<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
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 Code Number) Identification
incorporation or organization) Number)
</TABLE>
501 KANSAS AVENUE
KANSAS CITY, KANSAS 66105
(913) 321-6392
(Address and telephone number of Small Business Issuer's principal executive
offices and principal place of business)
TOM W. OLOFSON
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
ELECTRONIC PROCESSING, INC.
501 KANSAS AVENUE, KANSAS CITY, KANSAS 66105
(913) 321-6392
(Name, address and telephone number of agent for service)
---------------------
Copies to:
<TABLE>
<S> <C> <C>
RICHARD M. WRIGHT, JR., Esq. ROBERT C. LEVY, Esq. JAMES L. NOUSS,
Gilmore & Bell, P.C. Seigfreid, Bingham, Levy, JR., Esq.
700 West 47th Street, Suite Selzer & Gee Bryan Cave LLP
400 2800 Commerce Tower One Metropolitan
Kansas City, Missouri 64112 911 Main Street Square
(816) 931-7500 Kansas City, Missouri 64105 211 North
(816) 421-4460 Broadway, Suite
3600
St. Louis,
Missouri
63102-2750
(314) 259-2000
</TABLE>
---------------------
Approximate date 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, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock,
$0.01 par value.......................... 1,437,500 $11.94 $17,163,750 $5,063.31
</TABLE>
(1) Includes 187,500 shares of Common Stock that may be purchased by the
Underwriter to cover over-allotments, if any.
(2) Estimated by the average of the bid and asked price for the shares of
Common Stock as of Monday, April 27, 1998 solely for purposes of calculating
the registration fee pursuant to Rule 457(c) under the Securities Act of
1933.
---------------------
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, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 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 BY 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 MAY 1, 1998
1,250,000 SHARES
[LOGO]
COMMON STOCK
--------------
Of the 1,250,000 shares of Common Stock being offered hereby (the
"Offering"), 1,000,000 shares are being sold by Electronic Processing, Inc.
("EPI" or the "Company") and 250,000 shares are being sold by the Selling
Shareholders. See "Principal and Selling Shareholders." The Company will not
receive any of the proceeds from the sale of shares of Common Stock by the
Selling Shareholders.
The Company has applied for inclusion of the Common Stock on the Nasdaq
National Market under the symbol "EPIQ." The Common Stock is presently included
in the Nasdaq SmallCap Market under the symbol "EPIQ." On April 30, 1998, the
last sale price of the Common Stock as reported by the Nasdaq SmallCap Market
was $12.50 per share. See "Price Range of Common Stock."
-------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------------
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>
PROCEEDS TO
UNDERWRITING PROCEEDS TO SELLING
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
Total (3)..................... $ $ $ $
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriter against certain liabilities (including liabilities under the
Securities Act of 1933, as amended). See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $ .
(3) The Company has granted to the Underwriter a 45-day option to purchase up to
187,500 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 Public, Underwriting Discount and
Proceeds to Company will be $ , $ , and $ , respectively. See
"Underwriting."
-------------------
The shares of Common Stock are offered by the Underwriter, 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 the shares of Common Stock will be made on or
about , 1998, in St. Louis, Missouri.
[LOGO]
, 1998.
<PAGE>
Graphic entitled "Advanced Bankruptcy Management Systems" depicting two
proprietary software products: TCMS, which includes features for electronic
banking and creditor distribution; and CasePower, which includes features for
legal noticing and creditor distribution.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
STABILIZING AND SHORT COVERING TRANSACTIONS IN THESE SECURITIES OR THE
IMPOSITION OF PENALTY BIDS IN CONNECTION WITH THE OFFERING. IN CONNECTION WITH
THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) MAY
ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ
STOCK MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING".
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE INDICATED HEREIN, (I) THE INFORMATION IN THIS
PROSPECTUS ASSUMES THE UNDERWRITER'S OVER-ALLOTMENT OPTION WILL NOT BE
EXERCISED, AND (II) ALL REFERENCES TO YEARS INDICATE CALENDAR YEARS. ALL
REFERENCES TO THE "OFFERING" REFER TO THE 1,250,000 SHARES OF COMMON STOCK BEING
OFFERED HEREBY, UNLESS OTHERWISE INDICATED HEREIN.
THE COMPANY
Electronic Processing, Inc. ("EPI" or the "Company") develops, markets, and
licenses proprietary software products and provides support services for Chapter
7 and Chapter 13 bankruptcy trustees and other users of the federal bankruptcy
system. EPI serves a national client base with specialty products that
facilitate the financial and administrative aspects of bankruptcy management and
that are accompanied by a high level of coordinated support including network
integration, post-installation support and value-added services. EPI has
achieved growth rates in operating revenues and pro forma net income per share
of 32.8% and 72.7%, respectively, for 1997 compared to 1996, and 36.5% and
75.0%, respectively, for the three-month period ended March 31, 1998 compared to
the same period in 1997.
Bankruptcy filings in the United States have exhibited significant recent
growth. For the 1997 and 1996 government fiscal years, the Administrative Office
of the U.S. Courts reported in excess of 1.3 million and 1.1 million new
filings, respectively, each of which was an all-time high and represented
increases of 23.0% and 25.9%, respectively, over the prior year. The Company
believes this growth is partially attributable to the recent proliferation of
consumer debt, which has been fueled by the easy availability of credit, and to
an important psychological shift away from the public stigma and negative
connotations historically associated with bankruptcy. The record number of
filings have occurred despite what the Company perceives to be strong general
economic conditions in the United States. Should the United States economy
experience slower growth or recession, the Company believes that bankruptcy
filings may grow at an even higher rate.
Chapter 7 (Liquidation) is the most prevalent form of bankruptcy and
accounted for approximately 70% of all cases filed in 1997. In a Chapter 7 case,
a debtor's assets are liquidated, and the resulting cash proceeds are used to
pay creditors. The Company serves the Chapter 7 trustee market with TCMS
(Trustee Case Management System), a proprietary
Windows95/NT-Registered Trademark--based software application. EPI has an
exclusive national marketing arrangement with NationsBank, the third largest
United States banking company and the largest banker to the United States
government, to promote an integrated package of the Company's TCMS software and
NationsBank banking services to Chapter 7 trustees. In this strategic alliance,
the Company licenses its proprietary TCMS software without direct charge to a
Chapter 7 trustee end-user, who in turn deposits proceeds from the sale of
debtors' assets with NationsBank. EPI collects a monthly fee from NationsBank
that includes a percentage of the total trustee funds on deposit. Through this
billing model, the Company collects a recurring revenue stream that lasts for
the duration of the trustee client relationship. Chapter 7 asset proceeds
commonly remain on deposit for several years. On a national basis, the Company
estimates that there currently is in excess of $3 billion in trustee deposits
from Chapter 7 cases. In the first quarter of 1998, the Company began shipping
release 3.0 of TCMS, a major new enhancement which the Company believes further
streamlines Chapter 7 case administration for trustees.
Chapter 13 (Individual Reorganization) accounted for approximately 29% of
all cases filed in 1997. Under Chapter 13, a debtor makes periodic cash payments
to a trustee under a plan of reorganization that typically extends between 36
and 60 months. Creditors are paid monthly from the debtor's payments. The
Company has
3
<PAGE>
provided software products to Chapter 13 trustees since its inception and in
1997 began shipping CASEPOWER, a new proprietary
Windows95/NT-Registered Trademark--based client-server software application. The
Company collects a monthly fee directly from a trustee end-user based upon the
number of cases in each trustee's database and the number of noticing documents
generated through CASEPOWER.
In the first quarter of 1998, the Company introduced Bankruptcy
Link-Registered Trademark-, an Internet-based service that allows bankruptcy
constituents, including trustees, attorneys, debtors and creditors, to share
information electronically. Although the Internet is an emerging technology in
its target markets, the Company believes that Internet technologies will
comprise a key part of its future product infrastructure as existing products
are enhanced and new products are introduced.
The Company's objective is to become the leading provider of advanced
software and related services to the bankruptcy industry. To achieve this
objective, the Company will continue to adhere to the following core principles:
(i) develop specialized, business-critical applications; (ii) sustain its
recurring revenue models; (iii) develop key skill sets in software development
and bankruptcy management; and (iv) integrate leading technologies into its
products and services. As part of its strategy, the Company has identified the
following potential opportunities: (i) acquire competing technologies and/or
portfolios of business; (ii) achieve vertical integration, such as by providing
document imaging services to trustees, and horizontal integration, such as by
providing petition management applications for debtors' attorneys; (iii) provide
fee-based database services to users of bankruptcy case information such as
large national consumer credit providers who seek improved claims recovery
systems; and (iv) expand into international markets.
The Company was incorporated in Missouri in 1988, when it acquired a
business which had been developing Chapter 13 software products for trustees
since 1964, and completed its initial public offering of Common Stock in
February 1997. The Company's principal executive offices are located at 501
Kansas Avenue, Kansas City, Kansas, 66105, its telephone number is (913)
321-6392, and its web site is HTTP://WWW.EPICORP.COM.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C> <C>
Common Stock offered by
The Company..................... 1,000,000 shares
The Selling Shareholders........ 250,000 shares
---------
Total......................... 1,250,000 shares
---------
---------
Common Stock to be outstanding
after the Offering.............. 4,474,068 shares (1)
Use of Proceeds................... Repayment of long-term debt and general corporate
purposes, including software development, sales and
marketing expansion, capital investment for computer
equipment, potential acquisitions and working capital.
Nasdaq SmallCap Market symbol
(2)............................. EPIQ
</TABLE>
- -------
(1) Based on shares outstanding as of March 31, 1998. Does not include 248,800
shares of Common Stock issuable upon the exercise of outstanding options at
a weighted average exercise price of $5.48 per share, of which options to
purchase 65,660 shares are currently exercisable. The Company intends to
seek shareholder approval of an amendment to the stock option plan to
increase the number of shares of Common Stock issuable upon exercise of
stock options granted thereunder from 270,000 to 500,000 shares. See
"Management--Executive Compensation."
(2) The Company has applied for inclusion of the Common Stock on the Nasdaq
National Market.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Common Stock.
Bankruptcy Link-Registered Trademark- is a registered trademark of the
Company. This Prospectus also includes references to registered trademarks of
other companies. The Company has no proprietary rights in any of those other
trademarks.
5
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- ------------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues...................... $ 4,738 $ 4,985 $ 5,234 $ 6,319 $ 8,389 $ 1,857 $ 2,536
Cost of goods sold and direct costs..... 3,164 2,795 2,786 3,309 3,998 903 1,177
--------- --------- --------- --------- --------- ----------- -----------
Gross profit........................ 1,574 2,190 2,448 3,010 4,391 954 1,359
Operating expenses...................... 2,045 1,801 2,036 2,399 3,208 706 924
--------- --------- --------- --------- --------- ----------- -----------
Income (loss) from operations....... (471) 389 412 611 1,183 248 435
Pro forma net income (1)................ 685 52 83 190 638 105 251
Pro forma net income per share-- diluted
(1)................................... $ .11 $ .19 $ .04 $ .07
Weighted average common shares
outstanding--diluted.................. 1,800 3,367 2,796 3,601
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------
AS
ACTUAL ADJUSTED(2)
--------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................................ $ 1,652 $ 11,568
Working capital.......................................................................... 1,925 12,199
Total assets............................................................................. 8,552 18,468
Total debt............................................................................... 1,774 515
Shareholders' equity..................................................................... 5,856 17,031
</TABLE>
- -------
(1) Pro forma figures are unaudited. For the years ended December 31, 1993
through December 31, 1996, the Company operated as an S corporation and was
not subject to federal and certain state income taxes. The Company
terminated its status as an S corporation and became a C corporation subject
to federal and state income taxes as of February 4, 1997, the date of the
Company's initial public offering of Common Stock. Pro forma net income
figures assume a statutory 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. Pro forma net income for December 31,
1997 and the three months ended March 31, 1997 eliminates the effect of a
$272,900 initial income tax provision to record the effects of temporary
differences at the date of the change in tax status. See Note 8 of the Notes
to Financial Statements included elsewhere in this Prospectus.
(2) Adjusted to reflect the sale of 1,000,000 shares of Common Stock offered by
the Company hereby at an assumed offering price of $12.50 per share less
underwriting discounts and commissions and estimated offering expenses
payable by the Company and the anticipated application of the net proceeds
therefrom. See "Use of Proceeds."
6
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE
ACT"), INCLUDING THOSE RELATING TO THE POSSIBLE OR ASSUMED FUTURE RESULTS OF
OPERATIONS AND FINANCIAL CONDITION OF THE COMPANY. BECAUSE THOSE STATEMENTS ARE
SUBJECT TO A NUMBER OF UNCERTAINTIES AND RISKS, ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THOSE EXPRESSED OR
IMPLIED INCLUDE, BUT ARE NOT LIMITED TO, ANY MATERIAL CHANGES IN THE TOTAL ASSET
PROCEEDS ON DEPOSIT BY CHAPTER 7 TRUSTEES, CHANGES IN THE NUMBER OF BANKRUPTCY
FILINGS EACH YEAR, THE COMPANY'S RELIANCE ON ITS MARKETING ARRANGEMENT FOR
CHAPTER 7 REVENUE, AND THE COMPANY'S ABILITY TO ACHIEVE OR MAINTAIN
TECHNOLOGICAL ADVANTAGES. THESE AND OTHER IMPORTANT FACTORS ARE DISCUSSED IN
MORE DETAIL BELOW. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT FUTURE EVENTS OR
DEVELOPMENTS.
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN EVALUATING AN
INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY.
LACK OF PRODUCT AND BUSINESS DIVERSIFICATION
The Company has limited its focus to providing specialty products that
facilitate financial and administrative aspects of bankruptcy management. As a
result, the Company's Chapter 7 and Chapter 13 bankruptcy software and services
are expected to account for substantially all of its revenues for the
foreseeable future. The Company will not, therefore, have the benefit of product
or business diversification to help insulate it or its results of operations
from changes in the bankruptcy industry that could have a material adverse
effect on the Company's business, financial condition, and results of
operations.
DEPENDENCE ON ONGOING BANKRUPTCY FILINGS
The Company's business is highly dependent on the amount of liquidated asset
proceeds on deposit and 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.
A significant reduction in liquidated asset proceeds on deposit or the number of
pending bankruptcy cases would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Industry."
LIMITED NUMBER OF POTENTIAL TRUSTEE CLIENTS; HIGHLY COMPETITIVE MARKET
The Company does business in an industry with a limited number of Chapter 7
and Chapter 13 trustees. The Company estimates that there is in excess of $3
billion of liquidated asset proceeds on deposit being managed by approximately
1,700 Chapter 7 trustees, approximately 1,250 of whom continue to receive active
cases, and that there were approximately 820,000 Chapter 13 cases pending at the
end of 1997 managed by approximately 180 Chapter 13 trustees. There are several
companies in the market competing to sell to this limited group of trustee
clients, and some of the Company's competitors have substantially greater
financial and marketing resources than does the Company. In the Chapter 7
market, the Company competes with the Chase Manhattan Bank and Union Bank of
California, as well as other regional competitors in selected markets. In the
Chapter 13 market, the Company competes with DCS Corporation of Memphis,
Tennessee, a privately held company, and certain 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 trustee client accounts and to attract business from
trustees who are currently using a competitor's software product. See
"Business--Competition."
7
<PAGE>
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly results are subject to significant variations due to
a number of factors, any one of which could substantially affect the Company's
results of operations for any particular fiscal quarter. Specifically, quarterly
results of operations can vary due to fluctuations in trustees' deposit balances
or caseloads, unanticipated expenses related to software maintenance or customer
service, the timing, cancellation or rescheduling of customer orders, and the
timing and market acceptance of new software versions or support services. The
Company's performance in any given fiscal quarter is not necessarily indicative
of financial trends or future performance.
CUSTOMER CONCENTRATION
A single trustee client with a large Chapter 7 deposit base or a large
Chapter 13 caseload can comprise an important portion of the Company's operating
revenues, although sales to no one client exceeded 5% of the Company's revenues
in 1997. The Company's future financial performance will depend on its ability
to maintain existing trustee client accounts and to attract business from
trustee client accounts which are currently using a competitor's software
product. The loss of even a limited number of clients could have a material
adverse effect on the Company's business, financial condition and results of
operations.
RELIANCE ON MARKETING ARRANGEMENT FOR CHAPTER 7 REVENUE
Current regulation of Chapter 7 bankruptcy trustees has the practical effect
of discouraging trustees from incurring direct administrative costs for computer
expenses. Accordingly, the Company generates Chapter 7 revenue through an
arrangement in which Chapter 7 trustee clients, in accordance with a licensing
agreement with the Company, make deposits of liquidated asset proceeds with
NationsBank, from whom EPI collects a monthly fee that includes a percentage of
the total trustee funds on deposit. The Company promotes its Chapter 7 product
exclusively through a national marketing agreement with NationsBank that has
been in place since November 1993. This agreement has no fixed expiration date,
and either party has the option to end the agreement upon 90 days' notice. There
can be no assurance that this agreement will not be terminated; termination of
this agreement could have a material adverse effect on the Company's business,
financial condition and results of operations until and unless a replacement
marketing arrangement or arrangements could be established. Revenues from
Chapter 7 trustee clients represented 38.9% and 48.6% of the Company's total
revenues in 1997 and the three-month period ended March 31, 1998, respectively.
Substantially all of the Company's Chapter 7 revenues are collected through its
relationship with NationsBank. Although the Company has other Chapter 7 banking
relationships that predate its relationship with NationsBank, there can be no
assurance that another marketing arrangement or arrangements could be found with
terms comparable to those in the NationsBank agreement or at all.
RAPID TECHNOLOGICAL AND MARKET CHANGE
The bankruptcy software industry and the related market for support services
are characterized by rapidly evolving technology and bankruptcy case management
conventions. The introduction of products embodying new technology and the
development of new bankruptcy case management conventions can rapidly render
existing products obsolete and unmarketable. The Company's future success will
depend on its ability to continue to develop and market new competitive products
and to enhance existing products.
NEW RELEASES AND PRODUCTS
The Company intends to continue to issue new releases of its software
products periodically. Complex software products such as those offered by the
Company frequently contain undetected errors or "bugs" when first introduced or
as new versions are released that, despite prior testing by the Company, are
discovered only after a product has been installed and used by trustee clients.
There can be no assurance that errors will not be found in the Company's
software products or that such errors, or difficulties in installing,
maintaining or training
8
<PAGE>
trustee clients and their staffs on the utilization of new releases will not
result in a delay or loss of revenue, diversion of development resources, damage
to the Company's reputation, increased service costs or impaired market
acceptance of the Company's products, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
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 results of operations will depend more upon the innovation,
technological expertise and marketing abilities of its employees than upon such
protection. There can be 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 can be 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 operations.
RISK OF ACQUISITIONS
The Company may from time to time pursue the acquisition of other companies,
assets or product lines that complement or expand its existing business.
Acquisitions involve a number of risks that could materially affect the Company,
including the diversion of management's attention, the assimilation of the
operations and personnel of the acquired companies, the amortization of acquired
intangible assets and the potential loss of key personnel of the acquired
companies. There can be no assurance that any acquisition by the Company will
not have a material adverse effect on the Company's business, financial
condition, and results of operations. The Company currently has no agreements or
understandings with respect to any potential acquisitions.
MANAGEMENT OF GROWTH
The Company has experienced recent significant growth. A continuing period
of significant growth could place a significant strain on the Company's
management, operations and other resources. The Company's ability to manage its
growth will require it to continue to invest in its operational, financial and
information systems, and to attract, retain, motivate and effectively manage its
employees. The inability of the Company's management to manage growth
effectively could have a material adverse effect on the Company's business,
financial condition and results of operations.
SECURITY; PRODUCT LIABILITY
The Company has included security features in certain of its Internet-based
products and services that are intended to protect the privacy and integrity of
customer data. However, there can be no assurance that the Company's software
products will not be subject to break-ins or disruptive problems caused by
Internet users or that such break-ins or problems will not result in a delay or
loss of revenue, diversion of development resources, damage to the Company's
reputation, increased service costs, or impaired market acceptance of the
Company's products, any of which could cause a material adverse effect on the
Company's business, financial condition and results of operations. Additionally,
there can be no assurance that the Company will not be exposed to potential
liability for such break-ins, product defects, or other reasons. Defending such
a liability claim could cause a significant diversion of management's attention
and could have a material adverse effect on the Company's business, financial
condition and results of operations.
9
<PAGE>
DISCRETIONARY USE OF PROCEEDS
The net proceeds to be received by the Company from the Offering are
expected to be used to repay indebtedness and for general corporate purposes,
including possible acquisitions of complementary businesses or investments in
strategic or joint venture relationships. The Company has no present agreements
or understandings with respect to any potential acquisitions or strategic
investments, and there can be no assurance that any such acquisition or
strategic investment will take place. Pending application to such purposes, the
net proceeds will be invested in short-term, investment-grade, interest-bearing
securities. The Company's management will have discretion over the application
of such net proceeds. See "Use of Proceeds."
COMPLIANCE WITH GOVERNMENT REGULATIONS
Although the Company's products and services are not directly regulated by
the government, the Company's customers, as bankruptcy trustees, are subject to
significant regulation. Bankruptcy trustees are subject to the United States
Bankruptcy Code (the "Bankruptcy Code"), the Federal Rules of Bankruptcy
Procedure and local rules and procedures established by bankruptcy courts. The
Executive Office for United States Trustees, a division of the United States
Department of Justice, oversees bankruptcy trustees and establishes
administrative rules governing trustees' activities. The Company's future
success will depend significantly on its ability to develop and maintain
products and provide services that allow trustees to perform their duties within
applicable regulatory and judicial rules and procedures. There can be no
assurance that future regulation will not limit or eliminate the ability of
trustees to utilize fee-based products and services currently provided by the
Company. Failure by the Company to adapt its products and services to changes in
the Bankruptcy Code and applicable rules and procedures could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Industry."
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, assimilate and retain highly
qualified technical, managerial and sales and marketing personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
can retain its key personnel or that it can attract, assimilate and retain such
employees in the future. While the Company has non-disclosure agreements and
non-compete agreements with many of its employees, it does not have employment
agreements with any of its executive officers. The Company maintains key-man
life insurance policies on its Chief Executive Officer and its Chief Operating
Officer. The loss of the services of either 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 business, financial
condition and results of operations. See "Management."
CONTROL BY PRINCIPAL SHAREHOLDERS; ANTI-TAKEOVER PROVISIONS OF MISSOURI LAW
After the Offering, the Company's directors and executive officers will
beneficially own approximately 35.6% of the outstanding Common Stock. The
holders of a majority of the outstanding Common Stock can elect all of the
directors of the Company and, under Missouri law, the holders of at least
one-third of the outstanding Common Stock can delay or prevent certain
fundamental corporate transactions, including mergers, consolidations and the
sale of all or substantially all of the Company's assets. For as long as these
shareholders own a significant percentage of the Common Stock, they will retain
substantial influence over the affairs of the Company, which may result in
decisions that are not in the best interest of all of the shareholders of the
Company. These factors may also have the effect of delaying or preventing a
change in management or voting control of the Company. See "Principal and
Selling Shareholders" and "Description of Securities."
10
<PAGE>
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two-digit entries to represent years. For example, the year "1998"
would be represented by "98." These systems and products will need to be able to
accept four digit entries to distinguish years beginning with 2000 from prior
years. As a result, systems and products that do not accept four-digit year
entries will need to be upgraded or replaced to comply with such "Year 2000"
requirements. The Company believes that its CASEPOWER, TCMS, and TRUST SERVICE
AND INFORMATION SYSTEM programs are Year 2000 compliant, and the Company is
offering upgrades from its older AS/400 legacy product for Chapter 13 trustees
to CASEPOWER. In addition, the Company believes that its internal administrative
systems are Year 2000 compliant or will be upgraded or replaced prior to the
need to comply with Year 2000 requirements, and that such upgrades or
replacements will not require a significant investment. Further, there can be no
assurance that the computer systems of vendors or other entities on which the
Company relies will be Year 2000 compliant. There can be no assurance that
unanticipated or undiscovered Year 2000 compliance problems will not have a
material adverse effect on the Company's business, financial condition, or
results of operations.
ABSENCE OF DIVIDENDS
The Company does not intend to pay any cash 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 factors that the
Board of Directors may deem relevant. See "Dividend Policy."
VOLATILITY OF STOCK PRICE
The market price of the shares of Common Stock is subject to wide
fluctuations in response to factors such as actual or anticipated operating
results, announcements of technological innovations or new products developed by
the Company, its competitors or their customers, government regulatory action,
general market conditions and other factors. In addition, the stock market has
from time to time experienced significant price and volume fluctuations that
have particularly affected the market prices of stocks of technology companies
and that have often been unrelated to the operating performance of particular
companies. The market price of the Company's Common Stock has been volatile and
may continue to be volatile. See "Price Range of Common Stock."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,000,000 shares of Common Stock offered by the Company at an assumed price of
$12.50 per share are approximately $11.2 million (approximately $13.4 million if
the Underwriter's over-allotment option is exercised in full) after deducting
the underwriting discount and other estimated offering expenses, all of which
are payable by the Company. The net proceeds are intended to be used for
repayment of approximately $2.0 million of outstanding bank debt and for general
corporate purposes which may include software development, sales and marketing
expansion, capital investment for computer equipment, potential acquisitions of
complementary businesses or investments in strategic or joint-venture
relationships and working capital. The Company has no present agreements or
understandings with respect to any potential acquisitions or investments. The
bank loans to be repaid from a portion of the proceeds of the Offering bear
interest at rates of 9.0% and 9.5% per annum and mature in 1999. The proceeds of
these loans were used primarily to purchase computer hardware owned by the
Company and placed in Chapter 7 trustee client offices. Pending application to
such purposes, the net proceeds will be invested in short-term,
investment-grade, interest-bearing securities. The Company's management will
have discretion over the application of such net proceeds.
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company began trading on the Nasdaq SmallCap Market
under the symbol "EPIQ" on February 4, 1997. The table below sets forth for the
quarters indicated the high and low per share sale prices of the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1997
First quarter (from February 4, 1997)................................... $ 4.000 $ 3.000
Second quarter.......................................................... 4.875 3.000
Third quarter........................................................... 7.250 4.500
Fourth quarter.......................................................... 12.125 6.250
1998
First quarter........................................................... $ 20.000 $ 9.250
Second quarter (through April 30, 1998)................................. 14.875 11.000
</TABLE>
The last reported sale price for the Common Stock on the Nasdaq SmallCap
Market on April 30, 1998 was $12.50. As of March 31, 1998, there were
approximately 50 holders of record of Common Stock. The Company believes that as
of such date there were approximately 2,000 beneficial holders of the Common
Stock.
DIVIDEND POLICY
The Company does not expect to declare or pay any cash dividends in the
foreseeable future. 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 factors that the Board of Directors may deem relevant.
12
<PAGE>
CAPITALIZATION
The following table sets forth, in thousands, the capitalization of the
Company as of March 31, 1998 and as adjusted to reflect the issuance and sale of
1,000,000 shares of Common Stock offered by the Company hereby at an assumed
price per share of $12.50 and the application of the net proceeds therefrom as
set forth under "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------
AS ADJUSTED
ACTUAL (1)
------------- --------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents $ 1,652 $ 11,568
------ -------
------ -------
Short-term obligations, including current maturities of long-term debt.............. 692 334
------ -------
------ -------
Long-term debt, less current maturities............................................. 1,082 181
------ -------
Shareholders' equity:
Common stock, $0.01 par value, 10,000,000 shares authorized; 3,474,068 shares
issued and outstanding (actual) and 4,474,068 shares (as adjusted).............. 35 45
Additional paid-in capital........................................................ 5,208 16,373
Retained earnings................................................................. 613 613
------ -------
Total shareholders' equity...................................................... 5,856 17,031
------ -------
Total capitalization.............................................................. $ 6,938 $ 17,212
------ -------
------ -------
</TABLE>
- -------
(1) Based on shares outstanding as of March 31, 1998. Does not include 248,800
shares of Common Stock issuable upon the exercise of outstanding options at
a weighted average exercise price of $5.48 per share, of which options to
purchase 65,660 shares are currently exercisable. The Company intends to
seek shareholder approval of an amendment to the stock option plan to
increase the number of shares of Common Stock issuable upon exercise of
stock options granted thereunder from 270,000 to 500,000 shares. See
"Management--Executive Compensation."
13
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected financial data as of and for each of the last five fiscal years
ended December 31, 1997 set forth below have been derived from the Company's
audited financial statements. The selected financial data as of and for each of
the three-month periods ended March 31, 1998 and March 31, 1997 have been
derived from the unaudited financial statements of the Company which, in the
opinion of the Company's management, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation. The results of
operations for the three-month period ended March 31, 1998 are not necessarily
indicative of results that may be expected for the full year. This data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and Notes
thereto that appear elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEARS ENDED DECEMBER 31,
----------------------------------------------------- ----------------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total operating revenues..................... $ 4,738 $ 4,985 $ 5,234 $ 6,319 $ 8,389 $ 1,857 $ 2,536
--------- --------- --------- --------- --------- ------ ------
Processing costs............................. 2,281 2,218 2,098 2,498 2,947 670 892
Depreciation and amortization................ 883 577 688 811 1,051 233 285
--------- --------- --------- --------- --------- ------ ------
Total cost of goods sold and direct costs.... 3,164 2,795 2,786 3,309 3,998 903 1,177
--------- --------- --------- --------- --------- ------ ------
Gross profit............................... 1,574 2,190 2,448 3,010 4,391 954 1,359
Operating expenses........................... 2,045 1,801 2,035 2,399 3,208 706 924
--------- --------- --------- --------- --------- ------ ------
Income (loss) from operations.............. (471) 389 413 611 1,183 248 435
Other income (expenses)...................... (340) (283) (262) (277) (93) (71) (16)
Extraordinary gain........................... 1,972 -- -- -- -- -- --
--------- --------- --------- --------- --------- ------ ------
Net income before income taxes............... 1,161 106 151 334 1,090 177 419
Provision for income taxes................... -- -- -- -- 725 343 168
--------- --------- --------- --------- --------- ------ ------
Net income (loss)............................ $ 1,161 $ 106 $ 151 $ 334 $ 365 $ (166) $ 251
--------- --------- --------- --------- --------- ------ ------
--------- --------- --------- --------- --------- ------ ------
Net income per share--basic.................. $ .11 $ (.06) $ .07
Net income per share--diluted................ $ .11 $ (.06) $ .07
UNAUDITED PRO FORMA DATA:
Pro forma net income (1)..................... $ 685 $ 52 $ 83 $ 190 $ 638 $ 105 $ 251
--------- --------- --------- --------- --------- ------ ------
--------- --------- --------- --------- --------- ------ ------
Pro forma net income per share(1):
Basic...................................... $ .11 $ .20 $ .04 $ .07
Diluted.................................... $ .11 $ .19 $ .04 $ .07
Weighted average common shares
outstanding(2):
Basic...................................... 1,800 3,251 2,796 3,410
Diluted.................................... 1,800 3,367 2,796 3,601
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------------------------- -----------
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 27 $ 63 $ 27 $ 5 $ 1,835 $ 1,652
Working capital............................................. (202) (149) (523) (1,177) 1,776 1,925
Total assets................................................ 3,024 3,129 3,377 4,766 8,161 8,552
Total debt.................................................. 1,743 1,854 2,247 3,152 1,517 1,774
Shareholders' equity........................................ 808 844 758 990 5,599 5,856
</TABLE>
- ---------
(1) Pro forma figures are unaudited. For the years ended December 31, 1993
through December 31, 1996, the Company operated as an S corporation and was
not subject to federal and certain state income taxes. The Company
terminated its status as an S corporation and became a C corporation subject
to federal and state income taxes as of February 4, 1997, the date of the
Company's initial public offering of Common Stock. Pro forma net income
figures assume a statutory 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. Pro forma net income for December 31,
1997 and the three months ended March 31, 1997 eliminates the effect of a
$272,900 initial income tax provision to record the effects of temporary
differences at the date of the change in tax status. See Note 8 of the Notes
to Financial Statements included elsewhere in this Prospectus.
(2) Applies to both net income per share and pro forma net income per share.
14
<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
Financial Statements and Notes thereto that appear elsewhere in this Prospectus.
OVERVIEW
The Company develops, markets and licenses proprietary software products and
provides support services for Chapter 7 and Chapter 13 bankruptcy trustees and
other users of the federal bankruptcy system. Unlike traditional software
licensing arrangements under which the end-user pays a significant up-front
licensing fee and then modest support fees over time, EPI's billing models
generate revenue from every client every month for the duration of the trustee
client relationship. EPI has achieved growth rates in operating revenues and pro
forma net income per share of 32.8% and 72.7%, respectively, for 1997 compared
to 1996, and 36.5% and 75.0%, respectively, for the three-month period ended
March 31, 1998 compared to the same period in 1997.
Bankruptcy filings in the United States have exhibited significant recent
growth. For the 1997 and 1996 government fiscal years, the Administrative Office
of the U.S. Courts reported in excess of 1.3 million and 1.1 million new
filings, respectively, each of which was an all-time high and represented
increases of 23.0% and 25.9%, respectively, over the prior year. Because its
billing models are related primarily to trustees' bank deposit balances in
Chapter 7 and to trustees' caseloads in Chapter 13, the Company believes these
factors are important indicators of market size. The Company estimates that
there is in excess of $3 billion in deposits on a national basis for Chapter 7
cases. These funds are administered by approximately 1,700 individual Chapter 7
trustees, approximately 1,250 of whom are currently receiving new cases. The
Company estimates that there were approximately 820,000 pending cases in Chapter
13 at the end of 1997 managed by approximately 180 standing Chapter 13 trustees.
The Company promotes its TCMS (Trustee Case Management System) proprietary
software application directly to Chapter 7 trustees through a national marketing
alliance with NationsBank. Operating revenues from TCMS are generated according
to the following model: (i) EPI licenses TCMS to a trustee end-user without
direct charge; (ii) pursuant to EPI's licensing agreement, the trustee deposits
proceeds from the sale of debtors' assets into accounts at NationsBank; and
(iii) the Company collects a monthly fee from NationsBank that includes a
percentage of the total trustee funds on deposit. Through this billing model,
the Company collects a recurring revenue stream that lasts for the duration of
the trustee client relationship. Chapter 7 asset proceeds commonly remain on
deposit for several years. In the first quarter of 1998, the Company began
shipping release 3.0 of TCMS, a major enhancement to predecessor versions that
the Company believes will enhance sales. Growth of the TCMS product line has
accounted for the majority of the Company's revenue increases for the past two
years.
The Company licenses its CASEPOWER software application to Chapter 13
trustees and collects a monthly fee directly from each trustee client based on
the number of cases in the trustee's database and the number of noticing
documents generated through CASEPOWER. Unlike Chapter 7, an accompanying banking
marketing arrangement is not used or required in Chapter 13. Cases in Chapter 13
typically last between 36 and 60 months. The Company began marketing CASEPOWER,
a Windows95/NT-Registered Trademark--based client-server application for Chapter
13 trustees in 1997, and the Company is in the process of offering upgrades to
CASEPOWER from a predecessor product based upon AS/400 midrange technology that
features a similar billing model. The Company continues to support, but no
longer markets, the AS/400 product, and Chapter 13 sales have remained
relatively constant over the past two years primarily due to the anticipated
CASEPOWER introduction and the Company's focus on converting existing Chapter 13
trustee clients to CASEPOWER. In addition, the Company recently acquired a new
PC-based product for Chapter 13 that will be marketed under the trade name TRUST
SERVICE AND INFORMATION SYSTEM that the Company believes may be better suited
for trustee clients who do not necessarily need the client-server architecture
or the scope of value-added services available through CASEPOWER.
15
<PAGE>
The Company's gross profit margin has continued to increase as TCMS, which
has a higher gross margin than the Chapter 13 products, has comprised a greater
percentage of operating revenues. TCMS does not require the added service costs
associated with Chapter 13 such as report printing, distribution check printing,
notice generation and mailing, which are included in Chapter 13 cost of goods
sold and direct costs. Although the Company expects to achieve increases in
Chapter 13 revenues due to the introduction of CASEPOWER and the acquisition of
TRUST SERVICE AND INFORMATION SYSTEM, the Company expects that TCMS will
continue to contribute in greater proportion to any revenue growth, which in
turn should contribute positively to gross margins and operating results.
Software development costs are capitalized as soon as technological
feasibility has been established and are amortized on a straight-line basis over
a maximum five-year period. Prior to the completion of a detailed 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
straight-line amortization over the remaining estimated economic life of the
product, not to exceed five years. The Company capitalized approximately
$500,000 of software development costs in 1997 and anticipates that future
software development will be at or above the spending levels of prior years.
RESULTS OF OPERATIONS
The following table sets forth certain income statement data stated as a
percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operating revenues:
Chapter 7 product..................................... 14.4% 22.4% 38.9% 34.5% 46.9%
Chapter 13 products................................... 78.9 70.4 58.7 63.6 48.6
Other services........................................ 6.7 7.2 2.4 1.9 4.5
--------- --------- --------- --------- ---------
Total revenues.......................................... 100.0 100.0 100.0 100.0 100.0
--------- --------- --------- --------- ---------
Processing costs........................................ 40.1 39.6 35.1 36.1 35.2
Depreciation and amortization........................... 13.1 12.8 12.6 12.5 11.2
--------- --------- --------- --------- ---------
Cost of goods sold and direct costs..................... 53.2 52.4 47.7 48.6 46.4
--------- --------- --------- --------- ---------
Gross profit.......................................... 46.8 47.6 52.3 51.4 53.6
Operating expenses...................................... 38.9 37.9 38.2 38.1 36.4
--------- --------- --------- --------- ---------
Income from operations................................ 7.9 9.7 14.1 13.3 17.2
Pro forma net income.................................... 1.6 3.0 7.6 5.7 9.9
</TABLE>
QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997
Operating revenues increased 36.5%, or $678,676, to $2,535,796 in the
three-month period ended March 31, 1998, compared to $1,857,120 in the
three-month period ended March 31, 1997. Approximately 80.7% of the growth in
operating revenues was attributable to Chapter 7. Chapter 7 revenues increased
85.5%, or $547,693, to $1,188,585 in the three-month period ended March 31,
1998, compared to $640,892 in the three-month period ended March 31, 1997. The
increase in Chapter 7 revenue was due primarily to the growth in new Chapter 7
trustee clients resulting in higher monthly fees paid to EPI. Chapter 13 revenue
increased 4.4%, or $52,514, to $1,232,796 in the three-month period ended March
31, 1998 compared to $1,180,282 in the three-month period ended March 31, 1997.
The relatively lower growth in Chapter 13 was primarily due to the Company's
focus on converting existing Chapter 13 trustee clients to CASEPOWER and to a
constant level of revenue from legal noticing caused by a change in service mix.
16
<PAGE>
Total cost of goods sold and direct costs increased 30.4%, or $274,613, to
$1,177,254 in the three-month period ended March 31, 1998, compared to $902,641
in the three-month period ended March 31, 1997. Total cost of goods sold and
direct costs as a percentage of operating revenues decreased to 46.4% in the
three-month period ended March 31, 1998 compared to 48.6% in the three-month
period ended March 31, 1997, primarily due to TCMS for Chapter 7, which has a
higher gross margin, comprising a greater percentage of operating revenues in
the three-month period ended March 31, 1998. Processing costs increased 33.0%,
or $221,346, to $891,835 in the three-month period ended March 31, 1998,
compared to $670,489 in the three-month period ended March 31, 1997. The
increase in 1998 resulted principally from an increase in customer service
expense to support the growth in Chapter 7 sales and to support the new Chapter
13 product, CASEPOWER. Depreciation and amortization increased 22.9%, or
$53,267, to $285,419 in the three-month period ended March 31, 1998, compared to
$232,152 in the three-month period ended March 31, 1997, primarily due to the
purchase of computer equipment for the Company's Chapter 7 product.
Operating expenses increased 30.7%, or $216,883, to $923,772 in the
three-month period ended March 31, 1998, compared to $706,889 in the three-month
period ended March 31, 1997. Operating expenses as a percentage of operating
revenues decreased to 36.4% in the three-month period ended March 31, 1998 from
38.1% in the three-month period ended March 31, 1997. The dollar increase in
operating expenses was due to increases in general and administrative
infrastructure necessary to support a higher level of revenues, including
additional sales and marketing expenses related to growth of the Company's
Chapter 7 product. Sales and marketing expenses increased 32.8%, or $70,675, to
$285,857 in the three-month period ended March 31, 1998, compared to $215,183 in
the three-month period ended March 31, 1997.
Other income (expense) which includes interest income and interest expense
was ($16,223) in the three-month period ended March 31, 1998 compared to
($70,357) in the three-month period ended March 31, 1997. This resulted from a
reduction in net interest expense due to interest income from the investment of
the net proceeds from the sale of 1,600,000 shares of Common Stock from the
February 1997 public offering and the reduction in interest expense due to the
debt paid at the time of the public offering.
In connection with the issuance of Common Stock to the public, the Company
changed its income tax status to a C corporation. Pro forma earnings information
for the three-month period ended March 31, 1997 reflects the effects of
corporate income taxes on historical earnings as if the Company had been subject
to federal taxes for that period. The Company's effective tax rates were 40.0%
and 41.0% (pro forma) for the three-month periods ended March 31, 1998 and March
31, 1997, respectively.
Pro forma net income increased 138.3%, or $145,414, to $250,547 in the
three-month period ended March 31, 1998 compared to pro forma net income of
$105,133 in the three-month period ended March 31, 1997. Pro forma net income as
a percentage of operating revenues increased to 9.9% in the three-month period
ended March 31, 1998 from 5.7% in the three-month period ended March 31, 1997.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1996
Operating revenues increased 32.8%, or $2,069,952, to $8,389,144 in fiscal
1997, compared to $6,319,192 in fiscal 1996. Approximately 89.5% of the growth
in operating revenues was attributable to Chapter 7. Chapter 7 revenues
increased 130.9%, or $1,851,993, to $3,267,161 in fiscal 1997, compared to
$1,415,168 in fiscal 1996. The increase in revenue was due in part to the growth
in new Chapter 7 trustee business for the Company resulting in higher monthly
fees paid to EPI. Chapter 13 revenue increased 10.6% or $472,194, to $4,922,281
in fiscal 1997, compared to $4,450,087 in fiscal 1996. The additional revenue in
1997 was due to an increase in caseloads managed by Chapter 13 trustee clients.
Legal noticing revenue increased 10.3%, or $154,233, in 1997 compared to 1996,
in part resulting from growth in bankruptcy filings.
Total cost of goods sold and direct costs increased 20.8%, or $688,797, to
$3,997,845 in fiscal 1997, compared to $3,309,048 in fiscal 1996. Total cost of
goods sold and direct costs as a percentage of operating revenues decreased to
47.7% in fiscal 1997 from 52.4% in fiscal 1996 due primarily to TCMS for Chapter
7, which has a higher gross margin, comprising a greater percentage of operating
revenues in 1997. Processing
17
<PAGE>
costs increased 18.0%, or $448,433, to $2,946,542 in fiscal 1997, compared to
$2,498,109 in fiscal 1996. The increase in 1997 resulted principally from an
increase in customer service expense resulting from hiring additional trainers,
hardware installers and other customer service functions to support the growth
in Chapter 7 sales. Depreciation and amortization increased 29.6%, or $240,364,
to $1,051,303 in fiscal 1997, compared to $810,939 in fiscal 1996, primarily due
to the purchase of computer equipment for the installations of the Company's
Chapter 7 product.
Operating expenses increased 33.7%, or $809,181, to $3,208,566 in fiscal
1997, compared to $2,399,385 in fiscal 1996. Operating expenses as a percentage
of operating revenues increased to 38.2% in fiscal 1997 from 38.0% in fiscal
1996. The increase in operating expenses was due primarily to increases in
general and administrative infrastructure necessary to support a higher level of
revenues, including additional sales and marketing expenses. Sales and marketing
expenses increased 37.5%, or $274,763, to $1,006,945 in fiscal 1997, compared to
$732,182 in fiscal 1996. The increase in sales and marketing expenses was
attributable to the marketing of the Windows95/NT-Registered Trademark--based
version of TCMS and CASEPOWER, the new Windows95/NT-Registered Trademark--based
version for Chapter 13 trustees.
Other income (expense) which includes interest income and interest expense
was ($92,645) in fiscal 1997 compared to ($276,806) in fiscal 1996. This
resulted from a reduction in net interest expense due to interest income from
the investment of the net proceeds from the Company's initial public offering
and the reduction in interest expense due to the debt paid at the time of the
offering.
In connection with the issuance of Common Stock to the public, the Company
changed its income tax status to a C corporation. Pro forma earnings information
reflects the effects of corporate income taxes on historical earnings as if the
company had been subject to federal income taxes for all periods presented. The
Company's pro forma effective tax rates were 41% and 43% for 1997 and 1996,
respectively.
Pro forma net income increased 236.1%, or $448,446, to $638,399 in fiscal
1997 compared to pro forma net income of $189,953 in fiscal 1996. Pro forma net
income as a percentage of operating revenues increased to 7.6% in fiscal 1997
compared to 3.0% in fiscal 1996.
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1995
Operating revenues increased 20.7%, or $1,085,233, to $6,319,192 in fiscal
1996, compared to $5,233,959 in fiscal 1995. Approximately 61.1% of the growth
in operating revenues was attributable to revenues generated by Chapter 7.
Chapter 7 product revenue increased 88.3%, or $663,574, to $1,415,168 in fiscal
1996, compared to $751,594 in fiscal 1995. The introduction of TCMS for
Windows95/NT-Registered Trademark- in early 1996 helped to accelerate the
addition of new trustee clients resulting in a significant increase in Chapter 7
revenues. Chapter 13 revenue increased 7.8%, or $321,476, to $4,450,087 in
fiscal 1996, compared to $4,128,611 in fiscal 1995. The additional revenue
experienced in 1996 was due to an increase in caseloads managed by Chapter 13
trustee clients. Legal noticing revenue increased 20.1%, or $250,246, in part
resulting from growth in bankruptcy filings.
Total cost of goods sold and direct costs increased 18.8%, or $523,333, to
$3,309,048 in fiscal 1996, compared to $2,785,715 in fiscal 1995. The total cost
of goods sold and direct costs as a percentage of operating revenues decreased
to 52.4% in fiscal 1996 compared to 53.2% in fiscal 1995 primarily due to TCMS,
which has a higher gross margin, comprising a greater percentage of operating
revenues in 1996. Processing costs increased 19.0%, or $399,708, to $2,498,109
in fiscal 1996, compared to $2,098,401 in fiscal 1995. The increase in 1996
resulted principally from an increase in customer service expense, resulting
from hiring additional trainers, hardware installers and other customer service
functions to support the growth of Chapter 7 sales. Depreciation and
amortization increased 18.0%, or $123,625, to $810,939 in fiscal 1996, compared
to $687,314 in fiscal 1995, due primarily to the purchase of computer equipment
for the installations of the Company's new Chapter 7 product.
Operating expenses increased 17.9%, or $363,696, to $2,399,385 in fiscal
1996, compared to $2,035,689 in fiscal 1995. Operating expenses as a percentage
of operating revenues decreased to 38.0% in fiscal 1996
18
<PAGE>
compared to 38.9% in fiscal 1995. The dollar increase in these expenses was
primarily due to increases in general and administrative infrastructure
necessary to support a higher level of revenues, including additional sales and
marketing expenses. Sales and marketing expenses increased 64.0%, or $285,802,
to $732,182 in fiscal 1996 compared to $446,380 in fiscal 1995. The Company
increased its marketing activities in 1996 related to the introduction of a
Windows95/NT-Registered Trademark--based version of TCMS, including costs
associated with trade shows and promotional materials.
Pro forma earnings information reflects the effects of corporate income
taxes on historical earnings as if the Company had been subject to federal
income taxes for all the periods presented. The Company's pro forma effective
tax rates were 43% and 45% for 1996 and 1995, respectively.
Pro forma net income increased 129.2%, or $107,083, to $189,953 in fiscal
1996, compared to pro forma net income of $82,870 in fiscal 1995. Pro forma net
income as a percentage of operating revenues increased to 3.0% in fiscal 1996
compared to 1.6% in fiscal 1995.
QUARTERLY DATA
The following table sets forth certain unaudited quarterly historical
financial data for each of the Company's last nine quarters ended March 31,
1998. This unaudited quarterly information has been prepared on the same basis
as the annual information presented elsewhere in this Prospectus and, in the
Company's opinion, includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the selected quarterly
information. This information should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Prospectus. The
operating results for any quarter shown are not necessarily indicative of
results for any future period.
QUARTER ENDED
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30,
1996 1996 1996 1996 1997 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues.............. $ 1,388 $ 1,542 $ 1,709 $ 1,681 $ 1,857 $ 2,016 $ 2,223
Gross profit.................... 663 724 808 815 955 1,058 1,169
Operating income................ 125 136 153 197 248 250 332
Pro forma net income............ 32 44 47 67 105 145 191
<CAPTION>
DEC. 31, MAR. 31,
1997 1998
----------- -----------
<S> <C> <C>
Operating revenues.............. $ 2,293 $ 2,536
Gross profit.................... 1,209 1,359
Operating income................ 353 435
Pro forma net income............ 195 251
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1,161,432, $1,608,257 and
$200,063 during fiscal 1996, 1997, and for the three months ended March 31,
1998, respectively. The net cash provided by operating activities in fiscal 1997
consisted primarily of net income before deferred taxes of $667,128,
depreciation and amortization of $1,158,184, and an increase of $100,157 in
accounts payable and accrued expense offset primarily by an increase in accounts
receivable of $316,194. The increase in depreciation and amortization relates
primarily to the purchase of computer equipment for the installations of the
Company's Chapter 7 product. The outstanding accounts receivable balance has
increased primarily due to the growth in revenue.
During the three months ended March 31, 1998, net cash provided by operating
activities consisted primarily of net income before deferred taxes of $270,918
plus depreciation and amortization of $325,155, offset primarily by an increase
in accounts receivable of $223,182 and a decrease in accounts payable and
accrued expenses of $143,499 The increase in depreciation and amortization
relates primarily to the purchase of computer equipment for the installations of
the Company's Chapter 7 product. The outstanding accounts receivable balance has
increased primarily due to the growth in revenue.
The Company has available a $500,000 operating line of credit from a
financial institution as of March 31, 1998 with an interest rate of prime plus
1.0% per annum (currently 9.5%). The Company has two equipment lines of credit,
one for $500,000, with an interest rate of the bank's base lending rate plus
1.0% per annum
19
<PAGE>
(currently 9.5%) and another for $1,000,000, with an interest rate of the bank's
base lending rate plus 0.5% per annum (currently 9.0%). The balance outstanding
on the equipment lines of credit totaled $1,251,945 as of March 31, 1998. The
Company expects to repay the equipment loans from the proceeds of this Offering
and leave the operating line of credit in place for working capital purposes.
See "Use of Proceeds."
The Company invested in property and equipment totaling $1,294,603,
$2,180,517 and $490,521 during fiscal 1996, 1997 and for the three months ended
March 31, 1998, respectively, which related principally to the installation of
computer equipment for the Company's Chapter 7 product.
The Company incurred expenditures for software development costs totaling
$511,471, $498,392, and $156,706 during fiscal 1996, 1997, and the three-month
period ended March 31, 1998, respectively. These amounts have been capitalized
and are being amortized on a straight-line basis over a maximum five-year
period. Internal software costs incurred in the creation of computer software
products are capitalized as soon as technological feasibility has been
established. Prior to the completion of a detailed 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 straight-line
amortization over the remaining estimated economic life of the product, not to
exceed five years. Additionally, the Company anticipates future software
development will be at or above the spending levels of prior years.
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 the foreseeable future.
INFLATION
Inflation did not have a material impact on the Company's revenues or income
from operations in the quarter ended March 31, 1998 and in fiscal 1997, 1996 and
1995.
20
<PAGE>
BUSINESS
Electronic Processing, Inc. ("EPI" or the "Company") develops, markets, and
licenses proprietary software products and provides support services for Chapter
7 and Chapter 13 bankruptcy trustees and other users of the federal bankruptcy
system. EPI serves a national client base with specialty products that
facilitate the financial and administrative aspects of bankruptcy management and
that are accompanied by a high level of coordinated support including network
integration, post-installation support and value-added services. EPI has
achieved growth rates in operating revenues and pro forma net income per share
of 32.8% and 72.7%, respectively, for 1997 compared to 1996, and 36.5% and
75.0%, respectively, for the three-month period ended March 31, 1998 compared to
the same period in 1997.
The Company presently has two primary
Windows95/NT-Registered Trademark--based software products: TCMS (Trustee Case
Management System) for Chapter 7 trustees and CASEPOWER for Chapter 13 trustees.
The Company continues to support, but no longer markets, a predecessor product
for Chapter 13 trustees based on AS/400 midrange technologies and recently
acquired a new product for Chapter 13 trustees that will be marketed under the
trade name, "TRUST SERVICE AND INFORMATION SYSTEM." The Company believes that
TRUST SERVICE AND INFORMATION SYSTEM will complement CASEPOWER in the
marketplace and may be better suited for trustees who do not necessarily need
the client/server architecture or the scope of value-added services available
through CASEPOWER.
Unlike traditional software licensing arrangements under which the end-user
pays a significant up-front licensing fee and then modest support fees over
time, EPI's billing models generate revenue from every client every month for
the duration of the trustee client relationship. In Chapter 7, the Company
collects a monthly fee from NationsBank that includes a percentage of the total
trustee funds on deposit. In Chapter 13, the Company collects a monthly fee
directly from each trustee client based on the number of cases in the trustee's
database and the number of noticing documents generated through CASEPOWER.
INDUSTRY
Bankruptcy comprises an ever present, integral part of the U.S. economy, and
there is a national community of professionals who work in the bankruptcy
industry including trustees, judges, court clerks, attorneys, accountants,
government administrators, and other practitioners. In addition to the
bankruptcy judge, the primary constituents in a bankruptcy proceeding include
the debtor, the creditors, and the trustee, who acts as intermediary between the
debtor and creditors. The end-user clients of the Company's products are
TRUSTEES, not individual debtors or creditors.
The Bankruptcy Code provides five models through which a bankruptcy can be
administered:
- Chapter 7 (Liquidation) is the most prevalent form of bankruptcy and
accounted for approximately 70% of all cases filed in 1997. In a Chapter 7
case, the debtor's assets are liquidated, and the resulting cash proceeds
are used to pay creditors.
- Chapter 13 (Individual Reorganization) accounted for approximately 29% of
all cases filed in 1997. Under Chapter 13, the debtor makes periodic cash
payments to a trustee under a plan of reorganization that typically
extends between 36 and 60 months. Creditors are paid monthly from the
debtor's payments.
- Chapter 11 (Corporate Reorganization), Chapter 12 (Farm Reorganization),
and Chapter 9 (Municipal Reorganization) together accounted for
approximately 1% of all cases filed in 1997.
The Company believes that Chapter 7 and Chapter 13 are the most attractive
sectors in the bankruptcy industry to which it can provide service. Because its
billing models are related primarily to trustees' deposit balances in Chapter 7
and to trustees' caseloads in Chapter 13, the Company regards these factors as
important indicators of market size. The Company estimates that there is
currently in excess of $3 billion in deposits nationally from Chapter 7 cases.
These funds are administered by approximately 1,700 individual Chapter 7
21
<PAGE>
trustees, approximately 1,250 of whom are currently receiving new cases. The
Company estimates that there were approximately 820,000 Chapter 13 cases pending
at the end of 1997 managed by approximately 180 standing Chapter 13 trustees.
Bankruptcy filings have exhibited significant recent growth. For the 1997
and 1996 government fiscal years, the Administrative Office of the U.S. Courts
reported in excess of 1.3 million and 1.1 million new filings, respectively,
each of which was an all-time high and represented increases of 23.0% and 25.9%,
respectively, over the prior year. The Company believes this growth is partially
attributable to the recent proliferation of consumer debt, which has been fueled
by the easy availability of credit, and to an important psychological shift away
from the public stigma and negative connotations historically associated with
bankruptcy. The record number of filings have occurred despite what the Company
perceives to be strong general economic conditions in the United States. Should
the United States economy experience slower growth or recession, the Company
believes that bankruptcies may grow at an even higher rate.
The end-users of the Company's products are primarily Chapter 7 and Chapter
13 bankruptcy trustees. 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
liquidating the debtor's assets (Chapter 7) or collecting funds from the debtor
(Chapter 13), distributing the asset proceeds or collected funds to creditors
pursuant to the orders of the bankruptcy court, and preparing regular status
reports 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. The Company estimates that Chapter 7
trustees typically manage over 100 cases simultaneously and that Chapter 13
trustees typically manage over 1,000 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. EPI's
products allow a trustee client to manage an entire caseload; the Company does
not contract with trustees to manage specific individual cases.
CHAPTER 7 BANKRUPTCY
For Chapter 7 liquidation bankruptcy, each jurisdiction has a rotating
"panel" of trustees. Because Chapter 7 comprises approximately 70% of all
bankruptcies filed, multiple trustees are required in most parts of the country
to accommodate the caseload. Because the administration of a Chapter 7 case,
including asset liquidation and litigation, can last several years, 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.
CHAPTER 13 BANKRUPTCY
Most jurisdictions have a single standing Chapter 13 trustee who administers
all Chapter 13 filings for the area. In certain areas of the country, the
trustee is responsible for sending various required notices to parties of
interest. 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 provides regular
status reports to the United States Trustee and every six months provides a
detailed ledger of financial activity to each debtor and debtor's attorney.
Chapter 13 reorganizations typically last between 36 and 60 months. Upon
conclusion of the case, the trustee submits a final report to the bankruptcy
court outlining the financial history of the case.
22
<PAGE>
STRATEGY
The Company's objective is to become the leading provider of advanced
software and related services to the bankruptcy industry. To achieve this
objective, the Company will continue to adhere to the following core principles:
- DEVELOP SPECIALIZED, BUSINESS-CRITICAL APPLICATIONS. The Company believes
that the software applications that it provides to bankruptcy trustees
serve an essential, business-critical function in the trustee clients'
daily operations and that the functionality of EPI products cannot easily
be duplicated with generic, off-the-shelf software packages. Trustee
clients utilize EPI software for a wide variety of functions, and the
Company believes it maintains close working relationships with their
offices. Accordingly, the Company believes that its software becomes the
administrative cornerstone of the trustees' practices and an important
contributor to their offices' efficiency.
- SUSTAIN RECURRING REVENUE STRUCTURE. Unlike traditional software
licensing arrangements under which the end-user pays a significant
up-front licensing fee and then modest support fees over time, EPI's
billing models generate revenue from every client every month for the
duration of the trustee client relationship. In Chapter 7, the Company
collects a monthly fee through its marketing alliance with NationsBank
that includes a percentage of the total trustee funds on deposit. In
Chapter 13, the Company collects a monthly fee directly from each trustee
client that is based on the number of cases in the trustee's database and
the number of noticing documents generated through CASEPOWER.
- CONTINUE TO DEVELOP KEY SKILL SETS. The Company believes that the ongoing
integration of two key skill sets is required to achieve market
leadership: (1) proficiency in commercial software development, service
and support; and (2) expertise in bankruptcy management. The Company
believes it has recruited employees who are skilled in both functional
areas and intends to maintain and enhance these skill bases through
ongoing recruiting and employee development programs.
- INTEGRATE LEADING TECHNOLOGIES. The Company believes that emerging
computer technologies, including the Internet, will form a key portion of
its future product infrastructure. Accordingly, the Company intends to
maintain a current knowledge of advanced and emerging technologies and to
integrate them into its products and services to achieve competitive
advantages.
As part of its strategy, the Company has identified the following potential
opportunities:
- ACQUISITIONS. The Company will seek to acquire technologies and/or
portfolios of business held by direct competitors in the Company's core
Chapter 7 and Chapter 13 markets. In Chapter 7, these opportunities may
include acquiring blocks of Chapter 7 deposits from national or regional
competing banks and converting their respective customer bases to the EPI
platform, purchasing competing software products and customer bases, or
both. In Chapter 13, acquisition opportunities may include purchasing
competing software products and the customer installations they currently
serve.
- ENTER COMPLEMENTARY MARKETS. The Company intends to explore opportunities
for vertical integration, such as by providing document imaging services
to trustees, and horizontal integration, such as by providing petition
management applications for debtors' attorneys.
- DATABASE OPPORTUNITIES. The Company is building a database of national
bankruptcy case information and believes it may be able to provide
fee-based database services to users of bankruptcy case information such
as large national consumer credit providers who seek to improve their
claims recovery process. Additionally, the Company has begun to provide
fee-based data extraction and update services to a major investment
banking firm.
- INTERNATIONAL MARKETS. The Company believes that, similar to the United
States, most foreign economies include remedies for financial failure
including liquidation and reorganization. The Company also believes that
the types of technology-based services EPI provides to the U.S. market are
not yet widely
23
<PAGE>
used internationally. By modifying its software applications and bringing
them into compliance with other legal systems, the Company believes that
its products can be marketed internationally.
PRODUCTS
The Company's products and services are based on the development of
proprietary software. The Company's software applications run under
Windows95/NT-Registered Trademark- and are developed internally by a full-time
group of professional software developers utilizing current technologies
including Oracle-Registered Trademark-, PowerBuilder-Registered Trademark-,
VisualFoxPro-Registered Trademark-, dynamic HTML, and
Java-Registered Trademark-. The Company enhances its software applications
continually and frequently accommodates special product and service requests
from individual trustees. To gather information on evolving market needs and
priorities, the Company conducts detailed telephone interviews with end-users
several times annually and convenes user meetings in select geographic markets.
The Company also believes it has been aggressive in providing trustees with
innovations that offer trustees significant operating efficiencies.
The Company currently markets two primary software products: TCMS (Trustee
Case Management System) for Chapter 7 trustees and CASEPOWER for Chapter 13
trustees.
CHAPTER 7--TCMS (TRUSTEE CASE MANAGEMENT SYSTEM)
TCMS is a comprehensive software solution for Chapter 7 trustee case
management that is available in both standalone and networked versions for
Windows95/NT-Registered Trademark-. In the first quarter of 1998, the Company
began shipping release 3.0 of TCMS, a major enhancement over predecessor
versions. The Company believes that trustee clients typically rely on TCMS as
the administrative cornerstone of their trustee practices and utilize the system
extensively for functions including:
- ASSET MANAGEMENT. TCMS stores information about assets as they are
identified and tracks their remaining values as they are liquidated.
- BANKING. An online banking module allows the trustee to open and close
bank accounts electronically as well as to enter funds transfers. Daily
financial transactions are recorded in an interface that resembles a
personal check register. The system prepares 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.
- CALENDARING AND DOCKETING. Key events in asset cases are posted
automatically to a central calendar that can be printed regularly. The
software automatically schedules tasks required to administer cases in a
timely fashion.
- CUSTOMIZED DISTRICT REPORTS. EPI customizes final reports and final
accounts for each district where TCMS is marketed.
- 180 DAY REPORTS. TCMS generates the 180 Day Reports that trustees are
required to submit to the United States Trustee semiannually with a
variety of convenient reporting options.
PRICING AND CHAPTER 7 MARKETING ALLIANCE. Current regulation of Chapter 7
bankruptcy trustees has the practical effect of discouraging trustees from
incurring direct administrative costs for computer expenses. All major
nationally marketed Chapter 7 systems are provided to trustees without direct
charge to the trustee because of traditional market conventions. EPI has
established a marketing alliance with NationsBank to collect revenue from the
Company's Chapter 7 product under the following arrangement:
- EPI licenses its proprietary software to the end-user trustee and
furnishes hardware, conversion services, training and customer support,
without direct charge to the trustee;
- Pursuant to a licensing agreement with EPI, the trustee closes predecessor
banking relationships, transfers funds to NationsBank and agrees to
deposit with NationsBank the cash proceeds from all future asset
liquidations, which are commonly on deposit for several years; and
24
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- The Company collects a monthly fee from NationsBank that includes a
percentage of total trustee funds on deposit.
The Company's exclusive relationship with NationsBank, the largest banker to
the United States government in all fifty states, was established in November
1993. In this marketing arrangement, EPI and NationsBank promote products and
services to trustees nationwide. Through this arrangement, EPI collects a
recurring revenue stream that lasts for the duration of the trustee client
relationship, and NationsBank is able to build its deposit base in this market.
The Company also continues to support a limited number of trustee relationships
through other banks that predate its agreement with NationsBank.
CHAPTER 11 CASES MANAGED THROUGH TCMS. The Company has recently
incorporated several enhancements to TCMS that enable the application to more
readily administer Chapter 11 cases in addition to Chapter 7 cases. With these
new enhancements in place, the Company believes it can attract additional
deposit revenue from Chapter 11 bankruptcies from both new clients and from
clients who already utilize TCMS for their Chapter 7 requirements. The Company
estimates that there is over $2 billion on deposit in Chapter 11 cases
nationally and that Chapter 11 funds are typically on deposit for shorter
periods of time than Chapter 7 funds.
CHAPTER 13--CASEPOWER
CASEPOWER is a comprehensive software solution to the transaction processing
needs of Chapter 13 trustees. It is installed in a client-server configuration
utilizing Windows95/NT-Registered Trademark-. Trustee clients utilize the system
for the following functions:
- NOTICING. As users set up new cases in the system, EPI's data center in
Kansas City can access the trustee's system and extract data necessary to
generate and mail printed notices for creditors. The Company charges
trustees according to the number of notices printed.
- MONTHLY DISTRIBUTION. CASEPOWER'S advanced logic enables the trustee to
accommodate a wide variety of creditor payment scenarios established by
the bankruptcy court. The software calculates payments to creditors
monthly, and the trustee may choose to outsource check and report printing
functions to EPI's data center in Kansas City for an additional fee.
- CASE MANAGEMENT. CASEPOWER stores and monitors key dates, names,
addresses and text notes for every case in the system, and a variety of
retrieval options enables users to access case information in several
different formats.
- CASH MANAGEMENT. Users enter cash receipts and financial adjustments in
the system, and CASEPOWER updates the balances in each case in preparation
for monthly distribution to creditors.
- INQUIRY. Chapter 13 trustees' offices receive a multitude of outside
inquiries each day from creditors' and debtors' attorneys. CASEPOWER
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.
CASEPOWER is installed in an office to manage an entire caseload, which in
some instances can exceed 10,000 cases per trustee. The Company does not enter
trustee client relationships to manage partial caseloads or individual cases.
ACQUISITION OF TRUST SERVICE AND INFORMATION SYSTEM. In April 1998, the
Company acquired a new PC-based software application for Chapter 13 trustees
that will be marketed under the trade name, "TRUST SERVICE AND INFORMATION
SYSTEM." The Company believes that TRUST SERVICE AND INFORMATION SYSTEM will
complement CASEPOWER in the marketplace and may be better suited for trustees
who do not necessarily need the client/ server architecture or the scope of
value-added services available through CASEPOWER.
25
<PAGE>
LEGACY PRODUCT. Prior to CASEPOWER, the Company marketed a product based on
AS/400 midrange technology to Chapter 13 trustees. The Company continues to
support, but no longer markets, the AS/400 midrange product and is in the
process of upgrading AS/400 midrange users to the CASEPOWER platform.
PRICING. In Chapter 13, EPI collects a monthly fee directly from each
trustee client based on the number of cases in the trustee's database and the
number of noticing documents generated through CASEPOWER. Individual price
quotes are provided to each trustee based on the number of cases in the
trustee's database and optional value-added services selected, which may include
check printing, bank reconciliation, data entry service, hardware provision and
maintenance, and noticing document assembly.
CHAPTER 12 CASES MANAGED THROUGH CASEPOWER AND AS/400 MIDRANGE. Because of
the similarities between Chapter 13 and Chapter 12, trustees in Chapter 12 may
manage their caseloads through CASEPOWER. Chapter 12 represents less than 1% of
all bankruptcy filings.
INTERNET-BASED SERVICE--BANKRUPTCY LINK-REGISTERED TRADEMARK-
In the first quarter of 1998, the Company introduced an Internet-based
service, Bankruptcy Link-Registered Trademark-, that enables bankruptcy
professionals to share information electronically. The Company does not
presently charge for access to this service, which is still in an early stage of
utilization. In the short term, the Company believes that Bankruptcy Link will
enhance the marketability of its existing product lines because of potential
future increased efficiencies realized from electronic data exchange, and in the
long term, the Company believes that the Internet-based platform will serve as a
key element of future products and services.
SALES AND MARKETING
The Company's internal sales force has primary responsibility for all
aspects of sales and marketing, which include developing market visibility and
presence, showing the software's capabilities in on-site sales demonstrations,
preparing proposals, and closing contracts on new business. The Company's
products and services are marketed directly to trustees through on-site sales
demonstrations by the Company's internal sales department. The Company's account
executives typically receive a base salary plus a commission based upon the
revenue of new business for which they are responsible. In addition to account
executives located at the Company's corporate headquarters, the Company has also
placed full-time account executives in New York and Los Angeles, which the
Company believes to be two of the largest regional markets for its products.
The Executive Office for U.S. Trustees periodically publishes a directory of
bankruptcy trustees that the Company uses as its prospect list. Trustees make
their own decisions for software and service providers. The Company's sales
force also attends approximately ten bankruptcy trade shows annually, which
include the conferences of the National Association of Bankruptcy Trustees and
the National Association of Chapter 13 Trustees.
The Company believes that virtually all Chapter 7 and Chapter 13 trustees
already use some type of computerized case management system. Although the
Company does license systems to newly appointed trustees who do not yet have
software in place and to trustees who formerly used manual or internally
developed systems, the majority of the Company's trustee clients leave a
competing system for an EPI product. The Company believes that its advanced
technologies, case management functions, and bankruptcy expertise compel
trustees to choose its products over those of the competition. In the case of
its Chapter 7 sales and marketing efforts, the Company believes it gains
additional benefit from its national affiliation with NationsBank. Because of
the Company's recurring revenue models, customer retention efforts are an
important part of the Company's overall sales and marketing program. Through
periodic quality assurance telephone interviews and on-site post-installation
visits, the Company believes it is effective in maintaining close working
relationships with its trustee clients.
Through its strategic marketing alliance with the Company, NationsBank also
has a dedicated national sales force to promote an integrated package of the
Company's Chapter 7 TCMS product and NationsBank banking
26
<PAGE>
services to Chapter 7 trustees. NationsBank staff often travel with the
Company's representatives on joint sales calls and are responsible for
introducing prospective clients to the banking support that NationsBank offers
to trustees.
COMPETITION
The market for Chapter 7 and Chapter 13 trustee case management systems is
highly competitive, and there is a finite number of potential trustee clients.
There are several companies in the market competing for sales from this finite
group of trustee clients, and some of the Company's competitors have
substantially greater financial and marketing resources than does the Company.
The Company competes with both regional and national competitors.
In Chapter 7, the largest national competitor is Chase Manhattan Bank.
Through its wholly owned subsidiary, Manufacturer's Hanover Financial Management
Systems, it develops, promotes and supports a software product for Chapter 7
trustees. Another national competitor is Union Bank of California, which
contracts with DCI Corporation of Memphis, Tennessee, a privately held company,
for a software product. In selected regional markets, there are additional
competing software companies and banks.
In Chapter 13, the largest national competitor is DCS Corporation of
Memphis, Tennessee, a privately held company. There is also a number of smaller
competitors in Chapter 13, all of which are privately held companies.
The Company believes that the most important factors that influence
trustees' decisions regarding case management systems are (1) the features and
benefits of the proprietary software; (2) the level of bankruptcy expertise
offered by the vendor; and (3) the quality of the support, maintenance and
enhancements provided by the vendor. The Company believes it has developed a
strong combination of these core skill sets, as evidenced by the technologies
and case management functions of its applications, as well as its long-standing
experience in the bankruptcy industry and the backgrounds of its key personnel.
See "Risk Factors."
EMPLOYEES
The Company employs approximately 70 people and believes that its
relationship with employees is good.
PROPERTIES
The Company's corporate offices are located in a 30,000-square-foot facility
leased in Kansas City, Kansas. 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 Relationships and Related
Transactions."
LEGAL PROCEEDINGS
The Company is not a party to any pending or threatened litigation.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company, their ages as of March
31, 1998 and their positions are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- --------------------------------------------------------------------
<S> <C> <C>
Tom W. Olofson*...................... 56 Chairman, President and Chief Executive Officer
Christopher E. Olofson............... 28 Executive Vice President, Chief Operating Officer, and Director
Albert T. Annillo.................... 47 Senior Vice President
Reed A. Eichner...................... 40 Vice President--Operations
Nanci R. Trutna...................... 44 Vice President--Finance
Sally D. MacDonald................... 51 Vice President--Human Resources
Robert C. Levy *..................... 51 Secretary and Director
W. Bryan Satterlee*.................. 64 Director
</TABLE>
- -------
* 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 and 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.
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 Regional 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
28
<PAGE>
Software, Inc. from 1986 to 1989. Ms. MacDonald earned a BS in Business
Administration from the University of San Francisco in 1984. Ms. MacDonald has
announced plans to resign from the Company in the next few months to relocate to
California for family reasons.
ROBERT C. LEVY is an attorney who is a director, shareholder and executive
committee member of the law firm of Seigfreid, Bingham, Levy, Selzer & Gee in
Kansas City, Missouri, which law firm has provided and is expected to continue
to provide certain legal services to the Company. 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 JD 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. Mr. Levy has agreed to resign as
Secretary of the Company effective on the closing of this Offering, and the
Board of Directors intends to elect Ms. Trutna to fill that position.
W. BRYAN SATTERLEE was elected to the Company's Board of Directors in 1997.
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 1996
and 1997 to the Company's Chief Executive Officer and each other executive
officer of the Company who earned in excess of $100,000 in either year (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------
-------------------------------------- SECURITIES ALL OTHER
OTHER ANNUAL UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS(#) (2)(3)
- ----------------------------------- --------- ---------- --------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Tom W. Olofson,
Chairman/CEO..................... 1997 $ 100,489 -- $ 31,573 -- $ 11,537
1996 $ 50,000 $ 24,000 $ 36,827 -- $ 11,434
Christopher E. Olofson,
EVP/COO.......................... 1997 $ 120,101 -- $ 2,754 75,000 $ 3,600
1996 $ 108,101 -- $ 3,349 -- $ 1,620
</TABLE>
- -------
(1) Includes $28,562 in 1997 and $33,782 in 1996 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 $3,011 in 1997 and
$3,045 in 1996 for personal use of a Company automobile. Includes $2,754 for
1997 and $3,349 for 1996 for Christopher E. Olofson for personal use of a
Company automobile.
(2) Company benefits include $6,789 in 1997 and $9,075 in 1996 for group
insurance and $4,748 in 1997 and $2,359 in 1996 for Company matching
contributions to the 401(k) plan for Tom W. Olofson. Includes $3,600 in 1997
and $1,620 in 1996 for Company matching contributions for Christopher E.
Olofson.
(3) Does not include interest of $7,778 in 1997 and $40,000 in 1996 paid by the
Company to Tom W. Olofson on amounts borrowed by the Company from Tom W.
Olofson. See "Certain Relationships and Related Transactions."
29
<PAGE>
The Company does not have a long-term incentive compensation plan.
The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officers during the year ended
December 31, 1997.
OPTION GRANTS IN LAST YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
% OF TOTAL PRICE APPRECIATION FOR
SHARES OPTIONS GRANTED EXERCISE OPTION TERM(1)
UNDERLYING TO EMPLOYEES IN PRICE PER ----------------------
NAME OPTIONS GRANTED 1997 SHARE EXPIRATION DATE 5% 10%
- ------------------------------ --------------- ----------------- ------------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Tom W. Olofson................ -- -- -- -- -- --
Christopher E. Olofson........ 25,000 11.1% $ 3.85(2) 02/04/02 $ 15,425 $ 44,670
25,000 11.1% $ 4.95(2) 07/10/02 $ 19,833 $ 57,433
25,000 11.1% $ 6.80(2) 12/01/07 $ 155,780 $ 348,748
</TABLE>
- -------
(1) The amounts shown as potential realizable values are based on assumed
annualized rates of appreciation in the price of the Common Stock of 5.0%
and 10.0% over the term of the options, as set forth in the rules of the
Securities and Exchange Commission. Actual gains, if any, on stock option
exercises are dependent upon the future performance of the Common Stock.
There can be no assurance that the potential realizable values reflected in
this table will be achieved.
(2) The options were granted at 110%, 110% and 85%, respectively, of the fair
market value of the Common Stock on the date of grant, which was $3.50,
$4.50 and $8.00, respectively, on those dates.
The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officers that were outstanding at
December 31, 1997:
AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
------------------------------------------------------
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS THE-MONEY OPTIONS(1)
SHARED ACQUIRED -------------------------- --------------------------
NAME UPON EXERCISE (#) VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ----------------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Tom W. Olofson................... -- -- -- -- -- --
Christopher E. Olofson........... -- -- 50,000 25,000 $ 367,500 $ 123,750
</TABLE>
- -------
(1) Based on a per share price of Common Stock of $11.75, which was the closing
price for the Common Stock on the Nasdaq SmallCap Market on December 31,
1997, less the option exercise prices.
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 and reimburses them for
out-of-pocket expenses associated with their attendance at meetings.
The Company granted a one-time, ten-year option to W. Bryan Satterlee for
7,500 shares of Common Stock at an exercise price of $3.50 in February 1997, at
the time Mr. Satterlee joined the Board of Directors. The option vests 20% per
year over five years.
30
<PAGE>
STOCK OPTION PLAN
On October 17, 1995, the Company adopted the Electronic Processing, Inc.
1995 Stock Option Plan (the "1995 Plan"). 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 ("NSOs").
On November 4, 1996, the Board of Directors and shareholders of the Company
adopted an amendment to the 1995 Plan to increase the number of shares of Common
Stock available for the grant of stock options under the 1995 Plan from 180,000
to 270,000 shares.
On January 23, 1997, the Board of Directors and shareholders of the Company
adopted an amendment to the 1995 Plan to provide that the 1995 Plan may be
administered either by the Board of Directors of the Company or a Stock Option
Plan Committee of the Board; provided, however, that the Stock Option Plan
Committee may not grant stock options to officers or directors in the Company
unless it is made up of no less than two members of the Board who qualify as
"Non-Employee Directors" under Rule 16b-3 or its successors promulgated under
the Securities Exchange Act of 1934, as amended.
On February 3, 1997, the Board of Directors and shareholders of the Company
adopted an amendment to the 1995 Plan to provide that the purchase price of an
NSO granted by the Committee or the Board under the 1995 Plan may not be less
then 85.0% of the fair market value of the Common Stock, so long as the Common
Stock is qualified for sale in the State of Minnesota.
The Board of Directors of the Company has adopted an amendment to the 1995
Plan recommending to the shareholders that they increase the number of shares of
Common Stock available for the grant of stock options under the 1995 Plan from
270,000 shares to 500,000 shares. The Company will submit that proposed
amendment to the 1995 Plan to a vote of the shareholders of the Company at the
annual meeting scheduled for June, 1998.
The 1995 Plan is administered by the Board of Directors. The Board of
Directors 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 (110.0% with respect to ISO optionees who own at least 10.0% of the
outstanding Common Stock of the Company). With respect to NSOs, the exercise
price shall be determined by the Board of Directors and may not be less than
85.0% of the fair market value on the date of grant so long as the Common Stock
is qualified for sale in the state of Minnesota. The Board of Directors 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 ISO optionees who own at least 10.0%
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.
It has been the Company's practice to grant stock options to all full-time
employees after an initial period of employment with the Company.
31
<PAGE>
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.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controller persons of the Company
under the foregoing provisions or otherwise, the Company has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
CERTAIN RELATIONSHIPS AND RELATED 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 in the amount of $400,000
was paid by the Company in February, 1997. The note provided for interest at the
rate of 10%. Interest paid to Tom W. Olofson under this agreement was $40,000 in
1996 and $7,778 in 1997. 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. In accordance with an October 11, 1996 agreement between
the Company and Mr. Olofson, the Company paid $41,000 to Mr. Olofson, and the
stock purchase warrant was retired.
The Company has a noncancellable operating lease for its corporate
headquarters which expires on February 28, 2011. 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). The Company paid T&J Investment Company rent
for the 30,000 square foot facility of $145,500 and $149,250 in 1996 and 1997,
respectively.
The Company believes that the above transactions were on terms no less
favorable to the Company than could have been obtained from unaffiliated third
parties on an arm's length basis.
32
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 1998, before and after
giving effect to the sale of the shares of Common Stock offered hereby, by (i)
each person who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) Messrs. Tom W. Olofson and Christopher
E. Olofson (the "Selling Shareholders"), (iii) each director of the Company,
(iv) each of the Named Executive Officers, and (v) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING(2) OFFERING(2)
----------------------- SHARES BEING -----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------------------------- ---------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Tom W. Olofson (3)..................................... 1,620,000 46.6% 220,000 1,400,000 31.2%
Christopher E. Olofson (4)............................. 184,500 5.3% 30,000 154,500 3.4%
Robert C. Levy......................................... 22,500 * -- 22,500 *
W. Bryan Satterlee (5)................................. 8,500 * -- 8,500 *
All directors and executive officers as a group (8
persons)(6).......................................... 1,841,500 53.0% 250,000 1,591,500 35.6%
</TABLE>
- -------
(*) Less than 1%.
(1) The address of all of the named individuals is c/o Electronic Processing,
Inc., 501 Kansas Avenue, Kansas City, Kansas 66105.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options and warrants held by that person
that are currently exercisable or will become exercisable within 60 days of
the date of this Prospectus are deemed outstanding. Such shares, however,
are not deemed outstanding for the purposes of computing the percentage
ownership of any other person. Except as otherwise indicated in a footnote
to this table, the persons in this table have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned
by them.
(3) Excludes 40,500 shares owned by Mr. Olofson's adult son, Scott W. Olofson,
as to which shares Mr. Olofson disclaims beneficial ownership.
(4) Includes 75,000 shares of Common Stock subject to options that are
exercisable within the next 60 days.
(5) Includes 1,500 shares of Common Stock subject to options that are
exercisable within the next 60 days. Excludes 6,000 shares of Common Stock
issuable upon exercise of options that are not exercisable within the next
60 days.
(6) Includes 81,000 shares of Common Stock subject to options that are
exercisable within the next 60 days. Excludes 64,000 shares of Common Stock
subject to options held by directors and executive officers that are not
exercisable within the next 60 days.
33
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The authorized capital stock of the Company consists of 10,000,000 shares,
$0.01 par value. As of March 31, 1998, there were 3,474,068 shares of Common
Stock outstanding held of record by approximately 50 shareholders and
beneficially by approximately 2,000 shareholders. 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. Cumulative voting is not permitted in
the election of directors of the Company. 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, upon completion of the Offering, the shares of Common Stock
offered hereby will be fully paid and non-assessable.
As of March 31, 1998, 248,800 shares of Common Stock were issuable upon the
exercise of outstanding options granted under the 1995 Plan at a weighted
average exercise price of $5.48 per share, of which options to purchase 65,660
shares are currently exercisable. In connection with the Company's initial
public offering in 1997, the Company issued to the underwriter thereof a warrant
to purchase up to 160,000 shares of Common Stock at an exercise price per share
equal to $4.20. The 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 such
underwriter. The warrant is exercisable at any time during the four year period
ending February 3, 2001. As of April 24, 1998, the warrant was unexercised as to
47,800 shares of the original 160,000 shares.
MISSOURI ANTI-TAKEOVER STATUTES
The Missouri General Business and Corporation Law ("GBCL") requires the
affirmative vote of the holders of at least two-thirds of the outstanding shares
of Common Stock to approve certain fundamental corporate transactions, including
mergers, consolidations or the sale of all or substantially all the assets of
the Company. After the completion of the Offering, the Company's directors and
executive officers will beneficially own approximately 35.6% of the outstanding
Common Stock, and will have the ability to delay or prevent such a transaction.
See "Risk Factors--Control by Principal Shareholders; Anti-Takeover Provisions
of Missouri Law."
Under the GBCL, a person (or persons acting as a group) who acquires 20% or
more of the outstanding stock of an "issuing public corporation" will not have
voting rights, unless: (i) such acquiring person satisfies certain statutory
disclosure requirements, and (ii) the restoration of voting rights to such
acquiring person is approved by the issuing public corporation's shareholders.
Additional shareholder approval is required to restore voting rights when an
acquiring person has acquired one-third and a majority, respectively, of the
outstanding stock of the issuing public corporation. The GBCL permits an
"issuing public corporation" to elect not to be governed by this law. The
Company has not made this election. The Missouri business combination law does
not presently apply to the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Norwest Bank
Minnesota, N.A.
34
<PAGE>
UNDERWRITING
A.G. Edwards & Sons, Inc. (the "Underwriter") has agreed with the Company
and the Selling Shareholders, subject to the terms and conditions of the
Underwriting Agreement, to purchase the number of shares of Common Stock set
forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ---------------------------------------------------------------------------------- ----------
<S> <C>
A.G. Edwards & Sons, Inc.......................................................... 1,250,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the Underwriter is obligated to
purchase all of the shares of Common Stock, if any are purchased.
The Company has been advised that the Underwriter proposes to offer the
Common Stock to the public at the offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share and that the Underwriter and such dealers may reallow a
discount of not in excess of $ per share to other dealers. The offering price
and the concession and discount to dealers may be changed by the Underwriter
after the offering.
In the Underwriting Agreement, the Company has granted the Underwriter
options, expiring at the close of business on the 45(th) day subsequent to the
date of this Prospectus, to purchase up to an aggregate of 187,500 additional
shares of Common Stock at the offering price, less the underwriting discount set
forth on the cover page of this Prospectus. The Underwriter may exercise such
options solely to cover over-allotments, if any, in the sale of the shares. To
the extent the Underwriter exercises such options, the Underwriter will have a
firm commitment, subject to certain conditions, to purchase approximately the
same percentage of the option shares as the number of shares to be purchased by
it shown in the table above bears to 1,250,000, and the Company will be
obligated, pursuant to the options, to sell such shares to the Underwriter, for
which the Company will receive all of the proceeds.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act. The liability of each Selling Shareholder under this indemnity
is limited to the amount of his proceeds.
The Company and certain shareholders, who collectively will own 1,591,500
shares of Common Stock immediately following the Offering, have agreed that they
will not, directly or indirectly, offer, sell or otherwise dispose of any shares
of Common Stock, other than the shares offered pursuant to this Prospectus, for
a period of 180 days from the date of this Prospectus without the prior written
consent of A.G. Edwards & Sons, Inc.
In connection with the Offering, the Underwriter and selling group members
and their respective affiliates may engage in transactions that stabilize,
maintain or otherwise affect the market price of the Common Stock. Such
transactions may include stabilization transactions effected in accordance with
Rule 104 of Regulation M, pursuant to which such persons may bid for or purchase
Common Stock for the purpose of stabilizing its market price. The Underwriter
also may create a short position for the account of the Underwriter by selling
more Common Stock in connection with the Offering than it is committed to
purchase from the Company and the Selling Shareholders, and in such case may
purchase Common Stock in the open market following completion of the Offering to
cover all or a portion of such short position. The Underwriter may also cover
all or a portion of such short position, up to 187,500 shares of Common Stock,
by exercising the Underwriter's over-allotment option referred to above. In
addition, A.G. Edwards & Sons, Inc. may impose "penalty bids" whereby it may
reclaim from an Underwriter (or dealer participating in the Offering) for the
account of the Underwriter, the selling concession with respect to Common Stock
that is distributed in the Offering but subsequently purchased for the account
of the Underwriter in the open market. The Underwriter and selling group members
may engage in passive market making transactions in the Common Stock on the
Nasdaq Stock Market in accordance with Rule 103 of Regulation M. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock at a level above that which might otherwise prevail in
the open market. None of
35
<PAGE>
the transactions described in this paragraph is required, and, if it is
undertaken, it may be discontinued at any time.
The Underwriter has informed the Company that it does not intend to confirm
sales to any accounts over which it exercises discretionary authority.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Gilmore & Bell, P.C., Kansas City, Missouri. Certain legal matters
for the Underwriter will be passed upon by Bryan Cave LLP, St. Louis, Missouri.
EXPERTS
The balance sheets as of December 31, 1996 and 1997, and the statements of
income, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997 included in this Prospectus and in
the Registration Statement, have been included herein in reliance on the report
of Baird, Kurtz & Dobson, independent public accountants, given on the authority
of that firm as experts in auditing and accounting.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information may be inspected and copied at
the public reference facilities of the Commission, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its regional offices located at:
Seven World Trade Center, New York, New York 10048, and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material may be obtained at
prescribed rates from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Those materials
may also be obtained from The Nasdaq Stock Market, 1735 K Street, N.W.,
Washington, D.C. 20006, or may be obtained electronically on the Commission's
home page on the Internet at HTTP://WWW.SEC.GOV.
This Prospectus constitutes part of a Registration Statement filed by the
Company with the Commission under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus omits certain of the information contained
in the Registration Statement, and reference is hereby made to the Registration
Statement and related exhibits and schedules for further information with
respect to the Company and the Common Stock offered hereby. Any statements
contained elsewhere in this Prospectus concerning the provisions of any
documents are not necessarily complete, and in each instance reference is made
to the copy of the document filed as an exhibit to the Registration Statement.
36
<PAGE>
ELECTRONIC PROCESSING, INC.
DECEMBER 31, 1995, 1996 AND 1997
AND MARCH 31, 1997 AND 1998
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INDEPENDENT ACCOUNTANTS' REPORT............................................................................ F-2
FINANCIAL STATEMENTS
Balance Sheets........................................................................................... F-3
Statements of Income..................................................................................... F-4
Statements of Changes in Shareholders' Equity............................................................ F-5
Statements of Cash Flows................................................................................. F-6
Notes to Financial Statements............................................................................ F-7
</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, 1996 and 1997, and the related statements of income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. 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, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
BAIRD, KURTZ & DOBSON
Kansas City, Missouri
February 12, 1998
F-2
<PAGE>
ELECTRONIC PROCESSING, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
AND MARCH 31, 1998
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------ MARCH 31,
1998
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................. $ 4,882 $ 1,835,233 $ 1,651,757
Accounts receivable, trade, less allowance for doubtful accounts of
$5,000.............................................................. 798,230 1,114,424 1,337,606
Prepaid expenses and other............................................ 153,907 159,845 189,403
Deferred income taxes................................................. -- 18,823 19,000
------------ ------------ ------------
Total Current Assets................................................ 957,019 3,128,325 3,197,766
------------ ------------ ------------
PROPERTY AND EQUIPMENT, At cost
Furniture and fixtures................................................ 390,599 551,832 558,282
Computer equipment.................................................... 3,767,008 5,152,228 5,636,297
Office equipment...................................................... 297,971 325,429 325,429
Leasehold improvements................................................ 247,494 834,806 834,806
Transportation equipment.............................................. 14,969 14,969 14,969
------------ ------------ ------------
4,718,041 6,879,264 7,369,783
Less accumulated depreciation......................................... 2,520,613 3,338,301 3,586,714
------------ ------------ ------------
2,197,428 3,540,963 3,783,069
------------ ------------ ------------
SOFTWARE DEVELOPMENT COSTS, Net of amortization......................... 1,234,584 1,397,375 1,477,844
------------ ------------ ------------
OTHER ASSETS
Excess of cost over fair value of net assets acquired................. 63,499 61,486 60,983
Deferred stock issuance costs......................................... 271,563 -- --
Other................................................................. 42,145 32,819 32,590
------------ ------------ ------------
377,207 94,305 93,573
------------ ------------ ------------
$4,766,238... $ 8,160,968 $ 8,552,252
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable--line of credit.......................................... $ 500,000 $ 1,000 $ 1,000
Current maturities of long-term debt.................................. 1,008,889 626,665 690,735
Accounts payable...................................................... 534,519 491,217 365,730
Accrued expenses...................................................... 90,140 200,639 144,998
Income taxes payable.................................................. -- 32,960 70,589
------------ ------------ ------------
Total Current Liabilities........................................... 2,133,548 1,352,481 1,273,052
------------ ------------ ------------
LONG-TERM DEBT.......................................................... 1,242,660 889,046 1,081,891
------------ ------------ ------------
DEFERRED INCOME TAXES................................................... -- 320,452 341,000
------------ ------------ ------------
SUBORDINATED DEBT....................................................... 400,000 -- --
------------ ------------ ------------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding--1,800,000--
December 31, 1996; 3,400,000--December 31,
1997; 3,474,068--March 31, 1998 (unaudited)......................... 18,000 34,000 34,741
Additional paid-in capital............................................ 282,000 5,202,000 5,208,032
Retained earnings..................................................... 690,030 362,989 613,536
------------ ------------ ------------
990,030 5,598,989 5,856,309
------------ ------------ ------------
$ 4,766,238 $ 8,160,968 $ 8,552,252
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See Notes to Financial Statements
F-3
<PAGE>
ELECTRONIC PROCESSING, INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
---------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES............................ $ 5,233,959 $ 6,319,192 $ 8,389,144 $ 1,857,120 $ 2,535,796
------------ ------------ ------------ ------------ ------------
COST OF GOODS SOLD AND DIRECT COSTS
Processing costs............................ 2,098,401 2,498,109 2,946,542 670,489 891,835
Depreciation and amortization............... 687,314 810,939 1,051,303 232,152 285,419
------------ ------------ ------------ ------------ ------------
2,785,715 3,309,048 3,997,845 902,641 1,177,254
------------ ------------ ------------ ------------ ------------
GROSS PROFIT.................................. 2,448,244 3,010,144 4,391,299 954,479 1,358,542
------------ ------------ ------------ ------------ ------------
OPERATING EXPENSES
General and administrative.................. 1,947,794 2,309,491 3,101,685 682,961 884,036
Depreciation and amortization............... 87,895 89,894 106,881 23,928 39,736
------------ ------------ ------------ ------------ ------------
2,035,689 2,399,385 3,208,566 706,889 923,772
------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS........................ 412,555 610,759 1,182,733 247,590 434,770
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income............................. 1,686 48 66,667 11,980 21,105
Interest expense............................ (262,391) (280,158) (160,393) (83,154) (37,653)
Other....................................... (980) 3,304 1,081 817 325
------------ ------------ ------------ ------------ ------------
(261,685) (276,806) (92,645) (70,357) (16,223)
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES.................... 150,870 333,953 1,090,088 177,233 418,547
PROVISION FOR INCOME TAXES.................... -- -- 724,589 342,900 168,000
------------ ------------ ------------ ------------ ------------
NET INCOME.................................... $ 150,870 $ 333,953 $ 365,499 $ (165,667) $ 250,547
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
NET INCOME PER SHARE
Basic....................................... $ .11 $ (.06) $ .07
------------ ------------ ------------
------------ ------------ ------------
Diluted..................................... $ .11 $ (.06) $ .07
------------ ------------ ------------
------------ ------------ ------------
UNAUDITED PRO FORMA DATA
Income before income taxes.................. $ 150,870 $ 333,953 $ 1,090,088 $ 177,233 $ 418,547
Provision for income taxes.................. 68,000 144,000 451,689 72,100 168,000
------------ ------------ ------------ ------------ ------------
PRO FORMA NET INCOME.......................... $ 82,870 $ 189,953 $ 638,399 $ 105,133 $ 250,547
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
PRO FORMA NET INCOME PER SHARE
Basic....................................... $ .05 $ .11 $ .20 $ .04 $ .07
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Diluted..................................... $ .05 $ .11 $ .19 $ .04 $ .07
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
ELECTRONIC PROCESSING, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
TOTAL STOCK CAPITAL EARNINGS
------------ --------- ------------ ----------
<S> <C> <C> <C> <C>
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................................................... (195,968) -- -- (195,968)
------------ --------- ------------ ----------
BALANCE, DECEMBER 31, 1995.................................... 758,242 18,000 282,000 458,242
Net income.................................................. 333,953 -- -- 333,953
Dividends................................................... (102,165) -- -- (102,165)
------------ --------- ------------ ----------
BALANCE, DECEMBER 31, 1996.................................... 990,030 18,000 282,000 690,030
Dividends................................................... (250,000) -- -- (250,000)
Recapitalization prior to public offering................... -- -- 442,540 (442,540)
Net proceeds from public offering........................... 4,493,460 16,000 4,477,460 --
Net income.................................................. 365,499 -- -- 365,499
------------ --------- ------------ ----------
BALANCE, DECEMBER 31, 1997.................................... 5,598,989 34,000 5,202,000 362,989
Exercise of stock options (unaudited)....................... 6,773 24 6,749 --
Conversion of stock warrants (unaudited).................... -- 717 (717) --
Net income (unaudited)...................................... 250,547 -- -- 250,547
------------ --------- ------------ ----------
BALANCE, MARCH 31, 1998 (unaudited)........................... $ 5,856,309 $ 34,741 $ 5,208,032 $ 613,536
------------ --------- ------------ ----------
------------ --------- ------------ ----------
</TABLE>
See Notes to Financial Statements
F-5
<PAGE>
ELECTRONIC PROCESSING, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
---------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................... $ 150,870 $ 333,953 $ 365,499 $ (165,667) $ 250,547
Items not requiring (providing) cash:
Depreciation....................................... 426,960 604,330 820,570 191,867 248,415
Amortization of software development costs......... 337,515 294,490 335,601 63,710 76,237
Amortization of intangible assets.................. 10,734 2,013 2,013 503 503
Gain on disposal of equipment...................... 980 (1,909) (4,406) (817) --
Deferred income taxes.............................. -- -- 301,629 261,600 20,371
Changes in:
Accounts receivable................................ 32,722 (322,868) (316,194) (9,222) (223,182)
Prepaid expenses and other assets.................. 21,200 (42,472) 3,388 31,962 (29,329)
Accounts payable and accrued expenses.............. 50,178 293,895 100,157 (260,752) (143,499)
------------ ------------ ------------ ------------ ------------
Net cash provided by operating activities........ 1,031,159 1,161,432 1,608,257 113,184 200,063
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment......... -- 4,930 20,818 2,800 --
Purchase of property and equipment................... (72,729) (133,256) (1,042,383) (261,616) (56,280)
Expenditures for software development costs.......... (364,479) (511,471) (498,392) (132,856) (156,706)
------------ ------------ ------------ ------------ ------------
Net cash used in investing activities............ (437,208) (639,797) (1,519,957) (391,672) (212,986)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) under line-of-credit
agreement.......................................... 175,000 175,000 (499,000) (499,000) --
Proceeds from long-term debt......................... 11,694 250,000 -- -- --
Principal payments under capital lease obligation.... (300,866) (450,989) (777,023) (492,482) (96,234)
Principal payments on long-term debt................. (191,810) (230,563) (1,096,949) (996,125) (81,092)
Repayment of subordinated debt....................... -- -- (400,000) (400,000) --
Dividends paid....................................... (195,968) (102,165) (250,000) (250,000) --
Stock issuance costs................................. (127,589) (143,974) (172,977) (155,434) --
Payment to retire stock warrant...................... -- (41,000) -- -- --
Exercise of stock options............................ -- -- -- -- 6,773
Proceeds from public offering........................ -- -- 4,938,000 4,938,000 --
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities..................................... (629,539) (543,691) 1,742,051 2,144,959 (170,553)
------------ ------------ ------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... (35,588) (22,056) 1,830,351 1,866,471 (183,476)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......... 62,526 26,938 4,882 4,882 1,835,233
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............... $ 26,938 $ 4,882 $ 1,835,233 $ 1,871,353 $ 1,651,757
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
See Notes to Financial Statements
F-6
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
AND MARCH 31, 1997 AND 1998
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF OPERATIONS
Electronic Processing, Inc. (the Company) develops, markets, and licenses
proprietary software products and provides support services for Chapter 7 and
Chapter 13 bankruptcy trustees and other users of the federal bankruptcy system.
EPI serves a national client base with specialty products that facilitate the
financial and administrative aspects of bankruptcy management and that are
accompanied by a high level of coordinated support including network
integration, post-installation support and value-added services. 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>
<CAPTION>
<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 over the remaining estimated economic life of the
product, not to exceed five years.
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 calculated using the straight-line method.
F-7
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
AND MARCH 31, 1997 AND 1998
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
REVENUE RECOGNITION
For the Company's Chapter 7 bankruptcy software product, 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. Revenues for Chapter 13 processing and noticing are recorded
monthly at the completion of the services based on the trustees' month-end
caseloads. All ancillary fees are recognized as the services are provided.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
Prior to the Company's initial public offering (SEE NOTE 8), the Company,
with the consent of its shareholders, had elected under the Internal Revenue
Code to be taxed as an S corporation. In lieu of corporate income taxes, the
shareholders were taxed on their proportionate shares of the Company's taxable
income. Therefore, the 1995 and 1996 statements do not include any provision for
corporate income taxes.
CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
three months or less (primarily money market accounts) to be cash equivalents.
INTERIM FINANCIAL STATEMENTS
The balance sheet as of March 31, 1998 and the statements of income,
shareholders' equity and cash flows for the three month periods ended March 31,
1997 and 1998 have been prepared by the Company without audit. In the opinion of
management, all adjustments (which included only normal, recurring adjustments)
necessary for fair presentation have been made. The results for these periods
are not necessarily indicative of the results to be expected for the full year.
YEAR 2000
Many currently installed computer systems and software products are coded to
accept only two-digit entries to represent years. For example, the year "1998"
would be represented by "98." These systems and products will need to be able to
accept four digit entries to distinguish years beginning with 2000 from prior
years. As a result, systems and products that do not accept four-digit year
entries will need to be upgraded or replaced to comply with such "Year 2000"
requirements. The Company believes that its currently marketed software products
are Year 2000 compliant. In addition, the Company believes that its internal
administrative systems are Year 2000 compliant or will be upgraded or replaced
prior to the need to comply with Year 2000 requirements. The expenses associated
with this project are being expensed as incurred and are not expected to be
material to the Company's financial position or results of operations.
FUTURE CHANGES IN ACCOUNTING PRINCIPLE
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and display of
comprehensive income and its components. Comprehensive
F-8
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
AND MARCH 31, 1997 AND 1998
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. It includes all changes in equity except those resulting from
investments by owners and distributions to owners. This Statement is effective
for fiscal years beginning after December 15, 1997. Management believes the
impact of this Statement on the Company's results of operations or financial
position will not be material.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This Statement establishes standards for
reporting information about operating segments in annual financial statements of
public business enterprises and requires disclosure of selected information
about operating segments in interim financial reports. The Statement is
effective for financial statements for periods beginning after December 15,
1997. Management believes that the adoption of this Statement will not have a
material effect on the Company's results of operations or financial position.
The Accounting Standards Executive Committee has recently issued Statement
of Position (SOP), No. 97- 2, "Software Revenue Recognition." This SOP provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions and is effective for transactions entered into
in fiscal years beginning after December 15, 1997. Management believes the
impact of this SOP will not be material on the Company's results of operations
or financial position.
NOTE 2: SOFTWARE DEVELOPMENT COSTS
The following is a summary of software development costs capitalized:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------ MARCH 31,
1998
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Amounts capitalized, net of retirements................ $ 1,858,150 $ 2,356,484 $ 2,854,876 $ 3,011,582
------------ ------------ ------------ ------------
Accumulated amortization, beginning of year............ (489,895) (827,410) (1,121,900) (1,457,501)
Amortization expense................................... (337,515) (294,490) (335,601) (76,237)
------------ ------------ ------------ ------------
Accumulated amortization, end of year.................. (827,410) (1,121,900) (1,457,501) (1,533,738)
------------ ------------ ------------ ------------
Net software development costs......................... $ 1,030,740 $ 1,234,584 $ 1,397,375 $ 1,477,844
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
Included in the above are development costs relating to products not yet
released. Such costs totaled $503,827, $713,849 and $391,355 for the years ended
December 31, 1995, 1996 and 1997, respectively, and $25,721 for three months
ended March 31, 1998 (unaudited).
NOTE 3: NOTES PAYABLE AND LONG-TERM DEBT
Note payable at December 31, 1996 and 1997, and March 31, 1998 (unaudited),
represents advances against a $500,000 operating line of credit. Interest is 1%
in excess of the bank's base lending rate (9.5% at March 31, 1998) per annum and
is adjusted and payable on a quarterly basis. Principal is due on October 1,
1998. The note is collateralized by accounts receivable and customer contracts.
F-9
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
AND MARCH 31, 1997 AND 1998
NOTE 3: NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
Long-term debt includes the following at December 31, 1996 and 1997, and
March 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------ MARCH 31,
1998
------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable, bank (A).............................. $ 511,151
Note payable, bank (B).............................. 235,307 $ 436,372 $ 401,009
Note payable, bank (C).............................. 250,000
Note payable, bank (D).............................. 468,119 850,936
Capital lease obligations (E)....................... 1,245,560 604,487 514,702
Other............................................... 9,531 6,733 5,979
------------ ------------ ------------
2,251,549 1,515,711 1,772,626
Less current maturities............................. 1,008,889 626,665 690,735
------------ ------------ ------------
$ 1,242,660 $ 889,046 $ 1,081,891
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
- -------
(A) Principal and interest (2% in excess of bank's base lending rate--10.25% at
December 31, 1996) payable in monthly installments of $18,792 with final
payment due in June 1999; collateralized by substantially all assets and
personally guaranteed by a principal shareholder.
(B) Revolving equipment line of credit of $500,000, with interest (1% in excess
of bank's base lending rate-- 9.5% at December 31, 1997 and March 31, 1998)
payable monthly, in addition to monthly principal reductions equal to one
thirty-sixth of the outstanding principal balance, with the unpaid balance
being due in 1999; collateralized by equipment.
(C) Note and accrued interest (1% in excess of highest prime rate in Wall Street
Journal, calculated daily-- 9.25% at December 31, 1996); due in October
1997; personally guaranteed by a principal shareholder.
(D) Revolving equipment line of credit of $1,000,000 with interest (1/2% in
excess of bank's base lending rate-- 9% at December 31, 1997 and March 31,
1998), payable monthly, in addition to monthly principal reductions equal to
one thirty-sixth of the outstanding principal balance with the unpaid
balance being due in 1999; collateralized by equipment.
(E) Obligations include leases for the use of computer equipment for no more
than five years, expiring in 2003.
For the above obligations, the carrying value approximates fair value.
F-10
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
AND MARCH 31, 1997 AND 1998
NOTE 3: NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
Aggregate annual maturities of long-term debt and payments on capital lease
obligations are as follows:
<TABLE>
<CAPTION>
LONG-TERM DEBT CAPITAL LEASE
(EXCLUDING LEASES) OBLIGATIONS
--------------------------- --------------------------
DECEMBER 31, DECEMBER 31,
1997 MARCH 31, 1997 MARCH 31,
------------- 1998 ------------- 1998
------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
1999..................................................... $ 261,772 $ 356,759 $ 407,029 $ 368,013
2000..................................................... 649,452 901,165 165,541 111,380
2001..................................................... 44,371 41,136
2002..................................................... 34,830 36,483
2003..................................................... 21,996 14,665
------------- ------------ ------------- -----------
$ 911,224 $ 1,257,924 673,767 571,677
------------- ------------
------------- ------------
Less amount representing interest........................ 69,280 56,975
------------- -----------
Present value of future minimum lease payments........... 604,487 514,702
Less current maturities.................................. 364,893 333,976
------------- -----------
Noncurrent portion....................................... $ 239,594 $ 180,726
------------- -----------
------------- -----------
</TABLE>
Property and equipment include the following property under capital leases:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------ MARCH 31,
1998
------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment.................................. $ 1,822,113 $ 1,293,779 $ 1,262,859
Less accumulated depreciation....................... 412,717 461,239 508,697
------------ ------------ ------------
$ 1,409,396 $ 832,540 $ 754,162
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NOTE 4: OPERATING LEASES
The Company has a noncancellable operating lease for office space which
expires in February 2011. A principal shareholder 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).
An agreement was reached with the partnership whereby the Company was
reimbursed for the property taxes which amounted to approximately $30,000 for
1995, 1996 and 1997 and approximately $7,500 for the three months ended March
31, 1998 (unaudited).
F-11
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
AND MARCH 31, 1997 AND 1998
NOTE 4: OPERATING LEASES (CONTINUED)
Future minimum lease payments at March 31, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................................ $ 155,100
2000............................................................ 158,800
2001............................................................ 163,600
2002............................................................ 168,500
2003 and thereafter............................................. 1,732,700
---------
$2,378,700
---------
---------
</TABLE>
Rental expense under this lease was $142,125, $145,500 and $149,250 for the
years ended December 31, 1995, 1996 and 1997, respectively, and $37,900 for the
three months ended March 31, 1998 (unaudited).
NOTE 5: SUBORDINATED DEBT
The Company had the following subordinated debt outstanding with a principal
shareholder at December 31, 1996:
<TABLE>
<S> <C>
10% interest payable monthly, principal balance due July 1998..... $ 400,000
---------
---------
</TABLE>
Interest expense under this agreement was $40,000 for both the years ended
December 31, 1995 and 1996 and $7,778 for the year ended December 31, 1997.
In February 1997, a portion of the proceeds of the public offering (SEE NOTE
8) were utilized to retire the $400,000 subordinated debt obligation noted
above.
NOTE 6: RELATED PARTY TRANSACTIONS
Included in accounts payable at December 31, 1996 was $45,000 owed to a
principal shareholder. Additionally, included in accounts receivable at December
31, 1997 was $28,855 from an affiliated party that leases office space to the
Company (SEE NOTE 4).
NOTE 7: PROFIT SHARING PLAN
The Company has adopted a 401(k) plan covering substantially all employees.
The Company matches the first 10% of employee contributions and also has the
option of making discretionary contributions. Employees are fully vested in such
contributions after four years. Contributions amounted to $11,847, $18,113 and
$63,182 for the years ended December 31, 1995, 1996 and 1997, respectively, and
$16,500 for the three months ended March 31, 1998 (unaudited).
NOTE 8: INITIAL PUBLIC OFFERING
In February 1997, the Company completed a public offering of 1,600,000
shares of common stock (the IPO) and received net proceeds (prior to stock
issuance costs) of $4,938,000.
F-12
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
AND MARCH 31, 1997 AND 1998
NOTE 8: INITIAL PUBLIC OFFERING (CONTINUED)
In connection with the issuance of common stock to the public, the Company
changed its income tax status to a C corporation. At the time of becoming a C
corporation, the Company accrued an income tax provision of $272,900 to record
the deferred tax effects of temporary differences between financial statement
and tax bases of assets and liabilities as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts................................ $ 1,900
Accrued compensated absences................................... 4,200
Other.......................................................... 1,200
---------
$ 7,300
Deferred tax liabilities:
Property and equipment......................................... (280,200)
---------
Net deferred tax liability....................................... $(272,900)
---------
---------
</TABLE>
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 had been subject to corporate
income taxes for all the periods presented, including the period in 1997 prior
to the IPO. Pro forma adjustments reflect the provision for corporate income
taxes for 1995 and 1996 and the elimination of the initial income tax provision
for 1997, as discussed above.
NOTE 9: INCOME TAXES
The provision for income taxes includes the following components:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(PRO FORMA) (PRO FORMA) (PRO FORMA) (UNAUDITED- (UNAUDITED)
PRO FORMA)
<S> <C> <C> <C> <C> <C>
Taxes currently payable......................... $ 95,000 $ 179,000 $ 422,960 $ 83,400 $ 147,629
Deferred income taxes........................... (27,000) (35,000) 28,729 (11,300) 20,371
----------- ----------- ----------- ----------- -----------
$ 68,000 $ 144,000 $ 451,689 $ 72,100 $ 168,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
F-13
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
AND MARCH 31, 1997 AND 1998
NOTE 9: INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes at the statutory rate to
provision for income taxes at the Company's effective rate is shown below:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(PRO FORMA) (PRO FORMA) (PRO FORMA) (UNAUDITED- (UNAUDITED)
PRO FORMA)
<S> <C> <C> <C> <C> <C>
Computed at the statutory rate (34%)............ $ 51,300 $ 113,500 $ 370,600 $ 60,300 $ 142,000
Increase in taxes resulting from:
Nondeductible expenses........................ 8,500 12,800 24,300 6,000 2,600
State income taxes, net of federal tax effect
and other................................... 8,200 17,700 56,789 5,800 23,400
----------- ----------- ----------- ----------- -----------
Tax Provision............................. $ 68,000 $ 144,000 $ 451,689 $ 72,100 $ 168,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
Also included in the provision for the year ended 1997 and the quarter ended
March 31, 1997 is the initial income tax provision of $272,900 to record the
effects of temporary differences at the date of the change in tax status (SEE
NOTE 8).
The tax effects of temporary differences related to deferred taxes shown on
the accompanying balance sheets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------- MARCH 31,
1998
-----------
(UNAUDITED)
<S> <C> <C>
Deferred tax assets (current):
Allowance for doubtful accounts................................. $ 1,900 $ 1,900
Accrued compensated absences.................................... 16,923 17,100
------------- -----------
18,823 19,000
Deferred tax liabilities (noncurrent):
Property and equipment.......................................... 320,452 341,000
------------- -----------
$ (301,629) $(322,000)
------------- -----------
------------- -----------
</TABLE>
F-14
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
AND MARCH 31, 1997 AND 1998
NOTE 10: NET INCOME PER SHARE
The details of the basic and diluted net income per share calculations are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
--------------------------------------- ---------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES PER SHARE SHARES PER SHARE
NET INCOME OUTSTANDING AMOUNT NET INCOME OUTSTANDING AMOUNT
----------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net income............................ $ 365,499 $ 250,547
----------- -----------
Net income per share--Basic:
Income available to common
shareholders...................... $ 365,499 3,250,959 $ .11 $ 250,547 3,410,085 $ .07
----------- --- ----------- ---
----------- --- ----------- ---
Effect of dilutive securities:
Warrants............................ 40,214 43,858
Stock options....................... 76,210 146,630
----------- -----------
Net income per share--Diluted:
Income available to common
shareholders and assumed
conversions....................... $ 365,499 3,367,383 $ .11 $ 250,547 3,600,573 $ .07
----------- ----------- --- ----------- ----------- ---
----------- ----------- --- ----------- ----------- ---
</TABLE>
The details of the basic and diluted net income per share calculations for
the three-month period ended March 31, 1997 are not presented in the above table
because the effect of dilutive securities at March 31, 1997 was anti-dilutive.
Pro forma net income per share information has been provided to reflect the
effects of corporate income taxes, on a consistent basis for both years (SEE
NOTE 8) with the weighted average shares outstanding being 1,800,000 in 1996 for
both the basic and diluted earnings per share calculations. For 1995, 1996 and
1997, and the three months ended March 31, 1997 and 1998 (unaudited), the pro
forma earnings per share information was as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED MARCH 31,
DECEMBER 31,
------------------------------------- ----------------------
1995 1996 1997 1997 1998
--- --- --- --- ---------
<S> <C> <C> <C> <C> <C>
Basic............................................... .05 .11 .20 .04 .07
-- -- -- --
-- -- -- --
---
---
Diluted............................................. .05 .11 .19 .04 .07
-- -- -- --
-- -- -- --
---
---
</TABLE>
NOTE 11: STOCK OPTIONS
The Company's 1995 Stock Option Plan (the Plan) permits the issuance of
stock options for up to 270,000 shares of common stock to selected employees and
outside directors of the Company. The terms of each award are determined by the
Board of Directors. Under the terms of the Plan, options granted may be either
F-15
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
AND MARCH 31, 1997 AND 1998
NOTE 11: STOCK OPTIONS (CONTINUED)
nonqualified or incentive stock options (ISO's). The exercise price for ISO's
may not be less than the fair value on the date of the grant.
A summary of the Company's stock options outstanding as of December 31, 1997
and March 31, 1998 (unaudited) is presented below:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1998
---------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Outstanding, beginning of period.................. 0 $ 0.00 225,000 $ 4.65
Granted........................................... 237,000 4.59 28,500 11.69
Forfeited......................................... (12,000) 3.50 (2,300) 3.50
Exercised......................................... 0 0.00 (2,400) 3.50
Outstanding, end of period........................ 225,000 4.65 248,800 5.48
</TABLE>
The following information applies to options outstanding at December 31,
1997 and March 31, 1998 (unaudited):
<TABLE>
<CAPTION>
DECEMBER 31,
DATE OF 1997
EXERCISE FULL EXPIRATION NUMBER
PRICE VESTING OF OPTIONS OUTSTANDING
- ----------- ----------- ---------- ------------- EXERCISED OR GRANTED MARCH 31,
FORFEITED ----------- 1998
------------- NUMBER
(UNAUDITED) OUTSTANDING
(UNAUDITED) -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
$ 3.50 2002 2007 82,500 (4,200) 78,300
3.85 1997 2002 25,000 25,000
4.50 2002 2007 43,500 43,500
4.95 1997 2002 25,000 25,000
6.80 1998 2007 25,000 25,000
6.80 2002 2007 18,000 (500) 17,500
8.06 2002 2007 6,000 6,000
7.86 2003 2008 5,000 5,000
12.50 2003 2008 23,500 23,500
------------- ------ ----------- -----------
225,000 (4,700) 28,500 248,800
------------- ------ ----------- -----------
------------- ------ ----------- -----------
</TABLE>
F-16
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
AND MARCH 31, 1997 AND 1998
NOTE 11: STOCK OPTIONS (CONTINUED)
The Company accounts for this plan under APB Opinion No. 25, under which
only an immaterial amount of compensation cost has been recognized. Had
compensation cost been determined based on the fair value at the grant dates
using FASB Statement No. 123, the Company's December 31, 1997 and March 31, 1998
(unaudited) net income and earnings per share would have been reduced to the
following pro forma amounts:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
YEAR ENDED 31, 1998
DECEMBER 31, -------------
1997
------------- (UNAUDITED)
<S> <C> <C> <C>
Net income................................ As Reported $ 365,499 $ 250,547
Pro forma $ 178,024 $ 203,988
Net income per share--Basic............... As reported $ .11 $ .07
Pro forma $ .05 $ .06
Net income per share--Diluted:............ As reported $ .11 $ .07
Pro forma $ .05 $ .06
</TABLE>
Pro forma amounts presented here are based on actual earnings and consider
only the effects of estimated fair values of stock options.
The fair value of the above options was estimated at the date of grant using
the Black-Scholes option-pricing model with the key assumptions for 1997 being
risk-free interest rates of 5.5 - 6.7%, no expected dividends and expected
volatility of 367%.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferrable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
In connection with the initial public offering (SEE NOTE 8), the Company
issued warrants to purchase 160,000 shares of stock at $4.20 per share to its
underwriters. During the three month period ended March 31, 1998 (unaudited),
96,200 shares were converted in a cashless exercise, resulting in 71,668 shares
of stock being issued. At March 31, 1998 (unaudited), warrants to purchase
63,800 shares of stock remain outstanding.
NOTE 12: 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. Ultimate recoverability is dependent upon future
revenues over the life of each product.
- For its Chapter 7 software product, the Company has an agreement with a
national financial institution which provides for the generation of
significant monthly revenues based on the level of trustees' deposits
F-17
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
AND MARCH 31, 1997 AND 1998
NOTE 12: SIGNIFICANT ESTIMATES AND CONCENTRATIONS (CONTINUED)
with that institution. Revenues generated by Chapter 7 trustee clients that
are collected through the agreement with the financial institution
represented 10.9%, 20.8% and 38.4%, for the years ended 1995, 1996 and
1997, respectively, and 46.4% for the three month period ended March 31,
1998 (unaudited) of the Company's total operating revenues. Additionally
that institution represented 88.0% of the Company's December 31, 1997
accounts receivable balance and 44.0% of the Company's March 31, 1998
(unaudited) accounts receivable balance.
NOTE 13: ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ------------ ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligation and notes payable
incurred for equipment....................... $ 549,004 $ 1,161,347 $ 1,138,134 $ 131,886 $ 434,241
ADDITIONAL CASH INFORMATION
Interest paid.................................. 262,391 265,252 181,410 89,857 36,144
Income taxes paid.............................. 390,000 110,000
</TABLE>
NOTE 14: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following summarizes the unaudited quarterly results of operations for
the years ended December 31, 1996 and 1997 and the three month period ended
March 31, 1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Operating revenues............................. $ 1,388 $ 1,542 $ 1,709 $ 1,681
Gross profit................................... 663 724 808 815
Income from operations......................... 125 136 153 197
Net income..................................... 55 76 82 121
Net income per share--basic.................... N/A N/A N/A N/A
Pro forma net income (SEE NOTE 8).............. 32 44 .47 67
Pro forma net income per share--basic.......... .02 .02 .03 .04
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 THREE MONTHS
---------------------------------------------------- ENDED MARCH 31,
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 1998
----------- --------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Operating revenues............................. $ 1,857 $ 2,016 $ 2,223 $ 2,293 $ 2,536
Gross profit................................... 955 1,058 1,169 1,209 1,359
Income from operations......................... 248 250 332 353 435
Net income (loss).............................. (166) 145 191 195 251
Net income per share--basic.................... (.06) .05 .06 .06 .07
Pro forma net income (SEE NOTE 8).............. 105 145 191 195 251
Pro forma net income per share--basic.......... .04 .04 .06 .06 .07
</TABLE>
F-18
<PAGE>
Graphic entitled "Bankruptcy Industry/Business Model" depicting certain
participants in the Company's target markets, which include the debtor, the
trustee, and the creditors; certain current and future potential products
including TCMS and CasePower; a listing of various chapters of the Bankruptcy
Code, which include Chapters 7, 9, 11, 12 and 13; and a graphical representation
of the Company's new Internet-based service, Bankruptcy
Link-Registered Trademark-
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
SHAREHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Use of Proceeds................................ 12
Price Range of Common Stock.................... 12
Dividend Policy................................ 12
Capitalization................................. 13
Selected Financial Data........................ 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 15
Business....................................... 21
Management..................................... 28
Certain Relationships and Related
Transactions................................. 32
Principal and Selling Shareholders............. 33
Description of Securities...................... 34
Underwriting................................... 35
Legal Matters.................................. 36
Experts........................................ 36
Available Information.......................... 36
Index to Financial Statements.................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
1,250,000 SHARES
[LOGO]
COMMON STOCK
-----------------
PROSPECTUS
-----------------
[LOGO]
, 1998
<PAGE>
PART II--INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's bylaws 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; 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.
Any indemnification with regard to the foregoing, unless ordered by a court,
shall be made by the Company 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 the bylaws.
The determination shall be made by a majority vote of a quorum of disinterested
directors or at the direction of a quorum of disinterested directors, by
independent legal counsel in a written opinion or by the shareholders.
The Company's bylaws also provide that 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, issuer 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 as authorized by the Board in the specific case upon receipt
of an undertaking by or on behalf of the person to repay such amount unless it
shall be ultimately determined that he is entitled to be indemnified by the
corporation as authorized in the bylaws. 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 seeking
indemnification may have.
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 will be paid by the Company and are
estimates except the registration fee, NASD filing fee and the Nasdaq National
Market listing fee.
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
Registration Fee.................................................................. $ 5,064
NASD Filing Fee................................................................... 2,217
Nasdaq National Market Fee........................................................ 55,000
Transfer Agent Fees............................................................... 5,000
Legal Fees........................................................................ 200,000
Accounting Fees................................................................... 75,000
Printing and Engraving Costs...................................................... 45,000
Miscellaneous..................................................................... 62,719
----------
Total............................................................................. $ 450,000
----------
----------
</TABLE>
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Effective February 4, 1997, upon the closing of the Company's initial public
offering of its Common Stock, the Company issued stock options to purchase
119,500 shares of Common Stock at $3.50 per share under the 1995 Stock Option
Plan to six officers and directors and 46 other employees in reliance on Section
4(2) of the Securities Act. Subsequently, the Company filed a Registration
Statement on Form S-8 for options and shares of Common Stock issuable under the
1995 Stock Option Plan.
The Company sold 1,600,000 shares of Common Stock at an aggregate offering
price of $5,600,000, in its firm commitment underwritten initial public offering
with R.J. Steichen & Company on February 4, 1997. The Company received
approximately $4,800,000 in net proceeds from this offering reflecting an
underwriter's discount of $504,000, and approximately $300,000 in other offering
expenses, none of which was paid to directors or officers of the Company. The
net proceeds were expended for reduction of debt ($2,400,000, including $400,000
paid to Tom W. Olofson, Chairman and Chief Executive Officer of the Company, to
retire a subordinated note of the Company owned by him), equipment purchases and
other capital expenditures ($1,100,000), software development and software
product acquisition costs ($800,000), a final S corporation dividend ($250,000)
and general working capital purposes ($250,000).
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
- ------ --------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Articles of Incorporation, dated July 13, 1988; incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form SB-2 dated
February 4, 1997 (Registration Number 333-16805) (the "1997 Registration
Statement").
3.1a Amendment of Articles of Incorporation, dated August 10, 1988;
incorporated by reference to Exhibit 3.1a to the 1997 Registration
Statement.
3.1b Amendment of Articles of Incorporation, dated October 31, 1995;
incorporated by reference to Exhibit 3.1b to the 1997 Registration
Statement.
3.1c Amendment of Articles of Incorporation, dated April 1, 1996; incorporated
by reference to Exhibit 3.1c to the 1997 Registration Statement.
3.1d Amendment of Articles of Incorporation dated February 24, 1998;
incorporated by reference to Exhibit 3.1d to the Company's Form 10-KSB for
the year ended December 31, 1997 (the "1997 Form 10-KSB").
3.2 Bylaws, as amended and restated.
*5.1 Opinion of Gilmore & Bell, P.C.
10.1 Agreement for Computerized Trustee Case Management System between the
Company and NationsBank of Texas, N.A., dated November 22, 1993;
incorporated by reference to Exhibit 10.1 to the 1997 Registration
Statement.
10.2 Lease between T&J Investment Company and the Company, dated February 20,
1996; incorporated by reference to Exhibit 10.2 to the 1997 Registration
Statement.
10.2a Amendment to Lease between T&J Investment Company and the Company dated
December 9, 1997; incorporated by reference to Exhibit 10.2a to the 1997
Form 10-KSB.
10.3 Form of Underwriters Warrant; incorporated by reference to Exhibit 4.1 to
the 1997 Registration Statement.
10.4 Loan Agreement between Industrial State Bank and the Company dated March
4, 1997; incorporated by reference to Exhibit 10.4b to the 1997 Form
10-KSB.
10.5 Loan Agreement between Industrial State Bank and the Company, dated June
4, 1997; incorporated by reference to Exhibit 10.6b to the 1997 Form
10-KSB.
10.6 Loan Agreement between Exchange National Bank and the Company, dated July
21, 1997; incorporated by reference to Exhibit 10.7 to the 1997 Form
10-KSB.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
- ------ --------------------------------------------------------------------------
<C> <S>
10.7 1995 Stock Option Plan; as amended.
*11.1 Statement regarding Computation of Per Share Earnings.
23.1 Consent of Baird, Kurtz & Dobson, Certified Public Accountants.
23.2 Consent of Gilmore & Bell, P.C. (included in the opinion filed as Exhibit
5).
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
- -------
* To be filed by amendment
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes as follows:
(1) 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.
(2) That, for 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.
(3) 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 1st day of
May, 1998.
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<S> <C> <C>
ELECTRONIC PROCESSING, INC.
By: /s/ TOM W. OLOFSON
-----------------------------------------
Tom W. Olofson
CHIEF EXECUTIVE OFFICER, PRESIDENT AND
CHAIRMAN OF THE BOARD
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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.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
Chief Executive Officer;
/s/ TOM W. OLOFSON President; Chairman of
- ------------------------------ the Board (Principal May 1, 1998
Tom W. Olofson Executive Officer)
Vice President - Finance
/s/ NANCI R.TRUTNA (Principal Financial
- ------------------------------ Officer and Principal May 1, 1998
Nanci R.Trutna Accounting Officer)
/s/ CHRISTOPHER E. OLOFSON Chief Operating Officer;
- ------------------------------ Executive Vice May 1, 1998
Christopher E. Olofson President; Director
/s/ ROBERT C. LEVY
- ------------------------------ Director May 1, 1998
Robert C. Levy
/s/ W. BRYAN SATTERLEE
- ------------------------------ Director May 1, 1998
W. Bryan Satterlee
II-4
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Exhibit 1.1
1,250,000 Shares
Common Stock
($0.01 Par Value)
UNDERWRITING AGREEMENT
_________________, 1998
A.G. Edwards & Sons, Inc.
As Representative of the Several Underwriters
c/o A.G. Edwards & Sons, Inc.
One North Jefferson Avenue
St. Louis, Missouri 63103
The undersigned, Electronic Processing, Inc., a Missouri corporation
(the "Company") and the persons listed on Schedule I hereto (the "Selling
Shareholders"), hereby address you as the representative (the
"Representative") of each of the persons, firms and corporations listed on
Schedule II hereto (collectively, the "Underwriters") and hereby confirm
their agreement with the several Underwriters as follows:
1. DESCRIPTION OF SHARES. The Company proposes to issue and sell
to the Underwriters 1,000,000 shares of its Common Stock, par value $0.01 per
share (the "Common Stock"), and the Selling Shareholders propose to sell to
the Underwriters a total of 250,000 shares of Common Stock, as set forth on
Schedule I hereto (such 1,250,000 shares of Common Stock are herein referred
to as the "Firm Shares"). Solely for the purpose of covering
over-allotments in the sale of the Firm Shares, the Company further proposes
to grant to the Underwriters the right to purchase up to an additional
187,500 shares of Common Stock (the "Option Shares"), as provided in
Section 3 of this Agreement. The Firm Shares and the Option Shares are herein
sometimes referred to as the "Shares" and are more fully described in the
Prospectus hereinafter defined.
2. PURCHASE, SALE AND DELIVERY OF FIRM SHARES. On the basis of
the representations, warranties and agreements herein contained, but subject
to the terms and conditions herein set forth, the Company agrees and each
Selling Shareholder agrees, severally and not jointly, to sell to the
Underwriters, and each such Underwriter agrees, severally and not jointly,
(a) to purchase from the Company and from each of the Selling Shareholders,
pro rata, at a purchase price of $___ per share, the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule II hereto and (b)
to purchase from the Company any additional number of Option Shares which
such Underwriter may become obligated to purchase pursuant to Section 3
hereof.
The Company and the Selling Shareholders will deliver definitive
certificates for the Firm Shares at the office of A.G. Edwards & Sons, Inc.,
77 Water Street, New York, New York
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("Edwards' Office"), or such other place as you and the Company may
mutually agree upon, for the accounts of the Underwriters against payment to
the Company and the Selling Shareholders of the purchase price for the Firm
Shares sold by them to the several Underwriters by wire transfer or certified
or bank cashiers' check in clearing house (next day available) funds payable
to the order of the Company and the Selling Shareholders, respectively, and
delivered to One North Jefferson Avenue, St. Louis, Missouri 63103, or at
such other place as may be agreed upon between you and the Company (the
"Place of Closing"), at 10:00 a.m., St. Louis time, on _____________, 1998,
or at such other time and date not later than five (5) full business days
thereafter as you and the Company may agree, such time and date of payment
and delivery being herein called the "Closing Date."
The certificates for the Firm Shares so to be delivered will be made
available to you for inspection at Edwards' Office (or such other place as
you and the Company may mutually agree upon) at least one (1) full business
day prior to the Closing Date and will be in such names and denominations as
you may request at least two (2) full business days prior to the Closing Date.
It is understood that an Underwriter, individually, may (but shall not
be obligated to) make payment on behalf of the other Underwriters whose funds
shall not have been received prior to the Closing Date for Shares to be
purchased by such Underwriter. Any such payment by an Underwriter shall not
relieve the other Underwriters of any of their obligations hereunder.
It is understood that the Underwriters propose to offer the Shares to
the public upon the terms and conditions set forth in the Registration
Statement hereinafter defined.
3. PURCHASE, SALE AND DELIVERY OF THE OPTION SHARES. The Company
hereby grants options to the Underwriters to purchase from it on a pro rata
basis up to 187,500 Option Shares at the same per share purchase price and on
the same terms and conditions as the Firm Shares; provided, however, that
such options may be exercised only for the purpose of covering any
over-allotments which may be made by them in the sale of the Firm Shares. No
Option Shares shall be sold or delivered unless the Firm Shares previously
have been, or simultaneously are, sold and delivered.
The options are exercisable on behalf of the several Underwriters by
you, as Representative, at any time, and from time to time, before the
expiration of forty-five (45) days from the date of this Agreement, for the
purchase of all or part of the Option Shares covered thereby, by notice given
by you to the Company in the manner provided in Section 13 hereof, setting
forth the number of Option Shares as to which the Underwriters are exercising
the options, and the date of delivery of said Option Shares, which date shall
not be more than five (5) business days after such notice unless otherwise
agreed to by the parties. You may terminate the options at any time, as to
any unexercised portion thereof, by giving written notice to the Company to
such effect.
You, as Representative, shall make such allocation of the Option Shares
among the Underwriters as may be required to eliminate purchases of
fractional Shares.
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Delivery of the Option Shares with respect to which the options shall
have been exercised shall be made to or upon your order at Edwards' Office
(or at such other place as you and the Company may mutually agree upon),
against payment by you of the per share purchase price to the Company by wire
transfer or certified or bank cashier's check or checks, payable in clearing
house (next day available) funds. Such payment and delivery shall be made at
10:00 a.m., St. Louis time, on the date designated in the notice given by you
as above provided for, unless some other date and time are agreed upon, which
date and time of payment and delivery are called the "Option Closing Date."
The certificates for the Option Shares so to be delivered will be made
available to you for inspection at Edwards' Office at least one (1) full
business day prior to the Option Closing Date and will be in such names and
denominations as you may request at least two (2) full business days prior to
the Option Closing Date. On the Option Closing Date, the Company shall
provide the Underwriters such representations, warranties, agreements,
covenants, opinions, letters, certificates and other documents with respect
to the Option Shares as are required to be delivered on the Closing Date with
respect to the Firm Shares.
4. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY AND
THE SELLING SHAREHOLDERS.
(a) The Company represents and warrants to and agrees with each
Underwriter that:
(i) A registration statement (Registration No. 333-_____) on Form
SB-2 with respect to the Shares, including a preliminary prospectus, and such
amendments to such registration statement as may have been required to the
date of this Agreement, has been carefully prepared by the Company pursuant
to and in conformity with the requirements of the Securities Act of 1933, as
amended (the "Act"), and the Rules and Regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder and has been filed with the Commission under the Act. Copies of
such registration statement, including any amendments thereto, each related
preliminary prospectus (meeting the requirements of Rule 430 or 430A of the
Rules and Regulations) contained therein and the financial statements,
exhibits and schedules thereto have heretofore been delivered by the Company
to you. If such registration statement has not become effective under the
Act, a further amendment to such registration statement, including a form of
final prospectus, necessary to permit such registration statement to become
effective will be filed promptly by the Company with the Commission. If such
registration statement has become effective under the Act, a final prospectus
containing information permitted to be omitted at the time of effectiveness
by Rule 430A of the Rules and Regulations will be filed promptly by the
Company with the Commission in accordance with Rule 424(b) of the Rules and
Regulations. The term "Registration Statement" as used in this Agreement
means the registration statement as amended at the time it becomes or became
effective under the Act (the "Effective Date"), including financial
statements and all exhibits and schedules thereto and, if applicable, the
registration statement filed pursuant to Rule 462(b) of the Rules and
Regulations increasing the size of the offering registered under the Act and
the information deemed to be included therein by Rule 430A of the Rules and
Regulations. The term "Prospectus" as used in this Agreement means (i) the
prospectus as first filed with the Commission pursuant to Rule 424(b) of the
Rules and Regulations or (ii) if no such filing is required, the form of
final prospectus included in the Registration Statement at the Effective Date
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<PAGE>
or (iii) if a Term Sheet (as such term is defined in Rule 434(b) of the Rules
and Regulations) is filed with the Commission pursuant to Rule 424(b)(7) of
the Rules and Regulations, the Term Sheet and the last Preliminary Prospectus
filed with the Commission prior to the time the Registration Statement became
effective, taken together. The term "Preliminary Prospectus" as used in
this Agreement shall mean a preliminary prospectus as contemplated by Rule 430
or 430A of the Rules and Regulations included at any time in the Registration
Statement.
(ii) The Commission has not issued, and is not to the knowledge of
the Company threatening to issue, an order preventing or suspending the use
of any Preliminary Prospectus or the Prospectus nor instituted proceedings
for that purpose. Each Preliminary Prospectus at its date of issue, the
Registration Statement and the Prospectus and any amendments or supplements
thereto contain or will contain, as the case may be, all statements which are
required to be stated therein by, and in all material respects conform or
will conform, as the case may be, to the requirements of, the Act and the
Rules and Regulations. Neither the Registration Statement nor any amendment
thereto, as of the applicable Effective Date, and neither the Prospectus nor
any supplement thereto contains or will contain, as the case may be, any
untrue statement of a material fact or omits or will omit, as the case may
be, to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that the Company makes no
representation or warranty as to information contained in or omitted from the
Registration Statement or the Prospectus, or any such amendment or
supplement, in reliance upon, and in conformity with, information relating to
the Underwriters and furnished to the Company in writing by or on behalf of
the Underwriters expressly for use therein.
(iii) The filing of the Registration Statement and the execution and
delivery of this Agreement have been duly authorized by the Board of
Directors of the Company; this Agreement constitutes a valid and legally
binding agreement of the Company enforceable in accordance with its terms
(except to the extent the enforceability of the indemnification and
contribution provisions of Section 7 hereof may be limited by public policy
considerations as expressed in the Act as construed by courts of competent
jurisdiction, and except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other laws affecting
creditors' rights generally and by general principles of equity); the
issuance and sale of the Shares by the Company and the performance of this
Agreement and the consummation of the transactions herein contemplated will
not result in a violation of the Company's articles of incorporation or
bylaws or 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 properties or assets of the Company
under, any statute, any bond, debenture, note or other evidence of
indebtedness, or any agreement, indenture, mortgage, deed of trust, sale and
leaseback arrangement, joint venture or other instrument to which the Company
is a party or by which it is bound or to which any of the properties or
assets of the Company is subject, or any order, rule or regulation of any
court or governmental agency or body having jurisdiction over the Company or
its properties, except to such extent as does not materially adversely affect
the business of the Company; no consent, approval, authorization, order,
registration or qualification of or with any court or governmental agency or
body is required for the consummation of the transactions herein
contemplated, except such as may be required by
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the National Association of Securities Dealers, Inc. (the "NASD") or under
the Act or the Rles and Regulations or any state securities laws.
(iv) Except as described in the Prospectus, the Company has not
sustained since the date of the latest audited financial statements included
in the Prospectus any material loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order
or decree. Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, the Company has not
incurred any material liabilities or material obligations, direct or
contingent, other than in the ordinary course of business, or entered into
any material transactions not in the ordinary course of business, and there
has not been any material change in the capital stock or long-term debt of
the Company taken as a whole or any material adverse change in the condition
(financial or other), net worth, business, affairs, management, prospects or
results of operations of the Company. The Company has filed all necessary
federal, state and foreign income and franchise tax returns and paid all
taxes shown as due thereon; all tax liabilities are adequately provided for
on the books of the Company except to such extent as would not materially
adversely affect the business of the Company; the Company has made all
necessary payroll tax payments and is current and up-to-date with respect
thereto as of the date of this Agreement; and the Company has no knowledge of
any tax proceeding or action pending or threatened against the Company which
might materially adversely affect its business or properties.
(v) Except as described in the Prospectus, there is not now pending
or, to the knowledge of the Company, threatened or contemplated, any action,
suit or proceeding to which the Company is a party before or by any court or
public, regulatory or governmental agency or body which might be expected to
result (individually or in the aggregate) in any material adverse change in
the condition (financial or other), business or prospects of the Company, or
might be expected to materially and adversely affect (individually or in the
aggregate) the properties or assets thereof; and there are no contracts or
documents of the Company which would be required to be filed as exhibits to
the Registration Statement under the Act or the Rules and Regulations which
have not been filed as exhibits to the Registration Statement.
(vi) All of the outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid,
non-assessable and not subject to any preemptive or similar right which has
not been waived; and the Shares have been duly authorized and, when issued
and delivered to the Underwriters against payment therefor as provided by
this Agreement, will be validly issued, fully paid and non-assessable, and
the issuance of such Shares will not be subject to any preemptive or similar
rights.
(vii) Except as disclosed in the Prospectus, no holder of any
security of the Company has any right (not heretofore waived) to require
registration of shares of Common Stock or any other security of the Company
because of the filing of the Registration Statement or the consummation of
the transactions contemplated hereby and, except as disclosed in the
Prospectus, no person has the right to require registration under the Act of
any shares of Common Stock or other securities of the Company. No person has
the right, contractual or
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otherwise, to cause the Company to permit such person to underwrite the sale
of any of the Shares. Except as disclosed in the Prospectus, there are no
outstanding subscriptions, rights, warrants, options, calls, convertible
securities, commitments of sale or liens related to or entitling any person
to purchase or otherwise to acquire any shares of, or any security
convertible into or exchangeable or exercisable for, the capital stock of, or
other ownership interest in, the Company.
(viii) 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 power and authority (corporate and other) to own, lease and operate
its properties and conduct its business as described in the Registration
Statement; the Company is duly qualified to do business as a foreign
corporation and is in good standing in each state or other jurisdiction in
which its ownership or leasing of property or conduct of business legally
requires such qualification, except where the failure to be so qualified
would not have a material adverse effect on the ability of the Company to
conduct its business as described in the Registration Statement.
(ix) The Company has no subsidiaries and, except as disclosed in the
Prospectus, is not affiliated with any corporation, partnership, limited
liability company or other business entity.
(x) Baird, Kurtz & Dobson, the accounting firm which has certified
the financial statements filed with the Commission as a part of the
Registration Statement, is an independent public accounting firm within the
meaning of the Act and the Rules and Regulations.
(xi) The financial statements and schedules of the Company,
including the notes thereto, filed with and as a part of the Registration
Statement, are accurate in all material respects and present fairly the
financial position of the Company as of the respective dates thereof and the
results of operations and statements of cash flow for the respective periods
covered thereby, all in conformity with generally accepted accounting
principles applied on a consistent basis throughout the periods involved,
except as otherwise disclosed in the Prospectus. The selected financial data
included in the Registration Statement and Prospectus present fairly the
information shown therein and have been compiled on a basis consistent with
that of the audited financial statements in the Registration Statement and
Prospectus.
(xii) The Company maintains and keeps accurate books and records
reflecting its assets and maintains internal accounting controls which
provide reasonable assurance that (1) transactions are executed in accordance
with management's authorization, (2) transactions are recorded as necessary
to permit the preparation of the Company's financial statements and to
maintain accountability for the assets of the Company, (3) access to the
assets of the Company is permitted only in accordance with management's
authorization, and (4) the recorded accounts of the assets of the Company are
compared with existing assets at reasonable intervals.
(xiii) The Company is not (i) in violation of its articles of
incorporation or bylaws or (ii) in default in the performance of any
obligation, agreement or condition contained in any bond, debenture, note or
any other evidence of indebtedness or in any other contract, indenture,
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mortgage, deed of trust, sale and leaseback arrangement, joint venture or
other instrument, in each case material to the conduct of the business of the
Company, to which the Company is a party or by which it or any of its
properties is bound, except where such defaults, individually or in the
aggregate, would not have a material adverse effect on the condition
(financial or other), business or prospects of the Company.
(xiv) The Company is not in violation of any other laws, ordinances
or governmental rules or regulations to which it is subject, and neither the
Company nor any subsidiary has failed to obtain any other license, permit,
franchise, easement, consent, or other governmental authorization necessary
to the ownership, leasing and operation of its properties or to the conduct
of its business, which violation or failure would materially adversely affect
the business, operations, affairs, properties, prospects, profits or
condition (financial or other) of the Company. The Company has not, at any
time during the past five years, (A) made any unlawful contributions to any
candidate for any political office, or failed fully to disclose any
contribution in violation of law, or (B) made any payment to any state,
federal or foreign government official, or other person charged with similar
public or quasi-public duty (other than payment required or permitted by
applicable law).
(xv) Except as described in the Prospectus, the Company owns or
possesses, or can acquire on reasonable terms, adequate patents, patent
licenses, software, software licenses, trademarks, service marks, trade names
and copyrights necessary to conduct the business now operated by it, and the
Company has not received any notice of infringement of or conflict with
asserted rights of others with respect to any patents, patent licenses,
software, software licenses, trademarks, service marks, trade names or
copyrights which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a material adverse effect
on the conduct of the business, operations, financial condition or income of
the Company. The Company owns or has obtained licenses for all intellectual
property, including all patents and patent applications, described in the
Prospectus as being owned or used by or licensed to it. Except as described
in the Prospectus, (A) there are no rights of third parties to any
intellectual property described in the Prospectus as being owned by or
licensed to the Company and that is necessary for the conduct of its
business; (B) there is no infringement by third parties of any such
intellectual property; (C) there is no pending or threatened action, suit,
proceeding or claim by others challenging the rights of the Company in or to
such intellectual property; and (D) there is no pending or threatened action,
suit, proceeding or claim by others challenging the validity or scope of such
intellectual property.
(xvi) The Company has good and marketable title to all property owned
by it, free and clear of all liens, encumbrances, restrictions and defects,
except such as are described in the Registration Statement or do not
interfere with the use made and proposed to be made of such property; and any
property held under lease or sublease by the Company is held under valid,
subsisting and enforceable leases or subleases with such exceptions as are
not material and do not interfere with the use made and proposed to be made
of such property by the Company, and the Company has no notice or knowledge
of any material claim of any sort which has been, or may be, asserted by
anyone adverse to the Company's rights as lessee or sublessee under any lease
or sublease described above, or affecting or questioning the Company's rights
to the
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continued possession of the leased or subleased premises under any such lease
or sublease in conflict with the terms thereof.
(xvii) Except as described in the Prospectus, there is no factual
basis for any action, suit or other proceeding involving the Company or any
of its material assets for any failure of the Company, or any predecessor
thereof, to comply with any requirements of federal, state or local
regulation relating to air, water, solid waste management, hazardous or toxic
substances, or the protection of health or the environment. Except as
described in the Prospectus, none of the property owned or leased by the
Company is, to the knowledge of the Company, contaminated with any waste or
hazardous substances, and the Company may not be deemed an "owner or
operator" of a "facility" or "vessel" which owns, possesses, transports,
generates or disposes of a "hazardous substance" as those terms are defined
in Section 9601 of the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, 42 U.S.C. Section 9601 et seq.
(xviii) No labor disturbance exists with the employees of the Company
or is imminent which would have a material adverse effect on the Company.
(xix) The Company has not taken and will not take, directly or
indirectly, any action designed to or which might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock, and the Company is not aware of any such action taken or to be taken
by affiliates of the Company.
(xx) The Company is not, and upon the sale of the Shares to be
issued and sold by it hereunder and application of the net proceeds from such
sale as described in the Prospectus under the caption "Use of Proceeds,"
will not be, an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of
1940, as amended.
(xxi) The Company maintains insurance reasonably deemed adequate for
its business.
(xxii) The Company has filed an application to list the Shares on The
Nasdaq Stock Market National Market System [and has received notification
that the listing has been approved, subject to official notice of issuance of
the Shares].
(xxiii) Each of the Company's directors and executive officers has
executed and delivered a letter in the form of Schedule IV hereto.
(xxiv) The Company is in compliance with all provisions of Florida
Statutes Section 517.075 and the regulations thereunder, relating to issuers
doing business with Cuba.
(b) Each Selling Shareholder severally represents and warrants to and
agrees with each Underwriter and the Company that:
(i) All authorizations and consents necessary for the execution and
delivery by it of this Agreement and the sale and delivery of the Shares to
be sold by such Selling Shareholder
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hereunder have been given and are in full force and effect on the date hereof
and will be in full force and effect on the Closing Date.
(ii) Such Selling Shareholder has full legal right, power and
authority, and any approval required by law, except such as may be required
under the Act or the Rules and Regulations or as may be required by the NASD
or under state securities laws in connection with the purchase and
distribution of the Shares by the Underwriters, to enter into this Agreement,
the Custody Agreement (as defined herein) and the Power of Attorney (as
defined herein) and to sell, assign, transfer and deliver the Shares to be
sold by such Selling Shareholder.
(iii) Such Selling Shareholder has, and immediately prior to the
Closing Date such Selling Shareholder will have, good and valid title to such
Shares to be sold by such Selling Shareholder hereunder, free and clear of
all liens, mortgages, pledges, encumbrances, claims, equities and security
interests whatsoever; and, upon delivery of and payment for such Shares
hereunder, the several Underwriters will acquire good and valid title to such
Shares to be sold by such Selling Shareholder hereunder, free and clear of
all liens, mortgages, pledges, encumbrances, claims, equities and security
interests whatsoever.
(iv) The consummation by such Selling Shareholder of the
transactions contemplated herein and the fulfillment by such Selling
Shareholder of the terms hereof will not result in a violation or breach of
any terms or provisions of, or constitute a default under, any statute, any
bond, debenture, note or other evidence of indebtedness, or any agreement,
indenture, mortgage, deed of trust, sale and leaseback arrangement, joint
venture or other instrument to which such Selling Shareholder is a party or
by which such Selling Shareholder is bound, or to which any of the property
or assets of such Selling Shareholder is subject, or of any order, rule or
regulation applicable to such Selling Shareholder of any court or of any
regulatory body of an administrative agency or other governmental body having
jurisdiction over such Selling Shareholder or the property or assets of such
Selling Shareholder.
(v) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to or which might be reasonably
expected to cause or result in stabilization or manipulation of the price of
the Common Stock, and such Selling Shareholder is not aware of any such
action taken or to be taken by affiliates of such Selling Shareholder.
(vi) When the Registration Statement becomes effective and at all
times subsequent thereto, such information in the Registration Statement and
Prospectus and any amendments or supplements thereto as specifically refers
to such Selling Shareholder will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading.
(vii) Certificates in negotiable form representing all of the Shares
to be sold by such Selling Shareholder hereunder have been placed in the
custody of ________________ (the "Custodian") under a Custody Agreement in
the form heretofore furnished to you (the "Custody Agreement"), duly
executed and delivered by such Selling Shareholder, with the Custodian having
the authority to deliver the Shares to be sold by such Selling Shareholder
hereunder, and
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that such Selling Shareholder has duly executed and delivered a Power of
Attorney in the form heretofore furnished to you (the "Power of Attorney")
appointing ______________ as such Selling Shareholder's attorney-in-fact (the
"Attorney-in-Fact") with the Attorney-in-Fact having authority to execute
and deliver this Agreement on behalf of such Selling Shareholder, to
determine the purchase price to be paid by the Underwriters to the Selling
Shareholders as provided in Section 2, to authorize the delivery of the
Shares to be sold by it hereunder and otherwise to act on behalf of such
Selling Shareholder in connection with the transactions contemplated by this
Agreement and such Custody Agreement.
(viii) The Shares represented by the certificates held in custody for
such Selling Shareholder under the Custody Agreement are subject to the
interests of the Underwriters hereunder, and the arrangements made by such
Selling Shareholder for such custody, and the appointment by such Selling
Shareholder of the Custodian under the Custody Agreement and of the
Attorney-in-Fact by the Power of Attorney, are to that extent irrevocable.
(ix) The obligations of such Selling Shareholders hereunder shall
not be terminated by operation of law, whether by the death or incapacity of
any individual Selling Shareholder or by the occurrence of any other event,
and if any Selling Shareholder should die or become incapacitated, or if any
other such event should occur before the delivery of the Shares hereunder,
certificates representing the Shares shall be delivered by or on behalf of
each Selling Shareholder in accordance with the terms and conditions of this
Agreement and of the Custody Agreement, and actions taken by the Custodian
pursuant to the Custody Agreement or by the Attorney-in-Fact pursuant to the
Power of Attorney shall be as valid as if such death, incapacity or other
event had not occurred, regardless of whether or not the Custodian or
Attorney-in-Fact, or any of them, shall have received notice of such death,
incapacity or other event.
(x) Such Selling Shareholder is not prompted to sell shares of
Common Stock by any information concerning the Company which is not included
in the Registration Statement.
(xi) Such Selling Shareholder has executed and delivered to the
Representative a letter in the form of Schedule IV hereto.
(xii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of applicable federal tax laws with
respect to the transactions herein contemplated, such Selling Shareholder has
delivered or, prior to the Closing Date, will deliver to you a properly
completed and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations in
lieu thereof).
(c) Any certificate signed by any officer of the Company and
delivered to you or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to each Underwriter as to the
matters covered thereby; and any certificate signed by or on behalf of the
Selling Shareholders as such and delivered to you or to counsel for the
Underwriters shall be deemed a representation and warranty by the Selling
Shareholders to each Underwriter as to the matters covered thereby.
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5. ADDITIONAL COVENANTS. The Company and, where expressly
indicated, the Selling Shareholders, covenant and agree with the several
Underwriters that:
(a) If the Registration Statement is not effective under the Act,
the Company will use its best efforts to cause the Registration Statement to
become effective as promptly as possible, and it will notify you, promptly
after it shall receive notice thereof, of the time when the Registration
Statement has become effective. The Company (i) will prepare and timely file
with the Commission under Rule 424(b) of the Rules and Regulations, if
required, a Prospectus containing information previously omitted at the time
of effectiveness of the Registration Statement in reliance on Rule 430A of
the Rules and Regulations or otherwise or a Term Sheet, as applicable; (ii)
will not file any amendment to the Registration Statement or supplement to
the Prospectus of which the Underwriters shall not previously have been
advised and furnished with a copy or to which the Underwriters shall have
reasonably objected in writing or which is not in compliance with the Rules
and Regulations; and (iii) will promptly notify you after it shall have
received notice thereof of the time when any amendment to the Registration
Statement becomes effective or when any supplement to the Prospectus has been
filed.
(b) The Company will advise the Underwriters promptly, after it
shall receive notice or obtain knowledge thereof, of any request of the
Commission for amendment of the Registration Statement or for supplement to
the Prospectus or for any additional information, or of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or the use of the Prospectus or of the institution or threatening
of any proceedings for that purpose, and the Company will use its best
efforts to prevent the issuance of any such stop order preventing or
suspending the use of the Prospectus and to obtain as soon as possible the
lifting thereof, if issued.
(c) The Company will cooperate with the Underwriters and their
counsel in endeavoring to qualify the Shares for sale under the securities
laws of such jurisdictions as they may have designated and will make such
applications, file such documents, and furnish such information as may be
necessary for that purpose, provided the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction where it is not now so qualified or required to
file such a consent or to subject itself to taxation as doing business in any
jurisdiction where it is not now so taxed. The Company will, from time to
time, file such statements, reports, and other documents, as are or may be
required to continue such qualifications in effect for so long a period as
the Underwriters may reasonably request.
(d) The Company will deliver to, or upon the order of, the
Underwriters, without charge from time to time, as many copies of any
Preliminary Prospectus as they may reasonably request. The Company will
deliver to, or upon the order of, the Underwriters without charge as many
copies of the Prospectus, or as it thereafter may be amended or supplemented,
as they may from time to time reasonably request. The Company consents to the
use of such Prospectus by the Underwriters and by all dealers to whom the
Shares may be sold, both in connection with the offering or sale of the
Shares and for such other purposes and for such period of time thereafter as
the Prospectus is required by law to be delivered in connection with the
offering or sale of the
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Shares. The Company will deliver to the Underwriters at or before the
Closing Date two signed copies of the Registration Statement and all
amendments thereto including all exhibits filed therewith, and will deliver
to the Underwriters such number of copies of the Registration Statement,
without exhibits, and of all amendments thereto, as they may reasonably
request.
(e) If, during the period in which a prospectus is required by law
to be delivered by an Underwriter or dealer, any event shall occur as a
result of which, in the judgment of the Company or in your judgment or in the
opinion of counsel for the Underwriters, it becomes necessary to amend or
supplement the Prospectus in order to make the statements therein, in light
of the circumstances existing at the time the Prospectus is delivered to a
purchaser, not misleading, or, if it is necessary at any time to amend or
supplement the Prospectus to comply with any law, the Company promptly will
prepare and file with the Commission an appropriate amendment to the
Registration Statement or supplement to the Prospectus so that the Prospectus
as so amended or supplemented will not, in the light of the circumstances
when it is so delivered, be misleading, or so that the Prospectus will comply
with law.
(f) The Company will make generally available to its shareholders
and will file as an exhibit in a report pursuant to the Securities Exchange
Act of 1934, as amended (the "1934 Act"), as soon as it is practicable to
do so, but in any event not later than 15 months after the Effective Date of
the Registration Statement, an earnings statement in reasonable detail,
covering a period of at least 12 consecutive months beginning after the
Effective Date of the Registration Statement, which earnings statement shall
satisfy the requirements of Section 11(a) of the Act and Rule 158 of the
Rules and Regulations and will advise the Underwriters in writing when such
statement has been so made available.
(g) The Company will, for a period of five(5) years from the
Closing Date, deliver to the Underwriters at their principal executive
offices a reasonable number of copies of annual reports, quarterly reports,
current reports and copies of all other documents, reports and information
furnished by the Company to its shareholders or filed with any securities
exchange pursuant to the requirements of such exchange or with the Commission
pursuant to the Act or the 1934 Act. The Company will deliver to the
Underwriters similar reports with respect to any significant subsidiaries, as
that term is defined in the Rules and Regulations, which are not consolidated
in the Company's financial statements. Any report, document or other
information required to be furnished under this paragraph (g) shall be
furnished as soon as practicable after such report, document or information
becomes available.
(h) The Company will apply the proceeds from the sale of the Shares
as set forth in the description under "Use of Proceeds" in the Prospectus,
which description complies in all respects with the requirements of Item 504
of Regulation S-B.
(i) The Company will supply you with copies of all correspondence
to and from, and all documents issued to and by, the Commission in connection
with the registration of the Shares under the Act.
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<PAGE>
(j) Prior to the Closing Date (and, if applicable, the Option
Closing Date), the Company will furnish to you, as soon as they have been
prepared, copies of any unaudited interim financial statements of the
Company for any periods subsequent to the periods covered by the financial
statements appearing in the Registration Statement and the Prospectus.
(k) Prior to the Closing Date (and, if applicable, the Option
Closing Date), neither the Company nor any Selling Shareholder will issue any
press releases or other communications, directly or indirectly, and will hold
no press conferences with respect to the Company, the financial condition,
results of operations, business, properties, assets or liabilities of the
Company, or the offering of the Shares, without your prior written consent.
(l) The Company will use its best efforts to obtain approval for
and maintain the quotation of the Shares on The Nasdaq Stock Market
[National Market System].
(m) The Company will maintain and keep accurate books and records
reflecting its assets and will maintain internal accounting controls which
provide reasonable assurance that (1) transactions are executed in accordance
with management's authorization, (2) transactions are recorded as necessary
to permit the preparation of the Company's financial statements and to
maintain accountability for the assets of the Company, (3) access to the
assets of the Company is permitted only in accordance with management's
authorization, and (4) the recorded accounts of the assets of the Company are
compared with existing assets at reasonable intervals.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters to purchase and pay for the Shares, as
provided herein, shall be subject to the accuracy in all material respects,
as of the date hereof and as of the Closing Date (and, if applicable, the
Option Closing Date), of the representations and warranties of the Company
and the Selling Shareholders contained herein, to the performance in all
material respects by the Company and the Selling Shareholders of their
covenants and obligations hereunder, and to the following additional
conditions:
(a) All filings required by Rule 424 and Rule 430A of the Rules and
Regulations shall have been made. No stop order suspending the effectiveness
of the Registration Statement, as amended from time to time, shall have been
issued and no proceeding for that purpose shall have been initiated or, to
the knowledge of the Company or any Underwriter, threatened or contemplated
by the Commission, and any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus
or otherwise) shall have been complied with to the reasonable satisfaction of
the Underwriters.
(b) No Underwriter shall have disclosed in writing to the Company
on or prior to the Closing Date (and, if applicable, the Option Closing
Date), that the Registration Statement or Prospectus or any amendment or
supplement thereto contains an untrue statement of fact which, in the opinion
of counsel to the Underwriters, is material, or omits to state a fact which,
in the opinion of such counsel, is material and is required to be stated
therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
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<PAGE>
(c) On the Closing Date (and, if applicable, the Option Closing
Date), you shall have received the opinion of counsel for the Company,
addressed to you and dated the Closing Date (and, if applicable, the Option
Closing Date), to the effect that:
(i) 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 power and authority (corporate and other) to own, lease and operate
its properties and conduct its business as described in the Registration
Statement; the Company is duly qualified to do business as a foreign
corporation in good standing in each state or other jurisdiction in which its
ownership or leasing of property or conduct of business legally requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the ability of the Company to conduct its business
as described in the Registration Statement; and the Company has no
subsidiaries and, except as disclosed in the Prospectus, is not affiliated
with any corporation, partnership, limited liability company or other
business entity.
(ii) The Company has duly and validly authorized capital stock as
set forth under the heading "Capitalization" in the Prospectus; all
outstanding shares of Common Stock of the Company and the Shares conform to
the description thereof in the Prospectus under the heading "Description of
Capital Stock," and the outstanding shares of Common Stock have been duly
authorized and are validly issued, fully paid and non-assessable; the Shares
to be sold by the Company have been duly authorized and, when delivered and
paid for in accordance with this Agreement, will be validly issued, fully
paid and non-assessable, and the shareholders of the Company have no
preemptive or similar rights with respect to the Shares.
(iii) Such counsel has been advised by the staff of the Commission
that the Registration Statement has become effective under the Act and, to
the knowledge of such counsel after due inquiry, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the Act.
(iv) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial statements and
related schedules and any other financial data therein, as to which such
counsel need express no belief), as of their respective Effective Date or
issue date, comply as to form and appear on their face to be appropriately
responsive in all material respects to the requirements of the Act and the
applicable Rules and Regulations.
(v) The descriptions in the Registration Statement and Prospectus
of contracts and other documents filed as exhibits to the Registration
Statement are accurate in all material respects; all other material
agreements between the Company and third parties expressly referenced in the
Prospectus are legal, valid and binding obligations of the Company.
(vi) No authorization, approval, consent, order, registration or
qualification of or with of any court or governmental body, authority or
agency is required with respect to the Company in connection with the
transactions contemplated by this Agreement, except such as may be
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<PAGE>
required under the Act or the Rules and Regulations or as may be required by
the NASD or under state securities laws in connection with the purchase and
distribution of the Shares by the Underwriters.
(vii) The filing of the Registration Statement has been duly
authorized by the Board of Directors of the Company. This Agreement has been
duly authorized, executed and delivered by the Company and constitutes a
valid and legally binding agreement of the Company enforceable in accordance
with its terms (except to the extent the enforceability of the
indemnification and contribution provisions of Section 7 hereof may be
limited by public policy considerations as expressed in the Act as construed
by courts of competent jurisdiction, and except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other laws affecting creditors' rights generally or by the availability of
equitable remedies, regardless of whether such enforcement is considered in a
proceeding in equity or at law). The performance of this Agreement and the
consummation of the transactions herein contemplated will not result in a
violation of the Company's articles of incorporation or bylaws or 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 properties or assets of the Company under any statute,
any bond, debenture, note or other evidence of indebtedness, or any
agreement, indenture, mortgage, deed of trust, sale and leaseback
arrangement, joint venture or any other instrument known to such counsel
after due inquiry to which the Company is a party or by which it is bound or
to which any of the properties or assets of the Company is subject, or any
order, rule or regulation known to such counsel after due inquiry of any
court or governmental agency or body having jurisdiction over the Company or
its properties, except, in the case of any such violation, breach, default,
creation or imposition, to such extent as does not materially adversely
affect the business of the Company.
(viii) To the knowledge of such counsel after due inquiry, (A) there
are no material (individually or in the aggregate) legal, governmental or
regulatory proceedings pending or threatened to which the Company is a party
or of which the business or properties of the Company is the subject which
are not disclosed in the Registration Statement and Prospectus; (B) there are
no contracts or documents of a character required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement which are not described or filed as required; and (C)
there are no statutes or regulations required to be described in the
Registration Statement or Prospectus which are not described as required.
(ix) To the knowledge of such counsel after due inquiry, the Company
holds all licenses, certificates, permits and approvals from all state,
federal and other regulatory authorities, and have satisfied in all material
respects the requirements imposed by regulatory bodies, administrative
agencies or other governmental bodies, agencies or officials, that are
required for the Company lawfully to own, lease and operate its properties
and conduct its business as described in the Prospectus, and, to the
knowledge of such counsel after due inquiry, the Company is conducting its
business in compliance in all material respects with all of the laws, rules
and regulations of each jurisdiction in which it conducts its business.
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<PAGE>
(x) The statements made in the Registration Statement under the
captions "Risk Factors--Control by Principal Shareholders," "Dividend
Policy," "Capitalization," "Business--Industry" and "Description of
Capital Stock" and in Item 24 of Part II of the Registration Statement, to
the extent that they constitute summaries of documents referred to therein or
matters of law or legal conclusions, have been reviewed by such counsel and
are accurate summaries and fairly present the information disclosed therein.
(xi) The Company is not, and upon the sale of the Shares to be
issued and sold by it hereunder and application of the net proceeds from such
sale as described in the Prospectus under the caption "Use of Proceeds,"
will not be, an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of
1940, as amended.
(xii) To the knowledge of such counsel after due inquiry and except
as described in the Prospectus: (A) there are no rights of third parties to
any intellectual property described in the Prospectus as being owned by or
licensed to the Company and that is necessary for the conduct of its
business; (B) there is no infringement by third parties of any such
intellectual property; (C) there is no pending or threatened action, suit,
proceeding or claim by others challenging the rights of the Company in or to
such intellectual property; and (D) there is no pending or threatened action,
suit, proceeding or claim by others challenging the validity or scope of such
intellectual property.
Such counsel shall also state that, during the course of the preparation
by the Company of the Registration Statement and the Prospectus, such counsel
has participated in conferences with your representatives and counsel and
with officers and representatives of the Company, at which conferences the
contents of the Registration Statement and the Prospectus were discussed,
reviewed and revised, and, although such counsel is not passing upon, and
does not assume any responsibility for, the accuracy, completeness or
fairness of the statements made in the Registration Statement and the
Prospectus, on the basis of the information that was developed during the
course thereof, considered in the light of such counsel's understanding of
applicable law and the experience it has gained through its practice
thereunder, that such counsel has no reason to believe that, as of its
effective date, the Registration Statement or any further amendment thereto
made by the Company prior to the Closing Date (or, if applicable, the Option
Closing Date) (other than the financial statements and related schedules and
any other financial data therein, as to which such counsel need express no
belief) contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading or that, as of its date, the Prospectus or
any further amendment or supplement thereto made by the Company prior to such
Closing Date (or, if applicable, Option Closing Date) (other than the
financial statements and related schedules and any other financial data
therein, as to which such counsel need express no belief) contained an untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading or that, as of such Closing Date (or, if
applicable, Option Closing Date), either the Registration Statement or the
Prospectus or any further amendment or suppement thereto made by the Company
prior to such Closing Date (or, if applicable, Option Closing Date) (other
than the financial statements and related schedules and any other financial
data therein, as to which
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<PAGE>
such counsel need express no belief) contains an untrue statement of a
material fact or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and they do not know of any amendment to the
Registration Statement required to be filed or of any contracts or other
documents of a character required to be filed as an exhibit to the
Registration Statement or required to be described in the Registration
Statement or the Prospectus which are not filed or described as required.
In rendering the foregoing opinion, such counsel may rely, provided that
the opinion shall state that you and they are entitled to so rely, (1) as to
matters involving laws of any jurisdiction other than Missouri or the United
States, upon opinions addressed to the Underwriters of other counsel
satisfactory to them, and (2) as to all matters of fact, upon certificates of
public officials and of the executive officers of the Company.
(d) On the Closing Date (and, if applicable, the Option Closing
Date), you shall have received the opinion of counsel to the Selling
Shareholders, addressed to you and dated the Closing Date (and, if
applicable, the Option Closing Date), to the effect that:
(i) Each Selling Shareholder has duly authorized, executed and
delivered the Custody Agreement and Power of Attorney, appointing
__________________ as such Selling Shareholder's Custodian with authority to
take custody of and deliver the Shares as represented by certificates on
behalf of such Selling Shareholder in connection with the transactions
contemplated by this Agreement and the Custody Agreement and appointing
__________________ as such Selling Shareholder's Attorney-in-Fact with
authority to execute and deliver this Agreement on behalf of such Selling
Shareholder and otherwise to act on behalf of such Selling Shareholder in
connection with the transactions contemplated by this Agreement and the
Custody Agreement; such Custody Agreement and Power of Attorney constitute
valid and legally binding agreements of each such Selling Shareholder in
accordance with their terms (except to the extent the enforceability thereof
may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights generally or by the
availability of equitable remedies, regardless of whether such enforcement is
considered in a proceeding in equity or at law).
(ii) This Agreement has been duly authorized, executed and delivered
by or on behalf of the Selling Shareholders, and is a valid and legally
binding agreement of the Selling Shareholders enforceable in accordance with
its terms (except to the extent the enforceability of the indemnification
provisions of Section 7 hereof may be limited by public policy considerations
as expressed in the Act and as construed by courts of competent jurisdiction
and except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws affecting creditors'
rights generally or by the availability of equitable remedies, regardless of
whether such enforcement is considered in a proceeding in equity or at law).
(iii) Each Selling Shareholder has full legal right, power and
authority, and any approval required by law, except such as may be required
under the Act or the Rules and Regulations or as may be required by the NASD
or under state securities laws in connection with
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the purchase and distribution of the Shares by the Underwriters, to enter
into this Agreement, the Custody Agreement and the Power of Attorney and to
sell, assign, transfer and deliver the Shares to be sold by such Selling
Shareholder.
(iv) No consent, approval, authorization or order of any court, or
governmental agency or body is required for consummation of the transactions
contemplated by this Agreement in connection with the Shares to be sold by
each Selling Shareholder hereunder except such as may be required under the
Act or the Rules and Regulations or as may be required by the NASD or under
state securities laws in connection with the purchase and distribution of the
Shares by the Underwriters.
(v) Each Selling Shareholder has good and valid title to the Shares
being sold by such Selling Shareholder hereunder, free and clear of all
liens, mortgages, pledges, encumbrances, claims, equities and security
interests, and has transferred to the Underwriters good and valid title to
the Shares being sold by such Selling Shareholder on the Closing Date (and,
if applicable, the Option Closing Date), free and clear of all liens,
mortgages, pledges, encumbrances, claims, equities and security interests
whatsoever.
In rendering the foregoing opinion, such counsel may rely, provided that
the opinion shall state that you and they are entitled to so rely, (1) as to
matters involving laws of any jurisdiction other than Missouri or the United
States, upon opinions addressed to the Underwriters of other counsel
satisfactory to them, and (2) as to all matters of fact, upon certificates of
the Selling Shareholders.
(e) You shall have received on the Closing Date (and, if
applicable, the Option Closing Date), from Bryan Cave LLP, counsel to the
Underwriters, such opinion or opinions, dated the Closing Date (and, if
applicable, the Option Closing Date) with respect to the incorporation of the
Company, the validity of the Shares and other related matters as you may
reasonably require; the Company and Selling Shareholders shall have furnished
to such counsel such documents as they reasonably request for the purpose of
enabling them to pass on such matters.
(f) You shall have received at or prior to the Closing Date from
Bryan Cave LLP a memorandum or memoranda, in form and substance satisfactory
to you, with respect to the qualification for offering and sale by the
Underwriters of the Shares under state securities or Blue Sky laws of such
jurisdictions as the Underwriters may have designated to the Company.
(g) On the date of the Prospectus at a time prior to the execution
of this Agreement and on the Closing Date (and, if applicable, the Option
Closing Date), you shall have received from Baird, Kurtz & Dobson a letter or
letters, dated the date of this Agreement and the Closing Date (and, if
applicable, the Option Closing Date), respectively, in form and substance
satisfactory to you, confirming that they are independent public accountants
with respect to the Company within the meaning of the Act and the published
Rules and Regulations, and the answer to Item 509 of Regulation S-B set forth
in the Registration Statement is correct insofar as it relates to them, and
stating to the effect set forth in Schedule III hereto.
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(h) Except as contemplated in the Prospectus, (i) the Company shall
not have sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order
or decree; and (ii) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, the
Company shall not have incurred any liability or obligation, direct or
contingent, or entered into transactions, and there shall not have been any
change in the capital stock or long-term debt of the Company or any change in
the condition (financial or other), net worth, business, affairs, management,
prospects or results of operations of the Company, the effect of which, in
any such case described in clause (i) or (ii), is in your judgment so
material or adverse as to make it impracticable or inadvisable to proceed
with the public offering or the delivery of the Shares being delivered on
such Closing Date (and, if applicable, the Option Closing Date) on the terms
and in the manner contemplated in the Prospectus.
(i) There shall not have occurred any of the following: (i) a
suspension or material limitation in trading in securities generally on the
New York Stock Exchange or The Nasdaq Stock Market or the establishing on
such exchange by the Commission or by such exchange or on such market by the
NASD of minimum or maximum prices which are not in force and effect on the
date hereof; (ii) a suspension or material limitation in trading in the
Company's securities on The Nasdaq Stock Market; (iii) a general moratorium
on commercial banking activities declared by either federal or state
authorities; (iv) the outbreak or escalation of hostilities involving the
United States or the declaration by the United States of a national emergency
or war, if the effect of any such event specified in this clause (iv) in your
judgment makes it impracticable or inadvisable to proceed with the public
offering or the delivery of the Shares in the manner contemplated in the
Prospectus; (v) any calamity or crisis, change in national, international or
world affairs, act of God, change in the international or domestic markets,
or change in the existing financial, political or economic conditions in the
United States or elsewhere, if the effect of any such event specified in this
clause (v) makes it impracticable or inadvisable to proceed with the public
offering or the delivery of the Shares in the manner contemplated in the
Prospectus; or (vi) the enactment, publication, decree, or other promulgation
of any federal or state statute, regulation, rule, or order of any court or
other governmental authority, or the taking of any action by any federal,
state or local government or agency in respect of fiscal or monetary affairs,
if the effect of any such event specified in this clause (vi) in your
judgment makes it impracticable or inadvisable to proceed with the public
offering or the delivery of the Shares in the manner contemplated in the
Prospectus.
(j) You shall have received certificates, dated the Closing Date
(and, if applicable, the Option Closing Date) and signed by the President and
the Chief Financial Officer of the Company stating that (i) they have
carefully examined the Registration Statement and the Prospectus as amended
or supplemented and nothing has come to their attention that would lead them
to believe that either the Registration Statement or the Prospectus, or any
amendment or supplement thereto as of their respective effective or issue
dates, contained, and the Prospectus as amended or supplemented at such
Closing Date, contains any untrue statement of a material fact, or omits to
state a material fact required to be stated therein or necessary in order to
make the
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statements therein, in light of the circumstances under which they were made,
not misleading, and that (ii) all representations and warranties made herein
by the Company are true and correct in all material respects at such Closing
Date, with the same effect as if made on and as of such Closing Date, and all
agreements herein to be performed by the Company on or prior to such Closing
Date have been duly performed in all material respects.
(k) The Company and each of the Selling Shareholders shall not have
failed, refused, or been unable, at or prior to the Closing Date (and, if
applicable, the Option Closing Date) to have performed in all material
respects any agreement on their part to be performed or any of the conditions
herein contained and required to be performed or satisfied by them at or
prior to such Closing Date.
(l) The Company and the Selling Shareholders shall have furnished
to you at the Closing Date (and, if applicable, the Option Closing Date) such
other certificates as you may have reasonably requested as to the accuracy,
on and as of such Closing Date (and, if applicable, the Option Closing Date),
of the representations and warranties of the Company and the Selling
Shareholders herein and as to the performance by the Company and the Selling
Shareholders of their obligations hereunder.
(m) The Shares shall have been duly approved for quotation, subject
to official notice of issuance, on The Nasdaq Stock Market
[National Market System].
(n) The letters in the form set forth on Schedule IV hereto and
dated the date hereof or earlier have been executed and delivered to you by
the Company's directors and executive officers and by the Selling
Shareholders.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably
satisfactory to you and to Bryan Cave LLP, counsel for the several
Underwriters. The Company and Selling Shareholders will furnish you with
such conformed copies of such opinions, certificates, letters and documents
as you may request.
If any of the conditions specified above in this Section 6 shall not
have been satisfied at or prior to the Closing Date (and, if applicable, the
Option Closing Date) or waived by you in writing, this Agreement may be
terminated by you on notice to the Company and the Selling Shareholders.
7. INDEMNIFICATION. (a) The Company will indemnify and hold
harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of the Act, against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter or such
controlling person may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement
thereto, or in any blue sky application or other document executed by the
Company or based on any information furnished in writing by the Company,
filed in any jurisdiction in order to qualify any
20
<PAGE>
or all of the Shares under the securities laws thereof ("Blue Sky
Application"), or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and will reimburse each
Underwriter and each such controlling person for any legal or other expenses
reasonably incurred by such Underwriter or such controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company shall 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 or omission or alleged omission made in the Registration Statement,
such Preliminary Prospectus or the Prospectus, or such amendment or
supplement, or any Blue Sky Application in reliance upon and in conformity
with information furnished in writing to the Company by you or by any
Underwriter through you, expressly for use therein; and provided, further,
that if any Preliminary Prospectus or the Prospectus contaned any alleged
untrue statement or allegedly omitted to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading and such statement or omission shall have been corrected in a
revised Preliminary Prospectus or in the Prospectus or in an amended or
supplemented Prospectus, the Company shall not be liable to any Underwriter
or controlling person under this subsection (a) with respect to such alleged
untrue statement or alleged omission to the extent that any such loss, claim,
damage or liability of such Underwriter or controlling person results from
the fact that such Underwriter sold Shares to a person to whom there was not
sent or given, at or prior to the written confirmation of such sale, such
revised Preliminary Prospectus or Prospectus or amended or supplemented
Prospectus. This indemnity agreement shall be in addition to any liabilities
which the Company may otherwise have.
(b) Each Selling Shareholder will indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the Act, against any losses, claims, damages or liabilities, joint
or several, to which such Underwriter or controlling person may become
subject, under the Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or any Blue Sky
Application or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, such Preliminary Prospectus or the Prospectus, or such amendment
or supplement, or any Blue Sky Application, in reliance upon and in
conformity with information furnished in writing to the Company or any
Underwriter by such Selling Shareholder expressly for use therein; and will
reimburse any legal or other expenses reasonably incurred by each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
the Act, in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the indemnity contained
in this subsection (b) with respect to any Preliminary Prospectus shall not
inure to the benefit of any Underwriter (or to the benefit of any person
controlling such Underwriter) in respect of any action or claim asserted by a
person who purchased any Shares from such Underwriter, if, within the time
required by the Act such person
21
<PAGE>
was not sent or given a copy of the Prospectus, as then amended or
supplemented. This indemnity agreement shall be in addition to any
liabilities which the Selling Shareholders may otherwise have.
(c) Each Underwriter will indemnify and hold harmless the Company,
each of its directors, each of its officers who have signed the Registration
Statement and, each person, if any, who controls the Company within the
meaning of the Act, and each Selling Shareholder, against any losses, claims,
damages or liabilities, joint or several, to which the Company or any such
director, officer or controlling person or any such Selling Shareholder may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, any amendment or supplement thereto, or any Blue Sky Application
or arise out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registration Statement, such Preliminary
Prospectus or the Prospectus, such amendment or supplement, or any Blue Sky
Application in reliance upon and in conformity with information furnished in
writing to the Company by any such Underwriter expressly for use therein; and
will reimburse any legal or other expenses reasonably incurred by the Company
or any such director, officer or controlling person or any such Selling
Shareholder in connection with investigating or defending any such loss,
claim, damage, liability or action. This indemnity agreement shall be in
addition to any liabilities which the Underwriters may otherwise have.
(d) Any party which proposes to assert the right to be indemnified
under this Section 7 shall, within ten (10) days after receipt of notice of
commencement of any action, suit or proceeding against such party in respect
of which a claim is to be made against an indemnifying party under this
Section 7, notify each such indemnifying party of the commencement of such
action, suit or proceeding, enclosing a copy of all papers served, but the
omission so to notify such indemnifying party of any such action, suit or
proceeding shall not relieve such indemnifying party from any liability which
it may have to any indemnified party otherwise than under this Section 7. In
case any such action, suit or proceeding shall be brought against any
indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
in, and, to the extent that it shall wish, jointly with any other
indemnifying party, similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party, and after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party shall not be liable to
such indemnified party for any legal or other expenses, other than reasonable
costs of investigation, subsequently incurred by such indemnified party in
connection with the defense thereof. The indemnified party shall have the
right to employ its own counsel in any such action, but the fees and expenses
of such counsel shall be at the expense of such indemnified party unless (i)
the employment of counsel by such indemnified party at the expense of the
indemnifying party has been authorized by the indemnifying party, (ii) the
indemnified party shall have been advised by such counsel in a written
opinion that there may be
22
<PAGE>
a conflict of interest between the indemnifying party and the indemnified
party in the conduct of the defense, or certain aspects of the defense, of
such action (in which case the indemnifying party shall not have the right to
direct the defense of such action with respect to those matters or aspects of
the defense on which a conflict exists or may exist on behalf of the
indemnified party) or (iii) the indemnifying party shall not in fact have
employed counsel to assume the defense of such action, in any of which events
such fees and expenses to the extent applicable shall be borne by the
indemnifying party. An indemnifying party shall not be liable for any
settlement of any action or claim effected without its consent. Each
indemnified party, as a condition of such indemnity, shall cooperate in good
faith with the indemnifying party in the defense of any such action or claim.
(e) If the indemnification provided for in this Section 7 is for
any reason, other than pursuant to the terms thereof, judicially determined
(by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right to appeal) to be unavailable to an indemnified party under subsections
(a), (b) or (c) 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, the Selling Shareholders and the
Underwriters from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law, 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, as
applicable, of the Company, the Selling Shareholders and the Underwriters in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as
other relevant equitable considerations. The relative benefits received by,
as applicable, the Company, the Selling Shareholders and the Underwriters
shall be deemed to be in the same proportion as the total net proceeds from
the offering (before deducting expenses) received by the Company and the
Selling Shareholders bear to the total underwriting discounts and commissions
received by the Underwriters, 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 statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company, the Selling Shareholders or the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholders and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this subsection
(e) were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above
in this subsection (e). 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 subsection (e) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (e), no Underwriter shall
be required to contribute any amount in excess of the
23
<PAGE>
underwriting discounts and commissions applicable to the Shares purchased by
such Underwriter. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (e) to contribute are several in
proportion to their respective underwriting obligations and not joint.
8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties, and agreements of the Company and the Selling
Shareholders contained in Sections 7 and 11 herein or in certificates
delivered pursuant hereto, and the agreements of the Underwriters contained
in Section 7 hereof, shall remain operative and in full force and effect
regardless of any termination or cancellation of this Agreement or any
investigation made by or on behalf of any Underwriter or any controlling
person, the Company or any of its officers, directors or any controlling
persons, or the Selling Shareholders, and shall survive delivery of the
Shares to the Underwriters hereunder.
9. SUBSTITUTION OF UNDERWRITERS. (a) If any Underwriter shall
default in its obligation to purchase the Shares which it has agreed to
purchase hereunder, you may in your discretion arrange for you or another
party or other parties to purchase such Shares on the terms contained herein.
If within thirty-six (36) hours after such default by any Underwriter you do
not arrange for the purchase of such Shares, then the Company and the Selling
Shareholders shall be entitled to a further period of thirty-six (36) hours
within which to procure another party or parties reasonably satisfactory to
you to purchase such Shares on such terms. In the event that, within the
respective prescribed periods, you notify the Company and the Selling
Shareholders that you have so arranged for the purchase of such Shares, or
the Company and the Selling Shareholders notify you that they have so
arranged for the purchase of such Shares, you or the Company and the Selling
Shareholders shall have the right to postpone the Closing Date for a period
of not more than seven days, in order to effect whatever changes may thereby
be made necessary in the Registration Statement or the Prospectus, or in any
other documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your
opinion may thereby be made necessary. The term "Underwriter" as used in
this Agreement shall include any persons substituted under this Section 9
with like effect as if such person had originally been a party to this
Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters made by you or the
Company and the Selling Shareholders as provided in subsection (a) above, the
aggregate number of Shares which remains unpurchased does not exceed one
tenth (1/10th) of the total Shares to be sold on the Closing Date, then the
Company and the Selling Shareholders shall have the right to require each
non-defaulting Underwriter to purchase the Shares which such Underwriter
agreed to purchase hereunder and, in addition, to require each non-defaulting
Underwriter to purchase its pro rata share (based on the number of Shares
which such Underwriter agreed to purchase hereunder) of the Shares of such
defaulting Underwriter or Underwriters for which such arrangements have not
been made; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
24
<PAGE>
(c) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters made by you or the
Company and the Selling Shareholders as provided in subsection (a) above, the
number of Shares which remains unpurchased exceeds one tenth of the total
Shares to be sold on the Closing Date, or if the Company and the Selling
Shareholders shall not exercise the right described in subsection (b) above
to require the non-defaulting Underwriters to purchase Shares of the
defaulting Underwriter or Underwriters, then this Agreement shall thereupon
terminate, without liability on the part of any non-defaulting Underwriter or
the Company and the Selling Shareholders except for the expenses to be borne
by the Company and the Underwriters as provided in Section 11 hereof and the
indemnity and contribution agreements in Section 7 hereof; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
10. EFFECTIVE DATE AND TERMINATION OF AGREEMENT. (a) This
Agreement shall become effective at 1:00 p.m., St. Louis time, on the first
business day following the Effective Date of the Registration Statement, or
at such earlier time after the Effective Date of the Registration Statement
as you in your discretion shall first release the Shares for offering to the
public; provided, however, that the provisions of Section 7 and 11 shall at
all times be effective. For the purposes of this Section 10(a), the Shares
shall be deemed to have been released to the public upon release by you of
the publication of a newspaper advertisement relating to the Shares or upon
release of telegrams, facsimile transmissions or letters offering the Shares
for sale to securities dealers, whichever shall first occur.
(b) This Agreement may be terminated by you at any time before it
becomes effective in accordance with Section 10(a) by notice to the Company
and the Selling Shareholders; provided, however, that the provisions of this
Section 10 and of Section 7 and Section 11 hereof shall at all times be
effective. In the event of any termination of this Agreement pursuant to
Section 9 or this Section 10(b) hereof, the Company and the Selling
Shareholders shall not then be under any liability to any Underwriter except
as provided in Section 7 or Section 11 hereof.
(c) This Agreement may be terminated by you at any time at or
prior to the Closing Date by notice to the Company and the Selling
Shareholders if any condition specified in Section 6 hereof shall not have
been satisfied on or prior to the Closing Date. Any such termination shall
be without liability of any party to any other party except as provided in
Sections 7 and 11 hereof.
(d) This Agreement also may be terminated by you, by notice to the
Company and the Selling Shareholders, as to any obligation of the
Underwriters to purchase the Option Shares, if any condition specified in
Section 6 hereof shall not have been satisfied at or prior to the Option
Closing Date or as provided in Section 9 hereof.
If you terminate this Agreement as provided in Sections 10(b), 10(c) or
10(d), you shall notify the Company and the Selling Shareholders by telephone
or telegram, confirmed by letter.
11. COSTS AND EXPENSES. The Company and the Selling Shareholders
will bear and pay the costs and expenses incident to the registration of the
Shares and public offering thereof,
25
<PAGE>
including, without limitation, (a) the fees and expenses of the Company's
accountants and the fees and expenses of counsel for the Company, (b) the
preparation, printing, filing, delivery and shipping of the Registration
Statement, each Preliminary Prospectus, the Prospectus and any amendments or
supplements thereto (except as otherwise expressly provided in Section 5(d)
hereof) and the printing, delivery and shipping of this Agreement, the
Agreement Among Underwriters, the Selected Dealer Agreement, Underwriters'
Questionnaires, Custody Agreements and Powers of Attorney, and Blue Sky
Memoranda, (c) the furnishing of copies of such documents (except as
otherwise expressly provided in Section 5(d) hereof) to the Underwriters, (d)
the registration or qualification of the Shares for offering and sale under
the securities laws of the various states, including the reasonable fees and
disbursements of Underwriters' counsel relating to such registration or
qualification, (e) the fees payable to the NASD and the Commission in
connection with their review of the proposed offering of the Shares, (f) all
printing and engraving costs related to preparation of the certificates for
the Shares, including transfer agent and registrar fees, (g) all initial
transfer taxes, if any, (h) all fees and expenses relating to the
authorization of the Shares for trading on The Nasdaq Stock Market National
Market System, (i) all travel expenses, including air fare and accommodation
expenses, of representatives of the Company in connection with the offering
of the Shares and (j) all of the other costs and expenses incident to the
performance by the Company of the registration and offering of the Shares;
provided, however, that the Underwriters will bear and pay the fees and
expenses of the Underwriters' counsel (other than fees and disbursements
relating to the registration or qualification of the Shares for offering and
sale under the securities laws of the various states), the Underwriters'
out-of-pocket expenses, and any advertising costs and expenses incurred by
the Underwriters incident to the public offering of the Shares; and provided,
further, that the Selling Shareholders will bear and pay the fees and
expenses of the Selling Shareholders' counsel.
If this Agreement is terminated by you in accordance with the provisions
of Section 10(c), the Company shall reimburse the Underwriters for all of
their out-of-pocket expenses, including the reasonable fees and disbursements
of counsel to the Underwriters.
12. DEFAULT OF SELLING SHAREHOLDERS. Failure or refusal by any of
the Selling Shareholders to sell and deliver on the Closing Date the Shares
agreed to be sold and delivered by such Selling Shareholder shall in no
manner relieve the other Selling Shareholders or the Company of their
respective obligations under this Agreement. If any Selling Shareholder
should fail or refuse to sell and deliver his Shares, the remaining Selling
Shareholders shall have the right hereby granted to increase, pro rata or
otherwise, the number of Shares to be sold by them hereunder to the total
number of Shares to be sold by all Selling Shareholders as set forth in
Schedule I. If the remaining Selling Shareholders do not fully exercise the
right to increase the number of Shares to be sold by them, the Underwriters,
at your option, will have the right to elect to purchase or not to purchase
the Shares to be sold by the Company and the remaining Selling Shareholders.
In the event the Underwriters purchase the Shares of the Company and such
other Selling Shareholders pursuant to this Section 12, the Closing Date
shall be postponed for a period of not more than seven (7) days in order that
the Registration Statement and Prospectus or other documents may be amended
or supplemented to the extent necessary under the provisions of the Act and
the Rules and Regulations or under the securities laws of any jurisdiction.
If the
26
<PAGE>
Underwriters determine not to purchase the Shares of the Company and the
other Selling Shareholders, if any, this Agreement shall terminate and
neither the Company nor the Underwriters nor any other Selling Shareholder
shall be under any obligation under this Agreement except as provided in
Section 7 hereof and except for the obligation of the Company to pay for such
expenses as are set forth in Section 11 hereof. Nothing herein shall relieve
a defaulting Selling Shareholder from liability for his default or from
liability under Section 7 hereof or for expenses imposed by this Agreement
upon such Selling Shareholder.
13. NOTICES. All notices or communications hereunder, except as
herein otherwise specifically provided, shall be in writing and if sent to
the Underwriters shall be mailed, delivered, sent by facsimile transmission,
or telegraphed and confirmed c/o A.G. Edwards & Sons, Inc. at One North
Jefferson Avenue, St. Louis, Missouri 63103, Attention: Syndicate, facsimile
number (314) 955-7387, or if sent to the Company shall be mailed, delivered,
sent by facsimile transmission, or telegraphed and confirmed to the Company
at 501 Kansas Avenue, Kansas City, Kansas 66105-1309, facsimile number (913)
321-6392, or if sent to any Selling Shareholder shall be mailed, delivered,
sent by facsimile transmission or telegraphed and confirmed to such Selling
Shareholder, c/o the Attorney-in-Fact at the above address of the Company.
Notice to any Underwriter pursuant to Section 7 shall be mailed, delivered,
sent by facsimile transmission, or telegraphed and confirmed to such
Underwriter's address as it appears in the Underwriters' Questionnaire
furnished in connection with the offering of the Shares or as otherwise
furnished to the Company and the Selling Shareholder.
14. PARTIES. This Agreement shall inure to the benefit of and be
binding upon the Underwriters and the Selling Shareholders, and the Company
and their respective successors and assigns. Nothing expressed or mentioned
in this Agreement is intended or shall be construed to give any person,
corporation or other entity, other than the parties hereto and their
respective successors and assigns and the controlling persons, officers and
directors referred to in Section 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 successors and assigns and said controlling
persons and said officers and directors, and for the benefit of no other
person, corporation or other entity. No purchaser of any of the Shares from
any Underwriter shall be construed a successor or assign by reason merely of
such purchase.
In all dealings with the Company and the Selling Shareholders under this
Agreement you shall act on behalf of each of the several Underwriters, the
Company, and the Selling Shareholders shall be entitled to act and rely upon
any statement, request, notice or agreement on behalf of the Underwriters,
made or given by you on behalf of the Underwriters, as if the same shall have
been made or given in writing by the Underwriters.
15. COUNTERPARTS. This Agreement may be executed by any one or
more of the parties hereto in any number of counterparts, each of which shall
be deemed to be an original, but all such counterparts shall together
constitute one and the same instrument.
27
<PAGE>
16. PRONOUNS. Whenever a pronoun of any gender or number is used
herein, it shall, where appropriate, be deemed to include any other gender
and number.
17. APPLICABLE LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Missouri.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
28
<PAGE>
If the foregoing is in accordance with your understanding, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among the Company, each of the Selling
Shareholders and the Underwriters.
ELECTRONIC PROCESSING, INC.
By:
-------------------------------------
Title:
----------------------------------
Selling Shareholders Named in
Schedule I Hereto
By:
-------------------------------------
As Attorney-in-Fact acting on behalf
of each of the Selling Stockholders
named in Schedule I to this
Agreement
Accepted in St. Louis,
Missouri as of the date
first above written, on
behalf of ourselves and each
of the several Underwriters
named in Schedule II hereto.
A.G. EDWARDS & SONS, INC.
By:
-----------------------------
Title:
--------------------------
29
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
NAME OF NUMBER OF
SELLING SHAREHOLDER FIRM SHARES
<S> <C>
Tom W. Olofson 220,000
---------
Christopher E. Olofson 30,000
---------
Total 250,000
---------
---------
</TABLE>
30
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
NAME OF NUMBER OF
UNDERWRITER FIRM SHARES
<S> <C>
A.G. Edwards & Sons, Inc.
----------
- ------------------------- ----------
- ------------------------- ----------
- ------------------------- ----------
- ------------------------- ----------
- ------------------------- ----------
- ------------------------- ----------
- ------------------------- ----------
- ------------------------- ----------
Total 1,250,000
----------
----------
</TABLE>
31
<PAGE>
SCHEDULE III
Pursuant to Section 6(g) of the Underwriting Agreement, Baird,
Kurtz & Dobson shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to the Company within the meaning of the Act and the applicable
published rules and regulations thereunder.
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
prospective financial statements and/or pro forma financial information)
examined by them and included in the Prospectus or the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of the Act and the applicable Rules and
Regulations thereunder; and, if applicable, they have made a review in
accordance with standards established by the American Institute of
Certified Public Accountants ("AICPA") of the unaudited interim
financial statements, selected financial data, pro forma financial
information, prospective financial statements and/or condensed financial
statements derived from audited financial statements of the Company for
the periods specified in such letter, as indicated in their reports
thereon, copies of which [have been furnished to the Representative of
the Underwriters (the "Representative")] [are attached hereto].
(iii) They have made a review in accordance with standards
established by the AICPA of the unaudited condensed statements of
income, balance sheets and statements of cash flows included in the
Prospectus as indicated in their reports thereon copies of which [have
been separately furnished to the Representatives][are attached hereto];
and on the basis of specified procedures including inquiries of
officials of the Company who have responsibility for financial and
accounting matters regarding whether the unaudited condensed financial
statements referred to in paragraph (vi)(A)(i) below comply as to form
in all material respects with the applicable accounting requirements of
the Act and the related published rules and regulations, nothing came to
their attention that caused them to believe that the unaudited condensed
financial statements do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the related
published rules and regulations;
(iv) The unaudited selected financial information with respect
to the results of operations and financial position of the Company for
the five most recent fiscal years included in the Prospectus agrees with
the corresponding amounts (after restatements where applicable) in the
audited financial statements for such five fiscal years which were
included or incorporated by reference in the Company's Annual Reports on
Form 10-KSB or the Company's Registration Statement on Form SB-2 (File
No. 333-______) for such fiscal years;
32
<PAGE>
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K and
on the basis of limited procedures specified in such letter nothing came
to their attention as a result of the foregoing procedures that caused
them to believe that this information does not conform in all material
respects with the disclosure requirements of Items 301, 302, 402 and
503(d), respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an
audit in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, performing the procedures specified by
the AICPA for a review of interim financial information as discussed in
SAS No. 71, Interim Financial Information, on the latest available
interim financial statements of the Company, inspection of the minute
books of the Company since the date of the latest audited financial
statements included in the Prospectus, inquiries of officials of the
Company responsible for financial and accounting matters and such other
inquiries and procedures as may be specified in such letter, nothing
came to their attention that caused them to believe that:
(A) any material modifications should be made to the
unaudited statements of income, balance sheets and statements of cash
flows included in the Prospectus for them to be in conformity with
generally accepted accounting principles, or the unaudited statements of
income, balance sheets and statements of cash flows included in the
Prospectus do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
Rules and Regulations thereunder;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited financial statements from which
such data and items were derived, and any such unaudited data and items
were not determined on a basis substantially consistent with the basis
for the corresponding amounts in the audited financial statements
included in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any unaudited
condensed financial statements referred to in Clause (A) and any
unaudited income statement data and balance sheet items included in the
Prospectus and referred to in Clause (B) were not determined on a basis
substantially consistent with the basis for the audited financial
statements included in the Prospectus;
(D) any unaudited pro forma condensed financial
statements included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the Act
and the published rules and regulations thereunder or the pro forma
adjustments have not been properly applied to the historical amounts in
the compilation of those statements;
(E) as of a specified date not more than five days prior
to the date of such letter, there have been any changes in the capital
stock or any increase in the long-term debt
33
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of the Company, or any decreases in working capital, net assets,
shareholders' equity or other items specified by the Representative, or
any changes in any items specified by the Representative, in each case
as compared with amounts shown in the latest balance sheet included in
the Prospectus, except in each case for changes, increases or decreases
which the Prospectus discloses have occurred or may occur or which are
described in such letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred to
in Clause (E) there were any decreases in net revenues or operating
profit or the total or per share amounts of net income or any other
changes in any other items specified by the Representative, in each case
as compared with the comparable period of the preceding year and with
any other period of corresponding length specified by the
Representative, except in each case for changes, decreases or increases
which the Prospectus discloses have occurred or may occur or which are
described in such letter; and
(vii) In addition to the examination referred to in their
report(s) included in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to
in paragraphs (iii) and (vi) above, they have carried out certain
specified procedures, not constituting an audit in accordance with
generally accepted auditing standards, with respect to certain amounts,
percentages and financial information specified by the Representative,
which are derived from the general accounting records of the Company,
which appear in the Prospectus, or in Part II of, or in exhibits and
schedules to, the Registration Statement specified by the
Representative, and have compared certain of such amounts, percentages
and financial information with the accounting records of the Company and
have found them to be in agreement.
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SCHEDULE IV
FORM OF LOCK-UP LETTER
ELECTRONIC PROCESSING INC.
1,250,000 SHARES
COMMON STOCK, PAR VALUE $0.01 PER SHARE (THE "COMMON STOCK")
A.G. Edwards & Sons, Inc.
As Representative of the Several Underwriters
c/o A.G. Edwards & Sons, Inc.
One North Jefferson Avenue
St. Louis, Missouri 63103
Ladies and Gentlemen:
The undersigned shareholder (the "Shareholder") of
Electronic Processing Inc., a Missouri corporation (the "Company"), wishes
to facilitate the offering (the "Offering") of 1,250,000 shares of Common
Stock, par value $0.01 per share (the "Common Stock"), of the Company. The
Shareholder recognizes that the Offering will be of benefit to the Company
and the Shareholder.
In consideration of the foregoing and in order to induce you,
as the representative (the "Representative") of certain underwriters (the
"Underwriters") to enter into an underwriting agreement with the Company
and certain selling shareholders (the "Underwriting Agreement") relating to
the Offering and to complete the purchase of the shares of Common Stock
pursuant to such Underwriting Agreement, the Shareholder hereby agrees with
the Underwriters as follows:
1. During the term of this Agreement, as specified in
paragraph 3 hereof, such Shareholder shall not, directly or indirectly,
offer, sell, contract to sell or otherwise dispose of any shares of the
Company's Common Stock or any securities convertible into or exercisable or
exchangeable for, or any rights to purchase or acquire, Common Stock or the
beneficial ownership thereof (collectively the "Subject Securities"),
without your prior written consent as Representative of the Underwriters.
2. Any purported transfer of any Subject Securities in
violation of paragraph 1 hereof (an "Unauthorized Transfer") will be null
and void. The Company will not be required to register, recognize or give
effect to any Unauthorized Transfer and the purported transferee of any
Subject Securities or any interest therein pursuant to an Unauthorized
Transfer will not acquire any rights in such Subject Securities during the
term of this Agreement as specified in paragraph 3 hereof.
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3. This Agreement shall become effective upon the later of:
(i) the effective date of the Registration Statement filed by the Company
with the Securities and Exchange Commission on Form SB-2 (SEC Registration
No. 333-________) in connection with the Offering, as such Registration may
be amended from time to time (the "Registration Statement") or (ii) the
execution hereof by the Shareholder. This Agreement shall terminate without
any prior notice upon the earlier of (i) the date which is one hundred and
eighty (180) days after the effective date of the Registration Statement or
(ii) the termination or cancellation of the Underwriting Agreement for any
reason prior to the sale of the Common Stock to the Underwriters.
Notwithstanding the foregoing, this Agreement shall terminate immediately
upon any abandonment of the Registration Statement.
4. This Agreement shall be construed and enforced in
accordance with the laws of the State of Missouri. The Underwriters shall be
entitled to all legal and equitable remedies in enforcing this Agreement,
including without limitation an injunction against any sale of shares of the
Common Stock in contravention of this Agreement. If at any time subsequent
to the date of this Agreement any provision hereof shall be held by any court
of competent jurisdiction to be illegal, void or unenforceable, such
provision shall be of no force and effect, but the illegality or
unenforceability of such provision shall have no effect upon, and shall not
impair the legality or enforceability of, any other provision of this
Agreement.
5. This Agreement may be executed in one or more
counterparts, each of which shall be an original, but all of which taken
together shall constitute one and the same instrument.
6. All of the terms and provisions of this Agreement shall
inure to the benefit of and be binding upon the respective heirs, successors,
personal representatives and permitted assigns of the parties hereto.
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<PAGE>
If the foregoing correctly sets forth the agreement between
the undersigned and the Underwriters, please indicate your acceptance in the
space provided below for that purpose.
Very truly yours,
--------------------------------------
(SIGNATURE)
Print Name:
---------------------------
Date:
---------------------------------
Agreed to and accepted as of the date above
written:
A.G. Edwards & Sons, Inc.
For itself and as Representative of the several Underwriters
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
37
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EXHIBIT 3.2
BYLAWS
OF
ELECTRONIC PROCESSING, INC.
A Missouri Corporation
As Amended and Restated on April 28, 1998
ARTICLE I
OFFICES
The principal office of Electronic Processing, Inc., a Missouri
corporation, (the "Corporation"), shall be located in the City of Kansas City,
State of Kansas. The Corporation may also have offices at such other places,
either within or without the State of Missouri, as the Board of Directors may
from time to time determine or as the business of the Corporation may require.
The Registered Office of the Corporation, required by The General and Business
Corporation Law of Missouri to be maintained in the State of Missouri, shall be
as designated in the Articles of Incorporation, and the location of the
Registered Office may be changed from time to time by action of the Board of
Directors to any other place in Missouri.
ARTICLE II
SHAREHOLDERS
SECTION 1. ANNUAL MEETING. An annual meeting of shareholders shall be
held during the month of June in each year on the day and at the hour to be
designated by the Board of Directors or the Chairman of the Board or the
President, at the principal offices of the corporation, or at such other place,
either within or without the State of Missouri, as may be designated in the
notice of such meeting, for the purpose of electing directors and for the
transaction of such other business as may properly come before the meeting. If
the election of directors shall not be held on the day designated for the annual
meeting, the board of directors shall cause the election to be held as soon
thereafter as may be convenient..
SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders may be
held at any time for the consideration of such matters as shall be specified in
the Corporation's notice of such meetings. Such special meetings shall be held
at the time and place, either within or without the State of Missouri, specified
in the notice of such meeting, and shall consider only such business as shall be
specified in the notice of such meetings. Except as otherwise required by law
and subject to the rights, if any, of the holders of any class or series of
stock having a preference over the Common Stock as to dividends or liquidation,
special meetings of the shareholders may be called only by the Chairman of the
Board, the President or the Board of Directors.
<PAGE>
SECTION 3. NOMINATION OF DIRECTORS AND PRESENTATION OF BUSINESS AT
SHAREHOLDER MEETINGS.
(a) Nominations of persons for election to the Board of Directors and the
proposal of business to be considered by the shareholders may be made at an
annual meeting of shareholders (i) pursuant to the Corporation's notice of
meeting, (ii) by or at the direction of the Board of Directors, or (iii) by any
shareholder who was a shareholder of record at the time of the giving of notice
provided for in this Section 3, who is entitled to vote thereon at the meeting
and who complied with the notice procedures set forth in this Section 3.
(b) For nominations or other business to be properly brought before an
annual meeting by a shareholder pursuant to clause (iii) of paragraph (a) of
this Section 3, the shareholder must have given timely notice thereof in
writing to the Secretary of the Corporation. To be timely, a shareholder's
notice shall be delivered to the Secretary at the principal executive offices
of the Corporation not less than sixty (60) days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that
notices for nominations may be delivered to the Secretary not less than
thirty (30) days prior to such anniversary; and provided, further, that in
the event that the date of the annual meeting is advanced by more than thirty
(30) days or delayed by more than sixty (60) days from such anniversary date,
notice by the shareholder to be timely must be so delivered not later than
the close of business on the later of (i) the 60th day (in the case of
nominations, the 30th day) prior to such annual meeting, or (ii) the 10th day
following the date on which public announcement of the date of such meeting
is first made. Such shareholder's notice shall set forth as to each person
whom the shareholder proposes to nominate for election or reelection as a
director: (i) the name and address of the shareholder who intends to make
the nomination and of the person or persons to be nominated; (ii) a
representation that such shareholder is a holder of record of stock of the
Corporation entitled to vote in the election of directors at such meeting and
intends to appear in person or by proxy at the meeting to nominate the person
or persons specified in the notice; (iii) the name and address of such
shareholder, as it appears on the Corporation's books, and of the beneficial
owner (as such term is defined in 17 C.F.R. Section 240.13d-3 ("Rule 13d-3")
under the Securities Exchange Act of 1934 ("Exchange Act")), if any, on whose
behalf the nomination is made; (iv) the class and number of shares of the
Corporation which are owned beneficially (as such term is defined in Rule
13d-3 under the Exchange Act) and of record by the nominating shareholder and
each nominee proposed by such shareholder; (v) a description of all
arrangements or understandings between the shareholder and each nominee and
any other person (naming such persons) pursuant to which the nomination or
nominations are to be made by the shareholder; (vi) such other information
regarding each nominee proposed by such shareholder as would have been
required to be included in a proxy statement filed pursuant to 17 C.F.R.
Section 240.14a-1 et seq. ("Regulation 14A") as then in effect under the
Exchange Act had the nominee been nominated, or intended to be nominated, by
the Board of Directors; and (vii) the consent of each nominee to serve as a
director of the Corporation if so elected. As to any other business that the
shareholder proposes to bring before the meeting, a shareholder's notice to
the Secretary shall set forth as to each matter: (i) a brief description of
the business desired to be brought before the annual meeting; (ii) a
representation that such shareholder is a holder of record of stock entitled
to vote on the business proposed by such shareholder and intends to appear in
person or by proxy at the meeting to present the proposed business to be
brought before the meeting; (iii) the name and address of the shareholder
proposing such business, as it appears on the Corporation's books, and of the
beneficial owner (as
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such term is defined in Rule 13d-3 under the Exchange Act), if any, on whose
behalf the business is proposed; (iv) the class and number of shares of the
Corporation which are owned beneficially (as such term is defined in Rule
13d-3 under the Exchange Act) and of record by the shareholder; (v) the
reason for conducting such business at the meeting and any material interest
of the shareholder or such beneficial owner in such business; and (vi) all
other information with respect to each such matter as would have been
required to be included in a proxy statement filed pursuant to Regulation 14A
as then in effect under the Exchange Act had proxies been solicited by the
Board with respect thereto. Notwithstanding anything in this paragraph (b)
to the contrary, in the event that the number of directors to be elected to
the Board is increased and there is no public announcement naming all of the
nominees for director or specifying the size of the increased Board made by
the Corporation at least forty (40) days prior to the first anniversary of
the preceding year's annual meeting, a shareholder's notice shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the 10th day following the day on which such public announcement
is first made by the Corporation.
(c) Only such business shall be conducted at a special meeting of
shareholders as shall have been brought before the meeting pursuant to the
Corporation's notice of meeting. Nominations of persons for election to the
Board of Directors may be made at a special meeting of shareholders with regard
to which the Board has determined that directors are to be elected (i) pursuant
to the Corporation's notice of meeting, (ii) by or at the direction of the
Board, or (iii) by any shareholder who is a shareholder of record at the time of
the giving of notice provided for in this Section 3, who shall be entitled to
vote for the election of directors at the meeting and who complies with the
notice procedures set forth in the last sentence of this paragraph (c). In the
event the Corporation calls a special meeting of shareholders for the purpose of
electing one or more directors to the Board, any such shareholder may nominate a
person or persons (as the case may be) for election to such position(s) as
specified in the Corporation's notice of meeting, if the shareholder's notice
setting forth the information required by paragraph (b) of this Section 3 shall
be delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the later of (i) the 30th
day prior to such special meeting, or (ii) the 10th day following the day on
which public announcement is first made of the date of the special meeting and
of the nominees proposed by the Board to be elected at such meeting.
(d) Only such business shall be conducted at a meeting of shareholders as
shall have been brought before the meeting in accordance with the procedures set
forth in this Section 3. The chairman of the meeting of shareholders shall have
the power and duty to determine whether a nomination or any business proposed to
be brought before the meeting was made in accordance with the procedures set
forth in this Section 3 and, if any proposed nomination or business is not in
compliance with this Section 3, to declare that such defective nominations or
proposal shall be disregarded.
(e) For purposes of this Section 3, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Sections 13,
14 or 15(d) of the Exchange Act.
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<PAGE>
(f) Notwithstanding the foregoing provisions of this Section 3, (i) if any
class or series of stock has the right, voting separately by class or series, to
elect directors at an annual or special meeting of shareholders, such directors
shall be nominated and elected pursuant to the terms of such class or series of
stock; and (ii) a shareholder shall also comply with all applicable requirements
of the Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this Section 3. To the extent this Section 3 shall be
deemed by the Board of Directors or the Securities and Exchange Commission, or
adjudged by a court of competent jurisdiction, to be inconsistent with the
rights of shareholders to request inclusion of a proposal in the Corporation's
proxy statement pursuant to 17 C.F.R. Section 240.14a-8 ("Rule 14a-8") under
the Exchange Act, such rule shall prevail.
SECTION 4. NOTICE OF MEETINGS. Written or printed notice stating the
place, day, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called, shall be delivered not less
than ten (10) or more than seventy (70) days before the date of the meeting,
either personally or by mail, by or at the direction of the Chairman of the
Board, the President, the Board of Directors or the Secretary or the officer or
persons calling the meeting, to each shareholder of record entitled to vote at
such meeting. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail, addressed to the shareholder at his or her
address as it appears on the records of the Corporation, with postage thereon
prepaid. Attendance at any meeting in person or by proxy shall constitute a
waiver of notice of such meeting, except when a shareholder attends a meeting
for the express purpose of objecting to the transaction of any business because
the meeting has not been lawfully called or convened.
SECTION 5. CONDUCT OF MEETING. The Board of Directors of the Corporation
may, to the extent not prohibited by law, adopt by resolution such rules and
regulations for the conduct of the meetings or any meeting of shareholders as it
shall deem appropriate. Except to the extent inconsistent with such rules and
regulations, the chairman of the meeting shall have the right and authority to
prescribe such rules, regulations and procedures and to do all such acts and
things as are necessary or desirable for the proper conduct of the meeting,
including, without limitation, (i) the establishment of an agenda for the
meeting, (ii) the establishment of procedures for the maintenance of order,
(iii) limitations on attendance at or participation in the meeting to
shareholders of record of the Corporation, their duly authorized proxies and
such other persons as shall be determined, (iv) restrictions on entry to the
meeting after a specified time, (v) limitations on the time allotted to the
questions or comments on the affairs of the Corporation, and (vi) the timing of
the opening and closing of the voting polls. Unless otherwise determined by the
Board or the chairman of the meeting, meetings of shareholders shall not be
required to be held in accordance with any rules of parliamentary procedure. If
demanded by ten percent (10%) of the shareholders entitled to vote, present in
person or by proxy, the vote on any question or election shall be by ballot and
conducted by two inspectors appointed by the chairman of the meeting and who are
not directors, in which event, all questions touching the qualification of
voters and the validity of proxies, shall be decided by such inspectors;
otherwise, no vote need be by ballot or conducted by inspectors.
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<PAGE>
SECTION 6. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. For the
purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders, or shareholders entitled to receive payment of any
dividend or other distribution, or in order to make a determination of
shareholders for any other proper purpose, the Board of Directors of the
Corporation may provide that the share transfer books shall be closed for a
stated period but not to exceed, in any case, seventy (70) days. If the share
transfer books shall be closed for the purpose of determining shareholders
entitled to notice of or to vote at a meeting of shareholders, such books shall
be closed for at least ten (10) days immediately preceding such meeting. In
lieu of closing the share transfer books, the Board of Directors may fix in
advance a date as the record date for any such determination of shareholders,
such date in any case to be not more than seventy (70) days preceding such
meeting or action, and, for a meeting of shareholders, not less than ten (10)
days immediately preceding such meeting. If the share transfer books are not
closed and no record date is fixed for the determination of shareholders
entitled to receive payment of a dividend, the date on which notice of the
meeting is mailed or the date on which the resolution of the Board of Directors
declaring such dividend is adopted, as the case may be, shall be the record date
of such determination of shareholders.
SECTION 7. LIST OF SHAREHOLDERS. The office or agent having charge of the
transfer books for shares shall make, at least ten (10) days and not more than
seventy (70) days before such meeting of shareholders, a complete list of the
shareholders entitled to vote at such meeting, arranged in alphabetical order,
with the address of each and the number of shares held by each, which list, for
a period of ten (10) days prior to such meeting, shall be kept on file at the
principal office of the Corporation and shall be subject to inspection by any
shareholder at any time during usual business hours. Such list shall also be
produced and kept open at the time and place of the meeting, and shall be
subject to inspection by any shareholder during the whole time of the meeting.
The original share ledger or transfer book, or a duplicate thereof, shall be
prima facie evidence as to who are the shareholders entitled to examine such
list or share ledger or transfer book or to vote at any meeting of shareholders.
SECTION 8. QUORUM AND MANNER OF ACTING. A majority of the outstanding
shares of the Corporation entitled to vote at the meeting, represented in person
or by proxy, shall constitute a quorum at any meeting of shareholders; provided
that, if less than a majority of the outstanding shares entitled to vote at the
meeting are represented at said meeting, a majority of the shares so represented
may adjourn the meeting from time to time without further notice to any
shareholder not present at the meeting, to a specified date not later than
ninety (90) days after such adjournment. At any subsequent session of an
adjourned 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. If a quorum is present,
the affirmative vote of a majority of the shares represented at any meeting
shall be the act of the shareholders, unless the vote of a greater number or
voting by classes is required by law, the Articles of Incorporation or these
Bylaws. The shareholders present at a duly called or held meeting at which a
quorum is present may continue to do business until adjournment, notwithstanding
the withdrawal of enough shareholders to leave less than a quorum.
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SECTION 9. PROXIES. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by his or her duly
authorized attorney-in-fact. Such proxy shall be filed with the Secretary of
the Corporation before or at the time of the meeting. No proxy shall be valid
after eleven (11) months from the date of execution, unless otherwise provided
in the proxy.
SECTION 10. VOTING OF SHARES; NO CUMULATIVE VOTING. Each shareholder
shall have the number of votes provided in the Articles of Incorporation for
each share of stock entitled to vote under the provisions of the Articles of
Incorporation and registered in such shareholder's name on the books of the
Corporation. Except as otherwise provided by the Articles of Incorporation, no
cumulative voting shall be permitted in the election of directors. At all
meetings of shareholders, except as otherwise required by statute, by the
Articles of Incorporation or by these Bylaws, all matters shall be decided by
the vote of a majority in interest of the shareholders entitled to vote and
present in person or by proxy.
SECTION 11. VOTING OF SHARES OF CERTAIN HOLDERS. The term "shareholder"
as used in these Bylaws means a registered holder of share of the Corporation;
provided, however, that if permitted by law:
(a) Shares of stock in the name of another corporation, foreign or
domestic, may be voted by such officer, agent or proxy as the bylaws of such
corporation may prescribe, or, in the absence of such provision, as the Board of
Directors of such corporation may determine.
(b) Shares of stock in the name of a deceased person may be voted by his
or her executor or administrator in person or by proxy.
(c) Shares of stock in the name of a guardian, curator or trustee may be
voted by such fiduciary either in person or by proxy provided the books of the
Corporation show the stock to be in the name of such fiduciary in such capacity.
(d) Shares of stock in the name of a receiver may be voted by such
receiver, and shares held by or in the control of a receiver may be voted by
such receiver without the transfer thereof into his or her name, if authority to
do so is contained in an appropriate order of the court by which such receiver
was appointed.
(e) Shares of stock which have been pledged shall be voted by the pledgor
until the shares of stock have been transferred into the name of the pledgee,
and, thereafter, the pledgee shall be entitled to vote the shares so
transferred.
SECTION 12. INFORMAL ACTION BY SHAREHOLDERS. Any action required to be
taken at a meeting of the shareholders, or any other action 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 subject matter thereof.
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ARTICLE III
DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the Corporation
shall be managed by its Board of Directors which may exercise all such powers of
the Corporation and do all such lawful acts and things as are not by law, the
Articles of Incorporation or these Bylaws directed or required to be exercised
and done by shareholders.
SECTION 2. NUMBER, TENURE AND QUALIFICATIONS. The number of directors to
constitute the Board of Directors shall be four (4) and such number may be
increased or decreased by future action of the Board of Directors, provided that
the number of directors shall not be less than three (3). Each director shall
hold office for the term specified in the Articles of Incorporation and until
his or her successor, if any, shall have been elected and qualified, or until
his or her earlier resignation, removal or death. Only such persons who are
nominated in accordance with the procedures set forth in Article II, Section 3
shall be eligible to serve as directors.
SECTION 3. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Unless otherwise
provided by law, the Articles of Incorporation or these Bylaws, any vacancies in
the Board of Directors for any reason, and any newly created directorships
resulting from any increase in the number of directors, may be filled by a
majority of the remaining directors, although less than a quorum, or by a sole
remaining director, and any directors so chosen shall hold office until the next
election of the class for which such directors shall have been chosen and until
their respective successors are elected and qualified or until their earlier
resignation, removal or death.
SECTION 4. MEETINGS.
(a) The annual meeting of the Board of Directors shall be held at the same
place as the annual meeting of the shareholders immediately following said
meeting. In the event of adjournment of such annual meeting of the Board of
Directors, because a quorum is not present or otherwise, such meeting may be
held, without further notice, at any place within or without the State of
Missouri, as may be designated by the directors adjourning such meeting,
provided a quorum is present, but in no event later than thirty (30) days after
the annual meeting of shareholders. All other meetings of the Board of
Directors shall be held at the principal place of business of the Corporation or
at such other place within or without the State of Missouri as may be designated
by the Board of Directors.
(b) Regular meetings of the Board of Directors may be held without notice
at such times and places either within or without the State of Missouri as shall
from time to time be fixed by resolution adopted by the Board of Directors. Any
business may be transacted at the annual meeting or any regular meeting of the
Board.
(c) Except as may otherwise be required by law, special meetings of the
Board of Directors may be called at any time by the Chairman of the Board, the
President or a majority of the members of the Board of Directors. Such meeting
may be held either within or without the State of Missouri.
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SECTION 6. NOTICE OF MEETINGS. No notice, other than that provided by
these Bylaws, shall be necessary for the annual meeting of the Board of
Directors, and no notice, other than as specified in Section 4(b), shall be
necessary for any regular meeting of the Board. Written notice of each special
meeting shall be given to each director, delivered personally or by mail or by
telephone, at least three (3) days prior thereto. If mailed, such notice shall
be deemed to be delivered when deposited in the United States mail, addressed to
the place of business of the director, with postage thereon prepaid. If notice
be given by telegram, such notices shall be deemed to be delivered when the
telegram is delivered to the telegraph company, addressed to the place of
business of the director. Whenever any notice is required to be given to any
director, a waiver thereof in writing signed by the director, whether before or
after the time stated therein, shall be deemed equivalent to the giving of such
notice. Attendance at a meeting shall be deemed a waiver of notice thereof,
except where such attendance is for the purpose of objecting to the transaction
of any business because the meeting is not lawfully called or convened.
SECTION 7. MEETING BY TELEPHONE CONFERENCE OR SIMILAR COMMUNICATIONS
EQUIPMENT. Unless otherwise restricted by the Articles of Incorporation or
these Bylaws 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 the
Board or such 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.
SECTION 8. QUORUM. A majority of the number of directors elected and
holding office at the time of any meeting shall constitute a quorum for the
transaction of business at any meeting of the Board of Directors, provided that
if less than a majority of such number of directors are present at said meeting,
a majority of the directors present may adjourn the meeting from time to time
without further notice. The act of a majority of the directors present at any
meeting at which a quorum is present shall be the act of the Board, unless the
act of a greater number is required by law, the Articles of Incorporation or
these Bylaws.
SECTION 9. ACTION BY UNANIMOUS CONSENT. Any action which is required to
be or may be taken at a meeting of the Board of Directors or any committee of
the Board may be taken without a meeting if all the members of the Board of
Directors or committee, as the case may be, consent in writing to such action.
Such consents shall have the same force and effect as a unanimous vote of the
directors or committee members at a meeting duly held. The Secretary shall file
such consents with the minutes of the meetings of the Board or the committee, as
the case may be.
SECTION 10. COMMITTEES.
(a) The Board of Directors may, by resolution or resolutions adopted by a
majority of the whole Board, designate two (2) or more directors of the
Corporation to constitute one or more committees (including, without limitation,
an Executive Committee). Each such committee, to the extent provided in such
resolution or resolutions, shall have and may exercise all of the authority of
the Board in the management of the Corporation; provided, however, that the
designation of each such committee and the delegation thereto of authority shall
not operate to
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relieve the Board, or any member thereof, of any responsibility imposed upon
it or such member by law.
(b) Each such committee 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
each such committee if the committee so requests.
SECTION 11. EXECUTIVE COMMITTEE. The Board of Directors at the annual or
any regular or special meeting of the directors may, by resolution adopted by a
majority of the whole Board, designate and elect any two (2) or more directors
of the Corporation to constitute an Executive Committee of the Corporation and
appoint one of the directors so designated as the chairman of the Executive
Committee. 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. Vacancies in the committee may
be filled by the Board at any meeting thereof. Each member of the committee
shall hold office until such committee member's successor has been duly elected
and qualified, or until such committee member's resignation or removal from the
Executive Committee by the Board, or until such committee member otherwise
ceases to be a director. Any member of the Executive Committee may be removed
from the committee by resolution adopted by a majority of the Board. The
compensation, if any, of members of the Executive Committee shall be established
by resolution of the Board.
(c) All actions taken by the Executive Committee shall be reported to the
Board at the next meeting of the Board after such action is taken. The minute
books of the Executive Committee shall at all times be open to the inspection of
any director.
(d) The Executive Committee shall meet at the call of its chairman or of
any two members of the Executive Committee. A majority of the Executive
Committee shall constitute a quorum for the transaction of business (or if there
shall only be two members, then both must be present), and the act of a majority
of those present at any meeting at which a quorum is present (or if there shall
be only two members, then they must act unanimously) shall constitute the act of
the Executive Committee.
SECTION 12. AUDIT COMMITTEE.
(a) The Board of Directors at the annual or any regular or special meeting
of the directors may, by resolution adopted by a majority of the whole Board,
designate and elect any two (2) or more directors of the Corporation to
constitute an Audit Committee and appoint one of the directors so designated as
the chairman of the Audit Committee. Vacancies in the committee may be filled
by the Board at any meeting thereof. Each member of the committee shall hold
office until such committee member's successor has been duly elected and
qualified, or until such committee member's resignation or removal from the
Audit Committee by the Board, or until such committee member otherwise ceases to
be a director. Any member of the Audit Committee may be removed from the
committee by resolution adopted by a majority of the Board. The compensation,
if any, of members of the Audit Committee shall be established by resolution of
the Board.
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(b) The Audit Committee shall be responsible for (i) recommending to the
Board the appointment or discharge of independent auditors, (ii) reviewing with
the management of the Corporation and the independent auditors the terms of
engagement of independent auditors, including the fees, scope and timing of the
audit and any other services rendered by the independent auditors, (iii)
reviewing, with the independent auditors and management, the Corporation's
policies and procedures with respect to internal auditing, accounting and
financial controls, (iv) reviewing with management the independent statements,
audit results and reports and the recommendations made by any of the auditors
with respect to changes in accounting procedures and internal controls, (v)
reviewing the results of studies of the Corporation's system of internal
accounting controls, (vi) and performing any other duties or functions deemed
appropriate by the Board. The Audit Committee shall have the powers and rights
necessary or desirable to fulfill these responsibilities, including the power
and right to consult with legal counsel and to rely upon the opinion of legal
counsel. The Audit Committee is authorized to communicate directly with the
Corporation's financial officers and employees, internal auditors and
independent auditors as it deems desirable and to have the internal auditors or
independent auditors perform any additional procedures as it deems appropriate.
(c) All actions taken by the Audit Committee shall be reported to the
Board at the next meeting of the Board after such action is taken. The minute
books of the Audit Committee shall at all times be open to the inspection of any
director.
(d) The Audit Committee shall meet at the call of its chairman or of any
two members of the Audit Committee. A majority of the Audit Committee shall
constitute a quorum for the transaction of business (or if there shall only be
two members, then both must be present), and the act of a majority of those
present at any meeting at which a quorum is present (or if there shall be only
two members, then they must act unanimously) shall constitute the act of the
Audit Committee.
SECTION 13. COMMITTEE PROCEDURES. Unless otherwise provided in these
Bylaws or in the resolution designating any committee, any committee may fix its
rules or procedures, fix the time and place of its meetings and specify what
notice of meetings, if any, shall be given.
SECTION 14. LIMITATION OF COMMITTEE POWERS. Notwithstanding any other
provision of these Bylaws, no committee of the Board of Directors shall have the
power or authority of the Board with respect to (i) amending the Articles of
Incorporation, (ii) approving or recommending to shareholders any type or form
of Business Combination (as defined in Section 351.459 of The General and
Business Corporation Law of Missouri), (iii) approving or recommending to the
shareholders a dissolution of the Corporation or a revocation of a dissolution,
(iv) amending these Bylaws, (v) declaring a dividend or making any other
distribution to the shareholders, (vi) authorizing the issuance of stock
otherwise than pursuant to the grant or exercise of a stock option under
employee stock options of the Corporation or in connection with a public
offering of securities registered under the Securities Act of 1933, or (vii)
appointing any member of any committee of the Board.
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SECTION 15. COMPENSATION OF DIRECTORS. The Board of Directors, by
resolution adopted by a majority of the whole Board, may establish reasonable
compensation of all directors for services to the Corporation as directors,
officers, or otherwise, provided that nothing herein contained shall be
construed to preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor. Members of any standing committee
may be allowed like compensation for their services to the Corporation.
SECTION 16. RESIGNATIONS. Any director may resign at any time upon
written notice to the Corporation. Such resignation shall take effect at the
time specified therein or, if no time is specified therein, upon receipt thereof
by the Corporation, and, unless otherwise specified therein, the acceptance of
such resignation by the Corporation shall not be necessary to make such
resignation effective.
SECTION 17. REMOVAL OF DIRECTORS. Any director or directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote.
ARTICLE IV
OFFICERS
SECTION 1. DESIGNATIONS.
(a) The officers of the Corporation shall be a Chairman of the Board of
Directors, a Chief Executive Officer, a President, a Chief Operating Officer,
one or more Executive Vice Presidents, one or more Vice Presidents, a Secretary,
a Treasurer, one or more Assistant Secretaries and one or more Assistant
Treasurers. The Board may, from time to time, elect one or more of the
prescribed officers as it shall deem advisable, but need not elect any officers
other than a Chairman of the Board, a President, a Treasurer and a Secretary.
The Board may, if it desires, elect or appoint additional officers and may
further identify or describe any one or more of the officers of the Corporation.
(b) The Chairman of the Board of Directors shall be chosen from among the
Board, but the other officers of the Corporation need not be members of the
Board. Any two or more offices may be held by the same person.
SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the Corporation
shall be elected by the Board of Directors at the annual meeting of the Board of
Directors held after each annual meeting of shareholders. If the election of
officers shall not be held at such meeting, such election shall be held as soon
thereafter as may be convenient. Vacancies may be filled or new offices filled
at any meeting of the Board of Directors. Each officer shall hold office until
his or her successor shall have been duly elected and shall have qualified, or
until his or her death, or until he or she shall resign or shall have been
removed in the manner hereinafter provided. Election or appointment of an
officer or agent shall not of itself create contract rights.
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SECTION 3. AGENTS. The Board of Directors from time to time may appoint
such other agents for the Corporation as the Board shall deem necessary or
advisable, each of whom shall serve at the pleasure of the Board or for such
period as the Board may specify, and shall exercise such powers, have such
titles and perform such duties as shall be determined from time to time by the
Board or by an officer empowered by the Board to make such determinations.
SECTION 4. REMOVAL. Any officer or agent elected or appointed by the
Board of Directors may be removed by the Board of Directors whenever in its
judgment the best interests of the Corporation would be served thereby;
provided, however, that such removal shall be without prejudice to the contract
rights, if any, of the person so removed.
SECTION 5. 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, agents and
employees of the Corporation may be fixed, increased or decreased by the Board,
but until action is taken with respect thereto by the Board, 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 to do so.
SECTION 6. CHAIRMAN OF THE BOARD. Unless the Board of Directors otherwise
provides, the Chairman of the Board shall also be the Chief Executive Officer of
the Corporation. The Chairman of the Board shall preside at all meetings of the
shareholders and of the Board of Directors. The Chairman shall have the
authority to sign all bonds, notes, debentures, mortgages and other contracts of
the Corporation, may cause the seal to be affixed thereto, and may execute all
other instruments, for and in the name of the Corporation.
SECTION 7. PRESIDENT.
(a) Subject to the control of the Board of Directors, the President shall
have general supervision, control, and management of the affairs and business of
the Corporation, and shall have general charge and supervision of all officers,
agents, and employees of the Corporation. In the event of the absence or
disability of the Chairman of the Board, the President shall perform the duties
and exercise the powers of the Chairman of the Board. In the absence of
specific action by the Board of Directors, the President shall have final
approval of contracts executed by the Corporation.
(b) The President may execute certificates of stock of the Corporation and
all bonds, notes, debentures, mortgages and other contracts of the Corporation,
may cause the seal to be affixed thereto, and may execute all other instruments,
for and in the name of the Corporation.
(c) Unless the Board of Directors otherwise provides, the President, or
any person designated in writing by the President, shall have full power and
authority on behalf of the Corporation to (i) attend and to vote or take action
at any meeting of the holders of securities of corporations in which the
Corporation may hold securities, and at such meetings shall possess and may
exercise any and all rights and powers incident to being a holder of such
securities, and
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(ii) execute and deliver waivers of notice and proxies for an in the name of
this Corporation with respect to securities of any such corporation held by
this Corporation.
(d) The President shall, unless the Board of Directors otherwise provides,
be an ex officio member of all standing committees.
(e) The President shall perform such other duties and have such other
powers, responsibilities and authority as may be prescribed elsewhere in these
Bylaws or from time to time by the Board of Directors.
SECTION 8. CHIEF OPERATING OFFICER, EXECUTIVE VICE PRESIDENTS AND VICE
PRESIDENTS. In the absence of the President, or in the event of his or her
inability or refusal to act, the Chief Operating Officer, the Executive Vice
President(s) and the Vice President(s) in the order designated or, in the
absence of any designation, the Chief Operating Officer shall perform the duties
of the President, and, when so acting, shall have all powers of and be subject
to all the restrictions upon the President. The Chief Operating Officer may
sign, with the Secretary or an Assistant Secretary, certificates of stock of the
Corporation; and shall perform other duties as from time to time may be assigned
to him or her by the President or by the Board of Directors.
SECTION 9. TREASURER AND ASSISTANT TREASURERS. The Treasurer shall have
charge and custody of and be responsible for all funds and securities of the
Corporation; receive and give receipts for moneys due and payable to the
Corporation from any source whatsoever; deposit all such moneys in the name of
the Corporation in such banks, trust companies, or other depositories as shall
be selected in accordance with the provisions of these Bylaws; and, in general,
perform all the duties incident to the office of Treasurer and such other duties
as from time to time may be assigned to him or her by the President or by the
Board of Directors. In the absence or disability of the Treasurer or in the
event of the Treasurer's inability or refusal to act, any Assistant Treasurer
may perform the duties and exercise the powers of the Treasurer until the Board
of Directors otherwise provides. Assistant Treasurers shall perform such other
duties and have such other powers, responsibilities and authority as the Board
may from time to time prescribe.
SECTION 10. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall
perform all duties incident to the office of Secretary and such other duties as
from time to time may be assigned to him or her by the President or by the Board
of Directors. The Secretary shall keep the minutes of the meetings of
shareholders and the Board of Directors in one or more books provided for that
purpose; see that all notices are duly given in accordance with the provisions
of these Bylaws or as required by law; be custodian of the corporate records and
of the seal of the Corporation and see that the seal of the Corporation is
affixed to all certificates of stock prior to the issuance thereof, and to all
documents, the execution of which on behalf of the Corporation under its seal is
duly authorized in accordance with the provisions of these Bylaws; keep a
register of the post office address of each shareholder, which shall be
furnished to the Secretary by such shareholders; sign with the President or the
Chief Operating Officer certificates for shares of the corporation, the issue of
which shall have been authorized by resolution of the Board of Directors; and
have general charge of the share transfer books of the Corporation. In the
absence or disability of the Secretary or in the event of the Secretary's
inability or refusal to act, any Assistant Secretary may perform the duties and
exercise the powers of the Secretary until the Board of Directors
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otherwise provides. Assistant Secretaries shall perform such other duties
and have such other powers, responsibilities and authority as the Board may
from time to time prescribe.
ARTICLE V
INDEMNIFICATION
SECTION 1. INDEMNIFICATION IN ACTIONS BY THIRD PARTIES. 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, other than an action
by or in the right of the Corporation, by reason of the fact that the person is
or was a director, officer, employee, or agent of the Corporation, or is or was
serving in an Indemnifiable Capacity against all liabilities and expenses,
including, without limitation, attorneys' fees, judgments, fines, amounts paid
in settlement (provided that such settlement and all amounts paid in connection
therewith are approved in advance by the Corporation in accordance with Section
4), ERISA excise taxes or penalties, or other expenses actually and reasonably
incurred in connection with such action, suit, or proceeding (including, without
limitation, the investigation, defense, settlement, or appeal of such action,
suit or proceeding) if such person acted in good faith and in a manner such
person 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 the conduct was unlawful; provided that the
Corporation shall not be required to indemnify or advance expenses to any such
person seeking indemnification or advancement of expenses in connection with any
action, suit or proceeding initiated by such person (including, without
limitation, any cross-claim or counterclaim) unless the initiation of such
action, suit or proceeding was authorized by the Board of Directors or as
otherwise provided in Section 4. 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 such person
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 the conduct was unlawful.
SECTION 2. INDEMNIFICATION IN DERIVATIVE ACTIONS. 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 or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that the
person is or was a director, officer, employee or agent of the Corporation, or
is or was serving in an Indemnifiable Capacity against amounts paid in
settlement thereof (provided that such settlement and all amounts paid in
connection therewith are approved in advance by the Corporation in accordance
with Section 4) and all expenses, including attorneys' fees, actually and
reasonably incurred in connection with the defense or settlement of the action,
suit or proceeding (including, without limitation, the investigation, defense,
settlement or appeal of such action, suit or proceeding) if the person acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the Corporation; except that no indemnification under this
Section 2 shall be made in respect of any claim, issue or matter as to which
such person shall have been adjudged to be liable for negligence or misconduct
in the performance of such person's duties to the Corporation unless and only to
the extent that the
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court in which the action or suit was brought determines upon application,
that, despite the adjudication of liability and in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper.
SECTION 3. DETERMINATION OF RIGHT TO INDEMNIFICATION. Any indemnification
under Section 1 and 2 of this Article, 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 director, officer, employee or agent is proper in
the circumstances because such person has met the applicable standard of conduct
set forth in this article. 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. If such determination is adverse to the person to be indemnified
hereunder, such person shall have the right to maintain an action in any court
of competent jurisdiction against the Corporation to determine whether or not
such person has met the requisite standard of conduct and is entitled to such
indemnification hereunder. For the purposes of such court action, an adverse
determination as to the eligibility of a person for indemnification made
pursuant to this Section 3 shall not constitute a defense to such action nor
create a presumption regarding such person's eligibility for indemnification
hereunder. If such court action is successful and the person is determined to
be entitled to such indemnification, such person shall be reimbursed by the
Corporation for all fees and expenses, including attorneys' fees, actually and
reasonably incurred in connection with any such action (including, without
limitation, the investigation, defense, settlement or appeal of such action).
SECTION 4. ADVANCEMENT OF EXPENSES. Expenses incurred in defending a
civil or criminal action, suit or proceeding shall 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 director, officer, employee or agent to repay
such amounts unless it shall ultimately be determined that such person is
entitled to be indemnified by the Corporation as authorized in this Article. In
no event shall any advance be made in instances where it is reasonably
determined that such person would not be entitled to indemnification hereunder
or that such person deliberately breached such person's duty to the Corporation
or its shareholder (i) by the Board by a majority vote of a quorum consisting of
directors who were not parties to the action, suit or proceeding, (ii) if such
quorum is not obtainable, or even if obtainable, if a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or
(iii) by the shareholders, and such determination shall be final and binding.
SECTION 5. NON-EXCLUSIVITY. The indemnification provided by this Article
shall not be deemed exclusive of any other rights to which those seeking
indemnification shall be entitled under any other bylaw, agreement, vote of
members or disinterested directors or otherwise, both as to action in such
person's 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,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
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SECTION 6. INSURANCE. Upon resolution passed by the Board of Directors,
the Corporation may purchase and maintain insurance on behalf of any person who
is or was serving in an Indemnifiable Capacity against any liability asserted
against such person and incurred by such person in any such capacity, or arising
out of such person's status as such, whether or not the Corporation would have
the power to indemnify such person against such liability under the provisions
of this Article V. Notwithstanding anything in this Article V to the contrary:
(i) the Corporation shall not be obligated to indemnify any person serving in an
Indemnifiable Capacity for any amounts which have been paid directly to such
person by any insurance maintained by the Corporation; and (ii) an
indemnification provided pursuant to this Article V (A) shall not be used as a
source of contribution to, or as a substitute for, or as a basis for recoupment
of any payments pursuant to, any indemnification obligation or insurance
coverage which is available from any Other Enterprise, and (B) shall become
operative, and payments shall be required to be made thereunder, only in the
event and to the extent that the amounts in question have not been fully paid by
any indemnification obligation or insurance coverage which is available from any
Other Enterprise.
SECTION 7. VESTING OF RIGHTS. The rights granted or created hereby
shall be vested in each person entitled to indemnification hereunder as a
bargained-for, contractual condition of such person's serving or having
served in an Indemnifiable Capacity and, while this Article V may be amended
or repealed, no such amendment or repeal shall release, terminate or
adversely affect the rights of such person under this Article V with respect
to any act taken or the failure to take any act by such person prior to such
amendment or repeal or with respect to any action, suit or proceeding with
respect to such act or failure to act filed after such amendment or repeal.
SECTION 8. DEFINITIONS. For purposes of this Article V, references to:
(a) "the Corporation" shall, if and only if the Board of Directors so
determines, include, in addition to the resulting or surviving corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify a person who serves in an
Indemnifiable Capacity so that any person who is or was serving in an
Indemnifiable Capacity as to a constituent corporation shall stand in the same
position under the provisions of this Article V with respect to the resulting or
surviving corporation as such person would if such person had served the
resulting or surviving corporation in the same capacity;
(b) "Other Enterprise" or "Other Enterprises" shall include, without
limitation, any other corporation, partnership, limited liability company, joint
venture, trust, employee benefit plan or other enterprise;
(c) "fines" shall include any excise taxes assessed against a person with
respect to an employee benefit plan;
(d) "defense" shall include investigations of any threatened, pending or
completed action, suit or proceeding as well as appeals thereof and shall also
include any defensive assertion of a cross-claim or counterclaim;
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(e) "serving at the request of the Corporation" shall include any service
by a person in an Indemnifiable Capacity which imposes duties on, or involves
services by, such person with respect to an employee benefit plan, its
participants, or beneficiaries; and a person who acted in good faith and in a
manner such person 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 interest of the Corporation" as referred to in
this Article V; and
(f) "Indemnifiable Capacity" shall include service by a person as a
director or officer of the Corporation, or, at the Corporation's request,
service by a person as a director, officer, trustee or in any other comparable
position of an Other Enterprise.
For the purpose of this Article V, unless the person described in Section 4
making a determination as to the availability of indemnification shall determine
otherwise, any director, officer, employee or agent of the Corporation serving
as a director, officer, trustee or in any other comparable position of an Other
Enterprise of which the Corporation, directly or indirectly, is a shareholder or
creditor, or in which the Corporation is in any way interested, shall be
presumed to be serving as such at the request of the Corporation. In all other
instances where any person shall serve as a director, officer, trustee or in any
other comparable position of an Other Enterprise, if it is not otherwise
established that such person is or was serving at the request of the
Corporation, the persons described by Section 4 making a determination as to the
availability of indemnification shall determine whether such person is or was
serving at the request of the Corporation, and it shall not be necessary to show
any actual or prior request for such service, which determination shall be final
and binding on the Corporation and the person seeking indemnification.
SECTION 9. SEVERABILITY. If any provision of this Article V or the
application of any such provision to any person or circumstance is held invalid,
illegal or unenforceable for any reason whatsoever, the remaining provisions of
this Article V and the application of such provision to other persons or
circumstances shall not be affected thereby and, to the fullest extent possible,
the court finding such provision invalid, illegal or unenforceable shall modify
and construe the provision so as to render it valid and enforceable as against
all persons or entities and to give the maximum possible protection to persons
subject to indemnification hereby within the bounds of validity, legality and
enforceability. Without limiting the generality of the foregoing, if any person
who is or was serving in an Indemnifiable Capacity is entitled under any
provision of this Article V to indemnification by the Corporation of some or a
portion of the judgments, amounts paid in settlement, attorneys' fees, ERISA
excise taxes or penalties, fines or other expenses actually and reasonably
incurred by any such person in connection with any threatened, pending or
completed action, suit or proceeding (including, without limitation, the
investigation, defense, settlement or appeal of such action, suit or
proceeding), whether civil, criminal, administrative, investigative or
appellate, but not, however, for all of the total amount thereof, the
Corporation shall nevertheless indemnify such person for the portion thereof to
which such person is entitled.
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ARTICLE VI
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. PAYMENT FOR SHARES OF STOCK. The Corporation shall not issue
shares of stock of the Corporation except for money paid, labor done or property
actually received or 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, and no loan of money for the purpose of such payment shall be made by
the Corporation.
SECTION 2. CERTIFICATES FOR SHARES. Certificates representing shares
of the Corporation shall be in such form as may be determined by the Board of
Directors. Such certificates shall be signed by the President, the Chief
Operating Officer and by the Secretary or an Assistant Secretary and shall be
sealed with the seal of the Corporation, provided that such seal may be a
facsimile and where any such certificate is countersigned by a transfer
agent, other than the Corporation or its employees, the signatures of said
officers upon such certificate may be facsimiles. In case any such officer,
transfer agent or registrar who has signed or whose facsimile signature has
been placed upon any such certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, such
certificate may nevertheless be issued by the Corporation with the same
effect as if such person were such officer, transfer agent or registrar at
the date of issue. All certificates for shares shall be consecutively
numbered or otherwise identified. The name of the person to whom the shares
represented thereby are issued, with the number of shares and date of issue,
shall be entered on the books of the Corporation. All certificates
surrendered to the Corporation or its transfer agent for transfer shall be
cancelled and no new certificate shall be issued until the former certificate
for a like number of shares shall have been surrendered and cancelled, except
as provided in Section 3.
SECTION 2. TRANSFER OF SHARES. Transfers of shares of the Corporation
shall be made only on the books of the Corporation by the holder of record
thereof or by his or her legal representative, who shall furnish proper evidence
of authority to transfer, or by his or her attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary of the Corporation,
and on surrender for cancellation of the certificate for such shares. The
person in whose name shares stand on the books of the Corporation shall be
deemed the owner thereof for all purposes as regards the Corporation. The stock
record book and other transfer records shall be in the possession of the
Secretary or of a transfer agent for the Corporation. The Corporation, by
resolution of the Board of Directors, may from time to time appoint a transfer
agent 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 (and upon
the revocation of any such appointment, thereafter until a new appointment is
similarly made) the Secretary of the Corporation shall be the transfer agent 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 of such transfer agent.
-18-
<PAGE>
SECTION 3. 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, if any, in such sum as the Board of Directors may provide;
provide, however, that a new certificate may be issued without requiring a bond
when in the judgment of the Board it is proper to do so.
ARTICLE VII
GENERAL PROVISIONS
SECTION 1. FISCAL YEAR. The fiscal year of the Corporation shall begin on
the first day of January in each year and end on the thirty-first day of
December in each year, or such other period of twelve (12) months as the Board
of Directors may determine.
SECTION 2. DIVIDENDS. The Board of Directors may from time to time
declare, and the Corporation may pay dividends on its outstanding shares in the
manner and upon the terms and conditions provided by law and its Articles of
Incorporation.
SECTION 3. CORPORATE SEAL. The Board of Directors shall provide a
corporate seal which shall be in the form of a circle and shall have inscribed
thereon the name of the Corporation and the words "Corporate Seal -- Missouri."
Such seal may be used by causing it, or a facsimile thereof, to be impressed or
affixed or in any manner reproduced upon the document to be sealed.
SECTION 4. CONTRACTS WITH OFFICERS OR DIRECTORS OR THEIR AFFILIATES.
(a) 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 any committee thereof which authorizes the contract or transaction,
or solely because such persons or their votes are counted for such purpose, if:
(i) The material facts as to such person's relationship or interest
and as to the contract or transaction are disclosed or are known to the
Board of Directors or such committee, and the Board or such committee in
good faith authorized 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
(ii) The material facts as to such person's 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 vote of the shareholders; or
-19-
<PAGE>
(iii) The contract or transaction is fair as to the Corporation as
of the time it is authorized or approved by the Board of Directors, a
committee thereof, or the shareholders.
(b) Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or a committee which
authorized the contract or transaction.
SECTION 5. DEPOSITORIES. The moneys of the Corporation shall be deposited
in the name of the Corporation in such bank or banks or other depositories as
the Board of Directors shall designate, and shall be drawn out only by check or
draft signed by persons designated by resolution adopted by the Board.
Notwithstanding the foregoing, the Board may by resolution authorize an officer
or officers of the Corporation to designate any bank or banks or other
depositories in which moneys of the Corporation may be deposited, and to
designate the persons who may sign checks or drafts on any particular account or
accounts of the Corporation, whether created by direct designation of the Board
or by an authorized officer or officers as aforesaid.
SECTION 6. AMENDMENTS. Except as may be specified in Article V of these
Bylaws, these Bylaws may from time to time be altered, amended or repealed, or
new Bylaws may be adopted, in the manner provided in the Articles of
Incorporation or by law.
-20-
<PAGE>
EXHIBIT 10.7
ELECTRONIC PROCESSING, INC
1995 STOCK OPTION PLAN
ADOPTED OCTOBER 17, 1995
AMENDED NOVEMBER 4, 1996
AMENDED JANUARY 23, 1997
AMENDED FEBRUARY 3, 1997
AMENDED MARCH 3, 1998
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 Board of Directors of the
Corporation (the "Board") or a Stock Option Plan Committee ("Committee") of
the Board. Unless the Committee is composed solely of not less than two
members of the Board who qualify as "Non-Employee Directors" under Rule 16b-3
or its successors promulgated under the Securities Exchange Act of 1934, as
amended ("Rule 16b-3"), all grants of stock options under the Plan to
officers and directors of the Corporation shall be made by the Board. (The
administrator of the Plan shall be referred to herein as the "Committee",
regardless of whether the Plan is administered by the Board or the
Committee). 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 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
<PAGE>
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
Five Hundred Thousand (500,000) and such amounts of shares of Common Stock
shall be, and hereby are reserved for such purpose. Such shares may be
previously issues 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 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
-2-
<PAGE>
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 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, as determined by the
Committee, which may be less than the fair market value of the Common Stock
on the date the NSO is granted; provided, however, that the purchase price
may not be less than eighty-five percent (85%) of the fair market value of
the Common Stock so long as the Common Stock is qualified for sale in the
State of Minnesota.
(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 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
-3-
<PAGE>
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.
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.
-4-
<PAGE>
(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 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, 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
-5-
<PAGE>
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.
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
-6-
<PAGE>
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
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 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
-7-
<PAGE>
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 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
-8-
<PAGE>
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.
(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.
-9-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED 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 included herein dated
February 12, 1998 relating to the financial statements of Electronic
Processing, Inc., which appears in such Prospectus. We also consent to the
reference to our Firm under the heading "Independent Public Accountants" in
such Prospectus.
BAIRD, KURTZ & DOBSON
Kansas City, Missouri
April 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1998 JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1998 DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 1,652 1,835 5 27
<SECURITIES> 0 0 0 0
<RECEIVABLES> 1,343 1,119 803 480
<ALLOWANCES> 5 5 5 5
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 3,198 3,128 957 637
<PP&E> 7,370 6,879 4,718 3,283
<DEPRECIATION> 3,587 3,338 2,521 1,800
<TOTAL-ASSETS> 8,552 8,161 4,766 3,377
<CURRENT-LIABILITIES> 1,273 1,352 2,134 1,161
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 35 34 18 18
<OTHER-SE> 5,822 5,565 972 740
<TOTAL-LIABILITY-AND-EQUITY> 8,552 8,161 4,766 3,377
<SALES> 2,536 8,389 6,319 5,234
<TOTAL-REVENUES> 2,557 8,457 6,323 5,235
<CGS> 1,177 3,998 3,309 2,786
<TOTAL-COSTS> 1,177 3,998 3,309 2,786
<OTHER-EXPENSES> 924 3,209 2,399 2,036
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 37 160 281 262
<INCOME-PRETAX> 419 1,090 334 151
<INCOME-TAX> 168 725 0 0
<INCOME-CONTINUING> 251 365 334 151
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 251 365 334 151
<EPS-PRIMARY> .07 .20<F1> .11 .05
<EPS-DILUTED> .07 .19<F1> .11 .05
<FN>
<F1> Calculated on a pro forma basis
</FN>
</TABLE>
