UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
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(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, 1999
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 February 7, 2000, there were 21,518,126 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, 1999 and September 30, 1999
Consolidated Statement of Operations 4
Three months ended December 31,
1999 and 1998
Consolidated Statement of Cash Flows 5
Three months ended December 31, 1999 and 1998
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of
Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
ELECTRONIC CLEARING HOUSE, INC.
<TABLE>
CONSOLIDATED BALANCE SHEET
<CAPTION>
ASSETS
December 31 September 30
1999 1999
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . .$ 1,770,000 $ 2,900,000
Restricted cash . . . . . . . . . . . . . . . 710,000 736,000
Accounts receivable less allowance
of $975,000 and $1,001,000 . . . . . . . . . 1,368,000 1,532,000
Inventory less allowance of
$202,000 and $202,000. . . . . . . . . . . . 607,000 580,000
Prepaid expenses and other assets . . . . . . 146,000 88,000
Other receivable . . . . . . . . . . . . . . 1,404,000 323,000
Total current assets. . . . . . . . . . 6,005,000 6,159,000
Noncurrent assets:
Other receivables . . . . . . . . . . . . . . 19,000 27,000
Property and equipment, net . . . . . . . . . 2,238,000 1,962,000
Real estate held for investment, net . . . . 252,000 252,000
Deferred tax asset. . . . . . . . . . . . . . 1,385,000 1,392,000
Other assets, net . . . . . . . . . . . . . . 1,424,000 1,222,000
Goodwill, net . . . . . . . . . . . . . . . . 1,885,000 1,918,000
Total assets. . . . . . . . . . . . . . .$13,208,000 $12,932,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
portion of long-term debt . . . . . . . . $ 149,000 $ 149,000
Accounts payable . . . . . . . . . . . . 267,000 159,000
Accrued expenses. . . . . . . . . . . . . . . 757,000 779,000
Deferred income . . . . . . . . . . . . . . . 62,000 62,000
Total current liabilities . . . . . . . 1,235,000 1,149,000
Long-term debt . . . . . . . . . . . . . . . . . 575,000 599,000
Total liabilities . . . . . . . . . . . 1,810,000 1,748,000
Stockholders' equity:
Convertible preferred stock, $.01 par value,
5,000,000 shares authorized:
Series "K", 25,000 and 25,000 shares
issued and outstanding. . . . . . . . . . . -0- -0-
Series "L", 40,000 and 40,000 shares
issued and outstanding. . . . . . . . . . . -0- -0-
Common stock, $.01 par value,
36,000,000 authorized:
20,328,126 and 19,874,126 shares issued;
20,241,260 and 19,788,213 shares
outstanding. . . . . . . . . . . . . . . . 203,000 199,000
Additional paid-in capital. . . . . . . . . . 17,189,000 16,958,000
Accumulated deficit . . . . . . . . . . . . . (5,854,000) (5,835,000)
Less treasury stock at cost,
86,866 and 85,913 common shares. . . . . . . (140,000) (138,000)
Total stockholders' equity . . . . . . 11,398,000 11,184,000
Total liabilities and
stockholders' equity . . . . . . . . . .$13,208,000 $12,932,000
See accompanying notes to consolidated financial statements.
</TABLE>
ELECTRONIC CLEARING HOUSE, INC.
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
<CAPTION>
Three Months
Ended December 31,
1999 1998
(Unaudited)
<S> <C> <C>
Revenues:
Bankcard processing revenue . . . . . . . . $3,635,000 $3,376,000
Transaction revenue . . . . . . . . . . . . 2,462,000 1,771,000
Terminal sales and lease revenue . . . . . 108,000 94,000
Other revenue . . . . . . . . . . . . . . . -0- 228,000
. . . . . . . . . . . . . . . . . . . . 6,205,000 5,469,000
Costs and expenses:
Processing and transaction expense . . . . 4,361,000 3,734,000
Cost of terminals sold and leased . . . . . 95,000 72,000
Other operating costs . . . . . . . . . . 731,000 569,000
Selling, general and administrative . . . . 1,022,000 845,000
Amortization expense-acquisition. . . . . . 52,000 -0-
. . . . . . 6,261,000 5,220,000
(Loss) income from operations. . . . . (56,000) 249,000
Interest income. . . . . . . . . . . . . . . . 71,000 48,000
Interest expense . . . . . . . . . . . . . . . (19,000) (25,000)
(Loss) income before provision
for income tax. . . . . . . . . . . . (4,000) 272,000
Provision for income taxes . . . . . . . . . . (15,000) (14,000)
Net (loss) income . . . . . . . . . . . $ (19,000) $ 258,000
Earnings per share - Basic . . . . . . $ -0- $ 0.02
Earnings per share - Diluted. . . . . . . $ -0- $ 0.01
See accompanying notes to consolidated financial statements.
</TABLE>
ELECTRONIC CLEARING HOUSE, INC.
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Three Months
Ended December 31,
1999 1998
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (19,000) $ 258,000
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Depreciation 79,000 63,000
Amortization 98,000 18,000
Provisions for losses on accounts and
notes receivable 54,000 25,000
Provision for income taxes 7,000 -0-
Changes in assets and liabilities:
Restricted cash 26,000 117,000
Accounts receivable 116,000 156,000
Inventory (27,000) (41,000)
Prepaid expenses and other assets (92,000) (45,000)
Accounts payable 108,000 (97,000)
Accrued expenses (17,000) (18,000)
Net cash provided by operating activities 333,000 436,000
Cash flows from investing activities:
Other assets (249,000) -0-
Purchase of equipment. (355,000) (103,000)
(Increase) decrease in notes receivable (1,047,000) 1,000
Net cash used in investing activities (1,651,000) (102,000)
Cash flows from financing activities:
Repayment of notes payable (29,000) (35,000)
Proceeds from acquisition 4,000 -0-
Proceeds from common stock warrants exercised 140,000 190,000
Proceeds from exercise of stock options 73,000 41,000
Net cash (used in) provided by
financing activities (188,000) 196,000
Net (decrease) increase in cash (1,130,000) 530,000
Cash and cash equivalents at beginning of period 2,900,000 2,486,000
Cash and cash equivalents at end of period $1,770,000 $3,016,000
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,
1999, 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 to Stockholders
incorporated by reference in the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1999. The result of operations for the three
months ended December 31, 1999 are not necessarily indicative of the likely
results for the entire fiscal year ending September 30, 2000.
NOTE 2 - Net income (loss) per share:
Net income (loss) 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 (loss) per share except where it would be anti-
dilutive. For the basic net income (loss) per common share, the convertible
preferred stock is not considered to be equivalent to common stock. Earnings
(loss) per share - basic amounts included in the consolidated statement of
operations are based upon average shares outstanding of 19,970,115 and
15,876,845 in the three months ended December 31, 1999 and 1998, respectively.
Earnings (loss) per share - diluted amounts included in the consolidated
statements of operations are based upon average shares outstanding of
22,768,053 in the three months ended December 31, 1998. Diluted earnings per
share for the three months ended December 31, 1999, are not disclosed as
potentially dilutive common stock equivalents would be anti-dilutive to the
loss per share calculation.
NOTE 3 - Non-cash transactions:
Significant non-cash transaction for the three months ended December 31,
1999 was as follows:
- In connection with the acquisition of Peak Check Services, a collection
division of Magic Software Development, Inc., the Company issued 20,000
shares of common stock with a market value of $22,000.
Significant non-cash transaction for the three months ended December 31,
1998 was as follows:
- Capital equipment of $43,000 was acquired under capital leases.
NOTE 4 - Inventory:
The components of inventory are as follows:
<TABLE>
<CAPTION>
December 31 September 30
1999 1999
<S> <C> <C>
Raw materials $242,000 $249,000
Finished goods 567,000 533,000
$809,000 $782,000
Less:
Allowance for obsolescence 202,000 202,000
$607,000 $580,000
</TABLE>
NOTE 5 - Note Receivable:
In November 1999, the Company completed a $1,000,000 post-petition
secured financing arrangement with Tropical Beaches, Inc. dba New Strategies,
a bankcard processing merchant who filed for Chapter 11 protection on June 29,
1999. This loan is secured by all the assets of New Strategies and also has
super-priority administrative claim status with respect to any unpaid
administrative claims in the Chapter 11 case. This loan bears interest at
eighteen percent (18%) per annum and is currently scheduled to be repaid
starting in February 2000.
NOTE 6 - Segment Information:
The Company currently operates in three business segments: Bankcard and
transaction processing, Terminal Sales and Leasing, and check-related
products, all of which are located in the United States.
The Company's reportable operating segments have been determined in
accordance with the Company's internal management structure, which is
organized based on operating activities.
<TABLE>
<CAPTION>
For the Three Months Ended
December 31,
1999 1998
<S> <C> <C>
Revenues:
Bankcard and transaction processing $5,876,000 $5,361,000
Terminal sales and leasing 108,000 94,000
Check-related products 221,000 14,000
$6,205,000 $5,469,000
Operating income:
Bankcard and transaction processing $338,000 $351,000
Terminal sales and leasing (87,000) (107,000)
Check-related products (307,000) 5,000
$(56,000) $249,000
</TABLE>
NOTE 7 - Subsequent Event:
On January 4, 2000, the Company acquired Rocky Mountain Retail Systems,
Inc. (RMRS). The acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to the assets
purchased and the liabilities assumed based upon their estimated fair values
at the date of acquisition.
Pursuant to the Merger Agreement, the Company issued a total of 1,000,000
shares of common stock to the selling shareholders of RMRS. An additional
1,500,000 shares of common stock will be placed into escrow to be issued to
the RMRS selling shareholders under a performance clause wherein, should the
RMRS subsidiary's performance meet or exceed predetermined earnings goals for
years 2000 through 2002, a proportionate number of performance-based shares
will be issued.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion of the financial condition and results of operations
of Electronic Clearing House, Inc. ("ECHO" or the "Company") should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere herein. This discussion contains forward-looking
statements, including statements regarding the Company's strategy, financial
performance and revenue sources, which involve risks and uncertainties. The
Company's actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, those set forth elsewhere herein.
New Development
On January 4, 2000, the Company completed the acquisition of Rocky Mountain
Retail Systems, Inc. (RMRS), based in Boulder, Colorado. The acquisition was
accounted for using the purchase method of accounting.
Under the terms of the acquisition agreement, the Company issued 1,000,000
shares of restricted common stock. An additional 1,500,000 shares of
restricted stock will be placed into escrow to be issued to the RMRS selling
shareholders under a performance clause wherein, should the RMRS subsidiary's
performance meet or exceed predetermined earnings goals for years 2000 through
2002, a proportionate number of performance-based shares will be issued.
RMRS is the creator/owner and processor for National Check Information Systems
(NCIS) through which RMRS provides check verification services to large retail
chains, processors and collection agencies across the nation.
RMRS will operate as a wholly owned subsidiary and Dr. Donald Dick, President
of RMRS, will remain the President of the ECHO subsidiary. Operations will
remain in Boulder, Colorado. Mr. Robert Anderson will continue to serve as
Vice President and Chief Technical Officer. Mr. Arnold Feinberg will continue
to oversee all sales activity for RMRS and will serve as Vice President of
Sales.
Result of Operations
Three Months Ended December 31, 1999 and 1998
Revenues. Electronic Clearing House, Inc. recorded a net loss of $19,000
for the first quarter of fiscal year 2000 as compared to a net income of
$258,000 in the same period for the prior year. Loss before income tax
provision was $4,000 for this fiscal quarter versus income of $272,000 for the
first fiscal quarter of 1999.
The Company incurred higher operating expenses during this fiscal quarter as a
result of the various check related products and services currently under
development. The Company also incurred higher marketing and operating
expenses to fully integrate and market these new products and services.
Total revenue for the quarter increased from $5,469,000 in fiscal 1999 to
$6,205,000 in fiscal 2000, a 13.5% increase.
Revenues derived from the electronic processing of transactions are recognized
at the time the transactions are processed by the merchant. Bankcard
processing and transaction revenue increased 9.6%, from $5,361,000 in first
fiscal quarter 1999 to $5,876,000 in first fiscal quarter 2000. This increase
was primarily attributable to a 13.1% increase in bankcard processing volume.
Additionally, there was a 17.2% increase in U-Haul transaction revenue over
the same prior year quarter. Increase in bankcard processing and transaction
revenue was partially offset by a decrease of $228,000 in certain software
development revenue recorded in the prior year. Check-related products
revenues increased from $14,000 in the first fiscal quarter of 1999 to
$221,000 in the first fiscal quarter of 2000, a 1478.6% increase.
In the first quarter of 2000, the Company reviewed certain higher volume
merchants who were believed to present potential risk to the Company due to
the combination of risk factors which included the nature of their service
and their operating history. Furthermore, this review resulted in several
merchants being terminated and, for a short time, will lower the Company's
revenues and earnings from its processing activities. Management believes
that the reduced volume will be replaced through new business by the third
quarter of 2000 and that the actions taken at this time to terminate select
merchants will diminish the likelihood of any major loss being incurred by the
Company due to merchant activity, merchant fraud or merchant closure.
Revenue related to terminal sales is recognized when the equipment is shipped.
Terminal sales and lease revenue for the three months ended December 31, 1999
were $108,000, which represented a 14.9% increase over $94,000 for the same
fiscal quarter last year.
Between January and February of 2000, the Company received accumulated orders
from U-Haul for approximately 2,400 terminals to be delivered sometime in
April to May 2000 time frame. The total number of active U-Haul systems in
the field will be approximately 14,000 after this deployment is completed.
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 from $3,734,000 in the first fiscal quarter of 1999 to $4,361,000 in
the current fiscal quarter, a 16.8% increase. This was in direct relation to
the 9.6% increase in processing and transaction revenues for the current
fiscal quarter.
Cost of terminals sold and leased increased from $72,000 in the first quarter
of fiscal year 1999 to $95,000 in the current fiscal quarter, a 31.9%
increase.
Other operating costs increased from $569,000 in the first fiscal quarter 1999
to $731,000 in the first fiscal quarter 2000, a 28.5% increase. This is
reflective of the on-going investments made by the Company for the development
of the various check related products and services and the increase in sales
and marketing expenses to promote and integrate such products.
Selling and general and administrative expenses increased from $845,000 in the
first fiscal quarter 1999 to $1,022,000 in the first fiscal quarter 2000, a
20.9% increase. As a percentage of total revenue, selling, general and
administrative expenses increased from 15.5% in the first fiscal quarter 1999
to 16.5% in the first fiscal quarter 2000. This incremental increase was
reflective of the higher employee-related costs to support the growth of the
Company.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had available cash of $1,770,000,
restricted cash of $710,000 in reserve with its primary processing banks and a
working capital of $4,770,000.
Accounts receivable net of allowance for doubtful accounts decreased $164,000
during the three-month period ended December 31, 1999. Inventory costs
remained relatively unchanged from $580,000 at September 30, 1999 to $607,000
at December 31, 1999.
Other receivable mainly consisted of a $1,000,000 post-petition secured
financing arrangement with Tropical Beaches, Inc. d.b.a. New Strategies, a
bankcard processing merchant who filed for Chapter 11 protection on June 29,
1999. This loan is secured by all the assets of New Strategies and also has
super-priority administrative claim status with respect to any unpaid
administrative claims in the Chapter 11 case. This loan is currently
scheduled to be repaid starting in February 2000.
At the present, the Company's cash flows from operations is sufficient to
support the current level of research and development costs and marketing
costs. The Company intends to further develop all of its check related
products and services and fully integrate its sales and marketing efforts as a
result of the recent acquisitions. These development and marketing costs will
continue to have a negative impact in operating income for the coming quarter
until these check products are fully deployed in the subsequent quarters.
The Company's current ratio improved from 3.86 to 1 at December 31, 1998 to
4.86 to 1 at December 31, 1999. The Company's debt to equity ratio also
improved from .33 to 1 at December 31, 1998 to .16 to 1 at December 31, 1999.
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 such 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.
The Company has developed and tested a contingency plan to address Year 2000
risks to its systems. All programs, including merchant systems, have been
modified and successfully tested. Additionally, interface requirements and
testing have been successfully completed with Visa, MasterCard, Discover and
American Express. Key management has been reassigned to implement the plan
and, other than the cost of such management and the resultant loss of their
contribution to other revenue generating activities of the Company,
substantial new costs are not anticipated to be incurred. The costs
associated with the Year 2000 issue were approximately $250,000 and are not
believed to have a material adverse affect on the results of operations or
financial position of the Company. These costs were included in the operating
expenses in fiscal year 1999. The Company was adequately prepared and,
therefore, not effected by the change-over date on January 1, 2000. However,
the Company could still be affected adversely as a result of any disruption in
the operation of the various third-party enterprises with which the Company
interacts.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The following report on Form 8-K was filed during the quarter ended December
31, 1999:
Date of Filing Item Reported
November 19, 1999 Completion of a $1 million post-petition secured financing
arrangement with Tropical Beaches, Inc. dba New
Strategies, a bankcard processing merchant who filed for
Chapter 11 protection on June 29, 1999.
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: February 11, 2000 By: \s\Alice Cheung
Alice Cheung, Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 1770
<SECURITIES> 0
<RECEIVABLES> 2343
<ALLOWANCES> 975
<INVENTORY> 607
<CURRENT-ASSETS> 6005
<PP&E> 4760
<DEPRECIATION> 2522
<TOTAL-ASSETS> 13208
<CURRENT-LIABILITIES> 1235
<BONDS> 575
0
0
<COMMON> 203
<OTHER-SE> 11195
<TOTAL-LIABILITY-AND-EQUITY> 13208
<SALES> 108
<TOTAL-REVENUES> 6205
<CGS> 95
<TOTAL-COSTS> 5092
<OTHER-EXPENSES> 1074
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> (4)
<INCOME-TAX> (15)
<INCOME-CONTINUING> (19)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
