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 December 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 January 23, 1998, there were 14,976,541 shares of the Registrant's
Common Stock outstanding.
ELECTRONIC CLEARING HOUSE, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet 3
December 31, 1997 and September 30, 1997
Consolidated Statement of Operations 4
Three months ended December 31,
1997 and 1996
Consolidated Statement of Cash Flows 5
Three months ended December 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 10
Signatures 11 <PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
ELECTRONIC CLEARING HOUSE, INC.
<TABLE>
CONSOLIDATED BALANCE SHEET
<CAPTION>
ASSETS
December 31 September 30
1997 1997
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . .$ 948,000 $ 772,000
Restricted cash . . . . . . . . . . . . . . . 446,000 323,000
Accounts receivable less allowance
of $993,000 and $1,025,000 . . . . . . . . .1,446,000 1,129,000
Inventory less allowance of
$88,000 and $70,000. . . . . . . . . . . . . 873,000 749,000
Prepaid expenses and other assets . . . . . . 70,000 23,000
Notes receivable from stockholders
and related parties less allowance
of $148,000. . . . . . . . . . . . . . . . . 51,000 51,000
Total current assets. . . . . . . . . . . 3,834,000 3,047,000
Noncurrent assets:
Long term receivables . . . . . . . . . . . . 335,000 373,000
Property and equipment, net . . . . . . . . .1,559,000 1,570,000
Real estate held for investment, net . . . . 252,000 252,000
Other assets, net . . . . . . . . . . . . . . 836,000 842,000
. . . . . . . . . . . . . . . . . . . .$6,816,000 $6,084,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
portion of long-term debt . . . . . . . . $ 135,000 $ 150,000
Accounts payable . . . . . . . . . . . . 92,000 112,000
Accrued expenses. . . . . . . . . . . . . . . 1,247,000 731,000
Total current liabilities . . . . . . . .1,474,000 993,000
Long-term debt . . . . . . . . . . . . . . . . . 670,000 681,000
Total liabilities . . . . . . . . . . . . . . 2,144,000 1,674,000
Stockholders' equity:
Convertible preferred stock, $.01 par value,
5,000,000 shares authorized:
Series "H", 23,511 shares
issued and outstanding: . . . . . . . . . .
Series "K", 325,000 and 375,000
shares issued and outstanding . . . . . . . 3,000 4,000
Series "L", 168,000 and 172,000
shares issued and outstanding . . . . . . . 2,000 2,000
Common stock, $.01 par value,
26,000,000 authorized:
14,976,541 and 14,600,541 shares
issued; 14,970,300 and 14,594,300
shares outstanding. . . . . . . . . . . . . 150,000 146,000
Additional paid-in capital. . . . . . . . . .14,062,000 13,865,000
Accumulated deficit . . . . . . . . . . . . . (9,545,000) (9,607,000)
Total stockholders' equity . . . . . . . 4,672,000 4,410,000
$6,816,000 $6,084,000
See accompanying notes to consolidated financial statements.
</TABLE>
ELECTRONIC CLEARING HOUSE, INC.
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
Three Months
Ended December 31,
1997 1996
(Unaudited)
<S> <C> <C>
Revenues:
Bankcard processing revenue . . . . . . . . $2,652,000 $2,858,000
Bankcard transaction fees . . . . . . . . . 1,446,000 1,020,000
Terminal sales and lease revenue . . . . . 72,000 153,000
Check guarantee fees . . . . . . . . . . . 18,000 26,000
Research and development. . . . . . . . . . 24,000 30,000
. . . . . . . . . . . . . . . . . . . . 4,212,000 4,087,000
Costs and expenses:
Bankcard processing . . . . . . . . . . . . 2,979,000 2,883,000
Cost of terminals sold and leased . . . . . 121,000 153,000
Check guarantee . . . . . . . . . . . . . 7,000 10,000
Customer service. . . . . . . . . . . . . . 98,000 104,000
Selling . . . . . . . . . . . . . . . . . . 6,000 7,000
General and administrative. . . . . . . . . 827,000 725,000
Research and development . . . . . . . . . 105,000 90,000
. . . . . . 4,143,000 3,972,000
Income from operations . . . . . . . . 69,000 115,000
Interest income. . . . . . . . . . . . . . . . 21,000 13,000
Interest expense . . . . . . . . . . . . . . . (27,000) (65,000)
Loss reserve for notes receivable. . . . . . . 0 (12,000)
Income before provision for income tax 63,000 51,000
Provision for income tax . . . . . . . . . . . (1,000) (1,000)
Net income . . . . . . . . . . . . $ 62,000 $ 50,000
Earnings per share . . . . . . . . $ .004 $ .004
See accompanying notes to consolidated financial statements.
</TABLE>
ELECTRONIC CLEARING HOUSE, INC.
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Three Months
Ended December 31,
1997 1996
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . $ 62,000 $ 50,000
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Depreciation . . . . . . . . . . . . . . . . 62,000 47,000
Amortization . . . . . . . . . . . . . . . . 22,000
Provisions for losses on accounts
and notes receivable. . . . . . . . . . . . (32,000) 75,000
Provision for obsolete inventory . . . . . . 18,000 6,000
Changes in assets and liabilities:
Restricted cash. . . . . . . . . . . . . . . (123,000) (18,000)
Accounts receivable. . . . . . . . . . . . . (247,000) (339,000)
Inventory . . . . . . . . . . . . . . . . . (142,000) (160,000)
Prepaid expenses and other assets. . . . . . (47,000) 7,000
Other assets . . . . . . . . . . . . . . . . (16,000) (91,000)
Accounts payable . . . . . . . . . . . . . . (20,000) 51,000
Accrued expenses . . . . . . . . . . . . . . 516,000 479,000
Net cash provided by operating activities . . 53,000 107,000
Cash flows from investing activities:
Purchase of equipment. . . . . . . . . . . . (25,000) (31,000)
Net cash used in investing activities . . . . (25,000) (31,000)
Cash flows from financing activities:
Repayment of notes payable. . . . . . . . . . (52,000) (38,000)
Proceeds from issuance of preferred stock . . 200,000
Common stock warrants exercised. . . . . . . 44,000
Proceeds from exercise of stock options . . . 59,000
Net cash provided by financing activities . . 148,000 65,000
Net increase in cash . . . . . . . . . . . . . . 176,000 141,000
Cash and cash equivalents at beginning of period 772,000 172,000
Cash and cash equivalents at end of period . . . $ 948,000 $ 313,000
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
ELECTRONIC CLEARING HOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of presentation:
The accompanying consolidated financial statements as of December 31,
1997, and for the three-month period 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, 1997. The result of operations for the three-
months ended December 31, 1997 are not necessarily indicative of the results
for the entire fiscal year ending September 30, 1998.
NOTE 2 - Earnings per share:
Earnings per share is computed based upon the weighted average number of
common shares outstanding of 14,793,150 and 11,770,399 for the three-month
periods ended December 31, 1997 and 1996, respectively.
<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 December 31, 1997 and 1996
Revenues. Electronic Clearing House, Inc. recorded a net income of $62,000
for the first quarter of fiscal year 1998 as compared to a net income of
$50,000 in the same period for the prior year, a 24% increase. Overall revenue
increased 3% over the same period in the prior year. The increase reflected
revenue growth of 6% in bankcard processing and transaction revenue and a 53%
decrease 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, modification in the
Company's pricing policy with reference to monthly fees, and the increased
transaction revenue generated from dealers associated with a major equipment
rental customer. As of December 31, 1997, the Company processed for over
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; (v) the growing number of installed equipment rental
dealers; and (vi) referrals from two new primary banks.
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 currently has four primary bank
relationships. Multiple 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's Internet-related product, ECHONLINE, was introduced in January
1997 and has been adopted by several Internet Service Providers (ISP). The
Company anticipates additional growth in merchant volume as additional ISP's
finalize their interface programs to ECHONLINE.
Revenue related to terminal sales are recognized when the equipment is
shipped. Terminal sales and lease revenue for the three months ended December
31, 1997 were $72,000 which represented a 53% decrease over the same fiscal
quarter last year. This was primarily attributable to the declining number
of referrals from one of the Company's leading terminal leasing agents. The
Company is introducing ECHOTEL, a method of transaction entry that utilizes
the telephone, which is expected to replace the revenues the Company normally
recognizes through its terminal leasing activities.
Research and development revenue remained relatively constant for the current
fiscal quarter over the same fiscal quarter last year, reflecting development
work done for existing customers.
Check guarantee fees decreased by $8,000 for the current fiscal quarter over
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.
The Company is currently evaluating whether check guarantee should be retained
as a product line and, if retained, what its total product line should include
and how it can be effectively marketed outside the state of California.
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, transaction expense and customer service expense,
increased 3% in the current fiscal quarter over the same fiscal period last
year. This was in direct relation to the 6% increase in processing revenues.
Cost of terminals sold and leased decreased 21% in the current quarter of
fiscal year 1998 as compared to the same fiscal quarter last year. This
relates directly to the 53% decrease in terminal and lease sales.
Research and development expense increased 17% in the current fiscal quarter
as compared to the same fiscal quarter last year. This is reflective of the
strategic investments made by the Company in programming personnel and
specialized developmental equipment.
Check guarantee expense decreased 30% in the current fiscal quarter over the
same fiscal quarter in the prior year as a result of the 31% decrease in check
guarantee revenue generated.
Selling and general and administrative expenses increased 14% 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
3% overall revenue increase and the incremental increase in operating costs to
support the Company's infrastructure.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had available cash of $948,000,
restricted cash of $446,000 in reserve with its primary processing banks and a
working capital of $2,360,000.
Accounts receivable net of allowance for doubtful accounts increased $317,000
during the three-month period ended December 31, 1997. This was primarily due
to the increase in chargeback receivables from two former merchants. The
Company is currently seeking to recover these chargeback receivables through
legal means. Inventory costs increased $142,000 which was mainly
attributable to the inventory build-up related to an equipment order of 3,100
terminals which are scheduled to be delivered during the second and third
fiscal quarters of 1998.
Currently, the Company's cash flow from operations is sufficient to support
the research and development costs and marketing costs which would allow the
Company to be competitive in the electronic commerce industry.
In January 1998, the United States Postal Service ("USPS") advised the Company
that a pilot program, which was initiated in May 1997, has been extended an
additional six months. The USPS has requested and agreed to pay for the
development of additional features to be incorporated in the terminal-based
operating system used in the postal Electronic Money Order Dispenser ("EMOD").
Due primarily to the increased forms costs and a need for consistency in
operations, the USPS has decided to utilize a wide forms format for any
national EMOD program. This will require that the printer used in the current
EMOD system be changed to a wide carriage type of printer. The Company is
investigating various printers to determine the one best suited to work in the
EMOD environment and will provide its suggestions to the USPS during the
extended pilot period.
At December 31, 1997, the ratio of current assets to current liabilities was
2.60:1 as compared to 1.16:1 at December 31, 1996. The Company's debt to
equity ratio was .46:1 at December 31, 1997 as compared to 1.30:1 at December
31, 1996.
<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 December 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: January 27, 1998 By: \s\Alice Cheung
Alice Cheung, Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 948
<SECURITIES> 0
<RECEIVABLES> 2,439
<ALLOWANCES> 993
<INVENTORY> 873
<CURRENT-ASSETS> 3,834
<PP&E> 3,568
<DEPRECIATION> 2,009
<TOTAL-ASSETS> 6,816
<CURRENT-LIABILITIES> 1,474
<BONDS> 670
0
5
<COMMON> 150
<OTHER-SE> 4,517
<TOTAL-LIABILITY-AND-EQUITY> 6,816
<SALES> 72
<TOTAL-REVENUES> 4,212
<CGS> 121
<TOTAL-COSTS> 3,084
<OTHER-EXPENSES> 938
<LOSS-PROVISION> 0
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</TABLE>
