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 June 30, 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 June 30, 1996, 11,391,804 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>
June 30 September 30
1996 1995
(Unaudited) Audited
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . .$ 298,000 $ 97,000
Restricted cash . . . . . . . . . . . . . . . . 482,000 313,000
Accounts receivable less allowance
of $877,000 and $824,000 . . . . . . . . . . .1,192,000 707,000
Inventory . . . . . . . . . . . . . . . . . . . 488,000 393,000
Prepaid expenses and other assets . . . . 13,000 16,000
Notes receivable from stockholders and
related parties. . . . . . . . . . . . . . . . 171,000 195,000
Total current assets. . . . . . . . . . . . . .2,644,000 1,721,000
Property and equipment, net . . . . . . . . . . .1,473,000 1,430,000
Investments in real estate . . . . . . . . . . . 336,000 336,000
Other assets, net . . . . . . . . . . . . . . . . 624,000 576,000
. . . . . . . . . . . . . . . . . . . .$5,077,000 $4,063,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of
long-term debt . . . . . . . . . . . . . . . $1,040,000 $ 831,000
Accounts payable . . . . . . . . . . . . . . . 565,000 245,000
Accrued expenses. . . . . . . . . . . . . . . . 766,000 764,000
Total current liabilities . . . . . . . .2,371,000 1,840,000
Long-term debt . . . . . . . . . . . . . . . . . 630,000 724,000
Total liabilities . . . . . . . . . . . . 3,001,000 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:. . . . . . . . . . . . . . .
Series "K", 350,000 shares issued
and outstanding:. . . . . . . . . . . . . . . 4,000
Common stock, $.01 par value,
20,000,000 authorized:
11,391,804 and 11,046,804 shares issued;
11,385,563 and 11,040,563 shares
outstanding. . . . .. . . . . . . . . . . . . 114,000 111,000
Additional paid-in capital. . . . . . . . . . .11,565,000 10,724,000
Accumulated deficit . . . . . . . . . . . . . . (9,607,000) (9,336,000)
Total stockholders' equity . . . . . . 2,076,000 1,499,000
</TABLE> $5,077,000 $4,063,000
See accompanying notes to consolidated financial statements.
<TABLE>
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION> Three Months Nine Months
Ended June 30 Ended June
30
1996 1995 1996 1995
(Unaudited) (Unaudited)
In Thousands
<S> <C> <C> <C> <C>
Revenues:
Bankcard processing revenue . . . . . . . . . $3,233 $2,202 $8,189 $5,903
Check guarantee fees . . . . . . . . . . . . 30 47 107 151
Terminal sales and lease revenue . . . . . . 148 950 2,082 5,437
Research and development. . . . . . . . . . . 17 100 30
. . . . . . . . . . . . . . . . . . . 3,411 3,216 10,478 11,521
Costs and expenses:
Bankcard processing expense . . . . . . . . . 2,474 1,644 6,181 4,499
Check guarantee expense . . . . . . . . . . . 17 22 58 72
Customer service expense. . . . . . . . . . . 103 114 299 270
Cost of terminals sold and leased . . . . . . 206 756 1,696 4,087
Research and development . . . . . . . . . . 48 41 224 187
Selling . . . . . . . . . . . . . . . . . . . 8 24 31 71
General and administrative. . . . . . . . . . 756 762 2,123 2,152
. . . . . . . . . . . . . . . . . . . . 3,612 3,363 10,612 11,338
(Loss) income from operations. . . . . . (201) (147) (134) 183
Interest income . . . . . . . . . . . . . . . . 11 7 28 20
Interest expense. . . . . . . . . . . . . . . . (52) (46) (161) (146)
Loan settlement . . . . . . . . . . . . . . . . 327
(Loss) income before income taxes. . . . . (242) (186) (267) 384
Income tax provision. . . . . . . . . . . . . . 2 1 4 4
Net (loss) income . . . . . . . . . . $ (244)$ (187) $ (271) $ 380
Net (loss) income per share . . . . ($.021) ($.017) ($.024) $.034
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Nine Months
Ended June 30,
1996 1995
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income . . . . . . . . . . . . . . . . .($271,000)$380,000
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation and amortization . . . . . . . . . . .149,000 150,000
Provision for losses on accounts
and notes receivable . . . . . . . . . . . . . . .53,000 40,000
Changes in assets and liabilities:
Restricted cash . . . . . . . . . . . . . . . . .(169,000) 7,000
Accounts receivable . . . . . . . . . . . . . . .(538,000) 348,000
Note receivable from stockholders and
related parties. . . . . . . . . . . . . . . . .24,000
Inventory . . . . . . . . . . . . . . . . . . . .(95,000) 858,000
Prepaid expenses and other assets . . . . . . . . 3,000 143,000
Other assets, net . . . . . . . . . . . . . . . .(48,000) 200,000
Accounts payable . . . . . . . . . . . . . . . .320,000 (1,362,000)
Accrued expenses. . . . . . . . . . . . . . . . . 2,000(1,518,000)
Net cash used in operating activities . . . . . . (570,000) (754,000)
Cash flows from investing activities:
Purchase of equipment. . . . . . . . . . . . . . . . (92,000)(199,000)
Investment in real estate. . . . . . . . . . . . . . (880,000)
Net cash used in investing activities . . . . . . . (92,000)(1,079,000)
Cash flows from financing activities:
Proceeds from issuance of notes payable. . . . . . .220,000 1,171,000
Repayment of notes payable . . . . . . . . . . . . .(105,000)
Issuance of preferred stock for cash . . . . . . . .700,000
Proceeds from exercise of stock options. . . . . . . 48,000
Net cash flows provided by
financing activities. . . . . . . . . . . . . . 863,000 1,171,000
Net increase (decrease) in cash . . . . . . . . . . . .201,000 (662,000)
Cash and cash equivalents at beginning of period. . . . 97,000 1,198,000
Cash and cash equivalents at end of period. . . . . . .$ 298,000$ 536,000
</TABLE>
See accompanying notes to consolidated financial statements.
ELECTRONIC CLEARING HOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of presentation:
The accompanying Consolidated Balance Sheet as of June 30, 1996, the
Consolidated Statement of Operations and the Consolidated Statement of Cash
Flows for the nine-month periods ended June 30, 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 (loss) income per share is computed based upon the weighted average
number of shares outstanding of 11,248,748 and 11,037,000 for the nine-month
periods ended June 30, 1996 and 1995, respectively.
NOTE 3 - Non-cash equity transactions
During the nine months ended June 30, 1996, $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
Nine months ended June 30, 1996 and 1995
Electronic Clearing House, Inc. recorded a net loss of $244,000 for the quarter
ended June 30, 1996 and a loss for the nine month period ended June 30, 1996 of
$271,000. Unusual research and development expenses related to a pilot program
underway for the United States Postal Service ("USPS") and delayed revenues due
to a slower than expected deployment of systems for a national rental
organization were the primary contributors to the loss. Additionally, a one-time
settlement of $327,000 recorded in the prior period of fiscal 1995 should be
considered when comparison is made with the $380,000 income reported for the
same nine month period in fiscal 1995. Discussion regarding each of these
issues will follow under "Bankcard processing revenue", "Terminal sales and
lease revenue" and "Research and development" sections herein.
Bankcard processing revenue increased 39% from $5,903,000 to $8,189,000,
compared with the same period last year. The Company's expanding
merchant base and profitability is primarily attributable to four programs.
The first factor is the effective sales efforts of an independent
processing-related 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 acquisition of the existing merchants already processing with the
agent banks. Fourth, inventory transactions processed for a national rental
organization are at their high point in the summer months and generate
increased, non-credit card-related, revenues for the Company. An increase
of 100% in the number of such inventory transactions was expected to occur
in June, 1996, but was delayed for 60 days due to software and logistics
issues that have since been resolved.
Profitable operations of the Company's processing activities was attained in the
latter part of fiscal 1995 and has been maintained through the first nine months
of fiscal 1996. Additional growth and increased profitability is expected in the
bankcard processing area due to the increased number of merchants being served
and the increased inventory activity resulting from the full deployment of the
Company's systems by a national rental organization.
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 card 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. Two additional banks have signed letters
of intent to become primary banks for the Company and the Company is making the
necessary software enhancements to allow the new primary banks to become active
by year end.
Processing-related expenses, consisting of bankcard processing expense and
customer service expense, increased 36% from $4,769,000 to $6,480,000 as
compared to the same period one year ago, reflecting the increased volume
processed.
Check guarantee fees have deceased 29% from $151,000 to $107,000 and related
expenses have decreased 19% from $72,000 to $58,000, reflecting no active
marketing or development of the Company's check guarantee services. Check
guarantee services are not presently being actively promoted for two primary
reasons; 1) negative check writer data is only available on California activity
while much of the Company's base of merchants are in other states, and 2)
development focus and resources are being placed in bankcard processing and
terminal sales programs that are felt to have a higher growth and revenue
potential.
Terminal sales and lease revenue decreased 62% from $5,437,000 to $2,082,000, as
compared to the nine months ended June 30, 1995. The significant reduction in
revenue between periods partially reflects a large order of 4,000 systems to a
national credit card customer in the prior period while the current period
reflects the delivery of 1,800 systems to a national rental organization. Due to
the type of customer who finds the Company's equipment useful, larger orders
placed annually are the norm rather than small orders placed more frequently.
This inherent difference in similar periods makes revenue comparison difficult.
Related costs have decreased 58%, directly related to the lower sales.
The primary variables affecting equipment sales are inventory levels, software
design and development by the Company, 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 maintainsand 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 by two or more quarters.
Research and development income for the period increased from $30,000 to
$100,000, reflecting an increase in fee-paid developmental work done for
existing customers. Research and development expense increased 20% from
$187,000 to $224,000, 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 USPS that was
awarded to the Company in November, 1995. The Company has chosen to incur
significant expenses in the development of the USPS system for two primary
reasons; 1) the potential exists for a national program with the USPS if
the pilot program proves to be successful, and 2) the new system will meet
the needs of other customers and markets that the Company feels it can
solicit effectively.
There was a 56% reduction in selling expense from $71,000 to $31,000, as
compared to the nine months ended June 30, 1995, reflecting a reduction in
the direct sales efforts on behalf of the Company's equipment subsidiary,
Computer Based Controls, Inc. ("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 $2,152,000 to
$2,123,000 during the period reflecting both a control on such costs and the
beginning effects of an in-house automation program that lowers operating costs
while allowing increased processing volume. Interest expense was also relatively
level, increasing from $146,000 to $161,000.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had available cash of $298,000, $482,000 of
restricted cash in reserve with its processing bank and a positive working
capital of $273,000.
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
$700,000 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 is
expected to operate at a loss for the balance of the year.
Management is taking two steps to mitigate this uncertainty. First, direct
investments in or loans to the Company are being solicited and secured. The
board of directors has authorized the private placement of additional
securities and/or the establishment of loan relationships to
meet cash flow requirements as needed. The Company has received
$700,000 in proceeds from the issuance of preferred stock during the
current period. Other debt and equity placements are being considered.
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 has resulted in an
operating loss in the current quarter from CBC activities alone that exceeds the
total loss shown by the Company for the nine month period. Since the development
portion of the USPS pilot program is nearing completion, continued losses at
this level from CBC are not expected. Indications are that the continued
increase in earnings from the Company's processing activity will result in
consolidated positive earnings in future quarters even when taking into
account periodic CBC losses.
Management believes its commitment to the USPS project will result in the
fastest return on investment. The pilot program involves 575 systems with
options to increase the order to 1,575 systems. Deployment and payment under
the pilot program is projected to occur in September/October, 1996.
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 favor of the Company in
November, 1994 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 due April 1, 1996 was extended until March, 15,
1997. $600,000 of short-term debt represents notes which are due March 31,
1997. $200,000 of short-term debt represents notes 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 June 30, 1996, the Company's consolidated capital resource commitments
included one capital lease for a backup computer system with total payments of
$17,000 over the next 15 months, and other leased equipment with payments due
over the next 42 months aggregating $88,000.
At June 30, 1996, the ratio of current assets to current liabilities was 1.12:1
compared to .94:1 at September 30, 1995. The twelve-month average collection
period for receivables was 25 days for the nine months ended June 30, 1996, the
same as fiscal year 1995. The Company's annualized inventory turnover ratio for
the current period was 5.13, 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
June 30, 1996:
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: August 6, 1996 By: \s\ Joel M. Barry
Joel M. Barry
Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> JUN-30-1996
<CASH> 298
<SECURITIES> 0
<RECEIVABLES> 2,069
<ALLOWANCES> 877
<INVENTORY> 488
<CURRENT-ASSETS> 2,644
<PP&E> 3,494
<DEPRECIATION> 2,021
<TOTAL-ASSETS> 5,077
<CURRENT-LIABILITIES> 2,371
<BONDS> 630
0
4
<COMMON> 114
<OTHER-SE> 1,958
<TOTAL-LIABILITY-AND-EQUITY> 5,077
<SALES> 2,082
<TOTAL-REVENUES> 10,478
<CGS> 1,696
<TOTAL-COSTS> 6,538
<OTHER-EXPENSES> 2,378
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 161
<INCOME-PRETAX> (267)
<INCOME-TAX> 4
<INCOME-CONTINUING> (271)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (271)
<EPS-PRIMARY> (.024)
<EPS-DILUTED> (.024)
</TABLE>
