shield businesses and
citizens from the complexity of older, mainframe-based systems that agencies
commonly use, creating an intuitive and efficient interaction with governments.
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Some of the products and services we currently offer in different
jurisdictions include:
<TABLE>
<CAPTION>
PRODUCT OR SERVICE DESCRIPTION PRIMARY USERS
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
Driver's License Records Retrieval Offers controlled instant look-up of Insurance companies
driving records by license number,
name and birth date, or social
security number. Includes commercial
licenses.
Vehicle Title, Lien & Registration Provides controlled interactive Insurance companies, lenders
title, registration and lien
database access.
BillWatch (Lobbyist in a Box) Allows the user to monitor state Attorneys, lobbyists
legislative activity. Users can tag
bills by key word or bill number,
and BillWatch-C- will send an e-mail
when a change occurs in the status
of the bill.
Health Professional License Services Allows users to search databases on Hospitals, clinics, health insurers,
several health professions. citizens
Secretary of State Searches Allows users to access filings of Attorneys, lenders
corporations, partnerships and other
entities, including charter
documents.
UCC Searches Permits searches of the UCC Attorneys, lenders
database.
Professional License Renewal Permits professionals to renew their Attorneys, doctors, other licensed
licenses on line using a credit professionals
card.
Motor Fuel EDI Project Allows motor fuel carriers to file Motor fuel carriers
their tax reports electronically.
Sales/Use Tax Filing Allows Sales and Use Tax filers to Retailers
file the required forms online. The
electronic forms handle the
computation in the form and write
the data out so that it can be
entered into the Department of
Revenue's databases without the need
for the information to be re-keyed
in the Department's office.
Online Birth Certificate Processes an online request for an Citizens
official birth certificate, charging
the user's credit card.
</TABLE>
One of the largest consumers of our products and services is ChoicePoint, a
data reseller that uses our electronic government portals to access motor
vehicle records for sale to the auto insurance industry. Currently, ChoicePoint
has entered into contracts with our subsidiaries, or the networks our
subsidiaries operate, to request these records from the states of Arkansas,
Indiana, Kansas, Nebraska, Virginia, Utah and Maine. Under the terms of these
contracts, we provide ChoicePoint with driver's license and traffic records that
vary by contract, for fees that currently range from $3.00 to $11.00 per record
requested. We collect the entire fee, of which a certain portion is remitted to
the state. Each of these contracts may be terminated at any time after 60-days'
notice and may be terminated immediately at the option of any party upon a
material breach of the contract by the other party. Furthermore, each of these
contracts is immediately terminable if the state statute allowing for the public
release of these records is repealed.
In addition to these products and services, we also provide customer service
and support. Our customer service representatives serve as a liaison between our
government clients and businesses and citizens. Representatives are available
24 hours a day, seven days a week to address any problems that might arise on
the portals we operate.
OUR EFED BUSINESS
eFed provides its customers a procurement solution which combines commercial
off-the-shelf software with major bank purchase card programs, creating an
end-to-end procurement product. eFed's
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software is structured to adhere to strict government business rules while its
workflow characteristics remain intuitive and user-friendly. Because it is based
on commercial off-the-shelf technology, the eFed product requires less
customization than competing products and is therefore easier and less expensive
to install.
OUR NIC CONQUEST BUSINESS
Our NIC Conquest business develops and delivers applications that improve
the back-office administration of government records and better enable
electronic filing and distribution. These applications often are highly
customized for specific government or agency needs, and have been developed
under separate contracts outside of our core contractual arrangements with
governments.
SALES AND MARKETING
We have two primary sales and marketing goals:
- to develop new sources of revenue through new government relationships;
and
- to retain and grow our revenue streams from existing government
relationships.
We have well-established sales and marketing processes for achieving these
goals, which are managed by our national market development division and a
marketing department within each business unit.
DEVELOPING NEW SOURCES OF REVENUE
We focus our new government sales and marketing efforts on increasing the
number of state, local, federal and international governments and government
agencies that are receptive to a public/private model for delivering information
and/or completing transactions over the Internet. We meet regularly with
interested government officials to educate them on the public/private model and
its potential advantages for their jurisdictions. Members of our management team
are also regular speakers at conferences devoted to the application of Internet
technologies to facilitate the relationship between governments and their
citizens. In states where we believe interest is significant, we seek to develop
supportive, educational relationships with professional and business
organizations that may benefit from the government service improvements our
Internet delivery strategy can produce.
Once a government decides to implement a public/private model for managing
Internet access to resources and transactions, it typically starts a selection
process that operates under special rules that apply to government purchasing.
These rules typically require open bidding by possible service providers against
a list of requirements established by the government under existing procedures
or procedures especially created for the Internet provider selection process. We
respond to requests for bids with a proposal that outlines in detail our
philosophy and plans for implementing our business model. Once our proposal is
selected, we enter into negotiations for a contract. 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 governments
over the Internet.
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Although each government's unique political and economic environment drives
different marketing and development priorities, we have found many of our core
applications to be relevant across multiple jurisdictions. Each of our business
units' operations has a director of marketing and additional marketing staff
that regularly meet with government, business and consumer representatives to
discuss potential new services. We also promote the use of existing services to
existing and new customers through speaking engagements and targeted advertising
to organizations for professionals, including lawyers, bankers and insurance
agents, that have a need for regular interaction with government.
We have recently implemented a centralized marketing function to identify
products and services that have been developed and implemented successfully for
one government and replicate them in other jurisdictions.
ACQUISITIONS AND STRATEGIC ALLIANCES
Since August 1999, we have completed or announced our intention to complete
the acquisition of two companies, eFed and SDR, and strategic alliances with two
companies, Oracle and Bank of America. eFed is a leading provider of online
government procurement services to federal, state and local governments, and SDR
is a leading provider of online elections and ethics filing systems. Oracle is a
leading provider of electronic commerce services, and we intend to implement
Oracle's OracleO Internet Platform for our electronic government solutions. Bank
of America will facilitate the payment processing aspect of our
business-to-business procurement, payment and reconciliation solution.
TECHNOLOGY AND OPERATIONS
Over the past eight years, we have made substantial investments in the
development of Internet-based applications and operations specifically designed
to allow businesses and citizens to transact with and receive information from
governments. The scope of our technological expertise includes network
engineering as it applies to the interconnection of government systems to the
Internet, Internet security, Web-to-legacy system integration, Web-to-mainframe
integration, database design, Web site administration and Web page development.
Within this scope, we have developed and implemented a comprehensive Internet
portal framework for governments, and a broad array of stand-alone services
using a combination of our own proprietary technologies and commercially
available, licensed technologies. We believe that our technological expertise,
coupled with our in-depth understanding of governmental processes and systems,
has made us adept at rapidly creating tailored portal services that keep our
clients on the forefront of electronic government.
Each of our government clients has unique priorities and needs in the
development of its electronic government services. Over 60% of our employees
work in the Internet services and applications development and operations areas,
and nearly all are focused on a single government client's application needs.
Our employees develop an understanding of a specific government's application
priorities, technical profiles and information technology personnel and
management. At the same time, all of our development directors are trained by
experienced technical staff from our other operations on our standard technical
framework, and there is frequent and growing communication and cooperation,
which ensures that our government clients can make use of the most advanced
electronic government services we have developed throughout our organization.
Most of our portals and applications are physically hosted in each
jurisdiction in which we operate on servers that we own or lease. We also
provide links to sites that are maintained by government agencies or
organizations that we do not manage. Our business units provide uninterrupted
24 hour per day, seven day 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.
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Finally, we have designed our government portals and applications to be
compatible with virtually any existing system and to be rapidly deployable. We
have implemented a government portal in as little as seven days from the award
of a contract, and have begun generating revenues from data access transactions
in as little as 30 days. To enable this level of speed and efficiency, we
license commercially available technology whenever possible and focus on the
integration and customization of these off-the-shelf hardware and software
components when necessary. We expect that commercially licensed technology will
continue to be available at reasonable costs.
COMPETITION
We believe that the principal factors upon which our businesses compete are:
- understanding of government needs;
- the quality and fit of electronic government services;
- the speed and responsiveness to the needs of businesses and citizens; and
- cost-effectiveness.
We believe we compete favorably with respect to the above-listed factors. In
most cases, the principal substitute for our services is a government-designed
and managed service that integrates other vendors' technologies, products and
services. Companies that have expertise in marketing and providing technical
electronic services to government entities may begin to compete with us by
further developing their services and increasing their focus on this piece of
their business and market shares. Examples of companies that may compete with us
are the following:
- large systems integrators, including American Management Systems, Inc.,
Sapient Corporation and SAIC;
- traditional software applications developers, including Microsoft and
Oracle;
- traditional consulting firms, including IBM, KPMG Peat Marwick,
Deloitte & Touche and Andersen Consulting;
- providers of ecommerce applications, including Ariba, Commerce One,
PurchasePro.com and Digital Commerce Corporation;
- consumer-oriented government portal companies, such as govWorks.com and
EZgov.com; and
- Web service companies, including Whittman-Hart/USWeb, AppNet
Systems, Inc., and Verio Inc.
Many of our potential competitors are national or international in scope and
may have greater resources than we do. These resources could enable our
potential competitors to initiate severe price cuts or take other measures in an
effort to gain market share. Additionally, in some geographic areas, we may face
competition from smaller consulting firms with established reputations and
political relationships with potential government clients. If we do not compete
effectively or if we experience any pricing pressures, reduced margins or loss
of market share resulting from increased competition, our business and financial
condition may be adversely affected.
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
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<PAGE>
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 operate the portals themselves, or inadvertently allow our
intellectual property or other information to fall into the hands of third
parties, including our competitors.
EMPLOYEES
As of December 31, 1999, we had 185 full-time employees, of which 28 were
working in our corporate operations and 157 were located in our business units.
Of our employees, 40 were in sales and marketing, 100 were in service
development and operations and 45 were in finance, business development and
administration. Our future success will depend, in part, on our ability to
continue to attract, retain and motivate highly qualified technical and
management personnel, for whom competition is intense. From time to time, we
also employ independent contractors to support our research and development,
marketing, sales and support and administrative organizations. Our employees are
not covered by any collective bargaining agreement, and we have never
experienced a work stoppage. We believe that our relations with our employees
are good.
FACILITIES
Our principal administrative facility occupies a total of approximately
3,000 square feet at 12 Corporate Woods, 10975 Benson Street, Suite 390,
Overland Park, Kansas 66210. All of our subsidiaries also lease their
facilities. We believe our current facilities are adequate to meet our needs for
the foreseeable future. We do not anticipate acquiring property or buildings in
the foreseeable future.
LEGAL PROCEEDINGS
We may from time to time become a party to various legal proceedings arising
in the ordinary course of our business. However, we are not currently subject to
any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers and directors as of February 18, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ----------------------------------------------------------
<S> <C> <C>
Jeffery S. Fraser....... 40 Chairman and Director
James B. Dodd........... 42 President, Chief Executive Officer and Director
Kevin C. Childress...... 41 Chief Financial Officer
William F. Bradley, 44 Executive Vice President--Policy and Legal, and General
Jr...................... Counsel (1)
Samuel R. 57 Executive Vice President--Operations and Administration
Somerhalder.............
Harry H. Herington...... 39 Executive Vice President--State Operations (2)
Joseph Nemelka.......... 31 Executive Vice President--Marketing Development
Terrence L. Parker...... 35 Chief Technology Officer
Ray G. Coutermarsh...... 41 Executive Vice President--Local Markets
John L. Bunce, Jr....... 40 Director
Daniel J. Evans......... 75 Director
Ross C. Hartley......... 52 Director
Patrick J. Healy........ 32 Director
Peter B. "Pete" 66 Director
Wilson..................
</TABLE>
- ------------------------
(1) Mr. Bradley also serves as our Secretary.
(2) Mr. Herington also serves as our Assistant Secretary.
JEFFERY S. FRASER, one of our founders, has served as our Chairman since
April 1998 and as one of our directors since our formation. Mr. Fraser also
served as our Chief Executive Officer from April 1998 until November 1999 and as
our President from April 1998 to December 1998. He was also the 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 Executive Officer and
director since November 1999. He also served as our President, Chief Operating
Officer and a director from January 1999 to December 1999. Prior to joining us,
Mr. Dodd spent 14 years with 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 at
the investment banking firm of 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.
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WILLIAM F. BRADLEY, JR. has served as our Secretary since May 1998, General
Counsel since July 1998 and Executive Vice President--Policy and Legal since
January 1999. In addition, Mr. Bradley served as a director between May 1998 to
February 1999, and he currently serves as Chief Executive Officer and a director
of our subsidiary, Indiana Interactive, Inc. 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.
SAMUEL R. SOMERHALDER has served as our Executive Vice President--Operations
and Administration since January 1999. From May 1998 to November 1998,
Mr. Somerhalder served as one of our directors. Prior to that, he served as
President, Chief Executive Officer and a director of our subsidiary, Nebraska
Interactive, Inc., from January 1995 until August 1999. From November 1994 to
April 1996, he also served as Secretary of Nebraska 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--State
Operations 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. From September 1995 to September 1996, Mr. Herington served as the
Vice President 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.
JOSEPH NEMELKA has served as our Executive Vice President--Marketing
Development since November 1999. Mr. Nemelka also served as Chief Executive
Officer and a director of our subsidiary, Utah Interactive, Inc. Mr. Nemelka
also served as the President of our Market Development Division from October
1996 to July 1999. From July 1997 to March 1999, he served as President and
Chief Executive Officer of Arkansas Information Consortium, Inc. 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.
TERRENCE L. PARKER has served as our Chief Technology Officer since November
1999. Prior to joining us, Mr. Parker served Sprint Corporation for five years
in various technical capacities, ultimately becoming Senior Director of Next
Generation Products and Applications. As Senior Director at Sprint, Mr. Parker
was responsible for developing Internet-enabled services for its broadband
business. Additionally, Mr. Parker was the principal architect of Sprint
Consumer ISP technical operations.
RAY G. COUTERMARSH has served as our Executive Vice President--Local Markets
since February 2000. Prior to joining our company, Mr. Coutermarsh was the
National Partner in charge of KPMG Peat Marwick LLP's Public Sector electronic
commerce practice, where he was responsible for launching electronic commerce
solutions targeted at strategic market segments in high technology and
government. Prior to that, Mr. Coutermarsh was responsible for KPMG's electronic
commerce vendor alliance strategy, working with such technology leaders as
BroadVision and Microsoft. Mr. Coutermarsh earned a B.S. in business
administration from Plymouth State College, a member of the University of New
Hampshire systems, and an MBA from New Hampshire College.
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
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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, 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.
Governor Evans is the chairman of and has served as a consultant for Daniel J.
Evans Associates Consulting, a consulting company in Washington, since
May 1989. Governor 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. Governor 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.
PETER B. "PETE" WILSON has served as one of our directors since July 1999.
Governor Wilson served as Governor of the State of California from 1991 until
1999. Prior to serving as Governor of California, Governor Wilson served in the
U.S. Senate for eight years, representing the State of California. He has also
served as the mayor of San Diego, California. Governor Wilson is a member of The
Irvine Company board of directors and is on the Thomas Weisel Partners board of
advisors. He received his undergraduate degree from Yale University and his law
degree from Boalt Hall (University of California at Berkeley). After graduating
from Yale, Governor Wilson spent three years in the Marine Corps as an infantry
officer.
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 discretion of the board of directors.
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
ten. 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.
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BOARD COMMITTEES
The board of directors has established a compensation committee and an audit
committee. The compensation committee, consisting of Messrs. Bunce, Fraser,
Hartley and Healy, 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. Evans, Hartley and Wilson
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 January 31, 2000, a portion of our outstanding common stock, totaling
27,469,884 shares and representing approximately 51.6% 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 2,905,378 shares of
common stock in this offering, which will reduce the number of shares it holds
to 24,564,506, or approximately 42.9% of the 57,324,310 share of our common
stock to be outstanding after the offering. A total of 18,267,220 shares, or
16,335,170 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.
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.
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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 fiscal 1999. 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.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION ALL OTHER COMPENSATION
------------------------------ ---------------------------------
TOTAL
HEALTH CONSULTING 401(K)
YEAR SALARY BONUS INSURANCE FEES MATCH
-------- -------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
James B. Dodd.................................... 1999 $197,746 $ -- $14,670 $4,500 $5,000
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Jeffery S. Fraser................................ 1999 208,333 -- 16,660 4,500 5,000
CHAIRMAN
William F. Bradley, Jr........................... 1999 138,000 -- 13,588 1,500 5,000
EXECUTIVE VICE PRESIDENT--POLICY AND LEGAL, AND
GENERAL COUNSEL
Samuel R. Somerhalder............................ 1999 131,500 -- 15,632 1,000 3,945
EXECUTIVE VICE PRESIDENT--OPERATIONS AND
ADMINISTRATION
Harry H. Herington............................... 1999 136,500 -- 16,004 3,500 5,000
EXECUTIVE VICE PRESIDENT--STATE OPERATIONS
</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, Indiana Interactive, Inc., and, briefly,
as a director of our subsidiary, Nebraska Interactive, Inc. Mr. Somerhalder
served as a director of our subsidiary, Nebraska Interactive, Inc.
Mr. Herington served as a director of our subsidiaries, Nebraska Interactive,
Inc, Kansas Information Consortium, Inc., Indiana Interactive, Inc. and Arkansas
Information Consortium, Inc.
OPTION GRANTS AND EXERCISES DURING FISCAL 1999
No stock options were granted to or exercised by each of the executive
officers listed in the summary compensation table above during fiscal year 1999.
AGGREGATED OPTION EXERCISES IN 1999 AND FISCAL YEAR END OPTION VALUES
None of our executive officers have exercised options in 1999. Other than
James B. Dodd, none of the executive officers listed in the summary compensation
table above held options in 1999.
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EMPLOYMENT AGREEMENTS
JEFFERY S. FRASER
On July 24, 1998, Jeffery S. Fraser entered into an employment agreement
with us. Mr. Fraser currently serves as our Chairman and as one of our
directors. 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, 2001, 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 12 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. Mr. Dodd currently serves as our President and Chief Executive Officer. His
employment 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 18 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
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$175,000. Should we terminate Mr. Childress' employment without cause, as
similarly defined in Mr. Fraser's 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 18 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. Mr. Bradley currently serves as our Executive Vice
President--Policy and Legal, General Counsel and Secretary. 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, 2001, 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 12 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. Mr. Somerhalder currently serves as our Executive Vice
President--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, 2001, 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 12 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
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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.
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. Mr. Herington currently serves as our Executive Vice President--State
Operations. 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 12 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.
RAY G. COUTERMARSH
On February 1, 2000, Ray G. Coutermarsh entered into an employment agreement
with us. He currently serves as our Executive Vice President--Local Markets.
This agreement provides Mr. Coutermarsh with an annual base salary of $140,000.
Should we terminate Mr. Coutermarsh's employment without cause, as similarly
defined in Mr. Fraser's employment agreement, before February 1, 2003, we must
pay Mr. Coutermarsh his then-current annual salary in a single lump sum payment
on our first regular company pay period after his termination. Should we
terminate Mr. Coutermarsh's employment without cause on or after February 1,
2003, Mr. Coutermarsh will not be entitled to severance pay, except as provided
in our severance benefit plan, if any, in effect on the termination date.
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Should we terminate Mr. Coutermarsh's employment for cause, we must pay
Mr. Coutermarsh all compensation due on the date of termination.
Under the terms of his agreement, Mr. Coutermarsh may terminate his
employment with us in writing at any time for any reason. If Mr. Coutermarsh
terminates his employment with us voluntarily, he will not be entitled to
severance pay. In connection with his employment agreement, Mr. Coutermarsh
entered into a proprietary information and inventions agreement and a
non-competition agreement. Should Mr. Coutermarsh's employment with us terminate
for any reason, the agreements provide collectively that Mr. Coutermarsh: (a)
will not use any of our proprietary information without our prior written
consent and (b) will not use any confidential information to compete against us
or any of our employees for a period of two years following termination.
TERRENCE L. PARKER
On November 9, 1999, Terrence L. Parker entered into an employment agreement
with us to serve as our Chief Technology Officer. This agreement provides
Mr. Parker with an annual base salary of $130,000. Should we terminate
Mr. Parker's employment without cause, as similarly defined in Mr. Fraser's
employment agreement, we must pay Mr. Parker his then-current base compensation
for 12 months in a single lump sum payment on our first regular pay period
following his termination. Should we terminate Mr. Parker's employment for
cause, we must pay Mr. Parker all compensation due on the date of termination.
Under the terms of his agreement, Mr. Parker may terminate his employment
with us in writing at any time for any reason. If Mr. Parker terminates his
employment with us voluntarily, he will not be entitled to severance pay. In
connection with his employment agreement, Mr. Parker entered into a proprietary
information and inventions agreement and a non-competition agreement. Should
Mr. Parker's employment with us terminate for any reason, the agreements provide
collectively that Mr. Parker: (a) will not use any of our proprietary
information without our prior written consent and (b) will not use any
confidential information to compete against us or any of our employees for two
years following termination.
JOSEPH NEMELKA
On July 24, 1998, Joseph Nemelka entered into an employment agreement with
us. He currently serves as our Executive Vice President--Marketing Development.
This agreement provides Mr. Nemelka with an annual base salary of $115,000.
Should we terminate Mr. Nemelka's employment without cause, as similarly defined
in Mr. Fraser's employment agreement, before July 1, 2001, we must pay
Mr. Nemelka his then-current salary in equal monthly payments on the first day
of the month for each of the 12 months following his termination. Should we
terminate Mr. Nemelka's employment without cause on or after July 1, 2001,
Mr. Nemelka 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. Nemelka's employment for cause, we must pay
Mr. Nemelka all compensation due on the date of termination.
Under the terms of his agreement, Mr. Nemelka may terminate his employment
with us in writing at any time for any reason. If Mr. Nemelka terminates his
employment with us voluntarily, he will not be entitled to severance pay. In
connection with his employment agreement, Mr. Nemelka entered into a proprietary
information and inventions agreement and a non-competition agreement. Should
Mr. Nemelka's employment with us terminate for any reason, the agreements
provide collectively that Mr. Nemelka: (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.
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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
December 31, 1999, options to purchase 122,954 shares of common stock granted
under the 1998 plan had been exercised, options to purchase 4,025,593 shares of
common stock were outstanding and options to purchase 5,138,207 shares of common
stock remained available for grant. The outstanding options were exercisable at
a weighted average exercise price of $7.49 per share. Outstanding options to
purchase an aggregate of 1,581,768 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. Awards under the 1998 plan may consist of incentive
stock options, which qualify under Section 422 of 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 certain restrictions relating to the duration of the option, the size
of an option award and the exercise price:
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 alternative, 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 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. At
December 31, 1999, no shares of common stock had been purchased by employees
under the 1999 plan.
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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.
Our stock purchase plan will be administered by the compensation committee
of the board of directors. The committee will have complete authority to make
awards 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.
A participating employee is granted a purchase right by which our shares of
common stock may be purchased during any offering period 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 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
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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 and a member of our board of directors, 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. In 1999, we made no direct payment to the Hartley Insurance Agency.
However, we made an aggregate payment of $353,504 for all brokering services
provided by 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 shareholders, each approximately have a 25%
interest. In 1998, we made payments totaling $24,223 to Sky King Leasing. We
made no payments to Sky King Leasing in 1999.
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 December 31, 1999, 27,480,610 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 James B. Dodd options to purchase
1,393,010 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 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 compensation charge of approximately $2.2 million for
this grant, amortized over four years from the date of grant.
Governor Wilson, one of our directors, is a member of the board of advisors
of Thomas Weisel Partners LLC. Thomas Weisel Partners LLC is one of the
representatives of the underwriters of this offering.
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We have entered 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, 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 January 31, 2000 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.
Beneficial ownership is calculated based on 53,189,048 shares of our common
stock outstanding as of January 31, 2000 and 57,324,310 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 60 days of January 31, 2000 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 2,905,378 shares being sold by the voting trust and a pro rata allocation
among the Hellman & Friedman entities of the aggregate of 968,460 shares those
entities are selling in the offering.
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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
OWNED PRIOR TO NUMBER OF SHARES BENEFICIALLY
OFFERING SHARES OWNED AFTER OFFERING
----------------------- BEING -----------------------
NAME AND ADDRESS NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
- ---------------- ---------- ---------- --------- ---------- ----------
<S> <C> <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..................... 27,469,884 51.6% 2,905,378 24,564,506 42.9%
Hellman & Friedman Capital Partners
III, L.P. c/o Hellman & Friedman LLC
One Maritime Plaza
San Francisco, CA 94111................ 8,216,609 15.4 884,010 7,332,599 12.8
H&F Orchard Partners III, L.P.
c/o Hellman & Friedman LLC
One Maritime Plaza
San Francisco, CA 94111................ 545,255 1.0 65,081 480,174 *
H&F International Partners III, L.P
c/o Hellman & Friedman LLC
One Maritime Plaza
San Francisco, CA 94111................ 162,844 * 19,369 143,475 *
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Jeffery S. Fraser...................... 27,469,884 51.6 2,905,378 24,564,506 42.9
James B. Dodd.......................... 602,714 1.1 100,363 502,351 *
William F. Bradley, Jr................. 1,835,363 3.5 194,119 1,641,244 2.9
Kevin C. Childress..................... 91,145 * 52,829 38,316 *
Samuel R. Somerhalder.................. 2,018,185 3.8 213,457 1,804,728 3.1
Harry H. Herrington.................... 1,034,447 1.9 109,409 925,038 1.6
John L. Bunce, Jr...................... 8,924,708 16.8 968,460 7,956,248 13.9
Daniel J. Evans........................ 69,302 * -- 69,302 *
Ross C. Hartley........................ 27,469,884 51.6 2,905,378 24,564,506 42.9
Patrick J. Healy....................... 8,924,708 16.8 968,460 7,956,248 13.9
Peter B. "Pete" Wilson................. 10,000 * -- 10,000 *
OTHER SELLING SHAREHOLDERS
Walter L. Mazar,II
11440 Isaac Newton Square, #205
Reston, VA 90190....................... 202,000 * 30,300 171,700 *
Robert B. Main
11440 Isaac Newton Square, #205
Reston, VA 90190....................... 202,000 * 30,300 171,700 *
Ronald Linehan
11440 Isaac Newton Square, #205
Reston, VA 90190....................... 202,000 * 30,300 171,700 *
All executive officers and directors as
a group (14 persons)................. 37,032,883 69.6 4,009,100 33,023,783 57.2%
</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."
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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. Fraser include 21,074,192 shares held in the voting trust
for which Mr. Fraser acts as a co-trustee and 6,084,426 shares held in the
voting trust of which a family trust established for the benefit of Mr. Fraser
is the beneficial owner and 311,266 shares are held for the benefit of Crimson
Tide Charitable Remainder Unitrust for which Mr. Fraser is the trustee.
Shares held by Mr. Dodd include 149,103 shares held for the benefit of
Mr. Dodd in the voting trust for which Messrs. Fraser and Hartley act as
co-trustees and 445,763 shares subject to options exercisable within 60 days of
January 31, 2000. After completion of this offering, Mr. Dodd will own
beneficially 133,333 shares in the voting trust and 361,170 shares subject to
options exercisable within 60 days of January 31, 2000.
Shares held by Mr. Bradley include 1,835,363 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. Childress include 20,419 shares held for the benefit of
Mr. Childress in the voting trust for which Messrs. Fraser and Hartley act as
co-trustee and 69,651 shares subject to options exercisable within 60 days of
December 31, 1999. After completion of this offering, Mr. Childress will own
beneficially 18,259 shares in the voting trust and 18,982 shares subject to
options exercisable within 60 days of January 31, 2000.
Shares held by Mr. Somerhalder include 2,018,185 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 177,823 shares held by
Mr. Somerhalder's wife, Jean Somerhalder, as custodian to Chloe V. Fraser,
177,823 shares held by Mrs. Somerhalder as custodian to Jacob B. Fraser, 177,823
shares held by Mrs. Somerhalder as custodian to Joshua D. Fraser, 177,823 shares
held by Mrs. Somerhalder as custodian to Matthew S. Fraser and 177,823 shares
held by Mrs. Somerhalder as custodian to William N. Fraser.
Shares held by Mr. Herington include 1,034,447 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 20,168,754 shares held in the voting
trust for which Mr. Hartley acts as a co-trustee and 7,301,130 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 319,683 shares held in an
irrevocable trust established for the benefit of Hillary L. Hartley, 319,683
shares held in an irrevocable trust established for the benefit of Antonia C.
Hartley and 319,683 shares held in an irrevocable trust established for the
benefit of William R. Hartley.
Shares held by Governor Wilson include 10,000 shares subject to options
exercisable within 60 days of January 31, 2000.
Shares held by all executive officers and directors as a group include
27,469,884 shares held in the voting trust for which Messrs. Fraser and Hartley
act as co-trustees and 424,804 shares subject to options exercisable within
60 days of December 31, 1999, assuming the issuance and sale of 84,593 and
50,669 shares of common stock in this offering after the exercise of options by
James B. Dodd and Kevin C. Childress, respectively.
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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
There will be 57,324,310 shares of common stock outstanding, assuming no
exercise of the underwriters' over-allotment option and the issuance and sale of
84,593 and 50,669 shares of common stock in the offering after the exercise of
options by James B. Dodd and Kevin C. Childress, respectively, after giving
effect to the sale of the common stock we are offering. As of January 31, 2000,
there were 27,469,884 shares of common stock outstanding that were held of
record or beneficially through a voting trust by approximately 107 persons.
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 January 31, 2000, a portion of our outstanding common stock, totaling
27,469,884 shares and representing approximately 51.6% 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
2,905,378 shares of common stock in this offering, which will reduce the number
of shares it holds to 24,564,506 or approximately 42.9% of our outstanding
common stock after completion of the offering. A total of 18,267,220 shares, or
16,335,170 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.
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REGISTRATION RIGHTS
According to the terms of an investor rights agreement between us and
Hellman & Friedman, 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 federal securities laws, 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 federal
securities laws 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.
According to the terms of the Asset Purchase Agreement between us and
Electric Press, Inc. for the acquisition of eFed, a division of Electric Press,
Inc., the shareholders of eFed are entitled to piggyback registration rights in
connection with any registration by us of our securities. In the event that we
propose to register any shares of common stock under the federal securities
laws, 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, subject to certain limitations. The piggyback
registration rights of the eFed holders terminate on the earlier of (a) the date
when the shares held by them may be sold under Rule 144 and/or Rule 145 during
any 90 day period, or (b) the date when all shares held by them are sold
pursuant to a registration statement or under Rule 144 and/or Rule 145.
ANTI-TAKEOVER 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
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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.
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.
68
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding 57,324,310 shares
of common stock based upon shares outstanding at January 31, 2000, assuming no
exercise of the underwriters' over-allotment option. Excluding the 4,000,000
shares of common stock offered hereby and assuming no exercise of the
underwriters' over-allotment option and the issuance and sale of 84,593 and
50,669 shares of common stock in this offering after the exercise of options by
James B. Dodd and Kevin C. Childress, respectively, as of the effective date of
the registration statement, there will be 265,838 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 not to exceed 90 days
after the date of this prospectus. As of the effective date, there were
35,381,461 shares subject to lock-up agreements. Credit Suisse First Boston
Corporation may release the shares subject to the lock-up agreements in whole or
in part at any time with or without notice. However, Credit Suisse First Boston
Corporation has no current plans to do so.
The following table indicates approximately when the 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 released from lock-up agreements or
eligible for sale into the public market.
ELIGIBILITY OF RESTRICTED AND LOCKED-UP SHARES FOR SALE IN THE PUBLIC MARKET
<TABLE>
<S> <C>
At effective date.................... 0
90 days after effective date......... 34,866,361
After 90 days post-effective date.... 780,938
</TABLE>
Most of the restricted shares that will become available for sale in the
public market beginning 90 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
573,243 shares immediately after this offering, or
- the average weekly trading volume during the four calendar weeks preceding
the date on which notice of the sale is filed with the SEC.
Sales pursuant to Rule 144 are subject to requirements relating to manner of
sale, notice and availability of current public information about us. A person,
or persons whose shares are aggregated, who is not deemed to have been one of
our affiliates at any time during the 90 days immediately preceding the sale and
who has beneficially owned his or her shares for at least two years is entitled
to sell such shares pursuant to Rule 144(k) without regard to the limitations
described above.
In addition to rights of sale under Rule 144, entities affiliated with
Hellman & Friedman that will hold an aggregate of 968,460 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 December 31, 1999, 9,286,754 shares were reserved for issuance under
our amended and restated 1998 stock option plan, of which options to purchase
4,025,593 shares were then outstanding and 825,008 were then exercisable. After
completion of this offering, options to purchase 3,890,331 shares of common
stock will be outstanding assuming the issuance and sale in this offering of
84,593
69
<PAGE>
and 50,669 shares of common stock after the exercise of options by James B. Dodd
and Kevin C. Childress, respectively. All of these shares will be freely
tradable when issued, subject to Rule 144 volume limitations applicable to
affiliates and lock-up agreements.
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 not to exceed 90 days after the
date of this prospectus without the prior written consent of Credit Suisse First
Boston Corporation.
70
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , we and the selling shareholders have agreed to
sell to the underwriters named below, for whom Credit Suisse First Boston
Corporation, Chase Securities Inc., Thomas Weisel Partners LLC, Banc of America
Securities LLC, FAC/Equities, a division of First Albany Corporation, and George
K. Baum & Company are acting as representatives, the following respective
numbers of shares of common stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Chase Securities Inc........................................
Thomas Weisel Partners LLC..................................
Banc of America Securities LLC..............................
First Albany Corporation....................................
George K. Baum & Company....................................
---------
Total................................................... 8,100,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
Certain of the selling shareholders have granted to the underwriters a
30-day option to purchase on a pro rata basis up to an aggregate of 1,215,000
additional outstanding shares from the selling shareholders at the public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share on
sales to other broker/dealers. After the public offering, the offering price and
concession and discount to broker/dealers may be changed by the representatives.
71
<PAGE>
The following table summarizes the compensation and estimated expenses we
and the selling stockholders will pay:
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------------------- -----------------------
WITHOUT WITH WITHOUT WITH
OVER- OVER- OVER- OVER-
ALLOTMENT ALLOTMENT ALLOTMENT ALLOTMENT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Underwriting discounts and commissions
payable by us........................... $ $ $ $
Expenses payable by us.................... $ $ $ $
Underwriting discounts and commissions
payable by the selling shareholders..... $ $ $ $
Expenses payable by the selling
shareholders............................ $ $ $ $
</TABLE>
We, our officers and directors, the selling shareholders and other
shareholders holding an aggregate of approximately 35,381,461 million shares
have agreed that we and they will not offer, sell, pledge or otherwise dispose
of, directly or indirectly, or file with the Securities and Exchange Commission
a registration statement under the Securities Act relating to any additional
shares of our common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock, or publicly disclose the
intention to make any offer, sale, pledge, disposition or filing, without the
prior written consent of Credit Suisse First Boston Corporation for a period not
to exceed 90 days after the date of this prospectus, except in the case of
issuances by us upon the exercise of employee stock options outstanding on the
date hereof.
Our common stock is listed on the Nasdaq National Market under the symbol
"EGOV."
We and the selling shareholders have agreed to indemnify the underwriters
against liabilities under the Securities Act, or contribute to payments which
the underwriters may be required to make in that respect.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and passive market making in
accordance with Regulation M under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a stabilizing or syndicate member when the common stock originally
sold by the syndicate member is purchased in a stabilizing or syndicate
covering transaction to cover syndicate short positions.
- In passive market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to limitations, make
bids for or purchases of the common stock until the time, if any, at which
a stabilizing bid is made.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on the
Nasdaq National Market or otherwise, and if commenced, may be discontinued at
any time.
72
<PAGE>
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 LLC has acted as a lead or co-manager on
over 80 offerings of equity securities that have been completed. Thomas Weisel
Partners LLC does not have any material relationship with us or any of our
officers, directors or controlling persons, except that one of our directors,
Governor Wilson, is a member of the board of advisors of Thomas Weisel Partners
LLC and except with respect to its contractual relationship with us pursuant to
the underwriting agreement entered into in connection with this offering.
73
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we and the selling
stockholders prepare and file a prospectus with the securities regulatory
authorities in each province where trades of common stock are effected.
Accordingly, any resale of the common stock in Canada must be made in accordance
with applicable securities laws which will vary depending on the relevant
jurisdiction, and which may require resales to be made in accordance with
available statutory exemptions or pursuant to a discretionary exemption granted
by the applicable Canadian securities regulatory authority. Purchasers are
advised to seek legal advice prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us, the selling stockholders and the
dealer from whom such purchase confirmation is received that (i) the purchaser
is entitled under applicable provincial securities laws to purchase the common
stock without the benefit of a prospectus qualified under these securities laws,
(ii) where required by law, that the purchaser is purchasing as principal and
not as agent, and (iii) the purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action of Ontario Purchasers
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein and the selling stockholders may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or these persons. All or a substantial
portion of the assets of the issuer and these persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the issuer or these persons in Canada or to enforce a judgment obtained in
Canadian courts against the issuer or these persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser pursuant to this offering. This report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one report must
be filed in respect of common stock acquired on the same date and under the same
prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
74
<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 consolidated financial statements of the Company as of December 31, 1998
and 1999 and for each of the three years in the period ended December 31, 1999,
the financial statements of Indian@ Interactive, Inc., Kansas Information
Consortium, Inc. and Nebrask@ Interactive, Inc. as of December 31, 1996 and 1997
and for each of the years then ended and the financial statements of Arkansas
Information Consortium, Inc. as of December 31, 1997 and for the year then ended
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.
The financial statements of eFed, a Division of Electric Press, Inc., as of
December 31, 1997 and 1998 and for each of the years then ended included in this
Prospectus have been so included in reliance on the report of Ernst & Young LLP,
independent auditors, given on the authority of said firm as experts in auditing
and accounting.
The consolidated financial statements of SDR Technologies, Inc. and
subsidiary as of December 31, 1998 and 1999 and for each of the years then ended
included in this prospectus have been so included in reliance on the report of
Hurley & Company, independent auditors, 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.
We are subject to the informational requirements of the Exchange Act and, in
accordance therewith, file reports, proxy statements and other information with
the SEC. You may 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 may obtain copies of
this material from the Public Reference Section of the SEC as described above,
or inspect them without charge at the SEC's Web site. Our common stock has been
approved for quotation on the Nasdaq National Market. You may also 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.
75
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
INDEX TO 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
EFED, A DIVISION OF ELECTRIC PRESS, INC.
Report of Ernst & Young LLP, Independent Auditors....... F-36
Balance Sheets.......................................... F-37
Statements of Operations................................ F-38
Statements of Divisional Equity (Deficit)............... F-39
Statements of Cash Flows................................ F-40
Notes to Financial Statements........................... F-41
Financial Information (unaudited)....................... F-46
Statements of Income (unaudited)........................ F-47
Statements of Cash Flows (unaudited).................... F-48
Notes to Financial Statements (unaudited)............... F-49
SDR TECHNOLOGIES, INC. AND SUBSIDIARY
Report of Hurley & Company, Independent Auditors........ F-50
Consolidated Balance Sheets............................. F-51
Consolidated Statements of Operations................... F-53
Consolidated Statements of Changes in Stockholders'
Deficit................................................ F-54
Consolidated Statements of Cash Flows................... F-55
Notes to Consolidated Financial Statements.............. F-56
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................ F-66
Consolidated Balance Sheets............................. F-67
Consolidated Statements of Income....................... F-68
Consolidated Statements of Changes in Shareholders'
Equity................................................. F-69
Consolidated Statements of Cash Flows................... F-70
Notes to Consolidated Financial Statements.............. F-71
KANSAS INFORMATION CONSORTIUM, INC.
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................ F-77
Balance Sheets.......................................... F-78
Statements of Income.................................... F-79
Statements of Changes in Shareholders' Equity........... F-80
Statements of Cash Flows................................ F-81
Notes to Financial Statements........................... F-82
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
ARKANSAS INFORMATION CONSORTIUM, INC.
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................ F-86
Balance Sheets.......................................... F-87
Statements of Operations................................ F-88
Statements of Changes in Shareholders' Equity........... F-89
Statements of Cash Flows................................ F-90
Notes to Financial Statements........................... F-91
NEBRASK@ INTERACTIVE, INC.
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................ F-96
Balance Sheets.......................................... F-97
Statements of Income.................................... F-98
Statements of Changes in Shareholders' Equity........... F-99
Statements of Cash Flows................................ F-100
Notes to Financial Statements........................... F-101
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Overview................................................ F-105
Pro Forma Consolidated Statement of Operations.......... F-106
Pro Forma Condensed Consolidated Balance Sheet.......... F-107
Notes to Pro Forma Consolidated Financial Information... F-108
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
National Information Consortium, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
National Information Consortium, Inc. and its subsidiaries (the "Company") at
December 31, 1998 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on the financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
February 17, 2000
F-3
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,310,751 $ 9,527,389
Marketable securities..................................... -- 82,480,760
Trade accounts receivable................................. 2,908,043 6,009,925
Deferred income taxes..................................... -- 157,663
Prepaid expenses.......................................... 47,133 278,868
Other current assets...................................... 67,311 614,044
----------- ------------
Total current assets................................ 4,333,238 99,068,649
Property and equipment, net................................. 1,229,415 2,998,376
Deferred income taxes....................................... -- 693,802
Other assets................................................ 17,183 253,665
Intangible assets, net...................................... 11,669,059 30,646,446
----------- ------------
Total assets........................................ $17,248,895 $133,660,938
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,376,505 $ 3,804,996
Accrued expenses.......................................... 227,106 872,795
Income taxes payable...................................... 68,700 83,653
Deferred income taxes..................................... 164,234 --
Bank lines of credit...................................... 1,023,592 --
Capital lease obligations--current portion................ 235,323 189,931
Notes payable--current portion............................ 50,000 50,000
Application services contracts............................ 1,256,000 231,969
Other current liabilities................................. 49,465 120,469
----------- ------------
Total current liabilities........................... 5,450,925 5,353,813
Capital lease obligation--long-term portion................. 409,989 218,164
Notes payable--long term portion 50,000 --
Deferred income taxes....................................... 425,878 --
----------- ------------
Total liabilities................................... 6,336,792 5,571,977
----------- ------------
Commitments and contingencies (Notes 4, 10, 13 and 20)...... -- --
Shareholders' equity:
Common stock, no par, 200,000,000 shares authorized
42,066,181 and 53,165,370 shares issued and
outstanding............................................. -- --
Additional paid-in capital................................ 19,551,646 149,035,928
Accumulated deficit....................................... (5,825,966) (16,556,526)
Accumulated other comprehensive income.................... -- 1,731
----------- ------------
13,725,680 132,481,133
Less notes and stock subscriptions receivable............. -- (30,000)
Less deferred compensation expense........................ (2,813,577) (4,362,172)
----------- ------------
Total shareholders' equity.......................... 10,912,103 128,088,961
----------- ------------
Total liabilities and shareholders' equity.......... $17,248,895 $133,660,938
=========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Revenues.............................................. $ 996,550 $28,623,656 $ 56,966,128
Cost of revenues...................................... 5,168 21,210,632 42,190,835
----------- ----------- ------------
Gross profit........................................ 991,382 7,413,024 14,775,293
----------- ----------- ------------
Operating expenses:
Service development and operations.................. 224,128 3,884,810 5,876,294
Selling, general and administrative................. 660,254 4,241,780 9,212,837
Stock compensation.................................. 370,235 568,869 3,188,051
Depreciation and amortization....................... 13,679 5,922,396 10,968,482
----------- ----------- ------------
Total operating expenses............................ 1,268,296 14,617,855 29,245,664
----------- ----------- ------------
Operating loss........................................ (276,914) (7,204,831) (14,470,371)
----------- ----------- ------------
Other income (expense):
Interest expense.................................... -- (88,161) (168,872)
Other income, net................................... 111 55,839 2,492,460
----------- ----------- ------------
Total other income (expense)........................ 111 (32,322) 2,323,588
----------- ----------- ------------
Loss before income taxes.............................. (276,803) (7,237,153) (12,146,783)
Income tax expense (benefit).......................... -- 658,813 (1,416,223)
----------- ----------- ------------
Net loss.............................................. $ (276,803) $(7,895,966) $(10,730,560)
=========== =========== ============
Net loss per share:
Basic and diluted................................... $ (0.01) $ (0.21) $ (0.23)
=========== =========== ============
Weighted average shares outstanding................... 20,857,785 37,242,423 47,278,461
=========== =========== ============
Pro forma tax provision (unaudited)--Note 12:
Net loss............................................ $ (276,803) $(7,895,966)
Pro forma provision for income taxes................ 36,438 (1,516,894)
=========== ===========
Pro forma net loss.................................. $ (313,241) $(6,379,072)
=========== ===========
Pro forma basic and diluted loss per share.......... $ (0.02) $ (0.17)
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES ACCUMULATED
COMMON STOCK ADDITIONAL AND STOCK DEFERRED OTHER
--------------------- PAID-IN ACCUMULATED SUBSCRIPTIONS COMPENSATION COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE EXPENSE INCOME
---------- -------- ------------ ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997.... 20,357,609 $ -- $ 102,600 $ (7,552) $ -- $ -- $ --
Net loss.................... -- -- -- (276,803) -- -- --
Distributions to
shareholders.............. -- -- -- (130,327) -- -- --
Issuance of common stock to
employees................. 1,930,600 -- 524,835 -- (25,000) -- --
---------- ---- ------------ ------------ -------- ----------- ------
BALANCE, DECEMBER 31,
1997...................... 22,288,209 -- 627,435 (414,682) (25,000) -- --
Common stock issued in
exchange.................. 19,255,155 -- 18,539,814 -- -- -- --
Net loss.................... -- -- -- (7,895,966) -- -- --
Distributions to
shareholders.............. -- -- -- (838,367) -- -- --
Termination of Subchapter S
election.................. -- -- (3,323,049) 3,323,049 -- -- --
Issuance of common stock to
employees................. 522,817 -- 583,333 -- -- -- --
Stock options granted with
exercise price less than
fair market value at date
of grant.................. -- -- 3,124,113 -- -- (2,855,390) --
Deferred compensation
expense recognized........ -- -- -- -- -- 41,813 --
Stock subscriptions
received.................. -- -- -- -- 25,000 -- --
---------- ---- ------------ ------------ -------- ----------- ------
BALANCE, DECEMBER 31,
1998...................... 42,066,181 -- 19,551,646 (5,825,966) -- (2,813,577) --
Net loss.................... -- -- -- (10,730,560) -- -- --
Stock options granted with
exercise price less than
fair market value at date
of grant.................. -- -- 3,436,752 -- -- (3,144,152) --
Stock options exercised..... 122,954 -- 177,018 -- -- -- --
Stock options cancelled..... -- -- (274,056) -- -- 274,056 --
Deferred compensation
expense recognized........ -- -- -- -- -- 1,321,501 --
Issuance of common stock to
employees................. 370,235 -- 2,198,950 -- (250,000) -- --
Issuance of common stock
from initial public
offering, net of
expenses.................. 10,000,000 -- 109,439,618 -- -- -- --
Issuance of common stock to
acquire business.......... 606,000 -- 14,506,000 -- -- -- --
Stock subscriptions
received.................. -- -- -- -- 220,000 -- --
Unrealized holding gain on
marketable securities..... -- -- -- -- -- -- 1,731
---------- ---- ------------ ------------ -------- ----------- ------
BALANCE, DECEMBER 31,
1999...................... 53,165,370 $ -- $149,035,928 $(16,556,526) $(30,000) $(4,362,172) $1,731
========== ==== ============ ============ ======== =========== ======
<CAPTION>
TOTAL
------------
<S> <C>
BALANCE, JANUARY 1, 1997.... $ 95,048
Net loss.................... (276,803)
Distributions to
shareholders.............. (130,327)
Issuance of common stock to
employees................. 499,835
------------
BALANCE, DECEMBER 31,
1997...................... 187,753
Common stock issued in
exchange.................. 18,539,814
Net loss.................... (7,895,966)
Distributions to
shareholders.............. (838,367)
Termination of Subchapter S
election.................. --
Issuance of common stock to
employees................. 583,333
Stock options granted with
exercise price less than
fair market value at date
of grant.................. 268,723
Deferred compensation
expense recognized........ 41,813
Stock subscriptions
received.................. 25,000
------------
BALANCE, DECEMBER 31,
1998...................... 10,912,103
Net loss.................... (10,730,560)
Stock options granted with
exercise price less than
fair market value at date
of grant.................. 292,600
Stock options exercised..... 177,018
Stock options cancelled..... --
Deferred compensation
expense recognized........ 1,321,501
Issuance of common stock to
employees................. 1,948,950
Issuance of common stock
from initial public
offering, net of
expenses.................. 109,439,618
Issuance of common stock to
acquire business.......... 14,506,000
Stock subscriptions
received.................. 220,000
Unrealized holding gain on
marketable securities..... 1,731
------------
BALANCE, DECEMBER 31,
1999...................... $128,088,961
============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
--------- ----------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(276,803) $(7,895,966) $ (10,730,560)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 13,679 5,922,396 10,968,482
Compensation expense recognized related to sale of
common stock.......................................... 370,235 258,333 1,573,950
Compensation expense recognized related to stock
options............................................... -- 310,536 1,614,101
(Gain) loss on disposals of property and equipment...... 1,200 (12,639) (312)
Accretion of discount on marketable securities.......... -- -- (1,968,000)
Application services contracts.......................... -- 1,256,000 (1,024,031)
Deferred income taxes................................... -- 590,113 (1,441,577)
Changes in operating assets and liabilities, net of
effects of acquisitions:
(Increase) in trade accounts receivable............... (1,471) (21,980) (2,305,126)
(Increase) decrease in prepaid expenses............... (21,849) 3,335 (231,735)
(Increase) in other current assets.................... -- (54,956) (367,714)
(Increase) in other assets............................ -- (8,103) (223,269)
Increase (decrease) in accounts payable............... 56,681 (184,889) 1,184,597
Increase in income taxes payable...................... -- 68,700 14,953
Increase in accrued expenses.......................... 19,199 80,472 575,692
Increase in other current liabilities................. 17,119 43,034 71,004
--------- ----------- -------------
Net cash provided by (used in) operating activities....... 177,990 354,386 (2,289,545)
--------- ----------- -------------
Cash flows from investing activities:
Purchases of property and equipment....................... (112,521) (255,203) (1,765,692)
Proceeds from disposals of property and equipment......... 5,026 42,736 26,458
Proceeds from notes receivable from shareholders.......... -- 55,000 --
Capitalized software development costs.................... -- -- (145,260)
Purchases of marketable securities........................ -- -- (186,406,450)
Maturities of marketable securities....................... -- -- 88,607,000
Sales of marketable securities............................ -- -- 17,282,104
Acquisition of business................................... -- -- (15,146,544)
Cash of acquired companies................................ -- 764,908 --
--------- ----------- -------------
Net cash provided by (used in) investing activities....... (107,495) 607,441 (97,548,384)
--------- ----------- -------------
Cash flows from financing activities:
Net proceeds from initial public offering of common
stock................................................... -- -- 109,439,618
Proceeds from bank lines of credit........................ -- 1,190,285 1,251,000
Payments on bank lines of credit.......................... -- (270,084) (2,274,592)
Proceeds from notes payable............................... 29,942 -- --
Payments on notes payable................................. -- (29,942) (842,778)
Payments on capital lease obligations..................... -- (101,533) (237,217)
Payments on debentures payable............................ -- (130,130) --
Distributions to shareholders............................. (130,327) (588,367) --
Proceeds from issuance of common stock to employees....... 129,600 75,000 321,518
Proceeds from exercise of employee stock options.......... -- -- 177,018
Proceeds from subscriptions receivable.................... -- 25,000 220,000
--------- ----------- -------------
Net cash provided by financing activities................. 29,215 170,229 108,054,567
--------- ----------- -------------
Net increase in cash and cash equivalents................... 99,710 1,132,056 8,216,638
Cash and cash equivalents, beginning of year................ 78,985 178,695 1,310,751
--------- ----------- -------------
Cash and cash equivalents, end of year...................... $ 178,695 $ 1,310,751 $ 9,527,389
========= =========== =============
Other cash flow information:
Interest paid............................................. $ -- $ 54,707 $ 168,872
========= =========== =============
Income taxes paid......................................... $ -- $ -- $ 117,000
========= =========== =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
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") was formed on
December 18, 1997, for the sole purpose of effecting a common stock exchange
offer (the "Exchange Offer") to combine under common ownership five separate
affiliated entities under which the Company conducted its business operations.
The five companies were National Information Consortium USA, Inc.
("NIC/USA"), Kansas Information Consortium, Inc. ("KIC"), Indiana
Interactive, Inc. ("III"), Nebraska Interactive, Inc. ("NII") and Arkansas
Information Consortium, Inc. ("AIC"). The Exchange Offer was consummated on
March 31, 1998, and has been accounted for as a business combination. NIC/USA is
the entity whose shareholders received the largest portion of the Company's
common stock shares and was treated as the accounting acquirer with the purchase
method of accounting being applied to the four other companies (see Note 3). The
accompanying consolidated financial statements reflect the acquisitions on
March 31, 1998, with the results of operations and cash flows subsequent to that
date reflecting the results of all the companies, and prior to that date only
the operations of
NIC/USA.
NIC provides federal, state and local governments with e-government
services, including a broad range of software and applications. NIC helps
governments use the Internet by building Web sites and applications that allow
businesses and citizens to access government information and to complete
government-based transactions online. Some examples of applications include:
professional license renewals, Internet tax filings, driver's license and motor
vehicle record searches, automated UCC file searches and automobile registration
renewals. The Company's primary business activity is to design, build and
operate Internet-based portals on behalf of state and local governments desiring
to provide access to government information and to complete government-based
transactions online. Operating under multiple-year contracts (see Note 6), NIC
markets the services and solicits users to complete government-based
transactions and to enter into subscriber contracts permitting the user to
access the portal and the government information contained therein in exchange
for transactional and/or subscription user fees. The Company is responsible for
funding up front investment and ongoing operational costs of the government
portals. In addition, the Company enters into service contracts to provide
consulting, development and management services to government portals in
exchange for a negotiated fee. As of December 31, 1999, NIC had signed portal
contracts with Arkansas, Georgia, Idaho, Indiana, Indianapolis and Marion County
(Indiana), Iowa, Kansas, Maine, Nebraska, Utah and Virginia.
On September 15, 1999, NIC acquired the net assets of the business of eFed,
a provider of Internet-based procurement software and services for the
government. eFed designs, develops and manages online procurement software and
services for federal and state government markets. eFed was a division of
privately held Reston, Virginia-based Electric Press, Inc. The acquisition was
accounted for as a purchase and the results of eFed's operations are included in
the Company's consolidated statements of operations from the date of acquisition
(see Note 4).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements consolidate NIC/USA with
its wholly-owned subsidiaries for periods prior to the Exchange Offer and the
Company together with all of its direct and indirect wholly owned subsidiaries,
including NIC/USA, for periods subsequent to the Exchange
F-8
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Offer. All significant intercompany balances and transactions have been
eliminated. The Company and NIC/USA had no partially owned subsidiaries at
December 31, 1999.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of commercial bank deposits and
money market funds with original maturities of one month or less.
MARKETABLE SECURITIES
The Company's marketable securities are classified as available-for-sale and
consist of short-term U.S. government obligations and corporate debt securities.
These investments are stated at fair value with any unrealized holding gains or
losses included as a component of shareholders' equity as accumulated other
comprehensive income or loss until realized. The cost of securities sold is
based on the specific identification method. The fair values of the company's
marketable securities are based on quoted market prices at the reporting date.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over estimated useful
lives of 8 years for furniture and fixtures, 3-10 years for equipment,
3-5 years for purchased software and the lesser of the term of the lease or
5 years for leasehold improvements. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in operations for the
period. The cost of maintenance and repairs is charged to expense as incurred;
significant renewals and betterments are capitalized.
The Company periodically evaluates the carrying value of property and
equipment to be held and used when events and circumstances warrant such a
review. The carrying value of property and equipment is considered impaired when
the anticipated undiscounted cash flows from the asset is separately
identifiable and is less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
value of the asset. Fair value is determined primarily using the anticipated
cash flows discounted at a rate commensurate with the risk involved. Losses on
assets to be disposed of are determined in a similar manner, except that fair
values are reduced for the cost to dispose.
INTANGIBLE ASSETS
At each balance sheet date, the Company assesses the value of recorded
goodwill and other intangible assets for possible impairment based primarily on
the ability to recover the balances from expected future cash flows on an
undiscounted basis. If the sum of the expected future cash flows on an
undiscounted basis is less than the carrying amount of the intangible asset, an
impairment loss would be recognized for the amount by which the carrying value
of the intangible asset exceeds its estimated fair value. The Company has not
recorded any provisions for possible impairment of goodwill or intangible
assets.
F-9
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." eFed
develops Internet-based procurement software products for license to federal,
state and local governments. Capitalized software development costs are included
in intangible assets, net, in the consolidated balance sheet. Software
development costs are amortized on a straight-line basis over the estimated
economic life of the software, generally three years, commencing when each
product is available for general release. Capitalized software development costs
since the date of acquisition of eFed were $145,260, which have not begun to be
amortized at December 31, 1999.
INTERNAL USE SOFTWARE
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which establishes guidelines
for the accounting for the costs of all computer software developed or obtained
for internal use. SOP 98-1 became effective January 1, 1999. The adoption of SOP
98-1 did not have a material impact on the Company's consolidated financial
statements.
REVENUE RECOGNITION
The Company recognizes revenue from providing electronic government portal
services (primarily information access and filing fees) when the services are
provided. The costs that the Company pays state agencies for data access are
accrued as cost of revenues and accounts payable at the time revenue from the
sale of public information is recognized. The Company must remit a certain
amount or percentage of these fees to government agencies regardless of whether
the Company ultimately collects the fees. Filing fees are becoming a more
significant portion of the Company's government portal services, but were not
material in 1999 and prior years. The Company intends to recognize these
revenues net of the portion paid to the government beginning in the year 2000.
Revenue from service contracts to provide consulting, development and
management services to government portals is recognized as the services are
provided at rates provided for in the contract.
eFed recognizes revenues from license agreements upon delivery and
acceptance of the software application if there is persuasive evidence of an
arrangement, collection of the resulting receivable is probable, the fee is
fixed or determinable, and there is sufficient vendor-specific objective
evidence to support allocating the total fee to all elements of these license
arrangements. Where agreements provide for evaluation or customer acceptance,
revenue is recognized upon the completion of the evaluation process and
acceptance of the software by the customer.
eFed recognizes revenues from professional services as the services are
provided. If a transaction includes both license and service elements, the
license fee is recognized on delivery and acceptance of the software, provided
services do not include significant customization or modification of the base
product, and the payment terms for licenses are not subject to additional
acceptance criteria. In cases where license fee payments are contingent on the
acceptance of services, recognition of revenues is deferred for both the license
and the service elements until the acceptance criteria are met. Software
maintenance revenues are recognized ratably over the term of the support
contract, typically one year.
F-10
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company has an application services division that develops applications
to automate certain government back-office processes to facilitate electronic
access. The Company recognizes revenues from application service contracts on
the percentage of completion method, utilizing labor hours incurred to date as
compared to the estimated total labor hours for each contract. Any anticipated
losses on contracts are charged to operations as soon as they are determinable.
In the fourth quarter of 1998, the Company determined that the balance of
revenues remaining to be recognized under existing application service division
contractual obligations was not expected to cover anticipated costs of
developing and implementing the related applications and accrued $1,256,000 for
the expected loss. The Company accrued an additional $1,125,000 of anticipated
losses in 1999 based on revised estimates. The provision for anticipated losses
was determined on an individual contract basis. The Company expects
substantially all of its existing application service contractual commitments
will be satisfied by the third quarter of 2000. At December 31, 1999, the
Company's remaining accrual was approximately $232,000 which management believes
is adequate. Because of the inherent uncertainties in estimating the costs of
completion, it is at least reasonably possible that the estimates will change
within the near term.
INCOME TAXES
The Company changed its income tax status from an S corporation to a C
corporation on July 1, 1998. The Company, along with its subsidiaries, files a
consolidated federal income tax return.
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end based on enacted laws and statutory
tax rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized.
SERVICE DEVELOPMENT AND OPERATIONS COSTS
The Company expenses as incurred the employee costs to develop, operate and
maintain the government portals. These costs are included in service development
and operations expense in the consolidated statements of operations.
APPLICATION DEVELOPMENT COSTS
As discussed above, the Company, through a development division, is
developing applications under customer contracts that automate certain
government back-office processes to facilitate electronic access. Costs incurred
to meet customer contractual commitments to develop these applications are
considered costs of performance under the contracts and have been expensed as
incurred. These costs are included in service development and operations expense
in the consolidated statements of operations.
STOCK-BASED COMPENSATION
The Company has elected to account for its stock-based compensation plan
using the intrinsic value method prescribed in Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." SFAS
No. 123, "Accounting for Stock-Based Compensation," establishes
F-11
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
COMPREHENSIVE LOSS
Effective January 1, 1999, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." The Company has no material components of other
comprehensive income or loss and, accordingly, the Company's comprehensive loss
is approximately the same as its net loss for all periods presented.
LOSS PER SHARE
The Company computes net loss per share in accordance with the provisions of
SFAS No. 128, "Earnings Per Share" and SEC Staff Accounting Bulletin No. 98.
Under SFAS No. 128 and SAB No. 98, basic net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
shares outstanding for the period. Diluted net loss per share is the same as
basic net loss per share because common stock issuable upon exercise of employee
stock options is antidilutive.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
marketable securities and accounts receivable. The Company limits its exposure
to credit loss by depositing its cash and cash equivalents with high credit
quality financial institutions. The Company is subject to concentrations of
credit risk and interest rate risk related to its short-term marketable
securities. The Company's credit risk is managed by limiting the amount of
investments placed with any one issuer, investing primarily in debt instruments
of the U.S. Government and its agencies and high quality corporate issues
generally with maturities of one year or less. The Company performs ongoing
credit evaluations of its customers' financial condition and generally requires
no collateral to secure accounts receivable. Due to the high credit worthiness
of the Company's customers, consisting mainly of data resellers and insurance
companies, the Company considers accounts receivable to be fully collectible.
Accordingly, no allowance for doubtful accounts is required. The Company has not
experienced any significant credit losses.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements
F-12
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
SEGMENT REPORTING
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," became applicable to the Company during the year ended
December 31, 1999. SFAS No. 131 uses the "management" approach, which designates
the internal organization that is used by management for making operating
decisions and assessing performance as the source of the Company's segments.
SFAS No. 131 also requires disclosures about products and services, geographical
areas and major customers. The adoption of SFAS No. 131 did not affect the
Company's results of operations or financial position (see Note 18).
3. ACCOUNTING FOR THE EXCHANGE OFFER
On March 31, 1998, the Company exchanged its common shares for the common
shares of five affiliated business units: NIC/USA, KIC, III, NII and AIC.
Starting in 1991 with the state of Kansas, the Company's founders established an
S corporation for business conducted within each state in which it was awarded a
contract. By 1996, the Company had expanded into four states and decided to
pursue future business opportunities through NIC/USA, leaving the four other
business units to pursue opportunities solely within those states.
Ownership of the five affiliated business units was similar, but not
identical, leading to the conclusion to account for the Exchange Offer as a
business combination. Prior to consummating the Exchange Offer, the Company was
a holding company with no operations of its own. Exchange ratios were determined
proportionately based on estimated 1998 pretax earnings for each company. No
appraisal of fair market value of the separate companies was obtained.
Management determined the fair value of the consolidated company on March 31,
1998 was $40 million. The fair value was allocated to each of the business units
based upon proportional values agreed to by the shareholders in consummating the
Exchange Offer.
Shareholders of NIC/USA, III, KIC, AIC and NII received 22,288,209,
10,099,461, 4,179,039, 3,032,009 and 1,944,646 shares of the Company's common
shares which were valued for purchase accounting at $21,460,187, $9,724,259,
$4,023,785, $2,919,368 and $1,872,401, respectively. As the shareholders of
NIC/USA received 54% of the Company's common shares, NIC/USA was treated as the
acquirer in applying purchase accounting.
The cost of the acquired business units of $18,539,813 was allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed on
the basis of their fair values on the Exchange Offer date. The fair value of net
tangible assets, consisting primarily of cash, accounts receivable, property and
equipment, accounts payable and debt, approximated historical carrying amounts.
The sole identifiable intangible asset relates to the government contracts and
was valued at the net present value of projected future cash flows over the
lives of the existing contracts discounted by 15%. Developed applications were
not assigned a value because each state has a perpetual right of use license to
applications developed if the Company's relationship is terminated. The
remainder of the
F-13
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACCOUNTING FOR THE EXCHANGE OFFER (CONTINUED)
cost was allocated to goodwill. The purchase price and allocation by acquired
business unit and in total is summarized as follows:
<TABLE>
<CAPTION>
III KIC AIC NII TOTAL
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Fair market value at March 31,
1998 $9,724,259 $4,023,785 $2,919,368 $1,872,401 $18,539,813
========== ========== ========== ========== ===========
Allocated to:
Tangible net assets............. 464,766 311,159 304,529 108,897 1,189,351
Contract intangibles............ 1,911,321 433,611 447,994 672,387 3,465,313
Goodwill........................ 7,348,172 3,279,015 2,166,845 1,091,117 13,885,149
---------- ---------- ---------- ---------- -----------
$9,724,259 $4,023,785 $2,919,368 $1,872,401 $18,539,813
========== ========== ========== ========== ===========
Government contract expiration
date 8/31/00 12/31/99 6/30/00 1/31/02
</TABLE>
As a result of rapid technological changes occurring in the Internet
industry and the intense competition for qualified Internet professionals,
recorded contract intangibles and goodwill are amortized on a straight-line
basis over the life of the then existing contracts. There can be no assurance
the contracts will be renewed when they expire at terms that will be beneficial
to the Company. At the time of the Exchange Offer, the Company and each of the
business units were S corporations. The Exchange Offer was tax free to the
shareholders. The historical tax basis in the assets and liabilities carries
over to the Company, and the amortization of the goodwill and contract
intangibles is not deductible for income tax purposes.
4. BUSINESS ACQUISITION
On September 15, 1999, NIC acquired the net assets of the business of eFed,
a provider of Internet-based procurement software and services for the
government. eFed designs, develops and manages online procurement software and
services for federal and state markets. eFed was a division of privately held
Reston, Virginia-based Electric Press, Inc. The acquisition was accounted for as
a purchase and the results of eFed's operations are included in the Company's
consolidated statements of operations from the date of acquisition. The total
purchase price for the business was approximately $29.5 million. Total
consideration included $15 million in cash from the proceeds of NIC's initial
public offering and the issuance of 606,000 shares of unregistered common stock
with a fair value of approximately $14.5 million. The fair value of the common
shares was determined based on the average closing market price of NIC's common
stock three days before, the day of, and three days after the September 13, 1999
announcement date of the acquisition.
Additional consideration is also payable through the end of calendar year
2003 if eFed's financial results exceed certain targeted levels, which have been
set substantially above the historical experience of eFed at the time of
acquisition. On or before March 31, 2000 and annually thereafter to March 31,
2004, NIC will issue up to an additional 606,000 shares of common stock (or at
the Company's option, the cash equivalent) if eFed achieves certain revenue
targets. Consideration will be payable only if eFed's cumulative revenues exceed
$10 million with the full amount due if cumulative revenues reach $200 million
by the end of 2003. The amount of consideration due annually will be based on a
percentage determined by dividing cumulative revenue to date by $200 million and
subtracting any contingent consideration paid in a prior period. Similarly, NIC
will issue a presently indeterminable number of additional shares of common
stock if eFed's cumulative earnings before interest, income
F-14
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS ACQUISITION (CONTINUED)
taxes, depreciation and amortization ("EBITDA") exceeds $10 million up to a
maximum of $110 million by the end of 2003. In this instance, the contingent
consideration will only be paid in common stock and the number of potential
shares will be determined by dividing $10 million by the average of the
Company's closing common stock price for the five trading days immediately
preceding the first EBITDA payment date. An EBITDA payment date will not occur
unless eFed reaches $10 million in cumulative EBITDA in the measurement period.
Such consideration, if payable, will be recorded as additional purchase price.
Of the 606,000 shares of common stock issued to the shareholders of Electric
Press to affect the acquisition, 515,100 shares were issued as restricted stock
and 90,900 shares were delivered to an escrow account. The restricted stock is
subject to cancellation in whole or in part if certain representations,
warranties and obligations under the purchase agreement are not satisfied. If
such obligations are satisfied, 499,950 shares become unrestricted one year
after the closing date and 15,150 shares become unrestricted two years after the
closing date. The 90,900 escrowed shares are to be held in escrow until certain
existing government contracts listed in the purchase agreement are assigned to
NIC or are replaced by alternative agreements to provide the same services to
the same governmental agencies. Management expects eFed to satisfy such
obligations and that such government contracts will be assigned to NIC or
replaced by similar alternative agreements.
The total purchase price of approximately $29.5 million was allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed on
the basis of their fair values on the closing date. The fair value of net
tangible assets acquired, consisting primarily of accounts receivable, property
and equipment, accounts payable and other accrued expenses, totaled $816,000 and
approximated historical carrying amounts. The sole identifiable intangible asset
relates to eFed's Internet procurement software. This asset was valued at
approximately $21.8 million based on the net present value of projected future
net cash flows from licensing the software over its estimated three-year life
discounted by 15%. The remainder of the cost was allocated to goodwill. The
goodwill is being amortized on a straight-line basis over three years.
5. ACQUISITION PRO FORMA INFORMATION
The following unaudited pro forma consolidated amounts for the year ended
December 31, 1998 give effect to the acquisitions of the business units in the
Exchange Offer and the acquisition of eFed as if they had occurred on
January 1, 1998, using the amortization of goodwill and intangibles the Company
has recorded for periods subsequent to completing the transactions. The
following unaudited pro forma consolidated amounts for the year ended
December 31, 1999 give effect to the acquisition of eFed as if the acquisition
had occurred on January 1, 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
Revenues......................................... $ 38,177,141 $ 59,306,306
Operating loss................................... (15,626,238) (21,047,543)
Net loss......................................... (13,801,255) (14,753,107)
Basic and diluted loss per share................. $ (0.31) $ (0.30)
Weighted average shares outstanding.............. 43,920,054 48,435,330
</TABLE>
F-15
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. GOVERNMENT PORTAL CONTRACTS
Each of the Company's government portal contracts generally has an initial
term of three to five years. The Company enters into separate agreements with
various agencies and divisions of the government to provide specific services
and to conduct specific transactions. These agreements preliminarily establish
the pricing of the electronic transactions and data access services the Company
provides and the division of revenues between the Company and the government
agency. The government must approve prices and revenue sharing agreements. The
Company owns all the applications developed under these contracts. After
completion of a defined contract term, the government agency typically receives
a perpetual, royalty-free license to the applications for use only. If the
Company's contract is not renewed after a defined term the government agency
would be entitled to take over the portal in place with no future obligation of
the Company. In some cases, the Company provides management services to
government-owned portals in exchange for an agreed-upon fee.
The following is a summary of the significant terms of operating agreements
that Company's larger business units have entered into with government agencies.
VIRGINIA INTERACTIVE, INC. (VI)
On July 30, 1997, VI, a wholly owned subsidiary of NIC/USA, entered into a
contract to provide electronic government services to the Virginia Information
Providers Network Authority (the "Virginia Authority"). VI is responsible for
managing and marketing the government portal as well as funding up 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
F-16
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. GOVERNMENT PORTAL CONTRACTS (CONTINUED)
service for the city of Indianapolis and Marion County, Indiana. In addition,
the Subsidiary is to further operate, manage and expand CivicNet.
In connection with the revenues generated under the contract with AIIN, AIIN
receives 2% of gross revenues per annum, before all other payments. The
data-providing entities are then paid in accordance with interagency agreements.
The remaining balance is retained by III.
ARKANSAS INFORMATION CONSORTIUM, INC. (AIC)
AIC serves as a provider of electronic government services, by a contract
signed in July 1997 between AIC and the Information Network of Arkansas ("INA"),
a public instrumentality created by legislation in the State of Arkansas (the
"State"). AIC is responsible for managing and marketing the government portal as
well as funding up-front investment and ongoing operational costs. The contract
is for one three-year term through June 30, 2000, with four one-year renewals at
the option of INA. If the State decides to extend the contract through June 30,
2003, or at anytime thereafter, the INA shall be entitled to a perpetual for use
only license to the applications developed for no additional compensation to
AIC. Prior to June 30, 2003, the INA reserves the right to negotiate terms to
license the applications.
Network transaction fees received pursuant to the agreement with INA are
disbursed first for payment of certain operating expenses for the government
portal (primarily telecommunication costs). Five percent of the amount by which
gross revenues for the portal exceed the amount payable to government agencies
is then distributed to the INA. The balance is retained by AIC.
KANSAS INFORMATION CONSORTIUM, INC. (KIC)
KIC was incorporated August 15, 1991 to serve as a provider of electronic
government services to develop, operate, maintain and expand a government portal
for electronic access to public information for the Information Network of
Kansas ("INK"). INK is a State of Kansas government instrumentality created by
the Kansas legislature for the purpose of providing electronic access to state,
county and local information required by Kansas businesses and citizens. KIC is
responsible for managing and marketing the government portal as well as funding
up-front investment and ongoing operational costs. The contract with INK
includes limitations and provisions for the rates KIC can charge and the amount
of remuneration to INK and each government agency. The contract was to expire on
December 31, 1999, but was renewed until December 31, 2002, unless earlier
terminated by INK for cause. INK shall have the option, upon termination or
expiration of the contract, to require KIC to provide electronic government
services in accordance with the terms of the contract for a period of up to
twelve months from the time of the expiration or notification of termination.
INK is entitled to a perpetual for use only license to the applications
developed for no additional compensation to KIC.
In connection with the revenues generated under the contract with INK, INK
receives 2.0% of gross revenue, per annum, payable monthly, before all other
payments. KIC may then receive a 25.0% rate of return per annum on its risk
capital from net income before taxes. The remaining net income before taxes is
shared 66.7% with KIC and 33.3% with INK. Risk capital is defined in the
contract as the sum of paid-in capital, corporate loans with a payback period
exceeding one year, and noncancellable obligations under corporate leases.
F-17
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. GOVERNMENT PORTAL CONTRACTS (CONTINUED)
NEBRASKA INTERACTIVE, INC. (NII)
NII was incorporated November 22, 1994 for the purpose of operating as a
provider of electronic government services for the public information portal of
the State of Nebraska ("Nebraska Online"). NII developed and operates the public
information portal to provide businesses and citizens with electronic access to
state, county and local information via the Internet. NII is responsible for
managing and marketing the portal as well as funding up-front investment and
ongoing operational costs.
On December 3, 1997, NII entered into a contract with the Nebraska State
Records Board ("NSRB") to provide electronic government services to enhance,
operate, maintain and expand the existing portal that was developed by NII under
its 1995 contract with the Nebraska Library Commission ("NLC") and various
government agencies. The contract includes limitations and provisions for the
rates NII can charge and the amount of remuneration to each government agency.
The contract will expire on January 31, 2002 unless earlier terminated by the
NSRB for cause. The NSRB shall have the option, upon termination or expiration
of the contract, to require NII to provide electronic government services in
accordance with the terms of the contract for a period of up to twelve months
from the time of the expiration or notice of termination, whichever is earlier.
On January 1, 2002, the NSRB will be entitled to a perpetual for use only
license to the applications developed for no additional compensation to NII.
In connection with the revenues generated under the contract with the NSRB,
the NSRB receives 4.5% of the first $89,000 in gross profit and 2% of gross
profit thereafter. Gross profit is defined in the contract as the difference
between NII's gross revenues and amounts paid to government agencies and for
certain telecommunication expenses.
NATIONAL INFORMATION CONSORTIUM U.S.A., INC. (NIC/USA)
A service contract was entered into between NIC/USA and the GeorgiaNet
Authority ("GANET"), an agency of the State of Georgia, on September 15, 1996.
Pursuant to the contract, NIC/USA must dedicate a minimum number of full time
employees to assist GANET in creating and providing an information access
program. Pursuant to the contract, GANET is entitled to a perpetual use license
to the applications developed at no additional compensation to NIC/USA. However,
if GANET terminates the contract prior to September 2001, GANET must pay NIC/USA
a fee ranging from $500,000 to $1,000,000 (based on the date of termination) in
order to receive a license for the applications. The contract must be renewed by
GANET on a yearly basis. In the event fees received by GANET from its customers
are insufficient to cover its obligations to NIC/USA, the contract shall
terminate without further obligation of GANET.
In connection with the revenues generated under the contract with GANET,
GANET pays
NIC/USA $800,000 per year, in equal amounts of $200,000 on a quarterly basis. In
addition, GANET pays NIC/USA 5% of gross GANET revenues from non-bulk fees per
quarter.
NEW ENGLAND INTERACTIVE, INC. (NEI)
NEI was incorporated in 1999 for the purpose of operating as a provider of
electronic government services for the New England region. On April 15, 1999,
NEI entered into a three-year contract, with two two-year renewal periods, with
the State of Maine to develop and operate Maine's government portal that will
provide electronic transactions and expanded access to public information. Under
the
F-18
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. GOVERNMENT PORTAL CONTRACTS (CONTINUED)
contract, NEI will fund initial investment and ongoing operational costs. Upon
completion of the initial contractual term in April 2002, the State of Maine
will be entitled to a perpetual for use only license for the applications NEI
developed, with no additional compensation due to NEI.
In connection with the revenues generated under the contract, NEI is
entitled to retain any revenues remaining after payment of all network operating
expenses, statutory fees for retrieval of public information and various other
expenses.
UTAH INTERACTIVE, INC. (UII)
UII was formed in 1999 to provide electronic access to public records in
Utah. In May 1999, UII entered into a contract with the State of Utah (the
"State") to provide coordinated network development and management for the
State's online government services. The contract extends to May 2003 with the
option for three two-year renewal periods. Under the contract, UII will fund
initial investment and ongoing operational costs. Upon completion of the initial
four-year term of the contract, or if the contract is terminated by the State
for cause, the State will be entitled to a perpetual for use only license for
the applications UII developed, with no additional compensation due to UII.
In connection with the revenues generated under the contract, UII retains
any revenues that remain after payment of all network operating expenses,
statutory fees for retrieval of public information and various other expenses.
IDAHO INFORMATION CONSORTIUM, INC.(IIC)
IIC was incorporated in July 1999 for the purpose of operating as a provider
of electronic government services for the State of Idaho. On December 7, 1999,
IIC entered into a three-year contract, with two two-year renewal periods, with
the State of Idaho to develop and operate Idaho's government portal, Access
Idaho, which will provide electronic transactions and expanded access to public
information. Under the contract, IIC will fund initial investment and ongoing
operational costs. Upon termination or expiration of the contract, the State of
Idaho will be entitled to a perpetual for use only license for the applications
IIC developed, with no additional compensation due to IIC.
In connection with the revenues generated under the contract, IIC is
entitled to retain any revenues remaining after payment of all network operating
expenses, statutory fees for retrieval of public information and various other
expenses.
F-19
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. MARKETABLE SECURITIES
The Company held no marketable securities prior to the completion of its
initial public offering of common stock on July 20, 1999. The fair value of
marketable debt securities as of December 31, 1999 is as follows:
<TABLE>
<S> <C>
U.S. government obligations................................. $12,252,850
Corporate debt securities................................... 70,227,910
-----------
$82,480,760
===========
</TABLE>
All marketable debt securities held by the Company at December 31, 1999
mature within one year. Gross realized gains and losses and unrealized holding
gains and losses through December 31, 1999 were not significant.
8. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Furniture and fixtures............................... $ 210,209 $ 652,411
Equipment............................................ 1,530,636 3,192,576
Purchased software................................... 101,484 281,481
Leasehold improvements............................... 39,285 163,556
---------- ----------
1,881,614 4,290,024
Less accumulated depreciation........................ 652,199 1,291,648
---------- ----------
$1,229,415 $2,998,376
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1998 and 1999,
was $13,559, $236,699 and $581,416, respectively.
9. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Goodwill........................................... $13,885,149 $21,302,573
Software intangible................................ -- 21,790,000
Contract intangibles............................... 3,465,313 3,465,313
Software development costs......................... -- 145,260
----------- -----------
17,350,462 46,703,146
Less accumulated amortization...................... 5,681,403 16,056,700
----------- -----------
$11,669,059 $30,646,446
=========== ===========
</TABLE>
F-20
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. BANK LINES OF CREDIT AND OTHER DEBT OBLIGATIONS
NIC/USA has a $1,000,000 operating line of credit from a bank that bears
interest at the bank's index rate (8.5% at December 31, 1999). The expiration
date on the line is April 30, 2000. At December 31, 1998 and 1999, $370,000 and
$0, respectively, was outstanding on the line. The line is collateralized by
NIC/USA's assets and guaranteed by the parent company. NIC/USA entered into a
$225,000 equipment line of credit with a bank in January 1998. The line bears
interest at the bank's reference rate plus 1.75% (10.25% at December 31, 1999).
There is no given expiration date on the line. At December 31, 1998 and 1999, no
amounts were outstanding on the line. The line is collateralized by the related
equipment and guaranteed by the parent company. NIC/USA has issued to GANET an
irrevocable letter of credit in the amount of $200,000. The letter expires on
October 31, 2000.
On January 19, 1999, NIC/USA purchased an airplane and financed the purchase
by borrowing $544,000 from a bank in the form of a note payable. The note was
paid in full during 1999.
VI entered into a $250,000 operating line of credit with a bank in
May 1998. The line bears interest at the bank's index rate (8.5% at
December 31, 1999). The expiration date on the line is April 30, 2000. At
December 31, 1998 and 1999, $218,750 and $0, respectively, was outstanding on
the line. The line is collateralized by VI's assets and guaranteed by the parent
company. VI entered into a $225,000 equipment line of credit with a bank in
April 1998. The line bears interest at the bank's reference rate plus 1.75%
(10.25% at December 31, 1999). There is no given expiration date on the line. At
December 31, 1998 and 1999, there were no amounts outstanding on the line. The
line is collateralized by the related equipment and guaranteed by the parent
company.
Iowa Interactive, Inc. entered into a $225,000 equipment line of credit with
a bank in April 1998. The line bears interest at the bank's reference rate plus
1.75% (10.25% at December 31, 1999). There is no given expiration date on the
line. At December 31, 1998 and 1999, no amounts were outstanding on the line.
The line is collateralized by the related equipment and guaranteed by the parent
company. Iowa Interactive, Inc has issued to the State of Iowa an irrevocable
letter of credit in the amount of $50,000. The letter expires on April 30, 2000.
III has a $400,000 operating line of credit from a bank that bears interest
at the bank's index rate (8.5% at December 31, 1999). The expiration date on the
line is April 30, 2000. At December 31, 1998 and 1999, $192,136 and $0,
respectively, was outstanding on the line. The line is collateralized by the
III's assets and guaranteed by the parent company. III had a $150,000 operating
line of credit with a bank that expired on November 1, 1999. At December 31,
1998, $18,209 was outstanding on the line. III has a $225,000 equipment line of
credit with a bank that bears interest at the bank's reference rate plus 1.75%
(10.25% at December 31, 1999). There is no given expiration date on the line. At
December 31, 1998 and 1999, there were no amounts outstanding on the line. The
line is collateralized by the related equipment and guaranteed by the parent
company.
KIC has a $250,000 operating line of credit from a bank that bears interest
at the bank's index rate (8.5% at December 31, 1999). The expiration date on the
line is April 30, 2000. At December 31, 1998 and 1999, $179,497 and $0,
respectively, was outstanding on the line. The line is collateralized by KIC's
assets and guaranteed by the parent company. KIC has a $225,000 equipment line
of credit with a bank that bears interest at the bank's reference rate plus
1.75% (10.25% at December 31, 1999). There is no given expiration date on the
line. At December 31, 1998 and 1999, no amounts were outstanding on the line.
The line is collateralized by the related equipment and guaranteed by the parent
company.
F-21
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. BANK LINES OF CREDIT AND OTHER DEBT OBLIGATIONS (CONTINUED)
AIC has a $150,000 operating line of credit from a bank that bears interest
at the bank's index rate (8.5% at December 31, 1999). The expiration date on the
line is April 30, 2000. At December 31, 1998 and 1999, no amounts were
outstanding on the line. The line is collateralized by AIC's assets and
guaranteed by the parent company. AIC has a $225,000 equipment line of credit
with a bank that bears interest at the bank's reference rate plus 1.75% (10.25%
at December 31, 1999). There is no given expiration date on the line. At
December 31, 1998 and 1999, no amounts were outstanding on the line. The line is
collateralized by the related equipment and guaranteed by the parent company. In
March 1998, AIC agreed to pay a shareholder $19,500 for past services and
reacquired the shareholder's shares of AIC. The remaining balance of $6,500 is
due in 2000.
NII has a $100,000 line of credit with a bank that bears interest at the
bank's index rate (8.5% at December 31, 1999). The expiration date on the line
is April 30, 2000. At December 31, 1998 and 1999, $45,000 and $0, respectively,
was outstanding on the line. The line is collateralized by NII's assets and
guaranteed by the parent company. NII has a $225,000 equipment line of credit
with a bank that bears interest at the bank's reference rate plus 1.75% (10.25%
at December 31, 1999). There is no given expiration date on the line. At
December 31, 1998 and 1999, no amounts were outstanding on the line. The line is
collateralized by the related equipment and guaranteed by the parent company. In
March 1998, NII agreed to pay a shareholder $130,500 for past services and
reacquired the shareholder's shares of NII. The remaining balance of $43,500 is
due in 2000.
On April 30, 1999, NEI entered into a $100,000 operating line of credit
agreement with a bank that bears interest at the bank's prime rate (8.5% at
December 31, 1999). The expiration date on the line is April 30, 2000. At
December 31, 1999, no amounts were outstanding on the line. The line is
collateralized by NEI's assets and guaranteed by the parent company.
On April 30, 1999, UII entered into a $200,000 operating line of credit
agreement with a bank that bears interest at the bank's prime rate plus (8.5% at
December 31, 1999). The expiration date on the line is April 30, 2000. At
December 31, 1999, no amounts were outstanding on the line. The line is
collateralized by UII's assets and guaranteed by the parent company.
IIC has issued to the State of Idaho an irrevocable letter of credit in the
amount of $500,000. The letter expires on December 7, 2000.
11. SHAREHOLDERS' EQUITY
COMMON STOCK
The Company's Board of Directors had authorized 13,500,000 shares of common
stock for issuance by the Company at December 31, 1998. In April 1999, the
Company was reincorporated in the state of Colorado and changed the par value of
its common stock from $.01 per share to no par. On May 6, 1999, the Company
increased its authorized shares to 200,000,000.
On May 3, 1999, the Board of Directors authorized a common stock split in
the range of 4 for 1 to 5 for 1, and granted authority to the Company's officers
to determine the exact amount of the split. Such officers approved a 4.643377
for 1 split, to be effected by means of a dividend of 3.643377 shares of common
stock for each share of common stock held, plus cash in lieu of fractional
shares, effective for shareholders of record on July 14, 1999. The effect of the
stock split has been retroactively reflected in the accompanying consolidated
financial statements for all periods presented. All references to the
F-22
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SHAREHOLDERS' EQUITY (CONTINUED)
number of Company common shares and per share amounts elsewhere in the related
footnotes have also been restated as appropriate to reflect the effect of the
common stock split for all periods presented.
On July 20, 1999, the Company completed its initial public offering of
common stock by selling an aggregate of 10 million new shares of common stock
for net proceeds of approximately $109.4 million after deducting underwriting
discounts, commissions and expenses. The Company has placed the net proceeds
from its initial public offering in short-term, investment-grade,
interest-bearing debt securities (see Note 7) pending the use of the proceeds to
increase new market development efforts, increase marketing efforts aimed at
raising transaction volume, create new products and services, further develop
common infrastructure and operating platforms, and make potential acquisitions.
A portion of the proceeds has also been used for working capital needs and to
pay the cash portion of the September 15, 1999 acquisition of eFed (see
Note 4).
In the first six months of 1998, the Company made $588,367 of S corporation
cash distributions to common shareholders. NIC/USA made $130,327 of
distributions to its shareholders in 1997.
On June 30, 1998, the Company and a voting trust consisting of all the
Company's then current shareholders entered into a stock purchase agreement for
the Company's shareholders to sell a 25% interest in the Company to an
investment management firm. The Company did not receive any of the proceeds from
the sale. Under the voting trust agreement, two principal shareholders have the
right to vote all of the voting trust's common shares and to sell all or any
part of such shares. One common shareholder has the right, only upon termination
within the first three years of employment with the Company, to cause the
Company to repurchase 173,258 shares of common stock purchased by the
shareholder on February 9, 1999, at the $1.44 price per share paid by the
shareholder.
At December 31, 1997 and as of March 31, 1998, the date of the Exchange
Offer, NIC/USA had 1,000,000 common shares authorized and 112,330 common shares
issued and outstanding. However, as NIC/USA was considered the accounting
acquirer, its historical outstanding share information has been adjusted for the
Exchange Offer exchange ratio. Shareholders of NIC/USA received 198.42 Company
common shares for each share held of NIC/USA on March 31, 1998. Retroactive
adjustments are also made for purposes of calculating and reporting earnings per
share.
COMMON STOCK TRANSACTIONS
From August 1997 through December 1997, NIC/USA sold 5,130 and 4,500 shares
of its common stock to employees at prices of $29.24 and $1.00 per share,
respectively. The Company recorded $370,235 in compensation expense related to
these transactions.
From April 1998 through June 1998, the Company sold 348,254 shares of common
stock to two employees at $0.22 per share. The Company recorded $258,333 in
compensation expense related to these transactions.
On June 30, 1998, the Company issued 174,563 shares of its common stock and
made an S corporation distribution of those shares, which were valued at $1.43
per share, to its shareholders. These shares were given to a consultant as
compensation for services rendered to the Company's shareholders with the
investment management firm sale. In connection with the transaction, the Company
also paid $57,077 in professional fees on behalf of the shareholders which were
also
F-23
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SHAREHOLDERS' EQUITY (CONTINUED)
distributed as an S corporation distribution. These shares have been treated as
outstanding for all periods prior to the Exchange Offer for purposes of
calculating and reporting earnings per share.
From January 1999 through May 1999, the Company sold 346,512 shares of
common stock to five employees at $1.44 per share. The Company recorded
$1,489,124 in compensation expense related to these transactions. In May 1999,
the Company sold 23,727 shares of common stock to an employee at $5.27 per
share. The Company recorded $84,826 in compensation expense related to this
transaction.
In connection with the acquisition of eFed on September 15, 1999, 606,000
shares of common stock were issued to the selling shareholders. Of the 606,000
shares, 515,100 shares were issued as restricted stock and 90,900 shares were
delivered to an escrow account. The restricted stock is subject to cancellation
in whole or in part if certain representations, warranties and obligations under
the purchase agreement are not satisfied. If such obligations are satisfied,
499,950 shares become unrestricted one year after the closing date and 15,150
shares become unrestricted two years after the closing date. The 90,900 escrowed
shares are to be held in escrow until certain existing government contracts
listed in the purchase agreement are assigned to NIC or are replaced by
alternative agreements to provide the same services to the same governmental
agencies.
ADDITIONAL PAID-IN CAPITAL
The Company offset its accumulated deficit on the date of Subchapter S
election termination against its additional paid-in capital as reflected in the
consolidated statements of changes in shareholders' equity.
12. INCOME TAXES
On July 1, 1998, the Company changed its income tax status from an S
corporation to a C corporation. The Company recognized a net deferred tax
liability of approximately $1,374,000 representing the tax effects of temporary
differences between the book and tax bases of assets and liabilities on that
date. The effect of recognizing the deferred tax liability has been included in
the consolidated statement of operations for the year ended December 31, 1998.
Inasmuch as the Company was an S corporation for the entire 1997 year,
federal and state income taxes on the Company's operations were the
responsibilities of the Company's shareholders. As a result, no income tax
benefit or expense is reported for 1997.
F-24
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1999
--------- ------------
<S> <C> <C>
Current income taxes:
Federal............................................. $ 56,045 $ --
State............................................... 12,655 25,354
-------- -----------
Total............................................. 68,700 25,354
-------- -----------
Deferred income taxes:
Federal............................................. 540,345 (1,295,716)
State............................................... 49,768 (145,861)
-------- -----------
Total............................................. 590,113 (1,441,577)
-------- -----------
Total income tax expense (benefit)................ $658,813 $(1,416,223)
======== ===========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
were as follows at December 31:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts payable and accrued expenses............ $ 721,757 $ --
Application services contracts................... 479,922 88,987
Compensation related to non-qualified stock
options........................................ 59,842 394,980
Amortization of eFed goodwill and software
intangible..................................... -- 864,639
Net operating loss carryforward.................. -- 677,673
Other............................................ 28,130 7,718
----------- -----------
Total.......................................... 1,289,651 2,033,997
----------- -----------
Deferred tax liabilities:
Accrued revenue.................................. (897,097) --
Contract intangibles............................. (881,346) (392,434)
Depreciation..................................... (62,324) (173,383)
Accreted discount on marketable securities....... -- (585,541)
Other............................................ (38,996) (31,174)
----------- -----------
Total.......................................... (1,879,763) (1,182,532)
----------- -----------
Net deferred tax (liability) asset................. $ (590,112) $ 851,465
=========== ===========
</TABLE>
For tax purposes, the Company had available, at December 31, 1999, a net
operating loss ("NOL") carryforward of approximately $1,731,000, which will
expire in the year 2019. The Company believes it is more likely than not it will
generate sufficient taxable income from future operations to fully utilize the
NOL carryforward prior to its expiration. Consequently, the Company has not
provided a valuation allowance for this deferred tax asset.
F-25
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
The following table reconciles the effective income tax rate indicated by
the consolidated statements of operations and the statutory federal income tax
rate:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Effective federal and state income tax rate................. (9.1)% 11.7%
Goodwill amortization relating to the Exchange Offer........ 15.5 17.8
S to C corporation adjustment............................... 19.7 --
Pretax loss as an S corporation (six months)................ 10.4 --
Non-deductible stock compensation expense................... -- 6.6
State income taxes.......................................... (1.3) (1.3)
Other....................................................... (0.2) 0.2
----- ----
Statutory federal income tax rate........................... 35.0% 35.0%
===== ====
</TABLE>
The unaudited pro forma provision for income taxes for the years ended
December 31, 1997 and 1998 included on the consolidated statements of operations
present the Company's results of operations as if it were a C corporation for
the entire period. The pro forma provision for income taxes for the year ended
December 31, 1998 represents the incremental provision for the six month period
the Company was an S corporation together with removing the $1,374,000
cumulative effect recorded in 1998 as discussed above. The pro forma provision
for income taxes was calculated based on enacted tax laws and statutory tax
rates applicable to the periods presented taking into account permanent
differences.
13. COMMITMENTS AND CONTINGENCIES
LEASES
The Company and its subsidiaries lease office space and certain equipment
under noncancellable operating leases. Capital lease agreements require the
Company and its subsidiaries to pay all taxes, fees, assessments or other
charges.
F-26
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum noncancellable lease payments under all noncancellable
operating and capital leases at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR OPERATING CAPITAL
- ----------- --------- --------
<S> <C> <C>
2000.................................................... $545,601 $217,180
2001.................................................... 459,016 213,918
2002.................................................... 342,130 17,877
2003.................................................... 55,315 --
2004.................................................... 4,009 --
--------
448,975
Less interest........................................... 40,880
--------
Present value of net minimum lease payments............. 408,095
Less current portion.................................... 189,931
--------
Long-term portion....................................... $218,164
========
</TABLE>
Capitalized leased property and equipment consists of the following at
December 31:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Furniture and fixtures.................................. $117,911 $ 70,651
Equipment............................................... 766,153 528,350
Purchased software...................................... 81,795 60,003
-------- --------
965,859 659,004
Less accumulated depreciation........................... 314,026 246,243
-------- --------
$651,833 $412,761
======== ========
</TABLE>
Rent expense for noncancellable operating leases for the years ended
December 31, 1997, 1998 and 1999 was $2,099, $354,192 and $402,241,
respectively.
LITIGATION
The Company is involved in legal proceedings and litigation arising in the
ordinary course of business. In the opinion of management, the outcome of such
proceedings and litigation currently pending would not be material to the
consolidated financial position, liquidity or results of operations of the
Company.
14. EMPLOYEE BENEFIT AND STOCK OPTION PLANS
DEFINED CONTRIBUTION 401(K) PROFIT SHARING PLAN
The Company and its subsidiaries sponsor a defined contribution 401(k)
profit sharing plan. In accordance with the plan, all full-time employees are
eligible immediately upon employment. A discretionary match of up to 5% of an
employee's salary and a discretionary contribution may be made to the plan as
determined by the Board of Directors. Expense related to Company matching
contributions totaled $14,031, $94,571 and $176,736, for the years ended
December 31, 1997, 1998 and
F-27
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. EMPLOYEE BENEFIT AND STOCK OPTION PLANS (CONTINUED)
1999, respectively. No discretionary contributions were made for the years ended
December 31, 1997, 1998 and 1999.
EMPLOYEE STOCK PURCHASE PLAN
In May 1999, the Company's Board of Directors approved an employee stock
purchase plan intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code. A total of 2,321,688 shares of NIC
common stock have been reserved for issuance under this plan. Terms of the plan
will permit eligible employees to purchase NIC common stock through payroll
deductions up to 15% of each employee's compensation. Amounts deducted and
accumulated by the participant will be used to purchase shares of NIC's common
stock at 85% of the lower of the fair value of the common stock at the beginning
or the end of the offering period, as defined. No offering of stock was made to
employees during 1999. Accordingly, no shares were issued in 1999 pursuant to
the plan.
1998 STOCK OPTION PLAN
The Company has adopted a formal stock option plan to provide for the
granting of either incentive stock options or non-qualified stock options to
encourage certain employees of the Company and its subsidiaries, and certain
directors of the Company, to participate in the ownership of the Company, and to
provide additional incentive for such employees and directors to promote the
success of its business through sharing the future growth of such business. The
plan was adopted effective May 5, 1998 and amended November 3, 1998 and May 4,
1999. The Company is authorized to grant options for up to 9,286,754, common
shares under the plan. Employee options are generally exercisable one year from
date of grant in cumulative annual installments of 33% and expire four years
after the grant date.
The Company accounts for the plan using the intrinsic value method
prescribed in APB No. 25. SFAS No. 123 requires certain disclosures regarding
expense and value of options granted using the fair-value-based method even
though the Company follows APB No. 25. Had compensation cost for the Company's
plan been determined in accordance with SFAS No. 123, the Company's net loss and
loss per share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1999
----------- ------------
<S> <C> <C>
Net loss
As reported..................................... $(7,895,966) $(10,730,560)
Pro forma....................................... $(8,005,301) $(12,134,460)
Basic and diluted loss per share:
As reported..................................... $ (0.21) $ (0.23)
Pro forma....................................... $ (0.21) $ (0.26)
</TABLE>
For purposes of complying with the disclosure provisions of SFAS No. 123 and
as permitted by the Financial Accounting Standards Board for nonpublic
companies, prior to NIC's initial public offering in July 1999, the fair value
of each option grant was determined on the date of the grant using the minimum
value option pricing model. The minimum value model does not consider expected
volatility in stock price. Subsequent to the offering, the fair value of each
option grant was determined using the
F-28
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. EMPLOYEE BENEFIT AND STOCK OPTION PLANS (CONTINUED)
Black-Scholes option pricing model. Except for the volatility assumption, which
is only used under the Black-Scholes model, the following assumptions were
applied in determining pro forma compensation cost for the years ended
December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
---------- ---------
<S> <C> <C>
Risk-free interest rate................................ 4.54% 5.48%
Expected dividend yield................................ 0.00 0.00
Expected option life................................... 4.62 years 4.0 years
Expected stock price volatility........................ 0.001% 80%
Fair value of options granted.......................... $1.45 $11.14
</TABLE>
A summary of the Company's stock option plan as of December 31, 1998 and
1999 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1998 1999
---------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding at January 1................. -- 2,514,019 $ 1.44
Granted................................ 2,534,812 $1.44 1,798,285 $15.09
Exercised.............................. -- -- (122,954) $ 1.44
Canceled............................... (20,793) $1.44 (163,757) $ 2.51
--------- ---------
Outstanding at December 31............... 2,514,019 $1.44 4,025,593 $ 7.49
Exercisable at December 31............... 199,317 $1.44 825,008 $ 2.18
Weighted average grant-date fair value of
options granted during the year........ $1.45 $11.14
</TABLE>
The following table summarizes information about stock options outstanding
under the Plan at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE AVERAGE
SHARES REMAINING EXERCISE SHARES EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE PRICE OUTSTANDING PRICE
- ----------------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.44................................ 2,432,672 3.5 $ 1.44 725,357 $ 1.44
$5.27................................ 717,302 4.3 $ 5.27 69,651 $ 5.27
$10.00-$14.36........................ 183,609 3.4 $14.12 30,000 $12.91
$23.28-$34.88........................ 602,260 3.8 $28.21 -- --
$35.00-$37.13........................ 89,750 3.8 $36.83 -- --
</TABLE>
During 1998, the exercise price of all options granted under the plan was
$1.44, which was less than the fair market value of the stock on the various
grant dates. From September 1998 through December 1998, the Company granted
2,534,812 common stock options with an exercise price of $1.44 per share.
Compensation expense of $310,536 was recorded in 1998 relating to these option
grants with $2,813,577 of compensation expense deferred at December 31, 1998 to
be amortized over the vesting period of the options.
F-29
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. EMPLOYEE BENEFIT AND STOCK OPTION PLANS (CONTINUED)
In December 1998, the Company granted 1,393,010 common stock options
(1,046,500 non-qualified options and 346,510 incentive options) to an executive
of the Company under two separate stock option agreements covered by the Plan.
Non-qualified stock options totaling 60,712 vested immediately with the
remainder of the options exercisable one year from date of grant in cumulative
annual installments of 25%. The non-qualified stock options expire ten years
after the grant date. Incentive stock options totaling 69,302 vested immediately
with the remainder of the options exercisable one year from date of grant in
cumulative annual installments of 25%. The incentive stock options expire five
years from the date of grant.
From January 1999 through May 1999, the Company granted 191,767 common stock
options with a vesting period of three years and an exercise price of $1.44 per
share, which was less than the fair market value of the stock on the various
grant dates. Compensation expense of approximately $213,000 was recorded
relating to these options for the year ended December 31, 1999, with
approximately $496,000 of compensation expense deferred at December 31, 1999 to
be amortized over the three-year vesting periods of the option grants. In
April 1999, the Company granted 20,791 common stock options with a vesting
period of three years and an exercise price of $5.27 per share, which was less
than the fair market value of the stock on the grant date. Compensation expense
of approximately $16,000 was recorded relating to these options for the year
ended December 31, 1999, with approximately $58,000 of compensation expense
deferred at December 31, 1999 to be amortized over the three year vesting
periods of the option grants.
In May 1999, the Company granted 696,511 common stock options (601,636
non-qualified options and 94,875 incentive options) to an executive of the
Company employee at an exercise price of $5.27 per share, which was less than
the fair market value of the stock on the grant date, under two separate stock
option agreements covered by the Plan. Non-qualified stock options totaling
50,669 vested immediately with the remainder of the options exercisable one year
from date of grant in cumulative annual installments of 25%. The non-qualified
stock options expire ten years after the grant date. Incentive stock options
totaling 18,975 vested immediately with the remainder of the options exercisable
one year from date of grant in cumulative annual installments of 25%. The
incentive stock options expire five years from the date of grant. Relating to
this executive's stock options, compensation expense of approximately $598,000
was recorded for the year ended December 31, 1999, with approximately $1,892,000
of compensation expense deferred at December 31, 1999, to be amortized over the
vesting period of the options.
In August of 1999, the Company granted 10,000 common stock options with
immediate vesting to a director of the Company with an exercise price of $10 per
share, which was less than the fair market value of the stock on the grant date.
Compensation expense of approximately $44,000 was recorded relating to this
option grant for the year ended December 31, 1999.
Including expense recognized in connection with options granted prior to
January 1, 1999, the Company recognized a total of $1,614,101 of compensation
expense related to common stock options for the year ended December 31, 1999.
Total deferred compensation expense was $4,362,172 at December 31, 1999.
F-30
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. RELATED PARTY TRANSACTIONS
The Company and its subsidiaries purchase business and health insurance
through an insurance agency that is controlled by a shareholder and director of
the Company at costs that the Company believes approximate arms-length
transactions. In 1998, a payment of $8,345 was made directly to this insurance
agency. No direct payments were made in 1997 or 1999. Aggregate insurance
payments made that were brokered by this insurance agency totaled approximately
$50,000, $478,000 and $354,000 for the years ended December 31, 1997, 1998 and
1999, respectively.
17. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
NIC/USA financed the purchase of $335,646 of property and equipment in 1998
under capital leases.
KIC sold certain assets during 1998 which were then leased back from the
purchaser over a period of three years. The resulting lease is being accounted
for as a capital lease. The purchaser paid down KIC's bank line of credit in
1998 by $28,666 as part of this sale-leaseback transaction.
III sold certain assets during 1998 which were then leased back from the
purchaser over a period of three years. The resulting lease is being accounted
for as a capital lease. The purchaser paid down III's bank line of credit in
1998 by $169,287 as part of this sale-leaseback transaction.
AIC financed the purchase of $13,083 of property and equipment in 1998 under
capital leases.
NII financed the purchase of $7,114 of property and equipment in 1998 under
capital leases.
As discussed in Note 4, on September 15, 1999, NIC acquired the net assets
of the business of eFed, a provider of Internet-based procurement software and
services for the government. The total purchase price for the business was
approximately $29.5 million. A portion of the purchase price included the
issuance of 606,000 shares of unregistered common stock with a fair value of
approximately $14.5 million. The fair value of net tangible assets acquired,
consisting primarily of accounts receivable, property and equipment, accounts
payable and other accrued expenses, totaled $816,000.
18. SEGMENT AND RELATED INFORMATION
The Company's two reportable segments consist of its state and local
government business and the eFed division. The state and local government
business includes the Company's direct and indirect wholly-owned subsidiaries
operating in the states of Virginia, Iowa, Georgia, Arkansas, Indiana, Kansas,
Nebraska, Maine, Utah and Idaho and its application services division.
Unallocated corporate-level expenses are reported in the reconciliation of the
segment totals to the related consolidated totals as "other reconciling items."
Management evaluates the performance of its segments and allocates resources to
them based on gross profit and earnings before interest, taxes, depreciation,
amortization and non-cash charges related to stock compensation and the
Company's application services division ("EBITDA"). In the fourth quarter of
1998, the Company determined that the balance of revenues remaining to be
recognized under existing application service division contractual obligations
was not expected to cover anticipated costs of developing and implementing the
related applications and accrued $1,256,000 for the expected loss. The Company
accrued an additional $1,125,000 of anticipated losses in 1999 based on revised
estimates. The summary of significant accounting policies applies to both of the
segments. There have been no intersegment transactions for the periods reported.
F-31
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SEGMENT AND RELATED INFORMATION (CONTINUED)
The table below reflects summarized financial information concerning the
Company's reportable segments for the years ending December 31:
<TABLE>
<CAPTION>
STATE AND
LOCAL OTHER
GOVERNMENT RECONCILING CONSOLIDATED
BUSINESS EFED ITEMS TOTAL
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
1997
Revenues................................... $ 996,550 $ -- $ -- $ 996,550
Cost of revenues........................... 5,168 -- -- 5,168
----------- -----------
Gross profit............................... 991,382 -- -- 991,382
EBITDA..................................... 107,000 -- -- 107,000
1998
Revenues................................... 28,623,656 -- -- 28,623,656
Cost of revenues........................... 21,210,632 -- -- 21,210,632
----------- -----------
Gross profit............................... 7,413,024 -- -- 7,413,024
EBITDA..................................... 1,005,921 -- (463,487) 542,434
1999
Revenues................................... 55,395,154 1,570,974 -- 56,966,128
Cost of revenues........................... 42,126,957 63,878 -- 42,190,835
----------- ---------- -----------
Gross profit............................... 13,268,197 1,507,096 -- 14,775,293
EBITDA..................................... 3,864,068 333,341 (3,386,247) 811,162
</TABLE>
A reconciliation of total segment EBITDA to total consolidated loss before
income taxes for the years ended December 31, 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------- ----------- ------------
<S> <C> <C> <C>
Total EBITDA for reportable segments.................... $ 107,000 $ 542,434 $ 811,162
Application development contracts....................... -- (1,256,000) (1,125,000)
Stock compensation...................................... (370,235) (568,869) (3,188,051)
Depreciation and amortization........................... (13,679) (5,922,396) (10,968,482)
Other income, net....................................... 111 55,839 2,492,460
Interest expense........................................ -- (88,161) (168,872)
--------- ----------- ------------
Consolidated loss before income taxes................. $(276,803) $(7,237,153) $(12,146,783)
========= =========== ============
</TABLE>
A primary source of revenue is derived from data resellers use of the
Company's government portals to access motor vehicle records for sale to the
auto insurance industry. For the year ended December 31, 1998, one data reseller
accounted for 60% of the Company's revenues and two other resellers accounted
for an additional 11% of the Company's revenues. For the year ended
December 31, 1999, one of these data resellers accounted for approximately 67%
of the Company's revenues and two other resellers accounted for an additional
11% of the Company's revenues. At December 31, 1999, one data reseller accounted
for approximately 45% of the Company's accounts receivable and two other data
resellers accounted for approximately 12%.
F-32
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. UNAUDITED QUARTERLY OPERATING RESULTS (IN THOUSANDS EXCEPT FOR PER SHARE
AMOUNTS)
<TABLE>
<CAPTION>
QUARTER
-----------------------------------------
1(ST) 2(ND) 3RD 4(TH)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1998
Revenues.................................................. $ 361 $ 8,494 $ 9,773 $ 9,996
Operating loss............................................ (124) (1,942) (1,561) (3,578)
Net loss.................................................. (124) (1,946) (1,938) (3,888)
Basic and diluted loss per share.......................... $(0.01) $ (0.05) $ (0.05) $ (0.09)
</TABLE>
<TABLE>
<CAPTION>
QUARTER
-----------------------------------------
1(ST) 2(ND) 3RD 4(TH)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1999
Revenues................................................ $11,455 $13,311 $15,691 $16,509
Operating loss.......................................... (3,302) (2,941) (2,378) (5,850)
Net loss................................................ (3,299) (2,503) (1,442) (3,486)
Basic and diluted loss per share........................ $ (0.08) $ (0.06) $ (0.03) $ (0.07)
</TABLE>
The quarterly results of operations reflect the effect of the Exchange Offer
on March 31, 1998, with the results of operations prior to that date reflecting
only the operations of NIC/USA. The quarterly data is subject to seasonal
fluctuations resulting in lower revenues in the fourth quarter of each calendar
year, due to the smaller number of business days in the quarter and a lower
volume of business-to-government and citizen-to-government transactions during
the holiday periods.
In the fourth quarter of 1998, the Company determined that the balance of
revenues remaining to be recognized under existing application service division
contractual obligations was not expected to cover anticipated costs of
developing and implementing the related applications and accrued approximately
$1.3 million for the expected loss. The Company accrued an additional $900,000
of anticipated losses in the second quarter of 1999 and $225,000 in the fourth
quarter of 1999 based on revised estimates.
20. SUBSEQUENT EVENTS
On January 3, 2000, the Company commenced a three-year contract, with two
two-year renewal periods, with the State of Hawaii to develop and operate
Hawaii's government portal, Access Hawaii, which will provide electronic
transactions and expanded access to public information. To manage the contract,
the Company has created a new subsidiary, Hawaii Information Consortium, Inc.
("HIC"), a Hawaii corporation, which will be based in Hawaii's capitol city,
Honolulu. Under the contract, HIC will fund initial investment and ongoing
operational costs. Upon completion of the initial three-year term of the
contract or upon termination of the contract, the State of Hawaii will be
entitled to a perpetual for use only license for the applications HIC developed,
with no additional compensation due to HIC. In connection with the revenues
generated under the contract, HIC is entitled to retain any revenues remaining
after payment of statutory fees for retrieval of public information and all
network operating expenses. The Company anticipates Access Hawaii will be
operational in the first quarter of 2000.
On January 14, 2000, NIC merged its application services division with
Conquest Softworks, LLC ("Conquest"). Conquest, based in Durango, Colorado, is a
provider of software applications and services for electronic filings and
document management solutions for government. NIC contributed
F-33
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. SUBSEQUENT EVENTS (CONTINUED)
$6.5 million in cash and the net assets of its application services division for
a 65% ownership in the new company, which will be referred to as NIC Conquest.
NIC will eventually own approximately 60% of NIC-Conquest with the remainder to
be owned by NIC-Conquest employees and other shareholders who were previously
shareholders of Conquest. During the first quarter of 2000, NIC-Conquest may
incur non-cash compensation charges for the amount by which the fair value of
NIC-Conquest common stock to be sold to employees exceeds the amount paid. The
merger will be accounted for as a purchase, and on a pro forma basis, would not
have a material effect on the Company's financial statements for the year ended
December 31, 1999. At any time after the first anniversary of the merger or upon
a change in control of NIC (defined as a change in beneficial ownership of 40%
or more of the issued and outstanding voting securities of NIC, excluding any
public offering of equity securities of NIC), each of the non-NIC shareholders
shall have the right to put to NIC all, but not less than all, of their shares
at a price equal to a formula exercise price. In addition, NIC-Conquest may not
remove any non-NIC member from the board of directors, authorize or issue any
new equity shares senior to the common shares currently issued, amend its
articles of incorporation to alter the rights, preferences or privileges of the
shares held by non-NIC shareholders disproportionate to the shares held by NIC,
increase the authorized number of members of the board of directors, effect a
change in control in NIC-Conquest (defined as 1) the filing of a registration
statement with the Securities and Exchange Commission for the purposes of
registering shares under the Securities Act of 1933; 2) approval by the board of
directors of planning to make a public offering, to merge or to be acquired; or
3) the receipt of any bona fide proposal or inquiry regarding the merger or
acquisition of the company or substantially all of its assets), or sell,
spin-off or otherwise distribute any business or subsidiary of the company on a
basis other than pro rata to all the shareholders without the vote or written
consent of at least one of the board members representing the minority
shareholders.
On January 14, 2000, eFed signed a letter of intent with Bank of America
Corporation, through its subsidiary Bank of America, N.A. (USA), to create a
limited liability company to offer state and local governments a Web-based
business-to-business procurement, payment and reconciliation service. The two
companies will share equally the revenue of the limited liability company
generated from transaction fees, sales rebates from suppliers, and promotional
consideration from suppliers. eFed will primarily be responsible for providing
the electronic purchasing platform based on the eFed software, end user
interface customization, hardware and software support and maintenance services
to Bank of America and state and municipal clients, and other technical services
in support of the business endeavors of the limited liability company. In
addition, Bank of America will have the opportunity to become a strategic
investor in NIC upon the achievement of certain revenue performance criteria by
the new company. Warrants of 0.75% up to 2.5% of the current fully diluted
shares of outstanding NIC common stock will become exercisable upon achieving
certain cumulative revenue targets by December 31, 2004. These warrants are
priced in two equally sized series at $34.44 and $44.77. Once exercisable, Bank
of America will have the longer of December 31, 2005, or twenty-four months to
execute the warrants on the shares.
On February 16, 2000, NIC entered into a definitive merger agreement to
acquire SDR Technologies, Inc. ("SDR"), a provider of Internet-based
applications for governments, in exchange for 2,081,189 shares of unregistered
NIC common stock. SDR designs and develops online election and ethics filing
systems for federal, state and local government agencies. SDR has also developed
a number of Internet-based applications for tax filings, business filings,
professional licensing, and automobile registrations. The SDR acquisition will
be accounted for as a purchase and is expected to
F-34
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. SUBSEQUENT EVENTS (CONTINUED)
close by the end of March 2000. At December 31, 1999, SDR's total assets were
approximately $900,000 and total liabilities were approximately $3 million. For
the year ended December 31, 1999, SDR had net sales of approximately $2.6
million and incurred a net loss of approximately $984,000. Based on a
preliminary purchase price and purchase price allocation, intangible assets
arising from the transaction are expected to total approximately $122.2 million
(unaudited) and will be amortized over a period expected to approximate three
years. The transaction is structured to be tax free to the SDR shareholders, and
the amortization of the intangible assets will not be deductible for income tax
purposes. Pursuant to the Agreement and Plan of Reorganization and Merger,
outstanding SDR shares at the closing date will be converted to NIC common stock
based upon the exchange ratio of approximately 0.5857 NIC shares for each SDR
share. The preliminary purchase price per share was determined to be $58.29,
which was based on the average closing market price of NIC's common stock one
day before, the day of, and one day after the February 17, 2000 announcement
date of the acquisition. However, the average closing market price of NIC's
common stock three days before, the day of, and three days after the
announcement date of the acquisition will be used to determine the final
purchase price per share. The following unaudited pro forma consolidated amounts
for the year ended December 31, 1999 give effect to the acquisitions of eFed
(see Note 4) and SDR as if the acquisitions had occurred on January 1, 1999.
These amounts do not purport to be indicative of what would have occurred had
the acquisitions actually been made as of such date or the results which may
occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
<S> <C>
Revenues.................................................... $61,940,873
Operating loss.............................................. (62,652,831)
Net loss.................................................... (56,100,619)
Basic and diluted loss per share............................ $ (1.11)
Weighted average shares outstanding......................... 50,516,519
</TABLE>
On February 16, 2000, NIC signed a letter of intent to purchase a 20%
ownership interest in a privately held Internet commerce company. In exchange
for $5 million in cash, NIC will receive preferred stock convertible into common
stock. The investment is expected to be accounted for under the equity method.
The closing of the transaction is expected to take place on or before March 10,
2000.
F-35
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Electric Press, Inc.
We have audited the accompanying balance sheets of eFed, a Division of
Electric Press, Inc. as of December 31, 1998 and 1997, and the related
statements of operations, divisional equity (deficit), and cash flows for the
years then ended. These financial statements are the responsibility of the
Division's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of eFed, a Division of Electric
Press, Inc. at December 31, 1998 and 1997, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
September 2, 1999
McLean, Virginia
F-36
<PAGE>
EFED, A DIVISION OF ELECTRIC PRESS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1997 1998
-------- --------
<S> <C> <C>
Assets
Current assets:
Accounts receivable, net of allowance for doubtful
accounts of $0 and $22,235 at December 31, 1997 and
1998, respectively...................................... $ 65,000 $305,657
Prepaid expenses.......................................... -- 23,017
-------- --------
Total current assets........................................ 65,000 328,674
Furniture, fixtures and equipment, at cost:
Computer equipment........................................ 77,593 77,593
Leasehold improvements.................................... -- 46,246
Office furniture.......................................... -- 1,163
Computer software......................................... 6,359 6,359
-------- --------
83,592 131,361
Less: Accumulated depreciation.............................. 19,501 48,169
-------- --------
Net furniture, fixtures and equipment..................... 64,451 83,192
Capitalized software, net of accumulated amortization of $0
and $65,562 at December 31, 1997 and 1998, respectively... 187,144 202,151
Other assets................................................ -- 10,813
-------- --------
Total assets................................................ $316,595 $624,830
======== ========
Liabilities and divisional equity (deficit)
Current liabilities:
Accounts payable.......................................... $ 5,131 $ 63,975
Accrued expenses.......................................... -- 45,000
Line of credit............................................ 12,036 36,288
Current portion of long-term debt......................... 10,040 10,040
Deferred revenue.......................................... -- 33,075
Due to affiliate.......................................... 399,065 268,885
-------- --------
Total current liabilities................................... 426,272 457,263
Long-term debt, net of current portion...................... 13,105 3,078
Commitments (NOTE 4)
Divisional equity (deficit):
Retained earnings (deficit)............................... (122,782) 164,489
-------- --------
Total divisional equity (deficit)........................... (122,782) 164,489
Total liabilities and divisional equity (deficit)........... $316,595 $624,830
======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
F-37
<PAGE>
EFED, A DIVISION OF ELECTRIC PRESS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
----------------------
1997 1998
--------- ----------
<S> <C> <C>
Revenue..................................................... $ 92,975 $1,644,796
Costs of revenue............................................ (18,276) (389,730)
Amortization of capitalized software........................ -- (65,562)
--------- ----------
Gross profit................................................ 74,699 1,189,504
Operating expenses:
Selling and marketing..................................... 97,801 353,017
General and administrative................................ 16,891 508,443
Research and development.................................. 59,992 6,857
Depreciation.............................................. 19,501 28,668
--------- ----------
Total operating expenses.................................... 194,185 896,985
--------- ----------
Operating income (loss)..................................... (119,486) 292,519
Interest expense.......................................... 3,296 5,248
--------- ----------
Net income (loss)........................................... $(122,782) $ 287,271
========= ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-38
<PAGE>
EFED, A DIVISION OF ELECTRIC PRESS, INC.
STATEMENTS OF DIVISIONAL EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED
EARNINGS
(DEFICIT) TOTAL
--------- ---------
<S> <C> <C>
Balance at December 31, 1996................................ $ -- $ --
Net loss for the period................................... (122,782) (122,782)
--------- ---------
Balance at December 31, 1997................................ (122,782) (122,782)
Net income for the period................................. 287,271 287,271
--------- ---------
Balance at December 31, 1998................................ $ 164,489 $ 164,489
========= =========
</TABLE>
SEE ACCOMPANYING NOTES.
F-39
<PAGE>
EFED, A DIVISION OF ELECTRIC PRESS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
---------------------
1997 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income (loss)........................................... $(122,782) $ 287,271
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation............................................ 19,501 28,668
Amortization of capitalized software.................... -- 65,562
Provision for doubtful accounts......................... -- 22,235
Changes in operating assets and liabilities:
Accounts receivable................................... (65,000) (262,892)
Prepaid expenses...................................... -- (23,017)
Other assets.......................................... -- (10,813)
Accounts payable...................................... 5,131 58,844
Accrued expenses...................................... -- 45,000
Deferred revenue...................................... -- 33,075
Due to affiliate...................................... 398,705 (130,180)
--------- ---------
Net cash provided by operating activities................... 235,555 113,753
Cash flows from investing activities
Purchase of furniture, fixtures and equipment............... (83,592) (47,409)
Capitalized software........................................ (187,144) (80,569)
--------- ---------
Net cash used in investing activities....................... (270,736) (127,978)
Cash flows from financing activities
Proceeds from line of credit, net........................... 12,036 24,252
Proceeds on long-term debt.................................. 40,162 --
Payments on long-term debt.................................. (17,017) (10,027)
--------- ---------
Net cash provided by financing activities................... 35,181 14,225
--------- ---------
Net change in cash.......................................... -- --
Cash at beginning of year................................... -- --
--------- ---------
Cash at end of year......................................... $ -- $ --
========= =========
</TABLE>
SEE ACCOMPANYING NOTES.
F-40
<PAGE>
EFED, A DIVISION OF ELECTRIC PRESS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
eFed, a Division of Electric Press, Inc. (the Division) provides Internet
eCommerce business solutions for government procurement. The accompanying
financial statements have been prepared on a divisional basis, and accordingly,
certain allocations have been made regarding overhead expenses. In the opinion
of management, these allocations are reasonable and represent the overhead
expenses attributable to the Division for the periods presented. For the year
ended December 31, 1997, these allocations were based on direct and indirect
costs incurred by the Division in relation to total direct and indirect costs
incurred by Electric Press, Inc. For the year ended December 31, 1998, these
allocations were made based on the amount of direct labor costs incurred by the
Division in relation to direct labor costs incurred by Electric Press, Inc.
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.
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are stated at cost and are depreciated
using the straight-line method over three to ten years. Leasehold improvements
are recorded at cost and amortized using the straight-line method over the life
of the lease.
CAPITALIZED SOFTWARE
Capitalized software is stated at cost. Amortization of capitalized software
is computed on the straight-line basis over three years.
REVENUE RECOGNITION
The Division recognizes revenue from sales of its products upon delivery and
passage of title to the customer. Revenue is recognized provided that no
significant obligations remain and that collection of the resulting receivable
is probable. Where agreements provide for evaluation or customer acceptance, the
Company recognizes revenue upon the completion of the evaluation process and
acceptance of the product by the customer.
DEFERRED REVENUE
Deferred revenue consists of amounts received from customers in advance of
the date services are rendered.
F-41
<PAGE>
EFED, A DIVISION OF ELECTRIC PRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The stockholders of Electric Press, Inc. have elected to be treated as an S
corporation under the Internal Revenue Code, whereby income and losses are
reported on the stockholders' individual tax returns. Accordingly, no provision
for income taxes is included in the accompanying financial statements of the
Division.
FINANCIAL INSTRUMENTS
The Division considers the recorded value of its financial assets and
liabilities to approximate the fair value of the respective assets and
liabilities at December 31, 1997 and 1998. For accounts receivable, the Division
performs ongoing credit evaluations of its customers' financial condition and
generally does not require collateral. The Division maintains reserves for
credit losses which, historically, have been within management's expectations.
2. LINE OF CREDIT
Electric Press, Inc. has a line of credit agreement with a bank. The total
amount available under the agreement was $200,000 in 1997 and $750,000 in 1998.
The line of credit is secured by a blanket lien on all of the Division's assets
and by deeds of trust on the personal residences of the majority stockholders of
Electric Press, Inc. The line of credit is also guaranteed by the majority
stockholders and their spouses of Electric Press, Inc. Interest is payable
monthly at prime plus 1.5% on the outstanding balance. A commitment fee of 1% is
due on any unused portion of the line of credit. The entire balance is due upon
demand. The outstanding balance related to the Division at December 31, 1997 and
1998 was $12,036 and $36,288, respectively.
F-42
<PAGE>
EFED, A DIVISION OF ELECTRIC PRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
3. LONG-TERM DEBT
Long-term debt consists on the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
-------------------
1997 1998
-------- --------
<S> <C> <C>
Note payable to a bank, secured by a blanket lien on the
Division's assets and deeds of trust on the Electric
Press, Inc. majority stockholders' personal residences,
and personally guaranteed by the Electric Press, Inc.
majority stockholders and their spouses. The note is
payable in monthly installments of $1,201, plus interest
at prime plus 1.5%, final payment due March 2000. $14,918 $ 8,288
Note payable to a bank, secured by a blanket lien on all
the Division's assets and deeds of trust on the Electric
Press, Inc. majority stockholders' personal residences,
and personally guaranteed by the Electric Press, Inc.
majority stockholders and their spouses. The note is
payable in monthly installments of $917, plus interest
at prime plus 1.5%, final payment due May 2000.......... 8,227 4,830
------- -------
Total............................................... 23,145 13,118
Less: Current portion............................... 10,040 10,040
------- -------
$13,105 $ 3,078
======= =======
</TABLE>
At December 31, 1998, the scheduled future principal maturities of long-term
debt is as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
- ----------------------- --------
<S> <C>
1999........................................................ $10,040
2000........................................................ 3,078
-------
Total..................................................... $13,118
=======
</TABLE>
4. LEASES
Electric Press, Inc. is obligated, as lessee and sublessee, under
noncancellable operating leases for office space, which expire on various dates
through May 2002. In addition, Electric Press, Inc. is obligated, on a pro rata
basis, for annual increases in operating expenses and real estate taxes incurred
by the landlord.
Electric Press, Inc. has entered into operating leases as lessee for office
furniture and equipment. The leases expire between March 1999 and May 2002.
The Division's share of rental expense under all operating leases for the
years ended December 31, 1997 and 1998 was $2,283 and $89,294, respectively.
F-43
<PAGE>
EFED, A DIVISION OF ELECTRIC PRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
4. LEASES (CONTINUED)
At December 31, 1998, the future minimum lease payment required under
operating leases related to the Division are as follows:
<TABLE>
<CAPTION>
FURNITURE AND
YEAR ENDING DECEMBER 31 OFFICE SPACE EQUIPMENT TOTAL
- ----------------------- ------------ ------------- --------
<S> <C> <C> <C>
1999....................................... $131,174 $124,816 $255,990
2000....................................... 134,580 68,034 202,614
2001....................................... 138,618 19,080 157,698
2002....................................... 58,610 15,900 74,510
-------- -------- --------
Total...................................... $462,982 $227,830 $690,812
======== ======== ========
</TABLE>
5. RETIREMENT PLAN
Effective January 1, 1997, Electric Press, Inc. adopted a 401(k) retirement
plan (the Plan) that is available to substantially all employees of the Company.
The Plan permits employee contributions based upon percentages of compensation
that may not exceed certain amounts as provided by the Internal Revenue Code.
The Plan permits the employer to make matching contributions (which are
discretionary) that are equal to a percentage of the amount each employee
contributes. The percentage is determined each year by the Company. Additional
discretionary contributions may be made annually. For the years ended
December 31, 1997 and 1998, the matching contribution attributable to the
Division was $5,406 and $13,133, respectively, and was charged to expense.
6. RELATED PARTY TRANSACTIONS
As of December 31, 1997 and 1998, the Division had recorded a due to
affiliate of $399,065 and $268,885, respectively. This due to affiliate is
payable to Electric Press, Inc. and represents costs incurred by the Division
and paid for by Electric Press, Inc.
7. SUBSEQUENT EVENT
In August 1999, Electric Press, Inc. signed a letter of intent with National
Information Consortium (NIC), whereby NIC would acquire all assets of the
Division. As consideration, NIC shall deliver to Electric Press, Inc.
$15 million in cash and 606,000 shares of NIC common stock. In addition, NIC
will be required to either issue additional shares of common stock or pay
additional equivalent cash during an earn-out period through March 31, 2004. The
sale of the Division is expected to close in September 1999.
8. YEAR 2000 (UNAUDITED)
The Division is aware of the implications associated with the "Year 2000" as
it relates to software information systems and other outside implications on the
Division's operations. The "Year 2000" is not expected to have a material impact
on the Division's current information systems because current software is either
already "Year 2000" compliant or required changes will be insignificant. Any
required changes and expenses are to be completed by September 30, 1999. As a
result, the Division does not anticipate that incremental expenditures to ensure
that its information systems are "Year 2000"
F-44
<PAGE>
EFED, A DIVISION OF ELECTRIC PRESS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
8. YEAR 2000 (UNAUDITED) (CONTINUED)
compliant will be material to the Division's liquidity, financial position or
results of operations. Total costs incurred to date relative to the "Year 2000"
have aggregated $15,600 and have been expensed as incurred by Electric
Press, Inc. Future costs expected to be incurred are less than $10,500.
F-45
<PAGE>
FINANCIAL INFORMATION
EFED, A DIVISION OF ELECTRIC PRESS, INC.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND THE PERIOD FROM JANUARY 1, 1999 TO SEPTEMBER 15, 1999
(UNAUDITED)
F-46
<PAGE>
EFED, A DIVISION OF ELECTRIC PRESS, INC.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS JANUARY 1, 1999 TO
ENDED SEPTEMBER 30, SEPTEMBER 15,
1998 1999
-------------------- ------------------
<S> <C> <C>
Revenue.................................................... $1,244,221 $2,340,178
Costs of revenue........................................... (262,884) (540,630)
Amortization of capitalized software....................... (44,348) (112,408)
---------- ----------
Gross profit............................................... 936,989 1,687,140
Operating expenses:
Selling and marketing.................................... 161,432 518,553
General and administrative............................... 260,874 919,802
Research and development................................. 6,856 24,010
Depreciation............................................. 21,503 18,828
---------- ----------
Total operating expenses................................... 450,665 1,481,193
Operating income........................................... 486,324 205,947
Interest expense......................................... 4,995 10,688
---------- ----------
Net income................................................. $ 481,329 $ 195,259
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-47
<PAGE>
EFED, A DIVISION OF ELECTRIC PRESS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS JANUARY 1, 1999 TO
ENDED SEPTEMBER 30, SEPTEMBER 15,
1998 1999
------------------- ------------------
<S> <C> <C>
Cash flows from operating activities
Net income................................................. $ 481,329 $ 195,259
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation............................................. 21,503 18,828
Amortization of capitalized software..................... 44,348 112,408
Changes in operating assets and liabilities:
Accounts receivable.................................... (405,206) (473,599)
Unbilled receivables................................... -- (125,295)
Prepaid expenses....................................... -- 23,017
Accounts payable....................................... 1,765 209,919
Accrued expenses....................................... 60,000 (5,000)
Due to affiliate....................................... (107,332) 158,643
Deferred revenue....................................... 9,000 (33,075)
--------- ---------
Net cash provided by operating activities.................. 105,407 81,105
Cash flows from investing activities
Capitalized software....................................... (38,445) (280,476)
Purchase of equipment...................................... (47,409) --
--------- ---------
Net cash used in investing activities...................... (85,854) (280,476)
Cash flows from financing activities
Proceeds (payment) from (on) line of credit, net........... (12,036) 212,489
Payments on long-term debt................................. (7,517) (13,118)
--------- ---------
Net cash provided (used in) by financing activities........ (19,553) 199,371
Net change in cash......................................... -- --
Cash at beginning of period................................ -- --
--------- ---------
Cash at end of period...................................... $ -- $ --
========= =========
</TABLE>
SEE ACCOMPANYING NOTES.
F-48
<PAGE>
EFED, A DIVISION OF ELECTRIC PRESS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
eFed, a division of Electric Press, Inc. (the Division) provides Internet
eCommerce business solutions for government procurement. The accompanying
financial statements have been prepared on a divisional basis, and accordingly,
certain allocations have been made regarding overhead expenses. In the opinion
of management, these allocations are reasonable and represent the overhead
expenses attributable to the Division for the periods presented. These
allocations were made based primarily on the amount of direct and indirect labor
costs incurred by the Division in relation to direct and indirect costs incurred
by Electric Press, Inc.
2. UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial information of the Division for the nine months ended
September 30, 1998 and the period from January 1, 1999 to September 15, 1999 has
been prepared by the management of Electric Press, Inc., without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles for
complete financial statements have been condensed or omitted pursuant to such
rules and regulations relating to interim financial statements. In the opinion
of management, the accompanying unaudited interim financial information reflects
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the results of its operations and its cash flows for the nine
months ended September 30, 1998 and the period from January 1, 1999 to
September 15, 1999. Results of operations for the interim period ended
September 15, 1999 are not necessarily indicative of the results expected for
the full year.
3. SALE OF EFED
Effective September 15, 1999, National Information Consortium (NIC) acquired
all assets of the Division. As consideration, NIC delivered to Electric
Press, Inc. $15 million in cash and 606,000 shares of NIC common stock. In
addition, NIC may be required to either issue additional shares of common stock
or pay additional equivalent cash during an earn-out period through March 31,
2004.
F-49
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
SDR Technologies, Inc.
We have audited the accompanying consolidated balance sheets of SDR
Technologies, Inc. and Subsidiary as of December 31, 1999 and 1998 and the
related consolidated statements of operations, changes in stockholders' deficit
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. We did not audit the financial statements of SDR Software Engineering,
Pvt., Ltd., a majority-owned subsidiary of SDR Technologies, Inc., which
statements reflect total assets of $83,929 and $20,469 as of December 31, 1999
and 1998 respectively and total revenues of $100,677 and $114,750 for the years
then ended respectively. Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion, as it relates to the amounts
included for SDR Software Engineering, Pvt., Ltd., is based solely on the
reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the consolidated financial statements present fairly, in all material respects,
the financial position of SDR Technologies, Inc. and Subsidiary at December 31,
1999 and 1998 and the results of operations and cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Hurley & Company
Granada Hills, CA
February 9, 2000
F-50
<PAGE>
SDR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents................................. $ 8,956 $ 73,459
Accounts Receivable, Less Allowance for Doubtful Accounts
of $0................................................... 134,219 458,544
Prepaid Expenses.......................................... 1,535 2,927
Note Receivable, Officer.................................. 2,920 0
Other Receivables......................................... 0 38,313
-------- --------
TOTAL CURRENT ASSETS.................................... 147,630 573,243
-------- --------
PROPERTY AND EQUIPMENT, Net (Note 2)........................ 152,874 307,537
-------- --------
CAPITALIZED EQUIPMENT LEASE, Net (Note 2)................... 3,610 0
-------- --------
OTHER ASSETS
Deposits.................................................. 8,108 15,846
Deferred Finance Costs, Net of Accumulated Amortization of
$12,736 and $39,302 respectively........................ 28,882 2,316
Deferred Charges.......................................... 654 0
-------- --------
TOTAL OTHER ASSETS...................................... 37,644 18,162
-------- --------
TOTAL ASSETS............................................ $341,758 $898,942
======== ========
</TABLE>
(The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements)
F-51
<PAGE>
SDR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable.......................................... $ 184,135 $ 287,305
Loans Payable--Related Parties (Note 3)................... 89,000 200,000
Accrued Expenses.......................................... 116,066 150,873
Advances Payable--Related Parties (Note 5)................ 388,265 279,784
Note Payable--Current Portion (Note 6).................... 7,325 7,700
Capital Lease Payable (Note 2)............................ 2,250 0
Deferred Revenue.......................................... 482,000 71,860
Credit Line--Current Portion (Note 4)..................... 0 1,950,000
----------- -----------
TOTAL CURRENT LIABILITIES............................... 1,269,041 2,947,522
----------- -----------
LONG-TERM LIABILITIES
Note Payable--Long Term (Note 6).......................... 11,697 3,997
Credit Line--Long Term (Note 4)........................... 1,327,500 0
----------- -----------
TOTAL LONG-TERM DEBT.................................... 1,339,197 3,997
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 12)............. -- --
----------- -----------
TOTAL LIABILITIES....................................... 2,608,238 2,951,519
----------- -----------
STOCKHOLDERS' DEFICIT (Notes 13 and 14)
Series A Preferred Stock, non cumulative, no par or stated
value, 0 and 10,000,00 Shares Authorized, 0 and 205,907
Shares Issued and Outstanding, Respectively............. 0 891,025
Common Stock, no par or stated value, 20,000,000 Shares
Authorized, 2,885,981 and 2,758,104 Shares Issued and
Outstanding, Respectively............................... 70,441 200,851
Stock Options............................................. 0 733,000
Deferred Compensation..................................... 0 (415,000)
Accumulated Deficit....................................... (2,336,870) (3,461,310)
Accumulated Other Comprehensive Income (Loss)............. (51) (1,143)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIT............................. (2,266,480) (2,052,577)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT............. $ 341,758 $ 898,942
=========== ===========
</TABLE>
(The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements)
F-52
<PAGE>
SDR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
NET SALES................................................... $ 1,350,959 $ 2,634,567
COST OF SALES............................................... 556,918 866,486
----------- -----------
GROSS MARGIN.............................................. 794,041 1,768,081
OPERATING EXPENSES.......................................... 1,834,631 2,626,107
----------- -----------
LOSS FROM OPERATIONS........................................ (1,040,590) (858,026)
INTEREST EXPENSE............................................ (70,469) (126,871)
INTEREST INCOME............................................. 107 3,157
----------- -----------
NET LOSS BEFORE PROVISION FOR INCOME TAXES................ (1,110,952) (981,740)
PROVISION FOR INCOME TAXES.................................. 815 800
----------- -----------
NET LOSS.................................................... (1,111,767) (982,540)
OTHER COMPREHENSIVE INCOME (Loss)
LOSS ON FOREIGN CURRENCY EXCHANGE......................... (51) (1,092)
----------- -----------
TOTAL COMPREHENSIVE INCOME (LOSS)........................... $(1,111,818) $ (983,632)
=========== ===========
EARNINGS (LOSS) PER SHARE:
Basic and Diluted......................................... $ (0.39) $ (0.35)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic and Diluted......................................... 2,872,064 2,808,708
=========== ===========
</TABLE>
(The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements)
F-53
<PAGE>
SDR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON PREFERRED OTHER
-------------------- ------------------- STOCK DEFERRED ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT OPTIONS COMPENSATION DEFICIT INCOME (LOSS)
--------- -------- -------- -------- -------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1997............... 2,885,981 $ 52,000 $ 1,206,662
Repurchase of
Common Stock..... (173,215) (1,177) (18,441)
Common Stock
Issued/Services.. 173,215 19,618
Net Loss........... 1,111,767
Loss on Foreign
Currency
Exchange......... $ (51)
--------- -------- ------- -------- -------- --------- ----------- -------
Balance, December 31,
1998............... 2,885,981 70,441 (2,336,870) (51)
Repurchase of
Common Stock..... (155,579) (8,100) (141,900)
Common Stock
Issued/Services.. 27,702 138,510
Preferred Stock
Issued........... 205,907 $891,025
Stock Options
Granted with
Exercise Price
Less than Fair
Market Value on
Date of Grant.... $733,000 $(415,000)
Net Loss........... (982,540)
Loss on Foreign
Currency
Exchange......... (1,092)
--------- -------- ------- -------- -------- --------- ----------- -------
Balance, December 31,
1999............... 2,758,104 $200,851 205,907 $891,025 $733,000 $(415,000) $(3,461,310) $(1,143)
========= ======== ======= ======== ======== ========= =========== =======
<CAPTION>
TOTAL
STOCKHOLDERS'
DEFICIT
-------------
<S> <C>
Balance, December 31,
1997............... $ 1,154,662
Repurchase of
Common Stock..... (19,618)
Common Stock
Issued/Services.. 19,618
Net Loss........... 1,111,767
Loss on Foreign
Currency
Exchange......... (51)
-----------
Balance, December 31,
1998............... (2,266,480)
Repurchase of
Common Stock..... (150,000)
Common Stock
Issued/Services.. 138,510
Preferred Stock
Issued........... 891,025
Stock Options
Granted with
Exercise Price
Less than Fair
Market Value on
Date of Grant.... 318,000
Net Loss........... (982,540)
Loss on Foreign
Currency
Exchange......... (1,092)
-----------
Balance, December 31,
1999............... $(2,052,577)
===========
</TABLE>
(The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements)
F-54
<PAGE>
SDR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss.................................................. $(1,111,767) $ (982,540)
Adjustments to Reconcile Net Loss to Net Cash Used By
Operating Activities:
Depreciation and Amortization........................... 49,366 77,515
Compensation Expense Related to Stock Options Granted... 0 318,000
Decrease (Increase) In:
Accounts Receivable................................... 243,067 (321,405)
Prepaid Expenses...................................... 5,730 (1,392)
Deposits.............................................. 249 (7,738)
Other Receivables..................................... 0 (38,313)
Increase (Decrease) In:
Accounts Payable...................................... (19,920) 103,170
Accrued Expenses...................................... 74,749 34,807
Deferred Revenue...................................... 197,000 (410,140)
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES............... (561,526) (1,228,036)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment....................... (38,480) (201,349)
Collections of Loans...................................... 6,946 0
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES............... (31,534) (201,349)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Loans....................................... 89,000 200,000
Proceeds from Line of Credit.............................. 614,500 622,500
Stockholder's Loan........................................ 5,945 0
Payments on Note Payable.................................. 0 (7,324)
Payments on Loans--Officer................................ (596) (129)
Payments on Advances--Related Party....................... (119,963) (108,352)
Payments on Equipment Lease............................... (2,263) (2,250)
Proceeds From Sale of Stock............................... 0 940,535
Repurchase of Common Stock................................ 0 (150,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES........... 586,623 1,494,980
----------- -----------
FOREIGN CURRENCY ADJUSTMENTS:............................... (51) (1,092)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (6,488) 64,503
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 15,444 8,956
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 8,956 $ 73,459
=========== ===========
</TABLE>
(The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements)
F-55
<PAGE>
SDR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES:
ORGANIZATION AND OPERATION
SDR Technologies, Inc. (the "Company") was incorporated in the state of
California on December 4, 1991. The Company operates in the government
electronic filing industry specializing in Internet technologies. The Company is
a provider of information technology services to the ethics and elections
industries and fulfills the software development, data processing, network and
distributed systems needs of U.S. Federal, state, local and Canadian ethics
agencies. The Company also provides business-to-government,
citizen-to-government and government-to-government services ranging from
consulting to creation of e-business marketplaces. Additionally, the Company
develops technologies, engineering solutions and analytical systems for
government electronic filing markets.
The Company enters into contracts with Secretary of State ethics agencies to
develop an electronic marketplace where candidates, committees, and lobbyists
file their financial information and the public and agency investigators have
access to search, compare and print the data. During fiscal year 1999, over
200,000 financial reports were electronically accepted over the Company's
systems.
The Company derives its revenues primarily from fees paid by government
agencies for its products and services. In addition, the Company receives
monthly subscription fees through site hosting, data processing and application
time-sharing services.
In 1998 the Company invested $6,350 for a 51% ownership in an Indian
software development company, SDR Software Engineering Pvt., Ltd. (SDRSE) based
in Pune, India. The subsidiary was incorporated under the applicable laws and
regulations of India and all of its revenue during 1999 and 1998 were generated
by software exports to SDR Technologies, Inc. in the United States. Also, see
Note 15.
BASIS OF CONSOLIDATION
For the years ended December 31, 1998 and 1999 the financial statements of
SDR Technologies, Inc. and SDRSE are consolidated. All significant inter-company
transactions, including all revenues of SDRSE, have been eliminated from the
consolidated financial statements. All of the consolidation data for SDRSE was
obtained from their audited financial statements as of March 31, 1999 and
December 31, 1999. In 1999, SDRSE changed its year-end to December 31. Minority
interest at December 31, 1999 is approximately $7,000 and is not considered
material to the consolidated financial statements.
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 certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
EARNINGS (LOSS) PER SHARE
Basic and diluted earnings (loss) per share is computed by dividing net
income (loss) by the weighted-average number of shares issued and outstanding
during the current year. Diluted net loss per share gives effect to the
potential exercise of outstanding stock options and warrants. Basic and diluted
F-56
<PAGE>
SDR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES: (Continued)
loss per share are the same in 1998 and 1999, because the net loss would make an
increase in the number of shares anti-dilutive.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Bad debts are provided on the allowance method based on historical
experience and management's evaluation of outstanding accounts receivable at the
balance sheet date. At December 31, 1999 and 1998 no allowances have been
provided as all accounts receivable have been determined to be collectible.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with Statement of Position
97-2, "Software Revenue Recognition". Revenue is recognized on a portion of the
fee allocated to a delivered element of a contract. The delivery of an element
of a contract is considered to have occurred if there are no undelivered
elements that are essential to the functionality of the delivered element.
Revenue from product sales is recorded when the related products are shipped.
Maintenance revenue is recognized ratably over the contract period, generally
12 months.
DEPRECIATION AND AMORTIZATION
Fixed assets are carried at cost, less accumulated depreciation and
amortization. Depreciation and amortization of property and equipment is
computed under the straight-line method over the following estimated useful
lives:
<TABLE>
<CAPTION>
YEARS
--------
<S> <C>
Furniture and Fixtures...................................... 7
Computer Equipment.......................................... 5
Capitalized Equipment....................................... 5-7
Leasehold Improvements...................................... 5
</TABLE>
When assets are retired or otherwise disposed of, the cost and accumulated
depreciation and amortization are removed from the accounts, and any resulting
gain or loss is reflected in the results of operations for the period. The cost
of maintenance and repairs is charged to expense as incurred, whereas
significant renewals or betterments are capitalized. Included in the
consolidated statement of operations for the years ended December 31, 1998 and
1999 is a provision for depreciation and amortization of property and equipment
in the amount of $37,232 for SDR Technologies, Inc., and $5,187 for SDRSE, and
$45,737 for SDR Technologies, Inc. and $4,559 for SDRSE respectively.
Amortization of deferred finance costs is calculated using the straight-line
method from 12 to 38 months. Amortization expense for the years ended
December 31, 1998 and 1999 was $6,947 and $26,566 respectively.
F-57
<PAGE>
SDR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES: (Continued)
STATEMENT OF CASH FLOWS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. For the years ended
December 31, 1998 and 1999, cash paid for interest and income taxes was $80,514
and $815 respectively and $140,454 and $800 respectively.
During the years ended December 31, 1998 and 1999 SDR Technologies, Inc.
entered into the following non-monetary transactions: Repayment of a $50,000 and
$39,000 loan payable including interest of $5,095 in exchange for 18,819 shares
of preferred stock in 1999; purchase of production equipment through a capital
lease agreement for $4,513 and repurchase of 173,215 shares of common stock in
exchange for a note payable for $19,618 issued to an ex-officer of the company
in 1998 (see Note 6); Issuance of 173,215 common shares valued at $19,618 for
services in 1998; Issuance of 27,702 shares of common stock valued at $138,510
in lieu of cash for professional services relating to raising capital in 1999.
INCOME TAXES
In the beginning of 1998, SDR Technologies, Inc., by the consent of its
stockholders, elected to terminate its S Corporation election under the Internal
Revenue Code and the laws of the State of California.
The Company's operations for the year ended December 31, 1998 and 1999
resulted in net losses of $1,111,767 and $982,540 respectively. Therefore there
were no provisions made for corporate income taxes under the Internal Revenue
Code. The laws of the State of California however require the payment of a
minimum annual Franchise Tax, therefore, a provision for state income taxes was
provided in the consolidated financial statements.
The Company computes deferred income taxes in accordance with Financial
Accounting Standards Board Statement No. 109 (SFAS No. 109), "Accounting for
Income Taxes". Deferred taxes are computed based on the tax liability or benefit
in future years of the reversal of temporary differences in the recognition of
income or deduction of expenses between financial and tax reporting purposes. As
of December 31, 1998 and 1999 deferred income taxes, after application of
valuation allowances, were negligible. Therefore, no deferred taxes have been
recognized as of December 31, 1998 and 1999.
CONCENTRATION OF RISK
The Company is currently dependent on one major lender for operating funds.
If this lender were to decide not to renew the loan, the Company would need to
secure an operating loan from one or more additional sources. Management
believes that this risk is limited by working with the lender well in advance of
any renewal date.
The Company currently employs and has outside contracts with several
individuals highly specialized in writing custom tailored electronic reporting
software programs for various governmental entities. If the services of one or
more employees or outside contractors were to be lost, this could have at least
a short-term impact on the ability of the Company to fulfill current contracts
and to obtain new business. Management believes this risk is limited by their
ongoing search for qualified individuals on a world-wide basis.
F-58
<PAGE>
SDR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES: (Continued)
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables. The Company sells mainly to various
government entities at all levels. The credit risk associated with related
receivables is limited by their geographic dispersion and variety of government
agencies. The Company has not experienced any significant credit losses. The
three largest customers comprised approximately 43.2%, 33.5% and 19.2% of
accounts receivable at December 31, 1998, and the three largest customers
comprised approximately 45.7%, 35.9% and 16.5% of accounts receivable at
December 31, 1999.
COMPUTER SOFTWARE COSTS
The Company accounts for computer software costs in accordance with
Financial Accounting Standards Board Statement No. 86, "Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed". The Company's
policy is to record costs incurred to develop software for sale as research and
development expense until such time as the product proves it has market
acceptance. At that time, costs of significant development and improvements are
capitalized and amortized over the life of the expected revenue stream of the
product. The cost of the Company's current products was expensed in the period
prior to market acceptance and the software development costs subsequently
incurred were expensed. Capitalizable costs could be more significant in the
future. Purchased software is capitalized and amortized over its estimated
useful life.
RECLASSIFICATION OF CONSOLIDATED FINANCIAL STATEMENT PRESENTATION
Certain reclassifications have been made to the 1998 consolidated financial
statements to conform with the 1999 consolidated financial statement
presentation. Such reclassifications had no effect on financial results as
previously reported.
DIVIDENDS
The Company has not paid cash dividends to date, nor does the Company
anticipate the payment of cash dividends on its Common and/or Preferred stock in
the foreseeable future.
STOCK SPLIT
On August 1, 1999 the Company's Board of Directors adopted a resolution to
split its common stock. Each outstanding share of the Company's common stock was
split into 75.05 shares. As of December 31, 1999, after the effect of the stock
split, there were 2,758,104 shares of the Company's common stock outstanding.
The effect of the stock split has been retroactively reflected in the
consolidated financial statements for all periods presented.
F-59
<PAGE>
SDR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
NOTE 2--PROPERTY AND EQUIPMENT:
Property and equipment is recorded at cost and is summarized as follows:
<TABLE>
<CAPTION>
1998 1999
-------- ---------
<S> <C> <C>
Computer, Furniture, and Fixtures--SDRSE............... $ 17,968 $ 24,782
Furniture, Fixtures and Equipment...................... 8,962 70,450
Computer Equipment..................................... 179,748 252,923
Leasehold Improvements................................. 4,377 40,366
Purchased Software Costs............................... 0 26,900
-------- ---------
211,055 415,421
Less Accumulated Depreciation and Amortization....... (58,181) (107,884)
-------- ---------
152,874 307,537
-------- ---------
Capitalized Equipment Lease............................ 4,513 0
Less Accumulated Amortization........................ (903) 0
-------- ---------
3,610 0
-------- ---------
$156,484 $ 307,537
======== =========
</TABLE>
NOTE 3--LOANS PAYABLE:
On July 23, 1998 SDR Technologies, Inc. entered into a loan agreement with a
group of foreign investors for $39,000. The loan matured on July 23, 1999. In
accordance with the terms of the loan agreement SDR refinanced the loan at
maturity by repaying the entire loan with 7,800 shares of SDR Technologies, Inc.
Series A Preferred stock.
On August 31, 1998 SDR Technologies, Inc. borrowed an additional $50,000
under a separate loan agreement. The $50,000 loan matured on August 31, 1999 and
was repaid, including interest of $5,095 with the issuance of 11,019 shares of
SDR Technologies, Inc. Series A Preferred stock.
In November of 1999 SDR Technologies, Inc. signed a convertible promissory
note payable to Linea Associates for $200,000. The note bears interest at 7% per
annum and both principal and interest are due on March 19, 2000 unless, in
accordance with the loan agreement, the note is converted to SDR
Technologies Inc. common stock prior to the note's maturity date. The interest
accrued on the note as of December 31, 1999 is $1,595.
F-60
<PAGE>
SDR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
NOTE 4--REVOLVING LINE OF CREDIT:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Bank of America, revolving line of credit in the
original amount of $500,000 and subsequently raised
to $1,950,000, collateralized by marketable
securities of the Stein Family Trust, a stockholder,
payable interest only monthly at the banks FIRST rate
which approximates LIBOR (5.83% at December 31,
1999). Average interest rate during 1999 was
approximately 5.35%. Outstanding principal due
March 1, 2000........................................ $1,327,500 $1,950,000
========== ==========
</TABLE>
NOTE 5--ADVANCES PAYABLE, RELATED PARTIES:
<TABLE>
<S> <C> <C>
SDRSE has an unsecured non-interest bearing payable,
due on demand to an officer/stockholder of the
company. The payable is expected to be settled within
the current year. There is no signed note for the
above transaction.................................... $ 5,945 $ 5,816
SDR Technologies, Inc. has an unsecured, non-interest
bearing payable, due on demand to Kimball Petition
Management, Inc. which is owned by two officer/
stockholders of the Company.......................... 370,743 262,391
SDR Technologies, Inc. has an unsecured, non-interest
bearing payable, due on demand to an
officer/stockholder of the Company................... 11,577 11,577
---------- ----------
$ 388,265 $ 279,784
========== ==========
</TABLE>
NOTE 6--NOTE PAYABLE:
SDR Technologies, Inc. has an unsecured note payable due to a former
stockholder resulting from a stock redemption agreement between the Company and
the former stockholder. The Company, in consideration for the stockholder's
surrender of 173,215 shares of SDR stock, issued a promissory note payable to
the stockholder for $19,618. The note bears interest at 5% per annum and is
payable in 31 equal monthly payments including principal and interest.
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Principal Balance, December 31............................ $19,022 $11,697
Less Current Portion...................................... (7,325) (7,700)
------- -------
Long Term Portion....................................... $11,697 $ 3,997
======= =======
</TABLE>
F-61
<PAGE>
SDR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
NOTE 6--NOTE PAYABLE: (Continued)
Future minimum payments under the above obligation are as follows:
<TABLE>
<S> <C>
DECEMBER 31,
2000...................................................... $ 7,700
2001...................................................... 3,997
-------
$11,697
=======
</TABLE>
NOTE 7--INCOME TAXES:
Provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Current:
Federal................................................... $ 0 $ 0
State..................................................... 815 800
---- ----
Deferred.................................................... 0 0
---- ----
Income Tax Expense.......................................... $815 $800
==== ====
</TABLE>
The Company has accumulated tax loss carryforwards of approximately
$1,111,767 and $1,397,540 for Federal tax purposes for the years ended
December 31, 1998 and 1999 respectively. In addition the Company has a tax loss
carryforward of $555,884 and $698,770 for California franchise tax purposes for
the years ended December 31, 1998 and 1999 respectively. The Federal net
operating losses (NOL's) expire in 2018 and 2019. The state NOL's expire in 2003
and 2004. The carryforward amounts are subject to review and revisions if any,
by tax authorities. As of December 31, 1998 and 1999 deferred tax assets, after
application of valuation allowances, were negligible.
NOTE 8--RELATED PARTY TRANSACTIONS:
Throughout the years ended December 31, 1998 and 1999, non-interest bearing
funds advanced during 1997 and previous years were repaid to Kimball Petition
Management, Inc., owned by two officer/stockholders of the Company. The total
amounts repaid in 1998 and 1999 were $119,962 and $108,352 respectively. Also,
see Notes 4, 5 and 6.
NOTE 9--REPURCHASE OF COMMON STOCK
In June of 1999 SDR Technologies, Inc. purchased 155,579 shares of its
common stock for $150,000 from a former officer of the Company in complete
liquidation of his interest in the Company.
NOTE 10--LEASE COMMITMENTS:
In June 1997 SDR Technologies, Inc., began leasing office facilities under a
five year agreement. Under the non-cancelable lease the base monthly rent is
$4,031 plus common area expenses. The base lease amount is subject to a cost of
living increase based on the CPI for the Los Angeles--Long Beach--Anaheim area.
The Company has an option to extend the lease for an additional five years
F-62
<PAGE>
SDR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
NOTE 10--LEASE COMMITMENTS: (Continued)
beginning in June 2002. In May of 1999 SDR Technologies Inc. began leasing an
additional suite in the same building where its offices are located under a
contract expiring May 31 of 2002. Under the lease the base monthly rental is
$3,423 subject to cost of living increases similar to those described above.
Rent expense relative to the office space leased was $55,613 and $80,712 for
the years ended December 31, 1998 and 1999 respectively.
The minimum future obligations under the above operating leases are as
follows:
<TABLE>
<S> <C>
DECEMBER 31,
2000...................................................... $ 89,448
2001...................................................... 89,448
2002...................................................... 37,272
Thereafter................................................ 0
--------
$216,168
========
</TABLE>
NOTE 11--MAJOR CUSTOMERS:
For the year ended December 31, 1998 the three largest customers comprised
approximately 63.7%, 14.1% and 12.1% of total revenues, or a total of 89.9%. For
the year ended December 31, 1999, the five largest customers comprised
approximately 78.5% of total revenues, ranging from 12.9% up to 18.6% each. No
other customer represented more than 10% of revenues. During the year ended
December 31, 1999 the Company recognized $669,500 in revenues for the
performance of contracts awarded in 1997 and 1998.
NOTE 12--CONTINGENT LIABILITIES:
For the year ended December 31, 1999 as well as all prior years since
inception, the Company has been filing state income and sales tax returns in all
states where the Company deemed appropriate. Additional state income and sales
tax liabilities may however arise as a result of eventual reviews of the
Company's business activities in other states by the respective tax authorities.
Currently, the Company is unaware of any potential tax liabilities.
The Company is involved in a legal action arising in the normal course of
business. The ultimate resolution of this matter is not ascertainable at this
time. In the opinion of management, such matter will not have a material effect
upon the financial position of the Company. No provision has been made in these
consolidated financial statements related to this claim.
NOTE 13--STOCK OPTIONS AND WARRANTS:
The Company has adopted a 1999 Stock Option Plan ("Plan"), which permits the
Company to grant options to employees, officers, directors, consultants and
independent contractors. An aggregate of 700,000 shares of common stock may be
issued pursuant to the Plan. As of December 31, 1999, 366,450 options have been
granted, 158,949 options have vested under the Plan with 207,501 future options
pending. The shares vest over 3 years and expire 10 years after the grant date.
In accordance
F-63
<PAGE>
SDR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
NOTE 13--STOCK OPTIONS AND WARRANTS: (Continued)
with SFAS No. 123, "Stock-Based Compensation", the Company has recognized
stock-based compensation of $318,000 for 1999.
A summary of the Company's stock option activity and related information for
the year ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
-------- ----------------
<S> <C> <C>
Outstanding at Beginning of Year.................... 0 0
Granted............................................. 366,450 $1.04
Exercised........................................... 0 0
Forfeited........................................... 0 0
------- -----
Outstanding at End of Year........................ 366,450 $1.04
======= =====
Exercisable at End of Year.......................... 158,949 $1.00
Weighted-Average Fair Value Of Options
Granted During the year........................... $3.00
</TABLE>
The following table summarizes information about stock options outstanding
under the Plan at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE AVERAGE
SHARES REMAINING EXERCISE SHARES EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE PRICE OUTSTANDING PRICE
- ----------------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.00 364,950 9.5 $ 1.00 158,949 $ 1.00
$11.59 1,500 9.5 $11.59 0 $11.59
</TABLE>
There are 205,907 warrants with the option to buy one share of common stock
at $7.50 per share.
Each share of Series A Preferred stock includes a warrant (see Note 14). All
warrants were outstanding at December 31, 1999 and all expire by 2003. All
options expire by 2009.
NOTE 14--CAPITAL STOCK
In August of 1999 the Company designated 1,000,000 of its authorized shares
of Preferred stock as Series A Preferred stock. The no par Series A Preferred
stock has dividend and voting rights equal to the common stock. Each Series A
share is convertible into common stock at a conversion price of $5.00 per share,
subject to adjustment pursuant to certain anti-dilution provisions. However, at
such time as the Company's common stock becomes listed for trading on a U.S.
stock exchange, the conversion price shall be adjusted to the lower of the
conversion price then in effect or 80% of the initial public offering price per
share. During 1999 the Company raised $891,025 by issuing 205,907 shares of
Series A Preferred stock, net of $138,510 in common stock issued in exchange for
professional services related to the sale of the Preferred stock.
F-64
<PAGE>
SDR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
NOTE 14--CAPITAL STOCK (Continued)
Each share of Preferred stock includes a warrant. Each warrant entitles its
holder to purchase one share of common stock at an exercise price of $7.50 per
share, subject to adjustment pursuant to certain anti-dilution provisions. The
warrants may be exercised at any time until September 2003, at which time the
unexercised warrants will expire by their own terms.
NOTE 15--SUBSEQUENT EVENTS:
In January of 2000, SDR Technologies signed a convertible promissory note
payable to National Information Consortium, Inc. a Colorado company, for
$1,000,000. The note bears interest at 10% per annum and both principal and
interest are due on June 30, 2000 unless, in accordance with the loan agreement,
the note is converted to SDR Technologies, Inc. Common Stock.
During the first quarter of year 2000, SDR Technologies, Inc. purchased an
additional 49% of the outstanding Common Stock of SDRSE for $6,000. After this
transaction SDR Technologies, Inc. owns 100% of the outstanding stock of the
subsidiary.
The Company's ability to operate over the next twelve months is dependent
upon the raising of additional capital. The capital can be raised by executing a
Series B Preferred Stock offering, which the Company has already verbally
obtained commitments. Also, the Company has entered into discussions and has
signed a term sheet regarding a potential business combination with National
Information Consortium, Inc. If the merger was to consummate, it would
substantially improve the financial viability of SDR Technologies, Inc.
F-65
<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-66
<PAGE>
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 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-67
<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-68
<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-69
<PAGE>
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, THREE MONTHS
------------------- ENDED
1996 1997 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-70
<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
F-71
<PAGE>
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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
F-72
<PAGE>
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-73
<PAGE>
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BANK LINES OF CREDIT (CONTINUED)
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.
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-74
<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-75
<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-76
<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-77
<PAGE>
KANSAS INFORMATION CONSORTIUM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1996 1997 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-78
<PAGE>
KANSAS INFORMATION CONSORTIUM, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, THREE MONTHS
----------------------- ENDED
1996 1997 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-79
<PAGE>
KANSAS INFORMATION CONSORTIUM, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON
COMMON STOCK ADDITIONAL TREASURY STOCK STOCK
------------------- PAID-IN RETAINED ------------------- SUBSCRIPTIONS
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT RECEIVABLE TOTAL
-------- -------- ---------- -------- -------- -------- ------------- --------
<S> <C> <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) $154,355
Net income......................... -- -- -- 167,412 -- -- -- 167,412
Distributions to shareholders...... -- -- -- (138,002) -- -- -- (138,002)
Sales of treasury stock............ -- -- 7,470 -- 3,000 3,000 -- 10,470
------- -------- ------- -------- ------- -------- -------- --------
BALANCE, DECEMBER 31, 1996......... 250,000 250,000 8,870 (6,385) (25,250) (32,750) (25,500) 194,235
Net income......................... -- -- -- 190,028 -- -- -- 190,028
Distributions to shareholders...... -- -- -- (203,360) -- -- -- (203,360)
Sales of treasury stock............ -- -- 13,276 -- 4,500 4,500 -- 17,776
Payment received for subscribed
stock............................ -- -- -- -- -- -- 25,500 25,500
------- -------- ------- -------- ------- -------- -------- --------
BALANCE, DECEMBER 31, 1997......... 250,000 250,000 22,146 (19,717) (20,750) (28,250) -- 224,179
Net income (unaudited)............. -- -- -- 146,585 -- -- -- 146,585
Distributions to shareholders
(unaudited)...................... -- -- -- (59,605) -- -- -- (59,605)
------- -------- ------- -------- ------- -------- -------- --------
BALANCE, MARCH 31, 1998
(UNAUDITED)...................... 250,000 $250,000 $22,146 $67,263 (20,750) $(28,250) $ -- $311,159
======= ======== ======= ======== ======= ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-80
<PAGE>
KANSAS INFORMATION CONSORTIUM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, THREE MONTHS
---------------------- ENDED
1996 1997 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-81
<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
F-82
<PAGE>
KANSAS INFORMATION CONSORTIUM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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-83
<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,
-------------------
1996 1997 USEFUL 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-84
<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-85
<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-86
<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-87
<PAGE>
ARKANSAS INFORMATION CONSORTIUM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
1997 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-88
<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-89
<PAGE>
ARKANSAS INFORMATION CONSORTIUM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
1997 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-90
<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.
F-91
<PAGE>
ARKANSAS INFORMATION CONSORTIUM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-92
<PAGE>
ARKANSAS INFORMATION CONSORTIUM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-93
<PAGE>
ARKANSAS INFORMATION CONSORTIUM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-94
<PAGE>
ARKANSAS INFORMATION CONSORTIUM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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-95
<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-96
<PAGE>
NEBRASK@ INTERACTIVE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1996 1997 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-97
<PAGE>
NEBRASK@ INTERACTIVE, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, THREE MONTHS
----------------------- ENDED
1996 1997 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-98
<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-99
<PAGE>
NEBRASK@ INTERACTIVE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
------------------------ ENDED
1996 1997 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-100
<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
F-101
<PAGE>
NEBRASK@ INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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-102
<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,
-------------------
1996 1997 USEFUL 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-103
<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-104
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
OVERVIEW
On September 15, 1999, National Information Consortium, Inc. ("NIC" or the
"Company") acquired the net assets of the business of eFed, a provider of
Internet-based procurement software and services for the government. eFed
designs, develops and manages online procurement software and services for
federal and state markets. eFed was a division of privately held Reston,
Virginia-based Electric Press, Inc. The acquisition was accounted for as a
purchase and the results of eFed's operations are included in the Company's
consolidated statement of operations from the date of acquisition. The total
purchase price for the business was approximately $29.5 million. Total
consideration included $15 million in cash from the proceeds of NIC's initial
public offering and the issuance of 606,000 shares of unregistered common stock
with a fair value of approximately $14.5 million.
On February 16, 2000, NIC entered into a merger agreement to acquire SDR
Technologies, Inc. ("SDR"), a provider of Internet-based applications for the
government, in exchange for 2,081,189 shares of unregistered common stock
resulting in a preliminary purchase price of approximately $120.2 million. The
SDR acquisition will be accounted for as a purchase and is expected to close by
the end of March 2000. The pro forma financial information has been prepared on
the basis of assumptions described in the Notes to Pro Forma Consolidated
Financial Information and includes assumptions relating to the allocation of
consideration paid for the assets and liabilities of SDR based on preliminary
estimates of fair value. The actual allocation of such consideration may differ
from that reflected in the pro forma financial information.
The unaudited pro forma consolidated statement of operations combines NIC's
historical results of operations for the year ended December 31, 1999 with
eFed's historical results for the period from January 1, 1999 to September 15,
1999, and SDR's historical results for the year ended December 31, 1999, as if
the acquisitions occurred on January 1, 1999. NIC's historical results of
operations already include eFed's results of operations for the period from the
date of acquisition to December 31, 1999. The unaudited pro forma condensed
consolidated balance sheet gives effect to the SDR acquisition as if it had
taken place on December 31, 1999.
The unaudited pro forma consolidated financial information is not necessarily
indicative of the operating results that would have been achieved had the
transactions taken place on January 1, 1999 or December 31, 1999 and should not
be construed as being representative of future operating results. The pro forma
financial information should be read in conjunction with the audited financial
statements and related notes of NIC, eFed and SDR, included elsewhere in this
prospectus.
F-105
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
(a) (b)
NIC eFed SDR Adjustments Pro Forma
------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............... $ 56,966,128 $2,340,178 $2,634,567 $ -- $ 61,940,873
Cost of revenues....... 42,190,835 540,630 866,486 -- 43,597,951
------------ ---------- ---------- ------------ ------------
Gross profit......... 14,775,293 1,799,548 1,768,081 -- 18,342,922
------------ ---------- ---------- ------------ ------------
Operating expenses:
Service development
and operations..... 5,876,294 -- -- -- 5,876,294
Selling, general and
administrative..... 9,212,837 1,462,365 2,230,592 -- 12,905,794
Stock compensation... 3,188,051 -- 318,000 -- 3,506,051
Depreciation and
amortization....... 10,968,482 131,236 77,515 6,783,119 (c) 58,707,614
40,747,262 (d)
------------ ---------- ---------- ------------ ------------
Total operating
expenses........... 29,245,664 1,593,601 2,626,107 47,530,381 80,995,753
------------ ---------- ---------- ------------ ------------
Operating income
(loss)............... (14,470,371) 205,947 (858,026) (47,530,381) (62,652,831)
------------ ---------- ---------- ------------ ------------
Other income (expense):
Interest expense..... (168,872) (10,688) (126,871) -- (306,431)
Other income, net.... 2,492,460 -- 3,157 -- 2,495,617
------------ ---------- ---------- ------------ ------------
Total other income
(expense).......... 2,323,588 (10,688) (123,714) -- 2,189,186
------------ ---------- ---------- ------------ ------------
Income (loss) before
income taxes......... (12,146,783) 195,259 (981,740) (47,530,381) (60,463,645)
Income tax expense
(benefit)............ (1,416,223) -- 800 (2,565,313) (e) (4,363,026)
(382,290) (f)
------------ ---------- ---------- ------------ ------------
Net income (loss)...... $(10,730,560) $ 195,259 $ (982,540) $(44,582,779) $(56,100,619)
============ ========== ========== ============ ============
Net loss per share:
Basic and diluted.... $ (0.23) $ (1.11)
============ ============
Weighed average shares 1,156,869 (g)
outstanding.......... 47,278,461 2,081,189 (h) 50,516,519
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
F-106
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
(i)
NIC SDR Adjustments Pro Forma
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 9,527,389 $ 73,459 $ -- $ 9,600,848
Marketable securities................ 82,480,760 -- -- 82,480,760
Accounts receivable and other current
assets............................. 7,060,500 499,784 -- 7,560,284
------------ ----------- ------------ ------------
Total current assets................. 99,068,649 573,243 -- 99,641,892
Property and equipment, net............ 2,998,376 307,537 -- 3,305,913
Other long-term assets................. 947,467 18,162 -- 965,629
Intangible assets, net................. 30,646,446 -- 122,241,787(j) 152,888,233
------------ ----------- ------------ ------------
Total assets....................... $133,660,938 $ 898,942 $122,241,787 $256,801,667
============ =========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and other current
liabilities.......................... $ 5,113,882 $ 510,038 $ -- $ 5,623,920
Bank line of credit.................... -- 1,950,000 -- 1,950,000
Other short-term debt.................. 239,931 487,484 -- 727,415
------------ ----------- ------------ ------------
Total current liabilities.......... 5,353,813 2,947,522 -- 8,301,335
Capital lease obligations and other
long-term debt....................... 218,164 3,997 -- 222,161
------------ ----------- ------------ ------------
Total liabilities.................. 5,571,977 2,951,519 -- 8,523,496
Shareholders' equity (deficit)......... 128,088,961 (2,052,577) 122,241,787(k) 248,278,171
------------ ----------- ------------ ------------
Total liabilities and shareholders'
equity........................... $133,660,938 $ 898,942 $122,241,787 $256,801,667
============ =========== ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
F-107
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma consolidated statement of operations combines NIC's
historical results of operations for the year ended December 31, 1999 with
eFed's historical results for the period from January 1, 1999 to September 15,
1999, and SDR's historical results for the year ended December 31, 1999, as if
the acquisitions occurred on January 1, 1999. NIC's historical results of
operations already include eFed's results of operations for the period from the
date of acquisition to December 31, 1999. The unaudited pro forma condensed
consolidated balance sheet gives effect to the SDR acquisition as if it had
taken place on December 31, 1999.
The pro forma financial information has been prepared on the basis of
assumptions described in these notes and includes assumptions relating to the
allocation of the consideration paid for the assets and liabilities of SDR based
on preliminary estimates of fair value. The actual allocation of such
consideration may differ from that reflected in the pro forma financial
information.
The pro forma consolidated financial information gives effect to the
following pro forma adjustments:
(a) This column represents eFed's unaudited results of operations for the period
from January 1, 1999 to September 15, 1999. The Company's consolidated
results of operations already include eFed's results of operations for the
period from the date of acquisition to December 31, 1999.
(b) This column represents SDR's consolidated results of operations for the year
ended December 31, 1999.
(c) The pro forma adjustment represents amortization expense for the period from
January 1, 1999 to September 15, 1999, resulting from the application of
purchase accounting to the eFed acquisition. The Company's consolidated
results of operations reflect amortization for the period from the date of
acquisition to December 31, 1999.
The total purchase price for the eFed business was approximately $29.5
million. Total consideration included $15 million in cash from the proceeds
of NIC's initial public offering and the issuance of 606,000 shares of
unregistered common stock with a fair value of approximately $14.5 million.
The fair value of the common shares was determined based on the average
closing market price of NIC's common stock three days before, the day of,
and three days after the September 13, 1999 announcement date of the
acquisition. Additional consideration is also payable through the end of
calendar year 2003 if eFed's financial results exceed certain targeted
levels, which have been set substantially above the historical experience of
eFed at the time of acquisition.
The total purchase price of approximately $29.5 million was allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed
on the basis of their fair values on the closing date. The fair value of net
tangible assets acquired, consisting primarily of accounts receivable,
property and equipment, accounts payable and other accrued expenses, totaled
$816,000 and approximated historical carrying amounts. The sole identifiable
intangible asset relates to eFed's Internet procurement software. This asset
was valued at approximately $21.8 million based on the net present value of
projected future net cash flows from licensing the software over its
estimated three-year life discounted by 15%. The remainder of the cost was
allocated to goodwill. The goodwill is being amortized on a straight-line
basis over three years.
(d) The pro forma adjustment represents estimated amortization expense for the
year ended December 31, 1999 resulting from the application of purchase
accounting to the SDR acquisition.
The SDR merger will be accounted for using the purchase method of
accounting. SDR common stock and equivalents will be converted to NIC common
stock based upon the exchange ratio of
F-108
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
approximately 0.5857 NIC shares for each SDR share. Based on the exchange
ratio, NIC will issue to SDR shareholders 2,081,189 shares of unregistered
common stock as consideration. For purposes of the pro forma financial
information, the preliminary purchase price per share was determined to be
$58.29, which was based on the average closing market price of NIC's common
stock one day before, the day of, and one day after the February 17, 2000
announcement date of the acquisition. However, the average closing market
price of NIC's common stock three days before, the day of, and three days
after the announcement date of the acquisition will be used to determine the
final purchase price per share.
With respect to SDR warrants and common stock options to be exchanged as
part of the SDR merger, all warrants and options are included as part of the
number of shares to be exchanged in the merger. The estimated acquisition
cost has been reduced by the exercise price of the warrants ($1,544,303) and
options ($578,994).
The transaction is structured to be tax free to SDR shareholders. The
historical tax basis in the assets and liabilities will carry over to NIC,
and the amortization of the purchase accounting intangibles will not be
deductible for income tax purposes.
Below is a table of the estimated acquisition cost, preliminary purchase
price allocation and annual estimated amortization of the intangible assets
acquired:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ESTIMATED ACQUISITION COST:
Estimated fair value of common stock to be issued... $121,312,507
Estimated direct costs of acquisition............... 1,000,000
Less exercise price of SDR warrants and stock
options........................................... (2,123,297)
------------
$120,189,210
============
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED ANNUAL
AMORTIZATION AMORTIZATION
PERIOD OF INTANGIBLES
------------ --------------
<S> <C> <C> <C>
PURCHASE PRICE ALLOCATION:
Estimated fair value of net tangible assets of SDR
at December 31, 1999.............................. $ (2,052,577)
Intangible assets acquired.......................... 122,241,787 3 years $40,747,262
------------
$120,189,210
============
</TABLE>
Tangible assets to be acquired in the SDR merger will primarily consist of
accounts receivable and property and equipment. Liabilities to be assumed in
the SDR merger will primarily consist of obligations under a revolving line
of credit, loans and advances payable, accounts payable, and accrued
liabilities.
(e) For the period from January 1, 1999 to September 15, 1999, Electric Press,
Inc. was an S corporation. Accordingly, no provision for income taxes was
included in eFed's results of operations for the corresponding period. This
adjustment represents eFed's pro forma tax provision (expense on its results
of operations) and the pro forma tax benefit related to the amortization
expense resulting from the application of purchase accounting for the period
from January 1, 1999 to September 15, 1999. The Company's consolidated
results of operations already include eFed's tax provision and the tax
benefit relating to amortization for the period from the date of
F-109
<PAGE>
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
acquisition to December 31, 1999. The pro forma benefit for income taxes was
calculated based on enacted tax laws and statutory tax rates applicable to
the period presented.
(f) For the year ended December 31, 1999, no provision for income taxes, other
than a provision for a minimum annual state franchise tax, was included in
SDR's consolidated results of operations. Net deferred tax assets arising
primarily from SDR's net operating losses, after application of valuation
allowances, were negligible. This adjustment represents SDR's pro forma tax
benefit on its results of operations for 1999. Amortization of the goodwill
arising from the application of purchase accounting will not be deductible
for income tax purposes.
(g) This adjustment represents the incremental shares needed to reflect the
common shares outstanding for the period based on the following assumed
stock issuances as of January 1, 1999 related to the eFed acquisition:
- The actual issuance of 606,000 unregistered common shares as part of
the acquisition price.
- The assumed issuance of 1,363,636 shares of common stock at $11 per
share, resulting in net proceeds of $15 million. The net proceeds were
used to pay the cash portion of the acquisition price. The $11 share
price was based on the net proceeds per share received by the Company
from its initial public offering of 10 million shares of common stock
on July 15, 1999. The pro forma weighted average shares outstanding
reflect the 1,969,636 shares as outstanding for the entire year ended
December 31, 1999, and also reflect the difference between the 10
million shares of common stock issued on July 15, 1999 and 1,363,636
shares noted above as outstanding from July 15, 1999 to December 31,
1999.
(h) This adjustment represents the incremental shares needed to reflect the
common shares outstanding for the period related to the SDR acquisition.
(i) This column represents SDR's consolidated balance sheet as of December 31,
1999.
(j) This adjustment represents the estimated intangible assets arising from the
SDR acquisition.
(k) This adjustment represents the elimination of SDR's shareholders' deficit
($2,052,577) and the issuance of NIC common stock in connection with the SDR
merger.
F-110
<PAGE>
[LOGO]
<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............... $ 130,336
NASD Filing Fee............................................. 35,000
Nasdaq National Market Listing Fee.......................... 17,500
Accounting Fees and Expenses................................ 400,000
Blue Sky Fees and Expenses.................................. 2,000
Legal Fees and Expenses..................................... 300,000
Transfer Agent and Registrar Fees and Expenses.............. 10,000
Printing Expenses........................................... 300,000
Miscellaneous Expenses...................................... 5,164
==========
Total................................................. $1,200,000
</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, 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
II-1
<PAGE>
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 December 31, 1999, we have granted or issued and
sold the following unregistered securities:
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. On September 15, 1999, we issued to Electric Press, Inc. 606,000 shares
of unregistered common stock with a fair value of approximately $14.5 million.
The issuances of 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
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
II-2
<PAGE>
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 22 day of February, 2000.
<TABLE>
<S> <C> <C>
NATIONAL INFORMATION CONSORTIUM, INC.
BY: /S/ JAMES B. DODD
-----------------------------------------
James B. Dodd
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a
Director and/or officer of National Information Consortium, Inc., a Colorado
corporation, hereby constitutes and appoints James B. Dodd and Kevin C.
Childress, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite, necessary or advisable to be
done, as fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or their or his substitutes, may lawfully do or cause to be done by
virtue hereof.
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>
/s/ JEFFERY S. FRASER Chairman and Director
------------------------------------------- February 22, 2000
Jeffery S. Fraser
President, Chief Executive
/s/ JAMES B. DODD Officer and Director
------------------------------------------- (Principal Executive February 22, 2000
James B. Dodd Officer)
/s/ KEVIN C. CHILDRESS Chief Financial Officer
------------------------------------------- (Principal Financial and February 22, 2000
Kevin C. Childress Accounting Officer)
/s/ JOHN L. BUNCE, JR. Director
------------------------------------------- February 22, 2000
John L. Bunce, Jr.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DANIEL J. EVANS Director
------------------------------------------- February 22, 2000
Daniel J. Evans
/s/ ROSS C. HARTLEY Director
------------------------------------------- February 22, 2000
Ross C. Hartley
/s/ PATRICK J. HEALY Director
------------------------------------------- February 22, 2000
Patrick J. Healy
/s/ PETE WILSON Director
------------------------------------------- February 22, 2000
Pete Wilson
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
- --------------------- ------------------------------------------------------------
<C> <S>
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 Investors' Rights Agreement, dated January 12, 2000
4.4 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 Joseph
Nemelka, dated July 24, 1998
10.9 Employment Agreement between the Registrant and James B.
Dodd dated January 1, 1999*
10.10 Employment Agreement between the Registrant and Ray G.
Coutermarsh dated February 1, 2000
10.11 Employment Agreement between the Registrant and Terrence
Parker dated November 9, 1999
10.12 Contract for Network Manager Services between the
Information Network of Kansas and Kansas Information
Consortium, Inc. dated December 18, 1991 with addenda dated
October 15, 1992, August 19, 1993, May 26, 1995 and June 13,
1996 and amendment on March 2, 1998*
10.13 Contract for Network Manager Services between the State of
Indian@ by and through the Intelenet Commission and Indian@
Interactive, Inc., dated July 18, 1995*
10.14 Services Contract by and between National Information
Consortium, U.S.A. and the GeorgiaNet Authority, an agency
of the State of Georgia, dated September 15, 1996*
10.15 Contract for Network Manager between Information Network of
Arkansas by and through the Information Network of Arkansas
Board and Arkansas Information Consortium, Inc. dated July
2, 1997*
10.16 Contract for Network Manager Services between the Nebrask@
State Records Board on behalf of the State of Nebrask@ and
Nebrask@ Interactive, Inc. dated December 3, 1997 with
addendum No. 1 dated as of the same date*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
- --------------------- ------------------------------------------------------------
<C> <S>
10.17 Contract for Network Manager Services between the
Commonwealth of Virginia by and through the Virginia
Information Providers Network Authority and Virginia
Interactive, LLC dated January 15, 1998*
10.18 Contract for Network Manager Services between Iowa
Interactive, Inc. and the State of Iowa by and through
Information Technology Services dated April 23, 1998 with
letter addendum dated August 7, 1998*
10.19 Contract for Network Manager Services between the
Consolidated City of Indianapolis and Marion County by and
through the Enhanced Access Board of Marion County and City-
County Interactive, LLC dated August 31, 1998 with addendum
dated as of the same date*
10.20 State of Maine Contract for Special Services with New
England Interactive, Inc. dated April 14, 1999*
10.21 State of Idaho Contract for Electronic Business and portal
Services with the Idaho Department of Administration and
other Public Agencies, dated December 7, 1999
10.22 State of Hawaii Contract for Special Services with the State
of Hawaii, dated December 29, 1999
10.23 Employment Agreement between the Registrant and Kevin C.
Childress dated May 16, 1999*
10.24 Sublease for the Registrant's offices at 12 Corporate Woods,
Overlank Park dated May 14, 1999 and Lease for the same
address dated January 15, 1995 with First Lease Modification
dated October 30, 1996*
10.25 Agreement between Equifax Services and Nebrask@ Online dated
March 25, 1996*
10.26 Agreement between ChoicePoint and the Information Network of
Kansas dated September 1, 1997*
10.27 Agreement between Equifax/ChoicePoint and the Information
Network of Arkansas dated September 2, 1997*
10.28 Agreement between Equifax Systems, Inc. and Access Indian@
Information Network dated November 14, 1995*
10.29 Contract for Network Manager Services between the State of
Utah and Utah Interactive, Inc. dated as of May 7, 1999*
10.30 Asset Purchase Agreement between the Registrant and Electric
Press, Inc, for the acquisition of eFed, a division of
Electric Press, Inc., dated as of September 15, 1999
10.31 Contribution Agreeement between the Registrant and Conquest
Softworks, LLC, dated as of January 12, 2000 Agreement
10.32 Agreement and Plan of Reorganization and Merger between the
Registrant and SDR Technologies, Inc., dated as of
February 16, 2000
21.1 Subsidiaries of the Registrant
23.1 Consent of Morrison & Foerster LLP. Reference is made to
Exhibit 5.1
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.3 Consent of Ernst & Young LLP, Independent Auditors
23.4 Consent of Hurley & Company, Independent Auditors
24.1 Power of Attorney of James B. Dodd and Kevin C. Childress.
Reference is made to II-4
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Incorporated by reference to Registration Statement on Form S-1, File
No. 333-77939
<PAGE>
EXHIBIT 1.1
_________ SHARES
NATIONAL INFORMATION CONSORTIUM, INC.
COMMON STOCK
FORM OF UNDERWRITING AGREEMENT
[Date]
CREDIT SUISSE FIRST BOSTON CORPORATION
...........................................
...........................................,
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. INTRODUCTORY. National Information Consortium, Inc., a Colorado
corporation ("COMPANY") proposes to issue and sell ________ shares of its Common
Stock ("SECURITIES") and the stockholders listed in Schedule A hereto ("SELLING
STOCKHOLDERS") propose severally to sell an aggregate of ______________
outstanding shares of the Securities (such ____________ shares of Securities
being hereinafter referred to as the "FIRM SECURITIES"). The Company also
proposes to sell to the Underwriters, at the option of the Underwriters, an
aggregate of not more than ________ additional shares of its Securities and the
Selling Stockholders also propose to sell to the Underwriters, at the option of
the Underwriters, an aggregate of not more than _____________ additional
outstanding shares of the Company's Securities], as set forth below (such
____________ additional shares being hereinafter referred to as the "OPTIONAL
SECURITIES"). The Firm Securities and the Optional Securities are herein
collectively called the "OFFERED SECURITIES". The Company and the Selling
Stockholders hereby agree with the several Underwriters named in
Schedule--A--B--hereto ("UNDERWRITERS") as follows:
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
STOCKHOLDERS. (a) The Company represents and warrants to, and agrees with, the
several Underwriters that:
(i) A registration statement (No. 333- ) relating to the Offered
Securities, including a form of prospectus, has been filed with the
Securities and Exchange Commission ("COMMISSION") and either (A) has
been declared effective under the Securities Act of 1933 ("ACT") and is
not proposed to be amended or (B) is proposed to be amended by
amendment or post-effective amendment. If such registration statement
(the "INITIAL REGISTRATION STATEMENT") has been declared effective,
either (A) an additional registration statement (the "ADDITIONAL
REGISTRATION STATEMENT") relating to the Offered Securities may have
been filed with the Commission pursuant to Rule 462(b) ("RULE 462(b)")
under the Act and, if so filed, has become effective upon filing
pursuant to such Rule and the Offered Securities all have been duly
registered under the Act pursuant to the initial registration statement
and, if applicable, the additional registration statement or (B) such
an additional registration statement is proposed to be filed with the
Commission pursuant to Rule 462(b) and will become effective upon
filing pursuant to such Rule and upon such filing the Offered
Securities will all have been duly registered under the Act pursuant to
the initial registration statement and such additional
1.
<PAGE>
registration statement. If the Company does not propose to amend the
initial registration statement or if an additional registration
statement has been filed and the Company does not propose to amend it,
and if any post-effective amendment to either such registration
statement has been filed with the Commission prior to the execution
and delivery of this Agreement, the most recent amendment (if any) to
each such registration statement has been declared effective by the
Commission or has become effective upon filing pursuant to Rule 462(c)
("RULE 462(c)") under the Act or, in the case of the additional
registration statement, Rule 462(b). For purposes of this Agreement,
"EFFECTIVE TIME" with respect to the initial registration statement
or, if filed prior to the execution and delivery of this Agreement,
the additional registration statement means (A) if the Company has
advised the Representatives thatit does not propose to amend such
registration statement, the date and time as of which such
registration statement, or the most recent post-effective amendment
thereto (if any) filed prior to the execution and delivery of this
Agreement, was declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c), or (B) if the Company
has advised the Representatives that it proposes to file an amendment
or post-effective amendment to such registration statement, the date
and time as of which such registration statement, as amended by such
amendment or post-effective amendment, as the case may be, is declared
effective by the Commission. If an additional registration statement
has not been filed prior to the execution and delivery of this
Agreement but the Company has advised the Representatives that it
proposes to file one, "EFFECTIVE TIME" with respect to such additional
registration statement means the date and time as of which such
registration statement is filed and becomes effective pursuant to Rule
462(b). "EFFECTIVE DATE" with respect to the initial registration
statement or the additional registration statement (if any) means the
date of the Effective Time thereof. The initial registration
statement, as amended at its Effective Time, including all information
contained in the additional registration statement (if any) and deemed
to be a part of the initial registration statement as of the Effective
Time of the additional registration statement pursuant to the General
Instructions of the Form on which it is filed and including all
information (if any) deemed to be a part of the initial registration
statement as of its Effective Time pursuant to Rule 430A(b) ("RULE
430A(b)") under the Act, is hereinafter referred to as the "INITIAL
REGISTRATION STATEMENT". The additional registration statement, as
amended at its Effective Time, including the contents of the initial
registration statement incorporated by reference therein and including
all information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to
Rule 430A(b), is hereinafter referred to as the "ADDITIONAL
REGISTRATION STATEMENT". The Initial Registration Statement and the
Additional Registration are hereinafter referred to collectively
as the "REGISTRATION STATEMENTS" and individually as a "REGISTRATION
STATEMENT". The form of prospectus relating to the Offered Securities,
as first filed with the Commission pursuant to and in accordance
with Rule 424(b) ("RULE 424(b)") under the Act or (if no such filing
is required) as included in a Registration Statement, is hereinafter
referred to as the "PROSPECTUS". No document has been or will be
prepared or distributed in reliance on Rule 434 under the Act.
(ii) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement: (A) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all respects to the requirements of
the Act and the rules and regulations of the Commission ("RULES AND
REGULATIONS") and did not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, (B) on the
Effective Date of the Additional Registration Statement (if any), each
Registration Statement conformed or will conform, in all respects to
the requirements of the Act and the Rules and Regulations and did not
include, or will not include, any untrue statement of a material fact
and did not omit, or will not omit, to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading, and (C) on the date of this Agreement, the Initial
Registration Statement and, if the Effective Time of the Additional
Registration Statement is prior to the execution and delivery of this
Agreement, the Additional Registration Statement each conforms, and at
the time of filing of the Prospectus pursuant
2.
<PAGE>
to Rule 424(b) or (if no such filing is required) at the Effective
Date of the Additional Registration Statement in which the Prospectus
is included, each Registration Statement and the Prospectus will
conform, in all respects to the requirements of the Act and the Rules
and Regulations, and neither of such documents includes, or will
include, any untrue statement of a material fact or omits, or will
omit, to state any material fact required to be stated therein or
necessary to make the statements therein not misleading. If the
Effective Time of the Initial Registration Statement is subsequent to
the execution and delivery of this Agreement: on the Effective
Date of the Initial Registration Statement, the Initial Registration
Statement and the Prospectus will conform in all respects to the
requirements of the Act and the Rules and Regulations, neither of
such documents will include any untrue statement of a material
fact or will omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading,
and no Additional Registration Statement has been or will be filed.
The two preceding sentences do not apply to statements in or
omissions from a Registration Statement or the Prospectus based
upon written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein, it being
understood and agreed that the only such information is that
described as such in Section 7(c) hereof.
(iii) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Colorado,
with power and authority (corporate and other) to own its properties
and conduct its business as described in the Prospectus; and the
Company is duly qualified to do business as a foreign corporation in
good standing in all other jurisdictions in which its ownership or
lease of property or the conduct of its business requires such
qualification.
(iv) Each subsidiary of the Company has been duly incorporated and
is an existing corporation in good standing under the laws of the
jurisdiction of its incorporation, with power and authority (corporate
and other) to own its properties and conduct its business as described
in the Prospectus; and each subsidiary of the Company is duly qualified
to do business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification; all of the issued
and outstanding capital stock of each subsidiary of the Company has
been duly authorized and validly issued and is fully paid and
nonassessable; and the capital stock of each subsidiary owned by the
Company, directly or through subsidiaries, is owned free from liens,
encumbrances and defects.
(v) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized and validly
issued, fully paid and nonassessable and conform to the description
thereof contained in the Prospectus; and the stockholders of the
Company have no preemptive rights with respect to the Securities.
(vi) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person that would give rise to a valid claim against the Company or any
Underwriter for a brokerage commission, finder's fee or other like
payment in connection with this offering.
(vii) There are no contracts, agreements or understandings between
the Company and any person granting such person the right to require
the Company to file a registration statement under the Act with respect
to any securities of the Company owned or to be owned by such person or
to require the Company to include such securities in the securities
registered pursuant to a Registration Statement or in any securities
being registered pursuant to any other registration statement filed by
the Company under the Act.
(viii) The Securities have been approved for listing subject to
notice of issuance on the Nasdaq Stock Market's National Market.
3.
<PAGE>
(ix) No consent, approval, authorization, or order of, or filing
with, any governmental agency or body or any court is required to be
obtained or made by the Company for the consummation of the
transactions contemplated by this Agreement in connection with the sale
of the Offered Securities, except such as have been obtained and made
under the Act and such as may be required under state securities laws.
(x) The execution, delivery and performance of this Agreement, and
the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms and provisions of,
or constitute a default under, any statute, any rule, regulation or
order of any governmental agency or body or any court, domestic or
foreign, having jurisdiction over the Company or any subsidiary of the
Company or any of their properties, or any agreement or instrument to
which the Company or any such subsidiary is a party or by which the
Company or any such subsidiary is bound or to which any of the
properties of the Company or any such subsidiary is subject, or the
charter or by-laws of the Company or any such subsidiary.
(xi) This Agreement has been duly authorized, executed and
delivered by the Company.
(xii) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and
all other properties and assets owned by them, in each case free from
liens, encumbrances and defects that would materially affect the value
thereof or materially interfere with the use made or to be made thereof
by them; and except as disclosed in the Prospectus, the Company and its
subsidiaries hold any leased real or personal property under valid and
enforceable leases with no exceptions that would materially interfere
with the use made or to be made thereof by them.
(xiii) The Company and its subsidiaries possess adequate
certificates, authorities or permits issued by appropriate governmental
agencies or bodies necessary to conduct the business now operated by
them and have not received any notice of proceedings relating to the
revocation or modification of any such certificate, authority or permit
that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a material
adverse effect on the condition (financial or other), business,
properties or results of operations of the Company and its subsidiaries
taken as a whole ("MATERIAL ADVERSE EFFECT").
(xiv) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
might have a Material Adverse Effect.
(xv) The Company and its subsidiaries own, possess or can acquire
on reasonable terms, adequate trademarks, trade names and other rights
to inventions, know-how, patents, copyrights, confidential information
and other intellectual property (collectively, "INTELLECTUAL PROPERTY
RIGHTS") necessary to conduct the business now operated by them, or
presently employed by them, and have not received any notice of
infringement of or conflict with asserted rights of others with respect
to any intellectual property rights that, if determined adversely to
the Company or any of its subsidiaries, would individually or in the
aggregate have a Material Adverse Effect.
(xvi) Except as disclosed in the Prospectus, neither the Company
nor any of its subsidiaries is in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or any
court, domestic or foreign, relating to the use, disposal or release of
hazardous or toxic substances or relating to the protection or
restoration of the environment or human exposure to hazardous or toxic
substances (collectively, "ENVIRONMENTAL LAWS"), owns or operates any
real property contaminated with any substance that is subject to any
environmental laws, is liable for any off-site disposal or
contamination pursuant to any environmental laws, or is subject to any
claim relating to any environmental laws, which violation,
contamination, liability or claim would
4.
<PAGE>
individually or in the aggregate have Material Adverse Effect; and the
Company is not aware of any pending investigation which might lead to
such a claim.
(xvii) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, any of
its subsidiaries or any of their respective properties that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect, or
would materially and adversely affect the ability of the Company to
perform its obligations under this Agreement, or which are otherwise
material in the context of the sale of the Offered Securities; and no
such actions, suits or proceedings are threatened or, to the Company's
knowledge, contemplated.
(xviii) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of
the Company and its consolidated subsidiaries as of the dates shown and
their results of operations and cash flows for the periods shown, and
such financial statements have been prepared in conformity with the
generally accepted accounting principles in the United States applied
on a consistent basis; and the assumptions used in preparing the pro
forma financial statements included in each Registration Statement and
the Prospectus provide a reasonable basis for presenting the
significant effects directly attributable to the transactions or events
described therein, the related pro forma adjustments give appropriate
effect to those assumptions, and the pro forma columns therein reflect
the proper application of those adjustments to the corresponding
historical financial statement amounts.
(xix) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there
has been no material adverse change, nor any development or event
involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of
the Company and its subsidiaries taken as a whole, and, except as
disclosed in or contemplated by the Prospectus, there has been no
dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(xx) The Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940.
(xxi) Neither the Company nor any of its affiliates does business
with the government of Cuba or with any person or affiliate located in
Cuba within the meaning of Section 517.075, Florida Statutes and the
Company agrees to comply with such Section if prior to the completion
of the distribution of the Offered Securities it commences doing such
business.]
(xxii) Furthermore, the Company represents and warrants to the
Underwriters that (i) the Registration Statement, the Prospectus and
any preliminary prospectus comply, and any further amendments or
supplements thereto will comply, with any applicable laws or
regulations of foreign jurisdictions in which the Prospectus or any
preliminary prospectus, as amended or supplemented, if applicable, are
distributed in connection with the Directed Share Program, and that
(ii) no authorization, approval, consent, license, order, registration
or qualification of or with any government, governmental
instrumentality or court, other than such as have been obtained, is
necessary under the securities law and regulations of foreign
jurisdictions in which the Directed Shares are offered outside the
United States.
(b) Each Selling Stockholder severally represents and warrants and
agrees with the several Underwriters that:
5.
<PAGE>
(i) Such Selling Stockholder has and on each Closing Date
hereinafter mentioned will have valid and unencumbered title to the
Offered Securities to be delivered by such Selling Stockholder on such
Closing Date and full right, power and authority to enter into this
Agreement and to sell, assign, transfer and deliver the Offered
Securities to be delivered by such Selling Stockholder on such Closing
Date hereunder; and upon the delivery of and payment for the Offered
Securities on each Closing Date hereunder the several Underwriters will
acquire valid and unencumbered title to the Offered Securities to be
delivered by such Selling Stockholder on such Closing Date.
(ii) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement: (A) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all respects to the requirements of
the Act and the Rules and Regulations and did not include any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, (B) on the Effective Date of the Additional
Registration Statement (if any), each Registration Statement conformed,
or will conform, in all respects to the requirements of the Act and the
Rules and Regulations did not include, or will not include, any untrue
statement of a material fact and did not omit, or will not omit, to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and (C) on the date of this
Agreement, the Initial Registration Statement and, if the Effective
Time of the Additional Registration Statement is prior to the execution
and delivery of this Agreement, the Additional Registration Statement
each conforms, and at the time of filing of the Prospectus pursuant
to Rule 424(b) or (if no such filing is required) at the Effective
Date of the Additional Registration Statement in which the Prospectus
is included, each Registration Statement and the Prospectus will
conform, in all respects to the requirements of the Act and the Rules
and Regulations, and neither of such documents includes, or will
include, any untrue statement of a material fact or omits, or will
omit, to state any material fact required to be stated therein or
necessary to make the statements therein not misleading. If the
Effective Time of the Initial Registration Statement is subsequent
to the execution and delivery of this Agreement: on the Effective Date
of the Initial Registration Statement, the Initial Registration
Statement and the Prospectus will conform in all respects to the
requirements of the Act and the Rules and Regulations, neither of
such documents will include any untrue statement of a material fact
or will omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading. The two
preceding sentences do not apply to statements in or omissions from a
Registration Statement or the Prospectus based upon written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood
and agreed that the only such information is that described as such
in Section 7(c).
(iii) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between such Selling
Stockholder and any person that would give rise to a valid claim
against such Selling Stockholder or any Underwriter for a brokerage
commission, finder's fee or other like payment in connection with this
offering.
3. PURCHASE, SALE AND DELIVERY OF OFFERED SECURITIES. On the basis
of the representations, warranties and agreements herein contained, but
subject to the terms and conditions herein set forth, the Company and each
Selling Stockholder agree, severally and not jointly, to sell to each
Underwriter, and each Underwriter agrees, severally and not jointly, to
purchase from the Company and each Selling Stockholder, at a purchase price
of $ per share, that number of Firm Securities (rounded up or down, as
determined by Credit Suisse First Boston Corporation ("CSFBC") in its
discretion, in order to avoid fractions) obtained by multiplying Firm
Securities in the case of the Company and the number of Firm Securities set
forth opposite the name of such Selling Stockholder in Schedule A hereto, in
the case of a Selling Stockholder, in each case by a fraction the numerator
of which is the number of Firm Securities set forth opposite the name of such
Underwriter in Schedule B hereto and the denominator of which is the total
number of Firm Securities.
6.
<PAGE>
Certificates in negotiable form for the Offered Securities to be sold
by the Selling Stockholders hereunder have been placed in custody, for delivery
under this Agreement, under Custody Agreements made with ,
as custodian ("CUSTODIAN"). Each Selling Stockholder agrees that the shares
represented by the certificates held in custody for the Selling Stockholders
under such Custody Agreements are subject to the interests of the Underwriters
hereunder, that the arrangements made by the Selling Stockholders for such
custody are to that extent irrevocable, and that the obligations of the Selling
Stockholders hereunder shall not be terminated by operation of law, whether by
the death of any individual Selling Stockholder or the occurrence of any other
event, or in the case of a trust, by the death of any trustee or trustees or the
termination of such trust. If any individual Selling Stockholder or any such
trustee or trustees should die, or if any other such event should occur, or if
any of such trusts should terminate, before the delivery of the Offered
Securities hereunder, certificates for such Offered Securities shall be
delivered by the Custodian in accordance with the terms and conditions of this
Agreement as if such death or other event or termination had not occurred,
regardless of whether or not the Custodian shall have received notice of such
death or other event or termination.
The Company and the Custodian will deliver the Firm Securities to
the Representatives for the accounts of the Underwriters, against payment of
the purchase price in Federal (same day) funds by official bank check or
checks or wire transfer to an account at a bank acceptable to CSFBC drawn to
the order of in the case of shares of Firm Securities
and in the case of shares of Firm Securities, at the
office of , at A.M., New York time, on
, or at such other time not later than seven full business days
thereafter as CSFBC and the Company determine, such time being herein
referred to as the "FIRST CLOSING DATE". The certificates for the Firm
Securities so to be delivered will be in definitive form, in such
denominations and registered in such names as CSFBC requests and will be made
available for checking and packaging at the office of
at least 24 hours prior to the First Closing Date.
In addition, upon written notice from CSFBC given to the Company and
the Selling Stockholders from time to time not more than 30 days subsequent to
the date of the Prospectus, the Underwriters may purchase all or less than all
of the Optional Securities at the purchase price per Security to be paid for the
Firm Securities. Company and the Selling Stockholders agree, severally and not
jointly, to sell to the Underwriters the respective numbers of Optional
Securities obtained by multiplying the number of Optional Securities specified
in such notice by a fraction the numerator of which is in the case of the
Company and the number of shares set forth opposite the names of such Selling
Stockholders in Schedule A hereto under the caption "Number of Optional
Securities to be Sold" in the case of the Selling Stockholders and the
denominator of which is the total number of Optional Securities (subject to
adjustment by CSFBC to eliminate fractions). Such Optional Securities shall be
purchased from the Company and each Selling Stockholder for the account of each
Underwriter in the same proportion as the number of Firm Securities set forth
opposite such Underwriter's name bears to the total number of Firm Securities
(subject to adjustment by CSFBC to eliminate fractions) and may be purchased by
the Underwriters only for the purpose of covering over-allotments made in
connection with the sale of the Firm Securities. No Optional Securities shall be
sold or delivered unless the Firm Securities previously have been, or
simultaneously are, sold and delivered. The right to purchase the Optional
Securities or any portion thereof may be exercised from time to time and to the
extent not previously exercised may be surrendered and terminated at any time
upon notice by CSFBC to the Company and the Selling Stockholders.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "OPTIONAL CLOSING DATE", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "CLOSING DATE"), shall be determined by CSFBC
but shall be not later than five(3) full business days after written notice of
election to purchase Optional Securities is given. The Company and the Custodian
will deliver the Optional Securities being purchased on each Optional Closing
Date to the Representatives for the accounts of the several Underwriters,
against payment of the purchase price therefor in Federal (same day) funds by
official bank check or checks or wire transfer to an
7.
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account at a bank acceptable to CSFBC drawn to the order of in
the case of Optional Securities and
in the case of Optional Securities, at the above
office of . The certificates for the Optional Securities being
purchased on each Optional Closing Date will be in definitive form, in such
denominations and registered in such names as CSFBC requests upon reasonable
notice prior to such Optional Closing Date and will be made available for
checking and packaging at the office of at a
reasonable time in advance of such Optional Closing Date.
4. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. CERTAIN AGREEMENTS OF THE COMPANY AND THE SELLING STOCKHOLDERS. The
Company agrees with the several Underwriters and the Selling Stockholders that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance
with subparagraph (1) (or, if applicable and if consented to by CSFBC,
subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the
second business day following the execution and delivery of this
Agreement or (B) the fifteenth business day after the Effective Date of
the Initial Registration Statement.
The Company will advise CSFBC promptly of any such filing pursuant to
Rule 424(b). If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement and
an additional registration statement is necessary to register a portion
of the Offered Securities under the Act but the Effective Time thereof
has not occurred as of such execution and delivery, the Company will
file the additional registration statement or, if filed, will file a
post-effective amendment thereto with the Commission pursuant to and in
accordance with Rule 462(b) on or prior to 10:00 P.M., New York time,
on the date of this Agreement or, if earlier, on or prior to the time
the Prospectus is printed and distributed to any Underwriter, or will
make such filing at such later date as shall have been consented to by
CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to
amend or supplement the initial or any additional registration
statement as filed or the related prospectus or the Initial
Registration Statement, the Additional Registration Statement (if any)
or the Prospectus and will not effect such amendment or supplementation
without CSFBC's consent; and the Company will also advise CSFBC
promptly of the effectiveness of each Registration Statement (if its
Effective Time is subsequent to the execution and delivery of this
Agreement) and of any amendment or supplementation of a Registration
Statement or the Prospectus and of the institution by the Commission of
any stop order proceedings in respect of a Registration Statement and
will use its best efforts to prevent the issuance of any such stop
order and to obtain as soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of
which the Prospectus 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 the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act,
the Company will promptly notify CSFBC of such event and will promptly
prepare and file with the Commission, at its own expense, an amendment
or supplement which will correct such statement or omission or an
amendment which will effect such compliance. Neither CSFBC's consent
to, nor the Underwriters' delivery of, any such amendment or supplement
shall constitute a waiver of any of the conditions set forth in
Section 6.
8.
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(d) As soon as practicable, but not later than the Availability
Date (as defined below), the Company will make generally available to
its securityholders an earnings statement covering a period of at least
12 months beginning after the Effective Date of the Initial
Registration Statement (or, if later, the Effective Date of the
Additional Registration Statement) which will satisfy the provisions of
Section 11(a) of the Act. For the purpose of the preceding sentence,
"AVAILABILITY DATE" means the 45th day after the end of the fourth
fiscal quarter following the fiscal quarter that includes such
Effective Date, except that, if such fourth fiscal quarter is the last
quarter of the Company's fiscal year, "AVAILABILITY DATE" means the
90th day after the end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as a
prospectus relating to the Offered Securities is required to be
delivered under the Act in connection with sales by any Underwriter or
dealer, the Prospectus and all amendments and supplements to such
documents, in each case in such quantities as CSFBC requests. The
Prospectus shall be so furnished on or prior to 3:00 P.M., New York
time, on the business day following the later of the execution and
delivery of this Agreement or the Effective Time of the Initial
Registration Statement. All other such documents shall be so furnished
as soon as available. The Company and the Selling Stockholders will pay
the expenses of printing and distributing to the Underwriters all such
documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC
designates and will continue such qualifications in effect so long as
required for the distribution.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year,
a copy of its annual report to stockholders for such year; and the
Company will furnish to the Representatives (i) as soon as available, a
copy of each report and any definitive proxy statement of the Company
filed with the Commission under the Securities Exchange Act of 1934 or
mailed to stockholders, and (ii) from time to time, such other
information concerning the Company as CSFBC may reasonably request.
(h) For a period of 90 days after the date of the initial public
offering of the Offered Securities, the Company will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement under
the Act relating to, any additional shares of its Securities or
securities convertible into or exchangeable or exercisable for any
shares of its Securities, or publicly disclose the intention to make
any such offer, sale, pledge, disposition or filing, without the prior
written consent of CSFBC except of convertible or exchangeable
securities or the exercise of warrants or options, in each case grants
of employee stock options pursuant to the terms of a plan in effect on
the date hereof, issuances of Securities pursuant to the exercise of
such options or the exercise of any other employee stock options
outstanding on the date hereof or issuances of Securities pursuant to
the Company's dividend reinvestment plan.
(i) The Company and each Selling Stockholder agree with the
several Underwriters that the Company and such Selling Stockholder will
pay all expenses incident to the performance of the obligations of the
Company and such Selling Stockholder, as the case may be, under this
Agreement, for any filing fees and other expenses (including fees and
disbursements of counsel) in connection with qualification of the
Offered Securities for sale under the laws of such jurisdictions as
CSFBC designates and the printing of memoranda relating thereto for the
filing fee incident to, and the reasonable fees and disbursements of
counsel to the Underwriters in connection with, the review by the
National Association of Securities Dealers, Inc. of the Offered
Securities, for any travel expenses of the Company's officers and
employees and any other expenses of the Company in connection with
9.
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attending or hosting meetings with prospective purchasers of the
Offered Securities, for any transfer taxes on the sale by the Selling
Stockholders of the Offered Securities to the Underwriters and for
expenses incurred in distributing preliminary prospectuses and the
Prospectus (including any amendments and supplements thereto) to the
Underwriters.
(j) Each Selling Stockholder agrees to deliver to CSFBC,
attention: Transactions Advisory Group on or prior to the First Closing
Date a properly completed and executed United States Treasury
Department Form W-9 (or other applicable form or statement specified by
Treasury Department regulations in lieu thereof).
(k) The Selling Stockholder agrees, for a period of 90 days after
the date of the initial public offering of the Offered Securities, not
to offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any additional shares of the Securities of the
Company or securities convertible into or exchangeable or exercisable
for any shares of Securities, enter into a transaction which would have
the same effect, or enter into any swap, hedge or other arrangement
that transfers, in whole or in part, any of the economic consequences
of ownership of the Securities, whether any such aforementioned
transaction is to be settled by delivery of the Securities or such
other securities, in cash or otherwise, or publicly disclose the
intention to make any such offer, sale, pledge or disposition, or enter
into any such transaction, swap, hedge or other arrangement, without,
in each case, the prior written consent of CSFBC.
6. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations
of the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholders herein, to
the accuracy of the statements of Company officers made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Stockholders of their obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated the
date of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if
the Effective Time of the Initial Registration Statement is subsequent
to the execution and delivery of this Agreement, shall be prior to the
filing of the amendment or post-effective amendment to the registration
statement to be filed shortly prior to such Effective Time), of
confirming that they are independent public accountants within the
meaning of the Act and the applicable published Rules and Regulations
thereunder and stating to the effect that:
(i) in their opinion the financial statements and
schedules )examined by them and included in the Registration
Statements comply as to form in all material respects with the
applicable accounting requirements of the Act and the related
published Rules and Regulations;
(ii) they have performed the procedures specified by
the American Institute of Certified Public Accountants for a
review of interim financial information as described in
Statement of Auditing Standards No. 71, Interim Financial
Information, on the unaudited financial statements included in
the Registration Statements;
(iii) on the basis of the review referred to in
clause (ii) above, a reading of the latest available interim
financial statements of the Company, inquiries of officials of
the Company who have responsibility for financial and
accounting matters and other specified procedures, nothing
came to their attention that caused them to believe that:
10.
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(A) the unaudited financial statements
included in the Registration Statements do not comply
as to form in all material respects with the
applicable accounting requirements of the Act and the
related published Rules and Regulations or any
material modifications should be made to such
unaudited financial statements for them to be in
conformity with generally accepted accounting
principles;
(B) the unaudited consolidated net sales,
net operating income, net income and net income per
share amounts for the -month periods ended
[____________] included in the Prospectus do not
agree with the amounts set forth in the unaudited
consolidated financial statements for those same
periods or were not determined on a basis
substantially consistent with that of the
corresponding amounts in the audited statements of
income;
(C) at the date of the latest available
balance sheet read by such accountants, or at a
subsequent specified date not more than three
business days prior to the date of this Agreement,
there was any change in the capital stock or any
increase in short-term indebtedness or long-term debt
of the Company and its consolidated subsidiaries or,
at the date of the latest available balance sheet
read by such accountants, there was any decrease in
consolidated net assets, as compared with amounts
shown on the latest balance sheet included in the
Prospectus; or
(D) for the period from the closing date of
the latest income statement included in the
Prospectus to the closing date of the latest
available income statement read by such accountants
there were any decreases, as compared with the
corresponding period of the previous year, in
consolidated net sales or net operating income in the
total or per share amounts of consolidated income
before extraordinary items or net income;
except in all cases set forth in clauses (C) and (D) above for
changes, increases or decreases which the Prospectus discloses
have occurred or may occur or which are described in such
letter; and
(iv) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other
financial information contained in the Registration Statements
(in each case to the extent that such dollar amounts,
percentages and other financial information are derived from
the general accounting records of the Company and its
subsidiaries subject to the internal controls of the Company's
accounting system or are derived directly from such records by
analysis or computation) with the results obtained from
inquiries, a reading of such general accounting records and
other procedures specified in such letter and have found such
dollar amounts, percentages and other financial information to
be in agreement with such results, except as otherwise
specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statements is subsequent to the execution and
delivery of this Agreement, "REGISTRATION STATEMENTS" shall mean the
initial registration statement as proposed to be amended by the
amendment or post-effective amendment to be filed shortly prior to its
Effective Time, (ii) if the Effective Time of the Initial Registration
Statements is prior to the execution and delivery of this Agreement but
the Effective Time of the Additional Registration Statement is
subsequent to such execution and delivery, "REGISTRATION STATEMENTS"
shall mean the Initial Registration Statement and the additional
registration statement as proposed to be filed or as proposed to be
amended by the post-effective
11.
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amendment to be filed shortly prior to its Effective Time, and
(iii) "PROSPECTUS" shall mean the prospectus included in the
Registration Statements.
(b) If the Effective Time of the Initial Registration
Statement is not prior to the execution and delivery of this Agreement,
such Effective Time shall have occurred not later than 10:00 P.M., New
York time, on the date of this Agreement or such later date as shall
have been consented to by CSFBC. If the Effective Time of the
Additional Registration Statement (if any) is not prior to the
execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date of
this Agreement or, if earlier, the time the Prospectus is printed and
distributed to any Underwriter, or shall have occurred at such later
date as shall have been consented to by CSFBC. If the Effective Time of
the Initial Registration Statement is prior to the execution and
delivery of this Agreement, the Prospectus shall have been filed with
the Commission in accordance with the Rules and Regulations and Section
5(a) of this Agreement. Prior to such Closing Date, no stop order
suspending the effectiveness of a Registration Statement shall have
been issued and no proceedings for that purpose shall have been
instituted or, to the knowledge of any Selling Stockholder, the Company
or the Representatives, shall be contemplated by the Commission.
(c) Subsequent to the execution and delivery of this
Agreement, there shall not have occurred (i) any change, or any
development or event involving a prospective change, in the condition
(financial or other), business, properties or results of operations of
the Company and its subsidiaries taken as one enterprise which, in the
judgment of a majority in interest of the Underwriters including the
Representatives, is material and adverse and makes it impractical or
inadvisable to proceed with completion of the public offering or the
sale of and payment for the Offered Securities; (ii) any downgrading in
the rating of any debt securities of the Company by any "nationally
recognized statistical rating organization" (as defined for purposes of
Rule 436(g) under the Act), or any public announcement that any such
organization has under surveillance or review its rating of any debt
securities of the Company (other than an announcement with positive
implications of a possible upgrading, and no implication of a possible
downgrading, of such rating); (iii) any material suspension or material
limitation of trading in securities generally on the New York Stock
Exchange, or any setting of minimum prices for trading on such
exchange, or any suspension of trading of any securities of the Company
on any exchange or in the over-the-counter market; (iv) any banking
moratorium declared by U.S. Federal or New York authorities; or (v) any
outbreak or escalation of major hostilities in which the United States
is involved, any declaration of war by Congress or any other
substantial national or international calamity or emergency if, in the
judgment of a majority in interest of the Underwriters including the
Representatives, the effect of any such outbreak, escalation,
declaration, calamity or emergency makes it impractical or inadvisable
to proceed with completion of the public offering or the sale of and
payment for the Offered Securities.
(d) The Representatives shall have received an opinion, dated
such Closing Date, of Morrison & Foerster LLP, counsel for the Company,
to the effect that:
(i) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the
State of Colorado, with corporate power and authority to own
its properties and conduct its business as described in the
Prospectus; and the Company is duly qualified to do business
as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or
the conduct of its business requires such qualification;
(ii) The Offered Securities delivered on such Closing
Date and all other outstanding shares of the Common Stock of
the Company have been duly authorized and validly issued, are
fully paid and nonassessable and conform to the description
thereof
12.
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contained in the Prospectus; and the stockholders of the
Company have no preemptive rights with respect to the
Securities;
(iii) There are no contracts, agreements or
understandings known to such counsel between the Company and
any person granting such person the right to require the
Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned
by such person or to require the Company to include such
securities in the securities registered pursuant to the
Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the
Company under the Act;
(iv) The Company is not and, after giving effect to
the offering and sale of the Offered Securities and the
application of the proceeds thereof as described in the
Prospectus, will not be an "investment company" as defined in
the Investment Company Act of 1940.
(v) No consent, approval, authorization or order of,
or filing with, any governmental agency or body or any court
is required to be obtained or made by the Company or any
Selling Stockholder for the consummation of the transactions
contemplated by this Agreement or the Custody Agreement in
connection with the sale of the Offered Securities, except
such as have been obtained and made under the Act and such as
may be required under state securities laws;
(vi) The execution, delivery and performance of this
Agreement or the Custody Agreement and the consummation of the
transactions herein or therein contemplated will not result in
a breach or violation of any of the terms and provisions of,
or constitute a default under, any statute, any rule,
regulation or order of any governmental agency or body or any
court having jurisdiction over the Company or any subsidiary
of the Company or any of their properties, or any agreement or
instrument to which the Company or any such subsidiary is a
party or by which the Company or any such subsidiary is bound
or to which any of the properties of the Company or any such
subsidiary is subject, or the charter or by-laws of the
Company or any such subsidiary;
(vii) The Initial Registration Statement was declared
effective under the Act as of the date and time specified in
such opinion, the Additional Registration Statement (if any)
was filed and became effective under the Act as of the date
and time (if determinable) specified in such opinion, the
Prospectus either was filed with the Commission pursuant to
the subparagraph of Rule 424(b) specified in such opinion on
the date specified therein or was included in the Initial
Registration Statement or the Additional Registration
Statement (as the case may be), and, to the best of the
knowledge of such counsel, no stop order suspending the
effectiveness of a Registration Statement or any part thereof
has been issued and no proceedings for that purpose have been
instituted or are pending or contemplated under the Act, and
each Registration Statement and the Prospectus, and each
amendment or supplement thereto, as of their respective
effective or issue dates, complied as to form in all material
respects with the requirements of the Act and the Rules and
Regulations; such counsel have no reason to believe that any
part of a Registration Statement or any amendment thereto, as
of its effective date or as of such Closing Date, contained
any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary
to make the statements therein not misleading; or that the
Prospectus or any amendment or supplement thereto, as of its
issue date or as of such Closing Date, contained any untrue
statement of a material fact or omitted to state any material
fact necessary in order to make the statements therein, in the
light of the circumstances under which they
13.
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were made, not misleading; the descriptions in the
Registration Statements and Prospectus of statutes, legal and
governmental proceedings and contracts and other documents
are accurate and fairly present the information required to
be shown; and such counsel do not know of any legal or
governmental proceedings required to be described in a
Registration Statement or the Prospectus which are not
described as required or of any contracts or documents of
a character required to be described in a Registration
Statement or the Prospectus or to be filed as exhibits
to a Registration Statement which are not described
and filed as required; it being understood that such counsel
need express no opinion as to the financial statements or
other financial data contained in the Registration Statements
or the Prospectus; and
(viii) This Agreement has been duly authorized,
executed and delivered by the Company.
(e) The Representatives shall have received the opinion
contemplated in the Power of Attorney executed and delivered by each
Selling Stockholder and an opinion, dated such Closing Date, of
, counsel for the Selling Stockholders, to the effect that:
(i) Each Selling Stockholder had valid and
unencumbered title to the Offered Securities delivered by such
Selling Stockholder on such Closing Date and had full right,
power and authority to sell, assign, transfer and deliver the
Offered Securities delivered by such Selling Stockholder on
such Closing Date hereunder; and the several Underwriters have
acquired valid and unencumbered title to the Offered
Securities purchased by them from the Selling Stockholders on
such Closing Date hereunder;
(ii) No consent, approval, authorization or order of,
or filing with, any governmental agency or body or any court
is required to be obtained or made by any Selling Stockholder
for the consummation of the transactions contemplated by the
Custody Agreement or] this Agreement in connection with the
sale of the Offered Securities sold by the Selling
Stockholders, except such as have been obtained and made under
the Act and such as may be required under state securities
laws;
(iii) The execution, delivery and performance of the
Custody Agreement and this Agreement and the consummation of
the transactions therein and herein contemplated will not
result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, any
rule, regulation or order of any governmental agency or body
or any court having jurisdiction over any Selling Stockholder
or any of their properties or any agreement or instrument to
which any Selling Stockholder is a party or by which any
Selling Stockholder is bound or to which any of the properties
of any Selling Stockholder is subject or the charter or
by-laws of any Selling Stockholder which is a corporation; and
(iv) The Power of Attorney and related Custody
Agreement with respect to each Selling Stockholder has been
duly authorized, executed and delivered by such Selling
Stockholder and constitute valid and legally binding
obligations of each such Selling Stockholder enforceable in
accordance with their terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium
and similar laws of general applicability relating to or
affecting creditors' rights and to general equity principles;
and]
(v) This Agreement has been duly authorized, executed
and delivered by each Selling Stockholder.
14.
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(f) The Representatives shall have received from Brobeck,
Phleger & Harrison LLP, counsel for the Underwriters, such opinion or
opinions, dated such Closing Date, with respect to the incorporation of
the Company, the validity of the Offered Securities delivered on such
Closing Date, the Registration Statements, the Prospectus and other
related matters as the Representatives may require, and the Selling
Stockholders and the Company shall have furnished to such counsel such
documents as they request for the purpose of enabling them to pass upon
such matters. In rendering such opinion, Brobeck, Phleger & Harrison
LLP may rely as to the incorporation of the Company and all other
matters governed by Colorado law upon the opinion of Morrison &
Foerster LLP referred to above.
(g) The Representatives shall have received a certificate,
dated such Closing Date, of the President or any Vice President and a
principal financial or accounting officer of the Company in which such
officers, to the best of their knowledge after reasonable
investigation, shall state that: the representations and warranties of
the Company in this Agreement are true and correct; the Company has
complied with all agreements and satisfied all conditions on its part
to be performed or satisfied hereunder at or prior to such Closing
Date; no stop order suspending the effectiveness of any Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of
subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule
462(b), including payment of the applicable filing fee in accordance
with Rule 111(a) or (b) under the Act, prior to the time the Prospectus
was printed and distributed to any Underwriter; and, subsequent to the
respective dates of the most recent financial statements in the
Prospectus, there has been no material adverse change, nor any
development or event involving a prospective material adverse change,
in the condition (financial or other), business, properties or results
of operations of the Company and its subsidiaries taken as a whole
except as set forth in or contemplated by the Prospectus or as
described in such certificate.
(h) The Representatives shall have received a letter, dated
such Closing Date, of Pricewaterhouse Coopers LLP which meets the
requirements of subsection (a) of this Section, except that the
specified date referred to in such subsection will be a date not more
than three days prior to such Closing Date for the purposes of this
subsection.
(i) On or prior to the date of this Agreement, the
Representatives shall have received lockup letters from each of
executive officers, directors and 5% stockholders of the Company who
are not Selling Stockholders.
The Selling Stockholders and the Company will furnish the Representatives with
such conformed copies of such opinions, certificates, letters and documents as
the Representatives reasonably request. CSFBC may in its sole discretion waive
on behalf of the Underwriters compliance with any conditions to the obligations
of the Underwriters hereunder, whether in respect of an Optional Closing Date or
otherwise.
7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company will indemnify and
hold harmless each Underwriter, its partners, directors and officers and each
person, if any who controls such Underwriter within the meaning of Section 15 of
the Act, against any losses, claims, damages or liabilities, joint or several,
to which such Underwriter may become subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement, the
Prospectus, or any amendment or supplement thereto, or any related preliminary
prospectus, or arise out of or are based upon 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, and will reimburse each Underwriter
for any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such loss, claim,
15.
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damage, liability or action as such expenses are incurred; provided, however,
that the Company will not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement in or omission or alleged
omission from any of such documents in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below.
(a) The Selling Stockholders, jointly and severally, will indemnify and
hold harmless each Underwriter, its partners, directors and officers and each
person who controls such Underwriter within the meaning of Section 15 of the
Act, against any losses, claims, damages or liabilities, joint or several, to
which such Underwriter may become subject, under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any Registration Statement, the Prospectus, or
any amendment or supplement thereto, or any related preliminary prospectus, or
arise out of or are based upon 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, and will reimburse each Underwriter for any
legal or other expenses reasonably incurred by such Underwriter in connection
with investigating or defending any such loss, claim, damage, liability or
action as such expenses are incurred; provided, however, that the Selling
Stockholders will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement in or omission or alleged omission from
any of such documents in reliance upon and in conformity with written
information furnished to the Company by an Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below.
(b) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company, its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the Act, and each
Selling Stockholder against any losses, claims, damages or liabilities to which
the Company or such Selling Stockholder may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein, and will reimburse any
legal or other expenses reasonably incurred by the Company and each Selling
Stockholder in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being understood
and agreed that the only such information furnished by any Underwriter consists
of (i) the following information in the Prospectus furnished on behalf of each
Underwriter: the last paragraph at the bottom of the cover page concerning the
terms of the offering by the Underwriters, the legend concerning
over-allotments, stabilizing and passive market making on the inside front cover
page and, the concession and reallowance figures appearing in the paragraph
under the caption "Underwriting" and the information contained in the and
paragraph[s] under the caption "Underwriting."
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under
subsection (a), (b) or (c) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a), (b) or (c) above. In case any such action
is brought
16.
<PAGE>
against any indemnified party and it notifies an indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with
the consent of the indemnified party, be counsel to the indemnifying party),
and after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with
the defense thereof other than reasonable costs of investigation.
Notwithstanding anything contained herein to the contrary, if indemnity may
be sought pursuant to the last paragraph in Section 7 (a) hereof in respect
of such action or proceeding, then in addition to such separate firm for the
indemnified parties, the indemnifying party shall be liable for the
reasonable fees and expenses of not more than one separate firm (in addition
to any local counsel) for the Designated Underwriter for the defense of any
losses, claims, damages and liabilities arising out of the Directed Share
Program, and all persons, if any, who control the Designated Underwriter
within the meaning of either Section 15 of the Act of Section 20 of the
Exchange Act. No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement of any pending or threatened
action in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified
party unless such (i) settlement includes an unconditional release of such
indemnified party from all liability on any claims that are the subject
matter of such action and (ii) does not include a statement as to, or an
admission of, fault, culpability or a failure to act by or on behalf of an
indemnified party.
(d) If the indemnification provided for in this Section is unavailable
or insufficient to hold harmless an indemnified party under subsection (a), (b)
or (c) above, then each indemnifying 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 subsection (a), (b) or (c) above (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Stockholders on the one hand and the Underwriters on the
other from the offering of the Securities 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 the Company and the Selling Stockholders on
the one hand and the Underwriters on the other in connection with the statements
or omissions which resulted in such losses, claims, damages or liabilities as
well as any other relevant equitable considerations. The relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by the
Company and the Selling Stockholders bear to the total underwriting discounts
and commissions received by the Underwriters. The relative fault 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 the Company, the Selling
Stockholders or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The amount paid by an indemnified party as a result of
the losses, claims, damages or liabilities referred to in the first sentence of
this subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any action or claim which is the subject of this subsection (e).
Notwithstanding the provisions of this subsection (e), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this subsection
(e) to contribute are several in proportion to their respective underwriting
obligations and not joint.
17.
<PAGE>
(e) The obligations of the Company and the Selling Stockholders under
this Section shall be in addition to any liability which the Company and the
Selling Stockholders may otherwise have and shall extend, upon the same terms
and conditions, to each person, if any, who controls any Underwriter (as
hereinafter defined) within the meaning of the Act; and the obligations of the
Underwriters under this Section shall be in addition to any liability which the
respective Underwriters may otherwise have and shall extend, upon the same terms
and conditions, to each director of the Company, to each officer of the Company
who has signed a Registration Statement and to each person, if any, who controls
the Company within the meaning of the Act.
8. DEFAULT OF UNDERWRITERS. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder on either the
First or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the Company and the Selling Stockholders for
the purchase of such Offered Securities by other persons, including any of the
Underwriters, but if no such arrangements are made by such Closing Date, the
non-defaulting Underwriters shall be obligated severally, in proportion to their
respective commitments hereunder, to purchase the Offered Securities that such
defaulting Underwriters agreed but failed to purchase on such Closing Date. If
any Underwriter or Underwriters so default and the aggregate number of shares of
Offered Securities with respect to which such default or defaults occur exceeds
10% of the total number of shares of Offered Securities that the Underwriters
are obligated to purchase on such Closing Date and arrangements satisfactory to
CSFBC, the Company and the Selling Stockholders for the purchase of such Offered
Securities by other persons are not made within 36 hours after such default,
this Agreement will terminate without liability on the part of any
non-defaulting Underwriter, the Company or the Selling Stockholders, except as
provided in Section 9 (provided that if such default occurs with respect to
Optional Securities after the First Closing Date, this Agreement will not
terminate as to the Firm Securities or any Optional Securities purchased prior
to such termination). As used in this Agreement, the term "Underwriter" includes
any person substituted for an Underwriter under this Section. Nothing herein
will relieve a defaulting Underwriter from liability for its default.
9. SURVIVAL OF CERTAIN REPRESENTATIONS AND OBLIGATIONS. The respective
indemnities, agreements, representations, warranties and other statements of the
Selling Stockholders, of the Company or its officers and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation, or statement as to the
results thereof, made by or on behalf of any Underwriter, any Selling
Stockholder, the Company or any of their respective representatives, officers or
directors or any controlling person, and will survive delivery of and payment
for the Offered Securities. If this Agreement is terminated pursuant to Section
8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company and the Selling Stockholders shall
remain responsible for the expenses to be paid or reimbursed by them pursuant to
Section 5 and the respective obligations of the Company, the Selling
Stockholders, and the Underwriters pursuant to Section 7 shall remain in effect,
and if any Offered Securities have been purchased hereunder the representations
and warranties in Section 2 and all obligations under Section 5 shall also
remain in effect. If the purchase of the Offered Securities by the Underwriters
is not consummated for any reason other than solely because of the termination
of this Agreement pursuant to Section 8 or the occurrence of any event specified
in clause (iii), (iv) or (v) of Section 6(c), the Company and the Selling
Stockholders will, jointly and severally, reimburse the Underwriters for all
out-of-pocket expenses (including fees and disbursements of counsel) reasonably
incurred by them in connection with the offering of the Offered Securities.
10. NOTICES. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Representatives c/o Credit Suisse First Boston Corporation, Eleven
Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking
Department - Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at
, Attention: , or, if sent to the
18.
<PAGE>
Selling Stockholders or any of them, will be mailed, delivered or telegraphed
and confirmed to at ; provided, however, that
any notice to an Underwriter pursuant to Section 7 will be mailed, delivered or
telegraphed and confirmed to such Underwriter.
11. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective personal representatives
and successors and the officers and directors and controlling persons referred
to in Section 7, and no other person will have any right or obligation
hereunder.
12. REPRESENTATION. The Representatives will act for the several
Underwriters in connection with the transactions contemplated by this
Agreement, and any action under this Agreement taken by the Representatives
jointly or by CSFBC will be binding upon all the Underwriters. will act
for the Selling Stockholders in connection with such transactions, and any
action under or in respect of this Agreement taken by will be binding
upon all the Selling Stockholders.]
13. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby. The Company irrevocably appoints ____________
as its authorized agent in the Borough of Manhattan in The City of New York upon
which process may be served in any such suit or proceeding, and agrees that
service of process upon such agent, and written notice of said service to the
Company by the person serving the same to the address provided in Section 10,
shall be deemed in every respect effective service of process upon the Company
in any such suit or proceeding. The Company further agrees to take any and all
action as may be necessary to maintain such designation and appointment of such
agent in full force and effect for a period of seven years from the date of this
Agreement.
19.
<PAGE>
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement among the
Selling Stockholders, the Company and the several Underwriters in accordance
with its terms.
Very truly yours,
................................................
[INSERT NAME OR NAMES OF SELLING STOCKHOLDERS]
................................................
NATIONAL INFORMATION CONSORTIUM, INC.
By...............................
[INSERT TITLE]
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date first above
written.
CREDIT SUISSE FIRST BOSTON CORPORATION
......................................
......................................
Acting on behalf of themselves and as the
Representatives of the
several Underwriters.
By CREDIT SUISSE FIRST BOSTON CORPORATION
By..................................
[INSERT TITLE]
20.
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF OPTIONAL
FIRM SECURITIES SECURITIES TO
SELLING STOCKHOLDER TO BE SOLD BE SOLD
------------------- --------------- -------------
<S> <C> <C>
Total............ -------- ---------
-------- ---------
-------- ---------
</TABLE>
21.
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
NUMBER OF
FIRM SECURITIES
UNDERWRITER TO BE PURCHASED
----------- ---------------
<S> <C>
Credit Suisse First Boston Corporation..............
---------
Total...................................
---------
---------
</TABLE>
22.
<PAGE>
EXHIBIT 4.3
CONQUEST, INC.,
A NIC ENTITY,
INVESTORS' RIGHTS AGREEMENT
THIS INVESTORS' RIGHTS AGREEMENT (this "AGREEMENT") is entered into as
of January 12, 2000, by and among Conquest, Inc., a NIC entity, a Colorado
corporation (the "COMPANY"), National Information Consortium, Inc., a Colorado
corporation ("NIC"), and each of the other holders of certain interests in the
Company as attached hereto on EXHIBIT A (the "NON-NIC SHAREHOLDERS").
RECITALS
WHEREAS, NIC and the several members (the "CONQUEST MEMBERS") of
Conquest Softworks, L.L.C., a Colorado limited liability company ("CONQUEST"),
have entered into a Contribution Agreement, dated as of January 12, 2000 (the
"CONTRIBUTION AGREEMENT"), pursuant to which the Company has issued to NIC and
to each of the Conquest Members such number of shares of common stock of the
Company, par value $0.001 per share (the "SHARES"), that equals fifty percent of
the total number of Shares outstanding immediately following the Closing (as
defined below) of the transactions described in the Contribution Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, the Company, NIC, Conquest and the Holders hereby agree as follows:
AGREEMENT
1. GENERAL
1.1 CERTAIN DEFINITIONS. As used in this Agreement, the following
terms shall have the following respective meanings:
"AGREEMENT" shall mean this Conquest, Inc. Investors' Rights
Agreement, dated January 12, 2000, by and among the Company, NIC and the Non-NIC
Shareholders.
"ARTICLES OF INCORPORATION" shall mean the Company's articles of
incorporation, as filed with the Secretary of State of the State of Colorado.
"BUSINESS PLAN" shall mean a plan for the conduct of the Company's
Business for any calendar year or as otherwise agreed by the Company's board of
directors, including operations plans, spending budgets, development work-plans
and related goals.
"CLOSING" shall have the meaning given such term in the Contribution
Agreement.
"COMMISSION" shall mean the United States Securities and Exchange
Commission.
1
<PAGE>
"COMPANY" shall mean Conquest, Inc., a Colorado corporation.
"COMPANY'S BUSINESS" shall be the business of developing,
commercializing and providing: software, related documentation, training and
certain hardware for state UCC filings, corporations divisions filings and other
governmental systems; public access software for filing and searching of these
state systems; and various software systems for use by other governmental units.
"CONFIDENTIAL INFORMATION" shall have the meaning specified in
SECTION 4.2.
"CONTRIBUTION AGREEMENT" shall have the meaning specified in the
preamble to this Agreement.
"CONQUEST CHANGE IN CONTROL TRANSACTION" shall have the meaning
specified in SECTION 2.4(a).
"EBITDA" shall mean earnings before income taxes, depreciation and
amortization.
"EQUITY INCENTIVE PLAN" means any plan or program, duly adopted by the
Company's board of directors, for the issuance of Shares or other equity
securities to employees, directors or consultants of the Company.
"GAAP" shall mean United States generally accepted accounting
principals, as consistently applied.
"SHAREHOLDER" shall mean all beneficial holders of the Shares.
"IPO" shall mean the initial underwritten firm commitment public
offering of the Shares pursuant to registration statement filed under Securities
Act and declared effective by the Commission.
"NIC REPRESENTATIVE" shall mean either of Jim Dodd or Kevin Childress
acting as a member of the Company's board of directors or, in their absence, any
individual nominated by NIC and duly elected to serve on the Company's board of
directors.
"NON-NIC REPRESENTATIVE" shall mean either of William Birdsall, Jerry
Nelson or Tom Sullivan acting as a member of the Company's board of directors
or, in their absence, any individual nominated by the Conquest Members and duly
elected to serve on the Company's board of directors.
"NON-NIC SHAREHOLDER PUT" shall have the meaning specified in
SECTION 2.2(a).
"NON-NIC SHAREHOLDERS" shall mean any holder of the Company's Shares
other than NIC.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
<PAGE>
"SHARES" shall mean the Company's common stock, par value $0.001 per
share.
2. CALL AND PUT OPTIONS
2.1 NIC CALL OPTION.
(a) RIGHT TO PURCHASE. At any time during the period
commencing on January 12, 2001 and ending upon the occurrence of a Conquest
Change in Control Transaction, NIC shall have the right, exercisable pursuant to
the procedures provided in SECTION 2.1(d) hereof, to purchase from the Non-NIC
Shareholders all, but not less than all, of the then-outstanding Shares held by
the Non-NIC Shareholders at a price equal to the Call Exercise Price and paid by
wire transfer of immediately available funds to each of the Non-NIC Shareholders
pro rata.
(b) CALL EXERCISE PRICE. In addition to any additional amounts
that may be required to be paid following the Call Exercise Date upon the terms
provided in SECTION 2.1(c) the Call Exercise Price per share will be a dollar
amount equal to the greater of:
(i) the quotient obtained by dividing (A) the product
of twelve times theCompany's EBITDA for the immediately preceding twelve months,
as such EBITDA shall have been determined through the procedures provided in
SECTION 2.3, by (B) the total number of Shares issued and outstanding on the
Call Exercise Date; or
(ii) the quotient obtained by dividing 30,000,000 by
the total number of Shares issued and outstanding on the Call Exercise Date;
(iii) PROVIDED, HOWEVER, that, after January 12, 2002,
the Call Exercise Price must be a dollar amount equal to the amount provided for
by SECTION 2.1(b)(i).
(c) SUBSEQUENT PAYMENT UPON CERTAIN CHANGES IN CONTROL. If a
Conquest Change in Control Transaction is consummated during the period
commencing on the Call Exercise Date and ending on the date which is 48 months
following the Call Exercise Date, then NIC agrees to pay, within 30 days after
the consummation of such Conquest Change in Control Transaction, by wire
transfer of immediately available funds, the cash amount to each of the Non-NIC
Shareholders pro rata provided below:
(i) If a Conquest Change in Control Transaction is
consummated during the period commencing on the Call Exercise Date and ending on
the day which is twelve months after the Call Exercise Date, then NIC shall pay
an aggregate dollar amount, if any, equal to the difference between the Call
Exercise Price and (A) 35% of the acquisition price paid in the Conquest Change
in Control Transaction or (B) if such Conquest Change in Control Transaction is
an IPO, the aggregate offering price of the Shares formerly held by the Conquest
Members and acquired by NIC pursuant to the call option provided in
SECTION 2.1(a).
<PAGE>
(ii) If a Conquest Change in Control Transaction is
consummated during the period commencing on the date which is one day after the
twelve month period immediately following the Call Exercise Date and ending on
the day which is 24 months after the Call Exercise Date, then NIC shall pay an
aggregate dollar amount, if any, equal to 75% of the amount determined under the
formula provided in SECTION 2.1(c)(i).
(iii) If a Conquest Change in Control Transaction is
consummated during the period commencing on the date which is one day after the
24 month period immediately following the Call Exercise Date and ending on the
day which is 36 months after the Call Exercise Date, then NIC shall pay an
aggregate dollar amount, if any, equal to 50% of the amount determined under the
formula provided in SECTION 2.1(c)(i).
(iv) If a Conquest Change in Control Transaction is
consummated during the period commencing on the date which is one day after the
36 month period immediately following the Call Exercise Date and ending on the
day which is 48 months after the Call Exercise Date, the NIC shall pay an
aggregate dollar amount, if any, equal to 25% of the amount determined under the
formula provided in SECTION 2.1(c)(i).
(d) CALL EXERCISE PROCEDURE. If NIC wishes to exercise the
right to purchase provided for by SECTION 2.1(a), NIC shall promptly deliver
written notice of its election to exercise to each of the Non-NIC Shareholders
and initiate a procedure, if any, to determine the Call Exercise Price. The date
upon which its written notice of exercise was delivered shall be the "Call
Exercise Date." The closing with respect to any exercise of the NIC call option
provided for by SECTION 2.1(a) shall take place at the principal offices of the
Company on the tenth business day following the final determination of the Call
Exercise Price; provided, however, that all orders, consents and approvals of
governmental authorities legally required for the closing of such sale shall
have been obtained and be in effect. At such closing, in exchange for full
payment of the Call Exercise Price, as provided in SECTION 2.1(b), the Non-NIC
Shareholders shall deliver to NIC all of the Shares, free and clear of all liens
and encumbrances of any nature, issued and outstanding and held by the Non-NIC
Shareholders. NIC shall exercise commercially reasonable efforts to promptly
obtain all orders, consents and approvals of governmental authorities legally
required in light of the transactions to take place at such closing.
2.2 NON-NIC SHAREHOLDER PUT OPTION.
(a) RIGHT TO PUT. Each of the Non-NIC Shareholders
individually shall have the right (a "Non-NIC Shareholder Put"), exercisable
after the times described in SECTION 2.2(a)(i) through SECTION 2.2(a)(ii) below
and pursuant to the procedures provided in SECTION 2.2(c) hereof, to put to NIC
all, but not less than all, of the Shares held by such Non-NIC Shareholder at a
price equal to the Put Exercise Price paid by wire transfer of immediately
available funds.
(i) At any time after January 12, 2001; or
(ii) upon the occurrence of a NIC Change in Control
Transaction.
<PAGE>
(b) PUT EXERCISE PRICE. The Put Exercise Price will be a
dollar amount determined as follows:
(i) If a Non-NIC Shareholder Put is exercised after
January 12, 2001 but not upon the occurrence of a NIC Change in Control
transaction, the Put Exercise Price per share will be a dollar amount equal to
the quotient obtained by dividing (A) the product of seven times the Company's
EBITDA for the immediately preceding twelve months, as such EBITDA shall have
been determined through the procedures provided in SECTION 2.3, by (B) the total
number of Shares issued and outstanding on the Put Exercise Date; or
(ii) If a Non-NIC Shareholder Put is exercised after
January 12, 2002 and upon the occurrence of a NIC Change in Control Transaction,
the Put Exercise Price per share will be a dollar amount equal to the quotient
obtained by dividing (A) the product of twelve times the Company's EBITDA for
the immediately preceding twelve months, as such EBITDA shall have been
determined through the procedures provided in SECTION 2.3, by (B) the total
number of Shares issued and outstanding on the Put Exercise Date; or
(iii) If a Non-NIC Shareholder Put is before January
12, 2002 and upon the occurrence of a NIC Change in Control Transaction, the Put
Exercise Price will be a dollar amount equal to the greater of the amount
determined under the formula provided in SECTION 2.2(b)(ii) or the quotient
obtained by dividing the sum of $30,000,000 by the total number of Shares issued
and outstanding on the Put Exercise Date.
(c) PUT EXERCISE PROCEDURE. If a Non-NIC Shareholder wishes to
exercise its right to put provided for by SECTION 2.2(a), that Non-NIC
Shareholder shall promptly deliver written notice of its election to exercise to
NIC and initiate a procedure, if any, required to determine the Put Exercise
Price. The date upon which its written notice of exercise was delivered shall be
the "Put Exercise Date." The closing with respect to any exercise of a Non-NIC
Shareholder Put shall take place at the principal offices of the Company on the
tenth business day following the final determination of the Put Exercise Price;
provided, however, that all orders, consents and approvals of governmental
authorities legally required for the closing of such sale shall have been
obtained and be in effect. At such closing, in exchange for full payment of the
Put Exercise Price, as provided in SECTION 2.2(b), that Non-NIC Shareholder
shall deliver to NIC all of the Shares held by it free and clear of all liens
and encumbrances of any nature. NIC shall exercise commercially reasonable
efforts to promptly obtain all orders, consents and approvals of governmental
authorities legally required in light of the transactions to take place at such
closing.
2.3 PROCEDURES REQUIRED TO DETERMINE CERTAIN EXERCISE PRICES.
In the event that NIC and any Non-NIC Shareholder fail to agree on the
Company's EBITDA within 60 days of any Call Exercise Date or Put Exercise Date
then if the difference between the two proposed EBITDA calculations is less than
or equal to ten percent of the higher proposed EBITDA calculation, the Company's
EBITDA shall be the average of the two
<PAGE>
proposed EBITDA calculations. In all other cases, NIC and such Non-NIC
Shareholder shall each, within fifteen (15) days of the expiration of such
60-day period, submit in writing to a nationally recognized accounting firm
not having any substantial relation with either party and reasonably
acceptable to each party (an "Independent Firm"), a proposed EBITDA together
with documentation supporting such EBITDA. The Independent Firm shall
determine, within fifteen (15) days of receipt of the proposed EBITDA
calculations and supporting documentation, an EBITDA value for the Company,
and the proposed EBITDA calculations closest to such EBITDA value determined
by the Independent Firm shall be the Company's EBITDA and shall be final and
binding on the parties for purposes of the payment of such Call Exercise
Price or such Put Exercise Price. In the event that the parties fail to agree
on an Independent Firm within fifteen (15) days of the expiration of such
60-day period, each of the parties shall select a nationally recognized
accounting firm, and the two accounting firms proposed by the parties shall
select a third nationally recognized accounting firm to serve as the
Independent Firm, and the parties shall be required to submit their proposed
EBITDA calculations to such Independent Firm within fifteen (15) days
thereafter. Failure by either party to submit a proposed EBITDA calculations
to the Independent Firm (or failure to propose an accounting firm as the
Independent Firm) shall, following receipt of written notice by the failing
party and a 15-day cure period thereafter, be deemed to result in the
selection of the proposed EBITDA calculations or the proposed Independent
Firm, as the case may be, of the non-defaulting party.
2.4 CERTAIN CHANGE IN CONTROL TRANSACTIONS.
(a) CONQUEST CHANGE IN CONTROL TRANSACTION.
(i) For purposes of this Agreement, a "Conquest Change
in Control Transaction" shall be deemed to have commenced upon the occurrence of
any one of the following events:
(A) the filing of a registration statement
with the Commission for the purposes of
registering Shares under the Securities
Act of 1933, as amended;
(B) approval, by the Company's board of
directors, of planning to make a public
stock offering, to merge or to be
acquired; or
(C) the receipt of any bona fide proposal or
inquiry regarding the merger or
acquisition of the Company or
substantially all of its assets.
(ii) For purposes of the Agreement, a "Conquest Change
in Control Transaction" shall be deemed to have been consummated upon the
closing of any of the proposed transactions identified under SECTION 2.4(a)(i).
(iii) If, following the commencement of a Conquest
Change in Control Transaction, the Company's board of directors expressly
abandons or rejects such Conquest
<PAGE>
Change in Control Transaction, the rights and obligations of NIC and the
Non-NIC Shareholders hereunder shall, upon such abandonment or rejection,
then be the same as if such Conquest Change in Control Transaction had not
commenced.
(b) NIC CHANGE IN CONTROL TRANSACTION. For purposes of this
Agreement, a "NIC Change in Control Transaction" shall be deemed to have been
consummated upon the closing of any transaction or series of related
transactions resulting in a change in beneficial ownership of 40% or more of the
issued and outstanding voting securities of NIC, excluding any public offering
of equity securities of NIC.
2.5 TERMINATION OF RIGHTS.
The rights set forth in SECTION 2.1 and 2.2 of this Agreement shall
terminate upon the occurrence of an IPO.
3. CORPORATE GOVERNANCE
3.1 COMPOSITION OF THE BOARD OF DIRECTORS.
(a) INITIAL DIRECTORS. Each of NIC and the Non-NIC
Shareholders agrees to take all actions reasonably necessary (including the
voting of all Shares owned by them) to ensure that the Company's board of
directors shall be comprised of seven directors and that the initial seven
directors shall be: Jerry Nelson, Tom Sullivan, William Birdsall, Jim Dodd,
Kevin Childress, Robert Gow and David King. The initial directors shall each
have an initial term of three years. The Company shall reimburse members of the
Board for their reasonable expenses associated with carrying out their duties as
members of the Board.
(b) EXECUTIVE COMPENSATION MATTERS.
(i) The Company shall establish a compensation
committee of its board of directors. Such compensation committee shall be
comprised of three members of the Company's board of directors and shall have
the powers and duties set forth in the resolutions of the board of directors
authorizing the establishment of such committee. The compensation committee
shall initially consist of the following three members of the Company's board of
directors: William Birdsall, Kevin Childress and Robert Gow. NIC shall have
final authority to approve the committee's recommendations relating to
compensation.
(ii) Promptly following the Closing, the Company's
compensation committee shall recommend and the Company's board of directors
shall adopt an Equity Incentive Plan which shall provide for the award of
incentive compensation to the Company's key employees, subject to the terms of
such employees' employment contracts as applicable. For each of the first three
calendar years of the Company's operations, such Equity Incentive Plan with
provide for a bonus pool equal to the lesser of $5,000,000 or one seventh
(1/7th) of the Company's EBITDA for the calendar year during which awards are
being made. Up to 50% of such bonuses may be paid in the common stock of NIC,
with the balance to be paid in cash.
<PAGE>
Such bonuses shall be paid within 45 days after the end of each calendar
year. Following the first three calendar years of the Company's operations,
the Company's board of directors, or an appropriately authorized committee
thereof, shall determine any formula upon which bonuses are awarded.
(c) The Company's board of directors shall initially appoint
William Birdsall to act as the Chair of the Board of Directors, the Chief
Executive Officer and the President of the Company. Mr. Birdsall shall have an
employment agreement with a minimum term of three years. Mr. Birdsall shall be
responsible for selecting other persons to serve as officers of the Company. All
other employees and consultants for the Company shall be selected by
Mr. Birdsall, must be approved by the Board of Directors and shall each enter
into a written consulting or employment agreement, which shall include an
appropriate covenant not to compete with the Company. The Company shall have
no obligation or responsibility to hire any current employee of Conquest or NIC.
3.2 REQUIRED REPRESENTATIVE CONSENTS.
(a) CONSENT OF NIC REPRESENTATIVE. For as long as any Shares
are outstanding, the Company shall not, unless it has obtained the vote or
written consent of (i) at least a majority of the Shareholders or (ii) at least
one NIC Representative:
(i) remove any NIC Representative;
(ii) authorize, issue any additional Shares or any new
equity security senior to the Shares, except with respect to issuances of
additional Shares under any Equity Incentive Plan for employees and/or
consultants;
(iii) amend the Articles of Incorporation, Bylaws or
this Agreement, or waive any of the provisions thereof or hereof, in a manner
that would alter or change the rights, preferences or privileges of the Shares
held by NIC disproportionate to the Non-NIC Shareholders;
(iv) take any action that results in the redemption of
any Shares (other than pursuant to the Company's exercise of its rights under
any Equity Incentive Plan to repurchase Shares or options granted to employees
or consultants);
(v) increase the authorized number of the members of
the Company's board of directors;
(vi) pay dividends other than pro rata in accordance
with the number of Shares owned by each Shareholder;
(vii) effect a Conquest Change of Control Transaction;
<PAGE>
(viii) sell, spin-off or otherwise distribute any
business or subsidiary of the Company on a basis other than pro rata to all of
the Shareholders;
(ix) cause the Company to engage in any business not
related to the Company's Business; or
(x) increase the pool of shares reserved for issuance
under any Equity Incentive Plan.
(b) CONSENT OF NON-NIC REPRESENTATIVE. For as long as any
Shares are outstanding, the Company shall not, unless it has obtained the vote
or written consent of at least one Non-NIC Representative:
(i) approve any agreements or arrangements between or
involving the Company and NIC, or the Company and a NIC affiliate;
(ii) remove any Non-NIC Representative;
(iii) authorize, issue any additional Shares or any new
equity security senior to the Shares, except with respect to issuances of
additional Shares under any Equity Incentive Plan for employees and/or
consultants;
(iv) amend its Articles of Incorporation, Bylaws or
this Agreement, or waive any of the provisions thereof, in a manner that would
alter or change the rights, preferences or privileges of the Shares held by the
Non-NIC Shareholders disproportionate to NIC;
(v) take any action that results in the redemption of
any Shares (other than pursuant to the Company's exercise of its rights under
any Equity Incentive Plan to repurchase Shares or options granted to employees
or consultants);
(vi) increase the authorized number of the members of
the Company's board of directors;
(vii) pay dividends other than pro rata in accordance
with the number of Shares owned by each Shareholder;
(viii) effect a Conquest Change of Control Transaction;
(ix) sell, spin-off or otherwise distribute any
business or subsidiary of the Company on a basis other than pro rata to all of
the Shareholders;
(x) cause the Company to engage in any business not
related to the Company's Business; or
<PAGE>
(xi) increase the pool of shares reserved for issuance
under any Equity Incentive Plan.
3.3 TERMINATION OF RIGHTS.
SECTIONS 3.1 and 3.2 shall terminate upon an IPO.
4. COVENANTS
4.1 REPORTING AND DELIVERY OF FINANCIAL STATEMENTS.
(a) The Company will maintain true books and records of
account in which full and correct entries will be made of all its business
transactions pursuant to a system of accounting established and administered in
accordance with GAAP and will set aside on its books all such proper accruals
and reserves as shall be required under GAAP.
(b) The Company shall deliver to each Holder as soon as
practicable, but in any event within 90 days after the end of each fiscal year
of the Company, a balance sheet of the Company, a statement of shareholder's
equity, a statement of income and a statement of cash flows, each as of the end
of such year, such year-end financial reports to be in reasonable detail,
prepared in accordance with GAAP.
(c) The Company shall deliver to each Shareholder such other
information related to the Company as required by law.
(d) The Company will furnish to NIC, at least 30 days prior to
the beginning of each fiscal year, a proposed annual Business Plan for such
fiscal year. The implementation of the proposed annual Business Plan shall be
contingent upon its approval by NIC under this SECTION 4.1(d), which such
approval shall not be unreasonably withheld.
(e) The rights granted pursuant to this SECTION 5.1 shall
terminate upon the IPO.
4.2 CONFIDENTIALITY OF RECORDS.
Each Shareholder agrees to use, and to use its best commercially
reasonable efforts to ensure that its authorized representatives use, the same
degree of care as such Shareholder uses to protect its own Confidential
Information to keep confidential any information furnished to it which the
Company identifies as being confidential (so long as such information is not in
the public domain), except that such Shareholder may disclose such Confidential
Information to any member, subsidiary, parent or manager of a Shareholder or
entity under common control with such Shareholder for the purpose of evaluating
its investment in the Company as long as such member, subsidiary, parent or
manager of a Shareholder or entity under common control with such Shareholder
agrees to be bound by this SECTION 4.2. For purposes of this SECTION 4.2
"CONFIDENTIAL INFORMATION" does not include information, technical data or
know-how that (i) is
<PAGE>
in the Shareholder's possession at the time of initial disclosure as shown by
the Shareholder's files and records immediately prior to the time of such
disclosure and that is not subject to any other legal obligation regarding
its disclosure; (ii) before or after it has been disclosed to the
Shareholder, is part of the public knowledge or literature, not as a result
of any action or inaction of the Shareholder or (iii) is approved for release
by written authorization of the Company. The provisions of this SECTION 4.2
shall not apply (i) to the extent that a Shareholder is required to disclose
Confidential Information pursuant to any law, statute, rule or regulation or
any order of any court of competent jurisdiction or pursuant to any
requirement (whether or not having the force of law, but if not having the
force of law, being of a type with which institutional investors in the
relevant jurisdiction are accustomed to comply) of any self-regulating
organization or any governmental, fiscal, monetary or other authority or (ii)
to the disclosure of Confidential Information to a Shareholder's employees,
counsel, accountants or other professional advisors, provided such persons
agree to be bound by this SECTION 4.2.
5. MISCELLANEOUS
5.1 GOVERNING LAW. This Agreement is to be construed in
accordance with and governed by the laws of the State of Colorado, without
giving effect to any choice of law rule that would cause the application of
the laws of any jurisdiction other than the State of Colorado to the rights
and duties of the parties.
5.2 SURVIVAL. The representations, warranties, covenants and
agreements made herein shall survive any investigation made by any
Shareholder and the closing of the transactions contemplated hereby. All
statements as to factual matters contained in any certificate or other
instrument delivered by or on behalf of the Company pursuant hereto in
connection with the transactions contemplated hereby shall be deemed to be
representations and warranties by the Company hereunder solely as of the date
of such certificate or instrument.
5.3 SUCCESSORS AND ASSIGNS; TRANSFERS. Except as otherwise
expressly provided herein, the provisions hereof shall inure to the benefit
of, and be binding upon, the permitted successors, assigns, heirs, executors
and administrators of the parties hereto and shall inure to the benefit of
and be enforceable by each person who shall be a Shareholder from time to
time; provided, however, that prior to the receipt by the Company of adequate
written notice of the permitted transfer of any Shares specifying the full
name and address of the transferee, the Company may deem and treat the person
listed as the Shareholder of such Shares in its records as the absolute owner
and Shareholder of such Shares for all purposes, including the payment of
dividends or any redemption price. Any attempt by a Shareholder to transfer
Shares in violation of this Agreement or the Articles of Incorporation shall
be void, and the Company agrees it will not effect such a transfer nor will
it treat any alleged transferee as the holder of such Shares without the
written consent of the holders of a majority of the Shares.
<PAGE>
5.4 SEVERABILITY. In case any provision of this Agreement shall
be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
5.5 AMENDMENT AND WAIVER. Except as otherwise expressly
provided, the obligations of the Company and the rights of the Shareholders
under this Agreement may be amended, modified or waived only with the written
consent of the Company, upon the approval of the Company's board of directors
pursuant to SECTION 3.2 hereof, and the approval of Shareholders representing
at least eighty (80%) of the voting power of the then issued and outstanding
Shares.
5.6 NOTICES. All notices required or permitted hereunder shall
be in writing and shall be deemed effectively given: (i) upon personal
delivery to the party to be notified, (ii) when sent by confirmed telex or
facsimile if sent during normal business hours of the recipient; if not, then
on the next business day or (iii) one day after deposit with a nationally
recognized overnight courier, specifying next-day delivery, with written
verification of receipt. All communications shall be sent to the party to be
notified at the address as set forth on the signature pages hereof or at such
other address as such party may designate by ten days' advance written notice
to the other parties hereto.
5.7 INJUNCTIVE RELIEF. Each party hereto acknowledges that it
will be impossible to measure in money the damages that would be suffered if
any party fails to comply with any of the obligations herein imposed on such
party and that in the event of any failure, an aggrieved Person will be
irreparably damaged and will not have an adequate remedy at law. Any such
Person shall, therefore, be entitled to injunctive relief and/or specific
performance to enforce such obligations, and if any action should be brought
inequity to enforce any of the provisions of this obligations, none of the
parties hereto shall raise the defense that there is an adequate remedy at
law.
5.8 TITLES AND SUBTITLES. The titles of the sections and
subsections of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
5.9 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
5.10 ENTIRE AGREEMENT. This Agreement, including any exhibits
and other agreements expressly referenced herein, constitutes the entire
agreement between the parties concerning the subject matter hereof and
supersedes any prior agreements, representations, statements, negotiations,
understandings, proposals or undertakings, oral or written, with respect to
the subject matter expressly set forth herein.
<PAGE>
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this INVESTORS'
RIGHTS AGREEMENT as of the date set forth in the first paragraph hereof.
THE COMPANY CONQUEST, INC.
By: /s/ William Birdsall
---------------------------------------
WILLAIM BIRDSALL
Chief Executive Officer and President
Address: 464 Turner Drive, Suite 5
Durango, CO 81301
NIC NATIONAL INFORMATION CONSORTIUM, INC.
By: /s/ Kevin Childress
---------------------------------------
KEVIN CHILDRESS
Chief Financial Officer
Address: 12 Corporate Woods
10975 Benson Street, Suite 390
Overland Park, CO 66210
Facsimile: 877-456-3468
CONQUEST MEMBERS William Birdsall
/s/ William Birdsall
------------------------------------
Address: 25 Lewis Mountain Lane
Durango, CO 81301
<PAGE>
The Nelson Family Foundation Inc.
/s/ Jerry Nelson
------------------------------------
By: Jerry Nelson
Address: 8787 E. Pinnacle Peak Road
Suite 200
Scottsdale, AZ 85255
/s/ Peter Glick
------------------------------------
Address: 117 Sunrise Lane
Durango, CO 81301
/s/ Thomas Sullivan, Sr.
------------------------------------
Address: 6390 E. Tanque Verde Road
Tuscon, AZ 85715
/s/ William Eckard
------------------------------------
Address: 5566 Country Road, #203
Durango, CO 81301
<PAGE>
[Signature Page to Investors' Rights Agreement]
/s/ DAVID LEVENTHAL
--------------------------------
Address: ___________________
___________________
Facsimile: __________
/s/ STEVE ORCHARD
--------------------------------
Address: ___________________
___________________
Facsimile: __________
<PAGE>
[Signature Page to Investors' Rights Agreement]
/s/ RON ROSS
--------------------------------
Address: ___________________
___________________
Facsimile: __________
/s/ EVERETT WOHLERS
--------------------------------
Address: ___________________
___________________
Facsimile: __________
<PAGE>
EXHIBIT A
William Birdsall
The Nelson Family Foundation Inc.
Peter Glick
Thomas Sullivan, Sr.
William Eckard
David Leventhal
Steve Orchard
Ron Ross
Everett Wohlers
<PAGE>
EXHIBIT 5.1
Morrison & Foerster LLP
425 Market Street
San Francisco, CA 94105
Tel. (415) 268-7000 Fax (415) 268-7522
February 22, 2000
National Information Consortium, Inc.
12 Corporate Woods
10975 Benson Street, Suite 390
Overland Park, Kansas 66210
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
S-1 (the "Registration Statement") of National Information Consortium, Inc.,
a Colorado corporation (the "Company"), filed with the Securities and
Exchange Commission, on February 22, 2000, relating to the registration under
the Securities Act of 1933, as amended, of up to 4,000,000 shares of the
Company's common stock, without par value per share (the "Common Stock"),
which are authorized but unissued shares of Common Stock to be offered and
sold by the Company, and 5,315,000 shares of the Common Stock (including up
to 1,215,000 shares of the Common Stock subject to the underwriters'
over-allotment option), all of which are presently issued and outstanding and
will be sold by certain selling shareholders named in the Registration
Statement (the "Selling Shareholders"). The Common Stock is to be sold to the
underwriters named in the Registration Statement for resale to the public.
As counsel to the Company, we have examined the proceedings taken by
the Company in connection with the issuance and sale of the Common Stock.
We are of the opinion that the up to 5,315,000 shares of Stock to be
sold by the Selling Shareholders pursuant to the Registration Statement are
validly issued, fully paid and non-assessable, and that the up to 4,000,000
shares of Common Stock to be offered and sold by the Company have been duly
authorized and, when issued and sold by the Company in the manner described
in the Registration Statement and in accordance with the resolutions adopted
by the Board of Directors of the Company, will be validly issued, fully paid
and nonassessable.
We consent to the use of this opinion as an exhibit to the
Registration Statement and further consent to all references to us in the
Registration Statement, the prospectus constituting a part thereof and any
amendments thereto.
Very truly yours,
/s/ Morrison & Foerster LLP
Morrison & Foerster LLP
<PAGE>
Exhibit 10.8
NATIONAL INFORMATION CONSORTIUM, INC.
KEY EMPLOYEE AGREEMENT
FOR
JOSEPH NEMELKA
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 24 day of
July, 1998, by and between Joseph Nemelka (Executive") and NATIONAL INFORMATION
CONSORTIUM, INC. a Delaware corporation (The "Company").
WHEREAS, the Company desires to employ Executive to provide personal
services to the Company and to the Company's subsidiaries, and desires to
provide Executive with certain compensation and benefits in return for his
services; and
WHEREAS, Executive desires to be employed by the Company and provide
personal services to the Company in return for certain compensation and
benefits;
NOW, THEREFORE, the parties hereto agree as follows:
1. EMPLOYMENT BY THE COMPANY.
1.1 Subject to terms set forth herein, the Company or a subsidiary of
the Company agrees to employ Executive in the position of Subsidiary President
and Executive hereby accepts such employment effective as of the date first
written above. During the term of his employment with the Company, Executive
will devote his best efforts and substantially all of his business time and
attention (except for vacation periods and reasonable periods of illness or
other incapacities permitted by the Company's general employment policies) to
the business of the Company.
1.2 Executive will serve in an executive capacity and shall perform
such duties as are customarily associated with his then current title,
consistent with the Bylaws of the Company and as required by the Company's Board
of Directors (the "Board").
1.3 The employment relationship between the parties shall also be
governed by the general employment policies and practices of the Company,
including those relating to protection of confidential information and
assignment of inventions, except that when the terms of this Agreement differ
from or are in conflict with the Company's general employment policies or
practices, this Agreement shall control.
2. COMPENSATION.
2.1 SALARY. Executive shall receive for services to be rendered
hereunder an annualized base salary of $115,000, payable in equal installments
(prorated for portions of a pay period) on the Company's regular pay days and
the Company will withhold from such compensation all applicable federal and
state income, social security and disability and other taxes as required by
applicable laws.
<PAGE>
2.2 STANDARD COMPANY BENEFITS. Executive shall be entitled to all
rights and benefits for which he is eligible under the terms and conditions of
the standard Company benefits and compensation practices which may be in effect
from time to time and provided by the Company to its employees generally.
3. PROPRIETARY INFORMATION OBLIGATIONS.
3.1 AGREEMENT. Executive agrees to execute and abide by the
Proprietary Information and Inventions Agreement attached hereto as EXHIBIT A
(the "Proprietary Information Agreement").
4. OUTSIDE ACTIVITIES.
4.1 Except with the prior written consent of the Company's Board of
Directors, Executive will not during the term of this Agreement undertake or
engage in any other employment, occupation or business enterprise, other than
ones in which Executive is a passive investor. Executive may engage in civic and
not-for-profit activities so long as such activities do not materially interfere
with the performance of his duties hereunder.
4.2 Except as permitted by Section 4.3, Executive agrees not to
acquire, assume or participate in, directly or indirectly, any position,
investment or interest known by him to be adverse or antagonistic to the
Company, its business or prospects, financial or otherwise.
4.3 During the term of his employment by the Company, except on
behalf of the Company, Executive will not directly or indirectly, whether as an
officer, director, stockholder, partner, proprietor, associate, representative,
consultant, or in any capacity whatsoever engage in, become financially
interested in, be employed by or have any business connection with any other
person, corporation, firm, partnership or other entity whatsoever which were
known by him to compete directly with the Company, throughout the world, in any
line of business engaged in (or planned to be engaged in) by the Company;
provided, however, that anything above to the contrary notwithstanding, he may
own, as a passive investor, shares of a publicly-held corporation that is
competitive with the Company, if such shares are actively traded on an
established national securities market, so long as the number of shares of such
corporation's capital stock that are owned beneficially (directly or indirectly)
by Executive shall not in the aggregate constitute more than 5% of the
outstanding voting stock of such corporation.
5. TERMINATION OF EMPLOYMENT.
5.1 TERMINATION WITHOUT CAUSE.
(a) The Company shall have the right to terminate Executive's
employment with the Company at any time without cause.
(b) In the event Executive's employment is terminated without
cause before July 1, 2001, the Company shall pay Executive one year's base
compensation in equal monthly payments on the first day of the month for each of
the twelve months
2
<PAGE>
following such termination; PROVIDED HOWEVER that if Executive is terminated
without cause during the final twelve months of Executive's employment
Agreement, Executive shall only be entitled to the equivalent of Executive's
base compensation for the remaining number of months until the expiration of
that Employment Agreement.
(c) In the event Executive's employment is terminated without
cause on or after July 1, 2001, Executive will not be entitled to severance pay,
pay in lieu of notice or any other such compensation, except as provided in the
Company's Severance Benefit Plan, if any, in effect on the termination date.
5.2 TERMINATION FOR CAUSE.
(a) The Company shall have the right to terminate Executive's
employment with the Company at any time for cause. Written notification of
termination and specific cause of termination shall be provided to Executive at
the time of termination.
(b) "Cause" for termination shall mean: (i) indictment or
conviction of any felony or of any crime involving dishonesty; (ii) willful
participation in any fraud against the Company; (iii) breach of Executive's
duties to the Company, including persistent unsatisfactory performance of job
duties; (iv) intentional damage to any property of the Company; or (v) conduct
by Executive which in the good faith and reasonable determination of the Board
demonstrates gross unfitness to serve. With respect to clause (ii) above,
Executive shall be given written notice of such unsatisfactory performance and
30 days from the date of such notice to cure the causes set forth therein.
(c) In the event Executive's employment is terminated at any
time with cause, Executive will not be entitled to severance pay, pay in lieu of
notice or any other such compensation; PROVIDED, HOWEVER, that Executive shall
receive all compensation earned prior to and including the date of termination.
5.3 VOLUNTARY OR MUTUAL TERMINATION.
(a) Executive may voluntarily terminate his employment with the
Company in writing at any time, after which no further compensation will be paid
to Executive.
(b) In the event Executive voluntarily terminates his
employment, he will not be entitled to severance pay, pay in lieu of notice or
any other such compmsation; PROVIDED, HOWEVER, that Executive shall receive all
compensation earned prior to and including the date of termination.
6. NON-INTERFERENCE; NON-COMPETITION.
(a) While employed by the Company, and for three (3) years
immediately following the Termination Date, Executive agrees not to interfere
with the business of the Company by:
3
<PAGE>
(i) soliciting, attempting to solicit, inducing, or otherwise
causing any employee of the Company to terminate his or her employment in order
to become an employee, consultant or independent contractor to or for any
competitor of the Company; or
(ii) directly or indirectly soliciting the business of any
customer of the Company which at the time of termination or one year immediately
prior thereto was listed on the Company's customer list.
(b) Executive agrees to execute and abide by the Non-Competition
Agreement attached hereto as EXHIBIT B.
7. GENERAL PROVISIONS.
7.1 NOTICES. Any notices provided hereunder must be in writing and
shall be deemed effective upon the earlier of personal delivery (including
personal delivery by telex) or the third day after mailing by first class mail,
to the Company at its primary office location and to Executive at his address as
listed on the Company payroll.
7.2 SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provisions had never been contained herein.
7.3 WAIVER. If either party should waive any breach of any provisions
of this Agreement, he or it shall not thereby be deemed to have waived any
preceding or succeeding breach of the same or any other provision of this
Agreement.
7.4 COMPLETE AGREEMENT. This Agreement and its Exhibits, constitute
the entire agreement between Executive and the Company and it is the complete,
final, and exclusive embodiment of their agreement with regard to this subject
matter. It is entered into without reliance on any promise or representation
other than those expressly contained herein, and it cannot be modified or
amended except in a writing signed by Executive and an officer of the Company.
7.5 COUNTERPARTS. This Agreement may be executed in separate
counterparts, any one of which need not contain signatures of more than one
party, but all of which taken together will constitute one and the same
Agreement.
7.6 HEADINGS. The headings of the sections hereof are inserted for
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning thereof.
7.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive and the Company, and
their
4
<PAGE>
respective successors, assigns, heirs, executors and administrators, except that
Executive may not assign any of his duties hereunder and he may not assign any
of his rights hereunder without the written consent of the Company, which shall
not be withheld unreasonably.
7.8 ATTORNEY FEES. If either party hereto brings any action to
enforce his or its rights hereunder, the prevailing party in any such action
shall be entitled to recover his or its reasonable attorneys' fees and costs
incurred in connection with such action.
7.9 CHOICE OF LAW. All questions concerning the construction,
validity and interpretation of this Agreement will be governed by the law of
the State of Kansas.
IN WITNESS WHEREOF, the parties have executed this Key Employee Agreement
on the day and year first above written.
NATIONAL INFORMATION
CONSORTIUM, INC.:
By: /s/ Jeff Fraser
-----------------------------------
Name: Jeff Fraser
---------------------------------
Title: President
--------------------------------
EXECUTIVE:
/s/ Joseph Nemelica
--------------------------------------
Name: Joseph Nemlica
---------------------------------
5
<PAGE>
EXHIBIT 10.10
NATIONAL INFORMATION CONSORTIUM, INC.
KEY EMPLOYEE AGREEMENT
FOR
RAY G. COUTERMARSH
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 1st
day of February, 2000, by and between Ray G. Coutermarsh ("Executive") and
NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation (the "Company").
WHEREAS, the Company desires to employ Executive to provide personal
services to the Company and to the Company's subsidiaries, and wishes to provide
Executive with certain compensation and benefits in return for Executive's
services; and
WHEREAS, Executive wishes to be employed by the Company and provide
personal services to the Company and to the Company's subsidiaries in return for
certain compensation and benefits;
NOW, THEREFORE, the parties hereto agree as follows:
1. EMPLOYMENT BY THE COMPANY.
1.1. Subject to terms set forth herein, the Company or a subsidiary of
the Company, agrees to employ Executive in the position of President, Local
Markets and Executive hereby accepts such employment effective as of the date
first written above. During the term of employment with the Company, Executive
will devote their best efforts and substantially all of their business time and
attention (except for vacation periods and reasonable periods of illness or
other incapacity's permitted by the Company's general employment policies) to
the business of the Company.
1.2. Executive will serve in an executive capacity and shall perform
such duties as are customarily associated with their then current title,
consistent with the Bylaws of the Company and as required by the Company's Board
of Directors (the "Board").
1.3. The employment relationship between the parties shall also be
governed by the general employment policies and practices of the Company,
including those relating to protection of confidential information and
assignment of inventions, except that when the terms of this Agreement differ
from or are in conflict with the Company's general employment policies or
practices, this Agreement shall control.
2. COMPENSATION
2.1. Salary. Executive shall receive for services to be rendered
hereunder an annualized base salary of $140,000.00, payable in equal
installments (prorated for portions of a pay period) on the Company's regular
pay days and the Company will
<PAGE>
withhold from such compensation all applicable federal and state income,
social security and disability and other taxes as required by applicable laws.
2.2. STANDARD COMPANY BENEFITS. Executive shall be entitled to all
rights and benefits for which they are eligible under the terms and conditions
of the standard Company benefits and compensation practices which may be in
effect from time to time and provided by the Company to its employees generally.
3. PROPRIETARY INFORMATION OBLIGATIONS
3.1. AGREEMENT. Executive agrees to execute and abide by the
Proprietary Information and Inventions Agreement attached hereto as EXHIBIT A.
4. TERMINATION OF EMPLOYMENT
4.1. TERMINATION WITHOUT CAUSE.
(a) The Company shall have the right to terminate Executive's
employment with the Company at any time without cause.
(b) In the event Executive's employment is terminated without
cause, before February 1, 2003, the Company shall pay Executive 12 months' base
compensation in a single lump sum distribution on the first regular Company pay
period after said termination.
(c) In the event Executive's employment is terminated without
cause on or after February 1, 2003, they will not be entitled to severance pay,
pay in lieu of notice or any other such compensation, except as provided in the
Company's Severance Benefit Plan, if any, in effect on the termination date.
4.2. TERMINATION FOR CAUSE.
(a) The Company shall have the right to terminate Executive's
employment with the Company at any time for cause. Written notification of
termination and specific cause of termination shall be provided to the Executive
at the time of termination.
(b) "Cause" for termination shall mean an employee's
conviction of a felony or the willful and deliberate failure of an employee to
perform his customary duties, in a manner consistent with the manner reasonably
prescribed by the Board of Directors or President of Buyer (other than any
failure resulting from his incapacity due to physical or mental illness,
disability or death) after not less than thirty (30) days prior written notice
from Buyer.
(c) In the event the Executive is notified in writing their
employment is to be terminated for cause, the Executive shall be given thirty
days from date of notification to cure the specific cause(s) set forth in the
notification.
<PAGE>
(d) In the event Executive's employment is terminated at any
time for cause, the executive shall not be entitled to severance pay, pay in
lieu of notice or any other such compensation; PROVIDED, HOWEVER, Executive
shall be entitled and shall receive all compensation earned prior to and
including the date of termination.
4.3. VOLUNTARY OR MUTUAL TERMINATION.
(a) Executive may voluntarily terminate their employment in
writing with the Company at any time, after which no further compensation will
be paid to Executive.
(b) In the event Executive voluntarily terminates their
employment, Executive shall not be entitled to severance pay, pay in lieu of
notice or any other such compensation; PROVIDED, HOWEVER, Executive shall be
entitled and shall receive all compensation earned prior to and including the
date of termination.
5. NON-INTERFERENCE; NON-COMPETITION.
5.1. AGREEMENT. Executive agrees to execute and abide by the
Noncompetition Agreement attached hereto as EXHIBIT B.
6. GENERAL PROVISION.
6.1. NOTICES. Any notices provided hereunder must be in writing and
shall be deemed effective upon the earlier of personal delivery (including
personal delivery by facsimile) or the third day after mailing by first class
mail, to the Company at its primary office location and to Executive at the
address listed on the Company payroll.
6.2. SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provisions had never been contained herein.
6.3. WAIVER. If either party should waive any breach of any provisions
of this Agreement, they or it shall not thereby be deemed to have waived any
preceding or succeeding breach of the same or any other provision of this
Agreement.
6.4. COMPLETE AGREEMENT. This Agreement and its Exhibits, constitute
the entire agreement between Executive and the Company and it is the complete,
final, and exclusive embodiment of their agreement with regard to the material
terms of executive employment, compensation, and duration. It is entered into
without reliance on any promise or representation other than those expressly
contained herein, and it cannot be modified or amended except in a writing
signed by Executive and an officer of the Company.
<PAGE>
6.5. COUNTERPARTS. This Agreement may be executed in separate
counterparts, any one of which need not contain signatures of more than one
party, but all of which taken together will constitute one and the same
Agreement.
6.6. HEADINGS. The headings of the sections hereof are inserted for
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning thereof.
6.7. SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive and the Company, and
their respective successors, assigns, heirs, executors and administrators,
except that Executive may not assign any of their duties hereunder and they may
not assign any of their rights hereunder without the written consent of the
Company, which shall not be withheld unreasonably.
6.8. ATTORNEY FEES. If either party hereto brings any action to enforce
their or its rights hereunder, the prevailing party in any such action shall be
entitled to recover their or its reasonable attorneys' fees and costs incurred
in connection with such action.
6.9. CHOICE OF LAW. All questions concerning the construction, validity
and interpretation of this Agreement will be governed by the law of the State of
Kansas.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Key Employee
Agreement on the day and year first above written.
NATIONAL INFORMATION CONSORTIUM, INC.:
By: /s/ Sam Somerhalder
-------------------------------------------------
Name: Sam Somerhalder
-----------------------------------------------
Title: Executive Vice President
----------------------------------------------
EXECUTIVE:
/s/ Ray Coutermarsh
-----------------------------------------------------
Name: Ray Coutermarsh
<PAGE>
EXHIBIT 10.11
NATIONAL INFORMATION CONSORTIUM, INC.
KEY EMPLOYEE AGREEMENT
FOR
TERRY PARKER
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 9th
day of November, 1999, by and between Terry Parker ("Executive") and NATIONAL
INFORMATION CONSORTIUM, INC., a Colorado corporation (the "Company").
WHEREAS, the Company desires to employ Executive to provide personal
services to the Company and to the Company's subsidiaries, and wishes to provide
Executive with certain compensation and benefits in return for Executive's
services; and
WHEREAS, Executive wishes to be employed by the Company and provide
personal services to the Company and to the Company's subsidiaries in return for
certain compensation and benefits;
NOW, THEREFORE, the parties hereto agree as follows:
1. EMPLOYMENT BY THE COMPANY.
1.1. Subject to terms set forth herein, the Company or a subsidiary of
the Company, agrees to employ Executive in the position of Chief Technology
Officer and Executive hereby accepts such employment effective as of the date
first written above. During the term of employment with the Company, Executive
will devote their best efforts and substantially all of their business time and
attention (except for vacation periods and reasonable periods of illness or
other incapacity's permitted by the Company's general employment policies) to
the business of the Company.
1.2. Executive will serve in an executive capacity and shall perform
such duties as are customarily associated with their then current title,
consistent with the Bylaws of the Company and as required by the Company's Board
of Directors (the "Board").
1.3. The employment relationship between the parties shall also be
governed by the general employment policies and practices of the Company,
including those relating to protection of confidential information and
assignment of inventions, except that when the terms of this Agreement differ
from or are in conflict with the Company's general employment policies or
practices, this Agreement shall control.
2. COMPENSATION
2.1. Salary. Executive shall receive for services to be rendered
hereunder an annualized base salary of $130,000.00, payable in equal
installments (prorated for portions of a pay period) on the Company's regular
pay days and the Company will
<PAGE>
withhold from such compensation all applicable federal and state income,
social security and disability and other taxes as required by applicable laws.
2.2. STANDARD COMPANY BENEFITS. Executive shall be entitled to all
rights and benefits for which they are eligible under the terms and conditions
of the standard Company benefits and compensation practices which may be in
effect from time to time and provided by the Company to its employees generally.
3. PROPRIETARY INFORMATION OBLIGATIONS
3.1. AGREEMENT. Executive agrees to execute and abide by the
Proprietary Information and Inventions Agreement attached hereto as EXHIBIT A.
4. TERMINATION OF EMPLOYMENT
4.1. TERMINATION WITHOUT CAUSE.
(a) The Company shall have the right to terminate Executive's
employment with the Company at any time without cause.
(b) In the event Executive's employment is terminated without
cause, the Company shall pay Executive 12 months' base compensation in a single
lump sum distribution on the first regular Company pay period after said
termination.
4.2. TERMINATION FOR CAUSE.
(a) The Company shall have the right to terminate Executive's
employment with the Company at any time for cause. Written notification of
termination and specific cause of termination shall be provided to the Executive
at the time of termination.
(b) "Cause" for termination shall mean an employee's
conviction of a felony or the willful and deliberate failure of an employee to
perform his customary duties, in a manner consistent with the manner reasonably
prescribed by the Board of Directors or President of Buyer (other than any
failure resulting from his incapacity due to physical or mental illness,
disability or death) after not less than thirty (30) days prior written notice
from Buyer.
(c) In the event the Executive is notified in writing their
employment is to be terminated for cause, the Executive shall be given thirty
days from date of notification to cure the specific cause(s) set forth in the
notification.
(d) In the event Executive's employment is terminated at any
time for cause, the executive shall not be entitled to severance pay, pay in
lieu of notice or any other such compensation; PROVIDED, HOWEVER, Executive
shall be entitled and shall receive all compensation earned prior to and
including the date of termination.
4.3. VOLUNTARY OR MUTUAL TERMINATION.
<PAGE>
(a) Executive may voluntarily terminate their employment in
writing with the Company at any time, after which no further compensation will
be paid to Executive.
(b) In the event Executive voluntarily terminates their
employment, Executive shall not be entitled to severance pay, pay in lieu of
notice or any other such compensation; PROVIDED, HOWEVER, Executive shall be
entitled and shall receive all compensation earned prior to and including the
date of termination.
5. NON-INTERFERENCE; NON-COMPETITION.
5.1. AGREEMENT. Executive agrees to execute and abide by the
Noncompetition Agreement attached hereto as EXHIBIT B.
6. GENERAL PROVISION.
6.1. NOTICES. Any notices provided hereunder must be in writing and
shall be deemed effective upon the earlier of personal delivery (including
personal delivery by facsimile) or the third day after mailing by first class
mail, to the Company at its primary office location and to Executive at the
address listed on the Company payroll.
6.2. SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provisions had never been contained herein.
6.3. WAIVER. If either party should waive any breach of any provisions
of this Agreement, they or it shall not thereby be deemed to have waived any
preceding or succeeding breach of the same or any other provision of this
Agreement.
6.4. COMPLETE AGREEMENT. This Agreement and its Exhibits, constitute
the entire agreement between Executive and the Company and it is the complete,
final, and exclusive embodiment of their agreement with regard to the material
terms of executive employment, compensation, and duration. It is entered into
without reliance on any promise or representation other than those expressly
contained herein, and it cannot be modified or amended except in a writing
signed by Executive and an officer of the Company.
6.5. COUNTERPARTS. This Agreement may be executed in separate
counterparts, any one of which need not contain signatures of more than one
party, but all of which taken together will constitute one and the same
Agreement.
6.6. HEADINGS. The headings of the sections hereof are inserted for
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning thereof.
<PAGE>
6.7. SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive and the Company, and
their respective successors, assigns, heirs, executors and administrators,
except that Executive may not assign any of their duties hereunder and they may
not assign any of their rights hereunder without the written consent of the
Company, which shall not be withheld unreasonably.
6.8. ATTORNEY FEES. If either party hereto brings any action to enforce
their or its rights hereunder, the prevailing party in any such action shall be
entitled to recover their or its reasonable attorneys' fees and costs incurred
in connection with such action.
6.9. CHOICE OF LAW. All questions concerning the construction, validity
and interpretation of this Agreement will be governed by the law of the State of
Kansas.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Key Employee
Agreement on the day and year first above written.
NATIONAL INFORMATION CONSORTIUM, INC.:
By: /s/ Sam Somerhalder
-------------------------------------------------
Name: Sam Somerhalder
-----------------------------------------------
Title: Executive Vice President
----------------------------------------------
EXECUTIVE:
/s/ Terry Parker
-----------------------------------------------------
Name: Terry Parker
<PAGE>
Exhibit 10.21
IIC
- -------------------------------------------------------------------------------
CHANGE ORDER Date: 12/07/99
State of Idaho, Dept. of Admin., Division of Purchasing Time: 08:20
Pages 1 of 3
Delivery Due CPO 422 0 Rev#: 1
12/06/02
- -------------------------------------------------------------------------------
Ship to: 2000IMS Bill to: 2000IMS
Admin - Internal Management Systems Admin - Internal Management Systems
650 W STATE STREET 650 W STATE STREET
PO BOX 83720 PO BOX 83720
BOISE ID 83720-0004 BOISE ID 83720-0004
- -------------------------------------------------------------------------------
Vendor :34996 Terms: Net 30 Days
IDAHO INFORMATION CONSORTIUM INC
Attn: SCOTT SOMERHALDER FOB: Dest-Freight Prepaid & Allowed
425 W CAPITOL BLVD Routing:
LITTLE ROCK AR 72201 Buyer: Mark Little
Stated In: USD
- -------------------------------------------------------------------------------
Line Item ID / Description Quantity U/M Unit U/M Total
Nmbr Ordered Price Price
- -------------------------------------------------------------------------------
1 91551 1.00 M030 0.00000 M030 0.00000
Information Highway Electronic Services (Internet, etc.)
- -------------------------------------------------------------------------------
CONTRACT FOR ELECTRONIC BUSINESS AND INTERNET PORTAL SERVICES
NOTICE OF CONTRACT (CPO) AWARD
Contract for ELECTRONIC BUSINESS AND INTERNET PORTAL SERVICES for
the DEPARTMENT OF ADMINISTRATION AND OTHER PUBLIC AGENCIES.
This contract to be drawn on as requested by the requisitioning
agencies, for a period of Three (3) years commencing
December 7, 1999 and ending December 6, 2002, with an option to
renew for Two (2) additional Two (2) year periods.
PUBLIC AGENCY CLAUSE
Contract prices shall be extended to other "Public Agencies" as
defined in Section #67-2327 of the Idaho Code, which reads: "Public
Agency" means any city or political subdivision of this state,
including, but not limited to, counties; school districts; highway
districts; port authorities; instrumentalities of counties; cities
or any political subdivision created under the laws of the State of
Idaho. It will be the responsibility of the Public Agency to
independently contract with the vendor and/or comply with any other
applicable provisions of Idaho Code governing public contracts.
Idaho Information Consortium, Inc CONTACT Scott Somerhalder
PHONE 208-853-1381
FACSIMILE 208-853-1381
INVOICES MUST BE SENT TO THE IDAHO ORDERING AGENCY
ITRMC Project Team CONTACT Bill Fernsworth
PHONE 208-332-1878
FACSIMILE 208-334-2307
THIS CONTRACT CONSISTS OF THE FOLLOWING AND ALSO CONSTITUTES THE
STATE OF IDAHO'S ACCEPTANCE OF YOUR SIGNED PROPOSAL
A. This Notice of Contract (CPO) Award;
B. THE STATE OF IDAHO'S ELECTRONIC BUSINESS AND INTERNET PORTAL
SERVICES REQUEST FOR PROPOSAL dated June 23, 1999, incorporated
herein by reference as though set forth in full; and
C. IIC's signed Proposal dated July 30, 1999, in response to
The Electronic Business and Internet Portal Services RFP,
- -------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
CHANGE ORDER Date: 12/07/99
State of Idaho, Dept. of Admin., Division of Purchasing Time: 08:20
Pages 2 of 3
Delivery Due CPO 422 0 Rev#: 1
12/06/02
- -------------------------------------------------------------------------------
Continued Next Page
incorporated herein by reference as though set forth in full.
D. Any Service Level Agreement entered pursuant to this contact.
E. Any Purchase Order issued pursuant to this contract.
In the event of any inconsistency, unless otherwise agreed to in
writing by both parties, such inconsistency shall be resolved by
giving precedence in the following order:
1. This document.
2. The State of Idaho's Request for Proposal
3. IIC's signed Proposal
QUANTITIES: The State of Idaho, Division of Purchasing can only
give approximations of quantities and will not be held responsible
for figures given in this document.
The following modifications are made to the Terms and Conditions
that accompanied and were incorporated into the the State of
Idaho's Electronic Business and Internet Portal Services Request for
Proposal:
STATE OF IDAHO STANDARD CONTRACT TERMS AND CONDITIONS
1. Termination is changed to read: TERMINATION: The State may
terminate the Agreement (and/or any order issued pursuant to
the Agreement) when the Contractor has been provided written notice
of default or non-compliance and has failed to cure the default or
non-compliance within a reasonable time, not to exceed thirty (30)
calendar days, after receipt of such notice. If the Agreement is
terminated for default or non-compliance, the Contractor will be
responsible for any direct costs and/or damages incurred by the
State for placement of the new contract. The State, upon
termination for default or non-compliance, reserves the right to
take any legal action it may deem necessary. For purposes of this
Contract, the phrase "a default or event of non-compliance"
warranting termination under this section" shall include but not
be limited to:
(1) Any material breach or evasion by IIC of the terms or
conditions of this Contract and its amendments, if any; or
(2) Substantial cessation of Portal services by the portal; or
(3) Fraud, misappropriation, embezzlement, malfeasance,
significant malfeasance, illegal conduct by IIC, its officers, or
directors; or
(4) Dissolution of IIC or forfeiture of its company existence; or
(5) Amendment of the State's enabling authority making the Portal
substantially impractical; or
(6) An adverse judicial decision by a court of competent
jurisdiction which has the effect of rendering Portal operations
no longer feasible; or
(7) Insolvency of IIC; or
(8) Material breach of an SLs.s. by IIs.s.; or
(9) Willful disclosure of any confidential information by IIC; or
(10)Legislation materially alters the ability of IIC to operate
the Portal; or
(11) Failure of IIC to provide an annual irrevocable Letter of
Credit in the amount of $500,000.00, naming the State of Idaho as
the Beneficiary, within 30 days of the contract anniversary date.
The following modifications are made to the Specifications that
accompanied The State of Idaho's Electronic Business and Internet
Portal Services Request for Proposal:
NEW ITEM: Idaho Information Consortium may terminate this Contract
if the key Premium service applications do not generate sufficient
revenue to support the basic core functions required to operate the
Portal due to the limitations required of IIC in the operations of
the Portal by the State.
Item 3.10([illegible]), Insurance and Performance Bond Requirement,
is Modified to accept an Irrevocable Letter of Credit in the
amount of
- -------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
CHANGE ORDER Date: 12/07/99
State of Idaho, Dept. of Admin., Division of Purchasing Time: 08:20
Pages 3 of 3
Delivery Due CPO 422 0 Rev#: 1
12/06/02
- -------------------------------------------------------------------------------
Continued Next Page
$500,000.00 in lieu of a Performance Bond of the same amount. Item
3.10(d) is modified to reflect that the amount of Comprehensive
Crime coverage for employee dishonesty, forgery, theft, wire
transfer fraud, computer fraud or theft is $400,000.00 during the
first year and $200,000.00 for all subsequent years, including
renewals.
Item 5.17, Protection of Network Operations in Transition (ME),
Is changed to read:
"Upon termination or expiration of the Contract, Access Idaho must
remain operational during any transition period. Upon termination
or expiration, all records applicable to a state agency, including
working papers and operational documentation, must be delivered
immediately to the Department of Administration and will become the
property of the State, if not already such, as indicated in Section
3.13 (Intellectual Property). Proposals must describe the process
that would be used to facilitate a smooth transition. The State
will provide no less than six months notification as to its
renew/rebid intentions."
STATE AGENCY: Invoices are to be paid through data entry of
expenditures into the State Controller's STARS system using
established State Contract payment procedures. THE DIVISION OF
PURCHASING'S ASSIGNED STATE CONTRACT NUMBER MUST BE SHOWN IN THE NPC
FIELD OF THE STARS PAYMENT TRANSACTION RECORD.
JAN G. COX
Administrator
Division of Purchasing
P O Box 83720
Boise, Idaho 83720-0075
Ph: (208)327-7465
/s/ Scott Somerhalder 12/7/99
SCOTT SOMERHALDER DATE
President
Total Of Line Items 0.00000
Discount 0.00000
Sub-Total 0.00000
Misc. charge-1 0.00000
Misc. charge-2 0.00000
Tax 0.00000
Freight 0.00000
---------
Purchase Order Total 0.00000
- -------------------------------------------------------------------------------
Signature: /s/ Jan G. Cox
------------------------
Jan G. Cox
<PAGE>
Exhibit 10.22
SCOPE OF WORK AND SPECIAL TERMS AND CONDITIONS
CONTRACT FOR PORTAL MANAGER SERVICES
THIS CONTRACT is between the State of Hawaii, hereinafter referred to as
"the State", and Hawaii Information Consortium, Inc., a for-profit
corporation, hereinafter referred to a "HIC".
WHEREAS, the State has worked diligently to create an opportunity for
providing enhanced electronic access to public services and information for
Hawaii citizens in the most cost-effective, progressive, and cooperative
means possible; and
WHEREAS, Access Hawaii, hereinafter referred to as the "Portal", is
poised to become a significant public access, economic development and
educational tool for the State of Hawaii and its residents; and
WHEREAS, the Portal will significantly benefit the State through:
1. Increased public services;
2. Enhanced public access to State government;
3. Equality of access to State government regardless of geographic
locations;
4. Increased efficiency of State government agencies and offices without
budget increases through electronic commerce transactions;
5. Providing additional resources to State agencies and offices and to
assist them in information management, access, and electronic commerce
functions as project grows;
6. Providing both Standard Portal Services and Premium Services, for
which an access charge will be assessed as recommended by the Access Hawaii
Committee, hereinafter referred to as the AHC;
7. Enhancing access to services and information of political
subdivisions; and
WHEREAS, in order to effectuate electronic access and commerce for
citizens with government throughout the State, the Governor's Office issued a
Request for Proposals for an Electronic Business and Internet Portal
Provider, GOV (RFP 99-00) on September 22, 1999 and amendments on October 7,
1999, October 14, 1999, November 5, 1999, and December 9, 1999, referred to
hereinafter collectively as the "RFP", seeking proposals for a private Portal
manager; and
<PAGE>
WHEREAS, HIC submitted an original proposal on November 19, 1999 in
response to the RFP and Best and Final Offer on December 20, 1999 in response
to Addenda D, and such proposal was determined by the proposal review
committee to be the one best suited to the goals of the State, which proposal
in hereinafter referred to as the"HIC Proposal"; and
WHEREAS, the State desires to contract with HIC to serve as the Portal
Manager and to establish, develop, operate, maintain and expand the Portal as
mutually agreed to by HIC and the State; and
WHEREAS the Portal will provide increased electronic access and commerce
among Hawaii residents, businesses, and other government entities;
NOW THEREFORE, the parties agree as follows:
1. INCORPORATION BY REFERENCE
The provisions of the RFP and the HIC Proposal are hereby incorporated
into this Contract and made a part hereof. If there is any conflict among the
provisions of the RFP, the HIC Proposal, this Contract, and the laws of the
State, then those conflicts will be resolved in the following order
precedence:
1. Hawaii law
2. Contract
3. The RFP and addenda & the HIC Proposal, equally.
This Contract may be amended only by mutual expressed written consent.
2. PURPOSE OF THE PORTAL.
The purpose of the Portal and this contract is to realize the vision of
the Governor and Access Hawaii Committee in meeting the goals set forth in the
RFP and may be summarized as follows:
2
<PAGE>
A. To create and provide a significant and diligently promoted public service
to Hawaii citizens and businesses by:
(1) Expanded business and citizen access to government services and
information;
(2) Offering an easy and convenient process for these groups to conduct
transactions with State government online;
(3) Accelerating the development and delivery of an increased volume of
quality, online government services;
(4) Improving the level of customer service from State government;
(5) Extend electronic government services to citizens of cities and
county government; and
B. To provide such public service without increasing the tax burden on the
citizens of Hawaii, through utilization of private capital and management
and appropriate payment for the same.
3. TERM OF CONTRACT AND RENEWALS
This Contract shall be for a term of three (3) years, commencing
January 3, 2000 and expiring at 12:00 a.m., January 3, 2003, unless earlier
terminated.
At the option of the State, the Contract may be renewed for a period of
two (2) additional years by written notice from the State on or before
July 1, 2002, of its decision to extend the Contract period through
January 3, 2005.
At the option of the State, the Contract may be renewed for an additional
period of two (2) additional years by written notice from the State on or
before July 1, 2004, of its decision to extend the Contract period through
January 3, 2007.
4. RELATIONSHIP OF PARTIES
Access Hawaii will be overseen by the AHC, an advisory committee to the
State. Routine contract administrative activities will be implemented
through the AHC, who is the state electronic commerce coordinator
committee, working in concert with HIC. Final statutory and decision-making
authority for this contract resides with the Governor's Special Advisor
3
<PAGE>
for Technology Development (GSATD). The duties and responsibilities of the
AHC and HIC are as follows:
A. Notwithstanding any other provisions contained herein, it is expressly
agreed that HIC is an independent contractor in the performance of each and
every part of this Contract. As such HIC is solely liable for all labor
and expenses in furtherance of such performance hereunder. It is expressly
agreed that HIC and any of its subcontractors and agents, officers and
employees in the performance of this Contract shall act in an independent
capacity and not as officers or employees of the State. It is further
expressly agreed that this Contract shall not be construed as a partnership
or joint venture between HIC or any subcontractor and the State of Hawaii.
B. HIC may become an agent of the State only by the expressed written
consent of the State.
C. HIC will not pledge any assets of the State in its care, custody or
control, or cause any type of lien to attach to such.
D. HIC will provide Portal manager services in exchange for the
opportunity to earn a reasonable profit from the Portal's premium services.
Premium Services are those services or information that are made available
in such a way that they have commercial value or add convenience to the
user. HIC will capitalize, develop and operate the Portal, which will
serve in a manner which is self-supporting and cost effective. Some of the
information access is intended to be provided standard (no cost) to Portal
users. Standard services will be funded from the proceeds of the premium
services. The development of premium or standard services will include
adequate integration with state agency systems to ensure that necessary
records are created and populated appropriately. The Portal is intended to
be self-supporting with HIC receiving its compensation from the net
proceeds of premium services. The State of Hawaii will give its full
support and effort to HIC in the effort to make the Portal self-supporting.
E. The AHC will establish priorities and policies and approve or
disapprove Service Level Agreements (agreements between the Portal and
State Agencies or political subdivisions that define circumstances and
responsibilities relating to providing on-line
4
<PAGE>
electronic access and/or transactions, which are at the agencies' or
political subdivisions' discretion). HIC will submit a revised budget plan
for the operation of the Portal within 60 days of the commencement of this
contract.
F. As a contractor for the State, HIC will deliver and disburse funds
as agreed between HIC, AHC and any entity as negotiated in separate Service
Level Agreement. The AHC and the Hawaii Director of the Department of
Budget and Finance ("B&F") shall approve all funds handling procedures. HIC
will keep, maintain and be a custodian of all Portal financial and
operation records.
G. HIC will follow relevant state and federal statutes, rules and
regulations applicable to assuring privacy and confidentiality. With
respect to state and local government information and filings, service
level agreements will specify the process for disclosure. Any disclosure
that is not specified in the service level agreement shall only be
disclosed through the express written authorization of the data custodian.
HIC company records are not considered public documents for purposes of
public disclosure.
5. HARDWARE AND SOFTWARE AGREEMENTS
A. HIC will provide hardware, and provide or develop software as
outlined in the HIC Proposal, and such other hardware and software as may
be necessary to make the Portal operational.
B. Upon completion of the initial three year term of the contract, HIC
will provide to the State at no cost, and without additional terms or
conditions, a complete copy, together with any software updates or upgrades
made by HIC, of all application and Portal software (hereinafter
collectively "The Software") developed either by HIC or by any or all of
its Affiliate Portal Companies and implemented on the Portal Corporations
who are wholly owned subsidiaries of the National Information Consortium,
Inc. that serve as the Portal Managers for state gateway service
initiatives.) HIC will also include with the Software complete
documentation and source code. The State shall be granted a perpetual
for-use-only license to The Software including rights to modify the code
and application, as the State deems appropriate. This provision does not
apply to software or documentation
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created by third parties and purchased by HIC, or one of its Affiliate
Portal Companies. The Software shall be delivered to the State no later
than the end of the term of the contract unless otherwise agreed to
mutually by the parties to this contract. This provision also remains in
effect for any additional software created by HIC or an Affiliate Portal
Company implemented on the Portal during any subsequent contract
extension, amendment or renewal period.
C. If this Agreement is terminated by the State "for cause", or by HIC
for reasons identified in section 15 and 16 prior to the end of the
initial contract term, or by HIC without cause, the State shall be
entitled to the license at the time termination is effective. If this
Agreement is terminated by the State without cause, the State reserves
the right to negotiate terms for licensure or software. The State
reserves the right to acquire equipment at fair market value at the
termination of this contract in coordination with HIC's leasing agent.
D. License shall be limited to State use for the state of Hawaii's
Portal for state and local government services and may not be sublicensed
to political subdivisions; however, if the State has a joint program
through the Portal with a political subdivision at the time the license
is granted or before the termination of the contract, the license may
continue to be used for such a program only.
E. HIC shall deposit on a quarterly basis, the most recent version of
all Portal application source code in escrow with a Hawaii-based neutral
third party (the "Escrow Agent") to be mutually chosen by HIC and the
State. Over the term of the contract HIC will have the authority to
remove superseded source code. The source code shall be delivered to the
State by the Escrow Agent in the event HIC: (i) is declared insolvent
through bankruptcy proceedings, (ii) is unable to perform its obligations
to the State under the Contract, or (iii) as otherwise provided in its
agreement with the Escrow Agent.
HIC acknowledges that the State will review, approve and subsequently
receive from HIC, an executed copy of the software escrow agreement
between HIC and the Escrow Agent to the State. HIC will notify the State
in writing of any amendments to such agreements, any change in Escrow
Agent, or of any replacement or successor escrow arrangements. The
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Escrow Agent will provide written notification to the State's GSATD or
his successor, at least semiannually, detailing all account activity
during the previous period.
F. All Portal trademarks, trade names, logos and other identifiers,
Internet uniform resource locators, Internet addresses and e-mail
addresses obtained or developed pursuant to this Contract shall be the
property of the State.
6. CONNECTIONS BETWEEN PORTAL AND STATE AGENCIES
Costs associated with and maintenance of communication links from State
facilities to HIC facilities for Portal purposes, including but not
limited to leased circuits from telephone or cable companies, shall be
paid as expenses by HIC.
7. PORTAL SERVICE
A. HIC shall negotiate with and obtain written Service Level Agreements
from each separate data-providing entity (hereinafter, "DPE") from which
electronic access or transactions are desired.
B. Subscribers (customers who apply for and receive from the Portal, a
user name and password in order to access the services they desire with
monthly billing instead of instant payment) will be required to execute a
contract for services. All contracts with subscribers and all SLA's shall
be subject to approval and continuing monitoring by the AHC.
C. HIC will enter into an SLA with each agency or political subdivision
who provides information to HIC for the Portal or which has a transaction
which furnishes information to the agency or political subdivision. These
agreements will be signed by the agencies' authorized representative(s)
and will be approved by the AHC. Only information that is legally and
ethically distributable, as determined by the state agency, in its
capacity as the legal custodian of the respective data, will be included
on the Portal. The SLA will detail what information will be accessed or
transactions performed, how it will be accessed and provided to the
public or how the transaction will generally operate with the agency, any
statutory fees or enhanced access charges, and what, if any special
requirements must be
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satisfied by the individual customers to qualify for access to the
information or to perform the transaction. The agency and HIC will agree
on a schedule for collection and payment of any statutory fee required.
Once an agreement has been reached and approved by the AHC, the public
information application will be developed according to the agency's SLA.
D. Since HIC's software developers creating the application may see
some confidential information while working with the agency
representative in determining which data fields are required, HIC's
employees must satisfy any privacy and confidentiality requirements that
the agency may require prior to beginning work.
E. All SLA's or other requests regarding the Portal from non-state
level political subdivisions must be approved by the AHC through the
service request process. The AHC shall establish the priority of such
requests.
8. DISTRIBUTION OF PORTAL REVENUES
A. The establishment of all charges to Portal users shall be reviewed
by the AHC. The AHC will review and approve any and all Portal use or
data access charges for fairness, reasonableness, and appropriateness in
furthering the goals of this Agreement. HIC may at any time recommend
changes in charges to the AHC.
B. In establishing Portal use or data access charges the AHC shall
consider the following factors:
(1) A commitment to the public policy requirement to provide
electronic access to public records at the most reasonable rate
possible and to improve government service to its citizens and
businesses by allowing transactions online.
(2) That the charges may be adjusted to permit funding of special
projects and enhancement of public service.
(3) The entrepreneurial and start-up nature of the business and
attendant risk of capital for HIC and the need to earn a reasonable
profit on Portal operations.
(4) The need to invest in the reasonable expansion, maintenance and
improvement to online Portal transactions and information services.
(5) Any other reasonable factors which in the opinion of AHC should
be considered.
8
C. To the extent an audit report discloses any discrepancies in the HIC
charges, billings, or financial records, and following a period for
review and verification of the amount by HIC, HIC will adjust the payment
as soon as reasonable possible, but not to
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exceed 90 days. HIC shall cooperate to assure that verification is
completed in a timely manner.
D. HIC also agrees to make other changes requested by the State, which
is agreed to by HIC and the AHC, to comply with recommendations resulting
from any audit. Any such audit will be performed by a competent and
reputable Certified Public Accountant licensed in Hawaii.
E. The accounting system is to include a numbered chart of accounts,
books of original entry of all transactions, appropriate subsidiary
ledgers, a general ledger, which includes to-date postings and an audit
trail through financial statements. Such books may either be maintained
on paper or on computer with appropriate backup. HIC shall from the
beginning of this Contract adopt the calendar year ending December 31st
for reporting purposes.
F. HIC will report activities to the State as follows:
(1) Within 120 days after the close of HIC's fiscal year, HIC will
submit to the State an annual financial report and audit. These
reports must be certified by an independent certified public
accountant (selected by HIC) that may be the accountant or a member
of the firm of accountants who regularly audit the books and
accounts of HIC. The submitted audit information must include, but
is not limited to, the audited financial statements, auditor
opinions, reports on internal control, findings and recommendations
and management letters. In addition, HIC is subject to any further
audit and review determined necessary by the State after furnishing
reasonable notice to HIC.
(2) Develop and regularly update, in cooperation with the data
custodians, a draft Portal strategic plan for presentation to the
AHC on at least an annual basis.
(3) Report to the AHC on a periodic basis concerning potential new
applications, services and related issues. HIC will strive to
improve access to, and the utility of the public information and
transactions available through the Portal by exploring and
recommending ways to:
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a. Expand the amount and kind of public services and
information available;
b. Increase the utility of the public information presented,
the transactions available, and the form in which both are
provided;
c. Expand the base of users who access the public services
and information;
d. Improve individual and business access to public services
and information through implementing improvements in
technology; and,
e. Make recommendations designed to increase the effectiveness
and resources of the Portal.
f. Redesign and maintain the State of Hawaii website and the
agreed upon Portal pages.
(4) HIC will measure Customer satisfaction including Web surveys
and report results to the AHC on a schedule to be agreed to by the
AHC and HIC but no less than on an annual basis, and
(5) HIC will measure and report to the AHC on growth trends and
usage of the Portal, as well as hits, access, transactions and other
performance measures or metrics as mutually agreed upon by the AHC
and HIC. Working in cooperation with the AHC, HIC will submit the
details of the proposed service measures either as part of the
service management plan for Portal wide indicators and as part of
the Service Level Agreements for application specific indicators.
(6) If available, HIC will utilize the state's payment card
processor for payment card transactions, with the provision that
HIC will receive state rates negotiated as part of the State of
Hawaii contract with its chosen bank during the life of that
contract unless otherwise determined by the State, or unless more
favorable rates may be obtained by HIC independent of the state.
(7) HIC will have an initial opportunity to collect state statutory
fees from users before paying same to the state. HIC guarantees the
collection of such statutory fees to the state.
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11. PERSONNEL PRACTICES
A. The hiring, recruitment, management, training, and firing of HIC
employees will be the responsibility of HIC. The State's only involvement
in the personnel affairs of HIC shall be limited to disclosure of the
names and positions of officers and employees of HIC, except within
its role as auditor.
B. No officer, employee, or director of HIC shall receive a salary,
except as and for services performed by such officer, employee, or
director, or member for HIC on behalf of the Portal.
C. HIC shall be responsible for all required costs attributable to its
officers and employees, including but not limited to, worker's
compensation premiums and deductible, unemployment compensation tax
withholding contributions, tax withholding contributions, and similar
items.
12. INSURANCE AND BONDS
HIC shall provide the AHC written proof of the following insurance
provided by a qualified firm authorized/admitted to do business in Hawaii:
A. General comprehensive liability insurance policy in the amount of at
least $1,000,000.
B. Workers' compensation insurance coverage as required by State law on
all HIC employees.
C. Fidelity bond in the amount of at least $200,000 per HIC employee.
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13. CHANGES IN PORTAL
A. Portal operations and development shall be generally in accordance
with the HIC Proposal, the RFP and this contract as described in
Section 11, and Section 13.B.
B. A planned material change in Portal operations cannot be made by HIC
without the prior written consent of the AHC. A "material change" includes,
but is not limited to, a change which is substantial and which increases
response time to inquires, adds to the complexity of Portal use,
diminishes services provided to users, or results in a comparable impact
on operations noticeable by users.
C. HIC will provide to the AHC at least thirty (30) days prior written
notice of a planned material change in Portal operations.
D. HIC shall timely provide to the AHC such other management reports as
the AHC may reasonably request.
14. NOTICES
Each party may change its designation for notice following written notice
to the other party to this Contract.
AHC
Mr. Joseph Blanco
Chair, Access Hawaii
State Capitol
Honolulu, Hawaii
HIC
Aka A. DeMesa
Hawaii Information Consortium, Inc.
Honolulu, Hawaii
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Notices by the parties to one another shall be given in writing to the
persons identified above or to such other persons as may be subsequently
identified in a written notice. Such notices shall be effective on the
date of receipt if sent by U.S. first-class or restricted delivery
mail, postpaid, or by any reputable overnight delivery service, prepaid.
15. TERMINATION OF CONTRACT
The State of HIC shall have the right to terminate this Contract for cause,
subject to cure, by providing written notice of termination to HIC or the
State, respectively. Such notice shall specify the time, the specific
provision of this Contract or "for cause" reason that gives rise to the
termination and shall specify reasonable appropriate action that can be
taken by HIC or the State to avoid termination of the Contract. The State
and HIC shall provide a period of up to sixty (60) days, unless otherwise
specified in this Contract, for HIC or the State to cure breaches and
deficiencies of its performance obligations under this Contract. The State
may terminate this Contract at any time, if directed to do so by statute
or court order.
16. TERMINATION FOR CAUSE
A. For purposes of this Contract, the phrase "for cause" by the State
shall include but not be limited to:
(1) Any material breach or evasion by HIC of the terms or
conditions of this Contract and its amendments, if any; or,
(2) Substantial cessation of Portal services by the Portal; or,
(3) Fraud, misappropriation, embezzlement, malfeasance, significant
misfeasance, or illegal conduct by HIC, its employees, agents,
officers, or directors; or,
(4) Dissolution of HIC or forfeiture of its company existence; or,
(5) Amendment of the State's enabling authority making the Portal
substantially impractical; or,
(6) An adverse judicial decision by a court of competent
jurisdiction, which has the effect of rendering Portal operations no
longer feasible; or,
(7) Insolvency of HIC; or,
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(8) Material breach of an SLA; or,
(9) Negligent disclosure of any confidential information; or,
(10) Legislation materially alters the ability of HIC to operate the
Portal; or,
(11) All applicable provisions of the RFP.
B. For purposes of this Contract, the phrase "for cause" by HIC shall
include, but not be limited to key premium service applications that do not
generate sufficient revenue to support the basic core functions required
to operate the Portal at a reasonable profit, provided that HIC
acknowledges that no reasonable profit is expected in the first eighteen
(18) months of the initial contract term.
17. CONTINUATION OF OPERATIONS DURING TRANSITION PERIOD
If for any reason this contract shall be terminated or upon expiration of
the Contract without extension, or at the end of any extension HIC shall,
at the option of the State, continue to operate under this Contract as
Portal Manager in accordance with all forms and conditions of this
Contract, together with any amendments or modifications in existence at
such time, for a period of up to twelve (12) months from the time of
expiration or notification of termination from the State to HIC. The intent
of this provision is to insure continuation of Portal operations while a
successor Portal manager is chosen and installed. The State shall notify
HIC at the earliest possible opportunity but in any event, no later than
the date of notification of termination, or the notifications dates set
forth in Section 2 above whichever is earlier that it shall continue
operations and the duration of time for such continuation.
18. DEFENSE OF PATENT, COPYRIGHT, TRADEMARK, TRADE SECRET
HIC warrants that its proposed operation of the Portal does not and shall
not infringe on the United States patent, copyright, trademark or trade
secret right of any person or entity. The State shall be provided with
prompt notice of any such claim of infringement and HIC shall have the
exclusive right to defend or settle such claim at HIC's option subject to
State approval which shall not be unreasonably withheld. The State shall
cooperate with HIC in its defense or settlement of such claim at no
expense and no liability to the State. HIC
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is not responsible for the content of information or links furnished by
the state or any entity thereunder to HIC.
19. MARKETING
It is recognized that HIC and its affiliated companies intend to use its
experience with the State, the AHC and DPE's as a marketing tool with
third parties. It is agreed that HIC may make references to and use the
State as a reference. If HIC intends to claim that the State "endorses"
HIC or use the State seal, AHC or Portal logo or claim representations
made by the State, all such material must be submitted to AHC to review
and approval prior to use by HIC.
20. LIABILITY
A. The State, its agents, and employees shall not be legally responsible
for errors due to problems caused by HIC's actions or intentional
omissions in operation of the Portal.
B. HIC agrees for itself, its agents, employees, and assigns to hold
harmless, indemnify and defend the State, its agents and employees from
any actions arising out of HIC's negligence or material failure to perform
under the terms of this Contract.
C. HIC agrees that it has not right of subrogation or contribution from
the State for any judgment rendered against HIC to the extent such
judgment results from HIC's negligence or material failure to perform
under the terms of this contract.
21. ASSIGNMENT
HIC may not assign any of its rights or delegate any of its duties
hereunder unless done pursuant to prior written consent of the State,
which consent shall not be unreasonably withheld.
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22. CLAIMS
This Contract shall be construed according to the laws of the State of
Hawaii. Any legal proceedings against the State regarding this
solicitation or any resultant contract shall be brought in the State's
administrative, legislative, or judicial forums.
23. ENTIRE AGREEMENT
This Contract, including any documents incorporated by reference,
constitutes the entire agreement of the parties and supersedes all other
prior written or oral contracts between the parties with respect to the
subject matter hereof. This Contract may be amended only in writing signed
by the parties thereto.
24. Disputes. In the event of any disputes or misunderstanding between the
State and HIC, in addition to any and all other remedies, the State
reserves the right to involve the National Information Consortium ("NIC")
in the resolution process.
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IN WITNESS WHEREOF, the parties have executed this Agreement, effective
the day and year first above written.
STATE OF HAWAII
By /s/ JOSEPH F. BLANCO
----------------------
JOSEPH F. BLANCO
Procurement Officer
HAWAII INFORMATION CONSORTIUM, INC.
By /s/ AKA A. DEMESA
----------------------
AKA A. DEMESA
President and CEO
APPROVED AS TO FORM:
/s/ DEBORAH [illegible] EMERSON
- ---------------------------
Deputy Attorney General
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CONTRACTOR ACKNOWLEDGEMENT:
STATE OF HAWAII )
:SS
CITY AND COUNTY OF HONOLULU
On this 29TH day of DECEMBER, 1999, before me appeared AKA A. DEMESA
_____ to me known to be the person(s) described in and, who, being by me duly
sworn, did say that he is PRESIDENT and CEO of HAWAII INFORMATION CONSORTIUM,
INC., the Contractor named in the foregoing instrument, and that he is
authorized to sign said instrument in behalf of the Contractor, and
acknowledges that he executed said instrument as the free act and deed of the
Contractor.
/s/ STEPHANIE T. KATAYAMA
----------------------------------
Stephanie T. Katayama
Notary Public
State of HAWAII
My commission expires: 2/27/2000
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EXHIBIT 10.30
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (this "AGREEMENT") is made this 15 day
of September, 1999, by and between National Information Consortium, Inc., a
Colorado corporation ("BUYER"), and Electric Press, Inc., a Virginia
corporation ("SELLER").
R E C I T A L S:
A. Buyer desires to purchase, and Seller desires to sell, substantially
all of Seller's assets, properties and rights in the business conducted by
Seller's eFed division (the "BUSINESS").
B. Buyer is to acquire only specified liabilities in connection with
its purchase of the Business, as herein described.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual promises, agreements, representations, warranties and covenants herein
contained, the parties hereby agree as follows:
SECTION 1
PURCHASE AND SALE OF ASSETS
1.1. CLOSING DATE. The closing (the "CLOSING") of the transactions
contemplated hereby shall be held at the offices of counsel to Buyer, Morrison &
Foerster LLP, 2000 Pennsylvania Avenue, NW, Washington, D.C. 20006-1888 on the
second Business Day following the satisfaction or waiver of all of the
conditions specified in Sections 4.3, 4.4 and 4.5 or on such other date as may
be mutually agreed upon by the parties (the "CLOSING DATE").
1.2. SALE OF ASSETS.
At the Closing, Seller shall sell, transfer, convey, assign and deliver
to the Subsidiary, free and clear of all liens, security interests, other
encumbrances, restrictions on transfer and adverse claims ("ENCUMBRANCES"), and
Buyer shall purchase from Seller, all of Seller's right, title and interest in
the assets, properties, goodwill and rights of Seller set forth on
SCHEDULE 1.2(a) (the "Assets").
(a) Without limiting the generality of the foregoing or the
description of "Assets" set forth on Schedule 1.2(a), the Assets shall include
the following:
(i) Seller's entire right, title and interest in and
to all current and archived code, articles, reviews, ratings,
commentary and other content, including all web site pages, used
exclusively in connection with the Business, including media on which
only such content is stored, and further including all inventory of
such materials, whether in printed form or on film, microfilm,
microfiche or other negative;
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(ii) all of the software and scripting, in all
formats (including object and source formats), relating to or used
exclusively in connection with the Business, including all web site
design and operational software set forth on Schedule 1.2(a), and
including with respect thereto: (1) all inventories of computer program
code (in all media) for said software and scripting; (2) any related
documentation and user materials; and (3) Seller's rights under all
related warranties; the source and object code for the procurement
management software used by Seller to conduct the Business;
(iii) the web sites and the domain names described in
SCHEDULE 1.2(a)(iii);
(iv) the tangible personal property used to conduct
the Business to the extent listed in SCHEDULE 1.2(a)(iv), together with
all related documentation and user materials, and all related
warranties;
(v) Seller's entire right, title and interest to the
third-party software licensed by Seller used exclusively in connection
with the Business, including any related documentation and user
materials, and Seller's rights under all related warranties;
(vi) all of the technical data and know-how,
including research, product plans, marketing materials, developments,
inventions, discoveries, processes, formulas, algorithms, technology,
designs, drawings, and business strategies, presently used exclusively
in and material to, the Business;
(vii) all of the trademarks, service marks, and trade
names (including registrations, licenses, and applications to register
pertaining thereto) used to identify the Business and/or its goods or
services (including any trademarks registered, or for which
registration is applied, after the date hereof), as set forth on
SCHEDULE 1.2(a)(vii) (the "TRADEMARKS");
(viii) all patents and copyrights (including
registrations, licenses, and applications to register pertaining
thereto), and all other intellectual property rights, trade secrets,
and other proprietary information, processes, and formulas used
exclusively in the Business;
(ix) all accounts receivable of Seller relating to
the Business (the "ACCOUNTS RECEIVABLE") as specified in a schedule to
be prepared by Seller in accordance with an accounting procedure to be
agreed upon by Buyer and Seller and provided to Buyer by Seller two
days prior to the Closing Date (the "ACCOUNTS RECEIVABLE SCHEDULE");
(x) all goodwill of the Business as a going concern;
all goodwill associated with the Trademarks;
(xi) Seller's entire right, title and interest in, to
and under all contracts, agreements, licenses, permits, arrangements,
permissions and other commitments and
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arrangements, oral or written, with any person or entity (including
legal authorities) with respect solely to the Business, including,
subject to the consent of the applicable government agency, all
contracts with governmental bodies or agencies under which Seller
provides services in connection with the Business; PROVIDED that Buyer
acknowledges that certain government contracts, specified on
SCHEDULE 1.2(a)(xi), require the prior consent of the other parties
to the assignment of such contracts;
(xii) all rights of Seller under express or implied
warranties from suppliers or contractors with respect to the Assets;
(xiii) all claims, causes of action, choses in
action, rights of recovery and rights of set-off of any kind arising
out of the Assets or the Business;
(xiv) all existing business and marketing records of
the Business, including accounting and operating records, asset
ledgers, inventory records, budgets, databases, customer lists,
employment and consulting agreements, supplier lists, information and
data respecting leased or owned equipment, files, books, correspondence
and mailing lists, creative, promotional and advertising materials and
brochures, and other business records; and
(xv) all media, including disks, tapes and CDs, and
other tangible property necessary for the transfer of the Assets from
Seller to Buyer pursuant to the terms and conditions of this Agreement.
1.3. BILL OF SALE. The sale and delivery of the Assets shall be
effected by a Bill of Sale, Assignment and Assumption Agreement in the form of
EXHIBIT A attached hereto (the "BILL OF SALE") and such endorsements,
assignments, licenses, drafts, checks and other instruments of transfer and
conveyance, agreements, and documents in form described herein or reasonably
acceptable to Buyer; PROVIDED that the consent to the assignment of contracts
relating to the Business between Seller and the United States government shall
be accomplished by a separate agreement among Buyer, Seller and the United
States government (the "Novation").
1.4. ASSUMED LIABILITIES.
(a) At the Closing, Buyer shall assume:
(i) the trade accounts payable of the Seller relating
to the Business that were incurred in the ordinary course of the
Business and are set forth on SCHEDULE 1.4(a) (the "Assumed Liabilities
Schedule") prepared by Seller in accordance with an accounting
procedure to be agreed upon by Buyer and Seller and provided to Buyer
by Seller two days prior to the Closing;
(ii) the duties and obligations required to be
performed after the Closing under the contracts, leases and other
agreements included in the Assets; and
(iii) the employment related payables of Seller to
the extent specifically
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related to the operation of the Business arising subsequent to the
Closing and set forth on SCHEDULE 1.4(a).
(b) Seller shall, when due, satisfy all of its liabilities or
obligations, except for the liabilities listed on the Assumed Liabilities
Schedule.
1.5. BASE PURCHASE PRICE. As consideration for the sale and transfer of
the Assets, Buyer shall pay or deliver to Seller at the Closing:
(a) $15 million in cash and
(b) 606,000 shares of Buyer's common stock ("BUYER COMMON
STOCK");
PROVIDED that the 606,000 shares of Buyer Common Stock delivered under in this
Section 1.5 shall be issued pursuant to the terms and restrictions contained in
Section 1.9; and PROVIDED FURTHER that all shares of Buyer Common Stock
delivered pursuant to this Section 1.5 and any other provision of this Agreement
shall be valued at $16.50165 per share, unless the terms of such other provision
specifically calculate the per share valuation of Buyer Common Stock on a
different basis.
1.6. ADDITIONAL PURCHASE PRICE. Buyer shall make additional payments to
Seller as follows:
(a) On or before March 31 of 2000, 2001, 2002, 2003 and 2004
(each, a "REVENUE PAYMENT DATE") Buyer shall at its option either (i) issue to
Seller a number of shares of Buyer Common Stock or (ii) pay the cash equivalent
of the prior clause (i) determined as of such date (the "REVENUE PAYMENT")
determined by the following formula:
(__(X-Y)____) * 606,000
($200,000,000)
where (X) means Cumulative Business Revenues and (Y) means Cumulative Previous
Business Revenues on which a Revenue Payment has been made.
The Revenue Payment shall be payable on the first Revenue Payment Date
on which the Cumulative Business Revenues is equal to or exceeds $10,000,000.
Buyer shall not be obligated to issue more than 606,000 shares of Buyer Common
Stock.
(b) On or before March 31 of 2000, 2001, 2002, 2003 and 2004
(each, an "EBITDA PAYMENT DATE"), Buyer shall issue to Seller a number of shares
of Buyer Common Stock (the "EBITDA PAYMENT") determined by the following
formula:
(__(X-Y)____) * Potential EBITDA Shares
($110,000,000)
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where (X) means Cumulative Business EBITDA and (Y) means Cumulative Previous
EBITDA on which an EBITDA payment has been made.
The EBITDA Payment shall be payable on the first EBITDA Payment Date on
which the Cumulative EBITDA is equal to or exceeds $10,000,000. Buyer shall not
be obligated to issue more than the number of Potential EBITDA Shares to Seller.
(c) For purposes of this Agreement, terms used in subsections
(a) and (b) above shall be defined as follows:
(i) "CURRENT YEAR BUSINESS REVENUES" means revenues
reflected on Buyer's financial statements for the calendar year
immediately preceding the Revenue Payment Date which were derived by
Buyer from the operation of the Business, determined in accordance with
generally accepted accounting principles applied on a consistent basis,
based upon audited financial statements of Buyer performed by its
independent accounting firm.
(ii) "CUMULATIVE BUSINESS REVENUES" means the total
of all Current Year Business Revenues for the calendar years ending
prior to the Revenue Payment Date.
(iii) "CUMULATIVE PREVIOUS BUSINESS REVENUES" means
the total of all Current Year Business Revenues for calendar years
ending more than one year prior to a particular Revenue Payment Date.
(iv) "CURRENT YEAR BUSINESS EBITDA" means earnings
before interest, taxes and depreciation reflected on Buyer's financial
statements for the calendar year immediately preceding the EBITDA
Payment Date which were derived by Buyer from the operation of the
Business, determined in accordance with generally accepted accounting
principles applied on a consistent basis, based upon audited financial
statements of Buyer performed by its independent accounting firm,
subject to the limitations of Section 1.6(c)(viii) below.
(v) "CUMULATIVE EBITDA" means the total of all
Current Year EBITDA for the calendar years ending prior to the EBITDA
Payment Date.
(vi) "CUMULATIVE PREVIOUS EBITDA" means the total of
all Current Year EBITDA for calendar years ending more than one year
prior to a particular EBITDA Payment Date.
(vii) "POTENTIAL EBITDA SHARES" means $10,000,000
divided by the average of the closing sale price of Buyer Common Stock
on the Nasdaq National Market on each of the five (5) trading days
immediately preceding (but not including) the first EBITDA Payment Date
on which Buyer is obligated to issue Buyer Common Stock to Seller with
respect to an EBITDA Payment.
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(viii) For the purposes of determining Current Year
Business EBITDA, Buyer shall not allocate to the Business any corporate
financial overhead, accounting or legal expenses that are not incurred
in the operation of the Business.
(ix) Buyer shall manage and operate the Business and
the Assets as a separate business unit after the Closing, and shall
maintain a financial reporting system that will separately account for
the revenue and expenses of the Business and the Assets, through
December 31, 2003 (the "Earn Out Period"). Moreover, neither Buyer
(through operating divisions or units other than the Business) nor its
subsidiaries or other entities contracted by it shall, during the Earn
Out Period,(x) compete with the Business; (y) transfer personnel from
the Business without Seller's consent, which shall not be unreasonably
withheld; or (z) cause or permit assets of the Business to be sold or
transferred without Seller's consent, which consent shall not be
unreasonably withheld. For the purposes of calculating the Revenue
Payment, Buyer shall not allocate to the Business expenses or costs
that are not incurred in the operation of the Business.
1.7. ALLOCATION. Within 90 days after the Closing Date, Buyer shall
prepare and finalize a schedule setting forth an allocation of the Purchase
Price among the Assets (the "ALLOCATION SCHEDULE"), subject to the approval of
Seller which shall not be unreasonably withheld. Each party agrees to report the
transactions contemplated hereby for federal income tax and all other tax
purposes (including for purposes of Section 1060 of the Internal Revenue Code of
1986, as amended (the "CODE")) in a manner consistent with the Allocation
Schedule, and in accordance with all applicable rules and regulations, and to
take no position inconsistent with the allocation set forth therein in any
administrative or judicial examination or other proceeding. Each of Buyer and
Seller shall timely file the appropriate forms in accordance with the
requirements of Section 1060 of the Code and this Section.
1.8. METHOD OF PAYMENT.
(a) Except as otherwise expressly provided herein, all cash
payments from one party to another under this Agreement shall be made by wire
transfer in United States dollars to an account designated in writing by the
party to receive such payment. With respect to all payments made pursuant to
this Section 1, the parties agree that such designation has been already been
provided in advance of the scheduled date of payment and need not be provided
two Business Days before the Closing Date.
(b) Buyer shall not be required to deliver or issue fractional
shares, and instead may deliver an equivalent cash amount in lieu of any
fractional share.
(c) Any payment or delivery hereunder due on a day which is
not a Business Day shall be postponed, without interest, until the next Business
Day.
(d) Buyer shall have no obligation to register under the
Securities Act of 1933, as amended (the "Securities Act"), any shares of Buyer
Common Stock delivered to Seller pursuant to this Agreement except as provided
in Section 6 herein.
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(e) Buyer shall be entitled to deduct and withhold from any
payment or delivery of Buyer Common Stock to Seller or Shareholders hereunder
such amount as Buyer is legally required to deduct and withhold with respect to
the making of such payment or delivery under the Code or any provision of state,
local or foreign tax laws.
1.9. REPURCHASE RIGHT; CANCELLATION RIGHT; ESCROW.
(a) With respect to 151,500 shares (the "Indemnity Shares") of
the Buyer Common Stock to be delivered to the Seller at the Closing pursuant to
Section 1.5(b):
(i) The Indemnity Shares shall be divided equally
between and issued to each of Walter L. Mazan II, Robert Main and
Ronald Linehan (each a "Shareholder"). The certificates representing
the Indemnity Shares shall each be stamped or otherwise imprinted with
a legend in the form set forth on EXHIBIT B attached hereto, which,
inter alia, shall have the effect of prohibiting each of the
Shareholders from offering to sell, contracting to sell or otherwise
selling, disposing of, loaning, pledging or granting any rights with
respect to any such shares of Buyer, any options or warrants to
purchase any such shares of Buyer Common Stock, or any securities
convertible into or exchangeable for such shares of Buyer Common Stock
until up to the second anniversary of the Closing Date and subject to
cancellation in whole or in part, subject to Section 1.9(a)(ii)(2), in
order to satisfy Seller's obligations under Section 5.2(c).
(ii) Pursuant to the terms of this Agreement and
Section 5.2(c), under certain circumstances Buyer may have a claim
against the Indemnity Shares (a "CLAIM") from the period following the
Closing Date until up to the second anniversary of the Closing Date.
Subject to the provisions of Section 1.9(a)(ii)(4) and the procedures
set forth in Section 5.2(c):
(1) From time to time, on or before the first
anniversary of the Closing Date, Buyer
may give a notice (the "NOTICE") to
Seller specifying in reasonable detail
the nature and dollar amount (to the
extent ascertainable at the time) of any
Claim it may have under this Agreement
and Section 5.2(c). Buyer may make more
than one Claim with respect to any
underlying state of facts. If Seller
gives a notice to Buyer disputing any
Claim (a "COUNTER NOTICE") within 30 days
following receipt by Seller of Buyer's
Notice, both Buyer and Seller agree to
comply fully with the provisions set
forth under Section 1.9(a)(ii)(4) below.
If Buyer does not receive a Counter
Notice within the period ending 30 days
after the receipt by Seller of such
Notice, then the dollar amount claimed by
Buyer as set forth in the Notice shall be
deemed established for purposes of this
Agreement and Section 5.2(c), and Buyer
has the immediately exerciseable right to
repurchase up to the number of
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Indemnity Shares (the "CLAIMED SHARES")
equal to the quotient achieved by
dividing the dollar value of such Claim
by $16.50165. At the end of such 30-day
period, Seller shall cause Shareholders
to deliver to Buyer's transfer agent the
certificates representing the Indemnity
Shares, and Buyer shall instruct its
transfer agent to cancel that portion of
Claimed Shares represented by the
certificate and to reissue three
certificates representing the balance of
uncancelled Indemnity Shares, each
bearing a legend in the form set forth on
Exhibit B, in the names of the
Shareholders.
(2) Immediately after the first anniversary
of the Closing Date, Seller shall cause
Shareholders to deliver to Buyer's
transfer agent the certificates
representing the remaining Indemnity
Shares, and Buyer shall instruct its
transfer agent to cancel such
certificates and reissue (A) three
certificates in equal amounts
representing in the aggregate 15,150
shares of Buyer Common Stock, each in the
name of a Shareholder and each stamped or
otherwise printed with a legend in the
form set forth on Exhibit B; and (B)
three certificates in equal amounts
representing in the aggregate the balance
of the Indemnity Shares held by
Shareholder on the first anniversary of
the Closing Date, each to be issued in
the name of a Shareholder and without
bearing restrictive legends and not
subject to Claims presented on or before
such date.
(3) From time to time, on or before the
second anniversary of the Closing Date,
Buyer may give a Notice to Seller
specifying in reasonable detail the
nature and dollar amount (to the extent
ascertainable at the time) of any Claim
it may have arising under the matter
described in SCHEDULE 5.2(c). If Seller
gives a Counter Notice to Buyer, within
30 days following receipt by Seller of
Buyer's Notice, both Buyer and Seller
agree to comply fully with the provisions
set forth under Section 1.9(a)(ii)(4)
below. If Buyer does not receive a
Counter Notice within the period ending
30 days after the receipt by Seller of
Buyer's Notice, then the dollar amount
claimed by Buyer as set forth in the
Notice shall be deemed established for
purposes of this Agreement and Section
5.2(c), and Buyer has the immediately
exerciseable right to repurchase up to
15,150 Indemnity Shares. At the end of
such 30-day period, Seller shall cause
Shareholders to deliver to Buyer's
transfer agent the certificates
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representing the Indemnity Shares, and
Buyer shall instruct its transfer agent
to cancel that portion of Claimed Shares
represented by the certificate and to
reissue three certificates, each bearing
a legend in the form set forth on Exhibit
B, in the names of the Shareholders.
(4) If a Counter Notice is given with respect
to a Claim, Seller and Buyer may
apportion the Indemnity Shares only in
accordance with (A) joint written
instructions of Buyer and the Seller or
(B) a final non-appealable order from
binding arbitration (an "ORDER"). Both
Buyer and Seller shall act on such Order
without further question.
(b) With respect to 363,600 shares of the Buyer Common Stock
(the "RETENTION HOLDBACK") to be delivered pursuant to Sections 1.5(b):
(i) The Retention Holdback shall be divided equally
between and issued to each of the Shareholders. The certificates
representing the Retention Holdback shall each be stamped or otherwise
imprinted with a legend in the form set forth on EXHIBIT C attached
hereto.
(ii) If, on or prior to the first anniversary of the
Closing Date, either or both of Ronald Linehan or Robert Main are no
longer employed by Buyer for any reason except death or Buyer's
termination of employment without Cause (as defined in Section 7.9),
Buyer shall, subject to the provisions of Section 1.9(b)(iv), on or
after the first anniversary of the Closing Date, notify Seller in
writing (the "RETENTION CLAIM") that, within 30 days from the date of
the Retention Claim, Buyer shall repurchase the Retention Holdback and
instruct its transfer agent to cancel all of the certificates held by
Seller that represent the Retention Holdback. If Seller does not
dispute in a written notice given to Buyer (the "COUNTER RETENTION
NOTICE") within 30 days from the date of the Retention Notice, Buyer
may at any time thereafter repurchase the Retention Holdback at a price
equal to the greater of (1) $0.001 per share or (2) Seller's obligation
incurred in protecting the price of such Buyer Common Stock, if any,
and instruct its transfer agent to cancel all of the certificates held
by Seller that represent the Retention Holdback. In the event Seller
should receive any payments from third parties as a result of any
agreement protecting the price of such Buyer Common Stock repurchased
by Buyer, Seller shall promptly remit the premiums paid to Buyer.
(iii) If, on or prior to the first anniversary of the
Closing Date, either or both of Ronald Linehan or Robert Main remain
employed by Buyer or are no longer employed by Buyer due to death or
Buyer's termination of employment without Cause (as defined in
Section 7.9), Buyer shall provide written instruction to its transfer
agent to cancel the certificates representing the Retention Holdback
and issue to the Shareholders replacement certificates that no longer
bear restrictive legends.
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(iv) If a Counter Notice is given with respect to a
Retention Claim, only in accordance with (i) joint written instructions
of Buyer and the Seller, or (ii) a final non-appealable Order, may the
restrictions from transfer be lifted from the certificates. Both Buyer
and Seller shall act on such Order and legal opinion without further
question.
(c) Subject to the terms of Section 1.9(c)(iv) below, with
respect to 90,900 shares of the Buyer Common Stock (the "GOVERNMENT CONTRACTS
HOLDBACK") to be delivered pursuant to Section 1.5(b):
(i) The Government Contracts Holdback shall be
divided equally between and issued to each of the Shareholders and
delivered to Morrison & Foerster LLP (the "ESCROW AGENt"), 2000
Pennsylvania Avenue, NW, Washington, D.C. 20006-1888. The certificates
representing the Government Contracts Holdback shall each be stamped or
otherwise imprinted with a legend in the form set forth on Exhibit C
attached hereto. The parties agree that the Government Contracts
Holdback shall be held in escrow, pursuant to reasonable terms to be
established by Escrow Agent, until the earlier of (1) Seller's
obtaining the consent of the parties listed on Schedule 1.2(a)(xi) to
the assignment to Buyer of the agreements between Seller and such
parties, (2) Seller's securing alternate agreements that replace those
listed on Schedule 1.2(a)(xi) by providing the same services to the
same governmental agencies as those provided by the agreements listed
on Schedule 1.2(a)(xi) or (3) 120 days after the Closing Date.
(ii) If, before 120 days following the Closing Date,
the events described in either Sections 1.9(c)(i)(1) or 1.9(c)(i)(2)
occur, Buyer shall instruct Escrow Agent to deliver the Government
Contracts Holdback to Seller. If the events described in either
Sections 1.9(c)(i)(1) or 1.9(c)(i)(2) do not occur before 120 days
following the Closing Date, Buyer shall promptly give to Seller and to
Escrow Agent a notice (the "HOLDBACK NOTICE") that Buyer intents to
instruct Escrow Agent to deliver the Government Contracts Holdback to
Buyer. If Seller gives a notice to Buyer disputing the Holdback Notice,
(a "COUNTER HOLDBACK NOTICE") within 30 days following receipt by Buyer
of such Counter Notice, both Buyer and Seller agree to comply fully
with the provisions set forth under Section 1.9(c)(iii) below. If Buyer
does not receive a Counter Notice within the period ending 30 days
after the receipt by Buyer of such Counter Notice, then the dollar
amount claimed by Buyer as set forth in the Notice shall be deemed
established for purposes of this Agreement, and Buyer has the
immediately exerciseable right to instruct Escrow Agent to deliver the
Government Contracts Holdback to Buyer equal to the quotient achieved
by dividing the dollar value of such Claim by $16.50165.
(iii) If a Counter Holdback Notice is given with
respect to a Claim, Buyer may instruct its transfer agent to deliver
the Government Contracts Holdback to Buyer, only in accordance with
(A) joint written instructions of Buyer and the Seller or (B) an
Order. Any such Order shall be accompanied by a legal opinion of
counsel for the presenting party satisfactory to the other party to
the effect that the Order is final and non-
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appealable. Both Buyer and Seller shall act on such Order and legal
opinion without further question.
1.10. ACCOUNTS RECEIVABLES. Any amounts paid to Seller with respect to
any Account Receivable after the Closing Date will be delivered by Buyer to
Seller as soon as reasonably practicable. Any revenues or compensation received
in connection with the Business that are paid to Seller prior to the Closing
Date for services to be provided after the Closing Date will be held until the
Closing Date and then delivered by Seller to Buyer.
1.11. EXCLUDED ASSETS. The following items are not included in the
Assets or the Business (the "EXCLUDED ASSETS"): (i) all assets, tangible or
intangible, used by Seller in its publishing business; (ii) all trademarks,
trade names and intellectual property used by Seller in its business operations
for both the business and the publishing business, except to the extent
specifically listed in Schedules 1.2(a), 1.2(a)(iii), 1.2(a)(iv), 1.2(a)(vii)
and the Accounts Receivables Schedule.
SECTION 2
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer as of the date hereof and as of
the Closing Date as follows, except for disclosure contained on the Schedules
hereto numbered to correspond to the sections below (the "DISCLOSURE
SCHEDULES"):
2.1. DUE ORGANIZATION, POWER AND AUTHORITY. Seller is a corporation
duly and validly incorporated under the laws of the Commonwealth of Virginia and
is qualified to conduct business in every jurisdiction where such qualification
is required. Seller has the full corporate power and authority to conduct its
business as presently conducted and to enter into this Agreement and the other
Transaction Documents and to consummate the transactions contemplated herein and
therein.
2.2. POWER; AUTHORIZATION AND ENFORCEABILITY. All action on the part of
Seller necessary for the authorization, execution, delivery and performance of
this Agreement and the other Transaction Documents to which it is a party has
been taken and remains in full force and effect. Seller has all requisite power
and capacity to execute and deliver this Agreement and to carry out and perform
its obligations under the terms of this Agreement and each of the Transaction
Documents to which it is a party. All action on the part of Seller necessary for
the authorization, execution, delivery and performance of this Agreement and the
other Transaction Documents to which it is a party has been taken and remains in
full force and effect. Delivery of the Bill of Sale and other instruments of
transfer contemplated by Section 1.3 will transfer to Buyer good and marketable
title to all of the Assets, free and clear of any Encumbrance. This Agreement
constitutes, and the other Transaction Documents will each constitute, the valid
and binding obligations of Seller, enforceable in accordance with its terms,
except as such
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enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, arrangement, moratorium or other similar laws and by general
principles of equity.
2.3. NO CONFLICT. Seller is not in violation in any material respect of
any term or provision of any agreement to which it is a party. The execution,
delivery and performance of this Agreement and each of the other Transaction
Documents by Seller have not resulted and will not result in, nor will
consummation of the transactions contemplated hereby or thereby result in, any
violation of or conflict with, or constitute a default under, any agreement, or
result in the creation of any Encumbrance upon any of the Assets or any of the
other assets of Seller or the acceleration of maturity of or other change in any
obligation of Seller or right of any third-party; and there exists no such
violation, conflict or default that does or could reasonably be expected to
materially adversely affect the condition or prospects of the Business or the
Assets or the ability of Seller to consummate its obligations hereunder and
under the Transaction Documents.
2.4. GOVERNMENTAL CONSENTS, ETC. To the best of Seller's knowledge, no
consent, approval or authorization of or designation, declaration, or filing
with any governmental, regulatory or administrative body, agency or authority,
or any court or judicial authority (each, an "AUTHORITY") on the part of Seller
is required in connection with the valid execution and delivery of this
Agreement or any other Transaction Document or the consummation of the
transactions contemplated hereby or thereby. The execution, delivery, and
performance of this Agreement and each Transaction Document, and the
consummation of the transactions contemplated hereby or thereby, do not require
consent, approval, or authorization under any agreement to which Seller is a
party or by which the Assets or Business is bound or affected.
2.5. FINANCIAL STATEMENTS AND CONDITION.
(a) Seller has delivered to Buyer financial statements for the
periods January 1, 1997 through December 31, 1997, January 1, 1998 through
December 31, 1998 (the "Financial Statements"), and for the period January 1,
1999 through June 30, 1999 (the "Interim Statements"). The Financial Statements
are audited and prepared in accordance with United States generally accepted
accounting principles consistently applied throughout the period covered by the
Financial Statements. Seller's independent auditors have provided a review
report covering the Interim Statements. The Financial Statements and the Interim
Statements constitute true and complete financial statements for the periods
specified and are in accordance with the books and records of the Seller. Such
statements present fairly the position of the Business as of the respective
dates thereof and the results of operations and cash flows of the Business for
the periods covered thereby.
(b) Seller has no direct or indirect indebtedness,
liabilities, claims, losses, damages, deficiencies, obligations or
responsibilities, liquidated or unliquidated, accrued, absolute, contingent, or
otherwise ("LIABILITIES") which in any way encumber the Assets and no
Liabilities otherwise exist that encumber the Assets.
(c) Since June 30, 1999, Seller has not:
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(i) suffered any change, event or condition that, in
any case or in the aggregate, has had or could reasonably be expected
to have a material adverse effect upon the Business or the Assets or
Seller's ability to consummate the transactions contemplated herein and
in the other Transaction Documents;
(ii) entered into any material transaction, contract
or commitment relating to the Business in any manner; and
(iii) incurred or paid any liability or obligation
not in the ordinary course of business, consistent with past custom and
practice including as to quantity and frequency with respect to the
Business.
2.6. TAX MATTERS. Seller has, within the times and in the manner
prescribed by law, filed all required tax returns, including sales and use tax
returns, has paid or provided for all taxes, including sales and use tax owed by
Seller, with respect to the Business (whether or not shown on any tax return to
be due and owing by him), has paid or provided for all deficiencies or other
assessments of taxes, interest or penalties owed by it, and, to the best of
Seller's Knowledge (as defined), all such tax returns were correct and complete.
No taxing authority has asserted, or, to the best of Seller's Knowledge, will
successfully assert, any claim for the assessment of any additional taxes of any
nature with respect to any periods covered by any such tax returns; and all
taxes or other charges required to be withheld or collected by Seller, with
respect to the Business, have been duly withheld or collected and, to the extent
required, have been paid to the proper taxing Authority or properly segregated
or deposited as required by law.
2.7. COMPLIANCE AND LAWS. Seller has in all respects complied with, and
is now in all respects in compliance with, all laws, rules, regulations, orders,
judgments and decrees of all Authorities applicable to the Business with which
failure to comply would result in a Material Adverse Effect (as defined) on
Seller, and the Business is otherwise in compliance with all such laws,
regulations, orders, judgments and decrees. Seller possesses each franchise,
license, permit, authorization, certification, consent, variance, permission,
order or approval of or from any Authority, and has filed all filings, notices
or recordings with any Authority (collectively, "LICENSES") with which the
failure to comply would result in a Material Adverse Effect on the Seller and is
now, and has at all times in the past been, in compliance with each thereof.
Each such License is identified on SCHEDULE 2.7. No proceeding or other action
is pending or, to the best of Seller's Knowledge, threatened, to revoke, amend,
or limit any License, and Seller has no basis to believe that any such
proceeding or action would result from the consummation of the transactions
contemplated hereby or by the other Transaction Documents, or that any such
License would not be renewed in the ordinary course.
2.8. LITIGATION. There is no pending or, to the best of Seller's
Knowledge, threatened adverse claim, dispute, governmental investigation, suit,
action, arbitration, legal, administrative or other proceeding of any nature,
domestic or foreign, criminal or civil, at law or in equity, by or against or
otherwise affecting Seller, the Business or the Assets.
2.9. TANGIBLE PROPERTY. Seller has good and marketable title to each
item of tangible personal property that is an Asset, free and clear of all
Encumbrances, and each such item of
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tangible personal property is in good operating condition and repair, useable
in the ordinary course of business. SCHEDULE 1.2(a)(iv) contains a complete
and accurate list setting forth a description of each item of tangible
property that is an Asset.
2.10. AGREEMENTS.
(a) SCHEDULE 2.10(a) sets forth a true and complete list of
all Material agreements, written or oral, express or implied, including all
commitments, guarantees of indebtedness and other instruments, binding Seller
with respect to the Business or the Assets or that otherwise bind or affect the
Business or Assets, and all powers of attorney. True and complete copies of each
such written agreement have been delivered to Buyer.
(b) With respect to such agreements:
(i) Each such agreement is the valid and binding
obligation of the other contracting party, enforceable in accordance
with its terms against the other contracting party, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, arrangement, moratorium or other similar laws and by
general principles of equity, and is in full force and effect;
(ii) Seller has fulfilled all material obligations
required to have been performed by him prior to the Closing Date, and
there is no reason to believe that the other contracting party will not
be able to fulfill all of its or its obligations when due in respect
thereof; and
(iii) to the best of Seller's Knowledge, no other
contracting party to any such agreement is in breach thereof, and there
are not, nor have there been in the twelve (12) month period prior to
the date hereof, any material disputes between Seller and any other
contracting party.
(c) Seller is not a party to, nor is Seller otherwise bound
by, any agreement or commitment that (i) restricts the conduct of the Business
anywhere in the world; (ii) contains any unusual or burdensome provisions that
could reasonably be expected to have an adverse effect upon the condition
(financial or otherwise) of the Business or the Assets; or (iii) grants
exclusive rights to sell advertising on the Web Sites or any other exclusive
rights.
(d) All representations and warranties that have been provided
by Seller and which are contained in any agreement with any federal, state or
local governmental authority listed on Schedule 2.10(a) are true and complete.
2.11. EMPLOYEES AND CONSULTANTS.
(a) SCHEDULE 2.11(a) is a true and complete list of each
employee of Seller and each consultant with whom Seller has done business within
twelve months prior to the date hereof involving the Business. The schedule sets
forth for each employee the current rate of compensation for such employee and
the employee's hire date.
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(b) Seller has provided to Buyer true and complete copies of
all employee benefits plans and other related materials of Seller.
(c) Schedule 2.11(c) lists (i) all "employee benefit plans"
within the meaning of Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), (ii) all employment agreements, including,
but not limited to, any individual benefit arrangement, policy or practice with
respect to any current or former employee or director of Seller or of any trade
or business, whether or not incorporated, which would be treated as a single
employer with Seller under Section 4001 of ERISA or Section 414(b), (c), (m) or
(o) of the Internal Revenue Code of 1986, as amended (the "CODE") (each such
trade or business, a "MEMBER OF THE CONTROLLED GROUP"), and (iii) all other
employee benefit, bonus or other incentive compensation, stock option, stock
purchase, stock appreciation, severance pay, lay-off or reduction in force,
change in control, sick pay, vacation pay, salary continuation, retainer, leave
of absence, educational assistance, service award, employee discount, fringe
benefit plans, arrangements, policies or practices, whether legally binding or
not, which Seller or any Member of the Controlled Group maintains, to which any
of them contributes, or for which any of them has any obligation or liability
(collectively, the "EMPLOYEE PLANS" and each an "EMPLOYEE PLAN").
(d) None of the Employee Plans is a plan described in Section
3(35) of ERISA or a plan subject to the minimum funding standards set forth in
Section 302 of ERISA and Section 412 of the Code (a "DEFINED BENEFIT PLAN"), and
neither Seller nor any Member of the Controlled Group has ever sponsored,
maintained or contributed to, or ever been obligated to contribute to, a Defined
Benefit Plan.
(e) None of the Employee Plans is a plan described in Section
3(37) of ERISA (a "MULTIEMPLOYER PLAN," and neither Seller nor any Member of the
Controlled Group has ever contributed to, or ever been obligated to contribute
to, a Multiemployer Plan.
(f) Seller does not maintain or contribute to any plan that
provides health benefits to an employee after the employee's termination of
employment or retirement except as required under Section 4980B of the Code and
Sections 601 through 608 of ERISA.
(g) Each Employee Plan which is an "employee benefit plan," as
defined in Section 3(3) of ERISA, complies by its terms and in operation with
the requirements provided by any and all statutes, orders or governmental rules
and regulations currently in effect and applicable to the Employee Plan,
including but not limited to ERISA and the Code.
(h) All reports, forms and other documents required to be
filed with any government entity or furnished to employees, former employees or
beneficiaries with respect to any Employee Plan (including without limitation,
summary plan descriptions, Forms 5500 and summary annual reports) have been
timely filed and furnished and are accurate.
(i) Each of the Employee Plans that is intended to qualify
under Section 401(a) of the Code has been determined by the Internal Revenue
Service so to qualify after January 1, 1989, and each trust maintained pursuant
thereto has been determined by the Internal Revenue Service to be exempt from
taxation under Section 501 of the Code. Nothing has occurred since
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the date of the Internal Revenue Service's favorable determination letter
that could adversely affect the qualification of the Employee Plan and its
related trust. Seller and each Member of the Controlled Group have timely
amended and operated each of the Employee Plans to comply with the Small
Business and Job Protection Act of 1996 and subsequent legislation enacted
through the date hereof, and Section 501 of the Code.
(j) All contributions for all periods ending prior to the
Closing Date (including periods from the first day of the current plan year to
the Closing Date) have been made [or will have been made prior to the Closing
Date] by Seller or by a Member of the Controlled Group.
(k) All insurance premiums have been paid in full, subject
only to normal retrospective adjustments in the ordinary course, with regard to
the Employee Plans for plan years ending on or before the Closing Date.
(l) With respect to each Employee Plan:
(i) no prohibited transactions (as defined in Section
406 or 407 of ERISA or Section 4975 of the Code) have occurred for
which a statutory exemption is not available;
(ii) no action or claims (other than routine claims
for benefits made in the ordinary course of plan administration for
which plan administrative review procedures have not been exhausted)
are pending or threatened or imminent against or with respect to the
Employee Plan, any employer who is participating (or who has
participated) in any Employee Plan or any fiduciary (as defined in
Section 3(21) of ERISA), of the Employee Plan;
(iii) neither Seller, nor any fiduciary has any
Knowledge of any facts that could give rise to any such action or
claim; and
(iv) each Employee Plan provides that it may be
amended or terminated at any time and, except for benefits protected
under Section 411(d) of the Code, all benefits payable to current,
terminated employees or any beneficiary may be amended or terminated by
Seller at any time without liability.
(m) Neither Seller nor any Member of the Controlled Group has
any liability or is threatened with any liability (whether joint or several)
(i) for any excise tax imposed by Sections 4971, 4975, 4976, 4977 or 4979 of
the Code, or (ii) to a fine under Section 502 of ERISA.
(n) All of the Employee Plans, to the extent applicable, are
in compliance with the continuation of group health coverage provisions
contained in Section 4980B of the Code and Sections 601 through 608 of ERISA.
(o) True, correct and complete copies of all documents
creating or evidencing any Employee Plan have been delivered to Buyer, and true,
correct and complete copies of all
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reports, forms and other documents required to be filed with any governmental
entity or furnished to employees, former employees or beneficiaries
(including, without limitation, summary plan descriptions, Forms 5500 and
summary annual reports for all plans subject to ERISA, but excluding
individual account statements and tax forms) have been delivered to Buyer.
There are no negotiations, demands or proposals which are pending or have
been made which concern matters now covered, or that would be covered, by the
type of agreements required to be listed in Schedule 2.11(c).
(p) All expenses and liabilities relating to all of the
Employee Plans have been, and will on the Closing Date be fully and properly
accrued on Seller's books and records and disclosed in accordance with generally
accepted accounting principles and in plan financial statements.
(q) To the best knowledge of Seller, Seller is not engaged,
and has never been engaged, in any unfair labor practice of any nature. There
has never been any slowdown, work stoppage, labor dispute or union organizing
activity, or any similar activity or dispute, affecting Seller or any of its
employees. There is not now pending, and to the best knowledge of Seller no
person has threatened to commence, any such slowdown, work stoppage, labor
dispute or union organizing activity or any similar activity or dispute, nor has
any event occurred, nor does any condition or circumstance exist, that likely
would directly or indirectly give rise to or provide a basis for the
commencement of any such slowdown, work stoppage, labor dispute or union
organizing activity or similar activity or dispute.
2.12. BROKERS OR FINDERS. Seller has not incurred, nor will incur,
directly or indirectly, any liability, for brokerage or finders' fees or agents'
commissions or any similar charges in connection with this Agreement or any
transaction contemplated hereby. Seller shall indemnify and hold Buyer harmless
with respect to any claim by any broker, agent, or finder claiming to have acted
on behalf of Seller, respecting the subject matter hereof.
2.13. INTELLECTUAL PROPERTY.
(a) Seller owns, Buyer shall receive at Closing, and Seller's
intellectual property includes, all trademarks, service marks, trade names, and
copyrights (including registrations, licenses, and applications pertaining
thereto) and all other intellectual property rights, software (in object and
source code formats), trade secrets, and other proprietary information,
processes, and formulas used in the Business and set forth on Schedule 1.2(a).
At the date hereof, Seller has no registered trademarks, service marks, trade
names or copyrights. Buyer acknowledges that the Assets do not include
intellectual property used by Seller in its other businesses, including, but not
limited to the name "Electric Press" and the domain registration
www.elpress.com.
(b) Each employee and consultant of Seller has executed a
proprietary rights and information agreement in a form provided to Buyer.
(c) No intellectual property right or other claims have been
asserted by any person or entity to the use of any Asset and there is no valid
basis for any such claim. The use of any
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Asset by Seller, and the operation of the Business as currently conducted,
does not infringe on the intellectual property or other rights of any person
arising out of the laws of the United States.
(d) Seller has good and marketable title to each item of
intellectual property used in the Business as more fully described in
Sections 1.2(a)(v), 1.2(a)(vi), 1.2(a)(vii) and 1.2(a)(viii), free and clear
of all Encumbrances. Seller is the sole and rightful owner of all right,
title and interest in and to each of such items of intellectual property, and
has the unrestricted right to market, license and otherwise exploit each
intangible Asset.
2.14. THIRD-PARTY COMPONENTS, RIGHTS, ETC.
(a) To the best of Seller's knowledge, Seller has validly and
effectively obtained the right and license to use the third-party programs and
other intellectual property included in the Assets and used to operate the
Business as it is currently operated or has been conducted in the last year,
including intellectual property rights and licenses as provided for under the
agreements set forth in SCHEDULE 1.2(a), except for any open source software and
derivatives thereof developed by Seller which Seller has and at all times has
had the right to use in the Business without obtaining a license and which Buyer
similarly will be entitled to so use following the Closing Date. Seller has the
right to assign and transfer to Buyer the foregoing rights and licenses, and, to
the best of Seller's Knowledge, the Assets contain no other programming or
materials in which any third-party may claim superior, joint, or common
ownership, including any right or license other than licenses granted in the
ordinary course of business. The Assets do not contain derivative works of any
programming or materials not owned in their entirety by Seller and included in
the Assets.
(b) Seller has not granted, transferred or assigned any of
Seller's right, title or interest in or to any Asset to any person or entity
other than in the ordinary course of business. There are no contracts,
agreements, licenses, and other commitments and arrangements in effect with
respect to the marketing, distribution, licensing or promotion of any Asset by
any independent salesperson, distributor, sublicensor or other remarketer or
sales organization, except as set forth on SCHEDULE 1.2(a).
2.15. GENERAL.
(a) No representation or warranty made by Seller herein or in
any other Transaction Document, or any schedule or exhibit attached hereto or
thereto, contains any material misstatement of any fact or omits to state
anything necessary to make any material statement made herein or therein not
misleading. The information to be provided to Buyer by Seller or any of its
representatives for inclusion in the Registration Statement will not contain any
material misstatement of any fact or omit to state anything necessary to make
any material fact contained therein not misleading.
(b) Other than the facts or other information disclosed in the
Disclosure Schedules, there is no fact within the Knowledge of Seller (other
than publicly known facts relating exclusively to political or economic matters
of general applicability that will adversely affect all comparable businesses)
that:
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(i) may have a Material Adverse Effect on the
Business or its condition, assets, liabilities, operations, financial
performance, net income or prospects, or the ability of Seller to
comply with or perform any covenant or obligation under this Agreement
or any of the other Transaction Documents; or
(ii) may have the effect of preventing, delaying,
making illegal or otherwise interfering with any of the transactions
contemplated hereby or by any of the other Transaction Documents.
2.16. INVESTMENT REPRESENTATIONS.
(a) Seller is an "accredited investor," as defined in
Rule 501(a) under the Securities Act. Seller, by reason of its business and
financial experience has such knowledge, sophistication and experience in
financial and business matters and in making investment decisions of this
type that it is capable of (i) evaluating the merits and risks of an
investment in Buyer Common Stock and making an informed investment decision,
(ii) protecting its own interest and (iii) bearing the economic risk of such
investment.
(b) Seller is acquiring the Buyer Common Stock to be issued
pursuant to Section 1.5(b) and 1.6 for investment for Seller's own account, not
as a nominee or agent and not with the view to, or any intention of, a resale or
distribution thereof, in whole or in part, or the grant of any participation
therein, except distributions to its shareholders pro rata, from time to time.
Seller understands that such shares have not been, and will not be, registered
under the Securities Act or state securities laws. Seller will comply with the
Securities Act in connection with any offer, sale, pledge, transfer or other
disposition of such shares.
SECTION 3
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as of the date hereof and as of
the Closing Date as follows:
3.1. REQUISITE POWER. Buyer has all requisite corporate power to
execute and deliver this Agreement and to carry out and perform its obligations
under the terms of this Agreement and the other Transaction Documents to which
it is a party.
3.2. AUTHORIZATION. All action on the part of Buyer necessary for the
authorization, execution, delivery and performance of this Agreement and the
other Transaction Documents to which it is a party has been taken and remains in
full force and effect. This Agreement constitutes, and the other Transaction
Documents to which Buyer is a party will each constitute, the valid and binding
obligation of Buyer enforceable against Buyer in accordance with its terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, arrangement, moratorium or other similar laws and by
general principles of equity.
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3.3. NO CONFLICT. The execution, delivery, and performance of this
Agreement and any of the other Transaction Documents to which it is a party by
Buyer has not resulted and will not result in, nor will consummation of the
transactions contemplated hereby or thereby result in, any material violation
of, or conflict with, or constitute a default under, any of its charter
documents or material agreements; and there exists no such violation or default
that does or could materially and adversely affect the ability of Buyer to
consummate its obligations hereunder.
3.4. GOVERNMENTAL CONSENTS, ETC. To the best of Buyer's knowledge, no
consent, approval or authorization of or designation, declaration, or filing
with any Authority on the part of Buyer is required in connection with the valid
execution and delivery of this Agreement or any Transaction Document to which
Buyer is a party or the consummation of the transactions contemplated thereby or
thereby.
3.5. BROKERS OR FINDERS. Buyer has not incurred, and will not incur,
directly or indirectly, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with this Agreement or any
transaction contemplated hereby. Buyer shall indemnify and hold Seller harmless
with respect to any claim by any broker, agent or finder claiming to have acted
on behalf of Buyer respecting the subject matter hereof.
3.6. BUYER'S COMMON STOCK. The issuance and delivery by Buyer of shares
of Buyer's Common Stock in connection with the Base Purchase Price and the
Additional Purchase Price will be, at the Closing, or at the Revenue Payment
Date, as applicable, duly and validly authorized by all necessary corporate
action on the part of Buyer. The shares of Buyer's Common Stock to be issued
will, when issued and delivered to Seller in accordance with this Agreement, be
validly issued, fully paid and non-assessable, and free and clear of all liens,
claims and Encumbrances.
3.7. GENERAL.
(a) No representation or warranty made by Buyer herein or in
any other Transaction Document contains any material misstatement of any fact or
omits to state anything necessary to make any material statement made herein or
therein not misleading.
(b) There is no fact within the Knowledge of Buyer (other than
publicly known facts relating exclusively to political or economic matters of
general applicability that will adversely affect all comparable businesses)
that:
(i) may have a material adverse effect on the ability
of Buyer to comply with or perform any covenant or obligation under
this Agreement or any of the other Transaction Documents; or
(ii) may have the effect of preventing, delaying,
making illegal or otherwise interfering with any of the transactions
contemplated hereby or by any of the other Transaction Documents.
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SECTION 4
CLOSING CONDITIONS/CLOSING DOCUMENTS/TERMINATION
4.1. SELLER DELIVERIES. At the Closing, Seller shall execute and
deliver to Buyer the following documents:
(a) a noncompetition agreement (the "NONCOMPETITION
AGREEMENT") in the form of EXHIBIT D with Seller;
(b) the Bill of Sale, and such other instruments of assignment
as Buyer and its counsel reasonably request to evidence or effect the sale,
transfer and conveyance and assignment of the Assets to the Subsidiary;
(c) a certificate, signed by the chief executive officer of
Seller and dated as of the Closing Date, to the effect that (i) all of the
representations and warranties of Seller in this Agreement are true and correct
as of the Closing Date, as if made on the Closing Date; and (ii) Seller has
fully performed each covenant required to be performed prior to the Closing
Date;
(d) a certificate, dated the Closing Date, of an officer of
Seller attaching resolutions of the Board of Directors of Seller in connection
with the authorization and execution, delivery and performance by Buyer of this
Agreement and the other Transaction Documents to which Buyer is a party,
certified as being in full force and effect as of the Closing Date;
(e) disks, tapes and/or CDs containing the intangible Assets
set forth in Section 1.2 and SCHEDULE 1.2(a); all records and other materials
and documentation set forth in Section 1.2 and SCHEDULE 1.2(a);
(f) all passwords and communications information used solely
to operate the Business;
(g) all other records of the Business not previously provided
to Buyer as reasonably requested by Buyer;
(h) an opinion of Seller's counsel in form and substance
satisfactory to Buyer and its counsel;
(i) all consents necessary to transfer agreements, domain
names and other tangibles and intangibles included in the Assets; and
(j) a receipt, executed by the Shareholders, acknowledging
issuance to them of the Buyer Common Stock and providing certain investment
representations and representations acknowledging the restrictions placed on the
shares pursuant to this Agreement.
4.2. BUYER DELIVERIES. At the Closing, Buyer shall execute and deliver
to Seller:
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(a) the Bill of Sale;
(b) a certificate, signed on behalf of Buyer and dated as of
the Closing Date, to the effect that (i) all of the representations and
warranties of Buyer in this Agreement are true and correct as of the Closing
Date, as if made on the Closing Date; and (ii) Buyer has fully performed each
covenant required to be performed prior to the Closing Date;
(c) a certificate, dated the Closing Date, of an officer of
Buyer attaching resolutions of the Board of Directors of Buyer in connection
with the authorization and execution, delivery and performance by Buyer of this
Agreement and the other Transaction Documents to which Buyer is a party,
certified as being in full force and effect as of the Closing Date;
(d) the cash portion of the Purchase Price;
(e) certificates representing an aggregate amount of 151,500
shares of Buyer Common Stock, issued pursuant to the terms and restrictions
contained in Section 1.9(a);
(f) certificates representing an aggregate amount of 363,600
shares of Buyer Common Stock issued pursuant to the terms and restrictions
contained in Section 1.9(b); and
(g) certificates representing an aggregate amount of 90,900
shares of Buyer Common Stock issued pursuant to the terms and restrictions
contained in Section 1.9(c).
4.3. BUYER'S CLOSING CONDITIONS. Buyer's obligation to consummate the
transactions contemplated hereby at the Closing is conditioned on the following:
(a) the representations and warranties of Seller contained in
this Agreement or in any other Transaction Document are true and correct on the
date hereof and on the Closing Date with the same effect as though such
representations and warranties had been made on and as of the Closing Date;
(b) Seller shall have delivered all of the documents and
materials required under Section 4.1;
(c) all material registrations, filings, applications,
notices, consents, approvals, orders, qualifications and waivers required in
respect of the transactions contemplated hereby and by the other Transaction
Documents other than the Novations ("CONSENTS") shall have been filed, made or
obtained and remain effective;
(d) Seller's satisfaction of and compliance with all covenants
to be performed by Seller under this Agreement and the other Transaction
Documents prior to the Closing;
(e) each of the employees of Seller specified in
SCHEDULE 4.3(e) (the "KEY EMPLOYEES") shall have accepted employment with
Buyer effective as of the Closing and shall have executed a Buyer Employment
Agreement. Each of Ronald Linehan and Robert Main
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shall have entered into a Buyer Employment Agreement and a key employee
agreement in the form set forth on EXHIBIT E attached hereto;
(f) the parties to each of the contracts listed in
SCHEDULE 4.3(f) shall have consented to the assignment of such contracts to
Buyer without requiring any change to the terms of such contracts that
diminishes their value or is otherwise adverse to Buyer other than the
Novations;
(g) the positive difference between the Accounts Receivable
and the Accounts Payable as stated on the Accounts Receivable Schedule and the
Accounts Payable Schedule, shall be no less than $300,000; and
(h) no event shall have occurred or be existing which has had,
or is reasonably likely to have, a material adverse effect on the condition or
prospects of the Business.
4.4. SELLER'S CLOSING CONDITIONS.
Seller's obligation to consummate the transactions contemplated hereby
at the Closing is conditioned on the following:
(a) the representations and warranties of Buyer contained in
this Agreement or in any other Transaction Document are true and correct on the
date hereof and on the Closing Date with the same effect as though such
representations and warranties had been made on and as of the Closing Date;
(b) Buyer shall have delivered all of the documents required
under Section 4.2; and
(c) Buyer's satisfaction of and compliance with all covenants
to be performed by Buyer under this Agreement and the other Transaction
Documents prior to the Closing.
4.5. CONDITIONS TO EACH PARTY'S OBLIGATIONS. Each party's obligation to
consummate the transactions contemplated hereby at the Closing is further
subject to the conditions that:
(a) any applicable waiting period under the HSR Act (as
defined below) shall have expired or been terminated;
(b) there be no suit, action or other proceeding before any
Authority in which it is sought to prohibit the consummation of such
transactions or to restrict the transfer or use of any Assets; and
(c) no temporary restraining order or injunction or court
order preventing the consummation of such transactions or the transfer or use of
any Assets shall be in effect.
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4.6. TERMINATION.
(a) Each party shall have the right to terminate this
Agreement on the signed written agreement of the other party.
(b) Buyer shall have the right to terminate this Agreement
upon notice to Seller if Buyer during the course of its due diligence review
discovers information that was not previously provided by Seller and such
information would have a material adverse effect on the Business.
(c) Each party shall have the right to terminate this
Agreement if the closing conditions for the terminating party have not been
satisfied within 90 days of date of this Agreement; PROVIDED that neither party
shall have a right to so terminate if the failure to satisfy that party's
closing conditions is caused by or results from the failure of that party to
satisfy its obligations under this Agreement or any of the other Transaction
Documents or if such party is otherwise in default of any of its
representations, warranties or covenants under this Agreement.
SECTION 5
COVENANTS
5.1. PRE-CLOSING COVENANTS.
(a) Each of Seller and Buyer shall use its reasonable efforts
to conduct the Closing within 5 days following the date hereof.
(b) Each of Seller and Buyer shall at its own expense file
with the United States Department of Justice and the Federal Trade Commission,
any required regulatory submissions under the Hart-Scott-Rodino Antitrust
Improvements Act of 1968 (the "HSR ACT") and shall use its commercially
reasonable efforts to obtain any necessary approvals of such agencies to the
consummation of the transactions contemplated by this Agreement and the
Transaction Documents.
(c) Seller will take all commercially reasonable steps as may
be necessary to put Buyer in actual possession and operating control of the
Assets and Business as of the Closing Date, including obtaining all Consents.
(d) Until the earlier of termination of this Agreement or the
Closing Date: (i) neither Seller nor any of its representatives shall engage in
any discussions or negotiations with a third-party for the acquisition of all or
any portion of the Business or the Assets or solicit or otherwise facilitate or
encourage (through the provision of information or otherwise) an offer for the
acquisition of all or any portion of the Business or the Assets, and (ii) in the
event that Seller is approached by a third-party with respect to an acquisition
of all or any portion of the Business or the Assets, Seller shall immediately
notify Buyer in writing of the identity of such third-party.
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(e) Until the earlier of the termination of this Agreement or
the Closing, Seller shall, except with the prior written consent of Buyer:
(i) operate the Business exclusively in the ordinary
course consistent with past practices and in a manner which neither
increases nor decreases web site Traffic in a manner inconsistent with
commercially reasonable past practices;
(ii) maintain the Assets in good repair and
condition, ordinary wear and tear excepted, and continue to preserve
and protect the Assets;
(iii) comply with all applicable laws, regulations,
rules, ordinances and court orders;
(iv) maintain the books and records of the Business
on a basis consistent with prior periods;
(v) perform in all respects under all obligations and
agreements of the Business, including paying when due all accounts
payable, rents, taxes and other obligations of Seller or otherwise
affecting the Business;
(vi) cause the positive difference between its
Accounts Receivable and Accounts Payable, determined immediately prior
to the Closing Date, to be less than $300,000; and
(vii) use all commercially reasonable efforts to
preserve the Business and preserve the goodwill of licensors,
suppliers, consultants, contributors, customers and others having
business relations with the Business.
(f) Until the earlier termination of this Agreement or the
Closing, Seller shall not, except with the prior written consent of Buyer,
except in the ordinary course of business:
(i) sell, lease, license or otherwise dispose of any
Assets other than in the ordinary course of business consistent with
past practices, grant any right or interest in any Asset to any person
or create or permit the imposition of any Encumbrance on any Asset, and
with respect to intellectual property licensed from third parties and
included in the Assets, sell, lease, license, or otherwise dispose of,
or enter into any other agreement with respect to, such intellectual
property in a manner which would prevent or interfere with the grant of
the license;
(ii) make any assignment, license or sub-license of
any of the intangible Assets;
(iii) enter into any contract or agreement with
respect to the Business;
(iv) incur, assume, guarantee or otherwise become
liable for any indebtedness for borrowed money with respect to the
Business or the Assets;
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(v) waive any confidentiality rights pertaining to
the Assets or the Business;
(vi) enter into any joint venture, partnership or
other similar arrangement or form any other new material arrangement
for the conduct of the Business or with respect to the Assets; or
(vii) adopt or amend, or permit any Member of the
Controlled Group to adopt or amend, any Employee Plan, except to the
extent necessary to comply with changes in applicable law.
(g) Seller will afford, or cause to be afforded, to Buyer and
its representatives access to all personnel, facilities, properties, books, tax
returns, accounts, data, records, agreements and documents pertaining to or
included in the Assets or the Business. Seller will promptly advise Buyer in
writing of any event occurring subsequent to the date of this Agreement which
would render any representation or warranty of Seller contained in this
Agreement, if made on or as of the date of such event or the Closing Date,
untrue or inaccurate in any material respect or which is reasonably likely to
have a material adverse effect on the condition or prospects of the Business. ;
PROVIDED that Seller shall not be obligated to deliver to Buyer information the
delivery of which is prohibited by applicable law. Buyer will maintain the
confidentiality of all information (to the extent it is otherwise non-public and
not independently developed by Buyer) provided pursuant to this Section 5.1(g)
pending the Closing Date.
(h) Seller will provide Buyer with the Services pursuant to
the terms set forth on Schedule 1.2(a)(xvi). Seller will provide the employees
working for the Business with medical insurance coverage for approximately
thirty (30) days or until any applicable waiting period expires under Buyer's
plan, for which coverage Buyer will pay Seller.
(i) Buyer shall offer employment to each Key Employee,
including a grant of options to purchase Buyer Common Stock in an amount
specified on SCHEDULE 5.1(i).
(j) Buyer understands that its consent to the execution of a
counter party agreement by Seller's shareholders may be required, and that such
consent shall not be unreasonably withheld or unduly delayed.
5.2. POST-CLOSING COVENANTS.
(a) For a period of one year from and after the Closing,
Seller shall, at Buyer's expense, execute all such instruments or documents and
take all such other actions as Buyer may reasonably request to effectuate the
transactions contemplated hereby and by the other Transaction Documents,
including (i) obtaining of any necessary or advisable consents not required by
Buyer prior to Closing (including consents to assignment of contract rights and
obligations as Buyer may reasonably request); (ii) filing of tax returns,
including the filing of sales and use tax returns and notices as any party
hereto may reasonably require; and (iii) cooperating with Buyer to facilitate
the transition of Business customers, developers, content contributors and
advertisers to Buyer (such cooperation does not include going on joint sales
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calls, preparation of marketing materials or presentations, or traveling to
any site outside of the northern Virginia area).
(b) Seller shall make available to Buyer the services
specified in SCHEDULE 5.2(b) AND Buyer shall pay Seller for such services
pursuant to a separate Services Agreement in the form set forth on Exhibit F
(the "SERVICES AGREEMENT").
(c) Subject to the limitations below, Seller shall indemnify,
defend and hold harmless Buyer, its officers, directors, employees, partners,
members, shareholders, affiliates and agents (and their officers, directors,
employees, members, partners and shareholders) (collectively, the "INDEMNIFIED
PARTIES") from and against any action, loss, liability, damage, claim, fine,
penalty, lien or expense, including legal costs, reasonable attorneys' fees and
expenses (collectively, "LOSSES") to the extent the same arises out of or is
related to (i) any breach by Seller of any representation, warranty, agreement
or covenant made by Seller herein or in any other Transaction Document;
(ii) Seller's failure to comply with any bulk sales or similar law; (iii) any
tax, including use or sales tax, in respect of the conduct of the Business
prior to the Closing Date; (iv) any claim arising out of or in connection
with the conduct of the Business on or prior to the Closing Date alleging
that all, or any portion of, the Business infringes any intellectual property
right or other interest of any person or entity; and (v) any claim, cause of
action or other obligation of Seller or of the Business relating to the
period prior to the Closing Date, whether the claim relating to such
obligation arises before or after the Closing Date, including any obligations
with respect to Assumed Liabilities to the extent that any such obligation or
Assumed Liability arose from or was the result of any facts or circumstances,
the existence of which constitutes a breach of a representation or warranty
made by Seller hereunder. Each Indemnified Party will give prompt notice to
Seller upon actual knowledge thereof of any claim or condition to which the
foregoing indemnification covenant relates; PROVIDED that failure to give
such notice shall not preclude any indemnity hereunder unless and to the
extent that such failure has actually and materially prejudiced Seller. With
respect to claims arising from the matter asserted on SCHEDULE 5.2(c), Buyer
must inform Seller of such claims within 24 months following the Closing
Date. With respect to claims arising from other breaches of representations
and warranties, Buyer must inform Seller of any such claims within 12 months
following the Closing Date except for breaches of representations and
warranties set forth in Section 2.6, which must be asserted within 30 days
after the expiration of the applicable statute of limitations governing the
assertion of liabilities which are the subject thereof, and Sections 2.1 and
2.2, as to which there is no limitation as to the date of assertion. The
liability of Seller under this Section 5.2(c) shall not exceed $2,500,000 and
shall be paid by each Shareholder, pro rata, from the aggregate 151,500
shares of Buyer Common Stock issued to and held by each Shareholder pursuant
to Section 1.9(a).
(d) Subject to the limitations below, Buyer shall indemnify,
defend and hold harmless Seller, its officers, directors, employees, partners,
members, shareholders, affiliates and agents (and their officers, directors,
employees, members partners and shareholders) (collectively, the "SELLER'S
INDEMNIFIED PARTIES") from and against any Losses to the extent the same arises
out of or is related to (i) any breach by Buyer of any representation, warranty,
agreement, or covenant made by Buyer herein or in any other Transaction
Document, (ii) any
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claim, cause of action or other obligation of Buyer or of the Business
relating to the Assumed Liabilities, except to the extent arising from
circumstances constituting a breach of any representation, warranty or
covenant of Seller (without regard to any limit on the survival of such
representations, warranties or covenants); and (iii) any debt, liability or
obligation arising out of the Assets or the operation of the Business after
the Closing. Seller will give prompt notice to Buyer upon actual knowledge
thereof of any claim or condition to which the foregoing indemnification
covenant relates; PROVIDED that failure to give such notice shall not
preclude any indemnity hereunder unless and to the extent that such failure
has actually and materially prejudiced Buyer. Seller must inform Buyer of any
claims for breaches of representations and warranties within 12 months
following the Closing Date except for breaches of representations and
warranties set forth in Section 3.1 and 3.2, as to which there is no
limitation as to the date of assertion.
(e) Subject to the provisions of Section 5.2(h), Buyer shall
have the right to setoff any amount it is obligated to pay to Seller pursuant to
this Agreement or the other Transaction Documents against any amount owed by
Seller for any reason pursuant to this Agreement or the other Transaction
Documents; PROVIDED that where Buyer desires to exercise such setoff right in
respect of shares of Buyer Common Stock otherwise deliverable by Seller, Seller
may, at its option, elect to pay to Buyer in cash the amount to be setoff, which
payment must be made by Seller within five business days of Buyer's notice of
claim or Buyer shall again be entitled to exercise such right of setoff.
(f) From and after the Closing, if Seller becomes aware of any
Asset in its possession that was not delivered to Buyer at Closing, Seller shall
promptly notify Buyer of any such Asset, and deliver any such Asset to Buyer in
accordance with Buyer's reasonable instructions.
(g) From and after the date which is sixty days after the
Closing Date, Seller shall, upon the written request of Buyer, immediately
destroy or erase all of Seller's copies of the Assets set forth in
SCHEDULE 1.2(a) and, upon Buyer's request, promptly confirm destruction of
same by signing and returning to Buyer an "affidavit of destruction"
acceptable to Buyer.
(h) Except with respect to claims arising from the matter
described in Schedule 5.2(c), as to which Seller shall be liable for all amounts
up to but not in excess of $250,000, Seller shall not be liable to any
Indemnified Party unless an until the aggregate amount of Losses exceed the
amount of $100,000, and thereafter Indemnified Party shall be entitled to
indemnification only for the aggregate amount of such Losses in excess of
$100,000. The aggregate liability, including expenditures for legal fees and
disbursements, to which Seller shall be subject pursuant to the provisions of
Section 5.2(c) shall not exceed that number of shares of Buyer Common Stock
which equals $2,500,000, based upon the Closing Share Price. Any liability
directly to Buyer may be paid by the delivery of shares of Buyer's Common Stock
held in escrow pursuant to Section 1.9(a) or may be discharged at the election
of the Seller in cash. All damages to which the Indemnified Party may be
entitled pursuant to the provisions of Section 5.2(c) shall be net insurance
coverage in which Indemnified Party receives the benefits with respect thereto.
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(i) With respect to disputes arising under Sections 1.9(a),
1.9(b) and 1.9(c), notwithstanding anything to the contrary contained in this
Agreement, all disputes shall be settled by arbitration administered by the
American Arbitration Association in accordance with the Commercial Arbitration
Rules then in effect. The arbitration shall be held in either Virginia or
Kansas; the location to be chosen by the respondent within 5 days after receipt
of claimant's demand for arbitration. The arbitration shall be conducted in by a
panel of three arbitrators to be selected within 15 days after respondent's
receipt of claimant's demand for arbitration and in the following manner: Buyer
shall select one arbitrator; Seller shall select one arbitrator; and a third
arbitrator, chose by the selected party arbitrators, to serve as a neutral
chairperson. If one or both of the parties fail to nominate an arbitrator within
the time limits specified herein, the American Arbitration Association shall
select an arbitrator on the party's behalf. The hearing shall be held no later
than 60 days following the appointment of the third arbitrator.
SECTION 6
REGISTRATION RIGHTS
6.1. PIGGYBACK REGISTRATION RIGHTS. If at any time Buyer proposes to
register for public offering any of its common stock under the Securities Act
(other than a registration statement on Form S-8 or Form S-4, or their
successors, or any other form for a similar limited purpose such as a dividend
reinvestment plan, or any registration statement covering only securities
proposed to be issued in exchange for securities or assets of another entity),
whether or not for its own account, Buyer shall furnish prompt (but in no event
later than thirty (30) days prior to the filing of the applicable registration
statement) written notice to each Shareholder of its intention to effect such
registration and the intended method of distribution in connection therewith.
Upon the written request of a Shareholder made to Buyer within 15 days after the
mailing of such notice by Buyer, Buyer shall include in such registration the
number of shares requested for inclusion by such Shareholder (the "Registrable
Securities"), subject to the provisions hereof and other customary terms,
conditions, limitations and cut-backs relating to the registration of securities
generally; PROVIDED, HOWEVER, that all rights granted pursuant to this Section 6
to any Shareholder shall terminate with respect to any Registrable Securities
held by such Shareholder upon the earlier to occur of (i) the time as all such
Registrable Securities of such Shareholder may immediately be sold pursuant to
Rule 144 and/or Rule 145 under the Securities Act within any ninety (90) day
period, or (ii) upon the sale of all such Registrable Securities pursuant to a
registration statement or Rule 144 and/or Rule 145 under the Securities Act.
6.2. In addition to the obligations set forth under Section 6.3, in
order to include any Registrable Securities of a Shareholder in a registration
statement pursuant to this Section 6 that the Shareholder shall furnish to Buyer
such information regarding itself, the Registrable Securities held by it, and
the intended method of disposition of such securities as shall be required to
effect the registration of the Registrable Securities held by such Shareholder.
Any such information, or any comments on any such information included in a
draft of a registration
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statement provided to such Shareholder for its comment, shall be provided to
Buyer within any reasonable time period requested by Buyer.
6.3. Each Shareholder shall notify Buyer, at any time when a prospectus
is required to be delivered under applicable law, of the happening of any event
as a result of which the prospectus included in the applicable registration
statement, as then in effect, with respect to information provided or confirmed
by such Shareholder, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing.
Such Shareholder shall immediately upon the happening of any such event cease
using such prospectus.
6.4. In connection with any underwritten offering of a Shareholder's
Registrable Securities, Buyer shall not be required under this Section 6 to
register any of such Registrable Securities in connection with such underwritten
offering unless such Shareholder accepts the underwriters selected by Buyer and
executes an underwriting agreement with such underwriters containing such
provisions as are customary in an underwritten offering that includes shares
held by selling shareholders. Registrable Securities shall be sold in such
offering only in such quantity as the lead managing underwriter determines, in
its sole discretion, will not jeopardize the success of the offering by Buyer.
To the extent that the lead managing underwriter will not permit the
registration of all of the securities sought to be registered, in the case of a
registration pursuant to this Section 6, the securities to be included shall be
apportioned as follows: (i) first, Buyer and any holders of securities of Buyer
exercising any demand registration rights granted to such holders shall be
entitled to register all securities that Buyer or such other holders propose to
sell for their own account, in such proportion as they shall agree upon; (ii)
second, any holders of Buyer securities exercising piggyback registration rights
as and to the extent that such registration rights were granted prior to the
date hereof and have priority over the registration rights granted to
Shareholders hereunder; and (iii) lastly, any Shareholder, together with any
holders of other Buyer securities exercising piggyback registration rights as
and to the extent that such registration rights rank PARI PASSU with the
piggyback registration rights hereunder, shall be entitled to register, on a pro
rata basis (based on the number of Registrable Securities which a Shareholder
would be entitled, absent any apportionment pursuant to this Section 6.4 to have
Buyer register), up to that number of Registrable Securities and other shares of
common stock that is equal to the remaining shares of common stock that the lead
managing underwriter will permit to be registered after giving effect to the
apportionment set forth in clauses (i) and (ii) above, in connection with such
offering.
6.5. If requested by Buyer or a representative of the underwriters of
the offering, each Shareholder shall not sell or otherwise transfer or dispose
of any securities held by such Shareholder (other than those included in the
registration) for a period specified by the representative of the underwriters,
not to exceed one hundred eighty (180) days following the effective date of a
registration statement of Buyer filed under the Securities Act.
6.6. Nothing in this Section 6 shall create any liability on the part
of Buyer or any other person to any Shareholder if Buyer or any other person
should, for any reason, decide not
30
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to file a registration statement proposed to be filed or to withdraw such
registration statement subsequent to its filing, regardless of any action
whatsoever that any Shareholder may have taken, whether as a result of the
issuance by Buyer of any notice under this Section 6 or otherwise.
6.7. Unless otherwise required by law, rule or regulation, if
Registrable Securities owned by Shareholders who have made the election provided
in Section 6.1 are included in such registration statement, the Buyer shall bear
and pay all fees, costs, and expenses incident to such inclusion, including,
without limitation, registration fees, blue sky qualification fees, exchange
listing fees and expenses, legal fees and disbursements of Buyer's counsel
(including blue sky counsel), reasonable legal fees and disbursements of one
counsel to the Shareholders, printing costs, costs of any special audits and
accounting fees. Each selling Shareholder shall pay all underwriting discounts
and commissions with respect to such Shareholder's Registrable Securities, as
well as fees and disbursements of counsel (other than the one counsel to the
Shareholders) and other advisors for such selling Shareholder and all internal,
overhead and other expenses of such selling Shareholder.
6.8. The Buyer, before filing a registration statement, amendment or
supplement thereto, will furnish copies of such documents to legal counsel
selected by the Shareholders. In addition, the Buyer will make available for
inspection by any selling Shareholder or by any attorney or other agent of any
selling Shareholder all information reasonably requested by such persons which
relates to such registration. All non-publicly available information provided to
any selling Shareholder, or any attorney or agent of any selling Shareholder
shall be kept strictly confidential by such selling Shareholder, or attorney or
agent of such selling Shareholder so long as such information remains nonpublic.
6.9. The Buyer will promptly notify each selling Shareholder of the
occurrence of any event which renders any prospectus then being circulated among
prospective purchasers misleading because such prospectus contains an untrue
statement of a material fact or omits to state a material fact necessary to make
the statements made, in light of the circumstances in which they were made, not
misleading, and the Buyer will amend the prospectus so that it does not contain
any material misstatements or omissions and deliver the number of copies of such
amendments to each selling Shareholder as each selling Shareholder may require.
6.10. In connection with any registration of Registrable Securities
pursuant to this Agreement, the Buyer shall, at its expense, keep effective and
maintain such registration and any related qualification of Registrable
Securities under state securities laws for such period not exceeding 120 days as
may be necessary for the selling Shareholders, underwriters and selling agents
to dispose of such Registrable Securities, from time to time to amend or
supplement the Prospectus used in connection therewith to the extent necessary
to comply with applicable laws, and to furnish to such selling Shareholders such
number of copies of the registration statement, the prospectus constituting a
part thereof, and any amendment or supplement thereto as such selling
Shareholders may reasonably request in order to facilitate the disposition of
the registered Registrable Securities.
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6.11. Subject to the requirements of the applicable securities laws,
nothing in this agreement to the contrary shall prevent Shareholders from
participating in any tender offer for outstanding Buyer Common Stock, which
tender offer is not in violation of the Securities Exchange Act of 1934, as
amended, and the regulations promulgated thereunder; PROVIDED that $16.50165 for
every share of Buyer Common Stock finally tendered by each Shareholder is set
aside, to the reasonable satisfaction of Buyer, secured and made available to
Buyer to cover claims that may arise from time to time against such shares under
the terms of this Agreement.
SECTION 7
MISCELLANEOUS
7.1. GOVERNING LAW. This Agreement shall be governed in all respects by
the laws of the State of Kansas, without giving effect to any choice or conflict
of law provision or rule (whether of the State of Kansas or any other
jurisdiction that would cause the application of the laws of any jurisdiction
other that the State of Kansas).
7.2. SURVIVAL. The representations and warranties made herein shall
survive any investigation made by the parties and the Closing for a period of 12
months following the Closing Date, except for the representations and warranties
set forth in Sections 2.1, 2.2, 2.6, 3.2 and 3.6 which shall survive until the
expiration of the applicable statute of limitations governing the assertion of
liabilities which are the subject thereof. Except as expressly provided
otherwise herein, the covenants and agreements made herein shall survive the
Closing.
7.3. SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
provisions hereof and of the other Transactional Documents shall inure to the
benefit of, and be binding upon, the successors, assigns, heirs, executors and
administrators of the parties hereto. No party may assign any of its rights or
obligations hereunder or thereunder without the express written consent of the
other party hereto, which consent may not be unreasonably withheld; PROVIDED
that any party may assign any and all of its rights and interests hereunder of
thereunder to one or more of its affiliates and designate one or more of its
affiliates to perform its obligations hereunder; PROVIDED that such party
remains liable for full and total performance of its obligations hereunder and
thereunder.
7.4. NOTICES. Any notices authorized to be given hereunder or under any
of the other Transactional Documents shall be in writing and deemed given, if
delivered personally or by overnight courier, on the date of delivery, if a
Business Day, or if not a Business Day, on the first Business Day following
delivery, or if mailed, three days after mailing by registered or certified
mail, return receipt requested, and in each case, addressed, as follows:
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If to Buyer:
National Information Consortium, Inc.
Attention: President
12 Corporate Woods
10975 Benson Street, Suite 390
Overland Park, KS 66210
Facsimile: (913) 498-3472
and a copy to:
John W. Campbell, Esq.
Morrison & Foerster LLP
425 Market Street
San Francisco, CA 94105
Facsimile: (415) 268-7522
If to Seller:
Duffy Mazan,
Chief Executive Officer
Electric Press, Inc.
1140 Isaac Newton Square
Reston, VA 22090
Facsimile: (703) 742-4648
and a copy to
Jocelyn West Brittin, Esq.
McGwire, Woods, Battle & Boothe LLP
1750 Tyson's Boulevard
McLean, VA 22102
Facsimile: (703) 712-5050
or if delivered by telecopier, on a Business Day before 4:00 PM local time of
addressee, on transmission confirmed electronically, or if at any other time or
day on the first Business Day succeeding transmission confirmed electronically,
to the facsimile numbers provided above, or to such other address or telecopy
number as any party shall specify to the other, pursuant to the foregoing notice
provisions.
7.5. WAIVER; AMENDMENTS. This Agreement and the other Transaction
Documents (i) set forth the entire agreement of the parties respecting the
subject matter hereof; (ii) supersede any prior and contemporaneous
understandings, agreements, or representations by or among the parties, written
or oral, to the extent they related in any way to the subject matter hereof; and
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(iii) may not be amended orally, and no right or obligation of any party may be
altered, except as expressly set forth in a writing signed by such party.
7.6. COUNTERPARTS. This Agreement may be signed in several
counterparts.
7.7. EXPENSES. Each party shall bear its own expenses incurred with
respect to the preparation of this Agreement and the other Transaction Documents
and the consummation of the transactions contemplated hereby and thereby.
7.8. POST-CLOSING CONFIDENTIALITY AND PUBLICITY. On and at all times
after the date of this Agreement:
(a) except to the extent required by law, and until Buyer has
made its public announcement regarding this transaction, Seller shall not make
any disclosure of any nature (to any of their suppliers, customers, landlords,
creditors or employees or to any other person) concerning any of the
transactions contemplated by this Agreement or any of the other Transactional
Documents except as contemplated by the Transactional Documents agreed to by
Buyer, and Seller shall keep the existence and terms of this Agreement and the
other Transaction Documents strictly confidential; and
(b) Seller shall keep strictly confidential, and shall not
use, or disclose to any other person, any non-public document or other
information that relates directly or indirectly to the Business or the Assets,
including personnel information, secret processes, proprietary know-how,
customer lists and other technical or business information included in the
Assets and not generally known in similar businesses.
7.9. CERTAIN DEFINITIONS.
(a) When used in this Agreement, "TRANSACTION DOCUMENTS" shall
mean this Agreement, the Seller Services Agreement and the Bill of Sale.
(b) When used in this Agreement, "BUSINESS DAY" shall mean a
day other than a Saturday, Sunday or a day on which commercial banks in Kansas
City, Kansas are generally closed for business.
(c) When used in this Agreement, "PERSON" shall mean and
include any individual, entity or Authority.
(d) When used in this Agreement, "CAUSE" shall mean an
employee's conviction of a felony or the willful and deliberate failure of an
employee to perform his customary duties, in a manner consistent with the manner
reasonably prescribed by the Board of Directors or President of Buyer (other
than any failure resulting from his incapacity due to physical or mental
illness, disability or death) after not less than thirty (30) days prior written
notice from Buyer.
(e) When used in this Agreement, "KNOWLEDGE" of a particular
fact or other matter shall mean, with respect to an individual, that:
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(i) such individual is actually aware of such fact or
other matter; or
(ii) a reasonable individual could be expected to
discover or otherwise become aware of such fact or other matter in the
course of conducting a reasonably diligent investigation concerning the
truth or existence of such fact or other matter.
Seller shall be deemed to have "Knowledge" of a particular fact or
other matter if any officer or key employee of Seller has Knowledge of such fact
or other matter.
(f) When used in this Agreement, "MATERIAL" means, with
respect to the representations, warranties and covenants provided herein, a
contract, obligation, liability, transaction, breach, Encumbrance, proceeding or
other matter or event, if the aggregate amount or value involved with respect to
each such contract, obligation, liability, transaction, breach, Encumbrance,
proceeding or other matter or event exceeds $10,000.
(g) When used in this Agreement, "MATERIAL ADVERSE EFFECT"
means, with respect to Seller, (i) any material adverse effect on Seller's
business, financial condition, assets, liabilities, operations, financial
performance, net income or prospects or (ii) any material adverse effect on
Seller's ability to comply with or perform any material covenant or obligation
under this Agreement and the other Transactional Documents.
7.10. SEVERABILITY. In the event any of the provisions of this
Agreement shall be held by a court or other tribunal of competent jurisdiction
to be unenforceable, the other provisions of this Agreement shall remain in full
force and effect.
7.11. INTERPRETATION.
(a) The parties hereto agree that any rule of construction to
the effect that ambiguities are to be resolved against the drafting party shall
not be applied in the construction or interpretation of this Agreement.
(b) As used in this Agreement, the words "include" and
"including," and variations thereof, shall not be deemed to be terms of
limitation, but rather shall be deemed to be followed by the words "without
limitation."
(c) Except as otherwise indicated, all references in this
Agreement to "Sections," "Exhibits" and "Schedules" refer to Sections of this
Agreement and Exhibits and Schedules to this Agreement.
(d) A person shall be deemed to have "knowledge" of a
particular fact or matter if (i) such person is actually aware of such fact or
other matter or (ii) a reasonable person would be expected to become aware of
such fact or other matter in the course of performing such person's ordinary
duties and responsibilities in a reasonable and prudent manner consistent with
such person's position.
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IN WITNESS WHEREOF, the undersigned have executed this Asset Purchase
Agreement as of the date first written above.
NATIONAL INFORMATION CONSORTIUM, INC.
By: /s/
-----------------------------------------
Name:
Title:
ELECTRIC PRESS, INC.
By: /s/
-----------------------------------------
Name:
Title:
36
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EXHIBIT 10.31
CONTRIBUTION AGREEMENT
THIS CONTRIBUTION AGREEMENT (this "AGREEMENT") is entered into as of
the 12th day of January, 2000, by and among National Information Consortium,
Inc., a Colorado corporation ("NIC"), Conquest, Inc., a NIC entity, a Colorado
corporation (the "COMPANY"), and the members (the "CONQUEST MEMBERS") of
Conquest Softworks, L.L.C., a Colorado limited liability company ("CONQUEST").
RECITALS
WHEREAS, NIC and the Conquest Members will form the Company for the
purpose of carrying out the transactions contemplated by this Agreement;
WHEREAS, NIC desires to contribute the NIC Assets (as defined below) to
the Company in exchange for fifty percent (50%) of the shares of the Company's
common stock, par value $.001 per share (the "SHARES") outstanding immediately
following the Closing (as defined below), subject to the terms and conditions of
this Agreement; and
WHEREAS, the Conquest Members desire to contribute all of the member
interests in Conquest (the "MEMBER INTERESTS") to the Company in exchange for
fifty percent (50%) of the Shares outstanding immediately following the Closing,
subject to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, NIC, the Company and the Conquest Members hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. As used in this Agreement, the following terms shall
have the following meanings:
"AGREEMENT" shall mean this Contribution Agreement, dated January 12,
2000, by and among NIC, the Company and the Conquest Members.
"ARTICLES OF INCORPORATION" shall mean the Articles of Incorporation of
the Company, substantially in the form attached hereto as Exhibit 1.1, as the
same may be amended, supplemented or otherwise modified from time to time.
"CLOSING" shall have the meaning set forth in Section 3.1 of this
Agreement
"CLOSING DATE" shall mean the actual date of the Closing.
<PAGE>
"CONQUEST" shall mean Conquest Softworks, L.L.C., a Colorado limited
liability company.
"GAAP" means generally accepted accounting principles as currently in
effect in the United States consistently applied.
"GOVERNMENTAL AUTHORITY" shall mean any nation or government, any state
or other political subdivision thereof, and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government, but does not include any such entity in its capacity as a party
to any contract.
"LIABILITIES" shall mean, as to any Person, all debts, liabilities and
obligations, direct, indirect, absolute or contingent of such Person or entity,
whether accrued, vested or otherwise, whether known or unknown and whether or
not actually reflected, or required by GAAP to be reflected, in such Person's
balance sheets or other books and records.
"LIENS" shall mean any adverse claims, liens, security interests,
charges, leases, licenses and other encumbrances of any kind and nature.
"MEMBER INTERESTS" shall mean the member interests in Conquest, as set
forth in Schedule 2.2.
"COMPANY" shall mean Conquest, Inc., a NIC entity, a Colorado
corporation.
"NIC" shall mean National Information Consortium, Inc., a Colorado
corporation.
"NIC ASSETS" shall mean the assets set forth on Schedule 2.1 to be
contributed by NIC to the Company pursuant to the terms and conditions of this
Agreement.
"PERSON" shall mean any individual, corporation, partnership, joint
venture, trust, incorporated organization, limited liability company, other form
of business or legal entity or Governmental Authority.
"RELATED AGREEMENTS" shall mean, collectively, the Common Stock
Purchase Agreement to be entered by and among NIC and the Conquest Members,
substantially in the form of Exhibit 1.2 attached hereto, and the Investors'
Rights Agreement to be entered into by and among the Company, NIC and the
Conquest Members, substantially in the form of Exhibit 1.3 attached hereto.
"SHARES" shall mean the shares of the Company's common stock, par value
$.001 per share.
ARTICLE II
<PAGE>
CONTRIBUTION OF ASSETS; ASSUMPTION OF LIABILITIES
2.1 CONTRIBUTIONS OF NIC. Subject to the terms and conditions contained
in this Agreement, at the Closing NIC shall contribute, transfer, assign, convey
and deliver to the Company, and the Company shall acquire from NIC free and
clear of all liens and encumbrances, the NIC Assets as set forth in Schedule 2.1
hereto, which assets consist of the following:
(i) all of the NIC software business operations and assets (including
all sources codes, software applications, contracts and potential
contracts and other assets) for Uniform Commercial Code internal
government office software and corporations/business entities internal
government office software for secretary of states offices; and
(ii) the sum of Two Million Dollars ($2,000,000) in cash.
The parties hereto hereby agree and acknowledge that the remaining NIC
business shall not be included in the NIC Assets, including but not limited to
all government database filing and interface software. NIC shall execute and
deliver such bills of sale and other documents of transfer as may be necessary
or reasonably requested to effect and memorialize the contributions, transfers,
assignments, conveyances and deliveries set forth in this Section 2.1.
2.2 CONTRIBUTIONS OF CONQUEST MEMBERS. Subject to the terms and
conditions contained in this Agreement, at the Closing each Conquest Member
shall contribute, transfer, assign, convey and deliver to the Company, and the
Company shall acquire from the Conquest Member, free and clear of all liens and
encumbrances, all of the Conquest Member's right, title and interest in: (i) the
Member Interests as set forth in Schedule 2.2 (which the Conquest Members
represent and warrant constitute all of the issued and outstanding member
interests in Conquest); and (ii) source codes, domain names, and ISP addresses
developed by or used in Conquest's business.
Each Conquest Member shall execute and deliver such bills of sale and
other documents of transfer as may be necessary or reasonably requested to
effect and memorialize the contributions, transfers, assignments conveyances and
deliveries to be made by such Conquest Member under this Section 2.2.
Each Conquest Member understands and agrees that, upon the
contributions, transfers, assignments, conveyances and deliveries set forth in
this Section 2.2, all rights that such Conquest Member may have as a member or
employee of Conquest shall terminate.
2.3 ASSUMPTION OF LIABILITIES. On and after the Closing Date, the
Company will, pursuant to an assumption agreement in a form reasonably
satisfactory to the parties hereto, assume and agree to pay, perform and
discharge when due, all of the following Liabilities (collectively, the "ASSUMED
LIABILITIES"): All of Conquest's executory
<PAGE>
contracts, entered into in the ordinary course of its business, to provide
software and related services to state and county governments, and all of the
contracts listed in Schedule 2.1 attached hereto.
2.4 ISSUANCE OF SHARES. As consideration for the contributions of NIC
set forth in Section 2.1 above, and subject to the terms and conditions
contained in this Agreement and the Articles of Incorporation, the Company shall
issue to NIC 15,000,000 validly issued, fully paid and nonassessable Shares of
the Company, which shall constitute fifty percent (50%) of the issued and
outstanding capital stock of the Company on the Closing Date. As consideration
for the contributions of the Conquest Members set forth in Section 2.2 above,
and subject to the terms and conditions contained in this Agreement and the
Articles of Incorporation, the Company shall issue to the Conquest Members an
aggregate of 15,000,000 validly issued, fully paid and nonassessable Shares of
the Company, which shall constitute fifty percent (50%) of the issued and
outstanding capital stock of the Company on the Closing Date.
ARTICLE III
CLOSING
3.1 TIME AND PLACE OF CLOSING. The consummation of the contributions
described herein and the other transactions contemplated hereby (the "CLOSING")
shall take place on January 14, 2000, at the offices of Morrison & Foerster LLP,
5200 Republic Plaza, 370 Seventeenth Street, Denver, Colorado 80202-5638, or at
such other date or location as the parties may mutually agree.
3.2 RELATED AGREEMENTS. On the Closing, the relevant parties shall
enter into the Common Stock Purchase Agreement substantially in the form set
forth as Exhibit 1.2 attached hereto, and the Investors' Rights Agreement
substantially in the form set forth as Exhibit 1.3 attached hereto.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS AND WARRANTIES OF NIC. Except as set forth in
Schedule 4.1 attached hereto, NIC hereby represents and warrants to the other
parties to this Agreement as follows:
(a) DUE ORGANIZATION. NIC is duly organized, validly existing and in
good standing under the laws of the State of Colorado, and has the requisite
power and authority to own or lease its properties and to carry on its business
as presently conducted. NIC has all requisite power and authority to enter into
this Agreement and the Related Agreements and to perform its obligations
hereunder and thereunder.
<PAGE>
(b) POWER AND AUTHORITY. The execution, delivery and performance by NIC
of this Agreement and the Related Agreements and the consummation by NIC of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action. This Agreement has been, and each of the Related
Agreements will on the Closing Date be, duly executed and delivered by NIC and
constitutes or, in the case of the Related Agreements, upon execution thereof
will constitute, a valid and legally binding obligation of NIC, enforceable
against it in accordance with its terms.
(c) GOOD AND MARKETABLE TITLE. NIC has good and marketable title to the
NIC Assets to be contributed hereunder, free and clear of all liens,
encumbrances, equities, security interests and claims whatsoever, with full
right and authority to deliver the same hereunder, and that upon delivery of the
NIC Assets hereunder, the Company will receive good and marketable title
thereto, free and clear of all liens, encumbrances, equities, security interests
and claims whatsoever. The Conquest Members have been provided true and accurate
copies of all contracts listed in Schedule 2.1, and there have been no
amendments or modifications to, or breach of, such contracts as of the date
hereof.
(d) NO VIOLATION. The execution, delivery and performance of this
Agreement and the Related Agreements by NIC and the consummation by NIC of the
transactions contemplated hereby and thereby will not (i) conflict with or
result in a breach of any provision of the charter or bylaws of NIC,
(ii) require any consent, approval, authorization or permit of, or filing
with or notification to, any Governmental Authority, (iii) require the
consent or approval of any Person (other than a Governmental Authority) or
violate or conflict with, or result in a breach of any provision of,
constitute a default (or an event which with notice or lapse of time or both
would become a default) or give to any third party any right of termination,
cancellation, amendment or acceleration under, or result in the creation of a
Lien under, any of the terms, conditions or provisions of any contract,
license or other agreement or instrument to which NIC is a party or by which
it or its assets or property are bound, or (iv) violate or conflict with any
order, writ, injunction, decree, statute, rule or regulation applicable to
NIC; other than any consents and approvals the failure of which to obtain and
any violations, conflicts, breaches defaults and other rights set forth
pursuant to clauses (ii), (iii) and (iv) above which, individually or in the
aggregate, would not reasonably be expected to have a material adverse effect
on the NIC Assets or NIC's ability to perform its obligations under this
Agreement or the Related Agreements.
(e) LEGAL PROCEEDINGS. There is no litigation, proceeding or
governmental investigation to which NIC is a party pending or, to the knowledge
of NIC, threatened against NIC or that relates to the transactions contemplated
by this Agreement which could, either individually or in the aggregate, result
in a material adverse effect on the NIC Assets or which seeks to restrain or
enjoin the consummation of any of the transactions contemplated hereby. NIC is
not in violation of any term of any judgment, writ, decree, injunction or order
entered by any court or governmental authority (domestic or foreign) and
outstanding against NIC or with respect to the NIC Assets, except for such
violations which could not, individually or in the aggregate, have a material
adverse effect on the NIC Assets. To the knowledge of NIC, there are no facts
<PAGE>
which would provide a basis for any successful prosecution of any such
litigation, proceeding or investigation.
(f) NO FEES. Neither NIC nor its officers, directors or employees, on
behalf of NIC, has employed any broker or finder or incurred any other Liability
for any brokerage fees, commissions or finders' fees in connection with the
transactions contemplated by this Agreement.
4.2 REPRESENTATIONS AND WARRANTIES OF THE CONQUEST MEMBERS. Except as
set forth in Schedule 4.2 attached hereto, each of the Conquest Members hereby
represents and warrants to NIC and the Company as follows:
(a) DUE ORGANIZATION OF CONQUEST. Conquest is duly organized, validly
existing and in good standing under the laws of the State of Colorado, and has
the requisite power and authority to own or lease its properties and to carry on
its business as presently conducted.
(b) POWER AND AUTHORITY. This Agreement has been, and each of the
Related Agreements will on the Closing Date be, duly authorized, executed and
delivered by the Conquest Member and constitutes or, in the case of the Related
Agreements, upon execution thereof will constitute, valid and binding
obligations of the Conquest Member enforceable against such Conquest Member in
accordance with its terms.
(c) FINANCIAL INFORMATION. (i) The unaudited balance sheet of Conquest
as at December 31, 1999 (such latest balance sheet being referred to herein as
the "BALANCE SHEET") and the related statements of operations and cash flows for
the period ending December 31, 1999, copies of which have been furnished to NIC
and which are attached hereto as Schedule 4.2(c), present fairly in all material
respects the financial condition of Conquest as at December 31, 1999, and the
results of its operations for the twelve-month period ending on December 31,
1999. At December 31, 1999, Conquest did not have any material contingent
obligation, contingent liability or liability for taxes, or any long-term lease
or unusual forward or long-term commitment not reflected in the Balance Sheet or
otherwise disclosed in the Schedules to this Agreement.
(ii) Except to the extent set forth in the Balance Sheet, Conquest does
not have any Liabilities or obligations (absolute, accrued, contingent or
otherwise), whether due or to become due which would be required, in accordance
with GAAP, to be set forth on a balance sheet of Conquest, other than any such
Liabilities or obligations incurred since December 31, 1999 in the ordinary
course of business consistent with past practice.
(d) GOOD AND MARKETABLE TITLE. Such Conquest Member has good and
marketable title to all Member Interests and other assets to be contributed by
such Conquest Member hereunder, free and clear of all liens, encumbrances,
equities, security interests and claims whatsoever, with full right and
authority to deliver the same hereunder, and that upon delivery of such Member
Interests hereunder, the Company will
<PAGE>
receive good and marketable title thereto, free and clear of all liens,
encumbrances, equities, security interests and claims whatsoever.
(e) NO VIOLATION. The execution, delivery and performance of this
Agreement and the Related Agreements by such Conquest Member and the
consummation by such Conquest Member of the transactions contemplated hereby and
thereby will not (i) conflict with or result in a breach of any provision of the
organizational documents of Conquest, (ii) require any consent, approval,
authorization or permit of, or filing with or notification to, any Governmental
Authority, (iii) require the consent or approval of any Person (other than a
Governmental Authority) or violate or conflict with, or result in a breach of
any provision of, constitute a default (or an event which with notice or lapse
of time or both would become a default) or give to any third party any right of
termination, cancellation, amendment or acceleration under, or result in the
creation of a Lien under, any of the terms, conditions or provisions of any
contract, license or other agreement or instrument to which Conquest or such
Conquest Member is a party or by which they or their respective assets or
property are bound, or (iv) violate or conflict with any order, writ,
injunction, decree, statute, rule or regulation applicable to Conquest or such
Conquest Member; other than any consents and approvals the failure of which to
obtain and any violations, conflicts, breaches defaults and other rights set
forth pursuant to clauses (ii), (iii) and (iv) above which, individually or in
the aggregate, would not reasonably be expected to have a material adverse
effect on the assets, business or condition (financial or otherwise) of Conquest
or the Conquest Member or the Conquest Member's ability to perform its
obligations under this Agreement or the Related Agreements.
(f) LEGAL PROCEEDINGS. There is no litigation, proceeding or
governmental investigation to which Conquest is a party pending or, to the
knowledge of the Conquest Member, threatened against Conquest or that relates to
the transactions contemplated by this Agreement which could, either individually
or in the aggregate, result in a material adverse effect on the assets, business
or condition (financial or otherwise) of Conquest or which seeks to restrain or
enjoin the consummation of any of the transactions contemplated hereby. Conquest
is not in violation of any term of any judgment, writ, decree, injunction or
order entered by any court or governmental authority (domestic or foreign) and
outstanding against Conquest or with respect to its assets, except for such
violations which could not, individually or in the aggregate, have a material
adverse effect on the assets, business or condition (financial or otherwise) of
Conquest. To the knowledge of such Conquest Member, there are no facts which
would provide a basis for any successful prosecution of any such litigation,
proceeding or investigation.
(g) NO FEES. Except as set forth in Schedule 4.2(g) hereto, such
Conquest Member has not employed any broker or finder or incurred any other
Liability for any brokerage fees, commissions or finders' fees in connection
with the transactions contemplated by this Agreement.
4.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties given by the parties in Article IV shall survive the Closing until
the third
<PAGE>
anniversary of the Closing Date, at which time such representations and
warranties will terminate.
ARTICLE V
COVENANTS
5.1 FILINGS. As promptly as practicable after the date of this
Agreement, each of the parties hereto shall make or cause to be made all filings
and submissions under applicable laws and regulations, if any, as may be
required for the consummation of the transactions contemplated by this
Agreement. Each of the parties hereto shall coordinate and cooperate in
exchanging such information and providing such reasonable assistance as may be
requested by either of them in connection with the filings and submissions
contemplated by this Section 5.1.
5.2 CONSENTS. Each of the parties hereto shall use their best efforts
to obtain all necessary consents, approvals and waivers of all Governmental
Authorities necessary for the consummation of the transactions contemplated by
this Agreement and all consents, approvals and waivers required under any
contract, license or other agreement to which it is a party.
5.3 AGREEMENT TO COOPERATE; FURTHER ASSURANCES. Subject to the terms
and conditions of this Agreement, each of the parties hereto shall use all
reasonable efforts to take, or cause to be taken, all action and to do, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement. In case at any time after the Closing Date any further action is
necessary or desirable to transfer any of the NIC Assets or the Member Interests
to the Company (including obtaining any third party consents), to effect the
assumption by the Company of the Assumed Liabilities or otherwise to carry out
the purposes of this Agreement, the parties hereto shall execute such further
documents (including assignments, acknowledgements and consents and other
instruments of transfer) and shall take such further action as shall be
necessary or desirable to effect such transfer and to otherwise carry out the
purposes of this Agreement, in each case to the extent not inconsistent with
applicable law.
5.4 CONDUCT OF CONQUEST PENDING THE CLOSING DATE. The Conquest Members
agree that except with the prior written consent of NIC, prior to the Closing
Date Conquest shall:
(a) operate its business only in the usual, regular and ordinary
manner, on a basis consistent with past practice and, to the extent consistent
with such operation, use its reasonable efforts to preserve its present business
organization intact, keep available the services of its present employees,
preserve its present business relationships and maintain all rights, privileges
and franchises necessary or desirable in the normal conduct of its business;
<PAGE>
(b) maintain its inventory of supplies, parts and other materials and
keep its books, accounts, files and records in the usual, regular and ordinary
manner, on a basis consistent with past practice, and comply with and perform in
all material respects all laws and contractual and other obligations applicable
to Conquest's business;
(c) maintain in full force and effect adequate insurance with respect
to Conquest's business and the employees of Conquest covering risks customarily
insured by similar businesses;
(d) not enter into any contract, agreement or other commitment which
involves aggregate consideration in excess of $10,000 except for purchases and
sales of inventories and advertising promotion in the ordinary course of
business consistent with past practice;
(e) except as required by applicable law or to the extent required
under existing employee benefit plans, agreements or arrangements as in effect
on the date of this Agreement, not (i) increase the compensation or fringe
benefits of any of Conquests' officers or employees, except for increases, in
the ordinary course of business, in salary or wages of employees who are not
officers, (ii) except in the ordinary course of business grant any severance or
termination pay, (iii) hire, except in the ordinary course of business, any new
employees or consultants, or (iv) enter into or amend or terminate any
collective bargaining, bonus, profit sharing, thrift, compensation, pension,
retirement, deferred compensation, employment, termination, severance or other
plan, agreement, trust, fund, policy or arrangement for the benefit of any past
or present officers or employees;
(f) not dispose of or abandon any of the Conquest assets, other than
the disposition of obsolete or worn-out equipment or machinery in the ordinary
course of business, consistent with past practice;
(g) not (i) permit or allow any of the Conquest assets to become
subject to any Liens, or (ii) waive any material claims or rights relating to
the Conquest business or assets;
(h) not acquire or agree to acquire outside the ordinary course of
business any assets that are material, individually or in the aggregate, to the
Conquest business, or make or agree to make any capital expenditures except for
capital expenditures not in excess of $10,000 for any individual expenditure and
$50,000 in the aggregate;
(i) not transfer any rights of material value of the Conquest business
or modify or change in any material respect any existing license, lease,
contract or other document relating to the operations of the Conquest business,
other than in the ordinary course of business consistent with past practice;
(j) not change any material accounting principle that would affect the
Balance Sheet;
<PAGE>
(k) not pledge or otherwise use any Conquest assets as collateral or
security for any indebtedness of Conquest or any other Person other than liens
arising in the ordinary course of business under existing agreements that are
released prior to the Closing;
(m) pay all trade payables, accrued expenses (including legal and other
professional fees and the finders fees identified in Schedule 4.2(g) attached
hereto) and payroll and other taxes in accordance with past practice and all
applicable terms thereof and legal requirements; and
(n) not authorize any of, or commit or agree to take any of, the
foregoing prohibited actions.
5.5 CONDUCT OF NIC PENDING THE CLOSING DATE. NIC agrees that, except
with the prior written consent of the Conquest Members, prior to the Closing
Date NIC shall:
(a) operate the NIC Assets only in the usual, regular and ordinary
manner, on a basis consistent with past practice and, to the extent consistent
with such operation, use its reasonable efforts to preserve the NIC Assets
intact, and comply with and perform in all material respects all laws and
contractual and other obligations applicable to the NIC Assets;
(b) not dispose of or abandon any of the NIC Assets, permit or allow
any of the NIC Assets to become subject to any Liens, or waive any material
claims or rights relating to the NIC Assets;
(c) not transfer any rights of material value of the NIC Assets or
modify or change in any material respect any existing license, contract or other
document relating to the operations of the NIC Assets, other than in the
ordinary course of business consistent with past practice;
(d) not pledge or otherwise use any NIC Assets as collateral or
security for any indebtedness of NIC or any other Person other than liens
arising in the ordinary course of business under existing agreements that are
released prior to the Closing; and
(e) not authorize any of, or commit or agree to take any of, the
foregoing prohibited actions.
5.6 PUBLIC STATEMENTS. Before any party shall release any information
concerning this Agreement or the matters contemplated hereby which is intended
for or may result in public dissemination thereof, they shall cooperate with the
other parties, shall furnish drafts of all documents or proposed oral statements
to the other parties, provide the other parties the opportunity to review and
comment upon any such documents or statements and shall not release or permit
release of any such information
<PAGE>
without the consent of the other parties, except to the extent required by
applicable law or the rules of any securities exchange or automated quotation
system on which its securities are traded.
5.7 ADDITIONAL COVENANTS OF THE CONQUEST MEMBERS.
(a) Each Conquest Member acknowledges that: (i) he has occupied a
position of trust and confidence with Conquest and has become familiar with
Conquest's Confidential Information; (ii) Conquest's products and services are
marketed throughout the United States; (iii) Conquest competes with other
businesses that are or could be located in any part of the United States; and
(iv) the confidentiality obligations and covenant not to compete set forth below
are reasonable and necessary to protect and preserve the Conquest business.
(b) For purposes of this Agreement, "Confidential Information" shall
mean any and all of the following which are the subject of reasonable efforts to
maintain their secrecy and which derive independent economic value (whether
actual or potential) from not being generally known to other persons: compute
software and programs (including object code and source code); computer software
and database technologies, systems, structures and architectures (and related
processes, formulae, compositions, improvements, devices, inventions and other
information); inventions and ideas; successes and failures; specifications;
processes; past, current and planned research and development; price lists;
market studies; business plans; and other information relating to the business
operations of Conquest. The following information is not regarded as
confidential and is excluded from the definition of Confidential Information:
(i) information which at the time of disclosure to the
Conquest Member was in the public domain or which, after disclosure to the
Conquest Member, became part of the public domain through no action by, or fault
of, the Conquest Member;
(ii) information which can be shown by the Conquest Member
through tangible evidence to have been know to the Conquest Member at the time
of disclosure and not acquired directly or indirectly as a consequence of or
through his employment or ownership status with Conquest or Conquest Software,
Inc.; or
(iii) information which was received by the Conquest Member
from a third party having the legal right to transmit it.
(c) Each Conquest Member agrees that he will not disclose or use any
Confidential Information, except as required for the faithful performance of his
duties to the Company and that he will take reasonable precautions against the
unauthorized disclosure or use of Confidential Information.
(d) Each Conquest Member further covenants that, in order to protect
the value of the Conquest membership interests and other assets being
contributed to the
<PAGE>
Company, he shall not for a period of two (2) years from the date of this
Agreement, directly or indirectly engage (whether as owner, partner,
investor, employee, advisor, consultant, contracting party, referring source
or otherwise) in any business anywhere in the United States that is in
competition with the Company's Business (as defined in the Investors' Rights
Agreement, attached hereto). This covenant not to compete includes, but is
not limited to, activities with respect to software object technology design,
development, sales or consulting involving systems for the filing, searching,
indexing and database management of Uniform Commercial Code documents,
corporation documents and records, real estate and land records, motor
vehicle registration, titles, licensing and records, court documents and
records, trademark registration, professional licensing and tax assessment.
Notwithstanding the foregoing, a Conquest Member may purchase or otherwise
acquire up to (but not more than) one percent of any class of securities of
any enterprise (but without otherwise participating in the activities of such
enterprise) if such securities are listed on any national or regional
securities exchange or have been registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended.
ARTICLE VI
CONDITIONS PRECEDENT TO CLOSING
6.1 CONDITIONS TO EACH PARTY'S CLOSING OBLIGATIONS. The respective
obligations of each party to consummate the transactions contemplated by this
Agreement shall be subject to the fulfillment of the following conditions on or
prior to the Closing Date:
(a) No statute, rule, regulation, executive order, decree, or
preliminary or permanent injunction shall have been enacted, entered,
promulgated or enforced by any state, federal or foreign court of competent
jurisdiction or governmental authority which prohibits consummation of the
transactions contemplated by this Agreement and the Related Agreements, whether
temporary, preliminary or permanent; provided, however, that the parties hereto
shall use their reasonable commercial efforts to have such order, decree or
injunction vacated; and
(b) all orders, consents and approvals of Governmental Authorities
legally required for the consummation of the transactions contemplated by this
Agreement shall have been obtained and be in effect at the Closing Date, except
those for which failure to obtain such consents and approvals would not,
individually or in the aggregate, have a material adverse effect on the assets,
business or condition (financial or otherwise) of the Company.
6.2 CONDITIONS TO THE CLOSING OBLIGATIONS OF NIC. The obligations of
NIC to consummate the transactions contemplated by this Agreement shall be
subject to the fulfillment of the following additional conditions:
(a) the Conquest Members shall have performed in all material respects
its obligations under this Agreement required to be performed by it at or prior
to the Closing Date, and the representations and warranties of the Conquest
Members set forth in this
<PAGE>
Agreement shall be true and correct in all material respects at and as of the
Closing Date as if made at and as of such time, except to the extent that any
such representation or warranty specifically speaks to a specified date, in
which case such representation or warranty shall have been true and correct
as of such date; and
(b) the Company shall have all intellectual property rights necessary
to conduct its business, except for such rights the failure of which to have
would not, individually or in the aggregate, reasonably be expected to have a
material adverse effect on the assets, business or condition (financial or
otherwise) of the Company.
6.3 CONDITIONS TO THE CLOSING OBLIGATION OF THE CONQUEST MEMBERS. The
obligation of the Conquest Members to consummate the transactions contemplated
by this Agreement shall be subject to the fulfillment of the following
additional conditions:
(a) NIC shall have performed in all material respects its obligations
under this Agreement required to be performed by it at or prior to the Closing
Date, and the representations and warranties of NIC set forth in this Agreement
shall be true and correct in all material respects at and as of the Closing Date
as if made at and as of such time, except to the extent that any such
representation or warranty specifically speaks to a specified date, in which
case such representation or warranty shall have been true and correct as of such
date; and
(b) the Company shall have all intellectual property rights necessary
to conduct its business, except for such rights the failure of which to have
would not, individually or in the aggregate, reasonably be expected to have a
material adverse effect on the assets, business or condition (financial or
otherwise) of the Company.
ARTICLE VII
TERMINATION
7.1 TERMINATION. This Agreement may be terminated at any time prior to
the Closing by:
(a) the mutual written consent of NIC and the Conquest Members;
(b) either NIC or the Conquest Members if (i) any Governmental
Authority, the consent of which is a condition to the obligations of each party
hereto to consummate the transactions contemplated hereby, shall have determined
not to grant its consent (or imposes material conditions with respect thereto
such that the condition precedent set forth in Section 6.1(c) is incapable of
being satisfied) and all appeals of such determination shall have been taken and
have been unsuccessful; or (ii) any court of competent jurisdiction in the
United States shall have issued an order, judgment or decree (other than a
temporary restraining order) restraining, enjoining or otherwise prohibiting the
transactions contemplated hereby and such order, judgment or decree shall have
become final and nonappealable;
<PAGE>
(c) NIC if there has been a material breach by a Conquest Member of any
representation, warranty, covenant or agreement set forth in this Agreement,
which breach has not been cured within ten days following receipt by the
Conquest Members of notice of such breach;
(d) the Conquest Members if there has been a material breach by NIC of
any representation, warranty, covenant or agreement set forth in this Agreement,
which breach has not been cured within ten days following receipt by NIC of
notice of such breach; or
(e) either NIC or the Conquest Members by written notice to the other
on or after February 15, 2000 if the Closing has not occurred prior to receipt
of such notice.
7.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement as provided in Section 7.1 hereof, this Agreement shall forthwith
become void (except this Section 7.2, and Sections 5.6 hereof, which shall
survive the termination) and there shall be no liability on the part of any
parties or their respective officers or directors except for any breach of any
of its obligations under Section 5.6 hereof. Notwithstanding the foregoing, no
party hereto shall be relieved from liability for any willful breach of this
Agreement.
ARTICLE VIII
INDEMNIFICATION
8.1 INDEMNIFICATION BY NIC AND THE CONQUEST MEMBERS. NIC and each
Conquest Member hereby agree to indemnify the Company and defend and hold it
harmless from and against any and all claims, demands, liabilities, costs,
expenses, penalties, damages and losses, including, without limitation,
attorneys' fees, resulting from any misrepresentation or breach of warranty or
breach of covenant made by such party in this Agreement or in any document,
certificate, or exhibit given or delivered to the Company pursuant to or in
connection with this Agreement.
8.2 SURVIVAL. The indemnification provisions of Section 8.1 shall
survive beyond the Closing. Notwithstanding the foregoing, the obligations to
indemnify the Company and to hold it harmless for misrepresentations and
breaches of warranties made in this Agreement shall terminate when the
applicable representation or warranty terminates pursuant to Section 4.3 hereof;
provided, however, that such obligation to indemnify and hold harmless shall not
terminate with respect to any item as to which the Company shall have, before
the expiration of the applicable period, previously made a claim by delivering a
notice (stating in reasonable detail the basis of such claim) to the
indemnifying party.
ARTICLE IX
GENERAL PROVISIONS
<PAGE>
9.1 NOTICES. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (i) upon personal delivery to the
party to be notified; (ii) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient, if not, then on the next business
day; or (iii) one day after deposit with a nationally recognized overnight
courier, specifying next day delivery, with written verification of receipt. All
communications shall be sent to the respective parties at the addresses or
facsimile numbers set forth below:
If to the Conquest Members:
To the address set forth below the Conquest Member's signature
hereto
with a copy to:
Boardman, Suhr, Curry & Field LLP
Fourth Floor
One South Pinckney Street
P.O. Box 927
Madison, Wisconsin 53701-0927
Attention: Jon C. Nordenberg
Telecopier: (608) 283-1709
If to NIC:
Jim Dodd
President and Chief Executive Officer
National Information Consortium, Inc.
12 Corporate Woods
10975 Benson Street, Suite 390
Overland Park, Kansas 66210
Telecopier: 877-456-3468
with a copy to:
Morrison & Foerster LLP
425 Market Street
San Francisco, California 94105
Attention: John W. Campbell III, Esq.
Telecopier: 415-268-7522
9.2 ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding between the parties hereto with respect to the subject matter
hereof.
9.3 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
<PAGE>
9.4 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Colorado.
9.5 INTERPRETATION OF AGREEMENT. The article, section and other
headings of this Agreement are for convenience of reference only and shall not
be construed to affect the meaning of any provision contained herein.
9.6 NO ASSIGNMENT; SUCCESSORS AND ASSIGNS. The parties' respective
rights and obligations hereunder may not be assigned, transferred, pledged, or
encumbered, in any manner, direct or indirect, contingent or otherwise, in whole
or in part, voluntarily or by operation of law, without the prior written
consent of the other parties, provided that the foregoing shall not apply to any
assignment by operation of law to any successor Person in any merger or
consolidations, This Agreement shall be binding on the parties hereto and their
respective successors and permitted assigns.
9.7 EXPENSES. Except as set forth in this Agreement, whether or not the
transactions contemplated by this Agreement are consummated, all legal and other
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
costs.
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement
as of the date first set forth above.
NATIONAL INFORMATION CONSORTIUM, INC.
By: /s/ Kevin Childress
-------------------------------------------
KEVIN CHILDRESS
Chief Financial Officer
Address: National Information Consortium, Inc.
12 Corporate Woods
10975 Benson Street, Suite 390
Overland Park, Kansas 66210
Facsimile: __________
CONQUEST, INC., A NIC ENTITY
/s/ William Birdsall
-------------------------------------------
By: William Birdsall
Address: 464 Turner Driver, Suite 5
Durango, CO 81301
<PAGE>
CONQUEST MEMBERS:
William Birdsall
/s/ William Birdsall
-------------------------------------------
Address: 25 Lewis Mountain Lane
Durango, CO 81301
The Nelson Family Foundation Inc.
/s/ Jerry Nelson
-------------------------------------------
By: Jerry Nelson
Address: 8787 E. Pinnacle Peak Road
Suite 200
Scottsdale, AZ 85255
Peter Glick
/s/ Peter Glick
-------------------------------------------
Address: 117 Sunrise Lane
Durango, CO 81301
Thomas Sullivan, Sr.
/s/ Thomas Sullivan, Sr.
-------------------------------------------
Address: 6390 E. Tanque Verde Road
Tuscon, AZ 85715
William Eckard
/s/ William Eckard
-------------------------------------------
Address: 5566 Country Road, #203
Durango, CO 81301
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EXHIBIT 10.32
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
by and among
NATIONAL INFORMATION CONSORTIUM, INC.,
SDR ACQUISITION CORP.,
and
SDR TECHNOLOGIES, INC.
dated as of
February 16, 2000
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TABLE OF CONTENTS
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AGREEMENT AND PLAN OF REORGANIZATION AND MERGER. . . . . . . . . . . . . . . 1
ARTICLE I
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.2 Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.3 Effective Time . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.4 Effects of the Merger. . . . . . . . . . . . . . . . . . . . . 3
Section 1.5 Charter and By-Laws. . . . . . . . . . . . . . . . . . . . . . 3
Section 1.6 Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.7 Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS. . 4
Section 2.1 Cancellation of Shares of Common Stock . . . . . . . . . . . . 4
Section 2.2 Conversion of Shares of Company Common Stock . . . . . . . . . 4
Section 2.3 Company Options. . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE III
EXCHANGE OF SHARES/ESCROW. . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.1 Exchange of Company Certificates . . . . . . . . . . . . . . . 7
Section 3.2 Transfer Taxes; Withholding. . . . . . . . . . . . . . . . . .10
Section 3.3 Dissenting Shares. . . . . . . . . . . . . . . . . . . . . . .10
Section 3.4 No Further Ownership Rights in Company Capital Stock . . . . .11
Section 3.5 Lost, Stolen or Destroyed Company Certificates . . . . . . . .11
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF COMPANY. . . . . . . . . . . . . . . . . .12
Section 4.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . .12
Section 4.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . .13
Section 4.3 Authority Relative to this Agreement . . . . . . . . . . . . .15
Section 4.4 Consents and Approvals; No Violations. . . . . . . . . . . . .15
Section 4.5 Financial Statements . . . . . . . . . . . . . . . . . . . . .16
Section 4.6 Absence of Certain Changes . . . . . . . . . . . . . . . . . .16
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Section 4.7 No Undisclosed Liabilities . . . . . . . . . . . . . . . . . .18
Section 4.8 Information in Disclosure Documents. . . . . . . . . . . . . .19
Section 4.9 No Default . . . . . . . . . . . . . . . . . . . . . . . . . .19
Section 4.10 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . .19
Section 4.11 Compliance with Laws. . . . . . . . . . . . . . . . . . . . .20
Section 4.12 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Section 4.13 Employee Benefit Plans; ERISA . . . . . . . . . . . . . . . .23
Section 4.14 Intellectual Property . . . . . . . . . . . . . . . . . . . .27
Section 4.15 Contracts and Commitments . . . . . . . . . . . . . . . . . .32
Section 4.16 Labor Relations . . . . . . . . . . . . . . . . . . . . . . .33
Section 4.17 Personnel . . . . . . . . . . . . . . . . . . . . . . . . . .35
Section 4.18 Environmental Matters . . . . . . . . . . . . . . . . . . . .35
Section 4.19 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . .37
Section 4.20 Title to Properties; Encumbrances . . . . . . . . . . . . . .38
Section 4.21 Equipment . . . . . . . . . . . . . . . . . . . . . . . . . .38
Section 4.22 Leases. . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Section 4.23 Related Party Transactions. . . . . . . . . . . . . . . . . .39
Section 4.24 Absence of Certain Payments . . . . . . . . . . . . . . . . .39
Section 4.25 Brokers or Finders. . . . . . . . . . . . . . . . . . . . . .39
Section 4.26 Books and Records . . . . . . . . . . . . . . . . . . . . . .40
ARTICLE V
REPRESENTATIONS AND
WARRANTIES OF PARENT AND MERGER SUB. . . . . . . . . . . . . . . . . . . . .40
Section 5.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . .40
Section 5.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . .40
Section 5.3 Authority Relative to this Agreement . . . . . . . . . . . . .41
Section 5.4 Consents and Approvals; No Violations. . . . . . . . . . . . .41
Section 5.5 SEC Reports and Financial Statements . . . . . . . . . . . . .42
Section 5.6 Absence of Certain Changes . . . . . . . . . . . . . . . . . .42
Section 5.7 Information in Disclosure Documents. . . . . . . . . . . . . .43
Section 5.8 Activities of Merger Sub . . . . . . . . . . . . . . . . . . .43
Section 5.9 No Default . . . . . . . . . . . . . . . . . . . . . . . . . .43
Section 5.10 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . .44
Section 5.11 Brokers or Finders. . . . . . . . . . . . . . . . . . . . . .44
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ARTICLE VI
COVENANTS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . .44
Section 6.1 Conduct of Business Pending Merger . . . . . . . . . . . . . .44
Section 6.2 No Solicitation of Competing Transaction . . . . . . . . . . .47
Section 6.3 Shareholder Approval . . . . . . . . . . . . . . . . . . . . .48
Section 6.4 Further Information. . . . . . . . . . . . . . . . . . . . . .48
Section 6.5 Access; Confidentiality. . . . . . . . . . . . . . . . . . . .49
Section 6.6 280G Consent . . . . . . . . . . . . . . . . . . . . . . . . .49
Section 6.7 Company Warrants . . . . . . . . . . . . . . . . . . . . . . .49
ARTICLE VII
OTHER COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50
Section 7.1 Fairness Hearing . . . . . . . . . . . . . . . . . . . . . . .50
Section 7.2 Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . .51
Section 7.3 Directors' and Officers' Indemnification . . . . . . . . . . .52
Section 7.4 Notification of Certain Matters. . . . . . . . . . . . . . . .54
Section 7.5 Tax-Free Reorganization. . . . . . . . . . . . . . . . . . . .54
Section 7.6 Nasdaq Listing . . . . . . . . . . . . . . . . . . . . . . . .55
Section 7.7 Company 401(k) Plan . . . . . . . . . . . . . . . . . . .55
ARTICLE VIII
CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
Section 8.1 Conditions to Each Party's Obligation To Effect the Merger . .55
Section 8.2 Conditions of Obligations of the Company . . . . . . . . . . .56
Section 8.3 Conditions of Obligations of Parent. . . . . . . . . . . . . .57
ARTICLE IX
TERMINATION AND AMENDMENT. . . . . . . . . . . . . . . . . . . . . . . . . .59
Section 9.1 Termination. . . . . . . . . . . . . . . . . . . . . . . . . .59
Section 9.2 Effect of Termination. . . . . . . . . . . . . . . . . . . . .61
(iii)
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ARTICLE X
INDEMNIFICATION AND ESCROW . . . . . . . . . . . . . . . . . . . . . . . . .62
Section 10.1 Survival of Representations and Warranties. . . . . . . . . .62
Section 10.2 Indemnification by the Shareholders Indemnitors . . . . . . .62
Section 10.3 Procedure for Third Party Claims. . . . . . . . . . . . . . .62
Section 10.4 Indemnity Period. . . . . . . . . . . . . . . . . . . . . . .64
Section 10.5 Satisfaction of Indemnification Claim . . . . . . . . . . . .64
Section 10.6 Indemnification Basket. . . . . . . . . . . . . . . . . . . .64
Section 10.7 FIRPTA Affidavit. . . . . . . . . . . . . . . . . . . . . . .65
ARTICLE XI
DEFINITIONS AND INTERPRETATION . . . . . . . . . . . . . . . . . . . . . . .65
Section 11.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . .65
Section 11.2 Interpretation. . . . . . . . . . . . . . . . . . . . . . . .73
ARTICLE XII
MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74
Section 12.1 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . .74
Section 12.2 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . .74
Section 12.3 Extension; Waiver . . . . . . . . . . . . . . . . . . . . . .75
Section 12.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . .75
Section 12.5 Descriptive Headings. . . . . . . . . . . . . . . . . . . . .76
Section 12.6 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . .76
Section 12.7 Entire Agreement; Assignment. . . . . . . . . . . . . . . . .76
Section 12.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . .77
Section 12.9 Specific Performance. . . . . . . . . . . . . . . . . . . . .77
Section 12.10 Parties in Interest. . . . . . . . . . . . . . . . . . . . .77
EXHIBITS
A Shareholders to Execute Voting Agreements. . . . . . . . . . . A-1
B Form of Voting and Warrant Exercise Agreement. . . . . . . . . B-1
C Indemnification Escrow Agreement . . . . . . . . . . . . . . . C-1
D Supplemental Indemnification Agreement . . . . . . . . . . . . D-1
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(iv)
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AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
This AGREEMENT AND PLAN OF REORGANIZATION AND MERGER (this
"AGREEMENT"), dated as of February 16, 2000, by and among National
Information Consortium, Inc., a Colorado corporation ("PARENT"), SDR
Acquisition Corp., a California corporation and a wholly owned subsidiary of
Parent ("MERGER SUB"), and SDR Technologies, Inc., a California corporation
(the "COMPANY"). CERTAIN CAPITALIZED TERMS USED IN THIS AGREEMENT HAVE THE
MEANINGS ASCRIBED TO THEM IN SECTION 11.1 HEREOF.
W I T N E S S E T H:
WHEREAS, the Board of Directors of Parent has approved, and deems
it advisable and in the best interests of its stockholders to consummate, the
merger (the "MERGER") of Merger Sub with and into the Company, upon the terms
and subject to the conditions set forth herein;
WHEREAS, the Company Board, having carefully considered the
long-term prospects and interests of the Company and the Shareholders, has
approved the transactions contemplated hereby and has resolved to recommend
to the Shareholders the approval and adoption of this Agreement and the
consummation of the transactions contemplated hereby upon the terms and
subject to the conditions set forth herein;
WHEREAS, as a condition and inducement to Parent to enter into
this Agreement and incur the obligations set forth herein, concurrently with
the execution and delivery of this Agreement, the Shareholders set forth in
Exhibit A hereto, who include at least a majority of the voting power with
respect to each separate class vote of the Company Required Vote on a Fully
Diluted Basis, shall enter into Voting Agreement substantially in the form of
Exhibit B attached hereto (the "VOTING AND WARRANT EXERCISE AGREEMENT"),
pursuant to which, among other things, (a) each such holder has agreed to
vote shares of Company Common Stock and/or Company Preferred Stock
(collectively, the "COMPANY CAPITAL STOCK") held by such holder in favor of
approval and adoption of this Agreement and (b) each holder of a Company
Warrant has agreed to exercise such Company Warrant prior to the Effective
Time;
WHEREAS, as Parent's condition to the consummation of the
transactions contemplated by this Agreement and to incur the obligations set
forth
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herein, Parent and the Shareholders shall enter into an indemnification
escrow agreement in the form of Exhibit C attached hereto (the
"INDEMNIFICATION ESCROW AGREEMENT"), pursuant to which a portion of the
Merger Consideration is to be placed in an escrow account to secure certain
indemnification obligations of the Company to Parent;
WHEREAS, each Shareholder shall, prior to the Closing, enter into
a supplemental escrow agreement in the form of Exhibit D attached hereto (the
"SUPPLEMENTAL INDEMNIFICATION AGREEMENT");
WHEREAS, in order to receive the Merger Consideration described
herein, each Shareholder shall execute the Indemnification Escrow Agreement
provided in the Letter of Transmittal;
WHEREAS, the Boards of Directors of each of Parent and Merger
Sub, and the sole stockholder of Merger Sub have approved this Agreement and
the transactions contemplated hereby in accordance with the provisions of the
California General Corporation Law ("CGCL"), and the Company Board has
approved this Agreement and the transactions contemplated hereby in
accordance with the provisions of the CGCL; and
WHEREAS, for United States federal income tax purposes, it is
intended that the Merger qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended, and the
rules and regulations promulgated thereunder (the "CODE").
NOW, THEREFORE, in consideration of the foregoing and the
respective representations, warranties, covenants and agreements set forth
herein, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.1 THE MERGER. Upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with section 1110
et seq. of the CGCL, Merger Sub shall be merged with and into the Company at
the Effective Time. Following the Merger, the separate corporate existence
of Merger Sub shall cease and the Company shall continue as the surviving
corporation (the "SURVIVING
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CORPORATION") and shall succeed to and assume all the rights, properties,
liabilities and obligations of Merger Sub in accordance with the CGCL.
Section 1.2 CLOSING. The closing of the Merger (the "CLOSING")
shall take place at 10:00 a.m., Los Angeles time, on a date to be specified
by the parties, which shall be no later than the third business day after
satisfaction or waiver of all of the conditions set forth in Article VIII of
this Agreement (the "CLOSING DATE"), at the offices of Skadden, Arps, Slate,
Meagher & Flom LLP, 300 South Grand Avenue, Suite 3400, California 90071,
unless another time, date or place is agreed to in writing by the parties
hereto.
Section 1.3 EFFECTIVE TIME. Concurrently with the Closing, the
parties hereto shall execute and file an agreement of merger between Merger
Sub and the Company together with the related officers' certificates required
by section 1103 of the CGCL, in the form attached to this agreement as
Exhibit D (the "CERTIFICATE OF MERGER"), with the Secretary of State of the
State of California (the "SECRETARY OF STATE"). The parties hereto shall
make all other filings, recordings or publications required by the CGCL in
connection with the Merger. The Merger shall become effective upon the
filing of the Certificate of Merger with the Secretary of State (the time at
which the Merger becomes effective being the "EFFECTIVE TIME").
Section 1.4 EFFECTS OF THE MERGER. The Merger shall have the
effects set forth in section 1107 of the CGCL. From and after the Effective
Time, the Surviving Corporation shall possess all rights, privileges,
immunities, powers and franchises and be subject to all of the obligations,
restrictions, disabilities, liabilities, debts and duties of the Company and
Merger Sub.
Section 1.5 CHARTER AND BY-LAWS. The articles of
incorporation of Merger Sub shall be the articles of incorporation of the
Surviving Corporation until thereafter amended as provided by law and such
articles of incorporation of the Surviving Corporation.
(b) The by-laws of Merger Sub shall be the by-laws of the
Surviving Corporation thereafter amended as provided by law and such by-laws
of the Surviving Corporation.
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Section 1.6 DIRECTORS. The directors of Merger Sub at the
Effective Time of the Merger shall be the directors of the Surviving
Corporation until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified, as the case may be.
Section 1.7 OFFICERS. The officers of the Company at the
Effective Time of the Merger shall be the officers of the Surviving
Corporation until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified, as the case may be.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS
Section 2.1 CANCELLATION OF SHARES OF COMPANY CAPITAL STOCK. As
of the Effective Time, by virtue of the Merger and without any action on the
part of the holder of any shares of Company Common Stock or any shares of
capital stock of Merger Sub, each share of Common Stock, no par value of the
Company (the "COMPANY COMMON STOCK") and Company Preferred Stock held by the
Company as treasury stock immediately prior to the Effective Time (the
"CANCELLED SHARES") shall automatically be cancelled and retired and cease to
exist, and no consideration or payment shall be delivered therefor or in
respect thereto.
Section 2.2 CONVERSION OF SHARES OF COMPANY COMMON STOCK.
(a) As of the Effective Time, by virtue of the Merger and
without any action on the part of the holder of any shares of Company Common
Stock or any shares of capital stock of Merger Sub, each share of Company
Common Stock issued and outstanding immediately prior to the Effective Time
(other than Dissenting Shares and Cancelled Shares) shall be converted,
subject to subsection (b) of this Section 2.2, into a fraction of a fully
paid and nonassessable share ("PARENT SHARES") of Common Stock, no par value
per share, of Parent ("PARENT COMMON STOCK") equal to the Exchange Ratio (the
"MERGER CONSIDERATION"). The "EXCHANGE RATIO" shall be .5857.
All shares of Company Common Stock to be converted into the
Merger Consideration pursuant to this Section 2.2 shall, by virtue of the
Merger and without any action on the part of the holders thereof, cease to be
outstanding, be
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cancelled and retired and cease to exist; and each holder of a certificate
representing, prior to the Effective Time any shares of Company Capital Stock
or Company Warrants, shall thereafter cease to have any rights with respect
to such shares of Company Capital Stock or Company Warrants, except the right
to receive (i) the Merger Consideration, (ii) any dividends and other
distributions in accordance with Section 3.1(c) hereof and (iii) any cash to
be paid in lieu of any fractional Parent Share in accordance with Section
3.1(d) hereof.
(b) INDEMNIFICATION ESCROW AGREEMENT. Notwithstanding
subsection (a) of this Section 2.2, (i) each Shareholder must execute the
Indemnification Escrow Agreement in order to be entitled to receive the
Merger Consideration and (ii) the Merger Consideration shall be reduced pro
rata by any amounts paid to Parent pursuant to the Indemnification Escrow
Agreement.
(c) TREATMENT OF COMPANY PREFERRED STOCK. (i) Subject to
subsection (b) of this Section 2.2, at the Effective Time each issued and
outstanding share of Company Preferred Stock, other than any shares of
Company Preferred Stock to be cancelled in accordance with Section 2.1 hereof
and other than Dissenting Shares, if any, shall be converted into the right
to receive the Merger Consideration that the holder of such Company Preferred
Stock would have received pursuant to Section 2.2(a) hereof (subject to the
proviso therein) had such holder converted such shares of Company Preferred
Stock into shares of Company Common Stock immediately prior to the Effective
Time.
(d) CAPITAL STOCK OF MERGER SUB. No shares of Merger
Sub stock will be issued directly or indirectly in the Merger. Each share of
Merger Sub issued and outstanding immediately prior to the Effective Time
shall be converted into and become one fully paid and nonassessable share of
common stock, no par value per share of the Surviving Corporation.
(e) TAKING OF NECESSARY ACTION; FURTHER ACTION. If, at
any time after the Effective Time, any further action is necessary or
desirable to carry out the purposes of this Agreement and to vest the
Surviving Corporation with full right, title and possession to all assets,
property, rights, privileges, powers and franchises of the Company and Merger
Sub, the officers and directors of the Surviving Corporation shall be fully
authorized in the name of either or both of the Company or Merger Sub or
otherwise to take, and Parent and the Company shall cause such officers and
directors to take, all such lawful and necessary action, so long as such
action is not inconsistent with the Agreement.
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Section 2.3 COMPANY OPTIONS.
(a) At the Effective Time, each outstanding option to
purchase shares of Company Common Stock (each a "COMPANY OPTION") issued
under the Company Benefit Plan (each, a "COMPANY STOCK PLAN") or otherwise,
whether vested or unvested, shall be assumed by Parent and shall thereupon
constitute an option to acquire that number of shares of Parent Common Stock
equal to (i) the number of shares of Company Common Stock subject to the
Company Option immediately prior to the Effective Time, multiplied by (ii)
the Exchange Ratio, rounded to the nearest whole share, at a price per share
of Parent Common Stock equal to (x) the per share exercise price of the
Company Option immediately prior to the Effective Time, divided by (y) the
Exchange Ratio, rounded to the nearest whole cent. As soon as reasonably
practicable following the Effective Time, Parent shall deliver to each holder
of a Company Option an appropriate notice setting forth the terms of such
assumption.
(b) Except as may be otherwise agreed to by Parent
and the Company or as otherwise contemplated or required to effectuate this
Section 2.5, the Company Benefit Plans shall terminate as of the Effective
Time and the provisions in any other plan, program or arrangement providing
for the issuance or grant of any other interest in respect of the capital
stock of the Company shall be deleted as of the Effective Time.
(c) The Company shall take all necessary actions to
provide that as of the Effective Time no holder of Company Options will have
any right to receive shares of common stock of the Surviving Corporation upon
exercise of any such Company Option.
ARTICLE III
EXCHANGE OF SHARES/ESCROW
Section 3.1 EXCHANGE OF COMPANY CERTIFICATES/ESCROW DEPOSIT.
(a) At or within two business days of the Effective Time,
Parent shall deposit, or cause to be deposited (i) with the Exchange Agent
for the benefit of holders of shares of Company Common Stock, certificates
representing
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Parent Shares constituting 90% of the Merger Consideration (the "CURRENT
CONSIDERATION") and (ii) with the Escrow Agent (as defined in the
Indemnification Escrow Agreement) certificates representing Parent Shares
constituting 10% of the Merger Consideration. Such Merger Consideration
deposited with the Escrow Agent, together with any other securities of Parent
issued by means of dividend, distribution, split-up, recapitalization,
combination, exchange of shares or the like upon or with respect to the
Parent Shares (collectively, the "ESCROW SHARES") shall be held as collateral
for the indemnification obligations under Article X hereof and pursuant to
the Indemnification Escrow Agreement. The disposition of the Escrow Shares
by the Escrow Agent shall be governed by the terms of this Agreement and the
Indemnification Escrow Agreement.
(b) As of or promptly following the Effective Time, the
Surviving Corporation shall cause the Exchange Agent to send by courier or
overnight delivery (and to make available for collection by hand) to each
holder of record of a certificate or certificates, which immediately prior to
the Effective Time represented outstanding shares of Company Capital Stock
(the "COMPANY CERTIFICATES"), (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Company Certificates shall pass, only upon proper delivery of the Company
Certificates to the Exchange Agent and that shall be in the form and have
such other provisions as Parent and the Company may reasonably specify) (the
"LETTER OF TRANSMITTAL") which shall, among other things, provide that each
Shareholder who executes such Letter of Transmittal shall become a party to
and be bound by the Indemnification Escrow Agreement which shall be attached
as an exhibit to the Letter of Transmittal; and (ii) instructions for use in
effecting the surrender of the Company Certificates in exchange for (A) a
certificate or certificates representing that number of whole Parent Shares,
if any, into which the number of shares of Company Capital Stock previously
represented by such Company Certificate shall have been converted pursuant to
this Agreement and (B) the amount of cash, if any, into which all or a
portion of the number of shares of Company Capital Stock previously
represented by such Company Certificate shall have been converted pursuant to
this Agreement in lieu of fractional Parent Shares (which instructions shall
provide that at the election of the surrendering holder, Company Certificates
may be surrendered, and the Merger Consideration in exchange therefor
collected by hand delivery). Upon surrender of a Company Certificate for
cancellation to the Exchange Agent, together with a Letter of Transmittal,
duly completed and validly executed in accordance with the instructions
thereto, and such other documents as may be required pursuant to such
instructions, the holder of such Company Certificate shall be entitled to
receive in exchange
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therefor the Current Consideration for each share of Company Capital Stock
formerly represented by such Company Certificate, to be sent by courier or
overnight delivery (or made available for collection by hand if so elected by
the surrendering holder) within three business days of receipt thereof (but
in no case prior to the Effective Time), and the Company Certificate so
surrendered shall be forthwith cancelled. The Exchange Agent shall accept
such Company Certificates upon compliance with such reasonable terms and
conditions as the Exchange Agent may impose to effect an orderly exchange
thereof in accordance with normal exchange practices. No interest shall be
paid or accrued for the benefit of holders of the Company Certificates on the
Merger Consideration (or the cash pursuant to subsections (c) and (d) below)
payable upon the surrender of the Company Certificates.
(c) No dividends or other distributions with respect to
Parent Shares with a record date on or after the Effective Time shall be paid
to the holder of any unsurrendered Company Certificate with respect to the
Parent Shares represented thereby by reason of the conversion of shares of
Company Capital Stock pursuant to Section 2.2(a) hereof and no cash payment
in lieu of fractional Parent Shares shall be paid to any such holder pursuant
to Section 3.1(d) hereof until such Company Certificate is surrendered in
accordance with this Article III. Subject to the effect of applicable laws,
following surrender of any such Company Certificate, there shall be paid,
without interest, to the Person in whose name the Parent Shares representing
such securities are registered (i) at the time of such surrender, the amount
of any cash payable in lieu of fractional Parent Shares to which such holder
is entitled pursuant to Section 3.1(d) hereof and the proportionate amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to Parent Shares issued upon conversion of
Company Capital Stock, and (ii) at the appropriate payment date or as
promptly as practicable thereafter, the proportionate amount of dividends or
other distributions with a record date after the Effective Time but prior to
such surrender and a payment date subsequent to such surrender payable with
respect to such Parent Shares.
(d) Notwithstanding any other provision of this
Agreement, no fraction of a Parent Share will be issued and no dividend or
other distribution, stock split or interest with respect to Parent Shares
shall relate to any fractional Parent Share, and such fractional interest
shall not entitle the owner thereof to vote or to any rights as a security
holder of Parent. In lieu of any such fractional security, each holder of
shares of Company Common Stock otherwise entitled to a fraction of a Parent
Share (after aggregating all fractional shares of Parent Common
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Stock to be received by such holder) shall receive from Parent an amount of
cash (rounded to the nearest whole cent) equal to the product of (i) such
fraction, multiplied by (ii) the Exchange Ratio.
(e) Any portion of the Merger Consideration deposited
with the Exchange Agent pursuant to this Section 3.1 (the "EXCHANGE FUND")
that remains undistributed to the holders of the Company Certificates for
three months after the Effective Time shall be delivered to Parent, upon
demand, and any holders of shares of Company Capital Stock prior to the
Merger who have not theretofore complied with this Article III shall
thereafter look for payment of their claim, as general creditors thereof,
only to Parent for their claim for (1) Parent Shares, if any, (2) any cash
without interest, to be paid, in lieu of any fractional Parent Shares and (3)
any dividends or other distributions with respect to Parent Shares to which
such holders may be entitled.
(f) None of Parent, Merger Sub or the Company or the
Exchange Agent shall be liable to any Person in respect of any Parent Shares
held in the Exchange Fund (and any cash, dividends and other distributions
payable in respect thereof) delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. If any Company
Certificates shall not have been surrendered prior to one year after the
Effective Time (or immediately prior to such earlier date on which (i) any
Parent Shares, (ii) any cash in lieu of fractional Parent Shares or (iii) any
dividends or distributions with respect to Parent Shares in respect of such
Company Certificate would otherwise escheat to or become the property of any
Governmental Entity), any such Parent Shares, cash, dividends or
distributions in respect of such Company Certificate shall, to the extent
permitted by applicable law, become the property of Parent, free and clear of
all claims or interest of any Person previously entitled thereto.
(g) The Exchange Agent shall invest any cash, if any,
included in the Exchange Fund, as directed by Parent on a daily basis. Any
interest and other income resulting from such investments shall be paid to
Parent. Nothing contained in this Section 3.1(g) shall relieve Parent or the
Exchange Agent from making the payments required by this Article III to be
made to the holders of shares of Company Capital Stock.
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Section 3.2 TRANSFER TAXES; WITHHOLDING. If any certificate for
a Parent Share is to be issued to, or cash is to be remitted to, a Person
(other than the Person in whose name the Company Certificate surrendered in
exchange therefor is registered), it shall be a condition of such exchange
that the Company Certificate so surrendered shall be properly endorsed and
otherwise in proper form for transfer and that the Person requesting such
exchange shall pay to the Exchange Agent any transfer or other Taxes required
by reason of the payment of the Merger Consideration to a Person other than
the registered holder of the Certificate so surrendered, or shall establish
to the satisfaction of the Exchange Agent that such Tax either has been paid
or is not applicable. Parent or the Exchange Agent shall be entitled to
deduct and withhold from the Parent Shares (or cash in lieu of fractional
Parent Shares) otherwise payable pursuant to this Agreement to any holder of
shares of Company Capital Stock such amounts as Parent or the Exchange Agent
are required to deduct and withhold under the Code, or any provision of
state, local or foreign Tax law, with respect to the making of such payment.
To the extent that amounts are so withheld by Parent or the Exchange Agent,
such withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of shares of Company Capital Stock in respect
of whom such deduction and withholding was made by Parent or the Exchange
Agent. Parent shall remit such withheld amounts to the appropriate
Governmental Entity.
Section 3.3 DISSENTING SHARES.
(a) "DISSENTING SHARES"shall have the meaning set forth
in section 1300 of the CGCL.
(b) Notwithstanding any provision of this Agreement to
the contrary, Dissenting Shares shall not be converted into or represent a
right to receive Parent Common Stock pursuant to Section 2.2 hereof, but the
holder thereof shall be entitled to only such rights as are granted by the
CGCL.
(c) If any holder of shares of Company Capital Stock who
demands appraisal of such holder's shares of Company Capital Stock under the
CGCL effectively withdraws or loses (through failure to perfect or otherwise)
such holder's right to appraisal, then as of the Effective Time or the
occurrence of such event, whichever later occurs, such holder's shares of
Company Capital Stock shall automatically be converted into and represent
only the right to receive Parent Common Stock as provided in Section 2.2(a)
hereof, without interest, upon surrender
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of the Company Certificate or Company Certificates representing such shares
of Company Capital Stock pursuant to Section 3.1 hereof.
(d) The Company shall give Parent (i) prompt notice of
any written demands for appraisal or payment of the fair value of any shares
of Company Capital Stock, withdrawals of such demands, and any other
instruments served on the Company pursuant to the CGCL received by the
Company, and (ii) the opportunity to direct all negotiations and proceedings
with respect to demands for appraisal under the CGCL. Except with the prior
written consent of Parent, the Company shall not voluntarily make any payment
with respect to any demands for appraisal, settle or offer to settle any such
demands.
Section 3.4 NO FURTHER OWNERSHIP RIGHTS IN COMPANY CAPITAL
STOCK. The Merger Consideration (including Merger Consideration deposited
into the Escrow Fund) shall be deemed to have been issued (and paid) in full
satisfaction of all rights pertaining to the shares of Company Capital Stock
theretofore represented by Company Certificates surrendered for exchange, and
there shall be no further registration of transfers on the records of the
Surviving Corporation of shares of Company Capital Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Company Certificates are presented to the Surviving Corporation or the
Exchange Agent for any reason, they shall be canceled and exchanged as
provided in this Article III.
Section 3.5 LOST, STOLEN OR DESTROYED COMPANY CERTIFICATES. In
the event any Company Certificates shall have been lost, stolen or destroyed,
the Exchange Agent shall issue in exchange for such lost, stolen or destroyed
Company Certificates, upon the making of an affidavit of that fact by the
holder thereof, such shares of Parent Common Stock (and cash in lieu of
fractional shares) as may be required pursuant to Section 3.1 hereof;
PROVIDED, HOWEVER, that Parent or the Surviving Corporation may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed Company Certificates to deliver a
bond in such sum as it may reasonably direct as indemnity against any claim
that may be made against Parent, the Surviving Corporation or the Exchange
Agent with respect to the Company Certificates alleged to have been lost,
stolen or destroyed.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF COMPANY
Except as set forth in Schedule A prepared and signed by an
appropriate officer of the Company delivered to Parent at the execution of
this Agreement setting forth specific exceptions to the Company's
representations and warranties set forth herein, including reference to the
applicable representation (the "COMPANY DISCLOSURE SCHEDULE"), the Company
represents and warrants to Parent as set forth below.
Section 4.1 ORGANIZATION. (a) The Company and each of its
Subsidiaries is a corporation duly incorporated, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted. The Company
and each of its Subsidiaries is duly qualified or licensed and in good
standing to do business in each jurisdiction in which the property owned,
leased or operated by it or the nature of the business conducted by it makes
such qualification or licensing necessary, except in such other jurisdictions
where the failure to be so duly qualified or licensed and in good standing
could not reasonably be expected to have a Company Material Adverse Effect.
For purposes of this Agreement, "COMPANY MATERIAL ADVERSE EFFECT" means,
individually or in the aggregate, a material adverse effect on the business,
financial condition, results of operations of the Company and its
Subsidiaries, taken as a whole but shall not include (i) any effect or change
that results from the announcement or pendency of the Merger or any of the
other transactions contemplated by this Agreement (except with respect to
effects or changes related to employees of the Company), (ii) any effect or
change that results from the taking of any action contemplated by this
Agreement or expressly permitted by the consent of Parent pursuant to this
Agreement and (iii) any effect or change that results from continued
financial losses of the Company as a result of the operations of the Company
in the ordinary course of business consistent with past practice. The
Company has heretofore delivered to Parent accurate and complete copies of
its Articles of Incorporation (the "COMPANY ARTICLES") and Bylaws and the
organizational documents of each of its Subsidiaries, in each case, as
currently in effect.
(b) Section 4.1(a) of the Company Disclosure Schedule
sets forth a complete and accurate list of each Subsidiary of the Company.
Other
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than as set forth in such list, the Company does not own directly or
indirectly, any capital stock or other equity securities of any corporation
or have any direct or indirect equity or ownership in trust in any business
other than publicly traded securities constituting less than five percent of
the outstanding equity of the issuing entity.
(c) The Company owns all of the outstanding shares of
capital stock of each of its Subsidiaries. There are no outstanding offers,
subscriptions, options, conversion rights, warrants or other agreements or
commitments (either firm or conditional) obligating the Company or any
Subsidiary to issue, sell, grant or otherwise dispose of (or cause to be
issued, sold, granted or otherwise disposed of) any capital stock of a
Subsidiary. Section 4.1(c) of the Company Disclosure Schedule lists, for
each Subsidiary, its authorized capital stock, the number of its shares
issued and outstanding and its jurisdiction of incorporation or organization.
Section 4.2 CAPITALIZATION.
(a) The authorized capital stock of the Company consists
of (i) 20,000,000 shares of Company Common Stock, of which 2,758,104 shares
were issued and outstanding as of January 25, 2000, (ii) 10,000,000 shares
of Company Preferred Stock, of which 1,000,000 have been designated Series A
Preferred Stock, 205,907 shares of which are issued and outstanding as of
January 25, 2000. As of January 25, 2000 (i) 150,000 shares of Company
Capital Stock were issued and held in the treasury of the Company, (ii)
1,000,000 shares of Company Common Stock are reserved for issuance pursuant
to outstanding Company Warrants, and (iii) 383,418 shares of Company Common
Stock are reserved for issuance pursuant to outstanding Company Options. All
of the outstanding shares of Company Capital Stock are, and all shares of
Company Capital Stock which may be issued pursuant to the exercise of
outstanding Company Options and Company Warrants will be, when issued in
accordance with the respective terms thereof, duly authorized, validly
issued, fully paid and non-assessable. The rights, preferences and
privileges of the Company Preferred Stock are as set forth in the Company
Articles. Since the date of the filing of the Company Articles or the
Certificate of Amendment thereto, there have not occurred any events that
would cause any adjustment or readjustment in the applicable conversion
prices of such Company Preferred Stock. Each share of Company Preferred
Stock is convertible into one share of Company Common Stock.
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(b) As of the date hereof, (i) there are no shares of
capital stock of the Company authorized, issued or outstanding; (ii) there
are no existing options, warrants, calls, preemptive rights, indebtedness
having general voting rights or debt convertible into securities having such
rights ("VOTING DEBT") or subscriptions or other rights, agreements,
arrangements or commitments of any character, relating to the issued or
unissued capital stock of the Company obligating the Company to issue,
transfer or sell or cause to be issued, transferred or sold any shares of
capital stock or Voting Debt of, or other equity interest in, the Company or
securities convertible into or exchangeable for such shares or equity
interests, or obligating the Company to grant, extend or enter into any such
option, warrant, call, subscription or other right, agreement, arrangement or
commitment and (iii) there are no outstanding contractual obligations of the
Company to repurchase, redeem or otherwise acquire any shares of capital
stock of the Company, or to provide funds to make any investment (in the form
of a loan, capital contribution or otherwise) in any other entity.
(c) There are no voting trusts or other agreements or
understandings to which the Company is a party or of which the Company has
knowledge with respect to the voting of the capital stock of the Company.
(d) Following the Effective Time, no holder of Company
Options will have any right to receive shares of common stock of the
Surviving Corporation upon exercise of Company Options.
(e) No Indebtedness of the Company contains any
restriction upon (i) the prepayment of any of such Indebtedness, (ii) the
incurrence of Indebtedness by the Company, or (iii) the ability of the
Company to grant any lien on its properties or assets. For purposes of this
Agreement, "INDEBTEDNESS" shall mean (i) all indebtedness for borrowed money
or for the deferred purchase price of property or services (other than
current trade liabilities incurred in the ordinary course of business and
payable in accordance with customary practices), (ii) any other indebtedness
that is evidenced by a note, bond, debenture or similar instrument, (iii) all
obligations under financing leases, (iv) all obligations in respect of
acceptances issued or created, (v) all liabilities secured by any lien on any
property and (vi) all guarantee obligations.
(f) Section 4.2 of the Company Disclosure Schedule sets
forth each outstanding Company Option and identifies the holder thereof.
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Section 4.3 AUTHORITY RELATIVE TO THIS AGREEMENT. The Company
has all requisite corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized and
approved by the Company Board and no other corporate proceedings on the part
of the Company are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby, other than, with respect to the Merger, the
approval and adoption of this Agreement by the Company Required Vote.
Shareholders sufficient to assure the receipt by the Company Required Vote to
approve the Merger have duly executed and delivered the Voting and Warrant
Exercise Agreement.
Section 4.4 CONSENTS AND APPROVALS; NO VIOLATIONS. Except for
the hearing (the "FAIRNESS HEARING") to be held pursuant to section 25142 of
the California Corporate Securities Law of 1968, as amended (the "CSL") and
the filing and recordation of the Certificate of Merger and in accordance
with the requirements of the CGCL, no notice to, filing with, and no permit,
authorization, consent or approval of, any arbitrator, court, nation,
government, any state or other political subdivision thereof and any entity
exercising executive, legislative, judicial regulatory or administrative
functions of, or pertaining to, government (a "GOVERNMENTAL ENTITY"), or any
private third party is necessary for the consummation by the Company of the
transactions contemplated by this Agreement. Neither the execution and
delivery of this Agreement by the Company, the consummation by the Company of
the transactions contemplated hereby nor compliance by the Company with any
of the provisions hereof will (i) conflict with or result in any material
breach of any provision of the Company Articles or Bylaws or the
organizational documents of any Subsidiary of the Company, (ii) result in a
violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination,
cancellation or acceleration or result in the creation of any mortgage,
pledge, charge, security interest, claim or encumbrance of any kind
(collectively, a "LIEN")) under, any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, license, contract, agreement or other
instrument or obligation to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries or any of their
respective properties or assets may be bound or (iii) violate any order,
writ, injunction, decree, statute, rule or regulation applicable to the
Company or any of its Subsidiaries, or its properties or assets, except with
respect to clauses (ii) and (iii), where such violation, breach, default,
termination, acceleration, cancellation or creation of a Lien could not
reasonably be expected to result in a Company Material Adverse Effect.
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Section 4.5 FINANCIAL STATEMENTS. The Company has previously
provided Parent with its audited balance sheet as of December 31, 1999 (the
"DECEMBER BALANCE SHEET") and the related statements of results of operations
and statements of cash flows for the fiscal year and the period then ended,
including, with respect to the audited financial statements, the notes
thereto (the "COMPANY FINANCIAL STATEMENTS"). The Company Financial
Statements for the year ended December 31, 1999 have been audited by London &
Co., the Company's independent accountants. The Company Financial Statements
fairly present, in all material respects, in accordance with United States
generally accepted accounting principles ("US GAAP") consistently applied,
the financial position of the Company as of such dates and its results of
operations and cash flows for such fiscal periods except, in the case of such
unaudited statements, for normal recurring year end adjustments which
adjustments will not be material, either individually, or in the aggregate.
Section 4.6 ABSENCE OF CERTAIN CHANGES.
Except as and to the extent set forth in the Company Financial
Statements, from December 31, 1999 to the date of this Agreement, the Company
did not:
(a) suffer any Company Material Adverse Effect;
(b) incur any liabilities or obligations (absolute,
accrued, contingent or otherwise) except non-material items incurred in the
ordinary course of business and consistent with past practice, which neither
singly or in the aggregate exceed $25,000 except under any line of credit
existing on the December Balance Sheet (counting obligations or liabilities
arising from one transaction or a series of similar transactions, and all
periodic installments or payments under any lease or other agreement
providing for periodic installments or payments, as a single obligation or
liability), or increased, or experienced any change in any assumptions
underlying or methods of calculating, any bad debt, contingency or other
reserves other than trade payables incurred in the ordinary course of
business and consistent with past practice;
(c) pay, discharge or satisfy any claim, liabilities or
obligations (absolute, accrued, contingent or otherwise) other than the
payment, discharge or satisfaction in the ordinary course of business and
consistent with past practice of liabilities and obligations reflected or
reserved against in the December
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Balance Sheet or incurred in the ordinary course of business and consistent
with past practice since December 31, 1999;
(d) permit or allow any of its property or assets (real,
personal or mixed, tangible or intangible) to be subjected to any Liens,
except for Liens for current taxes not yet due or Liens the incurrence of
which could not reasonably be expected to have a Company Material Adverse
Effect;
(e) write-down the value of any of its material inventory
(including write-downs by reason of shrinkage or mark-down) or write-off as
uncollectible any notes or accounts receivable, except for immaterial
write-downs or write-offs in the ordinary course of business and consistent
with past practice and except for write-downs or write-offs for which
reserves have been established on the December Balance Sheet;
(f) cancel any debts or waived any claims or rights of
substantial value;
(g) sell, transfer, or otherwise dispose of any of its
material properties or assets (real, personal or mixed, tangible or
intangible), except in the ordinary course of business and consistent with
past practice;
(h) grant any increase in the compensation or benefits of
any director, officer, employee or consultant of the Company (including any
such increase pursuant to any bonus, pension, profit sharing or other plan or
commitment) or any increase in the compensation or benefits payable or to
become payable to any director, officer, employee or consultant of the
Company, except in the case of employees other than officers of the Company
for such increases in compensation or benefits made in the ordinary course of
business and consistent with past practice;
(i) make any change in severance policy or practices;
(j) make any capital expenditure or acquire any property,
plant and equipment for a cost in excess of $50,000 per fiscal quarter in the
aggregate;
(k) declare, pay or set aside for payment any dividend or
other distribution in respect of its capital stock or redeemed, purchased or
otherwise
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acquired, directly or indirectly, any shares of capital stock or other
securities of the Company;
(l) make any change in any method of tax or financial
accounting or accounting practice or make or change any election for federal,
state, local or foreign tax purposes;
(m) make any tax election, settle or compromise any
federal, state, local or foreign income tax liability, or waive or extend the
statute of limitations in respect of any such taxes;
(n) pay, loan or advance (other than reasonable travel
advances) any amount to, or sold, transferred or leased any material
properties or assets (real, personal or mixed, tangible or intangible) to, or
enter into any agreement or arrangement with, any of its officers, directors
or shareholders or any affiliate or associate of any of its officers,
directors or shareholders except for directors' fees, and compensation to
employees at rates not inconsistent with the Company's past practice or make
any changes in its existing borrowing or lending arrangements for or on
behalf of any such person; or
(o) agree, whether in writing or otherwise, to take any
action described in this Section.
Section 4.7 NO UNDISCLOSED LIABILITIES. Except as and to the
extent provided in the December Balance Sheet, except for liabilities for
future performance under contracts scheduled in Section 4.15 of the Company
Disclosure Schedule, neither the Company nor any of its Subsidiaries at
December 31, 1999 had any material liabilities (whether contingent or
absolute, direct or indirect, known or unknown to the Company or matured or
unmatured) that were not fully reflected or fully reserved against in the
December Balance Sheet, respectively, or incurred other than in the ordinary
course.
Section 4.8 INFORMATION IN DISCLOSURE DOCUMENTS. None of the
information supplied in writing by the Company for inclusion or incorporation
by reference in (i) the Application will, at the time the Application is
filed with the Commissioner and at the time the Fairness Hearing is held,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading and (ii) the information provided to Shareholders
relating to the Special Meeting to be held in
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connection with the Merger (the "INFORMATION STATEMENT") at the time it is
mailed to the Shareholders and at the time of the meeting of the Shareholders
to be held in connection with the Merger, will not contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading.
Section 4.9 NO DEFAULT. Neither the Company nor any of its
Subsidiaries is in default or violation (and no event has occurred which with
notice or the lapse of time or both would constitute a default or violation)
of any term, condition or provision of (i) the Company Articles or its Bylaws
or the organizational documents of the Company's Subsidiaries, respectively,
(ii) any note, bond, mortgage, indenture, license, contract, agreement or
other instrument or obligation to which the Company or any of its
Subsidiaries is a party or by which any of them or any of their respective
properties or assets may be bound, except as could not reasonably be expected
to have a Company Material Adverse Effect, (iii) any order, writ, injunction,
decree, or (iv) any statute, rule or regulation applicable to the Company or
any of its Subsidiaries, except as could not reasonably be expected to have a
Company Material Adverse Effect.
Section 4.10 LITIGATION. There is no action, suit, proceeding,
arbitration, investigation pending or, to the knowledge of the Company,
threatened by or before any Governmental Entity involving the Company or any
of its Subsidiaries except as could not reasonably be expected to have a
Company Material Adverse Effect. The foregoing includes, without limitation,
actions pending or threatened involving the prior employment of any employees
of the Company or any of its Subsidiaries or their obligations under any
agreements with prior employers. Neither the Company nor any of its
Subsidiaries is a party or subject to the provisions of any order or decree
of any Governmental Entity. There is no action, suit, proceeding,
arbitration or, to the knowledge of the Company, investigation involving the
Company or any of its Subsidiaries currently pending or which the Company or
any of its Subsidiaries presently intends to initiate.
Section 4.11 COMPLIANCE WITH LAWS. The Company and each of its
Subsidiaries is in compliance with, and has not violated any applicable law,
rule or regulation of any United States federal, state, local, or foreign
government or agency thereof, including 8 U.S.C. Section 1324a and all
related Immigration Reform and Control Act provisions which require the
hiring and employment of individuals authorized to work in the United States,
which materially affects the business, properties, assets or
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prospects of the Company and its Subsidiaries taken as a whole, and no
notice, charge, claim or action has been received by the Company or any of
its Subsidiaries or has been filed, commenced or, to the Company's knowledge,
threatened against the Company alleging any such violation, except for any
matter otherwise covered by this sentence which could not reasonably be
expected to have, individually or in the aggregate, a Company Material
Adverse Effect. All licenses, permits and approvals required under such
laws, rules and regulations are in full force and effect except where the
failure to be in full force and effect could not reasonably be expected to
have a Company Material Adverse Effect.
Section 4.12 TAXES.
(a) The Company duly elected to be treated as an S
corporation under the Code and all pertinent state tax laws for all tax years
from the date of its organization through the tax year ended December 31,
1997, and had been qualified and treated as an S corporation for federal and
state income tax purposes from the date of its organization through the tax
year ended December 31, 1997.
(b) The Company and its Subsidiaries: (i) have duly and
timely filed (or there has been filed on their behalf) with the appropriate
taxing authorities all Tax Returns required by applicable laws to be filed by
them, and all such Tax Returns are true, correct and complete and (ii) have
timely paid or there has been paid on their behalf all Taxes due or claimed
to be due from them by any taxing authority with respect to any period prior
to or ending as of the Effective Time, or, with respect to Current Taxes,
have established an adequate accrual for the payment of Current Taxes on the
balance sheet for such fiscal period. For purposes of this Agreement,
"Current Taxes" shall include only Taxes with respect to the Company's and
its Subsidiaries' Taxable year that includes the Effective Time to the extent
such Taxes are not yet due and payable on or prior to the Effective Time.
(c) The Company and its Subsidiaries have complied in all
respects with all applicable laws, rules and regulations relating to the
payment and withholding of Taxes (including, without limitation, withholding
of Taxes pursuant to Section 1441 and 1442 of the Code or similar provisions
under any state, local or foreign law) and have, within the time and manner
prescribed by law, withheld and paid over to the proper taxing authorities
all amounts required to be withheld and paid over under all applicable laws.
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(d) There are no Liens for Taxes upon the assets or
properties of the Company or any of its Subsidiaries except for statutory
Liens for current Taxes not yet due and for which adequate reserves have been
established.
(e) Neither the Company nor any of its Subsidiaries has
requested any extension of time within which to file any Tax Return in
respect of any taxable year which has not since been filed and no outstanding
waivers or comparable consents that are still in effect regarding the
application of the statute of limitations with respect to any Taxes or Tax
Returns has been given by or on behalf of the Company or any of its
Subsidiaries.
(f) No federal, state, local or foreign audits,
examinations or other administrative proceedings or court proceedings
("AUDITS") exist or have been initiated of which the Company has received
notice or completed with regard to any Taxes or Tax Returns of the Company or
any of its Subsidiaries, and neither the Company nor any of its Subsidiaries
has received any notice that such an Audit is pending or threatened with
respect to any Taxes due from or with respect to the Company or any of its
Subsidiaries or any Tax Return filed by or with respect to the Company or any
of its Subsidiaries, and no issue has been raised in writing by any tax
authority in any Audit of the Company or any of its Subsidiaries that, if
raised with respect to any other period not so audited, could be expected to
result in a proposed deficiency for any such period not so audited.
(g) Neither the Company nor any of its Subsidiaries has
requested or received an adverse ruling from any taxing authority or signed a
closing or other agreement with any taxing authority.
(h) The applicable statute of limitations for the
assessment of Taxes for taxable periods ending before December 31, 1995 has
expired for the Company and its Subsidiaries.
(i) Neither the Company nor any of its Subsidiaries is
required to include in income any adjustment pursuant to Section 481(a) of
the Code, by reason of any voluntary or involuntary change in accounting
method (nor has any taxing authority proposed any such adjustment or change
of accounting method).
(j) Neither the Company nor any of its Subsidiaries is a
party to, or bound by, or has any obligation under, any Tax sharing
agreement, Tax indemnification agreement or similar contract or arrangement.
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(k) No power of attorney has been granted by or with
respect to the Company or any of its Subsidiaries with respect to any matter
relating to Taxes.
(l) The reserves for Taxes reflected in the December
Balance Sheet are adequate for the payment of all Taxes incurred or which may
be incurred by the Company and its Subsidiaries through the date thereof.
Since the date of the December Balance Sheet, the Company and its
Subsidiaries have not incurred any liability for Taxes other than in the
ordinary course of business.
(m) Neither the Company nor any of its Subsidiaries is or
has ever been a member of an affiliated group filing a consolidated Tax
Return (or similar state or local filing group for Tax purposes) other than a
consolidated Tax Return where the Company is the common parent.
(n) Neither the Company nor any of its Subsidiaries is,
or has ever been, a United States real property holding company as defined in
Section 897(c)(2) of the Code.
(o) Neither the Company nor any of its Subsidiaries has
filed a consent under Section 341(f) of the Code concerning collapsible
corporations.
(p) Neither the Company nor any of its Subsidiaries has
any liability for the Taxes of any Person (other than the Company and its
Subsidiaries) under Treasury Regulations Section 1.1502-6 (or any similar
provision of any state, local or foreign law), as a transferee or successor,
by contract or otherwise.
(q) Neither the Company nor any of its Subsidiaries is a
party to any agreement, plan, contract or arrangement that could result,
separately or in the aggregate, in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code.
(r) Neither the Company nor any of its Subsidiaries has
received notice of any claim made by a Governmental Entity in a jurisdiction
where the Company or any of its Subsidiaries, as applicable, does not file a
Tax Return, that the Company or any of its Subsidiaries is or may be subject
to taxation by that jurisdiction.
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(s) The Company has previously delivered or made
available to Parent complete and accurate copies of each of: (i) all audit
reports, letter rulings, technical advice memoranda and similar documents
issued by a taxing authority relating to the United States federal, state,
local or foreign Taxes due from or with respect to the Company or any of its
Subsidiaries (ii) the United States federal income Tax Returns for the years
ended December 31, 1996 through December 31, 1998, and state, local and
foreign income Tax Returns, for the years ended December 31, 1996 through
December 31, 1998, filed by the Company or any of its Subsidiaries, and (iii)
any closing agreements entered into by the Company or any of its Subsidiaries
with any taxing authority in each case existing on the date hereof. The
Company will deliver to Parent all materials with respect to the foregoing
for all matters arising after the date hereof.
(t) For purposes of this Agreement, (i) "TAXES"
(including, with correlative meaning, the term "TAX") shall mean all taxes,
charges, fees, levies, penalties or other assessments imposed by any federal,
state, local or foreign taxing authority, including, but not limited to,
income, gross receipts, excise, property, sales, transfer, franchise,
payroll, withholding, social security or other taxes, including any interest,
penalties or additions attributable thereto, and (ii) "TAX RETURN" shall mean
any return, report, information return or other document (including any
related or supporting information) with respect to Taxes or the refiling of
any such Tax Return previously filed.
Section 4.13 EMPLOYEE BENEFIT PLANS; ERISA.
(a) Section 4.13 of the Disclosure Schedule contains a
true and complete list of each employment, bonus, deferred compensation,
incentive compensation, stock purchase, stock option, stock appreciation
right or other stock-based incentive, severance, change-in-control, or
termination pay, hospitalization or other medical, disability, life or other
insurance, supplemental unemployment benefits, profit-sharing, pension, or
retirement plan, program, agreement or arrangement and each other employee
benefit plan, program, agreement or arrangement, sponsored, maintained or
contributed to or required to be contributed to by the Company or any of its
Subsidiaries, or by any trade or business, whether or not incorporated (an
"ERISA AFFILIATE"), that together with the Company or any of its Subsidiaries
would be deemed a "single employer" within the meaning of Section 4001(b)(1)
of ERISA, for the benefit of any current or former employee or director of
the Company, or any of its Subsidiaries or any ERISA Affiliate (the "PLANS").
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Section 4.13(a) of the Disclosure Schedule identifies each of the Plans that
is an "employee welfare benefit plan," or "employee pension benefit plan" as
such terms are defined in Sections 3(1) and 3(2) of ERISA (such plans being
hereinafter referred to collectively as the "ERISA PLANS"). None of the
Company, any of its Subsidiaries nor any ERISA Affiliate has any formal plan
or commitment, whether legally binding or not, to create any additional Plan
or modify or change any existing Plan that would affect any current or former
employee or director of the Company, any of its Subsidiaries or any ERISA
Affiliate.
(b) With respect to each of the Plans, the Company has
heretofore delivered to the Parent true and complete copies of each of the
following documents, as applicable:
(i) a copy of the Plan documents (including all
amendments thereto) for each written Plan or a written description of
any Plan that is not otherwise in writing;
(ii) a copy of the annual report or Internal
Revenue Service Form 5500 Series, if required under ERISA, with
respect to each ERISA Plan for the last three Plan years ending prior
to the date of this Agreement for which such a report was filed;
(iii) a copy of the actuarial report, if required
under ERISA, with respect to each ERISA Plan for the last three Plan
years ending prior to the date of this Agreement;
(iv) a copy of the most recent Summary Plan
Description ("SPD"), together with all Summaries of Material
Modification issued with respect to such SPD, if required under ERISA,
with respect to each ERISA Plan, and all other material employee
communications relating to each ERISA Plan;
(v) if the Plan is funded through a trust or any
other funding vehicle, a copy of the trust or other funding agreement
(including all amendments thereto) and the latest financial statements
thereof, if any;
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(vi) all contracts relating to the Plans with
respect to which the Company, any of its Subsidiaries or any ERISA
Affiliate may have any liability, including insurance contracts,
investment management agreements, subscription and participation
agreements and record keeping agreements; and
(vii) the most recent determination letter received
from the IRS with respect to each Plan that is intended to be
qualified under Section 401(a) of the Code.
(c) At no time has the Company, any of its Subsidiaries
or any ERISA Affiliate ever maintained, established, sponsored, participated
in or contributed to any ERISA Plan that is subject to Title IV of ERISA.
(d) None of the Company, any of its Subsidiaries, any
ERISA Affiliate, any of the ERISA Plans, any trust created thereunder, nor to
the Company's knowledge, any trustee or administrator thereof has engaged in
a transaction or has taken or failed to take any action in connection with
which the Company, any of its Subsidiaries or any ERISA Affiliate could be
subject to any material liability for either a civil penalty assessed
pursuant to Section 409 or 502(i) of ERISA or a tax imposed pursuant to
Section 4975(a) or (b), 4976 or 4980B of the Code.
(e) All contributions and premiums which the Company, any
of its Subsidiaries or any ERISA Affiliate is required to pay under the terms
of each of the ERISA Plans and Section 412 of the Code, have, to the extent
due, been paid in full or properly recorded on the financial statements or
records of the Company or its Subsidiaries, and none of the ERISA Plans or
any trust established thereunder has incurred any "accumulated funding
deficiency" (as defined in Section 302 of ERISA and Section 412 of the Code),
whether or not waived, as of the last day of the most recent fiscal year of
each of the ERISA Plans ended prior to the date of this Agreement. No Lien
has been imposed under Section 412(n) of the Code or Section 302(f) of ERISA
on the assets of the Company, any of its Subsidiaries or any ERISA Affiliate,
and no event or circumstance has occurred that is reasonably likely to result
in the imposition of any such Lien on any such assets on account of any ERISA
Plan.
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(f) At no time has the Company, any of its Subsidiaries
or any ERISA Affiliate ever contributed to or be requested to contribute to
any "multiemployer pension plan, " as such term is defined in Section 3(37)
of ERISA.
(g) To the knowledge of the Company, each of the Plans
has been operated and administered in all material respects in accordance
with applicable laws, including but not limited to ERISA and the Code.
(h) Each of the ERISA Plans that is intended to be
"qualified" within the meaning of Section 401(a) of the Code is so qualified.
The Company has applied for and received a currently effective determination
letter from the IRS stating that it is so qualified, and no event has
occurred which would affect such qualified status.
(i) Any fund established under an ERISA Plan that is
intended to satisfy the requirements of Section 501(c)(9) of the Code has so
satisfied such requirements.
(j) No amounts payable under any of the Plans or any
other contract, agreement or arrangement with respect to which the Company or
any of its Subsidiaries may have any liability could fail to be deductible
for federal income tax purposes by virtue of Section 280G of the Code.
(k) No Plan provides benefits, including without
limitation death or medical benefits (whether or not insured), with respect
to current or former employees of the Company, its Subsidiaries or any ERISA
Affiliate after retirement or other termination of service (other than (i)
coverage mandated by applicable laws, (ii) death benefits or retirement
benefits under any "employee pension plan" as that term is defined in Section
3(2) of ERISA, (iii) deferred compensation benefits accrued as liabilities on
the books of the Company, any of its Subsidiaries or an ERISA Affiliate, or
(iv) benefits, the full direct cost of which is borne by the current or
former employee (or beneficiary thereof)).
(l) The consummation of the transactions contemplated by
this Agreement will not, either alone or in combination with any other event,
(i) entitle any current or former employee, officer or director of the
Company, any of its Subsidiaries or any ERISA Affiliate to severance pay,
unemployment compensation or any other similar termination payment, or (ii)
accelerate the time of payment or
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vesting, or increase the amount of or otherwise enhance any benefit due any
such employee, officer or director.
(m) There are no pending or, to the Company's knowledge,
threatened or anticipated claims by or on behalf of any Plan, by any employee
or beneficiary under any such Plan or otherwise involving any such Plan
(other than routine claims for benefits).
Section 4.14 INTELLECTUAL PROPERTY.
(a) "INTELLECTUAL PROPERTY" means any United States and
foreign, international and state: patents and patent applications,
industrial design registrations, certificates of invention and utility models
(collectively, "PATENTS"); trademarks, service marks, and trademark or
service mark registrations and applications, trade names, logos, designs,
slogans, and general intangibles of like nature, together with all goodwill
related to the foregoing (collectively, "TRADEMARKS"); Internet domain names;
copyrights, copyright registrations, renewals and applications for
copyrights, including without limitation for the Content and the Software
(collectively, "COPYRIGHTS"); Content; Software, technology, trade secrets
and other confidential information, know-how, proprietary processes,
formulae, algorithms, models and methodologies (collectively, "TRADE
SECRETS"); rights of privacy and publicity, including, but not limited to,
the names, likenesses, voices and biographical information of real persons;
and all license agreements and other agreements granting rights relating to
any of the foregoing. "SOFTWARE" means any and all (i) computer programs,
including any and all software implementations of algorithms, models and
methodologies, whether in source code or object code form, (ii) databases,
compilations, and any other electronic data files, including any and all
collections of data, whether machine readable or otherwise, (iii)
descriptions, flow-charts, technical and functional specifications, and other
work product used to design, plan, organize, develop, test, troubleshoot and
maintain any of the foregoing, (iv) without limitation to the foregoing, the
software technology supporting any functionality contained on Internet
site(s), and (v) all documentation, including technical, end-user, training
and troubleshooting manuals and materials, relating to any of the foregoing.
"CONTENT" means any and all information, pictures, images, graphics, video,
audio, text and any other content or information, in whatever form and on any
media.
(b) The Company and each of its Subsidiaries own or have the
valid right to use all Intellectual Property as currently used in connection
with the
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business of the Company and its Subsidiaries, including, without limitation,
all license agreements and other agreements granting rights relating to any
Intellectual Property to which the Company or any of its Subsidiaries is a
party or is otherwise bound ("LICENSE AGREEMENTS") (collectively, "COMPANY
INTELLECTUAL PROPERTY").
(c) Section 4.14(c)(1) of the Company Disclosure Schedule sets
forth a complete and accurate list of all registrations, applications, or
materially unregistered United States, foreign, international and state (i)
Patents, (ii) Trademarks, (iii) Internet domain names, and (iv) Copyrights,
including Content and Software, indicating for each, the applicable
jurisdiction, record owner, registration number (or application number), and
date issued (or date filed). Section 4.14(c)(2) of the Company Disclosure
Schedule sets forth a complete and accurate list of all License Agreements
granting or restricting any right to use or practice any rights in connection
with any Intellectual Property, to which the Company or any of its
Subsidiaries is a party or is otherwise bound, except for those licenses for
software that may be readily obtained in the public marketplace for less than
$25,000 individually or $500,000 in the aggregate, indicating for each the
title, the parties, date executed, and the Intellectual Property covered
thereby.
(d) The Intellectual Property owned by the Company or any of
its Subsidiaries is solely and exclusively owned by the Company or its
Subsidiaries free and clear of all Liens, and the Company or its Subsidiaries
is listed in the records of the appropriate United States, state or foreign
agency as the sole owner of record for all registrations and applications for
any Intellectual Property that it owns.
(e) All Company Intellectual Property had been duly maintained,
is valid and subsisting, in full force and effect, and has not been
cancelled, expired, or abandoned. There is no pending or, to the knowledge
of the Company, threatened opposition, interference or cancellation
proceeding before any court or registration authority in any jurisdiction
against the items set forth on Section 4.14(c)(1) of the Company Disclosure
Schedule, or, to the best knowledge of the Company, against any Company
Intellectual Property licensed to the Company or any of its Subsidiaries as
set forth in Section 4.14(c)(2) of the Company Disclosure Schedule, which if
resolved adversely to the Company or its Subsidiaries, would have a Company
Material Adverse Effect.
(f) There are no settlements, forebearances to sue, consents,
judgments, or orders or similar obligations to which the Company or any of
its Subsidiaries is a party or is otherwise bound, which (i) restrict the
rights of the
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Company or any of its Subsidiaries to use any Company Intellectual Property,
(ii) restrict the business of the Company or any of its Subsidiaries in order
to accommodate a third party's Intellectual Property rights, or (iii) permit
third parties to use any Intellectual Property which would otherwise infringe
any Company Intellectual Property. The Company and each of its Subsidiaries
have not licensed or sublicensed their rights in any material Intellectual
Property other than pursuant to the License Agreements, and no royalties,
honoraria or other fees are payable by the Company or its Subsidiaries for
the use of or right to use any Company Intellectual Property in connection
with the business of the Company or its Subsidiaries as currently conducted,
except pursuant to the License Agreements set forth on Section 4.14(c)(2) of
the Company Disclosure Schedule. The License Agreements are valid and
binding obligations of all parties thereto, enforceable in accordance with
their terms except that (i) such enforcement may be subject to applicable
bankruptcy, insolvency or other similar laws, now or hereafter in effect,
affecting creditors' rights generally, and (ii) the remedy of specific
performance and injunctive relief and other forms of relief of equitable
relief may be subject to equitable defenses, and there exists no event or
condition which will result in a violation or breach of, or constitute (with
or without due notice or lapse of time or both) a default by the Company or
its Subsidiaries, or, to the knowledge of the Company, by any other party
under any such License Agreement.
(g) The Company and each of its Subsidiaries take reasonable
measures to protect the confidentiality of their Trade Secrets, including
requiring employees and independent contractors having access thereto to
execute written non-disclosure agreements. To the knowledge of the Company,
no Trade Secret material to the business of the Company or any of its
Subsidiaries as currently operated has been disclosed or authorized to be
disclosed to any third party, including any employee, agent, contractor or
other entity, other than pursuant to a non-disclosure agreement that
adequately protects the proprietary interests of the Company or any of its
Subsidiaries in and to such Trade Secrets. To the best knowledge of the
Company, no party to any non-disclosure agreement relating to its Trade
Secrets is in breach thereof.
(h) Neither the Company nor any of its Subsidiaries, nor, to
the knowledge of the Company, the employees of the Company or any of its
Subsidiaries have any agreements or arrangements with any Persons other than
the Company or its Subsidiaries related to confidential information or trade
secrets of such Persons or restricting any such Person's ability to engage in
business activities of any nature. To the knowledge of the Company, the
activities of the present employees of the
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Company or any of its Subsidiaries on behalf of the Company or its
Subsidiaries, do not violate any such agreements or arrangements known to the
Company.
(i) The conduct of the business of the Company or any of its
Subsidiaries as currently conducted does not infringe upon any Intellectual
Property owned or controlled by any third party (either directly or
indirectly such as through contributory infringement or inducement to
infringe), except such infringement as would not reasonably be expected to
result in a Company Material Adverse Effect and is not libelous, slanderous,
defamatory, violative in any way of publicity or privacy rights, or obscene,
except for such violations as would not reasonably be expected to result in a
Company Material Adverse Effect. There are no Claims or suits pending or, to
the knowledge of the Company, threatened, and neither the Company nor its
Subsidiaries has received any notice of a third party claim or suit, (i)
alleging that its activities or the conduct of its business infringes upon or
constitutes the unauthorized use of the Intellectual Property rights of any
third party, nor alleging libel, slander, defamation, or other violation of a
personal right, or (ii) challenging the ownership, use, validity or
enforceability of any Company Intellectual Property, which if resolved
adversely to the Company or any of its Subsidiaries, would have a Company
Material Adverse Effect.
(j) To the knowledge of the Company, no third party is
misappropriating, infringing, diluting, or otherwise violating any Company
Intellectual Property, and, no such claims are pending against a third party
by the Company or any of its Subsidiaries.
(k) The consummation of the transactions contemplated hereby
will not result in the loss or impairment of the right of the Company or any
of its Subsidiaries to own or use any of the Company Intellectual Property
nor require the consent of any governmental authority or third party in
respect of any such Intellectual Property.
(l) To the knowledge of the Company, no current or former
director, officer or employee of the Company or any of its Subsidiaries (or
any of their respective predecessors in interest) will, after giving effect
to the transactions contemplated herein, own or retain any rights in or to
any of the Company Intellectual Property.
(m) Section 4.14(m) of the Company Disclosure Schedule sets
forth a complete and accurate list of all Software (other than Software
acquired in the
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ordinary course of business or having an acquisition price of less than
$25,000 individually or $500,000 in the aggregate) owned, licensed, leased,
or otherwise used by the Company and each of its Subsidiaries, and identifies
which Software is owned, licensed, leased, or otherwise used, as the case may
be. With respect to the Software set forth in Section 4.15(m) of the Company
Disclosure Schedule that the Company and each of its Subsidiaries own, such
Software was either developed (i) by employees of the Company or any of its
Subsidiaries within the scope of their employment, or (ii) by independent
contractors who have assigned their rights to the Company or any of its
Subsidiaries pursuant to written agreements.
(n) The Company and each of its Subsidiaries own or have the
valid right to use (including, without limitation, the rights to copy,
distribute and sell to any party) all Software developed by the Company or
any of its Subsidiaries, whether developed for itself (as part of its core
technology or otherwise) or on behalf of any third party.
(o) The Company and each of its Subsidiaries have experienced
no material problems or failures with respect to Year 2000 Compliance, and to
the best knowledge of the Company, will not experience any such Year 2000
Compliance problems or failures in the future. As used herein, "Year 2000
Compliant" and "Year 2000 Compliance" mean for all dates and times,
including, without limitation, dates and times after December 31, 1999 and in
the multi-century scenario, when used on a stand-alone system or in
combination with other software or systems: (i) the application system
functions and receives and processes dates and times correctly without
abnormal results; (ii) all date-related calculations are correct (including,
without limitation, age calculations, duration calculations and scheduling
calculations); (iii) all manipulations and comparisons of date-related data
produce correct results for all valid date values within the scope of the
application; (iv) there is no century ambiguity; (v) all reports and displays
are sorted correctly; and (vi) leap years are accounted for and correctly
identified (including, without limitation, that 2000 is recognized as a leap
year).
Section 4.15 CONTRACTS AND COMMITMENTS.
(a) Section 4.15(a) of the Company Disclosure Schedule
sets forth all material contracts of the Company and its Subsidiaries.
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(b) There are no purchase contracts or commitments under
which the Company or any of its Subsidiaries is required to pay in excess of
$50,000 which continue for a period of more than 12 months or is in excess of
the normal, ordinary, and usual requirements of business or at any excessive
price.
(c) There are no outstanding sales contracts,
commitments, or proposals of the Company or any of its Subsidiaries that call
for the payment or receipt of more than $50,000 in a fiscal quarter which
continue for a period of more than 12 months or which the Company believes
will result in any loss in excess of $10,000 to the Company and its
Subsidiaries, taken as a whole upon completion or performance thereof.
(d) Neither the Company nor any of its Subsidiaries has
any outstanding contracts with officers, employees, agents, consultants,
advisors, salesmen, sales representatives, distributors, or dealers that are
not cancellable by it on notice of not longer than 30 days and without
liability, penalty, or premium or any agreement or arrangement providing for
the payment of any bonus or commission based on sales or earnings.
(e) Neither the Company nor any of its Subsidiaries is in
default, nor, to the best knowledge of the Company, is there any basis for
any valid claim of default under any material contract made or obligation
owed by it.
(f) Neither the Company nor any of its Subsidiaries is
restricted by contract from carrying on its business anywhere in the world.
(g) Neither the Company nor any of its Subsidiaries is
under any material liability or obligation with respect to the return of
inventory or merchandise in the possession of wholesalers, distributors,
retailers or other customers.
(h) Neither the Company nor any of its Subsidiaries has
any obligation for borrowed money, including guarantees of or agreements to
acquire any such obligation of others.
(i) Neither the Company nor any of its Subsidiaries has
any outstanding loan to any Person other than to the Company or its
Subsidiaries.
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(j) Neither the Company nor any of its Subsidiaries has
any power of attorney outstanding or any obligations or liabilities (whether
absolute, accrued, contingent, or otherwise), as guarantor, surety,
co-signer, endorser, co-maker or indemnitor in respect of the obligation of
any Person.
(k) None of the officers, directors or, to the best
knowledge of the Company, shareholders of the Company has any interest in any
property, real or personal, tangible or intangible, including, without
limitation, the Intellectual Property Rights, that is material to the conduct
of the business of the Company and its Subsidiaries taken as a whole.
Section 4.16 LABOR RELATIONS.
(a) (i) There is no labor strike, dispute, slowdown,
stoppage or lockout actually pending, or, to the knowledge of the Company,
threatened against or affecting the Company or its Subsidiaries and since
inception there has not been any such action; (ii) to the knowledge of the
Company, no union claims to represent the employees of the Company or its
Subsidiaries; (iii) neither the Company nor any of its Subsidiaries is a
party to or bound by any collective bargaining or similar agreement with any
labor organization, or work rules or practices agreed to with any labor
organization or employee association applicable to employees of the Company
or its Subsidiaries; (iv) none of the employees of the Company or its
Subsidiaries is represented by any labor organization and the Company has no
knowledge of any current union-organizing activities among the employees of
the Company or its Subsidiaries, nor does any question concerning
representation exist concerning such employees; (v) there are no written
personnel policies, rules or procedures applicable to employees of the
Company or its Subsidiaries other than those set forth in Section 4.16(a) of
the Company Disclosure Schedule, true, correct and complete copies of which
have heretofore been delivered to Parent; (vi) the Company and its
Subsidiaries are, and have at all times been, in material compliance with all
applicable laws respecting employment and employment practices, terms and
conditions of employment, wages, hours of work, immigration, equal employment
opportunity, and occupational safety and health, and are not engaged in any
unfair labor practices as defined in the National Labor Relations Act or
other applicable law, ordinance or regulation, except when the failure to be
in compliance could not reasonably be expected to have a Company Material
Adverse Effect; (vii) there is no unfair labor practice charge or complaint
against the Company or any of its Subsidiaries pending or, to the knowledge
of the Company, threatened before the National Labor Relations Board or any
similar state
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agency; (viii) there is no grievance or arbitration proceeding pending which
arose out of any collective bargaining agreement or other grievance procedure
relating to the Company or any of its Subsidiaries; (ix) to the knowledge of
the Company, no charges with respect to or relating to the Company are
pending before the Equal Employment Opportunity Commission or any other
agency responsible for the prevention of unlawful employment practices; (x)
to the knowledge of the Company, no federal, state, or local agency
responsible for the enforcement of labor or employment laws intends to
conduct an investigation with respect to or relating to the Company, and no
such investigation is in progress; and (xi) there are no complaints,
controversies, lawsuits or other proceedings pending or, to the knowledge of
the Company, threatened to be brought by any applicant for employment of
current or former employees, or classes of the foregoing, alleging breach of
any express or implied contract for employment, any law or regulation
governing employment or the termination thereof or other discriminatory,
wrongful or tortious conduct in connection with the employment relationship.
Except as set forth in Section 4.16(a) of the Company Disclosure Schedule,
there are no employment contracts, severance agreements or confidentiality
agreements with any employees of the Company. The execution of this
Agreement and the consummation of the transactions contemplated hereby will
not result in a breach or other violation of any collective bargaining
agreement or any other employment contract to which the Company or any of its
Subsidiaries is a party, except, with respect to such employment contracts,
as could not reasonably be expected to have a Company Material Adverse Effect.
(b) From the enactment of Worker Adjustment and
Retraining Notification Act of 1988 (the "WARN ACT") to the date of this
Agreement, neither the Company nor any of it Subsidiaries has effectuated (i)
a "plant closing" (as defined in the WARN Act) affecting any site of
employment or one or more facilities or operating units within any site of
employment or facility of the Company or any of its Subsidiaries thereto, or
(ii) a "mass layoff" (as defined in the WARN Act) affecting any site of
employment or facility of the Company or any of its Subsidiaries, nor has the
Company been affected by any transaction or engaged in layoffs or employment
terminations sufficient in number to trigger application of any similar state
or local law. None of the employees of the Company or any of its
Subsidiaries has suffered an "employment loss" (as defined in the WARN Act)
during the ninety-day period prior to the execution of this Agreement.
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Section 4.17 PERSONNEL. Section 4.17 of the Company Disclosure
Schedule sets forth a complete and correct list of the names and current
salaries of each employee of the Company and its Subsidiaries with a base
salary in excess of $85,000, and of all employment, compensation, severance,
consulting or indemnification contracts between the Company and its present
employees, officers, directors and consultants to the extent the Company has
any continuing obligations thereunder. The Company has made available to
Parent true and correct copies of all such agreements.
Section 4.18 ENVIRONMENTAL MATTERS.
(a) The Company and its Subsidiaries are in full
compliance with all Environmental Laws (as hereinafter defined), which
compliance includes, but is not limited to, the possession by the Company of
all material permits and other governmental authorizations required under
applicable Environmental Laws, and compliance in all material respects with
the terms and conditions thereof. Neither the Company nor any of its
Subsidiaries has received any communication, whether from a governmental
authority, citizens group, employee or otherwise, that alleges that the
Company or any of its Subsidiaries is not in full compliance, and, to the
knowledge of the Company, there are no material circumstances that may
prevent or interfere with such compliance in the future. All of the permits
the Company and its Subsidiaries have pursuant to Environmental Laws are
listed on Section 4.18(a) of the Company Disclosure Schedule.
(b) There are no Environmental Claims pending, alleged
or, to the knowledge of the Company or any of its Subsidiaries, threatened
against the Company or any of its Subsidiaries, or, to the knowledge of the
Company or any of its Subsidiaries, against any Person or entity whose
liability for any Environmental Claim the Company or any of its Subsidiaries
has retained or assumed either contractually or by operation of law.
(c) There are no past or present actions, activities,
circumstances, conditions, events or incidents, including, without
limitation, the release, emission, discharge, presence or disposal of any
Material of Environmental Concern by or attributable to the Company or any of
its Subsidiaries, that could form the basis of any Environmental Claim
against the Company or any of its Subsidiaries or, to the knowledge of the
Company, against any Person whose liability for any Environmental Claim the
Company or any of its Subsidiaries has retained or assumed either
contractually or by operation of law.
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(d) Without in any way limiting the generality of the
foregoing, (i) all on-site and off-site locations where the Company or any of
its Subsidiaries has stored Materials of Environmental Concern are identified
in Section 4.18(d) of the Company Disclosure Schedule, (ii) any underground
storage tanks, and the capacity and contents of such tanks, if known to the
Company, located on property owned or leased by the Company or any of its
Subsidiaries are identified in Section 4.18(d) of the Company Disclosure
Schedule, (iii) except as could not reasonably be expected to cause a Company
Material Adverse Effect, there is no asbestos contained in or forming part of
any building, building component, structure or office space owned or leased
by the Company or any of its Subsidiaries, and (iv) no polychlorinated
biphenyls (PCB's) or PCB-containing items are used or stored at any property
owned, leased or operated by the Company or any of its Subsidiaries.
(e) The Company has provided to Parent all assessments,
reports, data, results of investigations or audits, and other information
that is in the possession of or reasonably available to the Company or any of
its Subsidiaries regarding environmental matters pertaining to or the
environmental condition of the business of the Company and its Subsidiaries,
or the compliance (or noncompliance) by the Company or any of its
Subsidiaries with any Environmental Laws.
(f) For purposes of this Agreement:
(i) "ENVIRONMENTAL CLAIM" means any material
claim, action, cause of action, investigation or notice (written or
oral) by any Person or entity alleging potential liability (including,
without limitation, potential liability for investigatory costs,
cleanup costs, governmental response costs, natural resources damages,
property damages, personal injuries, or penalties) arising out of,
based on or resulting from (a) the presence, or release into the
environment, of any Material of Environmental Concern at any location,
whether or not owned or operated by the Company or (b) circumstances
forming the basis of any violation, or alleged violation, of any
Environmental Law.
(ii) "ENVIRONMENTAL LAWS" means all federal, state,
local and foreign laws and regulations relating to pollution or
protection of human health (excluding those described in Section
4.16(a)(vi)) or the environment (including, without limitation,
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ambient air, surface water, ground water, land surface or subsurface
strata), including, without limitation, laws and regulations relating
to emissions, discharges, releases or threatened releases of Materials
of Environmental Concern, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport
or handling of Materials of Environmental Concern.
(iii) "MATERIALS OF ENVIRONMENTAL CONCERN" means
chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum and petroleum products, but excluding
materials commonly employed or wastes commonly generated in office
operations and/or janitorial operations.
Section 4.19 INSURANCE.
(a) Section 4.19(a) of the Company Disclosure Schedule
contains an accurate and complete description of all material policies of
fire, liability, workmen's compensation and other forms of insurance owned or
held by the Company or any of its Subsidiaries. All such policies are in
full force and effect, all premiums with respect thereto covering all periods
up to and including the date of this Agreement will have been paid, and no
notice of cancellation or termination has been received with respect to any
such policy. Such policies (i) satisfy the obligations of the Company and
its Subsidiaries to procure and maintain insurance coverage as required by
the contracts set forth in Section 4.15 of the Company Disclosure Schedule
and (ii) will remain in full force and effect through the respective dates
set forth in Section 4.19(a) of the Company Disclosure Schedule without the
payment of additional premiums and will not in any way be affected by, or
terminate or lapse by reason of, the transactions contemplated by this
Agreement.
(b) All pending claims, if any, made against the Company
or any of its Subsidiaries that are covered by insurance have been disclosed
to and accepted by the appropriate insurance companies and are being defended
by such appropriate insurance companies and are described in Section 4.19(b)
of the Company Disclosure Schedule; no such claims have been denied coverage
since the Company's inception. During the last six months, no policy of the
Company or any of its Subsidiaries has been cancelled by the issuer thereof.
During the last six months, the Company or any of its Subsidiaries has not
been refused any insurance with respect to its assets or operations, nor has
its coverage been limited by any
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insurance carrier to which it has applied for any such insurance or with
which it has carried insurance since the Company's inception.
Section 4.20 TITLE TO PROPERTIES; ENCUMBRANCES. The Company has
good, valid and marketable title to all the tangible properties and assets
that it or any of its Subsidiaries purports to own (real, personal and
mixed), including, without limitation, all the properties and assets
reflected in the December Balance Sheet as being owned by the Company or any
of its Subsidiaries, and all the material properties and assets purchased by
the Company or any of its Subsidiaries since the date of the December Balance
Sheet, which properties and assets (other than inventory) individually or in
the aggregate are not in excess of $50,000. All such properties and assets
are free and clear of all mortgages, title defects or objections, Liens,
claims, charges, security interests or other encumbrances including, without
limitation, leases, chattel mortgages, conditional sales contracts,
collateral security arrangements and other title or interest retention
arrangements, and are not, in the case of real property, subject to any
rights of way, building use restrictions, exceptions, variances, reservations
or limitations, except, with respect to all such material properties and
assets, (a) Liens shown on the December Balance Sheet as securing specified
liabilities or obligations and liens incurred in connection with the purchase
of property and/or assets, if such purchase was effected after the date of
the December Balance Sheet, with respect to which no default exists; (b)
imperfections of title, if any, none of which are substantial in amount,
materially detract from the value or impair the use of the property subject
thereto, or impair the operations of the Company and which have arisen only
in the ordinary course of business and consistent with past practice since
the date of the December Balance Sheet; and (c) Liens for current taxes not
yet due.
Section 4.21 EQUIPMENT. The equipment of the Company and its
Subsidiaries is in good operating condition and repair, normal wear and tear
excepted, and is adequate for the uses to which it is being put.
Section 4.22 LEASES. Section 4.22 of the Company Disclosure
Schedule contains a list of all leases relating to real property to which the
Company or any of its Subsidiaries is a party, all of which have been
previously delivered to Parent. All such leases are valid, binding and
enforceable against the Company or its Subsidiaries in accordance with their
terms except that (i) such enforcement may be subject to applicable
bankruptcy, insolvency or other similar laws, now or hereafter in effect,
affecting creditors' rights generally, and (ii) the remedy of specific
performance and injunctive relief and other forms of equitable relief may be
subject
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to equitable defenses, and are in full force and effect; there are no
existing material defaults by the Company or its Subsidiaries thereunder; and
no event of default has occurred which (whether with or without notice, lapse
of time or the happening or occurrence of any other event) would constitute a
default by the Company or its Subsidiaries thereunder, except for defaults
that could not reasonably be expected to have a Company Material Adverse
Effect.
Section 4.23 RELATED PARTY TRANSACTIONS. No contracts or
agreements are in effect as of the date hereof between the Company or its
Subsidiaries, on the one hand, and officers, directors or Shareholders of the
Company or their respective Affiliates, on the other hand.
Section 4.24 ABSENCE OF CERTAIN PAYMENTS. Neither the Company,
any of its Subsidiaries nor any of their respective officers, directors,
employees or agents or other people acting on behalf of any of them have (i)
engaged in any activity prohibited by the United States Foreign Corrupt
Practices Act of 1977 or any other similar law, regulation, decree, directive
or order of any Governmental Entity and (ii) without limiting the generality
of the preceding clause (i), used any corporate or other funds for unlawful
contributions, payments, gifts or entertainment, or made any unlawful
expenditures relating to political activity to government officials or
others. Neither the Company, any of its Subsidiaries, nor any of their
respective directors, officers, employees or agents of other persons acting
on behalf of any of them, has accepted or received any unlawful
contributions, payments, gifts or expenditures.
Section 4.25 BROKERS OR FINDERS. Except for any fees payable to
Houlihan Lokey Howard and Zukin Capital, the Company represents, as to
itself, and its Affiliates, that no agent, broker, investment banker,
financial advisor or other firm or Person is or will be entitled to any
brokers' or finder's fee or any other commission or similar fee in connection
with any of the transactions contemplated by this Agreement. True and correct
copies of all agreements between the Company or any of its Subsidiaries and
Houlihan Lokey Howard and Zukin Capital, including, without limitation, any
fee arrangements are included in Section 4.26 of the Company Disclosure
Schedule.
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Section 4.26 BOOKS AND RECORDS. The minute books and stock
record books of the Company and each of its Subsidiaries contain all (i)
minutes of meetings of the shareholders and boards of directors, (ii) written
statements of actions taken by the shareholders and boards of directors
without a meeting, and (iii) records of the issuance, transfer and
cancellation of all shares of capital stock and other securities, in each
case since the date of incorporation of the Company and each of its
Subsidiaries, respectively. Such minute book and stock record book are true
and complete in all material respects.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to the Company and
the Shareholders as set forth below:
Section 5.1 ORGANIZATION. (a) Parent is a corporation duly
organized, validly existing and in good standing under the laws of Colorado
and has all requisite corporate power and authority and all necessary
government approvals to own, lease and operate its properties and to carry on
its business as now being conducted except where the failure to be so
organized, existing and in good standing or to have such power, authority and
governmental approvals would not have a material adverse effect on the
business, financial condition or results of operation of Parent and its
Subsidiaries, taken as a whole (a "PARENT MATERIAL ADVERSE EFFECT"). Parent
is duly qualified or licensed and in good standing to do business in each
jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification or licensing
necessary, except where the failure to be so duly qualified or licensed and
in good standing could not reasonably be expected to have, in the aggregate,
a Parent Material Adverse Effect.
Section 5.2 CAPITALIZATION.
(a) As of December 31, 1999, Parent had 200,000,000
shares of Parent Common Stock authorized for issuance, of which 53,165,370
shares of Parent Common Stock were issued and outstanding. All of the issued
and outstanding shares of Parent Common Stock are validly issued, fully paid
and nonassessable.
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(b) All of the Parent Shares will be validly issued,
fully paid and nonassessable.
Section 5.3 AUTHORITY RELATIVE TO THIS AGREEMENT. Each of
Parent and Merger Sub has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated
hereby. The execution, delivery and performance of this Agreement and the
consummation of the Merger have been duly and validly authorized by the
respective Board of Directors of Parent and Merger Sub and approved by Parent
in its capacity as sole stockholder of Merger Sub, and no other corporate
proceedings on the part of Parent or Merger Sub are necessary to authorize
this Agreement or to consummate the Merger. This Agreement has been duly
executed by Parent and Merger Sub and constitutes a valid and binding
agreement of Parent and Merger Sub enforceable against Parent and Merger Sub
in accordance with its terms except that (i) such enforcement may be subject
to applicable bankruptcy, insolvency or other similar laws, now or hereafter
in effect, affecting creditors' rights generally, and (ii) the remedy of
specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
Section 5.4 CONSENTS AND APPROVALS; NO VIOLATIONS. Except for
the Fairness Hearing and the filing and recordation of the Certificate of
Merger in accordance with the requirements of the CGCL, neither the
execution, delivery or performance of this Agreement by Parent and Merger
Sub, the consummation by Parent and Merger Sub of the transactions
contemplated hereby, nor compliance by Parent with any of the provisions
hereof will (i) require any notice to, filing with, or permit, authorization,
consent or approval of, any Governmental Entity or any private third party,
(ii) conflict with or result in any breach of any provision of the charter or
bylaws of Parent or Merger Sub, (iii) result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default
(or give rise to any right of termination, cancellation or acceleration or
result in the creation of any Lien) under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, license, contract,
agreement or other instrument or obligation to which Parent or Merger Sub is
a party or by which any of them or any of their properties or assets may be
bound or (iv) violate any order, writ, injunction, decree, statute, treaty,
rule or regulation applicable to Parent, Merger Sub or any of their
properties or assets except, in the case of clauses (i), (iii) and (iv),
where the failure to obtain such permits, authorizations, consents or
approvals or to make such filings, or where such violations, breaches or
defaults would not, individually or in the
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aggregate, materially impair the ability of Parent or Merger Sub to
consummate the transactions contemplated by this Agreement and would not
reasonably be expected to result in a Parent Material Adverse Effect.
Section 5.5 SEC REPORTS AND FINANCIAL STATEMENTS. Parent has
filed with the SEC, and has heretofore made available to the Company true and
complete copies of, all forms, reports, schedules, statements and other
documents required to be filed by it and its Subsidiaries since January 28,
2000 under the Exchange Act or the Securities Act (as such documents have
been amended since the time of their filing, collectively, the "PARENT SEC
DOCUMENTS"). As of their respective dates or, if amended, as of the date of
the last such amendment, the Parent SEC Documents, including, without
limitation, any financial statements or schedules included therein (a) did
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading, and (b) complied in all material respects with the
applicable requirements of the Exchange Act and the Securities Act, as the
case may be, and the applicable rules and regulations of the SEC thereunder.
Each of the consolidated financial statements included in the Parent SEC
Documents has been prepared from, and is in accordance with, the books and
records of Parent and its Subsidiaries, complies in all material respects
with applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, has been prepared in accordance
with US GAAP applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or in the case of unaudited
financial statements, as permitted for presentation in Quarterly Reports on
Form 10-Q) and fairly presents the consolidated financial position and the
consolidated results of operations and cash flows of the Parent and its
consolidated Subsidiaries as at the dates thereof or for the periods
presented therein.
Section 5.6 ABSENCE OF CERTAIN CHANGES. Except to the extent
disclosed in the Parent SEC Documents filed prior to the date of this
Agreement, since November 15, 1999 through the date of this Agreement, Parent
and its Subsidiaries have conducted their respective businesses and
operations in all material respects consistent with past practice only in the
ordinary course and there has not occurred any event, change, or effect
(including the incurrence of any liabilities of any nature, whether or not
accrued, contingent or otherwise) that would reasonably be expected to have a
Parent Material Adverse Effect.
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Section 5.7 INFORMATION IN DISCLOSURE DOCUMENTS. None of the
information supplied in writing by Parent for inclusion or incorporation by
reference in (i) the Application will, at the time the Application is filed
with the Commissioner and at the time the Fairness Hearing is held, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statement therein not
misleading and (ii) the Information Statement will, at the time it is mailed
to the Shareholders and at the time of the Special Meeting to be held in
connection with the Merger, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they are made, not misleading. The Application will comply in all
material respects with the provisions of the CSL and the rules and
regulations thereunder, except that no representation is made by Parent with
respect to statements made therein based on information supplied by the
Company in writing for inclusion or incorporation by reference therein.
Section 5.8 ACTIVITIES OF MERGER SUB. Merger Sub was formed for
the purpose of participating in the Merger as contemplated in this Agreement.
Merger Sub has engaged in no other business activities and has conducted its
operations only as contemplated by this Agreement.
Section 5.9 NO DEFAULT. The businesses of Parent and its
Subsidiaries are not being conducted in default or violation (and no event
has occurred which with notice, lapse of time or both, would constitute a
default or violation) of any term, condition or provision of (i) their
respective organizational documents, (ii) any note, bond, mortgage,
indenture, guarantee, other instrument or obligation to which Parent is a
party or by which it or any of its properties or assets may be bound, or
(iii) any United States federal, state, local or foreign law, statute,
regulation, rule, ordinance, judgment, decree, order, writ, injunction,
concession, grant, franchise, permit or license or other governmental
authorization or approval applicable to Parent, excluding from the foregoing
clauses (ii) and (iii), defaults or violations that could not reasonably be
expected to have a Parent Material Adverse Effect. As of the date of this
Agreement, no investigation or review by any Governmental Entity or other
entity with respect to Parent or any of its Subsidiaries is pending or, to
the best knowledge of Parent, threatened, nor has any Governmental Entity or
other entity indicated an intention to conduct the same, other than, in each
case, those the outcome of which, as far as reasonably can be foreseen, in
the future would not have a Parent Material Adverse Effect.
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Section 5.10 LITIGATION. As of the date hereof, except as set
forth in the Parent SEC Documents, there is no action, suit, proceeding or,
to the knowledge of Parent, investigation pending or, to the knowledge of
Parent, threatened, involving Parent or any of its Subsidiaries, by or before
any court, governmental or regulatory authority or by any third party that
would reasonably be expected to have a Parent Material Adverse Effect.
Section 5.11 BROKERS OR FINDERS. Neither Parent nor any of its
Subsidiaries or Affiliates has entered into any agreement or arrangement
entitling any agent, broker, investment banker, financial advisor or other
firm or person to any brokers' or finders' fee or any other commission or
similar fee in connection with any of the transactions contemplated by this
Agreement except for Thomas Weisel Partners LLC, whose fees and expenses will
be paid by Parent in accordance with Parent's agreement with such firm.
ARTICLE VI
COVENANTS OF THE COMPANY
The Company covenants and agrees to perform as follows:
Section 6.1 CONDUCT OF BUSINESS PENDING MERGER. Except as
otherwise specifically provided in this Agreement, from the date of this
Agreement to the earlier of the Effective Time or termination hereof, the
Company agrees to (i) conduct its operations only in the ordinary and usual
course of business and consistent with past practices and (ii) use its
reasonable best efforts to preserve intact its present business organization,
keep available the services of its present officers, key employees and
consultants and preserve its present relationships with licensors, licensees,
customers, suppliers, key employees, labor organizations and others having
business relationships with it. Without limiting the generality of the
foregoing, and except as otherwise specifically provided in this Agreement,
the Company will not, directly or indirectly, prior to the Effective Time,
without the prior written consent of Parent:
(a) except to authorize sufficient capital stock as
required to effect the transactions contemplated in connection with the
Merger, propose or adopt any amendment to or otherwise change the Company
Articles or Bylaws;
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(b) authorize for issuance, sale, pledge, disposition or
encumbrance, or issue, sell, pledge, dispose of or encumber (whether through
the issuance or granting of options, warrants, commitments, subscriptions,
rights to purchase, convertible securities or otherwise), any capital stock
of any class or any other securities of, or any other ownership interest in,
the Company or any of its Subsidiaries (except for the issuance of shares of
Company Common Stock upon conversion of Preferred Stock, upon exercise of
Company Options or Company Warrants, in each case outstanding as of the date
of this Agreement or amend any of the terms of any such securities or
agreements outstanding on the date hereof except that the Company Warrants
may be amended to provide for a cashless exercise procedure such that no more
than 205,907 shares of Company Common Stock shall be issued upon conversion
of the Company Warrants); PROVIDED, HOWEVER, that holders of Company Options
or Company Warrants may exercise such Company Options or Company Warrants.
(c) reclassify, combine, split or subdivide any shares of
its or its Subsidiaries' capital stock, declare, set aside or pay any
dividend or other distribution (whether in cash, securities or property or
any combination thereof) in respect of any class or series of its capital
stock, other than any dividend declared prior to the date hereof;
(d) redeem, purchase or otherwise acquire, or propose or
offer to redeem, purchase or otherwise acquire, any outstanding Company
Capital Stock, Company Warrants or Company Options or other securities of the
Company except pursuant to the Company Benefit Plan;
(e) organize any new Subsidiary, acquire any capital
stock or equity securities of any corporation or acquire any equity or
ownership interest (financial or otherwise) in any business;
(f) (i) incur, assume or prepay any material liability,
or incur any indebtedness for borrowed money other than in accordance with
the Company's current financing arrangements, (ii) assume, guarantee, endorse
or otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any third party, (iii) make any loans,
advances or capital contributions to, or investments in, any third party,
(iv) mortgage or pledge any of its material properties or assets, tangible or
intangible, or create or suffer to exist any Lien thereupon, or (v) authorize
any new capital expenditures for property, plant and
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equipment that, individually or in the aggregate, are in excess of $100,000
per fiscal quarter;
(g) make any change in the compensation payable or to
become payable to any of its or any of its Subsidiaries' officers, directors,
employees, agents or consultants (other than normal recurring salary
adjustments in the ordinary course of business consistent with past practice)
or to Persons providing management services, or enter into or amend, in any
material respect, any existing employment, severance, consulting, termination
or other agreement or employee benefit plan or make any loans to any of its
officers, directors, employees, Affiliates, agents or consultants (other than
reasonable travel advances) or make any change in its existing borrowing or
lending arrangements for or on behalf of any such Persons pursuant to an
employee benefit plan or otherwise;
(h) license (except in the ordinary course of business
consistent with past practice) or otherwise transfer or dispose of, any
material Intellectual Property Rights of the Company or any of its
Subsidiaries, or dispose of or disclose to any Person any trade secret,
formula, process or know-how not theretofore a matter of public knowledge
other than in the ordinary course of business consistent with past practice;
(i) enter into any material contract or transaction other
than in the ordinary course of business, consistent with past practices;
(j) cancel any debts or waive, release or relinquish any
contract rights or other rights of substantial value other than in the
ordinary course of business, consistent with past practices;
(k) except as explicitly contemplated by Section 6.2
hereof, authorize, recommend, propose or enter into or announce an intention
to authorize, recommend, propose or enter into a term sheet, letter of
intent, agreement in principle or a definitive agreement with respect to any
merger, consolidation, liquidation, dissolution, or business combination, any
acquisition of a material amount of property or assets or securities, or any
disposition of a material amount of property or assets or securities;
(l) make any change with respect to accounting policies
or procedures in effect as of the Company's fiscal year ended December 31,
1999;
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(m) pay, discharge or satisfy any material claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise) other than the payment, discharge or satisfaction in
the ordinary course of business, consistent with past practices, of
liabilities reflected or reserved against in the Company's Financial
Statements or incurred in the ordinary course of business consistent with
past practices since the date thereof;
(n) take or commit or agree (in writing or otherwise) to
take any of the foregoing actions, or fail to take any action, as a result of
which a failure of the conditions set forth in Section 8.1 or 8.2 is likely
to occur; or
(o) make any election relating to Taxes, change any
election relating to Taxes already made, adopt or change any accounting
method relating to Taxes, enter into any closing agreement relating to Taxes,
settle any claim or assessment relating to Taxes or consent to any claim or
assessment relating to Taxes or any waiver of the statute of limitations for
any such claim or assessment.
Section 6.2 NO SOLICITATION OF COMPETING TRANSACTION.
(a) (i) Except as contemplated by this Section 6.2, none
of the Company or any Affiliate of the Company shall (and the Company shall
not authorize or permit the officers, directors, employees, representatives
and agents of the Company and each Affiliate of the Company, including, but
not limited to, investment bankers, attorneys and accountants, to), directly
or indirectly, solicit, initiate, facilitate or encourage (including by way
of furnishing or disclosing financial or operational or other non-public
information) any inquiries or the making of any proposal with respect to any
acquisition of the capital stock, business or material assets of the Company
or any of its Subsidiaries, whether by merger, tender offer, exchange offer,
sale of assets or similar transactions involving the Company or any
Subsidiary, division or operating or principal business unit of the Company
(an "ACQUISITION TRANSACTION") or negotiate, explore or otherwise engage in
discussions with any Person with respect to any Acquisition Transaction or
enter into any agreement, arrangement or understanding with respect to any
such Acquisition Transaction or that would require it to abandon, terminate
or fail to consummate the Merger or any other transaction contemplated by
this Agreement. Upon execution of this Agreement, the Company will
immediately cease any existing activities, discussions or negotiations with
any parties conducted heretofore with respect to any of the foregoing.
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(ii) Notwithstanding the foregoing, nothing contained
in this Agreement shall prevent the Company, the Company Board or its
Affiliates from furnishing nonpublic information to, or entering into
discussions or negotiations with, any Person in connection with an
unsolicited bona fide written proposal relating to an Acquisition Transaction
to the Company, the Company Board or its Affiliates from Persons other than
Affiliates of the Company, if any, only to the extent that the Company Board
by action of a majority of the directors, determines in good faith, upon the
written advice of outside counsel or its financial advisor, with a copy sent
to the Parent that (i) such bona fide written proposal is more favorable from
a financial point of view to the Shareholders than the Merger and (ii) such
action is necessary for the Company Board to comply with its fiduciary duties
to the Company under applicable law.
(iii) The Company will immediately notify Parent of
the existence of any proposal or inquiry, including a request for non-public
information, received by the Company, the Shareholders or their respective
representatives and the terms thereof (and will immediately provide to Parent
copies of any written materials received by the Company in connection with
such proposal, discussion, negotiation or inquiry) and the identity of the
party making such proposal or inquiry or engaging in such discussion or
negotiation.
(b) Except as set forth in Section 6.2(a)(ii), neither
the Company Board nor any committee thereof shall (i) withdraw or modify, or
propose to withdraw or modify, in a manner adverse to Parent or Merger Sub,
its approval or recommendation of this Agreement or the Merger, (ii) approve
or recommend or propose to approve or recommend, any Acquisition Transaction
or (iii) enter into any agreement with respect to any Acquisition
Transaction.
Section 6.3 SHAREHOLDER APPROVAL. Subject to the provisions of
Section 6.2, the Company shall take all action necessary, in accordance with
the CGCL and the Company Articles and Bylaws, to cause its shareholders to
consider at a special meeting of the Shareholders (the "Special Meeting") and
act upon this Agreement and the Merger no later than three (3) business days
after the Commissioner shall determine to issue a permit to issue shares of
Parent Common Stock in connection with the Merger following the Fairness
Hearing.
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Section 6.4 FURTHER INFORMATION. As soon as such information
becomes available, and in any event not later than thirty days after the end
of each fiscal month, the Company shall provide to Parent an unaudited
balance sheet as of the end of such month and the related statements of
results of operations and statements of cash flows for such period together
with a list of the ages and amounts of all accounts and notes due and
uncollected as of the end of such month.
Section 6.5 ACCESS; CONFIDENTIALITY. Subject to the Company's
confidentiality obligations to third parties, the Company shall afford to the
officers, employees, accountants and counsel of Parent, full access during
normal business hours from the date hereof until the Effective Time or
termination of this Agreement in accordance with the terms hereof, to all its
properties, books, contracts, commitments and records and, during such
period, the Company shall furnish promptly to Parent all other information
concerning its business, properties and personnel as Parent may reasonably
request. Notwithstanding anything herein to the contrary, the terms of the
confidentiality agreement previously entered into by and between Parent and
the Company shall remain in full force and effect.
Section 6.6 280G CONSENT. Prior to the Closing, the Company
shall take such steps as may be necessary to prevent any payment or benefit
from being subject to the excise tax payable under section 4999 of the Code
or the loss of deductibility under section 280G of the Code in connection
with the transactions contemplated by this Agreement, including, but not
limited, to taking the steps necessary to qualify for the exemption for small
business corporations under section 280G(b)(5) of the Code.
Section 6.7 COMPANY WARRANTS. Prior to the Closing, the Company
shall use its best efforts to cause the holder of each issued and outstanding
warrant to purchase shares of Company Common Stock (collectively, the
"COMPANY WARRANTS") to exercise such Company Warrant.
Section 6.8 OUTSTANDING DEBT. Prior to the Closing, the Company
shall take all necessary action to effect the conversion of the indebtedness
set forth on Section 6.8 of the Company Disclosure Schedule into Company
Common Stock.
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ARTICLE VII
OTHER COVENANTS
Section 7.1 FAIRNESS HEARING.
(a) Prior to the Closing, upon the terms and subject to
the conditions of this Agreement, Parent and the Company agree to use their
respective reasonable best efforts to take, or cause to be taken, all actions
and to do, or cause to be done, all things necessary, proper or advisable
(subject to any applicable laws) to consummate and make effective the Merger
as promptly as practicable including, but not limited to (i) the prompt
preparation and filing with the Commissioner of the documents required by the
CSL including, but not limited to, any required Application, request for a
hearing ("HEARING REQUEST") or notice of a hearing ("HEARING NOTICE")
pursuant to Sections 25121 and 25142 of the CSL (collectively, the "NOTICE
MATERIALS"), in connection with the Merger and the issuance of Parent Common
Stock, in order to perfect the exemption from registration provided by
Section 3(a)(10) of the Securities Act and the preparation and filing of all
other forms, registrations and notices required to be filed to consummate the
Merger and the taking of such actions as are necessary to obtain any
requisite approvals, consents, orders, exemptions or waivers by any third
party or Governmental Entity, and (ii) the satisfaction of the other parties'
conditions to Closing. Each of Parent and the Company shall use reasonable
efforts to have the Permit Application, Hearing Request and Hearing Notice
declared effective under the CSL as promptly as practicable after such
filing. In addition, Parent and the Company will prepare, and the Company
will distribute, an information statement or proxy statement (the
"INFORMATION STATEMENT") along with the Notice Materials, as may be required
by California Law, at the earliest practicable date to submit this Agreement,
the Merger, and the transactions contemplated hereby, to the Company
shareholders. Each of the Parent and the Company will promptly provide all
information relating to their respective business and operations necessary
for inclusion in the Notice Materials to satisfy all requirements of
applicable state and federal securities laws. Each of Parent and the Company
shall be solely responsible for any statement, information, or omission, in
the Notice Materials relating to it or its affiliates based upon the written
information furnished by it or its representatives. Notwithstanding the
foregoing, or any other covenant herein contained, Parent shall not be
required to divest or hold separate or otherwise take or commit to take any
action that limits
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Parent's freedom of action with respect to, or its ability to retain, the
Company or any material portions thereof or any of the businesses, product
lines, properties or assets of the Company.
(b) Prior to the Closing, each party shall promptly
consult with the other parties hereto with respect to all filings made by
such party with any Governmental Entity or any other information supplied by
such party to a Governmental Entity in connection with this Agreement and the
Merger. Each party hereto shall promptly inform the other of any
communication from any Governmental Entity regarding the Merger. If any
party hereto or Affiliate thereof receives a request for additional
information or documentary material from any such Governmental Entity with
respect to the Merger, then such party shall promptly notify the other and
endeavor in good faith to make, or cause to be made, as soon as reasonably
practicable and after consultation with the other parties, an appropriate
response in compliance with such request. To the extent that transfers,
amendments or modifications of permits (including environmental permits) are
required as a result of the execution of this Agreement or consummation of
the Merger, the Company shall use reasonable best efforts to effect such
transfers, amendments or modifications.
(c) Each of Company and Parent shall (i) give the other
party prompt notice of the commencement of any material legal proceeding by
or before any court or other governmental body with respect to the Merger or
any of the other transactions contemplated by this Agreement and (ii) keep
the other party generally informed as to the status of any such legal
proceeding.
(d) Notwithstanding the foregoing, nothing in this
Agreement shall be deemed to require Parent or the Company to commence any
litigation against any Person in order to facilitate the consummation of the
Merger or to defend against any litigation brought by any third party or
Governmental Entity seeking to prevent the consummation of the Merger.
Section 7.2 PUBLICITY. The initial press release with respect
to the execution of this Agreement shall be a joint press release acceptable
to Parent and the Company. Thereafter, until the Effective Time, or the date
this Agreement is terminated or abandoned pursuant to Article IX hereof,
neither party hereto nor any of their respective Affiliates shall issue or
cause the publication of any press release or other announcement with respect
to the Merger or this Agreement without prior
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approval of the other party, except as may be required by law or by any
listing agreement with a national securities exchange or trading market.
Section 7.3 DIRECTORS' AND OFFICERS' INDEMNIFICATION.
(a) For purposes of this Section 7.3:
(i) "INDEMNIFIED PARTIES" shall mean the current
officers and directors of Company and each other person who is or was
a director or officer of the Company at or at any time prior to the
Effective Time.
(ii) "LOSSES" shall include costs, expenses
(including reasonable expenses of investigation and attorneys' fees),
judgments, awards, fines, penalties, amounts paid in settlement,
losses, claims, damages and liabilities.
(iii) "PROCEEDING" shall mean any action, suit,
proceeding, arbitration, hearing, audit or investigation (whether
civil, criminal, administrative or investigative and whether formal or
informal).
(b) From and after the Effective Time, Parent will cause
the Surviving Corporation to fulfill and honor in all respects the
obligations of Company pursuant to (i) each indemnification agreement in
effect between Company and any indemnified Party identified in Section 7.3 of
the Company Disclosure Schedule and (ii) any indemnification provision
contained in the Company Articles or Bylaws (as in effect on the date of this
Agreement). Parent and the Surviving Corporation shall ensure that each
provision that is currently included in the articles of incorporation or
by-laws of Merger Sub relating to indemnification or exculpation from
liability shall remain in effect as provisions of the articles of
incorporation of the Surviving Corporation at and after the Effective Time,
and that no such provision shall be repealed or modified within three years
following the Effective Time in any manner that might adversely affect the
rights thereunder of any Indemnified Party.
(c) Without limiting the generality or the effect of
Section 7.3(b), during the period commencing as of the Effective Time and
ending on the sixth anniversary of the Effective Time, Parent shall cause the
Surviving Corporation to indemnify and hold harmless each Indemnified Party
against and
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from any Losses arising from or relating directly or indirectly to any claim
or Proceeding that arises or has arisen from or that relates directly or
indirectly to (i) any action or omission or alleged action or omission on the
part of such Indemnified Party in such Indemnified Party's capacity as a
director or officer of Company (regardless of whether such action or
omission, or alleged action or omission, shall have occurred prior to, at or
after the Effective Time) or (ii) the Merger or any of the other transactions
contemplated by or referred to in this Agreement; PROVIDED, HOWEVER, that if,
at any time prior to the sixth anniversary of the Effective Time, any
Indemnified Party delivers to the Surviving Corporation a written notice
asserting a right to indemnification under this Section 7.3(c), then the
right to indemnification asserted in such notice shall survive beyond the
sixth anniversary of the Effective Time. The Surviving Corporation will have
the right (at its sole expense) to control the defense of any such claim or
Proceeding after the Effective Time; PROVIDED, HOWEVER, that: (1) Parent
will not be permitted to enter into any settlement or compromise, or to
consent to the entry of any judgment, with respect to such claim or
Proceeding unless such settlement, compromise or consent imposes no
obligation of any nature on any Indemnified Party and includes an
unconditional release of all Indemnified Parties from all liability relating
to such claim or Proceeding; and (2) if any Indemnified Party determines in
good faith (after consultation with counsel) that, under applicable standards
of professional conduct, an actual or potential conflict exists or might
reasonably be expected to arise between the position of such Indemnified
Party and the position of Parent, the Surviving Corporation or any other
Person, then the Indemnified Parties, as a group, at the expense of the
Surviving Corporation, shall be entitled to one separate counsel reasonably
acceptable to the Surviving Corporation to participate in such Proceeding.
(d) During the period commencing as of the Effective Time
and ending on the sixth anniversary of the Effective Time, Parent shall use
its reasonable best efforts to include the officers and directors of the
Company on the directors' and officers' liability insurance policy of Parent
currently in effect, so long as the aggregate annual premiums for insurance
under this Section 7.3(d) do not exceed $25,000.
(e) Parent shall bear and pay, and shall reimburse the
Indemnified Parties for, all reasonable costs and expenses, including
reasonable attorneys' fees, that may be incurred by the Indemnified Parties
in seeking to enforce their rights against Parent and the Surviving
Corporation under this Section 7.3, but only to the extent that the
Indemnified Parties are entitled to indemnification hereunder.
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(f) This Section 7.3 shall survive the consummation of
the Merger and the Effective Time, is intended to benefit and may be enforced
by the Indemnified Parties and their respective heirs, successors and assigns
(each of whom shall be entitled to enforce this provision against Parent and
the Surviving Corporation) and shall be binding on Parent and the Surviving
Corporation and their respective successors and assigns.
Section 7.4 NOTIFICATION OF CERTAIN MATTERS. The Company shall
give prompt notice to Parent, and Parent shall give prompt notice to the
Company, of the occurrence (or non-occurrence) of any event of which the
Company or Parent, respectively, has knowledge, the occurrence (or
non-occurrence) of which would be likely to cause any representation or
warranty contained in this Agreement of the Company or the Parent, as
applicable, to be untrue or inaccurate (if such representation or warranty is
qualified by materiality) or untrue or inaccurate in any material respect (if
not so qualified) and of the occurrence of any failure of either party to
comply with or satisfy any covenant, condition or agreement to be complied
with or satisfied by it hereunder; PROVIDED, HOWEVER, that (x) delivery of
any notice pursuant to this Section 7.4 shall not limit or otherwise affect
the remedies available to either party hereunder, (y) shall not constitute an
admission by the party delivering such notice that any such representation or
warranty has been breached and (z) shall not have an effect in determining
whether the conditions set forth in Article VIII have been satisfied.
Section 7.5 TAX-FREE REORGANIZATION. No party hereto shall
intentionally take, or cause or allow to be taken, any action whether before
or after the Effective Time which would disqualify the Merger as a
"reorganization" within the meaning of Section 368(a) of the Code.
Section 7.6 NASDAQ LISTING. Parent shall use its commercially
reasonable efforts to cause the Parent shares to be issued in the Merger to
be approved for quotation on the Nasdaq National Market, subject to official
notice of issuance, prior to the Closing Date.
Section 7.7 COMPANY 401(k) PLAN. The Company shall take all
necessary or prudent action to terminate the Company's 401(k) Plan prior to
the Effective Time.
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Section 7.8 The Company shall not, at or prior to the Closing,
prepay the Promissory Note with funds other than (a) the proceeds of the
Promissory Note or (b) funds obtained in the ordinary course of business
consistent with past practice.
ARTICLE VIII
CONDITIONS
Section 8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. The respective obligations of each party to effect the Merger shall
be subject to the satisfaction at or prior to the Closing Date of the
following conditions, any and all of which may be waived in whole or in part
by the Company or Parent, as the case may be, to the extent permitted by
applicable law:
(a) No statute, rule or regulation shall have been
enacted or promulgated by any Governmental Entity which prohibits the
consummation of the Merger; and there shall be no order, decree or injunction
of a court of competent jurisdiction in effect precluding consummation of the
Merger.
(b) The Commissioner shall have issued the CSL Permit and
the qualification thereunder shall not be the subject of any stop order or
proceedings seeking a stop order.
(c) The Parent Shares to be issued to the Shareholders
pursuant to this Agreement and upon exercise of Company Options shall have
been authorized for trading on Nasdaq effective upon the Closing Date.
(d) This Agreement shall have been adopted and the Merger
shall have been approved by the Company Required Vote. For purposes of this
Agreement, "Company Required Vote" shall mean the affirmative vote of the
holders of a majority of the outstanding shares of (i) Company Common Stock,
(ii) Company Common Stock and Company Preferred Stock and (iii) Company
Preferred Stock, in each case, voting separately as a single class as of the
record date for the Special Meeting.
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Section 8.2 CONDITIONS OF OBLIGATIONS OF THE COMPANY. The
obligations of the Company to effect the Merger are further subject to the
satisfaction at or prior to the Closing Date of the following conditions,
unless waived in writing by the Company:
(a) The representations and warranties of Parent and
Merger Sub set forth in this Agreement shall be true and correct in all
material respects (except for representations and warranties qualified by
materiality which shall be true and correct in all respects) as of the date
of this Agreement and, except for representations and warranties that speak
as of a specific date other than the Closing Date (which need only be true
and correct in all respects as of such date), as of the Closing Date, with
the same force and effect as though such representations and warranties had
been made on and as of the Closing Date.
(b) Parent and Merger Sub shall have performed and
complied, in all material respects, with all obligations and covenants
required to be performed or complied with by it under this Agreement at or
prior to the Closing Date.
(c) The Company shall have received from Parent an
officer's certificate certifying to the fulfillment of the conditions
specified in Section 8.2(a), 8.2(b) and 8.2(d).
(d) From the date of this Agreement through the Effective
Time, Parent shall not have suffered a Parent Material Adverse Effect and no
events or facts which would reasonably be expected to have a Parent Material
Adverse Effect shall have occurred or arisen.
(e) The Company shall have received an opinion of Troop
Steuber Pasich Reddick & Tobey, LLP in form and substance reasonably
satisfactory to the Company, dated as of the date of the Effective Time,
substantially to the effect that, on the basis of facts, representations and
assumptions set forth in the opinion, for United States federal income tax
purposes, the Merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Code. In rendering such opinion, Troop Steuber Pasich
Reddick & Tobey, LLP may request, receive and rely upon representations
contained in the certifications of Parent, Merger Sub, the Company and
others, and Parent, Merger Sub and the Company agree to provide such
certifications as Troop Steuber Pasich Reddick & Tobey, LLP may reasonably
request.
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(f) The Company shall have received a legal opinion from
counsel to Parent in a form reasonably satisfactory to the Company.
Section 8.3 CONDITIONS OF OBLIGATIONS OF PARENT. The
obligations of Parent and Merger Sub to effect the Merger are further subject
to the satisfaction at or prior to the Closing Date of the following
conditions, unless waived in writing by Parent:
(a) The representations and warranties of the Company set
forth in this Agreement shall be true and correct in all material respects
(except for representations and warranties qualified by materiality which
shall be true and correct in all respects) as of the date of this Agreement
and, except for representations and warranties that speak as of a specific
date other than the Closing Date (which need only be true and correct in all
material respects as of such date), as of the Closing Date, with the same
force and effect as though such representations and warranties had been made
on and as of the Closing Date.
(b) The Company shall have performed and complied, in all
material respects, with all obligations and covenants required to be
performed or complied with by it under this Agreement at or prior to the
Closing Date.
(c) Parent shall have received from the Company an
officer's certificate certifying to the fulfillment of the conditions
specified in Sections 8.3(a), 8.3(b), 8.3(d), 8.3(e), 8.3(h), 8.3(m) and
8.3(n).
(d) From the date of this Agreement through the Effective
Time, the Company shall not have suffered a Company Material Adverse Effect
and no events or facts that would reasonably be expected to have a Company
Material Adverse Effect shall have occurred or arisen.
(e) All consents, permits and approvals of Governmental
Entities and other private third parties listed in Section 4.4 of the Company
Disclosure Schedule and identified with an asterisk shall have been obtained
with no material adverse conditions attached and no material expense imposed
on the Company.
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(f) Parent shall have received an opinion of Skadden,
Arps, Slate, Meagher & Flom LLP, in form and substance reasonably
satisfactory to Parent, dated as of the date of the Effective Time,
substantially to the effect that, on the basis of facts, representations and
assumptions set forth in the opinion, for United States federal income tax
purposes, the Merger will constitute a "reorganization" within the meaning of
section 368(a) of the Code. In rendering such opinion, Skadden, Arps, Slate,
Meagher & Flom LLP may request, receive and rely upon representations
contained in the certifications of Parent, Merger Sub, the Company and
others, and Parent, Merger Sub and the Company agree to provide such
certifications as Skadden, Arps, Slate, Meagher & Flom LLP may reasonably
request.
(g) Parent shall have received a legal opinion from Troop
Steuber Pasich Reddick & Tobey, LLP in a form satisfactory to Parent.
(h) As of the Effective Time, no litigation or proceeding
shall be threatened or pending against Parent or the Company by any
Governmental Entity that seeks to enjoin or prevent the consummation of the
Merger, or to require Parent to divest or hold separate any business in
connection with the Merger, or which would reasonably be expected to have a
Company Material Adverse Effect.
(i) The Company shall have terminated the Company's
401(k) Plan.
(j) Holders of no more than three percent (3%) of the
outstanding Company Common Stock shall have asserted appraisal rights for
shares of Company Common Stock in accordance with the CGCL.
(k) Parent shall have received from the Company the
FIRPTA Affidavit.
(l) Each of the employees of the Company listed on
Section 8.3(l) of the Company Disclosure Schedule shall have executed
employment agreements with Parent in a form satisfactory to Parent.
(m) The Shareholders set forth in Section 8.3(m) of the
Company Disclosure Schedule, holding at least 60 percent of the voting power
of the Company on a Fully Diluted Basis shall have entered into a shareholder
agreement
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substantially in the form attached hereto as Exhibit H (the "SHAREHOLDER
AGREEMENT").
(n) Each of the Shareholders shall have executed the
Supplemental Indemnification Agreement.
(o) Each issued and outstanding Company Warrant shall
have been exercised in full.
(p) The Company indebtedness set forth on Section 6.8 of
the Company Disclosure Schedule shall have been converted to Company Common
Stock on a basis reasonably satisfactory to Parent.
(q) Parent shall be satisfied as of midnight, February
23, 2000, in its sole discretion, with the results of its due diligence
investigation of the Company; PROVIDED, HOWEVER, that such date shall be
extended by two business days if Parent has not received all materials it has
reasonably requested and had an opportunity to review such materials at least
two business days, PROVIDED, FURTHER, that such extension shall apply only to
matters arising out of those materials requested and not received.
ARTICLE IX
TERMINATION AND AMENDMENT
Section 9.1 TERMINATION. This Agreement may be terminated at
any time prior to the Effective Time, whether before or after approval of the
matters presented in connection with the Merger by the shareholders of the
Company:
(a) by mutual written consent of the Company and Parent;
(b) by either the Company or Parent, if
(i) any Governmental Entity shall have issued an
order, decree or ruling or taken any other action (which order,
decree, ruling or other action the parties hereto shall use their
reasonable best efforts to lift), which permanently restrains, enjoins
or otherwise prohibits the consummation of the Merger and such order,
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decree, ruling or other action shall have become final and
non-appealable;
(ii) the Merger is not approved and adopted by the
Company Required Vote in accordance with the CGCL and the Company
Articles at the Special Meeting;
(iii) the Merger shall not have been consummated
before April 17, 2000 (unless the failure to consummate the Merger by
such date shall be due to the action or failure to act of the party
seeking to terminate); or
(iv) the Commissioner shall finally determine to
deny a permit to issue shares of Parent Common Stock in connection
with the Merger following the Fairness Hearing.
(c) by the Company, if Parent shall have breached any of
its representations or warranties if such representation or warranty is
qualified by materiality or breached in any material respect if not so
qualified, or breached a covenant in any material respect contained in this
Agreement, and which breach cannot be or has not been cured within 30 days
after the giving of written notice by the Company to Parent;
(d) by Parent,
(i) if the Company shall have breached Section
6.2(b);
(ii) if the Company shall have breached any
representation or warranty if such representation or warranty is
qualified by materiality or breached in any material respect if not so
qualified, or breached a covenant in any material respect contained in
this Agreement, and which breach cannot be or has not been cured
within 30 days after the giving of written notice by Parent to the
Company; or
(iii) if the Company Board shall have taken action
pursuant to Section 6.2(a)(ii).
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Section 9.2 EFFECT OF TERMINATION. (a) In the event of the
termination of this Agreement by any party hereto pursuant to the terms of
this Agreement, written notice thereof shall forthwith be given to the other
party or parties specifying the provision hereof pursuant to which such
termination is made, and the Merger shall be deemed abandoned and this
Agreement shall forthwith become void, without liability on the part of any
party hereto, except as provided in this Section 9.2, Section 6.5 and Section
12.1, and except that nothing herein shall relieve any party from liability
for any breach of this Agreement.
(b) If, so long as Parent is not in material breach of
this Agreement and (x) Parent or the Company shall have terminated this
Agreement pursuant to Section 9.1(b)(ii) or (iv) or (y) Parent or the Company
shall have terminated this Agreement pursuant to Section 9.1(b)(iii) or
9.1(d)(iii) and within one year after a termination pursuant to this clause
(y), the Company (or any of its Subsidiaries) shall have directly or
indirectly consummated an Acquisition Transaction, then, in either such case,
the Company shall pay Parent (A) the Termination Fee, plus (B) an amount
equal to Parent's actual, documented out-of-pocket expenses directly
attributable to the negotiation and execution of this Agreement and the
attempted completion of the Merger. Any fees or amounts payable under this
Section 9.2(b) shall be paid in same day funds no later than (i) two business
days after a termination described in clause (x) of this Section 9.2(b), or
(ii) concurrently with or prior to the consummation of, such Acquisition
Transaction, in the case of a termination described in clause (y) of this
Section 9.2(b).
(c) Nothing herein shall preclude any of the parties from
bringing a cause of action for breach of this Agreement by any of the other
parties hereto.
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ARTICLE X
INDEMNIFICATION AND ESCROW
Section 10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties made herein shall survive beyond the Effective
Time and shall continue in full force and effect until the date that is
eighteen months following the Effective Time except that representations and
warranties contained in Sections 4.12, 4.13 and 4.18 shall survive until
thirty (30) days after the expiration of all applicable statute of limitation
periods including any waivers or extensions thereof, at which time such
representations and warranties shall expire except for claims made prior to
such date.
Section 10.2 (a) INDEMNIFICATION BY THE SHAREHOLDERS
INDEMNITORS. The Shareholder Indemnitors shall, jointly but not severally,
indemnify, hold harmless and reimburse each of Parent and the Surviving
Corporation and any employee, director, officer or agent of each of them (the
"INDEMNIFIED PARTIES") for (1) any claim, cost, loss, liability or expense
(including reasonable attorneys' fees and expenses) or other actual damages
(collectively, "DAMAGES") arising, directly or indirectly, from: (a) any
breach of any of the warranties or representations of the Company in this
Agreement, (b) any failure by the Company to perform or comply with any of
its covenants or obligations in this Agreement, (c) any Third Party Claim (as
defined below) relating to a breach referred to in clause (a) or (b) above;
(2) any liabilities of the Company at the Effective Time in excess of the
estimated liabilities as of the date hereof, including any expenses pursuant
to Section 12.1; and (3) the outstanding balance under the Promissory Note as
of the Effective Time plus any principal on the Promissory Note which the
Company has paid with funds other than funds obtained in the ordinary course
of business, consistent with past practice.
(b) INDEMNIFICATION BY PARENT. Parent shall indemnify, hold
harmless and reimburse each Shareholder Indemnitor for any Damages arising,
directly or indirectly from any breach of any warranty or representation of
Parent in this Agreement and any failure by Parent to perform or comply with
any of its covenants or obligations in this Agreement.
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Section 10.3 PROCEDURE FOR THIRD PARTY CLAIMS. Promptly after
receipt by an indemnified party under Section 10.2 (each an "Indemnified
Party") of notice of the commencement of any action or demand or claim by a
third party (a "THIRD PARTY CLAIM") which gives rise to Damages, such
Indemnified Party shall, if a claim in respect thereof is to be made against
an indemnifying party (each an "Indemnifying Party") under such Section, give
notice to the Indemnifying Party (or the Shareholder Representative if the
Shareholder Indemnitors are the Indemnified Parties) of its assertion of such
claim for indemnification and of the commencement of the action of its
assertion of such claim for indemnification and of the commencement of the
action or assertion of the Third Party Claim with respect to which the claim
for indemnification pertains. Failures to so notify the Indemnifying Party
(or the Shareholder Representative, as the case may be) shall not relieve the
Indemnifying Party of any liability that they may have to any Indemnified
Party except to the extent that the defense of such action or Third Party
Claim is materially prejudiced thereby. If any such action shall be brought
or a Third Party Claim shall be asserted against an Indemnified Party and it
shall give notice to the Indemnifying Party or the Shareholder
Representative, as the case may be, of the commencement or assertion thereof,
the Indemnifying Party shall be entitled, at the sole expense of the
Indemnifying Party to participate therein and, to the extent that it shall
wish, to assume the defense thereof with counsel reasonably satisfactory to
such Indemnified Party PROVIDED, HOWEVER, that: (1) the Indemnifying Party
shall not be permitted to enter into any settlement or compromise, or to
consent to the entry of any judgment, with respect to such claim or
Proceeding unless such settlement, compromise or consent imposes no
obligation of any nature on any Indemnified Party and includes an
unconditional release of all Indemnified Parties from all liability relating
to such claim or Proceeding; and (2) if any Indemnified Party determines in
good faith (after consultation with counsel) that, under applicable standards
of professional conduct, an actual or potential conflict exists or might
reasonably be expected to arise between the position of such Indemnified
Party and the position of the Indemnifying Party or any other Person, then
the Indemnified Parties, as a group, at the expense of the Indemnifying
Parties, shall be entitled to separate counsel reasonably acceptable to the
Indemnifying Party to participate in such Proceeding. After notice from the
Indemnifying Party to such Indemnified Party or the Shareholder
Representative, as the case may be, of its election to assume the defense
thereof, the Indemnifying Party shall not be liable to such Indemnified Party
under this Article X for any fees of other counsel or any other expense
(unless such fees or expenses are incurred at the request of the Shareholder
Representative), in each case subsequently incurred by such Indemnified Party
in connection with the defense thereof. If the Indemnified Party or the
Shareholder Representative, as the case may be, receives notice of any
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action or Third Party Claim, it shall promptly notify the Indemnified Party
as to whether, at its expense, it intends to control the defense thereof on
behalf of the Indemnifying Party. If the Indemnifying Party defends an
action, it shall have full control over the litigation, including settlement
and compromise thereof, subject only to the following: no compromise or
settlement thereof may be effected by the Indemnifying Party without the
Indemnified Party's consent (which shall not be unreasonably withheld) unless
(i) there is no finding or admission of any violation of law and no effect on
any other claims that may be made against the Indemnified Party, (ii) the
sole relief provided is monetary damages that are paid in full by the
Indemnifying Party or in the case of a final disposition of such action or
Third Party Claim, out of the Escrow Fund and (iii) there is no effect of the
compromise or settlement of the litigation on future Taxes of the Parent or
the Company. If notice is given to the Indemnified Party or the Shareholder
Representative, as the case may be, of the commencement of any action and it
does not, within 20 days after the Indemnified Party's notice is given, give
notice to the Indemnified Party of its election to assume the defense
thereof, the Indemnified Party shall have full control over the litigation,
including settlement and compromise thereof.
Section 10.4 INDEMNITY PERIOD. No claim for indemnification
under Section 10.2 of the Agreement may be made unless notice is given by the
party seeking such indemnification to the party from whom indemnification is
sought on or prior to the date on which the applicable representation or
warranty expires.
Section 10.5 SATISFACTION OF INDEMNIFICATION CLAIM. Except as
provided in the Shareholder Agreement, following the Effective Time any
indemnification or recovery by Parent or the Surviving Corporation under this
Agreement, any agreement or instrument contemplated hereby, any document
relating hereto or thereto or any Exhibit or Schedule to this Agreement or
otherwise relating to the transactions contemplated hereby shall be limited
solely to the Escrow Shares then in the Escrow Fund, and each Shareholder
Indemnitor's liability shall be limited to such Shareholder Indemnitor's pro
rata share of the Escrow Shares in accordance with the terms of the Escrow
Agreement. In all such cases, the value of the Parent Common Stock to be so
delivered shall be determined pursuant to the terms of the Escrow
Indemnification Agreement.
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Section 10.6 INDEMNIFICATION BASKET. The provisions for
indemnity contained in Section 10.1 shall become effective only in the event
that the aggregate amount of all indemnifiable damages for which the
Shareholder Indemnitors are liable under this Article XI exceeds $500,000
(the "INDEMNIFICATION BASKET"); PROVIDED, HOWEVER, that in the event the
indemnification damages for which the Shareholders are liable exceed the
Indemnification Basket, the Shareholder Indemnitors shall be responsible for
the entire amount of all such damages, consistent with Section 10.1 hereof;
and PROVIDED, FURTHER, that the foregoing limitation shall not apply in
respect of the indemnification obligations described in clause (3) of
Section 10.2. For purposes of determining whether the Indemnification Basket
has been satisfied with respect to any breach of the representations and
warranties contained in Article IV hereof that are qualified by the phrase
"Company Material Adverse Effect," any such representation or warranty so
qualified shall be deemed breached if it is untrue or incorrect, regardless
of whether such breach would or could have a Company Material Adverse Effect.
For the purposes of determining individual or aggregate Damages, the amount
of each claim shall be deemed to be an amount (i) net of any insurance
proceeds and any indemnity contribution or other similar payment recoverable
by the Indemnified Party or any Affiliate from any third party with respect
thereto, (ii) net of any reserves provided for the specific item in question
on the December Balance Sheet and (iii) net of any refund, credit or other
reduction in otherwise required Tax payments of the Indemnified Party of any
Affiliate thereof for the taxable period in which the indemnity payment is
mad, or (by reason of a carryback) any taxable period prior to the date of
such indemnity payment, which is attributable to or arising out of such
payment; provided, however, that the determination of any refund, credit or
other reduction in otherwise required Tax payments pursuant to this clause
(iii) shall be determined by the Parent in its sole and absolute discretion.
Section 10.7 FIRPTA AFFIDAVIT. At the Closing, the Company
shall provide an affidavit, in a form reasonably satisfactory to Parent,
stating under penalties of perjury that the Company is not and has never been
a United States real property holding corporation (as defined in section
897(c)(2) of the Code) (the "FIRPTA AFFIDAVIT").
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ARTICLE XI
DEFINITIONS AND INTERPRETATION
Section 11.1 DEFINITIONS. For all purposes of this Agreement,
except as otherwise expressly provided or unless the context clearly requires
otherwise:
"Acquisition Transaction" shall have the meaning set forth in
Section 6.2 hereof.
"Affiliate" shall have the meaning set forth in Rule 12b-2 of the
Exchange Act.
"Agreement" or "this Agreement" shall mean this Agreement and
Plan of Reorganization and Merger, together with the Exhibits and Schedules
hereto and the Company Disclosure Schedule.
"Ancillary Agreements" shall mean the Voting and Warrant Exercise
Agreement, the Shareholders Agreement and the Indemnification Escrow
Agreement.
"Application" shall mean the Application for Permit under Section
25121 of the California Corporations Code to be filed in accordance with
Section 4.8 of this Agreement with the California Department of Corporations,
including the disclosure documents relating thereto.
"Audits" shall have the meaning set forth in Section 4.12 hereof.
"Bylaws" shall mean the Bylaws of the Company.
"CGCL" shall mean the California General Corporation Law.
"Cancelled Shares" shall have the meaning set forth in Section 2.1
hereof.
"Certificate of Merger" shall have the meaning set forth in
Section 1.3 hereof.
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"Closing" shall mean the closing referred to in Section 1.2
hereof.
"Closing Date" shall mean the date on which the Closing occurs.
"Code" shall have the meaning set forth in the recitals hereto.
"Commissioner" shall mean the Commission of Corporations of the
State of California.
"Company" shall have the meaning set forth in the preamble
hereto.
"Company Articles" shall have the meaning set forth in 4.1 hereof.
"Company Benefit Plan" shall mean the Company's 1999 Stock Option
Plan.
"Company Board" shall mean the Board of Directors of the Company.
"Company Capital Stock" shall mean the Company Common Stock and
Company Preferred Stock.
"Company Certificates" shall have the meaning set forth in
Section 3.1 hereof.
"Company Common Stock" shall mean the common stock, no par value,
of the Company.
"Company Disclosure Schedule" shall have the meaning set forth in
Article IV.
"Company Financial Statements" shall have the meaning set forth
in Section 4.5 hereof.
"Company Intellectual Property" shall have the meaning set forth
in Section 4.14 hereof.
"Company Material Adverse Effect" shall have the meaning set
forth in Section 4.1 hereof.
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"Company Option" shall have the meaning set forth in Section 2.3
hereof.
"Company Preferred Stock" shall mean the Series A Preferred
Stock, no par value, of the Company.
"Company Required Vote" shall have the meaning set forth in
Section 8.1 hereof.
"Company Stock Plan" shall have the meaning set forth in Section 2.
"Company Warrants" shall have the meaning set forth in Section 2.2
hereof.
"Content" shall have the meaning set forth in Section 4.14 hereof.
"Copyrights" shall have the meaning set forth in Section 4.14
hereof.
"Current Taxes" shall have the meaning set forth in Section 4.12
hereof.
"CSL" shall have the meaning set forth in Section 4.4 hereof.
"CSL Permit" shall mean the permit issued by the Commissioner
authorizing the issuance of the Parent Common Stock pursuant to the terms and
conditions of this Agreement.
"Date Data" shall have the meaning set forth in Section 4.14
hereof.
"Damages" shall have the meaning set forth in Section 10.2 hereof.
"December Balance Sheet" shall have the meaning set forth in
Section 4.5 hereof.
"Dissenting Shares" shall have the meaning set forth in Section 3.3
hereof.
"Effective Time" shall have the meaning set forth in Section 1.3
hereof.
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<PAGE>
"Environmental Claim" shall have the meaning set forth in
Section 4.18 hereof.
"Environmental Laws" shall have the meaning set forth in
Section 4.18 hereof.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"ERISA Affiliate" shall have the meaning set forth in Section 4.13
hereof.
"ERISA Plans" shall have the meaning set forth in Section 4.13
hereof.
"Escrow Shares" shall have the meaning set forth in Section 3.1
hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Exchange Agent" shall mean the Person or Persons designated by
the Parent and reasonably acceptable to the Company to act as exchange agent
for payment of the Merger Consideration.
"Exchange Fund" shall have the meaning set forth in Section 3.1
hereof.
"Exchange Ratio" shall have the meaning set forth in Section 2.2.
"Fairness Hearing" shall have the meaning set forth in Section 4.4
hereof.
"FIRPTA Affidavit" shall have the meaning set forth in Section 10.7
hereof.
"Fully Diluted Basis" - calculations made on a Fully Diluted
Basis shall include:
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<PAGE>
(a) the number of shares of Company Common Stock
outstanding immediately prior to the Effective Time;
(b) the number of shares of Company Common Stock issuable
upon the conversion of any shares of Company Preferred Stock outstanding
immediately prior to the Effective Time;
(c) the number of shares of Company Common Stock issuable
upon the exercise of any Company Options outstanding immediately prior to the
Effective Time (whether or not such Company Options are then exercisable);
(d) the number of shares of Company Common Stock issuable
upon the exercise of any Company Warrants outstanding immediately prior to
the Effective Time (whether or not such Company Warrants are then
exercisable);
(e) the number of shares of Company Common Stock issuable
upon the exercise of, and, if applicable, subsequent conversion of, any other
rights to acquire any securities of the Company of any nature whatsoever; and
(f) the reduction in the number of shares of Company
Common Stock received by a holder of any Company Option or Company Warrant as
a result of a "cashless exercise" of such Company Option or Company Warrant
at any time between February 16, 2000 and the Effective Time.
"Governmental Entity" shall have the meaning set forth in
Section 4.4 hereof.
"Hearing Notice" shall have the meaning set forth in Section 7.1
hereof.
"Hearing Request" shall have the meaning set forth in Section
7.1 hereof.
"Indebtedness" shall have the meaning set forth in Section 4.2
hereof.
"Indemnification Escrow Agreement" shall have the meaning set
forth in the recitals hereto.
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<PAGE>
"Indemnification Basket" shall have the meaning set forth in
Section 10.6 hereof.
"Indemnified Parties" shall have the meaning set forth in
Section 10.2 hereof.
"Information Statement"shall have the meaning set forth in
Section 4.8 hereof.
"Intellectual Property" shall have the meaning set forth in
Section 4.14 hereof.
"Letter of Transmittal" shall have the meaning set forth in
Section 3.1 hereof.
"License Agreements" shall have the meaning set forth in
Section 4.14 hereof.
"Lien" shall have the meaning set forth in Section 4.4 hereof.
"Loan Obligations" shall have the meaning set forth in Section 7.7
hereof.
"Losses" shall have the meaning set forth in Section 7.3 hereof.
"Materials of Environmental Concern" shall have the meaning set
forth in Section 4.18 hereof.
"Merger" shall have the meaning set forth in the recitals hereto.
"Merger Consideration" shall have the meaning set forth in
Section 2.2.
"Merger Sub" shall have the meaning set forth in the preamble
hereto.
"Notice Materials" shall have the meaning set forth in Section 7.1
hereof.
"Parent" shall have the meaning set forth in the preamble hereto.
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<PAGE>
"Parent Common Stock" shall have the meaning set forth in
Section 2.2 hereof.
"Parent Material Adverse Effect" shall have the meaning set
forth in Section 5.1 hereof.
"Parent SEC Documents" shall have the meaning set forth in
Section 5.5 hereof.
"Parent Shares" shall have the meaning set forth in Section 2.2
hereof.
"Patents" shall have the meaning set forth in Section 4.14 hereof.
"PBGC" shall have the meanings set forth in Section 4.13 hereof.
"Person" shall mean a natural person, partnership, corporation,
limited liability company, business trust, joint stock company, trust,
unincorporated association, joint venture, Governmental Entity or other
entity or organization.
"Proceeding" shall have the meaning set forth in Section 7.3
hereof.
"Promissory Note" shall mean the Convertible Promissory Note of
the Company payable to Parent, dated January 28, 2000.
"Secretary of State" shall mean the Secretary of State of the
State of California.
"Plans" shall have the meaning set forth in Section 4.13 hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Shareholder Agreement" shall have the meaning set forth in
Section 8.2 hereof.
"Shareholders" shall mean the holders of the Company Capital
Stock and Company Warrants.
"Software" shall have the meaning set forth in Section 4.14 hereof.
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<PAGE>
"Special Meeting" shall mean the special meeting of Shareholders
convened for the purpose of approving and adopting this Agreement and the
transactions contemplated herein.
"Subsidiary" shall mean, with respect to any person, any
corporation or other organization, whether incorporated or unincorporated, of
which (i) at least a majority of the securities or other interests having by
their terms ordinary voting power to elect a majority of the board of
directors or others performing similar functions with respect to such
corporation or other organization is directly or indirectly owned or
controlled by such party or by any one or more of its Subsidiaries, or by
such party and one or more of its Subsidiaries or (ii) such party or any
other Subsidiary of such party is a general partner (excluding any such
partnership where such party or any Subsidiary of such party does not have a
majority of the voting interest in such partnership).
"Surviving Corporation" shall mean the successor or surviving
corporation in the Merger.
"System" shall have the meaning set forth in Section 4.14 hereof.
"Tax" or "Taxes" shall have the meaning set forth in Section 4.12
hereof.
"Tax Return" shall have the meaning set forth in Section 4.12
hereof.
"Termination Fee" shall mean $5,000,000.
"Third Party Claim" shall have the meaning set forth in Section 10.3
hereof.
"Trade Secrets" shall have the meaning set forth in Section 4.14
hereof.
"Trademarks" shall have the meaning set forth in Section 4.14
hereof.
"US GAAP" shall have the meaning set forth in Section 4.5 hereof.
"Voting Debt" shall have the meaning set forth in Section 4.2
hereof.
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<PAGE>
"WARN Act" shall have the meaning set forth in Section 4.16 hereof.
"Year 2000 Compliant" and "Year 2000 Compliance" shall have the
meaning set forth in Section 4.14 hereof.
Section 11.2 INTERPRETATION.
(a) When a reference is made in this Agreement to a section or
article, such reference shall be to a section or article of this Agreement
unless otherwise clearly indicated to the contrary.
(b) Whenever the words "include," "includes" or "including" are
used in this Agreement they shall be deemed to be followed by the words
"without limitation."
(c) The words "hereof," "herein" and "herewith" and words of
similar import shall, unless otherwise stated, be construed to refer to this
Agreement as a whole and not to any particular provision of this Agreement,
and article, section, paragraph, exhibit and schedule references are to the
articles, sections, paragraphs, exhibits and schedules of this Agreement
unless otherwise specified.
(d) The plural of any defined term shall have a meaning
correlative to such defined term and words denoting any gender shall include
all genders. Where a word or phrase is defined herein, each of its other
grammatical forms shall have a corresponding meaning.
(e) A reference to any party to this Agreement or any other
agreement or document shall include such party's successors and permitted
assigns.
(f) A reference to any legislation or to any provision of any
legislation shall include any modification or re-enactment thereof, any
legislative provision substituted therefor and all regulations and statutory
instruments issued thereunder or pursuant thereto.
(g) The parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of
intent or interpretation arises, this Agreement shall be construed as if
drafted jointly by the parties, and no presumption or burden of proof shall
arise favoring or disfavoring any party by virtue of the authorship of any
provisions of this Agreement.
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<PAGE>
ARTICLE XII
MISCELLANEOUS
Section 12.1 FEES AND EXPENSES. Except as specifically provided
to the contrary in this Agreement, all costs and expenses incurred in
connection with this Agreement and the consummation of the Merger shall be
paid by the party incurring such expenses; PROVIDED, that (i) any fees and
expenses of the Company in excess of $800,000 incurred in connection with
this Agreement and the consummation of the Merger shall be borne by the
Shareholder Indemnitors and (ii) if any legal action is instituted to enforce
or interpret the terms of this Agreement, the prevailing party in such action
shall be entitled, in addition to any other relief to which the party is
entitled, to reimbursement of its actual attorneys fees.
Section 12.2 AMENDMENT. This Agreement may be amended by the
written agreement by each of the parties hereto but no amendment shall be
made that by law requires further approval by the Shareholders without such
approval. This Agreement may not be amended except by an instrument in
writing signed on behalf of Parent, Merger Sub and the Company.
Section 12.3 EXTENSION; WAIVER. At any time prior to the
Effective Time, the parties hereto may, to the extent legally allowed, (i)
extend the time for the performance of any of the obligations or other acts
of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party.
Section 12.4 NOTICES. All notices and other communications
hereunder shall be in writing (and shall be deemed given upon receipt) if
delivered personally, sent by facsimile transmission (receipt of which is
confirmed) or by mail to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
75
<PAGE>
(a) if to the Company, to
SDR Technologies, Inc.
31225 La Baya Drive, Suite 107
Westlake Village, California 91362
Attention: Kelly Kimball
Facsimile No.: (818) 865-1315
with a copy to:
Troop Steuber Pasich Reddick & Tobey, LLP
2029 Century Park East, 24th Floor
Los Angeles, California 90067
Attention: V. Joseph Stubbs, Esq.
Facsimile No.: (310) 728-2243
and
(b) if to Parent, to
National Information Consortium, Inc.
10975 Benson Street
Suite 390, 12 Corporate Woods
Overland Park, Kansas 66210
Attention: Kevin Childress
Facsimile No.: (913) 498-3472
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
300 S. Grand Avenue, Suite 3400
Los Angeles, California 90071
Attention: Rod A. Guerra, Esq.
Facsimile No.: (213) 687-5600
76
<PAGE>
Section 12.5 DESCRIPTIVE HEADINGS. The descriptive headings
herein are inserted for convenience only and are not intended to be part of
or to affect the meaning or interpretation of this Agreement.
Section 12.6 COUNTERPARTS. This Agreement may be executed in
two or more counterparts, all of which shall be considered one and the same
agreement and shall become effective when two or more counterparts have been
signed by each of the parties and delivered to the other parties, it being
understood that all parties need not sign the same counterpart.
Section 12.7 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement
(including the Exhibits and Schedules attached hereto) together with the
agreements to be delivered at Closing (a) constitutes the entire agreement
and supersedes all prior agreements and understandings, both written and
oral, among the parties with respect to the subject matter hereof, any
provisions of any such latter agreement which are inconsistent with the
transactions contemplated by this Agreement being waived hereby, and (b)
shall not be assigned by operation of law or otherwise except that Parent and
Merger Sub may assign, in their sole discretion, any or all of their rights,
interests and obligations hereunder to any direct or indirect wholly or
majority owned Subsidiary or Affiliate of Parent; PROVIDED, HOWEVER, that
such assignment shall not relieve Parent of its obligations hereunder.
Section 12.8 GOVERNING LAW. This Agreement shall be governed
and construed in accordance with the laws of the State of California without
regard to any applicable principles of conflicts of law.
Section 12.9 SPECIFIC PERFORMANCE. The parties hereto agree
that if any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached, irreparable
damage would occur, no adequate remedy at law would exist and damages would
be difficult to determine, and that the parties shall be entitled to specific
performance of the terms hereof, in addition to any other remedy at law or
equity.
Section 12.10 PARTIES IN INTEREST. Except as set forth in
Sections 7.3 and 10.2 hereof (which are intended to be for the benefit of the
Persons referred to therein and their beneficiaries, and may be enforced by
such Persons as intended third-party beneficiaries), this Agreement shall be
binding upon and inure solely to the benefit of each party hereto, and
nothing in this Agreement, express or implied, is
77
<PAGE>
intended to or shall confer upon any other Person or Persons any rights,
benefits or remedies of any nature whatsoever under or by reason of this
Agreement.
78
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be signed by their respective officers thereunto duly authorized as of the
date first written above.
NATIONAL INFORMATION CONSORTIUM, INC.
By:
--------------------------------
Name:
Title:
SDR ACQUISITION CORP.
By:
--------------------------------
Name:
Title:
SDR TECHNOLOGIES, INC.
By:
-----------------------------
Name:
Title:
<PAGE>
Exhibit 21.1
LIST OF SUBSIDIARIES
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
1. Kansas Information Consortium, Inc. Kansas, U.S.
2. Indiana Interactive, Inc. Indiana, U.S.
2a. City-County Interactive, LLC Indiana, U.S.
3. National Information Consortium, U.S.A., Inc. Kansas, U.S.
4. Arkansas Information Consortium, Inc. Arkansas, U.S.
5. Nebraska Interactive, Inc. Nebraska, U.S.
6. Virginia Interactive, LLC Virginia, U.S.
7. Iowa Interactive, Inc. Iowa, U.S.
8. New England Interactive, Inc. Maine, U.S.
9. Utah Interactive, Inc. Utah, U.S.
10. Hawaii Information Consortium, Inc Hawaii, U.S.
11. Idaho Information Consortium, Inc Idaho, U.S.
12. eFed, Inc Virgina, U.S.
<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 February 17, 2000 relating to the consolidated financial
statements of National Information Consortium, Inc., which appears in such
Registration Statement. We also consent to the use in such Registration
Statement of our reports dated May 6, 1999 relating to the financial statements
of Indian@ Interactive, Inc., Kansas Information Consortium, Inc., Arkansas
Information Consortium, Inc., and Nebrask@ Interactive, Inc., which appear in
such Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
/s/ PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
February 22, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated September 2, 1999, with respect to the financial
statements of eFed, a Division of Electric Press, Inc. for the two years ended
December 31, 1998 included in the Registration Statement (Form S-1 No. 333-___)
and related Prospectus of National Information Consortium, Inc. for the
registration of shares of its common stock.
/s/ Ernst & Young LLP
McLean, Virginia
February 22, 2000
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement on Form S-1 of National
Information Consortium, Inc. of our report dated February 9, 2000 with respect
to the financial statements of SDR Technologies, Inc. and Subsidiary as of
December 31, 1998 and 1999 and the two years ended December 31, 1999 included in
this Form S-1. We also consent to the reference to us under the heading
"Experts" in such Registration Statement.
/s/ Hurley & Company
Granada Hills, California
February 22, 2000
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<PAGE>
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 9,527,389
<SECURITIES> 82,480,760
<RECEIVABLES> 6,009,925
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 99,068,649
<PP&E> 2,998,376
<DEPRECIATION> 0
<TOTAL-ASSETS> 133,660,938
<CURRENT-LIABILITIES> 5,353,813
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 128,088,961
<TOTAL-LIABILITY-AND-EQUITY> 133,660,938
<SALES> 0
<TOTAL-REVENUES> 56,966,128
<CGS> 0
<TOTAL-COSTS> 42,190,835
<OTHER-EXPENSES> 29,245,664
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (168,872)
<INCOME-PRETAX> (12,146,783)
<INCOME-TAX> (1,416,223)
<INCOME-CONTINUING> (10,730,560)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (10,730,560)
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