<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 JUNE 30, 1998
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 July 31, 1998,
was 4,629,468 shares
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
<PAGE>
ELECTRONIC PROCESSING, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 1998
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Income -
Three months ended June 30, 1997 and 1998 3
Balance Sheets - December 31, 1997 and June 30, 1998 4
Statements of Cash Flows -
Six months ended June 30, 1997 and 1998 6
Notes to Consolidated Financial Statements - June 30, 1997 and 1998 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
</TABLE>
<PAGE>
ELECTRONIC PROCESSING, INC.
STATEMENTS OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30 Three Months Ended June 30
------------------------ --------------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES $3,873,081 $5,360,646 $2,015,961 $2,824,851
COST OF GOODS SOLD AND DIRECT COSTS
Processing costs 1,381,409 1,820,793 710,921 928,958
Depreciation and amortization 478,869 644,223 246,717 358,804
---------- ---------- ---------- ----------
1,860,278 2,465,016 957,638 1,287,762
---------- ---------- ---------- ----------
GROSS PROFIT 2,012,803 2,895,630 1,058,323 1,537,089
---------- ---------- ---------- ----------
OPERATING EXPENSES
General and administrative 1,469,992 1,933,209 787,031 1,049,172
Depreciation and amortization 44,972 80,732 21,044 40,997
---------- ---------- ---------- ----------
1,514,964 2,013,941 808,075 1,090,169
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 497,839 881,689 250,248 446,920
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income 31,857 79,087 19,877 57,981
Interest expense (105,008) (81,057) (21,854) (43,403)
Other 823 325 5 0
---------- ---------- ---------- ----------
(72,328) (1,645) (1,972) (14,578)
---------- ---------- ---------- ----------
NET INCOME BEFORE INCOME TAXES
PROVISION FOR INCOME TAXES $425,511 $880,044 $248,276 $461,498
---------- ---------- ---------- ----------
Current 187,050 331,383 105,750 183,754
Deferred (13,948) 22,169 (4,749) 1,798
Deferred - Related to Conversion to
"C" Corporation 272,900
---------- ---------- ---------- ----------
446,002 353,552 101,001 185,552
---------- ---------- ---------- ----------
INCOME (LOSS) ($20,491) $526,492 $147,275 $275,946
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings (loss) per share - diluted (.01) .14 .04 .07
PRO FORMA DATA
Income before income taxes 425,511 880,044 248,276 461,498
Provision for income taxes 173,102 353,552 101,001 185,552
---------- ---------- ---------- ----------
PRO FORMA NET INCOME $252,409 $526,492 $147,275 $275,946
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
PRO FORMA EARNINGS PER SHARE
Basic $08 $.15 $.04 $.07
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted $.08 $.14 $.04 $.07
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 3,099,448 3,612,712 3,400,000 3,813,970
Diluted 3,099,448 3,790,164 3,404,892 3,988,226
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
ELECTRONIC PROCESSING, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND JUNE 30, 1998
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1998
----------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $1,835,233 $12,151,400
Accounts receivable, trade, less allowance for
doubtful accounts of $5,000 1,114,424 1,404,970
Prepaid expenses and other 159,845 139,518
Deferred income taxes 18,823 19,000
---------- -----------
Total Current Assets 3,128,325 13,714,888
---------- -----------
PROPERTY AND EQUIPMENT, At cost
Furniture and fixtures 551,832 584,086
Computer equipment 5,152,228 6,398,141
Office equipment 325,429 339,794
Leasehold improvements 834,806 907,933
Transportation equipment 14,969 14,969
---------- -----------
6,879,264 8,244,923
Less accumulated depreciation 3,338,301 3,867,060
---------- -----------
3,540,963 4,377,864
---------- -----------
SOFTWARE DEVELOPMENT COSTS, Net of
amortization 1,397,375 1,902,269
---------- -----------
INTANGIBLE ASSETS, Net of amortization
Excess of cost over fair value of net assets acquired 61,486 60,479
---------- -----------
OTHER ASSETS
32,819 31,816
---------- -----------
$8,160,968 $20,087,316
---------- -----------
---------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1998
----------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Note payable - line of credit $1,000
Current maturities of long-term debt $626,665 293,109
Accounts payable 491,217 370,281
Accrued expenses 200,639 182,993
Income Taxes Payable 32,960 11,141
---------- -----------
Total Current Liabilities 1,352,481 857,524
---------- -----------
LONG-TERM DEBT 889,046 152,219
---------- -----------
DEFERRED INCOME TAXES 320,452 341,000
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 3,400,000 shares
December 31, 1997 and 4,629,468 shares June 30, 1998 34,000 46,295
Additional paid-in capital 5,202,000 17,800,798
Retained earnings 362,989 889,480
---------- -----------
5,598,989 18,736,573
---------- -----------
$8,160,968 $20,087,316
---------- -----------
---------- -----------
</TABLE>
<PAGE>
ELECTRONIC PROCESSING, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) (20,491) 526,492
Items not requiring (providing) cash:
Provision Deferred Income Taxes 258,952 20,371
Depreciation 381,829 528,760
Amortization of software development costs 141,005 195,189
Amortization of intangible assets 1,007 1,007
(Gain) loss on disposal of equipment (823) 0
Changes in:
Accounts receivable (180,733) (290,545)
Prepaid expenses and other assets 42,825 21,330
Accounts payable and accrued expenses (208,042) (138,582)
Accrued income taxes 64,050 (21,819)
---------- -----------
Net cash provided by operating activities 479,579 842,203
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 2,800 0
Purchase of property and equipment (517,142) (368,563)
Expenditures for software development costs (263,010) (700,085)
---------- -----------
Net cash used in investing activities (777,352) (1,068,648)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) under line-of-credit agreement (499,000)
Principal payments under capital lease obligation (587,694) (193,187)
Principal payments on long-term debt (1,011,391) (1,875,293)
Principal repayment subordinated note (400,000) 0
Dividends paid (250,000) 0
Stock issuance costs (830,895) 0
Proceeds stock issuance 5,600,000 12,611,092
---------- -----------
Net cash provided by financing activities 2,021,020 10,542,612
---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,723,247 10,316,167
---------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING PERIOD 4,882 1,835,233
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,728,129 $12,151,400
---------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
AND JUNE 30, 1997 AND 1998
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Electronic Processing, Inc. (the Company) develops, markets, and licenses
proprietary software products and provides support services for Chapter 7 and
Chapter 13 bankruptcy trustees and other users of the federal bankruptcy system.
EPI serves a national client base with specialty products that facilitate the
financial and administrative aspects of bankruptcy management and that are
accompanied by a high level of coordinated support including network
integration, post-installation support and value added services. The Company
extends unsecured credit to customers throughout the United States.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated on a straight-line basis over the
estimated useful life of each asset as follows:
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 over the remaining estimated economic life of the
product, not to exceed five years.
INTANGIBLE ASSETS
The excess of cost over fair value of net assets acquired is being
amortized over 40 years. Organizational costs are being amortized over seven
years. All amortization is calculated using the straight-line method.
<PAGE>
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REVENUE RECOGNITION
For the Company's Chapter 7 bankruptcy software product, monthly fees are
received from a national financial institution after the product is installed
and deposits are transferred based on the level of trustees= deposits with that
institution. Revenues for Chapter 13 processing and noticing are recorded
monthly at the completion of the services based on the trustees= month-end
caseloads. All ancillary fees are recognized as the services are provided.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
Prior to the Company's initial public offering (SEE NOTE 2), the Company,
with the consent of its shareholders, had elected under the Internal Revenue
Code to be taxed as an S corporation. In lieu of corporate income taxes, the
shareholders were taxed on their proportionate shares of the Company's taxable
income.
CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
three months or less (primarily money market accounts) to be cash equivalents.
INTERIM FINANCIAL STATEMENTS
The balance sheet as of June 30, 1998 and the statements of income,
shareholders' equity and cash flows for the six month periods ended June 30,
1997 and 1998 have been prepared by the Company without audit. In the opinion of
management, all adjustments (which included only normal, recurring adjustments)
necessary for fair presentation have been made. The results for these periods
are not necessarily indicative of the results to be expected for the full year.
YEAR 2000
Many currently installed computer systems and software products are coded
to accept only two-digit entries to represent years. For example, the year
"1998" would be represented by "98." These systems and products will need to be
able to accept four digit entries to distinguish years beginning with 2000 from
prior years. As a result, systems and products that do not accept four-digit
year entries will need to be upgraded or replaced to comply with such "Year
2000" requirements. The Company believes that its currently marketed software
products are Year 2000 compliant. In addition, the Company believes that its
internal administrative systems are Year 2000 compliant or will be upgraded or
replaced prior to the need to comply with Year 2000 requirements. The expenses
associated with this project are being expensed as incurred and are not expected
to be material to the Company's financial position or results of operations.
<PAGE>
NOTE 2: INITIAL PUBLIC OFFERING
In February 1997, the Company completed a public offering of 1,600,000
shares of common stock (the IPO) and received net proceeds (prior to stock
issuance costs) of $4,938,000.
In connection with the issuance of common stock to the public, the Company
changed its income tax status to a C corporation. At the time of becoming a C
corporation, the Company accrued an income tax provision of $272,900 to record
the deferred tax effects of temporary differences between financial statement
and tax bases of assets and liabilities as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 1,900
Accrued compensated absences 4,200
Other 1,200
-----------
7,300
Deferred tax liabilities:
Property and equipment (280,200)
-----------
Net deferred tax liability $ (272,900)
-----------
-----------
</TABLE>
Pro forma earnings information has been provided to reflect the effects of
corporate income taxes on historical earnings, including the effects of
permanent and temporary differences in reporting income and expenses for tax and
financial reporting purposes, as if the Company had been subject to income taxes
for all the periods presented, including the period in 1997 prior to the IPO.
Pro forma adjustment for 1997 eliminated the initial income tax provision of
$272,900.
NOTE 3: ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Six Months Ended
----------------
December 31, June 30
------------ -------
1997 1997 1998
---- ----- ----
(unaudited)
<S> <C> <C> <C>
NONCASH INVESTING AND FINANCING
ACTIVITIES
Capital lease obligation and notes
payable incurred for equipment $1,138,134 $316,080 $997,097
ADDITIONAL CASH INFORMATION
Interest paid 181,410 105,008 81,056
Income taxes paid 390,000 355,000
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SIX- MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX- MONTHS ENDED JUNE 30, 1997
Operating revenues increased 38.4%, or $1,487,565 to $5,360,646 in the
six-month period ended June 30, 1998, compared to $3,873,081 in the six-month
period ended June 30, 1997. Approximately 91.7% of the growth in operating
revenues were attributable to revenues generated by Chapter 7. Chapter 7 sales
increased 98.5%, or $1,363,987 to $2,748,087 in the six-month period ended June
30, 1998, compared to $1,384,100 in the six-month period ended June 30, 1997.
The increase in Chapter 7 revenue was due in part to the growth in new Chapter 7
trustee business for the Company resulting in higher monthly fees paid to EPI.
Chapter 13 revenue increased 5.0%, or $123,579, to $2,612,559 in the six- month
period ended June 30, 1998 compared to $2,488,980 in the six-month period ended
June 30, 1997. The relatively lower growth in Chapter 13 was primarily due to
the Company's focus on converting existing Chapter 13 trustee clients to
CASEPOWER and to a constant level of revenue from legal noticing caused by a
change in service mix.
Total cost of goods sold and direct costs increased 32.5%, or $604,738 to
$2,465,016 in the six-month period ended June 30, 1998, compared to $1,860,278
in the six-month period ended June 30, 1997. Total cost of goods sold and direct
costs as a percentage of operating revenues decreased to 46.0% in the six-month
period ended June 30, 1998 compared to 48.0% in the six-month period ended June
30, 1997, primarily due to TCMS for Chapter 7, which has higher gross margins,
comprising a greater percentage of operating revenues in the six-month period
ended June 30, 1998. Chapter 7 as a percentage of operating revenues increased
to 51.3% in the six-month period ended June 30, 1998 from 35.7% in the six-month
period ended June 30, 1997. Processing costs increased 31.8%, or $439,384, to
$1,820,793 in the six-month period ended June 30, 1998, compared to $1,381,409
in the six-month period ended June 30, 1997. The increase in 1998 resulted
principally from an increase in customer service expense to support the growth
in Chapter 7 sales and to support the new Chapter 13 product, CASEPOWER.
Processing costs as a percentage of operating revenues decreased to 34.0% in the
six-month period ended June 30, 1998 compared to 35.7% in the six-month period
ended June 30, 1997. Depreciation and amortization increased 34.5%, or $165,354,
to $644,223 in the six-month period ended June 30, 1998, compared to $478,869 in
the six-month period ended June 30, 1998, primarily due to the purchase of
computer equipment for the Company's Chapter 7 product.
Operating expenses increased 32.9%, or $498,977 to $2,013,941 in the
six-month period ended June 30, 1998, compared to $1,514,964 in the six-month
period ended June 30, 1997. Operating expenses as a percentage of operating
revenues decreased to 37.6 % in the six-month period ended June 30, 1998 from
39.1 % in the six-month period ended June 30, 1997. The dollar increase in
operating expenses was due to increases in general and administrative
infrastructure
<PAGE>
necessary to support a higher level of revenues, including additional sales
and marketing expenses related to growth of the Company's Chapter 7 product.
Sales and marketing expenses include sales and marketing salaries, trade show
costs, travel associated with Chapter 7 installations, and advertising costs.
Sales and marketing expenses increased 24.4 %, or $121,462 to $619,751 in the
six-month period ended June 30, 1998, compared to $498,289 in the six-month
period ended June 30, 1997.
Other income (expense) which includes interest income and interest expense,
was ($1,645) in the six-month period ended June 30, 1998 compared to ($72,328)
in the six-month period ended June 30, 1997. This resulted from a reduction in
net interest expense due to interest income from the investment of the net
proceeds from the sale of 1,600,000 shares of Common Stock in the Company's
February 1997 initial public offering and the reduction in interest expense due
to the debt paid with a portion of such net proceeds.
In connection with the Company's initial public offering, the Company
changed its income tax status to a C corporation. Pro forma earnings information
for the six-month period ended June 30, 1997 reflects the effects of corporate
income taxes on historical earnings as if the Company had been subject to
federal taxes for that period. The Company's effective tax rates were 40% and
41% (pro-forma) for the six-month periods ended June 30, 1998 and June 30,1997,
respectively.
Net income increased 108.6%, or $274,083, to $526,492 in the six-month
period ended June 30, 1998, compared to pro forma net income of $252,409 in the
six-month period ended June 30, 1997. Pro forma net income as a percentage of
operating revenues increased to 9.8% in the six-month period ended June 30, 1998
from 6.5% in the six-month period ended June 30, 1997.
QUARTER ENDED JUNE 30, 1998 COMPARED WITH QUARTER ENDED JUNE 30, 1997
Operating revenues increased 40.1%, or $808,890, to $2,824,851 in the
three-month period ended June 30, 1998, compared to $2,015,961 in the
three-month period ended June 30, 1997. Substantially all of the growth in
operating revenues, 98.2%, was attributable to Chapter 7. Chapter 7 revenues
increased 106.9%, or $794,495, to $1,537,703 in the three-month period ended
June 30, 1998, compared to $743,208 in the three-month period ended June 30,
1997. The increase in Chapter 7 revenue was due primarily to the growth in new
Chapter 7 trustee clients resulting in higher monthly fees paid to EPI. Chapter
13 revenue increased 1.1%, or $14,394, to $1,287,147 in the three-month period
ended June 30, 1998 compared to $1,272,753 in the three-month period June 30,
1997. The lower growth in Chapter 13 was primarily due to the Company's focus on
converting existing Chapter 13 trustee clients to CASEPOWER and to a constant
level of revenue from legal noticing caused by a change in service mix. Also,
additional cost savings in direct processing costs were passed on to some
Chapter 13 trustees by reducing certain monthly fees charged.
<PAGE>
Total cost of goods sold and direct costs increased 34.5%, or $330,124, to
$1,287,762 in the three-month period ended June 30, 1998, compared to $957,638
in the three-month period ended June 30, 1997. Total cost of goods sold and
direct costs as a percentage of operating revenues decreased to 45.6% in the
three-month period ended June 30, 1998, compared to 47.5% in the three-month
period ended June 30, 1997, primarily due to TCMS for Chapter 7, which has a
higher gross margin, comprising a greater percentage of operating revenues in
the three-month period ended June 30, 1998. Processing costs increased 30.7%, or
$218,037, to $928,958 in the three-month period ended June 30, 1998, compared to
$710,921 in the three-month period ended June 30, 1997. The increase in 1998
resulted principally from an increase in customer service expense to support the
growth in Chapter 7 sales and to support the new Chapter 13 product, CASEPOWER.
Deprecation and amortization increased 45.4%, or $112,087, to $358,804 in the
three-month period ended June 30, 1998, compared to $246,717 in the three-month
period ended June 30, 1997, primarily due to the purchase of computer equipment
for the Company's Chapter 7 product.
Operating expenses increased 34.9%, or $282,094, to $1,090,169 in the
three-month period ended June 30, 1998, compared to $808,075 in the three-month
period ended June 30, 1997. Operating expenses as a percentage of operating
revenues decreased to 38.6% in the three-month period ended June 30, 1998 from
40.1% in the three-month period ended June 30, 1997. The dollar increase in
operating expenses was due primarily to increases in general and administrative
infrastructure necessary to support a higher level of revenues, including
additional sales and marketing expenses. Sales and marketing expenses increased
21.4%, or $61,689, to $349,609 in the three-month period ended June 30, 1998,
compared to $287,920 in the three-month period ended June 30, 1997.
Other income (expense), which includes interest income and interest
expense, was $14,578 in the three-month period ended June 30, 1998, compared to
($1,972) in the three-month period ended June 30, 1997. This resulted from a
reduction in net interest expense due to interest income from the investment of
the net proceeds from the sale of 1,000,000 shares of Common Stock in the
Company's June 1998 stock Offering.
Pro forma earnings information for the three-month period ended June 30,
1997 reflects the effects of corporate income taxes on historical earnings as if
the Company had been subject to federal income taxes for that period. The
Company's effective tax rates were 40.2% and 40.7% (pro forma) for the
three-month periods ended June 30, 1998 and June 30, 1997, respectively.
Pro forma net income increased 87.4%, or $128,671, to $275,946 in the
three-month period ended June 30, 1998, compared to pro forma net income of
$147,275 in the three-month period ended June 30, 1997. Pro forma net income as
a percentage of operating revenues increased to 9.8% in the three-month period
ended June 30, 1998 from 7.3% in the three-month period ended June 30, 1997.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity position is strong with total cash and cash
equivalents of $12,151,400 at June 30, 1998 and working capital of $12,857,364.
The Company completed a secondary public offering in June of 1998 of
1,000,000 shares of Common Stock and 140,500 shares of Common Stock in an
over-allotment at $12.00 a share to raise $12,727,980 in net proceeds.
$1,724,089 of debt was paid off with these net proceeds.
Net cash provided by operating activities was $479,579 for the six-months
ended June 30, 1997 and $842,203 for the six-months ended June 30, 1998. The net
cash provided by operating activities in the six months ended June 30, 1997
consisted primarily of net income before deferred taxes of $238,461,
depreciation and amortization of $523,841, offset by an increase in accounts
receivable of $180,733 and an decrease in accounts payable and accrued expenses
of $208,042. The outstanding balance of accounts receivable balance has
increased primarily due to the growth in revenue.
The net cash provided by operating activities for the six-months ended June
30, 1998 consisted primarily of net income before deferred taxes of $546,864,
depreciation and amortization of $724,956, offset primarily by an increase in
accounts receivable of $290,545 and a decrease in accounts payable and accrued
expenses of $138,582. The increase in depreciation and amortization relates
primarily to the purchase of computer equipment for the installations of the
Company's Chapter 7 product. The outstanding accounts receivable balance has
increased primarily due to the growth in revenue.
The Company invested in property and equipment totaling $833,222 and
$1,365,660 for the six-month period ended June 30, 1997, and June 30, 1998,
respectively, which related principally to the installation of computer
equipment for the Company's Chapter 7 product.
The Company incurred expenditures for software costs totaling $263,010 and
$700,085 for the six-months ended June 30, 1997, and June 30, 1998,
respectively. In April of 1998 the Company acquired a PC-based product for
Chapter 13 trustees and this purchase is reflected in the June 30, 1998 software
expenditures. These expenditures are capitalized and are being amortized on a
straight-line basis over a maximum five-year period. Internal software costs
incurred in the creation of computer software products are capitalized as soon
as technological feasibility has been established. Prior to the completion of a
detailed program design, development costs are expensed. Capitalized costs are
amortized based on current and future revenue for each product with an annual
minimum equal to straight-line amortization over the remaining estimated
economic life of the product, not to exceed five years. Additionally, the
Company anticipates future software development will be at or above the spending
levels of prior years.
<PAGE>
The Company believes that the net proceeds from the June 1998 stock
Offering, together with funds that may be generated from operations, will be
sufficient to finance the Company's currently anticipated working capital and
property and equipment expenditures for the foreseeable future.
<PAGE>
ELECTRONIC PROCESSING, INC.
JUNE 30, 1998 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 2, 1998,
to consider the election of directors, ratification of the appointment of
independent accountants for the Company for 1998 and to amend the Company's
stock option plan to increase the number of shares of Common Stock available for
the grant of stock options from 270,000 shares to 500,000 shares. The results of
the voting at the Annual Meeting were as follows:
ELECTION OF DIRECTORS
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
Tom Olofson 3,292,172 3,741 0
Christopher E. Olofson
Robert C. Levy
W. Bryan Satterlee
Ratification of Baird 3,277,184 6,493 12,236
Kurtz & Dobson as
Independent
Accountants
Increase the Number of 2,261,231 36,223 16,223
Shares of Common Stock
Available in the Stock
Option Plan from 270,000
To 500,000
</TABLE>
No other matters were submitted to a vote of the shareholders at the annual
meeting.
<PAGE>
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
(B) REPORTS ON FORM 8-K:
None
<PAGE>
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: August 14, 1998 /s/ Tom W. Olofson
---------------
Tom W. Olofson
Chairman of the Board
Chief Executive Officer
(Principal Executive Officer)
Director
Date: August 14, 1998 /s/ Nanci R. Trutna
---------------
Nanci R. Trutna
Vice President Finance
(Principal Financial Officer)
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from Electronic
Processing, Inc. Statement of Income for the six months ended June 30, 1998 and
Balance Sheet as of June 30, 1998 qualified in its entirety by reference to such
financial statements.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ELECTRONIC
PROCESSING, INC. STATEMENT OF INCOME FOR THE THREE MONTHS ENDED JUNE 30, 1998
AND BALANCE SHEET AS OF JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 12,151,400
<SECURITIES> 0
<RECEIVABLES> 1,409,970
<ALLOWANCES> 5,000
<INVENTORY> 0
<CURRENT-ASSETS> 13,714,888
<PP&E> 8,244,923
<DEPRECIATION> 3,867,060
<TOTAL-ASSETS> 20,087,316
<CURRENT-LIABILITIES> 857,524
<BONDS> 0
0
0
<COMMON> 46,295
<OTHER-SE> 18,690,278
<TOTAL-LIABILITY-AND-EQUITY> 20,087,316
<SALES> 5,360,646
<TOTAL-REVENUES> 5,439,733
<CGS> 2,465,016
<TOTAL-COSTS> 2,465,016
<OTHER-EXPENSES> 2,013,941
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81,057
<INCOME-PRETAX> 880,044
<INCOME-TAX> 353,552
<INCOME-CONTINUING> 526,492
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 526,492
<EPS-PRIMARY> .15
<EPS-DILUTED> .14
</TABLE>
