-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SRBqSWv7ZCCDawsEZmZXng+QgTYYybsgvTLxOOJ3hxchPqh3njkyp1OrtgX3mXaW kZYYRC2o83E9n39/PGRbOg== 0000912057-01-506146.txt : 20010409 0000912057-01-506146.hdr.sgml : 20010409 ACCESSION NUMBER: 0000912057-01-506146 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL INFORMATION CONSORTIUM CENTRAL INDEX KEY: 0001065332 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 522077581 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26621 FILM NUMBER: 1589550 BUSINESS ADDRESS: STREET 1: 12 CORPORATE WOODS 10975 BENSON STREET STREET 2: SUITE 390 CITY: OVERLAND PARK STATE: KS ZIP: 66210 MAIL ADDRESS: STREET 1: 12 CORPORATE WOODS 10975 BENSON STREET STREET 2: SUITE 390 CITY: OVERLAND PARK STATE: KS ZIP: 66210 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL INFORMATION CONSORTIUM INC DATE OF NAME CHANGE: 19990504 10-K 1 a2041279z10-k.txt FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSACTION PERIOD FROM ________________ TO ________________ COMMISSION FILE NUMBER 000-26621 -------------------------- NATIONAL INFORMATION CONSORTIUM, INC. (Exact name of registrant as specified in its charter) COLORADO 52-2077581 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization)
12 CORPORATE WOODS, 10975 BENSON STREET, SUITE 390, OVERLAND PARK, KANSAS 66210 (Address of principal executive office, including Zip Code) Registrant's telephone number, including area code: (877) 234-3468 Securities registered pursuant to Section 12(b) of the Act: None
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- None None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value per share (Title of Class) -------------------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of voting stock held by non-affiliates of the registrant, as of March 1, 2001 was approximately $110,599,397 (based on the closing price for shares of the registrant's common stock as reported by the Nasdaq National Market for the last trading day prior to that date). Shares of common stock held by each executive officer, director and holder of 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. On March 1, 2001, 56,041,425 shares of the registrant's common stock, no par value per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement to be issued in connection with its Annual Meeting of Shareholders to be held in 2001 are incorporated by reference into Part III of this Form 10-K. Except as otherwise stated, the information contained in this Form 10-K is as of March 1, 2001. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS NATIONAL INFORMATION CONSORTIUM, INC. FORM 10-K ANNUAL REPORT
PAGE -------- PART I Item 1 Business.................................................... 1 Item 2 Properties.................................................. 28 Item 3 Legal Proceedings........................................... 28 Item 4 Submission of Matters to a Vote of Security Holders......... 28 PART II Item 5 Market for Registrant's Common Equity and Related Shareholder Matters....................................... 29 Item 6 Selected Consolidated Financial Data........................ 29 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 30 Item 7A Quantitative and Qualitative Disclosures About Market Risk...................................................... 42 Item 8 Consolidated Financial Statements and Supplementary Data.... 43 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 86 PART III Item 10 Directors and Executive Officers of the Registrant.......... 86 Item 11 Executive Compensation...................................... 86 Item 12 Security Ownership of Certain Beneficial Owners and Management................................................ 86 Item 13 Certain Relationships and Related Transactions.............. 86 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 87
CAUTIONS ABOUT FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K includes forward-looking statements about events, products or financial performance that may not exist, or may not have occurred. For example, statements like we "expect," we "believe," we "plan," we "intend" or we "anticipate" are forward-looking statements. Investors should be aware that our actual operating results and financial performance may differ materially from our expressed expectations because of risks and uncertainties about the future including risks related to economic and competitive conditions. In addition, we will not necessarily update the information in this Annual Report on Form 10-K if any forward-looking statement later turns out to be inaccurate. Details about risks affecting various aspects of our business are included throughout this Form 10-K. Investors should read all of these risks carefully, and should pay particular attention to risks affecting the following areas: competition issues discussed on pages 15 to 16; government regulation discussed on page 16; intellectual property and proprietary rights discussed on pages 16 to 17; the specific risk factors discussed on pages 17 to 28; and commitments and contingencies described in note 16 to the consolidated financial statements included in this Form 10-K. PART I ITEM 1. BUSINESS OVERVIEW National Information Consortium, Inc. was formed on December 18, 1997, for the sole purpose of affecting an exchange of common stock, in a transaction referred to as the Exchange Offer, to combine under common ownership five separate affiliated entities under which we conducted our business operations. The five companies were National Information Consortium USA, Inc., Kansas Information Consortium, Inc., Indiana Interactive, Inc., Nebraska Interactive, Inc. and Arkansas Information Consortium, Inc. The Exchange Offer was consummated on March 31, 1998, and has been accounted for as a business combination. National Information Consortium USA, Inc. is the entity whose shareholders received the largest portion of the Company's common stock shares and was treated as the accounting acquirer with the purchase method of accounting being applied to the four other companies. On July 20, 1999, we completed our initial public offering, selling an aggregate of 10 million new shares of common stock for net proceeds of approximately $109.4 million after deducting underwriting discounts, commissions and expenses. We are a provider of Internet-based, electronic government services that help governments use the Internet to reduce costs and provide a higher level of service to businesses and citizens. We accomplish this currently through three different business segments: our state and local portal businesses, our government procurement business and our eGovernment products businesses. In our portal businesses, we enter into contracts with governments and on their behalf design, build and operate Internet-based portals. These portals consist of Web sites and applications that we build, which allow businesses and citizens to access government information online and complete transactions, including applying for a permit, retrieving driver's license records or filing a form or report. Our unique business model allows us to reduce our government clients' financial and technology risks and obtain revenues by sharing in the fees we generate from electronic government services. Our clients benefit because they gain a centralized, customer-focused presence on the Internet. Businesses and citizens gain a faster, more convenient and more cost-effective means to interact with governments. Currently, we have contracts to provide Internet-based electronic government portal services for thirteen states and four local governments. We typically enter into three to five year contracts with our government clients and manage operations for each contractual relationship through separate subsidiaries that operate as decentralized business units with a high degree of autonomy. We intend to increase our revenues by replicating our model in other states, municipalities, federal agencies and 1 international entities, and by delivering new products and services and expanding markets within our existing contractual relationships. NIC Commerce, our procurement business, is a leading provider of Internet-based electronic procurement solutions to governments. NIC Commerce designs, develops and manages online procurement software and services for federal and state markets. NIC Commerce's procurement solution allows buyers to search, compare and buy products and services across multiple contracts using the Internet. It also allows senior government procurement officials to better manage and reduce expenses associated with the procurement process. NIC Commerce, while traditionally deriving software licensing and maintenance revenues from several federal agencies, also has contracted to provide electronic procurement services under a transaction-based pricing model to five state/local government agencies. Our eGovernment products businesses include our NIC Conquest, NIC Technologies and IDT subsidiaries. Our NIC Conquest business was formed in January 2000 by combining our application services division with Conquest Softworks, LLC. Both of these businesses provided software applications and services for electronic filings and document management solutions for government. Our NIC Conquest business focuses on Secretaries of State, whose offices are state governments' principal agencies for corporate filings. On May 11, 2000, we acquired SDR Technologies, Inc., a provider of Internet-based applications for governments. SDR has been renamed National Information Consortium Technologies, Inc. and is referred to as NIC Technologies. NIC Technologies designs and develops online election and ethics filing systems for federal, state and local government agencies. Through development divisions in Westlake Village, California and Pune, India, NIC Technologies also serves as our centralized development business that builds standardized revenue-generating applications that can be deployed across our state and local portals in a timely and effective manner. On October 13, 2000, we acquired Intelligent Decision Technologies, Ltd., a provider of business-to-government reporting and filing software for the transportation industry. IDT has developed business-to-government applications that facilitate compliance with the Federal Highway Administration's Commercial Vehicle Information System Network. IDT currently has contracts to provide certain state governments with commercial vehicle electronic credentialing services that include registration, permitting, and tax filing software. Our multi-state filing portal for the trucking industry, which became operational in November 2000, will be integrated into IDT's operations, allowing us to leverage our eGovernment expertise on behalf of regulated industries such as transportation, which are required to file periodically with multiple government entities. On March 23, 2000, we completed a $5 million cash investment in privately held E-Filing.com, Inc., a provider of online filing applications for legal services, giving us ownership of 21% of E-Filing.com at December 31, 2000. This strategic investment is expected to enable both E-Filing.com and NIC to expand access to judicial eGovernment applications nationwide. On March 24, 2000, we completed a $5.5 million cash investment in privately held Tidemark Computer Systems, Inc., a provider of eGovernment permit applications and related services for local government, giving us ownership of approximately 27% of Tidemark at December 31, 2000. This strategic investment is expected to allow Tidemark and NIC to help communities automate a variety of business processes through mobile and web-based applications. In October 2000, we completed an initial $524,000 cash investment in e-Government Solutions Limited, or eGS, a private joint venture among Swiss venture capital firm ETF Group, London-based venture development organization Vesta Group, and our European subsidiary, NIC Europe, giving us ownership of 40% of eGS at December 31, 2000. The purpose eGS, based in London, England, is to 2 deliver eGovernment products and services throughout Western Europe, with initial efforts to focus on the United Kingdom. SEGMENT INFORMATION Our three reportable segments as of and for the year ended December 31, 2000 consisted of our state and local portal segment, our eGovernment products segment, and our government procurement segment. Our portal segment includes our subsidiaries operating state and local government portals. Our eGovernment products segment includes our NIC Conquest, NIC Technologies and IDT subsidiaries. Our government procurement segment includes our NIC Commerce subsidiary. For additional information relating to our reportable segments, refer to note 21 in the notes to consolidated financial statements included in this Form 10-K. INDUSTRY BACKGROUND THE MARKET FOR GOVERNMENT-TO-BUSINESS AND GOVERNMENT-TO-CITIZEN TRANSACTIONS Government regulation of commercial and consumer activities requires billions of transactions and exchanges of large volumes of information between government agencies and businesses and citizens. These transactions and exchanges include driver's license record retrieval, motor vehicle registrations, tax returns, permit applications and requests for government-gathered information. Government agencies typically defray the cost of processing these transactions and of storing, retrieving and distributing information through a combination of general tax revenues, service fees and charges for direct access to public records. According to the official statistics of the U.S. Census Bureau, federal, state and local governments collected a total of $451 billion in charges and miscellaneous fees from businesses and citizens in 1995. Additionally, states generated $26 billion in fees for motor vehicle, corporation and other licenses in 1995. THE LIMITS OF TRADITIONAL GOVERNMENT TRANSACTION METHODS Traditionally, government agencies have transacted, and in many cases continue to transact, with businesses and citizens using processes that are inconvenient and labor-intensive, require extensive paperwork and use large amounts of scarce staff resources. Transactions and information requests are often made in person or by mail and are processed manually, increasing the potential for errors and the need for numerous revisions and follow-up. Even newer methods, including telephone response systems, tape exchanges and dial-up computer networks, rely on multiple systems and potentially incompatible data formats, and require significant expertise and expenditures to introduce and maintain. As a result, businesses and citizens often have no choice but to face costly delays to complete essential tasks. These delays include waiting in line at a government agency, waiting for answers by telephone or waiting for responses by mail. Businesses and citizens encounter further inconvenience and delay because they usually can work with government agencies only during normal business hours. Even when electronic alternatives are available, they often require a cumbersome process of multiple contacts with different government agencies. Increases in the level of economic activity and in the population have exacerbated these problems and increased the demand for new services. GROWTH OF THE INTERNET, ELECTRONIC COMMERCE AND EGOVERNMENT The Internet has emerged as a global medium, enabling millions of people worldwide to share information, communicate and conduct business electronically. International Data Corporation, a market research firm, estimates that the number of Web users will grow from approximately 142 million worldwide in 1998 to over 502 million worldwide by the end of 2003. This growth is expected to be driven by the large and growing number of PCs installed in homes and offices, the decreasing cost of PCs, easier, faster and cheaper access to the Internet, improvements in network infrastructure, the 3 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. Gartner Group, a market research firm, predicts that spending on eGovernment initiatives, including hardware, software and services, in 2001 will top $2.1 billion, reaching $6.5 billion by 2005. Forrester Research predicts that states will process over 52 million online government transactions by 2004, and the number is expected to grow to 122 million transactions per year in 2006. With the nation's 35,000 cities and towns generating the majority of demand for applications, Forrester Research predicts that local governments will deploy over 8,900 different eGovernment applications by 2006. 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 4 - security and privacy concerns that are amplified by the confidential nature of the information and transactions available from and conducted with governments and the view that government information is part of the public trust. We believe traditional private sector Internet services generally do not address the unique needs of electronic government. Most Internet service providers do not fully understand and are not well-equipped to deal with the unique political and regulatory structures of governments. These providers, including large systems integrators, typically take a time-and-materials, project-based pricing approach that may not adequately balance the responsiveness to change of a successful Internet business with the longer time horizons and extended commitment periods of government projects. WHAT WE PROVIDE TO GOVERNMENTS We provide an Internet-based electronic government service that meets the needs of governments, businesses and citizens. The key elements of our service are: CUSTOMER-FOCUSED, ONE-STOP GOVERNMENT PORTAL Using our marketing and technical expertise and our government experience, we design, build and operate portals for each of our government clients that are designed to meet their needs as well as those of businesses and citizens. Our portals are designed to create a single point of presence on the Internet for our government clients that allows businesses and citizens to reach the Web site of every government agency in a specific jurisdiction from one online location. We employ a common look and feel in the Web sites of all government agencies associated with our electronic government portals and make them useful, appealing and easy to use. In addition to developing and managing the government portal, we develop applications that, in one location on the Internet, allow businesses and citizens to complete processes that have traditionally required separate interaction with several different government agencies, including establishing and obtaining required permits for a new business enterprise. These applications also permit businesses and citizens to conduct transactions with government agencies and to obtain information from them 24 hours per day, seven days per week. We also help our government clients to generate awareness and educate businesses and citizens about the availability and potential benefits of electronic government services. Similarly, our NIC Commerce business allows governments to implement procurement solutions from a one-stop Internet location. COMPELLING FINANCIAL MODEL FOR GOVERNMENTS We allow governments to implement comprehensive electronic government services at minimal cost and risk. We take on the responsibility and cost of designing, building and operating government portals and applications, with minimal use of government resources. We employ our technological resources and accumulated expertise to help governments avoid the risks of selecting and investing in new technologies. We implement our electronic government services rapidly, efficiently and accurately, using our well-tested and reliable infrastructure and processes. Once we establish a government portal and associated applications, we manage transaction flows and fund ongoing costs from the fees received from information accessed and transactions conducted through the portal. Our NIC Commerce business, while traditionally deriving revenues from software licensing and maintenance, also offers governments a transaction-based-pricing model. FOCUSED RELATIONSHIP WITH GOVERNMENTS We form relationships with governments by developing an in-depth understanding of their interests and then aligning our interests with theirs. By tying our revenues to the development of successful services and applications, we work to assure government agencies and constituents that we are focused on their needs. Moreover, we have pioneered, and encourage our clients to adopt a model for 5 electronic government policymaking that involves the formation of oversight boards that bring together interested government agencies, business and consumer groups and other important government constituencies in a single forum. We work within this forum to maintain constant contact with government agencies and constituents and strive to ensure their participation in the development of electronic government services. We attempt to understand and facilitate the resolution of potential political disputes among these participants to maximize the benefits of our services. We also design our services to observe relevant privacy and security regulations, so that they meet the same high standards of integrity, confidentiality and public service as government agencies would observe in their own actions. OUR STRATEGY Our objective is to strengthen our position as the leading provider of Internet-based electronic government services. Key strategies to achieve this objective include: CONTINUING TO ADD NEW STATE AND FEDERAL GOVERNMENT CLIENTS AND FURTHER PENETRATE LOCAL MARKETS We intend to increase the number of our government clients by leveraging our relationships with current government clients, our reputation for providing proven electronic government services and our technology and government process knowledge base. Our portals and our procurement and filing applications are designed to deliver our services quickly, easily and cost-effectively to new federal, state and local governments and agencies. We intend to continue marketing our products and services to new local governments, states, multi-state cooperative organizations and federal agencies. Our expansion efforts include developing relationships and sponsors throughout an individual government entity, pursuing strategic technology alliances, making presentations at conferences of government executives with responsibility for information technology policy, and developing contacts with organizations that act as forums for discussions between these executives. Currently we have four contracts for enterprise-wide portals in local government: Indianapolis/ Marion County, Indiana; the City of San Francisco, California; the City of Tampa, Florida; and Dallas County, Texas. We intend to increase our number of major local clients by offering both our enterprise portal solution as well as individual application solutions provided on a fee basis. We also expect to offer procurement solutions through NIC Commerce to major localities and election filing applications on a local basis through NIC Technologies. EXPANDING OUR INTERNATIONAL PRESENCE We believe our enterprise-wide model and its financial attractiveness have significant applicability to international governments. We intend to expand internationally, most likely through the transfer of our technology, know-how, track record, capital and business model into joint ventures involving entities whose trust relationships in their home markets resemble our own. In October 2000, we made an initial investment in e-Government Solutions Limited, or eGS, a private joint venture among Swiss venture capital firm ETF Group, London-based venture development organization Vesta Group, and our European subsidiary, NIC Europe, giving us ownership of 40% of eGS. The purpose eGS, based in London, England, is to deliver eGovernment products and services throughout Western Europe, with initial efforts to focus on the United Kingdom. BROADENING AND STANDARDIZING PRODUCT AND SERVICE OFFERINGS We plan to continue our development of new products and services designed for efficient online transactions with federal, state and local government agencies, enabling government agencies to interact more effectively online with businesses, citizens and other government agencies. We will increase and improve our development efforts by leveraging our experience, developing strategic technology 6 alliances, deepening the knowledge base that we have developed from our existing operations, standardizing our eGovernment services and product offerings, and coordinating our product development process across all Company operations making it a new competitive advantage. We will continue to work with government agencies, professional associations and other organizations to better understand the current and future needs of our customers. INCREASING TRANSACTIONAL REVENUES FROM OUR GOVERNMENT PORTALS AND PROCUREMENT AND FILING APPLICATIONS We intend to increase transactional revenues on our government portals and through our procurement and filing systems through both expanded marketing initiatives and new product offerings. We will continue to work with our government clients to create awareness of the online alternatives to traditional government interaction, through initiatives such as informational brochures, government voicemail recordings and inclusion of Web site information on government invoices. In addition, we will continue to update our portals to highlight new government service information provided on the portals. We also intend to expand our revenues through the development and marketing of new products and services, such as transaction-based procurement and filing systems. We plan to work with professional associations to directly and indirectly communicate to their members the potential convenience, ease of use and other benefits of the electronic government services our portals offer. CONTINUING TO DIVERSIFY OUR REVENUE STREAMS ACROSS NUMEROUS BUSINESS LINES In addition to our portal businesses, which provided the majority of our revenues in 2000, we are making investments in our NIC Commerce, NIC Conquest, NIC Technologies and IDT businesses to expand their respective operations. During 2000, NIC Commerce derived the majority of its revenues from software licensing and maintenance. Currently, our NIC Commerce is pursuing a growth strategy based increasingly on transaction fees for procurements undertaken on the NIC Commerce system. Our NIC Conquest business derives its revenues from fixed-price application development contracts with governments. These contracts are expected to be obtained through shorter sales cycles. Due to our increasing scale and market penetration, we are also able to provide specific fee-based product solutions to governments who do not wish to pursue an enterprise-wide portal solution. We expect these revenues, while not transaction-driven, to derive from shorter sales cycles than our portal businesses. CONTINUING TO PURSUE NEW STRATEGIC ALLIANCES, MERGERS AND ACQUISITIONS We intend to pursue strategic technology alliances, mergers and acquisitions that we believe will increase the number of products and services we can offer to government clients and the citizens and businesses that interact with them and alliances that will increase our operating leverage and drive business-to-government and citizen-to-government transactions and adoption of our eGovernment services. We also intend to pursue strategic technology and business alliances that will enable us to further develop business relationships with potential clients and/or improve our infrastructure and our operating platforms. 7 GOVERNMENT CONTRACTS OUR PORTAL BUSINESSES Through our portal businesses, we currently have contracts with 17 state and local government agencies. At December 31, 2000, we provided our government portal services to twelve states and two city-county governments through the following portals:
YEAR SERVICES POPULATION PORTAL NAME COMMENCED SERVED WEB ADDRESS - ----------- --------- ---------- ------------------------ CityServices (City and County of San Francisco, California). ................... 2000 747,000 http://cityservices.sfgov.org TennesseeAnytime. ........................... 2000 5,484,000 www.tennesseeanytime.org eHawaiiGov. ................................. 2000 1,185,000 www.ehawaiigov.com Access Idaho................................. 2000 1,252,000 www.accessidaho.com eUtah. ...................................... 1999 2,130,000 www.e-utah.org Information Resource of Maine................ 1999 1,253,000 www.informe.org AccessArkansas............................... 1997 2,551,000 www.accessarkansas.org CivicNet (Indianapolis and Marion County, Indiana)................................... 1997 811,000 www.civicnet.net IOWAccess Network............................ 1997 2,869,000 www.iowaccess.org Virginia Information Providers Network....... 1997 6,791,000 www.vipnet.org Georgia Technology Authority................. 1996 7,788,000 www.ganet.org AccessIndiana................................ 1995 5,943,000 www.in.gov Nebraska Online.............................. 1995 1,666,000 www.nol.org AccessKansas................................. 1992 2,654,000 www.accesskansas.org
We have also recently entered into contracts with the State of Montana, the City of Tampa (FL), and Dallas County (TX), and serve as a subcontractor to Deloitte Consulting on the New City of Ottawa (Canada) portal. Each of these government portals operates under a separate contract, which generally has an initial term of three to five years. Under a typical contract, a government agrees that: - we have the right to develop a comprehensive Internet portal owned by that government to deliver electronic government services; - the portal we establish is the primary electronic and Internet interface between the government and its citizens; - it supports the use of the portal for all commercially valuable applications in order to support the operation and expansion of the portal; - it sponsors access to agencies for the purpose of entering into agreements with these agencies to develop applications for their data and transactions and to link their Web pages to the portal; and - it establishes a policy making and fee approval board, which typically includes agency members, business customers and others, to establish prices for products and services and to set other policies. In return, we agree to: - develop, manage, market, maintain and expand that government's portal and information and electronic commerce applications; 8 - assume the investment risk of building and operating that government's portal and applications without the direct use of tax dollars; - bear the risk of collecting transaction fees; and - have an independent audit conducted upon that government's request. Under our contracts with Georgia and Iowa, we provide consulting, development and management services for these government portals predominantly under a fixed-price model. If future contracts follow this fixed-price model, our revenues and profits could suffer as a result of cost overruns or the failure to realize potential revenue increases from increased demand for fee-based transactions. We own all the software we develop under our government portal contracts. After completion of the initial contract term, our government clients receive a perpetual, royalty-free license to use the software only in their own portals. We also enter into separate agreements with various agencies and divisions of our government clients for the sale of electronic access to public records and to conduct other transactions. These agreements preliminarily establish the pricing of the electronic transactions and data access services we provide and the amounts we must remit to the agency. These terms are then submitted to the policy-making and fee approval board for approval. OUR NIC COMMERCE BUSINESS NIC Commerce is the only commercial off-the-shelf Web-based procurement solution designed specifically for governments. NIC Commerce's eFed software and supplier network allows government buyers to order products and services from multiple contracts and commercial sources, based on value, product information and contract terms and conditions. It is the leading provider of electronic procurement solutions that enable buyers to compare, negotiate and purchase products and services with speed, ease and accuracy. NIC Commerce, while traditionally deriving software licensing and maintenance revenues from several federal agencies, also has contracted to provide electronic procurement services under a transaction-based pricing model to five state/local governments as discussed below. On March 3, 2000, NIC Commerce entered into an operating agreement with Bank of America Corporation, through its subsidiary Bank of America N.A. (USA), to create a limited liability company to offer state and local governments the first Web-based business-to-business procurement, payment and reconciliation solution. By bundling NIC Commerce's software with Bank of America's government purchase cards, the new company will allow customers to place orders online through their preferred suppliers, request a quote from businesses for services, process transactions, initiate payments and reconcile accounts. Government agencies are also able to personalize their services to reflect preferred suppliers, contract requirements and other conditions through the browser-based catalog. The venture, called Banc of America Purchase Street, LLC, is the first web-based solution to integrate various shopping and payment functions for the public sector. Banc of America Purchase Street, LLC has recently contracted to provide electronic procurement services under transaction-based pricing models to two state/local government agencies: Houston-Galveston Area Council of Governments (H-GAC) and the State of South Carolina. NIC Commerce also has contracted to provide electronic procurement services under transaction-based pricing models to the States of Colorado, Utah and Hawaii. All such contracts under transaction-based models are expected to become operational during 2001. NIC Commerce has also recently contracted with the following Federal government agencies to provide procurement services under traditional software licensing and maintenance arrangements: the National Institutes of Health--IT Acquisition and Assessment Center, the U.S. Air Force IT Superstore, the U.S. Navy and the U.S. Army. 9 OUR NIC CONQUEST BUSINESS Our NIC Conquest business focuses on Secretaries of State, whose offices are state governments' principal agencies for corporate filings. NIC Conquest has contracted with the following thirteen states and five local governments to develop and license software applications for Web-enabling the back-office systems and processes for business-to-government filings:
STATES COUNTIES - ------ -------- Arkansas Apache County, Arizona Colorado Greenlee County, Arizona Indiana LaPaz County, Arizona Iowa Broward County, Florida Kansas Oklahoma County, Oklahoma Minnesota Montana Nebraska New York Oklahoma South Dakota Texas Wisconsin
OUR NIC TECHNOLOGIES BUSINESS NIC Technologies designs and develops online election and ethics filing systems for federal, state and local government agencies. NIC Technologies' government clients include Arkansas, California, Hawaii, Illinois, Louisiana, Michigan, Oklahoma, Texas, Washington, Washington, D.C. and British Columbia. OUR IDT BUSINESS IDT is a provider of business-to-government reporting and filing software for the transportation industry. IDT currently has contracts to provide the state governments in California, Maryland, Minnesota and Kentucky with commercial vehicle electronic credentialing services that include registration, permitting, and tax filing software. REVENUES We currently derive revenues from five sources: - transaction-based fees; - subscription fees; - software licensing and maintenance fees; - fees for managing electronic government operations; and - fees and charges for government application development. In 15 of our 21 existing larger operations, our revenues are generated from transactions, which generally include the collection of subscription and transaction-based fees. Among the highest volume, most commercially valuable products and services we offer are access to motor vehicle records and corporate filings, which accounted for over 66% of our revenues in 1999 and over 49% of our revenues in 2000. ChoicePoint, which resells these records to the auto insurance industry, accounted for approximately 48% of revenues in 1999 and 34% of our revenues in 2000. 10 In our other six larger operations, revenues are derived primarily from software licensing and maintenance fees, management fees for certain government operations and fees for application development. In 2000, these six operations accounted for approximately 40% of our revenues. OUR PRODUCTS AND SERVICES OUR PORTAL BUSINESSES Each of our business units works with its government clients to implement, develop, manage and enhance a comprehensive, Internet-based portal to deliver electronic government services to their constituents. Citizens and businesses use these portals to gain access to Web-based interactive applications in order to conduct transactions with the government and gain access to public information. Our portals are designed to provide user-friendly and convenient access to useful government information and services and include numerous fee-based transaction services and applications that we have developed. These fee-based services and applications allow businesses and citizens to access constantly changing government information and to file necessary government documents, including driver's license record retrieval, motor vehicle registration renewal, tax return filings, and permit applications. The types of products and services and the fees charged vary in each jurisdiction according to the unique preferences of that jurisdiction. In an effort to reduce the frustration businesses and citizens often encounter when dealing with multiple government agencies, we handle cross-agency communications whenever feasible and shield businesses and citizens from the complexity of older, mainframe-based systems that agencies commonly use, creating an intuitive and efficient interaction with governments. Some of the products and services we currently offer in different jurisdictions include:
PRODUCT OR SERVICE DESCRIPTION PRIMARY USERS - ------------------ ----------------------------- ----------------------------- Driver's License Records For those businesses legally Insurance companies Retrieval authorized, offers controlled instant look-up of driving records. Includes commercial licenses. Vehicle Title, Lien & Provides controlled Insurance companies, lenders, Registration interactive title, citizens registration and lien database access. Permits citizens to renew their vehicle registrations online. BillWatch (Lobbyist in a Box) Allows the user to monitor Attorneys, lobbyists state legislative activity. Users can tag bills by key word or bill number, and BillWatch-C- will send an e- mail when a change occurs in the status of the bill. Legislative activity can be monitored via wireless access. Health Professional License Allows users to search Hospitals, clinics, health Services databases on several health insurers, citizens professions to verify license status.
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PRODUCT OR SERVICE DESCRIPTION PRIMARY USERS - ------------------ ----------------------------- ----------------------------- Secretary of State Searches Allows users to access Attorneys, lenders filings of corporations, partnerships and other entities, including charter documents. UCC Searches and Filings Permits searches of the UCC Attorneys, lenders database to verify financial liens, and permits filings of secured financial documents. Professional License Renewal Permits professionals to Attorneys, doctors, other renew their licenses on line licensed professionals using a credit card. Driver's License Renewal Permits citizens to renew Citizens their driver's license on line using a credit card Motor Fuel EDI Project Allows motor fuel carriers to Motor fuel carriers file their tax reports electronically. Sales/Use Tax Filing Allows Sales and Use Tax Retailers filers to file the required forms online. The electronic forms handle the computation in the form and write the data out so that it can be entered into the Department of Revenue's databases without the need for the information to be re-keyed in the Department's office. Online Birth Certificate Processes an online request Citizens for an official birth certificate, charging the user's credit card.
One of the largest consumers of our products and services is ChoicePoint, a data reseller that uses our electronic government portals to access motor vehicle records for sale to the auto insurance industry. Currently, ChoicePoint has entered into contracts with the networks our subsidiaries operate to request these records from the states of Arkansas, Idaho, Indiana, Kansas, Maine, Nebraska, Tennessee, Utah and Virginia. Under the terms of these contracts, we provide ChoicePoint with driver's license and traffic records that vary by contract, for fees that currently range from $3.00 to $11.00 per record requested. We collect the entire fee, of which a certain portion is remitted to the state. Each of these contracts may be terminated at any time after 60-days' notice and may be terminated immediately at the option of any party upon a material breach of the contract by the other party. Furthermore, each of these contracts is immediately terminable if the state statute allowing for the public release of these records is repealed. In addition to these products and services, we also provide customer service and support. Our customer service representatives serve as a liaison between our government clients and businesses and citizens. Representatives are available 24 hours a day, seven days a week to address any problems that might arise on the portals we operate. 12 OUR NIC COMMERCE BUSINESS NIC Commerce provides its customers a procurement solution that combines commercial off-the-shelf software with major bank purchase card programs, creating an end-to-end procurement product. NIC Commerce's eFed software is structured to adhere to strict government business rules while its workflow characteristics remain intuitive and user-friendly. Because it is based on commercial off-the-shelf technology, the eFed product requires less customization than competing products and is therefore easier and less expensive to install. OUR NIC CONQUEST BUSINESS Our NIC Conquest business develops and delivers applications that improve the back-office administration of government records and better enable electronic filing and distribution. These applications often are highly customized for specific government or agency needs, and have been developed under separate contracts outside of our core contractual arrangements with governments. Our NIC Conquest business focuses on Secretaries of State, whose offices are state governments' principal agencies for corporate filings. Its products include: UCCDataNet State Imaging and Filing System, a comprehensive UCC office management system; uccfile.com Web Browser Interface, which allows Web access to filings; and County Suite Filing and Imaging Systems, which extends filing capabilities to land records and other filing types. OUR IDT BUSINESS Our IDT business develops and delivers business-to-government reporting and filing software for the transportation industry. IDT has developed business-to-government applications that facilitate compliance with the Federal Highway Administration's Commercial Vehicle Information System Network. IDT currently has contracts to provide certain state governments with commercial vehicle electronic credentialing services that include registration, permitting, and tax filing software. Our multi-state filing portal for the trucking industry, which became operational in November 2000, will be integrated into IDT's operations, allowing us to leverage our eGovernment expertise on behalf of regulated industries such as transportation, which are required to file periodically with multiple government entities. SALES AND MARKETING We have two primary sales and marketing goals: - to develop new sources of revenue through new government relationships; and - to retain and grow our revenue streams from existing government relationships. We have well-established sales and marketing processes for achieving these goals, which are managed by our national market development division and a marketing department within each business unit. DEVELOPING NEW SOURCES OF REVENUE We focus our new government sales and marketing efforts on increasing the number of state, local, federal and international governments and government agencies that are receptive to a public/private model for delivering information and/or completing transactions over the Internet. We meet regularly with interested government officials to educate them on the public/private model and its potential advantages for their jurisdictions. Members of our management team are also regular speakers at conferences devoted to the application of Internet technologies to facilitate the relationship between governments and their citizens. In states where we believe interest is significant, we seek to develop supportive, educational relationships with professional and business organizations that may benefit from 13 the government service improvements our Internet delivery strategy can produce. We also focus our marketing efforts on key government decision makers through the use of print media and corporate communications. Once a government decides to implement a public/private model for managing Internet access to resources and transactions, it typically starts a selection process that operates under special rules that apply to government purchasing. These rules typically require open bidding by possible service providers against a list of requirements established by the government under existing procedures or procedures especially created for the Internet provider selection process. We respond to requests for bids with a proposal that outlines in detail our philosophy and plans for implementing our business model. Once our proposal is selected, we enter into negotiations for a contract. GROWING EXISTING MARKETS In our existing government relationships, our marketing efforts focus on: - expanding the number of government agencies that provide services or information on the government portal; - identifying new information and transactions that can be usefully and cost-effectively delivered over the Internet; and - increasing the number of potential users who do business with governments over the Internet. Although each government's unique political and economic environment drives different marketing and development priorities, we have found many of our core applications to be relevant across multiple jurisdictions. Each of our business units' operations has a director of marketing and additional marketing staff that regularly meet with government, business and consumer representatives to discuss potential new services. We also promote the use of existing services to existing and new customers through speaking engagements and targeted advertising to organizations for professionals, including lawyers, bankers and insurance agents, that have a need for regular interaction with government. We have implemented a centralized marketing function to identify products and services that have been developed and implemented successfully for one government and replicate them in other jurisdictions. STRATEGIC ACQUISITIONS, INVESTMENTS AND ALLIANCES Since August 1999, we have: completed the acquisitions of four companies, eFed, Conquest Softworks, SDR and IDT; made equity-method investments in two private companies and one joint venture, Tidemark, E-Filing.com and eGS; and formed strategic alliances with several companies, including Oracle, Bank of America, AOL and Deloitte Consulting. Our acquisitions and equity-method investments are further described above. Oracle is a leading provider of electronic commerce services, and we have implemented Oracle's Oracle Internet Platform for our electronic government solutions. Bank of America will facilitate the payment processing aspect of our NIC Commerce business-to-business procurement, payment and reconciliation solution. We will deliver state government information, services and applications through AOL's State Government Guide. Deloitte Consulting brings a wealth of experience in eGovernment implementation, strategic planning, reengineering, change leadership, training, and integration solutions. TECHNOLOGY AND OPERATIONS Over the past nine 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 14 administration and Web page development. Within this scope, we have developed and implemented a comprehensive Internet portal framework for governments, and a broad array of stand-alone services using a combination of our own proprietary technologies and commercially available, licensed technologies. We believe that our technological expertise, coupled with our in-depth understanding of governmental processes and systems, has made us adept at rapidly creating tailored portal services that keep our clients on the forefront of electronic government. Each of our government clients has unique priorities and needs in the development of its electronic government services. Over 55% of our employees work in the Internet services and applications development and operations areas, and nearly all are focused on a single government client's application needs. Our employees develop an understanding of a specific government's application priorities, technical profiles and information technology personnel and management. At the same time, all of our development directors are trained by experienced technical staff from our other operations on our standard technical framework, and there is frequent and growing communication and cooperation, which ensures that our government clients can make use of the most advanced electronic government services we have developed throughout our organization. Most of our portals and applications are physically hosted in each jurisdiction in which we operate on servers that we own or lease. We also provide links to sites that are maintained by government agencies or organizations that we do not manage. Our business units provide uninterrupted 24 hour per day, seven day a week online service, and all of our operations maintain fault-tolerant, redundant systems, with thorough backup and security and disaster recovery procedures. We believe our systems and applications are scalable and can easily be replicated from one state to another. We focus on sustaining low-overhead operations, with all major investments driven by the objective of deploying the highest value-added technology and applications to each operation. Finally, we have designed our government portals and applications to be compatible with virtually any existing system and to be rapidly deployable. We have implemented a government portal in as little as seven days from the award of a contract, and have begun generating revenues from data access transactions in as little as 30 days. To enable this level of speed and efficiency, we license commercially available technology whenever possible and focus on the integration and customization of these off-the-shelf hardware and software components when necessary. We expect that commercially licensed technology will continue to be available at reasonable costs. COMPETITION We believe that the principal factors upon which our businesses compete are: - understanding of government needs; - the quality and fit of electronic government services; - the speed and responsiveness to the needs of businesses and citizens; and - cost-effectiveness. We believe we compete favorably with respect to the above-listed factors. In most cases, the principal substitute for our services is a government-designed and managed service that integrates other vendors' technologies, products and services. Companies that have expertise in marketing and providing technical electronic services to government entities have begun to compete with us by further developing their services and increasing their focus on this piece of their business and market shares. Examples of companies that may compete with us are the following: - large systems integrators, including American Management Systems, Sapient and SAIC; - traditional software applications developers, including Microsoft and Oracle; 15 - traditional consulting firms, including IBM, KPMG, and Accenture (formerly Andersen Consulting); - providers of e-commerce applications, including Ariba, Commerce One, PurchasePro.com, Digital Commerce Corporation and Official Payments Corporation; - consumer-oriented government portal companies, such as ezgov.com; and - Web service companies, including marchFirst and Verio. Many of our potential competitors are national or international in scope and may have greater resources than we do. These resources could enable our potential competitors to initiate severe price cuts or take other measures in an effort to gain market share. Additionally, in some geographic areas, we may face competition from smaller consulting firms with established reputations and political relationships with potential government clients. If we do not compete effectively or if we experience any pricing pressures, reduced margins or loss of market share resulting from increased competition, our business and financial condition may be adversely affected. GOVERNMENT REGULATION There are currently few laws or regulations that specifically regulate communications or commerce on the Internet. Laws and regulations may be adopted in the future, however, that address these issues including user privacy, pricing, and the characteristics and quality of products and services. An increase in regulation or the application of existing laws to the Internet could significantly increase our cost of operations and harm our business. For example, the Federal Communications Commission, or FCC, is currently reviewing its regulatory position that Internet access service is not "telecommunications" and may decide that Internet service providers must pay a percentage of their gross revenues as a "universal service contribution." If the FCC were to require universal service contributions from providers of Internet access or Internet backbone services, our costs of doing business may increase, and we may not be able to recover these costs from our customers. Additionally, state public utility commissions generally have declined to review potential regulation of such services, but may chose to do so in the future. As a result, our business and financial condition could be harmed. 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 applications, documentation and processes we have developed in connection with the electronic government products and services we offer. Despite our precautions, third parties may succeed in misappropriating our intellectual property or independently developing similar intellectual property. If we fail to adequately protect our intellectual property rights and proprietary information or if we become involved in litigation relating to our intellectual property rights and proprietary technology, our business could be harmed. Any actions we take may not be adequate to protect our proprietary rights, and other companies may develop technologies that are similar or superior to our proprietary technology. Additionally, it is possible that we could in the future become subject to claims alleging infringement of third-party intellectual property rights. Any claims could subject us to costly litigation, and may require us to pay damages and develop non-infringing intellectual property or acquire licenses to the intellectual property that is the subject of the alleged infringement. Additionally, licenses may not be available on acceptable terms or at all. Litigation regarding intellectual property rights is common in the Internet and software industries. We expect third-party infringement claims involving Internet technologies and software products and 16 services to increase. If an infringement claim is filed against us, we may be prevented from using certain technologies and may incur significant costs resolving the claim. We have in the past received letters suggesting that we are infringing on the intellectual rights of others, and we may from time to time encounter disputes over rights and obligations concerning intellectual property. Although we believe that our intellectual property rights are sufficient to allow us to market our existing products without incurring liability to third parties, we cannot assure you that our products and services do not infringe on the intellectual property rights of third parties. In addition, we have agreed, and may agree in the future, to indemnify certain of our customers against claims that our products infringe upon the intellectual property rights of others. We could incur substantial costs in defending ourselves and our customers against infringement claims. In the event of a claim of infringement, we and our customers may be required to obtain one or more licenses from third parties. We cannot assure you that we or our customers could obtain necessary licenses from third parties at a reasonable cost or at all. After termination of our contracts, it is possible that governments and their successors and affiliates may use their right of use license rights to the software programs and other applications we have developed for them in the operation of their portals to operate the portals themselves. Inadvertently, they also may allow our intellectual property or other information to fall into the hands of third parties, including our competitors. EMPLOYEES As of December 31, 2000, we had 362 full-time employees, of which 44 were working in our corporate operations and 318 were located in our business units. Of our employees, 76 were in sales and marketing, 204 were in service development and operations and 82 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. OTHER FACTORS AFFECTING OUR BUSINESS BECAUSE WE HAVE PORTAL SERVICE CONTRACTS WITH A LIMITED NUMBER OF STATES AND CITY GOVERNMENTS, THE TERMINATION OF CERTAIN OF THESE CONTRACTS MAY HARM OUR BUSINESS Currently, the majority of our revenues are derived from the operation of our portal businesses. We have portal contracts with 17 state and local governments. These contracts typically have initial terms of three to five years with optional renewal periods of one to five years. However, any renewal is optional and a government may terminate its contract prior to the expiration date upon specific cause events that are not cured within a period of ten to 180 days or, in some cases, upon passing legislation. Additionally, the contracts under which we provide management and development services can be terminated without cause on a specified period of notice. The loss of one or more of our larger government portal clients, if not replaced, could dramatically reduce our revenues. If these revenue shortfalls occur, our business and financial condition would be harmed. We cannot be certain if, when or to what extent governments might fail to renew or terminate any or all of their contracts with us. 17 WE MAY BE UNABLE TO OBTAIN FUTURE CONTRACTS THROUGH THE REQUEST FOR PROPOSAL PROCESS Much of our current revenues is derived from contracts with governments and government agencies that operate under special rules that apply to government purchasing. Where this process applies, there are special rules that typically require open bidding by possible service providers like us against a list of requirements established by governments under existing or specially-created procedures. To respond successfully to these requests for proposals, commonly known as RFPs, we must estimate accurately our cost structure for servicing a proposed contract, the time required to establish operations for the proposed client and the likely terms of any other proposals submitted. We also must assemble and submit a large volume of information within the strict time schedule mandated by an RFP. Whether or not we are able to respond successfully to RFPs in the future will significantly impact our business. We cannot guarantee that we will win any bids in the future through the RFP process, or that any winning bids will ultimately result in contracts. Even though we have broadened our product and service offerings, we still depend on the RFP process for a substantial part of our future contracts. Therefore, our business, results of operations and financial condition would be harmed if we fail to obtain profitable future contracts through the RFP process. OUR ACQUISITIONS AND STRATEGIC ALLIANCES ENTAIL NUMEROUS RISKS AND UNCERTAINTIES As part of our business strategy, we have made and may continue to make acquisitions or enter into strategic alliances that we believe will complement our existing businesses, increase traffic to our government clients' sites, enhance our services, broaden our software and applications offerings or technological capabilities or increase our revenues. These acquisitions and future acquisitions or joint ventures could present numerous risks and uncertainties, including: - difficulties in the assimilation of operations, personnel, technologies, products and information systems of the acquired companies; - the inability to successfully market, distribute, deploy and manage new products and services that we have limited or no experience in managing; - the diversion of management's attention from our core business; - the risk that an acquired business will not perform as expected; - risks associated with entering markets in which we have limited or no experience; - potential loss of key employees, particularly those of the purchased organizations; - adverse effects on existing business relationships with existing suppliers and customers; - potentially dilutive issuances of equity securities, which may be freely tradable in the public market; - significant charges; and - the incurrence of debt or other expenses related to goodwill and other intangible assets. We cannot assure you that any acquisitions we have announced or will announce will ultimately close. Moreover, even after we close such transactions, we cannot assure you that we will be able to successfully integrate the new businesses or any other businesses, products or technologies we may acquire in the future. For example, on September 20, 2000, we announced that our third quarter operating results would likely fall short of the consensus analyst revenue and earnings estimates. Concurrent with this announcement, we announced the restructuring of our NIC Commerce and NIC Technologies businesses, the reorganization of our management team and the consolidation of our marketing efforts. Our lower third quarter operating results were mainly attributable to our NIC 18 Commerce and NIC Technologies businesses, which were affected by industry-wide post Y2K delays in government decision-making and sales cycles during the first half of 2000. These businesses were the main sources of revenue shortfall versus expectations as a result of their management's ineffective forecasting and inadequate response to market signals that new business and revenues would be less than expectations. In addition, these businesses were the main source of EBITDA shortfall versus expectations as a result of expenditures for sustained development, marketing and product delivery efforts to support these operations whose revenue and gross profit impact did not materialize as expected during the quarter. Our response to the inadequate performance of our NIC Technologies and NIC Commerce businesses, both of which we have acquired since September 1999, was to initiate a change in leadership, while simultaneously adjusting operational processes and resources to more appropriately size these operations to visible demand and more efficiently align them with other eGovernment initiatives across NIC. The restructuring involved employee reductions in our marketing division and at our NIC Commerce and NIC Technologies businesses. As a result, we incurred a pre-tax charge of approximately $638,000 in the third quarter relating to employee severance costs. WE HAVE INCURRED NET LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE FORESEEABLE FUTURE We incurred net losses of approximately $40.3 million for the year ended December 31, 2000, $10.7 million for the year ended December 31, 1999 and $7.9 million for the year ended December 31, 1998. We also expect to incur significant operating expenses and will need to generate increased revenues to achieve profitability. Further, even though we expect to achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. As a result, we will need to generate significantly higher revenues while containing costs and operating expenses if we are to achieve profitability. We cannot be certain that our revenues will continue to grow or that we will ever achieve sufficient revenues to become profitable. WE MAY BE UNABLE TO SUSTAIN THE USAGE LEVELS OF CURRENT PRODUCTS AND SERVICES THAT PROVIDE A SIGNIFICANT PERCENTAGE OF OUR REVENUES We obtain a high proportion of our revenues from a limited number of products and services. Subscription-based and transaction-based fees charged for access to motor vehicle records and corporate filings accounted for over 49% of our revenues for the year ended December 31, 2000 and are expected to continue to account for a significant portion of our revenues in the near future. Regulatory changes or the development of alternative information sources could materially reduce our revenues from these products and services. A reduction in revenues from currently popular products and services would harm our business, results of operations and financial condition. IF OUR POTENTIAL CUSTOMERS ARE NOT WILLING TO SWITCH TO OR ADOPT OUR ONLINE GOVERNMENTAL PORTALS AND OTHER ELECTRONIC SERVICES, OUR GROWTH AND REVENUES WILL BE LIMITED The failure to generate a large customer base would harm our growth and revenues. This failure could occur for several reasons. Our future revenues and profits depend upon the widespread acceptance and use of the Internet as an effective medium for accessing public information, particularly as a medium for government procurement and filings. We cannot assure you that customer acceptance and use of the Internet will continue to grow. Additionally, we face intense competition in all sectors of our business. As a result, our efforts to create a larger customer base may be more difficult than expected even if we are perceived to offer products and services superior to those of our competitors. Further, because the government-to-citizen and government-to-business portal access and electronic filing market is relatively new, potential customers in this market may be confused or uncertain about the relative merits of each electronic government solution and of which solution to adopt, if any. Confusion and uncertainty in the marketplace may inhibit customers from adopting our solution, which could harm our business, results of operations and financial condition. 19 THE FEES WE COLLECT FOR MANY OF OUR PRODUCTS AND SERVICES ARE SUBJECT TO REGULATION THAT COULD LIMIT GROWTH OF OUR REVENUES AND PROFITABILITY Under the terms of our government contracts, we remit a portion of the fees we collect to state agencies. Generally, our contracts provide that the amount of any fees we retain is set by governments to provide us with a reasonable return or profit or, in one case, a specified return on equity. We have limited control over the level of fees we are permitted to retain. Our business, results of operations and financial condition may be harmed if the level of fees we are permitted to retain in the future is too low or if our costs rise without a commensurate increase in fees. THE POSSIBILITY OF GOVERNMENTS DEMANDING FIXED-PRICE CONTRACTS MAY SIGNIFICANTLY REDUCE OUR REVENUES AND PROFITS Substantially all of our current portal contracts are on a transaction-fee basis, through which our fees vary depending on the number of Internet users who access our products and services. However, we cannot assure you that governments will not demand fixed-price contracts in the future. Currently, we earn fees under our contracts with the states of Georgia and Iowa predominantly on a predominantly fixed-price basis. We may, from time to time, enter into other fixed-price contracts. Our failure to estimate accurately the resources and time required for an engagement, to manage governments' expectations effectively regarding the scope of services to be delivered for an estimated price or to complete fixed-price engagements within budget, on time and to governments' satisfaction could expose us to risks associated with cost overruns and, potentially, to penalties, which may harm our business, results of operations and financial condition. WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS AND FAILURE TO MANAGE OUR GROWTH COULD STRAIN OUR MANAGEMENT AND OTHER RESOURCES Our ability to successfully offer products and services and implement our business plan in a rapidly evolving market requires an effective planning and management process. We have acquired a number of new businesses or combined with existing entities to create new businesses, including NIC Commerce, NIC Conquest, NIC Technologies and IDT, which have strained our management resources. Any future expansion efforts could be expensive and put a strain on our management and other resources. We have increased, and plan to continue to increase, the scope of our operations at a rapid rate. Our headcount has grown and will continue to grow substantially. At December 31, 1998, we had a total of 95 employees, at December 31, 1999, we had a total of 185 employees, at December 31, 2000, we had a total of 362 employees, and at February 28, 2001, we had a total of 381 employees. In addition, we expect to hire a modest number of new employees in the near future. To manage future growth effectively, we must maintain and enhance our financial and accounting systems and controls, integrate new personnel and manage expanded operations. BECAUSE A MAJOR PORTION OF OUR CURRENT REVENUES IS GENERATED FROM A SMALL NUMBER OF USERS, THE LOSS OF ANY OF THESE USERS MAY HARM OUR BUSINESS AND FINANCIAL CONDITION A significant portion of our revenues are derived from data resellers' use of our electronic government portals to access motor vehicle records for sale to the automobile insurance industry. For the year ended December 31, 2000, one of these data resellers, ChoicePoint, accounted for approximately 34% of our revenues. Two other resellers accounted for an additional 8% of our revenues during the year ended December 31, 2000. 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. 20 WE MAY LOSE THE RIGHT TO THE CONTENT DISTRIBUTED THROUGH OUR GOVERNMENT PORTALS, WHICH IS PROVIDED TO US ENTIRELY BY GOVERNMENT ENTITIES We do not own or create the content distributed through our government portals. We depend on the governments with which we contract to supply information and data feeds to us on a timely basis to allow businesses and citizens to complete transactions and obtain government information. We cannot assure you that these data sources will continue to be available in the future. Government entities could terminate their contracts to provide data. Changes in regulations could mean that governments no longer collect some types of data or that the data is protected by more stringent privacy rules preventing uses now made of it. Moreover, our data sources are not always subject to exclusive agreements, so that data included in our products and services also may be included in those of our potential competitors. In addition, we are dependent upon the accuracy and reliability of government computer systems and data collection for the content of our portals. The loss or the unavailability of our data sources in the future, or the loss of our exclusive right to distribute some of the data sources, could harm our business, results of operations and financial condition. THE GROWTH IN OUR REVENUES MAY BE LIMITED BY THE NUMBER OF GOVERNMENTS THAT CHOOSE TO PROVIDE ELECTRONIC GOVERNMENT SERVICES AND TO ADOPT OUR BUSINESS MODEL AND BY THE FINITE NUMBER OF GOVERNMENTS WITH WHICH WE MAY CONTRACT FOR OUR ELECTRONIC GOVERNMENT SERVICES Although we have recently introduced new products and services through our NIC Commerce, NIC Conquest, SDR Technologies and IDT subsidiaries, and have recently been awarded contracts to provide eGovernment services under our traditional business model to several municipal/local governments, our revenues are generated principally from contracts with state governments to provide electronic government services on behalf of those governments to complete transactions and distribute public information electronically. The growth in our revenues largely depends on government entities adopting our public/private model. We cannot assure you that government entities will choose to provide electronic government services at all, or that they will not provide such services themselves without private assistance or adopting our public/private model. In addition, as there is a finite number of states remaining with which we can contract for our services, future increases in our revenues will depend on our ability to expand our business model to include multi-state cooperative organizations, local governments, federal agencies and international entities and to broaden our product and service offerings to diversify our revenue streams across our lines of business. We cannot assure you that we will succeed in expanding into new markets, broadening our product and service offerings, or that our services will be adaptable to those new markets. OUR BUSINESS WITH VARIOUS GOVERNMENT ENTITIES OFTEN REQUIRES SPECIFIC GOVERNMENT LEGISLATION TO BE PASSED FOR US TO INITIATE AND MAINTAIN OUR GOVERNMENT CONTRACTS Because a central part of our business includes the execution of contracts with governments under which we remit a portion of user fees charged to businesses and citizens to state agencies, it is often necessary for governments to draft and adopt specific legislation before the government can circulate an RFP to which we can respond. Furthermore, the maintenance of our government contracts requires the continued acceptance of enabling legislation and any implementing regulations. In the past, various entities that use the portals we operate to obtain government products and services have challenged the 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. 21 BECAUSE A LARGE PORTION OF OUR BUSINESS RELIES ON A CONTRACTUAL BIDDING PROCESS WHOSE PARAMETERS ARE ESTABLISHED BY GOVERNMENTS, THE LENGTH OF OUR SALES CYCLES IS UNCERTAIN AND CAN LEAD TO SHORTFALLS IN REVENUES Our dependence on a bidding process to initiate many new projects, the parameters of which are established by governments, results in uncertainty in our sales cycles because the duration and the procedures for each bidding process vary significantly according to each government entity's policies and procedures. The time between the date of initial contact with a government for a bid and the award of the bid may range from as little as 180 days to up to 36 months. The bidding process is subject to factors over which we have little or no control, including: - political acceptance of the concept of government agencies contracting with third parties to distribute public information, which has been offered traditionally only by the government agencies often without charge; - the internal review process by the government agencies for bid acceptance; - the need to reach a political accommodation among various interest groups; - changes to the bidding procedure by the government agencies; - changes to state legislation authorizing government's contracting with third parties to distribute public information; - changes in government administrations; - the budgetary restrictions of government entities; - the competition generated by the bidding process; and - the possibility of cancellation or delay by the government entities. Even though we have diversified our business to include services and products that are not subject to the bidding process, we are still dependent on the bidding process for a significant part of our business. Therefore, any material delay in the bidding process, changes to the bidding practices and policies, the failure to receive the bid or the failure to execute a contract may disrupt our financial results for a particular period and harm our business and financial condition. OUR APPLICATION SERVICES DIVISION HAS INCURRED LOSSES UNDER ITS FIXED-FEE CONTRACTS IN THE PAST, AND OUR RESULTS OF OPERATIONS COULD BE HARMED IF THE COSTS THAT OUR RECENTLY CREATED NIC CONQUEST BUSINESS INCURS TO MEET CONTRACTUAL COMMITMENTS EXCEED OUR CURRENT ESTIMATES Our application services division developed and implemented back-office government software applications for a fixed development fee. In the fourth quarter of 1998, we determined that the balance of revenues remaining to be recognized under our existing application services division contractual obligations was not expected to cover anticipated costs of developing and implementing the related applications. Estimated costs in excess of fixed contract prices of $1.3 million for completing these applications were expensed in the fourth quarter of 1998. We accrued additional anticipated losses of $1.1 million in 1999 and $1.4 million in the first quarter of 2000 based on revised estimates. Since we combined our application services division with Conquest Softworks, LLC in January 2000, we have expanded our applications to include back-end software applications and services for electronic filings and document management solutions for governments at a fixed fee. Our NIC Conquest business has assumed most of the contractual obligations of our application services division. It is possible that NIC Conquest's costs will similarly exceed revenues in the future, as a result of unforeseen difficulties in the creation of an application called for in a contract, unforeseen challenges in ensuring compatibility with existing systems, rising development and personnel costs or other reasons. If this occurs, our business, results of operations and financial condition could be harmed. 22 ENTRANCE OF POTENTIAL COMPETITORS INTO THE MARKETPLACE COULD HARM OUR ABILITY TO MAINTAIN OR IMPROVE OUR POSITION IN THE MARKET Many companies exist that provide one or more parts of the products and services we offer. In most cases, the principal substitute for our services is a government-designed and managed approach that integrates other vendors' technologies, products and services. Companies that have expertise in marketing and providing technical services to government entities have begun to compete with us by further developing their services and increasing their focus on this piece of their business and market shares. Examples of companies that may compete with us are the following: - large systems integrators, including American Management Systems, Sapient and SAIC; - traditional software applications developers, including Microsoft and Oracle; - traditional consulting firms, including IBM, KPMG, and Accenture (formerly Andersen Consulting); - providers of e-commerce applications, including Ariba, Commerce One, PurchasePro.com, Digital Commerce Corporation and Official Payments Corporation; - consumer-oriented government portal companies, including ezgov.com; and - Web service companies, including marchFirst and Verio. Many of our current and potential competitors are national or international in scope and may have greater resources than we do. These resources could enable our competitors to initiate severe price cuts or take other measures to gain market share. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources than us, significantly greater name recognition and a larger installed base of customers. Additionally, in some geographic areas, we may face competition from smaller consulting firms with established reputations and political relationships with potential government clients. If we do not compete effectively or if we experience any pricing pressures, reduced margins or loss of market share resulting from increased competition, our business and financial condition may be harmed. THE SEASONALITY OF USE FOR SOME OF OUR ELECTRONIC GOVERNMENT PRODUCTS AND SERVICES MAY HARM OUR FOURTH QUARTER RESULTS OF EACH CALENDAR YEAR The use of some of our electronic government products and services is seasonal, particularly the accessing of drivers' records, resulting in lower revenues in the fourth quarter of each calendar year, due to the smaller number of business days in this quarter and a lower volume of government-to-business and government-to-citizen transactions during the holiday period. As a result, seasonality is likely to cause our quarterly results to fluctuate, which could harm our business and financial condition and could harm the trading price of our common stock. OUR QUARTERLY RESULTS OF OPERATIONS ARE VOLATILE AND DIFFICULT TO PREDICT. IF WE FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, THE MARKET PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY Our future revenues and results of operations may vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control, and any of which may harm our business. These factors include: - the commencement, completion or termination of contracts during any particular quarter; - the introduction of new electronic government products and services by us or our competitors; - technical difficulties or system downtime affecting the Internet generally or the operation of our electronic government products and services; 23 - the amount and timing of operating costs and capital expenditures relating to the expansion of our business operations and infrastructure; - the result of negative cash flows due to capital investments; and - the incurrence of significant charges related to acquisitions. Due to the factors noted above, our revenues in a particular quarter may be lower than we anticipate and if we are unable to reduce spending in that quarter, our results of operations for that quarter may be harmed. You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. It is possible that in some future periods our results of operations may be below the expectations of public market analysts and investors. If this occurs, the price of our common stock may decline. IF WE FAIL TO COORDINATE OR EXPAND OUR OPERATIONAL PROCEDURES AND CONTROLS, WE MAY NOT EFFECTIVELY MANAGE OUR GROWTH Our growth rate may increase rapidly in response to the acceptance of our products and services under new or existing government contracts. If we cannot manage our growth effectively, we may not be able to coordinate the activities of our technical, accounting and marketing staffs, and our business could be harmed. We intend to plan for the acceptance of new bids by a number of governmental entities so that we may be ready to begin operations as soon as possible after acceptance of a bid. Additionally, we plan to continue our expansion of eGovernment products and services into new local, state and federal markets. As part of this plan of growth, we must implement new operational procedures and controls to expand, train and manage our employees and to coordinate the operations of our various subsidiaries. If we cannot manage the growth of our government portals, staff, software installation and maintenance teams, offices and operations, our business may be harmed. WE MAY BE UNABLE TO HIRE, INTEGRATE OR RETAIN QUALIFIED PERSONNEL The recent growth in our business has resulted in an increase in the responsibilities for both existing and new management personnel. Some of our personnel are presently serving in more than one executive capacity. The loss of any of our executives could harm our business. In addition, we expect that we will need to hire additional personnel in all areas in 2001, including general managers for new operations in jurisdictions in which we obtain contracts. Competition for personnel in the Internet industry is intense. We may not be able to retain our current key employees or attract, integrate or retain other qualified employees in the future. If we do not succeed in attracting new personnel or integrating, retaining and motivating our current personnel, our business could be harmed. In addition, new employees generally require substantial training in the presentation, policies and positioning of our government portals and other services. This training will require substantial resources and management attention. TO BE SUCCESSFUL, WE MUST DEVELOP AND MARKET COMPREHENSIVE, EFFICIENT, COST-EFFECTIVE AND SECURE ELECTRONIC ACCESS TO PUBLIC INFORMATION AND NEW PRODUCTS AND SERVICES Our success depends in part upon our ability to attract a greater number of Internet users to access public information electronically by delivering a comprehensive composite of public information and an efficient, cost-effective and secure method of electronic access and transactions. Moreover, in order to increase revenues in the future, we must continue to develop products and services that businesses and citizens will find valuable, and there is no guarantee that we will be able to do so. If we are unable to develop products and services that allow us to attract, retain and expand our current user base, our revenues and future results of operations may be harmed. We cannot assure you that the products and services we offer will appeal to a sufficient number of Internet users to generate 24 continued revenue growth. For example, we cannot assure you that the use of NIC Commerce, our online procurement software services, by local, state and federal governments will continue to grow. Our ability to attract Internet users to our government portals depends on several factors, including: - the comprehensiveness of public records available through our government portals; - the perceived efficiency and cost-effectiveness of accessing public records electronically; - the perceived efficacy of online government-to-business procurement solutions; - the effectiveness of security measures; and - the increased usage and continued reliability of the Internet. DEFICIENCIES IN OUR PERFORMANCE UNDER A GOVERNMENT CONTRACT COULD RESULT IN CONTRACT TERMINATION, REPUTATIONAL DAMAGE OR FINANCIAL PENALTIES Each government entity with which we contract for portal services has the authority to require an independent audit of our performance. The scope of audits could include inspections of income statements, balance sheets, fee structures, collections practices, service levels and our compliance with applicable laws, regulations and standards. We cannot assure you that a future audit will not find any material performance deficiencies that would result in an adjustment to our revenues and result in financial penalties. Moreover, the consequent negative publicity could harm our reputation among other governments with which we would like to contract. All of these factors could harm our business, results of operations and financial condition. WE MAY NEED MORE WORKING CAPITAL TO EXPAND OUR BUSINESS We anticipate that our current resources will be sufficient to meet our present working capital and capital expenditure requirements for at least the next twelve months. However, we may need to raise additional capital before this period ends to further: - expand our services and products offerings; - acquire complementary businesses or technologies; - support our expansion into other states, cities, municipalities and federal agencies and internationally; and - respond to competitive pressures. Our future liquidity and capital requirements will depend upon numerous factors, including the success of our existing and new product and service offerings and potentially competing technological and market developments. We may be required to raise additional funds through public or private financing, strategic relationships or other arrangements. We cannot assure you that such additional funding, if needed, will be available on terms acceptable to us, or at all. If adequate funds were not available on acceptable terms, our ability to develop or enhance our products and services, take advantage of future opportunities or respond to competitive pressures would be significantly limited. This limitation could harm our business, results of operations and financial condition. 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 25 address the increasingly sophisticated technological needs of our customers on a cost-effective and timely basis. Our ability to remain competitive will depend, in part, on our ability to: - enhance and improve the responsiveness, functionality and other features of the government portals we offer; - continue to develop our technical expertise; - develop and introduce new services, applications and technology to meet changing customer needs and preferences; and - influence and respond to emerging industry standards and other technological changes in a timely and cost-effective manner. We cannot assure you that we will be successful in responding to the above technological and industry challenges in a timely and cost-effective manner. If we are unable to integrate new technologies and industry standards effectively, our results of operations could be harmed. WE DEPEND ON THE INCREASING USE OF THE INTERNET AND ON THE GROWTH OF ONLINE GOVERNMENT INFORMATION SYSTEMS. IF THE USE OF THE INTERNET AND ELECTRONIC GOVERNMENT INFORMATION SYSTEMS DO NOT GROW AS ANTICIPATED, OUR BUSINESS WILL BE SERIOUSLY HARMED Our business depends on the increased acceptance and use of the Internet as a medium for accessing public information and completing government filings and procurement contracts. Rapid growth in the use of the Internet is a recent phenomenon. As a result, acceptance and use may not continue to develop at historical rates and a sufficiently broad base of individual and business customers may not adopt or continue to use the Internet as a medium for accessing government portals and other online services. Demand and market acceptance for recently introduced services and products over the Internet are subject to a high level of uncertainty, and there exist few proven services and products. Our business would be seriously harmed if: - Use of the Internet and other online services does not continue to increase or increases more slowly than expected; or - the technology underlying the Internet and other online services does not effectively support any expansion that may occur. 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 The Internet has experienced, and is expected to continue to experience, significant growth in the number of users and amount of traffic. If the Web continues to experience increased numbers of users, frequency of use or increased bandwidth requirements, the Internet infrastructure may not be able to support these increased demands or perform reliably. The Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure, and could face such outages and delays in the future. These outages and delays could reduce the level of Internet usage and traffic on our government portals. Such outages and delays would also hinder our customers' ability to file UCC documents online, renew professional licenses electronically, file fuel tax applications and complete online government purchase orders and requisitions. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols to handle increased levels of activity or due to increased governmental regulation. If the Internet infrastructure is not adequately developed or maintained, use of our government portals and our government-to-citizen and government-to-business services may be reduced. 26 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. WE MAY BE HELD LIABLE FOR CONTENT THAT WE OBTAIN FROM GOVERNMENT AGENCIES Because we aggregate and distribute sometimes private and sensitive public information over the Internet, we may face potential liability for defamation, libel, negligence, invasion of privacy, copyright or trademark infringement, and other claims based on the nature and content of the material that is published on our government portals. Most of the agreements through which we obtain consent to disseminate this information do not contain indemnity provisions in our favor. These types of claims have been brought, sometimes successfully, against online services and Web sites in the past. We cannot assure you that our general liability insurance will be adequate to indemnify us for all liability that may be imposed. Any liability that is not covered by our insurance or is in excess of our insurance coverage could severely harm our business operations and financial condition. CONCERNS OVER TRANSACTIONAL SECURITY MAY HINDER THE GROWTH OF OUR BUSINESS A significant barrier to electronic commerce is the secure transmission of confidential information over public networks. Any breach in our security could expose us to a risk of loss or litigation and possible liability. We rely on encryption and authentication technology licensed from third parties to provide secure transmission of confidential information. As a result of advances in computer capabilities, new discoveries in the field of cryptography or other developments, a compromise or breach of the algorithms we use to protect customer transaction data may occur. Because we provide information released from various government entities, we may represent an attractive target for security breaches. A compromise of our security or a perceived compromise of our security could severely harm our business. A party who is able to circumvent our security measures could misappropriate proprietary information, including customer credit card information, or cause interruptions or direct damage to our government portals. Also, should hackers obtain sensitive data and information, or create bugs or viruses in an attempt to sabotage the functionality of our products and services, we may receive 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. OUR SYSTEMS MAY FAIL OR LIMIT USER TRAFFIC, WHICH COULD HARM OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION Most of 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 27 terminate agreements with us. If any of these circumstances occurred, our business could be harmed. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures of or interruptions in our systems. Our government portals must accommodate a high volume of traffic and deliver frequently updated information. These government portals may experience interruptions due to any failure or delay by government agencies in the transmission or receipt of this information. Due to holidays and technical problems with state computer systems, our Web sites have experienced slower response times or decreased traffic in the past and may experience the same incidents in the future. In addition, our users depend on Internet service providers, online service providers and other Web site operators for access to our government portals and other online government-to-citizen and government-to-business services. Many of these providers and operators have experienced significant outages in the past due to system failures unrelated to our systems, holidays and heavy user traffic, and could experience the same outages, delays and other difficulties in the future. Any of these system failures could harm our business, results of operations and financial condition. ITEM 2. PROPERTIES Our principal administrative facility occupies a total of approximately 3,000 square feet of leased space 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. ITEM 3. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the shareholders during the fourth quarter of fiscal 2000. 28 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Since July 15, 1999, the date of our initial public offering, our stock has traded on the Nasdaq National Market under the symbol "EGOV." The following table shows the range of high and low closing sales prices reported on the Nasdaq National Market for the periods indicated. On March 1, 2001, the closing price of our common stock was $3.03.
HIGH LOW -------- -------- FISCAL YEAR ENDED DECEMBER 31, 1999 Third Quarter (from July 15, 1999).......................... $28.25 $12.81 Fourth Quarter.............................................. $39.63 $24.38
HIGH LOW -------- -------- FISCAL YEAR ENDED DECEMBER 31, 2000 First Quarter............................................... $67.88 $28.63 Second Quarter.............................................. $32.38 $ 9.75 Third Quarter............................................... $17.75 $ 3.97 Fourth Quarter.............................................. $ 4.06 $ 1.19
As of March 1, 2001, there were approximately 195 holders of record of shares of the Company's common stock. DIVIDEND POLICY Other than dividends paid while we were an S corporation, we have never declared or paid any cash dividends on shares of our common stock and do not anticipate declaring or paying dividends on our common stock in the foreseeable future. We expect that we will retain all available earnings generated by our operations for the development and growth of our business. Any future determination as to the payment of dividends will be made at the discretion of our Board of Directors and will depend on our operating results, financial condition, capital requirements, general business conditions and such other factors as the Board of Directors deems relevant. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below should be read in conjunction with the consolidated financial statements and related notes, and "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in this Form 10-K. On March 31, 1998, we exchanged our common stock for the common stock of five affiliated companies in a transaction referred to as the Exchange Offer. Prior to the completion of the Exchange Offer, we were a holding company with no operations of our own. The Exchange Offer consolidated five business units as operating subsidiaries under a holding company. Prior to April 1, 1998, our historical financial information reflects the results of our business unit formed to pursue new business opportunities and not the results of our business units operating in Indiana, Kansas, Arkansas and Nebraska. For 29 additional information on the Exchange Offer, refer to Note 3 in the notes to consolidated financial statements included in this Form 10-K.
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues.................................... $236 $ 996 $ 8,148 $ 16,147 $ 26,971 Total cost of revenues............................ 21 5 2,973 3,227 8,979 Gross profit...................................... 215 991 5,175 12,920 17,992 Operating income (loss)........................... 8 (277) (7,205) (14,470) (52,206) Net income (loss)................................. 8 (277) (7,896) (10,731) (40,278) Net income (loss) per share-basic and diluted..... 0.00 (0.01) (0.21) (0.23) (0.74)
DECEMBER 31, ---------------------------------------------------- 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents......................... $ -- $179 $ 1,311 $ 9,527 $ 13,878 Marketable securities............................. -- -- -- 82,481 24,914 Total assets...................................... 110 326 17,249 133,661 139,569 Bank lines of credit.............................. -- -- 1,024 -- -- Long-term debt (includes current portion of notes payable/capital lease obligations).............. -- 30 745 458 217 Total shareholders' equity........................ 95 188 10,912 128,089 130,938
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTION ABOUT FORWARD-LOOKING STATEMENTS This Form 10-K includes "forward-looking" statements about future financial results, future business changes and other events that haven't yet occurred. For example, statements like we "expect," we "believe," we "plan, we "intend" or we "anticipate" are forward-looking statements. Investors should be aware that actual operating results and financial performance may differ materially from our expressed expectations because of risks and uncertainties about the future including risks related to economic and competitive conditions. In addition, we will not necessarily update the information in this Form 10-K if any forward-looking statement later turns out to be inaccurate. Details about risks affecting various aspects of our business are discussed throughout this Form 10-K. Investors should read all of these risks carefully. OVERVIEW In this section, we are providing more detailed information about our operating results and changes in financial position over the past three years. This section should be read in conjunction with the consolidated financial statements and related notes included in this Form 10-K. We are a provider of Internet-based, electronic government services that help governments use the Internet to reduce costs and provide a higher level of service to businesses and citizens. We enter into contracts with governments and on their behalf design, build and operate Internet-based portals. These portals consist of Web sites and applications that we build, which allow businesses and citizens to access government information online and complete transactions, including applying for a permit, retrieving driver's license records or filing a form or report. Our unique business model allows us to reduce our 30 government clients' financial and technology risks and obtain revenue by charging fees for electronic government services and remitting a portion to our government clients. Our clients benefit because they gain a centralized, customer-focused presence on the Internet, and businesses and citizens gain a faster, more convenient and more cost-effective means to interact with governments. We also provide Internet-based applications and services for government procurement through our NIC Commerce business. Focusing on Secretaries of State, our NIC Conquest business builds Uniform Commercial Code and corporation software applications and provides online services that facilitate electronic filing and document management for governments. NIC Technologies designs and develops online election and ethics filing systems for federal, state and local government agencies. IDT provides business-to-government reporting and filing software for the transportation industry. At December 31, 2000, we had signed contracts to provide Internet-based electronic government services for the state governments of Arkansas, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Maine, Montana, Nebraska, Tennessee, Utah and Virginia and the city-county governments of the City of Indianapolis and Marion County (IN), Dallas County (TX), the City of San Francisco (CA) and the City of Tampa (FL). We also serve as a subcontractor to Deloitte Consulting on the New City of Ottawa (Canada) portal. We typically enter into three to five year contracts with our government clients and manage operations through separate subsidiaries that operate as decentralized business units with a high degree of autonomy. Under these contracts, each local business unit helps its government client implement, develop, manage and enhance a single, comprehensive portal for conducting transactions and delivering information to businesses and citizens online, and we remit to the government a portion of the fee we obtain through use of the portal for information and transactions. In our government contracts with Georgia and Iowa, we provide consulting, development and management services for those government portals predominantly under a fixed-price model. Subscription-based and transaction-based fees charged for access to motor vehicle records and corporate filings accounted for over 49% and 66% of our revenues for the years ended December 31, 2000 and 1999. We believe that while these applications will continue to be important sources of revenues, their contributions as a percentage of our total revenues will decline as other sources grow. We charge for access to records on a per-record basis and, depending upon government policies, also on a fixed or sliding scale bulk basis. Our fees are set by negotiation with the government agencies that control the records and are typically approved by a government sanctioned oversight body. We recognize revenues from transactions (primarily information access fees and filing fees) on an accrual basis net of the transaction fee due to the government, and we 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. The costs that we pay state agencies for data access are accrued as accounts payable at the time revenue from the access of public information is recognized. We must remit a certain amount or percentage of these fees to government agencies regardless of whether we ultimately collects the fees. The pricing of these transactions vary by the type of transaction and by state. Costs of portal revenues consist primarily of telecommunications and data processing costs and payments to certain of our state government clients under revenue- and/or profit-sharing arrangements. Revenues from state portal business units are highly correlated to population, but are also affected by pricing policies established by government entities for public records, the number and growth of commercial enterprises and the government entity's development of policy and information technology infrastructure supporting electronic government. BUSINESS ACQUISITIONS On September 15, 1999, we acquired the net assets of NIC Commerce (formerly eFed), a market leader in Internet-based procurement solutions for governments. NIC Commerce develops and manages online procurement software and services for federal and state government markets. Contracting with 31 several state and federal agencies, NIC Commerce provides value-added applications to its government partners, as well as potential new entry points for NIC into other federal, state and local sectors. NIC Commerce, while traditionally deriving software licensing and maintenance revenues from several federal agencies, also has contracted to provide electronic procurement services under a transaction-based pricing model to five state/local government agencies. These contracts are expected to begin producing revenues in 2001. On January 12, 2000, we merged our application services division with Conquest Softworks, LLC. NIC Conquest, the newly formed entity, is a provider of software applications and services for electronic filings and document management solutions for governments. The combined entity holds contracts with state and local governments for Web-enabling the back-office systems and processes for business-to-government filings. Its products include: UCCDataNet State Imaging and Filing System, a comprehensive UCC office management system; uccfile.com Web Browser Interface, which allows Web access to filings; and County Suite Filing and Imaging Systems, which extends filing capabilities to land records and other filing types. Our NIC Conquest business derives the majority of its revenues from fixed-price application development contracts with governments and recognizes revenues on the percentage of completion method, primarily utilizing labor hours incurred to date as compared to the estimated total labor hours for each contract. On May 11, 2000, we acquired SDR Technologies, a provider of Internet-based applications for governments. SDR has been renamed NIC Technologies. NIC Technologies designs and develops online election and ethics filing systems for federal, state and local government agencies and also serves as our centralized development business that builds standardized revenue-generating applications that can be deployed across our state and local portals in a timely and effective manner. NIC Technologies derives the majority of its revenues from time and materials application development and maintenance contracts with governments and recognizes revenues as services are provided. On October 13, 2000, we acquired Intelligent Decision Technologies, Ltd., a provider of business-to-government reporting and filing software for the transportation industry. IDT has developed business-to-government applications that facilitate compliance with the Federal Highway Administration's Commercial Vehicle Information System Network. IDT currently has contracts to provide certain state governments with commercial vehicle electronic credentialing services that include registration, permitting, and tax filing software. Our multi-state filing portal for the trucking industry, which became operational in November 2000, will be integrated into IDT's operations, allowing us to leverage our eGovernment expertise on behalf of regulated industries such as transportation, which are required to file periodically with multiple government entities. IDT derives the majority of its revenues from cost-plus time and materials application development contracts with governments and recognizes revenues as services are provided. All business acquisitions in 1999 and 2000 were accounted for as purchases and the results of the acquired companies' operations have been included in our consolidated statements of operations from the respective dates of acquisition. For additional information relating to our business acquisitions, refer to note 4 in the notes to consolidated financial statements included in this Form 10-K. STRATEGIC ALLIANCES AND INVESTMENTS On March 3, 2000, NIC Commerce entered into an operating agreement with Bank of America Corporation, through its subsidiary Bank of America, N.A. (USA), to create a limited liability company to offer state and local governments the first Web-based business-to-business procurement, payment and reconciliation service. By bundling NIC Commerce's software with Bank of America's government purchase cards, the new company will allow customers to place orders online through their preferred suppliers, request a quote from businesses for services, process transactions, initiate payments and reconcile accounts. Government agencies are also able to personalize their services to reflect preferred 32 suppliers, contract requirements and other conditions through the browser-based catalog. The venture, called Banc of America Purchase Street, LLC, is the first web-based solution to integrate various shopping and payment functions for the public sector. Banc of America Purchase Street, LLC has recently contracted to provide electronic procurement services under transaction-based pricing models to two state/local government agencies: Houston-Galveston Area Council of Governments and the State of South Carolina. For additional information on our strategic business relationship with Bank of America, refer to note 7 in the notes to consolidated financial statements included in this Form 10-K. On August 25, 2000, we entered into a three-year agreement with America Online, Inc. to deliver state government information, services and applications through AOL's Government Guide. For additional information on our agreement with AOL, refer to note 8 in the notes to consolidated financial statements included in this Form 10-K. On August 28, 2000, we announced a strategic alliance with Deloitte Consulting to deliver new services and business models to accelerate the evolution toward next-generation eGovernment. NIC and Deloitte Consulting will deliver end-to-end eGovernment solutions that will help governments around the world operate more efficiently and be more responsive to citizen and business needs. The NIC-Deloitte Consulting alliance will leverage our expertise in establishing and operating enterprise-wide eGovernment portals and Deloitte Consulting's experience in eGovernment implementation, strategic planning, reengineering, change leadership, training, and integration solutions. Under the terms of this agreement, NIC and Deloitte Consulting will identify and provide new services, technologies and ventures to target cross-jurisdiction, vertical or specific solutions for government transactions. The companies will also identify cross-selling and co-marketing opportunities and will expand international market reach for transaction-funded government portals by creating offerings for the Americas, Europe and Asia Pacific, and other global regions. The companies will support both traditional fee-for-service projects and transaction-funded enterprise-wide business models. The alliance is non-exclusive. On March 23, 2000, we completed a $5 million cash investment in privately held E-Filing.com, Inc., a provider of online filing applications for legal services, giving us ownership of 21% of E-Filing.com at December 31, 2000. This strategic investment is expected to enable both E-Filing.com and NIC to expand access to judicial eGovernment applications nationwide. On March 24, 2000, we completed a $5.5 million cash investment in privately held Tidemark Computer Systems, Inc., a provider of eGovernment permit applications and related services for local government, giving us ownership of approximately 27% of Tidemark at December 31, 2000. This strategic investment is expected to allow Tidemark and NIC to help communities automate a variety of business processes through mobile and web-based applications. At December 31, 2000, we were closely monitoring our investment in Tidemark due to significant liquidity issues inasmuch as Tidemark's current liquid resources were sufficient to meet operating requirements only through the end of April 2001. At the end of 2000, Tidemark was in various stages of merger and acquisition discussions with several companies. We expected Tidemark would be successful in merging its operations with or being acquired by another company. Based on information received in the latter half of March 2001 from a company looking to acquire Tidemark, we determined that we would not be able to recover the entire carrying value of our investment. Accordingly, in the fourth quarter of 2000, we adjusted the carrying value of our investment to its estimated fair value resulting in a noncash impairment loss of approximately $2.1 million. In addition, we recorded a deferred tax asset valuation allowance of approximately $2.0 million to offset the deferred tax asset we had recognized relating to our investment in Tidemark. E-Filing.com and Tidemark are in the early stage of their operations and are incurring net losses. We regularly review the carrying value of these equity method investments and record impairment losses when events and circumstances indicate that such assets are impaired. To date, we have not 33 recorded any such impairment losses on our investment in E-Filing.com. For additional information on our investments in E-Filing.com and Tidemark, refer to note 6 in the notes to consolidated financial statements included in this Form 10-K. In October 2000, we completed an initial $524,000 cash investment in e-Government Solutions Limited, or eGS, a private joint venture among Swiss venture capital firm ETF Group, London-based venture development organization Vesta Group, and our European subsidiary, NIC Europe, giving us ownership of 40% of eGS. The purpose eGS, based in London, England, is to deliver eGovernment products and services throughout Western Europe, with initial efforts to focus on the United Kingdom. For additional information on the eGS joint venture, refer to note 6 in the notes to consolidated financial statements included in this Form 10-K. OTHER RECENT DEVELOPMENTS On September 20, 2000, we announced that our third quarter operating results would likely fall short of the consensus analyst revenue and earnings estimates. Concurrent with this announcement, we announced the restructuring of two of our eGovernment product businesses, NIC Commerce and NIC Technologies, the reorganization of our management team and the consolidation of our marketing efforts. Our lower-than-expected third quarter operating results were mainly attributable to our NIC Commerce and NIC Technologies businesses, which were affected by industry-wide post Y2K delays in government decision-making and sales cycles during the first half of 2000. These businesses were the main sources of revenue shortfall versus expectations as a result of their management's ineffective forecasting and inadequate response to market signals that new business and revenues would be less than expectations. In addition, these businesses were the main source of EBITDA shortfall versus expectations as a result of expenditures for sustained development, marketing and product delivery efforts to support these operations whose revenue and gross profit impact did not materialize as expected during the quarter. Our response to the inadequate performance of our NIC Technologies and NIC Commerce businesses, both of which we have acquired since September 1999, was to initiate a change in leadership, while simultaneously adjusting operational processes and resources to more appropriately size these operations to visible demand and more efficiently align them with other eGovernment initiatives across NIC. Dan Houlihan, the former President of our largest state portal operation in Virginia, has assumed day-to-day management responsibility of NIC Technologies since July 2000 and is responsible for rebalancing the operation to better support the application development needs of NIC's growing local and state portal businesses and other growth initiatives across NIC. We announced the appointment of Chris Boehm as the new President of NIC Commerce effective November 1, 2000. Mr. Boehm joined NIC from Comptek Research, Inc., a leading supplier of advanced electronics and data communications systems to international government and industry clients, where he served as President of its software and technical services subsidiary. Mr. Boehm will be responsible for accelerating growth and expanding NIC's government eProcurement market share at the local, state, federal, and international levels. The restructuring involved employee reductions in our marketing division and at our NIC Commerce and NIC Technologies businesses. As a result, we incurred a pre-tax charge of approximately $638,000 in the third quarter relating to employee severance costs. Employee severance costs paid through December 31, 2000 totaled $358,000 with $280,000 accrued at December 31, 2000 for future payments. Cash requirements for the restructuring were funded from available resources. The employee severance costs relate to severance packages for 23 employees in marketing, product development and administration, 21 of which were terminated by December 31, 2000, with two additional terminations expected in the first quarter of 2001. The pre-tax savings from these reductions are expected to approximate $2.1 million annually. 34 MARCH 31, 1998 EXCHANGE OFFER On March 31, 1998, we exchanged our common stock for the common stock of five affiliated companies, in a transaction referred to as the Exchange Offer. Prior to the completion of the Exchange Offer, we were a holding company with no operations of our own. Our Exchange Offer consolidated five business units as operating subsidiaries under our holding company. Prior to April 1, 1998, our historical financial information reflects the results of our business unit formed to pursue new business opportunities, and not the results of our business units operating in Indiana, Kansas, Arkansas and Nebraska. For example, for the year ended December 31, 1998, revenues for all of our business units were $10.0 million, while the reported revenues of $8.1 million for the year ended December 31, 1998 represents 12 months of one of our business units and only nine months of the other four business units. Total expenses are likewise not comparable. Accordingly, we believe that the historical comparison of our results of operations for the year ended December 31, 1999 against the year ended December 31, 1998 is not necessarily meaningful. For additional information on the Exchange Offer, refer to note 3 in the notes to consolidated financial statements included in this Form 10-K. PRESENTATION OF REVENUES AND COST OF REVENUES In the fourth quarter of 2000, we began to recognize revenues for the access of public information net of the transaction fee due to the government. Previously, the Company presented such revenues on a gross basis and accrued the costs that it pays to government agencies for data access as cost of revenues. We also started to classify our revenues and cost of revenues into two categories: (1) portal and (2) software and services. The portal category includes revenues and cost of revenues of the Company's subsidiaries operating state and local government portals. The software and services category includes revenues and cost of revenues of the Company's Products segment, which includes the NIC Conquest, NIC Technologies and IDT subsidiaries, and the Company's Procurement segment, which includes the NIC Commerce subsidiary. All prior periods have been reclassified to present information on a comparable basis. COMPARISON OF YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 REVENUES. Total revenues increased 67% to $27.0 million for the year ended December 31, 2000 from $16.1 million for the year ended December 31, 1999. Portal revenues were $17.9 million for the year ended December 31, 2000, a 28% increase over $14.0 million for the year ended December 31, 1999. Of this 28% increase, 17% was attributable to revenues from our state portal business units that became operational after June 30, 1999 and 11% was from an increase in revenues relating to same state portal volumes (states open more than one year). Excluding state portal business units that became operational after June 30, 1999 and our state portal contracts in Georgia and Iowa, which we operate under a fixed-price model, same state portal transaction revenues for the year ended December 31, 2000 increased 17% over the year ended December 31, 1999 as a result of increased transaction volumes mainly from our Virginia and Indiana subsidiaries. Software and services revenues were $9.1 million for the year ended December 31, 2000, a 324% increase over $2.1 million for the year ended December 31, 1999. Of this 324% increase, 135% was attributable to NIC Conquest, which was formed in January 2000 through the merger of our application services division and Conquest Softworks, LLC, 96% was from NIC Commerce, which we acquired in September 1999, 78% was from NIC Technologies, which we acquired in May 2000, and 15% was from IDT, which we acquired in October 2000. Total revenues increased 98% to $16.1 million for the year ended December 31, 1999 from $8.1 million for the year ended December 31, 1998. Portal revenues were $14.0 million for the year ended December 31, 1999, a 81% increase over $7.8 million for the year ended December 31, 1998. Of 35 this 81% increase, 27% was attributable to revenues from our four initial business units included in reported revenues in the first quarter of 1999 compared to none reported in 1998 prior to the March 31, 1998 Exchange Offer, 44% was from our state business units that became operational during the second half of 1998 and third quarter of 1999 and 10% was from an increase in same state business volumes. With all business units included for the entire period, combined portal revenues were $9.5 million for the year ended December 31, 1998. Software and services revenues were $2.1 million for the year ended December 31, 1999, a 438% increase over $0.4 million for the year ended December 31, 1998. Of this 438% increase, 43% was attributable to increased revenues from our application services division (now NIC Conquest) and the remainder was from NIC Commerce, which we acquired in September 1999. GROSS PROFIT. Total gross profit increased 39% to $18.0 million for the year ended December 31, 2000 from $12.9 million for the year ended December 31, 1999. Portal gross profit reached $16.5 million for the year ended December 31, 2000, a 30% increase over $12.7 million for the year ended December 31, 1999. Of this 30% increase, 18% was attributable to gross profit from portal business units that became operational after June 30, 1999 and 12% was from an increase in gross profit relating to same state portal volumes. Excluding new state portal business units that became operational after June 30, 1999 and our state portal contracts in Georgia and Iowa, same state portal gross profit for the year ended December 31, 2000 increased 18% over the year ended December 31, 1999 as a result of increased transaction volumes mainly from our Virginia and Indiana subsidiaries. The portal gross profit rate was approximately 92% for the year ended December 31, 2000 compared to 91% for the year ended December 31, 1999. The same state portal gross profit rate for the year ended December 31, 2000 was approximately 90% compared to 89% for the year ended December 31, 1999. Total gross profit increased 150% to $12.9 million for the year ended December 31, 1999 from $5.2 million for the year ended December 31, 1998. Portal gross profit reached $12.7 million for the year ended December 31, 1999, an 81% increase over $7.0 million for the year ended December 31, 1998. Of this 81% increase, 26% was attributable to gross profit from our initial four business units, 48% was from new state business units that became operational in the second half of 1998 and third quarter of 1999 and 7% was from same state business unit growth. With all business units included for the entire period, combined portal gross profit was $6.7 million for the year ended December 31, 1998. The portal gross profit rate was approximately 91% for the years ended December 31, 1999 and 1998. Software and services gross profit was $1.5 million for the year ended December 31, 2000, $0.2 million for the year ended December 31, 1999, and $(1.9 million) for the year ended December 31, 1998. The majority of the increase in 2000 was attributable to gross profit from our NIC Commerce, NIC Technologies and IDT businesses, all of which were acquired subsequent to the second quarter of 1999, and to an increase in gross profit from our NIC Conquest business (formerly our application services division), which was formed in January 2000. Cost of software and services revenues for the years ended December 31, 2000, 1999 and 1998 include charges of $1.4 million, $1.1 million and $1.3 million, respectively, for anticipated costs in excess of revenues to be recognized under certain of our application development contracts. We intend to continue to expand our operations by developing and promoting new products and services and by expanding the breadth and depth of our eGovernment product and service offerings. Gross profit rates attributable to new business areas are likely to be different than those associated with our existing business activities. To the extent such business areas become larger components of our revenues, we would expect a corresponding change in our overall gross profit rate. SERVICE DEVELOPMENT AND OPERATIONS. Service development and operations expenses consist primarily of the employee expenses incurred to start up, operate and maintain our government portals as well as the expenses incurred to maintain the computer system and information technology 36 infrastructure throughout our various businesses. Service development and operations expenses for the year ended December 31, 2000 were $10.3 million, a 156% increase over $4.0 million for the year ended December 31, 1999. Of this 156% increase, 28% was attributable to state and local portal business units that became operational after June 30, 1999, 16% was from an increase in same state portal expenses, 45% was from NIC Commerce, 20% was from NIC Technologies and 47% was from an increase in corporate level expenses. Excluding acquired businesses, new state and local portal business units that became operational after June 30, 1999 and corporate level expenses, same state portal service development and operations expenses increased 20% over the year ended December 31, 1999 as a result of ongoing technology enhancements and service delivery investment in our state portal partnerships. Service development and operations expenses for the year ended December 31, 1999 were $4.0 million, a 144% increase over $1.6 million for the year ended December 31, 1998. Of this 144% increase, 35% was attributable to our four initial business units, 45% was from new state business units that became operational in the second half of 1998 and third quarter of 1999, 32% was from an increase in same state portal expenses, 22% was from NIC Commerce, 10% was from an increase in corporate level expenses. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses for the year ended December 31, 2000 were $30.1 million, a 227% increase over $9.2 million for the year ended December 31, 1999. In the second quarter of 2000, the Company incurred a one-time charge of approximately $0.8 million relating to our withdrawn secondary stock offering as further discussed in note 14 to the notes to consolidated financial statements included in this Form 10-K. During the third quarter of 2000, the Company incurred a one-time charge of approximately $0.6 million for employee severance costs related to the corporate restructuring of our NIC Commerce and NIC Technologies divisions and the consolidation of our marketing efforts, as further discussed above and in note 20 to the notes to consolidated financial statements included in this Form 10-K. The Company also incurred a one-time non-cash charge of approximately $0.2 million in the third quarter of 2000 due to the adoption of a company-wide vacation policy that required the Company to recognize a liability for earned but unused employee vacation. Excluding these one-time charges, selling, general and administrative expenses for the year ended December 31, 2000 increased 209% over the year ended December 31, 1999. Of this 209% increase, 21% was attributable to new state and local portal business units that became operational after June 30, 1999, 53% was from NIC Commerce, 16% was from NIC Conquest, 15% was from NIC Technologies and 3% was from IDT. Additionally, 98% of the increase was from an increase in corporate level expenses as a result of becoming a public company in July 1999 and as a result of our overall growth and positioning for future growth, including strategic infrastructure investments in marketing, public relations, finance, technology and management personnel. Excluding acquired businesses, new state portal business units that became operational after June 30, 1999, corporate level expenses and one-time charges, same state portal selling, general and administrative expenses for the year ended December 31, 2000 decreased 3% from the year ended December 31, 1999 as a result of continuing overhead cost containment and efficiency efforts in our more mature state portals. Selling, general and administrative expenses for the year ended December 31, 1999 were $9.2 million, a 117% increase over $4.2 million for the year ended December 31, 1998. Of this 117% increase, 16% was attributable to our four initial business units, 28% was from new state business units that became operational in the second half of 1998 and third quarter of 1999 and 19% was from NIC Commerce. Additionally, 53% of the increase was from corporate level expenses as a result of becoming a public company in July 1999 and as a result of our overall growth and positioning for future growth, including the addition of corporate level marketing, public relations, finance, technology and management personnel. 37 STOCK COMPENSATION. Stock compensation for the year ended December 31, 2000 was $1.8 million and consisted primarily of amortization of deferred compensation expense related to common stock options granted to senior level executives and other key employees. Stock compensation increased to $3.2 million for the year ended December 31, 1999 from $0.6 million for the year ended December 31, 1998. This increase was due to compensation expense recognized on stock sales to senior level executives in the first half of 1999 and on stock options granted to senior level executives and other key employees in late 1998 and 1999. From February 1999 through May 1999, we sold approximately 370,000 shares of common stock to key employees and recognized approximately $1.6 million in compensation expense for the amount by which the fair value of common stock sold exceeded the amount paid. In addition, we recognized approximately $1.6 million in compensation expense for the year ended December 31, 1999 relating to stock options. DEPRECIATION AND AMORTIZATION. The increase in depreciation and amortization expense for the year ended December 31, 2000 was primarily due to intangible asset amortization resulting from our acquisitions of NIC Commerce in September 1999, SDR Technologies in May 2000, Conquest Softworks, LLC in January 2000, IDT in October 2000, and the amortization of the fair value of fully vested warrants issued to AOL in August 2000 (refer to notes 4 and 8 in the notes to consolidated financial statements included in this Form 10-K). Depreciation expense increased by $1.3 million for the year ended December 31, 2000 as a result of additions to property and equipment throughout 2000 and the depreciation of fixed assets from our acquired businesses. These increases were partially offset by a decrease in intangible asset amortization resulting from our March 31, 1998 Exchange Offer. Certain intangible assets relating to that exchange offer became fully amortized in December 31, 1999, June 30, 2000 and August 31, 2000. Depreciation and amortization increased to $11.0 million for the year ended December 31, 1999 from $5.9 million for the year ended December 31, 1998. This increase is due to an additional quarter of intangible asset amortization in 1999 resulting from the Exchange Offer of $1.9 million and intangible asset amortization resulting from our acquisition of eFed on September 15, 1999 of $2.8 million. The remainder of the increase was attributable to additional depreciation expense as a result of additions to property and equipment throughout 1999. OPERATING LOSS. Operating loss for the year ended December 31, 2000 was $52.2 million compared to $14.5 million for the year ended December 31, 1999. Excluding non-cash charges for stock compensation, depreciation and amortization and the one-time charges in the second quarter of 2000 relating to the withdrawn common stock offering, the one-time charges in the third quarter of 2000 relating to our corporate restructuring and vacation liability, and the charges in 1999 and 2000 relating to the Company's application development contracts, operating loss would have been $19.4 million for the year ended December 31, 2000 compared to operating income of $0.8 million for the year ended December 31, 1999. Earnings before interest, taxes, equity in net loss of affiliates, depreciation, amortization, one-time charges and other non-cash charges related to stock compensation and our application development contracts ("EBITDA") was negative $19.4 million for the year ended December 31, 2000 compared to positive $0.8 million for the year ended December 31, 1999. EBITDA from our state and local portal segment decreased by approximately $0.2 million for the year ended December 31, 2000 primarily due to start up losses in our Hawaii, Idaho, Tennessee and San Francisco portals. Our Idaho and San Francisco portals began generating modest revenues during September 2000, while our Hawaii and Tennessee portals had not begun to generate revenues at December 31, 2000. We anticipate Hawaii and Tennessee will begin to generate more substantive revenues in the first and second quarters of 2001. Excluding the state and local portals that incurred start up losses in 2000, EBITDA from our portal operations increased by $2.2 million primarily as a result of a full twelve months of operating results from our New England and Utah portals, which began generating revenues in the third quarter of 1999, 38 and increased same state portal transaction volumes, primarily from our Virginia and Indiana subsidiaries. For the year ended December 31, 2000, EBITDA from our eGovernment products segment, which consists primarily of our NIC Conquest and NIC Technologies subsidiaries, was negative $2.7 million compared to negative $0.2 million for the year ended December 31, 1999. The decrease in EBITDA in 2000 was primarily the result of payroll-related expenses for product development and product delivery efforts at NIC Technologies, which precipitated the third quarter 2000 restructuring as discussed above and in note 20 to notes to consolidated financial statements included in this Form 10-K. For the year ended December 31, 2000, EBITDA from our NIC Commerce government procurement segment was negative $6.2 million compared to positive $0.3 million for the year ended December 31, 1999. The decrease in EBITDA in 2000 was due primarily to expenditures for business development, marketing and public relations, which also precipitated the third quarter 2000 restructuring at NIC Commerce. For the year ended December 31, 2000, corporate level expenses increased to $14.3 million from $3.4 million for the year ended December 31, 1999 as a result of our becoming a public company in July 1999 and strategic infrastructure investments as discussed above. Operating loss for the year ended December 31, 1999 was $14.5 million compared to $7.2 million for the year ended December 31, 1998. Excluding non-cash charges for stock compensation, depreciation and amortization, and the charges in 1999 and 1998 relating to the Company's application development contracts, operating income would have been $0.8 million for the year ended December 31, 1999 compared to $0.5 million for the year ended December 31, 1998. EBITDA was $0.8 million for the year ended December 31, 1999 compared to $0.5 million for the year ended December 31, 1998. Including our initial four business units for the first three months of 1998, pro forma operating income and EBITDA would have been $1.0 million for the year ended December 31, 1998. We do not expect to generate positive EBITDA until 2002 because of our continued investments in local portals, our AOL/Government Guide partnership and our new business plans for NIC Commerce and NIC Technologies, which has been positioned to provide the core technology and deployment base for our company-wide eGovernment growth initiatives. However, we expect EBITDA to improve on a sequential quarter-over-quarter basis throughout 2001. OTHER INCOME, NET. Other income, net, primarily reflects interest income earned on our cash and marketable securities portfolio. We have placed the proceeds from our July 20, 1999 initial public offering in short-term, investment-grade, interest-bearing marketable securities. Other income, net, for the year ended December 31, 1999 reflects less than six months of interest earned on these investments versus a full year of interest earned in 2000. We expect other income, net, to continue to fluctuate in relation to the average balance of our cash and marketable securities portfolio, which was approximately $38.8 million at December 31, 2000 compared to $92.0 million at December 31, 1999. EQUITY IN NET LOSS OF AFFILIATES. For the year ended December 31, 2000, equity in net loss of affiliates represents our share of losses of companies in which we have equity method investments that give us the ability to exercise significant influence, but not control, over the investees. In the first quarter of 2000, we invested in two private companies involved in the e-government services industry, Tidemark Computer Systems and E-Filing.com, primarily for strategic purposes. These companies are in the early stage of their operations and are incurring net losses. Therefore, we expect to continue to record losses on our equity-method investments in the foreseeable future. As noted above, in the fourth quarter of 2000, we incurred a noncash impairment loss of approximately $2.1 million relating to our investment in Tidemark. INCOME TAXES. We recognized an income tax benefit for the years ended December 31, 2000 and 1999. In 2000, the income tax benefit was less than the amount customarily expected because of 39 expenses that are not deductible for tax purposes including amortization of goodwill from the Exchange Offer, the Conquest merger, the SDR acquisition, the IDT acquisition, and certain stock compensation costs. Also, in the fourth quarter of 2000, we provided a valuation allowance for the future tax benefit on the losses we recognized on our investment in Tidemark. In 1999, the income tax benefit was less than the amount customarily expected because of expenses that are not deductible for tax purposes including amortization of goodwill from the Exchange Offer and certain stock compensation costs. We recognized an income tax provision of $659,000 for the year ended December 31, 1998. This provision was attributable to a one-time $1.4 million provision for deferred taxes on our conversion to a C corporation and to goodwill amortization relating to the Exchange Offer and a portion of stock compensation being non-deductible for tax purposes. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $24.5 million for the year ended December 31, 2000 compared to $2.3 million for the year ended December 31, 1999. The increase in cash used in operating activities is primarily attributable to additional cash needs (particularly attributable to NIC Commerce, acquired in September 1999, NIC Technologies, acquired in May 2000, and our Idaho, Hawaii, Tennessee and San Francisco portals, which became operational after November 1999) and corporate level expenses as a result of our overall growth and positioning for future growth, including planned strategic infrastructure investments in marketing, public relations, finance, technology and management personnel. As discussed in note 8 in the notes to consolidated financial statements included in this Form 10-K, NIC made an initial cash payment to AOL totaling $1.125 million in August 2000 and an additional payment of $375,000 in November 2000, of which $1.0 million is recorded as a prepaid expense in the consolidated balance sheet at December 31, 2000. We expect operating cash flow to be negative through at least the end of 2001 as a result of continued investment in our corporate infrastructure and growth strategies. However, we expect operating cash flow to improve throughout 2001, turning positive in 2002. Investing activities resulted in net cash generated of approximately $30.6 million for the year ended December 31, 2000 reflecting $60.8 million in net maturities of our marketable securities portfolio used for funding operations and for purchases of property and equipment ($5.4 million), our business combination with Conquest Softworks, LLC ($4.6 million), strategic equity investments in Tidemark ($5.5 million) and E-Filing.com ($5.3 million), direct costs of the SDR acquisition ($4.2 million), our acquisition of IDT ($0.5 million), and our investment in eGS ($0.5 million). Investing activities for the year ended December 31, 2000 also reflect approximately $4.1 million in capitalized software development costs mainly from our NIC Commerce and NIC Conquest subsidiaries. Investing activities for the year ended December 31, 1999 resulted in net cash used of $97.5 million, reflecting the purchase of marketable securities with the net proceeds of our July 1999 initial public offering, the $15 million cash outlay for our September 1999 eFed acquisition, and $1.8 million for purchases of property and equipment. Net cash used in financing activities totaled $1.8 million for the year ended December 31, 2000, primarily reflecting $2.3 million to pay off bank lines of credit assumed in the SDR ($2.0 million) and IDT ($0.3 million) acquisitions, $1.1 million in proceeds from the exercise of employee stock options and issuances of common stock to employees, $0.2 million in payments to repurchase common stock and $0.2 million in payments under capital leases. Net cash provided by financing activities was $108.1 million for the year ended December 31, 1999, reflecting the net proceeds received from our July 1999 initial public offering, a portion of which was used to pay down all amounts outstanding under our operating lines of credit. In addition, approximately $0.7 million was received from employee stock purchase and stock option transactions. At December 31, 2000, the Company's total cash and marketable securities balance was $38.8 million compared to $92.0 million at December 31, 1999. We believe that our current liquid 40 resources will be sufficient to meet our operating requirements and significant growth initiatives without the need of additional capital for at least the next twelve months and through the period when we expect to begin to generate positive operating cash flow in 2002. However, any projections of future cash flows are subject to substantial uncertainty. If current cash, marketable securities and cash that may be generated from operations are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities, issue debt securities or obtain a line of credit. The sale of additional equity securities could result in additional dilution to the Company's shareholders. From time to time, we expect to evaluate the acquisition of or investment in businesses and technologies that complement our various eGovernment businesses. Acquisitions or investments might impact the Company's liquidity requirements or cause the Company to sell additional equity securities or issue debt securities. There can be no assurance that financing will be available in amounts or on terms acceptable to the Company, if at all. DEFERRED TAX ASSETS At December 31, 2000, we have recorded net current and non-current deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," totaling approximately $9.2 million. We estimate that we must generate at least $24.2 million of future taxable income to realize those deferred tax assets and have considered additional expected taxable losses prior to our projections of taxable income. To achieve a sufficient level of future taxable income, we intend to pursue our current strategy of adding new local, state and federal government clients, broadening and standardizing our product and service offerings, and increasing transactional revenues from our existing government portals and procurement and filing applications. Based on information currently known to management, we believe it is more likely than not that the Company will realize the deferred tax assets. The table below reconciles loss before income taxes for financial statement purposes with taxable loss for federal income tax purposes (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Loss before income taxes.................................... $(55,120) $(12,147) $(7,237) Amortization of purchase accounting intangibles............. 23,798 9,828 5,681 Equity in net loss of affiliates............................ 6,524 -- -- Capitalized software development costs...................... (4,070) -- -- Disqualifying disposition of incentive stock options........ (3,050) -- -- Stock compensation expense.................................. 1,760 3,188 569 Provision for loss on application services contracts........ 263 (1,023) 1,256 Depreciation................................................ 36 (123) (48) Other....................................................... 459 (4) (288) -------- -------- ------- Taxable loss (2000 is an estimate).......................... $(29,400) $ (281) $ (67) ======== ======== =======
Our federal income tax loss carryforward of approximately $29.4 million expires in 2020, and our state income tax loss carryforwards of approximately $31.9 million may be used over various periods ranging from 5 to 20 years. We anticipate that net temporary differences should reverse and become available as tax deductions as follows: during 2001, $0.1 million; 2002, $0.2 million; 2003, $0.7 million; 2004, $0.7 million; thereafter, $4.8 million. 41 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK. Our exposure to market risk for changes in interest rates relates to the increase or decrease in the amount of interest income we can earn on our short-term investments in marketable debt securities and cash balances. Because our investments are in short-term, investment-grade, interest-bearing marketable securities, we are exposed to minimal risk on the principal of those investments. We ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and investment risk. We do not use derivative financial instruments. INVESTMENT RISK. In the first quarter of 2000, we invested in two private companies involved in the e-government services industry, Tidemark Computer Systems and E-Filing.com, primarily for strategic purposes. In the fourth quarter of 2000, we invested in a private joint venture, eGS, primarily to share in the risk of our international expansion and to deliver eGovernment products and services throughout Western Europe, with initial efforts to focus on the United Kingdom. Such investments are accounted for under the equity method, as we have the ability to exercise significant influence, but not control, over the investees. Significant influence is generally defined as an ownership interest of the voting stock of an investee of between 20% and 50%, although other factors, such as representation on the investee's Board of Directors, are considered in determining whether the equity method is appropriate. We regularly review the carrying value of these equity method investments and would record impairment losses when events and circumstances indicate that such assets are impaired. As discussed above in Management's Discussion and Analysis of Financial Condition and Results of Operations, in the fourth quarter of 2000, we recorded a noncash impairment loss of approximately $2.1 million relating to our investment in Tidemark. To date, we have not recorded any such impairment losses for E-Filing.com or eGS. 42 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NATIONAL INFORMATION CONSORTIUM, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------------- 1999 2000 ------------ ------------ ASSETS Current assets: Cash and cash equivalents................................. $ 9,527,389 $ 13,878,483 Marketable securities..................................... 82,480,760 24,914,405 Trade accounts receivable................................. 6,009,925 7,595,879 Deferred income taxes..................................... 157,663 195,430 Prepaid expenses.......................................... 278,868 2,051,015 Other current assets...................................... 614,044 1,954,090 ------------ ------------ Total current assets.................................... 99,068,649 50,589,302 Property and equipment, net................................. 2,998,376 7,596,078 Deferred income taxes....................................... 693,802 8,964,570 Other assets................................................ 253,665 199,948 Investments in affiliates and joint ventures................ -- 4,786,355 Intangible assets, net...................................... 30,646,446 67,433,117 ------------ ------------ Total assets............................................ $133,660,938 $139,569,370 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 3,804,996 $ 4,329,743 Accrued expenses.......................................... 872,795 2,907,497 Income taxes payable...................................... 83,653 149,502 Capital lease obligations--current portion................ 189,931 194,509 Notes payable--current portion............................ 50,000 -- Application services contracts............................ 231,969 356,508 Other current liabilities................................. 120,469 196,337 ------------ ------------ Total current liabilities............................... 5,353,813 8,134,096 Capital lease obligation--long-term portion................. 218,164 22,125 ------------ ------------ Total liabilities....................................... 5,571,977 8,156,221 ------------ ------------ Commitments and contingencies (Notes 4, 6, 8, 13, and 16)... -- -- Minority interest........................................... -- 475,302 Shareholders' equity: Common stock, no par, 200,000,000 shares authorized 53,165,370 and 56,038,571shares issued and outstanding............................................. -- -- Additional paid-in capital................................ 149,035,928 194,822,925 Accumulated deficit....................................... (16,556,526) (56,834,476) Accumulated other comprehensive income.................... 1,731 967 ------------ ------------ 132,481,133 137,989,416 Less notes and stock subscriptions receivable............. (30,000) (15,000) Less vested warrants issued............................... -- (4,222,220) Less deferred compensation expense........................ (4,362,172) (2,814,349) ------------ ------------ Total shareholders' equity.............................. 128,088,961 130,937,847 ------------ ------------ Total liabilities and shareholders' equity.............. $133,660,938 $139,569,370 ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 43 NATIONAL INFORMATION CONSORTIUM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------------------------- 1998 1999 2000 ----------- ------------ ------------ Revenues: Portal revenues.................................... $ 7,751,592 $ 14,010,681 $ 17,908,908 Software and services revenues..................... 396,811 2,136,438 9,062,368 ----------- ------------ ------------ Total revenues................................... 8,148,403 16,147,119 26,971,276 ----------- ------------ ------------ Cost of revenues: Cost of portal revenues............................ 715,375 1,292,948 1,397,361 Cost of software and services revenues............. 2,257,919 1,933,990 7,581,923 ----------- ------------ ------------ Total cost of revenues (exclusive of depreciation and amortization).............................. 2,973,294 3,226,938 8,979,284 ----------- ------------ ------------ Gross profit......................................... 5,175,109 12,920,181 17,991,992 ----------- ------------ ------------ Operating expenses: Service development and operations................. 1,646,895 4,021,182 10,303,380 Selling, general and administrative................ 4,241,780 9,212,837 30,145,506 Stock compensation................................. 568,869 3,188,051 1,789,874 Depreciation and amortization...................... 5,922,396 10,968,482 27,959,636 ----------- ------------ ------------ Total operating expenses......................... 12,379,940 27,390,552 70,198,396 ----------- ------------ ------------ Operating loss....................................... (7,204,831) (14,470,371) (52,206,404) ----------- ------------ ------------ Other income (expense): Interest expense................................... (88,161) (168,872) (48,458) Other income, net.................................. 55,839 2,492,460 3,659,689 Equity in net loss of affiliates................... -- -- (6,524,473) ----------- ------------ ------------ Total other income (expense)..................... (32,322) 2,323,588 (2,913,242) ----------- ------------ ------------ Loss before income taxes and minority interest....... (7,237,153) (12,146,783) (55,119,646) Income tax expense (benefit)......................... 658,813 (1,416,223) (14,592,021) ----------- ------------ ------------ Loss before minority interest........................ (7,895,966) (10,730,560) (40,527,625) Minority interest.................................... -- -- (249,675) ----------- ------------ ------------ Net loss............................................. $(7,895,966) $(10,730,560) $(40,277,950) =========== ============ ============ Net loss per share: Basic and diluted.................................. $ (0.21) $ (0.23) $ (0.74) =========== ============ ============ Weighted average shares outstanding.................. 37,242,423 47,278,461 54,795,280 =========== ============ ============ Pro forma tax provision (unaudited)--Note 15: Net loss........................................... $(7,895,966) Pro forma provision for income taxes............... (1,516,894) ----------- Pro forma net loss................................. $(6,379,072) =========== Pro forma basic and diluted loss per share........... $ (0.17) ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 44 NATIONAL INFORMATION CONSORTIUM, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED NOTES COMMON STOCK ADDITIONAL OTHER AND STOCK ----------------------- PAID-IN ACCUMULATED COMPREHENSIVE SUBSCRIPTIONS SHARES AMOUNT CAPITAL DEFICIT INCOME RECEIVABLE ---------- ---------- ------------ ------------ ------------- ------------- BALANCE, JANUARY 1, 1998........... 22,288,209 $ -- $ 627,435 $ (414,682) $ -- $(25,000) Common stock issued in exchange.... 19,255,155 -- 18,539,814 -- -- -- Net loss........................... -- -- -- (7,895,966) -- -- Distributions to shareholders...... -- -- -- (838,367) -- -- Termination of Subchapter S election......................... -- -- (3,323,049) 3,323,049 -- -- Issuance of common stock to employees........................ 522,817 -- 583,333 -- -- -- Stock options granted with exercise price less than fair market value at date of grant................. -- -- 3,124,113 -- -- -- Deferred compensation expense recognized....................... -- -- -- -- -- -- Stock subscriptions received....... -- -- -- -- -- 25,000 ---------- ---------- ------------ ------------ ----- -------- BALANCE, DECEMBER 31, 1998......... 42,066,181 -- 19,551,646 (5,825,966) -- -- Net loss........................... -- -- -- (10,730,560) -- -- Stock options granted with exercise price less than fair market value at date of grant................. -- -- 3,436,752 -- -- -- Stock options exercised............ 122,954 -- 177,018 -- -- -- Stock options cancelled............ -- -- (274,056) -- -- -- Deferred compensation expense recognized....................... -- -- -- -- -- -- Issuance of common stock to employees........................ 370,235 -- 2,198,950 -- -- (250,000) Issuance of common stock from initial public offering, net of expenses......................... 10,000,000 -- 109,439,618 -- -- -- Issuance of common stock to acquire business......................... 606,000 -- 14,506,000 -- -- -- Stock subscriptions received....... -- -- -- -- -- 220,000 Unrealized holding gain on marketable securities............ -- -- -- -- 1,731 -- ---------- ---------- ------------ ------------ ----- -------- BALANCE, DECEMBER 31, 1999......... 53,165,370 -- 149,035,928 (16,556,526) 1,731 (30,000) Net loss........................... -- -- -- (40,277,950) -- -- Stock options granted with exercise price less than fair market value at date of grant................. -- -- 130,000 -- -- -- Stock options exercised............ 421,524 -- 953,238 -- -- -- Stock options cancelled............ -- -- (2,337) -- -- -- Deferred compensation expense recognized....................... -- -- -- -- -- -- Issuance of common stock to employees........................ 11,792 -- 141,579 -- -- -- Issuance of common stock to acquire business......................... 2,454,885 -- 35,092,795 -- -- -- Issuance of common stock options to acquire business................. -- -- 3,703,912 -- -- -- Repurchase and retirement of common stock............................ (15,000) -- (128,140) -- -- -- Issuance of vested warrants........ -- -- 4,750,000 -- -- -- Amortization of vested warrants.... -- -- -- -- -- -- Stock subscriptions received....... -- -- -- -- -- 15,000 Tax deductions relating to incentive stock options.......... -- -- 1,145,950 -- -- -- Unrealized holding loss on marketable securities............ -- -- -- -- (764) -- ---------- ---------- ------------ ------------ ----- -------- BALANCE, DECEMBER 31, 2000......... 56,038,571 $ -- $194,822,925 $(56,834,476) $ 967 $(15,000) ========== ========== ============ ============ ===== ======== VESTED DEFERRED WARRANTS COMPENSATION ISSUED EXPENSE TOTAL ----------- ------------ ------------ BALANCE, JANUARY 1, 1998........... $ -- $ -- $ 187,753 Common stock issued in exchange.... -- -- 18,539,814 Net loss........................... -- -- (7,895,966) Distributions to shareholders...... -- -- (838,367) Termination of Subchapter S election......................... -- -- -- Issuance of common stock to employees........................ -- -- 583,333 Stock options granted with exercise price less than fair market value at date of grant................. -- (2,855,390) 268,723 Deferred compensation expense recognized....................... -- 41,813 41,813 Stock subscriptions received....... -- -- 25,000 ----------- ----------- ------------ BALANCE, DECEMBER 31, 1998......... -- (2,813,577) 10,912,103 Net loss........................... -- -- (10,730,560) Stock options granted with exercise price less than fair market value at date of grant................. -- (3,144,152) 292,600 Stock options exercised............ -- -- 177,018 Stock options cancelled............ -- 274,056 -- Deferred compensation expense recognized....................... -- 1,321,501 1,321,501 Issuance of common stock to employees........................ -- -- 1,948,950 Issuance of common stock from initial public offering, net of expenses......................... -- -- 109,439,618 Issuance of common stock to acquire business......................... -- -- 14,506,000 Stock subscriptions received....... -- -- 220,000 Unrealized holding gain on marketable securities............ -- -- 1,731 ----------- ----------- ------------ BALANCE, DECEMBER 31, 1999......... -- (4,362,172) 128,088,961 Net loss........................... -- -- (40,277,950) Stock options granted with exercise price less than fair market value at date of grant................. -- -- 130,000 Stock options exercised............ -- -- 953,238 Stock options cancelled............ -- 2,337 -- Deferred compensation expense recognized....................... -- 1,545,486 1,545,486 Issuance of common stock to employees........................ -- -- 141,579 Issuance of common stock to acquire business......................... -- -- 35,092,795 Issuance of common stock options to acquire business................. -- -- 3,703,912 Repurchase and retirement of common stock............................ -- -- (128,140) Issuance of vested warrants........ (4,750,000) -- -- Amortization of vested warrants.... 527,780 -- 527,780 Stock subscriptions received....... -- -- 15,000 Tax deductions relating to incentive stock options.......... -- -- 1,145,950 Unrealized holding loss on marketable securities............ -- -- (764) ----------- ----------- ------------ BALANCE, DECEMBER 31, 2000......... $(4,222,220) $(2,814,349) $130,937,847 =========== =========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 45 NATIONAL INFORMATION CONSORTIUM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------------------- 1998 1999 2000 ----------- ------------ ------------ Cash flows from operating activities: Net loss.................................................. $(7,895,966) $(10,730,560) $(40,277,950) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization........................... 5,922,396 10,968,482 27,959,636 Compensation expense recognized related to sale of common stock........................................... 258,333 1,573,950 41,588 Compensation expense recognized related to stock options................................................ 310,536 1,614,101 1,748,286 (Gain) loss on disposals of property and equipment...... (12,639) (312) 86,648 Accretion of discount on marketable securities.......... -- (1,968,000) (3,240,883) Application services contracts.......................... 1,256,000 (1,024,031) 124,539 Deferred income taxes................................... 590,113 (1,441,577) (14,753,234) Deferred income tax benefit relating to incentive stock options................................................ -- -- (1,145,950) Minority interest....................................... -- -- (249,675) Equity in net loss of affiliates........................ -- -- 6,524,473 Changes in operating assets and liabilities, net of effects of acquisitions: (Increase) in trade accounts receivable................. (21,980) (2,305,126) (991,904) (Increase) decrease in prepaid expenses................. 3,335 (231,735) (1,734,307) (Increase) in other current assets...................... (54,956) (367,714) (229,439) (Increase) decrease in other assets..................... (8,103) (223,269) 39,492 Increase (decrease) in accounts payable................. (184,889) 1,184,597 (74,522) Increase in income taxes payable........................ 68,700 14,953 65,849 Increase in accrued expenses............................ 80,472 575,692 1,782,910 Increase (decrease) in other current liabilities........ 43,034 71,004 (190,837) ----------- ------------ ------------ Net cash provided by (used in) operating activities....... 354,386 (2,289,545) (24,515,280) ----------- ------------ ------------ Cash flows from investing activities: Purchases of property and equipment....................... (255,203) (1,765,692) (5,417,151) Proceeds from disposals of property and equipment......... 42,736 26,458 14,298 Capitalized software development costs.................... -- (145,260) (4,069,832) Capitalized patent and trademark costs.................... -- -- (106,477) Proceeds from notes receivable from shareholders.......... 55,000 -- -- Purchases of marketable securities........................ -- (186,406,450) (267,876,755) Maturities of marketable securities....................... -- 88,607,000 328,683,223 Sales of marketable securities............................ -- 17,282,104 -- Acquisition of businesses, net of cash acquired........... 764,908 (15,146,544) (9,296,072) Investments in affiliates and joint ventures.............. -- -- (11,310,827) ----------- ------------ ------------ Net cash provided by (used in) investing activities....... 607,441 (97,548,384) 30,620,407 ----------- ------------ ------------
46 NATIONAL INFORMATION CONSORTIUM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, ----------------------------------------- 1998 1999 2000 ----------- ------------ ------------ Cash flows from financing activities: Net proceeds from initial public offering of common stock................................................... -- 109,439,618 -- Proceeds from bank lines of credit........................ 1,190,285 1,251,000 -- Payments on bank lines of credit.......................... (270,084) (2,274,592) (2,385,815) Payments on notes and debentures payable.................. (160,072) (842,778) (50,000) Payments on capital lease obligations..................... (101,533) (237,217) (197,097) Distributions to shareholders............................. (588,367) -- -- Proceeds from issuance of common stock to employees....... 75,000 321,518 111,579 Payments to repurchase common stock....................... -- -- (200,938) Proceeds from exercise of employee stock options.......... -- 177,018 953,238 Proceeds from stock subscriptions receivable.............. 25,000 220,000 15,000 ----------- ------------ ------------ Net cash provided by (used in) financing activities....... 170,229 108,054,567 (1,754,033) ----------- ------------ ------------ Net increase in cash and cash equivalents................... 1,132,056 8,216,638 4,351,094 Cash and cash equivalents, beginning of year................ 178,695 1,310,751 9,527,389 ----------- ------------ ------------ Cash and cash equivalents, end of year...................... $ 1,310,751 $ 9,527,389 $ 13,878,483 =========== ============ ============ Other cash flow information: Interest paid............................................. $ 54,707 $ 168,872 $ 51,053 =========== ============ ============ Income taxes paid......................................... $ -- $ 117,000 $ 85,323 =========== ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 47 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY AND BASIS OF PRESENTATION National Information Consortium, Inc. (the "Company" or "NIC") provides federal, state and local governments with a wide range of e-government products and services, including a broad range of software and applications. NIC helps governments use the Internet by building Web sites and applications that allow businesses and citizens to access government information and complete government-based transactions online. Certain of these applications allow governments to procure goods and services online. Some examples of applications include: professional license renewals, Internet tax filings, driver's license and motor vehicle record searches, automated UCC file searches, automobile registration renewals and online procurement software. The Company's primary business activity is to design, build and operate Internet-based portals on behalf of state and local governments desiring to provide access to government information and to complete government-based transactions online. Operating under multiple-year contracts (see Note 9), NIC markets the services and solicits users to complete government-based transactions and to enter into subscriber contracts permitting the user to access the portal and the government information contained therein in exchange for transactional and/or subscription user fees. The Company is responsible for funding up front investment and ongoing operational costs of the government portals. In addition, the Company enters into service contracts to provide consulting, development and management services to government portals in exchange for a negotiated fee. At December 31, 2000, NIC had signed portal contracts with the states of Arkansas, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Maine, Montana, Nebraska, Tennessee, Utah and Virginia and the cities and/or municipalities of Indianapolis and Marion County (IN), Dallas County (TX), the City of San Francisco (CA) and the City of Tampa (FL). NIC was formed on December 18, 1997, for the sole purpose of effecting a common stock exchange offer (the "Exchange Offer") to combine under common ownership five separate affiliated entities under which the Company conducted its business operations. The five companies were National Information Consortium USA, Inc. ("NIC/USA"), Kansas Information Consortium, Inc. ("KIC"), Indiana Interactive, Inc. ("III"), Nebraska Interactive, Inc. ("NII") and Arkansas Information Consortium, Inc. ("AIC"). The Exchange Offer was consummated on March 31, 1998, and has been accounted for as a business combination. NIC/USA is the entity whose shareholders received the largest portion of the Company's common stock shares and was treated as the accounting acquirer with the purchase method of accounting being applied to the four other companies (see Note 3). The accompanying consolidated financial statements reflect the acquisitions on March 31, 1998, with the results of operations and cash flows subsequent to that date reflecting the results of all the companies, and prior to that date only the operations of NIC/USA. On September 15, 1999, NIC acquired the net assets of eFed, a provider of Internet-based procurement software and services for governments. eFed designs, develops and manages online procurement software and services for federal and state government markets. eFed has been renamed NIC Commerce and is wholly owned by NIC. On January 12, 2000, NIC merged its Application Services Division with Conquest Softworks, LLC ("Conquest"). Conquest is a provider of Uniform Commercial Code and corporation software applications and services that facilitate electronic filings and document management for governments. NIC owns approximately 71.5% of the common stock in the newly formed company, which is referred to as NIC Conquest. On May 11, 2000, NIC acquired SDR Technologies, Inc. ("SDR"), a provider of Internet-based applications for governments. SDR designs and develops online election and ethics filing systems for federal, state and local government agencies and has also developed a number of Internet-based applications for tax filings, business filings, professional licensing, and automobile registrations. SDR has been renamed NIC Technologies and is 48 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. THE COMPANY AND BASIS OF PRESENTATION (CONTINUED) wholly owned by NIC. On October 13, 2000, NIC acquired Intelligent Decision Technologies, Ltd. ("IDT"), a provider of business-to-government reporting and filing software for the transportation industry. IDT has developed business-to-government applications that facilitate compliance with the Federal Highway Administration's Commercial Vehicle Information System Network. IDT currently has contracts to provide certain state governments with commercial vehicle electronic credentialing services that include registration, permitting, and tax filing software. All business acquisitions in 1999 and 2000 were accounted for as purchases and the results of the acquired companies' operations have been included in the Company's consolidated statements of operations from the respective dates of acquisition (see Note 4). In July 2000, the Emerging Issues Task Force reached a final consensus on Issue 99-19 ("EITF 99-19"), "Recording Revenue Gross as a Principal versus Net as an Agent," which provides guidance as to the circumstances when a company should recognize revenue based on the gross amount billed to the customer or the net amount retained. The consensus was effective beginning in the fourth quarter of 2000. In March 2001, management re-evaluated its initial conclusions on EITF 99-19 and decided to present the Company's revenues from information access fees net of the portion paid to the government for all periods presented. Previously, the Company presented such revenues on a gross basis and accrued the costs that it pays to government agencies for data access as cost of revenues. The effect of this new presentation was to decrease total revenues by $20,475,253, $40,819,009 and $50,041,671 and decrease total cost of revenues by $20,475,253, $40,819,009 and $50,041,671 for the years ended December 31, 1998, 1999 and 2000, respectively. The new presentation had no impact on gross profit, operating loss, net loss or net loss per share. Segment and quarterly information for all periods presented reflects the new presentation. In the fourth quarter of 2000, the Company decided to reclassify certain information in its consolidated statements of operations. The Company has separated its revenues and cost of revenues into two categories (portal, software and services) for all periods presented. Previously, the Company presented only one category of revenues and one category of cost of revenues. The portal category includes revenues and cost of revenues of the Company's subsidiaries operating state and local government portals. The software and services category includes revenues and cost of revenues of the Company's Products segment, which includes the NIC Conquest, NIC Technologies and IDT subsidiaries, and the Company's Procurement segment, which includes the NIC Commerce subsidiary. Also, cost of revenues, service development and operations expenses, and selling, general and administrative expenses have been reclassified for all periods presented. The Company now reflects the costs incurred by NIC Conquest and IDT to meet customer contractual commitments as cost of revenues. Previously, these expenses were primarily included in service development and operations and, to a lesser extent, in selling, general and administrative expenses. The effect of these reclassifications was to increase total cost of revenues by $2,237,915, $1,855,112 and $4,133,020 and decrease service development and operations expenses by $2,237,915, $1,855,112 and $4,093,723 for the years ended December 31, 1998, 1999 and 2000, respectively. Selling, general and administrative expenses decreased by $39,297 for the year ended December 31, 2000. These reclassifications had no impact on total revenues, operating loss, net loss or net loss per share. Segment information for all periods presented reflects these new classifications. 49 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 and majority-owned subsidiaries, including NIC/USA, for periods subsequent to the Exchange Offer. All significant intercompany balances and transactions have been eliminated. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist primarily of commercial bank deposits and money market funds with original maturities of one month or less. MARKETABLE SECURITIES The Company's marketable securities are classified as available-for-sale and consist of short-term U.S. government obligations and corporate debt securities. These investments are stated at fair value with any unrealized holding gains or losses included as a component of shareholders' equity as accumulated other comprehensive income or loss until realized. The cost of securities sold is based on the specific identification method. The fair values of the company's marketable securities are based on quoted market prices at the reporting date. PROPERTY AND EQUIPMENT Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful lives of 8 years for furniture and fixtures, 3-10 years for equipment, 3-5 years for purchased software and the lesser of the term of the lease or 5 years for leasehold improvements. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in results of 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. The Company has not recorded any provisions for possible impairment of property and equipment. There is considerable management judgement necessary to determine future cash flows, and accordingly, actual results could vary significantly from such estimates. INVESTMENTS IN AFFILIATES AND JOINT VENTURES The Company holds certain investments in affiliates and joint ventures accounted for under the equity method. The Company uses the equity method to account for equity investments in affiliates and joint ventures when NIC management can exert significant influence, but not control, over the operations of the investee or joint venture. Significant influence is generally deemed to exist if the 50 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Company has an ownership interest in the voting stock of the investee or joint venture of between 20% and 50%, although other factors, such as representation on the Board of Directors, are considered in determining whether the equity method of accounting is appropriate. The Company regularly reviews the carrying value of these equity method investments and would record impairment losses when events and circumstances indicate that such assets are impaired. 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 was 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. For purposes of evaluating the intangible assets relating to the SDR acquisition, the Company utilizes the expected cash flows from its portal businesses and NIC Technologies as NIC Technologies is now integrated as the application development organization for the Company's portal businesses. For NIC Commerce, NIC Conquest and IDT, the Company utilizes the expected cash flows resulting solely from these businesses. There is considerable management judgement necessary to determine future cash flows, and accordingly, actual results could vary significantly from such estimates. SOFTWARE DEVELOPMENT COSTS The Company capitalizes software development costs in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," primarily related to certain software development activities of NIC Commerce and NIC Conquest. Software development costs are amortized on a straight-line basis over the estimated economic life of the software, generally three years, commencing when each product is available for general release. Capitalized software development costs at December 31, 1999 totaled $145,260. No amortization expense was recognized in 1999, as such costs had not begun to be amortized. Capitalized software development costs, net of accumulated amortization, at December 31, 2000 totaled $3,160,511. Amortization expense recognized in 2000 totaled $149,654. INTERNAL USE SOFTWARE The Company accounts for the costs of developing internal use computer software in accordance with the American Institute of Certified Public Accountants Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 establishes guidelines for the accounting for the costs of all computer software developed or obtained for internal use and became effective January 1, 1999. The adoption of SOP 98-1 did not have a material impact on the Company's consolidated financial statements. At December 31, 2000, total capitalized internal use software development costs, net of accumulated amortization, were $886,752. Amortization expense recognized in 2000 totaled $18,175. In May 2000, the Emerging Issues Task Force ("EITF") reached certain consensuses on Issue 00-2 ("EITF 00-2"), "Accounting for Website Development Costs," which establishes the accounting for the costs incurred to develop Internet web sites. The consensuses are effective for costs incurred in 51 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) quarters beginning after June 30, 2000. The Company expenses as incurred all employee costs to start up, operate and maintain government portals as costs of performance under the contracts because, after the completion of a defined contract term, the government entities with which the Company contracts typically receive a perpetual, royalty-free license to the applications the Company developed. Such are included in service development and operations expense in the consolidated statements of operations. However, subsequent to the acquisition of SDR in May 2000, the Company began to centralize and standardize the development of revenue-generating Internet applications that could be deployed across the Company's portals and began capitalizing website application development costs pursuant to EITF 00-2. At December 31, 2000, capitalized development costs relating to these applications, net of accumulated amortization, totaled $580,041. Such costs are included as part of the total of internal use software development costs capitalized pursuant to SOP 98-1 noted above. REVENUE RECOGNITION PORTAL REVENUES The Company recognizes revenue from providing electronic government portal services (primarily information access fees and filing fees) net of the transaction fees due to the government when the services are provided. The fees that the Company must remit to state agencies for data access are accrued as accounts payable at the time services are provided. The Company must remit a certain amount or percentage of these fees to government agencies regardless of whether the Company ultimately collects the fees. Costs of portal revenues consist primarily of telecommunications and data processing costs and payments to certain of the Company's state government clients under revenue-and/or profit-sharing arrangements (see Note 9). Revenue from service contracts to provide consulting, development and management services to government portals is recognized as the services are provided at rates provided for in the contract. SOFTWARE AND SERVICES REVENUES The Company recognizes revenues from license agreements upon delivery and acceptance of the software application if there is persuasive evidence of an arrangement, collection of the resulting receivable is probable, the fee is fixed or determinable, and there is sufficient vendor-specific objective evidence to support allocating the total fee to all elements of these license arrangements. Where agreements provide for evaluation or customer acceptance, revenue is recognized upon the completion of the evaluation process and acceptance of the software by the customer. The Company recognizes revenues from professional services as the services are provided. If a transaction includes both license and service elements, the license fee is recognized on delivery and acceptance of the software, provided services do not include significant customization or modification of the base product, and the payment terms for licenses are not subject to additional acceptance criteria. In cases where license fee payments are contingent on the acceptance of services, recognition of revenues is deferred for both the license and the service elements until the acceptance criteria are met. Software maintenance revenues are recognized ratably over the term of the support contract, typically one year. NIC Conquest develops applications to automate certain government back-office processes and to facilitate electronic access to and filing of government information. NIC Conquest recognizes revenues 52 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) from application development contracts on the percentage of completion method, primarily utilizing labor hours incurred to date as compared to the estimated total labor hours for each contract. Any anticipated losses on contracts are charged to operations as soon as they are determinable. In the fourth quarter of 1998, the Company determined that the balance of revenues remaining to be recognized under existing application development contractual obligations was not expected to cover anticipated costs of developing and implementing the related applications and accrued $1,256,000 for the expected loss. The Company accrued an additional $1,125,000 of anticipated losses in 1999 based on revised estimates. Due to developments arising in late March 2000 relating to subcontractor performance and technical delivery issues, the Company determined that the balance of revenues remaining to be recognized under an application development contract with the Indiana Secretary of State was not expected to cover the Company's current estimate of costs to develop and implement the related application and accrued $1,350,000 for the expected loss. These losses are included in cost of software and services revenues in the consolidated statements of operations. At December 31, 2000, the accrual for all application development contracts held by the Company was approximately $357,000, which management believes is adequate. Because of the inherent uncertainties in estimating the costs of completion, it is at least reasonably possible that the estimate will change in the near term. SERVICE DEVELOPMENT AND OPERATIONS COSTS Service development and operations costs consist primarily of the employee expenses incurred to start up, operate and maintain the Company's government portals as well as the expenses incurred to maintain the computer system and information technology infrastructure throughout the Company's various businesses. STOCK-BASED COMPENSATION The Company has elected to account for its stock-based compensation plan using the intrinsic value method prescribed in Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123, "Accounting for Stock-Based Compensation," establishes 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. INCOME TAXES The Company changed its income tax status from an S corporation to a C corporation on July 1, 1998. The Company, along with its subsidiaries, files a consolidated federal income tax return. Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end based on enacted laws and statutory tax rates applicable to the periods in which the differences are 53 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. COMPREHENSIVE LOSS The Company has no material components of other comprehensive income or loss and, accordingly, the Company's comprehensive loss is approximately the same as its net loss for all periods presented. LOSS PER SHARE The Company computes net loss per share in accordance with the provisions of SFAS No. 128, "Earnings Per Share" and SEC Staff Accounting Bulletin No. 98. Under SFAS No. 128 and SAB No. 98, basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding for the period. Diluted net loss per share is the same as basic net loss per share because common stock issuable upon exercise of employee stock options is antidilutive. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and accounts receivable. The Company limits its exposure to credit loss by depositing its cash and cash equivalents with high credit quality financial institutions. The Company is subject to concentrations of credit risk and interest rate risk related to its short-term marketable securities. The Company's credit risk is managed by limiting the amount of investments placed with any one issuer, investing primarily in debt instruments of the U.S. Government and its agencies and high quality corporate issues generally with maturities of less than one year. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral to secure accounts receivable. Due to the high credit worthiness of the Company's customers, consisting mainly of data resellers, insurance companies and governmental entities, the Company considers accounts receivable to be fully collectible. Accordingly, no allowance for doubtful accounts has been recorded. 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. SEGMENT REPORTING The Company reports segment information in accordance with SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 uses the "management" approach, which designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's segments. SFAS No. 131 also requires disclosures about products and services, geographical areas and major customers (see Note 21). 54 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACCOUNTING FOR THE EXCHANGE OFFER On March 31, 1998, the Company exchanged its common shares for the common shares of five affiliated business units: NIC/USA, KIC, III, NII and AIC. Starting in 1991 with the state of Kansas, the Company's founders established an S corporation for business conducted within each state in which it was awarded a contract. By 1996, the Company had expanded into four states and decided to pursue future business opportunities through NIC/USA, leaving the four other business units to pursue opportunities solely within those states. Ownership of the five affiliated business units was similar, but not identical, leading to the conclusion to account for the Exchange Offer as a business combination. Prior to consummating the Exchange Offer, the Company was a holding company with no operations of its own. Exchange ratios were determined proportionately based on estimated 1998 pretax earnings for each company. No appraisal of fair market value of the separate companies was obtained. Management determined the fair value of the consolidated company on March 31, 1998 was $40 million. The fair value was allocated to each of the business units based upon proportional values agreed to by the shareholders in consummating the Exchange Offer. Shareholders of NIC/USA, III, KIC, AIC and NII received 22,288,209, 10,099,461, 4,179,039, 3,032,009 and 1,944,646 shares of the Company's common shares which were valued for purchase accounting at $21,460,187, $9,724,259, $4,023,785, $2,919,368 and $1,872,401, respectively. As the shareholders of NIC/USA received 54% of the Company's common shares, NIC/USA was treated as the acquirer in applying purchase accounting. The cost of the acquired business units of $18,539,813 was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values on the Exchange Offer date. The fair value of net tangible assets, consisting primarily of cash, accounts receivable, property and equipment, accounts payable and debt, approximated historical carrying amounts. The sole identifiable intangible asset relates to the government contracts and was valued at the net present value of projected future cash flows over the lives of the existing contracts discounted by 15%. Developed applications were not assigned a value because each state has a perpetual right of use license to applications developed if the Company's relationship is terminated. The remainder of the 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 at the time of the Exchange Offer........................... 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 then existing contracts. At the time of the 55 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACCOUNTING FOR THE EXCHANGE OFFER (CONTINUED) Exchange Offer, the Company and each of the business units were S corporations. The Exchange Offer was tax free to the shareholders. The historical tax basis in the assets and liabilities carries over to the Company, and the amortization of the goodwill and contract intangibles is not deductible for income tax purposes. 4. BUSINESS ACQUISITIONS EFED On September 15, 1999, NIC acquired the net assets of eFed, which has been renamed NIC Commerce. NIC Commerce designs, develops and manages online procurement software and services for federal and state markets. eFed was a division of privately held Reston, Virginia-based Electric Press, Inc. The acquisition was accounted for as a purchase and the results of NIC Commerce's operations are included in the Company's consolidated statements of operations from the date of acquisition. The total purchase price for the business was approximately $29.5 million. Total consideration included $15 million in cash from the proceeds of NIC's initial public offering and the issuance of 606,000 shares of unregistered common stock with a fair value of approximately $14.5 million. The fair value of the common shares was determined based on the average closing market price of NIC's common stock three days before, the day of, and three days after the September 13, 1999 announcement date of the acquisition. Additional consideration is also payable through the end of calendar year 2003 if NIC Commerce's financial results exceed certain targeted levels, which have been set substantially above historical experience at the time of acquisition. On or before March 31, 2000 and annually thereafter to March 31, 2004, NIC will issue up to an additional 606,000 shares of common stock (or at the Company's option, the cash equivalent) if NIC Commerce achieves certain revenue targets. Consideration will be payable only if NIC Commerce's cumulative revenues exceed $10 million with the full amount due if cumulative revenues reach $200 million by the end of 2003. The amount of consideration due annually will be based on a percentage determined by dividing cumulative revenue to date by $200 million and subtracting any contingent consideration paid in a prior period. Similarly, NIC will issue a presently indeterminable number of additional shares of common stock if NIC Commerce's cumulative earnings before interest, income taxes, depreciation and amortization ("EBITDA") exceeds $10 million up to a maximum of $110 million by the end of 2003. In this instance, the contingent consideration will only be paid in common stock and the number of potential shares will be determined by dividing $10 million by the average of the Company's closing common stock price for the five trading days immediately preceding the first EBITDA payment date. An EBITDA payment date will not occur unless NIC Commerce reaches $10 million in cumulative EBITDA in the measurement period. Such consideration, if payable, will be recorded as additional purchase price. No additional consideration is payable at December 31, 2000. Of the 606,000 shares of common stock issued to the shareholders of Electric Press to affect the acquisition, 515,100 shares were issued as restricted stock and 90,900 shares were delivered to an escrow account. The restricted stock is subject to cancellation in whole or in part if certain representations, warranties and obligations under the purchase agreement are not satisfied. Of the 515,100 restricted shares, 499,950 became unrestricted one year after the closing date and 15,150 will become unrestricted two years after the closing date. The 90,900 escrowed shares have been released from escrow, as certain existing government contracts listed in the purchase agreement were assigned to 56 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. BUSINESS ACQUISITIONS (CONTINUED) NIC or were replaced by alternative agreements to provide the same services to the same governmental agencies. The total purchase price of approximately $29.5 million was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values on the closing date. The fair value of net tangible assets acquired, consisting primarily of accounts receivable, property and equipment, accounts payable and other accrued expenses, totaled $816,000 and approximated historical carrying amounts. The sole identifiable intangible asset relates to NIC Commerce's Internet procurement software. This asset was valued at approximately $21.8 million based on the net present value of projected future net cash flows from licensing the software over its estimated three-year life discounted by 15%. The remainder of the cost was allocated to goodwill. The goodwill is being amortized on a straight-line basis over three years. SDR TECHNOLOGIES On May 11, 2000, NIC acquired SDR, a California corporation and provider of Internet-based applications for governments. SDR designs and develops online election and ethics filing systems for federal, state and local government agencies and has also developed a number of Internet-based applications for tax filings, business filings, professional licensing, and automobile registrations. SDR has been renamed NIC Technologies. Pursuant to the Amended and Restated Agreement and Plan of Reorganization and Merger, dated May 5, 2000 (the "Merger Agreement"), each outstanding share of common stock of SDR and each outstanding share of preferred stock of SDR was converted into 0.59977 share of NIC common stock, and each outstanding option to purchase one share of SDR common stock was converted into an option to purchase 0.59977 share of NIC common stock. Based on the exchange ratio, NIC issued to SDR shareholders 1,912,097 shares of common stock and options to purchase 229,965 shares of NIC common stock as consideration. Ten percent of the total number of shares of NIC common stock issued pursuant to the Merger Agreement will be held in escrow as collateral for the indemnification obligations of the selling shareholders under the Merger Agreement. The shares of NIC common stock placed in escrow will be held and released in accordance with the terms and conditions of an indemnification escrow agreement. Subject to NIC's claims against escrow shares discussed below and to certain other limitations, one half of the escrow shares were to be delivered to SDR shareholders nine months after the date of closing and any remaining escrow shares will be delivered to the SDR shareholders 18 months after the date of closing. The acquisition was accounted for as a purchase, and the purchase price was approximately $39.7 million. The purchase price per share was determined to be $17.21, which was based on the average closing market price of NIC's common stock three days before, the day of, and three days after April 24, 2000, the date on which the parties to the Merger Agreement agreed to the 0.59977 exchange ratio. The fair value of the options issued was accounted for as a component of the total purchase price. The transaction was structured to be tax free to the SDR shareholders. The historical tax basis in the assets and liabilities has carried over to NIC, and the amortization of purchase accounting intangibles is not deductible for income tax purposes. Prior to the acquisition date, SDR issued two $1 million convertible promissory notes to NIC, dated January 28, 2000 and March 27, 2000, in exchange for $2 million in cash. On April 21, 2000, NIC elected to convert the promissory notes into 67,476 shares of SDR common stock, which were automatically cancelled and retired upon the closing of the acquisition. Pursuant to the Merger 57 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. BUSINESS ACQUISITIONS (CONTINUED) Agreement, the principal amount of the January 28, 2000 promissory note, plus interest thereon, was to be deducted from the NIC shares held in escrow. The number of shares to be deducted from escrow relating to the January 28, 2000 note was to be based on the market price of NIC common stock when the escrow shares were released to NIC. NIC and the former SDR shareholders agreed to use the August 10, 2000 closing price of NIC common stock of $7.8125 per share to determine the number of shares to be deducted from escrow. The August 10, 2000 date was based on the date the former SDR shareholders received NIC's July 14, 2000 notice of claim against these escrow shares. As a result, NIC received 130,981 shares as indemnification for the January 28, 2000 promissory note. The principal amount of the January 28, 2000 promissory note was accounted for as a current receivable until NIC received the escrow shares, at which time the receivable and a corresponding amount of additional paid-in capital was reversed. At December 31, 2000, 54,229 shares of NIC common stock remained in escrow. The principal amount of the March 27, 2000 promissory note was accounted for as additional purchase price and was not deducted from the escrow shares. Additionally, 10,000 SDR common shares (representing 5,998 NIC common shares) issued on May 11, 2000 upon conversion of an SDR convertible promissory were deducted from the NIC shares in escrow. The total purchase price was reduced by $103,225, the fair value of the 5,998 NIC common shares to be deducted from escrow. Accordingly, the number of NIC issued and outstanding shares as of the closing date of the acquisition was reduced by 5,998 shares. Below is a table of the purchase price, purchase price allocation and annual amortization of the intangible assets acquired: PURCHASE PRICE: Fair value of common stock issued......................... $32,898,312 Fair value of common stock options issued................. 3,703,912 Direct acquisition costs.................................. 2,176,072 Fair value of March 27, 2000 promissory note.............. 1,000,000 Fair value of common stock to be deducted from escrow..... (103,225) ----------- $39,675,071 ===========
58 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. BUSINESS ACQUISITIONS (CONTINUED)
ANNUALIZED AMORTIZATION AMORTIZATION OF PERIOD INTANGIBLES ------------ --------------- PURCHASE PRICE ALLOCATION: Fair value of net tangible assets at May 11, 2000... $(1,743,857) Deferred tax liability.............................. (7,585,000) ACQUIRED INTANGIBLE ASSETS: Assembled domestic workforce........................ 1,100,000 2 years $ 550,000 Foreign workforce agreement......................... 8,800,000 5 years 1,760,000 Product technology.................................. 8,200,000 3 years 2,733,333 Customer contracts.................................. 400,000 2 years 200,000 Goodwill............................................ 30,503,928 3 years 10,167,976 ----------- ----------- $39,675,071 $15,411,309 =========== ===========
The total purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values on the closing date. The fair value of net tangible assets acquired approximated historical carrying amounts. Tangible assets acquired in the SDR acquisition primarily consisted of accounts receivable and property and equipment. Liabilities assumed consisted primarily of obligations under a revolving line of credit, accounts payable and accrued liabilities. CONQUEST SOFTWORKS On January 12, 2000, NIC merged its application services division with Conquest Softworks, LLC ("Conquest"). Conquest, based in Durango, Colorado, is a provider of Uniform Commercial Code and corporation software applications and services that facilitate electronic filings and document management for governments. NIC paid $6.5 million in cash and contributed the net assets of its application services division for a 65% ownership in the new company, which has been renamed NIC Conquest. The merger has been accounted for as a purchase and the results of NIC Conquest's operations are included in the Company's consolidated statements of operations from the date of acquisition. Conquest's 1999 results of operations as a stand-alone business were not material in relation to the consolidated financial statements of NIC. The total purchase price of approximately $7.0 million was allocated to NIC's share of tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values on the closing date. The fair value of net tangible assets acquired, consisting primarily of cash, accounts receivable, and property and equipment, totaled approximately $1.7 million and approximated historical carrying amounts. The sole identifiable intangible asset relates to Conquest's Uniform Commercial Code web browser software application. This asset was valued at approximately $2.7 million based on the net present value of projected future net cash flows from the application over its estimated three-year life discounted by 15%. The remainder of the purchase price was allocated to goodwill. The goodwill is being amortized on a straight-line basis over three years. At any time after January 12, 2001 or upon a change in control of NIC (defined as a change in beneficial ownership of 40% or more of the issued and outstanding voting securities of NIC, excluding 59 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. BUSINESS ACQUISITIONS (CONTINUED) any public offering of equity securities of NIC), each of the non-NIC shareholders shall have the right to put to NIC all, but not less than all, of their shares at a price equal to a put exercise price per share. The put exercise price per share will be a dollar amount determined as follows: (i) if a non-NIC shareholder put is exercised after January 12, 2001 but not upon the occurrence of a change in control of NIC, the put exercise price per share will be a dollar amount equal to the quotient obtained by dividing (A) the product of seven times NIC Conquest's EBITDA (defined as earnings before income taxes, depreciation and amortization) for the immediately preceding twelve months by (B) the total number of NIC Conquest shares issued and outstanding on the put exercise date; or (ii) if a non-NIC shareholder put is exercised after January 12, 2002 and upon the occurrence of a change in control of NIC, the put exercise price per share will be a dollar amount equal to the quotient obtained by dividing (A) the product of twelve times NIC Conquest's EBITDA for the immediately preceding twelve months by (B) the total number of NIC Conquest shares issued and outstanding on the put exercise date; or (iii) if a non-NIC shareholder put is before January 12, 2002 and upon the occurrence of a change in control of NIC, the put exercise price will be a dollar amount equal to the greater of the amount determined under the formula provided in (ii) above or the quotient obtained by dividing the sum of $30,000,000 by the total number of NIC Conquest shares issued and outstanding on the put exercise date. In addition, NIC Conquest may not remove any non-NIC member from the board of directors, authorize or issue any new equity shares senior to the common shares currently issued, amend its articles of incorporation to alter the rights, preferences or privileges of the shares held by non-NIC shareholders disproportionate to the shares held by NIC, increase the authorized number of members of the board of directors, effect a change in control in NIC Conquest (defined as 1) the filing of a registration statement with the SEC for the purposes of registering shares under the Securities Act of 1933; 2) approval by the board of directors of planning to make a public offering, to merge or to be acquired; or 3) the receipt of any bona fide proposal or inquiry regarding the merger or acquisition of the company or substantially all of its assets), or sell, spin-off or otherwise distribute any business or subsidiary of the company on a basis other than pro rata to all the shareholders without the vote or written consent of at least one of the board members representing the minority shareholders. On May 1, 2000, NIC acquired an additional 6.5% ownership interest in NIC Conquest from NIC Conquest's chief executive officer in exchange for 158,941 unregistered shares of NIC common stock, giving NIC ownership of 71.5% of NIC Conquest. The exchange ratio was determined based on the closing market price of NIC's common stock on the last trading day preceding the May 1, 2000 exchange agreement. The NIC shares issued were delivered to an escrow account and will be released from escrow in equal annual installments over a three-year period, beginning one year from the date of the exchange agreement. The fair market value of the NIC shares issued in the exchange was approximately $2 million and was allocated to NIC's 6.5% share of tangible and intangible assets acquired and liabilities assumed on the basis of their fair values on date of the share exchange. The fair value of net tangible assets acquired, consisting primarily of cash, accounts receivable, and property and equipment, totaled approximately $0.2 million and approximated historical carrying amounts. The remainder of the purchase price was allocated to goodwill, which will be amortized on a straight-line basis over three years. 60 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. BUSINESS ACQUISITIONS (CONTINUED) INTELLIGENT DECISION TECHNOLOGIES On October 13, 2000, NIC acquired Longmont, Colorado-based Intelligent Decision Technologies, Ltd. ("IDT"), a provider of business-to-government reporting and filing software for the transportation industry. IDT has developed business-to-government applications that facilitate compliance with the Federal Highway Administration's Commercial Vehicle Information System Network. IDT currently has contracts to provide the state governments in California, Maryland, Minnesota, and Kentucky with commercial vehicle electronic credentialing services that include registration, permitting, and tax filing software. The acquisition was accounted for as a purchase. The purchase price for the business was approximately $2.0 million, consisting of $0.5 million in cash and the issuance of 520,826 shares of unregistered NIC common stock. Pursuant to the Agreement and Plan of Merger dated September 8, 2000 (the "Merger Agreement"), fifty percent of the total number of shares of NIC common stock issued will be held in escrow as collateral for the indemnification obligations of the selling shareholders under the Merger Agreement. The shares of NIC common stock placed in escrow will be held and released subject to the terms and conditions of an escrow agreement, whereby 60 percent of the escrow shares will be delivered to the IDT shareholders one year after the date of closing, and the remaining escrow shares will be delivered to the IDT shareholders two years after the date of closing. Up to 520,826 shares of NIC common stock are payable as additional consideration depending on the earnings performance of IDT through the end of calendar year 2003. Consideration will be payable only if IDT's cumulative earnings before interest, income taxes, depreciation and amortization ("EBITDA") reach $275,000, with the full amount due if cumulative EBITDA reaches $700,000 by the end of 2003. At April 1, 2001 or on the first business day of any quarter thereafter until December 31, 2003 in which IDT's cumulative EBITDA equals $275,000, NIC will be required to issue 208,333 shares (the "Initial EBITDA Payment"). The number of shares to be issued each quarter after the Initial EBITDA Payment until December 31, 2003 will be based on a percentage determined by dividing, by $700,000, the difference between cumulative EBITDA to date and the initial EBITDA amount with respect to which the Initial EBITDA Payment was made. Such consideration, if payable, will be recorded as additional purchase price. The fair value of the NIC common stock was determined based on the average closing market price of NIC's common stock three days before, the day of, and three days after the October 13, 2000 closing date, which was the date final terms were agreed to. The purchase price of approximately $2.0 million was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The fair value of net tangible assets acquired, consisting primarily of accounts receivable, property and equipment, accounts payable and other accrued expenses, and a short-term line of credit, totaled $(118,663) and approximated historical carrying amounts. The remainder of the purchase price was allocated to goodwill (approximately $2.1 million). The goodwill is being amortized on a straight-line basis over three years. The transaction was structured to be tax free to the IDT shareholders, and the amortization of the goodwill arising from the application of purchase accounting is not deductible for income tax purposes. IDT's 1999 and 2000 results of operations as a stand-alone business were not material in relation to the consolidated financial statements of NIC. 61 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. BUSINESS ACQUISITIONS (CONTINUED) RESTRUCTURING CHARGE On September 20, 2000, the Company announced the restructuring of its eGovernment applications and services businesses to more appropriately size these operations to visible demand and more efficiently align them with other eGovernment initiatives across NIC. The restructuring involved employee reductions in its marketing division and at its NIC Commerce and NIC Technologies divisions. As a result, NIC incurred a pre-tax charge of approximately $638,000 in the third quarter of 2000 relating to employee severance costs. For additional information on the restructuring charge, refer to note 20. 5. ACQUISITION PRO FORMA INFORMATION (UNAUDITED) The following unaudited pro forma consolidated amounts for the year ended December 31, 1999 give effect to the acquisitions of eFed and SDR as if they had occurred on January 1, 1999, using the amortization of goodwill and intangibles the Company has recorded for periods subsequent to completing the acquisitions. The following unaudited pro forma consolidated amounts for the year ended December 31, 2000 give effect to the acquisition of SDR as if the acquisition had occurred on January 1, 2000. The results of operations for Conquest and IDT in 1999 and 2000 as stand-alone businesses were not material in relation to the consolidated financial statements of NIC.
YEAR ENDED DECEMBER 31, --------------------------- 1999 2000 ------------ ------------ Revenues......................................... $ 21,121,864 $ 27,727,256 Operating loss................................... (37,297,670) (59,962,810) Net loss......................................... (28,703,704) (46,498,798) Basic and diluted loss per share................. $ (0.57) $ (0.84) Weighted average shares outstanding.............. 50,210,448 55,398,070
6. INVESTMENTS IN AFFILIATES AND JOINT VENTURES On March 23, 2000, NIC completed a $5 million cash investment in E-Filing.com, Inc. ("E-Filing.com"), a provider of online filing applications for legal services, giving NIC ownership of 21% of E-Filing.com, a non-pubic company, through 2,433,800 shares of Series A voting Preferred Stock. The investment has been accounted for under the equity method. The difference between the amount of NIC's investment (approximately $5.3 million) and underlying equity (approximately $1.4 million) in E-Filing.com has been allocated to goodwill and is being amortized over 2 years. At December 31, 2000, the carrying value of the Company's investment in E-Filing.com totaled $3,686,155. On March 24, 2000, NIC completed a $5.5 million cash investment in Tidemark Computer Systems, Inc. ("Tidemark"), a provider of online permit applications for local government, giving NIC ownership of approximately 27% of Tidemark, a non-public company, through 4,530,396 shares of Series B voting Preferred Stock. The investment has been accounted for under the equity method. The difference between the amount of NIC's investment ($5.5 million) and underlying equity (approximately $2.3 million) in Tidemark was allocated to goodwill and was being amortized over 2 years. At December 31, 2000, NIC was closely monitoring its investment in Tidemark due to significant liquidity issues inasmuch as Tidemark's current liquid resources were sufficient to meet operating requirements only through the end of April 2001. At the end of 2000, Tidemark was in various stages of merger and 62 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. INVESTMENTS IN AFFILIATES AND JOINT VENTURES (CONTINUED) acquisition discussions with several companies. NIC expected Tidemark would be successful in merging its operations with or being acquired by another company. Based on information received in the latter half of March 2001 from a company looking to acquire Tidemark, NIC determined that it would not be able to recover the entire carrying value of its investment. Accordingly, in the fourth quarter of 2000, NIC adjusted the carrying value of its investment, primarily relating to goodwill, to its estimated fair value resulting in a noncash impairment loss of approximately $2.1 million. The estimated fair value of Tidemark was based on NIC's underlying equity in Tidemark's net book value at December 31, 2000. The yearly amortization of such goodwill was approximately $1.6 million. The impairment loss is included in Equity in net loss of affiliates in the consolidated statement of operations. In addition, NIC recorded a deferred tax asset valuation allowance of approximately $2.0 million to offset the deferred tax asset the Company had recognized relating to its investment in Tidemark (see Note 15). At December 31, 2000, the adjusted carrying value of the Company's investment in Tidemark was $575,851. E-Filing.com and Tidemark are in the early stage of their operations and are incurring net losses. The Company regularly reviews the carrying value of these equity method investments and records impairment losses when events and circumstances indicate that such assets are impaired. To date, the Company has not recorded any such impairment losses on its investment in E-Filing.com. In October 2000, NIC made an initial $524,000 cash investment in e-Government Solutions Limited ("eGS"), a private joint venture among Swiss venture capital firm ETF Group, London-based venture development organization Vesta Group, and NIC European Business Limited ("NIC Europe"), a European subsidiary of NIC, giving NIC ownership of 40% of the ordinary shares of eGS. The purpose of the eGS joint venture, based in London, England, is to deliver eGovernment products and services throughout Western Europe, with initial efforts to focus on the United Kingdom. As capital needs arise, NIC Europe will be required to make approximately $1.6 million in additional cash capital contributions to eGS in three installments of $524,000 beginning as early as three months, six months and nine months after the date of NIC's initial cash contribution. The investment in eGS will be accounted for under the equity method. eGS is in the early stages of its operations and incurred an insignificant amount of expenses in the fourth quarter of 2000. 7. FORMATION OF LIMITED LIABILITY COMPANY WITH BANK OF AMERICA On March 3, 2000, NIC Commerce created a jointly owned limited liability company with Bank of America Corporation, through its subsidiary Bank of America, N.A. (USA), to offer state and local governments a Web-based business-to-business procurement, payment and reconciliation service. The two companies will share the revenue that the limited liability company will generate from transaction fees, sales rebates from suppliers to governments, and promotional consideration from suppliers to governments. NIC Commerce will primarily be responsible for providing the electronic purchasing platform based on the NIC Commerce software, end user interface customization, hardware and software support and maintenance services to Bank of America and state and municipal clients, and other technical services in support of the business endeavors of the limited liability company. The limited liability company, called Banc of America Purchase Street, LLC, has recently contracted to provide electronic procurement services under transaction-based pricing models to two state/local government agencies, Houston-Galveston Area Council of Governments (H-GAC) and the State of South Carolina. These procurement portals are expected to become operational during 2001. 63 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. FORMATION OF LIMITED LIABILITY COMPANY WITH BANK OF AMERICA (CONTINUED) Bank of America will have the opportunity to become a strategic investor in NIC upon the achievement of certain revenue performance criteria by the new company. Warrants to purchase NIC common stock of 420,000 up to 1,400,000 shares will become exercisable upon achieving certain cumulative revenue targets by December 31, 2004. These warrants are priced in two equally sized series at $34.44 and $44.77 per share. Once exercisable, Bank of America will have the longer of December 31, 2005, or twenty-four months to execute the warrants on the shares. 8. INTERACTIVE SERVICES AGREEMENT WITH AMERICA ONLINE On August 25, 2000 (the "Effective Date"), NIC entered into a three-year Interactive Services Agreement (the "Agreement") with America Online, Inc. ("AOL") to deliver state government information, services and applications through AOL's State Government Guide. NIC will pay a $4.5 million cash carriage fee to AOL over the initial three-year term (the "Term"). NIC made an initial cash payment to AOL totaling $1.125 million on August 25, 2000, and must pay AOL $375,000 every three months for the next 27 months subsequent to the Effective Date. As an additional component of the carriage fee, NIC has also issued to AOL fully-vested common stock warrants representing the right to immediately purchase 624,653 shares of NIC common stock at an exercise price of $6.71875 per share. The warrants expire five years from the date of the Agreement. The exercise price per share was calculated based on the average closing price of NIC common stock for the four trading days prior to the August 28, 2000 announcement date of the Agreement. The fair value of the warrants issued to AOL was determined to be approximately $4.75 million on August 25, 2000, using the Black-Scholes option-pricing model. NIC will recognize the cash portion of the carriage fee on a straight-line basis over the Term as selling, general and administrative expense in the consolidated statement of operations. NIC will recognize the fair value of the fully vested warrants on a straight-line basis over the Term as amortization expense in the consolidated statement of operations. At December 31, 2000, NIC has recorded the unamortized fair value of the fully vested warrants as a contra-equity account in the consolidated balance sheet. Under the terms of the Agreement, NIC has granted to AOL a royalty-free, non-exclusive, worldwide license to use the applications developed by NIC (the "Customized Programming and Licensed Content"). In addition, NIC will fund the initial investment and ongoing operational costs to build, operate and maintain the Customized Programming and Licensed Content. NIC will share with AOL a portion of all transaction revenues generated by AOL members who access the transaction applications NIC develops specifically for the State Government Guide through the Customized Programming and Licensed Content. AOL and NIC will share revenues generated from the license or sale of advertisement on or through the State Government Guide. AOL has the right to extend the Agreement for up to two years beyond the Term. If the Agreement is extended, NIC may be required to pay AOL a maximum of $1.5 million in additional cash carriage fees per year beyond the Term if gross advertising revenues meet or exceed certain levels under the Agreement. Up to 624,653 additional warrants (the "Contingent Warrants"), with an exercise price and terms identical to the fully-vested warrants issued on August 25, 2000, are issuable to AOL if gross advertising revenues collected during the period the Agreement is in effect meet or exceed certain levels. One third of the Contingent Warrants are issuable to AOL on such dates that cumulative gross advertising revenues collected by AOL pursuant to the Agreement reach $22 million, $32 million and $40 million, respectively. 64 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. GOVERNMENT PORTAL CONTRACTS Each of the Company's government portal contracts generally has an initial term of three to five years. The Company enters into separate agreements with various agencies and divisions of the government to provide specific services and to conduct specific transactions. These agreements preliminarily establish the pricing of the electronic transactions and data access services the Company provides and the division of revenues between the Company and the government agency. The government must approve prices and revenue sharing agreements. The Company owns all the applications developed under these contracts. After completion of a defined contract term, the government agency typically receives a perpetual, royalty-free license to the applications for use only. If the Company's contract is not renewed after a defined term, the government agency would be entitled to take over the portal in place with no future obligation of the Company. In some cases, the Company provides management services to government-owned portals in exchange for an agreed-upon fee. The following is a summary of the significant terms of operating agreements that the Company's larger business units have entered into with government agencies. VIRGINIA INTERACTIVE, INC. (VI) On July 30, 1997, the VI business unit 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 Intelenet Commission. The Intelenet Commission is a State of Indiana body corporate and politic 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 the Intelenet Commission and the interagency agreements with various government agencies include limitations and provisions for the rates III can charge and the amount of remuneration to the Intelenet Commission and each government agency. The initial contract was to expire at the end of August 2000 but was renewed for an additional three years. The new contract expires at the end of August 2003, but may be renewed, or amended and renewed, for up to an additional two years. The Intelenet Commission is entitled to a perpetual for use only license to the applications developed for no additional compensation to III. III's wholly-owned subsidiary, City-County Interactive, L.L.C. (the "Subsidiary"), was formed in 1997 to provide electronic government services for CivicNet, formerly CivicLink, the electronic gateway 65 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. GOVERNMENT PORTAL CONTRACTS (CONTINUED) service for the city of Indianapolis and Marion County, Indiana. In addition, the Subsidiary is to further operate, manage and expand CivicNet. In connection with the revenues generated under the contract, the Intelenet Commission receives 2% of gross revenues per annum, before all other payments. The data-providing entities are then paid in accordance with interagency agreements. The remaining balance is retained by III. ARKANSAS INFORMATION CONSORTIUM, INC. (AIC) AIC serves as a provider of electronic government services, by a contract signed in July 1997 between AIC and the Information Network of Arkansas ("INA"), a public instrumentality created by legislation in the State of Arkansas (the "State"). AIC is responsible for managing and marketing the government portal as well as funding up-front investment and ongoing operational costs. The contract is for one three-year term through June 30, 2000, with four one-year renewals at the option of INA. The State exercised its first renewal option and extended the contract through June 30, 2001. If the State decides to extend the contract through June 30, 2003, or at anytime thereafter, the INA shall be entitled to a perpetual for use only license to the applications developed for no additional compensation to AIC. Prior to June 30, 2003, the INA reserves the right to negotiate terms to license the applications. Network transaction fees received pursuant to the agreement with INA are disbursed first for payment of certain operating expenses for the government portal (primarily telecommunication costs). Five percent of the amount by which gross revenues for the portal exceed the amount payable to government agencies is then distributed to the INA. The balance is retained by AIC. KANSAS INFORMATION CONSORTIUM, INC. (KIC) KIC was incorporated August 15, 1991 to serve as a provider of electronic government services to develop, operate, maintain and expand a government portal for electronic access to public information for the Information Network of Kansas ("INK"). INK is a State of Kansas government instrumentality created by the Kansas legislature for the purpose of providing electronic access to state, county and local information required by Kansas businesses and citizens. KIC is responsible for managing and marketing the government portal as well as funding up-front investment and ongoing operational costs. The contract with INK includes limitations and provisions for the rates KIC can charge and the amount of remuneration to INK and each government agency. The contract was to expire on December 31, 1999, but was renewed until December 31, 2002, unless earlier terminated by INK for cause. INK shall have the option, upon termination or expiration of the contract, to require KIC to provide electronic government services in accordance with the terms of the contract for a period of up to twelve months from the time of the expiration or notification of termination. INK is entitled to a perpetual for use only license to the applications developed for no additional compensation to KIC. In connection with the revenues generated under the contract with INK, INK receives 2.0% of gross revenue, per annum, payable monthly, before all other payments. KIC may then receive a 25.0% rate of return per annum on its risk capital from net income before taxes. The remaining net income before taxes is shared 66.7% with KIC and 33.3% with INK. Risk capital is defined in the contract as the sum of paid-in capital, corporate loans with a payback period exceeding one year, and noncancellable obligations under corporate leases. 66 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. GOVERNMENT PORTAL CONTRACTS (CONTINUED) NEBRASKA INTERACTIVE, INC. (NII) NII was incorporated November 22, 1994 for the purpose of operating as a provider of electronic government services for the public information portal of the State of Nebraska ("Nebraska Online"). NII developed and operates the public information portal to provide businesses and citizens with electronic access to state, county and local information via the Internet. NII is responsible for managing and marketing the portal as well as funding up-front investment and ongoing operational costs. On December 3, 1997, NII entered into a contract with the Nebraska State Records Board ("NSRB") to provide electronic government services to enhance, operate, maintain and expand the existing portal that was developed by NII under its 1995 contract with the Nebraska Library Commission ("NLC") and various government agencies. The contract includes limitations and provisions for the rates NII can charge and the amount of remuneration to each government agency. The contract was to expire on January 31, 2002. However, in January 2001, the NSRB extended the contract through January 2004, 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 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. On August 28, 2000, NIC/USA commenced a three-year contract, with two one-year optional renewal periods, with the State of Tennessee to develop and operate Tennessee's government portal, TennesseeAnytime, which will provide electronic transactions and expanded access to public information. Under the contract, NIC will fund initial investment and ongoing operational costs. The 67 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. GOVERNMENT PORTAL CONTRACTS (CONTINUED) State of Tennessee will be entitled to a perpetual, royalty-free, irrevocable, unlimited and nonexclusive right to use the applications NIC/USA develops. In connection with the revenues generated under the contract, the Company is responsible for payment of statutory fees for retrieval of public information and all network operating expenses. TennesseeAnytime became operational in October 2000. NEW ENGLAND INTERACTIVE, INC. (NEI) NEI was incorporated in 1999 for the purpose of operating as a provider of electronic government services for the New England region. On April 15, 1999, NEI entered into a three-year contract, with two two-year renewal periods, with the State of Maine to develop and operate Maine's government portal that will provide electronic transactions and expanded access to public information. Under the contract, NEI will fund initial investment and ongoing operational costs. Upon completion of the initial contractual term in April 2002, the State of Maine will be entitled to a perpetual for use only license for the applications NEI developed, with no additional compensation due to NEI. In connection with the revenues generated under the contract, NEI is entitled to retain any revenues remaining after payment of all network operating expenses, statutory fees for retrieval of public information and various other expenses. UTAH INTERACTIVE, INC. (UII) UII was formed in 1999 to provide electronic access to public records in Utah. In May 1999, UII entered into a contract with the State of Utah (the "State") to provide coordinated network development and management for the State's online government services. The contract extends to May 2003 with the option for three two-year renewal periods. Under the contract, UII will fund initial investment and ongoing operational costs. Upon completion of the initial four-year term of the contract, or if the contract is terminated by the State for cause, the State will be entitled to a perpetual for use only license for the applications UII developed, with no additional compensation due to UII. In connection with the revenues generated under the contract, UII retains any revenues that remain after payment of all network operating expenses, statutory fees for retrieval of public information and various other expenses. IDAHO INFORMATION CONSORTIUM, INC. (IIC) IIC was incorporated in July 1999 for the purpose of operating as a provider of electronic government services for the State of Idaho. On December 7, 1999, IIC entered into a three-year contract, with two two-year renewal periods, with the State of Idaho to develop and operate Idaho's government portal, Access Idaho, which will provide electronic transactions and expanded access to public information. Under the contract, IIC will fund initial investment and ongoing operational costs. Upon termination or expiration of the contract, the State of Idaho will be entitled to a perpetual for use only license for the applications IIC developed, with no additional compensation due to IIC. In connection with the revenues generated under the contract, IIC is entitled to retain any revenues remaining after payment of all network operating expenses, statutory fees for retrieval of public information and various other expenses. 68 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. GOVERNMENT PORTAL CONTRACTS (CONTINUED) HAWAII INFORMATION CONSORTIUM, INC. (HIC) On January 3, 2000, HIC commenced a three-year contract, with two two-year renewal periods, with the State of Hawaii to develop and operate Hawaii's government portal, Access Hawaii, which will provide electronic transactions and expanded access to public information. Under the contract, HIC will fund initial investment and ongoing operational costs. Upon completion of the initial three-year term of the contract or upon termination of the contract, the State of Hawaii will be entitled to a perpetual for use only license for the applications HIC developed, with no additional compensation due to HIC. In connection with the revenues generated under the contract, HIC is entitled to retain any revenues remaining after payment of statutory fees for retrieval of public information and all network operating expenses. 10. MARKETABLE SECURITIES The fair value of marketable debt securities was as follows at December 31:
1999 2000 ----------- ----------- U.S. government obligations........................ $12,252,850 $ 3,968,320 Corporate debt securities.......................... 70,227,910 20,946,085 ----------- ----------- $82,480,760 $24,914,405 =========== ===========
All marketable debt securities held by the Company at December 31, 1999 and 2000 mature within one year. Gross realized gains and losses and unrealized holding gains and losses were not significant for the years ended December 31, 1999 and 2000. The Company held no marketable securities prior to the completion of its initial public offering of common stock on July 20, 1999. 11. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31:
1999 2000 ---------- ----------- Furniture and fixtures.............................. $ 652,411 $ 1,100,956 Equipment........................................... 3,192,576 7,523,472 Purchased software.................................. 281,481 1,859,052 Leasehold improvements.............................. 163,556 303,522 ---------- ----------- 4,290,024 10,787,002 Less accumulated depreciation....................... 1,291,648 3,190,924 ---------- ----------- $2,998,376 $ 7,596,078 ========== ===========
Depreciation expense for the years ended December 31, 1998, 1999 and 2000, was $236,699, $581,416 and $1,728,559, respectively. 69 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. INTANGIBLE ASSETS Intangible assets consisted of the following at December 31:
1999 2000 ----------- ----------- Goodwill........................................... $21,302,573 $45,649,243 Software intangibles............................... 21,790,000 24,455,641 Contract intangibles............................... 3,465,313 1,072,388 Assembled domestic workforce intangible............ -- 1,100,000 Foreign workforce agreement intangible............. -- 8,800,000 Product technology intangible...................... -- 8,200,000 Software development costs......................... 145,260 4,215,092 Patents and trademarks............................. -- 106,477 ----------- ----------- 46,703,146 93,598,841 Less accumulated amortization...................... 16,056,700 26,165,724 ----------- ----------- $30,646,446 $67,433,117 =========== ===========
13. BANK LINES OF CREDIT AND OTHER DEBT OBLIGATIONS NIC has a $1 million line of credit with a bank in conjunction with a corporate credit card agreement. NIC has pledged approximately $500,000 in marketable securities as collateral on the line of credit. On January 19, 1999, NIC/USA purchased an airplane and financed the purchase by borrowing $544,000 from a bank in the form of a note payable. The note was paid in full during 1999. NIC/USA has issued to an office leasing company an irrevocable letter of credit in the amount of $118,043. The letter expires on September 15, 2001. Iowa Interactive, Inc has issued to the State of Iowa an irrevocable letter of credit in the amount of $50,000. The letter expires on April 30, 2001. NEI has issued to the State of Maine an irrevocable letter of credit in the amount of $50,000. The letter expires on May 14, 2001. IIC has issued to the State of Idaho an irrevocable letter of credit in the amount of $500,000. The letter expires on December 3, 2001. In March 1998, NII and AIC agreed to pay a shareholder $150,000 for past services and reacquired the shareholder's shares of NII and AIC. The remaining balance at December 31, 1999 of $50,000 was paid in 2000. 14. SHAREHOLDERS' EQUITY COMMON STOCK The Company's Board of Directors had authorized 13,500,000 shares of common stock for issuance by the Company at December 31, 1998. In April 1999, the Company was reincorporated in the state of Colorado and changed the par value of its common stock from $.01 per share to no par. On May 6, 1999, the Company increased its authorized shares to 200,000,000. On May 3, 1999, the Board of Directors authorized a common stock split in the range of 4 for 1 to 5 for 1, and granted authority to the Company's officers to determine the exact amount of the split. Such officers approved a 4.643377 for 1 split to be effected by means of a dividend of 3.643377 shares 70 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. SHAREHOLDERS' EQUITY (CONTINUED) of common stock for each share of common stock held, plus cash in lieu of fractional shares, effective for shareholders of record on July 14, 1999. The effect of the stock split has been retroactively reflected in the accompanying consolidated financial statements for all periods presented. All references to the number of Company common shares and per share amounts elsewhere in the related footnotes have also been restated as appropriate to reflect the effect of the common stock split for all periods presented. On July 20, 1999, the Company completed its initial public offering of common stock by selling an aggregate of 10 million new shares of common stock for net proceeds of approximately $109.4 million after deducting underwriting discounts, commissions and expenses. The Company has placed the net proceeds from its initial public offering in short-term, investment-grade, interest-bearing debt securities pending the use of the proceeds to increase new market development efforts, increase marketing efforts aimed at raising transaction volume, create new products and services, further develop common infrastructure and operating platforms, and make acquisitions. In the first six months of 1998, the Company made $588,367 of S corporation cash distributions to common shareholders. On June 30, 1998, the Company and a voting trust consisting of all the Company's then current shareholders entered into a stock purchase agreement for the Company's shareholders to sell a 25% interest in the Company to an investment management firm. The Company did not receive any of the proceeds from the sale. Under the voting trust agreement, two principal shareholders have the right to vote all of the voting trust's common shares and to sell all or any part of such shares. One common shareholder has the right, only upon termination within the first three years of employment with the Company, to cause the Company to repurchase 173,258 shares of common stock purchased by the shareholder on February 9, 1999, at the $1.44 price per share paid by the shareholder. The right is exercisable only upon the Company's decision to terminate employment. At December 31, 1997 and as of March 31, 1998, the date of the Exchange Offer, NIC/USA had 1,000,000 common shares authorized and 112,330 common shares issued and outstanding. However, as NIC/USA was considered the accounting acquirer, its historical outstanding share information has been adjusted for the Exchange Offer exchange ratio. Shareholders of NIC/USA received 198.42 Company common shares for each share held of NIC/USA on March 31, 1998. Retroactive adjustments are also made for purposes of calculating and reporting earnings per share. COMMON STOCK TRANSACTIONS From April 1998 through June 1998, the Company sold 348,254 shares of common stock to two employees at $0.22 per share. The Company recorded $258,333 in compensation expense related to these transactions. On June 30, 1998, the Company issued 174,563 shares of its common stock and made an S corporation distribution of those shares, which were valued at $1.43 per share, to its shareholders. These shares were given to a consultant as compensation for services rendered to the Company's shareholders with the investment management firm sale. In connection with the transaction, the Company also paid $57,077 in professional fees on behalf of the shareholders that were also distributed as an S corporation distribution. These shares have been treated as outstanding for all periods prior to the Exchange Offer for purposes of calculating and reporting earnings per share. 71 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. SHAREHOLDERS' EQUITY (CONTINUED) From January 1999 through May 1999, the Company sold 346,512 shares of common stock to five employees at $1.44 per share. The Company recorded $1,489,124 in compensation expense related to these transactions. In May 1999, the Company sold 23,727 shares of common stock to an employee at $5.27 per share. The Company recorded $84,826 in compensation expense related to this transaction. In April 2000, the Company sold 4,395 shares of common stock to an employee for $11.375 per share. In June 2000, the Company sold 1,932 shares of common stock to an employee for $12.9375 per share. In June 2000, the Company sold 2,828 shares of common stock to an employee for $8.84 per share and recorded $11,588 in compensation expense related to this transaction. In June 2000, the Company repurchased 5,000 shares of common stock from an employee for $20.1875 per share. These shares were canceled and retired in October 2000. In July 2000, the Company issued 2,637 shares of common stock to an executive of the Company for no cash consideration and recorded $30,000 in compensation expense related to this transaction. In March 2000, an outside director of the company exercised 10,000 non-qualified stock options at an exercise price of $10 per share. In November 2000, the Company rescinded this stock option exercise and returned the $100,000 in proceeds from the option exercise to the director. The Company recorded $72,800 in compensation expense related to this transaction. 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 statement of changes in shareholders' equity. During 2000, certain employees of the Company had disqualifying dispositions of common stock obtained through the exercise of incentive stock options. As a result, the Company will receive a federal income tax deduction of approximately $3.1 million in the current year. Through December 31, 2000, the Company had recognized cumulative compensation expense of approximately $157,000 for the excess of fair value of the Company's common stock on the grant date over the exercise price for options granted to certain of these employees. A portion of the tax benefit relating to the disqualifying dispositions totaling $157,000 has been recognized in the Company's results of operations, and the remaining tax benefit for the excess deduction was credited directly to additional paid-in capital. WITHDRAWN COMMON STOCK OFFERING On February 22, 2000, the Company filed a registration statement on Form S-1 with the SEC for an offering of approximately 8.1 million shares of the Company's common stock. On April 5, 2000, the Company announced its intention to withdraw the stock offering due to adverse market conditions. Direct costs related to the withdrawn offering of approximately $835,000 were expensed in the second quarter of 2000 and are included in selling, general and administrative expenses in the consolidated statement of operations. BUSINESS ACQUISITIONS For additional information relating to business acquisitions and other transactions involving the issuance of common stock, common stock options or warrants, refer to Notes 3, 4, 7 and 8 above. 72 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. INCOME TAXES On July 1, 1998, the Company changed its income tax status from an S corporation to a C corporation. The Company recognized a net deferred tax liability of approximately $1,374,000 representing the tax effects of temporary differences between the book and tax bases of assets and liabilities on that date. The effect of recognizing the deferred tax liability has been included in the consolidated statement of operations for the year ended December 31, 1998. The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31, ------------------------------------- 1998 1999 2000 -------- ----------- ------------ Current income taxes: Federal............................................... $ 56,045 $ -- $ -- State................................................. 12,655 25,354 161,213 -------- ----------- ------------ Total............................................... 68,700 25,354 161,213 -------- ----------- ------------ Deferred income taxes: Federal............................................... 540,345 (1,295,716) (13,077,074) State................................................. 49,768 (145,861) (1,676,160) -------- ----------- ------------ Total............................................... 590,113 (1,441,577) (14,753,234) -------- ----------- ------------ Total income tax expense (benefit).................. $658,813 $(1,416,223) $(14,592,021) ======== =========== ============
73 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. INCOME TAXES (CONTINUED) Significant components of the Company's deferred tax assets and liabilities were as follows at December 31:
1999 2000 ---------- ---------- Deferred tax assets: Application services contracts..................... $ 88,987 $ 140,821 Compensation related to non-qualified stock options.......................................... 394,980 788,260 Amortization of eFed goodwill and software intangible....................................... 864,639 3,918,486 Net operating loss carryforward.................... 677,673 11,943,265 Investments in affiliates.......................... -- 2,577,272 Other.............................................. 7,718 80,988 ---------- ---------- 2,033,997 19,449,092 Less: Valuation allowance.......................... -- (1,959,447) ---------- ---------- Total............................................ 2,033,997 17,489,645 ---------- ---------- Deferred tax liabilities: Purchase accounting intangibles.................... (392,434) (6,413,820) Depreciation....................................... (173,383) (261,297) Capitalized software development costs............. -- (1,638,324) Accreted discount on marketable securities......... (585,541) -- Other.............................................. (31,174) (16,204) ---------- ---------- Total............................................ (1,182,532) (8,329,645) ---------- ---------- Net deferred tax asset............................... $ 851,465 $9,160,000 ========== ==========
For tax purposes, the Company had available at December 31, 1998, 1999 and 2000 net operating loss ("NOL") carryforwards of approximately $67,000, $281,000 and $29,400,000 that will expire in the years 2018, 2019 and 2020, respectively. The Company believes it is more likely than not it will generate sufficient taxable income from future operations to fully utilize the NOL carryforwards prior to expiration. Consequently, the Company has not provided a valuation allowance for these deferred tax assets. The amount of the deferred tax asset considered realizable relating to these NOL's could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. In the fourth quarter of 2000, the Company recorded a deferred tax asset valuation allowance of $1,959,447 to offset the deferred tax asset the Company had recognized relating to its investment in Tidemark (see Note 6). The valuation allowance is appropriate because the excess of the tax loss over book loss which would be realized on the dispositon of Tidemark would give rise to a capital loss for tax reporting purposes, and the Company has no foreseeable capital gain income against which to offset such loss. Thus, the realization of this item would not give rise to a future tax benefit under current expectations. 74 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. INCOME TAXES (CONTINUED) The following table reconciles the effective income tax rate indicated by the consolidated statements of operations and the statutory federal income tax rate:
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1999 2000 -------- -------- -------- Effective federal and state income tax rate........... (9.1)% 11.7% 26.5% Goodwill amortization relating to the Exchange Offer and other acquisitions.............................. 15.5 17.8 7.0 S to C corporation adjustment......................... 19.7 -- -- Pretax loss as an S corporation (six months).......... 10.4 -- -- Non-deductible stock compensation expense............. -- 6.6 0.4 State income taxes.................................... (1.3) (1.3) (1.8) Valuation allowance relating to investment in Tidemark............................................ -- -- 3.6 Other................................................. (0.2) 0.2 (0.7) ---- ---- ---- Statutory federal income tax rate..................... 35.0% 35.0% 35.0% ==== ==== ====
The unaudited 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 period presented taking into account permanent differences. 16. COMMITMENTS AND CONTINGENCIES LEASES The Company and its subsidiaries lease office space and certain equipment under noncancellable operating leases. Capital lease agreements require the Company and its subsidiaries to pay all taxes, fees, assessments or other charges. 75 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. COMMITMENTS AND CONTINGENCIES (CONTINUED) Future minimum noncancellable lease payments under all noncancellable operating and capital leases at December 31, 2000 are as follows:
FISCAL YEAR OPERATING CAPITAL - ----------- ---------- ---------- 2001................................................. $1,271,684 $ 205,243 2002................................................. 1,018,541 20,519 2003................................................. 604,387 1,418 2004................................................. 505,561 -- 2005................................................. 332,448 -- Thereafter........................................... 128,058 -- ---------- 227,180 Less interest........................................ 10,546 ---------- Present value of net minimum lease payments.......... 216,634 Less current portion................................. 194,509 ---------- Long-term portion.................................... $ 22,125 ==========
Capitalized leased property and equipment consists of the following at December 31:
1999 2000 -------- -------- Furniture and fixtures.................................. $ 70,651 $ 95,619 Equipment............................................... 528,350 395,938 Purchased software...................................... 60,003 53,633 -------- -------- 659,004 545,190 Less accumulated depreciation........................... 246,243 276,911 -------- -------- $412,761 $268,279 ======== ========
Rent expense for operating leases for the years ended December 31, 1998, 1999 and 2000 was $354,192, $402,241 and $1,279,175, respectively. LITIGATION The Company is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such proceedings and litigation currently pending would not be material to the consolidated financial position, liquidity or results of operations of the Company. 17. EMPLOYEE BENEFIT AND STOCK OPTION PLANS DEFINED CONTRIBUTION 401(K) PROFIT SHARING PLAN The Company and its subsidiaries sponsor a defined contribution 401(k) profit sharing plan. In accordance with the plan, all full-time employees are eligible immediately upon employment. A discretionary match of up to 5% of an employee's salary and a discretionary contribution may be made to the plan as determined by the Board of Directors. Expense related to Company matching 76 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. EMPLOYEE BENEFIT AND STOCK OPTION PLANS (CONTINUED) contributions totaled $94,571, $176,736 and $469,088 for the years ended December 31, 1998, 1999 and 2000, respectively. No discretionary contributions were made for the years ended December 31, 1998, 1999 and 2000. EMPLOYEE STOCK PURCHASE PLAN In May 1999, the Company's Board of Directors approved an employee stock purchase plan intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code. A total of 2,321,688 shares of NIC common stock have been reserved for issuance under this plan. Terms of the plan will permit eligible employees to purchase NIC common stock through payroll deductions up to 15% of each employee's compensation. Amounts deducted and accumulated by the participant will be used to purchase shares of NIC's common stock at 85% of the lower of the fair value of the common stock at the beginning or the end of the offering period, as defined. No offering of stock was made to employees during 1999 or 2000. Accordingly, no shares have been issued pursuant to the plan. STOCK OPTION PLANS The Company has two formal stock option plans (the "NIC" plan and the "SDR" 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 NIC plan was adopted in May 1998 and amended in November 1998 and May 1999. Under the NIC plan, the Company is authorized to grant options for up to 9,286,754 common shares. Employee options are generally exercisable one year from date of grant in cumulative annual installments of 25% to 33% and expire four years after the grant date. The SDR plan was adopted in May 2000 in conjunction with NIC's acquisition of SDR. Under the SDR plan, the Company is authorized to grant options for up to 229,965 common shares. No options that are in addition to those granted upon the close of the SDR acquisition will be granted under the SDR plan. There have been no option repricings under the plans for the years ended December 31, 1998, 1999 and 2000. The Company accounts for the plans using the intrinsic value method prescribed in APB No. 25. SFAS No. 123 requires certain disclosures regarding expense and value of options granted using the fair-value-based method even though the Company follows APB No. 25. Had compensation cost for the Company's plans been determined in accordance with SFAS No. 123, the Company's net loss and loss per share would have been as follows for the years ended December 31, 1998, 1999 and 2000:
1998 1999 2000 ----------- ------------ ------------ Net loss: As reported........................ $(7,895,966) $(10,730,560) $(40,277,950) Pro forma.......................... $(8,005,301) $(12,134,460) $(47,148,116) Basic and diluted loss per share: As reported........................ $ (0.21) $ (0.23) $ (0.74) Pro forma.......................... $ (0.21) $ (0.26) $ (0.86)
77 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. EMPLOYEE BENEFIT AND STOCK OPTION PLANS (CONTINUED) For purposes of complying with the disclosure provisions of SFAS No. 123 and as permitted by the Financial Accounting Standards Board for nonpublic companies, prior to NIC's initial public offering in July 1999, the fair value of each option grant was determined on the date of the grant using the minimum value option pricing model. The minimum value model does not consider expected volatility in stock price. Subsequent to the offering, the fair value of each option grant was determined using the Black-Scholes option pricing model. Except for the volatility assumption, which is only used under the Black- Scholes model, the following assumptions were applied in determining pro forma compensation cost for the years ended December 31, 1998, 1999 and 2000:
1998 1999 2000 ------------- ------------ ------------ Risk-free interest rate...................... 4.54% 5.48% 6.10% Expected dividend yield...................... 0.00 0.00 0.00 Expected option life......................... 4.62 years 4.0 years 4.0 years Expected stock price volatility.............. 0.001% 80% 125% Fair value of options granted................ $ 1.45 $ 11.14 $ 8.62
A summary of the activity under the Company's stock option plans for the years ended December 31, 1998, 1999 and 2000 is presented below:
1998 1999 2000 -------------------------- --------------------------- --------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE --------- -------------- ---------- -------------- ---------- -------------- Outstanding at January 1..... -- -- 2,514,019 $ 1.44 4,025,593 $ 7.49 Granted.................... 2,534,812 $1.44 1,798,285 $15.09 3,372,507 $10.38 Exercised.................. -- -- (122,954) $ 1.44 (411,524) $ 2.07 Expired.................... -- -- -- -- (33,924) $12.29 Canceled................... (20,793) $1.44 (163,757) $ 2.51 (761,925) $21.44 --------- ---------- ---------- Outstanding at December 31... 2,514,019 $1.44 4,025,593 $ 7.49 6,190,727 $ 7.69 Exercisable at December 31................ 199,317 $1.44 825,008 $ 2.18 1,674,316 $ 4.86 Weighted average grant-date fair value of options granted during the year.... $1.45 $11.14 $ 8.62
78 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. EMPLOYEE BENEFIT AND STOCK OPTION PLANS (CONTINUED) The following table summarizes information about stock options outstanding under the Plan at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------ ---------------------------- WEIGHTED AVERAGE WEIGHTED REMAINING AVERAGE WEIGHTED SHARES CONTRACTUAL EXERCISE SHARES AVERAGE RANGE OF EXERCISE PRICE OUTSTANDING LIFE PRICE OUTSTANDING EXERCISE PRICE - ----------------------- ----------- ----------- -------- ----------- -------------- $1.44-2.13............... 2,324,447 2.8 $ 1.46 1,227,457 $ 1.45 $2.19-3.06............... 844,875 4.9 $ 2.41 25,000 $ 2.69 $3.34-4.06............... 115,000 4.5 $ 3.77 20,000 $ 3.88 $5.06-7.44............... 723,952 3.4 $ 5.39 182,947 $ 5.27 $7.75-11.38.............. 1,368,829 5.3 $10.87 10,000 $11.38 $12.38-18.38............. 214,584 2.8 $14.00 70,247 $14.36 $19.32-26.38............. 187,296 3.2 $23.09 62,571 $23.06 $29.38-43.88............. 324,744 2.9 $34.16 76,094 $35.24 $45.75-65.88............. 87,000 3.1 $51.80 -- --
During 1998, the exercise price of all options granted under the plan was $1.44, which was less than the fair market value of the stock on the various grant dates. From September 1998 through December 1998, the Company granted 2,534,812 common stock options with an exercise price of $1.44 per share. Compensation expense of $310,536 was recorded in 1998 relating to these option grants, with $2,813,577 of compensation expense deferred at December 31, 1998 to be amortized over the vesting period of the options. In December 1998, the Company granted 1,393,010 common stock options (1,046,500 non-qualified options and 346,510 incentive options) to an executive of the Company under two separate stock option agreements covered by the Plan. Non-qualified stock options totaling 60,712 vested immediately with the remainder of the options exercisable one year from date of grant in cumulative annual installments of 25%. The non-qualified stock options expire ten years after the grant date. Incentive stock options totaling 69,302 vested immediately with the remainder of the options exercisable one year from date of grant in cumulative annual installments of 25%. The incentive stock options expire five years from the date of grant. From January 1999 through May 1999, the Company granted 191,767 common stock options with a vesting period of three years and an exercise price of $1.44 per share, which was less than the fair market value of the stock on the various grant dates. Compensation expense of approximately $213,000 was recorded relating to these options for the year ended December 31, 1999, with approximately $496,000 of compensation expense deferred at December 31, 1999 to be amortized over the three-year vesting periods of the option grants. In April 1999, the Company granted 20,791 common stock options with a vesting period of three years and an exercise price of $5.27 per share, which was less than the fair market value of the stock on the grant date. Compensation expense of approximately $16,000 was recorded relating to these options for the year ended December 31, 1999, with approximately $58,000 of compensation expense deferred at December 31, 1999 to be amortized over the three year vesting periods of the option grants. 79 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. EMPLOYEE BENEFIT AND STOCK OPTION PLANS (CONTINUED) In May 1999, the Company granted 696,511 common stock options (601,636 non-qualified options and 94,875 incentive options) to an executive of the Company at an exercise price of $5.27 per share, which was less than the fair market value of the stock on the grant date, under two separate stock option agreements covered by the Plan. Non-qualified stock options totaling 50,669 vested immediately with the remainder of the options exercisable one year from date of grant in cumulative annual installments of 25%. The non-qualified stock options expire ten years after the grant date. Incentive stock options totaling 18,975 vested immediately with the remainder of the options exercisable one year from date of grant in cumulative annual installments of 25%. The incentive stock options expire five years from the date of grant. Relating to this executive's stock options, compensation expense of approximately $598,000 was recorded for the year ended December 31, 1999, with approximately $1,892,000 of compensation expense deferred at December 31, 1999, to be amortized over the vesting period of the options. In August of 1999, the Company granted 10,000 common stock options with immediate vesting to a director of the Company with an exercise price of $10 per share, which was less than the fair market value of the stock on the grant date. Compensation expense of approximately $44,000 was recorded relating to this option grant for the year ended December 31, 1999. In February of 2000, the Company made two grants of 10,000 common stock options with immediate vesting to two directors of the Company with an exercise price of $36.88 per share, which was less than the fair market value of the stock on the grant date. Compensation expense of $130,000 was recorded relating to these option grants for the year ended December 31, 2000. Including expense recognized in connection with options granted prior to January 1, 1999, the Company recognized a total of $1,614,101 of compensation expense related to common stock options for the year ended December 31, 1999. Total deferred compensation expense was $4,362,172 at December 31, 1999. Including expense recognized in connection with options granted prior to January 1, 2000, the Company recognized a total of $1,675,485 of compensation expense related to common stock options for the year ended December 31, 2000. Total deferred compensation expense was $2,814,350 at December 31, 2000. 18. RELATED PARTY TRANSACTIONS The Company and its subsidiaries purchased business and health insurance through an insurance agency that was controlled by a shareholder and director of the Company at costs that the Company believed approximated arms-length transactions. In 1998, a payment of $8,345 was made directly to this insurance agency. No direct payments were made in 1999 or 2000. Aggregate insurance payments made that were brokered by this insurance agency totaled approximately $478,000 and $354,000 for the years ended December 31, 1998 and 1999, respectively. No insurance payments were brokered by this agency in 2000. During 2000, the Company rented an aircraft on an hourly basis from a company that was controlled by two shareholders/directors of the Company at costs that the Company believed approximated arms-length transactions. In 2000, total payments made to this company totaled $244,700. No payments were made to this company in 1998 or 1999. 80 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES Certain subsidiaries of the Company financed the purchase of $355,843 of property and equipment in 1998 under capital leases. KIC sold certain assets during 1998 that 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 that 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. For additional information on noncash investing and financing activities relating to business acquisitions involving the issuance of common stock, common stock options or warrants, refer to Notes 3, 4, 7 and 8 above. 20. RESTRUCTURING CHARGE On September 20, 2000, the Company announced the restructuring of its eGovernment applications and services businesses to more appropriately size these operations to visible demand and more efficiently align them with other eGovernment initiatives across NIC. The restructuring involved employee reductions in its marketing division and at its NIC Commerce and NIC Technologies divisions. As a result, NIC incurred a pre-tax charge of approximately $638,000 in the third quarter of 2000 relating to employee severance costs. This charge is included in selling, general and administrative expenses in the consolidated statements of operations. Employee severance costs paid through December 31, 2000 totaled $358,000, with $280,000 accrued at December 31, 2000 for future payments. The employee severance costs relate to severance packages for 23 employees in marketing, product development and administration, 21 of which were terminated by December 31, 2000, with two additional terminations expected in the first quarter of 2001. 21. REPORTABLE SEGMENTS AND RELATED INFORMATION As discussed in Note 20 above, during the third quarter of 2000, the Company announced the restructuring of its eGovernment applications and services businesses. In conjunction with the restructuring, the Company also reorganized its management team to support the new corporate structure. Accordingly, NIC changed the composition of its reportable segments to match the manner by which the segments are internally organized and managed. The Company's reportable segments consist of its state and local portal businesses ("Portals"), its eGovernment products businesses ("Products") and its NIC Commerce government procurement business ("Procurement"). The Portals segment includes the Company's subsidiaries operating state and local government portals. The Products segment includes the NIC Conquest and NIC Technologies subsidiaries, which were previously included in the state and local government segment, and the IDT subsidiary. Unallocated corporate-level expenses are reported in the reconciliation of the segment totals to the related consolidated totals as "Other Reconciling Items." Management evaluates the performance of its segments and allocates resources to them based on gross profit and earnings before interest, taxes, equity in net loss of affiliates, depreciation, amortization, one-time charges and other non-cash charges related to stock compensation and application development contracts ("EBITDA"). There have been no significant intersegment transactions for the periods reported. The summary of significant accounting policies applies to all segments. 81 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 21. REPORTABLE SEGMENTS AND RELATED INFORMATION (CONTINUED) In the fourth quarter of 1998, the Company determined that the balance of revenues remaining to be recognized under existing application development contractual obligations was not expected to cover anticipated costs of developing and implementing the related applications and accrued $1,256,000 for the expected loss. The Company accrued an additional $900,000 of anticipated losses in the second quarter of 1999 and $225,000 in the fourth quarter of 1999 based on revised estimates. Due to developments arising in late March 2000 relating to subcontractor performance and technical delivery issues, the Company determined that the balance of revenues remaining to be recognized under an application development contract with the Indiana Secretary of State was not expected to cover the Company's current estimate of costs to develop and implement the related application and accrued $1,350,000 for the expected loss. Also in 2000, the Company recorded one-time pre-tax charges of approximately $834,000 relating to NIC's withdrawn secondary stock offering in April 2000 and approximately $638,000 in the third quarter for employee severance relating to the restructuring of its NIC Commerce and NIC Technologies divisions and the consolidation of NIC's marketing efforts. NIC also incurred a one-time non-cash charge of approximately $235,000 in the third quarter of 2000 due to the adoption of a company-wide vacation policy that required the Company to recognize a liability for earned but unused employee vacation. The table below reflects summarized financial information concerning the Company's reportable segments for the years ended December 31:
OTHER CONSOLIDATED PORTALS PRODUCTS PROCUREMENT RECONCILING ITEMS TOTAL ----------- ----------- ----------- ----------------- ------------ 1998 Revenues................... $ 7,751,592 $ 396,811 $ -- $ -- $ 8,148,403 Cost of revenues........... 715,375 2,257,919 -- -- 2,973,294 ----------- ----------- ----------- ------------ Gross profit............... 7,036,217 (1,861,108) -- -- 5,175,109 EBITDA..................... 1,611,089 (605,168) -- (463,487) 542,434 1999 Revenues................... 14,010,681 565,464 1,570,974 -- 16,147,119 Cost of revenues........... 1,292,948 1,870,112 63,878 -- 3,226,938 ----------- ----------- ----------- ------------ Gross profit............... 12,717,733 (1,304,648) 1,507,096 -- 12,920,181 EBITDA..................... 4,043,716 (179,648) 333,341 (3,386,247) 811,162 2000 Revenues................... 17,908,908 5,432,471 3,629,897 -- 26,971,276 Cost of revenues........... 1,397,361 5,667,566 1,914,357 -- 8,979,284 ----------- ----------- ----------- ------------ Gross profit............... 16,511,547 (235,095) 1,715,540 -- 17,991,992 EBITDA..................... 3,803,280 (2,746,967) (6,182,594) (14,272,713) (19,398,994)
82 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 21. REPORTABLE SEGMENTS AND RELATED INFORMATION (CONTINUED) The following is a reconciliation of total segment EBITDA to total consolidated loss before income taxes and minority interest for the years ended December 31:
1998 1999 2000 ----------- ------------ ------------ Total EBITDA for reportable segments................. $ 542,434 $ 811,162 $(19,398,994) Restructuring charge................................. -- -- (638,238) Vacation accrual..................................... -- -- (235,168) Application development contracts.................... (1,256,000) (1,125,000) (1,350,000) Withdrawn secondary offering expenses................ -- -- (834,493) Stock compensation................................... (568,869) (3,188,051) (1,789,874) Depreciation and amortization........................ (5,922,396) (10,968,482) (27,959,637) Other income, net.................................... 55,839 2,492,460 3,659,689 Interest expense..................................... (88,161) (168,872) (48,458) Equity in net loss of affiliates..................... -- -- (6,524,473) ----------- ------------ ------------ Consolidated loss before income taxes and minority interest........................................... $(7,237,153) $(12,146,783) $(55,119,646) =========== ============ ============
A primary source of revenue is derived from data resellers' use of the Company's government portals to access motor vehicle records for sale to the auto insurance industry. For the year ended December 31, 1999, one data reseller accounted for 56% of the Company's portal revenues and 48% of the Company's total revenues, and two other resellers accounted for an additional 9% of the Company's portal revenues and 8% of the Company's total revenues. For the year ended December 31, 2000, one of these data resellers accounted for approximately 51% of the Company's portal revenues and 34% of the Company's total revenues, and two other resellers accounted for an additional 12% of the Company's portal revenues and 8% of the Company's total revenues. At December 31, 2000, one data reseller accounted for approximately 37% of the Company's accounts receivable and two other data resellers accounted for approximately 11%. 83 NATIONAL INFORMATION CONSORTIUM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 22. UNAUDITED QUARTERLY OPERATING RESULTS (IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
QUARTER ----------------------------------------- 1ST 2ND 3RD 4TH -------- -------- -------- -------- 1999 Revenues................................. $ 3,103 $ 3,409 $ 4,340 $ 5,295 Gross profit............................. 2,575 2,260 3,678 4,407 Operating loss........................... (3,302) (2,941) (2,378) (5,850) Net loss................................. (3,299) (2,503) (1,442) (3,486) Basic and diluted net loss per share..... $ (0.08) $ (0.06) $ (0.03) $ (0.07)
QUARTER ----------------------------------------- 1ST 2ND 3RD 4TH -------- -------- -------- -------- 2000 Revenues.............................. $ 6,200 $ 7,478 $ 6,600 $ 6,693 Gross profit.......................... 3,678 4,885 4,826 4,603 Operating loss........................ (7,997) (11,968) (15,844) (16,397) Net loss.............................. (4,705) (8,973) (11,629) (14,971) Basic and diluted net loss per share............................... $ (0.09) $ (0.16) $ (0.21) $ (0.27)
The quarterly information above for revenues differs from that previously reported by the Company due to the net revenue presentation described in Note 1. The effect of this new presentation was to decrease previously reported revenues by $8,352, $9,902 $11,351 and $11,214 for the quarterly periods ended March 31, June 30, September 30, and December 31, 1999, respectively, and by $12,714, $12,432, $12,750 and $12,146 for the quarterly periods ended March 31, June 30, September 30, and December 31, 2000, respectively. The new presentation had no impact on gross profit, operating loss, net loss or net loss per share. The quarterly information above for gross profit differs from that previously reported by the Company due to the reclassification of cost of revenues described in Note 1. The effect of this reclassification was to decrease previously reported gross profit by $276, $831, $341 and $407 for the quarterly periods ended March 31, June 30, September 30, and December 31, 1999, respectively, and by $1,816, $1,054, $175, and $1,088 for the quarterly periods ended March 31, June 30, September 30, and December 31, 2000, respectively. The reclassification had no impact on operating loss, net loss or net loss per share. The information above for the fourth quarter of 2000 differs from that previously reported by the Company due to the noncash impairment loss relating to the Company's investment in Tidemark described in Note 6. The effect of the impairment loss was to decrease previously reported net loss by $3,205 and basic and diluted net loss per share by $0.06. The quarterly information is subject to seasonal fluctuations resulting in lower revenues in the fourth quarter of each calendar year, due to the smaller number of business days in the quarter and a lower volume of business-to-government and citizen-to-government transactions during the holiday periods. For additional information on significant charges affecting our quarterly results for the periods presented, refer to Note 21 above. 84 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of National Information Consortium, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in shareholders' equity and of cash flows, present fairly, in all material respects, the financial position of National Information Consortium, Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 our opinion. /s/ PRICEWATERHOUSECOOPERS LLP Kansas City, Missouri March 23, 2001 85 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding directors of the Company and the executive officers of the Company will be set forth under the caption "Management" in the Company's proxy statement related to its 2001 annual meeting of shareholders (the "Proxy Statement") and is incorporated herein by reference since such Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days after the end of the Company's fiscal year pursuant to regulation 14A. Information required by Item 405 of Regulation S-K will be set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to "Executive Compensation" in the Proxy Statement, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to "Share Ownership" in the Proxy Statement, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS To the extent applicable the information required by this item is incorporated herein by reference to "Compensation Committee Interlocks and Insider Participation" and "Certain Relationships and Related Transactions" in the Proxy Statement, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A. 86 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report:
PAGE -------- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets............................... 43 Consolidated Statements of Operations..................... 44 Consolidated Statements of Changes in Shareholders' Equity.................................................. 45 Consolidated Statements of Cash Flows..................... 46 Notes to Consolidated Financial Statements................ 48 Report of PricewaterhouseCoopers LLP, Independent Accountants............................................. 85
All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 3.1 Articles of Incorporation of the registrant(1) 3.2 Bylaws of the registrant(1) 4.1 Reference is made to Exhibits 3.1 and 3.2(1) 4.2 Investor Rights Agreement dated June 30, 1998(1) 4.3 Investors' Rights Agreement, dated January 12, 2000(2) 4.4 Specimen Stock Certificate of the registrant(1) 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(1) 10.1 Form of Indemnification Agreement between the registrant and each of its executive officers and directors(1) 10.2 Registrant's 1998 Stock Option Plan, as amended and restated(1) 10.3 Registrant's 1999 Employee Stock Purchase Plan(1) 10.4 Employment Agreement between the registrant and Jeffery S. Fraser dated July 1, 1998(1) 10.5 Employment Agreement between the registrant and William F. Bradley, Jr. dated July 24, 1998(1) 10.6 Employment Agreement between the registrant and Samuel R. Somerhalder dated July 24, 1998(1) 10.7 Employment Agreement between the registrant and Harry H. Herington dated July 24, 1998(1) 10.8 Employment Agreement between the registrant and Joseph Nemelka, dated July 24, 1998(2) 10.9 Employment Agreement between the registrant and James B. Dodd dated January 1, 1999(1) 10.10 Employment Agreement between the registrant and Ray G. Coutermarsh dated February 1, 2000(2) 10.11 Employment Agreement between the registrant and Terrence Parker dated November 9, 1999(2)
87
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 10.12 Contract for Network Manager Services between the Information Network of Kansas and Kansas Information Consortium, Inc. dated December 18, 1991 with addenda dated October 15, 1992, August 19, 1993, May 26, 1995 and June 13, 1996 and amendment on March 2, 1998(1) 10.13 Contract for Network Manager Services between the State of Indiana by and through the Intelenet Commission and Indian@ Interactive, Inc., dated July 18, 1995(1) 10.14 Services Contract by and between National Information Consortium, U.S.A. and the GeorgiaNet Authority, an agency of the State of Georgia, dated September 15, 1996(1) 10.15 Contract for Network Manager between Information Network of Arkansas by and through the Information Network of Arkansas Board and Arkansas Information Consortium, Inc. dated July 2, 1997(1) 10.16 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(1) 10.17 Contract for Network Manager Services between the Commonwealth of Virginia by and through the Virginia Information Providers Network Authority and Virginia Interactive, LLC dated January 15, 1998(1) 10.18 Contract for Network Manager Services between Iowa Interactive, Inc. and the State of Iowa by and through Information Technology Services dated April 23, 1998 with letter addendum dated August 7, 1998(1) 10.19 Contract for Network Manager Services between the Consolidated City of Indianapolis and Marion County by and through the Enhanced Access Board of Marion County and City- County Interactive, LLC dated August 31, 1998 with addendum dated as of the same date(1) 10.20 State of Maine Contract for Special Services with New England Interactive, Inc. dated April 14, 1999(1) 10.21 State of Idaho Contract for Electronic Business and portal Services with the Idaho Department of Administration and other Public Agencies, dated December 7, 1999(2) 10.22 State of Hawaii Contract for Special Services with the State of Hawaii, dated December 29, 1999(2) 10.23 Employment Agreement between the registrant and Kevin C. Childress dated May 16, 1999(1) 10.24 Sublease for the registrant's offices at 12 Corporate Woods, Overland Park dated May 14, 1999, and First Sublease Modification Agreement dated December 15, 1999, and Lease for the same address dated January 15, 1995 with First Lease Modification dated October 30, 1996(1) 10.25 Agreement between Equifax Services and Nebrask@ Online dated March 25, 1996(1) 10.26 Agreement between ChoicePoint and the Information Network of Kansas dated September 1, 1997(1) 10.27 Agreement between Equifax/ChoicePoint and the Information Network of Arkansas dated September 2, 1997(1) 10.28 Agreement between Equifax Systems, Inc. and Access Indian@ Information Network dated November 14, 1995(1) 10.29 Contract for Network Manager Services between the State of Utah and Utah Interactive, Inc. dated as of May 7, 1999(1)
88
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 10.30 Asset Purchase Agreement between the registrant and Electric Press, Inc, for the acquisition of eFed, a division of Electric Press, Inc., dated as of September 15, 1999(2) 10.31 Contribution Agreement between the registrant and Conquest Softworks, LLC, dated as of January 12, 2000 Agreement(2) 10.32 Agreement and Plan of Reorganization and Merger between the registrant and SDR Technologies, Inc., dated as of February 16, 2000(2) 10.33 Amended and Restated Agreement and Plan of Reorganization and Merger, dated as of May 5, 2000, as amended, by and among the registrant, SDR Acquisition Corp., a California corporation and a wholly owned subsidiary of the registrant, and SDR Technologies, Inc.(3) 10.34 Registrant's 1999 Stock Option Plan of SDR Technologies, Inc.(4) 10.35 Agreement and Plan of Merger, dated as of September 8, 2000, by and among the registrant, Cherry Hills Acquisition Sub, Inc., a Colorado corporation and wholly owned subsidiary of the registrant, and Intelligent Decision Technologies, Ltd. 10.36 Employment agreement between the Registrant and William F. Bradley, dated September 1, 2000 10.37 Employment agreement between the Registrant and Samuel R. Somerhalder, dated September 1, 2000 10.38 Employment agreement between the Registrant and Harry H. Herington, dated September 1, 2000 10.39 Employment agreement between the Registrant and Joseph Nemelka, dated September 1, 2000 10.40 Employment agreement between the Registrant and James B. Dodd, dated September 1, 2000 10.41 Employment agreement between the Registrant and Ray G. Coutermarsh, dated September 1, 2000 10.42 Employment agreement between the Registrant and Pradeep K. Agarwal, dated September 1, 2000 10.43 Employment agreement between the Registrant and Kevin C. Childress, dated September 1, 2000 10.44 Employment agreement between the Registrant and Stephen M. Kovzan, dated September 1, 2000 10.45 Contract Between the State of Tennessee, Department of Finance and Administration and National Information Consortium USA, Inc., dated August 28, 2000. 10.46 Self Funded Electronic Government Services Term Contract between the Department of Administration of the State of Montana and National Information Consortium USA, Inc., doing business in Montana through the subsidiary Montana Interactive, Inc., dated December 21, 2000. 21.1 Subsidiaries of the registrant 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
- ------------------------ (1) Incorporated by reference to Registration Statement on Form S-1, File No. 333-77939 (2) Incorporated by reference to Registration Statement on Form S-1, File No. 333-30872 89 (3) Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission on May 26, 2000 (4) Incorporated by reference to Registration Statement on Form S-8, File No. 333-37000 (b) REPORTS ON FORM 8-K. A report on Form 8-K was filed with the Securities and Exchange Commission on October 13, 2000, with attached Press Release of the Company dated October 6, 2000, announcing, under Item 5, that the Company had completed the restructuring of its eGovernment market and product development operations. The Company stated that it had refined its 2001 outlook and projects that it will likely not generate positive EBITDA until 2002 because of its investments in local portals, its AOL/ Government Guide partnership and continued market and core technology development across its eGovernment businesses. 90 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 30, 2001. NATIONAL INFORMATION CONSORTIUM, INC. BY: /S/ JAMES B. DODD ----------------------------------------- James B. Dodd
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JEFFERY S. FRASER Chairman and Director ------------------------------------------- March 30, 2001 Jeffery S. Fraser President, Chief Executive /s/ JAMES B. DODD Officer and Director ------------------------------------------- (Principal Executive March 30, 2001 James B. Dodd Officer) /s/ KEVIN C. CHILDRESS Chief Financial Officer ------------------------------------------- (Principal Financial March 30, 2001 Kevin C. Childress Officer) /s/ STEPHEN M. KOVZAN Vice President, Financial ------------------------------------------- Operations (Principal March 30, 2001 Stephen M. Kovzan Accounting Officer) /s/ JOHN L. BUNCE, JR. Director ------------------------------------------- March 30, 2001 John L. Bunce, Jr. /s/ DANIEL J. EVANS Director ------------------------------------------- March 30, 2001 Daniel J. Evans /s/ ROSS C HARTLEY Director ------------------------------------------- March 30, 2001 Ross C Hartley /s/ PETE WILSON Director ------------------------------------------- March 30, 2001 Pete Wilson
91 EX-10.35 2 a2041279zex-10_35.txt EXHIBIT 10.35 AGREEMENT AND PLAN OF MERGER by and among NATIONAL INFORMATION CONSORTIUM, INC. a Colorado corporation CHERRY HILLS ACQUISITION SUB, INC. a Colorado corporation INTELLIGENT DECISION TECHNOLOGIES, LTD. a Colorado corporation and THE PRINCIPAL SHAREHOLDER Dated as of September 8, 2000 TABLE OF CONTENTS RECITALS .................................................................. 1 ARTICLE 1 THE MERGER ...................................................... 2 1.1. THE MERGER .......................................................... 2 1.2. CLOSING ............................................................. 2 1.3. EFFECTIVE TIME ...................................................... 2 1.4. EFFECTS OF THE MERGER ............................................... 2 1.5. CHARTER AND BYLAWS .................................................. 2 1.6. DIRECTORS ........................................................... 3 1.7. OFFICERS ............................................................ 3 ARTICLE 2 EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS ................................ 3 2.1. CANCELLATION OF SHARES OF COMMON STOCK .............................. 3 2.2. CONVERSION OF SHARES OF COMPANY COMMON STOCK ........................ 3 2.3. ADDITIONAL PURCHASE PRICE ........................................... 3 2.4. CAPITAL STOCK OF MERGER SUB ......................................... 5 2.5. TAKING OF NECESSARY ACTION; FURTHER ACTION .......................... 5 2.6. COMPANY OPTIONS ..................................................... 5 2.7. ESCROW .............................................................. 5 ARTICLE 3 EXCHANGE OF SHARES .............................................. 6 3.1. EXCHANGE OF CERTIFICATES ............................................ 6 3.2. TRANSFER TAXES; WITHHOLDING ......................................... 8 3.3. DISSENTING SHARES ................................................... 8 3.4. NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK ................. 9 3.5. LOST, STOLEN OR DESTROYED CERTIFICATES .............................. 9 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY ................... 10 4.1. ORGANIZATION ........................................................ 10 4.2. CAPITALIZATION ...................................................... 10 4.3. AUTHORITY RELATIVE TO THIS AGREEMENT ................................ 11
i 4.4. APPROVALS ........................................................... 12 4.5. NO CONFLICTS ........................................................ 12 4.6. FINANCIAL STATEMENTS ................................................ 12 4.7. ABSENCE OF CERTAIN CHANGES .......................................... 13 4.8. LITIGATION .......................................................... 15 4.9. COMPLIANCE WITH LAWS ................................................ 16 4.10. GOVERNMENTAL CONSENT ............................................... 16 4.11. TAXES .............................................................. 17 4.12. EMPLOYEE BENEFIT PLANS; ERISA ...................................... 18 4.13. INTELLECTUAL PROPERTY .............................................. 21 4.14. CONTRACTS AND COMMITMENTS .......................................... 24 4.15. EMPLOYEES .......................................................... 26 4.16. ENVIRONMENTAL MATTERS .............................................. 28 4.17. INSURANCE .......................................................... 29 4.18. TITLE TO PROPERTIES; ENCUMBRANCES .................................. 30 4.19. RELATED PARTY TRANSACTIONS ......................................... 31 4.20. ABSENCE OF CERTAIN PAYMENTS ........................................ 31 4.21. BROKERS OR FINDERS ................................................. 32 4.22. BOOKS AND RECORDS .................................................. 32 4.23. RECEIVABLES; MAJOR CUSTOMERS ....................................... 32 4.24. PAYABLES; MAJOR SUPPLIERS .......................................... 33 4.25. POWERS OF ATTORNEY ................................................. 33 4.26. TAKEOVER STATUTE ................................................... 33 4.27. DUE DILIGENCE INFORMATION .......................................... 33 4.28. DISCLOSURE ......................................................... 33 ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL SHAREHOLDER ............................................ 34 ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB ................................................ 37 6.1. ORGANIZATION ........................................................ 37 6.2. AUTHORITY RELATIVE TO THIS AGREEMENT ................................ 37 6.3. APPROVALS ........................................................... 37
ii 6.4. NO CONFLICTS ........................................................ 38 6.5. FULLY PAID AND NONASSESSABLE ........................................ 38 6.6. BROKERS OR FINDERS .................................................. 38 6.7. FULL DISCLOSURE ..................................................... 38 6.8. PARENT SEC REPORTS .................................................. 38 ARTICLE 7 COVENANTS OF THE COMPANY ........................................ 38 7.1. CONDUCT OF BUSINESS PENDING THE MERGER .............................. 38 7.2. ACCESS AND INVESTIGATION ............................................ 41 7.3. FILINGS AND CONSENTS; COOPERATION ................................... 41 7.4. NOTIFICATION; UPDATES TO COMPANY DISCLOSURE SCHEDULE ................ 42 7.5. NO NEGOTIATION ...................................................... 42 7.6. BEST EFFORTS ........................................................ 43 7.7. CONFIDENTIALITY; PUBLICITY .......................................... 43 7.8. APPROVAL OF MERGER .................................................. 44 7.9. TAKEOVER STATUTES ................................................... 45 ARTICLE 8 COVENANTS OF PARENT ............................................. 45 8.1. NOTIFICATION ........................................................ 45 8.2. BEST EFFORTS ........................................................ 45 8.3. CONFIDENTIALITY; PUBLICITY .......................................... 46 ARTICLE 9 ADDITIONAL AGREEMENTS ........................................... 46 9.1. COMPANY 401(k) PLAN ................................................. 46 9.2. INTEGRATION MATTERS ................................................. 47 9.3. FIRPTA AFFIDAVIT .................................................... 47 9.4. WORKING CAPITAL LOAN ................................................ 47 9.5. OUTSTANDING LOANS ................................................... 47 9.6. INDEMNIFICATION ..................................................... 47 9.7. EMPLOYEE BENEFITS ................................................... 48 9.8. COMPANY MANAGEMENT .................................................. 48 9.9. TAX OPINION ......................................................... 48 9.10. RULE 144 REPORTING ................................................. 48 9.11. EMPLOYEE INCENTIVE POOL ............................................ 48
iii ARTICLE 10 CONDITIONS ..................................................... 49 10.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.......... 49 10.2. CONDITIONS OF OBLIGATIONS OF THE COMPANY ........................... 49 10.3. CONDITIONS OF OBLIGATIONS OF PARENT AND MERGER SUB ................. 50 ARTICLE 11 TERMINATION .................................................... 52 11.1. TERMINATION ........................................................ 52 11.2. TERMINATION PROCEDURES ............................................. 53 11.3. EFFECT OF TERMINATION .............................................. 53 ARTICLE 12 INDEMNIFICATION ................................................ 54 12.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES ......................... 54 12.2. INDEMNIFICATION BY THE COMPANY AND THE SHAREHOLDERS ................ 54 12.3. INDEMNIFICATION BY PARENT .......................................... 56 12.4. NO CONTRIBUTION .................................................... 57 12.5. INTEREST ........................................................... 57 12.6. SETOFF ............................................................. 57 12.7. DEFENSE OF THIRD PARTY CLAIMS ...................................... 57 ARTICLE 13 DEFINITIONS AND INTERPRETATION ................................. 58 13.1. DEFINITIONS ........................................................ 58 13.2. INTERPRETATION ..................................................... 65 ARTICLE 14 MISCELLANEOUS .................................................. 66 14.1. FEES AND EXPENSES .................................................. 66 14.2. AMENDMENT .......................................................... 66 14.3. EXTENSION; WAIVER .................................................. 66 14.4. NOTICES ............................................................ 66 14.5. DESCRIPTIVE HEADINGS ............................................... 68 14.6. COUNTERPARTS ....................................................... 68 14.7. ENTIRE AGREEMENT; ASSIGNMENT ....................................... 68 14.8. GOVERNING LAW ...................................................... 68 14.9. SPECIFIC PERFORMANCE ............................................... 68 14.10. PARTIES IN INTEREST ............................................... 68
iv EXHIBITS Form of Voting Agreement ..................... A Articles of Merger ........................... B Form of Escrow Agreement ..................... C Company Financial Statements ................. D Form of Promissory Note ...................... E Officer's Certificate of the Company ...................................... F Officer's Certificate of Parent .............. G Form of Escrow Agreement for Employee Pool ... H Legal Opinion of Counsel to Parent ........... I Legal Opinion of Counsel to the Company ...... J Form of Shareholders' Agreement .............. K
v AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (this "AGREEMENT") is entered into as of September 8, 2000 by and among NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation ("PARENT"), CHERRY HILLS ACQUISITION SUB, INC., a Colorado corporation and a wholly-owned subsidiary of Parent ("MERGER SUB"), INTELLIGENT DECISION TECHNOLOGIES, LTD., a Colorado corporation (the "COMPANY"), and the shareholder whose name appears on the signature page hereof (the "PRINCIPAL SHAREHOLDER"). CERTAIN CAPITALIZED TERMS USED IN THIS AGREEMENT HAVE THE MEANINGS ASCRIBED TO THEM IN SECTION 13.1 HEREOF. RECITALS A. The board of directors of Parent has approved, and deems it advisable and in the best interests of its shareholders to consummate the merger (the "MERGER") of the Company with and into Merger Sub, upon the terms and subject to the conditions set forth herein; B. The Company Board, having carefully considered the long-term prospects and interests of the Company and the Shareholders, has approved the transactions contemplated hereby and has resolved to recommend to the Shareholders the approval and adoption of this Agreement and the consummation of the transactions contemplated hereby, upon the terms and subject to the conditions set forth herein; C. As a condition and inducement to Parent to enter into this Agreement and incur the obligations set forth herein, concurrently with the execution and delivery of this Agreement, the Principal Shareholder and Revell Horsey shall enter into a voting agreement substantially in the form of EXHIBIT A attached hereto (the "VOTING AGREEMENT") pursuant to which, among other things, such Principal Shareholder and Revell Horsey agree to vote shares of Company Common Stock held by them in favor of approval and adoption of the Merger and this Agreement; D. The boards of directors of each of Parent and Merger Sub, and the sole shareholder of Merger Sub have approved this Agreement and the transactions contemplated hereby in accordance with the provisions of the Colorado Business Corporation Act (the "CBCA"), and the Company Board has approved this Agreement and the transactions contemplated hereby in accordance with the provisions of the CBCA; and E. For United States federal income tax purposes, the Merger is intended to qualify as a "reorganization" under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "CODE"). NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1 ARTICLE 1 THE MERGER 1.1. THE MERGER. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the applicable provisions of the CBCA, the Company shall be merged with and into Merger Sub at the Effective Time. Following the Merger, the separate corporate existence of the Company shall cease and Merger Sub shall continue as the surviving corporation (the "SURVIVING CORPORATION") and shall succeed to and assume all the rights, properties, liabilities and obligations of the Company in accordance with the CBCA. 1.2. CLOSING. The closing of the Merger (the "CLOSING") shall take place at 10:00 a.m., Pacific time, on a date to be specified by the parties, which shall be no later than the third business day after satisfaction or waiver of all of the conditions set forth in Article 8 of this Agreement (the "CLOSING DATE"), at the offices of Morrison & Foerster LLP, 425 Market Street, San Francisco, California, unless another time, date or place is agreed to in writing by the parties hereto. 1.3. EFFECTIVE TIME. Concurrently with the Closing, the parties hereto shall cause the Merger to be consummated by filing articles of merger, in substantially the form attached hereto as EXHIBIT B (the "ARTICLES OF MERGER"), with the Secretary of State of the State of Colorado (the "SECRETARY OF STATE"), in accordance with the relevant provisions of applicable law (the time of acceptance by the Secretary of State of such filing, or such later time agreed to by the parties and set forth in the Articles of Merger, being referred to herein as the "EFFECTIVE TIME"). 1.4. EFFECTS OF THE MERGER. The Merger shall have the effects set forth in the applicable provisions of the CBCA. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, powers and franchises of Merger Sub and the Company shall vest in the Surviving Corporation, and all debts, liabilities, obligations, restrictions, disabilities and duties of Merger Sub and the Company shall become the debts, liabilities, obligations, restrictions, disabilities and duties of the Surviving Corporation. 1.5. CHARTER AND BYLAWS. (a) The articles of incorporation of Merger Sub, as in effect immediately prior to the Effective Time, shall be the articles of incorporation of the Surviving Corporation until thereafter amended as provided by law and such articles of incorporation and bylaws of the Surviving Corporation; PROVIDED, that Article I of the articles of incorporation shall be amended as of the Effective Time to provide that "The name of the corporation is Intelligent Decision Technologies, Ltd." (b) The bylaws of Merger Sub, as in effect immediately prior to the Effective Time, shall be the bylaws of the Surviving Corporation until thereafter 2 amended as provided by law and such bylaws and the articles of incorporation of the Surviving Corporation. 1.6. DIRECTORS. The directors of Merger Sub immediately prior to the Effective Time shall be the directors of the Surviving Corporation until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be. 1.7. OFFICERS. The officers of the Company immediately prior to the Effective Time shall be the officers of the Surviving Corporation until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be. ARTICLE 2 EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS 2.1. CANCELLATION OF SHARES OF COMMON STOCK. At the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of common stock, no par value per share, of the Company (the "COMPANY COMMON STOCK") or any shares of capital stock of Merger Sub, all shares of capital stock held by the Company as treasury stock immediately prior to the Effective Time (collectively, the "CANCELLED SHARES") and all shares of capital stock of the Company held by Parent or Merger Sub shall automatically be cancelled and retired and cease to exist, and no consideration or payment shall be delivered therefor or in respect thereto. 2.2. CONVERSION OF SHARES OF COMPANY COMMON STOCK. At the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of Company Common Stock, according to each Shareholder's respective ownership interest in the Company immediately prior to the Effective Time, the Shareholders (other than the holders of Dissenting Shares and Cancelled Shares) shall receive the initial consideration set forth in this Section 2.2 and the additional consideration set forth in Section 2.3 below (collectively, the "MERGER CONSIDERATION"). The initial consideration (the "FIRST INSTALLMENT") shall consist of (a) $500,000 in cash (less the fees and expenses of legal counsel incurred by the Company in connection with the Merger and the accounting fees and expenses of BDO Seidman LLP incurred by the Company in connection with the Merger; provided, however, that the costs of the tax opinion referred to in SECTION 10.2(f) hereof shall be deducted only to the extent such costs exceed $4,000) paid at the Effective Time and (b) a number of shares of Parent Common Stock (as adjusted for stock splits, stock dividends, recapitalizations or the like) equal to the quotient of $1,750,000 divided by the average of the closing sale price of Parent Common Stock on the Nasdaq National Market on each of the ten trading days immediately preceding (but not including) the Closing Date (the "CLOSING SHARE PRICE"). 2.3. ADDITIONAL PURCHASE PRICE. 3 Parent shall pay additional merger consideration (the "CONTINGENT CONSIDERATION") as follows: (a) At April 1, 2001 or on the first business day of any quarter thereafter until December 31, 2003 (each, an "EBITDA PAYMENT DATE") in which cumulative Business EBITDA (as defined below) exceeds $275,000, Parent shall issue to the Shareholders a number of shares of Parent Common Stock (as adjusted for stock splits, stock dividends, recapitalizations or the like) equal to the quotient of $700,000 divided by the Closing Share Price plus all dividends or distributions on Parent Common Stock with a record date on or after the Closing Date (the "INITIAL EBITDA PAYMENT"). "BUSINESS EBITDA" means earnings before interest, taxes, depreciation and amortization reflected on Parent's financial statements that were derived by Parent from the operation of the business of the Surviving Corporation, determined in accordance with generally accepted accounting principles applied on a consistent basis. For the purposes of determining Business EBITDA, Parent shall not allocate to the business any overhead, accounting or legal expenses that are not incurred in the operation of the business. Business EBIDTA shall not include any non-cash compensation charges, any capitalization of expenses of the Merger or of the organization of Merger Sub, any extraordinary items (i.e. only operating income and expenses will be included), any charges or costs reimbursed or indemnified by the Shareholders, including under the Escrow Agreement or any amounts reimbursed to Parent or the Surviving Corporation pursuant to the Escrow Agreement for Employee Pool. (b) Following the Initial EBITDA Payment that is paid pursuant Section 2.3(a) and on each EBITDA Payment Date thereafter until December 31, 2003, Parent shall issue to the Shareholders a number of shares of Parent Common Stock determined by the following formula: ((X-Y)) * $1,750,000 divided by the Closing Share Price ---------- ($700,000) where (X) means cumulative Business EBITDA from and including January 1, 2001 and (Y) means cumulative Business EBITDA as of the prior EBITDA Payment Date. (c) Notwithstanding anything herein to the contrary, the maximum amount of Contingent Consideration payable by Parent pursuant to this Section 2.3 in shares of Parent Common Stock shall not exceed $1,750,000 in total value as measured by the Closing Share Price. (d) Notwithstanding anything herein to the contrary, Parent shall pay the Contingent Consideration upon a Change in Control of Parent or the Surviving Corporation. For purposes of this Agreement, a "CHANGE IN CONTROL" shall be deemed to occur if Parent or the Surviving Corporation shall sell, convey or otherwise dispose of or encumber all or substantially all of its assets or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any other 4 transaction or series of related transactions in which more than 50% of the voting power of Parent or the Surviving Corporation is disposed of; PROVIDED, HOWEVER, that this Section 2.3(d) shall not apply to a merger effected exclusively for the purpose of changing the domicile of Parent or the Surviving Corporation. (e) Parent shall manage and operate the Company and the business as a separate business unit after the Closing, and shall maintain a financial reporting system that will separately account for the revenue and expenses of the business and the Company through December 31, 2003. 2.4. CAPITAL STOCK OF MERGER SUB. No shares of Merger Sub stock will be issued directly or indirectly in the Merger. Each share of capital stock of Merger Sub issued and outstanding immediately prior to the Effective Time shall be unaffected by the Merger. 2.5. TAKING OF NECESSARY ACTION; FURTHER ACTION. If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of the Company and Merger Sub, the officers and directors of the Surviving Corporation shall be fully authorized in the name of either or both of the Company or Merger Sub or otherwise to take, and Parent and the Company shall cause such officers and directors to take, all such lawful and necessary action, so long as such action is not inconsistent with the Agreement. 2.6. COMPANY OPTIONS. (a) Each option to purchase shares of Company Common Stock (each a "COMPANY OPTION") issued under one of the Company's benefit plans or otherwise (the "COMPANY BENEFIT PLANS") outstanding immediately prior to the Effective Time that (i) has vested but has not been exercised or (ii) has not vested shall be terminated and the holder of these Company Options will have no right to receive any of the Merger Consideration. (b) Except as may be otherwise agreed to by Parent and the Company or as otherwise contemplated or required to effectuate this Section 2.7, the Company Benefit Plans shall terminate as of the Effective Time and the provisions in any other plan, program or arrangement providing for the issuance or grant of any other interest in respect of Company Common Stock shall be terminated as of the Effective Time. (c) The Company shall take all necessary actions to provide that as of the Effective Time no holder of Company Options will have any right to receive shares of common stock of the Surviving Corporation upon exercise of any such Company Option. 2.7. ESCROW. (a) As security for the indemnification obligations set forth herein, promptly following the Effective Time, Parent will deliver to an escrow agent (the 5 "ESCROW AGENT"), from the shares of Parent Common Stock otherwise deliverable pursuant to Sections 2.2, an amount equal to 50% of such shares (the "ESCROW FUND"). Such delivery and payment to the Escrow Agent shall be under an Escrow Agreement (the "ESCROW AGREEMENT") in substantially the form attached as EXHIBIT C between Parent, the Escrow Agent and the person representing and acting on behalf of the Shareholders (the "SHAREHOLDER REPRESENTATIVE") dated on or prior to the Closing Date, and shall be made on behalf of each Shareholder pro rata in proportion to the total number of shares of Parent Common Stock to be received by such Shareholder pursuant to Sections 2.2. (b) On the first annual anniversary of the Closing Date, the Escrow Agent will deliver 60% of the Escrow Fund and any proceeds thereon to the Shareholder Representative on behalf of the Shareholders to an address or account in the United States designated by the Shareholder Representative to the Escrow Agent in writing at least ten business days prior to such date. The Escrow Agent may withhold from such delivery the equivalent of any amounts then in dispute relating to indemnification obligations arising under this Agreement or any other Transactional Agreement. (c) On the second annual anniversary of the Closing Date, the Escrow Agent will deliver all shares of Parent Common Stock and proceeds thereof remaining in the Escrow Fund to the Shareholder Representative on behalf of the Shareholders to an address or account in the United States designated by the Shareholder Representative to the Escrow Agent in writing at least ten business days prior to such date. The Escrow Agent may withhold from such delivery the equivalent of any amounts then in dispute relating to indemnification obligations arising under this Agreement or any other Transactional Agreement; PROVIDED, that the withheld amount, to the extent not applied in satisfaction of indemnification obligations, shall be paid to the Shareholder Representative on behalf of the Shareholders as described above promptly upon resolution of such dispute. Upon receipt of the remaining amount of the Escrow Fund, the Shareholder Representative shall distribute the applicable amount of Parent Common Stock and proceeds thereof to the Shareholders in accordance with their percentage contribution to the Escrow Fund. (d) Subject to Section 12.2, nothing in this Section 2.7 shall be construed as limiting the liability of the Shareholders to the property in the Escrow Fund, nor shall such property be considered as liquidated damages for any breach under this Agreement or any other Transactional Agreement. ARTICLE 3 EXCHANGE OF SHARES 3.1. EXCHANGE OF CERTIFICATES. (a) Subject to Section 2.7, at or within two business days of the Effective Time, Parent shall deposit, or cause to be deposited with the Exchange Agent for the benefit of holders of shares of Company Common Stock, the First Installment. 6 (b) At or promptly following the Effective Time, the Surviving Corporation shall cause the Exchange Agent to send by courier or overnight delivery (and to make available for collection by hand) to each holder of record of a certificate or certificates, which immediately prior to the Effective Time represented outstanding shares of Company Common Stock (the "CERTIFICATES"), (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent and that shall be in the form and have such other provisions as Parent and the Company may reasonably specify) (the "LETTER OF TRANSMITTAL"); and (ii) instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration. Upon surrender of a Certificate for cancellation to the Exchange Agent, together with a Letter of Transmittal, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration for each share of Company Common Stock formerly represented by such Certificate, to be sent by courier or overnight delivery (or made available for collection by hand if so elected by the surrendering holder) within three business days of receipt thereof (but in no case prior to the Effective Time), and the Certificate so surrendered shall be forthwith cancelled. The Exchange Agent shall accept such Certificates upon compliance with such reasonable terms and conditions as the Exchange Agent may impose to effect an orderly exchange thereof in accordance with normal exchange practices. No interest shall be paid or accrued for the benefit of holders of the Certificates on the Merger Consideration payable upon the surrender of the Certificates. (c) No holder of any unsurrendered Certificate shall receive the Merger Consideration until such Certificate is surrendered in accordance with this Article 3. If any of the Merger Consideration is paid in shares of Parent Common Stock, subject to the effect of applicable laws, there shall be paid, without interest, to the Person in whose name the shares of Parent Common Stock representing such securities are registered (i) at the time of such surrender, the amount of any cash payable in lieu of fractional shares of Parent Common Stock to which such holder is entitled pursuant to Section 3.1(d) hereof and the proportionate amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to shares of Parent Common Stock issued pursuant to Section 2.2; and (ii) at the appropriate payment date or as promptly as practicable thereafter, the proportionate amount of dividends or other distributions with a record date after the Effective Time but prior to the payment of the First Installment. (d) Notwithstanding anything herein to the contrary, no fraction of a share of Parent Common Stock will be issued and no dividend or other distribution, stock split or interest with respect to shares of Parent Common Stock shall relate to any fractional share of Parent Common Stock, and such fractional interest shall not entitle the owner thereof to vote or to any rights as a security holder of Parent. In lieu of any such fractional security, each holder of shares of Company Common Stock otherwise entitled to a fraction of a share of Parent Common Stock (after aggregating all fractional shares of Parent Common Stock to be received by such holder) shall receive from Parent an amount of cash (rounded to the nearest whole cent) equal to the product of (i) such fraction, multiplied by (ii) the Closing Share Price. 7 (e) Any portion of the First Installment deposited with the Exchange Agent pursuant to Section 3.1(a) (the "EXCHANGE FUND") that remains undistributed to the holders of the Certificates for three months after the Effective Time shall be delivered to Parent, upon demand, and any holders of shares of Company Common Stock prior to the Merger who have not theretofore complied with this Article 3 shall thereafter look for payment of their claim, as general creditors thereof, only to Parent for their claim for the First Installment. (f) None of Parent, Merger Sub, the Company or the Exchange Agent shall be liable to any Person in respect of any amounts held in the Exchange Fund (and any cash, dividends and other distributions payable in respect thereof) delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (g) The Exchange Agent shall invest the cash portion of the First Installment included in the Exchange Fund as directed by Parent on a daily basis. Any interest and other income resulting from such investments shall be paid to Parent. Nothing contained in this Section 3.1(g) shall relieve Parent or the Exchange Agent from making the payments required by this Article 3 to be made to the holders of shares of Company Common Stock. 3.2. TRANSFER TAXES; WITHHOLDING. If any certificate for a share of Parent Common Stock is to be issued to a Person (other than the Person in whose name the Certificate surrendered in exchange therefor is registered), it shall be a condition of such exchange that the Certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer and that the Person requesting such exchange shall pay to the Exchange Agent any transfer or other Taxes required by reason of the payment of the Merger Consideration to a Person other than the registered holder of the Certificate so surrendered, or shall establish to the satisfaction of the Exchange Agent that such Tax either has been paid or is not applicable. Parent or the Exchange Agent shall be entitled to deduct and withhold from the shares of Parent Common Stock (or cash in lieu of fractional share of Parent Common Stock) otherwise payable pursuant to this Agreement to any holder of shares of Company Common Stock such amounts as Parent or the Exchange Agent are required to deduct and withhold under the Code or any provision of state, local or foreign Tax law with respect to the making of such payment. To the extent that amounts are so withheld by Parent or the Exchange Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Shareholders in respect of whom such deduction and withholding was made by Parent or the Exchange Agent. Parent shall remit such withheld amounts to the appropriate Governmental Entity. 3.3. DISSENTING SHARES. (a) "DISSENTING SHARES" shall have the meaning set forth in Article 113 of the CBCA. (b) Notwithstanding anything herein to the contrary, Dissenting Shares shall not be converted into or represent a right to receive the Merger Consideration 8 pursuant to Section 2.2 hereof, but the holder thereof shall be entitled to only such rights as are granted by the CBCA. (c) If any Shareholder who demands appraisal of such holder's shares of Company Common Stock under the CBCA effectively withdraws or loses (through failure to perfect or otherwise) such holder's right to appraisal, then as of the Effective Time or the occurrence of such event, whichever occurs later, such holder's shares of Company Common Stock shall automatically be converted into and represent only the right to receive the Merger Consideration as provided in Section 2.2 hereof, without interest, upon surrender of the Certificate(s) representing such shares of Company Common Stock pursuant to Section 3.1 hereof. (d) The Company shall give Parent (i) prompt notice of any written demands for appraisal or payment of the fair value of any shares of Company Common Stock, withdrawals of such demands, and any other instruments served on the Company pursuant to the CBCA received by the Company, and (ii) the opportunity to participate in all negotiations and proceedings with respect to demands for appraisal under the CBCA. Except with the prior written consent of Parent, the Company shall not voluntarily make any payment with respect to any demands for appraisal, settle or offer to settle any such demands. 3.4. NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. The Merger Consideration shall be deemed to have been issued (and paid) in full satisfaction of all rights pertaining to the shares of Company Common Stock theretofore represented by the Certificates surrendered for exchange, and there shall be no further registration of transfers on the records of the Surviving Corporation of shares of Company Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, the Certificates are presented to the Surviving Corporation or the Exchange Agent for any reason, they shall be canceled and exchanged as provided in this Article 3. 3.5. LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed Certificates, upon the making of an affidavit of that fact by the holder thereof, the First Installment and such other Merger Consideration as may be required pursuant to this Agreement; PROVIDED, HOWEVER, that Parent or the Surviving Corporation may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Parent, the Surviving Corporation or the Exchange Agent with respect to the Certificates alleged to have been lost, stolen or destroyed. 9 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company and the Principal Shareholder hereby represent and warrant to each of Parent and Merger Sub, subject to such exceptions as are specifically disclosed in the disclosure schedule (the "COMPANY DISCLOSURE SCHEDULE") delivered herewith, dated as of the date hereof (which exceptions shall be deemed to qualify the specific numbered and lettered sections and subsections hereof identified in the Company Disclosure Schedule), and signed by an appropriate officer of the Company, as follows: 4.1. ORGANIZATION. (a) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its business as now being conducted and as proposed to be conducted. The Company is duly qualified, licensed or admitted to do business and is in good standing in each jurisdiction in which the ownership, leasing or operation of their assets and properties makes such qualification, licensing or admission necessary, except for such failures to be so duly qualified, licensed or admitted and in good standing that could not reasonably be expected to have a Company Material Adverse Effect. Section 4.1(a) of the Company Disclosure Schedule sets forth each jurisdiction where the Company is so qualified, licensed or admitted to do business and separately lists each other jurisdiction in which the Company owns, leases or operates its assets and properties or conducts business. The Company has heretofore delivered to Parent accurate and complete copies of its articles of incorporation (the "COMPANY ARTICLES") and Bylaws as currently in effect. (b) The Company does not own any equity interests in or control, directly or indirectly, any corporation, partnership, trust, joint venture, association, limited liability company or other business entity. 4.2. CAPITALIZATION. (a) The authorized capital stock of the Company consists of 100,000 shares of Company Common Stock, of which 37,307 shares are issued and outstanding as of the date hereof. As of the date hereof, (i) no shares of Company Common Stock were issued and held in the treasury of the Company and (ii) 3,687 shares of Company Common Stock are reserved for issuance pursuant to outstanding Company Options. All of the outstanding shares of Company Common Stock are, and all shares of Company Common Stock which may be issued pursuant to the exercise of outstanding Company Options will be, when issued in accordance with the respective terms thereof, duly authorized, validly issued, fully paid and non-assessable, free of any preemptive or any other similar rights. All of the outstanding shares of Company Common Stock have been, and all shares of Company Common Stock which may be issued pursuant to the 10 exercise of outstanding Company Options will be issued in compliance with all applicable federal and state corporate and securities laws. (b) As of the date hereof, (i) except as described in Section 4.2(a),there are no shares of capital stock of the Company authorized, issued or outstanding; (ii) there are no existing options, warrants, calls, preemptive rights, indebtedness having general voting rights or debt convertible into securities having such rights ("VOTING DEBT") or subscriptions or other rights, agreements, arrangements or commitments of any character, relating to the issued or unissued capital stock of the Company obligating the Company to issue, transfer or sell or cause to be issued, transferred or sold any shares of capital stock or Voting Debt of, or other equity interest in, the Company or securities convertible into or exchangeable for such shares or equity interests, or obligating the Company to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement, arrangement or commitment and (iii) there are no outstanding contractual obligations of the Company to repurchase, redeem or otherwise acquire any shares of capital stock of the Company, or to provide funds to make any investment (in the form of a loan, capital contribution or otherwise) in any other entity. (c) There are no voting trusts or other agreements or understandings to which the Company is a party or of which the Company has knowledge with respect to the voting of Company Common Stock. (d) Following the Effective Time, no holder of Company Options will have any right to receive shares of common stock of the Surviving Corporation upon exercise of Company Options. (e) No Indebtedness of the Company contains any restriction upon (i) the prepayment of any of such Indebtedness, (ii) the incurrence of Indebtedness by the Company or (iii) the ability of the Company to grant any Lien on its properties or assets. 4.3. AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has all requisite corporate power and authority to execute and deliver this Agreement and the other Transactional Agreements, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the other Transactional Agreements, the performance of the Company's obligations hereunder and thereunder and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized and approved by the Company Board, and no other corporate proceedings on the part of the Company are necessary to authorize the execution, delivery and performance of this Agreement and the other Transactional Agreements or to consummate the transactions contemplated hereby and thereby, other than, with respect to the Merger, the approval and adoption of this Agreement and the Merger by the Company Required Vote. Shareholders sufficient to assure the receipt of the Company Required Vote to approve the Merger have duly executed and delivered the Shareholders' Agreement. This Agreement and the other Transactional Agreements have been duly and validly executed and delivered by the Company and, assuming the due authorization, execution and delivery hereof and thereof by Parent and Merger Sub, constitute legal, valid and binding 11 obligations of the Company enforceable against the Company in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar laws relating to the enforcement of creditors' rights generally and by general principles of equity. 4.4. APPROVALS. Except for the filing and recordation of the Articles of Merger with the Secretary of State in accordance with the requirements of the CBCA, no notice to, filing with, and no permit, authorization, consent or approval of, any Governmental Entity is necessary for the consummation by the Company of the transactions contemplated by this Agreement. 4.5. NO CONFLICTS. The execution and delivery of this Agreement and the other Transactional Agreements by the Company do not, and the performance by the Company of its obligations hereunder and thereunder and consummation of the transactions contemplated hereby and thereby do not or will not: (a) conflict with or result in a violation or breach of any of the terms, conditions or provisions of the Company Articles or Bylaws; (b) subject to obtaining the consents, approvals and actions, making the filings and giving the notices disclosed in Section 4.5 of the Company Disclosure Schedule, if any, conflict with or result in a violation or breach of Legal Requirement or Order applicable to the Company or any of its assets and properties; or (c) (i) result in a violation or breach of, (ii) constitute a default (or an event that, with or without notice or lapse of time or both, would constitute a default) under, (iii) require the Company to obtain any consent, approval or action of, make any filing with or give any notice to any Person as a result or under the terms of, (iv) result in the loss of any material benefit under or result in the payment of any amount with respect to or result in or give rise to any Person any right of termination, cancellation, acceleration or modification in or with respect to or (v) result in the creation or imposition of (or the obligation to create or impose) any mortgage, pledge, charge, security interest, claim or encumbrance of any kind (collectively, a "LIEN")) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, agreement or other instrument or obligation to which the Company is a party or by which the Company or any of their respective properties or assets may be bound. 4.6. FINANCIAL STATEMENTS. (a) The Company has delivered to Parent the unaudited balance sheet of the Company as of June 30, 2000, and the related unaudited statements of results of operations and statements of cash flows for the six month period then ended, which are attached hereto as EXHIBIT D (collectively, the "COMPANY FINANCIAL STATEMENTS"). 12 (b) The Company Financial Statements delivered to Parent are correct and complete in all material respects and have been prepared in accordance with United States generally accepted accounting principles ("US GAAP") applied on a consistent basis throughout the period indicated (subject to normal year-end adjustments, which adjustments shall not be material, either individually or in the aggregate, and the absence of all U.S. GAAP required footnotes). The Company Financial Statements present fairly and accurately the financial condition and operating results of the Company as of the dates and during the periods indicated therein, subject to normal year-end adjustments, which adjustments shall not be material, either individually or in the aggregate. (c) As of the date of the Company Financial Statements, (i) the Company had no liabilities of any nature (matured or unmatured, fixed or contingent) required by US GAAP to be provided for in the Company Financial Statements that were not provided for therein, (ii) the Company had no material liabilities of any nature (matured or unmatured, fixed or contingent) not required by US GAAP to be provided for in the Company Financial Statements and (iii) all reserves established by the Company and set forth in the Company Financial Statements were adequate for the purposes for which they were established. (d) The Company has no liabilities in excess of $20,000, individually or in the aggregate, except for: (i) liabilities identified as such in the "liabilities" column of the Company Financial Statements; (ii) accounts payable and liabilities (of the type required to be reflected as current liabilities in the "liabilities" column of a balance sheet prepared in accordance with US GAAP) incurred by the Company in the ordinary course of business since the date of the Company Financial Statement; and (iii) costs and expenses paid or payable to legal counsel and BDO Seidman LLP which will reduce the amount of the First Installment pursuant to Section 2.2. 4.7. ABSENCE OF CERTAIN CHANGES. Since June 30, 2000: (a) the Company has not incurred any liabilities outside of the ordinary course of business and consistent with past practice in excess of $25,000 or as described in Section 4.6(d)(iii); (b) the Company has not declared, set aside or paid any dividends on or made any other distributions (whether in cash, stock or property) in respect of any capital stock, or effected or approved any split, combination or reclassification of any capital stock, or issued or authorized the issuance of any other securities in respect of, in lieu of or in substitution for shares of capital stock, other than upon the exercise of a Company Option, or repurchased, redeemed or otherwise acquired, directly or indirectly, any shares of Company Common Stock; 13 (c) except for the issuance of shares of Company Common Stock upon exercise or conversion of any Company Option outstanding prior to the date hereof, the Company has not issued, granted, delivered, sold or authorized or proposed to issue, grant, deliver or sell, or purchased or proposed to purchase, any shares of capital stock, or securities convertible or exchangeable for shares of capital stock, nor has there been any modification or amendment of the rights of any holder of any outstanding shares of capital stock (including to reduce or alter the consideration to be paid to the Company upon the exercise of any outstanding Company Option), nor has there been any agreement, arrangement, plan or understanding with respect to any such modification or amendment; (d) there has not been any amendment to the Company Articles or Bylaws; (e) the Company has not made or agreed to any capital expenditures or commitments for additions to property, plant or equipment constituting capital assets; (f) the Company has not incurred any Indebtedness or guaranteed any Indebtedness in excess of $10,000; (g) the Company has not granted or approved any increase in salary, rate of commissions, rate of consulting fees or any other compensation of, including grant or accrual of any bonus, incentive compensation, service award or other similar benefit to, any current officer, director, employee, independent contractor or consultant of the Company; (h) the Company has not made or changed any material election in respect of Taxes, adopted or changed any accounting method in respect of Taxes, entered into any tax allocation agreement, tax sharing agreement, tax indemnity agreement or closing agreement, settlement or compromise of any claim or assessment in respect of Taxes, or consented to any extension or waiver of the limitation period applicable to any claim or assessment in respect of Taxes with any Governmental Entity; (i) the Company has not sold, transferred or otherwise disposed of any of its properties and assets (real, personal or mixed, tangible or intangible), except in the ordinary course of business and consistent with past practice; (j) there has not occurred any event, condition, change or development that has had or would reasonably be expected to have a Company Material Adverse Effect; (k) the Company has not changed any of its methods of accounting or accounting practices in any respect; (l) the Company has not failed to pay or satisfy any of its material liabilities; 14 (m) there has not occurred any actual or overtly threatened termination of any material customer account or group of accounts; (n) the Company has not entered into any transaction with any officer, director or shareholder or any affiliate or associate of any of its officers, directors or shareholders; (o) the Company has not made or agreed to make write-off or write-down any determination to write off or write-down, or revalue, any of its assets and properties(real, personal or mixed, tangible or intangible), or change in any reserves or liabilities associated therewith, in excess of $10,000; (p) the Company has not made any loan or advance to any Person; or (q) the Company has not entered into or approved any contract, arrangement or understanding to do, engage in or cause or having the effect of any of the foregoing. 4.8. LITIGATION. (a) There is no pending Proceeding, and, to the Company's knowledge, no Person has threatened to commence any Proceeding: (i) that involves the Company or that otherwise relates to or likely would adversely affect the Company's business or any of the assets owned or used by the Company (whether or not the Company is named as a party thereto); or (ii) that challenges, or that may have the effect of preventing, delaying, making illegal or otherwise interfering with, any of the transactions contemplated by this Agreement and the other Transactional Agreements. (b) To the Company's knowledge, no event has occurred, and no claim, dispute or other condition or circumstance exists, that likely would directly or indirectly give rise to or serve as a basis for the commencement of any such Proceeding. (c) No Proceeding has ever been commenced by or against the Company, and no Proceeding otherwise involving or relating to the Company has been pending or, to the Company's knowledge, has been threatened at any time. (d) There is no Order to which the Company, or any of the assets owned or used by the Company, is subject. No officer or employee of the Company is subject to any Order that prohibits such officer or employee from engaging in or continuing any conduct, activity or practice relating to the Company's business. (e) There is no Order or, to the Company's knowledge, proposed Order that, if issued or otherwise put into effect, (i) may have a Company Material Adverse Effect or a material adverse effect on the Company's ability to comply with or 15 perform any covenant or obligation under this Agreement and the other Transactional Agreements, or (ii) may have the effect of preventing, delaying, making illegal or otherwise interfering with any of the transactions contemplated hereby and thereby. 4.9. COMPLIANCE WITH LAWS. (a) The Company has at all times complied with each Legal Requirement that is applicable to it or to the conduct of its business or the ownership or use of any of its assets. (b) To the Company's knowledge, no event has occurred, and no condition or circumstance exists, that likely would (with or without notice or lapse of time) constitute or result directly or indirectly in a violation by the Company of, or a failure on the part of the Company to comply with, any Legal Requirement. (c) The Company has not received, at any time, any notice or other communication (in writing or otherwise) from any Governmental Entity, or any other Person, regarding (i) any actual, alleged, possible or potential violation of, or failure to comply with, any Legal Requirement, or (ii) any actual, alleged, possible or potential obligation on the part of the Company to undertake, or to bear all or any portion of the cost of, any cleanup or any remedial, corrective or response action of any nature. (d) To the Company's knowledge, no Governmental Entity has proposed or is considering any Legal Requirement that, if adopted or otherwise put into effect would specifically affect the Company and (i) may have a Company Material Adverse Effect or on the ability of the Company to comply with or perform any covenant or obligation under this Agreement and the other Transactional Agreements, or (ii) may have the effect of preventing, delaying, making illegal or otherwise interfering with any of the transactions contemplated hereby and thereby. 4.10. GOVERNMENTAL CONSENT. (a) Section 4.10 of the Company Disclosure Schedule identifies: (i) each Governmental Authorization that is held by the Company; and (ii) each other Governmental Authorization that, to the Company's knowledge, is held by any of the Company's employees and is used in connection with the Company's business. (b) The Company has delivered to Parent accurate and complete copies of all of the Governmental Authorizations identified in Section 4.10 of the Company Disclosure Schedule, including all renewals thereof and all amendments thereto. Each Governmental Authorization identified or required to be identified in Section 4.10 of the Company Disclosure Schedule is valid and in full force and effect. 16 (c) The Governmental Authorizations identified in Section 4.10 of the Company Disclosure Schedule constitute all of the Governmental Authorizations necessary to (i) enable the Company to conduct its business in the manner in which its business is currently being conducted and (ii) permit the Company to own and use its assets in the manner in which they are currently owned and used. 4.11. TAXES. (a) Each Tax required to have been paid, or claimed by any Governmental Entity to be payable, by the Company (whether pursuant to any Tax Return or otherwise) has been duly paid in full on a timely basis. Any Tax required to have been withheld or collected by the Company has been duly withheld and collected, and (to the extent required) each such Tax has been paid to the appropriate Governmental Entity. (b) Section 4.11(b) of the Company Disclosure Schedule accurately identifies all Tax Returns required to be filed by or on behalf of the Company with any Governmental Entity ("COMPANY RETURNS") with respect to any taxable period ending on or before the Closing Date. All Company Returns (i) have been, or will be, filed when due, and (ii) have been, or will be when filed, accurately and completely prepared in full compliance with all applicable Legal Requirements. All amounts shown on the Company Returns to be due on or before the Closing Date, and all amounts otherwise payable in connection with the Company Returns on or before the Closing Date, have been or will be paid on or before the Closing Date. The Company has delivered to Parent accurate and complete copies of all Company Returns filed by the Company. (c) The Company's liability for unpaid Taxes for all periods ending on or before the date of the Company Financial Statements, including any liability for Taxes assumed under contract, does not, in the aggregate, exceed the amount of the current liability accruals for Taxes (excluding reserves for deferred taxes) reported in the Company Financial Statements. The Company will establish, in the ordinary course of business, reserves adequate for the payment of all Taxes for the period from December 31, 1999 through the Closing Date, and the Company will disclose the dollar amount of such reserves to Parent on or prior to the Closing Date. (d) Section 4.11(d) of the Company Disclosure Schedule accurately identifies each examination or audit of any Company Return that has been conducted by any Governmental Entity. The Company has delivered to Parent accurate and complete copies of all audit reports and similar documents relating to Company Returns. No extension or waiver of the limitation period applicable to any of the Company Returns has been granted (by the Company or any other Person), and no such extension or waiver has been requested from the Company. (e) No claim or other Proceeding is pending or has been threatened against or with respect to the Company in respect of any Tax. There are no unsatisfied liabilities for Taxes (including liabilities for interest, additions to tax and penalties thereon and related expenses) with respect to any notice of deficiency or similar 17 document received by the Company. The Company has not entered into or become bound by any agreement or consent pursuant to Section 341(f) of the Code. The Company has not been, and will not be, required to include any adjustment in taxable income for any tax period (or portion thereof) pursuant to Section 481 or 263A of the Code or any comparable provision under state or foreign Tax laws as a result of transactions or events occurring, or accounting methods employed, prior to the Closing. The Company has never been in a "consolidated group" within the meaning of Treasury Regulations Section 1.1502-1(h), and is not liable for Taxes incurred by any individual, trust, corporation, partnership or any other Person either as a transferee, pursuant to Treasury Regulations Section 1.1502-6, or pursuant to any other provision of federal, territorial, state, local or foreign law or regulations. The Company is not a party to any joint venture, partnership or other arrangement or contract which could be treated as a partnership for United States federal income tax purposes. (f) There is no agreement, plan, arrangement or other contract covering any employee or independent contractor or former employee or independent contractor of the Company that, individually or collectively, could give rise directly or indirectly to the payment of any amount that would not be deductible pursuant to Section 280G or Section 162 of the Code. The Company is not, and has never been, a party to or bound by any tax indemnity agreement, tax sharing agreement, tax allocation agreement or similar contract, and has not otherwise assumed the tax liability of any other Person under contract. (g) The Company is not a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code and has not been a United States real property holding corporation within the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. (h) The Company has no net operating losses or other tax attributes presently subject to limitation under Code Sections 382, 383 or 384, or the federal consolidated return regulations. (i) The Company is in compliance with the terms and conditions of any applicable tax exemptions, tax agreements or tax orders of any Governmental Entity to which it is subject or benefits of which have been claimed, and the transactions contemplated by this Agreement will not have any adverse effect on such compliance. (j) The Company has not been a "distributing corporation" (within the meaning of Section 355(c)(2) of the Code) with respect to a transaction described in Section 355 of the Code within the 3-year period ending as of the date of this Agreement. 4.12. EMPLOYEE BENEFIT PLANS; ERISA. (a) Section 4.12(a) of the Company Disclosure Schedule contains a true and complete list of each employment, bonus, deferred compensation, incentive compensation, stock purchase, stock option, stock appreciation right or other stock-based incentive, severance, change-in-control, or termination pay, hospitalization or other 18 medical, disability, life or other insurance, supplemental unemployment benefits, profit-sharing, pension, or retirement plan, program, agreement or arrangement and each other employee benefit plan, program, agreement or arrangement, sponsored, maintained or contributed to or required to be contributed to by the Company, or by any trade or business, whether or not incorporated (an "ERISA AFFILIATE"), that together with the Company would be deemed a "single employer" within the meaning of Section 4001(b)(1) of ERISA, for the benefit of any current or former employee or director of the Company, or any ERISA Affiliate (the "PLANS"). Section 4.12(a) of the Company Disclosure Schedule identifies each of the Plans that is an "employee welfare benefit plan," or "employee pension benefit plan" as such terms are defined in Sections 3(1) and 3(2) of ERISA (such plans being hereinafter referred to collectively as the "ERISA PLANS"). Neither the Company nor any ERISA Affiliate has any formal plan or commitment, whether legally binding or not, to create any additional Plan or modify or change any existing Plan that would affect any current or former employee or director of the Company or any ERISA Affiliate. (b) With respect to each of the Plans, the Company has heretofore delivered to the Parent true and complete copies of each of the following documents to the extent the Company has such documents in its possession, as applicable: (i) a copy of the Plan documents (including all amendments thereto) for each written Plan or a written description of any Plan that is not otherwise in writing; (ii) a copy of the annual report or Internal Revenue Service Form 5500 Series, if required under ERISA, with respect to each ERISA Plan for the last three Plan years ending prior to the date of this Agreement for which such a report was filed; (iii) a copy of the actuarial report, if required under ERISA, with respect to each ERISA Plan for the last three Plan years ending prior to the date of this Agreement; (iv) a copy of the most recent Summary Plan Description, together with all Summaries of Material Modification issued with respect to such Summary Plan Description, if required under ERISA, with respect to each ERISA Plan, and all other material employee communications relating to each ERISA Plan; (v) if the Plan is funded through a trust or any other funding vehicle, a copy of the trust or other funding agreement (including all amendments thereto) and the latest financial statements thereof, if any; (vi) all contracts relating to the Plans with respect to which the Company or any ERISA Affiliate may have any liability, including insurance contracts, investment management agreements, subscription and participation agreements and record keeping agreements; and 19 (vii) the most recent determination letter received from the Internal Revenue Service with respect to each Plan that is intended to be qualified under Section 401(a) of the Code. (c) At no time has the Company or any ERISA Affiliate ever maintained, established, sponsored, participated in or contributed to any ERISA Plan that is subject to Title IV of ERISA. (d) Neither the Company nor any ERISA Affiliate, any of the ERISA Plans, any trust created thereunder, nor to the Company's knowledge, any trustee or administrator thereof has engaged in a transaction or has taken or failed to take any action in connection with which the Company or any ERISA Affiliate could be subject to any material liability for either a civil penalty assessed pursuant to Section 409 or 502(i) of ERISA or a tax imposed pursuant to Section 4975(a) or (b), 4976 or 4980B of the Code. (e) All contributions and premiums which the Company or any ERISA Affiliate is required to pay under the terms of each of the ERISA Plans and Section 412 of the Code, have, to the extent due, been paid in full or properly recorded on the financial statements or records of the Company, and none of the ERISA Plans or any trust established thereunder has incurred any "accumulated funding deficiency" (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, as of the last day of the most recent fiscal year of each of the ERISA Plans ended prior to the date of this Agreement. No Lien has been imposed under Section 412(n) of the Code or Section 302(f) of ERISA on the assets of the Company or any ERISA Affiliate, and no event or circumstance has occurred that is reasonably likely to result in the imposition of any such Lien on any such assets on account of any ERISA Plan. (f) At no time has the Company or any ERISA Affiliate ever contributed to or be requested to contribute to any "multiemployer pension plan, " as such term is defined in Section 3(37) of ERISA. (g) Each of the Plans has been operated and administered in all material respects in accordance with applicable Legal Requirements, including but not limited to ERISA and the Code. (h) Each of the ERISA Plans that is intended to be "qualified" within the meaning of Section 401(a) of the Code is so qualified. The Company has applied for and received a currently effective determination letter from the Internal Revenue Service stating that it is so qualified, and no event has occurred which would affect such qualified status. (i) Any fund established under an ERISA Plan that is intended to satisfy the requirements of Section 501(c)(9) of the Code has so satisfied such requirements. (j) No Plan provides benefits, including without limitation death or medical benefits (whether or not insured), with respect to current or former employees of the Company or any ERISA Affiliate after retirement or other termination of service 20 (other than (i) coverage mandated by applicable laws, (ii) death benefits or retirement benefits under any "employee pension plan" as that term is defined in Section 3(2) of ERISA, (iii) deferred compensation benefits accrued as liabilities on the books of the Company or an ERISA Affiliate, or (iv) benefits, the full direct cost of which is borne by the current or former employee (or beneficiary thereof)). (k) The consummation of the transactions contemplated by this Agreement and the other Transactional Agreements will not, either alone or in combination with any other event, (i) entitle any current or former employee, officer or director of the Company or any ERISA Affiliate to severance pay, unemployment compensation or any other similar termination payment, or (ii) accelerate the time of payment or vesting, or increase the amount of or otherwise enhance any benefit due any such employee, officer or director. (l) There are no pending or, to the Company's knowledge, threatened or anticipated claims by or on behalf of any Plan, by any employee or beneficiary under any such Plan or otherwise involving any such Plan (other than routine claims for benefits). 4.13. INTELLECTUAL PROPERTY. (a) "INTELLECTUAL PROPERTY" means any United States and foreign, international and state: patents and patent applications, industrial design registrations, certificates of invention and utility models (collectively, "PATENTS"); trademarks, service marks, and trademark or service mark registrations and applications, trade names, logos, designs, slogans, and general intangibles of like nature, together with all goodwill related to the foregoing (collectively, "TRADEMARKS"); Internet domain names; copyrights, copyright registrations, renewals and applications for copyrights, including without limitation for the Content and the Software (collectively, "COPYRIGHTS"); Content; Software, technology, trade secrets and other confidential information, know-how, proprietary processes, formulae, algorithms, models and methodologies (collectively, "TRADE SECRETS"); rights of privacy and publicity, including, but not limited to, the names, likenesses, voices and biographical information of real persons; and all license agreements and other agreements granting rights relating to any of the foregoing. "SOFTWARE" means any and all (i) computer programs, including any and all software implementations of algorithms, models and methodologies, whether in source code or object code form, (ii) databases, compilations, and any other electronic data files, including any and all collections of data, whether machine readable or otherwise, (iii) descriptions, flow-charts, technical and functional specifications, and other work product used to design, plan, organize, develop, test, troubleshoot and maintain any of the foregoing, (iv) without limitation to the foregoing, the software technology supporting any functionality contained on Internet site(s), and (v) all documentation, including technical, end-user, training and troubleshooting manuals and materials, relating to any of the foregoing. "CONTENT" means any and all information, pictures, images, graphics, video, audio, text and any other content or information, in whatever form and on any media. 21 (b) The Company owns or has the valid right to use all Intellectual Property as currently used in connection with the business of the Company, including, without limitation, all license agreements and other agreements granting rights relating to any Intellectual Property to which the Company is a party or is otherwise bound ("LICENSE AGREEMENTS") (collectively, "COMPANY INTELLECTUAL PROPERTY"). (c) Section 4.13(c)(1) of the Company Disclosure Schedule sets forth a complete and accurate list of all registrations, applications or material unregistered United States, foreign, international and state (i) Patents, (ii) Trademarks, (iii) Internet domain names and (iv) Copyrights, including Content and Software, indicating for each, the applicable jurisdiction, record owner, registration number (or application number), and date issued (or date filed). Section 4.13(c)(2) of the Company Disclosure Schedule sets forth a complete and accurate list of all License Agreements granting or restricting any right to use or practice any rights in connection with any Company Intellectual Property, other than licenses for commercial off-the-shelf software, indicating for each the title, the parties, date executed, and the Intellectual Property covered thereby. (d) The Intellectual Property owned by the Company is solely and exclusively owned by the Company free and clear of all Liens, and the Company is listed in the records of the appropriate United States, state or foreign agency as the sole owner of record for all registrations and applications for any Intellectual Property that it owns. The Company is not hereby representing that no other person independently acquired and independently owns property that is the same or similar to the Intellectual Property. (e) All Company Intellectual Property had been duly maintained, is valid and subsisting, in full force and effect, and has not been cancelled, expired or abandoned. There is no pending or, to the knowledge of the Company, threatened opposition, interference or cancellation proceeding before any court or registration authority in any jurisdiction against the items set forth on Section 4.13(c)(1) of the Company Disclosure Schedule, or, to the Company's knowledge, against any Company Intellectual Property licensed to the Company as set forth in Section 4.13(c)(2) of the Company Disclosure Schedule. (f) There are no settlements, forbearances to sue, consents, judgments, orders or similar obligations to which the Company is a party or is otherwise bound that (i) restrict the rights of the Company to use any Company Intellectual Property, (ii) restrict the business of the Company in order to accommodate a third-party's Intellectual Property rights or (iii) permit third parties to use any Intellectual Property which would otherwise infringe any Company Intellectual Property. The Company has not licensed or sublicensed its rights in any Intellectual Property other than pursuant to the License Agreements, and no royalties, honoraria or other fees are payable by the Company for the use of or right to use any Company Intellectual Property in connection with the business of the Company as currently conducted, except pursuant to the License Agreements set forth on Section 4.13(c)(2) of the Company Disclosure Schedule. The License Agreements are legal, valid and binding obligations of the Company and, to the Company's knowledge, are enforceable in accordance with their terms except as the enforceability thereof may be limited by bankruptcy, insolvency, fraudulent conveyance, 22 reorganization, moratorium or other similar laws relating to the enforcement of creditors' rights generally and by general principles of equity. There exists no event or condition which will result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default by the Company, or, to the knowledge of the Company, by any other party under any such License Agreement. (g) The Company has taken all reasonable measures to protect the confidentiality of its Trade Secrets, including requiring employees and independent contractors having access thereto to execute written non-disclosure agreements. To the knowledge of the Company, no Trade Secret of the Company has been disclosed or authorized to be disclosed to any third party, including any employee, agent, contractor or other entity, other than pursuant to a non-disclosure agreement that adequately protects the proprietary interests of the Company in and to such Trade Secrets. To the knowledge of the Company, no party to any non-disclosure agreement relating to its Trade Secrets is in breach thereof. (h) Neither the Company, nor, to the knowledge of the Company, the employees of the Company has any agreements or arrangements with any Person (other than the Company) relating to the confidential information or trade secrets of such Person or restricting any such Person's ability to engage in business activities of any nature. To the knowledge of the Company, the activities of the present employees of the Company do not violate any such agreements or arrangements known to the Company. (i) To the knowledge of the Company, the conduct of the business of the Company as currently conducted does not infringe upon any Intellectual Property owned or controlled by any third party (either directly or indirectly such as through contributory infringement or inducement to infringe) and is not libelous, slanderous, defamatory, violative in any way of publicity or privacy rights, or obscene. There are no claims or suits pending or, to the knowledge of the Company, threatened, and the Company has not received any notice of a third-party claim or suit, (i) alleging that the Company's activities or the conduct of its business infringes upon or constitutes the unauthorized use of the Intellectual Property rights of any third party or alleging libel, slander, defamation or other violation of a personal right or (ii) challenging the ownership, use, validity or enforceability of any Company Intellectual Property. (j) To the knowledge of the Company, no third party is misappropriating, infringing, diluting or otherwise violating any Company Intellectual Property and no such claims are pending against a third party by the Company. (k) The consummation of the transactions contemplated hereby will not result in the loss or impairment of the right of the Company to own or use any of the Company Intellectual Property nor require the consent of any Governmental Entity or third party or Person in respect of any such Company Intellectual Property. (l) To the knowledge of the Company, no current or former director, officer or employee of the Company (or any of its predecessors in interest) will, after 23 giving effect to the transactions contemplated herein, own or retain any rights in or to any of the Company Intellectual Property. (m) Section 4.13(m) of the Company Disclosure Schedule sets forth a complete and accurate list of all Software (other than Software acquired in the ordinary course of business) owned, licensed, leased or otherwise used by the Company, and identifies which Software is owned, licensed, leased or otherwise used, as the case may be. With respect to the Software set forth in Section 4.13(m) of the Company Disclosure Schedule that the Company owns, such Software was either developed (i) by employees of the Company within the scope of their employment or (ii) by independent contractors who have assigned their rights to the Company pursuant to written agreements. (n) The Company owns or has the valid right to use (including, without limitation, the rights to copy, distribute and sell to any party), as currently used, all Software developed by the Company, whether developed for itself (as part of its core technology or otherwise) or on behalf of any third party. (o) The Company has experienced no problems or failures of any kind with respect to Year 2000 Compliance, and to the knowledge of the Company, will not experience any such Year 2000 Compliance problems or failures in the future. As used herein, "YEAR 2000 COMPLIANCE" mean for all dates and times, including, without limitation, dates and times after December 31, 1999 and in the multi-century scenario, when used on a stand-alone system or in combination with other properly operating software or systems: (i) the application system functions and receives and processes dates and times correctly without abnormal results; (ii) all date-related calculations are correct (including, without limitation, age calculations, duration calculations and scheduling calculations); (iii) all manipulations and comparisons of date-related data produce correct results for all valid date values within the scope of the application; (iv) there is no century ambiguity; (v) all reports and displays are sorted correctly; and (vi) leap years are accounted for and correctly identified (including, without limitation, that 2000 is recognized as a leap year). 4.14. CONTRACTS AND COMMITMENTS. (a) Section 4.14(a) of the Company Disclosure Schedule identifies each Company Contract that is material to the Company, including: (i) each material contract for the purchase or lease of personal property with any supplier or for the furnishing of any services to the Company; (ii) all leases and subleases of real property; (iii) all material contracts and agreements relating to Indebtedness, other than trade Indebtedness of the Company; (iv) all contracts and agreements with Governmental Entity to which the Company is a party; 24 (v) all contracts and agreements that limit or purport to limit the ability of the Company to compete in any line of business or with any Person in any geographic area or during any period of time; (vi) all contracts containing confidentiality requirements (including non-disclosure agreements); (vii) all contracts and agreements between or among the Company on the one hand and any officer, director or shareholder of the Company or any affiliate of such Person on the other hand; (viii) any other material agreement of the Company which is terminable upon or prohibits a change of ownership or control of the Company as contemplated by this Agreement; (ix) all contracts with financial advisers for the sale of the Company or any of its assets; and (x) all other contracts and agreements, whether or not made in the ordinary course of business, that contemplates an exchange of consideration with an aggregate value of greater than $20,000. (b) Except as identified in Section 4.14(a) of the Company Disclosure Schedule, all Company Contracts are in writing. The Company has made available to Parent accurate and complete copies of all written Company Contracts referred to in Section 4.14(a) of the Company Disclosure Schedule, including all amendments thereto, and has provided to Parent a complete and accurate written description of each such Company Contract that is not written. (c) Each Company Contract is valid and in full force and effect, and is enforceable by the Company in accordance with its terms. The Company is not in default under any Company Contract, and (i) to the Company's knowledge, no Person has violated or breached, or declared or committed any default under, any Company Contract; (ii) no event has occurred, and no circumstance or condition exists, that likely would (with or without notice or lapse of time) (A) result in a violation or breach in any material respect of any of the provisions of any Company Contract, (B) give any Person the right to declare a default or exercise any remedy or hinder any Company Contract, (C) give any Person the right to accelerate the maturity or performance of any Company Contract or (D) give any Person the right to cancel, terminate or modify any Company Contract; and (iii) the Company has not waived any of its material rights under any Company Contract. No party to any Company Contract has notified the Company or made a claim to the effect that the Company has failed to perform an obligation thereunder. (d) To the Company's knowledge, each Person against which the Company has or may acquire any rights under any Company Contract is solvent and is able to satisfy all of such Person's current and future monetary obligations and other obligations and liabilities to the Company. 25 (e) The Company has never guaranteed or otherwise agreed to cause, insure or become liable for, and has never pledged any of its assets to secure, the performance or payment of any obligation or other liability of any other Person except in the ordinary course of business. The Company has never been a party to or bound by (i) any joint venture agreement, partnership agreement, profit sharing agreement, cost sharing agreement, loss sharing agreement or similar contract or (ii) any contract that creates or grants to any Person, or provides for the creation or grant of, any stock appreciation right, phantom stock right or similar right or interest. (f) The performance of the Company Contracts will not result in any violation of or failure to comply with any Legal Requirement. (g) No Person is materially renegotiating, nor has the contractual right to renegotiate, any amount paid or payable to the Company under any material Company Contract or any other material term or provision of any material Company Contract. (h) Section 4.14(h) of the Company Disclosure Schedule identifies and provides an accurate and brief description of each proposed material contract as to which any bid, offer, written proposal, term sheet or similar document has been submitted or received by the Company that would commit the Company to provide services and is outstanding. (i) To the Company's knowledge, there is no plan, intention or indication of any contracting party to any Company Contract to cause the termination, cancellation or modification of such Company Contract or to reduce or otherwise change its activity thereunder so as to adversely affect the benefits derived or expected to be derived therefrom by the Company. (j) There is no Company Contract that automatically terminates or allows termination by the other party upon consummation of any of the transactions contemplated by this Agreement or any of the other Transactional Agreements. 4.15. EMPLOYEES. (a) Section 4.15(a) of the Company Disclosure Schedule accurately sets forth, with respect to each employee of the Company (including any employee of the Company who is on a leave of absence or on layoff status): (i) the name of such employee and the date as of which such employee was originally hired by the Company; (ii) such employee's title; (iii) such employee's annualized compensation as of the date of this Agreement; (iv) each Plan in which such employee participates or is eligible to participate; and 26 (v) Governmental Authorization that is held by such employee and that is used in connection with the Company's business. (b) Section 4.15(b) of the Company Disclosure Schedule contains a list of individuals who are currently performing services for the Company and are classified as "consultants" or "independent contractors," and the respective compensation of each such "consultant" or "independent contractor." The Company is not a party to any agreement for the provisions of labor from any outside agency. (c) The consummation of the transactions contemplated by this Agreement and the other Transactional Agreements will not result in any payment or increased payment becoming due from the Company to any officer, director or employee of, or consultant or contractor to, the Company. (d) There is no former employee of the Company who is receiving or is scheduled to receive (or whose spouse or other dependent is receiving or is scheduled to receive) any benefits (whether from the Company or otherwise) relating to such former employee's employment with the Company. (e) The employment of each of the Company's employees is terminable by the Company at will. The Company is not a party to or bound by, and has never been a party to or bound by, any employment agreement or any union contract, collective bargaining agreement or similar contract. (f) The Company has delivered to Parent accurate and complete copies of all employee manuals and handbooks, disclosure materials, policy statements, employment agreements and other materials relating to the employment of the current and former employees of the Company. (g) To the Company's knowledge, (i) no employee of the Company intends to terminate his or her employment with the Company, and the Company does not have a present intention to terminate the employment of any employee, and (ii) no employee of the Company has received since December 31, 1999, or is currently considering, an offer to join a business that likely would be competitive with the Company's business. To the Company's knowledge, no employee of the Company is a party to or is bound by any confidentiality agreement, noncompetition agreement or other contract (with any Person) that likely would have an adverse effect on the performance by such employee of any of his duties or responsibilities as an employee of the Company, or otherwise on the Company's business or operations. (h) The Company has complied in all material respects with all Legal Requirements related to the employment of employees. The Company has not received any notice of any claim that it has not complied in any material respect with any Legal Requirement relating to the employment of employees, including any provisions thereof relating to wages, hours, collective bargaining, the payment of Social Security and similar taxes, equal employment opportunity, employment discrimination, the WARN Act, employee safety, or that it is liable for any arrearages of wages or any taxes or 27 penalties for failure to comply with any of the foregoing. There have been no claims based on sex, sexual or other harassment, age, disability, race or other discrimination or common law claims, including claims of wrongful termination, by any employees of the Company or by any of the employees performing work for the Company but provided by an outside employment agency, and, to the knowledge of the Company, there are no facts or circumstances known to the Company that could reasonably be expected to give rise to such complaint or claim. (i) The Company is not engaged, and has never been engaged, in any unfair labor practice of any nature. There has never been any slowdown, work stoppage, labor dispute or union organizing activity, or any similar activity or dispute, affecting the Company or any of its employees. There is not now pending, and to the Company's knowledge no Person has threatened to commence, any such slowdown, work stoppage, labor dispute or union organizing activity or any similar activity or dispute, nor has any event occurred, nor does any condition or circumstance exist, that likely would directly or indirectly give rise to or provide a basis for the commencement of any such slowdown, work stoppage, labor dispute or union organizing activity or any similar activity or dispute. 4.16. ENVIRONMENTAL MATTERS. (a) During the period that the Company has leased or owned its properties or owned or operated any facilities, the Company has not disposed or released any Hazardous Materials, and, to the Company's knowledge, there have been no disposals, releases or threatened releases by others of Hazardous Materials on, from or under such properties or facilities. The Company has no knowledge of any presence, disposals, releases or threatened releases of Hazardous Materials on, from or under any of such properties or facilities, which may have occurred prior to the Company having taken possession of any of such properties or facilities. For purposes of this Agreement, the terms "disposal," "release" and "threatened release" shall have the definitions assigned thereto by CERCLA. (b) None of the Company's owned properties or facilities is in violation of any Legal Requirement and to the Company's knowledge, none of its leased properties or facilities is in violation of any Legal Requirement, relating to industrial hygiene or to the environmental conditions on, under or about such properties or facilities, including, but not limited to, soil and ground water condition, except for such violations as individually or in the aggregate have not had and would not reasonably be expected a Company Material Adverse Effect. During the time that the Company has owned or leased its properties and facilities, neither the Company nor, to the Company's knowledge, any third party, has used, generated manufactured or stored on, under or about such properties or facilities or transported to or from such properties or facilities any Hazardous Materials. (c) During the time that the Company has owned or leased its properties and facilities, there has been no litigation brought or, to the Company's knowledge, threatened against the Company by, or any settlement reached by the 28 Company with, any party or parties alleging the presence, disposal, release or threatened release of any Hazardous Materials on, from or under any of such properties or facilities. (d) During the period that the Company has owned or leased its properties and facilities, no Hazardous Materials have been transported from such properties or facilities to any site or facility now listed or proposed for listing on the National Priorities List, at 40 C.F.R. Part 300, or any list with a similar scope or purpose published by any state authority. 4.17. INSURANCE. (a) Section 4.17 of the Company Disclosure Schedule accurately sets forth, with respect to each insurance policy maintained by or at the expense of, or for the direct or indirect benefit of, the Company (each, a "COMPANY INSURANCE POLICY"): (i) the name of the insurance carrier that issued such policy and the policy number of such policy; (ii) whether such policy is a "claims made" or an "occurrences" policy; (iii) a description of the coverage provided by such policy and the material terms and provisions of such policy (including all applicable coverage limits, deductible amounts and co-insurance arrangements); (iv) the annual premium payable with respect to such policy, and the cash value (if any) of such policy; and (v) a description of any claims pending, and any claims that have been asserted in the past, with respect to such policy. (b) Section 4.17 of the Company Disclosure Schedule also identifies (i) each pending application for insurance that has been submitted by or on behalf of the Company and (ii) each self-insurance or risk-sharing arrangement affecting the Company or any of its assets. The Company has delivered to Parent accurate and complete copies of all of the insurance policies identified in Section 4.17 of the Company Disclosure Schedule (including all renewals thereof and endorsements thereto) and binders relating thereto indicating that such policies are in full force and effect as of the date hereof, and all of the pending applications identified in Section 4.17 of the Company Disclosure Schedule. (c) Each Company Insurance Policy is valid, enforceable and in full force and effect, and has been issued by an insurance carrier that, to the knowledge of the Company, is solvent, financially sound and reputable. All of the information contained in the applications submitted in connection with said policies was (at the times said applications were submitted) accurate and complete, and all premiums and other amounts owing with respect to said policies have been paid in full on a timely basis. 29 (d) There is no pending claim under or based upon any Company Insurance Policy and, to the Company's knowledge, no event has occurred, and no condition or circumstance exists, that likely would (with or without notice or lapse of time) directly or indirectly give rise to or serve as a basis for any such claim. (e) The Company has not received: (i) any notice or other communication (in writing or otherwise) regarding the actual or possible cancellation or invalidation of any Company Insurance Policy or regarding any actual or possible adjustment in the amount of the premiums payable with respect to any of said policies; (ii) any notice or other communication (in writing or otherwise) regarding any actual or possible refusal of coverage under, or any actual or possible rejection of any claim under any Company Insurance Policy; or (iii) any indication that the issuer of any Company Insurance Policy may be unwilling or unable to perform any of its obligations thereunder. 4.18. TITLE TO PROPERTIES; ENCUMBRANCES. (a) The Company owns, and has good, valid and marketable title to, all assets it purports to own, including: (i) all assets reflected on the Company Financial Statements (except for inventory or other tangible assets sold or otherwise disposed of by the Company since the date thereof in the ordinary course of business); (ii) all assets acquired by the Company since the date of the Company Financial Statements (except for inventory or other tangible assets sold or otherwise disposed of by the Company since the date thereof in the ordinary course of business); (iii) all assets referred to in Sections 4.18(b), 4.13(c)(1), 4.13(c)(2) and 4.23(a) of the Company Disclosure Schedule, except leased assets identified in Section 4.18(b) of the Company Disclosure Schedule, and all of the Company's rights under Company Contracts; and (iv) all other assets reflected in the Company's books and records as being owned by the Company. All of said assets are owned by the Company free and clear of any Liens, except liens for current taxes and assessments not delinquent. (b) Section 4.18(b) of the Company Disclosure Schedule identifies all equipment, furniture, fixtures, improvements and other tangible and intangible assets owned by or leased to the Company with a value greater than $20,000 (including any 30 similar assets that have a collective value of greater than $20,000), and sets forth the original cost and book value of each of said assets. (c) To the Company's knowledge, each asset identified in Section 4.18(b) of the Company Disclosure Schedule is free of material defects and deficiencies and in good condition and repair, consistent with its age and intended use (ordinary wear and tear excepted). (d) The Company does not own any real property or any interest in real property, except for the leaseholds created under the real property leases identified in Section 4.18(d) of the Company Disclosure Schedule (the "LEASED PREMISES"). The Company enjoys peaceful and undisturbed possession of such premises. The Company has delivered to Parent complete copies of all such leases, including any amendments thereto. The Surviving Corporation will obtain a valid leasehold interest in such leases, in each case free and clear of all title defects, Liens and restrictions of any kind, except: (i) mechanics', carriers', workers' and other similar liens arising in the ordinary course of business since the date of the Company Financial Statements and (ii) liens for current taxes not yet due and payable. (e) Section 4.18(e) of the Company Disclosure Schedule identifies all personal property assets that are being leased or licensed to the Company. (f) All leases pursuant to which the Company leases real or personal property are valid and effective in accordance with their respective terms and, to the Company's knowledge, there exists no default thereunder or occurrence or condition which could result in a default thereunder or termination thereof. (g) The Leased Premises are in a condition adequate for the conduct of the business in the ordinary course of business, and the Company owns, or has a valid leasehold interest in or license to, all assets necessary for the conduct of its business as presently conducted. (h) The inventories of the Company reflected in the Company Financial Statements consist of items that are useable or salable in the ordinary course of business and do not include below-standard quality, damaged, defective or obsolete items the value of which has not been fully written down or with respect to which adequate reserves have not been provided, adjusted for operations and transactions through the Effective Time in accordance with the past custom and practice of the Company. Section 4.18(h) of the Company Disclosure Schedule discloses the addresses of all warehouses or other facilities and customers, if any, in which or with whom any material amounts of the inventories of the Company are located. 4.19. RELATED PARTY TRANSACTIONS. No contracts or agreements are in effect as of the date hereof between the Company, on the one hand, and officers, directors or Shareholders of the Company or their respective Affiliates, on the other hand. 4.20. ABSENCE OF CERTAIN PAYMENTS. Neither the Company, nor any of its respective officers, directors, employees or, to the Company's knowledge, agents or other 31 people acting on behalf of it have (a) engaged in any activity prohibited by the United States Foreign Corrupt Practices Act of 1977 or any other similar law, regulation, decree, directive or order of any Governmental Entity and (b) without limiting the generality of the preceding clause (a), used any corporate or other funds for unlawful contributions, payments, gifts or entertainment, or made any unlawful expenditures relating to political activity to government officials or others. Neither the Company, nor any of its respective directors, officers, employees or, to the Company's knowledge, agents of other persons acting on behalf of it has accepted or received any unlawful contributions, payments, gifts or expenditures. 4.21. BROKERS OR FINDERS. The Company has not agreed or become obligated to pay, or taken any action that likely would result in any Person claiming to be entitled to receive, any brokerage commission, finder's fee or similar commission or fee in connection with any of the transactions contemplated by this Agreement. 4.22. BOOKS AND RECORDS. The minute books and stock record books of the Company contain all (i) minutes of meetings of the Shareholders and boards of directors, (ii) written statements of actions taken by the Shareholders and boards of directors without a meeting and (iii) records of the issuance, transfer and cancellation of all shares of capital stock and other securities, in each case since the date of incorporation of the Company. Such minute book and stock record book are true and complete in all material respects. 4.23. RECEIVABLES; MAJOR CUSTOMERS. (a) Section 4.23(a) of the Company Disclosure Schedule provides an accurate and complete breakdown and aging of all accounts and notes receivable and a list of all other receivables of the Company as of the date hereof. All existing accounts receivable of the Company represent valid obligations of customers of the Company arising from bona fide transactions entered into in the ordinary course of business. Except as set forth on Section 4.23(a) of the Company Disclosure Schedule, all such account receivables are reflected on the Company Financial Statements, are valid receivables subject to no setoffs or counterclaims, are current, and, to the Company's knowledge, are collectible by the Company in accordance with their terms at their recorded amounts. (b) Section 4.23(b) of the Company Disclosure Schedule accurately identifies, and provides an accurate and complete list of the revenues received from, each customer or other Person that accounted for more than $20,000 of the gross revenues of the Company from January 1, 1999 through the date hereof. The Company has not received any notice or other communication (in writing or otherwise), or received any other information, indicating that any customer or other Person identified in Section 4.23(b) of the Company Disclosure Schedule may cease dealing with the Company or may otherwise reduce the volume of business transacted by such Person with the Company below historical levels. 32 (c) The Company has provided to Parent a copy of the Company's standard form of customer contract for each product and service it offers to customers, and all of the Company's customer relationships are governed by such standard contracts. The Company has no oral contracts or agreements to provide products and services. 4.24. PAYABLES; MAJOR SUPPLIERS. (a) Section 4.24 of the Company Disclosure Schedule provides an accurate and complete breakdown of: (i) the Company's accounts payable as of the date hereof, with aging; (ii) all customer deposits and other deposits held by the Company as of the date hereof; and (iii) the Company's long-term debt as of the date hereof. (b) Section 4.24 of the Company Disclosure Schedule accurately identifies, and provides an accurate and complete breakdown of the amounts paid to, each supplier or other Person, that received more than $20,000 from the Company from January 1, 1999 through the date hereof, other than amounts paid to employees or consultants and described in Section 4.15(a) or (b) of the Company Disclosure Schedule. Each such supplier or other Person has executed and delivered to the Company a valid and binding invoice or other agreement with the Company relating to the services or supplies to which such amounts relate. 4.25. POWERS OF ATTORNEY. The Company has not given a power of attorney to any Person. 4.26. TAKEOVER STATUTE. No Takeover Statute is applicable to the Merger, except for such statutes or regulations as to which all necessary action has been taken by the Company and the Company Board to permit the consummation of the Merger in accordance with the terms hereof. 4.27. DUE DILIGENCE INFORMATION. The Company has provided Parent and Parent's representatives with full and complete access to all of the Company's records and other documents and data, and have produced all documents and related materials in response to the itemized requests on Parent's due diligence request list that was sent to the Company in connection with the transactions contemplated hereby, except to the extent this Agreement otherwise addresses the obligation to deliver such documents and data. 4.28. DISCLOSURE. 33 (a) Neither this Agreement (including all Schedules and Exhibits hereto), nor any of the other Transactional Agreements, contains or will contain any untrue statement of material fact or omits or will omit to state any fact necessary to make any of the representations, warranties or statements contained herein or therein on behalf of the Company or any Principal Shareholder not misleading. (b) None of the information supplied in writing by the Company for inclusion or incorporation by reference in the Information Statement at the time it is mailed to the Shareholders and at the time of the meeting of the Shareholders to be held in connection with the Merger, will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL SHAREHOLDER The Principal Shareholder represents and warrants to each of Parent and Merger Sub as follows: (a) Such Principal Shareholder has the absolute and unrestricted right, power and authority to enter into and to perform his or her respective obligations under this Agreement and the other Transactional Agreements to which he or she is contemplated to be a party. This Agreement and the other Transactional Agreements constitute, or upon execution and delivery will constitute, the legal, valid and binding obligations of such Principal Shareholder, enforceable against him or her in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar laws relating to the enforcement of creditors' rights generally and by general principles of equity. (b) Subject to the satisfaction of the condition in Section 10.1(c) hereof, to the knowledge of such Principal Shareholder, the execution and delivery of this Agreement and the other Transactional Agreements, and the consummation of the transactions contemplated hereby or thereby, by such Principal Shareholder will not, directly or indirectly (with or without notice or lapse of time), contravene, conflict with or result in a violation of, or give any Governmental Entity or other Person the right to challenge any of the transactions contemplated hereby or thereby or to exercise any remedy or obtain any relief under, any Legal Requirement or any order to which such Principal Shareholder is subject. (c) There is no pending Proceeding and, to the knowledge of such Principal Shareholder, no Person has threatened to commence any Proceeding, that challenges, or that may have the effect of preventing, delaying or making illegal, such Principal Shareholder's ability to comply with or perform his or her obligations and covenants under the Transactional Agreements; and, to the knowledge of the Principal 34 Shareholder, no event has occurred, and no claim, dispute or other condition or circumstance exists, that might directly or indirectly give rise to or serve as a basis for the commencement of any such Proceeding. (d) To the knowledge of such Principal Shareholder, there is no proposed Order that, if issued or otherwise put into effect, may have a material adverse effect on the ability of such Principal Shareholder to comply with or perform any covenant or obligation under this Agreement and the other Transactional Agreements. (e) Neither such Principal Shareholder nor any Person acting on his or her behalf has negotiated with any finder, broker, intermediary or any similar Person in connection with the transactions contemplated herein. With respect to Parent Common Stock, each Principal Shareholder further represents and warrants as follows: (f) Such Principal Shareholder is an "accredited investor" as that term is defined in Rule 501(a) of Regulation D of the Securities Act. (g) Such Principal Shareholder, by reason of his or her business and financial experience, has such knowledge, sophistication and experience in financial and business matters and in making investment decisions of this type that he or she is capable of (i) evaluating the merits and risks of an investment in Parent Common Stock and making an informed investment decision, (ii) protecting his or her own interest and (iii) bearing the economic risk of such investment. If such Principal Shareholder retained a purchaser's representative with respect to the investment in Parent Common Stock that may be made hereby, then such Principal Shareholder shall, at or prior to the Closing, (A) acknowledge in writing such representation and (B) cause such representative to deliver a certificate to Parent containing such representations as are reasonably requested by Parent. (h) Such Principal Shareholder is acquiring Parent Common Stock for investment for such Principal Shareholder's own account, not as a nominee or agent and not with a view to, or any intention of, a resale or distribution thereof, in whole or in part, or the grant of any participation therein other than the transfer to the "employee pool" contemplated by Section 9.11 hereof. Such Principal Shareholder understands that the Parent Common Stock has not been registered under the Securities Act or state securities laws by reason of a specific exemption from the registration provisions of the Securities Act and applicable state securities laws that depends upon, among other things, the bona fide nature of the investment intent and the accuracy of such Principal Shareholder's representations as expressed in this Agreement. Such Principal Shareholder has not been formed for the specific purpose of acquiring Parent Common Stock. Such Principal Shareholder further understands that Parent shall have no obligation to register Parent Common Stock under the Securities Act or any state securities laws or to take any action that would make available any exemption from the registration requirements of such laws. Such Principal Shareholder hereby acknowledges that because of the restrictions on transfer or assignment of Parent Common Stock to be issued in connection with the 35 Merger hereunder, such Principal Shareholder may have to bear the economic risk of the investment commitment in Parent Common Stock for an indefinite period of time. (i) Such Principal Shareholder will observe and comply with the Securities Act and the rules and regulations promulgated thereunder, as now in effect and as from time to time amended, in connection with any offer, sale, pledge, transfer or other disposition of Parent Common Stock. In furtherance of the foregoing, and in addition to any restrictions contained in this Agreement or the other Transactional Agreements, such Principal Shareholder will not offer to sell, exchange, transfer, pledge, or otherwise dispose of any Parent Common Stock unless at such time at least one of the following is satisfied: (i) a registration statement under the Securities Act covering Parent Common Stock proposed to be sold, transferred or otherwise disposed of, describing the manner and terms of the proposed sale, transfer or other disposition, and containing a current prospectus, shall have been filed with the SEC and made effective under the Securities Act; (ii) such transaction shall be permitted pursuant to the provisions of Rule 144 of the Securities Act; (iii) counsel representing such Principal Shareholder shall have advised Parent in a written opinion letter reasonably satisfactory to Parent and its counsel that no registration under the Securities Act would be required in connection with the proposed sale, transfer or other disposition; (iv) an authorized representative of the SEC shall have rendered written advice to such Principal Shareholder to the effect that the SEC would take no action, or that the staff of the SEC would not recommend that the SEC take action, with respect to the proposed sale, transfer or other disposition if consummated; or (v) the transfer is pursuant to the "employee pool" contemplated by Section 9.11 hereof. (j) Such Principal Shareholder understands that an investment in Parent Common Stock involves substantial risks. Such Principal Shareholder has been given the opportunity to make a thorough investigation of the proposed activities of Parent and, upon request to Parent, has been furnished with materials relating to Parent and its proposed activities. Such Principal Shareholder has been afforded the opportunity to obtain any additional information deemed necessary by such Principal Shareholder to verify the accuracy of any representations made or information conveyed to such Principal Shareholder. Such Principal Shareholder confirms that all documents, records and books pertaining to its investment in Parent Common Stock and requested by such Principal Shareholder have been made available or delivered to such Principal Shareholder. Such Principal Shareholder has had an opportunity to ask questions of and 36 receive answers from Parent, or from a Person or Persons acting on Parent's behalf, concerning the terms and conditions of this investment. (k) Such Principal Shareholder is a "United States person," within the meaning of Section 7701(a)(30) of the Code. ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB Each of Parent and Merger Sub represent and warrant to the Company and the Shareholders as follows: 6.1. ORGANIZATION. Parent is a corporation duly organized, validly existing and in good standing under the laws of Colorado and has all requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its business as now being conducted. Parent is duly qualified, licensed or admitted to do business and is in good standing in each jurisdiction in which the ownership, leasing or operation of its assets and properties makes such qualification, licensing or admission necessary, except for such failures to be so duly qualified, licensed or admitted and in good standing that could not reasonably be expected to have a Parent Material Adverse Effect. 6.2. AUTHORITY RELATIVE TO THIS AGREEMENT. Each of Parent and Merger Sub has all requisite corporate power and authority to execute and deliver this Agreement and each of the Transactional Agreements, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and each of the Transactional Agreements, the performance of each of Parent's and Merger Sub's obligations hereunder and thereunder and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized and approved by the respective board of directors of Parent and Merger Sub, and no other corporate proceedings on the part of Parent or Merger Sub are necessary to authorize the execution, delivery and performance of this Agreement and the Transactional Agreements or to consummate the transactions contemplated hereby and thereby. This Agreement and each of the Transactional Agreements have been duly and validly executed and delivered by Parent and Merger Sub and, assuming the due authorization, execution and delivery by the Company and the Principal Shareholder, constitute legal, valid and binding obligations of Parent and Merger Sub enforceable against Parent and Merger Sub in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar laws relating to the enforcement of creditors' rights generally and by general principles of equity. 6.3. APPROVALS. Except for the filing and recordation of the Articles of Merger with the Secretary of State in accordance with the requirements of the CBCA, no notice to, filing with, and no permit, authorization, consent or approval of, any Governmental Entity is necessary 37 for the consummation by Parent or Merger Sub of the transactions contemplated by this Agreement. 6.4. NO CONFLICTS. The execution and delivery of this Agreement and the other Transactional Agreements by Parent and Merger Sub do not, and the performance by Parent and Merger Sub of their obligations hereunder and thereunder and consummation of the transactions contemplated hereby and thereby do not or will not: (a) conflict with or result in a violation or breach of any of the terms, conditions or provisions of Parent's or Merger Sub's certificate of incorporation or bylaws; or (b) conflict with or result in a violation or breach of any Legal Requirement applicable to Parent or Merger Sub, other than filings under applicable securities laws and applicable corporate laws. 6.5. FULLY PAID AND NONASSESSABLE. The shares of Parent Common Stock to be issued in connection with the Merger, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid, and nonassessable, and not subject to preemptive or any other similar rights. 6.6. BROKERS OR FINDERS. Parent has not agreed or become obligated to pay, or taken any action that likely would result in any Person claiming to be entitled to receive, any brokerage commission, finder's fee or similar commission or fee in connection with any of the transactions contemplated by this Agreement. 6.7. FULL DISCLOSURE. Neither this Agreement (including all Schedules and Exhibits hereto), nor any of the Transactional Agreements, contains or will contain any untrue statement of material fact or omits or will omit to state any fact necessary to make any of the representations, warranties or statements contained herein or therein on behalf of Parent or Merger Sub not misleading. 6.8. PARENT SEC REPORTS. Parent has filed all reports required to be filed with the SEC pursuant to the Exchange Act since January 1, 1998 (collectively, the "PARENT SEC REPORTS"). As of their respective filing dates, such Parent SEC Reports filed by Parent complied in all material respects with the requirements of the Securities Act and the Exchange Act. ARTICLE 7 COVENANTS OF THE COMPANY 7.1. CONDUCT OF BUSINESS PENDING THE MERGER. 38 Except as otherwise specifically provided in this Agreement, from the date of this Agreement to the earlier of the Effective Time or termination hereof, the Company agrees to (a) conduct its operations only in the ordinary and usual course of business and consistent with past practice and (b) use its reasonable best efforts to preserve intact its present business organization, keep available the services of its present officers, key employees and consultants and preserve its present relationships and goodwill with landlords, creditors, licensors, licensees, customers, suppliers, key employees, labor organizations and other having business relationships with it. Without limiting the generality of the foregoing, and except as otherwise specifically provided in this Agreement, the Company shall not, directly or indirectly, prior to the Effective Time, without the prior written consent of Parent: (a) except to authorize sufficient capital as required to effect the transactions contemplated in connection with the Merger, propose or adopt any amendment to otherwise change the Company Articles or Bylaws; (b) sell or otherwise issue (or grant any warrants, options or other rights to purchase, receive or acquire or have issued) any shares of Company Common Stock or any other securities, or otherwise allow any change in the capitalization of the Company as described in Section 4.2 hereof; (c) reclassify, combine, split or subdivide any shares of its capital stock, declare, set aside or pay any dividend or other distribution (whether in cash, securities or property or any combination thereof) in respect of any class or series of its capital stock, other any dividend declared prior to the date hereof; (d) redeem, purchase or otherwise acquire, or propose or offer to redeem, purchase or otherwise acquire, any outstanding Company Common Stock, Company Warrants or Company Options or other securities of the Company except to the Company Benefit Plan; (e) organize any new subsidiary, acquire any capital stock or equity securities of any corporation or acquire any entity or ownership interest (financial or otherwise) in any business; (f) (i) incur, assume or otherwise become subject to any liability, or incur any Indebtedness for borrowed money other than in accordance with the Company's current financing arrangements, (ii) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the obligations of any third party, (iii) make any loans, advances or capital contributions to, or investments in, any third party other than advances of employee travel expenses in the ordinary course of business, (iv) mortgage or pledge any of its properties or assets, tangible or intangible, or create or suffer to exist any Lien thereupon or (v) authorize any new capital expenditures for property, plant and equipment in excess of $25,000; (g) make any change in the compensation payable or to become payable to any of its officers, directors, employees, agents or consultants (other than 39 normal recurring salary adjustments in the ordinary course of business consistent with past practice) or to Persons providing management services, or enter into or amend any existing employment, severance, consulting, termination or other agreement or employee benefit plan or make any loans to any of its officers, directors, employees, Affiliates, agents or consultants (other than reasonable travel advances) or make any change in its existing borrowing or lending arrangements for or on behalf of any such Person pursuant to an employee benefit plan or otherwise; (h) license (except in the ordinary course of business consistent with past practice) or otherwise transfer or dispose of, any Intellectual Property of the Company, or dispose of or disclose to any Person any trade secret, formula, process or know-how other than in the ordinary course of business consistent with past practice; (i) enter into any contract or transaction other than in the ordinary course of business consistent with past practice; (j) cancel any debts or waive, release or relinquish any contract rights or other rights of substantial value other than in the ordinary course of business consistent with past practice; (k) except as explicitly contemplated by Section 7.2 hereof, authorize, recommend, propose or enter into or announce an intention to authorize, recommend, propose or enter into a term sheet, letter of intent, agreement in principle or a definitive agreement with respect to any merger, consolidation, liquidation, dissolution or business combination, any acquisition of a material amount of property or assets or securities, or any disposition of a material amount of property or assets or securities; (l) make any change with respect to accounting policies or procedures; (m) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise) other than the payment, discharge or satisfaction in the ordinary course of business consistent with past practice, of liabilities reflected or reserved against in the Company Financial Statements; (n) take or commit to agree (in writing or otherwise) to take any of the foregoing actions, or fail to take any action, as a result of which a failure of the conditions set forth in Section 9.1 or 9.2 is likely to occur; (o) commence any Proceeding; (p) revalue any of its assets, including writing down the value of inventory or writing off notes or accounts receivable, except as required under US GAAP and in the ordinary course of business; or (q) make any election relating to Taxes, changing any election relating to Taxes already made, adopt or change any accounting method relating to Taxes, enter into any closing agreement relating to Taxes, settle any claim or assessment relating to 40 Taxes or consent to any claim or assessment relating to Taxes or any waiver of the statute of limitations for any such claim or assessment. 7.2. ACCESS AND INVESTIGATION. The Company shall ensure that, at all times from the date of this Agreement through the Effective Time: (a) The Company and its representatives provide Parent and its representatives with free and complete access, at reasonable times and with reasonable notice, to the Company, the Company's premises and assets, and to all existing books, records, Tax Returns, work papers and other documents and information relating to the Company, and the Company and its representatives provide Parent and its representatives with copies of such existing books, records, Tax Returns, work papers and other documents and information relating to the Company as Parent may reasonably request; and (b) The Company and its representatives compile and provide Parent and its Representatives with such additional financial, operating and other data and information regarding the Company as Parent may reasonably request. 7.3. FILINGS AND CONSENTS; COOPERATION. The Company shall ensure that: (a) Each filing or notice required to be made or given (pursuant to any applicable Legal Requirement, Order or contract, or otherwise) by the Company in connection with the execution and delivery of this Agreement and the other Transactional Agreements, or in connection with the consummation or performance of the transactions contemplated hereby and thereby, is made or given as soon as possible after the date of this Agreement; (b) Each consent required to be obtained (pursuant to any applicable Legal Requirement, Order or contract, or otherwise) by the Company in connection with the execution and delivery of this Agreement and the other Transactional Agreements, or in connection with the consummation or performance of any of the transactions contemplated hereby and thereby (including each of the Consents identified in Section 4.5 of the Company Disclosure Schedule) is sought as soon as possible after the date of this Agreement and, if obtained, use its best efforts to ensure it remains in full force and effect through the Closing Date; (c) The Company promptly delivers to Parent a copy of each filing made, each notice given and each consent obtained by the Company after the date of this Agreement and prior to the Effective Time; and (d) The Company and its representatives cooperate with Parent and its representatives, and prepare and make available such documents and take such other 41 actions as Parent may request in good faith, in connection with any filing, notice or consent that Parent is required or elects to make, give or obtain. 7.4. NOTIFICATION; UPDATES TO COMPANY DISCLOSURE SCHEDULE. (a) The Company shall promptly notify Parent in writing of: (i) the discovery by the Company of any event, condition, fact or circumstance that occurred or existed on or prior to the date of this Agreement and that caused or constitutes a breach of any representation or warranty made by the Company in this Agreement or any of the other Transactional Agreements; (ii) any event, condition, fact or circumstance that occurs, arises or exists after the date of this Agreement and that would cause or constitute a breach of any representation or warranty made by the Company in this Agreement or any of the other Transactional Agreements if (i) such representation or warranty had been made as of the time of the occurrence, existence or discovery of such event, condition, fact or circumstance, or (ii) such extent, condition, fact or circumstance had occurred, arisen or existed on or prior to the date of this Agreement or any of the other Transactional Agreements; (iii) any breach of any covenant or obligation of the Company; and (iv) any event, condition, fact or circumstance that may make the timely satisfaction of any of the conditions set forth in Sections 10.1 or 10.3 impossible or unlikely. (b) If any event, condition, fact or circumstance that is required to be disclosed pursuant to Section 7.4(a) requires any material change in the Company Disclosure Schedule, or if any such event, condition, fact or circumstance would require such a change assuming the Company Disclosure Schedule were dated as of the date of the occurrence, existence or discovery of such event, condition, fact or circumstance, then the Company shall promptly deliver to Parent an update to the Company Disclosure Schedule specifying such change (a "DISCLOSURE SCHEDULE UPDATE"); PROVIDED, that no such update shall be deemed to supplement or amend the Company Disclosure Schedule for the purpose of (i) determining the accuracy of any of the representations and warranties made by the Company in this Agreement or any of the other Transactional Agreements or (ii) determining whether any of the conditions set forth in Sections 10.1 or 10.3 has been satisfied. 7.5. NO NEGOTIATION. (a) The Company shall ensure that neither the Company nor any of its representatives directly or indirectly: 42 (i) solicits or encourages the initiation of any inquiry, proposal or offer from any Person (other than Parent) relating to any Acquisition Transaction; (ii) participates in any discussions or negotiations with, or provides any non-public information to, any Person (other than Parent) relating to any Acquisition Transaction; or (iii) considers the merits of any unsolicited inquiry, proposal or offer from any Person (other than Parent) relating to any Acquisition Transaction. (b) Notwithstanding the foregoing, the Company shall (i) notify Parent orally (within one business day) and in writing (as promptly as practicable) of any Acquisition Transaction proposal (including the identity of the persons making such proposal and the terms of such proposal) that is received, and (ii) furnish to Parent a copy of any written proposal relating thereto. 7.6. BEST EFFORTS. The Company shall use its best efforts to cause the conditions set forth in Sections 10.1 and 10.3 to be satisfied on a timely basis, and shall not take any action or omit to take any action, the taking or omission of which would or could reasonably be expected to result in any of the representations and warranties of the Company set forth in this Agreement becoming untrue, in any of the conditions set forth in Sections 10.1 and 10.3 not being satisfied or in the business of the Company becoming materially less valuable. 7.7. CONFIDENTIALITY; PUBLICITY. The Company shall use its best efforts to ensure that: (a) the Company and its representatives keep strictly confidential the existence and terms of this Agreement and, not in any way limiting the generality of the foregoing, comply with the terms and provisions of the Non-Disclosure Agreement between Parent and the Company, dated March 14, 2000 (the "NON-DISCLOSURE AGREEMENT"); (b) without the prior written approval of Parent (such approval not to be unreasonably withheld), neither the Company nor any of its representatives issues or disseminates any press release or other publicity or otherwise makes any disclosure of any nature (to any of the Company's suppliers, customers, landlords, creditors or employees or to any other Person) regarding any of the transactions contemplated by this Agreement, except to the extent that the Company is required by law to make any such disclosure regarding such transactions; and (c) if the Company is required by law to make any disclosure regarding the transactions contemplated by this Agreement, the Company advises Parent, 43 at least five business days before making such disclosure, of the nature and content of the intended disclosure. 7.8. APPROVAL OF MERGER. The Company shall ensure that the Company approves or adopts, as applicable, as promptly as practicable after the date hereof, by all necessary further action of the Company Board, this Agreement and the other Transactional Agreements to which the Company is a party. The Company shall use its best efforts to obtain all necessary consents and votes of its Shareholders in connection with the approval of this Agreement and the other Transactional Agreements. In furtherance, and not in limitation, of the foregoing: (a) Promptly after the signing of this Agreement, the Company, in consultation with Parent, will prepare an Information Statement (the "INFORMATION STATEMENT") and use its best efforts to cause the Information Statement and any other disclosure documents deemed appropriate by Parent to be delivered to the Shareholders in connection with obtaining their approval of this Agreement and the other Transactional Agreements to which the Company is a party. The Company shall provide Parent with drafts of the Information Statement promptly upon distribution to the Company and its representatives, and shall give Parent the opportunity to comment thereon. The Company shall not distribute the Information Statement to the Shareholders without the approval of Parent; PROVIDED, that Parent shall in no way be responsible for any of the content of the Information Statement other than Parent SEC filings accompanying the Information Statement (the "PARENT SEC MATERIALS"). (b) Except as to the Parent SEC Materials, the Company shall ensure that the Information Statement does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. Whenever the Company obtains any knowledge of any event which should be set forth in an amendment or a supplement to the Information Statement or Parent disclosure documents, the Company will promptly inform Parent and will cooperate in mailing to the Shareholders such amendment or supplement. (c) The Company, acting through the Company Board, shall, in accordance with all applicable Legal Requirements and the Company Articles and Bylaws: (i) cause the Information Statement to be mailed to the Shareholders promptly upon completion thereof and (A) duly call, give notice of, convene and hold as soon as practicable a meeting of the Shareholders or (B) solicit an action by written consent in lieu thereof for the purpose of voting to approve and adopt the Merger, this Agreement and the other Transactional Agreements, to the extent required in accordance with Legal Requirements, and use its best efforts to obtain such Shareholders' approval; and 44 (ii) subject to the fiduciary duties of the Company Board, recommend approval and adoption of this Agreement and the other Transactional Agreements to which the Company is a party by the Shareholders, and include in the Information Statement such recommendation, and take all lawful action to solicit such approval. (d) The timing and procedures of such meeting (or consent solicitation) shall be subject to the reasonable approval of Parent. 7.9. TAKEOVER STATUTES. If any Takeover Statute shall become applicable to any of the transactions contemplated by this Agreement, the Company and the Company Board shall grant such approvals and take such action as are necessary so that the Merger and such transactions may be commenced as promptly as practicable in the terms contemplated hereby and otherwise act to eliminate or minimize the effects of such statute or regulation on such transactions. ARTICLE 8 COVENANTS OF PARENT 8.1. NOTIFICATION. Parent shall promptly notify the Company in writing of: (a) the discovery by Parent of any event, condition, fact or circumstance that occurred or existed on or prior to the date of this Agreement and that caused or constitutes a breach of any representation or warranty made by Parent in this Agreement or any other Transactional Agreement; (b) any event, condition, fact or circumstance that occurs, arises or exists after the date of this Agreement and that would cause or constitute a breach of any representation or warranty made by Parent in this Agreement or any other Transactional Agreement if (i) such representation or warranty had been made as of the time of the occurrence, existence or discovery of such event, condition, fact or circumstance, or (ii) such event, condition, fact or circumstance had occurred, arisen or existed on or prior to the date of this Agreement or any other Transactional Agreement; (c) any breach of any covenant or obligation of Parent; and (d) any event, condition, fact or circumstance that may make the timely satisfaction of any of the conditions set forth in Sections 10.1 or 10.2 impossible or unlikely. 8.2. BEST EFFORTS. 45 Parent shall use its best efforts to cause the conditions set forth in Sections 10.1 and 10.2 to be satisfied on a timely basis, and shall not take any action or omit to take any action, the taking or omission of which would or could reasonably be expected to result in any of the representations and warranties of Parent or Merger Sub set forth in this Agreement becoming untrue, or in any of the conditions set forth in Sections 10.1 and 10.2 not being satisfied. 8.3. CONFIDENTIALITY; PUBLICITY. Parent shall use its best efforts to ensure that: (a) Parent and its representatives keep strictly confidential the existence and terms of this Agreement prior to the issuance or dissemination of any mutually agreed upon press release or other disclosure of the transactions contemplated hereby and, not in any way limiting the generality of the foregoing, comply with the terms and provisions of the Non-Disclosure Agreement; (b) without the approval of the Company (such approval not to be unreasonably withheld), neither Parent nor any of its representatives issues or disseminates any press release or other publicity or otherwise makes any disclosure of any nature (to any of the Company's suppliers, landlords, creditors or employees or to any other Person) regarding any of the transactions contemplated hereby, except to the extent that Parent is required by law to make any such disclosure regarding such transactions or as otherwise agreed by the parties; and (c) if Parent is required by law to make any disclosure regarding such transactions, Parent advises the Company in writing, at least five business days before making such disclosure, of the nature and content of the intended disclosure; PROVIDED, that the Parent, in conjunction with the Company, shall be entitled to discuss the proposed transactions and the Company's business with the Company's customers and suppliers and potential customers and suppliers. ARTICLE 9 ADDITIONAL AGREEMENTS 9.1. COMPANY 401(k) PLAN. Parent and the Company agree to cooperate to perform all actions reasonably necessary to (i) terminate the Company's 401(k) Plan prior to the Effective Time; (ii) permit employees of the Company to roll over their account balances in the Company's 401(k) plan to Parent's 401(k) plan following the Effective Time, and (iii) cause Parent's 401(k) Plan to assume the outstanding loan obligations associated with such transferred accounts (the "LOAN OBLIGATIONS"); PROVIDED, that in no event shall Parent's 401(k) Plan be required to (A) assume any Loan Obligations in excess of $15,000 in the aggregate or (B) otherwise preserve any other optional forms of benefits not otherwise provided for under the Parent's 401(k) Plan as of the date hereof. 46 9.2. INTEGRATION MATTERS. The Company will cooperate in good faith with Parent to identify and, to the extent practicable, resolve matters regarding the orderly integration of their respective operations, including matters relating to the retention of other Company employees who will remain after the Merger. The Company will cooperate in good faith with Parent to facilitate the development of a plan for the transition to common network and back office systems. The Parent has agreed to make available options to purchase Parent Common Stock to employees of the Company as separately agreed to with the Principal Shareholder. 9.3. FIRPTA AFFIDAVIT. At or prior to the Closing, the Company shall provide an affidavit, in a form reasonably satisfactory to Parent, stating under penalties of perjury that the Company is not and has never been a United States real property holding corporation (as defined in section 897(c)(2) of the Code) (the "FIRPTA AFFIDAVIT"). 9.4. WORKING CAPITAL LOAN. Subject to Section 9.5, within two business days of the Closing Date, Parent shall loan to the Company an amount equal to $1,300,000 (the "WORKING CAPITAL LOAN"). In connection with such Working Capital Loan, the Company shall execute a promissory note in the form attached hereto as EXHIBIT E. Such Working Capital Loan shall not be prepaid unless the maximum amount of Contingent Consideration shall have been paid to the Shareholders. 9.5. OUTSTANDING LOANS. Within ten business days of the Closing Date, the Company shall pay, discharge and satisfy all amounts owing under (i) that certain WCMA Loan and Security Agreement, dated as of April 20, 1999, between the Company and Merrill Lynch Business Financial Services Inc. (the "MERRILL LYNCH LOAN AGREEMENT") and (ii) the Company's credit card with MBNA with the proceeds from the Working Capital Loan. The Company shall terminate the Merrill Lynch Loan Agreement and the Company's credit card at that time. 9.6. INDEMNIFICATION. The articles of incorporation and bylaws of the Surviving Corporation after the Effective Time shall contain provisions no less favorable with respect to indemnification of directors and officers than are set forth in the articles of incorporation and bylaws of the Company as of the date hereof, which provisions shall not be amended, repealed or otherwise modified for a period of two years from the Effective Date in any manner that would affect adversely the rights thereunder of individuals who at the Effective Time were directors or officers of the Company, unless such modification shall be required by applicable law. 47 9.7. EMPLOYEE BENEFITS. From and after the Effective Time and until the earlier of December 31, 2003 or such other time as mutually agreed between the Company and the Principal Shareholder, Parent will provide benefits to employees of the Company who continue as employees after the Effective Time (each, a "CONTINUING EMPLOYEE") that are generally comparable to those provided to other similarly situated employees of Parent from time to time. Parent agrees that the amount of time a Continuing Employee worked at the Company shall be included with the amount of time such Continuing Employee works at Parent for purposes of seniority or other benefits, including for calculating vacation time and sick time. 9.8. COMPANY MANAGEMENT. From and after the Effective Time and until December 31, 2003, Parent agrees that it will not alter the duties and responsibilities of Henry R. Horsey, Jr. as set forth in an employment agreement (the "EMPLOYMENT AGREEMENT") reasonably acceptable to Parent and Mr. Horsey or reassign Henry R. Horsey, Jr. or any employee of the Company to another position; PROVIDED, that the Company maintains Business EBITDA of at least $175,000 per year. The measurement period to determine the amount of Business EBITDA per year shall begin on January 1, 2001. From and after the Effective Time and until December 31, 2003, Parent shall also not take other actions without the approval of the Principal Shareholder that would make it less likely that the Shareholders would receive the Contingent Consideration, including reassigning or terminating without good cause based on the employee's conduct any Continuing Employee or changing the location or business plan and activities of the Company as currently contemplated. 9.9. TAX OPINION. Each of the Company and Parent shall cooperate with each other in obtaining the opinions of counsel referred to in Sections 10.2(f) and 10.3(i) hereof. In connection therewith, each of the Company and Parent shall deliver to each of Morrison & Foerster LLP and Chrisman, Bynum & Johnson P.C. an officer's certificate substantially in the form of EXHIBITS F AND G, respectively, hereto. 9.10. RULE 144 REPORTING. With a view to making available to the Shareholders the benefits of certain rules and regulations of the SEC that may permit the sale of Parent Common Stock acquired hereunder to the public without registration, the Company agrees to use its reasonable best efforts to make and keep public information available, as those terms are understood and defined in SEC Rule 144. 9.11. EMPLOYEE INCENTIVE POOL. Parent has reviewed the terms of the Escrow Agreement for Employee Pool (the "ESCROW AGREEMENT FOR EMPLOYEE POOL") in substantially the form attached hereto as EXHIBIT H, and does not object thereto. Pursuant to the Escrow Agreement for Employee 48 Pool, the Escrow Agent agrees that it will not disburse any shares of Parent Common Stock to the employee pool participants until arrangements have been made for the payment of FICA and withholding taxes by the Company or the employee pool participants to the satisfaction of the Parent. Parent agrees that based upon existing legal authority and the terms of the Escrow Agreement for Employee Pool: (a) it will not object to the transfer of Parent Common Stock to employee pool participants as provided in the Escrow Agreement for Employee Pool; (b) assuming that an employee pool participant is not an Affiliate of Parent within the meaning of Rule 144 of the Securities Act, it will not object to tacking of the participant's holding period; and based upon the current contemplated roles and responsibilities of each Shareholder with the Parent and its subsidiaries after the Effective Time, Parent will not assert such person is an Affiliate of Parent within the meaning of Rule 144. ARTICLE 10 CONDITIONS 10.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The respective obligations of each party to effect the Merger shall be subject to the satisfaction at or prior to the Closing Date of the following conditions, any and all of which may be waived in whole or in part by the Company or Parent, as the case may be, to the extent permitted by applicable law: (a) No statute, rule or regulation shall have been enacted or promulgated by any Governmental Entity which prohibits the consummation of the Merger; and there shall be no order, decree or injunction of a court of competent jurisdiction in effect precluding consummation of the Merger. (b) This Agreement shall have been adopted and the Merger shall have been approved by the Shareholders. (c) No Shareholder shall have exercised its purchase rights under any existing buy-sell agreement set forth in the Company Disclosure Schedule, and the time period for exercise shall have passed or been waived. 10.2. CONDITIONS OF OBLIGATIONS OF THE COMPANY. The obligations of the Company to effect the Merger are further subject to the satisfaction at or prior to the Closing Date of the following conditions, unless waived in writing by the Company: (a) The representations and warranties of Parent and Merger Sub set forth in this Agreement shall be true and correct in all material respects (except for representations and warranties qualified by materiality which shall be true and correct in all respects) as of the date of this Agreement and, except for representations and warranties that speak as of a specific date other than the Closing Date (which need only be true and correct in all respects as of such date), as of the Closing Date, with the same force and effect as though such representations and warranties had been made on and as of the Closing Date. 49 (b) Parent and Merger Sub shall have performed and complied, in all material respects, with all obligations and covenants required to be performed or complied with by it under this Agreement at or prior to the Closing Date. (c) The Company shall have received from Parent an officer's certificate certifying to the fulfillment of the conditions specified in Sections 10.2(a) and (b). (d) From the date of this Agreement through the Effective Time, Parent shall not have suffered a Parent Material Adverse Effect and no events or facts that would reasonably be expected to have a Parent Material Adverse Effect shall have occurred or arisen. (e) The Company and the Shareholders shall have received a legal opinion from Morrison & Foerster LLP, counsel to Parent, dated the Closing Date, substantially in the form attached hereto as EXHIBIT I. (f) The Shareholders shall have received an opinion from Chrisman, Bynum & Johnson PC, dated the Closing Date, substantially to the effect that, on the basis of certain facts, representations and assumptions set forth in such opinion, the Merger will be treated for federal income tax purposes as a reorganization qualifying under the provisions of Section 368(a) of the Code and that each of Parent, Merger Sub, and the Company will be a party to the reorganization within the meaning of Section 368(b) of the Code. In rendering such opinion, Chrisman, Bynum & Johnson PC shall be entitled to rely upon the representations of officers of Parent and the Company substantially in the form of EXHIBITS F AND G hereto and in the Transactional Agreements 10.3. CONDITIONS OF OBLIGATIONS OF PARENT AND MERGER SUB. The obligations of Parent and Merger Sub to effect the Merger are further subject to the satisfaction at or prior to the Closing Date of the following conditions, unless waived in writing by Parent: (a) The representations and warranties of the Company set forth in this Agreement shall be true and correct in all material respects (except for representations and warranties qualified by materiality which shall be true and correct in all respects) as of the date of this Agreement and, except for representations and warranties that speak as of a specific date other than the Closing Date (which need only be true and correct in all material respects as of such date), as of the Closing Date, with the same force and effect as though such representations and warranties had been made on and as of the Closing Date. (b) The Company shall have performed and complied, in all material respects, with all obligations and covenants required to be performed or complied with by it under this Agreement at or prior to the Closing Date. (c) Parent shall have received from the Company an officer's certificate certifying to the fulfillment of the conditions specified in Sections 10.3(a), (b) and (f). 50 (d) Parent shall have received resolutions of the Company, certified by a Secretary, Assistant Secretary, or other appropriate officer of the Company, authorizing the execution, delivery and performance of this Agreement and the other Transactional Agreements, and resolutions of the meeting of the Shareholders (or written consent in lieu thereof), certified by a Secretary, Assistant Secretary or other appropriate officer of the Company, authorizing the execution, delivery and performance of this Agreement and the other Transactional Agreements. (e) The Company shall have delivered to Parent a certificate, dated as of a date no longer than ten days prior to the Closing Date, duly issued by the appropriate governmental authority in Colorado showing the Company is in good standing and authorized to do business. (f) From the date of this Agreement through the Effective Time, the Company shall not have suffered a Company Material Adverse Effect and no events or facts that would reasonably be expected to have a Company Material Adverse Effect shall have occurred or arisen. (g) Each of the consents identified in Section 4.5 of the Company Disclosure Schedule shall have been obtained with no material expense to the Company and shall be in full force and effect. (h) Parent shall have received a legal opinion from Chrisman, Bynum & Johnson, P.C., counsel to the Company, dated the Closing Date, substantially in the form attached hereto as EXHIBIT J. (i) Parent shall have received an opinion from Morrison & Foerster LLP, dated the Closing Date, substantially to the effect that, on the basis of certain facts, representations and assumptions set forth in such opinion, the Merger will be treated for federal income tax purposes as a reorganization qualifying under the provisions of Section 368(a) of the Code and that each of Parent, Merger Sub and the Company will be a party to the reorganization within the meaning of Section 368(b) of the Code. In rendering such opinion, Morrison & Foerster LLP shall be entitled to rely upon the representations of officers of Parent and the Company substantially in the form of EXHIBITS F AND G hereto and in the Transactional Agreements. (j) As of the Effective Time, no litigation or Proceeding shall be threatened or pending against Parent or the Company by any Governmental Entity that seeks to enjoin or prevent the consummation of the Merger, or to require Parent to divest or hold separate any business in connection with the Merger, or which would reasonably be expected to have a Company Material Adverse Effect. (k) The Company shall have terminated the Company's 401(k) Plan. (l) Holders of no more than three percent of the outstanding Company Common Stock shall have asserted appraisal rights for shares of Company Common Stock in accordance with the CBCA. 51 (m) Parent shall have received from the Company the FIRPTA Affidavit. (n) Henry R. Horsey, Jr. shall have executed the Employment Agreement. (o) Each Shareholder shall have executed a shareholders' agreement substantially in the form attached hereto as EXHIBIT K. (p) The Principal Shareholder and Revell Horsey shall have executed the Voting Agreement. (q) Immediately prior to the Effective Time, all Company Options shall have been terminated. ARTICLE 11 TERMINATION 11.1. TERMINATION. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the matters presented in connection with the Merger by the Shareholders: (a) by mutual written consent of the Company and Parent; (b) by Parent if (i) there is a material breach of any covenant or obligation of the Company or any Principal Shareholder or (ii) Parent reasonably determines that the timely satisfaction of any condition set forth in Section 10.1 or 10.3 has become impossible or impractical (other than as a result of any failure on the part of Parent to comply with or perform any covenant or obligation set forth in this Agreement); (c) by the Company if (i) there is a material breach of any covenant or obligation of Purchaser or Merger Sub or (ii) the Company reasonably determines that the timely satisfaction of any condition set forth in Section 10.1 or 10.2 has become impossible or impractical (other than as a result of any failure on the part of the Company to comply with or perform any covenant or obligation set forth in this Agreement); (d) by either Parent or the Company if the Closing has not taken place on or before October 15, 2000 (other than as a result of any failure on the part of the party seeking to terminate to comply with or perform any covenant or obligation set forth in this Agreement); (e) by either Parent or the Company if any court of competent jurisdiction in the United States or other Governmental Entity shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the Merger and such order, decree, ruling or any other action shall have become final and non-appealable; PROVIDED, that the party seeking to terminate this Agreement pursuant to 52 this clause (e) shall have used all reasonable efforts to remove such order, decree or ruling; or (f) by either Parent or the Company if any approval of the Shareholders required for the consummation of the Merger submitted for approval shall not have been obtained by reason of the failure to obtain the required vote at a duly held meeting of Shareholders or at any adjournment thereof. 11.2. TERMINATION PROCEDURES. If Parent wishes to terminate this Agreement pursuant to Section 11.1, Parent shall deliver to the Company a written notice stating that Parent is terminating this Agreement and setting forth a brief description of the basis on which Parent is terminating this Agreement. If the Company wishes to terminate this Agreement pursuant to Section 11.1, the Company shall deliver to Parent a written notice stating that the Company is terminating this Agreement and setting forth a brief description of the basis on which the Company is terminating this Agreement. 11.3. EFFECT OF TERMINATION. (a) If this Agreement is terminated pursuant to Section 11.1, all further obligations of the parties under this Agreement shall terminate; PROVIDED, that: (i) the parties shall, in all events, remain bound by and continue to be subject to the applicable provisions set forth in Section 12; (ii) the Company shall, in all events, remain bound by and continue to be subject to Section 7.7; (iii) Parent shall, in all events, remain bound by and continue to be subject to Section 8.3; and (iv) the parties shall, in all events, remain bound by the terms and provisions of the Non-Disclosure Agreement. (b) Notwithstanding anything herein to the contrary, if (i) this Agreement is terminated by Parent because the Company shall have directly or indirectly consummated an Acquisition Transaction pursuant to which either the Company has disposed of all or substantially all of its assets or entered into a transaction described in clauses (b) or (c) of the definition of Acquisition Transaction, which has resulted in a change of control of the Company, then, the Company shall pay Parent an amount equal to the sum of the Termination Fee plus all documented out-of-pocket expenses incurred by Parent in connection with the negotiation and execution of this Agreement and the attempted completion of the Merger. The parties agree that such payment constitutes liquidated damages and is the sole remedy of Parent and Merger Sub in such circumstances. Such payment shall constitute liquidated damages and the sole remedy of Parent in such circumstances. 53 ARTICLE 12 INDEMNIFICATION 12.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. (a) All representations and warranties of the parties hereunder and under the Transactional Agreements shall survive the Closing and terminate on the date two years from the Closing Date; PROVIDED, HOWEVER, that representations and warranties contained in Sections 4.2, 4.3 and 4.11 shall survive until 30 days after the expiration of all applicable statute of limitation periods, including any waivers or extensions thereof, at which time such representations and warranties shall expire except for claims made prior to such date. (b) The representations, warranties, covenants and obligations of the respective parties, and the rights and remedies that may be exercised by any of them, shall not be limited or otherwise affected by or as a result of any information furnished to (except as set forth in the Company Disclosure Schedule), or any investigation made by, or the knowledge of, any of the parties or any of their representatives. (c) For purposes of this Agreement, although each statement or other item of information set forth in the Company Disclosure Schedule qualifies the specific representation and warranty to which such information refers, all such statements and other items of information set forth in the Company Disclosure Schedule shall be deemed to be a representation and warranty made by the Company in this Agreement. (d) The representations, warranties, covenants and obligations of the Company are made to Parent and Merger Sub and for the benefit of each Indemnitee. The representations, warranties, covenants and obligations of the Parent and Merger Sub are also made to and for the benefit of the Shareholders. 12.2. INDEMNIFICATION BY THE COMPANY AND THE SHAREHOLDERS. (a) The Company and the Shareholders shall hold harmless and indemnify Parent and Merger Sub and each of their respective officers, directors, employees, agents and representatives (collectively, the "INDEMNITEES" and individually each an "INDEMNITEE") from and against, and shall compensate and reimburse each of the Indemnitees for, any Damages which are suffered or incurred by any of the Indemnitees (regardless of whether or not such Damages relate to any third party claim), directly or indirectly, arising or resulting from or connected with: (i) any breach of any representation or warranty made by the Company or any Shareholder in this Agreement or any other Transactional Agreement; and (ii) any breach of any covenant or obligation of the Company or any Shareholder under this Agreement or any other Transactional Agreement. 54 (b) After Closing, no Person shall be required to indemnify any Indemnitee with respect to any claim for indemnification pursuant to Section 12.2(a) unless and until the aggregate amount of indemnifiable Damages suffered by all Indemnitees subject to indemnification pursuant to this Agreement exceeds $500,000 (the "THRESHOLD AMOUNT"), at which point the indemnifying Person shall indemnify the full amount of such claims and all claims thereafter, subject to any other applicable limitations in this Section 12.2 on the indemnifying Person's indemnification obligations. The aggregation of claims must only reach the Threshold Amount once, and after such point the Indemnitees may seek indemnification for all claims which may arise under this Section 12.2. (c) If there is any breach of any representation, warranty or other provision relating to the Company or the Company's business, condition, assets, liabilities, operations, financial performance, net income or prospects (or any aspect or portion thereof) in this Agreement or any of the other Transactional Agreements, then Parent itself shall be deemed, by virtue of its ownership of the stock of the Company, to have incurred Damages, if any, as a result of such breach or liability, and Parent shall be entitled to such indemnification as may be available pursuant to the terms of this Section 12. Nothing contained in this Section 12.2(c) shall have the effect of (i) limiting the circumstances under which Parent may otherwise be deemed to have incurred Damages for purposes of this Agreement, (ii) limiting the other types of Damages that Parent may be deemed to have incurred (whether in connection with any such breach or liability or otherwise), or (iii) limiting the rights of Parent or any of the other Indemnitees under this Section 12.2. (d) The Company and the Shareholders are not required to make any indemnification payment hereunder unless a claim is initiated prior to expiration of the applicable survival period set forth in Section 12.1(a). (e) The Company, by signing this Agreement, acknowledges and irrevocably agrees that the Merger Consideration is subject to the indemnification obligations as contemplated hereunder. (f) If there is a breach of the representations and warranties by a Shareholder, only that Shareholder (and that Shareholder's assets in the Escrow Fund) shall be liable for or have indemnification obligations in respect thereof. (g) The Principal Shareholder, by voting to approve this Agreement or surrendering his Certificate(s), acknowledges and irrevocably agrees (i) that the consideration to which such Principal Shareholder is entitled hereunder is subject to the indemnification obligations as contemplated hereunder and (ii) to all other obligations of the Principal Shareholder hereunder and under the other Transactional Agreements. (h) Any Shareholder may pay any indemnification claim by delivery of Parent Common Stock which shall be valued at the Closing Share Price. 55 (i) The total amount of indemnification owing by any Shareholder shall not exceed the value of the Parent Common Stock delivered as part of the Merger Consideration valued at the Closing Share Price; PROVIDED, that the total amount owing by Henry R. Horsey, Jr. will include the cash portion of the First Installment received by him. (j) All indemnification claims made by Parent or Merger Sub against a Shareholder shall be made first against the Escrow Fund and only be made against the Shareholder's other assets to the extent the claim allocable to that Shareholder exceeds the amount represented by that Shareholder's portion of the Escrow Fund. (k) A Shareholder may elect to pay in cash any claim made against the Shareholder's portion of the Escrow Fund. (l) The indemnification provisions of this Agreement are the sole and exclusive remedy of any Indemnity for Claims, causes, actions or other Damages related to this Agreement and the Merger. 12.3. INDEMNIFICATION BY PARENT. (a) Parent shall hold harmless and indemnify the Company and the Shareholders and their heirs, assigns and successors (collectively, the "SHAREHOLDER INDEMNITEES") from and against, and shall compensate and reimburse each of the Shareholder Indemnitees for, any Damages which are suffered or incurred by any of the Shareholder Indemnitees (regardless of whether or not such Damages relate to any third party claim), directly or indirectly, arising or resulting from or connected with: (i) any breach of any representation or warranty made by Parent or Merger Sub in this Agreement or any other Transactional Agreement; and (ii) any breach of any covenant or obligation of Parent or Merger Sub under this Agreement or any other Transactional Agreement. (b) After Closing, no Person shall be required to indemnify any Shareholder Indemnitee with respect to any claim for indemnification pursuant to Section 12.3(a) unless and until the aggregate amount of indemnifiable Damages suffered by all Shareholder Indemnitees subject to indemnification pursuant to this Agreement exceeds the Threshold Amount, at which point the indemnifying Person shall indemnify the full amount of such claims and all claims thereafter, subject to any other applicable limitations in this Section 12.3 on the indemnifying Person's indemnification obligations. The aggregation of claims must only reach the Threshold Amount once, and after such point the Shareholder Indemnitees may seek indemnification for all claims which may arise under this Section 12.3. A failure to pay the First Installment or the Contingent Consideration is not subject to the limitations in this Section 12.3(b). 56 (c) Parent is not required to make any indemnification payment hereunder unless a claim is initiated prior to expiration of the applicable survival period set forth in Section 12.1(a). 12.4. NO CONTRIBUTION. With respect to the matters for which Parent or any other Indemnitee is entitled to indemnification pursuant to Section 12.2, the Principal Shareholder shall not have, and shall not be entitled to exercise or assert, against Parent (and, if applicable, the Surviving Corporation) or any Indemnitee, or attempt to exercise or assert, any right of contribution or right of indemnity or any other right or remedy (but not defenses) in connection with any indemnification obligation to Parent or any Indemnitee (and, if applicable, the Surviving Corporation) to which the Principal Shareholder may become subject under any of the Transactional Agreements or otherwise in connection with any of the transactions contemplated hereby. 12.5. INTEREST. Any party that is required to indemnify any other Person pursuant to this Section 12 with respect to any Damages, shall also be required to pay to such other Person interest on the amount of such Damages (for the period commencing as of the date on which such Person first paid such Damages and ending on the date on which the applicable indemnification payment is made to such Person) at the rate of 8.75% per annum except to the extent interest has been included in the amount of Damages awarded. 12.6. SETOFF. In addition to any rights of setoff or other rights that any Person may have at common law or otherwise, each Person shall have the right to set off any amount that may be owed to it by the other under this Section 12 against any amount otherwise payable by such Person hereunder, other than wages, salary or benefits as an employee. 12.7. DEFENSE OF THIRD PARTY CLAIMS. (a) In the event of the assertion or commencement by any Person of any claim or Proceeding (whether against Parent, any other Indemnitee or any other Person) with respect to which the Company may become obligated hereunder to indemnify, hold harmless, compensate or reimburse any Indemnitee pursuant to this Section 12, the party to be indemnified (the "INDEMNIFIED PARTY") shall, reasonably promptly following the Indemnified Party's actual knowledge thereof, notify the Person providing the indemnification hereunder (the "INDEMNIFYING PARTY") of such claim or Proceeding by providing notice to the Company and the Principal Shareholder. In any such event, the Indemnified Party may proceed with the defense of such claim or Proceeding and the Indemnifying Party shall bear and pay all costs and expenses (including attorneys fees and costs) in connection with the Indemnified Party's defense of any such claim or Proceeding (whether or not incurred by the Indemnified Party). 57 (b) If the Indemnified Party so proceeds with the defense of any such claim or Proceeding: (i) all expenses reasonably incurred and relating to the defense of such claim or Proceeding (whether or not incurred by the Indemnified Party) shall be borne and paid exclusively by the Indemnifying Party; (ii) the Indemnifying Party shall make available to the Indemnified Party any documents and materials in the possession or control of the Indemnifying Party that may be necessary to the defense of such claim or Proceeding; (iii) the Indemnified Party shall keep the Company and the Principal Shareholder informed of all material developments and events relating to such claim or Proceeding; (iv) the Company and the Principal Shareholder shall have the right to participate in the defense of such claim or proceeding at its own expense; and (v) the Indemnified Party shall not settle, adjust or compromise such claim or Proceeding without the prior written consent of the Company and the Principal Shareholder, which consent shall not be unreasonably withheld. ARTICLE 13 DEFINITIONS AND INTERPRETATION 13.1. DEFINITIONS. As used in this Agreement, the following defined terms shall have the meanings indicated below: "Acquisition Transaction" shall mean any transaction involving: (a) the sale or other disposition of all or substantially all of the Company's business or assets, or (other than in the ordinary course of business) of any portion of the Company's business or assets; (b) the issuance, sale or other disposition of (i) any capital stock of the Company, (ii) any option, call, warrant or right (whether or not immediately exercisable) to acquire any capital stock of the Company or (iii) any security, instrument or obligation that is or may become convertible into or exchangeable for any capital stock of the Company; or (c) any, merger, consolidation, business combination, share exchange, merger or similar transaction involving the Company; PROVIDED, that an exercise of rights pursuant to the existing buy-sell agreements set forth in the Company Disclosure Schedule shall not constitute an Acquisition Transaction. 58 "Affiliate" shall have the meaning set forth in Rule 12b-2 of the Exchange Act. "Agreement" shall mean this Agreement and Plan of Merger, together with the Exhibits and Schedules hereto and the Company Disclosure Schedule. "Articles of Merger" shall have the meaning set forth in Section 1.3 hereof. "Business EBITDA" shall have the meaning set forth in Section 2.3(a) hereof. "Bylaws" shall mean the Bylaws of the Company. "Cancelled Shares" shall have the meaning set forth in Section 2.1 hereof. "CBCA" shall mean the Colorado Business Corporation Act. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended "Certificates" shall have the meaning set forth in Section 3.1(b) hereof. "Change in Control" shall have the meaning set forth in Section 2.3(d) hereof. "Closing" shall have the meaning set forth in Section 1.2 hereof. "Closing Date" shall have the meaning set forth in Section 1.2 hereof. "Closing Share Price" shall have the meaning set forth in Section 2.2 hereof. "Code" shall have the meaning set forth in the recitals hereto. "Company" shall have the meaning set forth in the preamble hereto. "Company Articles" shall have the meaning set forth in 4.1(a) hereof. "Company Benefit Plans" shall mean the Company's 1998 Stock Option Plan. "Company Board" shall mean the board of directors of the Company. "Company Common Stock" shall have the meaning set forth in Section 2.1 hereof. "Company Contract" shall mean any contract: (a) to which the Company is a party; (b) by which the Company or any of its assets is or may become bound or under which the Company has, or may become subject to, any obligation; or 59 (c) under which the Company has or may acquire any right or interest. "Company Disclosure Schedule" shall have the meaning set forth in the introductory paragraph to Article 4. "Company Financial Statements" shall have the meaning set forth in Section 4.6(a) hereof. "Company Insurance Policy" shall have the meaning set forth in Section 4.17(a) hereof. "Company Intellectual Property" shall have the meaning set forth in Section 4.13(b) hereof. "Company Material Adverse Effect" shall mean, individually or in the aggregate, a material adverse effect on the business, condition (financial or otherwise), results of operations, prospects or assets and properties of the Company. "Company Option" shall have the meaning set forth in Section 2.6(a) hereof. "Company Required Vote" shall mean the affirmative vote of the holders of a majority of the outstanding shares of Company Common Stock. "Company Returns" shall have the meaning set forth in Section 4.11(b) hereof. "Content" shall have the meaning set forth in Section 4.13(a) hereof. "Contingent Consideration" shall have the meaning set forth in Section 2.3 hereof. "Continuing Employee" shall have the meaning set forth in Section 9.6 hereof. "Copyrights" shall have the meaning set forth in Section 4.13(a) hereof. "Damages" shall mean the amount of any loss, damage, injury, liability, claim, fee (including any legal fee, expert fee, accounting fee or advisory fee), demand, settlement, judgment, award, fine, penalty, Tax, charge or cost (including any cost of investigation). "Disclosure Schedule Update" shall have the meaning set forth in Section 7.4(b) hereof. "Dissenting Shares" shall have the meaning set forth in Section 3.3(a) hereof. "EBITDA Payment Date" shall have the meaning set forth in Section 2.3(a) hereof. "Effective Time" shall have the meaning set forth in Section 1.3 hereof. 60 "Employment Agreement" shall have the meaning set forth in Section 9.8 hereof. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" shall have the meaning set forth in Section 4.12(a) hereof. "ERISA Plans" shall have the meaning set forth in Section 4.12(a) hereof. "Escrow Agent" shall have the meaning set forth in Section 2.7(a) hereof. "Escrow Agreement" shall have the meaning set forth in Section 2.7(a) hereof. "Escrow Agreement for Employee Pool" shall have the meaning set forth in Section 9.11 hereof. "Escrow Fund" shall have the meaning set forth in Section 2.7(a) hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Exchange Agent" shall mean Person or Persons designated by Parent and reasonably acceptable to the Company to act as exchange agent for payment of the Merger Consideration. "Exchange Fund" shall have the meaning set forth in Section 3.1(e) hereof. "FIRPTA Affidavit" shall have the meaning set forth in Section 9.3 hereof. "First Installment" shall have the meaning set forth in Section 2.2 hereof. "Governmental Authorization" shall mean any: (a) permit, license, certificate, franchise, concession, approval, consent, ratification, permission, clearance, confirmation, endorsement, waiver, certification, designation, rating, registration, qualification or authorization that is issued, granted, given or otherwise made available by or under the authority of any Governmental Entity or pursuant to any Legal Requirement; or (b) right under any contract with any Governmental Entity. "Governmental Entity" shall mean any: (a) nation, principality, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; (c) governmental or quasi-governmental authority of any nature (including any governmental division, subdivision, department, agency, bureau, branch, office, commission, council, board, instrumentality, officer, official, representative, organization, unit, body or entity and any court or other tribunal); 61 (d) multinational organization or body; or (e) individual, entity or body exercising, or entitled to exercise, any executive, legislative, judicial, administrative, regulatory, police, military or taxing authority or power of any nature. "Hazardous Materials" shall mean any hazardous or toxic substance, material or waste which is or becomes prior to the Closing regulated under, or defined as a "hazardous substance," "pollutant," "contaminant," "toxic chemical," "hazardous material," "toxic substance" or "hazardous chemical" under (a) CERCLA; (b) the Emergency Planning and Community Right-to-Know Act, 42 U.S.C. Section 11001 ET SEQ.; (c) the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, ET SEQ.; (d) the Toxic Substances Control Act, 15 U.S.C. Section 2601 ET SEQ.; (e) the Occupational Safety and Health Act of 1970, 29 U.S.C. Section 651 ET SEQ.; (f) regulations promulgated under any of the above statutes; or (g) any applicable state or local statute, ordinance, rule or regulation that has a scope or purpose similar to those statutes identified above. "Indebtedness" shall mean (a) all indebtedness for borrowed money or for the deferred purchase price of property or services (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices), (b) any other indebtedness that is evidenced by a note, bond, debenture or similar instrument, (c) all obligations under financing leases, (d) all obligations in respect of acceptances issued or created, (e) all liabilities secured by any Lien on any property and (f) all guarantee obligations. "Indemnified Party" shall have the meaning set forth in Section 12.7(a) hereof. "Indemnifying Party" shall have the meaning set forth in Section 12.7(a) hereof. "Indemnitee" shall have the meaning set forth in Section 12.2(a) hereof. "Information Statement" shall have the meaning set forth in Section 7.8(a) hereof. "Initial EBITDA Payment" shall have the meaning set forth in Section 2.3(a) hereof. "Intellectual Property" shall have the meaning set forth in Section 4.13(a) hereof. "Leased Premises" shall have the meaning set forth in Section 4.18(d) hereof. "Legal Requirement" shall mean any federal, state, local, municipal, foreign or other law, statute, legislation, constitution, principle of common law, resolution, ordinance, code, edict, decree, proclamation, treaty, convention, rule, regulation, ruling, directive, pronouncement, requirement, specification, determination, decision, opinion or interpretation that is or has been issued, enacted, adopted, passed, approved, promulgated, made, implemented or otherwise put into effect by or under the authority of any Governmental Entity. 62 "Letter of Transmittal" shall have the meaning set forth in Section 3.1(b) hereof. "License Agreements" shall have the meaning set forth in Section 4.13(b) hereof. "Lien" shall have the meaning set forth in Section 4.5(c) hereof. "Loan Obligations" shall have the meaning set forth in Section 9.1(a) hereof. "Merger" shall have the meaning set forth in the recitals hereto. "Merger Consideration" shall have the meaning set forth in Section 2.2 hereof. "Merger Sub" shall have the meaning set forth in the preamble hereto. "Merrill Lynch Loan Agreement" shall have the meaning set forth in Section 9.4(b) hereof. "Non-Disclosure Agreement" shall have the meaning set forth in Section 7.7(a) hereof. "Order" shall mean any: (a) order, judgment, injunction, edict, decree, ruling, pronouncement, determination, decision, opinion, verdict, sentence, subpoena, writ or award that is issued, made, entered, rendered or otherwise put into effect by or under the authority of any court, administrative agency or other Governmental Entity or any arbitrator or arbitration panel; or (b) contract with any Governmental Entity that is entered into in connection with any Proceeding. "Parent" shall have the meaning set forth in the preamble hereto. "Parent Common Stock" shall mean the common stock of Parent. "Parent Material Adverse Effect" shall mean, individually or in the aggregate, a material adverse effect on the business, condition (financial or otherwise), results of operations, prospects or assets and properties of Parent. "Parent SEC Materials" shall have the meaning set forth in Section 7.8(a) hereof. "Parent SEC Reports" shall have the meaning set forth in Section 6.8 hereof. "Patents" shall have the meaning set forth in Section 4.13(a) hereof. "Person" shall mean a natural person, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Entity or other entity or organization. "Plans" shall have the meaning set forth in Section 4.12(a) hereof. "Principal Shareholder" shall have the meaning set forth in the preamble hereto. 63 "Proceeding" shall mean any action, suit, litigation, arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding and any informal proceeding), prosecution, contest, hearing, inquiry, inquest, audit, examination or investigation, commenced, brought, conducted or heard by or before, or otherwise has involved, any Governmental Entity or any arbitrator or arbitration panel. "SEC" shall mean the Securities and Exchange Commission. "Secretary of State" shall have the meaning set forth in Section 1.3 hereof. "Securities Act" shall mean the Securities Act of 1933, as amended. "Shareholder Indemnitees" shall have the meaning set forth in Section 12.3(a) hereof. "Shareholder Representative" shall have the meaning set forth in Section 2.7(a) hereto. "Shareholders" shall mean the holders of the Company Common Stock. "Software" shall have the meaning set forth in Section 4.13(a) hereof. "Surviving Corporation" shall have the meaning set forth in Section 1.1 hereto. "Tax" shall mean any tax (including any income tax, franchise tax, capital gains tax, estimated tax, gross receipts tax, value added tax, surtax, excise tax, ad valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business tax, occupation tax, inventory tax, occupancy tax, withholding tax or payroll tax), levy, assessment, tariff, impost, imposition, toll, duty (including any customs duty), deficiency or fee, and any related charge or amount (including any fine, penalty or interest), (a) imposed, assessed or collected by or under the authority of any Governmental Entity, or (b) payable pursuant to any tax sharing agreement or similar contract. "Tax Return" shall mean any return (including any information return), report, statement, declaration, estimate, schedule, notice, notification, form, election, certificate or other document or information that is, has been or may in the future be filed with or submitted to, or required to be filed with or submitted to, any Governmental Entity in connection with the determination, assessment, collection or payment of any Tax or in connection with the administration, implementation or enforcement of or compliance with any Legal Requirement relating to any Tax. "Termination Fee" shall mean $1,000,000. "Threshold Amount" shall have the meaning set forth in Section 12.2(b) hereof. "Trade Secrets" shall have the meaning set forth in Section 4.13(a) hereof. "Trademarks" shall have the meaning set forth in Section 4.13(a) hereof. 64 "Transactional Agreements" shall mean this Agreement, the Escrow Agreement, the Shareholders' Agreement, the Voting Agreement and the Articles of Merger. "US GAAP" shall have the meaning set forth in Section 4.6(b) hereof. "Voting Agreement" shall have the meaning set forth in the recitals hereto. "Voting Debt" shall have the meaning set forth in Section 4.2(b) hereof. "Working Capital Loan" shall have the meaning set forth in Section 9.4(a) hereof. "Year 2000 Compliance" shall have the meaning set forth in Section 4.13(o) hereof. 13.2. INTERPRETATION. (a) When a reference is made in this Agreement to a section or article, such reference shall be to a section or article of this Agreement unless otherwise clearly indicated to the contrary. (b) Whenever the words "include," "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation." (c) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. (d) The plural of any defined term shall have a meaning correlative to such defined term and words denoting any gender shall include all genders. When a word or phrase is defined herein, each of its other grammatical forms shall have a corresponding meaning. (e) A reference to any party to this Agreement or any other agreement or document shall include such party's successors and permitted assigns. (f) A reference to any legislation or to any provision of any legislation shall include any modification or re-enactment thereof, any legislative provision substituted therefor and all regulations and statutory instruments issued thereunder or pursuant thereto. (g) The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement. 65 (h) For purposes of this Agreement, the Company and Parent shall be deemed to have "knowledge" of a particular fact or other matter if: (i) the chief executive officer or chief financial officer of the Company or Parent, as the case may be, is actually aware of such fact or other matter; or (ii) the chief executive officer or chief financial officer of the Company or Parent, as the case may be, could be expected to discover or otherwise become aware of such fact or other matter in the course of conducting a reasonably comprehensive investigation concerning the existence of such fact or other matter. ARTICLE 14 MISCELLANEOUS 14.1. FEES AND EXPENSES. Except as specifically provided to the contrary in this Agreement, all costs and expenses incurred in connection with this Agreement and the consummation of the Merger shall be paid by the party incurring such expenses; PROVIDED, that if any legal action is instituted to enforce or interpret the terms of this Agreement, the prevailing party in such action shall be entitled, in addition to any other relief to which the party is entitled, to reimbursement of its actual attorneys fees. 14.2. AMENDMENT. This Agreement may be amended by the written agreement by each of the parties hereto but no amendment shall be made that by law requires further approval by the Shareholders without such approval. This Agreement may not be amended except by an instrument in writing signed on behalf of Parent, Merger Sub and the Company. Subject to the limitations of the CBCA, this Agreement may be amended before or after receipt of the Company Required Vote approving and adopting this Agreement and the Merger. 14.3. EXTENSION; WAIVER. At any time prior to the Effective Time, the parties hereto may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. 14.4. NOTICES. All notices and other communications hereunder shall be in writing (and shall be deemed given upon receipt) if delivered personally, sent by facsimile transmission (receipt of which is confirmed) or by mail to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): 66 (a) if to the Company, to Intelligent Decision Technologies, Ltd. 203 South Main Street Suite A Longmont, Colorado 80501 Attention: Henry Horsey, Jr. Facsimile No.: (303) 774-9124 with a copy to Chrisman, Bynum & Johnson, P.C. 1900 Fifteenth Street Boulder, Colorado 80302 Attention: G. James Williams, Jr. Esq. Facsimile No.: (303) 449-5426 and (b) if to the Principal Shareholder, to Henry Horsey, Jr. 7685 North 83rd Street Longmont, Colorado 80503 Facsimile No.: (303) 652-0336 and (c) if to Parent, to National Information Consortium, Inc. 10975 Benson Street Suite 390, 12 Corporate Woods Overland Park, Kansas 66210 Attention: Kevin Childress Facsimile No.: (913) 498-3472 with a copy to Morrison & Foerster LLP 425 Market Street San Francisco, California 94105 Attention: John Campbell, Esq. Facsimile No.: (415) 268-7522 67 14.5. DESCRIPTIVE HEADINGS. The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 14.6. COUNTERPARTS. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. 14.7. ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (including the Exhibits and Schedules attached hereto) together with the Ancillary Agreements (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, any provisions of any such latter agreement which are inconsistent with the transactions contemplated by this Agreement being waived hereby, and (b) shall not be assigned by operation of law or otherwise except that Parent and Merger Sub may assign, in their sole discretion, any or all of their rights, interests and obligations hereunder to any direct or indirect wholly or majority owned subsidiary or Affiliate of Parent; PROVIDED, HOWEVER, that such assignment shall not relieve Parent of its obligations hereunder. 14.8. GOVERNING LAW. This Agreement shall be governed and construed in accordance with the laws of the State of Colorado without regard to any applicable principles of conflicts of law. 14.9. SPECIFIC PERFORMANCE. The parties hereto agree that if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached, irreparable damage would occur, no adequate remedy at law would exist and damages would be difficult to determine, and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity. 14.10. PARTIES IN INTEREST. Except as set forth in Sections 7.3 and 10.2 hereof (which are intended to be for the benefit of the Persons referred to therein and their beneficiaries, and may be enforced by such Persons as intended third-party beneficiaries or otherwise herein), this Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person or Persons any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. 68 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. NATIONAL INFORMATION CONSORTIUM, INC. By: ---------------------------------- Name: Kevin Childress Title: Chief Financial Officer CHERRY HILLS ACQUISITION SUB, INC. By: ---------------------------------- Name: Kevin Childress Title: President INTELLIGENT DECISION TECHNOLOGIES, LTD. By: ---------------------------------- Name: Title: PRINCIPAL SHAREHOLDER By: ---------------------------------- Henry R. Horsey, Jr. 69 EX-10.36 3 a2041279zex-10_36.txt EXHIBIT 10.36 NATIONAL INFORMATION CONSORTIUM, INC. KEY EMPLOYEE AGREEMENT FOR WILLIAM F. BRADLEY, JR. THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 1st day of September, 2000, by and between William F. Bradley, Jr. ("Executive") and NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation (the "Company"). This Agreement amends and restates all prior agreements between Executive and the Company with respect to the subject matter hereof. WHEREAS, the Company desires to employ Executive to provide personal services to the Company and to the Company's subsidiaries, and wishes to provide Executive with certain compensation and benefits in return for Executive's services; and WHEREAS, Executive wishes to be employed by the Company and provide personal services to the Company and to the Company's subsidiaries in return for certain compensation and benefits; NOW, THEREFORE, the parties hereto agree as follows: 1. EMPLOYMENT BY THE COMPANY. 1.1 ACCEPTANCE. Subject to terms set forth herein, the Company or a subsidiary of the Company, agrees to employ Executive in the position of Executive Vice President--Strategy, Policy & Legal, General Counsel, and Executive hereby accepts such employment effective as of the date first written above. During the term of employment with the Company, Executive will devote his best efforts and substantially all of his business time and attention (except for vacation periods and reasonable periods of illness or other incapacity's permitted by the Company's general employment policies) to the business of the Company. 1.2 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). 1.3 EMPLOYMENT 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. 2. COMPENSATION. 2.1 SALARY. Executive shall receive for services to be rendered hereunder an annualized base salary of $140,000, 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. 2.2 STANDARD COMPANY BENEFITS. Executive shall be entitled to all rights and benefits for which they are eligible under the terms and conditions of the standard Company benefits and compensation practices which may be in effect from time to time and provided by the Company to its employees generally. 3. PROPRIETARY INFORMATION OBLIGATIONS. 3.1 AGREEMENT. Executive agrees to execute and abide by the Proprietary Information and Inventions Agreement attached hereto as Exhibit A. 4. TERMINATION OF EMPLOYMENT. 4.1 TERMINATION WITHOUT CAUSE. (a) The Company shall have the right to terminate Executive's employment with the Company at any time without cause. (b) In the event Executive's employment is terminated without cause before September 1, 2003, the Company shall pay Executive 12 months' base compensation in a single lump sum distribution on the first regular Company pay period after said termination. (c) In the event Executive's employment is terminated without cause on or after September 1, 2003, 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. 4.2 TERMINATION FOR CAUSE. (a) The Company shall have the right to terminate Executive's employment with the Company at any time for cause. Written notification of termination and specific cause of termination shall be provided to the Executive at the time of termination. (b) "Cause" for termination shall mean an employee's conviction of a felony or the willful and deliberate failure of an employee to perform his customary duties, in a manner consistent with the manner reasonably prescribed by the Board of Directors or President of Company (other than any failure resulting from his incapacity due to physical -2- or mental illness, disability or death) after not less than thirty (30) days prior written notice from Company. (c) In the event the Executive is notified in writing his employment is to be terminated for cause and the cause is curable, the Executive shall be given thirty days from date of notification to cure the specific cause(s) set forth in the notification. (d) In the event Executive's employment is terminated at any time for cause, the executive shall not be entitled to severance pay, pay in lieu of notice or any other such compensation; provided, however, Executive shall be entitled and shall receive all compensation earned prior to and including the date of termination. 4.3 VOLUNTARY OR MUTUAL TERMINATION. (a) Executive may voluntarily terminate his employment in writing with the Company at any time, after which no further compensation will be paid to Executive. (b) In the event Executive voluntarily terminates his employment, Executive shall not be entitled to severance pay, pay in lieu of notice or any other such compensation; provided, however, Executive shall be entitled and shall receive all compensation earned prior to and including the date of termination. 4.4 TERMINATION IN CONNECTION WITH A CHANGE OF CONTROL (a) In the event of a "Change in Control" of the Company (as defined herein), and in the event that either in contemplation of such Change of Control or after such Change of Control, Executive's employment is terminated without cause, in addition to any payments to which Executive may be entitled pursuant to Section 4.1, subject to the provisions of paragraph (c) below, Executive shall be entitled to a severance payment equal to the product of the number of full years of employment of Executive with the Company times the sum of (i) one month's salary, and (ii) one/twelfth the annual bonus earned by Executive for the last complete calendar year or year of employment, whichever is greater. In the event Executive voluntarily terminates his employment with the Company within six months of a Change of Control, subject to the provisions of paragraph (c) below, Executive shall be entitled to a severance payment equal to the product of the number of full years of employment of Executive with the Company times the sum of (i) one month's salary, and (ii) one/twelfth times the annual bonus earned by Executive for the last complete calendar year or year of employment, whichever is greater. In addition, in either case, notwithstanding the provisions of any stock option agreement, all stock options held by the Executive shall vest upon such Change of Control. (b) For purposes of this Section 4.4, a "Change in Control" of the Company shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, who -3- is not a "beneficial owner" (as defined in Rule 13d-3 under said Act), of 5% or more of the Company's common stock as of the date of this agreement becomes the beneficial owner, directly or indirectly, of capital stock of the Company representing 40 percent or more of the total voting power represented by the Company's then outstanding capital stock, or (ii) the shareholders of the Company approve (x) a merger or consolidation of the Company with any other company, other than a merger or consolidation in which the shareholders of the Company would own 50% or more of the voting stock of the surviving corporation, (y) the sale of all of substantially all of the assets of the Company, or (z) the liquidation or dissolution of the Company. (c) Anything in this Agreement to the contrary notwithstanding, prior to the payment of any compensation or benefits payable under paragraph (a) of this Section 4.4 hereof, the certified public accountants of the Company immediately prior to a Change of Control (the "Certified Public Accountants") shall determine as promptly as practical and in any event with 20 business days following the sale of the Company whether any payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, any other agreements or otherwise) (a "Payment") would more likely than not be nondeductible by the Company for Federal income tax purposes because of section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and if it is, then the aggregate present value of amounts payable or distributable to or for the benefit of the Company pursuant to this Agreement (such payments or distributions pursuant to this Agreement are thereinafter referred to as "Contract Payments") shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Section, the "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Contract Payments without causing any payment to be nondeductible by the Company because of said Section 280G of the Code. If under the Section the certified Public Accountants determine that any payment would more likely than not be nondeductible by the Company because of Section 280G of the Code, the Company shall promptly give Executive notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Executive may then elect, in his sole discretion, which and how much of the Contract Payments or any other payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Agreement Payments or any other payments equals the Reduced Amount), and shall advise the Company in writing of his election within 20 business days of his receipt of notice. If no such election is made by Executive within such 20-day period, the Company may elect which and how much of the Contract Payments or any other payments shall be eliminated or reduced (as long as after such election the Aggregate present value of the Contract Payments equals the Reduced Amount) and shall notify Executive promptly of such election. For purposes of this Section, present value shall be determined in accordance with Section 280G(d)(4) of the Code. All determinations made by the Certified Public Accountants shall be binding upon the Company and Executive and the payment to Executive shall be made within 20 days of sale of the Company. The Company may suspend for a period of up to 30 days after the sale of the Company the Payment and any other payments or benefits due to Executive -4- until the Certified Public Accountants finish the determination and Executive (or the Company, as the case may be) elects how to reduce the Contract Payments or any other payments, if necessary. As promptly as practicable following such determination and the elections hereunder, the Company shall pay to our distribute to or for the benefit of Executive such amounts as are then due to Executive under this Agreement. 5. NON-INTERFERENCE; NON-COMPETITION. 5.1 AGREEMENT. Executive agrees to execute and abide by the Noncompetition Agreement attached hereto as Exhibit B. 6. GENERAL PROVISION. 6.1 NOTICES. Any notices provided hereunder must be in writing and shall be deemed effective upon the earlier of personal delivery (including personal delivery by facsimile) or the third day after mailing by first class mail, to the Company at its primary office location and to Executive at the address listed on the Company payroll. 6.2 SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been contained herein. 6.3 WAIVER. If either party should waive any breach of any provisions of this Agreement, they or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 6.4 COMPLETE AGREEMENT. This Agreement and its Exhibits, constitute the entire agreement between Executive and the Company and it is the complete, final, and exclusive embodiment of his agreement with regard to the material terms of executive employment, compensation, and duration. It is entered into without reliance on any promise or representation other than those expressly contained herein, and it cannot be modified or amended except in a writing signed by Executive and an officer of the Company. 6.5 COUNTERPARTS. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. 6.6 HEADINGS. The headings of the sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 6.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company, and his respective successors, -5- assigns, heirs, executors and administrators, except that Executive may not assign any of his duties hereunder and they may not assign any of his rights hereunder without the written consent of the Company, which shall not be withheld unreasonably. 6.8 ATTORNEYS' 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. 6.9 CHOICE OF LAW. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of Kansas. IN WITNESS WHEREOF, the parties have executed this Key Employee Agreement on the day and year first above written. NATIONAL INFORMATION CONSORTIUM, INC.: By: /s/ Sam Somerhalder --------------------------------- Name: SAM SOMERHALDER Title: EXECUTIVE VICE PRESIDENT EXECUTIVE: /s/ William F. Bradley, Jr. ------------------------------------ Name: William F. Bradley, Jr. -6- EXHIBIT "A" EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT In consideration of my employment or continued employment by NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation, or any controlled subsidiary of the Company (collectively, the "Company"), and in consideration of the compensation now and hereafter paid to me, I, the undersigned, hereby agree as follows: 1. NONDISCLOSURE. 1.1 RECOGNITION OF COMPANY'S RIGHTS; NONDISCLOSURE. At all times during my employment and thereafter, I will hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Company's Proprietary Information (defined below), except as such disclosure, use or publication may be required in connection with my work for the Company, or unless an officer of the Company expressly authorizes such in writing. I will obtain Company's written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to my work at Company and/or incorporates any Proprietary Information. I hereby assign to the Company any rights I may have or acquire in such Proprietary Information and recognize that all Proprietary Information shall be the sole property of the Company and its assigns. 1.2 PROPRIETARY INFORMATION. The term "Proprietary Information" shall mean any and all confidential and/or proprietary knowledge, data or information of the Company. By way of illustration but not limitation, "Proprietary Information" includes (a) trade secrets, inventions, ideas, processes, formulas, source and object codes, data, programs, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques (hereinafter collectively referred to as "Inventions"); and (b) information regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and (c) information regarding the skills and compensation of other employees of the Company. Notwithstanding the foregoing, it is understood that, at all such times, I am free to use information which is generally known in the trade or industry, which is not gained as result of a breach of this Agreement, and my own, skill, knowledge, know-how and experience to whatever extent and in whichever way I wish. 1.3 THIRD PARTY INFORMATION. I understand, in addition, that the Company has received and in the future will receive from third parties confidential or proprietary information ("Third Party Information") subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes. During the term of my employment and thereafter, I will hold Third Party Information in the strictest confidence and will not disclose to anyone (other than Company personnel who need to know such information in connection with his work for the Company) or use, except in connection with my work for the Company, Third Party Information unless expressly authorized by an officer of the Company in writing. 1.4 NO IMPROPER USE OF INFORMATION OF PRIOR EMPLOYERS AND OTHERS. During my employment by the Company I will not improperly use or disclose any confidential information or trade secrets, if any, of any former employer or any other person to whom I have an obligation of confidentiality, and I will not bring onto the premises of the Company any unpublished documents or any property belonging to any former employer or any other person to whom I have an obligation of confidentiality unless consented to in writing by that former employer or person. I will use in the performance of my duties only information which is generally known and used by persons with training and experience comparable to my own, which is common knowledge in the industry or otherwise legally in the public domain, or which is otherwise provided or developed by the Company. 2. ASSIGNMENT OF INVENTIONS. 2.1 PROPRIETARY RIGHTS. The term "Proprietary Rights" shall mean all trade secret, patent, copyright, and other intellectual property rights throughout the world. 2.2 PRIOR INVENTIONS. Inventions, if any, patented or unpatented, which I made prior to the commencement of my employment with the Company are excluded from the scope of this Agreement. To preclude any possible uncertainty, I have set forth on Exhibit A (Previous Inventions) attached hereto a complete list of all Inventions that I have, alone or jointly with others, conceived, developed or reduced to practice or caused to be conceived, developed or reduced to practice prior to the commencement of my employment with the Company, that I consider to be my property or the property of third parties and that I wish to have excluded from the scope of this Agreement (collectively referred to as "Prior Inventions"). If disclosure of any such Prior Invention would cause me to violate any prior confidentiality agreement, I understand that I am not to list such Prior Inventions in Exhibit A but am only to disclose a cursory name for each such invention, a listing of the party(ies) to whom it belongs and the fact that full disclosure as to such inventions has not been made for that reason. A space is provided on Exhibit A for such purpose. If no such disclosure is attached, I represent that there are no Prior Inventions. If, in the course of my employment with the Company, I incorporate a Prior Invention into a Company product, process or machine, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, modify, use and sell such Prior Invention. Notwithstanding the foregoing, I agree that I will not incorporate, or permit to be incorporated, Prior Inventions in any Company Inventions without the Company's prior written consent. 2.3 ASSIGNMENT OF INVENTIONS. Subject to Sections 2.4, and 2.6, I hereby assign and agree to assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to the Company all my right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by me, either alone or jointly with others, during the period of my -2- employment with the Company. Inventions assigned to the Company, or to a third party as directed by the Company pursuant to this Section 2, are hereinafter referred to as "Company Inventions." 2.4 NONASSIGNABLE INVENTIONS. This Agreement will not be deemed to require assignment of and "Company Inventions" shall not be decerned to include any invention which was developed entirely on my own time without using the Company's equipment, supplies, facilities, or trade secrets and neither related to the Company's actual or anticipated business, research or development, nor resulted from work performed by me for the Company. 2.5 OBLIGATION TO KEEP COMPANY INFORMED. During the period of my employment and for six (6) months after termination of my employment with the Company, I will promptly disclose to the Company fully and in writing all Inventions authored, conceived or reduced to practice by me, either alone or jointly with others. In addition, I will promptly disclose to the Company all patent applications filed by me or on my behalf within a year after termination of employment. At the time of each such disclosure, I will advise the Company in writing of any Inventions that I believe fully qualify for protection "as non- Company Inventions" and I will at that time provide to the Company in writing all evidence necessary to substantiate that belief. The Company will keep in confidence and will not use for any purpose or disclose to third parties without my consent any confidential information disclosed in writing to the Company pursuant to this Agreement relating to Inventions that "are not Company Inventions." I will preserve the confidentiality of any Invention which "is a Company Invention." 2.6 GOVERNMENT OR THIRD PARTY. I also agree to assign all my right, title and interest in and to any particular Company Invention to a third party, including without limitation the United States, as directed by the Company. 2.7 WORKS FOR HIRE. I acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of my employment and which are protectable by copyright are "works made for hire," pursuant to United States Copyright Act (17 U.S.C., Section 101). 2.8 ENFORCEMENT OF PROPRIETARY RIGHTS. I will assist the Company in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Company Inventions in any and all countries. To that end I will execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof. In addition, I will execute, verify and deliver assignments of such "Company Inventions" to the Company or its designee. My obligation to assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of my employment, but the Company shall compensate me at a reasonable rate after my termination for the time actually spent by me at the Company's request on such assistance. In the event the Company is unable for any reason, after reasonable effort, to secure my signature on any document needed in connection with the actions specified in the preceding -3- paragraph, I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney in fact, which appointment is coupled with an interest, to act for and in my behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by me. I hereby waive and quitclaim to the Company any and all claims, of any nature whatsoever, which I now or may hereafter have for infringement of any Proprietary Rights or Company Inventions assigned hereunder to the Company. 3. RECORDS. I agree to keep and maintain adequate and current records (in the form of notes, sketches, drawings and in any other form that may be required by the Company) of all Proprietary Information developed by me and all Inventions made by me during the period of my employment at the Company, which records shall be available to and remain the sole property of the Company at all times. 4. NO CONFLICTING OBLIGATION. I represent that my performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith. 5. RETURN OF COMPANY DOCUMENTS. When I leave the employ of the Company, I will deliver to the Company any and all original drawings, notes, memoranda, specifications, devices, formulas, and documents, and any other material containing or disclosing any Company Inventions, Third Party Information or Proprietary Information of the Company. I further agree that any property situated on the Company's premises and owned by the Company, including disks and other storage media, filing cabinets or other work areas, is subject to inspection by Company personnel at any time with or without notice. Prior to leaving, I will cooperate with the Company in completing and signing the Company's termination statement. 6. LEGAL AND EQUITABLE REMEDIES. Because my services are personal and unique and because I may have access to and become acquainted with the Proprietary Information of the Company, the Company shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance or other equitable relief, without bond and without prejudice to any other rights and remedies that the Company may have for a breach of this Agreement. -4- 7. NOTICES. Any notices required or permitted hereunder shall be given to the appropriate party at the address specified below or at such other address as the party shall specify in writing. Such notice shall be deemed given upon personal delivery to the appropriate address or if sent by certified or registered mail, three (3) days after the date of mailing. 8. NOTIFICATION OF NEW EMPLOYER. In the event that I leave the employ of the Company, I hereby consent to the notification of my new employer of my rights and obligations under this Agreement. 9. GENERAL PROVISIONS. 9.1 GOVERNING LAW; CONSENT TO PERSONAL JURISDICTION. This Agreement will be governed by and construed according to the laws of the State of Kansas, as such laws are applied to agreements entered into and to be performed principally within Kansas. I hereby expressly consent to the personal jurisdiction of the state and federal courts located in Johnson County, Kansas, for any lawsuit filed there against me by Company arising from or related to this Agreement. 9.2 SEVERABILITY. In case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein so long as the central purpose and intent of the Agreement can still be achieved. If moreover, any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 9.3 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon my heirs, executors, administrators and other legal representatives and will be for the benefit of the Company, its successors, and its assigns. 9.4 SURVIVAL. The provisions of this Agreement shall survive the termination of my employment and the assignment of this Agreement by the Company to any successor in interest or other assignee. 9.5 EMPLOYMENT. I agree and understand that nothing in this Agreement shall confer any right with respect to continuation of employment by the Company, nor shall it interfere in any way with my right or the Company's right to terminate my employment at any time, with or without cause. 9.6 WAIVER. No waiver by the Company of any breach of this Agreement shall be a waiver of any preceding or succeeding breach. No waiver by the Company of any right under this -5- Agreement shall be construed as a waiver of any other right. The Company shall not be required to give notice to enforce strict adherence to all terms of this Agreement. 9.7 ENTIRE AGREEMENT. The obligations pursuant to Sections 1 and 2 of this Agreement shall apply to any time during which I was previously employed, or am in the future employed, by the Company as a consultant if no other agreement governs nondisclosure and assignment of inventions during such period. This Agreement is the final, complete and exclusive agreement of the parties with respect to the subject matter hereof and supersedes and merges all prior discussions between us. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing and signed by the party to be charged. Any subsequent change or changes in my duties, salary or compensation will not affect the validity or scope of this Agreement. This Agreement shall be effective as of the first day of my employment with the Company, namely: January 1, 1995. I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE COMPLETELY FILLED OUT EXHIBIT A TO THIS AGREEMENT. Dated: October 13, 2000 /s/ William F. Bradley, Jr. ------------------------------------- (Signature) WILLIAM F. BRADLEY, JR. (Printed Name) ACCEPTED AND AGREED TO: NATIONAL INFORMATION CONSORTIUM, INC. By: /s/ Sam Somerhalder ---------------------------------- Title: EVP Lincoln, NE 68508 (Address) Dated: October 24, 2000 -6- EXHIBIT A PREVIOUS INVENTIONS TO: National Information Consortium, Inc. FROM: WILLIAM F. BRADLEY, JR. DATE: January 1, 1995 SUBJECT: Previous Inventions 1. Except as listed in Section 2 below, the following is a complete list of all inventions or improvements relevant to the subject matter of my employment by National Information Consortium, Inc. or any of its controlled subsidiaries (collectively, the "Company"), that have been made or conceived or first reduced to practice by one alone or jointly with others prior to my engagement by the Company: - No inventions or improvements. - See below: ------------------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------------ - Additional sheets attached. 2. Due to a prior confidentiality agreement, I cannot complete the disclosure under Section 1 above with respect to inventions or improvements generally listed below, the proprietary rights and duty of confidentiality with respect to which I owe to the following party(ies):
INVENTION OR IMPROVEMENT PARTY(IES) RELATIONSHIP 1. ___________________________ __________ ___________________ 2. ___________________________ __________ ___________________ 3. ___________________________ __________ ___________________
- Additional sheets attached. -7- EXHIBIT "B" NONCOMPETITION AGREEMENT THIS NONCOMPETITION AGREEMENT (the "Agreement") is being executed and delivered as of September 1, 2000, by William F. Bradley, Jr. (the "Executive") in favor of, and for the benefit of: NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation ("NIC," and together with NIC's subsidiaries, (the "Company"). Certain capitalized terms used in this Agreement are defined in Section 11. RECITALS A. As an employee of the Company, the Executive has obtained extensive and valuable knowledge and confidential information concerning the business of the Company. B. The Company and the Executive are executing a Key Employee Agreement (the "Employment Agreement") contemporaneously with the execution and delivery of this Agreement. Pursuant to the Employment Agreement, the Executive is becoming a key employee of the Company and will accordingly obtain extensive and valuable knowledge and confidential information concerning the business of the Company. C. The Company and the Executive acknowledge that this Agreement is intended to protect the legitimate business interests of the Company and of the Executive. D. The Company has conducted and is conducting its business on a national basis. AGREEMENT For good and valuable consideration, the receipt of which is hereby acknowledged, the Company and the Executive agree as follows: 1. RESTRICTION ON COMPETITION. The Executive agrees that, during the Noncompetition Period, the Executive shall not, and shall not permit any of his Affiliates to: (a) engage directly in Competition in any Restricted Territory; or (b) directly be or become an officer, director, stockholder, owner, co-owner, Affiliate, partner, promoter, employee, agent, representative, designer, consultant, advisor, manager, licensor, sublicensor, licensee or sublicensee of, for or to, or otherwise be or become associated with or acquire or hold (of record, beneficially or otherwise) any direct or indirect interest in, any Person that engages directly or indirectly in Competition in any Restricted Territory: Provided, however, that the Executive may, without violating this Section 1, own, as a passive investment, shares of capital stock of a publicly held corporation that engages in Competition if (i) such shares are actively traded on an established national securities market in the United States, (ii) the number of shares of such corporation's capital stock that are owned beneficially (directly or indirectly) by the Executive and the number of shares of such corporation's capital stock that are owned beneficially (directly or indirectly) by the Executive's Affiliates collectively represent less than five percent of the total number of shares of such corporation's capital stock outstanding, and (iii) neither the Executive nor any Affiliate of the Executive is otherwise associated directly or indirectly with such corporation or with any Affiliate of such corporation. 2. REPRESENTATIONS AND WARRANTIES. The Executive represents and warrants, to and for the benefit of the Company, that: (a) they have full power and capacity to execute and deliver, and to perform all of his obligations under, this Agreement; and (b) neither the execution and delivery of this Agreement nor the performance of this Agreement will result directly or indirectly in a violation or breach of(i) any agreement or obligation by which the Executive or any of his Affiliates is or may be bound, or (ii) any law, rule or regulation. The Executive's representations and warranties shall survive the expiration of the Noncompetition Period for an unlimited period of time. 3. SPECIFIC PERFORMANCE. The Executive agrees that, in the event of any breach or threatened breach by the Executive of any covenant or obligation contained in this Agreement, each of the Company shall be entitled (in addition to any other remedy that may be available to it, including monetary damages) to seek and obtain (a) a decree or order of specific performance to enforce the observance and performance of such covenant or obligation, and (b) an injunction restraining such breach or threatened breach. 4. NONEXCLUSIVITY. The rights and remedies of the parties hereto under this Agreement are not exclusive of or limited by any other rights or remedies which they may have, whether at law, in equity, by contract or otherwise, all of which shall be cumulative (and not alternative). Without limiting the generality of the foregoing, the rights and remedies of the parties hereto under this Agreement, and the obligations and liabilities of the Executive under this Agreement, are in addition to his respective rights, remedies, obligations and liabilities under the law of unfair competition, under laws relating to misappropriation of trade secrets, under other laws and common law requirements and under all applicable rules and regulations. Nothing in this Agreement shall limit any of the obligations, or the rights or remedies of the parties hereto, under the Employment Agreement; and nothing in the Employment Agreement shall limit any of the obligations, or any of the rights or remedies of the parties hereto, under this Agreement. No breach on the part of the Company or any other party of any covenant or obligation contained in the Employment Agreement or any other agreement shall limit or otherwise affect any right or remedy of the parties hereto under this Agreement. 5. SEVERABILITY. If any provision of this Agreement or any part of any such provision is held under any circumstances to be invalid or unenforceable in any jurisdiction, then (a) such provision or part thereof shall, with respect to such circumstances and in such jurisdiction, be deemed amended to conform to applicable laws so as to be valid and enforceable to the fullest possible extent, (b) the invalidity or unenforceability of such -2- provision or part thereof under such circumstances and in such jurisdiction shall not affect the validity or enforceability of such provision or part thereof under any other circumstances or in any other jurisdiction, and (c) the invalidity or unenforceability of such provision or part thereof shall not affect the validity or enforceability of the remainder of such provision or the validity or enforceability of any other provision of this Agreement. Each provision of this Agreement is separable from every other provision of this Agreement, and each part of each provision of this Agreement is separable from every other part of such provision so long as to do so does not destroy the central intent and purpose of the agreement. 6. GOVERNING LAW; VENUE. (a) This Agreement shall be construed in accordance with, and governed in all respects by, the laws of the State of Kansas (without giving effect to principles of conflicts of laws). (b) Any legal action or other legal proceeding relating to this Agreement or the enforcement of any provision of this Agreement may be brought or otherwise commenced in any state or federal court located in Johnson County Kansas. The Executive: (i) expressly and irrevocably consents and submits to the jurisdiction of each state and federal court located in Johnson County of Kansas (and each appellate court located in the State of Kansas), in connection with any such legal proceeding; (ii) agrees that service of any process, summons, notice or document by U.S. mail addressed to them at the address set forth on the signature page of this Agreement shall constitute effective service of such process, summons, notice or document for purposes of any such legal proceeding; (iii) agrees that each state and federal court located in Johnson County Kansas, shall be deemed to be a convenient forum; and (iv) agrees not to assert (by way of motion, as a defense or otherwise), in any such legal proceeding commenced in any state or federal court located in Johnson County Kansas, any claim that the Executive is not subject personally to the jurisdiction of such court, that such legal proceeding has been brought in an inconvenient forum, that the venue of such proceeding is improper or that this Agreement or the subject matter of this Agreement may not be enforced in or by such court. 7. WAIVER. No failure on the part of the Company or any other party to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of the Company or any other party in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no -3- single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. 8. CAPTIONS. The captions contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement. 9. CONSTRUCTION. Whenever required by the context, the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; and the neuter gender shall include the masculine and feminine genders. Any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement. Neither the drafting history nor the negotiating history of this Agreement shall be used or referred to in connection with the construction or interpretation of this Agreement. As used in this Agreement, the words "include" and "including," and variations thereof, shall not be deemed to be terms of limitation, and shall be deemed to be followed by the words "without limitation." Except as otherwise indicated in this Agreement, all references in this Agreement to "Sections" are intended to refer to Sections of this Agreement. 10. AMENDMENT. This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of the Executive and the Company (or any successor to the Company). 11. DEFINED TERMS. For purposes of this Agreement: (a) "Affiliate" means, with respect to the Executive, any other Person that, directly or indirectly, through one or more intermediaries, is controlled by the Executive. (b) "Competing Product" means any: (i) application or software program that provides an electronic gateway to government services or procurement information; (ii) product, device or system that is substantially the same as, incorporates, is a material component or part of, or is based upon or competes with anything referred to in clause (i) above or any product, device or system that has been designed, developed, promoted, sold, resold, installed, supported, maintained, licensed or sublicensed by or on behalf of Persons who at any time on or prior to the date of this Agreement were competitors of the Company (or of any predecessor of the Company) at any time on or prior to this date of this Agreement until the date of termination of employment. (c) "Competing Service" means any: (i) public/private partnership that provides an electronic gateway to government services or procurement information; (ii) service that is substantially the same as, incorporates, is a material component or part of, or is based upon or competes with a service that has been provided, performed or offered by or on behalf the Company (or of any predecessor of the Company) at any time on or prior to the date of this Agreement or until the date of -4- termination of employment; (iii) service that facilitates, supports or otherwise relates to the any Competing Product. (d) A Person shall be deemed to be engaged in "Competition" if: (i) such Person is engaged directly or indirectly in the design, development, manufacture, assembly, promotion, sale, supply, distribution, resale, installation, support, maintenance, repair, refurbishment, licensing, sublicensing, financing, leasing or subleasing of any Competing Product; or (ii) such Person is engaged directly or indirectly in providing, performing or offering any Competing Service. (e) "Confidential Information" means any non-public information (whether or not in written form and whether or not expressly designated as confidential) relating directly or indirectly to the Company or relating directly or indirectly to the business, operations, financial affairs, performance, assets, technology, processes, products, contracts, customers, licensees, sublicensees, suppliers, personnel, consultants or plans of the Company (including any such information consisting of or otherwise relating to trade secrets, know-how, technology, inventions, prototypes, designs, drawings, sketches, processes, license or sublicense arrangements, formulae, proposals, research and development activities, customer lists or preferences, pricing lists, referral sources, marketing or sales techniques or plans, operations manuals, service manuals, financial information, projections, lists of consultants, lists of suppliers or lists of distributors); provided, however, that "Confidential Information" shall not be deemed to include information of the Company that was already publicly known and in the public domain prior to the time of its disclosure by the Executive. (f) "Noncompetition Period" shall mean the period commencing on the date of this Agreement and ending on the second anniversary of the date of the termination of the Executive's employment with the Company. (g) "Person" means, other than Electric Press, Inc., a Virginia corporation, any: (i) individual or (ii) corporation, general partnership, limited partnership, limited liability partnership, trust, company (including any limited liability company or joint stock company) or other organization or entity. (h) "Restricted Territory" means each county or similar political subdivision of each State of the United States of America (including each of the counties in the State of California), and each State, territory or possession of the United States of America. -5- IN WITNESS WHEREOF, the Executive has duly executed and delivered this Noncompetition Agreement as of the date first above written. Signature /s/ William F. Bradley, Jr. --------------------------------- Name: WILLIAM F. BRADLEY, JR. Telephone No.: ( ) ____________________ Facsimile: ( ) ____________________ -6- EX-10.37 4 a2041279zex-10_37.txt EXHIBIT 10.37 NATIONAL INFORMATION CONSORTIUM, INC. KEY EMPLOYEE AGREEMENT FOR SAMUEL R.D. SOMERHALDER THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 1st day of September, 2000, by and between Samuel R.D. Somerhalder ("Executive") and NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation (the "Company"). This Agreement amends and restates all prior agreements between Executive and the Company with respect to the subject matter hereof. WHEREAS, the Company desires to employ Executive to provide personal services to the Company and to the Company's subsidiaries, and wishes to provide Executive with certain compensation and benefits in return for Executive's services; and WHEREAS, Executive wishes to be employed by the Company and provide personal services to the Company and to the Company's subsidiaries in return for certain compensation and benefits; NOW, THEREFORE, the parties hereto agree as follows: 1. EMPLOYMENT BY THE COMPANY. 1.1 ACCEPTANCE. Subject to terms set forth herein, the Company or a subsidiary of the Company, agrees to employ Executive in the position of Executive Vice President--Operations/Administration and Executive hereby accepts such employment effective as of the date first written above. During the term of employment with the Company, Executive will devote his best efforts and substantially all of his business time and attention (except for vacation periods and reasonable periods of illness or other incapacity's permitted by the Company's general employment policies) to the business of the Company. 1.2 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). 1.3 EMPLOYMENT 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. 2. COMPENSATION. 2.1 SALARY. Executive shall receive for services to be rendered hereunder an annualized base salary of $140,000, 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. 2.2 STANDARD COMPANY BENEFITS. Executive shall be entitled to all rights and benefits for which they are eligible under the terms and conditions of the standard Company benefits and compensation practices which may be in effect from time to time and provided by the Company to its employees generally. 3. PROPRIETARY INFORMATION OBLIGATIONS. 3.1 AGREEMENT. Executive agrees to execute and abide by the Proprietary Information and Inventions Agreement attached hereto as Exhibit A. 4. TERMINATION OF EMPLOYMENT. 4.1 TERMINATION WITHOUT CAUSE. (a) The Company shall have the right to terminate Executive's employment with the Company at any time without cause. (b) In the event Executive's employment is terminated without cause before September 1, 2003, the Company shall pay Executive 12 months' base compensation in a single lump sum distribution on the first regular Company pay period after said termination. (c) In the event Executive's employment is terminated without cause on or after September 1, 2003, 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. 4.2 TERMINATION FOR CAUSE. (a) The Company shall have the right to terminate Executive's employment with the Company at any time for cause. Written notification of termination and specific cause of termination shall be provided to the Executive at the time of termination. (b) "Cause" for termination shall mean an employee's conviction of a felony or the willful and deliberate failure of an employee to perform his customary duties, in a manner consistent with the manner reasonably prescribed by the Board of Directors or President of Company (other than any failure resulting from his incapacity due to physical -2- or mental illness, disability or death) after not less than thirty (30) days prior written notice from Company. (c) In the event the Executive is notified in writing his employment is to be terminated for cause and the cause is curable, the Executive shall be given thirty days from date of notification to cure the specific cause(s) set forth in the notification. (d) In the event Executive's employment is terminated at any time for cause, the executive shall not be entitled to severance pay, pay in lieu of notice or any other such compensation; provided, however, Executive shall be entitled and shall receive all compensation earned prior to and including the date of termination. 4.3 VOLUNTARY OR MUTUAL TERMINATION. (a) Executive may voluntarily terminate his employment in writing with the Company at any time, after which no further compensation will be paid to Executive. (b) In the event Executive voluntarily terminates his employment, Executive shall not be entitled to severance pay, pay in lieu of notice or any other such compensation; provided, however, Executive shall be entitled and shall receive all compensation earned prior to and including the date of termination. 4.4 TERMINATION IN CONNECTION WITH A CHANGE OF CONTROL (a) In the event of a "Change in Control" of the Company (as defined herein), and in the event that either in contemplation of such Change of Control or after such Change of Control, Executive's employment is terminated without cause, in addition to any payments to which Executive may be entitled pursuant to Section 4.1, subject to the provisions of paragraph (c) below, Executive shall be entitled to a severance payment equal to the product of the number of full years of employment of Executive with the Company times the sum of (i) one month's salary, and (ii) one/twelfth the annual bonus earned by Executive for the last complete calendar year or year of employment, whichever is greater. In the event Executive voluntarily terminates his employment with the Company within six months of a Change of Control, subject to the provisions of paragraph (c) below, Executive shall be entitled to a severance payment equal to the product of the number of full years of employment of Executive with the Company times the sum of (i) one month's salary, and (ii) one/twelfth times the annual bonus earned by Executive for the last complete calendar year or year of employment, whichever is greater. In addition, in either case, notwithstanding the provisions of any stock option agreement, all stock options held by the Executive shall vest upon such Change of Control. (b) For purposes of this Section 4.4, a "Change in Control" of the Company shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, who -3- is not a "beneficial owner" (as defined in Rule 13d-3 under said Act), of 5% or more of the Company's common stock as of the date of this agreement becomes the beneficial owner, directly or indirectly, of capital stock of the Company representing 40 percent or more of the total voting power represented by the Company's then outstanding capital stock, or (ii) the shareholders of the Company approve (x) a merger or consolidation of the Company with any other company, other than a merger or consolidation in which the shareholders of the Company would own 50% or more of the voting stock of the surviving corporation, (y) the sale of all of substantially all of the assets of the Company, or (z) the liquidation or dissolution of the Company. (c) Anything in this Agreement to the contrary notwithstanding, prior to the payment of any compensation or benefits payable under paragraph (a) of this Section 4.4 hereof, the certified public accountants of the Company immediately prior to a Change of Control (the "Certified Public Accountants") shall determine as promptly as practical and in any event with 20 business days following the sale of the Company whether any payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, any other agreements or otherwise) (a "Payment") would more likely than not be nondeductible by the Company for Federal income tax purposes because of section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and if it is, then the aggregate present value of amounts payable or distributable to or for the benefit of the Company pursuant to this Agreement (such payments or distributions pursuant to this Agreement are thereinafter referred to as "Contract Payments") shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Section, the "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Contract Payments without causing any payment to be nondeductible by the Company because of said Section 280G of the Code. If under the Section the certified Public Accountants determine that any payment would more likely than not be nondeductible by the Company because of Section 280G of the Code, the Company shall promptly give Executive notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Executive may then elect, in his sole discretion, which and how much of the Contract Payments or any other payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Agreement Payments or any other payments equals the Reduced Amount), and shall advise the Company in writing of his election within 20 business days of his receipt of notice. If no such election is made by Executive within such 20-day period, the Company may elect which and how much of the Contract Payments or any other payments shall be eliminated or reduced (as long as after such election the Aggregate present value of the Contract Payments equals the Reduced Amount) and shall notify Executive promptly of such election. For purposes of this Section, present value shall be determined in accordance with Section 280G(d)(4) of the Code. All determinations made by the Certified Public Accountants shall be binding upon the Company and Executive and the payment to Executive shall be made within 20 days of sale of the Company. The Company may suspend for a period of up to 30 days after the sale of the Company the Payment and any other payments or benefits due to Executive -4- until the Certified Public Accountants finish the determination and Executive (or the Company, as the case may be) elects how to reduce the Contract Payments or any other payments, if necessary. As promptly as practicable following such determination and the elections hereunder, the Company shall pay to our distribute to or for the benefit of Executive such amounts as are then due to Executive under this Agreement. 5. NON-INTERFERENCE; NON-COMPETITION. 5.1 AGREEMENT. Executive agrees to execute and abide by the Noncompetition Agreement attached hereto as Exhibit B. 6. GENERAL PROVISION. 6.1 NOTICES. Any notices provided hereunder must be in writing and shall be deemed effective upon the earlier of personal delivery (including personal delivery by facsimile) or the third day after mailing by first class mail, to the Company at its primary office location and to Executive at the address listed on the Company payroll. 6.2 SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been contained herein. 6.3 WAIVER. If either party should waive any breach of any provisions of this Agreement, they or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 6.4 COMPLETE AGREEMENT. This Agreement and its Exhibits, constitute the entire agreement between Executive and the Company and it is the complete, final, and exclusive embodiment of his agreement with regard to the material terms of executive employment, compensation, and duration. It is entered into without reliance on any promise or representation other than those expressly contained herein, and it cannot be modified or amended except in a writing signed by Executive and an officer of the Company. 6.5 COUNTERPARTS. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. 6.6 HEADINGS. The headings of the sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 6.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company, and his respective successors, -5- assigns, heirs, executors and administrators, except that Executive may not assign any of his duties hereunder and they may not assign any of his rights hereunder without the written consent of the Company, which shall not be withheld unreasonably. 6.8 ATTORNEYS' 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. 6.9 CHOICE OF LAW. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of Kansas. 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/ William F. Bradley, Jr. -------------------------------- Name: WILLIAM F. BRADLEY, JR. Title: EXECUTIVE VICE PRESIDENT EXECUTIVE: /s/ Samuel R.D. Somerhalder ----------------------------------- Name: SAMUEL R.D. SOMERHALDER -6- EXHIBIT "A" EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT In consideration of my employment or continued employment by NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation, or any controlled subsidiary of the Company (collectively, the "Company"), and in consideration of the compensation now and hereafter paid to me, I, the undersigned, hereby agree as follows: 1. NONDISCLOSURE. 1.1 RECOGNITION OF COMPANY'S RIGHTS; NONDISCLOSURE. At all times during my employment and thereafter, I will hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Company's Proprietary Information (defined below), except as such disclosure, use or publication may be required in connection with my work for the Company, or unless an officer of the Company expressly authorizes such in writing. I will obtain Company's written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to my work at Company and/or incorporates any Proprietary Information. I hereby assign to the Company any rights I may have or acquire in such Proprietary Information and recognize that all Proprietary Information shall be the sole property of the Company and its assigns. 1.2 PROPRIETARY INFORMATION. The term "Proprietary Information" shall mean any and all confidential and/or proprietary knowledge, data or information of the Company. By way of illustration but not limitation, "Proprietary Information" includes (a) trade secrets, inventions, ideas, processes, formulas, source and object codes, data, programs, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques (hereinafter collectively referred to as "Inventions"); and (b) information regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and (c) information regarding the skills and compensation of other employees of the Company. Notwithstanding the foregoing, it is understood that, at all such times, I am free to use information which is generally known in the trade or industry, which is not gained as result of a breach of this Agreement, and my own, skill, knowledge, know-how and experience to whatever extent and in whichever way I wish. 1.3 THIRD PARTY INFORMATION. I understand, in addition, that the Company has received and in the future will receive from third parties confidential or proprietary information ("Third Party Information") subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes. During the term of my employment and thereafter, I will hold Third Party Information in the strictest confidence and will not disclose to anyone (other than Company personnel who need to know such information in connection with his work for the Company) or use, except in connection with my work for the Company, Third Party Information unless expressly authorized by an officer of the Company in writing. 1.4 NO IMPROPER USE OF INFORMATION OF PRIOR EMPLOYERS AND OTHERS. During my employment by the Company I will not improperly use or disclose any confidential information or trade secrets, if any, of any former employer or any other person to whom I have an obligation of confidentiality, and I will not bring onto the premises of the Company any unpublished documents or any property belonging to any former employer or any other person to whom I have an obligation of confidentiality unless consented to in writing by that former employer or person. I will use in the performance of my duties only information which is generally known and used by persons with training and experience comparable to my own, which is common knowledge in the industry or otherwise legally in the public domain, or which is otherwise provided or developed by the Company. 2. ASSIGNMENT OF INVENTIONS. 2.1 PROPRIETARY RIGHTS. The term "Proprietary Rights" shall mean all trade secret, patent, copyright, and other intellectual property rights throughout the world. 2.2 PRIOR INVENTIONS. Inventions, if any, patented or unpatented, which I made prior to the commencement of my employment with the Company are excluded from the scope of this Agreement. To preclude any possible uncertainty, I have set forth on Exhibit A (Previous Inventions) attached hereto a complete list of all Inventions that I have, alone or jointly with others, conceived, developed or reduced to practice or caused to be conceived, developed or reduced to practice prior to the commencement of my employment with the Company, that I consider to be my property or the property of third parties and that I wish to have excluded from the scope of this Agreement (collectively referred to as "Prior Inventions"). If disclosure of any such Prior Invention would cause me to violate any prior confidentiality agreement, I understand that I am not to list such Prior Inventions in Exhibit A but am only to disclose a cursory name for each such invention, a listing of the party(ies) to whom it belongs and the fact that full disclosure as to such inventions has not been made for that reason. A space is provided on Exhibit A for such purpose. If no such disclosure is attached, I represent that there are no Prior Inventions. If, in the course of my employment with the Company, I incorporate a Prior Invention into a Company product, process or machine, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, modify, use and sell such Prior Invention. Notwithstanding the foregoing, I agree that I will not incorporate, or permit to be incorporated, Prior Inventions in any Company Inventions without the Company's prior written consent. 2.3 ASSIGNMENT OF INVENTIONS. Subject to Sections 2.4, and 2.6, I hereby assign and agree to assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to the Company all my right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by me, either alone or jointly with others, during the period of my -2- employment with the Company. Inventions assigned to the Company, or to a third party as directed by the Company pursuant to this Section 2, are hereinafter referred to as "Company Inventions." 2.4 NONASSIGNABLE INVENTIONS. This Agreement will not be deemed to require assignment of and "Company Inventions" shall not be decerned to include any invention which was developed entirely on my own time without using the Company's equipment, supplies, facilities, or trade secrets and neither related to the Company's actual or anticipated business, research or development, nor resulted from work performed by me for the Company. 2.5 OBLIGATION TO KEEP COMPANY INFORMED. During the period of my employment and for six (6) months after termination of my employment with the Company, I will promptly disclose to the Company fully and in writing all Inventions authored, conceived or reduced to practice by me, either alone or jointly with others. In addition, I will promptly disclose to the Company all patent applications filed by me or on my behalf within a year after termination of employment. At the time of each such disclosure, I will advise the Company in writing of any Inventions that I believe fully qualify for protection "as non- Company Inventions" and I will at that time provide to the Company in writing all evidence necessary to substantiate that belief. The Company will keep in confidence and will not use for any purpose or disclose to third parties without my consent any confidential information disclosed in writing to the Company pursuant to this Agreement relating to Inventions that "are not Company Inventions." I will preserve the confidentiality of any Invention which "is a Company Invention." 2.6 GOVERNMENT OR THIRD PARTY. I also agree to assign all my right, title and interest in and to any particular Company Invention to a third party, including without limitation the United States, as directed by the Company. 2.7 WORKS FOR HIRE. I acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of my employment and which are protectable by copyright are "works made for hire," pursuant to United States Copyright Act (17 U.S.C., Section 101). 2.8 ENFORCEMENT OF PROPRIETARY RIGHTS. I will assist the Company in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Company Inventions in any and all countries. To that end I will execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof. In addition, I will execute, verify and deliver assignments of such "Company Inventions" to the Company or its designee. My obligation to assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of my employment, but the Company shall compensate me at a reasonable rate after my termination for the time actually spent by me at the Company's request on such assistance. In the event the Company is unable for any reason, after reasonable effort, to secure my signature on any document needed in connection with the actions specified in the preceding -3- paragraph, I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney in fact, which appointment is coupled with an interest, to act for and in my behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by me. I hereby waive and quitclaim to the Company any and all claims, of any nature whatsoever, which I now or may hereafter have for infringement of any Proprietary Rights or Company Inventions assigned hereunder to the Company. 3. RECORDS. I agree to keep and maintain adequate and current records (in the form of notes, sketches, drawings and in any other form that may be required by the Company) of all Proprietary Information developed by me and all Inventions made by me during the period of my employment at the Company, which records shall be available to and remain the sole property of the Company at all times. 4. NO CONFLICTING OBLIGATION. I represent that my performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith. 5. RETURN OF COMPANY DOCUMENTS. When I leave the employ of the Company, I will deliver to the Company any and all original drawings, notes, memoranda, specifications, devices, formulas, and documents, and any other material containing or disclosing any Company Inventions, Third Party Information or Proprietary Information of the Company. I further agree that any property situated on the Company's premises and owned by the Company, including disks and other storage media, filing cabinets or other work areas, is subject to inspection by Company personnel at any time with or without notice. Prior to leaving, I will cooperate with the Company in completing and signing the Company's termination statement. 6. LEGAL AND EQUITABLE REMEDIES. Because my services are personal and unique and because I may have access to and become acquainted with the Proprietary Information of the Company, the Company shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance or other equitable relief, without bond and without prejudice to any other rights and remedies that the Company may have for a breach of this Agreement. -4- 7. NOTICES. Any notices required or permitted hereunder shall be given to the appropriate party at the address specified below or at such other address as the party shall specify in writing. Such notice shall be deemed given upon personal delivery to the appropriate address or if sent by certified or registered mail, three (3) days after the date of mailing. 8. NOTIFICATION OF NEW EMPLOYER. In the event that I leave the employ of the Company, I hereby consent to the notification of my new employer of my rights and obligations under this Agreement. 9. GENERAL PROVISIONS. 9.1 GOVERNING LAW; CONSENT TO PERSONAL JURISDICTION. This Agreement will be governed by and construed according to the laws of the State of Kansas, as such laws are applied to agreements entered into and to be performed principally within Kansas. I hereby expressly consent to the personal jurisdiction of the state and federal courts located in Johnson County, Kansas, for any lawsuit filed there against me by Company arising from or related to this Agreement. 9.2 SEVERABILITY. In case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein so long as the central purpose and intent of the Agreement can still be achieved. If moreover, any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 9.3 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon my heirs, executors, administrators and other legal representatives and will be for the benefit of the Company, its successors, and its assigns. 9.4 SURVIVAL. The provisions of this Agreement shall survive the termination of my employment and the assignment of this Agreement by the Company to any successor in interest or other assignee. 9.5 EMPLOYMENT. I agree and understand that nothing in this Agreement shall confer any right with respect to continuation of employment by the Company, nor shall it interfere in any way with my right or the Company's right to terminate my employment at any time, with or without cause. 9.6 WAIVER. No waiver by the Company of any breach of this Agreement shall be a waiver of any preceding or succeeding breach. No waiver by the Company of any right under this -5- Agreement shall be construed as a waiver of any other right. The Company shall not be required to give notice to enforce strict adherence to all terms of this Agreement. 9.7 ENTIRE AGREEMENT. The obligations pursuant to Sections 1 and 2 of this Agreement shall apply to any time during which I was previously employed, or am in the future employed, by the Company as a consultant if no other agreement governs nondisclosure and assignment of inventions during such period. This Agreement is the final, complete and exclusive agreement of the parties with respect to the subject matter hereof and supersedes and merges all prior discussions between us. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing and signed by the party to be charged. Any subsequent change or changes in my duties, salary or compensation will not affect the validity or scope of this Agreement. This Agreement shall be effective as of the first day of my employment with the Company, namely: January 1, 1995. I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE COMPLETELY FILLED OUT EXHIBIT A TO THIS AGREEMENT. Dated: October 24, 2000 /s/ Samuel R.D. Somerhalder ---------------------------------- (Signature) SAMUEL R.D. SOMERHALDER (Printed Name) ACCEPTED AND AGREED TO: NATIONAL INFORMATION CONSORTIUM, INC. By: /s/ William F. Bradley, Jr. ------------------------------- Title: Exec. VP ---------------------------------- (Address) Dated: October 24, 2000 -6- EXHIBIT A PREVIOUS INVENTIONS TO: National Information Consortium, Inc. FROM: SAMUEL R.D. SOMERHALDER DATE: January 1, 1995 SUBJECT: Previous Inventions 1. Except as listed in Section 2 below, the following is a complete list of all inventions or improvements relevant to the subject matter of my employment by National Information Consortium, Inc. or any of its controlled subsidiaries (collectively, the "Company"), that have been made or conceived or first reduced to practice by one alone or jointly with others prior to my engagement by the Company: - No inventions or improvements. - See below: ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- - Additional sheets attached. 2. Due to a prior confidentiality agreement, I cannot complete the disclosure under Section 1 above with respect to inventions or improvements generally listed below, the proprietary rights and duty of confidentiality with respect to which I owe to the following party(ies):
INVENTION OR IMPROVEMENT PARTY(IES) RELATIONSHIP 1. ___________________________ __________ ___________________ 2. ___________________________ __________ ___________________ 3. ___________________________ __________ ___________________
- Additional sheets attached. -7- EXHIBIT "B" NONCOMPETITION AGREEMENT THIS NONCOMPETITION AGREEMENT (the "Agreement") is being executed and delivered as of September 1, 2000, by Samuel R.D. Somerhalder (the "Executive") in favor of, and for the benefit of: NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation ("NIC," and together with NIC's subsidiaries, (the "Company"). Certain capitalized terms used in this Agreement are defined in Section 11. RECITALS A. As an employee of the Company, the Executive has obtained extensive and valuable knowledge and confidential information concerning the business of the Company. B. The Company and the Executive are executing a Key Employee Agreement (the "Employment Agreement") contemporaneously with the execution and delivery of this Agreement. Pursuant to the Employment Agreement, the Executive is becoming a key employee of the Company and will accordingly obtain extensive and valuable knowledge and confidential information concerning the business of the Company. C. The Company and the Executive acknowledge that this Agreement is intended to protect the legitimate business interests of the Company and of the Executive. D. The Company has conducted and is conducting its business on a national basis. AGREEMENT For good and valuable consideration, the receipt of which is hereby acknowledged, the Company and the Executive agree as follows: 1. RESTRICTION ON COMPETITION. The Executive agrees that, during the Noncompetition Period, the Executive shall not, and shall not permit any of his Affiliates to: (a) engage directly in Competition in any Restricted Territory; or (b) directly be or become an officer, director, stockholder, owner, co-owner, Affiliate, partner, promoter, employee, agent, representative, designer, consultant, advisor, manager, licensor, sublicensor, licensee or sublicensee of, for or to, or otherwise be or become associated with or acquire or hold (of record, beneficially or otherwise) any direct or indirect interest in, any Person that engages directly or indirectly in Competition in any Restricted Territory: Provided, however, that the Executive may, without violating this Section 1, own, as a passive investment, shares of capital stock of a publicly held corporation that engages in Competition if (i) such shares are actively traded on an established national securities market in the United States, (ii) the number of shares of such corporation's capital stock that are owned beneficially (directly or indirectly) by the Executive and the number of shares of such corporation's capital stock that are owned beneficially (directly or indirectly) by the Executive's Affiliates collectively represent less than five percent of the total number of shares of such corporation's capital stock outstanding, and (iii) neither the Executive nor any Affiliate of the Executive is otherwise associated directly or indirectly with such corporation or with any Affiliate of such corporation. 2. REPRESENTATIONS AND WARRANTIES. The Executive represents and warrants, to and for the benefit of the Company, that: (a) they have full power and capacity to execute and deliver, and to perform all of his obligations under, this Agreement; and (b) neither the execution and delivery of this Agreement nor the performance of this Agreement will result directly or indirectly in a violation or breach of(i) any agreement or obligation by which the Executive or any of his Affiliates is or may be bound, or (ii) any law, rule or regulation. The Executive's representations and warranties shall survive the expiration of the Noncompetition Period for an unlimited period of time. 3. SPECIFIC PERFORMANCE. The Executive agrees that, in the event of any breach or threatened breach by the Executive of any covenant or obligation contained in this Agreement, each of the Company shall be entitled (in addition to any other remedy that may be available to it, including monetary damages) to seek and obtain (a) a decree or order of specific performance to enforce the observance and performance of such covenant or obligation, and (b) an injunction restraining such breach or threatened breach. 4. NONEXCLUSIVITY. The rights and remedies of the parties hereto under this Agreement are not exclusive of or limited by any other rights or remedies which they may have, whether at law, in equity, by contract or otherwise, all of which shall be cumulative (and not alternative). Without limiting the generality of the foregoing, the rights and remedies of the parties hereto under this Agreement, and the obligations and liabilities of the Executive under this Agreement, are in addition to his respective rights, remedies, obligations and liabilities under the law of unfair competition, under laws relating to misappropriation of trade secrets, under other laws and common law requirements and under all applicable rules and regulations. Nothing in this Agreement shall limit any of the obligations, or the rights or remedies of the parties hereto, under the Employment Agreement; and nothing in the Employment Agreement shall limit any of the obligations, or any of the rights or remedies of the parties hereto, under this Agreement. No breach on the part of the Company or any other party of any covenant or obligation contained in the Employment Agreement or any other agreement shall limit or otherwise affect any right or remedy of the parties hereto under this Agreement. 5. SEVERABILITY. If any provision of this Agreement or any part of any such provision is held under any circumstances to be invalid or unenforceable in any jurisdiction, then (a) such provision or part thereof shall, with respect to such circumstances and in such jurisdiction, be deemed amended to conform to applicable laws so as to be valid and enforceable to the fullest possible extent, (b) the invalidity or unenforceability of such -2- provision or part thereof under such circumstances and in such jurisdiction shall not affect the validity or enforceability of such provision or part thereof under any other circumstances or in any other jurisdiction, and (c) the invalidity or unenforceability of such provision or part thereof shall not affect the validity or enforceability of the remainder of such provision or the validity or enforceability of any other provision of this Agreement. Each provision of this Agreement is separable from every other provision of this Agreement, and each part of each provision of this Agreement is separable from every other part of such provision so long as to do so does not destroy the central intent and purpose of the agreement. 6. GOVERNING LAW; VENUE. (a) This Agreement shall be construed in accordance with, and governed in all respects by, the laws of the State of Kansas (without giving effect to principles of conflicts of laws). (b) Any legal action or other legal proceeding relating to this Agreement or the enforcement of any provision of this Agreement may be brought or otherwise commenced in any state or federal court located in Johnson County Kansas. The Executive: (i) expressly and irrevocably consents and submits to the jurisdiction of each state and federal court located in Johnson County of Kansas (and each appellate court located in the State of Kansas), in connection with any such legal proceeding; (ii) agrees that service of any process, summons, notice or document by U.S. mail addressed to them at the address set forth on the signature page of this Agreement shall constitute effective service of such process, summons, notice or document for purposes of any such legal proceeding; (iii) agrees that each state and federal court located in Johnson County Kansas, shall be deemed to be a convenient forum; and (iv) agrees not to assert (by way of motion, as a defense or otherwise), in any such legal proceeding commenced in any state or federal court located in Johnson County Kansas, any claim that the Executive is not subject personally to the jurisdiction of such court, that such legal proceeding has been brought in an inconvenient forum, that the venue of such proceeding is improper or that this Agreement or the subject matter of this Agreement may not be enforced in or by such court. 7. WAIVER. No failure on the part of the Company or any other party to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of the Company or any other party in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no -3- single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. 8. CAPTIONS. The captions contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement. 9. CONSTRUCTION. Whenever required by the context, the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; and the neuter gender shall include the masculine and feminine genders. Any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement. Neither the drafting history nor the negotiating history of this Agreement shall be used or referred to in connection with the construction or interpretation of this Agreement. As used in this Agreement, the words "include" and "including," and variations thereof, shall not be deemed to be terms of limitation, and shall be deemed to be followed by the words "without limitation." Except as otherwise indicated in this Agreement, all references in this Agreement to "Sections" are intended to refer to Sections of this Agreement. 10. AMENDMENT. This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of the Executive and the Company (or any successor to the Company). 11. DEFINED TERMS. For purposes of this Agreement: (a) "Affiliate" means, with respect to the Executive, any other Person that, directly or indirectly, through one or more intermediaries, is controlled by the Executive. (b) "Competing Product" means any: (i) application or software program that provides an electronic gateway to government services or procurement information; (ii) product, device or system that is substantially the same as, incorporates, is a material component or part of, or is based upon or competes with anything referred to in clause (i) above or any product, device or system that has been designed, developed, promoted, sold, resold, installed, supported, maintained, licensed or sublicensed by or on behalf of Persons who at any time on or prior to the date of this Agreement were competitors of the Company (or of any predecessor of the Company) at any time on or prior to this date of this Agreement until the date of termination of employment. (c) "Competing Service" means any: (i) public/private partnership that provides an electronic gateway to government services or procurement information; (ii) service that is substantially the same as, incorporates, is a material component or part of, or is based upon or competes with a service that has been provided, performed or offered by or on behalf the Company (or of any predecessor of the Company) at any time on or prior to the date of this Agreement or until the date of -4- termination of employment; (iii) service that facilitates, supports or otherwise relates to the any Competing Product. (d) A Person shall be deemed to be engaged in "Competition" if: (i) such Person is engaged directly or indirectly in the design, development, manufacture, assembly, promotion, sale, supply, distribution, resale, installation, support, maintenance, repair, refurbishment, licensing, sublicensing, financing, leasing or subleasing of any Competing Product; or (ii) such Person is engaged directly or indirectly in providing, performing or offering any Competing Service. (e) "Confidential Information" means any non-public information (whether or not in written form and whether or not expressly designated as confidential) relating directly or indirectly to the Company or relating directly or indirectly to the business, operations, financial affairs, performance, assets, technology, processes, products, contracts, customers, licensees, sublicensees, suppliers, personnel, consultants or plans of the Company (including any such information consisting of or otherwise relating to trade secrets, know-how, technology, inventions, prototypes, designs, drawings, sketches, processes, license or sublicense arrangements, formulae, proposals, research and development activities, customer lists or preferences, pricing lists, referral sources, marketing or sales techniques or plans, operations manuals, service manuals, financial information, projections, lists of consultants, lists of suppliers or lists of distributors); provided, however, that "Confidential Information" shall not be deemed to include information of the Company that was already publicly known and in the public domain prior to the time of its disclosure by the Executive. (f) "Noncompetition Period" shall mean the period commencing on the date of this Agreement and ending on the second anniversary of the date of the termination of the Executive's employment with the Company. (g) "Person" means, other than Electric Press, Inc., a Virginia corporation, any: (i) individual or (ii) corporation, general partnership, limited partnership, limited liability partnership, trust, company (including any limited liability company or joint stock company) or other organization or entity. (h) "Restricted Territory" means each county or similar political subdivision of each State of the United States of America (including each of the counties in the State of California), and each State, territory or possession of the United States of America. -5- IN WITNESS WHEREOF, the Executive has duly executed and delivered this Noncompetition Agreement as of the date first above written. Signature /s/ Samuel R.D. Somerhalder ----------------------------- Name: SAMUEL R.D. SOMERHALDER Telephone No.: (775) 626-1128 Facsimile: (775) 626-1186 -6- EX-10.38 5 a2041279zex-10_38.txt EXHIBIT 10.38 NATIONAL INFORMATION CONSORTIUM, INC. KEY EMPLOYEE AGREEMENT FOR HARRY H. HERINGTON THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 1st day of September, 2000, by and between Harry H. Herington ("Executive") and NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation (the "Company"). This Agreement amends and restates all prior agreements between Executive and the Company with respect to the subject matter hereof. WHEREAS, the Company desires to employ Executive to provide personal services to the Company and to the Company's subsidiaries, and wishes to provide Executive with certain compensation and benefits in return for Executive's services; and WHEREAS, Executive wishes to be employed by the Company and provide personal services to the Company and to the Company's subsidiaries in return for certain compensation and benefits; NOW, THEREFORE, the parties hereto agree as follows: 1. EMPLOYMENT BY THE COMPANY. 1.1 ACCEPTANCE. Subject to terms set forth herein, the Company or a subsidiary of the Company, agrees to employ Executive in the position of Executive Vice President--State Operations and Executive hereby accepts such employment effective as of the date first written above. During the term of employment with the Company, Executive will devote his best efforts and substantially all of his business time and attention (except for vacation periods and reasonable periods of illness or other incapacity's permitted by the Company's general employment policies) to the business of the Company. 1.2 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). 1.3 EMPLOYMENT 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. 2. COMPENSATION. 2.1 SALARY. Executive shall receive for services to be rendered hereunder an annualized base salary of $140,000, 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. 2.2 STANDARD COMPANY BENEFITS. Executive shall be entitled to all rights and benefits for which they are eligible under the terms and conditions of the standard Company benefits and compensation practices which may be in effect from time to time and provided by the Company to its employees generally. 3. PROPRIETARY INFORMATION OBLIGATIONS. 3.1 AGREEMENT. Executive agrees to execute and abide by the Proprietary Information and Inventions Agreement attached hereto as Exhibit A. 4. TERMINATION OF EMPLOYMENT. 4.1 TERMINATION WITHOUT CAUSE. (a) The Company shall have the right to terminate Executive's employment with the Company at any time without cause. (b) In the event Executive's employment is terminated without cause before September 1, 2003, the Company shall pay Executive 12 months' base compensation in a single lump sum distribution on the first regular Company pay period after said termination. (c) In the event Executive's employment is terminated without cause on or after September 1, 2003, 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. 4.2 TERMINATION FOR CAUSE. (a) The Company shall have the right to terminate Executive's employment with the Company at any time for cause. Written notification of termination and specific cause of termination shall be provided to the Executive at the time of termination. (b) "Cause" for termination shall mean an employee's conviction of a felony or the willful and deliberate failure of an employee to perform his customary duties, in a manner consistent with the manner reasonably prescribed by the Board of Directors or President of Company (other than any failure resulting from his incapacity due to physical -2- or mental illness, disability or death) after not less than thirty (30) days prior written notice from Company. (c) In the event the Executive is notified in writing his employment is to be terminated for cause and the cause is curable, the Executive shall be given thirty days from date of notification to cure the specific cause(s) set forth in the notification. (d) In the event Executive's employment is terminated at any time for cause, the executive shall not be entitled to severance pay, pay in lieu of notice or any other such compensation; provided, however, Executive shall be entitled and shall receive all compensation earned prior to and including the date of termination. 4.3 VOLUNTARY OR MUTUAL TERMINATION. (a) Executive may voluntarily terminate his employment in writing with the Company at any time, after which no further compensation will be paid to Executive. (b) In the event Executive voluntarily terminates his employment, Executive shall not be entitled to severance pay, pay in lieu of notice or any other such compensation; provided, however, Executive shall be entitled and shall receive all compensation earned prior to and including the date of termination. 4.4 TERMINATION IN CONNECTION WITH A CHANGE OF CONTROL (a) In the event of a "Change in Control" of the Company (as defined herein), and in the event that either in contemplation of such Change of Control or after such Change of Control, Executive's employment is terminated without cause, in addition to any payments to which Executive may be entitled pursuant to Section 4.1, subject to the provisions of paragraph (c) below, Executive shall be entitled to a severance payment equal to the product of the number of full years of employment of Executive with the Company times the sum of (i) one month's salary, and (ii) one/twelfth the annual bonus earned by Executive for the last complete calendar year or year of employment, whichever is greater. In the event Executive voluntarily terminates his employment with the Company within six months of a Change of Control, subject to the provisions of paragraph (c) below, Executive shall be entitled to a severance payment equal to the product of the number of full years of employment of Executive with the Company times the sum of (i) one month's salary, and (ii) one/twelfth times the annual bonus earned by Executive for the last complete calendar year or year of employment, whichever is greater. In addition, in either case, notwithstanding the provisions of any stock option agreement, all stock options held by the Executive shall vest upon such Change of Control. (b) For purposes of this Section 4.4, a "Change in Control" of the Company shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, who -3- is not a "beneficial owner" (as defined in Rule 13d-3 under said Act), of 5% or more of the Company's common stock as of the date of this agreement becomes the beneficial owner, directly or indirectly, of capital stock of the Company representing 40 percent or more of the total voting power represented by the Company's then outstanding capital stock, or (ii) the shareholders of the Company approve (x) a merger or consolidation of the Company with any other company, other than a merger or consolidation in which the shareholders of the Company would own 50% or more of the voting stock of the surviving corporation, (y) the sale of all of substantially all of the assets of the Company, or (z) the liquidation or dissolution of the Company. (c) Anything in this Agreement to the contrary notwithstanding, prior to the payment of any compensation or benefits payable under paragraph (a) of this Section 4.4 hereof, the certified public accountants of the Company immediately prior to a Change of Control (the "Certified Public Accountants") shall determine as promptly as practical and in any event with 20 business days following the sale of the Company whether any payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, any other agreements or otherwise) (a "Payment") would more likely than not be nondeductible by the Company for Federal income tax purposes because of section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and if it is, then the aggregate present value of amounts payable or distributable to or for the benefit of the Company pursuant to this Agreement (such payments or distributions pursuant to this Agreement are thereinafter referred to as "Contract Payments") shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Section, the "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Contract Payments without causing any payment to be nondeductible by the Company because of said Section 280G of the Code. If under the Section the certified Public Accountants determine that any payment would more likely than not be nondeductible by the Company because of Section 280G of the Code, the Company shall promptly give Executive notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Executive may then elect, in his sole discretion, which and how much of the Contract Payments or any other payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Agreement Payments or any other payments equals the Reduced Amount), and shall advise the Company in writing of his election within 20 business days of his receipt of notice. If no such election is made by Executive within such 20-day period, the Company may elect which and how much of the Contract Payments or any other payments shall be eliminated or reduced (as long as after such election the Aggregate present value of the Contract Payments equals the Reduced Amount) and shall notify Executive promptly of such election. For purposes of this Section, present value shall be determined in accordance with Section 280G(d)(4) of the Code. All determinations made by the Certified Public Accountants shall be binding upon the Company and Executive and the payment to Executive shall be made within 20 days of sale of the Company. The Company may suspend for a period of up to 30 days after the sale of the Company the Payment and any other payments or benefits due to Executive -4- until the Certified Public Accountants finish the determination and Executive (or the Company, as the case may be) elects how to reduce the Contract Payments or any other payments, if necessary. As promptly as practicable following such determination and the elections hereunder, the Company shall pay to our distribute to or for the benefit of Executive such amounts as are then due to Executive under this Agreement. 5. NON-INTERFERENCE; NON-COMPETITION. 5.1 AGREEMENT. Executive agrees to execute and abide by the Noncompetition Agreement attached hereto as Exhibit B. 6. GENERAL PROVISION. 6.1 NOTICES. Any notices provided hereunder must be in writing and shall be deemed effective upon the earlier of personal delivery (including personal delivery by facsimile) or the third day after mailing by first class mail, to the Company at its primary office location and to Executive at the address listed on the Company payroll. 6.2 SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been contained herein. 6.3 WAIVER. If either party should waive any breach of any provisions of this Agreement, they or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 6.4 COMPLETE AGREEMENT. This Agreement and its Exhibits, constitute the entire agreement between Executive and the Company and it is the complete, final, and exclusive embodiment of his agreement with regard to the material terms of executive employment, compensation, and duration. It is entered into without reliance on any promise or representation other than those expressly contained herein, and it cannot be modified or amended except in a writing signed by Executive and an officer of the Company. 6.5 COUNTERPARTS. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. 6.6 HEADINGS. The headings of the sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 6.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company, and his respective successors, -5- assigns, heirs, executors and administrators, except that Executive may not assign any of his duties hereunder and they may not assign any of his rights hereunder without the written consent of the Company, which shall not be withheld unreasonably. 6.8 ATTORNEYS' 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. 6.9 CHOICE OF LAW. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of Kansas. IN WITNESS WHEREOF, the parties have executed this Key Employee Agreement on the day and year first above written. NATIONAL INFORMATION CONSORTIUM, INC.: By: /s/ Sam Somerhalder -------------------------- Name: SAM SOMERHALDER Title: EXECUTIVE VICE PRESIDENT EXECUTIVE: /s/ Harry H. Herington ------------------------------ Name: HARRY H. HERINGTON -6- EXHIBIT "A" EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT In consideration of my employment or continued employment by NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation, or any controlled subsidiary of the Company (collectively, the "Company"), and in consideration of the compensation now and hereafter paid to me, I, the undersigned, hereby agree as follows: 1. NONDISCLOSURE. 1.1 RECOGNITION OF COMPANY'S RIGHTS; NONDISCLOSURE. At all times during my employment and thereafter, I will hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Company's Proprietary Information (defined below), except as such disclosure, use or publication may be required in connection with my work for the Company, or unless an officer of the Company expressly authorizes such in writing. I will obtain Company's written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to my work at Company and/or incorporates any Proprietary Information. I hereby assign to the Company any rights I may have or acquire in such Proprietary Information and recognize that all Proprietary Information shall be the sole property of the Company and its assigns. 1.2 PROPRIETARY INFORMATION. The term "Proprietary Information" shall mean any and all confidential and/or proprietary knowledge, data or information of the Company. By way of illustration but not limitation, "Proprietary Information" includes (a) trade secrets, inventions, ideas, processes, formulas, source and object codes, data, programs, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques (hereinafter collectively referred to as "Inventions"); and (b) information regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and (c) information regarding the skills and compensation of other employees of the Company. Notwithstanding the foregoing, it is understood that, at all such times, I am free to use information which is generally known in the trade or industry, which is not gained as result of a breach of this Agreement, and my own, skill, knowledge, know-how and experience to whatever extent and in whichever way I wish. 1.3 THIRD PARTY INFORMATION. I understand, in addition, that the Company has received and in the future will receive from third parties confidential or proprietary information ("Third Party Information") subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes. During the term of my employment and thereafter, I will hold Third Party Information in the strictest confidence and will not disclose to anyone (other than Company personnel who need to know such information in connection with his work for the Company) or use, except in connection with my work for the Company, Third Party Information unless expressly authorized by an officer of the Company in writing. 1.4 NO IMPROPER USE OF INFORMATION OF PRIOR EMPLOYERS AND OTHERS. During my employment by the Company I will not improperly use or disclose any confidential information or trade secrets, if any, of any former employer or any other person to whom I have an obligation of confidentiality, and I will not bring onto the premises of the Company any unpublished documents or any property belonging to any former employer or any other person to whom I have an obligation of confidentiality unless consented to in writing by that former employer or person. I will use in the performance of my duties only information which is generally known and used by persons with training and experience comparable to my own, which is common knowledge in the industry or otherwise legally in the public domain, or which is otherwise provided or developed by the Company. 2. ASSIGNMENT OF INVENTIONS. 2.1 PROPRIETARY RIGHTS. The term "Proprietary Rights" shall mean all trade secret, patent, copyright, and other intellectual property rights throughout the world. 2.2 PRIOR INVENTIONS. Inventions, if any, patented or unpatented, which I made prior to the commencement of my employment with the Company are excluded from the scope of this Agreement. To preclude any possible uncertainty, I have set forth on Exhibit A (Previous Inventions) attached hereto a complete list of all Inventions that I have, alone or jointly with others, conceived, developed or reduced to practice or caused to be conceived, developed or reduced to practice prior to the commencement of my employment with the Company, that I consider to be my property or the property of third parties and that I wish to have excluded from the scope of this Agreement (collectively referred to as "Prior Inventions"). If disclosure of any such Prior Invention would cause me to violate any prior confidentiality agreement, I understand that I am not to list such Prior Inventions in Exhibit A but am only to disclose a cursory name for each such invention, a listing of the party(ies) to whom it belongs and the fact that full disclosure as to such inventions has not been made for that reason. A space is provided on Exhibit A for such purpose. If no such disclosure is attached, I represent that there are no Prior Inventions. If, in the course of my employment with the Company, I incorporate a Prior Invention into a Company product, process or machine, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, modify, use and sell such Prior Invention. Notwithstanding the foregoing, I agree that I will not incorporate, or permit to be incorporated, Prior Inventions in any Company Inventions without the Company's prior written consent. 2.3 ASSIGNMENT OF INVENTIONS. Subject to Sections 2.4, and 2.6, I hereby assign and agree to assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to the Company all my right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by me, either alone or jointly with others, during the period of my -2- employment with the Company. Inventions assigned to the Company, or to a third party as directed by the Company pursuant to this Section 2, are hereinafter referred to as "Company Inventions." 2.4 NONASSIGNABLE INVENTIONS. This Agreement will not be deemed to require assignment of and "Company Inventions" shall not be decerned to include any invention which was developed entirely on my own time without using the Company's equipment, supplies, facilities, or trade secrets and neither related to the Company's actual or anticipated business, research or development, nor resulted from work performed by me for the Company. 2.5 OBLIGATION TO KEEP COMPANY INFORMED. During the period of my employment and for six (6) months after termination of my employment with the Company, I will promptly disclose to the Company fully and in writing all Inventions authored, conceived or reduced to practice by me, either alone or jointly with others. In addition, I will promptly disclose to the Company all patent applications filed by me or on my behalf within a year after termination of employment. At the time of each such disclosure, I will advise the Company in writing of any Inventions that I believe fully qualify for protection "as non- Company Inventions" and I will at that time provide to the Company in writing all evidence necessary to substantiate that belief. The Company will keep in confidence and will not use for any purpose or disclose to third parties without my consent any confidential information disclosed in writing to the Company pursuant to this Agreement relating to Inventions that "are not Company Inventions." I will preserve the confidentiality of any Invention which "is a Company Invention." 2.6 GOVERNMENT OR THIRD PARTY. I also agree to assign all my right, title and interest in and to any particular Company Invention to a third party, including without limitation the United States, as directed by the Company. 2.7 WORKS FOR HIRE. I acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of my employment and which are protectable by copyright are "works made for hire," pursuant to United States Copyright Act (17 U.S.C., Section 101). 2.8 ENFORCEMENT OF PROPRIETARY RIGHTS. I will assist the Company in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Company Inventions in any and all countries. To that end I will execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof. In addition, I will execute, verify and deliver assignments of such "Company Inventions" to the Company or its designee. My obligation to assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of my employment, but the Company shall compensate me at a reasonable rate after my termination for the time actually spent by me at the Company's request on such assistance. In the event the Company is unable for any reason, after reasonable effort, to secure my signature on any document needed in connection with the actions specified in the preceding -3- paragraph, I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney in fact, which appointment is coupled with an interest, to act for and in my behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by me. I hereby waive and quitclaim to the Company any and all claims, of any nature whatsoever, which I now or may hereafter have for infringement of any Proprietary Rights or Company Inventions assigned hereunder to the Company. 3. RECORDS. I agree to keep and maintain adequate and current records (in the form of notes, sketches, drawings and in any other form that may be required by the Company) of all Proprietary Information developed by me and all Inventions made by me during the period of my employment at the Company, which records shall be available to and remain the sole property of the Company at all times. 4. NO CONFLICTING OBLIGATION. I represent that my performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith. 5. RETURN OF COMPANY DOCUMENTS. When I leave the employ of the Company, I will deliver to the Company any and all original drawings, notes, memoranda, specifications, devices, formulas, and documents, and any other material containing or disclosing any Company Inventions, Third Party Information or Proprietary Information of the Company. I further agree that any property situated on the Company's premises and owned by the Company, including disks and other storage media, filing cabinets or other work areas, is subject to inspection by Company personnel at any time with or without notice. Prior to leaving, I will cooperate with the Company in completing and signing the Company's termination statement. 6. LEGAL AND EQUITABLE REMEDIES. Because my services are personal and unique and because I may have access to and become acquainted with the Proprietary Information of the Company, the Company shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance or other equitable relief, without bond and without prejudice to any other rights and remedies that the Company may have for a breach of this Agreement. -4- 7. NOTICES. Any notices required or permitted hereunder shall be given to the appropriate party at the address specified below or at such other address as the party shall specify in writing. Such notice shall be deemed given upon personal delivery to the appropriate address or if sent by certified or registered mail, three (3) days after the date of mailing. 8. NOTIFICATION OF NEW EMPLOYER. In the event that I leave the employ of the Company, I hereby consent to the notification of my new employer of my rights and obligations under this Agreement. 9. GENERAL PROVISIONS. 9.1 GOVERNING LAW; CONSENT TO PERSONAL JURISDICTION. This Agreement will be governed by and construed according to the laws of the State of Kansas, as such laws are applied to agreements entered into and to be performed principally within Kansas. I hereby expressly consent to the personal jurisdiction of the state and federal courts located in Johnson County, Kansas, for any lawsuit filed there against me by Company arising from or related to this Agreement. 9.2 SEVERABILITY. In case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein so long as the central purpose and intent of the Agreement can still be achieved. If moreover, any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 9.3 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon my heirs, executors, administrators and other legal representatives and will be for the benefit of the Company, its successors, and its assigns. 9.4 SURVIVAL. The provisions of this Agreement shall survive the termination of my employment and the assignment of this Agreement by the Company to any successor in interest or other assignee. 9.5 EMPLOYMENT. I agree and understand that nothing in this Agreement shall confer any right with respect to continuation of employment by the Company, nor shall it interfere in any way with my right or the Company's right to terminate my employment at any time, with or without cause. 9.6 WAIVER. No waiver by the Company of any breach of this Agreement shall be a waiver of any preceding or succeeding breach. No waiver by the Company of any right under this -5- Agreement shall be construed as a waiver of any other right. The Company shall not be required to give notice to enforce strict adherence to all terms of this Agreement. 9.7 ENTIRE AGREEMENT. The obligations pursuant to Sections 1 and 2 of this Agreement shall apply to any time during which I was previously employed, or am in the future employed, by the Company as a consultant if no other agreement governs nondisclosure and assignment of inventions during such period. This Agreement is the final, complete and exclusive agreement of the parties with respect to the subject matter hereof and supersedes and merges all prior discussions between us. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing and signed by the party to be charged. Any subsequent change or changes in my duties, salary or compensation will not affect the validity or scope of this Agreement. This Agreement shall be effective as of the first day of my employment with the Company, namely: September 15, 1996. I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE COMPLETELY FILLED OUT EXHIBIT A TO THIS AGREEMENT. Dated: October 13, 2000 /s/ Harry H. Herington -------------------------------- (Signature) HARRY H. HERINGTON (Printed Name) ACCEPTED AND AGREED TO: NATIONAL INFORMATION CONSORTIUM, INC. By: /s/ Sam Somerhalder ---------------------------- Title: EVP Lincoln, NE 68508 (Address) Dated: October 24, 2000 -6- EXHIBIT A PREVIOUS INVENTIONS TO: National Information Consortium, Inc. FROM: HARRY H. HERINGTON DATE: September 15, 1996 SUBJECT: Previous Inventions 1. Except as listed in Section 2 below, the following is a complete list of all inventions or improvements relevant to the subject matter of my employment by National Information Consortium, Inc. or any of its controlled subsidiaries (collectively, the "Company"), that have been made or conceived or first reduced to practice by one alone or jointly with others prior to my engagement by the Company: - No inventions or improvements. - See below: ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- - Additional sheets attached. 2. Due to a prior confidentiality agreement, I cannot complete the disclosure under Section 1 above with respect to inventions or improvements generally listed below, the proprietary rights and duty of confidentiality with respect to which I owe to the following party(ies):
INVENTION OR IMPROVEMENT PARTY(IES) RELATIONSHIP 1. ___________________________ __________ ___________________ 2. ___________________________ __________ ___________________ 3. ___________________________ __________ ___________________
- Additional sheets attached. -7- EXHIBIT "B" NONCOMPETITION AGREEMENT THIS NONCOMPETITION AGREEMENT (the "Agreement") is being executed and delivered as of September 1, 2000, by Harry H. Herington (the "Executive") in favor of, and for the benefit of: NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation ("NIC," and together with NIC's subsidiaries, (the "Company"). Certain capitalized terms used in this Agreement are defined in Section 11. RECITALS A. As an employee of the Company, the Executive has obtained extensive and valuable knowledge and confidential information concerning the business of the Company. B. The Company and the Executive are executing a Key Employee Agreement (the "Employment Agreement") contemporaneously with the execution and delivery of this Agreement. Pursuant to the Employment Agreement, the Executive is becoming a key employee of the Company and will accordingly obtain extensive and valuable knowledge and confidential information concerning the business of the Company. C. The Company and the Executive acknowledge that this Agreement is intended to protect the legitimate business interests of the Company and of the Executive. D. The Company has conducted and is conducting its business on a national basis. AGREEMENT For good and valuable consideration, the receipt of which is hereby acknowledged, the Company and the Executive agree as follows: 1. RESTRICTION ON COMPETITION. The Executive agrees that, during the Noncompetition Period, the Executive shall not, and shall not permit any of his Affiliates to: (a) engage directly in Competition in any Restricted Territory; or (b) directly be or become an officer, director, stockholder, owner, co-owner, Affiliate, partner, promoter, employee, agent, representative, designer, consultant, advisor, manager, licensor, sublicensor, licensee or sublicensee of, for or to, or otherwise be or become associated with or acquire or hold (of record, beneficially or otherwise) any direct or indirect interest in, any Person that engages directly or indirectly in Competition in any Restricted Territory: Provided, however, that the Executive may, without violating this Section 1, own, as a passive investment, shares of capital stock of a publicly held corporation that engages in Competition if (i) such shares are actively traded on an established national securities market in the United States, (ii) the number of shares of such corporation's capital stock that are owned beneficially (directly or indirectly) by the Executive and the number of shares of such corporation's capital stock that are owned beneficially (directly or indirectly) by the Executive's Affiliates collectively represent less than five percent of the total number of shares of such corporation's capital stock outstanding, and (iii) neither the Executive nor any Affiliate of the Executive is otherwise associated directly or indirectly with such corporation or with any Affiliate of such corporation. 2. REPRESENTATIONS AND WARRANTIES. The Executive represents and warrants, to and for the benefit of the Company, that: (a) they have full power and capacity to execute and deliver, and to perform all of his obligations under, this Agreement; and (b) neither the execution and delivery of this Agreement nor the performance of this Agreement will result directly or indirectly in a violation or breach of(i) any agreement or obligation by which the Executive or any of his Affiliates is or may be bound, or (ii) any law, rule or regulation. The Executive's representations and warranties shall survive the expiration of the Noncompetition Period for an unlimited period of time. 3. SPECIFIC PERFORMANCE. The Executive agrees that, in the event of any breach or threatened breach by the Executive of any covenant or obligation contained in this Agreement, each of the Company shall be entitled (in addition to any other remedy that may be available to it, including monetary damages) to seek and obtain (a) a decree or order of specific performance to enforce the observance and performance of such covenant or obligation, and (b) an injunction restraining such breach or threatened breach. 4. NONEXCLUSIVITY. The rights and remedies of the parties hereto under this Agreement are not exclusive of or limited by any other rights or remedies which they may have, whether at law, in equity, by contract or otherwise, all of which shall be cumulative (and not alternative). Without limiting the generality of the foregoing, the rights and remedies of the parties hereto under this Agreement, and the obligations and liabilities of the Executive under this Agreement, are in addition to his respective rights, remedies, obligations and liabilities under the law of unfair competition, under laws relating to misappropriation of trade secrets, under other laws and common law requirements and under all applicable rules and regulations. Nothing in this Agreement shall limit any of the obligations, or the rights or remedies of the parties hereto, under the Employment Agreement; and nothing in the Employment Agreement shall limit any of the obligations, or any of the rights or remedies of the parties hereto, under this Agreement. No breach on the part of the Company or any other party of any covenant or obligation contained in the Employment Agreement or any other agreement shall limit or otherwise affect any right or remedy of the parties hereto under this Agreement. 5. SEVERABILITY. If any provision of this Agreement or any part of any such provision is held under any circumstances to be invalid or unenforceable in any jurisdiction, then (a) such provision or part thereof shall, with respect to such circumstances and in such jurisdiction, be deemed amended to conform to applicable laws so as to be valid and enforceable to the fullest possible extent, (b) the invalidity or unenforceability of such -2- provision or part thereof under such circumstances and in such jurisdiction shall not affect the validity or enforceability of such provision or part thereof under any other circumstances or in any other jurisdiction, and (c) the invalidity or unenforceability of such provision or part thereof shall not affect the validity or enforceability of the remainder of such provision or the validity or enforceability of any other provision of this Agreement. Each provision of this Agreement is separable from every other provision of this Agreement, and each part of each provision of this Agreement is separable from every other part of such provision so long as to do so does not destroy the central intent and purpose of the agreement. 6. GOVERNING LAW; VENUE. (a) This Agreement shall be construed in accordance with, and governed in all respects by, the laws of the State of Kansas (without giving effect to principles of conflicts of laws). (b) Any legal action or other legal proceeding relating to this Agreement or the enforcement of any provision of this Agreement may be brought or otherwise commenced in any state or federal court located in Johnson County Kansas. The Executive: (i) expressly and irrevocably consents and submits to the jurisdiction of each state and federal court located in Johnson County of Kansas (and each appellate court located in the State of Kansas), in connection with any such legal proceeding; (ii) agrees that service of any process, summons, notice or document by U.S. mail addressed to them at the address set forth on the signature page of this Agreement shall constitute effective service of such process, summons, notice or document for purposes of any such legal proceeding; (iii) agrees that each state and federal court located in Johnson County Kansas, shall be deemed to be a convenient forum; and (iv) agrees not to assert (by way of motion, as a defense or otherwise), in any such legal proceeding commenced in any state or federal court located in Johnson County Kansas, any claim that the Executive is not subject personally to the jurisdiction of such court, that such legal proceeding has been brought in an inconvenient forum, that the venue of such proceeding is improper or that this Agreement or the subject matter of this Agreement may not be enforced in or by such court. 7. WAIVER. No failure on the part of the Company or any other party to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of the Company or any other party in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no -3- single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. 8. CAPTIONS. The captions contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement. 9. CONSTRUCTION. Whenever required by the context, the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; and the neuter gender shall include the masculine and feminine genders. Any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement. Neither the drafting history nor the negotiating history of this Agreement shall be used or referred to in connection with the construction or interpretation of this Agreement. As used in this Agreement, the words "include" and "including," and variations thereof, shall not be deemed to be terms of limitation, and shall be deemed to be followed by the words "without limitation." Except as otherwise indicated in this Agreement, all references in this Agreement to "Sections" are intended to refer to Sections of this Agreement. 10. AMENDMENT. This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of the Executive and the Company (or any successor to the Company). 11. DEFINED TERMS. For purposes of this Agreement: (a) "Affiliate" means, with respect to the Executive, any other Person that, directly or indirectly, through one or more intermediaries, is controlled by the Executive. (b) "Competing Product" means any: (i) application or software program that provides an electronic gateway to government services or procurement information; (ii) product, device or system that is substantially the same as, incorporates, is a material component or part of, or is based upon or competes with anything referred to in clause (i) above or any product, device or system that has been designed, developed, promoted, sold, resold, installed, supported, maintained, licensed or sublicensed by or on behalf of Persons who at any time on or prior to the date of this Agreement were competitors of the Company (or of any predecessor of the Company) at any time on or prior to this date of this Agreement until the date of termination of employment. (c) "Competing Service" means any: (i) public/private partnership that provides an electronic gateway to government services or procurement information; (ii) service that is substantially the same as, incorporates, is a material component or part of, or is based upon or competes with a service that has been provided, performed or offered by or on behalf the Company (or of any predecessor of the Company) at any time on or prior to the date of this Agreement or until the date of -4- termination of employment; (iii) service that facilitates, supports or otherwise relates to the any Competing Product. (d) A Person shall be deemed to be engaged in "Competition" if: (i) such Person is engaged directly or indirectly in the design, development, manufacture, assembly, promotion, sale, supply, distribution, resale, installation, support, maintenance, repair, refurbishment, licensing, sublicensing, financing, leasing or subleasing of any Competing Product; or (ii) such Person is engaged directly or indirectly in providing, performing or offering any Competing Service. (e) "Confidential Information" means any non-public information (whether or not in written form and whether or not expressly designated as confidential) relating directly or indirectly to the Company or relating directly or indirectly to the business, operations, financial affairs, performance, assets, technology, processes, products, contracts, customers, licensees, sublicensees, suppliers, personnel, consultants or plans of the Company (including any such information consisting of or otherwise relating to trade secrets, know-how, technology, inventions, prototypes, designs, drawings, sketches, processes, license or sublicense arrangements, formulae, proposals, research and development activities, customer lists or preferences, pricing lists, referral sources, marketing or sales techniques or plans, operations manuals, service manuals, financial information, projections, lists of consultants, lists of suppliers or lists of distributors); provided, however, that "Confidential Information" shall not be deemed to include information of the Company that was already publicly known and in the public domain prior to the time of its disclosure by the Executive. (f) "Noncompetition Period" shall mean the period commencing on the date of this Agreement and ending on the second anniversary of the date of the termination of the Executive's employment with the Company. (g) "Person" means, other than Electric Press, Inc., a Virginia corporation, any: (i) individual or (ii) corporation, general partnership, limited partnership, limited liability partnership, trust, company (including any limited liability company or joint stock company) or other organization or entity. (h) "Restricted Territory" means each county or similar political subdivision of each State of the United States of America (including each of the counties in the State of California), and each State, territory or possession of the United States of America. -5- IN WITNESS WHEREOF, the Executive has duly executed and delivered this Noncompetition Agreement as of the date first above written. Signature /s/ Harry H. Herington ------------------------- Name: HARRY H. HERINGTON Telephone No.: (785) 331-2400 Facsimile: ( ) _____________ -6- EX-10.39 6 a2041279zex-10_39.txt EXHIBIT 10.39 NATIONAL INFORMATION CONSORTIUM, INC. KEY EMPLOYEE AGREEMENT FOR JOE NEMELKA THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 1st day of September, 2000, by and between Joe Nemelka ("Executive") and NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation (the "Company"). This Agreement amends and restates all prior agreements between Executive and the Company with respect to the subject matter hereof. WHEREAS, the Company desires to employ Executive to provide personal services to the Company and to the Company's subsidiaries, and wishes to provide Executive with certain compensation and benefits in return for Executive's services; and WHEREAS, Executive wishes to be employed by the Company and provide personal services to the Company and to the Company's subsidiaries in return for certain compensation and benefits; NOW, THEREFORE, the parties hereto agree as follows: 1. EMPLOYMENT BY THE COMPANY. 1.1 ACCEPTANCE. Subject to terms set forth herein, the Company or a subsidiary of the Company, agrees to employ Executive in the position of Executive Vice President--Market Development Division and Executive hereby accepts such employment effective as of the date first written above. During the term of employment with the Company, Executive will devote his best efforts and substantially all of his business time and attention (except for vacation periods and reasonable periods of illness or other incapacity's permitted by the Company's general employment policies) to the business of the Company. 1.2 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). 1.3 EMPLOYMENT 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. 2. COMPENSATION. 2.1 SALARY. Executive shall receive for services to be rendered hereunder an annualized base salary of $140,000, 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. 2.2 STANDARD COMPANY BENEFITS. Executive shall be entitled to all rights and benefits for which they are eligible under the terms and conditions of the standard Company benefits and compensation practices which may be in effect from time to time and provided by the Company to its employees generally. 3. PROPRIETARY INFORMATION OBLIGATIONS. 3.1 AGREEMENT. Executive agrees to execute and abide by the Proprietary Information and Inventions Agreement attached hereto as Exhibit A. 4. TERMINATION OF EMPLOYMENT. 4.1 TERMINATION WITHOUT CAUSE. (a) The Company shall have the right to terminate Executive's employment with the Company at any time without cause. (b) In the event Executive's employment is terminated without cause before September 1, 2003, the Company shall pay Executive 12 months' base compensation in a single lump sum distribution on the first regular Company pay period after said termination. (c) In the event Executive's employment is terminated without cause on or after September 1, 2003, 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. 4.2 TERMINATION FOR CAUSE. (a) The Company shall have the right to terminate Executive's employment with the Company at any time for cause. Written notification of termination and specific cause of termination shall be provided to the Executive at the time of termination. (b) "Cause" for termination shall mean an employee's conviction of a felony or the willful and deliberate failure of an employee to perform his customary duties, in a manner consistent with the manner reasonably prescribed by the Board of Directors or President of Company (other than any failure resulting from his incapacity due to physical -2- or mental illness, disability or death) after not less than thirty (30) days prior written notice from Company. (c) In the event the Executive is notified in writing his employment is to be terminated for cause and the cause is curable, the Executive shall be given thirty days from date of notification to cure the specific cause(s) set forth in the notification. (d) In the event Executive's employment is terminated at any time for cause, the executive shall not be entitled to severance pay, pay in lieu of notice or any other such compensation; provided, however, Executive shall be entitled and shall receive all compensation earned prior to and including the date of termination. 4.3 VOLUNTARY OR MUTUAL TERMINATION. (a) Executive may voluntarily terminate his employment in writing with the Company at any time, after which no further compensation will be paid to Executive. (b) In the event Executive voluntarily terminates his employment, Executive shall not be entitled to severance pay, pay in lieu of notice or any other such compensation; provided, however, Executive shall be entitled and shall receive all compensation earned prior to and including the date of termination. 4.4 TERMINATION IN CONNECTION WITH A CHANGE OF CONTROL (a) In the event of a "Change in Control" of the Company (as defined herein), and in the event that either in contemplation of such Change of Control or after such Change of Control, Executive's employment is terminated without cause, in addition to any payments to which Executive may be entitled pursuant to Section 4.1, subject to the provisions of paragraph (c) below, Executive shall be entitled to a severance payment equal to the product of the number of full years of employment of Executive with the Company times the sum of (i) one month's salary, and (ii) one/twelfth the annual bonus earned by Executive for the last complete calendar year or year of employment, whichever is greater. In the event Executive voluntarily terminates his employment with the Company within six months of a Change of Control, subject to the provisions of paragraph (c) below, Executive shall be entitled to a severance payment equal to the product of the number of full years of employment of Executive with the Company times the sum of (i) one month's salary, and (ii) one/twelfth times the annual bonus earned by Executive for the last complete calendar year or year of employment, whichever is greater. In addition, in either case, notwithstanding the provisions of any stock option agreement, all stock options held by the Executive shall vest upon such Change of Control. (b) For purposes of this Section 4.4, a "Change in Control" of the Company shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, who -3- is not a "beneficial owner" (as defined in Rule 13d-3 under said Act), of 5% or more of the Company's common stock as of the date of this agreement becomes the beneficial owner, directly or indirectly, of capital stock of the Company representing 40 percent or more of the total voting power represented by the Company's then outstanding capital stock, or (ii) the shareholders of the Company approve (x) a merger or consolidation of the Company with any other company, other than a merger or consolidation in which the shareholders of the Company would own 50% or more of the voting stock of the surviving corporation, (y) the sale of all of substantially all of the assets of the Company, or (z) the liquidation or dissolution of the Company. (c) Anything in this Agreement to the contrary notwithstanding, prior to the payment of any compensation or benefits payable under paragraph (a) of this Section 4.4 hereof, the certified public accountants of the Company immediately prior to a Change of Control (the "Certified Public Accountants") shall determine as promptly as practical and in any event with 20 business days following the sale of the Company whether any payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, any other agreements or otherwise) (a "Payment") would more likely than not be nondeductible by the Company for Federal income tax purposes because of section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and if it is, then the aggregate present value of amounts payable or distributable to or for the benefit of the Company pursuant to this Agreement (such payments or distributions pursuant to this Agreement are thereinafter referred to as "Contract Payments") shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Section, the "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Contract Payments without causing any payment to be nondeductible by the Company because of said Section 280G of the Code. If under the Section the certified Public Accountants determine that any payment would more likely than not be nondeductible by the Company because of Section 280G of the Code, the Company shall promptly give Executive notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Executive may then elect, in his sole discretion, which and how much of the Contract Payments or any other payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Agreement Payments or any other payments equals the Reduced Amount), and shall advise the Company in writing of his election within 20 business days of his receipt of notice. If no such election is made by Executive within such 20-day period, the Company may elect which and how much of the Contract Payments or any other payments shall be eliminated or reduced (as long as after such election the Aggregate present value of the Contract Payments equals the Reduced Amount) and shall notify Executive promptly of such election. For purposes of this Section, present value shall be determined in accordance with Section 280G(d)(4) of the Code. All determinations made by the Certified Public Accountants shall be binding upon the Company and Executive and the payment to Executive shall be made within 20 days of sale of the Company. The Company may suspend for a period of up to 30 days after the sale of the Company the Payment and any other payments or benefits due to Executive -4- until the Certified Public Accountants finish the determination and Executive (or the Company, as the case may be) elects how to reduce the Contract Payments or any other payments, if necessary. As promptly as practicable following such determination and the elections hereunder, the Company shall pay to our distribute to or for the benefit of Executive such amounts as are then due to Executive under this Agreement. 5. NON-INTERFERENCE; NON-COMPETITION. 5.1 AGREEMENT. Executive agrees to execute and abide by the Noncompetition Agreement attached hereto as Exhibit B. 6. GENERAL PROVISION. 6.1 NOTICES. Any notices provided hereunder must be in writing and shall be deemed effective upon the earlier of personal delivery (including personal delivery by facsimile) or the third day after mailing by first class mail, to the Company at its primary office location and to Executive at the address listed on the Company payroll. 6.2 SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been contained herein. 6.3 WAIVER. If either party should waive any breach of any provisions of this Agreement, they or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 6.4 COMPLETE AGREEMENT. This Agreement and its Exhibits, constitute the entire agreement between Executive and the Company and it is the complete, final, and exclusive embodiment of his agreement with regard to the material terms of executive employment, compensation, and duration. It is entered into without reliance on any promise or representation other than those expressly contained herein, and it cannot be modified or amended except in a writing signed by Executive and an officer of the Company. 6.5 COUNTERPARTS. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. 6.6 HEADINGS. The headings of the sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 6.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company, and his respective successors, -5- assigns, heirs, executors and administrators, except that Executive may not assign any of his duties hereunder and they may not assign any of his rights hereunder without the written consent of the Company, which shall not be withheld unreasonably. 6.8 ATTORNEYS' 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. 6.9 CHOICE OF LAW. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of Kansas. IN WITNESS WHEREOF, the parties have executed this Key Employee Agreement on the day and year first above written. NATIONAL INFORMATION CONSORTIUM, INC.: By: /s/ Sam Somerhalder -------------------------------- Name: SAM SOMERHALDER Title: EXECUTIVE VICE PRESIDENT EXECUTIVE: /s/ Joe Nemelka ----------------------------------- Name: JOE NEMELKA -6- EXHIBIT "A" EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT In consideration of my employment or continued employment by NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation, or any controlled subsidiary of the Company (collectively, the "Company"), and in consideration of the compensation now and hereafter paid to me, I, the undersigned, hereby agree as follows: 1. NONDISCLOSURE. 1.1 RECOGNITION OF COMPANY'S RIGHTS; NONDISCLOSURE. At all times during my employment and thereafter, I will hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Company's Proprietary Information (defined below), except as such disclosure, use or publication may be required in connection with my work for the Company, or unless an officer of the Company expressly authorizes such in writing. I will obtain Company's written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to my work at Company and/or incorporates any Proprietary Information. I hereby assign to the Company any rights I may have or acquire in such Proprietary Information and recognize that all Proprietary Information shall be the sole property of the Company and its assigns. 1.2 PROPRIETARY INFORMATION. The term "Proprietary Information" shall mean any and all confidential and/or proprietary knowledge, data or information of the Company. By way of illustration but not limitation, "Proprietary Information" includes (a) trade secrets, inventions, ideas, processes, formulas, source and object codes, data, programs, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques (hereinafter collectively referred to as "Inventions"); and (b) information regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and (c) information regarding the skills and compensation of other employees of the Company. Notwithstanding the foregoing, it is understood that, at all such times, I am free to use information which is generally known in the trade or industry, which is not gained as result of a breach of this Agreement, and my own, skill, knowledge, know-how and experience to whatever extent and in whichever way I wish. 1.3 THIRD PARTY INFORMATION. I understand, in addition, that the Company has received and in the future will receive from third parties confidential or proprietary information ("Third Party Information") subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes. During the term of my employment and thereafter, I will hold Third Party Information in the strictest confidence and will not disclose to anyone (other than Company personnel who need to know such information in connection with his work for the Company) or use, except in connection with my work for the Company, Third Party Information unless expressly authorized by an officer of the Company in writing. 1.4 NO IMPROPER USE OF INFORMATION OF PRIOR EMPLOYERS AND OTHERS. During my employment by the Company I will not improperly use or disclose any confidential information or trade secrets, if any, of any former employer or any other person to whom I have an obligation of confidentiality, and I will not bring onto the premises of the Company any unpublished documents or any property belonging to any former employer or any other person to whom I have an obligation of confidentiality unless consented to in writing by that former employer or person. I will use in the performance of my duties only information which is generally known and used by persons with training and experience comparable to my own, which is common knowledge in the industry or otherwise legally in the public domain, or which is otherwise provided or developed by the Company. 2. ASSIGNMENT OF INVENTIONS. 2.1 PROPRIETARY RIGHTS. The term "Proprietary Rights" shall mean all trade secret, patent, copyright, and other intellectual property rights throughout the world. 2.2 PRIOR INVENTIONS. Inventions, if any, patented or unpatented, which I made prior to the commencement of my employment with the Company are excluded from the scope of this Agreement. To preclude any possible uncertainty, I have set forth on Exhibit A (Previous Inventions) attached hereto a complete list of all Inventions that I have, alone or jointly with others, conceived, developed or reduced to practice or caused to be conceived, developed or reduced to practice prior to the commencement of my employment with the Company, that I consider to be my property or the property of third parties and that I wish to have excluded from the scope of this Agreement (collectively referred to as "Prior Inventions"). If disclosure of any such Prior Invention would cause me to violate any prior confidentiality agreement, I understand that I am not to list such Prior Inventions in Exhibit A but am only to disclose a cursory name for each such invention, a listing of the party(ies) to whom it belongs and the fact that full disclosure as to such inventions has not been made for that reason. A space is provided on Exhibit A for such purpose. If no such disclosure is attached, I represent that there are no Prior Inventions. If, in the course of my employment with the Company, I incorporate a Prior Invention into a Company product, process or machine, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, modify, use and sell such Prior Invention. Notwithstanding the foregoing, I agree that I will not incorporate, or permit to be incorporated, Prior Inventions in any Company Inventions without the Company's prior written consent. 2.3 ASSIGNMENT OF INVENTIONS. Subject to Sections 2.4, and 2.6, I hereby assign and agree to assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to the Company all my right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by me, either alone or jointly with others, during the period of my -2- employment with the Company. Inventions assigned to the Company, or to a third party as directed by the Company pursuant to this Section 2, are hereinafter referred to as "Company Inventions." 2.4 NONASSIGNABLE INVENTIONS. This Agreement will not be deemed to require assignment of and "Company Inventions" shall not be decerned to include any invention which was developed entirely on my own time without using the Company's equipment, supplies, facilities, or trade secrets and neither related to the Company's actual or anticipated business, research or development, nor resulted from work performed by me for the Company. 2.5 OBLIGATION TO KEEP COMPANY INFORMED. During the period of my employment and for six (6) months after termination of my employment with the Company, I will promptly disclose to the Company fully and in writing all Inventions authored, conceived or reduced to practice by me, either alone or jointly with others. In addition, I will promptly disclose to the Company all patent applications filed by me or on my behalf within a year after termination of employment. At the time of each such disclosure, I will advise the Company in writing of any Inventions that I believe fully qualify for protection "as non- Company Inventions" and I will at that time provide to the Company in writing all evidence necessary to substantiate that belief. The Company will keep in confidence and will not use for any purpose or disclose to third parties without my consent any confidential information disclosed in writing to the Company pursuant to this Agreement relating to Inventions that "are not Company Inventions." I will preserve the confidentiality of any Invention which "is a Company Invention." 2.6 GOVERNMENT OR THIRD PARTY. I also agree to assign all my right, title and interest in and to any particular Company Invention to a third party, including without limitation the United States, as directed by the Company. 2.7 WORKS FOR HIRE. I acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of my employment and which are protectable by copyright are "works made for hire," pursuant to United States Copyright Act (17 U.S.C., Section 101). 2.8 ENFORCEMENT OF PROPRIETARY RIGHTS. I will assist the Company in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Company Inventions in any and all countries. To that end I will execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof. In addition, I will execute, verify and deliver assignments of such "Company Inventions" to the Company or its designee. My obligation to assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of my employment, but the Company shall compensate me at a reasonable rate after my termination for the time actually spent by me at the Company's request on such assistance. In the event the Company is unable for any reason, after reasonable effort, to secure my signature on any document needed in connection with the actions specified in the preceding -3- paragraph, I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney in fact, which appointment is coupled with an interest, to act for and in my behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by me. I hereby waive and quitclaim to the Company any and all claims, of any nature whatsoever, which I now or may hereafter have for infringement of any Proprietary Rights or Company Inventions assigned hereunder to the Company. 3. RECORDS. I agree to keep and maintain adequate and current records (in the form of notes, sketches, drawings and in any other form that may be required by the Company) of all Proprietary Information developed by me and all Inventions made by me during the period of my employment at the Company, which records shall be available to and remain the sole property of the Company at all times. 4. NO CONFLICTING OBLIGATION. I represent that my performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith. 5. RETURN OF COMPANY DOCUMENTS. When I leave the employ of the Company, I will deliver to the Company any and all original drawings, notes, memoranda, specifications, devices, formulas, and documents, and any other material containing or disclosing any Company Inventions, Third Party Information or Proprietary Information of the Company. I further agree that any property situated on the Company's premises and owned by the Company, including disks and other storage media, filing cabinets or other work areas, is subject to inspection by Company personnel at any time with or without notice. Prior to leaving, I will cooperate with the Company in completing and signing the Company's termination statement. 6. LEGAL AND EQUITABLE REMEDIES. Because my services are personal and unique and because I may have access to and become acquainted with the Proprietary Information of the Company, the Company shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance or other equitable relief, without bond and without prejudice to any other rights and remedies that the Company may have for a breach of this Agreement. -4- 7. NOTICES. Any notices required or permitted hereunder shall be given to the appropriate party at the address specified below or at such other address as the party shall specify in writing. Such notice shall be deemed given upon personal delivery to the appropriate address or if sent by certified or registered mail, three (3) days after the date of mailing. 8. NOTIFICATION OF NEW EMPLOYER. In the event that I leave the employ of the Company, I hereby consent to the notification of my new employer of my rights and obligations under this Agreement. 9. GENERAL PROVISIONS. 9.1 GOVERNING LAW; CONSENT TO PERSONAL JURISDICTION. This Agreement will be governed by and construed according to the laws of the State of Kansas, as such laws are applied to agreements entered into and to be performed principally within Kansas. I hereby expressly consent to the personal jurisdiction of the state and federal courts located in Johnson County, Kansas, for any lawsuit filed there against me by Company arising from or related to this Agreement. 9.2 SEVERABILITY. In case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein so long as the central purpose and intent of the Agreement can still be achieved. If moreover, any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 9.3 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon my heirs, executors, administrators and other legal representatives and will be for the benefit of the Company, its successors, and its assigns. 9.4 SURVIVAL. The provisions of this Agreement shall survive the termination of my employment and the assignment of this Agreement by the Company to any successor in interest or other assignee. 9.5 EMPLOYMENT. I agree and understand that nothing in this Agreement shall confer any right with respect to continuation of employment by the Company, nor shall it interfere in any way with my right or the Company's right to terminate my employment at any time, with or without cause. 9.6 WAIVER. No waiver by the Company of any breach of this Agreement shall be a waiver of any preceding or succeeding breach. No waiver by the Company of any right under this -5- Agreement shall be construed as a waiver of any other right. The Company shall not be required to give notice to enforce strict adherence to all terms of this Agreement. 9.7 ENTIRE AGREEMENT. The obligations pursuant to Sections 1 and 2 of this Agreement shall apply to any time during which I was previously employed, or am in the future employed, by the Company as a consultant if no other agreement governs nondisclosure and assignment of inventions during such period. This Agreement is the final, complete and exclusive agreement of the parties with respect to the subject matter hereof and supersedes and merges all prior discussions between us. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing and signed by the party to be charged. Any subsequent change or changes in my duties, salary or compensation will not affect the validity or scope of this Agreement. This Agreement shall be effective as of the first day of my employment with the Company, namely: July 1, 1997. I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE COMPLETELY FILLED OUT EXHIBIT A TO THIS AGREEMENT. Dated: October 2, 2000 /s/ Joe Nemelka ----------------------------------- (Signature) JOE NEMELKA (Printed Name) ACCEPTED AND AGREED TO: NATIONAL INFORMATION CONSORTIUM, INC. By: /s/ Sam Somerhalder -------------------------------- Title: EVP Lincoln, NE 68508 (Address) Dated: October 24, 2000 -6- EXHIBIT A PREVIOUS INVENTIONS TO: National Information Consortium, Inc. FROM: JOE NEMELKA DATE: July 1, 1997 SUBJECT: Previous Inventions 1. Except as listed in Section 2 below, the following is a complete list of all inventions or improvements relevant to the subject matter of my employment by National Information Consortium, Inc. or any of its controlled subsidiaries (collectively, the "Company"), that have been made or conceived or first reduced to practice by one alone or jointly with others prior to my engagement by the Company: - No inventions or improvements. - See below: ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- - Additional sheets attached. 2. Due to a prior confidentiality agreement, I cannot complete the disclosure under Section 1 above with respect to inventions or improvements generally listed below, the proprietary rights and duty of confidentiality with respect to which I owe to the following party(ies):
INVENTION OR IMPROVEMENT PARTY(IES) RELATIONSHIP 1. ___________________________ __________ ___________________ 2. ___________________________ __________ ___________________ 3. ___________________________ __________ ___________________
- Additional sheets attached. -7- EXHIBIT "B" NONCOMPETITION AGREEMENT THIS NONCOMPETITION AGREEMENT (the "Agreement") is being executed and delivered as of September 1, 2000, by Joe Nemelka (the "Executive") in favor of, and for the benefit of: NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation ("NIC," and together with NIC's subsidiaries, (the "Company"). Certain capitalized terms used in this Agreement are defined in Section 11. RECITALS A. As an employee of the Company, the Executive has obtained extensive and valuable knowledge and confidential information concerning the business of the Company. B. The Company and the Executive are executing a Key Employee Agreement (the "Employment Agreement") contemporaneously with the execution and delivery of this Agreement. Pursuant to the Employment Agreement, the Executive is becoming a key employee of the Company and will accordingly obtain extensive and valuable knowledge and confidential information concerning the business of the Company. C. The Company and the Executive acknowledge that this Agreement is intended to protect the legitimate business interests of the Company and of the Executive. D. The Company has conducted and is conducting its business on a national basis. AGREEMENT For good and valuable consideration, the receipt of which is hereby acknowledged, the Company and the Executive agree as follows: 1. RESTRICTION ON COMPETITION. The Executive agrees that, during the Noncompetition Period, the Executive shall not, and shall not permit any of his Affiliates to: (a) engage directly in Competition in any Restricted Territory; or (b) directly be or become an officer, director, stockholder, owner, co-owner, Affiliate, partner, promoter, employee, agent, representative, designer, consultant, advisor, manager, licensor, sublicensor, licensee or sublicensee of, for or to, or otherwise be or become associated with or acquire or hold (of record, beneficially or otherwise) any direct or indirect interest in, any Person that engages directly or indirectly in Competition in any Restricted Territory: Provided, however, that the Executive may, without violating this Section 1, own, as a passive investment, shares of capital stock of a publicly held corporation that engages in Competition if (i) such shares are actively traded on an established national securities market in the United States, (ii) the number of shares of such corporation's capital stock that are owned beneficially (directly or indirectly) by the Executive and the number of shares of such corporation's capital stock that are owned beneficially (directly or indirectly) by the Executive's Affiliates collectively represent less than five percent of the total number of shares of such corporation's capital stock outstanding, and (iii) neither the Executive nor any Affiliate of the Executive is otherwise associated directly or indirectly with such corporation or with any Affiliate of such corporation. 2. REPRESENTATIONS AND WARRANTIES. The Executive represents and warrants, to and for the benefit of the Company, that: (a) they have full power and capacity to execute and deliver, and to perform all of his obligations under, this Agreement; and (b) neither the execution and delivery of this Agreement nor the performance of this Agreement will result directly or indirectly in a violation or breach of(i) any agreement or obligation by which the Executive or any of his Affiliates is or may be bound, or (ii) any law, rule or regulation. The Executive's representations and warranties shall survive the expiration of the Noncompetition Period for an unlimited period of time. 3. SPECIFIC PERFORMANCE. The Executive agrees that, in the event of any breach or threatened breach by the Executive of any covenant or obligation contained in this Agreement, each of the Company shall be entitled (in addition to any other remedy that may be available to it, including monetary damages) to seek and obtain (a) a decree or order of specific performance to enforce the observance and performance of such covenant or obligation, and (b) an injunction restraining such breach or threatened breach. 4. NONEXCLUSIVITY. The rights and remedies of the parties hereto under this Agreement are not exclusive of or limited by any other rights or remedies which they may have, whether at law, in equity, by contract or otherwise, all of which shall be cumulative (and not alternative). Without limiting the generality of the foregoing, the rights and remedies of the parties hereto under this Agreement, and the obligations and liabilities of the Executive under this Agreement, are in addition to his respective rights, remedies, obligations and liabilities under the law of unfair competition, under laws relating to misappropriation of trade secrets, under other laws and common law requirements and under all applicable rules and regulations. Nothing in this Agreement shall limit any of the obligations, or the rights or remedies of the parties hereto, under the Employment Agreement; and nothing in the Employment Agreement shall limit any of the obligations, or any of the rights or remedies of the parties hereto, under this Agreement. No breach on the part of the Company or any other party of any covenant or obligation contained in the Employment Agreement or any other agreement shall limit or otherwise affect any right or remedy of the parties hereto under this Agreement. 5. SEVERABILITY. If any provision of this Agreement or any part of any such provision is held under any circumstances to be invalid or unenforceable in any jurisdiction, then (a) such provision or part thereof shall, with respect to such circumstances and in such jurisdiction, be deemed amended to conform to applicable laws so as to be valid and enforceable to the fullest possible extent, (b) the invalidity or unenforceability of such -2- provision or part thereof under such circumstances and in such jurisdiction shall not affect the validity or enforceability of such provision or part thereof under any other circumstances or in any other jurisdiction, and (c) the invalidity or unenforceability of such provision or part thereof shall not affect the validity or enforceability of the remainder of such provision or the validity or enforceability of any other provision of this Agreement. Each provision of this Agreement is separable from every other provision of this Agreement, and each part of each provision of this Agreement is separable from every other part of such provision so long as to do so does not destroy the central intent and purpose of the agreement. 6. GOVERNING LAW; VENUE. (a) This Agreement shall be construed in accordance with, and governed in all respects by, the laws of the State of Kansas (without giving effect to principles of conflicts of laws). (b) Any legal action or other legal proceeding relating to this Agreement or the enforcement of any provision of this Agreement may be brought or otherwise commenced in any state or federal court located in Johnson County Kansas. The Executive: (i) expressly and irrevocably consents and submits to the jurisdiction of each state and federal court located in Johnson County of Kansas (and each appellate court located in the State of Kansas), in connection with any such legal proceeding; (ii) agrees that service of any process, summons, notice or document by U.S. mail addressed to them at the address set forth on the signature page of this Agreement shall constitute effective service of such process, summons, notice or document for purposes of any such legal proceeding; (iii) agrees that each state and federal court located in Johnson County Kansas, shall be deemed to be a convenient forum; and (iv) agrees not to assert (by way of motion, as a defense or otherwise), in any such legal proceeding commenced in any state or federal court located in Johnson County Kansas, any claim that the Executive is not subject personally to the jurisdiction of such court, that such legal proceeding has been brought in an inconvenient forum, that the venue of such proceeding is improper or that this Agreement or the subject matter of this Agreement may not be enforced in or by such court. 7. WAIVER. No failure on the part of the Company or any other party to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of the Company or any other party in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no -3- single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. 8. CAPTIONS. The captions contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement. 9. CONSTRUCTION. Whenever required by the context, the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; and the neuter gender shall include the masculine and feminine genders. Any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement. Neither the drafting history nor the negotiating history of this Agreement shall be used or referred to in connection with the construction or interpretation of this Agreement. As used in this Agreement, the words "include" and "including," and variations thereof, shall not be deemed to be terms of limitation, and shall be deemed to be followed by the words "without limitation." Except as otherwise indicated in this Agreement, all references in this Agreement to "Sections" are intended to refer to Sections of this Agreement. 10. AMENDMENT. This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of the Executive and the Company (or any successor to the Company). 11. DEFINED TERMS. For purposes of this Agreement: (a) "Affiliate" means, with respect to the Executive, any other Person that, directly or indirectly, through one or more intermediaries, is controlled by the Executive. (b) "Competing Product" means any: (i) application or software program that provides an electronic gateway to government services or procurement information; (ii) product, device or system that is substantially the same as, incorporates, is a material component or part of, or is based upon or competes with anything referred to in clause (i) above or any product, device or system that has been designed, developed, promoted, sold, resold, installed, supported, maintained, licensed or sublicensed by or on behalf of Persons who at any time on or prior to the date of this Agreement were competitors of the Company (or of any predecessor of the Company) at any time on or prior to this date of this Agreement until the date of termination of employment. (c) "Competing Service" means any: (i) public/private partnership that provides an electronic gateway to government services or procurement information; (ii) service that is substantially the same as, incorporates, is a material component or part of, or is based upon or competes with a service that has been provided, performed or offered by or on behalf the Company (or of any predecessor of the Company) at any time on or prior to the date of this Agreement or until the date of -4- termination of employment; (iii) service that facilitates, supports or otherwise relates to the any Competing Product. (d) A Person shall be deemed to be engaged in "Competition" if: (i) such Person is engaged directly or indirectly in the design, development, manufacture, assembly, promotion, sale, supply, distribution, resale, installation, support, maintenance, repair, refurbishment, licensing, sublicensing, financing, leasing or subleasing of any Competing Product; or (ii) such Person is engaged directly or indirectly in providing, performing or offering any Competing Service. (e) "Confidential Information" means any non-public information (whether or not in written form and whether or not expressly designated as confidential) relating directly or indirectly to the Company or relating directly or indirectly to the business, operations, financial affairs, performance, assets, technology, processes, products, contracts, customers, licensees, sublicensees, suppliers, personnel, consultants or plans of the Company (including any such information consisting of or otherwise relating to trade secrets, know-how, technology, inventions, prototypes, designs, drawings, sketches, processes, license or sublicense arrangements, formulae, proposals, research and development activities, customer lists or preferences, pricing lists, referral sources, marketing or sales techniques or plans, operations manuals, service manuals, financial information, projections, lists of consultants, lists of suppliers or lists of distributors); provided, however, that "Confidential Information" shall not be deemed to include information of the Company that was already publicly known and in the public domain prior to the time of its disclosure by the Executive. (f) "Noncompetition Period" shall mean the period commencing on the date of this Agreement and ending on the second anniversary of the date of the termination of the Executive's employment with the Company. (g) "Person" means, other than Electric Press, Inc., a Virginia corporation, any: (i) individual or (ii) corporation, general partnership, limited partnership, limited liability partnership, trust, company (including any limited liability company or joint stock company) or other organization or entity. (h) "Restricted Territory" means each county or similar political subdivision of each State of the United States of America (including each of the counties in the State of California), and each State, territory or possession of the United States of America. -5- IN WITNESS WHEREOF, the Executive has duly executed and delivered this Noncompetition Agreement as of the date first above written. Signature /s/ Joe Nemelka ----------------------- Name: JOE NEMELKA Telephone No.: (801) 756-7187 Facsimile: (801) 756-4643 -6- EX-10.40 7 a2041279zex-10_40.txt EXHIBIT 10.40 NATIONAL INFORMATION CONSORTIUM, INC. KEY EMPLOYEE AGREEMENT FOR JAMES B. DODD THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 1st day of September, 2000, by and between James B. Dodd ("Executive") and NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation (the "Company"). This Agreement amends and restates all prior agreements between Executive and the Company with respect to the subject matter hereof. WHEREAS, the Company desires to employ Executive to provide personal services to the Company and to the Company's subsidiaries, and wishes to provide Executive with certain compensation and benefits in return for Executive's services; and WHEREAS, Executive wishes to be employed by the Company and provide personal services to the Company and to the Company's subsidiaries in return for certain compensation and benefits; NOW, THEREFORE, the parties hereto agree as follows: 1. EMPLOYMENT BY THE COMPANY. 1.1 ACCEPTANCE. Subject to terms set forth herein, the Company or a subsidiary of the Company, agrees to employ Executive in the position of President and Chief Executive Officer and Executive hereby accepts such employment effective as of the date first written above. During the term of employment with the Company, Executive will devote his best efforts and substantially all of his business time and attention (except for vacation periods and reasonable periods of illness or other incapacity's permitted by the Company's general employment policies) to the business of the Company. 1.2 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). 1.3 EMPLOYMENT 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. 2. COMPENSATION. 2.1 SALARY. Executive shall receive for services to be rendered hereunder an annualized base salary of $200,000, 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. 2.2 STANDARD COMPANY BENEFITS. Executive shall be entitled to all rights and benefits for which they are eligible under the terms and conditions of the standard Company benefits and compensation practices which may be in effect from time to time and provided by the Company to its employees generally. 3. PROPRIETARY INFORMATION OBLIGATIONS. 3.1 AGREEMENT. Executive agrees to execute and abide by the Proprietary Information and Inventions Agreement attached hereto as Exhibit A. 4. TERMINATION OF EMPLOYMENT. 4.1 TERMINATION WITHOUT CAUSE. (a) The Company shall have the right to terminate Executive's employment with the Company at any time without cause. (b) In the event Executive's employment is terminated without cause before January 1, 2002, the Company shall pay Executive 18 months' base compensation in a single lump sum distribution on the first regular Company pay period after said termination. (c) In the event Executive's employment is terminated without cause on or after January 1, 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. 4.2 TERMINATION FOR CAUSE. (a) The Company shall have the right to terminate Executive's employment with the Company at any time for cause. Written notification of termination and specific cause of termination shall be provided to the Executive at the time of termination. (b) "Cause" for termination shall mean an employee's conviction of a felony or the willful and deliberate failure of an employee to perform his customary duties, in a manner consistent with the manner reasonably prescribed by the Board of Directors or President of Company (other than any failure resulting from his incapacity due to physical -2- or mental illness, disability or death) after not less than thirty (30) days prior written notice from Company. (c) In the event the Executive is notified in writing his employment is to be terminated for cause and the cause is curable, the Executive shall be given thirty days from date of notification to cure the specific cause(s) set forth in the notification. (d) In the event Executive's employment is terminated at any time for cause, the executive shall not be entitled to severance pay, pay in lieu of notice or any other such compensation; provided, however, Executive shall be entitled and shall receive all compensation earned prior to and including the date of termination. 4.3 VOLUNTARY OR MUTUAL TERMINATION. (a) Executive may voluntarily terminate his employment in writing with the Company at any time, after which no further compensation will be paid to Executive. (b) In the event Executive voluntarily terminates his employment, Executive shall not be entitled to severance pay, pay in lieu of notice or any other such compensation; provided, however, Executive shall be entitled and shall receive all compensation earned prior to and including the date of termination. 4.4 TERMINATION IN CONNECTION WITH A CHANGE OF CONTROL (a) In the event of a "Change in Control" of the Company (as defined herein), and in the event that either in contemplation of such Change of Control or after such Change of Control, Executive's employment is terminated without cause, in addition to any payments to which Executive may be entitled pursuant to Section 4.1, subject to the provisions of paragraph (c) below, Executive shall be entitled to a severance payment equal to the product of the number of full years of employment of Executive with the Company times the sum of (i) one month's salary, and (ii) one/twelfth the annual bonus earned by Executive for the last complete calendar year or year of employment, whichever is greater. In the event Executive voluntarily terminates his employment with the Company within six months of a Change of Control, subject to the provisions of paragraph (c) below, Executive shall be entitled to a severance payment equal to the product of the number of full years of employment of Executive with the Company times the sum of (i) one month's salary, and (ii) one/twelfth times the annual bonus earned by Executive for the last complete calendar year or year of employment, whichever is greater. In addition, in either case, notwithstanding the provisions of any stock option agreement, all stock options held by the Executive shall vest upon such Change of Control. (b) For purposes of this Section 4.4, a "Change in Control" of the Company shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, who -3- is not a "beneficial owner" (as defined in Rule 13d-3 under said Act), of 5% or more of the Company's common stock as of the date of this agreement becomes the beneficial owner, directly or indirectly, of capital stock of the Company representing 40 percent or more of the total voting power represented by the Company's then outstanding capital stock, or (ii) the shareholders of the Company approve (x) a merger or consolidation of the Company with any other company, other than a merger or consolidation in which the shareholders of the Company would own 50% or more of the voting stock of the surviving corporation, (y) the sale of all of substantially all of the assets of the Company, or (z) the liquidation or dissolution of the Company. (c) Anything in this Agreement to the contrary notwithstanding, prior to the payment of any compensation or benefits payable under paragraph (a) of this Section 4.4 hereof, the certified public accountants of the Company immediately prior to a Change of Control (the "Certified Public Accountants") shall determine as promptly as practical and in any event with 20 business days following the sale of the Company whether any payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, any other agreements or otherwise) (a "Payment") would more likely than not be nondeductible by the Company for Federal income tax purposes because of section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and if it is, then the aggregate present value of amounts payable or distributable to or for the benefit of the Company pursuant to this Agreement (such payments or distributions pursuant to this Agreement are thereinafter referred to as "Contract Payments") shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Section, the "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Contract Payments without causing any payment to be nondeductible by the Company because of said Section 280G of the Code. If under the Section the certified Public Accountants determine that any payment would more likely than not be nondeductible by the Company because of Section 280G of the Code, the Company shall promptly give Executive notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Executive may then elect, in his sole discretion, which and how much of the Contract Payments or any other payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Agreement Payments or any other payments equals the Reduced Amount), and shall advise the Company in writing of his election within 20 business days of his receipt of notice. If no such election is made by Executive within such 20-day period, the Company may elect which and how much of the Contract Payments or any other payments shall be eliminated or reduced (as long as after such election the Aggregate present value of the Contract Payments equals the Reduced Amount) and shall notify Executive promptly of such election. For purposes of this Section, present value shall be determined in accordance with Section 280G(d)(4) of the Code. All determinations made by the Certified Public Accountants shall be binding upon the Company and Executive and the payment to Executive shall be made within 20 days of sale of the Company. The Company may suspend for a period of up to 30 days after the sale of the Company the Payment and any other payments or benefits due to Executive -4- until the Certified Public Accountants finish the determination and Executive (or the Company, as the case may be) elects how to reduce the Contract Payments or any other payments, if necessary. As promptly as practicable following such determination and the elections hereunder, the Company shall pay to our distribute to or for the benefit of Executive such amounts as are then due to Executive under this Agreement. 5. NON-INTERFERENCE; NON-COMPETITION. 5.1 AGREEMENT. Executive agrees to execute and abide by the Noncompetition Agreement attached hereto as Exhibit B. 6. GENERAL PROVISION. 6.1 NOTICES. Any notices provided hereunder must be in writing and shall be deemed effective upon the earlier of personal delivery (including personal delivery by facsimile) or the third day after mailing by first class mail, to the Company at its primary office location and to Executive at the address listed on the Company payroll. 6.2 SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been contained herein. 6.3 WAIVER. If either party should waive any breach of any provisions of this Agreement, they or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 6.4 COMPLETE AGREEMENT. This Agreement and its Exhibits, constitute the entire agreement between Executive and the Company and it is the complete, final, and exclusive embodiment of his agreement with regard to the material terms of executive employment, compensation, and duration. It is entered into without reliance on any promise or representation other than those expressly contained herein, and it cannot be modified or amended except in a writing signed by Executive and an officer of the Company. 6.5 COUNTERPARTS. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. 6.6 HEADINGS. The headings of the sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 6.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company, and his respective successors, -5- assigns, heirs, executors and administrators, except that Executive may not assign any of his duties hereunder and they may not assign any of his rights hereunder without the written consent of the Company, which shall not be withheld unreasonably. 6.8 ATTORNEYS' 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. 6.9 CHOICE OF LAW. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of Kansas. IN WITNESS WHEREOF, the parties have executed this Key Employee Agreement on the day and year first above written. NATIONAL INFORMATION CONSORTIUM, INC.: By: /s/ Sam Somerhalder --------------------------- Name: SAM SOMERHALDER Title: EXECUTIVE VICE PRESIDENT EXECUTIVE: /s/ James B. Dodd ------------------------------- Name: JAMES B. DODD -6- EXHIBIT "A" EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT In consideration of my employment or continued employment by NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation, or any controlled subsidiary of the Company (collectively, the "Company"), and in consideration of the compensation now and hereafter paid to me, I, the undersigned, hereby agree as follows: 1. NONDISCLOSURE. 1.1 RECOGNITION OF COMPANY'S RIGHTS; NONDISCLOSURE. At all times during my employment and thereafter, I will hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Company's Proprietary Information (defined below), except as such disclosure, use or publication may be required in connection with my work for the Company, or unless an officer of the Company expressly authorizes such in writing. I will obtain Company's written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to my work at Company and/or incorporates any Proprietary Information. I hereby assign to the Company any rights I may have or acquire in such Proprietary Information and recognize that all Proprietary Information shall be the sole property of the Company and its assigns. 1.2 PROPRIETARY INFORMATION. The term "Proprietary Information" shall mean any and all confidential and/or proprietary knowledge, data or information of the Company. By way of illustration but not limitation, "Proprietary Information" includes (a) trade secrets, inventions, ideas, processes, formulas, source and object codes, data, programs, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques (hereinafter collectively referred to as "Inventions"); and (b) information regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and (c) information regarding the skills and compensation of other employees of the Company. Notwithstanding the foregoing, it is understood that, at all such times, I am free to use information which is generally known in the trade or industry, which is not gained as result of a breach of this Agreement, and my own, skill, knowledge, know-how and experience to whatever extent and in whichever way I wish. 1.3 THIRD PARTY INFORMATION. I understand, in addition, that the Company has received and in the future will receive from third parties confidential or proprietary information ("Third Party Information") subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes. During the term of my employment and thereafter, I will hold Third Party Information in the strictest confidence and will not disclose to anyone (other than Company personnel who need to know such information in connection with his work for the Company) or use, except in connection with my work for the Company, Third Party Information unless expressly authorized by an officer of the Company in writing. 1.4 NO IMPROPER USE OF INFORMATION OF PRIOR EMPLOYERS AND OTHERS. During my employment by the Company I will not improperly use or disclose any confidential information or trade secrets, if any, of any former employer or any other person to whom I have an obligation of confidentiality, and I will not bring onto the premises of the Company any unpublished documents or any property belonging to any former employer or any other person to whom I have an obligation of confidentiality unless consented to in writing by that former employer or person. I will use in the performance of my duties only information which is generally known and used by persons with training and experience comparable to my own, which is common knowledge in the industry or otherwise legally in the public domain, or which is otherwise provided or developed by the Company. 2. ASSIGNMENT OF INVENTIONS. 2.1 PROPRIETARY RIGHTS. The term "Proprietary Rights" shall mean all trade secret, patent, copyright, and other intellectual property rights throughout the world. 2.2 PRIOR INVENTIONS. Inventions, if any, patented or unpatented, which I made prior to the commencement of my employment with the Company are excluded from the scope of this Agreement. To preclude any possible uncertainty, I have set forth on Exhibit A (Previous Inventions) attached hereto a complete list of all Inventions that I have, alone or jointly with others, conceived, developed or reduced to practice or caused to be conceived, developed or reduced to practice prior to the commencement of my employment with the Company, that I consider to be my property or the property of third parties and that I wish to have excluded from the scope of this Agreement (collectively referred to as "Prior Inventions"). If disclosure of any such Prior Invention would cause me to violate any prior confidentiality agreement, I understand that I am not to list such Prior Inventions in Exhibit A but am only to disclose a cursory name for each such invention, a listing of the party(ies) to whom it belongs and the fact that full disclosure as to such inventions has not been made for that reason. A space is provided on Exhibit A for such purpose. If no such disclosure is attached, I represent that there are no Prior Inventions. If, in the course of my employment with the Company, I incorporate a Prior Invention into a Company product, process or machine, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, modify, use and sell such Prior Invention. Notwithstanding the foregoing, I agree that I will not incorporate, or permit to be incorporated, Prior Inventions in any Company Inventions without the Company's prior written consent. 2.3 ASSIGNMENT OF INVENTIONS. Subject to Sections 2.4, and 2.6, I hereby assign and agree to assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to the Company all my right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by me, either alone or jointly with others, during the period of my -2- employment with the Company. Inventions assigned to the Company, or to a third party as directed by the Company pursuant to this Section 2, are hereinafter referred to as "Company Inventions." 2.4 NONASSIGNABLE INVENTIONS. This Agreement will not be deemed to require assignment of and "Company Inventions" shall not be decerned to include any invention which was developed entirely on my own time without using the Company's equipment, supplies, facilities, or trade secrets and neither related to the Company's actual or anticipated business, research or development, nor resulted from work performed by me for the Company. 2.5 OBLIGATION TO KEEP COMPANY INFORMED. During the period of my employment and for six (6) months after termination of my employment with the Company, I will promptly disclose to the Company fully and in writing all Inventions authored, conceived or reduced to practice by me, either alone or jointly with others. In addition, I will promptly disclose to the Company all patent applications filed by me or on my behalf within a year after termination of employment. At the time of each such disclosure, I will advise the Company in writing of any Inventions that I believe fully qualify for protection "as non- Company Inventions" and I will at that time provide to the Company in writing all evidence necessary to substantiate that belief. The Company will keep in confidence and will not use for any purpose or disclose to third parties without my consent any confidential information disclosed in writing to the Company pursuant to this Agreement relating to Inventions that "are not Company Inventions." I will preserve the confidentiality of any Invention which "is a Company Invention." 2.6 GOVERNMENT OR THIRD PARTY. I also agree to assign all my right, title and interest in and to any particular Company Invention to a third party, including without limitation the United States, as directed by the Company. 2.7 WORKS FOR HIRE. I acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of my employment and which are protectable by copyright are "works made for hire," pursuant to United States Copyright Act (17 U.S.C., Section 101). 2.8 ENFORCEMENT OF PROPRIETARY RIGHTS. I will assist the Company in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Company Inventions in any and all countries. To that end I will execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof. In addition, I will execute, verify and deliver assignments of such "Company Inventions" to the Company or its designee. My obligation to assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of my employment, but the Company shall compensate me at a reasonable rate after my termination for the time actually spent by me at the Company's request on such assistance. In the event the Company is unable for any reason, after reasonable effort, to secure my signature on any document needed in connection with the actions specified in the preceding -3- paragraph, I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney in fact, which appointment is coupled with an interest, to act for and in my behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by me. I hereby waive and quitclaim to the Company any and all claims, of any nature whatsoever, which I now or may hereafter have for infringement of any Proprietary Rights or Company Inventions assigned hereunder to the Company. 3. RECORDS. I agree to keep and maintain adequate and current records (in the form of notes, sketches, drawings and in any other form that may be required by the Company) of all Proprietary Information developed by me and all Inventions made by me during the period of my employment at the Company, which records shall be available to and remain the sole property of the Company at all times. 4. NO CONFLICTING OBLIGATION. I represent that my performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith. 5. RETURN OF COMPANY DOCUMENTS. When I leave the employ of the Company, I will deliver to the Company any and all original drawings, notes, memoranda, specifications, devices, formulas, and documents, and any other material containing or disclosing any Company Inventions, Third Party Information or Proprietary Information of the Company. I further agree that any property situated on the Company's premises and owned by the Company, including disks and other storage media, filing cabinets or other work areas, is subject to inspection by Company personnel at any time with or without notice. Prior to leaving, I will cooperate with the Company in completing and signing the Company's termination statement. 6. LEGAL AND EQUITABLE REMEDIES. Because my services are personal and unique and because I may have access to and become acquainted with the Proprietary Information of the Company, the Company shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance or other equitable relief, without bond and without prejudice to any other rights and remedies that the Company may have for a breach of this Agreement. -4- 7. NOTICES. Any notices required or permitted hereunder shall be given to the appropriate party at the address specified below or at such other address as the party shall specify in writing. Such notice shall be deemed given upon personal delivery to the appropriate address or if sent by certified or registered mail, three (3) days after the date of mailing. 8. NOTIFICATION OF NEW EMPLOYER. In the event that I leave the employ of the Company, I hereby consent to the notification of my new employer of my rights and obligations under this Agreement. 9. GENERAL PROVISIONS. 9.1 GOVERNING LAW; CONSENT TO PERSONAL JURISDICTION. This Agreement will be governed by and construed according to the laws of the State of Kansas, as such laws are applied to agreements entered into and to be performed principally within Kansas. I hereby expressly consent to the personal jurisdiction of the state and federal courts located in Johnson County, Kansas, for any lawsuit filed there against me by Company arising from or related to this Agreement. 9.2 SEVERABILITY. In case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein so long as the central purpose and intent of the Agreement can still be achieved. If moreover, any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 9.3 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon my heirs, executors, administrators and other legal representatives and will be for the benefit of the Company, its successors, and its assigns. 9.4 SURVIVAL. The provisions of this Agreement shall survive the termination of my employment and the assignment of this Agreement by the Company to any successor in interest or other assignee. 9.5 EMPLOYMENT. I agree and understand that nothing in this Agreement shall confer any right with respect to continuation of employment by the Company, nor shall it interfere in any way with my right or the Company's right to terminate my employment at any time, with or without cause. 9.6 WAIVER. No waiver by the Company of any breach of this Agreement shall be a waiver of any preceding or succeeding breach. No waiver by the Company of any right under this -5- Agreement shall be construed as a waiver of any other right. The Company shall not be required to give notice to enforce strict adherence to all terms of this Agreement. 9.7 ENTIRE AGREEMENT. The obligations pursuant to Sections 1 and 2 of this Agreement shall apply to any time during which I was previously employed, or am in the future employed, by the Company as a consultant if no other agreement governs nondisclosure and assignment of inventions during such period. This Agreement is the final, complete and exclusive agreement of the parties with respect to the subject matter hereof and supersedes and merges all prior discussions between us. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing and signed by the party to be charged. Any subsequent change or changes in my duties, salary or compensation will not affect the validity or scope of this Agreement. This Agreement shall be effective as of the first day of my employment with the Company, namely: January 1, 1999. I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE COMPLETELY FILLED OUT EXHIBIT A TO THIS AGREEMENT. Dated: September 26, 2000 /s/ James B. Dodd ------------------------------ (Signature) JAMES B. DODD (Printed Name) ACCEPTED AND AGREED TO: NATIONAL INFORMATION CONSORTIUM, INC. By: /s/ Sam Somerhalder --------------------------- Title: EVP Lincoln, NE 68508 (Address) Dated: October 24, 2000 -6- EXHIBIT A PREVIOUS INVENTIONS TO: National Information Consortium, Inc. FROM: JAMES B. DODD DATE: January 1, 1999 SUBJECT: Previous Inventions 1. Except as listed in Section 2 below, the following is a complete list of all inventions or improvements relevant to the subject matter of my employment by National Information Consortium, Inc. or any of its controlled subsidiaries (collectively, the "Company"), that have been made or conceived or first reduced to practice by one alone or jointly with others prior to my engagement by the Company: - No inventions or improvements. - See below: ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- - Additional sheets attached. 2. Due to a prior confidentiality agreement, I cannot complete the disclosure under Section 1 above with respect to inventions or improvements generally listed below, the proprietary rights and duty of confidentiality with respect to which I owe to the following party(ies):
INVENTION OR IMPROVEMENT PARTY(IES) RELATIONSHIP 1. ___________________________ __________ ___________________ 2. ___________________________ __________ ___________________ 3. ___________________________ __________ ___________________
- - Additional sheets attached. -7- EXHIBIT "B" NONCOMPETITION AGREEMENT THIS NONCOMPETITION AGREEMENT (the "Agreement") is being executed and delivered as of January 1, 1999, by James B. Dodd (the "Executive") in favor of, and for the benefit of: NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation ("NIC," and together with NIC's subsidiaries, (the "Company"). Certain capitalized terms used in this Agreement are defined in Section 11. RECITALS A. As an employee of the Company, the Executive has obtained extensive and valuable knowledge and confidential information concerning the business of the Company. B. The Company and the Executive are executing a Key Employee Agreement (the "Employment Agreement") contemporaneously with the execution and delivery of this Agreement. Pursuant to the Employment Agreement, the Executive is becoming a key employee of the Company and will accordingly obtain extensive and valuable knowledge and confidential information concerning the business of the Company. C. The Company and the Executive acknowledge that this Agreement is intended to protect the legitimate business interests of the Company and of the Executive. D. The Company has conducted and is conducting its business on a national basis. AGREEMENT For good and valuable consideration, the receipt of which is hereby acknowledged, the Company and the Executive agree as follows: 1. RESTRICTION ON COMPETITION. The Executive agrees that, during the Noncompetition Period, the Executive shall not, and shall not permit any of his Affiliates to: (a) engage directly in Competition in any Restricted Territory; or (b) directly be or become an officer, director, stockholder, owner, co-owner, Affiliate, partner, promoter, employee, agent, representative, designer, consultant, advisor, manager, licensor, sublicensor, licensee or sublicensee of, for or to, or otherwise be or become associated with or acquire or hold (of record, beneficially or otherwise) any direct or indirect interest in, any Person that engages directly or indirectly in Competition in any Restricted Territory: Provided, however, that the Executive may, without violating this Section 1, own, as a passive investment, shares of capital stock of a publicly held corporation that engages in Competition if (i) such shares are actively traded on an established national securities market in the United States, (ii) the number of shares of such corporation's capital stock that are owned beneficially (directly or indirectly) by the Executive and the number of shares of such corporation's capital stock that are owned beneficially (directly or indirectly) by the Executive's Affiliates collectively represent less than five percent of the total number of shares of such corporation's capital stock outstanding, and (iii) neither the Executive nor any Affiliate of the Executive is otherwise associated directly or indirectly with such corporation or with any Affiliate of such corporation. 2. REPRESENTATIONS AND WARRANTIES. The Executive represents and warrants, to and for the benefit of the Company, that: (a) they have full power and capacity to execute and deliver, and to perform all of his obligations under, this Agreement; and (b) neither the execution and delivery of this Agreement nor the performance of this Agreement will result directly or indirectly in a violation or breach of(i) any agreement or obligation by which the Executive or any of his Affiliates is or may be bound, or (ii) any law, rule or regulation. The Executive's representations and warranties shall survive the expiration of the Noncompetition Period for an unlimited period of time. 3. SPECIFIC PERFORMANCE. The Executive agrees that, in the event of any breach or threatened breach by the Executive of any covenant or obligation contained in this Agreement, each of the Company shall be entitled (in addition to any other remedy that may be available to it, including monetary damages) to seek and obtain (a) a decree or order of specific performance to enforce the observance and performance of such covenant or obligation, and (b) an injunction restraining such breach or threatened breach. 4. NONEXCLUSIVITY. The rights and remedies of the parties hereto under this Agreement are not exclusive of or limited by any other rights or remedies which they may have, whether at law, in equity, by contract or otherwise, all of which shall be cumulative (and not alternative). Without limiting the generality of the foregoing, the rights and remedies of the parties hereto under this Agreement, and the obligations and liabilities of the Executive under this Agreement, are in addition to his respective rights, remedies, obligations and liabilities under the law of unfair competition, under laws relating to misappropriation of trade secrets, under other laws and common law requirements and under all applicable rules and regulations. Nothing in this Agreement shall limit any of the obligations, or the rights or remedies of the parties hereto, under the Employment Agreement; and nothing in the Employment Agreement shall limit any of the obligations, or any of the rights or remedies of the parties hereto, under this Agreement. No breach on the part of the Company or any other party of any covenant or obligation contained in the Employment Agreement or any other agreement shall limit or otherwise affect any right or remedy of the parties hereto under this Agreement. 5. SEVERABILITY. If any provision of this Agreement or any part of any such provision is held under any circumstances to be invalid or unenforceable in any jurisdiction, then (a) such provision or part thereof shall, with respect to such circumstances and in such jurisdiction, be deemed amended to conform to applicable laws so as to be valid and enforceable to the fullest possible extent, (b) the invalidity or unenforceability of such -2- provision or part thereof under such circumstances and in such jurisdiction shall not affect the validity or enforceability of such provision or part thereof under any other circumstances or in any other jurisdiction, and (c) the invalidity or unenforceability of such provision or part thereof shall not affect the validity or enforceability of the remainder of such provision or the validity or enforceability of any other provision of this Agreement. Each provision of this Agreement is separable from every other provision of this Agreement, and each part of each provision of this Agreement is separable from every other part of such provision so long as to do so does not destroy the central intent and purpose of the agreement. 6. GOVERNING LAW; VENUE. (a) This Agreement shall be construed in accordance with, and governed in all respects by, the laws of the State of Kansas (without giving effect to principles of conflicts of laws). (b) Any legal action or other legal proceeding relating to this Agreement or the enforcement of any provision of this Agreement may be brought or otherwise commenced in any state or federal court located in Johnson County Kansas. The Executive: (i) expressly and irrevocably consents and submits to the jurisdiction of each state and federal court located in Johnson County of Kansas (and each appellate court located in the State of Kansas), in connection with any such legal proceeding; (ii) agrees that service of any process, summons, notice or document by U.S. mail addressed to them at the address set forth on the signature page of this Agreement shall constitute effective service of such process, summons, notice or document for purposes of any such legal proceeding; (iii) agrees that each state and federal court located in Johnson County Kansas, shall be deemed to be a convenient forum; and (iv) agrees not to assert (by way of motion, as a defense or otherwise), in any such legal proceeding commenced in any state or federal court located in Johnson County Kansas, any claim that the Executive is not subject personally to the jurisdiction of such court, that such legal proceeding has been brought in an inconvenient forum, that the venue of such proceeding is improper or that this Agreement or the subject matter of this Agreement may not be enforced in or by such court. 7. WAIVER. No failure on the part of the Company or any other party to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of the Company or any other party in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no -3- single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. 8. CAPTIONS. The captions contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement. 9. CONSTRUCTION. Whenever required by the context, the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; and the neuter gender shall include the masculine and feminine genders. Any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement. Neither the drafting history nor the negotiating history of this Agreement shall be used or referred to in connection with the construction or interpretation of this Agreement. As used in this Agreement, the words "include" and "including," and variations thereof, shall not be deemed to be terms of limitation, and shall be deemed to be followed by the words "without limitation." Except as otherwise indicated in this Agreement, all references in this Agreement to "Sections" are intended to refer to Sections of this Agreement. 10. AMENDMENT. This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of the Executive and the Company (or any successor to the Company). 11. DEFINED TERMS. For purposes of this Agreement: (a) "Affiliate" means, with respect to the Executive, any other Person that, directly or indirectly, through one or more intermediaries, is controlled by the Executive. (b) "Competing Product" means any: (i) application or software program that provides an electronic gateway to government services or procurement information; (ii) product, device or system that is substantially the same as, incorporates, is a material component or part of, or is based upon or competes with anything referred to in clause (i) above or any product, device or system that has been designed, developed, promoted, sold, resold, installed, supported, maintained, licensed or sublicensed by or on behalf of Persons who at any time on or prior to the date of this Agreement were competitors of the Company (or of any predecessor of the Company) at any time on or prior to this date of this Agreement until the date of termination of employment. (c) "Competing Service" means any: (i) public/private partnership that provides an electronic gateway to government services or procurement information; (ii) service that is substantially the same as, incorporates, is a material component or part of, or is based upon or competes with a service that has been provided, performed or offered by or on behalf the Company (or of any predecessor of the Company) at any time on or prior to the date of this Agreement or until the date of -4- termination of employment; (iii) service that facilitates, supports or otherwise relates to the any Competing Product. (d) A Person shall be deemed to be engaged in "Competition" if: (i) such Person is engaged directly or indirectly in the design, development, manufacture, assembly, promotion, sale, supply, distribution, resale, installation, support, maintenance, repair, refurbishment, licensing, sublicensing, financing, leasing or subleasing of any Competing Product; or (ii) such Person is engaged directly or indirectly in providing, performing or offering any Competing Service. (e) "Confidential Information" means any non-public information (whether or not in written form and whether or not expressly designated as confidential) relating directly or indirectly to the Company or relating directly or indirectly to the business, operations, financial affairs, performance, assets, technology, processes, products, contracts, customers, licensees, sublicensees, suppliers, personnel, consultants or plans of the Company (including any such information consisting of or otherwise relating to trade secrets, know-how, technology, inventions, prototypes, designs, drawings, sketches, processes, license or sublicense arrangements, formulae, proposals, research and development activities, customer lists or preferences, pricing lists, referral sources, marketing or sales techniques or plans, operations manuals, service manuals, financial information, projections, lists of consultants, lists of suppliers or lists of distributors); provided, however, that "Confidential Information" shall not be deemed to include information of the Company that was already publicly known and in the public domain prior to the time of its disclosure by the Executive. (f) "Noncompetition Period" shall mean the period commencing on the date of this Agreement and ending on the second anniversary of the date of the termination of the Executive's employment with the Company. (g) "Person" means, other than Electric Press, Inc., a Virginia corporation, any: (i) individual or (ii) corporation, general partnership, limited partnership, limited liability partnership, trust, company (including any limited liability company or joint stock company) or other organization or entity. (h) "Restricted Territory" means each county or similar political subdivision of each State of the United States of America (including each of the counties in the State of California), and each State, territory or possession of the United States of America. -5- IN WITNESS WHEREOF, the Executive has duly executed and delivered this Noncompetition Agreement as of the date first above written. Signature /s/ James B. Dodd ------------------------ Name: JAMES B. DODD Telephone No.: (913) 341-4139 Facsimile: ( ) -6- EX-10.41 8 a2041279zex-10_41.txt EXHIBIT 10.41 NATIONAL INFORMATION CONSORTIUM, INC. KEY EMPLOYEE AGREEMENT FOR RAY COUTERMARSH THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 1st day of September, 2000, by and between Ray Coutermarsh ("Executive") and NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation (the "Company"). This Agreement amends and restates all prior agreements between Executive and the Company with respect to the subject matter hereof. WHEREAS, the Company desires to employ Executive to provide personal services to the Company and to the Company's subsidiaries, and wishes to provide Executive with certain compensation and benefits in return for Executive's services; and WHEREAS, Executive wishes to be employed by the Company and provide personal services to the Company and to the Company's subsidiaries in return for certain compensation and benefits; NOW, THEREFORE, the parties hereto agree as follows: 1. EMPLOYMENT BY THE COMPANY. 1.1 ACCEPTANCE. Subject to terms set forth herein, the Company or a subsidiary of the Company, agrees to employ Executive in the position of Executive Vice President--Local Markets and Executive hereby accepts such employment effective as of the date first written above. During the term of employment with the Company, Executive will devote his best efforts and substantially all of his business time and attention (except for vacation periods and reasonable periods of illness or other incapacity's permitted by the Company's general employment policies) to the business of the Company. 1.2 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). 1.3 EMPLOYMENT 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. 2. COMPENSATION. 2.1 SALARY. Executive shall receive for services to be rendered hereunder an annualized base salary of $140,000, 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. 2.2 STANDARD COMPANY BENEFITS. Executive shall be entitled to all rights and benefits for which they are eligible under the terms and conditions of the standard Company benefits and compensation practices which may be in effect from time to time and provided by the Company to its employees generally. 3. PROPRIETARY INFORMATION OBLIGATIONS. 3.1 AGREEMENT. Executive agrees to execute and abide by the Proprietary Information and Inventions Agreement attached hereto as Exhibit A. 4. TERMINATION OF EMPLOYMENT. 4.1 TERMINATION WITHOUT CAUSE. (a) The Company shall have the right to terminate Executive's employment with the Company at any time without cause. (b) In the event Executive's employment is terminated without cause before February 1, 2003, the Company shall pay Executive 12 months' base compensation in a single lump sum distribution on the first regular Company pay period after said termination. (c) In the event Executive's employment is terminated without cause on or after February 1, 2003, 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. 4.2 TERMINATION FOR CAUSE. (a) The Company shall have the right to terminate Executive's employment with the Company at any time for cause. Written notification of termination and specific cause of termination shall be provided to the Executive at the time of termination. (b) "Cause" for termination shall mean an employee's conviction of a felony or the willful and deliberate failure of an employee to perform his customary duties, in a manner consistent with the manner reasonably prescribed by the Board of Directors or President of Company (other than any failure resulting from his incapacity due to physical -2- or mental illness, disability or death) after not less than thirty (30) days prior written notice from Company. (c) In the event the Executive is notified in writing his employment is to be terminated for cause and the cause is curable, the Executive shall be given thirty days from date of notification to cure the specific cause(s) set forth in the notification. (d) In the event Executive's employment is terminated at any time for cause, the executive shall not be entitled to severance pay, pay in lieu of notice or any other such compensation; provided, however, Executive shall be entitled and shall receive all compensation earned prior to and including the date of termination. 4.3 VOLUNTARY OR MUTUAL TERMINATION. (a) Executive may voluntarily terminate his employment in writing with the Company at any time, after which no further compensation will be paid to Executive. (b) In the event Executive voluntarily terminates his employment, Executive shall not be entitled to severance pay, pay in lieu of notice or any other such compensation; provided, however, Executive shall be entitled and shall receive all compensation earned prior to and including the date of termination. 4.4 TERMINATION IN CONNECTION WITH A CHANGE OF CONTROL (a) In the event of a "Change in Control" of the Company (as defined herein), and in the event that either in contemplation of such Change of Control or after such Change of Control, Executive's employment is terminated without cause, in addition to any payments to which Executive may be entitled pursuant to Section 4.1, subject to the provisions of paragraph (c) below, Executive shall be entitled to a severance payment equal to the product of the number of full years of employment of Executive with the Company times the sum of (i) one month's salary, and (ii) one/twelfth the annual bonus earned by Executive for the last complete calendar year or year of employment, whichever is greater. In the event Executive voluntarily terminates his employment with the Company within six months of a Change of Control, subject to the provisions of paragraph (c) below, Executive shall be entitled to a severance payment equal to the product of the number of full years of employment of Executive with the Company times the sum of (i) one month's salary, and (ii) one/twelfth times the annual bonus earned by Executive for the last complete calendar year or year of employment, whichever is greater. In addition, in either case, notwithstanding the provisions of any stock option agreement, all stock options held by the Executive shall vest upon such Change of Control. (b) For purposes of this Section 4.4, a "Change in Control" of the Company shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, who -3- is not a "beneficial owner" (as defined in Rule 13d-3 under said Act), of 5% or more of the Company's common stock as of the date of this agreement becomes the beneficial owner, directly or indirectly, of capital stock of the Company representing 40 percent or more of the total voting power represented by the Company's then outstanding capital stock, or (ii) the shareholders of the Company approve (x) a merger or consolidation of the Company with any other company, other than a merger or consolidation in which the shareholders of the Company would own 50% or more of the voting stock of the surviving corporation, (y) the sale of all of substantially all of the assets of the Company, or (z) the liquidation or dissolution of the Company. (c) Anything in this Agreement to the contrary notwithstanding, prior to the payment of any compensation or benefits payable under paragraph (a) of this Section 4.4 hereof, the certified public accountants of the Company immediately prior to a Change of Control (the "Certified Public Accountants") shall determine as promptly as practical and in any event with 20 business days following the sale of the Company whether any payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, any other agreements or otherwise) (a "Payment") would more likely than not be nondeductible by the Company for Federal income tax purposes because of section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and if it is, then the aggregate present value of amounts payable or distributable to or for the benefit of the Company pursuant to this Agreement (such payments or distributions pursuant to this Agreement are thereinafter referred to as "Contract Payments") shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Section, the "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Contract Payments without causing any payment to be nondeductible by the Company because of said Section 280G of the Code. If under the Section the certified Public Accountants determine that any payment would more likely than not be nondeductible by the Company because of Section 280G of the Code, the Company shall promptly give Executive notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Executive may then elect, in his sole discretion, which and how much of the Contract Payments or any other payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Agreement Payments or any other payments equals the Reduced Amount), and shall advise the Company in writing of his election within 20 business days of his receipt of notice. If no such election is made by Executive within such 20-day period, the Company may elect which and how much of the Contract Payments or any other payments shall be eliminated or reduced (as long as after such election the Aggregate present value of the Contract Payments equals the Reduced Amount) and shall notify Executive promptly of such election. For purposes of this Section, present value shall be determined in accordance with Section 280G(d)(4) of the Code. All determinations made by the Certified Public Accountants shall be binding upon the Company and Executive and the payment to Executive shall be made within 20 days of sale of the Company. The Company may suspend for a period of up to 30 days after the sale of the Company the Payment and any other payments or benefits due to Executive -4- until the Certified Public Accountants finish the determination and Executive (or the Company, as the case may be) elects how to reduce the Contract Payments or any other payments, if necessary. As promptly as practicable following such determination and the elections hereunder, the Company shall pay to our distribute to or for the benefit of Executive such amounts as are then due to Executive under this Agreement. 5. NON-INTERFERENCE; NON-COMPETITION. 5.1 AGREEMENT. Executive agrees to execute and abide by the Noncompetition Agreement attached hereto as Exhibit B. 6. GENERAL PROVISION. 6.1 NOTICES. Any notices provided hereunder must be in writing and shall be deemed effective upon the earlier of personal delivery (including personal delivery by facsimile) or the third day after mailing by first class mail, to the Company at its primary office location and to Executive at the address listed on the Company payroll. 6.2 SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been contained herein. 6.3 WAIVER. If either party should waive any breach of any provisions of this Agreement, they or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 6.4 COMPLETE AGREEMENT. This Agreement and its Exhibits, constitute the entire agreement between Executive and the Company and it is the complete, final, and exclusive embodiment of his agreement with regard to the material terms of executive employment, compensation, and duration. It is entered into without reliance on any promise or representation other than those expressly contained herein, and it cannot be modified or amended except in a writing signed by Executive and an officer of the Company. 6.5 COUNTERPARTS. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. 6.6 HEADINGS. The headings of the sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 6.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company, and his respective successors, -5- assigns, heirs, executors and administrators, except that Executive may not assign any of his duties hereunder and they may not assign any of his rights hereunder without the written consent of the Company, which shall not be withheld unreasonably. 6.8 ATTORNEYS' 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. 6.9 CHOICE OF LAW. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of Kansas. IN WITNESS WHEREOF, the parties have executed this Key Employee Agreement on the day and year first above written. NATIONAL INFORMATION CONSORTIUM, INC.: By: /s/ Sam Somerhalder --------------------------- Name: SAM SOMERHALDER Title: EXECUTIVE VICE PRESIDENT EXECUTIVE: /s/ Ray G. Coutermarsh ------------------------------- Name: RAY COUTERMARSH -6- EXHIBIT "A" EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT In consideration of my employment or continued employment by NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation, or any controlled subsidiary of the Company (collectively, the "Company"), and in consideration of the compensation now and hereafter paid to me, I, the undersigned, hereby agree as follows: 1. NONDISCLOSURE. 1.1 RECOGNITION OF COMPANY'S RIGHTS; NONDISCLOSURE. At all times during my employment and thereafter, I will hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Company's Proprietary Information (defined below), except as such disclosure, use or publication may be required in connection with my work for the Company, or unless an officer of the Company expressly authorizes such in writing. I will obtain Company's written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to my work at Company and/or incorporates any Proprietary Information. I hereby assign to the Company any rights I may have or acquire in such Proprietary Information and recognize that all Proprietary Information shall be the sole property of the Company and its assigns. 1.2 PROPRIETARY INFORMATION. The term "Proprietary Information" shall mean any and all confidential and/or proprietary knowledge, data or information of the Company. By way of illustration but not limitation, "Proprietary Information" includes (a) trade secrets, inventions, ideas, processes, formulas, source and object codes, data, programs, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques (hereinafter collectively referred to as "Inventions"); and (b) information regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and (c) information regarding the skills and compensation of other employees of the Company. Notwithstanding the foregoing, it is understood that, at all such times, I am free to use information which is generally known in the trade or industry, which is not gained as result of a breach of this Agreement, and my own, skill, knowledge, know-how and experience to whatever extent and in whichever way I wish. 1.3 THIRD PARTY INFORMATION. I understand, in addition, that the Company has received and in the future will receive from third parties confidential or proprietary information ("Third Party Information") subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes. During the term of my employment and thereafter, I will hold Third Party Information in the strictest confidence and will not disclose to anyone (other than Company personnel who need to know such information in connection with his work for the Company) or use, except in connection with my work for the Company, Third Party Information unless expressly authorized by an officer of the Company in writing. 1.4 NO IMPROPER USE OF INFORMATION OF PRIOR EMPLOYERS AND OTHERS. During my employment by the Company I will not improperly use or disclose any confidential information or trade secrets, if any, of any former employer or any other person to whom I have an obligation of confidentiality, and I will not bring onto the premises of the Company any unpublished documents or any property belonging to any former employer or any other person to whom I have an obligation of confidentiality unless consented to in writing by that former employer or person. I will use in the performance of my duties only information which is generally known and used by persons with training and experience comparable to my own, which is common knowledge in the industry or otherwise legally in the public domain, or which is otherwise provided or developed by the Company. 2. ASSIGNMENT OF INVENTIONS. 2.1 PROPRIETARY RIGHTS. The term "Proprietary Rights" shall mean all trade secret, patent, copyright, and other intellectual property rights throughout the world. 2.2 PRIOR INVENTIONS. Inventions, if any, patented or unpatented, which I made prior to the commencement of my employment with the Company are excluded from the scope of this Agreement. To preclude any possible uncertainty, I have set forth on Exhibit A (Previous Inventions) attached hereto a complete list of all Inventions that I have, alone or jointly with others, conceived, developed or reduced to practice or caused to be conceived, developed or reduced to practice prior to the commencement of my employment with the Company, that I consider to be my property or the property of third parties and that I wish to have excluded from the scope of this Agreement (collectively referred to as "Prior Inventions"). If disclosure of any such Prior Invention would cause me to violate any prior confidentiality agreement, I understand that I am not to list such Prior Inventions in Exhibit A but am only to disclose a cursory name for each such invention, a listing of the party(ies) to whom it belongs and the fact that full disclosure as to such inventions has not been made for that reason. A space is provided on Exhibit A for such purpose. If no such disclosure is attached, I represent that there are no Prior Inventions. If, in the course of my employment with the Company, I incorporate a Prior Invention into a Company product, process or machine, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, modify, use and sell such Prior Invention. Notwithstanding the foregoing, I agree that I will not incorporate, or permit to be incorporated, Prior Inventions in any Company Inventions without the Company's prior written consent. 2.3 ASSIGNMENT OF INVENTIONS. Subject to Sections 2.4, and 2.6, I hereby assign and agree to assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to the Company all my right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by me, either alone or jointly with others, during the period of my -2- employment with the Company. Inventions assigned to the Company, or to a third party as directed by the Company pursuant to this Section 2, are hereinafter referred to as "Company Inventions." 2.4 NONASSIGNABLE INVENTIONS. This Agreement will not be deemed to require assignment of and "Company Inventions" shall not be decerned to include any invention which was developed entirely on my own time without using the Company's equipment, supplies, facilities, or trade secrets and neither related to the Company's actual or anticipated business, research or development, nor resulted from work performed by me for the Company. 2.5 OBLIGATION TO KEEP COMPANY INFORMED. During the period of my employment and for six (6) months after termination of my employment with the Company, I will promptly disclose to the Company fully and in writing all Inventions authored, conceived or reduced to practice by me, either alone or jointly with others. In addition, I will promptly disclose to the Company all patent applications filed by me or on my behalf within a year after termination of employment. At the time of each such disclosure, I will advise the Company in writing of any Inventions that I believe fully qualify for protection "as nonCompany Inventions" and I will at that time provide to the Company in writing all evidence necessary to substantiate that belief. The Company will keep in confidence and will not use for any purpose or disclose to third parties without my consent any confidential information disclosed in writing to the Company pursuant to this Agreement relating to Inventions that "are not Company Inventions." I will preserve the confidentiality of any Invention which "is a Company Invention." 2.6 GOVERNMENT OR THIRD PARTY. I also agree to assign all my right, title and interest in and to any particular Company Invention to a third party, including without limitation the United States, as directed by the Company. 2.7 WORKS FOR HIRE. I acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of my employment and which are protectable by copyright are "works made for hire," pursuant to United States Copyright Act (17 U.S.C., Section 101). 2.8 ENFORCEMENT OF PROPRIETARY RIGHTS. I will assist the Company in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Company Inventions in any and all countries. To that end I will execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof. In addition, I will execute, verify and deliver assignments of such "Company Inventions" to the Company or its designee. My obligation to assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of my employment, but the Company shall compensate me at a reasonable rate after my termination for the time actually spent by me at the Company's request on such assistance. In the event the Company is unable for any reason, after reasonable effort, to secure my signature on any document needed in connection with the actions specified in the preceding -3- paragraph, I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney in fact, which appointment is coupled with an interest, to act for and in my behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by me. I hereby waive and quitclaim to the Company any and all claims, of any nature whatsoever, which I now or may hereafter have for infringement of any Proprietary Rights or Company Inventions assigned hereunder to the Company. 3. RECORDS. I agree to keep and maintain adequate and current records (in the form of notes, sketches, drawings and in any other form that may be required by the Company) of all Proprietary Information developed by me and all Inventions made by me during the period of my employment at the Company, which records shall be available to and remain the sole property of the Company at all times. 4. NO CONFLICTING OBLIGATION. I represent that my performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith. 5. RETURN OF COMPANY DOCUMENTS. When I leave the employ of the Company, I will deliver to the Company any and all original drawings, notes, memoranda, specifications, devices, formulas, and documents, and any other material containing or disclosing any Company Inventions, Third Party Information or Proprietary Information of the Company. I further agree that any property situated on the Company's premises and owned by the Company, including disks and other storage media, filing cabinets or other work areas, is subject to inspection by Company personnel at any time with or without notice. Prior to leaving, I will cooperate with the Company in completing and signing the Company's termination statement. 6. LEGAL AND EQUITABLE REMEDIES. Because my services are personal and unique and because I may have access to and become acquainted with the Proprietary Information of the Company, the Company shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance or other equitable relief, without bond and without prejudice to any other rights and remedies that the Company may have for a breach of this Agreement. -4- 7. NOTICES. Any notices required or permitted hereunder shall be given to the appropriate party at the address specified below or at such other address as the party shall specify in writing. Such notice shall be deemed given upon personal delivery to the appropriate address or if sent by certified or registered mail, three (3) days after the date of mailing. 8. NOTIFICATION OF NEW EMPLOYER. In the event that I leave the employ of the Company, I hereby consent to the notification of my new employer of my rights and obligations under this Agreement. 9. GENERAL PROVISIONS. 9.1 GOVERNING LAW; CONSENT TO PERSONAL JURISDICTION. This Agreement will be governed by and construed according to the laws of the State of Kansas, as such laws are applied to agreements entered into and to be performed principally within Kansas. I hereby expressly consent to the personal jurisdiction of the state and federal courts located in Johnson County, Kansas, for any lawsuit filed there against me by Company arising from or related to this Agreement. 9.2 SEVERABILITY. In case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein so long as the central purpose and intent of the Agreement can still be achieved. If moreover, any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 9.3 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon my heirs, executors, administrators and other legal representatives and will be for the benefit of the Company, its successors, and its assigns. 9.4 SURVIVAL. The provisions of this Agreement shall survive the termination of my employment and the assignment of this Agreement by the Company to any successor in interest or other assignee. 9.5 EMPLOYMENT. I agree and understand that nothing in this Agreement shall confer any right with respect to continuation of employment by the Company, nor shall it interfere in any way with my right or the Company's right to terminate my employment at any time, with or without cause. 9.6 WAIVER. No waiver by the Company of any breach of this Agreement shall be a waiver of any preceding or succeeding breach. No waiver by the Company of any right under this -5- Agreement shall be construed as a waiver of any other right. The Company shall not be required to give notice to enforce strict adherence to all terms of this Agreement. 9.7 ENTIRE AGREEMENT. The obligations pursuant to Sections 1 and 2 of this Agreement shall apply to any time during which I was previously employed, or am in the future employed, by the Company as a consultant if no other agreement governs nondisclosure and assignment of inventions during such period. This Agreement is the final, complete and exclusive agreement of the parties with respect to the subject matter hereof and supersedes and merges all prior discussions between us. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing and signed by the party to be charged. Any subsequent change or changes in my duties, salary or compensation will not affect the validity or scope of this Agreement. This Agreement shall be effective as of the first day of my employment with the Company, namely: February 1, 2000. I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE COMPLETELY FILLED OUT EXHIBIT A TO THIS AGREEMENT. Dated: October 2, 2000 /s/ Ray G. Coutermarsh ---------------------------- (Signature) RAY COUTERMARSH (Printed Name) ACCEPTED AND AGREED TO: NATIONAL INFORMATION CONSORTIUM, INC. By: /s/ Sam Somerhalder ------------------------- Title: EVP Lincoln, NE 68508 (Address) Dated: October 24, 2000 -6- EXHIBIT A PREVIOUS INVENTIONS TO: National Information Consortium, Inc. FROM: RAY COUTERMARSH DATE: February 1, 2000 SUBJECT: Previous Inventions 1. Except as listed in Section 2 below, the following is a complete list of all inventions or improvements relevant to the subject matter of my employment by National Information Consortium, Inc. or any of its controlled subsidiaries (collectively, the "Company"), that have been made or conceived or first reduced to practice by one alone or jointly with others prior to my engagement by the Company: - No inventions or improvements. - See below: ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- - Additional sheets attached. 2. Due to a prior confidentiality agreement, I cannot complete the disclosure under Section 1 above with respect to inventions or improvements generally listed below, the proprietary rights and duty of confidentiality with respect to which I owe to the following party(ies):
INVENTION OR IMPROVEMENT PARTY(IES) RELATIONSHIP 1. ___________________________ __________ ___________________ 2. ___________________________ __________ ___________________ 3. ___________________________ __________ ___________________
- Additional sheets attached. -7- EXHIBIT "B" NONCOMPETITION AGREEMENT THIS NONCOMPETITION AGREEMENT (the "Agreement") is being executed and delivered as of February 1, 2000, by Ray Coutermarsh (the "Executive") in favor of, and for the benefit of: NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation ("NIC," and together with NIC's subsidiaries, (the "Company"). Certain capitalized terms used in this Agreement are defined in Section 11. RECITALS A. As an employee of the Company, the Executive has obtained extensive and valuable knowledge and confidential information concerning the business of the Company. B. The Company and the Executive are executing a Key Employee Agreement (the "Employment Agreement") contemporaneously with the execution and delivery of this Agreement. Pursuant to the Employment Agreement, the Executive is becoming a key employee of the Company and will accordingly obtain extensive and valuable knowledge and confidential information concerning the business of the Company. C. The Company and the Executive acknowledge that this Agreement is intended to protect the legitimate business interests of the Company and of the Executive. D. The Company has conducted and is conducting its business on a national basis. AGREEMENT For good and valuable consideration, the receipt of which is hereby acknowledged, the Company and the Executive agree as follows: 1. RESTRICTION ON COMPETITION. The Executive agrees that, during the Noncompetition Period, the Executive shall not, and shall not permit any of his Affiliates to: (a) engage directly in Competition in any Restricted Territory; or (b) directly be or become an officer, director, stockholder, owner, co-owner, Affiliate, partner, promoter, employee, agent, representative, designer, consultant, advisor, manager, licensor, sublicensor, licensee or sublicensee of, for or to, or otherwise be or become associated with or acquire or hold (of record, beneficially or otherwise) any direct or indirect interest in, any Person that engages directly or indirectly in Competition in any Restricted Territory: Provided, however, that the Executive may, without violating this Section 1, own, as a passive investment, shares of capital stock of a publicly held corporation that engages in Competition if (i) such shares are actively traded on an established national securities market in the United States, (ii) the number of shares of such corporation's capital stock that are owned beneficially (directly or indirectly) by the Executive and the number of shares of such corporation's capital stock that are owned beneficially (directly or indirectly) by the Executive's Affiliates collectively represent less than five percent of the total number of shares of such corporation's capital stock outstanding, and (iii) neither the Executive nor any Affiliate of the Executive is otherwise associated directly or indirectly with such corporation or with any Affiliate of such corporation. 2. REPRESENTATIONS AND WARRANTIES. The Executive represents and warrants, to and for the benefit of the Company, that: (a) they have full power and capacity to execute and deliver, and to perform all of his obligations under, this Agreement; and (b) neither the execution and delivery of this Agreement nor the performance of this Agreement will result directly or indirectly in a violation or breach of(i) any agreement or obligation by which the Executive or any of his Affiliates is or may be bound, or (ii) any law, rule or regulation. The Executive's representations and warranties shall survive the expiration of the Noncompetition Period for an unlimited period of time. 3. SPECIFIC PERFORMANCE. The Executive agrees that, in the event of any breach or threatened breach by the Executive of any covenant or obligation contained in this Agreement, each of the Company shall be entitled (in addition to any other remedy that may be available to it, including monetary damages) to seek and obtain (a) a decree or order of specific performance to enforce the observance and performance of such covenant or obligation, and (b) an injunction restraining such breach or threatened breach. 4. NONEXCLUSIVITY. The rights and remedies of the parties hereto under this Agreement are not exclusive of or limited by any other rights or remedies which they may have, whether at law, in equity, by contract or otherwise, all of which shall be cumulative (and not alternative). Without limiting the generality of the foregoing, the rights and remedies of the parties hereto under this Agreement, and the obligations and liabilities of the Executive under this Agreement, are in addition to his respective rights, remedies, obligations and liabilities under the law of unfair competition, under laws relating to misappropriation of trade secrets, under other laws and common law requirements and under all applicable rules and regulations. Nothing in this Agreement shall limit any of the obligations, or the rights or remedies of the parties hereto, under the Employment Agreement; and nothing in the Employment Agreement shall limit any of the obligations, or any of the rights or remedies of the parties hereto, under this Agreement. No breach on the part of the Company or any other party of any covenant or obligation contained in the Employment Agreement or any other agreement shall limit or otherwise affect any right or remedy of the parties hereto under this Agreement. 5. SEVERABILITY. If any provision of this Agreement or any part of any such provision is held under any circumstances to be invalid or unenforceable in any jurisdiction, then (a) such provision or part thereof shall, with respect to such circumstances and in such jurisdiction, be deemed amended to conform to applicable laws so as to be valid and enforceable to the fullest possible extent, (b) the invalidity or unenforceability of such -2- provision or part thereof under such circumstances and in such jurisdiction shall not affect the validity or enforceability of such provision or part thereof under any other circumstances or in any other jurisdiction, and (c) the invalidity or unenforceability of such provision or part thereof shall not affect the validity or enforceability of the remainder of such provision or the validity or enforceability of any other provision of this Agreement. Each provision of this Agreement is separable from every other provision of this Agreement, and each part of each provision of this Agreement is separable from every other part of such provision so long as to do so does not destroy the central intent and purpose of the agreement. 6. GOVERNING LAW; VENUE. (a) This Agreement shall be construed in accordance with, and governed in all respects by, the laws of the State of Kansas (without giving effect to principles of conflicts of laws). (b) Any legal action or other legal proceeding relating to this Agreement or the enforcement of any provision of this Agreement may be brought or otherwise commenced in any state or federal court located in Johnson County Kansas. The Executive: (i) expressly and irrevocably consents and submits to the jurisdiction of each state and federal court located in Johnson County of Kansas (and each appellate court located in the State of Kansas), in connection with any such legal proceeding; (ii) agrees that service of any process, summons, notice or document by U.S. mail addressed to them at the address set forth on the signature page of this Agreement shall constitute effective service of such process, summons, notice or document for purposes of any such legal proceeding; (iii) agrees that each state and federal court located in Johnson County Kansas, shall be deemed to be a convenient forum; and (iv) agrees not to assert (by way of motion, as a defense or otherwise), in any such legal proceeding commenced in any state or federal court located in Johnson County Kansas, any claim that the Executive is not subject personally to the jurisdiction of such court, that such legal proceeding has been brought in an inconvenient forum, that the venue of such proceeding is improper or that this Agreement or the subject matter of this Agreement may not be enforced in or by such court. 7. WAIVER. No failure on the part of the Company or any other party to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of the Company or any other party in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no -3- single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. 8. CAPTIONS. The captions contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement. 9. CONSTRUCTION. Whenever required by the context, the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; and the neuter gender shall include the masculine and feminine genders. Any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement. Neither the drafting history nor the negotiating history of this Agreement shall be used or referred to in connection with the construction or interpretation of this Agreement. As used in this Agreement, the words "include" and "including," and variations thereof, shall not be deemed to be terms of limitation, and shall be deemed to be followed by the words "without limitation." Except as otherwise indicated in this Agreement, all references in this Agreement to "Sections" are intended to refer to Sections of this Agreement. 10. AMENDMENT. This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of the Executive and the Company (or any successor to the Company). 11. DEFINED TERMS. For purposes of this Agreement: (a) "Affiliate" means, with respect to the Executive, any other Person that, directly or indirectly, through one or more intermediaries, is controlled by the Executive. (b) "Competing Product" means any: (i) application or software program that provides an electronic gateway to government services or procurement information; (ii) product, device or system that is substantially the same as, incorporates, is a material component or part of, or is based upon or competes with anything referred to in clause (i) above or any product, device or system that has been designed, developed, promoted, sold, resold, installed, supported, maintained, licensed or sublicensed by or on behalf of Persons who at any time on or prior to the date of this Agreement were competitors of the Company (or of any predecessor of the Company) at any time on or prior to this date of this Agreement until the date of termination of employment. (c) "Competing Service" means any: (i) public/private partnership that provides an electronic gateway to government services or procurement information; (ii) service that is substantially the same as, incorporates, is a material component or part of, or is based upon or competes with a service that has been provided, performed or offered by or on behalf the Company (or of any predecessor of the Company) at any time on or prior to the date of this Agreement or until the date of -4- termination of employment; (iii) service that facilitates, supports or otherwise relates to the any Competing Product. (d) A Person shall be deemed to be engaged in "Competition" if: (i) such Person is engaged directly or indirectly in the design, development, manufacture, assembly, promotion, sale, supply, distribution, resale, installation, support, maintenance, repair, refurbishment, licensing, sublicensing, financing, leasing or subleasing of any Competing Product; or (ii) such Person is engaged directly or indirectly in providing, performing or offering any Competing Service. (e) "Confidential Information" means any non-public information (whether or not in written form and whether or not expressly designated as confidential) relating directly or indirectly to the Company or relating directly or indirectly to the business, operations, financial affairs, performance, assets, technology, processes, products, contracts, customers, licensees, sublicensees, suppliers, personnel, consultants or plans of the Company (including any such information consisting of or otherwise relating to trade secrets, know-how, technology, inventions, prototypes, designs, drawings, sketches, processes, license or sublicense arrangements, formulae, proposals, research and development activities, customer lists or preferences, pricing lists, referral sources, marketing or sales techniques or plans, operations manuals, service manuals, financial information, projections, lists of consultants, lists of suppliers or lists of distributors); provided, however, that "Confidential Information" shall not be deemed to include information of the Company that was already publicly known and in the public domain prior to the time of its disclosure by the Executive. (f) "Noncompetition Period" shall mean the period commencing on the date of this Agreement and ending on the second anniversary of the date of the termination of the Executive's employment with the Company. (g) "Person" means, other than Electric Press, Inc., a Virginia corporation, any: (i) individual or (ii) corporation, general partnership, limited partnership, limited liability partnership, trust, company (including any limited liability company or joint stock company) or other organization or entity. (h) "Restricted Territory" means each county or similar political subdivision of each State of the United States of America (including each of the counties in the State of California), and each State, territory or possession of the United States of America. -5- IN WITNESS WHEREOF, the Executive has duly executed and delivered this Noncompetition Agreement as of the date first above written. Signature /s/ Ray G. Coutermarsh -------------------------- Name: RAY COUTERMARSH Telephone No.: (925) 837-2814 Facsimile: (925) 837-2816 -6- EX-10.42 9 a2041279zex-10_42.txt EXHIBIT 10.42 NATIONAL INFORMATION CONSORTIUM, INC. KEY EMPLOYEE AGREEMENT FOR PRADEEP K. AGARWAL THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 1st day of September, 2000, by and between Pradeep K. Agarwal ("Executive") and NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation (the "Company"). This Agreement amends and restates all prior agreements between Executive and the Company with respect to the subject matter hereof. WHEREAS, the Company desires to employ Executive to provide personal services to the Company and to the Company's subsidiaries, and wishes to provide Executive with certain compensation and benefits in return for Executive's services; and WHEREAS, Executive wishes to be employed by the Company and provide personal services to the Company and to the Company's subsidiaries in return for certain compensation and benefits; NOW, THEREFORE, the parties hereto agree as follows: 1. EMPLOYMENT BY THE COMPANY. 1.1 ACCEPTANCE. Subject to terms set forth herein, the Company or a subsidiary of the Company, agrees to employ Executive in the position of Executive Vice President and Chief Information Officer and Executive hereby accepts such employment effective as of the date first written above. During the term of employment with the Company, Executive will devote his best efforts and substantially all of his business time and attention (except for vacation periods and reasonable periods of illness or other incapacity's permitted by the Company's general employment policies) to the business of the Company. 1.2 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). 1.3 EMPLOYMENT 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. 2. COMPENSATION. 2.1 SALARY. Executive shall receive for services to be rendered hereunder an annualized base salary of $170,000, 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. 2.2 STANDARD COMPANY BENEFITS. Executive shall be entitled to all rights and benefits for which they are eligible under the terms and conditions of the standard Company benefits and compensation practices which may be in effect from time to time and provided by the Company to its employees generally. 3. PROPRIETARY INFORMATION OBLIGATIONS. 3.1 AGREEMENT. Executive agrees to execute and abide by the Proprietary Information and Inventions Agreement attached hereto as Exhibit A. 4. TERMINATION OF EMPLOYMENT. 4.1 TERMINATION WITHOUT CAUSE. (a) The Company shall have the right to terminate Executive's employment with the Company at any time without cause. (b) In the event Executive's employment is terminated without cause before July 1, 2003, the Company shall pay Executive 18 months' base compensation in a single lump sum distribution on the first regular Company pay period after said termination. (c) In the event Executive's employment is terminated without cause on or after July 1, 2003, 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. 4.2 TERMINATION FOR CAUSE. (a) The Company shall have the right to terminate Executive's employment with the Company at any time for cause. Written notification of termination and specific cause of termination shall be provided to the Executive at the time of termination. (b) "Cause" for termination shall mean an employee's conviction of a felony or the willful and deliberate failure of an employee to perform his customary duties, in a manner consistent with the manner reasonably prescribed by the Board of Directors or President of Company (other than any failure resulting from his incapacity due to physical or mental illness, disability or death) after not less than thirty (30) days prior written notice from Company. -2- (c) In the event the Executive is notified in writing his employment is to be terminated for cause and the cause is curable, the Executive shall be given thirty days from date of notification to cure the specific cause(s) set forth in the notification. (d) In the event Executive's employment is terminated at any time for cause, the executive shall not be entitled to severance pay, pay in lieu of notice or any other such compensation; provided, however, Executive shall be entitled and shall receive all compensation earned prior to and including the date of termination. 4.3 VOLUNTARY OR MUTUAL TERMINATION. (a) Executive may voluntarily terminate his employment in writing with the Company at any time, after which no further compensation will be paid to Executive. (b) In the event Executive voluntarily terminates his employment, Executive shall not be entitled to severance pay, pay in lieu of notice or any other such compensation; provided, however, Executive shall be entitled and shall receive all compensation earned prior to and including the date of termination. 4.4 TERMINATION IN CONNECTION WITH A CHANGE OF CONTROL (a) In the event of a "Change in Control" of the Company (as defined herein), and in the event that either in contemplation of such Change of Control or after such Change of Control, Executive's employment is terminated without cause, in addition to any payments to which Executive may be entitled pursuant to Section 4.1, subject to the provisions of paragraph (c) below, Executive shall be entitled to a severance payment equal to the product of the number of full years of employment of Executive with the Company times the sum of (i) one month's salary, and (ii) one/twelfth the annual bonus earned by Executive for the last complete calendar year or year of employment, whichever is greater. In the event Executive voluntarily terminates his employment with the Company within six months of a Change of Control, subject to the provisions of paragraph (c) below, Executive shall be entitled to a severance payment equal to the product of the number of full years of employment of Executive with the Company times the sum of (i) one month's salary, and (ii) one/twelfth times the annual bonus earned by Executive for the last complete calendar year or year of employment, whichever is greater. In addition, in either case, notwithstanding the provisions of any stock option agreement, all stock options held by the Executive shall vest upon such Change of Control. (b) For purposes of this Section 4.4, a "Change in Control" of the Company shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, who is not a "beneficial owner" (as defined in Rule 13d-3 under said Act), of 5% or more of the Company's common stock as of the date of this agreement becomes the beneficial -3- owner, directly or indirectly, of capital stock of the Company representing 40 percent or more of the total voting power represented by the Company's then outstanding capital stock, or (ii) the shareholders of the Company approve (x) a merger or consolidation of the Company with any other company, other than a merger or consolidation in which the shareholders of the Company would own 50% or more of the voting stock of the surviving corporation, (y) the sale of all of substantially all of the assets of the Company, or (z) the liquidation or dissolution of the Company. (c) Anything in this Agreement to the contrary notwithstanding, prior to the payment of any compensation or benefits payable under paragraph (a) of this Section 4.4 hereof, the certified public accountants of the Company immediately prior to a Change of Control (the "Certified Public Accountants") shall determine as promptly as practical and in any event with 20 business days following the sale of the Company whether any payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, any other agreements or otherwise) (a "Payment") would more likely than not be nondeductible by the Company for Federal income tax purposes because of section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and if it is, then the aggregate present value of amounts payable or distributable to or for the benefit of the Company pursuant to this Agreement (such payments or distributions pursuant to this Agreement are thereinafter referred to as "Contract Payments") shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Section, the "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Contract Payments without causing any payment to be nondeductible by the Company because of said Section 280G of the Code. If under the Section the certified Public Accountants determine that any payment would more likely than not be nondeductible by the Company because of Section 280G of the Code, the Company shall promptly give Executive notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Executive may then elect, in his sole discretion, which and how much of the Contract Payments or any other payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Agreement Payments or any other payments equals the Reduced Amount), and shall advise the Company in writing of his election within 20 business days of his receipt of notice. If no such election is made by Executive within such 20-day period, the Company may elect which and how much of the Contract Payments or any other payments shall be eliminated or reduced (as long as after such election the Aggregate present value of the Contract Payments equals the Reduced Amount) and shall notify Executive promptly of such election. For purposes of this Section, present value shall be determined in accordance with Section 280G(d)(4) of the Code. All determinations made by the Certified Public Accountants shall be binding upon the Company and Executive and the payment to Executive shall be made within 20 days of sale of the Company. The Company may suspend for a period of up to 30 days after the sale of the Company the Payment and any other payments or benefits due to Executive until the Certified Public Accountants finish the determination and Executive (or the Company, as the case may be) elects how to reduce the Contract Payments or any other -4- payments, if necessary. As promptly as practicable following such determination and the elections hereunder, the Company shall pay to our distribute to or for the benefit of Executive such amounts as are then due to Executive under this Agreement. 5. NON-INTERFERENCE; NON-COMPETITION. 5.1 AGREEMENT. Executive agrees to execute and abide by the Noncompetition Agreement attached hereto as Exhibit B. 6. GENERAL PROVISION. 6.1 NOTICES. Any notices provided hereunder must be in writing and shall be deemed effective upon the earlier of personal delivery (including personal delivery by facsimile) or the third day after mailing by first class mail, to the Company at its primary office location and to Executive at the address listed on the Company payroll. 6.2 SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been contained herein. 6.3 WAIVER. If either party should waive any breach of any provisions of this Agreement, they or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 6.4 COMPLETE AGREEMENT. This Agreement and its Exhibits, constitute the entire agreement between Executive and the Company and it is the complete, final, and exclusive embodiment of his agreement with regard to the material terms of executive employment, compensation, and duration. It is entered into without reliance on any promise or representation other than those expressly contained herein, and it cannot be modified or amended except in a writing signed by Executive and an officer of the Company. 6.5 COUNTERPARTS. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. 6.6 HEADINGS. The headings of the sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 6.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company, and his respective successors, assigns, heirs, executors and administrators, except that Executive may not assign any of his -5- duties hereunder and they may not assign any of his rights hereunder without the written consent of the Company, which shall not be withheld unreasonably. 6.8 ATTORNEYS' 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. 6.9 CHOICE OF LAW. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of Kansas. IN WITNESS WHEREOF, the parties have executed this Key Employee Agreement on the day and year first above written. NATIONAL INFORMATION CONSORTIUM, INC.: By: /s/ Sam Somerhalder ---------------------------- Name: SAM SOMERHALDER Title: EXECUTIVE VICE PRESIDENT EXECUTIVE: /s/ Pradeep K. Agarwal -------------------------------- Name: PRADEEP K. AGARWAL -6- EXHIBIT "A" EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT In consideration of my employment or continued employment by NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation, or any controlled subsidiary of the Company (collectively, the "Company"), and in consideration of the compensation now and hereafter paid to me, I, the undersigned, hereby agree as follows: 1. NONDISCLOSURE. 1.1 RECOGNITION OF COMPANY'S RIGHTS; NONDISCLOSURE. At all times during my employment and thereafter, I will hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Company's Proprietary Information (defined below), except as such disclosure, use or publication may be required in connection with my work for the Company, or unless an officer of the Company expressly authorizes such in writing. I will obtain Company's written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to my work at Company and/or incorporates any Proprietary Information. I hereby assign to the Company any rights I may have or acquire in such Proprietary Information and recognize that all Proprietary Information shall be the sole property of the Company and its assigns. 1.2 PROPRIETARY INFORMATION. The term "Proprietary Information" shall mean any and all confidential and/or proprietary knowledge, data or information of the Company. By way of illustration but not limitation, "Proprietary Information" includes (a) trade secrets, inventions, ideas, processes, formulas, source and object codes, data, programs, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques (hereinafter collectively referred to as "Inventions"); and (b) information regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and (c) information regarding the skills and compensation of other employees of the Company. Notwithstanding the foregoing, it is understood that, at all such times, I am free to use information which is generally known in the trade or industry, which is not gained as result of a breach of this Agreement, and my own, skill, knowledge, know-how and experience to whatever extent and in whichever way I wish. 1.3 THIRD PARTY INFORMATION. I understand, in addition, that the Company has received and in the future will receive from third parties confidential or proprietary information ("Third Party Information") subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes. During the term of my employment and thereafter, I will hold Third Party Information in the strictest confidence and will not disclose to anyone (other than Company personnel who need to know such information in connection with his work for the Company) or use, except in connection with my work for the Company, Third Party Information unless expressly authorized by an officer of the Company in writing. 1.4 NO IMPROPER USE OF INFORMATION OF PRIOR EMPLOYERS AND OTHERS. During my employment by the Company I will not improperly use or disclose any confidential information or trade secrets, if any, of any former employer or any other person to whom I have an obligation of confidentiality, and I will not bring onto the premises of the Company any unpublished documents or any property belonging to any former employer or any other person to whom I have an obligation of confidentiality unless consented to in writing by that former employer or person. I will use in the performance of my duties only information which is generally known and used by persons with training and experience comparable to my own, which is common knowledge in the industry or otherwise legally in the public domain, or which is otherwise provided or developed by the Company. 2. ASSIGNMENT OF INVENTIONS. 2.1 PROPRIETARY RIGHTS. The term "Proprietary Rights" shall mean all trade secret, patent, copyright, and other intellectual property rights throughout the world. 2.2 PRIOR INVENTIONS. Inventions, if any, patented or unpatented, which I made prior to the commencement of my employment with the Company are excluded from the scope of this Agreement. To preclude any possible uncertainty, I have set forth on Exhibit A (Previous Inventions) attached hereto a complete list of all Inventions that I have, alone or jointly with others, conceived, developed or reduced to practice or caused to be conceived, developed or reduced to practice prior to the commencement of my employment with the Company, that I consider to be my property or the property of third parties and that I wish to have excluded from the scope of this Agreement (collectively referred to as "Prior Inventions"). If disclosure of any such Prior Invention would cause me to violate any prior confidentiality agreement, I understand that I am not to list such Prior Inventions in Exhibit A but am only to disclose a cursory name for each such invention, a listing of the party(ies) to whom it belongs and the fact that full disclosure as to such inventions has not been made for that reason. A space is provided on Exhibit A for such purpose. If no such disclosure is attached, I represent that there are no Prior Inventions. If, in the course of my employment with the Company, I incorporate a Prior Invention into a Company product, process or machine, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, modify, use and sell such Prior Invention. Notwithstanding the foregoing, I agree that I will not incorporate, or permit to be incorporated, Prior Inventions in any Company Inventions without the Company's prior written consent. 2.3 ASSIGNMENT OF INVENTIONS. Subject to Sections 2.4, and 2.6, I hereby assign and agree to assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to the Company all my right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by me, either alone or jointly with others, during the period of my -2- employment with the Company. Inventions assigned to the Company, or to a third party as directed by the Company pursuant to this Section 2, are hereinafter referred to as "Company Inventions." 2.4 NONASSIGNABLE INVENTIONS. This Agreement will not be deemed to require assignment of and "Company Inventions" shall not be decerned to include any invention which was developed entirely on my own time without using the Company's equipment, supplies, facilities, or trade secrets and neither related to the Company's actual or anticipated business, research or development, nor resulted from work performed by me for the Company. 2.5 OBLIGATION TO KEEP COMPANY INFORMED. During the period of my employment and for six (6) months after termination of my employment with the Company, I will promptly disclose to the Company fully and in writing all Inventions authored, conceived or reduced to practice by me, either alone or jointly with others. In addition, I will promptly disclose to the Company all patent applications filed by me or on my behalf within a year after termination of employment. At the time of each such disclosure, I will advise the Company in writing of any Inventions that I believe fully qualify for protection "as non- Company Inventions" and I will at that time provide to the Company in writing all evidence necessary to substantiate that belief. The Company will keep in confidence and will not use for any purpose or disclose to third parties without my consent any confidential information disclosed in writing to the Company pursuant to this Agreement relating to Inventions that "are not Company Inventions." I will preserve the confidentiality of any Invention which "is a Company Invention." 2.6 GOVERNMENT OR THIRD PARTY. I also agree to assign all my right, title and interest in and to any particular Company Invention to a third party, including without limitation the United States, as directed by the Company. 2.7 WORKS FOR HIRE. I acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of my employment and which are protectable by copyright are "works made for hire," pursuant to United States Copyright Act (17 U.S.C., Section 101). 2.8 ENFORCEMENT OF PROPRIETARY RIGHTS. I will assist the Company in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Company Inventions in any and all countries. To that end I will execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof. In addition, I will execute, verify and deliver assignments of such "Company Inventions" to the Company or its designee. My obligation to assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of my employment, but the Company shall compensate me at a reasonable rate after my termination for the time actually spent by me at the Company's request on such assistance. In the event the Company is unable for any reason, after reasonable effort, to secure my signature on any document needed in connection with the actions specified in the preceding -3- paragraph, I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney in fact, which appointment is coupled with an interest, to act for and in my behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by me. I hereby waive and quitclaim to the Company any and all claims, of any nature whatsoever, which I now or may hereafter have for infringement of any Proprietary Rights or Company Inventions assigned hereunder to the Company. 3. RECORDS. I agree to keep and maintain adequate and current records (in the form of notes, sketches, drawings and in any other form that may be required by the Company) of all Proprietary Information developed by me and all Inventions made by me during the period of my employment at the Company, which records shall be available to and remain the sole property of the Company at all times. 4. NO CONFLICTING OBLIGATION. I represent that my performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith. 5. RETURN OF COMPANY DOCUMENTS. When I leave the employ of the Company, I will deliver to the Company any and all original drawings, notes, memoranda, specifications, devices, formulas, and documents, and any other material containing or disclosing any Company Inventions, Third Party Information or Proprietary Information of the Company. I further agree that any property situated on the Company's premises and owned by the Company, including disks and other storage media, filing cabinets or other work areas, is subject to inspection by Company personnel at any time with or without notice. Prior to leaving, I will cooperate with the Company in completing and signing the Company's termination statement. 6. LEGAL AND EQUITABLE REMEDIES. Because my services are personal and unique and because I may have access to and become acquainted with the Proprietary Information of the Company, the Company shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance or other equitable relief, without bond and without prejudice to any other rights and remedies that the Company may have for a breach of this Agreement. -4- 7. NOTICES. Any notices required or permitted hereunder shall be given to the appropriate party at the address specified below or at such other address as the party shall specify in writing. Such notice shall be deemed given upon personal delivery to the appropriate address or if sent by certified or registered mail, three (3) days after the date of mailing. 8. NOTIFICATION OF NEW EMPLOYER. In the event that I leave the employ of the Company, I hereby consent to the notification of my new employer of my rights and obligations under this Agreement. 9. GENERAL PROVISIONS. 9.1 GOVERNING LAW; CONSENT TO PERSONAL JURISDICTION. This Agreement will be governed by and construed according to the laws of the State of Kansas, as such laws are applied to agreements entered into and to be performed principally within Kansas. I hereby expressly consent to the personal jurisdiction of the state and federal courts located in Johnson County, Kansas, for any lawsuit filed there against me by Company arising from or related to this Agreement. 9.2 SEVERABILITY. In case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein so long as the central purpose and intent of the Agreement can still be achieved. If moreover, any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 9.3 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon my heirs, executors, administrators and other legal representatives and will be for the benefit of the Company, its successors, and its assigns. 9.4 SURVIVAL. The provisions of this Agreement shall survive the termination of my employment and the assignment of this Agreement by the Company to any successor in interest or other assignee. 9.5 EMPLOYMENT. I agree and understand that nothing in this Agreement shall confer any right with respect to continuation of employment by the Company, nor shall it interfere in any way with my right or the Company's right to terminate my employment at any time, with or without cause. 9.6 WAIVER. No waiver by the Company of any breach of this Agreement shall be a waiver of any preceding or succeeding breach. No waiver by the Company of any right under this -5- Agreement shall be construed as a waiver of any other right. The Company shall not be required to give notice to enforce strict adherence to all terms of this Agreement. 9.7 ENTIRE AGREEMENT. The obligations pursuant to Sections 1 and 2 of this Agreement shall apply to any time during which I was previously employed, or am in the future employed, by the Company as a consultant if no other agreement governs nondisclosure and assignment of inventions during such period. This Agreement is the final, complete and exclusive agreement of the parties with respect to the subject matter hereof and supersedes and merges all prior discussions between us. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing and signed by the party to be charged. Any subsequent change or changes in my duties, salary or compensation will not affect the validity or scope of this Agreement. This Agreement shall be effective as of the first day of my employment with the Company, namely: July 1, 2000. I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE COMPLETELY FILLED OUT EXHIBIT A TO THIS AGREEMENT. Dated: October 5, 2000 /s/ Pradeep K. Agarwal ----------------------------------- (Signature) PRADEEP K. AGARWAL (Printed Name) ACCEPTED AND AGREED TO: NATIONAL INFORMATION CONSORTIUM, INC. By: /s/ Sam Somerhalder -------------------------------- Title: EVP Lincoln, NE 68508 (Address) Dated: October 24, 2000 -6- EXHIBIT A PREVIOUS INVENTIONS TO: National Information Consortium, Inc. FROM: PRADEEP K. AGARWAL DATE: July 1, 2000 SUBJECT: Previous Inventions 1. Except as listed in Section 2 below, the following is a complete list of all inventions or improvements relevant to the subject matter of my employment by National Information Consortium, Inc. or any of its controlled subsidiaries (collectively, the "Company"), that have been made or conceived or first reduced to practice by one alone or jointly with others prior to my engagement by the Company: - No inventions or improvements. - See below: ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- - Additional sheets attached. 2. Due to a prior confidentiality agreement, I cannot complete the disclosure under Section 1 above with respect to inventions or improvements generally listed below, the proprietary rights and duty of confidentiality with respect to which I owe to the following party(ies):
INVENTION OR IMPROVEMENT PARTY(IES) RELATIONSHIP 1. ___________________________ __________ ___________________ 2. ___________________________ __________ ___________________ 3. ___________________________ __________ ___________________
- Additional sheets attached. -7- EXHIBIT "B" NONCOMPETITION AGREEMENT THIS NONCOMPETITION AGREEMENT (the "Agreement") is being executed and delivered as of July 1, 2000, by Pradeep K. Agarwal (the "Executive") in favor of, and for the benefit of: NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation ("NIC," and together with NIC's subsidiaries, (the "Company"). Certain capitalized terms used in this Agreement are defined in Section 11. RECITALS A. As an employee of the Company, the Executive has obtained extensive and valuable knowledge and confidential information concerning the business of the Company. B. The Company and the Executive are executing a Key Employee Agreement (the "Employment Agreement") contemporaneously with the execution and delivery of this Agreement. Pursuant to the Employment Agreement, the Executive is becoming a key employee of the Company and will accordingly obtain extensive and valuable knowledge and confidential information concerning the business of the Company. C. The Company and the Executive acknowledge that this Agreement is intended to protect the legitimate business interests of the Company and of the Executive. D. The Company has conducted and is conducting its business on a national basis. AGREEMENT For good and valuable consideration, the receipt of which is hereby acknowledged, the Company and the Executive agree as follows: 1. RESTRICTION ON COMPETITION. The Executive agrees that, during the Noncompetition Period, the Executive shall not, and shall not permit any of his Affiliates to: (a) engage directly in Competition in any Restricted Territory; or (b) directly be or become an officer, director, stockholder, owner, co-owner, Affiliate, partner, promoter, employee, agent, representative, designer, consultant, advisor, manager, licensor, sublicensor, licensee or sublicensee of, for or to, or otherwise be or become associated with or acquire or hold (of record, beneficially or otherwise) any direct or indirect interest in, any Person that engages directly or indirectly in Competition in any Restricted Territory: Provided, however, that the Executive may, without violating this Section 1, own, as a passive investment, shares of capital stock of a publicly held corporation that engages in Competition if (i) such shares are actively traded on an established national securities market in the United States, (ii) the number of shares of such corporation's capital stock that are owned beneficially (directly or indirectly) by the Executive and the number of shares of such corporation's capital stock that are owned beneficially (directly or indirectly) by the Executive's Affiliates collectively represent less than five percent of the total number of shares of such corporation's capital stock outstanding, and (iii) neither the Executive nor any Affiliate of the Executive is otherwise associated directly or indirectly with such corporation or with any Affiliate of such corporation. 2. REPRESENTATIONS AND WARRANTIES. The Executive represents and warrants, to and for the benefit of the Company, that: (a) they have full power and capacity to execute and deliver, and to perform all of his obligations under, this Agreement; and (b) neither the execution and delivery of this Agreement nor the performance of this Agreement will result directly or indirectly in a violation or breach of(i) any agreement or obligation by which the Executive or any of his Affiliates is or may be bound, or (ii) any law, rule or regulation. The Executive's representations and warranties shall survive the expiration of the Noncompetition Period for an unlimited period of time. 3. SPECIFIC PERFORMANCE. The Executive agrees that, in the event of any breach or threatened breach by the Executive of any covenant or obligation contained in this Agreement, each of the Company shall be entitled (in addition to any other remedy that may be available to it, including monetary damages) to seek and obtain (a) a decree or order of specific performance to enforce the observance and performance of such covenant or obligation, and (b) an injunction restraining such breach or threatened breach. 4. NONEXCLUSIVITY. The rights and remedies of the parties hereto under this Agreement are not exclusive of or limited by any other rights or remedies which they may have, whether at law, in equity, by contract or otherwise, all of which shall be cumulative (and not alternative). Without limiting the generality of the foregoing, the rights and remedies of the parties hereto under this Agreement, and the obligations and liabilities of the Executive under this Agreement, are in addition to his respective rights, remedies, obligations and liabilities under the law of unfair competition, under laws relating to misappropriation of trade secrets, under other laws and common law requirements and under all applicable rules and regulations. Nothing in this Agreement shall limit any of the obligations, or the rights or remedies of the parties hereto, under the Employment Agreement; and nothing in the Employment Agreement shall limit any of the obligations, or any of the rights or remedies of the parties hereto, under this Agreement. No breach on the part of the Company or any other party of any covenant or obligation contained in the Employment Agreement or any other agreement shall limit or otherwise affect any right or remedy of the parties hereto under this Agreement. 5. SEVERABILITY. If any provision of this Agreement or any part of any such provision is held under any circumstances to be invalid or unenforceable in any jurisdiction, then (a) such provision or part thereof shall, with respect to such circumstances and in such jurisdiction, be deemed amended to conform to applicable laws so as to be valid and enforceable to the fullest possible extent, (b) the invalidity or unenforceability of such -2- provision or part thereof under such circumstances and in such jurisdiction shall not affect the validity or enforceability of such provision or part thereof under any other circumstances or in any other jurisdiction, and (c) the invalidity or unenforceability of such provision or part thereof shall not affect the validity or enforceability of the remainder of such provision or the validity or enforceability of any other provision of this Agreement. Each provision of this Agreement is separable from every other provision of this Agreement, and each part of each provision of this Agreement is separable from every other part of such provision so long as to do so does not destroy the central intent and purpose of the agreement. 6. GOVERNING LAW; VENUE. (a) This Agreement shall be construed in accordance with, and governed in all respects by, the laws of the State of Kansas (without giving effect to principles of conflicts of laws). (b) Any legal action or other legal proceeding relating to this Agreement or the enforcement of any provision of this Agreement may be brought or otherwise commenced in any state or federal court located in Johnson County Kansas. The Executive: (i) expressly and irrevocably consents and submits to the jurisdiction of each state and federal court located in Johnson County of Kansas (and each appellate court located in the State of Kansas), in connection with any such legal proceeding; (ii) agrees that service of any process, summons, notice or document by U.S. mail addressed to them at the address set forth on the signature page of this Agreement shall constitute effective service of such process, summons, notice or document for purposes of any such legal proceeding; (iii) agrees that each state and federal court located in Johnson County Kansas, shall be deemed to be a convenient forum; and (iv) agrees not to assert (by way of motion, as a defense or otherwise), in any such legal proceeding commenced in any state or federal court located in Johnson County Kansas, any claim that the Executive is not subject personally to the jurisdiction of such court, that such legal proceeding has been brought in an inconvenient forum, that the venue of such proceeding is improper or that this Agreement or the subject matter of this Agreement may not be enforced in or by such court. 7. WAIVER. No failure on the part of the Company or any other party to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of the Company or any other party in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no -3- single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. 8. CAPTIONS. The captions contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement. 9. CONSTRUCTION. Whenever required by the context, the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; and the neuter gender shall include the masculine and feminine genders. Any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement. Neither the drafting history nor the negotiating history of this Agreement shall be used or referred to in connection with the construction or interpretation of this Agreement. As used in this Agreement, the words "include" and "including," and variations thereof, shall not be deemed to be terms of limitation, and shall be deemed to be followed by the words "without limitation." Except as otherwise indicated in this Agreement, all references in this Agreement to "Sections" are intended to refer to Sections of this Agreement. 10. AMENDMENT. This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of the Executive and the Company (or any successor to the Company). 11. DEFINED TERMS. For purposes of this Agreement: (a) "Affiliate" means, with respect to the Executive, any other Person that, directly or indirectly, through one or more intermediaries, is controlled by the Executive. (b) "Competing Product" means any: (i) application or software program that provides an electronic gateway to government services or procurement information; (ii) product, device or system that is substantially the same as, incorporates, is a material component or part of, or is based upon or competes with anything referred to in clause (i) above or any product, device or system that has been designed, developed, promoted, sold, resold, installed, supported, maintained, licensed or sublicensed by or on behalf of Persons who at any time on or prior to the date of this Agreement were competitors of the Company (or of any predecessor of the Company) at any time on or prior to this date of this Agreement until the date of termination of employment. (c) "Competing Service" means any: (i) public/private partnership that provides an electronic gateway to government services or procurement information; (ii) service that is substantially the same as, incorporates, is a material component or part of, or is based upon or competes with a service that has been provided, performed or offered by or on behalf the Company (or of any predecessor of the Company) at any time on or prior to the date of this Agreement or until the date of -4- termination of employment; (iii) service that facilitates, supports or otherwise relates to the any Competing Product. (d) A Person shall be deemed to be engaged in "Competition" if: (i) such Person is engaged directly or indirectly in the design, development, manufacture, assembly, promotion, sale, supply, distribution, resale, installation, support, maintenance, repair, refurbishment, licensing, sublicensing, financing, leasing or subleasing of any Competing Product; or (ii) such Person is engaged directly or indirectly in providing, performing or offering any Competing Service. (e) "Confidential Information" means any non-public information (whether or not in written form and whether or not expressly designated as confidential) relating directly or indirectly to the Company or relating directly or indirectly to the business, operations, financial affairs, performance, assets, technology, processes, products, contracts, customers, licensees, sublicensees, suppliers, personnel, consultants or plans of the Company (including any such information consisting of or otherwise relating to trade secrets, know-how, technology, inventions, prototypes, designs, drawings, sketches, processes, license or sublicense arrangements, formulae, proposals, research and development activities, customer lists or preferences, pricing lists, referral sources, marketing or sales techniques or plans, operations manuals, service manuals, financial information, projections, lists of consultants, lists of suppliers or lists of distributors); provided, however, that "Confidential Information" shall not be deemed to include information of the Company that was already publicly known and in the public domain prior to the time of its disclosure by the Executive. (f) "Noncompetition Period" shall mean the period commencing on the date of this Agreement and ending on the second anniversary of the date of the termination of the Executive's employment with the Company. (g) "Person" means, other than Electric Press, Inc., a Virginia corporation, any: (i) individual or (ii) corporation, general partnership, limited partnership, limited liability partnership, trust, company (including any limited liability company or joint stock company) or other organization or entity. (h) "Restricted Territory" means each county or similar political subdivision of each State of the United States of America (including each of the counties in the State of California), and each State, territory or possession of the United States of America. -5- IN WITNESS WHEREOF, the Executive has duly executed and delivered this Noncompetition Agreement as of the date first above written. Signature /s/ Pradeep K. Agarwal ----------------------- Name: PRADEEP K. AGARWAL Telephone No.: ( ) Facsimile: ( ) -6- EX-10.43 10 a2041279zex-10_43.txt EXHIBIT 10.43 NATIONAL INFORMATION CONSORTIUM, INC. KEY EMPLOYEE AGREEMENT FOR KEVIN CHILDRESS THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 1st day of September, 2000, by and between Kevin Childress ("Executive") and NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation (the "Company"). This Agreement amends and restates all prior agreements between Executive and the Company with respect to the subject matter hereof. WHEREAS, the Company desires to employ Executive to provide personal services to the Company and to the Company's subsidiaries, and wishes to provide Executive with certain compensation and benefits in return for Executive's services; and WHEREAS, Executive wishes to be employed by the Company and provide personal services to the Company and to the Company's subsidiaries in return for certain compensation and benefits; NOW, THEREFORE, the parties hereto agree as follows: 1. EMPLOYMENT BY THE COMPANY. 1.1 ACCEPTANCE. 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 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's 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). 1.3 EMPLOYMENT 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. 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. 2.2 STANDARD COMPANY BENEFITS. Executive shall be entitled to all rights and benefits for which they are eligible under the terms and conditions of the standard Company benefits and compensation practices which may be in effect from time to time and provided by the Company to its employees generally. 3. PROPRIETARY INFORMATION OBLIGATIONS. 3.1 AGREEMENT. Executive agrees to execute and abide by the Proprietary Information and Inventions Agreement attached hereto as Exhibit A. 4. TERMINATION OF EMPLOYMENT. 4.1 TERMINATION WITHOUT CAUSE. (a) The Company shall have the right to terminate Executive's employment with the Company at any time without cause. (b) In the event Executive's employment is terminated without cause before May 16, 2002, the Company shall pay Executive 18 months' base compensation in a single lump sum distribution on the first regular Company pay period after said termination. (c) In the event Executive's employment is terminated without cause on or after 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. 4.2 TERMINATION FOR CAUSE. (a) The Company shall have the right to terminate Executive's employment with the Company at any time for cause. Written notification of termination and specific cause of termination shall be provided to the Executive at the time of termination. (b) "Cause" for termination shall mean an employee's conviction of a felony or the willful and deliberate failure of an employee to perform his customary duties, in a manner consistent with the manner reasonably prescribed by the Board of Directors or President of Company (other than any failure resulting from his incapacity due to physical -2- or mental illness, disability or death) after not less than thirty (30) days prior written notice from Company. (c) In the event the Executive is notified in writing his employment is to be terminated for cause and the cause is curable, the Executive shall be given thirty days from date of notification to cure the specific cause(s) set forth in the notification. (d) In the event Executive's employment is terminated at any time for cause, the executive shall not be entitled to severance pay, pay in lieu of notice or any other such compensation; provided, however, Executive shall be entitled and shall receive all compensation earned prior to and including the date of termination. 4.3 VOLUNTARY OR MUTUAL TERMINATION. (a) Executive may voluntarily terminate his employment in writing with the Company at any time, after which no further compensation will be paid to Executive. (b) In the event Executive voluntarily terminates his employment, Executive shall not be entitled to severance pay, pay in lieu of notice or any other such compensation; provided, however, Executive shall be entitled and shall receive all compensation earned prior to and including the date of termination. 4.4 TERMINATION IN CONNECTION WITH A CHANGE OF CONTROL (a) In the event of a "Change in Control" of the Company (as defined herein), and in the event that either in contemplation of such Change of Control or after such Change of Control, Executive's employment is terminated without cause, in addition to any payments to which Executive may be entitled pursuant to Section 4.1, subject to the provisions of paragraph (c) below, Executive shall be entitled to a severance payment equal to the product of the number of full years of employment of Executive with the Company times the sum of (i) one month's salary, and (ii) one/twelfth the annual bonus earned by Executive for the last complete calendar year or year of employment, whichever is greater. In the event Executive voluntarily terminates his employment with the Company within six months of a Change of Control, subject to the provisions of paragraph (c) below, Executive shall be entitled to a severance payment equal to the product of the number of full years of employment of Executive with the Company times the sum of (i) one month's salary, and (ii) one/twelfth times the annual bonus earned by Executive for the last complete calendar year or year of employment, whichever is greater. In addition, in either case, notwithstanding the provisions of any stock option agreement, all stock options held by the Executive shall vest upon such Change of Control. (b) For purposes of this Section 4.4, a "Change in Control" of the Company shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, who -3- is not a "beneficial owner" (as defined in Rule 13d-3 under said Act), of 5% or more of the Company's common stock as of the date of this agreement becomes the beneficial owner, directly or indirectly, of capital stock of the Company representing 40 percent or more of the total voting power represented by the Company's then outstanding capital stock, or (ii) the shareholders of the Company approve (x) a merger or consolidation of the Company with any other company, other than a merger or consolidation in which the shareholders of the Company would own 50% or more of the voting stock of the surviving corporation, (y) the sale of all of substantially all of the assets of the Company, or (z) the liquidation or dissolution of the Company. (c) Anything in this Agreement to the contrary notwithstanding, prior to the payment of any compensation or benefits payable under paragraph (a) of this Section 4.4 hereof, the certified public accountants of the Company immediately prior to a Change of Control (the "Certified Public Accountants") shall determine as promptly as practical and in any event with 20 business days following the sale of the Company whether any payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, any other agreements or otherwise) (a "Payment") would more likely than not be nondeductible by the Company for Federal income tax purposes because of section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and if it is, then the aggregate present value of amounts payable or distributable to or for the benefit of the Company pursuant to this Agreement (such payments or distributions pursuant to this Agreement are thereinafter referred to as "Contract Payments") shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Section, the "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Contract Payments without causing any payment to be nondeductible by the Company because of said Section 280G of the Code. If under the Section the certified Public Accountants determine that any payment would more likely than not be nondeductible by the Company because of Section 280G of the Code, the Company shall promptly give Executive notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Executive may then elect, in his sole discretion, which and how much of the Contract Payments or any other payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Agreement Payments or any other payments equals the Reduced Amount), and shall advise the Company in writing of his election within 20 business days of his receipt of notice. If no such election is made by Executive within such 20-day period, the Company may elect which and how much of the Contract Payments or any other payments shall be eliminated or reduced (as long as after such election the Aggregate present value of the Contract Payments equals the Reduced Amount) and shall notify Executive promptly of such election. For purposes of this Section, present value shall be determined in accordance with Section 280G(d)(4) of the Code. All determinations made by the Certified Public Accountants shall be binding upon the Company and Executive and the payment to Executive shall be made within 20 days of sale of the Company. The Company may suspend for a period of up to 30 days after the sale of the Company the Payment and any other payments or benefits due to Executive -4- until the Certified Public Accountants finish the determination and Executive (or the Company, as the case may be) elects how to reduce the Contract Payments or any other payments, if necessary. As promptly as practicable following such determination and the elections hereunder, the Company shall pay to our distribute to or for the benefit of Executive such amounts as are then due to Executive under this Agreement. 5. NON-INTERFERENCE; NON-COMPETITION. 5.1 AGREEMENT. Executive agrees to execute and abide by the Noncompetition Agreement attached hereto as Exhibit B. 6. GENERAL PROVISION. 6.1 NOTICES. Any notices provided hereunder must be in writing and shall be deemed effective upon the earlier of personal delivery (including personal delivery by facsimile) or the third day after mailing by first class mail, to the Company at its primary office location and to Executive at the address listed on the Company payroll. 6.2 SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been contained herein. 6.3 WAIVER. If either party should waive any breach of any provisions of this Agreement, they or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 6.4 COMPLETE AGREEMENT. This Agreement and its Exhibits, constitute the entire agreement between Executive and the Company and it is the complete, final, and exclusive embodiment of his agreement with regard to the material terms of executive employment, compensation, and duration. It is entered into without reliance on any promise or representation other than those expressly contained herein, and it cannot be modified or amended except in a writing signed by Executive and an officer of the Company. 6.5 COUNTERPARTS. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. 6.6 HEADINGS. The headings of the sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 6.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company, and his respective successors, -5- assigns, heirs, executors and administrators, except that Executive may not assign any of his duties hereunder and they may not assign any of his rights hereunder without the written consent of the Company, which shall not be withheld unreasonably. 6.8 ATTORNEYS' 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. 6.9 CHOICE OF LAW. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of Kansas. IN WITNESS WHEREOF, the parties have executed this Key Employee Agreement on the day and year first above written. NATIONAL INFORMATION CONSORTIUM, INC.: By: /s/ Sam Somerhalder ---------------------------- Name: SAM SOMERHALDER Title: EXECUTIVE VICE PRESIDENT EXECUTIVE: /s/ Kevin Childress ------------------------------- Name: KEVIN CHILDRESS -6- EXHIBIT "A" EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT In consideration of my employment or continued employment by NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation, or any controlled subsidiary of the Company (collectively, the "Company"), and in consideration of the compensation now and hereafter paid to me, I, the undersigned, hereby agree as follows: 1. NONDISCLOSURE. 1.1 RECOGNITION OF COMPANY'S RIGHTS; NONDISCLOSURE. At all times during my employment and thereafter, I will hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Company's Proprietary Information (defined below), except as such disclosure, use or publication may be required in connection with my work for the Company, or unless an officer of the Company expressly authorizes such in writing. I will obtain Company's written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to my work at Company and/or incorporates any Proprietary Information. I hereby assign to the Company any rights I may have or acquire in such Proprietary Information and recognize that all Proprietary Information shall be the sole property of the Company and its assigns. 1.2 PROPRIETARY INFORMATION. The term "Proprietary Information" shall mean any and all confidential and/or proprietary knowledge, data or information of the Company. By way of illustration but not limitation, "Proprietary Information" includes (a) trade secrets, inventions, ideas, processes, formulas, source and object codes, data, programs, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques (hereinafter collectively referred to as "Inventions"); and (b) information regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and (c) information regarding the skills and compensation of other employees of the Company. Notwithstanding the foregoing, it is understood that, at all such times, I am free to use information which is generally known in the trade or industry, which is not gained as result of a breach of this Agreement, and my own, skill, knowledge, know-how and experience to whatever extent and in whichever way I wish. 1.3 THIRD PARTY INFORMATION. I understand, in addition, that the Company has received and in the future will receive from third parties confidential or proprietary information ("Third Party Information") subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes. During the term of my employment and thereafter, I will hold Third Party Information in the strictest confidence and will not disclose to anyone (other than Company personnel who need to know such information in connection with his work for the Company) or use, except in connection with my work for the Company, Third Party Information unless expressly authorized by an officer of the Company in writing. 1.4 NO IMPROPER USE OF INFORMATION OF PRIOR EMPLOYERS AND OTHERS. During my employment by the Company I will not improperly use or disclose any confidential information or trade secrets, if any, of any former employer or any other person to whom I have an obligation of confidentiality, and I will not bring onto the premises of the Company any unpublished documents or any property belonging to any former employer or any other person to whom I have an obligation of confidentiality unless consented to in writing by that former employer or person. I will use in the performance of my duties only information which is generally known and used by persons with training and experience comparable to my own, which is common knowledge in the industry or otherwise legally in the public domain, or which is otherwise provided or developed by the Company. 2. ASSIGNMENT OF INVENTIONS. 2.1 PROPRIETARY RIGHTS. The term "Proprietary Rights" shall mean all trade secret, patent, copyright, and other intellectual property rights throughout the world. 2.2 PRIOR INVENTIONS. Inventions, if any, patented or unpatented, which I made prior to the commencement of my employment with the Company are excluded from the scope of this Agreement. To preclude any possible uncertainty, I have set forth on Exhibit A (Previous Inventions) attached hereto a complete list of all Inventions that I have, alone or jointly with others, conceived, developed or reduced to practice or caused to be conceived, developed or reduced to practice prior to the commencement of my employment with the Company, that I consider to be my property or the property of third parties and that I wish to have excluded from the scope of this Agreement (collectively referred to as "Prior Inventions"). If disclosure of any such Prior Invention would cause me to violate any prior confidentiality agreement, I understand that I am not to list such Prior Inventions in Exhibit A but am only to disclose a cursory name for each such invention, a listing of the party(ies) to whom it belongs and the fact that full disclosure as to such inventions has not been made for that reason. A space is provided on Exhibit A for such purpose. If no such disclosure is attached, I represent that there are no Prior Inventions. If, in the course of my employment with the Company, I incorporate a Prior Invention into a Company product, process or machine, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, modify, use and sell such Prior Invention. Notwithstanding the foregoing, I agree that I will not incorporate, or permit to be incorporated, Prior Inventions in any Company Inventions without the Company's prior written consent. 2.3 ASSIGNMENT OF INVENTIONS. Subject to Sections 2.4, and 2.6, I hereby assign and agree to assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to the Company all my right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by me, either alone or jointly with others, during the period of my -2- employment with the Company. Inventions assigned to the Company, or to a third party as directed by the Company pursuant to this Section 2, are hereinafter referred to as "Company Inventions." 2.4 NONASSIGNABLE INVENTIONS. This Agreement will not be deemed to require assignment of and "Company Inventions" shall not be decerned to include any invention which was developed entirely on my own time without using the Company's equipment, supplies, facilities, or trade secrets and neither related to the Company's actual or anticipated business, research or development, nor resulted from work performed by me for the Company. 2.5 OBLIGATION TO KEEP COMPANY INFORMED. During the period of my employment and for six (6) months after termination of my employment with the Company, I will promptly disclose to the Company fully and in writing all Inventions authored, conceived or reduced to practice by me, either alone or jointly with others. In addition, I will promptly disclose to the Company all patent applications filed by me or on my behalf within a year after termination of employment. At the time of each such disclosure, I will advise the Company in writing of any Inventions that I believe fully qualify for protection "as non- Company Inventions" and I will at that time provide to the Company in writing all evidence necessary to substantiate that belief. The Company will keep in confidence and will not use for any purpose or disclose to third parties without my consent any confidential information disclosed in writing to the Company pursuant to this Agreement relating to Inventions that "are not Company Inventions." I will preserve the confidentiality of any Invention which "is a Company Invention." 2.6 GOVERNMENT OR THIRD PARTY. I also agree to assign all my right, title and interest in and to any particular Company Invention to a third party, including without limitation the United States, as directed by the Company. 2.7 WORKS FOR HIRE. I acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of my employment and which are protectable by copyright are "works made for hire," pursuant to United States Copyright Act (17 U.S.C., Section 101). 2.8 ENFORCEMENT OF PROPRIETARY RIGHTS. I will assist the Company in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Company Inventions in any and all countries. To that end I will execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof. In addition, I will execute, verify and deliver assignments of such "Company Inventions" to the Company or its designee. My obligation to assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of my employment, but the Company shall compensate me at a reasonable rate after my termination for the time actually spent by me at the Company's request on such assistance. In the event the Company is unable for any reason, after reasonable effort, to secure my signature on any document needed in connection with the actions specified in the preceding -3- paragraph, I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney in fact, which appointment is coupled with an interest, to act for and in my behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by me. I hereby waive and quitclaim to the Company any and all claims, of any nature whatsoever, which I now or may hereafter have for infringement of any Proprietary Rights or Company Inventions assigned hereunder to the Company. 3. RECORDS. I agree to keep and maintain adequate and current records (in the form of notes, sketches, drawings and in any other form that may be required by the Company) of all Proprietary Information developed by me and all Inventions made by me during the period of my employment at the Company, which records shall be available to and remain the sole property of the Company at all times. 4. NO CONFLICTING OBLIGATION. I represent that my performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith. 5. RETURN OF COMPANY DOCUMENTS. When I leave the employ of the Company, I will deliver to the Company any and all original drawings, notes, memoranda, specifications, devices, formulas, and documents, and any other material containing or disclosing any Company Inventions, Third Party Information or Proprietary Information of the Company. I further agree that any property situated on the Company's premises and owned by the Company, including disks and other storage media, filing cabinets or other work areas, is subject to inspection by Company personnel at any time with or without notice. Prior to leaving, I will cooperate with the Company in completing and signing the Company's termination statement. 6. LEGAL AND EQUITABLE REMEDIES. Because my services are personal and unique and because I may have access to and become acquainted with the Proprietary Information of the Company, the Company shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance or other equitable relief, without bond and without prejudice to any other rights and remedies that the Company may have for a breach of this Agreement. -4- 7. NOTICES. Any notices required or permitted hereunder shall be given to the appropriate party at the address specified below or at such other address as the party shall specify in writing. Such notice shall be deemed given upon personal delivery to the appropriate address or if sent by certified or registered mail, three (3) days after the date of mailing. 8. NOTIFICATION OF NEW EMPLOYER. In the event that I leave the employ of the Company, I hereby consent to the notification of my new employer of my rights and obligations under this Agreement. 9. GENERAL PROVISIONS. 9.1 GOVERNING LAW; CONSENT TO PERSONAL JURISDICTION. This Agreement will be governed by and construed according to the laws of the State of Kansas, as such laws are applied to agreements entered into and to be performed principally within Kansas. I hereby expressly consent to the personal jurisdiction of the state and federal courts located in Johnson County, Kansas, for any lawsuit filed there against me by Company arising from or related to this Agreement. 9.2 SEVERABILITY. In case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein so long as the central purpose and intent of the Agreement can still be achieved. If moreover, any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 9.3 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon my heirs, executors, administrators and other legal representatives and will be for the benefit of the Company, its successors, and its assigns. 9.4 SURVIVAL. The provisions of this Agreement shall survive the termination of my employment and the assignment of this Agreement by the Company to any successor in interest or other assignee. 9.5 EMPLOYMENT. I agree and understand that nothing in this Agreement shall confer any right with respect to continuation of employment by the Company, nor shall it interfere in any way with my right or the Company's right to terminate my employment at any time, with or without cause. 9.6 WAIVER. No waiver by the Company of any breach of this Agreement shall be a waiver of any preceding or succeeding breach. No waiver by the Company of any right under this -5- Agreement shall be construed as a waiver of any other right. The Company shall not be required to give notice to enforce strict adherence to all terms of this Agreement. 9.7 ENTIRE AGREEMENT. The obligations pursuant to Sections 1 and 2 of this Agreement shall apply to any time during which I was previously employed, or am in the future employed, by the Company as a consultant if no other agreement governs nondisclosure and assignment of inventions during such period. This Agreement is the final, complete and exclusive agreement of the parties with respect to the subject matter hereof and supersedes and merges all prior discussions between us. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing and signed by the party to be charged. Any subsequent change or changes in my duties, salary or compensation will not affect the validity or scope of this Agreement. This Agreement shall be effective as of the first day of my employment with the Company, namely: May 16, 1999. I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE COMPLETELY FILLED OUT EXHIBIT A TO THIS AGREEMENT. Dated: November 14, 2000 /s/ Kevin C. Childress ------------------------------ (Signature) KEVIN CHILDRESS (Printed Name) ACCEPTED AND AGREED TO: NATIONAL INFORMATION CONSORTIUM, INC. By: /s/ Sam Somerhalder --------------------------- Title: EVP 301 S. 13th, #301, Lincoln, NE 68508 (Address) Dated: November 14, 2000 -6- EXHIBIT A PREVIOUS INVENTIONS TO: National Information Consortium, Inc. FROM: KEVIN CHILDRESS DATE: May 16, 1999 SUBJECT: Previous Inventions 1. Except as listed in Section 2 below, the following is a complete list of all inventions or improvements relevant to the subject matter of my employment by National Information Consortium, Inc. or any of its controlled subsidiaries (collectively, the "Company"), that have been made or conceived or first reduced to practice by one alone or jointly with others prior to my engagement by the Company: - No inventions or improvements. - See below: ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- - Additional sheets attached. 2. Due to a prior confidentiality agreement, I cannot complete the disclosure under Section 1 above with respect to inventions or improvements generally listed below, the proprietary rights and duty of confidentiality with respect to which I owe to the following party(ies):
INVENTION OR IMPROVEMENT PARTY(IES) RELATIONSHIP 1. ___________________________ __________ ___________________ 2. ___________________________ __________ ___________________ 3. ___________________________ __________ ___________________
- Additional sheets attached. -7- EXHIBIT "B" NONCOMPETITION AGREEMENT THIS NONCOMPETITION AGREEMENT (the "Agreement") is being executed and delivered as of May 16, 1999, by Kevin Childress (the "Executive") in favor of, and for the benefit of: NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation ("NIC," and together with NIC's subsidiaries, (the "Company"). Certain capitalized terms used in this Agreement are defined in Section 11. RECITALS A. As an employee of the Company, the Executive has obtained extensive and valuable knowledge and confidential information concerning the business of the Company. B. The Company and the Executive are executing a Key Employee Agreement (the "Employment Agreement") contemporaneously with the execution and delivery of this Agreement. Pursuant to the Employment Agreement, the Executive is becoming a key employee of the Company and will accordingly obtain extensive and valuable knowledge and confidential information concerning the business of the Company. C. The Company and the Executive acknowledge that this Agreement is intended to protect the legitimate business interests of the Company and of the Executive. D. The Company has conducted and is conducting its business on a national basis. AGREEMENT For good and valuable consideration, the receipt of which is hereby acknowledged, the Company and the Executive agree as follows: 1. RESTRICTION ON COMPETITION. The Executive agrees that, during the Noncompetition Period, the Executive shall not, and shall not permit any of his Affiliates to: (a) engage directly in Competition in any Restricted Territory; or (b) directly be or become an officer, director, stockholder, owner, co-owner, Affiliate, partner, promoter, employee, agent, representative, designer, consultant, advisor, manager, licensor, sublicensor, licensee or sublicensee of, for or to, or otherwise be or become associated with or acquire or hold (of record, beneficially or otherwise) any direct or indirect interest in, any Person that engages directly or indirectly in Competition in any Restricted Territory: Provided, however, that the Executive may, without violating this Section 1, own, as a passive investment, shares of capital stock of a publicly held corporation that engages in Competition if (i) such shares are actively traded on an established national securities market in the United States, (ii) the number of shares of such corporation's capital stock that are owned beneficially (directly or indirectly) by the Executive and the number of shares of such corporation's capital stock that are owned beneficially (directly or indirectly) by the Executive's Affiliates collectively represent less than five percent of the total number of shares of such corporation's capital stock outstanding, and (iii) neither the Executive nor any Affiliate of the Executive is otherwise associated directly or indirectly with such corporation or with any Affiliate of such corporation. 2. REPRESENTATIONS AND WARRANTIES. The Executive represents and warrants, to and for the benefit of the Company, that: (a) they have full power and capacity to execute and deliver, and to perform all of his obligations under, this Agreement; and (b) neither the execution and delivery of this Agreement nor the performance of this Agreement will result directly or indirectly in a violation or breach of(i) any agreement or obligation by which the Executive or any of his Affiliates is or may be bound, or (ii) any law, rule or regulation. The Executive's representations and warranties shall survive the expiration of the Noncompetition Period for an unlimited period of time. 3. SPECIFIC PERFORMANCE. The Executive agrees that, in the event of any breach or threatened breach by the Executive of any covenant or obligation contained in this Agreement, each of the Company shall be entitled (in addition to any other remedy that may be available to it, including monetary damages) to seek and obtain (a) a decree or order of specific performance to enforce the observance and performance of such covenant or obligation, and (b) an injunction restraining such breach or threatened breach. 4. NONEXCLUSIVITY. The rights and remedies of the parties hereto under this Agreement are not exclusive of or limited by any other rights or remedies which they may have, whether at law, in equity, by contract or otherwise, all of which shall be cumulative (and not alternative). Without limiting the generality of the foregoing, the rights and remedies of the parties hereto under this Agreement, and the obligations and liabilities of the Executive under this Agreement, are in addition to his respective rights, remedies, obligations and liabilities under the law of unfair competition, under laws relating to misappropriation of trade secrets, under other laws and common law requirements and under all applicable rules and regulations. Nothing in this Agreement shall limit any of the obligations, or the rights or remedies of the parties hereto, under the Employment Agreement; and nothing in the Employment Agreement shall limit any of the obligations, or any of the rights or remedies of the parties hereto, under this Agreement. No breach on the part of the Company or any other party of any covenant or obligation contained in the Employment Agreement or any other agreement shall limit or otherwise affect any right or remedy of the parties hereto under this Agreement. 5. SEVERABILITY. If any provision of this Agreement or any part of any such provision is held under any circumstances to be invalid or unenforceable in any jurisdiction, then (a) such provision or part thereof shall, with respect to such circumstances and in such jurisdiction, be deemed amended to conform to applicable laws so as to be valid and enforceable to the fullest possible extent, (b) the invalidity or unenforceability of such -2- provision or part thereof under such circumstances and in such jurisdiction shall not affect the validity or enforceability of such provision or part thereof under any other circumstances or in any other jurisdiction, and (c) the invalidity or unenforceability of such provision or part thereof shall not affect the validity or enforceability of the remainder of such provision or the validity or enforceability of any other provision of this Agreement. Each provision of this Agreement is separable from every other provision of this Agreement, and each part of each provision of this Agreement is separable from every other part of such provision so long as to do so does not destroy the central intent and purpose of the agreement. 6. GOVERNING LAW; VENUE. (a) This Agreement shall be construed in accordance with, and governed in all respects by, the laws of the State of Kansas (without giving effect to principles of conflicts of laws). (b) Any legal action or other legal proceeding relating to this Agreement or the enforcement of any provision of this Agreement may be brought or otherwise commenced in any state or federal court located in Johnson County Kansas. The Executive: (i) expressly and irrevocably consents and submits to the jurisdiction of each state and federal court located in Johnson County of Kansas (and each appellate court located in the State of Kansas), in connection with any such legal proceeding; (ii) agrees that service of any process, summons, notice or document by U.S. mail addressed to them at the address set forth on the signature page of this Agreement shall constitute effective service of such process, summons, notice or document for purposes of any such legal proceeding; (iii) agrees that each state and federal court located in Johnson County Kansas, shall be deemed to be a convenient forum; and (iv) agrees not to assert (by way of motion, as a defense or otherwise), in any such legal proceeding commenced in any state or federal court located in Johnson County Kansas, any claim that the Executive is not subject personally to the jurisdiction of such court, that such legal proceeding has been brought in an inconvenient forum, that the venue of such proceeding is improper or that this Agreement or the subject matter of this Agreement may not be enforced in or by such court. 7. WAIVER. No failure on the part of the Company or any other party to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of the Company or any other party in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no -3- single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. 8. CAPTIONS. The captions contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement. 9. CONSTRUCTION. Whenever required by the context, the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; and the neuter gender shall include the masculine and feminine genders. Any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement. Neither the drafting history nor the negotiating history of this Agreement shall be used or referred to in connection with the construction or interpretation of this Agreement. As used in this Agreement, the words "include" and "including," and variations thereof, shall not be deemed to be terms of limitation, and shall be deemed to be followed by the words "without limitation." Except as otherwise indicated in this Agreement, all references in this Agreement to "Sections" are intended to refer to Sections of this Agreement. 10. AMENDMENT. This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of the Executive and the Company (or any successor to the Company). 11. DEFINED TERMS. For purposes of this Agreement: (a) "Affiliate" means, with respect to the Executive, any other Person that, directly or indirectly, through one or more intermediaries, is controlled by the Executive. (b) "Competing Product" means any: (i) application or software program that provides an electronic gateway to government services or procurement information; (ii) product, device or system that is substantially the same as, incorporates, is a material component or part of, or is based upon or competes with anything referred to in clause (i) above or any product, device or system that has been designed, developed, promoted, sold, resold, installed, supported, maintained, licensed or sublicensed by or on behalf of Persons who at any time on or prior to the date of this Agreement were competitors of the Company (or of any predecessor of the Company) at any time on or prior to this date of this Agreement until the date of termination of employment. (c) "Competing Service" means any: (i) public/private partnership that provides an electronic gateway to government services or procurement information; (ii) service that is substantially the same as, incorporates, is a material component or part of, or is based upon or competes with a service that has been provided, performed or offered by or on behalf the Company (or of any predecessor of the Company) at any time on or prior to the date of this Agreement or until the date of -4- termination of employment; (iii) service that facilitates, supports or otherwise relates to the any Competing Product. (d) A Person shall be deemed to be engaged in "Competition" if: (i) such Person is engaged directly or indirectly in the design, development, manufacture, assembly, promotion, sale, supply, distribution, resale, installation, support, maintenance, repair, refurbishment, licensing, sublicensing, financing, leasing or subleasing of any Competing Product; or (ii) such Person is engaged directly or indirectly in providing, performing or offering any Competing Service. (e) "Confidential Information" means any non-public information (whether or not in written form and whether or not expressly designated as confidential) relating directly or indirectly to the Company or relating directly or indirectly to the business, operations, financial affairs, performance, assets, technology, processes, products, contracts, customers, licensees, sublicensees, suppliers, personnel, consultants or plans of the Company (including any such information consisting of or otherwise relating to trade secrets, know-how, technology, inventions, prototypes, designs, drawings, sketches, processes, license or sublicense arrangements, formulae, proposals, research and development activities, customer lists or preferences, pricing lists, referral sources, marketing or sales techniques or plans, operations manuals, service manuals, financial information, projections, lists of consultants, lists of suppliers or lists of distributors); provided, however, that "Confidential Information" shall not be deemed to include information of the Company that was already publicly known and in the public domain prior to the time of its disclosure by the Executive. (f) "Noncompetition Period" shall mean the period commencing on the date of this Agreement and ending on the second anniversary of the date of the termination of the Executive's employment with the Company. (g) "Person" means, other than Electric Press, Inc., a Virginia corporation, any: (i) individual or (ii) corporation, general partnership, limited partnership, limited liability partnership, trust, company (including any limited liability company or joint stock company) or other organization or entity. (h) "Restricted Territory" means each county or similar political subdivision of each State of the United States of America (including each of the counties in the State of California), and each State, territory or possession of the United States of America. -5- IN WITNESS WHEREOF, the Executive has duly executed and delivered this Noncompetition Agreement as of the date first above written. Signature /s/ Kevin Childress ----------------------- Name: KEVIN CHILDRESS Telephone No.: ( ) Facsimile: ( ) -6- EX-10.44 11 a2041279zex-10_44.txt EXHIBIT 10.44 NATIONAL INFORMATION CONSORTIUM, INC. KEY EMPLOYEE AGREEMENT FOR STEVE KOVZAN THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 1st day of September, 2000, by and between Steve Kovzan ("Executive") and NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation (the "Company"). This Agreement amends and restates all prior agreements between Executive and the Company with respect to the subject matter hereof. WHEREAS, the Company desires to employ Executive to provide personal services to the Company and to the Company's subsidiaries, and wishes to provide Executive with certain compensation and benefits in return for Executive's services; and WHEREAS, Executive wishes to be employed by the Company and provide personal services to the Company and to the Company's subsidiaries in return for certain compensation and benefits; NOW, THEREFORE, the parties hereto agree as follows: 1. EMPLOYMENT BY THE COMPANY. 1.1 ACCEPTANCE. Subject to terms set forth herein, the Company or a subsidiary of the Company, agrees to employ Executive in the position of Vice President--Financial Operations and Executive hereby accepts such employment effective as of the date first written above. During the term of employment with the Company, Executive will devote his best efforts and substantially all of his business time and attention (except for vacation periods and reasonable periods of illness or other incapacity's permitted by the Company's general employment policies) to the business of the Company. 1.2 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). 1.3 EMPLOYMENT 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. 2. COMPENSATION. 2.1 SALARY. Executive shall receive for services to be rendered hereunder an annualized base salary of $95,000, 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. 2.2 STANDARD COMPANY BENEFITS. Executive shall be entitled to all rights and benefits for which they are eligible under the terms and conditions of the standard Company benefits and compensation practices which may be in effect from time to time and provided by the Company to its employees generally. 3. PROPRIETARY INFORMATION OBLIGATIONS. 3.1 AGREEMENT. Executive agrees to execute and abide by the Proprietary Information and Inventions Agreement attached hereto as Exhibit A. 4. TERMINATION OF EMPLOYMENT. 4.1 TERMINATION WITHOUT CAUSE. (a) The Company shall have the right to terminate Executive's employment with the Company at any time without cause. (b) In the event Executive's employment is terminated without cause before October 25, 2002, the Company shall pay Executive 12 months' base compensation in a single lump sum distribution on the first regular Company pay period after said termination. (c) In the event Executive's employment is terminated without cause on or after October 25, 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. 4.2 TERMINATION FOR CAUSE. (a) The Company shall have the right to terminate Executive's employment with the Company at any time for cause. Written notification of termination and specific cause of termination shall be provided to the Executive at the time of termination. (b) "Cause" for termination shall mean an employee's conviction of a felony or the willful and deliberate failure of an employee to perform his customary duties, in a manner consistent with the manner reasonably prescribed by the Board of Directors or President of Buyer (other than any failure resulting from his incapacity due to physical or -2- mental illness, disability or death) after not less than thirty (30) days prior written notice from Buyer. (c) In the event the Executive is notified in writing his employment is to be terminated for cause and the cause is curable, the Executive shall be given thirty days from date of notification to cure the specific cause(s) set forth in the notification. (d) In the event Executive's employment is terminated at any time for cause, the executive shall not be entitled to severance pay, pay in lieu of notice or any other such compensation; provided, however, Executive shall be entitled and shall receive all compensation earned prior to and including the date of termination. 4.3 VOLUNTARY OR MUTUAL TERMINATION. (a) Executive may voluntarily terminate his employment in writing with the Company at any time, after which no further compensation will be paid to Executive. (b) In the event Executive voluntarily terminates his employment, Executive shall not be entitled to severance pay, pay in lieu of notice or any other such compensation; provided, however, Executive shall be entitled and shall receive all compensation earned prior to and including the date of termination. 4.4 TERMINATION IN CONNECTION WITH A CHANGE OF CONTROL (a) In the event of a "Change in Control" of the Company (as defined herein), and in the event that either in contemplation of such Change of Control or after such Change of Control, Executive's employment is terminated without cause, in addition to any payments to which Executive may be entitled pursuant to Section 4.1, subject to the provisions of paragraph (c) below, Executive shall be entitled to a severance payment equal to the product of the number of full years of employment of Executive with the Company times the sum of (i) one month's salary, and (ii) one/twelfth the annual bonus earned by Executive for the last complete calendar year or year of employment, whichever is greater. In the event Executive voluntarily terminates his employment with the Company within six months of a Change of Control, subject to the provisions of paragraph (c) below, Executive shall be entitled to a severance payment equal to the product of the number of full years of employment of Executive with the Company times the sum of (i) one month's salary, and (ii) one/twelfth times the annual bonus earned by Executive for the last complete calendar year or year of employment, whichever is greater. In addition, in either case, notwithstanding the provisions of any stock option agreement, all stock options held by the Executive shall vest upon such Change of Control. (b) For purposes of this Section 4.4, a "Change in Control" of the Company shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee -3- or other fiduciary holding securities under an employee benefit plan of the Company, who is not a "beneficial owner" (as defined in Rule 13d-3 under said Act), of 5% or more of the Company's common stock as of the date of this agreement becomes the beneficial owner, directly or indirectly, of capital stock of the Company representing 40 percent or more of the total voting power represented by the Company's then outstanding capital stock, or (ii) the shareholders of the Company approve (x) a merger or consolidation of the Company with any other company, other than a merger or consolidation in which the shareholders of the Company would own 50% or more of the voting stock of the surviving corporation, (y) the sale of all of substantially all of the assets of the Company, or (z) the liquidation or dissolution of the Company. (c) Anything in this Agreement to the contrary notwithstanding, prior to the payment of any compensation or benefits payable under paragraph (a) of this Section 4.4 hereof, the certified public accountants of the Company immediately prior to a Change of Control (the "Certified Public Accountants") shall determine as promptly as practical and in any event with 20 business days following the sale of the Company whether any payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, any other agreements or otherwise) (a "Payment") would more likely than not be nondeductible by the Company for Federal income tax purposes because of section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and if it is, then the aggregate present value of amounts payable or distributable to or for the benefit of the Company pursuant to this Agreement (such payments or distributions pursuant to this Agreement are thereinafter referred to as "Contract Payments") shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Section, the "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Contract Payments without causing any payment to be nondeductible by the Company because of said Section 280G of the Code. If under the Section the certified Public Accountants determine that any payment would more likely than not be nondeductible by the Company because of Section 280G of the Code, the Company shall promptly give Executive notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Executive may then elect, in his sole discretion, which and how much of the Contract Payments or any other payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Agreement Payments or any other payments equals the Reduced Amount), and shall advise the Company in writing of his election within 20 business days of his receipt of notice. If no such election is made by Executive within such 20-day period, the Company may elect which and how much of the Contract Payments or any other payments shall be eliminated or reduced (as long as after such election the Aggregate present value of the Contract Payments equals the Reduced Amount) and shall notify Executive promptly of such election. For purposes of this Section, present value shall be determined in accordance with Section 280G(d)(4) of the Code. All determinations made by the Certified Public Accountants shall be binding upon the Company and Executive and the payment to Executive shall be made within 20 days of -4- sale of the Company. The Company may suspend for a period of up to 30 days after the sale of the Company the Payment and any other payments or benefits due to Executive until the Certified Public Accountants finish the determination and Executive (or the Company, as the case may be) elects how to reduce the Contract Payments or any other payments, if necessary. As promptly as practicable following such determination and the elections hereunder, the Company shall pay to our distribute to or for the benefit of Executive such amounts as are then due to Executive under this Agreement. 5. NON-INTERFERENCE; NON-COMPETITION. 5.1 AGREEMENT. Executive agrees to execute and abide by the Noncompetition Agreement attached hereto as Exhibit B. 6. GENERAL PROVISION. 6.1 NOTICES. Any notices provided hereunder must be in writing and shall be deemed effective upon the earlier of personal delivery (including personal delivery by facsimile) or the third day after mailing by first class mail, to the Company at its primary office location and to Executive at the address listed on the Company payroll. 6.2 SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been contained herein. 6.3 WAIVER. If either party should waive any breach of any provisions of this Agreement, they or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 6.4 COMPLETE AGREEMENT. This Agreement and its Exhibits, constitute the entire agreement between Executive and the Company and it is the complete, final, and exclusive embodiment of his agreement with regard to the material terms of executive employment, compensation, and duration. It is entered into without reliance on any promise or representation other than those expressly contained herein, and it cannot be modified or amended except in a writing signed by Executive and an officer of the Company. 6.5 COUNTERPARTS. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same Agreement. 6.6 HEADINGS. The headings of the sections hereof are inserted for convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. -5- 6.7 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company, and his respective successors, assigns, heirs, executors and administrators, except that Executive may not assign any of his duties hereunder and they may not assign any of his rights hereunder without the written consent of the Company, which shall not be withheld unreasonably. 6.8 ATTORNEYS' 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. 6.9 CHOICE OF LAW. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the law of the State of Kansas. IN WITNESS WHEREOF, the parties have executed this Key Employee Agreement on the day and year first above written. NATIONAL INFORMATION CONSORTIUM, INC.: By: /s/ Sam Somerhalder ---------------------------- Name: SAM SOMERHALDER Title: EXECUTIVE VICE PRESIDENT EXECUTIVE: /s/ Steve Kovzan ------------------------------- Name: STEVE KOVZAN -6- EXHIBIT "A" EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT In consideration of my employment or continued employment by NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation, or any controlled subsidiary of the Company (collectively, the "Company"), and in consideration of the compensation now and hereafter paid to me, I, the undersigned, hereby agree as follows: 1. NONDISCLOSURE. 1.1 RECOGNITION OF COMPANY'S RIGHTS; NONDISCLOSURE. At all times during my employment and thereafter, I will hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Company's Proprietary Information (defined below), except as such disclosure, use or publication may be required in connection with my work for the Company, or unless an officer of the Company expressly authorizes such in writing. I will obtain Company's written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to my work at Company and/or incorporates any Proprietary Information. I hereby assign to the Company any rights I may have or acquire in such Proprietary Information and recognize that all Proprietary Information shall be the sole property of the Company and its assigns. 1.2 PROPRIETARY INFORMATION. The term "Proprietary Information" shall mean any and all confidential and/or proprietary knowledge, data or information of the Company. By way of illustration but not limitation, "Proprietary Information" includes (a) trade secrets, inventions, ideas, processes, formulas, source and object codes, data, programs, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques (hereinafter collectively referred to as "Inventions"); and (b) information regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and (c) information regarding the skills and compensation of other employees of the Company. Notwithstanding the foregoing, it is understood that, at all such times, I am free to use information which is generally known in the trade or industry, which is not gained as result of a breach of this Agreement, and my own, skill, knowledge, know-how and experience to whatever extent and in whichever way I wish. 1.3 THIRD PARTY INFORMATION. I understand, in addition, that the Company has received and in the future will receive from third parties confidential or proprietary information ("Third Party Information") subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes. During the term of my employment and thereafter, I will hold Third Party Information in the strictest confidence and will not disclose to anyone (other than Company personnel who need to know such information in connection with his work for the Company) or use, except in connection with my work for the Company, Third Party Information unless expressly authorized by an officer of the Company in writing. 1.4 NO IMPROPER USE OF INFORMATION OF PRIOR EMPLOYERS AND OTHERS. During my employment by the Company I will not improperly use or disclose any confidential information or trade secrets, if any, of any former employer or any other person to whom I have an obligation of confidentiality, and I will not bring onto the premises of the Company any unpublished documents or any property belonging to any former employer or any other person to whom I have an obligation of confidentiality unless consented to in writing by that former employer or person. I will use in the performance of my duties only information which is generally known and used by persons with training and experience comparable to my own, which is common knowledge in the industry or otherwise legally in the public domain, or which is otherwise provided or developed by the Company. 2. ASSIGNMENT OF INVENTIONS. 2.1 PROPRIETARY RIGHTS. The term "Proprietary Rights" shall mean all trade secret, patent, copyright, and other intellectual property rights throughout the world. 2.2 PRIOR INVENTIONS. Inventions, if any, patented or unpatented, which I made prior to the commencement of my employment with the Company are excluded from the scope of this Agreement. To preclude any possible uncertainty, I have set forth on Exhibit A (Previous Inventions) attached hereto a complete list of all Inventions that I have, alone or jointly with others, conceived, developed or reduced to practice or caused to be conceived, developed or reduced to practice prior to the commencement of my employment with the Company, that I consider to be my property or the property of third parties and that I wish to have excluded from the scope of this Agreement (collectively referred to as "Prior Inventions"). If disclosure of any such Prior Invention would cause me to violate any prior confidentiality agreement, I understand that I am not to list such Prior Inventions in Exhibit A but am only to disclose a cursory name for each such invention, a listing of the party(ies) to whom it belongs and the fact that full disclosure as to such inventions has not been made for that reason. A space is provided on Exhibit A for such purpose. If no such disclosure is attached, I represent that there are no Prior Inventions. If, in the course of my employment with the Company, I incorporate a Prior Invention into a Company product, process or machine, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, modify, use and sell such Prior Invention. Notwithstanding the foregoing, I agree that I will not incorporate, or permit to be incorporated, Prior Inventions in any Company Inventions without the Company's prior written consent. 2.3 ASSIGNMENT OF INVENTIONS. Subject to Sections 2.4, and 2.6, I hereby assign and agree to assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to the Company all my right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced -2- to practice or learned by me, either alone or jointly with others, during the period of my employment with the Company. Inventions assigned to the Company, or to a third party as directed by the Company pursuant to this Section 2, are hereinafter referred to as "Company Inventions." 2.4 NONASSIGNABLE INVENTIONS. This Agreement will not be deemed to require assignment of and "Company Inventions" shall not be decerned to include any invention which was developed entirely on my own time without using the Company's equipment, supplies, facilities, or trade secrets and neither related to the Company's actual or anticipated business, research or development, nor resulted from work performed by me for the Company. 2.5 OBLIGATION TO KEEP COMPANY INFORMED. During the period of my employment and for six (6) months after termination of my employment with the Company, I will promptly disclose to the Company fully and in writing all Inventions authored, conceived or reduced to practice by me, either alone or jointly with others. In addition, I will promptly disclose to the Company all patent applications filed by me or on my behalf within a year after termination of employment. At the time of each such disclosure, I will advise the Company in writing of any Inventions that I believe fully qualify for protection "as non- Company Inventions" and I will at that time provide to the Company in writing all evidence necessary to substantiate that belief. The Company will keep in confidence and will not use for any purpose or disclose to third parties without my consent any confidential information disclosed in writing to the Company pursuant to this Agreement relating to Inventions that "are not Company Inventions." I will preserve the confidentiality of any Invention which "is a Company Invention." 2.6 GOVERNMENT OR THIRD PARTY. I also agree to assign all my right, title and interest in and to any particular Company Invention to a third party, including without limitation the United States, as directed by the Company. 2.7 WORKS FOR HIRE. I acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of my employment and which are protectable by copyright are "works made for hire," pursuant to United States Copyright Act (17 U.S.C., Section 101). 2.8 ENFORCEMENT OF PROPRIETARY RIGHTS. I will assist the Company in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Company Inventions in any and all countries. To that end I will execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof. In addition, I will execute, verify and deliver assignments of such "Company Inventions" to the Company or its designee. My obligation to assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of my employment, but the Company shall compensate me at a reasonable rate after my termination for the time actually spent by me at the Company's request on such assistance. -3- In the event the Company is unable for any reason, after reasonable effort, to secure my signature on any document needed in connection with the actions specified in the preceding paragraph, I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney in fact, which appointment is coupled with an interest, to act for and in my behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by me. I hereby waive and quitclaim to the Company any and all claims, of any nature whatsoever, which I now or may hereafter have for infringement of any Proprietary Rights or Company Inventions assigned hereunder to the Company. 3. RECORDS. I agree to keep and maintain adequate and current records (in the form of notes, sketches, drawings and in any other form that may be required by the Company) of all Proprietary Information developed by me and all Inventions made by me during the period of my employment at the Company, which records shall be available to and remain the sole property of the Company at all times. 4. NO CONFLICTING OBLIGATION. I represent that my performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith. 5. RETURN OF COMPANY DOCUMENTS. When I leave the employ of the Company, I will deliver to the Company any and all original drawings, notes, memoranda, specifications, devices, formulas, and documents, and any other material containing or disclosing any Company Inventions, Third Party Information or Proprietary Information of the Company. I further agree that any property situated on the Company's premises and owned by the Company, including disks and other storage media, filing cabinets or other work areas, is subject to inspection by Company personnel at any time with or without notice. Prior to leaving, I will cooperate with the Company in completing and signing the Company's termination statement. 6. LEGAL AND EQUITABLE REMEDIES. Because my services are personal and unique and because I may have access to and become acquainted with the Proprietary Information of the Company, the Company shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance or other equitable relief, without bond and without prejudice to any other rights and remedies that the Company may have for a breach of this Agreement. -4- 7. NOTICES. Any notices required or permitted hereunder shall be given to the appropriate party at the address specified below or at such other address as the party shall specify in writing. Such notice shall be deemed given upon personal delivery to the appropriate address or if sent by certified or registered mail, three (3) days after the date of mailing. 8. NOTIFICATION OF NEW EMPLOYER. In the event that I leave the employ of the Company, I hereby consent to the notification of my new employer of my rights and obligations under this Agreement. 9. GENERAL PROVISIONS. 9.1 GOVERNING LAW; CONSENT TO PERSONAL JURISDICTION. This Agreement will be governed by and construed according to the laws of the State of Kansas, as such laws are applied to agreements entered into and to be performed principally within Kansas. I hereby expressly consent to the personal jurisdiction of the state and federal courts located in Johnson County, Kansas, for any lawsuit filed there against me by Company arising from or related to this Agreement. 9.2 SEVERABILITY. In case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein so long as the central purpose and intent of the Agreement can still be achieved. If moreover, any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 9.3 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon my heirs, executors, administrators and other legal representatives and will be for the benefit of the Company, its successors, and its assigns. 9.4 SURVIVAL. The provisions of this Agreement shall survive the termination of my employment and the assignment of this Agreement by the Company to any successor in interest or other assignee. 9.5 EMPLOYMENT. I agree and understand that nothing in this Agreement shall confer any right with respect to continuation of employment by the Company, nor shall it interfere in any way with my right or the Company's right to terminate my employment at any time, with or without cause. -5- 9.6 WAIVER. No waiver by the Company of any breach of this Agreement shall be a waiver of any preceding or succeeding breach. No waiver by the Company of any right under this Agreement shall be construed as a waiver of any other right. The Company shall not be required to give notice to enforce strict adherence to all terms of this Agreement. 9.7 ENTIRE AGREEMENT. The obligations pursuant to Sections 1 and 2 of this Agreement shall apply to any time during which I was previously employed, or am in the future employed, by the Company as a consultant if no other agreement governs nondisclosure and assignment of inventions during such period. This Agreement is the final, complete and exclusive agreement of the parties with respect to the subject matter hereof and supersedes and merges all prior discussions between us. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing and signed by the party to be charged. Any subsequent change or changes in my duties, salary or compensation will not affect the validity or scope of this Agreement. This Agreement shall be effective as of the first day of my employment with the Company, namely: October 25, 1999. I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE COMPLETELY FILLED OUT EXHIBIT A TO THIS AGREEMENT. Dated: __________________ /s/ Steve Kovzan ------------------------------- (Signature) STEVE KOVZAN (Printed Name) ACCEPTED AND AGREED TO: NATIONAL INFORMATION CONSORTIUM, INC. By: ---------------------------- Title: EXECUTIVE VICE PRESIDENT ------------------------------- (Address) Dated: ------------------------- -6- EXHIBIT A PREVIOUS INVENTIONS TO: National Information Consortium, Inc. FROM: STEVE KOVZAN DATE: October 25, 1999 SUBJECT: Previous Inventions 1. Except as listed in Section 2 below, the following is a complete list of all inventions or improvements relevant to the subject matter of my employment by National Information Consortium, Inc. or any of its controlled subsidiaries (collectively, the "Company"), that have been made or conceived or first reduced to practice by one alone or jointly with others prior to my engagement by the Company: - No inventions or improvements. - See below: ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- - Additional sheets attached. 2. Due to a prior confidentiality agreement, I cannot complete the disclosure under Section 1 above with respect to inventions or improvements generally listed below, the proprietary rights and duty of confidentiality with respect to which I owe to the following party(ies):
INVENTION OR IMPROVEMENT PARTY(IES) RELATIONSHIP 1. ___________________________ __________ ___________________ 2. ___________________________ __________ ___________________ 3. ___________________________ __________ ___________________
- Additional sheets attached. -7- EXHIBIT "B" NONCOMPETITION AGREEMENT THIS NONCOMPETITION AGREEMENT (the "Agreement") is being executed and delivered as of October 25, 1999 by Steve Kovzan (the "Executive") in favor of, and for the benefit of: NATIONAL INFORMATION CONSORTIUM, INC., a Colorado corporation ("NIC," and together with NIC's subsidiaries, (the "Company"). Certain capitalized terms used in this Agreement are defined in Section 11. RECITALS A. As an employee of the Company, the Executive has obtained extensive and valuable knowledge and confidential information concerning the business of the Company. B. The Company and the Executive are executing a Key Employee Agreement (the "Employment Agreement") contemporaneously with the execution and delivery of this Agreement. Pursuant to the Employment Agreement, the Executive is becoming a key employee of the Company and will accordingly obtain extensive and valuable knowledge and confidential information concerning the business of the Company. C. The Company and the Executive acknowledge that this Agreement is intended to protect the legitimate business interests of the Company and of the Executive. D. The Company has conducted and is conducting its business on a national basis. AGREEMENT For good and valuable consideration, the receipt of which is hereby acknowledged, the Company and the Executive agree as follows: 1. RESTRICTION ON COMPETITION. The Executive agrees that, during the Noncompetition Period, the Executive shall not, and shall not permit any of his Affiliates to: (a) engage directly in Competition in any Restricted Territory; or (b) directly be or become an officer, director, stockholder, owner, co-owner, Affiliate, partner, promoter, employee, agent, representative, designer, consultant, advisor, manager, licensor, sublicensor, licensee or sublicensee of, for or to, or otherwise be or become associated with or acquire or hold (of record, beneficially or otherwise) any direct or indirect interest in, any Person that engages directly or indirectly in Competition in any Restricted Territory: Provided, however, that the Executive may, without violating this Section 1, own, as a passive investment, shares of capital stock of a publicly held corporation that engages in Competition if (i) such shares are actively traded on an established national securities market in the United States, (ii) the number of shares of such corporation's capital stock that are owned beneficially (directly or indirectly) by the Executive and the number of shares of such corporation's capital stock that are owned beneficially (directly or indirectly) by the Executive's Affiliates collectively represent less than five percent of the total number of shares of such corporation's capital stock outstanding, and (iii) neither the Executive nor any Affiliate of the Executive is otherwise associated directly or indirectly with such corporation or with any Affiliate of such corporation. 2. REPRESENTATIONS AND WARRANTIES. The Executive represents and warrants, to and for the benefit of the Company, that: (a) they have full power and capacity to execute and deliver, and to perform all of his obligations under, this Agreement; and (b) neither the execution and delivery of this Agreement nor the performance of this Agreement will result directly or indirectly in a violation or breach of(i) any agreement or obligation by which the Executive or any of his Affiliates is or may be bound, or (ii) any law, rule or regulation. The Executive's representations and warranties shall survive the expiration of the Noncompetition Period for an unlimited period of time. 3. SPECIFIC PERFORMANCE. The Executive agrees that, in the event of any breach or threatened breach by the Executive of any covenant or obligation contained in this Agreement, each of the Company shall be entitled (in addition to any other remedy that may be available to it, including monetary damages) to seek and obtain (a) a decree or order of specific performance to enforce the observance and performance of such covenant or obligation, and (b) an injunction restraining such breach or threatened breach. 4. NONEXCLUSIVITY. The rights and remedies of the parties hereto under this Agreement are not exclusive of or limited by any other rights or remedies which they may have, whether at law, in equity, by contract or otherwise, all of which shall be cumulative (and not alternative). Without limiting the generality of the foregoing, the rights and remedies of the parties hereto under this Agreement, and the obligations and liabilities of the Executive under this Agreement, are in addition to his respective rights, remedies, obligations and liabilities under the law of unfair competition, under laws relating to misappropriation of trade secrets, under other laws and common law requirements and under all applicable rules and regulations. Nothing in this Agreement shall limit any of the obligations, or the rights or remedies of the parties hereto, under the Employment Agreement; and nothing in the Employment Agreement shall limit any of the obligations, or any of the rights or remedies of the parties hereto, under this Agreement. No breach on the part of the Company or any other party of any covenant or obligation contained in the Employment Agreement or any other agreement shall limit or otherwise affect any right or remedy of the parties hereto under this Agreement. 5. SEVERABILITY. If any provision of this Agreement or any part of any such provision is held under any circumstances to be invalid or unenforceable in any jurisdiction, then (a) such provision or part thereof shall, with respect to such circumstances and in such -2- jurisdiction, be deemed amended to conform to applicable laws so as to be valid and enforceable to the fullest possible extent, (b) the invalidity or unenforceability of such provision or part thereof under such circumstances and in such jurisdiction shall not affect the validity or enforceability of such provision or part thereof under any other circumstances or in any other jurisdiction, and (c) the invalidity or unenforceability of such provision or part thereof shall not affect the validity or enforceability of the remainder of such provision or the validity or enforceability of any other provision of this Agreement. Each provision of this Agreement is separable from every other provision of this Agreement, and each part of each provision of this Agreement is separable from every other part of such provision so long as to do so does not destroy the central intent and purpose of the agreement. 6. GOVERNING LAW; VENUE. (a) This Agreement shall be construed in accordance with, and governed in all respects by, the laws of the State of Kansas (without giving effect to principles of conflicts of laws). (b) Any legal action or other legal proceeding relating to this Agreement or the enforcement of any provision of this Agreement may be brought or otherwise commenced in any state or federal court located in Johnson County Kansas. The Executive: (i) expressly and irrevocably consents and submits to the jurisdiction of each state and federal court located in Johnson County of Kansas (and each appellate court located in the State of Kansas), in connection with any such legal proceeding; (ii) agrees that service of any process, summons, notice or document by U.S. mail addressed to them at the address set forth on the signature page of this Agreement shall constitute effective service of such process, summons, notice or document for purposes of any such legal proceeding; (iii) agrees that each state and federal court located in Johnson County Kansas, shall be deemed to be a convenient forum; and (iv) agrees not to assert (by way of motion, as a defense or otherwise), in any such legal proceeding commenced in any state or federal court located in Johnson County Kansas, any claim that the Executive is not subject personally to the jurisdiction of such court, that such legal proceeding has been brought in an inconvenient forum, that the venue of such proceeding is improper or that this Agreement or the subject matter of this Agreement may not be enforced in or by such court. -3- 7. WAIVER. No failure on the part of the Company or any other party to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of the Company or any other party in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. 8. CAPTIONS. The captions contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement. 9. CONSTRUCTION. Whenever required by the context, the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; and the neuter gender shall include the masculine and feminine genders. Any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement. Neither the drafting history nor the negotiating history of this Agreement shall be used or referred to in connection with the construction or interpretation of this Agreement. As used in this Agreement, the words "include" and "including," and variations thereof, shall not be deemed to be terms of limitation, and shall be deemed to be followed by the words "without limitation." Except as otherwise indicated in this Agreement, all references in this Agreement to "Sections" are intended to refer to Sections of this Agreement. 10. AMENDMENT. This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of the Executive and the Company (or any successor to the Company). 11. DEFINED TERMS. For purposes of this Agreement: (a) "Affiliate" means, with respect to the Executive, any other Person that, directly or indirectly, through one or more intermediaries, is controlled by the Executive. (b) "Competing Product" means any: (i) application or software program that provides an electronic gateway to government services or procurement information; (ii) product, device or system that is substantially the same as, incorporates, is a material component or part of, or is based upon or competes with anything referred to in clause (i) above or any product, device or system that has been designed, developed, promoted, sold, resold, installed, supported, maintained, licensed or sublicensed by or on behalf of Persons who at any time on or prior to the date of this Agreement were competitors of the Company (or of any predecessor of the Company) at any time on or prior to this date of this Agreement until the date of termination of employment. (c) "Competing Service" means any: (i) public/private partnership that provides an electronic gateway to government services or procurement information; (ii) -4- service that is substantially the same as, incorporates, is a material component or part of, or is based upon or competes with a service that has been provided, performed or offered by or on behalf the Company (or of any predecessor of the Company) at any time on or prior to the date of this Agreement or until the date of termination of employment; (iii) service that facilitates, supports or otherwise relates to the any Competing Product. (d) A Person shall be deemed to be engaged in "Competition" if: (i) such Person is engaged directly or indirectly in the design, development, manufacture, assembly, promotion, sale, supply, distribution, resale, installation, support, maintenance, repair, refurbishment, licensing, sublicensing, financing, leasing or subleasing of any Competing Product; or (ii) such Person is engaged directly or indirectly in providing, performing or offering any Competing Service. (e) "Confidential Information" means any non-public information (whether or not in written form and whether or not expressly designated as confidential) relating directly or indirectly to the Company or relating directly or indirectly to the business, operations, financial affairs, performance, assets, technology, processes, products, contracts, customers, licensees, sublicensees, suppliers, personnel, consultants or plans of the Company (including any such information consisting of or otherwise relating to trade secrets, know-how, technology, inventions, prototypes, designs, drawings, sketches, processes, license or sublicense arrangements, formulae, proposals, research and development activities, customer lists or preferences, pricing lists, referral sources, marketing or sales techniques or plans, operations manuals, service manuals, financial information, projections, lists of consultants, lists of suppliers or lists of distributors); provided, however, that "Confidential Information" shall not be deemed to include information of the Company that was already publicly known and in the public domain prior to the time of its disclosure by the Executive. (f) "Noncompetition Period" shall mean the period commencing on the date of this Agreement and ending on the second anniversary of the date of the termination of the Executive's employment with the Company. (g) "Person" means, other than Electric Press, Inc., a Virginia corporation, any: (i) individual or (ii) corporation, general partnership, limited partnership, limited liability partnership, trust, company (including any limited liability company or joint stock company) or other organization or entity. (h) "Restricted Territory" means each county or similar political subdivision of each State of the United States of America (including each of the counties in the State of California), and each State, territory or possession of the United States of America. -5- IN WITNESS WHEREOF, the Executive has duly executed and delivered this Noncompetition Agreement as of the date first above written. Signature /s/ Steve Kovzan ----------------------- Name: STEVE KOVZAN Telephone No.: ( ) Facsimile: ( ) -6- EX-10.45 12 a2041279zex-10_45.txt EXHIBIT 10.45 CONTRACT BETWEEN THE STATE OF TENNESSEE, DEPARTMENT OF FINANCE AND ADMINISTRATION AND NATIONAL INFORMATION CONSORTIUM USA, INCORPORATED This Contract, by and between the State of Tennessee, Department of Finance and Administration, hereinafter referred to as the "State" and National Information Consortium USA, Incorporated, hereinafter referred to as the "Contractor," is for the provision of an Internet Portal and associated support services, as further defined in the "SCOPE OF SERVICES." The Contractor is a for-profit corporation. The Contractor's address is: 12 Corporate Woods 10975 Benson Street, Suite 390 Overland Park, KS 66210 The Contractor's place of incorporation or organization is Kansas. A. SCOPE OF SERVICES: A.1. The Contractor agrees to perform the services as defined in the Request for Proposals for Portal Services (RFP Number 31703-004), including all documents referenced in Subsection E.8, below. B. CONTRACT TERM: B.1. CONTRACT TERM. This Contract shall be effective for the period commencing on 8/28/2000 and ending on 8/27/2003. The State shall have no obligation for services rendered by the Contractor which are not performed within the specified period. B.2. TERM EXTENSION. The State reserves the right to extend this Contract for two additional one-year periods, provided that the State notifies the Contractor in writing of its intention to do so at least thirty (30) days prior to the contract expiration date. An extension of the term of this Contract will be effected through an amendment to the Contract. If the extension of the Contract necessitates additional funding beyond that which was included in the original Contract, the increase in the State's maximum liability will also be effected through an amendment to the Contract and shall be based upon rates provided for in the original contract. C. PAYMENT TERMS AND CONDITIONS: C.1. MAXIMUM LIABILITY. In no event shall the maximum liability of the State under this Contract exceed Two Million Eight Hundred Sixty-Two Thousand Five Hundred Dollars ($2,862,500.00). The Service Rates in Section C.3 shall constitute the entire compensation due the Contractor for the Service and all of the Contractor's obligations hereunder regardless of the difficulty, materials or equipment required. The Service Rates include, but are not limited to, all applicable taxes, fees, overheads, and all other direct and indirect costs incurred or to be incurred by the Contractor. The Contractor is not entitled to be paid the maximum liability for any period under the Contract or any extensions of the Contract for work not requested by the State. The maximum liability represents available funds for payment to the Contractor and does not guarantee payment of any such funds to the Contractor under this Contract unless the State requests work and the Contractor performs said work. In which case, the Contractor shall be paid in accordance with the Service Rates detailed in Section C.3. The State is under no obligation to request work from the Contractor in any specific dollar amounts or to request any work at all from the Contractor during any period of this Contract. C.2. COMPENSATION FIRM. The Service Rates and the Maximum Liability of the State under this Contract are firm for the duration of the Contract and are not subject to escalation for any reason unless amended. C.3. PAYMENT METHODOLOGY. The Contractor shall be compensated based on the Service Rates herein for units of service authorized by the State in a total amount not to exceed the Contract Maximum Liability established in Section C.1. The Contractor's compensation shall be contingent upon the satisfactory completion of units of service or project milestones defined in Section A. The Contractor shall be compensated based upon the following Service Rates and Payment Rates shown below:
AMOUNT PER SERVICE UNIT/MILESTONE TRANSACTION ---------------------- ----------- Driver's License renewals $2.50 Driver's License reinstatements $1.00 Professional License renewals $3.50 Corporate Certificates and Copies $2.00 TENNCare Eligibility Verification $0.00 Personalized Motor Vehicle Tag $3.00 Environmental Licenses and Permits $2.00 Simple Database Search $1.00 Intermediate Database Search $1.00 Vital Records $1.00
The Contractor shall be compensated for securing and supporting Premium Service Subscribers on an annual basis, the following annual fee:
SERVICE UNIT/MILESTONE ANNUAL FEE ---------------------- ---------- Premium Service Subscriber $75.00
The Contractor shall be compensated for each Consulting Classification Skill, based on the following payment rate per hour:
SERVICE/CLASSIFICATION PAYMENT RATE PER HOUR ---------------------- --------------------- Web Designer $65.00 Web Publisher $55.00 Advanced Web Publisher $80.00 Web Programmer/Analyst $65.00 Advanced Web Programmer/Analyst $80.00
The Contractor shall submit monthly invoices, in form and substance acceptable to the State with all of the necessary supporting documentation, prior to any payment. Such invoices shall be submitted for completed units of service or project milestones for the amount stipulated. The Contractor shall not be compensated for travel time to the primary location of service provision. C.4. TRAVEL COMPENSATION. The Contractor shall not be compensated or reimbursed for travel, meals, or lodging. C.5 PAYMENT PROCEDURE. The State will pay the Portal Contractor upon submission and approval of a consolidated invoice. The consolidated invoice should be broken down by State agency and related Portal application and should be available to the State in an electronic file format. The Portal Contractor will capture relevant accounting information so that Portal processing fees can be properly recorded in the State's financial system. The Contractor must provide an on-line Premium Subscriber Billing System for premium service subscribers. Subscribers must be able to access and review their invoices on-line over the Portal. The State will define to the Contractor the accounting information, credit terms and processing cycle for this billing process. The Premium Service Subscribers will pay the Contractor based upon these invoices. C.6. PAYMENT OF INVOICE. The payment of the invoice by the State shall not prejudice the State's right to object to or question any invoice or matter in relation thereto. Such payment by the State shall neither be construed as acceptance of any part of the work or service provided nor as an approval of any of the amounts invoiced therein. C.7. INVOICE REDUCTIONS. The Contractor's invoice shall be subject to reduction for amounts included in any invoice or payment theretofore made which are determined by the State, on the basis of audits conducted in accordance with the terms of this contract, not to constitute proper remuneration for compensable services. C.8. DEDUCTIONS. The State reserves the right to deduct from amounts which are or shall become due and payable to the Contractor under this or any contract between the Contractor and the State of Tennessee any amounts which are or shall become due and payable to the State of Tennessee by the Contractor. C.9. AUTOMATIC DEPOSITS. The Contractor shall complete and sign an "Authorization Agreement for Automatic Deposit (ACH Credits) Form." This form shall be provided to the Contractor by the State. Once this form has been completed and submitted to the State by the Contractor all payments to the Contractor, under this or any other contract the Contractor has with the State of Tennessee shall be made by Automated Clearing House (ACH). The Contractor shall not invoice the State for services until the Contractor has completed this form and submitted it to the State. D. STANDARD TERMS AND CONDITIONS: D.1. REQUIRED APPROVALS. The State is not bound by this Contract until it is approved by the appropriate State officials in accordance with applicable Tennessee State laws and regulations. D.2. MODIFICATION AND AMENDMENT. This Contract may be modified only by a written amendment executed by all parties hereto and approved by the appropriate Tennessee State officials in accordance with applicable Tennessee State laws and regulations. D.3. TERMINATION FOR CONVENIENCE. The State may terminate this Contract without cause for any reason. Said termination shall not be deemed a Breach of Contract by the State. The State shall give the Contractor at least ninety (90) days written notice before the effective termination date. D.3.a. The Contractor shall be entitled to receive compensation for satisfactory, authorized service completed as of the termination date, but in no event shall the State be liable to the Contractor for compensation for any service which has not been rendered. D.3.b. Upon such termination, the Contractor shall have no right to any actual general, special, incidental, consequential, or any other damages whatsoever of any description or amount. D.4. TERMINATION FOR CAUSE. If the Contractor fails to properly perform its obligations under this Contract in a timely or proper manner, or if the Contractor violates any terms of this Contract, the State shall have the right to immediately terminate the Contract and withhold payments in excess of fair compensation for completed services. Notwithstanding the above, the Contractor shall not be relieved of liability to the State for damages sustained by virtue of any breach of this Contract by the Contractor. D.5. SUBCONTRACTING. The Contractor shall not assign this Contract or enter into a subcontract for any of the services performed under this Contract without obtaining the prior written approval of the State. If such subcontracts are approved by the State, they shall contain, at a minimum, sections of this Contract pertaining to "Conflicts of Interest" and "Nondiscrimination" (sections D.6. and D.7.). Notwithstanding any use of approved subcontractors, the Contractor shall be the prime contractor and shall be responsible for all work performed. D.6. CONFLICTS OF INTEREST. The Contractor warrants that no part of the total Contract Amount shall be paid directly or indirectly to an employee or official of the State of Tennessee as wages, compensation, or gifts in exchange for acting as an officer, agent, employee, subcontractor, or consultant to the Contractor in connection with any work contemplated or performed relative to this Contract. D.7. NONDISCRIMINATION. The Contractor hereby agrees, warrants, and assures that no person shall be excluded from participation in, be denied benefits of, or be otherwise subjected to discrimination in the performance of this Contract or in the employment practices of the Contractor on the grounds of disability, age, race, color, religion, sex, national origin, or any other classification protected by Federal, Tennessee State constitutional, or statutory law. The Contractor shall, upon request, show proof of such nondiscrimination and shall post in conspicuous places, available to all employees and applicants, notices of nondiscrimination. D.8. RECORDS. The Contractor shall maintain documentation for all charges against the State under this Contract. The books, records, and documents of the Contractor, insofar as they relate to work performed or money received under this contract, shall be maintained for a period of three (3) full years from the date of the final payment and shall be subject to audit at any reasonable time and upon reasonable notice by the State, the Comptroller of the Treasury, or their duly appointed representatives. The financial statements shall be prepared in accordance with generally accepted accounting principles. D.9. MONITORING. The Contractor's activities conducted and records maintained pursuant to this Contract shall be subject to monitoring and evaluation by the State, the Comptroller of the Treasury, or their duly appointed representatives. D.10. PROGRESS REPORTS. The Contractor shall submit brief, periodic, progress reports to the State as requested. D.11. STRICT PERFORMANCE. Failure by any party to this Contract to insist in any one or more cases upon the strict performance of any of the terms, covenants, conditions, or provisions of this Contract shall not be construed as a waiver or relinquishment of any such term, covenant, condition, or provision. No term or condition of this Contract shall be held to be waived, modified, or deleted except by a written amendment signed by the parties hereto. D.12. INDEPENDENT CONTRACTOR. The parties hereto, in the performance of this Contract, shall not act as employees, partners, joint venturers, or associates of one another. It is expressly acknowledged by the parties hereto that such parties are independent contracting entities and that nothing in this Contract shall be construed to create an employer/employee relationship or to allow either to exercise control or direction over the manner or method by which the other transacts its business affairs or provides its usual services. The employees or agents of one party shall not be deemed or construed to be the employees or agents of the other party for any purpose whatsoever. The Contractor, being an independent contractor and not an employee of the State, agrees to carry adequate public liability and other appropriate forms of insurance, including adequate public liability and other appropriate forms of insurance on the Contractor's employees, and to pay all applicable taxes incident to this Contract. D.13. STATE LIABILITY. The State shall have no liability except as specifically provided in this Contract. D.14. FORCE MAJEURE. The obligations of the parties to this contract are subject to prevention by causes beyond the parties' control that could not be avoided by the exercise of due care including, but not limited to, acts of God, riots, wars, strikes, epidemics or any other similar cause. D.15. STATE AND FEDERAL COMPLIANCE. The Contractor shall comply with all applicable State and Federal laws and regulations in the performance of this Contract. D.16. GOVERNING LAW. This Contract shall be governed by and construed in accordance with the laws of the State of Tennessee. The Contractor agrees that it will be subject to the exclusive jurisdiction of the courts of the State of Tennessee in actions that may arise under this Contract. The Contractor acknowledges and agrees that any rights or claims against the State of Tennessee or its employees hereunder, and any remedies arising therefrom, shall be subject to and limited to those rights and remedies, if any, available under TENNESSEE CODE ANNOTATED, Sections 9-8-101 through 9-8-407. D.17. COMPLETENESS. This Contract is complete and contains the entire understanding between the parties relating to the subject matter contained herein, including all the terms and conditions of the parties' agreement. This Contract supersedes any and all prior understandings, representations, negotiations, and agreements between the parties relating hereto, whether written or oral. D.18. SEVERABILITY. If any terms and conditions of this Contract are held to be invalid or unenforceable as a matter of law, the other terms and conditions hereof shall not be affected thereby and shall remain in full force and effect. To this end, the terms and conditions of this Contract are declared severable. D.19. HEADINGS. Section headings of this Contract are for reference purposes only and shall not be construed as part of this Contract. E. SPECIAL TERMS AND CONDITIONS: E.1. CONFLICTING TERMS AND CONDITIONS. Should any of these special terms and conditions conflict with any other terms and conditions of this Contract, these special terms and conditions shall control. E.2. COMMUNICATIONS AND CONTACTS. All instructions, notices, consents, demands, or other communications required or contemplated by this Contract shall be in writing and shall be made by facsimile transmission, by overnight courier service, or by first class mail, postage prepaid, addressed to the respective party at the appropriate facsimile number or address as set forth below OR to such other party, facsimile number, or address as may be hereafter specified by written notice. The State: Bonnie Heithcock, State Portal Manager Department of Finance and Administration 312 8th Avenue, North 16th Floor, William R. Snodgrass Tennessee Tower 615-741-3700 (voice) 615-532-0471 (fax) The Contractor: Debra Luling, Portal General Manager National Information Consortium USA, Inc. 534 South Kansas Avenue, Suite 1210 Topeka, KS 66603-3406 785-296-5275 785-296-5563 All instructions, notices, consents, demands, or other communications shall be considered effectively given as of the day of delivery; as of the date specified for overnight courier service delivery; as of three (3) business days after the date of mailing; or on the day the facsimile transmission is received mechanically by the telefax machine at the receiving location and receipt is verbally confirmed by the sender if prior to 4:30 p.m. CST. Any communication by facsimile transmission shall also be sent by United States mail on the same date of the facsimile transmission. E.3. SUBJECT TO FUNDS AVAILABILITY. The Contract is subject to the appropriation and availability of State and/or Federal funds. In the event that the funds are not appropriated or are otherwise unavailable, the State reserves the right to terminate the Contract upon written notice to the Contractor. Said termination shall not be deemed a breach of Contract by the State. Upon receipt of the written notice, the Contractor shall cease all work associated with the Contract. Should such an event occur, the Contractor shall be entitled to compensation for all satisfactory and authorized services completed as of the termination date. Upon such termination, the Contractor shall have no right to recover from the State any actual, general, special, incidental, consequential, or any other damages whatsoever of any description or amount. E.4. BREACH. A party shall be deemed to have breached the Contract if any of the following occurs: I) failure to perform in accordance with any term or provision of the Contract; II) partial performance of any term or provision of the Contract; III) any act prohibited or restricted by the Contract, or IV) violation of any warranty. For purposes of this contract, items I through IV shall hereinafter be referred to as a "Breach." E.4.a. Contractor Breach--In event of a Breach by Contractor, the state shall have available the following remedies as described further herein: E.4.a.i. Actual Damages and any other remedy available at law or equity; E.4.a.ii. Liquidated Damages--the State may withhold as liquidated damages the amounts designated on Attachment A of this contract from any amounts owed Contractor. E.4.a.ii.(1) The State shall notify Contractor in writing of the Breach and the amounts to be withheld as Liquidated Damages. E.4.a.ii.(2) The parties agree that due to the complicated nature of the Contractor's obligations under this Contract it would be difficult to specifically designate a monetary amount for a Breach by Contractor as said amounts are likely to be uncertain and not easily proven. Contractor hereby represents and covenants it has carefully reviewed the liquidated damages contained in Attachment A and agree that said amounts represent a reasonable relationship between the amount and what might reasonably be expected in the event of Breach, and are a reasonable estimate of the damages that would occur from a Breach. E.4.a.ii.(3) It is hereby agreed between the parties that the liquidated damages represent solely the damages and injuries sustained by the State in losing the benefit of the bargain with Contractor and do not include: any injury or damage sustained by a third party and Contractor agrees that the liquidated damage amount is in addition to any amounts Contractor may owe the State pursuant to the indemnity provision or other section of this Contract; E.4.a.ii.(4) The State may continue to withhold the liquidated damages or a portion thereof until the Contractor cures the Breach, the State exercises its option to declare a Partial Default, or the State terminates the Contract. E.4.a.ii.(5) The State is not obligated to assess liquidated damages before availing itself of any other remedy. E.4.a.ii.(6) The State may chose to discontinue liquidated damages and avail itself of any other remedy available under this Contract or at law or equity; provided, however, Contractor shall receive a credit for said liquidated damages previously withheld except in the event of a Partial Default. E.4.a.iii. Partial Default E.4.a.iii.(1) In the event the State declares a Partial Default, the State shall provide written notice to the Contractor of the following: E.4.a.iii.(1)(a) The date which Contractor shall terminate providing the service associated with the Breach; and E.4.a.iii.(1)(b) The date the State will begin to provide the service associated with the Breach. E.4.a.iii.(2) The State may revise the time periods contained in the notice written to the Contractor. E.4.a.iii.(3) In the event the State declares a Partial Default, the State may withhold, together with any other damages associated with the Breach, from the amounts due the Contractor the greater of: E.4.a.iii.(3)(a) amounts which would be paid the Contractor to provide the defaulted service as provided in subsection (4); or E.4.a.iii.(3)(b) the cost to the State of providing the defaulted service, whether said service is provided by the State or a third party. E.4.a.iii.(4) To determine the amount the Contractor is being paid for any particular service, the Department shall be entitled to receive within five (5) days any requested material from Contractor. The State shall make the final and binding determination of said amount. E.4.a.iii.(5) The State may assess liquidated damages against the Contractor for any failure to perform which ultimately results in a Partial Default with said liquidated damages to cease when said Partial Default is effective. E.4.a.iii.(6) Upon Partial Default, the Contractor shall have no right to recover from the State any amount whether actual, general, special, incidental, consequential, or of any other whatsoever description. E.4.a.iii.(7) Contractor agrees to cooperate fully with the State in the event a Partial Default is taken. E.4.a.iv. Termination of the Contract--In the event of a Breach by Contractor, the State may terminate the Contract immediately or in stages. E.4.a.iv.(1) The Contractor shall be notified of the termination writing by the State. Said notice shall hereinafter be referred to as Termination Notice. E.4.a.iv.(2) The Termination Notice may specify either that the termination is to be effective immediately, on a date certain in the future, or that the Contractor shall cease operations under this Contract in stages. E.4.a.iv.(3) Contractor agrees to cooperate with the State in the event of a termination, Partial Default or Partial Takeover. E.4.a.iv.(4) In the event of a termination, the State may withhold any amounts which may be due Contractor without waiver of any other remedy or damages available to the State at law or at equity. E.4.a.iv.(5) In the event of a termination, the Contractor shall be liable to the State for any and all damages incurred by the State and any and all expenses incurred by the State which exceed the amount the State would have paid Contractor under this Contract. E.4.b. State Breach--In the event of a Breach of contract by the State, the Contractor shall notify the State in writing within thirty (30) days of any Breach of contract by the State. Said notice shall contain a description of the Breach. E.4.b.i. Failure by the Contractor to provide the written notice described in section E.4.b. shall operate as an absolute waiver by the Contractor of the State's Breach. E.4.b.ii. In no event shall any Breach on the part of the State excuse the Contractor from full performance under this Contract. E.4.b.iii. In the event of Breach by the State, the Contractor may avail itself of any remedy at law in the forum with appropriate jurisdiction; provided, however, failure by the Contractor to give the State written notice and opportunity to cure as described in section E.4.b. operates as a waiver of the State's Breach. E.4.b.iv. Failure by the Contractor to file a claim before the appropriate forum in Tennessee with jurisdiction to hear such claim within one (1) year of the notice described in section E.4.b. shall operate as a waiver of said claim in its entirety. It is agreed by the parties this provision establishes a contractual period of limitations for any claim brought by the Contractor. E.5. PARTIAL TAKEOVER. The State may, at its convenience and without cause, exercise a partial takeover of any service which the Contractor is obligated to perform under this Contract, including but not limited to any service which is the subject of a subcontract between Contractor and a third party, although the Contractor is not in Breach (hereinafter referred to as "Partial Takeover"). Said Partial Takeover shall not be deemed a Breach of Contract by the State. E.5.a. Contractor shall be given at least thirty (30) days prior written notice of said Partial Takeover with said notice to specify the area(s) of service the State will assume and the date of said assumption. E.5.b. Any Partial Takeover by the State shall not alter in any way Contractor's other obligations under this Contract. E.5.c. The State may withhold from amounts due the Contractor the amount the Contractor would have been paid to deliver the service as determined by the State. The amounts shall be withheld effective as of the date the State assumes the service. E.5.d. Upon Partial Takeover, the Contractor shall have no right to recover from the State any actual, general, special, incidental, consequential, or any other damages whatsoever of any description or amount. E.6. PERFORMANCE BOND. Upon approval of the Contract by all appropriate State officials in accordance with applicable State laws and regulations, the Contractor shall furnish a performance bond in the amount equal to one million dollars ($1,000,000.00), guaranteeing full and faithful performance of all undertakings and obligations under this Contract for the initial Contract term and all extensions thereof. The bond shall be in the manner and form prescribed by the State and must be issued through a company licensed to issue such a bond in the State of Tennessee. The Contractor shall obtain the required performance bond in form and substance acceptable to the State and provide it to the State no later than 9/8/2000. Failure to provide the performance bond prior to the deadline as required shall result in contract termination. In lieu of a performance bond, an irrevocable letter of credit may be substituted as a surety deposit. The substitution of a performance bond with a surety deposit, as well as the form and substance of such a surety deposit, must be approved by the State prior to its submittal and may be rejected by the State at its sole discretion. E.7. STATE FURNISHED PROPERTY. The Contractor shall be responsible for the correct use, maintenance, and protection of all articles of nonexpendable, tangible, personal property furnished by the State for the Contractor's temporary use under this Contract. Upon termination of this Contract, all property furnished shall be returned to the State in good order and condition as when received, reasonable use and wear thereof excepted. Should the property be destroyed, lost, or stolen, the Contractor shall be responsible to the State for the residual value of the property at the time of loss. E.8. INCORPORATION OF ADDITIONAL DOCUMENTS. Included in this Contract by reference are the following documents: I) The Contract document and its attachments II) All Clarifications and addenda made to the Contractor's Proposal III) The Request for Proposal and its associated amendments IV) Technical Specifications provided to the Contractor V) The Contractor's Proposal In the event of a discrepancy or ambiguity regarding the Contractor's duties, responsibilities, and performance under this Contract, these documents shall govern in order of precedence detailed above. E.9. WORKPAPERS SUBJECT TO REVIEW. The Contractor shall make all audit, accounting, or financial analysis workpapers, notes, and other documentation available for review by the Comptroller of the Treasury or his representatives, upon request, during normal working hours either while the analysis is in progress or subsequent to the completion of this Contract. E.10. PUBLIC FUNDING NOTICE. All notices, informational pamphlets, press releases, research reports, signs, and similar public notices prepared and released by the Contractor relative to this Contract shall include the statement, "This project is funded under an agreement with the State of Tennessee." Any such notices by the Contractor shall be approved by the State. E.11. PROHIBITED ADVERTISING. The Contractor shall not refer to this Contract or the Contractor's relationship with the State hereunder in commercial advertising in such a manner as to state or imply that the Contractor or the Contractor's services are endorsed. E.12. CONFIDENTIALITY OF RECORDS. Strict standards of confidentiality of records shall be maintained in accordance with the law. All material and information provided to the Contractor by the State or acquired by the Contractor on behalf of the State whether verbal, written, magnetic tape, cards or otherwise shall be regarded as confidential information in accordance with the provisions of State law and ethical standards and shall not be disclosed, and all necessary steps shall be taken by the Contractor to safeguard the confidentiality of such material or information in conformance with State law and ethical standards. The Contractor will be deemed to have satisfied its obligations under this section by exercising the same level of care to preserve the confidentiality of the State's information as the Contractor exercises to protect its own confidential information so long as such standard of care does not violate the applicable provisions of the first paragraph of this section. The Contractor's obligations under this section do not apply to information in the public domain; entering the public domain but not from a breach by the Contractor of this Contract; previously possessed by the Contractor without written obligations to the State to protect it; acquired by the Contractor without written restrictions against disclosure from a third party which, to the Contractor's knowledge, is free to disclose the information; independently developed by the Contractor without the use of the State's information; or, disclosed by the State to others without restrictions against disclosure. It is expressly understood and agreed the obligations set forth in this section shall survive the termination of this Contract. E.13. COPYRIGHTS AND PATENTS. The Contractor agrees to indemnify and hold harmless the State of Tennessee as well as its officers, agents, and employees from and against any and all claims or suits which may be brought against the State for infringement of any laws regarding patents or copyrights which may arise from the Contractor's performance of this Contract. In any such action brought against the State, the Contractor shall satisfy and indemnify the State for the amount of any final judgment for infringement. The Contractor further agrees it shall be liable for the reasonable fees of attorneys for the State in the event such service is necessitated to enforce the terms of this Contract or otherwise enforce the obligations of the Contractor to the State. The State shall give the Contractor written notice of any such claim or suit and full right and opportunity to conduct the Contractor's own defense thereof. E.14. PUBLIC ACCOUNTABILITY. If this Contract involves the provision of services to citizens by the Contractor on behalf of the State, the Contractor agrees to establish a system through which recipients of services may present grievances about the operation of the service program, and the Contractor agrees to display a sign stating: "NOTICE: This Contractor is a recipient of taxpayer funding. If you observe an employee engaging in any activity which you consider to be illegal or improper, please call the State Comptroller's toll free hotline: 1-800-232-5454" Said sign shall be displayed in a prominent place, located near the passageway(s) through which the public passes to receive State funded services. E.15. AUTHORIZED INDIVIDUALS. Each party hereto has provided the other party hereto with a list identifying the individuals from whom the other party is authorized to accept any notices, requests, demands, or other advice which may be given hereunder by the party providing such list. Said lists, which are attached hereto as Attachment B, shall be valid until revoked or amended by further written notice. The parties hereto shall only be entitled to rely on notices, requests, demands, or other advice given by such individuals. E.16. YEAR 2000. Notwithstanding any provisions contained in the contract, the contractor warrants that each hardware, commercial or custom software, firmware, and middleware product delivered under this contract and listed below ("listed item") shall be able to accurately process date/time data (including, but not limited to, displaying, calculating, comparing and sequencing) from, into, and between the twentieth and twenty-first centuries, including leap year calculations, when used in accordance with the product documentation provided by the contractor and subject to the following: I. In the case of hardware, commercial software, firmware, or middleware, the aforementioned warranty shall apply to the extent that information technology not provided pursuant to this contract, but used in combination with the listed items, properly exchanges date/time data with it. II. Notwithstanding the foregoing, in cases involving any development of new software or system(s) ("custom software"), the contractor further warrants that any contractor-provided data interfaces between listed items and items or systems not provided pursuant to this contract shall accurately process date/time data, as defined above and further qualified by specific interface requirements; provided that the date/time data is accurate within the items or systems not provided. In any case, if the contract requires that specific listed items must perform as a system in accordance with the foregoing warranty, then that warranty shall apply to those listed products as a system. Nothing in this warranty shall be construed to limit any rights or remedies the State may otherwise have under this contract with respect to defects other than year 2000 performance. The remedies available to the State under this warranty shall include repair or replacement of any listed product whose non-compliance is discovered and made known to the contractor in writing within the term of that listed item's warranty, as expressed elsewhere in this agreement. The contractor shall proceed with repair or replacement immediately upon notification by the State of non-compliance, time being of the essence. The State of Tennessee, at its sole option, may require the contractor, at any time, to demonstrate that procedures have been established to comply with all the obligations contained herein. This Section shall constitute the exclusive warranty regarding the Year 2000 and is in lieu of all other Year 2000 warranties, whether express or implied, including the implied warranties of merchantability and fitness for a particular purpose. E.17. YEAR 2000 HOLD HARMLESS. As required by Tennessee Code Annotated, Section 12-4-118, the contractor shall hold harmless and indemnify the State of Tennessee; its officers and employees; and any agency or political subdivision of the State for any breach of contract caused directly or indirectly by the failure of computer software or any device containing a computer processor to accurately or properly recognize, calculate, display, sort or otherwise process dates or times. E.18. ADDITIONAL PORTAL APPLICATION SERVICES. During the course of this Contract, the State may request the Contractor to design additional applications for the State Service Portal. The additional applications must be within the scope of this Contract. The State will provide the Contractor with documented requirements for the application and the Contractor will provide the requesting agency a proposed transaction fee or funding mechanism for the application. If the requesting agency and the Contractor mutually agree on the transaction fee or funding mechanism, the requested application and the associated transaction fee or funding mechanism will be reviewed by the Portal Advisory Committee. The Portal Advisory Committee must approve and prioritize all Portal applications. Approval of additional portal applications will be effected through an amendment to the contract before any work can begin on any approved application. E.19. STATE OWNERSHIP OF WORK PRODUCTS. The State shall have all ownership right, title, and interest, including ownership of copyright, in all work products, including application software, source code, or modifications thereof and associated documentation, created, designed, and/or developed solely for the State under this Contract (known collectively as "Work Products"). The State shall have royalty-free, non- exclusive, and unlimited rights to use, disclose, reproduce, and/or publish, for any purpose whatsoever, all said Work Products. The Contractor shall furnish the Work Products upon request of the State, in accordance with the Contract and applicable State law. The Contractor will be able to use the application source code and documentation where they may have applicability with other state and local government entities. E.20. CONTRACTOR PROPRIETARY PRODUCTS. The Contractor shall retain ownership right, title, and interest in the portions of the Portal applications that were not developed solely using State moneys or resources (known collectively as "Contractor Proprietary Products"). The Contractor hereby grants the State a perpetual, royalty-free, irrevocable, unlimited, and nonexclusive right to use the Contractor Proprietary Products for the State's business purposes, including, but not limited to, use for State's business purposes by any future service providers with whom the State may contract. The Contractor warrants that Contractor is duly authorized to grant this right. E.21. WORK PRODUCTS IN ESCROW. All Work Products and Contractor Portal Applications used to support the State Service Portal shall be maintained in escrow with an escrow agent. The State shall have access to the Products held in escrow in the event of Contractor business failure, Contractor breach of contract, Contract termination, or as necessary for disaster recovery purposes. E.22. POST-CONTRACT TRANSITION SERVICES. In the event that a different vendor is awarded the subsequent contract, the Contractor agrees to provide continuing services as the State transitions itself to receive such services from the new vendor. The services required are those as defined under this contract and shall be provided on a month-to-month basis for a period not to exceed twelve (12) months. Charges for these services shall be at the unit rates then current at the time of contract termination. IN WITNESS WHEREOF: NATIONAL INFORMATION CONSORTIUM USA, INC. - -------------------------------------------------------------------------------- HARRY HERINGTON, PRESIDENT DEPARTMENT OF FINANCE AND ADMINISTRATION: - -------------------------------------------------------------------------------- C. WARREN NEEL, PH.D., COMMISSIONER DATE APPROVED: DEPARTMENT OF FINANCE AND ADMINISTRATION: - -------------------------------------------------------------------------------- C. WARREN NEEL, PH.D., COMMISSIONER DATE COMPTROLLER OF THE TREASURY: - -------------------------------------------------------------------------------- JOHN G. MORGAN, COMPTROLLER OF THE TREASURY DATE ATTACHMENT A LIQUIDATED DAMAGES SERVICE LEVEL AGREEMENTS The additional remedies identified in this section shall not be construed to limit or restrict the State's application of any other remedies available under this Contract. As used in A, B, and C below, "total monthly costs for all effected services purchased under this contract" refers to the "amount due the Contractor by the state, based upon the payment methodology described in Section C.3 of the Contract." If, at the State's sole discretion, the Contractor is unable to meet a performance standard due to causes beyond the Contractor's control, the remedies described below may not be assessed. A. Portal Availability The following shall define the Service Level Agreement (SLA) commitment for the State Service Portal's availability: Performance Standard: State Service Portal available 99.7% of the time for the entire calendar month.* Penalty: Failure to meet the above availability requirement will result in a penalty payment of 1% of the total monthly costs for all effected services purchased under this contract. Failure to meet the above availability requirement for a second consecutive month will result in a penalty payment of 2% of the total monthly costs for all effected services purchased under this contract. Failure to meet the above availability requirement for a "n" consecutive month will result in a penalty payment of n% of the total monthly costs for all effected services purchased under this contract. B. Security Management The following shall define the SLA commitment for the State Service Portal's Security Management: Performance Standard: State Service Portal Security Management identifies security breaches, attempted breaches or attacks and TAKES corrective action within 2 hours of the occurrence. Penalty: Failure to meet the above security management requirement will result in a penalty payment of 2% of the total monthly costs for all effected services purchased under this contract for each occurrence. Failure to meet the above availability requirement for a second consecutive month will result in a penalty payment of 2.5% of the total monthly costs for all effected services purchased under this contract for each occurrence. Failure to meet the above availability requirement for a "n" consecutive month will result in a penalty payment of the prior (n minus 1) month's penalty percentage with an additional 0.5% added of the total monthly costs for all effected services purchased under this contract for each occurrence. C. Application Availability The following shall define the SLA commitment for the State Service Portal's specific application availability: Performance Standard: State Service Portal applications provided by the Contractor will be available to the customer 99.5% of the time for the entire calendar month. Penalty: Failure to meet the above application availability requirement will result in a penalty payment of 1% of the total monthly costs for all effected services purchased under this contract. Failure to meet the above availability requirement for a second consecutive month will result in a penalty payment of 2% of the total monthly costs for all effected services purchased under this contract. Failure to meet the above availability requirement for a "n" consecutive month will result in a penalty payment of n% of the total monthly costs for all effected services purchased under this contract. * "For the entire calendar month" refers to the portion of the month that the application or portal site was implemented. All time references refer to scheduled uptime and exclude scheduled downtimes. ATTACHMENT B AUTHORIZED INDIVIDUALS The State: Chief of Information Systems Department of Finance and Administration State Portal Manager Department of Finance and Administration The Contractor: Portal General Manager National Information Consortium USA, Inc. President National Information Consortium USA, Inc. President National Information Consortium EX-10.46 13 a2041279zex-10_46.txt EXHIBIT 10.46 SELF FUNDED ELECTRONIC GOVERNMENT SERVICES TERM CONTRACT RESULTING FROM RFP #01-252B NATIONAL INFORMATION CONSORTIUM USA, INC. DOING BUSINESS IN MONTANA THROUGH THE SUBSIDIARY: MONTANA INTERACTIVE, INC. CONTRACT TERMS AND CONDITIONS This contract is a result of RFP #01-252B. All references to the RFP in this contract are references to RFP #01-252B unless otherwise specified. 1. Parties This contract is entered into by and between the Department of Administration of the State of Montana, (hereinafter referred to as the "Department"), whose address and telephone number are: Department of Administration Information Services Division (ISD) P.O. Box 200113 Helena, MT 59620 406-444-2700 and National Information Consortium USA, Inc. (NICUSA), whose Federal ID Number, address and telephone number are: National Information Consortium USA, Inc. Doing business in Montana through the subsidiary Montana Interactive, Inc. (MII) Federal ID Number: 91-207-3898 677 East 730 South, Suite 204 American Fork, Utah 84003 801-756-7095 2. Effective Date, Duration and Renewal 2.1 This contract shall take effect on January 2, 2001. This contract shall terminate on January 1, 2006 unless terminated earlier in accordance with the terms of this contract. 2.2 This contract may be renewed by the Department for five (5) one-year periods or for any increments between one (1) and five (5) years as agreed upon by both parties. In no case may this contract run longer than ten (10) years. Reference: 18-4-313, MCA. 3. Definition of Project For purposes of this contract, "Project" is defined as self-funded electronic government (e-government) services and other e-government services provided by NICUSA to the State under this contract. 1 4. Work Order Procedure 4.1 For the purpose of this section, "work order" refers to both a Transaction Fund Work Order and an Agency Funded Work Order. 4.2 All new implementations of applications under this contract where funding is being provided by the transaction fund must have an approved Transaction Fund Work Order (see Attachment A). Each Transaction Fund Work Order, at a minimum, must include the information provided in Attachment A. In some cases, work may commence prior to final approval of the Transaction Fund Work Order. Upgrades and enhancements to existing applications do not need to be done through work orders. 4.3 All work conducted by NICUSA under this contract where an agency or program is providing the funding must be done through an approved Agency Funded Work Order (see Attachment A). Each Agency Funded Work Order, at a minimum, must include the information provided in Attachment A. If the agency or program is funding the project, work can commence upon the approval of the work order. 4.4 NICUSA and the agency or program will jointly fill out the information on the work order, sign it and submit it to the Department for signature. The Department will review the work order for compliance with this contract, state standards, the strategic direction of the State, the impact on the state's infrastructure, and other logistical matters. Work orders may be for Internet, or intranet applications, or for the support of such applications. Work orders must fit within the scope of this contract and the intent of the RFP. The Department acting on its own, or acting on the advice of the Governing Board, may disapprove any work order. If a work order is disapproved, all associated work must immediately cease and desist. 5. Transaction Fund, Revenue, and Remittance 5.1 The transaction fund is defined as a fund containing transaction fee revenue, as defined in Section 7 of the RFP, generated from the use of applications put into production through this contract. Other applicable revenue may also reside in the fund such as that defined in NICUSA's response to Section 7.8.5 of the RFP. 5.2 The transaction fund must be established as one or more accounts insured by the FDIC in financial institutions. The accounts shall be established as trust accounts with the funds held for the benefit of the State. NICUSA shall furnish the Department with the names of the institutions, the account numbers, and the names of those persons having signatory 2 authority. The accounts must be established in financial institutions licensed in Montana. Exceptions must be approved by both parties. 5.3 NICUSA is responsible for billing, collecting, and administering all revenue from applications put into production under this contract unless otherwise stated in the work order. NICUSA is responsible for depositing revenue into the transaction fund. NICUSA is responsible for all statutory fees owed to the State. 5.4 NICUSA is responsible for remitting the State's revenues to the Department of Revenue as outlined in Section 4.9 of the RFP. NICUSA shall follow any special remittance provisions in approved work orders. At no time must revenue due to the State be held longer than thirty-one (31) days without being remitted to the Department of Revenue. Revenue that will be remitted to the Department of Revenue includes, but is not limited to, statutory fees and facility charges owed by NICUSA to the State. 5.5 NICUSA is responsible for paying associated operation expenses, including all reasonable and required capital reinvestment in the Project. All remaining funds are to be retained by NICUSA. 6. Governing Board The State will establish an advisory Governing Board for the Department. Final authority resides with the Department. The Governing Board will advise on the following in relation to the Project: - Policy; - Work orders proposing a fee; - Fee changes; - General priorities of work orders and investments; - Service Management Business Plan; - Management of the transaction fund; and - Other issues as requested by the Department The Governing Board will use the Contractor's response to Section 7 of the RFP as a guide in its advice regarding fees, revenue, and NICUSA's return on investment versus reinvestment into the State. 7. Ownership of Data The State maintains ownership of all State data provided through the Project. Customer data collected by NICUSA may not be used for any purpose except in furtherance of the Project. In the event this contract is terminated, the necessary customer data collected by NICUSA will be provided to the Department or their designee. 3 8. NICUSA Employees 8.1 Employees of NICUSA may be given access to secured facilities and data. Prior to having access to secured facilities and data, NICUSA's employees must submit to the same level of scrutiny as state employees and be approved by the State for access. NICUSA's employees, in carrying out this project, must follow all applicable laws, procedures and policies. 8.2 This contract was awarded based on NICUSA's response to the RFP. If the key personnel outlined in the RFP response change, the Department must be notified immediately. If any of the key personnel outlined in the RFP leave, or are otherwise removed and are unable to fulfill this contract, they must be replaced by equally experienced and competent personnel. The Department may provide input into the selection process of key personnel directly fulfilling the terms of this contract. 8.3 The Department will notify NICUSA of any concerns with key personnel directly fulfilling the terms of this contract. NICUSA agrees to make a good faith effort to address the Department's concerns, which may include replacing key personnel. 9. Consideration/Payments (Outside of the Transaction Fund) 9.1 When work conducted by NICUSA is being funded by an agency or program, outside of the transaction fund in consideration for services provided, the ordering agency or program will pay within thirty (30) days of receipt of a properly executed invoice. The final payment, plus retainer (if applicable), will be made within thirty (30) days of receipt of a properly executed invoice and upon acceptance of the completed project. 9.2 The Department or ordering agencies may withhold payments to NICUSA regarding the disputed portion if NICUSA has not performed in accordance with this contract or the approved work order. 10. Political Subdivisions This contract will be offered to all entities defined in Section 1.1 of the RFP. However, the Governing Board as well as the Department must approve all work orders, or other requests regarding this contract, from political subdivisions. The Governing Board shall establish the priority of such requests and determine the policies and procedures for providing services to political subdivisions under this contract. At no time shall services be provided to political subdivisions to the detriment of the State. 4 11. Warranties NICUSA warrants that products (including hardware and software) and services offered through this contract will conform to the specifications requested, be fit and sufficient for the intended purpose, be of good material and workmanship and free from defect. To be fit and sufficient for the intended purpose includes adequate system performance. 12. Scope, Amendment, and Interpretation 12.1 This contract consists of 27 numbered pages, RFP #01- 252B as amended, NICUSA's response to the RFP including the clarification question responses, and negotiations. In the case of dispute or ambiguity, the order of precedence of document interpretation is in that same order. 12.2 These documents contain the entire agreement of the parties. Any enlargement, alteration or modification requires a written amendment signed by both parties. Mutually agreeable changes may be made to this contract provided that the terms of this contract: 12.2.1 Do not materially change NICUSA's obligations to the State as expressed in the contract. 12.2.2 Do not violate the Constitution, Laws, or Rules of Montana. 12.2.3 Do not impose onerous obligations or conditions that materially change the value of the product or services to be provided to the Department. 12.2.4 Do not contravene the mandatory requirements of the RFP. 13. Non-Exclusive Contract The Project is intended to be the State's single comprehensive method for e-government services. NICUSA is not the exclusive source for e-government services for the State. State entities electing to purchase or provide e-government services through sources other than this contract will follow existing procurement vehicles, or go through a competitive procurement process. However, NICUSA has exclusive rights to links on the State Portal for the applications developed by NICUSA, but will not be given exclusive rights to state data. The Project may, however, be the exclusive method for electronic services and data access for state agencies at their discretion as indicated on a work order. NICUSA has exclusive rights to the transaction fund for application development. However, at the Department's discretion, NICUSA may be required to verify that 5 their pricing, service and delivery on a specific application project are competitive with other vendors who distribute a similar application. If an application project is determined by the Department not to be competitive, then funding from the transaction fund may be made available to the State for the project. 14. Contract Management Liaison This contract is managed by the Information Services Division of the Department of Administration for the State of Montana in accordance with 2-17-501, MCA. Contract management inquiries and problems should be addressed to: Audrey Hinman, Chief Internet Technology Services Bureau Information Services Division P.O. Box 200113 Helena, MT 59620-0113 Telephone: 406-444-2700 FAX: 406-444-2701 15. Contractor Liaison NICUSA shall have an Account Executive in place for the duration of this contract. The Account Executive is the liaison to the Contract Management Liaison and will assume responsibility for the coordination of all products and services or projects under this contract. The Account Executive will meet with the Contract Management Liaison, agency project manager, agency procurement manager, and others as necessary to resolve any conflicts or disagreements under this contract. If the Account Executive changes, the Department must be notified immediately. The Department reserves the right to request NICUSA to change the Account Executive, or any representative serving the State, if in the opinion of the Department the current Account Executive, or representative, is not adequately meeting the needs of the State. Michael Muller, General Manager Montana Interactive, Inc. 677 East 730 South, Suite 204 American Fork, UT 84003 Telephone: 801-756-7095 FAX: 801-756-4643 16. Audit Requirements 16.1 With the approval of the Department, NICUSA shall select an independent auditor to audit, at its own expense, NICUSA's books and records, including the transaction fund books and records, on an annual basis during the term of the contract. NICUSA shall make such books and 6 records available at its principal place of business. All audit findings including, but not limited to, the audited financial statements, auditor opinions, reports on internal control, findings and recommendations, and management letters are to be provided to the Department for review within one hundred twenty (120) days after the close of NICUSA's fiscal year. In addition, NICUSA is subject to any further audit and review determined necessary by the Department or the Governing Board, after furnishing reasonable notice to NICUSA. This includes audits conducted by the Legislative Auditor. 16.2 To the extent an audit report discloses any discrepancies in charges, billings, or financial records, and following a period for review and verification of the amount by NICUSA, NICUSA will adjust the discrepancy as soon as reasonably possible, but not to exceed ninety (90) days. NICUSA shall cooperate to assure that verification is completed in a timely manner. NICUSA also agrees to make other changes requested by the Department, that are agreed to by NICUSA, to comply with recommendations resulting from any audit. 17. Reporting Requirements 17.1 NICUSA must provide monthly income statements and balance sheets for the transaction fund to the Department. 17.2 NICUSA must provide a monthly status report to the Department of all projects or work orders in progress and an overall view of the operation of the services provided under this contract. 17.3 NICUSA will measure and report monthly to the Department on growth trends and usage of the services provided under this contract. The report shall include number of hits, access, transactions and other performance measures or metrics as mutually agreed upon by the Department and NICUSA. NICUSA will measure and report monthly to the Department on the performance of the servers provided under this contract including swap rate, CPU usage, memory usage and disk usage. 17.4 NICUSA will submit a proposed three (3) year Service Management Business Plan to the Department including activities, schedules, deliverables, budgets, and financial forecasts. Section 7 of the RFP is to be used as a guideline for the initial Plan. NICUSA will submit the initial Plan to the Department within sixty (60) days of the execution of this contract. The Plan shall be revised and submitted on an annual basis. 17.5 The Department reserves the right to request additional reports regarding this contract. NICUSA agrees to make a good faith effort to provide all requested reports. 7 18. Contract Performance Security Contract Performance Security in the form of a surety bond #103332645 in the amount of $250,000 has been received by the State Procurement Bureau and will be returned to NICUSA after successful completion of this contract. This security must remain in effect for the entire contract period. The State may collect damages from contract security if NICUSA materially fails to perform or provide service as required. This could range from going out of business and leaving the State with no service provider or no finished or supported product, to completing the contract but doing so unsatisfactorily or as required by contract. The damages available to the State are limited to the additional costs incurred to select a new service provider or the cost of correcting the problem. The State may also collect from the security the overhead costs to the State in acquiring a new service provider or the overhead time expended to correct the problem. Reference: 18-4-312, MCA. 19. Headings The heading or captions of the sections and subsections of this contract are inserted for convenience only, shall not be deemed to be part of this contract, and in no way define, limit, extend or describe the scope of intent of any provisions hereof. 20. Access and Retention of Records 20.1 NICUSA agrees to provide the Department, the Legislative Auditor or their authorized agents access to any records necessary to determine contract compliance. 20.2 NICUSA agrees to create and retain all records supporting the products and services rendered for a period of three (3) years after either the completion date of this contract or the conclusion of any claim, litigation or exception relating to this contract taken by the State of Montana or a third party. Reference: 18-1-118, MCA. 21. Tax Exemption The State of Montana is exempt from Federal Excise Taxes (#81-0302402). 22. Product Requirements 8 NICUSA certifies that all applications offered through this contract are fully compatible with the State's computing environment as specified in Section 2 of the RFP. Should any application provided through this contract fail to exhibit fully compatible performance; NICUSA will be responsible for assuming all costs associated with correcting, or replacing all non- compliant applications. The Department shall have the final authority to determine compliance of an application. 23. Assignment, Transfer and Subcontracting NICUSA may not assign, transfer or subcontract any portion of this contract to any non-NIC-related entities without the express written consent of the Department. Reference: 18-4-141, MCA. NICUSA is solely responsible for ensuring that subcontractors comply with all terms and conditions of this contract. All contracts NICUSA engages in with non-NICUSA entities on behalf of the State to fulfill this contract must have the ability to be assigned, transferred, or assumed by the Department. This specifically includes all infrastructure solutions outlined in Section 4 of the RFP. NICUSA must provide copies of all said contracts to the Department. 24. Choice of Law and Venue This contract is governed by the laws of Montana. The parties agree that any litigation concerning this contract must be brought in the First Judicial District in and for the County of Lewis and Clark, State of Montana. Reference: 18-1-401, MCA. 25. Compliance with Laws 25.1 NICUSA must comply with all applicable federal and state law including the prevailing wage laws. 25.2 NICUSA must comply with the Montana Human Rights Act, the Civil Rights Act of 1964, the Age Discrimination Act of 1975, the Americans with Disabilities Act of 1990, and Section 504 of the Rehabilitation Act of 1973. 25.3 If one or more provisions of this contract are deemed to be unlawful or unconstitutional or stricken by a court of law, all valid provisions that are severable from the invalid provisions remain in effect and are valid and binding on the parties. If any provision hereof is in conflict with any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed to be modified to conform to such statute, rule of law, court order, or judgment. 9 26. Indemnification NICUSA agrees to indemnify and hold harmless the State, its officials, agents, and employees, while acting within the scope of their duties as such, harmless from and against all claims, demands, and causes of action of any kind or character, including the cost of defense, arising in favor of NICUSA's employees or third parties on account of bodily or personal injuries, death, or damage to property arising out of services performed, goods or rights to intellectual property provided or omissions of services or in any way resulting from the acts or omission of NICUSA and/or its agents, employees, subcontractors or its representatives under this agreement, all to the extent of NICUSA's negligence. 27. Patent and Copyright Protection 27.1 In the event of any claim by any third party against the Department that the products furnished under this contract infringe upon or violate any patent or copyright, the Department shall promptly notify NICUSA. NICUSA shall defend such claim, in the Department's name or its own, as appropriate, but at NICUSA's expense. NICUSA will indemnify the Department against all costs, damages and attorney's fees that a Court finally awards as a result of such claim. If the Department reasonably concludes that its interests are not being properly protected, it may enter any action. However, any settlement by the Department with the party alleging such infringement or violation shall not be binding upon NICUSA and NICUSA shall be under no obligation to pay or indemnify the Department. Further, if principles of governmental or public law are involved, the State of Montana may participate in the defense of any such action. 27.2 If any product furnished is likely to or does become the subject of a claim of infringement of a patent or copyright, then NICUSA may, at its option, procure for the Department the right to continue using the alleged infringing product, or modify the product so that it becomes non-infringing. If none of the above options can be accomplished, or if the use of such product by the Department shall be prevented by permanent injunction, the Department agrees to return the product at NICUSA's request and NICUSA agrees to grant the Department a credit for full cost of the product and any related product provided by NICUSA which can no longer be used effectively without the use of the infringing product. 27.3 This section 27 shall not apply if the infringement, or claim thereof, is based upon the use of products supplied by NICUSA in combination with other software not made or supplied by NICUSA (Department or other vendor supplied), or the use of products by the Department with apparatus, data or programs not furnished or supplied by NICUSA (Department or other vendor supplied), or products not manufactured or supplied by 10 NICUSA (Department or other vendor supplied). This section 27 will apply to all products offered by NICUSA. 28. Intellectual Property 28.1 All patent and other legal rights in or to inventions arising out of activities funded in whole or in part by this contract must be available to the Department for royalty- free and nonexclusive licensing to the State. NICUSA shall notify the Department in writing of any invention conceived or reduced to practice in the course of performance of this contract. 28.2 The Department shall have a royalty-free, nonexclusive, and irrevocable right to reproduce, publish or otherwise use and authorize others to use for operation of the State of Montana portal only, copyrightable property created under this contract. 28.3 All application source code and documentation together with all updates and revisions (collectively referred to below as "The Software") provided to the Department under this contract shall be the intellectual and tangible property of NICUSA. However, the State and all subsequent e- government service providers working on the State of Montana portal, shall be granted a perpetual for-use-only license by NICUSA to The Software only for purposes of this Project at no additional fee. This license includes rights to modify the code and applications, as the State deems appropriate. Designs, logos, graphics, and trademarks related to the Project are the property of the State and are licensed to NICUSA only for the duration of the contract. 28.4 The Software shall be deposited with an Escrow Agent on a quarterly basis. NICUSA and the Department shall mutually choose the Escrow Agent. The Department will review, approve and subsequently receive from NICUSA, an executed copy of the software escrow agreement between NICUSA and the Escrow Agent. NICUSA will notify the Department 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 Contract Management Liaison, at least semiannually, detailing all account activity during the previous period. Over the term of the contract, NICUSA will have the authority to remove superseded source code. Updates to The Software shall be escrowed and owned as stated above. The Department has full rights in verifying that this process is properly being followed. An exclusion to this provision applies to software or documentation created by third parties and purchased by NICUSA. 11 28.5 The Software shall be released to the Department upon termination of this contract, for disaster recovery purposes, if NICUSA is declared insolvent through bankruptcy proceedings, if NICUSA is unable to perform its obligations to the State under the contract, or as otherwise provided in the agreement with the Escrow Agent. In any of the events listed above, The Software from the Escrow Agent, and any updates or new applications not yet in escrow, shall be delivered to the Department immediately. 29. Insurance Requirements (Receipt of) 29.1 General Requirements: NICUSA shall maintain for the duration of the contract, at its cost and expense, insurance against claims for injuries to persons or damages to property, including contractual liability which may arise from or in connection with the performance of the work by NICUSA, agents, employees, assigns, or subcontractors. The insurance shall cover such claims as may be caused by any negligent act or omission. 29.2 Specific Requirements for Commercial General Liability: NICUSA shall purchase and maintain Occurrence coverage with combined single limits for bodily injury, personal injury, and property damage of $1,000,000 per occurrence and $2,000,000 aggregate per year to cover such claims as may be caused by any act, omission, or negligence of NICUSA or its officers, agents, representatives, assigns or subcontractors. 29.3 Additional Insured Status: The State, its officers, officials, employees, and volunteers are to be covered as additional insureds; for liability arising out of activities performed by or on behalf of NICUSA, including the insured's general supervision of NICUSA; products and completed operations; premises owned, leased, occupied, or used. 29.4 Deductibles and Self-Insured Retentions: Any deductible or self-insured retention must be declared to and approved by the Department. At the request of the agency either: 1) The insured shall reduce or eliminate such deductibles or self-insured retentions as respect to the State, its officers, officials, employees, and volunteers, or; 2) NICUSA shall procure a bond guaranteeing payment of losses and related investigations, claims administration, and defense expenses. 29.5 Certificate of Insurance/Endorsements: A certificate of insurance, indicating compliance with the required coverages, has been received by the State Procurement Bureau. NICUSA must notify the State immediately, of any material change in insurance coverage, such as changes in limits, coverage, change in status of policy, etc. 29.6 Primary Insurance: NICUSA's insurance coverage shall be primary insurance with respect to the State, its officers, officials, employees, and 12 volunteers and shall apply separately to each project or location. Any insurance or self-insurance maintained by the State, its officers, officials, employees or volunteers shall be excess of NICUSA's insurance, and shall not contribute with it. 30. Workers' Compensation/Independent Contractor's Exemption Contractors are required to maintain Workers' Compensation or an Independent Contractor's Exemption covering NICUSA and/or employees while performing work for the State of Montana in accordance with Section 39- 71-120/401/405, MCA. Neither NICUSA nor its employees are employees of the State. This insurance/exemption must be valid for the entire contract period. 31. Meetings Each party is required to meet with the other to resolve technical or contractual problems that may occur during the term of this contract. Meetings will occur as problems arise and will be coordinated by the Department. NICUSA will be given a minimum of three (3) full working days notice of meeting date, time, and location. Face to face meetings are desired. However, upon mutual agreement, a conference call meeting may be substituted. Consistent failure to participate in problem resolution meetings (two (2) consecutive missed or rescheduled meetings), or failure to make a good faith effort to resolve problems (as determined by the Department), may result in termination of this contract. 32. Notice Written notice sent by certified mail, return receipt requested, shall be deemed made when received or initially refused by the other party. 33. Termination 33.1 If NICUSA fails to perform the work in accordance with the provisions of this contract, or breaches any contract term and does not cure or does not correct such failure within a period of thirty (30) days after receipt of the Department's written notice thereof, the Department may, by written notice, terminate the whole or any part of this contract. Such written 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 NICUSA to avoid termination of the contract. The phrase "for cause" shall mean: 33.1.1 Any material breach or evasion by NICUSA of the terms or conditions of this contract and its amendments, if any. 13 33.1.2 Substantial cessation or material degradation of Network services by NICUSA shall be cause for immediate termination of this contract. 33.1.3 A conviction of fraud, misappropriation, embezzlement, malfeasance, significant misfeasance, or illegal conduct by NICUSA, its officers, directors or by any corporation or shareholder owning a controlling interest in NICUSA. 33.1.4 Dissolution of NICUSA or forfeiture of its corporate existence without assignment to a successor acceptable to the Department. 33.1.5 NICUSA's doing any of the following: 33.1.5.1 Commencing a voluntary case or other proceeding seeking liquidation, reorganization, or other relief with respect to itself or its debts under any bankruptcy, insolvency, or other similar law now or hereafter in effect; or filing an answer admitting the material allegations of a petition filed against NICUSA in any involuntary case or other proceeding commenced against NICUSA seeking liquidation, reorganization, or other relief under any bankruptcy, insolvency, or other similar law now or hereafter in effect with respect to NICUSA or either of their debts; or consenting to any such relief or to the appointment of or taking possession by any such official in any voluntary case or other proceeding commenced against NICUSA seeking liquidation, reorganization, or other relief under any bankruptcy, insolvency, or other similar law now or hereafter in effect with respect to NICUSA or either of their debts; 33.1.5.2 Seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of NICUSA or any substantial part of NICUSA's 's assets; 33.1.5.3 Making an assignment for the benefit of creditors; 33.1.5.4 Failing, being unable, or admitting in writing the inability generally to pay its debts as they become due; or 33.1.5.5 Taking any action to authorize any of the foregoing. 14 33.1.6 Intentional or negligent act or omission by NICUSA resulting in the disclosure of any information clearly indicated as being confidential. 33.2 The Department, at its sole discretion, may terminate or reduce the scope of this contract or any work order if available funding is reduced for any reason. Reference: 18- 4-313, MCA. 33.3 If NICUSA fails to perform the work in accordance with any work order, or any contract term in the work order and does not cure or does not correct such failure within a period of thirty (30) days after receipt of the Department's written notice thereof, the Department may, by written notice, terminate the whole or any part of the work order. 33.4 The Department may terminate this contract at any time and without cause if directed to do so by statute. 33.5 NICUSA shall have the right to terminate this contract for any material breach or evasion by the Department of the terms or conditions of this contract and its amendments, if any, subject to cure, by providing written notice of termination to the Department. Such notice shall specify the time, the specific reason that gives rise to the termination, and shall specify reasonable appropriate action that can be taken by the Department to avoid termination of the contract. NICUSA shall provide a specified period of time of up to thirty (30) calendar days for the Department to cure breaches and deficiencies of its performance obligations under this contract. 34. Infrastructure Support NICUSA shall support agency developers (internal employees or contractors) with the integration of separately developed agency applications into the infrastructure provided through this contract. The Department agrees to be an intermediary to cooperatively support these efforts, as resources allow. 35. Transition Period 35.1 If for any reason this contract is terminated other than for a material breach by the Department, or upon expiration of this contract without extension, or at the end of any extension of this contract, at the option of the Department NICUSA shall continue to operate under this contract in accordance with all its terms and conditions for a period of up to twelve (12) months from the time of expiration or notification of termination from the Department to NICUSA. The intent of this provision is to insure continuation of e-government services while a successor (which may be the State) is chosen and installed. The Department shall notify NICUSA 15 at the earliest possible opportunity, but in any event, no later than the date of notification of termination, that it shall continue operations and the duration of time for such continuation. 35.2 If for any reason this contract is terminated the Department has the option of purchasing equipment acquired under this contract at fair market value. If NICUSA engages in any lease agreements for equipment provided under this contract, the Department must have the option to assume the lease in case of contract termination. The Department shall have necessary access to all equipment and software provided under this contract in order to support the Department's work as well as agencies. 35.3 If for any reason this contract is terminated, the remaining funds in the transaction fund after all settlements are to be turned over to the Department as soon as the reasonable course of business allows, but not more than thirty (30) days. 36. Year 2000 Compliance NICUSA warrants that all hardware, software, and/or firmware delivered, developed, modified, or licensed, under this contract, shall be able to 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, when used in accordance with the product documentation provided by NICUSA, provided that all products (e.g. hardware, software, firmware) used in combination with other designated products properly exchange data with it. The remedies available to the State under this warranty shall include repair or replacement of any product whose non-compliance is discovered and made known to NICUSA, in writing, within this warranty period or within one year after acceptance, whichever is longer. Nothing in this warranty shall be construed to limit any rights or remedies the State may otherwise have under this contract, with respect to defects, other than Year 2000 compliance performance. 16 37. Execution The parties, through their authorized agents, have executed this contract on the dates set out below. CONTRACTOR - NATIONAL INFORMATION CONSORTIUM USA, INC. ----------------------------------- ------------------------------ Signature Date HARRY HERINGTON ----------------------------------- Name PRESIDENT ----------------------------------- Title 12 CORPORATE WOODS 10975 BENSON ST., SUITE 390 ----------------------------------- Address OVERLAND PARK, KS 66210 91-207-3898 ----------------------------------- ------------------------------ City, State, Zip Code Federal Employer ID # DEPARTMENT OF ADMINISTRATION - INFORMATION SERVICES DIVISION ----------------------------------- ------------------------------ Signature Date ANTHONY J. HERBERT ----------------------------------- Name ADMINISTRATOR ----------------------------------- Title Approved as to form and content: ----------------------------------- Legal Counsel, Department of Administration ----------------------------------- State Procurement Bureau 17 ATTACHMENT A Montana Interactive, Inc. (MII) will meet with all state agencies as requested to discuss their e-government plans. MII should involve the Department in these meetings when applicable. The appropriate version of the work order should be completed for all potential applications and MII must give the agency a reasonable expectation of the priority and schedule for each application. For large applications, to avoid delays in approval, MII should provide the Department drafts of work orders prior to their completion. An agency may indicate on a work order that the Project will be the exclusive method for electronic services and data access for their data source. TRANSACTION FUND WORK ORDER FOR MONTANA INTERACTIVE, INC. (MII) SELF-FUNDED ELECTRONIC GOVERNMENT SERVICES TERM CONTRACT DATE: TRACKING NUMBER: AGENCY: DIVISION OR PROGRAM: PROJECT NAME: DESCRIPTION OF WORK: (Include the data sources, what fields or data will be accessed or modified, whether production data or replicated data will be used, how updates to data sources will be conducted and record lock/contention handled, what the complete business process will be from start to finish, what the complete process will be for the end user, access methods available to the end user, any qualification procedures used for end users, a description of the capabilities of the application) DEVELOPMENT TOOLS AND (Identify whether Oracle will be used, Visual Basic, SOFTWARE USED: etc. and any third party software necessary for the implementation of the application, specifically state whether any non- state standard hardware or software will be involved) SECURITY: 18 IMPACT ON THE (Location of application, impact on hardware, software, INFRASTRUCTURE: the state network, and on statewide enterprise license agreements) SCHEDULE (INCLUDING (Must include estimated completion dates) MILESTONES): DELIVERABLES: ACCEPTANCE/COMPLETION CRITERIA: ESTIMATED AGENCY HOURS: FEE COLLECTED ON BEHALF OF AGENCY: REMITTANCE PROVISIONS: FEE COLLECTED ON BEHALF OF TRANSACTION FUND: MII PROJECT MANAGER: AGENCY PROJECT MANAGER: END USER SUPPORT (HELP (Clearly define how problems that need to be passed DESK): onto the State will be handled and who will be responsible for their resolution and how the problem will be tracked to completion.) ADDITIONAL TERMS: (At no time can a work order term be in conflict with a contract term.) - ---------------------------------------- ------------------------------ Michael Muller, General Manager Date Montana Interactive, Inc. - ---------------------------------------- ------------------------------ (Insert Agency Authority), (Insert Title) Date (Insert Agency, Division and/or Program) - ---------------------------------------- ------------------------------ Audrey Hinman, Chief Date Internet Technology Services Bureau, ISD 19 - ---------------------------------------- ------------------------------ (Insert Chair of Governing Board), Chair Date Montana Electronic Government Advisory Council (Needs to sign only if a fee is proposed) 20 AGENCY FUNDED WORK ORDER FOR MONTANA INTERACTIVE, INC. (MII) SELF-FUNDED ELECTRONIC GOVERNMENT SERVICES TERM CONTRACT DATE: TRACKING NUMBER: AGENCY: DIVISION OR PROGRAM: PROJECT NAME: DESCRIPTION OF WORK: (Include the data sources, what fields or data will be accessed or modified, whether production data or replicated data will be used, how updates to data sources will be conducted and record lock/contention handled, security, what the complete business process will be from start to finish, what the complete process will be for the end user, access methods available to the end user, any qualification procedures used for end users, a description of the capabilities of the application) DEVELOPMENT TOOLS AND (Identify whether Oracle will be used, Visual Basic, SOFTWARE USED: etc. and any third party software necessary for the implementation of the application, specifically state whether any non- state standard hardware or software will be involved) SECURITY: IMPACT ON THE (Location of application, impact on hardware, software, INFRASTRUCTURE: the state network, and on statewide enterprise license agreements) SCHEDULE (INCLUDING (Must include estimated completion dates) MILESTONES): DELIVERABLES: ACCEPTANCE/COMPLETION CRITERIA: ESTIMATED MII HOURS: ESTIMATED AGENCY HOURS: 21 RATE(S) CHARGED: (This can be stated as an amount billable per hour, not to exceed a certain amount, or a fixed agreed to amount; an hourly rate without a cap is not acceptable) PAYMENT SCHEDULE: (Outline the complete payment schedule, include any holdbacks due to non- compliance with the approved work order or missing scheduled milestones such as the completion date) REMITTANCE PROVISIONS (IF ANY): MII PROJECT MANAGER: AGENCY PROJECT MANAGER: PRODUCTION MAINTENANCE (Will MII have an ongoing responsibility to maintain ARRANGEMENT: and support this application, or will the agency or program take over once the application is in production? If MII will be responsible for maintaining and supporting the application, will the agency be providing the funding to do so?) END USER SUPPORT (HELP (Will MII be taking calls from the end users of the DESK) application, or will the agency's help desk take the calls? If MII will be responsible for supporting the application, will the agency be providing the funding to do so? If MII is providing the support, clearly define how problems that need to be passed onto the State will be handled and who will be responsible for their resolution and how the problem will be tracked to completion. If the agency has requirements for reporting regarding support issues, they should be stated here.) ADDITIONAL TERMS: (At no time can a work order term be in conflict with a contract term.) - ---------------------------------------- ------------------------------ Michael Muller, General Manager Date Montana Interactive, Inc. - ---------------------------------------- ------------------------------ (Insert Agency Authority), (Insert Title) Date (Insert Agency, Division and/or Program) 22 - ---------------------------------------- ------------------------------ Audrey Hinman, Chief Date Internet Technology Services Bureau, ISD 23 ATTACHMENT B INFRASTRUCTURE AGREEMENT FOR MONTANA INTERACTIVE, INC. (MII) It is the intent of the Department that the electronic government (e-government) services infrastructure be established in the most cost effective and efficient manner to lessen the burden on Montana's taxpayers. The infrastructure established through this contract will be available to all state agencies for their e-government applications and web sites (not just those provided by NICUSA). Use of the infrastructure is subject to the Governing Board's policies and procedures. The infrastructure must support the State's Internet portal as well as a separate server to support the State's intranet portal for the duration of the contract. Work orders completed through this contract may be for both Internet and intranet applications. This agreement is to outline the resources that will be provided by the Department and the resources that will be provided by NICUSA as an investment in the State. This agreement is to set the foundation for the relationship between the Department and NICUSA; however, it is subject to change as necessary when both parties agree. All rates quoted below are for fiscal year 2001 and are subject to change in future years as determined by the Legislature and/or the Department. NICUSA must provide all equipment and do all installation necessary to connect the servers to the network connection provided and must follow the published Mid-Tier Standards for the State. HARDWARE It is required that hardware provided by NICUSA meet the State's needs on an ongoing basis as deemed appropriate by the Governing Board. All hardware provided must be state standard equipment (IBM RS/6000 mid-tier boxes and Dell PowerEdge Intel boxes). The hardware housed in the State Data Center must be stored in tower racks. The procurement of tower racks to store the hardware is the responsibility of NICUSA. All consoles should be on a switch and NICUSA is limited to two physical consoles. The consoles and any console switches are the responsibility of NICUSA. Contractor employees will be authorized for physical access to the servers provided under this contract only. Access to secured areas will be granted on an as needed basis and is available 7 x 24. Appropriate procedures must be followed to gain access to secured areas. Remote administration of servers is encouraged. 24 The following hardware at a minimum will be housed in the State Data Center (it is understood that NICUSA will require additional servers than those listed below): INTERNET PORTAL SERVER: The State requires NICUSA provide a server for the State Portal (as defined in Section 4 of the RFP), agency web sites, and e-government services. This server will sit outside of the State's firewall. INTERNET PORTAL DEVELOPMENT SERVER: The State requires NICUSA provide a development server for the State Portal (as defined in Section 4 of the RFP), agency web sites, and e-government services. This server will sit outside of the State's firewall. INTRANET PORTAL SERVER: The State requires NICUSA provide a server for the State intranet, agency intranet web sites, and internal e-government services. This server will sit inside of the State's firewall. INTRANET PORTAL DEVELOPMENT SERVER: The State requires NICUSA provide a development server for the State intranet, agency intranet web sites, and internal e-government services. This server will sit inside of the State's firewall. SERVICES SERVICES PROVIDED BY ISD: 1. Space in the State Data Center including fire protection, air conditioning for continuously controlled temperature and humidity, and physical security with a centrally administered personnel access control system requiring pre-approved individual access 2. Connection of all servers to the State Data Network (SummitNet) 3. Back-up and recovery of servers using Harbor agents through the network with off-site storage following the State's policies 4. UPS electrical protection fully isolated from utility power surges, fluctuations, spikes, and high frequency electrical noise; provides for controlled shutdown of computer equipment during power outages 5. Continuous monitoring is available as an option whereas Department employees will notify NICUSA when a server is down 6. Scheduling of jobs for reliable execution of specific batch job streams to accommodate customer's production schedule needs is an option 25 7. Notification of all scheduled maintenance and outages 8. Ability to participate in weekly problem and change management meetings SERVICES PROVIDED BY NICUSA: 1. The necessary hardware and software to support production dependencies; NICUSA must provide all equipment and do all installation necessary to connect the servers to the network connection provided 2. Disaster recovery planning and any costs incurred with the disaster recovery plan; the disaster recovery plan must include the procedures NICUSA will follow when a server goes down with a hardware problem such as a system disk crash, hard parity check in a RAM card, etc.; the written disaster recovery plan must be submitted to the Department for approval within sixty (60) days of contract execution and revised annually 3. System stability, reliability, and recoverability 4. Capacity planning and ongoing analyses of changes in system utilization to best assure adequate configuration to accommodate ongoing production workload demands 5. Performance monitoring of system deliverables, including response times and other time-related production deliverables 6. Hardware maintenance, upgrades, and all equipment provided under this contract 7. All operating systems used must be state standard operating systems (AIX, Windows NT, or Windows 2000). NICUSA is responsible for procuring and installing all software provided under this contract. NICUSA is responsible for all operating system installations, upgrades, maintenance, software installations, and software changes. NICUSA is responsible for all operating systems and software support. RATES CHARGED BY ISD: A Service Level Agreement will be signed by both parties for all facility services provided by ISD. NICUSA will be charged $3,000 per year ($250 per month) per tower rack (approximately six (6) servers) for housing in the State Data Center. NICUSA is limited to two consoles regardless of the number of tower racks. 26 STATE NETWORK CONNECTIVITY LOCAL OFFICE CONNECTIVITY: NICUSA will be responsible for a monthly site rate to connect their local office to SummitNet. The monthly site rate varies depending on the service requested. The connection options are 56K at $250 per month or T-1 at $650 per month. These costs do not include the circuit costs. ISD will provide the service up to and including the router. NICUSA is responsible for all LANs and equipment in their office to connect to the router. INTERNET CONNECTIVITY STATE'S CURRENT CAPACITY: At the time of contract signing, the State intends to have a physical ATM DS3 connection to the Internet, with 9Mbps being used. NICUSA will be responsible for paying for additional capacity required for their use. The Department is willing to negotiate with NICUSA on the appropriate sharing arrangement, as additional capacity is needed. ORACLE Under the existing State of Montana Oracle Enterprise License Agreement, the Department will provide all required Oracle licenses. It is understood by NICUSA that these licenses are for exclusive use by NICUSA to carry out the terms of this contract and may not be used for any other purpose or entity. The State of Montana Oracle Enterprise License Agreement is for State of Montana agencies only and does not include and may not be used for political subdivisions. The Department will provide NICUSA with access to their Oracle web server and NICUSA is encouraged to use this web server whenever possible. If NICUSA (or an agency) wishes to have the Department host Oracle databases or applications, they will be charged ISD's published mid-tier rates. If NICUSA hosts their own Oracle databases, there will be no additional charges. The State has the right for agency and Department employees to perform technical reviews on all Oracle databases and applications prior to implementation. E-MAIL It would be very beneficial for the General Manager of Montana Interactive, Inc. (and perhaps all employees) to be on the state's e-mail system for the benefit of meeting scheduling and access to the state's address book. The cost is $6.00 per mailbox per month. 27 EX-21.1 14 a2041279zex-21_1.txt EXHIBIT 21.1 Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT
JURISDICTION OF NAME OF SUBSIDIARY INCORPORATION - ------------------ --------------- 1. Kansas Information Consortium, Inc. Kansas, U.S. 2. Indiana Interactive, Inc. Indiana, U.S. 2a. City-County Interactive, L.L.C. Indiana, U.S. 3. National Information Consortium USA, Inc. Kansas, U.S. 4. Arkansas Information Consortium, Inc. Arkansas, U.S. 5. Nebraska Interactive, Inc. Nebraska, U.S. 6. Virginia Interactive, Inc. Virginia, U.S. 7. Iowa Interactive, Inc. Iowa, U.S. 8. New England Interactive, Inc. Maine, U.S. 9. Utah Interactive, Inc. Utah, U.S. 10. Hawaii Information Consortium, Inc. Hawaii, U.S. 11. Idaho Information Consortium, Inc. Idaho, U.S. 12. NIC Commerce, Inc. Colorado, U.S. 13. NIC Conquest, Inc. Colorado, U.S. 14. National Information Consortium Technologies, Inc. California, U.S. 15. Intelligent Decision Technologies, Inc. Colorado, U.S. 16. National Online Registries, Inc. Colorado, U.S. 17. Bay Area Interactive, Inc. California, U.S. 18. Florida Local Interactive, Inc. Florida, U.S. 19. Texas Local Interactive, Inc. Texas, U.S. 20. NIC Canadian Business, Inc. Colorado, U.S. 21. National Information Consortium Company Canada Nova Scotia, Canada 22. NIC Holdings Company Canada Nova Scotia, Canada 23. NIC European Business Limited London, England
EX-23.1 15 a2041279zex-23_1.txt EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-83171 and 333-37000) of National Information Consortium, Inc. of our report dated March 23, 2001 relating to the consolidated financial statements, which appears in this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP Kansas City, Missouri April 2, 2001 -----END PRIVACY-ENHANCED MESSAGE-----