-----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, PYf2X/H8xjvBWHQ0y1KQRjQhc+tIJcV7SxcNCOTpA813e1IgzokpeCe9x7yxcUXK D4Mvr6qiwBx8yxViWaPEfg== 0001015402-03-003389.txt : 20030814 0001015402-03-003389.hdr.sgml : 20030814 20030814155647 ACCESSION NUMBER: 0001015402-03-003389 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 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: 03847610 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 JUNE 30, 2003 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 --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- As of July 31, 2003, there were 5,862,174 shares of the Registrant's Common Stock outstanding. 1 ELECTRONIC CLEARING HOUSE, INC. INDEX ----- PART I. FINANCIAL INFORMATION Page No. --------- Item 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED): Consolidated Balance Sheets 3 June 30, 2003 and September 30, 2002 Consolidated Statements of Operations 4 Three months and nine months ended June 30, 2003 and 2002 Consolidated Statements of Cash Flows 5 Nine months ended June 30, 2003 and 2002 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of 12 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 20 Item 4. Controls and Procedures 20 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 21 Item 6. Exhibits and Reports on Form 8-K 21 Signatures 22 2
PART I. FINANCIAL INFORMATION - -------------------------------- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS ELECTRONIC CLEARING HOUSE, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS JUNE 30, SEPTEMBER 30, 2003 2002 ------------- --------------- Current assets: Cash and cash equivalents $ 5,563,000 $ 2,409,000 Restricted cash 1,112,000 906,000 Settlement receivable 707,000 148,000 Accounts receivable less allowance of $438,000 and $431,000 1,891,000 1,596,000 Prepaid expenses and other assets 459,000 403,000 Deferred tax asset 79,000 266,000 ------------- --------------- Total current assets 9,811,000 5,728,000 Noncurrent assets: Property and equipment, net 6,396,000 5,101,000 Deferred tax asset 1,634,000 2,018,000 Other assets, less accumulated amortization of $293,000 and $259,000 529,000 637,000 Goodwill, net -0- 4,707,000 ------------- --------------- Total assets $ 18,370,000 $ 18,191,000 ============= =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings and current portion of long-term debt $ 625,000 $ 515,000 Accounts payable 111,000 201,000 Settlement payable 4,490,000 729,000 Accrued expenses 1,291,000 987,000 Deferred income -0- 62,000 ------------- --------------- Total current liabilities 6,517,000 2,494,000 Long-term debt 2,148,000 2,159,000 ------------- --------------- Total liabilities 8,665,000 4,653,000 ------------- --------------- Commitments and contingencies Stockholders' equity: Common stock, $0.01 par value, 36,000,000 authorized: 5,855,674 and 5,835,331 shares issued; 5,816,405 and 5,796,062 shares outstanding 59,000 58,000 Additional paid-in capital 21,498,000 21,435,000 Accumulated deficit (11,383,000) (7,486,000) Less treasury stock at cost, 39,269 common shares (469,000) (469,000) ------------- --------------- Total stockholders' equity 9,705,000 13,538,000 ------------- --------------- Total liabilities and stockholders' equity $ 18,370,000 $ 18,191,000 ============= ===============
See accompanying notes to consolidated financial statements. 3
ELECTRONIC CLEARING HOUSE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS NINE MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------------- -------------------------- 2003 2002 2003 2002 ------------ ----------- ------------ ------------ Revenues: Processing revenue $ 5,673,000 $4,180,000 $15,559,000 $12,048,000 Transaction revenue 4,853,000 4,157,000 13,837,000 12,413,000 Other revenue 52,000 78,000 250,000 261,000 ------------ ----------- ------------ ------------ 10,578,000 8,415,000 29,646,000 24,722,000 ------------ ----------- ------------ ------------ Costs and expenses: Processing and transaction expense 7,059,000 5,795,000 19,596,000 16,675,000 Other operating costs 812,000 688,000 2,329,000 2,238,000 Research and development expense 375,000 466,000 1,042,000 1,264,000 Selling, general and administrative expenses 1,768,000 1,480,000 5,123,000 5,008,000 Amortization expense - goodwill -0- 129,000 -0- 385,000 Legal settlement -0- -0- -0- 2,500,000 ------------ ----------- ------------ ------------ 10,014,000 8,558,000 28,090,000 28,070,000 ------------ ----------- ------------ ------------ Income (loss) from operations 564,000 (143,000) 1,556,000 (3,348,000) Interest income 6,000 10,000 21,000 46,000 Interest expense (51,000) (46,000) (150,000) (84,000) ------------ ----------- ------------ ------------ Income (loss) before (provision) benefit for income taxes and cumulative effect of an accounting change 519,000 (179,000) 1,427,000 (3,386,000) (Provision) benefit for income taxes (211,000) 11,000 (617,000) 1,217,000 ------------ ----------- ------------ ------------ Income (loss) before cumulative effect of an accounting change 308,000 (168,000) 810,000 (2,169,000) Cumulative effect of an accounting change to adopt SFAS 142 -0- -0- (4,707,000) -0- ------------ ----------- ------------ ------------ Net income (loss) $ 308,000 $ (168,000) $(3,897,000) $(2,169,000) ============ =========== ============ ============ Basic net earnings (loss) per share Before cumulative effect of accounting change $ 0.05 $ (0.03) $ 0.14 $ (0.38) Cumulative effect of accounting change -0- -0- (0.81) -0- ------------ ----------- ------------ ------------ Basic net earnings (loss) per share $ 0.05 $ (0.03) $ (0.67) $ (0.38) ============ =========== ============ ============ Diluted net earnings (loss) per share Before cumulative effect of accounting change $ 0.05 $ (0.03) $ 0.14 $ (0.38) Cumulative effect of accounting change -0- -0- (0.81) -0- ------------ ----------- ------------ ------------ Diluted net earnings (loss) per share $ 0.05 $ (0.03) $ (0.67) $ (0.38) ============ =========== ============ ============ Weighted average shares outstanding Basic 5,810,787 5,796,109 5,802,802 5,785,362 ============ =========== ============ ============ Diluted 6,039,990 5,796,109 5,802,802 5,785,362 ============ =========== ============ ============
See accompanying notes to consolidated financial statements. 4
ELECTRONIC CLEARING HOUSE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED JUNE 30, -------------------------- 2003 2002 ------------ ------------ Cash flows from operating activities: Net loss $(3,897,000) $(2,169,000) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation 498,000 476,000 Amortization of software 649,000 377,000 Amortization of goodwill -0- 385,000 Provision for losses on accounts and notes receivable 45,000 258,000 Provision for obsolete inventory -0- 201,000 Write-down of real estate -0- 100,000 Fair value of stock issued in connection with directors' compensation 21,000 45,000 Deferred income taxes 571,000 (1,236,000) Stock option compensation 20,000 -0- Legal settlement -0- 1,300,000 Cumulative effect of an accounting change 4,707,000 -0- Changes in assets and liabilities: Restricted cash (206,000) 520,000 Accounts receivable (340,000) (110,000) Settlement receivable (559,000) (68,000) Accounts payable (90,000) (3,000) Settlement payable 3,761,000 (60,000) Accrued expenses 304,000 (315,000) Prepaid expenses (118,000) (8,000) ------------ ------------ Net cash provided by (used in) operating activities 5,366,000 (307,000) ------------ ------------ Cash flows from investing activities: Other assets 74,000 (62,000) Purchase of equipment and software (2,129,000) (1,439,000) ------------ ------------ Net cash used in investing activities (2,055,000) (1,501,000) ------------ ------------ Cash flows from financing activities: Proceeds from issuance of notes payable 292,000 -0- Repayment of notes payable (133,000) (105,000) Repayment of capitalized leases (339,000) (144,000) Proceeds from sale and leaseback of equipment -0- 390,000 Proceeds from exercise of stock options 23,000 11,000 ------------ ------------ Net cash (used in) provided by financing activities (157,000) 152,000 ------------ ------------ Net increase (decrease) in cash 3,154,000 (1,656,000) Cash and cash equivalents at beginning of period 2,409,000 4,147,000 ------------ ------------ Cash and cash equivalents at end of period $ 5,563,000 $ 2,491,000 ============ ============
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 June 30, 2003, and for the three and nine-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, 2002. The results of operations for the three and nine months ended June 30, 2003 are not necessarily indicative of the likely results of operations for the entire fiscal year ending September 30, 2003. NOTE 2 - STOCK-BASED COMPENSATION: - ------------------------------------- The Company measures compensation expense for its employee stock-based compensation under APB 25. The Company provides pro-forma disclosures of net income and earnings per share as if a fair value method had been applied using the Black Scholes Model. Therefore, pro forma compensation costs for employee stock and stock option awards is measured as the excess, if any, of the fair value of the common stock at the grant date over the amount an employee must pay to acquire the stock and is amortized over the related service periods using the straight-line method. The following table compares net income and earnings per share as reported to the pro forma amounts that would be reported had compensation expense been recognized for the stock-compensation plans in accordance with the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation:
Three Months Ended Nine Months Ended June 30, June 30, ------------------------ -------------------------- 2003 2002 2003 2002 ----------- ----------- ------------ ------------ Net income (loss), as reported $ 308,000 $ (168,000) $(3,897,000) $(2,169,000) Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards granted since October 1, 1995 (92,000) (90,000) (262,000) (268,000) ----------- ----------- ------------ ------------ Pro forma net income (loss) $ 216,000 $ (258,000) $(4,159,000) $(2,437,000) =========== =========== ============ ============ Net earnings (loss) per share: Basic - as reported $ 0.05 $ (0.03) $ (0.67) $ (0.38) Basic - pro forma $ 0.04 $ (0.04) $ (0.72) $ (0.42) Diluted - as reported $ 0.05 $ (0.03) $ (0.67) $ (0.38) Diluted - pro forma $ 0.04 $ (0.04) $ (0.72) $ (0.42)
6 NOTE 3 - EARNINGS (LOSS) PER SHARE: - ----------------------------------------- The Company calculates earnings (loss) per share as required by SFAS No. 128, "Earnings per Share".
Three months ended June 30, Nine months ended June 30, ------------------------------- ------------------------------- 2003 2002 2003 2002 ------------- ---------------- ------------- ---------------- Numerator: Income (loss) before cumulative effect of an accounting change $ 308,000 $ (168,000) $ 810,000 $ (2,169,000) Cumulative effect of an accounting change to adopt SFAS 142 -0- -0- (4,707,000) -0- ------------- ---------------- ------------- ---------------- Net income (loss) $ 308,000 $ (168,000) $ (3,897,000) $ (2,169,000) ============= ================ ============= ================ Denominator: Weighted average shares outstanding for basic earnings (loss) per share 5,810,787 5,790,267 5,802,802 5,785,362 Effect of dilutive stock options 229,203 -0- -0- -0- ------------- ---------------- ------------- ---------------- Adjusted weighted average shares outstanding for diluted earnings (loss) per share 6,039,990 5,790,267 5,802,802 5,785,362 ============= ================ ============= ================ Basic net earnings (loss) per share: Before cumulative effect of accounting change $ 0.05 $ (0.03) $ 0.14 $ (0.38) Cumulative effect of accounting change -0- -0- (0.81) -0- ------------- ---------------- ------------- ---------------- Basic net earnings (loss) per share $ 0.05 $ (0.03) $ (0.67) $ (0.38) ============= ================ ============= ================ Diluted net earnings (loss) per share: Before cumulative effect of accounting change $ 0.05 $ (0.03) $ 0.14 $ (0.38) Cumulative effect of accounting change -0- -0- (0.81) -0- ------------- ---------------- ------------- ---------------- Diluted net earnings (loss) per share $ 0.05 $ (0.03) $ (0.67) $ (0.38) ============= ================ ============= ================
For the quarter ended June 30, 2003, a total of 229,203 shares of anti-dilutive common stock equivalents were included in the dilutive net earnings per share calculation. For the three months ended June 30, 2002 and the nine months ended June 30, 2003 and 2002, all dilutive common stock equivalents have been excluded from the calculation of diluted loss per share as their inclusion would be anti-dilutive to the loss per share calculation. NOTE 4 - NON-CASH TRANSACTIONS: - ----------------------------------- Significant non-cash transaction for the nine months ended June 30, 2003 was as follows: - Capital equipment of $279,000 was acquired under capital leases. Significant non-cash transactions for the nine months ended June 30, 2002 were as follows: - A $1.3 million 15-year long-term promissory note was issued as part of the Premiere Lifestyles International Corporation vs. ECHO legal settlement. - Capital equipment of $274,000 was acquired under capital leases. 7 NOTE 4: (CONTINUED) - ------- - The Company received 25,000 shares of ECHO's common stock (converted from 25,000 shares of preferred stock), as a repayment of a $54,000 chargeback receivable owed to the Company by a former merchant. NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS: - ------------------------------------------- In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 clarifies the requirements of SFAS 5, Accounting for Contingencies, relating to guarantees. In general, FIN 45 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability, or equity security of the guaranteed party. The disclosure requirements of FIN 45 are effective for the Company as of December 31, 2002, and require disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor's obligations under the guarantee. The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. Significant guarantees that have been entered into by the Company are disclosed in Note 8. In May 2003, the FASB issued Statement of Financial Accounting Standards, or SFAS, No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," which established standards for how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires certain financial instruments to be classified as liabilities, which were previously classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the Company's fourth quarter. The Company is currently evaluating the impact of FAS 150, but does not think the adoption of this statement will have an impact on the Company's results of operations, financial position or cash flows. 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 of which is the segment's operating income and the other of which 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. 8 NOTE 6: (CONTINUED) - -------
Three Months Ended Nine Months Ended June 30 June 30 -------------------------- -------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Revenues: Bankcard and transaction processing $ 8,612,000 $ 6,940,000 $23,927,000 $20,411,000 Check-related products 1,966,000 1,475,000 5,719,000 4,311,000 ------------ ------------ ------------ ------------ $10,578,000 $ 8,415,000 $29,646,000 $24,722,000 ============ ============ ============ ============ Operating income (loss): Bankcard and transaction processing $ 1,081,000 $ 543,000 $ 2,966,000 $ 1,666,000 Check-related products 96,000 (257,000) 304,000 (676,000) Other - corporate expenses (613,000) (429,000) (1,714,000) (4,338,000) ------------ ------------ ------------ ------------ $ 564,000 $ (143,000) $ 1,556,000 $(3,348,000) ============ ============ ============ ============
NOTE 7 - CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE: - ---------------------------------------------------------------------- Effective October 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets". SFAS 142 requires that goodwill no longer be amortized, but instead be tested for impairment at least annually using a fair value-based approach. In the year of adoption, SFAS No. 142 also requires the Company to perform an initial assessment of its reporting units to determine whether there is any indication that the goodwill carrying value may be impaired. This transitional assessment is made by comparing the fair value of each reporting unit, as determined in accordance with the new standard, to its book value. To the extent the fair value of any reporting unit is less than its book value, which would indicate that potential impairment of goodwill exists, a second transitional test is required to determine the amount of impairment. The Company has determined that it has two reporting units, which correspond to its two reportable business segments; the "Bankcard and Transaction Processing" unit and the "Check Related Products" unit. All of the Company's goodwill relates to business acquisition transactions, which apply exclusively to the Check Related Products unit. The Company completed the transitional impairment testing required by SFAS 142 in the first quarter of fiscal 2003. The Company determined the estimated fair value of its reporting units using a discounted cash flow technique and a market approach based upon the Company's total market capitalization as of October 1, 2002. Based upon the valuation findings, the Company determined that its goodwill was fully impaired and a non-cash charge equal to the goodwill carrying amount of $4.7 million was recognized in the Company's condensed consolidated financial statements. As prescribed by SFAS 142, the Company treated this non-cash goodwill impairment as a cumulative effect of change in accounting principle. No income tax benefit has been recognized for this charge as the goodwill is not deductible for income tax purposes. Had the provisions of SFAS No. 142 been applied for the three and nine months ended June 30, 2002, the Company's net income before the cumulative effect of a change in accounting principle, and net income (loss) per share would have been as follows: 9 NOTE 7: (CONTINUED) - -------
For the Three Months Ended For the Nine Months Ended June 30, June 30, ------------------------------ ------------------------------- 2003 2002 2003 2002 -------------- -------------- ---------------- ------------- Net income (loss), as reported $ 308,000 $ (168,000) $ (3,897,000) $ (2,169,000) Add: Goodwill amortization -0- 129,000 -0- 385,000 -------------- -------------- ---------------- ------------- Adjusted net income (loss) $ 308,000 $ (39,000) $ (3,897,000) $ (1,784,000) ============== ============== ================ ============= Basic earnings (loss) per share, as reported $ 0.05 $ (0.03) $ (0.67) $ (0.38) Effect of SFAS No. 142 -0- 0.02 -0- 0 07 -------------- -------------- ---------------- ------------- Adjusted basic earnings (loss) per share $ 0.05 $ (0.01) $ (0.67) $ (0.31) ============== ============== ================ ============= Diluted earnings (loss) per share, as reported $ 0.05 $ (0.03) $ (0.67) $ (0.38) Effect of SFAS No. 142 -0- 0.02 -0- 0 07 -------------- -------------- ---------------- ------------- Adjusted diluted earnings (loss) per share $ 0.05 $ (0.01) $ (0.67) $ (0.31) ============== ============== ================ =============
NOTE 8 - COMMITMENTS, CONTINGENT LIABILITIES, AND GUARANTEES: - -------------------------------------------------------------------- The Company currently relies on cooperative relationships with, and sponsorship by, two banks in order to process its Visa, MasterCard and other bankcard transactions. The agreement between the banks and the Company requires the Company to assume and compensate the banks for bearing the risk of "chargeback" losses. Under the rules of Visa and MasterCard, when a merchant processor acquires card transactions, it has certain contingent liabilities for the transactions processed. This contingent liability arises in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder's favor. In such a case, the disputed transaction is charged back to the merchant and the disputed amount is credited or otherwise refunded to the cardholder. If the Company is unable to collect this amount from the merchant's account, and if the merchant refuses or is unable to reimburse the Company for the chargeback due to merchant fraud, insolvency or other reasons, the Company will bear the loss for the amount of the refund paid to the cardholders. The Company is also exposed to financial risk in providing ACH services to the merchants. As the third-party processor for multiple originating banks, the Company is liable for any fraudulent activities committed by the merchants initiating the ACH activities. The Company utilizes stringent underwriting guidelines combined with a number of systems and procedures to manage merchant risk. In addition, the Company requires cash deposits by certain merchants, which are held by the Company's sponsoring banks to minimize the risk related to merchant frauds and chargebacks. A cardholder, through its issuing bank, generally has until the later of up to four months after the date a transaction is processed or the delivery of the product or service to present a chargeback to the Company's sponsoring bank as the merchant processor. Therefore, management believes that the maximum potential exposure for the chargebacks would not exceed the total amount of transactions processed through Visa and MasterCard for the last four months and other unresolved chargebacks in the process of resolution. For the last four months through June 30, 2003, this potential exposure totaled approximately $343 million. At June 30, 2003, the Company, through its sponsoring banks, had approximately $134,000 of unresolved chargebacks that were in the process of resolution. At June 30, 2003, the Company, through its sponsoring banks, had access to $9.0 million in merchant deposits to cover any potential chargeback losses. NOTE 8: (CONTINUED) - ------- For the three months ended June 30, 2003 and 2002, the Company processed approximately $259 million (2003) and $196 million (2002) of Visa and MasterCard 10 transactions, which resulted in $2.2 million in gross chargeback activities for the three months ended June 30, 2003 and $2.0 million for the three months ended June 30, 2002. Substantially all of these chargebacks were recovered from the merchants. The Company records a reserve for chargeback loss allowance based on its processing volume and historical trends and data. As of June 30, 2003 and 2002, the allowance for chargeback losses, which is classified as a component of the allowance for uncollectible accounts receivable, was $373,000 and $217,000, respectively. The expense associated with the valuation allowance is included in processing and transaction expense in the accompanying consolidated statements of income. The Company has a small check guarantee business. The Company charges the merchant a percentage of the face amount of the check and guarantees payment of the check to the merchant in the event the check is not honored by the checkwriter's bank. Merchants typically present customer checks for processing on a regular basis and, therefore, dishonored checks are generally identified within a few days of the date the checks are guaranteed by the Company. Accordingly, management believes that its best estimate of the Company's maximum potential exposure for dishonored checks at any given balance sheet date would not exceed the total amount of checks guaranteed in the last 10 days prior to the balance sheet date. As of June 30, 2003, the Company estimates that its maximum potential dishonored check exposure was approximately $333,000. For the quarters ended June 30, 2003 and 2002, the Company guaranteed approximately $4,112,000 (2003) and $2,931,000 (2002) of merchant checks, which resulted in $106,000 (2003) and $191,000 (2002) of dishonored checks presented to the Company for payments. The Company has the right to collect the full amount of the check from the checkwriter. Based on its actual collection experience, the Company collects approximately 50-60% of the total dishonored checks. The Company establishes a reserve for this activity based on historical and projected loss experience. As of June 30, 2003 and 2002, the reserve for check guarantee loss was $118,000 (2003) and $114,000 (2002). The expense associated with the valuation allowance is included in processing and transaction expense in the accompanying consolidated statements of income. During November 2002, the Company negotiated a $500,000 lease line with a leasing company to fund certain computer equipment needs. The Company has financed $233,000 of computer equipment through this lease line through June 30, 2003. In January 2003, an $800,000 line of credit for working capital needs and a $700,000 lease line for funding the remaining Oasis software installment payments were secured from First Regional Bank, the Company's primary bankcard sponsoring bank, at a borrowing rate of prime + 1%. The Company has drawn down $292,000 of the Oasis lease line as of June 30, 2003 and plans to continue the draw down further when the installment payments are done. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------------ CONDITION AND RESULTS OF OPERATIONS --------------------------------------- OVERVIEW Electronic Clearing House, Inc. ("ECHO" or "the Company") is an electronic payment processor and one of the few processors in the nation who can provide a "complete solution" to the payment processing needs of merchants, banks and collection agencies. The Company's services include point-of-sale ("POS") terminal management, debit and credit card processing, check guarantee, check verification, check conversion, check re-presentment, check collection and inventory tracking. The Company's ability to program and oversee the management of a merchant's POS system, provide credit card and debit card processing, provide multiple check services, provide both electronic and traditional collection services and fully integrate all these services into a single internet-based reporting capability constitutes a definition of what the Company refers to as a "complete solution" to the payment processing needs of merchants, banks and collection agencies. The Company derives revenues from two main business segments, bankcard and transaction processing (bank services), and check-related products (check services), and operates under the following brands; - MerchantAmerica, ECHO's retail provider of processing services to both the merchant and bank markets; - National Check Network(R) ("NCN(R)") for check verification; - XPRESSCHEX, Inc. for processing check guarantee, check conversion, check collection and check verification. MerchantAmerica, as a retail sales channel, generates revenues through the sale of both of the Company's business segments, while all of NCN and XPRESSCHEX revenues are reflected in the Company's check services business segment. The Company's main revenue generator is its bankcard and transaction processing business segment. ECHO typically receives a percentage-based fee on the dollar amount processed and a transaction fee on the number of transactions processed. For the quarter ended June 30, 2003, the bankcard and transaction processing business segment accounted for approximately 81.4% of the Company's total revenue. This business segment has been profitable consistently, although price competition continues to be intense. In an effort to enhance the bankcard transaction processing business segment's processing infrastructure and control processing costs, the Company licensed several payment processing systems from Oasis Technologies in 2002 and a full integration of this system is currently projected for completion by the last quarter of 2003. The Company's check services business segment has been experiencing rapid growth over the past four years, building upon the Company's XPRESSCHEX subsidiary that operated for many years as a check guarantee service primarily to California-based merchants. The acquisition of Magic Software Development, Inc. in 1999 and the acquisition of Rocky Mountain Retail Systems in 2000 significantly increased the Company's capabilities and provided a national market for the Company's check services. Over the past four years, ECHO has invested significant resources and management focus in its check services business. Check services revenues are based on a fixed fee per transaction or a fee based on the amount of the check for each transaction. The Company is one of a few check processors in the nation with both an Automated Clearing House ("ACH") engine, which gives the Company the ability to transfer and settle funds, and a robust check writer database (NCN), which provides a valuable service for check risk management to merchants. The NCN database includes over 20 million bad-check writer records, 80 million positive records, and is generated and refreshed daily by 280 affiliated collection agencies that continually contribute to the database to enrich its depth and value. 12 NCN provides an ongoing revenue stream as collection agencies, major national merchants, other transaction processors, and thousands of small merchants access the NCN database daily to verify the status of a check writer in real time. Check verification has been recognized as one of the lowest cost and most effective ways for retailers to lower the risks and loss experience in accepting checks as a form of payment and the Company's NCN database is one of only four major databases in the nation that can serve this market need on a national scale. XPRESSCHEX revenues are growing due to the increased use of the Company's check conversion services, which include capture of the necessary check data at the point of sale and submission of the transaction electronically to the Automated Clearing House (ACH) for settlement. Since the Company provides ACH and settlement services to the merchants, all settlement funds received by the Company on behalf of the merchants are recorded as settlement payable and all settlement funds paid by the Company in advance are recorded as settlement receivable. XPRESSCHEX also maintains an active collection agency, registered in 48 states, that serves primarily as a referral agent to select NCN members that are collection agencies and are located in various regions of the country. This ability to provide local collection capability through one national entity is a distinctive advantage the Company has over other check service companies who operate centralized collection agencies and only go to local agencies as a secondary or last option. In 2000, Visa U.S.A. announced its intention to utilize its processing network (VisaNet) that connects to over 14,000 banks and about 5 million merchants to electronically process checks. This program is referred to as Visa POS Check Service. Visa's research shows that personal checks continue to be the most popular form of payment among consumers, but the cost of check processing and check fraud is high for financial institutions and merchants, averaging more than one dollar for every check written at the point of sale. Consumers continue to use checks for approximately 85% of all non-cash personal spending. In December 2000, ECHO signed an agreement with Visa U.S.A. as a third-party acquiring processor in Visa's Point-of-Sale ("POS") Check Service program. The Visa POS Check Service allows merchants to receive immediate online authorization for paper checks, by converting them into electronic transactions at the point of sale and verifying them against Visa's member bank accounts. The Company provides critical back-end infrastructure for the service, including its NCN database for verification and its ACH backbone for funds settlement, for checks written on non-participating banks. At the present time, ECHO is the third-party acquiring processor for eight out of ten acquiring banks that are currently signed up for the Visa program. The Company is also one of only two companies that are currently certified as acquirer processors with Visa, a role that accepts transactions from the merchant's POS terminal and reformats them for submission to the Visa network. To date, ECHO is the only company to register as both a third-party processor and an acquirer processor with Visa under the Visa POS Check Service program. STRATEGY ECHO's strategy is to provide merchants and financial institutions with electronic connectivity to various payment services in the credit card, debit card and check-related markets. ECHO's services enable merchants to maximize revenues by offering a wide variety of payment options, reduce the costs associated with processing and handling checks, improve collections and manage risk more effectively. The Company has targeted several areas as significant opportunities for growth, including focusing on middle-market retail accounts for check services and developing a scalable infrastructure to support widespread implementation of the Visa POS Check Services. The Company also seeks to increase profitability of core merchant services by enhancing the back-end technology and reducing processing costs. - --The Company plans to grow ECHO's check services business by focusing on mid-size retail chains that can benefit most from automating check processing and verification. These mid-size accounts typically offer higher margins than larger accounts and offer a less competitive marketplace. ECHO has signed agreements with several retailers and the pipeline for prospective customers is growing. 13 - --The Company is continuing to enhance the Visa POS Check Service so as to leverage ECHO's check services products through Visa member banks. As the market gains acceptance of the Visa POS Check Services, it will significantly increase the Company's opportunities to market its check conversion services and verification services to its core merchant base and solidify its strategic relationships with the various financial institutions that have chosen the Company as their acquirer processor and/or third-party processor under the Visa POS Check Service program. It also will create a new marketing channel for the Company to cross sell its other check products such as electronic check re-presentments and check guarantee to the Visa member banks participating in the Visa POS Check Service program. - --ECHO has also identified an underserved, niche market of smaller regional and community banks for its agent bank program. The Company is providing a turn-key solution to allow smaller banks to offer a full spectrum of bankcard and check processing services to their customer base using ECHO's Merchant America product offering. The program is being sold at a low incremental cost to ECHO and still provides a better priced and a more integrated product offering to small banks than they can currently receive from other providers. Most significantly, ECHO's program allows the banks to retain ownership of their merchants, which provides both stability and economic benefits to the bank that other programs generally do not provide. SALES AND MARKETING ECHO sells its merchant and check services through several marketing channels, including independent sales organizations ("ISOs"), its own internal sales force, its Agent Bank program, and direct merchant referrals by existing merchants. Approximately 20% of the Company's new accounts have historically been generated through the ISOs. The Company also offers merchant services through a direct online sales channel, MerchantAmerica.com. Management believes that the Company is unique in the number of payment services that the Company offers to its merchants, the combination of transaction types that it manages directly, its ability to integrate additional services and its ability to support each merchant through one vertically integrated source. The Company's marketing strategy is to maximize cross selling opportunities to its existing base of merchants and financial institutions in the Visa POS Check Program; sell integrated suites of payment services, bankcard and check processing services to small banks; enhance and market MerchantAmerica; and develop the private label check service program. COMPETITION Bankcard processing and check processing services are highly competitive industries 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. ECHO is not currently a major player in the industries in which it competes and many of the Company's competitors have much 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. Many competitors also have economies of scale cost advantages over ECHO due to their high processing volumes that may make it difficult for ECHO to compete. The Company believes that its success will depend upon its ability to continuously develop new products and services and to enhance its current products and to introduce them promptly into the market. 14 RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2003 AND 2002 - ----------------------------------------- Financial highlights for the third quarter of 2003 as compared to the same period last year were as follows: - --Total revenue increased 25.7% to $10.6 million - --Gross margins from processing and transaction revenue increased to 32.9% from 30.5% - --Diluted EPS of $0.05 as compared to diluted loss per share of $0.03 - --Bankcard and transaction processing revenue increased 24.1% to $8.6 million - --Bankcard processing volume increased 32.1% to $259.1 million - --Check-related revenue increased 33.3% to $2.0 million - --ACH transactions processed increased 378.2% to 3.0 million REVENUE. Total revenue increased 25.7% to $10,578,000 for the three months ended June 30, 2003, from $8,415,000 for the same period last year. The increase was primarily attributed to a 24.1% growth in the bankcard processing business and 33.3% growth in the check services business segment. Total processing and transaction revenue for this fiscal quarter increased 26.3%, from $8,337,000 for the comparable quarter in fiscal 2002 to $10,526,000 in fiscal 2003. COST OF SALES. A majority of the Company's bankcard processing expenses are fixed as a percentage of the total processing volume, with the remaining costs based on the number of transactions processed. Processing-related expenses, consisting primarily of data center processing costs, interchange fees, third party processing fees, communication fees, etc., increased from $5,795,000 in the third fiscal quarter of 2002 to $7,059,000 in the current fiscal quarter, a 21.8% increase. The increase reflects a 26.3% increase in processing and transaction revenues for the current fiscal quarter. Gross margin from processing and transaction services increased from 30.5% in the third fiscal quarter last year to 32.9% in this fiscal quarter. This improvement in gross margin was due to the combination of a higher percentage of check services revenue as a percentage of total revenue, and incremental margin improvement as a result of economies of scale. EXPENSE. Other operating costs such as personnel costs, telephone and depreciation expenses increased from $688,000 in the third fiscal quarter of 2002 to $812,000 in this fiscal quarter, an increase of 18.0%. This increase was primarily attributable to a 25.7% increase in total revenue. Research and development expense decreased from $466,000 in the prior year quarter to $375,000 in the current fiscal quarter. This was primarily due to the Visa POS Check Service program transitioning from the pilot phase to implementation phase and the gradual decrease in the expense due to the capitalization of related costs associated with this program. However, the Company anticipates that it will continue to invest in research and development to remain competitive. Selling, general and administrative expenses increased from $1,480,000 in the third fiscal quarter 2002 to $1,768,000 in the current quarter. This increase was primarily attributable to the higher costs to support the Company's sales and marketing programs, hiring of additional management staff to support the growth of the Company, overall higher personnel costs due to cost of living adjustments and increases in employee benefits such as medical insurance cost and worker compensation insurance. As a percentage of total revenue, selling, general and administrative expenses decreased from 17.6% in the third fiscal quarter 2002 to 16.7% in the current fiscal quarter. OPERATING INCOME. Operating income for the quarter ended June 30, 2003 was $564,000, as compared to an operating loss of $143,000 in the same period last year. The increase in operating income was mainly due to the 25.7% increase in revenue and the elimination of $129,000 of goodwill amortization expense upon the adoption of SFAS 142 by the Company in the first fiscal quarter of this year. 15 INTEREST EXPENSE. Interest expense increased slightly to $51,000 for the quarter ended June 30, 2003, from $46,000 in the same period last year. This was due to an increase in capitalized lease obligations. EFFECTIVE TAX RATE. The effective tax rate for this fiscal quarter was 37.4% as compared to the statutory rate of 41.8%. This decrease in the rate is a result of the revisions of estimates regarding state tax apportionments, which had the effect of lowering the overall state rate applied. SEGMENT RESULTS Bankcard and Transaction Processing. Bankcard processing and transaction processing revenue increased 24.1%, from $6,940,000 in the third fiscal quarter 2002 to $8,612,000 for this fiscal quarter. This revenue increase was mainly attributable to an approximate 32.1% increase in bankcard processing volume as compared to the same quarter last year. The processing volume increase was a result of organic growth from the Company's existing merchants and new merchants generated from other marketing initiatives, such as the Company's MerchantAmerica program and other sales programs. The bankcard and transaction processing revenue increase was partially offset by a 31.0% decrease in U-Haul revenue as compared to the prior year quarter. Additionally, the Company has one bankcard processing merchant which has grown significantly over the past year and accounted for approximately 10% of the total bankcard and transaction processing revenue for the quarter ended June 30, 2003. While the Company anticipates that this merchant relationship will continue to be significant, there can be no assurance that this merchant will continue utilizing the Company's services or will represent a significant portion of bankcard and transaction processing revenue in the future. Gross margin from the bankcard and transaction processing segment remained relatively constant, from 25.4% in the quarter ended June 30, 2002 to 25.6% in the current fiscal quarter. Operating income for this business segment was $1,081,000 for the third fiscal quarter, up 99.1% from $543,000 in the same period last year. The increase in operating income is attributable to the 24.1% increase in bankcard processing revenue this quarter over the prior year quarter. Check Related Products. Check-related revenues increased from $1,475,000 for the third fiscal quarter ended June 30, 2002 to $1,966,000 for the current fiscal quarter, an increase of 33.3%. This was attributable to a 13.4% increase in check verification revenue and a 222.1% increase in other electronic check processing such as check conversion, and a decrease in check collection revenue. Check conversion revenue has grown significantly in this fiscal year as a result of broader market acceptance of the Company's various check-related products and as a result of the growth in the Visa POS Check Service program. During the month of June 2003, a major national retail merchant with approximately 3,000 storefronts initiated the Visa POS Check Service program in all of its stores nationwide. The Company is the third-party processor in this Visa POS relationship. As a result, the number of ACH transactions processed during June 2003 increased by more than 300% as compared to the previous month. Management believes that revenues generated from the Visa POS Check Service program as a whole will continue to grow as this program starts to build momentum. Check services revenue made up 18.6% of total processing and transaction revenues in this fiscal quarter as compared to 17.5% in the prior year. Check-related operating income was $96,000 for the current fiscal quarter as compared to an operating loss of $257,000 in the same period last year. The improvement in this business segment was primarily attributable to the 33.3% increase in revenue. 16 NINE MONTHS ENDED JUNE 30, 2003 AND 2002 Financial highlights for the nine months ended June 30, 2003, as compared to the same period last year, were as follows: - --Total revenue increased 19.9% to $29.6 million - --Gross margins from processing and transaction revenue increased to 33.3% from 31.8% - --Diluted EPS before cumulative effect of accounting change of $0.14 as compared to diluted loss per share of $0.38 - --Bankcard and transaction processing revenue increased 17.2% to $23.9 million - --Bankcard processing volume increased 27.5% to $712.1 million - --Check-related revenue increased 32.7% to $5.7 million - --ACH transactions processed increased 261.9% to 5.3 million REVENUE. Total revenue increased to $29,646,000 for the nine months ended June 30, 2003, from $24,722,000 for the same period last year. Total processing and transaction revenue for this nine-month period increased 20.2%, from $24,461,000 for the nine months ended June 30, 2002 to $29,396,000 for the current nine-month period. COST OF SALES. Processing-related expenses increased from $16,675,000 for the nine-month period in 2002 to $19,596,000 for the nine months ended June 30, 2003, a 17.5% increase. The increase reflects a 20.2% increase in processing and transaction revenues for the nine months ended June 30, 2003 as compared to the same period in the prior year. Gross margin from processing and transaction services increased from 31.8% in the nine-month period last year to 33.3% for the current nine-month period. This increase in gross margin was due to the incremental margin improvement as the processing volume continues to grow. EXPENSE. Other operating costs increased from $2,238,000 for the nine months ended June 30, 2002 to $2,329,000 for the nine months ended June 30, 2003, an increase of 4.1%. This increase was primarily attributable to a 19.9% increase in total revenue. Research and development expense decreased from $1,264,000 in the nine months ended June 30, 2002 to $1,042,000 in the current nine-month period. This was mainly attributable to the Visa POS Check Service program transitioning from the pilot phase to implementation phase and the diminishing research and development expenses associated with this program. Selling, general and administrative expenses increased from $5,008,000 for the nine months ended June 30, 2002 to $5,123,000 in the current nine-month period. This increase was attributable to the overall growth of the Company and was partially offset by the lower legal fees experienced in the current year due to the Premiere Lifestyles International Corporation ("PLIC") settlement in March 2002. As a percentage of total revenue, selling, general and administrative expenses decreased from 20.3% for the nine months ended June 30, 2002 to 17.3% in the current nine-month period. OPERATING INCOME. Operating income for the nine months ended June 30, 2003 was $1,556,000, as compared to an operating loss of $3,348,000 for the same period last year. The improvement in operating income was primarily attributable to the exclusion of the $3,095,000 legal and settlement expense related to the PLIC lawsuit settlement in March 2002, the 19.9% increase in revenue and the elimination of $385,000 of goodwill amortization expense. INTEREST EXPENSE. Interest expense increased to $150,000 for the nine months ended June 30, 2003, from $84,000 in the same period last year. EFFECTIVE TAX RATE. The effective tax rate for the nine months ended June 30, 2003 was 43.2%, as compared to a tax benefit of $1,217,000 for the nine months ended June 30, 2002, primarily due to the tax benefit related to the lawsuit settlement. 17 SEGMENT RESULTS Bankcard and Transaction Processing. Bankcard processing and transaction processing revenue increased 17.2%, from $20,411,000 for the nine months ended June 30, 2002 to $23,927,000 for the current nine-month period. This revenue increase was mainly attributable to an approximate 27.5% increase in bankcard processing volume as compared to the same nine-month period last year. The processing volume increase was a result of organic growth from the Company's existing merchants and other marketing initiatives. The bankcard and transaction processing segment generated a gross margin of 26.5% for the nine months ended June 30, 2003 as compared to 27.4% in the same period last year. This decrease in gross margin was attributable to the pricing concession offered to several high volume merchants and a decrease in U-Haul revenue, which yields a higher margin than the bankcard processing activities. Check Related Products. Check-related revenues increased from $4,311,000 for the nine months ended June 30, 2002 to $5,719,000 for the current nine-month period, an increase of 32.7%. This was attributable to the growth in the check conversion and check verification revenue. Check services revenue accounted for 19.3% of total revenue for the current nine-month period as compared to 17.4% in the same prior year period. Check-related operating income was $304,000 for the current nine-month period as compared to an operating loss of $676,000 in the same period last year. The improvement in operating income was primarily attributable to the 32.7% increase in check services revenue. As the result of the increase in ACH processing and settlement activities generated by the Company during the current nine-month period, settlement receivables to merchants increased from $148,000 at September 30, 2002 to $707,000 at June 30, 2003 and settlement payables to merchants increased from $729,000 at September 30, 2002 to $4,490,000 at June 30, 2003. The net impact was a net increase to cash on hand of $3,202,000 for the same nine-month period. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2003, the Company had available cash of $5,563,000, restricted cash of $1,112,000 in reserve with its primary processing banks and working capital of $3,294,000. Accounts receivable net of allowance for doubtful accounts increased to $1,891,000 at June 30, 2003 from $1,596,000 at September 30, 2002. Allowance for doubtful accounts, which reflect chargeback losses, remain relatively constant with a balance of $438,000 at June 30, 2003 from $431,000 at September 30, 2002. Net cash provided by operating activities for the nine months ended June 30, 2003 was $5,366,000, as compared to net cash used in operating activities of $307,000 for the nine months ended June 30, 2002. The cash generated was attributable to income of $810,000 before a non-cash charge of $4,707,000 due to a cumulative change in accounting principle, $3,202,000 from the net change in settlements payables and receivables, and other operating activities. In the nine months ended June 30, 2003, the Company used $139,000 for the purchase of equipment and $1,990,000 for the acquisition and capitalization of software costs. During the nine months ended June 30, 2003, the Company used $157,000 for financing activities such as notes payable proceeds and repayment of notes and capitalized leases obligations. During November 2002, the Company negotiated a $500,000 lease line with a leasing company to fund certain computer equipment needs of which approximately $233,000 had been drawn down through June 30, 2003. In January 2003, the Company negotiated an $800,000 line of credit for working capital needs and a $700,000 secured promissory note to fund the remaining Oasis software installment payments from First Regional Bank, the Company's primary bankcard sponsoring bank, at a borrowing rate of prime + 1%. In March 2003, the Company completed a draw down of $292,000 to fund the Oasis software installment payments from First Regional Bank. The Company anticipates a full draw down of this lease line by the last quarter of 2003. At June 30, 2003 the Company had the following cash commitments: 18
Payment Due By Period --------------------- Contractual Less than After Obligations Total 1 year 2-3 years 4-5 years 5 years - ------------------- ---------- ---------- ---------- ---------- ---------- Long-term debt including interest $2,943,059 $ 394,789 $ 713,582 $ 481,715 $1,352,973 Capital lease obligations 843,464 414,558 428,906 -0- -0- Operating leases 1,798,968 415,846 749,172 561,842 72,108 ---------- ---------- ---------- ---------- ---------- Total contractual cash obligations $5,585,491 $1,225,193 $1,891,660 $1,043,557 $1,425,081 ========== ========== ========== ========== ==========
The Company's primary source of liquidity is expected to be cash flow generated from operations and cash and cash equivalents currently on hand. However, with the anticipated growth in the check services segment resulting from broader market acceptance of the Company's various check-related products and growth in the Visa POS Check Service program, a significant capital investment may be required to fund both the infrastructure improvements and working capital needs necessary to sustain such growth. The Company may therefore be required to seek outside equity or other funding to support this anticipated growth. There is no assurance that the Company will be able to secure such funding on terms acceptable to the Company or at all. NEW ACCOUNTING PRONOUNCEMENTS In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 clarifies the requirements of SFAS 5, Accounting for Contingencies, relating to guarantees. In general, FIN 45 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability, or equity security of the guaranteed party. The disclosure requirements of FIN 45 are effective for the Company as of December 31, 2002, and require disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor's obligations under the guarantee. The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. In May 2003, the FASB issued Statement of Financial Accounting Standards, or SFAS, No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," which established standards for how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires certain financial instruments to be classified as liabilities, which were previously classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the Company's fourth quarter. The Company is currently evaluating the impact of FAS 150, but does not think the adoption of this statement will have an impact on the Company's results of operations, financial position or cash flows. 19 FORWARD-LOOKING STATEMENTS The discussion of the financial condition and results of operations of 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, and in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2002. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------------- The Company could be exposed to market risk from changes in interest rates on its lease lines. The Company's exposure to interest rate risk relates to its $800,000 line of credit and $700,000 software lease line. There was an outstanding balance of $292,000 against the $700,000 lease line as of June 30, 2003. However, a hypothetical 1% interest rate change would have no material impact on the Company's results of operations. ITEM 4. CONTROLS AND PROCEDURES ------------------------- As of June 30, 2003, the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective in causing material information to be recorded, processed, summarized and reported by our management on a timely basis and to ensure that the quality and timeliness of the Company's public disclosures complies with its Securities and Exchange Commission disclosure obligations. There have been no significant changes in the Company's internal controls or in other factors, which could significantly affect internal controls subsequent to the date that the Company carried out its evaluation. 20 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ----------------------------------------------------------- The Company held its Annual Meeting of Stockholders on February 3, 2003. At the Annual Meeting, there were 5,796,062 shares of Common Stock entitled to vote, and 4,751,235 shares (81.97%) were represented at the meeting in person or by proxy. Immediately prior to and following the Annual Meeting, the Board of Directors was comprised of Herbert L. Lucas, Jr., Carl R. Terzian, Aristides W. Georgantas, and Joel M. Barry. The following summarizes vote results for those matters submitted to our stockholders for action at the Annual Meeting: 1. Proposal to elect Herbert L. Lucas, Jr. to serve as the Company's Class I director for three years and until his successor has been elected and qualified. Director For Withheld -------- --- -------- Herbert L. Lucas, Jr. 4,678,748 72,487 2. Proposal to adopt the Company's 2003 Incentive Stock Option Plan. For Against Abstain Broker Non-Votes --- ------- ------- ---------------- 876,940 134,320 5,009 3,734,967 3. Proposal to ratify or reject the selection of PricewaterhouseCoopers LLP as independent public accountants of the Company for the fiscal year ending September 30, 2003. For Against Abstain Broker Non-Votes --- ------- ------- ---------------- 4,719,291 25,858 6,086 -0- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ------------------------------------- (a) Exhibits: 31.1 Certificate of Joel M. Barry, Chief Executive Officer of Electronic Clearing House, Inc. pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended. 31.2 Certificate of Alice L. Cheung, Chief Financial Officer of Electronic Clearing House, Inc. pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended. 32.1 Certificate of Joel M. Barry, Chief Executive Officer of Electronic Clearing House, Inc. pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended. 32.2 Certificate of Alice L. Cheung, Chief Financial Officer of Electronic Clearing House, Inc. pursuant to Rule 13a-14(b) under the Securities and Exchange Act of 1934, as amended. (b) Reports on Form 8-K: Date of Filing Item Reported - ---------------- -------------- May 15, 2003 Press release issued announcing Registrant's second quarter fiscal year 2003 earnings results. 21 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: August 14, 2003 By: \s\ Alice Cheung --------------------------- Alice Cheung, Treasurer and Chief Financial Officer 22 EX-31.1 3 doc2.txt EXHIBIT 31.1 CERTIFICATION OF CEO PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14(A) AND 15D-14(A) AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Joel M. Barry, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Electronic Clearing House, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management of other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/ Joel M. Barry -------------------- Joel M. Barry Chief Executive Officer 23 EX-31.2 4 doc3.txt EXHIBIT 31.2 CERTIFICATION OF CFO PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14(A) AND 15D-14(A) AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Alice L. Cheung, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Electronic Clearing House, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management of other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/ Alice L. Cheung ------------------------- Alice L. Cheung Chief Financial Officer 24 EX-32.1 5 doc4.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Electronic Clearing House, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joel M. Barry, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. \s\ Joel M. Barry Joel M. Barry Chief Executive Officer August 14, 2003 25 EX-32.2 6 doc5.txt EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Electronic Clearing House, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Alice L. Cheung, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. \s\ Alice L. Cheung Alice L. Cheung Chief Financial Officer August 14, 2003 26 -----END PRIVACY-ENHANCED MESSAGE-----