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 June 30, 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 July 24, 1997, there were 14,493,541 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
June 30, 1997 and September 30, 1996
Consolidated Statement of Operations 4
Three months and nine months ended
June 30, 1997 and 1996
Consolidated Statement of Cash Flows 5
Nine months ended June 30, 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>
June 30 September 30
1997 1996
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . .$ 382,000 $ 172,000
Restricted cash. . . . . . . . . . . . . . . . 488,000 516,000
Accounts receivable less allowance
of $727,000 and $289,000 . . . . . . . . . .1,362,000 901,000
Inventory less allowance of 54,000
and $20,000 . . . . . . . . . . . . . . . . . 796,000 579,000
Prepaid expenses and other assets. . . . . . . 36,000
Notes receivable from stockholders
and related parties . . . . . . . . . . . . . 31,000 50,000
Total current assets . . . . . . . . . 3,059,000 2,254,000
Noncurrent assets:
Property and equipment, net . . . . . . . . .1,509,000 1,489,000
Real estate held for investment, net . . . . 252,000 252,000
Other assets, net . . . . . . . . . . . . . . 999,000 687,000
$5,819,000 $4,682,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion
of long-term debt . . . . . . . . . . . . . $ 171,000 $1,044,000
Accounts payable . . . . . . . . . . . . . 302,000 178,000
Accrued expenses . . . . . . . . . . . . . . . 957,000 794,000
Total current liabilities. . . . . . .1,430,000 2,016,000
Long-term debt . . . . . . . . . . . . . . . . . 695,000 597,000
Total liabilities. . . . . . . . . . . 2,125,000 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", 375,000 shares issued
and outstanding . . . . . . . . . . . . . . . 4,000 4,000
Common stock, $.01 par value,
26,000,000 authorized:
14,470,541 and 11,571,804 shares
issued; 14,464,300 and 11,565,563
shares outstanding. . . . .. . . . . . . . . 145,000 116,000
Additional paid-in capital . . . . . . . . . .13,011,000 11,884,000
Accumulated deficit. . . . . . . . . . . . . .(9,466,000) (9,935,000)
Total stockholders' equity . . . . . . 3,694,000 2,069,000
$5,819,000 $4,682,000
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
Three Months Nine Months
Ended June 30 Ended June 30
1997 1996 1997 1996
(Unaudited) (Unaudited)
----------in thousands-----------
<S> <C> <C> <C> <C>
Revenues:
Bankcard processing revenue. . . . . . . . .$2,881 $2,452 $8,752 $6,128
Bankcard transactions fees . . . . . . . . .1,288 781 3,358 2,061
Terminal sales and lease revenue . . . . . .1,426 148 2,213 2,082
Check guarantee fees . . . . . . . . . . . . 19 30 65 107
Research and development . . . . . . . . . . 38 153 100
5,652 3,411 14,541 10,478
Costs and expenses:
Bankcard processing and
transactions expense. . . . . . . . . . . .3,223 2,474 9,154 6,181
Cost of terminals sold and leased. . . . . .1,002 206 1,601 1,696
Check guarantee . . . . . . . . . . . . . . 7 17 30 58
Customer service . . . . . . . . . . . . . . 104 103 308 299
Selling. . . . . . . . . . . . . . . . . . . 17 8 30 31
General and administrative . . . . . . . . . 911 756 2,462 2,123
Research and development . . . . . . . . . . 98 48 293 224
. . . . . .5,362 3,612 13,878 10,612
Income (loss) from operations. . . 290 (201) 663 (134)
Interest income. . . . . . . . . . . . . . . . 19 11 48 28
Interest expense . . . . . . . . . . . . . . . (52)(52) (193) (161)
Loss reserve for notes receivable. . . . . . . (23) (46)
Income (loss) before income taxes . . . . 234 (242) 472 (267)
Income tax provision . . . . . . . . . . . . . 1 2 3 4
Net income (loss). . . . . . . . . . $233 $(244) $469 $(271)
Net income (loss) per share . . . . $.017 ($.021) $.036 ($.024)
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Nine Months
Ended June 30,
1996 1997
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . .$469,000($271,000)
Adjustments to reconcile net income to net
cash provided in operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . .142,000 149,000
Provision for losses on accounts and
notes receivable. . . . . . . . . . . . . . . . . .488,000 53,000
Provision for obsolete inventory. . . . . . . . . . .34,000
Fair value of stock issued in connection
with legal settlement . . . . . . . . . . . . . . .12,000
Changes in assets and liabilities:
Restricted cash . . . . . . . . . . . . . . . . . . .28,000 (169,000)
Accounts receivable . . . . . . . . . . . . . . . . .(898,000)(538,000)
Note receivable from stockholders and
related parties . . . . . . . . . . . . . . . . . . 24,000
Inventory . . . . . . . . . . . . . . . . . . . .(367,000)(95,000)
Prepaid expenses and other assets . . . . . . . . . . 5,000 3,000
Other assets, net . . . . . . . . . . . . . . . . . .(146,000)(48,000)
Accounts payable . . . . . . . . . . . . . . . . . .181,000 320,000
Accrued expenses. . . . . . . . . . . . . . . . . . . 163,000 2,000
Net cash provided by (used in)
operating activities. . . . . . . . . . . . . 111,000 (570,000)
Cash flows from investing activities:
Purchase of equipment.. . . . . . . . . . . . . . . . (100,000) (92,000)
Net cash used in investing activities . . . . . (100,000) (92,000)
Cash flows from financing activities:
Proceeds from issuance of notes payable . . . . . . .150,000 220,000
Repayment of notes payable. . . . . . . . . . . . . .(139,000)(105,000)
Issuance of preferred stock for cash. . . . . . . . . 700,000
Common stock warrants exercised . . . . . . . . . . .129,000
Proceeds from exercise of stock options . . . . . . . 59,000 48,000
Net cash provided by financing
activities . . . . . . . . . . . . . . . . . . 199,000 863,000
Net increase in cash . . . . . . . . . . . . . . . . .210,000 201,000
Cash and cash equivalents at beginning
of period . . . . . . . . . . . . . . . . . . . . 172,000 97,000
Cash and cash equivalents at end of period . . . . . .$ 382,000$ 298,000
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 June 30, 1997,
and for the three and nine 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 nine months ended June 30, 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 12,927,935 and 11,248,748 for the nine-month
periods ended June 30, 1997 and 1996, respectively.
NOTE 3 - Non-cash equity transactions
During the nine months ended June 30, 1997, the Company recorded the
following non-cash equity transactions:
(a) $900,000 of convertible notes were converted into 2,200,000 shares of
the Company's common stock
(b) 82,345 shares of common stock were issued in settlement of $69,000 of
the Company's obligations<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 Results 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 June 30, 1997 and 1996
Revenues. Electronic Clearing House, Inc. recorded a net income of $233,000
for the third quarter of fiscal year 1997 as compared to a net loss of
$244,000 in the prior fiscal year. The Company's overall revenue increased
66% over the same period in the prior fiscal year. The increase reflected
revenue growth of 29% in Bankcard processing and transactions revenue and 864
% increase in terminal sales and lease 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 and transaction revenue
is primarily from the increase in the number of active retail merchant
accounts and the increased transaction revenue generated from dealers
associated with a major equipment rental customer. As of June 30, 1997, the
Company processed for approximately 8,000 active retail merchant accounts and
approximately 6,000 equipment rental dealers located around the country.
The Company's expanding merchant base and profitability is primarily
attributable to: (i) the effective sales efforts of an independent processing-
related sales organization that presently accounts for about 70% of the
Company's new merchant relationships; (ii) the referral from the Company's
existing merchant base; (iii) the direct response to the Company's Internet
Home Page, which accounts for approximately 20% of the Company's merchant
growth; (iv) marketing to targeted retail merchant industry segments which
generally have higher discount rates and processing volume as compared to a
typical retail merchant; and (v) the growing number of installed equipment
rental dealers. The Company anticipates the growth to continue for fiscal
1997. However, during this fiscal quarter, several of the Company's larger
merchants have ceased operations which accounted for approximately 18% of the
bankcard processing revenue of the prior fiscal quarter.
An important 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 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. During July 1997, the
Company entered into an agreement, adding an additional bank, bringing its
primary bank relationships to a total of three. The Company is currently
finalizing an agreement with a fourth primary bank.
The Company's Internet-related product, ECHOnline, was introduced in January
1997 and is being adopted by several Internet Service Providers (ISP).
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) requires the merchant to
electronically advise the Company when they have shipped to the customer, and
3) allows the merchant to issue credits on a customer order directly with the
Company. By providing these services, ECHOnline becomes easier for the ISP to
adopt and improves its marketability.
Terminal sales and lease revenue for the three months ended June 30, 1997 were
$1,426,000 which represented an 864% increase over the same fiscal quarter
last year. The increase reflects the delivery of 1,700 additional systems to
a national rental organization and the delivery of 175 "Stand-Alone"
Electronic Money Order Dispenser ("EMOD") systems to the United States Postal
Service ("USPS") under a pilot program awarded to the Company.
Research and development revenue increased by $38,000 for the current fiscal
quarter over the same fiscal quarter last year, reflecting development work
done for existing customers.
Check guarantee fees decreased 37% in the current fiscal quarter as compared
to the same fiscal quarter last year. The reduction is the result 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 29% in the current
quarter of fiscal year 1997 as compared to the same fiscal period last year.
This was in direct relation to the 29% increase in processing revenues.
Cost of terminals sold and leased increased 386% in the current quarter of
fiscal year 1997 as compared to the same fiscal quarter last year. This
relates directly to the 864% increase in terminal sales.
Research and development expense increased 104% in the current fiscal quarter
as compared to the same fiscal quarter last year, primarily reflecting the
continuing development of systems for the United States Postal Service and for
electronic commerce.
Check guarantee expense decreased 59% in the current fiscal quarter over the
same fiscal quarter in the prior year as a result of the 37% decrease in check
guarantee revenue generated.
Selling and general and administrative expenses increased 21% in the current
fiscal quarter as compared to the same fiscal quarter last year. This was
mainly attributable to the higher employee-related costs associated with the
66% overall revenue increase and the incremental increase in operating costs
to support the Company's infrastructure.
Nine Months Ended June 30, 1997 and 1996
Revenues. The Company recorded a net income of $469,000 for the nine months
ended June 30, 1997 as compared to a net loss of $271,000 for the same period
last year. The increase resulted primarily from a 48% increase in bankcard
processing and bankcard transaction revenues and a 6% increase in terminal
sales and lease revenues for the same nine month period from the prior year.
Research and development revenue increased 53% for the nine months ended June
30, 1997 over the same period last year. This was a result of the Company's
direction in promoting software engineering development work for existing
customers.
Check guarantee fees decreased 39% for the nine months ended June 30, 1997
over the same nine month period last year due to management's decision not to
actively promote check guarantee services. The two primary reasons are: 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 39% for the nine months ended
June 30, 1997 as compared to the same nine month period last year.
Cost and Expenses. Processing-related expenses increased 48% for the nine
months ended June 30, 1997 as compared to the same nine month period last
year. Gross margin on bankcard processing increased from 21% for the nine
months ended June 30, 1996 to 22% for the nine months ended June 30, 1997.
The increase in gross margin was a combination of economies of scale in
customer service support costs which was offset by $160,000 of additional
provision for chargeback activity recorded in the current quarter.
Cost of terminals sold and leased decreased 6% for the nine month period ended
June 30, 1997 as compared to the same period last year. Gross margin on sales
and leasing of equipment increased from 19% for the nine month period ended
June 30, 1996 to 28% for the nine months period ended June 30, 1997.
Research and development expense increased 31% for the nine month period
ended June 30, 1997 as compared to the same period last year. This is
reflective of the strategic investments made by the Company, both personnel
and products needed, in order to compete in the electronic commerce industry.
Selling and general and administrative expenses increased 16% for the nine
month period ended June 30, 1997 over the same nine month period last year.
However, when expressed as a percentage of total revenue, selling and general
and administrative expenses decreased from 20% of total revenues for the nine
months ended June 30, 1996 to 17% of total revenues for the nine months ended
June 30, 1997.
Interest expense increased from $161,000 for the nine month period ended June
30, 1996 to $193,000 for the nine months ended June 30, 1997. This was a
result of the additional financing costs related to the Company's capital
equipment acquisitions and increase in inventory financing costs during this
fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
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.
As of June 30, 1997, the Company had available cash of $382,000, restricted
cash of $488,000 in reserve with its primary processing bank and working
capital of $1,629,000.
Accounts receivable increased $461,000 during the nine month period ended June
30, 1997 as a result of increased processing and leasing activities. Inventory
costs increased $217,000 which was mainly attributable to the inventory build-
up related to the USPS pilot program.
The Company's subsidiary Computer Based Controls, Inc. (CBC) received the
First Article Test approval for its 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 began in the Dallas, Texas area 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 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 the merchant cash reserves
held under a cross collateral agreement are adequate to cover all chargeback
activities 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.
During the nine month period ended June 30, 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.
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 June 30, 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: July 30, 1997 By: \s\Alice Cheung
Alice Cheung, Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 382
<SECURITIES> 0
<RECEIVABLES> 2,089
<ALLOWANCES> 727
<INVENTORY> 796
<CURRENT-ASSETS> 3,059
<PP&E> 3,389
<DEPRECIATION> 1,880
<TOTAL-ASSETS> 5,819
<CURRENT-LIABILITIES> 1,430
<BONDS> 695
0
4
<COMMON> 145
<OTHER-SE> 3,545
<TOTAL-LIABILITY-AND-EQUITY> 5,819
<SALES> 2,213
<TOTAL-REVENUES> 14,541
<CGS> 1,601
<TOTAL-COSTS> 9,492
<OTHER-EXPENSES> 2,885
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 193
<INCOME-PRETAX> 472
<INCOME-TAX> 3
<INCOME-CONTINUING> 469
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 469
<EPS-PRIMARY> .036
<EPS-DILUTED> 0
</TABLE>
