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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-22081
ELECTRONIC PROCESSING, INC.
(Name of small business issuer in its charter)
Missouri 48-1056429
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
501 Kansas Avenue, Kansas City, Kansas 66105-1300
(Address of Principal Executive Office)
913-321-6392
(Issuer's Telephone Number)
Securities Registered Under Section 12(b) of the Exchange Act:
None
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, $.01 Par Value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
-- --
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
Revenues for the year ended December 31, 1999, were $14,820,400.
The aggregate market value of the Common Stock held by non-affiliates (based
upon the last reported price on the bid-ask average on the Nasdaq National
Market) on March 24, 2000, was approximately $43,471,000.
Documents incorporated by reference: The information required by Part III of
Form 10-KSB is incorporated herein by reference to the registrant's definitive
Proxy Statement relating to its 2000 Annual Meeting of Shareholders, which will
be filed with the Commission within 120 days after the end of the registrant's
fiscal year.
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ELECTRONIC PROCESSING, INC.
ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
PART I
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ITEM 1. DESCRIPTION OF BUSINESS.................................................................. 4
ITEM 2. DESCRIPTION OF PROPERTIES................................................................ 11
ITEM 3. LEGAL PROCEEDINGS........................................................................ 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................... 11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...................................................................... 12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS................................................................ 12
ITEM 7. FINANCIAL STATEMENTS..................................................................... 16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE................................................................. 35
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT................................................... 36
ITEM 10. EXECUTIVE COMPENSATION................................................................... 36
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................... 36
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................... 36
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K......................................................... 36
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
In this report, Electronic Processing, Inc. ("EPI" or the "Company")
makes statements that plan for or anticipate the future. These forward-looking
statements include statements about EPI's future business plans and strategies,
and other statements that are not historical in nature. These forward-looking
statements are based on the Company's current expectations. Many of these
statements are found in the "Description of Business" and "Management's
Discussion and Analysis of Financial Conditions and Results of Operations"
sections of this report.
Forward-looking statements may be identified by words or phrases such
as "believe," "expect," "anticipate," "should," "planned," "may," "estimated"
and "potential." Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended, provide a "safe
harbor" for forward-looking statements. In order to comply with the terms of the
safe harbor, and because forward-looking statements involve future risks and
uncertainties, listed below are a variety of factors that could cause actual
results and experience to differ materially from the anticipated results or
other expectations expressed in the Company's forward-looking statements. These
factors include, but are not limited to, (1) any material changes in the total
number of Chapter 7 Trustees or Chapter 7 deposits served by the Company, (2)
any material changes in the number of Chapter 13 Trustees or material changes in
the number of cases processed by Chapter 13 Trustees of the Company, (3) changes
in the number of bankruptcy filings each year, (4) changes in bankruptcy
legislation, (5) the Company's reliance on its marketing arrangement for Chapter
7 revenue, (6) the Company's ability to achieve or maintain technological
advantages, (7) uncertainties related to the recently completed PHiTECH
acquisition and the future operations and planned expansions of that business by
the Company, and (8) other risks detailed from time to time in the Company's
filings with the Securities and Exchange Commission, including this Annual
Report on Form 10-KSB for this year ended December 31, 1999. In addition, there
may be other factors not included in the Company's Securities and Exchange
Commission filings that may cause actual results to differ materially from any
forward-looking statements. The Company undertakes no obligation to update any
forward-looking statements contained herein to reflect future events or
developments.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Electronic Processing, Inc. ("EPI" or the "Company") serves a national
client base with specialty products that facilitate financial and administrative
aspects of bankruptcy management, including legal noticing, claims management,
funds distribution and government reporting. The Company develops, markets,
licenses and supports internally developed and proprietary software products
primarily to trustees under Chapter 7 and Chapter 13 of the federal bankruptcy
system, as well as to other users of the federal bankruptcy system, including
trustees in Chapter 11 and Chapter 12. EPI assimilates software development,
network operations, value-added services and comprehensive post-installation
support into an integrated environment that offers clients a high level of
coordinated support.
Today, the Company's business is centered around three primary software
products: TCMS (Trustee Case Management System) and DCI Ch/7 for Chapter 7
trustees and CasePower for Chapter 13 trustees. All products are compatible with
current computer technologies and offer an array of bankruptcy-specific
functions that are useful in the daily operations of a bankruptcy trustee's
office.
RECENT DEVELOPMENTS
DCI ACQUISTION. On November 29, 1999, the Company acquired certain
assets from DCI Chapter 7 Solutions, Inc. ("DCI"), which is a wholly-owned
subsidiary of Union Bank of California, N.A. ("UBOC"). Simultaneously with that
asset purchase, the Company acquired certain computer equipment owned by UBOC
and used by customers of DCI in connection with the DCI business. The aggregate
purchase price paid by the Company for the assets acquired from DCI and UBOC was
approximately $10,057,000, which was paid by the Company from its existing cash
and investments.
DCI provided bankruptcy administration software to Chapter 7 bankruptcy
trustees and was a primary competitor of the Company in the Chapter 7 bankruptcy
trustee software business. As of November 29, 1999, DCI had approximately 240
Chapter 7 trustee clients, with an aggregate deposit base of approximately $350
million. While DCI had its primary banking relationship with UBOC, it also
maintained Chapter 7 trustee deposits with various other national and regional
banks. The Company believes that the total Chapter 7 trustee deposits for DCI
customers held in bank accounts other than UBOC accounts was approximately $110
million as of November 29, 1999. Since the completion of the DCI acquisition,
the Company and Bank of America have been working to transfer the Chapter 7
Trustee deposits from UBOC to Bank of America.
PHITECH ACQUISITION. On March 17, 2000, the Company completed the
acquisition of the assets of PHiTECH, Inc. ("PHiTECH") of San Francisco
California for approximately $6,250,000 in cash. PHiTECH is an innovative
developer of software tools for business-to-business electronic commerce and
enterprise-wide open file delivery.
PHiTECH's current DATA EXPRESS product leverages Compaq Nonstop-TM-
technology to help corporate customers secure, format and automatically route
data in a fault tolerant environment over the Internet and private networks
using a wide variety of web-based and legacy communications protocols. Today,
several of the largest U.S. banking companies have already adopted PHiTECH's
technologies for e-business and financial services. The DATA EXPRESS product
family includes a core data transmission/receiving engine, a real-time
communications management console, a powerful data reformatting tool and an
advanced suite of security and scheduling functions required for
enterprise-class implementations. PHiTECH provides value-added services
including systems integration, consulting and end-user education. In 1999,
PHiTECH had revenues (unaudited) from DATA EXPRESS licensing, maintenance and
other services of $2.1 million, an approximate 60% increase compared to 1998.
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The PHiTECH subsidiary is expected to release JDX - a new,
next-generation Java-TM--based product - for delivery in late 2000. jDX will be
offered both as a library of reusable software components that can be integrated
into third-party systems and as a finished application intended to complement
DATA EXPRESS, which is a recognized market leader in open file delivery
technology. jDX, characterized by platform independence, high scalability and
the market-leading reputation of its predecessor, positions EPI to be a major
provider of software-based communications infrastructure for B2B e-commerce. The
Company will provide additional capital to finalize the development and rollout
of JDX.
In conjunction with the acquisition of PHiTECH, Inc., the Company
announced that it would change its name to EPIQ Systems, Inc., subject to
shareholder approval.
INDUSTRY OVERVIEW
Title 11 of the U.S. Code establishes federal law governing
bankruptcies. The participants in a bankruptcy proceeding include the debtor,
the creditors, and a trustee, as well as the presiding judge. The trustee acts
as an intermediary between the debtor and the creditors and is responsible for
administering the bankruptcy case. The end user clients of the Company's
products are trustees, not individual debtors or creditors.
The United States Trustee's office, a division of the Justice
Department, oversees bankruptcy trustees and establishes administrative rules
concerning trustees' activities. Local bankruptcy judges also direct trustees'
activities and have a high level of authority in a bankruptcy case. The
trustees' activities are guided by the Bankruptcy Code, the Federal Rules of
Bankruptcy Procedure, the trustee handbooks developed by the United States
Trustee, and local rules established by the courts.
There are five chapters of the Bankruptcy Code that define various
configurations of bankruptcy cases:
Chapter 7 - Liquidation
Chapter 9 - Reorganization of Municipality
Chapter 11 - Reorganization of Corporation
Chapter 12 - Reorganization of Family Farm
Chapter 13 - Reorganization of Individual Debt
The Company believes that Chapter 7 and Chapter 13 are the most
attractive sectors in the bankruptcy industry to which it can provide service
and has developed a strategic plan accordingly. In the aggregate, Chapters 9,
11, and 12 represent only approximately 1% of overall national bankruptcy
filings.
Chapter 7 and Chapter 13 bankruptcies serve different purposes and
require different services and information. Chapter 7 of the Bankruptcy Code
provides for liquidation of the assets of the debtor (which can be an
individual, partnership or corporation) and for the disbursement of the
resulting cash proceeds to the creditors. Chapter 13 provides for adjustments of
debt whereby the debtor makes regular payments to the trustee, who in turn
disburses the collected funds to the creditors. Assets are not liquidated in
Chapter 13.
Bankruptcy trustees in Chapters 7 and 13 are appointed by the United
States Trustee. A United States Trustee is appointed in most federal court
districts and generally has responsibility for overseeing the integrity of the
bankruptcy system. Bankruptcy trustees in Chapter 7 and Chapter 13 cases are
charged with managing the administrative aspects of liquidation or
reorganization bankruptcies. The trustee's primary responsibilities include
collecting funds from the debtor (Chapter 13) or liquidating the debtor's assets
(Chapter 7), distributing the collected funds to creditors pursuant to the
orders of the bankruptcy court, and preparing regular status reports, including
financial updates, for the United States Trustee and for the bankruptcy court.
Trustees typically are attorneys or certified public accountants and manage many
different
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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 36 and 60
months. Upon conclusion of the case, the trustee must submit a final report to
the bankruptcy court outlining the financial history of the case.
MARKET CONDITIONS
The Company estimates that there is over $3.0 billion in cash proceeds
being administered in Chapter 7 by approximately 1,700 trustees. The Company
estimates there are in excess of 700,000 cases pending in Chapter 13 managed by
approximately 180 standing Chapter 13 trustees.
MARKET CONDITIONS IN CHAPTER 7
The Company believes that there are favorable market conditions for its
Chapter 7 product and services. The Company has successfully entered key
strategic markets with successive releases of its Windows-based TCMS software.
During the second quarter ended June 30, 1999 the Company completed the TCMS 4.0
upgrade which incorporated substantial new features and technologies. In August
1999 the Company announced a major new version of TCMS, called TCMS 2000. TCMS
2000 incorporates important new case management functions that management
believes add significant value to a trustee's bankruptcy practice.
MARKET CONDITIONS IN CHAPTER 13
For the twelve-month period ended September 30, 1999, there were
385,262 Chapter 13 filings an approximate decrease of 4% from September 30,
1998, which was at an all-time record number. The Company believes that market
conditions are favorable for growth in the Chapter 13 sector because of
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the availability of the CasePower product for Windows and Oracle with its
ability to capture a larger share of the market.
PRODUCTS
The Company's products include TCMS (Trustee Case Management System)
for Chapter 7, DCI Ch/7 and CasePower for Chapter 13. The TCMS product and DCI
Chapter can also track Chapter 11 cases, and the CasePower product 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: TCMS AND DCI
The Company's Chapter 7 products assist trustees to manage liquidation
bankruptcies, whereby the trustee liquidates the debtor's assets and disburses
the resulting funds to creditors.
The Company's principal Chapter 7 product is Trustee Case Management
System (TCMS). As part of the DCI acquisition, the Company acquired the DCI
Chapter 7 software, against which TCMS had previously competed in various
markets. DCI Ch/7 is a Windows based package of proprietary software, computer
equipment and support services offered to Chapter 7 trustees. The Company
intends to maintain and enhance the DCI Chapter 7 software to meet the needs
of its customers and the marketplace.
TCMS is a Windows based package of proprietary software, computer
equipment and support services offered to Chapter 7 trustees through a national
marketing arrangement with Bank of America. 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, along with conversions, upgrade fees, and assorted other services. See
"Pricing - Chapter 7 Pricing."
SOFTWARE FEATURES
The TCMS software streamlines administrative tasks associated with
Chapter 7 liquidation bankruptcies. Most trustees use the system on a daily
basis for record keeping and to meet reporting requirements.
ASSET MANAGEMENT. As assets are identified, the trustee enters them
into TCMS through a convenient spreadsheet-like interface. The system
automatically tracks the remaining values of assets as they are liquidated and
provides a summary overview of properties within each case.
BANKING. An online banking module developed by the Company allows the
trustee to open and close bank accounts electronically as well as to enter funds
transfers. Simple to sophisticated financial transactions can be recorded on an
online computer screen that resembles a personal check register. The system
prepares MICR encoded laser checks and deposit slips on demand.
CLAIMS ADMINISTRATION. TCMS categorizes each claim by class and desired
priority level for distribution. Distribution checks are calculated and printed
automatically, and all financial ledgers are updated. An extensive library of
financial reports provides detailed information for each case. A proprietary
feature allows information to be downloaded from the court into the trustee's
database.
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CALENDARING AND DOCKETING. Key events in asset cases are posted
automatically to a central trustee's calendar that can be printed regularly. The
software automatically schedules tasks required to close cases in a timely
fashion.
CUSTOMIZED DISTRICT REPORTS. EPI develops custom tailored final reports
and final accounts for each district where TCMS is marketed. Preparing these
documents has traditionally been one of the most time consuming tasks in Chapter
7 case administration. With TCMS, trustees can quickly generate a fully
formatted, polished report with all figures calculated and filled in.
180 DAY REPORTS. The United States Trustee requires the trustee to
submit detailed status reports for each case every six months in a very specific
reporting format. TCMS prints these reports in compliance with the most recent
regulations.
CHAPTER 13 PRODUCT: CASEPOWER
The Company's Chapter 13 product assists trustees in managing
individual reorganization bankruptcies, whereby the debtor makes payments to the
trustee, who in turn disburses the funds to creditors. The Windows based
CasePower product assists 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 may out-source various
activities to EPI to facilitate the preparation of large output jobs.
Processing and report printing functions can be divided between the
client-site and EPI's data center in Kansas City. Both products are installed in
a multi-user configuration that allows each member of the trustee's office staff
to access the database and enter transactions throughout the business day. The
trustee's live database resides in his or her office. The size of a Chapter 13
trustee's office staff varies proportionally with the caseload managed.
The trustee's office staff enters financial information into CasePower,
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
software prepares distribution checks for creditors to whom funds are due. EPI
can print the checks and reports at its data center in Kansas City as a
value-added service for the trustee.
In certain parts of the country, the Chapter 13 trustee is responsible
for noticing parties-in-interest of key developments in each bankruptcy case,
including the setting of the mandatory first meeting of creditors. The Company's
products automate this meeting notice for the trustees. Each evening, EPI's data
center receives a modem transmission of daily noticing activity from the
client-site. EPI prints and reviews the notices, inserts them into envelopes and
mails them the next day. Trustees are billed directly for noticing services
based upon the number of documents generated.
Some bankruptcy courts require additional information, such as a
photocopy of the plan of reorganization, to be included with the notice. EPI
offers such document reproduction and assembly services to trustees at an
additional charge.
SOFTWARE FEATURES
CasePower 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 system, the EPI data center
in Kansas City can extract relevant information and prepare mandatory first
meeting of creditors notices for each case. Subsequent
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forms, such as reset notices, correcting notices, motions to allow claims,
motions to allow additional claims and motions to dismiss, can also be selected
and prepared through the system.
CASE MANAGEMENT. The products store and monitor key dates, names,
addresses and text notes for every case in the system. A variety of retrieval
mechanisms enable users to view case information from various perspectives.
FINANCIAL HISTORY. The office staff enters cash receipts and financial
adjustments in the system as part of the daily bank deposit. The software
updates the balances in each case and summarizes the day's financial
transactions. Each month, the software prepares a single-page summary of the
receipts and disbursements in every case.
MONTHLY DISTRIBUTION. The software's advanced distribution logic
interprets payment orders from the bankruptcy court. Several different payment
methodologies (e.g., pro rata, fixed monthly payment, per capita, etc.) may be
spread over 99 separate distribution priority levels. Individual checks or
voucher checks can be printed for each creditor. Claims having objections filed
on them can continue to accrue distributions without releasing funds until the
objection has been settled.
INQUIRY. Chapter 13 offices receive a multitude of outside inquiries
each day from creditors' and debtors' attorneys. The software provides
instantaneous inquiry access to the financial status of each debtor and claim in
the system. An optional creditor dial-in system gives outside parties inquiry
only access to the system through a modem connection.
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. Since that
time, the bank has been merged and the name of the bank changed to "Bank of
America." In this marketing arrangement, EPI and Bank of America promote
products and services to trustees in all states. Because Chapter 7 trustees are
discouraged from incurring direct costs for computer services, it is essential
for EPI to align with a bank or series of banks to earn revenues in Chapter 7.
The agreement with Bank of America does not have an expiration date. The Company
believes its representatives have developed positive, close working
relationships with their counterparts at Bank of America, and the Company
believes that it will maintain this relationship. However, were the relationship
with Bank of America 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. Bank of
America 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 Bank of
America to build its deposit base in this market.
The Company continues to support a number of trustee relationships
through other banks, including banking relationships acquired as part of the DCI
acquisition.
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 Bank of America to provide computer services to Chapter 7
trustees without direct charges to the Chapter 7 trustee under an arrangement
whereby (1) EPI
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licenses its proprietary software to the trustee and furnishes hardware,
conversion services, training and customer support, all at no cost to the
trustee, (2) the trustee agrees to deposit with Bank of America the cash
proceeds from all asset liquidations; and (3) the Company collects from Bank
of America a fee each month based upon the total deposits in the Chapter 7
bankruptcy portfolio. The Company also collects from Bank of America
conversion fees, upgrade fees and fees for electronic banking and technology
services. Electronic banking and technology services consist primarily of
special software development and consulting performed for Bank of America and
Chapter 7 trustees.
CHAPTER 13 PRICING
The Company typically receives an initial licensing fee and conversion
charge from the Chapter 13 trustee. It also receives monthly fees from each
Chapter 13 trustee client based on the total number of cases in that trustee's
database and the number of noticing documents generated. Variables affecting
pricing for EPI Chapter 13 clients include the number of cases in the database,
the type of equipment installed, the volume of noticing to be outsourced 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 Bank of America.
Trustees make their own decisions for software and service providers. The
Company believes that the most important factors in attracting business are the
quality of the software products and the quality of the post-installation
support. The Company estimates that the typical cycle for Chapter 7 business
lasts between two and four months.
The Company's Chapter 7 and Chapter 13 service agreements with trustees
typically include provisions for (i) descriptions of the products and services
included in the agreement, (ii) a limited warranty and indemnification clauses,
(iii) the trustee's agreement to deposit funds with Bank of America (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 in excess of 700,000
pending Chapter 13 cases being managed by approximately 180 Chapter 13 trustees,
and that there is over $3 billion on deposit by approximately 1,700 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 the Company. For
its Chapter 7 and 13 products, the Company competes with the Chase Manhattan
Bank, as well as other regional competitors in selected markets. Although the
Company believes that the requisite detailed knowledge of the bankruptcy system
makes it difficult for new competitors to enter the market successfully, 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 customers
who are currently using a competitor's software product.
PROPRIETARY RIGHTS
Historically, the Company has not protected its intellectual property
rights through patents or formal
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copyright registration. It has relied on trade secret, copyright, and trademark
law and non-disclosure agreements to establish and protect its proprietary
rights in its products. The Company believes, however, that its financial
performance will depend more upon the innovation, technological expertise and
marketing abilities of its associates than upon such protection.
There is no assurance that the Company will be able to protect its
trade secrets or that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets. There is no assurance that intellectual property
laws will protect the Company's intellectual property rights. In addition,
litigation may be necessary to enforce the Company's intellectual property
rights, to protect the Company's trade secrets, to determine the validity and
scope of the proprietary rights of others or to defend against claims of
infringements. Such litigation could result in substantial costs and diversion
of management and other resources and could have a material adverse effect on
the Company's business, financial condition and results of operation.
EMPLOYEES
As of the date of this report, the Company employs approximately 115
full-time employees (including the former PHiTECH employees) and believes its
relationships with its employees are good.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's corporate offices are located in a 30,000-square-foot
facility leased in Kansas City, Kansas. In connection with corporate growth
and the development of new products, this facility has been recently
renovated with additional office space. The Company believes that this
facility will be adequate for use for at least the next full year. The leased
facility is partially owned by a related party. See Item 12 "Certain
Relationships and Related Transactions."
As part of the DCI acquisition, the Company assumed the lease on an
approximately 6,580 square foot office in Memphis, Tennessee. The Company
intends to allow that lease to expire at the end of its current term in 2000. As
part of the PHiTECH acquisition, the Company assumed the sublease on
approximately 4,192 square feet of office space. The Company intends to maintain
the PHiTECH offices in San Francisco; the sublease terms are through December 1,
2002, with an option to renew for an additional five-year term.
ITEM 3. LEGAL PROCEEDINGS
The Company presently is not a party to any material litigation,
although it occasionally becomes involved in litigation arising in the normal
course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted in the fourth quarter of 1999 to a vote of
security holders.
11
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
The Company's Common Stock is traded on the Nasdaq National
Market-TM- under the symbol "EPIQ." Trading in the Common Stock commenced on
February 4, 1997, the date on which the Company closed the initial public
offering of its Common Stock. The following table shows the reported high and
low sales prices for the common stock for the calendar quarters of 1999 and 1998
as reported by Nasdaq:
<TABLE>
<CAPTION>
1999 1998
---- ----
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $12 7/8 $7 5/8 $20 $9 1/4
Second Quarter $10 5/8 $6 5/8 $15 3/8 $11
Third Quarter $11 1/8 $8 5/8 $15 1/2 $8 1/2
Fourth Quarter $15 3/8 $9 $11 3/4 $8 1/16
</TABLE>
HOLDERS
As of March 24, 2000, there were approximately 2,100 record
and beneficial owners of its Common Stock.
DIVIDENDS
The Company has not paid any dividends on its Common Stock since its
initial public offering in February 1997, other than one final dividend paid for
periods prior to the IPO when the Company was taxed as an S corporation under
the Internal Revenue Code. The Company currently intends to retain any earnings
for use in the operation and expansion of its business. The payment of future
dividends is within the discretion of the Board of Directors and will depend
upon the Company's future earnings, if any, its capital requirements, financial
condition and other relevant factors.
ITEM 6: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Operating revenues increased 28.4%, or $3,274,127 to $14,820,400 in
1999, compared to $11,546,273 in 1998. Approximately 92.2% of the growth in
operating revenues was attributable to revenues generated by Chapter 7.
Chapter 7 sales increased 47.5%, or $3,018,599 to $9,374,028 in 1999,
compared to $6,355,429 in 1998. The Company has an exclusive national
marketing arrangement with Bank of America. The bank pays EPI a monthly fee
based on the total dollar amount of Chapter 7 deposits at Bank
of America, fees for each new account conversion, fees for account upgrades,
fees for electronic banking and technology services. 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 and for electronic
banking and technology services provided. Electronic banking and technology
services accounted for approximately 67% of the increase in 1999 Chapter 7
revenues. Chapter 13 revenue increased 4.9%, or $255,519 to $5,446,372 in
1999 compared to $5,190,853 in 1998. The relatively lower growth in Chapter
13 was primarily due to servicing current Chapter 13 customers who had
converted to the Company's CasePower system and the Company's emphasis on its
Chapter 7 business and acquisitions.
12
<PAGE>
Total cost of goods sold and direct costs increased 30.7%, or
$1,617,668 to $6,894,503 in 1999, compared to $5,276,835 in 1998. Total cost of
goods sold and direct costs as a percentage of operating revenues increased to
46.5% in 1999 compared to 45.7% in 1998. Processing costs increased 23.9% or
$913,353 to $4,737,428 in 1999, compared to $3,824,075 in 1998. The increase in
1999 resulted principally from an increase in customer service expense to
support the growth in Chapter 7 sales and expenses associated with providing
technology services. Processing costs as a percentage of operating revenues
decreased to 32.0% in 1999 compared to 33.1% in 1998. Depreciation and
amortization increased 48.5%, or $704,315 to $2,157,075 in 1999, compared to
$1,452,760 in 1998, primarily due to the purchase of computer equipment for the
Company's Chapter 7 product.
Operating expenses increased 35.3%, or $1,548,920 to $5,935,001 in
1999, compared to $4,386,081 in 1998. Operating expenses as a percentage of
operating revenues was 40.0% in 1999 compared to 38.0% in 1998. 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, and acquisition related expenses and the
loss on disposal of computer equipment. Sales and marketing expenses include
sales and marketing salaries, trade shows costs, travel associated with
Chapter 7 installations, and advertising costs. Sales and marketing expenses
increased 32.4%, or $260,514 to $1,065,639 in 1999, compared to $805,125 in
1998. Included in operating expenses in 1999 were acquisition related
expenses of $315,197, which represented 20.3% of the operating expense
increase in 1999. In connection with the DCI acquisition, the Company
incurred acquisition related expenses, primarily attorneys, accountants, and
consulting fees of $113,955, travel and meeting related expenses of $122,398
and miscellaneous expense of $78,844. Also included in operating expenses was
a loss of $230,069 from the write-off of computer equipment, which
represented 14.9% of the operating expense increase. The Company retired
existing assets with a net book value of $230,069 after the DCI acquisition.
The Company acquired a significant amount of computer equipment with the DCI
acquisition; with the assimilation of DCI it was necessary to standardize
certain equipment for efficiency purposes going forward, and the Company,
therefore, determined that certain older existing equipment should be retired.
Other income (expense), which includes interest income and interest
expense, was $449,094 in 1999 compared to $266,500 in 1998. The increase
resulted from the investment of the net proceeds from the sale of 1,140,500
shares of Common Stock in a secondary public offering completed in June 1998.
Outstanding debt was paid off with a portion of the net proceeds from the 1998
stock offering resulting in a reduction in interest expense.
The provision for incomes taxes was $944,000 in 1999 and $829,239 in
1998. The provision for taxes as a percentage of pretax income was 38.7% in 1999
and 38.6% in 1998. The Company expects its effective tax rate in 2000 to be
slightly higher than prior years.
Net income increased 13.3%, or $175,372, to $1,495,990 in 1999,
compared to net income of $1,320,618 in 1998. Net income as a percentage of
operating revenues decreased to 10.1% in 1999 compared to 11.4% in 1998. The
decrease in the percentage to revenue was due to the acquisition-related
charges and the write-off of the computer equipment.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments
decreased to $5,492,848 as of
13
<PAGE>
December 31, 1999, from $11,520,256 as of December 31, 1998. The decrease in
cash was attributable to the DCI acquisition in November 1999, and the
purchase of computer equipment and software. The decrease in cash was
partially offset by cash flows attributable to operations and prepayment by
Bank of America for technology integration services and other Chapter 7
revenues.
The Company completed a public offering in June 1998 of 1,140,500
shares of Common Stock at $12.875 a share to raise $12,727,980 in net proceeds.
The Company paid $1,724,089 of debt with a portion of these net proceeds. The
Company used some of the proceeds on November 29, 1999, to purchase the assets
of DCI and certain computer equipment owned by Union Bank of California and used
by customers of DCI in connection with the DCI business.
Net cash provided by operating activities was $7,300,757 during 1999
and $2,937,735 during 1998. The net cash provided by operating activities in
1999 consisted primarily of net income before deferred taxes and loss on
disposal of assets of $1,816,243, depreciation and amortization of
$2,381,732, deferred revenue of $3,244,024 and an increase of $175,434 in
accounts payable and accrued expenses, a decrease in prepaid expenses and
other assets of $126,362 offset by an increase in accounts receivable of
$323,303 and an increase in refundable taxes payables of $119,735. The
increase in depreciation relates primarily to the purchase of computer
equipment for the installations of the Company's Chapter 7 product and the
increase in amortization relates to software capitalization and goodwill
amortization. The outstanding accounts receivable balance has increased
primarily due to the growth in revenue. The deferred revenue is a result of a
payment received in advance from Bank of America for technology integration
services and other Chapter 7 revenues.
The net cash provided by operating activities in 1998 consisted
primarily of net income before deferred taxes of $1,509,129 depreciation and
amortization of $1,606,854, and an increase of $385,329 in accounts payable and
accrued expenses, offset by an increase in accounts receivable of $471,879 and
an increase in prepaid expenses and other assets of $107,272. 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 $2,796,929 and
$3,421,690 for 1999 and 1998, respectively, which related principally to the
installation of computer equipment for the Company's Chapter 7 product.
The Company incurred expenditures for software development costs
totaling $660,969 and $1,041,960 for 1999 and 1998, respectively. In addition,
on November 29, 1999, with the purchase of DCI, the Company acquired a PC-based
software product for Chapter 7 trustees, which purchase is not reflected in the
1999 software expenditures. In April 1998 the Company acquired a PC-based
product for Chapter 13 trustees. This purchase is reflected in the 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. The Company anticipates
future software development expenditures (including the anticipated needs of
PHiTECH) will be at or above the spending levels of prior years.
On March 17, 2000, the Company completed the acquisition of PHiTECH
Inc., of San Francisco, California, a provider of software and servicing for
transaction processing. The aggregate purchase price paid by the Company for the
assets acquired from PHiTECH Inc.(prior to direct acquisition costs) was
$6,250,000, $1,000,000 of which is deferred. The Company paid the purchase price
from available cash and
14
<PAGE>
$3,500,000 of borrowings under the Company's previously unused line of credit.
The maximum borrowing under the line of credit is $3,500,000, all of which is
currently outstanding. No amounts were borrowed under this line of credit in
1999. The line of credit expires on October 1, 2000, unless renewed, and
principal on the line is due upon demand, and if no demand is made at maturity
of the line.
The Company also maintains a $2,500,000 equipment line of credit to
finance certain computer equipment purchases, which also matures on October 1,
2000. There have been no borrowings under this equipment line of credit.
The Company believes that funds generated from operations plus amounts
available under the Company's lines of credit, will be sufficient to finance the
Company's currently anticipated working capital and planned property and
equipment expenditures for the foreseeable future.
ITEM 7. FINANCIAL STATEMENTS
Following are the report of Baird, Kurtz & Dobson, Kansas City,
Missouri, independent auditors for the Company, and the financial statements of
the Company as of and for the 12-month periods ended December 31, 1999 and 1998.
15
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Electronic Processing, Inc.
Kansas City, Kansas
We have audited the accompanying balance sheets of ELECTRONIC PROCESSING,
INC. as of December 31, 1999 and 1998, and the related statements of income,
changes in stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ELECTRONIC PROCESSING, INC.
as of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ BAIRD, KURTZ & DOBSON
Kansas City, Missouri
February 25, 2000
16
<PAGE>
ELECTRONIC PROCESSING, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,642,848 $ 820,256
Short-term investments 3,850,000 10,700,000
Accounts receivable, trade, less allowance for
doubtful accounts of $5,000 1,954,806 1,586,303
Prepaid expenses and other 167,990 294,024
Deferred income taxes 85,700 39,345
Refundable income taxes 107,063
-------------- --------------
Total Current Assets 7,808,407 13,439,928
-------------- --------------
PROPERTY AND EQUIPMENT, At cost
Furniture and fixtures 667,905 526,862
Computer equipment 7,753,615 7,254,072
Office equipment 269,961 329,775
Leasehold improvements 941,393 864,184
Transportation equipment 14,969 14,969
-------------- --------------
9,647,843 8,989,862
Less accumulated depreciation 3,338,323 3,233,510
-------------- --------------
6,309,520 5,756,352
-------------- --------------
SOFTWARE DEVELOPMENT COSTS, Net of
Amortization 2,252,917 2,016,946
-------------- --------------
OTHER ASSETS
Excess of cost over fair value of net assets acquired,
at amortized cost 9,599,893 59,473
Agreement not to compete, at amortized cost 245,833
Other 5,584 5,912
-------------- --------------
9,851,310 65,385
-------------- --------------
$ 26,222,154 $ 21,278,611
============== ==============
</TABLE>
See Notes to Financial Statements
17
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
-------------- ----------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of capital lease obligations $ 42,406 $ 159,151
Accounts payable 762,958 626,577
Accrued expenses 588,189 450,608
Income taxes payable 12,672
Deferred revenue 2,067,566
-------------- --------------
Total Current Liabilities 3,461,119 1,249,008
-------------- --------------
CAPITAL LEASE OBLIGATIONS 66,894 109,300
-------------- --------------
DEFERRED REVENUE 1,176,458
-------------- --------------
DEFERRED INCOME TAXES 592,700 529,485
-------------- --------------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding - 4,642,068 and 4,633,268
shares at 1999 and 1998, respectively 46,421 46,333
Additional paid-in capital 17,698,965 17,660,878
Retained earnings 3,179,597 1,683,607
-------------- --------------
20,924,983 19,390,818
-------------- --------------
$ 26,222,154 $ 21,278,611
============== ==============
</TABLE>
See Notes to Financial Statements
18
<PAGE>
ELECTRONIC PROCESSING, INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- ---------
<S> <C> <C>
OPERATING REVENUES $ 14,820,400 $ 11,546,273
------------- -------------
COST OF GOODS SOLD AND DIRECT COSTS
Processing costs 4,737,428 3,824,075
Depreciation and amortization 2,157,075 1,452,760
------------- -------------
6,894,503 5,276,835
GROSS PROFIT 7,925,897 6,269,438
------------- -------------
OPERATING EXPENSES
General and administrative 5,165,078 4,231,987
Depreciation and amortization 224,657 154,094
Acquisition - related expenses 315,197
Loss on disposal of computer equipment 230,069
------------- --------------
5,935,001 4,386,081
-------------- --------------
INCOME FROM OPERATIONS 1,990,896 1,883,357
-------------- --------------
OTHER INCOME (EXPENSE)
Interest income 537,162 392,114
Interest expense (17,469) (89,755)
Other (70,599) (35,859)
-------------- --------------
449,094 266,500
------------- -------------
INCOME BEFORE INCOME TAXES 2,439,990 2,149,857
PROVISION FOR INCOME TAXES 944,000 829,239
------------- -------------
NET INCOME $ 1,495,990 $ 1,320,618
============= =============
EARNINGS PER SHARE INFORMATION
Basic $ .32 $ .32
======== ========
Diluted $ .31 $ .31
======== ========
</TABLE>
See Notes to Financial Statements
19
<PAGE>
ELECTRONIC PROCESSING, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Total Stock Capital Earnings
----- ----- ------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $ 5,598,989 $ 34,000 $ 5,202,000 $ 362,989
Net proceeds from public offering 12,409,311 11,405 12,397,906
Proceeds from the exercise of stock
options and warrants 61,900 928 60,972
Net income 1,320,618 1,320,618
------------- --------- -------------- ------------
BALANCE, DECEMBER 31, 1998 19,390,818 46,333 17,660,878 1,683,607
Proceeds from the exercise of stock
options and warrants 38,175 88 38,087
Net income 1,495,990 1,495,990
------------- --------- -------------- ------------
BALANCE, DECEMBER 31, 1999 $ 20,924,983 $ 46,421 $ 17,698,965 $ 3,179,597
============= ========= ============== ============
</TABLE>
See Notes to Financial Statements
20
<PAGE>
ELECTRONIC PROCESSING, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,495,990 $ 1,320,618
Items not requiring (providing) cash:
Depreciation 1,793,413 1,182,452
Amortization of software development costs 524,998 422,389
Amortization of intangible assets 63,321 2,013
(Gain) loss on disposal of equipment 303,393 35,862
Deferred income taxes 16,860 188,511
Changes in:
Accounts receivable (323,303) (471,879)
Prepaid expenses and other assets 126,362 (107,272)
Accounts payable and accrued expenses 175,434 385,329
Income taxes payable/refundable (119,735) (20,288)
Deferred revenue 3,244,024
-------------- --------------
Net cash provided by operating activities 7,300,757 2,937,735
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of short-term investments 169,276,784 51,403,000
Purchase of short-term investments (162,426,784) (62,103,000)
Proceeds from sale of property and equipment 307,613 16,814
Purchase of property and equipment (2,796,929) (3,421,690)
Expenditures for software development costs (660,969) (1,041,960)
Acquisition of DCI Chapter 7 Solutions, Inc. (10,056,904)
-------------- --------------
Net cash used in investing activities (6,357,189) (15,146,836)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments under line-of-credit agreement (1,000)
Proceeds from long-term debt 968,270
Principal payments under capital lease obligations (159,151) (368,435)
Principal payments on long-term debt (1,875,922)
Stock issuance costs (318,669)
Proceeds from exercise of stock options and warrants 38,175 61,900
Proceeds from public offering 12,727,980
-------------- --------------
Net cash provided by (used in) financing activities (120,976) 11,194,124
-------------- --------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 822,592 (1,014,977)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 820,256 1,835,233
-------------- --------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 1,642,848 $ 820,256
============== ==============
</TABLE>
See Notes to Financial Statements
21
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 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.
OPERATING SEGMENTS
The Company has two segments in which it allocates resources and assesses
performance: Chapter 7 and Chapter 13 bankruptcy services. For each of these
segments, the Company serves a national client base by developing specialty
software products and providing coordinated support (network integration,
post-installation support and other value-added services), which facilitate the
administrative aspects of bankruptcy management for court-appointed trustees.
The individual segments have similar operating and economic characteristics and
have been reported as one aggregated operating segment. The Company's major
revenue source, which exceeds 10% of revenues, is discussed in Note 12.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated on a straight-line basis over the
estimated useful life of each asset as follows:
<TABLE>
<S> <C>
Furniture and fixtures 10 years
Computer equipment 3-5 years
Office equipment 5-10 years
Transportation equipment 3-5 years
</TABLE>
Leasehold improvements are depreciated over the shorter of the lease term
or the estimated useful lives (5-10 years) of the improvements.
SOFTWARE DEVELOPMENT COSTS
Certain internal software development costs incurred in the creation of
computer software products are capitalized once technological feasibility has
been established. Prior to the completion of a detail program
22
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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.
23
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
INTANGIBLE ASSETS
The excess of cost over fair value of net assets acquired in the DCI
Chapter 7 Solutions, Inc. acquisition (SEE NOTE 13) is being amortized on a
straight-line basis over 14 years. The agreement not to compete is being
amortized over the five year life of the agreement.
REVENUE RECOGNITION
For the Company's Chapter 7 bankruptcy software product, monthly fees are
received from a national financial institution 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.
At the time of the acquisition of the assets of DCI Chapter 7 Solutions,
Inc. (SEE NOTE 13), the Company received $4,500,000 from a national financial
institution (SEE NOTE 12) for various technology and general integration
services. The Company has accounted for this payment as a multiple element
project with the revenues being recorded as such elements are completed and
delivered. At December 31, 1999, deferred revenues totaled $3,244,024 with
$1,176,458 of such amount being classified as long-term.
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.
CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
three months or less (primarily money market accounts) to be cash equivalents.
SHORT-TERM INVESTMENTS
Debt and marketable equity securities which the Company holds for
short-term investment purposes are classified as available-for-sale securities
and are carried at fair value. At December 31, 1999 and 1998, short-term
investments consist of Auction Rate Certificates, which are floating rate
investments based on pooled State and Federal agency securities. Such
investments trade at par so no realized or unrealized gains or losses were
present during 1999 or 1998. Proceeds from the sale of short-term investments
totaled $169,276,784 and $51,403,000 for the years ended December 31, 1999 and
1998, respectively.
24
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
FUTURE CHANGES IN ACCOUNTING PRINCIPLES
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes the accounting
for derivative instruments, including certain derivative instruments imbedded in
other contracts and hedging activities. This Statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Management has
not yet determined the applicability of this pronouncement on the Company's
results of operations or financial position.
NOTE 2: SOFTWARE DEVELOPMENT COSTS
The following is a summary of software development costs capitalized:
<TABLE>
<CAPTION>
1999 1998
------------- ---------
<S> <C> <C>
Amounts capitalized, net of retirements $ 3,431,165 $ 2,670,196
------------- -------------
Accumulated amortization,
beginning of year (653,250) (1,457,501)
Amortization expense (524,998) (422,389)
Software retired 1,226,640
------------- -------------
Accumulated amortization, end of year (1,178,248) (653,250)
------------- -------------
Net software development costs $ 2,252,917 $ 2,016,946
============= =============
</TABLE>
Included in the above are development costs relating to products not yet
released. Such costs totaled $432,663 and $521,164 at December 31, 1999 and
1998, respectively.
NOTE 3: NOTES PAYABLE
During 1998, the Company had a revolving equipment financing line of
credit with a bank with a maturity date of April 1999. Maximum principal
advances under this agreement were $1,000,000 with interest (1/2% in excess
of the bank's base lending rate), payable monthly, in addition to monthly
principal reductions equal to one 1/36th of the outstanding balance, with any
unpaid balance being due in 1999. There was no balance outstanding under this
obligation as of December 31, 1998.
25
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 3: NOTES PAYABLE (CONTINUED)
During 1999, the Company entered into a revised equipment financing line of
credit with the bank. Under the revised agreement, the maturity date was
extended to October 1, 2000 and the maximum amount of available borrowings was
increased to $2,500,000 with principal payment due on demand or in an amount
equal to 1/36th of the outstanding principal balance. Interest accrues at a
variable rate, revised daily, equal to the New York Prime Rate as published in
the WALL STREET JOURNAL. The note is secured by a security agreement dated July
21, 1997 and a line of credit agreement dated September 27, 1999. There were no
amounts borrowed under this agreement during the year ended December 31, 1999.
On September 27, 1999, the Company entered into a working capital line of
credit agreement with the same bank allowing for maximum borrowings of
$2,500,000, payable on demand or the agreement's maturity date of October 1,
2000. Interest accrues at a variable rate, revised daily, equal to the New York
Prime Rate as published in the WALL STREET JOURNAL. The note is secured by a
line of credit agreement which includes certain financial covenants pertaining
to the maintenance of certain earnings, net worth, and debt to worth ratios.
There were no amounts borrowed under this agreement during the year ended
December 31, 1999.
On February 8, 2000, the bank agreed to increase the maximum borrowings
under the working capital line of credit agreement to $3,500,000.
NOTE 4: CAPITAL LEASES
Capital leases are for the use of office equipment for no more than five
years, expiring in 2003.
<TABLE>
<CAPTION>
1999 1998
----------- -------
<S> <C> <C>
Capital lease obligations $ 109,300 $ 264,879
Other 3,572
----------- -----------
109,300 268,451
Less current maturities 42,406 159,151
----------- -----------
$ 66,894 $ 109,300
=========== ===========
</TABLE>
For the above obligations, the carrying value approximates fair value.
26
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 4: CAPITAL LEASES (CONTINUED)
Aggregate annual payments on capital lease obligations at December 31, 1999
are as follows:
<TABLE>
<CAPTION>
Capital
Lease
Obligations
-----------
<S> <C>
2000 $ 51,899
2001 42,358
2002 29,523
2003 2,096
----------
Less amount representing interest 16,576
----------
Present value of future minimum lease payments 109,300
Less current maturities 42,406
----------
Noncurrent portion $ 66,894
==========
</TABLE>
Property and equipment include the following property under capital leases:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Office equipment $ 218,205 $ 993,991
Less accumulated depreciation 70,648 474,696
----------- -----------
$ 147,557 $ 474,696
=========== ===========
</TABLE>
NOTE 5: OPERATING LEASES
The Company has a noncancellable operating lease for office space, which
expires in February 2011. An officer/principal shareholder 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).
27
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 5: OPERATING LEASES (CONTINUED)
Future minimum lease payments at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000 $ 162,400
2001 167,200
2002 173,000
2003 178,000
2004 and thereafter 1,484,200
------------
$ 2,164,800
============
</TABLE>
Rental expense under this lease was $157,800 and $154,000 for the years
ended December 31, 1999 and 1998, respectively.
NOTE 6: RELATED PARTY TRANSACTIONS
The Company was reimbursed for property taxes from the related party
disclosed in Note 5. Reimbursement for property taxes amounted to approximately
$33,000 and $30,000 for each of the years ended December 31, 1999 and 1998. In
addition, the related party reimbursed the Company for consulting services in
the amount of $19,000 for the year ended December 31, 1998.
The officer/principal shareholder reimbursed the Company for expenses paid
on his behalf in the amount of $30,000 for the year ended December 31, 1998.
NOTE 7: PROFIT SHARING PLAN
The Company has adopted a 401(k) plan covering substantially all
employees. The Company matches the first 10% of employee contributions and also
has the option of making discretionary contributions. Contributions amounted to
$122,025 and $96,825 for the years ended December 31, 1999 and 1998,
respectively.
NOTE 8: PUBLIC OFFERINGS
In May 1998, the Company completed a secondary public offering of 1,000,000
shares of common stock and received net proceeds (prior to stock issuance costs)
of $11,160,000. In June 1998, the underwriter exercised its over-allotment
option associated with the secondary offering by purchasing 140,500 additional
shares at a net price of $1,567,980.
28
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 9: INCOME TAXES
The provision for income taxes includes the following components:
<TABLE>
<CAPTION>
1999 1998
----------- -------
<S> <C> <C>
Taxes currently payable $ 927,140 $ 640,728
Deferred income taxes 16,860 188,511
----------- -----------
$ 944,000 $ 829,239
=========== ===========
</TABLE>
A reconciliation of the provision for income taxes at the statutory rate to
provision for income taxes at the Company's effective rate is shown below:
<TABLE>
<CAPTION>
1999 1998
----------- -------
<S> <C>
Computed at the statutory rate (34%) $ 830,000 $ 731,000
Increase in taxes resulting from:
Nondeductible expenses 32,400 29,300
State income taxes, net of federal
tax effect and other 81,600 68,939
----------- -----------
Tax provision $ 944,000 $ 829,239
=========== ===========
</TABLE>
The tax effects of temporary differences related to deferred taxes shown on
the accompanying balance sheets are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 1,900 $ 1,900
Accrued compensated absences 78,800 37,445
Accrued stock options 15,000 13,035
Intangible assets 97,500
------------ -----------
193,200 52,380
Deferred tax liabilities:
Property and equipment 700,200 542,520
------------ -----------
$ (507,000) $ (490,140)
============ ===========
</TABLE>
29
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 9: INCOME TAXES (CONTINUED)
The above net deferred tax liability is presented on the balance sheets as
follows:
<TABLE>
<CAPTION>
1999 1998
------------ --------
<S> <C> <C>
Deferred tax asset - current $ 85,700 $ 39,345
Deferred tax liability - long-term (592,700) (529,485)
------------- -------------
$ (507,000) $ (490,140)
============ ============
</TABLE>
NOTE 10: NET INCOME PER SHARE
The details of the basic and diluted net income per share calculations are
as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------ ---------------------------------------
Weighted Weighted
Average Average
Shares Per Share Shares Per Share
Net Income Outstanding Amount Net Income Outstanding Amount
---------- ----------- ------ ---------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Net income $1,495,990 $1,320,618
---------- ----------
Net income per share:
Income available to common
shareholders $1,495,990 4,636,822 $ .32 $1,320,618 4,126,679 $ .32
========== ===== ========== =====
Effect of dilutive securities:
Warrants 20,094 30,979
Stock options 123,894 125,436
---------- ----------
Net income per share - Diluted:
Income available to common
shareholders and assumed
conversions $1,495,990 4,780,810 $ .31 $1,320,618 4,283,094 $ .31
========== ========== ====== ========== ========== =====
</TABLE>
As of December 31, 1999 and 1998, the Company had 69,500 options
outstanding, which were anti-dilutive and, therefore, not considered in the
diluted earnings per share calculation above.
30
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 11: STOCK OPTIONS
The Company's 1995 Stock Option Plan (the Plan) permits the issuance of
stock options for up to 500,000 shares of common stock to selected employees and
outside directors of the Company. The terms of each award are determined by the
Board of Directors. Under the terms of the Plan, options granted may be either
nonqualified or incentive stock options (ISOs).
The exercise price for ISOs may not be less than the fair value on the date of
the grant.
A summary of the Company's stock options outstanding as of December 31,
1999 and 1998 is presented below:
<TABLE>
<CAPTION>
1999 1998
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding, beginning of year 358,650 $ 7.26 225,000 $ 4.65
Granted 132,500 9.85 171,250 10.53
Forfeited (26,700) 8.06 (30,200) 6.53
Exercised (8,800) 4.34 (7,400) 3.82
---------- ---------
Outstanding, end of year 455,650 8.03 358,650 7.26
========== =========
</TABLE>
The following table summarizes information about stock options under the
plan outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------- ----------- ---------------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$ 3.85 to $ 4.95 50,000 2.5 years $ 4.40 50,000 $ 4.40
$ 3.50 to $ 6.88 126,400 7.5 years 4.84 65,480 5.29
$ 8.25 to $10.75 129,500 9.5 years 9.69 20,000 8.25
$ 8.25 to $ 9.50 83,250 9.0 years 9.10 35,400 8.99
$12.00 to $12.63 66,500 8.5 years 12.25 33,340 12.10
</TABLE>
31
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 11: STOCK OPTIONS (CONTINUED)
The Company accounts for this plan under APB Opinion No. 25, under which
only an immaterial amount of compensation cost has been recognized. Had
compensation cost been determined based on the fair value at the grant dates
using FASB Statement No. 123, the Company's December 31, 1999 and 1998 net
income and earnings per share would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C> <C>
Net income As reported $ 1,495,990 $ 1,320,618
Pro forma $ 1,076,109 $ 820,925
Net income per share - Basic As reported $ .32 $ .32
Pro forma $ .23 $ .20
Net income per share - Diluted As reported $ .31 $ .31
Pro forma $ .23 $ .19
</TABLE>
Proforma amounts presented here are based on actual earnings and consider
only the effects of estimated fair values of stock options.
The fair value of the above options was estimated at the date of grant
using the Black-Scholes option-pricing model with the key assumptions being
risk-free interest rates of 5.0% - 6.7%, no expected dividends and expected
volatility of 237% and 238% for the years ended December 31, 1999 and 1998,
respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferrable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
In connection with the initial public offering (SEE NOTE 8), the Company
issued warrants to purchase 160,000 shares of stock at $4.20 per share to its
underwriters. During the year ended December 31, 1998, 104,200 warrants were
converted in a cashless exercise, resulting in 77,368 shares of stock being
issued. In addition, 8,000 warrants were exercised for their exercise price,
resulting in the issuance of an additional 8,000 shares of common stock. At
December 31, 1999 and 1998, warrants to purchase 47,800 shares of stock remain
outstanding.
32
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 12: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
- The Company capitalizes and amortizes costs incurred in the
development of software products. Ultimate recoverability is dependent
upon future revenues over the life of each product.
- For its Chapter 7 software product, the Company collects
revenue from its Chapter 7 trustee clients through an exclusive
marketing arrangement with a national financial institution in which
the Company receives revenues based on the level of trustees' deposits
with that institution as well as for other services. Revenues
recognized by the Company from this financial institution as a result
of these arrangements were $9,237,123 for 1999 and $6,288,535 for
1998. The revenues consist of fees from deposits, conversions,
upgrades, electronic banking services, and technology and other
services. The majority of the increase in 1999 was from electronic
banking, technology and other services.
Additionally, that institution represented approximately 66% of the
Company's December 31, 1999 accounts receivable balance.
NOTE 13: BUSINESS ACQUISITION
On November 29, 1999, the Company acquired substantially all business
assets of DCI Chapter 7 Solutions, Inc., (DCI), (a wholly-owned subsidiary of
the Union Bank of California, N.A. (UBOC)), a California corporation that
provided Chapter 7 program development, marketing and servicing. In a related
agreement, and as a part of the acquisition of DCI, the Company entered into an
agreement directly with UBOC for the acquisition of certain equipment. These
agreements, collectively the "acquisition," were accounted for as a purchase
transaction and, accordingly, the purchase price was allocated to all
identifiable intangible and tangible assets based upon their estimated fair
values.
The purchase price of this acquisition totaled $10,056,904, and was paid
entirely in cash. The purchase price was allocated to net intangible assets of
$350,000, net tangible assets of $107,330 and excess of cost over fair value of
net assets acquired of $9,599,574.
The operations of the Company include the operations of the acquiree
from the acquisition date. Unaudited Pro Forma operations assuming the
purchase was made at the beginning of each period are shown below:
<TABLE>
<CAPTION>
Three Months
Ended
1999 12-31-98
------------ ------------
<S> <C> <C>
Operating revenues $16,296,897 $ 3,551,414
Net income 935,111 248,363
</TABLE>
Pro Forma information for 1998 includes only the three months ended
December 31, 1998 since reliable information for prior periods was
unavailable. The Company's pricing model for providing Chapter 7 services is
materially different from the pricing model of the acquiree. Due to this and
other factors, the Pro Forma results are not necessarily indicative of what
would have occurred had the acquisition been on those dates, nor are they
necessarily indicative of future operations.
Pro Forma data reflect the difference in amortization expense between
the two companies as well as a reduction in interest income based on the
utilization of interest-bearing investments to purchase the acquiree.
33
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 14: SUBSEQUENT EVENT
On March 17, 2000, the Company acquired substantially all of the net
tangible and intangible assets of PHiTECH, Inc. for approximately $6,250,000 in
cash. PHiTECH is a developer of software tools for business-to-business
electronic commerce and enterprise-wide open file delivery. Concurrent with
the acquisition, the Company received an advance of $3,500,000 against its
working capital line of credit agreement (SEE NOTE 3) with such advance being
used as partial funding of this acquisition.
NOTE 15: ADDITIONAL CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligation and notes payable
incurred for equipment $ 28,828
</TABLE>
The Company acquired substantially all business assets of DCI. (SEE NOTE
13). In conjunction with the acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $ 10,155,432
Cash paid 10,056,904
--------------
Liabilities assumed $ 98,528
==============
</TABLE>
ADDITIONAL CASH INFORMATION
<TABLE>
<S> <C> <C>
Interest paid $ 18,167 97,780
Income taxes paid 1,034,899 654,438
</TABLE>
34
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
35
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Incorporated by reference to the Company's Proxy Statement for its
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days after the close of the year ended December 31, 1999.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's Proxy Statement for its
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days after the close of the year ended December 31, 1999.
ITEM 11.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Company's Proxy Statement for its
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days after the close of the year ended December 31, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Company's Proxy Statement for its
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days after the close of the year ended December 31, 1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
The following exhibits are filed with this Form 10-KSB or are incorporated
herein by reference:
EXHIBIT
NUMBER DESCRIPTION
3.1 Articles of Incorporation, dated July 13, 1988, incorporated by
reference to Exhibit 3.1 to the Registration Statement on Form SB-2
dated February 4, 1997. (Registration Number
333-16805) (the "1997 Registration Statement").
3.1a Amendment of Articles of Incorporation, dated August 10, 1988,
incorporated by reference to Exhibit 3.1a to the 1997 Registration
Statement.
3.1b Amendment of Articles of Incorporation, dated October 31, 1995,
incorporated by reference to Exhibit 3.1b to the 1997 Registration
Statement.
36
<PAGE>
3.1c Amendment of Articles of Incorporation, dated April 1, 1996,
incorporated by reference to Exhibit 3.1c to the 1997 Registration
Statement.
3.1d Amendment of Articles of Incorporation dated February 24, 1998,
incorporated by reference to Exhibit 3.1d to the annual report on Form
10-KSB for the year ended December 31, 1997 (the "1997 Form 10-KSB.").
3.2 Bylaws, as amended and restated, incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form SB-2 dated May 1,
1998 (Registration Number 333-51525) (the "1998 Registration
Statement").
10.1 Agreement for Computerized Trustee Case Management System between the
Company and NationsBank of Texas, N.A., dated November 22, 1993,
incorporated by reference to Exhibit 10. 1 to the 1997 Registration
Statement.
10.2 Lease between T&J Investment Company and the Company, dated February
20, 1996, incorporated by reference to Exhibit 10.2 to the 1997
Registration Statement.
10.2a Amendment to Lease referred to in Exhibit 10.2 dated December 9, 1997,
incorporated by reference to Exhibit 10.2a to the 1997 Form 10-KSB.
10.3 1995 Stock Option Plan, as amended, incorporated by reference to
Exhibit 10.7 to the 1998 Registration Statement.
10.4 Asset Purchase Agreement dated November 19, 1999, between the Company
and DCI Chapter 7 Solutions, Inc., incorporated by reference to Exhibit
10.1 to the Current Report on Form 8-K filed December 14, 1999, as
amended (the "1999 8-K").
10.5 Equipment Purchase Agreement dated as of November 19, 1999, between the
Company and Union Bank of California, N.A., incorporated by reference
to Exhibit 10.2 to the 1999 8-K.
10.6 Indemnity and Noncompetition Agreement dated as of November 19, 1999,
between Union Bank of California, N.A. and the Company, incorporated by
referenced to Exhibit 10.3 to the 1999 8-K.
23.1 Consent of Baird, Kurtz & Dobson, Certified Public Accountants*
27.1 Financial Data Schedule*
* FILED HEREWITH.
REPORTS ON FORM 8-K
1. 8-K filed December 14, 1999, as amended by Form 8-K/A Amendment No. 1
filed February 14, 2000, reporting the DCI acquisition and filing
historical and pro forma financial statements relating to the acquired
business.
37
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed by the undersigned, thereunto duly authorized.
Dated: March 29, 2000
ELECTRONIC PROCESSING, INC.
By: /S/ Tom W. Olofson
--------------------
Tom W. Olofson
Chairman/CEO
In accordance with the Exchange Act this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on
March 29, 2000.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- --------- --------
<S> <C>
/s/ Tom W. Olofson Chairman of the Board and
- ---------------------------- Chief Executive Officer
Tom W. Olofson (Principal Executive Officer)
Director
/s/ Christopher E. Olofson President and
- ---------------------------- Chief Operating Officer
Christopher E. Olofson Director
/s/ Janice E. Katterhenry Vice President-Finance and Secretary
- ---------------------------- (Principal Financial Officer)
Janice E. Katterhenry
/s/ Michael A. Rider Controller
- ---------------------------- (Principal Accounting
Michael A. Rider Officer)
/s/ Robert C. Levy Director
- ----------------------------
Robert C. Levy
/s/ W. Bryan Satterlee Director
- ----------------------------
W. Bryan Satterlee
</TABLE>
38
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
Electronic Processing, Inc.
501 Kansas Avenue
Kansas City, Kansas 66105
We consent to the incorporation by reference in the Registration
Statement of Electronic Processing, Inc. on Form S-8 (File No. 333-30847) for
the registration of 270,000 shares of its common stock and options to acquire
common stock, of our report dated February 25, 2000, on our audits of the
financial statements of Electronic Processing, Inc. as of December 31, 1999 and
1998 and for each of the years then ended, which report is included in the
Company's 1999 Annual Report on Form 10-KSB, filed with the Securities and
Exchange Commission.
/s/ BAIRD, KURTZ & DOBSON
Kansas City, Missouri
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,642,848
<SECURITIES> 3,850,000
<RECEIVABLES> 1,959,806
<ALLOWANCES> 5,000
<INVENTORY> 0
<CURRENT-ASSETS> 7,808,407
<PP&E> 9,647,843
<DEPRECIATION> 3,338,323
<TOTAL-ASSETS> 26,222,154
<CURRENT-LIABILITIES> 3,461,119
<BONDS> 0
0
0
<COMMON> 17,745,386
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 26,222,154
<SALES> 14,820,400
<TOTAL-REVENUES> 14,820,400
<CGS> 6,894,503
<TOTAL-COSTS> 6,894,503
<OTHER-EXPENSES> 5,935,001
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,469
<INCOME-PRETAX> 2,439,990
<INCOME-TAX> 944,000
<INCOME-CONTINUING> 1,495,990
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,495,990
<EPS-BASIC> .32
<EPS-DILUTED> .31
</TABLE>
