<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 14, 1997
REGISTRATION NO. 333-16805
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ELECTRONIC PROCESSING, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
MISSOURI 7389 48-1056429
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Number) Identification No.)
Incorporation or
Organization)
Identification No.)
</TABLE>
501 KANSAS AVENUE
KANSAS CITY, KANSAS 66105
(913) 321-6392
(Address and telephone number of principal executive offices)
TOM W. OLOFSON
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
501 KANSAS AVENUE
KANSAS CITY, KANSAS 66105
(913) 321-6392
(Name, address, including zip code, and telephone number of agent for service)
--------------------------
COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C> <C>
LEE R. PETILLON, ESQ. ROBERT C. LEVY, ESQ. MELODIE R. ROSE, ESQ.
MARK T. HIRAIDE, ESQ. SEIGFREID, BINGHAM, LEVY, SELZER & WILLIAM K. SJOSTROM, JR., ESQ.
PETILLON & HANSEN GEE FREDRIKSON & BYRON, P.A.
21515 HAWTHORNE BOULEVARD, SUITE 2800 COMMERCE TOWER 900 SECOND AVENUE SOUTH
1260 911 MAIN STREET 1100 INTERNATIONAL CENTRE
TORRANCE, CALIFORNIA 90503 KANSAS CITY, MISSOURI 64105 MINNEAPOLIS, MINNESOTA 55402
(310) 543-0500 (816) 421-4460 (612) 347-7000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLES OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) PER SECURITY (2) PRICE (2) FEE
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value......... 1,840,000 $3.75 $6,900,000 $2,091
Underwriter's warrant (3)............. 160,000 $50.00 $50 --
Total................................. 2,000,000 $6,900,050 $2,091
</TABLE>
(1) Includes 240,000 shares of Common Stock which may be purchased by the
Underwriter to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933.
(3) To be issued to the Underwriter.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION (THE
"COMMISSION"), ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 6, 1996
1,600,000 SHARES
[LOGO]
COMMON STOCK
Electronic Processing, Inc. ("EPI" or the "Company") is offering hereby
1,600,000 shares of Common Stock. Prior to this offering (the "Offering"), there
has been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price per share will be between $3.25
and $3.75. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The Company has applied to have
the Common Stock approved for inclusion in the Nasdaq SmallCap Market-TM- under
the proposed symbol "EPIQ."
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING OF PAGE 6 AND
"DILUTION" ON PAGE 11.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
Per Share......................... $ $ $
Total (3)......................... $ $ $
</TABLE>
(1) Does not reflect additional compensation to be received by R. J. Steichen &
Company (the "Underwriter"), in the form of (i) a nonaccountable expense
allowance equal to 3% of the total Price to Public; and (ii) a warrant to
purchase up to 160,000 shares of Common Stock at a per share price of 120%
of the initial offering price, exercisable for a period of four years
commencing one year from the date of this Prospectus (the "Underwriter's
Warrant"). In addition, the Company has agreed to indemnify the Underwriter
against certain liabilities. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $485,000 which includes the nonaccountable expense allowance described in
Note 1 above.
(3) The Company has granted to the Underwriter a 45-day option to purchase up to
240,000 additional shares of Common Stock on the same terms as set forth
above solely to cover over-allotments, if any. If the Underwriter exercises
such option in full, the total price to the public will be , the total
underwriting discount will be , and the total proceeds to the Company
will be . See "Underwriting."
The shares of Common Stock are offered by the Underwriter named herein on a
"firm commitment" basis, subject to prior sale, when, as and if delivered to and
accepted by it and subject to certain other conditions, including its right to
reject any order in whole or in part. It is expected that delivery of
certificates representing the Common Stock will be made against payment therefor
on or about , 1997 in Minneapolis, Minnesota.
RJ STEICHEN & COMPANY
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
[PHOTOGRAPHS]
GRAPHIC ENTITLED "ADVANCED BANKRUPTCY MANAGEMENT SYSTEMS" DEPICTING CERTAIN
FEATURES OF THE COMPANY'S TCMS PRODUCT: CREDITOR DISTRIBUTION, ELECTRONIC
BANKING, ASSET IMAGING, GOVERNMENT REPORTING, AND ELECTRONIC COURT INTERFACE. A
SEPARATE EMBEDDED GRAPHIC ENTITLED "REVENUE STRUCTURE" DEPICTS THE FOLLOWING:
"EPI LICENSES SOFTWARE AND HARDWARE TO TRUSTEE END-USER; TRUSTEE END-USER
DEPOSITS ASSET PROCEEDS TO PARTNERSHIP BANK; AND PARTNERSHIP BANK; AND
PARTNERSHIP BANK PAYS EPI MONTHLY FEE."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED BY THE MORE DETAILED INFORMATION AND
FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS
PROSPECTUS (THE "PROSPECTUS"). ALL INFORMATION CONCERNING THE COMPANY'S
AUTHORIZED, ISSUED AND OUTSTANDING COMMON STOCK AND ALL FINANCIAL INFORMATION
PRESENTED ON A PER SHARE BASIS REFLECT A SIX-FOR-ONE STOCK SPLIT EFFECTIVE,
THROUGH A STOCK DIVIDEND, AS OF NOVEMBER 4, 1996. UNLESS OTHERWISE INDICATED,
THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITER'S
OPTION TO PURCHASE FROM THE COMPANY UP TO 240,000 SHARES OF COMMON STOCK TO
COVER OVERALLOTMENTS, IF ANY.
THE COMPANY
Electronic Processing, Inc. ("EPI" or the "Company") serves a national
client base with specialty products that facilitate financial and administrative
aspects of bankruptcy management, including legal noticing, claims management,
funds distribution and government reporting. The Company develops, markets,
licenses and supports internally developed and proprietary software products
primarily to trustees under Chapter 7 and Chapter 13 of the Bankruptcy Code of
1978, as amended (the "Bankruptcy Code"), as well as to other users of the
federal bankruptcy system, including trustees in Chapter 11 and Chapter 12. EPI
assimilates software development, network operations, value-added services and
comprehensive post-installation support into an integrated environment that
offers clients a high level of coordinated support. Between 1993 and 1996, the
Company recruited a new operating management team to develop new products and
enter new markets.
Insolvency is an ever-present, integral part of the national economy, and
the Company's revenues increase as the number of cases processed by EPI's
software grows. The last two years have experienced the greatest increase in the
rate of bankruptcy filings in a decade. Industry analysts reported that
bankruptcy filings topped the one million mark for the first time in 1996. The
Company estimates that there are approximately 550,000 active cases pending in
Chapter 13 and approximately $2 billion on deposit from Chapter 7 liquidations.
Bankruptcy proceedings encompass Chapter 7 (liquidation), Chapter 13 (individual
reorganization), Chapter 11 (business reorganization) and Chapter 12 (farm
reorganization).
NationsBank, the fourth largest national banking company, has entered into
an exclusive national marketing arrangement with EPI to promote an integrated
package of banking services and the Company's software. In this strategic
alliance, the Company licenses its proprietary TCMS (Trustee Case Management
System) software to Chapter 7 trustees, who in turn deposit with NationsBank all
cash proceeds from asset sales. These funds are commonly on deposit for several
years. EPI receives a monthly percentage of the total of such deposits from
NationsBank. TCMS is a Windows95-Registered Trademark-/Windows NT
4-Registered Trademark- application and features custom electronic banking
features, court interface functions, and case management tools that were
developed by the Company.
In late 1996, the Company completed testing of CASEPOWER, a new
Windows95/Windows NT 4 product. The Company plans to begin marketing this
product directly to Chapter 13 trustees in early 1997. In addition to standard
licensing fees, the Company generates revenues each month based upon the number
of cases in the trustee's database, which in some instances can exceed 10,000
active cases per trustee. CASEPOWER uses the Oracle7-Registered Trademark-
database engine and may be ported to several key hardware computer platforms.
CASEPOWER incorporates advanced technologies, including document imaging and
scanning, bar coding, speech recognition and video help into an extensive
library of bankruptcy processing functions.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
3
<PAGE>
The Company is implementing a strategic business plan to enter affiliated
markets to build upon its existing proficiency in software development and
insolvency management. Other potential marketing opportunities for the Company
may include complementary lines of business, such as document imaging systems,
database extraction and updating services, bankruptcy petition management,
commercial claims recovery systems, and specialty products for international
insolvency markets.
The Company was incorporated in Missouri on July 15, 1988, when the Company
completed a transaction whereby it acquired all of the assets of an unrelated
predecessor corporation, including the name of the Company. The Company's
executive offices are located at 501 Kansas Avenue, Kansas City, Kansas, 66105,
and its telephone number is (913) 321-6392.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered......................... 1,600,000 shares
Common Stock to be outstanding after the
Offering.................................... 3,400,000 shares (1)
Use of Proceeds.............................. Repayment of corporate debt and capital
leases; software development; sales/marketing
expansion; and general corporate purposes,
including working capital.
Proposed Nasdaq SmallCap Market-TM- Symbol... EPIQ
</TABLE>
- ------------------------
(1) Excludes: (i) 270,000 shares of Common Stock reserved for issuance under the
Company's stock option plan of which 119,500 shares are issuable upon
exercise of options to be outstanding upon completion of this Offering; and
(ii) up to 160,000 shares of Common Stock issuable upon exercise of the
Underwriter's Warrant. See "Management -- Stock Option Plan" and
"Underwriting."
4
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ----------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating revenues................................ $4,984,697 $5,233,959 $3,843,292 $4,638,685
Cost of goods sold and direct costs............... 2,794,605 2,785,715 2,069,993 2,444,527
---------- ---------- ---------- ----------
Gross profit.................................... 2,190,092 2,448,244 1,773,299 2,194,158
Operating expenses................................ 1,800,531 2,035,689 1,446,177 1,780,666
---------- ---------- ---------- ----------
Income from operations.......................... 389,561 412,555 327,122 413,492
Other income(expenses)............................ (283,199) (261,685) (193,622) (200,288)
---------- ---------- ---------- ----------
Net income...................................... $ 106,362 $ 150,870 $ 133,500 $ 213,204
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Pro forma net income (1).......................... $ 52,362 $ 82,870 $ 74,500 $ 123,204
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Pro forma net income per share (1)................ $ .03 $ .05 $ .04 $ .07
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares outstanding (2).... 1,800,000 1,800,000 1,800,000 1,800,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------------
AS ADJUSTED
ACTUAL PRO FORMA (3) (4)
------------ ------------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets...................................................... $ 4,378,628 $ 4,385,328 $ 6,985,328
Working capital (deficit)......................................... (366,551) (510,911) 2,727,394
Long-term debt and subordinated debt less current portion......... 2,250,093 2,250,093 696,060
Total stockholders' equity........................................ 909,302 482,342 5,082,342
</TABLE>
- --------------------------
(1) Pro forma figures are unaudited. For all periods indicated, the Company
operated as an S Corporation and was not subject to federal and certain
state income taxes. The Company will terminate its status as an S
Corporation and become a C Corporation subject to federal and state income
taxes as of the closing date of this Offering. Pro forma net income figures
assume an effective corporate tax rate of 39% and include an allowance for
additional taxes that would have been paid on certain non-deductible
expenses, assuming the Company had been operating as a C Corporation for all
periods presented. See note 9 of the financial statements included herein
and "Prior S Corporation Status."
(2) Excludes (i) 270,000 shares of Common Stock reserved for issuance under the
Company's stock option plan of which 119,500 shares are subject to options
to be oustanding as of the completion of this Offering and (ii) the
Underwriter's Warrant. See "Management -- Stock Option Plan" and
"Underwriting."
(3) Pro forma gives effect to a $275,900 provision for income taxes (which
consists of a $6,700 current asset and a $282,600 long term liability)
resulting from the tax effect of temporary differences in the tax basis and
financial statement reporting basis of assets and liabilities at September
30, 1996 that would have been reflected had the Company's S Corporation
election terminated at such date. The Company will also declare a final S
Corporation distribution equal to its previously undistributed earnings only
since January 1, 1996 through the termination of the S Corporation status.
This final distribution will not exceed $250,000. For the nine-month period
January 1, 1996 through September 30, 1996 the Company's undistributed
earnings were $151,060. Pro forma gives effect to this $151,060 distribution
that would have occurred if the Company had terminated its status as an S
Corporation on September 30, 1996. See note 9 of the financial statements
included herein.
(4) As adjusted to give effect to the sale of 1,600,000 shares of Common Stock
at an assumed initial offering price of $3.50 per share and the application
of the net proceeds therefrom. See "Use of Proceeds."
5
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER, ALONG WITH THE
OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING CONSIDERATIONS AND
RISKS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS.
LACK OF PRODUCT DIVERSIFICATION AND PRODUCT CONCENTRATION
Historically, the Company's revenues have been generated primarily by sales
of its MIDRANGE Chapter 13 product and the accompanying services. In 1996, the
Company introduced a Windows version of its TCMS Chapter 7 product, which
increasingly is contributing to the Company's total revenues. The Company's
Chapter 7 and Chapter 13 bankruptcy software and services are expected to
provide substantially all of its revenues for the foreseeable future. The
Company's results will therefore depend on continued and increased market
acceptance of its products and the Company's ability to meet the needs of its
customers. Any reduction in demand for, or increasing competition with respect
to, these products would have a material adverse effect on the Company's
financial condition and results of operations. See "Business."
LIMITED NUMBER OF POTENTIAL CUSTOMERS; HIGHLY COMPETITIVE MARKET
The Company works in an industry with a finite number of Chapter 7 and
Chapter 13 trustees. The Company estimates that there are approximately 550,000
pending Chapter 13 cases being managed by approximately 180 Chapter 13 trustees,
and that there is approximately $2 billion of liquidated asset proceeds on
deposit being managed by approximately 1,200 Chapter 7 trustees. There are
several companies in the market all competing to sell to this finite group of
customers, and some of the Company's competitors have substantially greater
financial and marketing resources than does the Company. For its Chapter 7
product, the Company competes with the Chase Manhattan Bank and Union Bank of
California, as well as other regional competitors in selected markets. For its
Chapter 13 product, the Company competes with DCI Corporation of Memphis,
Tennessee, a private company, and other competitors. Although there are
presently a limited number of firms that offer services that directly compete
with the Company's, there can be no assurance that other firms with resources
significantly greater than the Company's will not enter the Company's industry.
The Company's future financial performance will depend on its ability to
maintain existing customer accounts and to attract business from customer
accounts which are currently using a competitor's software product. See
"Business -- Competition."
CUSTOMER CONCENTRATION
Each trustee manages many cases, and the Company's revenues are related to
the number of cases managed by the Company's software. Accordingly, a large
trustee client can comprise an important portion of the Company's operating
revenues, although sales to no one client presently exceed 10% of the Company's
revenues. The Company's future financial performance will be affected by its
ability to retain existing major accounts and to attract new major accounts. The
loss of even a small number of clients would have a substantial detrimental
effect on the Company's financial condition and results of operations.
DEPENDENCE ON ON-GOING BANKRUPTCY FILINGS
The Company's business is highly dependent on the number of bankruptcy
filings in the United States. Economic fluctuations in the United States could
impact the number of bankruptcy filings and/or the dollar volume flowing through
the federal bankruptcy system. The Company's financial results depend on the
continual influx of new filings into the national bankruptcy system. A
significant reduction in the number of pending bankruptcy cases would adversely
affect the financial condition and operating results of the Company. See
"Business -- Industry Overview."
6
<PAGE>
RELIANCE ON MARKETING ARRANGEMENT
Chapter 7 trustees are discouraged from incurring direct administrative
costs for computer expenses. It is therefore important for EPI to align with a
bank or series of banks to earn revenues in Chapter 7. The Company promotes its
Chapter 7 product through an exclusive national marketing arrangement with
NationsBank of Texas, N.A. ("NationsBank"). While both the Company and
NationsBank have expressed a long term commitment to this agreement, either
party has the option to end the agreement upon 90 days' notice. If either party
were to end the marketing arrangement, the Company could experience adverse
financial results while a replacement marketing arrangement or arrangements were
established. Revenues from the NationsBank marketing arrangement presently
represent less than 20% of the Company's total revenues. Although the Company
has other Chapter 7 banking relationships that predate its relationship with
NationsBank, there is no assurance that another marketing arrangement could be
found with terms comparable to those in the NationsBank agreement. See "Business
- -- Chapter 7 Marketing Arrangement."
INTRODUCTION OF NEW CHAPTER 13 PRODUCT
The Company plans to release for general distribution a new major software
product for Chapter 13 trustees in early 1997. Although the Company does not
anticipate any delays in releasing this product, there can be no assurance that
its national release will be timely or completed. In addition, this product is
intended to replace the Company's existing Chapter 13 product, which has
contributed the majority of the Company's revenues to date. Consequently, any
unforeseen problems with this new software product would materially affect the
Company's results of operations and financial position. There can be no
assurance that the market will accept the new product.
RAPID TECHNOLOGICAL AND MARKET CHANGE
The software industry and the related market for support services are
characterized by rapidly evolving technology and industry standards. The
introduction of products embodying new technology and the emergence of new
industry standards can rapidly render existing products obsolete and
unmarketable. The Company's future success will depend on its ability to
continue to develop and manufacture new competitive products and to enhance
existing products. See "Business -- New Product Development."
NEED FOR PRODUCT COMPLIANCE WITH GOVERNMENT REGULATION; GOVERNMENT REGULATION OF
FEE-BASED PRODUCTS AND SERVICES
Although the Company's products are not directly regulated by the
government, the products must allow trustees to perform their duties within the
applicable legal regulatory guidelines. The United States Department of Justice
and the United States bankruptcy courts both have authority to regulate aspects
of the bankruptcy industry. If the Company's products did not allow trustees to
remain in compliance with the applicable regulations, the Company would be
adversely affected. If any regulatory entity were to restrict or disallow the
types of fee-based products and services that the Company provides to the
bankruptcy market, the Company would be severely adversely affected. See
"Business -- Industry Overview."
DEPENDENCE UPON KEY PERSONNEL
The Company's future success will depend in significant part upon the
continued service of certain key technical and senior management personnel and
the Company's continuing ability to attract and retain highly qualified
technical, managerial and sales and marketing personnel. Competition for such
personnel is intense, and there is no assurance that the Company can retain its
key personnel or that it can attract, assimilate and retain such employees in
the future. The Company does not have employment agreements with any of its
executive officers. The Company maintains a $1,500,000 and $1,000,000 key-man
life insurance policy on the Company's Chief Executive Officer
7
<PAGE>
and its Executive Vice President/Chief Operating Officer, respectively. The loss
of these persons or other key personnel or the inability to hire or retain
qualified personnel in the future could have a material adverse effect upon the
Company's results of operations. See "Management."
DEPENDENCE ON PROPRIETARY TECHNOLOGY
Historically, the Company has not protected its intellectual property rights
through patents or formal copyright registration. The Company believes, however,
that its financial performance will depend more upon the innovation,
technological expertise and marketing abilities of its employees than upon such
protection.
There is no assurance that the Company will be able to protect its trade
secrets or that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets. There is no assurance that foreign intellectual property laws
will protect the Company's intellectual property rights. In addition, litigation
may be necessary to enforce the Company's intellectual property rights, to
protect the Company's trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringements. Such
litigation could result in substantial costs and diversion of management and
other resources and could have a material adverse effect on the Company's
business, financial condition and results of operation. See "Business --
Proprietary Rights."
REPAYMENT OF DEBT TO AFFILIATE
The Company intends to apply $400,000 of net proceeds of the Offering to
retire a $400,000 subordinated note owned by Tom W. Olofson, the Company's
Chairman and Chief Executive Officer. The note, which bears interest at a rate
of 10%, matures on July 15, 1998. Mr. Olofson has personally guaranteed
substantially all of the Company's outstanding debt. Upon application of the
proceeds of the Offering, Mr. Olofson's guarantees with respect to such debt
will be extinguished. See "Certain Transactions" and "Use of Proceeds."
CONTROL BY MANAGEMENT
Following completion of the Offering, the Common Stock currently owned
beneficially by the executive officers, directors and principal stockholders of
the Company and their affiliates will represent approximately 51.8% of the
outstanding Common Stock. Accordingly, such persons, if voting in concert, may
elect the entire Board of Directors, and generally continue to exercise control
over the Company's business and affairs following completion of the Offering.
See "Principal Stockholders."
IMMEDIATE DILUTION
Purchasers of Common Stock in the Offering will incur an immediate dilution
of approximately $2.37 in the pro forma per share net tangible book value of
their Common Stock (based on an assumed initial offering price of $3.50 per
share). Additional dilution could result from the exercise of certain options
and the Underwriter's Warrant. See "Dilution" and "Description of Securities."
FUTURE CAPITAL NEEDS
The Company's future capital requirements will depend on many factors,
including cash flow from operations, progress in its competing technological and
market developments, and the Company's ability to market its proposed products
successfully. Although the Company currently has no specific plans or
arrangements for financing other than the Offering, any additional equity
financings could result in substantial dilution to the Company's then existing
stockholders. Sources of debt financing may result in higher interest expense.
Any financing, if available, may be on terms unfavorable to the Company. The
Company anticipates that its existing capital resources and cash flow from
operations, together with the net proceeds of the Offering, will be adequate to
satisfy its operating expenses and capital requirements for at least 12 months
after the Offering. However, such projections may prove to be inaccurate. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and Financial Statements.
8
<PAGE>
DISCRETION TO REALLOCATE USE OF PROCEEDS
The proposed use of the net offering proceeds described herein represents
the Company's anticipated use of the proceeds based upon current operating plans
and certain assumptions, including those relating to the Company's future
revenue levels and expenditures and assumptions regarding industry and general
economic and other conditions. Future events, including problems, delays,
expenses and complications frequently encountered when developing new products,
as well as changes in competitive conditions affecting the Company's business
and the success or lack thereof of the Company's research and development or
marketing efforts, may make it necessary or advisable for the Company to
reallocate the net proceeds among the specified uses. Any such shifts will be at
the discretion of the Company. See "Use of Proceeds."
PUBLIC MARKET RISKS; ABSENCE OF PUBLIC TRADING HISTORY; POSSIBLE FLUCTUATIONS IN
TRADING PRICE
Prior to this Offering, there has been no market for the Company's
securities and there is no assurance that an active trading market will develop
or be sustained following the Offering. The initial public offering price of the
Common Stock will be determined in negotiations between the Company and the
Underwriter and may be greater or less than the price established by market
trading following the Offering. Sales in the public market of substantial
numbers of Common Stock can be expected to affect the price of the Common Stock
and could impair the Company's ability to raise additional capital through
equity offerings. Securities of many companies, in particular, newer and smaller
companies, have experienced substantial fluctuations and volatility that, in
some cases, were unrelated or disproportionate to the performance of the
companies themselves. Any such fluctuations, or general economic or market
trends, could adversely affect the price of the Common Stock. Due to all of the
foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. In that event, the price of the Common Stock would likely be
materially adversely affected. Investors in the Offering will also experience
substantial dilution because the initial public offering price of the Common
Stock is greater than the net tangible book value per share of the Company. See
"Shares Eligible for Future Sale" and "Dilution."
EFFECTS OF DELISTING FROM NASDAQ SMALLCAP MARKET-TM-
The Company's application for quotation of its Common Stock on the Nasdaq
SmallCap Market is pending approval. There can be no assurance that the Company
will be able to maintain the qualification standards for listing of the Common
Stock on the Nasdaq SmallCap Market. If the Company fails to maintain the
listing criteria, the Common Stock will be subject to delisting. Consequently,
the liquidity of the Company's Common Stock would likely be impaired, not only
in the number of shares which could be bought and sold, but also through delays
in the timing of the transactions, and reduction in security analysts' and the
news media's coverage, if any, of the Company. As a result, prices for the
Company's shares of Common Stock may be lower than might otherwise prevail.
APPLICABILITY OF "PENNY STOCK RULES"
Federal regulations under the Securities and Exchange Act of 1934, as
amended (the "Exchange Act") regulate the trading of so-called "penny stocks"
(the "Penny Stock Rules"), which are generally defined as any security not
listed on a national securities exchange or Nasdaq, priced at less than $5.00
per share and offered by an issuer with limited net tangible assets and
revenues. In addition, equity securities listed on Nasdaq which are priced at
less then $5.00 are deemed penny stocks for the limited purpose of Section
15(b)(6) of the Exchange Act. Therefore, if, during the time in which the Common
Stock is quoted on the Nasdaq SmallCap Market, the Common Stock is priced below
$5.00 per share, trading of the Common Stock will be subject to the provisions
of Section 15(b)(6) of the Exchange Act which make it unlawful for any
broker-dealer to participate in a distribution of any penny stock without the
consent of the Securities and Exchange Commission if, in the exercise of
reasonable care, the broker-dealer is aware of or should have been aware of the
participation of a previously sanctioned
9
<PAGE>
person. In such event, it may be more difficult for broker-dealers to sell the
Common Stock and purchasers of the shares of Common Stock offered hereby may
have difficulty in selling their shares in the future in the secondary trading
market.
In the event that the Company's Common Stock is delisted from the Nasdaq
SmallCap Market and the Company fails other relevant criteria, trading, if any,
of the Common Stock would be subject to the full range of the Penny Stock Rules.
Accordingly, delisting from the Nasdaq SmallCap Market and the application of
the comprehensive Penny Stock Rules may make it more difficult for
broker-dealers to sell the Company's Common Stock and purchasers of the shares
of Common Stock in the Offering may have difficulty in selling their shares in
the future in the secondary trading market.
ABSENCE OF DIVIDENDS
Although the Company made cash distributions prior to the Offering while it
was taxable as an S Corporation, and will pay a final S Corporation distribution
to present stockholders following termination of the Company's S Corporation
status, it does not intend to pay any other cash or stock dividends in the
foreseeable future. The Company intends to retain all earnings, if any, to
invest in the Company's operations. The payment of future dividends is within
the discretion of the Board of Directors and will depend upon the Company's
future earnings, if any, its capital requirements, financial condition and other
relevant factors. See "Dividend Policy" and "Prior S Corporation Status."
PRIOR S CORPORATION STATUS
The Company elected to be treated as an S Corporation for federal and
certain state income tax purposes commencing July 15, 1988. Unlike a C
Corporation, an S Corporation is generally not subject to income tax at the
corporate level. Instead, the S Corporation's income generally passes through to
the stockholders and is taxed on their personal income tax returns. The Company
will terminate its status as an S Corporation and will become a C Corporation as
of the closing of this Offering (the "Termination Date"). Subsequent to the
Termination Date, the Company will no longer be treated as an S Corporation and
will, accordingly, be fully taxable pursuant to federal and state income tax
laws. The Company will pay a final S Corporation distribution to present
stockholders following termination of the Company's S Corporation status. This
final distribution will represent the Company's previously undistributed
earnings only since January 1, 1996 through the Termination Date. The amount of
this final distribution will not exceed $250,000 and will be payable within 90
days following the Termination Date.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,600,000 shares of Common Stock offered hereby (assuming an initial offering
price of $3.50 per share, the mid-point of the price range stated on the cover
of this Prospectus) are estimated to be approximately $4,600,000 after deducting
the underwriting discount and other estimated expenses payable by the Company in
connection with the Offering. The net proceeds are intended to be used as
follows:
<TABLE>
<S> <C>
Retire corporate debt and capital leases............................... $1,600,000
Repay debt to affiliate................................................ 400,000
Sales/marketing expansion.............................................. 1,250,000
Software development................................................... 900,000
----------
General corporate purposes, including working capital.................. 450,000
----------
Total.................................................................. $4,600,000
----------
----------
</TABLE>
10
<PAGE>
The proposed use of the net offering proceeds described herein represents
the Company's anticipated use of the proceeds based upon current operating plans
and certain assumptions, including those relating to the Company's future
revenue levels and expenditures and assumptions regarding industry and general
economic and other conditions. Future unforeseen events may make it necessary or
advisable for the Company to reallocate the net proceeds among the above uses.
Any such reallocations will be at the discretion of the Company. See "Risk
Factors -- Discretion to Reallocate Use of Proceeds."
The Company plans to use approximately $1,600,000 of the proceeds to retire
certain corporate debt and capital leases. This includes (i) a $250,000 bank
term note with an interest rate of 1% over prime (9.25% at September 30, 1996)
that matures October 18, 1997; (ii) a bank term note that will be in the
approximate amount of $492,300 at the time of this Offering with an interest
rate of 2% over the bank's base lending rate (10.25% at September 30, 1996) on a
five year amortization schedule that matures June 8, 1999; (iii) a bank
equipment note that will be in the approximate amount of $250,000 at the time of
this Offering with an interest rate of 2% over the bank's base lending rate
(10.25% at September 30, 1996) on a three year amortization schedule that
matures June 8, 1998; and (iv) various equipment leases that will be in the
approximate amount of $607,641 at the time of this Offering on three year
amortization schedules with varying interest rates (ranging between 9.23% and
11.45% at September 30, 1996). Tom W. Olofson personally guarantees
substantially all of the Company's outstanding debt. Upon application of the
proceeds of the Offering, Mr. Olofson's guarantee obligations with respect to
such debt will be extinguished. See "Certain Transactions."
The Company intends to retire a $400,000 subordinated note with an interest
rate of 10% that matures July 15, 1998 owned by Tom W. Olofson, Chairman and
Chief Executive Officer. See "Certain Transactions."
The Company plans to use approximately $1,250,000 to expand its sales and
marketing efforts. This may include hiring additional sales/marketing staff,
publishing new advertising and promotional materials, attending additional trade
shows and conventions, and increasing national marketing coverage through more
extensive field sales calls. The Company plans to use approximately $900,000 of
the proceeds for software development. This may include the development of new
applications, enhancement to existing applications, hiring of new development
staff, acquisition of new development technologies and/or training for the
Company's software development staff.
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations, that the net proceeds of the Offering, together with
projected cash flow from operations, will be sufficient to satisfy the Company's
contemplated cash requirements for at least the next 12 months. Pending
application, the net proceeds of the Offering will be invested in short-term,
high-grade interest-bearing savings accounts, certificates of deposit, United
States government obligations, money market accounts or short-term interest
bearing obligations. Any proceeds received upon exercise of the Underwriter's
Warrant, as well as income from investments, will be used for general corporate
purposes.
DIVIDEND POLICY
The Company does not expect to declare or pay any other cash or stock
dividends in the foreseeable future, with the exception of a final S Corporation
distribution to existing stockholders. The Company currently intends to retain
any earnings for use in the operation and expansion of its business. The payment
of future dividends is within the discretion of the Board of Directors and will
depend upon the Company's future earnings, if any, its capital requirements,
financial condition and other relevant factors. See "Prior S Corporation
Status."
11
<PAGE>
DILUTION
At September 30, 1996, the Common Stock had a negative net tangible book
value of ($529,158) or ($0.29) per share. Net tangible book value per share is
equal to the Company's total tangible assets (total assets less intangible
assets, consisting of goodwill, deferred stock issuance costs, and computer
software) less its total liabilities, divided by the number of shares of Common
Stock outstanding. After giving effect to: (i) the sale by the Company of
1,600,000 shares of Common Stock offered hereby (assuming an initial public
offering price of $3.50 per share, the midpoint of the price range stated on the
cover of this Prospectus); (ii) the receipt of the estimated net proceeds
therefrom if the same had occurred on September 30, 1996; (iii) the $275,900
provision to income resulting from the tax effect of temporary differences which
existed at September 30, 1996, and (iv) the final S Corporation distribution
estimated to be $151,060 at September 30, 1996, the net tangible book value of
the Company at such date would have been approximately $3,836,220 or $1.13 per
share. This represents an immediate increase in net tangible book value of $1.42
per share to the existing stockholders and an immediate dilution of $2.37 per
share to new stockholders. Dilution represents the difference between the
initial public offering price paid by the purchaser in the Offering and the net
tangible book value per share immediately after completion of the Offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $ 3.50
Pro forma negative net tangible book value per share as of
September 30, 1996....................................................... $ (0.29)
Increase per share attributable to new stockholders....................... 1.42
---------
Net tangible book value per share after the Offering........................ 1.13
---------
Dilution per share to new stockholders...................................... $ 2.37
---------
---------
</TABLE>
The following table summarizes, as of the date of this Prospectus, the
difference between current stockholders and purchasers of Common Stock in the
Offering with respect to the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price paid
per share.
<TABLE>
<CAPTION>
SHARES PURCHASED (1) TOTAL CONSIDERATION (2)
---------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Current stockholders............................ 1,800,000 52.9% $ 300,000 5.1% $ 0.17
New investors................................... 1,600,000 47.1% 5,600,000 94.9% $ 3.50
----------- --------- ------------- ---------
Total........................................... 3,400,000 100.0% $ 5,900,000 100.0%
----------- --------- ------------- ---------
----------- --------- ------------- ---------
</TABLE>
- ------------------------
(1) The foregoing computations do not include: (i) 270,000 shares of Common
Stock reserved for issuance under the Company's stock option plan of which
119,500 shares are issuable upon exercise of options to be outstanding upon
completion of this Offering; and (ii) the Underwriter's Warrant. To the
extent that any outstanding options or warrants are exercised, there will be
further dilution to investors. See "Management -- Stock Option Plan" and
"Underwriting."
(2) Does not reflect deduction of the underwriting discount or any other
expenses incurred in connection with the Offering.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 and as adjusted to reflect the issuance and sale of 1,600,000
shares of Common Stock offered by the Company hereby (assuming an offering price
of $3.50 per share, the midpoint of the price range stated on the cover page
hereof), and the application of the net proceeds therefrom as set forth under
"Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------------
ACTUAL PRO FORMA (1) AS ADJUSTED
------------- ------------- -------------
<S> <C> <C> <C>
Short-term obligations, including current maturities of long-term
debt.............................................................. $ 697,648 $ 697,648 $ 251,681
------------- ------------- -------------
------------- ------------- -------------
Long-term debt, less current maturities............................. $ 1,850,093 $ 1,850,093 $ 696,060
Subordinated debt................................................... 400,000 400,000 0
Stockholders' equity:
Common stock, $0.01 par value, 5,000,000 shares authorized;
1,800,000 shares issued and outstanding (actual) and 3,400,000
shares as adjusted (2)........................................... 18,000 18,000 34,000
Additional paid-in capital........................................ 282,000 464,342 5,048,342
Retained earnings................................................. 609,302 0 0
------------- ------------- -------------
Total stockholders' equity...................................... 909,302 482,342 5,082,342
------------- ------------- -------------
Total capitalization.............................................. $ 3,159,395 $ 2,732,435 $ 5,778,402
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------------------
(1) Pro forma gives effect to a $275,900 provision to income taxes (which
consists of a $6,700 current asset and a $282,600 long term liability)
resulting from the tax effect of temporary differences in the tax basis and
financial statement reporting basis of assets and liabilities at September
30, 1996 that would have been reflected had the Company's S Corporation
election terminated at such date. The Company will also declare a final S
Corporation distribution equal to its previously undistributed earnings only
since January 1, 1996 through the termination of the S Corporation status.
This final distribution will not exceed $250,000. For the nine-month period
January 1, 1996 through September 30, 1996 the Company's undistributed
earnings were $151,060. Pro forma gives effect to this $151,060 distribution
that would have occurred if the Company had terminated its status as an S
Corporation on September 30, 1996. See note 9 of the financial statements
included herein.
(2) Does not include: (i) 270,000 shares of Common Stock reserved for issuance
under the Company's stock option plan of which 119,500 shares are issuable
upon exercise of options to be outstanding upon completion of this Offering;
and (ii) the Underwriter's Warrant. See "Management -- Stock Option Plan"
and "Underwriting."
13
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Financial Statements and related Notes thereto appearing elsewhere in the
Prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The selected balance sheet and statements of operation
data as of and for the years ended December 31, 1995 and 1994 and for the nine
months ended September 30, 1996 are derived from financial statements of the
Company which have been audited by Baird, Kurtz & Dobson, independent
accountants, and included herein. The selected balance sheet and statements of
income data as of and for the nine months ended September 30, 1995 have been
derived from unaudited interim financial statements of the Company contained
elsewhere herein. Results of operations for any interim period are not
necessarily indicative of results to be expected for the full fiscal year.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ----------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating revenues....................... $4,984,697 $5,233,959 $3,843,292 $4,638,685
Cost of goods sold and direct costs...... 2,794,605 2,785,715 2,069,993 2,444,527
---------- ---------- ---------- ----------
Gross profit........................... 2,190,092 2,448,244 1,773,299 2,194,158
Operating expenses....................... 1,800,531 2,035,689 1,446,177 1,780,666
---------- ---------- ---------- ----------
Income from operations................. 389,561 412,555 327,122 413,492
Other income (expenses).................. (283,199) (261,685) (193,622) (200,288)
---------- ---------- ---------- ----------
Net income............................. $ 106,362 $ 150,870 $ 133,500 $ 213,204
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Pro forma net income (1)................. $ 52,362 $ 82,870 $ 74,500 $ 123,204
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Pro forma net income per share (1)....... $ .03 $ .05 $ .04 $ .07
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares
outstanding............................. 1,800,000 1,800,000 1,800,000 1,800,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996,
DECEMBER 31, --------------------------------------------
---------------------------- AS ADJUSTED
1994 1995 ACTUAL PRO FORMA (2) (3)
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets...................... $ 3,128,658 $ 3,376,760 $ 4,378,628 $ 4,385,328 $ 6,985,328
Working capital (deficit)......... (149,022) (523,484) (366,551) (510,911) 2,727,394
Long-term debt and subordinated
debt less current portion........ 1,416,439 1,416,540 2,250,093 2,250,093 696,060
Total stockholders' equity........ 809,340 758,242 909,302 482,342 5,082,342
</TABLE>
- ------------------------
(1) Pro forma figures are unaudited. For all periods indicated, the Company
operated as an S Corporation and was not subject to federal and certain
state income taxes. The Company will terminate its status as an S
Corporation and become a C Corporation subject to federal and state income
taxes as of the closing date of this Offering. Pro forma net income figures
assume an effective corporate tax rate of 39% and include an allowance for
additional taxes that would have been paid on certain non-deductible
expenses, assuming the company had been operating as a C Corporation for all
periods presented. See note 9 of the financial statements included herein
and "Prior S Corporation Status."
14
<PAGE>
(2) Pro forma gives effect to a $275,900 provision for income taxes (which
consists of a $6,700 current asset and a $282,600 long term liability)
resulting from the tax effect of temporary differences in the tax basis and
the financial statement reporting basis of assets and liabilities at
September 30, 1996 that would have been reflected had the Company's S
Corporation election terminated at such date. The Company will also declare
a final S Corporation distribution equal to its previously undistributed
earnings only since January 1, 1996 through the termination of the S
Corporation status. This final distribution will not exceed $250,000. For
the nine-month period January 1, 1996 through September 30, 1996 the
Company's undistributed earnings were $151,060. Pro forma gives effect to
this $151,060 distribution that would have occurred if the Company had
terminated its status as an S Corporation on September 30, 1996. See note 9
to the financial statements included herein.
(3) As adjusted to give effect to the sale of 1,600,000 shares of Common Stock
at an assumed initial offering price of $3.50 per share and the application
of the net proceeds therefrom.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
historical financial statements, including the notes thereto included elsewhere
in this Prospectus.
OVERVIEW
The Company develops, markets and licenses specialty software products and
support services for Chapter 7 and 13 bankruptcy trustees as well as for other
users of the federal bankruptcy system. The Company is implementing a strategic
plan to increase operating revenues and gross profit through the introduction of
new products and the penetration of new markets. Additionally, the Company is
introducing new higher margin products that the Company believes can be sold to
a broader market. Accordingly, the Company has experienced in the past, and
believes it will continue to experience, a significant shift in product mix that
has affected and will continue to affect operating results.
In early 1996, the Company began marketing a Windows95 version of TCMS
(Trustee Case Management System for Chapter 7), a successor product to the
earlier DOS version. The Company has marketed the TCMS product line in an
exclusive national marketing arrangement with NationsBank since 1994. The TCMS
relationship with NationsBank and the Chapter 7 bankruptcy trustee is structured
as follows: (i) EPI licenses TCMS to a trustee end-user for no fee; (ii) the
trustee deposits proceeds from the sale of assets into accounts at NationsBank;
and (iii) NationsBank pays EPI a monthly fee based on the total dollar amount of
such deposits.
Since early 1996, the Company has had another new Windows95-based product in
beta testing that will be marketed under the trade name, CASEPOWER. This product
is scheduled for general market release during early 1997 and will be licensed
directly to Chapter 13 trustees. An accompanying banking marketing arrangement
is not used or required in Chapter 13 cases. The Company typically receives an
initial licensing fee and conversion charge from the Chapter 13 trustee. It also
receives monthly fees from each Chapter 13 trustee client based on the total
number of cases in that trustee's database and the number of noticing documents
generated. The Company intends to market this product aggressively in 1997 to
generate revenue streams from new clients and to generate upgrade revenues as
MIDRANGE systems are replaced. New Chapter 13 systems sales were relatively flat
during 1995 and 1996 as the development cycle for CASEPOWER progressed.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1995
Operating revenues for the nine-month period of fiscal 1996 were $4,638,685
compared to $3,843,292 for the similar 1995 period, an increase of 20.7%.
Chapter 7 sales increased $358,719 or 71.7% between years. The introduction of
TCMS for Windows95 in early 1996 helped to penetrate new markets resulting in a
significant increase in revenues. Chapter 13 revenue in the 1996 period compared
to the similar 1995 period increased $310,549 or 10.5%. The additional revenue
experienced in 1996 was due to an increase in caseloads managed by Chapter 13
trustee clients. Also, the number of new bankruptcy filings in 1996 was greater
than in 1995 resulting in increased legal noticing revenue which constituted
33.5% of the total Chapter 13 revenue for the nine months ending September 30,
1996.
Gross profit increased 23.7% or $420,859 to $2,194,158 during the nine
months ending September 30, 1996 compared to $1,773,299 for the 1995 period.
Gross profit as a percentage of operating revenues increased to 47.3% for the
1996 period from 46.1% for the 1995 period due primarily to TCMS, which has
higher gross margins, comprising a greater percentage of operating revenues in
1996. The Company anticipates the Chapter 7 revenue will continue to grow as the
number of installations of TCMS for Windows95 continues to increase.
16
<PAGE>
Operating expenses as a percentage of operating revenues were 38.4% for the
nine months ended September 30, 1996 compared to 37.6% for the similar period in
1995. Sales and marketing expenses were $559,552 in 1996 compared to $330,361 in
1995. The Company increased its marketing activities in 1996 related to the
introduction of a Windows95 version of TCMS, including costs associated with
trade shows and promotional materials.
Income from operations increased 26.4% to $413,492 for the nine-month period
ended September 30, 1996, compared to $327,122 for the nine-month period ended
September 30, 1995, principally due to increased sales and higher gross profit
margins.
For the nine months ended September 30, 1996, the Company reported net
income of $213,204 compared to net income of $133,500 for the nine months ended
September 30, 1995, a 59.7% increase.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Operating revenues in 1995 were $5,233,959 and $4,984,697 in 1994, an
increase of $249,262 or 5.0%. Chapter 7 revenues increased by $337,455 or 93.7%
due to the penetration of new markets. Chapter 13 revenues reflected a modest
decrease of $52,989 during 1995 due to the discontinuation of certain low margin
Chapter 13 service business which accounted for $192,268 of operating revenues
in 1994. Also, Chapter 13 equipment sales were lower by $44,426 during 1995 as
less emphasis was placed on MIDRANGE equipment sales as CASEPOWER was in the
final development stages.
Gross profit increased 11.8% or $258,152 to $2,448,244 during fiscal 1995
from $2,190,092 in fiscal 1994. Gross profit as a percentage of operating
revenues increased to 46.8% in fiscal 1995 from 43.9% in fiscal 1994. The
increase in gross profit as a percentage of operating revenues was primarily
attributable to an increase in Chapter 7 revenues, which have a higher profit
margin than the low margin Chapter 13 computer services that were discontinued.
Stated as a percentage of operating revenues, operating expenses represent
38.9% of the year ended December 31, 1995 operating revenues versus 36.1% of the
year ended December 31, 1994 operating revenues. The increase resulted primarily
from expanded marketing and promotional costs increasing $114,018 between
periods. The 1995 increase in operating expenses relates principally to the
additional selling efforts associated with the expanded sales program for its
Chapter 7 product.
Income from operations increased 5.9% to $412,555 for the year ended
December 31, 1995 compared to $389,561 for the year ended December 31, 1994,
principally due to increased sales and higher gross profit margins.
For the twelve month period ended December 31, 1995, the Company reported
net income of $150,870, a 41.8% increase, compared to $106,362 during the twelve
month period ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1,031,159 in 1995 and
$593,998 in 1994. The net cash provided by operating activities in 1995
consisted primarily of net income of $150,870, depreciation and amortization of
$775,209, and a $75,507 decrease in other receivables.
During the nine months ended September 30, 1996, net cash provided by
operating activities was $773,077 representing principally net income of
$213,204 plus depreciation of $654,303 and an increase in accounts payable of
$149,821 offset primarily by an increase in accounts receivable of $214,453. The
outstanding accounts receivable balance has increased primarily due to the
growth in revenue.
The Company has a $500,000 operating line of credit from a financial
institution, of which $365,000 was outstanding September 30, 1996 and a term
loan with an outstanding balance of $553,729 as of September 30, 1996, from the
same financial institution. The term loan has been
17
<PAGE>
reduced by $346,271 since it originated in July of 1994. The Company may borrow
up to 80% of eligible accounts receivable against this line which is
collateralized by substantially all of the Company's assets. The Company
currently expects to repay the term loan from the proceeds of this Offering and
leave the line of credit in place for working capital purposes. The Company
originated a $250,000 loan in June of 1996 to provide additional short term
working capital. The Company currently expects to repay the loan from the
proceeds of this Offering. See "Use of Proceeds."
The Company invested in property and equipment totaling $996,560 for the
nine months ending September 30, 1996, $621,733, and $488,524 for the years
ended 1995 and 1994, respectively, which related principally to the installation
of computer equipment for the Company's new Chapter 7 product. The equipment was
financed through various capital leases and a bank equipment term loan. As of
September 30, 1996, the balances outstanding on capital leases and the bank
equipment loan were $1,154,006 and $214,828, respectively. The Company made
principal payments on capital leases aggregating $321,828, $300,866, and
$274,593 for the nine months ended September 30, 1996 and years ended 1995 and
1994, respectively. As of September 30, 1996, the Company had $404,300 available
for eligible purchases of capital equipment through various equipment lines of
credit and bank commitments. The Company currently expects to repay the
outstanding balances of certain capital leases and term loans from the proceeds
of this Offering. See "Use of Proceeds."
The Company incurred expenditures for software development costs totaling
$364,122, $364,479 and $272,111 for the nine months ended September 30, 1996,
and years ended 1995 and 1994, respectively. These amounts have been capitalized
and are being amortized on a straight line basis over a maximum five year
period. Additionally, the Company anticipates future software development to be
at or above the spending levels of prior years with a portion of the Offering
proceeds being used to partially fund such development.
The Company believes that the net proceeds from this Offering, together with
funds that may be generated from operations, will be sufficient to finance the
Company's currently anticipated working capital and property and equipment
expenditures for at least 12 months following the Offering.
18
<PAGE>
BUSINESS
Electronic Processing, Inc. ("EPI" or the "Company") serves a national
client base with specialty products that facilitate financial and administrative
aspects of bankruptcy management, including legal noticing, claims management,
funds distribution and government reporting. The Company develops, markets,
licenses and supports internally developed and proprietary software products
primarily to trustees under Chapter 7 and Chapter 13 of the Bankruptcy Code of
1978, as amended (the "Bankruptcy Code"), as well as to other users of the
federal bankruptcy system, including trustees in Chapter 11 and Chapter 12. EPI
assimilates software development, network operations, value-added services and
comprehensive post-installation support into an integrated environment that
offers clients a high level of coordinated support.
Between 1993 and 1996, the Company concentrated on developing software and
systems compatible with current technologies and recruited a management team
experienced in bankruptcy management and software development. During this time
the Company concentrated on developing and upgrading its Chapter 7 and Chapter
13 products to be compatible with current software operating environments. In
1996, the Company introduced its TCMS Chapter 7 Windows95/Windows NT 4 based
system. In late 1996, the Company completed testing of CASEPOWER, a new PC-based
Windows95/Windows NT 4 Chapter 13 product, designed to replace the Company's
MIDRANGE Chapter 13 product, which was based on IBM mini-computer AS/400
technology.
INDUSTRY OVERVIEW
Bankruptcy comprises an ever present, integral part of the national economy.
Industry analysts report that even when certain other national economic
indicators are strong, bankruptcy filings can still grow at record-setting
rates. In 1996, new bankruptcy filings surpassed the one million mark for the
first time. There is a national community of professionals that works in the
bankruptcy industry including trustees, judges, court clerks, attorneys,
accountants, government administrators, and other professionals.
Title 11 of the U.S. Code establishes federal law governing bankruptcies.
The participants in a bankruptcy proceeding include the debtor, the creditors,
and a trustee, as well as the presiding judge. The trustee acts as an
intermediary between the debtor and the creditors and is responsible for
administering the bankruptcy case. The end user clients of the Company's
products are TRUSTEES, not individual debtors or creditors.
The United States Trustee's office, a division of the Justice Department,
oversees bankruptcy trustees and establishes administrative rules concerning
trustees' activities. Local bankruptcy judges also direct trustees' activities
and have a high level of authority in a bankruptcy case. The trustees'
activities are guided by the Bankruptcy Code, the Federal Rules of Bankruptcy
Procedure, the trustee handbooks developed by the United States Trustee, and
local rules established by the courts.
There are five chapters of the Bankruptcy Code that define various
configurations of bankruptcy cases:
- Chapter 7 -- Liquidation
- Chapter 9 -- Reorganization of Municipality
- Chapter 11 -- Reorganization of Corporation
- Chapter 12 -- Reorganization of Family Farm
- Chapter 13 -- Reorganization of Individual Debt
The Company believes that Chapter 7 and Chapter 13 are the most attractive
sectors in the bankruptcy industry to which it can provide service and has
developed a strategic plan accordingly. There are significantly fewer filings in
Chapter 9 and Chapter 12 than in Chapters 7 and 13, and the
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industry analysts note that Chapter 11 filings have decreased as distressed
organizations increasingly make private arrangements with their creditors for
payment of debt. On the whole, bankruptcy filings have increased significantly
recently, passing the one million mark for the first time in 1996.
Chapter 7 and Chapter 13 bankruptcies serve different purposes and require
different services and information. Chapter 7 of the Bankruptcy Code provides
for liquidation of the assets of the debtor (which can be an individual,
partnership or corporation) and for the disbursement of the resulting cash
proceeds to the creditors. Chapter 13 provides for adjustments of debt whereby
the debtor makes regular payments to the trustee, who in turn disburses the
collected funds to the creditors. Assets are not liquidated in Chapter 13.
Bankruptcy trustees in Chapters 7 and 13 are appointed by the United States
Trustee. A United States Trustee is appointed in most federal court districts
and generally has responsibility for overseeing the integrity of the bankruptcy
system. Bankruptcy trustees in Chapter 7 and Chapter 13 cases are charged with
managing the administrative aspects of liquidation or reorganization
bankruptcies. The trustee's primary responsibilities include collecting funds
from the debtor (Chapter 13) or liquidating the debtor's assets (Chapter 7),
distributing the collected funds to creditors pursuant to the orders of the
bankruptcy court, and preparing regular status reports, including financial
updates, for the United States Trustee and for the bankruptcy court. Trustees
typically are attorneys or certified public accountants and manage many
different bankruptcy cases simultaneously. A trustee client uses an EPI product
to manage an entire caseload; the Company does not contract with trustees to
manage specific individual cases. The Company estimates that Chapter 13 trustees
typically manage over one thousand cases simultaneously and that Chapter 7
trustees can manage over one hundred cases simultaneously. It is possible for a
given individual trustee to have caseloads in both Chapter 7 and Chapter 13
bankruptcies, but normally a trustee will specialize in one or the other.
CHAPTER 7 BANKRUPTCY TRUSTEES
For Chapter 7 liquidation bankruptcy, each region of the country has a
rotating "panel" of trustees. Because Chapter 7 comprises the overwhelming
majority of bankruptcies, multiple trustees are required in most parts of the
country to accommodate the caseload. As assets are liquidated and the first
funds are received in each asset case, the trustee opens bank accounts for the
case. In Chapter 7, each case must have its own bank accounts so that interest
earned can be segregated. Because asset liquidation and litigation regarding the
case may be a lengthy process, the trustee will deposit cash proceeds into an
interest-bearing account for the benefit of the creditors who will eventually
receive distributions. Typically, the trustee makes a single distribution at the
conclusion of the case. The administration of a Chapter 7 case can take several
years.
CHAPTER 13 BANKRUPTCY TRUSTEES
There are fewer filings in Chapter 13 (individual debt reorganization) than
in Chapter 7 (liquidation), so most areas of the country have a single standing
Chapter 13 trustee who administers all Chapter 13 filings rather than the
"panel" configuration associated with Chapter 7. In certain areas of the
country, the trustee is responsible for sending various notices to the debtor,
debtor's attorney, clerk of the court, United States Trustee and each creditor
indicating that the case has been filed. Because the debtor's assets are NOT
liquidated under Chapter 13, the trustee analyzes the debtor's income and
expenses and directs the debtor to make regular cash payments to the trustee
according to the court-approved plan of reorganization. Each month, the trustee
disburses the monies received from the debtor to eligible creditors according to
the plan. The trustee must provide regular status reports to the United States
Trustee. Every six months, the trustee must also prepare a detailed ledger of
financial activity in each bankruptcy case and mail it to each debtor and
debtor's attorney. Chapter 13 reorganizations usually last between thirty-six
and sixty months. Upon conclusion of the case, the trustee must submit a final
report to the bankruptcy court outlining the financial history of the case.
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MARKET CONDITIONS
The Company estimates that there are approximately $2 billion in cash
proceeds being administered in Chapter 7 by approximately 1,200 trustees. The
Company estimates there are approximately 550,000 cases pending in Chapter 13
managed by approximately 180 standing Chapter 13 trustees.
MARKET CONDITIONS IN CHAPTER 7
The Company believes that there are favorable market conditions for its
Chapter 7 product and services. Since the introduction of TCMS for Windows95 in
January 1996, the Company has successfully entered new key strategic markets,
including California and New York, two of the largest national bankruptcy
markets. The Company has also successfully entered other key metropolitan areas
and believes that these initial accounts will facilitate significant additional
sales. In November 1996, the Company began releasing a new enhanced version of
the software, TCMS version 2.0, that incorporates substantial new features that
the Company believes are unique in the marketplace. These features include an
internal auditor, e-mail enabled import/export, account receivable management, a
rapid posting module and a rapid case set-up module.
MARKET CONDITIONS IN CHAPTER 13
In October 1994, Congress passed the Bankruptcy Reform Act of 1994 (the
"Reform Act"). Among the changes enacted was an increase in the debt ceiling, or
"cap," that establishes an individual's eligibility to file Chapter 13
bankruptcy. The Reform Act raised the debt cap from $350,000 to $1,000,000. If
the cap is exceeded, the individual must file a Chapter 7 liquidation bankruptcy
or a small Chapter 11. The Company believes the increase in the Chapter 13 debt
cap expands the pool of eligible debtors in Chapter 13 and potentially increases
the number of Chapter 13 filings.
THE EPI STRATEGY
The Company's objective is to become the leading provider of technology
based insolvency management systems. To achieve this objective, the Company
intends to continue its intensive product development efforts, to increase its
sales, marketing and distribution capabilities and to distinguish itself as a
provider of advanced information processing products. The Company's strategy for
achieving its objectives includes the following:
- SUSTAIN AND DEVELOP RECURRING REVENUE STRUCTURE. The Company generates
the majority of its revenues through recurring fees collected from its
Chapter 7 and Chapter 13 products. In Chapter 13, the Company collects
fees from the trustee each month based on the number of cases in the
database and the number of notices generated. In Chapter 7, the Company
collects fees every month based on the overall funds on deposit. The
Company believes that this is a favorable structure for the long term
future and intends to sustain and develop it.
- ATTAIN TECHNICAL SUPERIORITY IN PRODUCT FEATURES. The Company intends to
maintain high technical skills for its product development efforts. The
Company believes that its successes have been partially attributable to
its technical acumen in software development technologies, including
Windows95, Windows NT 4, Microsoft Visual FoxPro, Oracle7, and
PowerBuilder. The Company intends to maintain a detailed knowledge of the
most current technical tools and to utilize this knowledge to further its
product development efforts.
- CAPITALIZE ON GROWTH TRENDS IN BANKRUPTCY FILINGS. The Company perceives
that bankruptcy is a growing part of the national economy. In recent years
there has been significant growth in bankruptcy filings. Recent periods
have experienced the greatest increases in the rate of bankruptcy filings
in a decade. Bankruptcy filings surpassed the one million mark for the
first time in 1996. The Company plans to pursue this business vigorously
and to increase its market penetration significantly.
- CONTINUE TO PENETRATE NEW GEOGRAPHIC MARKETS. Since the beginning of
1996, the Company has successfully entered key new geographic markets,
including California and New York -- two of
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the largest national bankruptcy markets -- with its TCMS product. Company
management intends to further develop the newly entered markets and to
begin to penetrate additional key metropolitan areas.
- EVALUATE OPPORTUNITIES IN COMPLEMENTARY BUSINESS LINES. The Company
believes that it has developed an unusually detailed perspective on the
national bankruptcy system and a rare combination of skills in commercial
software development and insolvency management. Using its core line of
Chapter 7 and Chapter 13 products as a base, the Company intends to
explore complementary business lines, which may include products and
services for debtors' attorneys, commercial claims recovery systems, as
well as specialty products for international insolvency markets.
PRODUCTS
The Company's existing products include TCMS (Trustee Case Management
System) for Chapter 7, and MIDRANGE for Chapter 13. The Company plans to begin
selling a new Chapter 13 product, CASEPOWER, in early 1997. The TCMS product can
also track Chapter 11 cases, and the MIDRANGE/ CASEPOWER products can also track
Chapter 12 cases. The Company produces its software applications internally with
a full time staff of professional software developers.
CHAPTER 7 PRODUCTS
The Company's Chapter 7 product assists trustees to manage liquidation
bankruptcies, whereby the trustee liquidates the debtor's assets and disburses
the resulting funds to creditors.
GRAPHIC ENTITLED "CHAPTER 7" DEPICTING A TRUSTEE RECEIVING ASSETS FROM THE
DEBTOR AND MAKING PAYMENTS TO CREDITORS. SOFTWARE FEATURES IDENTIFIED INCLUDE
ASSET MANAGEMENT, FUNDS ADMINISTRATION, CREDITOR PAYMENTS, AND GOVERNMENT
REPORTING.
CURRENT CHAPTER 7 PRODUCT: TCMS
TCMS (Trustee Case Management System) is a Windows95/Windows NT 4 based
package of proprietary software, computer equipment and support services offered
to Chapter 7 trustees through a national marketing arrangement with NationsBank.
TCMS provides easy-to-use modules for asset management, financial record keeping
and claims administration. An electronic banking link developed by the Company
gives users an automated mechanism for entering banking transactions, and an
electronic court interface allows users to download claim information into the
trustee's database automatically.
A typical TCMS system is provided to the end-user trustee client without
direct charge and includes the following products and services: (i) a license to
use the proprietary TCMS software and subsequent upgrades; (ii) computer
hardware, laser printer, modem, tape backup and operating software, which are
returned to EPI if the trustee's bankruptcy deposits leave the bank designated
by EPI; (iii) database conversion from previous computer system; (iv)
configuration and installation of hardware by EPI personnel; (v) on-site
software training; (vi) customization of reports conforming to local bankruptcy
court regulations; (vii) toll-free customer service; and (viii) remote
diagnostics. The Company's revenues are based upon the total funds kept on
deposit. See "Pricing -- Chapter 7 Pricing."
SOFTWARE FEATURES
The TCMS software streamlines administrative tasks associated with Chapter 7
liquidation bankruptcies. Most trustees use the system on a daily basis for
record keeping and to meet reporting requirements.
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- ASSET MANAGEMENT. As assets are identified, the trustee enters them into
TCMS through a convenient spreadsheet-like interface. The system
automatically tracks the remaining values of assets as they are liquidated
and provides a summary overview of properties within each case.
- BANKING. An online banking module developed by the Company allows the
trustee to open and close bank accounts electronically as well as to enter
funds transfers. Simple to sophisticated financial transactions can be
recorded on an online computer screen that resembles a personal check
register. The system prepares MICR encoded laser checks and deposit slips
on demand.
- CLAIMS ADMINISTRATION. TCMS categorizes each claim by class and desired
priority level for distribution. Distribution checks are calculated and
printed automatically, and all financial ledgers are updated. An extensive
library of financial reports provides detailed information for each case.
A proprietary feature allows information to be downloaded from the court
into the trustee's database.
- CALENDARING AND DOCKETING. Key events in asset cases are posted
automatically to a central trustee's calendar that can be printed
regularly. The software automatically schedules tasks required to close
cases in a timely fashion.
- CUSTOMIZED DISTRICT REPORTS. EPI utilizes OLE (object linking and
embedding) and ActiveX technology and the Microsoft Word for Windows95
word processing program to custom tailor final reports and final accounts
for each district where TCMS is marketed. Preparing these documents has
traditionally been one of the most time consuming tasks in Chapter 7 case
administration. With TCMS, trustees can quickly generate a fully
formatted, polished report with all figures calculated and filled in.
- 180 DAY REPORTS. The United States Trustee requires the trustee to submit
detailed status reports for each case every six months in a very specific
reporting format. TCMS prints these reports in compliance with the most
recent regulations.
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CHAPTER 13 PRODUCTS
The Company's Chapter 13 products assist trustees to manage individual
reorganization bankruptcies, whereby the debtor makes payments to the trustee,
who in turn disburses the funds to creditors:
GRAPHIC ENTITLED "CHAPTER 13" DEPICTING A TRUSTEE RECEIVING PAYMENTS FROM A
DEBTOR AND MAKING PAYMENTS TO CREDITORS. SOFTWARE FEATURES IDENTIFIED INCLUDE
LEGAL NOTICING, CREDITOR DISTRIBUTIONS, CASE MANAGEMENT, AND GOVERNMENT
REPORTING.
CURRENT CHAPTER 13 PRODUCT: MIDRANGE
MIDRANGE is based on IBM mini-computer AS/400 technology and uses the
Company's proprietary software to assist Chapter 13 trustees managing databases
containing from approximately 500 to over 10,000 active bankruptcies
simultaneously. Because Chapter 13 bankruptcy cases typically undergo thirty-six
to sixty consecutive monthly distributions, Chapter 13 is considerably more
transaction intensive and paperwork intensive than Chapter 7, where a single
distribution is normally made at the end of the case. Chapter 13 trustee clients
out-source various activities to EPI to facilitate the preparation of large
output jobs.
Processing and report printing functions are divided between the client-site
AS/400 installation and EPI's data center in Kansas City. The MIDRANGE is
installed in a multi-user configuration that allows each member of the trustee's
office staff to access the database and enter transactions throughout the
business day. The trustee's live database resides in his or her office. The size
of a Chapter 13 trustee's office staff varies proportionally with the caseload
managed. Therefore, MIDRANGE installations vary in size from three workstations
to over twenty workstations.
The trustee's office staff enters financial information into the MIDRANGE,
including cash receipts, financial adjustments and payment instructions for each
claim. EPI's proprietary program logic interprets a wide variety of
court-directed payment scenarios and consolidates them into easy-to-understand
codes that are entered by users. Daily reports and customized inquiries can be
requested and printed inside the trustee's office.
At the end of each month, the trustee forwards a copy of the database to EPI
in Kansas City. EPI prints distribution checks for each eligible creditor and
prepares detailed laser output for every case in the database as a billable
service. Checks and reports are shipped overnight back to the trustee for
inspection, approval and mailout.
In certain parts of the country, the Chapter 13 trustee is responsible for
noticing parties-in-interest of key developments in each bankruptcy case,
including the setting of the mandatory first meeting of creditors. The Company's
MIDRANGE software automates this meeting notice for the trustees. Other events
that may be noticed through the MIDRANGE include motions to dismiss the case,
reset notices, correcting notices and motions to allow claims. The MIDRANGE
software provides an optional noticing module that receives relevant input from
the office staff. Alternatively, trustees may purchase data entry services from
EPI and forward original documents to Kansas City for keying. Each evening,
EPI's data center receives a modem transmission of daily noticing activity from
the client-site AS/400. EPI prints and reviews the notices, inserts them into
envelopes and mails them the next day. Trustees are billed directly for noticing
services based upon the number of documents generated.
Some bankruptcy courts require additional information, such as a photocopy
of the plan of reorganization, to be included with the notice. EPI offers such
document reproduction and assembly services to trustees at an additional charge.
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SOFTWARE FEATURES
The MIDRANGE software helps trustees manage administrative aspects of
Chapter 13 bankruptcy. The trustee and office staff typically use the system
each day to monitor activity in their caseload.
- NOTICING. When new cases are entered on the MIDRANGE system, the EPI data
center in Kansas City can extract relevant information and prepare
mandatory first meeting of creditors notices for each case. Subsequent
forms, such as reset notices, correcting notices, motions to allow claims,
motions to allow additional claims and motions to dismiss, can also be
selected and prepared through the system.
- CASE MANAGEMENT. The MIDRANGE stores and monitors key dates, names,
addresses and text notes for every case in the system. A variety of
retrieval mechanisms enable users to view case information from various
perspectives.
- FINANCIAL HISTORY. The office staff enters cash receipts and financial
adjustments in the system as part of the daily bank deposit. The MIDRANGE
updates the balances in each case and summarizes the day's financial
transactions. Each month, the MIDRANGE prepares a single-page summary of
the receipts and disbursements in every case.
- MONTHLY DISTRIBUTION. The MIDRANGE's advanced distribution logic
interprets payment orders from the bankruptcy court. Several different
payment methodologies (e.g., pro rata, fixed monthly payment, per capita,
etc.) may be spread over 99 separate distribution priority levels.
Individual checks or voucher checks can be printed for each creditor.
Claims having objections filed on them can continue to accrue
distributions without releasing funds until the objection has been
settled.
- INQUIRY. Chapter 13 offices receive a multitude of outside inquiries each
day from creditors' and debtors' attorneys. The Midrange provides
instantaneous inquiry access to the financial status of each debtor and
claim in the system. An optional creditor dial-in system gives outside
parties inquiry access only to the system through a modem connection.
NEW CHAPTER 13 PRODUCT: CASEPOWER
The Company has developed a new PC-based Windows95/Windows NT 4 Chapter 13
product, CASEPOWER, that is intended to replace the existing MIDRANGE
mini-computer-based product. The Company tested this product in a trustee's
office from early 1996 and concluded such testing in the fourth quarter of 1996.
CASEPOWER is scheduled for general release in early 1997. CASEPOWER is
constructed on client-server architecture, whereby intelligent desktop devices
receive and transmit data and applications to and from file servers. The
database uses the Oracle7 database engine. The front end interface runs under
Microsoft Windows95 and therefore takes advantage of a graphical user interface
(GUI), which the Company believes has yet to be introduced in the mass Chapter
13 market.
CASEPOWER incorporates several advanced technologies that the Company
believes enhance its marketability. These include document imaging, bar coding,
audio and video instruction, speech recognition and outside creditor inquiry
dial-in.
With the CASEPOWER product, EPI has further simplified creditor distribution
logic for the trustee and added important functions, including an interactive
on-screen ledger that consolidates an entire bankruptcy case into a single
window and a comprehensive docketing module that manages court appearances and
key status changes in each bankruptcy case.
CHAPTER 7 MARKETING ARRANGEMENT
On November 22, 1993, the Company established an exclusive national
marketing arrangement with NationsBank of Texas, N.A. ("NationsBank"), a
subsidiary of NationsBank Corporation, for its Chapter 7 products. In this
marketing arrangement, EPI and NationsBank promote products and
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services to trustees in all states. Because Chapter 7 trustees are discouraged
from incurring direct costs for computer services, it is essential for EPI to
align with a bank or series of banks to earn revenues in Chapter 7. NationsBank,
headquartered in Charlotte, North Carolina, is the fourth largest national
banking company. The Company works in partnership with the bank's Federal
Government Banking Division based in Atlanta to market TCMS and NationsBank
banking services as a package. Chapter 7 bankruptcy deposits are housed in
Dallas, where NationsBank has established a customer service team to support
trustees using EPI's products.
The agreement with NationsBank does not have an expiration date. The
termination clause stipulates that either party must provide the other 90 days'
notice if it wishes to end the agreement. The Company believes its
representatives have developed positive, close working relationships with their
counterparts at NationsBank, and the Company believes that it will maintain this
relationship. However, were the relationship with NationsBank to end, there is
no assurance that the Company would be able to establish a new banking
relationship or series of relationships with comparable terms.
EPI holds the primary responsibility for developing all facets of the TCMS
system and for driving the national sales and marketing effort. NationsBank
personnel provide additional assistance in the marketing effort and are
responsible for administering the banking services provided to the trustee
clients.
Through this arrangement, EPI has a continual revenue stream from its
Chapter 7 operations. The structure of the marketing alliance assists
NationsBank to build its deposit base in this market.
The Company continues to support a limited number of trustee relationships
through other banks that predate the exclusive agreement with NationsBank.
PRICING
CHAPTER 7 PRICING
Unlike Chapter 13, the application of Chapter 7 bankruptcy regulations has
the practical effect of discouraging trustees from incurring direct
administrative costs for computer expenses. All nationally marketed Chapter 7
systems are provided to trustees without direct billing to the trustee because
of traditional market conventions. Clients typically choose systems based upon
the capability of the software and the quality of technical support services.
EPI has aligned with NationsBank to provide computer services to Chapter 7
trustees without direct charges to the Chapter 7 trustee under the following
arrangement:
- EPI licenses its proprietary software to the trustee and furnishes
hardware, conversion services, training and customer support, all at no
cost to the trustee;
- The trustee agrees to deposit with NationsBank the cash proceeds from all
asset liquidations; and
- NationsBank pays the Company a fee each month based upon the total
deposits in the Chapter 7 bankruptcy portfolio.
GRAPHIC DEPICTING REVENUE STRUCTURE OF THE COMPANY'S TCMS PRODUCT. EPI LICENSES
TCMS TO A TRUSTEE; THE TRUSTEE DEPOSITS MONEY WITH THE BANK; AND THE BANK PAYS
EPI A FEE.
CHAPTER 13 PRICING
The Company typically receives an initial licensing fee and conversion
charge from the Chapter 13 trustee. It also receives monthly fees from each
Chapter 13 trustee client based on the total number of cases in that trustee's
database and the number of noticing documents generated. Variables
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affecting pricing for EPI Chapter 13 clients include the number of cases in the
database, the type of equipment installed, the volume of noticing to be out
sourced to EPI, and the level of support service selected by the trustee. EPI
prepares individualized price quotes for each client.
SALES AND DISTRIBUTION
The Company's products and services are marketed directly to trustees
through on-site sales calls by the Company's internal sales department and, in
the case of Chapter 7, by supporting representatives of NationsBank. Trustees
make their own decisions for software and service providers. The Company
believes that the most important factors in attracting business are the quality
of the software products and the quality of the post-installation support.
The Company's national sales manager is in the Kansas City headquarters and
manages the internal sales force and acts as liaison with the NationsBank
representatives. The Company estimates that a typical sales cycle, from
identification of the client to the receipt of a trustee's agreement, lasts from
two to four months.
The Company's Chapter 7 and Chapter 13 service agreements with trustees
typically include provisions for (i) descriptions of the products and services
included in the agreement, (ii) a limited warranty and indemnification clauses,
(iii) the trustee's agreement to deposit funds with NationsBank (applicable in
Chapter 7 only), and (iv) termination information.
The Executive Office of the United States Trustee in Washington, D.C.,
regularly issues a directory of all current bankruptcy trustees. The Company
obtains this directory as it is issued and uses it as its prospect list.
The Company's sales representatives attend approximately eight bankruptcy
trade shows annually. The Company conducts direct mail campaigns and advertises
in trade journals to heighten its exposure and to stimulate sales.
COMPETITION
The Company works in an industry with a limited number of Chapter 7 and
Chapter 13 trustees. The Company estimates that there are approximately 550,000
pending Chapter 13 cases being managed by approximately 180 Chapter 13 trustees,
and that there is approximately $2 billion on deposit by approximately 1,200
Chapter 7 trustees. There are several companies in the market all competing for
sales from this finite group of customers, and some of the Company's competitors
have substantially greater financial and marketing resources than does the
Company. For its Chapter 7 product, the Company competes with the Chase
Manhattan Bank and Union Bank of California, as well as other regional
competitors in selected markets. For its Chapter 13 product, the Company
competes with DCI Corporation of Memphis, Tennessee, a private company, and
other competitors. Although the Company believes that the requisite detailed
knowledge of the bankruptcy system makes it difficult for new competitors to
successfully enter the market, and there are presently a limited number of firms
that offer services that directly compete with the Company's, there can be no
assurance that other firms with resources significantly greater than the
Company's will not enter the Company's industry. The Company's future financial
performance will depend on its ability to maintain existing customer accounts
and to attract business from customer accounts which are currently using a
competitor's software product.
FUTURE AND ADDITIONAL PRODUCTS
FUTURE PRODUCTS
The Company is committed to developing its presence in the bankruptcy
industry to the greatest possible extent. In addition to the products for
Chapter 7 and Chapter 13 trustees, the Company intends to develop additional
programs and services for debtors, attorneys and creditors. In late 1996, the
Company announced a new business line, EPI DOCUMENT IMAGING SYSTEMS, in which
paper
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documents are scanned and stored to CD-ROM technology. Optical Character
Recognition (OCR) features allow full-text search of the CD-ROM, each of which
can store at least 12,000 original documents. EPI DOCUMENT IMAGING SYSTEMS can
be used in concert with the Company's other products to achieve high levels of
integration. Additionally, the Company believes that its document imaging
business eventually can be marketed to a broader client base outside the
insolvency industry, including the legal, medical and claims processing
communities.
Other potential marketing opportunities for the Company may include
complementary lines of business, such as database extraction and updating
services, bankruptcy petition management, commercial claims recovery system and
specialty products for international insolvency markets.
CHAPTER 11
Chapter 11 bankruptcy is normally associated with corporate reorganization
but can also be applied to individuals meeting certain criteria. The Company has
developed a mainframe-based Chapter 11 product that performs noticing, claims
administration, funds distribution and creditor ballot tabulations.
Historically, EPI has marketed this product successfully to large companies
undergoing reorganization, including major airlines and other major companies.
EPI believes that Chapter 11 is one part of the bankruptcy system that is
contracting, as more eligible debtors are turning to private turn-arounds and
workouts in lieu of a formal Chapter 11. Additionally, there are a number of
competitors in Chapter 11 computer services. Accordingly, in light of what the
Company considers to be favorable market conditions in Chapters 7 and 13, the
Company has elected to focus its resources in these areas. While the Chapter 11
product is still available, it is not actively marketed.
CHAPTER 12
Chapter 12 bankruptcy is intended specifically for family farmers. A Chapter
12 case closely resembles Chapter 13 in administrative procedure but has
different debt ceilings that are more suitable for farmers. When Chapter 12
cases are filed in a given area, the standing Chapter 13 trustee often assumes
responsibility for them. The EPI Chapter 13 products have been used to manage
Chapter 12 cases as well.
NEW PRODUCT DEVELOPMENT
The Company plans to use approximately $900,000 of the proceeds from this
Offering for software development. This may include the development of new
applications, enhancement to existing applications, hiring of new development
staff, acquisition of new development technologies and/ or training for the
Company's software development staff. The Company produces its software
applications internally with its dedicated staff of professional software
developers. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
PROPRIETARY RIGHTS
Historically, the Company has not protected its intellectual property rights
through patents or formal copyright registration. It has relied on trade secret,
copyright, and trademark law and non-disclosure agreements to establish and
protect its proprietary rights in its products. The Company believes, however,
that its financial performance will depend more upon the innovation,
technological expertise and marketing abilities of its associates than upon such
protection.
There is no assurance that the Company will be able to protect its trade
secrets or that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets. There is no assurance that intellectual property laws will
protect the Company's intellectual property rights. In addition, litigation may
be necessary to
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enforce the Company's intellectual property rights, to protect the Company's
trade secrets, to determine the validity and scope of the proprietary rights of
others or to defend against claims of infringements. Such litigation could
result in substantial costs and diversion of management and other resources and
could have a material adverse effect on the Company's business, financial
condition and results of operation.
This Prospectus also contains trademarks of other companies. The products of
other companies mentioned herein are for reference purposes only and may be
trademarks or registered trademarks of their respective companies.
EMPLOYEES
The Company employs approximately 60 full-time employees, distributed as
follows: (i) 6 in senior management; (ii) 14 in information services; (iii) 23
in client services/sales; (iv) 14 in support services; and (v) 3 in accounting.
No Company employees are covered by collective bargaining agreements. The
Company believes its relationships with its employees are good.
PROPERTIES
The Company's corporate offices are located in a 30,000-square-foot facility
leased in Kansas City, Kansas. In connection with corporate growth and the
development of new products, this facility has been recently renovated with
additional office space. The Company believes that this facility will be
adequate for use for at least the next full year. The leased facility is
partially owned by a related party. See "Certain Transactions."
LEGAL PROCEEDINGS
The Company is not a party to any material litigation, although it
occasionally becomes involved in litigation arising in the normal course of
business. Management believes that any liability with respect to such actions
will not have a material adverse effect on the Company's financial position or
results of operation.
29
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company, their ages as of
September 30, 1996 and their positions are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
Tom W. Olofson (1)(2) 54 Chairman, President and Chief Executive Officer
Christopher E. Olofson 26 Executive Vice President, Chief Operating Officer, and Director
Albert T. Annillo 45 Senior Vice President
Reed A. Eichner 38 Vice President -- Operations
Nanci R. Trutna 43 Vice President -- Finance
Sally D. MacDonald 49 Vice President -- Human Resources
Robert C. Levy (1)(2) 49 Secretary and Director
W. Bryan Satterlee (2) 62 Director
</TABLE>
- ------------------------
(1) Member of Stock Option Plan Committee
(2) Member of Audit Committee
TOM W. OLOFSON led a private investor group that acquired the Company in
July 1988, and he has served as Chief Executive Officer and Chairman of the
Board since that time. During his business career, Mr. Olofson has held various
management positions with Xerox Corporation and was a Senior Vice President and
member, Office of the President of Marion Laboratories (now Hoechst Marion
Roussel, Inc.). Mr. Olofson is a director of Saztec International, Inc., a
provider of information management services, and also serves as a director of
various private companies in which he is an investor. He earned a BBA from the
University of Pittsburgh in 1963, and is currently a member of the Board of
Visitors of the Katz Graduate School of Business at the University of
Pittsburgh. He is the father of Christopher E. Olofson.
CHRISTOPHER E. OLOFSON joined EPI as a Vice President in June 1993, having
been a part-time employee of the Company since 1988. In January 1994, he was
designated Senior Vice President -- Operations, and became Executive Vice
President and a member of the Board of Directors effective January 1, 1995.
Effective July 1, 1996, Mr. Olofson also assumed the duties of Chief Operating
Officer. He earned an AB degree from Princeton University in 1992, SUMMA CUM
LAUDE. He was designated a Fulbright Scholar where he completed a one-year
program of study at the Stanford University Center in Taipei, Taiwan in 1993. He
is the son of Tom W. Olofson.
ALBERT T. ANNILLO has been Senior Vice President since January 1995. Mr.
Annillo joined the Company in October 1992 as a corporate Vice President. He was
Assistant Director, Executive Office for United States Trustees, Department of
Justice, Washington, D.C. for six years before his association with the Company.
He earned an MBA and an MED from William Patterson College in 1975 and 1979,
respectively.
REED A. EICHNER joined the Company as Vice President -- Sales and Marketing
in September 1995. He became Vice President -- Operations on September 1, 1996.
From May 1991 through August 1995 he served as President and owner of
Connexions, Inc., a company which provided system integration and document
conversion services. He was General Manager of Innovision Systems, Inc. from
September 1989 to May 1991. Mr. Eichner earned a BA from the University of North
Carolina in 1982.
30
<PAGE>
NANCI R. TRUTNA assumed her present position as Vice President -- Finance in
June 1993. She was with Merchants Bank, Kansas City, Missouri from 1981 to June
1993 where she became a Senior Vice President. Ms. Trutna is a Certified Public
Accountant and earned a BSBA in 1975 from the University of North Dakota.
SALLY D. MACDONALD joined the Company as Vice President -- Human Resources
in January 1996. Ms. MacDonald has extensive management experience in the human
resources field. She served as Region Human Resources Manager for Network
General, Inc. from 1992 to 1994, as Manager, Employment with North Supply
Company from 1989 to 1991, and as Manager, Employment and Employee Relations
with Informix Software, Inc. from 1986 to 1989. Ms. MacDonald earned a BS in
Business Administration from the University of San Francisco in 1984.
ROBERT C. LEVY is an attorney who is a director, stockholder and executive
committee member of the law firm of Seigfreid, Bingham, Levy, Selzer & Gee in
Kansas City, Missouri. He has been the Corporate Secretary and a Director of the
Company since July 1988. He earned a BS from Northwestern University in 1968,
and a J.D. from the University of California at Berkeley in 1971. Mr. Levy
formerly was Chairman of the Board of Directors of Blue Cross and Blue Shield of
Kansas City and presently serves as a member of that Board of Directors.
W. BRYAN SATTERLEE was elected to the Company's Board of Directors effective
as of the date of this Prospectus. Mr. Satterlee has been a partner since 1989
in NorthEast Ventures, a consulting firm based in Hartford, Connecticut which
specializes in business development services for and evaluations of
technology-based venture companies. He has extensive general management and
marketing experience in technology-based firms. Mr. Satterlee's background
includes ten years of management experience with IBM, as well as having been a
founder of a computer leasing/software business, telecommunications company and
a venture investment services business. He earned a BS in 1956 from Lafayette
College.
EXECUTIVE COMPENSATION
The following table sets forth the cash and other compensation paid in 1995
to the Company's Chief Executive Officer. No other executive officer of the
Company earned in excess of $100,000 in 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------- ALL OTHER
SALARY OTHER ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION YEAR (1)(2) BONUS COMPENSATION (3) (4)(5)
- ------------------------------------------------ --------- --------- --------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Tom W. Olofson, Chairman/CEO.................... 1995 $ 47,980 $ 24,000 $ 36,500 $ 9,920
</TABLE>
- ------------------------
(1) Tom W. Olofson's compensation in 1996 will be approximately the same as it
was in 1995. Effective January 1, 1997, Mr. Olofson's annual salary will be
$100,000.
(2) Christopher E. Olofson, Executive Vice President and Chief Operating
Officer, is being paid a base salary of $108,000 in 1996. Effective January
1, 1997, this annual base salary will be $120,000.
(3) Includes $33,452 for payment of annual life insurance premiums on policies
owned by Tom W. Olofson, which designate Jeanne H. Olofson, his wife, as the
beneficiary, and $3,048 for personal use of Company automobile.
(4) Company benefits which include $8,276 for group insurance and $1,644 for
Company matching contributions to 401(k) plan.
(5) Does not include: (i) fees of $24,658 paid during 1995 for guaranteeing the
Company's debt or (ii) interest of $40,000 on a subordinated note in 1995 on
amounts borrowed by the Company from Tom W. Olofson. See "Certain
Transactions."
31
<PAGE>
BOARD OF DIRECTORS COMPENSATION
The Board of Directors compensates its non-employee members at the rate of
$750 per quarter and $750 per meeting attended.
The Company will grant an option to W. Bryan Satterlee for 7,500 shares of
Common Stock at an exercise price equal to the initial public offering price.
STOCK OPTION PLAN
On October 17, 1995, the Company adopted a stock option plan ("the "1995
Plan"), which was amended on November 4, 1996. The 1995 Plan provides for the
issuance of options to employees, officers and directors of the Company
("Eligible Participants") to purchase up to an aggregate of 270,000 shares of
Common Stock, subject to adjustment under certain circumstances. Options granted
under the 1995 Plan may be either "incentive stock options" ("ISOs") as defined
by Section 422 of the United States Internal Revenue Code of 1986, as amended
(the "Code") or non-statutory stock options ("NSO's").
The 1995 Plan is administered by the Stock Option Plan Committee of the
Board of Directors (the "Committee"). The Committee must be composed of not less
than two members of the Board of Directors, each of whom has not during the one
year prior to service as a member of the Committee or is not during such service
granted or awarded Options pursuant to the 1995 Plan of the Company. The
Committee has sole discretion and authority, consistent with the provisions of
the 1995 Plan, to grant ISOs or NSOs, determine in good faith the fair market
value of the shares, select the eligible participants to whom options will be
granted under the 1995 Plan, construe and interpret the Plan, promulgate, amend
and rescind rules and regulations for the administration thereof, and make such
other determinations which are necessary and advisable for the 1995 Plan's
administration.
The exercise price of ISOs granted under the 1995 Plan shall be no less than
the fair market value of a share of Common Stock on the date the option is
granted (110% with respect to ISO optionees who own at least 10% of the
outstanding Common Stock of the Company). As respects NSOs, the exercise price
shall be determined by the Committee and may be less than the fair market value.
The Committee has the authority to determine the time or times at which options
granted under the 1995 Plan become exercisable, but options expire no later than
ten years from the date of grant (five years with respect to optionees who own
at least 10% of the outstanding Common Stock of the Company). Options are
nontransferable, other than by will and the laws of descent, and generally may
be exercised only by an employee while employed by the Company or within 90 days
after termination of employment or one year in the event of termination by
reason of death or disability.
The Company has reserved an aggregate of 270,000 shares of the Company's
Common Stock for issuance under the 1995 Plan. There will be outstanding at the
closing of this Offering options to purchase 119,500 shares of Common Stock
exercisable at the Offering price. Options granted under the 1995 Plan are
exercisable in cash or by delivery to the Company of shares of the Company's
Common Stock. The Company will grant an option to Christopher E. Olofson,
Executive Vice President and Chief Operating Officer, for 25,000 shares of
Common Stock at an exercise price equal to 110% of the initial public offering
price. The Company will grant an option to W. Bryan Satterlee, Director, for
7,500 shares of Common Stock at an exercise price equal to the initial public
offering price. Both of these options will be granted on the closing date of
this Offering.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's by-laws provide that the Company shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit, or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was a
director or officer of the Company (or is or was serving at the request of the
Company as a director or officer of another entity) against expenses, including
attorneys' fees, judgments, fines, and
32
<PAGE>
amounts paid in settlement (except that, in connection with an action by or in
the right of the Company, the indemnity shall be limited to expenses, including
attorneys' fees, and amounts paid in settlement) actually and reasonably
incurred by him in connection with such action, suit, or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Company and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
To the extent that a director, officer, employee, or agent has been
successful on the merits or otherwise in defense of any action, suit, or
proceeding, or in defense of any claim, he shall be indemnified against
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection with the action, suit, or proceeding. Expenses incurred in defending
a civil or criminal action, suit or proceeding may be paid by the Company in
advance of the final disposition of the action, suit, or proceeding. The
indemnification discussed in this section is not exclusive of any other rights
the party may have seeking indemnification.
The Company believes that it is the position of the Securities and Exchange
Commission that insofar as the foregoing provision may be invoked to disclaim
liability for damages arising under the Securities Act of 1933, as amended (the
"Securities Act"), the provision is against public policy as expressed in the
Securities Act and is therefore unenforceable. Such limitation of liability also
does not affect the availability of equitable remedies such as injunctive relief
or rescission.
CERTAIN TRANSACTIONS
In July 1988, an unaffiliated venture capital firm purchased a $400,000
subordinated note and a stock purchase warrant from the Company. In October
1991, the Company's Board of Directors deemed it in the best interest of the
Company to purchase the subordinated note and stock purchase warrant from the
venture capital firm. Because the Company could not then complete this
transaction without incurring additional debt, Tom W. Olofson, Chairman and
Chief Executive Officer, purchased the subordinated note and stock purchase
warrant. This subordinated note payable to Mr. Olofson is still outstanding in
the amount of $400,000. The note provides for interest at the rate of 10% with a
maturity date of July 1998. Interest paid to Tom W. Olofson under this agreement
was $40,000 per year for 1996, 1995 and 1994. The stock purchase warrant
provided for the acquisition of 969,228 shares of the Company's Common Stock at
$.4125 per share at any time prior to July 14, 1998 (giving retroactive effect
to the six-for-one stock split). The Company has calculated and recorded a value
of such stock purchase warrant in the amount of $41,000, with the value being
calculated using the difference between net book value and exercise price per
share. In an October 11, 1996 agreement between the Company and Mr. Olofson, it
was agreed that the Company would pay $41,000 to Mr. Olofson on or before
December 31, 1996, at which time the stock purchase warrant would be retired.
The Company intends to repay the $400,000 outstanding face value of the
subordinated note to Mr. Olofson from the proceeds of the Offering. See "Use of
Proceeds."
The Company has a noncancellable operating lease for its corporate
headquarters which expires in February 2001. Tom W. Olofson holds a 50%
interest, as a general partner, in T & J Investment Company, a Kansas general
partnership ("T & J Investment Company") that leases this facility to the
Company. The lease requires the Company to pay all executory costs (property
taxes, maintenance and insurance). Rental expense is scheduled to be $146,625
for the year ended December 31, 1996. Rental expense under a predecessor lease
between the Company and T & J Investment Company was $142,125 and $137,625 for
the years ended December 31, 1995 and 1994, respectively.
Tom W. Olofson personally guarantees substantially all of the Company's
outstanding debt. Fees totaling $24,658 and $23,250 were paid to Mr. Olofson
during 1995 and 1994, respectively, for
33
<PAGE>
guaranteeing the Company's debt. Upon application of the proceeds of the
Offering to retire certain corporate debt, Tom W. Olofson's guarantee
obligations with respect to such debt will be extinguished. See "Use of
Proceeds."
During the period February 1993 through March 1995, the Company secured a
line of credit in the amount of $350,000 from Tom W. Olofson. The loan was
evidenced by a line of credit note providing interest at the rate of 10%. The
maximum amount borrowed by the Company during this time period was $310,000 and
the note was paid off in its entirety in June 1994. Interest expense of $10,501
was recognized on the note payable outstanding to Mr. Olofson in 1994.
The Company believes that all prior transactions between the Company and its
officers, directors, or other affiliates of the Company were on terms no less
favorable than could have been obtained from unaffiliated third parties on an
arm's length basis. All future transactions, loans and any forgiveness of loans,
with directors, officers or stockholders holding more than 5% of the Company's
outstanding Common Stock, or affiliates of any such persons, will be made for
bona fide business purposes and will be on terms no less favorable than could be
obtained from an unaffiliated third party and will be approved by a majority of
the independent outside directors who do not have an interest in the
transactions.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock as of the date of this Prospectus for (i)
each director and director nominee of the Company; (ii) each person known to the
Company to be the beneficial owner of more than 5% of the outstanding shares;
and (iii) all directors and executive officers as a group. Except pursuant to
applicable community property laws or as otherwise indicated, each stockholder
has sole voting and investment power with respect to the shares beneficially
owned.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED
NUMBER OF --------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER (1) SHARES BEFORE OFFERING AFTER OFFERING
- ------------------------------------------------------- ----------- ----------------- -------------------
<S> <C> <C> <C>
Tom W. Olofson (2)..................................... 1,620,000 90.0% 47.6%
Christopher E. Olofson................................. 109,500 6.1% 3.2%
Robert C. Levy......................................... 30,000 1.7% 1.0%
W. Bryan Satterlee..................................... 0 -- --
All directors and executive officers as a group (4
persons).............................................. 1,759,500 97.8% 51.8%
</TABLE>
- ------------------------
(1) The address of all of the named individuals is c/o Electronic Processing,
Inc., 501 Kansas Avenue, Kansas City, Kansas 66105.
(2) Excludes 19,500 shares owned by Mr. Olofson's adult son, Scott W. Olofson,
as to which shares Mr. Olofson disclaims beneficial ownership.
34
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The authorized capital stock of the Company consists of 5,000,000 shares,
$0.01 par value. As of November 4, 1996, there were 1,800,000 shares of Common
Stock outstanding held of record by six stockholders. The holders of Common
Stock are entitled to one vote for each share held of record on all matters
submitted to a vote of the holders of Common Stock. The holders of Common Stock
are entitled to receive ratably such dividends as may be declared by the Board
of Directors out of funds legally available therefor. See "Dividend Policy." In
the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities. The holders of Common Stock have no preemptive or
subscription rights and there are no redemption or conversion rights with
respect to such shares. All outstanding shares of Common Stock are fully paid
and non-assessable and the shares of Common Stock to be issued upon completion
of the Offering will be fully paid and non-assessable.
UNDERWRITER'S WARRANT
In connection with the Offering, the Company has agreed to issue the
Underwriter a warrant to purchase up 160,000 shares of Common Stock at an
exercise price per share equal to 120% of the Price to Public. The Underwriter's
Warrant is non-transferable for a period of one year following the date of this
Prospectus. Thereafter, the Underwriter's Warrant may not be transferred other
than by will or pursuant to the operation of law, except to a person who is an
officer of the Underwriter. The Underwriter's Warrant is exercisable an any time
during the four year period beginning one year after the date of this
Prospectus.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Norwest Bank of
Minnesota, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding 3,400,000
shares of Common Stock. All of the 1,600,000 shares of Common Stock offered
hereby will be freely transferable without restriction or further registration
under the Securities Act, except for any shares purchased by any person who is
or thereby becomes an "affiliate" of the Company, which shares will be subject
to the resale limitations contained in Rule 144 promulgated under the Securities
Act as described below. The remaining 1,800,000 shares of Common Stock currently
outstanding, of which 1,759,500 are held by affiliates of the Company, may not
be sold unless registered under the Securities Act or sold pursuant to an
applicable exemption from registration or pursuant to Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act, is
entitled to sell, within any three month period, the number of shares
beneficially owned for at least two years that does not exceed the greater of
(i) one percent of the number of the then outstanding shares of Common Stock; or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements as to the manner of sale, notice and the availability of
current public information about the Company. Furthermore, a person who is not
deemed to have been an affiliate of the Company during the ninety days preceding
a sale by such person and who has beneficially owned such shares for at least
three years is entitled to sell such shares without regard to the volume, manner
of sale or notice requirement.
Up to 160,000 additional shares of Common Stock may be purchased by the
Underwriter through the exercise of the Underwriter's Warrant. The Underwriter's
Warrant will be exercisable at an exercise price equal to 120% of the price to
the public and will be exercisable at any time and from time to time during the
four year period commencing one year from the date of this Prospectus. Any and
all
35
<PAGE>
of such shares of Common Stock will be transferable without restriction,
provided that the Company satisfies certain securities registration requirements
in accordance with the terms of the Underwriter's Warrant. See "Underwriting."
Prior to the Offering, no public market for the Company's securities has
existed. Following the Offering, no predictions can be made of the effect, if
any, of future public sales of restricted shares or the availability of
restricted shares for sale in the public market. Moreover, the Company cannot
predict the number of shares of Common Stock that may be sold in the future
pursuant to Rule 144 because such sales will depend on, among other factors, the
market price of the Common Stock and the individual circumstances of the holders
thereof. The availability for sale of substantial amounts of Common Stock could
adversely affect prevailing market prices for the Company's securities.
All of the existing stockholders have entered or are expected to enter into
agreements (the "Lockup Agreements") under which they agree not to sell or
otherwise dispose of their equity securities without the prior written consent
of the Underwriter (which consent may not be unreasonably withheld) for a period
of six months from the date of this Prospectus.
After 90 days from the date of this Prospectus, the Company may file a
registration statement on Form S-8 under the Securities Act to register the
shares issuable to employees, directors and consultants upon exercise of stock
options granted or to be granted under its stock option plan. Upon the
effectiveness of that registration statement, shares that are not otherwise
subject to the Lockup Agreement referred to above will be available for
immediate resale to the public market.
36
<PAGE>
UNDERWRITING
The Company has entered into an Underwriting Agreement with R. J. Steichen &
Company (the "Underwriter") pursuant to which the Underwriter has agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
from the Company, and the Company has agreed to sell to the Underwriter shares
of Common Stock at the offering price less the underwriting discount set forth
on the cover page of this Prospectus. The Underwriting Agreement provides that
the obligations of the Underwriter to pay for and accept delivery of the
securities offered hereby are subject to the approval of certain legal matters
by their counsel and to certain other conditions. The Underwriter is committed
to take and pay for all of the Common Stock offered hereby (other than those
covered by the over-allotment option described below), if any are taken.
The Underwriter has advised the Company that it proposes to offer the Common
Stock directly to the public at the public offering price set forth on the cover
page of this Prospectus and to certain selected dealers at such price less a
concession not in excess of $. per share. The Underwriter may allow and such
dealers may reallow a concession not in excess of $. per share to certain
other dealers. After the initial public offering, the Price to Public,
concession and reallowance may be changed by the Underwriter.
The Company has granted to the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to an additional 240,000
shares of Common Stock, at the initial public offering price, solely for the
purpose of covering over-allotments, if any. The Underwriter may exercise this
option only to cover over-allotments in the sale of Common Shares. In addition,
the Company has agreed to pay to the Underwriter at the closing of the Offering
a non-accountable expense allowance of 3% of the aggregate public offering price
to cover expenses incurred by the Underwriter in connection with the Offering,
reduced by amounts advanced by the Company which, as of the date of this
Prospectus, are $10,000.
The Company has agreed to issue the "Underwriter's Warrant" to purchase up
to 160,000 shares of Common Stock. The Underwriter's Warrant will be
exercisable, at a price equal to 120% of the Price to Public, commencing one
year from the date of this Prospectus and will remain excercisable for a period
of four years after such date. The Underwriter's Warrant provides certain rights
to request that the Company register the sale of the shares of Common Stock
underlying the Underwriter's Warrant at such time as the Company is eligible to
use the Securities and Exchange Commission Form S-3 for such registration. The
Underwriter's Warrant is not transferable for one year from the date of this
Prospectus. Thereafter, the Underwriter's Warrant may not be transferred other
than by will or pursuant to the operation of law, except to a person who is an
officer of the Underwriter.
The Underwriter has informed the Company that it does not intend to confirm
sales to accounts over which they exercise discretionary authority.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against civil liabilities in connection with the
Offering, including liabilities under the Securities Act. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted pursuant to the foregoing provisions, the Company has been informed
that, in the opinion of the Commission, such indemnification is against public
policy as expressed in such Act and is therefore unenforceable.
The Company and its officers, directors and each holder of Common Stock
outstanding immediately prior to the Offering have agreed with the Underwriter
that, without the Underwriter's consent (which may not be unreasonably
withheld), they will not sell, transfer, or otherwise dispose of any equity
securities of the Company for a period of six months from the date of this
Prospectus.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. The initial public offering price for the Common Stock was
determined by negotiation between the
37
<PAGE>
Company and the Underwriter. Among the factors considered in determining the
offering price were the prevailing market conditions, the Company's financial
and operating history and condition, its prospects and the prospects for its
industry in general and the management of the Company. After completion of this
Offering, the market price of the Common Stock is subject to change as a result
of market conditions and other factors.
The foregoing is a brief summary of the provisions of the Underwriting
Agreement and the Underwriter's Warrant and does not purport to be a complete
statement of their terms and conditions. The Underwriting Agreement and the
Underwriter's Warrant have been filed as an exhibit to the registration
statement of which this Prospectus is a part.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Petillon & Hansen, Torrance, California. Certain legal matters for
the Underwriters will be passed upon by Fredrikson & Byron, P.A., Minneapolis,
Minnesota.
EXPERTS
The financial statements for the years ended December 31, 1995 and 1994 and
for the nine months ended September 30, 1996 included in this Prospectus and in
the registration statement have been so included in reliance on the report of
Baird, Kurtz & Dobson, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
Prior to this Offering, the Company has not been subject to the reporting
requirements of the Securities Exchange Act of 1934. The Company has filed with
the Securities and Exchange Commission a registration statement on Form SB-2
("Registration Statement"), together with exhibits thereto, relating to the
securities offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, omits certain of the information set forth in the
Registration Statement. For further information with respect to the Company and
to the securities offered hereby, reference is made to such Registration
Statement. Statements contained in this Prospectus as to the content of any
contract or other document referred to are not necessarily complete, and in each
instance, reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. The Registration Statement and exhibits can
be inspected and copied at the public reference section at the Commission's
principal office, 450 5th Street, N.W., Judiciary Plaza, Washington, D.C. 20549,
and at the Commission's Regional Offices located at the Northwestern Atrium
Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511, and 7
World Trade Center, 13th Floor, New York, New York 10048. Copies may be obtained
from the Commission's principal office upon payment of the fees prescribed by
the Commission. The Commission maintains a Web site that contains reports, proxy
and information statements and other information regarding issuers that file
electronically with the Commission (http://www.sec.gov). Statements contained in
this Prospectus as to the contents of any contract or other document referred to
are not necessarily complete and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified by such reference.
The Company intends to furnish its securityholders with annual reports
containing audited financial statements and interim reports containing unaudited
financial statements.
38
<PAGE>
ELECTRONIC PROCESSING, INC.
DECEMBER 31, 1994 AND 1995,
AND SEPTEMBER 30, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT ACCOUNTANTS' REPORT........................................... F-2
FINANCIAL STATEMENTS
Balance Sheets.......................................................... F-3
Statements of Income.................................................... F-5
Statements of Changes in Stockholders' Equity........................... F-6
Statements of Cash Flows................................................ F-7
Notes to Financial Statements........................................... F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Electronic Processing, Inc.
Kansas City, Kansas
We have audited the accompanying balance sheets of ELECTRONIC PROCESSING,
INC. as of December 31, 1994 and 1995, and September 30, 1996, and the related
statements of income, changes in stockholders' equity and cash flows for each of
the years ended December 31, 1994 and 1995, and the nine months ended September
30, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ELECTRONIC PROCESSING, INC.
as of December 31, 1994 and 1995, and September 30, 1996, and the results of its
operations and its cash flows for each of the years ended December 31, 1994 and
1995, and the nine months ended September 30, 1996, in conformity with generally
accepted accounting principles.
BAIRD, KURTZ & DOBSON
Kansas City, Missouri
November 8, 1996
F-2
<PAGE>
ELECTRONIC PROCESSING, INC.
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995,
AND SEPTEMBER 30, 1996
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1996
---------------------------- ----------------------------
1994 1995 ACTUAL PRO FORMA
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................ $ 62,526 $ 26,938 $ 13,777 $ 13,777
Accounts receivable, trade, less allowance for
doubtful accounts of $5,000......................... 432,011 474,796 689,249 689,249
Other receivables.................................... 76,073 566 3,128 3,128
Prepaid expenses and other........................... 148,247 135,194 146,528 146,528
Deferred income taxes 6,700
------------- ------------- ------------- -------------
Total Current Assets............................... 718,857 637,494 852,682 859,382
------------- ------------- ------------- -------------
PROPERTY AND EQUIPMENT, At cost
Furniture and fixtures............................... 274,972 354,413 366,712 366,712
Computer equipment................................... 1,815,146 2,322,751 3,048,889 3,048,889
Office equipment..................................... 337,676 337,676 296,369 296,369
Leasehold improvements............................... 220,896 253,669 247,494 247,494
Transportation equipment............................. 14,969 14,969 14,969 14,969
------------- ------------- ------------- -------------
2,663,659 3,283,478 3,974,433 3,974,433
Less accumulated depreciation........................ 1,374,094 1,800,120 1,921,617 1,921,617
------------- ------------- ------------- -------------
1,289,565 1,483,358 2,052,816 2,052,816
------------- ------------- ------------- -------------
SOFTWARE DEVELOPMENT COSTS, Net of amortization........ 1,017,457 1,044,421 1,182,119 1,182,119
------------- ------------- ------------- -------------
INTANGIBLE ASSETS, Net of amortization
Excess of cost over fair value of net assets
acquired............................................ 67,526 65,512 64,003 64,003
Organization costs................................... 8,720
------------- ------------- ------------- -------------
76,246 65,512 64,003 64,003
------------- ------------- ------------- -------------
OTHER ASSETS
Deferred stock issuance costs........................ 127,589 192,338 192,338
Other................................................ 26,533 18,386 34,670 34,670
------------- ------------- ------------- -------------
26,533 145,975 227,008 227,008
------------- ------------- ------------- -------------
$ 3,128,658 $ 3,376,760 $ 4,378,628 $ 4,385,328
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See Notes to Financial Statements
F-3
<PAGE>
ELECTRONIC PROCESSING, INC.
BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1994 AND 1995,
AND SEPTEMBER 30, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1996
---------------------------- ----------------------------
1994 1995 ACTUAL PRO FORMA
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt................. $ 587,293 $ 830,214 $ 697,648 $ 697,648
Accounts payable..................................... 217,045 263,197 366,960 366,960
Accrued expenses..................................... 63,541 67,567 113,625 113,625
Redeemable stock purchase warrant.................... 41,000 41,000
Dividends declared................................... 151,060
------------- ------------- ------------- -------------
Total Current Liabilities.......................... 867,879 1,160,978 1,219,233 1,370,293
------------- ------------- ------------- -------------
LONG-TERM DEBT......................................... 1,016,439 1,016,540 1,850,093 1,850,093
------------- ------------- ------------- -------------
DEFERRED INCOME TAXES.................................. 282,600
------------- ------------- ------------- -------------
SUBORDINATED DEBT...................................... 400,000 400,000 400,000 400,000
------------- ------------- ------------- -------------
REDEEMABLE STOCK PURCHASE WARRANT...................... 35,000 41,000
------------- ------------- ------------- -------------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 5,000,000
shares; issued and outstanding 1,800,000 shares..... 18,000 18,000 18,000 18,000
Additional paid-in capital........................... 282,000 282,000 282,000 464,342
Retained earnings.................................... 509,340 458,242 609,302
------------- ------------- ------------- -------------
809,340 758,242 909,302 482,342
------------- ------------- ------------- -------------
$ 3,128,658 $ 3,376,760 $ 4,378,628 $ 4,385,328
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
ELECTRONIC PROCESSING, INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------- ----------------------------
1994 1995 1996
------------- ------------- 1995 -------------
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING REVENUES................................... $ 4,984,697 $ 5,233,959 $ 3,843,292 $ 4,638,685
------------- ------------- ------------- -------------
COST OF GOODS SOLD AND DIRECT COSTS
Processing costs................................... 2,218,143 2,098,401 1,565,594 1,857,034
Depreciation and amortization...................... 576,462 687,314 504,399 587,493
------------- ------------- ------------- -------------
2,794,605 2,785,715 2,069,993 2,444,527
------------- ------------- ------------- -------------
GROSS PROFIT......................................... 2,190,092 2,448,244 1,773,299 2,194,158
------------- ------------- ------------- -------------
OPERATING EXPENSES
General and administrative......................... 1,717,238 1,947,794 1,379,843 1,713,856
Depreciation and amortization...................... 83,293 87,895 66,334 66,810
------------- ------------- ------------- -------------
1,800,531 2,035,689 1,446,177 1,780,666
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS............................... 389,561 412,555 327,122 413,492
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE)
Interest income.................................... 1,430 1,686 1,678 43
Interest expense................................... (236,369) (262,391) (194,300) (201,344)
Other.............................................. (48,260) (980) (1,000) 1,013
------------- ------------- ------------- -------------
(283,199) (261,685) (193,622) (200,288)
------------- ------------- ------------- -------------
NET INCOME........................................... $ 106,362 $ 150,870 $ 133,500 $ 213,204
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
UNAUDITED PRO FORMA DATA
Income before income taxes......................... $ 106,362 $ 150,870 $ 133,500 $ 213,204
Provision for income taxes......................... 54,000 68,000 59,000 90,000
------------- ------------- ------------- -------------
PRO FORMA NET INCOME................................. $ 52,362 $ 82,870 $ 74,500 $ 123,204
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
PRO FORMA PER SHARE INFORMATION
Net income......................................... $ .03 $ .05 $ .04 $ .07
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........... 1,800,000 1,800,000 1,800,000 1,800,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See Notes to Financial Statements
F-5
<PAGE>
ELECTRONIC PROCESSING, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
TOTAL STOCK CAPITAL EARNINGS
------------ --------- ----------- ------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993................................... $ 807,662 $ 18,000 $ 282,000 $ 507,662
Net income................................................. 106,362 106,362
Increase in value of redeemable warrant.................... (34,990) (34,990)
Dividends paid on common stock, $.04 per share............. (69,694) (69,694)
------------ --------- ----------- ------------
BALANCE, DECEMBER 31, 1994................................... 809,340 18,000 282,000 509,340
Net income................................................. 150,870 150,870
Increase in value of redeemable warrant.................... (6,000) (6,000)
Dividends paid on common stock, $.11 per share............. (195,968) (195,968)
------------ --------- ----------- ------------
BALANCE, DECEMBER 31, 1995................................... 758,242 18,000 282,000 458,242
Net income................................................. 213,204 213,204
Dividends paid on common stock, $.03 per share............. (62,144) (62,144)
------------ --------- ----------- ------------
BALANCE, SEPTEMBER 30, 1996.................................. $ 909,302 $ 18,000 $ 282,000 $ 609,302
------------ --------- ----------- ------------
------------ --------- ----------- ------------
</TABLE>
See Notes to Financial Statements
F-6
<PAGE>
ELECTRONIC PROCESSING, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- ------------------------
1994 1995 1995 1996
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................. $ 106,362 $ 150,870 $ 133,500 $ 213,204
Items not requiring (providing) cash:
Depreciation......................................... 317,830 426,960 308,394 426,370
Amortization of software development costs........... 321,413 337,515 252,108 226,424
Amortization of intangible assets.................... 20,512 10,734 10,231 1,509
(Gain) loss on disposal of equipment and software.... 47,078 980 (3,809) 382
Changes in:
Accounts receivable.................................. 25,389 (42,785) (85,017) (214,453)
Other receivables.................................... (19,238) 75,507 18,331 (2,562)
Prepaid expenses and other assets.................... (32,010) 21,200 (9,674) (27,618)
Accounts payable and accrued expenses................ (173,338) 50,178 (17,811) 149,821
Deferred revenue..................................... (20,000)
------------- ------------ ----------- -----------
Net cash provided by operating activities.......... 593,998 1,031,159 606,253 773,077
------------- ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment........... 25,236 5,210 350
Purchase of property and equipment..................... (46,828) (72,729) (19,443) (94,900)
Decrease in equipment held for sale.................... 26,635
(Increase) decrease in related party receivable........ (41,468) 41,468
Expenditures for software development costs............ (272,111) (364,479) (224,347) (364,122)
------------- ------------ ----------- -----------
Net cash used in investing activities.............. (308,536) (437,208) (197,112) (458,672)
------------- ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line-of-credit agreement.......... 150,000 175,000 125,000 40,000
Proceeds from long-term debt........................... 2,076,000 11,694 250,000
Principal payments under capital lease obligation...... (274,593) (300,866) (215,998) (321,828)
Principal payments on long-term debt................... (2,132,197) (191,810) (141,786) (168,845)
Dividends paid......................................... (69,694) (195,968) (155,971) (62,144)
Deferred stock issuance costs.......................... (127,589) (44,080) (64,749)
------------- ------------ ----------- -----------
Net cash used in financing activities.............. (250,484) (629,539) (432,835) (327,566)
------------- ------------ ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... 34,978 (35,588) (23,694) (13,161)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............. 27,548 62,526 62,526 26,938
------------- ------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR................... $ 62,526 $ 26,938 $ 38,832 $ 13,777
------------- ------------ ----------- -----------
------------- ------------ ----------- -----------
</TABLE>
See Notes to Financial Statements
F-7
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995, AND SEPTEMBER 30, 1996
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is engaged primarily in the development and marketing of
advanced proprietary software for electronic management of bankruptcy cases. An
extensive array of support services complements the software. The Company
extends unsecured credit to customers throughout the United States.
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.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated on a straight-line basis over the
estimated useful life of each asset as follows:
<TABLE>
<S> <C>
Furniture and fixtures.......................................... 10 years
Computer equipment.............................................. 5 years
Office equipment................................................ 5-10 years
Transportation equipment........................................ 3-5 years
</TABLE>
Leasehold improvements are depreciated over the shorter of the lease term or
the estimated useful lives (5-10 years) of the improvements.
SOFTWARE DEVELOPMENT COSTS
Certain internal software development costs incurred in the creation of
computer software products are capitalized once technological feasibility has
been established. Prior to the completion of a detail program design,
development costs are expensed. Capitalized costs are amortized based on current
and future revenue for each product with an annual minimum equal to the
straight-line amortization (5 years) over the remaining estimated economic life
of the product.
INTANGIBLE ASSETS
The excess of cost over fair value of net assets acquired is being amortized
over 40 years. Organizational costs are being amortized over seven years. All
amortization is provided by the straight-line method.
REVENUE RECOGNITION
Revenues for Chapter 13 processing and noticing are recorded monthly at the
completion of the services based on the trustees' month-end caseloads. For
Chapter 7 bankruptcy services, monthly fees are received from a national
financial institution after the product is installed and deposits are
transferred based on the level of trustees' deposits with that institution. All
ancillary fees are recognized as the services have been provided.
INCOME TAX STATUS
The Company, with the consent of its stockholders, has elected under the
Internal Revenue Code to be an S corporation. In lieu of corporation income
taxes, the stockholders are taxed on their
F-8
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995, AND SEPTEMBER 30, 1996
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
proportionate shares of the Company's taxable income. Therefore, these
statements do not include any provision for corporation income taxes. Management
intends to distribute sufficient funds to the stockholders to pay personal taxes
related to flow-through taxable income.
WARRANTS SUBJECT TO REDEMPTION AGREEMENT
Warrants to purchase common stock include a right to require the Company to
purchase such stock, if acquired, at a price based on an agreed-upon formula.
The warrant liability amount is being accrued over the period to the first
exercise date, based on the formula price determined as of the balance sheet
date. Increases in warrant liability are charged to retained earnings in a
manner similar to recognition of dividend liabilities on redeemable preferred
stock. During 1996, the liability amount was fixed by agreement with the
majority shareholder (see Note 5).
CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
three months or less (primarily money market accounts) to be cash equivalents.
NEW PRONOUNCEMENT
The Financial Accounting Standards Board issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of " in March 1995. The new Statement requires that assets to be
held and used be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset in question may not
be recoverable. The Company has determined that no such impairment exists at
September 30, 1996.
NOTE 2: SOFTWARE DEVELOPMENT COSTS
The following is a summary of software development costs capitalized:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------ ------------------
1994 1995 SEPTEMBER 30, 1996
-------------- -------------- ------------------
<S> <C> <C> <C>
Amounts capitalized (net of retirements)...................... $ 3,627,068 $ 3,991,547 $ 2,663,840
-------------- -------------- ------------------
Accumulated amortization, beginning of year................... (2,288,198) (2,609,611) (2,947,126)
Amortization expense.......................................... (321,413) (337,515) (226,424)
Retirements................................................... 1,691,829
-------------- -------------- ------------------
Accumulated amortization, end of year......................... (2,609,611) (2,947,126) (1,481,721)
-------------- -------------- ------------------
Net software development costs................................ $ 1,017,457 $ 1,044,421 $ 1,182,119
-------------- -------------- ------------------
-------------- -------------- ------------------
</TABLE>
Included in the above are development costs relating to products not yet
released. Such costs totaled $173,029, $503,827 and $684,956 at December 31,
1994 and 1995, and September 30, 1996, respectively.
F-9
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995, AND SEPTEMBER 30, 1996
NOTE 3: NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt includes the following at December 31, 1994 and 1995, and
September 30, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995 SEPTEMBER 30, 1996
------------- ------------- ------------------
<S> <C> <C> <C>
Note payable, bank (A).......................................... $ 150,000 $ 325,000 $ 365,000
Note payable, bank (B).......................................... 818,417 674,376 553,729
Note payable, bank (C).......................................... 116,352 184,581 214,828
Note payable, bank (D).......................................... 250,000
Other........................................................... 14,132 12,008 10,179
Capital lease obligations....................................... 504,831 650,789 1,154,005
------------- ------------- ------------------
1,603,732 1,846,754 2,547,741
Less current maturities......................................... 587,293 830,214 697,648
------------- ------------- ------------------
$ 1,016,439 $ 1,016,540 $ 1,850,093
------------- ------------- ------------------
------------- ------------- ------------------
</TABLE>
- ------------------------
(A) Note is available in multiple advances with a limit of $500,000. Interest is
2% in excess of the bank's base lending rate (10.25% at September 30, 1996)
per annum and is adjusted and payable on a quarterly basis. Principal is due
on October 1, 1997. The note is collateralized by substantially all assets
and is personally guaranteed by the majority stockholder.
(B) Principal and interest (2% in excess of bank's base lending rate -- 10.25%
at September 30, 1996) payable in monthly installments of $18,792 with final
payment due in June 1999; collateralized by substantially all assets and
personally guaranteed by the majority stockholder.
(C) Revolving equipment line of credit of $250,000, with interest (2% in excess
of bank's base lending rate -- 10.25% at September 30, 1996) payable
monthly, in addition to monthly principal reductions equal to one
thirty-sixth of the outstanding principal balance, with the unpaid balance
being due June 1998; collateralized by substantially all assets and
personally guaranteed by the majority stockholder.
(D) Note and accrued interest (1% in excess of highest prime rate in Wall Street
Journal, calculated daily -- 9.25% at September 30, 1996); due in October
1996 (extended after September 30, 1996, to October 1997); personally
guaranteed by majority stockholder.
The following maturities schedule reflects the payment terms noted above:
<TABLE>
<S> <C>
1997................................................... $ 697,648
1998................................................... 1,397,579
1999................................................... 438,490
2000................................................... 14,024
----------
$2,547,741
----------
----------
</TABLE>
NOTE 4: LEASES
OPERATING
The Company has a noncancellable operating lease for office space which
expires in February 2001. The majority stockholder of the Company is a partner
in the partnership that leases office space to the Company. The lease requires
the Company to pay all executory costs (property taxes, maintenance and
insurance).
F-10
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995, AND SEPTEMBER 30, 1996
NOTE 4: LEASES (CONTINUED)
For the year ended December 31, 1995 and the nine months ended September 30,
1996, an agreement was reached with the partnership whereby the Company was
reimbursed for the property taxes which amounted to approximately $30,000 for
both 1995 and 1996.
Future minimum lease payments at September 30, 1996 are as follows:
<TABLE>
<S> <C>
1997..................................................... $ 148,125
1998..................................................... 152,800
1999..................................................... 156,900
2000..................................................... 161,200
2001..................................................... 68,000
---------
$ 687,025
---------
---------
</TABLE>
Rental expense under this lease was $137,624 and $142,125 for the years
ended December 31, 1994 and 1995, respectively, and $109,125 for the period
ended September 30, 1996.
CAPITAL
Capital leases shown in long-term debt (SEE NOTE 3) include leases for the
use of computer equipment for no more than five years expiring in 2001.
Property and equipment include the following property under capital leases:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------- NINE MONTHS ENDED
1994 1995 SEPTEMBER 30, 1996
----------- ------------- ------------------
<S> <C> <C> <C>
Computer equipment............................................... $ 936,279 $ 1,163,513 $ 1,631,498
Less accumulated depreciation.................................... 302,676 355,542 357,546
----------- ------------- ------------------
$ 633,603 $ 807,971 $ 1,273,952
----------- ------------- ------------------
----------- ------------- ------------------
</TABLE>
Future minimum lease payments as of September 30, 1996 are as follows:
<TABLE>
<S> <C>
1997................................................... $ 548,036
1998................................................... 480,924
1999................................................... 271,149
2000................................................... 13,359
----------
Future minimum lease payments.......................... 1,313,468
Less amount representing interest...................... 159,464
----------
Present value of future minimum lease payments......... 1,154,004
Less current maturities................................ 451,625
----------
Noncurrent portion..................................... $ 702,379
----------
----------
</TABLE>
NOTE 5: SUBORDINATED DEBT AND STOCK PURCHASE WARRANT
The Company has the following subordinated debt outstanding with the
majority stockholder at December 31, 1994 and 1995, and September 30, 1996:
<TABLE>
<S> <C>
10% interest payable monthly, principal balance due July
1998.................................................... $ 400,000
---------
---------
</TABLE>
F-11
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995, AND SEPTEMBER 30, 1996
NOTE 5: SUBORDINATED DEBT AND STOCK PURCHASE WARRANT (CONTINUED)
Interest expense under this agreement was $40,000 for both the years ended
December 31, 1994 and 1995, and $30,000 for the nine month period ended
September 30, 1996.
The holder of the subordinated note also holds a stock purchase warrant
(originally issued in 1988) to acquire 969,228 shares of the Company's common
stock at $.41 per share (giving retroactive effect to the 6 to 1 stock split
discussed in Note 9) at any time prior to July 14, 1998.
Commencing July 15, 1996, the holder of common stock obtained by exercising
the stock purchase warrant may require the Company to purchase for cash all or
any part of the stock held. Likewise, the Company shall have the right to
purchase for cash all or part of the stock held that was obtained by exercising
the stock purchase warrant. The price in either such event shall be the greater
of, using either the preceding fiscal year-end financial statements or an
average of the two preceding fiscal year financial statements, (1) net book
value per share or (2) a valuation per share computed from a seven times pre-tax
income multiple. As of December 31, 1994 and 1995, the Company has calculated
and recorded a value of such warrants in the amount of $35,000 and $41,000,
respectively. Subsequent to September 30, 1996, the Company reached an agreement
with the principal stockholder to retire the warrant for a price of $41,000.
NOTE 6: RELATED PARTY TRANSACTIONS
Interest expense of $10,501 was recognized on a note payable outstanding to
the majority stockholder in 1994. Included in other receivables at December 31,
1994 is $41,468 due from related parties. Fees totaling $24,658 and $23,250 were
paid to the majority stockholder during 1995 and 1994, respectively, for
guarantees on Company debt.
NOTE 7: PROFIT SHARING PLAN
The Company has adopted a 401(k) plan covering substantially all employees.
Company matching contributions to the Plan are discretionary. Such contributions
amounted to $8,194 and $11,847 for the years ended December 31, 1994 and 1995,
respectively, and $9,000 was accrued for the period ended September 30, 1996.
NOTE 8: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
- The Company capitalizes and amortizes costs incurred in the development of
software products. These costs are being realized over the estimated life
of the resulting software product, principally five years. Ultimate
recoverability is dependent upon estimated future revenues over the life
of the product being realized.
- The majority of the Company's revenues are generated from processing and
noticing services for Chapter 13 bankruptcy cases. For Chapter 7
bankruptcy services, the Company has a significant marketing agreement
with a national financial institution which provides for the generation of
monthly revenues based on the level of trustees' deposits with that
institution.
NOTE 9: PLANNED PUBLIC OFFERING (UNAUDITED)
The Company is currently planning to make a public offering of shares of
common stock. In conjunction with the offering, the Company has increased the
number of authorized common shares to 5,000,000 and declared a 6 to 1 stock
split which became effective, through a stock dividend, on November 4, 1996. In
lieu of historical earnings (loss) per share, pro forma per share amounts
F-12
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995, AND SEPTEMBER 30, 1996
NOTE 9: PLANNED PUBLIC OFFERING (UNAUDITED) (CONTINUED)
reflecting the effects of the stock dividend retroactively have been provided as
described below. Additionally, the number of shares in the accompanying balance
sheets have been retroactively increased to reflect this stock split.
Upon issuance of common stock to the public, the Company will change its
income tax status to a C corporation. Pro forma earnings information has been
provided to reflect the effects of corporate income taxes on historical
earnings, including the effects of permanent and temporary differences in
reporting income and expenses for tax and financial reporting purposes, as if
the Company has been subject to income taxes for all the periods presented. Pro
forma adjustments reflect the provision for corporate income taxes.
At the time of becoming a C corporation, the Company will accrue an income
tax provision to record the effects of temporary differences between assets and
liabilities presented on the financial reporting basis and the income tax basis.
At September 30, 1996, the deferred tax effects of such differences were as
follows:
<TABLE>
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts............................... $ 1,900
Accrued compensated absences.................................. 3,500
Other......................................................... 1,300
---------
6,700
Deferred tax liabilities:
Property and equipment basis difference....................... (282,600)
---------
Net deferred tax asset (liability).............................. $(275,900)
---------
---------
</TABLE>
The pro forma provision for income taxes included these components:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ -----------------------
1994 1995 1995 1996
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Taxes currently payable....................................... $ 291,000 $ 95,000 $ 79,500 $ 126,000
Deferred income taxes......................................... (237,000) (27,000) (20,500) (36,000)
------------ ---------- ---------- -----------
$ 54,000 $ 68,000 $ 59,000 $ 90,000
------------ ---------- ---------- -----------
------------ ---------- ---------- -----------
</TABLE>
A reconciliation of pro forma income tax provision at the statutory rate to
pro forma income tax expense at the Company's effective rate is shown below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Computed at statutory rate (34%)................................... $ 36,200 $ 51,300 $ 45,400 $ 72,500
Increase in taxes resulting from:
Nondeductible expenses........................................... 7,400 8,500 6,300 6,500
State income taxes, net of federal tax effect and other.......... 10,400 8,200 7,300 11,000
--------- --------- --------- ---------
Pro forma tax provision............................................ $ 54,000 $ 68,000 $ 59,000 $ 90,000
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The Company has reserved 270,000 shares of common stock for issuance of
stock options to employees, officers and directors of the Company. Upon
successful completion of the offering, the
F-13
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995, AND SEPTEMBER 30, 1996
NOTE 9: PLANNED PUBLIC OFFERING (UNAUDITED) (CONTINUED)
Company will issue options for 119,500 of these shares with the exercise price
being equal to the initial public offering price. The Company will account for
such options in accordance with APB Opinion No 25, "Accounting for Stock Issued
to Employees," and will provide pro forma disclosures as required by Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation."
For supplementary purposes pro forma earnings per share would have been $.09
for both the nine months ended September 30, 1996, and for the year ended
December 31, 1995. Such calculations give effect (net of income taxes) to the
repayment of approximately $2,000,000 of the Company's outstanding indebtedness
and resulting reduction of interest expense as if a portion of the proceeds from
this initial public offering had been used to repay the debt at the original
dates of issuance and the number of shares of common stock (whose proceeds are
to be used to retire the debt) were outstanding from the same dates.
NOTE 10: PRO FORMA (UNAUDITED)
In anticipation of the public offering, the Company will declare a final S
corporation distribution to present stockholders. This final distribution will
represent the Company's previously undistributed earnings only since January 1,
1996, through the Termination Date. The amount of this final distribution will
not exceed $250,000 and will be payable within 90 days following the Termination
Date. If the final S corporation distribution were computed based upon 1996
earnings only through September 30, 1996, the amount of that distribution would
be $151,060. Any remaining retained earnings will then be reclassified to
additional paid-in capital. Additionally, the Company has reached agreement with
the majority stockholder to retire the redeemable stock warrant (see Note 5)
prior to the offering with a payment of $41,000.
Pro forma adjustments made to the September 30, 1996 balance sheet include
the effects of the special distribution of $151,060, and the recording of the
net deferred tax liability, but do not include the effects of the net proceeds
from the planned public offering.
NOTE 11: ADDITIONAL CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------ NINE MONTHS ENDED
1994 1995 SEPTEMBER 30, 1996
----------- ----------- ------------------
<S> <C> <C> <C>
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligation and notes payable
incurred for equipment.......................................... $ 441,696 $ 549,004 $ 901,660
ADDITIONAL CASH INFORMATION
Interest paid.................................................... 232,032 262,391 184,274
</TABLE>
F-14
<PAGE>
GRAPHIC ENTITLED "ADVANCED BANKRUPTCY MANAGEMENT SYSTEMS" DEPICTING CERTAIN
FEATURES OF THE COMPANY'S CASE POWER PRODUCT: CREDITOR DISTRIBUTION, LEGAL
NOTICE'S WINDOWS-TM- INTERFACE, BARCODING, AND DOCUMENT IMAGING.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Prior S Corporation Status................................................ 10
Use of Proceeds........................................................... 10
Dividend Policy........................................................... 11
Dilution.................................................................. 12
Capitalization............................................................ 13
Selected Financial Data................................................... 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 16
Business.................................................................. 19
Management................................................................ 30
Certain Transactions...................................................... 33
Principal Stockholders.................................................... 34
Description of Securities................................................. 35
Underwriting.............................................................. 37
Legal Matters............................................................. 38
Experts................................................................... 38
Additional Information.................................................... 38
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THE OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,600,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
RJ STEICHEN & COMPANY
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's by-laws provide that the Company shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit, or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was a
director or officer of the Company (or is or was serving at the request of the
Company as a director or officer of another entity) against expenses, including
attorneys' fees, judgments, fines, and amounts paid in settlement (except that,
in connection with an action by or in the right of the Company, the indemnity
shall be limited to expenses, including attorneys' fees, and amounts paid in
settlement) actually and reasonably incurred by him in connection with such
action, suit, or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the Company
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful.
To the extent that a director, officer, employee, or agent has been
successful on the merits or otherwise in defense of any action, suit, or
proceeding, or in defense of any claim, he shall be indemnified against
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection with the action, suit, or proceeding. Expenses incurred in defending
a civil or criminal action, suit or proceeding may be paid by the Company in
advance of the final disposition of the action, suit, or proceeding. The
indemnification discussed in this section is not exclusive of any other rights
the party may have seeking indemnification.
The Company believes that it is the position of the Securities and Exchange
Commission that insofar as the foregoing provision may be invoked to disclaim
liability for damages arising under the Securities Act, the provision is against
public policy as expressed in the Securities Act and is therefore unenforceable.
Such limitation of liability also does not affect the availability of equitable
remedies such as injunctive relief or rescission.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses for the issuance and distribution of the shares of
Common Stock registered hereby, other than underwriting commissions, are set
forth in the following table. All amounts are estimates except the registration
fee, NASD filing fee and the Nasdaq SmallCap Market listing fee.
<TABLE>
<CAPTION>
ITEM AMOUNT
- ------------------------------------------------------------------------------ --------------
<S> <C>
Registration Fee.............................................................. $ 2,091.00
NASD Filing Fee............................................................... 1,190.00
Nasdaq SmallCap Market Fee.................................................... 6,250.00
Maximum Underwriter's Nonaccountable Allowance................................ 180,000.00
Blue Sky Fees and Expenses.................................................... 12,000.00
Transfer Agent Fees........................................................... 7,500.00
Legal Fees.................................................................... 125,000.00
Accounting Fees............................................................... 48,000.00
Printing and Engraving Costs.................................................. 24,000.00
Miscellaneous................................................................. 78,969.00
--------------
Total....................................................................... $ 485,000.00
--------------
--------------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since November 1, 1992, the Registrant sold and issued the following
unregistered securities:
II-1
<PAGE>
The Company granted, effective as of the closing of this Offering, pursuant
to its 1995 Stock Option Plan, options to purchase 108,000 shares of the
Company's Common Stock to 6 officers and/or directors and to 46 other employees.
On November 4, 1996, the Company issued to its six stockholders a stock
dividend of an aggregate 1,500,000 shares of Common Stock.
All numbers of shares in this Item 26 have been adjusted to reflect the
six-for-one stock split.
The sales and issuances of securities described above were deemed to be
exempt from registration under the Securities Act by virtue of Section 4(2) or
Regulation D promulgated under the Securities Act. The purchasers in each case
represented their intention to acquire the securities for investment only and
not with a view to the distribution thereof. Appropriate legends are affixed to
the stock certificates issued in such transactions.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
- ------------- ------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation as filed with the Missouri Secretary of State.
3.2 Bylaws.
4.1 Form of Underwriter's Warrant.
4.2 Form of Common Stock Certificate.*
4.3 1995 Stock Option Plan.
5.1 Opinion of Petillon & Hansen, an association of professional corporations.
10.1 Agreement for Computerized Trustee Care Management System between the Company and NationsBank of
Texas, N.A., dated November 22, 1993.**
10.2 Lease between T&J Investment Company and the Company, dated February 20, 1996.
10.3 Subordinated Note to Tom Olofson.
10.4 Loan Agreement between Industrial State Bank and the Company, dated June 17, 1996.
10.5 Loan Agreement between Industrial State Bank and the Company, dated June 17, 1996.
10.6 Loan Agreement between Industrial State Bank and the Company, dated June 17, 1996.
10.7 Loan Agreement between Citizens National Bank and the Company, dated June 18, 1996.
10.8 Form of Service Agreement between EPI and Trustee.
23.1 Consent of Baird, Kurtz & Dobson, Certified Public Accountants.
23.2 Consent of Petillon & Hansen (included in the opinion filed as Exhibit 5).
23.3 Consent of W. Bryan Satterlee, Director Nominee.*
24.0 Power of Attorney (included on signature page).
27.0 Financial Data Schedule+
</TABLE>
- ------------------------
+ Previously filed.
* To be filed by amendment.
** Confidential treatment requested.
II-2
<PAGE>
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To provide to the Underwriter at the closing specified in the
underwriting agreement, certificates in such denominations and registered in
such names as required by the Underwriter to permit prompt delivery to each
purchaser.
(2) If the Registrant requests acceleration of the effective date of the
Registration Statement under Rule 461 under the Securities Act, the
Registrant acknowledges that:
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(3) That, for purposes of determining any liability under the Securities
Act, the Registrant will treat the information omitted from the form of
Prospectus filed as part of this Registration Statement in reliance upon
Rule 430A and contained in a form of Prospectus filed by the Registrant
under Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of
this Registration Statement as of the time the Commission declared it
effective.
(4) That for determining any liability under the Securities Act, the
Registrant will treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that time as
the initial bona fide offering of those securities.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement or amendment thereto to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Kansas City, Kansas, on the 13th day
of January, 1997.
Electronic Processing, Inc.
By: /s/ TOM W. OLOFSON
-----------------------------------------
Tom W. Olofson
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Tom W. Olofson, as his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments (including post-effective amendments) to this registration
statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
foregoing, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------- ------------------------------------------- -----------------------
<C> <S> <C>
/s/ TOM W. OLOFSON Chief Executive Officer; Chairman of the
---------------------------------- Board; President (Principal Executive January 13, 1997
Tom W. Olofson Officer)
/s/ NANCI R. TRUTNA Vice President -- Finance (Principal
---------------------------------- Financial Officer and Principal Accounting January 13, 1997
Nanci R. Trutna Officer)
/s/ CHRISTOPHER E. OLOFSON
---------------------------------- Chief Operating Officer; Executive Vice January 13, 1997
Christopher E. Olofson President; Director
/s/ ROBERT C. LEVY
---------------------------------- Director January 14, 1997
Robert C. Levy
</TABLE>
II-4
<PAGE>
1,600,000 SHARES COMMON STOCK
ELECTRONIC PROCESSING, INC.
UNDERWRITING AGREEMENT
, 1997
- ----------------------
R. J. Steichen & Company
801 Nicollet Mall
Suite 700
Minneapolis, MN 55402-2543
Dear Ladies and Gentlemen:
Electronic Processing, Inc., a Missouri corporation (the "Company"), hereby
confirms its agreement to issue and sell to R. J. Steichen & Company (the
"Underwriter"), an aggregate of 1,600,000 shares of authorized but unissued
common stock, par value $0.01 per share, of the Company (the "Common Stock").
Such 1,600,000 shares of Common Stock are collectively referred to in this
Agreement as the "Firm Shares." The Company also hereby confirms its agreement
to issue and sell to the Underwriter up to 240,000 shares of Common Stock upon
the request of the Underwriter solely for the purpose of covering
overallotments. Such additional shares are referred to in this Agreement as the
"Option Shares." The Firm Shares and the Option Shares are collectively
referred to herein as the "Shares." Further, the Company hereby confirms its
agreement to issue to the Underwriter warrants for the purchase of a total of
160,000 shares as described in Section 5 hereof (the "Underwriter's Warrants"),
assuming purchase by the Underwriter of the Firm Shares. The shares issuable
upon exercise of the Underwriter's Warrants are referred to as the "Warrant
Shares."
The Company hereby confirms the arrangements with respect to the purchase
by the Underwriter of the Firm Shares plus the Option Shares purchased if the
overallotment option is exercised in whole or in part.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to and agrees with the Underwriter as follows:
(a) A registration statement on Form SB-2 with respect to the Shares
has been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "1933 Act") and the rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "SEC") thereunder and has been filed with the SEC under the
1933 Act. The Company has filed such amendments to the registration
statement and such amended preliminary prospectuses as may have been
required to be filed to the date hereof. If the Company has elected not to
rely upon Rule 430A, the Company has prepared and will promptly file an
amendment to the registration statement and an amended prospectus (provided
the Underwriter has consented to such filing). If the Company has elected
to rely upon Rule 430A, it will prepare and timely file a prospectus
pursuant to Rule 424(b) that discloses the information previously omitted
from the prospectus in reliance upon Rule 430A. Copies
-1-
<PAGE>
of such registration statement and each pre-effective amendment thereto,
and each related preliminary prospectus have been delivered by the Company
to the Underwriter. Such registration statement, as amended or
supplemented, including all prospectuses included as a part thereof,
financial schedules, exhibits, the information (if any) deemed to be part
thereof pursuant to Rules 430A and 434 under the 1933 Act and any
registration statement filed pursuant to Rule 462 under the 1933 Act, is
herein referred to as the "Registration Statement." The term "Prospectus"
as used herein shall mean the final prospectus, as amended or supplemented,
included as a part of the Registration Statement on file with the SEC when
it becomes effective; provided, however, that if a prospectus is filed by
the Company pursuant to Rules 424(b) and 430A or a term sheet is filed by
the Company pursuant to Rule 434 under the 1933 Act, the term "Prospectus"
as used herein shall mean the prospectus so filed pursuant to Rules 424(b)
and 430A and the term sheet so filed pursuant to Rule 434. The term
"Preliminary Prospectus" as used herein means any prospectus, as amended or
supplemented, used prior to the Effective Date (as defined in Section 4(a)
hereof) and included as a part of the Registration Statement, including any
prospectus filed with the SEC pursuant to Rule 424(a).
(b) Neither the SEC nor any state securities division has issued any
order preventing or suspending the use of any Preliminary Prospectus, or
issued a stop order with respect to the offering of the Shares or requiring
the recirculation of a Preliminary Prospectus and, to the best knowledge of
the Company, no proceeding for any such purpose has been initiated or
threatened. Each part of the Registration Statement, when such part became
or becomes effective, each Preliminary Prospectus, on the date of filing
with the SEC, and the Prospectus and any amendment or supplement thereto,
on the date of filing thereof with the SEC and on any Closing Date (as
defined in Section 2 hereof), as the case may be, conformed or will conform
in all material respects with the requirements of the 1933 Act and the
Rules and Regulations and the securities laws ("Blue Sky Laws") of the
states where the Shares are to be sold (the "States") and contained or will
contain all statements that are required to be stated therein in accordance
with the 1933 Act, the Rules and Regulations and the Blue Sky Laws of the
States. When the Registration Statement became or becomes effective and
when any post-effective amendments thereto shall become effective, the
Registration Statement did not and will not contain any untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Neither any
Preliminary Prospectus, on the date of filing thereof with the SEC, nor the
Prospectus or any amendment or supplement thereto, on the date of filing
thereof with the SEC and on the First and Second Closing Dates, contained
or will contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading; provided,
however, that none of the representations and warranties in this Subsection
1(b) shall apply to statements in, or omissions from, the Registration
Statement, Preliminary Prospectus or the Prospectus, or any amendment
thereof or supplement thereto, which are based upon and conform to written
information furnished to the Company by the Underwriter specifically for
use in the preparation of the Registration Statement, Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto.
There is no contract or other document of the Company of a character
required by the 1933 Act or the Rules and Regulations to be described in
the Registration Statement or
-2-
<PAGE>
Prospectus, or to be filed as an exhibit to the Registration Statement,
that has not been described or filed as required. The descriptions of all
such contracts and documents or references thereto are correct and include
the information required under the 1933 Act and the Rules and Regulations.
(c) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Missouri,
with full corporate power and authority, to own, lease and operate its
properties and conduct its business as described in the Registration
Statement and Prospectus. The Company is duly qualified to do business as
a foreign corporation in good standing in each jurisdiction in which the
ownership or lease of its properties, or the conduct of its business,
requires such qualification and in which the failure to be qualified or in
good standing would have a material adverse effect on the business of the
Company. The Company has all necessary and material authorizations,
approvals and orders of and from all governmental regulatory officials and
bodies to own its properties and to conduct its business as described in
the Registration Statement and Prospectus, and is conducting its business
in substantial compliance with all applicable material laws, rules and
regulations of the jurisdictions in which it is conducting business. The
Company holds all material licenses, certificates, permits, authorizations,
approvals and orders of and from all state, federal and other governmental
regulatory officials and bodies necessary to own its properties and to
conduct its business as described in the Registration Statement and
Prospectus, or has obtained waivers from any such applicable requirements
from the appropriate state, federal or other regulatory authorities. All
such licenses, permits, approvals, certificates, consents, orders and other
authorizations are in full force and effect, and the Company has not
received notice of any proceeding or action relating to the revocation or
modification of any such license, permit, approval, certificate, consent,
order or other authorization which, individually or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, might materially
and adversely affect the conduct of the business or the condition,
financial or otherwise, or the earnings, affairs or business prospects of
the Company.
(d) The Company has no subsidiaries and is not affiliated with any
other Company or business entity, except as disclosed in the Prospectus.
(e) The Company is not in violation of its Articles of Incorporation
or Bylaws. The Company is not in default in the performance or observance
of any obligation, agreement, covenant or condition contained in any bond,
debenture, note or other evidence of indebtedness or in any contract,
indenture, mortgage, loan agreement, joint venture or other agreement or
instrument to which the Company is a party or by which the Company or its
properties are bound, and there does not exist any state of facts which
constitutes an event of default on the part of the Company or which, with
notice or lapse of time or both, would constitute such an event of default.
The Company is not, to the best of its knowledge, in violation of any law,
order, rule, regulation, writ, injunction or decree of any government,
governmental instrumentality or court, domestic or foreign, which violation
is material to the business of the Company.
(f) The Company has full requisite power and authority to enter into
this Agreement. This Agreement has been duly authorized, executed and
delivered by the
-3-
<PAGE>
Company and will be a valid and binding agreement on the part of the
Company, enforceable in accordance with its terms, if and when this
Agreement shall have become effective in accordance with Section 8, except
as enforceability may be limited by the application of bankruptcy,
insolvency, moratorium or similar laws affecting the rights of creditors
generally and by judicial limitations on the right of specific performance
and except as the enforceability of the indemnification or contribution
provisions hereof may be affected by applicable federal or state securities
laws. The performance of this Agreement and the consummation of the
transactions herein contemplated will not result in a breach or violation
of any of the terms and provisions of, or constitute a default under or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company pursuant to, (i) any indenture,
mortgage, deed of trust, loan agreement, bond, debenture, note, agreement
or other evidence of indebtedness, lease, contract or other agreement or
instrument to which the Company is a party or by which the property or
assets of the Company is bound, (ii) the Company's Articles of
Incorporation or Bylaws or (iii) any statute or any order, rule or
regulation of any court, governmental agency or body having jurisdiction
over the Company. No consent, approval, authorization or order of any
court, governmental agency or body is required for the consummation by the
Company of the transactions on its part herein contemplated, except such as
may be required under the 1933 Act, the Rules and Regulations, the Blue Sky
Laws, the rules and regulations of the National Association of Securities
Dealers, Inc. ("NASD") and the rules and regulations of Nasdaq.
(g) Except as is otherwise expressly stated in the Registration
Statement or Prospectus, there are no actions, suits or proceedings pending
before any court or governmental agency, authority or body to which the
Company is a party or of which the business or property of the Company is
the subject which might result in any material adverse change in the
condition (financial or otherwise), business or prospects of the Company,
materially and adversely affect its properties or assets or prevent
consummation of the transactions contemplated by this Agreement; and, to
the best of the Company's knowledge, no such actions, suits or proceedings
are threatened except as is otherwise expressly stated in the Registration
Statement or Prospectus. The Company is not aware of any facts which would
form the basis for the assertion of any material claim or liability which
are not disclosed in the Registration Statement or the Prospectus or
adequately reserved for in the financial statements which are a part
thereof, except for such claims or liabilities which are not currently
expected to have a material adverse effect on the condition (financial or
otherwise) or the earnings, affairs or business prospects of the Company.
All pending legal or governmental proceedings to which the Company is a
party or to which any of its property is subject which are not described in
the Registration Statement and the Prospectus, including ordinary routine
litigation incidental to the business, are, considered in the aggregate,
not material to the Company.
(h) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus. The outstanding Common Stock of
the Company is duly authorized, validly issued, fully paid and
nonassessable. The Shares conform in substance to all statements relating
thereto contained in the Registration Statement and Prospectus. The Shares
to be sold by the Company hereunder have been duly authorized and, when
issued and delivered pursuant to this Agreement, will be validly issued,
fully
-4-
<PAGE>
paid and nonassessable and will conform to the description thereof
contained in the Prospectus. No preemptive rights or similar rights of any
security holders of the Company exist with respect to the issuance and sale
of the Shares by the Company or exercise of the Underwriter's Warrants.
Except as disclosed in the Prospectus, the Company has no agreement with
any security holder which gives such security holder the right to require
the Company to register under the 1933 Act any securities of any nature
owned or held by such person either in connection with the transactions
contemplated by this Agreement or after a demand for registration by such
holder. Upon payment for and delivery of the Shares pursuant to this
Agreement, the Underwriter will acquire the Shares, free and clear of all
liens, encumbrances or claims. The certificates evidencing the Shares will
comply as to form with all applicable provisions of the laws of the State
of Missouri. Except as set forth in any part of the Registration
Statement, the Company does not have outstanding any options to purchase,
or any rights or warrants to subscribe for, or any securities or
obligations convertible into, or any contracts or commitments to issue or
sell, any Common Stock or other securities of the Company, or any such
warrants, convertible securities or obligations.
(i) The Underwriter's Warrants and the Warrant Shares have been duly
authorized. The Underwriter's Warrants, when issued and delivered to the
Underwriter, will constitute valid and binding obligations of the Company
in accordance with their terms, except as enforceability may be limited by
the application of bankruptcy, insolvency, moratorium or similar laws
affecting the rights of creditors generally and by judicial limitations on
the right of specific performance. The Warrant Shares when issued in
accordance with the terms of this Agreement and pursuant to the
Underwriter's Warrants, will be validly issued, fully paid and
nonassessable and subject to no preemptive rights or similar rights on the
part of any person or entity. A sufficient number of shares of Common
Stock of the Company have been reserved for issuance by the Company upon
exercise of the Underwriter's Warrants.
(j) Baird, Kurtz & Dobson, whose reports appear in the Registration
Statement and Prospectus, are independent accountants within the meaning of
the 1933 Act and the Rules and Regulations. The financial statements of
the Company, together with the related notes, forming part of the
Registration Statement and Prospectus (the "Financial Statements"), fairly
present the financial position and the results of operations of the Company
at the respective dates and for the respective periods to which they apply.
The Financial Statements are accurate, complete and correct and have been
prepared in accordance with the 1933 Act, the Rules and Regulations and
generally accepted accounting principles ("GAAP"), consistently applied
throughout the periods involved, except as may be otherwise stated therein.
The summaries of the Financial Statements and the other financial,
statistical and related notes set forth in the Registration Statement and
the Prospectus are (i) accurate and correct and fairly present the
information purported to be shown thereby as of the dates and for the
periods indicated on a basis consistent with the audited financial
statements of the Company and (ii) in compliance in all material respects
with the requirements of the 1933 Act and the Rules and Regulations.
-5-
<PAGE>
(k) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus and at any Closing Date,
except as is otherwise disclosed in the Registration Statement or
Prospectus, there has not been:
(i) any change in the capital stock or long-term debt (including
any capitalized lease obligation) of the Company, or increase in the
short-term debt, other than in the ordinary course of business, of the
Company;
(ii) any issuance of options, warrants, convertible securities
or other rights to purchase the capital stock of the Company;
(iii) any adverse change, or any development involving a
material adverse change, in or affecting the business, business
prospects, properties, assets, patents or patent applications
(including those of the Company and those relating to devices or
technologies licensed to the Company), management, financial position,
stockholders' equity, results of operations or general condition of
the Company;
(iv) any material transaction entered into by the Company;
(v) any material obligation, direct or contingent, incurred by
the Company, except obligations incurred in the ordinary course of
business that, in the aggregate, are not material; or
(vi) any dividend or distribution of any kind declared, paid or
made on the Company's capital stock.
(l) Except as is otherwise disclosed in the Registration Statement or
Prospectus, the Company has good and marketable title to all of the
property, real and personal, described in the Registration Statement or
Prospectus as being owned by the Company, free and clear of all liens,
encumbrances, equities, charges or claims, except as do not materially
interfere with the uses made and to be made by the Company of such property
or as disclosed in the Financial Statements. Except as is otherwise
disclosed in the Registration Statement or Prospectus, the Company has
valid and binding leases to the real and personal property described in the
Registration Statement or Prospectus as being under lease to the Company,
except as to those leases which are not material to the Company or the lack
of enforceability of which would not materially interfere with the use made
and to be made by the Company of such leased property.
(m) The Company has filed all necessary federal and state income and
franchise tax returns and paid all taxes shown as due thereon. The Company
is not in default in the payment of any taxes and has no knowledge of any
tax deficiency which might be asserted against it which would materially
and adversely affect the Company's business or properties.
(n) No labor disturbance by the employees of the Company exists or,
to the best of the Company's knowledge, is imminent which could reasonably
be expected to
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<PAGE>
have a material adverse effect on the conduct of the business, operations,
financial condition or income of the Company.
(o) Except as disclosed in the Prospectus:
(i) The Company owns or possesses the unrestricted rights to use
all patents, copyrights, trademarks, trade secrets and proprietary
rights or information necessary for the development, manufacture,
operation and sale of all products and services sold or proposed to be
sold by the Company and for the conduct of its present or intended
business as described in the Prospectus. There are no pending legal,
governmental or administrative proceedings relating to patents,
copyrights, trademarks or proprietary rights or information to which
the Company is a party or to which any property of the Company is
subject and no such proceedings are, to the best of the Company's
knowledge, threatened or contemplated against the Company by any
governmental agency or authority or others. The Company has not
received any notice of conflict with asserted rights of others. The
Company is not using any confidential information or trade secrets of
any third party without such party's consent.
(ii) The Company does not infringe upon the right or claimed
rights of any person under or with respect to any of the intangible
rights listed in the preceding subsection. The Company is not
obligated or under any liability whatsoever to make any payments by
way of royalties, fees or otherwise to any owner of, licensor of, or
other claimant to, any patent, trademark, trade name, copyright or
other intangible asset, with respect to the use thereof or in
connection with the conduct of its business or otherwise.
(p) The Company intends to apply the proceeds from the sale of the
Shares by it to the purposes and substantially in the manner set forth in
the Prospectus.
(q) The Company has no defined benefit pension plan or other pension
benefit plan, except for its 401(k) Plan which has no benefit obligations
and has not been funded, which is intended to comply with the provisions of
the Employee Retirement Income Security Act of 1974 as amended from time to
time, except as disclosed in the Registration Statement.
(r) To the best of the Company's knowledge, no person is entitled,
directly or indirectly, to compensation from the Company or the Underwriter
for services as a finder in connection with the transactions contemplated
by this Agreement.
(s) The conditions for use of a Registration Statement on Form SB-2
for the distribution of the Shares have been satisfied with respect to the
Company.
(t) The Company has not taken and will not take, directly or
indirectly, any action (and does not know of any action by its directors,
officers, stockholders, or others) which has constituted or is designed to,
or which might reasonably be expected to, cause or result in stabilization
or manipulation, as defined in the Securities Exchange
-7-
<PAGE>
Act of 1934, as amended (the "1934 Act") or otherwise, of the price of any
security of the Company to facilitate the sale or resale of the Shares.
(u) The Company has not sold any securities in violation of Section
5(a) of the 1933 Act.
(v) The Company maintains insurance, which is in full force and
effect, of the types and in the amounts adequate for its business and in
line with the insurance maintained by similar companies and businesses.
(w) The Company hereby represents that, as of the date hereof, it has
complied with all provisions of Section 517.075, Florida Statutes and Rule
3E-900-001 of the Rules of the Florida Department of Banking and Finance,
Division of Securities, copies of which are attached hereto.
(x) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific authorizations
and (ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with GAAP.
(y) All material transactions between the Company and its
stockholders who beneficially own more than 5% of any class of the
Company's voting securities have been accurately disclosed in the
Prospectus, and the terms of each such transaction are fair to the Company
and no less favorable to the Company than the terms that could have been
obtained from unrelated parties.
(z) The Company has obtained a written agreement from each of the
officers, directors, and current stockholders of the Company, that for 180
days following the Effective Date, such person will not, without the
Underwriter's prior written consent, sell, transfer or otherwise dispose
of, or agree to sell, transfer, or otherwise dispose of, any of his or her
shares of Common Stock or any options, warrants or rights to purchase
Common Stock, beneficially held by such persons during such 180-day period
other than by gift to donees who agree to be bound by the same restriction
or by will or the laws of descent.
(aa) The Common Stock of the Company has been approved by Nasdaq for
trading on its SmallCap Market-SM- following effectiveness of the
Registration Statement.
2. PURCHASE, SALE, DELIVERY AND PAYMENT.
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth,
the Company agrees to issue and sell the Underwriter, and the Underwriter
agrees to purchase the Firm Shares from the Company, at $_____________ per
Firm Share (which price represents the price to public less underwriting
discounts and commissions of $_____ per Share). The Underwriter will
purchase all of the Firm Shares if any are purchased.
-8-
<PAGE>
(b) On the basis of the representations and warranties herein
contained, but subject to the terms and conditions herein set forth, the
Company hereby grants an option to the Underwriter to purchase an aggregate
of the Option Shares at the same purchase price as the Firm Shares for use
solely in covering any overallotments made by the Underwriter in the sale
and distribution of the Firm Shares. The option granted hereunder may be
exercised at any time (but not more than once) within 45 days after the
Effective Date (as defined in Section 4(a) hereof) upon notice (confirmed
in writing) by the Underwriter to the Company setting forth the aggregate
number of Option Shares as to which the Underwriter is exercising the
option and the date on which certificates for such Option Shares are to be
delivered. The option granted hereby may be canceled by the Underwriter as
to the Option Shares for which the option is unexercised at any time prior
to the expiration of the 45-day period upon notice to the Company.
(c) The Company will deliver the Firm Shares to the Underwriter at
the offices of Fredrikson & Byron, P.A., unless some other place is agreed
upon, at 10:00 A.M., Minneapolis time, against payment of the purchase
price at the same place, on the third full business day after trading of
the Shares has commenced (but not more than ten full business days after
the date the Registration Statement is declared effective), or such earlier
time as may be agreed upon between the Underwriter and the Company. Such
time and place is herein referred to as the "First Closing Date."
(d) The Company will deliver the Option Shares being purchased by the
Underwriter to the Underwriter at the offices of Fredrikson & Byron, P.A.
set forth in Section 2(c) above, unless some other place is agreed upon, at
9:00 a.m., Minneapolis time, against payment of the purchase price at the
same place, on the date determined by the Underwriter and of which the
Company has received notice as provided in Section 2(b), which shall not be
earlier than one nor later than three full business days after the exercise
of the option as set forth in Section 2(b), or at such other time not later
than ten full business days thereafter as may be agreed upon by the
Underwriter and the Company, such time and date being herein referred to as
the "Second Closing Date." The First and Second Closing Dates are
collectively referred to herein as the "Closing Date."
(e) Certificates for the Shares to be delivered will be registered in
such names and issued in such denominations as the Underwriter shall
request of the Company at least two full business days prior to the First
Closing Date or the Second Closing Date, as the case may be. The
certificates will be made available to the Underwriter in definitive form
for the purpose of inspection and packaging at least 24 hours prior to each
respective Closing Date.
(f) Payment for the Shares shall be made, against delivery to the
Underwriter or its designated agent, of certificates for the Shares by wire
transfer to a designated account of the Company.
(g) The Underwriter will make a public offering of the Shares
directly to the public (which may include selected dealers who are members
in good standing with the NASD or foreign dealers not eligible for
membership in the NASD but who have agreed to abide by the interpretation
of the NASD's Board of Governor's with respect to
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<PAGE>
free-riding and withholding) as soon as the Underwriter deem practicable
after the Registration Statement becomes effective at the Price to Public
set forth in Section 2(a) above, subject to the terms and conditions of
this Agreement and in accordance with the Prospectus. Such concessions
from the public offering price may be allowed selected dealers of the NASD
as the Underwriter determine, and the Underwriter will furnish the Company
with such information about the distribution arrangements as may be
necessary for inclusion in the Registration Statement. It is understood
that the public offering price and concessions may vary after the initial
public offering. The Underwriter shall offer and sell the Shares only in
jurisdictions in which the offering of Shares has been duly registered or
qualified, or is exempt from registration or qualification, and shall take
reasonable measures to effect compliance with applicable state and local
securities laws.
(h) On the First Closing Date, the Company shall issue and deliver to
the Underwriter the Underwriter's Warrants against payment by the
Underwriter of the purchase price therefor of $50.00.
3. FURTHER AGREEMENTS OF THE COMPANY. The Company hereby covenants and
agrees with the Underwriter as follows:
(a) If the Registration Statement has not become effective prior to
the date hereof, the Company will use its best efforts to cause the
Registration Statement and any subsequent amendments thereto to become
effective as promptly as possible. The Company will notify the Underwriter
promptly, after the Company shall receive notice thereof, of the time when
the Registration Statement, or any subsequent amendment thereto, has become
effective or any supplement to the Prospectus has been filed. Following
the execution and delivery of this Agreement, the Company will prepare, and
timely file or transmit for filing with the SEC in accordance with Rules
430A, 424(b) and 434, as applicable, copies of the Prospectus, or, if
necessary, a post-effective amendment to the Registration Statement
(including the Prospectus), in which event, the Company will take all
necessary action to have such post-effective amendment declared effective
as soon as possible. The Company will notify the Underwriter promptly upon
the Company's obtaining knowledge of the issuance by the SEC of any stop
order suspending the effectiveness of the Registration Statement or of the
initiation or threat of any proceedings for that purpose and will use its
best efforts to prevent the issuance of any stop order and, if a stop order
is issued, to obtain as soon as possible the withdrawal or lifting thereof.
The Company will promptly prepare and file at its own expense with the SEC
any amendments of, or supplements to, the Registration Statement or the
Prospectus which may be necessary in connection with the distribution of
the Shares by the Underwriter. During the period when a Prospectus
relating to the Shares is required to be delivered under the 1933 Act, the
Company will promptly file any amendments of, or supplements to, the
Registration Statement or the Prospectus which may be necessary to correct
any untrue statement of a material fact or any omission to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Company will
notify the Underwriter promptly of the receipt of any comments from the SEC
regarding the Registration Statement or Prospectus or request by the SEC
for any amendment thereof or supplement thereto or for any additional
information. The Company will not file any amendment of, or supplement to,
the Registration Statement or Prospectus, whether prior
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<PAGE>
to or after the Effective Date, which shall not previously have been
submitted to the Underwriter and its counsel a reasonable time prior to the
proposed filing or to which the Underwriter shall have reasonably objected.
(b) The Company has used and will continue to use its best efforts to
register or qualify the Shares for sale under the securities laws of such
jurisdictions as the Underwriter may designate and the Company will file
such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification. In each
jurisdiction in which the Shares shall have been registered or qualified as
above provided, the Company will continue such registrations or
qualifications in effect for so long as may be required for purposes of the
distribution of the Shares; provided, however, that in no event shall the
Company be obligated to qualify to do business as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action
which would subject it to the service of process in suits, other than those
arising out of the offering or sale of the Shares in any jurisdiction where
it is not now so subject. In each jurisdiction where any of the Shares
shall have been so qualified, the Company will file such statements and
reports as are or may be reasonably required by the laws of such
jurisdiction to continue such qualification in effect. The Company will
notify the Underwriter immediately of, and confirm in writing, the
suspension of qualification of the Shares or the threat of such action in
any jurisdiction. The Company will use its best efforts to qualify or
register its Common Stock for sale in nonissuer transactions under (or
obtain exemptions from the application of) the securities laws of such
states designated by the Underwriter (and thereby permit market-making
transactions and secondary trading in its Common Stock in such states), and
will comply with such securities laws and will continue such
qualifications, registrations and exemptions in effect for a period of five
years after the date hereof.
(c) The Company will furnish to the Underwriter, as soon as
available, copies of the Registration Statement (one of which will be
signed and which shall include all exhibits), each Preliminary Prospectus,
the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section
10(a)(3) of the 1933 Act, all in such quantities as the Underwriter may
from time to time reasonably request prior to the printing of each such
document. The Company specifically authorizes the Underwriter and all
dealers to whom any of the Shares may be sold by the Underwriter to use and
distribute copies of such Preliminary Prospectuses and Prospectuses in
connection with the sale of the Shares as and to the extent permitted by
the federal and applicable state and local securities laws.
(d) For as long as the Company has more than 100 beneficial owners,
but in no event more than five years after the Effective Date, the Company
will mail as soon as practicable to the holders of its Common Stock
substantially the following documents, which documents shall be in
compliance with this Section if they are in the form prescribed by the 1934
Act:
(i) within forty-five days after the end of the first three quarters
of each fiscal year, copies of the quarterly unaudited statement of
profit and loss and quarterly unaudited balance sheets of the Company
and any material subsidiaries; and
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<PAGE>
(ii) within ninety days after the close of each fiscal year,
appropriate financial statements as of the close of such fiscal year
for the Company and any material subsidiary which shall be certified
to by a nationally recognized firm of independent certified public
accountants in such form as to disclose the Company's financial
condition and the results of its operations for such fiscal year.
(e) For as long as the Company has more than 100 beneficial owners,
but in no event more than five years after the Effective Date, the Company
will furnish to the Underwriter (i) concurrently with furnishing such
reports to its stockholders, the reports described in Section 3(d) hereof;
(ii) as soon as they are available, copies of all other reports (financial
or otherwise) mailed to security holders; and (iii) as soon as they are
available, copies of all reports and financial statements furnished to, or
filed with, the SEC, the NASD, any securities exchange or any state
securities commission by the Company. During such period, the foregoing
financial statements shall be on a consolidated basis to the extent that
the accounts of the Company and any subsidiary or subsidiaries are
consolidated and shall be accompanied by similar financial statements for
any significant subsidiary which is not so consolidated.
(f) The Company will not, without the prior written consent of the
Underwriter, which consent shall not be unreasonably withheld, sell or
otherwise dispose of any capital stock or securities convertible or
exercisable into capital stock of the Company (other than pursuant to
currently outstanding options and warrants) during the 180-day period
following the Effective Date. Prior to the Closing Date, the Company will
not repurchase or otherwise acquire any of its capital stock or declare or
pay any dividend or make any distribution on any class of its capital
stock.
(g) Subject to the proviso set forth below, the Company shall be
responsible for and pay all costs and expenses incident to the performance
of its obligations under this Agreement by the Company including, without
limiting the generality of the foregoing, (i) all costs and expenses in
connection with the preparation, printing and filing of the Registration
Statement (including financial statements and exhibits), Preliminary
Prospectuses and the Prospectus and any amendments thereof or supplements
to any of the foregoing; (ii) the issuance and delivery of the Shares,
including taxes, if any; (iii) the cost of all certificates representing
the Shares; (iv) the fees and expenses of the Transfer Agent for the
Shares; (v) the fees and disbursements of counsel for the Company; (vi) all
fees and other charges of the independent public accountants of the
Company; (vii) the cost of furnishing and delivering to the Underwriter and
dealers participating in the offering copies of the Registration Statement
(including appropriate exhibits), Preliminary Prospectuses, the Prospectus
and any amendments of, or supplements to, any of the foregoing; (viii) the
NASD filing and quotation fees; (ix) the fees and disbursements, including
filing fees and all accountable fees and expenses of counsel for the
Underwriter incurred in registering or qualifying the Shares for sale under
the laws of such jurisdictions upon which the Underwriter and the Company
may agree; and (x) a nonaccountable expense allowance to the Underwriter
equal to 3% of the gross proceeds of the Offering. The Underwriter hereby
acknowledge receipt of a $10,000 advance against the Underwriter's
nonaccountable expense allowance referred to in the preceding sentence. In
the event this Agreement is terminated pursuant to Section 8
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<PAGE>
below, the Company shall remain obligated to pay the Underwriter its actual
accountable out-of-pocket expenses, not to exceed $20,000 without the prior
written approval of the Company. Further, if upon termination of this
Agreement pursuant to Section 8 below, the Underwriter's actual accountable
out-of-pocket expenses do not exceed the $10,000 advance against the
Underwriter's accountable expense allowance, the portion of the advance not
used will be reimbursed to the Company by the Underwriter.
(h) The Company will not take, and will use its best efforts to cause
each of its officers and directors not to take, directly or indirectly, any
action designed to or which might reasonably be expected to cause or result
in the stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares.
(i) The Company will use its best efforts to maintain the quotation
of its Common Stock on the Nasdaq SmallCap Market-SM-.
(j) For a period of at least three years after the Effective Date,
the Company will file with the SEC all reports and other documents as may
be required by the 1933 Act, the Rules and Regulations and the 1934 Act.
(k) The Company will apply the proceeds from the sale of the Shares
substantially in the manner set forth in the Prospectus.
(l) Prior to or as of the First Closing Date, the Company shall have
performed each condition to closing required to be performed by it pursuant
to Section 4 hereof.
(m) Other than as permitted by the 1933 Act and the Rules and
Regulations, the Company will not distribute any prospectus or other
offering material in connection with the Offering.
(n) On First Closing Date, the Company shall grant to the Underwriter
the Underwriter's Warrants, in substantially the form attached as Appendix
B hereto.
4. CONDITIONS OF THE UNDERWRITER'S OBLIGATIONS. The obligations of the
Underwriter to purchase and pay for the Shares as provided herein shall be
subject to the accuracy of the representations and warranties of the Company, in
the case of the Firm Shares as of the date hereof and the First Closing Date (as
if made on and as of the First Closing Date) and in the case of the Option
Shares, as of the date hereof and the Second Closing Date (as if made on and as
of the Second Closing Date), to the performance by the Company of its
obligations hereunder, and to the satisfaction of the following additional
conditions on or before the First Closing Date in the case of the Firm Shares
and on or before the Second Closing Date in the case of the Option Shares:
(a) The Registration Statement shall have become effective not later
than 5:00 P.M. Minneapolis time, on the first full business day following
the date of this Agreement, or such later date as shall be consented to in
writing by the Underwriter (the "Effective Date"). If the Company has
elected to rely upon Rule 430A, the information concerning the price of the
Shares and price-related information previously omitted from
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<PAGE>
the effective Registration Statement pursuant to Rule 430A shall have been
transmitted to the SEC for filing pursuant to Rule 424(b) within the
prescribed time period, and prior to the Closing Date the Company shall
have provided evidence satisfactory to the Underwriter of such timely
filing (or a post-effective amendment providing such information shall have
been promptly filed and declared effective in accordance with the 1933 Act
and the Rules and Regulations). No stop order suspending the effectiveness
thereof shall have been issued and no proceeding for that purpose shall
have been initiated or, to the knowledge of the Company or the Underwriter,
threatened by the SEC or any state securities commission or similar
regulatory body. Any request of the SEC for additional information (to be
included in the Registration Statement or the Prospectus or otherwise)
shall have been complied with to the satisfaction of the Underwriter and
their legal counsel. The NASD, upon review of the terms of the Offering,
shall not have objected to the terms of the Underwriter' participation in
the Offering.
(b) The Underwriter shall not have advised the Company that the
Registration Statement or Prospectus, or any amendment thereof or
supplement thereto, contains any untrue statement of a fact which is
material or omits to state a fact which is material and is required to be
stated therein or is necessary to make the statements contained therein, in
light of the circumstances under which they were made, not misleading;
provided, however, that this Section 4(b) shall not apply to statements in,
or omissions from, the Registration Statement or Prospectus, or any
amendment thereof or supplement thereto, which are based upon and conform
to written information furnished to the Company by any of the Underwriter
specifically for use in the preparation of the Registration Statement or
the Prospectus, or any such amendment or supplement.
(c) Subsequent to the date as of which information is given the
Registration Statement and Prospectus, there shall not have occurred any
change, or any development involving a prospective change, which materially
and adversely affects the business or properties of the Company and which,
in the reasonable opinion of the Underwriter, materially and adversely
affects the market for the Shares.
(d) The Underwriter shall have received the opinion of Petillon &
Hansen, counsel for the Company, dated as of such respective Closing Date
and satisfactory in form and substance to the Underwriter and its counsel,
to the effect that:
(i) The Company has been duly incorporated and is validly
existing in good standing under the laws of the State of Missouri with
the requisite corporate power to own, lease and operate its properties
and conduct its business as described in the Prospectus; and is duly
qualified to do business as a foreign corporation in good standing in
all jurisdictions where the ownership or leasing of its properties or
the conduct of its business requires such qualification and in which
the failure to be so qualified or in good standing would have a
material adverse effect on its business and the activities of the
Company are permitted under the 1933 Act, the Rules and Regulations
and other applicable laws.
(ii) The number of authorized and, to the best of such counsel's
knowledge, the number of issued and outstanding shares of capital
stock of the Company are as set forth in the Prospectus and all such
capital stock has been
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<PAGE>
duly authorized and is validly issued, fully paid and nonassessable.
Upon delivery of and payment for the Shares hereunder, the Underwriter
will acquire the Shares free and clear of all liens, encumbrances or
claims. To the best of such counsel's knowledge, no preemptive
rights, contractual or otherwise, of securities holders of the Company
exist with respect to the issuance or sale of the Shares by the
Company pursuant to this Agreement or the issuance of the Warrant
Shares upon exercise of the Underwriter's Warrants. To the best of
such counsel's knowledge, no rights to require registration of shares
of Common Stock or other securities of the Company exist which may be
exercised in connection with the filing of the Registration Statement.
The Shares, Underwriter's Warrants and Warrant Shares conform as to
matters of law in all material respects to the description of these
securities made in the Prospectus and such description accurately sets
forth the material legal provisions thereof required to be set forth
in the Prospectus.
(iii) The Shares have been duly authorized and, upon delivery to
the Underwriter against payment therefor, will be validly issued,
fully paid and nonassessable.
(iv) The certificates evidencing the Shares comply as to form
with the applicable provisions of the laws of the State of Missouri.
In giving such opinion, Petillon & Hansen may rely on the opinion of
Seigfreid, Bingham, Levy, Selzer & Gee of Kansas City, Missouri.
(v) The Underwriter's Warrants have been duly authorized,
executed and delivered by the Company and are the valid and binding
obligations of the Company, enforceable in accordance with their
terms, except as enforceability may be limited by the application of
bankruptcy, insolvency, moratorium, or other laws of general
application affecting the rights of creditors generally and by
judicial limitations on the right of specific performance and other
equitable remedies, and except as the enforceability of
indemnification or contribution provisions hereof may be limited by
federal or state securities laws. The Warrant Shares when issued in
accordance with the terms of this Agreement and pursuant to the
Underwriter's Warrants will be validly issued, fully paid and
nonassessable. A sufficient number of shares of Common Stock has been
reserved for issuance upon exercise of the Underwriter's Warrants.
(vi) The Registration Statement has become and is effective
under the 1933 Act, the Prospectus has been filed as required by Rule
424(b), if necessary and, to the best knowledge of such counsel, no
stop orders suspending the effectiveness of the Registration Statement
have been issued and no proceedings for that purpose have been
instituted or are pending or contemplated under the 1933 Act.
(vii) To the best of such counsel's knowledge, there are no
material legal or governmental proceedings of a character required by
the 1933 Act and the Rules and Regulations to be described or referred
to in the Registration Statement or Prospectus that are not described
or referred to therein. All pending legal or
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<PAGE>
governmental proceedings, if any, to which the Company is a party or
to which any of its property is subject which are not described in the
Registration Statement and the Prospectus, including ordinary routine
litigation incidental to the business, are, considered in the
aggregate, not material to the Company.
(viii) No authorization, approval or consent of any governmental
authority or agency is necessary in connection with the issuance and
sale of the Shares as contemplated under this Agreement, except such
as may be required and obtained under the 1933 Act or under state or
other securities laws in connection with the purchase and distribution
of the Shares by the Underwriter.
(ix) The Registration Statement, when it became effective, the
Prospectus and any amendments thereof or supplements thereto, (other
than the financial statements and supporting financial and statistical
data included or incorporated therein, as to which such counsel need
express no opinion) on the date of filing or the date thereof,
complied as to form in all material respects with the requirements of
the 1933 Act and the Rules and Regulations.
(x) This Agreement has been duly authorized, executed and
delivered by, and is a valid and binding agreement of the Company,
enforceable in accordance with its terms, except as enforceability may
be limited by the application of bankruptcy, insolvency, moratorium or
similar laws affecting the rights of creditors generally and judicial
limitations on the right of specific performance and except as the
enforceability of indemnification or contribution provisions hereof
may be limited by federal or state securities laws.
(xi) To the best of such counsel's knowledge, the execution,
delivery and performance of this Agreement and the consummation of the
transactions described herein will not result in a violation of, or a
default under, the terms or provisions of (A) any material bond,
debenture, note, contract, lease, license, indenture, mortgage, deed
of trust, loan agreement, joint venture or other agreement or
instrument to which the Company is a party or by which the Company or
any of its properties are bound, or (B) any material law, order, rule,
regulation, writ, injunction, or decree known to such counsel of any
government, governmental agency or court having jurisdiction over the
Company or any of its properties.
(xii) To the best of such counsel's knowledge, except as
described in the Prospectus, there are no United States patents of
third parties which are infringed by the manufacture, use or sale of
the products or processes currently made, used or sold by the Company.
(xiii) To the best of such counsel's knowledge, and except as
stated below, there are no legal, governmental or administrative
proceedings pending or threatened against the Company that relate to
patents, trademarks or other intellectual property, except for pending
or proposed United States and foreign patent applications.
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(xiv) To the best of such counsel's knowledge, after due
inquiry, the Company has not received any notice of conflict with the
asserted rights of others in respect of any trademarks, service marks,
trade names, trademark registrations, service mark registrations,
copyrights, licenses, inventions, trade secrets, patents, patent
applications, know-how, or similar rights, nor of any threatened
actions with respect thereto, which, if determined adversely to the
Company, would individually or in the aggregate have a material
adverse effect on the general affairs, financial position, net worth
or results of operations of the Company.
(xv) To the best of such counsel's knowledge, after due inquiry,
the Company owns, possesses or is licensed under all such material
trademarks, trademark applications, trademark registrations, service
marks, service mark registrations, copyrights, patents, patent
applications and licenses as are described in the Prospectus and which
are necessary for the Company's present or planned future business as
described in the Prospectus.
In expressing the foregoing opinion, as to matters of fact relevant to
conclusions of law, counsel may rely, to the extent that they deem proper, upon
certificates of public officials and of the officers of the Company, provided
that copies of such officers' certificates are attached to the opinion.
In addition to the matters set forth above, such opinion shall also include
a statement to the effect that, although such counsel cannot guarantee the
accuracy, completeness or fairness of any of the statements contained in the
Registration Statement, Prospectus, or any amendment thereof or supplement
thereto in connection with such counsel's representation, investigation and due
inquiry of the Company in the preparation of the Registration Statement,
Prospectus and any amendment thereof or supplement thereto, nothing has come to
the attention of such counsel which causes them to believe that the Registration
Statement, Prospectus, or any amendment thereof or supplement thereto (other
than the financial statements and supporting financial and statistical data
included or incorporated therein, as to which such counsel need express no
opinion) contains an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading;
provided, however, that such opinion of counsel does not require any statement
concerning statements in, or omissions from, the Registration Statement,
Prospectus, or any amendment thereof or supplement thereto, which are based upon
and conform to written information furnished to the Company by any of the
Underwriter specifically for use in the preparation of the Registration
Statement, Prospectus, or any such amendment or supplement.
(e) The Underwriter shall have received from Fredrikson & Byron,
P.A., its counsel, such opinion or opinions as the Underwriter may
reasonably require, dated as of each closing date and satisfactory in form
and substance to the Underwriter, with respect to the sufficiency of
corporate proceedings and other legal matters relating to this Agreement
and the transactions contemplated hereby, and the Company shall have
furnished to said counsel such documents as they may have requested for the
purpose of enabling them to pass upon such matters. In connection with
such opinion, as to matters of fact relevant to conclusions of law, such
counsel may rely, to the extent that they
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deem proper, upon representations or certificates of public officials and
of responsible officers of the Company.
(f) The Underwriter and the Company shall have received letters,
dated the date hereof and as of each Closing Date, from Baird, Kurtz &
Dobson, independent public accountants, containing statements and
information of the type ordinarily included in accountants' "comfort
letters" to underwriters with respect to the financial statements and
certain financial and statistical information contained in the Registration
Statement and the Prospectus, all in form and substance satisfactory to the
Underwriter.
(g) The Underwriter shall have received from the Company a
certificate, dated as of each Closing Date, of the principal executive
officer and the principal financial or accounting officer of the Company to
the effect that:
(i) The representations and warranties of the Company in this
Agreement are true and correct as if made on and as of each closing
date. The Company has complied with all the agreements and satisfied
all the conditions on its part to be performed or satisfied at, or
prior to, such date.
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceeding for that
purpose has been instituted or is pending or to the best knowledge of
such officers contemplated under the 1933 Act.
(iii) Neither the Registration Statement nor the Prospectus nor
any amendment thereof or supplement thereto included any untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading, and, since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an
amended or supplemented prospectus which has not been so set forth;
provided, however, that such certificate does not require any
representation concerning statements in, or omissions from, the
Registration Statement or Prospectus, or any amendment thereof or
supplement thereto, which are based upon and conform to written
information furnished to the Company by any of the Underwriter
specifically for use in the preparation of the Registration Statement
or the Prospectus, or any such amendment or supplement.
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, and except
as contemplated or referred to in the Prospectus, no event has
occurred that should have been set forth in an amendment or supplement
to Registration Statement or the Prospectus which has not been so set
forth and the Company has not incurred any direct or contingent
liabilities or obligations material to the Company, or entered into
any material transactions, except liabilities, obligations or
transactions in the ordinary course of business, and there has not
been any change in the capital stock or long-term debt of the Company,
(including any capitalized lease obligations), any material increase
in the short-term debt of the Company, any material adverse
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<PAGE>
change in the financial position, net worth or results of operations
of the Company or declaration or payment of any dividend.
(v) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, the Company
has not sustained any material loss of, or damage to, its properties,
whether or not insured.
(vi) Except as is otherwise expressly stated in the Registration
Statement and Prospectus, there are no material actions, suits or
proceedings pending before any court or governmental agency, authority
or body, or, to the best of their knowledge, threatened, to which the
Company is a party or of which the business or property of the Company
is the subject.
(h) The Underwriter shall have received, dated as of each Closing
Date, from the Secretary of the Company a certificate of incumbency
certifying the names, titles and signatures of the officers authorized to
execute the resolutions of the Board of Directors of the Company
authorizing and approving the execution, delivery and performance of this
Agreement, a copy of such resolutions to be attached to such certificate,
certifying that such resolutions and the Articles of Incorporation of the
Company and the Bylaws of the Company have been validly adopted and have
not been amended or modified.
(i) The Underwriter shall have received a written agreement from each
of the officers, directors and stockholders of the Company, that for 180
days following the Effective Date, such person will not, without the
Underwriter's prior written consent, sell, transfer or otherwise dispose
of, or agree to sell, transfer or otherwise dispose of, other than by gift
to donees who agree to be bound by the same restriction or by will or the
laws of descent, any of his or her Common Stock, or any options, warrants
or rights to purchase Common Stock or any shares of Common Stock received
upon exercise of any options, warrants or rights to purchase Common Stock,
all of which are beneficially held by such persons during the 180-day
period.
(j) The Company shall not have failed to have performed any of its
agreements herein contained and required to be performed by it at or prior
to the First Closing Date or the Second Closing Date, as the case may be.
The Underwriter may waive in writing the performance of any one or more of
the conditions specified in this Section 4 or extend the time for their
performance.
(k) The Shares shall have been registered or qualified for sale or
exempt from such registration or qualification under the securities laws of
such jurisdictions as designated by the Underwriter such qualifications or
exemptions shall continue in effect to and including the First Closing Date
or the Second Closing Date, as the case may be.
(l) The Company shall have furnished to the Underwriter, dated as of
the date of each Closing Date, such further certificates and documents as
the Underwriter shall have reasonably required.
(m) All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably
satisfactory to the Underwriter and
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<PAGE>
its legal counsel. All statements contained in any certificate, letter, or
other document delivered pursuant hereto by, or on behalf of, the Company
shall be deemed to constitute representations and warranties of the
Company.
(n) The Underwriter may waive in writing the performance of any one
or more of the conditions specified in this Section 4 or extend the time
for their performance.
(o) If any of the conditions specified in this Section 4 shall not
have been fulfilled when and as required by this Agreement to be fulfilled,
this Agreement and all obligations of the Underwriter hereunder may be
canceled at, or at any time prior to, each Closing Date by the Underwriter.
Any such cancellation shall be without liability of the Underwriter to the
Company and shall not relieve the Company of its obligations under Section
3(g) hereof. Notice of such cancellation shall be given to the Company at
the address specified in Section 10 hereof in writing, or by telegraph or
telephone confirmed in writing.
5. UNDERWRITER'S WARRANTS. On the First Closing Date, the Company shall
grant to the Underwriter the Underwriter's Warrants, which shall first become
exercisable one year after the Effective Date and shall remain exercisable for a
period of four years thereafter. The Underwriter's Warrants shall be subject
to certain transfer restrictions and shall be in substantially the form filed as
an exhibit to the Registration Statement and attached as Appendix A hereto.
6. INDEMNIFICATION.
(a) The Company hereby agrees to indemnify and hold harmless the
Underwriter and each person, if any, who controls the Underwriter within
the meaning of Section 15 of the 1933 Act against any losses, claims,
damages or liabilities, joint or several, to which the Underwriter or each
such controlling person may become subject, under the 1933 Act, the 1934
Act, the common law or otherwise, insofar as such losses, claims, damages
or liabilities (or judicial or governmental actions or proceedings in
respect thereof) arise out of, or are based upon, (i) any untrue statement
or alleged untrue statement made by the Company in Section 1 hereof; (ii)
any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or any amendment thereof, or the
omission or alleged omission to state in the Registration Statement or any
amendment thereof a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; (iii) any untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus if used prior to the Effective Date of the Registration
Statement or in the Prospectus (as amended or as supplemented, if the
Company shall have filed with the Commission any amendment thereof or
supplement thereto), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading; or (iv) any untrue statement or alleged untrue
statement of a material fact contained in any application or other
statement executed by the Company or based upon written information
furnished by the Company filed in any jurisdiction in order to qualify the
Shares under, or exempt the
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<PAGE>
Shares or the sale thereof from qualification under, the securities laws of
such jurisdiction, or the omission or alleged omission to state in such
application or statement a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. The Company will reimburse the
Underwriter and each such controlling person for any legal or other
expenses reasonably incurred by the Underwriter or such controlling person
(subject to the limitation set forth in Section 7(d) hereof) in connection
with investigating or defending against any such loss, claim, damage,
liability or action. The Company, however, will not be liable in any such
case to the extent that any such loss, claim, damage or liability arises
out of, or is based upon, an untrue statement, or alleged untrue statement,
omission or alleged omission, made in reliance upon and in conformity with
written information furnished to the Company by, or on behalf of, the
Underwriter specifically for use in the preparation of the Registration
Statement or any such post effective amendment thereof, any such
Preliminary Prospectus or the Prospectus or any such amendment thereof or
supplement thereto, or in any application or other statement executed by
the Company or the Underwriter filed in any jurisdiction in order to
qualify the Shares under, or exempt the Shares or the sale thereof from
qualification under, the securities laws of such jurisdiction. Further,
the foregoing indemnity agreement is subject to the condition that, insofar
as it relates to any untrue statement, alleged untrue statement, omission
or alleged omission made in any Preliminary Prospectus but eliminated or
remedied in the Prospectus, such indemnity agreement shall not inure to the
benefit of the Underwriter if the person asserting any loss, claim, damage
or liability purchased the Shares from the Underwriter which are the
subject thereof (or to the benefit of any person who controls the
Underwriter), if a copy of the Prospectus was not sent or given to such
person with, or prior to, the written confirmation of the sale of such
Shares to such person due to the fault of the Underwriter. This indemnity
agreement is in addition to any liability which the Company may otherwise
have.
(b) The Underwriter agrees to indemnify and hold harmless the
Company, each of the Company's directors, each of the Company's officers
who has signed the Registration Statement and each person who controls the
Company within the meaning of Section 15 of the 1933 Act against any
losses, claims, damages or liabilities to which the Company or any such
director, officer, or controlling person may become subject, under the 1933
Act, the 1934 Act, the common law, or otherwise, insofar as such losses,
claims, damages, or liabilities (or judicial or governmental actions or
proceedings in respect thereof) arise out of, or are based upon, (i) any
untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any amendment thereof, or the omission or
alleged omission to state in the Registration Statement or any amendment
thereof, a material fact required to be stated therein or necessary to make
the statements therein not misleading; (ii) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus
if used prior to the Effective Date of the Registration Statement or in the
Prospectus (as amended or as supplemented, if the Company shall have filed
with the Commission any amendment thereof or supplement thereto), or the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading; or
(iii) any untrue statement or alleged untrue statement of a material fact
contained in any application or other statement executed by the Company or
by the
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<PAGE>
Underwriter and filed in any jurisdiction in order to qualify the Shares
under, or exempt the Shares or the sale thereof from qualification under,
the securities laws of such jurisdiction, or the omission or alleged
omission to state in such application or statement a material fact required
to be stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading; in each
case to the extent, but only the extent, that such untrue statement,
alleged untrue statement, omission or alleged omission, was made in
reliance upon and in conformity with written information furnished to the
Company by, or on behalf of, the Underwriter specifically for use in the
preparation of the Registration Statement or any such post effective
amendment thereof, any such Preliminary Prospectus or the Prospectus or any
such amendment thereof or supplement thereto, or in any application or
other statement executed by the Company or by the Underwriter and filed in
any jurisdiction. The Underwriter will reimburse any legal or other
expenses reasonably incurred by the Company or any such director, officer
or controlling person in connection with investigating or defending against
any such loss, claim, damage, liability or action. Further, the foregoing
indemnity agreement is subject to the condition that, insofar as it relates
to any untrue statement, alleged untrue statement, omission or alleged
omission made in any Preliminary Prospectus but eliminated or remedied in
the Prospectus, such indemnity agreement shall not inure to the benefit of
the Company if the person asserting any loss, claim, damage or liability
purchased the Shares from the Underwriter which are the subject thereof (or
to the benefit of any person who controls any Underwriter), if a copy of
the Prospectus was not sent or given to such person with, or prior to, the
written confirmation of the sale of such Shares to such person due to no
fault of the Underwriter. This indemnity agreement is in addition to any
liability which the Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
6 of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against any indemnifying party
under this Section 6, notify in writing the indemnifying party of the
commencement thereof. The omission so to notify the indemnifying party
will not relieve it from any liability under this Section 6 as to the
particular item for which indemnification is then being sought, unless such
omission so to notify prejudices the indemnifying party's ability to defend
such action. In case any such action is brought against any indemnified
party and the indemnified party notifies an indemnifying party of the
commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel who shall be reasonably satisfactory to such indemnified
party. After notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party
will not be liable to such indemnified party under this Section 6 for any
legal or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation; provided, however, that if, in the reasonable judgment of
the indemnified party, it is advisable for such parties and controlling
persons to be represented by separate counsel, any indemnified party shall
have the right to employ separate counsel to represent it and all other
parties and their controlling persons who may be subject to liability
arising out of any claim in respect of which indemnity may be sought by the
Underwriter against the Company or by the Company against the Underwriter
hereunder, in which event the fees
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and expenses of such separate counsel shall be borne by the indemnifying
party and paid as incurred. Any such indemnifying party shall not be
liable to any such indemnified party on account of any settlement of any
claim or action effected without the prior written consent of such
indemnifying party.
7. CONTRIBUTION.
(a) If the indemnification provided for in Section 6 is unavailable
for any reason or is insufficient to hold harmless an indemnified party
under Section 6(a) or (b) above in respect of any losses, claims, damages
or liabilities (or actions in respect thereof) referred to therein, then
each indemnifying party shall, in lieu of indemnifying such indemnified
party, contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages or liabilities (or actions in
respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Underwriter from the
offering of the Firm Shares and the Option Shares, if any. If, however,
the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give the
notice required under Section 6(c) above, then each indemnifying party
shall contribute to such amount paid or payable by such indemnified party
in such proportion as is appropriate to reflect not only such relative
benefits but also the relative fault of the Company and the Underwriter in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as
any other relevant equitable considerations. The relative benefits
received by the Company and the Underwriter shall be deemed to be in the
same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and bear to the total
underwriting discounts and commissions received by the Underwriter, in each
case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by the Company or the Underwriter and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 10(e) of the
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation.
The Company and the Underwriter agree that it would not be just and
equitable if contribution pursuant to this Section 7(a) were determined by
pro rata allocation or by any other method of allocation that does not take
account of the equitable considerations referred to above in this Section
7(a). The amount paid or payable by an indemnified party as a result of
the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this Section 7(a) shall be deemed to include any legal
or other expenses to which such indemnified party would be entitled if
Section 6(a) or (b) were applied. Notwithstanding the provisions of this
Section 7(a), the Underwriter shall not be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission.
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<PAGE>
(b) Promptly after receipt by any party to this Agreement of notice
of the commencement of any action, suit or proceeding, such party will, if
a claim for contribution in respect thereof is to be made against another
party (the "contributing party"), notify the contributing party of the
commencement thereof. The omission so to notify the contributing party
will not relieve it from any liability that it may have to any other party
so long as the failure to notify does not materially prejudice the
contributing party's rights. If any such action, suit or proceeding is
brought against any party, and such party notifies a contributing party of
the commencement thereof, the contributing party will be entitled to
participate therein with the notifying party and any other contributing
party similarly notified.
(c) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under
Section 6 or this Section 7 shall be paid by the indemnifying party to the
indemnified party as such losses, claims, damages, liabilities or expenses
are incurred. A successor to the Underwriter, or to the Company, or any
actor or officer of, or any person controlling, the Underwriter or the
Company shall be entitled to the benefits of the agreements contained in
Sections 6 and 7.
8. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at 8:00 a.m., Minneapolis
time, on the day on which the Underwriter releases the initial public
offering of the Firm Shares for sale to the public. The Underwriter shall
notify the Company immediately after any action has been taken which causes
this Agreement to become effective. Until this Agreement is effective, it
may be terminated by the Company or the Underwriter by giving notice as
hereinafter provided, except that the provisions of Sections 4(g), 6, 7 and
8 shall at all times be effective. For purposes of this Agreement, the
release of the initial public offering of the Firm Shares for sale to the
public shall be deemed to have been made when the Underwriter releases, by
telegram or otherwise, firm offers of the Firm Shares to securities dealers
or release for publication a newspaper advertisement relating to the Firm
Shares, whichever occurs first.
(b) Until the First Closing Date, this Agreement may be terminated by
the Underwriter, at its option, by giving notice to the Company, if (i) the
Company shall have sustained a loss by fire, flood, accident or other
calamity which is material with respect to the business of the Company; the
Company shall have become a party to material litigation, not disclosed in
the Registration Statement or the Prospectus; or the business or financial
condition of the Company shall have become the subject of any material
litigation, not disclosed in the Registration Statement or the Prospectus;
or there shall have been, since the respective dates as of which
information is given in the Registration Statement or the Prospectus, any
material adverse change in the general affairs, business, key personnel,
capitalization, financial position or net worth of the Company, whether or
not arising in the ordinary course of business, which loss or change, in
the reasonable judgment of the Underwriter, shall render it inadvisable to
proceed with the delivery of the Shares, whether or not such loss shall
have been insured; (ii) trading in securities generally on the New York
Stock Exchange, American Stock Exchange, Nasdaq National Market, Nasdaq
SmallCap Market-SM- or the
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<PAGE>
over-the-counter market shall have been suspended or minimum prices shall
have been established on such exchange by the SEC or by such exchanges or
markets; (iii) a general banking moratorium shall have been declared by
federal, New York or Minnesota authorities; (iv) there shall have been such
a material adverse change in general economic, monetary, political or
financial conditions, or the effect of international conditions on the
financial markets in the United States shall be such that, in the judgment
of the Underwriter, makes it inadvisable to proceed with the delivery of
the Shares; (v) the enactment, publication, decree or other promulgation of
any federal or state statute, regulation, rule or order of either of any
court or other governmental authority which, in the judgment of the
Underwriter, materially and adversely affects or will materially and
adversely affect the business or operations of the Company; (vi) there
shall be a material outbreak of hostilities or material escalation and
deterioration in the political and military situation between the United
States and any foreign power, or a formal declaration of war by the United
States of America shall have occurred; or (vii) the Company shall have
failed to comply with any of the provisions of this Agreement on its part
to be performed on or prior to such date or if any of the conditions,
agreements, representations or warranties of the Company shall not have
been fulfilled within the respective times provided for in this Agreement.
Any such termination shall be without liability of any party to any other
party, except as provided in Sections 6 and 7 hereof; provided, however,
that the Company shall remain obligated to pay costs and expenses to the
extent provided in Section 3(g) hereof.
(c) If the Underwriter elects to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 8, it
shall notify the Company promptly by telegram or telephone, confirmed by
letter sent to the address specified in Section 10 hereof. If the Company
shall elect to prevent this Agreement from becoming effective, it shall
notify the Underwriter promptly by telegram or telephone, confirmed by
letter sent to the address specified in Section 10 hereof.
9. SURVIVAL OF INDEMNITIES, CONTRIBUTION AGREEMENTS, WARRANTIES AND
REPRESENTATIONS. The respective indemnity and contribution agreements of the
Company and the Underwriter contained in Sections 6 and 7, respectively, the
representations and warranties of the Company set forth in Section 1 hereof and
the covenants of the Company set forth in Section 3 hereof shall remain
operative and in full force and effect, regardless of any investigation made by,
or on behalf of, the Underwriter, the Company, any of its officers and
directors, or any controlling person referred to in Sections 6 and 7, and shall
survive the delivery of and payment for the Shares. The aforesaid indemnity and
contribution agreements shall also survive any termination or cancellation of
this Agreement. Any successor of any party or of any such controlling person,
or any legal representative of such controlling person, as the case may be,
shall be entitled to the benefit of the respective indemnity and contribution
agreements.
10. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and, if sent to Underwriter
or any of the Underwriter, shall be mailed, delivered or telegraphed and
confirmed, to R. J. Steichen & Company, 700 Midwest Plaza, 801 Nicollet Mall,
Minneapolis, MN 55402, Attention: Patrick M. Sidders, Senior Vice President and
Managing Director with a copy to Melodie R. Rose, Esq., Fredrikson & Byron,
P.A., 1100 International Centre, 900 Second Avenue South, Minneapolis, Minnesota
55402; or, if sent to the Company, shall be mailed, delivered or telegraphed and
confirmed, to
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Electronic Processing, Inc., 501 Kansas Avenue, Kansas City, KS 66105,
Attention: Tom W. Olofson , with a copy to Mark T. Hiraide, Esq., Petillon &
Hansen, 1260 Union Bank Tower, 21515 Hawthorne Boulevard, Torrance, California
90503.
11. INFORMATION FURNISHED BY THE UNDERWRITER. The statements relating to
the stabilization activities of the Underwriter and the statements under the
caption "Underwriting" in any Preliminary Prospectus and in the Prospectus
constitute the written information furnished by, or on behalf of, the
Underwriter specifically for use with reference to the Underwriter referred to
in Section 1(b) and Section 6 hereof.
12. PARTIES. This Agreement shall inure to the benefit of and be binding
upon the Underwriter and the Company, their respective successors and assigns,
and the officers, directors and controlling persons referred to in Sections 6
and 7. Nothing expressed in this Agreement is intended or shall be construed to
give any person or corporation, other than the parties hereto, their respective
successors and assigns, and the controlling persons, officers and directors
referred to in Sections 6 and 7 any legal or equitable right, remedy, or claim
under, or in respect of, this Agreement or any provision herein contained, this
Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of the parties hereto and their
respective executors, administrators, successors, assigns and such controlling
persons, officers and directors, and for the benefit of no other person or
corporation. No purchaser of any Shares from the Underwriter shall be construed
a successor or assign merely by reason of such purchase.
13. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Minnesota.
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<PAGE>
If the foregoing is in accordance with the Underwriter's understanding of
this agreement, kindly sign and return to the Company the enclosed counterpart
of this Agreement, whereupon it will become a binding agreement between the
Company and the Underwriter in accordance with its terms.
Very truly yours,
ELECTRONIC PROCESSING, INC.
By
-------------------------------------
Its
------------------------------------
ACCEPTANCE
The foregoing Underwriting Agreement is hereby confirmed and accepted by the
undersigned
R. J. STEICHEN & COMPANY
By
---------------------------------
Its
--------------------------------
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<PAGE>
SCHEDULE I
PERSONS TO BE
SUBJECT TO LOCK-UP AGREEMENT
Tom W. Olofson
Terry C. Matlack
Christopher E. Olofson
Robert C. Levy
Mark H. Gilgus
Scott W. Olofson
FORM OF LOCK-UP AGREEMENT
The undersigned, a director, executive officer, or beneficial owner of the
common stock, $0.01 par value (the "Common Stock"), of Electronic Processing,
Inc. (the "Company"), understands that the Company has filed with the Securities
and Exchange Commission a registration statement on Form SB-2 (the "Registration
Statement") for the registration of up to 1,600,000 shares of Common Stock, plus
an overallotment option of 240,000 shares of Common Stock. The undersigned
further understands that in connection with the public offering of the Shares,
the Company contemplates entering into an underwriting agreement with R. J.
Steichen & Company (the "Underwriter").
In order to induce the Underwriter to proceed with the public offering,
the undersigned agrees, for the benefit of the Company and the Underwriter,
that should such public offering be effectuated the undersigned will not,
without the prior written consent of the Underwriter, which consent shall not
be unreasonably withheld, during the 180-day period commencing on the
effective date of the Registration Statement (the "Lockup Period") (i) sell,
transfer or otherwise dispose of, or agree to sell, transfer or otherwise
dispose of any shares of Common Stock of the Company beneficially held by the
undersigned during the Lockup Period, (ii) sell, transfer or otherwise
dispose of or agree to sell, transfer or otherwise dispose of any options,
rights, warrants or other securities exercisable or convertible into shares
of Common Stock of the Company beneficially held by the undersigned during
the Lockup Period, or (iii) sell or grant, or agree to sell or grant,
options, rights, warrants or other securities exercisable or convertible into
to any such shares of Common Stock. The foregoing does not prohibit gifts to
donees who agree to be bound by the restrictions set forth herein or
transfers by will or the laws of descent.
This Agreement shall be binding on the undersigned and his, her or its
respective successors, heirs, personal representatives and assigns.
Dated:
----------------- --------------------------------
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<PAGE>
STATE OF MISSOURI . . . OFFICE OF SECRETARY OF STATE
AMENDMENT OF ARTICLES OF INCORPORATION
(TO BE SUBMITTED IN DUPLICATE BY AN ATTORNEY)
SECRETARY OF STATE
STATE OF MISSOURI
P. O. BOX 778
JEFFERSON CITY, MO 65102
Pursuant to the provisions of The General and Business Corporation Law of
Missouri, the undersigned corporation hereby certifies the following:
1. The present name of the Corporation is Electronic
Processing, Inc.
The name under which it was originally organized was NEWCO
RGLG I, Inc.
2. An amendment to the corporation's Articles of Incorporation
was adopted by the directors and shareholders on April 1,
1996.
3. Article Third is amended to read as follows:
THIRD. The aggregate number of shares, class and par value, if any,
which the corporation shall have authority to issue shall be 5,000,000
shares of common stock, each with a par value of $.01.
There are no preferences, qualifications, limitations, restrictions,
or special or relative rights, including convertible rights, if any,
with respect to the authorized shares of stock.
4. Of the 300,000 shares of the corporation outstanding,
300,000 of such shares were entitled to vote on such
amendment.
The number of outstanding shares of any class entitled to
vote thereon as a class were as follows:
Class Number of Outstanding Shares
----- ----------------------------
Common 300,000
<PAGE>
5. The number of shares voted for and against such amendment
were as follows:
Class No. Voted For No. Voted Against
----- ------------- ----------------
Common 300,000 -0-
6. If the amendment changed the number of par value of authorized shares
having a par value, the amount in dollars of authorized shares having
a par value as changed is: $50,000.00.
If the amendment changed the number of authorized shares without par
value, the authorized number of shares without par value as changed
and the consideration proposed to be received for such increased
authorized shares without par value as are to be presently issued
are: N/A
7. If the amendment provides for an exchange, reclassification, or
cancellation of issued shares, or a reduction of the number of
authorized shares of any class below the number of issued shares of
that class, the following is a statement of the manner in which such
reduction shall be effected: N/A
IN WITNESS WHEREOF, the undersigned, Tom W. Olofson, President, has
executed this instrument and Robert C. Levy, its Secretary has affixed its
corporate seal hereto and attested said seal on the 1st day of April, 1996.
PLACE CORPORATE
SEAL HERE
ELECTRONIC PROCESSING, INC.
By:
-------------------------------------
Tom W. Olofson, President
ATTEST:
<PAGE>
By:
---------------------------
Robert C. Levy, Secretary
STATE OF MISSOURI )
) ss.
COUNTY OF JACKSON )
I, the undersigned, a Notary Public, do hereby certify that on this 1st day
of April, 1996 Tom W. Olofson personally appeared before me who, being by me
first duly sworn, declared that he is the President of Electronic Processing,
Inc., a Missouri corporation, and acknowledged that he signed the foregoing
document as President of the corporation, and that the statements therein
contained are true.
{Notarial Seal}
-------------------------
Notary Public
My commission expires:
- ----------------------
<PAGE>
BY-LAWS
OF
ELECTRONIC PROCESSING, INC.
Amended and Restated October 12, 1995
ARTICLE I
OFFICES AND RECORDS
1. (a) REGISTERED OFFICE AND REGISTERED AGENT. The location of the
registered office and the name of the registered agent of the corporation in the
State of Missouri (hereinafter referred to as "State") shall be such as shall be
determined from time to time by the board of directors and on file in the
appropriate office of the State pursuant to applicable provisions of law. Unless
otherwise permitted by law, the address of the registered office of the
corporation and the address of the business office of the registered agent shall
be identical.
(b) CORPORATE OFFICES. The corporation may have such corporate
offices anywhere within or without the State as the board of directors from time
to time may determine or the business of the corporation may require. The
"principal place of business" or "principal business" or "executive" office or
offices of the corporation may be fixed and so designated from time to time by
the board of directors, but the location or residence of the corporation in the
State shall be deemed for all purposes to be in the county in which its
registered office in the State is maintained.
2. (a) RECORDS. The corporation shall keep at its registered office, or
principal place of business, in the State, original or duplicate books in which
shall be
<PAGE>
recorded the number of shares subscribed, the names of the owners of its shares,
the numbers owned of record by them respectively, the amount of shares paid, and
by whom, the transfer of said shares with the date of transfer, the amount of
its assets and liabilities, and the names and places of residence of its
officers, and from time to time such other or additional records, statements,
lists, and information as may be required by law.
(b) INSPECTION OF RECORDS. A shareholder, if the shareholder be
entitled and demands to inspect the records of the corporation pursuant to any
statutory or other legal right, shall be privileged to inspect such records only
during the usual and customary hours of business and in such manner as will not
unduly interfere with the regular conduct of the business of the corporation. A
shareholder may delegate the right of inspection to an attorney and a certified
or public accountant on the condition, to be enforced at the option of the
corporation, that the shareholder and such attorney and/or accountant agree with
the corporation to furnish to the corporation promptly a true and correct copy
of each report with respect to such inspection. No shareholder shall use, permit
to be used or acquiesce in the use by others of any information so obtained to
the detriment competitively of the corporation, nor shall the shareholder
furnish or permit to be furnished any information so obtained to any competitor
or prospective competitor of the corporation. The corporation as a condition
precedent to any shareholder's inspection of the records of the corporation may
require the shareholder to indemnify the corporation, in such manner and for
such amount as may be determined by the board of directors, against any loss or
damage which may be suffered by it arising out of or resulting from any
unauthorized disclosure made or permitted to be made by such shareholder of
information obtained in the course of such inspection.
-2-
<PAGE>
ARTICLE II
SHAREHOLDERS
1. PLACE OF MEETINGS. All meetings of the shareholders shall be held at
the principal business office of the corporation in the State, except such
meetings as the board of directors to the extent permissible by law expressly
determines shall be held elsewhere, in which case such meetings may be held,
upon notice thereof as hereinafter provided, at such other place or places,
within or without the State, as the board of directors shall have determined,
and as shall be stated in such notice; and, unless specifically prohibited by
laws, any meeting may be held at any place and time, and for any purpose, if
consented to in writing by all the shareholders entitled to vote thereat.
2. (a) ANNUAL MEETINGS. An annual meeting of shareholders shall be held
on the 15th day of July, if not a legal holiday, and if a legal holiday, then on
the next weekday following, when they shall elect a board of directors and
transact such other business as may properly be brought before the meeting.
(b) SPECIAL MEETINGS. Special meetings of the shareholders may be
held for any purpose or purposes and may be called by the president, by the
board of directors, or by the holders of, or by any officer or shareholder upon
the written request of the holders of, not less than one-fifth of all
outstanding shares entitled to vote at any such meeting, and shall be called by
any officer directed to do so by the board of directors.
The "call" and the "notice" of any such meeting shall be deemed to be
synonymous.
-3-
<PAGE>
(c) CONSENT OF SHAREHOLDERS IN LIEU OF MEETING. Any action required
to be taken or which may be taken at a meeting of the shareholders may be taken
without a meeting if consents in writing, setting forth the action so taken,
shall be signed by all of the shareholders entitled to vote with respect to the
action so taken. The secretary shall file such consents with the minutes of the
meeting of the shareholders.
3. (a) NOTICE. Written or printed notice of each meeting of the
shareholders, whether annual or special, stating the place, day and hour of the
meeting, and, in case of a special meeting, the purpose or purposes thereof,
shall be delivered or given to each shareholder entitled to vote thereat, either
personally or by mail, not less than ten (10) days or more than fifty (50) days
prior to the meeting, unless, as to a particular matter, other or further notice
is required by law, in which case such other or further notice shall be given.
Any notice of a shareholders' meeting sent by mail shall be deemed to
be delivered when deposited in the United States mail with postage thereon
prepaid addressed to the shareholder at his address as it appears on the records
of the corporation.
(b) WAIVER OF NOTICE. Whenever any notice is required to be given
under the provisions of these by-laws, or of the articles of incorporation or of
any law, a waiver thereof in writing signed by the person or persons entitled to
such notice, whether before or after the time stated therein, shall be deemed
the equivalent to the giving of such notice.
-4-
<PAGE>
Attendance of a shareholder at any meeting shall constitute a waiver
of notice of such meeting except where a shareholder attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened.
4. PRESIDING OFFICIALS. Every meeting of the shareholders, for whatever
object, shall be convened by the president, or by the officer or any of the
persons who called the meeting by notice as above provided, but it shall be
presided over by the officers specified in Article IV of these by-laws;
provided, however, that the shareholders at any meeting, by a majority vote in
amount of shares represented thereat, and notwithstanding anything to the
contrary contained elsewhere in these by-laws, may select any persons of their
choosing to act as chairman and secretary of such meeting or any session
thereof.
5. (a) BUSINESS WHICH MAY BE TRANSACTED AT ANNUAL MEETINGS. At each
annual meeting of the shareholders, the shareholders shall elect a board of
directors to hold office until the next succeeding annual meeting or until their
successors shall have been elected and qualified and they may transact such
other business as may be desired, whether or not the same was specified in the
notice of the meeting, unless the consideration of such other business without
its having been specified in the notice of the meeting as one of the purposes
thereof, is prohibited by law.
(b) BUSINESS WHICH MAY BE TRANSACTED AT SPECIAL MEETINGS. Business
transacted at all special meetings shall be confined to the purposes stated in
the notice of such meeting, unless the transaction of other business is
consented to by the holders of all of the outstanding shares of stock of the
corporation entitled to vote thereat.
-5-
<PAGE>
6. QUORUM. Except as otherwise provided by law or by the articles of
incorporation, the holders of a majority of the outstanding shares entitled to
vote thereat, if present in person or by proxy, shall constitute a quorum for
the transaction of business at all meetings of the shareholders. Every decision
of a majority amount of shares of such quorum shall be valid as a corporate act,
except in those specific instances in which a larger vote is required by law or
by the articles of incorporation.
If, however, such quorum should not be present at any meeting, the
shareholders present and entitled to vote shall have power successively to
adjourn the meeting, without notice to any shareholder other than announcement
at the meeting, to a specified date not longer than ninety (90) days after such
adjournment. At any subsequent session of the meeting at which a quorum is
present in person or by proxy any business may be transacted which could have
been transacted at the initial session of the meeting if a quorum had been
present.
7. (a) PROXIES. At any meeting of the shareholders a shareholder having
the right to vote shall be entitled to vote in person or by proxy executed in
writing by such shareholder or by his duly authorized attorney-in-fact. No proxy
shall be valid after eleven (11) months from the date of its execution, unless
otherwise provided in the proxy.
(b) VOTING. Each shareholder shall have one vote for each share of
stock entitled to vote under the provisions of the articles of incorporation and
which is registered in his name on the books of the corporation; but in the
election of directors cumulative voting shall prevail. Accordingly, each
shareholder shall have the right to cast as many votes in the aggregate as shall
equal the number of voting shares so held by him, multiplied by the number of
directors to be elected at such election, and he
-6-
<PAGE>
may cast the whole number of such votes for one candidate or distribute them
among two or more candidates. Directors shall not be elected in any other
manner.
No person shall be admitted to vote on any shares belonging or
hypothecated to the corporation.
(c) REGISTERED SHAREHOLDERS - EXCEPTIONS - STOCK OWNERSHIP PRESUMED.
The corporation shall be entitled to treat the holders of the shares of stock of
the corporation, as recorded on the stock record or transfer books of the
corporation, as the holders of record and as the holders and owners in fact
thereof and, accordingly, the corporation shall not be required to recognize any
equitable or other claim to or interest in any such shares on the part of any
other person, firm, partnership, corporation or association, whether or not the
corporation shall have express or other notice thereof, except as is otherwise
expressly required by law, and the term "shareholder" as used in these by-laws
means one who is a holder of record of shares of the corporation; provided,
however, that if permitted by law:
(i) shares standing in the name of another corporation, domestic
or foreign, may be voted by such officer, agent or proxy as the
by-laws of such corporation may prescribe, or, in the absence of such
provision, as the board of directors of such corporation may
determine;
(ii) shares standing in the name of a deceased person may be
voted by his administrator or executor, either in person or by proxy;
and shares standing in the name of a guardian, curator or trustee may
be voted by such fiduciary, either in person or by proxy, but no
guardian, curator or trustee shall be entitled, as such fiduciary, to
-7-
<PAGE>
vote shares held by him without a transfer of such shares into his
name;
(iii) shares standing in the name of a receiver may be voted by
such receiver, and shares held by or under the control of a receiver
may be voted by such receiver without the transfer thereof into his
name if authority so to do be contained in an appropriate order of the
court by which such receiver was appointed; and
(iv) a shareholder whose shares are pledged shall be entitled to
vote such shares until the shares have been transferred of record into
the name of the pledgee, and thereafter the pledgee shall be entitled
to vote the shares so transferred.
8. SHAREHOLDERS' LISTS. A complete list of the shareholders entitled to
vote at each meeting of the shareholders, arranged in alphabetical order, with
the address of and the number of voting shares held by each, shall be prepared
by the officer of the corporation having charge of the stock transfer books of
the corporation, and shall, for a period of ten (10) days prior to the meeting,
be kept on file at the registered office of the corporation in the State and
shall at any time during the usual hours for business be subject to inspection
by any shareholder. Such list or a duplicate thereof shall also be produced and
kept open at the time and place of the meeting and shall be subject to the
inspection of any shareholder during the whole time of the meeting. The original
share ledger or transfer book, or a duplicate thereof kept in the State shall be
a prima facie evidence as to who are the shareholders entitled to examine such
list, share ledger or transfer book or to vote at any meeting of shareholders.
-8-
<PAGE>
Failure to comply with the foregoing shall not affect the validity of
any action taken at any such meeting.
9. CLOSING OF TRANSFER BOOKS. The board of directors shall have power to
close the transfer books of the corporation for a period not exceeding fifty
(50) days preceding the date of any meeting of shareholders or the date of
payment of any dividend or the date for the allotment of rights or the date when
any change or conversion or exchange of shares shall go into effect; provided,
however, that in lieu of closing the stock transfer books, unless prohibited by
the by-laws the board of directors may fix in advance a date, not exceeding
fifty (50) days preceding the date of any meeting of shareholders, or the date
for the payment of any dividend, or the date for the allotment of rights, or the
date when any change or conversion or exchange of shares shall go into effect,
as a record date for the determination of the shareholders entitled to notice
of, and to vote at the meeting, and any adjournment thereof, or entitled to
receive payment of the dividend, or entitled to the allotment of rights, or
entitled to exercise the rights in respect of the change, conversion or exchange
of shares. In such case only the shareholders who are shareholders of record on
the date of closing the transfer books or on the record date so fixed shall be
entitled to notice of, and to vote at, the meeting, and any adjournment thereof,
or to receive payment of the dividend, or to receive the allotment of rights, or
to exercise the rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the date of closing of the transfer
books or the record date fixed as aforesaid. If the board of directors does not
close the transfer books or set a record date for the determination of the
shareholders entitled to notice of, and to vote at, a meeting of shareholders,
only the shareholders who are shareholders of record at the close of business on
the twentieth day preceding the date of the meeting shall be entitled to notice
of, and to vote at, the meeting, and any
-9-
<PAGE>
adjournment of the meeting; except that, if prior to the meeting written waivers
of notice of the meeting are obtained from all shareholders of record at the
time the meeting is convened, only the shareholders who are shareholders of
record at the time the meeting is convened shall be entitled to vote at the
meeting, and any adjournment of the meeting. In addition, if no record date is
fixed, the record date for determining shareholders entitled to express consent
to corporate action in writing without a meeting, when no prior action by the
board of directors is necessary, shall be the day on which the first written
consent is expressed; and the record date for determining shareholders for any
other purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of shareholders of record entitled to notice of or to
vote at a meeting of shareholders shall apply to any adjournment of the meeting,
except that the board of directors may fix a new record date for the adjourned
meeting.
ARTICLE III
DIRECTORS
1. DIRECTORS-NUMBER. The number of directors to constitute the board of
directors shall be four (4). Directors need not be shareholders unless the
articles of incorporation at any time so require.
2. REMOVAL. Any director or directors may be removed, with or without
cause, by the holders of a majority of the shares then entitled to vote except
that if less than the entire board is to be removed, no director may be removed
-10-
<PAGE>
without cause if the votes cast against his removal would be sufficient to elect
him if then cumulatively voted, pursuant to Article II, Section 7(b) of these
by-laws, at an election of the entire board of directors.
3. POWERS OF THE BOARD. The property and business of the corporation
shall be controlled and managed by the directors, acting as a board. The board
shall have and is vested with all and unlimited powers and authorities, except
as may be expressly limited by law, the articles of incorporation or these
by-laws, to do or cause to be done any and all lawful things for and in behalf
of the corporation, to exercise or cause to be exercised any or all of its
powers, privileges and franchises, and to seek the effectuation of its objects
and purposes.
4. OFFICES. The directors may have one or more offices, and keep the
books of the corporation (except the original or duplicate stock ledgers, and
such other books and records as may by law be required to be kept at a
particular place) at such place or places within or without the State as the
board of directors may from time to time determine.
5. (a) NOTICE-REGULAR MEETINGS. Regular meetings of the board may be
held without notice at such times and places either within or without the State
as shall from time to time be fixed by resolution adopted by the full board of
directors. Any business may be transacted at a regular meeting.
(b) NOTICE-SPECIAL MEETINGS. Special meetings of the board may be
called at any time by the chairman of the board, the president or by any one or
more of the directors. The place may be within or without the State as
designated in the notice.
-11-
<PAGE>
Written or printed notice of each special meeting of the board,
stating the place, day and hour of the meeting and the purpose or purposes
thereof, shall be mailed to each director at least three (3) days before the day
on which the meeting is to be held, or shall be sent to him by telegram, or be
delivered, at least two (2) days before the day on which the meeting is to be
held. If mailed, such notice shall be deemed to be delivered when deposited in
the United States mail with postage thereon addressed to the director's
residence or usual place of business. If notice be given by telegraph, such
notice shall be deemed to be delivered when the same is delivered to the
telegraph company. The notice may be given by any officer having authority to
call the meeting or by any director.
"Notice" and "call" with respect to such meetings shall be deemed to
be synonymous.
(c) WAIVER OF NOTICE-ANY MEETING. Whenever any notice is required to
be given to any director under the provisions of these by-laws, or of the
articles of incorporation or of any law, a waiver thereof in writing signed by
such director, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice.
6. ACTION WITHOUT A MEETING. Any action which is required to be or may
be taken at a meeting of the directors may be taken without a meeting if
consents in writing, setting forth the action so taken, are signed by all of the
directors. The consents shall have the same force and effect as a unanimous vote
of the directors at a meeting duly held. The secretary shall file such consents
with the minutes of the meetings of the board of directors.
-12-
<PAGE>
7. MEETINGS BY CONFERENCE TELEPHONE OR SIMILAR COMMUNICATIONS EQUIPMENT.
Unless otherwise restricted by the articles of incorporation or these by-laws or
by law, members of the board of directors of the corporation, or any committee
designated by such board, may participate in a meeting of such board or
committee by means of conference telephone or similar communications equipment
whereby all persons participating in the meeting can hear each other, and
participation in a meeting in such manner shall constitute presence in person at
such meeting.
8. QUORUM. At all meetings of the board a majority of the full board of
directors shall, unless a greater number as to any particular matter is required
by statute, the articles of incorporation or these by-laws, constitute a quorum
for the transaction of business, and the act of a majority of the directors
present at any meeting at which there is a quorum, except as may be otherwise
specifically provided by statute, the articles of incorporation, or these
by-laws, shall be the act of the board of directors.
9. VACANCIES. If the office of any director becomes vacant by reason of
death, resignation or a newly created directorship, a majority of the surviving
or remaining directors, though less than a quorum, may fill the vacancy until a
successor shall have been duly elected at a shareholders' meeting.
10. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) The corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit, or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a
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<PAGE>
director or officer of the corporation, or is or was serving at the request of
the corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise, against expenses, including attorneys'
fees, judgments, fines, and amounts paid in settlement (except that, in
connection with an action by or in the right of the corporation, the indemnity
shall be limited to expenses, including attorneys' fees, and amounts paid in
settlement) actually and reasonably incurred by him in connection with such
action, suit, or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful; except that no
indemnification shall be made in respect of any claim, issue, or matter as to
which such person's conduct is finally adjudged to have been knowingly
fraudulent, deliberately dishonest, or willful misconduct. The termination of
any action, suit, or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
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<PAGE>
(b) To the extent that a director, officer, employee, or agent has
been successful on the merits or otherwise in defense of any action, suit, or
proceeding referred to in subsection (a) of this section, or in defense of any
claim, issue or matter therein, he shall be indemnified against expenses,
including attorneys' fees, actually and reasonably incurred by him in connection
with the action, suit, or proceeding.
(c) Any indemnification under subsection (a) of this section, unless
ordered by a court, shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the person is proper
in the circumstances because he has met the applicable standard of conduct set
forth in this section. The determination shall be made by the board of
directors by a majority vote of a quorum consisting of directors who were not
parties to the action, suit, or proceeding, or if such a quorum is not
obtainable, or even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion or by the
shareholders.
(d) Expenses incurred in defending a civil or criminal action, suit
or proceeding may be paid by the corporation in advance of the final disposition
of the action, suit, or proceeding as authorized by the board of directors in
the specific case upon receipt of an undertaking by or on behalf of the person
to repay such amount unless it shall ultimately be determined that he is
entitled to be indemnified by the corporation as authorized in this section.
(e) The indemnification provided by this section shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under the articles of incorporation or by-laws or any agreement, vote
of shareholders or disinterested directors or otherwise,
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<PAGE>
both as to action in his official capacity and as to action in another capacity
while holding such office, and shall continue as to a person who has ceased to
be a director or officer and shall inure to the benefit of the heirs, executors,
and administrators of such a person.
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(f) The corporation may purchase and maintain insurance on behalf of
any person who is or was a director or officer of the corporation, or is or was
serving at the request of the corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under the provisions of this
section.
(g) For the purposes of this section, references to "the corporation"
include all constituent corporations absorbed in a consolidation or merger as
well as the resulting or surviving corporation so that any person who is or was
a director or officer of such a constituent corporation or is or was serving at
the request of such constituent corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise shall stand
in the same position under the provisions of this section with respect to the
resulting or surviving corporation as he would if he had served the resulting or
surviving corporation in the same capacity.
(h) For purposes of this section, the term "other enterprise" shall
include employee benefit plans; the term "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and the term
"serving at the request of the corporation" shall include any service as a
director or officer of the corporation which imposes duties on, or involves
services by, such director or officer with respect to an employee benefit plan,
its participants, or beneficiaries; and a person who acted in good faith and in
a manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to in
this section.
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11. EXECUTIVE COMMITTEE; OTHER COMMITTEES. The board of directors may, by
resolution or resolutions adopted by a majority of the whole board of directors,
designate an Executive Committee or such other standing or special committees,
such committee(s) to consist of two or more directors of the corporation. The
Executive Committee, to the extent provided in said resolution or resolutions,
shall have and may exercise all of the authority of the board of directors in
the management of the corporation. Such other standing or special committee(s)
shall have such powers and perform such duties, not inconsistent with law or
these by-laws as may be assigned to it by resolution or resolutions adopted by
a majority of the board of directors. Notwithstanding anything herein to the
contrary, the designation of such committee(s) and the delegation thereto of
authority shall not operate to relieve the board of directors, or any member
thereof, of any responsibility imposed upon it or the person by law.
Any committee(s) established hereunder shall keep regular minutes of
its proceedings, which minutes shall be recorded in the minute book of the
corporation. The secretary or an assistant secretary of the corporation may act
as secretary for the committee if the committee so requests.
12. COMPENSATION OF DIRECTORS AND COMMITTEE MEMBERS. Directors and members
of all committees shall not receive any stated salary for their services as
such, but by resolution of the board, a fixed sum and expenses of attendance, if
any, may be allowed for attendance at each regular or special meeting of the
board or committee; provided that nothing herein contained shall be construed to
preclude any director or committee member from serving the corporation in any
other capacity and receiving compensation therefor.
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ARTICLE IV
OFFICERS
1. (a) OFFICERS-WHO SHALL CONSTITUTE. The officers of the corporation
may include a chairman of the board and chief executive officer, a president,
one or more vice presidents, a secretary, a treasurer, one or more assistant
secretaries and one or more assistant treasurers. The board shall elect or
appoint a president and secretary at its first meeting and after each annual
meeting of the shareholders. The board then, or from time to time, may also
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elect or appoint one or more of the other prescribed officers as it shall deem
advisable, but need not elect or appoint any officers other than a president and
secretary. The board may, if it desires, further identify or describe any one or
more of such officers.
The officers of the corporation need not be members of the board of
directors. Any two or more offices may be held by the same person.
An officer shall be deemed qualified when the officer enters upon the
duties of the office to which elected or appointed and furnishes any bond
required by the board; but the board may also require of such person written
acceptance and promise faithfully to discharge the duties of such office.
(b) TERM OF OFFICE. Each officer of the corporation shall hold
office at the pleasure of the board of directors or for such other period as the
board may specify at the time of election or appointment, or until death,
resignation or removal by the board, whichever first occurs. In any event, the
term of office of each officer of the corporation holding office at the pleasure
of the board shall terminate at the annual meeting of the board next succeeding
election or appointment and at which any officer of the corporation is elected
or appointed, unless the board provides otherwise at the time of election or
appointment.
(c) OTHER AGENTS. The board from time to time may also appoint such
other agents for the corporation as it shall deem necessary or advisable, each
of whom shall serve at the pleasure of the board or for such periods as the
board may specify, and shall exercise such powers, have such titles and perform
such duties as shall be determined from
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time to time by the board or by an officer empowered by the board to make such
determinations.
2. REMOVAL. Any officer or agent elected or appointed by the board of
directors, and any employee, may be removed or discharged by the board whenever
in its judgment the best interests of the corporation would be served thereby,
but such removal shall be without prejudice to the contract rights, if any, of
the person so removed.
3. SALARIES AND COMPENSATION. Salaries and compensation of all elected
officers of the corporation shall be fixed, increased or decreased by the board
of directors, but this power, except as to the salary or compensation of the
chairman of the board and the president, may, unless prohibited by law, be
delegated by the board to the chairman of the board, the president or a
committee. Salaries and compensation of all appointed officers and agents, and
of all employees of the corporation, may be fixed, increased or decreased by the
board of directors, but until action is taken with respect thereto by the board
of directors, the same may be fixed, increased or decreased by the president or
by such other officer or officers as may be empowered by the board of directors
to do so.
4. DELEGATION OF AUTHORITY TO HIRE, DISCHARGE AND DESIGNATE DUTIES. The
board from time to time may delegate to the chairman of the board, the president
or other officer or executive employee of the corporation, authority to hire,
discharge and fix and modify the duties, salary or other compensation of
employees of the corporation under their jurisdiction, and the board may
delegate to such officer or executive employee similar authority with respect to
obtaining and retaining for the corporation the services of attorneys,
accountants and other experts.
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5. THE CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER. If a chairman
of the board be elected or appointed, the chairman of the board shall be the
chief executive officer of the corporation with such general powers and duties
as are usually vested in the office of chief executive officer of a corporation,
shall preside at all meetings of the shareholders and directors at which the
chairman of the board may be present and shall have such other duties, powers
and authority as may be prescribed elsewhere in these by-laws. The board of
directors may delegate such other authority and assign such additional duties to
the chairman of the board, other than those conferred by law exclusively upon
the president, as it may from time to time determine. To the extent permissible
by law, the board may, from time to time, divide the responsibilities, duties
and authority for the general control and management of the corporation's
business and affairs between the chairman of the board and the president.
Notice of designation of chairman of the board as chief executive officer shall
be given to the extent and in the manner as may be required by law.
6. THE PRESIDENT. The president may execute all bonds, notes,
debentures, mortgages and other contracts requiring a seal, under the seal of
the corporation, and may cause the seal to be affixed thereto, and all other
instruments for and in the name of the corporation.
Unless the board otherwise provides, the president, or any person
designated in writing by the president may
(i) attend meetings of shareholders of other corporations to
represent the corporation thereat and to vote or take action with
respect to the shares of any such corporation owned by this
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corporation in such manner as the president or the president's
designee may determine, and
(ii) execute and deliver waivers of notice and proxies for and in
the name of the corporation with respect to any such shares owned by
this corporation.
The president shall, unless the board otherwise provides, be ex
officio a member of all standing committees.
The president shall have such other or further duties and authority as
may be prescribed elsewhere in these by-laws or from time to time by the board
of directors.
If a chairman of the board be elected or appointed and designated as
the chief executive officer of the corporation, the president shall perform such
duties as may be specifically delegated to the president by the board of
directors and as are conferred by law exclusively upon the president, and in the
absence, disability and inability to act of the chairman of the board, the
president shall perform the duties and exercise the powers of the chairman of
the board.
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7. VICE PRESIDENTS. The vice presidents in the order of their seniority,
as determined by the board, shall, in the absence, disability or inability to
act of the president, perform the duties and exercise the powers of the
president, and shall perform such other duties as the board of directors shall
from time to time prescribe.
8. THE SECRETARY AND ASSISTANT SECRETARIES. The secretary shall attend
all sessions of the board and, except as otherwise provided for in these
by-laws, all meetings of the shareholders, and shall record or cause to be
recorded all votes taken and the minutes of all proceedings in a minute book of
the corporation to be kept for that purpose. The secretary shall perform like
duties for the executive and other standing committees when requested by the
board or any such committee to do so.
The secretary shall see that all books, records, lists and
information, or duplicates, required to be maintained at the registered or some
office of the corporation in the State, or elsewhere, are so maintained.
The secretary shall keep in safe custody the seal of the corporation,
and when duly authorized to do so shall affix the same to any instrument
requiring it, and, when so affixed, shall attest the same by signature.
The secretary shall perform such other duties and have such other
authority as may be prescribed elsewhere in these by-laws or from time to time
by the board of directors or the chief executive officer of the corporation.
The secretary shall have the general duties, powers and
responsibilities of a secretary of a corporation.
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Any assistant secretary, in the absence, disability or inability to
act of the secretary, may perform the duties and exercise the powers of the
secretary, and shall perform such other duties and have such other authority as
the board of directors may from time to time prescribe.
9. THE TREASURER AND ASSISTANT TREASURERS. The treasurer shall have
responsibility for the safekeeping of the funds and securities of the
corporation, shall keep or cause to be kept full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall keep,
or cause to be kept, all other books of account and accounting records of the
corporation. The treasurer shall deposit or cause to be deposited all moneys and
other valuable effects in the name and to the credit of the corporation in such
depositories as may be designated by the board of directors or by any officer of
the corporation to whom such authority has been granted by the board of
directors.
The treasurer shall disburse, or permit to be disbursed, the funds of
the corporation as may be ordered, or authorized generally, by the board, and
shall render to the chief executive officer of the corporation and the
directors, whenever they may require it, an account of all the treasurer's
transactions and of those under the treasurer's jurisdiction, and of the
financial condition of the corporation.
The treasurer shall perform such other duties and shall have such
other responsibility and authority as may be prescribed elsewhere in these
by-laws or from time to time by the board of directors.
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The treasurer shall have the general duties, powers and
responsibilities of a treasurer of a corporation, and shall, unless otherwise
provided by the board, be the chief financial and accounting officer of the
corporation.
If required by the board, the treasurer shall give the corporation a
bond in a sum and with one or more sureties satisfactory to the board, for the
faithful performance of the duties of the office, and for the restoration to the
corporation, in the case of death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in the treasurer's possession or under the treasurer's control which belong
to the corporation.
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Any assistant treasurer, in the absence, disability or inability to
act of the treasurer, may perform the duties and exercise the powers of the
treasurer, and shall perform such other duties and have such other authority as
the board of directors from time to time prescribe.
10. DUTIES OF OFFICERS MAY BE DELEGATED. If any officer of the
corporation be absent or unable to act, or for any other reason that the board
may deem sufficient, the board may delegate, for the time being, some or all of
the functions, duties, powers and responsibilities of any officer to any other
officer, or to any other agent or employee of the corporation or other
responsible person, provided a majority of the whole board of directors concurs
therein.
ARTICLE V
CONFLICT OF INTEREST TRANSACTIONS
1. AFFILIATED TRANSACTIONS. No contract or transaction between the
corporation and one or more of its directors or officers, or between the
corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers or have a financial interest, shall be void or voidable solely for this
reason, or solely because the director or officer is present at or participates
in the meeting of the Board of Directors or committee thereof that authorizes
the contract or transaction or solely because his or their votes are counted for
such purposes if:
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(a) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the board of directors
or the committee, and the board of directors or committee in good faith
authorizes the contract or transaction by the affirmative vote of a majority of
the disinterested directors, even though the disinterested directors be less
than a quorum; or
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(b) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the shareholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by the vote of the shareholders; or
(c) The contract or transaction is fair as to the corporation as of
the time it is authorized, approved, or ratified by the board of directors, a
committee thereof, or the shareholders.
2. DETERMINING QUORUM. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the board of directors or
of a committee thereof which authorizes the contract or transaction.
ARTICLE VI
SHARES OF STOCK
1. PAYMENT FOR SHARES OF STOCK. The corporation shall not issue shares
of stock except for money paid, labor done or property actually received;
provided, however, that shares may be issued in consideration of valid bona fide
antecedent debts. No note or obligation given by any shareholder, whether
secured by deed of trust, mortgage or otherwise shall be considered as payment
of any part of any share or shares.
2. CERTIFICATE FOR SHARES OF STOCK. The certificate for shares of stock
of the corporation shall be numbered, shall be in such form as may be prescribed
by the board of directors in conformity with law, and shall be entered in
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the stock books of the corporation as they are issued. Such entries shall show
the name and address of the person, firm, partnership, corporation or
association to whom each certificate is issued. Each certificate shall have
printed, typed or written thereon the name of the person, firm, partnership,
corporation or association to whom it is issued and the number of shares
represented thereby. It shall be signed by the president or a vice president or,
if permitted by law, the chairman of the board and the secretary or an assistant
secretary or the treasurer or an assistant treasurer of the corporation, and
sealed with the seal of the corporation, which seal may be facsimile, engraved
or printed. If the corporation has a transfer agent or a transfer clerk who
signs such certificates, the signatures of any of the other officers above
mentioned may be facsimiles, engraved or printed. In case any such officer who
has signed or whose facsimile signature has been placed upon any such
certificate shall have ceased to be such officer before such certificate is
issued, such certificate may nevertheless be issued by the corporation with the
same effect as if such officer were an officer at the date of its issue.
3. TRANSFER OF SHARES-TRANSFER AGENT-REGISTRAR. Transfers of shares of
stock shall be made on the stock record or transfer books of the corporation
only by the person named in the stock certificate, or by the shareholder's
attorney lawfully constituted in writing, and upon surrender of the certificate
therefor. The stock record books and other transfer records shall be in the
possession of the secretary or of a transfer agent or transfer clerk for the
corporation. The corporation, by resolution of the board, may from time to time
appoint a transfer agent or transfer clerk, and, if desired, a registrar, under
such arrangements and upon such terms and conditions as the board deems
advisable, but until and unless the board appoints some other person, firm or
corporation as its transfer agent or transfer clerk (and upon the revocation of
any such appointment, thereafter until a new appointment is similarly
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made) the secretary of the corporation shall be the transfer agent or transfer
clerk of the corporation without the necessity of any formal action of the
board, and the secretary, or any person designated by the secretary shall
perform all of the duties thereof.
4. LOST OR DESTROYED CERTIFICATES. In case of the loss or destruction of
any certificate for shares of stock of the corporation, another may be issued in
its place upon proof of such loss or destruction and upon the giving of a
satisfactory bond of indemnity to the corporation and the transfer agent and
registrar of such stock, if any, in such sum as the board of directors may
provide; provided, however, that a new certificate may be issued without
requiring a bond when in the judgment of the board it is proper so to do.
5. REGULATIONS. The board of directors shall have power and authority to
make all such rules and regulations as it may deem expedient concerning the
issue, transfer, conversion and registration of certificates for shares of stock
of the corporation, not inconsistent with the laws of the State, the articles of
incorporation or these by-laws.
ARTICLE VII
GENERAL
1. FIXING OF CAPITAL-TRANSFERS OF SURPLUS. Except as may be specifically
otherwise provided in the articles of incorporation, the board of directors is
expressly empowered to exercise all authority conferred upon it or the
corporation by any law or statute, and in conformity therewith, relative to:
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(i) the determination of what part of the consideration received for
shares of the corporation shall be stated capital,
(ii) increasing stated capital,
(iii) transferring surplus to stated capital,
(iv) the consideration to be received by the corporation for its
shares, and
(v) all similar or related matters;
provided that any concurrent action or consent by or of the corporation and its
shareholders, required to be taken or given pursuant to law, shall be duly taken
or given in connection therewith.
2. DIVIDENDS. Dividends upon the outstanding shares of the corporation,
subject to the provisions of the articles of incorporation and of any applicable
law, may be declared by the board of directors at any meeting. Dividends may be
paid in cash, in property, or in shares of the corporation's stock.
Liquidating dividends or dividends representing a distribution of
paid-in surplus or a return of capital shall be made only when and in the manner
permitted by law.
3. CREATION OF RESERVES. Before the payment of any dividend, there may
be set aside out of any funds of the corporation available for dividends such
sum or sums as the board of directors from time to time deems proper as a
reserve fund or funds to meet contingencies, or for
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equalizing dividends, or for repairing or maintaining any property of the
corporation, or for any other purpose deemed by the board to be conducive to the
interest of the corporation, and the board may abolish any such reserve in the
manner in which it was created.
4. CHECKS. All checks and similar instruments for the payment of money
shall be signed by such officer or officers or such other person or persons as
the board of directors may from time to time designate. If no such designation
is made, and unless and until the board otherwise provides, the president and
secretary, or the president and treasurer, shall have power to sign all such
instruments for, in behalf and in the name of the corporation which are executed
or made in the ordinary course of the corporation's business.
5. FISCAL YEAR. The board of directors shall have power to fix and from
time to time change the fiscal year of the corporation. In the absence of action
by the board of directors, however, the fiscal year of the corporation shall end
each year on the date which the corporation treated as the close of its first
fiscal year, until such time, if any, as the fiscal year shall be changed by the
board of directors.
6. SEAL. The corporate seal shall have inscribed thereon the name of the
corporation and the words: Corporate Seal. Said seal may be used by causing it
or a facsimile thereof to be impressed or affixed or in any manner reproduced.
7. AMENDMENTS. The by-laws of the corporation may from time to time be
suspended, repealed, amended or altered, or new bylaws may be adopted, in the
manner provided in the Articles of Incorporation.
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WARRANT
TO PURCHASE 160,000 SHARES OF COMMON STOCK
OF
ELECTRONIC PROCESSING, INC.
THIS CERTIFIES THAT, for good and valuable consideration, R. J. Steichen &
Company (the "Underwriter"), or its registered assigns, is entitled to subscribe
for and purchase from Electronic Processing, Inc., a Missouri corporation (the
"Company"), at any time after __________, 1998, to and including ____________,
2002, One Hundred Sixty Thousand (160,000) fully paid and nonassessable shares
of the Common Stock of the Company at the price of ______________ per share (the
"Warrant Exercise Price"), subject to the antidilution provisions of this
Warrant. Reference is made to this Warrant in the Underwriting Agreement dated
___________ 1997, by and between the Company and the Underwriter. The shares
which may be acquired upon exercise of this Warrant are referred to herein as
the "Warrant Shares." As used herein, the term "Holder" means the Underwriter,
any party who acquires all or a part of this Warrant as a registered transferee
of the Underwriter, or any record holder or holders of the Warrant Shares issued
upon exercise, whether in whole or in part, of the Warrant. As used herein, the
term "Common Stock" means and includes the Company's presently authorized common
stock and shall also include any capital stock of any class of the Company
hereafter authorized which shall not be limited to a fixed sum or percentage in
respect of the rights of the Holders thereof to participate in dividends or in
the distribution of assets upon the voluntary or involuntary liquidation,
dissolution, or winding up of the Company.
This Warrant is subject to the following provisions, terms and conditions:
1. EXERCISE; TRANSFERABILITY.
(a) The rights represented by this Warrant may be exercised by the Holder
hereof, in whole or in part (but not as to a fractional share of Common Stock),
by written notice of exercise (in the form attached hereto) delivered to the
Company at the principal office of the Company prior to the expiration of this
Warrant and accompanied or preceded by the surrender of this Warrant along with
a check in payment of the Warrant Exercise Price for such shares.
(b) This Warrant may not be sold, assigned, hypothecated, or otherwise
transferred until exercisable. Thereafter, this Warrant may not be sold,
assigned, hypothecated or otherwise transferred other than by will or pursuant
to the operation of law, except to a person who is an officer of the
Underwriter. Further, this Warrant may not be sold, transferred, assigned,
hypothecated or divided into two or more Warrants of smaller denominations, nor
may any Warrant shares issued pursuant to exercise of this Warrant be
transferred, except as provided in Section 7 hereof.
2. EXCHANGE AND REPLACEMENT. Subject to Sections l and 7 hereof, this
Warrant is exchangeable upon the surrender hereof by the Holder to the Company
at its office for new Warrants of like tenor and date representing in the
aggregate the right to purchase the number of Warrant Shares purchasable
hereunder, each of such new Warrants to represent the right to purchase such
number of Warrant Shares (not to exceed the aggregate total number purchasable
hereunder) as shall be designated by the Holder at the time of such surrender.
Upon receipt by
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the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction, or mutilation of this Warrant, and, in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and upon
surrender and cancellation of this Warrant, if mutilated, the Company will make
and deliver a new Warrant of like tenor, in lieu of this Warrant; provided,
however, that if the Underwriter shall be such Holder, an agreement of indemnity
by such Holder shall be sufficient for all purposes of this Section 2. This
Warrant shall be promptly canceled by the Company upon the surrender hereof in
connection with any exchange or replacement. The Company shall pay all
expenses, taxes (other than stock transfer taxes), and other charges payable in
connection with the preparation, execution, and delivery of Warrants pursuant to
this Section 2.
3. ISSUANCE OF THE WARRANT SHARES.
(a) The Company agrees that the shares of Common Stock purchased hereby
shall be and are deemed to be issued to the Holder as of the close of business
on the date on which this Warrant shall have been surrendered and the payment
made for such Warrant Shares as aforesaid. Subject to the provisions of the
next section, certificates for the Warrant Shares so purchased shall be
delivered to the Holder within a reasonable time, not exceeding fifteen (15)
days after the rights represented by this Warrant shall have been so exercised,
and, unless this Warrant has expired, a new Warrant representing the right to
purchase the number of Warrant Shares, if any, with respect to which this
Warrant shall not then have been exercised shall also be delivered to the Holder
within such time.
(b) Notwithstanding the foregoing, however, the Company shall not be
required to deliver any certificate for Warrant Shares upon exercise of this
Warrant except in accordance with exemptions from the applicable securities
registration requirements or registrations under applicable securities laws.
Nothing herein, however, shall obligate the Company to effect registrations
under federal or state securities laws, except as provided in Section 9. If
registrations are not in effect and if exemptions are not available when the
Holder seeks to exercise the Warrant, the Warrant exercise period will be
extended, if need be, to prevent the Warrant from expiring, until such time as
either registrations become effective or exemptions are available, and the
Warrant shall then remain exercisable for a period of at least 30 calendar days
from the date the Company delivers to the Holder written notice of the
availability of such registrations or exemptions. The Holder agrees to execute
such documents and make such representations, warranties, and agreements as may
be required solely to comply with the exemptions relied upon by the Company, or
the registrations made, for the issuance of the Warrant Shares.
4. COVENANTS OF THE COMPANY. The Company covenants and agrees that all
Warrant Shares will, upon issuance, be duly authorized and issued, fully paid,
nonassessable, and free from all taxes, liens, and charges with respect to the
issue thereof. The Company further covenants and agrees that during the period
within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized and reserved for the purpose of issue
or transfer upon exercise of the subscription rights evidenced by this Warrant a
sufficient number of shares of Common Stock to provide for the exercise of the
rights represented by this Warrant.
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5. ANTIDILUTION ADJUSTMENTS. The provisions of this Warrant are subject
to adjustment as provided in this Section 5.
(a) The Warrant Exercise Price shall be adjusted from time to time such
that in case the Company shall hereafter:
(i) pay any dividends on any class of stock of the Company payable in
Common Stock or securities convertible into Common Stock;
(ii) subdivide its then outstanding shares of Common Stock into a greater
number of shares; or
(iii) combine outstanding shares of Common Stock, by reclassification or
otherwise;
then, in any such event, the Warrant Exercise Price in effect immediately prior
to such event shall (until adjusted again pursuant hereto) be adjusted
immediately after such event to a price (calculated to the nearest full cent)
determined by dividing (a) the number of shares of Common Stock outstanding
immediately prior to such event, multiplied by the then existing Warrant
Exercise Price, by (b) the total number of shares of Common Stock outstanding
immediately after such event (including the maximum number of shares of Common
Stock issuable in respect of any securities convertible into Common Stock), and
the resulting quotient shall be the adjusted Warrant Exercise Price per share.
An adjustment made pursuant to this Subsection shall become effective
immediately after the record date in the case of a dividend or distribution and
shall become effective immediately after the effective date in the case of a
subdivision, combination or reclassification. If, as a result of an adjustment
made pursuant to this Subsection, the Holder of any Warrant thereafter
surrendered for exercise shall become entitled to receive shares of two or more
classes of capital stock or shares of Common Stock and other capital stock of
the Company, the Board of Directors (whose determination shall be conclusive)
shall determine the allocation of the adjusted Warrant Exercise Price between or
among shares of such classes of capital stock or shares of Common Stock and
other capital stock. All calculations under this Subsection shall be made to
the nearest cent or to the nearest 1/100 of a share, as the case may be. In the
event that at any time as a result of an adjustment made pursuant to this
Subsection, the Holder of any Warrant thereafter surrendered for exercise shall
become entitled to receive any shares of the Company other than shares of Common
Stock, thereafter the Warrant Exercise Price of such other shares so receivable
upon exercise of any Warrant shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the provisions with
respect to Common Stock contained in this Section 5.
(b) Upon each adjustment of the Warrant Exercise Price pursuant to Section
5(a) above, the Holder of each Warrant shall thereafter (until another such
adjustment) be entitled to purchase at the adjusted Warrant Exercise Price the
number of shares, calculated to the nearest full share, obtained by multiplying
the number of shares specified in such Warrant (as adjusted as a result of all
adjustments in the Warrant Exercise Price in effect prior to such adjustment) by
the Warrant Exercise Price in effect prior to such adjustment and dividing the
product so obtained by the adjusted Warrant Exercise Price.
(c) In case of any consolidation or merger to which the Company is a party,
or in case of any sale or conveyance to another corporation of the property of
the Company as an entirety
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<PAGE>
or substantially as an entirety, or in the case of any statutory exchange of
securities with another corporation (including any exchange effected in
connection with a merger of a third corporation into the Company), there shall
be no adjustment under Subsection (a) of this Section above but the Holder of
each Warrant then outstanding shall have the right thereafter to convert such
Warrant into the kind and amount of shares of stock and other securities and
property which he would have owned or have been entitled to receive immediately
after such consolidation, merger, statutory exchange, sale, or conveyance had
such Warrant been converted immediately prior to the effective date of such
consolidation, merger, statutory exchange, sale, or conveyance and in any such
case, if necessary, appropriate adjustment shall be made in the application of
the provisions set forth in this Section with respect to the rights and
interests thereafter of any Holders of the Warrant, to the end that the
provisions set forth in this Section shall thereafter correspondingly be made
applicable, as nearly as may reasonably be, in relation to any shares of stock
and other securities and property thereafter deliverable on the exercise of the
Warrant. The provisions of this Subsection shall similarly apply to successive
consolidations, mergers, statutory exchanges, sales or conveyances.
(d) Upon any adjustment of the Warrant Exercise Price, then and in each
such case, the Company shall give written notice thereof, by first-class mail,
postage prepaid, addressed to the Holder as shown on the books of the Company,
which notice shall state the Warrant Exercise Price resulting from such
adjustment and the increase or decrease, if any, in the number of shares of
Common Stock purchasable at such price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
6. NO VOTING RIGHTS. This Warrant shall not entitle the Holder to any
voting rights or other rights as a shareholder of the Company.
7. NOTICE OF TRANSFER OF WARRANT OR RESALE OF THE WARRANT SHARES.
(a) Subject to the sale, assignment, hypothecation, or other transfer
restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof,
agrees to give written notice to the Company before transferring this Warrant or
transferring any Warrant Shares of such Holder's intention to do so, describing
briefly the manner of any proposed transfer. Promptly upon receiving such
written notice, the Company shall present copies thereof to the Company's
counsel and to counsel to the original purchaser of this Warrant. If in the
opinion of each such counsel the proposed transfer may be effected without
registration or qualification (under any federal or state securities laws), the
Company, as promptly as practicable, shall notify the Holder of such opinion,
whereupon the Holder shall be entitled to transfer this Warrant or to dispose of
Warrant Shares received upon the previous exercise of this Warrant, all in
accordance with the terms of the notice delivered by the Holder to the Company;
provided that an appropriate legend may be endorsed on this Warrant or the
certificates for such Warrant Shares respecting restrictions upon transfer
thereof necessary or advisable in the opinion of counsel to the Company and
satisfactory to the Company to prevent further transfers which would be in
violation of Section 5 of the Securities Act of 1933, as amended (the "1933
Act") and applicable state securities laws; and provided further that the
prospective transferee or purchaser shall execute such documents and make such
representations, warranties, and agreements as may be required solely to comply
with the exemptions relied upon by the Company for the transfer or disposition
of the Warrant or Warrant Shares.
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<PAGE>
(b) If in the opinion of either of the counsel referred to in this Section
7, the proposed transfer or disposition of this Warrant or such Warrant Shares
described in the written notice given pursuant to this Section 7 may not be
effected without registration or qualification of this Warrant or such Warrant
Shares the Company shall promptly give written notice thereof to the Holder, and
the Holder will limit its activities in respect to such as, in the opinion of
both such counsel, are permitted by law.
8. FRACTIONAL SHARES. Fractional shares shall not be issued upon the
exercise of this Warrant, but in any case where the Holder would, except for the
provisions of this Section, be entitled under the terms hereof to receive a
fractional share, the Company shall, upon the exercise of this Warrant for the
largest number of whole shares then called for, pay a sum in cash equal to the
sum of (a) the excess, if any, of the Market Price of such fractional share over
the proportional part of the Warrant Exercise Price represented by such
fractional share, plus (b) the proportional part of the Warrant Exercise Price
represented by such fractional share. For purposes of this Section, the term
"Market Price" with respect to shares of Common Stock of any class or series
means the closing sale price reported by Nasdaq National Market or any national
securities exchange or, if none, the average of the last reported closing bid
and asked prices on any national securities exchange or quoted in Nasdaq
SmallCap Market-SM-, or if not listed on a national securities exchange or
quoted in Nasdaq SmallCap Market-SM-, the average of the last reported closing
bid and asked prices as reported by Metro Data Company, Inc. from quotations by
market makers in such Common Stock on the Minneapolis-St. Paul local
over-the-counter market.
9. REGISTRATION RIGHTS.
(a) If at any time after ___________, 1998 and prior to the end of the
two-year period following complete exercise of this Warrant or ____________,
2004, whichever occurs earlier, the Company proposes to register under the 1933
Act (except by a Form S-4 or Form S-8 Registration Statement or any successor
forms thereto) or qualify for a public distribution under Section 3(b) of the
1933 Act, any of its securities, it will give written notice to all Holders of
this Warrant, any Warrants issued pursuant to Section 2 and/or Section 3(a)
hereof, and any Warrant Shares of its intention to do so and, on the written
request of any such Holder given within twenty (20) days after receipt of any
such notice (which request shall specify the interest in this Warrant or the
Warrant Shares intended to be sold or disposed of by such Holder and describe
the nature of any proposed sale or other disposition thereof), the Company will
use its best efforts to cause all such Warrant Shares, the Holders of which
shall have requested the registration or qualification thereof, to be included
in such registration statement proposed to be filed by the Company; provided,
however, that if a greater number of Warrant Shares is offered for participation
in the proposed offering than in the reasonable opinion of the managing
underwriter of the proposed offering can be accommodated without adversely
affecting the proposed offering, then the amount of Warrant Shares proposed to
be offered by such Holders for registration, as well as the number of securities
of any other selling shareholders participating in the registration, shall be
proportionately reduced to a number deemed satisfactory by the managing
underwriter.
(b) Further, on a one-time basis at any time after the date on which
registration on Form S-3 (or sucessor form) becomes available to the Company or
____________ 1998, whichever occurs earlier, upon request by the Holder or
Holders of a majority in interest of this Warrant,
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<PAGE>
of any Warrants issued pursuant to Section 2 and/or Section 3(a) hereof, and of
any Warrant Shares, the Company will promptly take all necessary steps to
register or qualify, on Form S-3 under the 1933 Act and the securities laws of
such states as the Holders may reasonably request, such number of Warrant Shares
issued and to be issued upon conversion of the Warrants requested by such
Holders in their request to the Company. The Company shall keep effective and
maintain any registration, qualification, notification, or approval specified in
this Paragraph (b) for such period as may be reasonably necessary for such
Holder or Holders of such Warrant Shares to dispose thereof and from time to
time shall amend or supplement the prospectus used in connection therewith to
the extent necessary in order to comply with applicable law.
(c) With respect to each inclusion of securities in a registration
statement pursuant to this Section 9, the Company shall bear the following fees,
costs, and expenses: all registration, filing and NASD fees, printing expenses,
fees and disbursements of counsel and accountants for the Company, fees and
disbursements of counsel for the underwriter or underwriters of such securities
(if the Company is required to bear such fees and disbursements), all internal
expenses, the premiums and other costs of policies of insurance against
liability arising out of the public offering, and legal fees and disbursements
and other expenses of complying with state securities laws of any jurisdictions
in which the securities to be offered are to be registered or qualified. Fees
and disbursements of special counsel and accountants for the selling Holders,
underwriting discounts and commissions, and transfer taxes for selling Holders
and any other expenses relating to the sale of securities by the selling Holders
not expressly included above shall be borne by the selling Holders pro rata.
(d) The Company hereby indemnifies each of the Holders of this Warrant and
of any Warrant Shares, and the officers and directors, if any, who control such
Holders, within the meaning of Section 15 of the 1933 Act, against all losses,
claims, damages, and liabilities caused by (1) any untrue statement or alleged
untrue statement of a material fact contained in any Registration Statement or
Prospectus (and as amended or supplemented if the Company shall have furnished
any amendments thereof or supplements thereto), any Preliminary Prospectus or
any state securities law filings; (2) any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading except insofar as such losses, claims,
damages, or liabilities are caused by any untrue statement or omission contained
in information furnished in writing to the Company by such Holder expressly for
use therein; and each such Holder by its acceptance hereof severally agrees that
it will indemnify and hold harmless the Company, each of its officers who signs
such Registration Statement, and each person, if any, who controls the Company,
within the meaning of Section 15 of the 1933 Act, with respect to losses,
claims, damages, or liabilities which are caused by any untrue statement or
alleged untrue statement, omission or alleged omission contained in information
furnished in writing to the Company by such Holder expressly for use therein.
10. ADDITIONAL RIGHT TO CONVERT WARRANT.
(a) The Holder of this Warrant shall have the right to require the Company
to convert this Warrant (the "Conversion Right") at any time after it is
exercisable, but prior to its expiration into shares of Company Common Stock
as provided for in this Section 10. Upon exercise of the Conversion Right, the
Company shall deliver to the Holder (without payment by the Holder of any
Warrant Exercise Price) that number of shares of Company Common Stock
6
<PAGE>
equal to the quotient obtained by dividing (x) the value of the Warrant at the
time the Conversion Right is exercised (determined by subtracting the aggregate
Warrant Exercise Price for the Warrant Shares in effect immediately prior to the
exercise of the Conversion Right from the aggregate Fair Market Value for the
Warrant Shares immediately prior to the exercise of the Conversion Right) by (y)
the Fair Market Value of one share of Company Common Stock immediately prior to
the exercise of the Conversion Right.
(b) The Conversion Right may be exercised by the Holder, at any time or
from time to time after it is exercisable, prior to its expiration, on any
business day by delivering a written notice in the form attached hereto (the
"Conversion Notice") to the Company at the offices of the Company exercising the
Conversion Right and specifying (i) the total number of shares of Stock the
Holder will purchase pursuant to such conversion and (ii) a place and date not
less than one or more than 20 business days from the date of the Conversion
Notice for the closing of such purchase.
(c) At any closing under Section 10(b) hereof, (i) the Holder will
surrender the Warrant and (ii) the Company will deliver to the Holder a
certificate or certificates for the number of shares of Company Common stock
issuable upon such conversion, together with cash, in lieu of any fraction of a
share, and (iii) the Company will deliver to the Holder a new warrant
representing the number of shares, if any, with respect to which the warrant
shall not have been exercised.
(d) Fair Market Value of a share of Common Stock as of a particular date
(the "Determination Date") shall mean:
(i) If the Company's Common Stock is traded on an exchange or is
quoted on the Nasdaq National Market, then the average closing or last sale
prices, respectively, reported for the ten (10) business days immediately
preceding the Determination Date,
(ii) If the Company's Common Stock is not traded on an exchange or on
the Nasdaq National Market but is traded on the Nasdaq SmallCap Market-SM-
or other over-the-counter market, then the average closing bid and asked
prices reported for the ten (10) business days immediately preceding the
Determination Date, and
(iii) If the Company's Common Stock is not traded on an exchange
or on the Nasdaq National Market, Nasdaq SmallCap Market-SM- or other
over-the-counter market, then the price established in good faith by the
Board of Directors.
IN WITNESS WHEREOF, Electronic Processing, Inc. has caused this Warrant to
be signed by its duly authorized officer and this Warrant to be dated
_____________, 1997.
Electronic Processing, Inc.
By
----------------------------
Its
---------------------------
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<PAGE>
TO: ELECTRONIC PROCESSING, INC.
NOTICE OF EXERCISE OF WARRANT -- To Be Executed by the Registered Holder in
Order to Exercise the Warrant
The undersigned hereby irrevocably elects to exercise the attached Warrant to
purchase for cash, _________________ of the shares issuable upon the exercise of
such Warrant, and requests that certificates for such shares (together with a
new Warrant to purchase the number of shares, if any, with respect to which this
Warrant is not exercised) shall be issued in the name of
______________________________
(Print Name)
Please insert social security
or other identifying number
of registered Holder of
certificate (______________) Address:
______________________________
______________________________
Date: ________________ ______________________________
Signature*
*The signature on the Notice of Exercise of Warrant must correspond to the name
as written upon the face of the Warrant in every particular without alteration
or enlargement or any change whatsoever. When signing on behalf of a
corporation, partnership, trust or other entity, PLEASE indicate your
position(s) and title(s) with such entity.
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<PAGE>
ASSIGNMENT FORM
To be signed only upon authorized transfer of Warrants.
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
unto _____________________________ the right to purchase the securities of
Electronic Processing, Inc.
to which the within Warrant relates and appoints _____________, attorney, to
transfer said right on the books of Electronic Processing, Inc. with full power
of substitution in the premises.
Dated:________________ _____________________________
(Signature)
Address:
______________________________
______________________________
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<PAGE>
CASHLESS EXERCISE FORM
(To be executed upon exercise of Warrant
pursuant to Section 10)
TO: ELECTRONIC PROCESSING, INC.
The undersigned hereby irrevocably elects a cashless exercise of the right
of purchase represented by the within Warrant Certificate for, and to purchase
thereunder, ______________ shares of Common Stock, as provided for in Section 10
therein.
Please issue a certificate or certificates for such Common Stock in the
name of, and pay any cash for any fractional share to:
Name__________________________________
(Please print name)
Address________________________________
______________________________________
Social Security No.___________________
Signature______________________________
NOTE: The above signature should correspond exactly with the name on the
first page of this Warrant Certificate or with the name of the assignee
appearing in the assignment form below.
And if said number of shares shall not be all the shares purchasable under
the within Warrant Certificate, a new Warrant Certificate is to be issued in the
name of said undersigned for the balance remaining of the shares purchasable
thereunder rounded up to the next higher number of shares.
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<PAGE>
ELECTRONIC PROCESSING, INC.
1995 STOCK OPTION PLAN
ADOPTED OCTOBER 17, 1995
AMENDED NOVEMBER 4, 1996
I. PURPOSE
The purposes of the Electronic Processing, Inc. 1995 Stock Option Plan (the
"Plan") are to: (1) closely associate the interests of the directors, officers
and all other employees of Electronic Processing, Inc. (the "Corporation") with
the interests of the shareholders by reinforcing the relationship between
participants' rewards and shareholder gains; (2) provide directors, officers and
all other employees with an equity ownership in the Corporation commensurate
with corporate performance, as reflected in increased shareholder value; (3)
maintain competitive compensation levels; and (4) provide an incentive to
officers and all other employees for continuous employment with the Corporation.
II. ADMINISTRATION
(a) The Plan shall be administered by the Stock Option Plan Committee
("Committee") of the Board of Directors of the Corporation ("Board") which
Committee shall be composed of not less than two members of the Board who
qualify as "disinterested persons" under Rule 16b-3 or its successors
promulgated under the Securities Exchange Act of 1934, as amended ("Rule 16b-
3"). In addition to its duties with respect to the Plan stated elsewhere in the
Plan, the Committee shall have full authority, consistent with the Plan, to
interpret the Plan, to promulgate such rules and regulations with respect to the
Plan as it deems desirable, to delegate its ministerial responsibilities
hereunder to appropriate persons and to make all other determinations necessary
or desirable for the administration of the Plan. All decisions, determinations
and interpretations of the Committee shall be binding upon all persons.
(b) Stock options granted pursuant to the Plan ("Options") shall be either
incentive stock options ("ISOs") intended to
<PAGE>
qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or nonqualified stock options ("NSOs") not intended to qualify under
Section 422 of the Code. References in this Plan to Options shall include both
ISOs and NSOs.
(c) The Committee shall administer the Plan in a manner necessary to
establish and maintain the Options intended to constitute ISOs as ISOs, and the
Options intended to constitute NSOs as NSOs. Accordingly, only employees of the
Corporation will be eligible for grants of ISOs. However, the Corporation makes
no representation that the Options designated as ISOs and the Options designated
as NSOs will qualify at the time of grant as ISOs and NSOs, respectively, or
will continue to qualify as ISOs and NSOs respectively. Nor does the
Corporation make any representation concerning the tax consequences to any
person upon receipt or exercise of any Option hereunder or the subsequent sale
of Common Stock acquired thereunder.
III. SHARES SUBJECT TO THE PLAN
Shares of Common Stock that may be issued under the Plan shall be the
common stock, one cent ($.01) par value, of the Corporation ("Common Stock").
The aggregate number of shares of Common Stock, subject to adjustment pursuant
to Article XVI, which may be delivered on exercise of the Options is 270,000 and
such amounts of shares of Common Stock shall be, and hereby are reserved for
such purpose. Such shares may be previously issued shares reacquired by the
Corporation or authorized but unissued shares. If any Option expires,
terminates or is canceled for any reason, without having been exercised in full,
the shares covered by the unexercised portion of such Option shall again be
available for Options, within the limit specified above.
IV. PARTICIPANTS
All members of the Board, except those serving on the Committee, and all
employees of the Corporation, or, if
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<PAGE>
applicable, its subsidiaries, including employees who are members of the Board,
shall be eligible to participate in the Plan; provided, however, that only
employees of the Corporation shall be granted ISOs. Subject to the foregoing,
the Committee shall, from time to time, determine, in its discretion, the
directors and employees, who shall be eligible for participation in the Plan
(the "Participants"). (For purposes of the Plan, the term "Participant(s)"
shall, when appropriate, include any person permitted to exercise an Option in
accordance with the terms of the Plan.) A member of the Board who is not an
employee of the Corporation shall not be eligible to receive ISOs.
V. GRANTS OF OPTIONS
(a) The Committee shall in its discretion determine the time or times when
Options shall be granted and the number of shares of Common Stock to be subject
to each Option, except that no Option may be granted more than ten years after
the effective date hereof.
(b) The Committee may in its discretion grant to Participants who are
employees of the Corporation either ISOs, NSOs or a combination of both and
shall at the time the Option is granted designate whether the Option is an ISO
or NSO.
(c) The Committee may only grant NSOs to Participants who are not
employees of the Corporation.
(d) At any given time, a share of Common Stock may be subject to only one
of the two types of Options that may be issued under the Plan.
(e) With respect to ISOs granted under the Plan, the aggregate fair market
value (determined as of the date the Option is granted) of the Common Stock with
respect to which ISOs are exercisable for the first time by the Participant
during any calendar year under all stock option plans of the Corporation and its
subsidiaries shall not exceed $100,000. Notwithstanding the provisions for
acceleration of the date an Option is first
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<PAGE>
exercisable in Article VII and Article VIII, in no event shall the date that an
ISO is first exercisable be accelerated under this Plan if the acceleration
would cause an ISO of a Participant to exceed the limit set forth in this
paragraph.
(f) No Option intended to constitute an ISO shall be granted to an
employee who, at the time the Option is granted, owns (within the meaning of
Section 422(b)(6) of the Code) Common Stock possessing more than 10 percent of
the total combined voting power of all classes of stock of the Corporation or,
if applicable, any of its subsidiaries (hereinafter referred to as a "Ten
Percent Shareholder") unless (1) the purchase price of the Common Stock subject
to such Option shall be, subject to adjustment pursuant to Article XVI, at least
110 percent of the fair market value of the Common Stock on the day the Option
is granted determined in accordance with Article VI which relates to the method
for determining the fair market value of the Common Stock on the date the ISO is
granted, and (2) the Option by its terms is not exercisable after the expiration
of five years from the date such Option is granted.
(g) Each Option shall be evidenced by a written Option Agreement which
shall (1) state the terms and conditions of the Option in accordance with the
Plan; and (2) contain such additional provisions as may be required under
applicable laws, regulations, and rules or otherwise consistent with the terms
of the Plan as the Committee may determine.
VI. OPTION PRICE
(a) The purchase price of a share of Common Stock subject to an NSO shall
be, subject to adjustment pursuant to Article XVI, determined by the Committee
and may be less than the fair market value of the Common Stock on the date the
NSO is granted.
(b) Except as provided in paragraph (f) of Article V relating to ISOs
issued to Ten Percent Shareholders, the purchase price of a share of Common
Stock subject to an ISO shall be, subject to adjustment pursuant to Article XVI,
an amount equal to
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<PAGE>
the fair market value of the Common Stock on the day the ISO is granted.
(c) The fair market value shall be the closing price at which the Common
Stock is traded on the day the ISO is granted. For this purpose, the closing
price of the Common Stock on any business day shall be (i) if such Common Stock
is listed or admitted for trading on any United States national securities
exchange, or if actual transactions are otherwise reported on a consolidated
transaction reporting system, the last reported sale price of Common Stock on
such exchange or reporting system, as reported in any newspaper of general
circulation, (ii) if the Common Stock is quoted on the National Association of
Securities Dealers Automated Quotations System ("NASDAQ"), or any similar system
of automated dissemination of quotations of securities prices in common use, the
closing bid quotation for such day of the Common Stock on such system, or (iii)
if neither clause (i) or (ii) is applicable, the mean between the high bid and
low ask quotations for the Common Stock as reported by the National Quotation
Bureau, Incorporated if at least two securities dealers have inserted both bid
and ask quotations for the Common Stock on at least 5 of the 10 preceding days.
VII. OPTION PERIOD; EXERCISE RIGHTS
(a) Except as provided in paragraph (f) of Article V relating to ISOs
issued to Ten Percent Shareholders, each Option shall be exercisable for a term
as the Committee shall determine, but not more than 10 years from the date it is
granted, and shall be subject to earlier termination as provided in Article
VIII.
(b) Unless specifically provided by the Committee in its sole discretion,
an Option shall become exercisable upon its grant.
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<PAGE>
VIII. EXERCISE RIGHTS UPON TERMINATION OF EMPLOYMENT
(a) If a Participant terminates employment on account of becoming
disabled, the Participant may exercise the Option in whole or in part within one
year after the date of disability, but in no event later than the date on which
it would have expired if the Participant had not become disabled.
For this purpose, a Participant shall be deemed to be disabled if he or she
is determined to be disabled for purposes of meeting any insurance requirements
under policies provided by the Corporation. If no such policies are in effect,
disability shall have the same meaning as set forth in Section 22(e) of the
Code.
(b) If a Participant dies during a period in which he or she is entitled
to exercise an Option (including the periods referred to in paragraphs (a) and
(d) of this Article), the Option may be exercised at any time within its
remaining term as shall be prescribed in the Option Agreement, but in no event
later than the date on which it would have expired if the Participant had lived,
or one year after the Participant's death, whichever date is earlier, by the
Participant's executor or administrator or by any person or persons who shall
have acquired the Option directly from the Participant by will or the laws of
descent and distribution. The Option may be exercised in whole or in part.
(c) If a Participant's employment with the Corporation or a subsidiary
shall be terminated for cause, he or she shall forfeit any and all outstanding
Option rights and such rights shall be deemed to have lapsed for purposes hereof
as of the date of the Participant's termination of service.
(d) If a Participant ceases to be employed by the Corporation or a
subsidiary for any reason other than disability, death or termination for cause
during a period in which he or she is entitled to exercise an Option, the
Participant's Option shall terminate three months after the date of such
cessation of employment, but in no event later than the date on which it would
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<PAGE>
have expired if such cessation of employment had not occurred. During such
period the Option may be exercised only to the extent that the Participant was
entitled to do so at the date of cessation of employment. The employment of a
Participant shall not be deemed to have ceased upon his or her absence from the
Corporation or a subsidiary on a leave of absence granted in accordance with the
usual procedures of the Corporation or such subsidiary.
(e) No acceleration of the exercise date of an ISO shall occur pursuant to
this Article if such earlier exercise would cause an ISO to violate paragraph
(e) of Article V.
IX. METHOD OF EXERCISE
An Option shall be deemed exercised when (i) the Corporation has received
written notice of such exercise in accordance with the terms of the Option, (ii)
full payment of the aggregate exercise price of the shares of Common Stock as to
which the Option is exercised has been made, and (iii) arrangements that are
satisfactory to the Committee in its sole discretion have been made for the
Participant's payment to the Corporation of the amount that is necessary for the
Corporation to withhold taxes in accordance with applicable Federal, state or
local tax withholding requirements. The exercise price of any share of Common
Stock purchased, and any required tax payment, shall be paid in cash, by the
tender of shares of Common Stock, or both. If payment is made in cash, it may
be made by certified or official bank check, personal check or money order. If
payment is made by the tender of shares of Common Stock, the fair market value
of each such share shall be determined as of the day the shares are tendered for
payment, in a manner consistent with the determination of fair market value
under paragraph (b) of Article VI. Any excess of the value of the tendered
shares over the purchase price will be returned to the Participant as follows:
(i) Any whole shares remaining in excess of the purchase price will
be returned to the Participant in kind,
7
<PAGE>
and may be represented by one or more certificates as determined by the
Corporation in its sole discretion.
(ii) Any partial Shares remaining in excess of the purchase price will
be returned to the Participant in cash.
No Participant shall be deemed to be a holder of any shares of Common Stock
subject to an Option unless and until a stock certificate or certificates for
such shares are issued to such person(s) under the terms of the Plan. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such stock certificate is issued, except as
expressly provided in Article XVI.
X. WITHHOLDING TAXES
Whenever the Corporation proposes or is required to issue or transfer
shares of Common Stock under the Plan, the Corporation shall have the right to
require the Participant to remit to the Corporation an amount sufficient to
satisfy any Federal, state and/or local withholding tax requirements prior to
the delivery of any certificate or certificates for such shares. Alternatively,
the Corporation may issue or transfer such shares of Common Stock net of the
number of shares sufficient to satisfy the withholding tax requirements. For
withholding tax purposes, the shares of Common Stock shall be valued on the date
the withholding obligation is incurred.
XI. NONTRANSFERABILITY OF OPTIONS
Each Option shall be nonassignable and nontransferable by the Participant
other than by will or the laws of descent and distribution. Each Option shall
be exercisable during the Participant's lifetime only by the Participant.
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<PAGE>
XII. REPURCHASE OF SHARES BY CORPORATION
The Corporation is under no obligation to repurchase Common Stock acquired
pursuant to the exercise of an Option hereunder.
XIII. USE OF PROCEEDS
The proceeds received by the Corporation from the sale by it of shares of
Common Stock to Participants exercising Options pursuant to the Plan will be
used for the general purposes of the Corporation.
XIV. LAWS AND REGULATIONS
(a) If any provision of the Plan should be held invalid or illegal for any
reason, such determination shall not affect the remaining provisions hereof, but
instead the Plan shall be construed and enforced as if such provision had never
been included in the Plan. Without limiting the generality of the foregoing,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3. To the extent any provision of the Plan or action by
the Committee hereunder is inconsistent with the foregoing requirements, it
shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Committee.
(b) The determinations and the interpretation and construction of any
provision of the Plan by the Committee shall be final and conclusive. This Plan
shall be governed by the laws of the State of Missouri. Headings contained in
this Plan are for convenience only and shall in no manner be construed as part
of this Plan. Any reference to the masculine, feminine, or neuter gender shall
be a reference to such other gender as is appropriate.
XV. ISSUANCE OF SHARES OF COMMON STOCK
9
<PAGE>
As a condition of any sale or issuance of shares of Common Stock upon
exercise of any Option, the Committee may require such agreements or
undertakings, if any, as the Committee may deem necessary or advisable to assure
compliance with any applicable law or regulation include, but not limited to,
the following:
(a) a representation and warranty by the Participant to the
Corporation, at the time any Option is exercised, that the Participant is
acquiring the shares of Common Stock to be issued for investment and not
with a view to, or for sale in connection with, the distribution of any
such shares; and
(b) a representation, warranty and/or agreement to be bound by any
legends that are, in the opinion of the Committee, necessary or appropriate
to comply with the provisions of any securities law deemed by the Committee
to be applicable to the issuance of the shares of Common Stock and are
endorsed upon the share certificates.
XVI. ADJUSTMENT UPON CHANGES IN CAPITALIZATION
(a) Options granted under the Plan shall be subject to adjustment by the
Committee as to the number and price of shares subject to such Options in the
event of changes in the outstanding shares of Common Stock by reason of stock
dividends, stock splits, recapitalization, reorganizations, mergers,
consolidations, combinations, exchanges, or other relevant changes in
capitalization occurring after the date of grant of any such Option. In the
event of any such change in the outstanding shares of Common Stock, the
aggregate number of shares available under the Plan shall be approximately
adjusted by the Committee, whose determination shall be conclusive.
(b) Except as otherwise expressly provided herein, the issuance by the
Corporation of shares of its capital stock of any class, or securities
convertible into shares of capital stock of any class, either in connection with
a direct sale or upon the exercise of rights or warrants to subscribe therefor,
or upon
10
<PAGE>
conversion of shares or obligations of the Corporation convertible into such
shares or other securities, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or exercise price of the
shares of Common Stock then subject to outstanding Options granted under the
Plan.
(c) Without limiting the generality of the foregoing, the existence of
outstanding Options granted under the Plan shall not affect in any manner the
right or power to the Corporation to make, authorize or consummate (i) any or
all adjustments, recapitalizations, reorganizations or other changes in the
Corporation's capital structure or its business; (ii) any merger or
consolidation of the Corporation; (iii) any issue by the Corporation of debt
securities, or preferred or preference stock that would rank above the shares of
Common Stock subject to outstanding Options; (iv) the dissolution or liquidation
of the Corporation; (v) any sale, transfer or assignment of all or any part of
the assets or business of the Corporation; or (vi) any other corporate act or
proceedings, whether of a similar character or otherwise.
XVII. NO EMPLOYMENT RIGHTS
Nothing in the Plan shall confer upon any employee of the Corporation or of
a subsidiary, if applicable, any right to continued employment, or interfere
with the right of the Corporation or a subsidiary to terminate his or her
employment at any time, for any reason.
XVIII. TERM OF PLAN; TERMINATION; AMENDMENTS
(a) This Plan is effective as of October 17, 1995 (the "Effective Date"),
the date of its original adoption by the unanimous consent of the Board and the
unanimous consent of the Shareholders of the Corporation. This Plan shall
continue in effect until all Options granted hereunder have expired or been
exercised, unless sooner terminated under the provisions relating
11
<PAGE>
thereto. No Option shall be granted after 10 years from the Effective Date.
(b) The Board may from time to time amend, terminate or suspend the Plan
or an Option, provided, however that, except to the extent provided in Article
XVI, no such amendment may (i) without approval by the Corporation's
shareholders, increase the number of shares of Common Stock reserved for Options
or change the class of persons eligible to receive Options or involve any other
change or modification requiring shareholder approval under Rule 16b-3, (ii)
permit the granting of Options that expire beyond the maximum period described
in Article V, (iii) extend the termination date of the Plan as set forth in
Article V; or (iv) cause the Plan to be ineligible to issue ISOs, (v) reduce the
purchase price of an outstanding ISO, (vi) without approval by the Corporation's
shareholders, materially increase in any other way the benefits accruing to
Participants or (vii) except to the extent otherwise specifically provided in
the Plan, substantially impair any Option previously granted to a Participant
without the consent of such Participant. Any termination or suspension of the
Plan shall not affect Options already granted and such Options shall remain in
full force and effect as if this Plan had not been terminated or suspended. No
Option may be granted while the Plan is suspended or after it is terminated.
(c) Except as set forth herein, the Board or the Committee, as the case
may be, may at any time or times amend the Plan, or amend any outstanding Option
or Options for the purpose of satisfying the requirements of any changes in
applicable laws or regulations or for any other purpose which at the time may be
permitted by law. In the event that applicable rules or regulations are
promulgated by the Internal Revenue Service which permit the acceleration of the
date an Option is first exercisable without violating the $100,000 limit
described in paragraph (e) of Article V, the Committee is authorized to act on
behalf of the Board in amending the Plan to permit acceleration in conformity
with such rules or regulations.
12
<PAGE>
(d) Nothing contained in this Plan shall be construed to prevent the
Corporation or any subsidiary, if applicable, from taking any corporate action
which is deemed by the Corporation or any such subsidiary to be appropriate or
in its best interest, whether or not such action would have an adverse effect on
the Plan or any award made under the Plan. No employee, beneficiary, other
person shall have any claim against the Corporation or any subsidiary as a
result of any such action.
XIX. INDEMNIFICATION OF COMMITTEE AND BOARD
The Corporation may, consistent with applicable law, indemnify members of
the Committee against any liability, loss or other financial consequence
suffered by them with respect to any act or omission of the Committee or its
members relating to the Plan to the same extent and subject to the same
conditions as specified in the indemnity provisions contained in the By-Laws of
the Corporation
XX. INTERPRETATION
(a) If any provision of the Plan should be held invalid or illegal for any
reason, such determination shall not affect the remaining provisions hereof, but
instead the Plan shall be construed and enforced as if such provision had never
been included in the Plan. Without limiting the generality of the foregoing,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors promulgated under the Securities
Exchange Act of 1934 and, in the case of ISOs, with all applicable conditions of
Section 422 of the Code or its successors and regulations promulgated
thereunder. To the extent any provision of the Plan or action by the Committee
or Board hereunder is inconsistent with the foregoing requirements, it shall be
deemed null and void.
(b) The determinations and the interpretation and construction of any
provision of the Plan by the Committee shall be final and conclusive.
13
<PAGE>
[PETILLON & HANSEN LETTERHEAD]
January 13, 1997
Electronic Processing, Inc.
501 Kansas Avenue
Kansas City, Kansas 66105
Gentlemen:
We have assisted in the preparation and filing of a registration statement on
Form SB-2, File No. 333-16805, filed with the Securities and Exchange Commission
on November 26, 1996 (the "Registration Statement") under the Securities Act of
1933, as amended (the "Act"), relating to the public offering of an aggregate of
up to 2,000,000 shares of Common Stock, no par value (the "Shares"), of
Electronic Processing, Inc. (the "Company") (including Common Stock underlying
an overallotment option to purchase from the Company up to 240,000 shares of
Common Stock).
As counsel for the Company and at the Company's request, we have examined such
corporate records, certificates and other documents and such questions of law as
we have considered necessary or appropriate for the purposes of this opinion.
We have assumed that appropriate action will be taken, prior to the offer and
sale of the Shares, to register and qualify the Shares for sale under all
applicable state securities or "blue sky" laws.
We have also assumed the legal capacity to sign and the genuineness of all
signatures of all persons executing instruments or documents examined or relied
upon by us and have assumed the conformity with original documents of all
documents examined by us as copies of such documents.
Based upon the foregoing and upon information furnished to us by the Company's
officers, it is our opinion that the Shares being issued and sold have been duly
and validly authorized and, when issued and sold as described in the
Registration Statement and in
<PAGE>
Electronic Processing, Inc.
January 13, 1997
Page 2
accordance with the terms of the Underwriting Agreement, a form of which was
filed as an exhibit to the Registration Statement, and upon receipt by the
Company of payment therefor as provided in the Underwriting Agreement, the
Shares will be legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the reference to this firm under the caption "Legal
Matters" in the Prospectus contained therein. This consent is not to be
construed as an admission that we are a party whose consent is required to be
filed with the Registration Statement under the provisions of the Act or the
rules and regulations of the Securities and Exchange Commission promulgated
thereunder.
This opinion expressed herein is solely for your benefit, and may be relied upon
only by you.
Very truly yours,
PETILLON & HANSEN
/s/ Petillon & Hansen
LRP:mth
<PAGE>
** CONFIDENTIAL TREATMENT REQUESTED
I
AGREEMENT FOR COMPUTERIZED TRUSTEE CASE MANAGEMENT SYSTEM
This Agreement for Computerized Trustee Case Management System
(hereinafter the "Agreement) is made and entered into on this 22nd day of
November, 1993, by and between ELECTRONIC PROCESSING, INC., a Kansas corporation
located at 501 Kansas Avenue, Kansas City, Kansas 66105, (hereinafter "EPI"),
and NATIONSBANK OF TEXAS, N.A., a national banking association with its
headquarters located at 901 Main Street, Dallas, Texas 75202 (hereinafter the
"Bank").
RECITALS:
WHEREAS, EPI is in the business of providing software, hardware, and
software support in order to assist trustees appointed in Chapter 7 bankruptcy
cases (hereinafter individually referred to as the "Trustee" and collectively
referred to as the "Trustees") comply with the record keeping and reporting
requirements of the various offices of the United States Trustees and Bankruptcy
Courts (the "System);
WHEREAS, the Bank is a depository of certain Chapter 7 bankruptcy Trustee
accounts and in order to continue to retain such accounts and to attract new
Trustee accounts, the Bank desires to obtain EPI's Trustee Case Management
Licensed Software System and related services (the "Licensed Software") for use
by the Trustees in administration of their bankruptcy estates;
WHEREAS, upon the terms and conditions described herein, EPI desires to
furnish its Licensed Software to the Bank for use by the Trustees who maintain
Chapter 7 depository accounts with the Bank;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein, EPI and the Bank hereby agree as follows:
ARTICLE I
BASIC AGREEMENT OF THE PARTIES
1.1 DUTIES AND RESPONSIBILITIES OF EPI - Exclusivity. Upon execution of
this Agreement and subject to the provisions set forth herein, EPI will grant to
the Trustees, who use the Bank as their primary depository of Chapter 7 Trustee
and Debtor-in-Possession accounts, a non-transferable, exclusive license to use
EPI's Licensed Software. In accordance with such exclusivity and as long as this
Agreement remains in full force and effect, EPI will not grant to any other
individuals or entities the right to use the Licensed Software. Notwithstanding
the foregoing, EPI may continue to license the Licensed Software to Trustees who
hold funds at banks that entered into a license agreement with EPI prior to the
date of this Agreement.
<PAGE>
EPI also will lease computer equipment necessary to operate the Licensed
Software .(the "Hardware'") to the Trustees. EPI shall also furnish to the
Trustees the maintenance and support services described below (the "Support
Services"):
(a) Installation of the Hardware and Licensed Software;
(b) Written instructional materials and up to two days of on-site training
regarding use of the Licensed Software;
(c) Conversion assistance for conversion of the Trustees' existing
Chapter 7 data to the System;
(d) An "800" toll free customer service phone number and remote
diagnostics available to the Trustees from the hours of 8:00 A.M. to 5:00 P.M.
central standard time, Monday through Friday;
(e) Maintenance of the Hardware and Licensed Software and the provision of
any enhancements, modifications, updates, new documentation releases and
corrections made by EPI to the Licensed Software, including without limitation,
any enhancements, modifications, updates or corrections necessary to conform
with the record keeping and reporting requirements of the U.S. Trustees and
Bankruptcy Courts.
1.2 Duties and Responsibilities of the Bank. During the term of this
Agreement, the Bank shall perform the following duties:
(a) The Bank shall coordinate deposit activity through a single branch and
shall continue to provide the bank support services currently provided to its
existing Chapter 7 Trustees' bank accounts. Such support services include, but
are not limited to, money market accounts, demand deposit accounts, paper
product support (such as checks, deposit slips, duplication of bank statements)
and other reporting activities as required by the U.S. Trustees and Bankruptcy
Courts. Within a reasonable time after the execution of this Agreement, the Bank
will commence providing automated statements delivered by electronic media to
the Trustees;
(b) The Bank shall be responsible for pledging collateral securing the
deposits as statutorily required including, but not limited to, the preparation
of the necessary reports concerning this collateral directly to the U.S.
Trustees and Bankruptcy Courts;
(c) Either the Bank or EPI shall require each Trustee to execute written
agreements, in the form attached hereto as Exhibit A and B, in which each
Trustee shall agree to comply with the restrictions concerning the System and to
perform the .other obligations detailed therein;
<PAGE>
(d) AS COMPENSATION FOR THE LICENSED SOFTWARE, HARDWARE AND SUPPORT
SERVICES FURNISHED TO THE TRUSTEES HEREUNDER.
ARTICLE II
WARRANTIES.
2.1 EPI's General Warranty. EPI represents and warrants that during the
term of this Agreement, it shall furnish to the Trustees the Licensed Software
and Hardware described in Section 1.1. of Article I above and the Support
Services reasonably necessary for the use of the Licensed Software and Hardware.
EPI further represents and warrants that the Licensed Software conforms with the
reporting and record keeping requirements of the U.S. Trustees and Bankruptcy
Courts.
The Bank acknowledges that the Licensed Software may be partially
integrated with the Trustees' own Software and that EPI shall not be responsible
for any failure of the Software attributable directly or indirectly to capacity,
inconsistency or any other problems with the Trustees' own software regardless
of whether EPI has been informed of such problems.
2.2 EPI's Data Conversion Warranty. EPI's liability for errors or
discrepancies in converting the Trustees' data shall be limited to the
correction thereof.
2.3 Representation. EPI hereby represents, warrants and covenants to the
Bank that:
(a) the Software and the System was developed by EPI;
(b) EPI is the owner of the System and the Software or has otherwise
obtained the right to grant to the Bank a License for the System hereunder
without violating or infringing any law, rule, regulation, United States or
foreign copyright, patent, trade secret or other proprietary right of any third
party. No pending or threatened litigation exists which alleges that EPI or the
System violates or infringes upon-any such law, rule, regulation, United States
or foreign copyright, patent, trade secret or other proprietary right of any
third party;
(c) in the event there is direct interface between the Bank's computer
systems and the System, the Software delivered pursuant to this Agreement now or
in the future is warranted by EPI to be free of any and all "time bombs," logic
bombs, software lock, computer viruses, copy protect mechanisms, encryptions,
time activated disabling devices or other codes, instructions or devices which
may disable the Software or other Software
<PAGE>
or erase or corrupt data. EPI agrees to indemnify the Bank against any data lost
as a result of EPI's failure to notify the Bank of any of the foregoing;
(d) EPI is fully aware of the Trustees' and the Bank's requirements and
intended uses for the Software and the Software shall satisfy such requirements
and is fit for such intended uses. EPI acknowledges that the Bank has relied
upon EPI's documentation and/or representations in its decision to obtain the
System from EPI;
(e) The execution, delivery and performance of this Agreement does not
violate the terms of any law, regulation, court order or agreement to which EPI
is subject;
(f) EPI shall comply with applicable laws, statutes, regulations and
ordinances;
(g) This Agreement is a valid and binding obligation on both EPI and the
Bank, enforceable against it in accordance with its terms;
(h) The System provided and the Support Services performed will be of a
professional and workmanlike manner in accordance with the standards set forth
in this Agreement or, in the absence thereof, as a minimum in accordance with
industry standards and practices;
(i) EPI and its employees, who will be installing the System or performing
the Support Services pursuant to this Agreement, shall be qualified with
suitable training, experience and skill, and shall have all rights and licenses
necessary to fulfill their obligations under this Agreement;
<PAGE>
(j) in the event there is direct interface between the Bank's computer.
systems and the System, EPI shall use all reasonable efforts to avoid the
disruption of normal operations of the Bank;
(k) EPI shall not infringe, misappropriate, or violate any third party
rights, including, without limitation, property or contractual rights, non-
disclosure obligations, trademark rights, copyrights, patent rights, or other
proprietary rights;
2.4 INDEMNIFICATION. EPI shall indemnify and hold harmless the Bank for
all losses, costs and expenses associated with any claim of infringement,
misappropriation or violation of third-party intellectual property rights.
If the System or EPI becomes or, in the view of the Bank, is likely to
become, the subject of a patent or copyright infringement claim, or trade secret
misappropriation claim, EPI shall pay any costs, damages and attorneys' fees
finally awarded against the Bank in such action which are attributable to such
claim, provided that the Bank notifies EPI promptly in writing of the claim and
EPI may fully participate in the defense and/or agrees to any settlement of such
claim. At such a time, EPI shall exercise its best efforts to obtain for the
Bank, at no charge, the right to continue to use the System without restriction,
or modify the System to become non-infringing or replace with another system of
equal or greater speed and functionality.
Further, EPI shall indemnify, defend, and hold harmless the Bank and
its affiliates, officers, directors, employees, agents, successors and permitted
assigns from and against any and all claims made, or asserted, or threatened by
any third party, or governmental agency, and all related losses, expenses,
damages, costs and liabilities, including reasonable attorneys' fees and
expenses incurred in investigation or defense, arising out of or related to the
following:
(a) any act or omission, or alleged act or omission, by the EPI, its
employees and agents or any Subcontractor engaged by EPI in the performance of
EPI's obligations under this Agreement or otherwise;
(b) any material breach in a representation, covenant or obligation of EPI
contained in this Agreement and
(c) EPI's relationship with its employees, agents or subcontractors or its
capacity as an employer.
2.5 DAMAGES. Damages recoverable under this Agreement shall include,
without limitation, costs, expenses, losses, damages and injuries incurred or
suffered by the Bank on account of claims made against the Bank resulting from
an act, omission, breach of warranty, or misrepresentation of EPI.
Notwithstanding the foregoing, . Bank shall
<PAGE>
solely be responsible to EPI for the performance of the Bank's obligations under
this Agreement.
2.6 NO OTHER WARRANTIES. EXCEPT AS SET FORTH ABOVE, EPI DISCLAIMS ALL
OTHER WARRANTIES WITH REGARD TO THE SERVICES AND PRODUCTS SOLD OR LICENSED
HEREUNDER INCLUDING ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. NOTWITHSTANDING THE FOREGOING, IF THE ABOVE DISCLAIMER IS
NOT ENFORCEABLE UNDER THE LAW OF THE STATE OF THE JURISDICTION IN QUESTION, SAID
DISCLAIMER SHALL BE CONSTRUED BY LIMITING IT AND REDUCING IT SO AS TO BE
ENFORCEABLE TO THE EXTENT COMPATIBLE WITH THE APPLICABLE STATE LAW AS IT IS THEN
DETERMINED.
ARTICLE III
PROPRIETARY RIGHTS OF EPI AND CONFIDENTIALITY
3.1 EPI acknowledges that the information and data supplied by the Bank is
confidential in nature and EPI shall not disclose this information and data to
any third party, other than the representatives of the United States Trustees
offices and Office of Inspector General, without the Trustee's prior written
consent. Additionally, all information which is exchanged between EPI and the
Bank pursuant to this Agreement:
(a) shall be considered confidential and proprietary property;
(b) shall not be disclosed to any other person or entity except as
contemplated by this Agreement and
(c) shall be subject to reasonable and prudent safeguards against improper
disclosure.
3.2 The requirements of Section 4.1 above shall not prohibit disclosures
required by law so long as the party required to disclose such information
advised the other party prior to such disclosure.
3.3 EPI understands that Bank operates under various laws and federal
regulatory agencies that are unique to the security sensitive banking industry.
As such, persons engaged by both the Bank and EPI to work with the System and/or
Support Services under this Agreement are held to a higher standard of conduct
and scrutiny than in other industries or business enterprises. EPI understands
and acknowledges that its employees shall possess appropriate character
disposition and honesty conducive to the banking environment.
<PAGE>
3.4 The Bank acknowledges that the Software and all operating manuals and
other-documentation and materials supplied to the Trustees by. EPI (the "Other
Materials"), and all copies thereof, are proprietary to EPI and title thereto
remains in EPI. All applicable rights to patents, copyrights, trademarks and
trade secrets in the Licensed Software and Other Materials are and shall remain
in EPI. The Bank shall not sell, transfer, publish, disclose, display or
otherwise make available to others the Licensed Software or Other Materials or
any copies thereof, except as provided in this Agreement. The Bank shall use all
reasonable efforts to confine knowledge and use of the System only to its
employees who require such knowledge and use in the ordinary course and scope of
their employment by Bank.
3.5 Subject to the conditions set forth hereafter and to the extent
required for use by such parties, Bank may disclose System to:
(a) persons who are employed as auditors by a public
accounting firm or by a federal or state agency; or
(b) representatives of the United States Trustees' offices the Office of
the Inspector General and
(c) trustees and debtors in possession who have contracted EPI and the
Bank in accordance with this Agreement.
3.6 REMEDIES. If the Bank attempts to use, copy, license, or convey the
items supplied by EPI hereunder in a manner contrary to the terms of this
Agreement or in derogation of EPI's proprietary rights, whether these rights are
explicitly herein stated, determined by law, or otherwise, EPI shall have, in
addition to any other remedies available to it, the right to injunctive relief
enjoining such action, the Bank hereby acknowledges that other remedies are
inadequate.
ARTICLE IV
TERMINATION
4.1 Termination. This Agreement shall commence on November 22, 1993, and
shall continue in full force and effect until terminated as provided herein. Any
party hereto may terminate this Agreement, with or without cause, upon ninety
(90) days' prior written notice to the other party.
4.2 RIGHTS AND OBLIGATIONS UPON TERMINATION. Upon termination of this
agreement, the Bank shall immediately:
<PAGE>
(a) In the event a Trustee were to forward Software and/or Hardware to the
Bank instead of to EPI, the Bank will forward all such items to EPI;
(b) If EPI has provided the Bank with Software, Hardware or other
materials, the Bank will return all such items to EPI.
EPI's obligation to furnish the Support Services shall also cease as of the
effective date of termination and the Bank shall pay to EPI the compensation
required under Article I, Section 1.2(d) through the effective date of such
termination. These rights and obligations of the parties shall be in addition to
such other rights and remedies permitted under applicable law.
ARTICLE V
ARBITRATION
5.1 EPI and the Bank will attempt in good faith to resolve any controversy
or claim arising out of or relating to this Agreement by mediation in accordance
with the Center for Public Resources ("CPR") Model Procedure for Mediation of
Business Disputes (the "CPR Procedures") -
5.2 If such claim or controversy has not been resolved pursuant to the CPR
Procedures within sixty (60) calendar days of the commencement of the CPR
Procedures (which period may be extended by mutual agreement), or if either
party will not participate in a mediation, the controversy shall be settled by
arbitration in accordance with the CPR Rules for Non-Administered Arbitration of
Business Disputes, by a sole arbitrator jointly selected by the parties. In the
event that EPI and the Bank are unable to agree on an arbitrator, the arbitrator
shall be selected by the senior judge of the United States Appellate Court
having jurisdiction over the venue of the arbitration. Any mediator or
arbitrator not appointed by a party shall be selected from either Judicial
Arbitration and Mediation Services, Inc., the CPR Panels of Distinguished
Neutrals the or American Arbitration Association Blue Ribbon Panel.. The
arbitration shall be governed by the United States Arbitration Act, and any
judgment upon the award rendered by the arbitrator may be entered by any court
having jurisdiction thereof. The place of arbitration shall be Dallas, Texas.
The arbitrator is empowered to award only those damages set forth in the Damages
section of this Agreement. In no case is the arbitrator empowered to award
punitive damages.
Notwithstanding the above, the right of the non-breaching party to
injunctive relief set forth in this Agreement shall not be affected by the
requirements of this section for mandatory mediation - arbitration.
<PAGE>
ARTICLE VI
GENERAL PROVISIONS
6.1 Force Majeure. The failure of any party to perform its obligations
hereunder, except the obligation to pay money, as a result of strikes,
accidents, acts of God, weather conditions, or other delays beyond the
reasonable control of that party, shall not be deemed an event of default
hereunder and the non-performing party shall be excused from performing under
this Agreement without penalty until such time as the party is capable of
performing.
6.9- Notices. Any notices or communications required or permitted
hereunder shall be given to the respective parties in writing, by certified
mail, return receipt requested, and said notices shall be deemed effective when
deposited in an official depository under the care, custody and control of the
United States Postal Service, postage prepaid, addressed as follows:
If to EPI:
Electronic Processing, Inc.
ATTN: President
501 Kansas Avenue
Kansas City, Kansas 66105
If to Bank:
NationsBank of Texas, N.A.
Federal Government Banking Division
ATTN: Vice President
600 Peachtree Street N.E.
22nd Floor
Atlanta, Georgia 30308
Either party may, from time to time, change the address to which notice shall be
sent by delivering notice to the other party in the manner provided herein;
6.3 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof, and
supersedes all prior agreements and representations, and may not be amended
except in writing signed by the parties to be bound. Except as otherwise
provided herein, this Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns from the
effective date hereof in accordance with the terms herewith.
<PAGE>
6.4 WAIVER. The waiver by any party hereto of a breach, violation, or
remedy provided in this Agreement or by law, shall not operate as, or be
construed to be, a waiver of any subsequent breach, violation or any other
remedy provided herein or by law.
6.5 GOVERNING LAW. This Agreement shall be governed and construed under
the laws of the State of Texas. In the event that either party hereto brings an
action against the other party to enforce, interpret, or construe any of the
terms, conditions, or covenants of this Agreement then the prevailing party to
such action shall be entitled to recovery from the non-prevailing party of its
costs, other litigation expenses, and reasonable attorney's fees.
6.6 SEVERABILITY. In the event that any of the provisions, or any portion
of a provision, of this Agreement are held by a court of competent jurisdiction
to be unenforceable, invalid, or illegal, such unenforceable, invalid, or
illegal provision shall be severed from this Agreement, and the remaining valid,
enforceable, and legal provisions hereof shall remain in full force and effect
and shall not be affected thereby. In addition, it is hereby stipulated and
agreed that it is the intent of the parties hereto that in lieu of such
unenforceable, invalid, or illegal provision, there be added, as a part of this
Agreement, a clause or provision as similar in terms to such unenforceable,
invalid, or illegal term or provision as may be possible so as to be
enforceable, valid, and legal.
6.7 NO AGENCY. The parties hereto hereby stipulate and agree that nothing
contained herein shall be deemed to create a partnership or joint venture by
either of the parties hereto, it being expressly understood that each party
shall act as and be deemed to be an independent contractor, engaged in the
operation of its own respective business. It is further stipulated and agreed
that neither party shall be considered to be an agent, partner, master or
servant of the other party for any purpose whatsoever, and that neither party
has general authority to enter into contracts, assume any obligations, or make
any warranties or representations on behalf of the other party.
6.8 ASSIGNMENTS. Neither party hereto may assign this Agreement, or any
rights or duties hereunder, without the prior written consent of the other
party. Any attempts to make such assignments, except as provided in this
section, shall be deemed null and void.
6.9 MULTIPLE COUNTERPARTS. This Agreement may be executed in duplicate
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute one an the same instrument.
6.10 RECITALS. Each party hereto acknowledges that all of the recitals,
representations and warranties contained herein are true and correct, and
reasserts and reaffirms each of the hereinabove recitals as if fully set forth
at length hereunder.
6.11 HEADINGS. The section headings contained herein are intended for
convenience only and in no way limit or otherwise affect the substantive
provisions contained herein.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written above.
ELECTRONIC PROCESSING, INC. NATIONSBANK OF TEXAS, N.A.
By: By:
--------------------------- -----------------------------
Printed Name: Judy McCraw Printed Name: Larry W. Dreyer
Title: Vice President Sales and Marketing Title: Vice President
<PAGE>
LEASE
THIS LEASE, made and entered into as of the 20th day of February, 1996,
by and between T & J INVESTMENT CO., a Kansas general partnership, hereinafter
referred to as the ("Lessor"), and ELECTRONIC PROCESSING, INC., a Missouri
corporation, (hereinafter referred to as the "Lessee"),
WITNESSETH:
WHEREAS, the T & J INVESTMENT CO., a Kansas general partnership, owns
certain real estate and buildings and improvements constructed thereon, more
fully described on Exhibit A attached hereto and incorporated herein (the
"Premises");
NOW, THEREFORE, in consideration of the premises and mutual covenants and
agreements herein set forth, Lessor and Lessee do hereby covenant and agree as
follows:
1. GRANTING OF LEASEHOLD. The Lessor by these presents hereby,
rents, leases and lets the Premises unto the Lessee, and the
Lessee hereby rents, leases and hires the Premises from the
Lessor for the rentals and upon and subject to the terms and
conditions hereinafter set forth.
2. TERM. The term of this Lease shall commence on February 20,
1996, and shall continue thereafter until February 28, 2001.
3. OPTION TO EXTEND TERM. The Lessee shall have an option to
extend this Lease upon the terms and conditions set forth herein
for an additional period of five (5) years. The option is to be
exercised in writing by the Lessee not later than six (6) months
prior to the expiration of the original term.
4. USE OF PREMISES. The Premises are to be used for the business
operations and offices of the Lessee and warehouse space as
discussed herein.
5. RENTAL. As rental for the Premises (the "Rental"), the Lessee
shall pay to the Lessor monthly rental due in advance on the
first day of each month in the amount of Twelve-Thousand, One-
Hundred ,Twenty-Five and 00/100 Dollars ($12,125.00) for the
period beginning March 1, 1996, and ending February 28, 1997. For
the period beginning March 1, 1997, and ending February 28, 1998,
the Rental shall be Twelve-Thousand, Five-Hundred and 00/100
Dollars ($12,500.00) per month. For the period beginning March 1,
1998, and ending February 28, 1999, the Rental shall be Twelve-
Thousand, Nine-Hundred and 00/100 Dollars ($12,900.00) per month.
For the period beginning March 1, 1999, and ending February 28,
2000, the Rental shall be Thirteen-Thousand, Two-Hundred and
00/100 Dollars ($13,200.00) per month. For the period beginning
March 1, 2000, and ending February 28, 2001, the Rental shall be
Thirteen-Thousand, Six-Hundred and 00/100 Dollars ($13,600.00)
per month.
<PAGE>
In the event that the Lessee shall exercise its option to extend the term
of this Lease under paragraph 4, the Rental for the period beginning March 1,
2001, and ending February 28, 2002, shall be Fourteen-Thousand and 00/100
Dollars ($14,000.00) per month. For the period beginning March 1, 2002, and
ending February 28, 2003, the Rental shall be Fourteen-Thousand, Five-Hundred,
Ninety and 00/100 Dollars ($14,500.00) per month. For the period beginning March
1, 2003, and ending February 28, 2004, the Rental shall be Fourteen-Thousand,
Nine-Hundred and 00/100 Dollars ($14,900.00) per month. For the period beginning
March 1, 2004, and ending February 28, 2005, the Rental shall be Fifteen-
Thousand, Three-Hundred, Seventy-Three and 00/100 Dollars per month. For the
period beginning March 1, 2005, and ending February 28, 2006, the Rental shall
be Fifteen-Thousand, Four-Hundred and 00/100 Dollars ($15,400.00) per month.
Lessee shall also pay any additional rental as required hereunder.
6. TRIPLE NET LEASE. The parties hereto recognize and agree that this
Lease is intended as a "triple net Lease", and that the Lessor shall
in all events receive as rental from the Lessee, an amount equal to
the Rental hereunder, and an amount equal to all costs, charges,
expenses, fees and other financial responsibilities of Lessor,
incurred in connection with its obligations hereunder, including
without limitation, all taxes, assessments, utilities, insurance,
costs, maintenance and repair costs, on other associated items. To
this end, the Lessee hereby agrees to pay to the Lessor as additional
rent any sums required to effectuate the purpose and intent of this
Lease as a triple net Lease.
7. CONSTRUCTION. The Lessee agrees to accept the Premises in the
condition existing on the date of the commencement of the Lease, but
the Lessee shall have the benefit of all warranties accruing to the
Lessor by reason of construction of the Premises and the installation
of any machinery and equipment.
8. ALTERATIONS AND ADDITIONS. The Lessee shall make no substantial
alterations or additions to the Premises without the prior written
consent of the Lessor in each instance being first had and obtained.
Any such alterations or additions so approved shall be at the sole
cost and expense of the Lessee, and shall neither reduce the size and
strength of the building nor adversely affect the market value of the
Premises.
9. MECHANIC'S LIENS. It is agreed that neither party shall permit the
filing of a mechanic's, materialmen's or other similar lien against
the Premises or any part thereof for materials furnished or labor
provided for any improvements erected on the Premises or repairs made
to the Premises during the term of this Lease or any extension hereof.
In the event any such lien is filed and the same is not removed by the
contracting party within twenty (20) days thereafter, the other party
may satisfy the same and the Lessor may add to or the Lessee may
subtract from the rental payable thereafter the amounts so paid;
provided, however, no such satisfactions shall be made by such non-
contracting party so long as the contracting party is contesting such
a lien upon reasonable grounds and such contest stays the foreclosure
thereof.
10. INSURANCE. The Lessee shall provide and pay for each and every
policy of casualty and liability insurance required by the Lessor, or,
at the option of the
<PAGE>
Lessor, reimburse the Lessor the premiums for any one or more of the
same. Such policies and provisions thereof shall in all respects
comply with the requirements set forth by the Lessor. Current
certificates evidencing the aforesaid policies shall be provided to
the Lessor upon its request. The policies shall be obtained through
Lockton Insurance Company or written by such insurance companies
authorized to do business in the State of Kansas having a Best rating
of not less than BX. Lessee shall be responsible for obtaining its own
general public liability insurance, personal property insurance and
any other insurance it deems necessary.
11. WAIVER OF LIABILITY. It is agreed that each of the parties hereto
does hereby waive and release any and all claims, demands and causes
of action which such party might otherwise have against the other for
damages to or loss of any part of the Premises, or to any of the
contents and leasehold improvements therein belonging to the Lessee,
and arising from perils ordinarily insured against under standard fire
and extended coverage insurance policies issued in the State of
Kansas, whether such damage or loss is occasioned by the negligence of
the parties, their agents, servants and employees, or otherwise; and
that all policies of insurance written to insure the Premises and its
contents shall contain a proper provision, by endorsement or
otherwise, whereby the insurance carriers issuing the same shall
acknowledge that the insured has so waived and released its right of
recovery against the other party hereto and shall waive the right of
subrogation which such carrier might otherwise have had against such
other party, all without impairment or invalidation of such insurance.
12. INDEMNITY. The Lessee agrees, in addition to maintaining the
public liability insurance policy referred to in paragraph 12 hereof,
to protect and save the Lessor whole and harmless from any and all
claims of any third parties for injuries to person or damage to
property arising out of the occupancy or operation of the Premises by
the Lessee, except such claims as arise out of negligent, intentional
or willful acts of the Lessor.
13. UTILITIES. The Lessee shall contract for in its own name and pay
for all utility services, including deposits, used in connection with
the Premises and, at its sole cost and expense, procure any and all
permits, licenses and authorizations necessary in connection
therewith.
14. ASSIGNMENT AND LEASING. The Lessee shall in no event, during the
term of this Lease or any extension hereof, further sublet all or any
portion of the Premises or assign this Lease, either in whole or in
part, whether by operation of law or otherwise, nor permit any other
person or persons to otherwise occupy the Premises or any portion
thereof, without the prior consent in writing of the Lessor. It is
anticipated that the Lessee may sublet a portion of the Premises for
warehouse space to unrelated third parties, and that Lessor will not
unreasonably withhold its consent to such a Lease.
15. CONDEMNATION. If all of the Premises shall be condemned by any
authority having the right of condemnation, or if such a portion of
the Premises is so condemned as will prevent practical use of the
Premises for Lessee's purposes, this Lease, and all obligations
hereunder, shall terminate on the date title vests
<PAGE>
pursuant to such proceedings. In the event the proper judicial
authority does not divide the award to compensate the separate loss of
each party, the Lessee shall have no claim against Lessor for the
value of any unexpired term of this Lease. If any condemnation
proceeding shall be instituted in which it is sought to take or damage
any part of the Premises or if the grade of any street or alley
adjacent is changed by any competent authority and such change of
grade makes it necessary or desirable to remodel the improvements to
conform to the changed grade, either party shall have the right to
cancel this Lease after having given written notice of cancellation to
the other party not less than ninety (90) days prior to the date of
cancellation designated in the notice. In the event of any such
termination, Rental at the then current rate shall be apportioned as
of the date of the termination. No money or other consideration shall
be payable to either party for the right of cancellation and the
Lessee shall have no right to share in the condemnation award or in
any judgment for damage caused by the taking or the change of grade.
Nothing herein shall preclude an award being made to Lessee for loss
of business or depreciation to and cost of removal of equipment and
fixtures.
16. MAINTENANCE AND REPAIR. The Lessee shall, at its sole cost and
expense, maintain and make all repairs to the Premises necessary to
preserve it in good order and condition and/or required of the Lessor
in the Lease.
17. DAMAGE OR DESTRUCTION. In the event the Premises are damaged or
destroyed to the extent it is no longer usable by the Lessee, then
either party may terminate the Lease. In the event the Premises are
damaged by any insurable event, but not to such extent as to be no
longer usable, Lessor shall restore the Premises to its former
condition and rent shall abate proportionately until such restoration.
18. LESSEE'S PROPERTY. The Lessor shall not in any manner be
responsible or liable for any damage to the property, fixtures or
chattels of the Lessee on the Premises, except, in the case of damage
arising from a willful act on the part of the Lessor, its employees or
agents.
19. REMOVALS. All repairs, alternations, additions, improvements,
installations and any other fixtures by whomsoever installed or
erected on the Premises (except such business trade fixtures and
equipment belonging to Lessee as can be removed without damage to or
leaving incomplete the Premises) shall belong to Lessor and remain on
and be surrendered with the Premises as a part thereof at the
expiration of this Lease or any extension thereof.
20. HOLDOVER. If the Lessee remains in possession of the Premises
after the expiration of this Lease or, where applicable, any extension
hereof, without the execution of a new Lease, it shall be deemed to be
occupying the Premises as tenant from month-to-month, subject to all
the conditions, provisions and obligations of this Lease insofar as
the same are applicable to a month-to-month tenancy.
21. SUBORDINATION. The Lessee agrees that this Lease shall be
subordinate to any mortgage that may hereafter be placed upon the
Premises and to all renewals and
<PAGE>
extensions thereof, and agrees to execute any and all documents
required to evidence or effectuate such subordination.
22. WASTE. Lessee shall not commit waste or permit waste to be
committed in or upon the Premises, and at the termination of this
Lease shall surrender and deliver the Premises to the Lessor in as
good condition as the same was at the commencement of the term hereof,
excepting (1) acts of God and unavoidable casualties; (2) intentional
acts for which the Lessor is responsible hereunder; and (3) ordinary
wear and tear.
23. PUBLIC REQUIREMENTS. Lessee shall comply with all laws, orders,
ordinances and other public requirements now or hereafter affecting
the Premises or the use thereof, and the cost of such compliance shall
be borne by the Lessee.
24. DEFAULT. This Lease is made on condition that if:
a. The Lessee defaults in the due and punctual payment of Rental
and any additional rentals provided for herein; or
b. The Lessee defaults in the keeping or performance of any other
covenant or obligation herein contained on the Lessee's part to
be kept or performed, and the Lessee fails to remedy the same
within twenty (20) days after the Lessor has given the Lessee
written notice specifying such default (or such additional
period, if any, as may be reasonably required to cure such
default if it is of such nature that it cannot be cured within
said twenty (20) day period because of governmental restriction
or other cause beyond the control of the Lessee); or
c. The Lessee shall file a voluntary petition under the
Bankruptcy Code, as amended; or an involuntary petition
under the Bankruptcy Code, as amended, is filed against the
Lessee, and after full hearing, Lessee is adjudged to be
bankrupt, insolvent or unable to pay its debts as they
mature; or the Lessee makes an assignment for the benefit of
creditors or a trustee or receiver, after full hearing, is
appointed or retained to take charge of and manage any
substantial part of the assets of the Lessee; or any
execution or attachment shall issue against the Lessee
whereupon the Premises, or any part thereof, or any interest
therein of the Lessee under this Lease shall be taken or
attempted to be taken and the same is not released prior to
judicial sale thereunder (each of the events described in
this subparagraph being deemed default under the provisions
of this Lease);
then the Lessor shall have the option to do any one or more of the
following: Upon ten (10) days prior written notice, unless default
shall be for failure to pay rent for which no demand or notice shall
be necessary, in addition to or not in limitation of any other remedy
permitted by law, to enter upon the Premises or any part thereof,
either with or without process of law, and to expel, remove and put
out the Lessee or any other persons who might be thereon, together
with all personal property found therein; and, the Lessor may
terminate this Lease or it may from time to
<PAGE>
time, without terminating this Lease, rent the Premises or any part
thereof for such term or terms (which may be for a term extending
beyond the term of this Lease) and at such rental or rentals and upon
such other terms and conditions as the Lessor in its sole discretion
may deem advisable, with the right to repair, renovate, remodel,
redecorate, alter and change the Premises. At the option of the
Lessor, rents received by the Lessor from such reletting shall be
applied first to the payment of any indebtedness from the Lessee to
the Lessor other than rent due hereunder; second, to payment of any
costs and expenses of such reletting, including, but not limited to,
attorney's fees, advertising fees and brokerage fees, and to the
payment of any repairs, renovation, remodeling, re-decorations,
alterations and changes in the Premises; third, to the payment of rent
due and payable hereunder and interest therein, and, if after applying
said rentals there is any deficiency in the rent and interest to be
paid by the Lessee under this Lease, the Lessee shall pay any such
deficiency to the Lessor and such deficiency shall be calculated and
collected by Lessor monthly. No such re-entry or taking possession of
the Premises shall be construed as an election on the Lessor's part to
terminate this Lease unless a written notice of such intention be
given to the Lessee. Notwithstanding any such reletting without
termination, the Lessor may at any time thereafter elect to terminate
this Lease for such previous breach and default. Should the Lessor at
any time terminate this Lease by reason of any default, in addition to
any other remedy it may have, it may recover from the Lessee the worth
at the time of such termination of the excess of the amount of rent
reserved in this Lease for the balance of the term hereof over the
then reasonable rental value of the Premises for the same period. The
Lessor shall have the right and remedy to seek redress in the courts
at any time to correct or remedy any default of the Lessee by
injunction or otherwise, without such resulting or being deemed a
termination of this Lease, and the Lessor, whether this Lease has been
or is terminated or not, shall have the absolute right by court action
or otherwise to collect any and all amounts of unpaid rent or any
other sums due from the Lessee to the Lessor under this Lease which
were or are unpaid at the date of termination. In case it should be
necessary for the Lessor to bring any action under this Lease, to
consult or place this Lease or any amount payable by Lessee hereunder
with an attorney concerning or for the enforcement of any of the
Lessor's rights hereunder, then the Lessee agrees in each and any such
case to pay to the Lessor, the Lessor's reasonable attorney's fees.
25. SURVIVAL OF OBLIGATIONS. The Lessee covenants and agrees with the
Lessor that its obligations under this Lease shall survive the
cancellation and termination of this Lease for any cause, and that the
Lessee shall continue to pay the Rental and the additional rentals
provided for herein and perform all other obligations set forth in
this Lease, all at the time or times specified herein.
26. PERFORMANCE OF LESSEE'S OBLIGATIONS. If the Lessee shall fail to
keep or perform any of its obligations as provided in this Lease in
respect of (a) maintenance of insurance, (b) prompt payment of taxes
and assessments, (c) repairs and maintenance of the Premises, (d)
compliance with legal or insurance requirements, or (e) keeping the
Premises lien free, or in the making of any other payment or
performance of any other obligation, then the Lessor may (but it shall
not be obligated so to do) upon the continuance of such failure on the
Lessee's part
<PAGE>
for twenty (20) days after notice of such failure is given the Lessee
by the Lessor and without waiving or releasing the Lessee from any
obligation hereunder, as an additional but not exclusive remedy, make
any such payment or perform any such obligation, and all sums so paid
by the Lessor and all necessary and incidental costs and expenses
incurred by the Lessor in performing such obligation shall be deemed
additional rent and shall be paid to the party incurring such costs
and expenses on demand, and if not so paid by the Lessee, the Lessor
shall have the same rights and remedies provided for in the case of
default by the Lessee in the payment of Rental.
27. RIGHTS OF ENTRY. At all reasonable times during the existence of
this Lease, Lessor shall have the right to enter the Premises for the
purpose of inspecting the same, or performing such work in or about
the Premises made necessary by the default of Lessee, or for
exhibiting the Premises to prospective purchasers, lessees or
mortgagees.
28. RIGHTS CUMULATIVE. The rights and remedies reserved by the Lessor
and the Lessee hereunder and those provided by law shall be construed
as cumulative and continuing rights. No one of them shall be exhausted
by the exercise thereof on one or more occasions. The Lessor and the
Lessee shall each be entitled to specific performance and injunctive
or other equitable relief for any breach or threatened breach of any
of the provisions of this Lease, notwithstanding the availability of
an adequate remedy at law, and each party hereby waives the right to
raise such defense in any proceeding in equity.
29. QUIET ENJOYMENT. The Lessor agrees that so long as the Lessee
fully complies with all of the terms, covenants and conditions herein
contained on the Lessee's part to be kept and performed, the Lessee
shall and may peaceably and quietly have, hold and enjoy the Premises
for the aforesaid term, it being expressly understood and agreed that
the aforesaid covenant of quiet enjoyment shall be binding upon the
Lessor, its successors or assigns.
30. RIGHT OF FIRST REFUSAL. Subject to any restrictions, conditions or
limitations under the Lease, in the event Lessor shall receive from an
unrelated third party, an acceptable bona fide offer to purchase the
Lessor's interest in the Premises, it shall immediately notify the
Lessee in writing of such offer, stating the terms and conditions of
the offer. The Lessee shall have thirty (30) days after receipt of
said written notice to elect to meet such offer by giving the Lessor
written notice of its election, and settlement shall be held within
thirty (30) days thereafter.
31. OPTION TO PURCHASE. Subject to any restrictions, conditions or
limitations under the Lease, at any time, the Lessee, upon giving
thirty (30) days written notice to the Lessor, shall have the right to
purchase the Lessor's interest in the Premises from the Lessor. If the
Lessor and Lessee are able to agree upon an appraiser, said appraiser
shall determine the purchase price of the Premises. In the event the
Lessor and Lessee are unable to agree upon an appraiser within fifteen
(15) days of the receipt of the aforementioned written notice, then
the Lessor and Lessee will each select an appraiser no later than
twenty (20) days of receipt of the written notice. Upon the selection
of an appraiser or appraisers, as the case may be, the
<PAGE>
purchase price will be determined within thirty (30) days. If there
are two appraisers, the purchase price shall be determined by taking
the average of their respective appraisals. The purchase price shall
be paid in cash or on such other terms and conditions as may be agreed
to by the Lessor within thirty (30) days of the determination of the
purchase price.
32. NOTICES. All notices required or desired to be given hereunder
shall be in writing and all such notices and other written documents
required or desired to be given hereunder shall be deemed duly served
and delivered for all purposes (a) upon the Lessor, if a copy thereof
be mailed by certified or registered mail, postage prepaid, addressed
to the Lessor at 501 Kansas Avenue, Kansas City, Kansas 66105, or at
such other place as the Lessor from time to time may designate in
writing to the party giving such notice, and (b) upon the Lessee, if a
copy thereof be mailed by certified or registered mail, postage
prepaid, addressed to the Lessee at the Premises, or at such other
place as the Lessee may from time to time designate in writing to the
party giving such notice. All notices given by certified or registered
mail as aforesaid shall be deemed duly given as of the date they are
so mailed.
33. WAIVER OF BREACH. No waiver of any breach of any covenant or
agreement herein contained shall operate as a waiver of any subsequent
breach of the same covenant or agreement or as a waiver of any breach
of any other covenant or agreement, and in case of a breach by either
party of any covenant, agreement or undertaking, the non-defaulting
party may nevertheless accept from the other any payment or payments
or performance hereunder without in any way waiving its right to
exercise any of its rights and remedies provided for herein or
otherwise with respect to any such default or defaults which were in
existence at the time such payment or payments or performance were
accepted by it.
34. RELATIONSHIP OF PARTIES. Nothing contained herein shall be deemed
or construed by the parties hereto, or by any third party, as creating
the relation of principal and agent or of partnership or of joint
venture between the Lessor and the Lessee. It is understood and agreed
that neither the method of computation of rent, nor any other
provision contained herein, nor any acts of the parties hereto,
creates a relationship other than the relationship of landlord and
tenant.
35. SECTION HEADINGS. The section headings shall not be treated as a
part of this Lease or as affecting the true meaning of the provisions
hereof.
36. INVALIDITY OF PORTIONS OF THE LEASE. If for any reason any
provision hereof shall be determined to be invalid or unenforceable,
the validity and effect of the other provisions hereof shall not be
affected thereby.
37. CONSTRUCTION AND ENFORCEMENT. This Lease shall be construed and
enforced in accordance with the laws of Kansas. Wherever in this Lease
it is provided that either party shall or will make any payment or
perform or refrain from performing any act or obligation, each such
provision shall, even though not so expressed, be construed as a
express covenant to make such payment or to perform, or not to
perform, as the case may be, such act or obligation.
<PAGE>
38. AMENDMENTS. This Lease may not be amended except by written
agreement executed by the Lessor and the Lessee subsequent to the date
hereof.
39. ENTIRE AGREEMENT. This Lease contains the entire agreement between
the parties hereto, there being no oral or collateral understandings
other than the terms and provisions hereof.
40. COVENANTS RUN WITH THE PREMISES. The terms, covenants, agreements
and conditions herein set forth shall run with the Premises and be
fully binding upon and inure to the benefit of the successors and
assigns of the parties hereto, except that no assignment or subletting
by the Lessee without the written consent of the Lessor shall vest any
right in the assignee or sublessee of the Lessee.
IN WITNESS WHEREOF, the parties hereto have hereunto subscribed their names as
of the day and year first above written.
T & J INVESTMENT CO.
By
------------------------------
Tom W. Olofson
General Partner
By
------------------------------
Jerry L. Haney
General Partner
"LESSOR"
ELECTRONIC PROCESSING, INC.
[Seal]
ATTEST:
By
- ------------------------- --------------------------------
Assistant Secretary Tom W. Olofson
CEO
ELECTRONIC PROCESSING, INC. "Lessee"
<PAGE>
EXHIBIT A
(a) All of Lots 1 thru 17, inclusive and all of Lots 40, 41, 42 and 43, all
in Block 28, Armourdale, also including the North 25 feet of the East 156
feet of Block 4, Armourdale Community Redevelopment Area, all now in and a
part of Kansas City, Wyandotte County, Kansas.
Containing approximately 73,321 square feet.
Subject to: (1) easements, restrictions and reservations now of
record, the rights of the public in and to any part of the premises lying
or being in public roads, alleys or highways, and (3) taxes and
assessments, general and special, not now due or payable; and
(b) The buildings and all improvements constructed or located thereon.
<PAGE>
SUBORDINATED NOTE
$400,000,00 (U.S.) Topeka, Kansas
10% Interest July 15, 1988
For value received, ELECTRONIC PROCESSING, INC., a Missouri corporation
("Borrower"), hereby promises to pay to TOM W. OLOFSON, or order ("Lender"), the
principal sum of Four Hundred Thousand Dollars ($400,000.00), together with
interest on the unpaid principal balance from the date of this Note until paid
in full at a rate equal to ten percent (10%) per annum. Interest shall be
computed on the basis of a 30-day month, 360-day year.
This Note has been issued in exchange for that certain Promissory Note,
dated July 15, 1988, given by Borrower to Kansas Venture Capital, Inc., a Kansas
corporation (the "Prior Note"), which was issued pursuant to the terms and
provisions of a Purchase Agreement dated July 15, 1988 ("Purchase Agreement"),
between Borrower (f/k/a Newco RGLG 1, Inc.) and Kansas Venture Capital, Inc.,
and the holder of this Note is entitled to the benefits provided for by said
Purchase Agreement, reference to which is hereby made for a statement of such
benefits with the same effect as if set forth herein in full. The Prior Note was
assigned by Kansas Venture Capital, Inc. to Lender by written assignment dated
October 15, 1991.
Monthly payments of interest only on the unpaid principal balance shall
be due and payable on the first day of each month during the term of this Note
until July 14, 1998, at which time the entire unpaid principal balance of this
Note and all accrued and unpaid interest and all other charges thereon shall be
due and payable in full. All payments shall be credited first to accrued late
charges and to mounts and charges other than principal and interest owed to
Lender, then to accrued and unpaid interest, and the balance to unpaid
principal. All payments shall be payable in lawful money of the United States of
America and shall be payable to Lender at 501 Kansas Avenue, Kansas City, Kansas
66 105, or at such other place as Lender may designate by notice from time to
time.
If all or any portion of any installment under this Note is received by
Lender more than five (5) days after the installment is due, Borrower shall pay
to Lender a late charge equal to five percent (5%) of such installment, such
late charge to be immediately due and payable without demand by Lender. If any
installment under this Note remains past due for thirty (30) or more days or
upon the occurrence of any one (1) or more of the Events of Noncompliance
specified in the Purchase Agreement, then the outstanding principal balance of
this Note shall bear interest during the period commencing with the end of such
thirty (30) days until payments under this Note are current or as of the close
of business on the date on which no Event of Noncompliance exists, as
applicable, at a rate equal to five percent (5%) over the then existing interest
rate on this Note, or if such increased rate of interest may not be collected
from Borrower under applicable law, then at the maximum
<PAGE>
increased rate of interest, if any, which may be collected from Borrower under
applicable law. Such default rate of interest shall accrue on any judgment
rendered hereon or in connection with any foreclosure of any collateral given as
security by Borrower to secure its performance under the Purchase Agreement and
this Note.
If a custodian, receiver, or liquidator is appointed for Borrower or for
any of its property, or if Borrower is insolvent or makes an assignment for the
benefit of creditors, or if Borrower admits in writing its inability to pay its
debts as they become due, or if any proceeding under any bankruptcy law is
commenced by or against Borrower, then at the option of Lender, the entire
unpaid principal balance of this Note, together with all interest and other
charges accrued thereon, shall immediately become due and payable in full.
If: (a) any monthly installment described herein is not paid when due; or
(b) an Event of noncompliance exists under the Purchase Agreement
pursuant to which this Note is issued:
then the entire principal sum outstanding, accrued interest thereon, and all
other charges thereon (including but not limited to the applicable prepayment
penalty) shall at once become due and payable at the option of Lender without
notice to Borrower; provided, however, that in the event of any non-monetary
default, Lender will give Borrower ten (10) days prior written notice of such
non-monetary default before exercising any Lenders rights and remedies, and
provided further that if said non-monetary default cannot be cured within ten
(10) days of the date of mailing of the notice described herein, such failure
shall not constitute an event of default so long as Borrower begins curative
action within said ten (10) day period and diligently pursues such action to
completion within thirty (30) days of the date of the mailing of the notice.
Lender shall be required to give said ten (10) day notice only twice in any
consecutive twelve (12) month period. Lender may exercise this option to
accelerate during any default by Borrower regardless of any prior forbearance,
and acceptance by Lender of payments in arrears shall not waive or affect any
prior or subsequent acceleration of this Note. Borrower agrees to pay to Lender
all costs and expenses of collection and/or suit (including but not limited to
any action for judicial foreclosure), including but not limited to all
attorneys' fees, regardless of whether litigation and/or foreclosure is
commenced.
Borrower may prepay the principal amount outstanding in whole or in part.
Lender may require that any partial prepayments be made on the date monthly
installments are due and be in increments of $10,000.00. Any partial prepayments
shall first be applied to the payment of all charges and amounts other than
principal and interest owed to Lender, then to all accrued interest and other
charges due on the date of such prepayment, and then to
-2-
<PAGE>
the principal mount outstanding. Such partial prepayment shall not postpone the
due date of any subsequent monthly installments or change the mount of such
installments, unless Lender agrees in writing.
Borrower agrees to pay all charges in connection with the servicing of
this Note, including but not limited to obtaining tax searches and bills,
ownership transfers, releases, consents, extensions, modifications, assignments,
and satisfactions and releases of financing statements.
Demand, presentment, notice of dishonor, diligence, protest, notice of
protest, trial by jury, and all 'other demands and notices are hereby waived by
Borrower and all makers, sureties, guarantors, and endorsers hereof. In any
litigation to which Lender and Borrower shall be adverse parties, Borrower
hereby waives (to the extent permitted by law) the fight to claim any defense
based on any statute of limitations or on any claim of laches and waives any
counterclaim, cross-claim, or set-off of any nature or description. Borrower
also (a) acknowledges and agrees that Lender can bring any suit, action, or
proceeding under this Note or any of the documents or instruments mentioned
herein in the courts of Shawnee County, Kansas, or the courts of the United
States District Cottrt for the District of Kansas, but shall not be restricted
to such courts; Co) consents to the jurisdiction of such courts; and (c)
consents to and waives any objection which Borrower now has or may hereafter
have to proper venue existing in any of such courts. Furthermore, Borrower
consents to the applicability of the law of the State of Kansas with respect to
personal liability under this Note and any action for a deficiency judgment,
whether before or after power of sale or judicial action foreclosure. This Note
shall be the joint and several obligation of Borrower and all makers,
guarantors, sureties, and endorsers, and shall be binding upon them and their
successors, heirs, personal representatives, and assigns.
Any notice to Borrower provided for in this Note shall be given by
mailing such notice by registered or certified mail, return receipt requested,
postage prepaid, addressed to Borrower at 501 Kansas Avenue, Kansas City,
Kansas, 66105, or to such other address as Borrower may designate in writing to
Lender as provided herein. Any notice to Lender shall be given by mailing such
notice by registered or certified mail, return receipt requested, postage
prepaid, addressed to Lender at the address stated in this Note, or at such
other address as Lender may designate by notice to Borrower as provided herein.
Notice shall be deemed given to Borrower or Lender upon deposit in the United
States mail in such manner.
From time to time, without affecting the obligation of Borrower or the
heirs, personal representatives, successors, or assigns of Borrower to pay the
outstanding principal balance of this Note and observe the covenants of Borrower
contained herein, without affecting the guaranty of any person, corporation,
partnership, or other entity for payment of the outstanding principal balance of
this Note, and without giving notice to or obtaining the consent of Borrower,
Lender may, at its sole option, extend the time for payment of said outstanding
principal balance or any pan thereof, reduce the payments thereon,
<PAGE>
release anyone liable on any of said outstanding principal balance, accept a
renewal of this Note, modify the terms and time of payment of said outstanding
principal balance, join in any extension or subordination agreement, release any
security given herefor (whether in whole or in pan), take or release other or
additional security, and agree in writing with Borrower to modify the rate of
interest or period of amortization of this Note or change the mount of the
monthly installments payable hereunder.
This Note is to be construed in accordance with the laws of the State of
Kansas. In case any one or more of the provisions of this Note shall, for any
reason, be held to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality, or unenforceability shall not affect any other
provisions of this Note, and this Note shall be construed as if such invalid,
illegal, or unenforceable provision had never been contained herein. If any one
or more of the provisions contained in this Note shall for any reason be held to
be unenforceable as to amount, time, duration, scope, activity, or subject, such
provision shall be construed by limiting and reducing it so as to make such
provision enforceable to the extent compatible with applicable law.
If Borrower is required or obligated at any time to pay interest on this
indebtedness evidenced hereby at a rate in excess of the maximum interest rate
permitted by law, then the rate of interest under this Note shall be deemed to
be reduced to such maximum lawful rate, the interest payable shall be computed
and compounded at such maximum lawful rate, and all prior interest payments in
excess of the maximum lawful rate shall be applied to and shall be deemed to
have been payments in reduction of the principal balance of this Note.
In the event of any conflict between the terms of this Note and any other
instrument, the terms of this Note shall govern.
Borrower acknowledges and agrees that it will use the proceeds evidenced
by this Note for a business loan.
As used herein, the singular shall mean the plural, the male the female,
the personal the impersonal, and vice versa.
This Note cannot be changed, amended, or modified orally.
This writing is intended by the parties as a final expression of this
Note and also is intended as a complete and exclusive statement of the terms of
this Note. No course of prior dealing between the parties, no usage of trade and
no parol or extrinsic evidence of any nature shall be used to supplement or
modify any term hereof, nor are there any conditions to the full effectiveness
of this Note.
<PAGE>
Time is of the essence with respect to all of Borrower' s obligations and
agreement under this Note.
ELECTRONIC PROCESSING, INC.
a Missouri corporation
By:
------------------------------
Tom W. Olofson
Chairman and CEO
(Corporate Seal)
Attest:
- -------------------------
Secretary/Asst. Secretary
<PAGE>
MODIFICATION AGREEMENT
THIS AGREEMENT is made this 31st day of October 1996, by and between
Electronic Processing, Inc., a Missouri corporation (hereinafter "Debtor"),
and INDUSTRIAL STATE BANK, a Kansas banking corporation (hereinafter "Bank");
WHEREAS Debtor did execute and deliver unto Bank its original Promissory Note
dated June 17, 1996 in the original amount of $500,000.00 made payable to
Industrial State Bank, and as security therefor did pledge machinery,
equipment, inventory, accounts receivable, software, contract rights, and the
personal guarantee of Tom W. Olofson as per the original Security Agreement
and Guarantee dated June 17, 1996;
WHEREAS Debtor has now requested that Bank change the current maturity date
from July 1, 1997 to October 1, 1997;
WHEREAS Bank has reviewed Debtor's request and hereby agrees to the same;
NOW THEREFORE, IN CONSIDERATION of the promises and agreements contained
herein, and other good and valuable considerations, the receipt and sum of
which is hereby acknowledged and agreed, it is hereby mutually agreed by the
undersigned that said original Note No. 46359 shall mature October 1, 1997,
with interest at Industrial State Bank's base lending rate plus two (2)
percent (10.25%) per annum, paid and adjusted quarterly beginning February 1,
1997, and on the 1st day of each quarter thereafter until October 1, 1997,
when the entire unpaid principal balance then outstanding, together with all
unpaid accrued interest, shall become due and payable in full. All other
terms and conditions of the existing obligation described herein shall remain
unchanged and continue in full force and effect.
IN ADDITION, BY INITIALING BELOW, BOTH DEBTOR AND LENDER AGREE THAT NO
UNWRITTEN AGREEMENTS EXIST BETWEEN THEM AND THIS AGREEMENT IS THE FINAL
AGREEMENT BETWEEN THEM.
ADDITIONAL TERMS: NONE
Lender: Industrial State Bank
By______________
President
Debtor: Electronic Processing, Inc.
By___________________
Chairman & CEO
All Due: October 1, 1997
Address: 501 Kansas Avenue
Kansas City, Kansas 66105
INDUSTRIAL STATE BANK
(Secured Lender)
By:_____________________
W. R. Hook
President
ELECTRONIC PROCESSING, INC.
(Debtor)
By_____________________
Tom W. Olofson
Chairman/CEO
Electronic Processing, Inc.
<PAGE>
a Missouri corporation
501 Kansas Avenue
Kansas City, Kansas 66105
BORROWERS NAME AND ADDRESS
"I" includes each borrower above, jointly and severally.
Industrial State Bank
32nd & Strong
P.O. Box 6007
Kansas City, Kansas 66106
"You" means the lender, its successors and assigns.
Loan Number 46359
Date JUNE 17, 1996
Maturity Date JULY 21, 1997
Loan Amount $ 500,000.00
Renewal of 45912
I promise to pay you, or your order, at your address listed above the PRINCIPAL
sum of FIVE HUNDRED THOUSAND DOLLARS AND NO/100 ------------DOLLARS $500,000.00
Single Advance: I have received all of this principal sum. No additional
advances are contemplated under this note.
XX Multiple Advance: The principal sum shown above is the maximum amount of
principal I can borrow under this note. As of today I have received the
amount of $__________________ and future principal advances are contemplated.
Conditions: The conditions for future advances are __________________________
XX Open end credit: You and I agree that I may borrow up to the maximum
amount of principal more than one time. This feature is subject to all other
conditions and expires no later than_____________________. Closed End Credit:
You and I agree that I may borrow up to the maximum only one time (and
subject to all other conditions).
PURPOSE: The purpose of this loan is to provide a line of credit for working
capital .
INTEREST: I agree to pay interest (calculated on a 365/actual days basis) on
the principal balance(s) owing from time to time as stated below.
Fixed Rate: I agree to pay interest at the fixed, simple rate of ________%
per year.
XX Variable Rate: I agree to pay interest at the initial simple rate of
10.25 % per year. This rate may change as stated below.
XX Index Rate: the future rate will be 2% IN EXCESS OF the following index
rate: INDUSTRIAL STATE BANK'S BASE LENDING RATE PER ANNUM.
No Index: The future rate will not be subject to any internal or external
index. It will be entirely in your control.
XX Frequency and Timing: The rate on this note may increase as often as
QUARTERLY.
An increase in the interest rate will take effect QUARTERLY BEGINNING OCTOBER
1, 1996
Limitations: The rate on this note will not at any time (and no matter what
happens to any index rate used) go above or below these limits.
Maximum Rate: The rate will not go above ___________ Minimum Rate: The
rate will not go below __________.
Post Maturity Rate: I agree to pay interest on the unpaid balance of this
note owing after maturity, and until paid in full, as stated below:
on the same fixed or variable rate basis in effect before maturity (as
indicated above.) XX at a rate equal to 5% IN EXCESS OF THE OTHERWISE
APPLICABLE RATE HEREON AT THE TIME OF DEFAULT.
ADDITIONAL CHARGES: In addition to interest I __ have paid __ agree to
pay the following additional charges ________________.
PAYMENTS: I agree to pay this note as follows:
XX Interest: I agree to pay accrued interest QUARTERLY, BEGINNING
OCTOBER 1, 1996 AND QUARTERLY THEREAFTER AND AT MATURITY.
XX Principal: I agree to pay the principal AS AVAILABLE, BUT NOT LATER THAN
JULY 1, 1997.
<PAGE>
Installments: I agree to pay this note in ____ payments. The first payment
will be in the amount of $_______ and will be due __________, ____. A
payment of $__________ will be due on the _______ day of each _________
thereafter. The final payment of the entire unpaid balance of principal and
interest will be due _____________, ____.
Effect of Variable Rate: An increase in the interest rate will have the
following effect on the payments. The amount of each scheduled payment will
be increased.
The amount of the final payment will be increased.
Notice to Borrower: This written agreement is the final expression of the
agreement between you and the Lender, and as such it may not be contradicted
by evidence of any prior oral agreements or of a contemporaneous oral
agreement between you and the Lender.
ADDITIONAL TERMS: NONE INDUSTRIAL STATE BANK
ELECTRONIC PROCESSING, INC.
______________________ _______________________
Chairman (Borrower) Pres. (Lender)
Affirmation: By signing or initialing here, Borrower & Lender affirm that no
unwritten oral agreement between them exists.
XX SECURITY: This note is secured by: MACHINERY, EQUIPMENT, SOFTWARE,
INVENTORY, ACCOUNTS RECEIVABLE, CONTRACT RIGHTS, AND THE PERSONAL GUARANTEES
OF TOM W. OLOFSON, ALL AS PER THE ORIGINAL DOCUMENTS OF EVEN DATE.
SIGNATURES: I agree to the terms of this note (including those on the other
side). I have received a copy on today's date.
ELECTRONIC PROCESSING, INC.
A Missouri Corporation
By:____________________________
Tom W. Olofson, Chairman/CEO
Signed________________________for Lender, Title PRESIDENT
<PAGE>
MODIFICATION AGREEMENT
THIS AGREEMENT is made this 17th day of June, 1996, by and between Electronic
Processing, Inc., a Missouri corporation (hereinafter "Debtor"), and
INDUSTRIAL STATE BANK, a Kansas banking corporation (hereinafter "Bank");
WHEREAS Debtor did execute and deliver unto Bank its original Promissory Note
dated June 8th, 1994 in the original amount of $900,000.00 made payable to
Bank, and did pledge as collateral thereto all machinery, equipment,
furniture, fixtures, inventory, software, accounts receivable, contract
rights, etc., and said original note was also personally guaranteed by Tom W.
Olofson, as per the original Security Agreements and Secured Guarantee dated
June 8, 1994;
WHEREAS the principal balance outstanding under said original Note has now
been reduced to $595,078.52 with the maturity currently scheduled for June 8,
1997;
WHEREAS Debtor is hereby requesting the Bank grant additional time to
maturity becoming due and payable in full on June 8, 1999, with all other
existing terms and conditions to remain unchanged;
WHEREAS Bank has reviewed Debtor's request and hereby agrees to the same
according to the terms and conditions contained herein.
NOW THEREFORE, IN CONSIDERATION of the promises and agreements set forth
herein, and other good and valuable considerations, the sum and receipt of
which is hereby acknowledged and agreed, it is hereby mutually agreed by the
undersigned to extend the maturity of said original Note No. 45908 dated June
8, 1994 to June 8, 1999, with interest to remain at Industrial State Bank's
base lending rate plus 2% per annum, adjusted the 8th day of each month,
payable in monthly principal and interest payments of $18,791.91 each, all
beginning July 8, 1996, and continuing on the 8th day of each succeeding
month thereafter until June 8, 1999, when the entire unpaid principal balance
then outstanding, together with all unpaid accrued interest, shall become due
and payable in full. All other existing terms and conditions of the original
obligation described herein shall remain unchanged and continue in full force
and effect.
IN ADDITION, BY INITIALING BELOW, BOTH DEBTOR AND BANK AGREE THAT THERE ARE
NO UNWRITTEN AGREEMENTS BETWEEN THEM AND THIS AGREEMENT IS THE FINAL
AGREEMENT BETWEEN THEM.
ADDITIONAL TERMS: NONE
Lender: Industrial State Bank
By______________
President
Debtor: Electronic Processing, Inc.
By___________________
Chairman & CEO
All Due: June 8, 1999
Address: 501 Kansas Avenue
Kansas City, Kansas 66105
INDUSTRIAL STATE BANK
(Secured Lender)
By:_____________________
W. R. Hook
President
ELECTRONIC PROCESSING, INC.
(Debtor)
<PAGE>
By______________
Tom W. Olofson
Chairman/CEO
Electronic Processing, Inc.
a Missouri corporation
501 Kansas Avenue
Kansas City, Kansas 66105
BORROWERS NAME AND ADDRESS
"I" includes each borrower above, jointly and severally.
Industrial State Bank
32nd & Strong
P.O. Box 6007
Kansas City, Kansas 66106
"You" means the lender, its successors and assigns.
Loan Number 00045908
Date JUNE 8, 1994
Maturity Date JUNE 8, 1997
Loan Amount $ 900,000.00
Renewal of
I promise to pay you, or your order, at your address listed above the PRINCIPAL
sum of NINE HUNDRED THOUSAND DOLLARS AND NO/100 ------------DOLLARS $900,000.00
XX Single Advance: I have received all of this principal sum. No additional
advances are contemplated under this note.
Multiple Advance: The principal sum shown above is the maximum amount of
principal I can borrow under this note. As of today I have received the
amount of $__________________ and future principal advances are contemplated.
Conditions: The conditions for future advances are __________________________
Open end credit: You and I agree that I may borrow up to the maximum amount
of principal more than one time. This feature is subject to all other
conditions and expires no later than_____________________.
XX Closed End Credit: You and I agree that I may borrow up to the maximum
only one time (and subject to all other conditions).
PURPOSE: The purpose of this loan is to provide funds to consolidate and
payoff existing business debt.
INTEREST: I agree to pay interest (calculated on a 365/actual days basis) on
the principal balance(s) owing from time to time as stated below.
Fixed Rate: I agree to pay interest at the fixed, simple rate of ________%
per year.
XX Variable Rate: I agree to pay interest at the initial simple rate of 9.25
% per year. This rate may change as stated below.
XX Index Rate: the future rate will be 2% IN EXCESS OF the following index
rate: INDUSTRIAL STATE BANK'S BASE LENDING RATE PER ANNUM.
No Index: The future rate will not be subject to any internal or external
index. It will be entirely in your control.
XX Frequency and Timing: The rate on this note may increase as often as
QUARTERLY.
An increase in the interest rate will take effect ON THE 8TH DAY
OF EACH MONTH BEGINNING JULY 8, 1994.
Limitations: The rate on this note will not at any time (and no matter what
happens to any index rate used) go above or below these limits.
Maximum Rate: The rate will not go above ___________ Minimum Rate: The
rate will not go below __________.
Post Maturity Rate: I agree to pay interest on the unpaid balance of this
note owing after maturity, and until paid in full, as stated below:
on the same fixed or variable rate basis in effect before maturity (as
indicated above.)
XX at a rate equal to 5% IN EXCESS OF THE OTHER WISE APPLICABLE RATE HEREON
AT THE TIME OF DEFAULT.
<PAGE>
XX ADDITIONAL CHARGES: In addition to interest I / / have paid /X / agree to
pay the following additional charges ANY AND ALL FILING FEES.
PAYMENTS: I agree to pay this note as follows:
Interest: I agree to pay accrued interest __________________________________
Principal: I agree to pay the principal_____________________________________.
XX Installments: I agree to pay this note in 36 payments. The first payment
will be in the amount of $18,791.91 and will be due the July 8, 1994. A
payment of $18,791.91 will be due on the 8th day of each succeeding month
thereafter. The final payment of the entire unpaid balance of principal and
interest will be due June 8, 1997.
Effect of Variable Rate: An increase in the interest rate will have the
following effect on the payments. The amount of each scheduled payment will
be increased.
The amount of the final payment will be increased.
Notice to Borrower: This written agreement is the final expression of the
agreement between you and the Lender, and as such it may not be contradicted
by evidence of any prior oral agreements or of a contemporaneous oral
agreement between you and the Lender.
ADDITIONAL TERMS: NONE INDUSTRIAL STATE BANK
ELECTRONIC PROCESSING, INC.
______________________ _______________________
Chairman (Borrower) Pres. (Lender)
Affirmation: By signing or initialing here, Borrower & Lender affirm that no
unwritten oral agreement between them exists.
XX SECURITY: This note is secured by: MACHINERY, EQUIPMENT, INVENTORY,
ACCOUNTS RECEIVABLE, CONTRACT RIGHTS, AND THE PERSONAL GUARANTEES OF TOM W.
OLOFSON, ALL AS PER THE ORIGINAL DOCUMENTS OF EVEN DATE.
SIGNATURES: I agree to the terms of this note (including those on the other
side). I have received a copy on today's date.
ELECTRONIC PROCESSING, INC.
A Missouri Corporation
By:_______________________
Tom W. Olofson, Chairman/CEO
Signed________________________for Lender, Title PRESIDENT
<PAGE>
MODIFICATION AGREEMENT
THIS AGREEMENT is made this 17th day of June, 1996, by and between Electronic
Processing, Inc., a Missouri corporation (hereinafter "Debtor"), and
INDUSTRIAL STATE BANK, a Kansas banking corporation (hereinafter "Bank");
WHEREAS Debtor did execute and deliver unto Bank its original Promissory Note
dated June 8th, 1994 in the original amount of $250,000.00 made payable to
Bank and as collateral thereto did pledge all machinery, equipment,
furniture, fixtures, accounts receivable, contract rights, software, the
personal guaranteed of Tom W. Olofson, as per the original Security
Agreements and Secured Guarantee dated June 8, 1994;
WHEREAS the principal balance outstanding under said original Note has now
been reduced to $166,179.94 and Debtor is desirous of converting this Note to
a re-advanceable line of credit for new equipment purchases with the ability
to advance back up to the original amount as needed and evidenced by invoices
for any such purposes, and is also requesting that Bank extend the maturity
of said Note to June 8, 1998;
WHEREAS Bank has reviewed Debtor's requests and has agreed to the same
according to the terms and conditions contained herein:
NOW THEREFORE, IN CONSIDERATION of the promises and agreements set forth
herein, and other good and valuable considerations, the sum and receipt of
which is hereby acknowledged and agreed , it is hereby mutually agreed by the
undersigned that said original Note No. 45937 shall now become a revolving
line of credit solely for the purchases of new equipment, any such advances
to be supported by invoices for the purchase of such new equipment, with
interest to remain at Industrial State Bank's base lending rate plus two
percent per annum (10.25%), paid and adjusted the 8th day of each month, in
addition to monthly principal reductions equal to one-thirty sixth (1/36) of
the then outstanding principal balance, all beginning July 8, 1996, and
continuing on the 6th day of each succeeding month thereafter until June 8,
1998, when the entire unpaid principal balance then outstanding, together
with all unpaid accrued interest, shall become due and payable in full. All
other existing terms and conditions of the original obligation described
herein shall remain unchanged and continue in full force and effect.
IN ADDITION, BY INITIALING BELOW, BOTH DEBTOR AND BANK AGREE THAT THERE ARE
NO UNWRITTEN AGREEMENTS BETWEEN THEM AND THIS AGREEMENT IS THE FINAL
AGREEMENT BETWEEN THEM.
ADDITIONAL TERMS: NONE
Lender: Industrial State Bank
By______________
President
Debtor: Electronic Processing, Inc.
By______________
Chairman & CEO
All Due: June 8, 1999
Address: 501 Kansas Avenue
Kansas City, Kansas 66105
INDUSTRIAL STATE BANK
(Secured Lender)
By:_____________________
W. R. Hook
President
ELECTRONIC PROCESSING, INC.
(Debtor)
By______________
Tom W. Olofson
Chairman/CEO
<PAGE>
Electronic Processing, Inc.
a Missouri corporation
501 Kansas Avenue
Kansas City, Kansas 66105
BORROWERS NAME AND ADDRESS
"I" includes each borrower above, jointly and severally.
Industrial State Bank
32nd & Strong
P.O. Box 6007
Kansas City, Kansas 66106
"You" means the lender, its successors and assigns.
Loan Number 00045937
Date JUNE 8, 1994
Maturity Date JUNE 8, 1997
Loan Amount $ 250,000.00
Renewal of
I promise to pay you, or your order, at your address listed above the PRINCIPAL
sum of TWO HUNDRED FIFTY THOUSAND AND NO/100 ----------------DOLLARS $250,000.00
Single Advance: I have received all of this principal sum. No additional
advances are contemplated under this note.
XX Multiple Advance: The principal sum shown above is the maximum amount of
principal I can borrow under this note. As of today I have received the
amount of $__________________ and future principal advances are contemplated.
Conditions: The conditions for future advances are _________________________
Open end credit: You and I agree that I may borrow up to the maximum amount
of principal more than one time. This feature is subject to all other
conditions and expires no later than_____________________.
XX Closed End Credit: You and I agree that I may borrow up to the maximum
only one time (and subject to all other conditions).
PURPOSE: The purpose of this loan is to provide funds for the purchase of
new equipment.
INTEREST: I agree to pay interest (calculated on a 365/actual days basis) on
the principal balance(s) owing from time to time as stated below.
Fixed Rate: I agree to pay interest at the fixed, simple rate of ________%
per year.
XX Variable Rate: I agree to pay interest at the initial simple rate of
9.25% per year. This rate may change as stated below.
XX Index Rate: the future rate will be 2% IN EXCESS OF the following index
rate: INDUSTRIAL STATE BANK'S BASE LENDING RATE PER ANNUM.
No Index: The future rate will not be subject to any internal or external
index. It will be entirely in your control.
XX Frequency and Timing: The rate on this note may increase as often as
MONTHLY.
An increase in the interest rate will take effect ON THE 8TH DAY OF EACH
MONTH BEGINNING JULY 8, 1994.
Limitations: The rate on this note will not at any time (and no matter what
happens to any index rate used) go above or below these limits.
Maximum Rate: The rate will not go above ___________ Minimum Rate: The
rate will not go below __________.
Post Maturity Rate: I agree to pay interest on the unpaid balance of this
note owing after maturity, and until paid in full, as stated below:
on the same fixed or variable rate basis in effect before maturity (as
indicated above.)
XX at a rate equal to 5% IN EXCESS OF THE OTHER WISE APPLICABLE RATE HEREON
AT THE TIME OF DEFAULT.
<PAGE>
ADDITIONAL CHARGES: In addition to interest I / / have paid /X/ agree to
pay the following additional charges ANY AND ALL FILING FEES.
PAYMENTS: I agree to pay this note as follows:
XX Interest: I agree to pay accrued interest THE 8TH DAY OF EACH MONTH
BEGINNING JULY 8, 1994 AND CONTINUING ON THE 8TH DAY OF EACH SUCCEEDING MONTH
THEREAFTER UNTIL MATURITY.
XX Principal: I agree to pay the principal IN MONTHLY PAYMENTS EQUAL TO 1/36
OF THE OUTSTANDING BALANCE BEGINNING JULY 8, 1994 AND CONTINUING ON THE 8TH
DAY OF EACH MONTH THEREAFTER UNTIL MATURITY.
Installments: I agree to pay this note in __________. The first payment
will be in the amount of ________________ and will be
due________________________.
The final payment of the entire unpaid balance of principal and interest will
be due____________. Effect of Variable Rate: An increase in the interest
rate will have the following effect on the payments.
The amount of each scheduled payment will be increased.
The amount of the final payment will be increased.
Notice to Borrower: This written agreement is the final expression of the
agreement between you and the Lender, and as such it may not be contradicted
by evidence of any prior oral agreements or of a contemporaneous oral
agreement between you and the Lender.
ADDITIONAL TERMS: NONE INDUSTRIAL STATE BANK
ELECTRONIC PROCESSING, INC.
______________________ _______________________
Chairman (Borrower) Pres. (Lender)
Affirmation: By signing or initialing here, Borrower & Lender affirm that no
unwritten oral agreement between them exists.
XX SECURITY: This note is secured by: MACHINERY, EQUIPMENT, INVENTORY,
ACCOUNTS RECEIVABLE, SOFTWARE, CONTRACT RIGHTS, AND THE PERSONAL GUARANTEE OF
TOM W. OLOFSON, ALL AS PER THE ORIGINAL DOCUMENTS OF EVEN DATE.
SIGNATURES: I agree to the terms of this note (including those on the other
side). I have received a copy on today's date.
ELECTRONIC PROCESSING, INC.
A Missouri Corporation
By:_______________________
Tom W. Olofson, Chairman/CEO
Signed________________________for Lender, Title PRESIDENT
<PAGE>
BORROWER'S NAME AND ADDRESS
"I" includes each borrower above, joint and severally.
ELECTRONIC PROCESSING, INC.
501 KANSAS AVENUE
KANSAS CITY, KS 66105-1309
LENDER' NAME AND ADDRESS
"You" means the lender, its successors and assigns.
CITIZENS NATIONAL BANK
7900 QUIVERA ROAD
LENEXA, KS 66215-2733
ACCOUNT #: CL
Loan Number 12428
Date OCTOBER 18, 1996
Maturity Date OCTOBER 18, 1996
Loan Amount $250,000.00
Renewal of 12428
For value received, I promise to pay to you, or your order, at your address
listed above the PRINCIPAL sum of TWO HUNDRED FIFTY THOUSAND AND
NO/100**********Dollars $250,000.00
XX Single Advance: I will receive all of this principal sum on OCTOBER 18,
1996. No additional advances are contemplated under this note.
Multiple Advance: the principal sum shown above is the maximum amount of
principal I can borrow under this note. On _______________ I will receive
the amount of $_________and future principal advances are contemplated.
Conditions: The conditions for future advances are
___________________________________________________
Open End Credit: You and I agree that I may borrow up to the maximum amount
of principal more than one time. This feature is subject to all other
conditions and expires on _____________________. Closed End Credit: You and
I agree that I may borrow up to the maximum only one time (and subject to all
other conditions ).
INTEREST: I agree to pay interest on the outstanding principal balance from
October 18, 1996 at the rate of 9.250% per year until FIRST CHANGE DATE.
XX Variable Rate: This rate may then change as stated below.
XX Index Rate: The future rate will be 1.000% OVER the following index rate:
PRIME RATE AS STATED IN WALL STREET JOURNAL - HIGHEST RATE WILL BE USED
No index: The future rate will not be subject o any internal or external
index. It will be entirely in your control.
XX Frequency and Timing: The rate on this note may change as often as DAILY
A change in the interest rate will take effect ON THE FOLLOWING DAY
Limitations: During the term of this loan, the applicable annual interest
rate will not be more than ______________% or less than _________________%.
The rate may not change more than _______________% each ___________________.
Effect of Variable Rate: A change in the interest rate will have the
following effect on the payments: The amount of each scheduled payment will
change. The amount of the final payment will change.
XX THE AMOUNT DUE AT MATURITY WILL CHANGE.
ACCURAL METHOD: Interest will be calculated on a ACTUAL/360 basis.
POST MATURITY RATE: I agree to pay interest on the unpaid balance of this
note owing after maturity, and until paid in full, as stated below:
on the same fixed or variable rate basis in effect before maturity (as
indicated above). XX At the rate equal to 5% ABOVE RATE IN EFFECT AT
MATURITY, MINIMUM ADDITIONAL FEE OF $25.00.
<PAGE>
LATE CHARGE: If a payment is made more than __________days after it is due,
I agree to pay a late charge of ______________.
ADDITIONAL CHARGES: In addition to interest, I agree to pay the following
charges which are ____ are not included in the principal amount above:
_____________________.
PAYMENTS: I agree to pay this note as follows:
XX Interest: I agree to pay accrued interest AT MATURITY
XX Principal: I agree to pay the principal OCTOBER 18, 1997.
Installments: I agree to pay this note in _________ payments. The first
payment will be in the amount $______________________ and will be due
________________. A payment of $_____________ will be due _______________
thereafter. The final payment of the entire unpaid balance of principal and
interest will be due _______________.
ADDITIONAL TERMS:
SECURITY: This note is separately secured by (describe separate document by
type and date): A SEPARATE GUARANTY AGREEMENT DATED JUNE 18, 1996
PURPOSE: The purpose of this loan is BUSINESS: RENEWAL OF EXISTING LOAN
SIGNATURES: I AGREE TO THE TERMS OF THIS NOTE (INCLUDING THOSE ON PAGE 2).
I have received a copy of today's date.
Signature of Lender
X___________________________
MARY L. ARMSTRONG, VICE PRESIDENT
ELECTRONIC PROCESSING, INC.
BY:___________________________
TOM W. OLOFSON, CEO
<PAGE>
TCMS SERVICE AGREEMENT
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This Trustee Case Management Service Agreement (hereinafter the "Agreement") is
made and entered into by and between ELECTRONIC PROCESSING, INC. (hereinafter
"EPI") and TRUSTEE, in the capacity as a Chapter 7 Bankruptcy Trustee (the
"Trustee").
WHEREAS, EPI is in the business of providing hardware, software and
software support in order to assist trustees representing estates in Chapter 7
bankruptcy to comply with the record keeping and reporting requirements of the
various offices of the Unites States Trustees and Bankruptcy Courts;
WHEREAS, the Trustee will maintain all or substantially all of the
Trustee's Chapter 7 depository accounts with NationsBank of Texas, N. A.
(hereinafter the "Depository Bank");
WHEREAS, pursuant to a separate agreement between EPI and the Bank, EPI has
agreed to make its trustee case management software and related support services
available to the Trustee;
WHEREAS, the Trustee desires to obtain such trustee case management
software and services upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein, EPI and the Trustee hereby agree as follows:
1. SERVICE. EPI shall provide to the Trustee its computerized trustee case
management service (the "System") to assist the Trustee in complying with
the banking and record- keeping requirements associated with the Trustee's
bankruptcy trustee and debtor in possession accounts. In particular, EPI
shall grant to the Trustee a non-transferable, nonexclusive license to use
EPI's Chapter 7 trustee case management software and operating software
(the "Licensed Software"). EPI will also provide to the Trustee the
computer equipment necessary to operate the System (the "Hardware"). EPI
shall also furnish to the Trustee the maintenance and support services
described below (the "Support Services"):
a) Installation of the Hardware and Licensed Software;
b) Written instructional materials and up to four days of on-site
training regarding use of the Licensed Software;
c) Conversion assistance for conversion of the Trustee's existing
Chapter 7 data to the System;
d) Maintenance of the Hardware and Licensed Software and the
provision of any enhancements, modifications, updates, new
documentation releases and corrections made by EPI to the Licensed
Software, including without limitation, any enhancements,
modifications, updates or corrections necessary to conform with
the record keeping and reporting requirements of the U.S. Trustees
and Bankruptcy Courts.
2. INSURANCE. The Trustee shall obtain and maintain property and casualty
insurance, which covers the Licensed Software and Hardware. Upon request,
the Trustee shall provide EPI with a certificate of insurance and/or a copy
of the insurance policy.
3. DEPOSITORY BANK. The Trustee shall maintain all or substantially all of the
Trustee's bankruptcy trustee or debtor-in-possession accounts at the
Depository Bank. If during the term of this Agreement, the Trustee no longer
maintains all or substantially all such accounts at the Depository Bank, the
Trustee shall immediately notify EPI.
Page 1 of 4
<PAGE>
4. COMPENSATION. Other than charges incurred in paragraph 5 below, the System
provided by EPI hereunder shall be free of charge to the Trustee. EPI's
compensation for furnishing the System shall be paid by the Depository
Bank.
5. INTEGRATION AND MODIFICATION OF THE SOFTWARE. The Trustee acknowledges
that the Licensed Software may be partially integrated with the Trustee's
own Software and that EPI shall not be responsible for any failures of the
Software attributable directly or indirectly to capacity, inconsistency or
any other problems with the Trustees' own software regardless of whether
EPI has been informed of such problems. The Trustee shall not modify the
Licensed Software without EPI's consent. EPI shall not be responsible for
maintaining the Trustee's modified portions of the Licensed Software.
Efforts to correct or diagnose difficulties or defects traceable to the
Trustees' errors, the Trustee's software problems or to system changes not
specifically approved by EPI in writing will be billed to the Trustee at
standard EPI time and material rates.
6. EPI'S WARRANTY. EPI's liability for errors or discrepancies in converting
the Trustee's data and processing the Trustee's reports shall be limited to
correction thereof. The Trustee shall be responsible for inspecting the
data, information, reports, records and other materials furnished by EPI to
the Trustee and shall notify EPI of any errors or discrepancies in such
data or other information within 14 days after receipt of such information
by the Trustee.
7. NO OTHER WARRANTIES. EXCEPT AS SET FORTH HEREIN, EPI DISCLAIMS ALL
WARRANTIES WITH REGARD TO THE SERVICES AND PRODUCTS SOLD OR LICENSED
HEREUNDER INCLUDING ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS
FOR A PARTICULAR PURPOSE. NOTWITHSTANDING THE FOREGOING, IF THE ABOVE
DISCLAIMER IS NOT ENFORCEABLE UNDER THE LAW OR THE STATE OF THE
JURISDICTION IN QUESTION, SAID DISCLAIMER SHALL BE CONSTRUED BY LIMITING IT
AND REDUCING IT SO AS TO BE ENFORCEABLE TO THE EXTENT COMPATIBLE WITH THE
APPLICABLE STATE LAW AS IT IS THEN DETERMINED.
8. NON-LIABILITY. NEITHER EPI NOR THE DEPOSITORY BANK SHALL HAVE LIABILITY
FOR INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF
OR IN CONNECTION WITH THE DELIVERY, USE OR PERFORMANCE OF THE SYSTEM.
9. TITLE TO SOFTWARE SYSTEMS AND CONFIDENTIALITY. The Licensed Software and
all operating manuals and other documentation and materials furnished to
the Trustee by EPI (the "Other EPI Materials") and all copies thereof, are
proprietary to EPI and title thereto remains in EPI. All applicable rights
to patents, copyrights, trademarks and trade secrets in the Licensed
Software and Other EPI Materials are and shall remain in EPI. The Trustee
shall not sell, transfer, publish, disclose, display or otherwise make
available to others the Licensed Software or Other EPI Materials or any
copies thereof. The Trustee agrees to secure and protect the Licensed
Software and Other EPI Materials and all copies thereof in a manner
consistent with the maintenance of EPI's rights therein, and to take
appropriate action by instruction or agreement with the Trustee's
employees, agents or consultants who are permitted access to the Licensed
Software or Other EPI Materials to satisfy its obligations hereunder. All
copies made by the Trustee of the Licensed Software and Other EPI
Materials, including translation, compilations, partial copies with
modifications and updated works, are the property of EPI. Violations of
any provision of this paragraph shall be the basis for immediate
termination of this Agreement.
Page 2 of 4
<PAGE>
10. REMEDIES. If the Trustee attempts to use, copy, license, or convey the
items supplied by EPI hereunder in a manner contrary to the terms of this
Agreement or in derogation of EPI's proprietary rights, whether these
rights are explicitly herein stated, determined by law, or otherwise, EPI
shall have, in addition to any other remedies available to it, the right to
injunctive relief enjoining such action and the Trustee hereby acknowledges
that other remedies are inadequate.
11. TERMINATION. This Agreement shall commence on the date of the initial
funds transfer to the Depository Bank, and shall continue in full force and
effect until terminated as set forth herein. Either EPI or the Trustee may
terminate this Agreement, without cause, upon thirty (30) days' prior
written notice to the other party. EPI reserves the right to terminate
this Agreement immediately in the event that the Trustee materially
breaches the Agreement, including, but not limited to, failure to maintain
all or substantially all of the Trustee's bankruptcy trustee and debtor-in-
possession accounts at the Depository Bank. EPI also reserves the right to
terminate this Agreement immediately upon termination of the Agreement for
Computerized Trustee Case Management System between EPI and the Depository
Bank.
Upon termination of this Agreement, the Trustee's right to use the Licensed
Software and Hardware and other information or materials supplied by EPI
shall automatically cease, and the Trustee shall immediately return the
Licensed Software, Hardware and Other EPI Materials and all copies thereof
to EPI. Upon request, the Trustee shall certify to EPI in writing that all
such information and material has been properly returned to EPI.
12. OTHER SOFTWARE PRODUCTS. The Trustee understands that the Microsoft Word
for Windows95 Version 7 word processing program is a product of Microsoft
and is necessary to use the optional custom report features in EPI's
Licensed Software. The Trustee agrees that if these features are to be
used, the Trustee will acquire the appropriate software license or licenses
from Microsoft at his/her own expense. EPI will assist the Trustee to load
the Word program on EPI's hardware if Trustee furnishes EPI a photocopy of
Trustee's license(s) to use the Word program.
The Trustee may wish to load other programs onto EPI's hardware, including
but not limited to, software to access PACER (public access to court
electronic records). Licenses for any such additional programs must be
acquired by the Trustee at her/his own expense, and such licenses must be
shown to EPI if the Trustee wishes EPI employees to load the additional
programs onto the system.
13. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between
the parties hereto with respect to the subject matter hereof, and
supersedes all prior agreements and representations.
14. AMENDMENT; BINDING AGREEMENT. This Agreement may not be amended except in
writing signed by the parties to be bound. Except as otherwise provided
herein, this Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns from the
effective date hereof in accordance with the terms herewith.
15. SEVERABILITY. In the event that any of the provisions, or any portion of a
provision, of this Agreement are held by a court of competent jurisdiction
to be unenforceable, invalid, or illegal, such provision shall be severed
herefrom, and the remaining valid, enforceable, and legal provisions hereof
shall remain in full force. It is agreed that the parties intend that in
lieu of such unenforceable, invalid, or illegal provision, there be added a
clause or provision as similar in terms to such unenforceable, invalid, or
illegal term or provision to make it enforceable, valid, and legal.
16. HEADINGS. The section headings contained herein are intended for
convenience only and in no way limit or otherwise affect the substantive
provisions contained herein.
Page 3 of 4
<PAGE>
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Trustee's Signature Electronic Processing, Inc.
501 Kansas Avenue
Kansas City, KS 661051309
- ------------------------------------ --------------------------------
Printed Name Printed Name
- ------------------------------------
Address:
- ------------------------------------
052996
Page 4 of 4
<PAGE>
CONSENT OF CERTIFIED INDEPENDENT PUBLIC ACCOUNTANTS
Electronic Processing, Inc.
501 Kansas Avenue
Kansas City, Kansas
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form SB-2 of our report dated November 8, 1996
relating to the financial statements of Electronic Processing, Inc., which
appears in such Prospectus. We also consent to the references to us under the
headings "Experts" and "Selected Financial Data" in such Prospectus. However,
it should be noted that Baird, Kurtz & Dobson has not prepared or certified
such "Selected Financial Data."
/s/ Baird, Kurtz & Dobson
-----------------------------------
BAIRD, KURTZ & DOBSON
Kansas City, Missouri
January 13, 1997
