-----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, By2ryMyLU7YHb9NxQI+ThV1fFkqmOJHoUVpauIsC5Ssy36Ca3lypbaoSC13B/4kS P6quLD6JY+b9JToa32BBUQ== 0000721773-00-000021.txt : 20010101 0000721773-00-000021.hdr.sgml : 20010101 ACCESSION NUMBER: 0000721773-00-000021 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001229 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-K SEC ACT: SEC FILE NUMBER: 000-15245 FILM NUMBER: 798717 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-K 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------------------- FORM 10-K -------------------------------------- X Annual Report Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934 for the fiscal year endedSept. 30, 2000 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 (IRS Employer of incorporation or organization) Identification No.) 28001 Dorothy Dr., Agoura Hills, California 91301-2697 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 706-8999, fax number: (818) 597-8999 ------------------------------ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of class) 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on December 15, 2000 as reported on the NASDAQ National Market, was approximately $19,042,590. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of December 15, 2000, Registrant had outstanding 21,730,934 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE None ELECTRONIC CLEARING HOUSE, INC. 2000 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I Page Item 1. Business. . . . . . . . . . . . . . . . . . . . . 3 Item 2. Properties. . . . . . . . . . . . . . . . . . . .15 Item 3. Legal Proceedings . . . . . . . . . . . . . . . .16 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . .16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Security Matters. . . . . . .17 Item 6. Selected Consolidated Financial Data. . . . . . .18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .19 Item 8. Financial Statements and Supplemental Data. . . .25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures . . . . .25 PART III Item 10. Directors and Executive Officers of the Registrant. . . . . . . . . . . . . . . . . . .26 Item 11. Executive Compensation. . . . . . . . . . . . . .29 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . .31 Item 13. Certain Relationships and Related Transactions. .33 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . .34 PART I ITEM 1. Business General Electronic Clearing House, Inc., ("ECHO") is an electronic payments processor of credit card, debit card, and/or check activity for over 58,000 merchants nationally. ECHO also provides nationwide check verification services and electronic and traditional check collection services. During fiscal year 2000, ECHO filed applications with the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) to capitalize and operate a subsidiary bank that would exclusively serve the merchant marketplace. Both applications are in final review. The addition of the bank would allow ECHO to benefit from the sizable deposits resulting from merchant processing activity. It would also allow ECHO to fully integrate bank account reporting information with each merchant's transactional data, a major step toward providing a useful, Internet-based merchant service commonly referred to as Business-to-Business (B2B) payment. Three acquisitions have been made in the past eighteen months, two check processing companies and one collection agency. As a result of these acquisitions, ECHO has increased its payment settlement and processing options that it can provide to a merchant, it has significantly expanded the base of merchants it serves and it has been recognized as the sixth largest provider of check verification services in the nation. ECHO has developed and maintains a variety of methods through which a merchant may gain access to the services of the Company believing the ease of conversion is a key in motivating a merchant to move from their current processor or bank provider of services to ECHO. These methods of connection include: a PC over the internet, various point-of-sale terminals, a fax machine and both cellular and touch-tone phones. The Company's largest client is U-Haul International whose dealers represent approximately 15,000 of the Company's base of merchants. ECHO provides several services to U-Haul dealers that include credit card processing, inventory tracking and dealer compensation management and reporting to U-Haul corporate. These services are being expanded to include ECHO's check and collection related services as well. The Company currently operates five active subsidiaries, all wholly-owned by the Company, to coordinate its business activities. 1) National Credit Card Reserve Corporation ("NCCR") provides primary corporate data center and customer service activities relating to transaction processing services which include electronic credit card and debit card authorizations, electronic fund transfers, inventory tracking, electronic deposits utilizing the Automated Clearing House ("ACH") for merchants, banks and other customers, and management and development of Internet software and related communication networks that are involved in providing transaction processing services. 2) ECHO Payment Services, Inc. ("EPS") leases, rents and sells point-of-sale (POS) systems and related equipment. 3) Computer Based Controls, Inc. ("CBC") designs and/or integrates various POS systems and related equipment to address merchant needs. 4) XpressCheX, Inc. ("XCX"), formerly known as Magic Software Development, provides secondary corporate data center services and is the primary data center for check guarantee and verification services, check clearing services to facilitate and track electronic funds transfer activity and the management of check verification services and member compensation for a national check association. All collection services, both electronic and traditional in nature, are managed and operated by XCX. 5) Rocky Mountain Retail System ("RMRS") manages National Check Information Service ("NCIS"), a national database of bad check writers, and provides check verification and check conversion services to retail merchants and collection agencies across the nation. History of Company The Company was incorporated in Nevada in 1981 under the name Bio Recovery Technology, Inc. In January 1986, the Company changed its name to Electronic Clearing House, Inc. and acquired Electronic Financial Systems, Inc., which was then engaged in credit card processing. In 1986, ECHO developed the capability, utilizing the Federal Reserve System's Automated Clearing House ("ACH"), to deposit funds into any U.S. bank of the merchant's choice. This development made it possible for remote banks and processors to provide the same processing services previously available only through the merchant's local bank. In 1985, the Company purchased Computer Based Controls (CBC), a company that had expertise in computer control systems. CBC subsequently developed a series of high performance terminals and secure printers that have been used primarily in the money order dispensing market by American Express, Comdata and the United States Postal Service. In 1995, a system utilizing CBC's terminal, ECHO's data center, and customer support services was developed and deployed to 2,000 U-Haul dealers for the real-time credit card authorization and management of rental equipment for U- Haul International. The number of active dealers under the system grew to more than 15,000 by fiscal year 2000 (see U-Haul). With regard to proprietary issues, three patent applications involved with the Company's printer methodology have been granted (see Patents). In early 1996, the Company purchased a business with specialties in the Internet, Windows NT programming and world-wide communications networks. Through this acquisition, the Company has been able to expand its scope of acceptable transaction input devices beyond the traditional POS systems to include transactions submitted over the Internet and over a common telephone. Through the expertise of the programming and management personnel resulting from this acquisition, the Company also expanded the tools it makes available to specific industries to utilize its services. In 1999, ECHO acquired Magic Software Development, located in Albuquerque, New Mexico. Since 1986, the Company maintained XpressCheX (XCX), a check guarantee service that only served California merchants, but, with the addition of Magic's check processing capabilities, the services provided by XCX were expanded and are now being offered on a national basis. In fiscal 2000, Magic's corporate name was changed to XpressCheX and all XpressCheX activity was moved to the new XCX entity. XCX will provide and promote its check and electronic funds transfer ("EFT") services to other processors and sales organizations in addition to ECHO and is thereby expected to increase its revenues and earnings therefrom in the coming years. In November of 1999, the Company acquired Peak Collection Services, a collection agency in Albuquerque, New Mexico, and incorporated Peak as the Collection Division into the XCX operation in December of 1999. Through filings and individual testing, the XCX Collection Division has completed registration as a collection agency in 42 of 50 states to date. Registration in all 50 states is expected to be complete by the second quarter of fiscal 2001. Having a fully integrated, nationally approved collection service adds considerable value to the XCX suite of check services. In January 2000, the Company acquired Rocky Mountain Retail Systems (RMRS) located in Boulder, Colorado, which provides a national check verification service. RMRS built and operates the National Check Information Service (NCIS). The core of NCIS is a database of over 12 million bad check writers compiled by RMRS over many years in cooperation with over 200 collection agencies and many large retail merchants. Being recognized as one of the best negative and positive databases in the nation, NCIS holds considerable value to the Company as an integrated service that it can add to its other merchant processing services. In September of 2000, the Company initiated beta testing of its debit card processing services through its primary processing center in California. Connecting to three networks, Interlink (Visa), Mastro (MasterCard) and STAR, the company can process approximately 90% of the debit cards issued in the USA today. In the most recent eighteen months, the Company has migrated from a single transaction processing "engine" (credit card) to five transaction processing engines which now include: credit card, debit card, check verification, check (ACH) settlement and check collection. The integration of these services onto point-of-sale equipment platforms in use in the marketplace today by merchants and the reporting of all ECHO's services in a common, Internet-based environment is a strategic Company objective. In light of the few third-party processors or processing banks who have similar capabilities, the Company believes it will have a distinctive advantage in fiscal year 2001 from a marketing/sales and operational model viewpoint. General Summary In management's opinion, the Company's core competency and profitability is realized by providing merchants electronic connectivity to various financial services in both the credit card, debit card and check-related markets. The Company has focused on developing the highest number of methods of access to the Company, believing such flexibility is key to meeting the specific needs of merchants in various stages of growth. Due to the technical capability of the Company, new avenues of transmission and communication, such as the Internet, have been integrated with the transaction processing services to generate a distinctive, one-stop provider of services to the merchant marketplace, including online access to full transaction detail. The Company has additional expertise in designing both hardware and software systems to integrate the Company's financially-based services into customers' information systems, utilizing the Internet in several ways. Such services have been performed for customers such as U-Haul International, American Express, the United States Postal Service, and innoVentry. Strategically, the Company believes that, in the years ahead, every merchant, large and small, will need a suite of basic financial services. Although the Company enjoys a relationship with its base of merchants that allows the Company to offer such services, it is logical for merchants generally to trust a bank to provide such services over a third party processor. This is a key reason the Company has undertaken the initiation of a bank, to strengthen the trust and further develop the financial relationship between the Company and its merchants. The Company believes that merchants will increasingly want to have their financial information aggregated into one source rather than monitor many providers. The Company believes the Internet offers the most logical, low-cost method of providing such information aggregation services. In addition, the Company anticipates that every merchant will see the need to be represented on the Internet for marketing purposes alone and, for some, to accommodate direct purchase activity over the Internet, commonly referred to as "e-commerce". Based upon this belief, the Company intends to build both its marketing services and its e-commerce capabilities relating to the Internet. The Company is committed to focusing its research and development energies to integrate its credit card clearing, debit card clearing, electronic check clearing, check verification, collection and bank account settlement data into an Internet reporting model that is easy for merchants to access and adequately secure. Credit Card Processing Review The Company is a registered Independent Service Organization and Merchant Service Provider with Visa and MasterCard, respectively. To engage in Visa and MasterCard processing, a cooperative relationship is required with a bank which provides necessary sponsorship of Visa and MasterCard transactions. The Company currently has two primary processing bank relationships (see Banking). For the year ended September 30, 2000, NCCR accounted for approximately 84% of the Company's revenues. NCCR presently provides 24-hour daily credit card processing capability, "800" number access to customer service personnel and, as needed, various field support services. Functioning like an electronic utility, NCCR earns a steady stream of transaction and processing fees while the multiple computers in its processing center communicate continuously with merchant terminals, and the databases of Visa, MasterCard, American Express, Diner's Club, Carte Blanche and Discover. Utilizing one of the numerous methods of access to the Company, the merchants' systems dial the Company's host computers and receive credit card authorizations for accounts which have been electronically verified for credit validation and other security considerations. Electronic files are then transmitted daily by NCCR to the major credit card organizations which subsequently transfer funds from the card issuing banks to one of NCCR's processing banks. At NCCR's direction, funds are then electronically moved from NCCR's processing banks and deposited into the bank of the merchant's choice. On a typical day, NCCR will make deposits to 450 banks across the nation on behalf of its merchant base. In addition to electronic authorizations and deposits into the merchant's bank of choice, the Company's software programs capture transactions, retain data and enable merchants to review, reconcile and edit (i.e., "correct") transactions from their business location. NCCR has been successful in providing various services which include a terminal loaner program to minimize downtime, frequent sales reports and information containing reconciliations of a merchant's business activity and sophisticated security services utilizing the merchant's terminal, the Company's host computers and field activity. NCCR utilizes several advanced telecommunications capabilities involving manageable network design, robust communications protocols, circuit troubleshooting, and packet switching, in order to provide consistent and reliable services to its merchants. NCCR's compensation for credit card processing is derived primarily from three primary sources, the merchant's discount rate, the merchant's transaction fee and set monthly fees. The discount rate is expressed as a percentage of the amount being processed. Once set, this percentage is deducted from the amount of each transaction submitted by the merchant and the net amount is deposited into the merchant's bank account. Discount rates range between 1.5% and 2.9% and, overall, the Company's average discount rate is 2.1%. Depending upon the discount rate charged and the cost of clearing interchange, from 75% to 90% of the discount rate revenue is paid to card issuing banks, the card issuing organizations, and the sponsoring bank. The transaction fee is charged for each transaction processed and the Company's average transaction revenue is $0.17 per transaction. The Company maintains a range from $.15 up to $0.32 per transaction, depending on the merchant/customer interface. Both Visa and MasterCard have instituted $.05 to $.10 transaction fees on each transaction processed that diminishes the benefit the Company historically might see from such charges. Due to lower costs of communications and negotiated contracts, the Company's direct costs have been lowered to a range between $.03 and $.05 per transaction, depending upon duration and method of transmission. Over the past several years, industry consolidation has been occurring and impressive growth in recent years in the credit card processing market has occurred by firms through portfolio acquisitions. Such a strategy raises special challenges that may involve supporting and integrating numerous processing methodologies, initiating quality customer support and field support services and, probably most difficult, maintaining merchant relationships. Merchant portfolios can be purchased but the merchants who are processing thereunder are under no obligation to continue to utilize the services of the new owner. This lack of contractual obligation can lead to a persistency issue. In the past year, some processors have started asking merchants to sign longer term agreements (2 to 3 years) in exchange for a rate reduction or cost savings. The Company is considering this approach as well. The Company's data center reliability and the costs associated with communication activities of NCCR are presently favorable but no assurance or guarantee can be made that such conditions will continue. Conversely, both Visa and MasterCard have historically increased their interchange fees and transaction fees to the point that building a profitable transaction business solely based upon credit card activity has become an increasingly difficult task. Fortunately, the Company has a base of processing activity that is profitable and the Company has added other forms of transaction processing (checks) that are not affected by such changes. Material changes in these areas, such as interchange fees, could reduce the profitability expected to be seen from NCCR operations in the future. Check Processing Review In 1987, the Company initiated its check guarantee services to merchants located in California so a merchant could accept a customer's check with impunity. To support merchants in other states, the Company has historically supported alternative check verification and guarantee services to operate concurrently with the Company's credit card software in the merchant's terminal. In 1999, the Company acquired Magic Software Development (renamed "XpressCheX") that provided ACH settlement services and supported a membership-based national verification service for collection agencies. In November of 1999, the Company acquired Peak Services, a collection agency, and integrated its operation into the XpressCheX group location in Albuquerque, New Mexico. In January, 2000, the Company acquired Rocky Mountain Retail Systems (RMRS), another provider of national check verification services promoted by over 160 collection agencies. RMRS also originated and maintains National Check Information Service (NCIS), a database of bad check writers that is available to merchants and collection agencies across the nation on a fee per transaction basis. The combination of the Company's check guarantee service, XpressCheX's ACH set of services, XpressCheX's collection capabilities and the RMRS verification services through NCIS, constitute the basis of a fully integrated national check service company. The following services are either being offered or will be offered in the near term by the Company. Check Verification The merchant pays a fixed fee for each transaction. For this fee, the Company will search NCIS, its proprietary database of bad check writers, attempting to match a specific piece of information (driver's license number, MICR number, etc.) provided by the merchant. A match identifies the check writer as an individual (or business) known to the provider to have current, delinquent check-related debts. Upon notification of this match (via a coded response from the provider), the merchant decides whether to accept (at his own risk) or decline the check. The provider offers no guarantee that the check will be honored by the check writer's bank and makes no promise of reimbursement if the check is dishonored by the bank. Check Guarantee The merchant pays a fee based on the amount of the check for each transaction. For this fee, the Company will search NCIS for the piece of identifying information provided by the merchant. If the identifying information is matched, the Company issues a coded response instructing the merchant to refuse to accept the check. If the identifying information is not matched, a coded response advises the merchant that the Company has guaranteed payment on that item. If that check is subsequently dishonored by the check writer's bank, the merchant is reimbursed by the Company. Check Conversion The most recent new check service to be announced nationally is called "check conversion". The merchant slips a customer's check either through a check reader that reads the Magnetic Ink Character Recognition (MICR) line on the check or a check imager that records the total image of the face of the check and the merchant enters the amount of the check into the system. The merchant then returns the check to the customer and the electronic image, captured by the reader, allows the Company to settle the check transaction electronically. This new system is finding quick acceptance by both customers and banks. Customers like it because they get their check back immediately and still have their hard copy of the transaction. Banks like it because no paper has to be handled by the bank to settle the transaction. Other advantages exist, probably the most significant being an electronic record is settled in priority to paper-based transactions which assures an electronic record first access to limited funds in a customer's account. Accounts Receivable Check Truncation (ARCT/Lockbox) For companies that receive large volumes of checks in the mail, such as utility companies and ISP's, a need exists to convert these checks to an electronic settlement process to speed processing and lower costs. In order to provide such services, a full tracking methodology must exist to assure all rejected items are ultimately settled. Utilizing the Internet, XpressCheX has developed a fully integrated reporting and tracking system that addresses the informational needs of companies who wish to automate check processing in this manner. RCK (Returned Check) XpressCheX is presently providing a service to merchants that allows the merchant to advise its bank that a returned check should be sent to the XpressCheX data processing center in Albuquerque, New Mexico, rather than returned to the merchant. Upon receipt, XpressCheX converts the check to an electronic ACH transaction for resubmission through the ACH network and images the check for possible collection activity, should it become necessary. The full face value of the check is returned to the merchant upon collection and a collection fee charged to the check writer usually in the range of $15 to $25 is retained by XpressCheX as payment for its RCK services. The Company intends to actively promote these services to its national base of merchants and plans to incorporate these check-related services into the normal services any new merchant receives upon becoming an ECHO merchant. The costs of providing check services varies based upon transaction communication timeframes, data file size, banking fees for access to the ACH and reserve allocations for potential losses, to name a few. Gross margins in check-related services can routinely exceed 50% over external costs. Risk of Processing Credit Card and Check Transactions The Company assumes the financial liability for any merchant-based fraudulent use of credit card and/or check information. To address this potential liability, the Company has developed and deployed theECHODETECT system that performs electronic surveillance and monitoring of fraudulent credit card or check use by merchant. Despite this effective tool, the Company could incur losses as the result of the unauthorized or fraudulent use of credit cards or checks by unscrupulous merchants, which could, depending on the size of the losses, have a materially adverse effect on the Company. The Company does not maintain any insurance to protect it against any such losses and is not aware of any insurance that could be acquired at a reasonable cost. Historically, the Company has allocated ten basis points (.001) of daily processing activity to serve as a reserve against any losses that it may sustain due to such activity. The Company has approximately $336,000 and $910,000 in reserve against chargeback receivables for the fiscal year ended 2000 and 1999, respectively. The Company sustained expenses of $528,000 and $433,000 against said chargeback losses for the fiscal years ended 2000 and 1999, respectively. Over the past 15 years that the Company has made automatic reserve contributions, no merchant loss has exceeded the reserve during the period such losses were realized. Based upon this fact, the Company believes this mechanism of allocating daily from processing revenues to a reserve to address these obligations when they arise will be adequate to address the inherent risks associated with merchant processing. Banking Activities and Relationships To engage in Visa and MasterCard processing, a cooperative relationship is required with a bank which provides necessary sponsorship for the merchants to process Visa and MasterCard transactions. From 1997 to 1999, the Company enjoyed four processing bank relationships: Imperial Bank, Los Angeles, California, First Charter Bank, Beverly Hills, California, First Regional Bank, Los Angeles, California and The Berkshire Bank, New York, New York. In 1999, the Company acquired the merchant portfolio previously processed through Imperial Bank and moved merchants from the sponsorship of Imperial Bank to First Regional Bank. Multiple bank relationships are desirable due to potential changes that can occur in the banking market wherein one of the Company's banks might be acquired and the new owner not desire to continue the relationship for any reason. In December of 1999, the Company filed its bank application with the OCC and in January, 2000, with the FDIC. Should approval of the bank be received, it is anticipated that the bank will become a primary member of Visa and MasterCard and that the Company will be better able to assure Visa and MasterCard membership to its base of merchants. Additionally, it is anticipated that the Company will benefit from the deposits generated by merchant processing activity. Currently, the average daily total deposits at all of the banks utilized by the Company exceeds $30 million. Subsequent to fiscal 2000 year end, the Company terminated its processing relationship with First Charter Bank. The Company also initiated legal proceedings to recover processing fees from First Charter Bank that the Company believes have been erroneously charged. There can be no assurance that the Company will be approved to start a bank or that the Company will always be able to maintain its present banking relationships, establish other such relationships, or, if such other relationships are available, that they can be obtained on terms satisfactory to the Company. U-Haul International The U-Haul program began in 1995 after a year of development of special software by the Company. The software operates on CBC's EB920 terminal, provides credit card authorization, and keeps track of available inventory at the dealer's site. The system also prepares the rental contract between the dealer and the customer and reports the activity electronically to the corporate office, thereby eliminating the need for a U-Haul dealer to manually prepare weekly summary reports of rental activity. The system tracks all financial data and forwards both rental and financial data daily to ECHO's data center. ECHO distributes the rental data on an hourly basis around the nation to the points of destination. This allows a receiving dealer to accept reservations for rental of the specific equipment prior to the equipment's actual arrival. The Company has capitalized part of its costs associated with the development of the system and amortizes such costs over three years. Revenues are derived from equipment sales to U-Haul and income resulting from daily transaction processing services provided to dealers and U-Haul Corporate. U-Haul transaction activity and equipment purchases constitute a significant portion of the Company's growing profitability. During fiscal year 2000, the Company entered into a three-year contract with U-Haul International which covers processing services, software development, data distribution, equipment purchases/warranty, customer support, and consulting. The contract has renewal provisions for extending the term. During 2000, the Company also deployed an additional 4,000 terminals to the U-Haul dealers. The Company presently serves approximately 15,000 U-Haul dealers. Internet ("Net") One of the most talked about marketing mediums in publications today is the Internet, the worldwide network of computers that allows businesses to advertise their products on an international scale. Customers "browse" or "surf the Net", read the advertisement and, if they wish, purchase those products from their businesses or homes, by use of their computers. Security Security of credit card numbers transmitted over the Net has been a recurring question. Serious concern exists in the banking industry about unscrupulous access to a customer's credit card number when it is presented over the Net. In the first quarter of fiscal 1997, the Company deployed a secure Internet World Wide Web ("WWW") server in anticipation of utilizing common commercial WWW browsers and the Internet as an additional POS transaction delivery mechanism. The Company has therefore been accepting credit card transactions over the Internet since January 1997, using a combination of 40 and 128-bit message encryption and digital signature standards, as well as proprietary back-end technology that offers additional protection to the cardholder and merchant. Management believes this combination of technologies offers superior confidentiality protection as well as substantial cost advantages compared to alternative, WWW-based transaction technologies. In 1996, Visa, MasterCard and major software development corporations established a methodology standard for moving transactions over the Net, called Secure Electronic Transactions ("SET"). SET involves the integration of several technologies and parties, including the purchaser, the seller, the bank, the processor and the network service provider. Due to the growing popularity and confidence in a simpler security transmission mode, Secure Socket Layer (SSL), the need for a full SET solution is becoming less apparent. Therefore, the future viability of SET is in question as a standard but, the Company intends to be a full participant in the SET community when, and only when, there appears to be adequate interest and involvement by all parties to make it a viable solution, when the response time is within acceptable time frames and when the overall benefits outweigh the costs. In preparation for SET deployment, the Company has already modified the interface to its internal transaction processing system to accept transactions via Transmission Control Protocol/Internet Protocol (TCP/IP). The Company's service based on these technologies is the ECHONLINE service, and it is aimed at enabling Internet Service Providers ("ISPs") to submit transactions to the Company on behalf of themselves and of their own customers using the Internet. During fiscal 1997, the Company reached agreements with two software developers to develop commercial interfaces toECHONLINE - one for UNIX, and one for Windows NT. The UNIX software is available at no charge, and ISPs have been able to process transactions withECHO within a week of securing this software. The Windows NT software is available for a modest fee, and ISPs and larger merchants that have acquired this software have been able to process transactions withECHO within a day of acquisition. Internet Banking and Business Information The Company believes that the Internet will become a common tool used by financial officers and business owners to evaluate merchant bank account information and make decisions regarding the status of checks written, funds availability and other banking issues that are commonly of concern to a merchant. In addition, small leases for office furniture, phone systems, copiers, fax machines, POS equipment and such will continue to be desired financial services of the merchant marketplace. Quick and easy access to information that most merchants need, such as insurance, travel and shipping services, are additional services the Company believes merchants would appreciate. The Company believes it can integrate merchant financial activities and informational services into a common Internet portal and thereby attract new and strengthen existing merchant relationships by providing greater value in a financial portal dedicated solely to merchants. The Company sees the Internet as a ubiquitous communications network that can provide low-cost access to the services the Company offers. Rather than refer to the Company as an Internet-based company, the Company is attuned more to building a suite of services that will be attractive to the merchant marketplace and utilize the Internet as a secure access method for delivery of those services. In light of the above issues, the Company has highly trained and knowledgeable people who are designing, developing and managing its Net activities. Although not expected, if for any reason certain key personnel were no longer available to the Company, the Company would have to look to outside sources for similar capabilities. No assurance can be made that such expertise would be found and, if found, available to assist the Company. Additionally, the Net products being developed and introduced are intended to augment the Company's present processing activities and are intended to be offered for low entry and low on-going processing costs when compared to other similar services. This strategy is intended to draw retail business relationships presently processing with other providers to the Company, but there is no assurance such a strategy will be effective or will be a sustainable pricing strategy in the long-term. The Company intends to review this strategy regularly as a result and make changes in pricing, if necessary, based upon actual experience. Programs and Services One of the Company's core beliefs is that the Company must accommodate as many different "point-of-interaction" entry methods as possible in order to build the credit card and check processing services business, while concentrating on those methods and techniques that will provide the most leverage for the Company. To these ends, the Company has developed the following programs and services: Third Party Applications Many industries (e.g. restaurants, hotels) rely on third-party-developed applications running on PC-compatibles and other equipment to support their point-of-interaction needs. To support these clients, the Company formalized and published POS interface specifications on its host computers, developed a conformance certification service/process, and widely encouraged third-party developers to use this free certification service and associated materials to build the Company's point-of-interaction interfaces into the third-party products. XpressCheXplus TheXpressCheXsystem is an electronic process whereby a mail order/telephone order-based merchant may collect checking account data from numerous customers and submit the file to ECHO in order to electronically move funds from the customer's checking account into the merchant's account. This service eliminates the need for paper checks to be received and processed by the merchant. ECHOTEL Historically, the Company has utilized a POS terminal located at the merchant's place of business, the industry standard method of data entry. The purchase of an electronic terminal is sometimes not economically feasible to a merchant with low monthly credit card volume or to a business that performs services at their customer's site (e.g., appliance repair, etc.). To address the needs of these retail business segments and provide access to electronic authorization and deposit services without the obligation to purchase equipment, the Company developed and deployed the ECHOTEL program permitting a merchant to submit POS transactions via any touch-tone telephone. This service utilizes Interactive Voice Response ("IVR") to prompt such merchants through the POS process, providing them with immediate credit card authorizations. ECHOTERM The Company maintains compatibility with the most common POS terminals in the nation built by Verifone. It also maintains compatibility with its own series of systems sold over the past years. As a group, these POS terminals are referred to as the ECHOTERM program. ECHOLINK In 1998, the Company announced theECHOLINK program, an Internet-based service that allows any merchant to review their processing activity in a secure manner over the Internet. TheECHOLINK program is a chargeable service and provides the merchant with many methods of sorting the data, including identifying frequent customers and quickly locating specific transactions under question by the customer or by the card issuing banks, the latter issues being commonly referred to as Retrieval Requests and Chargebacks. For merchants who are in a mail order or telephone order type of business, the ability to search and respond to Retrieval Requests and Chargebacks is a significant advantage over the paper-based systems that are still being used by other processors. ECHONET In 1999, the Company announced ECHONET, an Internet browser-based service that allows a merchant to enter credit card data either manually or through a card reader and receive an immediate authorization from the Company.ECHONET meets the needs of retail merchants who have Internet access and also call center type of businesses that desire operators to have immediate access to credit card authorization capability while on the phone with a caller. Financial Portal The Company is designing an Internet financial portal through which it will provide all of its transactional reporting services. The portal will also provide access to all banking information and be linked to other information sources commonly used by and beneficial to merchants. A marketing plan is being developed to utilize existing relationships with sales organizations, ISP's and other Internet specialists to promote and benefit from the merchant's use of the internet-based portal. The effectiveness of such a portal and of the marketing programs can not be assured but management is encouraged by the growing interest and use of these special tools by various merchants and by the interest of many Internet-based businesses to associate withECHO in order to access its suite of financially-based services for their merchants. Equipment Design and Manufacture Through the years, the Company has developed software that enables the Company's host computer to interface with the largest POS manufacturer, Verifone International, who is estimated to have a 65% share of the POS terminal market. The acquisitions of XpressCheX and Rocky Mountain Retail Systems has significantly expanded the number of terminal manufacturers that connect to the Company for check related services. The Company is currently developing credit card processing software to be used on these new POS platforms so that all of the Company's services can be accessed by merchants who own such systems. In addition, the Company is reviewing Internet capable POS systems (TCP/IP) and plans to adopt a standard equipment package around which it can design a merchant processing service that is fully Internet based. innoVentry InnoVentry is a partnership between Wells Fargo Bank and Cash America and provides cash advance services to casinos and the gaming industry at large. In September 1999, the Company entered into a five-year strategic alliance agreement with innoVentry to provide credit card transactions for innoVentry's casino business. In August of 2000, the two companies agreed to discontinue this relationship and the Company susequently sold its interest to innoVentry for $1,000,000. This resulted in a gain from sale of asset of $312,000 recorded by the Company in fiscal 2000. United States Postal Service ("USPS") Pilot Program In November 1995, CBC was awarded a contract to design and build 575 Electronic Money Order Dispensers ("EMOD") for the USPS. The First Article Test of the EMOD system was approved in February 1997. In May 1997, 175 "Stand-Alone" EMOD units were deployed in the Dallas, Texas area. The Company was informed in January 1998 that the pilot program was being extended and that the USPS found that the EMOD system generated significant savings in time and money for the USPS. The USPS subsequently asked CBC to bid the costs of making a software change to the EMOD that allowed other printers to be utilized with the EB921 control terminal. Final verbal permission to proceed was received from the USPS in December,1998 but, prior to proceeding, the Company asked for a formal funding approval. Such approval was not provided and, by mid-1999, the USPS announced that it needed to dedicate all personnel on special projects, such as EMOD, to other projects centered on confirming readiness for the year 2000 (Y2K). Since the arrival of the year 2000, no further indication has been received by the Company that the USPS intends to broaden or continue its development activities with the Company's EMOD system. No formal notice has been received from the USPS and, in the absence of formal notice, the Company believes it is reasonable to assume further development is not likely at this time. Patents The Company presently has three patents with respect to certain of its proprietary technology in operating printers and reading financial documents. The Company has obtained a patent on its method of electronically sensing the serial number of a document. This method relies on the use of its patented ECHOSYMBOLOGY(TM) bar code. The patent describes a unique method of illuminating a form from one side while resolving the bar code image from the opposite side. No additional optical components are required beyond the basic illumination source and the CCD image array. The Company developed and obtained a patent to a proprietary type of bar code reading technology, designated as font of machine readable patterns. The Company has also obtained a financial document dispensing apparatus and method patent for particular printing techniques and reporting presentations used in the preparation and tracking of financial documents. This patent provides an opportunity for promotion of its financial document dispensing devices as the issuance of financial documents becomes more common in non-bank environments. The Company has filed for a patent involved in Internet-based check submission and subsequent re-presentment methodologies but no assurance can be given that such patent filing will be granted. There can be no assurance that if challenged, these patents can be judicially sustained. In the absence of such protection, competitors would be able to duplicate the Company's products. Furthermore, even though the Company has patents, there can be no assurances that the Company's competitors will not independently develop or patent technologies that are substantially equivalent or superior to the Company's technologies. The Company has expended considerable time and resources to develop information systems to serve its merchant base. There is no intellectual property protection on the computer equipment and database that comprise these systems. Additionally, although the Company believes that its products and technologies do not infringe upon the proprietary rights of any third parties, there can be no assurance that third parties will not assert infringement claims against the Company. Similarly, infringement claims could be asserted against products and technologies which the Company licenses, or has the rights to use from third parties. Any such claims, if proven, could materially and adversely affect the Company's business and results of operations. Leasing The Company sells and leases terminals and printers to retail merchants through its subsidiary,ECHO Payment Services, Inc. ("EPS"). EPS cultivates relationships with independent sales organizations, agent banks, and trade associations and has formed strategic alliances with other marketing groups to increase equipment sales and leases. EPS normally leases equipment at an annual return between 18% and 24%, bundles leases in various sized packages and sells them at a discounted rate to banks and individual investors. Servicing and collection of leases sold is performed by the Company. Real Estate The Company presently owns undeveloped land in seven western states. The Company has entered into an agreement with a party to seek to sell all of its real estate holdings. The Company has held all of its land properties for over ten years and does not have current appraisals nor title insurance on its real estate holdings. Some of the properties are held pursuant to quit claim deeds. The real estate holdings are carried on the Company's books at estimated fair value less estimated costs to sell. Marketing Since 1997, the Company has slowed its reliance on a single Independent Sales Organization (ISO) that it had utilized for the prior five years to acquire new merchant accounts. The Company has set up several referral programs with several ISO's and, over the past year, approximately 20% of new accounts were generated by the ISO referral program. The balance of the Company's new merchant accounts were generated through the Internet, theECHOTEL program, the ECHONET program and direct merchant referrals by existing merchants to the Company. The acquisitions of XpressCheX, Inc. (formerly Magic Software Development) and Rocky Mountain Retail Systems has broadened the number of sales channels available to the Company and using these channels to sell credit and debit card processing is planned once full integration of services onto a common POS platform is finished in the first quarter of fiscal 2001. Additionally, cross- selling of check services to ECHO's existing base of merchants and U-Haul dealers is believed to be a significant opportunity for the Company to maximize earnings with a minimum marketing expense. Management believes the Company is unique in the number of methods of access it allows, the combination of transaction types that it manages directly, its ability to integrate additional services based upon customer needs and in its ability to support each merchant through one vertically integrated source. In most competitive instances, such services are performed by different parties and, as a consequence, merchants become frustrated trying to solve a problem, not knowing which party to call. The Company believes its commitment to maintaining a common Customer Support group serving all processing divisions (ECHO, XpressCheX and RMRS) on a 24/7/365 basis will become a distinctive advantage to merchants in choosing ECHO over its competitors. In October of 1999, the Company entered into an agreement with National Bank Drafting Services (NBDS), a sales organization with 2,000 licensees with headquarters located in Fort Worth, Texas. Initially, XpressCheX-based check services were to be offered by NBDS but in May, 2000, the services sold by NBDS were expanded to include credit card processing. Currently, check verification services from RMRS are being integrated with NBDS's other services to allow a further expansion of services being sold by NBDS. Due in part to delays in the full integration of services and difficulties in licensee training, the NBDS sales activity has developed more slowly than expected. However, due to an NBDS national conference held in October, 2000, and ECHO's active participation therein, it is expected that NBDS productivity will increase significantly in fiscal year 2001. The Company's marketing strategy is as follows: 1) To maximize its cross-selling activities to its existing base of merchants. Between its three transaction processing subsidiaries, the Company serves over 58,000 merchants, many of whom do not participate in the full range of services offered by the Company. This is due more to lack of information than choice by the merchant so the Company is dedicated to informing all merchants of its full capabilities and maximizing those relationships in fiscal year 2001. 2) To sell its integrated suite of check, credit and debit card-related processing services to small banks. The Company believes it has a combination of services that makes it a very attractive partner to small banks who will never develop or have access to these set of services from a single provider. 3) To finalize and release its merchant financial portal. The Company believes a centralized portal wherein all financial and informational data can be accessed by merchants will provide a marketing tool to its sales channels and will generate additional merchant referrals. 4) To support the NBDS licensees. The sophistication and professional nature of the average NBDS licensee was confirmed by the Company at the NBDS national convention held in October, 2000. It is firmly believed that continued training and sales support by the Company will result in increased sales being generated through the NBDS licensees. 5) To establish its bank as quickly as possible once approved and promote it nationally. Once the company is able to assert it has a bank dedicated solely to merchant processing, it is believed a national marketing campaign can be developed that will result in increased sales to the merchant marketplace. To management's knowledge, there is no bank in the here is no bank in the nation today that is dedicated only to providing merchant processing activity. 6) To support XpressCheX and RMRS in the independent and full development of their respective sales channels. Both XpressCheX and RMRS have existing opportunities to provide their respective services to nationally known of which might be competitors of ECHO from a credit card processing viewpoint. It is the Company's intent to support such alliances for XpressCheX and RMRS and to maintain the highest ethical treatment of such relationships to assure neither XpressCheX or RMRS customers have reason to question their reliance on an ECHO subsidiary for services. Markets can change for numerous reasons, e.g., new technology, economic factors, regulatory requirements, etc., many of which are not within the control of the Company so it can not be assured that the marketing efforts of the Company will be or continue to be effective or that the Company will see or continue to see an increase in processing volume in the future. Competition The Company enjoyed the distinction of being listed as the sixth largest provider of check verification services in the USA in the May, 2000 issue of The Nilson Report, a monthly financial subscription-based newsletter. The five providers of verification services in higher volume than ECHO were SCAN, TeleCheck, Equifax, IPS and NDC. In management's opinion, the provider who the Company most parallels in terms of range of processing services is TeleCheck. The industries in which the Company operates are highly competitive and are characterized by rapid technological change, rapid rates of product obsolescence and introductions of competitive products often at lower prices and/or with greater functionality than those currently on the market. The Company currently is not a major player in the industries in which it competes, and, in management's opinion, the Company's share of the markets in which it competes is relatively small in comparison to most of its competitors. Many of the Company's competitors have substantially greater financial and marketing resources than the Company. As a result, they may be better able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products and services than is the Company. Furthermore, in the future, the Company may encounter substantial additional competition. There can be no assurance that the Company's current products and services will not become obsolete, or that the Company will have the financial resources, technical expertise, marketing capabilities or manufacturing and support facilities to compete successfully in the future. The introduction of products and services embodying new technologies and the emergence of new industry standards can, in a relatively short period of time, render existing products obsolete and unmarketable. The Company believes that its success will depend upon its ability continuously to develop new products and services and to enhance its current products and to introduce them promptly into the market. There can be no assurance that the Company will be successful in developing and marketing new product enhancements, new products or services that respond to technological change or evolving industry standards. There can be no assurance that the Company will not experience difficulties that could delay or prevent the success or development, introduction and marketing of these products, enhancements and services, or that any new product, product enhancement and services it may introduce will achieve market acceptance. Failure to develop and introduce new products, product enhancements or services, or to gain customer acceptance of such products, product enhancements or services in a timely fashion could harm the Company's competitive position and materially adversely affect it. Employees The Company employed 145 persons at September 30, 2000, none of whom are represented by a labor union. The Company's headquarters are based in Agoura Hills with offices in Westlake Village, California; Albuquerque, New Mexico; and Boulder, Colorado. Management believes that its employee relations are good at the present time. Forward Looking Statements When used in the Business section (Item 1.) or elsewhere in this document, the words "believes", "anticipates", "expects", "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 included changes in economic conditions locally and nationally, and 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. ITEM 2. Properties In October 1994, the Company purchased the three-story, 13,500 square foot building it currently occupies for $880,000. The Company currently has a note collaterized by this building. The current monthly debt service is approximately $7,000. This building houses the Company's headquarters and computer facilities. The Company leases real property under various agreements which expires at various times over the next two years. The total lease payment is approximately $14,000 per month. The Company's cost of real estate held for investment was $528,000 for fiscal years ended 2000 and 1999. A $276,000 reserve allowance was set up as of September 30, 2000 and 1999 to reflect a net book value of $252,000 which is based on the estimated fair value less estimated cost to sell the properties. The Company owns several pieces of raw land for investment consisting of four noncontiguous parcels in Missouri totaling approximately five acres, two noncontiguous parcels in Texas totaling approximately forty-four acres, one acre in Castilla County, Colorado, one-third acre in Eureka County, Nevada, a single lot in Arrowhead County, Washington, a single lot in Ventura County, California, three acres in Independence County, Arkansas, and 498 acres in San Bernardino County, California. The Company has entered into an agreement with a party to represent and sell its properties. ITEM 3. Legal Proceedings As is the case with many businesses that serve thousands of customers, the Company routinely encounters legal actions that may or may not have substance. The Company is currently involved in lawsuits against eighteen (18) merchants for losses incurred from chargebacks that the Company has paid on behalf of those merchants. The amounts of losses claimed aggregate to more than $272,000. There is no assurance that these amounts are recoverable through litigation. In addition, litigation handled by outside law firms includes defense litigation with respect to a merchant lawsuit filed against the Company by Premiere Lifestyles International Corporation and a collection lawsuit filed by the Company against First Charter Bank for amounts owed the Company. The Company encounters other legal actions routinely in the course of doing business but none are considered significant and none are known at the date of filing other than those discussed above. ITEM 4. Submission of Matters to a Vote of Security Holders Two matters were submitted to a vote of Security Holders during the fiscal year ended September 30, 2000 at the Annual Shareholders' Meeting held on February 4, 2000. A majority of shareholders' votes approved two issues: (1) election of one director; and (2) ratification and approval of auditors. PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Security Matters Since January 17, 1986, the Company has been trading on the over-the-counter market under the name Electronic Clearing House, Inc. On October 2, 1989, the Company was accepted for listing on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") and trades under the symbol of "ECHO". The following table sets forth the range of high and low prices for the Company's Common Stock during the fiscal periods indicated. The prices set forth below represent quotations between dealers and do not include retail markups, markdowns or commissions and may not represent actual transactions. Moreover, due to the lack of an established trading market for the Company's common stock, such quotations may bear no relationship to the fair market value of the Company's common stock and may not indicate prices at which the Company's common stock would trade in an established public trading market.
FISCAL YEAR ENDED High Low SEPTEMBER 30 2000 First Quarter $3.68 $1.00 Second Quarter $6.75 $2.46 Third Quarter $3.96 $1.81 Fourth Quarter $2.37 $1.43 1999 First Quarter $4.19 $0.75 Second Quarter $3.12 $1.47 Third Quarter $2.41 $1.25 Fourth Quarter $1.62 $0.97 1998 First Quarter $1.38 $0.88 Second Quarter $1.25 $0.69 Third Quarter $2.00 $0.78 Fourth Quarter $1.88 $0.94
The prices set forth above are not necessarily indicative of liquidity of the trading market. Trading in the Company's common stock is limited and sporadic, as indicated by the average monthly trading volume of 4,406,442 shares for the period from October 1999 to September 2000. On December 15, 2000, the closing representative price per share of the Company's common stock, as reported through NASDAQ in the over-the-counter market, was $0.87. Holders of Common Stock As of September 30, 2000, there were 889 record holders of the Company's Common Stock, with 21,730,934 shares outstanding. The number of holders of record is based on the actual number of holders registered on the books of the Company's transfer agent and does not reflect holders of shares in "street name" or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies. Dividend Policy The Company has not paid any dividends in the past and has no current plan. The Company intends to devote all funds to the operation of its businesses. ITEM 6. Selected Consolidated Financial Data The following table sets forth certain selected consolidated financial data, which should be read in conjunction with the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included at items 7 and 8 below. The following data, insofar as they relate to each of the five years ended September 30, have been derived from annual financial statements, including the consolidated balance sheet at September 30, 2000 and 1999 and the related consolidated statement of operations and of cash flows for the three years ended September 30, 2000, and notes thereto appearing elsewhere herein.
Year Ended September 30 2000 1999 1998 1997 1996 ( ----- Amounts in thousands, except per share ----- ) Statement of Operations Data: Revenues . . . . . . . . . . . $28,340 $23,828 $21,063 $18,623 $14,342 Costs and expenses . . . . . . 28,324 22,636 19,852 18,103 14,526 Income (loss) from operations 16 1,192 1,211 520 (184) Interest income (expense), net 196 95 14 (138) (228) Other income (expense), net. . 312 -0- (35) (50) (182) Income (loss) before income tax (Provision) benefit . . . . . 524 1,287 1,190 332 (594) (Provision) benefit for income taxes . . . . . . . . (233) 1,331 (36) (4) (5) Net Income (loss). . . . . . . $ 291 $ 2,618 $ 1,154 $ 328 ($ 599) Net Income (loss) per share-basic $0.01 $0.14 $.08 $ .03 ($.05) Net Income (loss) per share-diluted $0.01 $0.11 $.05 $ .02 n/a Weighted average number of common Shares and equivalents outstanding-basic. . . . . . 21,030 18,143 14,974 13,337 11,297 Weighted average number of common Shares and equivalents outstanding-diluted. . . . . 23,300 23,299 21,834 19,851 n/a Balance Sheet Data: Working capital surplus . . . $ 6,029 $ 5,010 $ 3,611 $ 2,054 $ 238 Current assets . . . . . . . . 7,595 6,159 5,154 3,047 2,254 Total assets . . . . . . . . . 17,013 12,932 8,025 6,084 4,682 Current liabilities. . . . . . 1,566 1,149 1,543 993 2,016 Long-term debt, and payable to stockholders and related parties, less current portion. . . . . 767 599 639 681 597 Total stockholders' equity . . $14,680 $11,184 $5,843 $4,410 $2,069
ITEM 7. 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. Overview Electronic Clearing House, Inc. provides credit card authorizations, debit card authorizations, electronic deposit services, check guarantee, check verification, check conversion, accounts receivable check truncation (ARCT/Lockbox), RCK (Return Check), inventory tracking services and various Internet services to retail and wholesale merchants and U-Haul dealers across the nation. In addition, the Company develops and sells and leases electronic terminals for use by its customers and other processing companies. On January 4, 2000, the Company acquired Rocky Mountain Retail Systems, Inc. (RMRS), based in Boulder, Colorado. RMRS operates as a wholly owned subsidiary of the Company. Pursuant to the Merger Agreement, the Company issued a total of 1,000,000 shares of restricted common stock to the selling shareholders of RMRS. An additional 1,500,000 restricted 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. 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. NCIS's negative check writer database is ranked No. 6 in the nation by The Nilson Report. Result of Operations Fiscal years 2000 and 1999 Net Income. Electronic Clearing House, Inc. recorded income of $524,000 before income tax provision for fiscal year 2000, as compared to $1,287,000 in fiscal year 1999, a decrease of 59.3%. Net income after tax provision for fiscal year 2000 was $291,000, as compared to $2,618,000 in net income for fiscal year 1999 after a tax benefit of $1,331,000. Earnings per both basic and diluted shares were $.01 in fiscal year 2000, as compared to $.14 per basic share and $.11 per diluted share for fiscal year 1999. Revenue. Total revenues for fiscal year 2000 were $28,340,000, an 18.9% increase over revenues of $23,828,000 for fiscal year 1999. Revenues derived from the electronic processing of transactions are recognized at the time the transactions are processed by the merchant. Bankcard and transaction processing revenue increased 13.3%, from $21,089,000 in fiscal year 1999 to $23,902,000 for fiscal year 2000. This increase was primarily the results of a 16.3% increase in bankcard processing volume year-over-year. Check related revenues increased from $308,000 for fiscal year 1999 to $1,979,000 in fiscal 2000, a 542.5% increase. This was mainly attributable to the acquisition of Rocky Mountain Retail Systems (RMRS), which was completed in January 2000, and the inclusion of a full year of operations for XpressChex, which was acquired in April 1999. Total processing and transaction revenue increased from $21,323,000 for fiscal 1999 to $25,677,000 for fiscal 2000, an increase of 20.4%. Transaction revenues generated from one of our major customers, U-Haul International, increased 12.5% from the prior year as a result of the additional terminal deployed during the last two fiscal years. Revenue related to terminal sales is recognized when the equipment is shipped. Terminal sales revenue for fiscal 2000 were $2,459,000, which represented a 16.8% increase over $2,106,000 for fiscal 1999. This increase reflected the delivery of approximately 4,100 terminals to the U-Haul dealers during this fiscal year as compared to 2,500 terminals delivered in fiscal 1999. The increase was partially offset by fewer terminals sold to the merchants through various sales channels during fiscal 2000. The total U-Haul dealer base served by the Company nationwide has now grown to approximately 15,000 as a result of these latest terminal deployments. The Company believes that the U-Haul transaction revenue will continue to increase as a result of these additional units deployed. Other revenue decreased from $399,000 in fiscal year 1999 to $204,000 in fiscal 2000, a 48.9% decrease due to fewer billable software development work completed during the current year. XpressCheX, Inc., a wholly owned subsidiary of the Company, initiated its new ACH backbone service in May 2000. With a benchmark throughput in excess of 5.6 million transactions per day, a tenfold system processing improvement, this ACH system was designed with redundancy and scalability to allow multiple benchmark levels to be implemented and sustained simultaneously. This backbone will be used for check conversion (POP), check-representment (RCK), accounts receivable truncated check (ARTC, lockbox), on-line check acceptance, and batch processing. This system is completely configurable by merchant. Some of the features include automated sales commission tracing, multiple re- initiation of items and service fees, fully automated funds distribution of all fees and payments, integrated fraud protection, and automated return matching. In November 1999, the Company acquired Peak Services, a collection agency, and successfully integrated its operations into the XpressChex group location in Albuquerque, New Mexico. XpressCheX also has initiated a full RCH standard collection service with Internet-based reporting and check imaging. This collection service has grown from processing 500 checks a month to over 4,000 checks in the first few months of operations. In September 1999, the Company entered into a five-year strategic alliance agreement with innoVentry, a company jointly owned by Wells Fargo and Cash America International, Inc., to provide credit card transactions in innoVentry's casino business. In August 2000, the two companies agreed to discontinue this relationship and the Company susequently sold its interest to innoVentry for $1,000,000. As a result, the Company recognized $312,000 of gain. Cost and Expenses. Bankcard processing expenses should always reflect the changes in 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 transaction expense, increased from $14,778,000 for fiscal year 1999 to $18,128,000 in the current fiscal year, a 22.7% increase. This was in direct relation to the 20.4% increase in processing and transaction revenues for the current fiscal year. The decrease in gross margin was attributable to the marketing efforts being made to the retail sectors, which traditionally carries a lower risk and therefore generates a smaller gross margin to the processor. Cost of terminals sold and leased increased from $1,166,000 in fiscal year 1999 to $1,790,000 in fiscal year 2000, an increase of 53.5%. This is attributable to the 16.8% increase in terminal sales and lease revenue for the year. Additionally, the Company reduced the terminal price for the 4,100 U- Haul systems sold during the current year. Other operating costs increased from $2,424,000 in fiscal year 1999 to $3,231,000 in fiscal year 2000, an increase of 33.3%. This increase was mainly attributable to the XpressChex and the RMRS acquisitions and the significant integration expenses related to the various check products and services. Selling and general and administrative expenses increased from $4,176,000 in fiscal year 1999 to $4,816,000 in fiscal year 2000, an increase of 15.3%. As a percentage of total revenue, selling, general and administrative expenses decreased slightly from 17.5% of total revenue in fiscal year 1999 to 17.0% of total revenue in fiscal year 2000. This decrease was partially offset by the bank organization costs incurred during fiscal year 2000. Amortization of goodwill expense increased from $92,000 in fiscal 1999 to $359,000 in fiscal 2000 as a result of the XpressChex and the RMRS acquisitions. Overall, the Company has invested substantially and has made significant progress in enhancing and integrating a suite of new check services during this fiscal year. The Company has expanded its sources of revenue from one transaction type, credit card processing, to five different types of transactions, i.e., credit cards, debit cards, check verifications, ACH settlement and collections. Management believes that the overall effect of this enhanced transaction capability will be positive on both revenues and earnings in the future. In December 1999, the Company filed an application to start an Internet-base bank with the Office of the Controller of the Currency (OCC) and also filed an application with the Federal Deposit Insurance Corporation (FDIC) in January 2000. The bank would provide services exclusively to merchants and is, therefore, being considered a "special purpose" bank by both the OCC and the FDIC. The Company was advised that the regional offices of both the OCC and the FDIC have submitted the applications to their Washington D.C. offices where special purpose banks receive final review. Due to the fact the applications are classified as a "special purpose" bank, this application process has been unexpectedly slow. However, management is still optimistic about obtaining preliminary approvals from both the OCC and the FDIC within the next couple of months. If the OCC and the FDIC approvals are obtained, the Company will immediately file with the Federal Reserve Bank to become a bank holding company, a process estimated to take at least 60 days. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2000, the Company had available cash of $3,941,000, restricted cash of $1,017,000 in reserve with its primary processing banks and working capital of $6,029,000. The Company is currently financing its operations primarily from cash generated from operations. During fiscal 2000, the Company generated $788,000 from operations. The Company generated $1,000,000 from the sale of asset. Net cash used in investing activities was $332,000, mainly as a result of equipment and software purchases. Net cash provided by financing activities was $585,000 of which $389,000 was from the exercise of stock options and warants, and $400,000 from the issuance of a note payable. This was offset by $204,000 repayment of notes payable. Overall, the Company's cash balance increased by $1,041,000 in fiscal year 2000. Accounts receivable net of allowance for doubtful accounts increased from $1,532,000 at September 30, 1999 to $1,911,000 at September 30, 2000. This is reflective of the increased month-end billings to merchants due to revenue growth year-over-year. Inventory costs remained relatively constant from $580,000 at September 30, 1999 to $594,000 at September 30, 2000. At the present, the Company's cash flows from operations is sufficient to support the current level of developments costs and marketing costs which would allow the Company 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. However, once the OCC and the FDIC approved the bank application, the Company will need to seek additional funding to satisfy the anticipated capital requirements for the bank. There is no assurance that the funding will be obtained based on terms that are acceptable to the Company. NEW ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), subsequently amended by SFAS No. 137, which the Company is required to adopt effective October 1, 2000. This Statement requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designed as part of a hedge transaction and, if it is the type of hedge transaction. The Company does not believe that the new standard will have a material impact on the Company's financial statements. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", which provides the SEC's views on applying generally accepted accounting principles to selected revenue recognition issues. The SAB is effective fourth fiscal quarter of fiscal years beginning after December 15, 1999. The Company does not believe that the SAB will have a material impact on the Company's financial statements. Quarterly Financial Data (Unaudited) The following summarizes the unaudited quarterly financial results of the Company for the fiscal years ended September 30, 2000 and September 30, 1999 (in thousands, except share data):
Year Ended September 30, 2000 First Second Third Fourth Quarter Quarter Quarter Quarter Net revenues $6,205 $6,574 $8,022 $7,539 Income (loss) from operations (56) (288) 299 61 Net income (loss) (19) (219) 321 208 Basic net income (loss) per common share $ 0.00 ($0.01) $ 0.01 $ 0.01 Diluted net income (loss) per common share $ 0.00 ($0.01) $ 0.01 $ 0.01
Year Ended September 30, 1999 First Second Third Fourth Quarter Quarter Quarter Quarter Net revenues $5,469 $6,356 $6,133 $5,870 Income from operations 249 443 195 305 Net income 258 444 209 1,707 Basic net income per common share $ 0.02 $0.03 $ 0.01 $ 0.08 Diluted net income per common share $ 0.01 $ 0.02 $ 0.01 $ 0.07
Result of Operations Fiscal years 1999 and 1998 Revenues. Electronic Clearing House, Inc. recorded income of $1,287,000 before tax benefit for the fiscal year ended September 30, 1999, as compared to $1,190,000 in fiscal year 1998, an increase of 8.2%. Net income for the fiscal year 1999 rose to $2,618,000, a 126.9% increase over net income of $1,154,000 in fiscal year 1998. Total revenues for the fiscal year 1999 were $23,828,000, a 13.1% increase over revenues of $21,063,000 for fiscal year 1998. The primary revenue increase was from bankcard processing and transaction processing, from $18,835,000 in fiscal 1998 to $21,323,000 in fiscal 1999, a 13.2% increase. Revenues derived from the electronic processing of transactions are recognized at the time the transactions are processed by the merchant. The principal contributors to the increase in bankcard processing revenue and transaction revenue are the increased revenue from the Magic acquisition and the incremental effect of the pass-through of higher interchange rates from the credit card associations, which was effective April 1999. Additionally, transaction revenue from U-Haul also increased by 3.0% from the prior year. As of September 1999, the Company processed for over 19,000 active retail merchant accounts and equipment rental dealers located around the country. In July 1999, U-Haul International awarded the Company a bid for credit card processing service for its independent dealers who participate in the Preferred Dealer Program. The Company is also authorized to promote its credit card processing service to the 11,000 dealers who are currently using the Company's terminals for its daily inventory tracking and credit card authorization activities. The Company is now in the process of enhancing the software in the terminals to include credit card processing for the dealer's non-U-Haul activities. This will reduce the amount of equipment the dealer must have on his counter and simplify the dealer's day-to-day operations. However, there is no assurance that these independent dealers will sign-up with the Company's credit card processing program. Revenue related to terminal sales is recognized when the equipment is shipped. Terminal sales increased from $2,055,000 in fiscal 1998 to $2,106,000 in fiscal 1999, a 2.5% increase. This increase was primarily due to more terminals sold in fiscal 1999 as a result of several new sales programs. This increase was partially offset by 2,500 U-Haul systems shipped in fiscal 1999 versus 3,100 systems shipped in fiscal 1998. Other revenue which consist mainly of research and development revenue increased from $173,000 in fiscal 1998 to $399,000 in fiscal 1999, a 130.6% increase. This increase was attributable to software development work for innoVentry, a casino cash advance provider, and the United States Postal Service (USPS). In September 1999, the Company entered into a five-year strategic alliance agreement with innoVentry, a company jointly owned by Wells Fargo and Company and Cash America International, Inc., to provide credit card transactions in innoVentry's casino business. The Company is responsible for the daily overall credit card settlement functions and shares a percent of the net proceeds from these transactions with innoVentry. As of September 30, 1999, the Company and innoVentry jointly serve five casinos with 20 kiosk and cage- based systems deployed. The Company generated approximately $453,000 of revenue during fiscal year 1999. The Company provided software and hardware to the USPS for the development and deployment of automated money order dispensing systems under a pilot program awarded to Computer Based Controls, Inc. (CBC), a wholly owned subsidiary of the Company. CBC designed and implemented the requested features and a successful First Article Test of the new features was completed by the USPS in late June of 1998. In May 1999, the USPS advised the Company that it is in the process of evaluating the numerous USPS projects to 1) meet their strategic goals; 2) reduce duplication of effort; 3) confirm they are Y2K compliant; and 4) provide potential cost savings. Until this evaluation is complete, all further development is on hold. It was emphasized to the Company that the delay of active development under the pilot program should not imply that a decision has been made on the merits of the pilot program but that other issues are requiring the full resources of the USPS at this time. No commitment or indication was given regarding when the USPS would complete its evaluations and dedicate resources to the pilot program but it was evident, in management's opinion, that the USPS is still very interested in the Company's system that serves the small volume USPS offices. Costs 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, transaction expense and customer service expense, increased from $13,794,000 in fiscal 1998 to $14,778,000 in fiscal 1999, a 7.1% increase. This was directly attributable to the 13.2% increase in bankcard processing and transaction revenue in fiscal year 1999. The cost of terminals sold and leased decreased from $1,519,000 in fiscal 1998 to $1,166,000 in fiscal 1999, a 23.2% decrease. This was the result of higher gross margin from equipment sales due to lower pricing from equipment vendors. Additionally, no inventory allowance was recorded in fiscal year 1999. Other operating costs increased from $1,799,000 in fiscal 1998 to $2,424,000 in fiscal year 1999, a 34.7% increase. This increase was the research and development expenses on the cash advance project and the development costs of the check products and services for fiscal year 1999. Selling, and general and administrative expenses increased from $2,740,000 in fiscal 1998 to $4,176,000 in fiscal 1999, a 52.4% increase. As a percentage of total revenue, selling, general and administrative expenses increased from 13.0% in fiscal 1998 to 17.5% in fiscal year 1999. This was primarily attributable to the expansion of the Company's sales and marketing program and the inclusion of Magic's operations started in April 1999. Furthermore, the increase was due to the higher employee-related costs to support the growth of the Company. Income Tax Benefit (Provision). The Company recognized deferred tax credits in the amount of $1,392,000 in this fiscal year primarily from net operating loss carryforward and business tax credits from prior years. Liquidity and Capital Resources As of September 30, 1999, the Company had available cash of $2,900,000 and restricted cash of $736,000 in reserve with its primary processing banks. The Company's working capital improved from $3,611,000 as of September 30, 1998, to $5,010,000 as of September 30, 1999. The Company is currently financing its operations primarily through cash generated from operations. During fiscal 1999, the Company generated $838,000 from operations. In addition, the Company generated $816,000 from stock options and warrants exercised. Net cash used in investing activities was $1,145,000 in fiscal 1999. Cash increase of $540,000 from financing activities was primarily from a refinancing of an existing note payable. Overall, the Company total cash balance increased by $414,000 in fiscal year 1999. The Company anticipates that cash on hand and cash provided by operating activities will be sufficient to fund its existing operations for the next twelve months. However, the Company may need to raise additional funds in order to support expansion or develop new business units that is strategic to the Company's growth. Thee can be no assurance that additional financing will be available when needed on terms favorable to the Company, if at all. In November 1999, the Company completed a $1 million 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. According to the terms of the loan agreement, New Strategies will begin repayment in December 1999, and will retire the loan in full on or before February 2000 together with interest. The 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. As part of the consideration for the loan, the Company also was granted a first right of refusal to purchase New Strategies and is currently working with the company, its professionals and representatives of the Official Unsecured Creditors' Committee on formulating a plan of reorganization. The Company and New Strategies are currently working on a revised repayment schedule in order to provide additional working capital to New Strategies. The Company believes that the loan extension will not impair the eventual collectibility of the loan. 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 which would allow the Company to further develop its suite of check products, Internet products and services which is essential to the Company's future growth. The Company's current ratio improved significantly from 3.3 to 1 at September 30, 1998 to 5.4 to 1 at September 30, 1999. The Company's debt-to-equity ratio also improved from .37 to 1 at September 30, 1998, to .16 to 1 at September 30, 1999. ITEM 8. Financial Statements and Supplemental Data The Financial Statements and Supplementary Data are listed under "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8K". ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None PART III ITEM 10. Directors and Executive Officers of the Registrant The officers and directors of the Company are:
Date first became Name Position Officer or Director Joel M. Barry Chairman of the Board, 1986 Chief Executive Officer, President Alice L. Cheung Chief Financial Officer, 1996 Treasurer Lawrence M. Brown Vice President 1999 Jesse Fong Vice President 1994 David Griffin Vice President 1990 Rick Slater Vice President 1998 Patricia Atlas Williams Vice President 1997 Jack Wilson Vice President 1994 Donna L. Rehman Corporate Secretary 1990 R. Marshall Frost Counsel 1994 Aristides W. Georgantas Director 1999 Carl W. Schafer Director 1986 Herbert L. Lucas Director 1991 - ------------------------------------------ Member, Finance Committee Member, Audit Committee Member, Nominating Committee Member, Executive Compensation Committee
JOEL M. BARRY, age 50, has been a Director of the Company since July 8, 1986, and Chairman of the Board since December 26, 1986. Mr. Barry served as Chief Financial Officer from May 1, 1987 to June 9, 1990, and Executive Vice President from October 12, 1987 to June 29, 1990, when he was designated Chief Executive Officer of the Company. In May, 1999, Mr. Barry assumed the role of President. Mr. Barry is also a Director and Chief Executive Officer of the NCCR, CBC, and XpressCheX, Inc. (formerly Magic Software Development) wholly- owned subsidiaries. From August 1981 to June 1991, Mr. Barry was a lecturer and investment counselor for Dynamic Seminars, a firm he founded in 1981, and Basics Financial Planning and Investments, a firm he founded in 1983. From 1972 to 1974, Mr. Barry owned and operated a recording business and from 1975 to 1981 was employed as the Director of Marketing and Sales with Financial Dynamics, a financial planning firm located in Covina, California. Mr. Barry attended Oklahoma State University from 1969 to 1970, majoring in Accounting and Ozark Bible College from 1970 to 1972, majoring in music. ALICE L. CHEUNG, age 43, has served as Treasurer and Chief Financial Officer since July 1996. Ms. Cheung received her BS degree in business administration/accounting from California State University in Long Beach, California and became a Certified Public Accountant in May 1982. Prior to joining the Company, Ms. Cheung was the Treasurer and Chief Financial Officer of American Mobile Systems from February 1988 to January 1996, prior to its merger with Nextel Communications, Inc. Ms. Cheung is an active member of the American Institute of Certified Public Accountants. LAWRENCE M. BROWN, age 49, joined the Company in 1997 and was appointed Vice President and Chief Information Officer in 1999. Prior to joining the Company, Mr. Brown was founder and sole proprietor of Cypress Productivity Systems, an educational consultancy focused on software engineering processes and project management methodologies. Mr. Brown served Unisys Corporation for eighteen years in various roles in Professional Services, Engineering, and Marketing, with his last position as Director of Software Engineering. Mr. Brown holds a BA degree in English and a BS degree in physics from Rhodes College in Memphis, Tennessee, as well as an MDiv from Claremont School of Theology in Claremont, California. JESSE FONG, age 49, has served as Vice President since September 1994. Mr. Fong joined the Company in 1984 and has served as programmer, Data Processing manager and MIS director. He received a degree major in M.E. and minor in Computer Science in 1972, received an International Marketing certificate in 1975 and a Business Administration certificate in 1976. Mr. Fong worked as Marketing manager, Sales manager and Trainer with the Xerox Corporation in Taiwan from 1974 to 1978. After that, he joined Abbott Laboratory as Country manager for two years. After immigrating to the United States in 1980, he worked as International Marketing manager in a trading firm for four years. DAVID GRIFFIN, age 52, has served as Vice President since June 1990. Previous to this capacity, he was Vice President of Operations for the Company from January 1986 until September 1989, at which time he became a consultant to the Company. Mr. Griffin has served as Senior Vice President and General Manager for TeleCheck, Los Angeles and TeleCheck, San Diego, from May 1983 to August 1985. Prior to these appointments, he was Regional Manager of TeleCheck Services, a franchiser of check guarantee services, a division of Tymshare Corporation, which was subsequently acquired by McDonnell Douglas Corporation. Mr. Griffin holds a business administration degree with a major in accounting from the University of Houston. RICK SLATER, age 40, joined the Company in May 1995 as Vice President of Computer Based Controls, Inc. (CBC). In December of 1995, Mr. Slater was appointed President of CBC. Prior to joining the Company, Mr. Slater was President of Slater Research which provided contract engineering services to various institutions. During this time, Mr. Slater directly participated in the U.S. Coast Guard COMSTA upgrade project including site surveys, systems design and system upgrade integration in a number of sites within the U.S. While a group leader at Aiken Advanced Systems, Mr. Slater held a TS/SCI security clearance and developed numerous military signal collection systems installed throughout the world. Mr. Slater holds a BS degree in electrical engineering technology from Old Dominion University, Norfolk, Virginia. PATRICIA WILLIAMS, age 35, joined the Company in September 1996, serving as Director of Program Management and was appointed Vice President in October 1997. Prior to joining ECHO, Ms. Williams was an Operations Manager for Bank of America Systems Engineering in San Francisco. Ms. Williams has also served as a Senior Program manager for the Los Angeles office of LANSystems, Inc., a nationwide systems integrator as well as a Senior Project Manager and Systems Engineer for Bank of America Systems Engineering in Los Angeles. Ms. Williams holds a B.A. degree in communications from the University of California, Los Angeles. JACK WILSON, age 56, has served as Vice President since June 1994 and was Director of Bank Card Relations for the Company from October 1992 until May 1994. Mr. Wilson served as Vice President for Truckee River Bank from August 1989 until September 1992. Previously, he was Senior Vice President/Cashier of Sunrise Bancorp and a Vice President of First Interstate Bank. Mr. Wilson holds a teaching credential from the California Community College System in business and finance. DONNA L. REHMAN, age 51, joined the Company in 1988 and has served as Corporate Secretary since 1990. For three years prior thereto, she was self- employed in Woodland Hills, California in educational books and toys. She attended Southern Illinois University in Carbondale and was employed as an administrative assistant in Chicago for 4 years and Los Angeles for 5 years. R. MARSHALL FROST, age 53, has served the Company in varying capacities since 1987 and is currently In-House Counsel. Mr. Frost received his BA degree in business administration with emphasis in accounting from California State University at Fullerton, his AA degree in pre-med from Fullerton College, his JD degree from Ventura College of Law, and his MBA degree from the University of Redlands. Mr. Frost is an active member of the California Bar, a member of the American Bar Association and the International Bar Association, and a certified broker with the California Department of Real Estate. ARISTIDES W. GEORGANTAS, age 56, has served as a Director since February, 1999. Mr. Georgantas was Executive Vice President and Chief Operating Officer, Global Asset Management/Private Banking, and Chairman and Chief Executive Officer of Chemical Bank New Jersey, NA. He had also served as President and Chief Operating Officer of Horizon Bancorp and subsidiaries and Princeton Bank. His affiliations include Director of Blue Cross Blue Shield of New Jersey; Director of Glenmede Trust Company; Chairman of the Foundation for New Jersey Public Broadcasting; and Director of Mathematica Policy Research, Inc. Mr. Georgantas is a graduate of the University of Massachusetts and Columbia University Graduate School of Business. CARL W. SCHAFER, age 64, has been a Director since July 1986. Mr. Schafer was Financial Vice President and Treasurer (Chief Financial Officer) of Princeton University from July 1976 to October 1987. From October 1987 to April 1990, Mr. Schafer was a Principal of Rockefeller & Co., Inc. of New York, an investment management firm. He is a Director of The Atlantic Foundation and Harbor Branch Institution and became President of the Atlantic Foundation in April 1990. Mr. Schafer also holds the following positions: Director/Trustee of the Paine Webber and Guardian Families of Mutual Funds; Director of Roadway Express, Inc., a trucking company; Director of Frontier Oil Corporation, an oil refiner; Director of Nutraceutix, Inc., a bio technology company; Director of Labor Ready, Inc., a provider of temporary labor; and Chairman of The Johnson Atelier and School Of Sculpture. He graduated from the University of Rochester in 1958, and served with the U.S. Bureau of the Budget, successively, as Budget Examiner, Legislative Analyst, Deputy Director and Director of Budget Preparation. He resides in Princeton, New Jersey. HERBERT L. LUCAS, age 74, has been a Director since 1991. Mr. Lucas received a BA degree in History in 1950 from Princeton University and an MBA degree in 1952 from Harvard University Graduate School of Business Administration. He served as President from 1972 to 1981 of Carnation International in Los Angeles and as a member of the Board of Directors of the Carnation Company. Since 1982, Mr. Lucas has managed his family investment business. He has served on the Board of Directors of various financial and business institutions including Wellington Trust Company, Arctic Alaska Fisheries, Inc., Nutraceutix, and Sunworld International Airways, Inc. Mr. Lucas has served as a Trustee of The J. Paul Getty Trust, the Los Angeles County Museum of Art, and Winrock International Institute for Agricultural Research and Development. He was formerly a member of the Board of Trustees of Princeton University. All directors are to be elected to specific terms, from one year to three years, by the stockholders and serve until the next annual meeting or until their terms have expired. The annual meeting of stockholders was held on February 4, 2000, and the election of directors was held at that time. ITEM 11. Executive Compensation The following table sets forth the total compensation paid and stock options offered by the Company to its Chief Executive Officer and to each of its most highly compensated executive officers, other than the Chief Executive Officer, whose compensation exceeded $100,000 during the fiscal years ended September 30, 2000, 1999 and 1998. Summary Compensation Table
Annual Long Term Compensation Compensation Securities Capacities in Underlying Name Which Served Year Salary Bonus Options Joel M. Barry Chairman/Chief 2000 $190,000 $50,000 50,000 Executive Officer/ 1999 159,166 52,500 300,000 President 1998 148,616 14,000 -0- Alice Cheung Chief Financial 2000 $ 99,500 14,250 10,000 Officer/Treasurer 1999 94,416 12,000 20,000 1998 89,333 11,000 -0- Rick Slater Vice President 2000 $113,300 13,200 20,000 1999 110,000 10,000 20,000 1998 100,000 5,000 -0- Lawrence Brown Vice President 2000 $100,000 12,750 40,000 1999 88,600 -0- 20,000 1998 78,951 3,000 20,000 David Griffin Vice President 2000 90,910 9,100 10,000 1999 88,682 7,500 20,000 1998 69,981 3,000 -0- - ---------------------------------------------- The Company provides Mr. Barry with an automobile. Mr. Barry, Ms. Cheung, Mr. Slater, Mr. Brown and Mr. Griffin are participants of a Company sponsored 401(K) plan. There has been no compensation paid other than that indicated in the above table. None of these options has been exercised. See "Stock Option Plan" and "Warrants". Mr. Barry's salary includes a $1,117 vacation paydown.
Fiscal 2000 Option Grants Table The following table sets forth the stock options granted to the Company's Chief Executive Officer and each of its executive officers, other than the Chief Executive Officer whose compensation exceeded $100,000 during fiscal 2000. Under applicable Securities and Exchange Commission regulations, companies are required to project an estimate of appreciation of the underlying shares of stock during the option term. The Company has chosen to project this estimate using the potential realizable value at assumed annual rates of stock price appreciation for the option term at assumed rates of appreciation of 5% and 10%. However, the ultimate value will depend upon the market value of the Company's stock at a future date, which may or may not correspond to projections below.
Potential Realization Value at Assumed Annual Rates of Percent of Stock Price Total Granted Appreciation for to Employees Exercise Option Term Options in Price Expiration Name Granted Fiscal Year per share Date 5% 10% Joel M. Barry 50,000 11.76% $2.56 02/04/10 $36,000 $78,000 Alice Cheung 10,000 2.35% $1.75 12/23/09 $ 4,800 $11,000 Rick Slater 20,000 4.71% $1.75 12/23/09 $ 9,600 $22,000 Lawrence Brown 10,000 2.35% $1.75 12/23/09 $ 4,800 $11,000 30,000 7.06% $2.56 02/04/10 $21,000 $47,000 David Griffin 10,000 2.35% $1.75 12/23/09 $ 4,800 $11,000
The following table sets forth the number of unexercised options and warrants held by the Company's Chief Executive Officer and each of its executive officers, other than the Chief Executive Officer whose compensation exceeded $100,000 during fiscal 2000. No options/warrants have been exercised. Aggregated Option/SAR Exercises and Fiscal-Year Option/SAR Value Table
Value of Number of unexercised Shares unexercised in-the-money acquired on Value options/SARS Options/SARS Name exercise # realized $ FY-end # at FY-end $ Joel M. Barry 130,000 $143,000 870,000 $722,000 Alice Cheung -0- $ -0- 180,000 $ 98,000 Rick Slater 4,000 $ 8,000 222,000 $192,000 Lawrence Brown -0- $ -0- 100,000 $ 11,200 David Griffin 10,000 $ 36,200 165,000 $119,000 - ------------------------------------------------------ Based on the closing sales price of the Common Stock on September 30, 2000 of $1.50 per share, less the option exercise price.
Compensation Committee Interlocks and Insider Participation Carl W. Schafer, Director, Herbert L. Lucas, Jr., Director, and Aristides W. Georgantas, Director, serve on the compensation committee. No executive officer of the Company serves on the compensation committee of another entity or as a director of another entity with an executive officer on the Company's compensation committee. Director Compensation Each outside director received $15,000 and 5,859 shares of Common Stock in fiscal 2000; $15,000 and 5,455 shares of Common Stock in fiscal 1999; and $20,000 and 33,333 three-year options, exercisable at $0.91 per share in fiscal 1998. Directors are compensated for all reasonable expenses and are not compensated for special meetings other than regular meetings. Employment Agreements None. Bonus, Profit-Sharing and Other Remuneration Plans and Pension and Retirement Plans The Company has established a bonus program to reward extraordinary performance that exceeds pre-set goals established for executive officers and key personnel. The Company believes that such a bonus program provides the incentive to exceed such goals, thereby building shareholder value. The Company has a contributory 401(K) Retirement Pension Plan which covers all employees who are qualified under the plan provisions. Stock Option Plan On May 13, 1992, the Company's Board of Directors authorized adoption of a Directors and Officers Stock Option Plan ("Plan"), ratified by the shareholders at the Annual Meeting held July 10, 1992. The Plan provided for the issuance of up to 325,000 stock options, each to purchase one share of the Common Stock for $0.85 per share, subject to adjustment in the event of stock splits, combinations of shares, stock dividends or the like. On November 18, 1996, the Company's Board of Directors authorized an increase in the Plan to 3,375,000 options and was ratified by the shareholders at the Annual Meeting held in February 1997. On February 4, 1999, the Company's Board of Directors authorized an increase in the Plan to 5,375,000 options and was ratified by the shareholders at the Annual Meeting held in February 1999. With the exception of the foregoing, the Company has no stock option plans or other similar or related plans in which any of its officers or directors participate. ITEM 12. Security Ownership of Certain Beneficial Owners and Management As of November 8, 2000, there were 21,730,934 shares of the Company's Common Stock outstanding. To the Company's knowledge, no individual has beneficial ownership or control over 5% or more of the Company's outstanding Common Stock. The following table sets forth the number of shares of Common Stock owned beneficially by the Company's officers and directors, individually, and as a group, as of November 8, 2000.
Amount and Percentage of Nature of Beneficial Outstanding Stock Name and Address Ownership At 11/08/00 Joel M. Barry 1,023,250 4.50% 28001 Dorothy Drive Agoura Hills, CA 91301 Lawrence Brown 100,000 0.45% 28001 Dorothy Drive Agoura Hills, CA 91301 Alice L. Cheung 180,000 0.82% 28001 Dorothy Drive Agoura Hills, CA 91301 Jesse Fong 55,110 0.25% 28001 Dorothy Drive Agoura Hills, CA 91301 R. Marshall Frost 5,000 0.02% 28001 Dorothy Drive Agoura Hills, CA 91301 Aristides W. Georgantas 11,314 0.05% 28001 Dorothy Drive Agoura Hills, CA 91301 David Griffin 167,747 0.76% 28001 Dorothy Drive Agoura Hills, CA 91301 Herbert L. Lucas 385,081 1.74% 12011 San Vicente Boulevard Los Angeles, CA 90049 Donna Rehman 60,000 0.27% 28001 Dorothy Drive Agoura Hills, CA 91301 Carl W. Schafer 315,247 1.42% 28001 Dorothy Drive Agoura Hills, CA 91301 Rick Slater 224,000 1.01% 28001 Dorothy Drive Agoura Hills, CA 91301 Patricia Atlas Williams 100,000 0.45% 28001 Dorothy Drive Agoura Hills, CA 91301 Jack Wilson 144,300 0.66% 28001 Dorothy Drive Agoura Hills, CA 91301 All officers and directors as a group (13 persons) 2,771,049 11.43% - -------------------------------------------------- Outstanding Common Shares with effect given to conversion of preferred stock and options described in footnotes 2 through 5. Includes options according to the terms of the Incentive Stock Option Plan. See "Item 11. Options, Warrants or Rights". Includes options granted to outside directors. Includes 71,889 shares indirectly owned by Mr. Lucas through a trust for his wife. Includes 2,120 shares indirectly owned by Mr. Wilson through his wife.
ITEM 13. Certain Relationships and Related Transactions There were no material related-party transactions. PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8K (a) The following documents are filed as part of this report: (1) Consolidated Financial Statements Page Report of Independent Accountants . . . . . . . . . . . . . . . . . . F-1 Consolidated Balance Sheet at September 30, 2000 and 1999 . . . . . . .F-2 Consolidated Statement of Operations for each of the three years in the period ended September 30, 2000. . . . . . . . . . . . . . . . .F-3 Consolidated Statement of Changes in Stockholders' Equity for each of the three years in the period ended September 30, 2000. . .F-4 Consolidated Statement of Cash Flows for each of the three years in the period ended September 30, 2000. . . . . . . . . . . . . . . . .F-5 Notes to Consolidated Financial Statements. . . . . . . . . . . . . . .F-6 (2) Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts and Reserves. . . . . S-1 All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. (b) Reports on Form 8K for fourth quarter ending September 30, 2000: Form 8K, dated September 1, 2000, incorporated herein by reference (c) Exhibits: Exhibit Number Description of Document 1.1 Form of Underwriting Agreement between the Company and J.W. Gant & Associates, Inc. 1.2 Form of Agreement among Underwriters. 1.3 Form of Selected Dealer's Agreement. 2.1 Copy of Merger Agreement and Plan of Reorganization between Electronic Clearing House, Inc., ECHO Acquisition Corporation, and Magic Software Development, Inc., dated April 20, 1999. 2.2 Copy of Merger Agreement and Plan of Reorganization between Electronic Clearing House, Inc., ECHO Acquisition Corporation, and Rocky Mountain Retail Systems, Inc., dated January 4, 2000. 3.1 Articles of Incorporation of Bio Recovery Technology, Inc., filed with the Nevada Secretary of State on December 11, 1981. 3.2 Certificate of Amendment to Articles of Incorporation of Bio Recovery Technology, Inc., filed with the Nevada Secretary of State on September 1, 1983. 3.3 Certificate of Amendment of Articles of Incorporation of Bio Recovery Technology, Inc., filed with the Nevada Secretary of State on January 17, 1986. 3.4 By-Laws of Bio Recovery Technology, Inc. 4.1 Proposed Form of Purchase Option between the Company and J.W. Gant & Associates, Inc. 4.2 Specimen Common Stock Certificate. 10.31 Copy of Merchant Marketing and Processing Services Agreement between Electronic Clearing House, Inc. and First Charter Bank, dated January 25, 1994. 10.35 Copy of Merchant Marketing and Processing Services Agreement between Electronic Clearing House, Inc. and First Regional Bank, dated June 24, 1997. 10.36 Copy of Merchant Marketing and Processing Services Agreement between Electronic Clearing House, Inc. and The Berkshire Bank, dated July 31, 1997. 10.38 Copy of Product and Software Development and License Agreement between Electronic Clearing House, Inc. and innoVentry, dated April 1, 1999. 10.40 Copy of Merchant Account Assignment and Transfer Agreement between Electronic Clearing House, Inc. and Imperial Bank, dated July 8, 1999. 10.41 Copy of Processing and Software Development and License Agreement between Electronic Clearing House, Inc. and National Bank Drafting Systems, Inc., dated October 22, 1999. 10.42 Copy of Addendum to Agreement between Electronic Clearing House, Inc. and U-Haul International, dated January 1, 2000. 10.43 Copy of Software System License Agreement between Magic Software Development, Inc. and National Check Network, dated February 29, 2000. 10.44 Copy of Electronic Check Services Agreement between Electronic Clearing House, Inc. and National Bank Drafting Systems, Inc., dated May 17, 2000. 10.45 Copy of Amendment to Product and Software Development and License Agreement between Electronic Clearing House, Inc. and innoVentry, Inc., dated July 19, 2000. 10.46 Copy of Amended and Restated Merchant Marketing and Processing Services Agreement between Electronic Clearing House, Inc. and First Regional Bank, dated August 1, 2000. 10.47 Copy of Addendum to Amended and Restated Merchant Marketing and Processing Services Agreement between Electronic Clearing House, Inc. and First Regional Bank, daated August 1, 2000. 22.0 Subsidiaries of Registrant. - --------------------------------------------------------------- Filed as an Exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1988 and incorporated herein by reference. Filed as an Exhibit to Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1989 and incorporated herein by reference. Filed as an Exhibit to Registrant's Form S-1, Amendment No. 3, effective November 13, 1990 and incorporated herein by reference. Filed as an Exhibit to Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 1992 and incorporated herein by reference. Filed as an Exhibit to Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 1993 and incorporated herein by reference. Filed as an Exhibit to Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 1994 and incorporated herein by reference. Filed as an Exhibit to Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 1996 and incorporated herein by reference. Filed as an Exhibit to Registrant's Annual Report on Form 10-K for fiscal year ended September 30, 1997 and incorporated herein by reference. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By: \s\ Joel M. Barry Joel M. Barry, Chief Executive Officer and Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date \s\ Joel M. Barry Chairman of the Board ) December 28, 2000 Joel M. Barry and Chief Executive ) Officer ) ) ) \s\ Carl W. Schafer Director ) Carl W. Schafer ) ) ) ) \s\ Herbert L. Lucas, Jr. Director ) Herbert L. Lucas, Jr. ) ) ) ) \s\ Alice L. Cheung Chief Financial Officer ) Alice L. Cheung and Treasurer ) ) ) ) \s\ Marjan Hewson Controller ) Marjan Hewson ) REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Electronic Clearing House, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Electronic Clearing House, Inc. and its subsidiaries at September 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP Los Angeles, California November 28, 2000 ELECTRONIC CLEARING HOUSE, INC. CONSOLIDATED BALANCE SHEETS
September 30, 2000 1999 ASSETS Current assets: Cash and cash equivalents $3,941,000 $2,900,000 Restricted cash 1,017,000 736,000 Accounts receivable less allowance of $380,000 and $1,001,000 1,911,000 1,532,000 Inventory less allowance of $3,000 and $202,000 594,000 580,000 Prepaid expenses and other assets 132,000 88,000 Other receivable -0- 323,000 Total current assets 7,595,000 6,159,000 Noncurrent assets: Long term receivables 19,000 27,000 Property and equipment, net 2,949,000 2,678,000 Real estate held for investment, net 252,000 252,000 Deferred tax asset 1,214,000 1,392,000 Other assets, net 411,000 506,000 Goodwill, net 4,573,000 1,918,000 Total assets $17,013,000 $12,932,000 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings and current portion of long-term debt $ 177,000 $ 149,000 Accounts payable 290,000 159,000 Accrued expenses 1,046,000 779,000 Deferred income 53,000 62,000 Total current liabilities 1,566,000 1,149,000 Long-term debt 767,000 599,000 Total liabilities 2,333,000 1,748,000 Commitments and contingencies 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", 0 and 40,000 shares issued and outstanding, -0- -0- Common stock, $.01 par value, 36,000,000 shares authorized; 21,888,036 and 19,874,126 shares issued; 21,730,934 and 19,788,213 shares outstanding 219,000 199,000 Additional paid-in capital 20,474,000 16,958,000 Accumulated deficit (5,544,000) (5,835,000) Less treasury stock at cost, 157,102 and 85,913 common shares (469,000) (138,000) Total stockholders' equity 14,680,000 11,184,000 Total liabilities and stockholders' equity $ 17,013,000 $ 12,932,000
See accompanying notes to consolidated financial statements. ELECTRONIC CLEARING HOUSE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended September 30, 2000 1999 1998 REVENUES: Processing revenue $14,917,000 $13,222,000 $12,251,000 Transaction revenue 10,760,000 8,101,000 6,584,000 Terminal sales 2,459,000 2,106,000 2,055,000 Other revenue 204,000 399,000 173,000 28,340,000 23,828,000 21,063,000 COSTS AND EXPENSES: Processing and transaction expense 18,128,000 14,778,000 13,794,000 Cost of terminals sold 1,790,000 1,166,000 1,519,000 Other operating costs 3,231,000 2,424,000 1,799,000 Selling, general and administrative expenses 4,816,000 4,176,000 2,740,000 Amortization expense - acquisitions 359,000 92,000 -0- 28,324,000 22,636,000 19,852,000 Income from operations 16,000 1,192,000 1,211,000 Interest income 284,000 180,000 118,000 Interest expense (88,000) (85,000) (104,000) Gain on sale of asset 312,000 -0- -0- Other expense -0- -0- (35,000) Income before (provision) benefit for income taxes 524,000 1,287,000 1,190,000 (Provision) benefit for income taxes (233,000) 1,331,000 (36,000) Net income $ 291,000 $2,618,000 $1,154,000 Earnings per share - Basic $0.01 $0.14 $0.08 Earnings per share - Diluted $0.01 $0.11 $0.05 Shares used in computing basic earnings per share 21,029,572 18,143,109 14,974,125 Shares used in computing diluted earnings per share 23,300,391 23,299,486 21,834,034
See accompanying notes to consolidated financial statements. ELECTRONIC CLEARING HOUSE, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Stock Treasury Common Preferred Amount Balance at September 30, 1997 6,241 14,600,541 570,511 $ 152,000 Exercise of warrants 100,000 1,000 Exercise of stock options 44,000 Conversion of preferred to common 376,000 (94,000) 3,000 Issuance of preferred stock 40,000 Net income Balance at September 30, 1998 6,241 15,120,541 516,511 156,000 Exercise of warrants 650,000 7,000 Exercise of stock options 905,000 9,000 Conversion of preferred to common 2,182,220 (451,511) 17,000 Issuance of common stock to outside directors 16,365 Issuance of common stock - acquisition 1,000,000 10,000 Purchase of treasury stock 79,672 Net income Balance at September 30, 1999 85,913 19,874,126 65,000 199,000 Exercise of warrants 350,000 4,000 Exercise of stock options 466,333 5,000 Conversion of preferred to common 160,000 (40,000) 1,000 Issuance of common stock to outside directors 17,577 Issuance of common stock - acquisition 1,020,000 10,000 Purchase of treasury stock 71,189 Net income Balance at September 30, 2000 157,102 21,888,036 25,000 $219,000 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY CONTINUED: Additional Paid-In Treasury Accumulated Capital Stock Deficit Total Balance at September 30, 1997 $13,865,000 $ -0- $(9,607,000) $4,410,000 Exercise of warrants 49,000 50,000 Exercise of stock options 29,000 29,000 Conversion of preferred to common (3,000) -0- Issuance of preferred stock 200,000 200,000 Net income 1,154,000 1,154,000 Balance at September 30, 1998 14,140,000 -0- (8,453,000) 5,843,000 Exercise of warrants 253,000 260,000 Exercise of stock options 547,000 556,000 Conversion of preferred to common (17,000) -0- Issuance of common stock to outside directors 45,000 45,000 Issuance of common stock - acquisition 1,990,000 2,000,000 Purchase of treasury stock (138,000) (138,000) Net income 2,618,000 2,618,000 Balance at September 30, 1999 16,958,000(138,000) (5,835,000) 11,184,000 Exercise of warrants 136,000 140,000 Exercise of stock options 244,000 249,000 Conversion of preferred to common (1,000) -0- Issuance of common stock to outside directors 45,000 45,000 Issuance of common stock - acquisition 3,092,000 3,102,000 Purchase of treasury stock (331,000) (331,000) Net income 291,000 291,000 Balance at September 30, 2000 $20,474,000 $(469,000)$(5,544,000) $14,680,000
See accompanying notes to consolidated financial statements. ELECTRONIC CLEARING HOUSE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30, 2000 1999 1998 Cash flows from operating activities: Net income $ 291,000 $2,618,000 $1,154,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 325,000 271,000 225,000 Amortization 585,000 217,000 186,000 Provisions for losses on accounts and notes receivable 586,000 443,000 963,000 Provision for obsolete inventory 3,000 -0- 132,000 Provision (benefit) for deferred income taxes 178,000 (1,392,000) -0- Fair value of stock issued in connection with director's compensation 45,000 45,000 -0- Gain on sale of asset (312,000) -0- -0- Changes in assets and liabilities, net of effects of acquisitions: Restricted cash (281,000) (85,000) (328,000) Accounts receivable (824,000) (790,000)(1,031,000) Inventory (17,000) 139,000 (102,000) Prepaid expenses and other current assets (27,000) (45,000) 7,000 Accounts payable 117,000 (46,000) 61,000 Accrued expenses 128,000 (98,000) 114,000 Deferred income (9,000) (421,000) 433,000 Other receivable -0- (18,000) -0- Net cash provided by operating activities 788,000 838,000 1,814,000 Cash flows from investing activities: Other assets (139,000) (83,000) -0- Purchase of equipment and software (1,246,000)(1,062,000) (241,000) Increase in notes receivable (1,027,000) -0- -0- Repayment of notes receivable 1,000,000 5,000 19,000 Proceeds from sale of asset 1,000,000 -0- -0- Cash acquired through acquisition 80,000 -0- -0- Net cash used in investing activities (332,000)(1,140,000) (222,000) Cash flows from financing activities: Proceeds from issuance of notes payable 400,000 540,000 -0- Repayment of notes payable (204,000) (640,000) (157,000) Proceeds from issuance of preferred stock -0- -0- 200,000 Proceeds from common stock warrants exercised 140,000 260,000 50,000 Proceeds from exercise of stock options 249,000 556,000 29,000 Net cash provided by financing activities 585,000 716,000 122,000 Net increase in cash 1,041,000 414,000 1,714,000 Cash and cash equivalents at beginning of period 2,900,000 2,486,000 772,000 Cash and cash equivalents at end of period $ 3,941,000 $ 2,900,000 $ 2,486,000
See accompanying notes to consolidated financial statements. ELECTRONIC CLEARING HOUSE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Electronic Clearing House, Inc. (ECHO or the Company) is a Nevada corporation. The Company provides credit card authorizations, electronic deposit services, check guarantee, check verification, check conversion, inventory tracking services and various Internet services to retail and wholesale merchants and U-Haul dealers across the nation. In addition, the Company develops and sells electronic terminals for use by its customers and other processing companies. The Company has seven wholly owned subsidiaries: ECHO Payment Services, Inc. (formerly GCLC Corporation), Computer Based Controls, Inc., ECHO R&D Corporation (inactive), XpressCheX, Inc. (California), National Credit Card Reserve Corporation, XpressCheX, Inc. (formerly Magic Software Development, Inc.) and Rocky Mountain Retail Systems, Inc. During fiscal year ended 2000, the Company acquired Rocky Mountain Retail Systems, Inc. (RMRS), a Colorado corporation, through a merger of the Company's wholly owned subsidiary, ECHO Acquisition Corporation, a Colorado corporation, with and into RMRS. RMRS's primary operations consist of providing check verification services to large retail chains, processors and collection agencies across the nation. The following comments describe the more significant policies. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and accounts have been eliminated. Cash and Cash Equivalents Cash and cash equivalents consist of unrestricted balances only. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Restricted Cash Under the terms of the processing agreement with the Company's primary processing banks, the Company maintains several cash accounts as a reserve against chargeback losses. As processing fees are received by the processing banks, they are allocated per the processing agreement to the reserve accounts. Accounts Receivable Chargeback Accounts receivable chargeback losses occur when a credit card holder presents a valid claim against one of the Company's merchants and the merchant has insufficient funds or is no longer in business resulting in the charge being absorbed by the Company. The Company records a receivable for those chargebacks for which the merchant is liable but has not made payment. A reserve is estimated based upon a historically-determined percentage of gross credit card processing volume. Inventory Inventory is stated at the lower of cost or market, cost being determined on the first-in, first-out method. Inventory consists of terminals and printers held for sale or lease and related component parts. Property and Equipment Property and equipment are stated at cost, less accumulated depreciation and amortization. Expenditures for additions and major improvements are capitalized. Repair and maintenance costs are expensed as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts. Gains or losses from retirements and disposals are credited or charged to income. Depreciation and amortization are computed using the straight-line method over the shorter of the estimated useful lives of the respective assets or terms of the related leases. The useful lives and lease terms for depreciable assets are as follows: Building 39 years Computer equipment and software 3-5 years Furniture, fixtures and equipment 5 years Building improvements 10 years
Other Assets Other Assets consist primarily of patents. Costs related to obtaining a patent are capitalized and amortized over the life of the patent. Software Development Costs Under the provisions of Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," the Company capitalizes costs associated with software developed for internal use when both the preliminary project state is completed and management has authorized further funding for the completion of the project. Capitalized costs include only (1) external direct costs of materials and services consumed in developing or obtaining internal-use software, (2) payroll and payroll-related costs for employees who are directly associated with the software project, and (3) interest costs incurred, when material, while developing internal-use software. Capitalization of such costs ceases no later than the point at which the project is substantially complete and ready for its intended purpose. Capitalized software development costs are amortized using the straight-line method over the lesser of three years or estimated useful life. Research and development costs and other computer software maintenance costs related to software development are expensed as incurred. Goodwill Goodwill represents the excess of purchase price over net assets acquired in the acquisition of XpressCheX and RMRS and is being amortized on a straight- line basis over estimated useful lives of 10 years and 15 years, respectively. Long-Lived Assets The Company periodically reviews its long-lived assets for impairment using estimated undiscounted future cash flows associated with such assets. An impairment loss would be determined as the difference between the fair values and the carrying amounts of the assets. Management believes no such impairment has occurred as of September 30, 2000 and 1999. Revenues and Expenses All processing and transaction revenues are recognized at the time the transactions are processed by the merchant. Processing costs paid to banks are included in costs and expenses. Terminal sales are recorded when product is shipped. The Company expensed $528,000, $433,000, and $930,000 for the years ended September 30, 2000, 1999 and 1998, respectively for bankcard processing chargeback losses. The Company provided for other uncollectible leases and notes receivable balances of $35,000, $48,000 and $24,000 for the years ended September 30, 2000, 1999 and 1998, respectively. The Company has one customer that accounted for approximately $4,082,000, $2,898,000 and $3,409,000 of revenues for the years ended 2000, 1999 and 1998, respectively. The revenues for this customer are recorded as part of the bankcard transaction fees and terminal sales and lease segments. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). FAS 109 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount expected to be realized. 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 diluted net income per share except where it would be anti-dilutive. For the basic net income per common share, the convertible preferred stock is not considered to be equivalent to common stock. Stock-Based Compensation The Company has elected to account for its stock-based compensation plans in accordance with APB Opinion No. 25 and to adopt only the disclosure requirements of FAS 123. As a result, the adoption of FAS 123 does not have an impact on the financial position or results of operations of the Company. The pro forma disclosure required by FAS 123 is included in Note 12. Compensation expense is recognized in association with the issuance of stock options for the difference, if any, between the trading price of the stock at the time of issuance and the price to be paid by an officer or director. Compensation expense is recorded over the period the officer or director performs the related service. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments The amount recorded for financial instruments in the Company's consolidated financial statements approximates fair value as defined in SFAS No. 107, "Disclosures about Fair Value of Financial Instruments". Reclassifications Certain amounts in the 1999 and 1998 financial statements have been reclassified to conform to the 2000 presentation. NOTE 2 - STATEMENT OF CASH FLOWS:
September 30 2000 1999 1998 Cash paid for: Interest $88,000 $85,000 $104,000 Income taxes 40,000 64,000 4,000
Significant non-cash transactions for fiscal 2000 are as follows: - - In connection with business acquisition transactions, the Company issued 1,020,000 shares of common stock with a market value of $3,102,000. - - The Company acquired 71,189 shares of its common stock valued at $331,000 for repayment of a note receivable. Significant non-cash transactions for fiscal 1999 are as follows: - - Capital equipment of $43,000 was acquired under capital leases. - - In connection with a business acquisition transaction, the Company issued 1,000,000 shares of common stock with a market value of $2 million. - - The Company acquired 79,672 shares of its common stock valued at $138,000 as a result of a chargeback receivable settlement. Significant non-cash transactions for fiscal 1998 are as follows: - - Capital equipment of $57,000 was acquired under capital leases. NOTE 3 - INVENTORY The components of inventory are as follows:
September 30 2000 1999 Raw materials $ 98,000 $249,000 Finished goods 499,000 533,000 597,000 782,000 Less: Allowance for obsolescence 3,000 202,000 $ 594,000 $ 580,000
NOTE 4 - OTHER RECEIVABLES: Other receivables are comprised of the following:
September 30 2000 1999 Lease receivables - consist of long term portion of equipment leases to merchants, net of deferred interest $19,000 $ 27,000 Note receivable including accrued interest of $33,000 collateralized by 230,345 shares of the Company's common stock, due in May 2000, bears 6% interest -0- 323,000 $19,000 350,000 Less: long-term portion (19,000) (27,000) $ -0- $ 323,000
NOTE 5 - PROPERTY AND EQUIPMENT: Property and equipment are comprised of the following:
September 30 2000 1999 Land and building $ 880,000 $ 880,000 Computer equipment and software 3,802,000 3,344,000 Furniture, fixtures and equipment 1,023,000 900,000 Building improvements 271,000 203,000 Tooling equipment 285,000 285,000 Cost 6,261,000 5,612,000 Less: accumulated depreciation and amortization (3,312,000) (2,934,000) Net book value $2,949,000 $2,678,000
Included in property and equipment are assets under capital lease of $209,000 and $241,000 at September 30, 2000 and 1999, with related accumulated amortization of $119,000 and $94,000, respectively, and capitalized software development costs of $1,120,000 and $1,207,000, with related accumulated amortization of $485,000 and $491,000, respectively. NOTE 6 - INCOME TAXES The (provision) benefit for income taxes consists of the following components:
September 30 2000 1999 1998 Current federal taxes $ (4,000) $ (11,000) $ (28,000) Current state taxes (51,000) (50,000) (8,000) Deferred taxes (178,000) 1,392,000 -0- Total (provision) benefit for income taxes $(233,000) $1,331,000 $(36,000)
The Company's effective income tax rate differs from the statutory federal income tax rate due primarily to the effect of non-deductible goodwill expense and state income taxes. In addition, during the year ended September 30, 2000, the Company recognized the income tax benefit of a reserve established against the value of certain real estate owned by it. Components of the deferred tax asset include:
September 30 2000 1999 Deferred tax assets: Bank organization cost $ 28,000 -0- Reserve for bad debts 16,000 39,000 Inventory reserve 1,000 57,000 Land reserve 109,000 -0- Amortization of intangibles -0- 43,000 State tax expense 18,000 -0- Net operating loss carryforward 894,000 1,106,000 Business tax credit 113,000 113,000 AMT credit 35,000 34,000 Total deferred tax assets $1,214,000 $1,392,000
During 1999, the Company eliminated the valuation allowance previously established with respect to its deferred tax asset. This was based on the realization of a portion of the asset during 1999, and a determination that it is "more likely than not" that the remaining deferred tax asset as of September 30, 1999, will be realized. The Company has a federal net operating loss carryforward of $2,630,772 which expires in 2007 through 2011. NOTE 7 - BUSINESS ACQUISITIONS On January 4, 2000, the Company acquired 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. Results of RMRS's operations from the date of acquisition to September 30, 2000, have been included in the consolidated financial statements. Pursuant to the Merger Agreement, the Company issued a total of 1,000,000 shares of common stock to the selling shareholders of RMRS. In addition, up to 1,500,000 shares of common stock will be issued to the RMRS selling shareholders upon the achievement of certain predetermined earnings goals for year 2000 through 2002. This additional consideration will be recorded as goodwill when it is paid. As a result of this transaction, the Company recorded approximately $2,973,000 in goodwill and other acquisition costs which are being amortized over fifteen years. On April 20, 1999, the Company acquired Magic Software Development, Inc. 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. Results of Magic's operations from the date of acquisition to September 30, 1999, have been included in the consolidated financial statements. Pursuant to the Merger Agreement, the Company issued a total of 1,000,000 shares of common stock to the selling shareholders of Magic. In addition, up to 1,000,000 shares of common stock will be issued to the Magic selling shareholders upon the achievement of certain predetermined earnings goals for fiscal 2000 and 2001. This additional consideration will be recorded as goodwill when it is paid. As a result of this transaction, the Company recorded approximately $2,010,000 in goodwill and other acquisition costs which are being amortized over ten years. Pro Forma Disclosures The following summary, prepared on a pro forma basis, combines the operating results of the Company and RMRS, as if the acquisition had occurred as of the beginning of the periods presented. In addition, the pro forma results reflect the amortization of goodwill. The pro forma operating results are not necessarily indicative of what would have occurred had the merger actually taken place as of the beginning of the periods presented or what may be obtained in the future:
For the year ended For the year ended September 30, 2000 September 30, 1999 (unaudited) (unaudited) Revenue $28,662,000 $24,846,000 Net income 301,000 2,542,000 Earnings per share - Basic $ 0.01 $ 0.14 Earnings per share - Diluted $ 0.01 $ 0.11
NOTE 8 - SHORT-TERM BORROWINGS AND LONG-TERM DEBT: Short-term borrowings and long-term debt consist of the following:
September 30 2000 1999 Term loan collateralized by corporate headquarters building, due February 15, 2009, bearing interest at 7.87% $480,000 $518,000 Term loan, collateralized by equipment, due 2005, bearing interest at prime rate, 9.5% at September 30, 2000 346,000 -0- Capital leases 106,000 154,000 Notes payable, bearing interest at 9.5% 12,000 76,000 944,000 748,000 Less: current portion (177,000) (149,000) Total long-term debt $767,000 $599,000
The weighted average interest rate on the variable rate term loan for the period it was outstanding during the year ended September 30, 2000 was 9.08% One of the term loans contains restrictive debt covenants consisting of debt service coverage ratio and tangible net worth requirements. Future maturities of debt are as follows:
Fiscal year ended September 30 2001 $177,000 2002 173,000 2003 146,000 2004 133,000 2005 85,000 thereafter 230,000 $944,000
NOTE 9 - ACCRUED EXPENSES: Accrued expenses are comprised of the following:
September 30 2000 1999 Accrued bank card fees $145,000 $111,000 Accrued compensation and taxes 187,000 208,000 Accrued communication costs 117,000 121,000 Accrued professional fees 166,000 104,000 Accrued commission 291,000 124,000 Other 140,000 111,000 $1,046,000 $779,000
NOTE 10 - STOCKHOLDERS' EQUITY: Preferred Stock During fiscal 1994, the Company issued 23,511 shares of Series H Preferred Stock (Class H Stock) to two noteholders in exchange for $329,000 of debt and accrued interest. Class H Stock has a stated value of $14.00 and is convertible into 20 shares of common stock. The Company may call Class H Stock at any time at a price of $14.50 per share. Class H Stock has priority in liquidation over the Company's common stock but is junior in liquidation to all previous classes of preferred stock. During fiscal 1999, 23,511 shares of Class H Preferred Stock were converted into 470,220 shares of common stock. As of September 30, 1999, all the Class H Stock had been converted into shares of common stock. During fiscal 1996, the Company issued 425,000 shares of Series K Preferred Stock (Class K Stock) for an aggregated price of $850,000. Class K Stock has a stated value of $2.00 per share and is convertible into four shares of common stock. Class K Stock has priority in liquidation over the Company's common stock but is junior in liquidation to all previous classes of preferred stock. During fiscal 1999, 428,000 shares of Class K Stock were converted into 1,712,000 shares of the Company's common stock, respectively. As of September 30, 2000, there are 25,000 shares of Class K Stock convertible into 100,000 shares of common stock. During fiscal 1997, the Company issued 172,000 shares of Series L Preferred Stock (Class L Stock) for an aggregate price of $860,000. Class L Stock has a stated value of $5.00 per share and is convertible into four shares of common stock. During fiscal 1998, the Company issued 40,000 shares of Class L Stock for $200,000. During fiscal 2000 and fiscal 1999, 40,000 shares and 428,000 shares of Class L Stock were converted into 160,000 shares and 1,712,000 shares of common stock, respectively. Class L Stock has priority in liquidation over the Company's common stock, but is junior in liquidation to all previous classes of preferred stock. Class L and Class K Preferred Stock have no dividend yield and are non-cumulative. As of September 30, 2000, all the Class L Stock have been converted into shares of common stock. Stockholders' Rights Plan The Company has a Stockholders' Rights Plan. All stockholders have one preferred share purchase right ("Right") for each outstanding share of common stock of the Company. Each Right entitles the registered holder to purchase from the Company one-hundredth of a share of series A Junior Participating Preferred Stock, no par value ("preferred Stock") of the Company at a price of $0.50 per one one-hundredth of a share of Preferred Stock ("Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement dated as of September 30, 1996 ("Rights Agreement"). The Rights will separate from the Common Stock and a Distribution Date will occur upon the earlier of (i) 10 days following a public announcement that, without consent of the Board of Directors, a person or group of affiliated or associated persons ("Acquired Person") have acquired beneficial ownership of twenty-percent (20%) or more of the outstanding Common Stock, or (ii) 10 business days (or such later date as may be determined by action of the Board of Directors prior to such time as any person becomes an Acquired Person) following the commencement of, or announcement of an intention to make a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of twenty-percent (20%) of more such outstanding Common Stock. In the event that any person becomes the beneficial owner of twenty-percent (20%) or more of the Common Stock of the Company, ten (10) days thereafter ("Flip-In Event") each holder of a Right will thereafter have the right to receive, upon exercise thereof at the then current Purchase Price of the Right, Common Stock which has a value of two times the Purchase Price of the Right (such right being called the "Flip-In Right"). In the event the Company is acquired in a merger or other business combination transaction where the Company is not the surviving corporation or in the event that 50% or more of its assets or earning power is sold, proper provision shall be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then current Purchase Price of the Right, common stock of the acquiring entity which has a value of two times the Purchase Price of the Right. Upon the occurrence of the Flip-In Event, any Rights that are or were at any time owned by an Acquiring Person shall become null and void insofar as they relate to the Flip-In Right. The Rights are not exercisable until the Distribution Date. The Rights will expire on September 30, 2006 ("Final Expiration Date"), unless the Rights are earlier redeemed or exchanged by the Company, in each case, as description in the Rights Agreement. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
September 30 2000 1999 1998 Net income: $291,000 $2,618,000 $1,154,000 Shares: Denominator for basic earnings per share - weighted-average shares outstanding 21,029,572 18,143,109 14,974,125 Effect of dilutive securities: Employee stock options 2,057,218 3,856,213 3,322,972 Warrants 59,393 498,939 1,063,835 Series H Convertible Preferred Stock -0- 150,793 470,220 Series K Convertible Preferred Stock 100,000 366,027 1,335,616 Series L Convertible Preferred Stock 54,208 284,405 667,266 Dilutive potential common shares 2,270,819 5,156,377 6,859,909 Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 23,300,391 23,299,486 21,834,034 Basic earnings per share $0.01 $0.14 $0.08 Diluted earnings per share $0.01 $0.11 $0.05
NOTE 11 - COMMON STOCK OPTIONS: Stock option activity during 2000, 1999, and 1998 was as follows:
Exercise Options Price ` Outstanding September 30, 1997 3,480,000 $0.40 - $1.47 Granted 365,000 0.91 - 1.50 Forfeited -0- -0- Exercised (44,000) 0.50 - 1.15 Outstanding September 30, 1998 3,801,000 $0.40 - $1.50 Granted 645,000 1.00 - 2.00 Forfeited (223,000) 0.91 - 1.47 Exercised (905,000) 0.50 - 0.85 Outstanding September 30, 1999 3,318,000 $0.40 - $2.00 Granted 425,000 1.75 - 4.12 Forfeited (131,000) 1.44 - 2.56 Exercised (467,000) 0.40 - 1.12 Outstanding September 30, 2000 3,145,000 $0.40 - $4.12 Exercisable at September 30, 1998 2,881,000 $0.40 - $1.50 Exercisable at September 30, 1999 2,378,000 $0.45 - $1.44 Exercisable at September 30, 2000 2,110,000 $0.46 - $2.51 Options available for grant at September 30, 1999 2,040,800 Options available for grant at September 30, 2000 2,051,000
All officer and key employee options are granted under the Company's incentive stock option plan, with the exception of 350,000 shares of options granted to three officers, vesting over a period of 3-5 years, which were not granted under the plan. Options granted to outside directors are not included in the incentive stock option plan. The exercise price of both the incentive stock options and directors' options shall be 100% of the fair market value on the date the option is granted. Options granted to outside directors are normally vested immediately. Options granted to officers and employees are normally vested over a five-year period. Options are exercisable for a period of five years from date of vest. The Company has an Incentive Stock Option Plan (the "Plan"), which provides for the issuance of up to 5,375,000 stock options, each to purchase one share of the common stock at a price not less than 100% of the market price at the date of grant. The following table summarizes information about stock options outstanding at September 30, 2000:
Options Outstanding Options Exercisable Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Outstanding at Contractual Exercise Exercisable at Exercise Prices Sept. 30, 2000 Life Price Sept. 30, 2000 Price $0.40 - $0.50 1,169,000 3.9 $0.46 1,129,000 $0.45 $0.84 - $1.15 1,152,000 4.6 $1.00 712,000 $1.00 $1.21 - $1.75 529,000 6.1 $1.52 261,000 $1.45 $2.00 - $4.12 295,000 9.3 $2.51 8,000 $2.00 3,145,000 5.0 $1.03 2,110,000 $0.77
The weighted average fair value of the options granted under the plan in effect at September 30, 2000, during the fiscal years ended September 30, 2000, 1999 and 1998 were $0.80, $0.72, and $0.99, respectively. Fair value was determined using the Black Scholes options pricing formula. For options granted in fiscal 2000, the risk free interest rate was approximately 6%, the expected life was 3-5 years, the expected volatility was approximately 90.1% and the expected dividend yield was 0%, all calculated on a weighted average basis. For options granted in fiscal 1999, the risk-free interest rate was approximately 5%, the expected life was 3-5 years, the expected volatility was approximately 88.4% and the expected dividend yield was 0%, all calculated on a weighted average basis. For options granted in fiscal 1998, the risk-free interest rate was approximately 5%, the expected life was 3-5 years, the expected volatility was approximately 156.9%, and the expected dividend yield was 0%, all calculated on a weighted average basis. On a pro forma basis under the provision of FAS 123, net income and net income per share would have decreased by $245,000 and $0.01 for the year ended September 30, 2000, respectively; net income and net income per share would have decreased by $207,000 and $0.01 for the year ended September 30, 1999, respectively; and net income and net income per share would have decreased by $125,000 and $0.01 for the year ended September 30, 1998, respectively. NOTE 12 - COMMITMENTS AND CONTINGENCIES: Lease Commitments The Company leases real property under agreements which expire at various times over the next three years. The Company's future minimum rental payments for capital and operating leases at September 30, 2000 are as follows:
Fiscal Year Capital Leases Operating Leases 2001 $ 58,000 $108,000 2002 50,000 50,000 2003 18,000 5,000 Total minimum lease payments 126,000 $163,000 Less: imputed interest of 24% 19,000 Present value of net minimum lease payment $107,000
Rent expense for the years ended September 30, 2000, 1999, and 1998 totaled $155,000, $60,000, and $37,000, respectively. NOTE 13 - LITIGATION The Company is involved in various legal cases arising in the ordinary course of business. Based upon current information, management, after consultation with legal counsel, believes the ultimate disposition thereof will have no material effect upon either the Company's results of operations or its financial position. NOTE 14 - SEGMENT INFORMATION The Company has adopted FAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131). FAS 131 established revised standards for public companies related to the reporting of financial and descriptive information about their operating segments in financial statements. Certain information is disclosed, per FAS 131, based on the way management organizes financial information for making operating decisions and assessing performance. 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. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based upon two primary factors, one is the segment's operating income and the other is based on the segment's contribution to the Company's future strategic growth.
September 30 Business Segments 2000 1999 1998 Revenues: Bankcard and Transaction Processing $23,902,000 $21,089,000 $18,925,000 Terminal Sales 2,459,000 2,431,000 2,076,000 Check Related Products 1,979,000 308,000 62,000 $28,340,000 $23,828,000 $21,063,000 Operating Income: Bankcard and Transaction Processing $ 831,000 $1,499,000 $1,456,000 Terminal Sales 259,000 132,000 (269,000) Check Related Products (1,074,000) (439,000) 24,000 $ 16,000 $1,192,000 $1,211,000 Depreciation and Amortization: Bankcard and Transaction Processing $ 419,000 $302,000 $230,000 Terminal Sales 53,000 88,000 181,000 Check Related Products 495,000 98,000 -0- $ 967,000 $488,000 $411,000 Capital Expenditures: Bankcard and Transaction Processing $ 419,000 $496,000 $216,000 Terminal Sales 20,000 16,000 49,000 Check Related Products 296,000 135,000 -0- $ 735,000 $647,000 $265,000 Total Assets: Bankcard and Transaction Processing $10,026,000 $ 9,300,000 $6,093,000 Terminal Sales 1,038,000 1,381,000 1,928,000 Check Related Products 5,949,000 2,251,000 4,000 $17,013,000 $12,932,000 $8,025,000
ELECTRONIC CLEARING HOUSE, INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE II TO FORM 10K RULE 12-09 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
REDUCTION IN RESERVE AND BALANCE AT CHARGED TO ACCOUNTS BALANCE AT DESCRIPTION 9/30/98 EXPENSE RECEIVABLE 9/30/99 Allowance for trade receivables/ chargeback receivables $1,829,000 $ 443,000 $1,271,000 $1,001,000 Allowance for notes receivable $ 148,000 $ -0- $ -0- $ 148,000 Allowance for obsolete inventories $ 202,000 $ -0- $ -0- $ 202,000 Allowance for deferred tax asset $1,713,000 $ -0- $1,713,000 $ -0- SCHEDULE II TO FORM 10K RULE 12-09 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Continued: REDUCTION IN RESERVE AND CHARGED TO ACCOUNTS BALANCE AT DESCRIPTION EXPENSE RECEIVABLE 9/30/00 Allowance for trade receivables/ chargeback receivables $557,000 $1,178,000 $380,000 Allowance for notes receivable $29,000 $ -0- $177,000 Allowance for obsolete inventories $3,000 $202,000 $3,000 Allowance for deferred tax asset $ -0- $ -0- $ -0-
EXHIBIT 10.42 U-HAUL/ECHO AGREEMENT ADDENDUM THIS ADDENDUM ("Addendum") is hereby incorporated into the U-HAUL/ECHO AGREEMENT ("Agreement") made effective on December 12, 1996 by and between Electronic Clearing House, Inc. (ECHO) and U-Haul International (UHI). SECTION 9.13 IS HEREBY AMENDED AS FOLLOWS: 9.13 Termination. This Agreement can not be terminated prior to the completion of its initial or any extension term. Ninety (90) days prior to the Agreement's first term or any extension term, the Agreement can be terminated with a 90 day written notice from either party to terminate the Agreement. EXHIBIT D, ARTICLE 3 - PROCESSING SERVICES IS HEREBY AMENDED AS FOLLOWS: Dealer Transaction Fees Per Month 1/97 through 6/98: $ per transaction 7/98 through 12/99: $ per transaction 1/00 through 12/02: $ per transaction Minimums are: Year 1 (until 12/97): transactions per month Year 2 (until 12/98): transactions per month Year 3 (until 12/99): transactions per month PARTS OF Agreement NOT REVISED BY THIS Addemdum REMAIN IN FULL FORCE. This Addendum is executed by or on behalf of the parties by duly authorized representatives as of January 01, 2000. U-HAUL INTERNATIONAL (UHI) By: Layton Baker, Vice President-Marketing ELECTRONIC CLEARING HOUSE, iNC. (ECHO) By: Joel M. Barry, CEO and Chairman of the Board EXHIBIT 10.43 Magic Software Development, Inc. Software System License Agreement Contents 1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 2. License . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 3. Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 4. Copies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 5. Price and Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 6. Audit Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 7. Software System Ownership . . . . . . . . . . . . . . . . . . . . . . . .3 8. Intent to Cooperate . . . . . . . . . . . . . . . . . . . . . . . . . . .3 9. Confidentiality and Proprietary Rights. . . . . . . . . . . . . . . . . .4 9.1. Confidentiality Obligations of MSD . . . . . . . . . . . . . . . . .4 9.2. Confidentiality Obligations of NCN . . . . . . . . . . . . . . . . .4 9.3. Proprietary Rights of MSD. . . . . . . . . . . . . . . . . . . . . .4 9.4. Specific Remedies of Parties . . . . . . . . . . . . . . . . . . . .4 10. Use and Training. . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 11. Limited Warranty and Disclaimer of Other Warranties . . . . . . . . . . .5 12. Indemnity By MSD. . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 13. Indemnity By NCN. . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 14. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 14.1. Termination By MSD. . . . . . . . . . . . . . . . . . . . . . . . .6 14.2. Termination By NCN. . . . . . . . . . . . . . . . . . . . . . . . .7 14.3. Escrow Agreement. . . . . . . . . . . . . . . . . . . . . . . . . .7 15. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 16. Hardware Requirements and Other Responsibilities of NCN . . . . . . . . .8 17. Licensed Locations. . . . . . . . . . . . . . . . . . . . . . . . . . . .8 18. Delivery, Installation and Testing. . . . . . . . . . . . . . . . . . . .8 19. Custom Modifications. . . . . . . . . . . . . . . . . . . . . . . . . . .8 20. Required Upgrades . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 21. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 21.1. Full Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . .9 21.2. Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . .9 21.3. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . .9 21.4. Limitation of Action. . . . . . . . . . . . . . . . . . . . . . . .9 21.5. Independent Contractors . . . . . . . . . . . . . . . . . . . . . .9 21.6. Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 21.7. Attorney Fees . . . . . . . . . . . . . . . . . . . . . . . . . . .9 21.8. Effect of Agreement . . . . . . . . . . . . . . . . . . . . . . . .9 21.9. Amendment of Agreement. . . . . . . . . . . . . . . . . . . . . . 10 21.10. Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 21.11. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . 10 21.12. Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 21.13. Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 21.14. Titles and Words. . . . . . . . . . . . . . . . . . . . . . . . . 10 21.15. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . 11 21.16. Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 22. Mutual Release. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Schedule A - DESCRIPTION of SOFTWARE . . . . . . . . . . . . . . . . . . . . 12 Schedule B -PRICE and PAYMENT. . . . . . . . . . . . . . . . . . . . . . . . 13 Schedule C -DELIVERY, INSTALLATION and TESTING . . . . . . . . . . . . . . . 15 Schedule D - LICENSOR'S CURRENT PUBLISHED SPECIFICATIONS . . . . . . . . . . 16 Schedule E - ESCROW AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . 17 Software System License Agreement This agreement is made by and between Magic Software Development, Inc., a New Mexico corporation, ("MSD"), and National Check Network, Inc., a South Dakota corporation (the "Licensee" or "Original Licensee") and is entered into the date set forth below. Recitals Whereas, MSD is the sole owner of its Check Verification Software System ("Software System") and plans to allow paid access by third parties to such Software System. And, Whereas, NCN operates the NCN Network ("NCN Network"), an affiliation of independently owned businesses each of which has, via execution of a NCN Membership Agreement ("Membership Agreement"), contracted with NCN to participate as a member ("Member") of the NCN Network. And, Whereas, check verification services ("Services") being one of the services that NCN provides to Members, NCN desires to utilize MSD's Software System to provide Services. Therefore, in consideration of the conditions set forth herein, the sufficiency of which are acknowledged by both parties to this Agreement, NCN and MSD agree as follows: 1. Definitions For the purpose of this Agreement, the following definitions will apply: AGENCY: An independent collection agency that is a member of the NCN Network and a Sublicensee. AGENCY DATABASE: The database of each agency that is a member of NCN Network and a Sublicensee. DOWNLOAD LOCATION: The computer hardware provided by NCN, operated and maintained by MSD for NCN, and in which MSD's operating system and verification Software System are installed. NCN DATABASE: The aggregate of the Agency Databases, which is updated daily by each Sublicensee and is combined into a single database at the Download Location. NCN NETWORK: An affiliation of independent collection agencies that have entered into a written membership agreement with National Check Network. OTHER DATABASE: One or more databases, not incorporated into the NCN Database, that may consist of an individual Member's data, MSD's data or any combination of Member's, MSD's and other entities' data. SUBLICENSEE: Members of the NCN Member Network that have been properly sublicensed to utilize NCN's check verification capabilities. OUT-OF-AREA FEE: The fee an Agency pays to access the NCN Database out of the area code other than any area code(s) it may own. 2. License In accordance with the terms of this Agreement, MSD grants to NCN, and NCN accepts from MSD, a non-exclusive and non-transferable license ("License") to use the current version of MSD's Software System which is described on Schedule A. NCN may sublicense the Software to Members of the NCN Network provided that the Membership Agreement executed by each such Member contains text whereby (a) each Member is informed of any contractual restrictions on NCN's use or resale of MSD's Software System, and (b) the Member agrees to conform to and comply with any such restrictions. The Software System shall be used only on equipment and at location(s) identified in Schedule C or in one or more writings from NCN to MSD ("Data Processing Centers"). The Software System shall be used only for the processing of NCN's and MSD's own business, which shall include servicing, and maintaining records on behalf of, their customers and clients. A license may be temporarily transferred to back-up equipment at any time; MSD reserves the right to charge for installation of back-up equipment according to Schedule B. NCN acknowledges and agrees that NCN has absolutely no ownership rights of any kind to MSD's Software System or to any part of Software System. NCN further agrees that it will make no future claim(s) of ownership to Software System or any part of Software System that MSD has developed and that is used by NCN and its licensees. 3. Term This Agreement shall have an initial term of one (1) year from the Effective Date set forth (the "Initial Term"), and shall thereafter automatically renew for successive one (1) year periods (each a "Renewal Term"), unless earlier terminated in accordance with the terms of this Agreement. Either party may cancel this Agreement, by serving written notice of such termination on the other party at least six (6) months prior to the next renewal date thereof. In the event NCN gives notice to or merges with, sells, assigns or conveys in any manner to another entity in whole or in part, MSD may: Provide NCN a written notice that this Agreement in its entirety will revert to a month to month term, cancelable by MSD by its serving written notice of such termination on the other party at least 60 days prior to termination. 4. Copies The license(s) granted herein include(s) the right to copy the Software System in non-printed, machine readable form in whole or in part as necessary for NCN's own business use. In order to protect MSD's trade secret and copyrights in the Software System, NCN agrees not to reproduce and incorporate MSD's trade secret or copyright notice in any copies, modifications or partial copies. NCN shall maintain no more than three copies of the Software System for each Data Processing Center at any time. 5. Price and Payment NCN shall make payment to MSD for the Software System license pursuant to the price and payment terms set forth in Schedule B. 6. Audit Rights NCN shall maintain accurate books and records of all transactions done on the Software System set forth on Schedule A. Upon reasonable notice to NCN, and no more frequently than twice a year, NCN shall make such books and records available to MSD, at NCN's home office place of business during normal business hours, to audit the payment being made by NCN hereunder. MSD's audit rights shall only apply to NCN and such of its permitted Sublicensees who use the Software System. NCN shall make available to MSD at all reasonable times access to such of NCN's equipment so that MSD can monitor and ascertain the number of transactions processed by NCN pursuant to this Software Systems License Agreement. 7. Software System Ownership MSD represents that it is the owner of the Software System and is therefore duly licensed to use the Software System and all portions thereof and that it has the right to modify same and to grant NCN a license for its use. MSD is currently developing software packages. Concepts and ideas may be learned from NCN's operations. MSD will not be liable to NCN for incorporating such concepts and ideas into MSD's software packages. 8.Intent to Cooperate Both MSD and NCN acknowledge that successful implementation of the Software System pursuant to this Agreement shall require their full and mutual good faith cooperation, and acknowledge that they shall timely fulfill their respective responsibilities, including but not limited to those set forth below. 9.Confidentiality and Proprietary Rights 9.1.Confidentiality Obligations of MSD Except as provided for in Section 7 above, MSD acknowledges that in the course of dealings between the parties, MSD may acquire information about NCN, its business activities and operations, its technical information and trade secrets, all of which are highly confidential and proprietary to NCN (the "NCN Confidential Information"). NCN Confidential Information shall not include information generally available to or known by the public, or information independently developed outside the scope of this Agreement. MSD shall hold all such NCN Confidential Information in strict confidence and shall not reveal the same except pursuant to a court order or upon request of NCN. The NCN Confidential Information shall be safeguarded with at least as great a degree of care as MSD uses to safeguard its own most confidential materials or data relating to its own business including all check information, but in no event less than a reasonable degree of care. 9.2.Confidentiality Obligations of NCN NCN acknowledges that in the course of dealings between the parties, NCN may acquire information about MSD, its business activities and operations, its technical information and trade secrets, including but not limited to the Software System, all of which are highly confidential and proprietary to MSD (the "MSD Confidential Information"). MSD Confidential Information shall not include information generally available to or known by the public, or information independently developed outside the scope of this Agreement. NCN shall hold all such MSD Confidential Information in strict confidence and shall not reveal the same except pursuant to a court order or upon request of MSD. The MSD Confidential Information shall be safeguarded with at least as great a degree of care as NCN uses to safeguard its own most confidential materials or data relating to its own business, but in no event less than a reasonable degree of care. 9.3.Proprietary Rights of MSD NCN acknowledges and agrees that the Software System, and all copies thereof, constitute valuable trade secrets of MSD and or proprietary and confidential information of MSD and title thereto remains in MSD. Ownership of all applicable copyrights, trade secrets, patents and other intellectual property rights in the Software System are and shall remain vested in MSD or its licensor as the case may be. All other aspects of the Software System, including without limitation, programs, methods of processing, design and structure of individual programs and their interaction, tangible media (including but not limited to screens, documentation, manuals, and on-line documentation) and programming techniques employed therein shall remain the sole and exclusive property of MSD and shall not be used, sold, revealed, disclosed or otherwise communicated, directly or indirectly, by NCN to any person, company or institution whatsoever other than as expressly set forth herein. The copyright notice and restricted rights legends contained in the Software System shall appear on all tapes, diskettes and other tangible media (including but not limited to screens, documentation, manuals, and on line documentation) distributed by NCN. 9.4.Specific Remedies of Parties Remedies of MSD: If NCN commits a material breach of any of the provisions of Sections 9.2 and 9.3, MSD shall have, in addition to all other rights in law and equity, (a) the right to have such provision specifically enforced by any court having equity jurisdiction with no bond required, it being acknowledged and agreed that any such breach will cause irreparable injury to MSD and that money damages will not provide an adequate remedy, and (b) the right to require NCN to account for and pay to MSD all compensation, profits, monies or other tangible benefits (collectively "Benefits") derived or received as the result of any transactions constituting a breach of any of the provisions of Sections 9.2 and 9.3 and NCN hereby agrees to account for and pay such Benefits. Remedies of NCN: If MSD commits a breach of any of the provisions of Section 9.1 above, NCN shall have, in addition to all other rights in law and equity, (a) the right to have such provision specifically enforced by any court having equity jurisdiction with no bond required, it being acknowledged and agreed that any such breach will cause irreparable injury to NCN and that money damages will not provide an adequate remedy, and (b) the right to require MSD to account for and pay to NCN all compensation, profits, monies or other tangible benefits (collectively "Benefits") derived or received as the result of any transactions constituting a breach of any of the provisions of Section 9.1, and MSD hereby agrees to account for and pay such Benefits. 10.Use and Training NCN shall limit the use of the Software System to its employees who have been appropriately trained. MSD shall provide training for its verification software product to each NCN Member that joins NCN during the term of this contract at a location and on a date determined by MSD as a part of the set-up fee paid MSD. 11.Limited Warranty and Disclaimer of Other Warranties MSD warrants that Software System will conform, as to all substantial operational features, to MSD's current published specifications set forth on Schedule D when installed and will be free of defects which substantially affect system performance. NCN must immediately notify MSD in writing of its claim of any such defect. If the Software System is found defective by MSD, MSD's sole obligation under this warranty is to remedy such defect in a manner consistent with regular business practices. THE ABOVE IS A LIMITED WARRANTY AND IT IS THE ONLY WARRANTY MADE BY MSD. MSD MAKES AND NCN RECEIVES NO WARRANTY EXPRESS OR IMPLIED AND THERE ARE EXPRESSLY EXCLUDED ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. MSD SHALL HAVE NO LIABILITY WITH RESPECT TO ITS OBLIGATIONS UNDER THIS AGREEMENT FOR CONSEQUENTIAL, SPECIAL, DIRECT, EXEMPLARY, OR INCIDENTAL DAMAGES TO NCN OR THIRD PARTIES DEALING WITH NCN EVEN IF MSD HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THE STATED EXPRESS WARRANTY IS IN LIEU OF ALL LIABILITIES OR OBLIGATIONS OF MSD FOR DAMAGES ARISING OUT OF OR IN CONNECTION WITH THE DELIVERY, USE, OR PERFORMANCE OF THE SOFTWARE SYSTEM. If any modifications are made to the Software System by NCN, this warranty shall immediately be terminated. Correction for difficulties or defects traceable to NCN's errors, use of an operating system other than that supplied by MSD or systems changes shall be billed at MSD's standard time, and material charges, and any other related charges. NCN agrees that MSD's liability arising out of contract, negligence, strict liability in tort or warranty shall be limited to repair or replacement of the Software System. MSD agrees to repair NCN's hardware wrongfully damaged by MSD while such hardware is in MSD's custody. 12.Indemnity By MSD MSD at its own expense will defend any action brought against NCN to the extent that it is based on a claim that any Software System used within the scope of this Agreement infringes any patents, copyrights, license or other property right, provided that MSD is immediately notified in writing of such claim. MSD shall have the right to control the defense of all such claims, lawsuits and other proceedings. In no event shall NCN settle any such claim, lawsuit or proceeding without MSD's prior written approval. MSD shall also indemnify and hold harmless NCN from any claims, demands or liabilities or expenses (not including attorney fees), incurred by NCN as a result of any such action. If, as a result of any claim of infringement against any patent, copyright, license or other property right, MSD is enjoined from using the Software System, or if MSD believes that the Software System is likely to become the subject of a claim of infringement, MSD at its option and expense may procure the right for NCN to continue to use the Software System, or replace or modify the Software System so as to make it non-infringing. If neither of these two options is reasonably practicable MSD may discontinue the license granted herein on one month's written notice. The foregoing states the entire liability of MSD with respect to infringement of any copyrights or patents by the Software System or any parts thereof. MSD, without any search or investigation having been conducted, is not aware that it is infringing on any patent, copyright, license or other property right of any person. 13.Indemnity By NCN NCN shall indemnify, defend and hold MSD harmless from any claims, demands, liabilities or expenses, including reasonable attorneys' fees, incurred by MSD as a result of any claim or proceeding against MSD arising out of or based upon (i) the combination, operation or use of the Software System with any hardware, products, programs or data not supplied or approved in writing by MSD, if such infringement would have been avoided but for such combination, operation or use or (ii) the modification of the Software System by NCN or (iii) any claim against MSD by any customer of NCN or any customer of a merchant served by NCN. 14.Termination 14.1.Termination By MSD MSD shall have the right to terminate this agreement and license(s) granted herein: Upon thirty days' written notice in the event that NCN, its officers or employees violates any material provision of this Agreement including, but not limited to, confidentiality and payment which failure to pay can be cured by payment within such thirty days; In the event NCN (i) terminates or suspends its business; (ii) becomes subject to any bankruptcy or insolvency proceeding under Federal or state statute or (iii) becomes insolvent or becomes subject to direct control by a trustee, receiver or similar authority. In the event of termination by reason of NCN's failure to comply with any part of this agreement, or upon any act which shall give rise to MSD's right to terminate, MSD shall have the right, at any time, to terminate the license(s) and take immediate possession of the Software System and documentation and all copies wherever located, without demand or notice. Upon such termination NCN shall cease using the Software System. Within five (5) days after termination of the license(s), NCN will return to MSD the Software System (including but not limited to TCL code, objects, scripts, libraries, on-line documentation and manuals) in the form provided by MSD or as modified by NCN, or upon request by MSD destroy the Software System (including but not limited to TCL code, objects, scripts, libraries, on-line documentation and manuals) and all copies, and certify in writing that they have been destroyed. Termination under this paragraph shall not relieve NCN of its obligations regarding confidentiality of the Software System. Without limiting any of the above provisions, in the event of termination as a result of NCN's failure to comply with any of its obligations under this Agreement, NCN shall continue to be obligated for any payments due prior to termination. Termination of the license(s) shall be in addition to and not in lieu of any equitable remedies available to MSD. 14.2.Termination By NCN NCN shall have the right to terminate this Agreement and license(s) granted herein: NCN must provide written notice in the event that MSD, its officers or employees violates any material provision of this Agreement including, but not limited to, confidentiality. MSD then has thirty days to cure said material breach. If MSD fails to cure said breach, NCN can terminate the agreement with thirty days notice; In the event MSD (i) terminates or suspends its business; (ii) becomes subject to any bankruptcy or insolvency proceeding under Federal or state statute or (iii) becomes insolvent or becomes subject to direct control by a trustee, receiver or similar authority. 14.3.Escrow Agreement MSD and NCN agree to enter into the Escrow Agreement that is attached as Schedule E. 15.Taxes NCN shall, in addition to the other amounts payable under this Agreement, pay all applicable sales and other taxes, federal, state, or otherwise, however designated, which are levied or imposed by reason of the transactions contemplated by this Agreement. Without limiting the foregoing, NCN shall promptly reimburse to MSD an amount equal to any such items actually paid, or required to be collected or paid by MSD. 16.Hardware Requirements and Other Responsibilities of NCN NCN shall make available for the Software System implementation, at each location, computer equipment and Software System configurations approved by MSD as adequate for such implementation at such location. In addition to other responsibilities of NCN under this Agreement, NCN shall also be responsible for the following: Data integrity of information passed to MSD. Cost and maintenance of all hardware and phone lines. Results of power failures and interruptions caused by unplugging system from a source of electricity at NCN's location (this applies only to potential sites outside of MSD's control). 17.Licensed Locations Use of the Software System by NCN at any location other than those described in Schedule C and in writing from NCN to MSD from time to time shall be the basis for immediate termination of this Agreement. Termination of the Agreement shall be in addition to and not in lieu of any equitable remedies available to MSD. 18.Delivery, Installation and Testing The System has been delivered, installed and tested in accordance with the Delivery, Installation and Testing Schedule attached as Schedule C. 19.Custom Modifications NCN will have the opportunity to have input on upgrades to the Verification System. NCN may submit a list of requests made by NCN or its members on a quarterly basis. This list will include a brief description of each upgrade or programming request. If MSD determines that the request is custom programming, MSD will provide NCN the billing amount to create the program. MSD will use NCN's input to establish priorities of verification projects to be completed. All custom modifications to the Software System shall be undertaken by MSD at its then current time and materials charges. For each custom modification requested, NCN shall provide written specifications to MSD, which shall be mutually agreed upon prior to commencement of such custom modification effort. MSD will own all modifications to the Software System whether made by MSD or NCN. 20.Required Upgrades NCN agrees to perform each mutually agreed upon Software System and operating system upgrades within 120 days of receiving written notice from MSD of the availability thereof. 21.General 21.1.Full Agreement Each party acknowledges that it has read this Agreement, including the Schedules attached hereto, it understands it, and agrees to be bound by its terms, and further agrees that this is the complete and exclusive statement of the Agreement between the parties, which supersedes and merges all prior proposals, understandings and all other agreements, oral and written, between the parties relating to this Agreement. 21.2.Force Majeure Dates or times by which MSD is required to make performance under this license shall be postponed automatically to the extent that MSD is prevented from meeting them by causes beyond its reasonable control. 21.3.Governing Law This Agreement and performance hereunder shall be governed by the laws of the State of New Mexico. 21.4.Limitation of Action No action, regardless of form, arising out of this Agreement may be brought by MSD or NCN more than two years after the cause of action has arisen. 21.5.Independent Contractors It is expressly agreed that MSD and NCN are acting hereunder as independent contractors and under no circumstances shall any of the employees of one party be deemed the employees of the other for any purpose. This Agreement shall not be construed as authority for either party to act for the other party in any agency or other capacity, or to make commitments of any kind for the account of or on behalf of the other except to the extent and for the purposes provided for herein. 21.6.Assignment NCN may not assign or sub-license its rights, duties or obligations under this Agreement to any person or entity, in whole or in part, without providing sixty days prior written notice to MSD. 21.7.Attorney Fees The prevailing party shall have the right to collect from the other party its reasonable expenses incurred in enforcing this agreement including attorney's fees. 21.8.Effect of Agreement This Agreement will be binding upon the heirs, personal representatives and assigns of each of the parties. 21.9.Amendment of Agreement This Agreement may not be modified or amended except by a writing signed by each party. 21.10.Arbitration All disputes that may come about because of ambiguous or uncertain language of this agreement unresolved by the parties shall be submitted to binding arbitration. Any matter submitted to arbitration under this Agreement will be determined according to the following procedure: MSD will appoint one arbitrator. Within ten (10) days of receipt of written notice of appointment of an arbitrator by MSD, NCN will appoint one arbitrator. The two arbitrators so chosen will appoint a third arbitrator within ten (10) days of the appointment of the second arbitrator. The arbitrators so chosen will by majority vote decide the issue in question within thirty (30) days of the appointment of the third (3rd) arbitrator. The decision of the arbitrators will be binding upon all parties. In the event that an arbitrator is not appointed within the time period provided above, the party or parties failing to make the appointment will lose the right to do so and the presiding judge of the District Court for Bernalillo County New Mexico or other proper judicial official will appoint said arbitrator. Each party will advance one- half of the fees for the arbitrators and court reporter, if any, which fees can be awarded as costs by the arbitrators. 21.11.Counterparts This Agreement may be executed in several counterparts, each of which shall be considered an original when executed by the parties. 21.12.Authority All parties warrant that they have all the requisite authority and capacity to execute this Agreement and that its terms and provisions constitute valid and legally enforceable rights and obligations against the parties, their successors, assigns and administrators. Each person signing on behalf of a corporation, partnership or other form of business entity represents that such person has all the requisite authority and capacity to execute this agreement on behalf of the corporation, partnership or other form of business entity. 21.13.Notice All notices required or permitted to be given by MSD to NCN shall be deemed sufficient if mailed by registered or certified mail, return receipt requested, to NCN at the address set forth on page 11 of this Agreement or other address provided to MSD from NCN in the form of a written notice. All notices required or permitted to be given by MSD to NCN shall be deemed sufficient if mailed by registered or certified mail, return receipt requested, to MSD at the address set forth on page 11 of this Agreement or other address provided to MSD from NCN in the form of a written notice. 21.14.Titles and Words Section titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provisions hereof. Wherever the singular number is used in this Agreement and when required by the context, the same shall include the plural; and the masculine gender shall include the feminine and neuter genders and the word "person" shall include corporations, firms, partnerships or other forms of associations. 21.15.Severability The invalidity or unenforceability of any provision in the Agreement will not in any way affect the validity or enforceability of any other provision and this Agreement will be construed in all respects as if such invalid or unenforceable provision had never been in the Agreement. 21.16.Waiver The waiver or failure of MSD or NCN to exercise in any respect any right provided for herein shall not be deemed a waiver of any further right hereunder. 22.Mutual Release Excluding claims for (a) breach or enforcement of this Agreement and (b) enforcement of any judgment resulting herefrom, the parties irrevocably and unconditionally release and forever discharge each other, and their respective affiliates, subsidiaries, divisions, officers, directors, employees, attorneys and agents, from any and all actions, causes of action, suits, controversies, damages, demands, liabilities, of whatever kind or character, at law or in equity, direct or indirect, whether known or unknown, suspected or unsuspected, matured or unmatured (collectively "Claims") that each other ever had or now have as of the date of this Agreement arising out of the subject matter of this Agreement and all other prior written agreements between the parties. EXECUTED as of this 29th day of February, 2000 and effective the 1st day of March, 2000 ("Effective Date"). MSD: NCN: Name: Magic Software Development, Inc. Name: National Check Network, Inc. Address: 215 Central N.W., Ste. 3-A Address: 215 Central N.W., Ste. 3-D Albuquerque, NM 87102 Albuquerque, NM 87102 Signature: . . . . . . . . . . Signature: . . . . . . . . . . . . . . Title: . . . . . . . . . . . . Title: . . . . . . . . . . . . . . . . Schedule A - DESCRIPTION of SOFTWARE Magic Software Development, Inc. Software System License Agreement Description of Software System The following is a description of the Software System, which is licensed to NCN. 1. MSD's check verification software or any part thereof including but not limited to: 1.1 Terminal Control Language (TCL) 1.2 Scripts 1.3 Objects 1.4 Libraries 1.5 On-line, printed and other documentation 2. Operating systems provided by MSD. Schedule B -PRICE and PAYMENT Magic Software Development, Inc. Software System License Agreement Price and Payment 1. The following sets forth the price and payments due for the Software System that is licensed to NCN. The price per transaction is $ . NCN is also responsible for the taxes set forth in section 15 of this Agreement. If each Sub-Licensee does not verify or more transactions through MSD each month, the license fee shall be $ per month for each Sub-Licensee who does not meet the minimum required transactions per month. 2. Each new Sub-Licensee will pay a set-up fee of $ to MSD. In the event MSD logs more than 20 hours per Sub-Licensee setup, the Sub-Licensee will be billed an additional $ per hour for each additional hour required to accomplish the setup. 3. NCN is to use the Software System on one computer. In the event NCN decides it would like to use the Software System on more than one computer, the time and expenses required to accomplish that end must be agreed to and acknowledged in writing between the parties before MSD performs the work for said purpose. 4. All services of MSD requested by NCN in addition to those required of MSD by this Agreement shall be billed at the rate of $ per hour. Prior to MSD beginning work for said services, NCN and MSD must define the work and cost of it and agree to it in writing. 5. MSD services and technical support are provided at no charge during the hours of 7:00 a.m. to 6:00 p.m. Mountain Standard Time. Any technical support required at any other hours will be billed at the rate of $ per hour; any services required at any other hours will be billed at the rate of $ per hour. 6. There will be no charge to NCN for the following services of MSD: 6.1. Software and instructions required to perform Software System upgrades, if any. 6.2. Software and instructions required to perform operating system upgrades, if any. 6.3. Time and expenses required to correct defects in the Software System, if any. 7. MSD may perform the following services for NCN at the hourly rate set forth above: 7.1. Training in excess of that set forth in section 10 of the Software System License Agreement. 7.2. Correcting data integrity caused by NCN members. 7.3. Correcting any problems caused by Licensee or its members. 7.4. Authorized limited unanticipated maintenance and repair of Licensee's hardware as authorized by mutual consent. 7.5. Designing and implementing networks as requested by NCN. 7.6. General consulting services as requested by NCN. 7.7. Establishing and maintaining phone lines used by and requested by NCN. 8. Fees and expenses will be billed monthly and due on the 15th day of the month following the month in which they will have accrued. There will be a late fee of 1.5% per month added to any fees and expenses that are not received by MSD on the 20th day of the month payment is due. 9. In regards to transactions that are received via the NCN Network and computer system in behalf of MSD that do not access the NCN DATABASE, NCN will charge MSD the then cumulative current tiered pricing per transaction that NCN sublicensees are charged. MSD will not resell the transactions processed through the NCN hardware for less than the processing rates that NCN is charged. Schedule C -DELIVERY, INSTALLATION and TESTING Magic Software Development, Inc. Software System License Agreement Delivery, Installation and Testing Schedule The Software System will be completely installed and tested on each of the computers at the following sites listed below by the following dates: Location and Date: 1. Site has already been installed at 215 Central NW, Suite 3A, Albuquerque, NM. Schedule D - LICENSOR'S CURRENT PUBLISHED SPECIFICATIONS Magic Software Development, Inc. Software System License Agreement MSD's Current Published Specifications The MSD's current NCN specifications. These specifications may be changed or updated by MSD. Schedule E - ESCROW AGREEMENT Magic Software Development, Inc. Software System License Agreement Escrow Agreement This Escrow Agreement is entered into and effective as of the date set forth below by and among NCN and MSD, and the Escrow Agent named below. WHEREAS, MSD has granted a license to NCN to use certain computer software pursuant to the terms and conditions of a Software License Agreement (the "License Agreement"), annexed hereto as Exhibit A; and WHEREAS, the uninterrupted availability of all forms of such computer software is critical to NCN in the conduct of its business; and WHEREAS, MSD has agreed to deposit in escrow a copy of the source code form of the computer program ("Software") included in the Software System covered by the License Agreement, as well as any corrections or enhancements to such source code, but not including the source code for the sublicensed operating system, to be held by Escrow Agent in accordance with the terms and conditions of this Escrow Agreement. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties agree as follows: 1. Deposit MSD has concurrently herewith deposited with Escrow Agent a copy of the source code form of the Software (the "Source Code"), including all relevant commentary, explanations, and other documentation of the Source Code (collectively, "Commentary"). MSD also agrees to deposit with Escrow Agent, at such times as they are made, a copy of all revisions to the Source Code or Commentary encompassing all corrections or enhancements made to the Software by MSD pursuant to the License Agreement. Promptly after any such revision is deposited with Escrow Agent, both MSD and Escrow Agent shall give written notice thereof to NCN. 2. Term This Escrow Agreement shall remain in effect during the term of the License Agreement. Termination hereof is automatic upon delivery of the deposited Source Code and Commentary to NCN in accordance with the provisions hereof. 3. Default A default by MSD shall be deemed to have occurred under this Escrow Agreement upon the occurrence of any of the following: if MSD has availed itself of, or been subjected to by any third party, a proceeding in bankruptcy in which MSD is the named debtor, an assignment by MSD for the benefit of its creditors, the appointment of a receiver for MSD, or any other proceeding involving insolvency or the protection of, or from, creditors, and same has not been discharged or terminated without any prejudice to NCN's rights or interests under the License Agreement within thirty (30) days; or if MSD has ceased its on-going business operations; if any other event or circumstance occurs which demonstrates with reasonable certainty the inability or unwillingness of MSD to fulfill its obligations to NCN under the License Agreement or this Escrow Agreement. 4. Notice of Default NCN shall give written notice to Escrow Agent and MSD of the occurrence of a default hereunder, except that Escrow Agent shall give notice of the default to NCN and MSD if same is based on the failure of NCN to pay Escrow Agent's annual fee. Unless within thirty (30) days thereafter MSD files with the Escrow Agent its affidavit executed by an authorized officer stating that no such default has occurred or that the default has been cured, then the Escrow Agent shall upon the thirty-first (31st) day deliver to NCN in accordance with NCN's instructions the entire Source Code and Commentary with respect to the Software then being held by Escrow Agent. 5. Compensation As compensation for the services to be performed by Escrow Agent hereunder, NCN shall pay to Escrow Agent an initial fee set forth below payable at the time of execution of this Agreement, and an annual fee in the amount set forth below to be paid to Escrow Agent in advance on each anniversary date hereafter during the term of this Agreement. 6. Liability Escrow Agent shall not, by reason of its execution of its Agreement, assume any responsibility or liability for any transaction between MSD and NCN, other than the performance of its obligations, as Escrow Agent, with respect to the Source Code and Commentary held by it in accordance with this Agreement. 7. Tests Upon written notice to MSD and Escrow Agent, NCN shall have the right to conduct tests of the Source Code held in escrow, under the supervision of MSD, to confirm that it is the current Source Code for the Software running on the Hardware specified in the License Agreement. 8. Confidentiality Except as provided in this Agreement, Escrow Agent agrees that it shall not divulge or disclose or otherwise make available to any third person whatsoever, or make any use whatsoever, of the Source Code or Commentary, without the express prior written consent of MSD. 9. Address All notices or other communications required or contemplated herein shall be in writing, sent by certified mail, return receipt requested, addressed to another party at the address set forth in the License Agreement and to the Escrow Agent at the address set forth below or as same may be changed from time to time by notice similarly given. 10. Assignment Neither this Escrow Agreement, nor any rights, liabilities or obligations hereunder may be assigned by Escrow Agent without the prior written consent of NCN and MSD. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day 29th of February, 2000. ESCROW AGENT NCN By: ____________________ By: ___________________ Its: ____________________ Its: ___________________ Address: ________________ Address: _______________ MSD By: ___________________ Its: ___________________ Address: _______________ EXHIBIT 10.44 ELECTRONIC CHECK SERVICES AGREEMENT THIS ELECTRONIC CHECK SERVICES AGREEMENT ("Agreement") is made effective May 17, 2000 by and between National Bank Drafting Systems, Inc. ("NBDS"), a Texas corporation with principal offices located at 6707 Brentwood Stair Road, Suite 640, Fort Worth, Texas 76112, and Electronic Clearing House, Inc., ("ECHO"), a Nevada corporation with principal offices located at 28001 Dorothy Drive, Agoura Hills, CA . RECITALS WHEREAS ECHO, along with its XpressCheX and affiliates, is a processor of electronic check services, including Electronic Check Recovery, Electronic Phone Checks, Electronic ACH Payments, Remittance Processing and Electronic Check Conversion, to banks, merchants, and independent sales organizations; and, WHEREAS, NBDS, along with its national network of NBDS licensees, is a marketer of electronic check services and desires to engage ECHO to process NBDS' electronic check services ("NBDS Services"), NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE 1 - DEFINITIONS The definitions appearing in this Agreement or any supplement or addendum to this Agreement shall be applicable to both singular and plural forms of the defining terms. "ACH" means the Federal Reserve Bank's Automated Clearing House system. "Administrative Fees" means a fee charged to Merchants for miscellaneous services such as 24 hour customer support, batch processing, etc., as further defined in the applicable addenda for NBDS Services. "Administrative Reporting and Accounting Activities" means the mechanism by which ECHO, on a monthly basis, provides Merchant processing data to NBDS to facilitate NBDS' payment of sales commissions and reconciliation of revenues. "Daily Settlement Sheet" means the worksheet to be provided by ECHO to NBDS as further defined and described in Section 2.2.2 of this Agreement. "Discount Fee" means a percentage based fee, as further defined in the applicable addenda for NBDS Services, calculated on a Merchant's monthly sales volume "Collection Fee Revenue" means a fee charged to a Merchant's customer as further defined in the applicable addendum for each NBDS Service, for checks return unpaid by the checkwriter's bank. "Demand Deposit Account" means the demand deposit account or money market account at a financial institution designated for use in connection with NBDS Services. "Electronic Check Conversion" means the ability to convert a paper check into an electronic item at the point-of-purchase ("POP") and process it as an ACH transaction. "Electronic Check Recovery" means the ability to collect non-sufficient- funds (NSF) paper checks electronically. "Electronic ACH Payments" means the automating of receivables by originating recurring electronic payments via the ACH network. "Electronic Phone Check" means the ability to take a consumer's payment information over the phone and charge the consumers' checking account with a paper draft or electronic ACH transaction. "Merchant" means any individual or business entity that contracts for and receives NBDS Services provided for in this Agreement and/or its addenda. "Processor" means the entity designated by ECHO to perform Settlement in association with the NBDS Services provided by ECHO under this Agreement. "Processing Revenues" means any fees charged to Merchants, by ECHO, for NBDS Services provided by ECHO under this Agreement. "Regular Collection" means the traditional, manpower intensive method of collecting funds from delinquent consumers consisting primarily of (a) outgoing telephone calls to the consumer, (b) mailing of collection notices to the consumer, (c) when applicable, initiating legal action for collection against the consumer, and (d) reporting delinquent consumers to credit reporting agencies. "Settlement" means the movement of information and funds via a Processor and Sponsoring Bank through the ACH that results in the withdrawal or deposit of funds to bank accounts. "Sponsoring Bank" means one or more financial institutions through which ECHO contracts to gain access to the ACH. "Transaction Fee" means a fee per transaction charged to Merchants, as further defined in the applicable addenda, for NBDS Services. ARTICLE 2 - DUTIES OF ECHO 2.1. PROVIDE ELECTRONIC PROCESSING FOR NBDS SERVICES 2.1.1. Agreement to Provide NBDS Services. From time to time, as NBDS and ECHO reach agreement on specific NBDS Services to be provided through ECHO to NBDS, the details of each NBDS Service shall be documented in an addendum to this Agreement. Each such addendum shall include, but not be limited to: a description of that NBDS Service any applicable technical specification, flow charts, etc. merchant and administrative reporting requirements (if different from those defined under section 2.2) pricing distribution of revenues, commissions exclusivity issues Each such addendum shall represent agreement of the parties with regard to ECHO providing that specific NBDS Service and shall be supplemented by the broader terms expressed in this Agreement. In the event a specific issue is not addressed in an addendum, the applicable terms of this Agreement shall apply. 2.1.2. Cooperation. ECHO acknowledges and agrees that successful development of NBDS Services so as to become operational for use by NBDS shall require the full and mutual good faith cooperation of both parties. 2.1.3. Acceptance. NBDS' acceptance of each ECHO provided NBDS Service under this Agreement and the applicable addendum shall be deemed effective on the date ("Acceptance Date") that each such NBDS Service is (a) first utilized by any Merchant, or (b) upon the successful completion of acceptance testing conducted between ECHO and NBDS. Such acceptance testing shall proceed as follows: NBDS shall test each ECHO provided NBDS Service for a period not to exceed sixty (60) days. Upon the expiration of such sixty (60) day period, NBDS shall tender to ECHO a written description of any claimed defects in the NBDS Service. Such claimed defects shall be limited to any failure of the NBDS Service to conform to the specifications as defined in the applicable addendum for that NBDS Service. Upon receipt by ECHO of any such written description from NBDS of claimed defects in NBDS Services, ECHO shall determine in its sole and good faith discretion whether the claimed defects do or do not conform to the specifications in the applicable addendum. If the claimed defects do not conform to said specifications, ECHO shall proceed immediately to remedy the claimed defects, whereupon the acceptance test shall be repeated for another sixty (60) days, whereupon any subsequent defects claimed by NBDS, and any resulting remedial action by ECHO, shall be in conformance with, and identical to, the above mentioned testing procedures. 2.1.4. Performance and Systems Availability. ECHO warrants that ECHO's electronic processing systems ("ECHO's System") downtime for providing any NBDS Services will be limited to no more than 5% downtime in any one month of ECHO's operations, subject to the following exceptions and conditions: (a) ACH and Bank Networks Excluded. ECHO's System connects to and relies on the ACH network, and the Sponsoring Bank's processing system. A failure of the ACH network or the Sponsoring Bank's system will not constitute a failure of ECHO's System and will not be computed toward the 5% downtime limitation. (b) Public Networks Excluded. ECHO's System has multiple national communications networks, such as AT&T and MCI, it utilizes to access ECHO's data center operations. Any failure of such networks will not constitute failure of ECHO's System and will not be computed toward the 5% down time limitation. (c) Scheduled Maintenance Excluded. Scheduled system maintenance of ECHO's System shall not count towards the 5% downtime limitation set forth herein, provided such maintenance does not occur more than 3 hours per week. (d) Force Majeure Excluded. Force majeure events, as defined in section 8.16 herein, shall not be computed toward the 5% downtime limitation 2.1.5. Right To Remedy. In the event ECHO's System exceeds the five percent (5%) downtime limitation in any given month, ECHO shall have one full calendar month to re-establish such performance standard. NBDS agrees that only after ECHO's System has failed to re-establish the five percent (5%) downtime limitation for one full calendar month following the calendar month in which ECHO was notified by NBDS of ECHO's failure to meet the 5% downtime limitation, will NBDS have all remedies allowed in law and equity for ECHO's failure. 2.1.6. ECHO Warranty. ECHO warrants that its providing of NBDS Services will conform to terms of this Agreement and the specifications set forth in the applicable addenda, provided that, and only to the extent that, NBDS notifies ECHO in writing, and in accordance with section 8.1 of this Agreement, during the term of this Agreement of any non-conformity in ECHO's providing of such NBDS Services. In the event that ECHO's performance in providing NBDS Services is found to be non- conforming in any respect, and that notice with respect to such non- conformity has been given as provided above, ECHO's sole obligation under this warranty is to remedy such non-conformity within a reasonable time. THE WARRANTY STATED ABOVE IS A LIMITED WARRANTY AND IT IS THE ONLY WARRANTY MADE BY ECHO. ECHO DOES NOT MAKE, AND NBDS HEREBY EXPRESSLY WAIVES, ALL OTHER WARRANTIES EXPRESS OR IMPLIED. THERE ARE NO WARRANTIES OF MERCHANTIBILITY AND FITNESS FOR A PARTICULAR PURPOSE. THE STATED EXPRESS WARRANTY IS IN LIEU OF ALL LIABILITIES OR OBLIGATIONS OF ECHO FOR DAMAGES ARISING OUT OF OR IN CONNECTION WITH ANY WARRANTY CLAIMS REGARDING THE DEVELOPMENT, DELIVERY, USE OR PERFORMANCE OF ECHO'S PROCESSING OF NBDS' SERVICES. EXCEPT FOR LIABILITY UNDER ARTICLE 4, NEITHER PARTY SHALL HAVE LIABILITY WITH RESPECT TO ITS OBLIGATIONS UNDER THIS AGREEMENT OR OTHERWISE FOR CONSEQUENTIAL, EXEMPLARY, INCIDENTAL OR PUNITIVE DAMAGES EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 2.1.7. Sponsoring Bank(s). ECHO agrees to provide a Sponsoring Bank for the purpose of providing access to ACH and the banking system in connection with the administrative reporting, accounting and processing activities contemplated under this Agreement and the requirements of the Sponsoring Bank. 2.1.8. ECHO Compliance with Collection Laws. ECHO bears the full responsibility for insuring that its consumer collection activities are in full compliance with the requirements of all applicable state and federal laws. 2.1.9. Sales and Marketing Non-Exclusivity. ECHO retains the right to utilize additional sales organizations as, in its sole opinion, ECHO deems necessary to meet its growth requirements. 2.1.10. Telephone Merchant Support Services. ECHO shall provide Merchants with telephone access to ECHO's customer support personnel. 2.2 ADMINISTRATIVE REPORTING, ACCOUNTING AND SETTLEMENT PROCESSING. 2.2.1. For each Merchant for whom ECHO is providing any NBDS Services set forth in this Agreement and in the applicable addenda, the following detailed information, which may be changed from time to time as mutually agreed upon between the parties, will be provided to NBDS by inclusion in a monthly report: Merchant Name Merchant ID Number Licensee Number Monthly Sales Volume - Number of Transactions and Gross Dollar Volume Returned Items - Number of Items and Dollar Volume Discount Fees - Gross Dollar Amount and Net Dollar Amount Transaction Fees - Dollar Amount Administrative Fees - Dollar Amount Collection Fee Revenues - Number of Items and Collection Revenue Dollar Amount 2.2.2. As applicable for each NBDS Service, for each processing day, ECHO will provide the following funds distribution and settlement information, which may be changed from time to time as mutually agreed upon between the parties, to NBDS via a Daily Settlement Sheet: Day's Gross Sales - Number of Transactions and Dollar Amount Day's Gross Returns - Number of Transactions and Dollar Amount Day's Net Returns Breakdown of day's revenues X $ @ (standard discount rate) = $ X $ @ (allowance for rate exception) = $ X $ @. applicable transaction fee = $ X $ @ Collection Fees = $ X $ @ Administrative Fees = $ Days Total Revenues = $ ARTICLE 3 - DUTIES OF NBDS 3.1 PROCESSING SERVICES FEE NBDS agrees to pay ECHO a fee (Processing Fee), as set forth below and further defined in the applicable addendum for each NBDS Service, for ECHO's administrative reporting, accounting, and processing services. 3.1.1. Processing Fee. ECHO and NBDS agree that ECHO may deduct its Processing Fee daily from the funds handled in Settlement. Via the ACH network, ECHO will pay NBDS its share of the Processing Revenues from NBDS Services as well as NBDS' share of any related fees by the 10th day of the month following the month in which the NBDS Services were provided. ECHO and NBDS further agree that Section 2.2.2 provides a description of Daily Settlement Worksheet. 3.1.2. Audit Rights and Access to Books and Records. During ECHO's regular business hours, NBDS shall have the right to inspect ECHO's business records which reflect the Processing Fees and daily Settlement calculations. Such inspection shall be conducted at NBDS's sole cost and expense and shall only be permitted upon five (5) business days prior written notice to ECHO as provided in Section 8.1 of this Agreement. 3.2 NBDS' Obligations. 3.2.1. Processing Non-Exclusivity. NBDS retains the right to utilize additional processors from time to time as it deems necessary to meet its processing needs for NBDS' Services. 3.2.2. Cooperation and Development Support. NBDS acknowledges and agrees that successful providing of the NBDS Services, so as to become operational for use by NBDS, shall require the full and mutual good faith cooperation of both parties to this Agreement. In addition to providing ECHO with full, good faith cooperation and such information as may be required by ECHO in order to provide NBDS Services, NBDS shall provide ECHO with reasonable information concerning NBDS' procedures, work flow, and transaction volumes applicable to providing NBDS Services. 3.2.3. Check Clearing Data Transmission. NBDS shall cause Merchants or NBDS' affiliates who have given NBDS check presentment authority to transmit to ECHO or ECHO's designee all data and information, in such electronic format and content as ECHO shall require in connection with the providing of NBDS Services, including but not limited to, check images and financial data to permit ECHO to perform its accounting and any Settlement in connection with the providing NBDS Services. 3.2.4. Sales and Marketing of NBDS Services. During the term of this Agreement, NBDS agrees to perform, or cause to be performed, sales and marketing activities for the purpose of contracting with Merchants to utilize the NBDS Services provided by ECHO's System (except as provided in Sections 3.2.1 and 8.19). NBDS will bear the cost of producing Merchant applications, Merchant agreements and all other marketing materials used by NBDS and NBDS affiliates. Such agreements, applications and sales and marketing materials are to be reviewed and approved by ECHO prior to use. 3.2.5. Losses Due to Fraud, Return Activity and Regulatory Fines & Penalties. NBDS agrees that losses due to fraud, unpaid check return activity, fines and penalties imposed by regulatory agencies will be shared equally by ECHO and NBDS except as provided in Sections 2.1.8 and 3.2.6. ECHO will provide a periodic accounting of such losses to NBDS. NBDS hereby authorizes ECHO to debit one-half of such losses from NBDS's Demand Deposit Account. ECHO retains the unilateral right to decline to process for or terminate a Merchant if in ECHO's or Sponsoring Bank's sole discretion continued processing for that Merchant may constitute an unacceptable level of risk, profitability or potential for regulatory action. ECHO will have no liability to NBDS or its affiliates for any revenues lost due to such actions. 3.2.6. Merchant Compliance with NACHA Rules. NBDS bears the full responsibility of insuring that the policies and procedures of both NBDS and Merchants solicited by NBDS are in full compliance with the requirements of the National Automated Clearing House Association ("NACHA"). When required by the rules of NACHA or any other regulatory body, NBDS will provide Merchants with (a) appropriate consumer notices for posting at Merchant locations and (b) ink stamps or other means of obtaining consumer authorizations when required. NBDS should consult with their legal counsel and NBDS agrees to advise Merchants to consult with their legal counsel regarding compliance with NACHA's rules and regulations. This Agreement may not be construed so as to limit NBDS' or Merchants' obligation to comply with such rules and regulations. 3.2.7. NBDS Licensee Support. NBDS shall provide any and all services required to train and support the marketing and sales activities of NBDS licensees. ARTICLE 4 - MUTUAL CONFIDENTIALITY AND TRADE SECRETS 4.1. Confidentiality. ECHO and NBDS shall not disclose, except as authorized by this Agreement and applicable addenda, any proprietary or confidential information or trade secret regarding the other party's products and services. The parties recognize that in the performance of this Agreement and applicable addenda, each party may learn confidential proprietary work product of the other party and the parties agree not to disclose any confidential proprietary work product of the other party, except as authorized by this Agreement and applicable addenda, or expressly approved in writing by the other party prior to the contemplated disclosure. 4.2. ECHO Trade Secrets. NBDS acknowledges that the information provided to it by ECHO may represent or contain proprietary trade secrets of ECHO and NBDS hereby agrees to maintain the confidentiality of any such proprietary trade secrets of ECHO in a manner using at least as great a degree of care as the manner used to maintain the confidentiality of NBDS own most confidential information. In addition, information provided to NBDS by ECHO may represent or contain proprietary trade secrets of ECHO that constitutes the work product of ECHO and is confidential and proprietary to ECHO. 4.3. NBDS Trade Secrets. ECHO acknowledges that the information provided to it by NBDS may represent or contain proprietary trade secrets of NBDS and ECHO hereby agrees to maintain the confidentiality of any such proprietary trade secrets of NBDS in a manner using at least as great a degree of care as the manner used to maintain the confidentiality of ECHO's own most confidential information. In addition, information provided to ECHO by NBDS may represent or contain proprietary trade secrets of NBDS that constitutes the work product of NBDS and is confidential and proprietary to NBDS. ARTICLE 5 - TERM AND TERMINATION 5.1. Term and Termination. This Agreement shall remain in force until either party terminates this Agreement as follows: 5.1.1. Term. The initial term of this Agreement shall be five (5) years beginning on the effective date set forth in the preamble of this Agreement, and is subject to the right of NBDS to renew this Agreement for an additional five (5) years by delivery of written notice to ECHO, as provided for under section 8.1 of this Agreement, no later than six (6) months prior to the scheduled termination date of the initial five (5) year term of this Agreement. 5.1.2. Termination for Event of Default. Either party shall have the right to terminate this Agreement six (6) months after delivery of written notice, as provided in Section 8.1 of this Agreement, to the other party upon the occurrence of and stating the express nature of an event of default. For the purposes of this subsection, an event of default means: (i) material violation or breach by the other party, its officers or employees of any provision of this Agreement and any applicable addenda, including, but not limited to, confidentiality and payment, and that has occurred not more than ninety (90) days prior to delivery of the written termination notice; (ii) the termination of the business of the other party; (iii) the revocation of any license issued by any state or federal regulatory agency, the issuance of which is necessary for the conduct of the business of the other party; (iv) voluntary or involuntary filing of a bankruptcy petition or similar proceeding under state or federal law with respect to the other party; (v) the other party's insolvency or the making of any assignment for the benefit of creditors by the other party. 5.1.3. Post Termination Relationship. For a period of three (3) years following termination, NBDS and ECHO agree to continue to jointly service, under the terms of this Agreement and any related addenda, any Merchant relationships existing at the time of termination. Except as provided in Section 3.2.5 of this Agreement, ECHO may not terminate processing during this three-year period. NBDS agrees not to solicit such existing Merchants to move from ECHO's System during this three-year period. ARTICLE 6 - REPRESENTATIONS AND WARRANTIES OF ECHO ECHO represents and warrants that as of the effective date of this Agreement: 6.1. Due Organization. ECHO is duly organized and validly existing in good standing under the laws of the jurisdiction of its organization, and is duly qualified to conduct business in each jurisdiction which its business is conducted. 6.2. Authorization, Validity and Enforceability. The execution, delivery and performance of this Agreement, and related addenda, executed by ECHO is within ECHO's powers, has been duly authorized, and is not in conflict with ECHO's articles of incorporation or by-laws, or terms of any charter or other organizational document of ECHO; and that this Agreement, and related addenda, constitutes a valid and binding obligation of ECHO, enforceable in accordance with its terms. 6.3. Compliance with Applicable Laws. ECHO has complied with all licensing, permit and fictitious name requirements to lawfully conduct the business in which it is engaged. 6.4. No Conflict. The execution, delivery and performance by ECHO of this Agreement is not in conflict with any law, rule, regulation, order or directive, or any indenture, agreement, or undertaking to which ECHO is a party or by which ECHO may be bound or affected. 6.5. No Event of Default. No Event of Default has occurred and is continuing. ARTICLE 7 - REPRESENTATIONS AND WARRANTIES OF NBDS NBDS represents and warrants that as of the effective date of this Agreement: 7.1. Due Organization. NBDS is duly organized and validly existing in good standing under the laws of the jurisdiction of its organization, and is duly qualified to conduct business in each jurisdiction which its business is conducted. 7.2. Authorization, Validity and Enforcement. The execution, delivery and performance of this Agreement, and related addenda, executed by NBDS is within NBDS' powers, has been duly authorized, and is not in conflict with NBDS' operating agreement, or terms of any charter or other organizational document of NBDS; and that this Agreement constitutes a valid and binding obligation of NBDS, enforceable in accordance with its terms. 7.3. Compliance with Applicable Laws. NBDS has complied with all licensing, permit and fictitious name requirements to lawfully conduct the business in which it is engaged. 7.4. No Conflict. The execution, delivery and performance by NBDS of this Agreement is not in conflict with any law, rule, regulation, order or directive, or any indenture, agreement, or undertaking to which NBDS is a party or by which NBDS may be bound or affected. 7.5. No Event of Default. No Event of Default has occurred and is continuing. ARTICLE 8 - GENERAL 8.1. Notice. Any notice given by any party under this Agreement shall be in writing and personally delivered, deposited in the U.S. mail, postage prepaid, or sent by facsimile transmission, charges prepaid, and addressed as follows: To NBDS: National Bank Drafting Systems, Inc. 6707 Brentwood Stair Road, Suite 640 Fort Worth, Texas 76112 Attn: George Gouffray Facsimile No.: (817) 446-3236 To ECHO: Electronic Clearing House 28001 Dorothy Drive Agoura Hills, CA 91301 Attn: Joel Barry, CEO Facsimile No.: (818) 597-8999 Each party may change the address to which notices, requests and other communications are to be sent by giving notice of such changes to the other party. 8.2. Binding Effect. This Agreement, and related addenda, shall be binding upon and inure to the benefit of ECHO and NBDS and their successors and assigns; provided, however, that neither NBDS nor ECHO may assign or transfer either party's rights or obligations under this Agreement, and related addenda, without the prior written consent of the other party. 8.3. No Waiver. Any waiver, permit, consent or approval by either party of any event of default or breach of any provision, condition or covenant of this Agreement, and related addenda, must be in writing and shall be effective only to the extent set forth in writing. No waiver of any breach or default shall be deemed a waiver of any later breach or default of the same or any other provision of this Agreement, and related addenda. Any failure or delay on the part of either party in exercising any power, right or privilege under this Agreement, and related addenda, shall not operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude any further exercise thereof. 8.4. Rights Cumulative. All rights and remedies existing in this Agreement, and related addenda, are cumulative to, and not exclusive of, any other rights or remedies available under this Agreement, each related addendum, or applicable law. 8.5. Unenforceable Provisions. Any provision of this Agreement or related addenda which is prohibited or unenforceable in any jurisdiction, shall be so only as to such jurisdiction and only to the extent of such prohibition or unenforceability, but all remaining provisions of this Agreement and any related addenda shall remain valid and enforceable. 8.6. Execution in Counterparts. This Agreement and any related addenda may be executed in any number of counterparts which, when taken together, shall constitute but one agreement. 8.7. Further Assurance. At any time or from time to time upon the request of either party the other party will execute and deliver such further documents and do such other acts as the requesting party may reasonably request in order to affect fully the purposes of this Agree-ment and related addenda, and provide for the performance of all contemplated acts and activities in accordance with the terms of this Agreement and any related addenda. 8.8. Assignment. Except as otherwise provided herein, the rights and obligations of ECHO and NBDS under this Agreement and related addenda are personal and not assignable, either voluntarily or by operation of law, without prior written consent of both parties. Subject to the foregoing, all provisions contained in this Agreement shall extend to and be binding upon the parties hereto or their respective successors and permitted assigns. 8.9. Legal Fees and Costs. In the event of any dispute arising out of or in connection with this Agreement and any related addenda, the prevailing party in any judicial action, arbitration or proceeding shall be entitled to recover its reasonable attorney's fees and court costs, in addition to any other recovery permitted by law or equity. 8.10. Jury Trial Waiver. In the event of any litigation or other proceeding arising out of, related to, or in connection with this Agreement, the parties agree that any such litigation, trial or proceeding shall be tried and heard by the court only and not by a jury trial. 8.11. Schedules, Exhibits and Addenda. The schedules, exhibits, and addenda referenced in and attached to this Agreement are hereby incorporated into this Agreement by reference for all purposes and are subject to revision, modification, and such incorporation from time to time by mutual agreement signed by both parties. 8.12. Amendments. This Agreement, including schedules, exhibits, and addenda may be amended or modified only by prior written agreement signed by both parties. 8.13. Relationship with Parties. This Agreement, including any related addenda, is not intended by the parties to constitute or create a joint venture, partnership, or formal business entity of any kind. The rights and obligations of the parties shall be only those expressly set forth herein, and neither party shall act as the agent for the other. 8.14. State Law. This Agreement and related addenda shall be governed by and construed in accordance with the laws of the State of California as to all matters including validity, construction, effect, performance and remedies, without giving effect to the principles of choice of law thereof. For purposes of any lawsuit, action, or proceeding arising out of or relating to this Agreement and any applicable addenda, NBDS and ECHO agree that any process to be served in connection therewith shall, if delivered sent or mailed in accordance with Section 8.1, constitute good, proper and sufficient service. 8.15. Headings. The headings listed after each section number in this Agreement and any related addenda are inserted for convenience only, do not constitute a part of this Agreement, and are not to be considered in connection with the interpretation or enforcement of this Agreement or any related addenda. 8.16. Force Majeure. If performance by a party of any service or obligation under this Agreement and any related addenda is prevented, restricted, delayed or interfered with by reason of labor disputes, strikes, acts of God, floods, lightning, earthquakes, shortage of materials, rationing, utility or communication failures, failure or delay in receiving electronic data, blockages, embargo, or any law, order, proclamation, regulation, ordinance, demand or requirement having legal effect of any government or any judicial authority or representative of any such government, or any other act or omission whatsoever, which are beyond the reasonable control of such party, then such party shall be excused from the performance to the extent of the prevention, restriction, delay or interference. 8.17. Entire Agreement. This Agreement, including schedules, exhibits, and addenda, sets forth all of the promises, agreements, conditions and understandings between the parties respecting the subject matter hereof and supersedes all negotiations, conversations, discussions, correspondence, memorandums, agreements and addenda between the parties concerning the subject matter herein. This Agreement may not be amended or modified except by a writing or addenda signed by authorized representatives of both parties to this Agreement. 8.18. Time is of the Essence. The parties acknowledge and agree that time shall be of the essence in connection with the performance of all obligations set forth herein. 8.19. NBDS Excluded Accounts. ECHO acknowledges that NBDS currently provides its electronic check services to certain merchants by agreement through other processors utilizing the ACH network. ECHO acknowledges that it has no right or claim to revenues derived therefrom. 8.20. ECHO Excluded Accounts. NBDS acknowledges that ECHO currently provides its electronic check services to other business entities, including but not limited to banks, merchants, and independent sales organizations. NBDS acknowledges that it has no right or claim to revenues derived therefrom. 8.21. Solicitation and Hiring of Employees. The parties recognize that the employees of each party, and such employees' loyalty and service, constitute a valuable asset of each party. Accordingly, the parties hereby agree not to employ or make any offer of employment to, nor enter into a consulting relationship with, any person who is currently employed by the other party and for a period of two (2) years immediately following such person's termination of employment from either party. 8.22 Indemnification by ECHO. ECHO shall indemnify NBDS against, and hold NBDS harmless from and against all claims, actions and expenses, including attorney's fees and costs incurred by NBDS, arising from, related to or in connection with any breach by ECHO of any of its duties or obligations under this Agreement. This indemnification shall survive the termination of this Agreement. 8.23 Indemnification by NBDS. NBDS shall indemnify ECHO against, and hold ECHO harmless from and against all claims, actions and expenses, including attorney's fees and costs incurred by ECHO, arising from, related to or in connection with any breach by NBDS of any of its duties or obligations under this Agreement. This indemnification shall survive the termination of this Agreement. IN WITNESS WHEREOF, NBDS and ECHO have executed this Agreement by duly authorized representatives effective as of the date set forth in the preamble. Electronic Clearing House, Inc. National Bank Drafting Systems, Inc. ("ECHO") ("NBDS") By:___________________________________ By:_______________________________ Joel M. Barry, CEO George Gouffray, Senior Vice President Addendum A - Electronic Check Recovery and Regular Collection Services This Addendum A ("Addendum A") entitled Electronic Check Recovery and Regular Collection Services is made effective April 10, 2000 by and between National Bank Drafting Systems, Inc. ("NBDS"), a Texas corporation with principal offices located at 6707 Brentwood Stair Road, Suite 640, Fort Worth, Texas 76112, and Electronic Clearing House, Inc., ("ECHO"), a Nevada corporation with principal offices located at 28001 Dorothy Drive, Agoura Hills, CA. As authorized by section 2.1.1 of the Electronic Check Services Agreement ("Agreement") executed on May 17, 2000 by and between these same parties, Addendum A, upon its execution, is incorporated into that Agreement by this reference. WHEREAS NBDS desires to market the following services to Merchants: Electronic Check Recovery ("ECR") - a service that, utilizing electronic submission of data via the ACH, attempts to collect checks which (a) were presented for payment a first time as a paper item, and (b) subsequently returned unpaid by the consumer's bank for either non-sufficient funds ("NSF") or uncollected funds ("UCF") and (c) are less than 45 days old at the time they are received at ECHO. Regular collection service ("Regular Collection") - a service which begins when a returned item can no longer be collected electronically via an ACH debit to the consumer's account. Regular Collection consists of telephone and collection letter contacts with the consumer. WHEREAS ECHO, through its XpressCheX affiliates, is a provider of ECR and Regular Collection services, NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: Merchant Documentation and Merchant Approval NBDS is responsible for electronically transmitting a complete Merchant application to ECHO along with obtaining a signed Merchant agreement and any supporting documentation as required by ECHO. Originals of signed Merchant agreement are forwarded to and retained by ECHO. ECHO retains the unilateral right to decline to process for or terminate a Merchant if in ECHO's sole discretion continued processing for that Merchant may constitute an unacceptable level of risk, profitability or potential for regulatory action. ECHO will have no liability to NBDS or its affiliates for any revenues lost due to such actions. Merchant Welcome Letter Merchant requires a welcome letter containing a user ID for reporting system and password, instruction for online service and report tutorials, and telephone numbers for Merchant support, etc. NBDS shall be responsible for issuing such user IDs and password, and for generating and distributing the Merchant welcome letter within five (5) days of ECHO's approval of a Merchant application and agreement. Merchant ECR and Regular Collection Options Merchants may select from the following ECR and Regular Collection options. Merchants choosing a Service Option below are required to post consumer notices that allows ECHO to collect the face amount of the check plus a collection fee. Merchants choosing the Old Check Option are required to have had an electronic processing notice posted during the time the old checks were taken. NBDS agrees to enforce and monitor for compliance the above posting of notice. Service Option 1 - Merchant Chooses Both ECR and Regular Collection Preferred Method of Check Submission - Merchant's bank forwards checks to ECHO after 1st return. Alternate Method of Check Submission - When Merchant's bank either can not or will not forward checks, Merchant may forward checks to ECHO after 1st return. Service Option 2 - Merchant Chooses ECR but not Regular Collection Only Acceptable Method of Check Submission - Merchant forwards NSF and UCF after 1st return to ECHO (If applicable, Merchant forwards AC, Stop Pay etc to Merchant's 3rd party collector) Service Option 3 - Merchant Chooses Regular Collection Only In the event that a Merchant does not want to utilize ECR, this option allows the Merchant to utilize ECHO for Regular Collection services only. Preferred Method of Check Submission - Merchant's bank forwards checks to ECHO after 1st return. Alternate Method of Check Submission - When Merchant's bank either can not or will not forward checks, Merchant may forward checks to ECHO. Old Check Option - One time submission of ECRable items less than 180 days old Allows new Merchants a one-time opportunity to submit ECRable items, less than 180 days old, for ECR recovery. Merchants submit NSF and UCF items less than 180 days old and, upon collection of an item via ECR, Merchant receives reimbursement equal to 50% of the face value of that item. May be selected along with either Service Option 1, 2, or 3 above. If Merchant has selected a Service Option that includes Regular Collection, these "old checks" will be cycled into Regular Collection when ECR attempts are exhausted. ECHO's Regular Collection efforts on "old items" will be limited to (a) collection letter series, and (b) report consumer to credit reporting agency. When one of the above options allows for direct submission of checks by the Merchant, NBDS will provide Merchants with (a) preaddressed (to ECHO) envelopes, preformatted for Merchant to complete Merchant's return address consisting of Merchant name, address and Merchant number, and (b) Check Inventory Forms quantifying the number and amount of checks enclosed along with the name and Merchant number of the submitting Merchant. Reporting Options Merchants have the option of (a) accessing account information via online reporting (b) receiving paper based reporting via U.S. Mail, or (c) receiving both online and paper reporting. Merchant will be charged the applicable fee for the type of reporting that they select (see "Merchant Reporting" section on Page 6). Shredding of Paper Checks One hundred eighty (180) days after entry into the ECHO system, all checks stored at ECHO are shredded and are then only available via the stored image. Prior to the shredding of an item, a Merchant may request the return of the original paper check. For details on retrieval of a paper checks and the associated fees (see Check Retrievals and Check Retrieval Fees section on Page 30). Detailed Description of Electronic Check Recovery Service Merchants accept checks in the normal course of business and deposit ("1st Presentment") those paper checks with their local banks. Returned items are forwarded to ECHO (either by Merchant or by Merchant's bank). Returned checks are received at ECHO. All checks, including non-ECRable items, are entered and imaged into ECHO's system. At the Merchant's request and subject to check retrieval fees, non-ECRable checks are returned to Merchant. Upon arrival at ECHO, each check is evaluated and assigned to one of two collection groups a. ECR Collection group. Checks that returned for either NSF or UCF and are eligible for automated ECR collection. b. Regular Collection group. Checks that were returned Account Closed, Stop Payment, Fraud or any other reason that precludes an automated ECR collection and are therefore eligible only for Regular Collection. Items are re-evaluated each time they are returned following an automated ECR collection attempt and if no longer ECRable (and Merchant participates in Regular Collection), re-assigned to the Regular Collection group. Note 1: ECHO will assume that each NSF and UCF item submitted by a Merchant has been properly authorized by the consumer (for ECR) and that documentation of such authorization has been retained by the Merchant. In the event that evidence of the consumer's authorization is not present on the check, ECHO will assume that proper authorization was obtained either by way of the consumer's signature on a printed receipt/authorization, or that the consumer signed a contract with the Merchant containing an ongoing consumer authorization clause. ECHO reserves the right to conduct periodic Merchant audits to insure that consumer authorizations are on file. Merchants, in the Merchant ECR agreement, shall indemnify ECHO for their failure to obtain proper consumer authorization and authorize ECHO to periodically audit Merchant's consumer authorization documentation. Note 2: For every returned item submitted by a merchant, ECHO will assume that proper consumer notices were posted at the Merchant location to allow for the collection of a collection fee. Processing of ECR Collection Group : The item is immediately presented electronically (2nd Presentment) by ECHO for clearing via the ACH. If the 2nd Presentment clears the consumer's account (not returned by consumer's bank within 5 banking days of 2nd presentment) an electronic debit transaction, in an amount equal to the maximum allowed by state law, is electronically presented to the consumer's account via the ACH. If the 2nd Presentment of a item is returned (2nd Return) by the consumer's bank, the check either remains in the ECR Collection group (if eligible) or is placed in the Regular Collection group. When a 3rd Presentment is necessary, ECHO will attempt to minimize the likelihood of a 3rd Return by utilizing the following procedure: For checks greater than fifty ($50) dollars, ECHO will attempt one (1) funds verification call to the consumer's bank. No verification call will be attempted on checks of fifty dollars or less. If a funds verification attempt verifies that sufficient funds are available, the item will immediately be re-presented (3rd Presentment). Checks that do not require funds verification (due to the amount) will immediately be re- presented (3rd Presentment). On a check where a funds verification attempt was made, if the funds verification attempt is not able to verify funds, the 3rd Presentment of the item will be timed to hit the consumer's account on the following 1st or 16th day of the month without further funds verification attempts. If the 3rd Presentment clears the consumer's account (not returned by consumer's bank within 5 banking days of 3rd Presentment) the collection fee is charged to the consumer's account via the ACH. If the 3rd Presentment is returned (3rd Return) by the consumer's bank, the transaction can no longer be processed in the ECR Collection group and (if applicable for this Merchant) is placed in the Regular Collection group. Note: If the 1st or 16th day of any month falls on a non-banking day, then any banking related event scheduled for that day will be performed on the next banking day following that 1st or 16th. Handling Regular Collection Group: a) If a Merchant signs up for Regular Collection, ECHO will begin normal Regular Collection efforts that typically include sending collection letters and making phone calls. If a Merchant does not sign up for Regular Collection, ECHO will not perform any Regular Collection functions Handling of Returned Collection Fees In the event that a collection fee is returned unpaid by the consumer's bank, that item will be re-presented (2nd Presentment) only one time. That 2nd Presentment will be timed to hit the consumer's account on the next 1st or 16th of the month. Merchant Reimbursement for Recovered Items Merchants will be reimbursed only for recovered items. Reimbursement will occur on the 1st and 16th day of each month (or the first banking day thereafter) via ACH credit to the Merchants' accounts as follows: Option 1 - ECR and Regular Collection (Merchant is required to post consumer notices and obtain a signature allowing electronic collection of the face amount of the check and a collection fee) % of funds collected via ECR % of funds collected via Regular Collection Option 2 - ECR only (Merchant is required to post consumer notices and obtain a signature allowing electronic collection of the face amount of the check and a collection fee) % of funds collected via ECR Option 3 - Regular Collection only (Merchant is required to post consumer notices allowing collection of a collection fee) % of funds collected via Regular Collection Old Checks Option (Merchant is required to have had consumer notices posted at the time the check was taken allowing electronic collection of the face amount of the check). % of Recovered Funds Payment of Collection Fee Rebates to Merchants Merchant will qualify to receive a rebate of a collection fee when the following conditions are met: Merchant's bank is forwarding returned items directly to ECHO. This requirement is due to the less profitable nature of Merchants that receive returned items from their bank and either, (a) collect the "easy" items themselves (and keep the collection fee), and/or (b) delay in forwarding them for collection thereby reducing the likelihood of collection. The full amount of both the collection item and the collection fee are recovered via ECR. (Items collected via Regular Collection are not subject to Merchant rebates). The collection fee transaction is not returned or otherwise charged back by the consumer or the consumer's bank. The amount of that collection fee is greater than $15 When the above conditions for rebate qualification are met, the Merchant will receive rebates of % of qualifying collection fees. Rebates are paid twice monthly via ACH credit to the Merchants' accounts. When the above conditions for rebate qualification are not met, the Merchant will not receive a collection fee rebate. Technical Specifications, Flow Charts, etc. Merchant and Administrative Reporting Requirements Administrative Reporting NBDS will have online access to the following reports from ECHO: Check Status Report Total Merchant Listing Licensee Listing Report - future Sales Rep Listing Report Licensee Commission Report: ECR Collections Licensee Commission Report: Regular Collection NBDS Corporate Commissions Report: ECR Collections NBDS Corporate Commissions Report: Regular Collection Access to all reports available to ECR Merchants Samples of the reports that ECHO will provide to NBDS are included in this document. Merchant Reporting Electronic images of checks will be stored and available online for one (1) year. Merchant will receive detailed reporting of their account activity by one of the following methods. Applicable reporting fees, as detailed below, will be collected at the end of each calendar month via either ACH debit to Merchant's account or net remittance. Access to Online Reports - At any time throughout the collection process, the Merchant can access their account activity information, via ECHO's online reporting system, including a history and current status of each returned item. Immediately upon entry of an item into the ECHO system and for one (1) year thereafter, an item may be viewed or printed over the Internet. To cover the costs of supporting online reporting (password administration, etc.), Merchants will be charged ($ ) dollars per month for each Merchant site set up to access online reporting. This reporting fee structure is meant to allow a Merchant to access ALL Merchant locations from a single Merchant site, such as the home office, for the one ten dollar per month fee. Reports via U.S. Mail - Merchant may receive reporting via U.S. Mail to include (a) weekly check inventory report, (b) twice monthly remittance statements reconciling the ACH credits to their accounts and, (c) monthly collection statistics report. Merchants will be charged ($ ) dollars per month for EACH Merchant location for which paper reports are generated regardless of the address to which they are posted. Paper reporting will be sent via first class U.S. mail. Merchant may choose reporting by both online and U.S. Mail. In that event, both online and paper reporting fees will be charged as applicable. XpressCheX 215 Central Ave. NW Ste. 3-B Albuquerque, NM 87102 NBDS CORPORATE COMMISSIONS REPORT REGULAR COLLECTIONS BEGIN DATE: END DATE: Total Number of Checks= Gross Commission =$ Total Amount of Checks Entered=$ Licensee Commissions Due=$ Total Regular Fees =$ Total Special Fees =$ XpressCheX 215 Central Ave. NW Ste. 3-B Albuquerque, NM 87102 SALES REPS LISTING REPORT LICENSEE: 500 LICENSEE NAME: CASH FLOW SOLUTIONS BEGIN DATE: END DATE: Total Sales Reps Enrolled to Date: 2 Total New Sales Rep Enrolled: 1 XpressCheX 215 Central Ave. NW Ste. 3-B Albuquerque, NM 87102 LICENSEE LISTING REPORT BEGIN DATE: END DATE: Total Sales Reps Enrolled to Date: 2 Total New Sales Rep Enrolled: 1 XpressCheX 215 Central Ave. NW Ste. 3-B Albuquerque, NM 87102 TOTAL MERCHANT LISTING SALES REP 500-A LICENSEE 500 BEGIN DATE: END DATE: NEW MERCHANTS ENROLLED: 3 MERCHANTS ENROLLED TO DATE: 5 XpressCheX 215 Central Ave. NW Ste. 3-B Albuquerque, NM 87102 LICENSEE COMMISSION REPORT REGULAR COLLECTIONS SALES REP 500-A LICENSEE 500 BEGIN DATE: END DATE: Total Number of Checks= Commissions Due=$ Recovery Rate = Percent of dollar amount of checks returned that are paid. Total Recovery Rate = Average of recovery rate combined. XpressCheX 215 Central Ave. NW Ste. 3-B Albuquerque, NM 87102 LICENSEE COMMISSION REPORT RCK COLLECTIONS SALES REP 500-A LICENSEE 500 BEGIN DATE: END DATE: Total Number of Checks= Commissions Due=$ Recovery Rate = Percent of dollar amount of checks returned that are paid, plus rebates paid. Total Recovery Rate = The average recovery rate combined. XpressCheX 215 Central Ave. NW Ste. 3-B Albuquerque, NM 87102 CHECK STATUS REPORT SALES REP 500-A LICENSEE 500 BEGIN DATE: END DATE: Paid:Check paid in full. Working:Account is still active and is being worked by our collection department. Returned:Returned to Merchant for internal collection, or criminal or civil prosecution. Uncollected:Check is uncollectable and has either been reported to credit bureaus and/or check verification. XpressCheX 215 Central Ave. NW Ste. 3-B Albuquerque, NM 87102 NBDS CORPORATE COMMISSIONS REPORT RCK COLLECTIONS BEGIN DATE: END DATE: Total Number of Checks= Total Retained Fees =$ Total Amount of Checks Gross Commission =$ Total Regular Fees =$ Licensee Commissions Due=$ Total Rebates =$ Pricing Other than (a) applicable reporting fees (see "Merchant Reporting", page 6), (b) check retrieval fees (see "Check Retrievals and Check Retrieval Fees" below) and (c) any portion of the face value of a collected item retained by ECHO, there is no charge to Merchants for the ECR or Regular Collection service. NBDS and ECHO reserve the right to mutually change or, on a Merchant by Merchant basis, make exceptions to pricing policies as market conditions warrant. Check Retrievals and Check Retrieval Fees Merchants with online reporting can retrieve check images online. Check images will be stored and available online for one (1) year from the date received at ECHO. Merchants requiring an image of a check subsequent to that time will need to contact their original depository banks which are required by law to retain check images for seven years. Paper checks will be shredded one hundred and eighty (180) days after the date received at ECHO. Prior to the date an item is shredded, on an individual check basis, Merchant may request the return of specific paper checks. Such checks will be mailed by ECHO within 3 business days of Merchant's request. Actual receipt of the item(s) by Merchant is subject to U.S. Mail delivery standards for first class mail. The check retrieval fee for this service is five dollars ($5) per item. Retrieval Fees for Cancelled ECR Merchants - Upon written request from a Merchant canceling the service, all original checks not yet shredded by ECHO will be sent back to the Merchant without a retrieval fee. Commissions On items where the original item and the associated collection fee are both recovered via ACH debit to the consumer's account, NBDS and ECHO will equally split the Net Collection Fee. As an example, the gross collection fee was equal to $ ; the Merchant was paid a rebate of ($ ) dollars, therefore the resulting Net Collection Fee is $ . This net fee is split equally between ECHO and NBDS. ECHO will retain % of collection fees on items where either the original check or the collection fee is recovered through Regular Collection activities. "Old Checks" Option - Typically these items will not include a collection fee since the Merchant did not have the required consumer signature. When an "Old Check" is recovered, NBDS and ECHO will equally split the amount not refunded to Merchant. ECHO and NBDS will equally split online reporting fees. ECHO will retain % of paper reporting fees. ECHO will retain % of check retrieval fees. On a periodic basis, ECHO and NBDS will each evaluate their respective profitability derived from the ECR/Regular Collection service. Should the profitability of either party not meet its budgetary requirements, the commission splits may be re-negotiated. Should re-negotiation of the commissions not achieve a solution that is suitable to both parties, increased and/or additional fees to Merchants will be initiated. Merchant Servicing ECHO is responsible for providing Merchants with ongoing telephonic Merchant support services. NBDS is responsible for providing Merchant with an initial orientation training on both the ECR and Regular Collection services and the reporting system. Licensee and Sales Person Servicing NBDS is responsible for the training and ongoing support of NBDS licensee and sales personnel. Exclusivity issues No exclusivity is attached to these services. IN WITNESS WHEREOF, NBDS and ECHO have executed this Addendum by duly authorized representatives effective as of the date set forth in the preamble. Electronic Clearing House, Inc. National Bank Drafting Systems, Inc. ("ECHO") ("NBDS") By:___________________________________ By:_______________________________ Jody Barry, CEO George Gouffray, Senior Vice President EXHIBIT 10.45 AMENDMENT TO PRODUCT AND SOFTWARE DEVELOPMENT AND LICENSE AGREEMENT This amendment to the Product and Software Development Agreement (which original Agreement is dated as effective April 1, 1999) ("Amendment") is made effective July 19, 2000, by and between innoVentry Corp. ("Licensee"), a Delaware corporation with principal offices located at 534 Fourth Street, San Francisco, California 94107, and Electronic Clearing House, Inc. ("Licensor"), a Nevada corporation with principal offices located at 28001 Dorothy Drive, Agoura Hills, California 91301. RECITALS Whereas the parties have mutually determined that it is in their best interests to modify the original Agreement to accommodate a more mutually beneficial commercial arrangement between the parties; and Whereas the parties have mutually agreed that such commercial arrangement shall be in the form of a fully-paid, royalty free, exclusive, non- transferrable, irrevocable and perpetual license to the Processing system and sale of certain related equipment for the purpose of permitting Licensee to perform Settlement Processing activities without the assistance or support of Licensor; Now, therefore, in consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: AMENDMENTS The following terms shall be amended as described below: 1. Section 2.1.2, "Development and License," shall be replaced with the following new Section 2.1.2: "Section 2.1.2. Processing System License. Subject to all of the terms and conditions hereof, Licensor grants to Licensee and Licensee accepts from Licensor a fully-paid, royalty-free, exclusive, irrevocable and perpetual license to modify and use the Processing System for Licensee's own business purposes ("Software License"). Such license includes, but is not limited to, a license to all software and documentation set forth in Schedule 1, attached hereto. Payment for such license is included in the fees set forth in Article 3 below." 2. Section 2.2, "EQUIPMENT & INSTALLATION," shall be replaced with the following new Section 2.2: 2.2 Purchase of Equipment. 2.2.1 Equipment and Prices. Licensor agrees to sell and Licensee agrees to purchase the Equipment identified in Schedule 2, attached hereto. Licensor agrees that Licensee shall be the beneficiary of any manufacturer's warranties that cover any such Equipment. 2.2.2 Payment for Equipment. Licensee agrees to pay Licensor for the Equipment, upon receipt of Licensor's invoice for such Equipment and upon payment terms as are set forth Schedule 2, attached hereto and incorporated by this reference. Licensor will deliver the Equipment upon receipt of full payment for the Equipment. 2.2.3 Warranty. EXCEPT AS OTHERWISE EXPRESSLY AGREED IN WRITING, LICENSOR DISCLAIMS ALL WARRANTIES WITH RESPECT TO THE EQUIPMENT, INCLUDING THE IMPLIED WARRANTY OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. DAMAGES HEREUNDER SHALL BE LIMITED TO THE FAIR MARKET VALUE OF EQUIPMENT ACTUALLY PURCHASED. FOR THE PURPOSES OF THIS SECTION 2.2, LICENSOR SHALL NOT BE LIABLE, UNDER ANY LEGAL OR EQUITABLE THEORY, FOR SPECIAL, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES, INCLUDING, BUT NOT LIMITED TO, LOSS OF PROFITS, REVENUE OR SAVINGS, EVEN IF ANY PARTY GIVES AND RECEIVES NOTICE OF THE POSSIBILITY OF SUCH DAMAGES. 2.2.4 Equipment Assembly. Licensee shall not be required to perform any assembly and testing of any Equipment or to perform any services of any kind or nature in connection with the Equipment other than to sell the Equipment to Licensee subject to the terms hereof. 3. Sections 2.3, 2.4, 3.2.5, and 3.2.6 are terminated in their entirety. 4. Sections 2.5, 2.6, 3.2.1, 3.2.2 and 3.2.4 shall continue in force and effect for a period of sixty (60) days from the effective date of this Amendment and shall terminate in their entirety thereafter. After September 30, 2000, Licensor shall have no obligation to perform any Settlement Processing of any kind or perform any daily settlement and/or chargeback processing activities, or any other activities required to be performed by Licensor pursuant to Sections 2.5 and 2.6. 5. Sections 3.1.1 and 3.1.2 shall be replaced in their entirety with the following new Article 3, Section 3.1: "License Fee: For the License granted in Section 2.1.2, Licensee shall pay Licensor a one-time fee of $1,000,000.00 for the Software License as follows: $250,000 upon execution of this Amendment ("Amendment Effective Date"); and $750,000 on September 30, 2000, and (ii) a daily fee from the funds handled in the settlement process performed by Licensor in connection with Scrip Gaming Transactions. Licensor and Licensee further agree that the Daily Settlement Worksheet that has been utilized in the past accurately reflects the financial aspects of the Daily Settlement process and how Licensor's daily fee is calculated, on a daily basis, among other Daily Settlement calculations. Licensor's right to receive this daily fee shall terminate on October 1, 2000." 6. Article 5, "TERM/TERMINATION," shall be replaced with the following new Article 5: "Termination and Survival: The license granted to Licensee herein shall be irrevocable and perpetual, so long as Licensee remains in compliance with the terms herein. Licensor shall have the right to terminate the License in the event Licensee materially breaches the terms of this Agreement, and such breach remains uncured for a period of greater than sixty (60) days after delivery of written notice to Licensee by Licensor. Sections 2.1.2, 2.1.3, 2.1.4, 2.1.9, 3.1, 3.2.3, Article 4 and Article 9 shall survive termination of this Amendment." 7. Article 6 is terminated in its entirety. 8. Section 9.9 shall be amended by adding new Section 9.9.1 at the end of the existing Section 9.9, as follows: "Section 9.1.1 - Provided, however, Licensor agrees that Licensee may assign its rights and obligations under this Agreement to any assignee. 9. Article 9 shall be amended by adding a new Section 9.17, as follows: "9.17 No Event of Default. Neither party has knowledge of any Event of Default under the Agreement by the other party, 10. Software Development Services. Licensor agrees to perform software development services for Licensee in connection with the Processing System software for the purpose of modifying the Processing System software and interfaces between software components and/or to accommodate any network changes. Any such software development services performed by Licensor at Licensee's request shall be reimbursed to Licensor at the rate of $ per hour and shall be paid immediately upon receipt of Licensor's invoice. Licensor reserves the right to require Licensee to make an advance deposit for the cost of performing software development services in the event any requests from Licensee to perform software development services will require, in Licensor's judgment, in excess of 200 hours of labor. Licensor further reserves the right to increase the hourly rate for which it will perform software development services or to terminate its obligation to provide software development services upon 30 days written notice to Licensee. All other Articles, Sections, terms and conditions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, Licensee and Licensor have executed this Amendment by duly authorized representatives effective as of the date set forth in the preamble Dated: July 19, 2000 Electronic Clearing House, Inc. By: Joel M. Barry Chairman of the Board & CEO Dated: August 1, 2000 innoVentry, LLC By: Frank A. Petro, Jr. CEO Schedule 1 Software programs to be delivered to innoVentry: 1. Cage/Kiosk Terminal Application. The software that is the application for the cage terminals and the kiosk terminals. 2. Terminal PROM Software: the software that is programmed into the boot PROM that exists in the case and kiosk terminals. 3. TERM95 Terminal Upload/Download Software. The software that is used to upload and download the cage and kiosk application software, printer software and configuration parameters. 4. PostBridge Gateway Software: The software that inputs ATM requests and forwards them to TOAST/COAST. 5. COAST Software: The software that runs the Casino Server (the computer) and is responsible for inputting requests from the terminals, PC Cage or the ATMs, parsing that request and routing the request to either OTP, POSTILION and/or the Casino Server (the software) and formatting a response to the originator. 6. PostTerm Gateway Software: The software that forwards requests from COAST and delivers it to POSTILION. 7. Casino Server Database: The database that provides procedures and tables that control and store the results of the Casino transactions. 8. CasinoView Software: The application that allows a user to view, edit, delete or create transactions and sessions and to maintain configuration tables. 9. Systest/Auto Download Software: The software that is used to control the processing of systest requests received from the cage and kiosk terminals. 10. CreditDeposits Software: A scheduled function consisting of a program that performs deposits for credit card sessions based on time criteria. 11. DebitReversal Software: A scheduled function consisting of two programs and two stored procedures that reverses debit card session based on time criteria. 12. PPF Software: A scheduled function consisting of a program that creates a list of checks that comprise the positive pay file. 13. DSW Software: A scheduled function that consists of a VBS script and two stored procedures that creates the daily settlement worksheets for individual casinos. 14. DSWSum Software: A scheduled function that consists of a VBS script and two stored procedures that creates the daily settlement worksheet which is a summary of all casinos. 15. Daily/ReportExtract Software: A scheduled function that consists of a program that summarizes in a flat file, the daily transaction activity for all casinos. For each software program, the following is to be delivered: " Installation instructions: How the software is to be installed or alternatively, where it should be placed relative to a computer and file structure. " Software generation guide. How to generate the software from its source form. " Brief description of each file: For each file (or stored procedure, table, etc.), a brief description of the function of that file. Special Note: The PC Cage Software that runs on the Local Credit Server and provides the intranet service to the casino cage PCs will also be provided as well in this delivery of software but is not included in the purchase price under Section 3.1.1. An outstanding invoice of $ has already been sent to innoVentry on March 7, 2000, that covers the costs associated therewith. Schedule 2 Equipment and Prices The prices shown for the kiosk and cage based equipment and supplies below reflect ECHO's cost basis in the equipment and supplies. 1) 138 Kiosk Terminals at $ ea. = 2) 15 boxes checks/10 packs/box at $ /pack = 3) 4 electronic imprinters @ $ ea. = 4) 5 RP 121 printers @ $ ea. = 5) 10 EB921 terminals @ $ = Total Equipment Price: $ Upon execution of the Amendment to the Agreement, ECHO will invoice innoVentry for the equipment and supplies listed above and payment for the above equipment and supplies will be due within 30 days of receipt of invoices from ECHO. ECHO will cease charging innoVentry for check supplies upon execution of the Amendment and will ship the equipment and supplies as designated by innoVentry on or before 9/30/00. EXHIBIT 10.46 AMENDED AND RESTATED MERCHANT MARKETING AND PROCESSING SERVICES AGREEMENT THIS AMENDED AND RESTATED MERCHANT MARKETING AND PROCESSING SERVICES AGREEMENT ("Agreement") is made effective as of August 1, 2000, by and between First Regional Bank, ("Bank"), and Electronic Clearing House, Inc. ("ECHO") and is intended to supercede the Agreement dated June 24, 1997. RECITALS WHEREAS, Bank desires to provide Merchant Services to Merchants, and WHEREAS, ECHO is engaged in the business of providing various marketing and data processing services which will support Bank's Merchant Services to Merchants, and WHEREAS, Bank desires that ECHO provide these various marketing and data processing services to Bank as support for Bank's provision of Merchant Services, and WHEREAS, both Bank and ECHO desire to maintain a long-term, mutually profitable business relationship. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE 1 - DEFINITIONS The definitions appearing in this Agreement or any supplement or addendum to this Agreement shall be applicable to both singular and plural forms of the defining terms: 1.1 "ACH" means the Federal Reserve Bank's Automated Clearing House system. 1.2 "ACH Data" means debit and credit transactions authorized by account holder. 1.3 "Authorization Log" means the monthly transaction detail summary setting forth individual transactions sorted by Merchant, including, but not limited to, (i) the Merchant account number, (ii) the Cardholder's account number, (iii) the transaction amount, (iv) the transaction date and time, (v) the method of entry, and (vi) whether the transaction was authorized only, or authorized and captured. 1.4 "Authorization" means the alpha numeric characters by the Card issuing bank acknowledging that (i) the account number represents a valid Cardholder account, (ii) the transaction amount is within the Cardholder's spending limit, and (iii) the Card has not been reported lost or stolen at the time of the authorization. 1.5 "Card" means an unexpired Visa or MasterCard credit card. 1.6 "Cardholder" means the individual whose name is embossed on a Card. 1.7 "Chargeback" means an electronic debit to a Settlement initiated by a Cardholder dispute. 1.8 "Chargeback Reserve Account" means ECHO's demand deposit account at Bank established and funded by ECHO pursuant to the provisions of Section 6.4.5 and to be used to reimburse Bank according to the provisions of Section 6.5.1. 1.9 "Credit Voucher" means the Merchant's record of return or refund to be credited to Cardholder's account. 1.10 "Demand Deposit Account" means the Merchant demand deposit and/or money market account at Bank or other financial institution designated for use in conjunction with Merchant Services. 1.11 "Draft Capture Service" means the acquisition, electronically by ECHO, of the information necessary to submit a Sales Draft and/or Credit Voucher to Visa and/or MasterCard for Settlement. 1.12 "Funds Distribution Instructions" means electronic files containing debit and credit instructions pertaining to Merchant Demand Deposit Accounts. 1.13 "Independent Service Organization" means an Independent Service Organization as defined from time to time by Visa. 1.14 "MasterCard" means MasterCard International. 1.15 "MasterCard/Visa Reserve Account" means the demand deposit account at Bank established and funded by ECHO pursuant to the provisions of Section 6.4.5 and to be used to reimburse Bank according to the provisions of Section 6.3.6. 1.16 "Merchant" means businesses that accept the Card. 1.17 "Merchant Service Provider" means the Merchant Service Provider as defined by MasterCard from time to time. 1.18 "Merchant Services" means the services provided to Merchant by Bank, or by ECHO on behalf of Bank, under this Agreement. 1.19 "Pricing Guidelines" means the pricing guidelines established by Bank which are the charges, fees and discounts to be assessed to and collected from Merchants by ECHO for Merchant Services provided on Bank's behalf by ECHO in connection with Bank's Merchant Services program. 1.20 "Sales Draft" means Merchant's record of Cardholder purchase. 1.21 "Settlement" means the movement of information and funds via a Settlement Processor or ACH that results in the withdrawal or deposit of funds from Visa and MasterCard member banks per their authorized transactions. 1.22 "Settlement Data" means the daily sales and return transactions and any adjustments made in processing of chargebacks or resubmitted rejects needed by the Settlement Processor in connection with each Merchant for each business day. 1.23 "Settlement Processor" means the entity designated by ECHO to perform the withdrawal or deposit of funds from Visa and MasterCard member banks in conjunction with authorized transactions and the transmission of such funds to the entity entitled thereto. 1.24 "Settlement Processor Reserve Account" means the ECHO demand deposit account at Bank established and funded by ECHO pursuant to the provisions of Section 6.4.5 and to be used to reimburse Bank according to the provisions of Section 6.3.5. 1.25 "Total DDA Balances" means the end of month total funds on deposit in Demand Deposit Accounts, Money Market Accounts, and reserve accounts at Bank. 1.26 "Visa" means Visa U.S.A. ARTICLE 2 - REPRESENTATIONS AND WARRANTIES OF ECHO ECHO represents and warrants that as of the effective date of this Agreement: 2.1 Due Organization. ECHO is duly organized and validly existing in good standing under the laws of the jurisdiction of its organization, and is duly qualified to conduct business in each jurisdiction which its business is conducted. 2.2 Authorization, Validity and Enforceability. The execution, delivery and performance of this Agreement executed by ECHO is within ECHO's powers, has been duly authorized, and is not in conflict with ECHO's articles of incorporation or by-laws, or the terms of any charter or other organizational document of ECHO; and that this Agreement constitutes a valid and binding obligation of ECHO, enforceable in accordance with its terms. 2.3 Compliance with Applicable Laws. ECHO has complied with all licensing, permit and fictitious name requirements to lawfully conduct the business in which it is engaged. 2.4 No Conflict. The execution, delivery and performance by ECHO of this Agreement is not in conflict with any law, rule, regulation, order or directive, or any indenture, agreement, or undertaking to which ECHO is a party or by which ECHO may be bound or affected. 2.5 No Event of Default. No Event of Default has occurred and is continuing. ARTICLE 3 - REPRESENTATIONS AND WARRANTIES OF BANK Bank represents and warrants that as of the effective date of this Agreement: 3.1 Due Organization. Bank is duly organized and validly existing in good standing under the laws of the jurisdiction of its organization, and is duly qualified to conduct business in each jurisdiction which its business is conducted. 3.2 Authorization, Validity and Enforceability. The execution, delivery and performance of this Agreement executed by Bank is within Bank's powers, has been duly authorized, and is not in conflict with Bank's articles of incorporation or by-laws, or the terms of any charter or other organizational document of Bank; and that this Agreement constitutes a valid and binding obligation of Bank, enforceable in accordance with its terms. 3.3 Compliance with Applicable Laws. Bank has complied with all licensing, permit and fictitious name requirements to lawfully conduct the business in which it is engaged. 3.4 No Conflict. The execution, delivery and performance by Bank of this Agreement is not in conflict with any law, rule, regulation, order or directive, or any indenture, agreement, or undertaking to which Bank is a party or by which Bank may be bound or affected. 3.5 No Event of Default. No Event of Default has occurred and is continuing. ARTICLE 4 - CONDITIONS PRECEDENT OF BANK 4.1 Required Delivery. The obligation of ECHO to perform any services under this Agreement is subject to the condition that, on or before the date of any requested service by Bank, there shall have been delivered to ECHO, in form and substance satisfactory to ECHO, and duly executed as required by ECHO: (a) This Agreement; (b) Any and all documents or agreements required by ECHO to evidence approval by Visa and/or MasterCard, of Bank to become a primary credit card processing bank; (c) Such authorization documents as ECHO may require evidencing the authorization, validity and enforceability of this Agreement as executed by Bank; (d) Evidence from the appropriate governmental or regulatory authority or authorities, if required, such as the California State Banking Department, evidencing the approval and/or consent to any transactions or events related to the implementation of this Agreement and any services and/or transactions contemplated hereby; (e) Such other documents, instruments or agreements as ECHO may require. ARTICLE 5 - CONDITIONS PRECEDENT OF ECHO 5.1 Required Delivery. The obligation of Bank under this Agreement is subject to the condition that, on or before the date of the performance of any activities by Bank hereunder, there shall have been delivered to Bank, in form and substance satisfactory to Bank, and duly executed as required by Bank: (a) This Agreement; (b) Such authorization documents as Bank may require evidencing the authorization, validity and enforceability of this Agreement as executed by ECHO; (c) Such other documents, instruments or agreements as Bank may require. ARTICLE 6 - DUTIES OF ECHO ECHO agrees to assist Bank in filing its applications to Visa and MasterCard to become a primary credit card processing bank. During the term of this Agreement ECHO will, unless Bank otherwise consents in writing: 6.1 SALES AND MARKETING 6.1.1 Sales and Marketing Compliance. Conduct its Merchant solicitation activities in strict compliance with the rules and regulations of Visa, MasterCard and this Agreement, and use its best efforts to solicit Merchants for the Bank's Merchant Services program so that the number of new Merchants added averages per month or Merchant sales volume increases by not less than $ million annually. 6.1.2 Use of Employees. Staff sales, installation, service and other positions performing functions under this Agreement with employees who are individuals under the exclusive control of ECHO. Should ECHO determine it necessary, in its sole discretion, to utilize the services of non-employees, ECHO shall be responsible to assure that all acts performed by any such non-employees are conducted in accordance with the terms and conditions of this Agreement. 6.1.3 Marketing Materials. Produce marketing materials for the purpose of marketing Bank's Merchant Services program. The amount and type of any such marketing materials shall be within the sole discretion of ECHO, provided, however, all such marketing materials shall not be used or implemented by ECHO without the approval of Bank. The cost of creating and producing any such marketing materials shall be the sole cost and expense of ECHO. 6.1.4 Merchant Documentation. Obtain completed, properly executed applications and other documentation, as required by Bank, from each prospective Merchant, provide same to Bank for review according to Bank's Merchant approval criteria as defined by Bank from time to time. 6.1.5 Installation and Training. Provide such installation and training activities necessary and adequate for the implementation of Bank's Merchant Services at all Merchant locations. 6.1.6 Registration of ECHO. Provide Bank with sufficient copies of ECHO's current audited financial statements, as well as any other documentation reasonably necessary to allow Bank to register ECHO as (i) a remote originator with the Federal Reserve Bank, (ii) Merchant Service Provider ("MSP") with MasterCard, and (iii) an Independent Service Organization ("ISO") with Visa on an annual basis. ECHO further agrees to reimburse Bank, upon receipt of written demand, for all out-of-pocket registration fees imposed by Visa and MasterCard and the Federal Reserve Bank, incurred by Bank in connection with the registration of ECHO with Visa and MasterCard and the Federal Reserve Bank, as well as any out-of- pocket costs imposed in connection with Bank's assistance to ECHO as set forth in section 7.20. 6.2 AUTHORIZATION 6.2.1 Authorization Services. ECHO agrees to provide computer systems necessary and sufficient to permit Authorization consistent with the requirements of Visa or MasterCard for Merchants utilizing Settlement. ECHO shall not be required to provide "Authorization Only" services to any Merchant. 6.3 SETTLEMENT 6.3.1 Update of Settlement Processor Files. Provide appropriate Merchant information directly to the Settlement Processor necessary and sufficient to identify each Merchant to permit Settlement. The decision to commence or terminate a Merchant's processing with Visa or MasterCard shall be the sole decision of Bank. 6.3.2 Daily Settlement Data. Prepare and transmit to the Settlement Processor, on behalf of Bank, information pertaining to the sales and return transactions and any adjustments made in the processing of chargebacks or resubmitted rejects in connection with each Merchant for the previous business day. The time for transmission of the daily Settlement Data and the format for such information shall be as agreed between ECHO and the Settlement Processor. 6.3.3 Settlement Funds. Cooperate with Bank in the process of balancing funds transmitted to Bank by the Settlement Processor's bank. 6.3.4 Merchant Charges. ECHO agrees to assess each Merchant, either directly or through the ACH system, charges, fees and discounts in such amounts and at such times as set forth in the credit card agreement between Merchant and Bank. Bank and ECHO acknowledge and agree that the nature, type and amounts of each charge, fee or discount to be assessed to each Merchant shall be as agreed upon between Bank and ECHO from time to time. 6.3.5 Settlement Processor Fees and Charges. At the weekly disbursements, reimburse Bank for all fees and charges incurred by Bank for Settlement services provided to Bank by the Settlement Processor. 6.3.6 MasterCard/Visa Fees, Charges and Discounts. Reimburse Bank for all fees, charges and discounts incurred by Bank for credit card services provided to Bank by MasterCard and Visa. 6.3.7 Daily ACH Data. ECHO shall submit ACH Data daily to fulfill any and all authorized requests. 6.4 FUNDS DISTRIBUTION 6.4.1 Merchant Bank Card Processing Funds. Arrange for all Merchant bank card processing funds to be deposited directly with Bank and available to each Merchant pursuant to the terms of the appropriate Merchant agreement, as amended from time to time, between each Merchant and Bank. ECHO further agrees to provide Bank with all data necessary and sufficient to fully reconcile daily deposit transactions of merchant bank card processing funds and any further assistance in connection with reconciliation as Bank may request from time to time. 6.4.2 Funds Distribution Instructions. Each business day, transmit Funds Distribution Instructions to the appropriate Federal Reserve Bank ("FRB") in ACH format. 6.4.3 Bank Compensation. ECHO agrees that Bank shall be entitled to receive a specified percentage of the sum of each day's sales transactions, exclusive of returns and Chargebacks, for each Merchant, payable weekly, and calculated on aggregate monthly sales transactions, exclusive of returns and Chargebacks, in accordance with the following table: Percentage Previous Monthly Aggregate Average DDA Balances of ECHO Merchants and ECHO Corporate Deposits % Less than and up to $ million % Greater than $ million and up to $ million % Greater than $ million and up to $ million % Greater than $ million and up to $ million % Greater than $ million and up to $ million % Greater than $ million Bank acknowledges and agrees that it will perform all reasonable activities requested of it by ECHO for the purpose of reconciling each week's sales and return activity for the purpose of assisting ECHO in calculating the amount of compensation payable to Bank. 6.4.4 ECHO Compensation. As compensation for its services under this Agreement, Bank agrees that ECHO shall be entitled to receive all charges, fees and discounts received from each Merchant, either directly or through the ACH system, subject to ECHO's obligations under Article 6, Section 6.4, payable weekly. 6.4.5 Reserve Accounts. ECHO agrees to establish with Bank the following reserve accounts. (a) Chargeback Reserve Account. (b) Settlement Processor Reserve Account. (c) MasterCard/Visa Reserve Account. Bank acknowledges and agrees that ECHO shall be the account holder on each reserve account and is the owner of all funds deposited in each reserve account, and of all interest on each account which shall accrue at the then current money market account rate, subject to the terms and conditions of this Agreement. ECHO agrees to contribute to each reserve in such amounts and at such times as agreed upon between ECHO and Bank, in writing. 6.5 CHARGEBACKS 6.5.1 Reimbursement For Chargebacks and/or Merchant Fraud. Immediately, reimburse Bank for losses actually incurred as a result of Chargebacks and/or Merchant fraud. Should ECHO fail to reimburse Bank, Bank may charge such amounts against ECHO's chargeback reserve account. Upon request by ECHO, Bank shall assign to ECHO any and all Merchant agreements, Demand Deposit Accounts, Money Market Accounts, and reserve accounts pertaining to each Merchant for which Bank has received a Chargeback loss or Merchant fraud loss reimbursement. ECHO shall have the right to notify the Bank that it will not continue to process for any specific Merchant. Such notice shall be given in writing and shall not negate ECHO's reimbursement obligation to the Bank up to the date of such notice. Bank may require by written notice that ECHO continue to process for such merchant, but in such case, Bank shall assume all chargeback and fraud liability for any activity processed after ECHO's notice was given to Bank. 6.6 SECURITY; MONITORING 6.6.1 Supervision/Monitoring of Chargebacks, Security in New Accounts. Participate with Bank in the performance of security exception monitoring on a daily basis, in accordance with parameters established by Bank and using reports generated by ECHO and the Settlement Processor. Such security exception monitoring shall be undertaken for the purpose of evaluating and identifying Merchants with significant increases in average daily and/or weekly deposits, significant variations in average tickets amounts, significant variations in nonmagnetic card entry activity, and any other subsequently identified categories. ECHO further agrees to participate with Bank in researching any Merchant for which Bank and ECHO have identified questionable or suspicious transactions. At Bank's direction, ECHO agrees to follow Bank's policies and procedures for freezing, halting, and/or delaying the availability of ACH fund transfers or suspensions of current day and subsequent deposit or withdrawal activity for any Merchant until such time as Bank informs ECHO to make any ACH fund transfers available to the Merchant. Within 2 business days of preparation, ECHO agrees to provide daily and monthly security reports to Bank. ECHO agrees to notify Bank immediately upon receipt, of any information received by ECHO pertaining to the insolvency or bankruptcy, of any Merchant or any other adverse information indicating a violation of Visa and/or MasterCard regulations or information indicating illegal activity by or adverse information about any Merchant or any information which may indicate that a Merchant is using the Bank's Merchant Services for other than the sale of products and services initially approved for Merchant's business location. Bank acknowledges and agrees that ECHO has no affirmative obligation or responsibility to seek out any such information pertaining to a Merchant, but only has the obligation to report any such information as it may be received by ECHO from time to time. ECHO agrees to follow Bank's policies and procedures regarding Merchant change of ownership and/or change of address that may occur from time to time. 6.6.2 Merchant Review After Commencement of Processing. Perform a review of each Merchant application, business activities and retail location within 60 days after any Merchant's processing volume exceeds $ per month for the first time. Within 10 days after the end of each calendar month, ECHO will provide to Bank a listing of Merchants that meet this criteria for the immediately preceding calendar month. The review of any such Merchant's retail location may include on-going visits to such Merchant's retail location by ECHO field service personnel at ECHO's sole expense. Upon completion of each Merchant review pursuant to this paragraph, ECHO agrees to provide to Bank a written summary of said Merchant review for the Merchant account file within 10 business days of completion. 6.7 CUSTOMER SERVICE 6.7.1 Customer Service. Provide customer service to Merchants 7 days a week, 24 hours a day. This customer service activity shall be available to Merchants via 800 number line access for the purpose of responding to Merchant inquiries regarding credit card transactions, equipment operation, and repair services offered. At ECHO's sole election and determination, ECHO may provide field service to merchants. 6.7.2 Merchant Supplies; Invoice Merchants. Provide all supplies to Merchants needed to participate in Bank's Merchant Services program, such as printer paper, ribbons, extra transaction detail reports, imprinters, and imprinter plates. ECHO shall submit accumulated electronic files to Bank reflecting Merchant charges for supplies, transaction fees, discount fees and equipment lease fees for ECHO's billing each calendar month no later than the 5th business day following the end of each calendar month, utilizing the ACH system. ECHO shall incur the costs of generating and submitting such files and Bank shall be appropriately identified as the source of the automatic deductions notice mailed to Merchants reflecting the deduction of such charges from each Merchant Demand Deposit Account. 6.7.3 Merchant Qualification. Provide the technical enhancements needed to permit the qualification of Merchant sales and return transactions for any discounted interchange programs offered by Visa and/or MasterCard. 6.7.4 Electronic File Processing. Coordinate the Authorization, Settlement, Draft Capture Services, electronic deposit, and Chargeback processing services for Bank for Merchant Service by ECHO. Any such services shall be provided via access only to ECHO's proprietary computer system/network, 7 days each week 24 hours a day. 6.7.5 On-Line Access. Provide Bank with access to individual Merchant's credit card activity. All costs and expenses such as telecommunication, software and hardware costs related to the conduct of such retrieval access to Merchant data files shall be the sole responsibility and liability of Bank. 6.7.6 Insolvency or Bankruptcy of ECHO. Provide Bank with ECHO's data files reasonably necessary and sufficient to permit Bank to convert Merchants serviced by ECHO pursuant to this Agreement to another processing servicer in the event of the insolvency or bankruptcy of ECHO and which results in ECHO's inability to materially perform its duties under this Agreement. Upon the completion of any conversion pursuant to this paragraph, all compensation to ECHO shall cease. 6.7.7 Disaster Contingency Plan. Develop a contingency plan to assure continuity of service to Merchants by ECHO under this Agreement in the event of disaster. Bank agrees that any technical, operational, software or hardware methods or systems that ECHO discloses to Bank will only be used in the event of and in accordance with occurrences, circumstances and conditions described in the contingency plan. ECHO agrees that any technical, operational, software or hardware methods or systems that Bank discloses to ECHO will only be used in the event of and in accordance with occurrences, circumstances and conditions described in the contingency plan. 6.7.8 Financial Statements. Provide Bank with copies of ECHO's (i) annual audited financial statements and statement of operations within 10 calendar days of completion and (ii) 10Q and 10K reports within 10 days of filing with the Securities and Exchange Commission. 6.8 Financial Covenant. ECHO agrees to remain qualified for NASDAQ. Bank acknowledges and agrees that it shall not be a breach of this covenant if ECHO fails to remain qualified for NASDAQ unless such failure is a material cause of ECHO's inability to perform its duties under this Agreement. 6.9 Press Releases. Provide Bank with copies of any press release proposed by ECHO pertaining or relating to Merchant Services. ECHO further agrees not to issue any press release pertaining or relating to Merchant Services provided through Bank except in form and content satisfactory to Bank. ARTICLE 7 - DUTIES OF BANK During the term of this Agreement Bank will, unless ECHO otherwise consents in writing: 7.1 Merchant Services Program Management. Establish policies and procedures applicable to the provision of Merchant Services, including, but not limited to, policies and procedures for Merchant qualification, approval, Pricing Guidelines and contracts and agreements to be entered into by Merchants. 7.2 Registration of ECHO. Register, and annually re-register, ECHO as a Merchant Service Provider ("MSP") with MasterCard and as an Independent Service Organization ("ISO") with Visa. 7.3 Forms. Provide sufficient copies of all appropriate Merchant applications, agreements, forms, and other documents, including all supplements and addenda thereto, for use by ECHO in connection with its sales and marketing activities to Merchants in connection with Bank's Merchant Services program. Bank agrees that the cost and expense of preparing and providing all of the necessary Merchant applications, agreements, forms and documents shall be the sole responsibility of Bank. 7.4 Merchant Documentation. Review applications, agreements, forms, and documentation completed by or with respect to all prospective Merchants utilizing the qualification criteria established by Bank from time to time as the basis for acceptance or rejection of each prospective Merchant. Any decision to accept or reject a prospective Merchant, or terminate an existing Merchant, shall be the sole responsibility of Bank. Bank acknowledges and agrees that it will not accept a prospective Merchant that utilizes paper draft processing. 7.5 Exclusivity; Non-competition. Not enter into any new relationship with any other person or entity which would interfere or compete with ECHO's relationship with Bank pursuant to this Agreement provided that ECHO continues to meet the production standard for growth in the number of Merchants or the Merchant sales volume as set forth in Section 6.1.1 hereof. Bank acknowledges and agrees that ECHO may provide its services through other credit card processing banks and financial institutions in addition to Bank provided that ECHO continues to meet the production standard for growth in the number of Merchants or the Merchant sales volume as set forth in Section 6.1.1 hereof. 7.6 Registration of ECHO with the Federal Reserve Bank. Register ECHO with the Federal Reserve Bank ("FRB") as a remote originator with ACH or any other registration necessary to permit electronic funds transfer activity in connection with Bank's Merchant Services credit card program. ECHO's check truncation and similar programs shall be governed by separate written agreements between the parties. 7.7 ACH Rejects. Each business day, provide ECHO with a list of all ACH rejects received by Bank for the immediately preceding business day in form and content mutually acceptable to ECHO and Bank. 7.8 Supervision of Chargeback, Security and New Accounts. Bank may, but is not required to, provide supervision of ECHO's management, compliance and reporting functions relating to chargeback processing, new account management and any other duties agreed upon between Bank and ECHO. ECHO agrees that no advance notice will be necessary and that Bank shall be able to perform such supervision at any time Bank chooses. Any and all costs and expenses incurred by Bank in connection with such supervision shall be the sole responsibility of Bank. 7.9 Security Exception Monitoring. Bank may, but is not required to, perform, in cooperation with ECHO, security exception monitoring on a daily basis, according to parameters established by Bank and using reports generated by ECHO and the Settlement Processor. The security exception monitoring parameters established by Bank shall be provided by Bank to ECHO and the Settlement Processor in writing. 7.10 Settlement Processor Reports. Cause the Settlement Processor to deliver duplicate daily settlement reports to ECHO daily, for the immediately preceding business day, in form and content sufficient to permit timely reconciliation of rejects and chargebacks. 7.11 Demand Deposit Account Information. Provide ECHO with the name, address, account number and account balance, via on-line, real time computer access, of each Merchant Demand Deposit Account with Bank. All costs and expenses related to such access to Demand Deposit Account Information shall be the sole responsibility of ECHO. 7.12 Dispute of Settlement Processor Charges. Provide all reasonable assistance and information requested by ECHO and deemed by it as necessary to dispute charges assessed to Bank by the Settlement Processor. Bank acknowledges and agrees that its assistance to ECHO shall include, but not be limited to, communication by Bank with the Settlement Processor pertaining to ECHO's relationship with Bank and any disputed fees or charges assessed by the Settlement Processor. 7.13 Visa and MasterCard Policies and Procedures. Provide ECHO, within 5 calendar days of receipt, with copies of all written materials received from Visa and MasterCard including, but not limited to, each company's credit card interchange policies, procedures, operations manuals, updates, bulletins, rules and regulations necessary and sufficient to permit ECHO to perform all of its duties under this Agreement. 7.14 Settlement Processor Policies and Procedures. Provide ECHO, within 5 calendar days of receipt, with copies of all written materials received from the Settlement Processor, including, but not limited to, the Settlement Processor's credit card processing policies, procedures, operation manuals, updates, bulletins, rules and regulations necessary and sufficient to permit ECHO to perform all of its duties under this Agreement. 7.15 Bank Assistance with Visa and MasterCard. Bank will actively promote ECHO and its association with ECHO to Visa and MasterCard. Should either Visa or MasterCard make requests upon Bank regarding ECHO or Bank's Merchant Services, Bank will inform ECHO of such requests immediately and, if necessary, assist ECHO in satisfying such requests. Such assistance will not require additional compensation by ECHO to Bank but all expenses incurred by Bank will be paid by ECHO including but not limited to legal fees and administrative expenses. Bank acknowledges this role as a facilitator in such a situation is one of their primary responsibilities in this Agreement. 7.16 Bank Credit Card Profitability. Within 10 days after the end of each quarter, provide ECHO with such reports, in form and content mutually satisfactory to Bank and ECHO, that will demonstrate the on-going profitability of Bank's bankcard department or division. 7.17 Financial Statements. Provide ECHO with copies of Bank's Annual Report, and Quarterly Call Reports upon request. 7.18 Press Releases. Provide ECHO with copies of any press release proposed by Bank pertaining or relating to Merchant Services. Bank further agrees not to issue any press release pertaining or relating to Merchant Services provided through ECHO except in form and content satisfactory to ECHO. 7.19 Merchant Termination. Permit ECHO to notify each Merchant on behalf of Bank for which Bank has authorized the termination of the provision of Merchant Services. Bank acknowledges and agrees that, in the event ECHO advises Bank that ECHO will no longer process for a specific Merchant, the Bank will either terminate said Merchant or assume any and all liabilities, including chargeback and fraud activity, that may arise out of future processing services provided to said Merchant. 7.20 Settlement/Authorization Processor Certification. Bank agrees to perform any and all acts reasonably requested of it by ECHO necessary and sufficient to assist ECHO in the process of becoming certified by Visa and MasterCard as the authorized Settlement/Authorization Processor for Bank pursuant to this Agreement, including sponsorship of ECHO as a MasterCard and Visa Authorization Processor. ECHO agrees to reimburse Bank for all out-of- pocket costs incurred by Bank and charged by the Federal Reserve Bank, Visa and/or MasterCard relating thereto. 7.21 Agent Bank Processing. Bank agrees to allow any approved agent bank, including EC Bank (proposed), to be added to Bank's Settlement Processor arrangement, under the Settlement Processor Agreement currently in effect, and with appropriate indemnities in favor of Bank, for the purpose of settling agent bank's merchant sales transaction. All costs associated with setup and settlement shall be borne by ECHO. 7.22 Merchant Termination Coordinator. Permit ECHO to coordinate and determine the disengagement plan for any merchant Bank desires to terminate. Such plan shall take no longer than four months to conclude termination and shall be provided to Bank in writing and shall be subject to Bank's reasonable approval. ECHO's guarantee against chargeback losses shall be invalid immediately for all chargeback losses from the merchant being terminated on the day Bank fails to follow disengagement plan set out by ECHO under this section or takes such action that would negatively effect the disengagement plan in such a way to generate greater liability to ECHO or Bank. 7.23 Volume Restrictions. Anything in this Agreement to the contrary notwithstanding, Bank shall not be obligated to process Merchant sales volume in excess of the maximum dollar volumes, if any, established from time to time ("Volume Restrictions") by Visa, MasterCard, or by any bank regulatory authority having jurisdiction over Bank or by Bank, in its reasonable judgment, based upon risk exposure or capital requirements. The Bank's inability to accept new merchants or process additional Merchant sales volume due to Volume Restrictions shall not constitute a breach of Section 6.1.1. by either party nor shall it relieve the Bank from the restrictions imposed under Section 7.5 hereof. ARTICLE 8 - GENERAL 8.1 Notices. Any notice given by any party under this Agreement shall be in writing and personally delivered, deposited in the United States mail, postage prepaid, or sent by tested telex, or facsimile transmission or other authenticated message, charges prepaid, and addressed as follows: TO BANK: TO ECHO: First Regional Bank Electronic Clearing House, Inc. 28310 Roadside Dr., #250 28001 Dorothy Drive Agoura Hills, CA 91301 Agoura Hills, CA 91301-2697 Attention: Merchant Services Attn: Jack Wilson FAX or Telex No.: (818) 735-9699 FAX or Telex No.: (818) 879-7165 Each party may change the address to which notices, requests and other communications are to be sent by giving written notice of such change to either party. 8.2 Binding Effect. This Agreement shall be binding upon and enure to the benefit of ECHO and Bank and their successors and assigns; provided, however, that neither Bank nor ECHO may assign or transfer either party's rights or obligations under this Agreement without the prior written consent of the other party. 8.3 No Waiver. Any waiver, permit, consent or approval by either party of any event of default or breach of any provision, condition or covenant of this Agreement must be in writing and shall be effective only to the extent set forth in writing. No waiver of any breach or default shall be deemed a waiver of any later breach or default of the same or any other provision of this Agreement. Any failure or delay on the part of either party in exercising any power, right or privilege under this Agreement shall not operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude any further exercise thereof. 8.4 Rights Cumulative. All rights and remedies existing in this Agreement are cumulative to, and not exclusive of, any other rights or remedies available under contract or applicable law. 8.5 Unenforceable Provisions. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction, shall be so only as to such jurisdiction and only to the extent of such prohibition or unenforceability, but all remaining provisions of this Agreement shall remain valid and enforceable. 8.6 Execution in Counterparts. This Agreement may be executed in any number of counterparts which, when taken together, shall constitute but one agreement. 8.7 Further Assurances. At any time or from time to time upon the request of either party, the other party will execute and deliver such further documents and do such other acts as the requesting party may reasonably request in order to effect fully the purposes of this Agreement and provide for the performance of all contemplated acts and activities in accordance with the terms of this Agreement. 8.8 Indemnification By ECHO. ECHO shall indemnify Bank against, and hold Bank harmless from and against, all claims, actions, losses and expenses, including attorneys' fees and costs incurred by Bank, arising from, related to or in connection with any breach by ECHO of any of its duties or obligations under this Agreement. This indemnification shall survive the termination of this Agreement. 8.9 Indemnification By Bank. Bank shall indemnify, defend and hold harmless ECHO, from and against all claims, actions, losses, and expenses, including attorneys' fees and costs incurred by ECHO, arising from, related to, and in connection with, any breach by Bank of any of its duties or obligations under this Agreement. This indemnification shall survive the termination of this Agreement. 8.10 Term. This Agreement will be for an initial term of five (5) years from the effective date set forth in the preamble and full execution hereof and shall be subject to automatic renewals for five (5) year periods unless previously terminated by either party in accordance with the terms herein. 8.11 Non-Circumvention. Bank hereby acknowledges and agrees that ECHO "owns" all Merchants processing under this Agreement, except for Bank- originated Merchants. Bank also acknowledges ECHO's significant investment in Merchant processing services and in building a volume of Merchant processing activity. Bank agrees that it will not attempt to circumvent ECHO by soliciting Merchants who process through ECHO to process through another source. 8.12 Termination. Either party may terminate this Agreement without cause effective at the end of the initial term, or any renewal thereof, upon not less than 180 days prior written notice. Except as otherwise provided for in Section 8.14, if this Agreement is terminated by either party, the Chargeback Reserve Account shall remain at Bank for a period of one (1) year following termination, unless another qualified sponsoring bank assumes liability for all chargebacks and merchant fraud. 8.13 Termination For Cause. In addition to the termination provisions set forth in Section 8.12, either Bank or ECHO may terminate this Agreement, for cause, at any time if either party commits fraud or any material breach of this Agreement, or is declared insolvent or bankrupt, and such insolvency or bankruptcy results in that party's inability to perform any of its respective duties under this Agreement. In addition, ECHO may (i) terminate this Agreement, and (ii) transfer Merchants to any other bank performing Merchant Services for Visa and/or MasterCard upon the occurrence of any of the following events: i) Bank fails to qualify for, or maintain, Visa or MasterCard qualification as a credit card processing Bank; or ii) Bank's capital falls below the level required by the regulatory agency overseeing state chartered banks, presently the California Department of Financial Institutions, to be an "adequately" capitalized bank; or (i) Bank is merged with, or acquired by, any other entity and is not the survivor. Bank may terminate this Agreement in the event ECHO does not qualify as a remote originator due to the gross negligence of ECHO, or if any of the above items under (i) or (ii) were caused by the wilful act of ECHO. In the event ECHO terminates this Agreement for any of the causes set forth above, Bank agrees to assign all of its rights under any agreement between Bank and each Merchant, immediately upon ECHO's written request, to any bank identified by ECHO provided the new bank assumes all liability for any fraud or chargeback losses. Bank further agrees to transfer all Merchant files, records, and related documentation to the bank identified by ECHO and to provide all reasonable assistance requested by ECHO in the conversion and transfer of Merchant processing activity, Demand Deposit Accounts, Merchant reserve accounts established under any agreement between Bank and the Merchant, and the Reserve Accounts established pursuant to Section 6.4.5, or any other activity related to the provision of Merchant Services to any bank identified by ECHO. 8.14 Post Notice Of Termination Relationship. In the event either Bank or ECHO terminates this Agreement without cause, pursuant to the provisions of Section 8.12, ECHO shall continue to process under the sponsorship of Bank those Merchants approved by Bank under the terms of this Agreement, as well as new Merchants approved by Bank during the period following notice of termination. Adding new Merchants may continue for up to six (6) months following notice of termination. During the period following notice of termination, Bank shall not withhold its reasonable approval for any new Merchants marketed and added for processing by ECHO under the terms of this Agreement. All compensation and processing costs shall continue to be paid and ECHO's chargeback reserve account would continue to be maintained as set forth under this Agreement following notice of termination and for a period of one (1) year following the transfer of the Merchants to another qualified sponsoring bank. After termination, ECHO shall have the right to transfer Merchants to another qualified sponsoring bank over a twenty-four (24) month period in substantially equal installments so that the number of Merchants and their related demand deposit balances decline in a constant manner. Bank shall execute all necessary transfer and assignment documents to accommodate such transfer over a twenty-four (24) month period and compensation to Bank shall cease upon transfer of each respective group of Merchants. Bank shall not solicit Merchants to leave ECHO nor shall ECHO solicit Merchants to leave Bank. In the event ECHO terminates this Agreement pursuant to any of the provisions of Section 8.13, ECHO shall have the right to transfer Merchants to another qualified sponsoring bank and Bank shall execute all necessary transfer and assignment documents to accommodate such transfer and all compensation to Bank shall cease upon transfer of Merchants. If this Agreement is terminated for cause as defined in Section 8.13, the post termination relationship as set forth in this Section 8.14 does not apply except for ECHO's ability to add new Merchants as provided for in this Section. 8.15 Confidential Information and Trade Secrets. In connection with the services to be rendered by ECHO pursuant to this Agreement, ECHO will be providing Bank with certain information. Bank acknowledges and agrees that such information constitutes the Proprietary Information and trade secrets of ECHO ("Proprietary Information"). Bank further acknowledges and agrees that such Proprietary Information are the sole property of ECHO and that ECHO has the sole right, title and interest thereto, and Bank agrees that it shall not acquire, directly or indirectly, any rights, title or interest in or to any of such Proprietary Information. Bank agrees to treat such Proprietary Information on a secret and confidential basis and shall retain such Proprietary Information in secrecy and confidence during the term of this Agreement and for a period of three years after the termination of this Agreement. The Bank further agrees that access to any such Proprietary Information shall be strictly limited by Bank only to those persons in the Bank who have a need to evaluate and review the same. Bank further agrees to undertake all necessary steps to require its employees, agents, representatives and all others to whom it might disclose the Proprietary Information to retain the Proprietary Information in confidence during the term of this Agreement and for a period of three years after the termination of this Agreement. Bank further agrees to keep completely confidential names of any merchants, banks, lending institutions, corporations, organizations, individual or group of individuals, lenders or borrowers, buyers or sellers, introduced by ECHO or any individual or entity related to ECHO to Bank in connection with this Agreement or any of the transactions contemplated by this Agreement. Such names and identities shall remain confidential during the term of this agreement and for a period of three years thereafter, and such names and identities shall include any telephone numbers, addresses, faxes, telex numbers, et al. Bank further agrees, upon termination of this Agreement, to promptly return any documents or other materials obtained from ECHO prepared and/or delivered by ECHO to or for Bank in connection with this Agreement. Bank acknowledges and agrees that the services rendered by ECHO under this Agreement and the Proprietary Information provided by ECHO in connection with the rendition of those services are of a special, unique, unusual, extraordinary, and intellectual character, which give this Agreement peculiar value. Bank further acknowledges and agrees that any direct or indirect disclosure, or other improper use, of ECHO's Proprietary Information cannot be reasonably or adequately compensated in damages in an action at law. Accordingly, in addition to other remedies provided by law or this Agreement, ECHO shall have the right at any time after this Agreement is entered into, to obtain injunctive relief against the breach of this Agreement by Bank in connection with the direct or indirect disclosure, or other improper use of, ECHO's Proprietary Information. 8.16 Right of Setoff. Each party shall have a right of setoff with respect to any claims for any breach of this agreement. 8.17 Assignment. Except as otherwise provided herein, the rights and obligations of Bank and ECHO under this Agreement are personal and not assignable, either voluntarily or by operation of law, without the prior written consent of ECHO or Bank. Subject to the foregoing, all provisions contained in this Agreement shall extend to and be binding upon the parties hereto or their respective successors and permitted assigns. 8.18 Legal Fees. In the event of any dispute arising out of or in connection with this Agreement, the prevailing party shall be entitled to recover its reasonable attorney's fees and court costs in addition to any other recovery. 8.19 Jury Trial Waiver. In the event of any litigation, trial or other proceeding arising out of, related, or in connection with this Agreement, the parties agree that any such litigation, trial or proceeding shall be tried and heard by the Court only and not by a jury trial. 8.20 State Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California as to all matters including validity, construction, effect, performance and remedies without giving effect to the principles of choice of law thereof. For purposes of any lawsuit, action, or proceeding arising out of or relating to this Agreement, Bank and ECHO agree that any process to be served in connection therewith shall, if delivered, sent or mailed in accordance with Section 8.1, constitute good, proper and sufficient service thereof. 8.21 Headings. The headings listed after each section number in this Agreement are inserted for convenience only, do not constitute a part of the Agreement, and are not to be considered in connection with the interpretation or enforcement of this Agreement. 8.22 Force Majeure. If performance by ECHO of any service or obligation under this Agreement is prevented, restricted, delayed or interfered with by reason of labor disputes, strikes, acts of God, floods, lightning, severe weather, shortage of materials, rationing, utility or communication failures, failure of Visa or MasterCard or Settlement Processor, failure or delay in receiving electronic data, earthquakes, war, revolution, civil commotion, acts of public enemies, blockages, embargo, or any law, order, proclamation, regulation, ordinance, demand or requirement having legal effect of any government or any judicial authority or representative of any such government, or any other act or omission whatsoever, whether similar or dissimilar to those referred to in this clause, which are beyond the reasonable control of ECHO, then ECHO shall be excused from the performance to the extent of the prevention, restriction, delay or interference. 8.23 Entire Agreement. This Agreement, including Exhibits, sets forth all of the promises, agreements, conditions and understandings between the parties respecting the subject matter hereof and supersedes all negotiations, conversations, discussions, correspondence, memorandums and agreements between the parties concerning the subject matter. This Agreement may not be amended or modified except by a writing signed by authorized representatives of both parties to this Agreement. IN WITNESS WHEREOF, Bank and ECHO have executed this Agreement as of the date set forth in the preamble. ELECTRONIC CLEARING HOUSE, INC. By: ________________________________________ Jack Wilson Vice President FIRST REGIONAL BANK By: ________________________________________ Thomas E. McCullough Executive Vice President By: ________________________________________ Charles Arrindell Senior Vice President ADDENDUM TO AMENDED AND RESTATED MERCHANT MARKETING AND PROCESSING SERVICES AGREEMENT THIS ADDENDUM TO AMENDED AND RESTATED MERCHANT MARKETING AND PROCESSING SERVICES AGREEMENT ("Addendum") is made effective as of the 1st day of August, 2000, by and between First Regional Bank ("Bank") and Electronic Clearing House, Inc. ("ECHO"). RECITALS WHEREAS, Bank and ECHO have entered into that certain Amended and Restated Merchant Marketing and Processing Services Agreement ("Agreement") as of August 1, 2000; and WHEREAS, Section 6.4.3 of the Agreement specifies compensation to be received by the Bank based upon a percentage of the sum of each day's sales transaction for each Merchant; and WHEREAS, as a marketing promotion, ECHO wishes to provide new Merchants with processing at a lower rate than ECHO currently charges; and WHEREAS, in connection with the marketing promotion, ECHO has requested that the Bank forgo the compensation specified in Section 6.4.3, with respect to new Merchants only, and in lieu thereof to accept a flat processing fee equal to cents ($ ) per transaction; and WHEREAS, Bank is willing to accommodate ECHO on a temporary, experimental basis with this new pricing formula. NOW, THEREFORE, it is agreed by and between the parties as follows: 1. For a period of one (1) year from the date hereof, with respect to new Merchants who are signed up from and after August 1, 2000, Bank shall forgo the monies it would otherwise be entitled to under Section 6.4.3 of the Agreement, and in lieu thereof will receive from ECHO a processing fee equal to cents ($ ) per transaction. 2. The provisions of this Addendum, and particularly Paragraph 1 above, shall be applicable only to new Merchants, that is Merchants who have not processed their credit card business with, either Bank or ECHO under sponsorship of Bank, during the period from October 1, 1997 through August 1, 2000. 3. This Addendum, and the provisions thereof, shall be reviewed one (1) year from the execution of this Addendum. At that time, any extension of the provisions of this Addendum beyond one (1) year from the date of execution hereof shall be at the sole and absolute discretion of each of the parties hereto. 4. Should the parties not be able to agree, in writing, to extend this Addendum or revise its provisions within ninety (90) days of its expiration date, then all Bank compensation shall revert to the terms in Section 6.4.3. At that time, any extension of the provisions of this Addendum beyond one (1) year from the date of execution hereof shall be at the sole and absolute discretion of each of the parties hereto. Except as specifically set forth in this Addendum, all of the provisions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, this Addendum has been executed as of the date first hereinabove written. ELECTRONIC CLEARING HOUSE, INC. By: ________________________________ Jack Wilson Vice President FIRST REGIONAL BANK By: ____________________________ Thomas E. McCullough Executive Vice President By: ____________________________ Charles Arrindell Senior Vice President EX-27 2 0002.txt
5 1,000 12-MOS SEP-30-2000 SEP-30-2000 3,941 0 2,291 380 594 7,595 6,261 3,312 17,013 1,566 767 0 0 219 14,461 17,013 2,459 28,340 1,790 21,359 5,179 0 88 524 233 291 0 0 0 291 .01 .01
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