<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 15, 2000
REGISTRATION NO. 333-30872
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
NATIONAL INFORMATION CONSORTIUM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
COLORADO 7375 52-2077581
(State or other jurisdiction 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 (4)
<S> <C> <C> <C> <C>
Common Stock, without par value...... 9,315,000 $60.1875 $560,646,563 $148,011
</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 March 8, 2000.
(4) The registrant previously paid $130,336 in connection with the filing of the
registration statement on February 22, 2000 in accordance with
Section 6(b).
------------------------------
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 MARCH 15, 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 March 14, 2000 was
$65.50 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 $65.50 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....................................... 82,481 331,867
Total assets................................................ 133,661 383,047
Long-term debt (includes current portion of notes payable/
capital lease obligations)................................ 458 458
Total shareholders' equity.................................. 128,089 377,475
</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 as a medium for
government procurement and filings. We cannot assure you that customer
acceptance
7
<PAGE>
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 29, 2000, we had a total of
235 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.
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
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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 and our ability to enter
into contracts with those entities. We cannot assure you that government
entities will choose to provide electronic government services at all, that they
will not provide such services themselves without private assistance or adopting
our public/ private model, or that we will be selected as the service provider
if the model is adopted.
For example, recently the state of Texas considered our proposal for a
public/private portal that involved a more limited number of revenue-based
applications and services than our other state portals. We were subsequently
informed that the state of Texas did not select our proposal and is currently
negotiating with another vendor.
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 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
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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 have begun 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 due to 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 DOES 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 57.5%
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 42.8% 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
42.8% 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 or all 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 810,614 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, with this volatility
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 $249,386,000 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 $65.50 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 $65.50 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.................................. 149,036 398,422
Accumulated deficit......................................... (16,557) (16,557)
Accumulated other comprehensive income...................... 2 2
-------- --------
Total....................................................... 132,481 381,867
Less deferred compensation expense and other................ (4,392) (4,392)
-------- --------
Total shareholders' equity.................................. $128,089 $377,475
-------- --------
Total capitalization........................................ $128,307 $377,693
======== ========
</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 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)........................ $32.313 $11.250
Fourth Quarter............................................ $44.125 $23.875
<CAPTION>
FISCAL 2000
- -----------
First Quarter (through March 14, 2000). $ 78.000 $ 28.000
<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 $65.50 on March 14, 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 $65.50 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 $346.8 million, or $6.05 per share. This
represents an immediate increase in as adjusted net tangible book value of $4.22
per share to existing shareholders and an immediate dilution of $59.45 per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $ 65.50
Net tangible book value per share as of December 31,
1999.................................................... $ 1.83
Increase per share attributable to new investors.......... 4.22
------
As adjusted net tangible book value per share after the
offering.................................................. 6.05
-------
Dilution per share to new investors......................... $ 59.45
=======
</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 March 3, 2000, eFed formed a limited liability company with Bank of
America Corporation through its subsidiary, Bank of America, N.A. (USA), 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, 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
30
<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 they
affect 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 March 3 of this year, eFed and Bank of America Corporation formed 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. 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
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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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<PAGE>
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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<PAGE>
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.
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.
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
44
<PAGE>
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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<PAGE>
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 have begun 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--Strategy, Policy and Legal, and
Jr...................... General 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. 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--Strategy, 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 42.8% of the 57,350,878 shares 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--STRATEGY, 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--Strategy, 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 53,215,616 shares of our common
stock outstanding as of January 31, 2000 and 57,350,878 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 42.8%
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 42.8
James B. Dodd.......................... 602,714 1.1 100,363 502,351 *
William F. Bradley, Jr................. 1,835,363 3.4 194,119 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. Herington..................... 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........................ 41,442 * -- 41,442 *
Ross C. Hartley........................ 27,469,884 51.6 2,905,378 24,564,506 42.8
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. Mazan, II
11440 Isaac Newton Square, #205
Reston, VA 20190....................... 202,000 * 30,300 171,700 *
Robert B. Main
11440 Isaac Newton Square, #205
Reston, VA 20190....................... 202,000 * 30,300 171,700 *
Ronald Linehan
11440 Isaac Newton Square, #205
Reston, VA 20190....................... 202,000 * 30,300 171,700 *
All executive officers and directors as
a group (14 persons)................. 37,005,023 69.5 4,009,100 32,995,923 57.5%
</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
January 31, 2000. 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 390,152 shares subject to options exercisable within
60 days of January 31, 2000, 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 57,350,878 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 108 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 42.8% 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 57,350,878 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..............................
FAC/Equities, a division of 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
131 filed public offerings of equity securities, of which 96 have been
completed, and has acted as a syndicate member in an additional 64 public
offerings of equity securities. 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
shareholders 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 shareholders 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.
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............... $ 148,011
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...................................... 489
==========
Total................................................. $1,213,000
</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 Amendment No. 1 to 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 15th day of March, 2000.
<TABLE>
<S> <C> <C>
NATIONAL INFORMATION CONSORTIUM, INC.
BY: /S/ JAMES B. DODD
-----------------------------------------
James B. Dodd
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman and Director
------------------------------------------- March 15, 2000
Jeffery S. Fraser
President, Chief Executive
/s/ JAMES B. DODD Officer and Director
------------------------------------------- (Principal Executive March 15, 2000
James B. Dodd Officer)
* Chief Financial Officer
------------------------------------------- (Principal Financial and March 15, 2000
Kevin C. Childress Accounting Officer)
* Director
------------------------------------------- March 15, 2000
John L. Bunce, Jr.
* Director
------------------------------------------- March 15, 2000
Daniel J. Evans
* Director
------------------------------------------- March 15, 2000
Ross C. Hartley
* Director
------------------------------------------- March 15, 2000
Patrick J. Healy
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Director
------------------------------------------- March 15, 2000
Pete Wilson
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ JAMES B. DODD
--------------------------------------
James B. Dodd
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
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EXHIBIT
NUMBER DOCUMENT
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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*
4.5 Common Stock Call Option dated as of March 3, 2000 by the
Registrant and Bank of America, N.A.
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*
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
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10.16 Contract for Network Manager Services between the Nebrask@
State Records Board on behalf of the State of Nebrask@ and
Nebrask@ Interactive, Inc. dated December 3, 1997 with
addendum No. 1 dated as of the same date*
10.17 Contract for Network Manager Services between the
Commonwealth of Virginia by and through the Virginia
Information Providers Network Authority and Virginia
Interactive, LLC dated January 15, 1998*
10.18 Contract for Network Manager Services between Iowa
Interactive, Inc. and the State of Iowa by and through
Information Technology Services dated April 23, 1998 with
letter addendum dated August 7, 1998*
10.19 Contract for Network Manager Services between the
Consolidated City of Indianapolis and Marion County by and
through the Enhanced Access Board of Marion County and City-
County Interactive, LLC dated August 31, 1998 with addendum
dated as of the same date*
10.20 State of Maine Contract for Special Services with New
England Interactive, Inc. dated April 14, 1999*
10.21 State of Idaho Contract for Electronic Business and portal
Services with the Idaho Department of Administration and
other Public Agencies, dated December 7, 1999**
10.22 State of Hawaii Contract for Special Services with the State
of Hawaii dated December 29, 1999**
10.23 Employment Agreement between the Registrant and Kevin C.
Childress dated May 16, 1999*
10.24 Sublease for the Registrant's offices at 12 Corporate Woods,
Overland Park dated May 14, 1999 and 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**
10.33 First Sublease Modification Agreement for the Registrant's
offices at 12 Corporate Woods, Overland Park dated
December 15, 1999
21.1 Subsidiaries of the Registrant**
23.1 Consent of Morrison & Foerster LLP. Reference is made to
Exhibit 5.1.**
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.3 Consent of Ernst & Young LLP, Independent Auditors
23.4 Consent of Hurley & Company, Independent Auditors
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
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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>
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* Incorporated by reference to Registration Statement on Form S-1, File
No. 333-77939.
** Previously filed.
<PAGE>
THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE BEEN
ACQUIRED IN A PRIVATE PLACEMENT AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED UNLESS
THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH
SECURITIES, OR THE CORPORATION RECEIVES AN OPINION OF COUNSEL (WHICH MAY BE
THE COUNSEL FOR THE CORPORATION) STATING THAT SUCH SALE OR TRANSFER IS EXEMPT
FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
-------------------------------
NATIONAL INFORMATION CONSORTIUM, INC.
COMMON STOCK CALL OPTION
1,400,000 Shares
Void After
December 31, 2009
This Common Stock Call Option (this "WARRANT") is dated as of March 3,
2000, and is issued for good and valuable consideration, the receipt of which
is hereby acknowledged, by NATIONAL INFORMATION CONSORTIUM, INC., a Colorado
corporation (the "COMPANY"), to BANK OF AMERICA, N.A. ("BofA"). The term
"HOLDER" shall initially refer to BofA, the initial holder of this Warrant,
and shall further refer to any subsequent permitted holder of this Warrant
from time to time.
1. PRICE AND EXERCISE OF WARRANT. The Company does hereby certify and
agree that the Holder hereby is entitled to purchase from the Company up to
1,400,000 duly authorized, validly issued, fully paid and non-assessable
shares of the Company's common stock, without par value ("COMMON STOCK"),
upon the terms and subject to the provisions of this Warrant.
1.1 EXERCISABILITY OF WARRANT. Shares of Common Stock shall vest
and be purchasable upon exercise of this Warrant (the "SHARES") only if this
Warrant has become exercisable according to the following provisions:
(a) This Warrant shall become exercisable as of the date when,
and only if, the Shared Revenues (as defined in the Operating Agreement) with
respect to the joint venture by and between the Holder and eFed, Inc., a
wholly-owned subsidiary of the Company, aggregates at least $86,250,000 prior
to December 31, 2004, which revenues shall be calculated in accordance with
accounting principles mutually agreed to by the Holder and the Company (or as
determined by a reputable third-party accountant) (as so calculated, the
"CUMULATIVE REVENUES").
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(b) Upon the first occurrence of the Cumulative Revenues
aggregating at least $86,250,000 (the "FIRST VESTING"), 420,000 Shares shall
vest and may be purchased upon exercise of this Warrant. At the end of each
fiscal quarter thereafter, if the Cumulative Revenues have increased in
comparison to the immediately preceding fiscal quarter (each, including the
First Vesting, a "VESTING EVENT"), additional Shares shall vest, and the
number of such Shares shall be the product of (X) 420,000 Shares, multiplied
by (Y) a fraction, (A) the numerator of which is the difference between (x)
the Cumulative Revenues at the end of such fiscal quarter and (y) the
Cumulative Revenues at the end of the fiscal quarter immediately preceding
such fiscal quarter, and (B) the denominator of which is $86,250,000. All
Shares which have vested pursuant to this Section 1.1(b) shall be hereinafter
referred to as the "VESTED SHARES."
(c) Notwithstanding anything to the contrary in this Warrant,
no Vesting Event shall occur after December 31, 2004, and under no
circumstances shall the total number of Vested Shares exceed 1,400,000.
1.2 EXERCISE PRICE. At each Vesting Event, a price per share at
which the Vested Shares may be purchased by exercise of this Warrant shall be
assigned to such Vested Shares (each such price, a "WARRANT PRICE"). At each
Vesting Event, one-half of the Vested Shares shall bear a Warrant Price of
$34.44 (the "BASE WARRANT PRICE"), and all remaining Vested Shares shall bear
a Warrant Price that is thirty percent greater than the Base Warrant Price.
1.3 TERM OF WARRANT. This Warrant shall be exercisable until the
later of (a) December 31, 2005 or (b) the twenty-four (24) month anniversary
of the final Vesting Event (the expiration date for this Warrant is
hereinafter referred to as the applicable "EXPIRATION DATE").
1.4 EXERCISE OF WARRANT.
(a) This Warrant may be exercised, in whole or in part, upon
surrender to the Company of the certificate or certificates evidencing this
Warrant to be exercised and delivery of a duly completed and executed form of
election to exercise attached hereto as EXHIBIT A (the "ELECTION TO
EXERCISE") and payment to the Company of the aggregate Warrant Price for the
number of Shares in respect of which this Warrant is then being exercised
(the "EXERCISE PAYMENT"). Shares which have been purchased pursuant to an
effective exercise of this Warrant are hereinafter referred to as "WARRANT
SHARES."
(b) Payment of the Exercise Price may be made (i) in cash or
by cashier's or bank check or (ii) by making a Cashless Exercise (as
hereinafter defined). Upon a "CASHLESS EXERCISE," the Holder shall receive
Warrant Shares on a net basis such that, without the payment of any funds,
the Holder shall surrender this Warrant in exchange for the number of Shares
equal to the product of (A) the number of Shares as to which this Warrant is
being exercised, multiplied by (B) a fraction, (X) the numerator of which is
the aggregate fair market value price of such Common Stock less the aggregate
then applicable exercise price, and (Y) the denominator of which is such
aggregate fair market value price.
(c) Subject to SECTION 5 hereof, upon surrender of this
Warrant and delivery of a duly completed and executed Election of Exercise
and Exercise Payment, the
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Company shall cause to be issued and delivered to the Holder, or such other
person as the Holder may designate in writing, a certificate or certificates
for the number of Warrant Shares so purchased upon the exercise of this
Warrant. Such certificate or certificates shall be deemed to have been issued
and any person so designated to be named therein shall be deemed to have
become a holder of record of such shares of Common Stock as of the date of
surrender of this Warrant and delivery of the duly completed and executed
Election of Exercise and Exercise Payment; PROVIDED that, if the date of
surrender of this Warrant and payment of the Warrant Price is not a business
day, the certificates for the Warrant Shares shall be issued as of the next
business day (whether before or after the Expiration Date), and until such
date, the Company shall be under no duty to cause to be delivered any
certificate for such Warrant Shares or for shares of such other class of
stock. If this Warrant is exercised in part, a new warrant certificate of the
same tenor and for the number of Shares not exercised shall be executed by
the Company.
1.5 FRACTIONAL INTERESTS. The Company shall not be required to
issue fractions of Warrant Shares on the exercise of this Warrant. If any
fraction of a Warrant Share would be issuable upon the exercise of this
Warrant (or any portion thereof), the Company shall purchase such fraction
for an amount in cash equal to the same fraction of the last reported sale
price of the Common Stock on the NASDAQ National Market System or any other
national securities exchange on which the Common Stock is then listed.
2. COVENANTS OF THE COMPANY.
2.1 The Company shall at all times reserve for issuance and keep
available out of its authorized and unissued shares of Common Stock, solely
for the purpose of providing for the exercise of this Warrant, such number of
shares of Common Stock as shall from time to time be sufficient therefor.
2.2 The Company will not, by amendment of its charter documents or
otherwise, avoid or seek to avoid the observance or performance of any of the
terms of this Warrant. Without limiting the foregoing, the Company (a) will
not increase the par value of any shares of capital stock receivable upon the
exercise of this Warrant above the amount payable therefor upon such exercise
and (b) will take all such action as may be necessary or appropriate in order
that the Company may validly and legally issue fully paid and nonassessable
shares of capital stock upon the exercise of this Warrant.
2.3 The issuance of certificates for shares of Common Stock upon
exercise of this Warrant shall be made without charge to the Holder for any
issuance tax in respect thereof or other cost incurred by the Company in
connection with such exercise and the related issuance of shares of Common
Stock. Each share of Common Stock issuable upon exercise of this Warrant
shall upon payment of the Exercise Price therefor, be fully paid and
nonassessable and free from all liens and charges with respect to the
issuance thereof.
2.4 To the extent commercially reasonable, the Company shall assist
and cooperate with any requirement imposed upon the Holder to make any
governmental filings or obtain any governmental approvals prior to or in
connection with any exercise of this Warrant (including, without limitation,
making any filings required to be made by the Company); provided
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that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any jurisdiction unless the Company is already required
to qualify to do business or subject to service in such jurisdiction.
3. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF WARRANT SHARES. The Warrant
Price in effect at any time and the number and kind of securities purchasable
upon the exercise of this Warrant shall be subject to adjustment from time to
time upon the occurrence of certain events, as hereinafter provided.
3.1 In case the Company shall hereafter (i) pay a dividend or make
a distribution on its Common Stock in shares of its Common Stock, (ii)
subdivide its outstanding Common Stock, (iii) combine its outstanding Common
Stock into a smaller number of shares, or (iv) issue any shares by
reclassification of its Common Stock (including any such reclassification in
connection with a consolidation or merger in which the Company is the
continuing corporation), the Warrant Price in effect at the time of the
record date for such dividend or distribution or the effective date of such
subdivision, combination or reclassification shall be proportionately
adjusted so that the Holder, upon exercise of this Warrant after such date,
shall be entitled to receive the aggregate number and kind of shares of
Common Stock which, if this Warrant had been exercised immediately prior to
such record date, it would have owned upon such exercise and been entitled to
receive upon such dividend, distribution, subdivision, combination or
reclassification.
3.2 Whenever the Warrant Price payable upon exercise of this
Warrant is adjusted pursuant to SECTION 3.1 above, the number of Shares
purchasable upon exercise of this Warrant shall simultaneously be adjusted by
multiplying the number of Shares initially issuable upon exercise of this
Warrant by the Warrant Price in effect as of the date of this Warrant and
dividing the product so obtained by the Warrant Price, as adjusted.
3.3 No adjustment in the Warrant Price shall be required unless
such adjustment would require an increase or decrease of at least $0.25 in
such price; PROVIDED that any adjustments not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations under this SECTION 3 shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the case may be.
3.4 Whenever the Warrant Price is adjusted, as herein provided, the
Company shall promptly cause a notice setting forth the adjusted Warrant
Price and adjusted number of shares issuable upon exercise of this Warrant to
be mailed to the Holder. The certificate setting forth the computation shall
be signed by an authorized officer of the Company.
3.5 In the event that at any time, as a result of any adjustment
made pursuant to SECTION 3.1 above, the Holder thereafter shall become
entitled to receive any shares of the Company, other than Common Stock,
thereafter the number of such other shares so receivable upon exercise of
this Warrant shall be subject to adjustment from time to time in a manner and
on terms as nearly equivalent as practicable to the provisions with respect
to the Common Stock contained in SECTION 3.1 above.
4. CONSOLIDATION, MERGER OR SALE OF ASSETS.
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<PAGE>
4.1 In case of any consolidation of the Company with, or merger of
the Company with or into any other entity (other than a merger which does not
result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock), or any sale or transfer of all or
substantially all of the assets of the Company or of the person formed by
such consolidation or resulting from such merger or which acquires such
assets, as the case may be, the Holder shall have the right thereafter to
exercise this Warrant for the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer by a
holder of the number of shares of Common Stock for which this Warrant may
have been exercised immediately prior to such consolidation, merger, sale or
transfer; PROVIDED that (i) such Holder is not a person with which the
Company consolidated or into which the Company merged or which merged into
the Company or to which such sale or transfer was made, as the case may be
("CONSTITUENT PERSON"), or an Affiliate (as hereinafter defined) of a
Constituent Person, and (ii) in the case of a consolidation, merger, sale or
transfer which includes an election as to the consideration to be received by
the holders, such Holder failed to exercise its rights of election as to the
kind or amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer (PROVIDED, HOWEVER, that, if the kind
or amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer is not the same for each share of
Common Stock held immediately prior to such consolidation, merger, sale or
transfer by other than a Constituent Person or an Affiliate thereof and in
respect of which such rights of election shall not have been exercised
("NON-ELECTING SHARE"), then for the purposes of this SECTION 4.1 the kind
and amount of securities, cash, and other property receivable upon such
consolidation, merger, sale or transfer by each Non-Electing Share shall be
deemed to be the kind and amount so receivable per share by a plurality of
the Non-Electing Shares). For purposes of this SECTION 4, "AFFILIATE" shall
have the meaning given to such term in Rule 12b-2 promulgated under the
Securities and Exchange Act of 1934, as amended (the "EXCHANGE ACT").
4.2 Adjustments for events subsequent to the effective date of such
a consolidation, merger and sale of assets shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Warrant. In any
such event, effective provisions shall be made in the certificate or articles
of incorporation of the resulting or surviving corporation, in any contract
of sale, conveyance, lease or transfer, or otherwise so that the provisions
set forth herein for the protection of the rights of the Holder shall
thereafter continue to be applicable; and any such resulting or surviving
corporation shall expressly assume the obligation to deliver, upon exercise,
such shares of stock, other securities, cash and property. The provisions of
this SECTION 4 shall similarly apply to successive consolidations, mergers,
sales, leases or transfers.
5. REGISTRATION RIGHTS.
5.1 PIGGYBACK REGISTRATION. Whenever during the period beginning on
the date hereof and ending one (1) year after the final Vesting Event, the
Company proposes to file with the Securities and Exchange Commission (the
"COMMISSION") a registration statement (other than as to securities issued
pursuant to an employee benefit plan or as to a transaction subject to Rule
145 promulgated under the Securities Act of 1933, as amended (the "ACT"), or
for which a Form S-4 Registration Statement could be used), it shall, at
least 30 days prior to each such filing, give written notice of such proposed
filing to the Holder, at its address as it appears on the records of the
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Company, and shall offer to include and shall include in such filing any
proposed disposition of the Warrant Shares upon receipt by the Company, not
less than ten (10) days prior to the proposed filing date, of a written
request therefor setting forth the facts with respect to such proposed
disposition and all other information with respect to such person reasonably
necessary to be included in such registration statement; PROVIDED that (i)
the Holder shall (together with the Company and the other shareholders
distributing their securities through such offering) enter into an
underwriting agreement with the underwriters for any offering made pursuant
to such registration statement and (ii) the Holder shall have no right to
participate in the selection of the underwriters for such offering; provided,
further, that such underwriting agreement shall not provide for
indemnification or contribution obligations on the part of the Holder in
favor of the Company greater than the obligations set forth in this Section
5. Notwithstanding anything to the contrary herein, if the managing
underwriter for the offering made pursuant to this SECTION 5 advises the
Company that the inclusion of all or part of the Warrant Shares in the
offering would be detrimental to the offering, such securities shall not be
included in the offering.
5.2 REGISTRATION ON FORM S-3.
(a) In case the Company shall receive from the Holder a
written request that the Company file a registration statement on Form S-3
(or any successor form to Form S-3) for a public offering of shares of the
Warrant Shares the reasonably anticipated aggregate price to the public of
which would exceed $2,000,000, and the Company is a registrant entitled to
use Form S-3 to register the Warrant Shares for such an offering, the Company
shall use its best efforts to cause such Warrant Shares to be registered for
the offering on such form and to cause the offering and sale of such Warrant
Shares to be qualified in such jurisdictions as the Holder may reasonably
request.
(b) Notwithstanding the foregoing, the Company shall not be
obligated to take any action pursuant to this Section 5.2:
(i) if it has already effected two registrations pursuant
to this Section 5.2 and/or Section 5.1 in any twelve (12) month period;
(ii) in any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance, unless the Company
is already subject to service in such jurisdiction and except as may be
required by the Act;
(iii) if the Company shall furnish to the Holder a
certificate signed by the Company's President and/or Chief Executive Officer
stating that in the good faith judgment of the Company's Board of Directors
it would be seriously detrimental to the Company or its shareholders for a
registration statement to be filed in the near future, then the Company's
obligation to use its best efforts to file a registration statement shall be
deferred for a period not to exceed 120 days from the receipt of the request
to file such registration by the Holder, provided that the Company may not
exercise this deferral right more than once in any twelve
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(12) month period, and provided further that the Company shall not register
shares for its own account (or the account of any other party) during such
120-day period, except in a Rule 145 transaction or with respect to an
employee benefit plan; or
(iv) if such registration, qualification or compliance is
proposed to be part of a firm commitment underwritten public offering with
underwriters not reasonably acceptable to the Company.
5.3 REGISTRATION PROCEDURES. In the case of each registration
effected by the Company pursuant to Section 5 hereof, the Company will keep
the Holder advised in writing as to the initiation of each registration and
as to the completion thereof. At its expense the Company will:
(a) prepare and file with the Commission a registration
statement with respect to such securities and use its best efforts to cause
such registration statement to become and remain effective for at least 180
days or until the distribution described in the registration statement has
been completed, whichever first occurs;
(b) furnish to the Holder (and to the underwriters of the
securities being registered, if any) such reasonable number of copies of the
registration statement, preliminary prospectus, final prospectus and such
other documents as such persons may reasonably request in order to facilitate
the public offering of such securities;
(c) use its best efforts to register and qualify the
securities covered by such registration statement under such other securities
or blue sky laws of such jurisdictions as shall be reasonably requested by
the Holder, provided that, the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or file a
general consent to service of process in any such states or jurisdictions;
(d) notify the Holder at any time when a prospectus relating
thereto is required to be delivered under the Act of the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes a misstatement 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 the light of the circumstances
then existing, or otherwise fails to comply with the requirements of the Act
and the rules and regulations promulgated thereunder. The Company shall,
promptly upon the happening of any such event, provide the Holder with
revised prospectuses correcting any such untrue statement or omission or
failure to comply;
(e) list the registered securities on a national securities
exchange or trading system; and
(f) furnish, at the request of the Holder, on the date the
Warrant Shares are delivered to the underwriters for sale in connection with
a registration, if such Warrant Shares are being sold through underwriters,
or, if such Warrant Shares are not being sold through underwriters, on the
date that the registration statement with respect to such Warrant Shares
becomes effective: (i) an opinion, dated such date, of the counsel
representing the Company for the
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purposes of such registration, in form and substance as is mutually agreed
upon by such counsel and the Holder, addressed to such Holder, and (ii) a
letter dated such date, from the independent certified accountants of the
Company, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public
offering, addressed to Holder, provided that such Holder shall have provided
such accountants with such documentation in connection with providing such
letter to such Holder as such accountants may reasonably request.
5.4 INDEMNIFICATION. In the event any Warrant Shares are included
in a registration statement under Section 5 hereof:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless the Holder, any underwriter (as defined in the Act) for
such Holder and each person, if any who controls such Holder or underwriter
within the meaning of the Act or the Exchange Act, against any losses,
claims, damages or liabilities (joint or several) to which they may become
subject under the Act, the Exchange Act or other federal or state law,
insofar as such losses, claims, damages or liabilities (or action in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "VIOLATION"): (i) any untrue
statement or alleged untrue statement of a material fact contained in such
registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii)
the omission or alleged omission to state therein a material fact required to
be stated therein, or necessary to make the statements therein not
misleading, or (iii) any violation or alleged violation by the Company of the
Act, the Exchange Act, any state securities law or any rule or regulation
promulgated under the Act, the Exchange Act or any state securities law; and
the Company will pay to each such Holder, underwriter or controlling person,
as incurred, any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided however, that the indemnity agreement contained
in this Section 5.4(a) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action is such settlement is effected
without the consent of the Company (which consent shall not be unreasonably
withheld), nor shall the Company be liable in any such case for any such
loss, claim, damage, liability or action to the extent that it arises out of
or is based upon a Violation that occurs in reliance upon and in conformity
with written information furnished expressly for use in connection with such
registration by the Holder, any such underwriter or controlling person.
(b) To the extent permitted by law, the selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Act, any underwriter and any
controlling person of any such underwriter, against any losses, claims,
damages, or liabilities (joint or several) to which any of the foregoing
persons may become subject, under the Act, the Exchange Act or other federal
or state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs
in reliance upon and in conformity with written information furnished by the
Holder expressly for use in connection with such registration; and the Holder
will pay any legal or other expenses reasonably incurred by any person
intended to be indemnified pursuant to this Section 5.4(b), in connection
with investigating
8
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or defending any such loss, claim, damage, liability or action; provided,
however, that the indemnity agreement contained in this Section 5.4(b) shall
not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Holder, which consent shall not be unreasonably withheld; provided, that, in
no event shall any indemnity under this Section 5.4(b) exceed the net
proceeds from the offering received by the Holder.
(c) Promptly after receipt by an indemnified party under this
Section 5.4 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect
thereof is to be made against the indemnifying party under this Section 5.4,
deliver to the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to participate in,
and, to the extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume the defense thereof with
counsel mutually satisfactory to the parties; provided, however, that an
indemnified party shall have the right to retain its own counsel, with the
fees and expenses to be paid by the indemnifying party, if representation of
such indemnified party by the counsel retained by the indemnifying party
would be inappropriate due to actual or potential differing interests between
such indemnified party and any other party represented by such counsel in
such proceeding. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action , if
prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this
Section 5.4, but the omission to so deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to
any indemnified party otherwise than under this Section 5.4.
(d) If the indemnification provided for in Section 5.4 is held
by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any losses, claims, damages or liabilities referred to
herein, the indemnifying party, in lieu of indemnifying such indemnified
party thereunder, shall to the extent permitted by applicable law contribute
to the amount paid or payable by such indemnified party as a result of such
loss, claim, damage or liability in such proportion as is appropriate to
reflect the relative fault of the indemnifying party on the one hand and of
the indemnified party on the other in connection with the Violation(s) that
resulted in such loss, claim, damage or liability, as well as any other
relevant equitable considerations. The relative fault of the indemnifying
party and of the indemnified party shall be determined by a court of law by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates
to information supplied by the indemnifying party or by the indemnified party
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission; provided, that
in no event shall any contribution by the Holder hereunder exceed the net
proceeds from the offering received by such Holder.
(e) The obligations of the Company and the Holder under this
Section 5.4 shall survive the completion of any offering of Warrant Shares in
a registration statement under Section 5 hereof and otherwise.
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5.5 The Company shall pay all reasonable fees, disbursements and
out-of-pocket expenses (other than brokerage fees and commissions of and
legal fees of counsel to the Holder, if any) in connection with the filing of
any registration statement under this SECTION 5 (or obtaining the opinion of
counsel with respect to sales under Rule 144 of the Act) and in complying
with applicable securities and blue sky laws. The Company at its expense will
supply the Holder with copies of such registration statement and the
prospectus included therein and any subsequent amendments thereto and other
related documents any opinions in such quantities as may be reasonably
requested by the Holder.
5.6 The Company shall not be required by this SECTION 5 to file
such registration statement if, in the opinion of counsel for the Holder and
the Company (or, should they not agree, in the opinion of another counsel
experienced in securities law matters acceptable to counsel for the Holder
and the Company), the proposed public offering or other transfer as to which
such registration statement is requested is exempt from applicable federal
and state securities laws and would result in all purchasers or transferees
obtaining securities which are not "restricted securities," as defined in
Rule 144 under the Act.
5.7 The Company agrees that until all Warrant Shares have been sold
under a registration statement or pursuant to Section 5.2 hereof or Rule 144
under the Act, it will use its best efforts to keep current in filing all
materials required to be filed with the Commission in order to permit the
holders of such securities to sell the same pursuant to an effective
Registration Statement on Form S-3 or under Rule 144.
6. RESTRICTIONS ON TRANSFER; PROPOSED TRANSFERS. "TRANSFER" means sell,
assign, convey, donate, pledge, encumber, transfer or otherwise dispose of,
or contract to do any of the foregoing. "TRANSFEREE" and "TRANSFERABLE" shall
have their respective meanings as grammatical variations of "Transfer."
6.1 RESTRICTIONS ON TRANSFERABILITY. This Warrant, the rights
provided hereunder and the Warrant Shares shall not be Transferable except
upon the conditions specified herein. The Holder shall cause any Transferee
to agree to take and hold such Warrant or Warrant Shares subject to the
provisions and upon the conditions herein.
6.2 RESTRICTIVE LEGEND. Each certificate or certificates
representing the Warrant Shares shall be stamped or otherwise imprinted with
a legend in the following form (in addition to any legend required under
applicable agreements and laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED IN A
PRIVATE PLACEMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR UNLESS THE CORPORATION RECEIVES AN OPINION OF
COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID
ACT.
10
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AS SET FORTH IN A COMMON STOCK CALL OPTION ISSUED
BY THE CORPORATION, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF
THE CORPORATION AND WILL BE FURNISHED UPON REQUEST TO THE HOLDER OF RECORD
OF THE SHARES REPRESENTED BY THIS CERTIFICATE.
6.3 NOTICE OF PROPOSED TRANSFERS. The Holder, by acceptance of this
Warrant or the certificate(s) representing the Warrant Shares, agrees to
comply in all respects with the provisions of this SECTION 6. Prior to any
proposed Transfer of this Warrant or the Warrant Shares, subject to the
requirements set forth in SECTION 6.4 below, the Holder shall give 15 days
prior written notice to the Company of such Holder's intention to effect such
Transfer (the "TRANSFER NOTICE"). Each Transfer Notice shall describe the
manner and circumstances of the proposed transfer in sufficient detail and
shall, if the Company so requests, be accompanied by either (i) a written
opinion of legal counsel who shall be reasonably satisfactory to the Company
addressed to the Company and reasonably satisfactory in form and substance to
the Company's counsel to the effect that the proposed Transfer may be
effected without registration under the Act or (ii) a "no action" letter from
the Commission to the effect that the proposed Transfer without registration
will not result in a recommendation by the staff of the Commission that
action be taken with respect thereto, whereupon the Holder of such Warrant or
Warrant Shares shall be entitled to transfer such securities in accordance
with the terms of the notice delivered by the Holder to the Company;
PROVIDED, HOWEVER, that no opinion or no action letter need be obtained with
respect to a Transfer without consideration to (A) any affiliated entity of
the Holder or (B) to a parent corporation or wholly-owned subsidiary of the
Holder or to a wholly-owned subsidiary of such parent; PROVIDED, in any such
case, that the Transferee agrees in writing to be subject to the terms
hereof. Each certificate evidencing Restricted Securities transferred as
above provided shall bear the appropriate restrictive legend set forth in
SECTION 6.2 above, except that such certificate shall not bear such
restrictive legend if in the opinion of counsel for the Company such legend
is not required in order to establish compliance with any provisions of the
Act.
6.4 RIGHT OF FIRST REFUSAL. In the event that the Holder desires to
Transfer this Warrant or the Warrant Shares to a proposed Transferee, the
Holder shall first offer such Warrant or Warrant Shares for sale to the
Company at the same price and upon the same terms (or terms as similar as
reasonably possible) upon which the Holder is proposing to Transfer such
Warrant or Warrant Shares (the "RIGHT OF FIRST REFUSAL"). This Right of First
Refusal must be offered to the Company by giving notice to the Company in
accordance with SECTION 6.3 above. If the Company declines to exercise its
Right of First Refusal, it shall immediately so notify the Holder.
(a) EXERCISE OF RIGHT OF FIRST REFUSAL. The Right of First
Refusal set forth in this SECTION 6.4 may be exercised by the Company as to
any portion of this Warrant or the Warrant Shares offered for sale to it by
the Holder, by giving notice to the Holder within 15 days of the receipt by
the Company of the Transfer Notice. If within such period the Company elects
to exercise its Right of First Refusal as to only a part of this Warrant or
the Warrant Shares, then the
11
<PAGE>
Holder may Transfer any remaining portions of this Warrant or the Warrant
Shares pursuant to the proposed Transfer.
(b) EXCEPTIONS TO RIGHT OF FIRST REFUSAL. The Right of First
Refusal granted under this SECTION 6.4 shall not be applicable to the
Transfer of any Warrant Shares to (i) any affiliated entity of the Holder or
(ii) to a parent corporation or wholly-owned subsidiary of the Holder or to a
wholly-owned subsidiary of such parent.
(c) EXPIRATION OF RIGHT OF FIRST REFUSAL. The Right of First
Refusal granted under this SECTION 6.4 shall expire upon registration of the
Warrant Shares pursuant to an effective registration statement under the Act.
6.5 PROCEDURE FOR TRANSFER. All transfers shall be registered with
the Company by submission to it of this Warrant, together with the annexed
assignment form attached hereto as EXHIBIT B (the "ASSIGNMENT FORM") duly
completed and executed. After the Company's receipt of this Warrant and the
Assignment Form so completed and executed, the Company will issue and deliver
to the transferee a new warrant (representing the portion of this Warrant so
transferred) at the same Exercise Price per share and otherwise having the
same terms and provisions as this Warrant, which the Company will register in
the new holder's name. In the event of a partial transfer of this Warrant,
the Company shall concurrently issue and deliver to the transferring holder a
new warrant that entitles the transferring holder to purchase the balance of
this Warrant not so transferred and that otherwise is upon the same terms and
conditions as this Warrant. Upon the due delivery of this Warrant for
transfer, the transferee holder shall be deemed for all purposes to have
become the Holder of the new warrant issued the portion of this Warrant so
transferred, effective immediately prior to the close of business on the date
of such delivery, irrespective of the date of actual delivery of the new
warrant representing the portion of this Warrant so transferred.
7. REPLACEMENT AND EXCHANGE OF WARRANT.
7.1 In the event of the loss, theft or destruction of this Warrant,
the Company shall execute and deliver an identical new warrant to the Holder
in substitution therefor upon the Company's receipt of (i) evidence
reasonably satisfactory to the Company of such event and (ii) if requested by
the Company, an indemnity agreement reasonably satisfactory in form and
substance to the Company. In the event of the mutilation of or other damage
to this Warrant, the Company shall execute and deliver an identical new
warrant to the Holder in substitution therefor upon the Company's receipt of
the mutilated or damaged warrant.
7.2 The Holder and the Company shall each pay its own costs and
expenses incurred in connection with the exercise, exchange or replacement of
this Warrant; PROVIDED, that the Holder shall pay all stamp and other
transfer taxes payable in connection with the transfer or replacement of this
Warrant.
8. RIGHTS AND OBLIGATIONS OF THE WARRANT HOLDER. This Warrant shall
not entitle the Holder to any rights of a stockholder in the Company.
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<PAGE>
9. NOTICES. Any notice or other communication required or permitted
to be given here shall be in writing and shall be effective (a) upon hand
delivery or delivery by telefacsimile (with correct answerback received),
telecopy or facsimile at the address or number designated below (if delivered
on a business day during normal business hours where such notice is to be
received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice
is to be received) or (b) on the third business day following the date of
mailing by express courier service, fully prepaid, addressed to such address,
or upon actual receipt of such mailing, whichever shall first occur. The
addresses for such communication shall be:
If to the Company: National Information Consortium, Inc.
12 Corporate Woods
10975 Benson Street, Suite 390
Overland Park, KS 66210
Telephone: (913) 498-3468
Facsimile: (913) 498-3472
Attention: Kevin Childress
With a copy to: Morrison & Foerster LLP
425 Market Street
San Francisco, CA 94105-2482
Telephone: (415) 268-7000
Facsimile: (415) 268-7522
Attention: John W. Campbell, III, Esq.
If to the Holder: Bank of America Corporation
201 North Tryon Street, NCI-022-14-05
Charlotte, North Carolina 28255
Telephone: 704-386-7613
Facsimile: 704-388-8495
Attention: Allen Kendle
With a copy to: Bank of America Corporation
100 North Tryon Street, NCI-007-56-11
Charlotte, North Carolina 28255
Telephone: 704-386-5724
Facsimile: 704-370-3515
Attention: Office of the General Counsel
Each party hereto may from time to time change its address for notices under
this SECTION 9 by giving at least 10 days' notice of such changes address to
the other party hereto.
10. AMENDMENTS AND WAIVERS. This Warrant and any term hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver,
discharge or termination is sought.
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11. APPLICABLE LAW. This Warrant shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware.
14
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed on the day and year first above written.
NATIONAL INFORMATION CONSORTIUM, INC.,
a Colorado corporation
By: /s/ Kevin C. Childress
----------------------------------
Name: Kevin C. Childress
--------------------------------
Title: Chief Financial Officer
-------------------------------
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<PAGE>
FIRST SUBLEASE MODIFICATION AGREEMENT
Dated: December 15, 1999
This Sublease Modification Agreement ("Agreement") is effective as of
the date above set forth, and is entered into by and between ACCEPTANCE
INSURANCE COMPANIES, INC. (hereinafter referred to as "Sublandlord"), and
NATIONAL INFORMATION CONSORTIUM, a Colorado corporation (as "Subtenant"), to
amend and modify that sublease and Addendum Number One dated as of May 14, 1999
(the "Lease"), for office space designated as Suite 390 in 12 Corporate Woods in
the Corporate Woods Office Park located in the City of Overland Park, Johnson
County, Kansas, more fully described in the Lease and referred to as the "Leased
Premises".
WHEREAS, Sublandlord and Subtenant desire to otherwise amend and modify
the Sublease as hereinafter set forth.
NOW, THEREFORE, for and in consideration of the rents, covenants and
agreements as set forth in the Sublease, and of the promises and undertakings
hereinafter set forth, the receipt and legal sufficiency of which is hereby
acknowledged, the parties agree that said Sublease shall be and is hereby
amended and modified as hereinafter provided.
1. RECITATIONS. The foregoing recitations are an integral part of this
Agreement.
2. LEASED PREMISES. Effective as of January 1, 2000, Section 1. of the
Sublease is hereby revoked and replaced by the following:
1. LEASED PREMISES. The Lease Premises currently consist of
approximately 1,720 net rentable square feet designated as Suite 390 in
12 Corporate Woods. The Leased Premises are hereby expanded effective
as of January 1, 2000, to include Suite 380 in 12 Corporate Woods.
Suite 380 includes approximately 1,060 square feet of office space,
together with the pro rata share of the common area allocable thereto
of 127 square feet, for a total of approximately 1,187 net rentable
square feet. The expanded Leased Premises will include approximately
2,596 square feet of office space, with 311 square feet of common area
allocated thereto, for a total of approximately 2,907 net rentable
square feet.
3. RENT. Section 3. RENT., Paragraph A shall continue to be applicable
through December 31, 1999. Commencing as of January 1, 2000, and continuing
through the balance of the Lease Term, Rent shall be as follows:
3. RENT.
Subtenant agrees to pay the Sublandlord Rent as follows:
A. Base Rent. The monthly Base Rent ("Base Rent") during
the balance of the Lease Term shall be the sum of Four Thousand Seven
Hundred Twenty-Three and 88/100 Dollars ($4,723.88) from January 1,
2000 to December 31, 2001. All monthly Base Rent shall by payable in
advance, and shall be due on the first day of each month throughout the
balance of the Lease Term.
4. REIMBURSEMENT OF SUBLANDLORD RELOCATION EXPENSES. Subtenant agrees to
reimburse Sublandlord for all reasonable expenses incurred relating to the
following:
<PAGE>
FIRST SUBLEASE MODIFICATION AGREEMENT
Page 2 of 2
A. Actual expenses for services provided by third
parties to move Sublandlord's telephone switch from Sublandlord's
current offices located at Suite 380 in 12 Corporate Woods to its new
offices located at Suite 270 in 12 Corporate Woods. Sublandlord will
furnish Subtenant with a cost estimate in advance of the work being
performed. Amount shall not exceed $3,000.
B. Actual expenses, consisting of labor and materials,
for services provided by third parties for constructing an additional
office space and countertop at Sublandlord's new offices located at
Suite 270 in 12 Corporate Woods. Sublandlord will furnish estimates
from third parties to Subtenant in advance of the remodeling and
Subtenant will participate in selection of the remodeling services
provider. Amount shall not exceed $7,150.
C. Subtenant further agrees to make monthly
reimbursement payments to the Sublandlord for Sublandlord's increased
rental of $819.04 per month for months January 2000 through December
2000.
Sublandlord must submit copies of actual invoices to Subtenant showing payment
by Sublandlord in order to receive reimbursement for such expenses.
Except as modified above, all other terms and conditions of said
Sublease and all previous modifications thereof, shall remain unchanged and in
full force and effect, except to the extent they are inconsistent with the
foregoing provisions. Should any inconsistencies exist between this Agreement
and the Sublease as previously modified, the terms and provisions of this
Agreement shall control.
Sublandlord has delivered a copy of this Agreement for Subtenant's
review only, and the delivery hereof does not constitute an offer to Subtenant
or an option to amend the Sublease as hereinabove provided. This Agreement shall
not be binding and effective until a copy executed by Subtenant is delivered to,
accepted and executed by Sublandlord. The provisions of this Agreement shall
bind and inure to the benefit of the parties hereto, and to their respective
successors and assigns.
IN WITNESS WHEREOF, said parties have executed this Agreement in
quadruplicate as of the day and year first above written.
SUBLANDLORD: SUBTENANT:
ACCEPTANCE INSURANCE COMPANIES, INC. NATIONAL INFORMATION CONSORTIUM
a Colorado corporation
By: /s/ Patricia L. Briggs By: /s/ Stephen M. Kovzan
----------------------------------- --------------------------------
Name: Patricia L. Briggs Name: Stephen M. Kovzan
Its: Leasing Manager Its: Controller
<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
March 15, 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 Amendment No. 1 to the Registration Statement
(Form S-1 No. 333-30872) and related Prospectus of National Information
Consortium, Inc. for the registration of shares of its common stock.
/s/ Ernst & Young LLP
McLean, Virginia
March 14, 2000
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Amendment No. 1 to the 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 Amendment No. 1. We also consent to the
reference to us under the heading "Experts" in such Amendment No. 1.
/s/ Hurley & Company
Granada Hills, California
March 14, 2000
