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 December 31, 1995 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 December 31, 1995, 11,296,804 shares of common stock, .01 par value, of
the Registrant were outstanding.
Total Sequential Pages: 13
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>
December 31 September
30
1995 1995
(Unaudited) Audited
<S> . . . . . . . . . . . . . . . . . . . . <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . $ 306,000 $ 97,000
Restricted cash. . . . . . . . . . . . . . . 294,000 313,000
Accounts receivable less allowance of $824,000 920,000 707,000
Inventory. . . . . . . . . . . . . . . . . . 560,000 393,000
Prepaid expenses and other assets. . . . . . 18,000 16,000
Notes receivable from stockholders and
related parties. . . . . . . . . . . . . . . 195,000 1,721,000
Total current assets. . . . . . . . . . 2,293,000 1,721,000
Noncurrent assets:
Property and equipment, net .. . . . . . . . 1,516,000 1,430,000
Real estate held for investment. . . . . . . 336,000 336,000
Other assets, net. . . . . . . . . . . . . . 576,000 576,000
. . . . . . . . . . . . . . . . . . . $4,721,000 $4,063,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of
long-term debt . . . . . . . . . . . . . . $ 821,000 $ 831,000
Accounts payable . . . . . . . . . . . . . . 655,000 245,000
Accrued expenses . . . . . . . . . . . . . . 1,045,000 764,000
Total current liabilities . . . . . . . 2,521,000 1,840,000
Long-term debt . . . . . . . . . . . . . . . . . 725,000 724,000
Total liabilities . . . . . . . . . . . 3,246,000 2,564,000
Stockholders' equity:
Convertible 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:
Common Stock, $.01 par value, 20,000,000 shares authorized:
11,296,804 and 11,046,804 shares issued; 11,290,563
and 11,040,563 shares outstanding. . . . . . 113,000 110,000
Additional paid-in capital . . . . . . . . . 10,821,000 10,724,000
Accumulated deficit . . . . . . . . . . . . (9,459,000) (9,336,000)
Total stockholders' equity . . . . . . 1,475,000 1,499,000
. . . . . . . . . . . . . . . . . . . $4,721,000 $4,063,000
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
Three Months
Ended December 31
1995 1994
(Unaudited)
<S> . . . . . . . . . . . . . . . . . . . . <C> <C>
Revenues:
Bankcard processing revenue . . . . . . . . $2,409,000 $1,836,000
Terminal sales and lease revenue . . . . . 401,000 3,242,000
Check guarantee fees . . . . . . . . . . . 42,000 57,000
Research and development. . . . . . . . . . 20,000 11,000
. . . . . . . . . . . . . . . . . . . . 2,872,000 5,146,000
Costs and expenses:
Bankcard processing expense . . . . . . . . 1,763,000 1,432,000
Cost of terminals sold and leased . . . . . 346,000 2,398,000
Check guarantee . . . . . . . . . . . . . 21,000 32,000
Customer service. . . . . . . . . . . . . . 99,000 86,000
Selling . . . . . . . . . . . . . . . . . . 17,000 27,000
General and administrative. . . . . . . . . 642,000 615,000
Research and development . . . . . . . . . 63,000 77,000
. . . . . . 2,951,000 4,667,000
(Loss) income from operations. . . . . (79,000) 479,000
Interest income . . . . . . . . . . . . . . . . 8,000 6,000
Interest expense. . . . . . . . . . . . . . (52,000) (44,000)
(Loss) income before income taxes. . . (123,000) 441,000
Income tax provision. . . . . . . . . . . . . . 1,000 1,000
Net (loss) income . . . . . . . . . . ($124,000) $440,000
Net (loss) income per share . . . . ($ .01) $ .04
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Three Months
Ended December 31,
1995 1994
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income . . . . . . . . . . . ($ 124,000) $ 440,000
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation . . . . . . . . . . . . . 45,000 56,000
Provisions for losses on accounts and notes receivable 20,000
Changes in assets and liabilities:
Restricted cash. . . . . . . . . . . . 19,000 19,000
Accounts receivable. . . . . . . . . . (213,000) (1,061,000)
Inventory. . . . . . . . . . . . . . . (167,000) 683,000
Prepaid expenses and other current assets (2,000) 156,000
Other assets, net. . . . . . . . . . . (20,000)
Accounts payable . . . . . . . . . . . 410,000 (249,000)
Accrued expenses . . . . . . . . . . . 282,000 (1,151,000)
Net cash provided (used) by
operating activities . . . . . . . . 250,000 (1,107,000)
Cash flows from investing activities:
Purchase of equipment.. . . . . . . . . (31,000) (50,000)
Investment in real estate . . . . . . . (880,000)
Net cash used by investing activities (31,000) (930,000)
Cash flows from financing activities:
Proceeds from issuance of notes payable. . . . 1,174,000
Repayment of notes payable . . . . . . . . . . (10,000)
Net cash (used) provided by financing
activities. . . . . . . . . . . . . (10,000) 1,174,000
Net increase (decrease) in cash . . . . . . . . 209,000 (863,000)
Cash at beginning of period . . . . . . . . . . 97,000 1,198,000
Cash at end of period . . . . . . . . . . . . . $ 306,000 $ 335,000
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 December 31, 1995, the
Consolidated Statement of Operations and the Consolidated Statement of Cash
Flows for the three-month period ended December 31, 1995 and 1994 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 (loss) earnings per share is computed based upon the weighted average
number of shares outstanding of 11,043,251 and 10,950,553 for the three-month
periods ended December 31, 1995 and 1994, respectively.
NOTE 3 - Non-cash equity transaction:
During the quarter ended December 31, 1995, $100,000 of computer equipment
and Internet specific programs were purchased for 250,000 shares of the
Company's Common Stock.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months ended December 31, 1995 and 1994
Electronic Clearing House, Inc. recorded a net loss of $124,000 for the quarter
ended December 31, 1995, compared with net income of $440,000 for the quarter
ended December 31, 1994. Transaction processing operations were profitable for
the quarter with the loss attributable to smaller equipment deliveries during
the quarter and corporate debt expense.
Bankcard processing revenue and check guarantee fees increased 29% from
$1,893,000 to $2,451,000, compared with the same period last year, directly
reflecting an increase of 23% in the number of active merchants served by the
Company, 5,279 as of December 31, 1995, compared to 4,288 one year ago.
In November 1994, the Company transferred approximately 3,300 merchants from a
previous processing bank, Charter Pacific Bank ("CPB") to its now primary
processing bank, First Charter Bank ("FCB"), and ceased processing with CPB.
Since the change to FCB, the number of active merchants served by the Company
has steadily increased. The primary contingency related to processing
profitability is the consistency and multiplicity of the Company's primary bank
relationships. Additional primary banking relationships diminish the potential
for disruptions in processing operations. The Company initiated an Agent Bank
program during the current quarter to identify potential primary bank
relationships and to increase processing volume at a faster pace as a result of
the existing merchant relationships already with the prospective banks. During
the quarter, two banks have been secured under the Company's Agent Bank program
and the Company is making the necessary software enhancements to allow both
banks to serve as alternate primary banks during the current fiscal year.
Processing-related expenses, consisting of bankcard processing expense, check
guarantee expense and customer service expense, increased 21% from $1,550,000
to $1,883,000 as compared the same period one year ago, reflecting the increased
volume processed.
Terminal sales and lease revenue decreased 88% from $3,242,000 to $401,000, as
compared to the quarter ended December 31, 1994, reflecting the large orders
delivered during the December 31, 1994, quarter. Correspondingly, related costs
have decreased 86%. During the current quarter, orders were received in excess
of $2,000,000 and are scheduled for delivery in the second and fourth quarters
of fiscal 1996. In November 1995, the Company received an order for 1,800
systems from one of its customers and was awarded a contract from the United
States Postal Service to design and deploy 575 money order systems under a pilot
program scheduled to begin in September 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.
Without maintaining on-hand inventory, the time from receipt of a customer's
order to delivery for an EB9 terminal is presently four (4) months, primarily
due to the lead times on electronic components for the system.
Research and development expense, net of related income, decreased 35% from
$66,000 to $43,000 compared to the same period one year ago reflecting the
completion in fiscal 1994 and 1995 of specific developmental projects in
response to the requirements of one of the Company's existing customers and the
United States Postal Service. Research and development expense is expected to
increase during the current fiscal year due to additional developmental effort
required under the United States Postal Service contract.
There was a 37% reduction in selling expense from $27,000 to $17,000 compared
to the quarter ended December 31, 1994, reflecting the continued migration from
a Company-underwritten sales force to commission-based third party sales
organizations.
General and administrative expense increased 4% from $615,000 to $642,000,
reflecting increases in employee related expenses.
Interest expense was $52,000 as compared to $44,000 in the same period one year
ago which reflects the December 1994 issuance of $600,000 in notes payable.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had available cash of $306,000, $294,000 of
restricted cash in reserve with its processing bank and a $228,000 working
capital deficit.
The Consolidated Statement of Cash Flows discloses cash provided by an increase
in accounts payable and a significant down-payment on a point of sale equipment
order, as reflected by the increase in accrued expenses. The most significant
components of purchased equipment are tooling for the Company's manufacturing
processes and the buy-out on the lease of a company automobile.
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, an
accumulated deficit and a shortfall in current assets. Management has taken the
steps discussed in the following paragraphs to mitigate this uncertainty.
The Company has historically contracted with small undercapitalized banks that
served as primary processing banks for merchants solicited by the Company. Due
to frequent management changes and financial difficulties that can arise very
quickly with small banks, the Company has had to change banks in the past which
has negatively affected the number of merchants served by the Company and,
thereby, the financial performance of the Company. Multiple bank relationships
would make the change from one bank to another much less costly and traumatic
to the Company and its merchants. In November 1994, the Company transferred
approximately 3,300 merchants sponsored by Charter Pacific Bank to First Charter
Bank and ceased processing with Charter Pacific Bank. This transition occurred
smoothly because the banking relationship with First Charter Bank was already
established.
Under the Agent Bank program initiated in October, 1996, the Company has
established two new bank relationships that are expected to develop into
additional primary bank relationships by the third quarter of 1996. The Company
intends to continue the promotion of its Agent Bank program throughout the
current year and secure more Agent Bank relationships as a result. While
additional primary banks will be secured for contingency purposes, the Company
intends to develop marketing strategies for the new primary banks that do not
interfere with its existing primary bank relationship. The Company's primary
marketing efforts will remain focused through First Charter Bank, its lead
processing bank.
Profitable operations of the Company's hardware subsidiary, Computer Based
Controls ("CBC"), have been closely tied to the orders received from a single
purchaser, a national credit card issuer. The primary strategy to assure the
profitability of CBC's equipment manufacturing and sales has been to diminish
its dependence on this single customer by expanding the customer base. This is
being done by providing specialized programming, adapting the EB9 product to a
variety of applications and actively marketing the enhanced product. In both
fiscal 1993 and 1994, 67% of terminal sales were to CBC's primary purchaser.
This number was reduced to 60% in fiscal 1995, due to several new customer
contracts being secured with no new orders anticipated in the current year from
the single large customer.
Under-capitalization has been a limiting factor to the increase in equipment
sales by restricting both the stockpiling of long-lead electronic components and
the maintenance of basic inventory reserves of assembled systems in order to
reduce the time between order and delivery. With a growth-oriented banking
relationship in place, the Company, through its independent sales organization,
has increased the number of active merchants allowing the Company to exceed the
break-even point in processing. This occurred in the fourth quarter of fiscal
1995. Consequently, the Company's transaction processing operations is expected
to contribute significantly to a positive cash flow in fiscal 1996. The primary
focus of the Company's equipment design and manufacturing efforts in fiscal 1996
will be directed toward performance under the contract with the United States
Postal Service. Management expects the growth in transaction processing
revenues to fully compensate for the temporary shift in emphasis from equipment
sales to development by the fourth quarter of the current fiscal year. Until
that time, two other possible sources of capital will be used for working
capital purposes.
The first potential source of capital is direct investment in or loans to the
Company. 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. Debt and equity placements are currently being
considered.
The second potential source of capital is resolution of a current lawsuit. The
Company received a judgement on November 17, 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. Enforcement of the judgement and
collection of the funds is currently underway in Louisiana.
Based upon continued growth in its processing operations, the current order and
down-payment for 1,800 EB9 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 for
sales of the EB9 system and by the establishment of multiple banking
relationships.
$100,000 of short-term debt represents notes with detached warrants due April
1, 1996. $600,000 of short-term debt represents notes with detached warrants
which were due December 28, 1995 and were extended to December 31, 1996. 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.
No major capital expenditures are presently planned through December 1996. As
of December 31, 1995, the Company's consolidated capital resource commitments
included three capital leases for computer systems with total payments of
$38,000 over the next 3 to 21 months, and other leased equipment with payments
due over the next 33 months aggregating $90,000.
At December 31, 1995, the ratio of current assets to current liabilities was
.91:1 compared to .94:1 at September 30, 1995. The twelve-month average
collection period for receivables was 26 days for the quarter ended December 31,
1995 as compared with 25 days during fiscal year 1995. The Company's annualized
inventory turnover ratio for the current period was 2.91 as compared to 5.12
during fiscal year 1995.
<PAGE>
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 December 31, 1995:
Date of Filing Item Reported
None. None.
<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 thereunto duly authorized.
ELECTRONIC CLEARING HOUSE, INC.
(Registrant)
Date: By:
David Olert, Treasurer and
Chief Financial Officer
