UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended March 31, 1997
OR
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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)
Telephone Number (818) 706-8999
www.echo-inc.com
(Registrant's telephone number, including area code; web site address)
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
As of April 21, 1997, there were 14,458,541 shares of the Registrant's
Common Stock outstanding.
ELECTRONIC CLEARING HOUSE, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet 3
March 31, 1997 and September 30, 1996
Consolidated Statement of Operations 4
Three months and six months ended
March 31, 1997 and 1996
Consolidated Statement of Cash Flows 5
Six months ended March 31, 1997 and 1996
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 7
Financial Condition and Results of
Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
<TABLE>
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<CAPTION>
March 31, September 30,
1997 1996
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . $ 103,000 $ 172,000
Restricted cash. . . . . . . . . . . . . . . . 568,000 516,000
Accounts receivable less allowance of
$476,000 and $289,000 . . . . . . . . . . . .1,507,000 901,000
Inventory less allowance of $32,000
and $20,000 . . . . . . . . . . . . . . . . .1,081,000 579,000
Prepaid expenses and other assets. . . . . . . 11,000 36,000
Notes receivable from stockholders
and related parties . . . . . . . . . . . . . 25,000 50,000
Total current assets. . . . . . . . . . . 3,295,000 2,254,000
Noncurrent assets:
Property and equipment, net .. . . . . . . . .1,465,000 1,489,000
Real estate held for investment, net . . . . . 252,000 252,000
Other assets, net. . . . . . . . . . . . . . . 815,000 687,000
$5,827,000 $4,682,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion
of long-term debt . . . . . . . . . . . . .$ 179,000 $ 1,044,000
Accounts payable . . . . . . . . . . . . . . . 508,000 178,000
Accrued expenses . . . . . . . . . . . . . . . 1,112,000 794,000
Total current liabilities . . . . . . . .1,799,000 2,016,000
Long-term debt . . . . . . . . . . . . . . . . . 643,000 597,000
Total liabilities . . . . . . . . . . . . 2,442,000 2,613,000
Stockholders' equity:
Convertible preferred stock, $.01 par value,
5,000,000 shares authorized:
Series "H", 23,511 shares issued and outstanding:
Series "K", 425,000 shares issued
and outstanding: . . . . . . . . . . . . . . 4,000 4,000
Common stock, $.01 par value,
26,000,000 authorized:
14,175,696 and 11,571,804 shares issued;
14,169,455 and 11,565,563 shares
outstanding. . . . .. . . . . . . . . . . . . 142,000 116,000
Additional paid-in capital . . . . . . . . . .12,938,000 11,884,000
Accumulated deficit. . . . . . . . . . . . . . (9,699,000) (9,935,000)
Total stockholders' equity . . . . . . . 3,385,000 2,069,000
$5,827,000 $4,682,000
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,
1997 1996 1997 1996
(Unaudited) (Unaudited)
---------- in thousands ----------
<S> <C> <C> <C> <C>
Revenues:
Bankcard processing revenue. . . . . . . .$3,013 $1,900 $5,871 $3,676
Bankcard transactions fees . . . . . . . . 1,050 647 2,070 1,280
Terminal sales and lease
revenue . . . . . . . . . . . . . . . . . 634 1,533 787 1,934
Check guarantee fees . . . . . . . . . . . 20 35 46 77
Research and development . . . . . . . . . 85 80 115 100
4,802 4,195 8,889 7,067
Costs and expenses:
Bankcard processing and
transactions expense. . . . . . . . . . . 3,048 1,943 5,931 3,707
Cost of terminals sold
and leased . . . . . . . . . . . . . . . 446 1,144 599 1,490
Check guarantee . . . . . . . . . . . . . 13 20 23 41
Customer service . . . . . . . . . . . . . 100 97 204 196
Selling. . . . . . . . . . . . . . . . . . 6 5 13 23
General and administrative . . . . . . . . 826 726 1,551 1,367
Research and development . . . . . . . . . 105 114 195 176
. . . . . . . . . . 4,544 4,049 8,516 7,000
Income from operations . . . . . . . . . 258 146 373 67
Interest income. . . . . . . . . . . . . . . 16 9 29 17
Interest expense . . . . . . . . . . . . . . (76) (57) (141) (109)
Loss reserve for notes
receivable. . . . . . . . . . . . . . . . (11) (23)
Income (loss) before
income taxes . . . . . . . . . . . . . 187 98 238 (25)
Income tax provision . . . . . . . . . . . . (1) (1) (2) (2)
Net income (loss) . . . . . . . . . . . $ 186 $ 97 $ 236 $ (27)
Net income (loss) per share . . . . . .$ .015 $ .009 $ .019 ($ .002)
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Six Months
Ended March 31,
1997 1996
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $236,000($27,000)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation . . . . . . . . . . . . . . . . . . . .93,000 97,000
Provision for losses on accounts and
notes receivable. . . . . . . . . . . . . . . . . .212,000 33,000
Provision for obsolete inventory . . . . . . . . . .12,000
Changes in assets and liabilities:
Restricted cash. . . . . . . . . . . . . . . . . . .(52,000) (67,000)
Accounts receivable. . . . . . . . . . . . . . . . .(793,000) (917,000)
Inventory . . . . . . . . . . . . . . . . . . . .(514,000) (22,000)
Prepaid expenses and other
current assets. . . . . . . . . . . . . . . . . . .25,000 (2,000)
Other assets, net . . . . . . . . . . . . . . . . .(128,000) 16,000
Accounts payable . . . . . . . . . . . . . . . . . .330,000 789,000
Accrued expenses . . . . . . . . . . . . . . . . . . 318,000 36,000
Net cash used in operating activities. . . . . . . (261,000) (64,000)
Cash flows from investing activities:
Purchase of equipment. . . . . . . . . . . . . . . . (69,000) (67,000)
Net cash used in investing activities. . . . . . . (69,000) (67,000)
Cash flows from financing activities:
Proceeds from issuance of notes payable. . . . . . .160,000 220,000
Repayment of notes payable . . . . . . . . . . . . .(80,000) (70,000)
Issuance of preferred stock for cash . . . . . . . . 100,000
Common stock warrants exercised. . . . . . . . . . .122,000
Proceeds from exercise of stock options. . . . . . . 59,000 35,000
Net cash provided by financing activities. . . . . 261,000 285,000
Net (decrease) increase in cash. . . . . . . . . . . .(69,000) 154,000
Cash and cash equivalents at beginning
of period . . . . . . . . . . . . . . . . . . . . 172,000 97,000
Cash and cash equivalents at end
of period . . . . . . . . . . . . . . . . . . . .$103,000 $ 251,000
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 financial statements as of March 31, 1997,
and for the three and six month periods then ended are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and the results of operations for the interim periods. The consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto, together with management's discussion
and analysis of financial condition and results of operations, contained in
the Company's Annual Report to Stockholders incorporated by reference in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1996. The result of operations for the three and six months ended March 31,
1997 are not necessarily indicative of the results for the entire fiscal
year ending September 30, 1997.
NOTE 2 - Earnings per share:
Net income (loss) per share is computed based upon the weighted average
number of shares outstanding of 12,623,556 and 11,153,804 for the six-month
periods ended March 31, 1997 and 1996, respectively.
NOTE 3 - Non-cash equity transaction:
During the six-months ended March 31, 1997, $900,000 of convertible notes
were converted into 2,200,000 shares of the Company's common stock.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
When used in the Management's Discussion and Analysis of Financial Condition
and Result of Operations or elsewhere in this document, the word "believes",
"anticipates", "contemplates", and similar expressions are intended to
identify forward-looking statements. Such statements are subject to certain
risks and uncertainties which could cause actual results to differ materially
from those projected. Those risks and uncertainties include changes in laws
and regulations affecting the Company's primary lines of business. The
Company undertakes no obligation to publicly release the results of any
revisions to those forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Result of Operations
Three Months Ended March 31, 1997 and 1996
Revenues. Electronic Clearing House, Inc. recorded a net income of $186,000
for the second quarter of fiscal year 1997 compared to $97,000 in the prior
fiscal year, an increase of 92%. The increase reflected revenue growth of 60%
in Bankcard processing and transactions revenue over the same period in the
prior fiscal year. Revenues derived from the electronic processing of
transactions are recognized at the time the transactions are processed by the
merchant. The increase in bankcard processing revenue is primarily from the
increase in the number of active merchant accounts. As of March 31, 1997, the
Company has approximately 7,800 active merchant accounts.
The Company's expanding merchant base and profitability is primarily
attributable to: the effective sales efforts of an independent processing-
related sales organization that presently accounts for about 70% of the
Company's new merchant relationships; the referral from the Company's existing
merchant base; the direct response to the Company's Internet Home Page which
accounts for approximately 20% of the Company's merchant growth; and target
marketing of merchant industry types which generally have higher discount
rates, margins and processing volume as compared to a typical retail merchant.
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. The Company currently has
signed letters of intent with two additional banks as primary banks. The
Company is making the necessary software enhancements to allow one of the new
primary banks to become active in the third quarter of fiscal 1997.
The Company's ECHOnline Internet related product, which was introduced in
January, 1997, is being adopted by several Internet Service Providers (ISP)
and additional growth in merchant volume is expected as ISP's finalize their
interface programs to ECHOnline. A new feature called Merchant Fulfillment
Service has been added to the ECHOnline service which 1) delivers the Internet
generated order directly to the merchant, 2) allows the merchant to
electronically advise the Company when they have shipped to the customer, and
3) allows the merchant to issue credits directly with the Company on a
customer order. By providing these services, it becomes easier for an ISP to
adopt the ECHOnline service.
Terminal sales and lease revenue for the three months ended March 31, 1997
were $634,000 which represented a 59% decrease over the same fiscal quarter
last year. The decrease reflected the delivery of 700 systems to a national
rental organization in the current fiscal quarter versus 1,800 systems in the
same fiscal quarter last year. Another 1,700 systems are scheduled to be
delivered in the third quarter of fiscal 1997.
Research and development revenue increased 6% in the second fiscal quarter
over the same fiscal quarter last year. This revenue is for the development
work done for existing customers.
Check guarantee fees decreased 43% in the second fiscal quarter over the same
fiscal quarter last year. This was reflective of the absence of active
marketing or development of the Company's check guarantee services.
Cost and Expenses. Bankcard processing expenses have generally remained
constant as a percentage of processing revenue. A majority of the Company's
bankcard processing expenses are fixed as a percentage of each transaction
amount, with the remaining costs being based on a fixed rate applied to the
transactions processed. Processing-related expenses, consisting of bankcard
processing expense and customer service expense, increased 54% in the second
quarter of fiscal year 1997 as compared to the same fiscal period last year.
This was in direct relation to the 60% increase in processing revenues.
Cost of terminal sold and leased decreased 61% in the second quarter of fiscal
year 1997 as compared to the same fiscal quarter last year. This was in
direct relation to the 59% decrease in terminal sales.
Research and development expense decreased 8% in the second fiscal quarter as
compared to the same fiscal quarter last year.
Check guarantee expense decreased 35% in the second fiscal quarter over the
same fiscal quarter in the prior year as a result of the 43% decrease in check
guarantee revenue generated.
Selling and general and administrative expenses increased 14% in the second
fiscal quarter as compared to the same fiscal quarter last year. This was
mainly attributable to the higher employee-related costs associated with the
14% total revenue increase and the incremental increase in operating costs to
support the Company's infrastructure.
Six Months Ended March 31, 1997 and 1996
Revenues. The Company recorded a net income of $236,000 for the six months
ended March 31, 1997 as compared to a net loss of $27,000 for the same six
month period last year. This primarily resulted from a 60% increase from
bankcard processing and transactions revenue for the same six month period
from prior year.
Terminal sales and lease revenue decreased 59% for the six months ended March
31, 1997 as compared to the same six month period last year. This was mainly
attributable to the 700 systems delivered for the six month period ended March
31, 1997 versus 1,800 systems delivered for the same six month period last
year.
Research and development revenue increased 15% for the six months ended March
31, 1997 over the same six month period last year. This was a result of the
Company's direction in generating fees for software engineering development
work for existing customers.
Check guarantee fees decreased 40% for the six months ended March 31, 1997
over the same six month period last year due to management's decision not to
actively promote check guarantee services for two primary reasons: 1) negative
check writer data are only available on California activity while much of the
Company's base of merchants is in other states, and 2) development focus and
resources are being placed in bankcard processing and terminal sales programs
that are viewed by management to have a higher growth and revenue potential.
Overall, the Company's total revenue increased 26% for the six months ended
March 31, 1997 as compared to the same six month period last year.
Cost and Expenses. Processing-related expenses increased 57% for the six
months ended March 31, 1997 as compared to the same six month period last
year. Gross margin on bankcard processing improved from 21% for the six
months ended March 31, 1996 to 23% for the six months ended March 31, 1997.
The improved gross margin resulted from the economy of scale in the customer
service support costs.
Cost of terminal sold and leased decreased 60% for the six month period ended
March 31, 1997 as compared to the same six month period last year. Gross
margin has remained consistent, from 23% for the six month period ended March
31, 1996 to 24% for the six month period ended March 31, 1997.
Research and development expense increased 11% for the six month period ended
March 31, 1997 as compared to the same six month period last year. This was a
result of the 15% increase in research and development revenue for the six
month period.
Selling and general and administrative expenses increased 13% for the six
month period ended March 31, 1997 over the same six month period last year.
However, when expressed as a percentage of total revenue, selling and general
and administrative expenses decreased from 19% of total revenues for the six
months ended March 31, 1996 to 17% of total revenues for the six months ended
March 31, 1997.
Interest expense increased from $109,000 for the six month period ended March
31, 1996 to $141,000 for the six months ended March 31, 1997. This was a
result of increases in borrowing for the six month period March 31, 1997 over
the same period last year. However, as of March 31, 1997, all of the
convertible notes payable were converted into the Company's common stock which
will decrease interest expense by approximately $108,000 per annum.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had available cash of $103,000, $568,000 of
restricted cash in reserve with its primary processing bank and a positive
working capital of $1,496,000. The Company also has a current ratio of 1.83
to 1 at March 31, 1997.
The Company received a $438,000 downpayment on an order for 2,379 EB920A
terminals in November 1996. Accounts receivable increased $606,000 during the
six month period ended March 31, 1997 as a result of increased processing
activities, leasing activities and the 700 EB920A terminals delivered during
this six month period. Inventory increased $502,000 which was mainly
attributable to the inventory build-up for the remaining EB920A terminals to
be delivered in the third quarter of fiscal 1997 and the United States Postal
Service (USPS) pilot program systems inventory costs.
The Company's subsidiary, Computer Based Controls, Inc. (CBC), received the
First Article Test approval for its Electronic Money Order Dispenser (EMOD) in
February 1997 from the USPS. Additionally, 175 "Stand-Alone" EMOD units were
delivered to the USPS in April 1997 and a phased deployment will occur in the
Dallas, Texas area beginning in May 1997. The USPS has advised the Company
that they are having difficulty in securing a printing company that is able to
economically produce the desired EMOD form stock with the necessary security
components. This may delay decisions regarding further deployment after the
pilot program begins and/or may generate the need for a redesign of the
existing systems to accommodate a modified paper stock. There is no assurance
that a redesign of the existing systems will be economically feasible for both
the Company and USPS.
In March 1997, a fax service business utilizing a merchant account through the
Company declared Chapter 11 bankruptcy which was subsequently changed to a
Chapter 7 in April 1997. The Company believes that merchant cash reserves
held under a cross collateral agreement are adequate to cover all chargeback
activity that might be processed but the Company has deposited $100,000 into a
special reserve to be utilized if merchant reserves prove to be inadequate.
The Company has instituted additional processing ratios and comparisons that
are made daily, using this merchant as its example, that are expected to
provide earlier detection of merchant processing difficulties and allow the
Company to intervene to assist the merchant sooner and minimize the Company's
risk relating thereto.
During the six month period ended March 31, 1997, $900,000 of convertible
notes payable were converted into 2,200,000 of the Company's common stock.
This conversion has significantly increased the Company working capital and
improved its debt to equity ratio.
The report of the Company's independent accountant during the past eleven
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.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1997.
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: May 1, 1997 By: \s\ Alice Cheung
Alice Cheung, Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 103
<SECURITIES> 0
<RECEIVABLES> 1983
<ALLOWANCES> 476
<INVENTORY> 1081
<CURRENT-ASSETS> 3295
<PP&E> 3296
<DEPRECIATION> 1831
<TOTAL-ASSETS> 5827
<CURRENT-LIABILITIES> 1799
<BONDS> 643
0
4
<COMMON> 142
<OTHER-SE> 3239
<TOTAL-LIABILITY-AND-EQUITY> 5827
<SALES> 787
<TOTAL-REVENUES> 8889
<CGS> 599
<TOTAL-COSTS> 6158
<OTHER-EXPENSES> 1759
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 141
<INCOME-PRETAX> 238
<INCOME-TAX> 2
<INCOME-CONTINUING> 236
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50
<EPS-PRIMARY> .019
<EPS-DILUTED> 0
</TABLE>
