<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, 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 October 31,
1998, was 4,633,268 shares
Transitional Small Business Disclosure Format (Check one): Yes No X
-- --
<PAGE>
ELECTRONIC PROCESSING, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1998
CONTENTS
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PAGE
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<S> <C>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Income -
Three months ended September 30, 1997 and 1998 3
Balance Sheets - December 31, 1997 and September 30, 1998 4
Statements of Cash Flows -
Nine months ended September 30, 1997 and 1998 6
Notes to Financial Statements - September 30, 1997 and 1998 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
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 NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
------------------------ ------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES $6,096,467 $8,473,235 $2,223,385 $3,112,589
COST OF GOODS SOLD AND DIRECT COSTS
Processing costs 2,151,158 2,837,476 769,748 1,016,683
Depreciation and amortization 763,408 1,032,387 284,539 388,164
---------- ---------- ---------- ----------
2,914,566 3,869,863 1,054,287 1,404,847
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
GROSS PROFIT 3,181,901 4,603,372 1,169,098 1,707,742
---------- ---------- ---------- ----------
OPERATING EXPENSES
General and administrative 2,284,361 3,138,005 814,367 1,204,797
Depreciation and amortization 67,984 119,766 23,105 39,033
---------- ---------- ---------- ----------
2,352,345 3,257,771 837,382 1,243,830
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 829,556 1,345,601 331,716 463,912
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income 48,490 239,801 16,633 160,713
Interest expense (130,957) (91,285) (25,949) (10,224)
Other 1,007 (15,067) 185 (15,391)
---------- ---------- ---------- ----------
(81,460) 133,449 (9,131) 135,098
---------- ---------- ---------- ----------
NET INCOME BEFORE INCOME TAXES $748,096 $1,479,050 $322,585 $599,010
---------- ---------- ---------- ----------
PROVISION FOR INCOME TAXES
Current 279,993 481,470 92,883 150,089
Deferred 24,400 88,669 38,348 66,500
Deferred - Related to Conversion to
"C" Corporation 272,900
---------- ---------- ---------- ----------
577,233 570,137 131,231 216,589
---------- ---------- ---------- ----------
INCOME (LOSS) $170,863 $908,913 $191,354 $382,421
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings (loss) per share - diluted .05 .22 .06 .08
PRO FORMA DATA
Income before income taxes 748,096 1,479,050 322,585 599,010
Provision for income taxes 304,333 570,137 131,231 216,589
---------- ---------- ---------- ----------
PRO FORMA NET INCOME $443,763 $908,913 $191,354 $382,421
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
PRO FORMA EARNINGS PER SHARE
Basic $.14 $.23 $.06 $.08
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted $.13 $.22 $.05 $.08
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 3,200,733 3,995,961 3,400,000 4,631,266
Diluted 3,440,700 4,114,096 3,500,298 4,782,877
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
ELECTRONIC PROCESSING, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND SEPTEMBER 30, 1998
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $1,835,233 $11, 673,721
Accounts receivable, trade, less allowance for
doubtful accounts of $5,000 1,114,424 1,625,847
Prepaid expenses and other 159,845 173,046
Deferred income taxes 18,823 28,000
---------- ------------
Total Current Assets 3,128,325 13,500,613
---------- ------------
PROPERTY AND EQUIPMENT, At cost
Furniture and fixtures 551,832 500,775
Computer equipment 5,152,228 7,408,920
Office equipment 325,429 320,106
Leasehold improvements 834,806 860,018
Transportation equipment 14,969 14,969
---------- ------------
6,879,264 9,104,788
Less accumulated depreciation 3,338,301 3,775,205
---------- ------------
3,540,963 5,329,583
---------- ------------
SOFTWARE DEVELOPMENT COSTS, Net of
amortization 1,397,375 1,945,169
---------- ------------
INTANGIBLE ASSETS, Net of amortization
Excess of cost over fair value of net assets
acquired 61,486 59,976
---------- ------------
OTHER ASSETS
32,819 6,626
---------- ------------
$8,160,968 $20,841,967
---------- ------------
---------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
CURRENT LIABILITIES
Note payable - line of credit $1,000
Current maturities of long-term debt $626,665 221,958
Accounts payable 491,217 794,638
Accrued expenses 200,639 299,240
Income Taxes Payable 32,960 99,250
--------- ---------
Total Current Liabilities 1,352,481 1,415,086
--------- ---------
LONG-TERM DEBT 889,046 128,650
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DEFERRED INCOME TAXES 320,452 318,500
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized
10,000,000 shares; issued and outstanding
3,400,000 shares December 31, 1997 and
4,633,068 shares Sept. 30, 1998 34,000 46,331
Additional paid-in capital 5,202,000 17,661,500
Retained earnings 362,989 1,271,901
--------- ---------
5,598,989 18,979,732
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$8,160,968 $20,841,967
--------- ---------
--------- ---------
</TABLE>
<PAGE>
ELECTRONIC PROCESSING, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) 170,863 908,913
Items not requiring (providing) cash:
Provision Deferred Income Taxes 297,300 (11,129)
Depreciation 584,216 838,356
Amortization of software development costs 245,666 312,287
Amortization of intangible assets 1,510 1,510
(Gain) loss on disposal of equipment (817) 15,912
Changes in:
Accounts receivable (201,169) (511,423)
Prepaid expenses and other assets 16,051 12,992
Accounts payable and accrued expenses (155,915) 402,022
Accrued income taxes 61,933 66,290
--------- ---------
Net cash provided by operating activities 1,019,638 2,035,730
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 2,800 1,200
Purchase of property and equipment (956,786) (1,654,667)
Expenditures for software development costs (380,341) (852,406)
--------- ---------
Net cash used in investing activities (1,334,327) (2,505,873)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) under line-of-credit
agreement (499,000)
Principal payments under capital lease obligation (681,188) (287,105)
Principal payments on long-term debt (1,045,761) (1,876,095)
Principal repayment subordinated note (400,000) 0
Dividends paid (250,000) 0
Stock issuance costs (834,968) 0
Proceeds stock issuance 5,600,000 12,471,831
--------- ---------
Net cash provided by financing activities 1,889,083 10,308,631
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,574,394 9,838,488
--------- ---------
CASH AND CASH EQUIVALENTS, BEGINNING PERIOD 4,882 1,835,233
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,579,276 $11,673,721
--------- ---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
AND
SEPTEMBER 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.
<PAGE>
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.
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
trustee's deposits with that institution. Revenues for Chapter 13 processing
and noticing are recorded monthly at the completion of the services based on
the trustee's 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 in February,
1997, 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 September 30, 1998 and the statements
of income, shareholders' equity and cash flows for the nine month periods
ended September 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.
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.
<PAGE>
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:
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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>
Nine Months Ended
---------------------
December 31, September 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 $696,079 $997,097
ADDITIONAL CASH INFORMATION
Interest paid 181,410 130,957 91,285
Income taxes paid 390,000 218,000 535,350
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
NINE-MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE-MONTHS ENDED
SEPTEMBER 30, 1997
Operating revenues increased 39.0%, or $2,376,768 to $8,473,235 in
the nine-month period ended September 30, 1998, compared to $6,096,467 in the
nine-month period ended September 30, 1997. Approximately 97.4% of the growth
in operating revenues were attributable to revenues generated by Chapter 7.
Chapter 7 sales increased 104.1%, or $2,314,493 to $4,538,574 in the
nine-month period ended September 30, 1998, compared to $2,224,081 in the
nine-month period ended September 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 1.6 %, or $62,275 to $3,934,661 in the nine- month period ended
September 30, 1998 compared to $3,872,386 in the nine-month period ended
September 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 32.8%, or
$955,297 to $3,869,863 in the nine-month period ended September 30, 1998,
compared to $2,914,566 in the nine-month period ended September 30, 1997.
Total cost of goods sold and direct costs as a percentage of operating
revenues decreased to 45.7 % in the nine-month period ended September 30,
1998 compared to 47.8% in the six-month period ended September 30, 1997,
primarily due to TCMS for Chapter 7, which has higher gross margins,
comprising a greater percentage of operating revenues in the nine-month
period ended September 30, 1998. Chapter 7 as a percentage of operating
revenues increased to 53.6% in the nine-month period ended September 30, 1998
from 36.5% in the nine-month period ended September 30, 1997. Processing
costs increased 31.9%, or $686,318, to $2,837,476 in the nine-month period
ended September 30, 1998, compared to $2,151,158 in the nine-month period
ended September 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 33.5% in the nine-month period
ended September 30, 1998 compared to 35.3% in the nine-month period ended
September 30, 1997. Depreciation and amortization increased 35.2%, or
$268,979, to $1,032,387 in the nine-month period ended September 30, 1998,
compared to $763,408 in the nine-month period ended September 30, 1998,
primarily due to the purchase of computer equipment for the Company's
Chapter 7 product.
Operating expenses increased 38.5%, or $905,426 to $3,257,771 in
the nine-month period ended September 30, 1998, compared to $2,352,345 in the
nine-month period ended September 30, 1997. Operating expenses as a
percentage of operating revenues was 38.4 % in the nine-month period ended
September 30, 1998 compared to 38.6 % in the nine-month period ended
September 30, 1997. The dollar increase in operating expenses was due to
increases in general and administrative infrastructure necessary to support a
higher level of revenues, including additional sales and marketing expenses
related to growth of the Company's Chapter 7 product. Sales and marketing
expenses include sales and marketing salaries, trade show costs, travel
associated with Chapter 7 installations, and advertising costs. Sales and
marketing expenses increased 41.4 %, or $310,744 to $1,060,701 in the
nine-month period ended September 30, 1998, compared to $749,957 in the
nine-month period ended September 30, 1997.
Other income (expense) which includes interest income and interest
expense, was $133,449 in the nine-month period ended September 30, 1998
compared to ($81,460) in the
<PAGE>
nine-month period ended September 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 1,000,000 shares of Common Stock in
a secondary public offering in June, 1998. Outstanding debt was paid off with
a portion of the net proceeds from the stock offerings resulting in a
reduction in interest expense.
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 nine-month period ended September 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 38.5% and 40.1% (pro-forma) for the nine-month periods ended
September 30, 1998 and September 30, 1997, respectively.
Net income increased 104.8%, or $465,150, to $908,913 in the
nine-month period ended September 30, 1998, compared to pro forma net income
of $443,763 in the nine-month period ended September 30, 1997. Net income
as a percentage of operating revenues increased to 10.7% in the nine-month
period ended September 30, 1998 from 7.3% in the nine month period ended
September 30, 1997.
QUARTER ENDED SEPTEMBER 30, 1998 COMPARED WITH QUARTER ENDED
SEPTEMBER 30, 1997
Operating revenues increased 40.0%, or $889,204, to $3,112,589 in
the three-month period ended September 30, 1998, compared to $2,223,385 in
the three-month period ended September 30, 1997. All of the growth in
operating revenues was attributable to Chapter 7. Chapter 7 revenues
increased 110.2 %, or $925,806, to $1,765,785 in the three-month period ended
September 30, 1998, compared to $839,979 in the three-month period ended
September 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 decreased 2.6 %, or $36,602 to $1,346,804 in
the three-month period ended September 30, 1998 compared to $1,383,406 in the
three-month period September 30, 1997. The decrease in Chapter 13 revenue 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 the Chapter 13 trustees by reducing
the monthly fee charged.
Total cost of goods sold and direct costs increased 33.3%, or
$350,560, to $1,404,847 in the three-month period ended September 30, 1998,
compared to $1,054,287 in the three-month period ended September 30, 1997.
Total cost of goods sold and direct costs as a percentage of operating
revenues decreased to 45.1 % in the three-month period ended September 30,
1998, compared to 47.4% in the three-month period ended September 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. Chapter 7 as a percentage of operating revenues
increased to 56.7% in the three-month period ended September 30, 1998, from
37.8% in the three-month period ended September 30, 1997. Processing costs
increased 32.1%, or $246,935, to $1,016,683 in the three-month period ended
September 30, 1998, compared to $769,748 in the three-month period ended
September 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 36.4%, or $103,625, to $388,164 in the three-month
period ended September 30, 1998, compared to $284,539 in the three-month
period ended September 30, 1997, primarily due to the purchase of computer
equipment for the Company's Chapter 7 product.
<PAGE>
Operating expenses increased 48.5%, or $406,448, to $1,243,830 in
the three-month period ended September 30, 1998, compared to $837,382 in the
three-month period ended September 30, 1997. Operating expenses as a
percentage of operating revenues was 40.0% in the three-month period ended
September 30, 1998 compared to 37.7% in the three-month period ended
September 30, 1997. The increase in operating expenses was due primarily to
increases in general and administrative infrastructure necessary to support a
higher level of revenues, including additional sales and marketing expenses.
Sales and marketing expenses increased 74.2%, or $182,771, to $429,173 in the
three-month period ended September 30, 1998, compared to $246,402 in the
three-month period ended September 30, 1997.
Other income (expense), which includes interest income and
interest expense, was $135,098 in the three-month period ended September 30,
1998, compared to ($9,131) in the three-month period ended September 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.
The Company's effective tax rates were 36.2% and 40.7% for the
three-month periods ended September 30, 1998 and September 30, 1997,
respectively.
Net income increased 99.9%, or $191,067, to $382,421 in the
three-month period ended September 30, 1998, compared to net income of
$191,354 in the three-month period ended September 30, 1997. Net income as a
percentage of operating revenues increased to 12.3% in the three-month period
ended September 30, 1998 from 8.6% in the three-month period ended
September 30, 1997.
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
21st century dates from 20th century dates. Any programs that have time
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in the computer shutting down or
performing incorrect computations. As a result, in less than two years,
computer systems and software products used by many companies, 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 the first quarter of this year, the
Company began shipping release 3.0 of TCMS, as part of the Company's
continual process of enhancing and upgrading its existing software products.
Although release 3.0 of TCMS was written to be Year 2000 compliant, the
impetus for its design was the Company's desire to further streamline Chapter
7 case administration for trustees. Similarly, in 1997 the Company began
shipping CASEPOWER, a new proprietary Windows95/NT-based client-server
software application for Chapter 13 trustees. Like TCMS, CASEPOWER was
written to be Year 2000 compliant. Also like TCMS, the impetus for
CASEPOWER'S design was the Company's commitment to the development and
marketing of new and competitive bankruptcy case management conventions. The
Company estimates that its national upgrade program for existing Chapter 13
customers, from its older AS/400 legacy product to CASEPOWER, is 90%
completed. All Chapter 13 trustees are scheduled to be upgraded by June 1999.
<PAGE>
The Company is also in the process of discussing with its
vendors and customers the potential impact the Year 2000 issue may have on
their systems. More specifically, the Company has reviewed and assessed the
probability of a material adverse effect from the Year 2000 issue on the
Company's exclusive national marketing arrangement with Bank of America.
Bank of America has reported that it undertook a process of software
inventory, analysis, modification, testing and verification to assess the
potential impact of the Year 2000 issue on its systems. Bank of America
expects to substantially complete the Year 2000 software conversion projects
for its systems by the end of this year. Bank of America's management
believes that its plans for dealing with the Year 2000 issue will result in
timely and adequate modifications of systems and technology. Over the next
13 months, the plans of other third parties to address the Year 2000 issue
will be monitored and any identified impact on the Company will be evaluated.
The Year 2000 issue also affects the Company's internal
systems, including information technology (IT) and non-IT systems. The
Company has assessed the readiness of its systems for handling the Year 2000.
Management currently believes that all material systems are either
compliant, or will be upgraded or replaced by the Year 2000. The costs
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity position is strong with total cash and cash
equivalents of $11,673,721 at September 30, 1998 and working capital of
$12,085,527.
The Company completed a public offering in June, 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 $1,019,638 for the
nine-months ended September 30, 1997 and $2,035,730 for the nine-months
ended September 30, 1998. The net cash provided by operating activities in
the nine-months ended September 30, 1997 consisted primarily of net income
before taxes of $530,096, depreciation and amortization of $831,392, offset
by an increase in accounts receivable of $201,169 and a decrease in accounts
payable and accrued expenses of $155,915. 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 nine-months ended
September 30, 1998 consisted primarily of net income before taxes of
$964,074, depreciation and amortization of $1,152,153, and an increase in
accounts payable and accrued expenses of $402,022 offset primarily by an
increase in accounts receivable of $511,423. 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 $1,652,865 and
$2,651,764 for the nine-month period ended September 30, 1997, and September
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 $380,341
and $852,406 for the nine-months ended September 30, 1997, and September 30,
1998,
<PAGE>
respectively. In April of 1998 the Company acquired a PC-based product for
Chapter 13 trustees and this purchase is reflected in the September 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.
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.
FORWARD-LOOKING STATEMENTS
This Form 10-QSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended, including
those relating to the possible or assumed future results of operations and
financial condition of the Company. Because those statements are subject to
a number of uncertainties and risks, actual results may differ materially
from those expressed or implied by the forward-looking statements. Factors
that could cause actual results to differ from those expressed or implied
include, but are not limited to, any material changes in the total asset
proceeds on deposit by Chapter 7 trustees, changes in the number of
bankruptcy filings each year, the Company's reliance on its marketing
arrangement for Chapter 7 revenue, the Company's ability to achieve or
maintain technological advantages, and any material adverse effect of the
Year 2000 issue. The Company undertakes no obligation to update any
forward-looking statements contained herein to reflect future events or
developments.
<PAGE>
ELECTRONIC PROCESSING, INC.
SEPTEMBER 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
None
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:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit Page
- -------- ----------------------- ---------
<S> <C> <C>
27 Financial Data Schedule 13
</TABLE>
(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: November 12, 1998 /s/ Tom W. Olofson
------------------------
Tom W. Olofson
Chairman of the Board
Chief Executive Officer
(Principal Executive Officer)
Director
Date: November 12, 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 nine months ended
September 30, 1998 and Balance Sheet as of September 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 NINE MONTHS ENDED SEPTEMBER 30,
1998 AND BALANCE SHEET AS OF SEPTEMBER 30, 1998
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 11,673,721
<SECURITIES> 0
<RECEIVABLES> 1,630,847
<ALLOWANCES> 5,000
<INVENTORY> 0
<CURRENT-ASSETS> 13,500,613
<PP&E> 9,104,788
<DEPRECIATION> 3,775,205
<TOTAL-ASSETS> 20,841,967
<CURRENT-LIABILITIES> 1,415,086
<BONDS> 0
0
0
<COMMON> 46,331
<OTHER-SE> 18,933,401
<TOTAL-LIABILITY-AND-EQUITY> 20,841,967
<SALES> 8,473,235
<TOTAL-REVENUES> 8,713,036
<CGS> 3,869,863
<TOTAL-COSTS> 3,869,863
<OTHER-EXPENSES> 3,257,771
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 91,285
<INCOME-PRETAX> 1,479,050
<INCOME-TAX> 570,137
<INCOME-CONTINUING> 908,913
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 908,913
<EPS-PRIMARY> .23
<EPS-DILUTED> .22
</TABLE>
