-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T2pGP8BR+RJE4gvHegHodWFeC7VFXkBp8I0L9cuibzbiHOAlS8xTGTEioHtxHAys RfrbKjqjBgxpuD5TDYAxmQ== 0000912057-97-002169.txt : 19970130 0000912057-97-002169.hdr.sgml : 19970130 ACCESSION NUMBER: 0000912057-97-002169 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19970129 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELECTRONIC PROCESSING INC CENTRAL INDEX KEY: 0001027207 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 481056429 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-16805 FILM NUMBER: 97513401 BUSINESS ADDRESS: STREET 1: 501 KANSAS AVENUE CITY: KANSAS CITY STATE: KS ZIP: 66105 BUSINESS PHONE: 9133216392 MAIL ADDRESS: STREET 1: 501 KANSAS AVENUE CITY: KANSAS CITY STATE: KS ZIP: 66105 SB-2/A 1 FORM SB-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 29, 1997 REGISTRATION NO. 333-16805 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 2 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ ELECTRONIC PROCESSING, INC. (Name of small business issuer in its charter) MISSOURI 7389 48-1056429 (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Number) Identification No.) Incorporation or Organization) Identification No.)
501 KANSAS AVENUE KANSAS CITY, KANSAS 66105 (913) 321-6392 (Address and telephone number of principal executive offices) TOM W. OLOFSON CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER 501 KANSAS AVENUE KANSAS CITY, KANSAS 66105 (913) 321-6392 (Name, address, including zip code, and telephone number of agent for service) -------------------------- COPIES OF ALL COMMUNICATIONS TO: LEE R. PETILLON, ESQ. ROBERT C. LEVY, ESQ. MELODIE R. ROSE, ESQ. MARK T. HIRAIDE, ESQ. SEIGFREID, BINGHAM, LEVY, SELZER & WILLIAM K. SJOSTROM, JR., ESQ. PETILLON & HANSEN GEE FREDRIKSON & BYRON, P.A. 21515 HAWTHORNE BOULEVARD, SUITE 2800 COMMERCE TOWER 900 SECOND AVENUE SOUTH 1260 911 MAIN STREET 1100 INTERNATIONAL CENTRE TORRANCE, CALIFORNIA 90503 KANSAS CITY, MISSOURI 64105 MINNEAPOLIS, MINNESOTA 55402 (310) 543-0500 (816) 421-4460 (612) 347-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the Prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE AMOUNT OF TITLES OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED (1) PER SECURITY (2) PRICE (2) FEE Common Stock, $0.01 par value......... 1,840,000 $3.75 $6,900,000 $2,091 Underwriter's warrant (3)............. 160,000 $50.00 $50 -- Total................................. 2,000,000 $6,900,050 $2,091
(1) Includes 240,000 shares of Common Stock which may be purchased by the Underwriter to cover over-allotments, if any. (2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933. (3) To be issued to the Underwriter. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JANUARY 29, 1997 1,600,000 SHARES [LOGO] COMMON STOCK Electronic Processing, Inc. ("EPI" or the "Company") is offering hereby 1,600,000 shares of Common Stock. Prior to this offering (the "Offering"), there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price per share will be between $3.25 and $3.75. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. The Company has applied to have the Common Stock approved for inclusion in the Nasdaq SmallCap Market-TM- under the proposed symbol "EPIQ." ------------------------ THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING OF PAGE 6 AND "DILUTION" ON PAGE 11. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PROCEEDS TO PRICE TO PUBLIC DISCOUNT (1) COMPANY (2) Per Share......................... $ $ $ Total (3)......................... $ $ $
(1) Does not reflect additional compensation to be received by R. J. Steichen & Company (the "Underwriter"), in the form of (i) a nonaccountable expense allowance equal to 3% of the total Price to Public; and (ii) a warrant to purchase up to 160,000 shares of Common Stock at a per share price of 120% of the initial offering price, exercisable for a period of four years commencing one year from the date of this Prospectus (the "Underwriter's Warrant"). In addition, the Company has agreed to indemnify the Underwriter against certain liabilities. See "Underwriting." (2) Before deducting expenses of the Offering payable by the Company estimated at $485,000 which includes the nonaccountable expense allowance described in Note 1 above. (3) The Company has granted to the Underwriter a 45-day option to purchase up to 240,000 additional shares of Common Stock on the same terms as set forth above solely to cover over-allotments, if any. If the Underwriter exercises such option in full, the total price to the public will be , the total underwriting discount will be , and the total proceeds to the Company will be . See "Underwriting." The shares of Common Stock are offered by the Underwriter named herein on a "firm commitment" basis, subject to prior sale, when, as and if delivered to and accepted by it and subject to certain other conditions, including its right to reject any order in whole or in part. It is expected that delivery of certificates representing the Common Stock will be made against payment therefor on or about , 1997 in Minneapolis, Minnesota. RJ STEICHEN & COMPANY THE DATE OF THIS PROSPECTUS IS , 1997 [PHOTOGRAPHS] GRAPHIC ENTITLED "ADVANCED BANKRUPTCY MANAGEMENT SYSTEMS" DEPICTING CERTAIN FEATURES OF THE COMPANY'S TCMS PRODUCT: CREDITOR DISTRIBUTION, ELECTRONIC BANKING, ASSET IMAGING, GOVERNMENT REPORTING, AND ELECTRONIC COURT INTERFACE. A SEPARATE EMBEDDED GRAPHIC ENTITLED "REVENUE STRUCTURE" DEPICTS THE FOLLOWING: "EPI LICENSES SOFTWARE AND HARDWARE TO TRUSTEE END-USER; TRUSTEE END-USER DEPOSITS ASSET PROCEEDS TO PARTNERSHIP BANK; AND PARTNERSHIP BANK; AND PARTNERSHIP BANK PAYS EPI MONTHLY FEE." 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS (THE "PROSPECTUS"). ALL INFORMATION CONCERNING THE COMPANY'S AUTHORIZED, ISSUED AND OUTSTANDING COMMON STOCK AND ALL FINANCIAL INFORMATION PRESENTED ON A PER SHARE BASIS REFLECT A SIX-FOR-ONE STOCK SPLIT EFFECTIVE, THROUGH A STOCK DIVIDEND, AS OF NOVEMBER 4, 1996. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITER'S OPTION TO PURCHASE FROM THE COMPANY UP TO 240,000 SHARES OF COMMON STOCK TO COVER OVERALLOTMENTS, IF ANY. THE COMPANY Electronic Processing, Inc. ("EPI" or the "Company") serves a national client base with specialty products that facilitate financial and administrative aspects of bankruptcy management, including legal noticing, claims management, funds distribution and government reporting. The Company develops, markets, licenses and supports internally developed and proprietary software products primarily to trustees under Chapter 7 and Chapter 13 of the Bankruptcy Code of 1978, as amended (the "Bankruptcy Code"), as well as to other users of the federal bankruptcy system, including trustees in Chapter 11 and Chapter 12. EPI assimilates software development, network operations, value-added services and comprehensive post-installation support into an integrated environment that offers clients a high level of coordinated support. Between 1993 and 1996, the Company recruited a new operating management team to develop new products and enter new markets. Insolvency is an ever-present, integral part of the national economy, and the Company's revenues increase as the number of cases processed by EPI's software grows. The last two years have experienced the greatest increase in the rate of bankruptcy filings in a decade. Industry analysts reported that bankruptcy filings topped the one million mark for the first time in 1996. The Company estimates that there are approximately 550,000 active cases pending in Chapter 13 and approximately $2 billion on deposit from Chapter 7 liquidations. Bankruptcy proceedings encompass Chapter 7 (liquidation), Chapter 13 (individual reorganization), Chapter 11 (business reorganization) and Chapter 12 (farm reorganization). NationsBank, the fourth largest national banking company, has entered into an exclusive national marketing arrangement with EPI to promote an integrated package of banking services and the Company's software. In this strategic alliance, the Company licenses its proprietary TCMS (Trustee Case Management System) software to Chapter 7 trustees, who in turn deposit with NationsBank all cash proceeds from asset sales. These funds are commonly on deposit for several years. EPI receives a monthly percentage of the total of such deposits from NationsBank. TCMS is a Windows95-Registered Trademark-/Windows NT 4-Registered Trademark- application and features custom electronic banking features, court interface functions, and case management tools that were developed by the Company. In late 1996, the Company completed testing of CASEPOWER, a new Windows95/Windows NT 4 product. The Company plans to begin marketing this product directly to Chapter 13 trustees in early 1997. In addition to standard licensing fees, the Company generates revenues each month based upon the number of cases in the trustee's database, which in some instances can exceed 10,000 active cases per trustee. CASEPOWER uses the Oracle7-Registered Trademark- database engine and may be ported to several key hardware computer platforms. CASEPOWER incorporates advanced technologies, including document imaging and scanning, bar coding, speech recognition and video help into an extensive library of bankruptcy processing functions. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 3 The Company is implementing a strategic business plan to enter affiliated markets to build upon its existing proficiency in software development and insolvency management. Other potential marketing opportunities for the Company may include complementary lines of business, such as document imaging systems, database extraction and updating services, bankruptcy petition management, commercial claims recovery systems, and specialty products for international insolvency markets. The Company was incorporated in Missouri on July 15, 1988, when the Company completed a transaction whereby it acquired all of the assets of an unrelated predecessor corporation, including the name of the Company. The Company's executive offices are located at 501 Kansas Avenue, Kansas City, Kansas, 66105, and its telephone number is (913) 321-6392. THE OFFERING Common Stock offered......................... 1,600,000 shares Common Stock to be outstanding after the Offering.................................... 3,400,000 shares (1) Use of Proceeds.............................. Repayment of corporate debt and capital leases; software development; sales/marketing expansion; and general corporate purposes, including working capital. Proposed Nasdaq SmallCap Market-TM- Symbol... EPIQ
- ------------------------ (1) Excludes: (i) 270,000 shares of Common Stock reserved for issuance under the Company's stock option plan of which 119,500 shares are issuable upon exercise of options to be outstanding upon completion of this Offering; and (ii) up to 160,000 shares of Common Stock issuable upon exercise of the Underwriter's Warrant. See "Management -- Stock Option Plan" and "Underwriting." 4 SUMMARY FINANCIAL DATA
FOR THE NINE MONTHS FOR THE YEARS ENDED ENDED DECEMBER 31, SEPTEMBER 30, ---------------------- ---------------------- 1994 1995 1995 1996 ---------- ---------- ---------- ---------- (UNAUDITED) STATEMENT OF INCOME DATA: Operating revenues................................ $4,984,697 $5,233,959 $3,843,292 $4,638,685 Cost of goods sold and direct costs............... 2,794,605 2,785,715 2,069,993 2,444,527 ---------- ---------- ---------- ---------- Gross profit.................................... 2,190,092 2,448,244 1,773,299 2,194,158 Operating expenses................................ 1,800,531 2,035,689 1,446,177 1,780,666 ---------- ---------- ---------- ---------- Income from operations.......................... 389,561 412,555 327,122 413,492 Other income(expenses)............................ (283,199) (261,685) (193,622) (200,288) ---------- ---------- ---------- ---------- Net income...................................... $ 106,362 $ 150,870 $ 133,500 $ 213,204 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Pro forma net income (1).......................... $ 52,362 $ 82,870 $ 74,500 $ 123,204 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Pro forma net income per share (1)................ $ .03 $ .05 $ .04 $ .07 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted average common shares outstanding (2).... 1,800,000 1,800,000 1,800,000 1,800,000 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
SEPTEMBER 30, 1996 ------------------------------------------- AS ADJUSTED ACTUAL PRO FORMA (3) (4) ------------ ------------- -------------- BALANCE SHEET DATA: Total assets...................................................... $ 4,378,628 $ 4,385,328 $ 6,985,328 Working capital (deficit)......................................... (366,551) (510,911) 2,727,394 Long-term debt and subordinated debt less current portion......... 2,250,093 2,250,093 696,060 Total stockholders' equity........................................ 909,302 482,342 5,082,342
- -------------------------- (1) Pro forma figures are unaudited. For all periods indicated, the Company operated as an S Corporation and was not subject to federal and certain state income taxes. The Company will terminate its status as an S Corporation and become a C Corporation subject to federal and state income taxes as of the closing date of this Offering. Pro forma net income figures assume an effective corporate tax rate of 39% and include an allowance for additional taxes that would have been paid on certain non-deductible expenses, assuming the Company had been operating as a C Corporation for all periods presented. See note 9 of the financial statements included herein and "Prior S Corporation Status." (2) Excludes (i) 270,000 shares of Common Stock reserved for issuance under the Company's stock option plan of which 119,500 shares are subject to options to be oustanding as of the completion of this Offering and (ii) the Underwriter's Warrant. See "Management -- Stock Option Plan" and "Underwriting." (3) Pro forma gives effect to a $275,900 provision for income taxes (which consists of a $6,700 current asset and a $282,600 long term liability) resulting from the tax effect of temporary differences in the tax basis and financial statement reporting basis of assets and liabilities at September 30, 1996 that would have been reflected had the Company's S Corporation election terminated at such date. The Company will also declare a final S Corporation distribution equal to its previously undistributed earnings only since January 1, 1996 through the termination of the S Corporation status. This final distribution will not exceed $250,000. For the nine-month period January 1, 1996 through September 30, 1996 the Company's undistributed earnings were $151,060. Pro forma gives effect to this $151,060 distribution that would have occurred if the Company had terminated its status as an S Corporation on September 30, 1996. See note 9 of the financial statements included herein. (4) As adjusted to give effect to the sale of 1,600,000 shares of Common Stock at an assumed initial offering price of $3.50 per share and the application of the net proceeds therefrom. See "Use of Proceeds." 5 RISK FACTORS THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER, ALONG WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING CONSIDERATIONS AND RISKS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS. LACK OF PRODUCT DIVERSIFICATION AND PRODUCT CONCENTRATION Historically, the Company's revenues have been generated primarily by sales of its MIDRANGE Chapter 13 product and the accompanying services. In 1996, the Company introduced a Windows version of its TCMS Chapter 7 product, which increasingly is contributing to the Company's total revenues. The Company's Chapter 7 and Chapter 13 bankruptcy software and services are expected to provide substantially all of its revenues for the foreseeable future. The Company's results will therefore depend on continued and increased market acceptance of its products and the Company's ability to meet the needs of its customers. Any reduction in demand for, or increasing competition with respect to, these products would have a material adverse effect on the Company's financial condition and results of operations. See "Business." LIMITED NUMBER OF POTENTIAL CUSTOMERS; HIGHLY COMPETITIVE MARKET The Company works in an industry with a finite number of Chapter 7 and Chapter 13 trustees. The Company estimates that there are approximately 550,000 pending Chapter 13 cases being managed by approximately 180 Chapter 13 trustees, and that there is approximately $2 billion of liquidated asset proceeds on deposit being managed by approximately 1,200 Chapter 7 trustees. There are several companies in the market all competing to sell to this finite group of customers, and some of the Company's competitors have substantially greater financial and marketing resources than does the Company. For its Chapter 7 product, the Company competes with the Chase Manhattan Bank and Union Bank of California, as well as other regional competitors in selected markets. For its Chapter 13 product, the Company competes with DCI Corporation of Memphis, Tennessee, a private company, and other competitors. Although there are presently a limited number of firms that offer services that directly compete with the Company's, there can be no assurance that other firms with resources significantly greater than the Company's will not enter the Company's industry. The Company's future financial performance will depend on its ability to maintain existing customer accounts and to attract business from customer accounts which are currently using a competitor's software product. See "Business -- Competition." CUSTOMER CONCENTRATION Each trustee manages many cases, and the Company's revenues are related to the number of cases managed by the Company's software. Accordingly, a large trustee client can comprise an important portion of the Company's operating revenues, although sales to no one client presently exceed 10% of the Company's revenues. The Company's future financial performance will be affected by its ability to retain existing major accounts and to attract new major accounts. The loss of even a small number of clients would have a substantial detrimental effect on the Company's financial condition and results of operations. DEPENDENCE ON ON-GOING BANKRUPTCY FILINGS The Company's business is highly dependent on the number of bankruptcy filings in the United States. Economic fluctuations in the United States could impact the number of bankruptcy filings and/or the dollar volume flowing through the federal bankruptcy system. The Company's financial results depend on the continual influx of new filings into the national bankruptcy system. A significant reduction in the number of pending bankruptcy cases would adversely affect the financial condition and operating results of the Company. See "Business -- Industry Overview." 6 RELIANCE ON MARKETING ARRANGEMENT Chapter 7 trustees are discouraged from incurring direct administrative costs for computer expenses. It is therefore important for EPI to align with a bank or series of banks to earn revenues in Chapter 7. The Company promotes its Chapter 7 product through an exclusive national marketing arrangement with NationsBank of Texas, N.A. ("NationsBank"). While both the Company and NationsBank have expressed a long term commitment to this agreement, either party has the option to end the agreement upon 90 days' notice. If either party were to end the marketing arrangement, the Company could experience adverse financial results while a replacement marketing arrangement or arrangements were established. Revenues from the NationsBank marketing arrangement presently represent between 15% to 20% of the Company's total revenues. Although the Company has other Chapter 7 banking relationships that predate its relationship with NationsBank, there is no assurance that another marketing arrangement could be found with terms comparable to those in the NationsBank agreement. See "Business -- Chapter 7 Marketing Arrangement." INTRODUCTION OF NEW CHAPTER 13 PRODUCT The Company plans to release for general distribution a new major software product for Chapter 13 trustees in early 1997. Although the Company does not anticipate any delays in releasing this product, there can be no assurance that its national release will be timely or completed. In addition, this product is intended to replace the Company's existing Chapter 13 product, which has contributed the majority of the Company's revenues to date. Consequently, any unforeseen problems with this new software product would materially affect the Company's results of operations and financial position. There can be no assurance that the market will accept the new product. RAPID TECHNOLOGICAL AND MARKET CHANGE The software industry and the related market for support services are characterized by rapidly evolving technology and industry standards. The introduction of products embodying new technology and the emergence of new industry standards can rapidly render existing products obsolete and unmarketable. The Company's future success will depend on its ability to continue to develop and manufacture new competitive products and to enhance existing products. See "Business -- New Product Development." NEED FOR PRODUCT COMPLIANCE WITH GOVERNMENT REGULATION; GOVERNMENT REGULATION OF FEE-BASED PRODUCTS AND SERVICES Although the Company's products are not directly regulated by the government, the products must allow trustees to perform their duties within the applicable legal regulatory guidelines. The United States Department of Justice and the United States bankruptcy courts both have authority to regulate aspects of the bankruptcy industry. If the Company's products did not allow trustees to remain in compliance with the applicable regulations, the Company would be adversely affected. If any regulatory entity were to restrict or disallow the types of fee-based products and services that the Company provides to the bankruptcy market, the Company would be severely adversely affected. See "Business -- Industry Overview." DEPENDENCE UPON KEY PERSONNEL The Company's future success will depend in significant part upon the continued service of certain key technical and senior management personnel and the Company's continuing ability to attract and retain highly qualified technical, managerial and sales and marketing personnel. Competition for such personnel is intense, and there is no assurance that the Company can retain its key personnel or that it can attract, assimilate and retain such employees in the future. The Company does not have employment agreements with any of its executive officers. The Company maintains a $1,500,000 and $1,000,000 key-man life insurance policy on the Company's Chief Executive Officer 7 and its Executive Vice President/Chief Operating Officer, respectively. The loss of these persons or other key personnel or the inability to hire or retain qualified personnel in the future could have a material adverse effect upon the Company's results of operations. See "Management." DEPENDENCE ON PROPRIETARY TECHNOLOGY Historically, the Company has not protected its intellectual property rights through patents or formal copyright registration. The Company believes, however, that its financial performance will depend more upon the innovation, technological expertise and marketing abilities of its employees than upon such protection. There is no assurance that the Company will be able to protect its trade secrets or that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets. There is no assurance that foreign intellectual property laws will protect the Company's intellectual property rights. In addition, litigation may be necessary to enforce the Company's intellectual property rights, to protect the Company's trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringements. Such litigation could result in substantial costs and diversion of management and other resources and could have a material adverse effect on the Company's business, financial condition and results of operation. See "Business -- Proprietary Rights." REPAYMENT OF DEBT TO AFFILIATE The Company intends to apply $400,000 of net proceeds of the Offering to retire a $400,000 subordinated note owned by Tom W. Olofson, the Company's Chairman and Chief Executive Officer. The note, which bears interest at a rate of 10%, matures on July 15, 1998. Mr. Olofson has personally guaranteed substantially all of the Company's outstanding debt. Upon application of the proceeds of the Offering, Mr. Olofson's guarantees with respect to such debt will be extinguished. See "Certain Transactions" and "Use of Proceeds." CONTROL BY MANAGEMENT Following completion of the Offering, the Common Stock currently owned beneficially by the executive officers, directors and principal stockholders of the Company and their affiliates will represent approximately 51.8% of the outstanding Common Stock. Accordingly, such persons, if voting in concert, may elect the entire Board of Directors, and generally continue to exercise control over the Company's business and affairs following completion of the Offering. See "Principal Stockholders." IMMEDIATE DILUTION Purchasers of Common Stock in the Offering will incur an immediate dilution of approximately $2.37 in the pro forma per share net tangible book value of their Common Stock (based on an assumed initial offering price of $3.50 per share). Additional dilution could result from the exercise of certain options and the Underwriter's Warrant. See "Dilution" and "Description of Securities." FUTURE CAPITAL NEEDS The Company's future capital requirements will depend on many factors, including cash flow from operations, progress in its competing technological and market developments, and the Company's ability to market its proposed products successfully. Although the Company currently has no specific plans or arrangements for financing other than the Offering, any additional equity financings could result in substantial dilution to the Company's then existing stockholders. Sources of debt financing may result in higher interest expense. Any financing, if available, may be on terms unfavorable to the Company. The Company anticipates that its existing capital resources and cash flow from operations, together with the net proceeds of the Offering, will be adequate to satisfy its operating expenses and capital requirements for at least 12 months after the Offering. However, such projections may prove to be inaccurate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and Financial Statements. 8 DISCRETION TO REALLOCATE USE OF PROCEEDS The proposed use of the net offering proceeds described herein represents the Company's anticipated use of the proceeds based upon current operating plans and certain assumptions, including those relating to the Company's future revenue levels and expenditures and assumptions regarding industry and general economic and other conditions. Future events, including problems, delays, expenses and complications frequently encountered when developing new products, as well as changes in competitive conditions affecting the Company's business and the success or lack thereof of the Company's research and development or marketing efforts, may make it necessary or advisable for the Company to reallocate the net proceeds among the specified uses. Any such shifts will be at the discretion of the Company. See "Use of Proceeds." PUBLIC MARKET RISKS; ABSENCE OF PUBLIC TRADING HISTORY; POSSIBLE FLUCTUATIONS IN TRADING PRICE Prior to this Offering, there has been no market for the Company's securities and there is no assurance that an active trading market will develop or be sustained following the Offering. The initial public offering price of the Common Stock will be determined in negotiations between the Company and the Underwriter and may be greater or less than the price established by market trading following the Offering. Sales in the public market of substantial numbers of Common Stock can be expected to affect the price of the Common Stock and could impair the Company's ability to raise additional capital through equity offerings. Securities of many companies, in particular, newer and smaller companies, have experienced substantial fluctuations and volatility that, in some cases, were unrelated or disproportionate to the performance of the companies themselves. Any such fluctuations, or general economic or market trends, could adversely affect the price of the Common Stock. Due to all of the foregoing factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In that event, the price of the Common Stock would likely be materially adversely affected. Investors in the Offering will also experience substantial dilution because the initial public offering price of the Common Stock is greater than the net tangible book value per share of the Company. See "Shares Eligible for Future Sale" and "Dilution." EFFECTS OF DELISTING FROM NASDAQ SMALLCAP MARKET-TM- The Company's application for quotation of its Common Stock on the Nasdaq SmallCap Market is pending approval. There can be no assurance that the Company will be able to maintain the qualification standards for listing of the Common Stock on the Nasdaq SmallCap Market. If the Company fails to maintain the listing criteria, the Common Stock will be subject to delisting. Consequently, the liquidity of the Company's Common Stock would likely be impaired, not only in the number of shares which could be bought and sold, but also through delays in the timing of the transactions, and reduction in security analysts' and the news media's coverage, if any, of the Company. As a result, prices for the Company's shares of Common Stock may be lower than might otherwise prevail. APPLICABILITY OF "PENNY STOCK RULES" Federal regulations under the Securities and Exchange Act of 1934, as amended (the "Exchange Act") regulate the trading of so-called "penny stocks" (the "Penny Stock Rules"), which are generally defined as any security not listed on a national securities exchange or Nasdaq, priced at less than $5.00 per share and offered by an issuer with limited net tangible assets and revenues. In addition, equity securities listed on Nasdaq which are priced at less then $5.00 are deemed penny stocks for the limited purpose of Section 15(b)(6) of the Exchange Act. Therefore, if, during the time in which the Common Stock is quoted on the Nasdaq SmallCap Market, the Common Stock is priced below $5.00 per share, trading of the Common Stock will be subject to the provisions of Section 15(b)(6) of the Exchange Act which make it unlawful for any broker-dealer to participate in a distribution of any penny stock without the consent of the Securities and Exchange Commission if, in the exercise of reasonable care, the broker-dealer is aware of or should have been aware of the participation of a previously sanctioned 9 person. In such event, it may be more difficult for broker-dealers to sell the Common Stock and purchasers of the shares of Common Stock offered hereby may have difficulty in selling their shares in the future in the secondary trading market. In the event that the Company's Common Stock is delisted from the Nasdaq SmallCap Market and the Company fails other relevant criteria, trading, if any, of the Common Stock would be subject to the full range of the Penny Stock Rules. Accordingly, delisting from the Nasdaq SmallCap Market and the application of the comprehensive Penny Stock Rules may make it more difficult for broker-dealers to sell the Company's Common Stock and purchasers of the shares of Common Stock in the Offering may have difficulty in selling their shares in the future in the secondary trading market. ABSENCE OF DIVIDENDS Although the Company made cash distributions prior to the Offering while it was taxable as an S Corporation, and will pay a final S Corporation distribution to present stockholders following termination of the Company's S Corporation status, it does not intend to pay any other cash or stock dividends in the foreseeable future. The Company intends to retain all earnings, if any, to invest in the Company's operations. The payment of future dividends is within the discretion of the Board of Directors and will depend upon the Company's future earnings, if any, its capital requirements, financial condition and other relevant factors. See "Dividend Policy" and "Prior S Corporation Status." PRIOR S CORPORATION STATUS The Company elected to be treated as an S Corporation for federal and certain state income tax purposes commencing July 15, 1988. Unlike a C Corporation, an S Corporation is generally not subject to income tax at the corporate level. Instead, the S Corporation's income generally passes through to the stockholders and is taxed on their personal income tax returns. The Company will terminate its status as an S Corporation and will become a C Corporation as of the closing of this Offering (the "Termination Date"). Subsequent to the Termination Date, the Company will no longer be treated as an S Corporation and will, accordingly, be fully taxable pursuant to federal and state income tax laws. The Company will pay a final S Corporation distribution to present stockholders following termination of the Company's S Corporation status. This final distribution will represent the Company's previously undistributed earnings only since January 1, 1996 through the Termination Date. The amount of this final distribution will not exceed $250,000 and will be payable within 90 days following the Termination Date. USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the 1,600,000 shares of Common Stock offered hereby (assuming an initial offering price of $3.50 per share, the mid-point of the price range stated on the cover of this Prospectus) are estimated to be approximately $4,600,000 after deducting the underwriting discount and other estimated expenses payable by the Company in connection with the Offering. The net proceeds are intended to be used as follows: Retire corporate debt and capital leases............................... $1,600,000 Repay debt to affiliate................................................ 400,000 Sales/marketing expansion.............................................. 1,250,000 Software development................................................... 900,000 ---------- General corporate purposes, including working capital.................. 450,000 ---------- Total.................................................................. $4,600,000 ---------- ----------
10 The proposed use of the net offering proceeds described herein represents the Company's anticipated use of the proceeds based upon current operating plans and certain assumptions, including those relating to the Company's future revenue levels and expenditures and assumptions regarding industry and general economic and other conditions. Future unforeseen events may make it necessary or advisable for the Company to reallocate the net proceeds among the above uses. Any such reallocations will be at the discretion of the Company. See "Risk Factors -- Discretion to Reallocate Use of Proceeds." The Company plans to use approximately $1,600,000 of the proceeds to retire certain corporate debt and capital leases. This includes (i) a $250,000 bank term note with an interest rate of 1% over prime (9.25% at September 30, 1996) that matures October 18, 1997; (ii) a bank term note that will be in the approximate amount of $492,300 at the time of this Offering with an interest rate of 2% over the bank's base lending rate (10.25% at September 30, 1996) on a five year amortization schedule that matures June 8, 1999; (iii) a bank equipment note that will be in the approximate amount of $250,000 at the time of this Offering with an interest rate of 2% over the bank's base lending rate (10.25% at September 30, 1996) on a three year amortization schedule that matures June 8, 1998; and (iv) various equipment leases that will be in the approximate amount of $607,641 at the time of this Offering on three year amortization schedules with varying interest rates (ranging between 9.23% and 11.45% at September 30, 1996). Tom W. Olofson personally guarantees substantially all of the Company's outstanding debt. Upon application of the proceeds of the Offering, Mr. Olofson's guarantee obligations with respect to such debt will be extinguished. See "Certain Transactions." The Company intends to retire a $400,000 subordinated note with an interest rate of 10% that matures July 15, 1998 owned by Tom W. Olofson, Chairman and Chief Executive Officer. See "Certain Transactions." The Company plans to use approximately $1,250,000 to expand its sales and marketing efforts. This may include hiring additional sales/marketing staff, publishing new advertising and promotional materials, attending additional trade shows and conventions, and increasing national marketing coverage through more extensive field sales calls. The Company plans to use approximately $900,000 of the proceeds for software development. This may include the development of new applications, enhancement to existing applications, hiring of new development staff, acquisition of new development technologies and/or training for the Company's software development staff. The Company anticipates, based on currently proposed plans and assumptions relating to its operations, that the net proceeds of the Offering, together with projected cash flow from operations, will be sufficient to satisfy the Company's contemplated cash requirements for at least the next 12 months. Pending application, the net proceeds of the Offering will be invested in short-term, high-grade interest-bearing savings accounts, certificates of deposit, United States government obligations, money market accounts or short-term interest bearing obligations. Any proceeds received upon exercise of the Underwriter's Warrant, as well as income from investments, will be used for general corporate purposes. DIVIDEND POLICY The Company does not expect to declare or pay any other cash or stock dividends in the foreseeable future, with the exception of a final S Corporation distribution to existing stockholders. The Company currently intends to retain any earnings for use in the operation and expansion of its business. The payment of future dividends is within the discretion of the Board of Directors and will depend upon the Company's future earnings, if any, its capital requirements, financial condition and other relevant factors. See "Prior S Corporation Status." 11 DILUTION At September 30, 1996, the Common Stock had a negative net tangible book value of ($529,158) or ($0.29) per share. Net tangible book value per share is equal to the Company's total tangible assets (total assets less intangible assets, consisting of goodwill, deferred stock issuance costs, and computer software) less its total liabilities, divided by the number of shares of Common Stock outstanding. After giving effect to: (i) the sale by the Company of 1,600,000 shares of Common Stock offered hereby (assuming an initial public offering price of $3.50 per share, the midpoint of the price range stated on the cover of this Prospectus); (ii) the receipt of the estimated net proceeds therefrom if the same had occurred on September 30, 1996; (iii) the $275,900 provision to income resulting from the tax effect of temporary differences which existed at September 30, 1996, and (iv) the final S Corporation distribution estimated to be $151,060 at September 30, 1996, the net tangible book value of the Company at such date would have been approximately $3,836,220 or $1.13 per share. This represents an immediate increase in net tangible book value of $1.42 per share to the existing stockholders and an immediate dilution of $2.37 per share to new stockholders. Dilution represents the difference between the initial public offering price paid by the purchaser in the Offering and the net tangible book value per share immediately after completion of the Offering. The following table illustrates this per share dilution: Assumed initial public offering price per share............................. $ 3.50 Pro forma negative net tangible book value per share as of September 30, 1996....................................................... $ (0.29) Increase per share attributable to new stockholders....................... 1.42 --------- Net tangible book value per share after the Offering........................ 1.13 --------- Dilution per share to new stockholders...................................... $ 2.37 --------- ---------
The following table summarizes, as of the date of this Prospectus, the difference between current stockholders and purchasers of Common Stock in the Offering with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price paid per share.
SHARES PURCHASED (1) TOTAL CONSIDERATION (2) ---------------------- ------------------------ AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ----------- --------- ------------- --------- ------------- Current stockholders............................ 1,800,000 52.9% $ 300,000 5.1% $ 0.17 New investors................................... 1,600,000 47.1% 5,600,000 94.9% $ 3.50 ----------- --------- ------------- --------- Total........................................... 3,400,000 100.0% $ 5,900,000 100.0% ----------- --------- ------------- --------- ----------- --------- ------------- ---------
- ------------------------ (1) The foregoing computations do not include: (i) 270,000 shares of Common Stock reserved for issuance under the Company's stock option plan of which 119,500 shares are issuable upon exercise of options to be outstanding upon completion of this Offering; and (ii) the Underwriter's Warrant. To the extent that any outstanding options or warrants are exercised, there will be further dilution to investors. See "Management -- Stock Option Plan" and "Underwriting." (2) Does not reflect deduction of the underwriting discount or any other expenses incurred in connection with the Offering. 12 CAPITALIZATION The following table sets forth the capitalization of the Company as of September 30, 1996 and as adjusted to reflect the issuance and sale of 1,600,000 shares of Common Stock offered by the Company hereby (assuming an offering price of $3.50 per share, the midpoint of the price range stated on the cover page hereof), and the application of the net proceeds therefrom as set forth under "Use of Proceeds."
SEPTEMBER 30, 1996 ------------------------------------------- ACTUAL PRO FORMA (1) AS ADJUSTED ------------- ------------- ------------- Short-term obligations, including current maturities of long-term debt.............................................................. $ 697,648 $ 697,648 $ 251,681 ------------- ------------- ------------- ------------- ------------- ------------- Long-term debt, less current maturities............................. $ 1,850,093 $ 1,850,093 $ 696,060 Subordinated debt................................................... 400,000 400,000 0 Stockholders' equity: Common stock, $0.01 par value, 5,000,000 shares authorized; 1,800,000 shares issued and outstanding (actual) and 3,400,000 shares as adjusted (2)........................................... 18,000 18,000 34,000 Additional paid-in capital........................................ 282,000 464,342 5,048,342 Retained earnings................................................. 609,302 0 0 ------------- ------------- ------------- Total stockholders' equity...................................... 909,302 482,342 5,082,342 ------------- ------------- ------------- Total capitalization.............................................. $ 3,159,395 $ 2,732,435 $ 5,778,402 ------------- ------------- ------------- ------------- ------------- -------------
- ------------------------ (1) Pro forma gives effect to a $275,900 provision to income taxes (which consists of a $6,700 current asset and a $282,600 long term liability) resulting from the tax effect of temporary differences in the tax basis and financial statement reporting basis of assets and liabilities at September 30, 1996 that would have been reflected had the Company's S Corporation election terminated at such date. The Company will also declare a final S Corporation distribution equal to its previously undistributed earnings only since January 1, 1996 through the termination of the S Corporation status. This final distribution will not exceed $250,000. For the nine-month period January 1, 1996 through September 30, 1996 the Company's undistributed earnings were $151,060. Pro forma gives effect to this $151,060 distribution that would have occurred if the Company had terminated its status as an S Corporation on September 30, 1996. See note 9 of the financial statements included herein. (2) Does not include: (i) 270,000 shares of Common Stock reserved for issuance under the Company's stock option plan of which 119,500 shares are issuable upon exercise of options to be outstanding upon completion of this Offering; and (ii) the Underwriter's Warrant. See "Management -- Stock Option Plan" and "Underwriting." 13 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the Financial Statements and related Notes thereto appearing elsewhere in the Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected balance sheet and statements of operation data as of and for the years ended December 31, 1995 and 1994 and for the nine months ended September 30, 1996 are derived from financial statements of the Company which have been audited by Baird, Kurtz & Dobson, independent accountants, and included herein. The selected balance sheet and statements of income data as of and for the nine months ended September 30, 1995 have been derived from unaudited interim financial statements of the Company contained elsewhere herein. Results of operations for any interim period are not necessarily indicative of results to be expected for the full fiscal year.
FOR THE NINE MONTHS FOR THE YEARS ENDED ENDED DECEMBER 31, SEPTEMBER 30, ---------------------- ---------------------- 1994 1995 1995 1996 ---------- ---------- ---------- ---------- (UNAUDITED) STATEMENT OF INCOME DATA: Operating revenues....................... $4,984,697 $5,233,959 $3,843,292 $4,638,685 Cost of goods sold and direct costs...... 2,794,605 2,785,715 2,069,993 2,444,527 ---------- ---------- ---------- ---------- Gross profit........................... 2,190,092 2,448,244 1,773,299 2,194,158 Operating expenses....................... 1,800,531 2,035,689 1,446,177 1,780,666 ---------- ---------- ---------- ---------- Income from operations................. 389,561 412,555 327,122 413,492 Other income (expenses).................. (283,199) (261,685) (193,622) (200,288) ---------- ---------- ---------- ---------- Net income............................. $ 106,362 $ 150,870 $ 133,500 $ 213,204 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Pro forma net income (1)................. $ 52,362 $ 82,870 $ 74,500 $ 123,204 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Pro forma net income per share (1)....... $ .03 $ .05 $ .04 $ .07 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted average common shares outstanding............................. 1,800,000 1,800,000 1,800,000 1,800,000 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
SEPTEMBER 30, 1996, DECEMBER 31, -------------------------------------------- ---------------------------- AS ADJUSTED 1994 1995 ACTUAL PRO FORMA (2) (3) ------------- ------------- ------------- ------------- -------------- BALANCE SHEET DATA: Total assets...................... $ 3,128,658 $ 3,376,760 $ 4,378,628 $ 4,385,328 $ 6,985,328 Working capital (deficit)......... (149,022) (523,484) (366,551) (510,911) 2,727,394 Long-term debt and subordinated debt less current portion........ 1,416,439 1,416,540 2,250,093 2,250,093 696,060 Total stockholders' equity........ 809,340 758,242 909,302 482,342 5,082,342
- ------------------------ (1) Pro forma figures are unaudited. For all periods indicated, the Company operated as an S Corporation and was not subject to federal and certain state income taxes. The Company will terminate its status as an S Corporation and become a C Corporation subject to federal and state income taxes as of the closing date of this Offering. Pro forma net income figures assume an effective corporate tax rate of 39% and include an allowance for additional taxes that would have been paid on certain non-deductible expenses, assuming the company had been operating as a C Corporation for all periods presented. See note 9 of the financial statements included herein and "Prior S Corporation Status." 14 (2) Pro forma gives effect to a $275,900 provision for income taxes (which consists of a $6,700 current asset and a $282,600 long term liability) resulting from the tax effect of temporary differences in the tax basis and the financial statement reporting basis of assets and liabilities at September 30, 1996 that would have been reflected had the Company's S Corporation election terminated at such date. The Company will also declare a final S Corporation distribution equal to its previously undistributed earnings only since January 1, 1996 through the termination of the S Corporation status. This final distribution will not exceed $250,000. For the nine-month period January 1, 1996 through September 30, 1996 the Company's undistributed earnings were $151,060. Pro forma gives effect to this $151,060 distribution that would have occurred if the Company had terminated its status as an S Corporation on September 30, 1996. See note 9 to the financial statements included herein. (3) As adjusted to give effect to the sale of 1,600,000 shares of Common Stock at an assumed initial offering price of $3.50 per share and the application of the net proceeds therefrom. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's historical financial statements, including the notes thereto included elsewhere in this Prospectus. OVERVIEW The Company develops, markets and licenses specialty software products and support services for Chapter 7 and 13 bankruptcy trustees as well as for other users of the federal bankruptcy system. The Company is implementing a strategic plan to increase operating revenues and gross profit through the introduction of new products and the penetration of new markets. Additionally, the Company is introducing new higher margin products that the Company believes can be sold to a broader market. Accordingly, the Company has experienced in the past, and believes it will continue to experience, a significant shift in product mix that has affected and will continue to affect operating results. In early 1996, the Company began marketing a Windows95 version of TCMS (Trustee Case Management System for Chapter 7), a successor product to the earlier DOS version. The Company has marketed the TCMS product line in an exclusive national marketing arrangement with NationsBank since 1994. The TCMS relationship with NationsBank and the Chapter 7 bankruptcy trustee is structured as follows: (i) EPI licenses TCMS to a trustee end-user for no fee; (ii) the trustee deposits proceeds from the sale of assets into accounts at NationsBank; and (iii) NationsBank pays EPI a monthly fee based on the total dollar amount of such deposits. Since early 1996, the Company has had another new Windows95-based product in beta testing that will be marketed under the trade name, CASEPOWER. This product is scheduled for general market release during early 1997 and will be licensed directly to Chapter 13 trustees. An accompanying banking marketing arrangement is not used or required in Chapter 13 cases. The Company typically receives an initial licensing fee and conversion charge from the Chapter 13 trustee. It also receives monthly fees from each Chapter 13 trustee client based on the total number of cases in that trustee's database and the number of noticing documents generated. The Company intends to market this product aggressively in 1997 to generate revenue streams from new clients and to generate upgrade revenues as MIDRANGE systems are replaced. New Chapter 13 systems sales were relatively flat during 1995 and 1996 as the development cycle for CASEPOWER progressed. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1995 Operating revenues for the nine-month period of fiscal 1996 were $4,638,685 compared to $3,843,292 for the similar 1995 period, an increase of 20.7%. Chapter 7 sales increased $358,719 or 71.7% between years. The introduction of TCMS for Windows95 in early 1996 helped to penetrate new markets resulting in a significant increase in revenues. Chapter 13 revenue in the 1996 period compared to the similar 1995 period increased $310,549 or 10.5%. The additional revenue experienced in 1996 was due to an increase in caseloads managed by Chapter 13 trustee clients. Also, the number of new bankruptcy filings in 1996 was greater than in 1995 resulting in increased legal noticing revenue which constituted 33.5% of the total Chapter 13 revenue for the nine months ending September 30, 1996. Processing costs increased to $1,857,034 for the nine-month period of fiscal 1996 from $1,565,594 for the 1995 period or a 18.6% increase. The increase in 1996 resulted principally from an increase in customer service expense, resulting from hiring additional trainers, hardware installers and other customer service functions to support the growth of Chapter 7 sales. Depreciation and amortization increased to $587,493 for the nine-month period of fiscal 1996 from $504,399 for the 1995 period or a 16 16.5% increase. This increase relate primarily to the purchase of computer equipment for the installations of the Company's new Chapter 7 product. Total cost of goods sold and direct costs increased to $2,444,527 for the nine-month period of fiscal 1996 from $2,069,993 for the 1995 period or a 18.1% increase. Gross profit increased 23.7% or $420,859 to $2,194,158 during the nine months ending September 30, 1996 compared to $1,773,299 for the 1995 period. Gross profit as a percentage of operating revenues increased to 47.3% for the 1996 period from 46.1% for the 1995 period due primarily to TCMS, which has higher gross margins, comprising a greater percentage of operating revenues in 1996. The Company anticipates the Chapter 7 revenue will continue to grow as the number of installations of TCMS for Windows95 continues to increase. Operating expenses as a percentage of operating revenues were 38.4% for the nine months ended September 30, 1996 compared to 37.6% for the similar period in 1995. Sales and marketing expenses were $559,552 in 1996 compared to $330,361 in 1995. The Company increased its marketing activities in 1996 related to the introduction of a Windows95 version of TCMS, including costs associated with trade shows and promotional materials. Income from operations increased 26.4% to $413,492 for the nine-month period ended September 30, 1996, compared to $327,122 for the nine-month period ended September 30, 1995, principally due to increased sales and higher gross profit margins. For the nine months ended September 30, 1996, the Company reported net income of $213,204 compared to net income of $133,500 for the nine months ended September 30, 1995, a 59.7% increase. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Operating revenues in 1995 were $5,233,959 and $4,984,697 in 1994, an increase of $249,262 or 5.0%. Chapter 7 revenues increased by $337,455 or 93.7% due to the penetration of new markets. Chapter 13 revenues reflected a modest decrease of $52,989 during 1995 due to the discontinuation of certain low margin Chapter 13 service business which accounted for $192,268 of operating revenues in 1994. Also, Chapter 13 equipment sales were lower by $44,426 during 1995 as less emphasis was placed on MIDRANGE equipment sales as CASEPOWER was in the final development stages. Processing costs decreased $119,742 or 5.4% during fiscal 1995. This decrease in costs is attributed to the discontinuing of low margin Chapter 13 services mentioned above which accounted for $97,956 of processing costs in 1994. Depreciation and amortization increased to $687,314 for the year ended December 31, 1995 from $576,462 for the year ended December 31, 1994. The Company invested in property and equipment totaling $621,733 and $488,524 for the year ended 1995 and 1994, respectively, which increased the average depreciable fixed asset base. The increase in property and equipment purchased related primarily to the installation of computer equipment for the Company's new Chapter 7 product. Total cost of goods and direct costs in 1995 were $2,785,715 and $2,794,605 in 1994, a decrease of $8,890. Gross profit increased 11.8% or $258,152 to $2,448,244 during fiscal 1995 from $2,190,092 in fiscal 1994. Gross profit as a percentage of operating revenues increased to 46.8% in fiscal 1995 from 43.9% in fiscal 1994. The increase in gross profit as a percentage of operating revenues was primarily attributable to an increase in Chapter 7 revenues, which have a higher profit margin than the low margin Chapter 13 computer services that were discontinued. Stated as a percentage of operating revenues, operating expenses represent 38.9% of the year ended December 31, 1995 operating revenues versus 36.1% of the year ended December 31, 1994 operating revenues. The increase resulted primarily from expanded marketing and promotional costs increasing $114,018 between periods. The 1995 increase in operating expenses relates principally to the additional selling efforts associated with the expanded sales program for its Chapter 7 product. 17 Income from operations increased 5.9% to $412,555 for the year ended December 31, 1995 compared to $389,561 for the year ended December 31, 1994, principally due to increased sales and higher gross profit margins. For the twelve month period ended December 31, 1995, the Company reported net income of $150,870, a 41.8% increase, compared to $106,362 during the twelve month period ended December 31, 1994. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $1,031,159 in 1995 and $593,998 in 1994. The net cash provided by operating activities in 1995 consisted primarily of net income of $150,870, depreciation and amortization of $775,209, and a $75,507 decrease in other receivables. During the nine months ended September 30, 1996, net cash provided by operating activities was $773,077 representing principally net income of $213,204 plus depreciation of $654,303 and an increase in accounts payable of $149,821 offset primarily by an increase in accounts receivable of $214,453. The outstanding accounts receivable balance has increased primarily due to the growth in revenue. The Company has a $500,000 operating line of credit from a financial institution, of which $365,000 was outstanding September 30, 1996 and a term loan with an outstanding balance of $553,729 as of September 30, 1996, from the same financial institution. The term loan has been reduced by $346,271 since it originated in July of 1994. The Company may borrow up to 80% of eligible accounts receivable against this line which is collateralized by substantially all of the Company's assets. The Company currently expects to repay the term loan from the proceeds of this Offering and leave the line of credit in place for working capital purposes. The Company originated a $250,000 loan in June of 1996 to provide additional short term working capital. The Company currently expects to repay the loan from the proceeds of this Offering. See "Use of Proceeds." The Company invested in property and equipment totaling $996,560 for the nine months ending September 30, 1996, $621,733, and $488,524 for the years ended 1995 and 1994, respectively, which related principally to the installation of computer equipment for the Company's new Chapter 7 product. The equipment was financed through various capital leases and a bank equipment term loan. As of September 30, 1996, the balances outstanding on capital leases and the bank equipment loan were $1,154,006 and $214,828, respectively. The Company made principal payments on capital leases aggregating $321,828, $300,866, and $274,593 for the nine months ended September 30, 1996 and years ended 1995 and 1994, respectively. As of September 30, 1996, the Company had $404,300 available for eligible purchases of capital equipment through various equipment lines of credit and bank commitments. The Company currently expects to repay the outstanding balances of certain capital leases and term loans from the proceeds of this Offering. See "Use of Proceeds." The Company incurred expenditures for software development costs totaling $364,122, $364,479 and $272,111 for the nine months ended September 30, 1996, and years ended 1995 and 1994, respectively. These amounts have been capitalized and are being amortized on a straight line basis over a maximum five year period. Additionally, the Company anticipates future software development to be at or above the spending levels of prior years with a portion of the Offering proceeds being used to partially fund such development. The Company believes that the net proceeds from this Offering, together with funds that may be generated from operations, will be sufficient to finance the Company's currently anticipated working capital and property and equipment expenditures for at least 12 months following the Offering. 18 BUSINESS Electronic Processing, Inc. ("EPI" or the "Company") serves a national client base with specialty products that facilitate financial and administrative aspects of bankruptcy management, including legal noticing, claims management, funds distribution and government reporting. The Company develops, markets, licenses and supports internally developed and proprietary software products primarily to trustees under Chapter 7 and Chapter 13 of the Bankruptcy Code of 1978, as amended (the "Bankruptcy Code"), as well as to other users of the federal bankruptcy system, including trustees in Chapter 11 and Chapter 12. EPI assimilates software development, network operations, value-added services and comprehensive post-installation support into an integrated environment that offers clients a high level of coordinated support. Between 1993 and 1996, the Company concentrated on developing software and systems compatible with current technologies and recruited a management team experienced in bankruptcy management and software development. During this time the Company concentrated on developing and upgrading its Chapter 7 and Chapter 13 products to be compatible with current software operating environments. In 1996, the Company introduced its TCMS Chapter 7 Windows95/Windows NT 4 based system. In late 1996, the Company completed testing of CASEPOWER, a new PC-based Windows95/Windows NT 4 Chapter 13 product, designed to replace the Company's MIDRANGE Chapter 13 product, which was based on IBM mini-computer AS/400 technology. INDUSTRY OVERVIEW Bankruptcy comprises an ever present, integral part of the national economy. Industry analysts report that even when certain other national economic indicators are strong, bankruptcy filings can still grow at record-setting rates. In 1996, new bankruptcy filings surpassed the one million mark for the first time. There is a national community of professionals that works in the bankruptcy industry including trustees, judges, court clerks, attorneys, accountants, government administrators, and other professionals. Title 11 of the U.S. Code establishes federal law governing bankruptcies. The participants in a bankruptcy proceeding include the debtor, the creditors, and a trustee, as well as the presiding judge. The trustee acts as an intermediary between the debtor and the creditors and is responsible for administering the bankruptcy case. The end user clients of the Company's products are TRUSTEES, not individual debtors or creditors. The United States Trustee's office, a division of the Justice Department, oversees bankruptcy trustees and establishes administrative rules concerning trustees' activities. Local bankruptcy judges also direct trustees' activities and have a high level of authority in a bankruptcy case. The trustees' activities are guided by the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, the trustee handbooks developed by the United States Trustee, and local rules established by the courts. There are five chapters of the Bankruptcy Code that define various configurations of bankruptcy cases: - Chapter 7 -- Liquidation - Chapter 9 -- Reorganization of Municipality - Chapter 11 -- Reorganization of Corporation - Chapter 12 -- Reorganization of Family Farm - Chapter 13 -- Reorganization of Individual Debt The Company believes that Chapter 7 and Chapter 13 are the most attractive sectors in the bankruptcy industry to which it can provide service and has developed a strategic plan accordingly. There are significantly fewer filings in Chapter 9 and Chapter 12 than in Chapters 7 and 13, and the 19 industry analysts note that Chapter 11 filings have decreased as distressed organizations increasingly make private arrangements with their creditors for payment of debt. On the whole, bankruptcy filings have increased significantly recently, passing the one million mark for the first time in 1996. Chapter 7 and Chapter 13 bankruptcies serve different purposes and require different services and information. Chapter 7 of the Bankruptcy Code provides for liquidation of the assets of the debtor (which can be an individual, partnership or corporation) and for the disbursement of the resulting cash proceeds to the creditors. Chapter 13 provides for adjustments of debt whereby the debtor makes regular payments to the trustee, who in turn disburses the collected funds to the creditors. Assets are not liquidated in Chapter 13. Bankruptcy trustees in Chapters 7 and 13 are appointed by the United States Trustee. A United States Trustee is appointed in most federal court districts and generally has responsibility for overseeing the integrity of the bankruptcy system. Bankruptcy trustees in Chapter 7 and Chapter 13 cases are charged with managing the administrative aspects of liquidation or reorganization bankruptcies. The trustee's primary responsibilities include collecting funds from the debtor (Chapter 13) or liquidating the debtor's assets (Chapter 7), distributing the collected funds to creditors pursuant to the orders of the bankruptcy court, and preparing regular status reports, including financial updates, for the United States Trustee and for the bankruptcy court. Trustees typically are attorneys or certified public accountants and manage many different bankruptcy cases simultaneously. A trustee client uses an EPI product to manage an entire caseload; the Company does not contract with trustees to manage specific individual cases. The Company estimates that Chapter 13 trustees typically manage over one thousand cases simultaneously and that Chapter 7 trustees can manage over one hundred cases simultaneously. It is possible for a given individual trustee to have caseloads in both Chapter 7 and Chapter 13 bankruptcies, but normally a trustee will specialize in one or the other. CHAPTER 7 BANKRUPTCY TRUSTEES For Chapter 7 liquidation bankruptcy, each region of the country has a rotating "panel" of trustees. Because Chapter 7 comprises the overwhelming majority of bankruptcies, multiple trustees are required in most parts of the country to accommodate the caseload. As assets are liquidated and the first funds are received in each asset case, the trustee opens bank accounts for the case. In Chapter 7, each case must have its own bank accounts so that interest earned can be segregated. Because asset liquidation and litigation regarding the case may be a lengthy process, the trustee will deposit cash proceeds into an interest-bearing account for the benefit of the creditors who will eventually receive distributions. Typically, the trustee makes a single distribution at the conclusion of the case. The administration of a Chapter 7 case can take several years. CHAPTER 13 BANKRUPTCY TRUSTEES There are fewer filings in Chapter 13 (individual debt reorganization) than in Chapter 7 (liquidation), so most areas of the country have a single standing Chapter 13 trustee who administers all Chapter 13 filings rather than the "panel" configuration associated with Chapter 7. In certain areas of the country, the trustee is responsible for sending various notices to the debtor, debtor's attorney, clerk of the court, United States Trustee and each creditor indicating that the case has been filed. Because the debtor's assets are NOT liquidated under Chapter 13, the trustee analyzes the debtor's income and expenses and directs the debtor to make regular cash payments to the trustee according to the court-approved plan of reorganization. Each month, the trustee disburses the monies received from the debtor to eligible creditors according to the plan. The trustee must provide regular status reports to the United States Trustee. Every six months, the trustee must also prepare a detailed ledger of financial activity in each bankruptcy case and mail it to each debtor and debtor's attorney. Chapter 13 reorganizations usually last between thirty-six and sixty months. Upon conclusion of the case, the trustee must submit a final report to the bankruptcy court outlining the financial history of the case. 20 MARKET CONDITIONS The Company estimates that there are approximately $2 billion in cash proceeds being administered in Chapter 7 by approximately 1,200 trustees. The Company estimates there are approximately 550,000 cases pending in Chapter 13 managed by approximately 180 standing Chapter 13 trustees. MARKET CONDITIONS IN CHAPTER 7 The Company believes that there are favorable market conditions for its Chapter 7 product and services. Since the introduction of TCMS for Windows95 in January 1996, the Company has successfully entered new key strategic markets, including California and New York, two of the largest national bankruptcy markets. The Company has also successfully entered other key metropolitan areas and believes that these initial accounts will facilitate significant additional sales. In November 1996, the Company began releasing a new enhanced version of the software, TCMS version 2.0, that incorporates substantial new features that the Company believes are unique in the marketplace. These features include an internal auditor, e-mail enabled import/export, account receivable management, a rapid posting module and a rapid case set-up module. MARKET CONDITIONS IN CHAPTER 13 In October 1994, Congress passed the Bankruptcy Reform Act of 1994 (the "Reform Act"). Among the changes enacted was an increase in the debt ceiling, or "cap," that establishes an individual's eligibility to file Chapter 13 bankruptcy. The Reform Act raised the debt cap from $350,000 to $1,000,000. If the cap is exceeded, the individual must file a Chapter 7 liquidation bankruptcy or a small Chapter 11. The Company believes the increase in the Chapter 13 debt cap expands the pool of eligible debtors in Chapter 13 and potentially increases the number of Chapter 13 filings. THE EPI STRATEGY The Company's objective is to become the leading provider of technology based insolvency management systems. To achieve this objective, the Company intends to continue its intensive product development efforts, to increase its sales, marketing and distribution capabilities and to distinguish itself as a provider of advanced information processing products. The Company's strategy for achieving its objectives includes the following: - SUSTAIN AND DEVELOP RECURRING REVENUE STRUCTURE. The Company generates the majority of its revenues through recurring fees collected from its Chapter 7 and Chapter 13 products. In Chapter 13, the Company collects fees from the trustee each month based on the number of cases in the database and the number of notices generated. In Chapter 7, the Company collects fees every month based on the overall funds on deposit. The Company believes that this is a favorable structure for the long term future and intends to sustain and develop it. - ATTAIN TECHNICAL SUPERIORITY IN PRODUCT FEATURES. The Company intends to maintain high technical skills for its product development efforts. The Company believes that its successes have been partially attributable to its technical acumen in software development technologies, including Windows95, Windows NT 4, Microsoft Visual FoxPro, Oracle7, and PowerBuilder. The Company intends to maintain a detailed knowledge of the most current technical tools and to utilize this knowledge to further its product development efforts. - CAPITALIZE ON GROWTH TRENDS IN BANKRUPTCY FILINGS. The Company perceives that bankruptcy is a growing part of the national economy. In recent years there has been significant growth in bankruptcy filings. Recent periods have experienced the greatest increases in the rate of bankruptcy filings in a decade. Bankruptcy filings surpassed the one million mark for the first time in 1996. The Company plans to pursue this business vigorously and to increase its market penetration significantly. - CONTINUE TO PENETRATE NEW GEOGRAPHIC MARKETS. Since the beginning of 1996, the Company has successfully entered key new geographic markets, including California and New York -- two of 21 the largest national bankruptcy markets -- with its TCMS product. Company management intends to further develop the newly entered markets and to begin to penetrate additional key metropolitan areas. - EVALUATE OPPORTUNITIES IN COMPLEMENTARY BUSINESS LINES. The Company believes that it has developed an unusually detailed perspective on the national bankruptcy system and a rare combination of skills in commercial software development and insolvency management. Using its core line of Chapter 7 and Chapter 13 products as a base, the Company intends to explore complementary business lines, which may include products and services for debtors' attorneys, commercial claims recovery systems, as well as specialty products for international insolvency markets. PRODUCTS The Company's existing products include TCMS (Trustee Case Management System) for Chapter 7, and MIDRANGE for Chapter 13. The Company plans to begin selling a new Chapter 13 product, CASEPOWER, in early 1997. The TCMS product can also track Chapter 11 cases, and the MIDRANGE/ CASEPOWER products can also track Chapter 12 cases. The Company produces its software applications internally with a full time staff of professional software developers. CHAPTER 7 PRODUCTS The Company's Chapter 7 product assists trustees to manage liquidation bankruptcies, whereby the trustee liquidates the debtor's assets and disburses the resulting funds to creditors. GRAPHIC ENTITLED "CHAPTER 7" DEPICTING A TRUSTEE RECEIVING ASSETS FROM THE DEBTOR AND MAKING PAYMENTS TO CREDITORS. SOFTWARE FEATURES IDENTIFIED INCLUDE ASSET MANAGEMENT, FUNDS ADMINISTRATION, CREDITOR PAYMENTS, AND GOVERNMENT REPORTING. CURRENT CHAPTER 7 PRODUCT: TCMS TCMS (Trustee Case Management System) is a Windows95/Windows NT 4 based package of proprietary software, computer equipment and support services offered to Chapter 7 trustees through a national marketing arrangement with NationsBank. TCMS provides easy-to-use modules for asset management, financial record keeping and claims administration. An electronic banking link developed by the Company gives users an automated mechanism for entering banking transactions, and an electronic court interface allows users to download claim information into the trustee's database automatically. A typical TCMS system is provided to the end-user trustee client without direct charge and includes the following products and services: (i) a license to use the proprietary TCMS software and subsequent upgrades; (ii) computer hardware, laser printer, modem, tape backup and operating software, which are returned to EPI if the trustee's bankruptcy deposits leave the bank designated by EPI; (iii) database conversion from previous computer system; (iv) configuration and installation of hardware by EPI personnel; (v) on-site software training; (vi) customization of reports conforming to local bankruptcy court regulations; (vii) toll-free customer service; and (viii) remote diagnostics. The Company's revenues are based upon the total funds kept on deposit. See "Pricing -- Chapter 7 Pricing." SOFTWARE FEATURES The TCMS software streamlines administrative tasks associated with Chapter 7 liquidation bankruptcies. Most trustees use the system on a daily basis for record keeping and to meet reporting requirements. 22 - ASSET MANAGEMENT. As assets are identified, the trustee enters them into TCMS through a convenient spreadsheet-like interface. The system automatically tracks the remaining values of assets as they are liquidated and provides a summary overview of properties within each case. - BANKING. An online banking module developed by the Company allows the trustee to open and close bank accounts electronically as well as to enter funds transfers. Simple to sophisticated financial transactions can be recorded on an online computer screen that resembles a personal check register. The system prepares MICR encoded laser checks and deposit slips on demand. - CLAIMS ADMINISTRATION. TCMS categorizes each claim by class and desired priority level for distribution. Distribution checks are calculated and printed automatically, and all financial ledgers are updated. An extensive library of financial reports provides detailed information for each case. A proprietary feature allows information to be downloaded from the court into the trustee's database. - CALENDARING AND DOCKETING. Key events in asset cases are posted automatically to a central trustee's calendar that can be printed regularly. The software automatically schedules tasks required to close cases in a timely fashion. - CUSTOMIZED DISTRICT REPORTS. EPI utilizes OLE (object linking and embedding) and ActiveX technology and the Microsoft Word for Windows95 word processing program to custom tailor final reports and final accounts for each district where TCMS is marketed. Preparing these documents has traditionally been one of the most time consuming tasks in Chapter 7 case administration. With TCMS, trustees can quickly generate a fully formatted, polished report with all figures calculated and filled in. - 180 DAY REPORTS. The United States Trustee requires the trustee to submit detailed status reports for each case every six months in a very specific reporting format. TCMS prints these reports in compliance with the most recent regulations. 23 CHAPTER 13 PRODUCTS The Company's Chapter 13 products assist trustees to manage individual reorganization bankruptcies, whereby the debtor makes payments to the trustee, who in turn disburses the funds to creditors: GRAPHIC ENTITLED "CHAPTER 13" DEPICTING A TRUSTEE RECEIVING PAYMENTS FROM A DEBTOR AND MAKING PAYMENTS TO CREDITORS. SOFTWARE FEATURES IDENTIFIED INCLUDE LEGAL NOTICING, CREDITOR DISTRIBUTIONS, CASE MANAGEMENT, AND GOVERNMENT REPORTING. CURRENT CHAPTER 13 PRODUCT: MIDRANGE MIDRANGE is based on IBM mini-computer AS/400 technology and uses the Company's proprietary software to assist Chapter 13 trustees managing databases containing from approximately 500 to over 10,000 active bankruptcies simultaneously. Because Chapter 13 bankruptcy cases typically undergo thirty-six to sixty consecutive monthly distributions, Chapter 13 is considerably more transaction intensive and paperwork intensive than Chapter 7, where a single distribution is normally made at the end of the case. Chapter 13 trustee clients out-source various activities to EPI to facilitate the preparation of large output jobs. Processing and report printing functions are divided between the client-site AS/400 installation and EPI's data center in Kansas City. The MIDRANGE is installed in a multi-user configuration that allows each member of the trustee's office staff to access the database and enter transactions throughout the business day. The trustee's live database resides in his or her office. The size of a Chapter 13 trustee's office staff varies proportionally with the caseload managed. Therefore, MIDRANGE installations vary in size from three workstations to over twenty workstations. The trustee's office staff enters financial information into the MIDRANGE, including cash receipts, financial adjustments and payment instructions for each claim. EPI's proprietary program logic interprets a wide variety of court-directed payment scenarios and consolidates them into easy-to-understand codes that are entered by users. Daily reports and customized inquiries can be requested and printed inside the trustee's office. At the end of each month, the trustee forwards a copy of the database to EPI in Kansas City. EPI prints distribution checks for each eligible creditor and prepares detailed laser output for every case in the database as a billable service. Checks and reports are shipped overnight back to the trustee for inspection, approval and mailout. In certain parts of the country, the Chapter 13 trustee is responsible for noticing parties-in-interest of key developments in each bankruptcy case, including the setting of the mandatory first meeting of creditors. The Company's MIDRANGE software automates this meeting notice for the trustees. Other events that may be noticed through the MIDRANGE include motions to dismiss the case, reset notices, correcting notices and motions to allow claims. The MIDRANGE software provides an optional noticing module that receives relevant input from the office staff. Alternatively, trustees may purchase data entry services from EPI and forward original documents to Kansas City for keying. Each evening, EPI's data center receives a modem transmission of daily noticing activity from the client-site AS/400. EPI prints and reviews the notices, inserts them into envelopes and mails them the next day. Trustees are billed directly for noticing services based upon the number of documents generated. Some bankruptcy courts require additional information, such as a photocopy of the plan of reorganization, to be included with the notice. EPI offers such document reproduction and assembly services to trustees at an additional charge. 24 SOFTWARE FEATURES The MIDRANGE software helps trustees manage administrative aspects of Chapter 13 bankruptcy. The trustee and office staff typically use the system each day to monitor activity in their caseload. - NOTICING. When new cases are entered on the MIDRANGE system, the EPI data center in Kansas City can extract relevant information and prepare mandatory first meeting of creditors notices for each case. Subsequent forms, such as reset notices, correcting notices, motions to allow claims, motions to allow additional claims and motions to dismiss, can also be selected and prepared through the system. - CASE MANAGEMENT. The MIDRANGE stores and monitors key dates, names, addresses and text notes for every case in the system. A variety of retrieval mechanisms enable users to view case information from various perspectives. - FINANCIAL HISTORY. The office staff enters cash receipts and financial adjustments in the system as part of the daily bank deposit. The MIDRANGE updates the balances in each case and summarizes the day's financial transactions. Each month, the MIDRANGE prepares a single-page summary of the receipts and disbursements in every case. - MONTHLY DISTRIBUTION. The MIDRANGE's advanced distribution logic interprets payment orders from the bankruptcy court. Several different payment methodologies (e.g., pro rata, fixed monthly payment, per capita, etc.) may be spread over 99 separate distribution priority levels. Individual checks or voucher checks can be printed for each creditor. Claims having objections filed on them can continue to accrue distributions without releasing funds until the objection has been settled. - INQUIRY. Chapter 13 offices receive a multitude of outside inquiries each day from creditors' and debtors' attorneys. The Midrange provides instantaneous inquiry access to the financial status of each debtor and claim in the system. An optional creditor dial-in system gives outside parties inquiry access only to the system through a modem connection. NEW CHAPTER 13 PRODUCT: CASEPOWER The Company has developed a new PC-based Windows95/Windows NT 4 Chapter 13 product, CASEPOWER, that is intended to replace the existing MIDRANGE mini-computer-based product. The Company tested this product in a trustee's office from early 1996 and concluded such testing in the fourth quarter of 1996. CASEPOWER is scheduled for general release in early 1997. CASEPOWER is constructed on client-server architecture, whereby intelligent desktop devices receive and transmit data and applications to and from file servers. The database uses the Oracle7 database engine. The front end interface runs under Microsoft Windows95 and therefore takes advantage of a graphical user interface (GUI), which the Company believes has yet to be introduced in the mass Chapter 13 market. CASEPOWER incorporates several advanced technologies that the Company believes enhance its marketability. These include document imaging, bar coding, audio and video instruction, speech recognition and outside creditor inquiry dial-in. With the CASEPOWER product, EPI has further simplified creditor distribution logic for the trustee and added important functions, including an interactive on-screen ledger that consolidates an entire bankruptcy case into a single window and a comprehensive docketing module that manages court appearances and key status changes in each bankruptcy case. CHAPTER 7 MARKETING ARRANGEMENT On November 22, 1993, the Company established an exclusive national marketing arrangement with NationsBank of Texas, N.A. ("NationsBank"), a subsidiary of NationsBank Corporation, for its Chapter 7 products. In this marketing arrangement, EPI and NationsBank promote products and 25 services to trustees in all states. Because Chapter 7 trustees are discouraged from incurring direct costs for computer services, it is essential for EPI to align with a bank or series of banks to earn revenues in Chapter 7. NationsBank, headquartered in Charlotte, North Carolina, is the fourth largest national banking company. The Company works in partnership with the bank's Federal Government Banking Division based in Atlanta to market TCMS and NationsBank banking services as a package. Chapter 7 bankruptcy deposits are housed in Dallas, where NationsBank has established a customer service team to support trustees using EPI's products. The agreement with NationsBank does not have an expiration date. The termination clause stipulates that either party must provide the other 90 days' notice if it wishes to end the agreement. The Company believes its representatives have developed positive, close working relationships with their counterparts at NationsBank, and the Company believes that it will maintain this relationship. However, were the relationship with NationsBank to end, there is no assurance that the Company would be able to establish a new banking relationship or series of relationships with comparable terms. EPI holds the primary responsibility for developing all facets of the TCMS system and for driving the national sales and marketing effort. NationsBank personnel provide additional assistance in the marketing effort and are responsible for administering the banking services provided to the trustee clients. Through this arrangement, EPI has a continual revenue stream from its Chapter 7 operations. The structure of the marketing alliance assists NationsBank to build its deposit base in this market. The Company continues to support a limited number of trustee relationships through other banks that predate the exclusive agreement with NationsBank. PRICING CHAPTER 7 PRICING Unlike Chapter 13, the application of Chapter 7 bankruptcy regulations has the practical effect of discouraging trustees from incurring direct administrative costs for computer expenses. All nationally marketed Chapter 7 systems are provided to trustees without direct billing to the trustee because of traditional market conventions. Clients typically choose systems based upon the capability of the software and the quality of technical support services. EPI has aligned with NationsBank to provide computer services to Chapter 7 trustees without direct charges to the Chapter 7 trustee under the following arrangement: - EPI licenses its proprietary software to the trustee and furnishes hardware, conversion services, training and customer support, all at no cost to the trustee; - The trustee agrees to deposit with NationsBank the cash proceeds from all asset liquidations; and - NationsBank pays the Company a fee each month based upon the total deposits in the Chapter 7 bankruptcy portfolio. GRAPHIC DEPICTING REVENUE STRUCTURE OF THE COMPANY'S TCMS PRODUCT. EPI LICENSES TCMS TO A TRUSTEE; THE TRUSTEE DEPOSITS MONEY WITH THE BANK; AND THE BANK PAYS EPI A FEE. CHAPTER 13 PRICING The Company typically receives an initial licensing fee and conversion charge from the Chapter 13 trustee. It also receives monthly fees from each Chapter 13 trustee client based on the total number of cases in that trustee's database and the number of noticing documents generated. Variables 26 affecting pricing for EPI Chapter 13 clients include the number of cases in the database, the type of equipment installed, the volume of noticing to be out sourced to EPI, and the level of support service selected by the trustee. EPI prepares individualized price quotes for each client. SALES AND DISTRIBUTION The Company's products and services are marketed directly to trustees through on-site sales calls by the Company's internal sales department and, in the case of Chapter 7, by supporting representatives of NationsBank. Trustees make their own decisions for software and service providers. The Company believes that the most important factors in attracting business are the quality of the software products and the quality of the post-installation support. The Company's national sales manager is in the Kansas City headquarters and manages the internal sales force and acts as liaison with the NationsBank representatives. The Company estimates that a typical sales cycle, from identification of the client to the receipt of a trustee's agreement, lasts from two to four months. The Company's Chapter 7 and Chapter 13 service agreements with trustees typically include provisions for (i) descriptions of the products and services included in the agreement, (ii) a limited warranty and indemnification clauses, (iii) the trustee's agreement to deposit funds with NationsBank (applicable in Chapter 7 only), and (iv) termination information. The Executive Office of the United States Trustee in Washington, D.C., regularly issues a directory of all current bankruptcy trustees. The Company obtains this directory as it is issued and uses it as its prospect list. The Company's sales representatives attend approximately eight bankruptcy trade shows annually. The Company conducts direct mail campaigns and advertises in trade journals to heighten its exposure and to stimulate sales. COMPETITION The Company works in an industry with a limited number of Chapter 7 and Chapter 13 trustees. The Company estimates that there are approximately 550,000 pending Chapter 13 cases being managed by approximately 180 Chapter 13 trustees, and that there is approximately $2 billion on deposit by approximately 1,200 Chapter 7 trustees. There are several companies in the market all competing for sales from this finite group of customers, and some of the Company's competitors have substantially greater financial and marketing resources than does the Company. For its Chapter 7 product, the Company competes with the Chase Manhattan Bank and Union Bank of California, as well as other regional competitors in selected markets. For its Chapter 13 product, the Company competes with DCI Corporation of Memphis, Tennessee, a private company, and other competitors. Although the Company believes that the requisite detailed knowledge of the bankruptcy system makes it difficult for new competitors to successfully enter the market, and there are presently a limited number of firms that offer services that directly compete with the Company's, there can be no assurance that other firms with resources significantly greater than the Company's will not enter the Company's industry. The Company's future financial performance will depend on its ability to maintain existing customer accounts and to attract business from customer accounts which are currently using a competitor's software product. FUTURE AND ADDITIONAL PRODUCTS FUTURE PRODUCTS The Company is committed to developing its presence in the bankruptcy industry to the greatest possible extent. In addition to the products for Chapter 7 and Chapter 13 trustees, the Company intends to develop additional programs and services for debtors, attorneys and creditors. In late 1996, the Company announced a new business line, EPI DOCUMENT IMAGING SYSTEMS, in which paper 27 documents are scanned and stored to CD-ROM technology. Optical Character Recognition (OCR) features allow full-text search of the CD-ROM, each of which can store at least 12,000 original documents. EPI DOCUMENT IMAGING SYSTEMS can be used in concert with the Company's other products to achieve high levels of integration. Additionally, the Company believes that its document imaging business eventually can be marketed to a broader client base outside the insolvency industry, including the legal, medical and claims processing communities. Other potential marketing opportunities for the Company may include complementary lines of business, such as database extraction and updating services, bankruptcy petition management, commercial claims recovery system and specialty products for international insolvency markets. CHAPTER 11 Chapter 11 bankruptcy is normally associated with corporate reorganization but can also be applied to individuals meeting certain criteria. The Company has developed a mainframe-based Chapter 11 product that performs noticing, claims administration, funds distribution and creditor ballot tabulations. Historically, EPI has marketed this product successfully to large companies undergoing reorganization, including major airlines and other major companies. EPI believes that Chapter 11 is one part of the bankruptcy system that is contracting, as more eligible debtors are turning to private turn-arounds and workouts in lieu of a formal Chapter 11. Additionally, there are a number of competitors in Chapter 11 computer services. Accordingly, in light of what the Company considers to be favorable market conditions in Chapters 7 and 13, the Company has elected to focus its resources in these areas. While the Chapter 11 product is still available, it is not actively marketed. CHAPTER 12 Chapter 12 bankruptcy is intended specifically for family farmers. A Chapter 12 case closely resembles Chapter 13 in administrative procedure but has different debt ceilings that are more suitable for farmers. When Chapter 12 cases are filed in a given area, the standing Chapter 13 trustee often assumes responsibility for them. The EPI Chapter 13 products have been used to manage Chapter 12 cases as well. NEW PRODUCT DEVELOPMENT The Company plans to use approximately $900,000 of the proceeds from this Offering for software development. This may include the development of new applications, enhancement to existing applications, hiring of new development staff, acquisition of new development technologies and/ or training for the Company's software development staff. The Company produces its software applications internally with its dedicated staff of professional software developers. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." PROPRIETARY RIGHTS Historically, the Company has not protected its intellectual property rights through patents or formal copyright registration. It has relied on trade secret, copyright, and trademark law and non-disclosure agreements to establish and protect its proprietary rights in its products. The Company believes, however, that its financial performance will depend more upon the innovation, technological expertise and marketing abilities of its associates than upon such protection. There is no assurance that the Company will be able to protect its trade secrets or that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets. There is no assurance that intellectual property laws will protect the Company's intellectual property rights. In addition, litigation may be necessary to 28 enforce the Company's intellectual property rights, to protect the Company's trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringements. Such litigation could result in substantial costs and diversion of management and other resources and could have a material adverse effect on the Company's business, financial condition and results of operation. This Prospectus also contains trademarks of other companies. The products of other companies mentioned herein are for reference purposes only and may be trademarks or registered trademarks of their respective companies. EMPLOYEES The Company employs approximately 60 full-time employees, distributed as follows: (i) 6 in senior management; (ii) 14 in information services; (iii) 23 in client services/sales; (iv) 14 in support services; and (v) 3 in accounting. No Company employees are covered by collective bargaining agreements. The Company believes its relationships with its employees are good. PROPERTIES The Company's corporate offices are located in a 30,000-square-foot facility leased in Kansas City, Kansas. In connection with corporate growth and the development of new products, this facility has been recently renovated with additional office space. The Company believes that this facility will be adequate for use for at least the next full year. The leased facility is partially owned by a related party. See "Certain Transactions." LEGAL PROCEEDINGS The Company is not a party to any material litigation, although it occasionally becomes involved in litigation arising in the normal course of business. Management believes that any liability with respect to such actions will not have a material adverse effect on the Company's financial position or results of operation. 29 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The executive officers and directors of the Company, their ages as of September 30, 1996 and their positions are set forth below.
NAME AGE POSITION - --------------------------- --- ------------------------------------------------------------------ Tom W. Olofson (1)(2) 54 Chairman, President and Chief Executive Officer Christopher E. Olofson 26 Executive Vice President, Chief Operating Officer, and Director Albert T. Annillo 45 Senior Vice President Reed A. Eichner 38 Vice President -- Operations Nanci R. Trutna 43 Vice President -- Finance Sally D. MacDonald 49 Vice President -- Human Resources Robert C. Levy * 49 Secretary and Director W. Bryan Satterlee * 62 Director
- ------------------------ * Member of Audit Committee TOM W. OLOFSON led a private investor group that acquired the Company in July 1988, and he has served as Chief Executive Officer and Chairman of the Board since that time. During his business career, Mr. Olofson has held various management positions with Xerox Corporation and was a Senior Vice President and member, Office of the President of Marion Laboratories (now Hoechst Marion Roussel, Inc.). Mr. Olofson is a director of Saztec International, Inc., a provider of information management services, and also serves as a director of various private companies in which he is an investor. He earned a BBA from the University of Pittsburgh in 1963, and is currently a member of the Board of Visitors of the Katz Graduate School of Business at the University of Pittsburgh. He is the father of Christopher E. Olofson. CHRISTOPHER E. OLOFSON joined EPI as a Vice President in June 1993, having been a part-time employee of the Company since 1988. In January 1994, he was designated Senior Vice President -- Operations, and became Executive Vice President and a member of the Board of Directors effective January 1, 1995. Effective July 1, 1996, Mr. Olofson also assumed the duties of Chief Operating Officer. He earned an AB degree from Princeton University in 1992, SUMMA CUM LAUDE. He was designated a Fulbright Scholar where he completed a one-year program of study at the Stanford University Center in Taipei, Taiwan in 1993. He is the son of Tom W. Olofson. ALBERT T. ANNILLO has been Senior Vice President since January 1995. Mr. Annillo joined the Company in October 1992 as a corporate Vice President. He was Assistant Director, Executive Office for United States Trustees, Department of Justice, Washington, D.C. for six years before his association with the Company. He earned an MBA and an MED from William Patterson College in 1975 and 1979, respectively. REED A. EICHNER joined the Company as Vice President -- Sales and Marketing in September 1995. He became Vice President -- Operations on September 1, 1996. From May 1991 through August 1995 he served as President and owner of Connexions, Inc., a company which provided system integration and document conversion services. He was General Manager of Innovision Systems, Inc. from September 1989 to May 1991. Mr. Eichner earned a BA from the University of North Carolina in 1982. 30 NANCI R. TRUTNA assumed her present position as Vice President -- Finance in June 1993. She was with Merchants Bank, Kansas City, Missouri from 1981 to June 1993 where she became a Senior Vice President. Ms. Trutna is a Certified Public Accountant and earned a BSBA in 1975 from the University of North Dakota. SALLY D. MACDONALD joined the Company as Vice President -- Human Resources in January 1996. Ms. MacDonald has extensive management experience in the human resources field. She served as Region Human Resources Manager for Network General, Inc. from 1992 to 1994, as Manager, Employment with North Supply Company from 1989 to 1991, and as Manager, Employment and Employee Relations with Informix Software, Inc. from 1986 to 1989. Ms. MacDonald earned a BS in Business Administration from the University of San Francisco in 1984. ROBERT C. LEVY is an attorney who is a director, stockholder and executive committee member of the law firm of Seigfreid, Bingham, Levy, Selzer & Gee in Kansas City, Missouri. He has been the Corporate Secretary and a Director of the Company since July 1988. He earned a BS from Northwestern University in 1968, and a J.D. from the University of California at Berkeley in 1971. Mr. Levy formerly was Chairman of the Board of Directors of Blue Cross and Blue Shield of Kansas City and presently serves as a member of that Board of Directors. W. BRYAN SATTERLEE was elected to the Company's Board of Directors effective as of the date of this Prospectus. Mr. Satterlee has been a partner since 1989 in NorthEast Ventures, a consulting firm based in Hartford, Connecticut which specializes in business development services for and evaluations of technology-based venture companies. He has extensive general management and marketing experience in technology-based firms. Mr. Satterlee's background includes ten years of management experience with IBM, as well as having been a founder of a computer leasing/software business, telecommunications company and a venture investment services business. He earned a BS in 1956 from Lafayette College. EXECUTIVE COMPENSATION The following table sets forth the cash and other compensation paid in 1995 to the Company's Chief Executive Officer. No other executive officer of the Company earned in excess of $100,000 in 1995. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION -------------------------------------- ALL OTHER SALARY OTHER ANNUAL COMPENSATION NAME AND PRINCIPAL POSITION YEAR (1)(2) BONUS COMPENSATION (3) (4)(5) - ------------------------------------------------ --------- --------- --------- ---------------- ------------- Tom W. Olofson, Chairman/CEO.................... 1995 $ 47,980 $ 24,000 $ 36,500 $ 9,920
- ------------------------ (1) Tom W. Olofson's compensation in 1996 will be approximately the same as it was in 1995. Effective January 1, 1997, Mr. Olofson's annual salary will be $100,000. (2) Christopher E. Olofson, Executive Vice President and Chief Operating Officer, is being paid a base salary of $108,000 in 1996. Effective January 1, 1997, this annual base salary will be $120,000. (3) Includes $33,452 for payment of annual life insurance premiums on policies owned by Tom W. Olofson, which designate Jeanne H. Olofson, his wife, as the beneficiary, and $3,048 for personal use of Company automobile. (4) Company benefits which include $8,276 for group insurance and $1,644 for Company matching contributions to 401(k) plan. (5) Does not include: (i) fees of $24,658 paid during 1995 for guaranteeing the Company's debt or (ii) interest of $40,000 on a subordinated note in 1995 on amounts borrowed by the Company from Tom W. Olofson. See "Certain Transactions." 31 BOARD OF DIRECTORS COMPENSATION The Board of Directors compensates its non-employee members at the rate of $750 per quarter and $750 per meeting attended. The Company will grant an option to W. Bryan Satterlee for 7,500 shares of Common Stock at an exercise price equal to the initial public offering price. STOCK OPTION PLAN On October 17, 1995, the Company adopted a stock option plan ("the "1995 Plan"), which was amended on November 4, 1996. The 1995 Plan provides for the issuance of options to employees, officers and directors of the Company ("Eligible Participants") to purchase up to an aggregate of 270,000 shares of Common Stock, subject to adjustment under certain circumstances. Options granted under the 1995 Plan may be either "incentive stock options" ("ISOs") as defined by Section 422 of the United States Internal Revenue Code of 1986, as amended (the "Code") or non-statutory stock options ("NSO's"). The 1995 Plan is administered by the Board of Directors. The Board of Directors has sole discretion and authority, consistent with the provisions of the 1995 Plan, to grant ISOs or NSOs, determine in good faith the fair market value of the shares, select the eligible participants to whom options will be granted under the 1995 Plan, construe and interpret the Plan, promulgate, amend and rescind rules and regulations for the administration thereof, and make such other determinations which are necessary and advisable for the 1995 Plan's administration. The exercise price of ISOs granted under the 1995 Plan shall be no less than the fair market value of a share of Common Stock on the date the option is granted (110% with respect to ISO optionees who own at least 10% of the outstanding Common Stock of the Company). As respects NSOs, the exercise price shall be determined by the Board of Directors and may be less than the fair market value. The Board of Directors has the authority to determine the time or times at which options granted under the 1995 Plan become exercisable, but options expire no later than ten years from the date of grant (five years with respect to optionees who own at least 10% of the outstanding Common Stock of the Company). Options are nontransferable, other than by will and the laws of descent, and generally may be exercised only by an employee while employed by the Company or within 90 days after termination of employment or one year in the event of termination by reason of death or disability. The Company has reserved an aggregate of 270,000 shares of the Company's Common Stock for issuance under the 1995 Plan. There will be outstanding at the closing of this Offering options to purchase 119,500 shares of Common Stock exercisable at the Offering price. Options granted under the 1995 Plan are exercisable in cash or by delivery to the Company of shares of the Company's Common Stock. The Company will grant an option to Christopher E. Olofson, Executive Vice President and Chief Operating Officer, for 25,000 shares of Common Stock at an exercise price equal to 110% of the initial public offering price. The Company will grant an option to W. Bryan Satterlee, Director, for 7,500 shares of Common Stock at an exercise price equal to the initial public offering price. Both of these options will be granted on the closing date of this Offering. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's by-laws provide that the Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer of the Company (or is or was serving at the request of the Company as a director or officer of another entity) against expenses, including attorneys' fees, judgments, fines, and amounts paid in settlement (except that, in connection with an action by or in the right of the Company, the indemnity shall be limited to expenses, including attorneys' fees, and amounts paid in 32 settlement) actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. To the extent that a director, officer, employee, or agent has been successful on the merits or otherwise in defense of any action, suit, or proceeding, or in defense of any claim, he shall be indemnified against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the action, suit, or proceeding. Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the Company in advance of the final disposition of the action, suit, or proceeding. The indemnification discussed in this section is not exclusive of any other rights the party may have seeking indemnification. The Company believes that it is the position of the Securities and Exchange Commission that insofar as the foregoing provision may be invoked to disclaim liability for damages arising under the Securities Act of 1933, as amended (the "Securities Act"), the provision is against public policy as expressed in the Securities Act and is therefore unenforceable. Such limitation of liability also does not affect the availability of equitable remedies such as injunctive relief or rescission. CERTAIN TRANSACTIONS In July 1988, an unaffiliated venture capital firm purchased a $400,000 subordinated note and a stock purchase warrant from the Company. In October 1991, the Company's Board of Directors deemed it in the best interest of the Company to purchase the subordinated note and stock purchase warrant from the venture capital firm. Because the Company could not then complete this transaction without incurring additional debt, Tom W. Olofson, Chairman and Chief Executive Officer, purchased the subordinated note and stock purchase warrant. This subordinated note payable to Mr. Olofson is still outstanding in the amount of $400,000. The note provides for interest at the rate of 10% with a maturity date of July 1998. Interest paid to Tom W. Olofson under this agreement was $40,000 per year for 1996, 1995 and 1994. The stock purchase warrant provided for the acquisition of 969,228 shares of the Company's Common Stock at $.4125 per share at any time prior to July 14, 1998 (giving retroactive effect to the six-for-one stock split). The Company has calculated and recorded a value of such stock purchase warrant in the amount of $41,000, with the value being calculated using the difference between net book value and exercise price per share. In an October 11, 1996 agreement between the Company and Mr. Olofson, it was agreed that the Company would pay $41,000 to Mr. Olofson on or before December 31, 1996, at which time the stock purchase warrant would be retired. The Company intends to repay the $400,000 outstanding face value of the subordinated note to Mr. Olofson from the proceeds of the Offering. See "Use of Proceeds." The Company has a noncancellable operating lease for its corporate headquarters which expires in February 2001. Tom W. Olofson holds a 50% interest, as a general partner, in T & J Investment Company, a Kansas general partnership ("T & J Investment Company") that leases this facility to the Company. The lease requires the Company to pay all executory costs (property taxes, maintenance and insurance). Rental expense is scheduled to be $146,625 for the year ended December 31, 1996. Rental expense under a predecessor lease between the Company and T & J Investment Company was $142,125 and $137,625 for the years ended December 31, 1995 and 1994, respectively. Tom W. Olofson personally guarantees substantially all of the Company's outstanding debt. Fees totaling $24,658 and $23,250 were paid to Mr. Olofson during 1995 and 1994, respectively, for guaranteeing the Company's debt. Upon application of the proceeds of the Offering to retire certain corporate debt, Tom W. Olofson's guarantee obligations with respect to such debt will be extinguished. See "Use of Proceeds." 33 During the period February 1993 through March 1995, the Company secured a line of credit in the amount of $350,000 from Tom W. Olofson. The loan was evidenced by a line of credit note providing interest at the rate of 10%. The maximum amount borrowed by the Company during this time period was $310,000 and the note was paid off in its entirety in June 1994. Interest expense of $10,501 was recognized on the note payable outstanding to Mr. Olofson in 1994. The Company believes that all prior transactions between the Company and its officers, directors, or other affiliates of the Company were on terms no less favorable than could have been obtained from unaffiliated third parties on an arm's length basis. All future transactions, loans and any forgiveness of loans, with directors, officers or stockholders holding more than 5% of the Company's outstanding Common Stock, or affiliates of any such persons, will be made for bona fide business purposes and will be on terms no less favorable than could be obtained from an unaffiliated third party and will be approved by a majority of the independent outside directors who do not have an interest in the transactions. PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of shares of Common Stock as of the date of this Prospectus for (i) each director and director nominee of the Company; (ii) each person known to the Company to be the beneficial owner of more than 5% of the outstanding shares; and (iii) all directors and executive officers as a group. Except pursuant to applicable community property laws or as otherwise indicated, each stockholder has sole voting and investment power with respect to the shares beneficially owned.
PERCENTAGE BENEFICIALLY OWNED NUMBER OF -------------------------------------- NAME AND ADDRESS OF BENEFICIAL OWNER (1) SHARES BEFORE OFFERING AFTER OFFERING - ------------------------------------------------------- ----------- ----------------- ------------------- Tom W. Olofson (2)..................................... 1,620,000 90.0% 47.6% Christopher E. Olofson................................. 109,500 6.1% 3.2% Robert C. Levy......................................... 30,000 1.7% 1.0% W. Bryan Satterlee..................................... 0 -- -- All directors and executive officers as a group (4 persons).............................................. 1,759,500 97.8% 51.8%
- ------------------------ (1) The address of all of the named individuals is c/o Electronic Processing, Inc., 501 Kansas Avenue, Kansas City, Kansas 66105. (2) Excludes 19,500 shares owned by Mr. Olofson's adult son, Scott W. Olofson, as to which shares Mr. Olofson disclaims beneficial ownership. 34 DESCRIPTION OF SECURITIES COMMON STOCK The authorized capital stock of the Company consists of 5,000,000 shares, $0.01 par value. As of November 4, 1996, there were 1,800,000 shares of Common Stock outstanding held of record by six stockholders. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the holders of Common Stock. The holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities. The holders of Common Stock have no preemptive or subscription rights and there are no redemption or conversion rights with respect to such shares. All outstanding shares of Common Stock are fully paid and non-assessable and the shares of Common Stock to be issued upon completion of the Offering will be fully paid and non-assessable. UNDERWRITER'S WARRANT In connection with the Offering, the Company has agreed to issue the Underwriter a warrant to purchase up 160,000 shares of Common Stock at an exercise price per share equal to 120% of the Price to Public. The Underwriter's Warrant is non-transferable for a period of one year following the date of this Prospectus. Thereafter, the Underwriter's Warrant may not be transferred other than by will or pursuant to the operation of law, except to a person who is an officer of the Underwriter. The Underwriter's Warrant is exercisable an any time during the four year period beginning one year after the date of this Prospectus. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is Norwest Bank of Minnesota, N.A. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have outstanding 3,400,000 shares of Common Stock. All of the 1,600,000 shares of Common Stock offered hereby will be freely transferable without restriction or further registration under the Securities Act, except for any shares purchased by any person who is or thereby becomes an "affiliate" of the Company, which shares will be subject to the resale limitations contained in Rule 144 promulgated under the Securities Act as described below. The remaining 1,800,000 shares of Common Stock currently outstanding, of which 1,759,500 are held by affiliates of the Company, may not be sold unless registered under the Securities Act or sold pursuant to an applicable exemption from registration or pursuant to Rule 144. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including a person who may be deemed to be an "affiliate" of the Company as that term is defined under the Securities Act, is entitled to sell, within any three month period, the number of shares beneficially owned for at least two years that does not exceed the greater of (i) one percent of the number of the then outstanding shares of Common Stock; or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain requirements as to the manner of sale, notice and the availability of current public information about the Company. Furthermore, a person who is not deemed to have been an affiliate of the Company during the ninety days preceding a sale by such person and who has beneficially owned such shares for at least three years is entitled to sell such shares without regard to the volume, manner of sale or notice requirement. Up to 160,000 additional shares of Common Stock may be purchased by the Underwriter through the exercise of the Underwriter's Warrant. The Underwriter's Warrant will be exercisable at an exercise price equal to 120% of the price to the public and will be exercisable at any time and from time to time during the four year period commencing one year from the date of this Prospectus. Any and all 35 of such shares of Common Stock will be transferable without restriction, provided that the Company satisfies certain securities registration requirements in accordance with the terms of the Underwriter's Warrant. See "Underwriting." Prior to the Offering, no public market for the Company's securities has existed. Following the Offering, no predictions can be made of the effect, if any, of future public sales of restricted shares or the availability of restricted shares for sale in the public market. Moreover, the Company cannot predict the number of shares of Common Stock that may be sold in the future pursuant to Rule 144 because such sales will depend on, among other factors, the market price of the Common Stock and the individual circumstances of the holders thereof. The availability for sale of substantial amounts of Common Stock could adversely affect prevailing market prices for the Company's securities. All of the existing stockholders have entered or are expected to enter into agreements (the "Lockup Agreements") under which they agree not to sell or otherwise dispose of their equity securities without the prior written consent of the Underwriter (which consent may not be unreasonably withheld) for a period of six months from the date of this Prospectus. After 90 days from the date of this Prospectus, the Company may file a registration statement on Form S-8 under the Securities Act to register the shares issuable to employees, directors and consultants upon exercise of stock options granted or to be granted under its stock option plan. Upon the effectiveness of that registration statement, shares that are not otherwise subject to the Lockup Agreement referred to above will be available for immediate resale to the public market. 36 UNDERWRITING The Company has entered into an Underwriting Agreement with R. J. Steichen & Company (the "Underwriter") pursuant to which the Underwriter has agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase from the Company, and the Company has agreed to sell to the Underwriter shares of Common Stock at the offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriter to pay for and accept delivery of the securities offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The Underwriter is committed to take and pay for all of the Common Stock offered hereby (other than those covered by the over-allotment option described below), if any are taken. The Underwriter has advised the Company that it proposes to offer the Common Stock directly to the public at the public offering price set forth on the cover page of this Prospectus and to certain selected dealers at such price less a concession not in excess of $. per share. The Underwriter may allow and such dealers may reallow a concession not in excess of $. per share to certain other dealers. After the initial public offering, the Price to Public, concession and reallowance may be changed by the Underwriter. The Company has granted to the Underwriter an option, exercisable within 45 days from the date of this Prospectus, to purchase up to an additional 240,000 shares of Common Stock, at the initial public offering price, solely for the purpose of covering over-allotments, if any. The Underwriter may exercise this option only to cover over-allotments in the sale of Common Shares. In addition, the Company has agreed to pay to the Underwriter at the closing of the Offering a non-accountable expense allowance of 3% of the aggregate public offering price to cover expenses incurred by the Underwriter in connection with the Offering, reduced by amounts advanced by the Company which, as of the date of this Prospectus, are $10,000. The Company has agreed to issue the "Underwriter's Warrant" to purchase up to 160,000 shares of Common Stock. The Underwriter's Warrant will be exercisable, at a price equal to 120% of the Price to Public, commencing one year from the date of this Prospectus and will remain excercisable for a period of four years after such date. The Underwriter's Warrant provides certain rights to request that the Company register the sale of the shares of Common Stock underlying the Underwriter's Warrant at such time as the Company is eligible to use the Securities and Exchange Commission Form S-3 for such registration. The Underwriter's Warrant is not transferable for one year from the date of this Prospectus. Thereafter, the Underwriter's Warrant may not be transferred other than by will or pursuant to the operation of law, except to a person who is an officer of the Underwriter. The Underwriter has informed the Company that it does not intend to confirm sales to accounts over which they exercise discretionary authority. The Underwriting Agreement provides for reciprocal indemnification between the Company and the Underwriter against civil liabilities in connection with the Offering, including liabilities under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted pursuant to the foregoing provisions, the Company has been informed that, in the opinion of the Commission, such indemnification is against public policy as expressed in such Act and is therefore unenforceable. The Company and its officers, directors and each holder of Common Stock outstanding immediately prior to the Offering have agreed with the Underwriter that, without the Underwriter's consent (which may not be unreasonably withheld), they will not sell, transfer, or otherwise dispose of any equity securities of the Company for a period of six months from the date of this Prospectus. Prior to the Offering, there has been no public market for the Common Stock of the Company. The initial public offering price for the Common Stock was determined by negotiation between the 37 Company and the Underwriter. Among the factors considered in determining the offering price were the prevailing market conditions, the Company's financial and operating history and condition, its prospects and the prospects for its industry in general and the management of the Company. After completion of this Offering, the market price of the Common Stock is subject to change as a result of market conditions and other factors. The foregoing is a brief summary of the provisions of the Underwriting Agreement and the Underwriter's Warrant and does not purport to be a complete statement of their terms and conditions. The Underwriting Agreement and the Underwriter's Warrant have been filed as an exhibit to the registration statement of which this Prospectus is a part. LEGAL MATTERS The validity of the securities offered hereby will be passed upon for the Company by Petillon & Hansen, Torrance, California. Certain legal matters for the Underwriters will be passed upon by Fredrikson & Byron, P.A., Minneapolis, Minnesota. EXPERTS The financial statements for the years ended December 31, 1995 and 1994 and for the nine months ended September 30, 1996 included in this Prospectus and in the registration statement have been so included in reliance on the report of Baird, Kurtz & Dobson, independent accountants, given on the authority of said firm as experts in auditing and accounting. ADDITIONAL INFORMATION Prior to this Offering, the Company has not been subject to the reporting requirements of the Securities Exchange Act of 1934. The Company has filed with the Securities and Exchange Commission a registration statement on Form SB-2 ("Registration Statement"), together with exhibits thereto, relating to the securities offered hereby. This Prospectus, which constitutes a part of the Registration Statement, omits certain of the information set forth in the Registration Statement. For further information with respect to the Company and to the securities offered hereby, reference is made to such Registration Statement. Statements contained in this Prospectus as to the content of any contract or other document referred to are not necessarily complete, and in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified by such reference. The Registration Statement and exhibits can be inspected and copied at the public reference section at the Commission's principal office, 450 5th Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the Commission's Regional Offices located at the Northwestern Atrium Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511, and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies may be obtained from the Commission's principal office upon payment of the fees prescribed by the Commission. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission (http://www.sec.gov). Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified by such reference. The Company intends to furnish its securityholders with annual reports containing audited financial statements and interim reports containing unaudited financial statements. 38 ELECTRONIC PROCESSING, INC. DECEMBER 31, 1994 AND 1995, AND SEPTEMBER 30, 1996 INDEX
PAGE ---- INDEPENDENT ACCOUNTANTS' REPORT........................................... F-2 FINANCIAL STATEMENTS Balance Sheets.......................................................... F-3 Statements of Income.................................................... F-5 Statements of Changes in Stockholders' Equity........................... F-6 Statements of Cash Flows................................................ F-7 Notes to Financial Statements........................................... F-8
F-1 INDEPENDENT ACCOUNTANTS' REPORT Board of Directors Electronic Processing, Inc. Kansas City, Kansas We have audited the accompanying balance sheets of ELECTRONIC PROCESSING, INC. as of December 31, 1994 and 1995, and September 30, 1996, and the related statements of income, changes in stockholders' equity and cash flows for each of the years ended December 31, 1994 and 1995, and the nine months ended September 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ELECTRONIC PROCESSING, INC. as of December 31, 1994 and 1995, and September 30, 1996, and the results of its operations and its cash flows for each of the years ended December 31, 1994 and 1995, and the nine months ended September 30, 1996, in conformity with generally accepted accounting principles. BAIRD, KURTZ & DOBSON Kansas City, Missouri November 8, 1996 F-2 ELECTRONIC PROCESSING, INC. BALANCE SHEETS DECEMBER 31, 1994 AND 1995, AND SEPTEMBER 30, 1996 ASSETS
DECEMBER 31, SEPTEMBER 30, 1996 ---------------------------- ---------------------------- 1994 1995 ACTUAL PRO FORMA ------------- ------------- ------------- ------------- CURRENT ASSETS Cash and cash equivalents............................ $ 62,526 $ 26,938 $ 13,777 $ 13,777 Accounts receivable, trade, less allowance for doubtful accounts of $5,000......................... 432,011 474,796 689,249 689,249 Other receivables.................................... 76,073 566 3,128 3,128 Prepaid expenses and other........................... 148,247 135,194 146,528 146,528 Deferred income taxes 6,700 ------------- ------------- ------------- ------------- Total Current Assets............................... 718,857 637,494 852,682 859,382 ------------- ------------- ------------- ------------- PROPERTY AND EQUIPMENT, At cost Furniture and fixtures............................... 274,972 354,413 366,712 366,712 Computer equipment................................... 1,815,146 2,322,751 3,048,889 3,048,889 Office equipment..................................... 337,676 337,676 296,369 296,369 Leasehold improvements............................... 220,896 253,669 247,494 247,494 Transportation equipment............................. 14,969 14,969 14,969 14,969 ------------- ------------- ------------- ------------- 2,663,659 3,283,478 3,974,433 3,974,433 Less accumulated depreciation........................ 1,374,094 1,800,120 1,921,617 1,921,617 ------------- ------------- ------------- ------------- 1,289,565 1,483,358 2,052,816 2,052,816 ------------- ------------- ------------- ------------- SOFTWARE DEVELOPMENT COSTS, Net of amortization........ 1,017,457 1,044,421 1,182,119 1,182,119 ------------- ------------- ------------- ------------- INTANGIBLE ASSETS, Net of amortization Excess of cost over fair value of net assets acquired............................................ 67,526 65,512 64,003 64,003 Organization costs................................... 8,720 ------------- ------------- ------------- ------------- 76,246 65,512 64,003 64,003 ------------- ------------- ------------- ------------- OTHER ASSETS Deferred stock issuance costs........................ 127,589 192,338 192,338 Other................................................ 26,533 18,386 34,670 34,670 ------------- ------------- ------------- ------------- 26,533 145,975 227,008 227,008 ------------- ------------- ------------- ------------- $ 3,128,658 $ 3,376,760 $ 4,378,628 $ 4,385,328 ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
See Notes to Financial Statements F-3 ELECTRONIC PROCESSING, INC. BALANCE SHEETS (CONTINUED) DECEMBER 31, 1994 AND 1995, AND SEPTEMBER 30, 1996 LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, SEPTEMBER 30, 1996 ---------------------------- ---------------------------- 1994 1995 ACTUAL PRO FORMA ------------- ------------- ------------- ------------- CURRENT LIABILITIES Current maturities of long-term debt................. $ 587,293 $ 830,214 $ 697,648 $ 697,648 Accounts payable..................................... 217,045 263,197 366,960 366,960 Accrued expenses..................................... 63,541 67,567 113,625 113,625 Redeemable stock purchase warrant.................... 41,000 41,000 Dividends declared................................... 151,060 ------------- ------------- ------------- ------------- Total Current Liabilities.......................... 867,879 1,160,978 1,219,233 1,370,293 ------------- ------------- ------------- ------------- LONG-TERM DEBT......................................... 1,016,439 1,016,540 1,850,093 1,850,093 ------------- ------------- ------------- ------------- DEFERRED INCOME TAXES.................................. 282,600 ------------- ------------- ------------- ------------- SUBORDINATED DEBT...................................... 400,000 400,000 400,000 400,000 ------------- ------------- ------------- ------------- REDEEMABLE STOCK PURCHASE WARRANT...................... 35,000 41,000 ------------- ------------- ------------- ------------- STOCKHOLDERS' EQUITY Common stock, $.01 par value; authorized 5,000,000 shares; issued and outstanding 1,800,000 shares..... 18,000 18,000 18,000 18,000 Additional paid-in capital........................... 282,000 282,000 282,000 464,342 Retained earnings.................................... 509,340 458,242 609,302 ------------- ------------- ------------- ------------- 809,340 758,242 909,302 482,342 ------------- ------------- ------------- ------------- $ 3,128,658 $ 3,376,760 $ 4,378,628 $ 4,385,328 ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
See Notes to Financial Statements F-4 ELECTRONIC PROCESSING, INC. STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1994 AND 1995 AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
YEARS ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------- ---------------------------- 1994 1995 1996 ------------- ------------- 1995 ------------- ------------- (UNAUDITED) OPERATING REVENUES................................... $ 4,984,697 $ 5,233,959 $ 3,843,292 $ 4,638,685 ------------- ------------- ------------- ------------- COST OF GOODS SOLD AND DIRECT COSTS Processing costs................................... 2,218,143 2,098,401 1,565,594 1,857,034 Depreciation and amortization...................... 576,462 687,314 504,399 587,493 ------------- ------------- ------------- ------------- 2,794,605 2,785,715 2,069,993 2,444,527 ------------- ------------- ------------- ------------- GROSS PROFIT......................................... 2,190,092 2,448,244 1,773,299 2,194,158 ------------- ------------- ------------- ------------- OPERATING EXPENSES General and administrative......................... 1,717,238 1,947,794 1,379,843 1,713,856 Depreciation and amortization...................... 83,293 87,895 66,334 66,810 ------------- ------------- ------------- ------------- 1,800,531 2,035,689 1,446,177 1,780,666 ------------- ------------- ------------- ------------- INCOME FROM OPERATIONS............................... 389,561 412,555 327,122 413,492 ------------- ------------- ------------- ------------- OTHER INCOME (EXPENSE) Interest income.................................... 1,430 1,686 1,678 43 Interest expense................................... (236,369) (262,391) (194,300) (201,344) Other.............................................. (48,260) (980) (1,000) 1,013 ------------- ------------- ------------- ------------- (283,199) (261,685) (193,622) (200,288) ------------- ------------- ------------- ------------- NET INCOME........................................... $ 106,362 $ 150,870 $ 133,500 $ 213,204 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- UNAUDITED PRO FORMA DATA Income before income taxes......................... $ 106,362 $ 150,870 $ 133,500 $ 213,204 Provision for income taxes......................... 54,000 68,000 59,000 90,000 ------------- ------------- ------------- ------------- PRO FORMA NET INCOME................................. $ 52,362 $ 82,870 $ 74,500 $ 123,204 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- PRO FORMA PER SHARE INFORMATION Net income......................................... $ .03 $ .05 $ .04 $ .07 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........... 1,800,000 1,800,000 1,800,000 1,800,000 ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
See Notes to Financial Statements F-5 ELECTRONIC PROCESSING, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1994 AND 1995 AND NINE MONTHS ENDED SEPTEMBER 30, 1996
ADDITIONAL COMMON PAID-IN RETAINED TOTAL STOCK CAPITAL EARNINGS ------------ --------- ----------- ------------ BALANCE, DECEMBER 31, 1993................................... $ 807,662 $ 18,000 $ 282,000 $ 507,662 Net income................................................. 106,362 106,362 Increase in value of redeemable warrant.................... (34,990) (34,990) Dividends paid on common stock, $.04 per share............. (69,694) (69,694) ------------ --------- ----------- ------------ BALANCE, DECEMBER 31, 1994................................... 809,340 18,000 282,000 509,340 Net income................................................. 150,870 150,870 Increase in value of redeemable warrant.................... (6,000) (6,000) Dividends paid on common stock, $.11 per share............. (195,968) (195,968) ------------ --------- ----------- ------------ BALANCE, DECEMBER 31, 1995................................... 758,242 18,000 282,000 458,242 Net income................................................. 213,204 213,204 Dividends paid on common stock, $.03 per share............. (62,144) (62,144) ------------ --------- ----------- ------------ BALANCE, SEPTEMBER 30, 1996.................................. $ 909,302 $ 18,000 $ 282,000 $ 609,302 ------------ --------- ----------- ------------ ------------ --------- ----------- ------------
See Notes to Financial Statements F-6 ELECTRONIC PROCESSING, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994 AND 1995 AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
YEARS ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, --------------------------- ------------------------ 1994 1995 1995 1996 ------------- ------------ ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income............................................. $ 106,362 $ 150,870 $ 133,500 $ 213,204 Items not requiring (providing) cash: Depreciation......................................... 317,830 426,960 308,394 426,370 Amortization of software development costs........... 321,413 337,515 252,108 226,424 Amortization of intangible assets.................... 20,512 10,734 10,231 1,509 (Gain) loss on disposal of equipment and software.... 47,078 980 (3,809) 382 Changes in: Accounts receivable.................................. 25,389 (42,785) (85,017) (214,453) Other receivables.................................... (19,238) 75,507 18,331 (2,562) Prepaid expenses and other assets.................... (32,010) 21,200 (9,674) (27,618) Accounts payable and accrued expenses................ (173,338) 50,178 (17,811) 149,821 Deferred revenue..................................... (20,000) ------------- ------------ ----------- ----------- Net cash provided by operating activities.......... 593,998 1,031,159 606,253 773,077 ------------- ------------ ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of property and equipment........... 25,236 5,210 350 Purchase of property and equipment..................... (46,828) (72,729) (19,443) (94,900) Decrease in equipment held for sale.................... 26,635 (Increase) decrease in related party receivable........ (41,468) 41,468 Expenditures for software development costs............ (272,111) (364,479) (224,347) (364,122) ------------- ------------ ----------- ----------- Net cash used in investing activities.............. (308,536) (437,208) (197,112) (458,672) ------------- ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings under line-of-credit agreement.......... 150,000 175,000 125,000 40,000 Proceeds from long-term debt........................... 2,076,000 11,694 250,000 Principal payments under capital lease obligation...... (274,593) (300,866) (215,998) (321,828) Principal payments on long-term debt................... (2,132,197) (191,810) (141,786) (168,845) Dividends paid......................................... (69,694) (195,968) (155,971) (62,144) Deferred stock issuance costs.......................... (127,589) (44,080) (64,749) ------------- ------------ ----------- ----------- Net cash used in financing activities.............. (250,484) (629,539) (432,835) (327,566) ------------- ------------ ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... 34,978 (35,588) (23,694) (13,161) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............. 27,548 62,526 62,526 26,938 ------------- ------------ ----------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR................... $ 62,526 $ 26,938 $ 38,832 $ 13,777 ------------- ------------ ----------- ----------- ------------- ------------ ----------- -----------
See Notes to Financial Statements F-7 ELECTRONIC PROCESSING, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1994 AND 1995, AND SEPTEMBER 30, 1996 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The Company is engaged primarily in the development and marketing of advanced proprietary software for electronic management of bankruptcy cases. An extensive array of support services complements the software. The Company extends unsecured credit to customers throughout the United States. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PROPERTY AND EQUIPMENT Property and equipment are depreciated on a straight-line basis over the estimated useful life of each asset as follows: Furniture and fixtures.......................................... 10 years Computer equipment.............................................. 5 years Office equipment................................................ 5-10 years Transportation equipment........................................ 3-5 years
Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful lives (5-10 years) of the improvements. SOFTWARE DEVELOPMENT COSTS Certain internal software development costs incurred in the creation of computer software products are capitalized once technological feasibility has been established. Prior to the completion of a detail program design, development costs are expensed. Capitalized costs are amortized based on current and future revenue for each product with an annual minimum equal to the straight-line amortization (5 years) over the remaining estimated economic life of the product. INTANGIBLE ASSETS The excess of cost over fair value of net assets acquired is being amortized over 40 years. Organizational costs are being amortized over seven years. All amortization is provided by the straight-line method. REVENUE RECOGNITION Revenues for Chapter 13 processing and noticing are recorded monthly at the completion of the services based on the trustees' month-end caseloads. For Chapter 7 bankruptcy services, monthly fees are received from a national financial institution after the product is installed and deposits are transferred based on the level of trustees' deposits with that institution. All ancillary fees are recognized as the services have been provided. INCOME TAX STATUS The Company, with the consent of its stockholders, has elected under the Internal Revenue Code to be an S corporation. In lieu of corporation income taxes, the stockholders are taxed on their F-8 ELECTRONIC PROCESSING, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 AND 1995, AND SEPTEMBER 30, 1996 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) proportionate shares of the Company's taxable income. Therefore, these statements do not include any provision for corporation income taxes. Management intends to distribute sufficient funds to the stockholders to pay personal taxes related to flow-through taxable income. WARRANTS SUBJECT TO REDEMPTION AGREEMENT Warrants to purchase common stock include a right to require the Company to purchase such stock, if acquired, at a price based on an agreed-upon formula. The warrant liability amount is being accrued over the period to the first exercise date, based on the formula price determined as of the balance sheet date. Increases in warrant liability are charged to retained earnings in a manner similar to recognition of dividend liabilities on redeemable preferred stock. During 1996, the liability amount was fixed by agreement with the majority shareholder (see Note 5). CASH EQUIVALENTS The Company considers all liquid investments with original maturities of three months or less (primarily money market accounts) to be cash equivalents. NEW PRONOUNCEMENT The Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of " in March 1995. The new Statement requires that assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset in question may not be recoverable. The Company has determined that no such impairment exists at September 30, 1996. NOTE 2: SOFTWARE DEVELOPMENT COSTS The following is a summary of software development costs capitalized:
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED ------------------------------ ------------------ 1994 1995 SEPTEMBER 30, 1996 -------------- -------------- ------------------ Amounts capitalized (net of retirements)...................... $ 3,627,068 $ 3,991,547 $ 2,663,840 -------------- -------------- ------------------ Accumulated amortization, beginning of year................... (2,288,198) (2,609,611) (2,947,126) Amortization expense.......................................... (321,413) (337,515) (226,424) Retirements................................................... 1,691,829 -------------- -------------- ------------------ Accumulated amortization, end of year......................... (2,609,611) (2,947,126) (1,481,721) -------------- -------------- ------------------ Net software development costs................................ $ 1,017,457 $ 1,044,421 $ 1,182,119 -------------- -------------- ------------------ -------------- -------------- ------------------
Included in the above are development costs relating to products not yet released. Such costs totaled $173,029, $503,827 and $684,956 at December 31, 1994 and 1995, and September 30, 1996, respectively. F-9 ELECTRONIC PROCESSING, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 AND 1995, AND SEPTEMBER 30, 1996 NOTE 3: NOTES PAYABLE AND LONG-TERM DEBT Long-term debt includes the following at December 31, 1994 and 1995, and September 30, 1996:
DECEMBER 31, ---------------------------- 1994 1995 SEPTEMBER 30, 1996 ------------- ------------- ------------------ Note payable, bank (A).......................................... $ 150,000 $ 325,000 $ 365,000 Note payable, bank (B).......................................... 818,417 674,376 553,729 Note payable, bank (C).......................................... 116,352 184,581 214,828 Note payable, bank (D).......................................... 250,000 Other........................................................... 14,132 12,008 10,179 Capital lease obligations....................................... 504,831 650,789 1,154,005 ------------- ------------- ------------------ 1,603,732 1,846,754 2,547,741 Less current maturities......................................... 587,293 830,214 697,648 ------------- ------------- ------------------ $ 1,016,439 $ 1,016,540 $ 1,850,093 ------------- ------------- ------------------ ------------- ------------- ------------------
- ------------------------ (A) Note is available in multiple advances with a limit of $500,000. Interest is 2% in excess of the bank's base lending rate (10.25% at September 30, 1996) per annum and is adjusted and payable on a quarterly basis. Principal is due on October 1, 1997. The note is collateralized by substantially all assets and is personally guaranteed by the majority stockholder. (B) Principal and interest (2% in excess of bank's base lending rate -- 10.25% at September 30, 1996) payable in monthly installments of $18,792 with final payment due in June 1999; collateralized by substantially all assets and personally guaranteed by the majority stockholder. (C) Revolving equipment line of credit of $250,000, with interest (2% in excess of bank's base lending rate -- 10.25% at September 30, 1996) payable monthly, in addition to monthly principal reductions equal to one thirty-sixth of the outstanding principal balance, with the unpaid balance being due June 1998; collateralized by substantially all assets and personally guaranteed by the majority stockholder. (D) Note and accrued interest (1% in excess of highest prime rate in Wall Street Journal, calculated daily -- 9.25% at September 30, 1996); due in October 1996 (extended after September 30, 1996, to October 1997); personally guaranteed by majority stockholder. The following maturities schedule reflects the payment terms noted above: 1997................................................... $ 697,648 1998................................................... 1,397,579 1999................................................... 438,490 2000................................................... 14,024 ---------- $2,547,741 ---------- ----------
NOTE 4: LEASES OPERATING The Company has a noncancellable operating lease for office space which expires in February 2001. The majority stockholder of the Company is a partner in the partnership that leases office space to the Company. The lease requires the Company to pay all executory costs (property taxes, maintenance and insurance). F-10 ELECTRONIC PROCESSING, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 AND 1995, AND SEPTEMBER 30, 1996 NOTE 4: LEASES (CONTINUED) For the year ended December 31, 1995 and the nine months ended September 30, 1996, an agreement was reached with the partnership whereby the Company was reimbursed for the property taxes which amounted to approximately $30,000 for both 1995 and 1996. Future minimum lease payments at September 30, 1996 are as follows: 1997..................................................... $ 148,125 1998..................................................... 152,800 1999..................................................... 156,900 2000..................................................... 161,200 2001..................................................... 68,000 --------- $ 687,025 --------- ---------
Rental expense under this lease was $137,624 and $142,125 for the years ended December 31, 1994 and 1995, respectively, and $109,125 for the period ended September 30, 1996. CAPITAL Capital leases shown in long-term debt (SEE NOTE 3) include leases for the use of computer equipment for no more than five years expiring in 2001. Property and equipment include the following property under capital leases:
YEARS ENDED DECEMBER 31, -------------------------- NINE MONTHS ENDED 1994 1995 SEPTEMBER 30, 1996 ----------- ------------- ------------------ Computer equipment............................................... $ 936,279 $ 1,163,513 $ 1,631,498 Less accumulated depreciation.................................... 302,676 355,542 357,546 ----------- ------------- ------------------ $ 633,603 $ 807,971 $ 1,273,952 ----------- ------------- ------------------ ----------- ------------- ------------------
Future minimum lease payments as of September 30, 1996 are as follows: 1997................................................... $ 548,036 1998................................................... 480,924 1999................................................... 271,149 2000................................................... 13,359 ---------- Future minimum lease payments.......................... 1,313,468 Less amount representing interest...................... 159,464 ---------- Present value of future minimum lease payments......... 1,154,004 Less current maturities................................ 451,625 ---------- Noncurrent portion..................................... $ 702,379 ---------- ----------
NOTE 5: SUBORDINATED DEBT AND STOCK PURCHASE WARRANT The Company has the following subordinated debt outstanding with the majority stockholder at December 31, 1994 and 1995, and September 30, 1996: 10% interest payable monthly, principal balance due July 1998.................................................... $ 400,000 --------- ---------
F-11 ELECTRONIC PROCESSING, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 AND 1995, AND SEPTEMBER 30, 1996 NOTE 5: SUBORDINATED DEBT AND STOCK PURCHASE WARRANT (CONTINUED) Interest expense under this agreement was $40,000 for both the years ended December 31, 1994 and 1995, and $30,000 for the nine month period ended September 30, 1996. The holder of the subordinated note also holds a stock purchase warrant (originally issued in 1988) to acquire 969,228 shares of the Company's common stock at $.41 per share (giving retroactive effect to the 6 to 1 stock split discussed in Note 9) at any time prior to July 14, 1998. Commencing July 15, 1996, the holder of common stock obtained by exercising the stock purchase warrant may require the Company to purchase for cash all or any part of the stock held. Likewise, the Company shall have the right to purchase for cash all or part of the stock held that was obtained by exercising the stock purchase warrant. The price in either such event shall be the greater of, using either the preceding fiscal year-end financial statements or an average of the two preceding fiscal year financial statements, (1) net book value per share or (2) a valuation per share computed from a seven times pre-tax income multiple. As of December 31, 1994 and 1995, the Company has calculated and recorded a value of such warrants in the amount of $35,000 and $41,000, respectively. Subsequent to September 30, 1996, the Company reached an agreement with the principal stockholder to retire the warrant for a price of $41,000. NOTE 6: RELATED PARTY TRANSACTIONS Interest expense of $10,501 was recognized on a note payable outstanding to the majority stockholder in 1994. Included in other receivables at December 31, 1994 is $41,468 due from related parties. Fees totaling $24,658 and $23,250 were paid to the majority stockholder during 1995 and 1994, respectively, for guarantees on Company debt. NOTE 7: PROFIT SHARING PLAN The Company has adopted a 401(k) plan covering substantially all employees. Company matching contributions to the Plan are discretionary. Such contributions amounted to $8,194 and $11,847 for the years ended December 31, 1994 and 1995, respectively, and $9,000 was accrued for the period ended September 30, 1996. NOTE 8: SIGNIFICANT ESTIMATES AND CONCENTRATIONS Generally accepted accounting principles require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Those matters include the following: - The Company capitalizes and amortizes costs incurred in the development of software products. These costs are being realized over the estimated life of the resulting software product, principally five years. Ultimate recoverability is dependent upon estimated future revenues over the life of the product being realized. - The majority of the Company's revenues are generated from processing and noticing services for Chapter 13 bankruptcy cases. For Chapter 7 bankruptcy services, the Company has a significant marketing agreement with a national financial institution which provides for the generation of monthly revenues based on the level of trustees' deposits with that institution. NOTE 9: PLANNED PUBLIC OFFERING (UNAUDITED) The Company is currently planning to make a public offering of shares of common stock. In conjunction with the offering, the Company has increased the number of authorized common shares to 5,000,000 and declared a 6 to 1 stock split which became effective, through a stock dividend, on November 4, 1996. In lieu of historical earnings (loss) per share, pro forma per share amounts F-12 ELECTRONIC PROCESSING, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 AND 1995, AND SEPTEMBER 30, 1996 NOTE 9: PLANNED PUBLIC OFFERING (UNAUDITED) (CONTINUED) reflecting the effects of the stock dividend retroactively have been provided as described below. Additionally, the number of shares in the accompanying balance sheets have been retroactively increased to reflect this stock split. Upon issuance of common stock to the public, the Company will change its income tax status to a C corporation. Pro forma earnings information has been provided to reflect the effects of corporate income taxes on historical earnings, including the effects of permanent and temporary differences in reporting income and expenses for tax and financial reporting purposes, as if the Company has been subject to income taxes for all the periods presented. Pro forma adjustments reflect the provision for corporate income taxes. At the time of becoming a C corporation, the Company will accrue an income tax provision to record the effects of temporary differences between assets and liabilities presented on the financial reporting basis and the income tax basis. At September 30, 1996, the deferred tax effects of such differences were as follows: Deferred tax assets: Allowance for doubtful accounts............................... $ 1,900 Accrued compensated absences.................................. 3,500 Other......................................................... 1,300 --------- 6,700 Deferred tax liabilities: Property and equipment basis difference....................... (282,600) --------- Net deferred tax asset (liability).............................. $(275,900) --------- ---------
The pro forma provision for income taxes included these components:
YEARS ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------ ----------------------- 1994 1995 1995 1996 ------------ ---------- ---------- ----------- Taxes currently payable....................................... $ 291,000 $ 95,000 $ 79,500 $ 126,000 Deferred income taxes......................................... (237,000) (27,000) (20,500) (36,000) ------------ ---------- ---------- ----------- $ 54,000 $ 68,000 $ 59,000 $ 90,000 ------------ ---------- ---------- ----------- ------------ ---------- ---------- -----------
A reconciliation of pro forma income tax provision at the statutory rate to pro forma income tax expense at the Company's effective rate is shown below:
YEARS ENDED DECEMBER NINE MONTHS ENDED 31, SEPTEMBER 30, -------------------- -------------------- 1994 1995 1995 1996 --------- --------- --------- --------- Computed at statutory rate (34%)................................... $ 36,200 $ 51,300 $ 45,400 $ 72,500 Increase in taxes resulting from: Nondeductible expenses........................................... 7,400 8,500 6,300 6,500 State income taxes, net of federal tax effect and other.......... 10,400 8,200 7,300 11,000 --------- --------- --------- --------- Pro forma tax provision............................................ $ 54,000 $ 68,000 $ 59,000 $ 90,000 --------- --------- --------- --------- --------- --------- --------- ---------
The Company has reserved 270,000 shares of common stock for issuance of stock options to employees, officers and directors of the Company. Upon successful completion of the offering, the F-13 ELECTRONIC PROCESSING, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1994 AND 1995, AND SEPTEMBER 30, 1996 NOTE 9: PLANNED PUBLIC OFFERING (UNAUDITED) (CONTINUED) Company will issue options for 119,500 of these shares with the exercise price being equal to the initial public offering price. The Company will account for such options in accordance with APB Opinion No 25, "Accounting for Stock Issued to Employees," and will provide pro forma disclosures as required by Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation." For supplementary purposes pro forma earnings per share would have been $.09 for both the nine months ended September 30, 1996, and for the year ended December 31, 1995. Such calculations give effect (net of income taxes) to the repayment of approximately $2,000,000 of the Company's outstanding indebtedness and resulting reduction of interest expense as if a portion of the proceeds from this initial public offering had been used to repay the debt at the original dates of issuance and the number of shares of common stock (whose proceeds are to be used to retire the debt) were outstanding from the same dates. NOTE 10: PRO FORMA (UNAUDITED) In anticipation of the public offering, the Company will declare a final S corporation distribution to present stockholders. This final distribution will represent the Company's previously undistributed earnings only since January 1, 1996, through the Termination Date. The amount of this final distribution will not exceed $250,000 and will be payable within 90 days following the Termination Date. If the final S corporation distribution were computed based upon 1996 earnings only through September 30, 1996, the amount of that distribution would be $151,060. Any remaining retained earnings will then be reclassified to additional paid-in capital. Additionally, the Company has reached agreement with the majority stockholder to retire the redeemable stock warrant (see Note 5) prior to the offering with a payment of $41,000. Pro forma adjustments made to the September 30, 1996 balance sheet include the effects of the special distribution of $151,060, and the recording of the net deferred tax liability, but do not include the effects of the net proceeds from the planned public offering. NOTE 11: ADDITIONAL CASH FLOWS INFORMATION
YEARS ENDED DECEMBER 31, ------------------------ NINE MONTHS ENDED 1994 1995 SEPTEMBER 30, 1996 ----------- ----------- ------------------ NONCASH INVESTING AND FINANCING ACTIVITIES Capital lease obligation and notes payable incurred for equipment.......................................... $ 441,696 $ 549,004 $ 901,660 ADDITIONAL CASH INFORMATION Interest paid.................................................... 232,032 262,391 184,274
F-14 GRAPHIC ENTITLED "ADVANCED BANKRUPTCY MANAGEMENT SYSTEMS" DEPICTING CERTAIN FEATURES OF THE COMPANY'S CASE POWER PRODUCT: CREDITOR DISTRIBUTION, LEGAL NOTICE'S WINDOWS-TM- INTERFACE, BARCODING, AND DOCUMENT IMAGING. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 6 Prior S Corporation Status................................................ 10 Use of Proceeds........................................................... 10 Dividend Policy........................................................... 11 Dilution.................................................................. 12 Capitalization............................................................ 13 Selected Financial Data................................................... 14 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 16 Business.................................................................. 19 Management................................................................ 30 Certain Transactions...................................................... 33 Principal Stockholders.................................................... 34 Description of Securities................................................. 35 Underwriting.............................................................. 37 Legal Matters............................................................. 38 Experts................................................................... 38 Additional Information.................................................... 38 Index to Financial Statements............................................. F-1
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THE OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 1,600,000 SHARES [LOGO] COMMON STOCK --------------------- PROSPECTUS --------------------- RJ STEICHEN & COMPANY , 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's by-laws provide that the Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer of the Company (or is or was serving at the request of the Company as a director or officer of another entity) against expenses, including attorneys' fees, judgments, fines, and amounts paid in settlement (except that, in connection with an action by or in the right of the Company, the indemnity shall be limited to expenses, including attorneys' fees, and amounts paid in settlement) actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. To the extent that a director, officer, employee, or agent has been successful on the merits or otherwise in defense of any action, suit, or proceeding, or in defense of any claim, he shall be indemnified against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the action, suit, or proceeding. Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the Company in advance of the final disposition of the action, suit, or proceeding. The indemnification discussed in this section is not exclusive of any other rights the party may have seeking indemnification. The Company believes that it is the position of the Securities and Exchange Commission that insofar as the foregoing provision may be invoked to disclaim liability for damages arising under the Securities Act, the provision is against public policy as expressed in the Securities Act and is therefore unenforceable. Such limitation of liability also does not affect the availability of equitable remedies such as injunctive relief or rescission. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The estimated expenses for the issuance and distribution of the shares of Common Stock registered hereby, other than underwriting commissions, are set forth in the following table. All amounts are estimates except the registration fee, NASD filing fee and the Nasdaq SmallCap Market listing fee.
ITEM AMOUNT - ------------------------------------------------------------------------------ -------------- Registration Fee.............................................................. $ 2,091.00 NASD Filing Fee............................................................... 1,190.00 Nasdaq SmallCap Market Fee.................................................... 6,250.00 Maximum Underwriter's Nonaccountable Allowance................................ 180,000.00 Blue Sky Fees and Expenses.................................................... 12,000.00 Transfer Agent Fees........................................................... 7,500.00 Legal Fees.................................................................... 125,000.00 Accounting Fees............................................................... 48,000.00 Printing and Engraving Costs.................................................. 24,000.00 Miscellaneous................................................................. 78,969.00 -------------- Total....................................................................... $ 485,000.00 -------------- --------------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES Since November 1, 1992, the Registrant sold and issued the following unregistered securities: II-1 The Company intends to grant upon completion of this Offering, pursuant to its 1995 Stock Option Plan, options to purchase 119,500 shares of the Company's Common Stock to 6 officers and/or directors and to 46 other employees. On November 4, 1996, the Company issued to its six stockholders a stock dividend of an aggregate 1,500,000 shares of Common Stock. All numbers of shares in this Item 26 have been adjusted to reflect the six-for-one stock split. The sales and issuances of securities described above were deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) or Regulation D promulgated under the Securities Act. The purchasers in each case represented their intention to acquire the securities for investment only and not with a view to the distribution thereof. Appropriate legends are affixed to the stock certificates issued in such transactions. ITEM 27. EXHIBITS
EXHIBIT NUMBER TITLE - ----------- ------------------------------------------------------------------------------------------------ 1.1 Form of Underwriting Agreement.+ 3.1 Restated Certificate of Incorporation as filed with the Missouri Secretary of State. 3.2 Bylaws.+ 4.1 Form of Underwriter's Warrant.+ 4.2 Form of Common Stock Certificate. 4.3 1995 Stock Option Plan. 5.1 Opinion of Petillon & Hansen, a partnership of professional corporations. 10.1 Agreement for Computerized Trustee Care Management System between the Company and NationsBank of Texas, N.A., dated November 22, 1993.** 10.2 Lease between T&J Investment Company and the Company, dated February 20, 1996.+ 10.3 Subordinated Note to Tom Olofson.+ 10.4 Loan Agreement between Industrial State Bank and the Company, dated June 17, 1996. 10.4a Modification to Loan Agreement between Industrial State Bank and the Company, dated October 31, 1996 (previously filed with Exhibit 10.4).+ 10.5 Loan Agreement between Industrial State Bank and the Company, dated June 8, 1994.+ 10.5a Modification to Loan Agreement between Industrial State Bank and the Comapny, dated June 17, 1996 (previously filed with Exhibit 10.5).+ 10.6 Loan Agreement between Industrial State Bank and the Company, dated June 8, 1994.+ 10.6a Modification to Loan Agreement between Industrial State Bank and the Company, dated June 17, 1996 (previously filed with Exhibit 10.6).+ 10.7 Loan Agreement between Citizens National Bank and the Company, dated June 18, 1996.+ 10.8 Form of Service Agreement between EPI and Trustee.+ 23.1 Consent of Baird, Kurtz & Dobson, Certified Public Accountants. 23.2 Consent of Petillon & Hansen (included in the opinion filed as Exhibit 5). 23.3 Consent of W. Bryan Satterlee, Director Nominee. 24.0 Power of Attorney (included on signature page).
II-2
EXHIBIT NUMBER TITLE - ----------- ------------------------------------------------------------------------------------------------ 27.0 Financial Data Schedule+
- ------------------------ + Previously filed. * To be filed by amendment. ** Confidential treatment requested. II-3 ITEM 28. UNDERTAKINGS The undersigned Registrant hereby undertakes: (1) To provide to the Underwriter at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. (2) If the Registrant requests acceleration of the effective date of the Registration Statement under Rule 461 under the Securities Act, the Registrant acknowledges that: Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (3) That, for purposes of determining any liability under the Securities Act, the Registrant will treat the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this Registration Statement as of the time the Commission declared it effective. (4) That for determining any liability under the Securities Act, the Registrant will treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. II-4 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement or amendment thereto to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Kansas City, Kansas, on the 13th day of January, 1997. Electronic Processing, Inc. By: /s/ TOM W. OLOFSON ----------------------------------------- Tom W. Olofson CHAIRMAN AND CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Tom W. Olofson, as his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this registration statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitutes, may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates stated.
SIGNATURE TITLE DATE - ------------------------------------------- ------------------------------------------- ----------------------- /s/ TOM W. OLOFSON Chief Executive Officer; Chairman of the ---------------------------------- Board; President (Principal Executive January 13, 1997 Tom W. Olofson Officer) /s/ NANCI R. TRUTNA Vice President -- Finance (Principal ---------------------------------- Financial Officer and Principal Accounting January 13, 1997 Nanci R. Trutna Officer) /s/ CHRISTOPHER E. OLOFSON ---------------------------------- Chief Operating Officer; Executive Vice January 13, 1997 Christopher E. Olofson President; Director /s/ ROBERT C. LEVY ---------------------------------- Director January 14, 1997 Robert C. Levy
II-4 EX-3.1 2 EXHIBIT 3.1 ARTICLES OF INCORPORATION OF NEWCO RGLG 1, INC. The undersigned, being a natural person of the age of eighteen years or more, for the purpose of forming a corporation under The General and Business Corporation Law of Missouri , does hereby adopt the following Articles of Incorporation: FIRST. The Name of the corporation is : Newco RGLG 1, Inc. SECOND. The address of its initial registered office in the State of Missouri is 2300 City Center Square, P.O. Box 26278, registered agent at such address is Marvin L. Rich THIRD. The aggregate number of shares which the corporation shall have authority to issue shall be one million (1,000,000) shares of common stock, each of the par value of one cent ($.01) per share. FOURTH. The name and place of residence of the incorporator are as follows: Name: Marvin L. Rich Residence: 6632 Wenonga Road, Mission, Kansas 66208 FIFTH. The number of directors to constitute the first board of directors of the corporation is five (5). Thereafter the number of directors shall be fixed by, or in the manner provided in, the bylaws of the corporation. Any change in the number of directors shall be reported to the Secretary of State within thirty (30) calendar days of such change. Directors need not be shareholders unless the bylaws require them to be shareholders. The persons to constitute the first board of directors, each of whom shall hold office until the first annual meeting of the shareholders or until his successor shall have been elected and qualified, are as follows: Rex Wiggins Tom Olofson Terry Matlack Max Muller SIXTH. The duration of the corporation is perpetual. SEVENTH. This corporation is formed for the following purposes: (a) To engage in every aspect of ddata processing, creation of date bases, communicatins and other computer related acctivities. (b) To but, lease, rent or otherwise acquire, own, hold, use, divide, partition, develop, improve, operate and sell, lease, mortgage or otherwise dispose of, deal in and turn to account real estate, leaseholds and any and all interests or estates therein or appertaining thereto; and to construct, manage, operate, improve, maintain and otherwise deal with buildings, structures and improvements situated or to be situated on any real estate or leasehold. (c) To engage in any mining, manufacturing, chemical, metallurgical, processing or related business, and to buy, lease, construct or otherwise acquire, own, hold, use, sell, lease, mortgage or otherwise dispose of, plants, works, facilities and equipment therefor. (d) To buy, utilize, lease, rent, import, export, manufacture, produce, design, prepare, assemble, fabricate, improve, develop, sell, lease, mortgage, pledge, hypothecate, distribute and otherwise deal in at wholesale, retail or otherwise, and as principal, agent or otherwise, all commodities, goods, wares, merchandise, machinery, tools, devices, apparatus, equipment and all other personal property, whether tangible or intangible, of every kind without limitation as to description, location or amount. (e) To apply for, obtain, purchase, lease, take licenses in respect of or otherwise acquire, and to hold, own, use, operate, enjoy, turn to account, grant licenses in respect of, manufacture under, introduce, sell, assign, mortgage, pledge or otherwise dispose of: 1. Any and all inventions, devices, processes and formulae and any improvements and modifications thereof; 2. Any and all letters patent of the United States or of any other country, state of locality, and all rights connected therewith or appertaining thereto. 3. Any and all copyrights granted by the United States or any other country, state or locality; 4. Any and all trademarks, trade names, trade symbols and other indications of origin and ownership granted by or recognized under the laws of the United States or of any other county, state or locality; and to conduct and carry of its business in any or all of its various branches under any trade name or trade names. (f) To engage in carry on and conduct research, experiments, investigations, analyses, studies and laboratory work, for the purpose of discovering new products or to improve products, articles and things, and to buy, construct or otherwise acquire, own, operate, maintain, lease, sell, mortgage or otherwise dispose of, laboratories and similar facilities, plants and any and all other establishments, and to procure, construct, own, use, hold and dispose of all necessary equipment in respect thereof, for the purposes aforesaid. (g) To enter into any lawful contract or contracts with persons, firms, corporations, other entities, governments or any agencies or subdivisions thereof, including guaranteeing the performance of any contract or any obligation of any person, firm, corporation or other entity. (h) To purchase and acquire, as a going concern or otherwise, and to carry on, maintain and operate all or any part of the property or business of any corporation, firm, association, entity, syndicate or person whatsoever, deemed to be of benefit to the corporation, or of use in any manner in connection with any of its purposes; and to dispose thereof upon such terns as may seem advisable to the corporation. (i) To purchase or otherwise acquire, hold, sell, pledge, reissue, transfer or otherwise deal in, shares of the corporation s own stock provided that it shall not use its funds or property for the purchase of its own shares of stock when such Use would be prohibited by law, by the articles of incorporation or by the bylaws of the corporation; and, provided further, that shares of its own stock belonging to it shall not be voted upon directly or indirectly. (j) To invest, lend and deal with moneys of the corporation in any lawful manner, and to acquire by purchase, by the exchange of stock or other securities of the corporation, by subscription or otherwise, and to invest in, to hold for investment or for any other purpose, and to use, sell, pledge or otherwise dispose of, and in general to deal in any interest concerning or enter into any transaction with respect to (including long and short sales of) any stocks, bonds, notes, debentures, certificates, receipts and other securities and obligations of any government, state, municipality, corporation, association or other entity, including individuals and partnerships and, while owner thereof, to exercise all of the rights, powers and privileges of ownership, including, among other things, the right to vote thereon for any and all purposes and to give consents with respect thereto. (k) To borrow or raise money for any purpose of the corporation and to secure any loan, indebtedness or obligation of the corporation and the interest accruing thereon, and for that or any other purpose to mortgage, pledge, hypothecate or charge all of any part of the present or hereafter acquired property, rights and franchises of the corporation, real, personal, mixed or of any character whatever, subject only to limitations specifically imposed by law. (l) to do any or all of the things hereinabove enumerated alone for its own account, or for the account of others, or as the agent for others, or in association with others or by or through others, and to enter into all lawful contracts and undertakings in respect thereof. (m) To have one or more offices, to conduct its business, carry on its operations and promote its objects within and without the State of Missouri and anywhere in the world, and without restriction as to place, manner or amount, but subject to the laws applicable thereto; and to do any or all of the things herein set forth to the same extent as a natural person might or could do and in any part of the world, either alone or in the company with others. (n) In general, to carry on any other business in connection with each and all of the foregoing or incidental thereto, and to carry on, transact and engage in any and every lawful business or other lawful thing calculated to be of gain, profit or benefit to the corporation as fully and freely as a natural person might do, to the extent and in the manner, and anywhere within and without the State of Missouri, as it may from time to time determine; and to have and exercise each and all of the powers and privileges, either direct or incidental, which are given and provided by or are available under the laws of the State of Missouri in respect of general and business corporations organized for profit thereunder; provided, however, that the corporation shall not engage in any activity for which a corporation may not be formed under the laws of the State of Missouri. None of the purposes and powers specified in any of the paragraphs of this Article SEVENTH shall be in any way limited or restricted by reference to or inference from the terms of any other paragraphs, and the purposes and powers specified in each of the paragraphs of this Article SEVENTH shall be regarded as independent purposes and powers. The enumeration of specific purposes and powers in this Article SEVENTH shall not be construed to restrict in any manner the general purposes and powers of this corporation, nor shall the expression of one thing be deemed to exclude another, although it be of like nature. The enumeration of purposes or powers herein shall not be deemed to exclude or in any way limit by inference any purposes or powers which this corporation has power to exercise, whether expressly by the laws of the State of Missouri, now or hereafter in effect, or impliedly by any reasonable construction of such laws. EIGHTH. (a) Except as may be otherwise specifically provided by statute, or the articles or incorporation or the bylaws of the corporation, as from time to time amended, all powers of management, direction and control of the corporation shall be, and hereby are, vested in the board of directors. (b) The bylaws of the corporation may from time to time be altered, amended, suspended or repealed, or new bylaws may be adopted, in any of the following ways: (i) by the affirmative vote, at any annual or special meeting of the shareholders, or the holders of a majority of the outstanding shares of stock of the corporation entitled to vote; or (ii) by resolution adopted by a majority of the full board of directors at a meeting thereof, or adopted by a majority of the full board of directors at a meeting thereof, or (iii) by unanimous written consent of all the shareholders or all the directors in lieu of a meeting; provided, however, that the power of the directors to alter, amend, suspend or repeal the bylaws or any portion thereof may be denied as to any bylaws or portion thereof enacted by the shareholders if at the time of such enactment the shareholders shall so expressly provide. (c) The corporation may agree to the terms and conditions upon which any director, officer, employee or agent accepts his office or position and in its bylaws or otherwise may agree to indemnify and protect any director, officer, employee or agent to the extent permitted by the laws of Missouri. NINTH. Insofar as it is permitted under the laws of Missouri and except as may be otherwise provided by the bylaws of this corporation, no contract or other transaction between this corporation and any other firm or corporation shall be affected or invalidated solely by reason of the fact that any director or officer of this corporation is interested in, or is a member, shareholder, director or officer of such other firm or corporation; and any director or officer of this corporation, individually or jointly with one or more other directors or officers of this corporation, may be a party to, or may in interested in, any contract or transaction of this corporation or in which this corporation is interested, and no such contract or transaction shall be invalidated thereby. TENTH. The directors shall have power to hold their meetings and to keep the books (except any books required to be kept in the State of Missouri, pursuant to the laws thereof) at any place within or without the State of Missouri. ELEVENTH. The corporation shall be entitled to treat the registered holder of any shares of the corporation as the owner of such shares and of all rights derived from such shares for all purposes. The corporation shall not be obligated to recognize any equitable or other claim to or interest in such shares or rights on the part of any other person, including but without limiting the generality of the term person, a purchaser, pledgee, assignee or transferee of such shares or rights, unless and until such person becomes the registered holder of such shares, and the foregoing shall apply whether or not the corporation shall have either actual or constructive notice of the interest of such person. TWELFTH. The corporation reserves the right to alter, amend or repeal any provision contained in its articles of incorporation in the manner now or hereafter prescribed by the statutes of Missouri, and all rights and powers conferred herein are granted subject to this reservation; and, in particular, the corporation reserves the right and privilege to amend its articles of incorporation from time to time so as to authorize other or additional classes of shares (including preferential shares), to increase or decrease the number of shares of any class now or hereafter authorized, to establish, limit or deny to shareholders of any class the right to purchase or subscribe for any shares of stock of the corporation of any class, whether now or hereafter authorized or whether issued for cash, property or services or as a dividend or otherwise, or to purchase or subscribe for any obligations, bonds, notes, debentures, or securities or stock convertible into shares of stock of the corporation or carrying or evidencing any right to purchase shares of stock of any class, and to vary the preference, priorities, special powers, qualifications limitations, restrictions and the special or relative rights or other characteristics in respect of the shares of each class, and to accept and avail itself of, or subject itself to, the provisions of any statutes of Missouri hereafter enacted pertaining to general and business corporations, to exercise all the rights, powers and privileges conferred upon corporations organized thereunder or accepting the provisions thereof and to assume the obligations and duties imposed therein, upon the affirmative vote of the holders of a majority of the shares of stock entitled to vote thereon, or, in the event the laws of Missouri require a separate vote by classes of shares, upon the affirmative vote of the holders of a majority of the shares of each class whose separate vote is required thereon. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 13th day of July, 1988. /s/ Marvin L. Rich ____________________________ Marvin L. Rich Incorporator STATE OF MISSOURI ) ) ss. COUNTY OF JACKSON ) Subscribed and sworn to before me on this 13th day of July, 1988. BARBARA RAGAN Notary Public My Commission Expires: July 10, 1991 STATE OF MISSOURI...OFFICE SECRETARY OF STATE JAMES C. KIRKPATRICK, Secretary of State AMENDMENT OF ARTICLES OF INCORPORATION (To be submitted in duplicate by an attorney) HONORABLE JAMES C. KIRKPATRICK SECRETARY OF STATE STATE OF MISSOURI JEFFERSON CITY, MO 65101 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 Newco RGLG 1, Inc. The name under which it was originally organized was Newco RGLG 1, Inc. (2) An amendment to the Corporation s Articles of Incorporation was adopted by the shareholders on July 29, 1988. (3) Article #1 is amended to read as follows: The name of the corporation is: Electronic Processing, Inc. (4) Of the 300,000 shares outstanding, 300,000 of such shares were entitled to vote on such amendment. The number of outstanding shares of any class entitled to vote thereon as a class were as follows: Class Number of Outstanding Shares Common 300,000 (5) The number of shares voted for and against the amendment was as follows: Class No. Voted For No. Voted Against Common 300,000 0 (6) If the amendment changed the number or par value of authorized shares having a par value the amount in dollars of authorized shares having a par value as changed is: N/A 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, Max Muller, President, has executed this instrument and its Assistant Secretary, Peggy Mitchell, has affixed its corporate seal hereto and attested said seal on the 10th day of August, 1988. PLACE CORPORATE SEAL HERE (IF NO SEAL, STATE "NONE") None NEWCO RGLG 1, INC. ATTEST: /s/Peggy J. Mitchell /s/Max Muller __________________________________ By_________________________ Peggy J. Mitchell, Asst. Secretary Max Muller, President STATE OF KANSAS ) ) ss. COUNTY OF JOHNSON ) I, WANDA KENDRICK, a notary public do hereby certify that on this 10th day of August, 1988, personally appeared before me Max Muller, who, being by me first duly sworn, declared that he is the President of Newco RGLG 1, Inc., that he signed the foregoing document as President of the corporation, and that the statements therein contained are true. WANDA KENDRICK ______________________________ Notary Public My commission expires 1/28/90 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 October 12, 1995. 3. Articles 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 3,000,000 shares of common stock, each with a par value of $.01. There are no preferences, qualifications, limitations, restrictions, or special or relative rights, including convertible rights, if any, with respect to the authorized shares of stock. 4. Of the 300,000 shares outstanding, 300,000 of such shares were entitled to vote on such amendment. The number of outstanding shares of any class entitled to vote thereon as a class were as follows: Class Number Of Outstanding Shares ----- ---------------------------- Common 300,000 5. The number of shares voted and against the amendment was as follows: Class No. Voted For No. Voted Against ----- ------------- ----------------- Common 300,000 -0- 6. If the amendment changed the number of par value of authorized shares having a par value, the amount in dollars of authorized shares having a par value as changed is : $30,000.00 If the amendment changed the number of authorized shared 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 the 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 31st day of October, 1995. PLACE CORPORATE SEAL HERE ELECTRONIC PROCESSING, INC. By: /s/Tom W. Olofson ------------------------------------- Tom W. Olofson, President By: /s/ Robert C. Levy ---------------------------------- Robert C. Levy, Secretary STATE OF KANSAS ) ) ss. COUNTRY OF WYANELETTE ) I, the undersigned, a Notary Public, do hereby certify that on this 31st day of October, 1995, Tom W. Olofson personally appeared before me who, being by me first duly sworn, declared the he is the President of Electronic Processing, Inc., and acknowledged the he signed the foregoing document as President of the corporation, and that the statement therein contained are true. NOTARIAL SEAL /s/ Judy E. Schuberger -------------------------------------- Notary Public My commission expires 4/5/97 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 April 1 , 1996. 3. Articles Third is amended to read as follows: Third. The aggregate number of shares, class and par value, if any, which the corporation shall have authority to issue shall be 5,000,000 shares of common stock, each with a par value of $.01. There are no preferences, qualifications, limitations, restrictions, or special or relative rights, including convertible rights, if any, with respect to the authorized shares of stock. 4. Of the 300,000 shares outstanding, 300,000 of such shares were entitled to vote on such amendment. The number of outstanding shares of any class entitled to vote thereon as a class were as follows: Class Number of Outstanding Shares ----- ---------------------------- Common 300,000 5. The number of shares voted and against the amendment was as follows: Class No. Voted For No. Voted Against ----- ------------- ----------------- Common 300,000 -0- 6. If the amendment changed the number of par value of authorized shares having a par value, the amount in dollars of authorized shares having a par value as changed is : $50,000.00 If the amendment changed the number of authorized shared 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 the class, the following is a statement of the manner in which such reduction shall be effected: N/A IN WITNESS WHEREOF, the undersigned, Tom W. Olofson, President, has executed this instrument and Robert C. Levy, its Secretary has affixed its corporate seal hereto and attested said seal on the 1st day of April, 1996. PLACE CORPORATE SEAL HERE ELECTRONIC PROCESSING, INC. By: /s/ Tom W. Olofson ---------------------------- Tom W. Olofson, President ATTEST: By:/s/ Robert C. Levy ----------------------------- Robert C. Levy, Secretary STATE OF MISSOURI ) ) ss. COUNTRY OF JACKSON ) I, the undersigned, a Notary Public, do hereby certify that on this 1st day of April, 1995, Tom W. Olofson personally appeared before me who, being by me first duly sworn, declared the he is the President of Electronic Processing, Inc., and acknowledged the he signed the foregoing document as President of the corporation, and that the statement therein contained are true. {Notarial Seal} /s/ Judy E. Schuberger -------------------------- Notary Public My commission expires: 4/5/97 - ---------------------- STATE OF MISSOURI . . . OFFICE OF SECRETARY OF STATE AMENDMENT OF ARTICLES OF INCORPORATION (TO BE SUBMITTED IN DUPLICATE BY AN ATTORNEY) SECRETARY OF STATE STATE OF MISSOURI P. O. BOX 778 JEFFERSON CITY, MO 65102 Pursuant to the provisions of The General and Business Corporation Law of Missouri, the undersigned corporation hereby certifies the following: 1. The present name of the Corporation is Electronic Processing, Inc. The name under which it was originally organized was NEWCO RGLG I, Inc. 2. An amendment to the corporation's Articles of Incorporation was adopted by the directors and shareholders on April 1, 1996. 3. Article Third is amended to read as follows: THIRD. The aggregate number of shares, class and par value, if any, which the corporation shall have authority to issue shall be 5,000,000 shares of common stock, each with a par value of $.01. There are no preferences, qualifications, limitations, restrictions, or special or relative rights, including convertible rights, if any, with respect to the authorized shares of stock. 4. Of the 300,000 shares of the corporation outstanding, 300,000 of such shares were entitled to vote on such amendment. The number of outstanding shares of any class entitled to vote thereon as a class were as follows: Class Number of Outstanding Shares ----- ---------------------------- Common 300,000 5. The number of shares voted for and against such amendment were as follows: Class No. Voted For No. Voted Against ----- ------------- ---------------- Common 300,000 -0- 6. If the amendment changed the number of par value of authorized shares having a par value, the amount in dollars of authorized shares having a par value as changed is: $50,000.00. If the amendment changed the number of authorized shares without par value, the authorized number of shares without par value as changed and the consideration proposed to be received for such increased authorized shares without par value as are to be presently issued are: N/A 7. If the amendment provides for an exchange, reclassification, or cancellation of issued shares, or a reduction of the number of authorized shares of any class below the number of issued shares of that class, the following is a statement of the manner in which such reduction shall be effected: N/A IN WITNESS WHEREOF, the undersigned, Tom W. Olofson, President, has executed this instrument and Robert C. Levy, its Secretary has affixed its corporate seal hereto and attested said seal on the 1st day of April, 1996. PLACE CORPORATE SEAL HERE ELECTRONIC PROCESSING, INC. By: ------------------------------------- Tom W. Olofson, President ATTEST: By: --------------------------- Robert C. Levy, Secretary STATE OF MISSOURI ) ) ss. COUNTY OF JACKSON ) I, the undersigned, a Notary Public, do hereby certify that on this 1st day of April, 1996 Tom W. Olofson personally appeared before me who, being by me first duly sworn, declared that he is the President of Electronic Processing, Inc., a Missouri corporation, and acknowledged that he signed the foregoing document as President of the corporation, and that the statements therein contained are true. {Notarial Seal} ------------------------- Notary Public My commission expires: - ---------------------- EX-4.2 3 EXHIBIT 4.2 NUMBER SHARES EPI ELECTRONIC PROCESSING INC COMMON STOCK COMMON STOCK INCORPORATED UNDER THE LAWS SEE REVERSE FOR OF THE STATE OF MISSOURI CERTAIN DEFINITIONS This Certifies that is the record holder of FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE, OF ELECTRONIC PROCESSING, INC. transferable on the books of the Corporation in person or by duly authorized attorney on surrender of this certificate properly endorsed. This certificate shall not be valid until countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the signatures of its duly authorized officers. Dated: /s/ Robert C. Levy [SEAL] /s/ Tom W. Olofson SECRETARY CHAIRMAN COUNTERSIGNED AND REGISTERED: NORWEST BANK MINNESOTA, N.A. TRANSFER AGENT AND REGISTRAR BY /S/ L M Kaufman AUTHORIZED SIGNATURE The Corporation shall furnish without charge to each stockholder who so requests a statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock of the Corporation or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Such requests shall be made to the Corporation's Secretary at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT - ______________Custodian______________ (Cust) (Minor) under Uniform Gifts to Minors Act__________________________________ (State) UNIF TRF MIN ACT - _________Custodian (until age_______) (Cust) ______________under Uniform Transfers (Minor) to Minors Act________________________ (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, _________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE / / ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OR ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ __________________________________________________________________________Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ________________________________________________________________________Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated_______________________________ X___________________________________________ X___________________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed By____________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCK- BROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17aD-15. AMERICAN BANK NOTE COMPANY JAN 15, 1997 fm 3504 ATLANTIC AVENUE SUITE 12 LONG BEACH, CA 90807 048462BK (310)989-2333 (FAX) (310) 426-7450 Proof /s/ DW NEW ------- EX-4.3 4 EXHIBIT 4.3 ELECTRONIC PROCESSING, INC. 1995 STOCK OPTION PLAN ADOPTED OCTOBER 17, 1995 AMENDED NOVEMBER 4, 1996 AMENDED JANUARY 23, 1997 I. PURPOSE The purposes of the Electronic Processing, Inc. 1995 Stock Option Plan (the "Plan") are to: (1) closely associate the interests of the directors, officers and all other employees of Electronic Processing, Inc. (the "Corporation") with the interests of the shareholders by reinforcing the relationship between participants' rewards and shareholder gains; (2) provide directors, officers and all other employees with an equity ownership in the Corporation commensurate with corporate performance, as reflected in increased shareholder value; (3) maintain competitive compensation levels; and (4) provide an incentive to officers and all other employees for continuous employment with the Corporation. II. ADMINISTRATION (a) The Plan shall be administered by the Board of Directors of the Corporation (the "Board") or a Stock Option Plan Committee ("Committee") of the Board. Unless the Committee is composed solely of not less than two members of the Board who qualify as "Non-Employee Directors" under Rule 16b-3 or its successors promulgated under the Securities Exchange Act of 1934, as amended ("Rule 16b-3"), all grants of stock options under the Plan to officers and directors of the Corporation shall be made by the Board. (The administrator of the Plan shall be referred to herein as the "Committee", regardless of whether the Plan is administered by the Board or the Committee). In addition to its duties with respect to the Plan stated elsewhere in the Plan, the Committee shall have full authority, consistent with the Plan, to interpret the Plan, to promulgate such rules and regulations with respect to the Plan as it deems desirable, to delegate its ministerial responsibilities hereunder to appropriate persons and to make all other determinations necessary or desirable for the administration of the Plan. All decisions, determinations and interpretations of the Committee shall be binding upon all persons. (b) Stock options granted pursuant to the Plan ("Options") shall be either incentive stock options ("ISOs") intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or nonqualified stock options ("NSOs") not intended to qualify under Section 422 of the Code. References in this Plan to Options shall include both ISOs and NSOs. (c) The Committee shall administer the Plan in a manner necessary to establish and maintain the Options intended to constitute ISOs as ISOs, and the Options intended to constitute NSOs as NSOs. Accordingly, only employees of the Corporation will be eligible for grants of ISOs. However, the Corporation makes no representation that the Options designated as ISOs and the Options designated as NSOs will qualify at the time of grant as ISOs and NSOs, respectively, or will continue to qualify as ISOs and NSOs respectively. Nor does the Corporation make any representation concerning the tax consequences to any person upon receipt or exercise of any Option hereunder or the subsequent sale of Common Stock acquired thereunder. III. SHARES SUBJECT TO THE PLAN Shares of Common Stock that may be issued under the Plan shall be the common stock, one cent ($.01) par value, of the Corporation ("Common Stock"). The aggregate number of shares of Common Stock, subject to adjustment pursuant to Article XVI, which may be delivered on exercise of the Options is 270,000 and such amounts of shares of Common Stock shall be, and hereby are reserved for such purpose. Such shares may be previously issued shares reacquired by the Corporation or authorized but unissued shares. If any Option expires, terminates or is canceled for any reason, without having been exercised in full, the shares covered by the unexercised portion of such Option shall again be available for Options, within the limit specified above. IV. PARTICIPANTS All members of the Board, except those serving on the Committee, and all employees of the Corporation, or, if 2 applicable, its subsidiaries, including employees who are members of the Board, shall be eligible to participate in the Plan; provided, however, that only employees of the Corporation shall be granted ISOs. Subject to the foregoing, the Committee shall, from time to time, determine, in its discretion, the directors and employees, who shall be eligible for participation in the Plan (the "Participants"). (For purposes of the Plan, the term "Participant(s)" shall, when appropriate, include any person permitted to exercise an Option in accordance with the terms of the Plan.) A member of the Board who is not an employee of the Corporation shall not be eligible to receive ISOs. V. GRANTS OF OPTIONS (a) The Committee shall in its discretion determine the time or times when Options shall be granted and the number of shares of Common Stock to be subject to each Option, except that no Option may be granted more than ten years after the effective date hereof. (b) The Committee may in its discretion grant to Participants who are employees of the Corporation either ISOs, NSOs or a combination of both and shall at the time the Option is granted designate whether the Option is an ISO or NSO. (c) The Committee may only grant NSOs to Participants who are not employees of the Corporation. (d) At any given time, a share of Common Stock may be subject to only one of the two types of Options that may be issued under the Plan. (e) With respect to ISOs granted under the Plan, the aggregate fair market value (determined as of the date the Option is granted) of the Common Stock with respect to which ISOs are exercisable for the first time by the Participant during any calendar year under all stock option plans of the Corporation and its subsidiaries shall not exceed $100,000. Notwithstanding the provisions for acceleration of the date an Option is first 3 exercisable in Article VII and Article VIII, in no event shall the date that an ISO is first exercisable be accelerated under this Plan if the acceleration would cause an ISO of a Participant to exceed the limit set forth in this paragraph. (f) No Option intended to constitute an ISO shall be granted to an employee who, at the time the Option is granted, owns (within the meaning of Section 422(b)(6) of the Code) Common Stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Corporation or, if applicable, any of its subsidiaries (hereinafter referred to as a "Ten Percent Shareholder") unless (1) the purchase price of the Common Stock subject to such Option shall be, subject to adjustment pursuant to Article XVI, at least 110 percent of the fair market value of the Common Stock on the day the Option is granted determined in accordance with Article VI which relates to the method for determining the fair market value of the Common Stock on the date the ISO is granted, and (2) the Option by its terms is not exercisable after the expiration of five years from the date such Option is granted. (g) Each Option shall be evidenced by a written Option Agreement which shall (1) state the terms and conditions of the Option in accordance with the Plan; and (2) contain such additional provisions as may be required under applicable laws, regulations, and rules or otherwise consistent with the terms of the Plan as the Committee may determine. VI. OPTION PRICE (a) The purchase price of a share of Common Stock subject to an NSO shall be, subject to adjustment pursuant to Article XVI, determined by the Committee and may be less than the fair market value of the Common Stock on the date the NSO is granted. (b) Except as provided in paragraph (f) of Article V relating to ISOs issued to Ten Percent Shareholders, the purchase price of a share of Common Stock subject to an ISO shall be, subject to adjustment pursuant to Article XVI, an amount equal to 4 the fair market value of the Common Stock on the day the ISO is granted. (c) The fair market value shall be the closing price at which the Common Stock is traded on the day the ISO is granted. For this purpose, the closing price of the Common Stock on any business day shall be (i) if such Common Stock is listed or admitted for trading on any United States national securities exchange, or if actual transactions are otherwise reported on a consolidated transaction reporting system, the last reported sale price of Common Stock on such exchange or reporting system, as reported in any newspaper of general circulation, (ii) if the Common Stock is quoted on the National Association of Securities Dealers Automated Quotations System ("NASDAQ"), or any similar system of automated dissemination of quotations of securities prices in common use, the closing bid quotation for such day of the Common Stock on such system, or (iii) if neither clause (i) or (ii) is applicable, the mean between the high bid and low ask quotations for the Common Stock as reported by the National Quotation Bureau, Incorporated if at least two securities dealers have inserted both bid and ask quotations for the Common Stock on at least 5 of the 10 preceding days. VII. OPTION PERIOD; EXERCISE RIGHTS (a) Except as provided in paragraph (f) of Article V relating to ISOs issued to Ten Percent Shareholders, each Option shall be exercisable for a term as the Committee shall determine, but not more than 10 years from the date it is granted, and shall be subject to earlier termination as provided in Article VIII. (b) Unless specifically provided by the Committee in its sole discretion, an Option shall become exercisable upon its grant. 5 VIII. EXERCISE RIGHTS UPON TERMINATION OF EMPLOYMENT (a) If a Participant terminates employment on account of becoming disabled, the Participant may exercise the Option in whole or in part within one year after the date of disability, but in no event later than the date on which it would have expired if the Participant had not become disabled. For this purpose, a Participant shall be deemed to be disabled if he or she is determined to be disabled for purposes of meeting any insurance requirements under policies provided by the Corporation. If no such policies are in effect, disability shall have the same meaning as set forth in Section 22(e) of the Code. (b) If a Participant dies during a period in which he or she is entitled to exercise an Option (including the periods referred to in paragraphs (a) and (d) of this Article), the Option may be exercised at any time within its remaining term as shall be prescribed in the Option Agreement, but in no event later than the date on which it would have expired if the Participant had lived, or one year after the Participant's death, whichever date is earlier, by the Participant's executor or administrator or by any person or persons who shall have acquired the Option directly from the Participant by will or the laws of descent and distribution. The Option may be exercised in whole or in part. (c) If a Participant's employment with the Corporation or a subsidiary shall be terminated for cause, he or she shall forfeit any and all outstanding Option rights and such rights shall be deemed to have lapsed for purposes hereof as of the date of the Participant's termination of service. (d) If a Participant ceases to be employed by the Corporation or a subsidiary for any reason other than disability, death or termination for cause during a period in which he or she is entitled to exercise an Option, the Participant's Option shall terminate three months after the date of such cessation of employment, but in no event later than the date on which it would 6 have expired if such cessation of employment had not occurred. During such period the Option may be exercised only to the extent that the Participant was entitled to do so at the date of cessation of employment. The employment of a Participant shall not be deemed to have ceased upon his or her absence from the Corporation or a subsidiary on a leave of absence granted in accordance with the usual procedures of the Corporation or such subsidiary. (e) No acceleration of the exercise date of an ISO shall occur pursuant to this Article if such earlier exercise would cause an ISO to violate paragraph (e) of Article V. IX. METHOD OF EXERCISE An Option shall be deemed exercised when (i) the Corporation has received written notice of such exercise in accordance with the terms of the Option, (ii) full payment of the aggregate exercise price of the shares of Common Stock as to which the Option is exercised has been made, and (iii) arrangements that are satisfactory to the Committee in its sole discretion have been made for the Participant's payment to the Corporation of the amount that is necessary for the Corporation to withhold taxes in accordance with applicable Federal, state or local tax withholding requirements. The exercise price of any share of Common Stock purchased, and any required tax payment, shall be paid in cash, by the tender of shares of Common Stock, or both. If payment is made in cash, it may be made by certified or official bank check, personal check or money order. If payment is made by the tender of shares of Common Stock, the fair market value of each such share shall be determined as of the day the shares are tendered for payment, in a manner consistent with the determination of fair market value under paragraph (b) of Article VI. Any excess of the value of the tendered shares over the purchase price will be returned to the Participant as follows: (i) Any whole shares remaining in excess of the purchase price will be returned to the Participant in kind, 7 and may be represented by one or more certificates as determined by the Corporation in its sole discretion. (ii) Any partial Shares remaining in excess of the purchase price will be returned to the Participant in cash. No Participant shall be deemed to be a holder of any shares of Common Stock subject to an Option unless and until a stock certificate or certificates for such shares are issued to such person(s) under the terms of the Plan. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as expressly provided in Article XVI. X. WITHHOLDING TAXES Whenever the Corporation proposes or is required to issue or transfer shares of Common Stock under the Plan, the Corporation shall have the right to require the Participant to remit to the Corporation an amount sufficient to satisfy any Federal, state and/or local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. Alternatively, the Corporation may issue or transfer such shares of Common Stock net of the number of shares sufficient to satisfy the withholding tax requirements. For withholding tax purposes, the shares of Common Stock shall be valued on the date the withholding obligation is incurred. XI. NONTRANSFERABILITY OF OPTIONS Each Option shall be nonassignable and nontransferable by the Participant other than by will or the laws of descent and distribution. Each Option shall be exercisable during the Participant's lifetime only by the Participant. 8 XII. REPURCHASE OF SHARES BY CORPORATION The Corporation is under no obligation to repurchase Common Stock acquired pursuant to the exercise of an Option hereunder. XIII. USE OF PROCEEDS The proceeds received by the Corporation from the sale by it of shares of Common Stock to Participants exercising Options pursuant to the Plan will be used for the general purposes of the Corporation. XIV. LAWS AND REGULATIONS (a) If any provision of the Plan should be held invalid or illegal for any reason, such determination shall not affect the remaining provisions hereof, but instead the Plan shall be construed and enforced as if such provision had never been included in the Plan. Without limiting the generality of the foregoing, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3. To the extent any provision of the Plan or action by the Committee hereunder is inconsistent with the foregoing requirements, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. (b) The determinations and the interpretation and construction of any provision of the Plan by the Committee shall be final and conclusive. This Plan shall be governed by the laws of the State of Missouri. Headings contained in this Plan are for convenience only and shall in no manner be construed as part of this Plan. Any reference to the masculine, feminine, or neuter gender shall be a reference to such other gender as is appropriate. XV. ISSUANCE OF SHARES OF COMMON STOCK 9 As a condition of any sale or issuance of shares of Common Stock upon exercise of any Option, the Committee may require such agreements or undertakings, if any, as the Committee may deem necessary or advisable to assure compliance with any applicable law or regulation include, but not limited to, the following: (a) a representation and warranty by the Participant to the Corporation, at the time any Option is exercised, that the Participant is acquiring the shares of Common Stock to be issued for investment and not with a view to, or for sale in connection with, the distribution of any such shares; and (b) a representation, warranty and/or agreement to be bound by any legends that are, in the opinion of the Committee, necessary or appropriate to comply with the provisions of any securities law deemed by the Committee to be applicable to the issuance of the shares of Common Stock and are endorsed upon the share certificates. XVI. ADJUSTMENT UPON CHANGES IN CAPITALIZATION (a) Options granted under the Plan shall be subject to adjustment by the Committee as to the number and price of shares subject to such Options in the event of changes in the outstanding shares of Common Stock by reason of stock dividends, stock splits, recapitalization, reorganizations, mergers, consolidations, combinations, exchanges, or other relevant changes in capitalization occurring after the date of grant of any such Option. In the event of any such change in the outstanding shares of Common Stock, the aggregate number of shares available under the Plan shall be approximately adjusted by the Committee, whose determination shall be conclusive. (b) Except as otherwise expressly provided herein, the issuance by the Corporation of shares of its capital stock of any class, or securities convertible into shares of capital stock of any class, either in connection with a direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon 10 conversion of shares or obligations of the Corporation convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or exercise price of the shares of Common Stock then subject to outstanding Options granted under the Plan. (c) Without limiting the generality of the foregoing, the existence of outstanding Options granted under the Plan shall not affect in any manner the right or power to the Corporation to make, authorize or consummate (i) any or all adjustments, recapitalizations, reorganizations or other changes in the Corporation's capital structure or its business; (ii) any merger or consolidation of the Corporation; (iii) any issue by the Corporation of debt securities, or preferred or preference stock that would rank above the shares of Common Stock subject to outstanding Options; (iv) the dissolution or liquidation of the Corporation; (v) any sale, transfer or assignment of all or any part of the assets or business of the Corporation; or (vi) any other corporate act or proceedings, whether of a similar character or otherwise. XVII. NO EMPLOYMENT RIGHTS Nothing in the Plan shall confer upon any employee of the Corporation or of a subsidiary, if applicable, any right to continued employment, or interfere with the right of the Corporation or a subsidiary to terminate his or her employment at any time, for any reason. XVIII. TERM OF PLAN; TERMINATION; AMENDMENTS (a) This Plan is effective as of October 17, 1995 (the "Effective Date"), the date of its original adoption by the unanimous consent of the Board and the unanimous consent of the Shareholders of the Corporation. This Plan shall continue in effect until all Options granted hereunder have expired or been exercised, unless sooner terminated under the provisions relating 11 thereto. No Option shall be granted after 10 years from the Effective Date. (b) The Board may from time to time amend, terminate or suspend the Plan or an Option, provided, however that, except to the extent provided in Article XVI, no such amendment may (i) without approval by the Corporation's shareholders, increase the number of shares of Common Stock reserved for Options or change the class of persons eligible to receive Options or involve any other change or modification requiring shareholder approval under Rule 16b-3, (ii) permit the granting of Options that expire beyond the maximum period described in Article V, (iii) extend the termination date of the Plan as set forth in Article V; or (iv) cause the Plan to be ineligible to issue ISOs, (v) reduce the purchase price of an outstanding ISO, (vi) without approval by the Corporation's shareholders, materially increase in any other way the benefits accruing to Participants or (vii) except to the extent otherwise specifically provided in the Plan, substantially impair any Option previously granted to a Participant without the consent of such Participant. Any termination or suspension of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been terminated or suspended. No Option may be granted while the Plan is suspended or after it is terminated. (c) Except as set forth herein, the Board or the Committee, as the case may be, may at any time or times amend the Plan, or amend any outstanding Option or Options for the purpose of satisfying the requirements of any changes in applicable laws or regulations or for any other purpose which at the time may be permitted by law. In the event that applicable rules or regulations are promulgated by the Internal Revenue Service which permit the acceleration of the date an Option is first exercisable without violating the $100,000 limit described in paragraph (e) of Article V, the Committee is authorized to act on behalf of the Board in amending the Plan to permit acceleration in conformity with such rules or regulations. 12 (d) Nothing contained in this Plan shall be construed to prevent the Corporation or any subsidiary, if applicable, from taking any corporate action which is deemed by the Corporation or any such subsidiary to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any award made under the Plan. No employee, beneficiary, other person shall have any claim against the Corporation or any subsidiary as a result of any such action. XIX. INDEMNIFICATION OF COMMITTEE AND BOARD The Corporation may, consistent with applicable law, indemnify members of the Committee against any liability, loss or other financial consequence suffered by them with respect to any act or omission of the Committee or its members relating to the Plan to the same extent and subject to the same conditions as specified in the indemnity provisions contained in the By-Laws of the Corporation XX. INTERPRETATION (a) If any provision of the Plan should be held invalid or illegal for any reason, such determination shall not affect the remaining provisions hereof, but instead the Plan shall be construed and enforced as if such provision had never been included in the Plan. Without limiting the generality of the foregoing, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors promulgated under the Securities Exchange Act of 1934 and, in the case of ISOs, with all applicable conditions of Section 422 of the Code or its successors and regulations promulgated thereunder. To the extent any provision of the Plan or action by the Committee or Board hereunder is inconsistent with the foregoing requirements, it shall be deemed null and void. (b) The determinations and the interpretation and construction of any provision of the Plan by the Committee shall be final and conclusive. 13 EX-5.1 5 EXHIBIT 5.1 January 28, 1997 Electronic Processing, Inc. 501 Kansas Avenue Kansas City, Kansas 66105 Gentlemen: We have assisted in the preparation and filing of a registration statement on Form SB-2, File No. 333-16805, filed with the Securities and Exchange Commission on November 26, 1996 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Act"), relating to the public offering of an aggregate of up to 2,000,000 shares of Common Stock, no par value (the "Shares"), of Electronic Processing, Inc. (the "Company") (including Common Stock underlying an overallotment option to purchase from the Company up to 240,000 shares of Common Stock). As counsel for the Company and at the Company's request, we have examined such corporate records, certificates and other documents and such questions of law as we have considered necessary or appropriate for the purposes of this opinion. We have assumed that appropriate action will be taken, prior to the offer and sale of the Shares, to register and qualify the Shares for sale under all applicable state securities or "blue sky" laws. We have also assumed the legal capacity to sign and the genuineness of all signatures of all persons executing instruments or documents examined or relied upon by us and have assumed the conformity with original documents of all documents examined by us as copies of such documents. Based upon the foregoing and upon information furnished to us by the Company's officers, it is our opinion that the Shares being issued and sold have been duly and validly authorized and, when issued and sold as described in the Registration Statement and in accordance with the terms of the Underwriting Agreement, a form of which was filed as an exhibit to the Registration Statement, and upon receipt by the Company of payment therefor as provided in the Underwriting Agreement, the Shares will be legally issued, fully paid and non-assessable. Electronic Processing, Inc. January 28, 1997 Page 2 We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and the reference to this firm under the caption "Legal Matters" in the Prospectus contained therein. This consent is not to be construed as an admission that we are a party whose consent is required to be filed with the Registration Statement under the provisions of the Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Very truly yours, PETILLON & HANSEN /s/ Petillon & Hansen EX-10.4 6 EXHIBIT 10.4 MODIFICATION AGREEMENT THIS AGREEMENT is made this 31st day of October 1996, by and between Electronic Processing, Inc., a Missouri corporation (hereinafter "Debtor"), and INDUSTRIAL STATE BANK, a Kansas banking corporation (hereinafter "Bank"); WHEREAS Debtor did execute and deliver unto Bank its original Promissory Note dated June 17, 1996 in the original amount of $500,000.00 made payable to Industrial State Bank, and as security therefor did pledge machinery, equipment, inventory, accounts receivable, software, contract rights, and the personal guarantee of Tom W. Olofson as per the original Security Agreement and Guarantee dated June 17, 1996; WHEREAS Debtor has now requested that Bank change the current maturity date from July 1, 1997 to October 1, 1997; WHEREAS Bank has reviewed Debtor's request and hereby agrees to the same; NOW THEREFORE, IN CONSIDERATION of the promises and agreements contained herein, and other good and valuable considerations, the receipt and sum of which is hereby acknowledged and agreed, it is hereby mutually agreed by the undersigned that said original Note No. 46359 shall mature October 1, 1997, with interest at Industrial State Bank's base lending rate plus two (2) percent (10.25%) per annum, paid and adjusted quarterly beginning February 1, 1997, and on the 1st day of each quarter thereafter until October 1, 1997, when the entire unpaid principal balance then outstanding, together with all unpaid accrued interest, shall become due and payable in full. All other terms and conditions of the existing obligation described herein shall remain unchanged and continue in full force and effect. IN ADDITION, BY INITIALING BELOW, BOTH DEBTOR AND LENDER AGREE THAT NO UNWRITTEN AGREEMENTS EXIST BETWEEN THEM AND THIS AGREEMENT IS THE FINAL AGREEMENT BETWEEN THEM. ADDITIONAL TERMS: NONE Lender: Industrial State Bank By______________ President Debtor: Electronic Processing, Inc. By___________________ Chairman & CEO All Due: October 1, 1997 Address: 501 Kansas Avenue Kansas City, Kansas 66105 INDUSTRIAL STATE BANK (Secured Lender) By:_____________________ W. R. Hook President ELECTRONIC PROCESSING, INC. (Debtor) By_____________________ Tom W. Olofson Chairman/CEO Electronic Processing, Inc. a Missouri corporation 501 Kansas Avenue Kansas City, Kansas 66105 BORROWERS NAME AND ADDRESS "I" includes each borrower above, jointly and severally. Industrial State Bank 32nd & Strong P.O. Box 6007 Kansas City, Kansas 66106 "You" means the lender, its successors and assigns. Loan Number 46359 Date JUNE 17, 1996 Maturity Date JULY 1, 1997 Loan Amount $ 500,000.00 Renewal of 45912 I promise to pay you, or your order, at your address listed above the PRINCIPAL sum of FIVE HUNDRED THOUSAND DOLLARS AND NO/100 ------------DOLLARS $500,000.00 Single Advance: I have received all of this principal sum. No additional advances are contemplated under this note. XX Multiple Advance: The principal sum shown above is the maximum amount of principal I can borrow under this note. As of today I have received the amount of $__________________ and future principal advances are contemplated. Conditions: The conditions for future advances are __________________________ XX Open end credit: You and I agree that I may borrow up to the maximum amount of principal more than one time. This feature is subject to all other conditions and expires no later than_____________________. Closed End Credit: You and I agree that I may borrow up to the maximum only one time (and subject to all other conditions). PURPOSE: The purpose of this loan is to provide a line of credit for working capital . INTEREST: I agree to pay interest (calculated on a 365/actual days basis) on the principal balance(s) owing from time to time as stated below. Fixed Rate: I agree to pay interest at the fixed, simple rate of ________% per year. XX Variable Rate: I agree to pay interest at the initial simple rate of 10.25 % per year. This rate may change as stated below. XX Index Rate: the future rate will be 2% IN EXCESS OF the following index rate: INDUSTRIAL STATE BANK'S BASE LENDING RATE PER ANNUM. No Index: The future rate will not be subject to any internal or external index. It will be entirely in your control. XX Frequency and Timing: The rate on this note may increase as often as QUARTERLY. An increase in the interest rate will take effect QUARTERLY BEGINNING OCTOBER 1, 1996 Limitations: The rate on this note will not at any time (and no matter what happens to any index rate used) go above or below these limits. Maximum Rate: The rate will not go above ___________ Minimum Rate: The rate will not go below __________. Post Maturity Rate: I agree to pay interest on the unpaid balance of this note owing after maturity, and until paid in full, as stated below: on the same fixed or variable rate basis in effect before maturity (as indicated above.) XX at a rate equal to 5% IN EXCESS OF THE OTHERWISE APPLICABLE RATE HEREON AT THE TIME OF DEFAULT. ADDITIONAL CHARGES: In addition to interest I __ have paid __ agree to pay the following additional charges ________________. PAYMENTS: I agree to pay this note as follows: XX Interest: I agree to pay accrued interest QUARTERLY, BEGINNING OCTOBER 1, 1996 AND QUARTERLY THEREAFTER AND AT MATURITY. XX Principal: I agree to pay the principal AS AVAILABLE, BUT NOT LATER THAN JULY 1, 1997. Installments: I agree to pay this note in ____ payments. The first payment will be in the amount of $_______ and will be due __________, ____. A payment of $__________ will be due on the _______ day of each _________ thereafter. The final payment of the entire unpaid balance of principal and interest will be due _____________, ____. Effect of Variable Rate: An increase in the interest rate will have the following effect on the payments. The amount of each scheduled payment will be increased. The amount of the final payment will be increased. Notice to Borrower: This written agreement is the final expression of the agreement between you and the Lender, and as such it may not be contradicted by evidence of any prior oral agreements or of a contemporaneous oral agreement between you and the Lender. ADDITIONAL TERMS: NONE INDUSTRIAL STATE BANK ELECTRONIC PROCESSING, INC. ______________________ _______________________ Chairman (Borrower) Pres. (Lender) Affirmation: By signing or initialing here, Borrower & Lender affirm that no unwritten oral agreement between them exists. XX SECURITY: This note is secured by: MACHINERY, EQUIPMENT, SOFTWARE, INVENTORY, ACCOUNTS RECEIVABLE, CONTRACT RIGHTS, AND THE PERSONAL GUARANTEES OF TOM W. OLOFSON, ALL AS PER THE ORIGINAL DOCUMENTS OF EVEN DATE. SIGNATURES: I agree to the terms of this note (including those on the other side). I have received a copy on today's date. ELECTRONIC PROCESSING, INC. A Missouri Corporation By:____________________________ Tom W. Olofson, Chairman/CEO Signed________________________for Lender, Title PRESIDENT EX-23.1 7 EXHIBIT 23.1 CONSENT OF CERTIFIED INDEPENDENT PUBLIC ACCOUNTANTS Electronic Processing, Inc. 501 Kansas Avenue Kansas City, Kansas We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form SB-2 of our report dated November 8, 1996 relating to the financial statements of Electronic Processing, Inc., which appears in such Prospectus. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Prospectus. However, it should be noted that Baird, Kurtz & Dobson has not prepared or certified such "Selected Financial Data." /s/ Baird, Kurtz & Dobson ----------------------------------- BAIRD, KURTZ & DOBSON Kansas City, Missouri January 29, 1997 EX-23.3 8 EXHIBIT 23.3 Exhibit 23.3 The Board of Directors Electronic Processing, Inc. I hereby consent to being named in the Electronic Processing, Inc. registration statement on Form SB-2 as a director-nominee of the Company. W. BRYAN SATTERLEE --------------------------------- W. Bryan Satterlee January 20 , 1997 ----- -----END PRIVACY-ENHANCED MESSAGE-----