<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
AMENDMENT NO. 1
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DECEMBER 14, 1999 (NOVEMBER 29, 1999)
Date of Report (Date of earliest event
reported)
ELECTRONIC PROCESSING, INC.
(Exact name of Registrant as specified in its charter)
MISSOURI 0-22081 48-1056429
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification Number)
501 KANSAS AVENUE
KANSAS CITY, KS 66105
(Address of principal executive offices)
(913) 321-6392
(Registrant's telephone number, including area code)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) AND (b) FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL STATEMENTS.
On November 29, 1999, the Registrant 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 Registrant 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 Registrant for the assets acquired from
DCI and UBOC (prior to direct acquisition costs) was $10,000,000, which was
paid by the Registrant from its existing cash and investments.
DCI provided bankruptcy administration software to Chapter 7
bankruptcy trustees and was a primary competitor of the Registrant 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 Registrant 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.
The Registrant acquired the assets of DCI in order to gain immediate
access to their Chapter 7 Trustee customer base and related deposit amounts
so as to facilitate an increase in market share in this segment of the
Registrant's business. In that regard, it is important to note that the
Registrant did not deem the financial statements of DCI to be a relevant
factor in determining the purchase price or the projected operating
performance of this business under the Registrant's ownership. This is due
primarily to the fact that the dealings between UBOC and its wholly-owned
subsidiary, DCI, were related party transactions, while the DCI business will
be operated by the Registrant as part of its free-standing Chapter 7
business. The Registrant believes it is important for its stockholders and
prospective investors to understand this difference when reviewing the
financial statements for the acquired DCI business.
The following financial statements for the acquired business are
filed with this Amendment:
1. DCI Chapter 7 Solutions, Inc. Accountants' Report and Financial
Statements as of November 28, 1999 and December 31, 1998.
2. Pro Forma Condensed Combined Balance Sheet as of September 30,
1999.
3. Pro Forma Condensed Combined Income Statement for the nine
months ended September 30, 1999.
4. Pro Forma Condensed Combined Income Statement for the three
months ended December 31, 1998.
5. Notes to Pro Forma Condensed Combined Financial Information.
1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ELECTRONIC PROCESSING, INC.
Date: February 14, 2000
By: /s/ Tom W. Olofson
----------------------------------
Name: Tom W. Olofson
Title: Chairman of the Board, Chief
Executive Officer and Director
2
<PAGE>
DCI CHAPTER 7 SOLUTIONS, INC.
Accountants' Report and Financial Statements
November 28, 1999 and December 31, 1998
[LOGO]
<PAGE>
DCI CHAPTER 7 SOLUTIONS, INC.
NOVEMBER 28, 1999 AND DECEMBER 31, 1998
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT ACCOUNTANTS' REPORT.................................... 1
FINANCIAL STATEMENTS
Balance Sheets................................................. 2
Statements of Operations....................................... 3
Statements of Changes in Stockholders' Equity.................. 4
Statements of Cash Flows....................................... 5
Notes to Financial Statements.................................. 6
</TABLE>
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Union Bank of California, N.A.
San Francisco, California
We have audited the accompanying balance sheets of DCI CHAPTER 7
SOLUTIONS, INC. (a wholly-owned subsidiary of Union Bank of California, N.A.)
as of November 28, 1999 and December 31, 1998, and the related statements of
operations, changes in stockholders' equity and cash flows for the period
September 2, 1998 through December 31, 1998 and for the period January 1,
1999 through November 28, 1999. 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 DCI CHAPTER 7
SOLUTIONS, INC. as of November 28, 1999 and December 31, 1998, and the
results of its operations and its cash flows for the period September 2, 1998
through December 31, 1998 and the period January 1, 1999 through November 28,
1999 in conformity with generally accepted accounting principles.
BAIRD, KURTZ & DOBSON
Kansas City, Missouri
January 14, 2000
-1-
<PAGE>
DCI CHAPTER 7 SOLUTIONS, INC.
BALANCE SHEETS
NOVEMBER 28, 1999 AND DECEMBER 31, 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 443,115 $ 706,657
Accounts receivable, trade 42,304 220,024
Inventory 3,394 30,959
Deferred income taxes 28,688
----------- -----------
Total Current Assets 517,501 957,640
----------- -----------
PROPERTY AND EQUIPMENT, At cost
Furniture and fixtures 45,541 5,500
Computer equipment 7,875 3,196
Data processing equipment 14,542
Software 250,000 250,000
----------- -----------
317,958 258,696
Less accumulated depreciation 74,618 17,461
----------- -----------
243,340 241,235
----------- -----------
OTHER ASSETS
Excess of cost over fair value of net assets acquired, net of
accumulated amortization 2,565,976 3,193,215
Deferred income taxes 270,898 125,100
Other 3,000
----------- -----------
2,839,874 3,318,315
----------- -----------
$ 3,600,715 $ 4,517,190
=========== ===========
</TABLE>
See Notes to Financial Statements
-2-
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 10,498 $ 48,452
Note payable 200,000
Retention bonus payable 75,000 75,000
Income taxes payable - parent 29,820 132,745
Deferred income taxes 20,831
----------- -----------
Total Current Liabilities 115,318 477,028
----------- -----------
LONG-TERM LIABILITIES
Retention bonus payable 100,000 175,000
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value; 25,000 shares
authorized, issued and outstanding 25,000 25,000
Additional paid-in capital 4,275,000 4,275,000
Retained earnings (deficit) (914,603) (434,838)
------------ -----------
3,385,397 3,865,162
----------- -----------
$ 3,600,715 $ 4,517,190
=========== ===========
</TABLE>
<PAGE>
DCI CHAPTER 7 SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
PERIOD JANUARY 1, 1999 THROUGH NOVEMBER 28, 1999
AND PERIOD SEPTEMBER 2, 1998 THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
OPERATING REVENUES $ 1,476,497 $ 627,716
----------- -----------
OPERATING EXPENSES
General and administrative 1,550,810 1,078,819
Depreciation and amortization 684,396 245,547
----------- -----------
2,235,206 1,324,366
----------- -----------
LOSS FROM OPERATIONS (758,709) (696,650)
INTEREST EXPENSE 8,288 2,712
----------- -----------
LOSS BEFORE INCOME TAX BENEFIT (766,997) (699,362)
INCOME TAX BENEFIT (287,232) (264,524)
----------- -----------
NET LOSS $ (479,765) $ (434,838)
=========== ===========
LOSS PER SHARE INFORMATION
Basic and diluted $ (19.19) $ (17.39)
========= =========
</TABLE>
See Notes to Financial Statements
-3-
<PAGE>
DCI CHAPTER 7 SOLUTIONS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PERIOD JANUARY 1, 1999 THROUGH NOVEMBER 28, 1999
AND PERIOD SEPTEMBER 2, 1998 THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
Additional Retained
Common Paid-In Earnings
Total Stock Capital (Deficit)
-------------- --------- -------------- -------------
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 2, 1998 $ 4,300,000 $ 25,000 $ 4,275,000 $ 0
Net loss (434,838) (434,838)
-------------- --------- -------------- -------------
BALANCE, DECEMBER 31, 1998 3,865,162 25,000 4,275,000 (434,838)
Net loss (479,765) (479,765)
-------------- --------- -------------- -------------
BALANCE, NOVEMBER 28, 1999 $ 3,385,397 $ 25,000 $ 4,275,000 $ (914,603)
============= ========= ============== =============
</TABLE>
See Notes to Financial Statements
-4-
<PAGE>
DCI CHAPTER 7 SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
PERIOD JANUARY 1, 1999 THROUGH NOVEMBER 28, 1999
AND PERIOD SEPTEMBER 2, 1998 THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (479,765) $ (434,838)
Items not requiring (providing) cash:
Depreciation 57,157 17,461
Amortization of intangible assets 627,239 228,086
Deferred income taxes (195,317) (104,269)
Changes in:
Accounts receivable 177,720 (220,024)
Inventory 27,565 (11,522)
Other assets (3,000)
Accounts payable and accrued expenses (37,954) 48,452
Income taxes payable/refundable - parent (102,925) 132,745
Retention bonus payable (75,000) 250,000
------------ -------------
Net cash used in operating activities (4,280) (93,909)
------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of substantially all business assets of DCI Corporation (3,496,238)
Purchase of property and equipment (59,262) (3,196)
------------ -------------
Net cash used in investing activities (59,262) (3,499,434)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on note payable (200,000)
------------
Net cash used in financing activities (200,000)
------------
DECREASE IN CASH (263,542) (3,593,343)
CASH, BEGINNING OF PERIOD 706,657 4,300,000
----------- -------------
CASH, END OF PERIOD $ 443,115 $ 706,657
=========== =============
</TABLE>
See Notes to Financial Statements
-5-
<PAGE>
DCI CHAPTER 7 SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 28, 1999 AND DECEMBER 31, 1998
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
DCI Chapter 7 Solutions, Inc. (the "Company") is a wholly-owned subsidiary
of Union Bank of California, N.A. ("UBOC"). The Company was incorporated in the
State of California in 1983. In August 1998, the Company was activated with a
$4,275,000 capital infusion by UBOC for the express purpose of acquiring
substantially all the business assets of DCI Corporation, a Tennessee
corporation, on September 2, 1998 (SEE NOTE 2). The Company markets and licenses
proprietary software products and provides support services for Chapter 7
bankruptcy trustees throughout the United States.
The Company ceased operations on November 28, 1999 upon the acquisition by
Electronic Processing Inc. ("EPI"), a Kansas corporation (SEE NOTE 11).
Operating Segments
The Company's Chapter 7 operations represents a single operating segment.
The Company serves a national client base by licensing 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. A
major portion of the Company's revenue is derived from UBOC (SEE NOTE 8).
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.
INTANGIBLE ASSETS
The excess of purchase price over fair value of the acquired business
assets of DCI Corporation at acquisition date is being amortized on a
straight-line basis over five years.
REVENUE RECOGNITION
For the Company's Chapter 7 bankruptcy software product, monthly fees are
received from various financial institutions after the product is installed and
deposits are transferred based on the level of trustees' deposits with that
institution.
-6-
<PAGE>
DCI CHAPTER 7 SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 28, 1999 AND DECEMBER 31, 1998
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Licensing fees are received in advance on all new trustee accounts and are
recognized as income in the period received.
INCOME TAXES
The Company files a consolidated federal income tax return and combined
California franchise tax returns and has entered into a tax sharing agreement
with UBOC. The agreement requires each group member to calculate its own tax
liability as though it filed separate Federal and State income tax returns. UBOC
serves as the clearing agent for purposes of collecting from other group members
their respective shares of tax liability or reimbursing members for tax benefits
they provide. UBOC does not reimburse any other member for such member's
deferred tax account.
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.
NOTE 2: ACQUISITIONS
On September 2, 1998, the Company acquired substantially all business
assets of the Chapter 7 division of DCI Corporation, a Tennessee corporation,
that primarily provided Chapter 7 program development, marketing and servicing.
The acquisition was 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 total purchase price amounted
to $3,696,238, which consisted of net intangible assets (software) of $250,000,
net tangible assets of $24,937 and excess of cost over fair value of net assets
acquired of $3,421,301. Cash of $3,496,238 and a note payable for $200,000 (SEE
NOTE 4) were given as consideration of this purchase.
Concurrent with the acquisition of substantially all business assets of
DCI Corporation, the Company entered into a $500,000 retention bonus agreement
with a certain officer of DCI Corporation. Of this amount, $250,000 was paid at
closing with the other amounts being payable in three installments at the
anniversary date of the closing. Included in liabilities at November 28, 1999
and December 31, 1998 are $175,000 and $250,000, respectively, relating to this
agreement. None of the amounts were contingent upon continued employment, so the
amount was recorded as compensation expense on the agreement date.
-7-
<PAGE>
DCI CHAPTER 7 SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 28, 1999 AND DECEMBER 31, 1998
NOTE 3: OPERATING LEASE
The Company has a noncancellable operating lease for office space, which
expires in September 2000. The lease requires the Company to pay all executory
costs (property taxes, maintenance and insurance).
Future minimum lease payments at November 28, 1999 are as follows:
<TABLE>
<S> <C>
2000 $70,000
=======
</TABLE>
Rental expense under this lease was $83,333 and $41,389 for the
periods January 1, 1999 through November 28, 1999 and
September 2, 1998 through December 31, 1998, respectively.
NOTE 4: NOTE PAYABLE
As a part of the acquisition of substantially all of the business assets of
DCI Corporation, the Company entered into a note payable agreement with the
owner of DCI Corporation. The note represents a working capital payable that was
retained from the sales proceeds disbursed to the seller at the acquisition
date. Upon satisfactory settlement of all accounts receivable and payable
existing at the acquisition date, the note payable was due to the seller on the
first anniversary date of the acquisition. The agreement required interest to be
paid on this balance at 5.5% per annum. The principal balance plus accrued
interest was disbursed to the seller in September 1999.
NOTE 5: RELATED PARTY TRANSACTIONS
The Company has entered into various transactions with its parent company,
UBOC, to provide Chapter 7 processing for its customers. Service fees are billed
one month in arrears while license fees are determined by contract. Effective
February 9, 1999, UBOC ceased paying the Company license fees on trustee
arrangements originating after that date. Additionally, concurrent with the sale
(SEE NOTE 11), UBOC opted not to pay for November 1999 service fees.
UBOC provides certain administrative services to the Company for which
it receives a management fee. For the period September 2, 1998 through December
31, 1998, this fee was based on an estimate of the hours and salary cost of
specific employees. For the period January 1, 1999 through November 28, 1999,
this fee was based on an allocation of corporate overhead costs principally
based on the full-time equivalent employees for each company.
-8-
<PAGE>
DCI CHAPTER 7 SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 28, 1999 AND DECEMBER 31, 1998
NOTE 5: RELATED PARTY TRANSACTIONS (CONTINUED)
The activity between the Company and UBOC for the periods January 1, 1999
through November 28, 1999 and September 2, 1998 through December 31, 1998 is
summarized below:
<TABLE>
<CAPTION>
1999 1998
---------- -------
<S> <C> <C>
Service fee revenue $971,612 $ 389,129
License fee revenue 15,200 6,200
Accounts receivable 100,494
Management fee expense 227,200 27,880
Income taxes payable 29,820 132,745
</TABLE>
NOTE 6: EMPLOYEE BENEFIT AND INCENTIVE PLANS
The Company is a participant in the UBOC Retirement Plan, which is a
noncontributory defined benefit plan. The plan provides retirement benefits
based on years of credited service and the final average compensation amount as
defined in the plan. Employees become eligible for this plan after one year of
service and become fully vested after five years of service. No employees were
eligible for participation in the plan as of December 31, 1998, and no employees
were vested in the plan as of November 28, 1999.
The Company also is a participant in UBOC's defined contribution plan
authorized under Section 401(k) of the Internal Revenue Code. All eligible
employees with at least one year of service are eligible to participate in the
plan. The Company recognized no expense related to this plan for either 1999 or
1998.
NOTE 7: INCOME TAXES
The income tax benefit includes the following components:
<TABLE>
<CAPTION>
1999 1998
----------- --------
<S> <C> <C>
Current tax benefit $ (91,915) $(160,255)
Deferred income taxes (195,317) (104,269)
------------ ------------
$ (287,232) $(264,524)
============ ===========
</TABLE>
-9-
<PAGE>
DCI CHAPTER 7 SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 28, 1999 AND DECEMBER 31, 1998
NOTE 7: INCOME TAXES (CONTINUED)
A reconciliation of the income tax benefit at the statutory rate to the
income tax benefit at the Company's effective rate is shown below:
<TABLE>
<CAPTION>
1999 1998
----------- --------
<S> <C> <C>
Computed at the statutory rate (35%) $ (268,449) $ (244,777)
Increase (decrease) in taxes resulting from:
Nondeductible expenses 1,925 3,087
State income taxes, net of federal
tax effect and other (20,708) (22,834)
------------ ------------
Income tax benefit $ (287,232) $ (264,524)
============ ============
</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:
Accrued compensation $ 66,938 $ 107,227
Excess of cost over fair value of
net assets acquired 232,648 58,162
----------- ----------
299,586 165,389
Deferred tax liabilities:
Accrued income (61,120)
----------- ----------
$ 299,586 $ 104,269
=========== ==========
</TABLE>
The above net deferred tax asset is presented on the balance sheets as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- --------
<S> <C> <C>
Deferred tax asset - current $ 28,688
Deferred tax asset - long-term 270,898 $ 125,100
Deferred tax liability - current (20,831)
----------- ------------
$ 299,586 $ 104,269
=========== ===========
</TABLE>
-10-
<PAGE>
DCI CHAPTER 7 SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 28, 1999 AND DECEMBER 31, 1998
NOTE 8: 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:
- As discussed in Note 5, the Company recognized service and license fee
revenues totaling $986,812 (66% of total revenues) and $395,329 (63% of
total revenues) in transactions with its parent company, UBOC, for the
periods ended November 28, 1999 and December 31, 1998, respectively.
Additionally, amounts due from UBOC represented 46% of the Company's
December 31, 1998 accounts receivable balance.
NOTE 9: NET LOSS PER SHARE
The details of the basic net loss per share calculations are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------ ----------------------------------------
Weighted Weighted
Average Average
Shares Per Share Shares Per Share
Net (Loss) Outstanding AMOUNT Net (Loss) Outstanding Amount
-------------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net loss $ (479,765) $(434,838)
---------- ----------
Net loss per share:
Income available to common
shareholders $ (479,765) 25,000 $(19.19) $(434,838) 25,000 $(17.39)
=========== ====== ======== ========== ====== ========
</TABLE>
NOTE 10: ADDITIONAL CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
1999 1998
--------- -------
<S> <C> <C>
NONCASH INVESTING AND FINANCING ACTIVITIES
Note payable issued in purchase transaction $ 200,000
ADDITIONAL CASH INFORMATION
Interest paid $ 11,000
</TABLE>
-11-
<PAGE>
DCI CHAPTER 7 SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 28, 1999 AND DECEMBER 31, 1998
NOTE 11: SUBSEQUENT EVENT
On November 29, 1999, the Company sold substantially all of its operating
net assets (tangible and intangible) to Electronic Processing Inc. ("EPI"), a
Kansas corporation, in a cash transaction totaling $9,500,000.
-12-
<PAGE>
ELECTRONIC PROCESSING, INC.
PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
<PAGE>
ELECTRONIC PROCESSING, INC.
PRO FORMA CONDENSED COMBINING BALANCE SHEET
SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
DCI
Electronic Chapter 7
Processing Solutions, Pro Forma Pro Forma
Inc. Inc. Combined Adjustments Consolidated
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 8,435,257 $ 314,069 $ 8,749,326 $ (314,069) 1.a.
(8,435,257) 1.b.
Short-term investments 1,700,000 1,700,000 (1,621,647) 1.b. $ 78,353
Accounts receivable, trade, net of
allowance for doubtful accounts 3,724,024 72,448 3,796,472 3,796,472
Other 313,493 7,357 320,850 (7,357) 1.a. 313,493
----------- ----------- ----------- ------------ -----------
14,172,774 393,874 14,566,648 (10,378,330) 4,188,318
PROPERTY AND EQUIPMENT, At cost,
less accumulated depreciation 6,418,414 53,804 6,472,218 172,280 1.b. 6,644,498
SOFTWARE DEVELOPMENT COSTS,
net of amortization 2,123,156 195,833 2,318,989 (95,833) 1.b. 2,223,156
OTHER ASSETS
Excess of cost over fair value of net
assets acquired 57,963 2,680,019 2,737,982 (2,680,019) 1.a. 6,479,116
6,421,153 1.b.
Customer list 3,150,248 1.b. 3,150,248
Deferred income taxes 255,963 255,963 (255,963) 1.a.
Other 5,430 5,430 250,000 a.b. 255,430
----------- ----------- ----------- ----------- -----------
TOTAL ASSETS $22,777,737 $ 3,579,493 $26,357,230 $(3,416,464) $22,940,766
=========== =========== =========== ============ ===========
CURRENT LIABILITIES
Current maturities of long-term debt $ 73,565 $ 73,565 $ 73,565
Accounts payable and accrued expenses 929,941 $ 85,745 1,015,686 (75,000) 1.a. 940,686
Other 137,274 102,954 240,228 152,284 1.b. 289,558
(102,954) 1.a.
1,140,780 188,699 1,329,479 (25,670) 1,303,809
----------- ----------- ----------- ----------- -----------
LONG-TERM DEBT 120,360 100,000 220,360 (100,000) 1.a. 120,360
DEFERRED INCOME TAXES 616,000 616,000 616,000
STOCKHOLDERS' EQUITY 20,900,597 3,290,794 24,191,391 (2,979,454) 1.a. 20,900,597
(311,340) 1.b.
----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $22,777,737 $ 3,579,493 $26,357,230 $(3,416,464) $22,940,766
=========== =========== =========== ============ ===========
</TABLE>
<PAGE>
ELECTRONIC PROCESSING, INC.
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
DCI
Electronic Chapter 7
Processing Solutions, Pro Forma Pro Forma
Inc. Inc. Combined Adjustments Consolidated
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES $11,031,682 $ 1,351,176 $12,382,858 $12,382,858
----------- ----------- ----------- -----------
OPERATING EXPENSES
General and administrative 7,404,819 1,399,584 8,804,403 $ (91,000) 2.c. 8,713,403
Depreciation and amortization 1,558,200 558,689 2,116,889 62,590 2.b. 2,179,479
----------- ----------- ----------- ----------- -----------
8,963,019 1,958,273 10,921,292 (28,410) 10,892,882
----------- ----------- ----------- ------------ -----------
INCOME (LOSS) FROM OPERATIONS 2,068,663 (607,097) 1,461,566 28,410 1,489,976
OTHER INCOME (EXPENSE) 360,079 (8,288) 351,791 (346,470) 2.d. 5,321
----------- ------------ ----------- ------------ -----------
INCOME (LOSS) BEFORE INCOME
TAXES 2,428,742 (615,385) 1,813,357 (318,060) 1,495,297
INCOME TAX PROVISION (BENEFIT) 934,338 (227,830) 706,508 (120,227) 2.e. 586,281
----------- ------------ ----------- ------------ -----------
NET INCOME (LOSS) $ 1,494,404 $ (387,555) $ 1,106,849 $ (197,833) $ 909,016
=========== ============ =========== ============ ===========
EARNINGS PER COMMON SHARE
Basic 0.32 0.20
=========== ===========
Diluted 0.31 0.19
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Basic 4,635,402 4,635,402
=========== ===========
Diluted 4,806,116 4,806,116
=========== ===========
</TABLE>
<PAGE>
ELECTRONIC PROCESSING, INC.
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Electronic DCI
Processing Chapter 7 Pro Forma Pro Forma
Inc. Solutions, Inc. Combined Adjustments Consolidated
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES $ 3,073,038 $ 478,376 $ 3,551,414 $ 3,551,414
----------- ----------- ----------- -----------
OPERATING EXPENSES
General and administrative 2,114,909 492,922 2,607,831 2,607,831
Depreciation and amortization 420,373 184,160 604,533 $ 20,863 2.b. 625,396
----------- ----------- ----------- ----------- -----------
2,535,282 677,082 3,212,364 20,863 3,233,227
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 537,756 (198,706) 339,050 (20,863) 318,187
OTHER INCOME (EXPENSE) 133,047 (2,712) 130,335 (84,305) 2.d. 46,030
----------- ------------ ----------- ------------ -----------
INCOME (LOSS) BEFORE INCOME
TAXES 670,803 (201,418) 469,385 (105,168) 364,217
INCOME TAX PROVISION (BENEFIT) 259,098 (76,136) 182,962 (39,754) 2.e. 143,208
----------- ------------ ----------- ------------ -----------
NET INCOME (LOSS) $ 411,705 $ (125,282) $ 286,423 $ (65,414) $ 221,009
=========== ============ =========== ============ ===========
EARNINGS PER COMMON SHARE
BASIC 0.09 0.05
=========== ===========
Diluted 0.09 0.05
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
BASIC 4,633,264 4,633,264
=========== ===========
Diluted 4,772,117 4,772,117
=========== ===========
</TABLE>
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO PRO FORMA CONDENSED COMBINING
FINANCIAL STATEMENTS
(UNAUDITED)
On November 19, 1999, the Company entered into an asset purchase agreement with
DCI Chapter 7 Solutions, Inc. ("DCI"), (a wholly owned subsidiary of the Union
Bank of California, N.A.) for $9,549,216. Concurrently with this transaction,
the Company entered into an agreement directly with Union Bank of California,
N.A. for the acquisition of certain computer equipment for $507,688. These
transactions were closed on November 29, 1999.
1. The pro forma condensed combining balance sheet of the Company and DCI
as of September 30, 1999 has been prepared as if the acquisitions
occurred on September 30, 1999 in accordance with the following
assumptions:
a. The transactions are accounted for utilizing the purchase
method of accounting. The assets and liabilities not purchased
by the Company have been eliminated. The eliminations include
DCI's cash, deposits, cost in excess of assets acquired,
deferred tax asset, due to (from) Union Bank of California and
retention bonus payable.
b. In accordance with the purchase method of accounting, the net
assets of DCI are adjusted to their fair value. The components
of the transaction assumed in the pro forma condensed
combining balance sheet are outlined as follows:
<TABLE>
<S> <C> <C>
Cash $ 10,056,904
Less: Historical book value of DCI (adjusted for assets
and liabilities not acquired) $ 311,340
Adjustments to reflect fair value of DCI's assets:
Software development costs (95,833)
Computer equipment 172,280
Customer list 3,150,248
Non-compete agreement 250,000
Employee relocation obligation (152,284) 3,635,751
------------- -------------
Excess of cost over fair value of net assets acquired $ 6,421,153
=============
</TABLE>
2. The pro forma condensed statements of operations have been prepared in
accordance with the following assumptions:
a. The acquisition occurs on October 1, 1998 and is accounted for
using the purchase method of accounting. Accordingly, the
operations of DCI are included in the pro forma consolidated
results of operations from October 1, 1998 through the last
reporting period of the registrant (nine months ended
September 30, 1999).
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO PRO FORMA CONDENSED COMBINING
FINANCIAL STATEMENTS
(UNAUDITED)
b. The net change in amortization expense is comprised of the
following:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, 1999 December 31, 1998
------------------ ------------------
<S> <C> <C>
Increase in amortization expenses of cost in excess
of fair value of assets acquired relating to the
Company's acquisition of DCI $ 242,949 $ 80,983
Increase in amortization expense of customer list
acquired in the Company's acquisition of DCI 295,336 98,445
Increase in amortization expense of the non-compete
agreement resulting from the Company's acquisition
of DCI 37,500 12,500
Decrease in amortization expense of DCI's cost in
excess of fair value of assets acquired (513,195) (171,065)
------------ -----------
Increase in amortization expense $ 62,590 $ 20,863
============ ===========
</TABLE>
- The excess of cost over fair value of net assets acquired is
being amortized using the straight-line method over 20
years.
- The customer list is being amortized using the straight-line
basis over the estimated life of the underlying service
contracts, which has been determined to be 8 years.
- The non-compete agreement resulting from the acquisition is
being amortized using the straight-line method over 5 years.
- DCI's amortization of cost in excess of fair value of assets
was being amortized over a period of 5 years on the
straight-line basis.
c. Entry to remove the effect of retention bonuses paid by DCI
that are not anticipated to be ongoing costs.
d. Interest income of the Company has been reduced based on the
assumed reduction of interest bearing investments which would
have occurred on the October 1, 1998 date.
e. The tax effect of these adjustments is calculated using the
combined incremental tax of 37.8%.
<PAGE>
ELECTRONIC PROCESSING, INC.
NOTES TO PRO FORMA CONDENSED COMBINING
FINANCIAL STATEMENTS
(UNAUDITED)
In the accompanying pro forma condensed combining financial statements, the
Company has not attempted to project the impact of the different Chapter 7
revenue model which exists between DCI/UBOC and the existing Company
arrangement. Additionally, no attempt has been made to contrast the level of
management fees which DCI has incurred during the subject periods to the
actual level of operating costs which would be present in the combined
entity's financials or the financial statement impact of a substantial
payment from Bank of America on acquisition date for technology integration
services.
The pro forma condensed combining financial statements, which have been prepared
by the Company's management based upon the historical financial statements of
the Company and DCI Chapter 7 Solutions, Inc., should be read in conjunction
with the accompanying audited financial statements and notes thereto of DCI
Chapter 7 Solutions, Inc. contained elsewhere in this document. The pro forma
condensed combining financial statements are not necessarily indicative of the
financial position or the results of operations of the combined entities as they
may be in the future or as they might have been if the proposed transaction had
been in effect on the dates indicated.
