FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1996 Commission File Number: 0-15245
ELECTRONIC CLEARING HOUSE, INC.
(Exact name of Registrant as specified in its charter)
NEVADA 93-0946274
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
28001 DOROTHY DRIVE, AGOURA HILLS, CALIFORNIA 91301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 706-8999
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 .
At March 31, 1996, 11,366,804 shares of common stock, $.01 par value, of
the Registrant were outstanding.
Total Sequential Pages: 13
DOCUMENTS INCORPORATED BY REFERENCE
None
ELECTRONIC CLEARING HOUSE, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION 3
Consolidated Balance Sheet 4
Consolidated Statement of Operations 5
Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of 8
Operations
PART II. OTHER INFORMATION 11
SIGNATURES 13<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
<PAGE>
<TABLE>
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<CAPTION>
March 31 September 30
1996 1995
(Unaudited) Audited
<S> <C> <C>
Current assets:
Cash . . . . . . . . . . . . . . . . . . .$ 251,000$ 97,000
Restricted cash . . . . . . . . . . . . . . . . 380,000 313,000
Accounts receivable less allowance of
$857,000 and $824,000 . . . . . . . . . . . .1,591,000 707,000
Inventory . . . . . . . . . . . . . . . . . . . 415,000 393,000
Prepaid expenses and other assets . . . . 18,000 16,000
Notes receivable from stockholders
and related parties. . . . . . . . . . . . . . 195,000 195,000
.Total current assets . . . . . . . . . 2,850,000 1,721,000
Property and equipment, net . . . . . . . . . . .1,500,000 1,430,000
Property held for sale and
investments in real estate . . . . . . . . . . 336,000 336,000
Other assets, net . . . . . . . . . . . . . . . . 560,000 576,000
. . . . . . . . . . . . . . . . . . . .$5,246,000 $4,063,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion
of long-term debt . . . . . . . . . . . . .$ 1,036,000$ 831,000
Accounts payable . . . . . . . . . . . . . . . 1,034,000 245,000
Accrued expenses. . . . . . . . . . . . . . . . 800,000 764,000
.Total current liabilities. . . . . . .2,870,000 1,840,000
Long-term debt . . . . . . . . . . . . . . . . . 668,000 724,000
.Total liabilities. . . . . . . . . . . 3,538,000 2,564,000
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized:
Series "A", 2,500 shares issued and outstanding:
Series "D", 1,562 shares issued and outstanding:
Series "H", 23,511 shares issued and outstanding:
Series "K", 50,000 shares issued and outstanding 1,000
Common stock, $.01 par value, 20,000,000 authorized:
11,336,804 and 11,046,804 shares issued; 11,330,563 and
11,040,563 shares outstanding. . . . .. . . . . 114,000 111,000
Additional paid-in capital. . . . . . . . . . .10,956,000 10,724,000
Accumulated deficit . . . . . . . . . . . . . . (9,363,000)(9,336,000)
.Total stockholders' equity . . . . . . 1,708,000 1,499,000
. . . . . . . . . . . . . . . . . . . .$5,246,000 $4,063,000
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
Three Months Six Months
Ended March 31, Ended March
31,
1996 1995 1996 1995
(Unaudited) (Unaudited)
(in thousands, except per share
data)
<S> <C> <C> <C> <C>
Revenues:
Bankcard processing revenue . . . . . . . $2,547 $1,864 $4,956$3,700
Check guarantee fees . . . . . . . . . . 35 47 77105
Terminal sales and lease revenue . . . . 1,533 1,246 1,9344,488
Research and development. . . . . . . . . 80 2 100 13
4,195 3,159 7,067 8,306
Costs and expenses:
Bankcard processing expense . . . . . . . 1,943 1,423 3,7072,855
Check guarantee expense . . . . . . . . . 20 18 4150
Customer service expense. . . . . . . . . 97 69 196156
Cost of terminals sold and leased . . . . 1,144 934 1,4903,332
Research and development . . . . . . . . 114 69 176145
Selling . . . . . . . . . . . . . . . . . 5 20 2347
General and administrative. . . . . . . . 726 776 1,3671,391
4,049 3,309 7,0007,976
Income (loss) from operations. . . . 146 (150) 67330
Interest income . . . . . . . . . . . . . . 9 6 1712
Interest expense. . . . . . . . . . . . . . (57) (55) (109) (100)
Legal settlement. . . . . . . . . . . . . . 327 327
Income (loss) before income taxes . . . . 98 128 (25)569
Income tax provision. . . . . . . . . . . . 1 1 2 2
Net income (loss) . . . . . . . . $ 97 $127 ($27)$567
Net income (loss) per share . . . $ .009 $.012 ($.002)$.052
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Six Months
Ended March 31,
1996 1995
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income . . . . . . . . . . . . . . . . .($27,000)$567,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . .97,000 99,000
Provision for losses on accounts and notes receivable33,000 20,000
Changes in assets and liabilities:
Restricted cash. . . . . . . . . . . . . . . . . . .(67,000) 2,000
Accounts receivable. . . . . . . . . . . . . . . . .(917,000) 359,000
Inventory . . . . . . . . . . . . . . . . . . . .(22,000) 550,000
Prepaid expenses and other assets . . . . . . . . .(2,000) 142,000
Other assets, net . . . . . . . . . . . . . . . . .16,000 205,000
Accounts payable . . . . . . . . . . . . . . . . . .789,000(1,252,000)
Accrued expenses . . . . . . . . . . . . . . . . . . 36,000(1,341,000)
Net cash used in operating activities. . . . . . . (64,000) (649,000)
Cash flows from investing activities:
Purchase of equipment.. . . . . . . . . . . . . . . . (67,000) (81,000)
Investment in real estate . . . . . . . . . . . . . . (880,000)
Net cash used in investing activities. . . . . . . (67,000) (961,000)
Cash flows from financing activities:
Proceeds from issuance of notes payable . . . . . . .220,000 1,103,000
Repayment of notes payable. . . . . . . . . . . . . .(70,000)
Issuance of preferred stock for cash . . . . . . . . 100,000
Proceeds from exercise of stock options . . . . . . . 35,000
Net cash flows provided by financing activities. . 285,000 1,103,000
Net increase (decrease) in cash . . . . . . . . . . . .154,000 (507,000)
Cash at beginning of period . . . . . . . . . . . . . . 97,000 1,198,000
Cash at end of period . . . . . . . . . . . . . . . . .$ 251,000$ 691,000
See accompanying notes to consolidated financial statements.
</TABLE>
ELECTRONIC CLEARING HOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of presentation:
The accompanying Consolidated Balance Sheet as of March 31, 1996, the
Consolidated Statement of Operations and the Consolidated Statement of Cash
Flows for the six-month period ended March 31, 1996 and 1995 are unaudited,
but in the opinion of management include all adjustments necessary for a fair
presentation of the financial position and the results of operations for the
periods presented.
NOTE 2 - Earnings per share:
Net income (loss) per share is computed based upon the weighted average
number of shares outstanding of 11,153,804 and 10,954,738 for the six-month
periods ended March 31, 1996 and 1995, respectively.
NOTE 3 - Non-cash equity transaction:
During the six months ended March 31, 1996, $100,000 of computer equipment
and Internet specific programs were purchased for 250,000 shares of the
Company's Common Stock.
NOTE 4 - Subsequent events:
Subsequent to March 31, 1996, the Company issued 150,000 shares of Series
K Preferred Stock. One share of Series K Preferred Stock is convertible into
four shares of common stock. Proceeds from these transactions were $300,000.
The March 31, 1996 pro forma summary balance sheet information, adjusted to
reflect these transactions, is as follows:
Current assets $3,150,000
Total assets 5,546,000
Total liabilities 3,538,000
Stockholders' equity 2,008,000
Total liabilities and
stockholders' equity 5,546,000
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Six months ended March 31, 1996 and 1995
Electronic Clearing House, Inc. recorded a net income of $97,000 for the quarter
ending March 31, 1996 and a consequent reduction in the net loss for the six
month period ending March 31, 1996 from $124,000 as of December 31, 1995 to
$27,000. Comparison with the $567,000 income reported for the same six month
period in fiscal 1995 should take two items into account, a one-time settlement
of $327,000 recorded in the second quarter of fiscal 1995 and delivery of an
unusual equipment order of $4,200,000 for the prior period that contributed a
net margin of approximately $500,000. Discussion will follow regarding
"Terminal sales and lease revenue" differences between the current period and
comparable period last year.
Bankcard processing revenue and check guarantee fees increased 34% from
$3,700,000 to $4,956,000, compared with the same period last year, directly
reflecting an increase of 33% in the number of active merchants served by the
Company. Profitable operations of the Company's processing activities was
attained in the latter part of fiscal 1995, has been maintained through the
first six months of fiscal 1996 and is expected to continue.
The Company's expanding merchant base and subsequent profitability is
attributable to three primary marketing programs. First, the effective sales
efforts of an independent sales organization that is presently accounting for
approximately 70% of the Company's new merchant relationships. Secondly,
referrals from the Company's existing merchant base and the direct response to
the Company's Internet Home Page account for approximately 20% of the Company's
merchant growth. Thirdly, the Company's new agent bank program, actively
promoted in the first quarter of fiscal 1996, is resulting in increased merchant
relationships and increased processing volume as a result of the existing
merchants already processing with the agent banks. To date, three banks have
been secured under the Company's agent bank program.
A primary contingency related to processing profitability is the consistency and
multiplicity of the Company's primary bank relationships. Primary bank
relationships are necessary to assure access to the major credit issuing
organizations and, presently, the Company has two primary bank relationships.
Additional primary bank relationships diminish the potential for disruptions in
processing operations that might occur due to changes in management or ownership
of one of the Company's primary banks. The active development of the agent bank
program is expected to diminish this risk and has resulted in a letter of intent
for one of the agent banks to become a primary bank for the Company. The Company
is making the necessary software enhancements to allow the transition of an
agent bank to a primary bank to be a smooth and transparent process.
Processing-related expenses, consisting of bankcard processing expense, check
guarantee expense and customer service expense, increased 29% from $3,061,000 to
$3,944,000 as compared to the same period one year ago, reflecting the increased
volume processed.
Terminal sales and lease revenue decreased 57% from $4,488,000 to $1,934,000, as
compared to the six months ended March 31, 1995, reflecting the large orders
delivered during the quarter ending December 31, 1994. Correspondingly, related
costs have decreased 55%. The current period reflects the delivery of 1,800
systems to a national rental organization that were ordered in the first quarter
of 1996.
The primary variables affecting equipment sales are inventory levels, the timing
of customer orders and the lead time required for delivery of such orders. The
Company's primary terminal system, the EB920, is a highly customer-specific
terminal and for this reason, as well as the financial costs related thereto,
the Company does not maintain significant on-hand inventory beyond depot
requirements. Customer orders have historically been in large quantities that
exceed the inventory amounts the Company maintains and such orders are typically
received only one or two times per year per customer. From the time the
customer's order is received to the delivery of the systems is presently a four
(4) month period, primarily due to the lead times of electronic components for
the system. Customer-specific software developed by the Company may also
contribute to the time delay as beta site programs are required. These variables
make it difficult to compare quarterly periods, as the time between order and
delivery will most likely overlap two or more quarters.
Research and development expense increased 21% from $145,000 to $176,000
compared to the same period one year ago reflecting, primarily, the
developmental effort required under a pilot program to design and deploy
electronic money order systems for the United States Postal Service (USPS)
that was awarded to the Company in November, 1995. Research and development
income increased significantly, as well, reflecting an increase in fee-paid
developmental work done for existing customers.
There was a 51% reduction in selling expense from $47,000 to $23,000, as
compared to the six months ended March 31, 1995, reflecting a reduction in
the direct sales efforts on behalf of the Company's equipment subsidiary,
Computer Based Controls (CBC). The reduction in such activity was deemed
advisable since the total resources and production capabilities of CBC were
absorbed in meeting outstanding orders from a major equipment rental
organization and the requirements of the USPS pilot program.
General and administrative expense decreased marginally from $1,391,000 to
$1,367,000 during the period and interest expense was also relatively level,
increasing from $100,000 to $109,000.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had available cash of $251,000, $380,000 of
restricted cash in reserve with its processing bank and a $20,000 working
capital deficit.
The Consolidated Statement of Cash Flows indicates an increase in accounts
receivable with a corresponding increase in accounts payable, both related to
equipment shipped in March 1996. The most significant components of purchased
equipment are tooling for the Company's manufacturing processes and upgrades to
computer systems. The two significant financing activities are the sale of
$100,000 of Series K Preferred Stock and the issuance of $200,000 of short-term
notes.
The report of the Company's independent accountants during the past ten years
has contained an explanatory paragraph as to the uncertainty of the Company's
ability to continue as a going concern resulting from recurring losses. The
profitability of the Company's processing activities diminishes this risk
significantly but CBC, the Company's hardware subsidiary, is expected to
operate at a loss for the balance of the year. Management is taking two steps
to mitigate this uncertainty.
First, direct investment in or loans to the Company are being solicited and
secured. The board of directors has authorized the private placement of
additional securities or the establishment of loan relationships to meet cash
flow requirements as needed. The Company issued $200,000 in notes payable due
March 15, 1997 and received $100,000 in proceeds from the issuance of preferred
stock during the current period. Other debt and equity placements are currently
being negotiated.
Secondly, CBC's activities are being focused almost entirely on the performance
under the USPS pilot program and other developmental projects are being
postponed. This concentration of energy and resources will limit the extent of
the CBC loss in the current year and, management belives, will result in the
fastest return on investment. The pilot program involves 575 systems with
options to increase the order to 1,575 systems. Payment by the USPS under
the pilot program is projected to occur in September, 1996, and, assuming
the optional volume of systems is ordered, will recoup much, if not all, of
the cash investment CBC will make in the interim period. Management believes
the possibility of a USPS program to deploy CBC money order systems on a
national scale holds significant potential value that justifies the dedicated
efforts of CBC resources and personnel during this period and for the
remainder of fiscal year 1996.
Liquidity may also be increased by the potential resolution of a current
lawsuit. The Company received a judgement in November, 1994 in favor of the
Company against a guarantor of a merchant account to recover approximately
$260,000 that the Company was required to advance in 1993 to cover chargeback
activity of the merchant and related legal expenses. The judgement was upheld
on appeal in March 1996, and enforcement and collection of the funds is
currently underway against the guarantor.
Based upon continued growth in its processing operations, the recent delivery of
1,800 EB920 systems and the additional financing discussed above, cash flow is
expected to meet liquidity needs throughout 1996. As described above in "Results
of Operations", contingencies that could impact liquidity are mitigated by
continuing successes in the expansion of the customer base and by the
establishment of multiple banking relationships.
$100,000 of short-term debt represents notes with detached warrants due April 1,
1996 and discussions are underway regarding the possible retirement or extension
of the loan. $600,000 of short-term debt represents notes with detached
warrants which are due December 31, 1996. $200,000 of short-term debt
represents notes with detached warrants due March 15, 1997. The other
significant portions of current debt are the short-term portion of the
mortgage on the Company's office facility and the current portion of capital
leases which are paid monthly out of operating income. Long-term debt
consists of the long-term portion of the mortgage on the Company's office
facility and capital leases paid monthly out of operating income.
As of March 31, 1996, the Company's consolidated capital resource commitments
included one capital lease for a backup computer system with total payments of
$20,000 over the next 18 months, and other leased equipment with payments due
over the next 45 months aggregating $98,000.
At March 31, 1996, the ratio of current assets to current liabilities was .99:1
compared to .94:1 at September 30, 1995. The twelve-month average collection
period for receivables was 30 days for the six months ended March 31, 1996, as
compared with 25 days during fiscal year 1995. The Company's annualized
inventory turnover ratio for the current period was 7.38, as compared to 5.12
during fiscal year 1995.
PART II. OTHER INFORMATION
<PAGE>
Items 1, 2, 3, 4 & 5
These items are not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the
quarter ended March 31, 1996:
Date of Filing Item Reported
None None
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 thereunto duly authorized.
ELECTRONIC CLEARING HOUSE, INC.
(Registrant)
Date: April 24, 1996 By: \s\ David Olert
David Olert, Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 251
<SECURITIES> 0
<RECEIVABLES> 2,448
<ALLOWANCES> 857
<INVENTORY> 415
<CURRENT-ASSETS> 2,850
<PP&E> 3,469
<DEPRECIATION> 1,969
<TOTAL-ASSETS> 5,246
<CURRENT-LIABILITIES> 2,870
<BONDS> 668
0
1
<COMMON> 114
<OTHER-SE> 1,593
<TOTAL-LIABILITY-AND-EQUITY> 5,246
<SALES> 1,934
<TOTAL-REVENUES> 7,067
<CGS> 1,490
<TOTAL-COSTS> 3,944
<OTHER-EXPENSES> 1,566
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 109
<INCOME-PRETAX> (25)
<INCOME-TAX> 2
<INCOME-CONTINUING> (27)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27)
<EPS-PRIMARY> (.002)
<EPS-DILUTED> (.002)
</TABLE>
