<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 MARCH 31, 1997
COMMISSION FILE NUMBER 0-22081
--------------------------------------------------
ELECTRONIC PROCESSING, INC.
MISSOURI 48-1056429
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
501 KANSAS AVENUE, KANSAS CITY, KANSAS 66105-1300
(Address of Principal Executive Office)
913-321-6392
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
----- ----
The number of shares outstanding of registrants common stock at April 30, 1997,
was 3,400,000 shares
Transitional Small Business Disclosure Format (Check one): Yes No X
----- -----
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ELECTRONIC PROCESSING, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 1997
CONTENTS
--------
PAGE
----
PART 1 - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Consolidated Statements of Operations -
Three months ended March 31, 1996 and 1997 3
Consolidated Balance Sheets - December 31, 1996 and
March 31, 1997 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 1996 and 1997 6
Notes to Consolidated Financial Statements -
March 31, 1996 and 1997 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
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ELECTRONIC PROCESSING, INC.
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
OPERATING REVENUES $1,388,224 $1,857,120
---------- ----------
COST OF GOODS SOLD AND DIRECT COSTS
Processing costs 548,354 670,489
Depreciation and amortization 176,818 232,152
---------- ----------
725,172 902,641
-------- --------
GROSS PROFIT 663,052 954,479
------- -------
OPERATING EXPENSES
General and administrative 516,482 682,961
Depreciation and amortization 21,989 23,928
-------- --------
538,471 706,889
------- -------
INCOME FROM OPERATIONS 124,581 247,590
--------- ---------
OTHER INCOME (EXPENSE)
Interest income 12 11,980
Interest expense (69,386) (83,154)
Other (381) 817
--------- ---------
(69,755) (70,357)
--------- ---------
INCOME BEFORE INCOME TAXES $ 54,826 $ 177,233
---------- ----------
PROVISION FOR INCOME TAXES
Current 81,300
Deferred (11,300)
Deferred - Related to Conversion to "C" Corporation 272,900
----------
342,900
----------
NET INCOME (LOSS) $ 54,826 $(165,667)
---------- ----------
Earnings per share (loss) (.06)
PRO FORMA DATA
Income before income taxes 54,826 177,233
Provision for income taxes 23,146 72,100
------ ------
PRO FORMA NET INCOME $ 31,680 $ 105,133
---------- ----------
PRO FORMA EARNINGS PER SHARE
Net income $ .02 $ .04
---------- ----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,800,000 2,795,556
--------- ---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
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ELECTRONIC PROCESSING, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND MARCH 31, 1997
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
------------ ---------
1996 1997
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,882 $1,871,353
Accounts receivable, trade, less allowance for
doubtful accounts of $5,000 798,230 807,452
Prepaid expenses and other 153,907 137,167
Deferred income taxes 8,200
------- ---------
Total Current Assets 957,019 2,824,172
------- ---------
PROPERTY AND EQUIPMENT, At cost
Furniture and fixtures 390,599 390,599
Computer equipment 3,312,303 3,684,891
Office equipment 297,971 306,511
Leasehold improvements 247,494 262,534
Transportation equipment 14,969 14,969
------ ------
4,263,336 4,659,504
Less accumulated depreciation 2,087,483 2,283,999
--------- ---------
2,175,853 2,375,505
--------- ---------
SOFTWARE DEVELOPMENT COSTS, Net of
amortization 1,256,159 1,325,305
--------- ---------
INTANGIBLE ASSETS, Net of amortization
Excess of cost over fair value of net assets acquired 63,499 62,996
--------- ---------
OTHER ASSETS
Deferred stock issuance costs 271,563
Other 42,145 26,923
------ ------
$4,766,238 $6,614,901
---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
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LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt 1,508,889 $ 407,012
Accounts payable 534,519 235,831
Accrued expenses 90,140 46,775
Income Taxes Payable 81,300
--------- ----------
Total Current Liabilities 2,133,548 770,918
--------- ----------
LONG-TERM DEBT 1,242,660 488,816
--------- ----------
DEFERRED INCOME TAXES 269,800
SUBORDINATED DEBT 400,000
---------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 5,000,000
shares; issued and outstanding 1,800,000 shares
December 31, 1996 and 3,400,000 shares March 31, 18,000 34,000
1997
Additional paid-in capital 282,000 5,219,543
Retained earnings (deficit) 690,030 (168,177)
--------- ----------
990,030 5,085,366
--------- ----------
$4,766,238 $6,614,901
---------- ----------
</TABLE>
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ELECTRONIC PROCESSING, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 54,826 (165,667)
Items not requiring (providing) cash:
Provision Deferred Income Taxes 261,600
Depreciation 127,589 191,867
Amortization of software development costs 70,716 63,710
Amortization of intangible assets 504 503
(Gain) loss on disposal of equipment 382 (817)
Changes in:
Accounts receivable (120,327) (9,222)
Prepaid expenses and other assets (32,519) 31,962
Accounts payable and accrued expenses 169,317 (342,053)
Accrued income taxes 81,300
---------- -----------
Net cash provided by operating activities 270,488 113,183
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 350 2,800
Purchase of property and equipment (197,737) (393,509)
Expenditures for software development costs (140,675) (132,856)
---------- -----------
Net cash used in investing activities (338,062) (523,565)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) under line-of-credit agreement 25,000 (499,000)
Proceeds from long-term debt 168,890 131,886
Principal payments under capital lease obligation (92,064) (492,482)
Principal payments on long-term debt (54,564) (996,126)
Principal repayment subordinated note (400,000)
Dividends paid (250,000)
Stock issuance costs (817,425)
Proceeds stock issuance 5,600,000
---------- -----------
Net cash provided by financing activities 47,262 2,276,853
---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (20,312) 1,866,471
CASH AND CASH EQUIVALENTS,
BEGINNING PERIOD 26,938 4,882
---------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 6,626 $1,871,353
---------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
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ELECTRONIC PROCESSING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1997
(UNAUDITED)
INTERIM STATEMENT PRESENTATION
The accompanying unaudited consolidated financial statements included all
adjustments (consisting only of normal recurring accruals ) which, in the
opinion of management, are necessary for a fair presentation of financial
position, results of operations and cash flows. The results of the
three-month period are not necessarily indicative of the operating results
for the entire year.
PRO FORMA
In connection with the issuance of common stock to the public, the Company
changed its income tax status to a C corporation. At such time, the Company
recorded a deferred tax payable of $272,900 to account for the effects of
temporary differences between assets and liabilities presented on the
financial reporting basis and the income tax basis. As required by FASB # 109
"Accounting for Income Taxes", this amount is also included in the 1997
provision for income taxes in the accompanying statements of income.
Pro forma earnings information has been provided to reflect the effects of
corporate income taxes on historical earnings, including the effects of
permanent and temporary differences in reporting income and expenses for tax
and financial reporting purposes, as if the Company had been subject to
income taxes for all the periods presented. Pro forma adjustments reflect the
provision for corporate income taxes. Pro forma earnings also eliminates the
effect of the above tax provision of $272,900 resulting from the initial
conversion to a C Corporation.
ADDITIONAL CASH FLOWS INFORMATION
1996 1997
(unaudited) (unaudited)
----------- -----------
NON-CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligation and notes payable
incurred for equipment $168,890 $131,886
ADDITIONAL CASH INFORMATION
Interest Paid 69,386 83,154
(4) INITIAL PUBLIC OFFERING
On February 4, 1997, the Company completed a public offering of 1,600,000
shares of common stock at $3.50 per share to raise $4,782,575 in net
proceeds. The proceeds from the offering were used, in the three months ended
March 31, 1997, to retire approximately $2,400,000 of debt and to purchase
additional computer equipment related to the Company's Chapter 7 product.
The Company had reserved 270,000 shares of common stock for issuance of stock
options to employees, officers and directors of the Company. Upon completion
of the offering, the Company issued options for 119,500 of these shares with
the exercise price being equal to the initial public offering price.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Operating revenues for the three months ended March 31, 1997 increased to
$1,857,120 from $1,388,224 for the quarter ended March 31,1996, an increase
of 33.8%. Chapter 7 revenue increased $434,065 or 209.9%. The increase in
revenue was due in part to the growth in new Chapter 7 trustee business for
the Company and a higher overall portfolio of deposits from existing trustee
clients. This growth in deposits resulted in higher monthly fees paid to
EPI. In addition, the Company received increased installation revenue due to
the new clients installed. The Company has an exclusive national marketing
arrangement with NationsBank . The bank pays EPI a monthly fee based on the
total dollar amount of Chapter 7 deposits at NationsBank and a fee for each
new account installed. Chapter 13 revenue in 1997 compared to 1996 increased
$81,637 or 7.5%. The additional revenue experienced in 1997 was due to an
increase in caseloads managed by Chapter 13 trustee clients. Also, the number
of new bankruptcy filings in 1997 was greater than in 1996 resulting in
increased legal noticing revenue which constituted 33.8% of the total Chapter
13 revenue for 1997.
Processing costs increased to $670,489 for the three months ended March 31,
1997 compared to $548,354 for the 1996 period or a 22.3% increase. The
increase for the first quarter of 1997 resulted principally from an increase
in customer service expense, resulting from hiring additional trainers,
hardware installers and other customer service functions to support the
growth of Chapter 7 sales. Depreciation and amortization for the quarter
ended March 31, 1997 increased to $232,152 from $176,818 for the same period
in the prior year or a 31.3% increase. This increase related primarily to the
purchase of computer equipment for the installations of the Company's new
Chapter 7 product. Total cost of goods sold and direct costs increased to
$902,641 for the first quarter of 1977 compared to $725,172 for the first
quarter of the prior year or a 24.5% increase.
Gross profit increased $291,427 or 44.0% to $954,479 for the first quarter of
1997 compared to $663,052 for the similar period in 1996.Gross profit
increased to 51.4% of operating revenues for the three months ended March
31, 1997 compared to a gross profit of 47.8% for the quarter ended March 31,
1996 due primarily to TCMS, which has higher gross margins, comprising a
greater percentage of operating revenues in 1997.
Operating expenses as a percentage of operating revenues were 38.1% for the
three months ended March 31, 1997 compared to 38.8% for the first quarter of
1996. Total operating expenses increased 31.3% over the same period last
year. Sales and marketing expenses, which include sales and marketing
salaries, trade show costs, and advertising costs increased 61.3% the for the
three months ended March 31, 1997. The Company increased its marketing
activities in 1997 related to the marketing of the Windows 95 version of
TCMS.
Income from operations increased 98.7% to $247,590 for the first quarter of
1997, compared to $124,581 for the similar period in 1996, principally due to
increased sales and higher gross profit margins.
In connection with the issuance of common stock to the public, the Company
changed its income tax status to a C corporation. At such time, the company
recorded a deferred tax payable of $272,900 to account for the effects of
temporary differences between assets and liabilities presented on the
financial reporting bases and the income tax basis. As required by FASB #109,
this amount is also included in the 1997 provision for income taxes in the
accompanying statements of income.
Pro forma earnings information reflects the effects of corporate income taxes
on historical earnings as if the Company had been subject to income taxes for
all the periods presented and also eliminates the effect
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of the above tax provision of $272,900 resulting from the initial conversion
to a C corporation. The Company's effective tax rates were 41% and 42% for
the first quarter of 1997 and 1996, respectively.
For the three months ended March 31, 1997, the Company reported pro forma net
income of $105,133 compared to pro forma net income of $31,680 for the three
months ended March 31, 1996, a 231.9% increase.
CAPITAL RESOURCES AND LIQUIDITY
The Company completed an initial public offering of its common stock on
February 4, 1997, when it sold 1,600,000 shares of common stock at $3.50 per
share to raise $4,782,575 in net proceeds. The proceeds from the stock
offering were used to pay off approximately $2,387,608 in debt and to
purchase computer equipment related principally to the installation of
computer equipment for the Company's Chapter 7 product.
The Company's liquidity position is strong with total cash and cash
equivalents of $1,871,353 at March 31,1997 and working capital of
$2,053,254. The company generated net cash from operations of $113,183 as of
March 31, 1997 representing principally net income before taxes of $177,233
plus depreciation and amortization of $256,080 and an decrease in prepaid
expenses and other assets of $31,962 offset in part by a decrease in
accounts payable and accrued expense of $342,053.
The Company has a $500,000 operating line of credit from a financial
institution, of which $1,000 was outstanding at March 31, 1997 . The Company
may borrow up to 80% of eligible accounts receivable against this line. The
Company has an $250,000 equipment line of credit from the same financial
institution of which $132,886 was outstanding at March 31, 1997. Both loans
expire in March 1998, and the Company anticipates no difficulties in
obtaining a renewal or extension of the loans.
The Company paid a final S Corporation distribution of $250,000 to the
stockholders following the termination of the Company's S Corporation status.
In addition, the Company incurred expenditures for software development costs
totaling $132,856 for the first three months of 1997. The Company invested in
property and equipment totaling $393,509 in the first quarter of 1997. The
Company anticipates financing its operations, capital expenditures and
software expenditures from internally generated funds and through bank
borrowings and capital leases.
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ELECTRONIC PROCESSING, INC.
MARCH 31, 1997 FORM 10-QSB
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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:
Exhibit
Number Description of Exhibit Page
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27 Financial Data Schedule 13
(b) REPORTS ON FORM 8-K:
None
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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: May 15, 1997 /s/ Tom W. Olofson
------------------------------
Tom W. Olofson
Chairman of the Board
Chief Executive Officer
(Principal Executive Officer)
Director
Date: May 15, 1997 /s/ Nanci R. Trutna
------------------------------
Nanci R. Trutna
Vice President Finance
(Principal Financial Officer)
This schedule contains summary financial information extracted from
Electronic Processing, Inc. Consolidated Statement of Income for the three
months ended March 31, 1997 and Consolidated Balance Sheet as at March 31,
1997 qualified in its entirety by reference to such financial statements.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,871,353
<SECURITIES> 0
<RECEIVABLES> 812,452
<ALLOWANCES> 5,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,824,172
<PP&E> 4,659,504
<DEPRECIATION> 2,283,999
<TOTAL-ASSETS> 6,614,901
<CURRENT-LIABILITIES> 770,918
<BONDS> 0
0
0
<COMMON> 34,000
<OTHER-SE> 5,051,366<F1>
<TOTAL-LIABILITY-AND-EQUITY> 6,614,901
<SALES> 1,857,120
<TOTAL-REVENUES> 1,857,937<F2>
<CGS> 902,641
<TOTAL-COSTS> 902,641
<OTHER-EXPENSES> 706,889
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,154
<INCOME-PRETAX> 177,233
<INCOME-TAX> 342,900
<INCOME-CONTINUING> (165,667)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (165,667)
<EPS-PRIMARY> (.06)<F3>
<EPS-DILUTED> (.06)<F3>
<FN>
<F1>REFLECTS RETAINED EARNINGS PAID IN CAPITAL
<F2>REFLECTS OPERATING REVENUES AND INCOME
<F3>CALCULATED ON A PRO-FORMA BASIS WOULD BE .04
</FN>
</TABLE>
