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, 1998
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 27, 1999, there were 17,149,861 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, 1998 and September 30, 1998
Consolidated Statement of Operations 4
Three months ended December 31,
1998 and 1997
Consolidated Statement of Cash Flows 5
Three months ended December 31, 1998 and 1997
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.
CONSOLIDATED BALANCE SHEET
<TABLE>
ASSETS
<CAPTION>
December 31 September 30
1998 1998
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . $ 3,016,000 $ 2,486,000
Restricted cash. . . . . . . . . . . . . . . . 534,000 651,000
Accounts receivable less allowance of
$1,854,000 and $1,829,000 . . . . . . . . . . 1,065,000 1,251,000
Inventory less allowance of $202,000
and $202,000. . . . . . . . . . . . . . . . . 760,000 718,000
Prepaid expenses and other assets. . . . . . . 60,000 16,000
Notes receivable from related parties . . . . 31,000 32,000
Total current assets . . . . . . . . . 5,466,000 5,154,000
Noncurrent assets:
Long term receivables . . . . . . . . . . . . 324,000 320,000
Property and equipment, net . . . . . . . . . 1,689,000 1,606,000
Real estate held for investment, net . . . . 252,000 252,000
Other assets, net . . . . . . . . . . . . . . 676,000 693,000
$8,407,000 $8,025,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion
of long-term debt . . . . . . . . . . . . . $ 79,000 $ 92,000
Accounts payable . . . . . . . . . . . . . 76,000 173,000
Accrued expenses . . . . . . . . . . . . . . . 827,000 845,000
Deferred income. . . . . . . . . . . . . . . . 433,000 433,000
Total current liabilities . . . . . . . 1,415,000 1,543,000
Long-term debt . . . . . . . . . . . . . . . . . 660,000 639,000
Total liabilities . . . . . . . . . . . 2,075,000 2,182,000
Stockholders' equity:
Convertible preferred stock, $.01 par value,
5,000,000 shares authorized:
Series "H", 23,511 shares issued and outstanding:
Series "K", 100,000 and 325,000 shares issued
and outstanding . . . . . . . . . . . . . . 1,000 3,000
Series "L", 104,000 and 168,000 shares issued
and outstanding . . . . . . . . . . . . . . 1,000 2,000
Common stock, $.01 par value, 26,000,000 authorized:
16,841,541 and 15,120,541 shares issued;
16,835,300 and 15,114,300 shares outstanding. . . . .168,000 151,000
Additional paid-in capital. . . . . . . . . . 14,357,000 14,140,000
Accumulated deficit . . . . . . . . . . . . . (8,195,000) (8,453,000)
Total stockholders' equity . . . . . . 6,332,000 5,843,000
$8,407,000 $8,025,000
See accompanying notes to consolidated financial statements.
</TABLE>
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months
Ended December 31,
1998 1997
(Unaudited)
<S> <C> <C>
Revenues:
Bankcard processing revenue. . . . . . . . . $3,376,000 $2,652,000
Bankcard transaction fees. . . . . . . . . . 1,771,000 1,446,000
Terminal sales and lease revenue . . . . . . 94,000 72,000
Other revenue. . . . . . . . . . . . . . . . 228,000 42,000
5,469,000 4,212,000
Costs and expenses:
Bankcard processing and transaction expense . 3,721,000 2,979,000
Cost of terminals sold and leased . . . . . . 73,000 121,000
Other operating costs . . . . . . . . . . . . 257,000 210,000
Selling, general and administrative. . . . . . 1,169,000 833,000
5,220,000 4,143,000
Income from operations. . . . . . . . . . 249,000 69,000
Interest income. . . . . . . . . . . . . . . . . 48,000 21,000
Interest expense . . . . . . . . . . . . . . . . (25,000) (27,000)
Income before income tax provision. . . . 272,000 63,000
Income tax provision, net . . . . . . . . . . . (14,000) (1,000)
Net income . . . . . . . . . . . . . $ 258,000 $ 62,000
Earnings per share - Basic . . . . . $ 0.016 $ 0.004
Earnings per share - Diluted . . . . . . $ 0.011 $ 0.003
See accompanying notes to consolidated financial statements.
</TABLE>
ELECTRONIC CLEARING HOUSE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Ended December 31,
1998 1997
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . .$ 258,000 $ 62,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . 63,000 62,000
Amortization. . . . . . . . . . . . . . . . . . . . 18,000 22,000
Provisions for losses on accounts and
notes receivable . . . . . . . . . . . . . . . . . 25,000 (32,000)
Provision for obsolete inventory. . . . . . . . . . -0- 18,000
Changes in assets and liabilities:
Restricted cash . . . . . . . . . . . . . . . . . . 117,000 (123,000)
Accounts receivable . . . . . . . . . . . . . . . . 156,000 (247,000)
Inventory . . . . . . . . . . . . . . . . . . . . (41,000) (142,000)
Prepaid expenses and other assets . . . . . . . . . (44,000) (47,000)
Other assets . . . . . . . . . . . . . . . . . . . (1,000) (16,000)
Accounts payable . . . . . . . . . . . . . . . . . (97,000) (20,000)
Accrued expenses. . . . . . . . . . . . . . . . . . (18,000) 516,000
Net cash provided by operating activities. . . . . . 436,000 53,000
Cash flows from investing activities:
Purchase of equipment.. . . . . . . . . . . . . . . (103,000) (25,000)
Net cash used in investing activities. . . . . . . . (103,000) (25,000)
Cash flows from financing activities:
Decrease in notes receivable from
related parties . . . . . . . . . . . . . . . . . . 1,000 -0-
Repayment of notes payable . . . . . . . . . . . . . (35,000) (52,000)
Proceeds from issuance of preferred stock . . . . . -0- 200,000
Proceeds from common stock warrants exercised. . . 190,000 -0-
Proceeds from exercise of stock options. . . . . . . 41,000 -0-
Net cash provided by financing activities. . . . . . 197,000 148,000
Net increase in cash . . . . . . . . . . . . . . . . . 530,000 176,000
Cash and cash equivalents at beginning of period . . . 2,486,000 772,000
Cash and cash equivalents at end of period . . . . . .$3,016,000 $ 948,000
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 December 31,
1998, 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 period. The
consolidated financial statements herein 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 on Form 10-K for the
fiscal year ended September 30, 1998. The result of operations for the three
months ended December 31, 1998 are not necessarily indicative of the likely
results for the entire fiscal year ending September 30, 1999.
NOTE 2 - Net income per share:
Net income per share is based on the weighted average number of common
shares and dilutive common equivalent shares outstanding during the period.
The shares issuable upon conversion of preferred stock and exercise of options
and warrants are included in the weighted average for the calculation of net
income per share except where it would be anti-dilutive. For the net income
per common share, the convertible preferred stock is not considered to be
equivalent to common stock. Earnings per share - basic amounts included in
the consolidated statement of operations are based upon average shares
outstanding of 15,876,845 and 14,793,150 in the three months ended December
31, 1998 and 1997, respectively. Earnings per share - diluted amounts
included in the consolidated statements of operations are based upon average
shares outstanding of 22,768,053 and 21,490,500 in the three months ended
December 31, 1998 and 1997, respectively. Earnings per share - diluted
assuming full dilution for the first quarter of fiscal 1999 was determined on
the assumption that the convertible preferred stock was converted, and the
warrants and all the options were exercised on October 1, 1998 or the issuance
date, whichever is later.
NOTE 3 - Non-cash transactions
Siginificant non-cash transaction for the three months ended December 31,
1998 was as follows:
- Capital equipment of $43,000 was acquired under capital leases.
Significant non-cash transaction for the three months ended December 31,
1997 was as follows:
- Capital equipment of $26,000 was acquired under capital leases.
<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, 1998 and 1997
Revenues. Electronic Clearing House, Inc. recorded a net income of $258,000
for the first quarter of fiscal year 1999 as compared to a net income of
$62,000 in the same period for the prior year, a 316.1% increase. This is the
result of an overall increase in revenue growth of 29.8% compared with the
same period last fiscal year. The increase reflected revenue growth of 25.6%
in bankcard processing and transaction revenue combined with a 442.9% increase
in other 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 attributable to three
areas: (1) 8.5% increase in processing volume along with the rate increases
for the entire merchant base as a result of the interchange rate increases
implemented by Visa and MasterCard in April 1998; (2) 60.2% increase in
inventory transaction volume with U-Haul International due to the additional
systems deployed during the past year; and (3) the implementation of certain
industry specific fees in the third quarter of fiscal 1998. As of December
1998, the Company processed for over 17,000 active retail merchant accounts
and equipment rental dealers located around the country.
Revenue related to terminal sales is recognized when the equipment is shipped.
Terminal sales and lease revenue for the three months ended December 31, 1998
were $94,000 which represented a 30.6% increase over the same fiscal quarter
last year. The Company is currently scheduled to deploy another 2,500 U-Haul
systems in the second quarter of fiscal 1999. The total number of active U-
Haul systems in the field will be approximately 11,500 after this deployment
is completed.
Other revenue increased 442.9% for the current fiscal quarter over the same
fiscal quarter last year, reflecting software development work currently
underway for a casino cash advance provider. The Company is in negotiation
with this casino cash advance provider to finalize the contractual
arrangements regarding this project.
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 24.9% in the current fiscal quarter over the same fiscal period last
year. This was in direct relation to the 25.6% increase in processing and
transaction revenues for the current fiscal quarter.
Cost of terminals sold and leased decreased 39.7% in the first quarter of
fiscal year 1999 as compared to the same fiscal quarter last year. This
relates to the decrease in lease receivable bad debt provisions for the
current fiscal quarter as compared to the prior year.
Research and development expense for the current fiscal quarter increased
45.7% when compared with the same fiscal quarter last year. This is
reflective of the on-going investments made by the Company both in programming
personnel and specialized cash advance developmental project.
Selling and general and administrative expenses increased 40.3% in the current
fiscal quarter as compared to the same fiscal quarter last year. This
reflects the Company's commitment toward several sales programs which was
implemented during the current fiscal quarter. Additionally, the higher
general and administrative expense is also associated with the 29.8% overall
revenue increase and the incremental increase in operating costs to support
the Company's infrastructure.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had available cash of $3,016,000,
restricted cash of $534,000 in reserve with its primary processing banks and
working capital of $4,051,000.
Accounts receivable net of allowance for doubtful accounts decreased $186,000
during the three-month period ended December 31, 1998. Inventory costs
increased $42,000 which was due to the inventory build-up for the U-Haul
equipment order which is scheduled to be delivered during the second fiscal
quarter of 1999.
At the present, the Company's cash flows from operations is sufficient to
support the current level of research and developments costs and marketing
costs which would allow the Company to further develop its suite of Internet
products and services which is believed to be essential to the Company's
future growth.
The Company's current ratio improved from 2.60 to 1 at December 31, 1997 to
3.86 to 1 at December 31, 1998. The Company's debt to equity ratio also
improved from .46 to 1 at December 31, 1997 to .33 to 1 at December 31, 1998.
Other - Year 2000 Issue
Many existing computer systems and related software applications, and other
control devices, use only two digits to identify a year in a date field,
without considering the impact of the upcoming change in the century. Such
systems, applications and/or devices could fail or create erroneous results
unless corrected so that they can process data related to the Year 2000. The
Company relies on computer systems, applications and devices in operating and
monitoring all major aspects of its business, including, but not limited to,
its financial systems, customer services, internal networks and
telecommunication equipment, and end products. The Company also relies,
directly and indirectly, on the external systems of various independent
business enterprises, such as its customers, sponsoring banks, suppliers,
creditors, financial organizations, and of governments for the accurate
exchange of data and related information.
In fiscal 1997, the Company received independent certification of Year 2000
compliance from Visa and from MasterCard for processing authorization
requests. All possible paths for such transactions were demonstrated to be
compliant.
In fiscal 1998, the Company assessed the Year 2000 issues in depth and
developed a comprehensive plan. The Company is currently executing its plan
to minimize the potential impact of the Year 2000 issues on its business and
expects to be in a testing mode in the first calendar quarter of 1999. The
Company spent approximately $200,000 in fiscal year 1998 in connection with
the Year 2000 problems. Management's current estimate is that the costs
associated with the Year 2000 issue will be approximately $250,000 in fiscal
1999. The assignment of resources to address the Year 2000 issue has had a
minor impact on development and/or delay of other Company projects. The
Company's existing contingency plan for business resumption during and
following catastrophic events has been augmented to provide for longer-term
outages that could result from Year 2000 issues. For example, the
Uninterruptible Power Supply system that has served the Company since 1987 has
been replaced with a much more robust system. In addition, a stand-alone
power generator is currently being installed to increase the Company's ability
to sustain longer-term outages. However, despite the Company's efforts to
address the Year 2000 impact on its internal systems, the Company may have
failed to fully identify all areas and, once discovered, the Company may not
be able to resolve such areas without disruption of its business and without
incurring significant expenses. In addition, even if the internal systems of
the Company are not materially affected by the Year 2000 issue, the Company
could be affected adversely as a result of any disruption in the operation of
the various third-party enterprises with which the Company interacts.
Significant care is being taken to confirm other key providers/vendors are
fully compliant with Year 2000 issues but no assurance can be given that the
Company's efforts in this regard or that the representations made regarding
compliance with Year 2000 by vendors will prove successful.
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, 1998.
<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: January 28, 1999 By: \s\Alice Cheung
Alice Cheung, Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 3016
<SECURITIES> 0
<RECEIVABLES> 2919
<ALLOWANCES> 1854
<INVENTORY> 760
<CURRENT-ASSETS> 5466
<PP&E> 3924
<DEPRECIATION> 2235
<TOTAL-ASSETS> 8407
<CURRENT-LIABILITIES> 1415
<BONDS> 660
0
2
<COMMON> 168
<OTHER-SE> 6162
<TOTAL-LIABILITY-AND-EQUITY> 8407
<SALES> 94
<TOTAL-REVENUES> 5469
<CGS> 73
<TOTAL-COSTS> 3978
<OTHER-EXPENSES> 1169
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> 272
<INCOME-TAX> 14
<INCOME-CONTINUING> 258
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 258
<EPS-PRIMARY> .016
<EPS-DILUTED> .011
</TABLE>
