<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 0-22081
--------------------------------------------------
ELECTRONIC PROCESSING, INC.
MISSOURI 48-1056429
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
501 KANSAS AVENUE, KANSAS CITY, KANSAS 66105-1300
(Address of Principal Executive Office)
913-321-6392
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of registrants common stock at October 31,
1997, was 3,400,000 shares
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
<PAGE>
ELECTRONIC PROCESSING, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1997
CONTENTS
Page
----
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Income -
Three months and nine months ended September 30, 1997 and 1996 3
Balance Sheets -September 30, 1997 and December 31, 1996 4
Statements of Cash Flows -
Nine months ended September 30, 1997 and 1996 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and 8
Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE>
ELECTRONIC PROCESSING, INC.
STATEMENTS OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES $6,096,467 $4,638,685 $2,223,385 $1,708,704
---------- ---------- ---------- ----------
COST OF GOODS SOLD AND DIRECT COSTS
Processing costs 2,151,158 1,857,034 769,748 679,728
Depreciation and amortization 763,408 587,493 284,539 221,406
---------- ---------- ---------- ----------
2,914,566 2,444,527 1,054,287 901,134
---------- ---------- ---------- ----------
GROSS PROFIT 3,181,901 2,194,158 1,169,098 807,570
---------- ---------- ---------- ----------
OPERATING EXPENSES
General and administrative 2,284,361 1,713,856 814,367 632,065
Depreciation and amortization 67,984 66,810 23,015 22,603
---------- ---------- ---------- ----------
2,352,345 1,780,666 837,382 654,668
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 829,556 413,492 331,716 152,902
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income 48,490 43 16,633 5
Interest expense (130,957) (201,344) (25,949) (72,490)
Other 1,007 1,013 185 1,394
---------- ---------- ---------- ----------
(81,460) (200,288) (9,131) (71,091)
---------- ---------- ---------- ----------
NET INCOME BEFORE INCOME TAXES $748,096 $213,204 $322,585 $81,811
---------- ---------- ---------- ----------
PROVISION FOR INCOME TAXES
Current 279,933 92,883
Deferred 24,400 38,348
Deferred - Related to Conversion to
C Corporation 272,900
---------- ----------
577,233 131,231
---------- ----------
INCOME $170,863 $213,204 $191,354 $81,811
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per share .05 .06
PRO FORMA DATA
Income before income taxes 748,096 213,204 322,585 81,811
Provision for income taxes 304,333 90,000 131,231 34,536
---------- ---------- ---------- ----------
PRO FORMA NET INCOME $443,763 $123,204 $191,354 $47,275
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
PRO FORMA EARNINGS PER SHARE
Net income $.14 $.07 $.06 $.03
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,200,733 1,800,000 3,400,000 1,800,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
ELECTRONIC PROCESSING, INC.
BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
September 30, 1997 Dec. 31, 1996
------------------ -------------
(Unaudited) (Note)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $1,579,276 $4,882
Accounts receivable, trade, less allowance for
doubtful accounts of $5,000 999,399 798,230
Prepaid expenses and other 150,548 153,907
Deferred income taxes 8,200
---------- ----------
Total Current Assets 2,737,423 957,019
---------- ----------
PROPERTY AND EQUIPMENT, At cost
Furniture and fixtures 478,669 390,599
Computer equipment 4,290,008 3,312,303
Office equipment 306,510 297,971
Leasehold improvements 823,711 247,494
Transportation equipment 14,969 14,969
---------- ----------
5,913,867 4,263,336
Less accumulated depreciation 2,671,349 2,087,483
---------- ----------
3,242,518 2,175,853
---------- ----------
SOFTWARE DEVELOPMENT COSTS, Net of
amortization 1,390,834 1,256,159
---------- ----------
INTANGIBLE ASSETS, Net of amortization
Excess of cost over fair value of net assets
acquired 61,989 63,499
---------- ----------
OTHER ASSETS
Deferred stock issuance costs 271,563
Other 29,445 42,145
---------- ----------
$7,462,209 $4,766,238
---------- ----------
---------- ----------
</TABLE>
NOTE: THE BALANCE SHEET AT DECEMBER 31, 1996, HAS BEEN DERIVED FROM THE
AUDITED BALANCE SHEET AT THAT DATE, BUT IT DOES NOT INCLUDE ALL OF THE
INFORMATION AND FOOTNOTES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES FOR COMPLETE FINANCIAL STATEMENTS.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, 1997 Dec. 31, 1996
------------------ -------------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt $539,437 $1,508,889
Accounts payable 334,697 534,519
Accrued expenses 134,047 90,140
Income taxes payable 61,933
---------- ----------
Total Current Liabilities $1,070,114 2,133,548
---------- ----------
LONG-TERM DEBT 682,242 1,242,660
----------
DEFERRED INCOME TAXES 305,500
----------
SUBORDINATED DEBT 400,000
----------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 5,000,000
shares; issued and outstanding 1,800,000 shares
December 31, 1996 and 3,400,000 shares
September 30, 1997 34,000 18,000
Additional paid-in capital 5,202,000 282,000
Retained earnings 168,353 690,030
---------- ----------
5,404,353 990,030
---------- ----------
$7,462,209 $4,766,238
---------- ----------
---------- ----------
</TABLE>
<PAGE>
ELECTRONIC PROCESSING, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $170,863 $213,204
Items not requiring (providing) cash:
Provision Deferred Income Taxes 297,300
Depreciation 584,216 426,370
Amortization of software development costs 245,666 226,424
Amortization of intangible assets 1,510 1,509
(Gain) loss on disposal of equipment (817) 382
Changes in:
Accounts receivable (201,169) (217,015)
Prepaid expenses and other assets 16,051 (27,618)
Accounts payable and accrued expenses (155,915) 149,821
Accrued income taxes 61,933
--------- ---------
Net cash provided by operating activities 1,019,638 773,077
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 2,800 350
Purchase of property and equipment (956,786) (94,900)
Expenditures for software development costs (380,341) (364,122)
---------- ----------
Net cash used in investing activities (1,334,327) (458,672)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) under line-of-credit agreement (499,000) 40,000
Proceeds from long-term debt 0 250,000
Proceeds from capital leases 0
Principal payments under capital lease obligation (681,188) (321,828)
Principal payments on long-term debt (1,045,761) (168,845)
Principal repayment subordinated note (400,000)
Dividends paid (250,000)
Stock issuance costs (834,968) (62,144)
Proceeds stock issuance 5,600,000 (64,749)
Net cash provided by (used in) financing activities
---------- ----------
1,889,083 (327,566)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,574,394 (13,161)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 4,882 26,938
---------- ----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $1,579,276 $13,777
---------- ----------
---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
(1) INTERIM STATEMENT PRESENTATION
The accompanying unaudited financial statements included all adjustments
(consisting only of normal recurring accruals ) which, in the opinion of
management, are necessary for a fair presentation of financial position,
results of operations and cash flows. The results of operations for the interim
periods shown are not necessarily indicative of the operating results for the
entire year.
(2) PRO FORMA
In connection with the issuance of common stock to the public, the Company
changed its income tax status to a C corporation. At such time, the Company
recorded a deferred tax payable of $272,900 to account for the effects of
temporary differences between assets and liabilities presented on the financial
reporting basis and the income tax basis. As required by FASB # 109 "Accounting
for Income Taxes", this amount is also included in the 1997 provision for
income taxes in the accompanying statements of income.
Pro forma earnings information has been provided to reflect the effects of
corporate income taxes on historical earnings, including the effects of
permanent and temporary differences in reporting income and expenses for tax
and financial reporting purposes, as if the Company had been subject to income
taxes for all the periods presented. Pro forma adjustments reflect the
provision for corporate income taxes. Pro forma earnings also eliminates the
effect of the above tax provision of $272,900 resulting from the initial
conversion to a C Corporation.
(3) ADDITIONAL CASH FLOWS INFORMATION
1997 1996
--------- --------
NON-CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligation and notes payable
incurred for equipment $696,079 $901,660
ADDITIONAL CASH INFORMATION
Interest Paid $130,957 $201,344
(4) INITIAL PUBLIC OFFERING
On February 4, 1997, the Company completed a public offering of 1,600,000
shares of common stock at $3.50 per share to raise $4,782,575 in net proceeds.
The proceeds from the offering were used to retire $2,387,608 of debt, purchase
additional computer equipment related to the Company's Chapter 7 product, fund
additional software development costs for new products, and fund expansion of
the company's sales/marketing program.
<PAGE>
The Company has reserved 270,000 of common stock for issuance of stock options
to employees, officers and directors of the Company. Upon completion of the
offering, the Company issued options for 115,500 of these shares with the
exercise price equal to the initial public offering price. Also, an additional
68,500 options were issued on July 10, 1997 at the exercise price of $4.50 per
share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1996
Operating revenues for the nine months ended September 30, 1997 were $6,096,467
compared to $4,638,685 for the similar 1996 period, an increase of 31.4%.
Chapter 7 revenue increased $981,832 or 114.3% . The Company has an exclusive
national marketing arrangement with NationsBank. The bank pays EPI a monthly
fee based on the total dollar amount of Chapter 7 deposits at NationsBank and a
fee for each new account installed. The increase in revenue was due in part to
the growth in new Chapter 7 trustee business for the Company resulting in
higher monthly fees paid to EPI. Chapter 13 revenue in the 1997 period
compared to the similar 1996 period increased $433,703 or 12.7%. The
additional revenue experienced in 1997 was due to an increase in caseloads
managed by Chapter 13 trustee clients. Also, the number of new bankruptcy
filings in 1997 was greater than in 1996 resulting in increased legal noticing
revenue, which constituted 32.3% of the total Chapter 13 revenue for 1997,
compared to 32.2% in the same period in 1996.
Processing costs increased to $2,151,158 for the first nine months of 1997
compared to $1,857,034 for the 1996 period or a 15.8% increase. The increase
for the first nine months of 1997 resulted principally from an increase in
customer service expense, trainers, hardware installers and other customer
service functions to support the growth of the Chapter 7 sales. Depreciation
and amortization for the nine months ended September 30, 1997 increased to
$763,408 from $587,493 for the same period in the prior year or a 29.9%
increase. The increase related 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 $2,914,566 for the first nine months
of 1997 compared to $2,444,527 for the first nine months of the prior year or a
19.2% increase.
Gross profit increased $987,743 or 45.0% to $3,181,901 for the nine months
ended September 30, 1997 compared to $2,194,158 for the similar period in 1996.
Gross profit as a percentage of operating revenues increased to 52.2% for the
1997 period from 47.3% for the 1996 period due primarily to TCMS (Trustee Case
Management System) for Chapter 7, which has higher gross margins, comprising a
greater percentage of operating revenues in 1997.
Operating expenses as a percentage of operating revenues were 38.6% for the
nine months ended September 30, 1997 compared to 38.4% for the first nine
months of 1996. Total operating expenses increased 32.1% over the same period
last year. Sales and marketing expenses, which include sales and marketing
salaries, trade show costs, and advertising costs increased 34.0% over the nine
months ended September 30, 1997. The Company increased its marketing
activities in 1997 related to the marketing of the Windows 95 version of TCMS.
<PAGE>
Income from operations increased 100.6% to $829,556 for the first nine months
of 1997 compared to $413,492 for the first nine months of 1996, principally due
to increased sales and higher gross profit margins.
In connection with the issuance of common stock to the public, the Company
changed its income tax status to a C corporation. At such time, the company
recorded a deferred tax payable of $272,900 to account for the effects of
temporary differences between assets and liabilities presented on the financial
reporting bases and the income tax basis. As required by FASB #109, this amount
is also included in the 1997 provision for income taxes in the accompanying
statements of income.
Pro forma earnings information reflects the effects of corporate income taxes
on historical earnings as if the Company had been subject to income taxes for
all the periods presented and also eliminates the effect of the above tax
provision of $272,900 resulting from the initial conversion to a C corporation.
The Company's effective tax rates were 41% and 42% for the first nine months of
1997 and 1996, respectively.
For the nine months ended September 30, 1997, the Company reported pro forma
net income of $443,763 compared to pro forma net income of $123,204 for the
nine months ended September 30, 1996, a 260.2% increase.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS SEPTEMBER 30,
1996.
Operating revenues for the three months ended September 30, 1997 were
$2,223,385 compared to $1,708,704 for the similar 1996 period, an increase of
30.1%. The principal reasons for the increases in operations for the three
months ended September 30, 1997 versus 1996 are outlined in the discussion of
the nine-month results.
Processing costs increased to $769,748 for the third quarter ended September
30, 1997 compared to $679,728 for the similar 1996 period, a 13.2% increase.
Total cost of goods sold and direct costs increased to $1,054,287 for the three
months ended September 30, 1997 compared to $901,134 for the similar period in
1996 or a 17.0% increase. Gross profit was $1,169,098 or 52.6% of operating
revenues in the third quarter of 1997 versus $807,570 or 47.3% of operating
revenues in the third quarter of 1996. See nine-month results above for
further discussion.
Operating expenses as a percentage of operating revenues were 37.7% for the
three months ending September 30, 1997 compared to 38.3% for the 1996 period.
Total operating expenses increased $182,714 or 27.9% over 1996. The increase
resulted primarily from expanded marketing and promotional costs for TCMS as
discussed above.
Income from operations increased 116.9% to $331,716 for the third quarter of
1997. For the third quarter ended September 30, 1997, the Company reported pro
forma net income of $191,354 compared to pro forma net income of $47,275 for
the third quarter ended September 30, 1996, a 304.8% increase.
CAPITAL RESOURCES AND LIQUIDITY AT SEPTEMBER 30, 1997
The Company completed an initial public offering of its common stock on
February 4, 1997, when it sold 1,600,000 shares of common stock at $3.50 per
share to raise $4,782,575 in net proceeds. The proceeds from the stock offering
were used to retire $2,387,608 in debt, purchase additional computer equipment
related principally to the installation of computer
<PAGE>
equipment for the Company's Chapter 7 product, fund additional software
development costs for new products, and fund expansion of the company's
sales/marketing program.
The Company's liquidity position is strong with total cash and cash equivalents
of $1,579,276 at September 30, 1997 and working capital of $1,667,309. The
company generated net cash from operations of $1,019,638 during the nine
months ended September 30, 1997 representing principally net income before
taxes of $530,096 plus depreciation and amortization of $831,392 offset in
part by a decrease in accounts payable and accrued expense of $155,915 and an
increase in accounts receivable of $201,169.
The Company has a $500,000 operating line of credit from a financial
institution, of which $1,000 was outstanding at September 30, 1997 . The
Company has two equipment lines of credit, one for $500,000 and another for
$1,000,000. The balance outstanding on the equipment lines of credit totaled
$565,933 at September 30, 1997. The Company anticipates no difficulties in
obtaining a renewal or extension of the loans when they become due in March and
July of 1998.
The Company paid a final S Corporation distribution of $250,000 to the
stockholders following the termination of the Company's S Corporation status.
In addition , the Company incurred expenditures for software development costs
totaling $380,341 for the first nine months of 1997. The Company invested in
property and equipment totaling $1,652,865 in the first nine months of 1997.
The Company anticipates financing its operations, capital expenditures and
software expenditures from internally generated funds and through bank
borrowings.
FORWARD-LOOKING STATEMENTS
This Form 10-QSB contains forward-looking statements that involve a number of
risks and uncertainties. Among the important factors that could cause actual
results to differ materially from those indicated by such forward-looking
statements are a significant change in on-going bankruptcy filings in the
United States, legislative or regulatory changes affecting bankruptcy filings
or the way bankruptcy trustees carry out their duties, entry into the market of
new competitors or development by competitors of new or superior product
technologies and other risks detailed from time to time in the Company's
reports and registration statements filed with the Securities and Exchange
Commission.
<PAGE>
ELECTRONIC PROCESSING, INC.
JUNE 30, 1997 FORM 10-QSB
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual Meeting of the Shareholders of the Company was held on June 3,
1997, to consider the election of directors, ratification of the appointment
of independent accountants for the Company for 1997, and to amend the
Articles of Incorporation of the corporation to increase the number of
authorized shares of common stock from 5,000,000 to 10,000,000. The results
of the voting at the Annual Meeting were as follows:
ELECTION OF DIRECTORS:
FOR AGAINST ABSTAIN
3,331,255 3,300 0
Tom W. Olofson
Christopher E. Olofson
Robert C. Levy
W. Bryan Satterlee
RATIFICATION OF BAIRD, KURTZ 3,330,255 3,000 1,300
DOBSON AS INDEPENDENT
ACCOUNTANTS
INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON
STOCK FROM 5,000,000 TO
10,000,000 3,304,255 12,230 8,100
No other matters were submitted to a vote of the shareholders at the annual
meeting.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following Exhibit is filed by attachment to this Form 10-QSB:
Exhibit
Number Description of Exhibit Page
- ------- ---------------------- ----
27 Financial Data Schedule 13
<PAGE>
(b) REPORTS ON FORM 8-K:
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ELECTRONIC PROCESSING, INC.
Date: November 14, 1997 /s/ Tom W. Olofson
----------------------------------
Tom W. Olofson
Chairman of the Board
Chief Executive Officer
(Principal Executive Officer)
Director
Date: November 14, 1997 s/ Nanci R. Trutna
----------------------------------
Nanci R. Trutna
Vice President Finance
(Principal Financial Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,579,276
<SECURITIES> 0
<RECEIVABLES> 1,004,399
<ALLOWANCES> 5,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,737,423
<PP&E> 5,913,867
<DEPRECIATION> 2,671,349
<TOTAL-ASSETS> 7,462,209
<CURRENT-LIABILITIES> 1,070,114
<BONDS> 0
0
0
<COMMON> 34,000
<OTHER-SE> 5,370,353<F1>
<TOTAL-LIABILITY-AND-EQUITY> 7,462,209
<SALES> 6,096,467
<TOTAL-REVENUES> 6,145,964<F2>
<CGS> 2,914,566
<TOTAL-COSTS> 2,914,566
<OTHER-EXPENSES> 2,352,345
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 130,957
<INCOME-PRETAX> 748,096
<INCOME-TAX> 577,233
<INCOME-CONTINUING> 170,863
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 170,863<F3>
<EPS-PRIMARY> .05<F4>
<EPS-DILUTED> .05<F4>
<FN>
<F1>REFLECTS RETAINED EARNINGS AND IN PAID IN CAPITAL.
<F2>REFLECTS OPERATING REVENUES AND OTHER INCOME.
<F3>CALCULATED ON A PRO-FORMA BASIS WOULD BE $443,763.
<F4>CALCULATED ON A PRO-FORMA BASIS WOULD $.14.
</FN>
</TABLE>
