<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 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 July 31, 1997,
was 3,400,000 shares
Transitional Small Business Disclosure Format (Check one): Yes__ No X
<PAGE>
ELECTRONIC PROCESSING, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 1997
CONTENTS
PAGE
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Income -
Three months and six months ended June 30, 1997 and 1996 3
Balance Sheets - June 30, 1997 and December 31, 1996 4
Statements of Cash Flows -
Six months ended June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and 8
Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE>
ELECTRONIC PROCESSING, INC.
STATEMENTS OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30 Three Months Ended June 30
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES $3,873,081 $2,929,972 $2,015,961 $1,541,748
---------- ---------- ---------- ----------
COST OF GOODS SOLD AND DIRECT COSTS
Processing costs 1,381,409 1,177,307 710,921 628,955
Depreciation and amortization 478,869 366,086 246,717 189,268
---------- ---------- ---------- ----------
1,860,278 1,543,393 957,638 818,223
---------- ---------- ---------- ----------
GROSS PROFIT 2,012,803 1,386,579 1,058,323 723,525
---------- ---------- ---------- ----------
OPERATING EXPENSES
General and administrative 1,469,992 1,081,791 787,031 565,309
Depreciation and amortization 44,972 44,207 21,044 22,218
---------- ---------- ---------- ----------
1,514,964 1,125,998 808,075 587,527
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 497,839 260,581 250,248 135,998
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income 31,857 38 19,877 26
Interest expense (105,008) (128,854) (21,858) (59,468)
Other 823 (382) 5 0
---------- ---------- ---------- ----------
(72,328) (129,198) (1,972) (59,442)
---------- ---------- ---------- ----------
NET INCOME BEFORE INCOME TAXES $425,511 $131,383 $248,276 $76,556
---------- ---------- ---------- ----------
PROVISION FOR INCOME TAXES
Current 187,050 105,750
Deferred (13,948) (4,749)
Deferred - Related to Conversion to
C Corporation 272,900
---------- ----------
446,002 101,001
---------- ----------
INCOME (LOSS) ($20,491) $131,383 $147,275 $76,556
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings (loss) per share (.01) .04
PRO FORMA DATA
Income before income taxes 425,511 131,383 248,276 76,556
Provision for income taxes 173,102 55,444 101,001 32,307
---------- ---------- ---------- ----------
PRO FORMA NET INCOME $252,409 $75,939 $147,275 $44,249
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
PRO FORMA EARNINGS PER SHARE
Net income $.08 $.04 $.04 $.02
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,099,448 1,800,000 3,400,000 1,800,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
ELECTRONIC PROCESSING, INC.
BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
June 30, 1997 Dec. 31, 1996
(Unaudited) (Note)
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $1,728,129 $4,882
Accounts receivable, trade, less allowance for
doubtful accounts of $5,000 978,963 798,230
Prepaid expenses and other 125,658 153,907
Deferred income taxes 8,200
---------- ----------
Total Current Assets 2,840,950 957,019
---------- ----------
PROPERTY AND EQUIPMENT, At cost
Furniture and fixtures 390,599 390,599
Computer equipment 3,874,606 3,312,303
Office equipment 306,511 297,971
Leasehold improvements 507,540 247,494
Transportation equipment 14,969 14,969
---------- ----------
5,094,225 4,263,336
Less accumulated depreciation 2,468,959 2,087,483
---------- ----------
2,625,265 2,175,853
---------- ----------
SOFTWARE DEVELOPMENT COSTS, Net of
amortization 1,378,164 1,256,159
---------- ----------
INTANGIBLE ASSETS, Net of amortization
Excess of cost over fair value of net assets acquired 62,492 63,499
---------- ----------
OTHER ASSETS
Deferred stock issuance costs 271,563
Other 27,569 42,145
---------- ----------
$6,934,440 $4,766,238
---------- ----------
---------- ----------
</TABLE>
NOTE: THE BALANCE SHEET AT DECEMBER 31, 1996, HAS BEEN DERIVED FROM THE AUDITED
BALANCE SHEET AT THAT DATE, BUT IT DOES NOT INCLUDE ALL OF THE INFORMATION AND
FOOTNOTES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR COMPLETE
FINANCIAL STATEMENTS.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, Dec. 31,
1997 1996
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt $ 450,875 $1,508,889
Accounts payable 330,285 534,519
Accrued expenses 86,332 90,140
Income Taxes Payable 64,050
---------- ----------
Total Current Liabilities 931,542 2,133,548
---------- ----------
LONG-TERM DEBT 518,669 1,242,660
----------
DEFERRED INCOME TAXES 267,152
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 June 30, 1997 34,000 18,000
Additional paid-in capital 5,206,078 282,000
Retained earnings (deficit) (23,001) 690,030
---------- ----------
5,217,077 990,030
---------- ----------
---------- ----------
$6,934,440 $4,766,238
---------- ----------
---------- ----------
</TABLE>
<PAGE>
ELECTRONIC PROCESSING, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (20,491) $131,383
Items not requiring (providing) cash:
Provision Deferred Income Taxes 258,952
Depreciation 381,829 263,258
Amortization of software development costs 141,005 146,029
Amortization of intangible assets 1,007 1,007
(Gain) loss on disposal of equipment (823) 382
Changes in:
Accounts receivable (180,733) (374,176)
Prepaid expenses and other assets 42,825 (65,153)
Accounts payable and accrued expenses (208,042) 165,360
Accrued income taxes 64,050 ----------
----------
Net cash provided by operating activities 479,579 268,090
---------- ----------
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 2,800 350
Purchase of property and equipment (517,142) (615,014)
Expenditures for software development costs (263,010) (238,079)
---------- ----------
Net cash used in investing activities (777,352) (852,743)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) under line-of-credit agreement (499,000) 75,000
Proceeds from long-term debt 0 260,901
Proceeds from capital leases 0 544,204
Principal payments under capital lease obligation (587,694) (195,908)
Principal payments on long-term debt (1,011,391) (109,800)
Principal repayment subordinated note (400,000)
Dividends paid (250,000)
Stock issuance costs (830,895)
Proceeds stock issuance 5,600,000
---------- ----------
Net cash provided by financing activities 2,021,020 574,397
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,723,247 (10,256)
CASH AND CASH EQUIVALENTS,
BEGINNING PERIOD 4,882 26,938
---------- ----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $1,728,129 $16,682
---------- ----------
---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(UNAUDITED)
(1) INTERIM STATEMENT PRESENTATION
The accompanying unaudited financial statements included all adjustments
(consisting only of normal recurring accruals ) which, in the opinion of
management, are necessary for a fair presentation of financial position,
results of operations and cash flows. The results of operations for the interim
periods shown are not necessarily indicative of the operating results for the
entire year.
(2) PRO FORMA
In connection with the issuance of common stock to the public, the Company
changed its income tax status to a C corporation. At such time, the Company
recorded a deferred tax payable of $272,900 to account for the effects of
temporary differences between assets and liabilities presented on the financial
reporting basis and the income tax basis. As required by FASB # 109 "Accounting
for Income Taxes", this amount is also included in the 1997 provision for income
taxes in the accompanying statements of income.
Pro forma earnings information has been provided to reflect the effects of
corporate income taxes on historical earnings, including the effects of
permanent and temporary differences in reporting income and expenses for tax and
financial reporting purposes, as if the Company had been subject to income taxes
for all the periods presented. Pro forma adjustments reflect the provision for
corporate income taxes. Pro forma earnings also eliminates the effect of the
above tax provision of $272,900 resulting from the initial conversion to a C
Corporation.
(3) ADDITIONAL CASH FLOWS INFORMATION
1997 1996
-------- ---------
NON-CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligation and notes payable
incurred for equipment $316,080 $555,105
ADDITIONAL CASH INFORMATION
Interest Paid 105,008 128,854
(4) INITIAL PUBLIC OFFERING
On February 4, 1997, the Company completed a public offering of 1,600,000 shares
of common stock at $3.50 per share to raise $4,782,575 in net proceeds. The
proceeds from the offering were used to retire $2,387,608 of debt, purchase
additional computer equipment related to the Company's Chapter 7 product, fund
additional software development costs for new products, and fund expansion of
the company's sales/marketing program.
<PAGE>
The Company has reserved 270,000 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 equal to the initial public offering price.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996
Operating revenues for the six months ended June 30, 1997 were $3,873,081
compared to $2,929,972 for the similar 1996 period, an increase of 32.2%.
Chapter 7 revenue increased $662,792 or 139.0%. The Company has an exclusive
national marketing arrangement with NationsBank. The bank pays EPI a monthly
fee based on the total dollar amount of Chapter 7 deposits at NationsBank and a
fee for each new account installed. The increase in revenue was due in part to
the growth in new Chapter 7 trustee business for the Company resulting in higher
monthly fees paid to EPI. Chapter 13 revenue in the 1997 period compared to the
similar 1996 period increased $237,922 or 11.2%. 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
34.1% of the total Chapter 13 revenue for 1997.
Processing costs increased to $1,381,409 for the first half of 1997 compared to
$1,177,307 for the 1996 period or a 17.3% increase. The increase for the first
half of 1997 resulted principally from an increase in customer service expense,
trainers, hardware installers and other customer service functions to support
the growth of the Chapter 7 sales. Depreciation and amortization for the six
months ended June 30, 1997 increased to $478,869 from $366,086 for the same
period in the prior year or a 30.8% increase. The increase related primarily to
the purchase of computer equipment for the installations of the company's new
Chapter 7 product. Total cost of goods sold and direct costs increased to
$1,860,278 for the first half of 1997 compared to $1,543,393 for the first half
of the prior year or a 20.5% increase.
Gross profit increased $626,224 or 45.2% to $2,012,803 for the six months ended
June 30, 1997 compared to $1,386,579 for the similar period in 1996. Gross
profit as a percentage of operating revenues increased to 52.0% for the 1997
period from 47.3% for the 1996 period due primarily to TCMS (Trustee Case
Management System) for Chapter 7, which has higher gross margins, comprising a
greater percentage of operating revenues in 1997.
Operating expenses as a percentage of operating revenues were 39.1% for the six
months ended June 30, 1997 compared to 38.4% for the first half of 1996. Total
operating expenses increased 34.5% over the same period last year. Sales and
marketing expenses, which include sales and marketing salaries, trade show
costs, and advertising costs increased 51.7% for the six months ended June 30,
1997. The Company increased its marketing activities in 1997 related to the
marketing of the Windows 95 version of TCMS.
Income from operations increased 91.0% to $497,839 for the first half of 1997
compared to $260,581 for the first half of 1996, principally due to increased
sales and higher gross profit margins.
<PAGE>
In connection with the issuance of common stock to the public, the Company
changed its income tax status to a C corporation. At such time, the company
recorded a deferred tax payable of $272,900 to account for the effects of
temporary differences between assets and liabilities presented on the financial
reporting bases and the income tax basis. As required by FASB #109, this amount
is also included in the 1997 provision for income taxes in the accompanying
statements of income.
Pro forma earnings information reflects the effects of corporate income taxes on
historical earnings as if the Company had been subject to income taxes for all
the periods presented and also eliminates the effect of the above tax provision
of $272,900 resulting from the initial conversion to a C corporation. The
Company's effective tax rates were 41% and 42% for the first half of 1997 and
1996, respectively.
For the six months ended June 30, 1997, the Company reported pro forma net
income of $252,409 compared to pro forma net income of $75, 939 for the six
months ended June 30, 1997, a 232.4% increase.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED WITH THREE MONTHS JUNE 30, 1996.
Operating revenues for the three months ended June 30, 1997 were $2,015,961
compared to $1,541,748 for the similar 1996 period, an increase of 30.8%. The
principal reasons for the increases in operations for the three months ended
June 30, 1997 versus 1996 are outlined in the discussion of the six-month
results.
Processing costs increased to $710,921 for the second quarter ended June 30,
1997 compared to $628,955 for the similar 1996 period, a 13.0% increase. Total
cost of goods sold and direct costs increased to $957,638 for the three months
ended June 30, 1997 compared to $818,223 for the similar period in 1996 or a
17.0% increase. Gross profit was $1,058,323 or 52.5% of operating revenues in
the second quarter of 1997 versus $723,525 or 46.9% of operating revenues in the
second quarter of 1996. See six-month results above for further discussion.
Operating expenses as a percentage of operating revenues were 40.1% for the
three months ending June 30, 1997 compared to 38.1% for the 1996 period. Total
operating expenses increased $220,548 or 37.5% over 1996. The increase resulted
primarily from expanded marketing and promotional costs for TCMS as discussed
above.
Income from operations increased 84.0% to $250,248 for the second quarter of
1997. For the second quarter ended June 30, 1997, the Company reported pro
forma net income of $147,275 compared to pro forma net income of $44,249 for the
second quarter ended June 30, 1996, a 232.8% increase.
CAPITAL RESOURCES AND LIQUIDITY AT JUNE 30, 1997
The Company completed an initial public offering of its common stock on February
4, 1997, when it sold 1,600,000 shares of common stock at $3.50 per share to
raise $4,782,575 in net proceeds. The proceeds from the stock offering were used
to pay off $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 $1,728,129 at June 30, 1997 and working capital of $1,909,408. The company
generated net cash from operations of $479,579 during the six months ended
<PAGE>
June 30, 1997 representing principally net income before taxes of $425,511 plus
depreciation and amortization of $523,841 offset in part by a decrease in
accounts payable and accrued expense of $208,042 and increase in accounts
receivable of $180,733.
The Company has a $500,000 operating line of credit from a financial
institution, of which $1,000 was outstanding at June 30, 1997 . The Company may
borrow up to 80% of eligible accounts receivable against this line. The Company
has an $500,000 equipment line of credit from the same financial institution of
which $302,504 was outstanding at June 30, 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 $263,010 for the first half of 1997. The Company invested in property
and equipment totaling $833,222 in the first half of 1997. The Company
anticipates financing its operations, capital expenditures and software
expenditures from internally generated funds and through bank borrowings and
capital leases.
<PAGE>
ELECTRONIC PROCESSING, INC.
JUNE 30, 1997 FORM 10-QSB
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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
- ------- ---------------------- -----
27 Financial Data Schedule 13
(b) REPORTS ON FORM 8-K:
None
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ELECTRONIC PROCESSING, INC.
Date: August 14, 1997 /s/ TOM W. OLOFSON
------------------------------------
Tom W. Olofson
Chairman of the Board
Chief Executive Officer
(Principal Executive Officer)
Director
Date: August 14, 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 and six
months ended June 30, 1997 and Consolidated Balance Sheet as at June 30, 1997
qualified in its entirety by reference to such financial statements.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,728,129
<SECURITIES> 0
<RECEIVABLES> 983,963
<ALLOWANCES> 5,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,840,950
<PP&E> 5,094,225
<DEPRECIATION> 2,468,959
<TOTAL-ASSETS> 6,934,440
<CURRENT-LIABILITIES> 931,542
<BONDS> 0
0
0
<COMMON> 34,000
<OTHER-SE> 5,183,077<F1>
<TOTAL-LIABILITY-AND-EQUITY> 6,934,440
<SALES> 3,873,081
<TOTAL-REVENUES> 3,905,761<F2>
<CGS> 1,860,278
<TOTAL-COSTS> 1,860,278
<OTHER-EXPENSES> 1,514,964
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105,008
<INCOME-PRETAX> 425,511
<INCOME-TAX> 446,002
<INCOME-CONTINUING> (20,491)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,491)<F3>
<EPS-PRIMARY> (.01)<F4>
<EPS-DILUTED> (.01)<F4>
<FN>
<F1>RELECTS RETAINED EARNINGS PAID IN CAPITAL
<F2>RELECTS OPERATING REVENUES AND INCOME
<F3>CALCULATED ON A PRO-FORMA BASIS WOULD BE $252,409
<F4>CALCULATED ON A PRO-FORMA BASIS WOULD BE $.08
</FN>
</TABLE>
