-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MCuzYF8NV+CcxAf6O9FXTFFYWml+cINhf+/4PaH7/r/1T9pHY4S9WW3LMmz6QJAp oVnK6dOPuSilRwu607QRpg== 0000721773-99-000011.txt : 19990507 0000721773-99-000011.hdr.sgml : 19990507 ACCESSION NUMBER: 0000721773-99-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990506 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELECTRONIC CLEARING HOUSE INC CENTRAL INDEX KEY: 0000721773 STANDARD INDUSTRIAL CLASSIFICATION: FUNCTIONS RELATED TO DEPOSITORY BANKING, NEC [6099] IRS NUMBER: 930946274 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15245 FILM NUMBER: 99611694 BUSINESS ADDRESS: STREET 1: 28001 DOROTHY DR CITY: AGOURA HILLS STATE: CA ZIP: 91301-2697 BUSINESS PHONE: 8187068999 MAIL ADDRESS: STREET 1: 28001 DOROTHY DRIVE CITY: AGOURA HILLS STATE: CA ZIP: 91301 FORMER COMPANY: FORMER CONFORMED NAME: BIO RECOVERY TECHNOLOGY INC DATE OF NAME CHANGE: 19860122 10-Q 1 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, 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 May 3, 1999, there were 19,492,126 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, 1999 and September 30, 1998 Consolidated Statement of Operations 4 Three months and six months ended March 31, 1999 and 1998 Consolidated Statement of Cash Flows 5 Six months ended March 31, 1999 and 1998 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 12 Signatures 13 PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements ELECTRONIC CLEARING HOUSE, INC. CONSOLIDATED BALANCE SHEET ASSETS
March 31, Sept 30, 1999 1998 (Unaudited) Current assets: Cash and cash equivalents . . . . . . . $ 2,370,000$ 2,486,000 Restricted cash . . . . . . . . . . . . 554,000 651,000 Accounts receivable less allowance of $2,203,000 and $1,829,000 . . . . .1,869,000 1,251,000 Inventory less allowance of $202,000 and $202,000. . . . . . . . . 578,000 718,000 Prepaid expenses and other assets . . . 47,000 16,000 Notes receivable from stockholders and related parties less allowance of $148,000. . . . . . . . . . . . . . 27,000 32,000 .Total current assets . . . . . . . . .5,445,000 5,154,000 Noncurrent assets: Long term receivables . . . . . . . . . 329,000 320,000 Property and equipment, net . . . . . .1,707,000 1,606,000 Real estate held for investment, net . 252,000 252,000 Other assets, net . . . . . . . . . . . 939,000 693,000 . . . . . . . . . . . . . . . . . . . .$8,672,000 $8,025,000 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings and current portion of long-term debt . . . . . . $ 91,000 $ 92,000 Accounts payable . . . . . . . . . . . 146,000 173,000 Accrued expenses. . . . . . . . . . . . 763,000 845,000 Deferred income . . . . . . . . . . . . 21,000 433,000 . . . . Total current liabilities . . .1,021,000 1,543,000 Long-term debt . . . . . . . . . . . . . 627,000 639,000 . . . . Total liabilities . . . . . . . 1,648,000 2,182,000 Stockholders' equity: Convertible preferred stock, $.01 par value, 5,000,000 shares authorized: Series "H", 0 and 23,511 shares issued and outstanding: . . . . . . . Series "K", 75,000 and 325,000 shares issued and outstanding. . . . . . . . 1,000 3,000 Series "L", 60,000 and 168,000 shares issued and outstanding. . . . . . . . 1,000 2,000 Common stock, $.01 par value, 36,000,000 authorized: 18,027,126 and 15,120,541 shares issued; 18,020,885 and 15,114,300 shares outstanding. . . . .. . . . . . . . . 180,000 151,000 Additional paid-in capital. . . . . . .14,593,000 14,140,000 Accumulated deficit . . . . . . . . . . (7,751,000) (8,453,000) . . . . Total stockholders' equity . . 7,024,000 5,843,000 . . . . . . . . . . . . . . . . . . . .$8,672,000 $8,025,000 See accompanying notes to consolidated financial statements.
ELECTRONIC CLEARING HOUSE, INC. CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Six Months Ended Mar 31, Ended Mar 31, 1999 1998 1999 1998 (Unaudited) (Unaudited) ---in thousands-- Revenues: Bankcard processing revenue . . .$3,073 $2,638 $6,449 $5,290 Bankcard transactions fees. . . . 1,768 1,566 3,539 3,012 Terminal sales and lease revenue . . . . . . . . . 1,475 920 1,569 992 Other revenue . . . . . . . . . . 40 64 268 106 6,356 5,188 11,825 9,400 Costs and expenses: Bankcard processing and transactions expense . . . . . . 3,476 3,201 7,197 6,180 Cost of terminals sold and leased 806 567 879 688 Other operating costs . . . . . . 190 195 447 405 Selling, general and administrative. . . . . . . 1,441 968 2,610 1,801 . 5,913 4,931 11,133 9,074 Income from operations . . . 443 257 692 326 Interest income. . . . . . . . . . 38 22 86 43 Interest expense . . . . . . . . . (24) (27) (49) (54) Income before provision for income tax. . . . . . . . . 457 252 729 315 Provision for income taxes . . . . (13) (1) (27) (2) Net income . . . . . . $ 444 $ 251 $ 702 $ 313 Earnings per share - Basic . .$0.025 $0.017 $0.042 $0.021 Earnings per share - Diluted .$0.019 $0.012 $0.031 $0.015 See accompanying notes to consolidated financial statements.
ELECTRONIC CLEARING HOUSE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended March 31, 1999 1998 (unaudited) Cash flows from operating activities: Net income . . . . . . . . . . . . $ 702,000 $ 313,000 Adjustments to reconcile net income to net cash used in operating activities: Depreciation . . . . . . . . . . . 107,000 116,000 Amortization. . . . . . . . . . . . 35,000 51,000 Provision for losses on accounts and notes receivable . . . . . . . 374,000 210,000 Provision for obsolete inventory. . -0- 36,000 Fair value of stock issued in connection with directors' compensation . . . 45,000 -0- Changes in assets and liabilities: Restricted cash . . . . . . . . . . 97,000 (141,000) Accounts receivable . . . . . . . . (1,002,000)(1,026,000) Inventory . . . . . . . . . . . . . 141,000 (485,000) Prepaid expenses and other current assets . . . . . . . . . . (31,000) (6,000) Other assets, net . . . . . . . . . (281,000) (35,000) Accounts payable . . . . . . . . . (27,000) 656,000 Accrued expenses. . . . . . . . . . (82,000) 251,000 Deferred income . . . . . . . . . . (412,000) -0- Net cash used in operating activities . . . . . . . . . . . . (334,000) (60,000) Cash flows from investing activities: Purchase of equipment.. . . . . . . (165,000) (97,000) Net cash used in investing activities . . . . . . . (165,000) (97,000) Cash flows from financing activities: Decrease (increase) in notes receivable from related parties . . . . . . . 5,000 (36,000) Repayment of notes payable. . . . . (56,000) (86,000) Proceeds from issuance of preferred stock . . . . . . . . . -0- 200,000 . . . . . . . . . . . . . . . . Proceeds from common stock warrants exercised . . . . . . . . 260,000 -0- Proceeds from exercise of stock options. . . . . . . . . . . 174,000 -0- Net cash provided by financing activities . . . . . . . 383,000 78,000 Net decrease in cash . . . . . . . . . (116,000) (79,000) Cash and cash equivalents at beginning of period . . . . . . . . . 2,486,000 772,000 Cash and cash equivalents at end of period . . . . . . . . . . . . $2,370,000 $ 693,000 See accompanying notes to consolidated financial statements.
ELECTRONIC CLEARING HOUSE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Basis of presentation: The accompanying consolidated financial statements as of March 31, 1999, 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 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, 1998. The result of operations for the three and six months ended March 31, 1999 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 17,596,509 and 14,976,541 in the three months and 16,727,228 and 14,883,838 in the six months ended March 31, 1999 and 1998, respectively. Earnings per share - diluted amounts included in the consolidated statements of operations are based upon average shares outstanding of 23,060,306 and 21,503,760 in the three months and 22,925,211 and 21,429,585 in the six months ended March 31, 1999 and 1998, respectively. Earnings per share - diluted assuming full dilution for the six months ended March 31, 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: Significant non-cash transaction for the six months ended March 31, 1999 was as follows: - Capital equipment of $43,000 was acquired under capital leases. Significant non-cash transaction for the six months ended March 31, 1998 was as follows: - Capital equipment of $26,000 was acquired under capital leases. NOTE 4 - Subsequent event: On April 20, 1999, the Company completed the acquisition of Magic Software Development, Inc. (Magic). Magic, based in Albuquerque, New Mexico, will operate as a wholly owned subsidiary of the Company. The Company issued a total of 1,000,000 shares of common stock to the Selling Shareholders of Magic upon the effectiveness of the acquisition. For further disclosure, see Management's Discussion and Analysis of Financial Conditions and Results of Operations - "Highlights" on page 7. 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. Highlights On April 20, 1999, the Company completed the acquisition of Magic Software Development, Inc.(Magic), based in Albuquerque, New Mexico. Magic will operate as a wholly owned subsidiary of the Company. Under the terms of the acquisition, the Company issued a total of 1,000,000 shares of common stock as "Base Shares" to the Selling Shareholders of Magic. The shares will be held in escrow and 500,000 shares will be released to the Magic Selling Shareholders on April 1, 2001 and 500,000 shares will be released on April 1, 2002. The Company has also agreed to issued up to 1,000,000 of additional "Performance Shares" to the Selling Shareholders of Magic upon the achievement of certain predetermined earnings goals for fiscal year 2000 and 2001. Any "Performance Shares" issued will be held in escrow and 50% will be released on April 1, 2003 and the balance to be released on April 1, 2004. Magic is a provider of electronic check verification, electronic check re-presentment, check conversion, and check guarantee solutions to financial services companies and retailers across the nation. Magic processes over 75 million check verification transactions per year, totaling over two billion dollars. Magic currently employs 13 full-time employees, primarily programmers and engineers. At the present, a majority of Magic's revenue is generated from electronic check verification. Electronic check verification is the process of using an electronic device to verify information about a check being presented for payment. The information is verified against data, which have previously been collected and stored in a database. A verification compares information to a negative database, a positive database, or combination of both. Magic has been an active member of the Electronic Check Counsel, a group of national retailers, banks and electronic processors, that was set up by the National Automated Clearing House Association (NACHA) to investigate and advise NACHA on new electronic check products. NACHA just announced its approval of new rules relating to electronic check conversion and, in management's opinion, Magic is positioned well to provide this new service to both retailers and financial institutions. The benefits to retailers of using electronic check conversion at the point-of-sale include reduced costs from the elimination of paper handling, faster and more effective redeposit and return item processing, simplified reconciliation, detailed settlement and transaction reporting, improved customer information flow, and a lower incidence of fraud. A complementary process to check conversion is electronic check re-presentment. This is the process of converting non-sufficient funds (NSF) or uncollected funds check into an electronic item. These items are then sent through the ACH network for collection instead of being manually processed. The Company will be offering all of the above services and products to its core merchant base once Magic is fully integrated into the Company's operations. Result of Operations Three Months Ended March 31, 1999 and 1998 Revenues. Electronic Clearing House, Inc. recorded a net income of $444,000 for the second quarter of fiscal year 1999 as compared to a net income of $251,000 in the same period for the prior year, a 77% increase. This net income increases reflected revenue growth of 15% in bankcard processing and transaction revenue combined with a 60% increase in terminal sales and lease revenue over the same period in the prior fiscal year. Revenue for the second quarter grew from $5,188,000 to $6,356,000 compared with prior year, an increase of 23%. 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 mainly attributable to two areas: (1) 60% increase in inventory transaction volume with U-Haul International due to the additional systems deployed during the past year; and (2) the implementation of certain industry specific fees in the third quarter of fiscal 1998 combined with merchant processing growth. The Company has chosen to be more cautious with certain higher volume merchants which pose highest processing risk to the Company. In the second fiscal quarter of 1999, the Company terminated several high volume merchant accounts which, in management's opinion, was in the best interest of the Company but did lower the overall processing gross margin of the Company by approximately 8% when compared with the first fiscal quarter. The Company has been successful in replacing the processing volume by adding new merchants through various sales programs, however, the new merchants generally have been sold at a lower discount rate and, hence, lower margin, due to the lower risk involved. As of March 1999, the Company processed for over 19,000 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 March 31, 1999 were $1,475,000, which represented a 60% increase over the same fiscal quarter last year. During this second fiscal quarter, the Company completed the deployment of 2,500 additional U-Haul systems. Cost and Expenses. Bankcard processing expenses have generally remained constant as a percentage of processing revenue. Most 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 transaction expense, increased 9% in the second fiscal quarter over the same fiscal period last year. This was in direct relation to the 15% increase in processing and transaction revenues for the second fiscal quarter. Cost of terminals sold and leased increased 42% in the second quarter of fiscal year 1999 as compared to the same fiscal quarter last year. This relates directly to the 60% increase in terminal sales and lease revenue during the second quarter. Since the beginning of this fiscal year, the Company has invested a substantial amount of research and development capital in the development of certain casino cash advance technology. The Company is currently finalizing an agreement with a joint venture partner regarding this new casino cash advance venture. Selling and general and administrative expenses increased 49% in the second fiscal quarter as compared to the same fiscal quarter last year. This is the result of the Company's commitment toward several sales programs which were implemented during the first quarter of this fiscal year. Additionally, the higher general and administrative expense is also associated with the 23% overall revenue increase and the incremental increase in operating costs to support the Company's infrastructure. Six Months Ended March 31, 1999 and 1998 Revenue. Electronic Clearing House, Inc. recorded a net income of $702,000 for the six months ended March 31, 1999 as compared to a net income of $313,000 for the same period last fiscal year, an increase of 124%. This is indicative of the 20% increase in processing and transaction revenue and the 58% increase in terminal sales and lease revenue. As a percentage of total revenue, processing and transaction revenue accounted for 84% of the total revenue for the six month period ended March 31, 1999 as compared to 88% for the same period in the prior year. Terminal sales and lease revenue accounted for 13% of the total revenue for the six months ended March 31, 1999 as compared to 11% for the same period last year. Other revenue increased from $106,000 for the six months ended March 31, 1998 to $268,000 for the six months ended March 31, 1999, an increase of 153%. This increase is attributable to software development work for a casino cash advance provider. Overall, the Company's total revenue increased 26% for the six months ended March 31, 1999 as compared to the same six months period last year. Cost and Expenses. Processing and transaction expenses increased 16% for the six months ended March 31, 1999 as compared to the same six month period last year. This is directly related to the 20% increase in processing and transaction revenue for the same six months period. Additionally, gross margin on processing and transaction activities has improved from 26% for the six months period ended March 31, 1998 to 28% for the six months period ended March 31, 1999. Cost of terminals sold and leased increased 28% for the six months period ended March 31, 1999 as compared to the same six month period last year. This was in direct relation to the 58% increase in terminal sales and lease revenue. Gross margin from terminal sales improved from 31% for the six month period ended March 31, 1998 to 44% for the six month period ended March 31, 1999. Selling, general and administrative expenses increased 45% for the six months ended March 31, 1999 over the same six months period last year. As a percentage of total revenue, selling, general and administrative expenses increased from 19% for the six months ended March 31, 1998 to 22% for the six months ended March 31, 1999. This was primarily attributable to the expansion of the Company's sales and marketing program this fiscal year. Additionally, the increase was also attributable to the higher employee-related costs to support the growth of the Company. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 1999, the Company had available cash of $2,370,000, restricted cash of $554,000 in reserve with its primary processing banks and a working capital of $4,424,000. Accounts receivable net of allowance for doubtful accounts increased $618,000 during the six months period ended March 31, 1999. This is mainly due to the receivable recorded as a result of the U-Haul terminal shipment. 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 essential to the Company's future growth. The Company's current ratio improved significantly from 2.38 to 1 at March 31, 1998 to 5.33 to 1 at March 31, 1999. The Company's debt to equity ratio also improved from .51 to 1 at March 31, 1998 to .23 to 1 at March 31, 1999. Other Year 2000 Issues 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 The following reports on Form 8-K were filed during the quarter ended March 31, 1999: Date of Filing Item Reported February 8, 1999 Resignation of Director Fariborz Hamzei and appointment of Director Aristides Georgantas March 8, 1999 Letter of intent to acquire Magic Software Development, Inc., Albuquerque, New Mexico. 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) By: \s\Alice Cheung Alice Cheung, Treasurer and Chief Financial Officer May 5, 1999 EX-27 2
5 1,000 6-MOS SEP-30-1999 MAR-31-1999 2370 0 4072 2203 578 5445 3986 2279 8672 1021 627 0 2 180 6842 8672 1569 11825 879 7644 2610 0 49 729 27 702 0 0 0 702 .042 .031
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