AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 18, 1999
REGISTRATION NO. 333-77939
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
NATIONAL INFORMATION CONSORTIUM, INC.
(Exact name of registrant as specified in its charter)
COLORADO 7375 52-2077581
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code No.) Identification
Incorporation or Organization) No.)
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12 CORPORATE WOODS,
10975 BENSON STREET, SUITE 390
OVERLAND PARK, KANSAS 66210
877-234-EGOV
(Address and telephone number of principal executive offices and
principal place of business)
JEFFERY S. FRASER
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
NATIONAL INFORMATION CONSORTIUM, INC.
12 CORPORATE WOODS,
10975 BENSON STREET, SUITE 390
OVERLAND PARK, KANSAS 66210
877-234-EGOV
COPIES TO:
JOHN W. CAMPBELL, III, ESQ. NORA L. GIBSON, ESQ.
KRISTIAN E. WIGGERT, ESQ. PETER S. BUCKLAND, ESQ.
VALERIE A. VILLANUEVA, ESQ. ANGELA C. HILT, ESQ.
JACLYN LIU, ESQ. Brobeck, Phleger & Harrison LLP
Morrison & Foerster LLP Spear Street Tower, One Market
425 Market Street San Francisco, California 94105
San Francisco, California 94105-2482
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If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. / /
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
SUBJECT TO COMPLETION, DATED JUNE 18, 1999
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE SUCH AN OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
13,000,000 SHARES
[LOGO]
COMMON STOCK
This is an initial public offering of common stock by National Information Consortium, Inc. Of the 13,000,000 shares of common stock being sold in this offering, 10,000,000 shares are being sold by us and 3,000,000 shares are being sold by the selling shareholders. We will not receive any of the proceeds from the sale of shares by the selling shareholders. The estimated initial public offering price is between $9.00 and $11.00 per share.
The shares of common stock have been proposed to be listed for quotation on the Nasdaq National Market under the symbol EGOV.
PER SHARE TOTAL
----------------- ----------
Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to National Information Consortium, Inc., before
expenses.................................................. $ $
Proceeds to the selling shareholders, before expenses....... $ $
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The selling shareholders have granted the underwriters an option for a period of 30 days to purchase up to 1,950,000 additional shares of common stock.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
HAMBRECHT & QUIST
THOMAS WEISEL PARTNERS LLC
FAC/EQUITIES
VOLPE BROWN WHELAN & COMPANY
, 1999
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."]
[Picture of person using computer at home with arrow pointing at picture and text accompanying arrow reading "and here."] |
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.]
TABLE OF CONTENTS
PAGE
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Prospectus Summary........................................... 4
Risk Factors................................................. 8
Forward-Looking Statements................................... 19
How We Intend to Use the Proceeds from the Offering.......... 20
Dividend Policy.............................................. 20
Capitalization............................................... 21
Dilution..................................................... 22
Selected Consolidated Actual and Pro Forma Financial Data.... 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 24
Business..................................................... 35
Management................................................... 46
Certain Transactions......................................... 58
Principal and Selling Shareholders........................... 59
Description of Capital Stock................................. 62
Shares Eligible for Future Sale.............................. 65
Underwriting................................................. 66
Legal Matters................................................ 68
Experts...................................................... 68
Where You Can Find Additional Information About Us........... 68
Index to Consolidated Financial Statements................... F-1
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All brand names and trademarks appearing in this prospectus are the property of their respective holders.
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 enter into contracts with governments and on their behalf design, build and operate Internet-based portals, forming a partner relationship with governments. These portals consist of Web sites and applications that we build, which allow businesses and citizens to access government information online and complete transactions, including applying for a permit, renewing a license or filing a report. Our unique business model allows us to reduce our government partners' financial and technology risks and obtain revenue by sharing in the fees governments generate from electronic government services. Our partners benefit because they gain a centralized, customer-focused presence on the Internet. Businesses and citizens gain a faster, more convenient and more cost-effective means to interact with governments.
Government's regulation of commercial and consumer activities requires billions of transactions and exchanges of large volumes of information between government agencies, and businesses and citizens. These transactions and exchanges include driver's license renewals, motor vehicle registrations, tax returns, permit applications and requests for government-gathered information. Traditionally, government agencies have transacted, and in many cases continue to transact, with businesses and citizens using processes that are expensive, inconvenient, labor-intensive and require extensive paperwork. Electronic alternatives have often been unavailable, technically challenging and costly to implement, or fragmented among different government agencies. The growing acceptance of the Internet and electronic commerce presents a significant opportunity for the development of electronic government, in which government agencies can quickly and cost-effectively conduct transactions and distribute information over the Internet.
Despite the potential benefits of electronic government, government entities encounter a unique set of challenges in implementing and maintaining Internet-based electronic government services. In addition to the conventional barriers the private sector confronts, including high costs, technological risk, the need for customized and rapid deployment, and the scarcity of qualified personnel, governments also face the intricacies of the political process, a diverse constituent base, limited marketing capabilities and heightened security requirements due to public trust concerns.
We have pioneered the development of an Internet-based electronic government solution that addresses these unique government challenges and meets the needs of businesses and citizens. The key elements of our solution are:
- a customer-focused, one-stop government portal that provides a single point of presence on the Web for all government agencies and permits businesses and citizens to conduct transactions and process information requests 24 hours a day, seven days a week;
- a cost-efficient financial model that minimizes the use of government resources and up-front investment and is quickly and easily deployed; and
- a contractual relationship with governments that aligns our interests with those of government and encourages the participation of interested government agencies, business and consumer groups and other important government entities, forming a partner relationship with governments. We work with each of our government partners to maximize
their use of Internet technology, while addressing issues critical to them including the privacy and security of citizens.
We plan to strengthen our position as the leading provider of electronic government services. Key elements of our strategy are to:
- continue to penetrate new markets, including other states, multi-state cooperative organizations, local governments and federal agencies, and to expand our services into international markets;
- broaden product and service offerings with new Internet-based applications, including sales and use tax payments, enabling government agencies, businesses and citizens to interact more effectively online;
- increase transaction volumes from existing and new customers by generating awareness and educating potential business and consumer users about the availability and benefits of electronic government services;
- enhance the capability and efficiency of our business units by aggregating best practices across our organization and strengthening corporate operational and administrative functions, including product development, training and recruiting; and
- attract, retain and train specialized and qualified personnel through performance incentives, targeted hiring and development programs.
We currently provide Internet-based electronic government services for the state governments of Arkansas, Georgia, Indiana, Iowa, Kansas, Maine, Nebraska, and Virginia and the city-county government of the City of Indianapolis and Marion County, Indiana. We have also been selected to provide services to and have entered into a contract with the state of Utah. We typically enter into three to five year contracts with our government partners 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 partner implement, develop, manage and enhance a single, comprehensive portal for conducting transactions and delivering information to businesses and citizens online, and we receive a share of the fee revenue governments obtain through use of the portal for transactions. In our government partnerships with Georgia and Iowa, we provide consulting, development and management services for these government portals predominantly under a fixed-price model.
We were incorporated in Delaware in December 1997 and reincorporated in Colorado in April 1999. In 1998, we completed an exchange offer, through which we consolidated our individual business units that deliver electronic government services into our present company as subsidiaries. Our headquarters are located at 12 Corporate Woods, 10975 Benson Street, Suite 390, Overland Park, Kansas 66210 and our telephone number is 877-234-EGOV. Our Web site is www.nicusa.com. Any reference contained in this prospectus to our Web site, or to any other Web site, shall not be deemed to incorporate information from those sites into this prospectus.
THE OFFERING
Common stock offered by us...................... 10,000,000 shares
Common stock offered by the selling 3,000,000 shares
shareholders..................................
Common stock to be outstanding after this 52,481,996 shares
offering......................................
Use of proceeds................................. - increased marketing efforts;
- creation of new products and services;
- further development of infrastructure;
- working capital;
- general corporate purposes; and
- potential aquisitions.
Proposed Nasdaq National Market Symbol.......... EGOV
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The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of March 31, 1999 and does not include the following:
- 2,512,332 shares of common stock subject to options issued at a weighted average exercise price of $1.44 per share granted under our 1998 stock option plan; or
- 9,026,808 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.
As of March 31, 1999, 31,896,145 shares of our outstanding common stock have been placed in a voting trust, representing approximately 75.1% of our outstanding common stock prior to this offering. The voting trust is selling 1,500,000 shares of common stock in this offering, which will reduce the number of shares it holds to 30,396,145, or approximately 57.9% of our outstanding common stock. The trustees of this voting trust are Messrs. Fraser and Hartley, both of whom serve as directors of our company. As a result, Messrs. Fraser and Hartley have, among other rights, the ability to control the election of directors and approve corporate actions that must be submitted for a vote of shareholders.
UNLESS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT:
- THE UNDERWRITERS WILL NOT EXERCISE THEIR OPTION TO PURCHASE ADDITIONAL SHARES OF COMMON STOCK TO COVER OVER-ALLOTMENTS, IF ANY;
- THE PUBLIC OFFERING PRICE WILL BE $10.00 PER SHARE;
- WE WILL COMPLETE A 4.643377 FOR 1 SPLIT OF OUR COMMON STOCK BEFORE THIS OFFERING IS COMPLETED; AND
- PRO FORMA INFORMATION GIVES EFFECT TO THE EXCHANGE OFFER WE COMPLETED IN MARCH 1998 AS IF THE EXCHANGE OFFER OCCURRED AT THE BEGINNING OF THE PERIOD PRESENTED.
PLEASE SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--EXCHANGE OFFER" FOR MORE DETAILED INFORMATION ABOUT THE EXCHANGE OFFER.
SUMMARY CONSOLIDATED ACTUAL AND PRO FORMA FINANCIAL INFORMATION
The following summary consolidated actual and pro forma financial information should be read in conjunction with our consolidated financial statements and their related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this prospectus. The consolidated statement of operations data for the years ended December 31, 1997 and 1998 labeled "Actual" are derived from, and are qualified by reference to, the audited financial statements included in this prospectus. The consolidated statement of operations data for the years ended December 31, 1997 and 1998 and the three months ended March 31, 1998 labeled "Pro Forma" are unaudited and derived from and qualified by reference to the pro forma consolidated statements of operations included in this prospectus. The consolidated statement of operations data for the three month periods ended March 31, 1998 and 1999 and the consolidated balance sheet data at March 31, 1999 labeled "Actual" are derived from, and qualified by reference to, our unaudited interim financial statements included in this prospectus. The as adjusted consolidated balance sheet data summarized below gives effect to the receipt of the estimated net proceeds from the sale of 10,000,000 shares of common stock offered by us in this offering at an assumed initial public offering price of $10.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses.
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
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1997 1998 1998
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ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA
----------- ----------- --------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues........................................ $ 996 $ 24,382 $ 28,624 $ 36,532 $ 361 $ 8,270
Cost of revenues................................ 5 18,410 21,211 27,394 1 6,184
Gross profit.................................... 991 5,972 7,413 9,138 360 2,086
Operating loss.................................. (277) (6,864) (7,205) (8,737) (124) (1,655)
Net loss........................................ $ (277) $ (6,932) $ (7,896) $ (9,430) $ (124) $ (1,658)
Net loss per share--basic and diluted........... $ (0.01) $ (0.17) $ (0.21) $ (0.22) $ (0.01) $ (0.04)
Weighted average shares outstanding............. 20,858 40,113 37,242 41,950 22,679 41,934
1999
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ACTUAL
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues........................................ $ 11,455
Cost of revenues................................ 8,604
Gross profit.................................... 2,851
Operating loss.................................. (3,302)
Net loss........................................ $ (3,299)
Net loss per share--basic and diluted........... $ (0.08)
Weighted average shares outstanding............. 42,243
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MARCH 31, 1999
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ACTUAL AS ADJUSTED
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CONSOLIDATED BALANCE SHEET DATA:
Cash.................................................................................... $ 1,115 $ 91,015
Total assets............................................................................ 16,633 106,533
Bank lines of credit.................................................................... 839 839
Long-term debt (includes current portion of notes payable/capital lease obligations).... 1,179 1,179
Total shareholders' equity.............................................................. 9,787 99,687
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON STOCK. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. ANY OF THE FOLLOWING RISKS COULD MATERIALLY HARM OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION AND COULD RESULT IN A COMPLETE LOSS OF YOUR INVESTMENT.
RISKS PARTICULAR TO NATIONAL INFORMATION CONSORTIUM
BECAUSE WE HAVE SERVICE CONTRACTS WITH A LIMITED NUMBER OF STATES AND CITY GOVERNMENTS, THE TERMINATION OF ANY OF THESE CONTRACTS MAY HARM OUR BUSINESS
Currently, we have contracts with eight states and one local government, and have been selected to provide services to and have entered into a contract with the state of Utah. These contracts typically have initial terms of three to five years with option renewal periods of one to five years. However, any renewal is optional and a government may terminate its contract prior to the expiration date upon specific cause events that are not cured within a period of 20 to 180 days or, in some cases, upon passing legislation. Additionally, the contracts under which we provide management and development services can be terminated without cause on a specified period of notice. The decision by one or more governments not to renew an existing contract or any termination of one or more of these contracts will result in significant revenue shortfalls. If these revenue shortfalls occur, our business and financial condition would be harmed. We cannot be certain if, when or to what extent governments might fail to renew or terminate any or all of their contracts with us.
OUR REVENUE GROWTH IS LIMITED BY THE NUMBER OF STATES THAT CHOOSE TO PROVIDE ELECTRONIC GOVERNMENT SERVICES AND TO ADOPT OUR BUSINESS MODEL AND THE FINITE NUMBER OF STATES WITH WHICH WE MAY CONTRACT FOR OUR ELECTRONIC GOVERNMENT SERVICES
We contract with state governments to provide electronic government services on the state government's behalf to complete transactions and distribute public information electronically. Our revenue growth depends on government entities adopting such public/private partnerships. We cannot assure you that government entities will choose to provide electronic government services at all, or that they will not provide such services themselves without private assistance or adopting our public/private model.
In addition, as there is a finite number of states remaining with which we can contract for our services, future increases in our revenues will depend on our ability to expand our business model to include multi-state cooperative organizations, local government, federal agencies and international entities. We cannot assure you that we will succeed in our expansion into new markets or that our services will be adaptable to those new markets.
WE MAY BE UNABLE TO OBTAIN FUTURE CONTRACTS THROUGH THE REQUEST FOR PROPOSAL PROCESS
Once a government decides to adopt a public/private model for electronic government, it starts a selection process that operates under special rules that apply to government purchasing. These rules typically require open bidding by possible service providers like us against a list of requirements established by governments under existing or specially-created procedures. To respond successfully to these requests for proposals, commonly known as RFPs, we must estimate accurately our cost structure for servicing a proposed contract, the time required to establish operations for the proposed client and the likely terms of any other proposals submitted. We also must assemble and submit a large volume of information within the strict time schedule mandated by an RFP. Whether or not we are able to respond successfully to RFPs in the future will significantly impact our business. We cannot guarantee that we will win any bids in the future through the RFP process, or that any winning bids will ultimately result in contracts. Our business, financial condition and operating results would be harmed if we fail to obtain profitable future contracts through the RFP process.
THE FEES WE COLLECT FOR OUR PRODUCTS AND SERVICES ARE SUBJECT TO REGULATION THAT COULD LIMIT OUR REVENUE GROWTH AND PROFITABILITY
We collect user fees on behalf of government agencies and, under the terms of our government contracts, we retain a portion of the fees. Generally, our contracts provide that the amount of any fees we retain is set by the government to provide us with a reasonable return or profit or, in one case, a specified return on equity. We have limited control over the level of fees we are permitted to retain. Our business, results of operations and financial condition may be harmed if the level of fees we are permitted to retain is too low or if our costs rise without a commensurate increase in fees.
THE POSSIBILITY OF GOVERNMENTS DEMANDING FIXED-PRICE CONTRACTS MAY SIGNIFICANTLY REDUCE OUR REVENUES AND PROFITS
Substantially all of our present contracts are on a transaction or subscription fee basis, through which our fees vary depending on the number of Internet users who access our products and services. However, we cannot assure you that governments will not demand fixed-price contracts in the future. Currently, we earn fees under our contracts with the states of Georgia and Iowa predominantly on a fixed-price basis. We may, from time to time, enter into other fixed-price contracts. Our failure to estimate accurately the resources and time required for an engagement, to manage the government's expectations effectively regarding the scope of services to be delivered for an estimated price or to complete fixed-price engagements within budget, on time and to the government's satisfaction could expose us to risks associated with cost overruns and, potentially, to penalties, which may harm our business, operating results and financial condition.
WE MAY BE UNABLE TO SUSTAIN THE USAGE LEVELS OF CURRENT PRODUCTS AND SERVICES THAT PROVIDE A SIGNIFICANT PERCENTAGE OF OUR REVENUES
We obtain a high proportion of our revenues from a limited number of products and services. Subscription-based and transaction-based fees charged for access to motor vehicle records, financing statements, corporation and court information accounted for over 90% of our revenues for the year ended December 31, 1998 on a pro forma basis and are expected to continue to account for a significant portion of our revenue in the near future. Regulatory changes or the development of alternative information sources could materially reduce our revenues from these products and services. A reduction in revenues from currently popular products and services would harm our business, results of operations and financial condition.
BECAUSE A MAJOR PORTION OF OUR CURRENT REVENUES ARE GENERATED FROM A SMALL NUMBER OF USERS, THE LOSS OF ANY OF THESE USERS MAY HARM OUR BUSINESS AND FINANCIAL CONDITION
The primary source of our revenue is derived from data resellers' use of our electronic government portals to access motor vehicle records for sale to the auto insurance industry. For the year ended December 31, 1998, one of these data resellers, Choicepoint, accounted for approximately 60% of our revenues. Two other resellers accounted for an additional 11% of our revenue during the year ended December 31, 1998. It is possible that these users will develop alternative data sources or new business processes that would materially diminish their use of our portals. The loss of all or a substantial portion of business from any of these entities would harm our business and financial condition.
OUR BUSINESS WITH VARIOUS GOVERNMENT ENTITIES OFTEN REQUIRES SPECIFIC GOVERNMENT LEGISLATION TO BE PASSED FOR US TO INITIATE AND MAINTAIN OUR GOVERNMENT CONTRACTS
Because our business includes the execution of contracts with governments under which we receive a portion of user fees charged to businesses and citizens, it is often necessary for governments to draft and adopt specific legislation before the government can circulate an RFP to which we can respond.
Furthermore, the maintenance of our government contracts requires the continued acceptance of enabling legislation and any implementing regulations. In the past, various entities that use the portals we operate to obtain government products and services have challenged the authority of governments to electronically provide these products and services exclusively through portals like those we operate. A successful challenge in the future could result in a proliferation of alternative ways to obtain these products and services, which would harm our business, results of operations and financial condition. The repeal or modification of any enabling legislation would also harm our business, results of operations and financial condition.
BECAUSE WE RELY ON A CONTRACTUAL BIDDING PROCESS WHOSE PARAMETERS ARE ESTABLISHED BY GOVERNMENTS, THE LENGTH OF OUR SALES CYCLES IS UNCERTAIN AND CAN LEAD TO REVENUE SHORTFALLS
Our dependence on a bidding process to initiate new projects, the parameters of which are established by governments, results in uncertainty in our sales cycles because the duration and the procedures for each bidding process vary significantly according to each government entity's policies and procedures. The time between the date of initial contact with a government for a bid and the award of the bid may range from as little as 180 days to up to 36 months. The bidding process is subject to factors over which we have little or no control, including:
- political acceptance of the concept of government agencies contracting with third parties to distribute public information, which has been offered traditionally only by the government agencies often without charge;
- the internal review process by the government agencies for bid acceptance;
- the need to reach a political accommodation among various interest groups;
- changes to the bidding procedure by the government agencies;
- changes to state legislation authorizing government's contracting with third parties to distribute public information;
- changes in government administrations;
- the budgetary restrictions of government entities;
- the competition generated by the bidding process; and
- the possibility of cancellation or delay by the government entities.
Any delay in the bidding process, changes to the bidding practices and policies, the failure to receive the bid or the failure to execute a contract may disrupt our financial results for a particular period and harm our business and financial condition.
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 solution we offer. In most cases, the principal substitute for our services is a government-designed and managed solution that integrates other vendors' technologies, products and services. Companies that have expertise in marketing and providing technical solutions to government entities may begin to compete with us by further developing their services and increasing their focus on this piece of their business and market shares. Examples of companies that may compete with us are the following:
- large systems integrators, including American Management Systems, Inc. and Sapient Corporation;
- traditional consulting firms, including International Business Machines Corporation and Science Applications International Corporation; and
- Web service companies, including USWeb/CKS, AppNet Systems, Inc. and Verio Inc.
Many of our potential competitors are national or international in scope and may have greater resources than we do. These resources could enable our potential competitors to initiate severe price cuts or take other measures in an effort to gain market share. Additionally, in some geographic areas, we may face competition from smaller consulting firms with established reputations and political relationships with potential government partners. If we do not compete effectively or if we experience any pricing pressures, reduced margins or loss of market share resulting from increased competition, our business and financial condition may be harmed.
THE SEASONALITY OF USE FOR SOME OF OUR ELECTRONIC GOVERNMENT PRODUCTS AND SERVICES MAY HARM OUR FOURTH QUARTER RESULTS OF EACH CALENDAR YEAR
The use of some of our electronic government products and services is seasonal, particularly the accessing of drivers' records, resulting in lower revenues in the fourth quarter of each calendar year, due to the smaller number of business days in this quarter and a lower volume of government-to-business and government-to-citizen transactions during the holiday period. As a result, seasonality is likely to cause our quarterly results to fluctuate, which could harm our business and financial condition and could harm the trading price of our common stock.
THE UNPREDICTABILITY OF OUR QUARTER-TO-QUARTER RESULTS MAY HARM THE TRADING PRICE OF OUR COMMON STOCK
Our future revenues and operating results may vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control, and any of which may harm our business. These factors include:
- the commencement, completion or termination of contracts during any particular quarter;
- the introduction of new electronic government products and services by us or our competitors;
- technical difficulties or system downtime affecting the Internet generally or the operation of our electronic government products and services; and
- the amount and timing of operating costs and capital expenditures relating to the expansion of our business operations and infrastructure.
Due to the factors noted above, our revenues in a particular quarter may be lower than we anticipate and if we are unable to reduce spending in that quarter, our operating results for that quarter may be harmed. You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. It is possible that in some future periods our results of operations may be below the expectations of public market analysts and investors. If this occurs, the price of our common stock may decline.
WE MAY LOSE THE RIGHT TO THE CONTENT DISTRIBUTED THROUGH OUR GOVERNMENT PORTALS, WHICH IS PROVIDED TO US ENTIRELY BY GOVERNMENT ENTITIES
We do not own or create the content distributed through our government portals. We depend on the governments with which we contract to supply information and data feeds to us on a timely basis to allow businesses and citizens to complete transactions and obtain government information. We cannot assure you that these data sources will continue to be available in the future. Government entities could terminate their contracts to provide data. Changes in regulations could mean that governments no longer collect some types of data, or that the data is protected by more stringent privacy rules preventing uses
now made of it. Moreover, our data sources are not always subject to exclusive agreements, so that data included in our products and services also may be included in those of our potential competitors. In addition, we are dependent upon the accuracy and reliability of government computer systems and data collection for the content of our portals. The loss or the unavailability of our data sources in the future, or the loss of our exclusive right to distribute some of the data sources, would harm our business, operating results and financial condition.
IF WE FAIL TO COORDINATE OR EXPAND OUR OPERATIONAL PROCEDURES AND CONTROLS, WE MAY NOT EFFECTIVELY MANAGE OUR GROWTH
Our growth rate may increase rapidly in response to the acceptance of our products and services under new or existing government contracts. If we cannot manage our growth effectively, we may not be able to coordinate the activities of our technical, accounting, and marketing staffs, and our business could be harmed. We intend to plan for the acceptance of new bids by a number of governmental entities so that we may be ready to begin operations as soon as possible after acceptance of a bid. As part of this plan of growth, we must implement new operational procedures and controls to expand, train and manage our employees and to coordinate the operations of our various subsidiaries. If we acquire new businesses, we also may have difficulties integrating new operations, technologies and personnel. If we cannot manage the growth of our government portals, staff, offices and operations, our business may be harmed.
WE MAY BE UNABLE TO HIRE, INTEGRATE OR RETAIN QUALIFIED PERSONNEL
The recent growth in our business has resulted in an increase in the responsibilities for both existing and new management personnel. Many of our personnel are presently serving in both an executive capacity and as general managers of our government portals. The loss of any of our executives, particularly Jeffery S. Fraser, our Chief Executive Officer, and James B. Dodd, our President and Chief Operating Officer, would likely harm our business.
In addition, we expect that we will need to hire additional personnel in all areas in 1999, including general managers for new operations in jurisdictions in which we obtain contracts. Competition for personnel in the Internet industry is intense. We may not be able to retain our current key employees or attract, integrate or retain other qualified employees in the future. If we do not succeed in attracting new personnel or integrating, retaining and motivating our current personnel, our business could be harmed. In addition, new employees generally require substantial training in the presentation, policies and positioning of our government portals. This training will require substantial resources and management attention.
TO BE SUCCESSFUL, WE MUST DEVELOP AND MARKET COMPREHENSIVE, EFFICIENT, COST-EFFECTIVE AND SECURE ELECTRONIC ACCESS TO PUBLIC INFORMATION AND NEW PRODUCTS AND SERVICES
Our success depends in part upon our ability to attract a greater number of Internet users to access public information electronically by delivering a comprehensive composite of public information and an efficient, cost-effective and secure method of electronic access and transactions. Moreover, in order to increase revenues in the future, we must continue to develop products and services that businesses and citizens will find valuable, and there is no guarantee that we will be able to do so. If we are unable to develop products and services that allow us to attract, retain and expand our current user base, our revenues and future operating results may be harmed. We cannot assure you that the products and services we offer will appeal to a sufficient number of Internet users to generate continued revenue growth. Our ability to attract Internet users to our government portals depends on several factors, including:
- the comprehensiveness of public records available through our government portals;
- the perceived efficiency and cost-effectiveness of accessing public records electronically;
- the effectiveness of security measures; and
- the increased usage and continued reliability of the Internet.
DEFICIENCIES IN OUR PERFORMANCE UNDER A GOVERNMENT CONTRACT COULD RESULT IN CONTRACT TERMINATION, REPUTATIONAL DAMAGE OR FINANCIAL PENALTIES
Each government entity with which we contract has the authority to require an independent audit of our performance. The scope of audits could include inspections of income statements, balance sheets, fee structures, collections practices, service levels and our compliance with applicable laws, regulations and standards. We cannot assure you that a future audit will not find any material performance deficiencies that would result in an adjustment to our revenues. Moreover, the consequent negative publicity could harm our reputation among other governments with which we would like to contract. All of these factors could harm our business, results of operations and financial condition.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY AS A CONSOLIDATED COMPANY, IT MAY BE DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS
In March 1998, we completed an exchange offer through which we consolidated our individual business units that deliver our electronic government services into our present company as subsidiaries. Accordingly, we only have a limited operating history as a consolidated company on which to base an evaluation of our business and prospects. You must consider our business in the light of the risks, expenses and problems frequently encountered by companies like us, particularly recently consolidated companies in new and rapidly evolving markets like the Internet. These risks include whether we will be able to take advantage of economies of scale for the following:
- cost-effective use of our company-wide managerial and administrative resources;
- efficient allocation of operating and financial resources among the individual business units;
- efficient integration of new marketing and sales strategies and technological improvements among the individual business units; and
- the addition of new business units without overburdening our current management and operational resources.
We may not be able to successfully address these risks and as a result our business, operating results and financial condition may be harmed.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS
We rely on a combination of nondisclosure and other contractual arrangements with governments, our employees and third parties, and privacy and trade secret laws to protect and limit the distribution of the proprietary applications, documentation and processes we have developed in connection with the electronic government products and services we offer. If we fail to adequately protect our intellectual property rights and proprietary information or if we become involved in litigation relating to our intellectual property rights and proprietary technology, our business could be harmed. Any actions we take may not be adequate to protect our proprietary rights and other companies may develop technologies that are similar or superior to our proprietary technology.
Additionally, it is possible that we could in the future become subject to claims alleging infringement of third party intellectual property rights. Any claims could subject us to costly litigation, and may require us to pay damages and develop non-infringing intellectual property or acquire licenses to the intellectual property that is the subject of the alleged infringement. Additionally, licenses may not be available on acceptable terms or at all.
UPON THE COMPLETION OF THE INITIAL TERM OF OUR GOVERNMENT CONTRACTS, GOVERNMENTS OBTAIN A PERPETUAL RIGHT OF USE LICENSE TO OUR SOFTWARE PROGRAMS AND OTHER APPLICATIONS
After termination of our contracts, it is possible that governments and their successors and affiliates may use their right of use license rights to the software programs and other applications we have developed for them in the operation of their portals to launch competing services. Inadvertently, they also may allow our intellectual property or other information to fall into the hands of third parties, including our competitors.
WE MAY NEED MORE WORKING CAPITAL TO EXPAND OUR BUSINESS
We anticipate that our current cash resources, combined with the net proceeds from this offering, will be sufficient to meet our present working capital and capital expenditure requirements for the next 18 months following the date of this prospectus. However, we may need to raise additional capital before this period ends to do the following:
- support our expansion into other states, cities, municipalities, federal agencies and internationally;
- respond to competitive pressures; and
- acquire complementary businesses or technologies.
Our future liquidity and capital requirements will depend upon numerous factors, including the success of our existing and new product and service offerings and potentially competing technological and market developments. We may be required to raise additional funds through public or private financing, strategic relationships or other arrangements. We cannot assure you that such additional funding, if needed, will be available on terms acceptable to us, or at all. If adequate funds are not available on acceptable terms, our ability to develop or enhance our products and services, take advantage of future opportunities or respond to competitive pressures would be significantly limited. This limitation could harm our business, operating results and financial condition.
WE MAY BE UNABLE TO INTEGRATE NEW TECHNOLOGIES AND INDUSTRY STANDARDS EFFECTIVELY
Our future success will depend on our ability to enhance and improve the responsiveness, functionality and features of our products and services in accordance with industry standards and to address the increasingly sophisticated technological needs of our customers on a cost-effective and timely basis. Our ability to remain competitive will depend, in part, on our ability to:
- enhance and improve the responsiveness, functionality and other features of the government portals we offer;
- continue to develop our technical expertise;
- develop and introduce new services, applications and technology to meet changing customer needs and preferences; and
- influence and respond to emerging industry standards and other technological changes in a timely and cost-effective manner.
We cannot assure you that we will be successful in responding to the above technological and industry challenges in a timely and cost-effective manner. If we are unable to integrate new technologies and industry standards effectively, our results of operations could be harmed.
RISKS TYPICAL OF THE INTERNET INDUSTRY
IF THE INTERNET INFRASTRUCTURE FAILS TO DEVELOP OR BE ADEQUATELY MAINTAINED, OUR BUSINESS WOULD BE HARMED BECAUSE USERS MAY NOT BE ABLE TO ACCESS OUR GOVERNMENT PORTALS
Our success depends on the increase in Internet usage generally and in particular as a means to access public information electronically. This in part requires the development and maintenance of the Internet infrastructure. If this infrastructure fails to develop or be adequately maintained, our business would be harmed because users may not be able to access our government portals. Among other things, this development and maintenance will require a reliable network backbone with the necessary speed, data capacity, security and timely development of complementary products for providing reliable Internet access and services.
The Internet has experienced, and is expected to continue to experience, significant growth in the number of users and amount of traffic. If the Web continues to experience increased numbers of users, frequency of use or increased bandwidth requirements, the Internet infrastructure may not be able to support these increased demands or perform reliably. The Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure, and could face such outages and delays in the future. These outages and delays could reduce the level of Internet usage and traffic on our government portals. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols to handle increased levels of activity or due to increased governmental regulation. If the Internet infrastructure is not adequately developed or maintained, use of our government portals may be reduced.
WE MAY BE HELD LIABLE FOR CONTENT THAT WE OBTAIN FROM GOVERNMENT AGENCIES
Because we aggregate and distribute sometimes private and sensitive public information over the Internet, we may face potential liability for defamation, negligence, invasion of privacy and other claims based on the nature and content of the material that is published on our government portals. Most of the agreements through which we obtain consent to disseminate this information do not contain indemnity provisions in our favor. These types of claims have been brought, sometimes successfully, against online services and Web sites in the past. We cannot assure you that the general liability insurance will be adequate to indemnify us for all liability that may be imposed. Any liability that is not covered by our insurance or is in excess of our insurance coverage could severely harm our business operations and financial conditions.
CONCERNS OVER TRANSACTIONAL SECURITY MAY HINDER THE GROWTH OF OUR BUSINESS
A significant barrier to electronic commerce is the secure transmission of confidential information over public networks. Any breach in our security could expose us to a risk of loss or litigation and possible liability. We rely on encryption and authentication technology licensed from third parties to provide secure transmission of confidential information. As a result of advances in computer capabilities, new discoveries in the field of cryptography or other developments, a compromise or breach of the algorithms we use to protect customer transaction data may occur. Because we provide information released from various government entities, we may represent an attractive target for security breaches.
A compromise of our security or a perceived compromise of our security could severely harm our business. A party who is able to circumvent our security measures could misappropriate proprietary information, including customer credit card information, or cause interruptions or incur direct damage to our government portals. Also, should hackers obtain sensitive data and information, or create bugs or viruses in an attempt to sabotage the functionality of our products and services, we may receive negative publicity, incur liability to our customers or lose the confidence of the governments with which we contract, any of which may cause the termination or modification of our government contracts.
We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by these breaches. However, protection may not be available at a reasonable price or at all.
GOVERNMENTAL REGULATION OF THE INTERNET MAY RESTRICT THE OPERATION AND GROWTH OF OUR BUSINESS
There are currently few laws or regulations that specifically regulate communications or commerce on the Internet. Laws and regulations may be adopted in the future, however, that address these issues including user privacy, pricing, and the characteristics and quality of products and services. An increase in regulation or the application of existing laws to the Internet could significantly increase our cost of operations and harm our business. For example, the Federal Communications Commission may, in the future, reconsider its ruling that Internet access service is not "telecommunications" and may decide that Internet service providers must pay a percentage of their gross revenues as a "universal service contribution." If the Federal Communications Commission were to require universal service contributions from providers of Internet access or Internet backbone services, our costs of doing business may increase, and we may not be able to recover these costs from our customers. As a result, our business and financial condition could be harmed.
OUR BUSINESS MAY BE NEGATIVELY AFFECTED BY YEAR 2000 ISSUES
We cannot assure you that the software systems that we use for portal management, network monitoring, quality assurance, applications and information and transaction processing do not contain undetected errors or defects associated with Year 2000 data functions. Further, we cannot assure you that our network systems acquired from third parties do not contain undetected errors or defects. If any such errors or defects do exist, we may incur material costs to resolve them.
Because our products and services depend significantly on information provided by and transactions conducted with our government partners, our ability to deliver services and transactions properly to our customers depends on these government partners being Year 2000 ready. We cannot assure you that our government partners are Year 2000 ready. If they are not, their information systems may be disrupted and our ability to provide services and transactions curtailed. Our business, results of operations and financial condition would be harmed as a result.
In addition, the software and systems of financial institutions, utility companies, Internet access companies, third-party service providers and others outside of our control may not be Year 2000 ready. If these entities are not Year 2000 ready, a systemic failure beyond our control could result, including a prolonged Internet, telecommunications or general electrical failure. This type of failure would make it difficult or impossible to use the Internet or access our government portals. If a prolonged failure of this type occurs, our business and financial condition would be harmed.
OUR SYSTEMS MAY FAIL OR LIMIT USER TRAFFIC
Our communications hardware and computer hardware operations for delivering our electronic government services are located individually in each state or city where we provide those services. We cannot assure you that during the occurrence of fire, floods, earthquakes, power loss, telecommunications failures, break-ins and similar events that the modem banks and direct dial-up connections we have to serve as back-up systems will not prevent damage to our systems or cause interruptions to our services. Computer viruses, electronic break-ins or other similar disruptive problems could cause users to stop visiting our government portals and could cause our clients to terminate agreements with us. If any of these circumstances occurred, our business could be harmed. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures of or interruptions in our systems.
Our government portals must accommodate a high volume of traffic and deliver frequently updated information. These government portals may experience interruptions due to any failure or delay by government agencies in the transmission or receipt of this information. Due to holidays and technical problems with state computer systems, our Web sites have experienced slower response times or decreased
traffic in the past and may experience the same incidents in the future. In addition, our users depend on Internet service providers, online service providers and other Web site operators for access to our government portals. Many of these providers and operators have experienced significant outages in the past due to system failures unrelated to our systems, holidays and heavy user traffic, and could experience the same outages, delays and other difficulties in the future. Any of these system failures could harm our business, results of operations and financial condition.
RISKS PARTICULAR TO THIS OFFERING
OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR SHAREHOLDERS WILL RETAIN SIGNIFICANT CONTROL OVER US AFTER THIS OFFERING, WHICH WILL ALLOW THEM TO INFLUENCE THE OUTCOME OF MATTERS SUBMITTED TO SHAREHOLDERS FOR APPROVAL
After this offering, executive officers, directors and holders of 5% or more of our outstanding common stock will, in the aggregate, own approximately 75.2% of our outstanding common stock. In addition, as of March 31, 1999, 31,896,145 shares of our outstanding common stock have been placed in a voting trust, representing approximately 75.1%% of our outstanding common stock prior to this offering. The voting trust is selling 1,500,000 shares of common stock in this offering, which will reduce the number of shares it holds to 30,396,145, or approximately 57.9% of our outstanding common stock. The trustees of this voting trust are Messrs. Fraser and Hartley, both of whom serve as directors of our company. As a result, Messrs. Fraser and Hartley have, among other rights, the ability to control the election of directors and approve corporate actions that must be submitted for a vote of shareholders.
The interests of these affiliates may conflict with the interests of other shareholders, and the actions they take or approve may be contrary to those desired by the other shareholders. This concentration of ownership may also have the effect of delaying, preventing or deterring an acquisition of our company by a third party.
OUR MANAGEMENT WILL RETAIN BROAD DISCRETION IN THE USE OF PROCEEDS FROM THIS OFFERING AND MAY USE THE PROCEEDS IN WAYS THAT MAY NOT INCREASE OUR OPERATING RESULTS OR MARKET VALUE
We intend to use all of the net proceeds from the sale of the common stock for increased marketing efforts, creation of new products and services, further development of infrastructure, working capital, general corporate purposes and potential acquisitions. However, our management will retain significant flexibility in applying the net proceeds of this offering and may use the proceeds in ways in which you do not agree. Until the proceeds are needed, we plan to invest them in investment-grade, interest-bearing securities. The failure of our management to apply such funds effectively could harm our business.
THE SIGNIFICANT NUMBER OF SHARES OF COMMON STOCK THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR FUTURE MAY HARM THE MARKET PRICE OF OUR COMMON STOCK
The market price of our common stock could drop as a result of sales of a large number of shares of our common stock in the market after this offering, or the perception that such sales could occur. These factors also could make it more difficult for us to raise funds through future offerings of our common stock.
Based on the number of shares of common stock outstanding as of March 31, 1999, there will be 52,481,996 shares of common stock outstanding immediately after this offering. All of the shares sold in this offering will be freely transferable without restriction or further registration under the Securities Act, except for shares purchased by our "affiliates" as defined in Rule 144 of the Securities Act. Upon completion of this offering, 39,481,996 shares will be "restricted securities" as defined in Rule 144. These restricted securities may be sold in the future without registration under the Securities Act to the extent permitted under Rule 144, Rule 701 or an exemption under the Securities Act. In connection with this offering, holders of all shares of restricted securities have agreed not to sell their shares without the prior written consent of Hambrecht & Quist LLC for a period of 180 days from the date of this prospectus.
As of March 31, 1999, 2,512,332 shares of common stock were issuable upon exercise of outstanding options. Of those options, options to purchase shares will be vested and fully exercisable 180 days after commencement of this offering. In connection with this offering, holders of outstanding options have agreed not to sell any shares of common stock they acquire as a result of option exercises without the prior written consent of Hambrecht & Quist LLC for a period of 180 days from the date of this prospectus, subject to exceptions for holders whose employment terminates during the 180 day period.
OUR STOCK PRICE, LIKE THAT OF OTHER INTERNET COMPANIES, MAY BE VOLATILE
The market price of our common stock is likely to be highly volatile. Our stock price could fluctuate in response to a variety of factors, including:
- actual or anticipated variations in quarterly operating results;
- announcements of new contracts or applications;
- changes in financial estimates by securities analysts; and
- other events or factors that may be beyond our control.
The stock market has experienced significant price and volume fluctuations and the market prices of securities of technology companies, particularly Internet-related companies, have been highly volatile, often unrelated to the operating performance of such companies. Investors may not be able to resell their shares of our common stock at or above the initial public offering price. In the past, securities class action litigation has often been instituted against a company following periods of volatility in the company's stock price. This type of litigation could result in substantial costs and could divert our management's attention and resources.
INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE DILUTION AND A DISPARITY IN STOCK PURCHASE PRICE
The initial public offering price is expected to be substantially higher than the pro forma net tangible book value per share of the outstanding common stock immediately after the offering. Accordingly, purchasers of common stock in this offering will experience immediate and substantial dilution of approximately $8.26 in net tangible book value per share, or approximately 82.6% of the assumed offering price of $10.00 per share. In contrast, existing shareholders paid an average price of $0.11 per share. Investors will incur additional dilution upon the exercise of outstanding stock options and warrants. Furthermore, any additional equity financing may be dilutive to shareholders and debt financing, if available, may involve restrictive covenants, which may limit our operating flexibility with respect to certain business matters. If additional funds are raised through the issuance of equity securities, the percentage ownership of our shareholders will be reduced. Shareholders may experience additional dilution in net book value per share and such equity securities may have rights, preferences and privileges senior to those of the holders of our common stock.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS COULD PREVENT OR DELAY A CHANGE OF CONTROL AND, AS A RESULT, NEGATIVELY IMPACT OUR SHAREHOLDERS
Our articles of incorporation provide that our board of directors may not for a period of three years engage in a business combination with an interested shareholder unless the business combination is approved in a prescribed manner. Furthermore, our bylaws limit the ability of shareholders to raise matters at a meeting of shareholders without giving advance notice. The anti-takeover provisions in our articles of incorporation and bylaws may have the effect of delaying, deterring or preventing changes in control or management of our company, even if such change in control or management would be beneficial to shareholders. These provisions also could limit the price that some investors might be willing to pay in the future for shares of our common stock.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and uncertainties, which may include statements about our:
- business strategy;
- plans for hiring additional personnel;
- plans for entering into agreements with states to create, develop and manage government portals;
- plans for the introduction of new electronic government products and services;
- anticipated sources of funds, including the proceeds from this offering, to fund our operations for the 18 months following the date of this prospectus; and
- plans, objectives, expectations and intentions contained in this prospectus that are not historical facts.
When used in this prospectus, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions are generally intended to identify forward-looking statements. In addition, this prospectus includes statistical data about the Internet that comes from information published by sources including International Data Corporation and Forrester Research. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of reasons, including those discussed under "Risk Factors" and elsewhere in this prospectus. We assume no obligation to update any forward-looking statements.
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
We estimate that we will receive net proceeds of $89,900,000 from the sale of the 10,000,000 shares of common stock offered by us in this offering, assuming an initial public offering price of $10.00 per share and after deducting the estimated underwriting discounts and offering expenses. We will not receive any of the proceeds from the sale of shares by the selling shareholders.
While we cannot predict with certainty how the proceeds of this offering will be used, we currently intend to use them as follows:
- to increase our new market development efforts;
- to increase marketing efforts aimed at raising transaction volume;
- to create new products and services; and
- to further develop common infrastructure and operating platforms.
We expect to use the remaining net proceeds from this offering for working capital and other general corporate purposes. In addition, although we are not currently participating in any active negotiations and have no commitments or agreements with respect to any acquisition, we might in the future use a portion of the remaining proceeds to pay for acquisitions.
Pending these uses, the net proceeds of this offering will be invested in short-term, investment-grade, interest-bearing investments or accounts.
The amounts we actually spend for these purposes may vary significantly and will depend on a number of factors, including our future revenue and cash generated by operations and the other factors described under "Risk Factors." Therefore, we will have broad discretion in the way we use the net proceeds. See "Risk Factors--Our management will retain broad discretion in the use of proceeds from this offering and may use the proceeds in ways in which you do not agree" for more information.
DIVIDEND POLICY
Other than dividends paid while we were a corporation formed under Subchapter S of the Internal Revenue Code, we have never declared or paid any cash dividends on shares of our common stock. We intend to retain any future earnings for future growth and do not anticipate paying any cash dividends in the foreseeable future.
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
- on an actual basis, giving effect to our reincorporation in Colorado in April 1999 and an increase in our authorized shares of common stock in May 1999; and
- as adjusted to give effect to the receipt of the estimated net proceeds from the sale of 10,000,000 shares of common stock offered by us in this offering at an assumed initial public offering price of $10.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses.
The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of March 31, 1999 and does not include the following:
- 2,512,332 shares of common stock subject to options issued at a weighted average exercise price of $1.44 per share granted under our 1998 stock option plan; or
- 9,026,808 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.
MARCH 31, 1999
------------------------
ACTUAL AS ADJUSTED
----------- -----------
(IN THOUSANDS)
Capital lease obligations-- long-term portion............................................ $ 384 $ 384
----------- -----------
Shareholders' equity:
Common stock, no par value; 200,000,000 shares authorized; 42,481,996 shares issued and
outstanding, actual; 52,481,996 shares issued and outstanding, as adjusted............. $ -- $ --
Additional paid-in capital............................................................... 22,435 112,335
Accumulated deficit...................................................................... (9,125) (9,125)
----------- -----------
13,310 103,210
Less other............................................................................... (3,523) (3,523)
----------- -----------
Total shareholders' equity............................................................... $ 9,787 $ 99,687
----------- -----------
Total capitalization..................................................................... $ 10,171 $ 100,071
----------- -----------
----------- -----------
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DILUTION
As of March 31, 1999, our actual net tangible book value was approximately $1.33 million or $.03 per share. Actual net tangible book value per share represents the amount of total actual tangible assets less total actual liabilities, divided by the shares of common stock outstanding as of March 31, 1999. After giving effect to the sale of the 10,000,000 shares of common stock we are offering, after deducting the underwriting discount and estimated offering expenses, our adjusted net tangible book value as of March 31, 1999 would have been $91.23 million, or $1.74 per share. This represents an immediate increase in as adjusted net tangible book value of $1.71 per share to existing shareholders and an immediate dilution of $8.26 per share to new investors. The following table illustrates this per share dilution:
Assumed public offering price per share................................. $ 10.00
Net tangible book value per share as of March 31, 1999.............. $ .03
Increase per share attributable to new investors.................... 1.71
-----
As adjusted net tangible book value per share after the offering........ 1.74
-----------
Dilution per share to new investors..................................... 8.26
-----------
-----------
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The following table sets forth, on a pro forma basis, as of March 31, 1999 the difference between the number of shares of common stock purchased, the total consideration paid and the average price per share paid by the existing shareholders and the new investors purchasing shares of common stock in this offering:
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- --------- ----------- ----------- ---------------
Existing
shareholders.. 42,481,996 81.0% $ 4,645,071 4.4% $ 0.11
New
investors... 10,000,000 19.0 100,000,000 95.6
--------- --------- ----------- -----
Total..... 52,481,996 100.0% $104,645,071 100.0%
--------- --------- ----------- -----
--------- --------- ----------- -----
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The foregoing discussion and tables assume no exercise of any of the 2,512,332 stock options with a weighted average exercise price of $1.44 outstanding as of March 31, 1999.
Sales by the selling shareholders to this offering will reduce the number of shares of common stock held by existing shareholders to 39,481,996 or approximately 75.2% (37,531,996 shares, or approximately 71.5%, if the underwriters' over-allotment option is exercised in full) of the total number of shares of common stock outstanding upon the closing of this offering and will increase the number of shares held by new public investors to 13,000,000 or approximately 24.8% (14,950,000 shares, or approximately 28.5%, if the underwriters' over-allotment option is exercised in full) of the total number of shares of common stock outstanding after this offering. See "Principal and Selling Shareholders."
SELECTED CONSOLIDATED ACTUAL AND PRO FORMA FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and their related notes, our pro forma consolidated statements of operations and their related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this prospectus. No financial data is reported for 1994 as we had no meaningful operations during that year. The consolidated statement of operations data for the year ended December 31, 1995 and the consolidated balance sheet data as of December 31, 1995 and 1996 are unaudited and derived from financial statements not included in this prospectus. The consolidated statement of operations data for the years ended December 31, 1996, 1997 and 1998 and the consolidated balance sheet data as of December 31, 1997 and 1998 labeled "Actual" are derived from, and are qualified by reference to, our audited financial statements included in this prospectus. The consolidated statement of operations data for the years ended December 31, 1997 and 1998 and the three month period ending March 31, 1998 labeled "Pro Forma" are unaudited and derived from and qualified by reference to our pro forma consolidated statements of operations and their related notes included in this prospectus. The consolidated statement of operations data for the three month period ended March 31, 1998 and 1999 and the consolidated balance sheet data as of March 31, 1999 labeled "Actual" are unaudited and derived from and qualified by reference to our unaudited interim financial statements included in this prospectus.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1998
--------------------------
1995 1997
--------- --------------------------
1996
---------
ACTUAL ACTUAL PRO FORMA ACTUAL PRO FORMA
-------------------- ----------- ------------- ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................... $ 3 $ 236 $ 996 $ 24,382 $ 28,624 $ 36,532
Cost of revenues........................... -- 21 5 18,410 21,211 27,394
--------- --------- ----------- ------------- ----------- -------------
Gross profit............................. 3 215 991 5,972 7,413 9,138
Operating expenses:
Service development and operations....... -- 38 224 1,309 3,885 4,327
Selling, general and administrative...... 12 168 660 3,122 4,242 5,087
Stock compensation....................... -- -- 370 631 569 574
Depreciation and amortization -- 1 14 7,774 5,922 7,887
--------- --------- ----------- ------------- ----------- -------------
Total operating expenses............... 12 207 1,268 12,836 14,618 17,875
--------- --------- ----------- ------------- ----------- -------------
Operating income (loss).................... (9) 8 (277) (6,864) (7,205) (8,737)
--------- --------- ----------- ------------- ----------- -------------
Other income (expense):
Interest expense......................... -- -- -- (51) (88) (105)
Other income (expense), net.............. -- -- -- (17) 56 71
--------- --------- ----------- ------------- ----------- -------------
Total other income (expense)........... -- -- -- (68) (32) (34)
--------- --------- ----------- ------------- ----------- -------------
Income (loss) before income taxes.......... (9) 8 (277) (6,932) (7,237) (8,771)
Income tax expense (benefit)............... -- -- -- -- 659 659
--------- --------- ----------- ------------- ----------- -------------
Net income (loss).......................... $ (9) $ 8 $ (277) $ (6,932) $ (7,896) $ (9,430)
--------- --------- ----------- ------------- ----------- -------------
--------- --------- ----------- ------------- ----------- -------------
Net income (loss) per share:
Basic and diluted........................ $ (0.47) $ 0.00 $ (0.01) $ (0.17) $ (0.21) $ (0.22)
--------- --------- ----------- ------------- ----------- -------------
--------- --------- ----------- ------------- ----------- -------------
Weighted average shares outstanding........ 19 6,005 20,858 40,113 37,242 41,950
THREE MONTHS
ENDED MARCH 31,
---------------------------------------
1998 1999
-------------------------- -----------
ACTUAL PRO FORMA ACTUAL
----------- ------------- -----------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................... $ 361 $ 8,270 $ 11,455
Cost of revenues........................... 1 6,184 8,604
----------- ------------- -----------
Gross profit............................. 360 2,086 2,851
Operating expenses:
Service development and operations....... 135 577 935
Selling, general and administrative...... 325 1,171 1,518
Stock compensation....................... -- 5 1,699
Depreciation and amortization 24 1,988 2,001
----------- ------------- -----------
Total operating expenses............... 484 3,741 6,153
----------- ------------- -----------
Operating income (loss).................... (124) (1,655) (3,302)
----------- ------------- -----------
Other income (expense):
Interest expense......................... -- (17) (37)
Other income (expense), net.............. -- 15 17
----------- ------------- -----------
Total other income (expense)........... -- (3) (20)
----------- ------------- -----------
Income (loss) before income taxes.......... (124) (1,658) (3,322)
Income tax expense (benefit)............... -- -- (23)
----------- ------------- -----------
Net income (loss).......................... $ (124) $ (1,658) $ (3,299)
----------- ------------- -----------
----------- ------------- -----------
Net income (loss) per share:
Basic and diluted........................ $ (0.01) $ (0.04) $ (0.08)
----------- ------------- -----------
----------- ------------- -----------
Weighted average shares outstanding........ 22,679 41,934 42,243
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DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
ACTUAL ACTUAL ACTUAL
----------- ----------- -----------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash............................................................................. $ $ $ 179
Total assets..................................................................... 14 110 326
Bank lines of credit............................................................. --
Long-term debt (includes current portion of notes payable/capital lease
obligations)................................................................... -- -- 30
Total shareholders' equity....................................................... (15) 95 188
MARCH 31,
-------------
1998 1999
----------- -------------
ACTUAL ACTUAL
----------- -------------
CONSOLIDATED BALANCE SHEET DATA:
Cash............................................................................. $ 1,311 $ 1,115
Total assets..................................................................... 17,249 16,633
Bank lines of credit............................................................. 1,024 839
Long-term debt (includes current portion of notes payable/capital lease
obligations)................................................................... 745 1,179
Total shareholders' equity....................................................... 10,912 9,787
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR
FINANCIAL STATEMENTS AND THE RELATED NOTES APPEARING AT THE END OF THIS PROSPECTUS. OUR DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED UPON CURRENT EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. ACTUAL RESULTS AND THE TIMING OF EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS," "BUSINESS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are the leading provider of Internet-based electronic government services that help governments reduce costs and provide a higher level of service to businesses and citizens. We form partnerships with governments and on their behalf design, build and operate Internet-based portals that allow businesses and citizens to complete transactions and obtain government information online. We typically enter into three to five year contracts with our government partners and manage operations for each partnership through separate subsidiaries that operate as decentralized business units with a high degree of autonomy. Under these contracts, each business unit focuses solely on providing a comprehensive electronic government solution for that partner, and receives a share of the revenue the partner generates through its portal while the contract is in effect. In our government partnerships with Georgia and Iowa, we provide consulting, development and management services for these government portals predominantly under a fixed-price model. By establishing a local business unit for each government partner, we have been able to develop a management culture and incentive system that focuses on locally-based service that distinguishes us from divisions of larger traditional technology providers.
We were founded in 1991 when our first business unit was selected to provide electronic government services in Kansas under a public/private partnership model. Since then, we have formed partnerships and created business units to serve the eight states of Arkansas, Georgia, Indiana, Iowa, Kansas, Maine, Nebraska and Virginia, and one city-county government, the City of Indianapolis and Marion County, Indiana. We have been selected by the state of Utah to provide our electronic government services and have entered into a contract with the state of Utah for our software.
In 1997, we contracted with one of our government partners to develop, for a fixed fee, back-office database management software which would enable improved electronic filing, storage, management and distribution of Uniform Commercial Code (UCC) and other corporate records. We formed a separate application development division to develop, maintain and implement the core technology for these applications, and subsequently entered into development contracts with four additional states to implement similar back-office software.
EXCHANGE OFFER
Starting with the partnership with the State of Kansas, our founders established a separate S corporation for business conducted within each state where they were awarded a public/private partnership contract. On March 31, 1998, we completed an exchange offer to combine our business units, which previously operated as five separate affiliated companies, into one consolidated company with each business unit as a subsidiary of our company. The exchange offer was accounted for using the purchase accounting method. The $17.3 million excess of the fair market value over the net book value of the acquired business units has been partially allocated to intangible assets that relate to our existing government contracts. The contracts were valued at the net present value of projected future cash flows over the lives of the existing contracts. The remainder of the excess was allocated to goodwill. See Note 3 of the notes to our consolidated financial statements that appear at the end of this prospectus for additional discussion of the accounting for the exchange offer.
BUSINESS MODEL
We derive revenues from four sources:
- the sale of electronic access to public records on behalf of government;
- subscription and transaction-based fees;
- fees for managing electronic government operations; and
- fees and charges for government application development.
In seven of our nine existing subsidiaries, our revenues are generated from transactions, which generally include the sale of electronic access to public records on behalf of the government and the collection of subscription and transaction-based fees. Among the highest volume, most commercially valuable products and services we offer are access to driver's license and motor vehicle records, which accounted for over 90% of our pro forma revenues in 1998. We believe that while these two applications will continue to be important sources of transaction revenue early in our government partnerships, their contribution as a percentage of our total revenues in existing government partnerships will decline as other sources grow. Pro forma revenues from other government products and services grew 107% in 1998 over 1997.
We charge for access to records on a per-record basis and, depending upon government policies, also on a fixed or sliding scale bulk basis. Our fees are set by negotiation with the government agencies that control the records and are typically approved by a government sanctioned oversight body. We recognize revenues from transactions on an accrual basis and bill end-user customers primarily on a monthly basis. We typically receive a majority of payments via electronic funds transfer and credit card within 20 days of billing and remit payment to governments within 60 days of the transaction. Government agency fees and amounts payable to the primary contracting governmental entities are also accrued as cost of revenues and accounts payable at the time revenues are recognized.
In our government partnerships with Georgia and Iowa, we provide consulting, development and management services to state-operated government portals predominantly under a fixed-price model. Revenues from these service contracts are recognized when service is provided and billed at rates and intervals provided for in the contract.
Our application development division develops and implements back-office government software applications for a fixed development fee, which is recognized as revenue on a percentage of completion basis. In the fourth quarter of 1998, we determined that the balance of revenues remaining to be recognized in 1999 under our existing application development division contractual obligations was not expected to cover anticipated costs of developing and implementing the related applications. Estimated costs in excess of fixed contract prices of $1.3 million for completing these applications were expensed in the fourth quarter of 1998. Based on our most recent monthly review of our current application development contracts, we expect to accrue an additional $0.9 million of anticipated losses in the second quarter of 1999. We expect substantially all of our existing application development contractual commitments will be satisfied by the third quarter of 2000. The current fixed-price contracts do not, and we believe in the future will not, represent a significant percentage of our revenues.
Revenues from individual business units are highly correlated to population, but are also affected by pricing policies established by government entities for public records, the number and growth of commercial enterprises and the government entity's development of policy and information technology (IT) infrastructure supporting electronic government.
Approximately 83% of our pro forma revenue growth from 1997 to 1998 was attributable to revenues from our business units that conducted operations for substantially less than a full year in 1997. We believe that the formation of partnerships with additional government entities will continue to be the primary contributor to our revenue growth in the foreseeable future.
Substantially all of our cost of revenues consist of payments we make to our government partners for access to public records we distribute over the Internet to businesses and citizens, and the remainder consist of
telecommunications costs. The pricing, costs and gross margin derived from these records vary by the type of public record and by state.
The majority of our operating expenses are personnel-related, and directly associated with the development and marketing of electronic government services in our business units. All nine business units have largely the same operational design and a similar cost structure. Each of our business units has a president, a marketing group and a service development and operations group which together focus on the rapid development and deployment of Internet applications to meet the needs of governments, businesses and citizens in that particular venue. The amortization of goodwill and intangible assets related to our exchange offer is the other major component of operating expenses.
Since the inception of our first business unit in Kansas, we have used stock purchase and stock option programs for key employees as compensation to attract strong business and technical talent. We have recorded compensation expense for some of our stock and options grants. The expense is equal to the excess of the fair market price on the date of grant or sale over the option exercise or stock sale price. As of March 31, 1999, we recorded deferred compensation of approximately $3.4 million. For the stock options granted, deferred compensation is being amortized over the vesting periods of the stock options. We recognized a total of approximately $569,000 in stock compensation expense in 1998 and approximately $1.7 million in stock compensation expense in the three months ended March 31, 1999.
PRO FORMA RESULTS OF OPERATIONS
Prior to the completion of our exchange offer in March 1998, we were a holding company with no operations of our own. Our exchange offer consolidated five business units as operating subsidiaries under our holding company.
Prior to April 1, 1998, our historical consolidated results of operations reflect only the results of our business unit formed to pursue new business opportunities and not the results of our business units operating in Indiana, Kansas, Arkansas and Nebraska. For example, for the three months ended March 31, 1999, revenues were $11.5 million, which represents all of our business units while the $361,000 reported for the three months ended March 31, 1998 represents primarily our operations in Georgia. Total operating expenses are likewise not comparable. Accordingly, we believe that historical comparison of our results of operations for the three months ended March 31, 1999 against the three months ended March 31, 1998, the year ended December 31, 1998 against the year ended December 31, 1997 and the year ended December 31, 1997 against the year ended December 31, 1996 is not meaningful.
We believe that comparisons of results of operations for the three months ended March 31, 1999 against the pro forma results of operations for the three months ended March 31, 1998 and the pro forma results of operations for the year ended December 31, 1998 against the pro forma results of operations for the year ended December 31, 1997 most accurately represents our combined operations for these periods. See the pro forma consolidated financial information that appears at the end of this prospectus for additional details regarding the pro forma information.
The following table presents certain consolidated statement of operations data for the periods indicated as a percentage of total revenues on a pro forma basis, except for the three months ended March 31, 1999.
PERCENTAGE OF REVENUES
------------------------------------------------
YEAR ENDED DECEMBER THREE MONTHS
31, ENDED MARCH 31,
-------------------- --------------------------
1997 1998 1998 1999
--------- --------- ------------- -----------
PRO FORMA PRO FORMA ACTUAL
-------------------- ------------- -----------
Revenues....................................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................................... 75.5 75.0 74.8 75.1
--------- --------- ----- -----
Gross profit................................................... 24.5 25.0 25.2 24.9
Operating expenses.............................................
Service development and operations........................... 5.3 11.8 7.0 8.2
Selling, general and administrative.......................... 12.8 13.9 14.1 13.2
Stock compensation........................................... 2.6 1.6 0.1 14.8
Depreciation and amortization................................ 31.9 21.6 24.0 17.5
--------- --------- ----- -----
Total operating expenses................................... 52.6 48.9 45.2 53.7
--------- --------- ----- -----
Operating income (loss)........................................ (28.1) (23.9) (20.0) (28.8)
Interest expense............................................... (0.2) (0.3) (0.2) (0.3)
Other income (expense), net.................................... (0.1) 0.2 0.2 0.1
--------- --------- ----- -----
Income before income taxes..................................... (28.4) (24.0) (20.0) (29.0)
Income tax expense (benefit)................................... 0.0 1.8 0.0 (0.2)
--------- --------- ----- -----
Net loss....................................................... (28.4)% (25.8)% (20.0 )% (28.8 )%
--------- --------- ----- -----
--------- --------- ----- -----
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PRO FORMA COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 1998
REVENUES. Revenues increased 38.5% to $11.5 million for the three months ended March 31, 1999 from $8.3 million on a pro forma basis for the three months ended March 31, 1998. This increase was primarily attributable to two new business units that were fully operational in the first quarter of 1999, but were not operational in 1998.
COST OF REVENUES. Cost of revenues consists of payments we make to our government partners for access to public records we distribute over the Internet to businesses and citizens, and the remainder consist of telecommunications costs. Cost of revenues increased 39.1% to $8.6 million for the three months ended March 31, 1999 from $6.2 million on a pro forma basis for the three months ended March 31, 1998. This increase primarily was attributable to the cost related to the two new business units that were fully operational in the first quarter of 1999, but were not operational in 1998.
SERVICE DEVELOPMENT AND OPERATIONS. Service development and operations costs consist of costs to develop, implement, operate and maintain government portals, as well as costs of personnel that design, develop and implement back-office government applications. These costs increased 62.1% to $935,000 for the three months ended March 31, 1999 from $577,000 on a pro forma basis for the three months ended March 31, 1998. This increase primarily was attributable to new business units and the increase in size of our application development division.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative costs consist of marketing and sales costs in our business units and costs of corporate-level personnel. These costs increased 29.6% to $1.5 million for the three months ended March 31, 1999 from $1.2 million on a pro forma basis for the three months ended March 31, 1998. This increase primarily was attributable to new business units and the addition of corporate-level personnel.
STOCK COMPENSATION. Stock compensation was $1.7 million for the three months ended March 31, 1999 compared to $5,000 on a pro forma basis for the three months ended March 31, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization consisted primarily of amortization of goodwill and intangible assets related to our exchange offer. Depreciation and amortization was $2.0 million for the three months ended March 31, 1999 and 1998.
INCOME TAXES. On March 31, 1998 we were an S corporation, as were all of our business units, and therefore we did not record income tax expense. We recognized an income tax benefit of $23,000 for the three months ended March 31, 1999. Goodwill amortization and a portion of stock compensation is not non-deductible for tax purposes.
PRO FORMA COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES. Pro forma revenues increased 49.8% to $36.5 million for the year ended December 31, 1998 from $24.4 million for the year ended December 31, 1997. This increase was primarily attributable to the addition of four new business units in 1997 that had a full year of operations in 1998.
COST OF REVENUES. Pro forma cost of revenues increased 48.8% to $27.4 million for the year ended December 31, 1998 from $18.4 million for the year ended December 31, 1997. This increase was primarily attributable to the costs related to the addition of four new business units in 1997 that had a full year of operations in 1998.
SERVICE DEVELOPMENT AND OPERATIONS. Pro forma service development and operations costs increased 237.4% to $4.3 million of the year ended December 31, 1998 from $1.3 million for the year ended December 31, 1997. This increase was primarily attributable to the development of new business units and increased development costs of our applications development division, including a charge in the fourth quarter of 1998 of $1.3 million for anticipated losses on application development contracts.
SELLING, GENERAL AND ADMINISTRATIVE. Pro forma selling, general and administrative costs increased 62.9% to $5.1 million for the year ended December 31, 1998 from $3.1 million for the year ended December 31, 1997. This increase primarily was attributable to marketing and sales activities within our new business units.
STOCK COMPENSATION. Pro forma stock compensation was $574,000 for the year ended December 31, 1998 and $631,000 for the year ended December 31, 1997.
DEPRECIATION AND AMORTIZATION. Pro forma depreciation and amortization was $7.9 million for the year ended December 31, 1998 and $7.8 million for the year ended December 31, 1997.
INCOME TAXES. We recognized an income tax provision of $659,000 for the year ended December 31, 1998. This provision was attributable to a one-time $1.4 million provision for deferred taxes on our conversion to a C corporation, and goodwill amortization and a portion of stock compensation being non-deductible for tax purposes. For the year ended December 31, 1997, we were an S corporation, as were all of our business units, and therefore we did not record income tax expense.
SELECTED ACTUAL AND PRO FORMA QUARTERLY OPERATING RESULTS
The following tables present certain consolidated statements of operations data for our nine most recent quarters ended March 31, 1999 in dollars and as a percentage of total revenues. Data for periods prior to the three months ended June 30, 1998 are presented on a pro forma basis. 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.
QUARTER ENDED
--------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
Revenues....................... $ 5,295 $ 5,410 $ 6,395 $ 7,282 $ 8,270 $ 8,493 $ 9,773 $ 9,996 $11,455
Cost of revenues............... 4,017 4,081 4,874 5,438 6,184 6,152 7,347 7,711 8,604
-------- -------- --------- -------- -------- -------- --------- -------- --------
Gross profit................... 1,278 1,329 1,521 1,844 2,086 2,341 2,426 2,285 2,851
-------- -------- --------- -------- -------- -------- --------- -------- --------
Operating expenses:
Service development and
operations................. 276 288 329 416 577 676 806 2,268 935
Selling, general and
administrative............. 612 694 764 1,052 1,171 1,380 1,219 1,317 1,518
Stock compensation........... 10 -- 150 471 5 259 -- 310 1,699
Depreciation and
amortization............... 1,936 1,946 1,937 1,955 1,988 1,969 1,962 1,968 2,001
-------- -------- --------- -------- -------- -------- --------- -------- --------
Total operating expenses..... 2,834 2,928 3,180 3,894 3,741 4,284 3,987 5,863 6,153
-------- -------- --------- -------- -------- -------- --------- -------- --------
Operating income (loss)........ $(1,556) $(1,599) $(1,659) $(2,050) $(1,655) $(1,943) $(1,561) $(3,578) $(3,302)
-------- -------- --------- -------- -------- -------- --------- -------- --------
-------- -------- --------- -------- -------- -------- --------- -------- --------
AS A PERCENTAGE OF TOTAL REVENUES
--------------------------------------------------------------------------------------------------
Revenues....................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............... 75.9 75.4 76.2 74.7 74.8 72.4 75.2 77.1 75.1
-------- -------- --------- -------- -------- -------- --------- -------- --------
Gross profit................... 24.1 24.6 23.8 25.3 25.2 27.6 24.8 22.9 24.9
Operating expenses:
Service development and
operations................. 5.2 5.3 5.2 5.7 7.0 8.0 8.2 22.7 8.2
Selling, general and
administrative............. 11.6 12.8 11.9 14.5 14.1 16.2 12.5 13.2 13.2
Stock compensation........... 0.2 0.0 2.3 6.5 0.1 3.0 0.0 3.1 14.8
Depreciation and
amortization............... 36.5 36.0 30.3 26.8 24.0 23.2 20.1 19.7 17.5
-------- -------- --------- -------- -------- -------- --------- -------- --------
Total operating expenses..... 53.5 54.1 49.7 53.5 45.2 50.4 40.8 58.7 53.7
-------- -------- --------- -------- -------- -------- --------- -------- --------
Operating income (loss)........ (29.4)% (29.5)% (25.9)% (28.2)% (20.0)% (22.8)% (16.0)% (35.8)% (28.8)%
-------- -------- --------- -------- -------- -------- --------- -------- --------
-------- -------- --------- -------- -------- -------- --------- -------- --------
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We expect operating results to fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. See "Risk Factors--The unpredictability of our quarter to quarter results may adversely affect the trading price of our common stock" and "--The seasonality of use for some of our electronic government products and services may adversely affect our fourth quarter results of each calendar year" for more information on quarterly fluctuations and seasonality and how it affects our business.
We believe that period to period comparisons of our operating results will not necessarily be meaningful and you should not rely on them as an indication of future performance. It is possible that in some future periods our operating results may be below the expectations of public market analysts and investors. In such event, the trading price of our common stock may decline.
HISTORICAL RESULTS OF OPERATIONS
HISTORICAL COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 1998
REVENUES. Revenues increased to $11.5 million for the three months ended March 31, 1999 from $361,000 for the three months ended March 31, 1998. This increase was primarily attributable to the revenues of the four affiliated business units included in reported revenues subsequent to the March 31, 1998 exchange offer and to new state business units becoming fully operational during the latter part of 1998.
COST OF REVENUES. Cost of revenues increased to $8.6 million for the three months ended March 31, 1999 from $1,000 for the three months ended March 31, 1998. This increase was primarily attributable to the cost of the revenues of the business units acquired in the exchange offer and the additional state business units that became fully operational during the latter part of 1998.
SERVICE DEVELOPMENT AND OPERATIONS. Service development and operations costs increased to $935,000 for the three months ended March 31, 1999 from $135,000 for the three months ended March 31, 1998. The increase was primarily attributable to the business units acquired in the exchange offer and to additional state business units.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative costs increased to $1.5 million for the three months ended March 31, 1999 from $325,000 for the three months ended March 31, 1998. The increase was due primarily to the business units acquired in the exchange offer and to the addition of corporate-level personnel.
STOCK COMPENSATION. Stock compensation was $1.7 million for the three months ended March 31, 1999. There was no stock compensation expense for the three months ended March 31, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to $2.0 million for the three months ended March 31, 1999 from $24,000 for the three months ended March 31, 1998. This increase is primarily attributable to amortization of goodwill and intangible assets resulting from the completion of the exchange offer.
INCOME TAXES. On March 31, 1998 we were an S corporation and did not record income tax expense. We recognized an income tax benefit of $23,000 for the three months ended March 31, 1999. Goodwill amortization and a portion of stock compensation is non-deductible for tax purposes.
HISTORICAL COMPARISON OF YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Historical results of operations for the years ended December 31, 1997 and 1996 reflect the start-up of our business unit formed to pursue new business opportunities in states other than Indiana, Kansas, Arkansas and Nebraska. These states contained our initial business units that were accounted for as acquired in the March 31, 1998 exchange offer.
REVENUES. Revenues increased to $28.6 million for the year ended December 31, 1998 from $1.0 million for the year ended December 31, 1997 and $236,000 for the year ended December 31, 1996. The increase in 1998 was primarily attributable to the revenues of the business units aquired in the exchange offer subsequent to March 31, 1998 and the addition of new state business units.
COST OF REVENUES. Cost of revenues increased to $21.2 million for the year ended December 31, 1998 from $5,000 for the year ended December 31, 1997 and $21,000 for the year ended December 31, 1996. The increase in 1998 was primarily attributable to the cost of revenues of the business units acquired in the exchange offer subsequent to March 31, 1998 and the addition of new state business units.
SERVICE DEVELOPMENT AND OPERATIONS. Service development and operations costs increased to $3.9 million for the year ended December 31, 1998 from $224,000 for the year ended December 31, 1997 and $38,000 for the year ended December 31, 1996. The increase in 1998 was primarily attributable to additional state business units, the completion of the exchange offer and the increase in size of our application development division, for which we recorded a $1.3 million charge in the fourth quarter for anticipated losses for satisfying remaining obligations under our application development contracts.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative costs increased to $4.2 million for the year ended December 31, 1998 from $660,000 for the year ended December 31, 1997 and $168,000 for the year ended December 31, 1996. The increase in 1998 was primarily attributable to the business units acquired in the exchange offer and to the addition of corporate-level personnel.
STOCK COMPENSATION. Stock compensation increased to $569,000 for the year ended December 31, 1998 from $370,000 for the year ended December 31, 1997. There was no stock compensation expense for the year ended December 31, 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to $5.9 million for the year ended December 31, 1998 from $14,000 for the year ended December 31, 1997. Depreciation and amortization expense for the year ended December 31, 1996 was negligible. The 1998 expense consisted primarily of amortization of goodwill and intangible assets resulting from the completion of the exchange offer.
INCOME TAXES. We recognized an income tax provision of $659,000 for the year ended December 31, 1998. This provision was attributable to a one-time $1.4 million provision for deferred taxes on our conversion to a C corporation and to goodwill amortization and a portion of stock compensation being non-deductible for tax purposes. For the years ended December 31, 1997 and 1996, we were an S corporation and did not record income tax expense.
SELECTED HISTORICAL QUARTERLY OPERATING RESULTS
The following table presents certain historical consolidated statement of operations data for our nine most recent quarters ended March 31, 1999. Actual results of operations data are presented for all periods. In management's opinion, this unaudited information has been prepared on the same basis as the audited annual financial statements and includes all adjustments, consisting only of normal recurring adjustments, necessary for fair presentation of the unaudited information for the quarters presented. You should read this information in conjunction with the consolidated financial statements, including the notes thereto, included elsewhere in this prospectus. The results of operations for any quarter are not necessarily indicative of results that we might achieve for any subsequent periods.
QUARTER ENDED
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MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
Revenues....................... $ 200 $ 216 $ 285 $ 295 $ 361 $8,494 $9,773 $9,996 $11,455
Cost of revenues............... -- -- 2 3 1 6,152 7,347 7,711 8,604
-------- -------- --------- -------- -------- -------- --------- -------- --------
Gross profit................... 200 216 283 292 360 2,342 2,426 2,285 2,851
-------- -------- --------- -------- -------- -------- --------- -------- --------
Operating Expenses:
Service, development and
operations................. 44 48 53 79 135 676 806 2,268 935
Selling, general and
administrative............. 111 162 145 242 325 1,381 1,219 1,317 1,518
Stock compensation........... -- -- 146 224 -- 259 -- 310 1,699
Depreciation and
amortization............... 2 2 3 7 24 1,968 1,962 1,968 2,001
-------- -------- --------- -------- -------- -------- --------- -------- --------
Total operating expenses..... 157 212 347 552 484 4,284 3,987 5,863 6,153
-------- -------- --------- -------- -------- -------- --------- -------- --------
Operating income (loss)........ 43 4 (64) (260) (124) (1,942) (1,561) (3,578) (3,302)
-------- -------- --------- -------- -------- -------- --------- -------- --------
Other income (expense):
Interest expense............. -- -- -- -- -- (19) (31) (38) (37)
Other income (expense),
net........................ -- -- -- -- -- 15 24 17 17
-------- -------- --------- -------- -------- -------- --------- -------- --------
Total other income........... -- -- -- -- -- (4) (7) (21) (20)
Income (loss) before income
taxes........................ 43 4 (64) (260) (124) (1,946) (1,568) (3,599) (3,322)
Income taxes................... -- -- -- -- -- -- 370 289 (23)
-------- -------- --------- -------- -------- -------- --------- -------- --------
Net income (loss).............. $ 43 $ 4 $ (64) $ (260) $ (124) $(1,946) $(1,938) $(3,888) $(3,299)
-------- -------- --------- -------- -------- -------- --------- -------- --------
-------- -------- --------- -------- -------- -------- --------- -------- --------
Net income (loss) per share:
Basic and diluted............ $ 0.00 $ 0.00 $(0.00) $(0.01) $(0.01) $(0.05) $(0.05) $(0.09) $ (0.08)
-------- -------- --------- -------- -------- -------- --------- -------- --------
-------- -------- --------- -------- -------- -------- --------- -------- --------
Weighted average shares
outstanding................ 20,532 20,536 20,826 21,527 22,679 41,946 42,066 42,066 42,243
-------- -------- --------- -------- -------- -------- --------- -------- --------
-------- -------- --------- -------- -------- -------- --------- -------- --------
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We expect operating results to fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. See "Risk Factors--The unpredictability of our quarter to quarter results may adversely affect the trading price of our common stock" and "--The seasonality of use for some of our electronic government products and services may adversely affect our fourth quarter results of each calendar year" for more information on quarterly fluctuations and seasonality and how it affects our business.
We believe that period to period comparisons of our operating results will not necessarily be meaningful and you should not rely on them as an indication of future performance. It is possible that in some future periods our operating results may be below the expectations of public market analysts and investors. In such event, the trading price of our common stock may decline.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the exchange offer, each of our business units funded its initial development and organizational costs from stock sales to employees and private investors. Since March 31, 1998, initial development and organizational costs related to new business units have been funded by net cash generated from operations in existing business units. In most cases, our business units have generated positive cash flow from operations within the first ninety days following initial service implementation, and have thereafter begun to fund all activities from operating cash flow. As of March 31, 1999, we had approximately $1.1 million in cash and cash equivalents.
Net cash used in operating activities was $366,000 for the three months ended March 31, 1999. The difference between the net loss of $3.3 million and net cash used was attributable to over $3.6 million in non-cash charges, primarily amortization of intangibles and stock compensation. This difference was offset by an increase in accounts receivable of $787,000, which was due to increased volume in our largest business unit. The difference between the net loss of $7.9 million and net cash provided by operating activities of $354,000 during the year ended December 31, 1998 was attributable to the non-cash charges in amortization of intangibles and non-cash expense recognized for application development contracts.
Investing activities resulted in net cash used of $10,000 in the three months ended March 31, 1999, and net cash provided of $607,000 in the year ended December 31, 1998. The cash provided from investing activities in the year ended December 31, 1998 was attributable to cash of $765,000 held by the business units we consolidated in connection with our exchange offer, offset by cash invested in property and equipment of $255,000.
Cash flows provided from financing activities were $181,000 for the three months ended March 31, 1999, and $170,000 for the year ended December 31, 1998. Cash flows provided from financing activities for the three months ended March 31, 1999 were primarily attributable to issuances of our common stock to executives and a board member during the period. Cash flows provided from financing activities for the year ended December 31, 1998 were primarily attributable to cash flows from borrowings of $1.2 million, offset by cash used for payments on notes, leases, debentures and distributions to shareholders totaling $588,000.
Cash provided and/or used for operating, investing and financing activities during the periods ended March 31, 1998, December 31, 1997, and December 31, 1996 reflected the cash flow from our business unit formed to pursue new business opportunities, and is not comparable to cash flow patterns reflected in our consolidated operations.
Each of our business units maintains operating lines of credit and equipment lines of credit on identical or substantially similar terms and conditions from the same bank. The total amount outstanding on our bank lines of credit for our business units totaled $839,000 as of March 31, 1999.
We believe that the net proceeds from this offering, together with the existing cash balances and financing arrangements, will provide us with sufficient funds to finance our operations through at least the
next 18 months. If the cash we generate from our operations is insufficient to satisfy our liquidity requirements after this 18 month period, we may need to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity or convertible debt securities may result in additional dilution to our shareholders. We may not be able to raise any additional capital or on acceptable terms or at all.
YEAR 2000 READINESS
Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. As a result, software that records only the last two digits of the calendar year may not be able to distinguish whether "00" means 1900 or 2000. This may result in software failures or the creation of erroneous results.
We have conducted an internal review of software systems that we use for portal management, network monitoring, quality assurance, applications and information and transaction processing. Because we developed most of these software systems internally after the Year 2000 problem was already known, we were largely able to anticipate four digit requirements. In connection with ongoing reviews of our government portals, we also are reviewing our computer infrastructure, including network equipment and servers. We do not anticipate material problems with network equipment, as the majority of our current configuration have been installed or upgraded with Year 2000 ready systems. Similarly, we purchased most of our servers within the past four years. With this relatively current equipment, we do not anticipate material Year 2000 readiness problems, and we will replace any servers that cannot be updated either in the normal replacement cycle or on an accelerated basis.
We also have internally standardized the majority of our systems on a Solaris operating system, which we are advised by our vendor is Year 2000 ready after implementation of the latest service upgrades. We use multiple software systems for internal business purposes, including accounting, electronic mail, service development, human resources, customer service and support and sales tracking systems. The majority of these applications have either been purchased, upgraded or internally developed within the last three years.
We have made inquiries of vendors of systems we believe to be mission critical to our business regarding their Year 2000 readiness. Although we have received various assurances, we have not received affirmative documentation of Year 2000 readiness from any of these vendors and we have not performed any operational tests on our internal systems. We generally do not have contractual rights with third party providers should their equipment or software fail due to Year 2000 issues. If this third-party equipment or software does not operate properly with regard to Year 2000, we may incur unexpected expenses to remedy any problems. These expenses could potentially include purchasing replacement hardware and software. We have not determined the state of readiness of some of our third-party suppliers of information and services, phone companies, long distance carriers, financial institutions and electric companies, the failure of any one of which could severely disrupt our ability to conduct our business.
Concurrently with our analysis of our internal systems, we have begun to survey third-party entities with which we transact business, including government partners, critical vendors and financial institutions, for Year 2000 readiness. We expect to complete this survey in the second quarter of 1999. Our government partners typically have addressed Year 2000 issues on an agency-by-agency basis under an overall Year 2000 program. We are monitoring regularly the Year 2000 progress of those agencies which account for high transaction and revenue volumes through our portals. We believe that many, though not all, of these agencies have completed Year 2000 readiness implementation. We cannot estimate the effect, if any, that non-ready systems of these entities could have on our business, results of operations or financial condition, and there can be no assurance that the impact, if any, would not be material.
We anticipate that our review of Year 2000 issues and any remediation efforts will continue throughout calendar 1999. The costs incurred to date to remediate our Year 2000 issues have not been
material. If any Year 2000 issues are uncovered with respect to these systems or our other internal systems, we believe that we will be able to resolve these problems without material difficulty, as replacement systems are available on commercially reasonable terms. Presently, we have included the total remaining cost of addressing Year 2000 issues within our existing information technology budget. We do not anticipate any Year 2000 complications based on a number of assumptions, including the assumption that we have already identified our most significant Year 2000 issues. However, these assumptions may not be accurate, which could cause our actual results to differ materially from those anticipated. In view of our Year 2000 review and remediation efforts to date, the recent development of a number of our products and services, the recent installation of our networking equipment and servers, and the limited activities that remain to be completed, we do not consider contingency planning to be necessary at this time.
Our applications operate in complex network environments and directly and indirectly interact with a number of external hardware and software systems. We are unable to predict to what extent our business may be affected if our systems or the systems that operate in conjunction with our systems experience a material Year 2000 failure. The most likely worst case scenarios are that the Internet infrastructure fails or the internal systems of our government partners fail, either of which would render us unable to provide products and services, which would harm our business. Additionally, known or unknown errors or defects that affect the operation of our software and systems could result in delay or loss of revenue, interruption of services, cancellation of contracts and memberships, diversion of development resources, damage to our reputation, increased service and warranty costs, and litigation costs, any of which could harm our business, financial condition and results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 131, "Disclosure about Segments of an Enterprise and Related Information," which establishes standards for the way public business enterprises report information in annual statements and interim financial reports regarding operating segments, products and services, geographic areas and major customers. This statement is effective for financial statements for periods beginning after December 15, 1997. The adoption of this statement did not have a significant impact on the way we report information in our annual statements and interim financial reports.
In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", which establishes guidelines for the accounting for the costs of all computer software developed or obtained for internal use. We are required to adopt SOP 98-1 effective January 1, 1999. The adoption of SOP 98-1 did not have a material impact on our consolidated financial statements.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our cash balances and on the increase or decrease in the amount of interest expense we must pay with respect to our various outstanding debt instruments. The risk associated with fluctuating interest expense is limited, however, to the exposure related to those debt instruments and credit facilities which are tied to market rates and we do not believe it is material. We do not use derivative financial instruments. We ensure the safety and preservation of our invested principal funds by limiting default risks, market risk and investment risk.
BUSINESS
OVERVIEW
We are 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 enter into contracts with governments and on their behalf design, build and operate Internet-based portals, forming a partner relationship with governments. These portals consist of Web sites and applications that we build, which allow businesses and citizens to access government information online and complete transactions, including applying for a permit, renewing a license or filing a report. Our unique business model allows us to reduce our government partners' financial and technology risks and obtain revenue by sharing in the fees governments generate from electronic government services. Our partners benefit because they gain a centralized, customer-focused presence on the Internet. Businesses and citizens gain a faster, more convenient and more cost-effective means to interact with governments.
Currently, we provide Internet-based electronic government services for eight states and one local government. The state of Utah has recently selected us as an electronic government services provider, and we have entered into a contract to implement our services in that state. We typically enter into three to five year contracts with our government partners and manage operations for each contractual relationship through separate subsidiaries that operate as decentralized business units with a high degree of autonomy. We intend to increase our revenues by replicating our model in other states, municipalities, federal agencies and international entities, and by delivering new services and expanding markets within our existing contractual relationship.
INDUSTRY BACKGROUND
THE MARKET FOR GOVERNMENT-TO-BUSINESS AND GOVERNMENT-TO-CITIZEN TRANSACTIONS
Government's regulation of commercial and consumer activities requires billions of transactions and exchanges of large volumes of information between government agencies and businesses and citizens. These transactions and exchanges include driver's license renewals, motor vehicle registrations, tax returns, permit applications and requests for government-gathered information. Government agencies typically defray the cost of processing these transactions and of storing, retrieving and distributing information through a combination of general tax revenue, service fees and charges for direct access to public records. According to the official statistics of the U.S. Census Bureau, federal, state and local governments collected a total of $451 billion in charges and miscellaneous fees from businesses and citizens in 1995. Additionally, states generated $26 billion in fees for motor vehicle, corporation and other licenses in 1995.
THE LIMITS OF TRADITIONAL GOVERNMENT TRANSACTION METHODS
Traditionally, government agencies have transacted, and in many cases continue to transact, with businesses and citizens using processes that are inconvenient and labor-intensive, require extensive paperwork and use large amounts of scarce staff resources. Transactions and information requests are often made in person or by mail and are processed manually, increasing the potential for errors and the need for numerous revisions and follow-up. Even newer methods, including telephone response systems, tape exchanges and dial-up computer networks, rely on multiple systems and potentially incompatible data formats, and require significant expertise and expenditures to introduce and maintain. As a result, businesses and citizens often have no choice but to face costly delays to complete essential tasks. These delays include waiting in line at a government agency, waiting for answers by telephone or waiting for responses by mail. Businesses and citizens encounter further inconvenience and delay because they usually can work with government agencies only during normal business hours. Even when electronic alternatives are available, they often require a cumbersome process of multiple contacts with different government agencies. Increases in the level of economic activity and in the population have exacerbated these problems and increased the demand for new services.
GROWTH OF THE INTERNET AND ELECTRONIC COMMERCE
The Internet has emerged as a global medium, enabling millions of people worldwide to share information, communicate and conduct business electronically. International Data Corporation, a market research firm, estimates that the number of Web users will grow from approximately 97 million worldwide in 1998 to approximately 320 million worldwide by the end of 2002. This growth is expected to be driven by the large and growing number of PCs installed in homes and offices, the decreasing cost of PCs, easier, faster and cheaper access to the Internet, improvements in network infrastructure, the proliferation of Internet content and the increasing familiarity with and acceptance of the Internet by governments, businesses and consumers. In addition, the volume of electronic commerce has grown in parallel with the Internet itself. According to International Data Corporation, transactions on the Internet are expected to increase from approximately $32 billion in 1998 to approximately $426 billion in 2002. Business-to-business usage is also growing rapidly. Forrester Research, a market research firm, estimates that business-to-business electronic commerce will grow from $17 billion in 1998 to $327 billion in 2002.
EMERGENCE OF THE INTERNET AS A MEDIUM FOR ELECTRONIC GOVERNMENT
The growing acceptance of the Internet and electronic commerce presents a significant opportunity for the development of electronic government, in which government agencies conduct transactions and distribute information over the Internet. By using the Internet, government agencies can increase the number and efficiency of interactions with constituents without increasing expenditures or demands on current personnel. In addition, regardless of physical distance, businesses and citizens can obtain government information quickly and easily over the Internet. For example, motor vehicle administrations can provide instantaneous responses to auto insurers' requests for driving record data by allowing controlled access to government databases through the Internet. This Internet-based interaction reduces costs for both government and users and decreases response times compared to providing the same data by mail or special purpose dial-up computer connections.
CHALLENGES TO THE IMPLEMENTATION OF ELECTRONIC GOVERNMENT SERVICES
Despite the potential benefits of electronic government, barriers to creating successful Internet-based services often preclude governments from implementing them. Some of these barriers are similar to those the private sector encounters, including:
- the high cost of implementing and maintaining Internet technology in a budget-constrained environment;
- the financial, operational and technology risks of moving from older, established technologies to rapidly evolving Internet technologies;
- the need to quickly assess the requirements of potential customers and cost-effectively design and implement electronic government services that are tailored to meet these requirements; and
- the intense competition for qualified technical personnel.
Governments also face some unique challenges that exacerbate the difficulty of advancing to Internet-based services, including:
- lengthy and political appropriations processes that make it difficult for governments to acquire resources and to develop Internet services quickly;
- a diverse and substantially autonomous group of government agencies that have adopted varying and fragmented approaches to providing information and transactions over the Internet;
- 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 solution 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.
OUR SOLUTION
We provide a unique, Internet-based electronic government solution that meets the needs of businesses, citizens and governments. The key elements of our solution are:
CUSTOMER-FOCUSED, ONE-STOP GOVERNMENT PORTAL
Using our well-established marketing and technical expertise and our government experience, we design, implement and manage portals for each of our government partners that meet their needs as well as those of businesses and citizens. Our portals are designed to create a single point of presence on the Internet for our government partners 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 partners to generate awareness and educate businesses and citizens about the availability and potential benefits of electronic government services.
COMPELLING FINANCIAL MODEL
We allow governments to implement comprehensive electronic government services at minimal cost and risk. We take on the responsibility and cost of designing, building and operating government portals and applications, with minimal use of government resources. We employ our technological resources and accumulated expertise to help governments avoid the risks of selecting and investing in new technologies. We implement our electronic government services rapidly, efficiently and accurately, using our well-tested and reliable infrastructure and processes. Once we establish a government portal and associated applications, we manage transaction flows and fund ongoing costs from a share of fees received from information accessed and transactions conducted through the portal.
PARTNERSHIP WITH GOVERNMENTS
We form partnerships 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 assure government agencies and constituents that we are focused on their needs. Moreover, we have pioneered, and encourage our partners 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:
CONTINUE TO PENETRATE NEW MARKETS
We intend to increase the number of our government partners by leveraging our relationships with current government partners, our reputation for providing proven electronic government services and our technology and government process knowledge base. We have designed our services and infrastructure so that we can deploy our services quickly, easily and cost-effectively in new locations. We intend to market our one-stop approach to other states, multi-state cooperative organizations, local governments and federal agencies. In the future, we may expand our services into international markets. Our expansion efforts will include developing relationships and sponsors throughout an individual government entity, making presentations at conferences of government executives with responsibility for information technology policy, and developing contacts with organizations that act as forums for discussions between these executives.
BROADEN PRODUCT AND SERVICE OFFERINGS
We intend to develop new product and service offerings to enable government agencies and businesses and citizens to interact more effectively online. We will increase our development efforts by leveraging our experience and deepening the knowledge base that we have developed from our operations. We will continue to work with government agencies, professional associations and other organizations to better understand the current and future needs of our customers.
INCREASE TRANSACTION VOLUMES FROM EXISTING AND NEW CUSTOMERS
We intend to increase traffic to our government portals through both targeted and broad marketing initiatives. We will continue to work with our government partners to create awareness of the online alternatives to traditional government interaction, through initiatives including informational brochures, government voicemail recordings and inclusion of Web site information on government invoices. In addition, we will continue to update our portals to highlight new government service information provided on the portals. We plan to work with professional associations to directly and indirectly communicate to their members the convenience, ease of use and other benefits of the electronic government services our portals offer.
ENHANCE CAPABILITY AND EFFICIENCY OF CORE BUSINESS OPERATIONS
We will continue to enhance our business model by increasing the overall capability and efficiency of each government business unit. On a corporate level, we will work with each business unit to share and coordinate the implementation of best practices across our organization and to create new products and services in response to the needs of businesses and citizens. We intend to strengthen our operational and administrative functions to provide standardized services in areas that benefit from economies of scale, including new market development and human resources management. In addition, we
will continue to use performance incentives, including stock-based compensation and local manager bonuses, to encourage each business unit to raise customer satisfaction, continuously develop new products and services and lower overall business unit costs.
ATTRACT, RETAIN AND TRAIN SPECIALIZED AND QUALIFIED PERSONNEL
We believe that attracting, training and retaining specialized talent is critical to executing our growth strategy. We intend to continue to improve employee retention through challenging and entrepreneurial work assignments and incentive programs, including equity interests in our company. We strive to foster a creative, open atmosphere in which we encourage each employee to make valuable contributions. We intend to hire employees with experience in government processes who also have specific technical, marketing or contract negotiation skills. In addition, we intend to improve the quality and retention of our workforce through increased centralized training programs.
GOVERNMENT PARTNERSHIPS
We provide electronic government services to eight states and one city-county government through the following partnerships:
YEAR
SERVICES POPULATION
PARTNERSHIP NAME COMMENCED SERVED WEB ADDRESS
------------------------------------------------ ----------- ----------- -----------------
Information Resource of Maine................... 1999 1,244,000 www.state.me.us
Information Network of Arkansas................. 1997 2,538,000 www.state.ar.us
CivicNet (Indianapolis and Marion County,
Indiana)...................................... 1997 813,000 www.civicnet.net
IOWAccess Network............................... 1997 2,862,000 www.iowaccess.org
Virginia Information Providers Network.......... 1997 6,791,000 www.vipnet.org
GeorgiaNet Authority............................ 1996 7,642,000 www.state.ga.us
Access Indian@ Information Network.............. 1995 5,899,000 www.state.in.us
Nebrask@ Online................................. 1995 1,663,000 www.state.ne.us
Information Network of Kansas................... 1992 2,629,000 www.state.ks.us
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Source: 1998 estimated population information from the U.S. Census Bureau Web site at www.census.gov.
Each of these partnerships operates under a separate contract, which generally has an initial term of three to five years. Under a typical contract, a government agrees that:
- we have the right to develop a comprehensive Internet portal owned by the government to deliver electronic government services;
- the portal we establish is the primary electronic and Internet interface between the government and its citizens;
- the government supports the use of the portal for all commercially valuable applications in order to support the operation and expansion of the portal;
- the government sponsors access to agencies for the purpose of entering into agreements with these agencies to develop applications for their data and transactions and to link their Web pages to the portal; and
- the government establishes a policy making and fee approval board, which typically includes agency members, business customers and others, to establish prices for products and services and to set other policies.
In return, we agree to:
- develop, manage, market, maintain and expand the government's portal and information and electronic commerce applications;
- assume the investment risk of building and operating the government's portal and applications without the direct use of tax dollars;
- bear the risk of collecting transaction fees; and
- have an independent audit conducted upon the government's request.
We own all the software we develop under these contracts. After completion of the initial contract term, our government partners receive a perpetual, royalty-free license to use the software only in their own portals.
We enter into separate agreements with various agencies and divisions of our government partners to provide specific services and to conduct specific transactions. These agreements preliminarily establish the pricing of the electronic transactions and data access services we provide and the allocation of revenues between us and the agency. These terms are then submitted to the policy making and fee approval board for approval.
In May 1999, we entered into a contract with the state of Utah to provide electronic government services on terms similar to those of our services in the table above. We are in the process of setting up operations under this contract.
In our government partnerships with Georgia and Iowa, we provide consulting, development and management services for these government portals predominantly under a fixed-price model.
OUR PRODUCTS AND SERVICES
Each of our business units works with its government partner to implement, develop, manage, and enhance a comprehensive, Internet-based portal to deliver electronic government services to the government's constituents. Citizens and businesses use these portals to gain access to Web-based interactive applications in order to conduct transactions with the government and gain access to public service information.
We provide user-friendly and convenient access to useful government information and services on each portal and develop numerous fee-based transaction services and applications. These fee-based services and applications allow businesses and citizens to access constantly changing government information and to file necessary government documents, including driver's license renewals, motor vehicle registrations, tax returns, and permit applications. The types of products and services and the fees charged vary in each jurisdiction according to the unique preferences of that jurisdiction. In an effort to reduce the frustration businesses and citizens often encounter when dealing with multiple government agencies, we handle cross-agency communications whenever feasible and shield businesses and citizens from the complexity of older, mainframe-based systems that agencies commonly use, creating an intuitive and efficient way to deal with government.
Some of the products and services we currently offer in different jurisdictions include:
PRODUCT OR SERVICE DESCRIPTION PRIMARY USERS
Driver's License Offers controlled instant look-up of driving Insurance companies
Records Search records by license number, name and birth date,
or social security number. Includes commercial
licenses.
Vehicle Title, Provides controlled interactive title, Insurance companies,
Lien & registration and lien database access. lenders
Registration
BillWatch-TM- Allows the user to monitor state legislative Attorneys, lobbyists
(Lobbyist in a activity. Users can tag bills by key word or
Box-Registered Trademark-) bill number, and BillWatch-TM- will send an
e-mail when a change occurs in the status of
the bill.
Health Allows users to search databases on several Hospitals, clinics,
Professional health professions. health insurers,
License Services citizens
Secretary of State Allows users to access filings of corporations, Attorneys, lenders
Searches partnerships and other entities, including
charter documents.
UCC Searches Permits searches of the UCC database. Attorneys, lenders
Professional Permits professionals to renew their licenses Attorneys, doctors,
License Renewal on line using a credit card. other licensed
professionals
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PRODUCT OR SERVICE DESCRIPTION PRIMARY USERS
Motor Fuel EDI Allows motor fuel carriers to file their tax Motor fuel carriers
Project reports electronically.
Sales/Use Tax Allows Sales and Use Tax filers to file the Retailers
Filing required forms online. The electronic forms
handle the computation in the form and write
the data out so that it can be entered into the
Department of Revenue's databases without the
need for the information to be re-keyed in the
Department's office.
Online Birth Processes an online request for an official Citizens
Certificate birth certificate, charging the user's credit
card.
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Our application development division develops and delivers applications that improve the back-office administration of government records, and that better enable electronic filing and distribution. These applications often are highly customized for specific government or agency needs, and have been developed under separate contracts outside of our core partnership arrangements with governments.
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 partners and businesses and
citizens. Representatives are available 24 hours a day, seven days a week to address any problems that might arise on the portals we operate.
SALES AND MARKETING
We have two primary sales and marketing goals:
- to develop new sources of revenue through new government partnerships; and
- to retain and grow our revenue streams from existing government partnerships.
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 partnership for delivering information and completing transactions over the Internet. We meet regularly with interested government officials to educate them on the public/private partnership 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 partnership 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 partner selection process. We respond to requests for bids with a proposal that outlines in detail our philosophy and plans for implementing our business model. Once our proposal is selected, we enter into negotiations for a contract. We have responded to a number of requests for comprehensive electronic government services proposals from governments and have been awarded and entered into contracts in each case.
GROWING EXISTING MARKETS
In our existing government partnerships, our marketing efforts focus on:
- expanding the number of government agencies that provide services or information on the government portal;
- identifying new information and transactions that can be usefully and cost-effectively delivered over the Internet; and
- increasing the number of potential users who do business with the government over the Internet.
Although each government's unique political and economic environment drives different marketing and development priorities, we have found many of our core applications to be relevant across multiple jurisdictions. Each of our partnership 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, which will identify products and services that have been developed and implemented successfully for one government and replicate them in other jurisdictions.
TECHNOLOGY AND OPERATIONS
Over the past eight years, we have made substantial investments in the development of Internet-based applications and operations specifically designed to allow businesses and citizens to transact with and receive information from governments. The scope of our technological expertise includes network engineering as it applies to the interconnection of government systems to the Internet, Internet security, Web-to-legacy system integration, Web-to-mainframe integration, database design, Web site administration and Web page development. Within this scope, we have developed and implemented a comprehensive Internet portal framework for governments, and a broad array of standalone service solutions using a combination of our own proprietary technologies and commercially available, licensed technologies. Our technological expertise, coupled with our in-depth understanding of governmental processes and systems, has made us adept at rapidly creating tailored solutions that keep our partners on the forefront of electronic government.
Each of our government partners has unique priorities and needs in the development of its electronic government services. Over 60% of our employees work in the Internet services and applications development, and operations area, and nearly all are focused on a single government partner'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 partnership operations on our standard technical framework, and there is frequent and growing communication and cooperation, which ensures that our government partners can make use of the most advanced electronic government services we have developed throughout our organization.
Most of our portals and applications are physically hosted in each jurisdiction in which we operate on servers that we own or lease. We also provide links to sites that are maintained by government agencies or organizations that we do not manage. Our business units provide uninterrupted 24 hour per day, 7 day a week online service, and all of our operations maintain fault-tolerant, redundant systems, with thorough backup and security and disaster recovery procedures.
We believe our systems and applications are scalable and can easily be replicated from one state to another. We focus on sustaining low-overhead operations, with all major investments driven by the objective of deploying the highest value-added technology and applications to each partnership operation.
Finally, we have designed our government portals and applications to be compatible with virtually any existing system and to be rapidly deployed. We have implemented a government portal in as little as seven days from the award of a contract, and have begun generating revenues from data access transactions in as little as 30 days. To enable this level of speed and efficiency, we license commercially available technology whenever possible and focus on the integration and customization of these off-the-shelf solutions when necessary. We expect that commercially licensed technology will continue to be available at reasonable costs.
COMPETITION
We believe that the principal factors upon which we compete are:
- understanding of government needs;
- the quality and fit of electronic government services;
- the speed and responsiveness to the needs of businesses and citizens; and
- cost-effectiveness.
We believe we compete favorably with respect to the above-listed factors. In most cases, the principal substitute for our services is a government-designed and managed solution that integrates other
vendors' technologies, products and services. Companies that have expertise in marketing and providing technical electronic services to government entities may begin to compete with us by further developing their services and increasing their focus on this piece of their business and market shares. Examples of companies that may compete with us are the following:
- large systems integrators, including American Management Systems, Inc. and Sapient Corporation;
- traditional consulting firms, including International Business Machines Corporation and Science Applications International Corporation; and
- Web service companies, including USWeb/CKS, AppNet Systems, Inc., and Verio Inc.
Many of our potential competitors are national or international in scope and may have greater resources than we do. These resources could enable our potential competitors to initiate severe price cuts 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 partners. If we do not compete effectively or if we experience any pricing pressures, reduced margins or loss of market share resulting from increased competition, our business and financial condition may be materially adversely affected.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We rely on a combination of nondisclosure and other contractual arrangements with governments, our employees and third parties, and privacy and trade secret laws to protect and limit the distribution of the proprietary software, documentation and processes we have developed in connection with the electronic government products and services we offer. If we fail to adequately protect our intellectual property rights and proprietary information or if we become involved in litigation relating to our intellectual property rights and proprietary technology, our business could be harmed. Any actions we take may not be adequate to protect our proprietary rights and other companies may develop technologies that are similar or superior to our proprietary technology.
Although we believe that our products and services do not infringe on the intellectual property rights of others and that we have all rights needed to use the intellectual property employed in our business, it is possible that we could in the future become subject to claims alleging infringement of third party intellectual property rights. Any claims could subject us to costly litigation, and may require us to pay damages and develop non-infringing intellectual property or acquire licenses to the intellectual property that is the subject of the alleged infringement.
Additionally, upon the completion of the initial term of our government contracts, governments and their successors and affiliates obtain a perpetual right of use license to the software programs and other applications we have developed for them in the operation of the networks. It is possible that governments may use their limited license rights after termination of our contracts to launch competing services, or inadvertently allow our intellectual property or other information to fall into the hands of third parties, including our competitors.
EMPLOYEES
As of March 31, 1999, we had 102 full-time employees, of which 6 were working in our corporate operations and 96 were located in our business units. Of our employees, 18 were in sales and marketing, 63 were in service development and operations and 21 were in finance, business development and administration. Our future success will depend, in part, on our ability to continue to attract, retain and motivate highly qualified technical and management personnel, for whom competition is intense. From time to time, we also employ independent contractors to support our research and development, marketing, sales and support and administrative organizations. Our employees are not covered by any
collective bargaining agreement, and we have never experienced a work stoppage. We believe that our relations with our employees are good.
FACILITIES
Our principal administrative facility occupies a total of approximately 1,800 square feet at 12 Corporate Woods, 10975 Benson Street, Suite 390, Overland Park, Kansas 66210. All of our subsidiaries also lease their facilities. We believe our current facilities are adequate to meet our needs for the foreseeable future. We do not anticipate acquiring property or buildings in the foreseeable future.
LEGAL PROCEEDINGS
We may from time to time become a party to various legal proceedings arising in the ordinary course of our business. However, we are not currently subject to any material legal proceedings.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive officers and directors as of June 15, 1999:
NAME AGE POSITION
------------------------------- --- ------------------------------------------------------
Jeffery S. Fraser.............. 39 Chairman, Chief Executive Officer and Director
James B. Dodd.................. 42 President, Chief Operating Officer and Director
Kevin C. Childress............. 41 Chief Financial Officer
William F. Bradley, Jr......... 44 Executive Vice President--Strategy, Policy & Legal,
General Counsel and Secretary
Samuel R. Somerhalder.......... 57 Executive Vice President--Operations and
Administration
Harry H. Herington............. 39 Executive Vice President--Marketing and Technology
Services, and Assistant Secretary
John L. Bunce, Jr.............. 40 Director
Daniel J. Evans................ 73 Director
Ross C. Hartley................ 51 Director
Patrick J. Healy............... 32 Director
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JEFFERY S. FRASER, one of our founders, has served as our Chairman and Chief Executive Officer since January 1999 and as one of our directors since our formation. Mr. Fraser served as our President and Chief Executive Officer from April 1998 to December 1998 and President and Chief Executive Officer of our subsidiary, National Information Consortium USA, Inc., from January 1993 to April 1998. Additionally, from January 1992 to September 1998, he served as President and Chief Executive Officer of our subsidiary, Kansas Information Consortium, Inc. Mr. Fraser holds a B.S. in human resource management and an M.S. in information systems from Friends University in Wichita, Kansas.
JAMES B. DODD has served as our President, Chief Operating Officer and a director since January 1999. Prior to joining us, Mr. Dodd spent 14 years with the Sprint Corporation, a telecommunications company, where he served in various senior management positions including, most recently, as Vice President and General Manager of Sprint's Consumer Internet Access Group. Other positions he held at Sprint included Vice President of Consumer International Marketing from 1992 to 1994, and Vice President of Consumer Product Management and Development from 1995 to 1996. Mr. Dodd earned a CPA in 1982 and holds a B.A. in economics from Stanford University and an M.B.A. from the Harvard Business School.
KEVIN C. CHILDRESS has served as our Chief Financial Officer since May 1999. Prior to joining us, Mr. Childress served as a Managing Director and head of the food and beverage industry group at BT Alex. Brown, Inc., an investment banking firm, from 1992 to 1999. Prior to joining BT Alex. Brown, Mr. Childress was with Salomon Brothers Inc. for 11 years, part of which time was spent as the manager of the firm's Chicago-based midwest municipal finance group. Mr. Childress holds a B.A. in economics and political science from Stanford University.
WILLIAM F. BRADLEY, JR. has served as our Secretary since May 1998, General Counsel since July 1998 and Executive Vice President--Strategy, Policy & Legal since January 1999. From May 1998 to February 1999, Mr. Bradley served as one of our directors. He also serves as President, Chief Executive Officer and a director of our subsidiary, Indian@ Interactive, Inc. Mr. Bradley is also the General Manager for City-County Interactive, LLC, a subsidiary of Indian@ Interactive, Inc., which manages CivicNet for the city of Indianapolis and Marion County, Indiana. From July 1989 to December 1994, Mr. Bradley was an associate and later a law partner at Hinkle, Eberhart & Elkouri, LLC, a law firm in Kansas. Mr. Bradley holds a B.A. in English from the University of Kansas, Lawrence, and a J.D. degree from the University of Kansas School of Law.
SAMUEL R. SOMERHALDER has served as our Executive Vice President of Operations and Administration since January 1999. From May 1998 to November 1998, Mr. Somerhalder served as one of our directors. He also serves as President, Chief Executive Officer and a director of our subsidiary, Nebrask@ Interactive, Inc., which manages Nebraska Online for which he has served as the General Manager since January 1995. From November 1994 to April 1996, he also served as Secretary of Nebrask@ Interactive, Inc. Prior to joining us, Mr. Somerhalder was the Senior Vice President of Marketing for First Commerce Technologies, Inc., an information technology company, from October 1991 to January 1995. Mr. Somerhalder holds a B.S. in business administration from Kansas State University.
HARRY H. HERINGTON has served as our Executive Vice President of Marketing and Technology Services since January 1999. He served as one of our directors from May 1998 to February 1999. He also serves as President of National Information Consortium USA, Inc., which has a government partnership with Georgia to manage GeorgiaNet for which Mr. Herington is the General Manager. From September 1995 to September 1996, Mr. Herington served as the General Manager of Kansas Information Consortium, Inc. Prior to accepting his present position with us, Mr. Herington was the Associate General Counsel for the League of Kansas Municipalities from August 1992 to September 1995. Mr. Herington holds a B.A. in photo journalism from Wichita State University in Kansas and a J.D. degree from the University of Kansas School of Law.
JOHN L. BUNCE, JR. has served as one of our directors since June 1998. Mr. Bunce is a Managing Director and a member of the executive committee of Hellman & Friedman LLC, a direct investment firm, which he joined as an associate in 1988. Hellman & Friedman LLC is an affiliate of Hellman & Friedman Capital Partners III, L.P., H&F Orchard Partners III, L.P. and H&F International Partners III, L.P. Mr. Bunce also serves as a director of Western Wireless Corporation, a cellular telecommunications company, Voicestream Wireless Corporation, a telecommunications provider of personal communications services (PCS), Bronner Slosberg Humphrey, Co., a direct marketing and interactive agency, Falcon International Communications L.P., a cable company, and MobileMedia Corporation, a paging and messaging services company. Mr. Bunce holds a B.A. in international relations from Stanford University and an M.B.A. from the Harvard Business School.
DANIEL J. EVANS has served as one of our directors since November 1998. He is the chairman of and serves as a consultant for Daniel J. Evans Associates Consulting, a consulting company in Washington, since May 1989. Mr. Evans currently serves as a director of Puget Sound Energy, an investor-owned electric utility company, Flow International, a robotics company, Western Wireless Corporation, a wireless communications company, and Tera Computer, a computer manufacturing company. He also served as a U.S. Senator from September 1983 to January 1989 and the Governor of the State of Washington from January 1965 to January 1977. Mr. Evans holds a B.S. and an M.S. in civil engineering from the University of Washington.
ROSS C. HARTLEY, one of our founders, has served as one of our directors since our formation. From its incorporation to March 1999, Mr. Hartley served as Vice President of Marketing of Kansas Information Consortium, Inc. Mr. Hartley also has served as President of The Hartley Insurance Group, an insurance company in Kansas, since 1974. He also serves as a director of Empire District Electric Company, an investor-owned electric utility company. Mr. Hartley holds a B.S. in mathematics from Baker University in Baldwin City, Kansas and a J.D. degree from the University of Kansas School of Law.
PATRICK J. HEALY has served as one of our directors since June 1998. Mr. Healy is a Managing Director of Hellman & Friedman LLC, a direct investment firm, having joined Hellman & Friedman LLC as an associate in 1994. Hellman & Friedman LLC is an affiliate of Hellman & Friedman Capital Partners III, L.P., H&F Orchard Partners III, L.P. and H&F International Partners III, L.P. Currently, he also serves as a director of Bronner Slosberg Humphrey, Co., a direct marketing and interactive agency. Mr. Healy holds an A.B. in economics from Harvard College and an M.B.A. from the Harvard Business School.
All directors hold office until the next annual meeting of the shareholders and until their successors have been duly elected and qualified. Executive officers are elected by and serve at the direction of the board of directors.
KEY EMPLOYEES
NAME AGE POSITION
------------------------------- --- ------------------------------------------------------
Richard L. Brown............... 36 President, Chief Operating Officer and a director of
Utah Interactive, Inc.
Robert P. Chandler............. 39 President, Chief Executive Officer and a director of
Arkansas Information Consortium, Inc. and General
Manager of the Information Network of Arkansas
Tamara Dukes................... 36 President, Chief Executive Officer and a director of
New England Interactive, Inc. and General Manager of
InforME Network
Steven Gill.................... 38 Director of Finance of National Information Consortium
W. Kent Hiller................. 32 President, Chief Executive Officer and a director of
Iowa Interactive, Inc. and General Manager of
IOWAccess Network
Daniel Houlihan................ 53 President, Chief Executive Officer and a director of
Virginia Interactive, LLC and General Manager of
Virginia Information Providers Network
Debra Luling................... 32 President, Chief Executive Officer and a director of
Kansas Information Consortium, Inc. and General
Manager of the Information Network of Kansas
Joseph Nemelka................. 30 President of Market Development Division of National
Information Consortium and Chief Executive Officer and
a director of Utah Interactive, Inc.
Keith Schraad.................. 38 President of Georgia Division of National Information
Consortium USA and General Manager of GeorgiaNet
Authority
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RICHARD L. BROWN has served since March 1999 as President, Chief Operating Officer and a director of our subsidiary, Utah Interactive, Inc. Mr. Brown served as the Director of Marketing and Operations of our subsidiary, Indiana Interactive, Inc., from June 1998 to March 1999 and a marketing executive from April 1998 to June 1998. Prior to joining us, Mr. Brown founded and was Chief Executive Officer of Community Ventures in Living, Ltd., a community-based non-profit organization in Indiana which assisted individuals with disabilities. Mr. Brown holds a B.S. in economics from Purdue University.
ROBERT P. CHANDLER has served since March 1999 as President and Chief Executive Officer of our subsidiary, Arkansas Information Consortium, Inc., which manages the Information Network of Arkansas for which he serves as the General Manager. He also has served as Secretary and a director of Arkansas Information Consortium, Inc., since January 1997. Prior to joining us, Mr. Chandler served as a Territory Director of ALLTEL Information Services Inc., an information services provider in the telecommunications and financial services industries, from January 1994 to September 1996 and as the Director of Sales and Marketing at the same company from May 1997 to February 1999. From October 1996 to April 1997, he served as the Director of Sales and Marketing for eCommLink, Inc., a software solutions provider in the financial services industry, a company for which he was also a founding member. Mr. Chandler holds a B.S. in marketing from Kansas State University and an M.B.A. from the University of Kansas School of Business.
TAMARA DUKES has served since March 1999 as President, Chief Executive Officer and a director of our subsidiary, New England Interactive, Inc. which manages Information Resource of Maine, our partnership with the State of Maine, for which she serves as the General Manager. Ms. Dukes served as Director of Marketing for Access Indiana Information Network from January 1998 through May 1998 and IOWAccess Network from June 1998 through February 1999. Prior to joining us, Ms. Dukes founded Tamara Downham Dukes Marketing Consultants, a marketing consulting company, in 1996, where she served as a principal from 1996 to January 1998. Additionally, Ms. Dukes created, produced and sold radio
advertising campaigns for WGLM Radio in Lafayette, Indiana from January 1995 to January 1998. Ms. Dukes holds a B.A. in communication from Wheaton College.
STEVEN GILL has served as our Director of Finance since February 1999. Prior to joining us, Mr. Gill spent 11 years with Payless ShoeSource, Inc., a retail shoe company, where he served in various positions including, most recently, Assistant Controller, and other positions including Director of Financial Planning and Analysis, Functional Controller, Manager of Real Estate and Construction Planning and Analysis, and Manager of Corporate Financial Planning and Analysis. Mr. Gill holds a B.S. in statistics from Brigham Young University and an M.B.A. from the Brigham Young University's Marriott Graduate School of Management.
W. KENT HILLER has served since November 1997 as President, Chief Executive Officer and a director of our subsidiary, Iowa Interactive, Inc., which manages the IOWAccess Network for which he serves as the General Manager. From April 1996 to November 1997, he served as Director of Development for Indiana Interactive, Inc. Prior to joining us, Mr. Hiller was a network engineering manager for the state of Indiana from March 1995 to April 1996. From January 1989 to March 1995, he held various positions in both engineering and software development for the Space & Defense Group of The Boeing Company, an aerospace company. Mr. Hiller holds a B.S. in mechanical engineering from Purdue University and an M.B.A. from the Seattle University School of Business.
DANIEL HOULIHAN has served since September 1997 as President, Chief Executive Officer and a director of our subsidiary, Virginia Interactive, LLC, which manages Virginia Information Providers Network for which he serves as the General Manager. From October 1996 to August 1997, Mr. Houlihan served as Vice President of Operations for Kansas Information Consortium, Inc. Prior to joining us, he served as Chief Information Officer from December 1995 to October 1996 and the Director of Information Services Division from June 1993 to December 1995 for the State of Indiana. Mr. Houlihan holds a B.A. in political science from Creighton University and an M.B.A. with a specialization in information systems from the Florida Institute of Technology.
DEBRA LULING has served since May 1998 as President, Chief Executive Officer and a director of Kansas Information Consortium, Inc., which manages Information Network of Kansas for which she serves as the General Manager. She also served as the Director of Marketing from November 1996 to May 1998 and a marketing representative from January 1996 November 1996 for Kansas Information Consortium, Inc. Prior to joining us, Ms. Luling served from June 1993 to December 1995 as the director of marketing activities for NewTek, Inc., a computer hardware and software manufacturer in the desktop video industry, where she oversaw the marketing and public relations efforts. Ms. Luling holds a B.S. in journalism from the University of Kansas.
JOSEPH NEMELKA has served since March 1999 as President of our Market Development Division. Mr. Nemelka also serves as Chief Executive Officer and a director of our subsidiary, Utah Interactive, Inc. From July 1997 to March 1999, he served as President and Chief Executive Officer of Arkansas Information Consortium, Inc. Prior to joining us, Mr. Nemelka served as a marketing associate for Kansas Information Consortium, Inc. from October 1995 to August 1996 and for Indiana Interactive, Inc. from August 1996 to October 1996. From October 1996 to July 1997, he served as a project manager for the Georgia division of our subsidiary National Information Consortium USA. Mr. Nemelka holds a B.A. in political science from Brigham Young University and a J.D. degree from the University of Kansas School of Law.
KEITH SCHRAAD has served since March 1999 as President of the Georgia division of National Information Consortium/USA, which manages GeorgiaNet Authority for which he serves as the General Manager. From October 1998 until March 1999, he served as a project manager for National Information Consortium USA. Additionally, from October 1997 to October 1998 he served as a marketing associate for Kansas Information Consortium, Inc. Prior to joining us, Mr. Schraad served as a Kansas State Senator and was an aide to U.S. Senator Robert Dole. Mr. Schraad holds a B.A. in general studies from the University of Kansas and a J.D. degree from the Washburn University School of Law.
COMPOSITION OF THE BOARD OF DIRECTORS
Under our articles of incorporation and bylaws, the board of directors has the power to set the number of directors at not less than three nor more than 10. The number of members of the board of directors is currently set at six. We intend to add one additional independent director prior to the closing of this offering.
BOARD COMMITTEES
The board of directors has established a compensation committee and an audit committee. The compensation committee, consisting of Messrs. Hartley and Bunce, reviews and approves the salaries, bonuses and other compensation payable to our executive officers and administers and makes recommendations concerning our employee benefit plans.
The audit committee, consisting of Messrs. Hartley and Evans, and an additional independent director to be elected prior to the closing of this offering, recommends the selection of independent public accountants to the board of directors, reviews the scope and results of the audit and other services provided by our independent accountants, and reviews our accounting practices and systems of internal accounting controls.
VOTING TRUST
As of March 31, 1999, a portion of our outstanding common stock, totaling 31,896,145 shares and representing approximately 75.1% of the outstanding common stock prior to the offering is held in a voting trust, for which Messrs. Fraser and Hartley serve as trustees. The voting trust is selling 1,500,000 shares of common stock in this offering, which will reduce the number of shares it holds to 30,396,145, or approximately 57.9% of our outstanding common stock. A total of 24,170,249 shares (23,033,549 shares after the offering, assuming a pro rata allocation of shares sold by the voting trust) in the voting trust are held for the benefit of affiliates of our company. The address of each of the trustees is c/o Jeffery S. Fraser, 1811 Wakarusa Drive, Suite 100, Lawrence, Kansas 66047. The trustees have dispositive and exclusive voting power over all shares held by the voting trust, including without limitation, the right to vote for the election of directors, authorize an amendment to the articles of incorporation or bylaws, and authorize a merger or consolidation of the company. Additionally, the trustees are empowered to perform any and all acts necessary and appropriate for the organization and operation of the voting trust.
The voting trust certificates are transferable upon surrender of the same according to the rules established by the trustees. The voting trust expires on (a) June 30, 2018, (b) upon mutual assent of the trustees with written notification to holders of the voting trust certificates, or (c) upon deadlock between the trustees and failure to remedy the deadlock after 90 days.
DIRECTOR COMPENSATION
Directors who are also our employees currently receive no additional compensation for their services as directors of our company. Directors who are not our employees do not receive a fee for attendance in person at meetings of the board of directors or committees of the board of directors, but are reimbursed for travel expenses and other out-of-pocket costs incurred in connection with their attendance of meetings.
In the past, Messrs. Fraser, Bradley, Somerhalder, Herington and Hartley received consulting fees for their services, including serving as directors for our subsidiaries.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of our compensation committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee.
There are no family relationships among any of our directors or executive officers other than between Mr. Fraser and Mr. Somerhalder, who is Mr. Fraser's brother-in-law.
EXECUTIVE COMPENSATION
The following table contains information in summary form concerning the compensation paid to our chief executive officer and each of our most highly compensated executive officers whose total salary, bonus and other compensation exceeded $100,000 during the year ended December 31, 1998. In accordance with the rules of the SEC, the compensation described in this table does not include perquisites and other personal benefits received by the executive officers named in the table below which do not exceed the lesser of $50,000 or 10% of the total salary and bonus reported for these officers.
SUMMARY COMPENSATION TABLE
ALL OTHER 1998
1998 ANNUAL COMPENSATION
COMPENSATION --------------------------
---------------------- TOTAL HEALTH CONSULTING
SALARY BONUS INSURANCE FEES 401(K) MATCH
--------- ----------- ------------- ----------- ---------------
Jeffery S. Fraser ...................... $ 202,591 -- $ 13,799 $ 51,500 $ 2,733
Chairman and Chief Executive
Officer
William F. Bradley, Jr. ................ 110,509 -- 11,912 18,000 2,733
Secretary, General Counsel and
Executive Vice President--Strategy,
Policy & Legal
Samuel R. Somerhalder .................. 101,004 -- 13,758 12,000 2,733
Executive Vice President--
Operations and Administration
Harry H. Herington ..................... 83,999 -- 14,263 32,000 2,733
Executive Vice President--
Marketing and Technology Services
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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 various other services they performed for our subsidiaries.
Mr. Fraser served as a director of each of our subsidiaries. Mr. Bradley served as a director of our subsidiary, Indian@ Interactive, Inc., and, briefly, as a director of our subsidiary, Nebrask@ Interactive, Inc. Mr. Somerhalder served as a director of our subsidiary, Nebrask@ Interactive, Inc. Mr. Herington served as a director of our subsidiaries, Nebrask@ Interactive, Inc, Kansas Information Consortium, Inc., Indian@ Interactive, Inc. and Arkansas Information Consortium, Inc.
OPTION GRANTS AND EXERCISES DURING FISCAL 1998
No stock options were granted to or exercised by each of the executive officers listed in the summary compensation table above during fiscal 1998.
AGGREGATED OPTION EXERCISES IN 1998 AND FISCAL YEAR END OPTION VALUES
None of the executive officers listed in the summary compensation table above exercised or held options in 1998.
EMPLOYMENT AGREEMENTS
JEFFERY S. FRASER
On July 24, 1998, Jeffery S. Fraser entered into an employment agreement with us to serve as our President. Mr. Fraser currently serves as our Chairman and Chief Executive Officer. The employment agreement provides Mr. Fraser with an annual base salary of $249,000. Should we terminate Mr. Fraser's employment without cause, before July 1, 2000, we must pay Mr. Fraser one year's base salary in equal monthly payments on the first day of the month for each of the twelve months following his termination. Should we terminate Mr. Fraser's employment without cause after such time, but prior to July 1, 2001, we must pay Mr. Fraser the equivalent of his base salary for the number of months remaining until July 1, 2001. Should we terminate Mr. Fraser's employment without cause on or after July 1, 2001, Mr. Fraser will not be entitled to severance pay, except as provided in our severance benefit plan, if any, in effect on the termination date. Cause is defined in the agreement as: (a) indictment or conviction for any felony or crime involving dishonesty; (b) willful participation in any fraud against us; (c) willful breach of Mr. Fraser's duties to us; (d) intentional damage to any of our property; or (e) conduct by Mr. Fraser which our board of directors determines to be inappropriate for his position.
Should we terminate Mr. Fraser's employment for cause, we must pay Mr. Fraser all compensation due on the date of termination.
Under the terms of his agreement, Mr. Fraser may terminate his employment with us in writing at any time for any reason. In connection with his employment agreement, Mr. Fraser entered into a proprietary information and inventions agreement and a non-competition agreement. Should Mr. Fraser's employment with us terminate for any reason, the agreements provide collectively that Mr. Fraser: (a) will not use any of our proprietary information without our prior written consent; (b) will not use any confidential information to compete against us or any of our employees; and (c) will not, for three years following termination, solicit any of our employees or customers.
JAMES B. DODD
On January 1, 1999, James B. Dodd entered into an employment agreement with us to serve as our President and Chief Operating Officer. This agreement provides Mr. Dodd with an annual base salary of $200,000. Should we terminate Mr. Dodd's employment without cause, as similarly defined in Mr. Fraser's employment agreement, before January 1, 2002, we must pay Mr. Dodd his then-current salary in equal monthly payments on the first day of the month for each of the eighteen months following his termination. Should we terminate Mr. Dodd's employment without cause on or after January 1, 2002, Mr. Dodd will not be entitled to severance pay, except as provided in our severance benefit plan, if any, in effect on the termination date.
Should we terminate Mr. Dodd's employment for cause, we must pay Mr. Dodd all compensation due on the date of termination.
Under the terms of his agreement, Mr. Dodd may terminate his employment with us in writing at any time for any reason. In connection with his employment agreement, Mr. Dodd entered into a proprietary information and inventions agreement and a non-competition agreement. Should Mr. Dodd's employment with us terminate for any reason, the agreements provide collectively that Mr. Dodd: (a) will not use any of our proprietary information without our prior written consent; (b) will not use any confidential information to compete against us or any of our employees; and (c) will not, for three years following termination, solicit any of our employees or customers.
KEVIN C. CHILDRESS
On May 16, 1999, Kevin C. Childress entered into an employment agreement with us to serve as our Chief Financial Officer. This agreement provides Mr. Childress with an annual base salary of $175,000. Should we terminate Mr. Childress' employment without cause, as similarly defined in Mr. Fraser's
employment agreement, before May 16, 2002, we must pay Mr. Childress his then-current salary in equal monthly payments on the first day of the month for each of the eighteen months following his termination. Should we terminate Mr. Childress' employment without cause on or after May 16, 2002, Mr. Childress will not be entitled to severance pay, except as provided in our severance benefit plan, if any, in effect on the termination date.
Should we terminate Mr. Childress' employment for cause, we must pay Mr. Childress all compensation due on the date of termination.
Under the terms of his agreement, Mr. Childress may terminate his employment with us in writing at any time for any reason. In connection with his employment agreement, Mr. Childress entered into a proprietary information and inventions agreement and a non-competition agreement. Should Mr. Childress' employment with us terminate for any reason, the agreements provide collectively that Mr. Childress: (a) will not use any of our proprietary information without our prior written consent; (b) will not use any confidential information to compete against us or any of our employees; and (c) will not, for three years following termination, solicit any of our employees or customers.
WILLIAM F. BRADLEY, JR.
On July 24, 1998, William F. Bradley Jr., entered into an employment agreement with us to serve as our Subsidiary President. In addition Mr. Bradley serves as our Secretary, General Counsel, and Executive Vice President of Strategy, Policy & Legal. The employment agreement provides Mr. Bradley with an annual base salary of $140,000. Should we terminate Mr. Bradley's employment without cause, as similarly defined in Mr. Fraser's employment agreement, before July 1, 2000, we must pay Mr. Bradley one year's base salary in equal monthly payments on the first day of the month for each of the twelve months following his termination. Should we terminate Mr. Bradley's employment without cause after such time, but prior to July 1, 2001, we must pay Mr. Bradley the equivalent of his base salary for the number of months remaining until July 1, 2001. Should we terminate Mr. Bradley's employment without cause on or after July 1, 2001, Mr. Bradley will not be entitled to severance pay, except as provided in our severance benefit plan, if any, in effect on the termination date.
Should we terminate Mr. Bradley's employment for cause, we must pay Mr. Bradley all compensation due on the date of termination.
Under the terms of his agreement, Mr. Bradley may terminate his employment with us in writing at any time for any reason. In connection with his employment agreement, Mr. Bradley entered into a proprietary information and inventions agreement and a non-competition agreement. Should Mr. Bradley's employment with us terminate for any reason, the agreements provide collectively that Mr. Bradley: (a) will not use any of our proprietary information without our prior written consent; (b) will not use any confidential information to compete against us or any of our employees; and (c) will not, for three years following termination, solicit any of our employees or customers.
SAMUEL R. SOMERHALDER
On July 24, 1998, Samuel R. Somerhalder entered into an employment agreement with us to serve as our Subsidiary President. In addition, Mr. Somerhalder serves as our Executive Vice President of Operations and Administration. The employment agreement provides Mr. Somerhalder with an annual base salary of $115,000. Should we terminate Mr. Somerhalder's employment without cause, as similarly defined in Mr. Fraser's employment agreement, before July 1, 2000, we must pay Mr. Somerhalder one year's base salary in equal monthly payments on the first day of the month for each of the twelve months following his termination. Should we terminate Mr. Somerhalder's employment without cause after such time, but prior to July 1, 2001, we must pay Mr. Somerhalder the equivalent of his base salary for the number of months remaining until July 1, 2001. Should we terminate Mr. Somerhalder's employment without cause on or after July 1, 2001, Mr. Somerhalder will not be entitled to severance pay, except as provided in our severance benefit plan, if any, in effect on the termination date.
Should we terminate Mr. Somerhalder's employment for cause, we must pay Mr. Somerhalder all compensation due on the date of termination.
Under the terms of his agreement, Mr. Somerhalder may terminate his employment with us in writing at any time for any reason. In connection with his employment agreement, Mr. Somerhalder entered into a proprietary information and inventions agreement and a non-competition agreement. Should Mr. Somerhalder's employment with us terminate for any reason, the agreements provide collectively that Mr. Somerhalder: (a) will not use any of our proprietary information without our prior written consent; (b) will not use any confidential information to compete against us or any of our employees; and (c) will not, for three years following termination, solicit any of our employees or customers.
HARRY H. HERINGTON
On July 24, 1998, Harry H. Herington entered into an employment agreement with us to serve as our Subsidiary President. In addition, Mr. Herington serves as our Executive Vice President of Marketing and Technology Services. The employment agreement provides Mr. Herington with an annual base salary of $125,000. Should we terminate Mr. Herington's employment without cause, as similarly defined in Mr. Fraser's employment agreement, before July 1, 2000, we must pay Mr. Herington one year's base salary in equal monthly payments on the first day of the month for each of the twelve months following his termination. Should we terminate Mr. Herington's employment without cause after such time, but prior to July 1, 2001, we must pay Mr. Herington the equivalent of his base salary for the number of months remaining until July 1, 2001. Should we terminate Mr. Herington's employment without cause on or after July 1, 2001, Mr. Herington will not be entitled to severance pay, except as provided in our severance benefit plan, if any, in effect on the termination date.
Should we terminate Mr. Herington's employment for cause, we must pay Mr. Herington all compensation due on the date of termination.
Under the terms of his agreement, Mr. Herington may terminate his employment with us in writing at any time for any reason. In connection with his employment agreement, Mr. Herington entered into a proprietary information and inventions agreement and a non-competition agreement. Should Mr. Herington's employment with us terminate for any reason, the agreements provide collectively that Mr. Herington: (a) will not use any of our proprietary information without our prior written consent; (b) will not use any confidential information to compete against us or any of our employees; and (c) will not, for three years following termination, solicit any of our employees or customers.
BENEFIT PLANS
AMENDED AND RESTATED 1998 STOCK OPTION PLAN
The 1998 plan was adopted and approved by our board of directors and by our shareholders in May 1998, at which time a total of 4,643,377 shares of common stock were reserved for issuance under this plan. In November 1998, the 1998 plan was amended to reserve a total of 7,893,741 shares of common stock for issuance under this plan. In May 1999, the 1998 plan was amended to reserve a total of 9,286,754 shares of common stock for issuance under this plan. At March 31, 1999, options to purchase 69,302 shares of common stock granted under the 1998 plan had been exercised, options to purchase 2,512,332 shares of common stock were outstanding and options to purchase 6,705,120 shares of common stock remained available for grant. The outstanding options were exercisable at a weighted average exercise price of $1.44 per share. Outstanding options to purchase an aggregate of 1,209,414 shares were held by employees who are not officers or directors of our company.
Our board of directors has delegated administration of the 1998 plan to its compensation committee. The compensation committee is made up of not less than two nor more than five non-employee directors within the meaning under Rule 16b-3 of the Exchange Act. Awards under the 1998 plan may consist of incentive stock options, which are stock options that qualify under Section 422 of
the Internal Revenue Code, or non-qualified stock options, which are stock options that do not qualify under that provision.
The compensation committee may grant incentive stock options to employees and officers of our company or any of our subsidiaries, and non-qualified stock options to employees, officers or directors of our company or any of our subsidiaries. The compensation committee may set the terms of such grants, subject to the restrictions in the 1998 plan. Incentive stock option grants are subject to the following limitations:
- the term of any incentive stock option may not be longer than ten years;
- the term of any incentive stock option granted to an individual possessing more than 10% of the combined voting power of our company or a subsidiary may not be longer than five years;
- the aggregate fair market value of all shares underlying incentive stock options granted to an individual that first become exercisable in any calendar year may not exceed $100,000;
- the exercise price of incentive stock options may not be less than the greater of the par value of the underlying shares or the fair market value of the underlying shares on the grant date; and
- the exercise price of any incentive stock option granted to an individual possessing more than 10% of the combined voting power of our company or a subsidiary may not be less than 110% of the fair market value of the underlying shares on the grant date.
During an optionee's lifetime, only an optionee can exercise an incentive stock option or non-qualified stock option. He or she cannot transfer such options other than by will or the laws of descent and distribution. If an optionee's status as an employee or director of our company or any of our subsidiaries terminates for any reason other than termination because of death, disability, for cause or on account of voluntary termination, then the optionee may exercise, in the 30 day period following the termination, that portion of the options that is exercisable at the time of the termination unless such options terminate or expire sooner by their terms. If an optionee's employment by our company or any of our subsidiaries is terminated for cause, as defined in the 1998 plan, or if an optionee voluntarily terminates his or her employment with our company or with any of our subsidiaries, then any option held by the optionee shall be terminated immediately and forfeited without any payment from our company or our subsidiaries. In the event the optionee becomes disabled or dies while the optionee is an employee or director of our company, then the options vested as of the date of disability or death may be exercised prior to the earlier of their expiration date or 12 months from the date of the optionee's disability or death.
In the event of (a) a merger, consolidation or reorganization in which we are not the surviving company or (b) the acquisition by another company of all or substantially all of our assets, then every option outstanding under the 1998 plan may be assumed or replaced with new options of comparable value by the surviving, continuing, successor or acquiring company. In the event that the outstanding options are neither assumed nor replaced, the compensation committee may provide that an optionee can exercise his or her options within the period of 30 days prior to the merger, consolidation, reorganization or acquisition. Additionally, in connection with change of control situations in which a person, other than one of our shareholders, directors or officers, acquires greater than 50% of the combined voting power of the company or less than a majority of the directors are persons who were nominated or selected by our board of directors, the compensation committee may accelerate the time at which options granted under the 1998 plan may be exercised by an optionee.
The 1998 plan will terminate automatically in 2008 unless sooner terminated by the board of directors. The board of directors has the authority to amend, suspend or terminate the 1998 plan, subject to shareholder approval of some of the amendments. However, no action may be taken which will affect
any shares of common stock previously issued and sold or any option previously granted under the 1998 plan without the optionee's consent.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our stock purchase plan was approved by the board of directors and our shareholders in May 1999. Our stock purchase plan is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code in order to provide our employees with an opportunity to purchase our stock through payroll deductions. An aggregate of 2,321,688 shares of common stock has been reserved for issuance and are available for purchase under the stock purchase plan, subject to adjustment in the event of a stock split, stock dividend or other similar change in our common stock or our capital structure. All employees of our company and of our affiliates who have been employed for a continuous period, as determined by the board or committee administering the stock purchase plan but which will not exceed two years, preceding the offering are eligible to participate in our stock purchase plan, provided that no employee of our company or of our affiliates whose customary employment is for less than five months in any calendar year and less than 20 hours per week are eligible to participate in our stock purchase plan. Non-employee directors, consultants, and employees subject to the rules or laws of a foreign jurisdiction that prohibit or make impractical their participation in a stock purchase plan are not eligible to participate in our stock purchase plan. Participation in our stock purchase plan is also subject to the following limitations: (a) no employee will be eligible for the grant of a stock purchase right if immediately after the right is granted the employee would own more than five percent of the total combined voting power of all of our or our affiliates' classes of stock, and (b) an eligible employee may be granted a purchase right only to the extent that the right does not permit the employee to purchase stock with a fair market value of greater than $25,000 for each calendar year.
Our stock purchase plan will be administered by the board of directors or a committee appointed by the board consisting of three or more board members. The committee will have complete authority to determine the employees who will receive stock purchase rights and will designate offering periods not to exceed 27 months. The committee will establish one or more purchase dates during an offering period during which stock purchase rights may be exercised and common stock may be purchased.
In the event we dissolve, liquidate, merge or consolidate through a merger in which we are not the surviving corporation, effectuate a reverse merger in which we are the surviving corporation but our shares of common stock outstanding prior to the merger are converted into other property, whether in the form of securities, cash or otherwise, or are acquired by any person, entity or group, as defined by the Exchange Act or any successive provisions, holding at least 50% of our combined voting power, then, the board or committee administering the stock purchase plan may (a) allow the surviving or acquiring corporation to assume the outstanding rights or substitute similar rights for those participating under the stock purchase plan, (b) have the existing rights under the stock purchase plan remain in full force and effect or (c) allow those participating under the stock purchase plan to use their accumulated payroll deductions to purchase our common stock immediately prior to the transactions described above, provided that their rights under the ongoing offering period will be terminated.
On the first day of each offer period, a participating employee is granted a purchase right. A purchase right is a form of option to be automatically exercised on the forthcoming exercise dates within the offer period during which authorized deductions are to be made from the pay of participants and credited to their accounts under the stock purchase plan. When the purchase right is exercised, the participant's withheld salary is used to purchase our shares of common stock. The price per share at which our shares of common stock are to be purchased under the stock purchase plan during any offering period is the lesser of (a) 85% of the fair market value of our common stock on the date of the commencement of the offer period or (b) 85% of the fair market value of our common stock on the purchase date. The participant's purchase right is exercised in this manner on each exercise date arising in the offer period unless, on any purchase date, the fair market value of our common stock is lower than the fair market value of our common stock on the first day of the offering period. If so, the participant's participation in
the original offering period is terminated, and the participant is automatically enrolled in the next offering period which will commence on the next day.
Payroll deductions may range up to 15% of a participant's regular base pay, exclusive of bonuses, overtime, shift-premiums, commissions, reimbursements or other expense allowances. Participants may not make direct cash payments to their accounts. The board or committee administering the stock purchase plan may establish the maximum number of our shares of common stock that any employee may purchase under the stock purchase plan during an offering period. The Internal Revenue Code imposes additional limitations on the amount of common stock that may be purchased during any calendar year.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our articles of incorporation and bylaws provide that we will indemnify any person entitled to indemnity under the Colorado Business Corporation Act, as it now exists or as amended, against all liability and expenses to the fullest extent permitted by Colorado law. However, we will not indemnify any person in connection with any proceeding initiated by this person, unless the proceeding is authorized by a majority of our board of directors. In addition to indemnification provided for in our charter documents, upon the closing of this offering, we will have entered into agreements to indemnify our directors and officers. To the fullest extent permitted by the Colorado Business Corporation Act, these agreements, among other things, provide for the indemnification of our directors and officers for some of the expenses, including attorneys' fees, judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by us or in the right of the company, arising out of such person's services as one of our directors or officers, any of our subsidiaries or any other company or enterprise to which such person provides services at our request. Furthermore, we plan to purchase and maintain insurance on behalf of our directors and officers to insure them against liabilities that they may incur in their capacities as or arising out of their status as directors and officers. We believe that these provisions and agreements will assist us in attracting and retaining qualified persons to serve as directors and officers.
Section 7-109-102 of the Colorado Business Corporation Act provides that a corporation may indemnify a director from liability incurred in connection with a proceeding in which the director is made a party because of his or her status as a director, except upon adjudication in connection with the particular proceeding that (a) the director was liable to the corporation or (b) the director was liable because he or she derived an improper personal benefit.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors and officers under the provisions contained in our charter documents, the Colorado Business Corporation Act or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities, other than the payment by us of expenses incurred or paid by one of our directors or officers, the successful defense of any action, suit, or proceeding is asserted by such director or officer, we will submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue, unless in the opinion of our counsel the matter has been settled by controlling precedent.
There is no pending litigation or proceeding involving one of our directors or officers as to which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.
CERTAIN TRANSACTIONS
Mr. Hartley, one of our founders, is the President of The Hartley Insurance Agency, an insurance company, which acts as our insurance agent and broker. In 1998, a payment of $8,345 was made directly to The Hartley Insurance Agency. However, the aggregate insurance payment we made that was brokered by The Hartley Insurance Agency totaled $478,392, including the $8,345 payment made directly to The Hartley Insurance Agency.
We have periodically leased aircraft from Sky King Leasing, a Kansas corporation, of which Mr. Fraser, one of our founders, Mr. Hartley and Christopher L. Shults, one of our five percent shareholders, each approximately have a 25% interest. In 1998, we made payments totaling $24,223 to Sky King Leasing.
On January 8, 1998, we entered into an agreement with each of Messrs. Fraser and Hartley to provide their respective estates with a right to require us to repurchase some or all shares of our common stock owned by them upon their death. These agreements were terminated on July 1, 1998.
In March 1998, we completed an exchange offer in which shareholders in our local operating networks exchanged their stock for shares of our common stock. Messrs. Fraser, Hartley, Bradley, Somerhalder and Herington received an aggregate of 21,614,414 shares of our common stock in the exchange offer.
On June 30, 1998, Messrs. Fraser and Hartley entered into a voting trust agreement under which they act as joint trustees for a voting trust which holds, as of March 31, 1999, 31,896,145 shares of our common stock. See "Description of Capital Stock--Voting Trust."
On June 30, 1998, the voting trust described above sold to Hellman & Friedman Capital Partners III, L.P. and its affiliates H&F International Partners III, L.P. and H&F Orchard Partners III, L.P., collectively, 10,516,547 shares of our common stock at a price of $1.43 per share for an aggregate of approximately $15,000,000. In connection with this sale, we entered into an investor rights agreement with Hellman & Friedman and its affiliates in which we granted them rights to register shares of our common stock in the future. See "Description of Capital Stock" for a more detailed description.
On December 3, 1998, we issued to Mr. James B. Dodd options to purchase 1,393,013 shares of our common stock at an exercise price of $1.44 per share. 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.
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. 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.
We intend to enter into indemnification agreements with each of our directors and officers. These indemnification agreements will require us to indemnify these individuals to the fullest extent permitted by Colorado law.
We have also entered into various employment agreements with our officers. See "Management-- Employment Agreements" for a more detailed description.
We believe that all of the transactions set forth above were made on terms no less favorable to us than could have been obtained from unaffiliated third parties. We intend that all future transactions, 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.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth the beneficial ownership of our common stock as of March 31, 1999 and as adjusted to reflect the sale of the shares of common stock in this offering by:
- each person or entity known by us to own beneficially more than five percent of our common stock;
- our chief executive officer, each of the executive officers named in the summary compensation table and each of our directors;
- all of our executive officers and directors as a group; and
- all other selling shareholders.
The Beneficial ownership is calculated based on 42,481,996 shares of our common stock outstanding as of March 31, 1999 and 52,481,996 shares outstanding immediately following the completion of this offering. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power, or shares voting and investment power with his or her spouse, with respect to all shares of capital stock listed as owned by such person. Shares issuable upon the exercise of options that are currently exercisable or become exercisable within sixty days of March 31, 1999 are considered outstanding for the purpose of calculating the percentage of outstanding shares of our common stock held by the individual, but not for the purpose of calculating the percentage of outstanding shares of our common stock held by any other individual.
The number of shares being offered and shares beneficially owned after the offering assume a pro rata allocation among beneficiaries of the voting trust of the 1,500,000 shares being sold by the voting trust and a pro rata allocation among the Hellman & Friedman entities of the aggregate of 1,500,000 shares those entities are selling in the offering.
The address of each of the executive officers and directors is c/o National Information Consortium, Inc., 12 Corporate Woods, 10975 Benson Street, Suite 390, Overland Park, Kansas 66210.
SHARES
BENEFICIALLY
SHARES BENEFICIALLY OWNED OWNED AFTER
PRIOR TO OFFERING OFFERING
----------------------------- NUMBER OF SHARES -----------
NAME AND ADDRESS NUMBER PERCENTAGE BEING OFFERED NUMBER
----------------------------------------------------------- ------------- -------------- ----------------- -----------
5% SHAREHOLDERS
Jeffery S. Fraser and Ross C. Hartley, co-trustees of
National Information Consortium Voting Trust, dated June
30, 1998 c/o Jeffery S. Fraser
1811 Wakarusa Drive, Suite 100
Lawrence, KS 66047....................................... 31,896,145 75.1% 1,500,000 30,396,145
Hellman & Friedman Capital Partners III, L.P. c/o Hellman &
Friedman LLC
One Maritime Plaza
San Francisco, CA 94111.................................. 9,601,607 22.6 1,369,200 8,232,407
H&F Orchard Partners III, L.P.
c/o Hellman & Friedman LLC
One Maritime Plaza
San Francisco, CA 94111.................................. 704,609 1.7 100,800 603,809
H&F International Partners III, L.P
c/o Hellman & Friedman LLC
One Maritime Plaza
San Francisco, CA 94111.................................. 210,331 * 30,000 180,331
Christopher L. and Linda D. Shults
633 North Wheatland Place
Wichita, KS 67235........................................ 2,229,851 5.2 104,850 2,125,001
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Jeffery S. Fraser.......................................... 31,896,145 75.1 1,500,000 30,396,145
James B. Dodd.............................................. 303,272 * 8,100 295,172
William F. Bradley, Jr..................................... 2,132,679 5.0 100,350 2,032,329
Samuel R. Somerhalder...................................... 2,345,123 5.5 110,250 2,234,873
Harry H. Herington......................................... 1,202,021 * 56,550 1,145,471
John L. Bunce, Jr.......................................... 10,516,547 24.8 1,500,000 9,016,547
Daniel J. Evans............................................ 69,302 * -- 69,302
NAME AND ADDRESS PERCENTAGE
----------------------------------------------------------- ---------------
5% SHAREHOLDERS
Jeffery S. Fraser and Ross C. Hartley, co-trustees of
National Information Consortium Voting Trust, dated June
30, 1998 c/o Jeffery S. Fraser
1811 Wakarusa Drive, Suite 100
Lawrence, KS 66047....................................... 57.9%
Hellman & Friedman Capital Partners III, L.P. c/o Hellman &
Friedman LLC
One Maritime Plaza
San Francisco, CA 94111.................................. 15.7
H&F Orchard Partners III, L.P.
c/o Hellman & Friedman LLC
One Maritime Plaza
San Francisco, CA 94111.................................. 1.2
H&F International Partners III, L.P
c/o Hellman & Friedman LLC
One Maritime Plaza
San Francisco, CA 94111.................................. *
Christopher L. and Linda D. Shults
633 North Wheatland Place
Wichita, KS 67235........................................ 4.1
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Jeffery S. Fraser.......................................... 57.9
James B. Dodd.............................................. *
William F. Bradley, Jr..................................... 3.9
Samuel R. Somerhalder...................................... 4.3
Harry H. Herington......................................... 2.2
John L. Bunce, Jr.......................................... 17.2
Daniel J. Evans............................................ *
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Ross C. Hartley............................................ 31,896,145 75.1 1,500,000 30,396,145 Patrick J. Healy........................................... 10,516,547 24.8 1,500,000 9,016,547 All executive officers and directors as a group (10 persons)................................................. 42,612,010 100.0 3,000,000 39,612,010 Ross C. Hartley............................................ 57.9 Patrick J. Healy........................................... 17.2 All executive officers and directors as a group (10 persons)................................................. 75.3 |
* Less than 1%.
For a description of the voting trust and the rights and powers of the trustees, see "Description of Capital Stock--Voting Trust."
H&F Investors III, a California general partnership, is the sole general partner of Hellman & Friedman Capital Partners III, L.P., a California limited partnership, H&F Orchard Partners III, L.P., a California limited partnership, and H&F International Partners III, L.P., a California limited partnership. Messrs. Bunce and Healy are Managing Directors of Hellman & Friedman LLC, an affiliate of H&F Investors III. The managing general partner of H&F Investors III is Hellman & Friedman Associates III, L.P., a California limited partnership, and the general partners of Hellman & Friedman Associates III are H&F Management III, L.L.C., a California limited liability company, and H&F Investors III, Inc., a California corporation. The sole shareholder of H&F Investors III, Inc. is the Hellman Family Revocable Trust. The investment decisions of H&F Investors III, Inc. and H&F Management III, L.L.C. are made by an executive committee, of which Mr. Bunce is a member. The executive committee indirectly exercises voting and investment power with respect to the shares of our common stock held by Hellman & Friedman Capital Partners III, H&F Orchard Partners III and H&F International Partners III, and could be deemed to beneficially own such shares. The executive committee disclaims such beneficial ownership except to the extent of its indirect pecuniary interest in such shares.
Mr. Bunce and Mr. Healy each disclaim beneficial ownership of all shares of our common stock held by Hellman & Friedman Capital Partners III, H&F Orchard Partners III and H&F International Partners III, except to the extent of their individual indirect pecuniary interest in those shares.
Shares held by Mr. and Mrs. Shults include 2,229,851 shares held for the benefit of Mr. and Mrs. Shults in the voting trust for which Messrs. Fraser and Hartley act as co-trustees.
Shares held by Mr. Fraser include 24,445,425 shares held in the voting trust for which Mr. Fraser acts as a co-trustee and 7,450,720 shares held in the voting trust of which a family trust established for the benefit of Mr. Fraser is the beneficial owner.
Shares held by Mr. Dodd include 173,258 shares held for the benefit of Mr. Dodd in the voting trust for which Messrs. Fraser and Hartley act as co-trustees and 130,014 shares subject to options exercisable within 60 days of March 31, 1999.
Shares held by Mr. Bradley include 2,132,679 shares held for the benefit of Mr. Bradley in the voting trust for which Messrs. Fraser and Hartley act as co-trustees.
Shares held by Mr. Somerhalder include 2,345,123 shares held for the benefit of Mr. Somerhalder or his wife in the voting trust for which Messrs. Fraser and Hartley act as co-trustees. These shares include 206,630 shares held by Mr. Somerhalder's wife, Jean Somerhalder, as custodian to Chloe V. Fraser, 206,630 shares held by Mrs. Somerhalder as custodian to Jacob B. Fraser, 206,630 shares held by Mrs. Somerhalder as custodian to Joshua D. Fraser, 206,630 shares held by Mrs. Somerhalder as custodian to Matthew S. Fraser and 206,630 shares held by Mrs. Somerhalder as custodian to William N. Fraser.
Shares held by Mr. Herington include 1,202,021 shares held for the benefit of Mr. Herington in the voting trust for which Messrs. Fraser and Hartley act as co-trustees.
Shares held by Mr. Evans include 41,442 shares held in the Evans family revocable trust.
Shares held by Mr. Hartley include 23,412,278 shares held in the voting trust for which Mr. Hartley acts as a co-trustee and 8,483,867 shares held for the benefit of Mr. Hartley or his children in the voting trust. Shares held for the benefit of Mr. Hartley or his children include 371,470 shares held in
an irrevocable trust established for the benefit of Hillary L. Hartley, 371,470 shares held in an irrevocable trust established for the benefit of Antonia C. Hartley and 371,470 shares held in an irrevocable trust established for the benefit of William R. Hartley.
Shares held by all executive officers and directors as a group include 31,896,145 shares held in the voting trust for which Messrs. Fraser and Hartley act as co-trustees and 130,014 shares subject to options exercisable within 60 days of March 31, 1999.
Excluding the shares of common stock beneficially owned by Messrs. Fraser and Hartley solely as a result of their status as trustees of the voting trust, Messrs. Fraser and Hartley's beneficial ownership disclosure would appear as follows:
SHARES BENEFICIALLY OWNED
SHARES BENEFICIALLY
PRIOR TO OFFERING NUMBER OF OWNED AFTER OFFERING
------------------------- SHARES BEING ------------------------
NAME AND ADDRESS NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
------------------------------- ---------- ------------- ------------- --------- -------------
Jeffery S. Fraser.............. 7,450,720 17.5% 350,400 7,100,320 13.5%
Ross C. Hartley................ 8,483,867 20.0 399,000 8,084,867 15.4
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DESCRIPTION OF CAPITAL STOCK
We are authorized to issue up to 200,000,000 shares of common stock, with no par value per share.
The following summary of certain provisions of our common stock does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of our articles of incorporation, which are included as an exhibit to the registration statement of which this prospectus is a part, and by the provisions of applicable law.
COMMON STOCK
As of March 31, 1999, there were 42,481,996 shares of common stock outstanding that were held of record or beneficially through a voting trust by approximately 53 persons. There will be shares of common stock outstanding, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options, after giving effect to the sale of the common stock we are offering.
The holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders. We do not have cumulative voting rights in the election of directors, and accordingly, holders of a majority of the shares voting are able to elect all of the directors. Subject to preferences that may be granted to any then outstanding preferred stock, holders of common stock are entitled to receive ratably such dividends as may be declared by the board of directors out of funds legally available for such purpose as well as any distributions to the shareholders. In the event of our liquidation, dissolution or winding up, holders of common stock are entitled to share ratably in all of our assets remaining after payment of liabilities and the liquidation preference of any then outstanding preferred stock. Holders of common stock have no preemptive or other subscription of conversion rights. There are no redemption or sinking fund provisions applicable to the common stock.
VOTING TRUST
As of March 31, 1999, a portion of our outstanding common stock, totaling 31,896,145 shares and representing approximately 75.1% of the outstanding common stock prior to the offering, is held in a voting trust, for which Messrs. Fraser and Hartley serve as trustees. The voting trust is selling 1,500,000 shares of common stock in this offering, which will reduce the number of shares it holds to 30,396,145, or approximately 57.9% of our outstanding common stock. A total of 24,170,249 shares (23,033,549 shares after the offering, assuming a pro rata allocation of shares sold by the voting trust) in the voting trust are held for the benefit of affiliates of our company. The address of each of the trustees is c/o Jeffery S. Fraser, 1811 Wakarusa Drive, Suite 100, Lawrence, Kansas 66047. The trustees have dispositive and exclusive voting power over all shares held by the voting trust, including without limitation, the right to vote for the election of directors, authorize an amendment to the articles of incorporation or bylaws, and authorize a merger or consolidation of the company. Additionally, the trustees are empowered to perform any and all acts necessary and appropriate for the organization and operation of the voting trust.
The voting trust certificates are transferable upon surrender of the same according to the rules established by the trustees. The voting trust expires on (a) June 30, 2018, (b) upon mutual assent of the trustees with written notification to holders of the voting trust certificates or (c) upon deadlock between the trustees and failure to remedy the deadlock after 90 days.
REGISTRATION RIGHTS
According to an investor rights agreement between us and one of our shareholders, Hellman & Friedman, and its affiliates, H&F International Partners and H&F Orchard Partners, after the closing of the offering, Hellman & Friedman and its affiliates will be entitled to demand that we file a registration
statement with respect to the registration of shares of our common stock under the Securities Act. We are not required to effect:
- more than two registrations;
- a registration during the 180 day period following the effective date of this registration statement; or
- a registration for a period not to exceed 90 days, if our board of directors has made a good faith determination that it would be seriously detrimental to us and our shareholders for a registration statement to be filed.
Furthermore, according to the terms of this investor rights agreement, after the closing of this offering, Hellman & Friedman and its affiliates will be entitled to piggyback registration rights in connection with any registration by us of our securities for our own account or the account of other shareholders. In the event that we propose to register any shares of common stock under the Securities Act, the holders of the piggyback registration rights are entitled to receive notice and are entitled to include their shares of common stock in the registration statement.
At any time after we become eligible to file a registration statement on Form S-3, Hellman & Friedman and its affiliates also may require us to file an unlimited number of registration statements on Form S-3 under the Securities Act with respect to their shares of common stock. We are not required to effect more than two such registrations in any twelve-month period.
The registration rights of Hellman & Friedman and its affiliates terminate on the earlier of (a) the fifth anniversary of the date of this offering or (b) the date when the shares held by them constitute less than 1% of our outstanding common stock and may be sold under Rule 144 during any three-month period. We are generally required to bear all of the expenses of all registrations under the investor rights agreement, except underwriting discounts and commissions. The registration rights agreement also contains a commitment by us to indemnify the holders of registration rights.
ANTITAKEOVER EFFECTS OF PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS
Provisions of our articles of incorporation and bylaws restrict transactions and business combinations between our company and an interested shareholder owning 15% or more of our outstanding voting stock, for a period of three years from the date the shareholder becomes an interested shareholder. Subject to some exceptions, unless the transaction is approved by our board of directors and the holders of at least two-thirds of our outstanding voting stock, excluding shares held by the interested shareholder, these provisions prohibit significant business transactions. These prohibited business transactions include a merger with, disposition of assets to, or receipt of disproportionate financial benefits by the interested shareholder, or any other transaction that would increase the interested shareholder's proportionate ownership of our voting stock. The prohibition does not apply if, upon consummation of the transaction in which any person becomes an interested shareholder, the interested shareholder owns at least 85% of our outstanding voting stock. This calculation does not include shares held by persons who are both directors and officers or shares authorized under employee stock plans in which the employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer.
Our bylaws provide that all shareholder action may be effected at a duly called meeting of shareholders or by a consent in writing. The bylaws also provide that the president or secretary at the request in writing of a majority of the board of directors or at the request in writing of shareholders owning a majority of the issued and outstanding capital stock of the company entitled to vote may call a special meeting of shareholders. Furthermore, our bylaws limit the ability of shareholders to raise matters at a meeting of shareholders without giving advance notice.
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 289 S. San Antonio Road, Suite 100, Los Altos, California 94022, and its telephone number is (650) 917-3800.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding 52,481,996 shares of common stock based upon shares outstanding at March 31, 1999, assuming no exercise of the underwriters' over-allotment option. Excluding the 13,000,000 shares of common stock offered hereby and assuming no exercise of the underwriters' over-allotment option, as of the effective date of the registration statement, there will be 39,481,996 shares of common stock outstanding, all of which are "restricted" shares under the Securities Act. All restricted shares are subject to lock-up agreements with the underwriters pursuant to which the holders of the restricted shares have agreed not to sell, pledge or otherwise dispose of such shares for a period of 180 days after the date of this prospectus. Hambrecht & Quist LLC may release the shares subject to the lock-up agreements in whole or in part at any time with or without notice. However, Hambrecht & Quist LLC has no current plans to do so.
The following table indicates approximately when the 39,481,996 shares of our common stock that are not being sold in the offering but which will be outstanding at the time the offering is complete will be eligible for sale into the public market:
ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN PUBLIC MARKET
---------------------------------------------------------------------------
At effective date............................................... 0
180 days after effective date...................................
After 180 days post-effective date..............................
|
Most of the restricted shares that will become available for sale in the public market beginning 180 days after the effective date will be subject to volume and other resale restrictions pursuant to Rule 144 because the holders are our affiliates. The general provisions of Rule 144 are described below.
In general, under Rule 144, any of our affiliates, or person, or persons whose shares are aggregated, who has beneficially owned restricted shares for at least one year, will be entitled to sell in any three-month period a number of shares that does not exceed the GREATER of:
- 1% of the then outstanding shares of the common stock, approximately 524,819 shares immediately after this offering, OR
- the average weekly trading volume during the four calendar weeks preceding the date on which notice of the sale is filed with the SEC.
Sales pursuant to Rule 144 are subject to requirements relating to manner of sale, notice and availability of current public information about us. A person, or persons whose shares are aggregated, who is not deemed to have been one of our affiliates at any time during the 90 days immediately preceding the sale and who has beneficially owned his or her shares for at least two years is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations described above.
As of March 31, 1999, 9,286,754 shares were reserved for issuance under our amended and restated 1998 stock option plan, of which options to purchase 2,512,332 shares were then outstanding and 130,014 were then exercisable. We intend to file, within 180 days after the date of this prospectus, a registration statement under the Securities Act to register the 9,286,754 shares under our 1998 stock option plan and the 2,321,688 shares of common stock reserved for issuance under our employee stock purchase plan. Upon registration, all of these shares will be freely tradable when issued, subject to Rule 144 volume limitations applicable to affiliates and lock-up agreements.
LOCK-UP AGREEMENTS
All officers and directors and some of the holders of common stock and options to purchase common stock have agreed pursuant to "lock-up" agreements that they will not offer, sell, contract to sell, pledge, grant any option to sell, or otherwise dispose of, directly or indirectly, any shares of common stock or securities convertible or exchangeable for common stock, or warrants or other rights to purchase common stock for a period of 180 days after the date of this prospectus without the prior written consent of Hambrecht & Quist LLC.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement and the underwriters named below, through their representatives, Hambrecht & Quist LLC, Thomas Weisel Partners LLC, FAC/ Equities, a division of First Albany Corporation, and Volpe Brown Whelan & Company, LLC have severally agreed to purchase from us the following respective numbers of shares of common stock:
NUMBER OF
NAME SHARES
-------------------------------------------------------------------------------- ---------
Hambrecht & Quist LLC...........................................................
Thomas Weisel Partners LLC......................................................
First Albany Corporation........................................................
Volpe Brown Whelan & Company, LLC...............................................
---------
Total......................................................................... 13,000,000
---------
---------
|
The underwriting agreement provides that the obligations of the underwriters are subject to certain conditions precedent, including the absence of any material adverse change in our business and the receipt of certain certificates, opinions and letters from us, our counsel and the independent accountants. The nature of the underwriters' obligation is such that they are committed to purchase all shares of common stock offered if any shares are purchased.
The following tables show the per share and total underwriting discounts and commissions we will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters' over-allotment option to purchase additional shares.
UNDERWRITING DISCOUNTS AND COMMISSIONS PAYABLE BY US
AND THE SELLING SHAREHOLDERS
WITH WITHOUT
OVER-ALLOTMENT EXERCISE OVER-ALLOTMENT EXERCISE
----------------------------- -----------------------------
Per Share................................... $ $
Total....................................... $ $
|
We estimate that the total expenses of this offering, excluding underwriting discounts and commissions, will be approximately $ .
The underwriters propose to offer the shares of common stock directly to the public at the initial public offering price set forth on the cover page of this prospectus and to selected dealers at such price less a concession not in excess of $ per share. The underwriters may allow and the dealers may reallow a concession not in excess of $ per share to other dealers. After the initial public offering of the shares, the offering price and other selling terms may be changed by the underwriters. The representatives have informed us that the underwriters do not intend to confirm discretionary sales of more than 5% of the shares of common stock offered in this offering.
The selling shareholders have granted to the underwriters an option, exercisable no later than 30 days after the date of this prospectus, to purchase up to 1,950,000 additional shares of common stock at the initial public offering price, less the underwriting discount set forth on the cover page of this prospectus. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of common stock to be purchased by it shown in the above table bears to the total number of shares of
common stock offered hereby. The selling shareholders will be obligated, pursuant to the option, to sell shares to the underwriters to the extent the option is exercised. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of shares of common stock offered hereby.
The offering of shares is made for delivery when, as and if accepted by the underwriters and subject to prior sale and withdrawal, cancellation or modification of the offering without notice. The underwriters reserve the right to reject an order for the purchase of shares in whole or in part.
The underwriters have advised us that they do not intend to confirm discretionary sales in excess of 5% of the shares of common stock offered under this prospectus.
The selling shareholders and us have each agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect thereof.
Our shareholders, including executive officers, directors and the selling shareholders, have agreed not to, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of common stock or options to acquire shares of common stock or securities exchangeable for or convertible into shares of common stock owned by them during the 180-day period following the date of this prospectus. We have agreed that we will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of common stock or options to acquire shares of common stock or securities exchangeable for or convertible into shares of common stock during the 180-day period following the date of this prospectus, except that we may issue shares upon the exercise of options granted prior to the date hereof, and may grant additional options under our stock option plans, provided that, without the prior written consent of Hambrecht & Quist LLC, the additional options shall not be exercisable during that period.
Prior to this offering, there has been no public market for the common stock. The initial public offering price for the common stock will be determined by negotiation among us and the representatives of the underwriters. Among the factors to be considered in determining the initial public offering price are prevailing market and economic conditions, our revenues and earnings, market valuations of other companies engaged in activities similar to ours, estimates of our business potential and our prospects, the present state of our business operations, our management and other factors deemed relevant.
Persons participating in this offering may over-allot or effect transactions which stabilize, maintain or otherwise affect the market price of the common stock at levels above those which might otherwise prevail in the open market, including by entering stabilizing bids, effecting syndicate covering transactions or imposing penalty bids. A stabilizing bid means the placing of any bid or effecting of any purchase, for the purpose of pegging, fixing or maintaining the price of the common stock. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with the offering. A penalty bid means an arrangement that permits the underwriters to reclaim a selling concession from a syndicate member in connection with the offering when shares of common stock sold by the syndicate member are purchased in syndicate covering transactions. Such transactions may be effected on the Nasdaq National Market, in the over-the-counter market, or otherwise. This stabilizing, if commenced, may be discontinued at any time.
A prospectus in electronic format is being made available on a Web site maintained by Hambrecht & Quist LLC. In addition, some broker-dealers may choose to make a prospectus in electronic format available on Web sites maintained by them.
Thomas Weisel Partners LLC, one of the representatives of the underwriters, was organized and registered as a broker-dealer in December 1998. Since December 1998, Thomas Weisel Partners has been named as a lead or co-manager on 39 filed public offerings of equity securities, of which 17 have been completed, and has acted as a syndicate member in an additional 17 public offerings of equity securities. Thomas Weisel Partners does not have any material relationship with us or any of our officers, directors or other controlling persons, except with respect to its contractual relationship with us pursuant to the underwriting agreement entered into in connection with this offering.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us by Morrison & Foerster LLP, San Francisco, California. Certain legal matters in connection with the offering will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, San Francisco, California.
EXPERTS
The audited financial statements included in this prospectus have been so included in reliance on the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT US
We have filed with Securities and Exchange Commission in Washington, D.C. a Registration Statement on Form S-1 under the Securities Act with respect to the common stock offered in this prospectus. This prospectus, filed as part of the registration statement, does not contain all of the information set forth in the registration statement and its exhibits and schedules, portions of which have been omitted as permitted by the rules and regulations of the SEC. For further information about us and the common stock, we refer you to the registration statement and to its exhibits and schedules. Statements in this prospectus about the contents of any contract, agreement or other document are not necessarily complete and, in each instance, we refer you to the copy of such contract, agreement or document filed as an exhibit to the registration statement, and each such statement being qualified in all respects by reference to the document to which it refers. Anyone may inspect the registration statement and its exhibits and schedules without charge at the public reference facilities the SEC maintains at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the SEC located at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois, 60661. You may obtain copies of all or any part of these materials from the SEC upon payment to the SEC of prescribed fees. You may also inspect these reports and other information without charge at a Web site maintained by the SEC. The address of this site is http://www.sec.gov.
Upon completion of this offering, we will become subject to the informational requirements of the Exchange Act and, in accordance therewith, file reports, proxy statements and other information with the SEC. You will be able to inspect and copy these reports, proxy statements and other information at the public reference facilities maintained by the SEC and at the SEC's regional offices at the addresses noted above. You also will be able to obtain copies of this material from the Public Reference Section of the SEC as described above, or inspect them without charge at the SEC's Web site. We have applied for quotation of our common stock on the Nasdaq National Market. If we receive approval for quotation on the Nasdaq National Market, then you will be able to inspect reports, proxy and information statements and other information concerning us at the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
NATIONAL INFORMATION CONSORTIUM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
NATIONAL INFORMATION CONSORTIUM, INC. Report of PricewaterhouseCoopers LLP, Independent Accountants....................... F-3 Consolidated Balance Sheets......................................................... F-4 Consolidated Statements of Operations............................................... F-5 Consolidated Statements of Changes in Shareholders' Equity.......................... F-6 Consolidated Statements of Cash Flows............................................... F-7 Notes to Consolidated Financial Statements.......................................... F-8 INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY Report of PricewaterhouseCoopers LLP, Independent Accountants....................... F-25 Consolidated Balance Sheets......................................................... F-26 Consolidated Statements of Income................................................... F-27 Consolidated Statements of Changes in Shareholders' Equity.......................... F-28 Consolidated Statements of Cash Flows............................................... F-29 Notes to Consolidated Financial Statements.......................................... F-30 KANSAS INFORMATION CONSORTIUM, INC. Report of PricewaterhouseCoopers LLP, Independent Accountants....................... F-36 Balance Sheets...................................................................... F-37 Statements of Income................................................................ F-38 Statements of Changes in Shareholders' Equity....................................... F-39 Statements of Cash Flows............................................................ F-40 Notes to Financial Statements....................................................... F-41 ARKANSAS INFORMATION CONSORTIUM, INC. Report of PricewaterhouseCoopers LLP, Independent Accountants....................... F-45 Balance Sheets...................................................................... F-46 Statements of Operations............................................................ F-47 Statements of Changes in Shareholders' Equity....................................... F-48 Statements of Cash Flows............................................................ F-49 Notes to Financial Statements....................................................... F-50 NEBRASK@ INTERACTIVE, INC. Report of PricewaterhouseCoopers LLP, Independent Accountants....................... F-54 |
Balance Sheets...................................................................... F-55 Statements of Income................................................................ F-56 Statements of Changes in Shareholders' Equity....................................... F-57 Statements of Cash Flows............................................................ F-58 Notes to Financial Statements....................................................... F-59 PRO FORMA CONSOLIDATED FINANCIAL INFORMATION Overview............................................................................ F-63 Pro Forma Consolidated Statements of Operations..................................... F-64 Notes to Pro Forma Consolidated Financial Information............................... F-67 |
REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of National Information Consortium, Inc.
The common stock split described in Note 8 to the consolidated financial statements has not been consummated at June 16, 1999. When it has been consummated, we will be in a position to furnish the following report:
"In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of National Information Consortium, Inc. and its subsidiaries (the "Company") at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above."
/s/ PRICEWATERHOUSECOOPERS LLP Kansas City, Missouri June 16, 1999 |
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------
1997 1998
-------- -----------
MARCH 31,
1999
------------
(UNAUDITED)
ASSETS
Current assets:
Cash...................................................................................... $178,695 $ 1,310,751 $ 1,115,136
Trade accounts receivable................................................................. 6,932 2,908,043 3,694,625
Prepaid expenses.......................................................................... 21,849 47,133 103,420
Other current assets...................................................................... 6,247 67,311 255,410
-------- ----------- ------------
Total current assets.................................................................... 213,723 4,333,238 5,168,591
Property and equipment, net................................................................. 112,203 1,229,415 1,684,850
Other assets................................................................................ 120 17,183 4,790
Intangible assets, net...................................................................... -- 11,669,059 9,775,258
-------- ----------- ------------
Total assets............................................................................ $326,046 $17,248,895 $16,633,489
-------- ----------- ------------
-------- ----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 56,681 $ 2,376,505 $ 2,755,641
Accrued expenses.......................................................................... 34,551 227,106 261,122
Income taxes payable...................................................................... -- 68,700 22,700
Deferred income taxes..................................................................... -- 164,234 254,068
Bank lines of credit...................................................................... -- 1,023,592 839,452
Capital lease obligations--current portion................................................ -- 235,323 201,233
Notes payable--current portion............................................................ 5,019 50,000 594,000
Application development contracts......................................................... -- 1,256,000 1,174,471
Other current liabilities................................................................. 17,119 49,465 47,865
-------- ----------- ------------
Total current liabilities............................................................... 113,370 5,450,925 6,150,552
Capital lease obligations--long term portion................................................ -- 409,989 384,019
Note payable--long term portion............................................................. 24,923 50,000 --
Deferred income taxes....................................................................... -- 425,878 312,098
-------- ----------- ------------
Total liabilities....................................................................... 138,293 6,336,792 6,846,669
-------- ----------- ------------
Commitments and contingencies (Notes 10 and 11)
Shareholders' equity:
Common stock, no par, 200,000,000 shares authorized, 22,288,209, 42,066,181 and 42,481,996
shares issued and outstanding........................................................... -- -- --
Additional paid-in capital................................................................ 627,435 19,551,646 22,435,331
Accumulated deficit....................................................................... (414,682) (5,825,966) (9,125,019)
-------- ----------- ------------
212,753 13,725,680 13,310,312
Less notes and stock subscriptions receivable............................................. (25,000) -- (125,000)
Less deferred compensation expense........................................................ -- (2,813,577) (3,398,492)
-------- ----------- ------------
Total shareholders' equity.............................................................. 187,753 10,912,103 9,786,820
-------- ----------- ------------
Total liabilities and shareholders' equity.............................................. $326,046 $17,248,895 $16,633,489
-------- ----------- ------------
-------- ----------- ------------
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- ---------------------
1996 1997 1998 1998 1999
--------- --------- ---------- --------- ----------
(UNAUDITED)
Revenues........................ $ 235,971 $ 996,550 $28,623,656 $ 361,358 $11,455,065
Cost of revenues................ 21,248 5,168 21,210,632 690 8,603,698
--------- --------- ---------- --------- ----------
Gross profit.................. 214,723 991,382 7,413,024 360,668 2,851,367
--------- --------- ---------- --------- ----------
Operating expenses:
Service development and
operations.................. 38,248 224,128 3,884,810 134,932 934,871
Selling, general and
administrative.............. 168,399 660,254 4,241,780 325,290 1,517,568
Stock compensation............ -- 370,235 568,869 -- 1,698,770
Depreciation and
amortization................ 297 13,679 5,922,396 24,031 2,001,559
--------- --------- ---------- --------- ----------
Total operating expenses...... 206,944 1,268,296 14,617,855 484,253 6,152,768
--------- --------- ---------- --------- ----------
Operating income (loss)......... 7,779 (276,914) (7,204,831) (123,585) (3,301,401)
--------- --------- ---------- --------- ----------
Other income (expense):
Interest expense.............. -- -- (88,161) (628) (36,995)
Other income, net............. -- 111 55,839 -- 16,565
--------- --------- ---------- --------- ----------
Total other income
(expense)................... -- 111 (32,322) (628) (20,430)
--------- --------- ---------- --------- ----------
Income (loss) before income
taxes......................... 7,779 (276,803) (7,237,153) (124,213) (3,321,831)
Income tax expense (benefit).... -- -- 658,813 -- (22,778)
--------- --------- ---------- --------- ----------
Net income (loss)............... $ 7,779 $(276,803) $(7,895,966) $(124,213) $(3,299,053)
--------- --------- ---------- --------- ----------
--------- --------- ---------- --------- ----------
Net income (loss) per share:
Basic and diluted............. $ 0.00 $ (0.01) $ (0.21) $ (0.01) $ (0.08)
--------- --------- ---------- --------- ----------
--------- --------- ---------- --------- ----------
Weighted average shares
outstanding (Note 8)........ 6,004,625 20,857,785 37,242,423 22,679,122 42,242,941
--------- --------- ---------- --------- ----------
--------- --------- ---------- --------- ----------
Pro forma tax provision
(unaudited)--Note 9:
Net income (loss)............. $ 7,779 $(276,803) $(7,895,966) $(124,213)
Pro forma provision for income
taxes....................... 3,034 36,438 (1,516,894) (48,443)
--------- --------- ---------- ---------
Pro forma net income (loss)... $ 4,745 $(313,241) $(6,379,072) $ (75,770)
--------- --------- ---------- ---------
--------- --------- ---------- ---------
Pro forma basic and diluted
income (loss) per share..... $ 0.00 $ (0.02) $ (0.17) $ 0.00
--------- --------- ---------- ---------
--------- --------- ---------- ---------
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NOTES
COMMON STOCK ADDITIONAL AND STOCK DEFERRED
--------------------- PAID-IN ACCUMULATED SUBSCRIPTIONS COMPENSATION
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE EXPENSE TOTAL
---------- --------- ----------- ------------ ------------- ------------ -----------
BALANCE,
JANUARY
1,
1996... 19,841 $ -- $ 100 $ (15,331) $ -- $ -- $ (15,231)
Net
income... 7,779 7,779
Issuance
of
common
stock... 20,337,768 -- 102,500 -- -- -- 102,500
---------- --------- ----------- ------------ ------------- ------------ -----------
BALANCE,
DECEMBER
31,
1996... 20,357,609 -- 102,600 (7,552) -- -- 95,048
Net
loss... -- -- -- (276,803) -- -- (276,803)
Distributions
to
shareholders... -- -- -- (130,327) -- -- (130,327)
Issuance
of
common
stock... 1,930,600 -- 524,835 -- (25,000) -- 499,835
---------- --------- ----------- ------------ ------------- ------------ -----------
BALANCE,
DECEMBER
31,
1997... 22,288,209 -- 627,435 (414,682) (25,000) -- 187,753
Common
stock
issued
in
exchange... 19,255,155 -- 18,539,814 -- -- -- 18,539,814
Net
loss... -- -- -- (7,895,966) -- -- (7,895,966)
Distributions
to
shareholders... -- -- -- (838,367) -- -- (838,367)
Termination
of
Subchapter
S
election... -- -- (3,323,049) 3,323,049 -- -- --
Issuance
of
common
stock... 522,817 -- 583,333 -- -- -- 583,333
Stock
options
granted
with
exercise
price
less
than
fair
market
value
at
date
of
grant.. -- -- 3,124,113 -- -- (2,855,390) 268,723
Deferred
compensation
expense
recognized... -- -- -- -- -- 41,813 41,813
Stock
subscription
received... -- -- -- -- 25,000 -- 25,000
---------- --------- ----------- ------------ ------------- ------------ -----------
BALANCE,
DECEMBER
31,
1998... 42,066,181 -- 19,551,646 (5,825,966) -- (2,813,577) 10,912,103
Net
loss
(unaudited)... -- -- -- (3,299,053) -- -- (3,299,053)
Stock
options
granted
with
exercise
price
less
than
fair
market
value
at
date
of
grant
(unaudited)... -- -- 794,561 -- -- (794,561) --
Stock
options
exercised
(unaudited)... 69,303 -- 100,000 -- -- -- 100,000
Deferred
compensation
expense
recognized
(unaudited)... -- -- -- -- -- 209,646 209,646
Issuance
of
common
stock
(unaudited)... 346,512 -- 1,989,124 -- (125,000) -- 1,864,124
---------- --------- ----------- ------------ ------------- ------------ -----------
BALANCE,
MARCH
31,
1999
(unaudited)... 42,481,996 $ -- $22,435,331 $ (9,125,019) $(125,000) $(3,398,492) $ 9,786,820
---------- --------- ----------- ------------ ------------- ------------ -----------
---------- --------- ----------- ------------ ------------- ------------ -----------
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
NATIONAL INFORMATION CONSORTIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- -----------------------
1996 1997 1998 1998 1999
--------- --------- ----------- --------- ------------
(UNAUDITED)
Cash flows from operating activities:
Net income (loss)................................ $ 7,779 $(276,803) $(7,895,966) $(124,213) $ (3,299,053)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization.................. 297 13,679 5,922,396 24,031 2,001,559
Compensation expense recognized upon issuance
of common stock.............................. -- 370,235 258,333 -- 1,489,124
Compensation expense recognized upon granting
of stock options............................. -- -- 268,723 -- --
Recognition of deferred compensation expense... -- -- 41,813 -- 209,646
(Gain) loss on disposals of property and
equipment.................................... -- 1,200 (12,639) -- --
Application development contracts.............. -- -- 1,256,000 -- (81,529)
Deferred income taxes.......................... -- -- 590,113 -- (23,946)
Changes in operating assets and liabilities:
(Increase) in trade accounts receivable........ (11,708) (1,471) (21,980) (110,991) (786,582)
(Increase) decrease in prepaid expenses........ -- (21,849) 3,335 -- (56,287)
(Increase) in other current assets............. -- -- (54,956) (10,805) (188,099)
(Increase) decrease in other assets............ -- -- (8,103) (3,505) 3,574
Increase (decrease) in accounts payable........ -- 56,681 (184,889) 15,265 379,136
Increase in accrued expenses................... -- 19,199 80,472 4,092 34,016
Increase (decrease) in income taxes payable.... -- -- 68,700 -- (46,000)
Increase (decrease) in other current
liabilities.................................. 15,351 17,119 43,034 (17,119) (1,600)
--------- --------- ----------- --------- ------------
Net cash provided by (used in) operating
activities................................... 11,719 177,990 354,386 (223,245) (366,041)
--------- --------- ----------- --------- ------------
Cash flows from investing activities:
Purchase of property and equipment............... (19,676) (112,521) (255,203) (46,881) (10,374)
Proceeds from disposals of property and
equipment...................................... -- 5,026 42,736 -- --
Proceeds from notes receivable from
shareholders................................... -- -- 55,000 -- --
Cash of acquired companies....................... -- -- 764,908 -- --
--------- --------- ----------- --------- ------------
Net cash provided by (used in) investing
activities..................................... (19,676) (107,495) 607,441 (46,881) (10,374)
--------- --------- ----------- --------- ------------
Cash flows from financing activities:
Proceeds from bank lines of credit............... -- -- 1,190,285 150,000 70,000
Payments on bank lines of credit................. -- -- (270,084) -- (254,140)
Proceeds from notes payable...................... -- 29,942 -- -- --
Payments on notes payable........................ (29,251) -- (29,942) (1,617) (50,000)
Payments on capital lease obligations............ -- -- (101,533) -- (60,060)
Payments on debentures payable................... -- -- (130,130) -- --
Distributions to shareholders.................... -- (130,327) (588,367) -- --
Proceeds from issuance of common stock........... 102,500 129,600 75,000 -- 475,000
Proceeds from subscriptions receivable........... -- -- 25,000 -- --
--------- --------- ----------- --------- ------------
Net cash provided by financing activities........ 73,249 29,215 170,229 148,383 180,800
--------- --------- ----------- --------- ------------
Net increase (decrease) in cash.................... 65,292 99,710 1,132,056 (121,743) (195,615)
Cash, beginning of year............................ 13,693 78,985 178,695 178,695 1,310,751
--------- --------- ----------- --------- ------------
Cash, end of period................................ $ 78,985 $ 178,695 $ 1,310,751 $ 56,952 $ 1,115,136
--------- --------- ----------- --------- ------------
--------- --------- ----------- --------- ------------
Other cash flow information:
Interest paid.................................... $ -- $ -- $ 54,707 $ -- $ 36,995
--------- --------- ----------- --------- ------------
--------- --------- ----------- --------- ------------
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND BASIS OF PRESENTATION
National Information Consortium, Inc. (the "Company" or "NIC") is a provider of Internet-based electronic government services, which are integrated packages of hardware and software, that help governments use the Internet to reduce costs and provide a higher level of service to businesses and citizens. The Company was formed as a Delaware corporation on December 18, 1997, for the sole purpose of effecting a common stock exchange offer (the "Exchange Offer") to combine under common ownership five separate affiliated entities under which the Company conducted its business operations. The five companies were National Information Consortium USA, Inc. ("NIC/USA"), Kansas Information Consortium, Inc. ("KIC"), Indian@ Interactive, Inc. ("III"), Nebrask@ Interactive, Inc. ("NII") and Arkansas Information Consortium, Inc. ("AIC"). The Exchange Offer was consummated on March 31, 1998, and has been accounted for as a business combination. NIC/USA is the entity whose shareholders received the largest portion of the Company's common stock shares and is treated as the accounting acquirer with the purchase method of accounting being applied to the four other companies (see Note 3). The accompanying consolidated financial statements reflect the acquisitions on March 31, 1998, with the results of operations and cash flows subsequent to that date reflecting the results of all the companies, and prior to that date only the operations of NIC/USA.
As of December 31, 1998, the Company provides electronic government services for seven states and one local government. The Company's primary business activity is to design, build and operate Internet-based portals for governments under multi-year contracts, forming a relationship in which governments view the Company as their partner (referred to as government partnerships--see Note 4). In addition, the Company enters into contracts to provide consulting, development and management services to government portals in exchange for a negotiated fee. The Company also has a development division that develops applications to automate certain government back-office processes to facilitate electronic access.
The Company negotiates contracts with government agencies desiring to include their information on the government portal. The Company markets the services and solicits users to enter into subscriber contracts permitting the user to access the portal and the government information contained therein in exchange for a transactional or subscription user fee. The Company is responsible for funding up front investment and ongoing operational costs. Through separate wholly-owned subsidiaries, NIC/USA operates in Virginia and Iowa, and has a service contract with the state of Georgia. Following the Exchange Offer, the Company has wholly-owned subsidiaries operating in the states of Arkansas, Indiana, Kansas and Nebraska in addition to the operations of NIC/USA.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements consolidate NIC/USA with its wholly-owned subsidiaries for periods prior to the Exchange Offer and the Company together with all of its direct and indirect wholly-owned subsidiaries, including NIC/USA, for periods subsequent to the Exchange Offer. All significant intercompany balances and transactions have been eliminated. The Company and NIC/USA have no partially owned subsidiaries.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful lives of 8 years for furniture and fixtures, 3-8 years for equipment, 3-5 years for purchased software and 5 years for leasehold improvements. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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.
REVENUE RECOGNITION
The Company recognizes revenues from providing electronic government services (primarily transaction and information access fees) when the service is provided. The Company must remit a certain percentage of these fees to government agencies regardless of whether the Company ultimately collects the fees. Government agency fees and amounts payable to the primary contracting governmental entities (see Note 4) are accrued as cost of revenues and accounts payable at the time the revenue is recognized.
Revenue from service contracts is recognized as the services are provided at rates provided for in the contract.
The Company recognizes revenues from application development contracts on the percentage of completion method, utilizing labor hours incurred to date as compared to the estimated total labor hours for each contract. Included in the measurement of percentage of completion are the internal costs of developing the core technology which is a deliverable under the Company's current contracts. Any anticipated losses on contracts are charged to operations as soon as they are determinable. In the fourth quarter of 1998, the Company determined that its most recent cost estimates exceeded the remaining revenues to be recognized. The Company accrued $1.3 million of estimated costs in excess of revenues for satisfying remaining obligations under the contracts. The provision for anticipated losses was determined on an individual contract basis. Because of the inherent uncertainties in estimating the costs of completion, it is at least reasonably possible that the estimates will change within the near term.
INCOME TAXES
The Company changed its income tax status from an S corporation to a C corporation on July 1, 1998. The Company, along with its subsidiaries, files a consolidated federal income tax return.
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 COSTS
The Company expenses as incurred the employee costs to develop, implement, operate and maintain the government portals. These costs are included in service development and operations expense in the consolidated statements of operations.
APPLICATION DEVELOPMENT COSTS
As discussed above, the Company, through a development division, is developing an application under customer contracts that automates certain government back-office processes to facilitate electronic access. Costs of developing this application are considered costs of performance under the contracts and have been expensed as incurred. These costs are included in service development and operations expense in the consolidated statements of operations.
STOCK-BASED COMPENSATION
The Company has elected to account for its stock-based compensation plan using the intrinsic value method prescribed in Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," establishes accounting and disclosure requirements using a fair-value-based method of accounting for stock-based compensation plans. The Company has elected the method of accounting prescribed by APB No. 25 as described above, and has adopted the disclosure requirements of SFAS No. 123.
Accordingly, the Company records as compensation expense the amount by which the fair value of common stock sold to employees and consultants exceeds the amount paid. Any excess of fair value of the price of common stock over the exercise price for options granted to employees is recorded as deferred compensation expense within shareholders' equity and amortized as expense ratably over the vesting period.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and accounts receivable. The Company limits its exposure to credit loss by depositing its cash with high credit quality financial institutions. The Company considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required. The Company has not experienced any significant credit losses.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for reporting financial information regarding operating segments, products and services, geographic areas and major customers. The statement is effective for financial statements for periods beginning after December 15, 1997. As the Company operates in one business segment, the adoption of this statement did not have a significant impact on the Company's financial statements.
In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which establishes guidelines for the accounting for the costs of all computer software developed or obtained for internal use. SOP 98-1 is effective January 1, 1999. The adoption of SOP 98-1 did not have a material impact on the Company's consolidated financial statements.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying consolidated balance sheet as of March 31, 1999, the consolidated statements of operations and cash flows for the three months ended March 31, 1999 and 1998 and the consolidated statement of changes in shareholders' equity for the three months ended March 31, 1999 are unaudited.
In the opinion of management, these statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the results of these periods. The data disclosed in the notes to financial statements for these periods are unaudited.
3. ACCOUNTING FOR THE EXCHANGE OFFER
On March 31, 1998, the Company exchanged its common shares for the common shares of five affiliated business units--NIC/USA, KIC, III, NII and AIC. Starting in 1991 with the state of Kansas, the Company's founders established an S corporation for business conducted within each state in which it was awarded a contract. By 1996, the Company had expanded into four states and decided to pursue future business opportunities through NIC/USA, leaving the four other business units to pursue opportunities solely within those states.
Ownership of the five affiliated business units was similar, but not identical, leading to the conclusion to account for the Exchange Offer as a business combination. Prior to consummating the Exchange Offer, the Company was a holding company with no operations of its own. Exchange ratios were determined proportionately based on estimated 1998 pretax earnings for each company. No appraisal of fair market value of the separate companies was obtained.
Management determined the fair value of the consolidated company on March 31, 1998 was $40 million. The fair value was allocated to each of the business units based upon proportional values agreed to by the shareholders in consummating the Exchange Offer.
Shareholders of NIC/USA, III, KIC, AIC and NII received 22,288,209, 10,099,461, 4,179,039, 3,032,009 and 1,944,646 shares of the Company's common shares which were valued for purchase accounting at $21,460,187, $9,724,259, $4,023,785, $2,919,368 and $1,872,401, respectively. As the shareholders of NIC/USA received 54% of the Company's common shares, NIC/USA was treated as the acquirer in applying purchase accounting.
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACCOUNTING FOR THE EXCHANGE OFFER (CONTINUED) The cost of the acquired business units of $18,539,813 was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values on the Exchange Offer date. The fair value of net tangible assets, consisting primarily of cash, accounts receivable, property and equipment, accounts payable and debt, approximated historical carrying amounts. The sole identifiable intangible asset relates to the government contracts and was valued at the net present value of projected future cash flows over the lives of the existing contracts discounted by 15%. Developed applications were not assigned a value because each state has a perpetual right of use license to applications developed if the Company's relationship is terminated. The remainder of the cost was allocated to goodwill. The purchase price and allocation by acquired business unit and in total is summarized as follows:
III KIC AIC NII TOTAL
--------- --------- --------- --------- ----------
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
|
As a result of rapid technological changes occurring in the Internet industry and the intense competition for qualified Internet professionals, recorded contract intangibles and goodwill are amortized on a straight-line basis over the life of the existing contracts. There can be no assurance the contracts will be renewed when they expire at terms that will be beneficial to the Company. At the time of the Exchange Offer, the Company and each of the business units were S corporations. The Exchange Offer was tax free to the shareholders. The historical tax basis in the assets and liabilities carries over to the Company and the amortization of the goodwill and contract intangibles is not deductible for income tax purposes.
The following unaudited pro forma consolidated amounts give effect to the acquisitions of the business units as if they had occurred on January 1, 1997, using the amortization of goodwill and contract intangible the Company has and will record for periods subsequent to the Exchange Offer:
YEAR ENDED
DECEMBER 31,
---------------------- THREE MONTHS ENDED
1997 1998 MARCH 31, 1998
---------- ---------- -------------------
Revenues...................... $24,382,184 $36,532,345 $ 8,270,047
Operating loss................ (6,863,442) (8,736,631) (1,655,386)
Net loss...................... (6,931,996) (9,429,917) (1,658,166)
Basic and diluted loss per
share....................... $ (0.17) $ (0.22) $ (0.04)
Weighted average shares
outstanding................. 40,112,940 41,950,418 41,934,277
|
4. GOVERNMENT PARTNERSHIPS
Each of the Company's government partnerships operates under a separate contract, which generally has an initial term of three to five years. The Company enters into separate agreements with various agencies and divisions of the government partners to provide specific services and to conduct
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. GOVERNMENT PARTNERSHIPS (CONTINUED) 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. Prices and revenue sharing agreements must be approved by the government. The Company owns all the applications developed under these contracts. After completion of a defined contract term, the Company's government partners receive 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 partners would be entitled to take over the portal in place with no future obligation of the Company. In some cases, the Company provides management services to government-owned portals in exchange for an agreed-upon fee.
The following is a summary of the Company's larger business units that have entered into agreements with government partners and the significant terms of those operating agreements.
VIRGINIA INTERACTIVE, LLC (VI)
On July 30, 1997, VI, a wholly-owned subsidiary of NIC/USA, entered into a contract to provide electronic government services to the Virginia Information Providers Network Authority (the "Virginia Authority"). VI is responsible for managing and marketing the government portal as well as funding up front investment and ongoing operational costs. The contract is for a period of five years, commencing September 1, 1997, with the Virginia Authority having a five-year renewal option. If the Virginia Authority extends the contract through 2007, it is entitled to a perpetual license for applications developed at no additional compensation to VI.
User fees received by the VI business unit are disbursed (1) first for the payment of operating expenses (primarily telecommunication costs), (2) then to the Virginia Authority in accordance with interagency agreements negotiated by VI on behalf of the Virginia Authority and for the reasonable and necessary expenses of the Virginia Authority, and (3) then all remaining funds to VI.
INDIANA INTERACTIVE, INC. (III)
The III business unit develops, operates, maintains and expands electronic government services for electronic access to public information for the Access Indiana Information Network ("AIIN"). AIIN is a State of Indiana government instrumentality created by the Indiana legislature for the purpose of providing electronic access to state, county and local information required by Indiana businesses and citizens. III is responsible for managing and marketing the government portal as well as funding up-front investment and ongoing operational costs. The contract with AIIN and the interagency agreements with various government agencies include limitations and provisions for the rates III can charge and the amount of remuneration to AIIN and each government agency. The initial contract expires September 2000 but may be renewed, or amended and renewed, for up to an additional five years. AIIN is entitled to a perpetual for use only license to the applications developed for no additional compensation to III.
III's wholly-owned subsidiary, City-County Interactive, L.L.C. (the "Subsidiary"), was formed in 1997 to provide electronic government solutions for CivicNet, formerly CivicLink, the electronic gateway service for the city of Indianapolis and Marion County, Indiana. In addition, the Subsidiary is to further operate, manage and expand CivicNet.
In connection with the revenues generated under the contract with AIIN, AIIN receives 2% of gross revenues per annum, before all other payments. The data-providing entities are then paid in accordance with interagency agreements. The remaining balance is retained by III.
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. GOVERNMENT PARTNERSHIPS (CONTINUED) ARKANSAS INFORMATION CONSORTIUM, INC. (AIC)
AIC serves as a provider of electronic government services, by a contract signed in July 1997 between AIC and the Information Network of Arkansas ("INA"), a public instrumentality created by legislation in the State of Arkansas (the "State"). AIC is responsible for managing and marketing the government portal as well as funding up-front investment and ongoing operational costs. The contract is for one three-year term through June 30, 2000, with four one-year renewals at the option of INA. If the State decides to extend the contract through June 30, 2003, or at anytime thereafter, the INA shall be entitled to a perpetual for use only license to the applications developed for no additional compensation to AIC. Prior to June 30, 2003, the INA reserves the right to negotiate terms to license the applications.
Network transaction fees received pursuant to the agreement with INA are disbursed first for payment of certain operating expenses for the government portal (primarily telecommunication costs). Five percent of the amount by which gross revenues for the portal exceed the amount payable to government agencies is then distributed to the INA. The balance is disbursed to AIC.
KANSAS INFORMATION CONSORTIUM, INC. (KIC)
KIC was incorporated August 15, 1991 to serve as a provider of electronic government services to develop, operate, maintain and expand a government portal for electronic access to public information for the Information Network of Kansas ("INK"). INK is a State of Kansas government instrumentality created by the Kansas legislature for the purpose of providing electronic access to state, county and local information required by Kansas businesses and citizens. KIC is responsible for managing and marketing the government portal as well as funding up-front investment and ongoing operational costs. The contract with INK includes limitations and provisions for the rates KIC can charge and the amount of remuneration to INK and each government agency. The initial contract was to expire on December 31, 1996, but was renewed until December 31, 1999 unless earlier terminated by INK for cause. INK shall have the option, upon termination or expiration of the contract, to require KIC to provide electronic government services in accordance with the terms of the contract for a period of up to twelve months from the time of the expiration or notification of termination. INK is entitled to a perpetual for use only license to the applications developed for no additional compensation to KIC.
In connection with the revenues generated under the contract with INK, INK receives 2.0% of gross revenue, per annum, payable monthly, before all other payments. KIC may then receive a 25.0% rate of return per annum on its risk capital from net income before taxes. The remaining net income before taxes is shared 66.7% with KIC and 33.3% with INK. Risk capital is defined in the contract as the sum of paid-in capital, corporate loans with a payback period exceeding one year, and noncancellable obligations under corporate leases.
NEBRASK@ INTERACTIVE, INC. (NII)
NII was incorporated November 22, 1994 for the purpose of operating as a provider of electronic government solutions for the public information portal of the State of Nebraska ("Nebrask@ Online"). NII developed and operates the public information portal to provide businesses and citizens with electronic access to state, county and local information via the Internet. NII is responsible for managing and marketing the portal as well as funding up-front investment and ongoing operational costs.
On December 3, 1997, NII entered into a contract with the Nebraska State Records Board ("NSRB") to provide electronic government services to enhance, operate, maintain and expand the existing portal that was developed by NII under its 1995 contract with the Nebraska Library Commission ("NLC")
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. GOVERNMENT PARTNERSHIPS (CONTINUED)
and various government agencies. The contract includes limitations and provisions for the rates NII can charge and the amount of remuneration to each government agency. The contract will expire on January 31, 2002 unless earlier terminated by the NSRB for cause. The NSRB shall have the option, upon termination or expiration of the contract, to require NII to provide electronic government services in accordance with the terms of the contract for a period of up to twelve months from the time of the expiration or notice of termination, whichever is earlier. On January 1, 2002, the NSRB will be entitled to a perpetual for use only license to the applications developed for no additional compensation to NII.
In connection with the revenues generated under the contract with the NSRB, the NSRB receives 4.5% of the first $89,000 in gross profit and 2% of gross profit thereafter. Gross profit is defined in the contract as the difference between NII's gross revenues and amounts paid to government agencies and for certain telecommunication expenses.
NATIONAL INFORMATION CONSORTIUM U.S.A., INC. (NIC/USA)
A service contract was entered into between NIC/USA and the GeorgiaNet Authority ("GANET"), an agency of the State of Georgia, on September 15, 1996. Pursuant to the contract, NIC/USA must dedicate a minimum number of full time employees to assist GANET in creating and providing an information access program. Pursuant to the contract, GANET is entitled to a perpetual use license to the applications developed at no additional compensation to NIC/USA. However, if GANET terminates the contract prior to September 2001, GANET must pay NIC/USA a fee ranging from $500,000 to $1,000,000 (based on the date of termination) in order to receive a license for the applications. The contract must be renewed by GANET on a yearly basis. In the event fees received by GANET from its customers are insufficient to cover its obligations to NIC/USA, the contract shall terminate without further obligation of GANET.
In connection with the revenues generated under the contract with GANET, GANET pays NIC/ USA $800,000 per year, in equal amounts of $200,000 on a quarterly basis. In addition, GANET pays NIC/ USA 5% of gross GANET revenues from non-bulk fees per quarter.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
--------------------
1997 1998
--------- ---------
Furniture and fixtures............................... $ -- $ 210,209
Equipment............................................ 125,048 1,530,636
Purchased software................................... -- 101,484
Leasehold improvements............................... -- 39,285
--------- ---------
125,048 1,881,614
Less accumulated depreciation........................ 12,845 652,199
--------- ---------
$ 112,203 $1,229,415
--------- ---------
--------- ---------
|
Depreciation expense for the years ended December 31, 1996, 1997 and 1998, was $177, $13,559 and $236,699, respectively.
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER 31,
---------------------- MARCH 31, 1999
1997 1998 (UNAUDITED)
---------- ---------- -------------------
Goodwill....................... $ -- $13,885,149 $13,885,149
Contract intangibles........... -- 3,465,313 3,465,313
---------- ---------- -------------------
-- 17,350,462 17,350,462
Less accumulated
amortization................. -- 5,681,403 7,575,204
---------- ---------- -------------------
$ -- $11,669,059 $ 9,775,258
---------- ---------- -------------------
---------- ---------- -------------------
|
7. BANK LINES OF CREDIT AND OTHER DEBT OBLIGATIONS
NIC/USA has a $1,000,000 operating line of credit from a bank that bears interest at the bank's index rate (7.75% at December 31, 1998). The expiration date on the line is April 30, 1999. At December 31, 1997 and 1998, $0 and $370,000 was outstanding on the line. The line is collateralized by NIC/USA's assets and guaranteed by various affiliated companies. The line was renewed on April 30, 1999 with a maturity date of April 30, 2000.
NIC/USA entered into a $225,000 equipment line of credit with a bank in January 1998. The line bears interest at the bank's reference rate plus 1.75% (9.50% at December 31, 1998). There is no given expiration date on the line. At December 31, 1998, no amounts were outstanding on the line. The line is collateralized by the related equipment and guaranteed by the parent company.
In December 1997, NIC/USA borrowed $29,942 from a bank in the form of a note payable collateralized by an automobile. The note was repaid in full in 1998.
In October 1998, NIC/USA issued to GANET, an irrevocable letter of credit in the amount of $200,000 that expires October 31, 1999.
On January 19, 1999, NIC/USA purchased an airplane and financed the purchase by borrowing $544,000 from a bank in the form of a note payable. The note bears interest at 7.75% and matures January 19, 2000. The loan is to be repaid in eleven monthly installments of $6,529 commencing February 19, 1999 with a final lump-sum payment of $513,707 on January 19, 2000. The note is collateralized by the airplane.
VI entered into a $250,000 operating line of credit with a bank in May 1998. The line bears interest at the bank's index rate (7.75% at December 31, 1998). The expiration date on the line is April 30, 2000. At December 31, 1998, $218,750 was outstanding on the line. The line is collateralized by VI's assets and guaranteed by various affiliated companies.
VI entered into a $225,000 equipment line of credit with a bank in April 1998. The line bears interest at the bank's reference rate plus 1.75% (9.50% at December 31, 1998). There is no given expiration date on the line. At December 31, 1998, there were no amounts outstanding on the line. The line is collateralized by the related equipment and guaranteed by the parent company.
Iowa Interactive, Inc. entered into a $225,000 equipment line of credit with a bank in April 1998. The line bears interest at the bank's reference rate plus 1.75% (9.50% at December 31, 1998). There is no given expiration date on the line. At December 31, 1998, no amounts were outstanding on the line. The line is collateralized by the related equipment and guaranteed by the parent company.
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. BANK LINES OF CREDIT AND OTHER DEBT OBLIGATIONS (CONTINUED) III has a $400,000 operating line of credit from a bank that bears interest at the bank's index rate (7.75% at December 31, 1998). The expiration date on the line is April 30, 2000. At December 31, 1998, $192,136 was outstanding on the line. The line is collateralized by the III's assets and guaranteed by various affiliated companies.
III has a $150,000 operating line of credit with a bank that bears interest at the bank's prime rate plus 0.50% (8.25% at December 31, 1998). The expiration date on the line is November 1, 1999. At December 31, 1998, $18,209 was outstanding on the line. The line is collateralized by III's assets.
III has a $225,000 equipment line of credit with a bank which bears interest at the bank's reference rate plus 1.75% (9.50% at December 31, 1998). There is no given expiration date on the line. At December 31, 1998, there were no amounts outstanding on the line. The line is collateralized by the related equipment and guaranteed by the parent company.
KIC has a $250,000 operating line of credit from a bank that bears interest at the bank's index rate (7.75% at December 31, 1998). The expiration date on the line is April 30, 2000. At December 31, 1998, $179,497 was outstanding on the line. The line is collateralized by KIC's assets and guaranteed by various affiliated companies.
KIC has a $225,000 equipment line of credit with a bank which bears interest at the bank's reference rate plus 1.75% (9.50% at December 31, 1998). There is no given expiration date on the line. At December 31, 1998, no amounts were outstanding on the line. The line is collateralized by the related equipment and guaranteed by the parent company.
AIC has a $150,000 operating line of credit from a bank that bears interest at the bank's index rate (7.75% at December 31, 1998). The expiration date on the line is April 30, 2000. At December 31, 1998, no amounts were outstanding on the line. The line is collateralized by AIC's assets and guaranteed by the parent company.
AIC has a $225,000 equipment line of credit with a bank which bears interest at the bank's reference rate plus 1.75% (9.50% at December 31, 1998). There is no given expiration date on the line. At December 31, 1998, no amounts were outstanding on the line. The line is collateralized by the related equipment and guaranteed by the parent company.
In March 1998, AIC agreed to pay a shareholder $19,500 for past services and reacquired the shareholder's 5,005 shares of NII. An initial payment of $6,500 was made with the remaining balance of $13,000 due in two annual installments of $6,500 in 1999 and 2000.
AIC has issued to the State of Arkansas an irrevocable letter of credit in the amount of $50,000.
NII has a $100,000 line of credit with a bank that bears interest at the bank's index rate (7.75% at December 31, 1998). The expiration date on the line is April 30, 2000. At December 31, 1998, $45,000 was outstanding on the line. The line is collateralized by NII's assets and guaranteed by the parent company.
NII has a $225,000 equipment line of credit with a bank which bears interest at the bank's reference rate plus 1.75% (9.50% at December 31, 1998). There is no given expiration date on the line. At December 31, 1998, no amounts were outstanding on the line. The line is collateralized by the related equipment and guaranteed by the parent company.
In March 1998, NII agreed to pay a shareholder $130,500 for past services and reacquired the shareholder's 5,250 shares of NII. An initial payment of $43,500 was made with the remaining balance of $87,000 due in two annual installments of $43,500 in 1999 and 2000.
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. BANK LINES OF CREDIT AND OTHER DEBT OBLIGATIONS (CONTINUED) The operating line of credit agreements contain various covenants relating to reporting requirements and financial ratios. At December 31, 1998, the Company was either in compliance with these covenants or had received waivers on any violations of these covenants.
8. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
COMMON STOCK
The Company's Board of Directors has authorized 13,500,000 shares of common stock for issuance by the Company at December 31, 1998. In April 1999, the Company was reincorporated in the state of Colorado and changed the par value of its common stock from $.01 per share to no par. On May 6, 1999, the Company increased its authorized shares to 200,000,000.
On June 14, 1999, the Board of Directors declared a 4.643377 for 1 stock split on the Company's common stock whereby 3.643377 additional shares will be issued for each share of common stock held by shareholders of record on a date prior to the effective date of the registration statement filed by the Company for an initial public offering of its common stock. The effect of the stock split has been retroactively reflected in the accompanying consolidated financial statements for all periods presented. All references to the number of Company common shares and per share amounts elsewhere in the related footnotes have also been restated as appropriate to reflect the effect of the common stock split for all periods presented.
In the first six months of 1998, the Company made $588,367 of S corporation cash distributions to common shareholders. NIC/USA made $130,327 of distributions to its shareholders in 1997.
On June 30, 1998, the Company and a voting trust entered into by the Company's shareholders entered into a stock purchase agreement for the Company's shareholders to sell a 25% interest in the Company to an investment management firm. The Company did not receive any of the proceeds from the sale. Under the voting trust agreement, two principal shareholders have the right to vote all of the Company's common shares, except those held by the investment management firm and to sell all or any part of such shares. The investment management investors also have certain registration rights, a right of first refusal to purchase any common shares proposed to be sold by the voting trust, a right to participate in any sale by the voting trust and certain other rights. The Company's bylaws give the Company the right of first refusal to purchase any common shares desired to be sold by a shareholder at the lesser of a third party offered price or a formula price. One common shareholder has the right, only upon termination within the first three years of employment, to cause the Company to repurchase 173,258 shares of common stock purchased by the shareholder on February 9, 1999, at the $1.44 price per share paid by the shareholder.
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE (CONTINUED)
At December 31, 1997 and as of March 31, 1998, the date of the Exchange Offer, NIC/USA had 1,000,000 common shares authorized and 112,330 common shares issued and outstanding. However, as NIC/USA is considered the accounting acquirer, its historical outstanding share information has been adjusted for the Exchange Offer exchange ratio. Shareholders of NIC/USA received 198.42 Company common shares for each share held of NIC/USA on March 31, 1998. Retroactive adjustments are also made for purposes of calculating and reporting earnings per share.
COMMON STOCK TRANSACTIONS
From August 1997 through December 1997, NIC/USA sold 5,130 and 4,500 shares of its common stock to employees at prices of $29.24 and $1.00 per share, respectively. The Company recorded $370,235 in compensation expense related to these transactions.
From April 1998 through June 1998, the Company sold 348,254 shares of common stock to two employees at $0.22 per share. The Company recorded $258,333 in compensation expense related to this transaction. From September 1998 through December 1998, the Company granted 2,534,796 common stock options. Compensation expense of $310,536 was recorded in 1998 and deferred compensation expense of $2,813,577 was recorded at December 31, 1998 which is being expensed ratably over the vesting period.
On June 30, 1998, the Company issued 174,563 shares of its common stock and made an S corporation distribution of those shares, which were valued at $1.43 per share, to its shareholders. These shares were given to a consultant as compensation for services rendered to the Company's shareholders with the investment management firm sale. In connection with the transaction, the Company also paid $57,077 in professional fees on behalf of the shareholders which were also distributed as an S corporation distribution.
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.
1999 EMPLOYEE STOCK PURCHASE PLAN
In May 1999, the Company's Board of Directors approved an employee stock
purchase plan intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code.
EARNINGS PER SHARE
The Company computes net income (loss) per share in accordance with the provisions of SFAS No. 128, "Earnings Per Share" and SEC Staff Accounting Bulletin No. 98. Under SFAS No. 128 and SAB No. 98, basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding for the period. Treated as outstanding for all periods prior to the Exchange Offer is an issuance of 174,563 of common shares to all common shareholders on July 1, 1998 for no consideration to the Company as described above. Diluted net income (loss) per share is the same as basic net income (loss) per share because common stock issuable upon exercise of employee stock options is antidilutive.
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE (CONTINUED)
The following sets forth the calculation of earnings per share for the actual and pro forma periods indicated:
YEAR ENDED DECEMBER 31, PRO FORMA
------------------------------------- THREE THREE THREE
1998 MONTHS ENDED MONTHS ENDED MONTHS ENDED
1997 PRO FORMA 1998 MARCH 31, 1998 MARCH 31, 1998 MARCH 31, 1999
ACTUAL (UNAUDITED) ACTUAL (UNAUDITED) (UNAUDITED) (UNAUDITED)
---------- ------------ ----------- -------------- -------------- --------------
Net loss................ $ (276,803) $(9,429,917) $(7,895,966) $ (1,658,166) $ (124,213) $ (3,299,053)
Basic and diluted loss
per share............. $ (0.01) $ (0.22) $ (0.21) $ (0.04) $ (0.01) $ (0.08)
Weighted-average common
shares outstanding.... 20,857,785 41,950,418 37,242,423 41,934,277 22,679,122 42,242,941
|
9. INCOME TAXES
On July 1, 1998, the Company changed its income tax status from an S corporation to a C corporation. The Company recognized a net deferred tax liability of approximately $1,374,000 representing the temporary differences between the book and tax bases of assets and liabilities on that date. No deferred tax liability was recorded for goodwill. The effect of recognizing the deferred tax liability has been included in the consolidated statement of operations for the year ended December 31, 1998.
Income tax expense for the year ended December 31, 1998 consisted of the following:
Current income taxes:
Federal........................................................ $ 56,045
State.......................................................... 12,655
---------
Total........................................................ 68,700
---------
Deferred income taxes, net:
Federal........................................................ 540,345
State.......................................................... 49,768
---------
Total........................................................ 590,113
---------
Total income taxes........................................... $ 658,813
---------
---------
|
The unaudited pro forma provision for income taxes for the years ended December 31, 1996, 1997 and 1998 and the three-months ended March 31, 1998 presented on the Consolidated Statements of Operations present the Company's results of operations as if it were a C corporation for the entire period. The pro forma provision for income taxes for the year ended December 31, 1998 represents the incremental provision for the six month period the Company was an S corporation together with removing the $1,374,000 cumulative effect recorded in 1998 as discussed above. The pro forma provision for income taxes was calculated based on enacted tax laws and statutory tax rates applicable to the periods presented taking into account permanent differences.
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED) Significant components of the Company's deferred tax assets and liabilities at December 31, 1998, are as follows:
Deferred tax assets:
Accrued accounts payable...................................... $ 721,757
Application development contracts............................. 479,922
Compensation related to non-qualified stock options........... 59,842
Other......................................................... 28,130
---------
Total....................................................... 1,289,651
---------
Deferred tax liabilities:
Accrued revenue............................................... 897,097
Contract intangibles.......................................... 881,346
Depreciation.................................................. 62,324
Other......................................................... 38,996
---------
Total....................................................... $1,879,763
---------
Net deferred tax liability...................................... $ 590,112
---------
---------
|
The following table is a reconciliation between the effective income tax rate indicated by the consolidated statements of operations and the statutory federal income tax rate for the year ended December 31, 1998:
Effective federal and state income tax rate (provision).............. (9.1)%
Goodwill amortization (six months)................................... 15.5
S to C corporation adjustment........................................ 19.7
Pretax loss as an S corporation (six months)......................... 10.4
State income taxes................................................... (1.3)
Other................................................................ (0.2)
---------
Statutory federal income tax rate.................................... 35.0%
---------
---------
|
10. CAPITAL LEASE OBLIGATIONS
The Company and its subsidiaries lease various property and equipment under capital leases. The agreements require the company and its subsidiaries to pay all taxes, fees, assessments or other charges.
Capitalized leased property and equipment consists of the following at December 31, 1998:
Furniture and fixtures............................................ $ 117,911
Equipment......................................................... 766,153
Purchased software................................................ 81,795
---------
965,859
Less accumulated depreciation..................................... 314,026
---------
$ 651,833
---------
---------
|
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL LEASE OBLIGATIONS (CONTINUED) Future minimum noncancellable lease payments under these capital leases at December 31, 1998 are as follows:
FISCAL YEAR
------------------------------------------------------------------
1999.............................................................. $ 280,884
2000.............................................................. 217,180
2001.............................................................. 213,918
2002.............................................................. 17,787
---------
729,769
Less interest..................................................... 84,457
---------
Present value of net minimum lease payments....................... 645,312
Less current portion.............................................. 235,323
---------
Long-term portion................................................. $ 409,989
---------
---------
|
11. OPERATING LEASES
The Company and its subsidiaries lease office space and certain equipment under operating leases. The future minimum lease payments under noncancellable operating leases are as follows:
FISCAL YEAR
--------------------------------------------------------------------------------
1999............................................................................ $ 408,412
2000............................................................................ 320,125
2001............................................................................ 248,143
2002............................................................................ 209,932
2003............................................................................ 24,989
------------
$ 1,211,601
------------
------------
|
Total rent expense for the years ended December 31, 1996, 1997 and 1998 was $0, $2,099 and $354,192 respectively.
12. EMPLOYEE BENEFIT PLAN
The Company and its subsidiaries sponsor a defined contribution 401(k) profit sharing plan. In accordance with the plan, all full-time employees are eligible immediately upon employment. A discretionary match and a discretionary contribution may be made to the plan as determined by the Board of Directors. Company contributions totaled $1,731, $14,031, and $94,571 for the years ended December 31, 1996, 1997 and 1998, respectively.
13. STOCK OPTION PLAN
The Company has adopted a formal stock option plan (the "Plan") to provide for the granting of either incentive stock options or non-qualified stock options to encourage certain employees of the Company and its subsidiaries, and certain directors of the Company, to participate in the ownership of the Company, and to provide additional incentive for such employees and directors to promote the success of its business through sharing the future growth of such business. The Company is authorized to grant
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK OPTION PLAN (CONTINUED)
options for up to 9,286,754, common shares under the Plan, of which 2,534,796 have been granted in 1998. The exercise price of all options granted under the plan was $1.44, which was less than the fair market value of the stock on the various grant dates. The weighted-average grant-date fair value of options granted during the year was $1.60. Employee options are generally exercisable one year from date of grant in cumulative annual installments of 33% and expire four years after the grant date.
On December 31, 1998, the Company granted 1,393,013 options (1,046,501 non-qualified options and 346,512 incentive options) to an executive of the Company under two separate stock option agreements covered by the Plan. Non-qualified stock options totaling 60,712 vested immediately with the remainder of the options exercisable one year from date of grant in cumulative annual installments of 25%. The non-qualified stock options expire ten years after the grant date. Incentive stock options totaling 69,302 vested immediately with the remainder of the options exercisable one year from date of grant in cumulative annual installments of 25%. The incentive stock options expire five years from the date of grant.
Stock option activity for the year ended December 31, 1998, was as follows:
SHARES WEIGHTED AVERAGE PRICE
--------- -------------------------
Outstanding at January 1.................. -- --
Granted................................. 2,534,796 $ 1.44
Exercised............................... -- --
Forfeited............................... 20,793 $ 1.44
---------
Outstanding at December 31................ 2,514,003 $ 1.44
Exercisable at December 31................ 199,317 $ 1.44
|
For all options outstanding at December 31, 1998, the exercise price was $1.44 per share and the weighted-average remaining contractual life was 6.7 years.
The Company accounts for the Plan using the intrinsic value method prescribed in Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," requires certain disclosures regarding expense and value of options granted using the fair-value-based method even though the Company follows APB No. 25. Had compensation cost for the Company's Plan been determined consistent with SFAS No. 123, the Company's net loss and loss per share would have been as follows for the year ended December 31, 1998:
Net loss As reported.................................................... $(7,895,966) Pro forma...................................................... $(7,906,551) Basic and diluted loss per share: As reported.................................................... $ (0.21) Pro forma...................................................... $ (0.21) |
The Company used the minimum value option pricing model, as permitted by the Financial Accounting Standards Board for nonpublic companies, to determine the fair value of grants made in 1998.
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK OPTION PLAN (CONTINUED) The minimum value model does not consider expected volatility in stock price. The following assumptions were applied in determining pro forma compensation cost for the year ended December 31, 1998:
Risk-free interest rate.......................................... 5.00% Expected dividend yield.......................................... 0.00% Expected option life............................................. 6.6 years Expected stock price volatility.................................. 0.001% Fair value of options granted.................................... $1.60 |
14. CONCENTRATION OF CREDIT
For the year ended December 31, 1998, the Company derived 71% of its revenues from two data resellers.
15. RELATED PARTY TRANSACTIONS
The Company and its subsidiaries pay their Board members director fees for services rendered. Total expense incurred for the year ended December 31, 1998 was $130,500. No director fees were paid in either 1997 or 1996.
The Company and its subsidiaries purchase business and health insurance through an insurance agency that is controlled by a shareholder and director of the Company. Insurance expense for the years ended December 31, 1996, 1997 and 1998 was approximately $3,000, $50,000 and $444,600, respectively.
16. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NIC/USA financed the purchase of $335,646 of property and equipment in 1998 under capital leases.
KIC sold certain assets during 1998 which were then leased back from the purchaser over a period of three years. The resulting lease is being accounted for as a capital lease. The purchaser paid down KIC's bank line of credit in 1998 by $28,666 as part of this sale-leaseback transaction.
III sold certain assets during 1998 which were then leased back from the purchaser over a period of three years. The resulting lease is being accounted for as a capital lease. The purchaser paid down III's bank line of credit in 1998 by $169,287 as part of this sale-leaseback transaction.
AIC financed the purchase of $13,083 of property and equipment in 1998 under capital leases.
NII financed the purchase of $7,114 of property and equipment in 1998 under capital leases.
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 |
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------
1996 1997
--------- --------- MARCH 31,
1998
-----------
(UNAUDITED)
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
--------- --------- -----------
--------- --------- -----------
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
---------------------- MARCH 31, 1998
1996 1997 (UNAUDITED)
---------- ---------- --------------
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
---------- ---------- --------------
---------- ---------- --------------
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NOTES DUE
COMMON STOCK ADDITIONAL ON COMMON
---------------------- PAID-IN RETAINED STOCK
SHARES AMOUNT CAPITAL EARNINGS PURCHASES TOTAL
----------- --------- ----------- --------- ----------- --------------
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
----------- --------- ----------- --------- ----------- --------------
----------- --------- ----------- --------- ----------- --------------
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- --------- THREE MONTHS
ENDED
MARCH 31, 1998
---------------
(UNAUDITED)
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
--------- --------- ---------------
--------- --------- ---------------
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
INDIAN@ INTERACTIVE, INC.
Indian@ Interactive, Inc. (the "Company") was incorporated March 6, 1995 to design, build and operate Internet-based portals that allow businesses and citizens to complete transactions and obtain government information online for the Intelenet Commission ("Intelenet"). Intelenet is a State of Indiana government instrumentality created by the Indiana legislature for the purpose of providing electronic access to state, county and local information required by Indiana businesses and citizens. The Company is responsible for managing and marketing the government portal as well as funding up front investment and ongoing operational costs. The contract with Intelenet and the interagency agreements with various state agencies include limitations and provisions for the rates the Company can charge and the amount of remuneration to Intelenet and each state agency. The initial contract expires September 2000 but may be renewed, or amended and renewed, for up to an additional five years. Intelenet is entitled to a perpetual for use only license to the applications development for no additional compensation to the Company.
In October 1997, the Company entered into a computer system agreement with the Indiana Secretary of State ("SOS"). The system is intended to automate many of SOS's internal operations and provide the public electronic access to certain SOS data.
On March 31, 1998, the shareholders of the Company exchanged all of the issued and outstanding common stock shares for shares of common stock in International Information Consortium, Inc. whose name was later changed to National Information Consortium, Inc. ("NIC"). As a result, NIC became the sole shareholder of the Company.
CITY-COUNTY INTERACTIVE, L.L.C.
The Company's wholly-owned subsidiary, City-County Interactive, L.L.C. (the "Subsidiary"), was formed in 1997 to assume the role of electronic government services provider for CivicNet, formerly CivicLink, the government portal for the city of Indianapolis and Marion County, Indiana. In addition, the Subsidiary is to further operate, manage and expand CivicNet.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the Company and its subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
ACCOUNTS RECEIVABLE
The Company considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in income for the period. The cost of maintenance and repairs is charged to expense as incurred; significant renewals and betterments are capitalized.
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company periodically evaluates the carrying value of property and equipment to be held and used when events and circumstances warrant such a review. The carrying value of property and equipment is considered impaired when the anticipated undiscounted cash flows from the asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost to dispose.
REVENUE RECOGNITION
The Company recognizes revenues from providing electronic government services (primarily transaction fees) when the service is provided. The Company must remit a certain percentage of fees to state agencies regardless of whether the Company ultimately collects the fees. In connection with the revenues generated under the contract with Intelenet, Intelenet receives 2% of gross revenues per annum, before all other payments. The data providing entities are then paid in accordance with interagency agreements. The remaining balance is retained by the Company.
ORGANIZATION COSTS
During the period ended December 31, 1995, the Company incurred organization costs totaling $24,059. The organization costs are being amortized on a straight-line basis over a period of five years.
SERVICE DEVELOPMENT COSTS
The Company expenses as incurred the employee costs to develop, implement, operate and maintain the government portal.
STOCK BASED COMPENSATION
The Company records as compensation expense the amount by which the fair value of common stock sold to employees exceeds the amount paid.
INCOME TAXES
The Company has elected to be taxed as a small business corporation under provisions of Subchapter S of the Internal Revenue Code. Under such provisions, the shareholders are taxed individually on their respective shares of the Company's taxable income. Therefore, no provision for income tax expense has been made. The Company changed its income tax status from an S corporation to a C corporation effective July 1, 1998.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying balance sheet as of March 31, 1998, and the related statements of income, changes in shareholders' equity and cash flows for the three months ended March 31, 1998 are unaudited.
In the opinion of management, these statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the results of this period. The data disclosed in the notes to the financial statements for this period is unaudited.
2. CONCENTRATION OF CREDIT
For the years ended December 31, 1997 and 1996, the Company derived 77% and 80%, respectively, of its transaction fees from two data resellers. At December 31, 1997 and 1996, 79% and 81%, respectively, of its accounts receivable were from the same two data resellers.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
-------------------- USEFUL
1996 1997 LIVES
--------- --------- ---------
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
--------- ---------
--------- ---------
|
Depreciation expense for the years ended December 31, 1997 and 1996 was $102,520 and $78,637, respectively.
4. BANK LINES OF CREDIT
INDIAN@ INTERACTIVE, INC.
The Company has a $100,000 operating line of credit from a bank which was increased to $150,000 in October 1997. The interest rate on the line equals the bank's prime rate plus 0.50% (9.00% at December 31, 1997). The line expired on November 1, 1998. There were no amounts outstanding on the line of credit at December 31, 1997 and 1996. The line is collateralized by the Company's assets as well as personal guarantees of three of the Company's shareholders.
The Company obtained an additional $200,000 operating line of credit with a bank in December 1997 which was subsequently increased to $400,000 in 1998. The interest rate on the line equals the bank's index rate (8.50% at December 31, 1997). The line matures April 30, 2000. There were no amounts outstanding on the line of credit at December 31, 1997. The line of credit is collateralized by the Company assets and guaranteed by various affiliated companies.
INDIAN@ INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BANK LINES OF CREDIT (CONTINUED) The Company has a $600,000 equipment line of credit from a bank which bears interest at the bank's prime rate plus 0.50% (9.00% at December 31, 1997). The line expired on November 1, 1998. At December 31, 1997 and 1996, $79,508 and $119,196, respectively, of equipment purchases were outstanding on the line. During January 1997, $100,300 of the existing balance on the line of $119,196 was refinanced through a sale-leaseback with the bank. The line is collateralized by the Company's assets as well as personal guarantees of three of the Company's shareholders.
The Company obtained an additional $225,000 equipment line of credit from a bank in April 1998. The interest rate on the line equals the bank's reference rate plus 1.75%. There is no given expiration date on the line. The line is collateralized by the related equipment and guaranteed by an affiliated company.
The line of credit agreements contain various covenants relating to reporting requirements and financial ratios. At December 31, 1997 and 1996, the Company was either in compliance with these covenants or had received waivers on any violations of these covenants.
CITY-COUNTY INTERACTIVE, L.L.C.
The Subsidiary has a $100,000 operating line of credit with a bank which bears interest at the bank's prime rate plus 0.50%. (9.00% at December 31, 1997). The line expired November 1, 1998. There were no amounts outstanding on the line of credit at December 31, 1997 and 1996. The line is collateralized by the Subsidiary's assets as well as the guarantee of the Company and personal guarantees of three of the Company's shareholders.
The Subsidiary has a $75,000 equipment line of credit from a bank which bears interest at the bank's prime rate plus 0.50% (9.00% at December 31, 1997). The line expired on November 1, 1998. At December 31, 1997 and 1996, $13,415 and $0, respectively, of equipment purchases were outstanding on the line. The line is collateralized by the Subsidiary's assets as well as the guarantee of the Company and personal guarantees of three of the Company's shareholders.
5. DEBENTURES PAYABLE TO RELATED PARTIES
Debentures payable at December 31, 1997 and 1996 consist of $90,000 of 10% debentures issued to two shareholders. These debentures are due in one installment in October 2000. The Company called the debentures in May 1998. Due to the early call, the Company was required to pay a 5.0% premium.
6. CAPITAL LEASE OBLIGATIONS
The Company leases various equipment under agreements with original terms of three years. The agreements require the Company to pay all taxes, fees, assessments or other charges.
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:
1996 1997
--------- ---------
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
--------- ---------
--------- ---------
|
Future minimum lease payments under these capital leases at December 31, 1997 are as follows:
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
---------
---------
|
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:
FISCAL YEAR
1998............................................ $ 69,972
1999............................................ 58,120
2000............................................ 50,503
---------
$ 178,595
---------
---------
|
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.
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.
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 |
KANSAS INFORMATION CONSORTIUM, INC.
BALANCE SHEETS
DECEMBER 31,
--------------------
1996 1997
--------- --------- MARCH 31,
1998
-----------
(UNAUDITED)
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
--------- --------- -----------
--------- --------- -----------
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
KANSAS INFORMATION CONSORTIUM, INC.
STATEMENTS OF INCOME
YEAR ENDED
DECEMBER 31,
--------------------
1996 1997
--------- --------- THREE MONTHS
ENDED
MARCH 31, 1998
--------------
(UNAUDITED)
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
--------- --------- --------------
--------- --------- --------------
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
KANSAS INFORMATION CONSORTIUM, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL TREASURY STOCK COMMON STOCK
-------------------- PAID-IN RETAINED -------------------- SUBSCRIPTIONS
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT RECEIVABLE
--------- --------- ----------- ----------- --------- --------- -------------
BALANCE, JANUARY 1, 1996................ 250,000 $ 250,000 $ 1,400 $ (35,795) (28,250) $ (35,750) $ (25,500)
Net income.............................. -- -- -- 167,412 -- -- --
Distributions to shareholders........... -- -- -- (138,002) -- -- --
Sales of treasury stock................. -- -- 7,470 -- 3,000 3,000 --
--------- --------- ----------- ----------- --------- --------- -------------
BALANCE, DECEMBER 31, 1996.............. 250,000 250,000 8,870 (6,385) (25,250) (32,750) (25,500)
Net income.............................. -- -- -- 190,028 -- -- --
Distributions to shareholders........... -- -- -- (203,360) -- -- --
Sales of treasury stock................. -- -- 13,276 -- 4,500 4,500 --
Payment received for subscribed stock... -- -- -- -- -- -- 25,500
--------- --------- ----------- ----------- --------- --------- -------------
BALANCE, DECEMBER 31, 1997.............. 250,000 250,000 22,146 (19,717) (20,750) (28,250) --
Net income (unaudited).................. -- -- -- 146,585 -- -- --
Distributions to shareholders
(unaudited)........................... -- -- -- (59,605) -- -- --
--------- --------- ----------- ----------- --------- --------- -------------
BALANCE, MARCH 31, 1998 (UNAUDITED)..... 250,000 $ 250,000 $ 22,146 $ 67,263 (20,750) $ (28,250) $ --
--------- --------- ----------- ----------- --------- --------- -------------
--------- --------- ----------- ----------- --------- --------- -------------
TOTAL
---------
BALANCE, JANUARY 1, 1996................ $ 154,355
Net income.............................. 167,412
Distributions to shareholders........... (138,002)
Sales of treasury stock................. 10,470
---------
BALANCE, DECEMBER 31, 1996.............. 194,235
Net income.............................. 190,028
Distributions to shareholders........... (203,360)
Sales of treasury stock................. 17,776
Payment received for subscribed stock... 25,500
---------
BALANCE, DECEMBER 31, 1997.............. 224,179
Net income (unaudited).................. 146,585
Distributions to shareholders
(unaudited)........................... (59,605)
---------
BALANCE, MARCH 31, 1998 (UNAUDITED)..... $ 311,159
---------
---------
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
KANSAS INFORMATION CONSORTIUM, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- --------- THREE MONTHS
ENDED
MARCH 31, 1998
---------------
(UNAUDITED)
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
--------- --------- ---------------
--------- --------- ---------------
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
KANSAS INFORMATION CONSORTIUM, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. Kansas Information Consortium, Inc. (the "Company") was incorporated August 15, 1991 to design, build and operate Internet-based portals that allow businesses and citizens to complete transactions and obtain government information online for the Information Network of Kansas ("INK"). INK is a State of Kansas government instrumentality created by the Kansas legislature for the purpose of providing electronic access to state, county and local information required by Kansas businesses and citizens. The Company is responsible for managing and marketing the government portal as well as funding up front investment and ongoing operational costs. The contract with INK includes limitations and provisions for the rates the Company can charge and the amount of remuneration to INK and each state agency. The initial contract was to expire on December 31, 1996, but was renewed until December 31, 1999 unless earlier terminated by INK for cause. INK shall have the option, upon termination or expiration of the contract, to require the Company to act in accordance with the terms of the contract for a period of up to twelve months from the time of the expiration or notification of termination. INK is entitled to a perpetual for use only license to applications developed for no additional compensation to the Company.
On March 31, 1998, the shareholders of the Company exchanged all of their issued and outstanding common stock shares for shares of common stock in International Information Consortium, Inc. whose name was later changed to National Information Consortium, Inc. ("NIC"). As a result, NIC became the sole shareholder of the Company.
ACCOUNTS RECEIVABLE.
The Company considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required.
PROPERTY AND EQUIPMENT.
Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in income for the period. The cost of maintenance and repairs is charged to expense as incurred; significant renewals and betterments are capitalized.
The Company periodically evaluates the carrying value of property and equipment to be held and used when events and circumstances warrant such a review. The carrying value of property and equipment is considered impaired when the anticipated undiscounted cash flows from the asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost to dispose.
REVENUE RECOGNITION
The Company recognizes revenues from providing electronic government services (primarily transaction fees) when the service is provided. The Company must remit a certain percentage of transaction fees to state agencies regardless of whether the Company ultimately collects the fees. In connection with the revenues generated under the contract with INK, INK receives 2.0% of gross revenue per annum, payable monthly, before all other payments. The Company may then receive a 25.0% rate of return per annum on its risk capital from net income before taxes. The remaining net income before taxes
KANSAS INFORMATION CONSORTIUM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) is shared 66.7% with the Company and 33.3% with INK. Risk capital is defined in the contract as the sum of paid-in capital, corporate loans with a payback period exceeding one year, and noncancellable obligations under corporate leases.
SERVICE DEVELOPMENT COSTS.
The Company expenses as incurred the employee costs to develop, implement, operate and maintain the government portal.
STOCK-BASED COMPENSATION.
The Company records as compensation expense the amount by which the fair value of common stock sold to employees exceeds the amount paid.
INCOME TAXES.
The Company has elected to be taxed as a small business corporation under provisions of Subchapter S of the Internal Revenue Code. Under such provisions, the shareholders are taxed individually on their respective shares of the Company's taxable income. Therefore, no provision for income tax expense has been made. The Company changed its income tax status from an S corporation to a C corporation effective July 1, 1998.
USE OF ESTIMATES.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION.
The accompanying balance sheet as of March 31, 1998, and the related statements of income, changes in shareholders' equity and cash flows for the three months ended March 31, 1998 are unaudited.
In the opinion of management, these statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the results of this period. The data disclosed in the notes to the financial statements for this period is unaudited.
2. CONCENTRATION OF CREDIT
For the years ended December 31, 1997 and 1996, the Company derived 84% and 72%, respectively, of its transaction fees from six data resellers. At December 31, 1997 and 1996, 84% and 80%, respectively, of its accounts receivable were from the same six data resellers.
KANSAS INFORMATION CONSORTIUM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
-------------------- USEFUL
1996 1997 LIVES
--------- --------- -----------
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
--------- ---------
--------- ---------
|
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.
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:
FISCAL YEAR
-----------------------------------------------------------------
1998............................................................. $ 118,374
1999............................................................. 105,041
2000............................................................. 38,374
2001............................................................. 38,374
2002............................................................. 31,980
-----------
$ 332,143
-----------
-----------
|
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.
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 |
ARKANSAS INFORMATION CONSORTIUM, INC.
BALANCE SHEETS
DECEMBER 31,
1997
------------- MARCH 31, 1998
--------------
(UNAUDITED)
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
------------- --------------
------------- --------------
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
ARKANSAS INFORMATION CONSORTIUM, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED
DECEMBER 31,
1997
------------- THREE MONTHS
ENDED
MARCH 31, 1998
--------------
(UNAUDITED)
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
------------- --------------
------------- --------------
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
ARKANSAS INFORMATION CONSORTIUM, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SERIES A AND B
COMMON STOCK TREASURY STOCK
-------------------- RETAINED ----------------------
SHARES AMOUNT EARNINGS SHARES AMOUNT TOTAL
--------- --------- --------- ----------- --------- ---------
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
--------- --------- --------- ----------- --------- ---------
--------- --------- --------- ----------- --------- ---------
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
ARKANSAS INFORMATION CONSORTIUM, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED
DECEMBER 31,
1997
------------- THREE MONTHS
ENDED
MARCH 31, 1998
--------------
(UNAUDITED)
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
------------- --------------
------------- --------------
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
ARKANSAS INFORMATION CONSORTIUM, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Arkansas Information Consortium, Inc. (the "Company") was incorporated in October 1996 to design, build and operate Internet-based portals that allow businesses and citizens to complete transactions and obtain government information online, as defined by a contract signed in July 1997 between the Company and the Information Network of Arkansas ("INA"), a public instrumentality created by legislation in the State of Arkansas (the "State"), to provide electronic access via the Internet to public information. The Company is responsible for managing and marketing the government portal as well as funding up front investment and ongoing operational costs. The contract is for one three year term through June 30, 2000, with four one-year renewals at the option of INA. If the State decides to extend the contract through June 30, 2003, or at anytime thereafter, INA shall be entitled to a perpetual for use only license to the applications developed for no additional compensation to the Company. Prior to June 30, 2003, INA reserves the right to negotiate terms for licensure of applications.
On March 31, 1998, substantially all of the shareholders of the Company exchanged their shares for common stock shares in International Information Consortium, Inc., whose name was later changed to National Information Consortium, Inc. ("NIC"). As a result, NIC became the sole shareholder of the Company. Only one shareholder did not participate in the exchange. In March 1998, the Company agreed to pay this shareholder $19,500 for past services and reacquired the shareholder's 5,005 shares in the Company. The reacquired shares were recorded as treasury stock at fair market value, which totaled $14,385. An initial payment of $6,500 was made with the remaining balance recorded as a note payable due in two annual installments of $6,500 in 1999 and 2000. The difference between $19,500 and the fair value of the reacquired stock was recorded as expense in the amount of $5,115.
ACCOUNTS RECEIVABLE
The Company considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts has been recorded.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in operations for the period. The cost of maintenance and repairs is charged to expense as incurred; significant renewals and betterments are capitalized.
The Company periodically evaluates the carrying value of property and equipment to be held and used when events and circumstances warrant such a review. The carrying value of property and equipment is considered impaired when the anticipated undiscounted cash flows from the asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost to dispose.
ORGANIZATION COSTS
Organization costs represent legal costs incurred by the Company relating to its incorporation and formation and are being amortized using the straight-line method over five years.
ARKANSAS INFORMATION CONSORTIUM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES
The Company has elected to be treated as a small business corporation under provisions of Subchapter S of the Internal Revenue Code. Under such provisions, the shareholders are taxed individually on their respective shares of the Company's taxable income. Therefore, no provision for income tax has been made. The Company changed its income tax status from an S corporation to a C corporation effective July 1, 1998.
REVENUE RECOGNITION
The Company recognizes revenues from providing electronic government services (primarily transaction fees) when the service is provided. The Company must remit a certain percentage of transaction fees to state agencies regardless of whether the Company ultimately collects the fees. In addition, transaction fees received pursuant to the agreement with INA are disbursed first for payment of network operating expenses, then to INA 5% of the amount by which gross revenues exceed the amount payable to state agencies, and the balance to the Company.
SERVICE DEVELOPMENT COSTS
The Company expenses as incurred the employee costs to develop, implement, operate and maintain the government portal.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying balance sheet as of March 31, 1998, and the related statements of operations, cash flows and changes in shareholders' equity for the three months ended March 31, 1998 are unaudited.
In the opinion of management, these statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the results of this period. The data disclosed in the notes to the financial statements for this period is unaudited.
2. CONCENTRATION OF CREDIT
For the year ended December 31, 1997, the Company derived 99% of its transaction fees from three data resellers. The same three data resellers represent 99% of accounts receivable at December 31, 1997.
ARKANSAS INFORMATION CONSORTIUM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1997:
USEFUL
LIVES
-----------
Equipment............................................ $ 125,706 3-8 years
Leasehold improvements............................... 5,703 5 years
---------
131,409
Less accumulated depreciation........................ 7,917
---------
$ 123,492
---------
---------
|
Depreciation expense for the year ended December 31, 1997 was $7,917.
4. DEBENTURES PAYABLE
Debentures payable at December 31, 1997 consists of $40,130 of 9% debentures issued to seven individuals as part of the initial capitalization of the Company. In May 1998, the Company entered into a $150,000 bank line of credit agreement, which is guaranteed by NIC. Proceeds from the line of credit totaling $40,000 were used to repay the debentures. The line of credit was repaid in August 1998.
5. BANK LINES OF CREDIT AND LETTER OF CREDIT
The Company obtained a $150,000 operating line of credit from a bank in May 1998. The interest rate on the line equals the bank's index rate (8.50% at the inception of the line). The expiration date on the line is April 30, 2000. The line is collateralized by the Company's assets and guaranteed by an affiliated company.
The Company obtained a $225,000 equipment line of credit from a bank in April 1998. There is no given expiration date on the line. The line is collateralized by the related equipment and guaranteed by an affiliated company.
The Company has issued to the State an irrevocable letter of credit in the amount of $50,000.
6. OPERATING LEASES
The Company leases its office space and certain equipment under operating leases. Future minimum lease payments under noncancellable operating leases are as follows at December 31, 1997:
FISCAL YEAR
------------------------------------------------------------------
1998.............................................................. $ 42,322
1999.............................................................. 43,024
2000.............................................................. 22,328
2001.............................................................. 936
2002.............................................................. 936
---------
$ 109,546
---------
---------
|
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
ARKANSAS INFORMATION CONSORTIUM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. OPERATING LEASES (CONTINUED) years, upon written notice given 90 days before the end of that year. Under no other circumstances can the Company terminate the lease.
Total rent expense for the year ended December 31, 1997 was $18,364.
7. RELATED PARTY TRANSACTIONS
The Company pays its Board members director fees for services rendered. Total expense incurred was $6,000 for the three month period ended March 31, 1998. No director fees were paid in 1997.
The Company is affiliated, through common ownership, with several companies that also serve as electronic government services providers for various states. The Company is a partial guarantor of certain line of credit agreements entered into by these affiliated companies. The total amounts available and outstanding under such agreements at December 31, 1997 were $1,050,000 and $178,674.
Notes receivable from shareholders at December 31, 1997 represents two notes paying interest at 10% per annum which were originally issued in exchange for shares of the Company's stock and payable in three years. The notes were paid in full in July 1998.
During the start-up phase of the organization, an affiliated company paid expenses on behalf of the Company totaling approximately $96,000, all of which has been reimbursed by the Company. Of this amount, approximately, $3,800 was recorded as organization costs with the remaining $92,200 expensed as incurred.
The Company rents an aircraft on an hourly basis from Sky King Leasing, which has common shareholders with the Company. The amount paid to Sky King Leasing for the year ended December 31, 1997 was approximately $8,300.
The Company purchases business and health insurance through an insurance agency that is controlled by a shareholder of the Company. Insurance expense for the year ended December 31, 1997 was approximately $13,900.
8. EMPLOYEE BENEFIT PLAN
The Company, in conjunction with affiliated companies, maintains a 401(k) profit sharing plan. In accordance with the plan, all employees are eligible immediately upon employment. A discretionary match and a discretionary contribution may be made to the plan as determined by the Board of Directors. Company contributions totaled $4,301 for the year ended December 31, 1997.
9. COMMON STOCK
The initial capitalization of the Company in June 1997 consisted of 492,940 shares of $1 par common stock issued to approximately 35 individual investors. Cash was received for 220,556 of the shares and a note receivable was issued for 40,000 of the shares. The remaining 232,384 shares were issued in exchange for previous services rendered and were expensed at the $1 par amount which was the same price per share paid by the other investors.
The Articles of Incorporation of the Company stipulate that should any shareholder desire to sell or transfer their respective shares of common stock, such stock must first be offered to the Company. Any stock not purchased by the Company within a specified time period must then be offered to the remaining shareholders. The purchase price must be equivalent to the price that would be paid by a non-shareholder.
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 |
NEBRASK@ INTERACTIVE, INC.
BALANCE SHEETS
DECEMBER 31,
--------------------
1996 1997
--------- ---------
MARCH 31,
1998
-----------
(UNAUDITED)
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
--------- --------- -----------
--------- --------- -----------
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
NEBRASK@ INTERACTIVE, INC.
STATEMENTS OF INCOME
YEAR ENDED
DECEMBER 31,
--------------------
1996 1997
--------- --------- THREE MONTHS
ENDED
MARCH 31, 1998
---------------
(UNAUDITED)
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
--------- --------- ---------------
--------- --------- ---------------
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
NEBRASK@ INTERACTIVE, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL TREASURY STOCK
------------------------ PAID-IN RETAINED --------------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL
----------- ----------- ----------- ----------- --------- --------- ---------
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
----------- ----------- ----------- ----------- --------- --------- ---------
----------- ----------- ----------- ----------- --------- --------- ---------
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
NEBRASK@ INTERACTIVE, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- ---------
THREE MONTHS
ENDED
MARCH 31, 1998
--------------
(UNAUDITED)
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
--------- --------- --------------
--------- --------- --------------
|
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
NEBRASK@ INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Nebrask@ Interactive, Inc., (the "Company") was incorporated on November 22, 1994 to design, build and operate Internet-based portals for the State of Nebraska ("Nebrask@ Online") that allow businesses and citizens to complete transactions and obtain government information online. The Company is responsible for managing and marketing the portal as well as funding up front investment and ongoing operational costs.
On December 3, 1997, the Company entered into a contract to provide electronic government services for the Nebraska State Records Board ("NSRB") to enhance, operate, maintain and expand the existing portal that was developed by the Company under its 1995 contract with the Nebraska Library Commission ("NLC") and various state agencies. The contract includes limitations and provisions for the rates the Company can charge and the amount of remuneration to each state agency. The contract will expire on January 31, 2002 unless earlier terminated by the NSRB for cause. The NSRB shall have the option, upon termination or expiration of the contract, to require the Company to act in accordance with the terms of the contract for a period of up to twelve months from the time of expiration or notice of termination, whichever is earlier. On January 1, 2002, the NSRB will be entitled to a perpetual for use only license to the applications developed for no additional compensation to the Company.
On March 31, 1998, substantially all of the shareholders of the Company exchanged their shares for common stock shares in International Information Consortium, Inc., whose name was later changed to National Information Consortium, Inc. ("NIC"). As a result, NIC became the sole shareholder of the Company. Only one shareholder did not participate in the exchange. In March 1998, the Company agreed to pay this shareholder $130,500 for past services and reacquired the shareholder's 5,250 shares in the Company. The reacquired shares were recorded as treasury stock at fair market value, which totaled $89,439. An initial payment of $43,500 was made with the remaining balance recorded as a note payable due in two annual installments of $43,500 in 1999 and 2000. The difference between $130,500 and the fair value of the reacquired stock was recorded as expense in the amount of $41,061.
ACCOUNTS RECEIVABLE
The Company considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful lives of the assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in income for the period. The cost of maintenance and repairs is charged to expense as incurred; significant renewals and betterments are capitalized.
The Company periodically evaluates the carrying value of property and equipment to be held and used when events and circumstances warrant such a review. The carrying value of property and equipment is considered impaired when the anticipated undiscounted cash flows from the asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset. Fair value is determined primarily using the
NEBRASK@ INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost to dispose.
INCOME TAXES
The Company has elected to be treated as a small business corporation under provisions of Subchapter S of the Internal Revenue Code. Under such provisions, the shareholders are taxed individually on their respective shares of the Company's taxable income. Therefore, no provision for income tax has been made. The Company changed its income tax status from an S corporation to a C corporation effective July 1, 1998.
REVENUE RECOGNITION
The Company recognizes revenues from providing electronic government services (primarily transaction fees) when the service is provided. The Company must remit a certain percentage of transaction fees to state agencies regardless of whether the Company ultimately collects the fees. In addition, the NSRB receives 4.5% of the first $89,000 in gross profit and 2% of gross profit thereafter. Gross profit is defined in the contract as the difference between the Company's gross revenues and amounts paid to state agencies and for certain telecommunication expenses.
SERVICE DEVELOPMENT COSTS
The Company expenses as incurred the employee costs to develop, implement, operate and maintain the government portal.
STOCK-BASED COMPENSATION
The Company records as compensation expense the amount by which the fair value of common stock sold to employees exceeds the amount paid.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying balance sheet as of March 31, 1998, and the related statements of income, cash flows and changes in shareholders' equity for the three months ended March 31, 1998 are unaudited.
In the opinion of management, these statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the results of this period. The data disclosed in the notes to the financial statements for this period is unaudited.
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:
DECEMBER 31,
-------------------- USEFUL
1996 1997 LIVES
--------- --------- -----------
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
--------- ---------
--------- ---------
|
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.
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:
FISCAL YEAR
---------------------------------------------------
1998............................................... $ 28,626
1999............................................... 28,626
2000............................................... 11,296
2001............................................... 7,830
---------
$ 76,378
---------
---------
|
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.
NATIONAL INFORMATION CONSORTIUM, INC.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
OVERVIEW
On March 31, 1998, National Information Consortium, Inc. (the "Company" or "NIC") exchanged its common shares for the common shares of five affiliated companies (the "Exchange Offer") in a transaction accounted for using the purchase method of accounting. Prior to consummating the Exchange Offer, the Company was a holding company with no operations of its own. Shareholders of one of the affiliated companies, National Information Consortium USA, Inc. ("NIC/USA") received 54% of the Company's common shares and NIC/USA has been treated as the acquirer in applying purchase accounting.
The following unaudited pro forma consolidated statements of operations
give effect to the acquisition by NIC/USA of Kansas Information Consortium, Inc.
("KIC"), Indian@ Interactive, Inc. ("III"), Nebrask@ Interactive, Inc. ("NII")
and Arkansas Information Consortium, Inc. ("AIC") (the "Acquired Companies").
The unaudited pro forma consolidated statements of operations are based on the
individual statements of operations of the Company and the Acquired Companies
appearing elsewhere in this Prospectus, and combine the results of operations of
the Company and the Acquired Companies for the year ended December 31, 1997, the
three month period ended March 31, 1998 and the year ended December 31, 1998 as
if the transaction occurred on January 1, 1997. The pro forma adjustments
include the elimination of all intercompany transactions. These unaudited pro
forma consolidated statements of operations should be read in conjunction with
the historical financial statements and notes thereto of the Company and the
Acquired Companies included elsewhere in this Prospectus.
The unaudited pro forma consolidated statements of operations are not necessarily indicative of the operating results that would have been achieved had the transactions been in effect as of the beginning of the periods presented and should not be construed as being representative of future operating results.
NATIONAL INFORMATION CONSORTIUM, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1997
NIC III KIC AIC NII ELIMINATIONS ADJUSTMENTS PRO FORMA
--------- ---------- --------- --------- --------- ----------- ----------- ----------
Revenues.................. $ 996,550 $12,524,065 $6,067,362 $2,346,889 $2,447,318 $ -- $ -- $24,382,184
Cost of revenues.......... 5,168 10,040,041 4,576,795 2,077,144 1,710,699 -- -- 18,409,847
--------- ---------- --------- --------- --------- ----------- ----------- ----------
Gross profit............ 991,382 2,484,024 1,490,567 269,745 736,619 -- -- 5,972,337
Operating expenses:
Service development and
operations............ 224,128 480,492 387,083 90,447 126,510 -- -- 1,308,660
Selling, general and
administrative........ 660,254 1,070,667 812,306 187,567 391,377 -- -- 3,122,171
Stock compensation...... 370,235 13,431 13,276 232,384 1,978 -- -- 631,304
Depreciation and
amortization.......... 13,679 107,332 32,496 8,232 36,701 -- 7,575,204(A) 7,773,644
--------- ---------- --------- --------- --------- ----------- ----------- ----------
Total operating
expenses.............. 1,268,296 1,671,922 1,245,161 518,630 556,566 -- 7,575,204 12,835,779
--------- ---------- --------- --------- --------- ----------- ----------- ----------
Operating income (loss)... (276,914) 812,102 245,406 (248,885) 180,053 -- (7,575,204) (6,863,442)
--------- ---------- --------- --------- --------- ----------- ----------- ----------
Other income (expense):
Interest expense........ -- (32,330) (13,056) (1,731) (4,552) -- -- (51,669)
Other income (expense),
net................... 111 24,005 (42,322) 4,083 (2,762) -- -- (16,885)
--------- ---------- --------- --------- --------- ----------- ----------- ----------
Total other income
(expense)............. 111 (8,325) (55,378) 2,352 (7,314) -- -- (68,554)
--------- ---------- --------- --------- --------- ----------- ----------- ----------
Income (loss) before
income taxes............ (276,803) 803,777 190,028 (246,533) 172,739 -- (7,575,204) (6,931,996)
Income taxes (C).......... -- -- -- -- -- -- -- --
--------- ---------- --------- --------- --------- ----------- ----------- ----------
Net income (loss)......... $(276,803) $ 803,777 $ 190,028 $(246,533) $ 172,739 $ -- ($7,575,204) $(6,931,996)
--------- ---------- --------- --------- --------- ----------- ----------- ----------
--------- ---------- --------- --------- --------- ----------- ----------- ----------
Net loss per share:
Basic and diluted....... $ (0.01) $ (0.17)
--------- ----------
--------- ----------
Weighted average shares
outstanding........... 20,857,785 19,255,155(B) 40,112,940
--------- ----------- ----------
--------- ----------- ----------
|
SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.
NATIONAL INFORMATION CONSORTIUM, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998
NIC III KIC AIC NII ELIMINATIONS ADJUSTMENTS PRO FORMA
---------- --------- --------- --------- --------- ----------- ----------- ----------
Revenues................... $ 370,288 $3,541,101 $1,625,487 $2,041,142 $ 706,059 $ (14,030)(D) $ -- $8,270,047
Cost of revenues........... 690 2,727,257 $1,174,015 1,802,776 479,090 -- -- 6,183,828
---------- --------- --------- --------- --------- ----------- ----------- ----------
Gross profit............. 369,598 813,844 451,472 238,366 226,969 (14,030) -- 2,086,219
---------- --------- --------- --------- --------- ----------- ----------- ----------
Operating expenses:
Service development and
operations............. 148,962 225,425 99,685 56,808 59,912 (14,030)(D) -- 576,762
Selling, general and
administrative......... 320,190 424,581 190,994 100,425 134,994 -- -- 1,171,184
Stock compensation....... -- -- -- 5,115 -- -- -- 5,115
Depreciation and
amortization........... 24,031 31,841 9,971 6,236 22,664 -- 1,893,801(A) 1,988,544
---------- --------- --------- --------- --------- ----------- ----------- ----------
Total operating
expenses............... 493,183 681,847 300,650 168,584 217,570 (14,030) 1,893,801 3,741,605
---------- --------- --------- --------- --------- ----------- ----------- ----------
Operating income (loss).... (123,585) 131,997 150,822 69,782 9,399 -- (1,893,801) (1,655,386)
---------- --------- --------- --------- --------- ----------- ----------- ----------
Other income (expense):
Interest expense......... (628) (9,633) (4,639) (903) (1,602) -- -- (17,405)
Other income, net........ -- 8,623 400 3,628 1,974 -- -- 14,625
---------- --------- --------- --------- --------- ----------- ----------- ----------
Total other income
(expense).............. (628) (1,010) (4,239) 2,725 372 -- -- (2,780)
---------- --------- --------- --------- --------- ----------- ----------- ----------
Income (loss) before income
taxes.................... (124,213) 130,987 146,583 72,507 9,771 -- (1,893,801) (1,658,166)
Income taxes (C)........... -- -- -- -- -- -- -- --
---------- --------- --------- --------- --------- ----------- ----------- ----------
Net income (loss).......... $ (124,213) $ 130,987 $ 146,583 $ 72,507 $ 9,771 $ -- ($1,893,801) $(1,658,166)
---------- --------- --------- --------- --------- ----------- ----------- ----------
---------- --------- --------- --------- --------- ----------- ----------- ----------
Net loss per share:
Basic and diluted........ $ (0.01) $ (0.04)
---------- ----------
---------- ----------
Weighted average shares
outstanding............ 22,679,122 19,255,155(B) 41,934,277
---------- ----------- ----------
---------- ----------- ----------
|
SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.
NATIONAL INFORMATION CONSORTIUM, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1998
NIC III(E) KIC(E) AIC(E) NII(E) ELIMINATIONS ADJUSTMENTS PRO FORMA
---------- ---------- --------- --------- --------- ----------- ----------- ----------
Revenues................. $28,623,656 $3,541,101 $1,625,488 $2,041,142 $ 706,059 $ (5,101)(D) $ -- $36,532,345
Cost of revenues......... 21,210,632 2,727,257 1,174,015 1,802,776 479,090 -- -- 27,393,770
---------- ---------- --------- --------- --------- ----------- ----------- ----------
Gross profit........... 7,413,024 813,844 451,473 238,366 226,969 (5,101) -- 9,138,575
---------- ---------- --------- --------- --------- ----------- ----------- ----------
Operating expenses:
Service development and
operations........... 3,884,810 225,425 99,685 56,808 59,912 -- -- 4,326,640
Selling, general and
administrative....... 4,241,780 424,581 190,994 100,425 134,994 (5,101)(D) -- 5,087,673
Stock compensation..... 568,869 -- -- 5,115 -- -- -- 573,984
Depreciation and
amortization......... 5,922,396 31,841 9,971 6,236 22,664 -- 1,893,801(A) 7,886,909
---------- ---------- --------- --------- --------- ----------- ----------- ----------
Total operating
expenses............. 14,617,855 681,847 300,650 168,584 217,570 (5,101) 1,893,801 17,875,206
---------- ---------- --------- --------- --------- ----------- ----------- ----------
Operating income
(loss)................. (7,204,831) 131,997 150,823 69,782 9,399 -- (1,893,801) (8,736,631)
---------- ---------- --------- --------- --------- ----------- ----------- ----------
Other income (expense):
Interest expense....... (88,161) (9,634) (4,639) (903) (1,602) -- -- (104,939)
Other income, net...... 55,839 8,624 401 3,628 1,974 -- -- 70,466
---------- ---------- --------- --------- --------- ----------- ----------- ----------
Total other income
(expense)............ (32,322) (1,010) (4,238) 2,725 372 -- -- (34,473)
---------- ---------- --------- --------- --------- ----------- ----------- ----------
Income (loss) before
income
taxes.................. (7,237,153) 130,987 146,585 72,507 9,771 -- (1,893,801) (8,771,104)
Income taxes (C)......... 658,813 -- -- -- -- -- -- 658,813
---------- ---------- --------- --------- --------- ----------- ----------- ----------
Net income (loss)........ $(7,895,966) $ 130,987 $ 146,585 $ 72,507 $ 9,771 $ -- ($1,893,801) $(9,429,917)
---------- ---------- --------- --------- --------- ----------- ----------- ----------
---------- ---------- --------- --------- --------- ----------- ----------- ----------
Net income (loss) per
share:
Basic and diluted...... $ (0.21) $ (0.22)
---------- ----------
---------- ----------
Weighted average shares
outstanding.......... 37,242,423 4,707,995(B) 41,950,418
---------- ----------- ----------
---------- ----------- ----------
|
SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.
NATIONAL INFORMATION CONSORTIUM, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following adjustments were applied to the Company's historical consolidated statements of operations for the periods indicated to arrive at the pro forma consolidated financial information.
(A) Represents amortization expense related to the contract intangibles and goodwill resulting from the application of purchase accounting for the Acquired Companies. For the year ended December 31, 1997, the amount represents the annual amortization for the twelve month period following the March 31, 1998 Exchange Offer. For the three months ended March 31, 1998, the adjustment represents the amortization for the first three months following the Exchange Offer. The Company's consolidated results for the year ended December 31, 1998 already reflect amortization for the nine months following the Exchange Offer. The adjustment represents an additional three months amortization to arrive at a full year.
(B) For the year ended December 31, 1997 and the three months ended March 31, 1998, represents the Company's common shares issued to the shareholders of the Acquired Companies in the Exchange Offer. For the year ended December 31, 1998, represents incremental shares needed to reflect the common shares outstanding for a full year.
(C) For the year ended December 31, 1997 and the three months ended March 31, 1998, all of the companies were S corporations. No provision for income taxes has been included.
(D) To eliminate intercompany revenues and expenses.
(E) Represents the Acquired Companies results of operations for the three months ended March 31, 1998. The Company's results of operations already include the Acquired Companies results of operations for the nine months subsequent to the March 31, 1998 Exchange Offer.
INSIDE BACK COVER
National Information Consortium
[Text design reading "e-government portals" and "www.nicusa.com."]
[Map of the United States with maps of individual states in which National Information Consortium has contracted to operate government portals rising from map into foreground. Each individual state map contains the logo of that state government's portal.]
[Listing of the Web addresses of National Information Consortium's portals.]
13,000,000 SHARES
[LOGO]
PROSPECTUS
HAMBRECHT & QUIST
THOMAS WEISEL PARTNERS LLC
FAC/EQUITIES
VOLPE BROWN WHELAN & COMPANY
, 1999
YOU SHOULD RELY ONLY ON INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN ANY SUCH JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
UNTIL , 1999, ALL DEALERS THAT BUY, SELL OR TRADE IN OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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.
AMOUNT
---------
Securities and Exchange Commission Filing Fee................... $ 41,561
NASD Filing Fee................................................. 15,450
Nasdaq National Market Listing Fee.............................. 17,500
Accounting Fees and Expenses.................................... 300,000
Blue Sky Fees and Expenses...................................... 3,000
Legal Fees and Expenses......................................... 400,000
Transfer Agent and Registrar Fees and Expenses.................. 10,000
Printing Expenses............................................... 150,000
Miscellaneous Expenses.......................................... 62,489
---------
Total....................................................... $1,000,000
---------
---------
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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,
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therefore, unenforceable. In the event that a claim for indemnification against such liabilities, other than the payment by us of expenses incurred or paid by one of our directors or officers in the successful defense of any action, suit, or proceeding, is asserted by such director or officer, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
In addition to indemnification provided for in our charter documents, we intend to enter into agreements, a form of which is Exhibit 10.1 to this Registration Statement, to indemnify our directors and officers. These agreements provide for the indemnification of our directors and officers for certain expenses, including attorneys' fees, judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by us, arising out of such person's services as one of our directors or officers, any of our subsidiaries or any other company or enterprise to which such person provides services at our request, to the fullest extent permitted by the Colorado Business Corporation Act. Furthermore, we will purchase and maintain insurance on behalf of our directors and officers insuring them against liabilities that they may incur in their capacities as or arising out of their status as directors or officers.
The underwriting agreement, which is Exhibit 1.1 to this Registration Statement, provides for indemnification by our underwriters and their officers and directors for certain liabilities arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
From our incorporation to June 15, 1999, we have granted or issued and sold the following unregistered securities:
1. Stock options to employees, officers, directors and consultants under our 1998 stock option plan exercisable for up to an aggregate of 2,512,332 shares of our common stock, at a weighted average exercise price of $1.44 per share.
2. On April 21, 1998, we sold to Ms. Debra Luling 232,170 shares of our common stock at $0.22 per share for approximately $50,000.
3. On June 29, 1998, we sold to Mr. Everett Wohlers 116,084 shares of our common stock at $0.22 per share for approximately $25,000.
4. On June 29, 1998, we as a distribution to our shareholders, issued to Mr. Randall Eccker 174,563 shares of our common stock for his services to our shareholders in the sale of 10,516,547 shares of our common stock by the voting trust, for which Messrs. Fraser and Hartley are co-trustees, to Hellman & Friedman Capital Partners III, L.P., and affiliates.
5. On February 8, 1999, we sold to Mr. Joseph Nemelka 69,304 shares of our common stock at $1.44 per share for approximately $100,000.
6. On February 9, 1999, we sold to Mr. James B. Dodd 173,258 shares of our common stock at $1.44 per share for approximately $250,000.
7. On March 1, 1999, we sold to Mr. Robert P. Chandler 69,302 shares of our common stock at $1.44 per share for approximately $100,000.
8. On March 1, 1999, we sold to Ms. Tamara Dukes 17,324 shares of our common stock at $1.44 per share for approximately $25,000.
9. On March 1, 1999, we sold to Mr. Richard L. Brown 17,324 shares of our common stock at $1.44 per share for approximately $25,000.
10. On May 16, 1999, we sold to Mr. Kevin C. Childress 23,727 shares of our common stock at $5.27 per share for approximately $125,000.
The issuances of the securities in all of the transactions above were
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act by an issuer not involving a public offering,
where the purchasers represented their intention to acquire the securities for
II-2
investment only and not with a view to distribution and received or had access to adequate information about the Registrant, except for the transactions under Number 1, which were deemed to be exempted in reliance on Rule 701 promulgated under the Securities Act as transactions pursuant to a compensatory benefit plan.
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
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Overland Park, State of Kansas on the 18th day of June, 1999.
NATIONAL INFORMATION CONSORTIUM, INC.
By: /s/ JEFFERY S. FRASER*
-----------------------------------------
Jeffery S. Fraser
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
|
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:
SIGNATURE TITLE DATE
------------------------------ -------------------------- -------------------
Chairman and Chief
/s/ JEFFERY S. FRASER* Executive Officer
------------------------------ (Principal Executive June 18, 1999
Jeffery S. Fraser Officer)
/s/ JAMES B. DODD
------------------------------ President, Chief Operating June 18, 1999
James B. Dodd Officer and Director
/s/ KEVIN C. CHILDRESS Chief Financial Officer
------------------------------ (Principal Financial and June 18, 1999
Kevin C. Childress Accounting Officer)
/s/ JOHN L. BUNCE, JR.*
------------------------------ Director June 18, 1999
John L. Bunce, Jr.
/s/ DANIEL J. EVANS*
------------------------------ Director June 18, 1999
Daniel J. Evans
/s/ ROSS C. HARTLEY*
------------------------------ Director June 18, 1999
Ross C. Hartley
/s/ PATRICK J. HEALY*
------------------------------ Director June 18, 1999
Patrick J. Healy
|
*By: /s/ JAMES B. DODD
-------------------------
James B. Dodd
ATTORNEY-IN-FACT
|
II-4
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
----------- ----------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement*
3.1 Articles of Incorporation of the Registrant
3.2 Bylaws of the Registrant
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2 Investor Rights Agreement dated June 30, 1998+
4.3 Specimen Stock Certificate of the Registrant
5.1 Opinion of Morrison & Foerster LLP as to the legality of the common stock
9.1 Voting Trust Agreement between Jeffery S. Fraser and Ross C. Hartley and certain
Holders of Shares of National Information Consortium, Inc. dated June 30, 1998 and
form of the voting trust certificate+
10.1 Form of Indemnification Agreement between the Registrant and each of its executive
officers and directors+
10.2 Registrant's 1998 Stock Option Plan, as amended and restated+
10.3 Registrant's 1999 Employee Stock Purchase Plan+
10.4 Employment Agreement between the Registrant and Jeffery S. Fraser dated July 1,
1998+
10.5 Employment Agreement between the Registrant and William F. Bradley, Jr. dated July
24, 1998+
10.6 Employment Agreement between the Registrant and Samuel R. Somerhalder dated July
24, 1998+
10.7 Employment Agreement between the Registrant and Harry H. Herington dated July 24,
1998+
10.8 Employment Agreement between the Registrant and James B. Dodd dated January 1,
1999+
10.9 Contract for Network Manager Services between the Information Network of Kansas
and Kansas Information Consortium, Inc. dated December 18, 1991 with addenda dated
October 15, 1992, August 19, 1993, May 26, 1995 and June 13, 1996 and amendment on
March 2, 1998+
10.10 Contract for Network Manager Services between the State of Indiana by and through
the Intelenet Commission and Indian@ Interactive, Inc., dated July 18, 1995+
10.11 Services Contract by and between National Information Consortium, U.S.A. and the
GeorgiaNet Authority, an agency of the State of Georgia, dated September 15, 1996+
10.12 Contract for Network Manager between Information Network of Arkansas by and
through the Information Network of Arkansas Board and Arkansas Information
Consortium, Inc. dated July 2, 1997+
10.13 Contract for Network Manager Services between the Nebraska State Records Board on
behalf of the State of Nebraska and Nebrask@ Interactive, Inc. dated December 3,
1997 with addendum No. 1 dated as of the same date+
10.14 Contract for Network Manager Services between the Commonwealth of Virginia by and
through the Virginia Information Providers Network Authority and Virginia
Interactive, LLC dated January 15, 1998+
10.15 Contract for Network Manager Services between Iowa Interactive, Inc. and the State
of Iowa by and through Information Technology Services dated April 23, 1998+
|
EXHIBIT
NUMBER DOCUMENT
----------- ----------------------------------------------------------------------------------
10.16 Contract for Network Manager Services between the Consolidated City of
Indianapolis and Marion County by and through the Enhanced Access Board of Marion
County and City-County Interactive, LLC dated August 31, 1998 with addendum dated
as of the same date+
10.17 State of Maine Contract for Special Services with New England Interactive, Inc.
dated April 14, 1999+
10.18 Employment Agreement between the Registrant and Kevin C. Childress dated May 16,
1999
10.19 Sublease for the Registrant's offices at 12 Corporate Woods, Overlank Park dated
May 14, 1999 and Lease for the same address dated January 15, 1995 with First
Lease Modification dated October 30, 1996
10.20 Agreement between Equifax Services and Nebrask@ Online dated March 25, 1996.
10.21 Agreement between ChoicePoint and the Information Network of Kansas dated
September 1, 1997
10.22 Agreement between Equifax/ChoicePoint and the Information Network of Arkansas
dated September 2, 1997
10.23 Agreement between Equifax Systems, Inc. and Access Indian@ Information Network
dated November 14, 1995
10.24 Contract for Network Manager Services between the State of Utah and Utah
Interactive, Inc. dated as of May 7, 1999
21.1 Subsidiaries of the Registrant+
23.1 Consent of Morrison & Foerster LLP. Reference is made to Exhibit 5.1
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants
24.1 Power of Attorney of Kevin C. Childress
27.1 Financial Data Schedule
|
* To be filed by amendment
+ Previously filed
AMENDED
ARTICLES OF INCORPORATION
OF
NATIONAL INFORMATION CONSORTIUM, INC.
The Articles of Incorporation of National Information Consortium, Inc. is hereby restated, integrated and amended to read as follows:
ARTICLE 1
The name of the Corporation is National Information Consortium, Inc.
ARTICLE 2
The Corporation's registered office in the state of Colorado is The Corporation Company, 1675 Broadway, Suite 1200, Denver, CO 80202. The name of its registered agent at such address is The Corporation Company .
The Corporation's initial principal office in the state of Colorado is The Corporation Company, 1675 Broadway, Suite 1200, Denver, CO 80202.
ARTICLE 3
The nature of the business or purposes to be conducted or promoted by the Corporation is to engage in any lawful business, act or activity for which corporations may be organized under the Colorado Business Corporation Act.
ARTICLE 4
The total number of shares of stock which the Corporation shall have authority to issue is two hundred million (200,000,000) shares of common stock, no par value ("Common Stock").
ARTICLE 5
The Corporation shall indemnify, to the fullest extent permitted by applicable law in effect from time to time, any person, and the estate and personal representative of any such person, against all liability and expense (including attorneys' fees) incurred by reason of the fact that he or she is or was a director or officer of the Corporation or, while serving as a director or officer of the Corporation, he or she is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, fiduciary, or agent of, or in any similar managerial or fiduciary position of, another domestic or foreign Corporation or other individual or entity or of an employee benefit plan. The Corporation shall also indemnify any person who is serving or has served the Corporation as director, officer, employee, fiduciary, or agent, and that person's estate and personal representative, to the extent and in the manner provided in any bylaw, resolution of the shareholders or directors, contract, or otherwise, so long as such provision is legally permissible.
ARTICLE 6
There shall be no personal liability of a director to the Corporation or to its shareholders for monetary damages for breach of fiduciary duty as a director, except that said personal liability shall not be eliminated to the Corporation or to the shareholders for monetary damages arising due to any breach of the director's duty of loyalty to the Corporation or to the shareholders, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, acts specified in section 7-108-403, C.R.S., or any transaction from which a director derived an improper personal benefit. Notwithstanding any other provisions herein, personal liability of a director shall be eliminated to the greatest extent possible as is now, or in the future, provided for by law. Any repeal or modification of the foregoing sentence shall not adversely affect any right or protection of a director of the Corporation existing hereunder with respect to any act or omission occurring prior to such repeal or modification.
ARTICLE 7
The number of directors which shall constitute the whole board of directors shall be fixed from time to time by the bylaws of the Corporation, subject to Article IV(b) of these Articles.
ARTICLE 8
The name and mailing address of the persons who are to serve as the initial directors of the Corporation until the first annual meeting of shareholders of the Corporation, or until their successors are elected and qualified, are set forth below:
NAME ADDRESS
John L. Bunce One Maritime Plaza, #1200, San Francisco, CA 94111
James Dodd 534 South Kansas Avenue, #1210, Topeka, KS 66603
Daniel J. Evans 1111 Third Avenue, Suite 3400, Seattle, WA 98101
Jeffrey S. Fraser 172 North Center Street, Suite 201, Jackson, WY
83001
Ross C. Hartley P.O. Box 500, Baxter Springs, KS 66713
Patrick Healy One Maritime Plaza, #1200, San Francisco, CA 94111
|
ARTICLE 9
The name and mailing address of the incorporator is as follows:
NAME ADDRESS William F. Bradley, Jr. 150 W. Market St., #530, Indianapolis, IN 46204 |
ARTICLE 10
1. Elections of directors need not be by written ballot unless the bylaws of the Corporation shall so provide.
2. There shall be no cumulative voting by shareholders of any class or series in the election of directors of the Corporation.
3. Meetings of shareholders may be held at such place, either within or without the State of Colorado, as may be designated by or in the manner provided in the bylaws. The books of the Corporation may be kept (subject to any provision contained in the statutes of the State of Colorado) outside the State of Colorado at such place or places as may be designated from time to time by the board of directors or in the bylaws of the Corporation.
ARTICLE 11
1. As used in this Article XI, the term:
(1) "Affiliate" means a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, another person.
(2) "Associate," when used to indicate a relationship with any person, means: (i) any corporation, partnership, unincorporated association or other entity of which such person is a director, officer or partner or is, directly or indirectly, the owner of 20% or more of any class of voting stock; (ii) any trust or other estate in which such person has at least a 20% beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity; and (iii) any relative or spouse of such person, or any relative of such spouse, who has the same residence as such person.
(3) "Business Combination," means:
(i) any merger, consolidation or plan of share exchange involving the Corporation or any direct or indirect majority-owned subsidiary of the Corporation with (A) an Interested Shareholder (as hereinafter defined), or (B) with any other corporation, partnership, unincorporated association or other entity if the merger, consolidation or plan of share exchange is caused by the Interested Shareholder and as a result of such merger, consolidation or plan of share exchange subsection (b) of this Article is not applicable to the surviving entity;
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), except proportionately with all other shareholders of the Corporation, to or with the Interested Shareholder, whether as part of a dissolution or otherwise, of assets of the Corporation or of any direct or indirect majority-owned subsidiary of the Corporation which assets have an aggregate market value equal to 10% or more of either the aggregate market value of all the assets of the Corporation determined on a consolidated basis or the aggregate market value of all the outstanding stock of the Corporation;
(iii) any transaction which results in the issuance or transfer by the Corporation or by any direct or indirect majority-owned subsidiary of the Corporation of any stock of the Corporation or of such subsidiary to an Interested Shareholder, except: (A) pursuant to the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of the Corporation or any such subsidiary which securities were outstanding prior to the time that the Interested Shareholder became such; (B) pursuant to a dividend or distribution paid or made, or the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of the Corporation or any such subsidiary which security is distributed, pro rata to all holders of a class or series of stock of the Corporation subsequent to the time the Interested Shareholder became such; (C) pursuant to an exchange offer by the Corporation to purchase stock made on the same terms to all holders of said stock; or (D) any issuance or transfer of stock by the Corporation; provided however, that in no case under items (B)-(D) of this subparagraph shall there be an increase in the Interested Shareholder's proportionate share of the stock of any class or series of the Corporation or of the voting stock of the Corporation;
(iv) any transaction involving the Corporation or any direct or indirect majority-owned subsidiary of the Corporation which has the effect, directly or indirectly, of increasing the proportionate share of the stock of any class or series, or securities convertible into the stock of any class or series, of the Corporation or of any such subsidiary which is owned by the Interested Shareholder, except as a result of immaterial changes due to fractional share adjustments or as a result of any purchase or redemption of any shares of stock not caused, directly or indirectly, by the Interested Shareholder; or
(v) any receipt by the Interested Shareholder of the benefit,
directly or indirectly (except proportionately as a shareholder of the
Corporation), of any loans, advances, guarantees, pledges or other
financial benefits (other than those expressly permitted in subparagraphs
(i)-(iv) of this paragraph) provided by or through the Corporation or any
direct or indirect majority-owned subsidiary.
(4) "control," including the terms "controlling," "controlled by" and "under common control with," means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting stock, by contract or otherwise. A person who is the owner of 20% or more of the outstanding voting stock of any corporation, partnership, unincorporated association or other entity shall be presumed to have control of such entity, in the absence of proof by a preponderance of the evidence to the contrary; notwithstanding the foregoing, a presumption of control shall not apply where such person holds voting stock, in good faith and not for the purpose of circumventing this section, as an agent, bank, broker, nominee, custodian or trustee for one or more owners who do not individually or as a group have control of such entity.
(5) "Interested Shareholder" means any person (other than the Corporation and any direct or indirect majority-owned subsidiary of the Corporation) that (i) is the owner of 15% or more of the outstanding voting stock of the Corporation, or (ii) is an Affiliate or Associate of the Corporation and was the owner of 15% or more of the outstanding voting stock of the Corporation at any time within the 3-year period immediately prior to the date on which it is sought to be determined whether such person is an Interested Shareholder, and the Affiliates and Associates of such person; provided, however, that the term "Interested Shareholder" shall not include any person whose ownership of shares in excess of the 15% limitation set forth herein is the result of action taken solely by the Corporation; provided that such person shall be an Interested Shareholder if thereafter such person acquires additional shares of voting stock of the Corporation, except as a result of further corporate action not caused, directly or indirectly, by such person. For the purpose of determining whether a person is an Interested Shareholder, the voting stock of the Corporation deemed to be outstanding shall include stock deemed to be owned by the person through application of paragraph (8) of this subsection but shall not include any other unissued stock of the Corporation which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise.
(6) "person" means any individual, corporation, partnership, unincorporated association or other entity.
(7) "stock" means, with respect to any corporation, capital stock and, with respect to any other entity, any equity interest.
(8) "voting stock" means, with respect to any corporation, stock of any class or series entitled to vote generally in the election of directors and, with respect to any entity that is not a corporation, any equity interest entitled to vote generally in the election of the governing body of such entity.
(9) "owner," including the terms "own" and "owned," when used with respect to any stock, means a person that individually or with or through any of its Affiliates or Associates:
(i) beneficially owns such stock, directly or indirectly; or
(ii) has (A) the right to acquire such stock (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; provided, however, that a person shall not be deemed the owner of stock tendered pursuant to a tender or exchange offer made by such person or any of such person's Affiliates or Associates until such tendered stock is accepted for purchase or exchange; or (B) the right to vote such stock pursuant to any agreement, arrangement or understanding; provided, however, that a person shall not be deemed the owner of any stock because of such person's right to vote such stock if the agreement, arrangement or understanding to vote such stock arises solely from a revocable proxy or consent given in response to a proxy or consent solicitation made to 10 or more persons; or
(iii) has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy or consent as described in item (B) of subparagraph (ii) of this paragraph), or disposing of such stock with any other person that beneficially owns, or whose Affiliates or Associates beneficially own, directly or indirectly, such stock.
2. Notwithstanding any other provisions contained in these Articles, the Corporation shall not engage in any Business Combination with any Interested Shareholder for a period of three (3) years following the time that such shareholder became an Interested Shareholder, unless:
(1) Prior to such time the Board of Directors of the Corporation approved either the Business Combination or the transaction which resulted in the shareholder becoming an Interested Shareholder;
(2) Upon consummation of the transaction which resulted in the shareholder becoming an Interested Shareholder, the Interested Shareholder owned at least 85% of the voting stock of the Corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (i) by persons who are directors and also officers and (ii) employee stock plans in which 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; or
(3) At or subsequent to such time the Business Combination is approved by the board of directors and authorized at an annual or special meeting of shareholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the Interested Shareholder.
3. The restrictions contained in this Article shall not apply if:
(1) The Corporation, by action of the shareholders, adopts an amendment to these Articles of Incorporation expressly repealing this Article; provided that, in addition to any other vote required by law, such amendment to the Articles of Incorporation or bylaws must be approved by the affirmative vote of a majority of the shares entitled to vote. An amendment adopted pursuant to this paragraph shall not be effective until 12 months after the adoption of such amendment and shall not apply to any Business Combination between the Corporation and any person who became an Interested Shareholder of the Corporation on or prior to the date of such adoption;
(3) A shareholder becomes an Interested Shareholder inadvertently
and (i) as soon as practicable divests itself of ownership of sufficient
shares so that the shareholder ceases to be an Interested Shareholder; and
(ii) would not, at any time within the 3-year period immediately prior to a
Business Combination between the Corporation and such shareholder, have
been an Interested Shareholder but for the inadvertent acquisition of
ownership; or
(4) The Business Combination is proposed prior to the consummation
or abandonment of and subsequent to the earlier of the public announcement
or the notice required under the Colorado Business Corporation Act of a
proposed transaction which (i) constitutes one of the transactions
described in the 2nd sentence of this paragraph; (ii) is with or by a
person who either was not an Interested Shareholder during the previous 3
years or who became an Interested Shareholder with the approval of the
Corporation's Board of Directors; and (iii) is approved or not opposed by a
majority of the members of the Board of Directors then in office (but not
less than 1) who were directors prior to any person becoming an Interested
Shareholder during the previous 3 years or were recommended for election or
elected to succeed such directors by a majority of such directors. The
proposed transactions referred to in the preceding sentence are limited to
(x) a merger, consolidation or plan of share exchange involving the
Corporation (except for a merger in respect of which, pursuant to Section
7-111-104 of the Colorado Business Corporation Act or any successor
provision thereto, no vote of the shareholders of the Corporation is required); (y) a sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), whether as part of a dissolution or otherwise, of assets of the Corporation or of any direct or indirect majority-owned subsidiary of the Corporation (other than to any direct or indirect wholly-owned subsidiary or to the Corporation) having an aggregate market value equal to 50% or more of either that aggregate market value of all of the assets of the Corporation determined on a consolidated basis or the aggregate market value of all the outstanding stock of the Corporation; or (z) a proposed tender or exchange offer for 50% or more of the outstanding voting stock of the Corporation. The Corporation shall give not less than 20 days' notice to all Interested Shareholders prior to the consummation of any of the transactions described in clause (x) or (y) of the 2nd sentence of this paragraph.
4. No provision of the Articles of Incorporation or bylaw shall require, for any vote of shareholders required by this section, a greater vote of shareholders than that specified in this section.
ARTICLE 12
Except as specifically provided otherwise herein, the Corporation may amend, alter, change or repeal any provision contained in these Articles of Incorporation, in the manner now or hereafter prescribed by the laws of the State of Colorado, and may add additional provisions authorized by such laws as are then in force. All rights conferred upon the directors or shareholders of the Corporation herein or in any amendment hereof are granted subject to this reservation.
BYLAWS
OF
NATIONAL INFORMATION CONSORTIUM, INC.
* * * * *
ARTICLE I
OFFICES
Section 1.1. REGISTERED OFFICE AND AGENT. The initial registered office shall be CT Corporation System, 1675 Broadway, Suite 1200, Denver, CO 80202, and the name of the initial registered agent of the corporation at such address shall be CT Corporation System.
Section 1.2. OFFICES. The corporation may also have offices at such other places both within and without the State of Colorado as the Board of Directors may from time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 2.1. ANNUAL MEETINGS. Annual meetings of shareholders shall be held the first Tuesday in May, either within or without the State of Colorado, or at such other time and place as may be designated from time to time by the Board of Directors and stated in the notice of the meeting, for the purpose of electing a Board of Directors, and transacting such other business as may properly be brought before the meeting.
Section 2.2. SPECIAL MEETINGS. Special meetings of the shareholders, for any purpose or purposes, unless otherwise provided by statute or by the Articles of Incorporation, may be called at any time by the President and shall be called by 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 in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at any special meeting of shareholders shall be limited to the purposes stated in the notice.
Section 2.3. NOTICE OF MEETINGS. Whenever shareholders are required or permitted to take action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the written notice of any meeting shall be given not less than ten nor more than sixty days before the date of the meeting, to each shareholder entitled to vote at such meeting.
Section 2.4. QUORUM. Except as otherwise provided by law or by the Articles of Incorporation or these Bylaws, the presence in person or by proxy of the holders of a majority of the
outstanding shares of stock of the corporation entitled to vote thereat shall constitute a quorum at each meeting of the shareholders and all questions shall be decided by a majority of the shares so represented in person or by proxy at the meeting and entitled to vote thereat. The shareholders present at any duly organized meeting may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum.
Section 2.5. ADJOURNMENTS. Notwithstanding any other provisions of the Articles of Incorporation or these Bylaws, the holders of a majority of the shares of stock of the corporation entitled to vote at any meeting, present in person or represented by proxy, whether or not a quorum is present, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At any such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting originally called; provided, however, that if the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting.
Section 2.6. VOTING; PROXIES. Unless otherwise provided in the Articles of Incorporation, each shareholder shall at every meeting of the shareholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such shareholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. Each proxy shall be revocable unless expressly provided therein to be irrevocable or unless otherwise made irrevocable by law. The notice of every meeting of the shareholders may be accompanied by a form of proxy approved by the Board of Directors in favor of such person or persons as the Board of Directors may select.
Section 2.7. ACTION BY CONSENT OF SHAREHOLDERS. Unless otherwise provided in the Articles of Incorporation, any action required to be taken at any annual or special meeting of shareholders of the corporation, or any action which may be taken at any annual or special meeting of such shareholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by all of the holders of outstanding stock entitled to vote thereon.
Section 2.8. LIST OF SHAREHOLDERS ENTITLED TO VOTE. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of shareholders, a complete list of the shareholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each shareholder and the number of shares registered in the name of each shareholder. Such list shall be open to the examination of any shareholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any shareholder who is present.
Section 2.9. FIXING RECORD DATE. In order that the corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. The Board of Directors shall not close the books of the corporation against transfer of shares during the whole or any part of such period. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.
Section 2.10. BUSINESS TO BE BROUGHT BEFORE THE ANNUAL MEETING. To be
properly brought before the annual meeting of shareholders, business must be
either (a) specified in the notice of meeting (or any supplement thereto) given
by or at the direction of the Board of Directors, (b) otherwise brought before
the meeting by or at the direction of the Board of Directors, or (c) otherwise
properly brought before the meeting by a shareholder of the corporation who is a
shareholder of record at the time of giving of notice provided for in this
Section 2.10 of Article II, who shall be entitled to vote at such meeting and
who complies with the notice procedures set forth in this Section 2.10 of
Article II. In addition to any other applicable requirements, for business to be
brought before an annual meeting by a shareholder of the corporation, the
shareholder must have given timely notice thereof in writing to the Secretary of
the corporation. To be timely, a shareholder's notice must be delivered to or
mailed and received at the principal executive offices of the corporation not
less than 90 days prior to the anniversary date of the immediately preceding
annual meeting of shareholders of the corporation in the case of each subsequent
annual meeting of shareholders. A shareholder's notice to the Secretary shall
set forth as to each matter the shareholder proposes to bring before the annual
meeting (i) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and address, as they appear on the corporation's books,
of the shareholder proposing such business, (iii) the acquisition date, the
class and the number of shares of voting stock of the corporation which are
owned beneficially by the shareholder, (iv) any material interest of the
shareholder in such business, and (v) a representation that the shareholder
intends to appear in person or by proxy at the meeting to bring the proposed
business before the meeting.
Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 2.10.
The chairman of the annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 2.10 of Article II, and if the chairman should so determine, the chairman shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.
Notwithstanding the foregoing provisions of this Section 2.10 of Article II, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 2.10.
ARTICLE III
BOARD OF DIRECTORS
Section 3.1. NUMBER; QUALIFICATIONS. The number of directors shall be at least three and not more than ten, subject to the provisions contained in the Articles of Incorporation. Within that range, the number of directors shall be as stated by resolution adopted by the Board of Directors from time to time, but no decrease in the number of directors shall have the effect of shortening the term of any incumbent director. The directors shall be elected at the annual meeting of the shareholders, except as provided in Section 3.2, and each director elected shall hold office until his successor is elected and qualified or until his earlier death, resignation or removal. A director need not be a shareholder of the corporation. A majority of the directors may elect from its members a chairman, who shall also serve as chairman of any annual or special meeting of the shareholders. The chairman, if any, shall hold this office until his successor shall have been elected and qualified.
Section 3.2. VACANCIES. Any vacancy in the Board of Directors, including vacancies resulting from any increase in the authorized number of directors may be filled by a majority of the remaining directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual meeting of shareholders and their successors are duly elected and qualified, or until their earlier death, resignation or removal.
Section 3.3. POWERS. The business affairs and property of the corporation shall be managed by or under the direction of the Board of Directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these Bylaws directed or required to be exercised or done by the shareholders.
Section 3.4. RESIGNATIONS. Any director may resign at any time by written notice to the corporation. Any such resignation shall take effect at the date of receipt of such notice or at any later time specified therein, and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.
Section 3.5. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such place or places within or without the State of Colorado, at such hour and on such day as may be fixed by resolution of the Board of Directors, without further notice of such meetings.
Section 3.6. SPECIAL MEETINGS. Special meetings of the Board of Directors may be held whenever called by (i) the Chairman of the Board; (ii) the President; (iii) the President or Secretary on the written request of a majority of the Board of Directors; or (iv) resolution adopted by the Board of Directors. Special meetings may be held within or without the State of Colorado as may be stated in the notice of the meeting.
Section 3.7. NOTICE OF MEETINGS. Written notice of the time, place and general nature of the business to be transacted at all special meetings of the Board of Directors must be given to each director at least three days prior to the day of the meeting; provided, however, that notice of any meeting need not be given to any director if waived by him in writing, or if he shall be present at such meeting, except when the director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the grounds that the meeting is not lawfully called or convened.
Section 3.8. QUORUM; VOTE REQUIRED FOR ACTION. At all meetings of the Board of Directors, a majority of directors then in office shall constitute a quorum for the transaction of business and, except as otherwise provided by law or these Bylaws, the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors; but a lesser number may adjourn the meeting from day to day, without notice other than announcement at the meeting, until a quorum shall be present. Directors may participate in any meeting of the directors, and members of any committee of directors may participate in any meeting of such committee, by means of conference telephone or similar communications equipment by means of which all persons participating in such meeting can hear each other, and such participation shall constitute presence in person at such meeting.
Section 3.9. ACTION BY CONSENT OF DIRECTORS. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee of the Board of Directors may be taken without a meeting, if all members of the board or the committee of the board, as the case may be, consent thereto in writing, which may be in counterparts, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or the committee thereof. Such writing(s) shall be manually executed if practicable, but if circumstances so require, effect shall be given to written consent transmitted by telegraph, telex, telecopy or similar means of visual data transmission.
Section 3.10. TELEPHONIC MEETINGS PERMITTED. Members of the Board of Directors, or any committee designated by the board, may participate in a meeting of such board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Bylaw shall constitute presence in person at such meeting.
Section 3.11. COMPENSATION. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved by resolution of the Board of Directors, a fixed sum and expenses of attendance at each regular or special meeting or any committee thereof. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor.
Section 3.12. REMOVAL. Except as provided in the Articles of Incorporation or by law, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of shares entitled to vote at an election of directors. The notice calling such meeting shall state the intention to act upon such matter, and, if the notice so provides, the vacancy or vacancies caused by such removal may be filled at such meeting by a vote of the majority of the shares entitled to vote at an election of directors.
Section 3.13. COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee. The alternate members of any committee may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in a resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have such power or authority in reference to amending the Articles of Incorporation, adopting an agreement of merger or consolidation, recommending to the shareholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the shareholders a dissolution of the corporation or a revocation of a dissolution, or amending the Bylaws of the corporation; and, unless the resolution or the Articles of Incorporation expressly so provide, no committee shall have the power or authority to declare a dividend or to authorize the issuance of stock or to adopt a Certificate of Ownership and Merger. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. Members of special or standing committees shall be entitled to receive such compensation for serving on such committees as the Board of Directors shall determine.
Section 3.14. NOMINATION OF DIRECTORS. Only persons who are nominated in
accordance with-the following procedures shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of the
corporation may be made at a meeting of shareholders (a) by or at the direction
of the Board of Directors or (b) by any shareholder of the corporation who is a
shareholder of record at the time of giving of notice provided for in this
Section 3.14 of Article III, who shall be entitled to vote for the election of
directors at the meeting and who complies with the notice procedures set forth
in this Section 3.14 of Article III. Such nominations, other than those made by
or at the direction of the Board of Directors, shall be made pursuant to timely
notice in writing to the Secretary of the corporation. To be timely, a
shareholder's notice shall be delivered to or mailed and received at the
principal executive offices of the corporation (i) with respect to an election
to be held at the annual meeting of the shareholders of the corporation, not
later than 90 days prior to the anniversary date of the immediately preceding
annual meeting of shareholders of the corporation, and (ii) with respect to an
election to be held at a special meeting of shareholders of the corporation for
the election of directors, not later than the closing of business on the 10th
day following the day on which such notice of the date of the meeting was mailed
or public disclosure of the date of the meeting was made, whichever first
occurs. Such shareholder's notice to the Secretary shall set forth (a) as to
each person whom the shareholder proposes to nominate for election or
re-election as a director, all information relating to the person that is
required to be disclosed in solicitations for proxies for election of directors,
or is otherwise required, pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (including the written consent of such person
to be named in the proxy statement as a nominee and to serve as a director if
elected); and (b) as to the shareholder giving the notice (i) the name and
address, as they appear on the corporation's books, of such shareholder, and
(ii) the class and number of shares of capital stock of the corporation which
are beneficially owned by the shareholder. At the request of the Board
of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the corporation that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee.
In the event that a person is validly designated as nominee to the Board and shall thereafter become unable or unwilling to stand for election to the Board of Directors, the Board of Directors or the shareholder who proposed such nominee, as the case may be, may designate a substitute nominee.
No person shall be eligible to serve as a director of the corporation unless nominated in accordance with the procedures set forth in this Section 3.14 of Article III. The chairman of the meeting of shareholders shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the Bylaws, and if the chairman should so determine, the chairman shall so declare to the meeting and the defective nomination shall be disregarded.
Notwithstanding the foregoing provisions of this Section 3.14 of Article III, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 3.14 of Article III.
ARTICLE IV
NOTICES
Section 4.1. NOTICES. Whenever any notice is required to be given under the provisions of these Bylaws or of the Articles of Incorporation to any director or shareholder, such notice must be in writing and may be given in person, in writing or by mail, telegram, telecopy or other similar means of visual communication, addressed to such director or shareholder, at his address as it appears on the records of the corporation, with postage or other transmittal charges thereon prepaid. Such notice shall be deemed to be given (i) if by mail, at the time when the same shall be deposited in the United States mail and (ii) otherwise, when such notice is transmitted.
Section 4.2. WAIVER OF NOTICE. Whenever any notice is required to be given under the provisions of the Bylaws or of the Articles of Incorporation to any director or shareholder, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.
ARTICLE V
OFFICERS
Section 5.1. ELECTION; QUALIFICATIONS; TERM OF OFFICE; RESIGNATION; REMOVAL; VACANCIES. The officers of the corporation shall be elected or appointed by the Board of Directors and may include, at the discretion of the Board, a Chairman of the Board, a President, a Secretary, a Treasurer and such Executive, Senior or other Vice Presidents and other officers as may be determined by the Board of Directors. Any number of offices may be held by the same person. The officers of the corporation shall hold office until their successors are chosen and qualified, except that any officer
may resign at any time by written notice to the corporation and the Board of Directors may remove any officer at any time at its discretion with or without cause. Any vacancies occurring in any office of the corporation by death, resignation, removal or otherwise may be filled for the unexpired portion of the term by the Board of Directors at any regular or special meeting.
Section 5.2. POWERS AND DUTIES. The officers of the corporation shall have such powers and duties as generally pertain to their offices, except as modified herein or by the Board of Directors, as well as such powers and duties as shall be determined from time to time by the Board of Directors. The Chairman of the Board, if one is elected, and otherwise the President, shall preside at all meetings of the Board. The President shall preside at all meetings of the shareholders.
ARTICLE VI
STOCK
Section 6.1. CERTIFICATES. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, (i) the Chairman or Vice-Chairman of the Board of Directors, or the President or a Vice President and (ii) the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the corporation, certifying the number of shares owned by him in the corporation. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each shareholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.
Section 6.2. CERTIFICATES ISSUED FOR PARTLY PAID SHARES. Certificates may be issued for partly paid shares and in such case upon the face or back of the certificates issued to represent any such partly paid shares the total amount of the consideration to be paid therefor, and the amount paid thereon shall be specified.
Section 6.3. FACSIMILE SIGNATURES. Any of or all the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue.
Section 6.4. LOST, STOLEN OR DESTROYED STOCK CERTIFICATES; ISSUANCE OF NEW CERTIFICATES. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the
Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed.
Section 6.5. TRANSFER OF STOCK. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, and subject to applicable federal and state securities laws and contractual obligations, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.
ARTICLE VII
GENERAL PROVISIONS
Section 7.1. DIVIDENDS. Dividends upon the capital stock of the corporation, subject to the provisions of the Articles of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Articles of Incorporation. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created.
A member of the Board of Directors, or a member of any committee designated by the Board of Directors, shall be fully protected in relying in good faith upon the records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or committees of the Board of Directors, or by any other person as to matters the director reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation, as to the value and amount of the assets, liabilities and/or net profits of the Corporation, or any other facts pertinent to the existence and amount of surplus or other funds from which dividends might properly be declared and paid, or with which the Corporation's stock might properly be purchased or redeemed.
Section 7.2. FISCAL YEAR. The fiscal year of the corporation shall be the calendar year.
Section 7.3. SEAL. The seal of the corporation shall be in such form as the Board of Directors shall prescribe.
Section 7.4. AMENDMENTS. These Bylaws may be altered, amended or repealed or new Bylaws may be adopted by the shareholders or, unless expressly prohibited by a particular Bylaw, by the Board of Directors (i) at any regular meeting of the shareholders or of the Board of Directors (ii) or at any special meeting of the shareholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new Bylaws shall be contained in the notice of such
special meeting. The power to adopt, amend or repeal Bylaws conferred upon the Board of Directors shall not divest or limit the power of the shareholders to adopt, amend or repeal Bylaws.
ARTICLE VIII
INDEMNIFICATION
The corporation shall be authorized to indemnify any person entitled to indemnity under the Colorado Business Corporation Act, as the same exists or may hereafter be amended (the "Act"), to the fullest extent permitted by the Act; provided, however, that the corporation shall not be permitted to indemnify any person in connection with any proceeding initiated by such person, unless such proceeding is authorized by a majority of the directors of the corporation.
As amended effective May 4, 1999.
TABLE OF CONTENTS
PAGE
ARTICLE I OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1. REGISTERED OFFICE AND AGENT.. . . . . . . . . . . 1
Section 1.2. OFFICES.. . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II MEETINGS OF SHAREHOLDERS. . . . . . . . . . . . . . . . . . 1
Section 2.1. ANNUAL MEETINGS.. . . . . . . . . . . . . . . . . 1
Section 2.2. SPECIAL MEETINGS. . . . . . . . . . . . . . . . . 1
Section 2.3. NOTICE OF MEETINGS. . . . . . . . . . . . . . . . 1
Section 2.4. QUORUM. . . . . . . . . . . . . . . . . . . . . . 1
Section 2.5. ADJOURNMENTS. . . . . . . . . . . . . . . . . . . 2
Section 2.6. VOTING; PROXIES.. . . . . . . . . . . . . . . . . 2
Section 2.7. ACTION BY CONSENT OF SHAREHOLDERS.. . . . . . . . 2
Section 2.8. LIST OF SHAREHOLDERS ENTITLED TO VOTE.. . . . . . 2
Section 2.9. FIXING RECORD DATE. . . . . . . . . . . . . . . . 3
Section 2.10. BUSINESS TO BE BROUGHT BEFORE THE ANNUAL
MEETING.. . . . . . . . . . . . . . . . . . . . . 3
ARTICLE III BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . 4
Section 3.1. NUMBER; QUALIFICATIONS. . . . . . . . . . . . . . 4
Section 3.2. VACANCIES.. . . . . . . . . . . . . . . . . . . . 4
Section 3.3. POWERS. . . . . . . . . . . . . . . . . . . . . . 4
Section 3.4. RESIGNATIONS. . . . . . . . . . . . . . . . . . . 4
Section 3.5. REGULAR MEETINGS. . . . . . . . . . . . . . . . . 4
Section 3.6. SPECIAL MEETINGS. . . . . . . . . . . . . . . . . 4
Section 3.7. NOTICE OF MEETINGS. . . . . . . . . . . . . . . . 5
Section 3.8. QUORUM; VOTE REQUIRED FOR ACTION. . . . . . . . . 5
Section 3.9. ACTION BY CONSENT OF DIRECTORS. . . . . . . . . . 5
Section 3.10. TELEPHONIC MEETINGS PERMITTED.. . . . . . . . . . 5
Section 3.11. COMPENSATION. . . . . . . . . . . . . . . . . . . 5
Section 3.12. REMOVAL.. . . . . . . . . . . . . . . . . . . . . 5
Section 3.13. COMMITTEES. . . . . . . . . . . . . . . . . . . . 6
Section 3.14. NOMINATION OF DIRECTORS.. . . . . . . . . . . . . 6
ARTICLE IV NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 4.1. NOTICES.. . . . . . . . . . . . . . . . . . . . . 7
Section 4.2. WAIVER OF NOTICE. . . . . . . . . . . . . . . . . 7
ARTICLE V OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 5.1. ELECTION; QUALIFICATIONS; TERM OF OFFICE;
RESIGNATION; REMOVAL; VACANCIES.. . . . . . . . . 7
Section 5.2. POWERS AND DUTIES.. . . . . . . . . . . . . . . . 8
|
ARTICLE VI STOCK . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 6.1. CERTIFICATES. . . . . . . . . . . . . . . . . . . 8
Section 6.2. CERTIFICATES ISSUED FOR PARTLY PAID SHARES. . . . 8
Section 6.3. FACSIMILE SIGNATURES. . . . . . . . . . . . . . . 8
Section 6.4. LOST, STOLEN OR DESTROYED STOCK CERTIFICATES;
ISSUANCE OF NEW CERTIFICATES. . . . . . . . . . . 8
Section 6.5. TRANSFER OF STOCK.. . . . . . . . . . . . . . . . 9
ARTICLE VII GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . 9
Section 7.1. DIVIDENDS.. . . . . . . . . . . . . . . . . . . . 9
Section 7.2. FISCAL YEAR.. . . . . . . . . . . . . . . . . . . 9
Section 7.3. SEAL. . . . . . . . . . . . . . . . . . . . . . . 9
Section 7.4. AMENDMENTS. . . . . . . . . . . . . . . . . . . . 9
ARTICLE VIII INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . 10
|
* * * * *
BYLAWS
OF
NATIONAL INFORMATION CONSORTIUM, INC.
(A COLORADO CORPORATION)
As amended effective May 4, 1999
FRONT
COMMON STOCK COMMON STOCK
EGOV
THIS CERTIFICATE IS TRANSFERABLE IN BOSTON, MA OR NEW YORK, NY
INCORPORATED UNDER THE LAWS
OF THE STATE OF COLORADO
CUSIP 636491 10 2
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, NO PAR VALUE, OF
NATIONAL INFORMATION CONSORTIUM, INC.
transferable only on the books of the Corporation by the holder hereof in
person or by duly authorized attorney upon surrender of this Certificate
properly endorsed. This Certificate is not valid until countersigned by the
Transfer Agent and registered by the Registrar.
IN WITNESS WHEREOF, the Corporation has caused the facsimile signatures of its duly authorized officers to be hereunto affixed.
Dated:
SECRETARY CHAIRMAN
COUNTERSIGNED AND REGISTERED:
BankBoston, N.A.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
BACK
NATIONAL INFORMATION CONSORTIUM, INC.
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM N as tenants in common
TEN ENT N as tenants by the entireties
JT TEN N as joint tenants with right of
survivorship and not as tenants
in common
|
UNIF GIFT MIN ACT N ............. Custodian .............
(Cust) (Minor) under Uniform Gifts to Minors
Act ................................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises. Dated
X
X
NOTICE:
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
EXHIBIT 5.1
June 15, 1999
National Information Consortium, Inc.
2 Corporate Woods,
10975 Benson Street, Suite 390
Overland Park, KS 66210
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-1 of National Information Consortium, Inc., a Colorado corporation (the "Company"), filed with the Securities and Exchange Commission (the "Registration Statement") on May 6, 1999, relating to the registration under the Securities Act of 1933, as amended, of up to 14,950,000 shares of the Company's common stock, no par value per share (the "Stock"), which are authorized but unissued stock to be offered and sold by the Company (including up to 1,950,000 shares subject to the underwriters' over-allotment option) and 3,000,000 of which are presently issued and outstanding and will be sold by certain selling shareholders (the ""Selling Shareholders"). The Stock is to be sold to the underwriters named in the Registration Statement for resale to the public.
As counsel to the Company, we have examined the proceedings taken by the Company in connection with the issuance and sale of the Stock.
We are of the opinion that the up to 3,000,000 shares of Stock to be sold by the Selling Shareholders pursuant to the Registration Statement are validly issued, fully paid and non-assessable, and that the up to 11,950,000 shares of Stock to be offered and sold by the Company have been duly authorized and, when issued and sold by the Company in the manner described in the Registration Statement and in accordance with the resolutions adopted by the Board of Directors of the Company, will be validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to all references to us in the Registration Statement, the prospectus constituting a part thereof and any amendments thereto.
Very truly yours,
/s/ Morrison & Foerster LLP Morrison & Foerster LLP |
NATIONAL INFORMATION CONSORTIUM, INC.
KEY EMPLOYEE AGREEMENT
FOR
KEVIN CHILDRESS
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 16th day of May, 1999, by and between Kevin Childress ("Executive") and NATIONAL INFORMATION CONSORTIUM, INC. a Colorado corporation (the "Company").
WHEREAS, the Company desires to employ Executive to provide personal services to the Company and to the Company's subsidiaries, and desires to provide Executive with certain compensation and benefits in return for his services; and
WHEREAS, Executive desires to be employed by the Company and provide personal services to the Company in return for certain compensation and benefits;
NOW, THEREFORE, the parties hereto agree as follows:
1. EMPLOYMENT BY THE COMPANY.
1.1 EMPLOYMENT. Subject to terms set forth herein, the Company or a subsidiary of the Company agrees to employ Executive in the position of Chief Financial Officer and Executive hereby accepts such employment effective as of the date first written above. During the term of his employment with the Company, Executive will devote his best efforts and substantially all of his business time and attention (except for vacation periods and reasonable periods of illness or other incapacity permitted by the Company's general employment policies) to the business of the Company.
1.2 DUTIES. Executive will serve in an executive capacity and shall perform such duties as are customarily associated with his then current title, consistent with the Bylaws of the Company and as required by the Company's Board of Directors (the "Board"). Executive shall perform his duties at the Company's corporate headquarters, currently in Overland Park, Kansas.
1.3 POLICIES. The employment relationship between the parties shall also be governed by the general employment policies and practices of the Company, including those relating to protection of confidential information and assignment of inventions, except that when the terms of this Agreement differ from or are in conflict with the Company's general employment policies or practices, this Agreement shall control.
1.4 INVESTMENT. As a condition to your employment you will purchase 5,110 shares of the Company's common stock at a purchase price per share of $24.46 or
$125,000 in the aggregate.
2. COMPENSATION.
2.1 SALARY. Executive shall receive for services to be rendered hereunder an annualized base salary of $175,000, payable in equal installments (prorated for portions of a pay period) on the Company's regular pay days and the Company will withhold from such compensation all applicable federal and state income, social security and disability and other taxes as required by applicable laws. In addition, Executive shall be entitled to bonuses earned by Executive pursuant to bonus plans established from time to time by the Company's Board of Directors.
2.2 STANDARD COMPANY BENEFITS. Executive shall be entitled to all rights and benefits for which he is eligible under the terms and conditions of the standard Company benefits and compensation practices which may be in effect from time to time and provided by the Company to its employees generally.
2.3 MOVING EXPENSES. Executive shall be reimbursed by the Company for all reasonable expenses incurred by Executive for moving his family and his household and other belongings to the vicinity of the Company's corporate offices, including transitional living expenses incurred by Executive for a period and in an amount consistent with the policies of the Company which policies shall be established in consultation with Executive.
3. PROPRIETARY INFORMATION OBLIGATIONS.
3.1 AGREEMENT. Executive agrees to execute and abide by the Proprietary Information and Inventions Agreement attached hereto as EXHIBIT A (the "Proprietary Information Agreement").
4. OUTSIDE ACTIVITIES.
4.1 Except with the prior written consent of the Company's Board of Directors, Executive will not during the term of this Agreement undertake or engage in any other employment, occupation or business enterprise, other than ones in which Executive is a passive investor. Executive may engage in civic and not-for-profit activities so long as such activities do not materially interfere with the performance of his duties hereunder.
4.2 Except as permitted by Section 4.3, Executive agrees not to acquire, assume or participate in, directly or indirectly, any position, investment or interest known by him to be adverse or antagonistic to the Company, its business or prospects, financial or otherwise.
4.3 During the term of his employment by the Company, except on behalf of the Company, Executive will not directly or indirectly, whether as an officer, director,
stockholder, partner, proprietor, associate, representative, consultant, or in any capacity whatsoever engage in, become financially interested in, be employed by or have any business connection with any other person, corporation, firm, partnership or other entity whatsoever which were known by him to compete directly with the Company, throughout the world, in any line of business engaged in (or planned to be engaged in) by the Company; provided, however, that anything above to the contrary notwithstanding, he may own, as a passive investor, shares of a publicly-held corporation that is competitive with the Company, if such shares are actively traded on an established national securities market, so long as the number of shares of such corporation's capital stock that are owned beneficially (directly or indirectly) by Executive shall not in the aggregate constitute more than 5% of the outstanding voting stock of such corporation.
5. TERMINATION OF EMPLOYMENT.
5.1 TERMINATION WITHOUT CAUSE.
(a) The Company shall have the right to terminate Executive's employment with the Company at any time without cause.
(b) In the event Executive's employment is terminated without cause before May 16, 2002, the Company shall pay Executive severance equal to eighteen months at Executive's then-current salary. This severance will be paid in equal monthly payments on the first day of the month for each of the eighteen months following such termination.
(c) In the event Executive's employment is terminated without cause on or after May 16, 2002, Executive will not be entitled to severance pay, pay in lieu of notice or any other such compensation, except as provided in the Company's Severance Benefit Plan, if any, in effect on the termination date.
5.2 TERMINATION FOR CAUSE.
(a) The Company shall have the right to terminate Executive's employment with the Company at any time for cause. Written notification of termination and specific cause of termination shall be provided to Executive at the time of termination.
(b) "Cause" for termination shall mean: (i) indictment or conviction of any felony or of any crime involving dishonesty; (ii) willful participation in any fraud against the Company; (iii) breach of Executive's duties to the Company, including persistent unsatisfactory performance of job duties; (iv) intentional damage to any property of the Company; or (v) conduct by Executive which in the good faith and reasonable determination of the Board demonstrates gross unfitness to serve. With respect to clause (iii) above, Executive shall be given written notice of such unsatisfactory performance and 30 days from the date of such notice to cure the causes set forth therein.
(c) In the event Executive's employment is terminated at any time with cause, Executive will not be entitled to severance pay, pay in lieu of notice or any other such compensation; PROVIDED, HOWEVER, that Executive shall receive all compensation earned prior to and including the date of termination.
5.3 VOLUNTARY OR MUTUAL TERMINATION.
(a) Executive may voluntarily terminate his employment with the Company in writing at any time, after which no further compensation will be paid to Executive.
(b) In the event Executive voluntarily terminates his employment, he will not be entitled to severance pay, pay in lieu of notice or any other such compensation; PROVIDED, HOWEVER, that Executive shall receive all compensation earned prior to and including the date of termination.
6. NON-INTERFERENCE; NON-COMPETITION.
(a) While employed by the Company, and for three (3) years immediately following the Termination Date, Executive agrees not to interfere with the business of the Company by:
(i) soliciting, attempting to solicit, inducing, or otherwise causing any employee of the Company to terminate his or her employment in order to become an employee, consultant or independent contractor to or for any competitor of the Company; or
(ii) directly or indirectly soliciting the business of any customer of the Company which at the time of termination or one year immediately prior thereto was listed on the Company's customer list.
(b) Executive agrees to execute and abide by the Non-Competition Agreement attached hereto as EXHIBIT B.
7. GENERAL PROVISIONS.
7.1 NOTICES. Any notices provided hereunder must be in writing and shall be deemed effective upon the earlier of personal delivery (including personal delivery by telex) or the third day after mailing by first class mail, to the Company at its primary office location and to Executive at his address as listed on the Company payroll.
7.2 SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provisions had never been contained herein.
7.3 WAIVER. If either party should waive any breach of any provisions of this Agreement, he or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement.
7.4 COMPLETE AGREEMENT. This Agreement and its Exhibits, constitute the entire agreement between Executive and the Company and it is the complete, final, and exclusive embodiment of their agreement with regard to this subject matter. It is entered into without reliance on any promise or representation other than those expressly contained herein, and it cannot be modified or amended except in a writing signed by Executive and an officer of the Company.
7.5 COUNTERPARTS. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement.
7.6 HEADINGS. The headings of the sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof.
7.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company, and their respective successors, assigns, heirs, executors and administrators, except that Executive may not assign any of his duties hereunder and he may not assign any of his rights hereunder without the written consent of the Company, which shall not be withheld unreasonably.
7.8 ATTORNEY FEES. If either party hereto brings any action to enforce his or its rights hereunder, the prevailing party in any such action shall be entitled to recover his or its reasonable attorneys' fees and costs incurred in connection with such action.
7.9 CHOICE OF LAW. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of Kansas.
IN WITNESS WHEREOF, the parties have executed this Key Employee Agreement on the day and year first above written.
NATIONAL INFORMATION
CONSORTIUM, INC.:
By: /s/ James B. Dodd ------------------------------- James B. Dodd, President |
/s/ Kevin C. Childress ------------------------------- Kevin C. Childress |
Exhibit 10.19
SUBLEASE
THIS SUBLEASE, made this 16th day of May, 1999 by and between ACCEPTANCE INSURANCE COMPANIES, INC., a Delaware corporation or its successor ("Sublandlord"), and NATIONAL INFORMATION CONSORTIUM, a Colorado corporation ("Subtenant").
RECITALS:
A. Pursuant to the terms of that certain lease (the "Lease") dated January 10, 1995, and amended by a First Lease Modification Agreement dated October 30, 1996, by and between Sublandlord and Knickerbocker Properties, Inc. XXI as successor in interest to Metropolitan Life Insurance Company, a New York corporation as ("Landlord"), Sublandlord leases the Leased Premises (as defined in the Lease) in that Building designated as 12 Corporate Woods, the street address of which is 10975 Benson, Overland Park, Johnson County, Kansas 66210, (the "Building"), situated in CORPORATE WOODS, a subdivision in said City, County and State.
B. Subtenant desires to sublease from Sublandlord a portion of the Leased Premises pursuant to the terms and conditions set forth herein.
For and in consideration of the rents, covenants and agreements hereinafter set forth, Sublandlord and Subtenant agree with each other as follows:
1. PREMISES: Sublandlord hereby rents, leases and lets to Subtenant, and Subtenant hereby rents, leases and takes from Sublandlord, the following described premises, consisting of an area of 1,536 usable square feet together with a pro rata share of common floor area allocable thereto, 184 square feet, a total of approximately 1,720 net rentable square feet of office space (the "Premises"), located on the third floor of the Building and is that area identified as Suite 390 on Exhibit A attached hereto.
2. TERM: The sublease term shall be for thirty-two (32) months commencing on the 1st day of May, 1999 (the "Commencement Date"), and ending on the 31st day of December, 2001.
3. RENT: Subtenant agrees to pay Sublandlord as follows:
(a) The monthly rent payable by Subtenant to Sublandlord shall be Two Thousand Seven Hundred Ninety-Five AND NO/100 DOLLARS ($2,795.00) per month. The first month's rent is due upon signature of this document. All subsequent payments of any and all rent shall be due on the first day of each succeeding month thereafter.
(b) Additional Rent: Subtenant's Rent includes annual Operating Costs (as defined in the Lease) to the extent they do not exceed $7.91 per net rentable square foot ("Operating Stop"). Subtenant shall pay as Additional Rent, Subtenant's pro rata share of all Operating Costs (as defined in the Lease) assessed to
Sublandlord under the Lease, within ten (10) business days of the written notice from Sublandlord.
(c) Subtenant shall pay rent to Sublandlord and shall send rent to: ACCEPTANCE INSURANCE CO's., INC.; OMNI CENTRE BUSINESS PARK; 300 W. BROADWAY, SUITE 100; COUNCIL BLUFFS, IA 51503-9094, or at such address or to such person's attention as Sublandlord shall direct.
4. SECURITY DEPOSIT: Subtenant has deposited the sum of $2,795.00 with Sublandlord as security for its prompt and proper performance of all the terms, covenants and agreements contained in this Sublease. Subtenant understands and agrees (a) that such deposit is not a prepayment of rent and that Sublandlord shall not be obligated to apply said deposit to any unpaid rent or portion thereof, although it may do so at its option; (b) that such deposit does not constitute a trust fund, and that it may be deposited in any bank or depository selected by Sublandlord and commingled with Sublandlord's other funds; and (c) that Sublandlord shall have no obligation to account to Subtenant and Subtenant shall have no right to recover from Sublandlord any interest, earnings or other increments which may accrue during the time such deposit is held by Sublandlord.
5. SUBLETTING: This subletting shall be upon and subject to all the rules and regulations of Landlord and the terms and conditions of the Lease, except if there is a provision of this Sublease inconsistent with the Lease or rules and regulations, then the Lease or rules or regulations, respectively, will control. Subtenant further agrees to comply with all terms and conditions imposed on Sublandlord in the Lease, except as specifically otherwise addressed in this Sublease. Subtenant shall pay to Sublandlord any amounts due by Sublandlord to Landlord under the Lease as a result of Subtenant's actions or inactions with respect to the Premises, including but not limited to repairs, damages and alterations to the Premises.
6. INSURANCE: Subtenant shall deliver to Landlord an insurance certificate (in the same amounts and coverages) per Section 17 of the Lease, First Lease Modification Agreement, naming Landlord and Sublandlord as additional insureds. Subtenant shall deliver to Sublandlord a certificate of insurance evidencing coverage per Section 17 of the Lease and First Lease Modification Agreement.
7. LIABILITY: Subtenant further agrees that Sublandlord shall not be liable to Subtenant or its agents, servants, employees, customers or invitees, for any damage to person or property caused by any act, omission or neglect of Subtenant, its agents, servants, employees, clients or invitees, and Subtenant agrees to hold Sublandlord and Landlord and their agents, servants, employees, clients or invitees harmless from all claims for any such damage. Subtenant shall not be liable to Sublandlord or to Sublandlord's agents, servants, employees, clients or invitees for any damage to person or property caused by an act, omission or neglect of Sublandlord, or Landlord, their agents, servants, employees, clients and invitees. Sublandlord agrees to hold Subtenant and Landlord or their agents, servants, employees, clients and invitees harmless from all
claims for any damage caused by an act, omission or neglect of Sublandlord, its agents, servants, employees clients and invitees.
8. LEASEHOLD IMPROVEMENTS: Subtenant agrees to sublease the Premises in an "as is" condition. However, Sublandlord agrees to pay all costs to install a wall (sheetrocked, taped, sanded and painted) with cove base to separate Suite 380 from Suite 390. Sublandlord will provide directory signage, door signage, and have the locks re-keyed for Subtenant.
9. BINDING EFFECT: This Sublease shall be binding upon, and shall inure to the benefit of the parties and their respective heirs, successors and assigns.
10. GOVERNING LAW: This Sublease shall be construed according to the laws of the State of Kansas.
11. SUBLANDLORD'S LIABILITY: Sublandlord shall remain liable for the performance and observation of the covenants and conditions in the Lease contained on its part to be performed and observed.
12. SUBLANDLORD'S COMPLIANCE: The Sublandlord has, to date, complied with all terms of the Lease and will duly observe and perform those obligations imposed upon it under the Lease.
13. RIGHTS AND OBLIGATIONS OF THE PARTIES; FURTHER SUBLETTING OR ASSIGNMENT: All of the terms, provisions, covenants and conditions contained in the Lease are incorporated herein by reference and are hereby made a part of this Sublease with the same force and effect as if Sublandlord were the Landlord under the Lease and Subtenant were the Tenant thereunder, from and after May 1, 1999. In the event of any breach of this Sublease by Subtenant, Sublandlord will have the same rights against Subtenant under this Sublease as would be available to Landlord against the Sublandlord under the Lease if such breach were by the Sublandlord. Subtenant will have no right to assign the Sublease or sublet the Premises nor any part thereof, or encumber or otherwise transfer in any way, this Sublease or the Premises, nor part with or share possession of the Premises. Subtenant will have no right or option to hold over or extend this Sublease beyond December 31, 2001, nor to act on behalf of Sublandlord as Tenant under the Lease to hold over or extend occupancy of the Premises beyond the term of the Lease.
14. USE AND SURRENDER OF PREMISES: Subtenant will use the Premises for general office business purposes and for no other purpose. Upon termination of this Sublease, Subtenant will quit and surrender to Sublandlord the Premises (along with all keys, locks and the fixtures connected with the Premises), free of all of Subtenant's office furniture and personal property, in "broom-clean" condition.
IN WITNESS WHEREOF, the parties hereto have executed this Sublease as of the day and year first above written.
SUBLANDLORD: SUBTENANT:
ACCEPTANCE INSURANCE COMPANIES, INC. NATIONAL INFORMATION CONSORTIUM
a Delaware corporation a Colorado corporation
By: /s/ Bess Groben By: James B. Dodd
----------------------------------- -----------------------------
Name: Bess Groben Name: James B. Dodd
--------------------------------- ------------------------------
Title: Facilities Manager Title: President
-------------------------------- -----------------------------
|
SUBLEASE ADDENDUM NUMBER ONE
This Sublease Addendum made this 14th day of May, 1999 by and between Acceptance Insurance Companies Inc. (Sublandlord) and National Information Consortium (Subtenant) to supplement the terms and conditions of the Sublease between the parties and hereby is attached thereto and incorporated by reference therein. In consideration of the mutual covenants contained herein, Sublandlord and Subtenant agree as follows:
1. DISCRETIONARY OPTION Provided Subtenant is not in default with any of the terms and conditions of the Sublease and subject to Sublandlord's sole discretion to do so, Sublandlord hereby grants Subtenant an option to sublease the additional space at the Overland Park premises now occupied by the Sublandlord.
2. PREMISES Subject to the terms of the discretionary option, Sublandlord hereby rents, leases and lets to Subtenant, and Subtenant hereby rents, leases and takes from Sublandlord, the following described premises, consisting of an area of 1,187 rentable square feet of office space located on the third floor of the Building designated at 12 Corporate Woods, the street address of which is 10975 Benson, Overland Park, Kansas 66210 identified as Suite 380.
3. TERM The sublease term shall be for nineteen (19) months, seventeen
(17) days, commencing on the 15th day of May, 2000 and ending on the
31st day of December, 2001.
4. RENT Subtenant agrees to pay Sublandlord for the additional option space as follows:
A. The monthly rent payable by Subtenant to Sublandlord shall be Nineteen Hundred Twenty Eight AND 88/100 DOLLARS ($1,928.88) per month. The first month's rent is due May 15, 2000. All subsequent payments of any and all rent shall be due on the first day of each succeeding month thereafter.
B. Additional Rent: Subtenant's Rent includes annual Operating Costs (as defined in the Lease) to the extent they do not exceed $7.91 per net rentable square foot ("Operating Stop"). Subtenant shall pay as Additional Rent, Subtenant's pro rata share of all Operating Costs (as defined in the Lease) assessed to Sublandlord under the Lease, within ten (10) business days of the written notice from Sublandlord.
C. Subtenant shall pay rent to Sublandlord and shall send rent to: ACCEPTANCE INSURANCE COMPANIES INC.; OMNI CENTRE BUSINESS PARK; 300 W. BROADWAY, SUITE 100; COUNCIL BLUFFS, IA 51503-9094, or at such address or to such person's attention as Sublandlord shall direct.
5. SECURITY DEPOSIT Subtenant will deposit prior to May 15, 2001, the sum of $1,928.88 with Sublandlord as security for its prompt and proper performance of
all the terms, covenants and agreements contained in this Sublease Addendum. Subtenant understands and agrees (a) that such deposit is not a prepayment of rent and that Sublandlord shall not be obligated to apply said deposit to any unpaid rent or portion thereof, although it may do so at its option; (b) that such deposit does not constitute a trust fund, and that it may be deposited in any bank or depository selected by Sublandlord and commingled with Sublandlord's other funds; and (c) that Sublandlord shall have no obligation to account to Subtenant and Subtenant shall have no right to recover from Sublandlord any interest, earnings or other increments which may accrue during the time such deposit is held by Sublandlord.
6. SUBLET If Sublandlord, in its sole discretion, refuses to grant Subtenant the option for additional space, Subtenant, pursuant to the following, shall be allowed to sublet Subtenant's original subleased premises. This subletting shall be upon and subject to all the rules and regulations of Sublandlord and the terms and conditions of the Sublease, except if there is a provision of this Sublease inconsistent with the Lease or rules and regulations, then the Lease or rules or regulations, respectively, will control. Subtenant further agrees to comply with all terms and conditions imposed on Sublandlord in the Lease, except as specifically otherwise addressed in this Sublease. Subtenant shall remain liable for said rent to Sublandlord if Subtenant is unable to sublet original premises and shall pay to Sublandlord any amounts due under the Sublease as a result of Subtenant's actions or inactions with respect to the Premises, including but not limited to repair, damages and alterations to the Premises.
7. OTHER TERMS Sublandlord and Subtenant agree all other terms of the Sublease and Lease shall be applicable to this Sublease Addendum.
8. LEASEHOLD IMPROVEMENTS If Sublandlord does grant Subtenant the option for additional space, there shall be no subleasehold improvements paid for by the Sublandlord and Subtenant agrees to sublease the additional space in an "as is" condition.
IN WITNESS WHEREOF, the parties hereto have executed this Sublease Addendum as of the day and year first above written.
SUBLANDLORD: SUBTENANT:
ACCEPTANCE INSURANCE COMPANIES, INC. NATIONAL INFORMATION CONSORTIUM
a Delaware Corporation a Colorado Corporation
By: /s/ Bess Goben By: /s/ James B. Dodd
------------------------------ -----------------------------
Name: Bess Goben Name: James B. Dodd
---------------------------- --------------------------
Title: Facilities Mgr. Title: President
--------------------------- --------------------------
|
LEASE
THIS LEASE ("Lease"), is made as of the 15th day of January, 1995, between METROPOLITAN LIFE INSURANCE COMPANY, a New York Corporation, as "Landlord", and Acceptance Insurance Companies, Inc, a Delaware Corporation, as "Tenant".
W I T N E S S E T H:
For and in consideration of the rents, covenants and agreements hereinafter set forth, Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, the Leased Premises (hereinafter defined) upon the following terms and conditions:
1. TERM.
A. The term of this Lease ("Term" or "Lease Term") shall be three
(3) years, 0 (zero) months, and 0 (zero) days commencing on the first
(1st) day of March, 1995 ("Commencement Date"), unless adjusted as
hereinafter provided, and ending on the last day of February, 1998,
unless sooner terminated as hereinafter provided.
B. If Landlord shall permit Tenant to enter into possession of the Leased Premises prior to the Commencement Date, Tenant covenants and agrees that its occupancy shall be deemed to be under all of the covenants and agreements of this Lease and that it shall pay Landlord Rent, on a daily basis, in the amount or amounts herein otherwise provided for, as though the date Tenant did enter into possession was the designated Commencement Date. In the event Tenant's entry into possession shall occur on a day other than the first day of the month in which possession is permitted, all Rent provided for herein shall be prorated for such month on a daily basis, at the rate payable during the first month for which Rent is payable hereunder.
C. If Tenant enters into possession of the Leased Premises on a date other than the Commencement Date, the expiration date of the Lease Term shall not be adjusted unless otherwise hereafter agreed to in writing by Landlord.
D. If by the Commencement Date specified in Section 1, paragraph A
hereof, the Leased Premises have not been substantially completed pursuant to
the plans and specifications set forth on Exhibit B, due to omission, delay or
default by Tenant or anyone acting under or for Tenant ("Tenant Delay") or due
to any cause other than Landlord's default, Landlord shall have no liability,
and the obligations of this Lease (including, without limitation, the obligation
to pay Rent) shall nonetheless commence as of the specific date set forth in
Section 1, paragraph A hereof.
E. If, however, the Leased Premises are not substantially completed due to default on the part of Landlord, then as Tenant's sole remedy for the delay in Tenant's occupancy of the Leased Premises, the Commencement Date shall be delayed and the Rent herein provided shall not commence until the earlier of actual occupancy by Tenant or substantial completion of the work which Landlord has agreed to perform.
2. LEASED PREMISES.
Landlord hereby rents, leases and lets to Tenant, and Tenant hereby rents,
leases and takes from Landlord, the following described premises, consisting
of an area of approximately 520 square feet of space ("Leased Premises")
together with the pro rata share of common floor area allocable thereto,
which is approximately 62 square feet, for a total of approximately 582 net
rentable square feet, which is designated as Suite 380 located on the third
(3rd) floor in that building designated as 12 Corporate Woods ("Building"),
which Building contains approximately 101,331 total net rentable square feet,
the street address of which is 10975 Benson, and which is located within the
Corporate Woods Subdivision ("Corporate Woods"), in Overland Park, Johnson
County, Kansas 66210. The location of the Leased Premises within the Building
is further shown on Exhibit A attached hereto and is that area crosshatched.
3. SECURITY DEPOSIT.
Upon execution of this Lease, Tenant shall deposit with Landlord, the sum of
Eight Hundred Sixty Eight and 15/100 Dollars ($868.15) ("Security Deposit") as
security for its prompt and proper performance of all the terms, covenants and
agreements contained in this Lease. Tenant understands, acknowledges and agrees
(i) that the Security Deposit is not a prepayment of rent; (ii) that Landlord
shall not be obligated to apply the Security Deposit to any unpaid Rent or
portion thereof, although it may do so at its option; (iii) that the Security
Deposit does not constitute a trust fund; (iv) that the Security Deposit may be
deposited in any account including an interest bearing account maintained by
Landlord, in any bank or depository selected by Landlord, and commingled with
Landlord's other funds; and (v) that Landlord shall have no obligation to pay
interest on the Security Deposit and Tenant shall have no right to recover from
Landlord and Landlord shall have no obligation to account to Tenant for any
interest, earnings or other increments which may accrue during the time the
Security Deposit is held by Landlord, except as otherwise specifically provided
in this Lease. The Security Deposit shall be held by Landlord as security for
the performance by Tenant of all of Tenant's covenants and obligations under
this Lease. Landlord may, from time to time, without prejudice to any other
remedy, use the Security Deposit to the extent necessary to make good any
arrearage of Rent or to satisfy any other covenant or obligation of the Tenant
hereunder. Following any such application of the Security Deposit, Tenant shall
pay to Landlord on demand the amount so applied in order to restore the Security
Deposit to its original amount. If Tenant is not in default at the termination
of this Lease and has paid in full all Rent and prorations and assuming Landlord
is not required to make repairs to the Leased Premises caused by Tenant's
vacating or by extraordinary wear and tear, or remove any then existing
leasehold improvements, then the balance of the Security Deposit remaining after
any such application shall be returned by Landlord to Tenant. If Landlord
transfers its interest in the Leased Premises during the term of this Lease,
Landlord may assign the Security Deposit to the transferee and thereafter shall
have no further liability for the return of such Security Deposit.
4. LANDLORD'S LIEN.
As security for the performance of the obligations of Tenant under this Lease, Tenant hereby grants Landlord a security interest in all equipment, inventory, fixtures, furniture, and all
other property now owned or hereafter acquired by Tenant which is located in the Leased Premises, and all additions thereto, and all proceeds and products thereof. Tenant shall not remove any of such personal property from the Leased Premises until all of Tenant's obligations under this Lease have been satisfied in full. Without excluding any other manner of notice, any requirement of reasonable notice to Tenant of Landlord's intention to dispose of any property pursuant to the enforcement of such security interest will be met if such notice is given at least ten (10) days before the time of such disposition. Any sale made pursuant to the enforcement of such security interest shall be deemed to have been a public sale conducted in a commercially reasonable manner if held at the Leased Premises or at any warehouse in Johnson County, Kansas to where such property has been relocated by Landlord after advertisement of the time, place, method of sale and a general description of the property to be sold, in a daily newspaper published in Johnson County, Kansas, or Kansas City, Missouri for five (5) consecutive business days before the date of sale. The Tenant agrees to execute upon demand and deliver to the Landlord within ten (10) days after written request therefor by or on behalf of Landlord, such financing statements, continuation statements and other instruments which might reasonably be required to perfect, protect or continue the foregoing security interest.
5. RENT.
Tenant agrees to pay Landlord rent as follows:
A. BASE RENT. The monthly base rent ("Base Rent") shall be:
Eight Hundred Sixty-Eight and 15/100 DOLLARS ($868.15), from March 1, 1995 to
February 28, 1998; -- ($ -- ) from -- to --; and -- ($ -- ) from -- to --.
All base Rent shall be payable in advance. The Base Rent for the first
calendar month or partial calendar month of the Term shall be due upon the
Commencement Date subject to Section 7 hereof, and the remaining payments of
Base Rent shall be due on the first day of each calendar month thereafter
during the Term. The Base Rent includes annual Operating Costs (hereinafter
defined) to the extent they do not exceed $__________ per net rentable square
foot ("Operating Stop").
B. ADDITIONAL RENT. In addition to the Base Rent, Tenant shall pay during the Lease Term as additional rent ("Additional Rent"), the following:
(i) Tenant's pro rata share of all Operating Costs (hereinafter defined) reasonably attributable to the Leased Premises during the Term, to the extent such Operating Costs attributable TO the Leased Premises exceed the Operating Stop included in the Base Rent; and
(ii) All other sums or amounts herein otherwise provided for, which are to be paid for by Tenant.
C. All Base Rent and Additional Rent (both Base Rent and Additional Rent are herein included in the term "Rent") due hereunder shall be due and payable in U.S. dollars without notice or demand, both of which are hereby expressly waived, and without offset or counterclaim, except as herein specifically provided otherwise. Tenant's pro rata share of any item under this Lease shall be that percentage which the net rentable square feet of space in the Lease bears to the total net rentable square feet of space in the Building. All Rent
shall be payable to Landlord, c/o Jones & Company, 9401 Indian Creek Parkway - Suite 1000, Overland Park, Kansas 66210, or at such other address as Landlord may from time to time direct in the manner required hereunder for giving notice. If any Rent is not paid within ten (10) days after the same is due, Tenant shall pay to Landlord a late payment fee to compensate Landlord for its extra expenses, inclusive of legal fees, involved in handling such delinquency. The late payment fee shall be the greater of five percent (5%) of the amount delinquent, or $100.00, plus interest at the rate of eighteen percent (18%) per annum or the maximum rate which can be legally charged, whichever is less, on the entire delinquent sum from its due date until paid, which amounts shall be payable as Additional Rent.
6. RENT ADJUSTMENT.
A. OPERATING COSTS. Operating Costs for the Building shall be determined on an accrual basis for calendar year by taking into account on a consistent accounting basis all costs of management, maintenance, and operation of the Building, including, but not limited to, the costs of cleaning, utilities, water, air conditioning, heating, plumbing, elevator service, insurance and general maintenance contracts, costs of maintaining lawns, drives and parking areas, costs amortized over at least a five-year period for capital improvements designed to conserve energy or expected to reduce Operating Costs property taxes and special assessments against the Building, plus this Building's allocate share of all costs of maintaining and insuring common area within Corporate Woods, and all taxes and special assessments against such common areas, plus all other costs which can properly be considered operating expenses for the Building, but excluding costs of capital improvements (other than those amortized over at least a five.-year period for capital improvements designed to conserve energy or expected to reduce Operating Costs), alterations for Tenants, leasing commissions, advertising, depreciation, interest, income taxes and administrative costs not specifically incurred in the management and operation of the Building.
B. PROJECTED OPERATING COSTS. Whenever Landlord determines that projected Operating Costs ("Projected Operating Costs") attributable to the Leased Premises pursuant to the terms and provisions of this Lease during any calendar year will exceed the Operating Stop, Tenant shall pay to Landlord as Additional Rent, monthly, that portion of the Projected Operating Costs for the current calendar year, retroactive to January 1 of such calendar year, equal to one-twelfth (1/12) of the amount by which the Projected Operating Costs for the Leased Premises during the current calendar year exceed the Operating Stop. Any adjustment in Projected Operating Costs shall not cause an adjustment in the monthly Base Rent or the Operating Stop for the Leased Premises. Notice of any adjustment in Projected Operating Costs for the Leased Premises shall be given Tenant on or before April 1st of the year for which such adjustment is effective, or as soon thereafter as Landlord has determined the amount of such adjustment, if any, and any increase in the monthly payment toward the Projected Operating Costs in excess of the Operating Stop for the Leased Premises prior to the giving of such notice, after deducting all prepayments thereon made by Tenant, if any, shall be due in a lump sum as Additional Rent within ten (10) days after receipt of Landlord's statement therefor.
C. INTERIM ADJUSTMENT. If at any time during the Lease Term, Landlord determines that the Projected Operating Costs attributable to the Leased Premises during any calendar year are anticipated to be in excess of the last Projected Operating Costs submitted to Tenant,
Landlord may provide Tenant with a revised summary of Projected Operating Costs for such calendar year and advise Tenant of the sum by which Projected Operating Costs exceed the last Projected Operating Costs submitted to Tenant. In such event, Tenant shall pay to Landlord monthly during such calendar year as Additional Rent, a sum equal to one-twelfth (1/12) of the sum by which the Projected Operating Costs, as reflected in the revised summary, exceed the last Projected Operating Costs submitted to Tenant. Tenant shall also pay to Landlord as Additional Rent, one-twelfth (1/12) of such sum for each month or fractional month of the calendar year which has elapsed as of the date of such notice.
D. YEAR END ADJUSTMENT. Upon completion of each calendar year, Landlord shall determine the Operating Costs for such calendar year and shall advise Tenant of such actual figures by April 1 of the following calendar year exceed the total of Operating Stop and all additional payments of Projected Operating Costs for such calendar year, such excess shall be due in a lump sum as Additional Rent within ten (10) days after receipt of Landlord's statement therefor. If the Operating Costs for the Leased Premises for any calendar year exceed the Operating Stop, but are less than the total of the Operating Stop and all additional payments of Projected Operating Costs for such calendar year, Landlord shall credit such excess against any unpaid Rent then due hereunder, but if none, at Tenant's option, Landlord shall either refund to Tenant the amount of any excess payment of Rent, or credit such excess against the next maturing installment of Rent due hereunder. If the Term of this Lease shall end during any calendar year in which Additional Rent is due hereunder, Tenant's obligation to pay Additional Rent shall be applicable to only those calendar months prior to the end of the Lease Term hereunder. The provisions of this paragraph shall survive termination of the Lease.
7. PRORATION OF FIRST AND LAST MONTH'S RENT.
A. Tenant shall not be obligated to pay Rent hereunder until delivery of possession of the Leased Premises is tendered by landlord unless otherwise herein provided. Delivery of possession of the Leased Premises to Tenant shall be deemed to have been made when the Leased Premises have been substantially completed in compliance with and subject to the provisions of Section 13 hereof and the Leased Premises are tendered to or made available to Tenant for the installation of its fixtures and equipment. In the event delivery of possession is made on a day other than the first day of a calendar month, all Rent provided for herein shall be prorated for said month on a daily basis by taking the annualized rent, dividing it by 365 to establish the daily Rent, and then multiplying the daily Rent times the actual days following the delivery of possession included within such month.
B. If the Lease Term ends on any date other than the last day of a month, whether by expiration of the state Lease Term or otherwise, all Rent provided for herein shall be prorated for such month on a daily basis by taking the annualized rent, dividing it by 365 to establish the daily Rent, and then multiplying the daily Rent times the actual days included within such month.
8. USE.
Tenant agrees that it shall use the Leased Premises solely for general office use and for no other purpose. Tenant agrees that it will not do or permit anything to be done in or about the
Leased premises or in the Building or in Corporate Woods which will in any way obstruct or interfere with the rights of any other tenant or occupant of the Building or Corporate Woods, or injure or annoy them or disturb their quiet enjoyment, or interfere with any services to be provided to any common areas or to any other tenant within the building or Corporate Woods, or use or allow the Leased Premises to be used for any improper, immoral, unlawful or objectionable purpose, or in any manner which might injure or tend to injure, impair or tend to impair, the character, reputation or appearance of the Building, Corporate Woods, or any part thereof or which may invalidate or increase the premium cost of any insurance carried on the building. Tenant shall not commit waste in, on or about the Leased Premises, the Building or Corporate Woods.
9. SERVICES.
A. So long as Tenant is not in default under this Lease within the limitations hereinafter set forth, Landlord shall furnish Tenant during the Lease Term with the following services:
(i) Normal Business Hours: Landlord shall operate the Building during normal business hours ("Normal Business Hours") which shall be Monday through Friday, from 8:00 a.m. to 6:00 p.m., and on Saturday from 8:00 am. to 1:00 p.m., exclusive of holidays.
(ii) Water: Landlord shall supply to the common areas of the Building warm and cold water as reasonably necessary for normal drinking, lavatory, toilet and cleaning purposes.
(iii) Elevator: Landlord shall supply appropriate elevator services for the Building during Normal Business Hours and at all other times shall provide what Landlord deems to be sufficient elevator service, subject always to reasonable security requirements, to permit Tenant reasonable access to the Leased Premises.
(iv) HVAC: Landlord shall supply to the common areas and to the Leased Premises, on a year-round basis during Normal Business Hours, heat, ventilation and air conditioning, on a reasonable basis, through the heating, ventilating and air conditioning systems of the Building, at such temperatures and in such amounts as are considered by Landlord to be standard or as required by governmental authority. Landlord further agrees to provide upon prior written request from Tenant to Landlord, prior to 3:00 p.m. of the preceding business day, heating or air conditioning services for the Leased Premises at times other than as above specified, but Tenant shall pay as Additional Rent, the entire cost of such additional services, based upon an hourly rate determined by Landlord.
(v) Electricity: Landlord shall supply electrical power to meet normal electrical power needs for normal office uses during Normal Business Hours including power for standard lighting or other lighting approved by Landlord, typewriters, dictating equipment, calculating machines, personal computers and other machines of similar low electrical consumption, but not including electricity required for any item of electrical
equipment which singularly consumes more than .25 kilowatts per hour at rated capacity or requires voltage other than 120 volts single phase. Landlord may cause the Leased Premises to be separately metered or submetered, and from time to time, Landlord may at its option, cause a qualified electrical engineer or consultant to make an electrical usage analysis of the Leased Premises, all at Tenant's cost, which costs shall be due and payable upon demand as Additional Rent. If Tenant's electrical usage as determined either by metering, submetering or an electrical usage survey exceeds the normal electrical usage to be provided by Landlord hereunder, Tenant shall pay monthly as Additional Rent the entire cost of providing such excess electricity.
(vi) Maintenance: Landlord shall provide routine maintenance and electric lighting service (including lamp replacement), for all common area and service area of the Building and Corporate Woods in the manner and to the extent deemed by Landlord to be standard; and lamp replacement for all standard fluorescent light fixtures in the Leased Premises necessary to maintain the lighting provided by Landlord as a part of the improvements. In addition, solely at Tenant's cost, Landlord agrees to replace lamps in any non-standard light fixtures installed in the Leased Premises with Landlord's consent, using lamps supplied by and at the cost of Tenant.
(vii) Security: Landlord shall provide security in the form of limited access to the Building during other than Normal Business Hours, in such form as Landlord deems appropriate. Landlord shall have no liability to Tenant, its employees, agents, invitees or licensees for any losses resulting from theft or burglary, or for damages done by persons on the Leased Premises and Landlord shall not be required to insure against any such losses. Tenant shall fully cooperate with Landlord's efforts to maintain security in the Building and within Corporate Woods and Tenant shall follow and shall cause its agents and employees to follow all regulations promulgated from time to time by Landlord with respect thereto.
(viii) Janitorial: Landlord shall furnish to the common areas and to the Leased Premises, reasonable janitorial services and normal trash removal five (5) times weekly, exclusive of Saturdays, Sundays and holidays, compatible with other office buildings within Corporate Woods.
B. If at any time or from time to time Tenant requires, requests or obtains any additional work or services of any type in excess of those required to be supplied by Landlord, or if Tenant installs or causes Landlord to install any floor covering, lighting or other improvements which require any special care or treatment, Landlord may furnish such additional work or service to Tenant upon reasonable notice, and Tenant shall pay to Landlord all additional costs associated therewith, including a reasonable administrative or overhead charge by Landlord, as Additional Rent, upon being billed therefore, and the costs of such additional work or services billed directly to Tenant shall be excluded from Operating Expenses.
C. Landlord does not warrant that any of the services referred to above, or any other services which Landlord may supply to the Building or the Leased Premises, will be free from interruption. Landlord shall not be responsible or liable for any damage, loss or inconvenience resulting from failure to furnish any of the above services or any other services which Landlord
agrees to provide to the extent such failure is caused by acts of God, strikes, lockouts, embargoes, material shortages, war, accidents or other conditions reasonably beyond Landlord's control, or to the extent caused by maintenance, inspections, repairs, alterations, changes or improvements in any part of the Building, or in Corporate Woods, or to the extent caused by the failure of outside agencies to furnish such services. No failure to provide any such service or services shall constitute an eviction nor entitle Tenant to any reduction, offset, discontinuance or delay in the payment of any Rent or Additional Rent.
D. Tenant shall pay for the installation, use and maintenance of all of its telephone and other communication services, subject to Landlord's right to direct and approve the location and method of installation of all wires and other equipment which are to be installed in the Building. Tenant shall have no right to install any portion of any such installation, other than normal wiring, outside of the Leased Premises.
10. REPAIRS, MAINTENANCE AND ALTERATIONS.
A. Landlord agrees to maintain the structure, roof, exterior walls, exterior doors, exterior windows, public restrooms, elevators, all plumbing, heating, air conditioning and similar equipment and the corridors of the Building of which the Leased Premises is a part, and the grounds and parking areas serving the Building, and the common areas within Corporate Woods in good repair, provided, however, that if any repairs to any part of the Building or any such equipment installed in or used in connection with the Building or any of the grounds or parking areas serving the Building or any common areas of Corporate Woods is necessitated by the negligent act or omission of Tenant, its employees, agents, contractors, customers, guests, licensees or invitees, Tenant shall immediately reimburse Landlord for the cost thereof upon demand, as Additional Rent, and such reimbursed costs shall be excluded form the Operating Costs.
B. Tenant shall make no alterations, improvements or changes to the Leased Premises, the Building or Corporate Woods or install any vending machines on the Leased Premises without Landlord's prior written consent. Unless Landlord shall otherwise agree in writing, all maintenance, alterations, replacements, repairs, improvements or changes to which Landlord may consent shall be done either by or under the direction of Landlord, but at the sole cost of Tenant and only pursuant to such plans, specifications and agreements as are approved by Landlord. By consenting to or approving any plans, specifications and agreements for any alterations, improvements or changes which Tenant desires to make to the Leased Premises, Landlord does not warrant and shall assume no responsibility or liability for the completeness, design sufficiency, or compliance of such plans with all applicable laws, rules and regulations of governmental agencies or authorities.
C. Tenant shall be responsible for the Leased Premises and at Tenant's cost, shall keep it in a safe, neat and attractive condition. Tenant shall pay for all redecoration, remodeling, alteration and painting of the Leased Premises desired by Tenant which are approved by Landlord. Tenant shall also pay for the repair and maintenance during the Lease Term of all special equipment or improvements installed in the Leased Premises, including, but not limited to, supplemental air handling units, dishwashers, icemakers, disposals, showers, sinks,
commodes, parquet floors, glass walls or sidelights and other similar equipment or improvements.
D. Tenant covenants and agrees to reimburse Landlord for all costs and expenses incurred by Landlord to repair or replace any damage done to Corporate Woods, the Building, the Leased Premises, or any part of any of such property, caused by Tenant or Tenant's agents, employees, invitees, of visitors and such repairs shall restore the damaged property to as good a condition as it was in prior to such damage, and shall be effected in compliance with all applicable laws, ordinances, rules and regulations, and Tenant shall pay the cost thereof to Landlord on demand as Additional Rent. The Tenant shall not contract for any work or service which might interfere with Landlord's employees, agents or contractors doing work or performing services for the benefit of the Building or the Leased Premises. Any and all alterations to the Leased Premises shall become the property of Landlord upon termination of this Lease (except for movable equipment or furniture; owned by Tenant), provided, however, that Landlord may solely at its option, require Tenant to remove at the end of the Lease Term, any and all leasehold improvements designated by Landlord and all fixtures, equipment and other property installed on or in the Leased Premises by Tenant and to thereafter restore the Leased Premises to the condition required by Section 36 hereof. In the event that Landlord so elects, and Tenant fails to remove any such leasehold improvements, fixtures, equipment or property, Landlord may remove such at Tenant's cost, with no obligation on the part of Landlord to preserve or store any such removed improvements, fixtures, equipment or property, and Tenant shall pay Landlord on demand as Additional Rent, all costs incurred by Landlord in removing such and restoring the Leased Premises as hereinabove provided.
11. LIENS.
Tenant shall not under any circumstances permit any mechanics', materialmen's, laborers' or other liens to be placed upon the Leased Premises, the Building, or Corporate Woods and nothing in this Lease shall be deemed or construed in any way as constituting the consent or request of Landlord, express or implied, by inference or otherwise, to any person for the performance of any labor or the furnishing of any materials to the Leased Premises, the Building or Corporate Woods, or any part thereof, nor as giving Tenant any right, power, or authority to contract for or permit the rendering of any services or the furnishing of any materials that would give rise to any mechanics', materialmen's, laborers' or other liens against the Leased Premises, the Building or Corporate Woods. In addition to any and all other rights or remedies then available to Landlord, Landlord may, but shall not be obligated to, discharge any such lien, without obligation to determine the propriety of the lien amount. In the event any such lien is attached to the Leased Premises, the Building or Corporate Woods, or in the event anyone attempts to attach any such lien on any part of the Leased Premises, the Building or Corporate Woods, then forthwith upon notice from Landlord, Tenant shall cause such lien to be released. Tenant hereby indemnifies and agrees to hold Landlord harmless from all costs and expense, including payment to Landlord of all costs and expenses, including but not limited to legal fees incurred by Landlord and all costs incurred by Landlord to discharge such lien and any amount paid by Landlord for any of the aforesaid purposes shall be paid by Tenant to Landlord on demand as Additional Rent.
12. ASSIGNMENT AND SUBLETTING.
A. Tenant shall not sell, assign, transfer or encumber this Lease, or any interest herein, voluntarily or involuntarily, by operation of law or otherwise, or sublet the Leased Premises or any part thereof, or allow any other occupant to coma in,. with or under Tenant, or use or occupy any portion of the Leased Premises, or permit this Lease or the leasehold estate created hereby to become vested in or owned by any person, firm or corporation by operation of law or otherwise, without in every instance, first obtaining the prior written consent of Landlord. If Tenant is a corporation, the sale or transfer of fifty percent (50 %) or more of the stock of Tenant, (exclusive only of those shares of Tenant which are traded on any regulated securities exchange after such transfers) shall constitute an assignment of this Lease for the purposes of this paragraph. If Tenant is a partnership, any change in control of the general partnership interest of Tenant shall constitute an assignment of this Lease for the purposes of this paragraph. Any breach of the foregoing provisions shall constitute a breach hereof, and Landlord may, at its option, at any time thereafter, declare Tenant to be in default hereunder.
B. If Tenant shall request Landlord's consent to an assignment of this Lease or to a subletting of the whole or any part of the Leased Premises, Tenant shall submit to Landlord with such request, the name of the Proposed assignee or subtenant, such information concerning its business, financial responsibility and standing as Landlord may reasonably require, and a complete disclosure of all consideration to be paid for and the effective date of the proposed assignment or subletting. Upon receipt of such request and all such information by Landlord, it shall have the right, exercisable by notice in writing to Tenant within fourteen (14) days thereafter, (i) if the request is for an assignment or a subletting of all the Leased Premises, to cancel and terminate this Lease; or (ii) if such request is to sublet a portion of the Leased Premises only, to cancel and terminate this Lease with respect to such portion. If Landlord exercises its rights hereunder, the effective date of such cancellation shall be set forth in Landlord's notice to Tenant, but such date shall not be earlier than the effective date of the proposed assignment or subletting nor later than ninety (90) days thereafter. Further, Tenant shall continue to pay to Landlord all Rent as herein otherwise provided, until the effective date of such cancellation, on which date Tenant shall surrender to Landlord, possession of the Leased Premises or the portion thereof subject to such cancellation. If this Lease shall be canceled as to a portion of the Leased Premises only, then Tenant's obligations to pay Rent as herein otherwise provided, shall be abated proportionately from and after the effective date of such cancellation, and Tenant shall pay to Landlord all costs incurred to construct an appropriate demising wall separating the canceled portion of the Leased Premises from the remainder of the Leased Premises.
C. If Tenant requests Landlord's consent to an assignment or subletting of this Lease, and if Landlord elects to consent thereto, an amount equal to any consideration other than rent paid Tenant by the assignee or subtenant for or in connection with such assignment or subletting shall be payable forthwith by Tenant to Landlord as Additional Rent. If Tenant requests and obtains Landlord's consent to an assignment or subletting of all of the Leased Premises, the Rent attributable to the Leased Premises so assigned or sublet during each month of the term of such assignment or subletting, shall be the greater of the Rent attributable thereto then payable under this Lease, or the Rent to be paid Tenant by its subtenant or assignee for the Leased Premises. If Tenant requests and obtains Landlord's consent to an assignment or
subletting of less than all of the Leased Premises, the Rent attributable to that portion of the Leased Premises so assigned or sublet during each month of the term of such assignment or subletting, shall be the greater of the Rent attributable thereto then payable under this Lease (calculated on a pro rata basis based upon the net rentable square fee to so subleased or assigned as it relates to the total net rentable square feet in the Leased Premises), or the Rent to be paid Tenant by its subtenant or assignee for such subleased or assigned portion of the Leased Premises.
D. If Tenant wishes to assign or sublet all or any portion of the Leased Premises, and wishes to use a real estate broker to secure such assignee or subtenant, Tenant agrees to use the real estate broker then representing Landlord in Corporate Woods as Tenant's exclusive agent or such purposes, and to continue to use such broker so long as it is diligently seeking as assignee or subtenant for such space. Tenant shall not directly or indirectly advertise or permit anyone else to advertise the Leased Premises, or any portion of it, as being available for sublease or assignment, unless otherwise agreed to in writing by Landlord.
E. Any permitted assignment or subletting shall be only for the uses herein permitted and otherwise upon and subject to all the terms, provisions, covenants and conditions contained in this Lease and, notwithstanding Landlord's consent thereto, Tenant and all guarantors, hereunder, if any, shall continue to be and remain liable hereunder.
F. Any person, firm or corporation which enters into possession of all or any portion of the Leased Premises, either with or without Landlord's prior written consent, by such act, shall be deemed to have assumed as a joint obligor with Tenant and unconditionally guaranteed the timely performance of all of Tenant's obligations under this Lease, including but not limited to the payment of all Rent and other payments which become due and payable to Landlord hereunder, whether then due or thereafter accruing, and all damages due hereunder because of any default by Tenant hereunder or breach of this Lease. Acceptance of Rent or any other payment by Landlord from anyone other than Tenant who is in possession of all or any portion of the Leased Premises, or any notice or demand made by Landlord to anyone other than Tenant who has entered into possession of all or any portion of the Leased Premises in violation of the terms of this Lease shall not be deemed to be a waiver, consent or approval by Landlord of such breach or a consent to or approval of such person, firm or entity entering into such possession.
13. CONSTRUCTION OF IMPROVEMENTS.
Prior to the commencement of the Lease Term, Landlord agrees to cause the Leased Premises to be improved in accordance with the plans, specifications, and agreements approved by Landlord and Tenant and which are attached hereto as "Exhibit B" and made a part of this Lease. Landlord shall not be obligated to construct or install any improvements or facilities of any kind other than those called for by Exhibit B. The total cost of constructing the improvements as outlined in Exhibit B hereof shall be borne by Landlord up to but not exceeding $6,866.00. Tenant shall be advised of any projected costs in excess of such amount and Tenant agrees to pay Landlord at least fifty percent (50%) of any projected costs exceeding such amount prior to commencement of the construction of improvements and within ten (10) business days after Tenant is advised in writing of such sum, unless otherwise agreed to in writing by Landlord. The balance of any costs exceeding such amount shall be paid to Landlord upon substantial
completion of the Leased Premises within ten (10) business days after Tenant is advised in writing of the balance due. Landlord agrees to commence and complete the construction of the improvements called for by Exhibit B in a timely manner.
14. ACCEPTANCE OF LEASED PREMISES.
Tenant's taking possession of the Leased Premises shall be evidence that the Leased Premises were in good order and satisfactory condition when the Tenant took possession, provided however that within thirty (30) days after substantial completion pursuant to Section 7 hereof, Tenant may prepare a punchlist which sets forth any incomplete item required by Exhibit B, and Landlord agrees to thereafter in a timely manner commence to complete all such items set forth on the punchlist as soon as reasonably possible. Tenant has agreed to accept the Leased Premises in an "as is" condition except as herein otherwise provided, and Landlord shall have no obligation to alter, remodel, repair or improve the Leased Premises or the Building and no representations respecting the condition of the, Leased Premises or the Building have been made by Landlord to Tenant, other than as may be contained herein.
15. COMPLIANCE WITH APPLICABLE LAWS AND INSURANCE REQUIREMENTS.
A. During the Lease Term, Tenant shall not use or occupy, or permit any portion of the Leased Premises, the Building or Corporate Woods to be used or occupied, (a) in violation of any law, ordinance, order, rule, regulation, certificate of occupancy, or other governmental requirement, or (b) for any disreputable business or purpose, or (c) in any manner or for any business or purpose which creates risks of fire or other hazards, or which in any way violates, suspends, voids, or increases the cost of any fire or liability or any other insurance coverage of any kind carried by Landlord upon all or any part of the Building, its contents or Corporate Woods. Tenant, at Tenant's expense, shall comply with all present and future laws, ordinances, orders, rules, regulations, and other governmental requirements of all federal, state, county and municipal authorities relating to the use, condition or occupancy of the Leased Premises, and all rules, orders, regulations and requirements of any board of fire underwriters or insurance service office or any other similar body, having jurisdiction over the Building.
B. Tenant shall not do or commit, or permit to be done or committed, any act or thing which might cause any policy or policies of insurance written in connection with the Building or the property therein, or Corporate Woods, to become void or suspended or which might cause the insurance risk an the Building, or the property therein, or Corporate Woods, to be rendered more hazardous or otherwise increase the rate of premium for any such insurance over the rate in effect on the Commencement Date. Tenant shall pay to Landlord on demand as Additional Rent, the amount of any increase in premiums for the Building and Corporate Woods caused by any breach of this covenant.
16. INDEMNITY.
Landlord shall not be liable to Tenant, or to Tenant's agents, servants, employees, customers, or invitees for any injury to person or damage to property caused by any act, omission, or negligence of Tenant, its agents, servants, employees, invitees, licensees or any other person
entering the Leased Premises, the Building or Corporate Woods under the invitation of Tenant ("Invitees") or arising out of the use of the Leased Premises, the Building or Corporate Woods by Tenant or its Invitees or arising out of the conduct of Tenant's business or out of a default by Tenant in the performance of any of its obligations hereunder. Tenant hereby indemnifies and agrees to save Landlord harmless from and against all claims, liability or expense, including reasonable attorney's fees, arising from the use or occupation of the Leased Premises by Tenant or anyone on the Leased Premises with Tenant's permission, or form any breach of this Lease.
17. INSURANCE, LOSS, DAMAGE, REIMBURSEMENT.
A. TENANT'S INSURANCE REQUIREMENTS. Tenant shall maintain at its own cost and expense:
(i) Comprehensive general liability insurance on an occurrence basis naming both Landlord and Tenant as insureds covering claims and liabilities for injury or damage to persons or property or for the loss of life or property occurring upon, in or about the Leased Premises, caused by or resulting from any act or omission of Tenant, its employees, agents, contractors, customers, guests, licensees or invitees, such insurance to afford minimum protection during the Lease Term in such amounts as Landlord shall from time to time designate by written notice to Tenants, but in no event less than $1,000,000 combined single limit coverage for bodily injury, death, property damages or a combination thereof;
(ii) Workmen's Compensation and Employer's Liability Insurance in accordance with the laws of the State of Kansas;
(iii) Fire insurance in an amount adequate to cover the cost of replacement of all equipment, installations, fixtures and contents in the Leased Premises, including leasehold improvements paid for by Tenants, in the event of loss or damage by fire and against loss or damage by other risks now or hereafter embraced by so-called "Extended Coverage", with protection against vandalism, malicious mischief and sprinkler leakage; and
(iv) When required by Landlord, such other insurance against other insurable hazards and in such amounts as may from time to time be commonly and customarily insured against and are generally available for tenants in first class office buildings in the City of Overland Park, Kansas.
All of the above insurance may be affected by one or more policies (which may cover the Leased Premises and other locations), but shall be issued by insurers of recognized responsibility reasonably acceptable to Landlord, and each such policy shall contain a provision whereby the insurer agrees not to cancel or terminate such coverage without at least ten (10) days prior written notice to Landlord, and that no act or omission to act of any of the named insureds will invalidate such insurance as to the other named insureds.
B. WAIVER OF LIABILITY FOR DAMAGES. Landlord, its agents, servants and employees shall not be liable for any injury or damage to persons or property resulting from fire, explosion,
falling plaster, steam, gas, electricity, water, rain, snow, earthquakes, or leaks from any part of the Building, or from the pipes, appliances or plumbing works or from the roof, street or subsurface or from any other place or by dampness or by any other cause of whatsoever nature, unless caused by or due to the gross negligence or willful misconduct of Landlord, and Tenant does hereby expressly waive any consequential damages, compensation or claims for inconvenience or loss of business, rents or any profits as a result of any such injury or damage.
C. WAIVE OF SUBROGATION. Landlord and Tenant each hereby waives on behalf of itself and its insurers (none of which shall ever be assigned any such claim or be entitled thereto due to subrogation or otherwise) any and all rights of recovery, claim, action, or cause of action, against the other, its agents, officers, servants, partners, shareholders, or employees, and against every other tenant in the Building who shall have executed a similar waiver as set forth in this Section, and the agents, officers, servants, partners, shareholders and employees of each such other tenant, for any loss or damage that may occur to the Leased Premises, or any improvements thereto, or the Building or any improvements thereto, or any personal property of such party therein, by reason of fire, the elements, or any other cause or origin, which is insured against under any insurance policy actually being maintained from time to time, even if not required hereunder, or which would be insured against under the terms of any insurance policy required to be carried or maintained hereunder, whether or not such insurance coverage is actually being maintained by Tenant and regardless of the cause or origin, including in every instance negligence of the other party hereto, its agents, officers, or employees, or the negligence of any other tenant in the Building who shall have executed a similar waiver, or its agents, servants or employees. Landlord and Tenant each agree to cause appropriate clauses to be included in all of their insurance policies necessary to implement the foregoing provisions.
D. REIMBURSEMENT OBLIGATION OF TENANT. Tenant shall reimburse Landlord for all expense, damages and fines incurred or suffered by Landlord by reason of any breach, violation or nonperformance by Tenant, or its agents, servants or employees, of any covenant or provision of this Lease, or by reason of damage to persons or property caused by moving property of or for Tenant in or out of the Building, or by the installation or removal of furniture or other property of or for Tenant, or by reason of or arising out of the carelessness, negligence or improper conduct of Tenant, or its agents, servants or employees, in the use or occupancy of the Leased Premises or the Building or Corporate Woods.
E. TENANT NOTICE OBLIGATIONS. Tenant shall give Landlord immediate notice in case of fire or accidents in the Leased Premises or in the Building. Tenant shall give Landlord prompt notice if any of the insurance coverage and the clauses required to be included in each of Tenant's insurance policies pursuant to the provisions of this Section cannot be obtained. Tenant shall give Landlord immediate notice of any cancellation or change of the terms of any such policy which would affect any such clause or naming.
F. EVIDENCE OF INSURANCE. On or before the Commencement Date Tenant shall furnish Landlord with a certificate or certificates evidencing the aforesaid insurance coverage, or a copy of the actual insurance policy providing such insurance coverage. Renewal policies or certificates therefor shall be furnished to Landlord at least thirty (30) days prior to the expiration date of each policy theretofore furnished to Landlord.
18. LANDLORD'S USE OF BUILDING.
Landlord reserves the exclusive right to use the Building of which the Leased Premises is a part, and every Pad thereof, except the interior of the Leased Premises, for promotional purposes. Landlord reserves the right at all reasonable times to enter and be upon the Leased Premises for the purpose of examining same, to show the same to prospective purchasers and mortgagees, for cleaning, and to evaluate the need for repairs, alterations, additions, installations and removals as Landlord may deem proper or useful for serving the Leased Premises or the Building, and to enter and be upon the Leased Premises, through its agents, employees and contractors, at all reasonable times to repair, maintain, alter, improve and remodel the Leased Premises or the Building, or carry out any provision of this Lease, but Landlord shall to the extent reasonably possible, exercise such rights in a manner which will not unreasonably interrupt or interfere with Tenant's use and occupancy of the Leased Premises. Tenant shall not be entitled to any compensation, damages, or abatement or reduction in rent on account of any such repairs, maintenance, alterations, improvements, remodeling or entry upon the Leased Premises as herein permitted. For a period of one hundred eighty (180) days prior to the expiration of this Lease, Landlord shall have the right to enter upon the Leased Premises at all reasonable times and exhibit the same to prospective tenants.
19. DAMAGE OR DESTRUCTION.
A. If the Leased Premises or the Building is substantially and materially damaged by fire or other casualty, so that all or any portion of the Leased Premises is untenantable, even if the Leased Premises are not actually damaged, Landlord may, at its option, exercisable within ninety (90) days after the date of such damage, elect by written notice to Tenant either to repair and restore the same or to terminate this Lease.
B. If Landlord shall elect under Paragraph A above to repair or restore the Leased Premises, or the Building, Landlord shall do so as promptly as reasonably possible, and this I as shall remain in full force and effect during the making of such repairs, except that if such loss or damage was not caused in whole or in part by the negligent act of Tenant, its agents, employees, contractors or licensees, Rent shall abate as follows:
(i) If as a result of such damage or destruction the Leased Premises is rendered totally untenantable, Rent shall abate from the date of such damage or destruction until the Leased Premises, or any portion thereof accepted by Tenant, is ready for occupancy; or
(ii) If as a result of such damage or destruction the Leased Premises is rendered partially untenantable, and from and after the date Landlord restores a portion, but less than all of the Leased Premises to tenantable condition, and Tenant with Landlord's written consent elects to reoccupy such portion prior to the entire Leased Premises being restored to tenantable condition, Rent shall be reduced in the proportion that the untenantable square foot area of the Leased Premises bears to the total square foot area of the Leased Premises, and such reduction shall continue until the damaged or destroyed portion of the Leased Premises is ready for occupancy.
The foregoing provisions to the contrary notwithstanding, Landlord's obligation to repair, replace and restore the Leased Premises shall never exceed the scope of the work required to be done by Landlord at its cost in originally constructing the Leased Premises pursuant to Exhibit B, and Landlord shall not be obligated or required to repair, replace or restore any damage or injury, or make any repairs to or replacement or restoration of any tenant finish items or additions or improvements made in or to the Leased Premises by Tenant, or by Landlord for or on behalf of Tenant, (hereinafter "Tenant Paid Improvements") which are in excess of the original tenant finish which Landlord was obligated to provide at its cost pursuant to Section 13 hereof, except to the extent that the loss or damage of such Tenant Paid Improvements is insured under one or more insurance policies maintained or paid for by Tenant, and which are payable to Landlord, but then only to the extent that Landlord does in fact receive such insurance proceeds and can use such proceeds to repair or replace such damaged or destroyed Tenant Paid Improvements.
C. If Landlord shall elect under Paragraph A above to terminate this Lease, this Lease shall terminate as of the date of such damage or destruction.
D. Anything contained in this Section 19 to the contrary notwithstanding, if the Building of which the Leased Premises is a part, is substantially damaged or destroyed by fire or other casualty and Landlord elects not to repair or rebuild the same, Landlord may, at its option, elect to terminate this Lease, even though the Leased Premises may not be damaged or destroyed by such fire or other casualty; and provided further, that if the Leased Premises are substantially damaged or destroyed by fire or other casualty at any time when the then remaining Lease Term is less than twelve (12) months (exclusive of any unexercised renewal options), Landlord may, at its option, exercised within thirty (30) days after the date of such damage or destruction, elect to cancel this Lease rather than restore the Leased Premises as herein provided, in which event Landlord may retain all insurance proceeds payable to Landlord because of such loss or damage.
E. Any notice given hereunder shall be given in the manner hereinafter provided.
20. CONDEMNATION.
A. If the whole of the Leased Premises shall be taken for any public or quasi public use under any statute or by right of eminent domain, or by private purchase in lieu thereof, this Lease shall automatically terminate as of the date that possession shall be taken by or given to the condemning authority.
B. If only a portion of the Leased Premises or the Building of which it is a part or the site upon which it is located shall be so taken, or if any or all of the common areas comprising Corporate Woods which directly, materially and adversely affect the Building are so taken, Landlord, at its option, may terminate this Lease as of the date that possession shall be taken by or given to the condemning or acquiring authority, upon giving written notice of termination to Tenant. If Landlord elects not to terminate this Lease, it shall restore the Leased Premises to an architectural unit as nearly like its condition prior to such taking as shall be practicable; but such work shall not exceed the scope of the work required to be done by Landlord in originally constructing the Leased Premises. Landlord shall notify Tenant of its election either to terminate or to restore not later than ninety (90) days after the effective date of the after any such taking. If this Lease is not terminated, in connection with any condemnation or sale in lieu of
condemnation as hereinbefore provided, all of the terms of this Lease shall continue in effect, provided however, that if any portion of the Leased Premises has been taken, then the Rent, or a fair and just proportion thereof, according to the nature and extent of the taking of the Leased Premises, shall be suspended or abated.
C. All compensation awarded or paid upon a total or partial taking of the Leased Premises, the Building or any common area of Corporate Woods shall belong to and be the property of Landlord without any participation by Tenant; provided, however, that nothing contained herein shall be construed to preclude Tenant from prosecuting any claim directly against the condemning authority in such condemnation proceedings for low of business, depreciation to, damage to, cost of removal of, or for the value of, stock and trade fixtures, furniture and other personal property belonging to Tenant, and for any relocation allowance or award, so long as such claim, allowance or award shall not diminish or otherwise adversely affect Landlord's award.
21. ABANDONMENT.
If Tenant shall vacate or abandon the Leased Premises or if Tenant should refuse or fail to take possession of the Leased Premises at the Commencement Date, Tenant shall be deemed to be in default hereunder, and Landlord shall have the right to enter upon the Leased Premises and exhibit it to prospective lessees without notice, and to exercise all of Landlord's rights provided hereunder in event of a default hereunder.
22. PARKING.
Tenant shall be entitled to use and to permit its employees, agents, contractors, customers, guests and invitees to use Tenant's pro rata share of all parking spaces provided by Landlord for the Building, in the parking lots provided for the Building or as otherwise designated by Landlord, subject always to all applicable rules and regulations. In order to keep all required firelanes open, to protect persons and property from injury or damage due to fire or other casualty, to avoid unreasonably interfering with the rights of Landlord and other tenants within Corporate Woods, and their respective employees, agents, contractors, customers, guests and invitees, to keep all driveways, aisles, entry ramps, roadways, sidewalks and parking areas available for their intended uses, to provide suitable parking for visitors and the disabled, and to not unreasonably interfere with anyone's ingress and egress to any building within Corporate Woods, Tenant agrees to restrict the parking of its motor vehicles and the motor vehicles of all of its employees, agents, contractors, customers, guests and invitees to only those striped, designated parking areas provided for the Building, so that all roadways, driveways, aisles, entry ramps, sidewalks and pedestrian passageways shall remain open and unobstructed at all times for their intended use, and that those parking spaces designated as reserved for visitors and the disabled will be available to and used only by those for whom they are intended. Tenant shall not park any vehicles in any parking lot overnight, unless the owner of such car is then within the Building, without Landlord's prior consent. Should a motor vehicle be parked by Tenant or by any of its employees, agents, contractors, customers, guests and invitees other than in such designated parking areas, or overnight without Landlord's consent, or otherwise fail to be in compliance with all applicable rules and regulations, Landlord may remove or cause the removal of such vehicle from Corporate Woods or to other locations within Corporate Woods at the cost of the
owner thereof, and Landlord shall not be liable to such owner or any other person for any loss or damage which may result therefrom.
23. DEFAULT.
Any failure by Tenant to pay any installment of Base Rent within five (5) days after its due date, or any failure by Tenant to pay any other Rent or any other sum of money due hereunder within ten (10) days after notice to Tenant of the sum due, shall constitute a monetary default ("Monetary Default") under this Lease. If apparent Monetary Default exists at any time and if Tenant has not previously been in actual Monetary Default under this Lease, Landlord will attempt to advise Tenant, either by telephone or in writing, that such apparent Monetary Default exists, before Landlord actually gives Tenant notice of default hereunder. However, Landlord's right to give actual notice of default under this Lease shall not be conditional in any manner upon Landlord first advising Tenant of any such apparent Monetary Default. Any failure by Tenant to perform or comply with any other covenant or agreement herein contained (all of which shall be deemed to be material hereunder) which failure shall continue for a period of thirty (30) days after written notice thereof is given Tenant shall constitute a non-monetary default ("Non-Monetary Default") under this Lease. In the event of any Monetary Default or Non-Monetary Default hereunder (jointly and severally "Default"), this Lease shall be in Default. At any time thereafter while such Default continues to exist, Landlord may, at its option:
A. Terminate this Lease; or
B. Effect or pay or perform that obligation as to which the Tenant is in Default, and the Tenant shall thereupon be indebted to the Landlord for all amounts so paid or advanced and all costs and expenses incurred in connection therewith, such indebtedness to be payable on demand as Additional Rent; or
C. Re-enter, take possession of the Leased Premises and remove all persons and property therefrom (any property so removed may be stored in a public warehouse or elsewhere at the cost of, at the sole risk of loss of and for the account of Tenant), all without notice or legal process and without being deemed guilty of trespass, or liable for any loss or damage occasioned thereby. If Tenant shall, either before or after Default, voluntarily give up possession of the Leased Premises to Landlord, or deliver the keys to said Leased Premises to Landlord, or both, such actions shall be deemed to be in compliance with Landlord's rights and the acceptance thereof by Landlord or its agent shall not be deemed to be a termination of this Lease or constitute a surrender of the Leased Premises, unless Landlord specifically so elects in writing at such time. Should Landlord elect to re-enter into possession, or should it take possession pursuant to legal proceedings or pursuant to any notice provided by law, it may either terminate this Lease or, without terminating this Lease, may relet said Leased Premises (or any part thereof) separately or with any other portion or portions of the Building, for such term or terms (including a term extending beyond the Term of this Lease), at such rental or rentals and upon such other terms and conditions as Landlord in it s sole discretion may deem advisable. Upon each such reletting all rentals shall be applied first to the payment of any costs and expenses of such reletting, including brokerage fees, attorney's fees and costs of any alterations and repairs which Landlord, in its sole judgment, deemed necessary in connection with such reletting (if
leased in whole or in part with other space in the building, all such costs and expenses shall be allocated on a square foot basis); second to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord; third to the payment of rent due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future Rent or damage as the same may be come due and payable hereunder. If such rentals received from such reletting during any month shall be less than the Rent to be paid during said month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord monthly. No such re-entry or retaking of possession by Landlord shall be construed as an election by Landlord to terminate this Lease unless a written notice of such election is given to Tenant or unless the termination thereof is decreed by a court of competent jurisdiction. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach.
Should this Lease be terminated at any time due to Tenant's Default, Tenant shall forthwith surrender possession of the Leased Premises to Landlord without further demand, and Landlord, in addition to any other remedies it may have, may recover from Tenant all damages it may incur by reason of such breach, including the costs of recovering the Leased Premises, reasonable attorneys' fees, and the worth at the time of such termination of the amount of Rent and charges equivalent to Rent reserved in this Lease for the remainder of the stated term, all of which amounts shall be immediately due and payable from Tenant to Landlord as Additional Rent. In determining the Rent which would be payable by Tenant hereunder subsequent to Default, the Rent for each year o the unexpired term shall be equal to the Base Rent provided for the balance of the Lease Term, plus the average of the total annual Additional Rent and other charges due from Tenant form the Commencement Date of the then current Term hereof to the time of default, or for the proceeding three (3) full calendar years, whichever is the shorter period.
After any such Default, Landlord shall not be obligated to notify Tenant of the due date of Rent nor demand payment thereof on its due date, the same being expressly waived by Tenant. The acceptance of any sums of money from Tenant after the expiration of any ten (10) day or thirty (30) day notice is above-provided shall be taken to be a payment on account by Tenant and shall not constitute a waiver by Landlord of any of its rights hereunder or at law, nor shall it reinstate this Lease or cure a default on the part of Tenant, unless Landlord then so agrees in writing.
24. BROKERAGE COMMISSIONS.
Tenant represents and warrants that it has dealt with no broker, agent or other person in connection with this transaction other than Jones & Company Real Estate an Mortgages ("Listing Broker") and that no broker, agent or other person brought about this transaction, other than the Listing Broker. Tenant hereby indemnifies and does hereby agree to hold Landlord harmless from and against any claim by any other broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with Tenant with regard to this leasing transaction. The provisions of this paragraph shall survive the termination of this Lease.
25. WAIVER OF BENEFITS.
Tenant waives the benefits of all existing and future rent control legislation and statutes and any similar governmental rules and regulations, whether in time of war or not, to the extent permitted by law.
26. MISCELLANEOUS TAXES.
Tenant shall pay prior to delinquency all taxes assessed against or levied upon its occupancy of the Leased Premises, or upon the fixtures, furnishings, equipment and all other personal property of Tenant located in the Leased Premises, if nonpayment thereof shall give rise to a lien on any part of the Building, and when possible Tenant shall cause said fixtures, furnishings, equipment and other personal property to be assessed and billed separately from the property of Landlord. In the event any or all of Tenant's occupancy of the Leased Premises, shall be assessed and taxed with the property of Landlord, Tenant shall pay to Landlord its share of such taxes, as determined by Landlord, within ten (10) days after delivery to Tenant by Landlord of a statement in writing setting forth the amount of such taxes applicable to Tenant's fixtures, furnishings, equipment or personal property.
27. SPRINKLERS.
If there now is or shall be installed in the Building a "sprinkler system" and such a system or any of its appliances shall be damaged or injured or not in proper working order by reason of any act or omission of the Tenant, Tenant's agents, servants, employees, licensees or visitors, the Tenant shall immediately notify Landlord in writing, and, within a reasonable period after Landlord's receipt of such notice, Landlord shall have the sprinkler system restored at Tenant's expense, which costs Tenant shall forthwith pay as Additional Rent upon receipt of a billing therefor; and if any bureau, department or official of the state or city government, requires or recommends that any changes, modifications, alterations, or additional sprinkler heads or other equipment be made or supplied by reason of the Tenant's business, or the location of partitions, trade fixtures, or other contents of the Leased Premises, or for any other reason, or if any such changes, modifications, alterations, additional sprinkler heads or other equipment, become necessary to prevent the imposition of a penalty or charge against the full allowance in the fire insurance rate for a sprinkler system, Landlord shall at the Tenant's expense, promptly make and supply such changes, modifications, alterations, additional sprinkler head or other equipment, all of which Tenant shall forthwith pay as Additional Rent upon receipt of a billing therefor.
28. RIGHTS AND REMEDIES.
The rights and remedies of Landlord hereunder and any others provided by law shall be construed as cumulative and no one of them is exclusive of any other right or remedy. Such rights and remedies shall further be continuing rights and remedies, none of which shall be exhausted by being exercised on one or more occasions. Landlord shall be entitled to an injunction in proper cases, from time to time, if sought by Landlord to enforce any part or parts of this Lease or to prevent or stop any violation or default hereunder on the part of Tenant, its agents, servants or employees. A waiver by Landlord of any default, breach or failure of Tenant to comply with this Lease shall not be construed as a continuing waiver thereof or as a waiver by
Landlord of its right to enforce the terms of this Lease in the event of any subsequent default, breach or failure of Tenant to comply with this Lease. Any failure or waiver of Landlord to terminate this Lease upon the happening of any event giving Landlord the right or option to terminate this Lease, shall not be construed as a waiver of the tight of Landlord to terminate this Lease thereafter, upon the happening of any event giving Landlord the right or option to terminate this Lease. Whenever in this Lease Landlord reserves or is given the right and power to give or withhold its consent to any action on the part of Tenant, such right and power shall not be exhausted by its exercise on one or more occasions, but shall be a continuing right and power for the full term of this Lease.
29. ATTORNEY'S FEES AND COSTS.
In case suit shall be brought for recovery of possession of the Leased Premises, or because of the breach of any other covenant or agreement herein contained or for an interpretation of any provision of this Lease, or for any other reason involving this Lease, all expenses incurred therefor by the prevailing party, including a reasonable attorney's fee, shall be paid by the other party.
30. MEMORANDUM OF LEASE.
Landlord may record this Lease, or a memorandum hereof, at any time, at Landlord's option. Tenant shall execute and record a memorandum of this Lease at any time Landlord so requests. Tenant shall not record a memorandum of this Lease at any time, without Landlord's prior written request or consent to do so, which request or consent can be withheld or granted at Landlord's absolute discretion.
31. SUBORDINATION.
This Lease shall be subject and subordinate to all existing or future mortgages or deeds of trust placed by Landlord on the Building of which the Leased Premises is a part, or on Corporate Woods; provided, however, that Landlord may, at its option at any time, by written document duly recorded in the Office of the Register of Deeds in and for Johnson County, Kansas, cause this Lease to become superior to any mortgage or deed of trust on the Building, or Corporate Woods, or any portion thereof. Further, at Landlord's option, this Lease may be assigned by Landlord to any mortgages or cestui que trust as additional security for any loan to Landlord, and Tenant shall acknowledge within ten (10) days after written request, receipt of notice of each such assignment. Any such assignment may be recorded. Tenant shall, upon notice of any such assignment, comply with the terms thereof.
32. ESTOPPEL CERTIFICATE.
Within ten (10) days after Landlord's written request therefor, Tenant shall without charge, execute a written instrument addressed to Landlord or to any other person, firm or corporation specified by Landlord, certifying:
A. That Tenant has accepted the Lease Premises, is in occupancy, and is paying rent on a current basis with no off-sets or claims, or if it is not paying rent on a current basis or does
have off-sets or claims, Tenant shall specify the status of its rental payments and the basis and amount claimed due as off-sets or claims;
B. That this Lease is unmodified and in full force and effect, or if there has been any modification, that the same is in full force and effect as so modified, and identifying any such modification;
C. Whether or not there are any off-sets or defenses then existing in favor of Tenant against the enforcement of any of the terms, covenants and conditions of this Lease, and if so, specifying the same, and also stating that Landlord has observed and performed all of the terms, covenants and conditions to be observed and performed by Landlord hereunder, and if not, specifying to what extent Landlord has not observed or performed all of the terms, covenants and conditions to be observed and performed by Landlord hereunder; and
D. The dates to which monthly Base Rent, Additional Rent and all other charges equivalent to rent hereunder have been paid.
Such request may be made by Landlord at any time and from time to time during the term of this Lease.
33. ASSIGNMENT OF LEASE BY LANDLORD.
Landlord and each party succeeding to Landlord's interest in the Building may
transfer, assign, convey or otherwise dispose of this Lease and in each such
event, from and after the date of such transfer, assignment, conveyance or other
disposition of this Lease, Landlord and each successor shall be free from and
relieved of all covenants and obligations of the Landlord herein and from any
and all liability resulting from any act or omission or event occurring
thereafter. Each party succeeding to landlord's interest in the Building shall
be deemed to have agreed to assume and carry out any and all of the covenants of
Landlord under this Lease accruing from and after the date such successor
acquires its interest herein, and continuing only for so long thereafter as it
shall hold such interest, all without further agreement between the parties
hereto or their successors in interest. Tenant shall acknowledge within ten
(10) days after written request, receipt of notice of any such transfer,
assignment, conveyance or other disposition of Landlord's interest herein or in
the Building.
34. LIMITED LIABILITY OF LANDLORD.
The liability of Landlord and each of its successors for any default by Landlord (or its successors) under the terms of this Lease shall be limited to such claims and causes of action which accrue during Landlord's and each of its successor's respective ownership of the Building, and then shall be limited only to the interest of Landlord from time to time in the Building, or if the Building has been sold after such liability accrued but before it is fully satisfied, then the sale proceeds from the Building, and Tenant agrees to look solely to Landlord's interest in the Building or the sale proceeds therefrom for recovery of any judgment against the Landlord, it being intended that neither Landlord nor its survivors shall have any personal liability for any judgment or deficiency hereunder.
Any claim which Tenant may have against Landlord hereunder as of the date Landlord terminates its ownership of the Building, shall be deemed to have been waived or terminated by Tenant unless Landlord is given notice of such claim within six (6) months after the date Landlord gives notice to Tenant that Landlord has terminated its ownership of the Building, provided further however, that Tenant shall be deemed to have waived or terminated any claim it may have against Landlord unless Tenant files suit in a court of competent jurisdiction and timely obtains service of process upon Landlord all within twelve (12) months after the date Landlord gives notice to Tenant that Landlord has terminated its ownership of the Building.
35. TRANSFER OF TENANT.
Landlord shall have the right to transfer the Tenant to other premises within Corporate Woods so long as the premises to which Tenant is transferred shall contain net rentable square footage not less than the net rentable square footage in the Leased Premises, and have tenant improvements similar to or better than the existing tenant improvements in the vacated space, as determined by Landlord. Tenant's occupancy of any premises to which Tenant may be transferred shall be under all the covenants and agreements of this Lease and at the same Rent as herein otherwise provided. Landlord may exercise its rights hereunder at any time and from time to time during the Term of this Lease by giving written notice of the exercise thereof to Tenant at least sixty (60) days prior to that date upon which Tenant is to be transferred. If Landlord exercises its rights hereunder, Tenant shall be reimbursed for reasonable costs and expenses incurred by Tenant in connection with such transfer.
36. PEACEABLE SURRENDER.
Upon termination of this Lease, whether by expiration of the Lease Term or otherwise, Tenant shall peaceably quit and surrender to Landlord the Leased Premises, broom clean, in good condition and repair, ordinary wear and tear and damage by fire or other insured casualty excepted, together with all improvements constructed by Tenant thereon; provided, however, Landlord may require Tenant to remove all such alterations, improvements or changes to the Leased Premises and restore the Leased Premises to as good of condition as existed prior to the commencement of the Lease Term, ordinary wear and tear and loss by fire or other insured casualty excepted, provided however that if Landlord does not so elect to cause Tenant to remove all or any portion of such alterations or improvements or changes, all such designated alterations, improvements and changes shall become the property of Landlord, and shall remain upon and be surrendered with the Leased Premises. If upon termination of the Lease Term, the Leased Premises are surrendered to Landlord with damage suffered by fire or any other insured casualty, if Tenant has not previously assigned to Landlord all of Tenant's rights in and to any insurance proceeds payable because of such fire or other insured casualty damage to the Leased Premises, Tenant shall forthwith assign and set over to Landlord, all of Tenant's right, title and interest in and to all such insurance proceeds payable because of such fire or other insured casualty, and Tenant shall cooperate with Landlord as requested by Landlord, in pursuing any such claim on Landlord's behalf. If Tenant is not then in default hereunder, Tenant shall have the right and privilege, and at Landlord's option, even if Tenant is in default hereunder, the obligation at the termination of this Lease to forthwith remove any movable office equipment installed and maintained by Tenant in the Leased Premises and Tenant shall pay to Landlord to Additional Rent, all costs which would be incurred by Landlord if Landlord were to repair all
such damage, if any, to the Leased Premises or the Building resulting from the removal of such property. Tenant's obligation hereunder shall survive the expiration or other termination of the Lease Term.
37. HOLDING OVER.
In the event Tenant or any of its successors in interest hold over the Leased Promises, or any part thereof, upon expiration or other termination of this Lease or in the event Tenant continues to occupy the Leased Premises after the termination of Tenant's right of possession pursuant to Section 23 hereof, unless otherwise agreed in writing by Landlord, such holding aver shall constitute and be construed as a tenancy at will, and in such event Tenant shall pay double rent for all the time Tenant retains possession of the Leased Premises, of any part thereof, after the termination of this Lease, whether by expiration of the Lease Term or otherwise, and in addition Tenant shall pay all consequential damages, including legal fees, suffered by Landlord because of such holding over. Should Tenant holdover in any manner after expiration of this Lease, such holding over by Tenant shall be subject to all terms, covenants and conditions of this Lease which so not inconsistent with such holding over, and no such holding over by Tenant shall ever be construed as an extension of this Lease Term without Landlord's written consent.
38. QUIET ENJOYMENT.
Upon Tenant paying the Rent and observing and performing all the terms, covenants and conditions on Tenant's part to be observed and performed hereunder, Tenant may peaceably and quietly enjoy the Leased Premises without hindrance or molestation by anyone claiming by, through or under the Landlord, subject, nevertheless, to the terms and conditions of this Lease, and to any ground leases, underlying leases, mortgages, laws, regulations, covenants, restrictions and easements affecting title to the Building, the land upon which the Building is situated and Corporate Woods.
39. NOTICE.
Any notice permitted, provided for or required under this Lease must, unless otherwise expressly provided in this Lease, be in writing, and shall be given or served by depositing the same in the United States mail, postage prepaid, registered or certified and addressed to the party to be notified, with return receipt requested, or by delivering the same in person to an officer of such party with written acknowledged receipt, or by overnight delivery, when appropriate, addressed to die party to be notified at the address se forth below or such other address, notice of which has been given to the other party. Any such notice shall be effective as of the date it is so delivered, mailed or sent by overnight delivery. If directed to Landlord, it shall be addressed to:
Metropolitan Life Insurance Company
c/o Jones & Company, Managing Agent
9401 Indian Crock Parkway
40 Corporate Woods - Suite 1000
Overland Park, Kansas 66210
and to:
Metropolitan Life Insurance Company
One Lincoln center - Suite 800
Oak Brook Terrace, Illinois 60181
Attn: Regional Manager
Real Estate Investments
with a copy directed to:
Metropolitan Life Insurance Company
2001 Spring Road - Suite 400
Oakbrook, Illinois 60521
Attn.: Vice President
Real Estate Investments
If directed to Tenant, it shall be addressed to Tenant at the Leased Premises, with a copy directed to:
Acceptance Insurance Companies
One Central Park Plaza
222 South 15th Street, Suite 600 North
Omaha, Nebraska 68102
Attn: Bert Houle
40. TENANT.
The term "Tenant" as used in this Lease means and applies to whomever
executes this Lease as a Tenant regardless of number, gender or nature or
entity, and shall also include each person, corporation, partnership or other
entity, if any, which has guaranteed Tenant's performance hereunder, and so
far as affirmative covenants, hereunder, shall also include each person,
corporation, partnership or other entity, if any, which goes into possession
of any portion of the Leased Premises at any time during the Lease Term, with
or without Landlord's consent, but no person, corporation, partnership or
other entity, if any, which goes into possession of any part of the Leased
Premises without Landlord's consent and in violation of the provisions of
Section 12 hereof shall acquire any rights, legal or equitable, in the Leased
Premises or under this Lease. If more than one person, corporation,
partnership or other entity has executed this Lease, or any guarantee hereof,
all such persons, corporations, partnerships and other entities shall be
jointly and severally liable hereunder. Notice to Tenant in compliance with
Section 39 hereof, shall be deemed to be notice to each such person,
corporation, partnership or other entity.
41. RULES AND REGULATIONS.
Tenant agrees to abide by all rules and regulations for Tenants in the Building and occupants of space within Corporate Woods, as the same now exists and as they are established and modified by Landlord from time to time. The current rules and regulations are set forth in Exhibit C attached hereto and incorporated herein by reference. Landlord reserves the right to establish, modify and enforce additional reasonable and nondiscriminatory rules and regulations for the Building, the parking areas and common areas serving the Building and Corporate Woods, and to
modify existing rules and regulations from time to time, all for the safety, maintenance, repair and cleanliness of the Building and the parking area and common area serving the Building and Corporate Woods, and for the preservation of good order therein, and Tenant agrees to comply with and abide by all such rules and regulations as they exist from time to time.
42. HEIRS, SUCCESSORS AND ASSIGNS.
Subject to the provisions of Sections 33 and 34 hereof, all covenants, conditions and agreements herein contained shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns.
43. MISCELLANEOUS PROVISIONS
A. SEVERABILITY. If any term or provision of this Lease, or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall, not be affected thereby, and each term and provision of this Lease shall be valid and enforced to the fullest extent permitted by law notwithstanding the invalidity of any other term or provision hereof.
B. AUTHORITY. Each person executing this Lease for or on behalf of any party, in so doing, individually represents and warrants to the other party hereto, that such person has the actual and legal authority to bind such party for whom such person purports to be executing this Lease.
C. GOVERNING LAW. This Lease and the sights and obligations of the parties hereto shall be interpreted, construed, and enforced in accordance with the laws of the State of Kansas.
D. FORCE MAJEURE. Whenever a period of time is herein prescribed for the taking of any action by Landlord or Tenant, Landlord or Tenant as the case may be, shall not be liable or responsible for, and there shall be excluded from the computation of such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations or restrictions, or any other cause whatsoever beyond the control of Landlord or Tenant, as the case may be. The provisions of this Section shall not operate to excuse Tenant from the prompt payment of Rent or the prompt payment of any other sum required by the terms of this Lease.
E. TIME OF PERFORMANCE. Except as expressly otherwise herein provided, with respect to all required acts of Tenant, time is of the essence of this Lease.
F. EFFECT OF DELIVERY OF THIS LEASE. Landlord has delivered a copy of this Lease to Tenant for Tenant's review only, and the delivery hereof does not constitute an offer to Tenant or an option. This Lease shall not be binding and effective until a copy executed by Tenant is delivered to, and executed by Landlord.
G. INDEX AND HEADINGS; COPIES. The Index and Section headings of this Lease are for convenience only and shall not limit or define the meaning or content of this Lease or any
Section hereof. This Lease is being executed in several copies, each of which shall be deemed an original.
44. ADDENDUM AND EXHIBITS.
The following exhibits ("Exhibits") are attached hereto and incorporated herein by reference and made a part of this Lease for all purposes:
Exhibit "A" - Floor Plate of Leased Promises Exhibit "B" - Plans and Specifications for Leasehold Improvements Exhibit "C" - Current Rules and Regulations for Corporate Woods Office Park
45. INTEGRATED AGREEMENT.
This Lease, including the Addendum and all attached Exhibits, contains and constitutes the entire agreement between Landlord and Tenant and supersedes all prior agreements and understandings between the parties to this Lease relating to the subject matter of this Lease. There are no agreements, understandings, restrictions, warranties, representations or inducements between the parties to this Lease relating to the subject matter hereof, other than those set forth in this Lease.
IN WITNESS WHEREOF, the parties hereto have executed this Lease the day and year first above written.
LANDLORD: TENANT:
METROPOLITAN LIFE INSURANCE ACCEPTANCE INSURANCE
COMPANY, COMPANIES, INC.,
a New York Corporation a Nebraska Corporation
By: /s/ Jeffrey S. Moce By: /s/ Peter A. Kholla
----------------------------- ------------------------------
Name: Jeffrey S. Moce Name: Peter A. Kholla
------------------------ -------------------------
Its: Assistant Vice President Its: Asst. Corporate Secretary
------------------------- --------------------------
|
TABLE OF CONTENTS
PAGE NO.
1. TERM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
2. LEASED PREMISES.. . . . . . . . . . . . . . . . . . . . . . . . . . . .2
3. SECURITY DEPOSIT. . . . . . . . . . . . . . . . . . . . . . . . . . . .2
4. LANDLORD'S LIEN.. . . . . . . . . . . . . . . . . . . . . . . . . . . .2
5. RENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
6. RENT ADJUSTMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . .4
7. PRORATION OF FIRST AND LAST MONTH'S RENT. . . . . . . . . . . . . . . .5
8. USE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
9. SERVICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
10. REPAIRS, MAINTENANCE AND ALTERATIONS. . . . . . . . . . . . . . . . . .8
11. LIENS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
12. ASSIGNMENT AND SUBLETTING.. . . . . . . . . . . . . . . . . . . . . . 10
13. CONSTRUCTION OF IMPROVEMENTS. . . . . . . . . . . . . . . . . . . . . 11
14. ACCEPTANCE OF LEASED PREMISES.. . . . . . . . . . . . . . . . . . . . 12
15. COMPLIANCE WITH APPLICABLE LAWS AND INSURANCE
REQUIREMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
16. INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
17. INSURANCE, LOSS, DAMAGE, REIMBURSEMENT. . . . . . . . . . . . . . . . 13
18. LANDLORD'S USE OF BUILDING. . . . . . . . . . . . . . . . . . . . . . 15
19. DAMAGE OR DESTRUCTION.. . . . . . . . . . . . . . . . . . . . . . . . 15
20. CONDEMNATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
21. ABANDONMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
22. PARKING.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
23. DEFAULT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
24. BROKERAGE COMMISSIONS.. . . . . . . . . . . . . . . . . . . . . . . . 19
25. WAIVER OF BENEFITS. . . . . . . . . . . . . . . . . . . . . . . . . . 20
26. MISCELLANEOUS TAXES.. . . . . . . . . . . . . . . . . . . . . . . . . 20
27. SPRINKLERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
28. RIGHTS AND REMEDIES.. . . . . . . . . . . . . . . . . . . . . . . . . 20
29. ATTORNEY'S FEES AND COSTS.. . . . . . . . . . . . . . . . . . . . . . 21
30. MEMORANDUM OF LEASE.. . . . . . . . . . . . . . . . . . . . . . . . . 21
31. SUBORDINATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
32. ESTOPPEL CERTIFICATE. . . . . . . . . . . . . . . . . . . . . . . . . 21
33. ASSIGNMENT OF LEASE BY LANDLORD.. . . . . . . . . . . . . . . . . . . 22
34. LIMITED LIABILITY OF LANDLORD.. . . . . . . . . . . . . . . . . . . . 22
35. TRANSFER OF TENANT. . . . . . . . . . . . . . . . . . . . . . . . . . 23
36. PEACEABLE SURRENDER.. . . . . . . . . . . . . . . . . . . . . . . . . 23
37. HOLDING OVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
38. QUIET ENJOYMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
39. NOTICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
|
40. TENANT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 41. RULES AND REGULATIONS.. . . . . . . . . . . . . . . . . . . . . . . . 25 42. HEIRS, SUCCESSORS AND ASSIGNS.. . . . . . . . . . . . . . . . . . . . 26 43. MISCELLANEOUS PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . 26 44. ADDENDUM AND EXHIBITS.. . . . . . . . . . . . . . . . . . . . . . . . 27 45. INTEGRATED AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . 27 |
LEASE
ACCEPTANCE INSURANCE COMPANIES, INC.
AND
METROPOLITAN LIFE INSURANCE COMPANY
12 CORPORATE WOODS
10975 BENSON - SUITE 380
OVERLAND PARK, KANSAS 66210
FIRST LEASE MODIFICATION AGREEMENT
Dated as of 10/30/96
WITNESSETH:
WHEREAS, KNICKERBOCKER PROPERTIES, INC., XXI, as successor in interest to METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation, as ("Landlord"), and ACCEPTANCE INSURANCE COMPANIES, INC., a Delaware corporation as ("Tenant"), respectively, under the terms of a lease dated January 10, 1995 ("Lease"), covering approximately 582 net rentable square feet of office space in Suite 380 in 12 Corporate Woods in the Corporate Woods Office Park located in the city of Overland Park, Johnson County, Kansas desire to modify and amend said Lease; and
WHEREAS, Tenant now desires to expand the Leased Premises to include approximately 2,076 square feet plus 249 square feet of common area allocated thereto, for a total of approximately 2,325 additional net rentable square feet known as Suite 390 in 12 Corporate Woods requiring the following lease modifications to become effective January 1, 1997 or upon substantial completion of the improvements described on Exhibit B-1;
NOW, THEREFORE, for and in consideration of the rents, covenants and agreements as set forth in the Lease, and of the premises and undertakings hereinafter set forth, the receipt and sufficiency of which is hereby acknowledged, the parties agree that said Lease shall be and is hereby amended and modified as hereinafter provided.
1. The existing provisions of Section 1. TERM shall continue to be applicable through December 31, 1996. Section 1. TERM is hereby amended to provide that from and after January 1, 1997, the Term shall be as follows:
1. TERM
A. Term of this Lease ("Lease Term") shall be five (5) years, zero (0) months commencing on the first day of January, 1997 ("Commencement Date") unless adjusted as hereinafter provided and ending on the last day of December, 2001.
B. If Landlord shall permit Tenant to enter into possession of the Leased Premises prior to the Commencement Date, Tenant covenants and agrees that its occupancy shall be deemed to be under all of the covenants and agreements of this Lease except that it shall not owe or pay Rent to Landlord prior to the Commencement Date.
C. If Tenant enters into possession of the Leased Premises on a date other than the Commencement Date, the expiration date of the Lease Term shall not be adjusted unless otherwise hereafter agreed to in writing by Landlord.
D. If by the Commencement Date specified in Section 1, paragraph A hereof, the Leased Premises have not been substantially completed pursuant to the plans and
specifications set forth on Exhibit B-1, due to omission, delay or default by Tenant or anyone acting under or for Tenant ("Tenant Delay") or due to any cause other than Landlord's default, Landlord shall have no liability, and the obligations of this Lease (including, without limitation, the obligation to pay Rent) shall nonetheless commence as of the specific date set forth in Section 1, paragraph A hereof.
E. If, however, the Leased Premises are not substantially completed due to default on the part of the Landlord, then as Tenant's sole remedy for the delay in Tenant's occupancy of the Leased Premises, the Commencement Date shall be delayed and the Rent herein provided shall not commence until the earlier of actual occupancy by Tenant or substantial completion of the work which Landlord has agreed to perform.
2. Commencing as of January 1, 1997, Section 2. LEASED PREMISES is hereby revoked and replaced with the following provisions thereto:
2. LEASED PREMISES
Landlord hereby rents, leases and lets to Tenant, and Tenant hereby rents, leases and takes from Landlord the following described premises consisting of an area of approximately 2,596 square feet of space ("Leased Premises") together with the pro rata share of common floor area allocable thereto which is approximately 311 square feet for a total of approximately 2,907 net rentable square feet which is designated as Suites 380 and 390 located on the third floor in that building designated as 12 Corporate Woods ("Building"), which Building contains approximately 101,331 total net rentable square feet, the street address of which is 10975 Benson, and which is located within the Corporate Woods subdivision ("Corporate Woods"), in Overland Park, Johnson County, Kansas 66210. The location of the Leased Premises within the Building is further shown on Exhibit A-1 attached hereto and is that area cross-hatched.
3. The existing provisions of Section 5. RENT shall continue to be applicable through December 31, 1996. Rent is hereby amended to provide that from and after January 1, 1997, Rent shall be due and payable as follows:
5. RENT.
Tenant agrees to pay Landlord rent as follows:
A. BASE RENT. The monthly base rent ("Base Rent") shall be Four Thousand Seven Hundred Twenty-Three and 88/100 Dollars ($4,723.88) from January 1, 1997 to December 31, 2001. All Base Rent shall be payable in advance. The Base Rent for the first calendar month or partial calendar month of the Term shall be due upon the Commencement Date, subject to Section 7 of the Lease, and the remaining payments of Base Rent shall be due on the first day of each calendar month thereafter during the Term. The Base Rent includes annual Operating Costs (hereinafter defined) to the extent they do not exceed $7.91 per net rentable square foot ("Operating Stop").
B. ADDITIONAL RENT. In addition to the Base Rent, Tenant shall pay during the Lease Term as additional rent ("Additional Rent"), the following:
(i) Tenant's pro rata share of all Operating Costs (hereinafter defined) reasonably attributable to the Leased Premises during the Term, to the extent such Operating costs attributable to the Leased Premises exceed the Operating Stop included in the Base Rent; and
(ii) All other sums or amounts herein otherwise provided for, which are to be paid for by Tenant.
C. All Base Rent and Additional Rent (both Base Rent and Additional Rent are herein included in the term "Rent") due hereunder shall be due and payable in U.S. dollars without notice or demand, both of which are hereby expressly waived, and without offset or counterclaim, except as herein specifically provided otherwise. Tenant's pro rata share of any item under this Lease shall be that percentage which the net rentable square feet of space in the Leased Premises bears to the total net rentable square feet of space in the Building. All Rent shall be payable to Knickerbocker Properties, Inc. XXI, P.O. Box 29634 G.P.O., New York, New York 10087-9634, or at such other address as Landlord may from time to time direct in the manner required hereunder for giving notice. If any Rent is not paid within ten (10) days after the same is due, Tenant shall pay to Landlord a late payment fee to compensate Landlord for its extra expenses, inclusive of legal fees, involved in handling such delinquency. The late payment fee shall be the greater of five percent (5%) of the amount delinquent, or $100.00, plus interest at the rate of eighteen percent (18%) per annum or the maximum rate which can be legally charged, whichever is less, on the entire delinquent sum from its due date until paid, which amounts shall be payable as Additional Rent.
4. Effective immediately, Section 13. CONSTRUCTION OF IMPROVEMENTS is hereby revoked and replaced with the following provisions thereto:
13. CONSTRUCTION OF IMPROVEMENTS.
Landlord agrees to cause the Leased Premises to be improved in accordance with the plans, specifications, and agreements approved by Landlord and Tenant. Landlord agrees to assume the total cost of constructing the improvements as outlined in Exhibit B-1 hereof which shall not exceed $32,180.00. In the event the total cost of constructing such improvements exceeds such sum due to any Tenant-caused additions, changes, or delays, then Tenant shall be responsible for such excess costs, which sum shall be paid by Tenant to Landlord as additional rent, within twenty (20) days after Landlord's billing for such excess costs. Landlord agrees to commence and complete the construction of the improvements with reasonable diligence.
5. Effective immediately, Section 17 INSURANCE, LOSS, DAMAGE, REIMBURSEMENT is hereby revoked and replaced with the following provisions thereto:
17. INSURANCE, LOSS, DAMAGE, REIMBURSEMENT
A. TENANT'S INSURANCE REQUIREMENTS. Tenant shall maintain at its own cost and expense:
(i) Commercial general liability insurance on an occurrence basis naming Landlord, its asset manager and property manager and Tenant as insureds covering claims and liabilities for injury or damage to persons or property or for the loss of life or property occurring upon, in or about the Leased Premises, caused by or resulting from any act or omissions of Tenant, its employees, agents, contractors, customers, guests, licensees or invitees, such insurance to afford minimum protection during the Lease Term in such amounts as Landlord shall from time to time designate by written notice to Tenant, but in no event less than $5,000,000 combined single limit coverage for bodily injury, death, property damages or a combination thereof;
(ii) Workmen's Compensation and Employer's Liability Insurance in accordance with the laws of the State of Kansas;
(iii) Fire insurance in an amount adequate to cover the cost of replacement of all equipment, installations, fixtures and contents in the Leased Premises with a maximum deductible of $1,000.00, including leasehold improvements paid for by Tenant, in the event of loss or damage by fire and against loss or damage by other risks now or hereafter embraced by so-called "All Risk property coverage," including protection against vandalism, malicious mischief, theft and sprinkler leakage; and
(iv) When required by Landlord, such other insurance against other insurable hazards and in such amounts as may from time to time be commonly and customarily insured against and are generally available for tenants in first-class office buildings in the City of Overland Park, Kansas.
All of the above insurance may be affected by one or more policies (which may cover the Leased Premises and other locations), but shall be issued by insurers of recognized responsibility reasonably acceptable to Landlord, with a minimum Best's rating of A-V1, and each such policy shall contain a provision whereby the insurer agrees not to cancel or terminate such coverage without at least ten (10) days prior written notice to Landlord, and that no act or omission to act of any of the named insureds will invalidate such insurance as to the other named insureds. Tenant's insurance shall be primary and non-contributory.
B. WAIVER OF LIABILITY FOR DAMAGES. Landlord, its agents, servants and employees shall not be liable for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water, rain, snow, earthquakes or leaks from any part of the Building, or from the pipes, appliances or plumbing works or from the roof, street or subsurface or from any other place or by dampness or by any
other cause of whatsoever nature, unless caused by or due to the gross negligence or willful misconduct of Landlord, and Tenant does hereby expressly waive any consequential damages, compensation or claims for inconvenience or loss of business, rents or any profits as a result of any such injury or damage.
C. WAVIER OF SUBROGATION. Landlord and Tenant each hereby waives on behalf of itself and its property insurers (none of which shall ever be assigned any such claim or be entitled thereto due to subrogation or otherwise) any and all rights of recovery, claim, action, or cause of action, against the other, its agents, officers, servants, partners, shareholders, or employees, and against every other tenant in the building who shall have executed a similar waiver as set forth in this Section, and the agents, officers, servants, partners, shareholders and employees of each such other tenant, for any loss or damage that may occur to the Leased Premises, or any improvements thereto, or the Building or any improvements thereto, or any personal property of such party therein, by reason of fire, the elements, or any other cause or origin, which is insured against under any property insurance policy actually being maintained from time to time, even if not required hereunder, or which would be insured against under the terms of any insurance policy required to be carried or maintained hereunder, whether or not such insurance coverage is actually being maintained by Tenant and regardless of the cause or origin, including in every instance negligence of the other party hereto, its agents, officers, or employees, or the negligence of any other tenant in the Building who shall have executed a similar waiver, or its agents, servants or employees. Landlord and Tenant each agree to cause appropriate clauses to be included in their property insurance policies necessary to implement the foregoing provisions.
D. REIMBURSEMENT OBLIGATION OF TENANT. Tenant shall reimburse Landlord for all expense, damages and fines incurred or suffered by Landlord by reason of any breach, violation or nonperformance by Tenant, or its agents, servants or employees, of any covenant or provision of this Lease, or by reason of damage to persons or property caused by moving property of or for Tenant in or out of the Building, or by the installation or removal of furniture or other property of or for Tenant, or by reason of or arising out of the carelessness, negligence or improper conduct of Tenant, or its agents, servants or employees, in the use or occupancy of the Leased Premises or the Building or Corporate Woods.
E. TENANT NOTICE OBLIGATIONS. Tenant shall give Landlord immediate notice in case of fire or accidents in the Leased Premises or in the Building. Tenant shall give Landlord prompt notice if any of the insurance coverage and the clauses required to be included in each of Tenant's insurance policies pursuant to the provisions of this Section cannot be obtained. Tenant shall give Landlord immediate notice of any cancellation or change of the terms of any such policy which would affect any such clause or naming.
F. EVIDENCE OF INSURANCE. On or before the Commencement Date Tenant shall furnish Landlord with a certificate or certificates evidencing the aforesaid insurance coverage, or a copy of the actual insurance policy providing such insurance to coverage. Renewal policies or certificates therefor shall be furnished to Landlord at least thirty (30)
days prior to the expiration date of each policy for which either a certificate or a copy of the policy was theretofore furnished to Landlord.
6. Effective immediately, Section 39. NOTICE is hereby revoked in its entirety and replaced with the following provision:
39. NOTICE.
Any notice permitted, provided for or required under this Lease must, unless otherwise expressly provided in this Lease, be in writing, and shall be given or served by depositing the same in the United States mail, postage prepaid, registered or certified and addressed to the party to be notified, with return receipt requested, or by delivering the same in person to an officer of such party with written acknowledged receipt, or by overnight delivery, when appropriate, addressed to the party to be notified at the address set forth below or such other address, notice of which has been given to the other party. Any such notice shall be effective as of the date it is so delivered, mailed or sent by overnight delivery. If directed to Landlord, it shall be addressed to:
Knickerbocker Properties, Inc. XXI
c/o Jones Lang Wootten Realty Advisors
335 Madison Avenue, Seventh Floor
New York, New York 10017
ATTN: Bruce Morrison
with a copy directed to:
MC Real Estate Services
9401 Indian Creek Parkway, Suite 1000
Overland Park, Kansas 66210
ATTN: General Manager
If directed to Tenant, it shall be addressed to Tenant at the Leased Premises, with a copy directed to:
Acceptance Insurance Companies, Inc.
One Central Park Plaza
222 South 15th Street, Suite 600 North
Omaha, Nebraska 68102
ATTN: Bert Houle
All other terms and conditions of said Lease and of any previous modification thereof shall remain unchanged.
The provisions of this First Lease Modification 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 First Lease Modification Agreement in quadruplicate on the day and year first above written.
TENANT:
ACCEPTANCE INSURANCE COMPANIES, INC.,
A DELAWARE CORPORATION
By: /s/ Raymond N. Siebert Name: Raymond N. Siebert Its: V.P. Administration |
LANDLORD:
KNICKERBOCKER PROPERTIES, INC. XXI,
By: /s/ Bruce G. Morrison Name: Bruce G. Morrison Its: Vice President |
Exhibit 10.20
AGREEMENT FOR INTERACTIVE POINT-TO-POINT
ELECTRONIC ACCESS TO NEBRASKA DRIVERS LICENSE
RECORDS THROUGH NEBRASK@ ONLINE
THIS AGREEMENT, effective as of the last date written below, is between Equifax Services, a corporation with its principal office in Atlanta, Georgia and Nebrask@ Online, a State of Nebraska entity operated under the authority of the Nebraska Library Commission, by and through its agent for this purpose, Nebrask@ Interactive, Inc., a Nebraska corporation (hereinafter "Network Manager").
WHEREAS, Equifax desires to receive interactive electronic access to Nebraska Driver License Records (and at some future date, Motor Vehicle Title and Lien Records, if the same become available electronically) under the custody of the Division of Motor Vehicles of the State of Nebraska (hereinafter "DMV"), pursuant to that 1995 interagency agreement between DMV and the Nebraska Library Commission, and as it may be amended or superseded from time to time; and
WHEREAS, driver license records and motor vehicle title and lien records are currently public records under Nebraska statutes; and
WHEREAS, Equifax desires to receive such access via the Internet, a dedicated digital data circuit between Network Manager and Equifax or any other means of access mutually agreed upon (which type of access shall hereinafter be referred to as "interactive point-to-point");
NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein, and in consideration of the amounts to be paid by Equifax to Nebrask@ Online for interactive point-to-point access to such records, the parties agree as follows:
1. Network Manager shall furnish to Equifax upon query by Equifax, within limitations of the electronic delivery system, such data fields contained in Nebraska driver license records as is permitted by DMV to be furnished by Network Manager to all other interactive and batch customers.
2. Equifax may request records directly from Network Manager via the Internet or Telnet or "rlogin" through a remote TCP/IP router and digital data circuit provided by Equifax. All expenses associated with requesting or receiving records using the remote TCP/IP network shall be the responsibility of Equifax.
Agreement for Interactive Point-to-Point Electronic Access to Nebraska Drivers License Records through Nebrask@ Online PAGE 2
3. Equifax shall pay to Network Manager a fee for each record requested electronically, which fee has been set, and may be revised from time to time, by the Nebraska Library Commission, or some other state agency with supervisory and oversight authority over Nebrask@ Online, and which fee is currently $3.00 per record requested.
4. Payment shall be remitted to Network Manager within twenty (20) days from the date of the invoice. Invoices will be mailed monthly to the address shown below:
Equifax Services
Attn: Registry Management
Box 74006: Mail Drop 42J
Atlanta, GA 30374-0006
5. This agreement may be terminated at any time after sixty (60) days notice by the terminating party giving notice in writing, signed by a duly authorized representative of the terminating party. This agreement shall be terminable immediately at the option of any party upon any material breach of the agreement by the other party. This agreement shall be terminated immediately without advance notification upon cessation of the interagency agreement between DMV and the Nebraska Library Commission, unless there is in place a substitute agreement or authority for access to continue. Notice of termination shall be in writing signed by a duly authorized representative of the aggrieved party and deposited with the United States Postal Service, correctly addressed and postage prepaid.
6. Equifax agrees to use any information or records obtained from Network Manager, and to require others who obtain the information through Equifax to use any information or records so obtained, only in a manner consistent with federal or state laws, rules, regulations, and information policies, including policies of Network Manager.
Agreement for Interactive Point-to-Point Electronic Access to Nebraska Drivers License Records through Nebrask@ Online PAGE 3
7. This agreement constitutes the entire agreement of the parties and supersedes all other prior written or oral agreements between the parties with respect to the subject matter hereof. The agreement may be changed, modified or amended at any time by an instrument in writing, signed by duly authorized representatives of both parties hereto or by changes in Nebraska law.
IN WITNESS TO their agreement to all the above and foregoing, the parties hereto have caused this document to be signed by their duly authorized agents.
Equifax Services Nebrask@ Online
"Equifax" ANetwork Manager@
/s/ G.S. Iken /s/ Sam Somerhalder
---------------------------------- -----------------------------------
Authorized Agent Sam Somerhalder
G.S. Iken General Manager
----------------------------------
AVP
----------------------------------
(Typed Title)
Dated 3/15/96 Dated 3/25/96
----------------------------- -----------------------------
|
Exhibit 10.21
AGREEMENT
This agreement, effective September 1, 1997, is between ChoicePoint, a corporation with its principal office in Atlanta, Georgia, and the Information Network of Kansas, hereinafter referred to as INK, a State of Kansas instrumentality, by and through its agent, the Kansas Information Consortium, Inc. hereinafter referred to as Network Manager.
WHEREAS, ChoicePoint is desirous of entering into an Agreement with INK for the purpose of receiving computer access to driver license records under the custody of the Kansas Department of Revenue, hereinafter referred to as KDOR, as provided in K.S.A. 54-9301, ET SEQ..
WHEREAS, the driver license records maintained by KDOR are subject to K.S.A. 74-2012 as amended, and information therefrom may be provided to a requesting party for the purpose of assisting an insurer authorized to business in Kansas, or the insurer's authorized agent, in processing an application for, or renewal, or cancellation of, a motor vehicle liability insurance policy; and (uses as stated in "Certificate of Acceptance" attached hereto)
WHEREAS, the driver license records maintained by KDOR and accessed via INK are subject to the provisions of K.S.A. 45-201 ET SEQ. which relates to the Kansas Open Records Act.
WHEREAS, ChoicePoint desires to purchase electronic access to said records now and in subsequent years; and
WHEREAS, the parties hereto desire to follow the spirit as well as the letter of the legislative mandate as aforesaid and as contained in the Kansas Open Records Act, and that ChoicePoint as a requester of said records does not intend to, and will not: (A) use any list of names or addresses contained in or derived from the records of information for the purpose of selling or offering for sale any property or service to any person listed or to any person who resides at any address listed; or (B) sell, give or otherwise make available to any person any list of names addresses contained in or derived from the records or information for the purpose of allowing that person to sell or offer for sale any property or service to any person listed or to any person who resides at any address listed; (C) use any information or records obtained from INK in any manner contrary to Federal or State laws, rules and regulations or policies, or INK policy; and
FURTHERMORE, ChoicePoint, agrees to comply with the CONFIDENTIALITY requirements of driver license data in that; All records of the Kansas Division of Vehicles relating to the physical or mental condition of any person or to expungement shall be confidential. Records of the Division relation to diversion agreement for the purposes of K.S.A. 8-1567, 12-4415, and 22-2908, and amendments thereto, shall be confidential and shall be disclosed by direct computer access only to: (1) A city, county or district attorney, for the purpose of determining a person's eligibility for diversion; (2) a municipal or district court, for the purpose of using the record in connect with any matter before the court; (3) a law enforcement agency, for the purpose of supplying the record to a person authorized to obtain it under (1) or (2) or (4) an employer when a person is required to retain a commercial driver's license due to the nature of such person's employment. INDIVIDUALS AND/OR ORGANIZATIONS VIOLATING THIS CONFIDENTIALITY PROVISION ARE SUBJECT TO PROSECUTION.
NOW, THEREFORE, in consideration of the mutual covenants and agreements, for the amounts hereinafter provided to be paid by ChoicePoint, the parties hereto hereby agree as follows:
1. The Network Manager shall furnish to ChoicePoint agreed data, contained on Kansas driver license records requested by ChoicePoint.
2. ChoicePoint may request records directly from The Network Manager via dial-up 9.6Kps V.32 3780 to 3780 direct telecommunications line, dial up 2400bps to 28.8Kbps asynchronous Kermit direct telecommunication line.
3. All correspondence should be delivered to the following address:
Information Network of Kansas
534 South Kansas Avenue
Suite 1210
Topeka, KS 66603-3406
4. Remittances to INK under this contract will be delivered to the following address:
Information Network of Kansas
P.O. Box 1576
Topeka, KS 66603
5. Shipment and billing by the Network Manager shall be made to the following address:
ChoicePoint
Attention: Registry Management - 71D
P.O. Box 105179
Atlanta, Georgia 30348-5179
6. ChoicePoint shall pay to INK a fee of $4.00 per record request. Payment
shall be remitted to INK within twenty (20) days from the date of the
invoice. Invoices will be mailed monthly to the address shown in
Section 5. The account is in default if payment in full is not received
by the 25th of each month for the previous month's transactions. INK may
assess a late charge equal to 5% of the balance in default. In addition
INK may suspend or terminate Choicepoint ability to retrieve motor
vehicle records from the State of Kansas.
7. This agreement may be terminated at any time after sixty (60) days notice by an instrument in writing, signed by duly authorized representative of either party hereto. This agreement shall immediately be terminated upon any breach of any covenant by either party without advance notification or upon cessation of the agreement with KDOR. Notice of termination shall be in writing signed by a duly authorized representative of the aggrieved party and deposited with the United States Postal Service correctly addressed and postage prepaid.
8. This agreement constitutes the entire AGREEMENT of the parties and supersedes all other prior written or oral agreements between the parties with respect to subject matter hereof. This agreement may be changed, modified or amended at any time by an instrument in writing, signed by duly representatives of both parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their duly authorized official or officers.
ChoicePoint Information Network of Kansas Network Manager
/s/ George S. Iken 6/15/98 /s/ Debra Luling 6/22/98
------------------- ------- -------------------- -------
Signature Date Debra Luling Date
General Manager
|
CERTIFICATE OF ACCEPTABLE USE
DRIVER PRIVACY PROTECTION ACT: Prohibition on release and use of certain personal information by States, organizations and persons.
If this document is being signed by a representative of the company or organization, THE FORM MUST BE SIGNED BY AN INDIVIDUAL LEGALLY AUTHORIZED TO OBLIGATE YOUR COMPANY TO AN AGREEMENT.
I certify that CHOICEPOINT SERVICES INC. (FORMERLY EQUIFAX SERVICES INC) (User) is eligible under the DRIVER PRIVACY PROTECTION ACT OF 1994 (18 USC APP. 2721 ET SEQ.) and relevant Kansas statutes and regulations to receive the records of individuals who have chosen the "opt out" alternative through the Kansas Department of Motor Vehicles.
User certifies legal fulfillment in at least one of the federally regulated categories of permissible use and understands that by signing this form, User agrees to adhere to all regulations and stipulations associated with this law.
User further understands that it is a violation of Federal law to give false information to obtain such records and that by violating this Federal mandate User is subject to prosecution.
Should User or User's customers upon subsequent examination be found to have submitted a request and thereby obtained personal information, which request does NOT fall within one of the federally regulated categories of permissible use, then User, User's customer, or both could be SUBJECT TO THE PENALTIES PROVIDED FOR SUCH A VIOLATION IN THE DRIVER PRIVACY PROTECTION ACT OF 1994.
If you are not certain you or your company qualify to obtain opt out records, please refer to the actual text of the law (18 USC App. 272) to insure compliance.
PLEASE PLACE YOUR INITIAL TO THE LEFT OF THE FEDERALLY MANDATED CATEGORY(S) OF ACCEPTABLE USE FOR WHICH YOU ARE OBTAINING OPT OUT RECORDS.
1) ___________ For use by any government agency, including any court or law
enforcement agency, in carrying out its functions, or any private person
or entity acting on behalf of a Federal, State, or local agency in carrying
out its functions.
2) ___________ For use in connection with matters of motor vehicle or driver
safety and theft; motor vehicle emissions; motor vehicle product
alterations, recalls, or advisories; performance monitoring of motor
vehicles, motor vehicle parts and dealers; motor vehicle market
research activities, including survey research; and removal of
non-owner records from the original owner records of motor vehicle
manufacturers.
3) /s/ GI For use in the normal course of business by a legitimate
----------- business or its agents, employees, or contractors, but only -
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Certificate of Acceptable Use Page 1 of 2
A) /s/ GI to verify the accuracy of personal information
----------- submitted by the individual to the business
or its agents, employees, or contractors; and
B) /s/ GI if such information as so submitted is not
----------- correct or is no longer correct, to obtain the
correct information, but only for the purposes of preventing
fraud by, pursuing legal remedies against, or recovering
on a debt or security interest against, the individual.
4) ___________ For use in connection with any civil, criminal, administrative,
or arbitral proceeding in any Federal, State, or local court or agency or
before any self-regulatory body, including the service of process,
investigation in anticipation of litigation, and the execution or
enforcement of judgments and orders, or pursuant to an order of a Federal,
State, or local court.
5) ___________ For use in research activities, and for use in producing
statistical reports, so long as the personal information is not published,
redisclosed, or used to contact individuals.
6) /s/ GI For use by any insurer or insurance support organization, or
----------- by a self-insured entity, or its agents, employees, or
contractors, in connection with claims investigation activities, antifraud
activities, rating or underwriting.
7) /s/ GI For use in providing notice to the owners of towed or
----------- impounded vehicles.
8) /s/ GI For use by any licensed private investigative agency or
----------- licensed security service for any purpose permitted under this
subsection.
9) /s/ GI For use by an employer or its agent or insurer to obtain or
----------- verify information relating to a holder of a commercial
driver's license that is required under the Commercial Motor Vehicle Safety
Act of 1986 (49 USC App. 2710 et seq).
10) NOT ADOPTED
11) /s/ GI For any other use in response to requests for individual motor
----------- vehicle records if the motor vehicle department has provided in
a clear and conspicuous manner on forms for issuance or renewal of
operator's permits, titles, registrations, or identification cards, notice
that personal information collected by the department may be disclosed to
any business or person, and has provided in a clear and conspicuous manner
on such forms an opportunity to prohibit such disclosures.
12) NOT ADOPTED
13) /s/ GI For use by any requester, if the requester demonstrates it
----------- has obtained the written consent of the individual to whom the
information pertains.
14) ___________ For any other use specifically authorized under the law of the
State that holds the record, if such use is related to the operation of a
motor vehicle or public safety.
|
/s/ George S. Iken AVP 9/2/97 ----------------------------- -------- Name / Title (please print) Date |
User is in compliance with THE DRIVER PRIVACY PROTECTION ACT OF 1994 (18USC App. 2721 et seq) in the acquisitions of Kansas "opted out" records.
/s/ George S. Iken --------------------------------------- Signature |
Certificate of Acceptable Use Page 2 of 2
Exhibit 10.22
AGREEMENT FOR
BATCH PROCESSING
This agreement is made between Equifax/Choice Point, a corporation with its principal offices in Atlanta, Georgia ("SUBSCRIBER"), and the Information Network of Arkansas (INA), a State of Arkansas public instrumentality operating under the authority of A.C.A. ss. 25-25-101 ET SEQ.
WHEREAS, SUBSCRIBER is desirous of entering into an Agreement with INA for the purpose of receiving computer access to official driver license records ("Agreed Data") under the custody of the Office of Driver's Services of the Revenue Division of the Department of Finance and Administration ("ODS"); and
WHEREAS, SUBSCRIBER desires to purchase electronic access to said records now and in subsequent years, and to do so by electronic batch processing;
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein, including the amounts hereinafter provided to be paid by SUBSCRIBER for such access, the parties hereto agree as follows:
1. INA shall furnish to SUBSCRIBER Agreed Data requested by SUBSCRIBER, subject to any limitations to access to the ODS database imposed by ODS.
2. SUBSCRIBER may request records directly from INA via a dial-up
28.8 Kops V.34 37$0 to 3780 direct telecommunication line.
3. SUBSCRIBER shall pay INA a fee of $8.00 per record request for Traffic Violation Reports and $11.00 per record request for Commercial Traffic Violation Reports. Payment shall be remitted to INA within twenty (20) days from the date of the invoice. Invoices will be mailed monthly to the SUBSCRIBER's address, which is:
Equifax/Choice Point P. O. Box 740006 Atlanta, GA 30374-0008
Accounts not paid when due may be fined, or may have their access terminated without notice.
4. This agreement may be terminated at any time upon sixty (60) days notice by an instrument in writing, signed by a duly authorized representative or the party wishing to terminate, and mailed to the other party. This agreement may be immediately terminated upon any material breach of any covenant herein at the option of the non-breaching party, or upon cessation of the INA's Agreement with Department of Finance and Administration. Any notice of termination shall be deposited with the United States Postal Service, restricted delivery, return receipt requested, correctly addressed to the
party to receive notice, and postage prepaid. SUBSCRIBER's address for notice shall be the address in paragraph 3 above. INA's address for notice is:
Information Network of Arkansas ATTN: Network Manager 425 West Capitol Avenue TC3Y Tower, Suite 3565 Little Rock, AR 72201
5. SUBSCRIBER agrees and represents that each Arkansas traffic violation report and commercial traffic violation report request submitted by and through SUBSCRIBER to INA will either be individually _____________ by SUBSCRIBER for compliance with the circumstances permitted for personal information as set forth in the applicable Arkansas Code, as the applicable code sections may be amended from time to time, or else SUBSCRIBER will require those who request records through them to represent in writing ONLY requests which meet the criteria for furnishing personal information on Arkansas traffic violation reports and commercial traffic violation reports under those same code sections will be submitted through SUBSCRIBER to INA. SUBSCRIBER acknowledges that obtaining or requesting personal information without complying with the Arkansas Code Annotated, as they may be amended from time to time, may subject SUBSCRIBER or their customers to the penalties of Arkansas and Federal law. SUBSCRIBER further acknowledges that INA is relying upon SUBSCRIBER's agreement herewith in allowing access to electronic batch record access.
6. This agreement constitutes the entire AGREEMENT of the parties and supersedes all other prior written or oral agreements between the parties with respect to the subject matter herein. This agreement may be changed, modified or amended at any time, but only by an instrument in writing, signed by duly authorized representatives of both parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their duly authorized representatives.
SUBSCRIBER Information Network of Arkansas
/s/ G.S. Iken 9/2/97 /s/ Joseph Nemelka 9/2/97
--------------------------------- ------------- --------------------------------- -------------
Authorized Agent Date Joseph Nemelka Date
Network General Manager
G.S. Iken
---------------------------------
(Typed Name)
2
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--------------------------------- (Typed Title) |
Exhibit 10.23
AGREEMENT FOR BATCH PROCESSING
This agreement is made between Equifax Systems, Inc., a corporation with its principal office in Atlanta, GA ("SUBSCRIBER"), and Access Indiana Information Network (AIIN), a State of Indiana instrumentality operated under the authority of the Indiana Intelenet Commission.
WHEREAS, SUBSCRIBER is desirous of entering into an Agreement with AIIN for the purpose of receiving computer access to official driver license records ("Agreed Data") under the custody of the Indiana Bureau of Motor Vehicles, ("IBMV"); and
WHEREAS, SUBSCRIBER desires to purchase electronic access to said records now and in subsequent years, and to do so by electronic batch processing;
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein, including the amounts hereinafter provided to be paid by SUBSCRIBER for such access, the parties hereto agree as follows:
1. AIIN shall furnish to SUBSCRIBER Agreed Data requested by SUBSCRIBER, subject to any limitations to access to the IBMV database imposed by IBMV.
2. SUBSCRIBER may request records directly from AIIN via Tape or, via a dial-up 19.2Kbps V.34 3780 to 3780 direct telecommunication line.
3. SUBSCRIBER shall pay to AIIN a fee of $5.00 (five dollars) per record request. Payment shall be remitted to AINN within twenty (20) days from the date of the invoice. Invoices will be mailed monthly to the SUBSCRIBER'S address, which is:
Ms. Linda Campbell
Equifax Systems, Inc.
P.O. Box 740006
Registry Management, Drop 425
Atlanta, GA 30374-0006
Accounts not paid when due may be fined, or may have their access terminated without notice.
4. This agreement may be terminated at any time upon sixty (60) days advance notice by an instrument in writing, signed by a duly authorized representative of the party wishing to terminate, and mailed to the other party. This agreement may be immediately terminated upon any material breach of any covenant herein at the option of the non-breaching party, or upon cessation of the Indiana Intelenet Commission's Interagency Agreement with IBMV. Any notice of termination shall be deposited with the United States Postal Service, restricted delivery, return receipt requested, correctly
addressed to the party to receive notice, and postage prepaid. SUBSCRIBER's address for notice shall be the address in paragraph 3 above. AIIN's address for notice is:
Access Indiana Information Network
ISTA Building, Suite 530
150 West Market Street
Indianapolis, IN 46204-2806
5. This agreement constitutes the entire AGREEMENT of the parties and supersedes all other prior written or oral agreements between the parties with respect to the subject matter herein. This agreement may be changed, modified or amended at any time, but only by an instrument in writing, signed by duly authorized representatives of both parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their duly authorized representatives.
"SUBSCRIBER" Access Indiana Information Network
by /s/ G.S. Iken 11/6/95 by /s/ William F. Bradley, Jr. 11/14/95
------------------- -------- --------------------------- --------
Authorized agent Date William F. Bradley, Jr. Date
Network General Manager
G.S. Iken
---------------------
(Typed Name)
Asst. V.P.
---------------------
(Typed Title)
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Exhibit 10.24
STATE OF UTAH - STATEWIDE CONTRACT
Contract # PD-1068*
1. CONTRACTING PARTIES: This contract is between the State of Utah and the
following CONTRACTOR:
UTAH INTERACTIVE, INC. LEGAL STATUS OF CONTRACTOR
----------------------------------- [ ] Sole Proprietor
Name [ ] Non-Profit Corporation
[X] For-Profit Corporation
150 West Market St. Ste. 530 [ ] Partnership
----------------------------------- [ ] Government Agency
Address
INDIANAPOLIS IN 46204-2806
-----------------------------------
City State Zip
Federal Tax ID# 880417510 Vendor #94598A Commodity Code #20827000000
Vendor Contact Person: Richard L. Brown Vendor Phone #: 801-652-1188
Vendor Fax #: 317-233-2382 Vendor E-mail address: inet:ric@nicusa.com
2. GENERAL PURPOSE OF CONTRACT: The general purpose of this contract is to provide: COORDINATED NETWORK
DEVELOPMENT AND MANAGEMENT FOR ON-LINE GOVERNMENT SERVICES TO THE PUBLIC.
3. CONTRACT PERIOD: Effective date MAY 7, 1999 Termination date: MAY 6, 2003 unless terminated early or
extended in accordance with the terms and conditions of this contract.
Renewal options (if any) THREE TWO-YEAR RENEWAL PERIODS AS DESCRIBED IN CONTRACT ATTACHMENT B.
4. PRICING AS PER ATTACHED PRICE LIST (see Attachment B)
CASH DISCOUNT TERMS: ________________________________
DAYS REQUIRED FOR DELIVERY: _________________________
MINIMUM ORDER: ______________________________________
5. ATTACHMENT A: Standard Terms and conditions for Statewide Contracts
ATTACHMENT B: Scope of Work and Special Terms and Conditions
ATTACHMENT C: ______________________________________________
6. OTHER DOCUMENTS INCORPORATED BY REFERENCE, BUT NOT ATTACHED:
A. Request for Proposal Number RA9000 and Contractor's Response.
B. All other governmental laws and rules.
ANY CONFLICTS BETWEEN ATTACHMENT A AND OTHER ATTACHMENTS, AND INCORPORATED DOCUMENTS WILL BE RESOLVED
IN FAVOR OF ATTACHMENT A.
IN WITNESS WHEREOF, the parties sign and cause this contract to be executed.
CONTRACTOR STATE
/s/ Richard L. Brown /s/ David Moon
---------------------------------- --------------------------------------
Richard L. Brown, General Manager David Moon, Chief Information Officer
Utah Interactive, Inc.
/s/ Douglas Richins
---------------------------------------
Douglas Richins, Director of Purchasing
|
ATTACHMENT A:
STANDARD CONTRACT TERMS AND CONDITIONS
STATE OF UTAH, STATEWIDE CONTRACT
PARTICIPANTS: This is a contract for furnishing the State of Utah government departments, institutions, agencies and political subdivisions (i.e., colleges, school districts, counties, cities, etc.).
POLITICAL SUBDIVISION PARTICIPATION: Participation under this contract by political subdivisions (i.e., colleges, school districts, counties, cities, etc.) will be voluntarily determined by the political subdivision. The contractor agrees to supply the political subdivisions based upon the same terms, conditions and prices.
QUANTITY ESTIMATES: The State does not guarantee to purchase any amount under the contract to be awarded. Estimated quantities are for bidding purposes only and are not to be construed as a guarantee to purchase any amount.
DELIVERY: The prices bid will be the delivered price to any state agency or political subdivision. All deliveries will be F.O.B. destination with all transportation and handling charges paid by the contractor. Responsibility and liability for loss or damage will remain with Contractor until final inspection and acceptance when responsibility will pass to the Buyer except as to latent defects, fraud and Contractor's warranty obligations. The minimum shipment amount will be found in the special terms and conditions. Any order for less than the specified amount is to be shipped with the freight prepaid and added as a separate item on the invoice. Any portion of an order to be shipped without transportation charges that is back ordered will be shipped without charge.
LOCAL WAREHOUSE AND DISTRIBUTION: The contractor will maintain a reasonable amount of stock warehoused in the state of Utah for immediate or emergency shipments. Shipments are to be made in the quantities as required by the various ordering agencies. Orders for less than the minimum specified amount will have transportation charges prepaid by the contractor and added as a separate item on the invoice. Any portion of an order to be shipped without transportation charges that is backordered will be shipped without charge.
REPORTS: The contractor will submit quarterly reports to the State Purchasing Agent showing the quantities and dollar volume of purchases by each agency and political subdivision.
CASH DISCOUNT TERMS: Bidder may quote a cash discount based upon early payment; however, discounts offered for less than 30 days will not be considered in making the award. The date from which discount time is calculated will be the date a correct invoice is received or receipt of shipment, whichever is later, except that if testing is performed, the date will be the date of acceptance of the merchandise.
PRICE GUARANTEE, ADJUSTMENTS: The contract pricing is guaranteed for the period specified. Following the guarantee period, any request for price adjustment must be for an equal guarantee period, and must be made at least 30 days prior to the effective date. Requests for price adjustment must include sufficient documentation supporting the request. Any adjustment or amendment to the contract will not be effective unless approved by the State Director of Purchasing. The State will be given the immediate benefit of any decrease in the market or allowable discount.
ORDERING AND INVOICING: Orders will be placed by the using agencies directly with the contractor. All orders will be shipped promptly in accordance with the delivery guarantee. The contractor will then promptly submit invoices to the ordering agency. The state contract number and the agency ordering number will appear on the invoices, freight tickets, and correspondence relating to the contract order. The prices paid by the State will by those prices on file with the Division of Purchasing. The State has the right to adjust any invoice reflecting incorrect pricing.
PAYMENT: Payments are normally made within 30 days following the date the order is delivered or the date a correct invoice is received, whichever is later. After 45 days the Contractor may assess overdue account charges up to a maximum rate of one percent per month on the outstanding balance. All payments to the contractor will be remitted by mail. Payments may be made via a State of Utah (or political subdivision) "Purchasing Card."
TAXES: Contract prices will be exclusive of state sales, use and federal excise taxes. The State of Utah's sales and use tax exemption number is E33399. The tangible personal property or services being purchased are being paid from State funds and used in the exercise of that entity's essential functions. If the items being purchased are construction materials, they will be converted into real property by employees of this government entity, unless otherwise stated in the contract, or contract orders. The State of Utah's Federal excise exemption number is 87-780010K.
INSPECTIONS: Goods furnished under this contract will be subject to inspection and test by the Buyer at times and places determined by the Buyer. If the Buyer finds goods furnished to be incomplete or not in compliance with bid specifications, the Buyer may reject the goods and require Contractor to either correct them without charge or deliver them at a reduced price which is equitable under the circumstances. If Contractor is unable or refuses to correct such goods within a time deemed reasonable by the Buyer, the Buyer may cancel the order in whole or in part. Nothing in this paragraph will adversely affect the Buyer's rights including the rights and remedies associated with revocation of acceptance under the Uniform Commercial Code.
PATENTS, COPYRIGHTS, ETC.: The Contractor will release, indemnify and hold the Buyer, its officers, agents and employees harmless from liability of any kind or nature, including the Contractor's use of any copyrighted or uncopyrighted composition, secret process, patented or unpatented invention, article or appliance furnished or used in the performance of this contract.
HOLD HARMLESS: The contractor will release, protect, indemnify and hold the State and the respective political subdivisions and their officers, agencies, employees, harmless from and against any damage, cost or liability, including reasonable attorney's fees for any or all injuries to persons, property or claims for money damages arising from acts or omissions of the contractor, his employees or subcontractors or volunteers.
AMENDMENTS: The terms of this contract will not be waived, altered, modified, supplemented or amended in any manner whatsoever without prior written approval of the State Director of Purchasing.
ASSIGNMENT/SUBCONTRACT: Contractor will not assign, sell, transfer, subcontract or sublet rights, or delegate responsibilities under this contract, in whole or in part, without the prior written approval of the State Director of Purchasing.
CANCELLATION: Unless otherwise stated in the special terms and conditions, this price agreement may be canceled without cause by the State upon
60 days notice, in writing, prior to the effective date of the cancellation. Cancellation may be in whole or in part. Cancellation of the [illegible] contractor default may be immediate.
DEFAULT AND REMEDIES: Any of the following events will constitute cause for the State to declare Contractor in default of the contract 1. Nonperformance of contractual requirements; 2. A material breach of any term or condition of this contract. The State will issue a written notice of default providing a period in which Contractor will have an opportunity to cure. Time allowed for cure will not diminish or eliminate Contractor's liability for liquidated or other damages. If the default remains, after Contractor has been provided the opportunity to cure, the State may do one or more of the following: 1. Exercise any remedy provided by law; 2. Terminate this contract and any related contracts or portions thereof; 3. Impose liquidated damages; 4. Suspend contractor from receiving future bid solicitations.
GOVERNING LAW: This price agreement is governed by and construed in accordance with the laws of the state of Utah. Provisions of this contract are pursuant to the authority set forth in Section 63-66 UTAH CODE ANNOTATED, 1953, as amended, Utah State Procurement Rules (UTAH ADMINISTRATIVE CODE Section R33) and related statutes.
LAWS AND REGULATIONS: Any and all supplies, services and equipment furnished will comply fully with all applicable Federal and State laws and regulations.
FORCE MAJEURE: Neither party to this contract will be held responsible for delay or default caused by fire, riot, acts of God and/or war which is beyond that party's reasonable control. The State may terminate this contact after determining such delay or default will reasonably prevent successful performance of the contract.
HAZARDOUS CHEMICAL INFORMATION: The Contractor will provide one set of the appropriate material safety data sheet(s) and container label(s) upon delivery of a hazardous material to the user agency. All safety data sheets and labels will be in accordance with each participating state's requirements.
CONFLICT OF INTEREST: Contractor certifies that it has not offered or given any gift or compensation prohibited by the laws of the state of Utah to any officer or employee of the state or participating political subdivisions to secure favorable treatment with respect to being awarded this contract.
INDEPENDENT CONTRACTOR: Contractor will be an independent contractor, and as such will have no authorization, express or implied to bind the State to any agreements, settlements, liability or understanding whatsoever, and agrees not to perform any acts as agent for the State, except as expressly set forth herein. Compensation stated herein will be the total amount payable to the contractor by the State. The contractor will be responsible for the payment of all income tax and social security tax due as a result of payments received from the State for these contract services. Persons employed by the State and acting under the direction of the State will not be deemed to be employees or agents of the Contractor.
NON-COLLUSION: By signing the price agreement the Contractor certifies that the offer submitted has been arrived at independently and has been submitted without collusion with, and without any agreement, understanding or planned common course of action with any other vendor of materials, supplies, equipment or services described in the price agreement, designed to limit independent bidding or competition.
SEVERABILITY: If any provision of this contract is declared by a court to be illegal or in conflict with any law, the validity of the remaining terms and provisions will not be affected; and the rights and obligations of the parties will be construed and enforced as if the contract did not contain the particular provision held to be invalid.
RECORDS ADMINISTRATION: The contractor will maintain, or supervise the maintenance of all records necessary to properly account for the payments made to the contractor for costs authorized by this contract. These records will be retained by the contractor for at least four years after the contract terminates, or until all audits initiated within the four years have been completed, whichever is later.
AUDIT OF RECORDS: The contractor agrees to allow the State and Federal auditors, and State agency staff, access to all the records to this contract, for audit and inspection, and monitoring of services. Such access will be during normal business hours, or by appointment.
WARRANTY (INCLUDING YEAR 2000): The contractor agrees to warrant and assume
responsibility for each hardware, firmware, and/or software product
(hereafter called the product) that it licenses, or sells, to the State of
Utah under this contract. The contractor acknowledges that the Uniform
Commercial Code applies to this contract. In general, the contractor warrants
that: (1) the product will do what the salesperson said it would do, (2) the
product will live up to all specific claims that the manufacturer makes in
their advertisements, (3) the product will be suitable for the ordinary
purposes for which such product is used, (4) the product will be suitable for
any SPECIAL PURPOSES that the State has relied on the contractor's skill or
judgement to consider when it advised the State about the product, especially
to ensure year 2000 compatibility and fitness, (5) the product has been
properly designed and manufactured, and (6) the product is free of
significant defects or unusual problems about which the State has not been
warned. In general, "year 2000 compatibility and fitness" means: (1) the
product warranted by the contractor will not cease to perform before, during,
or after the calendar year 2000, (2) the product will not produce abnormal,
invalid, and/or incorrect results before, during, or after the calendar year
2000, (3) will include, but not be limited to, date data century recognition,
calculations that accommodate same century and multi-century formats, date
data values that reflect century, and (4) accurately process date data
(including, but not limited to, calculating, comparing, and sequencing)
from, into, and between the twentieth and twenty-first centuries, including
leap year calculations. If problems arise, the contractor will repair or
replace (at no charge to the State) the product whose noncompliance is
discovered and made known to the contractor in writing. If there is a Year
2000 problem, the contractor agrees to immediately assign senior engineering
staff to work continuously until the product problem is corrected, time
being of the essence. Nothing in this warranty will be construed to limit any
rights or remedies the State of Utah may otherwise have under this contract
with respect to defects other than Year 2000 performance.
DEBARMENT. The CONTRACTOR certifies that neither it nor its principals are presently debarred, suspended, proposed for debarment, declared ineligible, or voluntarily excluded from participation in this transaction (contract) by any governmental department or agency. If the CONTRACTOR cannot certify this statement, attach a written explanation for review by the STATE.
(revision date: April 8, 1999)
ATTACHMENT B
SCOPE OF WORK AND SPECIAL TERMS AND CONDITIONS
CONTRACT FOR NETWORK MANAGER SERVICES
THIS CONTRACT is between the State of Utah, hereinafter referred to as "the State", and Utah Interactive , Inc., a for-profit corporation, hereinafter referred to a "UII".
WHEREAS, the State has worked diligently to create an opportunity for providing enhanced electronic access to public services and information for Utah citizens in the most cost-effective, progressive, and cooperative means possible; and
WHEREAS, E-Utah, hereinafter referred to as the "Network", is poised to become a significant public access, economic development and educational tool for the State of Utah and its residents; and
WHEREAS, the Network will significantly benefit the State through:
1. Increased public services with minimal use of tax dollars;
2. Enhanced public access to State government;
3. Equality of access to State government regardless of geographic locations;
4. Increased efficiency of State government agencies and offices without budget increases through electronic commerce transactions;
5. Providing additional resources to State agencies and offices and to assist them in information management, access, and electronic commerce functions as the project grows;
6. Providing both Network services at no cost and Premium Services, for which an access charge will be assessed as recommended by the Utah Electronic Commerce Council, hereinafter referred to as the UECC;
7. Enhancing access to services and information of political subdivisions;
and
WHEREAS, in order to effectuate electronic access and commerce for citizens with government throughout the State, the Governor's Office, Chief Information Officers' Section issued a Request for Proposal for a Government Services and Information Network (Electronic Gateway Service) RFP # RA9000 on January 8, 1999 and amendments on February 3, 1999 and February 16, 1999, referred to hereinafter collectively as the "RFP", seeking proposals for a private network manager; and
WHEREAS, UII submitted a proposal in response to the RFP, and such proposal was determined by the proposal review committee and the Division of Purchasing to be the one best suited to the goals of the State, which proposal is hereinafter referred to as the "UII Proposal"; and
WHEREAS, the State desires to contract with UII to serve as the Network Manager and to establish, develop, operate, maintain and expand the Network as mutually agreed to by UII and the State; and
WHEREAS the Network will provide increased electronic access and commerce among Utah residents, businesses, and other government entities;
NOW THEREFORE, the parties agree as follows:
1. PURPOSE OF THE NETWORK.
The purpose of the Network and this contract is to realize the vision of the Governor and the Utah Legislature in meeting the goals set forth in the Utah Information Technology Act and may be summarized as follows:
A. To create and provide a significant and diligently promoted public service to Utah citizens and businesses by:
(1) Expanded business and citizen access to government services and information;
(2) Offering an easy and convenient process for these groups to conduct transactions with State government online;
(3) Accelerating the development and delivery of an increased volume of quality, online government services;
(4) Improving the level of customer service from State government; and
B. To provide such public service without increasing the tax burden on the citizens of Utah, through utilization of private capital and management and appropriate payment for the same.
2. TERM OF CONTRACT AND RENEWALS
This Contract shall be for a term of four (4) years, commencing May 7, 1999, and expiring at 12:00 a.m., May 6, 2003, unless earlier terminated by the State.
At the option of the State, the Contract may be renewed for a period of two
(2) additional years by written notice from the State on or before October 31,
2002, of its decision to extend the Contract period through May 6, 2005.
At the option of the State, the Contract may be renewed for an additional period of two (2) additional years by written notice from the State on or before October 31, 2004, of its decision to extend the Contract period through May 6, 2007.
At the option of the State, the Contract may be renewed for a period of two
(2) additional years by written notice from the State on or before October 31,
2006, of its decision to extend the Contract period through May 6, 2009.
3. RELATIONSHIP OF PARTIES
E-Utah will be overseen by the Utah Electronic Commerce Council (UECC), an advisory boeard to the State Chief Information Officer (CIO). Routine contract administrative activities will be implemented through the contract administrator, who is the state electronic commerce coordinator, working in concert with UII. Final statutory and decision-making authority for this contract resides with the CIO. The duties and responsibilities of the UECC and UII are as follows:
A. Notwithstanding any other provisions contained herein, it is expressly agreed that UII is an independent contractor in the performance of each and every part of this Contract. As such UII is solely liable for all labor and expenses in furtherance of such performance hereunder. It is expressly agreed that UII and any of its subcontractors and agents, officers and employees in the performance of this Contract shall act in an independent capacity and not as officers or employees of the State. It is further expressly agreed that this Contract shall not be construed as a partnership or joint venture between UII or any subcontractor and the State of Utah.
B. UII may become an agent of the State only by the expressed written consent of the State.
C. UII will not pledge any assets of the State in its care, custody or control, or cause any type of lien to attach to such.
D. UII will provide network manager services in exchange for the opportunity to earn a reasonable profit from the Network's premium services. Premium Services are those
services or information that are made available in such a way that they have commercial value or add convenience to the user. UII will develop and operate the Network which will serve in a manner which is self-supporting and cost effective. Much of the information access will be provided free to Network users. Free services will be funded from the proceeds of the premium services. The development of premium or free services will include adequate integration with state agency systems to ensure that necessary records are created and populated appropriately. The Network will be self-supporting with UII receiving its compensation from the net proceeds of premium services.
E. The UECC will establish priorities and policies and approve or disapprove Service Level Agreements (agreements between the Network and a State Agencies or political subdivisions that define circumstances and responsibilities relating to providing on-line electronic access and/or transactions, which are at the agencies' or political subdivisions' discretion.) The UECC will review and approve or disapprove a service management plan for activities, schedules and deliverables. UII will submit the plan to the UECC within 60 days of the commencement of this contract. The plan shall also include but not be limited to a detailed description of the proposed network security architecture (define) and other core or shared services. The plan will also describe how maintenance, back-up disaster recovery and the design and updating of the State Home Page will be implemented. UII will also submit a revised budget plan for the operation of the Network within 60 days of the commencement of this contract.
F. As a contractor for the State, UII will deliver and disburse funds as agreed between UII, UECC and any state entity as negotiated in separate Service Level Agreement. All funds handling procedures shall be approved by the UECC and the Utah State Treasurer. UII will keep, maintain and be a custodian of all Network financial and operation records.
G. UII will disclose information in accordance with the Government Records Management Act (GRAMA) and will follow other relevant state and federal statutes, rules and regulations applicable to assuring privacy and confidentiality. Service level agreements will specify the process for disclosure. Any disclosure that is not specified in the service level agreement shall only be disclosed through the express written authorization of the data custodian.
4. HARDWARE AND SOFTWARE AGREEMENTS
A. UII will provide hardware, and provide or develop software as outlined in the UII Proposal, and such other hardware and software as may be necessary to make the Network operational.
B. Upon completion of the initial four year term of the contract, UII will provide to the State at no cost, and without additional terms or conditions, a complete copy, together with any software updates or upgrades made by UII, of all application and network software (hereinafter collectively "The Software") developed either by UII or by any or all of its Affiliate Network Companies and implemented on the network (Corporations who are wholly owned subsidiaries of the National Information Consortium, Inc. that serve as the Network Managers for state gateway service initiatives.) UII will also include with The Software complete documentation and source code. The State shall be granted a perpetual for-use-only license to The Software including rights to modify the code and application as the State deems appropriate. An exclusion to this provision applies to software or documentation created by third parties and purchased by UII, or one of its Affiliate Network Companies. The Software shall be delivered to the State no later than the end of the term of
the contract unless otherwise agreed to mutually by the parties to this contract. This provision also remains in effect for any additional software created by UII or an Affiliate Network Company implemented on the Network during any subsequent contract extension, amendment or renewal period.
C. If this Agreement is terminated by the State "for cause" or by UII for reasons other than those identified in section 15 and 16 prior to the end of the initial contract term, the State shall be entitled to the license at the time termination is effective. If this Agreement is terminated by the State without cause the State reserves the right to negotiate terms for licensure of software. The State reserves the right to acquire equipment at fair market value at the termination of this contract in coordination with UII's leasing agent.
D. License shall be limited to State use and may not be sublicensed to political subdivisions; however, if the State has a joint program through the Network with a political subdivision at the time the license is granted or before the termination of the contract, the license may continue to be used for such a program only.
E. UII shall deposit on a quarterly basis, the most recent version of all network application source code in escrow with a neutral third party to be mutually chosen by UII and the State. Over the term of the contract UII will have the authority to remove superseded source code. The source code shall be delivered to the State by the Escrow Agent in the event UII: (i) is declared insolvent through bankruptcy proceedings, (ii) is unable to perform its obligations to the State under the Contract, or (iii) as otherwise provided in its agreement with the Escrow Agent.
UII acknowledges that the State will review, approve and subsequently receive from UII, an
executed copy of the software escrow agreement between UII and the Escrow Agent to the State. UII will notify the State in writing of any amendments to such agreements, any change in Escrow Agent, or of any replacement or successor escrow arrangements. The Escrow Agent will provide written notification to the State's Contract Administrator, at least semiannually, detailing all account activity during the previous period.
F. All Network trademarks, trade names, logos and other identifiers, Internet uniform resource locators, Internet addresses and e-mail addresses obtained or developed pursuant to this Contract shall be the property of the State.
5. CONNECTIONS BETWEEN INFORMATION NETWORK AND STATE AGENCIES
Costs associated with and maintenance of communication links from State facilities to UII facilities for Network purposes, including but not limited to leased circuits from telephone or cable companies, shall be paid as expenses by UII.
6. NETWORK SERVICE
A. UII shall negotiate with and obtain written Service Level Agreements from each separate data-providing entity (hereinafter, "DPE") from which electronic access or transactions are desired.
B. Subscribers (customers who apply for and receive from the network, a user name and password in order to access the services they desire) will be required to execute a contract
for services. All contracts with subscribers and all SLAs shall be subject to approval and continuing monitoring by the UECC.
C. UII will enter into an SLA with each agency or political subdivision who provides information to UII for the Network or which has a transaction which furnishes information to the agency or political subdivision. These agreements will be signed by the agencies' authorized representative(s) and will be approved by the UECC. Only information that is legally and ethically distributable, as determined by the state agency, in its capacity as the legal custodian of the respective data, will be included on the Network. The SLA will detail what information will be accessed or transactions performed, how it will be accessed and provided to the public or how the transaction will generally operate with the agency, any statutory fees or enhanced access charges, and what, if any special requirements must be satisfied by the individual customers to qualify for access to the information or to perform the transaction. The agency and UII will agree on a schedule for collection and payment of any statutory fee required. Once an agreement has been reached and approved by the UECC, the public information application will be developed according to the agency's SLA.
D. Since UII's software developer creating the application may see some confidential information while working with the agency representative in determining which data fields are required, UII's employees must satisfy any privacy and confidentiality requirements that the agency may require prior to beginning work.
E. All SLA's or other requests regarding the Network from non-state level political subdivisions must be approved by the UECC through the service request process. The UECC shall establish the priority of such requests.
7. DISTRIBUTION OF NETWORK REVENUES
A. The establishment of all charges to Network users shall be reviewed by the UECC. The UECC will review and approve any and all Network use or data access charges for fairness, reasonableness, and appropriateness. UII may at any time recommend changes in charges to the UECC.
B. In establishing Network use or data access charges the UECC shall consider the following factors:
(1) A commitment to the public policy requirement to provide electronic access to public records at the most reasonable rate possible and to improve government service to its citizens and businesses by allowing transactions online.
(2) That the charges may be adjusted to permit funding of special projects and enhancement of public service.
(3) The entrepreneurial and start-up nature of the business and attendant risk of capital for UII and the need to earn a reasonable profit on Network operations.
(4) The need to invest in the reasonable expansion, maintenance and improvement to online network transactions and information services.
(5) Any other reasonable factors which in the opinion of UECC should be considered.
C. In the event that costs which UII pays State agencies for data or data access are reduced or increased as a result of legislation or State regulatory administrative changes, such reductions or increases shall be passed on directly to subscribers and users of the information network unless otherwise approved in writing by the UECC.
8. NETWORK MANAGER REMUNERATION AND REVENUE DISTRIBUTION
Flow of funds will be determined through Service Level Agreements with Data Custodians as approved by the UECC and the State Treasurer. Within the framework of the revenue distribution procedure addressed in Section 7 above, the distribution of all funds attributable to Network transactions and subscriptions will be in the following order unless otherwise mutually agreed to between UII and the State in writing.
- Payment of statutory fees.
- Payment of all Network operating expenses and costs of sale. These expenses include but are not limited to the core and ongoing costs of the operating the Network as well as applications development costs associated with the deployment of free and premium services.
- Payment of reasonable and necessary expenses of the UECC as mutually agreed by the Board and UII as stated in the UECC budget plan.
- All remaining funds will be retained by UII.
9. FINANCES, RECORDS AND REPORTING
A. UII shall handle all revenue from Network operations as determined in accordance with Section 8. UII shall establish one or more accounts in financial institutions which are federally insured for deposit of revenue from Network operations and shall furnish the State with the names of the institutions, the account numbers, and the names of those persons having signatory authority.
B. All UII documents and records pertaining to operation of the Network will be available for inspection, auditing, and copying by the State, or other authorized representatives designated by the State, at any reasonable time. UII corporate records remain property of the corporation and are not subject to public inspections. Monthly income statements and balance sheets for the Network will be provided to the State by UII.
C. To the extent an audit report discloses any discrepancies in the UII charges, billings, or financial records, and following a period for review and verification of the amount by UII, UII will adjust the payment as soon as reasonable possible, but not to exceed 90 days. UII shall cooperate to assure that verification is completed in a timely manner.
D. UII also agrees to make other changes requested by the State, which are agreed to by UII and the UECC, to comply with recommendations resulting from any audit. Any such audit will be performed by a competent and reputable Certified Public Accountant licensed in Utah or a member of a 'big six' accounting firm.
E. The accounting system is to include a numbered chart of accounts, books of original entry of all transactions, appropriate subsidiary ledgers, a general ledger which includes to-date postings and an audit trail through financial statements. Such books may either be maintained on paper or on computer with appropriate backup. UII shall from the beginning of this Contract adopt the calendar year ending December 31st for reporting purposes.
F. UII will report activities to the State as follows:
(1) Within 120 days after the close of UII's fiscal year, UII will submit to the State an annual financial report and audit. These reports must be certified by an independent certified public accountant (selected by UII) who may be the accountant
or a member of the firm of accountants who regularly audit the books and accounts of UII. The submitted audit information must include, but is not limited to, the audited financial statements, auditor opinions, reports on internal control, findings and recommendations and management letters. In addition, UII is subject to any further audit and review determined necessary by the State after furnishing reasonable notice to UII.
(2) Develop and regularly update, in cooperation with the data custodians, a draft Network strategic plan for presentation to the UECC on at least an annual basis.
(3) Report to the UECC on a periodic basis concerning potential new applications, services and related issues. UII will strive to improve access to, and the utility of the public information and transactions available through the Network by exploring and recommending ways to:
a. Expand the amount and kind of public services and information available free of charge;
b. Increase the utility of the public information presented, the transactions available, and the form in which both are provided;
c. Expand the base of users who access the public services and information;
d. Improve individual and business access to public services and information through implementing improvements in technology; and,
e. Make recommendations designed to increase the effectiveness and resources of the Network.
f. Redesign and maintain the State of Utah website and the agreed upon Network pages
(4) UII will measure Customer satisfaction including Web surveys and report results to the UECC on a schedule to be agreed to by the UECC and UII but no less than on an annual basis, and
(5) UII will measure and report to the UECC on growth trends and usage of the Network, as well as hits, access, transactions and other performance measures or metrics as mutually agreed upon by the UECC and UII. Working in cooperation with the UECC, UII will submit the details of the proposed service measures either as part of the service management plan for Network wide indicators and as part of the Service Level Agreements for application specific indicators.
(6) UII will utilize the state's payment card processor for payment card transactions, with the provision that UII will receive state rates negotiated as part of the state of Utah contract with First Security Bank, during the life of that contract unless otherwise determined by the State.
(7) UII shall provide annually to the Utah State Auditor, 211 State Capitol Building, Salt Lake City, UT 84114, a Statement on Auditing Standards 70 Report (SAS-70).
10. PERSONNEL PRACTICES
A. The hiring, recruitment, management, training, and firing of UII employees will be the responsibility of UII. The State's only involvement in the personnel affairs of UII shall be limited to disclosure of the names and positions of officers and employees of UII, except within its role as auditor.
B. No officer, employee, or director of UII shall receive a salary, except as and for services performed by such officer, employee, or director, or member for UII on behalf of he Network.
C. UII shall be responsible for all required costs attributable to its officers and employees, including but not limited to, worker's compensation premiums and deductible, unemployment compensation tax withholding contributions, tax withholding contributions, and similar items.
11. INCORPORATION BY REFERENCE
The provisions of the RFP and the UII Proposal are hereby incorporated into this Contract and made a part hereof. If there is any conflict among the provisions of the RFP, the UII Proposal, this Contract, and the laws of the State, then those conflicts will be resolved in the following order precedence:
1. Utah law
2. Standard Terms and Conditions Contract Attachment A
3. Contract Attachment B
4. The RFP and addenda & the UII Proposal, equally.
This Contract may be amended only by mutual expressed written consent.
12. INSURANCE AND BONDS
UII shall provide the UECC written proof of the following insurance provided by a qualified firm authorized/admitted to do business in Utah:
A. General comprehensive liability insurance policy in the amount of at least $1,000,000.
B. Workers' compensation insurance coverage as required by State law on all UII employees.
C. Fidelity bond in the amount of at least $100,000 per UII employee.
13. CHANGES IN INFORMATION NETWORK
A. Network operations and development shall be generally in accordance with the UII Proposal, the RFP and this contract as described in Section 11, and Section 13.B.
B. A planned material change in Network operations cannot be made by UII without the prior written consent of the UECC. A "material change" includes, but is not limited to, a change which is substantial and which increases response time to inquires, adds to the complexity of Network use, diminishes services provided to users, or results in a comparable impact on operations noticeable by users.
C. UII will provide to the UECC at least thirty (30) days prior written notice of a planned material change in Network operations.
D. UII shall timely provide to the UECC such other management reports as the UECC may reasonably request.
14. NOTICES
Each party may change its designation for notice following written notice to the other party to this Contract.
UECC
Mr. Alan C. Sherwood
Chair, Electronic Commerce Council
State Office Building
Salt Lake City, Utah
UII
Joseph Nemelka and Richard L. Brown
Utah Interactive, Inc.
Salt Lake City, Utah
Notices by the parties to one another shall be given in writing to the persons identified above or to such other persons as may be subsequently identified in a written notice. Such notices shall be effective on the date of receipt if sent by U.S. first-class or restricted delivery mail, postpaid, or by any reputable overnight delivery service, prepaid.
15. TERMINATION OF CONTRACT
The State shall have the right to terminate this Contract for cause, subject to cure, by providing written notice of termination to UII. Such notice shall specify the time, the specific provision of this Contract or "for cause" reason that gives rise to the termination and shall specify reasonable appropriate action that can be taken by UII to avoid termination of the Contract. The State shall provide a period of up to sixty (60) days, unless otherwise specified in this Contract, for UII to cure breaches and deficiencies of its performance obligations under this Contract.
The State may terminate this Contract at any time, and without cause, if directed to do so by statute.
16. TERMINATION FOR CAUSE
A. For purposes of this Contract, the phrase "for cause" shall mean, but not be limited to:
(1) Any material breach or evasion by UII of the terms or conditions of this Contract and its amendments, if any; or,
(2) Substantial cessation of Network services by the Network; or,
(3) Fraud, misappropriation, embezzlement, malfeasance, significant misfeasance, or illegal conduct by UII, its officers, or directors; or,
(4) Dissolution of UII or forfeiture of its company existence; or,
(5) Amendment of the States's enabling authority making the network substantially impractical; or,
(6) An adverse judicial decision by a court of competent jurisdiction, which has the effect of rendering Network operations no longer feasible; or,
(7) Insolvency of UII; or,
(8) Material breach of an SLA; or,
(9) Negligent disclosure of any confidential information; or,
(10) Legislation materially alters the ability of UII to operate the Network; or,
(11) UII may terminate this Contract if the key premium service applications do not generate sufficient revenue to support the basic core functions required to operate the Network.
17. CONTINUATION OF OPERATIONS DURING TRANSITION PERIOD
If for any reason this contract shall be terminated or upon expiration of the Contract without extension, or at the end of any extension UII shall, at the option of the State, continue to operate under this Contract as Network Manager in accordance with all terms and conditions of this Contract, together with any amendments or modifications in existence at such time, for a period of up to twelve (12) months from the time of expiration or notification of termination from the State to UII. The intent of this provision is to insure continuation of information network operations while a successor network manager is chosen and installed. The State shall notify UII at the earliest possible opportunity but in any event, no later than the date of notification of termination, or the notifications dates set forth in Section 2 above whichever is earlier that it shall continue operations and the duration of time for such continuation.
18. PATENT, COPYRIGHT, TRADEMARK, TRADE SECRET INDEMNITY
UII warrants that its proposed operation of the Network does not and shall not infringe on the United States patent, copyright, trademark or trade secret right of any person or entity. The State shall be provided with prompt notice of any such claim of infringement and UII shall have the exclusive right to defend or settle such claim at UII's option. The State shall cooperate with UII in its defense or settlement of such claim at no expense and no liability to the State.
19. MARKETING
It is recognized that UII and its affiliated companies intend to use its experience with the State, the UECC and DPE's as a marketing tool with third parties. It is agreed that UII may make references to and use the State as a reference. If UII intends to claim that the State "endorses" UII or use the State seal, UECC or Network logo or claim representations made by the State, all such material must be submitted to UECC for review and approval prior to use by UII.
20. LIABILITY
A. The State, its agents, and employees shall not be legally responsible for errors due to problems caused by UII's operation of the Network.
B. UII agrees for itself, its agents, employees, and assigns to hold harmless, indemnify and defend the State, its agents and employees from any actions arising out of UII's negligence or material failure to perform under the terms of this Contract.
C. UII agrees that it has no right of subrogation or contribution from the State for any judgment rendered against UII to the extent such judgement results from UII's negligence or material failure to perform under the terms of this contract.
21. ASSIGNMENT
UII may not assign any of its rights or delegate any of its duties hereunder unless done pursuant to prior written consent of the State, which consent shall not be unreasonably withheld.
22. CLAIMS
This Contract shall be construed according to the laws of the State of Utah. Any legal proceedings against the State regarding this solicitation or any resultant contract shall be brought in the State's administrative, legislative, or judicial forums.
23. ENTIRE AGREEMENT
This Contract, including any documents incorporated by reference, constitutes the entire agreement of the parties and supersedes all other prior written or oral contracts between the parties with respect to the subject matter hereof. This Contract may be amended only by a writing signed by the parties thereto.
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our report dated June 16, 1999, relating to the consolidated financial statements of National Information Consortium, Inc., and of our reports dated May 6, 1999, relating to the financial statements of Indian@ Interactive, Inc., Kansas Information Consortium, Inc., Nebrask@ Interactive, Inc. and Arkansas Information Consortium, Inc., which appear in such Registration Statement. We also consent to the references to us under the heading "Experts" in such Registration Statement.
/s/ PRICEWATERHOUSECOOPERS LLP Kansas City, Missouri June 16, 1999 |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that the person whose signature appears below constitutes and appoints Jeffery S. Fraser and James B. Dodd, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by the Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 14th day of June, 1999.
/s/ Kevin C. Childress ---------------------- Kevin C. Childress Chief Financial Officer |
| ARTICLE 5 |
| RESTATED: |
| PERIOD TYPE | 3 MOS |
| FISCAL YEAR END | DEC 31 1999 |
| PERIOD START | JAN 01 1999 |
| PERIOD END | MAR 31 1999 |
| CASH | 1,115,136 |
| SECURITIES | 0 |
| RECEIVABLES | 3,694,625 |
| ALLOWANCES | 0 |
| INVENTORY | 0 |
| CURRENT ASSETS | 5,168,591 |
| PP&E | 1,684,850 |
| DEPRECIATION | 0 |
| TOTAL ASSETS | 16,633,489 |
| CURRENT LIABILITIES | 6,150,552 |
| BONDS | 0 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 0 |
| COMMON | 0 |
| OTHER SE | 9,786,820 |
| TOTAL LIABILITY AND EQUITY | 16,633,489 |
| SALES | 11,455,065 |
| TOTAL REVENUES | 11,455,065 |
| CGS | 8,603,698 |
| TOTAL COSTS | 8,603,698 |
| OTHER EXPENSES | 3,301,401 |
| LOSS PROVISION | 0 |
| INTEREST EXPENSE | 36,995 |
| INCOME PRETAX | (3,321,831) |
| INCOME TAX | (22,788) |
| INCOME CONTINUING | (3,299,053) |
| DISCONTINUED | 0 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | (3,299,053) |
| EPS BASIC | (0.08) |
| EPS DILUTED | (0.08) |