-----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, S51VXzQCh6IkzKKgMaIEFve/3Sxp7NODGbQxlcwE1i2EqMqJMXMpo1nQB+Cfw039 DNvp+2sSxg1Y4EAzoJ94tw== 0001015402-02-001584.txt : 20020509 0001015402-02-001584.hdr.sgml : 20020509 ACCESSION NUMBER: 0001015402-02-001584 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELECTRONIC CLEARING HOUSE INC CENTRAL INDEX KEY: 0000721773 STANDARD INDUSTRIAL CLASSIFICATION: FUNCTIONS RELATED TO DEPOSITORY BANKING, NEC [6099] IRS NUMBER: 930946274 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15245 FILM NUMBER: 02639600 BUSINESS ADDRESS: STREET 1: 28001 DOROTHY DR CITY: AGOURA HILLS STATE: CA ZIP: 91301-2697 BUSINESS PHONE: 8187068999 MAIL ADDRESS: STREET 1: 28001 DOROTHY DRIVE CITY: AGOURA HILLS STATE: CA ZIP: 91301 FORMER COMPANY: FORMER CONFORMED NAME: BIO RECOVERY TECHNOLOGY INC DATE OF NAME CHANGE: 19860122 10-Q 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange - --- Act of 1934 FOR THE PERIOD ENDED MARCH 31, 2002 OR Transition report pursuant to Section 13 or 15(d) of the Securities - --- Exchange Act of 1934 COMMISSION FILE NUMBER: 0-15245 ELECTRONIC CLEARING HOUSE, INC. (Exact name of registrant as specified in its charter) NEVADA 93-0946274 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 28001 DOROTHY DRIVE, AGOURA HILLS, CALIFORNIA 91301 (Address of principal executive offices) TELEPHONE NUMBER (818) 706-8999 WWW.ECHO-INC.COM (Registrant's telephone number, including area code; web site address) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No --- --- As of April 30, 2002, there were 5,796,109 shares of the Registrant's Common Stock outstanding. ELECTRONIC CLEARING HOUSE, INC. INDEX ----- PART I. FINANCIAL INFORMATION Page No. -------- Item 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED): Consolidated Balance Sheets 3 March 31, 2002 and September 30, 2001 Consolidated Statements of Operations 4 Three months and six months ended March 31, 2002 and 2001 Consolidated Statements of Cash Flows 5 Six months ended March 31, 2002 and 2001 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of 9 Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 2
PART I. FINANCIAL INFORMATION - -------------------------------- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS ELECTRONIC CLEARING HOUSE, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS MARCH 31, SEPTEMBER 30, 2002 2001 ------------ --------------- Current assets: Cash and cash equivalents $ 2,404,000 $ 4,147,000 Restricted cash 887,000 1,410,000 Accounts receivable less allowance of $345,000 and $313,000 1,825,000 1,864,000 Inventory, net 348,000 573,000 Prepaid expenses and other assets 158,000 137,000 ------------ --------------- Total current assets 5,622,000 8,131,000 Noncurrent assets: Long term receivables 17,000 21,000 Property and equipment, net 4,282,000 3,754,000 Real estate held for investment, net 152,000 252,000 Deferred tax asset 1,989,000 778,000 Other assets, net 803,000 800,000 Goodwill, net 4,934,000 5,185,000 ------------ --------------- Total assets $17,799,000 $ 18,921,000 ============ =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings and current portion of long-term debt $ 295,000 $ 240,000 Accounts payable 155,000 135,000 Settlement payable to merchants 520,000 618,000 Accrued expenses 1,187,000 1,395,000 Deferred income -0- 50,000 ------------ --------------- Total current liabilities 2,157,000 2,438,000 Long-term debt 1,902,000 744,000 ------------ --------------- Total liabilities 4,059,000 3,182,000 ------------ --------------- Commitments and contingencies Stockholders' equity: Convertible preferred stock, $.01 par value, 5,000,000 shares authorized: Series "K", -0- and 25,000 shares issued and outstanding -0- -0- Common stock, $.01 par value, 36,000,000 authorized: 5,835,357 and 5,809,121 shares issued; 5,796,109 and 5,769,873 shares outstanding 58,000 58,000 Additional paid-in capital 21,262,000 21,260,000 Accumulated deficit (7,111,000) (5,110,000) Less treasury stock at cost, 39,248 common shares (469,000) (469,000) ------------ --------------- Total stockholders' equity 13,740,000 15,739,000 ------------ --------------- Total liabilities and stockholders' equity $17,799,000 $ 18,921,000 ============ =============== See accompanying notes to consolidated financial statements.
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ELECTRONIC CLEARING HOUSE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS SIX MONTHS ENDED MARCH 31, ENDED MARCH 31, ------------------------- -------------------------- 2002 2001 2002 2001 ------------ ----------- ------------ ------------ Revenues: Processing revenue $ 4,061,000 $3,550,000 $ 7,868,000 $ 7,138,000 Transaction revenue 4,217,000 3,469,000 8,256,000 6,661,000 Terminal sales 54,000 108,000 129,000 206,000 Other revenue 54,000 253,000 54,000 354,000 ------------ ----------- ------------ ------------ 8,386,000 7,380,000 16,307,000 14,359,000 ------------ ----------- ------------ ------------ Costs and expenses: Processing and transaction expense 5,750,000 4,496,000 10,880,000 9,113,000 Cost of terminals sold 276,000 96,000 352,000 192,000 Other operating costs 1,075,000 933,000 1,996,000 1,789,000 Selling, general and administrative expenses 1,786,000 1,403,000 3,528,000 2,648,000 Amortization expense - goodwill 128,000 102,000 256,000 204,000 Legal settlement 2,500,000 -0- 2,500,000 -0- ------------ ----------- ------------ ------------ 11,515,000 7,030,000 19,512,000 13,946,000 ------------ ----------- ------------ ------------ (Loss) income from operations (3,129,000) 350,000 (3,205,000) 413,000 Interest income 14,000 54,000 36,000 117,000 Interest expense (24,000) (20,000) (38,000) (42,000) ------------ ----------- ------------ ------------ (Loss) income before provision for income taxes (3,139,000) 384,000 (3,207,000) 488,000 Benefit (provision) for income taxes 1,231,000 (217,000) 1,206,000 (299,000) ------------ ----------- ------------ ------------ Net (loss) income $(1,908,000) $ 167,000 $(2,001,000) $ 189,000 ============ =========== ============ ============ (Loss) earnings per share - Basic $ (0.33) $ 0.03 $ (0.35) $ 0.03 ============ =========== ============ ============ (Loss) earnings per share - Diluted $ (0.33) $ 0.03 $ (0.35) $ 0.03 ============ =========== ============ ============ Shares used in computing basic (loss) earnings per share 5,790,267 5,431,067 5,779,988 5,431,910 ============ =========== ============ ============ Shares used in computing diluted (loss) earnings per share 5,790,267 5,624,923 5,779,988 5,629,564 ============ =========== ============ ============ See accompanying notes to consolidated financial statements.
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ELECTRONIC CLEARING HOUSE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED MARCH 31, ------------------------- 2002 2001 ------------ ----------- Cash flows from operating activities: Net (loss) income $(2,001,000) $ 189,000 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation 307,000 178,000 Amortization of software 233,000 183,000 Amortization of goodwill 251,000 201,000 Provision for losses on accounts and notes receivable 203,000 202,000 Provision for obsolete inventory 200,000 7,000 Write-down of real estate 100,000 -0- Fair value of stock issued in connection with directors' compensation 45,000 -0- Deferred income taxes (1,211,000) 240,000 Legal settlement 1,300,000 -0- Changes in assets and liabilities: Restricted cash 523,000 53,000 Accounts receivable (250,000) (145,000) Inventory 25,000 (102,000) Prepaid expenses and other current assets (21,000) (9,000) Accounts payable 20,000 (28,000) Settlement payable to merchants (98,000) 297,000 Accrued expenses (176,000) (207,000) Deferred income (50,000) (2,000) Other receivable 4,000 (2,000) ------------ ----------- Net cash (used in) provided by operating activities (596,000) 1,055,000 ------------ ----------- Cash flows from investing activities: Other assets (26,000) (29,000) Purchase of equipment and software ( 958,000) (605,000) ------------ ----------- Net cash used in investing activities (984,000) (634,000) ------------ ----------- Cash flows from financing activities: Repayment of notes payable (65,000) (65,000) Repayment of capitalized leases (109,000) (21,000) Proceeds from exercise of stock options 11,000 -0- Repurchase of common stock -0- (115,000) ------------ ----------- Net cash used in financing activities (163,000) (201,000) ------------ ----------- Net (decrease) increase in cash (1,743,000) 220,000 Cash and cash equivalents at beginning of period 4,147,000 3,941,000 ------------ ----------- Cash and cash equivalents at end of period $ 2,404,000 $4,161,000 ============ =========== See accompanying notes to consolidated financial statements.
5 ELECTRONIC CLEARING HOUSE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - BASIS OF PRESENTATION: - ------------------------------------ The accompanying consolidated financial statements as of March 31, 2002, and for the three and six month periods then ended are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the financial position and the results of operations for the interim periods. The consolidated financial statements herein should be read in conjunction with the consolidated financial statements and notes thereto, together with management's discussion and analysis of financial condition and results of operations, contained in the Company's Annual Report to Stockholders incorporated by reference in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2001. The results of operations for the three and six months ended March 31, 2002 are not necessarily indicative of the likely results of operations for the entire fiscal year ending September 30, 2002. NOTE 2 - (LOSS) EARNINGS PER SHARE: - ----------------------------------------- The Company calculates net (loss) earnings per share as required by SFAS No. 128, "Earnings per Share".
Three months ended March 31, Six months ended March 31, ---------------------------- ---------------------------- 2002 2001 2002 2001 ------------- ------------- ------------- ------------- Net (loss) income $ (1,908,000) $ 167,000 $ (2,001,000) $ 189,000 ============= ============= ============= ============= Shares: Denominator for basic earnings per share - weighted-average shares outstanding 5,790,267 5,431,067 5,779,988 5,431,910 Effect of dilutive securities: Employee stock options -0- 168,856 -0- 172,654 Series K Convertible Preferred Stock -0- 25,000 -0- 25,000 ------------- ------------- ------------- ------------- Dilutive potential common shares -0- 193,856 -0- 197,654 ------------- ------------- ------------- ------------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 5,790,267 5,624,923 5,779,988 5,629,564 ============= ============= ============= ============= Basic (loss) earnings per share $ (0.33) $ 0.03 $ (0.35) $ 0.03 Diluted (loss) earnings per share $ (0.33) $ 0.03 $ (0.35) $ 0.03
Dilutive common stock equilvalents have been excluded from the calculation of diluted loss per share for the three and six months ended March 31, 2002, as their inclusion would be anti-dilutive to the loss per share calculation. Approximately 421,250 stock options for the three and six months ended March 31, 2001, were excluded from the calculation of diluted earnings per share as their effect would be antidilutive. However, these common stock equivalents could be dilutive in the future. 6 NOTE 3 - NON-CASH TRANSACTIONS: - ----------------------------------- Significant non-cash transactions for the six months ended March 31, 2002 were as follows: - A $1.3 million 15-year long-term promissory note was issued as part of the PLIC vs. ECHO legal settlement. - Capital equipment of $87,000 was acquired under capital leases. - The Company purchased and subsequently retired 25,000 shares of ECHO's common stock, which was pledged to the Company by a former merchant as collateral to a $54,000 chargeback receivable owed to the Company. Significant non-cash transaction for the six months ended March 31, 2001 was as follows: - An employee exercised stock options and executed a promissory note to the Company in the amount of $43,000. The note is interest bearing and fully secured by the underlying stock. NOTE 4 - INVENTORY: - ---------------------- The components of inventory are as follows: March 31 September 30 2002 2001 --------- ------------- Raw materials $ 69,000 $ 62,000 Finished goods 497,000 529,000 --------- ------------- $ 566,000 $ 591,000 Less: Allowance for obsolescence 218,000 18,000 --------- ------------- $ 348,000 $ 573,000 ========= ============= NOTE 5 - SHORT-TERM BORROWINGS AND LONG-TERM DEBT: - -------------------------------------------------------- Short-term borrowings and long-term debt consist of the following:
March 31 September 30 2002 2001 ----------- -------------- Term loan collateralized by corporate headquarters building, due February 15, 2009, bearing interest at 7.87% per annum $ 415,000 $ 438,000 Term loan collateralized by equipment, due 2005, bearing interest at prime rate, 4.75% at March 31, 2002 227,000 266,000 Long-term promissory note collateralized by corporate headquarters building, due March 25, 2017, bearing interest at 8.00% per annum 1,300,000 -0- 7 NOTE 5 - CONTINUED - ------------------ Capital leases 255,000 277,000 Notes payable, bearing interest at 9.5% -0- 3,000 ----------- -------------- 2,197,000 984,000 Less: current portion (295,000) (240,000) ----------- -------------- Total long-term debt $1,902,000 $ 744,000 =========== ==============
NOTE 6 - SEGMENT INFORMATION: - -------------------------------- The Company currently operates in two business segments: bankcard and transaction processing, 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 the Company's product lines. 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. The Company has consolidated the segment information for terminal sales into the bankcard and transaction processing segment due to the decreased significance of terminal sales.
Three Months Ended Six Months Ended March 31 March 31 ------------------------- -------------------------- 2002 2001 2002 2001 ------------ ----------- ------------ ------------ Revenues: Bankcard and transaction Processing $ 6,824,000 $6,068,000 $13,419,000 $12,124,000 Check-related products 1,508,000 1,059,000 2,834,000 1,881,000 Other 54,000 253,000 54,000 354,000 ------------ ----------- ------------ ------------ $ 8,386,000 $7,380,000 $16,307,000 $14,359,000 ============ =========== ============ ============ (Loss) income from operations: Bankcard and transaction Processing $ 338,000 $ 885,000 $ 1,123,000 $ 1,502,000 Check-related products (305,000) 5,000 (419,000) (123,000) Other - corporate expenses (3,162,000) (540,000) (3,909,000) (966,000) ------------ ----------- ------------ ------------ $(3,129,000) $ 350,000 $(3,205,000) $ 413,000 ============ =========== ============ ============
NOTE 7 - LITIGATION - ---------------------- In March 2002, the Company's Board of Directors approved a settlement agreement with Premier Lifestyle International Corporation ("PLIC") for $2,500,000 related to the lawsuit PLIC vs. ECHO. This agreement settled all claims between the two parties and the Company made no admission of liability as part of this settlement. As consideration for the settlement, the Company made a one-time cash payment of $1,200,000 to PLIC and executed a long-term promissory note secured by one office building in favor of PLIC for an additional $1,300,000, payable over 15 years, bearing interest at 8% per annum. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------------ CONDITION AND RESULTS OF OPERATIONS --------------------------------------- FORWARD-LOOKING STATEMENTS The following discussion of the financial condition and results of operations of Electronic Clearing House, Inc. ("ECHO" or the "Company") should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein. This discussion contains forward-looking statements, including statements regarding the Company's strategy, financial performance and revenue sources, which involve risks and uncertainties. The Company's actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth elsewhere herein. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's discussion and analysis of financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, management evaluates its estimates, including those related to revenue recognition, deferred taxes, goodwill amortization, capitalization of software costs, contingencies and litigation. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Management applies the following critical accounting policies in the preparation of our consolidated financial statements: - Revenue Recognition Policy. All processing and transaction revenues are recognized at the time the transactions are processed by the customer. Processing and transaction revenues are principally based on the number of transactions processed and a percentage of dollar volume processed. Terminal sales are recorded when product is shipped and title transferred to the customer. - Deferred Taxes. Deferred taxes are determined based on the differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In assessing the need for a valuation allowance, management considers estimates of future taxable income and ongoing prudent and feasible tax planning strategies. - Goodwill Amortization. Goodwill represents the excess of purchase price over tangible and other intangible assets acquired less liabilities assumed arising from business combinations and is being amortized on a straight-line basis over estimated useful lives ranging from 10 to 15 years. SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), issued in June 2001, requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires companies to complete a transitional goodwill impairment test six months from the date of adoption. The Company is currently evaluating the impact SFAS 142 will have on its financial statements and the results of its operations. The Company plans to adopt SFAS 142 by the first quarter of fiscal 2003. - Capitalization of Software Costs. The costs of purchased and internally developed software used to provide services to customers or internal administrative expenses are capitalized and amortized on a straight-line basis over the lesser of three years or estimated useful life. Under the provisions of Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal 9 Use," the Company capitalizes software costs when both the preliminary project stage is completed and management has authorized further funding for the completion of the project. Three Months Ended March 31, 2002 and 2001 - ------------------------------------------ NET LOSS. Electronic Clearing House, Inc. recorded a net loss of $1,908,000 for the second quarter of fiscal year 2002 as compared to a net income of $167,000 in the same period last year, primarily due to a $2.5 million legal settlement. Loss before income tax benefits for the second quarter of fiscal year 2002 was $3,139,000 versus income before provision for income taxes of $384,000 for the same period last year. Both basic and diluted losses per share were $0.33 for the three months ended March 31, 2002, as compared to both basic and diluted earnings per share of $0.03 for the same period last year. REVENUE. Total revenue for this quarter was $8,386,000, compared to $7,380,000 for the same period last year, an increase of 13.6%. Total processing and transaction revenue for this second fiscal quarter increased 17.9%, from $7,019,000 in fiscal 2001 to $8,278,000 in fiscal 2002. Bankcard processing and transaction revenue increased 12.5%, from $6,068,000 in second fiscal quarter 2001 to $6,824,000 for this fiscal quarter. This increase was mainly attributable to a 16.0% increase in bankcard processing volume as compared to the same quarter last year. This was the result of the Company's successful marketing programs such as the MerchantAmerica web offerings and other sales programs. Additionally, the bankcard processing revenue increase was partially offset by a decrease in revenue as a result of a rate reduction offered to U-Haul, a major transaction processing customer, in negotiating a contract renewal. Check-related revenues increased from $1,059,000 for the three months ended March 31, 2001 to $1,508,000 for the three months ended March 31, 2002, an increase of 42.4%. This was attributable to a 38.5% increase in check verification revenue and a 109.9% increase in electronic check presentment revenue. The Visa POS Check Services Pilot Program is continuing as planned. At the present time, the Company is working with four Visa member banks who have chosen to participate in this Visa Pilot Program. However, during the pilot phase, small numbers of merchants are being piloted by the banks, so the Company will not be generating significant revenue from this Visa program until the member banks have completed the pilot phase and begin to offer this program to their merchant base at large toward the latter part of this year. Management believes that the Visa POS Check Services Program will provide the Company with significant opportunities to develop strategic relationships with some major banks, which could result in a corresponding increase in our check services revenue in the coming years. Terminal sales and lease revenue for the three months ended March 31, 2002 was $54,000, which represented a 50% decrease from $108,000 for the same fiscal quarter last year. This reflects the Company's growth strategy being focused in the transaction business and not in terminal sales. Other revenue decreased from $253,000 in the second fiscal quarter 2002 to $54,000 in this fiscal quarter due to lesser customer software development work completed during the current quarter. 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 and check processing expense, increased from $4,496,000 in the second fiscal quarter of 2001 to $5,750,000 in the current fiscal quarter, a 27.9% increase. This was attributable to the 17.9% increase in processing and transaction revenues for the current fiscal quarter and reduced gross margin recognized in the current quarter as compared to the prior year. Gross margin from processing and transaction processing decreased from 35.9% in the second fiscal quarter last year to 30.6% in this fiscal quarter. This decrease in gross margin was due to the rate reduction in U-Haul processing revenue, an increase in overall direct bankcard processing expenses from 67.1% of processing revenue for the quarter ended March 31, 2001 to 71.6% for the 10 current fiscal quarter, and a $100,000 bad debt write-off in check related services. Check services revenue made up 18.2% of total processing and transaction revenues in this quarter as compared to 15.1% in the prior year. Excluding the bad debt write-off, check related division generated a gross margin of 46.4% for the current fiscal quarter as compared to a gross margin of 29.2% for the bankcard and transaction processing segment. On the average, check services revenue yields a higher gross margin than bankcard processing revenue. Cost of terminals sold increased from $96,000 in the second quarter of fiscal year 2001 to $276,000 in the current fiscal quarter, an increase of 187.5% as a result of a $200,000 inventory obsolescence allowance provided in the current quarter. This allowance was related to the write-down of certain customized printers in inventory. Other operating costs increased from $933,000 in the second fiscal quarter 2001 to $1,075,000 in this fiscal quarter, an increase of 15.2%. This increase was attributable to two major factors: 1) a 59.5% increase in research and development expenses as the Company continues to enhance and develop its various processing technologies in order to remain competitive in the marketplace and 2) higher customer support expenses due to increased sales activities. The Company is also currently investing a substantial amount in personnel costs in the management and software development related to the Visa POS Check Service Pilot Program. Selling, general and administrative expenses increased from $1,403,000 in the second fiscal quarter 2001 to $1,786,000 in this current quarter, an increase of 27.3%. This increase was due to the higher personnel costs of approximately $140,000, the higher legal and professional fees of about $90,000 mainly related to the legal settlement which was finalized in March 2002, and a $100,000 land valuation allowance recognized in the second fiscal quarter. As a percentage of total revenue, selling, general and administrative expenses increased from 19.0% in the second quarter 2001 to 21.3% in the current fiscal quarter. Legal settlement expense of $2,500,000 was related to the litigation known as Premiere Lifestyles International Corporation v. Electronic Clearing House, Inc. This settlement agreement was approved by the Company's Board of Directors in March 2002. The Company made a one-time cash payment of $1,200,000 to Premiere and executed a long-term promissory note secured by the Company's office building in favor of Premiere for an additional $1,300,000, payable over 15 years, with an interest rate of 8%. The Company made no admission of liability as part of this settlement. Benefit for income taxes was primarily due to the lawsuit settlement expense of $2,500,000. The cash portion of the settlement expense is deductible in the current period and the long-term note portion is deductible on an installment basis as the note is being paid. Six Months Ended March 31, 2002 and 2001 - ----------------------------------------------- NET LOSS. Electronic Clearing House, Inc. recorded a net loss of $1,950,000 for the six month period ended March 31, 2002, compared to a net income of $189,000 for the same period last year. Both basic and diluted net loss was $0.34 per share for the six months ended March 31, 2002 versus basic and diluted net income of $0.03 per share for the same period last year. REVENUE. Revenue for the six months of fiscal 2002 was $16,307,000, compared to $14,359,000 for the same period last year, an increase of 13.6%. Total processing and transaction revenue was $16,124,000 for the six months ended March 31, 2002 as compared to $13,799,000 for the six months ended March 31, 2001, an increase of 16.8%. Bankcard and transaction processing revenue was $13,419,000 for the six months ended March 31, 2002 as compared to $12,124,000 for the same period last year, an increase of 10.7%. Check-related revenue increased from $1,881,000 for the six months ended March 31, 2001 to $2,834,000 for the six months ended March 31, 2002, an increase of 50.7%. Terminal sales for the six months ended March 31, 2002 was $129,000 as compared to $206,000 for the same six-month period ended March 31, 2001, a decrease of 37.4%. 11 Other revenue decreased from $354,000 for the six months ended March 31, 2001 to $54,000 for the current six-month period due to lesser software development completed. COST AND EXPENSES. Processing and transaction expenses increased from $9,113,000 for the six months ended March 31, 2001 to $10,880,000 for the current six month period, an increase of 19.4%. This is primarily related to the 16.8% increase in processing and transaction revenue for the same six-month period. Gross margin on processing and transaction activities decreased from 34.0% for the six-month period ended March 31, 2001 to 32.5% for the same six month period this year. This was mainly due to the increase in processing expenses and the reduced rate offered to U-Haul in the current period. Cost of terminals sold increased from $192,000 for the six months ended March 31, 2001 to $352,000 for the current six month period, an increase of 83.3%. This was due to the $200,000 inventory obsolescence allowance recorded in the second fiscal quarter of 2002. Other operating costs increased from $1,789,000 for the six months ended March 31, 2001 to $1,996,000 for the six months ended March 31, 2002, an increase of 11.6%. This was attributable to the 16.8% increase in total processing and transaction revenue. The Company is continuing to invest in research and development costs related to the various check service products. Additionally, the Company is incurring operational expenses related to the management of the Visa POS Check Services Pilot Program without any offsetting revenue at the present time. Management believes that a significant portion of our growth strategy is contingent upon our ability to successfully roll out the Visa program and to develop the major bank relationships that this Visa program has provided to the Company. Selling, general and administrative expenses increased from $2,648,000 for the six months ended March 31, 2001 to $3,528,000 for the six months ended March 31, 2002, an increase of 33.2%. This increase was mainly due to the legal and consulting fees related to the lawsuit disclosed above and higher personnel costs. As a percentage of total revenue, selling, general and administrative expenses increased from 18.4% for the six months ended March 31, 2001 to 21.6% for the six months ended March 31, 2002. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2002, the Company had available cash of $2,404,000, restricted cash of $887,000 in reserve with its primary processing banks and a working capital of $3,465,000. Accounts receivable net of allowance for doubtful accounts remained relatively constant, from $1,864,000 at September 30, 2001 to $1,825,000 at March 31, 2002. Inventory costs decreased from $573,000 at September 30, 2001 to $348,000 at March 31, 2002 due to a $200,000 inventory obsolescence allowance. Net cash used in operating activities for the six months ended March 31, 2002 was $596,000 as compared to a net cash provided by operating activities of $1,055,000 for the six months ended March 31, 2001. This was primarily attributable to the $1,200,000 cash portion of legal settlement expenses incurred during the current period. In the six months ended March 31, 2002, the Company used $958,000 for the purchase of equipment and capitalized software costs. In April 2002, the Company executed a $500,000 sale and leaseback agreement for certain computer software and hardware purchased by the Company in the recent months. Additionally, the Company has negotiated an $850,000 lease line from the same leasing company for the purpose of funding certain computer software and hardware needs in the coming months. This funding source should be sufficient to finance the equipment needs in order to improve the infrastructures of our data center to accommodate the growth anticipated by the Company. At March 31, 2002, the Company had the following cash commitments: 12
Payment Due By Period ------------------------ Contractual Less than Obligations Total 1 year 2-3 years 4-5 years after 5 years - -------------------- ---------- -------- ---------- --------- -------------- Long-term debt including interest $3,166,073 $317,894 $ 609,654 $ 455,363 $ 1,783,162 Capital lease obligations 288,689 141,260 147,429 -0- -0- Operating leases 299,545 175,345 124,200 -0- -0- ---------- -------- ---------- --------- -------------- Total contractual cash obligations $3,754,307 $634,499 $ 881,283 $ 455,363 $ 1,783,162 ========== ======== ========== ========= ==============
The Company's primary source of liquidity is expected to be cash flow generated from operations and cash and cash equivalents currently on hand. Management believes that its cash flow from operations together with cash on hand will be sufficient to meet its working capital and other commitments as long as the current cash flow trend remains relatively consistent. 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings ------------------ In March 2002, the Company's Board of Directors approved a settlement agreement with Premier Lifestyle International Corporation ("PLIC") for $2,500,000 related to the lawsuit PLIC vs. ECHO. This agreement settled all claims between the two parties and the Company made no admission of liability as part of this settlement. As consideration for the settlement, the Company made a one-time cash payment of $1,200,000 to PLIC and executed a long-term promissory note secured by one office building in favor of PLIC for an additional $1,300,000, payable over 15 years, bearing interest at 8% per annum. The case was dismissed on April 8, 2002. Item 6. Exhibits and Reports on Form 8-K ------------------------------------- The following reports on Form 8-K were filed during the quarter ended March 31, 2002: Date of Filing Item Reported - ---------------- -------------- January 25, 2002 Press release issued announcing first quarter fiscal 2002 earnings and additional information relating to litigation with Premier Lifestyles International Corporation. March 6, 2002 Press release issued announcing settlement of litigation with Premiere Lifestyles International Corporation. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ELECTRONIC CLEARING HOUSE, INC. ---------------------------------- (Registrant) Date: May 9, 2002 By: \s\ Alice Cheung ----------------------------------- Alice Cheung, Treasurer and Chief Financial Officer 15 -----END PRIVACY-ENHANCED MESSAGE-----