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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-22081
-------------------------------------
ELECTRONIC PROCESSING, INC.
(Name of small business issuer in its charter)
Missouri 48-1056429
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
501 Kansas Avenue, Kansas City, Kansas 66105-1300
(Address of Principal Executive Office)
913-321-6392
(Issuer's Telephone Number)
Securities Registered Under Section 12(b) of the Exchange Act:
None
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, Without Par Value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months and (2) has
been subject to such filing requirements for the past 90 days. Yes X No __
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
Revenues for the fiscal year ended December 31, 1997 are $8,389,144
The aggregate market value of the Common Stock held by non-affiliates (based
upon the last reported price on the bid-ask average on the Nasdaq SmallCap
Market-TM-) on March 20, 1998 was approximately $22,800,000. As of March 20,
1998 there were 3,419,974 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Electronic Processing, Inc. ("EPI" or the "Company") serves a national client
base with specialty products that facilitate financial and administrative
aspects of bankruptcy management, including legal noticing, claims
management, funds distribution and government reporting. The Company
develops, markets, licenses and supports internally developed and proprietary
software products primarily to trustees under Chapter 7 and Chapter 13 of the
Bankruptcy Code of 1978, as amended (the "Bankruptcy Code"), as well as to
other users of the federal bankruptcy system, including trustees in Chapter
11 and Chapter 12. EPI assimilates software development, network operations,
value-added services and comprehensive post-installation support into an
integrated environment that offers clients a high level of coordinated
support.
Today, the Company's business is centered around two primary software
products: TCMS (Trustee Case Management System) for Chapter 7 trustees and
CasePower for Chapter 13 trustees. Both products are compatible with current
computer technologies and offer an array of bankruptcy-specific functions
that are useful in the daily operations of a bankruptcy trustee's office. The
Company also continues to support a predecessor product for Chapter 13
trustees that is founded on AS/400 technology.
INDUSTRY OVERVIEW
Title 11 of the U.S. Code establishes federal law governing bankruptcies. The
participants in a bankruptcy proceeding include the debtor, the creditors,
and a trustee, as well as the presiding judge. The trustee acts as an
intermediary between the debtor and the creditors and is responsible for
administering the bankruptcy case. The end user clients of the Company's
products are trustees, not individual debtors or creditors.
The United States Trustee's office, a division of the Justice Department,
oversees bankruptcy trustees and establishes administrative rules concerning
trustees' activities. Local bankruptcy judges also direct trustees'
activities and have a high level of authority in a bankruptcy case. The
trustees' activities are guided by the Bankruptcy Code, the Federal Rules of
Bankruptcy Procedure, the trustee handbooks developed by the United States
Trustee, and local rules established by the courts.
There are five chapters of the Bankruptcy Code that define various
configurations of bankruptcy cases:
Chapter 7 - Liquidation
Chapter 9 - Reorganization of Municipality
Chapter 11 - Reorganization of Corporation
Chapter 12 - Reorganization of Family Farm
Chapter 13 - Reorganization of Individual Debt
The Company believes that Chapter 7 and Chapter 13 are the most attractive
sectors in the bankruptcy industry to which it can provide service and has
developed a strategic plan accordingly. In the aggregate, Chapters 9, 11, and
12 represent only approximately 1% of overall national bankruptcy filings.
Chapter 7 and Chapter 13 bankruptcies serve different purposes and require
different services and information. Chapter 7 of the Bankruptcy Code provides
for liquidation of the assets of the debtor (which can be an individual,
partnership or corporation) and for the disbursement of the resulting cash
proceeds to the creditors. Chapter 13 provides for adjustments of debt
whereby the debtor makes regular payments to the trustee, who in turn
disburses the collected funds to the creditors. Assets are not liquidated in
Chapter 13.
Bankruptcy trustees in Chapters 7 and 13 are appointed by the United States
Trustee. A United States Trustee is appointed in most federal court districts
and generally has responsibility for overseeing the integrity of the
bankruptcy system. Bankruptcy trustees in Chapter 7 and Chapter 13 cases are
charged with managing the administrative aspects of liquidation or
reorganization bankruptcies. The trustee's primary responsibilities include
collecting funds from the debtor (Chapter 13) or liquidating the debtor's
assets (Chapter 7), distributing the collected funds to creditors pursuant to
the orders of the bankruptcy court, and preparing regular status reports,
including financial updates, for the United States Trustee and for the
bankruptcy court. Trustees typically are attorneys or certified public
accountants and manage many different bankruptcy cases simultaneously. A
trustee client uses an EPI product to manage an entire caseload; the Company
does not contract with trustees to manage specific individual cases. The
Company estimates that Chapter 13
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trustees typically manage over one thousand cases simultaneously and that
Chapter 7 trustees can manage over one hundred cases simultaneously. It is
possible for a given individual trustee to have caseloads in both Chapter 7
and Chapter 13 bankruptcies, but normally a trustee will specialize in one or
the other.
CHAPTER 7 BANKRUPTCY TRUSTEES
For Chapter 7 liquidation bankruptcy, each region of the country has a
rotating "panel" of trustees. Because Chapter 7 comprises the overwhelming
majority of bankruptcies, multiple trustees are required in most parts of the
country to accommodate the caseload. As assets are liquidated and the first
funds are received in each asset case, the trustee opens bank accounts for
the case. In Chapter 7, each case must have its own bank accounts so that
interest earned can be segregated. Because asset liquidation and litigation
regarding the case may be a lengthy process, the trustee will deposit cash
proceeds into an interest-bearing account for the benefit of the creditors
who will eventually receive distributions. Typically, the trustee makes a
single distribution at the conclusion of the case. The administration of a
Chapter 7 case can take several years.
CHAPTER 13 BANKRUPTCY TRUSTEES
There are fewer filings in Chapter 13 (individual debt reorganization) than
in Chapter 7 (liquidation), so most areas of the country have a single
standing Chapter 13 trustee who administers all Chapter 13 filings rather
than the "panel" configuration associated with Chapter 7. In certain areas of
the country, the trustee is responsible for sending various notices to the
debtor, debtor's attorney, clerk of the court, United States Trustee and each
creditor indicating that the case has been filed. Because the debtor's assets
are not liquidated under Chapter 13, the trustee analyzes the debtor's income
and expenses and directs the debtor to make regular cash payments to the
trustee according to the court-approved plan of reorganization. Each month,
the trustee disburses the monies received from the debtor to eligible
creditors according to the plan. The trustee must provide regular status
reports to the United States Trustee. Every six months, the trustee must also
prepare a detailed ledger of financial activity in each bankruptcy case and
mail it to each debtor and debtor's attorney. Chapter 13 reorganizations
usually last between thirty-six and sixty months. Upon conclusion of the
case, the trustee must submit a final report to the bankruptcy court
outlining the financial history of the case.
MARKET CONDITIONS
The Company estimates that there are approximately $3 billion in cash
proceeds being administered in Chapter 7 by approximately 1,500 trustees. The
Company estimates there are in excess of 550,000 cases pending in Chapter 13
managed by approximately 180 standing Chapter 13 trustees.
MARKET CONDITIONS IN CHAPTER 7
The Company believes that there are favorable market conditions for its
Chapter 7 product and services. The Company has successfully entered key
strategic markets, including California and New York, two of the largest
national bankruptcy markets, with the TCMS Release 2.0, the second major
Windows95-based version of the software. In September, 1997, the Company
announced that it was finalizing development of TCMS Version 3.0, which
incorporates substantial new features and technologies and projected a first
quarter 1998 general release date. Additionally, the Company announced the
development of Bankruptcy Link,-Registered Trademark- an Internet-based
environment that will allow bankruptcy professionals to share information
electronically.
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MARKET CONDITIONS IN CHAPTER 13
For the twelve-month period ended September 30, 1997, Chapter 13 filings
increased 18% according to the Administrative Office of U.S. Courts. The
Company believes that market conditions are favorable for growth in the
Chapter 13 sector because of nationally growing caseloads and the
availability of the CasePower product for Windows95/Windows NT.
PRODUCTS
The Company's products include TCMS (Trustee Case Management System) for
Chapter 7, CasePower for Chapter 13, and Midrange for Chapter 13. The TCMS
product can also track Chapter 11 cases, and the Midrange/CasePower products
can also track Chapter 12 cases. The Company produces its software
applications internally with a full time staff of professional software
developers.
CHAPTER 7 PRODUCTS
The Company's Chapter 7 product assists trustees to manage liquidation
bankruptcies, whereby the trustee liquidates the debtor's assets and
disburses the resulting funds to creditors.
CURRENT CHAPTER 7 PRODUCT: TCMS
TCMS (Trustee Case Management System) is a Windows95/Windows NT based package
of proprietary software, computer equipment and support services offered to
Chapter 7 trustees through a national marketing arrangement with NationsBank.
TCMS provides easy-to-use modules for asset management, financial record
keeping and claims administration. An electronic banking link developed by
the Company gives users an automated mechanism for entering banking
transactions, and an electronic court interface allows users to download
claim information into the trustee's database automatically.
A typical TCMS system is provided to the end-user trustee client without
direct charge and includes the following products and services: (i) a license
to use the proprietary TCMS software and subsequent upgrades; (ii) computer
hardware, laser printer, modem, tape backup and operating software, which are
returned to EPI if the trustee's bankruptcy deposits leave the bank
designated by EPI; (iii) database conversion from previous computer system;
(iv) configuration and installation of hardware by EPI personnel; (v) on-site
software training; (vi) customization of reports conforming to local
bankruptcy court regulations; (vii) toll-free customer service; and (viii)
remote diagnostics. The Company's revenues are based upon the total funds
kept on deposit. See "Pricing -- Chapter 7 Pricing."
SOFTWARE FEATURES
The TCMS software streamlines administrative tasks associated with Chapter 7
liquidation bankruptcies. Most trustees use the system on a daily basis for
record keeping and to meet reporting requirements.
Asset Management. As assets are identified, the trustee enters them into TCMS
through a convenient spreadsheet-like interface. The system automatically
tracks the remaining values of assets as they are liquidated and provides a
summary overview of properties within each case.
Banking. An online banking module developed by the Company allows the trustee
to open and close bank accounts electronically as well as to enter funds
transfers. Simple to sophisticated financial transactions can be recorded on
an online computer screen that resembles a personal check register. The
system prepares MICR encoded laser checks and deposit slips on demand.
Claims Administration. TCMS categorizes each claim by class and desired
priority level for distribution. Distribution checks are calculated and
printed automatically, and all financial ledgers are updated. An extensive
library of financial reports provides detailed information for each case. A
proprietary feature allows information to be downloaded from the court into
the trustee's database.
Calendaring and Docketing. Key events in asset cases are posted automatically
to a central trustee's calendar that can be printed regularly. The software
automatically schedules tasks required to close cases in a timely fashion.
Customized District Reports. EPI develops custom tailored final reports and
final accounts for each district where TCMS is marketed. Preparing these
documents has traditionally been one of the most time consuming tasks in
Chapter 7 case administration. With TCMS, trustees can quickly generate a
fully formatted, polished report with all figures calculated and filled in.
180 Day Reports. The United States Trustee requires the trustee to submit
detailed status reports for each case every six months in a very specific
reporting format. TCMS prints these reports in compliance with the most
recent regulations.
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CHAPTER 13 PRODUCTS
The Company's Chapter 13 products assist trustees to manage individual
reorganization bankruptcies, whereby the debtor makes payments to the
trustee, who in turn disburses the funds to creditors:
CURRENT CHAPTER 13 PRODUCTS: CASEPOWER AND MIDRANGE
CasePower is based on Windows95/NT and Oracle technology, while Midrange is
based on IBM mini-computer AS/400 technology. The CasePower product, on the
market since 1997, replaces the older Midrange product. The Company continues
to support the Midrange product as existing customers are converted to the
CasePower environment. See Year 2000 discussion.
Both products assist Chapter 13 trustees managing databases containing from
approximately 500 to over 10,000 active bankruptcies simultaneously. Because
Chapter 13 bankruptcy cases typically undergo thirty-six to sixty consecutive
monthly distributions, Chapter 13 is considerably more transaction intensive
and paperwork intensive than Chapter 7, where a single distribution is
normally made at the end of the case. Chapter 13 trustee clients out-source
various activities to EPI to facilitate the preparation of large output jobs.
Processing and report printing functions are divided between the client-site
and EPI's data center in Kansas City. Both products are installed in a
multi-user configuration that allows each member of the trustee's office
staff to access the database and enter transactions throughout the business
day. The trustee's live database resides in his or her office. The size of a
Chapter 13 trustee's office staff varies proportionally with the caseload
managed.
The trustee's office staff enters financial information into CasePower or
Midrange, including cash receipts, financial adjustments and payment
instructions for each claim. EPI's proprietary program logic interprets a
wide variety of court-directed payment scenarios and consolidates them into
easy-to-understand codes that are entered by users. Daily reports and
customized inquiries can be requested and printed inside the trustee's office.
At the end of each month, the trustee forwards a copy of the database to EPI
in Kansas City. EPI prints distribution checks for each eligible creditor and
prepares detailed laser output for every case in the database as a billable
service. Checks and reports are shipped overnight back to the trustee for
inspection, approval and mailout.
In certain parts of the country, the Chapter 13 trustee is responsible for
noticing parties-in-interest of key developments in each bankruptcy case,
including the setting of the mandatory first meeting of creditors. The
Company's products automate this meeting notice for the trustees. Each
evening, EPI's data center receives a modem transmission of daily noticing
activity from the client-site. EPI prints and reviews the notices, inserts
them into envelopes and mails them the next day. Trustees are billed directly
for noticing services based upon the number of documents generated.
Some bankruptcy courts require additional information, such as a photocopy of
the plan of reorganization, to be included with the notice. EPI offers such
document reproduction and assembly services to trustees at an additional
charge.
SOFTWARE FEATURES
The CasePower and Midrange software help trustees manage administrative
aspects of Chapter 13 bankruptcy. The trustee and office staff typically use
the system each day to monitor activity in their caseload.
Noticing. When new cases are entered on the system, the EPI data center in
Kansas City can extract relevant information and prepare mandatory first
meeting of creditors notices for each case. Subsequent forms, such as reset
notices, correcting notices, motions to allow claims, motions to allow
additional claims and motions to dismiss, can also be selected and prepared
through the system.
Case Management. The products store and monitor key dates, names, addresses
and text notes for every case in the system. A variety of retrieval
mechanisms enable users to view case information from various perspectives.
Financial History. The office staff enters cash receipts and financial
adjustments in the system as part of the daily bank deposit. The software
updates the balances in each case and summarizes the day's financial
transactions. Each month, the software prepares a single-page summary of the
receipts and disbursements in every case.
Monthly Distribution. The software's advanced distribution logic interprets
payment orders from the bankruptcy court. Several different payment
methodologies (e.g., pro rata, fixed monthly payment, per capita, etc.) may
be spread over 99 separate distribution priority levels. Individual checks or
voucher checks can be printed for each creditor. Claims having objections
filed on them can continue to accrue distributions without releasing funds
until the objection has been settled.
Inquiry. Chapter 13 offices receive a multitude of outside inquiries each day
from creditors' and debtors' attorneys. The software 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
only access to the system through a modem connection.
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CHAPTER 7 MARKETING ARRANGEMENT
On November 22, 1993, the Company established an exclusive national marketing
arrangement with NationsBank of Texas, N.A. ("NationsBank"), a subsidiary of
NationsBank Corporation, for its Chapter 7 products. In this marketing
arrangement, EPI and NationsBank promote products and services to trustees in
all states. Because Chapter 7 trustees are discouraged from incurring direct
costs for computer services, it is essential for EPI to align with a bank or
series of banks to earn revenues in Chapter 7. NationsBank Corporation,
headquartered in Charlotte, North Carolina, is the fourth largest national
banking company.
The agreement with NationsBank does not have an expiration date. The
termination clause stipulates that either party must provide the other 90
days' notice if it wishes to end the agreement. The Company believes its
representatives have developed positive, close working relationships with
their counterparts at NationsBank, and the Company believes that it will
maintain this relationship. However, were the relationship with NationsBank
to end, there is no assurance that the Company would be able to establish a
new banking relationship or series of relationships with comparable terms.
EPI holds the primary responsibility for developing all facets of the TCMS
system and for driving the national sales and marketing effort. NationsBank
personnel provide additional assistance in the marketing effort and are
responsible for administering the banking services provided to the trustee
clients.
Through this arrangement, EPI has a continual revenue stream from its Chapter
7 operations. The structure of the marketing alliance assists NationsBank to
build its deposit base in this market.
The Company continues to support a limited number of trustee relationships
through other banks that predate the exclusive agreement with NationsBank.
PRICING
CHAPTER 7 PRICING
Unlike Chapter 13, the application of Chapter 7 bankruptcy regulations has
the practical effect of discouraging trustees from incurring direct
administrative costs for computer expenses. All nationally marketed Chapter 7
systems are provided to trustees without direct billing to the trustee
because of traditional market conventions. Clients typically choose systems
based upon the capability of the software and the quality of technical
support services. EPI has aligned with NationsBank to provide computer
services to Chapter 7 trustees without direct charges to the Chapter 7
trustee under an arrangement whereby (1) EPI licenses its proprietary
software to the trustee and furnishes hardware, conversion services, training
and customer support, all at no cost to the trustee, (2) the trustee agrees
to deposit with NationsBank the cash proceeds from all asset liquidations;
and (3) NationsBank pays the Company a fee each month based upon the total
deposits in the Chapter 7 bankruptcy portfolio.
CHAPTER 13 PRICING
The Company typically receives an initial licensing fee and conversion charge
from the Chapter 13 trustee. It also receives monthly fees from each Chapter
13 trustee client based on the total number of cases in that trustee's
database and the number of noticing documents generated. Variables affecting
pricing for EPI Chapter 13 clients include the number of cases in the
database, the type of equipment installed, the volume of noticing to be out
sourced to EPI, and the level of support service selected by the trustee. EPI
prepares individualized price quotes for each client.
Sales and Distribution
The Company's products and services are marketed directly to trustees through
on-site sales calls by the Company's internal sales department and, in the
case of Chapter 7, by supporting representatives of NationsBank. Trustees
make their own decisions for software and service providers. The Company
believes that the most important factors in attracting business are the
quality of the software products and the quality of the post-installation
support. The Company estimates that the typical cycle for Chapter 7 business
lasts between two and four months.
The Company's Chapter 7 and Chapter 13 service agreements with trustees
typically include provisions for (i) descriptions of the products and
services included in the agreement, (ii) a limited warranty and
indemnification clauses, (iii) the trustee's agreement to deposit funds with
NationsBank (applicable in Chapter 7 only), and (iv) termination information.
The Executive Office of the United States Trustee in Washington, D.C.,
regularly issues a directory of all current bankruptcy trustees. The Company
obtains this directory as it is issued and uses it as its prospect list.
The Company's sales representatives attend approximately eight bankruptcy
trade shows annually. The Company conducts direct mail campaigns and
advertises in trade journals to heighten its exposure and to stimulate sales.
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COMPETITION
The Company works in an industry with a limited number of Chapter 7 and
Chapter 13 trustees. The Company estimates that there are in excess of
550,000 pending Chapter 13 cases being managed by approximately 180 Chapter
13 trustees, and that there is between $2 and $3 billion on deposit by
approximately 1,200 Chapter 7 trustees. There are several companies in the
market all competing for sales from this finite group of customers, and some
of the Company's competitors have substantially greater financial and
marketing resources than does the Company. For its Chapter 7 product, the
Company competes with the Chase Manhattan Bank and Union Bank of California,
as well as other regional competitors in selected markets. For its Chapter 13
product, the Company competes with DCI Corporation of Memphis, Tennessee, a
private company, and other competitors. Although the Company believes that
the requisite detailed knowledge of the bankruptcy system makes it difficult
for new competitors to successfully enter the market, and there are presently
a limited number of firms that offer services that directly compete with the
Company's, there can be no assurance that other firms with resources
significantly greater than the Company's will not enter the Company's
industry. The Company's future financial performance will depend on its
ability to maintain existing customer accounts and to attract business from
customer accounts which are currently using a competitor's software product.
PROPRIETARY RIGHTS
Historically, the Company has not protected its intellectual property rights
through patents or formal copyright registration. It has relied on trade
secret, copyright, and trademark law and non-disclosure agreements to
establish and protect its proprietary rights in its products. The Company
believes, however, that its financial performance will depend more upon the
innovation, technological expertise and marketing abilities of its associates
than upon such protection.
There is no assurance that the Company will be able to protect its trade
secrets or that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets. There is no assurance that intellectual property
laws will protect the Company's intellectual property rights. In addition,
litigation may be necessary to enforce the Company's intellectual property
rights, to protect the Company's trade secrets, to determine the validity and
scope of the proprietary rights of others or to defend against claims of
infringements. Such litigation could result in substantial costs and
diversion of management and other resources and could have a material adverse
effect on the Company's business, financial condition and results of
operation.
EMPLOYEES
The Company employs approximately 70 full-time employees and believes its
relationships with its employees are good.
ITEM 2. PROPERTIES
The Company's corporate offices are located in a 30,000-square-foot facility
leased in Kansas City, Kansas. In connection with corporate growth and the
development of new products, this facility has been recently renovated with
additional office space. The Company believes that this facility will be
adequate for use for at least the next full year. The leased facility is
partially owned by a related party. See Item 12 "Certain Relationships and
Related Transactions."
ITEM 3. LEGAL PROCEEDINGS
The Company presently is not a party to any material litigation, although it
occasionally becomes involved in litigation arising in the normal course of
business.
ITEM 4. SUBMISSION OF MATTERS
No matters were submitted in the fourth quarter to a vote of security holders.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
The Comnpany's Common Stock is traded on the Nasdaq SmallCap Market-TM- under
the symbol "EPIQ." Trading in the Common Stock commenced on Febrary 4, 1997,
the dat on which the Company closed the initial public offering of its Common
Stock. Accordingly, there was no trading in the Common Stock during 1996. The
following table shows the reported high and low sales prices for the common
stock for the calendar quarters of 1997 as reported by Nasdaq:
<TABLE>
<CAPTION>
1997
----
HIGH LOW
---- ---
<S> <C> <C>
First Quarter $4 $3
Second Quarter 4 7/8 3
Third Quarter 7 1/8 4 1/2
Fourth Quarter 12 1/8 6 1/4
</TABLE>
HOLDER
As of December 19, 1997, there were approximately 1,200 holders of record of
the Common Stock.
DIVIDENDS
The Company elected to be treated as an S Corporation for federal and certain
state income tax purposes commencing July 15, 1988. Unlike a C Corporation,
an S Corporation is generally not subject to income tax at the corporate
level. Instead, the S Corporation's income generally passes through to the
stockholders and is taxed on their personal income tax returns. The Company
terminated its status as an S Corporation and became a C Corporation as of
February 4, 1997 (the "Termination Date"). After the Termination Date, the
Company will no longer be treated as an S Corporation and will, accordingly,
be fully taxable under federal and state income tax laws. The Company paid a
final S Corporation distribution to present stockholders following
termination of the Company's S Corporation status. It was previously agreed
that this final S Corporation distribution would not exceed $250,000 and
would represent the company's previously undistributed earnings only since
January 1, 1996 through the termination date. The amount of this final S
Corporation distribution was $250,000 and it was paid on March 6, 1997.
The Company does not expect to declare or pay any other 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 relevant factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Operating revenues for 1997 were $8,389,144 compared to $6,319,192 for 1996,
an increase of 32.8% . Chapter 7 sales increased $1,851,993 or 130.9% between
years. The Company has an exclusive national marketing arrangement with
NationsBank. The bank pays EPI a monthly fee based on the total dollar amount
of Chapter 7 deposits at NationsBank and a fee for each new account
installed. 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 in 1997 compared to 1996 increased $479,392
or 10.79%. The additional revenue experienced in 1997 was due to an increase
in caseloads managed by Chapter 13 trustee clients. Also, the number of new
bankruptcy filings in 1997 was greater than in 1996 resulting in increased
legal noticing revenue of $154,233 or 10.3% which is a part of Chapter 13
revenue.
Processing costs increased to $2,946,542 during fiscal 1997 from $2,498,109
or a 17.9 % increase. The increase in 1997 resulted principally from an
increase in customer service expense resulting from hiring additional
trainers, hardware
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installers and other customer service functions to support the growth in
Chapter 7 sales. Depreciation and amortization increased to $1,051,303 during
fiscal 1997 from $810,939 in 1996 or a 29.6 % increase. The increase related
primarily to the purchase of computer equipment for the installations of the
company's Chapter 7 product. Total cost of goods sold and direct costs
increased to $3,997,845 during fiscal 1997 from $3,309,048 in 1996 or a 20.8%
increase. The cost of goods sold and direct costs was 47.7% of total revenue
in 1997 and 52.4% of total revenue in 1996.
Gross profit increased 45.9% or $1,381,155 to $4,391,299 in 1997 compared to
$3,010,144 for 1996. Gross profit as a percentage of operating revenues
increased to 52.3% for the 1997 period from 47.6% for the 1996 period due
primarily to TCMS (Trustee Case Management System) for Chapter 7, which has
higher gross margin, comprising a greater percentage of operating revenues in
1997.
Operating expenses as a percentage of operating revenue were 38.2% for the
twelve months ended December 31, 1997 compared to 38.0% for 1996. Sales and
marketing expenses, which include sales and marketing salaries, trade show
costs, and advertising costs, were $1,006,945 in 1997 compared to $714,067 in
1996. The increase in sales and marketing expenses was attributable to the
marketing of the Windows95/Windows NT version of TCMS and CasePower.
Income from operations increased 93.7% to $1,182,733 in 1997, compared to
$610,759 for 1996, principally due to increased sales and higher gross profit
margins.
Other income (expense) which includes interest income and interest expense
was ($92,645) in 1997 compared to ($276,806) in 1996. This reduction in net
interest expense was 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
retired 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. At such time, the company
recorded a tax provision of $272,900 to account for the effects of temporary
differences between assets and liabilities presented on the financial
reporting bases and the income tax basis. As required by FASB#109, this
amount is also included in the 1997 provision for income taxes in the
accompanying statements of income.
Pro Forma earnings information reflects the effects of corporate income taxes
on historical earnings as if the Company had been subject to income taxes for
all the periods presented and also eliminates the effect of the above tax
provision of $272,900 resulting from the initial conversion to a C
corporation. The Company's effective tax rates, on a pro-forma basis, were
41% and 43% for 1997 and 1996, respectively.
For the twelve months ended December 31, 1997, the Company reported pro forma
net income of $638,399 compared to pro forma net income of $189,953 for the
twelve months ended December 31, 1996.
CAPITAL RESOURCES AND LIQUIDITY
The Company's liquidity position remains strong with total cash and cash
equivalents of $1,835,233 at December 31, 1997 and working capital of
$1,775,844 . On February 4, 1997 , the Company sold 1,600,000 shares of
common stock in a public offering. The proceeds of this sale, net of
underwriting discounts and commissions and expenses, were $4,493,460.
The Company generated net cash from operations of $1,608,257 during the
twelve months ended December 31, 1997 representing principally net income
before deferred taxes of $667,128 plus 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 outstanding accounts receivable balance has increased primarily due to
the growth in revenue.
The Company's has a $500,000 operating line of credit from a financial
institution, of which $1,000 was outstanding at December 31, 1997. The
Company has two equipment lines of credit, one for $500,000 and another for
$1,000,000. The balance outstanding on the equipment lines of credit totaled
$904,491 at December 31, 1997. The Company anticipates no difficulties in
obtaining a renewal or extension of the loans when they become due in June of
1999 and August of 1998.
The Company paid a final S Corporation distribution of $250,000 to the
stockholders following the termination of the Company's S Corporation status.
In addition, the Company incurred expenditures for software development costs
totaling $498,392 for the twelve months ending December 31, 1997. The Company
invested in property and equipment
<PAGE>
totaling $2,180,517 in 1997. The company anticipates financing its
operations, capital expenditures and software expenditures from internally
generated funds and through bank borrowings.
YEAR 2000
The "year 2000" issue is the result of computer programs being written using
two digits rather than four to define the applicable year.
The Company has conducted a comprehensive review of its products and services
and has made modifications to ensure that the computer systems as so modified
will operate correctly across the century boundary. The expenses associated
with this project are being expensed as incurred and are not expected to be
material.
FORWARD-LOOKING STATEMENTS
This Form 10-KSB contains forward-looking statements that involve a number of
risks and uncertainties. Among the important factors that could cause actual
results to differ materially from those indicated by such forward-looking
statements are a significant change in on-going bankruptcy filings in the
United States, legislative or regulatory changes affecting bankruptcy filings
or the way bankruptcy trustees carry out their duties, entry into the market
of new competitors or development by competitors of new or superior product
technologies and other risks detailed from time to time in the company's
reports and registration statements filed with the Securities and Exchange
Commission.
ITEM 7. FINANCIAL STATEMENTS
Following are the report of Baird, Kurtz & Dobson, Kansas City, Missouri,
independent auditors for the Company, and the financial statements of the
Company as of and for the 12 month periods ended December 31, 1997 and 1996.
<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, 1997 and 1996, and the related statements
of income, changes in stockholders' equity and cash flows for the years then
ended. 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, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Kansas City, Missouri
February 12, 1998
<PAGE>
ELECTRONIC PROCESSING, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----
<S> <C> <C>
CURRENT ASSETS
--------------
Cash and cash equivalents $1,835,233 $ 4,882
Accounts receivable, trade, less allowance for
doubtful accounts of $5,000 1,114,424 798,230
Prepaid expenses and other 159,845 153,907
Deferred income taxes 18,823
---------- ----------
Total Current Assets 3,128,325 957,019
---------- ----------
PROPERTY AND EQUIPMENT, At cost
Furniture and fixtures 551,832 390,599
Computer equipment 5,152,228 3,767,008
Office equipment 325,429 297,971
Leasehold improvements 834,806 247,494
Transportation equipment 14,969 14,969
---------- ----------
6,879,264 4,718,041
Less accumulated depreciation 3,338,301 2,520,613
---------- ----------
3,540,963 2,197,428
---------- ----------
SOFTWARE DEVELOPMENT COSTS, Net of
amortization 1,397,375 1,234,584
---------- ----------
OTHER ASSETS
Excess of cost over fair value of net assets acquired 61,486 63,499
Deferred stock issuance costs 271,563
Other 32,819 42,145
---------- ----------
94,305 377,207
---------- ----------
$8,160,968 $4,766,238
---------- ----------
---------- ----------
</TABLE>
See Notes to Financial Statements
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
CURRENT LIABILITIES
-------------------
Note payable -- line of credit $ 1,000 $ 500,000
Current maturities of long-term debt 626,665 1,008,889
Accounts payable 491,217 534,519
Accrued expenses 200,639 90,140
Income taxes payable 32,960
------------ ------------
Total Current Liabilities 1,352,481 2,133,548
------------ ------------
LONG-TERM DEBT 889,046 1,242,660
------------ ------------
DEFERRED INCOME TAXES 320,452
------------ ------------
SUBORDINATED DEBT 400,000
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 10,000,000 shares; issued and
outstanding -- 3,400,000 and 1,800,000
shares at 1997 and 1996, respectively 34,000 18,000
Additional paid-in capital 5,202,000 282,000
Retained earnings 362,989 690,030
------------ ------------
5,598,989 990,030
------------ ------------
$ 8,160,968 $ 4,766,238
------------ ------------
------------ ------------
</TABLE>
<PAGE>
ELECTRONIC PROCESSING, INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
OPERATING REVENUES $8,389,144 $ 6,319,192
---------- -----------
COST OF GOODS SOLD AND DIRECT COSTS
Processing costs 2,946,542 2,498,109
Depreciation and amortization 1,051,303 810,939
---------- -----------
3,997,845 3,309,048
---------- -----------
GROSS PROFIT 4,391,299 3,010,144
---------- -----------
OPERATING EXPENSES
General and administrative 3,101,685 2,309,491
Depreciation and amortization 106,881 89,894
---------- -----------
3,208,566 2,399,385
---------- -----------
INCOME FROM OPERATIONS 1,182,733 610,759
---------- -----------
OTHER INCOME (EXPENSE)
Interest income 66,667 48
Interest expense (160,393) (280,158)
Other 1,081 3,304
---------- -----------
(92,645) (276,806)
---------- -----------
INCOME BEFORE INCOME TAXES 1,090,088 333,953
PROVISION FOR INCOME TAXES 724,589
---------- -----------
NET INCOME $ 365,499 $ 333,953
---------- -----------
---------- -----------
EARNINGS PER SHARE INFORMATION
Basic $ .11
-------
-------
Diluted $ .11
-------
-------
UNAUDITED PRO FORMA DATA
Income before income taxes $1,090,088 $ 333,953
Provision for income taxes 451,689 144,000
---------- -----------
PRO FORMA NET INCOME $ 638,399 $ 189,953
---------- -----------
---------- -----------
PRO FORMA PER SHARE INFORMATION
Basic $ .20 $ .11
------- ------
------- ------
Diluted $ .19 $ .11
------- ------
------- ------
</TABLE>
See Notes to Financial Statements
<PAGE>
ELECTRONIC PROCESSING, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Total Stock Capital Earnings
---------- ------- ------------ ----------
<S> <C> <C> <C> <C>
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 0
Net income 365,499 365,499
----------- -------- ------------ ----------
BALANCE, DECEMBER 31, 1997 $5,598,989 $ 34,000 $ 5,202,000 $ 362,989
----------- -------- ------------ ----------
----------- -------- ------------ ----------
</TABLE>
See Notes to Financial Statements
<PAGE>
ELECTRONIC PROCESSING, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 365,499 $ 333,953
Items not requiring (providing) cash:
Depreciation 820,570 604,330
Amortization of software development costs 335,601 294,490
Amortization of intangible assets 2,013 2,013
Gain on disposal of equipment (4,406) (1,909)
Deferred income taxes 301,629
Changes in:
Accounts receivable (316,194) (322,868)
Prepaid expenses and other assets 3,388 (42,472)
Accounts payable and accrued expenses 100,157 293,895
------------ -----------
Net cash provided by operating activities 1,608,257 1,161,432
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 20,818 4,930
Purchase of property and equipment (1,042,383) (133,256)
Expenditures for software development costs (498,392) (511,471)
------------ -----------
Net cash used in investing activities (1,519,957) (639,797)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) under line-of-credit agreement (499,000) 175,000
Proceeds from long-term debt 250,000
Principal payments under capital lease obligation (777,023) (450,989)
Principal payments on long-term debt (1,096,949) (230,563)
Repayment of subordinated debt (400,000)
Dividends paid (250,000) (102,165)
Stock issuance costs (172,977) (143,974)
Payment to retire stock warrant (41,000)
Proceeds from public offering 4,938,000
------------ -----------
Net cash provided by (used in) financing activities 1,742,051 (543,691)
------------ -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,830,351 (22,056)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 4,882 26,938
------------ -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 1,835,233 $ 4,882
------------ -----------
------------ -----------
</TABLE>
See Notes to Financial Statements
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is engaged primarily in the development, marketing and
licensing of advanced proprietary software for electronic management,
including processing and noticing, of bankruptcy cases. An extensive array of
support services complements the software. The Company extends unsecured
credit to customers throughout the United States.
YEAR 2000
The approach of the year 2000 raises a general issue with hardware and
software on a world-wide basis concerning potential problems caused by date
comparisons and calculations across the century boundary. The Company is
thoroughly analyzing its products and services and is undertaking the work
necessary to ensure that they continue to operate correctly across the
century boundary. 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated on a straight-line basis over the
estimated useful life of each asset as follows:
<TABLE>
<S> <C>
Furniture and fixtures 10 years
Computer equipment 5 years
Office equipment 5-10 years
Transportation equipment 3-5 years
</TABLE>
Leasehold improvements are depreciated over the shorter of the lease
term or the estimated useful lives (5-10 years) of the improvements.
SOFTWARE DEVELOPMENT COSTS
Certain internal software development costs incurred in the creation of
computer software products are capitalized once technological feasibility has
been established. Prior to the completion of a detail program design,
development costs are expensed. Capitalized costs are amortized based on
current and future revenue for each
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
product with an annual minimum equal to the straight-line amortization over
the remaining estimated economic life of the product.
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INTANGIBLE ASSETS
The excess of cost over fair value of net assets acquired is being
amortized over 40 years. Organizational costs are being amortized over seven
years. All amortization is provided by the straight-line method.
REVENUE RECOGNITION
Revenues for Chapter 13 processing and noticing are recorded monthly at
the completion of the services based on the trustees' month-end caseloads.
For Chapter 7 bankruptcy services, monthly fees are received from a national
financial institution after the product is installed and deposits are
transferred based on the level of trustees' deposits with that institution.
All ancillary fees are recognized as the services 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 stockholders, had elected under the Internal
Revenue Code to be taxed as an S corporation. In lieu of corporation income
taxes, the stockholders were taxed on their proportionate shares of the
Company's taxable income. Therefore, the 1996 statements do not include any
provision for corporation 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.
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 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.
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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>
Years Ended December 31,
-----------------------------
1997 1996
----------- ------------
<S> <C> <C>
Amounts capitalized, net of retirements $ 2,854,876 $ 2,356,484
----------- -----------
Accumulated amortization,
beginning of year (1,121,900) (827,410)
Amortization expense (335,601) (294,490)
----------- -----------
Accumulated amortization, end of year (1,457,501) (1,121,900)
----------- -----------
Net software development costs $ 1,397,375 $ 1,234,584
----------- -----------
----------- -----------
</TABLE>
Included in the above are development costs relating to products not yet
released. Such costs totaled $391,355 and $713,849 at December 31, 1997 and
1996, respectively.
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 3: NOTES PAYABLE AND LONG-TERM DEBT
Note payable at December 31, 1997 and 1996 represents advances against a
$500,000 working capital line of credit. Interest is 1% in excess of the
bank's base lending rate (9 1/2% at December 31, 1997) 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.
Long-term debt includes the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Note payable, bank (A) $ 511,151
Note payable, bank (B) $ 436,372 235,307
Note payable, bank (C) 250,000
Note payable, bank (D) 468,119
Capital lease obligations (E) 604,487 1,245,560
Other 6,733 9,531
----------- -----------
1,515,711 2,251,549
Less current maturities 626,665 1,008,889
----------- -----------
$ 889,046 $ 1,242,660
----------- -----------
----------- -----------
</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 the majority stockholder.
(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) 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
majority stockholder.
(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), 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 2002.
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 3: NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
For the above obligations, the carrying value approximates fair value.
Aggregate annual maturities of long-term debt and payments on capital
lease obligations are as follows:
<TABLE>
<CAPTION>
Long-Term Capital
Debt Lease
(Exc. Leases) Obligations
------------- -----------
<S> <C> <C>
1998 $ 261,772 $ 407,029
1999 649,452 165,541
2000 44,371
2001 34,830
2002 21,996
---------- ----------
$ 911,224 673,767
----------
----------
Less amount representing interest 69,280
----------
Present value of future minimum lease payments 604,487
Less current maturities 364,893
----------
Noncurrent portion $ 239,594
----------
----------
</TABLE>
Property and equipment include the following property under capital
leases:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Computer equipment $1,293,779 $1,822,113
Less accumulated depreciation 461,239 412,717
---------- ----------
$ 832,540 $1,409,396
---------- ----------
---------- ----------
</TABLE>
NOTE 4: OPERATING LEASES
The Company has a noncancellable operating lease for office space which
expires in February 2001 with options which would extend the lease to 2011.
The majority stockholder of the Company is a partner in the partnership that
leases office space to the Company. The lease requires the Company to pay all
executory costs (property taxes, maintenance and insurance).
For the years ended December 31, 1997 and 1996, an agreement was
reached with the partnership whereby the Company was reimbursed for the
property taxes which amounted to approximately $30,000 for both 1997 and 1996.
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 4: OPERATING LEASES (CONTINUED)
Future minimum lease payments at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $154,000
1999 157,800
2000 162,400
2001 27,200
--------
$501,400
--------
--------
</TABLE>
Rental expense under this lease was $149,250 and $145,500 for the years
ended December 31, 1997 and 1996, respectively.
NOTE 5: SUBORDINATED DEBT
The Company had the following subordinated debt outstanding with the
majority stockholder 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 $7,778 and $40,000
for the years ended December 31, 1997 and 1996, respectively.
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 due to
the majority stockholder. Additionally, included in accounts receivable at
December 31, 1997 was $28,855 from the partnership 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 $63,182 and $18,113 for the years ended December 31, 1997 and 1996,
respectively.
NOTE 8: INITIAL PUBLIC OFFERING
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
In February 1997, the Company completed a public offering of 1,600,000
shares of common stock and received net proceeds (prior to stock issuance
costs) of $4,938,000.
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
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 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 these components:
<TABLE>
<CAPTION>
1997 1996
--------- -----------
(Pro Forma)
<S> <C> <C>
Taxes currently payable $ 422,960 $179,000
Deferred income taxes 28,729 (35,000)
--------- ---------
$ 451,689 $144,000
--------- ---------
--------- ---------
</TABLE>
NOTE 9: INCOME TAXES (CONTINUED)
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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>
1997 1996
---------- ----------
(Pro Forma)
<S> <C> <C>
Computed at the statutory rate (34%) $ 370,600 $ 113,500
Increase in taxes resulting from:
Nondeductible expenses 24,300 12,800
State income taxes, net of federal
tax effect and other 56,789 17,700
---------- ----------
Tax Provision $ 451,689 $ 144,000
---------- ----------
---------- ----------
</TABLE>
Also included in the provision for 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 1997 balance sheet are as follows:
<TABLE>
<CAPTION>
1997
---------
<S> <C>
Deferred tax assets (current):
Allowance for doubtful accounts $ 1,900
Accrued compensated absences 16,923
---------
18,823
Deferred tax liabilities (noncurrent):
Property and equipment 320,452
--------
$301,629
--------
--------
</TABLE>
NOTE 10: EARNINGS PER SHARE
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
The details of the basic and diluted earnings per share
calculations for the year ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Weighted Average
Net Shares Per Share
Income Outstanding Amount
---------- ----------- ----------
<S> <C> <C> <C>
Net income $ 365,499
----------
Basic earnings per share:
Income available to common
stockholders $ 365,499 3,250,959 $.11
---------- ----
---------- ----
Effect of dilutive securities:
Warrants 40,214
Stock options 76,210
--------
Diluted earnings per share:
Income available to common
stockholders and assumed
conversions $ 365,499 3,367,383 $.11
---------- --------- ----
---------- --------- ----
</TABLE>
Pro forma earnings 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 1997
and 1996, the pro forma earnings per share information was as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Basic .20 .11
---- ----
---- ----
Diluted .19 .11
---- ----
---- ----
</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 term of each award shall
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
be determined by the committee of the Board of Directors charged with
administering the Plan. Under the terms of the Plan, options granted may be
either 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 is presented below:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
------- --------
<S> <C> <C>
Outstanding, beginning of year 0 $ 0
Granted 237,000 4.59
Forfeited (12,000) 3.50
Exercised 0 0
Outstanding, end of year 225,000 $ 4.65
</TABLE>
The following information applies to options outstanding at December 31,
1997:
<TABLE>
<CAPTION>
Exercise Date of Expiration Number
Price Full Vesting of Options Outstanding
-------- ------------ ---------- -----------
<S> <C> <C> <C>
$ 3.50 2002 2007 82,500
3.85 1997 2002 25,000
4.50 2002 2007 43,500
4.95 1997 2002 25,000
6.80 1998 2007 25,000
6.80 2002 2007 18,000
8.06 2002 2007 6,000
---------
225,000
---------
---------
</TABLE>
NOTE 11: STOCK OPTIONS (CONTINUED)
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 Company accounts for this plan
under APB Opinion No. 25, under which only an immaterial amount of
compensation cost has been
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
recognized. Had compensation cost been determined based on the fair value at
the grant dates using FASB Statement No. 123, the Company's 1997 net income
and earnings per share would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
<S> <C> <C>
Net income As Reported $ 365,499
Pro forma $ 178,024
Basic earnings per share As reported $ .11
Pro forma $ .05
Diluted EPS: As reported $ .11
Pro forma $ .05
</TABLE>
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 6.2 - 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.
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.
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 12: SIGNIFICANT ESTIMATES AND CONCENTRATIONS (CONTINUED)
-- A significant portion of the Company's revenues are generated
from processing and noticing services for Chapter 13 bankruptcy
cases. For Chapter 7 bankruptcy services, the Company has an
agreement with a national financial institution which provides
for the generation of significant monthly revenues based on the
level of trustees' deposits with that institution.
NOTE 13: ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1996
---------- -----------
<S> <C> <C>
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligation and notes payable
Incurred for equipment $1,138,134 $ 1,161,347
ADDITIONAL CASH INFORMATION
Interest paid 181,410 265,252
Income taxes paid 390,000
</TABLE>
<PAGE>
ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company, their ages as
of March 4, 1998, and their positions with the Company 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 * 63 Director
</TABLE>
* Member of Audit Committee
TOM W. OLOFSON led a private investor group that acquired the Company in
July 1988, and 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, and
was a part-time employee of the Company from 1988 to 1993. In January
1994, he was named 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 named a Fulbright Scholar; as
which he completed a one-year program of study at the Stanford University
Center in Taipei, Taiwan in 1993. He is the son of Tom W. Olofson.
ALBERT T. ANNILLO has been Senior Vice President since January 1995. Mr.
Annillo joined the Company in October 1992 as a corporate Vice President.
He was Assistant Director, Executive Office for United States Trustees,
Department of Justice, Washington, D.C. for six years before his
association with the Company. He earned an MBA and an MED from William
Patterson College in 1975 and 1979, respectively.
REED A. EICHNER joined the Company as Vice President - Sales and Marketing
in September 1995. He became Vice President - Operations on September 1,
1996. From May 1991 through August 1995 he served as President and owner
of Connexions, Inc., a company which provided system integration and
document conversion services. He was General Manager of Innovision
Systems, Inc. from September 1989 to May 1991. Mr. Eichner earned a BA
from the University of North Carolina in 1982.
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
<PAGE>
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. 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 Software, Inc.
from 1986 to 1989. Ms. MacDonald earned a BS in Business Administration
from the University of San Francisco in 1984.
ROBERT C. LEVY is a director, stockholder and executive committee member
of the law firm of Seigfreid, Bingham, Levy, Selzer & Gee in Kansas City,
Missouri. He has been the Corporate Secretary and a Director of the
Company since July 1988. He earned a BS from Northwestern University in
1968, and a J.D. from the University of California at Berkeley in 1971.
Mr. Levy formerly was Chairman of the Board of Directors of Blue Cross and
Blue Shield of Kansas City.
W. BRYAN SATTERLEE was elected to the Company's Board of Directors on
February 7, 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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company believes that during the fiscal year ended December 31, 1997,
all Section 16(a) filing requirements applicable to its officers,
directors, and greater than 10% beneficial owners were satisfied.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth the cash and other compensation paid in
1997 to the Company's Chief Executive Officers and each other executive
officer of the Company who earned in excess of $100,000 in 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
NAME AND PRINCIPAL POSITION OTHER ANNUAL ALL OTHER
YEAR SALARY BONUS COMPENSATION (1) COMPENSATION (2)(3)
---- ------ ----- ----------------- -------------------
<S> <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 $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 Company automobile.
Includes $2,754 for 1997 and $3,349 for 1996 for Christopher E.
Olofson for personal use of company automobile.
(2) Company benefits which 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 401(k) plan for
<PAGE>
Tom W. Olofson. Includes $3,600 in 1997 and $1,620 in 1996 for
Company matching contributions to 401(k) plan for Christopher E.
Olofson.
(3) Does not include interest of $7,778 in 1997 and $40,000 in 1996
on amounts borrowed by the Company from Tom W. Olofson. See
"Certain Transactions."
The Company does not have a long-term incentive compensation plan.
STOCK OPTIONS ISSUED
As shown in the table below Christopher E. Olofson was granted options for
75,000 shares of common stock during the year-ended December 31, 1997.
Prior to 1997, the Company did not grant any stock options. Tom W. Olofson
was not granted any stock options in 1997. Table also includes other
executive officer's options granted in 1997.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
NAME NUMBER OF SECURITIES EXERCISE PRICE EXPIRATION DATE
UNDERLYING OPTIONS GRANTED
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Christopher E. 25,000 $3.85 2002
Olofson
- ----------------------------------------------------------------------------------------
25,000 $4.95 2002
- ----------------------------------------------------------------------------------------
25,000 $6.80 2007
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Nanci R. Trutna 5,000 $3.50 2007
- ----------------------------------------------------------------------------------------
5,000 $4.50 2007
- ----------------------------------------------------------------------------------------
5,000 $6.80 2007
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Reed A. Eichner 5,000 $3.50 2007
- ----------------------------------------------------------------------------------------
5,000 $4.50 2007
- ----------------------------------------------------------------------------------------
5,000 $6.80 2007
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Sally D. 5,000 $3.50 2007
MacDonald
- ----------------------------------------------------------------------------------------
5,000 $4.50 2007
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Albert T. Annillo 7,500 $3.50 2007
- ----------------------------------------------------------------------------------------
5,000 $4.50 2007
- ----------------------------------------------------------------------------------------
5,000 $6.80 2007
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
TOTAL 132,500
- ----------------------------------------------------------------------------------------
</TABLE>
The percent of total options granted to above employees in the last fiscal
year was 58.9%. No stock options were exercised during 1997 by the named
executives.
COMPENSATION OF DIRECTORS
The Company pays its non-employee directors a fee of $750 per quarter and
$750 per meeting attended.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
<PAGE>
MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of shares of Common Stock as of the March 4, 1998 for
(i) each director of the Company; (ii) each person known to the Company to
be the beneficial owner of more than 5% of the outstanding shares; and
(iii) all directors and executive officers as a group. Except pursuant to
applicable community property laws or as otherwise indicated, each
stockholder has sole voting and investment power with respect to the
shares beneficially owned.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER (1) NUMBER OF SHARES PERCENTAGE OWNED
<S> <C> <C>
Tom W. Olofson 1,620,000 (2) 46.9%
Christopher E. Olofson 159,500 (3) 4.6%
Robert C. Levy 22,500 1.0%
W. Bryan Satterlee 8,500 (4)
All directors and executive officers 52.6%
as a group (8 persons) 1,816,500 (5)
</TABLE>
(1) The address of all of the named individuals is c/o Electronic
Processing, Inc., 501 Kansas Avenue, Kansas City, Kansas 66105.
(2) Excludes 40,500 shares owned by Mr. Olofson's adult son, Scott W.
Olofson, as to which shares Mr. Olofson disclaims beneficial
ownership.
(3) Includes 50,000 shares of common stock issuable upon exercise of
options that are currently exercisable. Excludes 25,000 shares of
common stock issued upon exercise of options held by Mr. Olofson that
are not currently exercisable and will not become exercisable within
60 days.
(4) Includes 1,500 shares of Common Stock issuable upon exercise of
options that are currently exercisable. Excludes 6,000 shares of
common stock issued upon exercise of options held by Mr. Satterlee
that are not currently exercisable and will not become exercisable
within 60 days.
(5) Includes 56,000 shares of common stock issuable upon exercise of
options that are currently exercisable. Excludes 89,000 shares of
common stock issued upon exercise of options held by directors and
executive officers that are not currently exercisable and will not
become exercisable within 60 days.
ITEM 12. 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. The note provided for
interest at the rate of 10% with a maturity date of July 1998. Interest
paid to Tom W. Olofson under this agreement was $40,000 per year for 1996,
1995 and 1994. The stock purchase warrant provided for the acquisition of
969,228 shares of the Company's Common Stock at $.4125 per share at any
time prior to July 14, 1998 (giving retroactive effect to the six-for-one
stock split). The Company has calculated and recorded a value of such
stock purchase warrant in the amount of $41,000, with the value being
calculated using the difference between net book value and exercise price
per share. In an October 11, 1996 agreement between the Company and Mr.
Olofson, it was agreed that the Company would pay $41,000 to Mr. Olofson
on or before December 31, 1996, at which time the stock purchase warrant
would be retired. The Company repaid the $400,000 outstanding face value
of the subordinated note to Mr. Olofson from the proceeds of its Common
stock offering in February, 1997.
The Company has a noncancellable operating lease for its corporate
headquarters which expires in February 28, 2001 with options if exercised,
to extend the lease to February 28, 2011. Tom W. Olofson holds a 50%
interest, as a general partner, in T & J Investment Company, a Kansas
general partnership
<PAGE>
("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).
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
The following exhibits are filed with this Form 10-KSB or are incorporated
herein by reference:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
3.1 Articles of Incorporation, dated July 13, 1988; incorporated by
reference to Exhibit 3.1 to the Registration Statement on Form
SB-2 dated February 4, 1997. (Registration Number 333-16805)
(the "Registration Statement")
3.1a Amendment of Articles of Incorporation , dated August 10, 1988;
incorporated by reference to Exhibit 3.1a to the Registration
Statement.
3.1b Amendment of Articles of Incorporation, dated October 31, 1995;
incorporated by reference to Exhibit 3.1b to the Registration
Statement.
3.1c Amendment of Articles of Incorporation, dated April 1, 1996;
incorporated by reference to Exhibit 3.1c to the Registration
Statement.
3.1d Amendment of Articles of Incorporation dated February 24, 1998. *
3.2 Bylaws; incorporated by reference to Exhibit 3.2 to the
Registration Statement.
4.1 Form of Underwriters Warrant; incorporated by reference to
Exhibit 4.1 to the Registration Statement.
4.3 1995 Stock Option Plan; incorporated by reference to Exhibit 4.3
to the Registration Statement .
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 Registration Statement.
10.2 Lease between T&J Investment Company and the Company, dated
February 20, 1996; incorporated by reference to Exhibit10.2 to
the Registration Statement.
10.2a Amendment to Lease between T & J Investment Company and the
Company dated December 9, 1997. *
10.3 Subordinated Note to Tom Olofson; incorporated by reference to
Exhibit 10.3 to the Registration Statement .
10.4 Loan Agreement between Industrial State Bank and the Company,
dated June 17, 1996;
</TABLE>
<PAGE>
<TABLE>
<S> <C>
incorporated by reference to Exhibit 10.4 to the Registration
Statement.
10.4a Modification to Loan Agreement between Industrial State Bank and
the Company, dated October 31, 1996, incorporated by reference
to Exhibit 10.4a to the Registration Statement.
10.4b Loan Agreement between Industrial State Bank and the Company
dated March 4, 1997.*
10.5 Loan Agreement between Industrial State Bank and the Company,
dated June 8, 1994; incorporated by reference to Exhibit 10.5 to
the Registration Statement.
10.5a Modification to Loan Agreement between Industrial State Bank and
the Company, dated June 17, 1996; incorporated by reference to
Exhibit 10.5a to the Registration Statement.
10.6 Loan Agreement between Industrial State Bank and the Company,
dated June 8, 1994 incorporated by reference to Exhibit 10.6 to
the Registration Statement.
10.6a Modification to Loan Agreement between Industrial State Bank and
the Company, dated June 17, 1996; incorporated by reference to
Exhibit 10.6a to the Registration Statement.
10.6b Loan Agreement between Industrial State Bank and the Company
dated June 4, 1997. *
10.7 Loan Agreement between Exchange National Bank and the Company
dated July 21, 1997.*
10.8 Form of Service Agreement between EPI and Trustee; incorporated
by reference to Exhibit 10.8 to the Registration Statement.
23.1 Consent of Baird, Kurtz & Dobson to incorporation by reference
of their report in the company's registration statement on Form
S-8. *
27.1 Financial Data Schedule
</TABLE>
* FILED HEREWITH.
REPORTS ON FORM 8-K
NONE
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed by the undersigned, thereunto duly authorized.
Dated: March 23, 1998
ELECTRONIC PROCESSING, INC.
By: /s/ Tom W. Olofson
-------------------------------
Tom W. Olofson
Chairman/CEO
In accordance with the Exchange Act this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on
March 23, 1998.
<TABLE>
<CAPTION>
Signature Capacity
- --------- --------
<S> <C>
/s/ Tom W. Olofson Chairman of the Board
- ------------------------------- Chief Executive Officer
Tom W. Olofson (Principal Executive Officer)
Director
/s/ Christopher E. Olofson Executive Vice President
- ------------------------------- Chief Operating Officer
Christopher E. Olofson Director
/s/Nanci R. Trutna Vice President of Finance
- ------------------------------- (Principal Financial Officer and Principal Accounting
Nanci R. Trutna Officer)
/s/ Robert C. Levy Director
- -------------------------------
Robert C. Levy
/s/ W. Bryan Satterlee Director
- -------------------------------
W. Bryan Satterlee
</TABLE>
<PAGE>
[CERTIFICATE]
STATE OF MISSOURI
[SEAL]
REBECCA MCDOWELL COOK
SECRETARY OF STATE
CORPORATION DIVISION
CERTIFICATE OF AMENDMENT
WHEREAS,
ELECTRONIC PROCESSING, INC.
A CORPORATION ORGANIZED UNDER THE GENERAL AND BUSINESS CORPORATION LAW HAS
DELIVERED TO ME A CERTIFICATE OF AMENDMENT OF ITS ARTICLES OF INCORPORATION
AND HAS IN ALL RESPECTS COMPLIED WITH THE REQUIREMENTS OF LAW GOVERNING THE
AMENDMENT OF ARTICLES OF INCORPORATION UNDER THE GENERAL BUSINESS CORPORATION
LAW, AND THAT THE ARTICLES OF INCORPORATION OF SAID CORPORATION ARE AMENDED
IN ACCORDANCE THEREWITH.
IN TESTIMONY WHEREOF, I HAVE SET MY HAND
AND IMPRINTED THE GREAT SEAL OF THE [SEAL]
STATE OF MISSOURI, ON THIS, THE 26TH
DAY OF FEBRUARY, 1998.
/s/ REBECCA MCDOWELL COOK
------------------------------------
SECRETARY OF STATE
<PAGE>
STATE OF MISSOURI . . . OFFICE OF SECRETARY OF STATE
AMENDMENT OF ARTICLES OF INCORPORATION
(TO BE SUBMITTED IN DUPLICATE BY AN ATTORNEY)
SECRETARY OF STATE
STATE OF MISSOURI
P. O. BOX 778
JEFFERSON CITY, MO 65102
Pursuant to the provisions of The General and Business Corporation
Law of Missouri, the undersigned Corporation certifies the following:
1. The present name of the Corporation is Electronic Processing,
Inc.
The name under which it was originally organized was NEWCO
RGLG I, Inc.
2. An amendment to the Corporation's Articles of Incorporation
was adopted by the shareholders on June 3, 1997.
3. Article Third is amended to read as follows:
THIRD. The aggregate number of shares, class and par value,
if any, which the corporation shall have authority to issue
shall be 10,000,000 shares of common stock, each with a par
value of $.01.
4. Of the 3,400,000 shares outstanding, 3,400,000 of such shares
were entitled to vote on such amendment.
The number of outstanding shares of any class entitled to
vote thereon as a class were as follows:
<TABLE>
<CAPTION>
Class Number of Outstanding Shares
----- ----------------------------
<S> <C>
Common 3,400,000
</TABLE>
-1-
<PAGE>
5. The number of shares voted for and against the amendment was
as follows:
<TABLE>
<CAPTION>
Class No. Voted For No. Voted Against
----- ------------- -----------------
<S> <C> <C>
Common 3,304,255 12,230
</TABLE>
6. If the amendment changed the number of par value of
authorized shares having a par value, the amount in dollars
of authorized shares having a par value as changed is:
$100,000.
If the amendment changed the number of authorized shares
without par value, the authorized number of shares without par
value as changed and the consideration proposed to be received
for such increased authorized shares without par value as are
to be presently issued are:
N/A
7. If the amendment provides for an exchange, reclassification,
or cancellation of issued shares, or a reduction of the number
of authorized shares of any class below the number of issued
shares of that class, the following is a statement of the manner
in which such reduction shall be effected:
N/A
IN WITNESS WHEREOF, the undersigned, Tom. W. Olofson, President, has
executed this instrument and Robert C. Levy, its Secretary has affixed its
corporate seal hereto and attested said seal on the 24 day of February,
1998.
PLACE CORPORATE
SEAL HERE
ELECTRONIC PROCESSING, INC.
By: /s/ Tom W. Olofson
------------------------------
Tom W. Olofson, President
FILED AND CERTIFICATE
ISSUED
FEB 26 1998
/s/ Rebecca McDowell Cook
SECRETARY OF STATE
-2-
<PAGE>
ATTEST:
By: /s/ Robert C. Levy
---------------------------------
Robert C. Levy, Secretary
STATE OF KANSAS )
) ss
COUNTY OF WYSADATTE)
I, the undersigned, a Notary Public, do hereby certify that on this
24th day of February, 1998, Tom W. Olofson personally appeared before me who,
being by me first duly sworn, declared that he is the President of Electronic
Processing, Inc., that he signed the foregoing document as President of the
corporation, and that the statements therein contained are true.
NOTARIAL SEAL /s/ JUDY E. SCHUBERGER
--------------------------
Notary Public
My commission expires 5/7/2001
NOTARY PUBLIC
STATE OF KANSAS
JUDY E. SCHUBERGER
MY APPT. EXP. 5/7/2001
-3-
<PAGE>
AMENDMENT TO LEASE
THIS AMENDMENT is made and entered into effective as of the 9th day of
December, 1997, by and between T & J INVESTMENT CO., a Kansas general
partnership (hereinafter referred to as "Lessor") and ELECTRONIC PROCESSING,
INC., a Missouri corporation (hereinafter referred to as "Lessee").
WITNESSETH:
WHEREAS, Lessor and Lessee entered into that certain Lease, dated
February 20, 1996 (the "Lease"), pursuant to which Lessee agreed to lease
from Lessor certain real estate and buildings and improvements constructed
thereon as more fully described in Exhibit A of the Lease;
WHEREAS, Lessor and Lessee desire to amend the terms of the Lease as set
forth herein;
NOW, THEREFORE, in consideration of the agreements herein contained, it
is hereby mutually agreed by the parties as follows:
1. OPTION TO EXTEND. The parties agree that Section 3 of the Lease is
deleted, and the following is hereby substituted in its place:
"3. OPTION TO EXTEND.
(a) First Option to Extend. Provided that no default then
exists with respect to the Lessee's obligations hereunder, the Lessee
shall have an option to extend this Lease at the end of the original
term hereof upon the terms and conditions set forth herein for an
additional period of five (5) years, with such extended period
commencing March 1, 2001 and continuing up to and until February 28,
2006. Such option is to be exercised in writing by the Lessee not
later than six (6) months prior to the expiration of the original
term.
(b) Second Option to Extend. Provided that the Lessee shall have
timely exercised its first option to extend the term of this Lease and
further provided that no default then exists with respect to the
Lessee's obligations hereunder, the Lessee shall have a second option
to extend this Lease at the end of the first extended term hereof upon
the terms and conditions set forth herein for an additional period of
five (5) years, with such extended term commencing March 1, 2006 and
continuing up to and until February 28, 2011. Such option is to be
exercised in writing by the Lessee not later than six (6) months prior
to the expiration of the first extended term."
<PAGE>
2. RENT. The parties agree that Section 5 of the Lease is deleted, and
the following is hereby substituted in its place:
"5. RENTAL. As rental for the Premises (the "Rental"), the Lessee
shall pay to the Lessor monthly rental due in advance on the first day
of each month in the amount of Twelve Thousand One Hundred Twenty-Five
and 00/100 Dollars ($12,125.00) for the period beginning March 1, 1996
and ending February 28, 1997. For the period beginning March 1, 1997
and ending February 28, 1998, the Rental shall be Twelve Thousand Five
Hundred and 00/100 Dollars ($12,500.00) per month. For the period
beginning March 1, 1998 and ending February 28, 1999, the Rental shall
be Twelve Thousand Nine Hundred and 00/100 Dollars ($12,900.00) per
month. For the period beginning March 1, 1999 and ending February 29,
2000, the Rental shall be Thirteen Thousand Two Hundred and 00/100
Dollars ($13,200.00) per month. For the period beginning March 1, 2000
and ending February 28, 2001, the Rental shall be Thirteen Thousand Six
Hundred and 00/100 Dollars ($13,600.00) per month.
In the event that the Lessee shall exercise its first option to extend
the term of this Lease under paragraph 3(a), the Rental for the period
beginning March 1, 2001 and ending February 28, 2002 shall be Fourteen
Thousand and 00/100 Dollars ($14,000.00) per month. For the period
beginning March 1, 2002 and ending February 28, 2003, the Rental shall
be Fourteen Thousand Five Hundred and 00/100 Dollars ($14,500.00) per
month. For the period beginning March 1, 2003 and ending February 29,
2004, the Rental shall be Fourteen Thousand Nine Hundred and 00/100
Dollars ($14,900.00) per month. For the period beginning March 1, 2004
and ending February 28, 2005, the Rental shall be Fifteen Thousand Four
Hundred and 00/100 Dollars ($15,400.00) per month. For the period
beginning March 1, 2005 and ending February 28, 2006, the Rental shall
be Fifteen Thousand Eight Hundred and 00/100 Dollars ($15,800.00) per
month.
In the event that the Lessee shall exercise its second option to extend
the term of this Lease under paragraph 3(b), the Rental for the period
beginning March 1, 2006 and ending February 28, 2007 shall be Sixteen
Thousand Two Hundred and 00/100 Dollars ($16,200.00) per month. For the
period beginning March 1, 2007 and ending February 29, 2008, the Rental
shall be Sixteen Thousand Six Hundred and 00/100 Dollars ($16,600.00)
per month. For the period beginning March 1, 2008 and ending February
28, 2009, the Rental shall be Seventeen Thousand and 00/100 Dollars
($17,000.00) per month. For the period beginning March 1, 2009 and
ending February 28, 2010, the Rental shall be Seventeen Thousand Four
Hundred and 00/100 Dollars ($17,400.00) per month. For the period
beginning March 1, 2010 and ending February 28, 2011, the Rental shall
be Seventeen Thousand Eight Hundred and 00/100 Dollars ($17,800.00) per
month.
Lessee shall also pay any additional rental as required hereunder."
3. REMAINING TERMS UNAFFECTED. Except as specifically amended herein,
all remaining terms, conditions, covenants and agreements contained in the
Lease remain in full force and effect, and the parties remain obligated to
perform the same.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment in
multiple counterparts, each of which shall be considered an original, as of the
day and year first above written.
ELECTRONIC PROCESSING, INC. T & J INVESTMENT CO.
"Lessee" "Lessor"
By: Tom Olofson By: Tom W. Olofson
------------------------- -------------------------
Tom Olofson, C.E.O. Tom W. Olofson, General Partner
By: Jerry L. Haney
------------------------
Jerry L. Haney, General Partner
-3-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------
Electronic Processing, Inc. Industrial State Bank Loan Number ___________________
A Missouri C corporation 32nd & Strong Avenue Date March 4, 1997
501 Kansas Avenue P.O. Box 6007 Maturity Date March 4, 1998
Kansas City, Kansas 66105-1309 Kansas City, Kansas 66106 Loan Amount $ 500,000.00
Renewal Of ____________________
BORROWER'S NAME AND ADDRESS LENDER'S NAME AND ADDRESS
"I" includes each borrower "You" means the lender, its
above, jointly and severally. successors and assigns.
- ----------------------------------------------------------------------------------------------------
</TABLE>
I promise to pay to you, or your order, at your address listed above the
PRINCIPAL sum of Five hundred thousand dollars and No/100 Dollars $500,000.00
---------------------------------------- ------------
/ / Single Advance: I have received all of this principal sum. No
additional advances are contemplated under this note.
/X/ Multiple Advance: The principal sum shown above is the maximum amount
of principal I can borrow under this note. As of today I have
received the amount of $____________ and future principal
advances are contemplated.
Conditions: The conditions for future advances are _______________
/X/ Open End Credit: You and I agree that I may borrow up to the
maximum amount of principal more than one time. This feature
is subject to all other conditions and expires no later than
____________________, __________.
/ / Closed End Credit: You and I agree that I may borrow up to the
maximum only one time (and subject to all other conditions).
PURPOSE: The purpose of this loan is to provide a line of credit for working
capital.
INTEREST: I agree to pay interest (calculated on a 365/actual days basis) on
the principal balance(s) owing from time to time as stated below.
/ / Fixed Rate: I agree to pay interest at the fixed, simple rate of
_____________ % per year.
/X/ Variable Rate: I agree to pay interest at the initial simple rate of
9.25% per year. This rate may change as stated below.
/X/ Index Rate: The future rate will be 1% in excess of the
following index rate: Industrial State Bank's base lending
rate per annum
/ / No index: The future rate will not be subject to any internal
or external index. It will be entirely in your control.
/X/ Frequency and Timing: The rate on this note may increase as
often as quarterly.
An increase in the interest rate will take effect
quarterly beginning June 4, 1997 and on the 4th day
of each quarter thereafter.
/ / Limitations: The rate on this note will not at any time (and no
matter what happens to any index rate used) go above or below these
limits:
/ / Maximum Rate: The rate will not go above ___________
/ / Minimum Rate: The rate will not go below ____________
Post Maturity Rate: I agree to pay interest on the unpaid balance of this
note owing after maturity, and until paid in full, as
stated below:
/ / on the same fixed or variable rate basis in effect before maturity
(as indicated above).
/X/ at a rate equal to 5% in excess of the otherwise applicable rate
hereon at the time of default.
/ / ADDITIONAL CHARGES: In addition to interest, I / / have paid / / agree to
pay the following additional charges _________________________________________
PAYMENTS: I agree to pay this note as follows:
/X/ Interest: I agree to pay accrued interest quarterly beginning
June 4, 1997 and on the 4th day of each succeeding quarter thereafter
until maturity March 4, 1998.
/X/ Principal: I agree to pay the principal March 4, 1998
/ / Installments: I agree to pay this note in _________ payments. The
first payment will be in the amount of $ _________________ and will
be due ____________. A payment of $ ____________ will be due on the
_____________ day of each _________________ thereafter. The final
payment of the entire unpaid balance of principal and interest will
be due ______________.
/ / Effect of Variable Rate: An increase in the interest rate will have
the following effect on the payments:
/ / The amount of each scheduled payment will be increased.
/ / The amount of the final payment will be increased.
/ / ___________________________________________________________________
- -------------------------------------------------------------------------------
NOTICE TO BORROWER: This written agreement is the final expression of the
agreement between you and the Lender, and as such it may not be contradicted
by evidence of any prior oral agreement or of a contemporaneous oral agreement
between you and the Lender.
ADDITIONAL TERMS: NONE INDUSTRIAL STATE BANK ELECTRONIC PROCESSING, INC.
AFFIRMATION: By signing or initialing here, Borrower & Lender affirm that no
unwritten oral agreement between them exists.
X [ILLEGIBLE] X [ILLEGIBLE]
----------------------- ------------------------
Pres (Lender) CEO (Borrower(s))
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
/xx/ SECURITY: This note is secured by: Accounts receivable and contract
rights as per the Security Agreement of even date.
/ / If checked, no agreement was signed today securing this note.
(This note is secured by any agreement listed above and any other agreement
to the extent permitted by law.)
- -------------------------------------------------------------------------------
SIGNATURES: I AGREE TO THE TERMS OF THIS NOTE (INCLUDING THOSE ON THE OTHER
SIDE). I have received a copy on today's date.
ELECTRONIC PROCESSING, INC.
a Missouri C corporation
By: /s/ Tom W. Olofson
- --------------------------
Tom W. Olofson, CEO
Signed: Marrion Reardon for Lender, Title: V. President
--------------- -----------------
<PAGE>
ADDITIONAL TERMS
APPLICABLE LAW: The law of the state of Kansas will govern this note. Any
term of this note which is contrary to applicable law will not be
effective, unless the law permits you and me to agree to such a variation.
PAYMENTS: Each payment I make on this note will first reduce the amount I owe
you for charges which are neither interest nor principal. The remainder of
each payment will then reduce unpaid earned interest, and then unpaid
principal. If you and I agree to a different application of payments, we
will describe our agreement on this form.
INTEREST: If I receive the principal in more than one advance, each advance
will start to earn interest only when I receive the advance. The interest
rate in effect on this note at any given time will apply to the entire
principal advanced at that time. If the interest rate on this note is
variable, decreases in the interest rate will have the corresponding
opposite effect on my payment that increases will have (as shown on the
front of this form). No matter how the interest rate is computed, it will
never be higher than the highest rate allowed by law.
INDEX RATES: If you and I have agreed that the interest rate on this note
will be variable and will be related to an index rate, then the index we
select will function only as a tool for setting the rate on this note.
You do not guarantee, by selecting any index, that the rate on this note
will have a particular relationship to the rate you charge on any other
loans or any type of class of loans with your other customers.
SINGLE ADVANCE LOANS: If this is a single advance loan, you and I expect that
you will make only one advance of principal. However, you may add other
amounts to the principal if you make any payments described in the
"PAYMENTS BY LENDER" paragraph below.
MULTIPLE ADVANCE LOANS: If this is a multiple advance loan, you and I expect
that you will make more than one advance of principal.
If this is closed end credit, then repaying a part of the principal will
not entitle me to additional credit.
If this is open end credit, then repaying a part of the principal will
entitle me to additional credit, unless the open end feature has expired.
You will not ordinarily make an advance if it would cause the unpaid
principal amount to become greater than the maximum principal amount, or
if the unpaid principal amount is already greater than the maximum principal
amount. You will never be obligated to make such an advance, even if you
occasionally do so.
PAYMENTS BY LENDER: If you are authorized to pay, on my behalf, charges I am
obligated to pay (such as property insurance premiums), then you may treat
those payments as advances and add them to the unpaid principal under this
note.
POST MATURITY RATE: For purposes of deciding when the "Post Maturity Rate"
(shown on the other side) applies, the term "maturity" means the
following:
(1) if the note is payable on demand, the date you make your
demand;
(2) if the note is payable on demand with an alternate maturity
date(s), the date you make your demand or the final alternate
maturity date or the date you accelerate payment on the note,
whichever is earlier; and
(3) in all other cases, the date of the last scheduled payment of
principal or the date you accelerate payment on the note, whichever
is earlier.
SET-OFF: You have the right to set-off any amount I owe you under this note
against any right I have to receive money from you. If my right to receive
money from you is owned by someone else not paying this note, your set-off
can only reach funds I could have reached with my own request or
endorsement. Your right of set-off does not extend to accounts where my
rights are only as a fiduciary. It also does not extend to my IRA or
other tax-deferred retirement account.
Your right of set-off applies without your first telling me you are going
to use it. It applies no matter what sort or value of collateral is on this
loan. It also applies no matter who else has agreed to pay this note.
You will not be liable for wrongful dishonor of a check where such dishonor
occurs because you set-off this debt against my account.
DEFAULT: I will be in default if any one or more of the following occur:
(1) I fail to make payment on time or in the amount due.
(2) I fail to keep the collateral insured, if required.
(3) I fail to keep any other promise I have made in connection with this
loan.
(4) I fail to pay, or keep any other promise, on any other loan or
agreement I have with you.
(5) Any other creditor of mine attempts to collect the debt I owe him
through court proceedings.
(6) I die.
(7) I go into bankruptcy, whether by my own choice or not.
(8) I do or fail to do something which causes you to believe that you will
have difficulty collecting the amount I owe you.
(9) Anything else happens which causes you to believe that you will have
difficulty collecting the amount I owe you.
REMEDIES: If I am in default on this note, you have the following remedies:
(1) You may demand immediate payment of all I owe you under this note.
(2) You may set-off this debt against any right I have to the payment of
money from you.
(3) You may demand more security or new parties obligated to pay this
note in return for not using any other remedy.
(4) You may make use of any remedy you have under state or federal law.
(5) You may make use of any remedy given to you in any agreement securing
this note.
(6) If this is a multiple advance loan, either open end or closed end,
you may refuse to make advances to me while I am in default:
By selecting any one or more of these remedies you do not give up
your right to later use any other remedy. By deciding not to use any remedy
should I default, you do not waive your right to later consider the event a
default if it happens again.
WAIVER: I give up my rights to require you to do certain things. I will not
require you to:
(1) demand payment of amounts due (presentment);
(2) obtain official certification of nonpayment (protest); or
(3) give notice that amounts due have not been paid (notice of dishonor).
ATTORNEYS' FEES: If you must hire a lawyer to collect this note, I must pay
his or her fee, plus court costs (except where prohibited by law).
SECURITY: This note is secured by any agreement listed on the reverse side
and any other agreement to the extent permitted by law.
ADDITIONAL PARTIES AND SECURITY: I understand that I must pay this note even
if someone else has signed it. You may sue me, or anyone else, or any of us
together, to collect this note. You do not have to tell me this note has not
been paid. You may release any cosigner and I will still be obligated to pay
the note. If you give up any of your rights it will not affect my duty to pay
this note. Extending new credit or renewing this note will not affect my
duty to pay this note.
FINANCIAL STATEMENTS: I agree to provide to you, upon request, any financial
statements or information you may deem necessary. I warrant that all
financial statements and information I provide to you are or will be
accurate, correct and complete.
PRIVACY: I understand and agree that from time to time you may receive credit
information concerning me from others and furnish credit and experience
information regarding my loan to others seeking such information. Except when
otherwise provided by law, I agree that you will not be liable for any claim
arising from the use of information provided to you by others or for
providing such information to others.
GUARANTEE: By signing below, I unconditionally guarantee the payment of any
amounts owed under this note. I also agree that all the other terms of the
note will apply to me.
X
- -----------------------------------
X
- -----------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
DATE OF PRINCIPAL BORROWERS PRINCIPAL PRINCIPAL INTEREST INTEREST INTEREST
TRANSACTION ADVANCE INITIALS PAYMENTS BALANCE RATE PAYMENTS PAID
(not required) THROUGH:
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
/ / $ $ $ % $ / /
- -------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- -------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- -------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- -------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- -------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- -------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- -------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- -------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- -------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- -------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- -------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- -------------------------------------------------------------------------------------------------------------------
/ / $ $ $ % $ / /
- -------------------------------------------------------------------------------------------------------------------
FORM UN=KS BACKSIDE REVISION DATE 10/3/88
</TABLE>
<PAGE>
<TABLE>
<S><C>
___________________________________________________________________________________________
Electronic Processing, Inc. Industrial State Bank Loan Number
a Missouri C corporation P.O. Box 6007 Date June 4, 1997
501 Kansas Avenue 32nd & Strong Avenue Maturity Date June 4, 1998
Kansas City, Kansas 66105-1309 Kansas City, Kansas 66106 Loan Amount $500,000.00
Renewal Of
BORROWER'S NAME AND ADDRESS LENDER'S NAME AND ADDRESS
"I" includes each borrower "You" means the lender,
above, jointly and severally. its successors and assigns.
___________________________________________________________________________________________
I promise to pay to you, or your order, at your address listed above the
PRINCIPAL sum of Five hundred thousand dollars and No/100 Dollars $500,000.00
/ / Single Advance: I have received all of this principal sum. No
additional advances are contemplated under this note.
/X/ Multiple Advance: The principal sum shown above is the maximum amount
of principal I can borrow under this note. As of
today I have received the amount of
$_______________ and future principal advances are
contemplated.
Conditions: The conditions for future advances are_____________________
________________________________________________________
________________________________________________________
/X/ Open End Credit: You and I agree that I may borrow up to the
maximum amount of principal more than one time.
This feature is subject to all other conditions
and expires no later than ______________________.
/ / Closed End Credit: You and I agree that I may borrow up to the
maximum only one time (and subject to all
other conditions).
PURPOSE: The purpose of this loan is provide a line of credit for the
purchase of new equipment.
INTEREST: I agree to pay interest (calculated on a 365/accrual days basis) on
the principal balance(s) owing from time to time as stated below.
/ / Fixed Rate: I agree to pay interest at the fixed, simple rate of _____%
per year.
/X/ Variable Rate: I agree to pay interest at the initial simple rate of
______% per year. This rate may change as stated below.
/X/ Index Rate: The future rate will be 17 in excess of the following
index rate: Industrial State Bank's base lending rate
per annum.
/ / No Index: The future rate will not be subject to any internal or
external index. It will be entirely in your control.
/X/ Frequency and Timing: The rate on this note may increase as often
as monthly. An increase in the interest rate will take
effect monthly beginning July 4, 1997 and on the 4th day
of each month thereafter.
/ / Limitations: The rate on this note will not at any time (and no
matter what happens to any index rate used) go above or
below these limits:
/ / MAXIMUM RATE: The rate will not go above_____________
/ / MINIMUM RATE: The rate will not go below ____________
Post Maturity Rate: I agree to pay interest on the unpaid balance of
this note owing after maturity, and until paid in full, as stated below:
/ / on the same fixed or variable rate basis in effect before maturity
(as indicated above)
/X/ at a rate equal to 5% in excess of the otherwise applicable rate
hereon at the time of default.
/ / ADDITIONAL CHARGES: In addition to interest, I / / have paid / / agree to
pay the following additional charges ___________________________________
________________________________________________________________________.
PAYMENTS: I agree to pay this note as follows:
/X/ Interest: I agree to pay accrued interest monthly beginning July 4,
1997 and on the 4th day of each succeeding month thereafter
until June 4, 1998.
/X/ Principal: I agree to pay the principal in monthly payments equal to
1/36 of the outstanding principal balance beginning July 4,
1997 and on the 4th day of each succeeding month thereafter.
/ / Installments: I agree to pay this note in ____ payments. The first
payment will be in the amount of $_________ and will be due ____________,
_____________. A payment of $____________ will be due on the __________
day of each ______________________ thereafter. The final payment of the
entire unpaid balance of principal and interest will be due __________,
______________.
/ / Effect of Variable Rate: An increase in the interest rate will have
the following effect on the payments:
/ / The amount of each scheduled payment will be increased.
/ / The amount of the final payment will be increased.
/ / ___________________________________________________________________.
_______________________________________________________________________________________________
NOTICE TO BORROWER: This written agreement is the final expression of the agreement between
you and the Lender, and as such it may not be contradicted by evidence of any prior oral
agreement or of a contemporaneous oral agreement between you and the Lender.
ADDITIONAL TERMS: NONE INDUSTRIAL STATE BANK ELECTRONIC PROCESSING, INC.
AFFIRMATION: By signing or initialing
here, Borrower & Lender affirm that no
unwritten oral agreement between them X /s/ [ILLEGIBLE] X /s/ [ILLEGIBLE]
exists. --------------------- -------------------------
Pres (Lender) CEO (Borrower(s))
_______________________________________________________________________________________________
/X/ SECURITY: This note is secured by: SIGNATURES: I AGREE TO THE TERMS OF THIS
Machinery and equipment as per the NOTE (INCLUDING THOSE ON THE OTHER SIDE),
Security Agreement of even date. I have received a copy on today's date.
ELECTRONIC PROCESSING, INC.
/ / If checked, no agreement was signed a Missouri C Corporation
today securing this note. (This note is ----------------------------------------
secured by any agreement listed above By: /s/ Tom W. Olofson
and any other agreement to the extent ----------------------------------------
permitted by law.) Tom W. Olofson, CEO
___________________________________________
Signed /s/ [ILLEGIBLE] for Lender, Title President
------------------------------- --------------------------------------
_______________________________________________________________________________________________
</TABLE>
<PAGE>
ADDITIONAL TERMS
APPLICABLE LAW: The law of the state of Kansas will govern this note. Any
term of this note which is contrary to applicable law will not be
effective, unless the law permits you and me to agree to such a variation.
PAYMENTS: Each payment I make on this note will first reduce the amount I owe
you for charges which are neither interest nor principal. The remainder of
each payment will then reduce unpaid earned interest, and then unpaid
principal. If you and I agree to a different application of payments, we
will describe our agreement on this form.
INTEREST: If I receive the principal in more than one advance, each advance
will start to earn interest only when I receive the advance. The interest
rate in effect on this note at any given time will apply to the entire
principal advanced at that time. If the interest rate on this note is
variable, decreases in the interest rate will have the corresponding
opposite effect on my payment that increases will have (as shown on the
front of this form). No matter how the interest rate is computed, it will
never be higher than the highest rate allowed by law.
INDEX RATES: If you and I have agreed that the interest rate on this note
will be variable and will be related to an index rate, then the index we
select will function only as a tool for setting the rate on this note.
You do not guarantee, by selecting any index, that the rate on this note
will have a particular relationship to the rate you charge on any other
loans or any type or class of loans with your other customers.
SINGLE ADVANCE LOANS: If this is a single advance loan, you and I expect that
you will make only one advance of principal. However, you may add other
amounts to the principal if you make any payments described in the
"PAYMENTS BY LENDER" paragraph below.
MULTIPLE ADVANCE LOANS: If this is a multiple advance loan, you and I expect
that you will make more than one advance of principal.
If this is closed end credit, then repaying a part of the principal will
not entitle me to additional credit.
If this is open end credit, then repaying a part of the principal will
entitle me to additional credit, unless the open end feature has expired.
You will not ordinarily make an advance if it would cause the unpaid
principal amount to become greater than the maximum principal amount, or if
the unpaid principal amount is already greater than the maximum principal
amount. You will never be obligated to make such an advance, even if you
occasionally do so.
PAYMENTS BY LENDER: If you are authorized to pay, on my behalf, charges I am
obligated to pay (such as property insurance premiums), then you may treat
those payments as advances and add them to the unpaid principal under this
note.
POST MATURITY RATE: For purposes of deciding when the "Post Maturity Rate"
(shown on the other side) applies, the term "maturity" means the
following:
(1) if the note is payable on demand, the date you make your demand;
(2) if the note is payable on demand with an alternate maturity date(s),
the date you make your demand or the final alternate maturity date or
the date you accelerate payment on the note, whichever is earlier; and
(3) in all other cases, the date of the last scheduled payment of
principal or the date you accelerate payment on the note, whichever is
earlier.
SET-OFF: You have the right to set-off any amount I owe you under this note
against any right I have to receive money from you. If my right to receive
money from you is owned by someone else not paying this note, your set-off
can only reach funds I could have reached with my own request or endorsement.
Your right of set-off does not extend to accounts where my rights are only
as a fiduciary. It also does not extend to my IRA or other tax-deferred
retirement account.
Your right of set-off applies without your first telling me you are going
to use it. It applies no matter what sort or value of collateral is on this
loan. It also applies no matter who else has agreed to pay this note.
You will not be liable for wrongful dishonor of a check where such dishonor
occurs because you set-off this debt against my account.
DEFAULT: I will be in default if any one or more of the following occur:
(1) I fail to make payment on time or in the amount due.
(2) I fail to keep the collateral insured, if required.
(3) I fail to keep any other promise I have made in connection with this
loan.
(4) I fail to pay, or keep any other promise, on any other loan or
agreement I have with you.
(5) Any other creditor of mine attempts to collect the debt I owe him
through court proceedings.
(6) I die.
(7) I go into bankruptcy, whether by my own choice or not.
(8) I do or fail to do something which causes you to believe that you will
have difficulty collecting the amount I owe you.
(9) Anything else happens which causes you to believe that you will have
difficulty collecting the amount I owe you.
REMEDIES: If I am in default on this note, you have the following remedies:
(1) You may demand immediate payment of all I owe you under this note.
(2) You may set-off this debt against any right I have to the payment of
money from you.
(3) You may demand more security or new parties obligated to pay this
note in return for not using any other remedy.
(4) You may make use of any remedy you have under state or federal law.
(5) You may make use of any remedy given to you in any agreement securing
this note.
(6) If this is a multiple advance loan, either open end or closed end,
you may refuse to make advances to me while I am in default.
By selecting any one or more of these remedies you do not give up
your right to later use any other remedy. By deciding not to use any remedy
should I default, you do not waive your right to later consider the event a
default if it happens again.
WAIVER: I give up my rights to require you to do certain things. I will not
require you to:
(1) demand payment of amounts due (presentment);
(2) obtain official certification of nonpayment (protest); or
(3) give notice that amounts due have not been paid (notice of dishonor).
ATTORNEYS' FEES: If you must hire a lawyer to collect this note, I must pay
his or her fee, plus court costs (except where prohibited by law).
SECURITY: This note is secured by any agreement listed on the reverse side
and any other agreement to the extent permitted by law.
ADDITIONAL PARTIES AND SECURITY: I understand that I must pay this note even
if someone else has signed it. You may sue me, or anyone else, or any of us
together, to collect this note. You do not have to tell me this note has not
been paid. You may release any cosigner and I will still be obligated to pay
the note. If you give up any of your rights it will not affect my duty to pay
this note. Extending new credit or renewing this note will not affect my
duty to pay this note.
FINANCIAL STATEMENTS: I agree to provide to you, upon request, any financial
statements or information you may deem necessary. I warrant that all
financial statements and information I provide to you are or will be
accurate, correct and complete.
PRIVACY: I understand and agree that from time to time you may receive credit
information concerning me from others and furnish credit and experience
information regarding my loan to others seeking such information. Except when
otherwise provided by law, I agree that you will not be liable for any claim
arising from the use of information provided to you by others or for
providing such information to others.
GUARANTEE: By signing below, I unconditionally guarantee the payment of any
amounts owed under this note. I also agree that all the other terms of the
note will apply to me.
X
- -----------------------------------
X
- -----------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
DATE OF PRINCIPAL BORROWER'S PRINCIPAL PRINCIPAL INTEREST INTEREST INTEREST
TRANSACTION ADVANCE INITIALS PAYMENTS BALANCE RATE PAYMENTS PAID
(NOT REQUIRED) THROUGH:
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
/ / $ $ $ % $ / /
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FORM UN=KS BACKSIDE REVISION DATE 10/3/88
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
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ELECTRONIC PROCESSING, INC. EXCHANGE NATIONAL BANK Loan Number 80336
501 KANSAS AVENUE 11301 NALL AVENUE Date JULY 21, 1997
KANSAS CITY, KS 66105 LEAWOOD, KS 66211 Maturity Date AUGUST 1, 1998
Loan Amount $1,000,000.00
Renewal of______________
BORROWER'S NAME AND ADDRESS LENDER'S NAME AND ADDRESS
"I" includes each borrower "You" means the lender, its
above, joint and severally. successors and assigns.
- ------------------------------------------------------------------------------------
</TABLE>
For value received, I promise to pay to you, or your order, at your address
listed above the PRINCIPAL sum of ONE MILLION AND NO/100*
* * * * * * * * * * * * * * * * * * * * * * * * * * * * Dollars $1,000,000.00
- -------------------------------------------------------- ---------------
/ / SINGLE ADVANCE: I will receive all of this principal sum on
_______________. No additional advances are contemplated under this note.
/X/ MULTIPLE ADVANCE: The principal sum shown above is the maximum amount of
principal I can borrow under this note. On JULY 21, 1997 I will receive the
amount of $__________ and future principal advances are contemplated.
CONDITIONS: The conditions for future advances are ALL FUTURE ADVANCES
MUST BE REQUESTED IN PERSON, IN WRITING OR BY PHONE AND ARE SUBJECT TO
APPROVAL OR DISAPPROVAL AT THE SOLE DISCRETION OF EXCHANGE NATIONAL BANK,
MANAGEMENT.
/X/ OPEN END CREDIT: You and I agree that I may borrow up to the
maximum amount of principal more than one time. This feature is
subject to all other conditions and expires on AUGUST 1, 1998.
/ / CLOSED END CREDIT: You and I agree that I may borrow up to the
maximum only one time (and subject to all other conditions).
INTEREST: I agree to pay interest on the outstanding principal balance from
JULY 21, 1997 at the rate of 9.000% per year until JULY 22, 1997.
/X/ VARIABLE RATE: This rate may then change as stated below.
/X/ INDEX RATE: The future rate will be 0.500% OVER the following
index rate: PRIME RATE AS QUOTED IN THE WALL STREET JOURNAL UNDER
MONEY RATES (CODE 143)
/ / NO INDEX: The future rate will not be subject to any internal or
external index. It will be entirely in your control.
/X/ FREQUENCY AND TIMING: The rate on this note may change as often as
DAILY
A change in the interest rate will take effect ON THE SAME DAY
/ / LIMITATIONS: During the term on this loan, the applicable annual
rate interest rate will not be more than ________% or less than
__________%. The rate may not change more than ________%
each _________________________.
EFFECT OF VARIABLE RATE: A change in the interest rate will have the
following effect on the payments:
/X/ The amount of each scheduled /X/ The amount of the final
payment will change. payment will change.
/ / ____________________________________________________________________.
ACCRUAL METHOD: Interest will be calculated on a ACTUAL/360 basis.
POST MATURITY RATE: I agree to pay interest on the unpaid balance of this
note owing after maturity, and until paid in full, as stated below:
/X/ on the same fixed or variable rate basis in effect before maturity
(as indicated above).
/ / at a rate equal to _________________________________________________.
/X/ LATE CHARGE: If a payment is made more than 10 days after it is due, I
agree to pay a late charge of 5.000% OF THE LATE PAYMENT WITH A MINIMUM OF
$5.00 AND A MAXIMUM OF $25.00.
/ / ADDITIONAL CHARGES: In addition to interest, I agree to pay the following
charges which / / are / / are not included in the principal amount above:_____
_______________________________________________________________________________.
PAYMENTS: I agree to pay this note as follows:
/X/ INTEREST: I agree to pay accrued interest ON DEMAND, BUT IF NO DEMAND IS
MADE THENON THE 1ST DAY OF EACH MONTH BEGINNING SEPTEMBER 1, 1997
/X/ PRINCIPAL: I agree to pay the principal ON DEMAND, BUT IF NO DEMAND IS
MADE THEN ON AUGUST 1, 1998
/ / INSTALLMENTS: I agree to pay this note in ______ payments. The first
payment will be in the amount of $______________ and will be due __________
____________. A payment of $_______________ will be due ___________________
thereafter. The final payment of the entire unpaid balance of principal and
interest will be due ____________________________________.
ADDITIONAL TERMS:
THIS NOTE IS SECURED BY:
1. A SECURITY AGREEMENT DATED JULY 21, 1997.
2. A LINE OF CREDIT AGREEMENT DATED JULY 21, 1997.
A PRINCIPAL REDUCTION EQUAL TO 1/36TH OF THE OUTSTANDING PRINCIPAL BALANCE
WILL BE DUE ON THE 1ST DAY OF EACH MONTH.
/X/ SECURITY: This note is separately secured PURPOSE: The purpose of this
by (describe separate document by type and date): loan is BUSINESS: EQUIPMENT
SEE ABOVE SECURITY FINANCING
SIGNATURES: I AGREE TO THE
TERMS OF THIS NOTE INCLUDING
THOSE ON PAGE 21. I have
received a copy on today's
date.
(This section is for your Internal use. Failure
to list a separate security document does not mean
the agreement will not secure this note.)
Signature for Lender ELECTRONIC PROCESSING, INC.
X /s/ Charles N. Van Zante BY:
---------------------------------------------- -------------------------
CHARLES N. VAN ZANTE, EXECUTIVE VICE PRESIDENT TOM W. OLOFSON, PRESIDENT
---------------------------------------------- -------------------------
-------------------------
UNIVERSAL NOTE Page 1 of 2
<PAGE>
DEFINITIONS: As used on page 1, "/x/" means the terms that apply to this
loan, "I," "me" or "my" means each Borrower who signs this note and each
other person or legal entity (including guarantors, endorsers, and sureties)
who agrees to pay this note (together referred to as "us"). "You" or "your"
means the Lender and its successors and assigns.
APPLICABLE LAW: The law of the state in which you are located will govern
this note. Any term of this note which is contrary to applicable law will not
be effective, unless the law permits you and me to agree to such a variation.
If any provision of this agreement cannot be enforced according to its
terms, this fact will not affect the enforceability of the remainder of this
agreement. No modification of this agreement may be made without your express
written consent. Time is of the essence in this agreement.
PAYMENTS: Each payment I make on this note will first reduce the amount I
owe you for charges which are neither interest nor principal. The remainder
of each payment will then reduce accrued unpaid interest, and then unpaid
principal. If you and I agree to a different application of payments, we will
describe our agreement on this note. I may prepay a part of, or the entire
balance of this loan without penalty, unless we specify to the contrary on
this note. Any partial prepayment will not excuse or reduce any later
scheduled payment until this note is paid in full (unless, when I make the
prepayment, you and I agree in writing to the contrary).
INTEREST: Interest accrues on the principal remaining unpaid from time to
time, until paid in full. If I receive the principal in more than one
advance, each advance will start to earn interest only when I receive the
advance. The interest rate in effect on this note at any given time will
apply to the entire principal advanced at that time. Notwithstanding anything
to the contrary, I do not agree to pay and you do not intend to charge any
rate of interest that is higher than the maximum rate of interest you could
charge under applicable law for the extension of credit that is agreed to
here (either before or after maturity). If any notice of interest accrual is
sent and is in error, we mutually agree to correct it, and if you actually
collect more interest then allowed by law and this agreement, you agree to
refund it to me.
INDEX RATE: The index will serve only as a device for setting the rate on
this note. You do not guarantee by selecting this index, or the margin, that
the rate on this note will be the same rate you charge on any other loans or
class of loans to me or other borrowers.
ACCRUAL METHOD: The amount of interest that I will pay on this loan will be
calculated using the interest rate and accrual method stated on page 1 of
this note. For the purpose of interest calculation, the accrual method will
determine the number of days in a "year." If no accrual method is stated,
then you may use any reasonable accrual method for calculating interest.
POST MATURITY RATE: For purposes of deciding when the "Post Maturity Rate"
(shown on page 1) applies, the term "maturity" means the date of the last
scheduled payment indicated on page 1 of this note or the date you accelerate
payment on the note, whichever is earlier.
SINGLE ADVANCE LOANS: If this is a single advance loan, you and I expect that
you will make only one advance of principal. However, you may add other
amounts to the principal if you make any payments described in the "PAYMENTS
BY LENDER" paragraph below.
MULTIPLE ADVANCE LOANS: If this is a multiple advance loan, you and I expect
that you will make more than one advance of principal. If this is closed end
credit, repaying a part of the principal will not entitle me to additional
credit.
PAYMENTS BY LENDER: If you are authorized to pay, on my behalf, charges I am
obligated to pay (such as property insurance premiums), then you may treat
those payments made by you as advances and add them to the unpaid principal
under this note, or you may demand immediate payment of the charges.
SET-OFF: I agree that you may set off any amount due and payable under this
note against any right I have to receive money from you.
"Right to receive money from you" means:
(1) any deposit account balance I have with you;
(2) any money owed to me on an item presented to you or in your
possession for collection or exchange; and
(3) any repurchase agreement or other nondeposit obligation.
"Any amount due and payable under this note" means the total amount of
which you are entitled to demand payment under the terms of this note at the
time you set off. This total includes any balance the due date for which you
properly accelerate under this note.
If my right to receive money from you is also owned by someone who has
not agreed to pay this note, your right of set-off will apply to my interest
in the obligation and to any other amounts I could withdraw on my sole
request or endorsement. Your right of set-off does not apply to an account or
other obligation where my rights are only as a representative. It also does
not apply to any Individual Retirement Account or other tax-deferred
retirement account.
You will not be liable for the dishonor of any check when the dishonor
occurs because you set off this debt against any of my accounts. I agree to
hold you harmless from any such claims arising as a result of your exercise
of your right of set-off.
REAL ESTATE OR RESIDENCE SECURITY: If this note is secured by real estate or
a residence that is personal property, the existence of a default and your
remedies for such a default will be determined by applicable law, by the
terms of any separate instrument creating the security interest and, to the
extent not prohibited by law and not contrary to the terms of the separate
security instrument, by the "Default" and "Remedies" paragraphs herein.
DEFAULT: I will be in default if any one or more of the following occur: (1)
I fail to make a payment on time or in the amount due; (2) I fail to keep the
property insured, if required; (3) I fail to pay, or keep any promise, on any
debt or agreement I have with you; (4) any other creditor of mine attempts to
collect any debt I owe him through court proceedings; (5) I die, am declared
incompetent, make an assignment for the benefit of creditors, or become
insolvent (either because my liabilities exceed my assets or I am unable to
pay my debts as they become due); (6) I make any written statement or provide
any financial information that is untrue or inaccurate at the time it was
provided; (7) I do or fail to do something which causes you to believe that
you will have difficulty collecting the amount I owe you; (8) any collateral
securing this note is used in a manner or for a purpose which threatens
confiscation by a legal authority; (9) I change my name or assume an additional
name without first notifying you before making such a change; (10) I fail to
plant, cultivate and harvest crops in due season if I am a producer of crops;
(11) any loan proceeds are used for a purpose that will contribute to
excessive erosion of highly erodible land or to the conversion of wetlands to
produce an agricultural commodity, as further explained in 7 C.F.R. Part
1940, Subpart G, Exhibit M.
REMEDIES: If I am in default on this note you have, but are not limited to,
the following remedies:
(1) You may demand immediate payment of all I owe you under this note
(principal, accrued unpaid interest and other accrued charges).
(2) You may set off this debt against any right I have to the payment of
money from you, subject to the terms of the "Set-Off" paragraph herein.
(3) You may demand security, additional security, or additional parties
to be obligated to pay this note as a condition for not using any other
remedy.
(4) You may refuse to make advances to me or allow purchases on credit by
me.
(5) You may use any remedy you have under state or federal law.
By selecting any one or more of these remedies you do not give up your right
to later use any other remedy. By waiving your right to declare an event to
be a default, you do not waive your right to later consider the event as a
default if it continues or happens again).
COLLECTION COSTS AND ATTORNEY'S FEES: I agree to pay all costs of collection,
replevin or any other or similar type of cost if I am in default. In
addition, if you hire an attorney to collect this note, I also agree to pay
any fee you incur with such attorney plus court costs (except where
prohibited by law). To the extent permitted by the United States Bankruptcy
Code, I also agree to pay the reasonable attorney's fees and costs you incur
to collect this debt as awarded by any court exercising jurisdiction under
the Bankruptcy Code.
WAIVER: I give up my rights to require you to do certain things. I will not
require you to:
(1) demand payment of amounts due (presentment);
(2) obtain official certification of nonpayment (protest); or
(3) give notice that amounts due have not been paid (notice of dishonor).
I waive any defenses I have based on suretyship or impairment of
collateral.
OBLIGATIONS INDEPENDENT: I understand that I must pay this note even if
someone else has also agreed to pay it (by, for example, signing this form
or a separate guarantee or endorsement). You may sue me alone, or anyone else
who is obligated on this note, or any number of us together, to collect this
note. You may do so without any notice that it has not been paid (notice of
dishonor). You may without notice release any party to this agreement
without releasing any other party. If you give up any of your rights, with or
without notice, it will not affect my duty to pay this note. Any extension of
new credit to any of us, or renewal of this note by all or less than all of
us will not release me from my duty to pay it. (Of course, you are entitled
to only one payment in full.) I agree that you may at your option extend this
note or the debt represented by this note, or any portion of the note or
debt, from time to time without limit or notice and for any term without
affecting my liability for payment of the note. I will not assign my
obligation under this agreement without your prior written approval.
CREDIT INFORMATION: I agree and authorize you to obtain credit information
about me from time to time (for example, by requesting a credit report) and
to report to others your credit experience with me (such as a credit reporting
agency). I agree to provide you, upon request, any financial statement or
information you may deem necessary. I warrant that the financial statements
and information I provide to you are or will be accurate, correct and
complete.
NOTICE: Unless otherwise required by law, any notice to me shall be given by
delivering it or by mailing it by first class mail addressed to me at my last
known address. My current address is on page 1. I agree to inform you in
writing of any changes in my address. I will give any notice to you by
mailing it first class to your address stated on page 1 of this agreement, or
to any other address that you have designated.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
DATE OF PRINCIPAL BORROWER'S PRINCIPAL PRINCIPAL INTEREST INTEREST INTEREST
TRANSACTION ADVANCE INITIALS PAYMENTS BALANCE RATE PAYMENTS PAID
(NOT REQUIRED) THROUGH:
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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</TABLE>
(page 2 of 2)
<PAGE>
- --------------------------------------------------------------------------------
ELECTRONIC PROCESSING, INC.
- --------------------------------------------------------------------------------
501 KANSAS AVENUE
- --------------------------------------------------------------------------------
KANSAS CITY, KS 66105
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TAXPAYER I.D. NUMBER : -
- --------------------------------------------------------------------------------
DEBTOR'S NAME, ADDRESS AND SSN OR TIN
("I" means each Debtor who signs.)
- --------------------------------------------------------------------------------
EXCHANGE NATIONAL BANK
11301 NALL AVENUE
LEAWOOD, KS 66211
SECURED PARTY'S NAME AND ADDRESS
("You" means the Secured Party, its successors and assigns.)
- -------------------------------------------------------------------------------
I am entering into this security agreement with you on JULY 21, 1997 (date).
SECURED DEBTS. I agree that this security agreement will secure the payment
and performance of the debts, liabilities or obligations described below that
(Check one) /X/ I / / (name) ________________________________________________
____________________________________________ owe(s) to you now or in the
future:
(Check one below):
/ / Specific Debt(s). The debt(s), liability or obligations evidenced by
(describe): __________________________________________________________
_____________ ________________________________________________ and all
extensions, renewals, refinancings, modifications and replacements of
the debt, liability or obligation.
/X/ All Debt(s). Except in those cases listed in the "LIMITATIONS" paragraph
on page 2, each and every debt, liability and obligation of every type
and description (whether such debt, liability or obligation now exists
or is incurred or created in the future and whether it is or may be
direct or indirect, due or to become due, absolute or contingent,
primary or secondary, liquidated or unliquidated, or joint, several or
joint and several).
Security Interest. To ensure the payment and performance of the above described
Secured Debts, liabilities and obligations, I give you a security
interest in all of the property described below that I now own and that I may
own in the future (including, but not limited to, all parts, accessories,
repairs, improvements, and accessions to the property), wherever the property
is or may be located, and all proceeds and products from the property.
/ / Inventory: All Inventory which I hold for ultimate sale or lease, or
which has been or will be supplied under contracts of service, or which
are raw materials, work in process, or materials used or consumed in my
business.
/X/ Equipment: All equipment including, but not limited to, all machinery,
vehicles, furniture, fixtures, manufacturing equipment, farm machinery
and equipment, shop equipment, office and recordkeeping equipment, and
parts and tools. All equipment described in a list or schedule which I
give to you will also be included in the secured property, but such a
list is not necessary for a valid security interest in my equipment.
/ / Farm Products: All farm products including, but not limited to:
(a) all poultry and livestock and their young, along with their products,
produce and replacements;
(b) all crops, annual or perennial, and all products of the crops; and
(c) all feed, seed, fertilizer, medicines, and other supplies used or
produced in my farming operations,
/ / Accounts, Instruments, Documents, Chattel Paper and Other Rights to
Payment: All rights I have now and that I may have in the future to the
payment of money including, but not limited to:
(a) payment for goods and other property sold or leased or for services
rendered, whether or not I have earned such payment by performance;
and
(b) rights to payment arising out of all present and future debt
instruments, chattel paper and loans and obligations receivable.
The above include any rights and interests (including all liens and
security interests) which I may have by law or agreement against any
account debtor or obligor of mine.
/ / General Intangibles: All general intangibles including, but not limited
to, tax refunds, applications for patents, patents, copyrights,
trademarks, trade secrets, good will, trade names, customer lists,
permits and franchises, and the right to use my name.
/ / Government Payments and Programs: All payments, accounts, general
intangibles, or other benefits (including, but not limited to, payments
in kind, deficiency payments, letters of entitlement, warehouse receipts,
storage payments, emergency assistance payments, diversion payments, and
conservation reserve payments) in which I now have and in the future may
have any rights or interest and which arise under or as a result of any
preexisting, current or future Federal or state governmental program
(including, but not limited to, all programs administered by the Commodity
Credit Corporation and the ASCS).
/ / The secured property includes, but is not limited by, the following:
If this agreement covers timber to be cut, minerals (including oil and gas),
fixtures or crops growing or to be grown, the legal description is:
- -------------------------------------------------------------------------------
I a(n) / / individual / / partnership /X/ corporation
/ /_____________________________________________
/ / if checked, file this agreement in the real estate records.
Record Owner (if not me):__________________________________
___________________________________________________________
_________________________________________________________ .
The property will be used for / / personal /X/ business
/ / agricultural / /_______________________ reasons.
EXCHANGE NATIONAL BANK
- -------------------------------------------------------------------------------
(Secured Party's Name)
By: /s/ CHARLES N. VAN ZANTE
----------------------------
CHARLES N. VAN ZANTE
Title: EXEC. VICE PRESIDENT
--------------------------
I AGREE TO THE TERMS SET OUT ON BOTH PAGE 1 AND PAGE 2 OF THIS AGREEMENT. I
have received a copy of this document on today's date.
ELECTRONIC PROCESSING, INC.
(Debtor's Name)
By:
------------------------------
TOM W. OLOFSON
Title: PRESIDENT
---------------------------
By:
------------------------------
Title:
---------------------------
(page 1 of 2)
<PAGE>
GENERALLY - "You" means the Secured Party identified on page 1 of this
agreement. "I," "me" and "my" means each person who signs this security
agreement as Debtor and who agrees to give the property described in this
agreement as security for the Secured Debts. All terms and duties under this
agreement are joint and individual. No modification of this security
agreement is effective unless made in writing and signed by you and me. This
security agreement remains in effect, even if the note is paid and I owe no
other debt to you, until discharged in writing. Time is of the essence in
this agreement.
APPLICABLE LAW - I agree that this security agreement will be governed by the
law of the state in which you are located. If property described in this
agreement is located in another state, this agreement may also, in some
circumstances, be governed by the law of the state in which the property is
located.
To the extent permitted by law, the terms of this agreement may vary
applicable law. If any provision of applicable law may not be varied by
agreement, any provision of this agreement that does not comply with that law
will not be effective. If any provision of this agreement cannot be enforced
according to its terms, this fact will not affect the enforceability of the
remainder of this agreement.
OWNERSHIP AND DUTIES TOWARD PROPERTY - I represent that I own all of the
property, or to the extent this is a purchase money security interest I will
acquire ownership of the property with the proceeds of the loan. I will defend
it against any other claim. Your claim to the property is ahead of the claims
of any other creditor. I agree to do whatever you require to protect your
security interest and to keep your claim in the property ahead of the claims
of other creditors. I will not do anything to harm your position.
I will keep books, records and accounts about the property and my business
in general. I will let you examine these records at any reasonable time. I
will prepare any report or accounting you request, which deals with the
property.
I will keep the property in my possession and will keep it in good repair
and use it only for the purpose(s) described on page 1 of this agreement. I
will not change this specified use without your express written permission. I
represent that I am the original owner of the property and, if I am not, that
I have provided you with a list of prior owners of the property.
I will keep the property at my address listed on page 1 of this agreement,
unless we agree I may keep it at another location. If the property is to be
used in another state, I will give you a list of those states. I will not try
to sell the property unless it is inventory or I receive your written
permission to do so. If I sell the property I will have the payment made
payable to the order of you and me.
You may demand immediate payment of the debt(s) if the debtor is not a
natural person and without your prior written consent (1) a beneficial
interest in the debtor is sold or transferred or (2) there is a change in
either the identity or number of members of a partnership or (3) there is a
change in ownership of more than 25 percent of voting stock of a corporation.
I will pay all taxes and charges on the property as they become due. You
have the right of reasonable access in order to inspect the property. I will
immediately inform you of any loss or damage to the property.
LIMITATIONS - This agreement will not secure a debt described in the section
entitled "Secured Debts" on page 1:
1) if you fail to make any disclosure of the existence of this security
interest required by law for such other debt;
2) if this security interest is in my principal dwelling and you fail to
provide (to all persons entitled) any notice of right of rescission
required by law for such other debt;
3) to the extent that this security interest is in "household goods" and
the other debt to be secured is a "consumer" loan (as those terms are
defined in applicable federal regulations governing unfair and
deceptive credit practices);
4) if this security interest is in margin stock subject to the
requirements of 12 C.F.R. Section 207 or 221 and you do not obtain a
statement of purpose if required under these regulations with respect
to that debt; or
5) if this security interest is unenforceable by law with respect to that
debt.
PURCHASE MONEY SECURITY INTEREST - For the sole purpose of determining the
extent of a purchase money security interest arising under this security
agreement: (a) payments on any non-purchase money loan also secured by this
agreement will not be deemed to apply to the purchase money loan, and (b)
payments on the purchase money loan will be deemed to apply first to the
non-purchase money portion of the loan, if any, and then to the purchase
money obligations in the order in which the items of collateral were acquired
or if acquired at the same time, in the order selected by you. No security
interest will be terminated by application of this formula. "Purchase money
loan" means any loan the proceeds of which, in whole or in part, are used to
acquire any collateral securing the loan and all extensions, renewals,
consolidations and refinancings of such loan.
AUTHORITY OF SECURED PARTY TO MAKE ADVANCES AND PERFORM FOR DEBTOR - I agree
to pay you on demand any sums you advanced on my behalf including, but not
limited to, expenses incurred in collecting, insuring, conserving, or
protecting the property or in any inventories, audits, inspections or other
examinations by you in respect to the property. If I fail to pay such sums,
you may do so for me, adding the amount paid to the other amounts secured by
this agreement. All such sums will be due on demand and will bear interest at
the highest rate provided in any agreement, note or other instrument
evidencing the Secured Debt(s) and permitted by law at the time of the
advance.
If I fail to perform any of my duties under this security agreement, or
any mortgage, deed of trust, lien or other security interest, you may without
notice to me perform the duties or cause them to be performed. I understand
that this authorization includes, but is not limited to, permission to: (1)
prepare, file, and sign my name to any necessary reports or accountings; (2)
notify any account debtor of your interest in this property and tell the
account debtor to make the payments to you or someone else you name, rather
than me; (3) place on any chattel paper a note indicating your interest in
the property; (4) in my name, demand, collect, receive and give a receipt
for, compromise, settle, and handle any suits or other proceedings involving
the collateral; (5) take any action you feel is necessary in order to realize
on the collateral, including performing any part of a contract or endorsing
it in my name; and (6) make an entry on my books and records showing the
existence of the security agreement. Your right to perform for me shall not
create an obligation to perform and your failure to perform will not preclude
you from exercising any of your other rights under the law or this security
agreement.
INSURANCE - I agree to buy insurance on the property against the risks and
for the amounts you require and to furnish you continuing proof of coverage.
I will have the insurance company name you as loss payee on any such policy.
You may require added security if you agree that insurance proceeds may be
used to repair or replace the property. I will buy insurance from a firm
licensed to do business in the state where you are located. The firm will be
reasonably acceptable to you. The insurance will last until the property is
released from this agreement. If I fail to buy or maintain the insurance (or
fail to name you as loss payee) you may purchase it yourself.
WARRANTIES AND REPRESENTATIONS - If this agreement includes accounts, I will
not settle any account for less than its full value without your written
permission. I will collect all accounts until you tell me otherwise. I will
keep the proceeds form all the accounts and any goods which are returned to me
or which I take back in trust for you. I will not mix them with any other
property of mine. I will deliver them to you at your request. If you ask me
to pay you the full price on any returned items or items retaken by myself, I
will do so.
If this agreement covers inventory, I will not dispose of it except in my
ordinary course of business at the fair market value for the property, or at
a minimum price established between you and me.
If this agreement covers farm products I will provide you, at your
request, a written list of the buyers, commission merchants or selling
agents to or through whom I may sell my farm products. In addition to those
parties named on this written list, I authorize you to notify at your sole
discretion any additional parties regarding your security interest in my farm
products. I remain subject to all applicable penalties for selling my farm
products in violation of my agreement with you and the Food Security Act. In
this paragraph the terms farm products, buyers, commission merchants and
selling agents have the meanings given to them in the Federal Food Security
Act of 1986.
DEFAULT - I will be in default if any one or more of the following occur: (1)
I fail to make a payment on time or in the amount due; (2) I fail to keep the
property insured, if required; (3) I fail to pay, or keep any promise, on any
debt or agreement I have with you; (4) any other creditor of mine attempts to
collect any debt I owe him through court proceedings; (5) I die, am declared
incompetent, make an assignment for the benefit of creditors, or become
insolvent (either because my liabilities exceed my assets or I am unable to
pay my debts as they become due); (6) I make any written statement or provide
any financial information that is untrue or inaccurate at the time it was
provided; (7) I do or fail to do something which causes you to believe that
you will have difficulty collecting the amount I owe you; (8) I change my name
or assume an additional name without first notifying you before making such a
change; (9) failure to plant, cultivate and harvest crops in due season; (10)
if any loan proceeds are used for a purpose that will contribute to excessive
erosion of highly erodible land or to the conversion of wetlands to produce
an agricultural commodity, as further explained in 7 C.F.R. Part 1940,
Subpart G, Exhibit M.
REMEDIES - If I am in default on this agreement, you have the following
remedies:
1) You may demand immediate payment of all I owe you under the obligation
secured by this agreement.
2) You may set off any obligation I have to you against any right I have
to the payment of money from you.
3) You may demand more security or new parties obligated to pay any debt
I owe you as a condition of giving up any other remedy.
4) You may make use of any remedy you have under state or federal law.
5) If I default by failing to pay taxes or other charges, you may pay
them (but you are not required to do so). If you do, I will repay to
you the amount you paid plus interest at the highest contract rate.
6) You may require me to gather the property and make it available to you
in a reasonable fashion.
7) You may repossess the property and sell it as provided by law. You may
repossess the property so long as the repossession does not involve a
breach of the peace or an illegal entry onto my property. You may sell
the property as provided by law. You may apply what you receive from
the sale of the property to: your expenses; your reasonable attorneys'
fees and legal expenses (where not prohibited by law); any debt I owe
you. If what you receive from the sale of the property does not
satisfy the debts, you may take me to court to recover the difference
(where permitted by law).
I agree that 10 days written notice sent to my address listed on page
1 by first class mail will be reasonable notice to me under the
Uniform Commercial Code.
If any items not otherwise subject to this agreement are contained in
the property when you take possession, you may hold these items for me
at my risk and you will not be liable for taking possession of them.
8) In some cases, you may keep the property to satisfy the debt. You may
enter upon and take possession of all or any part of my property, so
long as you do not breach the peace or illegally enter onto the
property, including lands, plants, buildings, machinery, and equipment
as may be necessary to permit you to manufacture, produce, process,
store or sell or complete the manufacture, production, processing,
storing or sale of any of the property and to use and operate the
property for the length of time you feel is necessary to protect your
interest, all without payment or compensation to me.
By choosing any one or more of these remedies, you do not waive your right
to later use any other remedy. You do not waive a default if you choose not
to use any remedy, and, by electing not to use any remedy, you do not waive
your right to later consider the event a
FILING - a carbon, photographic or other reproduction of this security
agreement or the financing statement covering the property described in this
agreement may be used as a financing statement where allowed by law. Where
permitted by law, you may file a financing statement which does not
contain my signature, covering the property secured by this agreement.
CO-MAKERS - If more than one of us has signed this agreement, we are all
obligated equally under the agreement. You may sue any one of us or any of us
together if this agreement is violated. You do not have to tell me if any
term of the agreement has not been carried out. You may release any co-signer
and I will be still be obligated under this agreement. You may release any of
the security and I will still be obligated under this agreement. Waiver by
you of any of your rights will not affect my duties under this agreement.
Extending this agreement or new obligations under this agreement, will not
affect my duty under the agreement.
(page 2 of 2)
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Electronic Processing, Inc. on Form S-8 (File No. 333-30847) for the
registration of 270,000 shares of its common stock and options to acquire
common stock, of our reports dated February 12, 1998, on our audits of the
consolidated financial statements of Electronic Processing, Inc. as of
December 31, 1997 and 1996, and for each of the years then ended, which
reports are included in the Company's 1997 Annual Report on Form 10-KSB,
filed with the Securities and Exchange Commission.
Baird, Kurtz & Dobson
Kansas City, Missouri
March 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ELECTRONIC
PROCESSING, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER
31, 1997 AND CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,835,233
<SECURITIES> 0
<RECEIVABLES> 1,119,424
<ALLOWANCES> 5,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,128,325
<PP&E> 6,879,264
<DEPRECIATION> 3,338,301
<TOTAL-ASSETS> 8,160,968
<CURRENT-LIABILITIES> 1,352,481
<BONDS> 0
0
0
<COMMON> 5,236,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,160,968
<SALES> 8,389,144
<TOTAL-REVENUES> 8,389,144
<CGS> 3,997,845
<TOTAL-COSTS> 3,997,845
<OTHER-EXPENSES> 3,140,818
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 160,393
<INCOME-PRETAX> 1,090,088
<INCOME-TAX> 724,589
<INCOME-CONTINUING> 365,499
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 365,499<F1>
<EPS-PRIMARY> .11<F2>
<EPS-DILUTED> .11<F3>
<FN>
<F1>CALCULATED ON A PRO-FORMA BASIS WOULD BE $638,399
<F2>CALCULATED ON A PRO-FORMA BASIS WOULD BE $.20
<F3>CALCULATED ON A PRO-FORMA BASIS WOULD BE $.19
</FN>
</TABLE>
